Two Views of the Same Contractual Defenses On Increased Labor Cost Claims
by John S. Mrowiec

Sophisticated subcontracts are usually written by prime contractors to attempt to maximize the general contractor's flexibility to maintain the project schedule while minimizing the subcontractor's ability to assert claims for delay, acceleration or disruption costs. A common combination of subcontract clauses would include the following:

(1.) Acknowledging that the subcontract time includes consideration of hindrances and delays
(2.) Allowing the general contractor to reschedule subcontractor's work
(3.) Requiring subcontractor to add workforce or to accelerate at contractor's direction
(4.) Excluding damages for delay
(5.) Providing contractor (or others) with final and binding decision-making authority on subcontractor claims
(6.) Setting short deadlines for submission of subcontractor claims and for protesting decisions on those claims

How effective are these provisions? It can be difficult to predict the outcome.

The answer often depends on the facts of the particular case. Two courts may read the provisions as applied to the very same facts completely differently. A textbook example is the recent case of Atlantic Coast Mechanical v. R.W. Allen Beers Construction, 2003 Ga. App. LEXIS 1468 (3d Div., Nov. 24, 2003), on reconsid., 2003 Ga. App. LEXIS 1573 (3d Div. Dec. 15, 2003).

Atlantic Coast Mechanical was the HVAC and plumbing subcontractor to Beers Construction, the general contractor. The project was the Children's Medical Center in Augusta, Ga.

The Subcontractor submitted a Request for Equitable Adjustment seeking payment of increased labor costs arising from alleged disruptions to the Subcontractor's work by the general contractor. Subcontractor claimed it was forced to perform its work in "a radically different manner, method and sequence than that reflected in the project schedules or contemplated by [subcontractor] at the time it bid on the project."

The REA listed a common litany of disruptions. Subcontractor claimed the following:

(a.) The concrete operations on the project were performed late and out of sequence and reshores were not removed as scheduled. As a result, Subcontractor had only restricted access to work areas and could not rough-in the overhead pipe and equipment using rolling scaffolds and manlifts, as planned.
(b.) When the restricted areas became more accessible, Subcontractor's work was constructively accelerated.
(c.) General Contractor required Subcontractor to work on most floors simultaneously which required Subcontractor to more than double the size of its crews and required the oversized crews to work overtime frequently.
(d.) General Contractor also instructed other subcontractors to work on floors where Subcontractor was working, further obstructing Subcontractor's access to ceiling work areas.
(e.) General Contractor allowed other subcontractors to stockpile drywall, curtain wall and other materials on the floors, further restricting Subcontractor's access to work areas.

Subcontractor claimed General Contractor's denial of Subcontractor's access to work areas, interference with Subcontractor's work and failure to schedule and manage other subcontractors properly resulted in a significant increase in labor costs.

The General Contractor denied the Subcontractor's REA in writing. The Subcontract contained the following provisions:

Article 3(b): Time is of the essence of this Trade Contract. In agreeing to complete the Work within the times and sequences herein mentioned, Subcontractor represents that it has taken into consideration and made allowances for all hindrances and delays incident to its Work.

Article 10(b): Subcontractor shall comply with any schedule requirements imposed upon General Contractor in its Agreement with the Owner. General Contractor shall have the right to decide the time, order and priority in which the various portions of Subcontractor's Work will be performed and other matters relative to the time and orderly conduct of Subcontractor's Work, if in General Contractor's judgment, such actions are necessary to assure compliance with the scheduling requirements imposed upon General Contractor in its Agreement with the Owner.

Article 10(c): Subcontractor shall at all times supply and promptly pay for adequate tools, appliances, equipment, a sufficient number of properly skilled workmen and a sufficient amount of materials and supplies of specified quality to efficiently and properly prosecute the Work in accordance with General Contractor's Schedule, and any modifications thereto issued by General Contractor, in order to achieve the Project completion date established by General Contractor. Subcontractor shall at all times give due consideration to the fact that other work is dependent upon Subcontractor's proper and timely completion of its Work.

Article 2: "Subcontractor agrees to be bound to General Contractor by all of the terms of the Agreement between General Contractor and the Owner (except for the payment provisions) and Subcontractor assumes toward General Contractor the obligations and responsibilities that General Contractor assumes toward the Owner. General Contractor shall have the benefit of all rights, redress and remedies against Subcontractor which the Owner has against General Contractor under its Agreement with General Contractor."

