United States: Fabricator/Erector Right To Pay For Extra Work Delayed By Legal Morass

A recent intermediate appellate court decision demonstrates how a complex legal relationship among an owner/developer, a design/builder, and a construction manager-at-risk can significantly prejudice a fabricator/erector's entitlement to its contract balance and payment for extra work. The situation is an obvious, continuing nightmare for the fabricator and erector involved – companies that tried to follow their contracts "by the book;" but, some eight years after the work was complete, they still have not been paid. It provides a number of lessons and warnings for those involved in the fabricated structural steel industry in the United States.
The decision is not yet final and the fabricator/erector's battle is not yet over; so stay tuned. A summary of what has occurred so far and some lessons to be learned are set out below.

Facts taken from the intermediate appellate court decision:

  • This was a hard bid, high rise condominium project; somewhat different from most projects in that fabrication and erection were bid to a CM-at-risk that had a contract with a design/builder; that in turn had a contract with the developer/owner.
  • There was a relatively standard change order clause in the fabricator's contract; plus a pay-if-paid clause; plus a clause awarding attorney fees to the prevailing party in the event of a dispute.
  • The fabricator was awarded the structural steel fabrication/erection work in 2006.
  • Thereafter an issue developed over alleged changes to the roof edge design. As set out in an appellate court judge's concurring opinion:

    "...I am deeply troubled by the discussions involving the proposed design changes. In 2006, the [owner and design/builder] repeatedly revised the structural design drawings. These resulted in significant changes to the termination of the roof edge and roof tip. [The fabricator and erector] both noted that these changes would require additional steel and welding work beyond the specifications called for in the contracts.

    [The CM-at-risk] directed [the fabricator and erector] to begin the work and keep track of their time and costs. Nevertheless, [the erector] wanted additional assurances that it would be paid for the additional welding work. [Authorized representatives of the CM-at-risk and design/builder] both directed [the erector] to proceed with the extra work and keep track of time and costs..."
  • It is not clear from the appellate court decision whether this direction was reduced to writing or not.
  • The steel fabrication and erection work appears to have been completed in 2007. The fabricator and erector were not paid for their extra work or their retainage on the base contract work.
  • Liens were filed in late 2007 and multiple law suits were filed starting in 2008. In the liens and suit the fabricator and erector ask for slightly more than $1,200,000 in payment due. There is no indication from the appellate court decision that there was an allegation of any deficiency in the fabricator or erector's work. No back charge claims or counter claims against the fabricator or erector are referenced in the appellate court decision.
  • The fabricator and erector's case came to trial before a jury on May 12, 2011. The trial appears to have stretched into late May or early June. The intermediate appellate court decision tells us that "the jury took only one hour to return a verdict in favor of [the fabricator and erector] for the full amounts requested."
  • After months of legal briefing and argument, final judgment was entered by the court in favor of the fabricator/erector on February 3, 2012, awarding the fabricator and erector the total sum of $603,456.19 in damages, plus pre-award and post-award interest, plus reimbursement of $349,241.70 in attorney fees. By this time filings indicate the fabricator and erector had incurred $904,778.68 in legal fees and related costs and claimed interest costs in the amount of $603,456.19.
  • The judgment was appealed; and on January 9, 2015, an intermediate appellate court entered an opinion vacating the jury verdict and judgment sending the dispute back to court for a second trial.

Four alternative paths forward:

  1. At this point there are four alternative paths that the case may take to resolution. First, the case may go back down to the state circuit court for a second jury trial, as ordered by the intermediate appellate court; or
  2. One or more of the parties may file a motion with the intermediate appellate court and ask the intermediate appellate court to reconsider its decision based on what are argued to be errors of fact or law in the decision; or
  3. One or more of the parties may file for review of the intermediate appellate court decision by the state's Supreme Court; or
  4. Two or more of the parties may enter into one or more settlement agreements resolving all or portions of the dispute without the necessity of further legal proceedings.

Positions and rationale:

In a nutshell, here are the relative positions of the parties and the appellate court's rationale in vacating the judgment and ordering a new trial:

The fabricator and erector want to be paid for their work and recover their out-of-pocket costs for having to deal with a situation that they feel was not of their making.

The construction manager believes that the cost of any extra work, the retainage, and any other legitimate cost incurred by the fabricator/erector should be paid by the owner and/or the design builder, not by the construction manager. It believes that it is protected by the pay-if-paid clause in its subcontract with the fabricator.

The design/builder believes that its original design and contract documents are sufficient to protect it from additional costs for extra work, (its directions to the erector to proceed with the extra work notwithstanding). It is arguing that the trial court erred in the manner in which the contract and other legal issues were presented to the jury.

The owner believes that it has a lump-sum contract and that any costs incurred beyond the lump sum were not approved as extras in a manner required by contract that would obligate it to pay more than the lump-sum.

The intermediate appellate court believed that the factual and legal issues involved in this dispute were not properly presented to the jury; that the failure to properly present the facts and law to the jury was a potentially prejudicial error; and that it had no alternative but to vacate the judgment and send the case back down for another trial.

Take-aways

In these sorts of situations hindsight is always 20/20. Without intending to be critical of anyone involved (and with a full understanding that leverage by subcontractors entering into contracts with general contractors, construction managers, design/builders, and owners is very limited), here are some take-aways for fabricators and erectors:

  1. From the fabricator/erector's standpoint, "pay-when/if-paid" clauses are among the "killer" contract clauses that should be avoided if at all possible. Other "killer" clauses include waiver of mechanic's lien clauses and clauses that include a right to set off payment due on one project because of disputes that arise on another project.
  2. The law of each state is slightly different. Mechanic's lien laws, enforcement of pay-if/when-paid clauses, subcontractor rights, application of the law of negligence to construction contract disputes, and court interpretations of "non-traditional" project delivery systems, such as design/build and CM-at-risk, may vary from state to state. The peculiarities of each state's individual laws and interpretation of legal principles could come into play in the event of a dispute. To the extent possible, subcontractors such as fabricators and erectors should be aware of these peculiarities at the front end of a project, before they enter into a contract, rather than at the back end, in state court litigation.
  3. In that regard, a subcontractor, such as fabricator or erector, has a right to understand what project delivery, dispute resolution and other contract provisions are in play above it in the project chain of command. Fabricators, erectors, and other subcontractors should also know ahead of time whether the contractor above it in the chain-of-command has made concessions that could materially impact the subcontractor's right to be paid.
  4. If a fabricator, erector, or other subcontractor finds itself working under a contract with unfavorable or questionable terms, and it is asked to undertake extra work, the direction to proceed with that extra work should be in writing, should be executed by the contracting senior and all others above it in the chain of command who control payment, and should contain a provision stating that the fabricator/erector or other subcontractor will be paid for the extra work notwithstanding any other provisions to the contrary in the existing contract documents. In other words, you may want to enter into what lawyers call a novation – a second contract that overrides some of the provisions of the original contract – before you proceed with extra work.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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