By: Thomas S. Tripodianos Published: April 2009

Subcontractor's Written Agreement Releasing All Claims Valid on Pre-Termination Claims

Question. The dispute between the parties, the Heating and Ventilating (“HVAC”) Subcontractor and its Sub-Subcontractor arises out of a public construction project. The contract price of the first sub-subcontract (contract # 1) was $3,550,000.00. Under the terms of both subcontracts, the sub-subcontractor was required to perform both modifications requested by the Owner, referred to as MODs and Contractor Proposed Changes, referred to as CPC's, which represent claims of the contractor for work they believed to be changes in the original contract documents. Four years into the project, the Owner held Contractor in default of its prime contract and terminated the same.

Contractor's Performance Bond Surety (“Surety”) stepped in to complete the project. In the interim, Subcontractor, Sub-Subcontractor, Sub-Subcontractor's surety (“Sub-sub-Surety”), and Surety and Contractor engaged in negotiations concerning the completion of the work. Ultimately, Subcontractor entered into a second sub-subcontract (contract # 2) with Sub-Subcontractor to complete the project. However, prior to entering into this second agreement, Subcontractor wrote to Sub-Subcontractor, informing Sub-Subcontractor that Subcontractor would be required to provide Contractor with releases for all of subcontractors. The letter also informed Sub-Subcontractor that it was required to provide Subcontractor with a release both for Contractor and for Subcontractor and to provide Subcontractor with labor, material and performance bonds. In return, Sub-Subcontractor would receive a new contract for completion of the project in the amount of $2,100,000.00. The letter also states that Subcontractor will pay Sub-Subcontractor $253,817.00 and that it will repay Subcontractor its retainer balance in the amount of $80,748.00 as that amount is received from Surety. Attached to the new subcontract is a “Rider # 2” which states both of these above amounts will be paid to Sub-Subcontractor upon Sub-Subcontractor signing a completion contract with Subcontractor and providing Subcontractor with a release. The second subcontract is clearly signed by the presidents of Subcontractor and Sub-Subcontractor. The payments were made as set forth and the new sub-subcontract for the amount set forth was signed. Also attached is a General Release by Sub-Subcontractor in favor of Subcontractor containing the apparent signature of President of Sub-Subcontractor.

The second subcontract also contains a provision that Sub-Subcontractor will provide Subcontractor with a General Release to enable Subcontractor to conclude its prior contract with Contractor. In addition, the second subcontract states as follows at paragraph 23: “Sub-Subcontractor authorizes Contractor and Surety to deduct 20% of Sub-Subcontractor's portion of any MOD or CPC resolved by and paid for by the Owner to the extent that Owner includes an allowance for Sub-Subcontractor”.

Contractor, Subcontractor and Sub-Subcontractor all, as set forth in various letters, negotiated their various claims for extra work with Owner. By letter, Sub-Subcontractor set forth in writing its claims in the amount of $2,338,973.71 that would be passed through Subcontractor to Contractor and ultimately to Owner. The Owner adjusted its contract with Contractor by recognizing over $10 million in extra work claims. Many of the claims submitted were valued by the owner at $0.00. The total allowed for Sub-Subcontractor’s extra work claims, when the attorney's fee percentage is deducted, was $87,086.65. Article 4.6 of both contracts signed by Sub-Subcontractor states that “(t)he determination of the Owner or Owner's Representative as to the extent or value of the Work performed and materials and equipment furnished by the Subcontractor shall bind the Subcontractor”. As Sub-Subcontractor's current complaint contains claims against Subcontractor for extra work, which the owner valued at zero and a delay claim which the owner included within the $87,086.65 already mentioned, Subcontractor asserts that all other and duplicative claims should be denied.

Sub-Subcontractor alleges that it was influenced to return to the jobsite and complete its work based on certain misrepresentations. These included assertions that no entity had yet been paid its MODs or CPC's and Sub-Subcontractor would receive all its extra work claims, less 20% for attorney's fees for everything it had supplied prior to the termination of Contractor. Sub-Subcontractor states that such promises were made to it by Subcontractor and by Sub-sub-Surety, which he now questions, since he later learned that Subcontractor's surety had become a wholly owned subsidiary of Sub-sub-Surety. He then alleges that he has no recollection of signing any releases. He states that he entered into the second agreement only based on assurances that Contractor and Subcontractor would seek to collect his pre-termination claims; that Sub-sub-Surety would finance its completion and that Sub-Subcontractor would be paid timely for its work on the second contract. Sub-Subcontractor asserts that none of these promises were valid. He later discovered that Subcontractor had collected over $7 million on its signing with Surety, much of which belonged to Sub-Subcontractor. He asserts further that he has since learned that Subcontractor was submitting Sub-Subcontractor's extra work claims in the first contract and collecting them without passing through payment. This continued, according to Sub-Subcontractor throughout Sub-Subcontractor's work on the second contract. In large part, Sub-Subcontractor appears to be arguing that it entered into the second agreement, believing it was owed over $4 million, because it was promised that Subcontractor and Sub-sub-Surety would be collecting much of this sum from the owner. It later learned that such monies could not be collected because Subcontractor had already been paid for Sub-Subcontractor’s work and, therefore, would not be paid again in a dispute with the Owner.

