Costa v. Brait Builders Corp.; An Agreement That Violates Public Policy Will Not Be Enforced
In Costa v. Brait Builders Corp., 463 Mass. 65, 972 N.E. 2d 449 (2012) (Costa) the Supreme Judicial Court of Massachusetts considered the issue of “[W]hether a subcontractor providing labor and materials to a public construction project for which a payment bond has been obtained by the general contractor pursuant to [Mass. Gen. Laws ch.] 149, § 29, may by private agreement forgo its right to pursue payment under the bond.” Id., 463 Mass. at 66, 972 N.E. at 451. In a unanimous decision, the court held that the subcontractor’s waiver of claims against the general contractor’s payment bond violated public policy and thus, was unenforceable.
The facts in Costa were as follows: on June 3, 2004, Brait Builders Corporation (Brait) entered into a general contract for $18,689,000 with the town of Bridgewater, Massachusetts to build an addition to an elementary school (the project). Because the project was a public work, Brait was required by law to obtain a performance bond and a payment bond, which it obtained from Arch Insurance Company (Arch) as surety. Each bond was written in the penal sum of $18,689,000. On June 25, 2004, Brait entered into a subcontract to pay John J. Costa, doing business as Costa & Son Construction (Costa), $900,000 to perform site work on the project.
Costa began work in 2004, but by early 2005 the relationship between Brait and Costa began to unravel. Beginning on January 3, 2005, Brait and Costa exchanged letters accusing each other of delaying the project. Brait accused Costa of under-manning the project. Costa in turn accused Brait of delayed building demolition, the unexpected presence of steel erectors, lack of a tarp and proper heating, all of which allegedly delayed and increased the cost of Costa’s work.
On January 28, 2005, Costa sent Brait a letter which stated that Costa was “ ‘discontinuing all site work …due to … extreme weather conditions,’ and stating that he would return when the ground thawed.” 463 Mass. at 68, 972 N.E.2d at 452. Brait responded that same day with a letter that terminated Costa’s subcontract due to “ ‘[u]nacceptable performance,’ and … Costa was barred from further accessing the project site without Brait’s written consent.” Id.
On May 3, 2005, Costa sued Brait in Massachusetts Superior Court for breach of contract and deceptive acts or practices under Massachusetts’ consumer protection law, Mass. Gen. Laws ch. 93A, § 11. Costa also sought to recover under Brait’s payment bond and against the payment bond surety, Arch. Brait answered and counterclaimed against Costa. Arch argued that Costa had relinquished its right to claim against the payment bond pursuant to a provision of its subcontract with Brait. This waiver was contained in article 7 of the subcontract which provided as follows:
“In the event that the subcontractor does not provide performance and payment bonds on a form acceptable to the Contractor, then the subcontractor waives its right to claim against the Contractor’s performance and payment bond as provided to the Awarding Authority.”
463 Mass. at 69, 972 N.E.2d at 453.
When Brait asked Costa to provide performance and payment bonds each in the full amount of the subcontract, $900,000, Costa was unable to do so. At trial, after Costa rested its case, Brait and Arch moved for a directed verdict based on the language of article 7. The trial judge found that article 7 was quite clear and granted the motion for a directed verdict.
The trial continued without Arch and eventually resulted in a verdict for Costa against Brait on the breach of contract and consumer protection law claims. The Supreme Judicial Court of Massachusetts granted Costa’s application for direct review to address the validity of Costa’s waiver of claims against the payment bond.
On appeal Costa argued that article 7 violated the public policy of Massachusetts and could not be enforced because, “[T]he requirement of a bond … on certain public construction contracts reflects a strong public policy of encouraging competitive bidding for, and swift completion of, such projects, rendering a waiver by private agreement unenforceable.” 463 Mass. at 69-70, 972 N.E.2d at 453 (citations omitted).
Arch argued in response that the payment bond requirement, “provides a direct benefit to laborers and materialmen – security against nonpayment – not to the public. Any benefit the statute may provide to the public is only incidental, … and not sufficient to override freedom of contract and mutual risk taking.” Id. (citations omitted).
