November 16, 1993
Recently you approached MTAS with several questions. It seems the city has been involved in the construction of a Biolac system sewage treatment plant (hereinafter plant) due to the inadequacy of its present lagoon. During the course of this construction a controversy has arisen between the city and the contractors hired to construct the plant. As a result, the contractors have sued the city for breach of contract and have quit work on the plant. The city is now faced with this lawsuit, a deadline from the State Department of Environment and Conservation as to when it must be in conformity with state environmental laws, and an unfinished sewer treatment plant. You have asked about the various legal rights and responsibilities of the parties concerned. I apologize in advance for the length of this letter, but I felt that the complexity of the fact situation and the legal analysis it entails needed the fullest possible explanation.
Before saying anything else, I would urge that the city contact the State Department of Environment and Conservation immediately, explain its situation, and ask for an extension of time to comply. The reason for this is simple. Even if all parties resolved this conflict to their satisfaction tomorrow, I doubt that the December deadline for compliance could be met. I must admit that I am not an engineer, but with winter weather coming on, absolutely no work being done on the project, and it only being some 35% complete (from a rough estimate with the photographs seen by our public works consultant Mr. Ed Archer), it hardly appears that the plant could be on line in time to meet the deadline. I will now follow with an explanation of the facts as I understand them since they are so important in framing the legal issues involved.
The engineers and the city entered into an agreement for them to be city engineers in March 1988. In the late spring or early summer of 1992, when the city decided it needed to build a sewage plant, it approached them about it. Section II subsection 3 of the agreement between the engineer and the city specifically provides that large jobs will be separately contracted, however, the engineer wanted to draw the plans under the hourly agreement, and the city agreed.
The construction contract was bid late in September of 1992, and the Construction company made the low bid and received the contract. Prior to the bidding of the job, in the summer of 1992, the city hired a City Manager. From all accounts, it seems implicit that it became part of the City Manager's duties to supervise the plant construction even though the contract between the Construction Company and the city specifically delegated these duties to the Engineer. After some consideration, the commission decided the price of the job was too high and authorized the City Attorney to re-bid it with several deletions he was to decide on. These changes were listed on the spec sheet. The Construction Company was still the low bidder and received the contract. Construction commenced shortly thereafter and proceeded apace. The re-bid itself has become a matter of some controversy that I will address at this point.
XX Engineering alleges it was hired by the former mayor to inspect the plant. As to whether they were actually hired, I will not venture, since I am not sure of all the facts surrounding this event. XX Engineering has made the allegation that the re-bid process violated T.C.A. 62-2-107 because the City Attorney authorized the changes. This statute calls for municipalities to engage the services of a licensed professional engineer or architect, which the City Attorney was not, before engaging in the construction of any public work. XX Engineering's contention is that the re-bid process was not approved by such a professional, but instead only by the City Attorney, and thus in violation of the statute. I do not believe this is true since you have shown me documents in your possession that show the changes as they were enumerated in the proposal for re-bids bearing the other (previously mentioned) engineer's stamp as required by statute.
In the spring of 1993, rumors of alleged deficiencies in the construction of the plant surfaced. The Construction Company was charged with making wide deviations from the plans that the engineer had drawn up. Shortly thereafter certain irregularities in the City Attorney's life also surfaced. These led to his resignation as city manager in July of 1993. During this entire period he is allegedly the only person to supervise the plant construction. The engineer is alleged to have made no inspections of his own during this period.
Not long after the city attorney's resignation it came to the city's attention that concrete was being placed in the settlement area of the plant contrary to contract specifications. The contract called for this concrete to be poured, while it is alleged the Construction Company was applying the concrete by spraying. When this came to the city's attention, it sent an employee to ask the Construction Company to halt this process and proceed according to contract specifications. The Construction Company thereupon quit work on the plant and filed suit against the city for breach of contract.
The legal implications of this set of transactions is, to say the least, interesting. The issues, in no particular order of importance are:
1. Did the engineer owe the city a duty to inspect the work as it progressed?
2. Did the city waive this duty by the alleged inspections of the city attorney?
3. Did the city materially breach the contract with the Construction Comapny as the lawsuit alleges?
4. Were the actions of the Construction Company in fact a violation of the contract terms that gave rise to an actual breach of the contract that would foreclose their claims of material breach by the city?
