Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Effect of “Pay If Paid” Provision on Public Payment Bond, Wellington Power Corp. v. CNA Surety Corp., 614 S.E.2d 680 (W. Va. 2005).
* What the Court Considered: A contractor on a public project hired an electrical subcontractor. The subcontract contained a “pay if paid” provision. A payment bond, which assured payment of subcontractors, was obtained in accordance with West Virginia law. Eventually, the subcontractor sued under the payment bond, claiming it was owed monies by the contractor. The surety sought to dismiss the claim on the basis of the “pay if paid” provision.
* What the Court Said: Because the “pay if paid” provision applied, the subcontractor’s claim against the bond was dismissed.
* What the Opinion Means: When parties contract lawfully and their contract is free from ambiguity or doubt, that agreement provides the law which governs their relationship. While it is public policy in West Virginia “to secure payment to the materialmen and laborers in the building of structures to be used by the public,” this policy does not outweigh the public policy of freedom of contract.
2. Liability for Removal of Safety Equipment, Browne v. Turner Constr. Co., 127 Cal. App. 4th 1334 (Cal. Ct. App. 2005).
* What the Court Considered: An employee of a subcontractor hired to install a fire sprinkler system sued the owner and general contractor for his injuries resulting from a fall. He claimed the owner and general contractor removed safety lines and hydraulic lifts, which would have permitted the employee to work without a ladder. The owner and general contractor had removed the safety equipment because the room was nearing completion.
* What the Court Said: Because the owner and general contractor undertook to supply the safety equipment, their removal of that equipment affirmatively contributed to the employee’s injuries.
* What the Opinion Means: Generally, under California law, the employer of an independent contractor has no duty to protect an employee of that contractor from the consequences of the contractor’s negligence. However, where the employer affirmatively contributes to the injuries, it can be held liable. Here, the owner and general contractor provided safety devices for the subcontractors. The subsequent removal of those devices raised the strong possibility that they not only affirmatively contributed to the injuries but actually created the situation in which the injuries were likely to occur.
3. Bid Acceptance As Contract Formation, Ry-tan Constr., Inc. v. Wash. Elem. School Dist. No. 6, 111 P.3d 1019 (Ariz. 2005).
* What the Court Considered: Upon being awarded a contract to build new classrooms at a school, a contractor signed an acknowledgement that it would not begin work on the project prematurely. Nonetheless, the contractor took equipment to the site and began work the night before the contract was to be signed. As a result, the school district refused to execute the contract and cancelled the bid.
* What the Court Said: Because a formal contract had not been signed, the school district could cancel the award.
* What the Opinion Means: A public agency that accepts a bid on a public contract is not bound until a formal contract exists. Because the contractor and the school district never executed a formal contract, the contractor could not recover from the school district.
4. General Contractor’s Responsibility for Safety of Subcontractor’s Employees, Comm’r of Labor of N.C. v. Weekley Homes, L.P., 609 S.E.2d 407 (N.C. Ct. App. 2005).
* What the Court Considered: A general contractor hired to build a subdivision was cited by the Department of Labor for failing to conduct “[f]requent or regular inspections of the jobsite . . . as part of an accident prevention program.” The citation was based on the fact that employees of various subcontractors were working on a steep pitch roof over six feet from the ground without fall protection. The general contractor appealed the citation.
* What the Court Said: Because North Carolina’s version of the Occupational Safety and Health Act (“OSHA”) requires contractors to ensure the safety of independent contractors, the citation was valid.
* What the Opinion Means: North Carolina’s version of OSHA requires that “[e]ach employer shall furnish to each of his employees conditions of employment and a place of employment free from recognized hazards that are causing or are likely to cause death or serious injury.” However, OSHA does not limit the duty of a general contractor, as the employer, only to its own employees. Instead, general contractors also are obligated to inspect the jobsite for safety violations committed by their subcontractors.
5. Refusal To Allow a Substitute As Tortious Interference, Major Indus., Inc. v. Krech, Ojard & Assocs., Inc., 2004 WL 2940912 (Minn. Ct. App. 2004).
* What the Court Considered: A school district hired an architecture firm to draft and design specifications for a construction project. The specifications called for the installation of two skylights produced by a particular manufacturer. A competitor of the manufacturer who contacted the firm to request that its skylights be approved as a substitute was later added as an approved manufacturer. The contractor hired to install the skylights included in its proposal the skylights of the substitute manufacturer. When the firm required the contractor to instead use the originally specified skylights, the substitute manufacturer sued for tortious interference with business relations.
* What the Court Said: The substitute manufacturer could proceed with its tortious interference claim.
* What the Opinion Means: Under Minnesota law, tortious interference with prospective contractual relations involves a showing that the defendant intentionally and improperly interfered with another’s prospective contractual relation. If the substitute manufacturer could prove that the architecture firm simply wanted to use the competitor’s product, regardless of whether the manufacturer’s product met the specifications, then the firm would be liable on the tortious interference claim.
