Texas Court of Appeals Holds that Contractor Released Claim for Additional Costs by Accepting Final Payment from Owner

McKinney & Moore, Inc. v. City of Longview, Texas
2009 Tex. App. LEXIS 9299 (Tex. App., Dec. 8, 2009)

The Court of Appeals of Texas for the Fourteenth District held that a general contractor’s acceptance of final payment barred its claims for compensation for extras. The Court relied on the express release language in the parties’ contract to support its ruling.

The City of Longview, Texas (the “Owner”) retained McKinney & Moore, Inc. (“MMI”) to serve as a general contractor for the construction of the Lake O’ the Pines Raw Water Intake Structure (the “Project”). The parties’ contract contained various provisions related to subsurface conditions and the Owner supplied reports regarding such conditions. Among other things, the contract also provided that the Owner was responsible for design accuracy and sufficiency of the contract documents. The contract further addressed circumstances under which MMI would be entitled to reimbursement for damages and the effect of MMI’s acceptance of final payment.

During the Project, MMI sought approval of multiple change orders seeking extensions of the Project schedule. The Project schedule was subsequently extended due to unexpected rainfall and the existence of iron ore rock not shown in the Owner-provided subsurface reports. Prior to completion of the Project, MMI sought compensation for the added costs it incurred as a result of these conditions. The Owner denied the request for additional costs. Thereafter, MMI submitted a final payment application to the Owner together with a cover letter indicating that MMI continued to seek an equitable adjustment of the contract sum. The Owner paid, and MMI accepted without protest the amount set forth in the final payment application.

MMI later sued, seeking an equitable adjustment in the contract sum. The Owner filed motions contending first, that MMI’s claim sounded in tort and was, therefore, barred by the doctrine of sovereign immunity and second, that MMI’s claims were barred by the provision in the contract whereby acceptance of final payment served as a release of all other claims. The trial court granted the Owner’s motions. MMI appealed to the Court of Appeals.

The Court of Appeals first reversed in part the trial court’s holding with respect to sovereign immunity. The Court found that the claim as to the accuracy of the subsurface reports sounded in contract and MMI was able to seek compensation from the Owner based upon the contractual provisions which (i) allowed MMI to rely on the accuracy of the reports, and (ii) permitted MMI to recover from the Owner where damages arose from the “act, neglect, omission, mistake or default” of the Owner. The Court further rejected the Owner’s position that the equitable adjustment sought by MMI was consequential in nature and thus barred by the Local Government Code. The Court opined that the damages sought by MMI were contemplated by the contract and were direct, rather than consequential.

The Court finally turned to MMI’s appeal of the grant of summary judgment on the issue of final payment. The Court affirmed the trial court’s ruling primarily addressing the Owner’s contention that MMI’s acceptance of final payment was a ban on recovery of additional compensation. Relying on the contract provision which provided that “acceptance by the [contractor] of the final payment shall be a bar to any claim,” the Court found that MMI waived any future claims to compensation when it accepted and deposited the Owner’s payment.

The Court rejected MMI’s argument that it reserved its rights when submitting its final payment application with a cover letter setting forth its renewed request for equitable adjustment. The Court further rejected MMI’s argument that the submission of a second, modified final payment application, adding $2,040 to the amount sought, resulted in the first final payment application no longer being “final.” The Court explained that, despite an earlier reservation of rights and modified final payment application, upon receipt of the last payment from the Owner, MMI had the option to (i) refuse payment and assert claims for additional sums or (ii) accept payment and waive its alleged additional costs. Because MMI chose to accept and deposit payment, by operation of the unambiguous contract terms, MMI waived any claims of additional costs.

Click here to view full text of decision courtesy of LexisNexis.

This entry was posted in Payment dispute and tagged , , , . Bookmark the permalink.