Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and David L. Hobson
1. Spearin Doctrine in Ohio, Dugan & Meyers Constr. Co. v. Ohio Dep’t of Admin. Svcs., 864 N.E.2d 68 (Ohio 2007).
* What the Court Considered: The contract for construction of three state university buildings contained a no-damages-for-delay clause, which provided the contractor shall not be entitled to monetary damages for any delays. Rather, the contractor’s sole remedy for delays, even delays caused by others, was an extension of time. The contractor was delayed primarily by numerous omissions, inaccuracies, and conflicts in the design documents, which were provided by the state. The contractor was ultimately relieved of its responsibilities for failure to timely progress the work. In the subsequent lawsuit, the contractor sought damages for the state’s alleged breach of a duty to provide plans that were buildable, accurate, and complete.
* What the Court Said: The contractor could not recover monetary damages for delays suffered as a result of design deficiencies.
* What the Opinion Means: In Ohio, the Spearin doctrine provides that, in cases involving government contracts, the government warrants the accuracy of its affirmative indications regarding job site conditions. In other jurisdictions, the doctrine also provides that the government warrants the accuracy and completeness of its designs. The court declined to apply the doctrine in cases involving delays caused by changes to the plans. Even if the doctrine applied, the no-damages-for-delay clause was valid and would have prevented the contractor from recovering monetary damages for the delays.
2. Public Bids Featuring Unlicensed Subcontractors, D.H. Williams Constr., Inc. v. Clovis Unified Sch. Dist., 146 Cal. App. 4th 757 (Cal. Ct. App. 2007).
* What the Court Considered: A contractor submitted the low bid to a school district for constructing an educational center but designated a subcontractor whose license had expired. When notified of this deficiency, the contractor presented a letter from the unlicensed subcontractor refusing the subcontract. The contractor assured the district it would self-perform the affected scopes of work. The district notified the contractor that it found the bid "non-responsive" by fax, and instead awarded the contract to the next-lowest bidder.
* What the Court Said: Because the district’s decision amounted to a finding that the contractor was "not responsible," the district must give the contractor a public hearing to explain its bid.
* What the Opinion Means: A subcontractor is not required to have a license at the time it submits a sub-bid. Thus, prime bids that include unlicensed subcontractors cannot be summarily deemed "non-responsive"—a determination that usually does not involve disputed facts or agency discretion. Declaring a bidder "not responsible" is a much more contested issue, which may have adverse impacts on the reputation of the bidder. While the district retains the discretion to deem "not responsible" bids including unlicensed subcontractors, it may only do so after affording the bidder a chance to explain its bid.
3. Foreseeability of Injury, Pulawa v. GTE Hawaiian Tel, 143 P.3d 1205 (Haw. 2007).
* What the Court Considered: A construction superintendent overseeing the excavation of a trench as part of a roadway improvement project suffered severe head injuries when he was struck by a 30-pound block of hardened concrete in a cement bag. The concrete was propelled from the rear tire of a loader as it drove over a pile of excavated material. The bag of concrete had been buried in the trench by an excavation contractor during a project two years earlier to install an underground telephone line.
* What the Court Said: Because the injury was not reasonably foreseeable, the excavation contractor did not owe a legal duty to the superintendent.
* What the Opinion Means: A defendant owes a duty of care only to those who are foreseeably endangered by the conduct and only with respect to those risks or hazards whose likelihood made the conduct unreasonably dangerous. That test was not met in this case, because the risk of the specific injury complained of here is not what made the improper backfill unreasonably dangerous. Rather, the only likely or probable harm resulting from improper backfill is settlement of the road and street failure.
4. Delay In Accepting Settlement Offer, Reedsport Sch. Dist. v. Gulf Ins. Co., 152 P.3d 988 (Ore. Ct. App. 2007).
* What the Court Considered: A roofer obtained a performance bond on a project to re-roof a school gymnasium. The bond contained a provision requiring any legal proceeding on the bond to be filed within two years of any specified event, such as contractor default. When the roofer defaulted, the school board made a claim on the performance bond. The surety made a settlement offer that the school district did not attempt to accept until 19 months later. Once the surety refused to honor that offer, the school district filed suit on the bond, some five years after initial default.
* What the Court Said: Because the settlement offer was not accepted "immediately" or within a reasonable time, the acceptance was ineffective.
* What the Opinion Means: The settlement offer made to the school district requested notification of acceptance "immediately." The attempted acceptance of this offer some 19 months later was ineffective because it was not accepted in the manner specified ("immediately") and because it was not accepted within a reasonable time. While Oregon law does provide a six-year statute of limitations for contracts, it also allows the parties to modify this period in their contracts. As the School District was required to approve the very bond it now sought recovery on, its efforts to avoid the limitations of the bond were denied.
5. Limitation Period for Breach of Indemnity Agreement Claim, Credit Gen. Ins. Co. in Liquidation v. TNT Dredging, Inc., 2007 WL 142171 (W.D. Mich. Jan. 16, 2007).
* What the Court Considered: On June 14, 1999, a subcontractor on a dredging project sent a letter to both the contractor and contractor’s surety, asserting it was entitled to more than $300,000. On October 5, 2000, the surety reached a settlement agreement with the subcontractor. The contractor failed to repay the surety as required by the Indemnity Agreement, which was executed in conjunction with the payment and performance bond. In February 2006, the surety sued the owner for breach of the indemnity agreement.
* What the Court Said: The surety’s claim was filed within the applicable limitations period.
