Case shows need for pass-through clause

CONTRACTORS HATE to be told by attorneys that they need long, written contracts and subcontracts. They want to return to the old days when everyone did business on a handshake. The trouble is (as they know in their heart) that as long as owners require them to sign long, written contracts, they will have to make sure that their subcontractors and suppliers keep the same sort of promises to them. A

CONTRACTORS HATE to be told by attorneys that they need long, written contracts and subcontracts. They want to return to the old days when everyone did business on a handshake. The trouble is (as they know in their heart) that as long as owners require them to sign long, written contracts, they will have to make sure that their subcontractors and suppliers keep the same sort of promises to them. A recent Missouri case illustrates the importance of having a “pass-through” clause in a subcontract.

In Werner v. Ashcraft Bloomquist Inc., 10 S.W.3d 575 (Mo. App. 2000), Ashcraft, a general contractor in St. Louis, entered into a contract with a developer to remodel a shopping center. Part of its scope of work was removal and reinstallation of all storefront signage. Ashcraft entered a labor-only subcontract with Werner’s company for $26,700. Werner removed all the signs and was paid $13,260.

In the meantime, the owner decided that it wanted all new signage, and entered a change order with Ashcraft (as its contract allowed it to do) deleting the reinstallation of the old signs. When Ashcraft told Werner that he would get no more money because there was no more work to do, Werner sued for breach of contract and won. Ashcraft admitted in court that its subcontract did not contain a no-fault termination clause, a clause incorporating by reference into the subcontract all the terms of its own contract with the developer, but it raised a number of different theories under which it argued that it shouldn’t have to pay Werner for the work he didn’t do.

First, Ashcraft argued that performance had become “impossible” since Ashcraft no longer had the right or ability to allow Werner to perform. The court threw this one out, saying that the Doctrine of Impossibility only applies where the superceding event was not within the control of either party. Here, the court found that Ashcraft’s “failure to make provision for that contingency [that work could be deleted] in its contract with Werner indicated its assumption of the risk that a change order might occur which could impair its contract with Werner.” (10 S.W.2d at 557).

In other words, just because Ashcraft made a poor contract with Werner doesn’t let Ashcraft off the hook.

Second, Ashcraft argued that its contract with Werner was “commercially frustrated,” which the court found to be pretty close to the same thing as impossibility, except that performance is possible, just so expensive as to make no sense. But, said the court, it would only invoke that doctrine to help Ashcraft out if the problem that arose was truly unforeseeable. Here, it was obviously foreseeable that the owner might execute a deductive change order because it put a clause in the contract giving it the right to do so. The fact that Ashcraft did not foresee it (and get the same right in its subcontract) did not make it unforeseeable.

Finally, Ashcraft tried to convince the court that it should be relieved of the obligation because its performance was frustrated by the acts of a third party (the owner). Because the subcontract did not condition Ashcraft’s performance on the consent of anyone else, the court denied the appeal for that reason too.

What does seem odd is that Ashcraft was ordered to pay $13,400 to Werner, which looks to be the entire unearned contract amount, even though Werner was not required to perform at all. Normally, the measure of damages is the injured party’s lost profits and unavoidable expenses, and it would seem that some of the expenses of a labor-only subcontract would not have been incurred here. Since that issue wasn’t raised in the appeal, we will never know.

What we do know is that Ashcraft would not have been in this bind, or in court, if it had just had a clause in its subcontract with Werner allowing it to terminate the subcontract in whole or in part in the event its contract with the owner was similarly changed.

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo. She can be reached by phone at 816/421-4800 or by e-mail at susan.mcgreevy@ husch.com.