By Phillip M. Daniels of Saul Ewing Arnstein & Lehr LLP
Published February 14, 2022
A recent bench trial in Delaware State Court ruled that a subcontractor was entitled to payment from a general contractor because an order of priority clause gave priority to a bid proposal contract term that barred a pay-when-paid clause from an owner. See Baltimore Pile Driving & Marine Constr., Inc. v. Wu & Assocs., Inc., No. CV N19L-07-090 SKR, 2021 WL 5711454 (Del. Super. Ct. Dec. 1, 2021).
When a contractor engages a subcontractor on a construction project, the subcontract negotiation process often follows this type of pattern: (A) the contractor issues a bid for a certain scope of work; (B) the subcontractor sends the general contractor a proposal, which, if signed by the contractor, serves as a contract for the bid services; (C) the contractor approves the scope of work but provides the subcontractor with the subcontractor’s preferred contract template for signature instead; and (D) the subcontractor and contractor ultimately agree to use a negotiated subcontract form. From the subcontractor’s standpoint, ensuring that the scope of work and the fee are clear are critical components of a subcontract, and the easiest way to address that is often by incorporating the subcontractor’s proposal into the subcontractor. A contractor equally benefits from its subcontractor having a firm grasp of its project obligations. Regardless, it is imperative that both the contractor and subcontractor understand the ramifications of a proposal becoming part of the contract.
The Baltimore Pile Driving & Marine Constr., Inc. v. Wu & Assocs., Inc. case illustrates this point. General contractor, Wu and Associates (“Wu”), contracted with subcontractor Baltimore Pile Driving and Marine Construction, Inc. (“BPDI”) for BPDI to construct an auger cast grout pile, to serve as the foundation for a gas material storage shed to be constructed by Wu. During construction, BPDI submitted 31 change order requests (“CORs”) to Wu concerning obstructions encountered while drilling, which led to downtime and loss of consumables (e.g. materials associated with its scope of work). Wu did not dispute eleven of the CORs and passed them through to the project owner for payment. Wu also did not dispute BPDI’s entitlement to payment for eight more CORs but withheld payment pursuant to its right to a setoff for costs incurred by BPDI. Wu denied and disputed the remaining twelve CORs. BPDI was not paid for any of the CORs. The project owner instructed Wu to terminate BPDI over “repeated ongoing concerns.” Wu terminated BPDI and did not pay BPDI for the CORs because
Wu never received funds from the project owner to cover the cost of the CORs. As a result, BPDI sued Wu to collect on the unpaid CORs.
BPDI and Wu had signed a contract that incorporated both BPDI’s proposal and an amendment drafted by Wu (“the Wu Addendum”). BPDI’s proposal included the provision, “NO PAY WHEN PAID CLAUSES ACCEPTED.” Meanwhile, the Wu Addendum included a pay-when-paid clause for change orders. However the Court ruled that BPDI’s proposal, which was incorporated into the contract, included an order of precedence clause that gave priority BPDI’s proposal in the event of conflicting clauses. As a result, the Court ruled that BPDI’s CORS were not subject to the Wu Addendum’s pay-when-paid clause, resulting in Wu being liable for some, but not all, of BPDI’s CORs.
This case demonstrates the importance of order of priority clauses in construction contracts.