Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. “Pay-When-Paid” Provision in Subcontract as Defense to Payment by Surety, Everett Painting Co., Inc. v. Padula & Wadsworth Constr., Inc., 856 So.2d 1059 (Fla. Dist. Ct. App. 2003).
* What the Court Considered: A painting subcontractor filed suit against its contractor and the contractor’s surety alleging that it was owed a total of $80,455.50, based on a claim for retainage under the contract, among other claims. The contractor and surety argued that the subcontract’s “pay-when-paid” provision barred the subcontractor’s claim for retainage because at the time of suit the contractor had not yet received final payment from the owner.
* What the Court Said: The “pay-when-paid” provision barred the subcontractor’s claim for retainage from the contractor; however, that provision did not provide a defense for the surety, so the subcontractor could proceed against the surety for recovery on the bond.
* What the Opinion Means: The “pay-when-paid” provision in the subcontract was clear and unambiguous and therefore binding on the parties to the contract. Accordingly, the subcontractor was prohibited from recovering retainage from the contractor until the owner made final payment to the contractor. However, the surety’s payment bond was a separate agreement from the subcontract and the “pay-when-paid” provision did not provide a defense for the surety. The court said the surety could have limited its liability by including conditional payment language in the bond.
2. Impossibility as Excuse from Contract Performance, Wilma Miller, d/b/a Double Diamond Constr. v. Mills Constr., Inc., 352 F.3d 1166 (8th Cir. 2003).
* What the Court Considered: Pursuant to its subcontract, a subcontractor agreed to provide the labor and equipment for steel erection work on a construction project; the contractor agreed to provide the prefabricated steel and other component parts needed for the project from a separate steel supplier. Much of the steel materials to be provided by the contractor were delivered late and were defective. Before the structure was completed, the subcontractor informed the owner that it could not complete its work until the problems were corrected. The supplier stated that the structure did not need additional bracing and the materials already provided would afford sufficient strength; however, the structure soon collapsed due to wind. The subcontractor sought payment for the amount of work completed up until the date of the collapse and a new contract for the reconstruction work. The contractor refused to pay the subcontractor’s request or sign a new contract and instead completed the project on its own. In ensuing litigation, the contractor alleged that the subcontractor had breached its contract by failing to construct the work in a good and workmanlike manner.
* What the Court Said: The subcontractor did not breach its contract. It was excused based upon impossibility of performance.
* What the Opinion Means: The doctrine of impossibility of performance “provides an excuse for nonperformance of contractual obligations caused by supervening or existing conditions not contemplated by the parties.” Under South Dakota law, the defense of impossibility (also called “commercial impracticability”) “requires that the difficulty excusing performance be unanticipated and inconsistent with the facts the parties assumed would continue to exist.” In this case, the structure’s collapse resulted from the contractor’s failure to provide appropriate materials and, because of the collapse, “it was no longer objectively possible for [the subcontractor] to complete the project as required under the contract” because the materials needed for the reconstruction were not scheduled to arrive on the site until after the contractual completion date.
3. Subcontractor’s Lien Rights After Prime Contractor’s Default, BloomSouth Flooring Corp. v. Boys’ and Girls’ Club of Taunton Inc., 800 N.E.2d 1038 (Mass. 2003).
* What the Court Considered: The contractor on an approximately $1.58 million contract for construction of a child care center subcontracted the project’s flooring work to a subcontractor. After completing most, but not all, of the work, the contractor abandoned the project with a remaining contract balance of $171,174.88. The owner declared the contractor in default and hired a third-party contractor to complete the project. The flooring subcontractor filed a mechanic’s lien claim for $85,428 it was owed under its subcontract, but failed to file a notice of the subcontract with the owner before the contract had been terminated for default.
* What the Court Said: The owner was not obligated to make payment to the subcontractor on its lien because there were no amounts owed or payable to the contractor on the date when the subcontractor filed its notice of subcontract.
* What the Opinion Means: The Massachusetts mechanic’s lien statute provides that a subcontractor’s lien may not exceed the amount “due or to become due under the [prime] contract” as of the date a notice of the subcontract is filed with the project owner. When the prime contractor defaulted, it left incomplete work in excess of the prime contract balance. Thus, there was no amount “due or to become due” on the prime contract. As no funds were due on the prime construct when the subcontractor filed its notice of subcontract, the owner was under no obligation to satisfy the subcontractor’s lien. The court said that the subcontractor could have protected itself by filing its notice of subcontract prior to beginning work on the project.
4. Sovereign Immunity for Government Contractor Under False Claims Act, United States ex rel. Ali v. Daniel, Mann, Johnson, & Mendenhall, 355 F.3d 1140 (9th Cir. 2004).
