Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Delay Damages Covered by Payment Bond, Lexicon, Inc. v. Safeco Ins. Co., 436 F.3d 662 (6th Cir. 2006).
* What the Court Considered: A subcontractor filed a claim for delay damages against a payment bond. The surety defended by claiming that delay damages were not recoverable as a matter of law against a payment bond.
* What the Court Said: Because the bond by its terms guaranteed payment of labor and materials, the subcontractor could recover for additional labor and materials expenses even if caused by delay.
* What the Opinion Means: According to the court, “if a bond guarantees payment of labor and materials, a subcontractor may recover for additional labor and materials expenses caused by delay under the bond.” Therefore, as long as delay damages are comprised of the increased cost of labor and materials needed to finish a project, then a payment bond may have to cover such delay damages.
2. Bid Responsiveness, R.D. Brown Contractors Inc. v. Bd. of Education of Columbia County, 626 S.E.2d 471 (Ga. 2006).
* What the Court Considered: The second lowest bidder on a new school construction project sought to enjoin the contract award to the lowest bidder because the lowest bidder failed to provide a list of subcontractors with its bid, as required by the terms of the bid process. The low bidder submitted its list of subcontractors hours after the bid deadline.
* What the Court Said: Because the list of subcontractors was not required by statute, the school board properly waived the omission.
* What the Opinion Means: Public Project owners have the authority to waive technicalities if in the best interest of the project and if the requirement is not material.
3. Owner’s Loss of Right to Assess Liquidated Damages, RDP Royal Palm Hotel, L.P. v. Clark Constr. Group, Inc., 2006 WL 373492 (11th Cir. Feb. 17, 2006).
* What the Court Considered: A construction project experienced significant site conditions problems and was therefore not completed by the contractual substantial completion date. Eventually, the Owner stopped making payments, causing the Contractor to stop working. Owner sought liquidated damages for each and every day between the contractual substantial completion date and the date a supplemental contractor actually completed the project.
* What the Court Said: Because Owner failed to set a new completion date and encouraged continued performance by the contractor, it waived its right to assess liquidated damages.
* What the Opinion Means: An owner can waive its right to assess liquidated damages against a contractor by failing to reserve its rights under the contractual “time is of the essence” provision.
4. Deference to Agency Methodology, Lantry v. State of New York, 2005 WL 3452257 (N.Y. Dec. 15, 2005).
* What the Court Considered: On a subcontract to install pre-glazed windows for a school district, a dispute arose regarding how the work would be classified. Both a glaziers union and an iron workers union claimed the work to be work it typically performed, and the subcontractor sought to pay its workers the lower glaziers pay rate.
* What the Court Said: The court upheld The New York Department of Labor (DOL) determination that the proper pay rate for the glazed-window installers was that of iron workers. The DOL reached their decision by looking to the nature of the work performed, and did not need to conduct surveys to ascertain local contractor practices.
* What the Opinion Means: Tasked with classifying work performed on public projects, the New York Department of Labor has the authority to determine work classifications based on its own methodology. Subcontractors and others who contract for public works projects should be aware of work classifications before contracting to do such work.
5. Premises Liability for Landowners, Kinsman v. Unocal Corp., 123 P.3d 931 (Cal. 2005).
* What the Court Considered: An employee of a contractor working to construct a plant asserted he developed mesothelioma from exposure to asbestos. He further asserted that the owner of the plant knew or should have known of the asbestos dangers but that it did not warn the employee. The asbestos had been brought to the site and circulated by another independent contractor.
* What the Court Said: Because the owner knew or should have known of the danger of asbestos at the plant, the employee could recover from the owner for his injuries.
* What the Opinion Means: In California, a commercial landowner is subject to premises liability for injury to a contractor’s employee from exposure to asbestos if he knew or should have known of the dangers of asbestos. Liability is not negated because the asbestos was circulated by the actions of another independent contractor.