The contract between the General Contractor and the project owner stated the following:

In the event of any delay, not the fault of General Contractor, General Contractor shall be entitled to an extension of time for completion only, and shall not be entitled to any additional payment on account of such delay. Without limiting the foregoing . . . , General Contractor shall not be entitled to payment or compensation of any kind from the Owner for direct, indirect or impact damages, including but not limited to costs of acceleration arising because of hindrance or delay from any cause whatsoever, whether such hindrances or delays be reasonable or unreasonable, foreseeable or unforeseeable, or avoidable or unavoidable; provided, however, that this provision shall not preclude recovery by General Contractor of damages for hindrances or delays due solely to fraud or bad faith on the part of the Owner or his agents.

Article 14(b): Any dispute concerning a question of fact arising under this Agreement which is not resolved shall be decided by General Contractor, and General Contractor shall reduce its decision to writing and furnish a copy thereof to Subcontractor. The decision of General Contractor shall be final and conclusive, unless within forty-eight (48) hours from the date of receipt of such decision, Subcontractor issues written notice to General Contractor contesting same. If Subcontractor does not contest General Contractor's final decision within the time period noted above, Subcontractor shall be deemed to have waived any right to contest that decision. Subcontractor shall carry on the Work and comply with its performance and scheduling obligations under this Agreement despite the existence of any dispute or legal proceedings, unless otherwise agreed in writing by the parties hereto.

The Subcontractor sued. The General Contractor moved for summary judgment.
The Contractor's arguments were as follows:

(a.) Subcontractor had waived the claim by failing to object to Contractor's letter denying the claim within 48 hours of receiving the letter
(b.) The subcontract provisions regarding schedule and hindrances barred the claim

(c.) The incorporated "no damages for delay" provision from the prime contract barred the claim. (The General Contractor also had a "change order waiver" argument but space limitations prevent my discussion of that argument.)

The trial court agreed with the Contractor and entered summary judgment dismissing Subcontractor's complaint. The Subcontractor appealed.

The Atlantic Coast Mechanical Appellate court disagreed with all the Contractor's arguments and reversed the trial court's judgment. First, regarding the 48-hour rule, the Atlantic Coast Mechanical appellate court emphasized that the provision expressly was limited to disputes "concerning a question of fact." In its letter, the Contractor argued that Subcontractor's REA was barred by the Subcontract's provision and did not consider the merits of the claim. The appellate court said that Contractor had not considered the dispute as a question of fact and, by its "plain language," the Subcontract's "48 hour" provision did not apply.

Regarding the schedule and hindrances subcontract provisions, the Atlantic Coast Mechanical court carefully reviewed those provisions as well. The provision that acknowledged there would be hindrances and delays, the appellate court held, "applies only to hindrances and delays that [Subcontractor] could have foreseen upon entering the contract." Subcontractor had submitted evidence in opposition to the Contractor's summary judgment motion that the disruptions and hindrances were far in excess of what normally could be expected when the subcontract was executed.

In addition, the Atlantic Coast Mechanical appellate court noted that the provision was silent regarding Subcontractor's entitlement to additional compensation for unanticipated labor costs caused by General Contractor's disruption. Similarly, concerning the provisions allowing the General Contractor to alter the time, order and priority of Subcontractor's work, the appellate court noted that the provisions "do not address whether [Subcontractor] is entitled to assert a claim for additional compensation when [Subcontractor] incurs substantial unanticipated labor costs in trying to meet the schedule(s) established by [General Contractor]."

Addressing the incorporated "no damages for delay" clause, the Atlantic Coast Mechanical appellate court noted there was other language in the subcontract that permitted compensation for disruption and delays not the fault of Subcontractor "to the extent, but only to the extent [General Contractor] actually recovers compensation for same from the Owner." The Subcontract contained a provision that, in the event of any conflicts between the subcontract agreement form and the incorporated prime contract, the subcontract agreement would govern. The Atlantic Coast Mechanical appellate court held that the subcontract language allowing compensation under some circumstances then trumped the incorporated prime contract's "no damages for delay" clause. The appellate court did not explain whether Subcontractor's rights depended on payment to General Contractor by Owner.

The Atlantic Coast Mechanical appellate court sent the case back to the trial court for trial. Two courts; same facts; same contract; opposite results.

John S. Mrowiec is a partner with Chicago-based Conway & Mrowiec, a construction and public contracts law and litigation practice. He may be reached at (312) 658-1100. For information, go to the firm's Web site at www.cmcontractors.com.