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It is not uncommon to see disputes between prime contractors and their subcontractors concerning whether terms submitted with the subcontractor proposal or subcontract form will take precedence over the broader terms of the prime contract that are incorporated by reference into the subcontract.  Where a wastewater treatment district specified certain holding tank liners by brand name or equal, the subcontractor did not effectively limit its subcontract bid to the prime contractor to be conditioned only upon acceptance of the “or equal” liner it intended to use.  When it submitted its proposal to the prime it indicated its intent to use the “or equal”.   But when it subsequently sent its subcontract to the prime contractor it inadvertently forgot to attach and incorporate its original proposal that would limit its scope of work to install only  the “or equal” liner.  A week after sending the subcontract without the proposal, the subcontractor realized its mistake and sent a revised subcontract with proposal attached.  Some time later, the prime contractor sent the subcontractor the signed subcontract – but without the limiting proposal attached.  The subcontractor, acted with apparent acceptance of the subcontract as executed by the prime contractor, and then proceeded to provide equipment submittals and information to the prime. The “or equal” liner was rejected by the design engineer and the prime contractor directed the subcontractor to install the more expensive brand name product.  The subcontractor refused to install the brand name without being paid extra for it – which the prime contractor refused to do.  The subcontractor’s attorney then wrote to the prime stating that the subcontractor was terminating the contract.  Ultimately, the prime contractor responded that this would be a default termination and provided an opportunity to cure, which the subcontractor refused to do.  A new subcontractor was obtained and completed the work with the brand name liner and the prime contractor successfully sued the original subcontractor to recover its costs.   John T. Jones Construction Co. v. Hoot Construction Company, 613 F. 3d 778 (8th Cir, 2010).

In this case the Des Moines Metropolitan Wastewater Reclamation Authority (WRA) was updating one of its wastewater treatment facilities and retained the engineering firm of Black & Veatch (B&V) to write the specifications for the project.   B&V specified that the wastewater holding tank liner must be a particular system created by a company named Lindabond.  This was changed at the request of the WRA to add the words “or equal” at the end of the specifications.  As engineer, B&V had discretion to determine what to accept as “equal”, says the court.

Jones Construction, a general contractor, intended to bid on the overall project and invited Hoot Construction to submit a subcontract bid to install the liner.  Hoot, however, only installs liners made by a different manufacturer other than Linabond.  Hoot advised the prime that it would submit a proposal to use an “or equal” as the basis of its bid.  Hoot then contacted its “or equal” supplier and “and received assurances from the Company that Ameron systems are considered equal to Linabond in the industry.”  Hoot then conveyed that information to the prime and informed the prime that It had never had  Ameron rejected as “or equal” on a project.  Hoot then submitted a bid to the prime to install the liner and the prime used that bid in its main bid to the client, and was awarded the project.

The prime contractor (Jones) administrator mailed a standard subcontract form to the subcontractor and asked the sub to sign and return it within ten days.  The form required the subcontractor to perform the work as described in the main contract and incorporated the main contract as an exhibit.   The subcontractor altered the contract slightly by changing some payment terms, signed it, and returned it to the prime as requested.  It forgot, however, to include a copy of its bid proposal as an attachment to the subcontract.  The court states “Hoot’s company policy was to incorporate its original bid into any subcontract as a means of limiting the scope of its work to the contents of the bid.”  Before the prime responded to the subcontract submittal, Hoot realized it had forgotten to attach its limiting proposal and it consequently faxed a copy of it to the prime and asked that it be attached as “Exhibit B” to the contract.

There is evidence as reported by the court decision, that an individual with the prime contractor received the fax and had internal discussions with others at the prime and understood, and essentially agreed, that the proposal was to be an attachment B to the contract.  This fact, however, was found by the court to be irrelevant to the terms of the contract since it was not formally made a part of the contract and the “integration clause” of the contract stated that nothing outside the four corners of the  written contract would be deemed to be part of the contract terms.

