by Mark A. Cobb
The Court of Appeals of Georgia recently issued their holding in Progressive Electrical Services, Inc. v. Task Force Construction, Inc., and this case interprets some construction contract terms which impact Georgia subcontractors. Specifically, this case gives subcontractors a reason to be concerned about every contract into which they enter unless they have taken the time to thoroughly read and understand every contract provision; in addition, this decision gives general contractors the ability to enforce some contract provisions which may, otherwise, seem onerous to others.
Background and Facts: The basic facts of this case present the all-too-common scenario of a subcontractor not paying its supplier, and, then, a general contractor seeking payment from the subcontractor of the amounts it had to spend resolving the supplier’s claim. Specifically, Task Force Construction was hired as a general contractor to build a public works project in Swainsboro, Georgia; Task Force, in turn, subcontracted the electrical portion of the project to Progressive Electrical. Progressive Electrical purchased their electrical supplies from a supply company. Because this was a public works project, the general contractor posted a payment bond which, essentially, promised that subcontractors and suppliers would receive payment. Unfortunately, Progressive Electrical did not pay its supplier; thus, the supplier made a timely claim for payment under the project’s payment bond. The surety which issued the bond settled the supplier’s claim for over $118,000. The surety, then sought indemnification from the general contractor which, the GC paid. After the general contractor reimbursed the surety, it sought to recover the amount which it paid to surety from its subcontractor, Progressive Electrical.
Although the background and facts may be similar to many other cases, specific provisions in the subcontract executed between the GC and subcontractor resulted in some disastrous consequences for the subcontractor and, probably more importantly, its principal.
Important Legal Issues Addressed by the Georgia Court of Appeals: Although much of the Court’s holding is significant for Georgia’s construction lawyer, today’s blog post, however, will discuss two particular contract terms addressed in Progressive v. Task Force; specifically, we’ll look at how the case addresses the difference between a guaranty and an indemnification and we’ll look at some contract language which, according to the court, binds an owner, officer (or perhaps, an employee) of a company to be personally liable for the company’s performance under the construction contract. Taken together, these two provisions make the officer of the subcontractor personally liable for reimbursing the GC.
CONTRACT PROVISION NUMBER 1:
(Making the Signatory of the Contract Jointly and Severally Liable)
Personal Liability Under the Contract: None of the parties denied that Progressive Electrical had executed its subcontract agreement with Task Force; however, Task Force attempted to recover under its indemnification from Progressive Electrical and its owner. Task Force made this attempt based upon a particular term in the contract between Task Force and Progressive Electrical:
Signing Individual. Each and every individual who signs this [agreement] or any Attachment or exhibit thereto on behalf of [Progressive Electrical] hereby warrants and agrees that such individual is duly authorized 1) to act on behalf of [Progressive Electrical]; 2) to enter this [agreement] on behalf of [Progressive Electrical]; and 3) to bind [Progressive Electrical] to the terms of [the Agreement]. Each and every individual signing on behalf of [Progressive Electrical] also further agrees that, notwithstanding anything contained herein or on any signature line to the contrary, each such individual signing on behalf of [Progressive Electrical], in addition to signing in a representative capacity, is also signing [the agreement] in his or her personal and individual capacity and each such individual signing on behalf of [Progressive Electrical], by signing below, hereby individually and personally agrees to be bound by all of the obligations of [Progressive Electrical] in [the agreement] (including, but not limited to, the Attachments hereto). (Emphasis Supplied in Court’s Decision)
Contract Term Enforceable Against Principal of Subcontractor: When the Court of Appeals read the Signature Provision which purported to bind the signatory individually, the Court held that it was a clear and easily understood contract term. Thus, when the President of Progressive Electrical signed the subcontract agreement, he agreed to be bound by this provision; and, consequently, he personally assumed liability for his company’s obligations under the subcontract.