5. Article 16 of the contract between the Construction Company and the city contained an arbitration provision. Was this provision violated, and should the city defend the lawsuit on grounds that this should be handled in arbitration?
6. What is the best course the city should pursue in the dual goals of protecting itself from liability and finishing the construction of the plant?
The key to these answers will have to be found in the contract itself. In my examination of it, I will try and present the answers to these questions as they appear. I freely admit that the following conclusions are mine and mine alone and may, or may not, hold water in court.
Question 1. This is, at best, a somewhat murky area of the law. I have found one case that could be applied in this situation. In re Robby's Pancake House of Florida, Inc., 21 B.R. 754 (Bkrtcy E.D. Tenn. 1982) deals with a plaintiff who sued to recover from the architect and engineer who had approved plans and supervised construction of a building that later literally fell apart due to the fill under the site compacting. The court acknowledged that an architect has a statutory duty imposed by T.C.A. 62-2-101, which calls for licensing of architects to protect public safety, and stated:
Thus, in Tennessee, it is abundantly clear that an architect is charged with a statutory duty to exercise superior knowledge and abilities so as to insure the sound and stable construction of the building.
The court went on however, to deny the plaintiff's claim. It noted that he was continually on the site and had essentially taken over the role of contractor. Indeed he had even gone so far as to make changes in the fill on the site and the building itself without consulting the architect. In light of these actions, the court ruled that the doctrine of estoppel, which prevents parties from raising claims or taking legal positions contrary to their actions, applied, thus no recovery could be allowed.
This is where the actions of the previous mayor and the City Attorney in relation to the Engineer become critical in determining whether there is any claim against the Engineer and takes on us to...
Question 2. If the city specifically told the Engineer that it wanted the City Attorney to do all inspection then underneath Robby's I would suspect the city is estopped from having a claim. If the Engineer simply acquiesced in the City Attorney's inspections and made no efforts to do it's own then the city may well have a claim. It is worth noting that the City Attorney had been employed by the Engineer for several years prior to becoming city manager. If the city and the Engineer both agreed that the City Attorney would do the inspection for both parties, then I believe a claim could lie against the Engineer on the theory that he was their agent and negligently performed his job for them. All of this is pure conjecture at this point since no one seems to know the exact nature of the City Attorney's status. In short, the issue of whether or not a claim against the Engineer would be worthwhile needs more investigation.
Question 3. As to whether the city materially breached the contract with the Construction Company, I have serious doubts as to whether the claim will float. One of the contentions of the Construction Company's complaint is that the city breached by preventing them from delivering on their end of the contract. I hardly think that a city employee demanding that they stop nonconforming work and asking them to simply comply with the contract provisions give rise to this type of complaint, especially in light of the numerous breaches of specific contract provisions the Construction Company has committed (see question 4), of which the incident in contention is yet another.
Alternatively, the Construction Company claims the city materially breached by failure to pay a construction draw. Though no reported Tennessee case law addresses the issue of whether not paying a construction draw is a material breach, numerous cases exist in other jurisdictions. An excellent example of these is Ernst v. Ohio Department of Administrative Services, 590 N.E.2d 812 (Ohio App. 10 Dist. 1990). The Ohio Court of Appeals ruled that failure to pay a draw may constitute a material breach if such failure goes to the essence of the contract. Since the plaintiff in this case had abandoned the project before the draw was paid, thus breaching his end of the contract, the defendant did not breach by refusing to pay the draw since the money involved could be used to correct the consequences of the plaintiff's breach. I would argue that the numerous breaches by the Construction Company abrogated any duty the city had toward them, thus the city did not breach by failing to pay the draw.
Even if the city were to be found to have breached by non-payment of the draw, it would not be held liable for the damages claimed by the Construction Company due to the previous material breaches by them. The case of McClain v. Kimbrough Construction Company, Inc., 806 S.W.2d 194 (Tenn. App. 1990) highlights the general rule of law that:
A party who has materially breached a contract is not entitled to damages stemming from the other party's later material breach of the same contract.
