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Court of Appeals Rejects Owner’s Common Contract Defenses

Payment disputes are becoming increasingly common as all project participants struggle with the harsh construction economy.  In a recent appellate opinion, a general contractor and its subcontractor recovered on the subcontractor’s differing-site-conditions claim, despite the owner’s assertion of fairly common and usually effective construction law defenses.

Background

In City of Savannah v. Batson-Cook Co., a subcontractor filed suit against a contractor to recover increased costs arising from differing site conditions.  While the contractor initially denied the subcontractor’s claim, it subsequently allowed the subcontractor to pass the claim through to the owner.  Accordingly, the subcontractor filed suit against the contractor, which filed a third-party complaint against the owner. 

The Owner’s Defenses

The owner asserted defenses and arguments related to, among other things, (1) the failure to provide certain close-out documents and to satisfy other conditions precedent; (2) the failure to provide timely notice of the claim; and (3) the improper assertion of non-contract claims.  At trial, the jury returned a verdict (1) in favor of the subcontractor (and against the contractor) for over $2 million, (2) in favor of the contractor (and against the owner) for over $17 million, and (3) in favor of the owner for $594,000.  The owner appealed. 

Court of Appeals: Owner’s Defenses Were Inadequate

The court of appeals affirmed the trial court’s verdict in favor of the contractor and subcontractor. 

  • The Rule of Futility: Excuse of Conditions Precedent

The owner first argued that the contractor/subcontractor failed to satisfy conditions precedent to final payment.  These conditions included (1) a request for final payment, (2) submission of a final accounting, (3) submission of affidavits and the consent of the surety, and (4) submission of a final application for payment.  The contractor-subcontractor countered that because the parties disputed the existence of differing site conditions, the subcontractor (and contractor) would certainly not agree that it had been fully paid.  Thus, satisfying the conditions precedent would have been futile.

The court agreed with the contractor and subcontractor, reasoning that satisfaction of the conditions precedent would have been a futile act, which the law does not require.  In other words, where satisfaction of a condition precedent depends on the resolution of key issues in dispute, such conditions are effectively excused.  It was, therefore, unnecessary for the contractor to perform a futile act of supplying the close-out documents in issue and other acts until the parties resolved whether differing site conditions in fact existed. 

As a precautionary note, a previous Georgia appellate case states that if the satisfaction of a condition precedent is not precluded by the disputed issues (and is thus not a futile act), the condition precedent is not excused.  Thus, contractors and subcontractors should not attempt to use the satisfaction of these conditions precedent as leverage in negotiations.   The rule stated by the Batson-Cook case applies only to the satisfaction of a condition precedent that is rendered futile due to the parties’ dispute. 

  • If Written Notice is Intended, Expressly Require Written Notice

The owner then argued that the contractor failed to provide timely written notice of its differing-site-conditions claim.  While the contract did require written notice in certain situations, the provision related to differing site conditions only required “notice.”  As a result, the owner could not require written notice for such claim, especially when it had actual notice. 

  • Non-Contract Claims Permitted for Extra-Contract Work

Finally, the owner argued that the subcontractor could not recover on claims for promissory estoppel and quantum meruit.  The court again ruled for the contractor/subcontractor because certain work performed by the subcontractor was outside of the scope of the subcontract (i.e., extra work).   The court reasoned that, where the contract does not expressly preclude (or does not specify claim procedures for) extra-work claims, such extra-work claims may be pursued through promissory estoppel or quantum meruit causes of action. 

Implication

The Batson-Cook case provides some relief for contractors and subcontractors in seeking payment for construction claims.  Most construction attorneys are familiar with, and regularly rely upon, arguments related to conditions precedent and notice and claims provisions  in construction contracts.  Nevertheless, this case indicates that certain creative arguments may be able to circumvent typical construction contract terms.