Largent Contracting, Inc. v. Great American Homes, Inc.

Brief Fact Summary. A construction contract provided for an engineer to authorize all payments to a construction company.  A problem arose with regard to monies owed for extra work done by the construction company.

Synopsis of Rule of Law. "[A] clause in a construction contract making the Engineer's decision concerning the acceptability and fitness of work performed under that contract 'final and conclusive' is binding on the parties to the contract unless there is fraud or the decision is so unjust as to imply bad faith or gross neglect."

Facts. The Plaintiff, Largent Contracting, Inc. (the "Plaintiff"), entered into a contract with the Defendant, Great American Homes, Inc. (the "Defendant"), on September 1, 1982.  The Plaintiff's obligation was to clear land and build a lake on the Defendant's land.  On September 2, 1982, the parties executed an amendment more clearly delineating the Plaintiff's responsibilities, but not changing the price, $133,479.50.  The Plaintiff alleges that it "performed additional work" with the Defendant's permission and seeks an extra $11,612.36.  The Defendant disagrees and contends the work was "not approved by the engineer as is required by the contract."  The court also cites various provisions of the parties' contract dealing with payment. 
•    An Amendment to the contract states:  "The following unit prices shall be used to determine progress payments for work performed on the above referenced project.  The final payment shall be determined by the quantity of units installed for each item and subject to verification and approval by the Owner's engineer."  The engineer designated for this projec, Gregory-Grace and Associates, Inc. ("Gregory-Grace"), admitted that the Plaintiff performed additional work with its permission.  The total bills the engineer approved for payment by the Defendant totaled $143,707.50 or about $10,000 more than the contract amount.  The date the final work application for payment was submitted, in September 1984, the majority of the work was completed.  On December 5, 1984, the last bill in the amount of $11,612.36 was submitted to Gregory-Grace, but the owner was not authorized to pay it.

Issue. Is the language in the contract strong enough to condition payment to the Plaintiff on the authorization of Gregory-Grace?

Held. No.  Under Tennessee law "a clause in a construction contract making the Engineer's decision concerning the acceptability and fitness of work performed under that contract 'final and conclusive' is binding on the parties to the contract unless there is fraud or the decision is so unjust as to imply bad faith or gross neglect."  The language in this case, however, is not as persuasive as in past precedents because "[t]he engineer is to approve final payment, but the contract does not provide that its decision as to disputes is to be final and conclusive or that the engineer is to be the final arbiter. A contract may provide for inspection or approval by a third party without making that party's judgment conclusive."  An issue of material fact exists because it is not clear why the Plaintiff has not been paid for the additional work when Gregory-Grace authorized the work to be done.

Discussion. This case offers an interesting look at how conditions play a role in construction contracts.