I have outlined several possible defenses to the claim, but it would be better, and cheaper, if the city could get the complaint dismissed. It has been a while since the first year of law school and the civil procedure course that year entailed, yet, if my memory serves me correctly, the Construction Company's complaint is seriously defective. This is due to the so-called "well-read complaint" rule. This basic axiom of civil procedure requires that a complaint against a defendant allege more than mere accusations, but instead, be able to show a serious dispute of fact and law between the parties. I think a case could be made that their complaint does not meet this standard.
As ruled in W & O Construction Company v. City of Smithville, 557 S.W.2d 920 (Tenn. 1977), a mere listing of series of theories of recovery does not, in and of itself, state a cause of action. The Construction Company's complaint is very close to this. It simply alleges that the City has failed to pay construction draws and thus materially breached the contract as if this has stopped the plaintiff's progress. Indeed it makes no mention of the incident mentioned in the preceding paragraph when a city employee asked the Construction Company to stop violating the terms of the contract. It makes no allegations of wrongdoing by the city that would have forced the Construction Company to abandon the job as they have done. The complaint makes no mention of the substantial wrongdoing by the Construction Company, the failure to arbitrate, serious deviations from plans, and failure to finish the job in the contracted time. Instead it carries on about alleged "material breaches" by the city with absolutely no specifics nor case law to show that the city's actions indeed constituted a breach. I do not believe this reaches the level required for judicial determination and would urge that the city ask for an immediate dismissal of the case on these grounds alone.
Question 4. It is apparent that during the course of the job the Construction Company made significant deviations from the plans without submitting written change orders. Though the contract calls for all changes to be made only pursuant to written change orders, I do not believe this alone gives rise to a breach of the contract by the Construction Company. The case of Moore Construction Co. v. Clarksville Department of Electricity, 707 S.W. 2d 1 (Tenn.App. 1985), holds that the conduct of the parties can give rise to a waiver of this requirement. Since the city never protested these changes and, in fact, no change orders were ever made by either party, I believe this a grounds for breach is dead.
I do believe that the performance of substandard work by the Construction Company may very well give rise to a breach of contract claim by the city and, at the very least, estop their claim that the city materially breached the contract. Article 13.1 of the contract reads:
CONTRACTOR warrants and guarantees to OWNER and ENGINEER that all Work will be in accordance with the Contract Documents and will not be defective.
Article 13.7 states:
Neither observation by ENGINEER nor inspections, tests or approval by others shall relieve CONTRACTOR from CONTRACTOR'S obligations to perform the Work in accordance with the Contract Documents. (underlining added)
I believe 13.7 is particularly important since it could foreclose a claim by the Construction Company that the City Attorney approved the deviations from plans, and there is some case law to back this up, Burlington v. Arnold Construction Company, 727 S.W. 2d 241 (Tenn.App. 1987). In that case the plaintiff's sued the defendant for defective performance of a contract to fill a ravine. The contract gave the owner and engineer a right to inspect which the owners, at best, barely exercised. The contract also contained an Article 13.4 which reads word for word almost exactly the same as Article 13.7 in the contract with the Construction Company. The defendants claimed the failure of the owner to inspect estopped the plaintiff's claim. The court refused to agree with this and even went so far as to put an affirmative duty to follow the contract documents on the contractor stating:
However negligent the owner or its engineer may have been in preparing the contract or specifications, when signed, they became the contract by which both parties were bound, and the contractor would not be released from his duty to perform what he contracted to do, even though the contract requirements were not the wisest or most complete. (emphasis added)
Further in the case the courts added:
The contractor had the primary duty to see that the work was performed in accordance with specifications. It is no defence that the owner failed to "catch" the contractor and stop further shoddy work. The contract provides, "Contractor shall be responsible to see that the work complies accurately with the contract documents." (Compare this language with Article 13.1 of the contract with the Construction Company.) The duty of constant inspection was upon the contractor, and the performance of that duty would have assured a satisfactory end result and avoided this lawsuit.
This case is further supported by Missouri Portland Cement Co. v. J.A. Jones Construction Co. 323 F.Supp. 242 (M.D. Tenn. 1970) in which the court held that the defendant construction company's duty to follow the plans was not diminished by the owner's failure to discover it had not done so, even though the owner had a representative on site who cleared the deviation.
