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Home / Opinion Digests / Contract / Contract – Construction Project – Subcontractor – Change Orders & Delay Charges – Statute of Limitations – Prejudgment Interest

Contract – Construction Project – Subcontractor – Change Orders & Delay Charges – Statute of Limitations – Prejudgment Interest

Cleveland Construction, Inc,. v. Ellis-Don Construction, Inc. (Lawyers Weekly No. 11-07-0332, 36 pp.) (Robert C. Hunter, J.) Appealed from Wake County Superior Court. (Paul G. Gessner & Robert H. Hobgood, JJ.) N.C. App. Click here for the full text of the opinion.

Holding: Where the defendant-general contractor filed claims — including the plaintiff-subcontractor’s claims — with the project owner and asked the subcontractor not to file suit against it so they would present a united front against the owner, the contractor is equitably estopped from asserting the statute of limitations in bar of the subcontractor’s claims.

We affirm partial summary judgment for the contractor. We affirm the trial court’s final judgment in part; we reverse the requirement that the subcontractor share in the costs the contractor incurred in prosecuting its claims against the owner.


Defendant was the prime contractor for a large, complex state building project. The project was scheduled for completion in three years, but it took six years to complete.

The plaintiff-subcontractor agreed to furnish and install metal studs, drywall, firewalls, vapor barrier, insulation, and acoustical ceiling and ceiling tiles. The subcontractor submitted numerous change order requests, extra work orders and claims for delay, disruption and inefficiency damages.

The subcontractor submitted periodic applications for payment. Each application said the subcontractor “acknowledge[d] that it ha[d] no unsettled change order requests or claims” pending against the defendant-contractor as of the date each application was submitted.

Beginning with its Aug. 20, 2000, payment application, the subcontractor attached a list of all of its pending change order requests. Beginning with its June 20, 2001, payment application, the subcontractor also included extra work orders in its list. The subcontractor first listed claims for delay, disruption and inefficiency damages in its Dec. 31, 2001, payment application.

Near the end of the project, the contractor informed its subcontractors that it intended to submit a claim for additional compensation to the project owner and the State Construction Office. The contractor asked the subcontractors to submit a claim to the contractor to “pass through” to the state.

The plaintiff-subcontractor submitted a claim for $4.2 million. The contractor’s claim to the state included the subcontractor’s claim.

The contractor settled with the state for $5 million. The settlement agreement states that the claims settled did not include subcontractor claims or any payment for delay/disruption or inefficiency damages.

The contractor then settled with the project’s designers after the subcontractor filed this action.

Judge Paul Gessner granted the contractor’s motion for partial summary judgment, ruling that the subcontractor had waived and released its extra/changed work, delay/disruption and inefficiency claims in its payment applications.

In preparation for trial, the contractor moved in limine to prevent the subcontractor from presenting evidence regarding (1) its claims for extra/changed work and delay/disruption damages that arose prior to Aug. 20, 2000, and (2) its claims for extra/changed work and delay/disruption damages that arose between Aug. 21, 2000, and June 20, 2001, that were not identified in the list accompanying the subcontractor’s periodic payment applications.

Judge Robert Hobgood ruled that the subcontractor could present evidence of such claims to the extent that the contractor passed those claims through to third parties and received payment thereon.

After referring the matter to a referee and reviewing the referee’s report, the trial court awarded the subcontractor $1,618,808, plus prejudgment interest running from Nov. 3, 2005, to the date of judgment.

Summary Judgment

Under the theory of quasi-estoppel, also known as “estoppel by benefit,” a party who accepts a transaction or instrument and then accepts benefits under it may be estopped to take a later position inconsistent with the prior acceptance of that same transaction or instrument. The essential purpose of quasi-estoppel is to prevent a party from benefitting by taking two clearly inconsistent positions.

Under the terms of the payment application, the subcontractor received periodic payments under its subcontract in exchange for its certified acknowledgment that, when it submitted its application, it had “no unsettled change order requests or claims” against the contractor. As the application specifies, the owner of the project and the prime contractor, as well as others, intended to “rel[y]” on “this certification.”

Having received periodic payments based on the applications submitted, the subcontractor is now precluded from asserting the claims which it expressly “acknowledge[d]” that it did not have as a condition of payment.

While Judge Gessner granted the contractor’s motion for partial summary judgment on the subcontractor’s unreserved pre-June 21, 2001, claims on the basis that the subcontractor had waived and released these claims, if the granting of summary judgment can be sustained on any grounds, it should be affirmed on appeal. The trial court’s entry of partial summary judgment on the subcontractor’s claims is, consequently, affirmed.

Statute of Limitations

Equitable estoppel may bar a party from relying on a statute of limitations defense when the delay in initiating an action was induced by acts, representations, or conduct that would constitute a breach of good faith.

The contractor notified its subcontractors, including plaintiff, that it intended to submit a claim for additional compensation with the project owner and the State Construction Office. The contractor solicited claims from its subcontractors to be aggregated and passed through to the owner for settlement.

The subcontractor submitted a verified claim on March 28, 2003, which included claims for extra/changed work, delay/disruption, and inefficiency damages. On July 1, 2003, the contractor submitted the subcontractor’s claim “in its entirety” to the owner and notified the subcontractor on Aug. 12, 2003, that its claim had been passed through to the state.

