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Liability Limitation Held Enforceable Despite Owner's Breach of Duty of Good Faith
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December 12, 2005
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ConstructionWebLinks.com
In 1996, Sun Company, Inc. contracted with John B. Conomos, Inc. for the painting of industrial piping at Sun's refinery in Marcus Hook, Pennsylvania.
Before contracting, Conomos had been invited to bid on the project and had attended a pre-bid meeting at the refinery in May 1996. The potential bidders were shown the project site and were given information about how the surface of the pipes was to be prepared before paint was applied. They were shown examples of the surface preparation required by Sun. The desired level of preparation was based on standards issued by the Steel Structures Painting Council, now known as the Society for Protective Coatings, and the contract between Sun and the contractor provided for such compliance. The standards range from SP-1 (washing) to SP-11 (all paint removed; surface is shiny). Sun required a modified version of the SP-3 standard.
Soon after work began, Sun's inspector demanded surface preparation that Conomos considered to be in excess of what was required under the contract. The contractor complied with the inspector's demands and then requested an increase in the contract price to cover the additional cost. When the contractor received no response, it stopped performing and left the job. Despite the contractor's action, Sun still offered no response and did not reply to two additional letters sent by the contractor. On September 9, 1996, Sun cancelled the contract by implementing a contract provision allowing Sun to cancel the contract at any time.
After cancellation of the contract, Sun contracted with the second lower bidder to complete the project. The replacement contractor experienced similar problems with the inspector. A representative of the paint manufacturer was brought in as a mediator. He found the work done by the replacement contractor to be acceptable under the painting standards and the terms of the contract.
The original contractor sued Sun for breach of contract for amounts allegedly due under the contract and also sought prompt payment interest, penalties and attorney fees under the Contractor and Subcontractor Payment Act, 73 Pennsylvania Consolidated Statutes §§501 to 516. The trial court, in a bench trial, held that Sun had committed a "bad faith breach" of contract by requiring excessive surface preparation and by ignoring communications from the contractor regarding an increase in the contract price. The trial judge awarded the contractor contract damages and prompt payment interest, penalties and attorney fees.
Sun appealed to the Superior Court of Pennsylvania. The Superior Court affirmed. John B. Conomos, Inc. v. Sun Co., Inc. (R & M), 831 A.2d 696 (Pa. Super. 2003). The Pennsylvania Supreme Court denied Sun's petition for allowance of appeal. 845 A.2d 818 (Pa. 2004).
The Superior Court found that the objective guidelines and standards in the contract created reasonable expectations regarding the basis upon which Sun was to inspect the work. It found that the duty of good faith implied in every contract was breached by Sun when Sun's inspector demanded a higher level of work than was required under the contract. However, the Superior Court found that Sun did not act in bad faith when it did not seek to salvage its contractual relationship with Conomos because Sun had no obligation to do so. Rather, it had the right to cancel the contract at any time.
The Superior Court also considered Sun's argument that the trial court should have enforced the liability limitation clause in the contract despite a finding of "bad faith breach" by Sun. The Superior Court noted that liability limitation provisions are not disfavored under Pennsylvania law. Absent fraud or unconscionability, liability limitations are binding on the contracting parties. It particularly noted that express contractual provisions control over implied contractual duties. Duties cannot be implied in excess of expressly accepted obligations. Absent express contract provisions, a breaching party's motivation is not relevant to the amount of damages awarded. Consequently, the Superior Court held that the liability limitation clause before it was valid despite Sun's bad faith breach because the parties had agreed to such a provision. It found that the trial court had erred in failing to acknowledge the applicability of the provision.
However, the Superior Court found the error to be harmless. The amount of contract damages awarded by the trial court did not exceed the amount allowed by the contractual liability limitation.
In addition, the Superior Court held that the contractual liability limitation did not preclude award of statutory interest, penalties and attorney fees under the Contractor and Subcontractor Payment Act. It held that such penalties, interest and fees, though in excess of the contractual liability limitation, were properly awarded. This is because the Act does not permit parties to waive penalties or attorney fees. While it permits them to waive interest to be awarded to the contractor when payments are wrongfully withheld or delayed, the contract at issue did not include such a waiver. Accordingly, the judgment and award of damages were affirmed.
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