Avoid Alternative Equipment – Specifically Identify Manufacturer

A supplier of goods cannot unilaterally deliver substitute goods where the contract between the parties identifies a specific manufacturer. When a contract explicitly describes a specific manufacturer, attempted delivery of nonconforming goods may be considered a breach of contract. The Court will look to the terms of the contract to determine the intent of the parties.

The court will interpret and enforce the contract in accordance with the plain meaning of the words as given by a reasonable person. In Fox v. Wheeler Electric, Inc., 169 P.3d 875 (Wyo. 2007), the Wyoming Supreme Court interpreted that the district court did not err when it held that the parties’ “contract required equipment from one particular manufacturer” even though the Contract Specifications provided that other manufacturers’ equipment might be accepted.

FACTUAL BACKGROUND
An operating contractor for a Dept. of Energy laboratory sent electrical subcontractors a Request for Proposal to upgrade fire monitoring systems. The proposal package contained Construction Specifications that identified equipment manufactured by a company called Digitize. Wheeler Electric, an electrical subcontractor, submitted a proposal relying on quotes from Fox, doing business as Fibertection, a fire alarm equipment supplier. Wheeler provided Fibertection with a copy of the Construction Specifications for the project.

Fibertection submitted a bid to Wheeler that included language “in conformance with the plans and specifications.” Additionally, Fibertection submitted an alternative bid to provide similar equipment from an alternative manufacturer at a lower cost. Both bids submitted by Fibertection to Wheeler were significantly lower than its competitors. Wheeler used Fibertection's bids in its proposal to the operating contractor and submitted both bids in its proposals package. The operating contractor awarded Wheeler the contract but rejected the proposal with the alternative equipment, indicating that it preferred Digitize equipment. Wheeler then issued a purchase order to Fibertection requesting that Fibertection order the Digitize equipment.

After receiving the purchase order, Fibertection attempted to order the Digitize equipment, but learned that the only authorized dealer in the state was its competitor. Unable to obtain the Digitize equipment, Fibertection instead ordered equipment from a third manufacturer. Fibertection informed Wheeler that it would be supplying equipment for the project from a different alternative manufacturer. Fibertection asserted that this alternative equipment was in full compliance with the plans and construction specifications, and that it was equal to or better than the Digitize equipment. Fibertection produced documentation to support this assertion. Wheeler passed the documentation on to the contractor with a request that the operating contractor approve the use of the alternative equipment. The operating contractor informed Wheeler that there was not enough time to review the equipment from the alternative manufacturer without compromising the project schedule and reiterated that it required the Digitize equipment as listed in the Construction Specifications.

Wheeler informed Fibertection that the operating contractor rejected the alternative equipment and that Fibertection would have to provide the Digitize equipment per the Construction Specifications. However, Fibertection could not provide the equipment. Therefore, Wheeler had no choice but to obtain the Digitize equipment from Fibertection’s competitor at a price appreciably higher than the Fibertection bid.

Subsequently, Wheeler sued Fibertection for breach of contract and the difference between the price it paid for the Digitize equipment and the Fibertection bid. Fibertection argued that its contract with Wheeler allowed it to provide either Digitize equipment or equipment from another manufacturer if it met the technical requirements for the project.

CLEAR LANGUAGE ESTABLISHES INTENT
The Court, when interpreting a contract, will focus on the intent of the parties forming the contract. The first step is to determine if the language of the contract is clear and unambiguous. If it is, the Court will determine the intent of the parties based solely on the language in the contract. The Court enforces the contract based on “the plain meaning its language would be given by a reasonable person.” Fibertection did not dispute the fact that the contract required it to furnish Digitize equipment. It asserted that the contract allowed it to supply any manufacturer’s equipment that met the technical requirements of the construction specifications. The Court, looking at the reasonable and plain meaning of the contract language, disagreed.

