Inside this Issue

A1 - Good Faith and Fair Dealing Duty was Violated by Prime Contractor who Settled Claim with its Client without Including Subcontractor Claim
A2 - Failure to file Certificate of Merit Requires Case to be Dismissed with Prejudice
A3 - Subcontractor Breached Contract by Refusing to Perform Extra Work as Directed by Contractor unless it First Received Change Order

Article 1

Good Faith and Fair Dealing Duty was Violated by Prime Contractor who Settled Claim with its Client without Including Subcontractor Claim

See similar articles: fair dealing | good faith

The covenant of good faith and fair dealing “prohibits arbitrary or unfair acts by one party that work to the disadvantage of the other". In this appeal, the court held that the district court properly applied the covenant of good faith and fair dealing when it awarded delay damages to a subcontractor against the prime contractor who settled a claim with the project owner but failed to include the subcontractor claim in the settlement. The Prime advised the subcontractor that its claim was being rejected by the Owner due to lack of backup information. But in reality, the Owner rejected the subcontractor claim because it was presented directly by the subcontractor instead of by the Prime on behalf of the subcontractor. The court also held that the conditional waiver and release signed by the subcontractor didn’t preclude it from recovering its damages. APACO Construction, Inc. v. Helix Electric of Nevada, LLC, 509 P.3d 49 (2022).

After the original project completion date passed, the subcontractor notified the Prime that it reserved the right to receive payment for additional costs incurred due to the delay. Prime responded by advising the subcontractor to seek reimbursement of its costs by providing documentation to the Prime that the Prime would submit to the Client. The Prime created a change order request for the subcontractor claim and submitted it to the Client. The Client rejected the change order request, said the court, “because the [Client] did not have a contract with the Subcontractor.”

It is not clear from the court decision, but it seems that the client wanted the Prime contractor to essentially certify the subcontractor claim and make it a change order request to the Client directly from the Prime instead of having a separate change order request from the Subcontractor.

In any event, the Prime never explained to the Subcontractor that this was why the claim was denied, and ultimately the Prime settled all the Prime’s outstanding claims with the Client and advised the Subcontractor that the Subcontractor claim was denied due to lack of adequate documentation.

The Prime argued that the covenant of good faith and fair dealing was improperly used by the court here because the express wording of the subcontract contained a no damages for delay clause, and provided that the subcontractor could only seek time extensions. The appellate court rejected that argument and explained, “An implied covenant of good faith and fair dealing exists in all contracts.” “A plaintiff can recover damages for breach of the covenant of good faith and fair dealing “[e]ven if a defendant does not breach the express terms of a contract.” “When one party performs a contract in a manner that is unfaithful to the purpose of the contract and the justified expectations of the other party are thus denied, damages may be awarded against the party who does not act in good faith.”

The conditional release and waiver Helix signed does not preclude it from receiving delay damages.

The Prime argued that the court should have enforced the release and waiver that the Subcontractor signed to received its retention payment. The court rejected that argument because it stated that any release or waiver required to be provided to receive payment or retention must, by state statute, be “limited to claims related to the invoiced amount of the labor, materials, equipment or supplies that are the subject of the progress bill or retainage bill.” The subject of the release was the retention payment for the work completed prior to the delay costs, and the release was therefore limited to that payment, held the court. Moreover, since the Subcontractor never received its delay costs, the Prime could not have withhold a retention amount from those costs – and the Subcontractor could therefore pursue a claim for those delay costs that were not contemplated by the waiver.

Comment: The covenant of good faith and fair dealing is often expressly stated in a contract. Even when not stated, however, the court here explains that all contracts by common law contain a covenant of good faith and fair dealing. In contrast, we sometimes see contracts that state the parties have a duty of “trust and confidence” and to each other. That is not the same as “good faith and fair dealing.” We believe it could lead to a fiduciary duty that is not appropriate in design and construction contracts. Therefore, whenever we see word like “trust and confidence” we strike them and replace them with “good faith and fair dealing.”

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 25, No. 1 (January 2023).

Article 2

Failure to file Certificate of Merit Requires Case to be Dismissed with Prejudice

Where a contractor’s laborer died from poisonous gas exposure when he went into a manhole, his family filed suit against an Engineering firm alleging that the firm was negligent is causing the individuals death. They failed to include a certificate of merit with their complaint as required by Texas law. A trial court denied the engineer’s motion to dismiss, and this was reversed on appeal, with the appellate court explaining that the claims arose out of the provision of professional engineering services where they implicate the engineer’s education, training, and experience in applying special knowledge or judgment. As such, the appellants were required to file a certificate of merit with their first petition/complaint filed against the engineer. LJA Engineering, Inc. v. Santos, 652 S.W.3d 916 (Texas 2022).

