The North Carolina Court of Appeals Upholds Multi-million Dollar Verdict Allowing Subcontractor to Recover Sub-subcontractor’s Losses

Metric Constructors, Inc. v. Hawker Siddeley Power Engineering, Inc. and Panda Rosemary Corp.,
468 S.E. 2d 435 (N.C. Ct. App. 1996).

Defendant Hawker Siddeley Power Engineering, Inc. (HSPE) was the Design/Build contractor on a co-generation power plant in Roanoke Rapids, North Carolina. As the general contractor, HSPE subcontracted with plaintiff Metric Constructors, Inc. (Metric) for construction of the power plant. In turn, Metric subcontracted with a wholly-owned subsidiary, Electrical and Special Systems, Inc. (ESSI) for specialized work. Because all of the designs for the plant prior to the commencement of construction were not complete, the project was deemed “Fast Track.”

Pursuant to its contract with Metric, HSPE was responsible for engineering design drawings and procurement of major equipment items. The contract had an inflexible completion date of October 30, 1990 and, in contract negotiations and in the contract, HSPE promised to issue drawings at a pace that would allow Metric to finish its work on time. The contract further provided that Metric would receive a bonus of $9,000 per day for early completion.

Upon completion of the project, to recover its expenses and losses, Metric filed a lien on the property and brought suit to enforce the lien. HSPE answered and counterclaimed alleging that Metric had breached its obligations under the contract between the parties. The trial court found that HSPE failed to deliver its promised performance from the outset of the project, issuing drawings weeks or even months after the issue dates that it provided Metric. Some revisions to drawings required Metric to demolish and reconstruct its work. The trial court further found that HSPE’s conduct forced Metric to expend considerable sums to complete the project on schedule, but HSPE refused to pay Metric for the cost overruns and extra work caused by delayed performance. The jury awarded Metric $6,615,863 in damages against HSPE for breach of contract and denied in its entirety HSPE’s counterclaim.

On appeal, HSPE argued, inter alia, that Metric lacked standing to assert a claim on behalf of ESSI. Article 4 of the contract between HSPE and Metric provided:

4.1 All proposed Lower Tier Subcontracts must be submitted to HSPE for written approval. If so approved, subcontractor shall bind all Lower Tier Subcontractors to the provisions of the Subcontract Documents.

4.2 Neither this Subcontract nor any Lower Tier Subcontract shall create any contractual relationship between any Lower Tier Subcontractor and HSPE nor any obligation of HSPE to Lower Tier Subcontractor.

4.3 Notwithstanding the existence of any Lower Tier Subcontract, Subcontractor shall be liable to HSPE for performance hereunder as if no Lower Tier Subcontractor exists.
Pursuant to Section 4.2, HSPE argued that it had no contractual obligation to ESSI as a Lower Tier Subcontractor, and therefore could not be liable to ESSI for damages to ESSI caused by any breach of its contract with Metric. In support of this argument, HSPE cited a 1983 North Carolina case that provided a subcontractor may not do indirectly through plaintiff higher tier contractor what it can not do directly by a suit against the defendant. Thus, HSPE argued that since ESSI could not bring a claim directly against HSPE, ESSI cannot present a claim indirectly through Metric.

The court rejected HSPE’s argument. Although the court agreed that ESSI could not sue HSPE directly, the court held that Metric may recover ESSI’s losses on the project as part of its contract damages. The court reasoned that unless the contractor was permitted to include the subcontractor’s claim as part of its own, there would be no means of recovering the damages incurred by the subcontractor. The court also focused on the fact that ESSI was never a plaintiff in the instant case and was not trying to bring its own claim against HSPE. Rather ESSI sought to recover its damages caused by HSPE’s conduct through a well/documented claim against Metric itself, and Metric, faced with a liability for that claim under its contract with the ESSI, included the amount of the claim as a subset of its damages against HSPE.

In sum, the court found that the result urged by HSPE would work a “manifest injustice” to Metric, ESSI and other similarly situated subcontractors. Provisions similar to Article 4 would shield a general contractor from any liability for payment to a subcontractor for Lower Tier Subcontractor’s damages while retaining the right to sue the subcontractor for the Lower Tier Subcontractor’s work. The court found such a result illogical. Refusing to adopt a position that would, in effect, leave a Lower Tier Subcontractor with no remedy, the court held that under the circumstances of the case, Metric was not precluded from recovering as part of its damages the losses sustained by ESSI as a result of HSPE’s conduct.

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