* What the Court Considered: A construction management firm, Daniel, Mann, Johnson & Mendenhall (“DMJM”), was hired by the State University at Northridge (“CSUN”) to coordinate the reconstruction of buildings damaged by the 1994 Northridge earthquake. In association with this work, DMJM was charged under to the False Claims Act (“FCA”) with filing false claims to the Federal Emergency Management Agency (“FEMA”) for repairs not related to the Northridge earthquake. Any “person” who “knowingly presents, or causes to be presented, to an officer or employee of the United States Government…a false or fraudulent claim for payment or approval” can be held liable under the FCA. However, states and state agencies enjoy sovereign immunity from liability under the FCA. DMJM argued that it was acting as the agent of CSUN and it was entitled to immunity for actions within the scope of its official duties.
* What the Court Said: DMJM, as a private, for-profit contractor, rather than an “arm-of-the state,” was not entitled to sovereign immunity under the FCA.
* What the Opinion Means: DMJM, a private corporation, was a “person” subject to suit under the FCA unless it shared CSUN’s sovereign immunity. Under the “arm-of-the-state” test, the court considered the following factors to determine whether DMJM was entitled to sovereign immunity: “(1) whether a money judgment would be satisfied out of state funds; (2) whether the entity performs central governmental functions; (3) whether the entity may sue or be sued; (4) whether the entity has the power to take property in its own name or only in the name of the state; and (5) the corporate status of the entity.” Although managing the reconstruction of state university buildings was a “central government function,” the other four factors weighed against granting immunity to DMJM. Thus, “[a]lthough [the DMJM employees] were working on behalf of a state university, as employees of a private, for-profit contractor, they were not government officials for immunity purposes.”
5. Contractor’s Right to Recover for Lost Productivity Caused By Government’s Interference, Leo Journagan Constr. Co. v. City Utilities of Springfield, Missouri, 116 S.W.3d 711 (Mo. Ct. App. 2003).
* What the Court Considered: After completing construction of a water pipeline project under a fixed-price contract, a government contractor filed suit for additional compensation. The contractor alleged that the government had breached the contract by interfering with the contractor’s performance of its work, thereby reducing the contractor’s labor productivity and increasing the cost of its performance.
* What the Court Said: The contractor had a valid claim for additional compensation because the government interfered when its inspectors issued directives that were not permitted under the contract.
* What the Opinion Means: In this case, the project specifications required that backfill was not to exceed four inches “within 12 inches of pipe or conduit and upper 18 inches of trench.” However, the government’s representatives demanded that the contractor maintain four-inch or less backfill of rock for the entire trench, including locations outside those stated in the specifications. Similarly, the government’s representatives limited the deflection of pipe joints to two or three degrees, although the specifications allowed for the deflection of pipe joints up to five degrees. Such government interference caused the contractor to incur lost productivity of approximately $2 million. As the government’s conduct constituted impermissible interference, the contractor was entitled to submit a claim to the jury for the government’s breach of contract.
6. Estoppel of Government’s Enforcement of Contract, Emma Corp. v. Inglewood Unified Sch. Dist., 8 Cal. Rptr. 3d 213 (Cal. Ct. App. 2004).
* What the Court Considered: A contractor that submitted the low bid on a school construction project discovered that it had failed to include in the bid its plumbing subcontractor’s costs, resulting in the bid being approximately $800,000 too low. The contractor sent a timely letter to the school district withdrawing its bid, but the letter did not include all the information required by the California bid withdrawal statutes. The school district then conspired to cause the contractor to fail in satisfying the statutory requirements for withdrawing the mistaken bid, including intentionally failing to respond to the question of whether any further information was needed to complete a proper bid withdrawal. The school district then awarded the contract to the contractor at its original bid price, forcing the contractor to forfeit its bid bond by withdrawing from the contract after the deadline for withdrawing bids.
* What the Court Said: The school district was estopped from accepting a mistaken bid because the district deliberately interfered with the contractor’s efforts to comply with the bid withdrawal statute.
* What the Opinion Means: The school district “deliberately engineered an attempt to enforce a contract it knew was mistakenly low.” The motivation for the district’s action was to retain the mistaken contractor’s bid bond to use as financing on the project. Because the school district “deliberately misled a mistaken bidder from timely complying with the bid withdrawal statutes,” the district was estopped from enforcing the contract. Any other result would be contrary to public policy because “[t]axpayers do not have an interest in lowering the costs of public projects by unfairly cheating mistaken bidders out of a portion of a project’s true costs.”
7. Reasonableness of Government Withholdings Under Davis Bacon Act, Copeland v. Veneman, 350 F.3d 1230 (Fed. Cir. 2004).
* What the Court Considered: Two public construction contracts incorporated provisions of the Davis Bacon Act (“DBA”), which sets wage and payment guidelines for contractors engaged in federal works contracts in excess of $2,000. During construction of the projects, several employees complained of DBA wage violations by the contractor, and the government withheld $37,905 from progress payments to the contractor. The contractor then missed completion deadlines on the contracts, even after contract extensions, and eventually the government terminated the contracts for default. The contractor argued that termination for default was not proper because the delay that resulted in the termination was caused by the government’s improper witholdings under the DBA on both contracts. Seven years after the initial withholdings, an administrative law judge determined that only $3,951 of the government’s withholdings could be verified.
