Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and David L. Hobson
1. Finality of Claims Decided in Arbitration, Dalton Paving & Constr., Inc. v. South Green Constr. of Georgia, Inc., 2007 WL 529656 (Ga. Ct. App. Feb 22, 2007).
* What the Court Considered: A subcontractor prevailed in arbitration against a contractor. However, the arbitrator rejected the subcontractor’s argument that the owner and contractor acted as a joint venture. The subcontractor then brought suit against the owners of the project, claiming they were joint venturers with the contractor.
* What the Court Said: The prior arbitration decision precluded the subcontractor’s claims against the owners.
* What the Opinion Means: Owners are third party beneficiaries of subcontracts. Therefore, to the extent claims involving the owners were addressed in the arbitration decision, the owners may use the decision as a shield against the subcontractor’s claims.
2. Contract Enforcement by an Unlicensed Subcontractor, B.D. Stephenson Trucking, LLC v. Riverbrooke Capital Partners, LLC, 2007 WL 2772673 (S.D. Ala. Sept. 25, 2006).
* What the Court Considered: An unlicensed subcontractor moved equipment to a job site in preparation for work that was subsequently awarded to another entity. The subcontractor’s equipment was used without its consent, and it brought suit against the general contractor for breach of contract.
* What the Court Said: The subcontractor may be able to enforce the contract even if it was not licensed, provided that it never began work on the project.
* What the Opinion Means: Subcontractors must be licensed "prior to beginning work." Relocating equipment to the job site is mere preparation rather than commencement of work. Thus, the lack of a license would not preclude recovery under the contract.
3. Forum Selection Clause, Dynamic Drywall, Inc. v. Walton Constr. Co., 2007 WL 164351 (D. Kan. Jan. 19, 2007).
* What the Court Considered: The subcontract incorporated the prime contract by reference. In addition, it provided that the contractor shall have the same rights and remedies against the subcontractor as the owner has against the contractor. Finally, it included a flow-down provision. The prime contract provided that Missouri state court shall have exclusive jurisdiction over claims between the contractor and owner. When the subcontractor sued the contractor in Kansas, the contractor sought to dismiss the suit on the basis of the prime contract’s forum selection clause.
* What the Court Said: Because the forum selection clause was enforceable, the suit was dismissed.
* What the Opinion Means: A broad flow-down provision includes the prime contract’s forum selection clause. Here, the flow-down provision was both very broad and free from any contradictory language.
4. Excessive Control Doctrine in Ohio, Int’l Fid. Ins. Co. v. TC Architects, Inc., 2006 WL 2683439 (Ohio Ct. App. Sept. 20, 2006).
* What the Court Considered: A contractor hired to remodel a veterinary hospital encountered numerous problems with the design. The architect attempted to redress these problems by taking control of the site and providing verbal directives to the contractor. When the contractor experienced delay as a result of the architect’s control, the contractor attempted to terminate the contract. Because the owner believed the contractor to be in default, it notified the contractor’s surety. Thereafter, the surety sued the architect for professional negligence.
* What the Court Said: Because there was no contractual privity between the surety and architect, the case was dismissed.
* What the Opinion Means: In the absence of a contract or a substitute for contractual privity, there is no general duty to protect another party from purely economic harm. The surety argued that the architect exercised excessive control over the work of the contractor and that therefore the "excessive control doctrine" should substitute for privity of contract. However, Ohio courts have not accepted the "excessive control doctrine" as a substitute for privity.
5. Negligence Claim Duplicates Breach of Contract Claim, Envirocon, Inc. v. Alcoa, Inc., 2006 WL 2460640 (N.D.N.Y. Aug. 23, 2006).
* What the Court Considered: A contractor was hired to construct a secure landfill cell. During the bidding process, the owner identified an acceptable source of clay to be used in lining the cell. After the contract was executed, the contractor retained the acceptable supplier to supply the clay. Thereafter, the owner specified that only gray clay would be acceptable. Because of the inherent moisture qualities of gray clay, the contractor sustained cost and time overruns. The contractor then sued the owner for negligence in communicating the specifications and in managing the contract.
* What the Court Said: Because the negligence claim was a mere duplication of a contract claim, the negligence claim was dismissed.
* What the Opinion Means: Generally, a tort cause of action that is based on the same facts underlying a contract claim will be dismissed as a mere duplication of the contract cause of action. This is particularly true where both types of claims seek identical damages.
6. "Operator" Liability for Toxic Waste Cleanup, Tailiesen Corp. v. Razore Land Co., 135 P.3d 1185 (Wash. App. 2006).