The Court’s Rational: Neither party disputed the established law in Georgia which holds that, “an agent who, acting within the scope of his authority, enters into contractual relations for a disclosed principal does not bind himself, in the absence of an express agreement to do so.” (Citation and punctuation omitted.) Instead, the Court looked at the Signature Provision, and acknowledged that it contains such an express agreement to bind the subcontractor’s principal individually; thus, when the President executed the agreement, he was signing on behalf of Progressive Electrical and also “individually and personally” he agreed “to be bound by all of the obligations of [Progressive Electrical]” under the parties’ contract, “notwithstanding anything contained [in the agreement] or any signature line to the contrary.” Accordingly, the Court found the language of the Signature Provision to be unambiguous language, and, therefore, the president’s single signature bound him in his individual capacity, along with Progressive Electrical, under the Agreement.
Isn’t This Too Extreme? Both Progressive Electrical and its president argued to the Court that enforcement of this contract term was too extreme. They argued that such a Signature Provision created a trap which allows “unbridled liability to be unleashed on unsuspecting victims.” Unfortunately for the subcontractor and its officer, the Court disagreed with this argument, pointing out the following:
a party to a contract has the duty to read a contract before signing it and by signing, the party is bound by its terms “unless [he] can show that an emergency existed at the time of signing that would excuse [his] failure to read it, or that the opposite party misled [him] by an artifice or device which prevented [him] from reading it, or that a fiduciary or confidential relationship existed between the parties upon which [he] relied in not reading the contract.
Furthermore, the Court pointed out that the Signature Provision included the heading “Signing Individual” in boldface type which further enhanced the term’s clarity and the parties’ intention. Thus, the court continued, that the President of the company “must be charged with knowledge of the Signature Provision, even if he did not read it, and he is therefore bound, individually, to the terms of the Agreement.” (Emphasis supplied.)
CONTRACT PROVISION NUMBER 2:
(Personal Guaranty v. Indemnification)
Indemnification Under the Subcontract: Since the general contractor paid out money to settle the dispute with the unpaid material supplier, the GC sought reimbursement from its subcontractor. The subcontract agreement which Progressive Electrical entered into with Task Force contained the following indemnification provision which was the subject to the court’s interpretation:
[Progressive Electrical agrees in indemnify Task Force] from all claims, losses, fines, penalties, assessments and damages (including but not limited to reasonable attorney’s fees) arising out of [inter alia, Progressive Electrical’s] breach of any term [of the agreement], including costs, investigation expenses, expert expenses and attorney’s fees incurred by [Task Force] in the investigation and defense of such claims or allegations.
Georgia Statutes: An “Indemnity Contract” is defined as an agreement between two parties, whereby the one party, the indemnitor, either agrees to indemnify and save harmless the other party, the indemnitee, from loss or damage, or binds the indemnitor to do some particular act or thing, or to protect the indemnitee against liability to, or the claim of, a third party. “Indemnity” means reimbursement, restitution, or compensation. National Bank v. Wright, 77 Ga. App. 272, 48 S.E.2d 306 (1948); in Progressive v. Task Force, the Court of Appeals reminds us that O.C.G.A.§ 10-7-1 states the following:
The contract of suretyship or guaranty is one whereby a person obligates himself to pay the debt of another in consideration of a benefit flowing to the surety or in consideration of credit or indulgence or other benefit given to his principal, the principal in either instance remaining bound therefore. Sureties, including those formerly called guarantors, are jointly and severally liable with their principal unless the contract provides otherwise. There shall be no distinction between contracts of suretyship and guaranty.
Consequently, the Court affirmed that, “An indemnity contract differs from a guaranty in that the former is an original rather than a collateral undertaking and generally undertakes to make good the promisee’s loss resulting from his liability to another rather than from another’s liability to him.” (Citations and punctuation omitted.) Thus, the court held that the subcontract agreement’s indemnity provision was enforceable.
Since this ruling just came down, the parties may be able to appeal the decision; if they do, we will do our best to update this blog article; in the meantime, the holding in Progressive v. Task Force is a stern reminder that before signing any contract, and in particular any construction contract, (i) read the contract thoroughly and (ii) understand the terms–and the potential consequences–of the contract. Otherwise, you might find yourself individually liable for a debt you are not willing to undertake.