* What the Opinion Means: Under Michigan law, a claim for breach of an indemnity agreement must be brought within six years of the breach. Further, Michigan follows the general rule that the statute of limitations for a cause of action for indemnification begins to run at the time the judgment is paid or settlement occurs. Thus, the claim was timely although not filed within six years after the letter of June 14, 1999.
6. Delay In Bringing Suit Under Copyright Act, Chirco v. Crosswinds Cmtys., Inc., 474 F.3d 227 (6th Cir. 2007).
* What the Court Considered: A developer learned that a rival had commenced construction on a condominium project using plans copyrighted and owned by the developer. Three months after the infringer broke ground, the developer filed suit, seeking a halt to construction and monetary damages. During the exchange of documents in that lawsuit, the developer learned that the infringer planned another development infringing upon the copyrighted plans. The plaintiff requested the records of the second project via a public records request, but took no action to enforce its copyright until two and a half years after learning of the second project. By that time, construction of the second project was partially completed and many of the units were occupied.
* What the Court Said: The developer’s delay in filing suit until many units were occupied, sold, or substantially constructed barred the otherwise available remedy of an order to destruct of all construction built according to the copyrighted plans.
* What the Opinion Means: Normally, so long as an action is brought within the statute of limitations period, any delay in bringing the action is reasonable. However, a copyright holder cannot remain inactive with knowledge of infringement while the infringer spends large sums of money exploiting the copyright. In that situation, an injured copyright holder can still seek monetary and preventative relief but is precluded from seeking destruction of the buildings.
7. Enforceability of Forum Selection Clause, Concrete Indus., Inc. v. Dobson Bros. Constr. Co., 2007 WL 1455979 (D. Kan. May 17, 2007).
* What the Court Considered: A concrete subcontractor submitted a bid quotation for a taxiway construction project at a Kansas airport. The general contractor sent a purchase order to the subcontractor, who then signed and returned the purchase order. The purchase order stated that the subcontractor was to provide the materials "in accordance with the conditions and terms noted on the face and reverse side of this order." One of the terms listed on the order provided that any action pertaining to the order shall be brought in Nebraska. The subcontractor filed a breach of contract action against the contractor in Kansas.
* What the Court Said: Because the subcontractor consented to the forum selection clause, the action was transferred to Nebraska.
* What the Opinion Means: Although the purchase order constituted an acceptance of the subcontractor’s bid, it contained additional terms. Between merchants, such terms become a part of the agreement unless they materially alter it. According to Kansas law, a forum selection clause is a material alteration and therefore must be agreed to by both parties. Here, the subcontractor consented to the forum selection clause when it signed and returned the purchase order.
8. Failure To Raise Related Claims in Board Appeal, Phillips/May Corp. v. United States, 2007 WL 1227696 (Fed. Cl. April 19, 2007).
* What the Court Considered: A contractor submitted a series of claims to the contracting officer at a military base related to its work at the base. The contracting officer failed to act on any of the claims, and the contractor appealed some—but not all—of those claims to the Armed Services Board of Contract Appeals ("ASBCA.") After the decision by the ASBCA, the contractor sought to litigate the remaining claims in the Court of Federal Claims.
* What the Court Said: The contractor could not pursue its remaining claims before the Federal Claims Court because the claims were based upon the same transactional facts as the claims appealed to, and decided by, the ASBCA.
* What the Opinion Means: Claims need not have been actually litigated and determined to preclude further consideration. It is enough if the claims could have been raised in the prior action. All of the contractor’s claims arose from work under the same contract and should have been included in the prior action.
9. Duty Of A Contraction Manager to Ensure Job Safety, Farabaugh v. Pa. Turnpike Comm’n, 911 A.2d 1264 (Pa. 2006).
* What the Court Considered: The Pennsylvania Turnpike Commission (PTC) employed a contractor to construct an expressway, and a construction manager ("CM") to administer and manage the construction. The contractor had no contractual relationship with the CM, but the CM did, in its contract with the owner, assume a duty to ensure safety on the project. An employee of the contractor died while performing a task at the direction of the contractor, and his estate sued both the contractor and the CM.
* What the Court Said: Because the CM owed a duty to ensure the safety of third parties, the lawsuit against the CM could proceed.
* What the Opinion Means: While a party in breach of a contract is generally not liable for the effects of its breach on parties outside the contract, the law may impose a duty to perform a contract such that third parties are uninjured. The extent of this duty for CMs will be determined in a case-by-case manner, based on the particular contract binding on the CM. The CM was paid to assume an active role in assuring safety on the jobsite by monitoring the safety efforts of all parties on the job.
10. Elements of Intentional Misrepresentation Claim, Baddeley v. Seek, 156 P.3d 959 (Wash. Ct. App. 2007).
* What the Court Considered: To obtain a building permit, a retaining wall contractor hired an engineering firm to provide an opinion on the soundness of the design and construction. The engineer reported that the wall was properly constructed and would likely perform as intended. When the wall subsequently failed, the owner sued the engineer for intentional misrepresentation.
* What the Court Said: Because the engineer did not intend the owner to act on the report, the owner’s claim was dismissed.
* What the Opinion Means: One element of a claim for intentional misrepresentation is that the defendant intended the plaintiff to act on the information provided. The owner could not prove this element of its claim because the engineer did not give the report to the owner. The court also decided that, because the owner had no contract with the engineer, the economic loss rule did not apply.
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: email@example.com.