The version of the Mass. Gen Laws ch. 149 § 29 (the Payment Bond Law or § 29) that was in effect in 2004 provided that on public construction projects where the amount of the contract is more than $2,000, contracting authorities “shall obtain security by bond in an amount not less than one half of the total contract price, for payment by the contractor and subcontractors for labor performed or furnished and materials used or employed therein.” Id. at 71, 972 N.E. 2d at 454. The statute did not say anything about waiver and Arch and Costa drew opposing inferences.
Arch infers from the statutory silence in § 29 that waivers are permitted. Costa replies … that the strength of the public policy behind the bond requirement obviates the need for a specific waiver provision and that [the mechanic’s lien statute] only includes such a prohibition because it also lists exceptions to that general rule.
The court decided that the text of § 29 did not answer the question posed and finding no answer in the statute’s text, turned to its legislative history. After examining § 29’s legislative history the court stated, “The question … is not whether § 29 was designed exclusively for a public or private purpose – it was not - but rather whether the public purpose is sufficiently weighty to preclude waiver by private agreement.” Id. at 72, 972 N.E. 2d at 455. The court then concluded that:
Our study of the statutory scheme for public construction, and the mechanic’s lien statute leads us to conclude that the strong public policy behind the § 29 bond requirement renders unenforceable a provision purporting to waive claims against such a bond … It is undisputed that § 29 is an outgrowth of the mechanic’s lien statute under which waivers are explicitly proscribed as “against public policy,”. Given our broad interpretation of § 29 and its remedial purpose, it would be anomalous to ascribe to the Legislature an intent to forbid waivers under [the mechanic’s lien statute] but permit them under § 29. We think the better view is that § 29 embraces a substantial public policy, precluding waiver. Accordingly, we conclude that article 7 of the subcontract is unenforceable, and we reverse the order granting the motion for a directed verdict.
Id. at 72-3, 972 N.E. 2d at 455-56 (emphasis supplied) (citations omitted).
So what is public policy? It has been described as vague, variable and a “will-o’-the-wisp of the law [that] varies and changes with the interests, habits, need, sentiments and fashions of the day ... .” Wallihan v. Hughes, 196 Va. 117, 125, 82 S.E.2d 553, 559 (1954). It has also been described as “more than a vague goal which may be used to circumvent the plain meaning of [a] contract.” Eichelman v. Nationwide Ins. Co., 551 Pa. 558, 563, 711 A.2d 1006, 1008 (1998). Even though public policy is flexible, there are certain underlying principles in the case law which demonstrate that a decision to refuse to enforce an agreement is based on more than an individual judge’s sense of justice.
First, a refusal to enforce the promise may be an appropriate sanction to discourage undesirable conduct, either by the parties themselves or by others. Second, enforcement of the promise may be an inappropriate use of the judicial process in carrying out an unsavory transaction. The decision in a particular case will often turn on a delicate balance of those considerations against those that favor supporting transactions freely entered into by the parties.
5 Williston on Contracts § 12.1 (4th Ed.)
Public policy against the enforcement of agreements is set forth in the Restatement(Second) of Contracts § 178 as follows:
When A Term Is Unenforceable On Grounds Of Public Policy
(1) A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms.
. . . .
(3) In weighing a public policy against enforcement of a term, account is taken of
(a) the strength of that policy as manifested by legislation or judicial decisions,
(b) the likelihood that a refusal to enforce the term will further that policy,
(c) the seriousness of any misconduct involved and the extent to which it was deliberate, and
(d) the directness of the connection between that misconduct and the term.
It is submitted that in light of these the principles, the Supreme Judicial Court’s decision was not an expression of one judge’s opinion of what was fair or whether the waiver contained in article 7 passed the smell test. The purpose of the bond law was to put a subcontractor on a public job in as good a position as if it were on a private job. The payment bond on a public project is a substitute for a mechanic’s lien on a private project. If the right to file a lien on a private project cannot be waived, the right to pursue a payment bond claim on a public project, likewise cannot be waived. The strength of the public policy against waiver was manifested in legislation, the mechanic’s lien statute. The court’s refusal to enforce the article 7 waiver, furthers the policy on non-waiver expressed in the mechanic’s lien statute.
For more information regarding this alert, please contact Robert Carlton (215.764.6275; email@example.com).