Inside this Issue

A1 - Notice of Proposed Termination and An Opportunity to Cure is Implied in Every Contract
A2 - Subcontractor unreasonably relied on email from Prime that stated only a little rock should be expected – contrary to the Geotech Report that showed the actual hard rock
A3 - Economic Loss Doctrine Does not Limit Actions where Tangible Property has been Damaged

Article 1

Notice of Proposed Termination and An Opportunity to Cure is Implied in Every Contract

Gail S. Kelley, P.E., J.D.

Termination of a contract for default can have significant consequences for a Contractor. In addition to the loss of work and loss of potential profit on the project, the Contractor may be liable for the Owner’s costs to complete the project with another contractor. Having a default termination on its record may also affect the Contractor’s ability to obtain future work. An improper termination can have equally significant consequences for the Owner, who may forfeit damages that it would otherwise be entitled to, and may be found liable for the Contractor’s damages from the termination. As a result, owners generally make sure that they strictly comply with all contractually required termination procedures, which raises the question of how an Owner should proceed when the contract is silent as to the requirements for a termination for default. The Connecticut Supreme Court addressed this issue in Centerplan Construction v. City of Hartford, 343 Conn. 368, 274 A.3d 51, and its opinion highlights the problems that can arise when a contract does not clearly state the parties’ rights and obligations.

The case involved a dispute over which party was responsible for delays in construction of the Dunkin Donuts baseball stadium in Hartford, Connecticut. The dispositive issue in the appeal before the court was whether the trial court correctly concluded that the plaintiffs—the project's developer, DoNo Hartford, LLC (Developer), and the project's design-builder, Centerplan Construction Company, LLC (Design-Builder) —"controlled" the architect and were therefore liable for any mistakes in, and changes to, the stadium's design. However, in remanding the case for a new trial, the court addressed the issue of whether a term sheet signed by the Owner (the City of Hartford) and the Developer unambiguously eliminated the Design-Builder’s right to notice and an opportunity to cure before it was terminated for default.

The City had contracted with the Developer under the Developer Agreement; the Developer in turn, contracted with the Design-Builder under the Builder Agreement. The three parties—the City, Developer, and Design-Builder—also entered into an agreement (the Direct Agreement) which allowed the City to step into the Developer’s shoes, replacing the Developer as a party to the Builder Agreement, if the City terminated the Developer Agreement.

During construction, the Developer sent a notice of claim to the City, requesting a budget increase and time extension because of changes that the City and the baseball team had made to the design. To resolve Developer’s claim, the City executed a term sheet with the Developer which extended the substantial completion deadline by two months, prevented any changes to the stadium's design without the City's consent, modified the liquidated damages provision in the Developer Agreement, and increased the contract amount. The Design-Builder was not a party to the term sheet.

When the extended substantial completion deadline was not attained, the City terminated both the Developer Agreement and the Builder Agreement. The plaintiffs sought an injunction against the terminations, and subsequently amended their complaint to include a breach of contract claim, alleging that the City had failed to provide notice and an opportunity to cure the default before termination.

Under the Development Agreement, the City could only terminate for default and remove Centerplan after providing all applicable notice and cure periods. Likewise, under the Builder Agreement, the Developer could only terminate the Design-Builder for default if Design-Builder failed to cure the default after being given seven-days' notice. However, the City claimed that in exchange for giving the Design-Builder an additional two months to complete the project, the term sheet divested the Design-Builder of any right to notice and an opportunity to cure. The court disagreed and found that because the Design-Builder was not a party to the term sheet, it was not bound by its terms. Although a contract may provide benefits to a third party, it cannot bind or impose any liability on a third party.

In both the Builder Agreement and the Direct Agreement, the Design-Builder agreed to certain provisions of the Developer Agreement, however, it did not agree to be bound by future modifications to the Developer Agreement. The court noted that even if the Design-Builder had somehow manifested assent to the term sheet, the fact that the term sheet was silent regarding any notice and cure requirements did not mean that no such requirements existed.

Under well-established common law, the right to cure is implied as a matter of law unless expressly waived. Because the term sheet was silent as to the common-law right, there was no express waiver of the right.

About the Author: As a professional engineer, Gail Kelley has performed structural design and analysis of post-tensioned structures, has performed constructability reviews, due diligence inspections, and condition assessments, and has provided litigation support for construction defect and delay claims in both state and federal court. She received her B.S. in Civil Engineering from Cornell University, and Master of Science in Structure and Materials from Massachusetts Institute of Technology (MIT), and she received her Juris Doctorate from American University, Washington College of Law. She provides risk management services for ConstructionRisk, LLC.

