Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Cory Menees
1. Flow-Down Provision Limits Time During Which Claims Can Be Filed Under Subcontract, Steadfast Ins. Co. v. Brodie Contractors, Inc., 2008 U.S. Dist. Lexis (W.D. Va. 2008).
* What the Court Considered: A subcontract silent on the issue of limitations was, through operation of a flow-down provision, subject to the general conditions contained in the prime contract. The general conditions provided that the statutory limitations period on claims arising under the contract would begin to run no later than the date of the project’s substantial completion. The project contractor eventually filed suit against a sub, claiming the sub’s work was substandard. The contractor argued that its claim accrued as of the date it formally rejected the sub’s work, a date subsequent to the project’s substantial completion but within Virginia’s five-year limitations period on contract claims. The sub argued the limitations clock began to run at the time the project was substantially completed, per the limitations provision contained in the prime contract.
* What the Court Said: As the subcontract was silent on the issue of limitations, the general conditions of the prime contract governed. That being the case, the limitations period began to run as of the date of the project’s substantial completion, and the contractor’s claim was time-barred.
* What the Opinion Means: In Virginia, statute of limitations provisions will flow down from prime to subcontracts where the subcontract is both silent on the issue of limitations and incorporates the terms of the prime contract by reference.
2. Owner Prevented From Arbitrating Dispute by Failure to Timely Elect to Arbitrate, 2008 U.S. Dist. LEXIS 84302 (W.D. Pa. 2008).
* What the Court Considered: A contract provided that an owner had thirty (30) days from the time the contractor submitted a dispute to the architect to decide between arbitration and litigation of the dispute. Fifty-six (56) days after the contractor submitted a dispute to the architect and two (2) weeks after the contractor attempted to initiate arbitration of its claims, the owner sought to have the dispute tried in court.
* What the Court Said: The owner was required to arbitrate the dispute, as it breached the contract and waived its right to choose between arbitration and litigation by failing to make a timely decision between the two.
* What the Opinion Means: In Pennsylvania, where a contract requires a party to make a timely decision between arbitration and litigation, the failure to make a decision between the two options within the period of time specified by the contract may result in a waiver of the right to make the decision.
3. Guarantor Successfully Compels Arbitration of Claims Against Him Based on Arbitration Clause Contained in Guarantied Contract Between Owner and Contractor, G&B Terminal, Inc. v. Herzberg, 2008 U.S. Dist. Lexis 84571 (E.D. Ark. Oct. 1, 2008).
* What the Court Considered: Herzberg guarantied a contractor’s timely completion of performance under certain contract documents. The guaranty itself contained no arbitration provision but by reference incorporated certain contract documents between the owner and contractor containing such a provision. When the contractor was late in completing the project, the owner sought recovery from Herzberg, who moved to compel arbitration based on a provision contained in the contract between the owner and contractor.
* What the Court Said: Because the guaranty by reference incorporated contract documents containing an arbitration provision, arbitration between the owner and guarantor was proper pursuant to the FAA.
* What the Opinion Means: Where a dispute between parties arises out of a contract containing an arbitration provision, the dispute may be arbitrable under the FAA even if the parties are not signatories to the contract.
4. Owner’s Recovery for Withdrawn Bid Limited to Bid Bond, Rye City Sch. Dist. v. Xavier Contractors, LLC, 54 A.D. 927 (N.Y. App. Div. 2008).
* What the Court Considered: A contractor withdrew its $3M-plus bid for general trades work on a school project following discovery of a clerical error that led it to submit an erroneously low bid. The withdrawal came two weeks after the school board accepted the erroneous bid. The lowest bid submitted when the project was re-bid was $465,000 higher than the withdrawn bid. The school district sued the withdrawing contractor for breach of contract, and the contractor and its surety sought to limit the school district’s recovery to the value of the bid bond.
* What the Court Said: The school district’s recovery was limited to the value of the bid bond, as the contract documents contemplated that the recovery would be so limited.
* What the Opinion Means: In New York, contractual limitations on damages for bid withdrawal will be enforced where the withdrawal is for reasons contemplated by the damages limitation provision.
5. Contractor Shielded from Liability for Injuries to Sub’s Employee by Limited Control Over Employee, Rohde v. Acuity, 2008 Wisc. App. LEXIS 761 (Wis. Ct. App. 2008).
* What the Court Considered: A contractor provided a sub’s employee with a scissor lift to facilitate the employee’s performance of subcontract work. The employee broke his wrist and ankle when he tipped the lift by driving it down an incline. The employee sued the contractor for negligence and violations of Wisconsin’s safe workplace statute. The contractor won summary judgment by arguing that it owed no duty to the employee given that he was directly employed by the sub. The employee appealed.
* What the Court Said: A contractor owes no duty to a sub’s employees where the contractor maintains no right to supervise the employees and has no control over the details of the employees’ work.
* What the Opinion Means: In Wisconsin, a contractor’s provision of equipment to a sub’s employees will not, without more, give rise to a duty of care to the employees.
6. Failure of Contractor to Disclose Identity of Experts Leads Court to Bar Experts’ Testimony, Walls v. Connor, 2008 Tenn. App. LEXIS 637 (Tenn. Ct. App. 2008).
