Opinion
C.A. No. N10C-03-076 PLA.
Submitted: August 18, 2010.
Decided: September 24, 2010.
UPON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT.
DENIED.
UPON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT.
DENIED.
Charles S. Knothe, Esquire, CHARLES S. KNOTHE, P.A., Attorney for Plaintiff.
Donald L. Logan, Esquire, and Victoria K. Petrone, Esquire, LOGAN ASSOCIATES, LLC, Wilmington, Delaware, Attorneys for Defendant.
I. Introduction
This case involves a commercial construction project that came to a halt when the project owner failed to pay for more than two million dollars of work, leaving the two subcontractors involved in this suit to hash out where the risk of the owner's default rested. When Defendant Radius Technologies, LLC ("Radius") was hired by a general contractor to install a fire alarm system on the project, it subcontracted a portion of its work to Plaintiff McAnulla Electrical Construction, Inc. ("McAnulla"). McAnulla filed this debt action after Radius failed to pay certain invoices for completed work.
Radius has moved for summary judgment on the basis that McAnulla's suit is premature because a flow-down provision in its subcontract with McAnulla requires McAnulla to adhere to arbitration requirements described in Radius's agreement with the project's general contractor. Furthermore, Radius submits that under both its contract with McAnulla and incorporated payment terms in the prime contract, its payment obligations are not triggered until it has received payment from the general contractor; because Radius has not been paid, it argues that McAnulla's right to receive payment on the subcontract has not yet accrued.
In response, McAnulla disputes that the flow-down provision applies because Radius drafted the parties' agreement and failed to provide McAnulla with a copy of the prime contract. McAnulla argues that Radius permitted it to enter into the subcontract knowing that the parties' understanding of the payment terms differed, and that the doctrine of unilateral mistake should bar Radius from enforcing terms of the prime contract against McAnulla. Moreover, according to McAnulla, its prior course of dealing with Radius establishes that it had previously refused pay-when-paid terms, such that pay-when-paid language included in the subcontract itself was "boilerplate" that must be trumped by a non-conditional thirty-day payment term that appears elsewhere in the agreement. McAnulla therefore filed its own summary judgment motion, contending that the undisputed facts demonstrate that Radius breached its payment obligation as to the outstanding invoices.
Upon review of the parties' filings, the Court concludes that the flow-down provision in the parties' contract is valid despite McAnulla's allegation that it did not receive a copy of the referenced prime contract. Nevertheless, the parties' contract is ambiguous as to the scope of the flow-down provision, and the Court cannot determine upon the limited record presented whether the parties intended for the arbitration, choice of law, and pay-when-paid clauses in the prime contract to flow down to their agreement. In addition, the Court finds that the pay-when-paid language appearing on the face of the parties' contract, standing alone, does not suffice to impose a condition precedent upon Radius's payment obligation. Because the ambiguous and potentially conflicting provisions of the parties' contract present material disputes regarding their intent, which cannot be resolved at this early stage of the case, the summary judgment motions filed by Radius and McAnulla must be DENIED for the reasons more fully explored herein.
II. Background
A commercial project known as Patriot Yards was under construction in Washington, D.C., from late 2008 into 2009, with James G. Davis Construction Corporation ("Davis") acting as general contractor. In March 2009, Davis contracted installation of the project's fire alarm system to Radius. The agreement between Davis and Radius ("the Davis contract" or "the prime contract") extensively addressed the parties' relationship and the work to be performed. In relevant part, the Davis contract includes the following pay-when-paid provision:
The . . . price shall be paid in partial payments, when received by [Davis] from the Owner, which shall be a condition precedent, to [Radius] in trust for the payment by [Radius] for work in place and material on jobsite. . . . Final payment shall be due after completion of all work, acceptance by the owner, compliance with all [contractual] obligations, and receipt of final payment from the Owner, which items shall be conditions precedent to the making of final payment to [Radius].
Def.'s Mot. for Summ. J., Ex. B., ¶ 9.
The Davis contract further stated that "Disputes with James G. Davis Construction Corporation shall be resolved by arbitration in accordance with the rules of the American Arbitration Association."
Id., ¶ 19.
