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Owner's Progress Inspections Do Not Preclude Rejection of Inspected Work That Fails to Meet Contract Specifications
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December 17, 2007
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Howrey LLP
The South Dakota Department of Transportation contracted with A-G-E Corp. to repave 11 miles of U.S. Highway 83. After each layer of roadway was installed, DOT inspectors sport checked the slope and elevation of the highway at randomly selected grade stakes, which were set every 100 feet. Inspectors verbally approved each layer. Then, A-G-E proceeded with the next layer. Work on the final layer was in progress when it was discovered that the slope and elevation on 2 miles of the road work was incorrect. A-G-E was required to remove the defective road work and re-grade the highway.
A-G-E sued DOT in Circuit Court, seeking $45,517.50 in damages for expenses incurred in the removal and re-grading. Both parties moved for summary judgment. The Circuit Court granted DOT's motion for summary judgment and dismissed A-G-E's lawsuit. A-G-E appealed the dismissal to the South Dakota Supreme Court, which affirmed the dismissal. A-G-E Corp. v. State, 719 N.W.2d 780 (S.D. 2006).
The court first noted that the contract made A-G-E solely responsible for the accuracy of its work and that the state's inspection did not relieve A-G-E of this responsibility.
A-G-E argued that DOT waived its right to reject work that did not comply with the project specifications when the DOT inspector checked A-G-E's work at each stage of construction and gave the "okay" to proceed to the next stage. According to A-G-E, DOT had a duty and opportunity to check the work as it progressed. A-G-E argued that it had relied on the inspection process in assessing whether its work was satisfactory.
The court rejected A-G-E's argument. The contract provided that work was to be performed "to the satisfaction of the Engineer" following final inspection. A-G-E chose to rely on the DOT progress inspections to determine whether its work was in conformity with the contract requirements. However, A-G-E's reliance did not mean that DOT waived its rights to insist that the work meet contract requirements. Looking to the contract language, the court pointed out that project inspectors were not authorized to change or waive contract provisions. Their involvement did not change A-G-E's duties. Moreover, A-G-E presented no evidence that project inspectors had discovered the grading did not meet specification any sooner than A-G-E. Without this knowledge, DOT could not knowingly waive its right to insist that the work comply with contract specifications.
Next, A-G-E argued that DOT should be estopped from holding A-G-E responsible for the needed rework. A-G-E argued that DOT should not be permitted to enforce the contract provisions against A-G-E because A-G-E had relied to its detriment on the fact that DOT inspectors had checked and approved the work. The court rejected this argument as well. It noted that DOT did not mislead A-G-E as to the results of the interim inspections - DOT did not know of the grading problems until an asphalt paving subcontractor raised the issue. The court distinguished cases in which owner engineers directed contractors to complete work outside the contract scope or specifications. The court noted that the DOT inspectors did not have the authority to supervise and direct A-G-E's work or to modify the specifications. Therefore, the inspectors were not authorized to order or permit work that did not comply with contractual specifications.
Finally, A-G-E sought to recover its rework expenses by arguing that the work required to bring the highway into conformity with the contract constituted "extra work" or "alterations" entitling A-G-E to additional compensation under the contract. The court rejected this argument. The rework was done to bring the A-G-E work into compliance with the contract specifications. It was not additional or different work for which there was no price included in the contract but rather "rework for failure to achieve the contract specifications." DOT had the right to enforce the contract specifications and to withhold final acceptance of the work until the contract specifications were met.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2007 Howrey LLP
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