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(A revised version of this article appears in The Construction
Lawyer, Volume 22, No. 4, Fall 2002, published by the
American Bar Association's Forum on the Construction Industry.)
By John W. Ralls
Two
contractors agreed to work together to submit a bid for
a large fire alarm system installation project. The two
agreed on a division of responsibility for the scope of
work. They also agreed that one (an electrical contractor)
would take the lead and that the other (a fire alarm contractor)
would perform as a subcontractor. The bid was successful.
Work
commenced before a written subcontract was signed. As work
proceeded, there were a number of changes to the work, and
the subcontractor performed a considerable amount of work
at the direction of the prime.
The
major sticking point in negotiations over the terms of the
subcontract centered on the changes clause. The prime contractor
favored a "flow-down" or "flow through"
clause "whereby [subcontractor] would receive whatever
compensation [owner] decided to pay" to the prime contractor
for the changed work. The subcontractor favored a "bidding
procedure" under which the subcontractor's estimates
for the cost of changes would be treated as a series of
fixed price contracts, a procedure the prime contractor
found unacceptable.
The
two were unable to resolve the issue. The subcontractor
ended up walking off the project before it was completed,
claiming that the prime contractor's failure to make timely
payments excused the subcontractor's future performance.
The prime contractor completed the project using another
subcontractor.
The
subcontractor sued the prime to recover the cost of its
work. The prime counter-claimed to recover additional costs
incurred in completing the work. The matter proceeded to
a bench trial.
During
the project, the owner required the prime contractor to
submit estimates of the cost involved in any change order.
The prime contractor requested pricing for changes, and
the subcontractor provided the pricing. There was conflicting
evidence at trial concerning the parties' intent with regard
to the change order pricing submitted. The prime contractor
contended the pricing was an estimate to be presented to
the owner for approval. The subcontractor treated the pricing
as a unilateral offer that was accepted when prime contractor
instructed the subcontractor to proceed with the requested
work.
The
trial court concluded that the parties had an implied-in-fact
contract entitling the subcontractor to payment for its
work at reasonable rates. The trial court, largely adopting
findings proposed by the prime contractor, also concluded:
"Because
the parties never agreed about the procedures for change
orders, but continued to work under the [prime] contract,
the Court concludes that they had an implied in fact contract
about the change orders. The parties intended to follow
established government requirements for contract modifications
known as the 'flow down' provision. The parties implemented
this provision each time [subcontractor] presented estimates
for additional work and negotiated a fair and equitable
price with [prime contractor] and [owner]."
The
trial court entered judgment in favor of the prime contractor.
The subcontractor appealed. The Idaho Supreme Court affirmed.
Fox v. Mountain West Elec., Inc., 2002 WL 1225091
(Idaho 2002).
Under
Idaho law, an implied in fact contract exists when "there
is no express agreement but the conduct of the parties implies
an agreement from which an obligation in contract exists."
After
noting that the trial court's findings are to be liberally
construed in favor of the judgment entered, the Idaho Supreme
Court found that the trial court's findings concerning the
parties' conduct were supported by the evidence. "Using
the [trial] court's findings that pricings submitted by
[the subcontractor] were used by [the prime contractor]
as estimates for the change orders, the conclusion made
by the district court that an implied-in-fact contract allowed
for the reasonable compensation of [the subcontractor] logically
follows and is grounded in the law of Idaho."
The
court noted that there was evidence presented at trial that
the flow-down method of compensation was "industry
standard" rather than the "series of fixed price
contracts" method favored by subcontractor and that
under Idaho law, a contractor is entitled to the reasonable
value of additional services rendered.
The
subcontractor also argued that the "gap filling"
provisions of the Uniform Commercial Code should apply because
the predominant factor of the transaction was the sale of
components for the fire alarm system, not services. The
subcontractor "argued that… various terms were
agreed upon by the parties in the prior agreement drafts,
including terms for the… payments" which, under
the UCC, should be given effect. The trial court found that
the contract contained both goods and services but that
the predominant factor was services. The Idaho Supreme Court
held there was no error in this finding.
The
Idaho Supreme Court also affirmed the trial court's findings
that the subcontractor breached the agreement by walking
off the job and that the prime contractor was entitled to
recover additional sums paid to the replacement contractor.
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