Cases of the Month
Significant Cases and Decisions Affecting the Construction Industry
By: Craig F. Martin
Lamson, Dugan and Murray, LLP
1. Iowa Subcontractors may recover from state for unpaid balances for Department of Transportation Jobs. Star Equipment, LTD., v. State, Iowa Dept. of Transp., 843 N.W.2d 446 (2014).
* What the Court considered: This case involved the construction of a roadside rest area along Interstate 80. Universal Concrete was selected as the general contractor and, as a Targeted Small Business, IDOT waived the construction surety bond requirement. IDOT accepted the work in September 2011, but Universal Concrete failed to pay three of its subcontractors, totaling about $30,000. IDOT retained about $3,500 and told the subcontractors that they could split the $3,500, but no other funds would be paid.
* What the Court said: The Iowa Supreme Court found that Iowa law permitted subcontractors to recover for their unpaid work from the IDOT amounts they could have recovered from the surety if IDOT had not waived the bond. Interestingly, the Iowa Supreme Court also allowed attorney fees for the prevailing subcontractors.
* What the opinion means: In Iowa, if subcontractors do not get paid on an IDOT job and the general contractor was not required to post a bond, they may be able to recover from IDOT.
2. Verify your coverage under an additional insured endorsement. Woodward, L.L.C., v. , No. 12-6056, slip op. (5th Cir. Feb. 11, 2014).
* What the Court considered: In this case the subcontractor named the general contractor as an additional insured. The additional insured endorsement provided that the general contractor was an additional insured, but only with respect to liability arising out of the subcontractor’s ongoing operations performed for the general contractor. At issue was the language in the additional insured endorsement, which provided coverage for ongoing operations, not completed operations.
* What the Court said: The court held that the damages arose out of completed operations not the subcontractor’s ongoing operations, so the insurer had no obligation to defend the general contractor in the lawsuit challenging the quality of the subcontractor’s work.
* What the opinion means: You should review your additional insured endorsement. And, you should review your contract to make sure you are either requiring (general contractor) or providing (subcontractor) the proper additional insured endorsement.
3. Agreements to Agree Are Not Enforceable Contracts. Cyberlock Consulting, Inc., v. Information Experts, Inc.,939 F.Supp.2d 572 (E.D. Va., 2013).
* What the Court considered: Cyberlock entered into a teaming agreement with Information Experts which included language that: if, during the period of this Agreement, a prime contract is awarded to Information Experts as a result of the proposal, Information Experts will, within five (5) business days from the date of award of the Task Order by the Government to Information Experts, enter into the attached subcontract. The parties then entered into a second teaming agreement that superseded the original teaming agreement. The second teaming agreement only required the parties — post-award of the prime contract — to exert reasonable efforts to negotiate a subcontract for work which might be awarded.
* What the Court said: The court found the second teaming agreement was simply a writing that contemplated a future transaction or more formal agreement, and thus is presumed to be an agreement to agree rather than a binding contract. Unfortunately, the court did not weigh in on whether the first teaming agreement created a binding contract.
* What the opinion means: The lesson to be learned from this case is that teaming agreements, and all agreements for that matter, must show that the parties have agreed to specific terms. It is not enough to show that the parties will negotiate open issues in good faith to reach a contractual objection.
4. Review Each Contract for Notice Provisions and Make Sure They are Followed. JEM Contracting v. Morrison-Maierle, 373 Mont. 391, 318 P.3d 678 (2014).
* What the Court Considered: This case involved a highway project in Montana. The contract provided: “Contractor shall notify the Owner and Engineer in writing about differing subsurface or physical conditions within 5 days of discovery and before disturbing the subsurface. . . . No claims for an adjustment in the contract price or contract times will be valid for differing subsurface or physical conditions if procedures of this paragraph are not followed.” On the first day on the job, JEM Contracting encountered subsurface conditions that differed from those in the bidding documents. JEM discussed the differing site conditions with the engineer’s onsite representative. JEM claims the engineer said that additional compensation would be paid because of the site condition. Eighteen days later, and after disturbing the area, JEM provide written notice of the differing site conditions to the county and requested additional compensation. The engineer denied JEM’s claim, finding that the claim was not supported and was out of time. The contractor submitted the claim to the county, which also rejected the claim. JEM sued the county and engineer.
* What the Court Said: The trial court found in favor of the engineer and county, ruling that JEM failed to timely submit its claim for additional compensation.
* What the Opinion Means: This case is yet another example of the importance of knowing and understanding the notice requirements of your contract. You need to review each contract for the notice provisions and follow them if you want your claim paid.
5. Sometimes a Court will Excuse Failure to Follow Technical Requirements of a Contract. Paul Reed Construction & Supply v. Acron, 8:12CV48, 2014 WL 202125 (D. Neb. Jan. 16, 2014) reconsideration denied, 8:12CV48, 2014 WL 585748 (D. Neb. Feb. 13, 2014).
* What the Court Considered: This case involved a road construction project in western Nebraska. Acron was hired to crush asphalt and concrete highway surface material. The contract contained the typical change order language: no changes in the work shall be agreed upon in writing; any claim for adjustment shall be made in writing within 10 days; and Failure to provide notice of a claim within 10 days shall be deemed a waiver When Acron arrived on site, it had to wait nearly a month to start crushing. When material was available to crush, it was often too big and had to be broken down. To its credit, throughout these problems, Acron e-mailed Paul Reed’s Chief Operating Officer notifying him of the problems and delays. Paul Reed acknowledged the problems and delays, but never issued any written change orders. Acron submitted invoices seeking additional compensation, in excess of $250,000, all of which were rejected by Paul Reed. In the ensuing lawsuit, Paul Reed claimed that Acron waived its claim because it did not have a written change order for the additional work. Acron argued that Paul Reed’s request for the work and refusal to provide written change orders should not allow it to avoid paying Acron.
* What the Court Said: The court agreed with Acron, finding that the parties to a contract may avoid a written change order provision where their words, acts or conduct amount to a waiver or modification of the provision. Specifically, the court found that Paul Reed knew about the additional work Acron was performing and by its actions and inactions approved it. The court’s opinion references a number of e-mails from Acron to Paul Reed and it appears that these e-mails saved Acron from the fate of the Montana contractor in the last post.
While it is best to comply with the notice requirements, well documented requests for approval of additional work may support a contractor’s claim that the upstream contractor waived technical compliance with the contract.
Craig Martin is a partner in the firm of Lamson, Dugan and Murray, LLP, in Omaha, Nebraska; and is a member of the firm’s Litigation Department. For more information, or if you have any questions, please contact us at firstname.lastname@example.org.