The first pages of the contract specifications stated that the subcontractor was to furnish, install, terminate and test “two Digitize 3505 control panels” and further identified Digitize software and a Digitize computer. The contract specifications also included the following language:

“Approved Equal: Whenever a product is specified by using a proprietary name, the name of a manufacturer, or vendor, the specific item mentioned shall be understood as establishing type, function, dimension, and quality desired. Other manufacturer's products will be accepted…, provided sufficient information is submitted…to demonstrate that products proposed are equivalent to those named.”

“Or Equal Material or Equipment Submittals: All “or equal” materials, equipment or systems shall be identified and submitted for approval as required by the Subcontractor Requirements Manual.”

The Court stated that “[t]he contract provisions…plainly provided that equipment from a manufacturer other than Digitize was subject to [operating contractor’s] approval. If it did not approve of alternative equipment, then Digitize equipment was required.” The Court determined that the word “desired” was not just a preference for the Digitize equipment but a requirement. The ability to approve or reject alternative equipment belonged to the operating contractor and not to Fibertection. Since the operating contractor did not agree to the alternative equipment or to any “or equal” equipment when forming the contract, Fibertection's failure to provide Digitize equipment constituted a breach of the contract.

Fibertection’s attempt to rely on Article 2 of the Uniform Commercial Code for the proposition that “[g]oods or conduct including any part of a performance are ‘conforming’ or conform to the contract when they are in accordance with the obligations under the contract” also failed. The Court reasoned that Fibertection “again ignores the provisions of the Construction Specifications that, as already discussed, required Digitize equipment.” The alternative equipment did not meet the obligations Fibertection agreed to under the contract, nor did it obtain the necessary approval to provide alternative equipment.

CONCLUSION
A supplier will not be allowed to provide alternative equipment where the clear and unambiguously expressed terms of a contract specifically identify a particular manufacturer. The court will determine the intent of the parties from the unambiguous language and enforce the contract based on the plain meaning of the words as given by a reasonable person.

PRACTICAL NOTE
When drafting a contract to a supplier for specific equipment:
1. State in clear and unambiguous language that the supplier is required to supply goods/services from a specific source;

2. Make it plain that the choice to approve or reject alternatives belongs to the contractor; and

3. Ensure that there is nothing in the contract language suggesting that the supplier is entitled to make a unilateral decision to substitute another product for the one specified.

Agreement to Arbitrate

The principle concept of every contract or agreement is to achieve the desires of the parties. The courts will examine the language of a contract to determine if the terms are clear and unambiguous. It is not the responsibility of the court to rephrase the language or to add any missing terms. Reasonably clear contract construction must take place when forming the contract.

In a recent Federal Circuit case, the Court held that if parties wish to include an arbitration clause, the word ‘arbitration’ must appear clearly in the agreement. Ganier v. Inglewood Homes, Inc., 944 So.2d 753 (4th Cir. 2006). Use of alternative words such as ‘final determination’ will not bind the parties to arbitration. A failure to stipulate a desire for a binding arbitration may render the clause null and void.

In the Ganier case, the homeowners initiated a suit against the builder on a breach of warranty claim. The claim stemmed from unresolved damages due to faulty workmanship and a failure to remedy by the builder. The builder took the position that the homeowners did not adhere to a provision of the contract that required disputes to be determined by a third party. The builder filed an ‘Exception of Prematurity or, in the Alternative, Motion to Stay’ based on the contractual language. The language that the Builder relied upon stated that “any dispute relating to the contract be referenced for final determination by the Orleans Parish Inspection Department, or another expert mutually agreed on by the parties.”

The homeowners opposed the Exception on the premise that the contract did not contain a valid and enforceable arbitration clause. They argued that the clause was vague and ambiguous and did not contain the words “binding arbitration.” In addition, they argued that the “Orleans Parish Inspection Department” did not exist.

The burden of proving the existence of a valid arbitration clause was on the builder because it requested the Exception. To succeed, the builder had to show that a valid agreement to arbitrate existed between it and the homebuilders. It further had to show that the disputed claim was within the scope of the arbitration agreement.