Radius subcontracted a portion of the fire alarm system work to McAnulla. In contrast to the detailed agreement between Davis and Radius, the subcontractor agreement between Radius and McAnulla ("the McAnulla contract") consisted of a single-page purchase order drafted by Radius. The agreement identified Radius as "Contractor" and McAnulla as "Subcontractor." Pursuant to the contract, McAnulla was to act as an alarm system subcontractor at the flat rate of $90,000.00. The contract described the "Payment Terms" as "30 days," and further provided that "All invoices must be received . . . by the 20th of the month, payable within 10 days upon receipt of payment of owner." The McAnulla contract also contained a flow-down provision that referred to a "Contract Manager/Owner contract":
Def.'s Mot. for Summ. J., Ex. A.
All work required to be performed hereunder shall be in strict conformance with this Purchase Order and the Contract Manager/Owner contract applicable to work. Subcontractor [ i.e., McAnulla] shall be bound to the Contractor [ i.e., Radius] by the terms of this Purchase Order and of the Contract Manager/Owner Contract and shall assume all responsibilities and obligations with respect to the work.
Id.
McAnulla began work on the site in March 2009, and submitted its first request for payment to Radius that month. Radius did not provide full payment on multiple invoices issued through May 2009. McAnulla's vice-president claims that when he contacted Radius in the spring of 2009, he was repeatedly assured that payment would be forthcoming. McAnulla ceased work in June 2009, apparently on the basis of Radius' nonpayment.
In October 2009, Davis filed a mechanic's lien against the property for more than $2 million that it claims the property owner owes for construction work and related expenses arising from the Patriot Yards project. According to Radius, the property owner's default has prevented it from receiving payment from Davis, and thus it has been unable to pay McAnulla in turn. On March 5, 2010, McAnulla filed the instant debt action against Radius, seeking to recover unpaid invoices in the amount of $68,085.00, plus interest.
III. Parties' Contentions
Prior to filing an answer to McAnulla's Complaint, Radius moved for summary judgment on the basis that McAnulla's claim is premature. Radius's position relies upon the payment and dispute provisions in its contract with Davis, which it contends are binding upon McAnulla by virtue of the flow-down provision in the McAnulla contract. First, Radius argues that Davis's receipt of payment from the project owner constitutes a condition precedent to its obligation to pay McAnulla because the pay-when-paid provision of the Davis contract applies to its relationship with McAnulla. Radius further contends that the flow-down provision in its contract with McAnulla subjects McAnulla to the arbitration clause contained in the Davis contract, and that McAnulla's dispute with Radius cannot be brought before this Court until after arbitration has occurred.
Radius further contends that a choice of law provision in the Davis contract was also incorporated into the McAnulla contract by way of the flow-down provision, and that the Court should therefore apply the law of the District of Columbia to this case.
In response, McAnulla adopts the position that none of the terms of the Davis contract were validly incorporated into its agreement with Radius. McAnulla claims that Radius did not supply it with a copy of the "Construction Manager/Owner Contract" referenced in the parties' agreement, leaving McAnulla unaware that Radius had not contracted directly with the project owner. McAnulla also notes that it has contracted with Radius on numerous other jobs and has previously required Radius to eliminate pay-when-paid provisions in favor of thirty-day payment terms. McAnulla has filed its own summary judgment motion, which suggests that the flow-down provision and pay-when-paid clause are unenforceable because Radius knew that McAnulla was mistaken as to Radius's understanding of the disputed payment terms and failed to clarify or correct that misunderstanding. Accordingly, McAnulla argues that the payment terms must be interpreted in view of the parties' prior course of dealing, such that only the thirty-day payment term should be given effect. Under McAnulla's proposed interpretation, summary judgment would be required because its contractual rights would not be subject to any condition precedent and the time for payment on all outstanding invoices would have elapsed in June 2009.
IV. Standard of Review
When considering a motion for summary judgment, the Court examines the record to ascertain whether genuine issues of material fact exist and to determine whether the moving party is entitled to judgment as a matter of law. Summary judgment will not be granted if, after viewing the evidence in the light most favorable to the non-moving party, there are material facts in dispute or if judgment as a matter of law is not appropriate. Summary judgment is also inappropriate "if, upon an examination of all the facts, it seems desirable to inquire thoroughly into them in order to clarify the application of the law to the circumstances."
