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ConstructionRisk.com Report
http://www.ConstructionRisk.com
Vol. 6, No. 6, September 04
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Inside
This Issue:
• Do You Really Want to Cash that Check?
• Indemnification Clause Unenforceable if Negligent Parties Are
Indemnified
• Insurance Carrier not Required to Treat CM as Additional Insured
Under Contractor’s Policy
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ARTICLE
#1
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Do You Really Want to
Cash that Check?
By M.K.
Holohan, Esq. – Wickwire Gavin, P.C.
Everyone involved in construction contracts is concerned about payment.
Owners generally refuse to pay general contractors until they have
secured lien releases; general contractors are hesitant to pay
subcontractors until specific blocks of work have been completed; and
subcontractors are concerned about getting paid at all. Given these
concerns, it is easy to see why a subcontractor might be quick to accept
any payment from the general contractor, but accepting partial payment
can have unexpected and harsh consequences. Subcontractors should think
twice before cashing a general contractor’s check for partial payment.
Accepting partial payment while there is an existing payment dispute,
whether related to change orders, delay costs, or some other factor, may
foreclose the subcontractor’s right to pursue a claim for the full
amount owed. If the paperwork or check itself contains language that
states that the payment is meant to satisfy the claim (e.g., "paid in
full," "final payment"), the subcontractor’s acceptance of that partial
payment may prohibit a future claim for the remaining amount owed. This
concept is known as "accord and satisfaction."
Accord and satisfaction is a legal principle that modifies a contract,
allowing the parties to essentially re-write the terms of the original
agreement. In this context, the "accord" occurs because the parties
re-write the contract – when the general contractor offers partial
payment and the subcontractor accepts. The "satisfaction" occurs
because by accepting partial payment, the subcontractor gives up its
claim for any additional payment. Accord and satisfaction is the law in
virtually every jurisdiction in the country. The concept has been
formalized by a provision of the Uniform Commercial Code (UCC), a
standard set of laws governing commercial transactions, and 49 states
have adopted their own versions of the UCC. Each state has the power to
modify the UCC provisions; therefore, it is important to check the
controlling law in each jurisdiction to determine the state laws
regarding “accord and satisfaction” of contract terms.
A further complication is that the jurisdiction controlling the “accord
and satisfaction” agreement may be different from the jurisdiction
controlling the underlying construction contract. Because the accord
and satisfaction agreement is considered to be separate from the
original contract, jurisdiction agreements (known as “choice of law”
clauses) in the original contract may not be applicable to the accord
and satisfaction agreement. For example, if the original contract said
that disputes would be decided under Virginia law, but the subcontractor
cashed the partial payment check in Illinois, a Virginia court will
apply Illinois law to determine whether accord and satisfaction has
occurred.
Generally, to establish accord and satisfaction there are three
requirements. First, there must be a bona fide claim dispute, i.e.,
there must be some real reason the prime contractor is disputing
payment. An unjustified refusal to pay the subcontractor does not
qualify as a bona fide dispute. Second, the prime contractor must have
made a good faith offer to pay the claim in full. Third, the check or
accompanying paperwork must contain a conspicuous statement that the
payment is intended to be full satisfaction of the claim. “Conspicuous”
does not necessarily mean that the language must appear in bold type or
a specific color or font. Courts have found a “conspicuous statement”
where the memo line of the check read "paid in full," and a letter
accompanying the check clearly stated that payment was intended as "full
and final payment." So, a notation on the memo of the check, or
paperwork accompanying the check, will satisfy this requirement.
Crossing out the “paid in full” language, or making a note on the check
or document that the amount is disputed will have no effect. If the
subcontractor has notice that the payment is meant to satisfy the debt,
but accepts the partial payment anyway, it waives the right to pursue
the disputed amount.
Although the subcontractor's claim is presumed to be satisfied when the
check is cashed, this presumption may be challenged by showing that the
“conspicuous notice” language was not clear enough for a reasonable
person to understand that payment was for final settlement of the
claim. So what standards are used to determine what a reasonable person
would understand about the payment terms? The Supreme Court of Virginia
recently provided guidance in Gelles & Sons General Contracting, Inc.
v. Jeffrey Stack, Inc.
