HawaiiConstructionLaw.com

Actual Notice of Delays Defeats Defense of Lack of Written Notice

During the early 1990s, debtor Redondo Construction Corporation (“Redondo”) entered into three separate construction contracts with the Puerto Rico Highway and Transportation Authority (“Authority”).  The contracts required the debtor to undertake construction of a bridge and access road (the Patillas project); replacement of a different bridge (the Dorado-Toa Alta project); and highway improvements (the
Mayagüez project). The Authority spelled out the design plans, specifications, and anticipated site conditions for each project in the contract documents.

 Each of the three projects encountered unanticipated problems, including unforeseen site conditions and flawed design plans.  Corrective actions substantially delayed
completion of the projects, forced the debtor to perform extra work, and ratcheted up the costs.  The Mayagüez project alone ran nearly three years past schedule due to modifications and change orders requested by the Authority.  

 The debtor eventually completed all three of the projects, and submitted claims for additional amounts owed under the contracts. While the claims were pending, the debtor filed for bankruptcy protection. In the Chapter 11 proceedings, the debtor served the Authority with a trio of adversary complaints. Each complaint concerned amounts allegedly owed with respect to a particular project.  The complaints were
tried before the bankruptcy court.  With the consent of the parties, the court issued a final judgment, finding that each of the three projects experienced delays and cost overruns for which the Authority was responsible.  The bankruptcy court concluded, among other things, that the physical conditions at the construction sites differed materially from those described by the Authority in the contract documents and that some specifications and design elements were flawed. In the end, the court awarded the debtor a total of $12,028,311.92 plus prejudgment interest at 6.5% per annum.  On motion, the court reduced the amount of damages by $69,792.26 but otherwise left the judgment intact.  On appeal to the district court, the district court found that the Authority’s claimed assignments or error were unpreserved, and affirmed the judgment without any substantive analysis of the Authority's assertions.

 The Authority appealed to the First Circuit, arguing four points on appeal.  First, the Authority argued that the debtor waived any claims related to the Mayagüez project by
failing to furnish timely written notice of its intention to seek additional recompense. Second, it argued that the court incorrectly awarded the debtor extended overhead damages and, in the alternative, miscalculated those damages.  Third, it argued that the debtor lacked standing to assert subcontractor claims. Finally, it argued that the court erred in awarding prejudgment interest.  This post addresses the first point -- written notice, as that is an issue that arises constantly in construction disputes.

 The Authority argued that the debtor waived its right to additional remuneration for the Mayagüez project. In support, the Authority invoked the so-called Blue Book -- the standard specifications for road and bridge construction that the parties acknowledge are incorporated in all of the contracts.  The Blue Book required the
Contractor to notify the [resident] Engineer in writing of his intention to make a claim for extra compensation within one working day after he begins the work on which he bases the claim.  With respect to the Mayagüez project, the Authority argued that the debtor submitted no written claims for additional compensation until approximately
six-and-a-half years after completion of the work.

 The bankruptcy court apparently agreed that the debtor had neglected to provide the written notice described in the Blue Book. The court found, however, that the Authority had received timely actual notice: the debtor had informed the Authority both of the problems and of its intention to seek additional compensation in a prolonged series of daily conversations and weekly meetings.  The court also found
that the Authority had issued work orders and/or change orders authorizing the
further work.  The First Circuit upheld these findings, noting its belief that the better rule and the law it believed the Puerto Rico Supreme Court would adopt if presented with the situation, is that strict conformity with a contract's written notice provision is not required as long as the counterparty receives substantially the same information through timely actual notice and suffers no prejudice from the non-conformity.  The court noted the Authority failed to demonstrate it was in any way prejudiced by its receipt of oral, as opposed to written, notice.  

In re Redondo Constr. Corp. v. Puerto Rico Highway and Transportation Authority, (First Cir. May 11, 2012). 