In reaching a determination on this case, the court relied upon both state law and the United States Arbitration Act. The court noted that although state and federal laws favor arbitration, an arbitration clause is not enforceable unless its meaning is “reasonably clear and ascertainable.” Moreover, the law requires that an interpretation of a contract is determined by the common intent of the parties. Where a contract does not contain language that is “a clear, unequivocal written expression that the parties agreed to arbitrate” their disputes the court will not enforce the clause.

The court also stated that no where in the clause did it contain the word “arbitration.” The builder did not cite to any case law that supported the premise that arbitration can be forced upon parties even when the contract did not contain the word arbitrate. The builder also failed to prove the existence of the referenced ‘Orleans Parish Inspection Department.’ Thus the holding of the court was that the arbitration clause was unenforceable.

Practical Application/Comments
Although the courts favor arbitration in lieu of formal litigation, if the contract does not specifically state “arbitration” the courts may not impose it. The language of the contract must be “reasonably clear and ascertainable” that it is the intent of the parties to arbitrate their disputes.

To enforce an arbitration clause the court will determine (1) whether a valid agreement to arbitrate between the parties exist; and (2) whether the disputed claim is within the scope of the arbitration agreement. It is advisable to use words such as “arbitrate” or “arbitration” in the actual clause. Relying upon synonyms or ambiguous forms of expressions, such as “final determination,” may render the clause unenforceable. It is also important to ensure that if arbitrators are referred to by name in the arbitration agreement that they actually exist, and will continue to exist, at the time enforcement of the agreement is sought.

This blog is intended to be solely a source of general information on topics related to construction, contract and commercial law. It is not intended to render legal advice on specific problems. If advice is required to address specific matters please feel free to contact me or another qualified attorney.

Ian C. Clarke
icclarke@smithcurrie.com

No license, No Rights!

Georgia and other states require that certain contractors have a license to file liens, recover damages, and to enforce contracts

Several states, including Georgia, require those desiring to engage in construction-related activities to obtain a license or to associate with a licensed individual. Failing to comply with the state’s licensing requirements can negatively affect your ability to enforce a contract or recover costs for any work performed. For example, in JR Construction/Electric, LLC v. Ordner Construction Co., 294 Ga. App. 453, 669 S.E.2d 224 (Ga. App. 2008), the court held that the subcontract between a contractor and a subcontractor was void as against public policy and unenforceable because the subcontractor was unable to show that it had conformed to the state’s licensing requirements.

Georgia’s Licensing Requirement

JR Construction/Electric, LLC (“JR”), a Wisconsin company, entered into an agreement with Ordner Construction Company (“Ordner”) to install electrical systems. At the time of contracting, JR was not directly associated with a Georgia licensed electrician. Georgia statute O.C.G.A. § 43-14-8(a), states that “[n]o person shall engage in the electrical contracting business as an electrical contractor unless such person has a valid license from the Division of Electrical Contractors.” Under section 43-14-8(f), the statute further provides that “[n]o partnership, limited liability company, or corporation shall have the right to engage in the business of electrical contracting unless there is regularly connected with such partnership, limited liability company, or corporation a person or persons actually engaged in the performance of such business on a full-time basis who have valid licenses issued to them” from the Division of Electrical Contractors.

In an effort to comply with the statute’s licensing requirement, JR entered into a joint venture agreement with Moore Electric Company (“Moore”). Moore had one licensed electrician, whose role, as project manager, was to supervise and monitor each Moore project and insure that all work was in accordance with the plans, codes and specifications. After performing the work outlined in the Ordner subcontract, JR filed a claim against Ordner for breach of contract, unjust enrichment and expenses of litigation. Ordner moved for summary judgment asserting that JR was not licensed to perform work in Georgia. The trial court granted Ordner’s motion for summary judgment. On appeal, JR asserted that it complied with the state’s licensing statute through the creation of a joint venture with Moore. JR claimed that Moore’s project manager supervised and monitored the work performed under the Ordner subcontract. However, no evidence was produced to show that Moore’s project manager did more than present his electrical license to obtain permits for the work.