Super. Ct. Civ. R. 56(c).
Storm v. NSL Rockland Place, LLC, 898 A.2d 874, 879-80 (Del. Super. 2005).
Ebersole v. Lowengrub, 180 A.2d 467, 468-69 (Del. 1962).
V. Discussion A. Choice of Law
As will be explained below, the Court concludes that the McAnulla contract is ambiguous as to which terms of the Davis contract the parties intended to incorporate, and the record at this stage in the case is insufficiently developed for the Court to interpret the flow-down provision. This ambiguity precludes a straightforward application of the choice of law provision included in the Davis contract. Although the parties have disputed whether the law of Delaware or the District of Columbia will apply, the Court's holding relies upon basic principles of contract law that do not differ between those jurisdictions. In the absence of an actual conflict of law, the Court will not engage in an unnecessary choice of law analysis.B. The McAnulla Contract
The meaning of contractual language is generally a question of law to be determined by the Court by reference to the contract itself. However, where a contractual provision is ambiguous, the Court may consider extrinsic evidence in interpreting it to discern the contracting parties' intent. A contractual provision is not ambiguous merely because the parties disagree as to how it is to be interpreted. Rather, ambiguity exists only where a provision is "reasonably or fairly susceptible of different interpretations or may have two or more different meanings."At the outset, the Court must reject McAnulla's argument that it cannot be subject to any terms defined by reference to the Davis contract because Radius did not supply it with a copy of the Davis contract or otherwise notify it of the prime contract terms that Radius now seeks to enforce. A party's failure to read a contract does not render the contract invalid or relieve that party of its terms. The obligation of a contracting party to read any contract it signs extends to documents incorporated by reference, which become part of the terms of the parties' agreement at the time of execution.
Graham v. State Farm Mut. Auto. Ins. Co., 565 A.2d 908, 913 (Del. 1989) ("[A] party's failure to read a contract [cannot] justify its avoidance."); Pers Travel, Inc. v. Canal Square Assocs., 804 A.2d 1108, 1110 (D.C. 2002) ("We have . . . consistently adhered to a `general rule that one who signs a contract has a duty to read it and is obligated according to its terms.'" (quoting Hollywood Credit Clothing Co. v. Gibson, 188 A.2d 348, 349 (D.C. 1963)).
See Rose Heart v. Ramesh C. Batta Assocs., P.A., 1994 WL 164581, at *4 (Del. Super. Apr. 12, 1994) (holding that by executing a contract, a party agrees "to be bound by the terms set forth in the agreement and those incorporated by reference"); Healy v. Silverhill Constr. Co., 2007 WL 2769799, at *2 (Del. Com. Pl. Sept. 19, 2007) ("[A] sophisticated party to a construction contract at the least should have read the contract and sought out the incorporated terms.").
Here, the McAnulla contract included a flow-down provision stating that McAnulla would complete its work in "strict accordance with this Purchase Order [ i.e., the McAnulla contract] and the Contract Manager/Owner contract applicable to work." Such flow-down provisions essentially build upon the principles of incorporation by reference and are often used in construction subcontracts to create obligations between subcontractor and contractor that mirror the obligations between the contractor and project owner. The McAnulla contract explicitly refers to the contract between Radius and the unnamed "Contract Manager/Owner," and makes clear that certain of McAnulla's obligations to Radius were defined by that prime contract. Neither McAnulla's failure to read the Davis contract nor its lack of awareness that Davis was the particular "Contract Manager/Owner" managing the Patriot Yards project nullify the flow-down provision; even if Radius neglected to provide McAnulla a copy of the Davis contract, as McAnulla alleges, McAnulla bore responsibility for making further inquiries before it agreed to assume obligations defined in a separate document. McAnulla's reliance upon the doctrine of unilateral mistake is therefore misplaced.
Def.'s Mot. for Summ. J., Ex. A (emphasis added).
See T. Bart Gary, Incorporation by Reference and Flow-Down Clauses, CONSTRUCTION LAW., Aug. 1990, at 46.