6. Right to Arbitrate After Filing a Mechanic’s Lien, Brendsel v. Winchester Constr. Co., 875 A.2d 789 (Md. Ct. Spec. App. 2005).
* What the Court Considered: The owner of an historic plantation house hired a contractor to renovate the property. The parties’ contract included an arbitration provision. Subsequently, the contractor filed a “Petition to Establish and Enforce a Mechanic’s Lien.” When the owner filed a counterclaim, the contractor sought to stop litigation on that claim and compel arbitration. The owner argued that the contractor had waived its right to arbitrate by suing on the mechanic’s lien in court.
* What the Court Said: The contractor did not waive its right to arbitrate by seeking to enforce a mechanic’s lien in court.
* What the Opinion Means: Under Maryland law, waiver is the intentional relinquishment of a known right. While a right to arbitrate may be waived, the contractor’s attempt to enforce a mechanic’s lien was not so inconsistent with the continued assertion of the right to arbitrate as to reflect an intention to repudiate it.
7. Contractual Validity and Foreclosure of a Lien, G. M. Fedorchak Assocs., Inc. v. Chicago Title Land Trust Co., 822 N.E.2d 905 (Ill. App. Ct. 2005).
* What the Court Considered: An architecture firm, which had not been paid for its services, sought to foreclose a mechanic’s lien. However, the firm’s principals had not been licensed architects at the time of contract execution.
* What the Court Said: The architecture firm lacked the legal capacity to foreclose on its lien.
* What the Opinion Means: Under Maryland law, the legal capacity to foreclose a mechanic’s lien depends upon the validity of the lien. The lien, in turn, must be based upon a valid contract. The contract in this case was not valid because the firm was not registered with the state and its two principals, who had completed the designs, were not authorized to practice architecture at the time the contract was formed.
8. Materials Supplier’s Right to a Lien, Bates County Redi-Mix, Inc. v. Windler, 162 S.W.3d 98 (Mo. Ct. App. 2005).
* What the Board of Contract Appeals Considered: A supplier furnished concrete for the construction of a foundation. The foundation was later discovered to have been improperly installed and thus was demolished and replaced. Although the defects in the foundation were not due to the concrete that was used for the original installation, the supplier’s concrete was not used in the construction of the replacement foundation. The supplier subsequently filed a mechanic’s lien.
* What the Board Said: Although the supplier’s concrete was not used in the construction of the permanent foundation, the supplier had lien rights against the property.
* What the Opinion Means: Generally, for a materials supplier to assert a lien against property, the materials must have become a permanent part of the structure or have been necessary for the completion of the structure. Under Missouri law, however, the mechanic’s lien statute is liberally construed as favorably to materialmen as its terms permit. Thus, although the concrete was not used in the completion of the permanent structure, the supplier had lien rights against the property.
9. Promissory Estoppel in Pennsylvania, Lobar, Inc. v. Lycoming Masonry, Inc., 2005 WL 1283530 (Pa. Super. Ct. 2005).
* What the Court Considered: A contractor incorporated a masonry subcontractor’s bid into its bid to the owner. After the contractor was awarded the contract, it sent a written subcontract to the subcontractor. The subcontractor refused to sign, claiming the subcontract required the use of much more expensive Concrete Masonry Units than the subcontractor had intended to use. Thereafter, the contractor entered into a subcontract with another subcontractor at a much higher cost, then sued the low bidder for the difference based on promissory estoppel.
* What the Court Said: The case must be decided on the basis of contractual principles, rather than equitable principles such as promissory estoppel.
* What the Opinion Means: If the subcontract sent to the low bidder by the contractor differed materially from the terms of the subcontractor’s bid offer, then it should have been considered a counteroffer. If it did not materially differ, then a contract should be deemed to have been formed between the parties. In either event, the doctrine of promissory estoppel would not apply.
10. Bad Faith Claim Must Follow Coverage Determination, Onebeacon Ins. Co. v. Delta Fire Sprinklers, Inc., 898 So. 2d 119 (Fla. Dist. Ct. App. 2005).
* What the Court Considered: A supplier furnished and installed a complete fire protection system at an apartment complex. Subsequently, the supplier asserted a bad faith claim against an insurance company for allegedly failing to attempt a good faith settlement of claims related to its work. The supplier’s bad faith claim was asserted at the same time litigation on the underlying insurance coverage issue was proceeding in a separate case.
* What the Court Said: Because there had not yet been a coverage determination, the bad faith claim was dismissed for being premature.
* What the Opinion Means: Under Florida law, there must first be a determination of coverage and contractual issues before a claim for bad faith against the insurance company may be prosecuted. If a court finds there is no insurance coverage, nor any loss or injury for which the insurer is contractually obligated to indemnify, then the insurer cannot have acted in bad faith in refusing to settle a claim.
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.