While the contractor was pursuing the aggregated claim, it sent a letter to the subcontractor encouraging it not to file suit against the contractor in order to present a “unified front” to the state during the administrative process.

The contractor’s affirmative representations that it was pursuing the subcontractor’s claims against the state and that initiating a lawsuit would jeopardize the “success[]” of recovery justifiably lulled the subcontractor into a false sense of security and induced the subcontractor delaying filing, as the subcontractor reasonably believed that the contractor would pass through to the subcontractor any proceeds attributable to its claim from the contractor’s settlements.

The contractor acknowledges that, through its settlement agreements with the project’s designers, it received settlement monies on the subcontractor’s claims. Having obtained, through third party settlements, funds derived from the subcontractor’s claims, the contractor is equitably estopped from asserting the statute of limitations as a defense to those claims.

Scope of Summary Judgment

Judge Gessner’s order unequivocally states that “all claims” not specifically reserved by the subcontractor arising prior to June 21, 2001 are barred. Therefore, the referee erred in considering extrinsic evidence regarding the scope of Judge Gessner’s summary judgment order.

However, Judge Hobgood’s subsequent order granted the contractor’s motion in limine, clarifying that the subcontractor would be permitted to present evidence regarding its delay/disruption and inefficiency claims to the extent that the contractor “pass[ed] th[e]se claims through to third parties, and received payment thereon.”

On appeal, the contractor fails to identify and differentiate between those claims that, although initially barred, were properly submitted to the referee due to the contractor’s recovering on them from third parties and those barred claims on which the contractor made no third-party recovery but on which the subcontractor nevertheless presented evidence. Nor does the contractor specify which erroneously considered claims — if there are any — were awarded to the subcontractor by the referee.

As the appellant on this issue, the contractor bears the burden of not only showing error, but also enabling this court to see that it was prejudiced and that a different result would have likely ensued had the error not occurred. The contractor has failed to satisfy this burden on appeal.

Prejudgment Interest

G.S. § 24-5(a) authorizes the award of pre-judgment interest on damages from the date of the breach at the contract rate, or the legal rate if the parties have not agreed upon an interest rate.

Since a 1985 amendment to § 24-5(a), once the relevant facts have been established entitling the party to damages, interest is awarded as a matter of law.

The referee found that the contractor breached the parties’ subcontract on Nov. 3, 2005 when the contractor notified the subcontractor by letter that it would not pass through to the subcontractor any funds the contractor had recovered through its settlement agreement with the owner.

The contractor contends that the award of prejudgment interest was erroneous because it had legitimate defenses and justifiable grounds to withhold most of the funds that it withheld during this lawsuit. This contention also has been rejected by this court: “We are unaware of any appellate interpretation which holds that N.C. Gen. Stat. § 24-5(a) has a ‘good faith’ exception. Indeed, the plain language of the statute indicates otherwise.”  Salvaggio v. New Breed Transfer Corp., 150 N.C. App. 688, 564 S.E.2d 641 (2002).

The contractor’s arguments regarding prejudgment interest are overruled.

Delay Damages

Even though the trial court erred in overruling the contractor’s exception to the referee’s conclusion that the principle of concurrent delay barred the contractor’s delay damages claim against the subcontractor, the contractor received delay damages in its settlement with the project designers. Since the contractor did not indicate the amount of delay damages it received from the designers, it has failed to show it was prejudiced by the trial court’s error.

The contractor fails to cite any authority — and we have found none — supporting its proposition that the subcontractor is fully liable for the contractor’s delay damages despite being only partially responsible for the delay. The contractor mischaracterizes its injury as being the “concurrency” of the delay rather than as the net effect of the delay itself.

Recovery Costs

The subcontractor also appeals from the final judgment, contending that Judge Hobgood erred in overruling its exception to the referee’s requiring the subcontractor to “share” the costs the contractor incurred in pursuing the subcontractor’s delay and disruption claims against the owner and designers of the project.

The contractor did not present any evidence in the numerous hearings before the referee regarding any construction industry custom regarding the “sharing” of recovery costs or the subcontractor’s actual or constructive knowledge of the purported custom. The contractor, apparently recognizing the lack of evidence on the issue, asserts that the referee, who was selected based on his “expertise in public construction law and accounting,” was “well within his authority to conclude that the costs incurred by [the contractor] in prosecuting its claim should have been shared by [the subcontractor] in accordance with accepted industry custom and practice.”

While the contractor is correct that long-established customs and usages are to be judicially recognized as part of the law, where, as here, no evidence is introduced as to usage or custom and the fact-finder did not, nor was it asked to, take judicial notice of any custom or usage, reliance on the doctrine of custom and usage is not appropriate.

There is simply no evidence in the record regarding (1) the existence of a customary practice in the construction industry concerning the sharing of recovery costs or (2) the subcontractor’s actual or constructive knowledge of such a custom. The referee did not take judicial notice of any custom, nor did the contractor ask that he take judicial notice of the custom.

Moreover, the referee failed to make any findings on these issues; he simply concluded, without any explanation of his rationale that the subcontractor should “share” in the costs. Without having taken judicial notice of the custom or having received any evidence on the practice, the referee’s determination lacks the necessary support to be upheld on appeal under our standard of review. The trial court, therefore, erred in overruling the subcontractor’s exception.

Affirmed in part and reversed in part.

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