Although the Court's conclusion would be the same even if the McAnulla and Radius had executed a detailed, multi-page document, it bears noting that the contract McAnulla signed was a single page containing fewer than a dozen sentences, none of which provide specific criteria for how $90,000.00 worth of alarm work was to be performed. This paucity of detail highlights the unreasonableness of McAnulla's argument that Radius's alleged failure to provide a copy of the Davis contract relieved McAnulla of all obligation to comply with any of the prime contract's terms; without reference to the Davis contract, the McAnulla contract is devoid of any meaningful standards for performance of the work.
Thus, the primary issue before the Court at this stage is not the validity but rather the scope of the flow-down provision. The disputed provision is hardly a model of clarity. It does demonstrate an intent by the parties to bind McAnulla by at least some of the terms of the Davis contract; however, the provision is ambiguous as to whether the parties meant for provisions of the Davis contract unrelated to the performance of work to flow down to the McAnulla contract.
The first sentence of the flow-down provision effectively obligates McAnulla to carry out "[a]ll work to be performed hereunder . . . in strict accordance" with the provisions of "the Contract Manager/Owner contract applicable to work." More problematically, the following sentence states that "Subcontractor shall be bound to the Contractor by the terms of this Purchase Order and of the Contract Manager/Owner Contract and shall assume all responsibilities and obligations with respect to the work." This second sentence is susceptible to two differing constructions. The first clause of the sentence, stating that McAnulla "shall be bound to [Radius] by the terms . . . of the Contract/Manager Owner Contract," could reasonably be read as separate from the second clause regarding work-related obligations. Such a reading, which Radius champions in its motion, would subject McAnulla to arbitration, payment, and choice of law terms mirroring those in the Davis contract. On the other hand, the sentence could also be consistent with an intent that only those provisions of the Davis contract establishing "responsibilities and obligations with respect to the work" should flow down to the McAnulla contract.
Although Radius correctly points out that the construction of contractual language is usually a question of law for the Court, summary judgment cannot be granted where a material factual dispute arises regarding contracting parties' intentions. In this case, the flow-down provision in the McAnulla contract must be clarified by resort to extrinsic evidence as to the parties' intent. The Court is far from satisfied that the record has been sufficiently developed to offer that evidence — indeed, the parties have not presented argument, let alone a factual record, regarding the ambiguity identified by the Court. In their filings, Radius and McAnulla essentially treated the flow-down provision as an all-or-nothing proposition: Radius contends that the flow-down provision requires McAnulla to fulfill every obligation that Radius owed Davis under the Davis contract, while McAnulla denies that it can be subject to any of the Davis contract's provisions without having received a copy of the document or other notice of its terms. Neither party directly addressed whether the flow-down provision was intended to apply to non-work-related terms in the Davis contract against McAnulla. Aside from the contracts themselves and copies of contracts from past projects, the only extrinsic evidence of the parties' intent presently before the Court is the affidavit of McAnulla's vice-president. That affidavit focuses on Radius's alleged failure to supply McAnulla with a copy of the Davis contract, and therefore does not illuminate McAnulla's understanding of the scope of the flow-down provision at the time of contracting. Radius has not supplied an affidavit, and its summary judgment motion was filed before discovery commenced in this case. As the record is inadequate for the Court to resolve the ambiguous flow-down provision, it cannot grant summary judgment in favor of either party.
See Modern Telecomms., Inc. v. Modern Talking Picture Serv., 1987 WL 11286, at *3 (Del. Ch. May 27, 1987).
Summary judgment on the present record would also be inappropriate given the two apparently conflicting payment provisions contained within the McAnulla contract. The top of the McAnulla contract identifies the "Payment Terms" as "30 days," whereas the bottom half of the page contains a sentence to the effect that "All invoices must be received in our office by the 20th of the month, payable within 10 days upon receipt of payment of owner." McAnulla argues that these two provisions must be viewed in light of the parties' prior course of dealing, during which it claims the "30 days" term was inserted in lieu of pay-when-paid language proposed by Radius. Because this amended thirty-day term has appeared in all subsequent contracts between the parties, McAnulla suggests that the language indicating that invoices were payable within ten days upon Radius's receipt of payment from the project owner is "boilerplate" that does not reflect the parties' actual intent. Radius counters that the contract is clear that its obligation to pay is not triggered until it has received payment from the project owner, and that the only possible ambiguity concerns whether McAnulla was to be paid ten or thirty days after this triggering event. Radius suggests that it can resolve this ambiguity by voluntarily accepting the "more stringent of the two options, being a 10 day payment requirement from when Radius receives payment."
