Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Troy Kiber
1. Termination of a Contract Because of Natural Disaster, In Re Roy Frischhertz Constr. Co., 2007 WL 2965049 (Bankruptcy E.D. La. Oct. 8, 2007).
* What the Court Considered: The parties signed a standard AIA contract containing a provision allowing the contractor to terminate its subcontractor "if the work is stopped for a period of 30 consecutive days" by a court order, act of government, or for nonpayment. After Hurricane Katrina forced an evacuation of the jobsite, the contractor terminated the contract under this provision. It later filed for bankruptcy and sought a declaratory judgment that its termination was proper. The subcontractor, pointing to the various evacuation orders, argued that the contractor was not prevented from accessing the project for any 30 consecutive days. In fact, it argued, the contractor actually worked on the project during the 30 evacuation period.
* What the Court Said: Because the declaration of emergency was in effect for more than 30 days, and the contractor performed no actual work during this time, the contractor could properly terminate the contract.
* What the Opinion Means: The court was persuaded by the "reality of the situation" and "common sense" that work was impractical during the Katrina and Rita time period. Also, merely visiting the site to assess damage did not constitute "work" on the project.
2. Liability of a Corporate Officer for Negligent Construction, Fields Bros. Gen. Contractors v. Rueckties, 655 Ga. App. 282 (Ga. Ct. App. 2007).
* What the Court Considered: Upon moving into their new home, a couple noticed numerous structural defects. They sued the contractor, alleging that the home had numerous "construction-related deficiencies" and that the contractor had breached its agreement to construct the home in a "good and workmanlike manner." The owners offered expert proof of the deficiencies and the president of the contractor testified that he had personally supervised the framing. The court held the president personally liable for negligent construction, and the president appealed.
* What the Court Said: Because the president actively participated in negligent construction, he could be liable in tort.
* What the Opinion Means: Generally corporate officers are insulated from liability originating in corporate actions. However, when the officer actively participates in a tort, such as negligent construction, he may be held liable apart from the corporation. While the pretrial order at issue did not specify the theory of negligence, the court held that the contractor was fairly apprised of the theory and the evidence was properly admitted.
3. Recovering Liquidated Damages as well as Actual Damages, Creative Waste Management, Inc. v. Capitol Environmental Services, Inc., 495 F.Supp.2d 353 (S.D.N.Y. 2007).
* What the Court Considered: A contractor agreed to dredge a public marina. The contract contained a liquidated damages clause making time of the essence and imposing a fee per yard of material not removed by the completion date. The contractor did not complete the project by the contractual date, and the city incurred costs in completing the project using another entity. The jury returned a verdict awarding the city both liquidated damages, $48,802, and the costs of completion, $300,000.
* What the Court Said: A party can recover both liquidated and actual damages when the former does not subsume the latter.
* What the Opinion Means: Ordinarily, an award of liquidated damages precludes recovery of actual damages. This is because liquidated damages are often crafted as a placeholder for difficult-to-ascertain actual damages. However, where liquidated damages are crafted to cover only delay damages, and the injured party also suffers costs of completion, that party may recover its actual costs of completion along with the liquidated amount.
4. Forum Selection and Flow-Down Clauses, ESI Companies, Inc. v. Ray Bell Constr. Co., 2008 WL 544563 (Tenn. Ct. App. Feb. 29, 2008).
* What the Court Considered: The Tennessee-based contractor’s agreement with the owner included a provision requiring all disputes to be brought in a specific Kentucky court. The agreement between that contractor and a Tennessee-based subcontractor included a flow down clause giving the contractor the "same rights and privileges" against the subcontractor as the owner had against the contractor. The subcontractor filed suit in Tennessee, and the contractor, citing the forum-selection clause, moved to dismiss.
* What the Court Said: Because the subcontract incorporated the forum selection clause of the prime contract, the dispute could only be heard in the forum named in the prime contract.
* What the Opinion Means: The subcontract contained a choice of law provision, but did not specify a forum for resolving those disputes. With no conflict between the prime and subcontract on this issue, the clause flowed down to the subcontract. Also, the fact that both parties were based in Tennessee did not make the Tennessee forum necessarily more convenient, in light of the location of other interested parties, the project itself, and witnesses.
5. Agreements to Arbitrate and Flow-Down Clauses, A.E.R. Constr., Inc. v. Travelers Cas. & Surety Co. of America, 2007 WL 3046324 (N.D.W.Va. Oct. 17, 2007).
* What the Court Considered: A subcontractor brought suit against the contractor’s surety. The surety moved to stay pending arbitration, citing a provision in the prime contract requiring arbitration and a provision of the subcontract incorporating all of the terms of the prime contract. However, the arbitration provision of the prime contract was deleted by an addendum issued by the architect. Still, the subcontract required "arbitration as provided in the general contract."
* What the Court Said: Because the general contract no longer required arbitration, there was no arbitration provision to incorporate and arbitration was not mandatory.
* What the Opinion Means: While a court was required to resolve any doubt about the scope of arbitrable issues in favor of arbitration, it could not enforce an absent arbitration clause. The language of the subcontract did not create an agreement to arbitrate but was dependent upon the terms of the general contract.
