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Betting the Farm: Three Rules for Construction
Disputes
Contractors need to avoid taking
irrevocable positions and be willing to explore and accept
reasonable compromises
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Stuart
Sobel
ATTORNEY AT LAW
Stuart Sobel is a shareholder of
the Coral Gables-based firm Siegfried, Rivera, Lerner,
De La Torre & Sobel P.A. He specializes in trial,
arbitration and appeal of business and tort disputes
with an emphasis on construction-related litigation.
Web site: http://www.siegfriedlaw.com/
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H.
Hugh McConnell
ATTORNEY AT LAW
H. Hugh McConnell is with the Coral
Gables-based law firm of Siegfried, Rivera, Lerner,
De La Torre & Sobel P.A. He specializes in construction
litigation and appellate practice. McConnell received
his law degree from Northeastern University.
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In a recent ruling by the U.S. District
Court for the Eastern District of Philadelphia, a metal panel
subcontractor learned a hard lesson about walking off a job
in a dispute with the contractor. The case was LBL Skysystems
(USA) Corp. v. APG-America Inc. and also involved the firms'
respective sureties.
The Facts of the Case
LBL had hired APG to install metal panels in the new USAirways
International Terminal at the Philadelphia airport. After
two years of working on the project, APG attempted to reduce
its scope by claiming it had erroneously supplied the support
steel for attaching its panels to the building. APG delivered
an ultimatum to LBL: Pay approximately $5 million for the
design, engineering, fabrication and installation of the support
steel already in place or APG would leave the job.
LBL investigated and confirmed that the support steel was
part of APG's contract. APG had hired an independent structural
engineer to design the steel that it now said deserved a change
order. APG's bid documents, design drawings, purchasing and
pay applications all confirmed that APG had indeed included
the support steel in the original contract up until that point.
LBL tried to dissuade APG from taking the drastic step of
walking off the job. But APG followed through on its threat
and reduced its manpower nearly to zero, a level where work
could not progress at the rate needed to keep LBL from defaulting
on its own contract with USAirways.
At this critical stage, LBL could afford neither to lose
its key subcontractor nor pay an extra $5 million for work
it had already purchased under the existing subcontract. LBL
called upon APG's performance bond surety to find a solution,
but the surety delayed a decision and ultimately declined
to complete APG's work or fund LBL's completion of it.
LBL was left with no choice but to do the work itself at
its own cost, which it did. Although it was an experienced
curtain-wall fabricator, LBL was not in the metal-panel business
and could not complete the work as efficiently as APG. Not
surprisingly, it cost LBL a lot more to complete APG's scope
of work than it would have cost APG itself. LBL deducted those
costs from the balance remaining in the subcontract and sued
APG for the difference.
After a hard-fought trial, the U.S. District Court agreed
with LBL, finding that the support steel was part of APG's
scope of work in the subcontract. The court awarded LBL a
judgment against both APG and its surety for nearly $2 million,
including interest. In addition, LBL is now seeking to recover
its fees from APG and its surety, which could more than double
APG's loss.
The disastrous miscalculations and missteps by APG now threaten
to close the doors on this third-generation business. Why
did this happen? How could it have been avoided?
Subcontract Provisions
Putting aside APG's position on the disputed work, perhaps
its fatal step was following through on its threat without
considering the full implications of its subcontract. As is
common, the prime contract between USAirways and LBL was also
incorporated into the LBL/APG subcontract. During negotiation
of the subcontract, a provision was stricken that would have
authorized APG to stop work during a dispute. That left APG
bound to a provision in the prime contract that expressly
required it to continue "working expeditiously"
during a dispute.
The court decided that APG's abandonment was inexcusable
whether or not APG's position on the scope dispute had merit.
It ruled that there was a material breach of the contract,
entitling LBL to recover the costs of completing APG's work
even if the cost to LBL exceeded what it might have cost APG
to continue working.
Lessons Learned
Three lessons come to mind from the Philadelphia airport
debacle:
- Read and understand the entire contract.
- Avoid taking irrevocable positions that may excuse performance
by your adversary.
- Be willing to explore and accept a reasonable compromise.
Construction agreements usually include by reference documents
that are separate from the single contract signed by the parties.
Subcontracts incorporate the terms of prime contracts, and
general and special conditions.
Also, bonds and insurance policies required by the contract
language impact the rights and obligations of the parties.
The total package of documents that make up the subcontract
must be carefully studied as an integrated agreement. The
time to understand the agreement is not after a dispute has
materialized but before it is signed, before work begins and
before disputes arise.
In this case, APG should not have walked off the job, no
matter how valid its position about the scope of work might
have been. The subcontract anticipated that disputes might
arise and prohibited APG from stopping its work, whatever
the dispute. APG also took an irrevocable position and ignored
all reasonable efforts at compromise, which left LBL with
no alternative except to terminate APG and sue both it and
its surety.
What should have been a negotiable dispute over half a million
dollars became a liability for millions.
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