Def.'s Resp. to Pl.'s Mot. for Summ. J., ¶ 10. Radius also argues that to the extent the Court considers extrinsic evidence in interpreting the payment provisions, "then the fact that none of McAnulla's invoices were paid within 30 days evidences that, even if the Court were to read in the date of invoicing as a trigger for the 30 day payment window, then McAnulla waived that requirement." Id. ¶ 11. The trouble with this position is that McAnulla could not control when Radius paid it — if McAnulla had that ability, the Court doubts that this suit would be necessary. That McAnulla continued to submit invoices for work it performed even though payments were not forthcoming hardly implies that it intended to waive a defined time period for receipt of payment, if the thirty-day term is ultimately found to reflect the parties' intent.
This concession aside, counsel for both parties have missed the mark in their exegeses of the McAnulla contract payment terms. From the Court's perspective, the primary issue is whether the provision stating that McAnulla's invoices are "payable . . . upon receipt of payment of owner" is sufficient to establish a condition precedent to Radius's duty to pay and thereby entitle Radius to summary judgment. Under both Delaware and District of Columbia law, the Court concludes that it is not.
Jurisdictions vary in their treatment of pay-when-paid clauses, and relatively narrow differences in contractual language can lead to widely varying results. The majority approach holds that "if reasonably possible, clauses in construction subcontracts stating that the subcontractor will be paid when the general contractor is paid will not be construed as establishing true conditions precedent, but rather as merely fixing the usual time for payment to the subcontractor, with the implied understanding that the subcontractor in any event has an unconditional right to payment within a reasonable time." Where parties have employed contractual language that can only be construed as intending that payment to the general contractor constitutes a condition precedent to the subcontractor's right to receive payment (resulting in what may be called a pay- if-paid provision), jurisdictions split as to whether such a condition precedent is enforceable as a matter of public policy.
See, e.g., Thos. J. Dyer Co. v. Bishop Int'l Eng'g Co., 303 F.2d 655, 659-60 (6th Cir. 1995); Wm. R. Clarke Corp. v. Safeco Ins. Co., 938 P.2d 372, 373 (Cal. 1997); Gilbane Bldg. Co. v. Brisk Waterproofing Co., Inc., 585 A.2d 248 (Md. Ct. Spec. App. 1991); see also Margie Alsbrook, Contracting Away an Honest Day's Pay: An Examination of Conditional Payment Clauses in Construction Contracts, 58 ARK. L. REV. 353 (2005).
Wm. R. Clarke Corp., 938 P.2d at 373 (collecting cases).
Compare West-Fair Elec. Contractors v. Aetna Cas. Sur. Co., 661 N.E.2d 967 (N.Y. 1995) (holding that a provision shifting the risk of a project owner's default from general contractor to subcontractor is void and unenforceable as contrary to public policy), with Peacock Constr. Co., Inc. v. Modern Air Conditioning, Inc., 353 So.2d 840, 842-43 (Fla. 1977) ("There is nothing . . . to prevent parties to these contracts from shifting the risk of payment failure by the owner to the subcontractor. But in order to make such a shift the contract must unambiguously express that intention.").
In Radius's view, its receipt of payment from Davis constitutes a condition precedent to its obligation to pay McAnulla, such that the only question raised by the contract is whether payment is due ten or thirty days after the condition precedent is satisfied. McAnulla seeks to have the "30 days" payment term applied without any regard for the ten-day pay-when-paid provision that is also in the contract. Accepting McAnulla's position would require this Court to render the pay-when-paid language meaningless, which it is unwilling to do. However, Radius's position is equally flawed in presuming that the pay-when-paid provision automatically created a condition precedent.
See, e.g., Troumouhis v. State Dept. of Transp., 2006 WL 1579776, at *4 (Del. Super. May 31, 2006) ("[C]ontract terms should not be read to be illusory or meaningless."); Caglioti v. Dist. Hosp. Partners, LP, 933 A.2d 800, 811 (D.C. 2007) (same).