The possible defense of authorization of changes by the City Attorney that the Construction Company may try to raise is further weakened by the parol evidence rule. This common law doctrine holds that a clear and unambiguous writing that evidences a contract between the parties cannot be contradicted by evidence of oral modifications to the writing. It is also codified at T.C.A. 47-2-202. This principle is illustrated in Airline Construction Company v. Barr, 807 S.W.2d 247 (Tenn.App. 1990). There the court flatly denied parol evidence concerning the length of time a construction contract was to last pointing out that when parol evidence conflicts with a parties' writing, it cannot be admitted as evidence. This clearly fits within the facts here. The parties' entered into an agreement that was intended to manifest the total relationship of the parties. Part of this agreement was the specifications. A mechanism for making changes was included through the written change work procedure. This was not followed, thus any evidence that the City Attorney verbally authorized changes from the written specifications would be in violation of the parol evidence rule.
I believe that yet another grounds for a claim of breach is the significant delays the contractor made in completing the work. The job was to commence when the notice to proceed was issued, evidently sometime around the end of October 1992, and be substantially completed within 180 days, yet well into July when the Construction Company quit, the job was far from done. This is a significant deviation from the contract. Airline Construction addresses this exact issue of time extensions in relation to the parol evidence rule. The plaintiff claimed the defendant orally promised to finish the construction in six months. The contract explicit stated 240 days. As discussed, the court applied the parol evidence rule to exclude the claim the work was to be done in six months. Likewise I think if the Construction Company were to claim an oral extension was made, it could not be admitted, and it would be found that they were in actual breach of the contract due to the delay unless the delay was proximately caused by the city.
If the Construction Company is found to have breached the contract through delay, they could owe the city a substantial amount of money since the contract calls for the contractor to pay two hundred dollars a day in liquidated damages for every day they are over the time limit. These provisions in public works contracts have been enforced in Tennessee due to the detriment caused the public by the delay, City of Bristol v. Bostwick, 240 S.W. 774 (Tenn. 1922).
Question 5. I do not believe that the contractors or the city is required to submit the question to arbitration. This is somewhat unfortunate since United Steelworkers of America v. American Manufacturing Co., 80 S.Ct 1343 (1960) clearly holds that courts have no business weighing the merits of claims when both parties have agreed to submit them to arbitration. If this principle had applied, it would have at least done away with the expense of litigation. The reason I believe the arbitration provision does not apply is because it requires disputes to be submitted within thirty days of the claim arising. An argument can be made, however, that the Construction Company acted in bad faith by not submitting to arbitration, but instead, waited until the period had run out and then filed suit.
Question 6. This is perhaps the most important question of all and requires several subjective answers. I would suggest that the city, purely as a matter of my own opinion, take the following steps:
a. As previously mentioned obtain an extension of the deadline for compliance from the State.
b. Explore the exact nature of the relationship between the city, the City Attorney and the Engineer to determine if any liability may lie upon the part of the Engineer for his apparent failure to inspect.
c. File a counterclaim against the Construction Company for its numerous actual breaches of contract.
d. Last, but certainly not least and perhaps most importantly, do nothing at this point in relation to the work already completed. Though it may not meet the contract specifications, it may very well be useable for the purpose it was intended. It is my understanding that there has been some discussion of demolishing the project as it now stands and starting over. This could be a very expensive proposition. Tennessee, as well as most other states, adhere to the theory of mitigation of damages. As explained in Tampa Electric Company v. Nashville Coal Company, 214 F.Supp. 647 (M.D. Tenn. 1963):
A plaintiff is never given judgment for damages for losses that he could have avoided by reasonable effort without risk of other substantial loss or injury.
However, the same case holds that if the plaintiff incurs additional expense in an attempt to avoid the consequences of a breach, these expenses are damages. In English this means that if the city were not to try and utilize the plant as it now stands, and it were later found that it could have been used, the city will not be able to recover the not inconsiderable expenses already involved in the project so far.
Instead I would suggest that the city hire a third party firm that has not been previously associated with the project to give an unbiased opinion and do an overall survey of the job to see what, if anything, can be salvaged. If the present work can be used, it could save the city a considerable amount of money, and the cost of hiring the engineer can be attributed to the defendant since this was done in an effort to mitigate damages.
I hope my analysis and suggestion have been of some use. Please feel free to contact me if I may be of any further assistance on this or any other matter.
Very truly yours,
MUNICIPAL TECHNICAL ADVISORY SERVICE