* What the Court Considered: An owner brought an action against a former owner, environmental consultant, and contractor for recovery of costs incurred when an underground petroleum tank was penetrated during development of condominiums.
* What the Court Said: Because the environmental consultant directed the contractor’s work, it was liable for the clean-up costs.
* What the Opinion Means: Washington’s Model Toxics Control Act assigns liability to any person who "operated" the building or equipment when the substances were released. Although the contractor physically pierced the tank, it was not liable for clean-up costs because it did not have "any control" over the decision of where to drill.
7. Limitation of Release, Maxwell Partners, LLC v. The Building Studio, LLP, 32 A.D.3d 321 (N.Y. App. Div. 2006).
* What the Court Considered: After a medical imaging center was damaged on September 11, 2001, the architect who had designed the center was retained to oversee the restoration. The architect was then hired to do some additional work in 2002 and again in 2003. In 2004, the owner replaced the architect, agreeing to execute a release in exchange for a license to use the architectural plans drafted in 2003. The release purported to disclaim all causes of action related to "the project" from the "beginning of the world." However, the release also purported to relate only to the 2003 plans. When the owner sued the architect based on work performed prior to 2003, the architect raised the release as a defense.
* What the Court Said: Because the limiting language in the release applied, the owner could pursue its claims against the architect.
* What the Opinion Means: Under New York law, if a release contains specific recitals as to claims being released, yet also contains a general clause purporting to release all claims and demands whatsoever, the general words are limited by the recital of the particular claim.
8. Enforcement of Contract’s Notice Requirements, Starks Mech., Inc. v. New Albany-Floyd County Consol. Sch. Corp., 854 N.E.2d 936 (Ind. Ct. App. 2006)
* What the Court Considered: The contract required all claims, whether for delay or additional costs, to be noticed to the owner within 14 days of discovery, and all claims for continuing delay to be updated weekly. While the contractor submitted numerous RFIs related to design issues, it did not submit any change order requests related to the issues until nearly two years later.
* What the Court Said: Because the contractor failed to comply with the terms of contract, it was not entitled to additional money from the Owner.
* What the Opinion Means: Explicit contractual notice provisions are enforced according to their terms. This contract specifically required claims for delay to be made in accordance with provisions governing all other claims. RFIs will not suffice to put the owner on notice of a claim.
9. Supplier’s Rights Under Joint Payment Agreement, Merrill Iron & Steel, Inc. v. Yonkers Contracting Co., 2006 WL 2679940 (S.D.N.Y. 2006).
* What the Court Considered: A subcontractor hired to construct a canopy issued a purchase order to a supplier of fabricated steel. The contractor, subcontractor, and supplier entered into a Joint Payment Agreement. The Agreement obligated the contractor to make certain payments to the subcontractor by means of a joint check made payable to both the subcontractor and supplier. When the contractor discovered a number of faulty welds, it paid only a portion of the subcontract amount directly to the subcontractor.
* What the Court Said: If the supplier can prove the contractor issued a check solely to the subcontractor, it can sue the contractor for breach of the Agreement.
* What the Opinion Means: Although the Joint Payment Agreement obligated the contractor to issue joint checks, it did not give rise to an unjust enrichment claim by the supplier against the contractor. However, if the supplier can show that the contractor issued a check made payable solely to the subcontractor after the date of the Agreement, the supplier can sue the contractor for breach of the Agreement, despite the contractor’s set-off for the defective welds.
10. Availability of Implied Contract Theory, Carlo Lizza & Sons Paving, Inc. v. Int’l Fid. Ins. Co., 2006 WL 284417 (E.D.N.Y. Sept. 29, 2006)
* What the Court Considered: A surety took over the project when the owner declared the general contractor in default. The surety and general contractor entered into a separate "Completion Agreement." Thereafter, a subcontractor sought delay damages from the surety under an implied contract theory. Specifically, it pointed to evidence that it had submitted invoices directly to the surety and that the surety had requested a Proof of Claim form from the subcontractor.
* What the Court Said: Although there was no contract between the surety and the subcontractor, the case against the surety could proceed on an implied contract theory.
* What the Opinion Means: Under New York law, a second-tier subcontractor may recover from the general contractor under an implied contract theory even where there is a separate contract between the second-tier subcontractor and the subcontractor. The same rule applies where a surety assumes the role of a general contractor under a performance bond.
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. David L. Hobson is an Associate at Smith, Gambrell, & Russell, LLP. For more information or if you have any questions, contact us at: firstname.lastname@example.org.