The majority approach to pay-when-paid clauses finds support in § 227(1) of the Restatement (Second) of Contracts, which provides, "In resolving doubts as to whether an event is made a condition of an obligor's duty . . . an interpretation is preferred that will reduce the obligee's risk of forfeiture, unless the event is within the obligee's control or the circumstances indicate that he has assumed the risk." Notably, the first illustration to § 227 features a pay-when-paid construction contract scenario:
Restatement (Second) of Contracts § 227.
A, a general contractor, contracts with B, a sub-contractor, for the plumbing work on a construction project. B is to receive $100,000, "no part of which shall be due until five days after Owner shall have paid Contractor therefor." B does the plumbing work, but the owner becomes insolvent and fails to pay A. A is under a duty to pay B after a reasonable time.
Id.
The District of Columbia Court of Appeals adopted § 227(1) in Wemhoff v. Investors Management Corp. of America. Although Wemhoff involved an agency contract which ultimately was found to include a condition precedent, the court relied upon the Restatement to explain that it was "reluctant" to find a condition precedent that would result in a forfeiture, even where the record left it "unable to reach any other conclusion."
528 A.2d 1205, 1209 (D.C. 1987).
Id.
Applying Delaware law, this Court has directly addressed the issue in the context of pay-when-paid clauses and concluded that "[i]n the absence of an unambiguous intent to make receipt of payment by [the prime contractor] a condition precedent of its obligation to pay [the subcontractor]," a pay-when-paid clause "must be interpreted as providing the time for payment" rather than a condition precedent. Where the owner has failed to provide payment, the Court has adopted the majority view that the subcontractor must be paid in a "reasonable" time.
Voltair Contractors, Inc. v. Coastal Mech., Inc., 1986 WL 13982, at *1 (Dec. 1, 1986); Worthy Bros. Pipeline Corp. v. Acierno, 1996 WL 527347, at *2 (Del. Super. July 26, 1996).
Worthy Bros. Pipeline Corp., 1996 WL 527347, at *2.
Setting aside the possibility that the Davis contract could ultimately inform the interpretation of the McAnulla contract's language, the wording of the McAnulla contract's pay-when-paid provision does not evince an intent to impose a condition precedent upon Radius's payment obligation. The provision does not explicitly reference a condition precedent or employ other language shifting the risk of a default by the project owner to McAnulla. Rather, the provision stating that invoices will be "payable within 10 days upon receipt of payment of owner" must be read as setting a time for payment. Because Radius has not been timely paid, the McAnulla contract pay-when-paid provision, construed without reference to the Davis contract, would require that McAnulla be paid within a reasonable time.
Cf. Urban Masonry Corp. v. N N Contractors, Inc., 676 A.2d 26, 36 n. 19 (D.C. 1996) (discussing pay-if-paid clause which imposed condition precedent via language stating that "[r]eceipt of payment by Contractor shall be a condition precedent to payment being owed to Subcontractor.").
Given the ambiguity concerning the scope of the flow-down provision, the Court cannot reach the question of whether the flow-down provision would affect the payment terms contained in the McAnulla contract. Furthermore, because neither party's arguments explored the possibility that the McAnulla contract's pay-when-paid provision might not state a condition precedent, the Court will not address whether the "30 days" and "payable within 10 days upon receipt of payment" provisions can be harmonized, nor whether a "reasonable time" for payment has elapsed if the parties did not intend for the Davis contract payment provision to flow down.
VI. Conclusion
Both parties' summary judgment motions ask the Court to resolve contractual ambiguities without the benefit of the arguments or the extrinsic evidence necessary to accomplish the task. For the reasons explained herein, the Court cannot reach a final conclusion as to the meaning of the relevant contractual language upon the motions presently before it, although it has attempted to provide some guidance for the parties by highlighting the ambiguities in the McAnulla contract and the legal framework in which the Court must consider the disputed terms. As neither party has demonstrated that it is entitled to judgment as a matter of law, both Defendant's Motion for Summary Judgment and Plaintiff's Motion for Summary Judgment are DENIED.
IT IS SO ORDERED.