Flow Down Provision Requires Subcontractor to Proceed During Pendency of Dispute Over Extra Work – A Dispute The Subcontractor Loses as a Result of Course of Performance

LBL Skysystems (USA), Inc. v. APG-America, Inc.
No. 02-5379, 2005 U.S. Dist. LEXIS 19065 (E.D.Pa. Aug. 31, 2005)

In LBL Skysystems (USA), Inc. v. APG-America, Inc., No. 02-5379, 2005 U.S. Dist. LEXIS 19065 (E.D.Pa. Aug. 31, 2005), the District Court concluded that a subcontractor was contractually obligated to continue performance, despite its dispute with the contractor over alleged extra work. Further, the Court concluded that the subcontractor was in the wrong, as its course of performance demonstrated that certain steel work was, in fact, within the subcontractor’s original work scope. As a result, the Court concluded that the contractor’s decision to terminate the subcontract was proper.

The parties’ dispute arose out of US Airways’s project to construct and renovate certain terminals at the Philadelphia International Airport (the “Project”). LBL Skysystems (USA), Inc. contracted with US Airways to supply and install the curtain wall, insulated metal panels, skylights and louvers for the Project (the “Prime Contract”). LBL, in turn, subcontracted the supply and installation of the insulated metal wall panels to APG-America, Inc. (the “Subcontract”).

To install the insulated metal wall panel system, the panels are attached to support steel, which is attached to the structural steel of the building. The Subcontract, via an attached Proposal Form, delineated the extent of APG’s responsibility for the supply and installation of the steel needed to perform its work scope. Pursuant to this form, APG was required to design, engineer, fabricate, furnish and install all steel relevant to its work, which was not “sized or indicated” on the structural steel drawings.

Relying on certain notations on the drawings, APG claimed that the support steel for the panels was “sized and indicated” on the drawings, and therefore was outside of its work scope. LBL disagreed, and demanded that APG provide the necessary steel. APG subsequently demanded additional compensation. At this time, APG had a number of change order requests pending with LBL. Based on these pending change orders and the scope dispute, APG stopped work on the Project. LBL responded by terminating the Subcontract and eventually filing a lawsuit against APG and its surety for breach of contract.

The District Court, addressed, among others, the following key issues: (1) whether APG was responsible for the support steel for the metal panels and (2) whether APG was obligated to continue performance during the pendancy of a dispute. After a trial, the District Court found in favor of LBL on both issues.

In evaluating APG’s work scope, the Court recognized that if a contract is ambiguous, a court may consider extrinsic evidence in interpreting the terms of the contract. Finding the phrase “sized or indicated” ambiguous, the District Court turned to the conduct of the parties to determined whether or not APG was responsible for the support steel. According to the Court, such conduct was perhaps the strongest indication of what the contract meant.

APG’s shop drawings provided the first indication that APG understood it was responsible for providing the support steel. The shop drawings detailed the support steel for the panels, and APG never objected to the inclusion of this detail by its subconsultant. The activities on APG’s schedule also included the installation of support steel, and did not indicate that this steel was the responsibility of others. Finally, APG took responsibility for engineering support steel at certain areas of the Project. In light of this evidence, the Court found that the support steel was within the original scope of APG’s Subcontract.

After determining the scope of APG’s work, the Court turned its attention to whether APG had an obligation to proceed during the pendancy of a dispute. This analysis focused on Paragraph 2.1 of the Subcontract, the flow-down clause.

Paragraph 2.1 bound APG to LBL to the same extent LBL was bound to US Airways under the Prime Contract, except to the extent the Subcontract conflicted with the Prime Contract. In this case, the Prime Contract required LBL to continue performance during the pendancy of any dispute with US Airways. The Court therefore concluded that APG was obligated to proceed during the pendancy of any dispute with LBL. To support its holding, the Court noted that no provision of the Subcontract conflicted with the relevant paragraph of the Prime Contract. And, during contract negotiations, APG agreed to delete from the Subcontract a provision which entitled it to stop work in the event of nonpayment.

The Court’s holding drives home the need for clarity in the drafting of scope and flow down provisions in subcontract agreements.

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