Owners Beware: Delaying Payment May Cost You
By: Scott J. Hedlund
The case of Kostmayer Construction, Inc. v. Sewerage & Water Board of New Orleans, 943 So.2d 1240 (La.App.4 Cir, 2006) should serve as a word of caution to owners who delay acceptance of completed work. In Kostmayer, the plaintiff, a marine contractor, won a public bid contract to build improvements and refurbishments to a Sewerage & Water Board ("SWB") pumping station. The contract included the driving of steel sheet piles to strengthen a bulkhead between the pumping station and the Industrial Canal.
While driving the piles, Kostmayer's work crew began to experience an electrical current or shock as they guided the piles into place. Kostmayer asked Burk-Kleinpeter, Inc. ("BKI"), the engineering firm who prepared the plans and specifications and provided contract administration for the project, for permission to shut down the job until the safety hazard could be identified and corrected. BKI agreed.
After much investigation, including the hiring of experts to analyze the situation, it was determined that the shock affecting the crew was the result of Radio Frequency Interference ("RFI"). RFI is a relatively obscure phenomenon where a structure of conductive metal absorbs radio waves and transfers them into electrical energy. The investigators in Kostmayer believed the 180-foot steel crane boom was acting as a giant radio antenna, collecting and focusing the electrical energy from three radio station transmission towers, and thereby causing the electrical current or shocks experienced by the workers.
With S&WB's approval, they hired two experts to develop a plan to resolve the problem. The plan included a complex arrangement of nylon straps and slings to insulate the crane from the workers, and allow the job to safely proceed. By the time that Kostmayer implemented the plan and resumed work, the project had already been shut down for 27 days. Consequently, Kostmayer submitted a proposed change order in the amount of $108,247.48, which included the cost of repairing the damaged crane and the costs of personnel and equipment during the down time. BKI recommended approval, but S&WB denied the change order.
At trial, the court awarded Kostmayer the full $108,247.48, as well as an additional $79,963.66 for retainage and attorney's fees. The trial judge stated that "Kostmayer had not breached the standard of care owed" and that the electrical problem was "an unforeseeable event." On appeal, the S&WB argued that the RFI was an existing condition, not unforeseeable, and therefore, per the contract, Kostmayer was liable for the damage and delay. The Appellate Court, in a thorough review of the provisions contained in the contract between the parties, agreed with the Trial Court that, based on the testimony of the engineers presented at trial, RFI was not a foreseeable event, and that the costs of the delay should be borne by the S&WB.
The S&WB also argued that the Trial Court erred in awarding attorney fees for two reasons. First, it claims that the retainage had not yet been paid because there had been no formal acceptance of the project and no clear lien certificate. Second, the project had not been accepted due to the disputed change order for additional costs. The Appellate Court held that the disputed change order had no bearing on the duty of the S&WB to pay Kostmayer the full retainage. "The S&WB does not contend that the contract was defective or incomplete; nor did it offer evidence of such. Nonetheless, the S&WB arbitrarily withheld its formal acceptance pending the resolution of this dispute. Absent evidence to show that Kostmayer did not complete the work in accord with the contract specifications, we agree with the trial court that Kostmayer was entitled to attorneys fees for the S&WB's failure to pay the retainage within the delays set for in the statute." Id at 1250.
Ultimately, the effect of this decision is that an owner needs to be cautious when deciding to delay the acceptance of a completed project. Delaying acceptance or withholding payment or retainage for work that has actually been completed in compliance with the contract documents exposes the owner to the possibility of additional penalties. Retainage, despite how it is often viewed, should not be used as a sword to threaten those contracted with the owner, but rather a shield to prevent the owner from damage or the possibility of multiple payment obligations. The withholding of formal acceptance is certainly available when the work submitted for approval is lacking in some way, whether it be incomplete, defective, unacceptable in quality, etc. Kostmayer highlights, however, that such withholding of acceptance in not allowed as leverage in other disputes.
Written for The Legal Blueprint, 2007, Issue 3.