Now, Sub-Subcontractor argues he has learned that Subcontractor received $550,000 from Contractor as part of the settlement of a mediation between Subcontractor and Contractor but that Sub-Subcontractor was not told about this, nor did it receive any pass thorough from Subcontractor. Subcontractor, he asserts, has no real excuse for this and its latter day claim that Sub-Subcontractor owes Subcontractor $268,986 for work not completed by Sub-Subcontractor on the second contract is simply made up. Sub-Subcontractor asserts that there is no proof that Subcontractor paid a second subcontractor for uncompleted work on the second contract. Based on Subcontractor's misrepresentations and conversion of funds belonging to Sub-Subcontractor, the sub-subcontractor asserts that Subcontractor cannot deny the claims.

In reply to Sub-Subcontractor’s allegations, Subcontractor relies upon documentary evidence that belies each and every one of Sub-Subcontractor's claims. First, by letter Sub-Subcontractor received a summary of all the extra work payments that Subcontractor was receiving on the first contract; second, by the time of the termination of contract # 1, Sub-Subcontractor had received $190,124 in extra work payments; third, there exists no written agreement setting forth that Sub-Subcontractor will be paid in full for all its extra work claims in return for entering into the second contract and it is obvious from the written agreements that Sub-Subcontractor would only get paid for that extra work approved by the Owner; fourth, it is undisputed that Sub-Subcontractor was to furnish a General Release of the First Contract as a condition to receiving the Second Contract; fifth, contemporaneous documents issued prior to this lawsuit from Surety to Sub-Subcontractor state that the Release from Sub-Subcontractor was indeed executed. Sixth, Sub-Subcontractor cannot dispute the clear provision of its written agreement, paragraph 4.6 to both agreements which makes the owner the final arbiter of extra work claims and binds the subcontractor to its determination With regard to the second contract, Subcontractor states that Sub-Subcontractor does not refute that certain of its claims; the $150,000 was already paid. The Subcontractor reiterates its grounds for defeating Sub-Subcontractor's claims that were for work sought by Surety and certain claims as being duplicative of a claim made pre-termination and rejected by the Owner.

Do Sub-Subcontractor’s claims survive?

Answer. No as to pre-termination claims. Yes as to post-termination claims.

In the commercial world, where parties are sophisticated entities, negotiating at arm’s length, enforcement of their agreements preserves the necessity for commercial clarity. Where the language of a release is clear and it is accompanied by valuable consideration, the allegation of economic duress will not lie.

Viewing the writings of the parties, including Subcontractor's letter to Sub-Subcontractor; the signed second subcontract agreement, specifically requiring and agreeing to the release of all claims against Subcontractor and Contractor; the reference in the signed subcontract to the attached release, the contemporaneous writing prior to any litigation to the release signed by Sub-Subcontractor; the consideration, with proof that payment was made, of the amounts set forth in the letter to Sub-Subcontractor, the receipt by Sub-Subcontractor of a second subcontract in the amount of $2,100,000, the intent of the parties is far from ambiguous. Sub-Subcontractor released Subcontractor from any and all claims relating to contract # 1 (the pre-termination phase) and Subcontractor granted Sub-Subcontractor $253,817 and $80,748 in payments plus a new agreement for over $2 million. In that same written agreement, it is made clear that the release is necessary in order “(t)o enable Subcontractor (to) conclude our prior contract with Contractor” and that any claims for MODs and CPCs, to the extent determined in Sub-Subcontractor's favor, will require a deduction of 20% in attorney's fees. Both agreements state that the determination of the owner as to the extent of the value of any work performed by the subcontractor “(s)hall bind the Subcontractor”. The moving papers contain Owner's final determination on contract # 1, which, when subtracting the agreed upon percentage for attorney's fees, equals $87,086.65. Accordingly, other than for that amount, Sub-Subcontractor's claims for the pre-termination contract are invalid pursuant to the clear meaning of the parties' agreement.

With regard to the post termination claims, Subcontractor has been unable to demonstrate the same kind of clear agreement, which would entitle it to judgment. There remains a dispute as to whether some were for work performed directly for Surety or whether they were for work performed for Subcontractor when Sub-Subcontractor merely contacted Surety because it was not receiving timely payment from Subcontractor. It is also unclear whether the claims for review of shop drawings in the post termination phase is for new work or for work, for which a claim had already been rejected. Those claims, the claims as well as Subcontractor's claim allegedly relating to payments made due to Sub-Subcontractor's default prior to leaving the job on contract # 2 will be preserved. Accordingly, the Sub-Subcontractor's and Subcontractor's claims with regard to contract # 2 survive.

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