In Gelles, a construction company (JSI) contracted with a
contractor (Gelles) for paving work. JSI received a $91,932 invoice
from Gelles, and made partial payment of $70,486. When Gelles later
invoiced JSI for a $26,175 balance, JSI sent an accounting of expenses
incurred to properly complete Gelles' work, with its estimate for a
reduced amount owed to Gelles of $13,580. Gelles disputed the
accounting, and JSI responded with a letter outlining defects in Gelles'
work, and the following statement: "JSI . . . stands by its final
amounts as stated on the latest correspondence, dated December 8, 2000.
Enclosed please find a check in the amount of $13,580.00 representing
final payment on the contract." Gelles cashed the check.
Gelles filed a motion for judgment against JSI and its bonding company
for $26,000 plus interest. JSI argued that Gelles' claim was barred by
Virginia’s accord and satisfaction law. Gelles argued that the language
was not conspicuous, and that it would not inform a reasonable person
that the payment was meant to be full satisfaction of the claim. Gelles
asked the court to create exact standards for identifying specific
conspicuous language. The court refused, reasoning that the statute’s
language simply required a statement "to the effect" that payment would
satisfy the claim; no magic words are required to create an accord and
satisfaction. The court emphasized that the merits of each case will
determine whether a reasonable person should have understood that the
payment was for final resolution of the claim. The court pointed to two
letters from JSI to Gelles that clearly expressed JSI's intent that the
payment be final resolution of Gelles' claim, and held that Gelles’
claim was barred by accord and satisfaction.
The lesson for subcontractors is clear: if you have a payment dispute
with the general contractor, read carefully, and do not cash a check for
partial payment if there is any type of statement about full payment, or
satisfaction of claims. However, even if you do cash the check, you may
have a second chance to preserve your claim. In some states you will
have a certain amount of time, generally 90 days, to return the payment
to the prime contractor with notice that you are still pursuing your
claim for the full amount owed. Then, you are free to pursue your full
claim against the general contractor without being subject to an accord
and satisfaction defense.
The lesson for prime contractors may be: don't wait to pay
subcontractors until final resolution of all the job issues. By
offering the subcontractor partial payment, plus conspicuous notice that
the payment is intended as final settlement of the claim, you may be
able to protect yourself from any future actions related to the claim.
A subcontractor who accepts such payment will waive the right to pursue
other, and potentially larger, claims against you.
About
the Author: M.K. Holohan is an associatae in the firm’s Vienna,
Viriginia office. She focuses her practice on government contract
litigation, bid protests, and construction litigation. M.K. can be
reached at 703-790-8750 or by e-mail at mholohan@wickwire.com.
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ARTICLE #2
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Indemnification Clause Unenforceable if
Negligent Parties Are Indemnified
Where an indemnification clause in a construction subcontract was so
broad as to require the subcontractor to indemnify a project owner and
construction manager for their own negligence, a court held the clause
could not be enforced during a summary judgment motion requested by the
indemnities. The clause could only be saved if it were proved that the
indemnitees were not themselves negligent, and that determination would
have to await the outcome of the trial on the facts.
In Lanarello v. City University of New York, 774 N.Y.S. 2d 517
(2004), the court considered the enforceability of an indemnification
clause that required the subcontractor to “indemnify the owner and
construction manager [Morse Diesel] for any and all losses they sustain
as a result of any or all injuries to any and all persons arising out of
or occurring in connection with [subcontractor’s] work, excepting only
injuries that arise out of faulty designs or affirmative acts of the
owner or construction manager committed with the intent to cause
injury.” The court concluded that this clause would indemnify the owner
and construction manager for their own negligence and therefore “runs
afoul of General Obligations Law section 5-322.1(1) of New York.