This article is published in ConstructionRisk Report, Vol. 25, No. 3 (March 2023).

Article 2

Subcontractor unreasonably relied on email from Prime that stated only a little rock should be expected – contrary to the Geotech Report that showed the actual hard rock

Foundation subcontractor sought extra payment for alleged differing site conditions related to rock found in the excavation area. The geotechnical report provided by the contractor showed several boring holes with this type of hard rock. But an email from the contractor to the subcontractor prior to bid date stated the rock would be Schist – consisting of mud and clay. The email also stated that a small portion of the site appears to be underlain by Ultramafic and Gabbroic Rock. The contract contained a pay-when-paid clause. Contractor submitted to the General Contractor the subcontractor's change order requests and other payment requests. While this was being analyzed by the GC the subcontractor stopped working and left the job -alleging that the contractor breached the contract by not prosecuting the claims to the Owner and by not promptly paying the subcontractor. Trial court and appellate court found the subcontractor did not reasonably rely on the contractor’s email and was warned of the conditions via the Geotech Report. The evidence demonstrated that the contractor acted in good faith and fair dealing and was actively seeking payment of the subcontractor requested change orders when he breached the contract by stopping work. Dietzel Enterprises, Inc. v. J.A. Wever Construction, LLC, 312 Neb 426 (2022).

The court determined that due to the pay-when-paid clause, the contractor had no obligation to pay the subcontractor “unless and until it received payment from [the GC]….” The court held that the subcontractor breached the contract by stopping its work.

Negligent Misrepresentation. Evidence at trial showed that the subcontractor admitted that the Geotech report “was the best source of information about subsurface conditions and that it was available to him when he formulated [subcontractor’s bid].” But the contractor alleged he relied on the email that he received 30 minutes earlier than when the contractor emailed him the Geotech report. He alleged that he relied on that first email and would not have submitted a bid but for the description of the conditions contained in that email. He alleged that contractor’s email constituted a negligent misrepresentation. That claim was rejected by the court because it held that the subcontractor did not justifiably rely on the representation contained in that email. The Geotech report that provided the correct information should have been relied upon by the subcontractor.

Good Faith and Fair Dealing. The subcontractor notified the contractor that it was unable to begin its excavation work on time. As a result, the contractor began doing excavation work for three (3) weeks before the subcontractor took over the work. During that them the contractor encountered hard rock in certain areas of the site. It failed to advise the subcontractor of those conditions. The subcontractor’s complaint alleged that this constituted a breach of the covenant of good faith and fair dealing. The court rejected that argument because it found the contractor was not obligated to inform the subcontractor about the hard rock because “the existence of the rock was something [Subcontractor] should have contemplated given the information that was available to it at time it submitted its bid.” The court noted that “the implied covenant of good faith and fair dealing exists in every contract and require that none of the parties do anything which will injure the right of another party to receive the benefit of the contract.” In this case, the court found no evidence of breach of the duty.

Pay-When-Paid Contract – Adequate Assurances of Prosecution of claim

Subcontractor submitted requests for “progress payments” as well as requests for payment on “change orders.” No one at the contractor ever disputed the change order requests or stated that they were rejecting the change order requests or otherwise not submitting them upstream to the prime contractor for review and payment. In fact, there was email between the parties acknowledging that the change orders had been submitted by the contractor up to the GC for payment. There was also a meeting between the parties at some point where the upstream review process had been discussed. The subcontractor therefore had no basis for arguing that the contractor was obligated to assure it that it was “prosecuting” the change order with the GC and that it would pay the subcontractor for the change orders.

For these and other reasons, the appellate court affirmed the trial court’s decision denying the subcontractor claims.

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. 3 (March 2023).

Article 3

Economic Loss Doctrine Does not Limit Actions where Tangible Property has been Damaged

See similar articles: Economic Loss Doctrine

Homeowner whose house was damaged by a landslide filed negligence lawsuit against a geotechnical engineer who performed a Geotech investigation for the homebuilder/contractor. The contractor was out of business and couldn’t be sued. Trial court dismissed the lawsuit based the application of the economic loss rule. This rule applies in this case where there was no privity of contract between the litigating parties. It “prevents recovery in tort of damages for purely economic loss.” On appeal, the homeowner argued that the rule should not have been applied because they are seeking damages to tangible property and not purely economic loss.

In this case, the appellate court reversed the summary judgment and held that the economic loss rule was inapplicable because the damages sought were for property damage and not purely economic losses. Breazeale v. Infrastructure & Development Engineering, Inc., 2022 WL 17830622 (Ohio 2022).

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