Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Consulting Firm’s Duty to Verify the Credentials of Its Consultants, Wartsila NSD N. Am., Inc. v. Hill Int’l, Inc., 342 F. Supp. 2d 267 (D.N.J. 2004).
* What the Court Considered: When a power plant construction project fell behind schedule, resulting in numerous contract disputes between the contractor and its subcontractors, the contractor hired a construction consulting firm. The consulting firm assigned one of its senior consultants to work on the project. After four months, the consultant was hired directly by the contractor. During arbitration between the contractor and a subcontractor, in which the consultant was to be a key witness, it was discovered that the consultant’s resume, which indicated he had a business degree and an electrical engineering degree and was a licensed engineer, was false. As a result, the consultant’s testimony was withdrawn, and the subcontractor won a $4.65 million judgment against the contractor. The contractor sued the consulting firm, and the firm moved to dismiss the claims.
* What the Court Said: Because the consulting firm’s duty to the contractor extended after the time the consultant was hired by the contractor as an independent consultant, the contractor’s claims could proceed to trial.
* What the Opinion Means: Under New Jersey law, the consulting firm “owed a duty of care to [the contractor] to ensure the veracity of [the consultant’s] credentials,” and this duty continued even after the time the consultant was hired directly by the contractor. The fact that the consultant might have performed his work flawlessly during the prior four months was irrelevant. Regarding the contractor’s negligent hiring claim, the court said the fact that the firm had a policy in place to verify employee credentials could justify a jury finding that the firm should have known the resume was false.
2. Missouri’s Prompt Payment Act as Applied to Lump-Sum Contracts, Vance Brothers, Inc. v. Obermiller Constr. Svcs., Inc., 2005 WL 147144 (Mo. Ct. App. 2004).
* What the Court Considered: A contractor hired to construct several Wal-Mart stores subcontracted for the surfacing of the parking lots. The subcontract called for the contractor to make one lump-sum payment to the subcontractor upon completion of the work. After the surfacing was completed, the contractor withheld payment on the basis that the work was substandard. The subcontractor sued under Missouri’s Private Prompt Payment Act.
* What the Court Said: The Prompt Payment Act applies only to scheduled progress payments—not to lump-sum payments.
* What the Opinion Means: Missouri’s Private Prompt Payment Act provides that “[a]ll persons who enter into a contract for private design or construction work . . . shall make all scheduled payments pursuant to the terms of the contract.” The plain language of the Act reveals that it was intended to apply only to scheduled progress payments and not to lump sums payable upon completion of the work.
3. Effect of Contractor’s Failure to Conduct Site Inspection, Orlosky, Inc. v. U.S., 2005 WL 318683 (Fed. Cl. 2005).
* What the Court Considered: The Navy hired a contractor to perform electrical work, including the resetting of reclosers, which are switches that provide emergency shut off in the event of a short circuit. The contractor failed to attend a site visit scheduled by the Navy. Later, the contractor discovered that, although the specifications called for the installation of pole-mounted reclosers, the site currently had reclosers set on concrete pads. To install pole-mounted type reclosers onto concrete pads, the contractor would be required to perform significantly more engineering and welding work than the contractor had included in its bid. Therefore, the contractor brought a claim for differing site conditions and defective specifications.
* What the Court Said: Because the contractor failed to inspect the site, the differing site conditions claim was barred, although the defective specifications claim could be continued by the contractor.
* What the Opinion Means: For a contractor to maintain a claim for differing site conditions, it must show the actual site conditions were not reasonably foreseeable. Here, by contrast, “[t]he actual conditions related to the reclosers were reasonably foreseeable because a reasonable contractor would have conducted a site inspection before bidding.” However, because the specifications required the contractor to install the reclosers in violation of safety regulations and manufacturer’s warranties, the contractor could maintain its defective specifications claim against the Navy.
4. Assignee’s Right to Recover on a Public Works Payment Bond, Quantum Corporate Funding, Inc. v. Westway Indus., Inc., 4 N.Y.3d 211 (2005).
* What the Court Considered: A subcontractor on a public works project sold its accounts receivable to an assignee company. After the contractor failed to pay the subcontractor, the assignee sued the contractor’s surety to recover on its payment bond. The surety argued that New York’s State Finance Law prevented the assignee from recovering on the public works payment bond.
* What the Court Said: Because an assignee steps into the shoes of an assigning subcontractor, the assignee may recover on a public work’s payment bond.
* What the Opinion Means: The surety argued that allowing assignees to collect on public works payment bonds would increase the cost of public works projects, thereby undermining the legislative goal of the State Finance Law, which is to reduce the cost of such projects. The court disagreed because an assignee can only recover in cases where the subcontractor would have been entitled to recover. Thus, allowing assignees to recover on payment bonds would not expose sureties to increased risk.
5. Change Order Requests as Notice of Claims, Cameo Homes v. Kraus-Anderson Constr. Co., 394 F.3d 1084 (8th Cir. 2005).
* What the Court Considered: A city hired a concrete contractor to reconstruct flood-damaged municipal facilities. The parties’ contract, a standard AIA form, stated that acceptance of final payment by the contractor would constitute a release of all claims and all liability except for those items specifically excepted by the contractor. Throughout the project, the contractor submitted change order requests for additional time and money that were not approved by the city. The contractor eventually accepted final payment and signed an “Affidavit of Payment of Debts and Claims.”
* What the Court Said: Because the contractor failed to provide written notice of its claims as required by the contract, its claims were dismissed.