Morse Diesel, the construction manager (“CM”) was asking the court to
enforce the indemnity clause by way of a summary judgment motion to
grant it judgment against the subcontractor. It argued that to the
extent that the clause did not require the subcontractor to indemnify
the CM for the CM’s own negligence the clause would be saved by another
clause in the contract providing that “each and every provision of law
and clause required by law to be inserted in the Contract shall be
deemed to be inserted therein.” In rejecting that argument, the court
stated “Such language is not equivalent to language in the
indemnification clause itself limiting a subcontractor’s indemnification
obligation ‘to the extent permitted by law.’”
The Motion court that denied the summary judgment motion found that
Morse Diesel had more than a mere general supervisory authority with
regard to one of its subcontractor’s who had responsibility for cleaning
up debris and providing temporary protection around openings. Since
negligence in those respects may have contributed to the accident, it
would be necessary to allow the matter to go to trail so that it could
be determined based on all the facts whether or Morse Diesel was
negligent or not.
Practice
Note: It is important to include a “survival” or “saving clause”
directly inside the indemnification article so that if for any reason a
court finds the indemnity language to be in violation of public policy
or a state anti-indemnity statute, the article will nevertheless survive
as language that falls back to that which is permissible under public
policy and state law. This is often accomplished by introducing the
article with language such as, “To the fullest extent permitted by law,
the Contractor shall indemnify the Client ….” This may be more
persuasive with a court than was the general saving clause that the
court declined to apply in this particular case.
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ARTICLE
#3
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Insurance Carrier not Required to Treat
CM as Additional Insured Under Contractor’s Policy
Where contractor was expected to make the construction manager (“CM”) an
additional insured under its general liability policy, but failed to do
so, the contractor’s insurance companies had no duty to provide
coverage to the CM.
The contractor’s insurance policies provide additional insured status to
those with whom the contractor enters into written contracts. Where the
CM, Morse Diesel, had no written contract with the contractor, it would
not be an additional insured pursuant to the terms of the policies. In
the case of Lanarello v. City University of New York, 774 N.Y.S.
2d 517 (2004), the court found that even if the CM were a third-party
beneficiary of the contracts between the contractors and the project
owner, that would merely give the CM standing to sue the contractors for
breach of their contractual duty to the project owner to name the CM as
an additional insured under their policies. This would not, however,
create any independent duty of the insurance carriers to rewrite their
policies to name the CM as an additional insured. Moreover, the fact
that the insurance companies had issued certificates naming a
predecessor construction manager as an additional insured, did not
require them to treat Morse Diesel as an additional insured since that
firm had not been specifically named as such and since Morse Diesel did
not show that it had relied on the certificates that had been issued to
its predecessor.
Practice
Note: As indicated in the court’s decision, a contractor’s general
liability insurance policy may state that parties with which it enters
into signed contracts will be considered “additional insureds” under the
policies. According to that language, third parties that are not in
direct contract with a contractor will not be given additional insured
status. For such a third party to become an additional insured, a
request will need to be made of the insurance carrier and a certificate
of insurance will need to be issued by the carrier to make a special
exception to name such a third party as an additional insured. Unless
that is done, the third party has no recourse directly against the
contractor’s insurance company. For these reasons, it is important to
dot the I’s and cross the t’s when it comes to requesting and tracking
certificates of insurance.
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ABOUT
THIS NEWSLETTER & A DISCLAIMER
This
newsletter Report is published and edited by J. Kent Holland, Jr.,
J.D., a construction lawyer and risk management consultant for
environmental and design professional liability. The Report is
independent of any insurance company, law firm, or other entity, and is
distributed with the understanding that ConstructionRisk.com, LLC, and
the editor and writers, are not hereby engaged in rendering legal
services or the practice of law. Further, the content and comments
in this newsletter are provided for educational purposes and for general
distribution only, and cannot apply to any single set of specific
circumstances. If you have a legal issue to which you believe this
newsletter relates, we urge you to consult your own legal counsel.
ConstructionRisk.com, LLC, and its writers and editors, expressly
disclaim any responsibility for damages arising from the use,
application, or reliance upon the information contained herein.
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Copyright
2004, ConstructionRisk.com, LLC
Publisher
& Editor: J. Kent Holland, Jr., Esq.
8596 Coral
Gables Lane
Vienna, VA
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