U.S. District Court in North Carolina Construes Flow Down Provision Binding Subcontractor to Contractor’s Settlements With Owner

Dew Electric, Inc. v. Mass Electric Construction Co.
2010 U.S. Dist. LEXIS 19904 (W.D.N.C. Mar. 5, 2010)

Defendant Mass-Aldridge, a Joint Venture, (“MAJV”) entered into two contracts with the Charlotte Area Transit System (“CATS”) to construct CATS’ new South Corridor Light Rail Project. Under the first contract, MAJV agreed to construct the Traction Power & Overland Catenary System and under the second contract, MAJV agreed to construct the Train Control & Communication system (collectively the “Prime Contracts”). In furtherance of its work under the Prime Contracts, MAJV entered into a subcontract for each project (collectively the “Subcontracts”) with Plaintiff Dew Electric, Inc. (“Dew”).

Under the Subcontracts, MAJV had authority to settle claims for additional compensation on behalf of DEW. The Subcontracts state:

In the event of any request or claims by Subcontractor seeking additional … compensation which arises out of or is related to … changes to or defects in the Prime Contract, … Subcontractor agrees to be bound by any final determination as rendered on its claim, … and Subcontractor shall in no event be entitled to receive any greater amount from Contractor than Contractor is entitled to and actually does receive from [the City] on account of Subcontractor claims … and Subcontractor agrees that it will accept such amount, if any, received by Contractor from [the City] as full satisfaction and discharge of such claims. Subcontractor agrees that it will not take any other action with respect to any such claims.

Subcontractor shall be bound by Contractor’s determination, made in good faith, as to apportionment of any amounts received by Contractor from [the City] on behalf of Subcontractor and other claimants, including Contractor, whose work is affected by any act or omission of the [City].

Delays occurred during the projects affecting both MAJV and DEW’s performance. MAJV, for itself and DEW, made claim for additional compensation under the Prime Contracts. MAJV successfully negotiated additional compensation in separate settlement amounts for the two Prime Contracts. Under the first Prime Contract, the City paid MAJV a $1,000,000 global settlement. This settlement was 40% of the $2,460,268 claimed by MAJV and its subcontractors. Upon receiving the settlement, MAJV tendered to DEW $45,000, which was 40% of DEW’s claim. However, the $45,000 was conditioned on DEW’s signing of a change order that released MAJV from further claims related to the delay. DEW refused to sign the change order and MAJV refused to release the funds. Similarly under the second Prime Contract, the City paid to MAJV $236,000 of the $393,351 claimed by MAJV and its subcontractors. The City specifically agreed to pay $49,332 of DEW’s $61,225 claim. Again MAJV tendered to DEW the $49,332 conditioned on DEW’s signing of a change order that released MAJV from further claims related to the delay. DEW refused to sign the change order and MAJV refused to release the funds.

DEW sued MAJV for breach of the Subcontracts. DEW claims that MAJV owed it $113,349.24 rather than the $45,000 tendered under the first Prime Contract and that MAJV owed it $61,225 rather than the $49,332 tendered under the second Prime Contract. DEW moved for partial summary judgment seeking, among other relief, immediate payment of $96,273.64 – the total amount tendered by MAJV. DEW argued that MAJV admitted that it owed this sum and thus there was no issue of material fact as to MAJV’s liability. For its part, MAJV asserted that DEW was required to accept the money as “full satisfaction and discharge” of any claims related to payment and that MAJV had the contractual right to require DEW to sign the releases before receiving the funds.

The Court, viewing the evidence in the light most favorable to MAJV for purposes of summary judgment, stated that with or without a change order, DEW had already agreed pursuant to the Subcontracts that accepting such payment would release MAJV from further liability. Further, MAJV might justified in withholding what it owes to DEW until DEW performs its end of the bargain and accepts payment as full discharge and satisfaction of the claim. Because a reasonable jury could make such a finding, the Court denied Dew’s motion for partial summary judgment.

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