* What the Court Considered: An owner refused final payment to a contractor on the basis of substandard performance of contract work. After the contractor sued the owner, the owner served the contractor with discovery requests asking that the contractor identify experts it planned to call at trial. After the contractor failed to respond to the requests, the owner sought a court order compelling the responses. After initially failing to provide the ordered responses, the contractor provided incomplete responses, whereupon the owner moved the court to bar the contractor’s experts from testifying as a punishment for the contractor’s failure to make discovery. The court granted the owner’s motion and eventually awarded the owner $55,000 in damages on its claim. The contractor appealed, arguing that the trial court abused its discretion by preventing the contractor’s experts from testifying.
* What the Court Said: The trial court’s ruling on the owner’s motion was upheld, as the Tennessee Rules of Civil Procedure allow that a party may be prohibited from introducing matters into evidence as a sanction for failing to make discovery.
* What the Opinion Means: In Tennessee, as in many other states, a party’s failure to comply with its discovery obligations may prove fatal to its case.
7. Right to Recover for Delay and Lost Productivity Waived Through Execution of Interim Releases, Addicks Servs. v. GGP-Bridgeland, L.P., 2008 U.S. Dist. LEXIS 89950 (S.D. Tex. 2008).
* What the Court Considered: A contractor regularly signed releases as consideration for progress payments. The release form contained a blank for listing contested amounts, but the contractor never listed any amounts in dispute. When the project finished nearly a year behind schedule, the contractor sued the owner for lost productivity and delay. The owner argued that the contractor had waived, through its execution of the releases, the right to recover the damages it sought. The contractor countered that the releases covered only work originally contemplated under the contract.
* What the Court Said: The releases were enforceable and waived the contractor’s right to recover the damages it sought in the suit. The fact that the owner had paid the contractor on claims for which the owner had previously obtained releases did not bar the owner from asserting the releases as a defense.
* What the Opinion Means: A contractor should fully understand what it is giving away by signing a release, and the scope of the release should be clearly articulated in writing. The contractor in the case above didn’t realize the extent of the rights it was waiving by signing releases, and its later lawsuit was barred as a result.
8. Insurer Loses Fight to Avoid Indemnity Obligation, Royal Indemnity Co. v. Terra Firma, Inc., 947 A.2d 913 (Conn. 2008).
* What the Court Considered: Two employees of a subcontractor sued both their employer and the prime contractor for injuries suffered when a trench dug by the sub collapsed. The sub was protected from suit by workers’ compensation exclusivity, but negligent supervision and unsafe workplace claims against the prime contractor proceeded to trial. Prior to trial, the court ruled that evidence of the sub’s negligence was inadmissible but that evidence of the sub’s performance under the subcontract could be offered. Upon learning of the court’s ruling, the sub’s insurer disclaimed any obligation to defend and indemnify the contractor as an additional insured under the sub’s liability policy. The insurer argued that the contractor’s liability to the injured employees could not be shown to have resulted from the sub’s “work” given that evidence of the sub’s negligence was inadmissible. The insurer sought a declaratory judgment holding that it was not obligated to indemnify the contractor in the case. The trial court issued summary judgment in favor of the contractor on the insurer’s claim, and the decision was upheld by the appellate court. The insurer appealed to the Connecticut Supreme Court.
* What the Court Said: The contractor’s liability resulted from the sub’s work, even if that work could not be shown to have been negligently performed. That being the case, the insurer remained obligated to indemnify the contractor.
* What the Opinion Means: Where an insurer’s indemnity obligation covers liability arising out of a sub’s “work,” Connecticut courts will not limit the coverage to liability for work negligently performed.
9. Contractor Found to Owe Duty of Care to Unlicensed Independent Contractor Injured on the Job, Tafoya v. Rael, 145 P.3d 551 (N.M. 2008).
* What the Court Considered: A GC hired an independent contractor (“plumber”) to perform plumbing work despite knowing that the plumber was unlicensed. After the plumber died in the performance of work for the GC, the plumber’s estate filed suit against the GC for negligent hiring. The GC won summary judgment at trial and the appeals court affirmed, finding that the GC owed no duty of care to an independent contractor. The plumber’s estate appealed.
* What the Court Said: The public policy underlying New Mexico’s Construction Industries Licensing Act – promotion of the general welfare through protection of life and property – means unlicensed independent contractors are owned a duty of care by GC’s who hire them despite knowing they are unlicensed.
* What the Opinion Means: In New Mexico, contractors who knowingly hire unlicensed independent contractors risk both (1) revocation and suspension of their own licenses; and (2) liability for negligent hiring.
10. Qualified Immunity of City’s Agent Extended to Immunize City from Suit for Interference with Contract, City of Boulder City v. Boulder Excavating, Inc., 191 P.3d 1175 (Nev. 2008).
* What the Court Considered: A city engineer asked that a low-bidding contractor remove a certain subcontractor from its list of subs given the city’s past difficulties with the sub. After the contractor complied with the engineer’s request, the sub sued the contractor, engineer, and city for violations of Nevada law and interference with contract. The trial court found the engineer protected by qualified immunity for “discretionary acts” but the city liable for inference with the contract. The city appealed.
* What the Court Said: The immunity of the city’s agent properly extended to the city itself.
* What the Opinion Means: In Nevada, municipal officials will benefit from “discretionary-act immunity” where their actions are based on “social, economic, or political policy.” Decisions impacting the public-bidding process, like that made by the city engineer in the case above, will be protected where they can be shown to be motivated by public policy considerations.
Ira Genberg is a Partner at Troutman Sanders LLP in Atlanta, Georgia, and is General Counsel for Associated Owners & Developers (AOD) in McLean, Virginia. Cory Menees is an Associate at Troutman Sanders LLP. For more information, or if you have any questions, contact us at email@example.com.