Atlas Manufacturing contracts with Cheap Construction Co. to erect a new factory building. The contract provides a lump sum payment of $100,000 to Cheap at the completion of the project. The project is expected to be completed in ten months. Cheap's estimated cost is $90,000. The contract provides that Atlas must advance funds to cover the agreed, or estimated cost of any change orders.

Cheap's performance is guaranteed by Baker Bonding Company. Atlas and Cheap are jointly covered by an All-Risk Insurance Policy issued by Iroquois Insurance Company. The policy covers the cost of repair or replacement, but not profit for such remedial work, nor the increased cost of the remaining work due to delay.

Due to the provable negligence of Cheap, a fire completely destroys the job when it is 50% complete, and six months have elapsed.  (Estimated value at $50,000, including profit.) The following sequence of events next occurs:

As Cheap is financing the project during the now extended period of construction, and as costs have increased, Cheap claims that this unforeseen event is a change order. It is stipulated that Cheap's cost to complete the project would have been  an additional $120,000 (not including profit.) Atlas refuses to advance any funds towards this claim. Cheap therefore refuses to continue work.

Atlas calls in Baker, who, after checking several competitive bids, contracts with Spendthrift Construction to perform Cheap's scope of work, for $175,000. Spendthrift's estimated cost is $140,000.  It is stipulated that the cost of demolition and clearing of the fire ravaged structure is exactly offset by the value of the salvageable materials and works (such as foundations) which survived the fire.

Iroquois refuses to pay on the policy due to the provable negligence of Cheap.  Atlas refuses to pay Cheap for work done to date.   Cheap sues Atlas and Iroquois for his $50,000 (including $5000 profit for the first 50% completion.) Cheap additionally sues Atlas for $5000 as anticipated profit on the second half of the project.  Atlas and Baker sue Iroquois and Cheap for the $75,000 overrun.  All additionally possible suits are filed.

1. DISCUSS what each party wins and/or pays, and why.

Include this table:                       

PARTY            Receives                      Pays

Atlas               $ from                          $ to

Baker              $ from                         $ to

Cheap              $ from                         $ to

Iroquois            $ from                         $ to

Spendthrift        $ from                         $ to