* What the Opinion Means: The submission of change order requests did not amount to written notice of claims as required by the contract. There was some evidence the parties established a different procedure for the approval of change order requests than provided in the contract. However, the contractor failed to prove “that the parties understood that its submission of change order requests to [the city] was effectively equivalent to submission of claims to the architect.”
6. Project Engineer’s Duty to Contractor’s Employees, Hjelle v. Mid-State Consultants, Inc., 394 F.3d 873 (10th Cir. 2005).
* What the Court Considered: A project engineer was hired as an inspector to observe the installation of fiber-optic cables at a construction site. While one of the engineer’s inspectors was observing the burying of cables in a trench, an employee of the contractor hired to install the cables was struck by a large chunk of frozen dirt. The employee sued the project engineer.
* What the Court Said: Because the project engineer did not exercise control over the work of the contractor, it was not liable for the injury to the employee.
* What the Opinion Means: The contractor’s agreement with the owner provided that the project engineer did not have authority to direct the work of the contractor. Furthermore, as an agent of the owner, the engineer could exercise no more control over the contractor’s work than was permitted the owner, who had no authority to instruct the employees regarding what to do, how to do it, or what equipment to use. Therefore, the engineer did not have a controlling and pervasive role over the contractor’s work.
7. Contractor’s Right to Sue Architect for Negligence in North Carolina, Ellis-Don Constr., Inc. v. HKS, Inc., 353 F. Supp. 2d 603 (M.D.N.C. 2005).
* What the Court Considered: The general contractor on a hospital construction project sued a project architect for negligence. According to the contractor, the architect performed its design and administration responsibilities negligently and in bad faith, “resulting in construction delays and cost overruns that forced [the contractor] to incur economic losses in excess of $1,000,000.” The architect argued that the economic loss rule precluded recovery because the contractor had suffered solely economic damages.
* What the Court Said: Because the economic loss rule did not apply, the contractor could sue the architect for negligence resulting in purely economic damages.
* What the Opinion Means: Under North Carolina law, “in the absence of privity of contract an architect may be held liable to a general contractor and his subcontractors for economic loss resulting from a breach of a common law duty of care.” Such a duty exists between the architect and contractor because of the parties’ working relationship. The economic loss doctrine, which the architect argued prevented recovery for economic loss in tort suits, applies only to cases of products liability.
8. Constitutionality of Rhode Island’s Lien Law, Gem Plumbing & Heating Co. v. Rossi, 867 A.2d 796 (R.I. 2005).
* What the Court Considered: A contractor hired to provide materials and labor for the construction of an office building followed Rhode Island’s statutory procedure in perfecting a lien on the property. The owners sought to dismiss the lien on the basis that Rhode Island’s Lien Law violates the due process requirement of the United States Constitution. After a lower court found the state law to be unconstitutional, the legislature amended the statute to provide for an expedited court hearing on the validity of a lien.
* What the Court Said: Because there are sufficient procedural safeguards to protect the owner, the Rhode Island Lien Law does not violate the Constitutional due process requirement.
* What the Opinion Means: In analyzing statutes for their compliance with the due process requirement, a court must determine whether there are sufficient procedural safeguards in place to limit the risk of erroneous deprivation of property. Here, the expedited court hearing provided for in the amendment constitutes one such procedural safeguard. There are other safeguards in the statute as well, including the necessity that the lien claimant file a detailed sworn affidavit; the property owner’s right to pay a cash bond to clear title; and the payment of court costs and fees to the prevailing party.
9. Bidder’s Obligation to Seek Relief From a Mistaken Bid, Diede Constr., Inc. v. Monterey Mech. Co., 22 Cal. Rptr. 3d 763 (Cal. Ct. App. 2004).
* What the Court Considered: A city solicited bids to renovate its city hall. Before the contract was executed, a subcontractor informed the eventual contractor to whom it had submitted a bid that the bid contained a $300,000 mistake and that it would not honor its proposal. The subcontractor further informed the contractor that it should seek to be relieved of its bid pursuant to California’s Public Contract Code. The contractor nevertheless proceeded to execute a contract with the city, then hired the next lowest bidding subcontractor to perform the work of the mistaken subcontractor. Thereafter, the contractor sought to recover, under a promissory estoppel theory, the difference in the amount of the original bid and the amount it actually paid for the work.
* What the Court Said: The contractor was not required to seek relief from its bid as a prerequisite to recovery on a promissory estoppel theory.
* What the Opinion Means: Under California’s Public Contract Code, “relief is available to a general contractor whose bid is based on a clerical mistake brought promptly to the attention of the public agency.” Because the Code addresses only bids submitted to public agencies, it does not apply to mistaken bids by subcontractors that are submitted to general contractors. Therefore, the contractor was not required first to seek relief from its bid to pursue the promissory estoppel claim.
10. Arbitrability of False Claims Act Violations, County of Solano v. Lionsgate Corp., 24 Cal. Rptr. 3d 362 (Cal. Ct. App. 2005).
* What the Court Considered: A county hired a contractor to replace a bridge. The parties’ contract included an arbitration provision. The county filed a demand for arbitration, alleging the contractor had violated the False Claims Act. After a hearing, the arbitrator assessed civil penalties against the contractor under the Act. The contractor appealed, asserting that False Claims Act violations cannot be arbitrated.
* What the Court Said: Because statutory claims may be arbitrated, the False Claims Act violations were properly referable to arbitration.
* What the Opinion Means: Although the False Claims Act includes references to “a civil action” and “the court,” this does not prevent such claims from being arbitrated. Here, the claims were properly arbitrable because the public purpose achieved in enforcing the Act was merely incidental to the primary benefit of compensating the county. Also, a judicial forum has no significant institutional advantages over arbitration in the administration of such claims.
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: email@example.com.