By Sara M. Bour, Esq., Manager and Counsel, AIA Contract Documents
October 26, 2022
Modular construction is regaining momentum in the United States. This should be no surprise, given its timesaving, sustainability, and safety benefits, among many more. Though “modular” delivery methods have been around for decades, peculiar legal issues are emerging because of the hybrid nature of this type of construction. “Modular” is a hybrid approach to construction because it often includes offsite manufacturing work and traditional onsite construction work. Traditional site-built construction methods are used to prepare the foundation for the project and sometimes even first-floor work.
A common topic that is discussed in the modular construction realm is bond coverage. If you’re contemplating a modular project, consider how to obtain adequate bond coverage that extends to both the manufacturing and construction phases of the work. In a recent case out of the Northern District of Georgia, the Court considered whether language from the A312 Performance Bond covered a contractor’s manufacturing work and traditional site-built work on a modular project. Since the contractor furnished modules under two separate purchase orders, both of which were not incorporated into the bonded contract, the Court ruled that the performance bond did not extend coverage to these elements of the contractor’s work.
In this case, IHI E&C International Corp., et al., v. Robinson Mechanical Contractors, Inc., d/b/a Robinson Construction Company, et al., No. 1:19-CV-04137-JPB, 2022 WL 4773388 (N.D.Ga 2022), IHI filed suit against Robinson and Fidelity and Deposit Company of Maryland in connection with a construction project in Elba Island, Georgia. Robinson entered into three written agreements with IHI. Under the first two agreements, referred to as “Purchase Orders,” Robinson agreed to furnish modules at an offsite location at two different prices. Under the third agreement, referred to as the “Construction Contract,” Robinson agreed to perform onsite construction work for a third and separate amount. Robinson obtained a payment and performance bond from Fidelity for the Construction Contract. The performance bond contained language from the A312 Performance Bond, which extended coverage for only the “performance of the Construction Contract.” Id.
IHI claimed that it was required to retain replacement contractors for the Project, and that it paid for repairs and correction of defects on Robinson’s work. Id. at 2. IHI later made a demand under the bond for payment of these extra expenses. IHI’s bond claim was made on the basis that the Purchase Orders were incorporated into the Construction Contract and covered by the bond. IHI’s argument was based on an indemnity provision in the Construction Contract, which IHI believed to have covered all of Robinson’s activities on the project, regardless of whether such work was performed under the Purchase Orders or the Construction Contract. Id. at 4. Coverage under the bond was disputed on the basis that the Purchase Orders are separate agreements and not incorporated into the Construction Contract. Thus, the question presented to the Court was whether the Construction Contract and performance bond covered damages arising out of Robinson’s work under the Purchase Orders.
The Court found the indemnity provision to be ambiguous and employed certain rules of construction to resolve this ambiguity. Id. at 5. When interpreting the disputed language in the context of the whole contract, the Court concluded that the Purchase Orders were not incorporated in their entirety into the Construction Contract. The Court stated that “Robinson’s completion of a part of its Purchase Order obligations at the Project site; the inclusion of certain Purchase Order work in the Construction Contract; and the reference in the Construction Contract to certain Purchase Order tasks do not equate to an incorporation of the entirety of the Purchase Orders . . . into the Construction Contract.” Id. at 7.
The Court also construed the bond in accordance with the industry practice. Id. at 9. In the construction industry, it is standard practice for bonds to have the same penal sum as the bonded contract price. In this case, the bond was the same price as the Construction Contract, evidencing that the parties expected the bond to only cover the Construction Contract, not the Purchase Orders. It would have been contrary to industry practice to incorporate the Purchase Orders into the bond, but keep the penal sum at the price of the Construction Contract. The Court noted that because the parties used A312 Performance Bond language, the transaction was handled according to industry custom. Id. at 9 n.5.
This case demonstrates the importance of adequate bond coverage on modular construction projects. Where manufacturing and traditional construction work are contractually bifurcated, without flow down provisions or proper incorporation, parties run the risk of inadequate coverage for the project. Parties should aim for complete clarity when defining the bonded obligations, as well as project-related responsibilities and deliverables. In particular, when using the A312 Performance Bond, the parties should have a mutual understanding as to what constitutes the “Construction Contract.” One or two references to outside manufacturing work peppered throughout the bonded contract may be insufficient to constitute incorporation of such work when determining the parties, and their sureties, legal obligations. Additionally, parties may consider including both manufacturing work and traditional site-built work in one consolidated construction contract, to avoid confusion as to what constitutes the bonded Construction Contract.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.