What happened next is that B&V rejected the “or equal” submittal for the liner.  In response to the prime contractor’s suggestion that the subcontractor either install the brand name liner or hire another installer to do so, the subcontractor retained an attorney who wrote to the prime advising that the subcontractor had contracted only to install the “or equal” liner and that the “wrongful rejection of Ameron as equal” prevented the subcontractor’s performance.  The attorney further accused the prime of breach of the subcontract by failing to gain approval of the “or equal” system.  The prime wrote back explaining that the subcontractor was responsible under the terms of the subcontract to install a lining system in accord with the specifications and that the limiting provisions of the subcontractor proposal had not been incorporated into the contract.  Termination for default ensued.  The question then for the court was whether it was a proper default termination.

As an initial matter, the court found that when the subcontractor submitted the subcontract form (with its proposed changes to payment provisions) and returned it to the prime, that constituted an “offer.”  When the prime contractor signed the subcontract and returned it to the subcontractor without attaching the subcontractor’s limiting proposal as an attachment that constituted a “counter-offer.”  When the subcontractor sent submittals to the prime for performance under that subcontract, this constituted “acceptance.”    The court concluded from the evidence reviewed that the subcontractor intended to be bound to the subcontract and had assumed the risk of rejection of its “or equal” system – meaning that it bore the risk of having to perform the subcontract with the more expensive brand name system.

Since the limiting proposal was not attached to the subcontract and made a part thereof, the court held that the written contract supersedes any oral understandings the parties might arguably have had.  In particular, “the subcontract includes an integration clause stating the agreement ‘represents the entire integrated agreement between the parties hereto and supersedes all prior negotiations, representations, or agreements, either written or oral.’ ”   For this reason, the court found that the Exhibit B subcontractor proposal that had not been signed by the prime and returned attached to the subcontract that was returned to the sub by the prime, was not part of the contract and cannot be admitted into evidence for the purpose of varying the terms of the contract or attempting to make the terms ambiguous so that parol evidence could be used to clarify the intention of the parties.

For these reasons, the court found that the subcontractor was properly default terminated and that the subcontractor was responsible for paying the extra reprocurement costs incurred by the prime contractor.

Comment: There are several lessons to take from this case.  The ones I find of significant importance are (1) In the battle of the forms, the form sent last and on which the work begins, is generally going to be enforced as the final contract.  It is important, therefore, to be certain that the form in existence when work begins says what you intend it to say;

(2)  Incorporation by reference of the prime contract, with its scope of work and requirements pertaining to that scope, made applicable to the subcontractor, is a good management technique by a prime to secure the services needed by the subcontractor for that work.  I have numerous instances where the prime contractor attempts to re-state the scope and/or specifications applicable to the subcontractor’s work and then be stuck having to analyze the subcontract proposals to determine whether they actually include everything necessary for that aspect of the work – or whether there are gaps that will have to be filled by the prime or other subcontractors.

(3)  It is generally too risky for a subcontractor to refuse to do contested work and assert that the prime is in breach of contract excusing the sub from completing the work.  Too often, the termination of the contract that ensues is found to be a correct default termination.  This same principle applies to the prime contractor contesting an owner’s insistence on performance of work.  If the contractor is correct in its position, it can later prevail in a claim against the project owner to recover its costs.  If it loses in that litigation, at least it succeeded in mitigating and managing the excess costs that were paid during the performance in contrast to the higher costs that may be incurred if the project owner terminates the contractor and re-procures the work from another contractor and higher cost and with additional time – all of which gets charged to the contractor in the event that the termination is deemed to be a proper default termination.

About the newsletter and author: J. Kent Holland is a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is also founder and president of ConstructionRisk, LLC, a consulting firm providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report (2010) at www.ConstructionRisk.com.  This article is published in ConstructionRisk.com Report, Vol. 13, No. 4 (April 2011).