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Access Plumbing & Heating, Inc. v. South Orange-Maplewood Board of Education

A-1024-99T1 (N.J. Super. App. Div. 2001) (Unpublished)

CONTRACTS; CONSIDERATION—Amending a contract to indemnify a party for its past performance is invalid where the indemnification is gratuitous because the indemnifying party received no consideration in return for its agreement.

A plumbing contractor had a series of annual contracts with a school board, pursuant to which the contractor provided work on an as-needed basis and was paid at one hourly rate for a mechanic and at another for a helper. Because the board informed the contractor that “this type of work” did not require a written contract, there was no such written contract. Toward the end of one of the contract periods, the contractor received notice from the Department of Labor that it was investigating possible violations of the Prevailing Wage Act. It was undisputed that the Act was not mentioned in any of the bid specifications. Triggered by the investigation, a secretary to the contracting officer for the school board prepared a retroactive contract to memorialize the most recent agreement. Eventually, the contractor drafted a counter offer taking the Act into account. The most significant provision in this proposal was that the contractor was to be indemnified by the school board “for any and all costs arising from a finding that the Labor Rates under the Prevailing Wage Act applies. If the Prevailing Wage Act applies with respect [to] the labor rates, the payable rate in paragraph 6 herein will be $86.90 per man hour.” The board’s contracting officer rejected the proposal, but promised to check with the Department of Labor as to whether the Act applied to such a contract. After a period of silence, the contractor discussed the matter with the contracting officer’s secretary. According to the contractor, she told him to “come in so that both parties could sign the agreement.” The revised version essentially accepted the indemnification provision proposed by the contractor. Shortly thereafter, the Department of Labor notified the school board that it had violated the Act and then also notified the contractor. The contractor settled the dispute with the Department of Labor. The settlement required the contractor to pay a fine, but did not require the contractor to pay a higher wage rate to its employees. The contractor then sent an adjusted statement to the school board, demanding a substantial amount of money determined by multiplying the number of hours worked by its employees times the specified rate of $86.90. The statement gave credit for payments already received. The board’s contracting officer rejected the statement. In fact, the contracting officer said that when he signed the contract he was unaware of the provision requiring indemnification. The lower court held in favor of the contractor based on its finding that “[i]t is crystal clear here that the contract was signed by the [contracting officer] that there’s no reason whatsoever, for this Court to certify the contract or paragraph Four A.” The lower court awarded damages to the plumbing contractor for the penalty that it was required to pay the Department of Labor, attorney’s fees, and certain costs. The lower court did not award the plumbing contractor damages based on its estimate because the contractor had never paid any of its employees at the rate prescribed in the Act. The contractor filed an appeal seeking to receive the much larger sum of money that it would be owed if the enhanced labor rate were applied under the contract. The Appellate Division pointed out that “a party who chooses not to read a contract cannot later be absolved of its burden when he or she becomes aware of what the contract contained.” Further, “it is well settled that affixing a signature to a contract creates a conclusive presumption that the signer read, understood, and assented to its terms.” Nonetheless, it found in favor of the school board. Its reasoning was that “in order for a contract to be enforceable it must be supported by consideration.” Therefore, when parties wish to modify an existing agreement, the modification, “must be based upon new or additional consideration.” The written agreement between a contractor and the board was a modification of their oral agreement. It required nothing additional from the contractor. On the other hand, if valid, the board would have to indemnify the contractor for its past performance if the Act applied. Under the Act, however, the board was not liable for a violation. “Accordingly, the revised agreement to indemnify [the contractor for its] past performance when the Board had no independent exposure under the Act was purely gratuitous. The Board did not receive consideration for its agreement to indemnify [the plumbing contractor], and, thus, no contact was formed.” Therefore, the lower court judgment in favor of the contractor was reversed.

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