 

Pay if Paid Case from the 7th Circuit

BMD Contractors, Inc., (“BMD”) was a mechanical piping subcontractor to Industrial Power Systems, Inc. (“Industrial Power”), which was in turn a subcontractor for the
general contractor overseeing the construction of an automobile transmission
manufacturing plant for Chrysler near Indianapolis, Indiana.  The project owner was Getrag Transmission Manufacturing, LLC. (“Getrag”). 

In connection with the project, Industrial Power executed a payment bond with
Fidelity and Deposit Company of Maryland (“Fidelity”). 

The project proceeded for a year when the manufacturer Getrag declared bankruptcy.   Work on the project ceased, and Getrag and its contractor and subcontractors defaulted on their payments under their respective contracts, causing a series of payment defaults to flow down the levels of contractors and subcontractors. 

 BMD and its subcontractor filed mechanics’ liens against Getrag’s property, and BMD
assigned to Feguson a portion of its rights under the payment bond.  Both Industrial Power and its surety, Fidelity, refused to pay BMD and Ferguson for their work, and both BMD and Ferguson sued Fidelity on the bond. 

 The subcontract between BMD and Industrial Power contained language the district court construed as a “pay if paid” clause, requiring Industrial Power to pay BMD only
if it received payment under its own contract with the general contractor.  The language of the subcontract stated that BMD “expressly agreed” that the owner’s “acceptance of subcontractor’s work and payment to the contractor for the subcontractor’ s work are conditions precedent to the subcontractor’s right to payments by the contractor.”  The district court rejected BMD’s argument
that the language at issue was in fact a “pay when paid” clause, which would
only have addressed the timing of payment, rather than whether payment must be
made at all. 

 On appeal, the Seventh Circuit Court of Appeals, sitting in diversity and applying Indiana law, made its best prediction of how the Indiana Supreme Court would decide the case.  It first discussed the difference between pay when paid vs. pay if paid clauses. 

BMD argued that because the subcontract provision at issue did not
contain language stating that BMD assumed the risk of nonpayment, it could not
be deemed a pay if paid clause.  The court rejected this argument, holding that “transfer of risk” language is not necessary to create an enforceable pay if paid clause.  The key language, instead, was the condition precedent language, which the Seventh Circuit found was sufficient, and noted has been deemed sufficient by the majority of courts that have evaluated such language.  The court further rejected
BMD’s argument that pay if paid clauses are void under Indiana public policy,
observing that Indiana courts will not find a violation of public policy unless
the language of the implicated statute is clear and unambiguous.  BMD relied upon a statute voiding waivers of payment bonds, holding that a provision in a contract that requires a person to waive a right to a claim against a payment bond before the person was paid for labor or materials, is void as a matter of law.  The court held that this provision was inapplicable to the contract language at issue since nothing in the BMD subcontract required it to waive its rights to payment under the payment bond. 
Rather, the subcontract allocated the risk of nonpayment. 

 Finally, BMD argued because the payment bond did not expressly incorporate the terms of the BMD subcontract, Fidelity could be liable to BMD even though Industrial Power was not liable under the subcontract.  The court said this violated basic tenets of common surety law, under which the surety possesses the defenses of its principal.

 BMD Contractors, Inc. v. Fidelity and Deposit Company of Maryland, 2012
U.S. App. LEXIS 9558 (7^th Cir. May 11, 2012). 

 

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Following up on their incredible feat of constructing a 30 story hotel in 15 days, Broad Sustainable Building ("BSB") reports it is planning construction of a 220 story building to be constructed in Changsha, in the Hunan Province.   The building will be called Sky City, and will be serviced by 104 elevators.

BSB claims its planned construction will be approved by the Chinese government, and will represent another breakthrough in sustainable and economical construction.  Sky City is expected to consume a fifth of the energy required to build a conventional building due to the company’s ‘unique construction methods’, such as ‘quadruple glazing’ and ‘15-centimeter-thick exterior walls for thermal insulation’.  It is also expected to cost much less to build than conventional construction -- $628 million as compared to $1.5 billion to construct the 828 m Burj Khalifa -- the world's current tallest building. 

 

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