I have written many times on disputes that arise when subcontractors begin work before executing a formal subcontract or when a disparity exists between the scope of work as defined in a subcontractor’s proposal and that which is contained in the written agreement.
The lesson is always the same: Start work only after a formal agreement is signed, and most importantly, read your subcontract. Hardy Corp. v. Rayco Industrial, Inc., 2013 WL 6516391 (Al. 2013) reinforces that advice and addresses how courts sometimes deal with evidence of precontract negotiations.
Hardy Corp. involved a dispute between a subcontractor and its second-tier subcontractor on a project to construct a kidney dialysis filter manufacturing facility in Alabama. The subcontractor’s scope of work included specialized piping work. After signing its subcontract with the prime contractor, the subcontractor sought bids from second-tier subcontractors for welding work. After receiving the apparent low bid for welding from Rayco, the subcontractor and Rayco met to discuss the welding proposal. After the meeting, Rayco submitted a revised proposal, and soon thereafter the subcontractor presented a subsubcontract agreement to Rayco, which Rayco signed.
During construction, a dispute arose over whether Rayco was responsible for performing what is known as passivation and for welding associated with the pure-steam return (PSR) piping. Rayco argued that in accordance with a specific exclusion contained in both of its proposals and in discussions during a negotiation meeting, it was not. The subcontractor pointed to specific language in the subsubcontract agreement that unambiguously included this work within Rayco’s scope. Despite the subcontractor’s demand, Rayco refused to perform the work, and the subcontractor brought in another company. The dispute proceeded to litigation.
As is typically the case in these situations, the trial court was faced with conflicting testimony. Rayco’s representative testified that Rayco made it clear that it did not have passivation or PSR pipe welding in its price and that if the subcontractor insisted, it would have to seek a quote from another company and add a markup to the additional cost. According to Rayco, the subcontractor indicated that it would pursue the excluded work with another subsubcontractor to save the expense of the added markup.
The subcontractor, on the other hand, testified that neither passivation nor PSR piping was specifically discussed at the meeting and that it sought, and received, from Rayco assurance that Rayco would be providing a “turnkey installation.”
Neither party disputed that two weeks after the meeting, Rayco submitted a slightly revised proposal to include payment and performance bonding and that such a proposal contained the same exclusionary language pertaining to passivation and PSR piping. It also was undisputed that two days later, the subcontractor issued a formal written subsubcontract agreement, which included within its scope the passivation and PSR piping work. Rayco either failed to scrutinize the scope of work language closely, or if its account of the meeting was accurate, it believed the subcontractor understood that passivation and PRS piping work was nevertheless excluded. Rayco signed and returned the subsubcontract to the subcontractor.
There was no indication in the court’s opinion that it regarded the language of the subsubcontract ambiguous on the issue of whether the passivation or PSR piping work was included in the scope of work. It appears that the language was clear in that regard. For this reason, it is somewhat surprising that the subcontractor did not seek to exclude any testimony by Rayco that tended to contradict that clear and unambiguous language. This is known as the Parol Evidence Rule, which I have discussed in previous columns. In any event, the court considered the testimony as “even split” and it analyzed the chronology in terms of offers and counteroffers.
In ruling for the subcontractor, the court held that Rayco’s proposal constituted an offer to perform the work under the stated conditions and caveats, and that the subsubcontract subsequently delivered to Rayco constituted the subcontractor’s counteroffer, which Rayco accepted by signing.
The lesson should be obvious. If conditions, caveats or exclusions are important enough to include in your proposals, you should ensure that they make it into the final subcontract agreement. Never assume verbal side agreements that conflict with the express language of your agreement will be honored down the road. R&B
