In a dispute involving whether a subcontractor satisfied the contract plans and specifications when it installed escalators for an airport expansion project, the appeals court held that because the subcontractor (Otis Elevator) was aware of an ambiguity concerning the escalator width, Otis had a duty to clarify the ambiguity prior to bidding. Failing to do so meant that Otis bore the risk that the project owner and architect would adopt a different interpretation of the requirements. The subcontract provided that “the appropriate design professional” was vested with binding authority to resolve ambiguities. Although the district court had set aside the design professional’s interpretation and ruled for Otis, the appeals court reversed the decision. Otis Elevator Company v. WG Yates & Sons Construction Company, 2014 WL 5304867 (U.S. 11th Circuit Court of Appeals).
Ambiguity in Specifications
Otis’ subcontract included a mechanism for resolving disputes about the subcontract’s terms, which stated: “If there is … a difference in interpretation, the matter shall be referred to the appropriate design professional whose decision the Subcontractor shall implement at no additional cost.” The Prime contractor asserted that the “appropriate design professional” referred to the architect that designed the airport expansion project. In support of that assertion, the Prime pointed to the provision of the subcontract that stated “the Subcontractor shall be bound … by all terms and conditions of the Prime Contract.” Next, it pointed to the terms of the Prime Contract which provided that the architect “shall decide all questions that may arise as to the interpretation and/or clarifications of the specifications or plans relating to the work.”
Drawing A180 of the plans laid out a detailed blueprint of the escalators and used “tick marks” to indicate the escalator width. The dispute arose out of a misunderstanding over whether the tick marks indicated that the width of steps themselves (the “nominal width”) was to be 39.5 inches or whether the distance from handrail to handrail (the “rated width”) was to be 39.5 inches. The architect and the prime contractor thought Drawing A180 called for 39.5 inch nominal width, whereas Otis thought it called for a 39.5 rated width and thus supplied escalators with a 32-inch step width.
Only after the four escalators called for by the plans were installed did the Prime and the architect realize that the escalators had 32 inch wide steps. There was a tent surrounding the escalators during construction, and this prevented the problem from being discovered sooner.
Shop Drawing Review Process.
The Prime Contract required the Prime contractor and the architect to review and approve all “shop drawings … and similar submittals” before work began, to ensure that they complied with the Prime Contract’s requirements. Otis’ shop drawings indicating that it would install escalators with a 32-inch step width were approved by both the Prime and the architect. Although Otis appears to have a good argument that approval of the narrower elevators excused it from installing the wider width that the owner desired, the court indicated that this was not so. As explained by the court,
“Otis did not include any disclaimer or other notice to Yates [the Prime contractor] that called attention to the fact that the shop drawings used 32–inch steps. As is customary in the industry, Chapman Sisson [the architect] did not conduct a “line item” review of the over 400 submittals it received from Yates’ subcontractors. Similarly, in keeping with industry custom and the terms of the Prime Contract, it did not check the shop drawings to ensure that their dimensions matched the Prime Contract’s specifications. When Chapman Sisson approved Otis’ revised shop drawings, it used a stamp that specifically qualified its approval by stating: “This review is only for general conformance with the design concept of the project and general compliance with the information given in the Contract Documents.” Yates also reviewed and approved the revised shop drawings. The stamp it placed on the shop drawings specified that Yates’ review had been “for general compliance” and that the ‘[f]inal dimensions and quantities required for the project remain the responsibility of the subcontractor.’”
In examining the significance of the shop drawing review process and whether this could excuse Otis, the court considered the terms and conditions of Otis’ subcontract. The subcontract expressly incorporated the terms and conditions of the Prime Contract as well as “all drawings specifications, details and standards.” As stated by the court, the subcontract required Otis to:
… complete the escalator installation “in strict accordance with this Subcontract and with the Prime Contract.” Second, the Subcontract gave “the appropriate design professional” binding authority to resolve “any conflict, ambiguity, … or … difference in interpretation” of the Subcontract. Third, the Subcontract established that Yates’ and Chapman Sisson’s review and approval of shop drawings did not excuse Otis from performing its work in “strict accordance” with the project’s plans and specifications. The Subcontract went on to emphasize that Yates had “no duty to discover any mistake, error, or deviation in any submittals from the Prime Contract requirements,” and that Yates’ and Chapman Sisson’s approval of the submittals “shall not relieve [Otis] from responsibility or liability for any mistakes, error, or deviation, or of [Otis’] obligation to perform its work in strict accordance with the Prime Contract.” Finally, the Subcontract had a merger clause that limited the terms of the agreement to those written in the Subcontract itself and the documents incorporated by reference in the Subcontract.”
When the airport discovered the escalators were narrower than called for by the specifications, they initially demanded that all four escalators be replaced. Eventually, a compromise was reached between the Prime contractor and airport whereby the four escalators would remain, but a fifth, wider elevator would be added between two of the narrow ones. Otis and the Prime contractor then worked out a change order, with Otis agreeing to complete the installation, and both parties reserving their respective rights against the other party. After completion, Otis filed suit against the Prime to recover its additional costs plus amounts the Prime had withheld. The Prime responded with a counterclaim for its costs due to the extra elevator work. In a bench trial, the District Court ruled for Otis on its breach of contract claim and awarded Otis the damages it claimed.
The trial court decision was reversed on appeal for the reasons explained above. The appeals court found that Otis had a duty to seek clarification of the specifications before bidding. The appeals court agreed with the Prime contractor that the airport architect was “the appropriate design professional” with authority to resolve ambiguities in subcontracts and that the design professional’s decision interpreting the specifications against Otis was binding. The court’s reasoning with respect to the design professional’s decision was follows:
“We also disagree with the district court’s conclusion that Chapman Sisson’s interpretation was not binding. Under Alabama law, the third-party expert’s decision “can be impeached only for fraud, or such gross mistakes as would imply bad faith or a failure to exercise an honest judgment.” Finish Line, 90 So.3d at 759 (quotation marks omitted). That is a high bar, and justifiably so. If the bar were lower, third-party-expert interpretations would lack the finality they are meant to provide. See id. Here, Chapman Sisson’s interpretation did not amount to fraud or such a gross mistake as to imply bad faith or a failure to exercise honest judgment. As the district court’s decision and Otis’ brief acknowledge, Drawing A180 is ambiguous as to whether it calls for 32–inch or 40–inch escalator steps—which means that it can be reasonably interpreted as calling for 40–inch escalator steps. See Mann v. GTE Mobilnet of Birmingham Inc., 730 So.2d 150, 155 (Ala.1999) (explaining that a contract term is ambiguous where it “is susceptible to more than one reasonable interpretation”). Because a reasonable interpretation is not a fraud or gross mistake, the district court should not have set aside the third-party expert’s binding interpretation.”
There are several lessons in this decision: (1) Subcontractors must pay attention to the terms of a prime contract that will be incorporated into their subcontract, and when negotiating the subcontract should take exception to those prime contract terms they finds unacceptable; (2) Granting the decision professional final decision-making authority may have greater impact than sometimes realized; and (3) Patent ambiguities in plans and specifications require a subcontractor to seek clarification before bidding.
About the author: Article written by J. Kent Holland, Jr., 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 founder and president of a consulting firm, ConstructionRisk, LLC, 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, Vol. 17, No. 3 (March 2015).
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