What you contractually agree to matters, particularly when you are deemed a sophisticated entity. This means you can figuratively live or die by the terms and conditions agreed to. Don’t take it from me, but it take it from the Fourth Circuit’s decision in U.S. f/u/b/o Modern Mosaic, Ltd. v. Turner Construction Co., 2019 WL 7174550 (4th Cir. 2019), where the Court started off by stressing, “One of our country’s bedrock principles is the freedom of individuals and entities to enter into contracts and rely that their terms will be enforced.” Id. at *1.
This case involved a dispute between a prime contractor and its precast concrete subcontractor on a federal project. The subcontractor filed a Miller Act payment bond lawsuit. The trial court ruled against the subcontractor based on…the subcontract’s terms! So, yes, what you contractually agree to matters.
Example #1 – The subcontractor fabricated and installed precast concrete panels per engineering drawings. However, the parking garage was not built per dimensions meaning the panels it fabricated would not fit. The subcontractor had to perform remedial work on the panels to get them to fit. The subcontractor pursued the prime contractor for these costs arguing the prime contractor should have field verified the dimensions. The problem for the subcontractor, however, was that the subcontract required the subcontractor, not the prime contractor, to field verify the dimensions. Based on this language that required the subcontractor to field verify existing conditions and take field measurements, the subcontractor was not entitled to its remedial costs (and they were close to $1 Million). Furthermore, and of importance, the Court noted that the subcontract contained a flow down provision requiring the subcontractor to be bound by all of the terms and conditions of the prime contract and assume those duties and obligations that the prime contractor was to assume towards the owner. While this flow-down provision may often be overlooked, here it was not, as it meant the subcontractor was assuming the field verification duties that the prime contractor was responsible to perform for the owner.
Example #2 – The subcontractor also argued that the prime contractor should bear its remedial costs to the precast panels because it accepted its shop drawings for the panels. However, the subcontract and prime contract (that was flowed down) required the subcontractor to obtain the approval of the prime contractor for the shop drawings before it started fabricating the panels. The subcontractor did not have the contractual right to begin fabrication prior to approval. The subcontractor, not uncommonly, started fabrication before the shop drawings were approved by the prime contractor. But even if the subcontractor obtained the approval, the subcontract provided that such approval does not relieve the subcontractor of performing the work per the plans and specifications and the proper matching and fitting of its work.
Example #3 – The subcontractor claimed it incurred additional costs due to soil remediation from another subcontractor. This required the subcontractor to wait many months for the soil to be properly prepared before it could finish its work. The subcontractor also incurred storage costs during this time. The prime contractor argued that the subcontract contained a no-damage-for-delay provision that barred the subcontractor’s damages. The trial court, affirmed by the appellate court, agreed that the subcontractor’s damages due to the delay were barred by the no-damage-for-delay provision it agreed to in the subcontract.
And, as the Court strongly concluded: “When parties, particularly sophisticated commercial entities like [prime contractor] and [subcontractor], negotiate and enter into written agreements, they have a right to expect the provisions of those agreements will not be cast aside when a dispute arises.” Id at 6. The Court started off and concluded its decision with the same principle
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