The court reviewed the engineering contract and described the scope of professional services as follows:

“As its name implies, LJA Engineering provides professional engineering services. LJA Engineering contracted with the City of Sour Lake to provide engineering services for a sanitary sewer rehabilitation project. LJA Engineering agreed to, among other things, (1) provide “preliminary design activities” to establish the “appropriate design criteria” for the project, (2) design and prepare the construction plans and specifications for the project, and (3) provide “inspection services to adequately observe the construction activity.” In addition, the contract between LJA Engineering and Sour Lake provided that LJA Engineering would “serve as [Sour Lake's] professional representative for the Services, and may make recommendations to [Sour Lake] concerning actions relating to [Sour Lake's] contractors, but LJA [Engineering] specifically disclaim[ed] any authority to direct or supervise the means, methods, techniques, safety activities, personnel, compliance, sequences, or procedures of construction selected by [Sour Lake's] contractors.”

The plaintiff’s suit against the engineer asserted, “that LJA Engineering failed to (1) provide warning of the existence of the poisonous gas, (2) properly inspect and oversee the work, and (3) properly supervise those whose work they had the right to control.”

The State of Texas has adopted a statutory requirement that plaintiffs that sue design professionals for negligent performance of professional services must file a certificate of merit with their complaint when the claims arise out of the practice of engineering services. The court explained that:

“The “practice of engineering” means “the performance of or an offer or attempt to perform any public or private service or creative work, the adequate performance of which requires engineering education, training, and experience in applying special knowledge or judgment of the mathematical, physical, or engineering sciences to that service or creative work.” Jacobs Eng'g Grp., Inc., 502 S.W.3d at 464 (quoting Tex. Occ. Code § 1001.003(b)). The practice of engineering includes, among other things, (1) “consultation, investigation, evaluation, analysis, planning, [and] engineering for program management;” (2) “design, conceptual design, or conceptual design coordination of engineering works or systems;” (3) “engineering for review of the construction or installation of engineered works to monitor compliance with drawings or specifications;” and (4) “a service, design, analysis, or other work performed for a public or private entity in connection with a utility, structure, building, machine, equipment, process, system, work, project, or industrial or consumer product or equipment of a mechanical, electrical, electronic, chemical, hydraulic, pneumatic, geotechnical, or thermal nature.”

The court further stated that Claims arise out of the provision of professional engineering services if they implicate the engineer's education, training, and experience in applying special knowledge or judgment. In this case, the plaintiffs alleged that the engineer was negligent because it failed to do the following:

(1) “Maintain a safe work environment for workers;” (2) “ensure that workers operated in a reasonably safe manner;” (3) “provide warning of poisonous or hazardous chemicals/gases;” (4) “properly inspect and oversee the work;” (5) “address known hazards and risks;” (6) “utilize reasonable means of protecting workers;” (7) “ensure the sewers were clear before starting work;” (8) “implement and/or enforce adequate safety protocols and procedures;” and (9) “properly supervise those whose work they had a right to control.”

In looking at the allegations in the complaint the appellate court concluded that the allegations implicated the engineer’s “licensed professional engineer employee's education, training, and experience in applying special knowledge or judgment to the performance of LJA Engineering's contractual obligations to Sour Lake.”

For these reasons, the court held that a certificate of merit was required.

Article 3

Subcontractor Breached Contract by Refusing to Perform Extra Work as Directed by Contractor unless it First Received Change Order

A concrete sub-subcontractor breached its contract by refusing for perform extra work as directed by its contractor unless the contractor agreed upon the compensation amount to be paid and executed a change order. The court held that the language of the subcontract required the subcontractor to perform when directed by the contractor even if the amount to be paid might be disputed, and that the contractor was not required to execute a change order before the subcontractor would start performing the required work. McCarthy Concrete, Inc., v. Banton Construction, 203 A.D.3d 1496 (New York 2022).

