June 26, 2008

Subcontractor not required to perform its paving work at midnight using teaspoons

By Tim Gordon

New Design Construction Company, Inc. v. Hamon Contractors, Inc. (Colo. App. 2008)

The Court of Appeals holds that the duty of good faith and fair dealing applies to a prime contractor’s right to schedule and sequence the work.  Additionally, the Court holds that a subcontractor not suing CDOT directly is not required to exhaust the CDOT administrative remedies prior to maintaining a suit against the prime contractor.  Finally, the Court addresses when penalty interest under Colorado’s prompt pay act applies and begins accruing.

CDOT hired Hamon as the prime contractor for several highway and bridge projects, and Hamon subcontracted the paving work to NDCC.  Hamon’s initial phasing plan contemplated that it would build five bridges sequentially, but later altered its plan so that it would work on all five bridges simultaneously.  Hamon did not inform NDCC of this re-sequencing.

The project was delayed, and CDOT accessed liquidated damages against Hamon.  NDCC also initially filed a claim with CDOT.  As a result of the LDs and claim, Hamon withheld payment from NDCC.  NDCC then sued Hamon, and ultimately abandoned its administrative claims against CDOT.  NDCC’s lawsuit against Hamon proceeded to trial, and NDCC was awarded $990,539.89 plus interest at 15% pursuant to the prompt payment act.  Hamon appealed.

Exhaustion of Administrative Remedies

The subcontract incorporated the terms of the prime contract with CDOT, which contained an administrative remedies provision.  Based in part on this, Hamon argued that NDCC must first exhaust its administrative remedies before maintaining a lawsuit.  But the Court of Appeals held that NDCC was not required to exhaust the CDOT administrative remedies, reasoning that, at the relevant time, NDCC was not maintaining claims against CDOT.

Duty of Good Faith and Fair Dealing in Scheduling and Sequencing Subcontractor Work

Under its contract with CDOT, Hamon was responsible for planning, scheduling, and reporting the progress of the work.  This included developing a critical path schedule and a phasing plan describing the project’s sequential work.  And pursuant to its subcontract with Hamon, NDCC was required to promptly prosecute the work as Hamon directed.

Because the subcontract gave Hamon discretion to control the terms of NDCC’s performance after the subcontract’s formation (i.e., the time when NDCC must work), the implied covenant of good faith and fair dealing applied.

[W]e conclude that Hamon was responsible for developing and maintaining a schedule, NDCC was responsible for completing its work when directed by Hamon to do so, and Hamon was required not to abuse its discretion when directing NDCC to complete its work.

According to the Court, if the duty of good faith and fair dealing did not apply to Hamon’s contractual right to schedule and sequence the work, then “Hamon could have required [NDCC] ‘to perform its paving work at midnight using teaspoons.'”

Penalty Interest under the Prompt Pay Act

As part of the judgment, NDCC was awarded penalty interest under the Colorado Prompt Pay Act at 15%.  The parties both raised issues on appeal regarding the interest.  The Court of Appeals held that penalty interest does not being to accrue until seven days after CDOT paid Hamon for the work performed by NDCC.  Furthermore, interest under the Prompt Pay Act is not to be compounded annually.  Also, the penalty interest only applies to the portion of NDCC’s recovery for unpaid work.

Finally, the Court of Appeals held that Hamon’s surety, USF&G, can only be liable for interest at the bond rate of 8%, not at the penalty interest rate of 15%.  The surety’s liability was limited by the bond terms.

Read the slip opinion.

Contact the Author.