Legal Lode: Out of Sorts

Let's say you are an equipment supplier. Your customer has a contract with a municipality to build and operate a public facility. Operating problems arise. Your customer decides not to pay. Be grateful that procurement rules required your customer to obtain a payment and performance bond.

Chiefly, the bond secures the contractor's promise to perform the contract in accordance with its terms and conditions, and it protects certain laborers, material suppliers and subcontractors against nonpayment. Since public property is not subject to mechanic's liens, a payment bond may be the only protection these claimants have if they are not paid for the goods and services they provide to the project.

Firstar Fiber Inc. (Firstar) won a contract from the city of Omaha to operate what would be Nebraska's first materials recovery facility for single-stream processing of residential and commercial recyclables. The city required, and Firstar provided, a payment and performance bond. Operations were to begin in early 2006.

To equip the facility, Firstar signed two agreements with Karl W. Schmidt & Associates (KWS) — the first, the Baler Line Conveyor Contract; the second, the Recycling Equipment Contract. KWS delivered the components to Firstar, and a third party installed them.

After a bevy of operating glitches, Firstar filed suit against KWS alleging various breaches of their contract, including delivery problems, failure to provide assembly instructions, incompatibility of the equipment with components bought from other suppliers, and KWS's failure to work with Firstar to deal with these matters.

As a result, Firstar asserted, it suffered damages from late deliveries, which, in turn, delayed installation and operation of the facility, added costs to install the equipment and to overcome alleged KWS equipment deficiencies, and decreased output and sales due to these shortcomings. As a self-help measure, doubtlessly expecting a sizeable verdict, Firstar withheld the final payment of $81,700 owed to KWS under the equipment contract. Firstar paid the baler contract price in full.

Undaunted, KWS answered the Firstar's lawsuit by denying the charges, and it countersued Firstar for $97,000, which it asserted was the actual amount unpaid by Firstar. For good measure, KWS shrewdly ensnared Firstar's bonding company, NASIC, with a third-party claim under the bond for the $97,000 owed by Firstar.

During the five-day jury trial, each side presented extensive evidence regarding their negotiations leading up to the equipment contract. KWS had pressed Firstar to buy a complete sorting system rather than some of the component parts. Another potential supplier, Bulk Handling Systems (BHS) also wanted to furnish a complete recyclables sorting system. BHS tried to convince Firstar it was a bad idea to build a system using components from different manufacturers, and it initially refused to sell component parts to Firstar. BHS later agreed to provide mechanized screens for Firstar's system with components from other suppliers.

KWS's sales manager painstakingly tried to fashion a KWS system that would satisfy Firstar's project manager. After Firstar disregarded KWS's recommendations on equipment and system layout, KWS simply followed Firstar's requests in configuring the system. The parties eventually signed a contract not for a system — Firstar rejected KWS's proposal for a complete system — but for specific conveyors, platforms and controllers. Firstar also declined KWS's offer to provide a factory installation supervisor.

Would Firstar's my-way-or-the-highway approach work? Would the payment bond make a difference?

For the answers, continue reading July 2010's "Sorted Out".

Barry Shanoff is a Rockville, Md., attorney and general counsel of the Solid Waste Association of North America.

The legal editor welcomes comments from readers. Contact Barry Shanoff via e-mail: [email protected].

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