* What the Court Said: The contractor failed to show that the contracting officer’s withholdings were excessive or unreasonable at the time of such withholdings; therefore, the termination for default was upheld.
* What the Opinion Means: Where amounts are withheld by the government because of potential DBA violations, the withholdings are proper as long as the amounts withheld were based upon a reasonable judgment of the contracting officer that the withheld amounts were needed to protect the employees’ interests. Here, the contractor could not show that the withholdings were excessive or unreasonable at the time they were made. Also, despite the contractor’s argument to the contrary, the DBA was applicable even though it was a “non-union” employer. The DBA is not limited to employers of union members. Furthermore, the contracts explicitly incorporated the DBA provisions at issue.
8. Strict Criminal Liability for Violation of Building Code, State v. Arkell, 672 N.W.2d 564 (Minn. 2003).
* What the Court Considered: A contractor hired an engineering firm to prepare plans for a construction project and another subcontractor to perform grading work for the project based upon those plans. After construction, grading and water drainage problems were discovered on the project. The contractor was charged with violations of the Uniform Building Code as adopted by city ordinances. Such violations were a misdemeanor under Minnesota state law. The contractor argued that he did not intend to violate the building code and believed that the subcontractors would take care of all regulatory issues.
* What the Court Said: The contractor was not strictly liable for criminal act based upon a subcontractor’s violation of the building code.
* What the Opinion Means: The building code is not a “public welfare statute;” accordingly, violation of the code does not create criminal liability without proof of “mens rea” (i.e., a “guilty mind”). A public welfare statute usually regulates potentially harmful or injurious items, such as harmful chemicals. By contrast, the building code does not contain the characteristics of or protect against harms like a public welfare statute, and a violation of the code does not result in strict criminal liability.
9. Recovery of Profits Under Mechanics’ Lien and Unforeseeable Costs Under Cost-Plus Contract, Hickman v. Kralicek Realty & Constr. Co., 2003 Ark App. LEXIS 852 (Ark. Ct. App. 2003).
* What the Court Considered: A contractor and owner agreed to a cost-plus construction contract. The owner maintained the right to choose its own subcontractors for certain work and pay those subcontractors directly. When the owner failed to pay the balance owed to the contractor, the contractor filed suit to recover on, or to foreclose, a mechanic’s lien. The owner argued, among other things, that (1) the contractor was not entitled to recover expected profits through a lien; and (2) the contractor had breached an implied warranty to provide a working septic system on the project.
* What the Court Said: The contractor was not entitled to recover profits through its lien; however, the contractor was not responsible for providing a septic system because, in a cost-plus contract, the contractor is not liable for unforeseeable costs associated with the contract.
* What the Opinion
Arkansas mechanics’ and materialmens’ lien statute does not extend to cover a
contractor’s profits. Thus, the contractor could only recover the costs of its
services, labor, and material by suing on its lien. With regard to the septic
system, “in a cost-pus contract, a builder is not liable for unforeseeable costs
associated with the contract.” Here, the owner assumed responsibility for the
septic system by hiring one subcontractor to install the system, then hiring a
second subcontractor to install a more elaborate system when it was determined
that the first subcontractor was unable to install such a system. The owner was
obligated to pay all such unforeseen costs, over the contractor’s bid, that the
owner incurred in installing the septic system. Furthermore, the owner was
barred from recovering for breach of implied warranty because it knew during
construction that the system was defective.
10. Contractor’s Liability Under Implied “Requirements Contract,” G.B. “Boots” Smith Corp. v. Cobb, 860 So.2d 774 (Miss. 2003).
* What the Court Considered: The contractor on a road construction project subcontracted for the purchase of fill dirt. The subcontract provided as follows: “The Sellers hereby sell to Buyer all fill dirt for Project No. SDP-009-4(34) on Highway 61 Bypass South from the Sunflower River West to the end of said project, in Coahoma County Mississippi.” The contract also stated that the quantity of fill dirt needed would be approximately 550,000 cubic yards. After the contractor had purchased 443,716.30 cubic yards from the subcontractor, it began acquiring fill dirt from a third party. The subcontractor sued for breach of contract.
* What the Court Said: Because the contract was a “requirements contract,” the contractor breached the contract by purchasing fill dirt for the project from another source.
* What the Opinion Means: A “requirements contract” requires the buyer to purchase all of its “requirements” for goods or services solely from one seller. The contractor argued that this was not a requirements contract because it did not contain the phrase “buyers agree to buy all fill dirt for the Project.” However, the court explained that, even without such language, the plain, unambiguous language of the contract provided an implied requirements contract. There would be no reason to include the wording “all fill dirt for the project” unless the contractor intended to buy all necessary dirt from these particular sellers.
Ira Genberg is a Senior Partner at the Smith, Gambrell & Russell, LLP law firm in Atlanta, Georgia, and also General Counsel for Associated Owners & Developers (AOD), McLean, Virginia. Ryan Stinnett is an Associate at Smith, Gambrell, & Russell, LLP. For more information or if you have any questions, contact us at: firstname.lastname@example.org.