Unintended Consequences of Incorporating Subcontractor’s Proposals in the Subcontract

By Lawrence LeClair posted 05-09-2022 01:08 PM

  

By Michael J. Baker of Snell & Wilmer LLP
Published Spring 2022


Contractor and subcontractor negotiations often lead to contract terms and language being incorporated into the subcontract agreement, which then leads to surprising results when issues arise. These results often occur when multiple documents are incorporated by reference or attached as exhibits and incorporated into the subcontract agreement. A recent Delaware decision, Baltimore Piled Driving & Marine Construction, Inc. v. Wu & Associates, Inc. 2021 WL 571-1454 highlights this common scenario and accompanying pitfalls. The parties’ subcontract incorporated the subcontractor proposal into the subcontract. This case demonstrates the unintended consequences resulting therefrom, and the dangers of incorporating conflicting clauses as a result of incorporating the subcontractor’s proposal into the subcontract agreement. This case also highlights the importance of order of precedence clauses in construction contracts.

The Baltimore Piled Driving and Marine Construction case illustrates the importance of understanding the consequences of incorporating a subcontract proposal into the subcontract agreement. In this case, WU, (“contractor”) contracted with Baltimore Marine (“subcontractor”) to construct grout piles to serve as the foundation for a material storage shed to be constructed by the general contractor. During construction, the subcontractor submitted 31 change order requests to the contractor concerning obstructions encountered while drilling, which allegedly led to additional costs and loss of time. The contractor did not dispute entitlement to many of the change orders requested and passed them through to the owner for payment. In the end, the contractor denied and disputed only 12 proposed change orders. The subcontractor was not paid for any of the proposed change orders. The project owner instructed general contractor to terminate the subcontractor over “ongoing concerns.” The contractor terminated the subcontractor as instructed and did not pay the subcontractor for the proposed change orders because the contractor never received funds from the project Owner in order to cover the cost of the proposed change orders. The contractor relied on language in the subcontract addendum that contained a paid-if-paid clause. The subcontractor sued the contractor to collect on all of the unpaid proposed change orders.

The subcontract incorporated both the subcontractor’s proposal and the amendment drafted by the general contractor containing the paid-if-paid language. The subcontractor’s proposal included the provision, “NO PAY WHEN PAY CLAUSES ACCEPTED.” The court ruled that the subcontractor’s proposal, which was incorporated into the subcontract, included an order of precedence clause that gave priority to subcontractor’s proposal in the event of conflicting clauses. As a result, the court ruled that the subcontractor change orders were not subject to the general contractor’s addendum “paid-if-paid” clause, resulting in the general contractor being liable for many of the subcontractor’s change orders. In other words, the general contractor did not have the pay-if-paid clause available as a defense. The takeaway here is to be careful about what is incorporated into your agreement and understand the impact of an order of precedence clause. Otherwise, you may have taken on more risk than you intended, which in the end can cost you a significant amount.



Michael J. Baker is a partner with Snell & Wilmer LLP. He focuses his practice on the representation of design professionals, engineers, general contractors, and public and private owners. His experience includes providing representation for business and contractual matters as well as disputes before arbitration panels, mediators and trial courts. He can be reached at mjbaker@swlaw.com or 714.427.7472.

 

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