The court determined that Moore’s project manager’s involvement with the project was too remote to comply with the Georgia licensing statute. JR failed to produce any additional evidence that it complied with the “being regularly connected to a Georgia-licensed electrician” requirement of the statute. Because JR failed to show compliance with the statute, the court held that it was unable to enforce the subcontract agreement against Ordner.

Additionally, JR was prohibited from recovering the value of its services under the theories of unjust enrichment or quantum meruit. In the decision, the court stated that where “an express agreement is unenforceable because it violates public policy, the agreement cannot be made legal and binding as an implied contract, by merely praying for a recovery on quantum meruit of a portion of the amount expressly agreed upon.” In other words, JR’s failure to produce evidence that it complied with Georgia’s licensing requirements voided the Ordner subcontract as against public policy and any implied promises to pay for services were also void when made.

New York’s Licensing Requirement

Similarly, licensing requirements in other states have prevented unlicensed contractors from enforcing mechanic’s liens or recovering payments under contract or in quantum meruit. In Vanguard Construction & Development Co., Inc., 879 N.Y.2d 300 (N.Y. 2009), the New York court held that although the homeowner was aware that the contractor was unlicensed and planned to take advantage of such fact, the contractor could not recover any further payments under the contract or in quantum meruit. New York’s public policy prohibits an unlicensed contractor from recovering for breach of contract or in quantum meruit and renders the underlying contract unenforceable by the contractor. However, the statute does not prevent the homeowner from recovering damages for breach of contract from the unlicensed contractor. Thus, while a contractor was unable to pursue damages arising from an express or implied contract, nor could it foreclose on a mechanic’s lien, the homeowner was entitled to enforce the contract and recover damages for breach of contract.

New Mexico’s Licensing Requirement

Likewise, in Romero v. Parker, 207 P.3d 350 (N.M. Ct. App. 2009), the New Mexico court held that public policy prevented an unlicensed subcontractor from bringing suit to recover payment for work performed on five different projects. Further, an unlicensed contractor risks having to repay payments already made to him. The court stated that “an unlicensed contractor may not retain payments made pursuant to a contract which requires him to perform in violation of the statute” and entitles a “landowner a full refund.” The general contractor that hired the unlicensed subcontractor filed a counterclaim seeking recovery of payments made to the subcontractor. However, the court denied the general contractor’s counterclaim because the general contractor failed “to furnish and maintain evidence of responsibility.” New Mexico statute § 60-13-1.1(c) requires that “contractors be required to furnish and maintain evidence of responsibility.” There was no indication that the subcontractor withheld information from the general contractor or that the general contractor made any attempt to obtain information concerning the subcontractor's licensure. Therefore, the court concluded that New Mexico’s statute barred “both an unlicensed subcontractor from recovering compensation from a general contractor and a general contractor who did not act responsibly in hiring an unlicensed subcontractor from recovering compensation already paid to the unlicensed subcontractor.”

Practical Note

Each state has its own contractor licensing requirements. Before performing work in a particular state, ensure that you have complied with and understand that state’s licensing requirements. A failure to fully comply may leave you with an unenforceable contract and no rights to file a lien, enforce a lien, make a claim on a bond, or to receive any payments.

Unenforceable contracts are contracts that have no remedy in damages or specific performance because they arise out of illegal bargains, which are void at their inception. If you take the risk and perform work without a license, in violation of a state statute, not only is the contract unenforceable as to you, you open yourself up to a plethora of other claims. Some states require that you reimburse the property owner any amounts they have paid for work you performed without a license. Additionally, you may be held liable to the property owners, general contractors, subcontractors, insurance companies, and bonding companies for damages for breach of contract, fraud, and indemnification.

Don't get caught doing business without a license.

This blog is intended to be solely a source of general information on topics related to construction, contract and commercial law. It is not intended to render legal advice on specific problems. If advice is required to address specific matters please feel free to contact me or another qualified attorney.

Ian C. Clarke
icclarke@smithcurrie.com