LAW: THE CONTRACTOR'S SIDE: Nothing was signed

Court determines prime, sub reached a meeting of the minds

Blog Entry June 24, 2014

Larry Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction.

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This month, we are once again confronted with a dispute between a prime contractor and subcontractor, an unsigned subcontract and one party who seeks to deny that a valid contract exists. This time, one party seeks to avoid a bad arbitration outcome.

Lakeshore Engineering Services, Inc. v. Target Const., Inc., 2014 WL 793653 involved a project the plaintiff prime contractor was performing for the U.S. Army Corps of Engineers. The defendant was a subcontractor the prime hired to perform a substantial portion of the work.

During negotiations, the prime tendered a draft subcontract to the subcontractor. The subcontractor claims to have marked up the subcontract and returned it unsigned to the prime’s project manager. For reasons never revealed, the subcontract was never signed by the prime or the subcontractor, yet both parties commenced their respective performances. The parties even executed a change order, which increased the subcontractor’s scope of work.

A few months later, the subcontractor returned a second copy of the previously marked-up subcontract to the prime contractor and asked the prime to execute it and return it to the subcontractor. The prime denied that it had previously received a marked-up copy of the subcontract and refused to accept the markups.

Eventually, a dispute regarding the subcontractor’s performance arose between the parties, and the prime terminated the subcontractor. The prime contractor found a replacement contractor to complete the work.

Pursuant to an arbitration clause in the unsigned subcontract, the prime contractor filed a demand for arbitration seeking its costs of completing the subcontractor’s work. The subcontractor filed its answering statement and a counterclaim but stated that it was making a special appearance solely for the purpose of preserving its rights. The subcontractor further stated that it “specifically denies that it has an agreement to arbitrate any disputes with [the prime], including the issues for which [prime contractor] has demanded arbitration in this proceeding.”

The subcontractor went as far as amending its counterclaim by asserting a claim for breach of contract, tort, statutory relief and unjust enrichment and sought more than $1 million in damages from the prime. The arbitration proceeded and the prime contractor prevailed on all issues. It received an award of $2,525,666.30 with interest. Thereafter, the prime filed a motion to affirm the arbitration award with the federal district court. At the hearing on the motion, the subcontractor argued that pursuant to the Federal Arbitration Act, the award must be vacated, because there was no binding arbitration agreement, and therefore, the arbitrator exceeded his powers. Specifically, the subcontractor contended that no binding subcontract was formed between the parties, and as a result, there was no valid agreement to arbitrate, ergo the arbitrator was without jurisdiction (and exceeded his powers) to issue an award.

The prime argued that the subcontract, although unsigned by the parties, was fully enforceable because both parties commenced their performance. The prime also argued that even absent an enforceable subcontract, the subcontractor waived its right to object to the “arbitrability” of the matter by actively participating in it for more than two years. The subcontractor countered that there had been no waiver, because it formally preserved this challenge by timely objecting to the arbitrator’s lack of jurisdiction in its answering statement and counterclaim during the arbitration.

The court first addressed the waiver issue and ruled that the subcontractor, in fact, waived its right to object to the arbitrability of the dispute. The court viewed the subcontractor’s mere references to objecting and preserving its rights as insufficient action and cited the subcontractor’s active participation—including its filing of a counterclaim for more than $1 million, participating in eight days of hearings and 16 depositions and exchanging thousands of documents in discovery—as inconsistent with its previous objections.

On the unsigned subcontract issue, the court determined that due to their respective performances, the parties had reached a meeting of the minds, and the subcontract as tendered by the prime to the subcontractor was in full force. It also noted that none of the subcontractor’s markups involved objections to the arbitration clause. Accordingly, even the subcontractor’s version of the subcontract required arbitration.

The underlying arbitration may have been inevitable, given the dispute between the parties over the subcontractor’s performance. However, both parties incurred substantial unnecessary costs arguing over the enforceability of the unsigned subcontract because they did not sign the agreement before beginning work. R&B

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