6. The Limits of Enforcing Arbitration Clauses Against Nonsignatories, United States ex rel. Lighting and Power Services, Inc. v. Interface Constr. Co., 2007 WL 2710030 (E.D. Mo. Sept. 11, 2007).
* What the Court Considered: A subcontractor’s agreement with the prime contractor contained an arbitration provision, but its sub-subcontract with another entity did not. That sub-subcontract did not expressly incorporate the prime contract but was made an attachment to the agreement between the subcontractor and the prime contractor. When the sub-subcontractor brought suit seeking unpaid amounts, the prime contractor sought to compel arbitration.
* What the Court Said: The nonsignatory sub-subcontractor was not bound to arbitrate its claims as its contract did not incorporate the terms of the prime contract.
* What the Opinion Means: Making the sub-subcontract an attachment to the subcontract did not express the required clear intent to incorporate the terms of that subcontract. This could have been accomplished by including a provision to the effect of "Any dispute shall be governed by the prime contract documents." Additionally, "receiving an indirect benefit is not enough to estopp a nonsignatory form avoiding an arbitration clause."
7. Commercial General Liability Coverage for Negligence, Bituminous Casualty Corp. v. Kenway Contracting, Inc., 240 S.W.3d 633 (Ky. 2007).
* What the Court Considered: A owner wishing to convert a residence to a business contracted with a corporation to remove an attached carport and perform other minor work. By mistake, an employee of the corporation demolished not just the carport but the entire building. The corporation sought coverage under its commercial general liability policy, but the insurance company demurred; taking the position that the demolition was neither an accident nor an occurrence as required for coverage.
* What the Court Said: The damage to the building was neither intended nor expected from the standpoint of the principals of the corporation, thus it was an accident and coverage was available.
* What the Opinion Means: While the actions of the employee in destroying the entire structure were intentional (if mistaken), they were accidental from the standpoint of the corporation and its principals. Construing the policy broadly as to effect coverage, the court found that "the fortuity requirement in the definition of accident is satisfied" and coverage was available.
8. Accord and Satisfaction of a Mechanic’s Lien, Wolfe v. Eagle Ridge Holding Co., LLC, 869 N.E.2d 521 (Ind. Ct. App. 2007).
* What the Court Considered: In response to a builder’s invoice, an owner made one partial payment, then sent another partial payment marked "Full & Final Payment" along with a letter explaining disputes with the invoice. The builder filed a lien and later applied a restrictive endorsement to the check, but waited so long in cashing the check that the bank would not accept it. A new check also marked "Full & Final Payment" was cashed without any restrictive endorsement. On a suit to foreclose the lien the Owner argued that the underlying debt was extinguished by cashing the second check.
* What the Court Said: Cashing a "full satisfaction" check is an accord and satisfaction that removes the underlying debt; thus the lien could not be foreclosed.
* What the Opinion Means: A check tendered in good faith to settle a bona fide dispute will extinguish the dispute if cashed. The court noted that even a restrictive endorsement, such as one purporting to reserve rights to seek further payment, did not alter the outcome where the check is clearly designated as a full and final payment.
9. Waiving the State of Limitations, Great American Ins. Co. of New York v. Jackson County Sch. Dist. No. 9, 2007 WL 2713894 (D. Or. Sept. 17, 2007).
* What the Court Considered: After parts of a junior high school suffered irreparable fire damage, the parties negotiated the insurance coverage related to the replacement cost. The parties worked "cooperatively, in good faith" for the years following the fire, but resorted to litigation to resolve remaining disputes. The litigation was filed outside of the two-year limitations period contained in the policy, thus the insurance company argued that it was time-barred.
* What the Court Said: The insurance company waived the limitations period by continuing to negotiate well beyond the specified time period.
* What the Opinion Means: By continuing negotiations past the limitations period, the insurance company waived that provision. The school district "reasonably and justifiably relied upon" the insurance company’s waiver, and at any rate, had no reason to file a suit until negotiations broke down. However, the court held that the school district could not recover inflationary costs beyond the two-year limitations period.
10. Designer Liability Under the Americans with Disabilities Act, Kuchmas v. Towson University, 2007 WL 2694186 (D. Md. Sept. 10, 2007).
* What the Court Considered: A disabled student brought claims against a university and its contractor and designer for accessibility problems at a dorm. The student alleged multiple counts under the Fair Housing Act ("FHA") and the Americans with Disabilities Act ("ADA"). He alleged that the designer violated the FHA and the ADA by failing to design and construct an accessible building and violated the FHA by failing to make reasonable accommodations.
* What the Court Said: The designer could not be liable under the ADA, or under the FHA for failing to make reasonable accommodations, and was not liable under the FHA for design and construction because the statute of limitations had expired.
* What the Opinion Means: The statute of limitations under the FHA "design and construct" claim began running when the building was constructed, so a suit six years later was untimely. The designer could not be liable under the FHA for failure to make reasonable accommodations because it was only responsible for the initial design and had no authority to make accommodations after construction was completed. Also, the ADA did not provide for liability of architects, but only owners and operators.
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. Troy Kiber is an Associate at Smith, Gambrell, & Russell, LLP. For more information or if you have any questions, contact us at: firstname.lastname@example.org.