For purposes of ease of reading, we are going to all the sub-subcontractor the “Plaintiff” or “Subcontractor”, and we The court explained the background as follows:

Plaintiff performed work on the project until the summer of 2015, when an “overall work suspension” by Amtrak caused Banton to demobilize plaintiff, estimating that the project would resume in the spring of 2016. After being unable to resolve …. Thereafter, Banton indicated that Amtrak desired to make changes to the concrete work including, as relevant here, using a concrete pumping method and installing tactile warning strips, and requested that plaintiff provide proposals for the costs of said modifications. Plaintiff sent proposals for some of the modifications, but they were not agreeable to Banton, and plaintiff was concerned about going forward without reaching an agreement as to compensation that accounted for plaintiff's increased labor and risk. On September 23, 2016, Banton directed plaintiff to return to the project site and proceed with the remaining work, despite having not yet reached an agreement as to compensation. Banton stated that it was “willing to fund the alleged added costs for concrete pumping and added reinforcing, under a reservation of rights.” Banton also stated that if plaintiff did not commence and continue work within three days, Banton would terminate plaintiff for default as well as seek costs. After plaintiff did not commence work, on September 27, 2016, Banton notified plaintiff that, because plaintiff breached the contract and did not proceed with the work, Banton was “forced to contract with another subcontractor to complete [plaintiff's] work.”

The issue to be decided by the court was whether the contract was breached by the contractor for refusing to issue a change order, or whether it was breached by the subcontractor for refusing to perform the additional work without first receiving a change order. The subcontract in question contained language typical of what is found in standard form contracts like those issued by the American Institute of Architects and others that require subcontractors to continue performing work so long as directed to do so by the contractor – even though no change order has been issued. The relevant language in this particular contract was quoted by the court as follows:

The subcontract between Banton and plaintiff provides that plaintiff “shall perform and provide all labor, materials, tools, equipment ... and any other item necessary to complete the [w]ork described below for the [p]roject” and provides a list of tasks that are “excluded from the subcontract,” including concrete pumping, winter conditions and tactile. With respect to changes and claims, the subcontract states that “[Banton] may, at any time, unilaterally or by agreement with [plaintiff], and without notice to the sureties, make changes in the [w]ork. Any unilateral order, or agreement under this [p]aragraph ... shall be in writing, unless an emergency requires [plaintiff] to proceed without a written order. [Plaintiff] shall immediately perform the work as changed without delay ” (emphasis added). The subcontract also provides that, “[f]or changes ordered by [Banton] independent of [Middlesex], [Amtrak] or the [c]ontract [d]ocuments, [plaintiff] shall be entitled to equitable adjustment of the [s]ubcontract [p]rice or [p]roject [s]chedule, or both to the extent that impact can be substantiated to [Banton's] satisfaction.... Pending resolution of any claim, dispute or other controversy, nothing shall excuse [plaintiff] from proceeding with prosecution of the [w]ork ” (emphasis added).

Although the court agrees with the subcontractor that the changes involved in the additional work were “material changes” the court stated that these changes did not constitute “cardinal” changes. A cardinal change is one that affects the essential identity or main purpose of the contract such that it constitutes a new undertaking. The main purpose of this contract was complete concrete work and the court concluded that the changes requested did not fundamentally change that purpose.

The court concluded its analysis as follows:

That said, we also do not agree with Supreme Court that plaintiff's performance under the subcontract was excused because there was no promise from Banton to compensate plaintiff for the changed work. Banton established that it had agreed not only to pay for the costs of the equipment needed to pump the concrete, but also agreed to pay some increased costs to plaintiff for the concrete pumping.³ Indeed, Banton's agreement to pay plaintiff for the changed work went above what Banton was required to do by way of the subcontract, wherein plaintiff agreed that “nothing shall excuse [plaintiff] from proceeding” with the work.⁴ The subcontract also specifically detailed the process to be followed by plaintiff to seek renumeration for increased costs due to changed work, and, if not satisfied, nothing would preclude plaintiff from commencing suit to seek damages. Further, it is clear from the subcontract that time was of the essence. Plaintiff's refusal to perform the changed work without an express agreement as to increased costs had the effect of holding Banton hostage in that the work,⁵ which was part of a much larger project, was stalled. Given that plaintiff had agreed, pursuant to the subcontract, to continue the work while pursing dispute resolution, its failure to perform the work amounted to a breach of the subcontract. Thus, we disagree with Supreme Court that Banton breached the contract based upon terminating the subcontract when plaintiff refused to perform absent an express agreement as to costs for the increased work. Accordingly, we reverse Supreme Court's determination that Banton breached the subcontract and wrongfully terminated plaintiff and vacate the judgment as to any damages and counsel fees awarded to plaintiff based upon that breach. Rather, we find that plaintiff breached the subcontract by refusing to perform the work as it was required to do under the subcontract and, as such, grant Banton's counterclaim for breach of contract.

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