6. Mechanic’s Lien May Include Interest, Braun v. Agri-Systems, 2005 WL 3325389 (Bankr. E.D. Cal. Dec. 8, 2005).
* What the Court Considered: A contractor filed a mechanic’s lien, claiming it was owed $1 million on outstanding invoices. The owner argued the lien impermissibly claimed interest on the unpaid invoices.
* What the Court Said: Because the debt was considered by the court to be liquidated, interest could properly be claimed on the lien.
* What the Opinion Means: In California, it is the nature—not the existence—of the dispute that determines whether the debt is unliquidated. Here, there was no question as to the existence of the indebtedness, only the amount of the indebtedness. Therefore, the damages were liquidated, and interest could therefore be included on the lien.
7. Warranty of Future Performance, Kelleher v. Marvin Lumber & Cedar Co., 2005 WL 3429739 (N.H. Dec. 15, 2005).
* What the Court Considered: A homeowner discovered rot in windows purchased from a manufacturer. The manufacturer’s sales brochure stated that all of its exterior wood windows were treated to “permanently protect against rot and decay.”
* What the Court Said: Because the language of the sales brochure qualified as a written warranty, the homeowner recovered.
* What the Opinion Means: The Magnuson-Moss Act protects consumers against deceptive warranty practices. Where the representation in a sales brochure specifies both a level of performance and a period of time, such a warranty will be enforceable against the manufacturer.
8. Voluntary Payment Provisions, Bond/Tec, Inc. v. Scottsdale Ins. Co., 622 S.E.2d 165 (N.C. App. 2005).
* What the Court Considered: The tie-offs a contractor used to seal off the working areas at night failed, causing water damage to the school. The contractor sought coverage for the property from his insurer and also hired a water restoration company to perform repairs. The insurance company denied coverage, claiming the contractor breached an obligation under the policy’s voluntary payments clause when he promised to pay the water restoration company “out of pocket.”
* What the Court Said: Because the contractor’s breach of a voluntary payment provision does not automatically relieve an insurer of its obligations, summary judgment in favor of the insurer was improper.
* What the Opinion Means: In North Carolina, even if a party breaches a voluntary payment provision, the insurer is not automatically relieved of its obligations. Only if the breach of the voluntary payment provision results in prejudice to the insurance company’s ability to investigate or litigate the claim will such a violation automatically relieve an insurer’s obligations.
9. Architect’s Malpractice Distinguished from Ordinary Negligence, Varner v. Classic Communities Corp., 2006 WL 28037 (Pa. Super. Jan. 6, 2006).
* What the Court Considered: Tenants who were injured when their townhome caught fire sued the architect, alleging negligence in his failing to adequately use fire-resistant materials as required by Pennsylvania code. The architect moved to dismiss the case because Plaintiffs failed to file a statutorily-required Certificate of Merit, which asserts that a defendant committed professional malpractice.
* What the Court Said: Because the substance of the plaintiffs’ claim was professional malpractice and not mere negligence, a Certificate of Merit was required.
* What the Opinion Means: The substance of a complaint, rather than its form, determines if a claim is one for professional malpractice. Thus, the fact that Plaintiffs labeled their claim as one of mere negligence was inapposite in determining whether a Certificate of Merit was required. Holding otherwise would allow a plaintiff to avoid the requirements of the Certificate of Merit statute merely by pleading a theory of negligence instead of malpractice.
10. Wind Deductible in Builder’s Risk Insurance Policy, Turner Constr. Co. v. ACE Property & Casualty Ins. Co., 429 F.3d 52 (2d Cir. 2005).
* What the Court Considered: A construction project sustained wind damage to the roof, which resulted in water damage due to rainwater entering the structure through the opening caused by the wind. The builder’s risk insurance policy contained an endorsement that provided for a higher deductible for wind damage than for other types of losses.
* What the Court Said: The court found the term “wind damage” in the policy to be ambiguous because it was unclear whether wind damage included damage from windstorms. The court determined that the higher “wind deductible” did not apply to water damage precipitated by the wind.
* What the Opinion Means: As demonstrated by the court’s decision due to the ambiguity of the term “wind damage,” care should be taken to clarify the intent of the insurer and the insured party.
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.