Cases of the Month

Significant Cases and Decisions Impacting the Construction Industry

By: Ira Genberg and Claiborne Smith

August 2009

1.      Architect’s Suit for Indemnity But Not Contribution Allowed Against Third Party, Children’s Corner Learning Center v. A. Miranda Contracting Corp., 64 A.D.3d 318 (N.Y. App. Div. 2009).

*     What the Court Considered:  The owner of a property entered into a contract with an architect to convert a building into a day care center.  In order to expedite the process, the owner also hired a consultant to procure the necessary construction and safety permits.  The owner proceeded to sue the architect for breach of contract and professional negligence for the economic loss sustained by the project being completed 6 months late.  The architect promptly filed a third-party complaint against the consultant who was supposed to provide the permits for both contribution and common law indemnity.

*     What the Court Said:  The court addressed New York’s statutory contribution provision, holding that contribution does not apply when the damages are solely economic loss even though the cause of action sounds in tort and not breach of contract.  However, the architect’s indemnity claim survived, since it could be ultimately found that the consultant’s negligence was the sole cause of the damages sustained by the owner.

*     What the Opinion Means:  New York courts will look to the nature of the damage rather than to the cause of action in determining whether to allow contribution in professional negligence cases.  This decision will limit the applicability of contribution claims in New York state.

2.      General Contractor Liable to Employees of Its Unlicensed Subcontractor for Unpaid Wages, Sanders Construction Co. v. Cerda, 95 Cal. Rptr. 3d 911 (Cal. App. 2009).

*     What the Court Considered:  Six employees of an unlicensed drywall subcontractor sued the general contractor of a project for their unpaid wages.  Plaintiffs asserted that Cal. Labor Code § 2705.5 applied, which provides that any person performing activities requiring a contractors’ license must hold a valid license to be considered an independent contractor.  Plaintiffs argued that because their employer was not a validly licensed California contractor, the general contractor was their actual statutory employer since the unlicensed subcontractor could not be considered an independent contractor under Cal. Labor Code § 2705.5.

*     What the Court Said:  The court agreed with Plaintiffs’ argument and upheld the trial court’s grant of unpaid wages to Plaintiffs.  The court based its decision on previous holdings that found general contractors were liable to workers of unlicensed subcontractors for workers compensation benefits.  The court further found that the policy of Cal. Labor Code § 2705.5 “discern[ed] no meaningful distinction exist[ing] between being paid wages and receiving other benefits based on wages.  In both instances, the same policy reasons militate against allowing a general contractor to escape liability for the obligations of an unlicensed subcontractor.”

*     What the Opinion Means:  General contractors or owners contracting with unlicensed subcontractors must be cognizant that they will be potentially liable in California to the employees of the unlicensed subcontractors for any unpaid benefits and wages.

3.      Bidder’s Suit for Damages and Injunctive Relief Is Moot When Public Project is Completed, PRN Assocs. LLC v. State, Department of Administration, 766 N.W.2d 559 (WI 2009).

*     What the Court Considered:  The University of Wisconsin solicited Requests for Proposals for the renovation of a building.  Plaintiff was awarded the bid, but a dispute caused the university to cancel the Request for Proposals and issue a second Request for Proposals.  Plaintiff bid on the second Request for Proposals and filed, concurrently, a bid protest for the cancellation of their winning bid from the first Request for Proposals.  Plaintiff was not awarded the second bid and its protest was denied for being untimely.  Plaintiff filed a second bid protest after its second bid was denied.  Plaintiff sought damages for bid preparation and costs or injunctive relief for the award of the contract.

*     What the Court Said:  The court unanimously affirmed that an action for damages or injunctive relief was moot.  The court reasoned that injunctive relief was impossible as the project was completed.  The Court, further, found that awarding damages was improper as the purpose of allowing contractors to file bid disputes was to protect and benefit the public not the individual bidders.  If the public were required to pay a damages award for the value of a contractor’s lost bid, the public would have to pay twice for the project, defeating the policy’s aims of protecting the public.

*     What the Opinion Means:  In contracting with a public entity, it is necessary for any bid disputes to be filed immediately and any injunctive relief sought from a court of law must occur prior to the award and finalization of the contract.

4.      Unambiguous Contract Modification Bars Contractors Claim for Cumulative Impact Damages, Bell BCI Co. v. United States, No. 2008-5087, 570 F.3d 1337 (Fed. Cir 2009).

*     What the Court Considered:  Plaintiff general contractor contracted to build a laboratory building for the National Institutes of Health (NIH).  After nine months the building was ahead of schedule and under cost.  At that point, the NIH entered into a contract modification with the Plaintiff to construct an additional floor.  The modification included a release that stated, “The modification agreed to herein is a fair and equitable adjustment for the Contractor’s direct and indirect costs.  This modification provides full compensation for the changed work, including both Contract cost and Contract time.  The Contractor hereby releases the Government from any and all liability under the Contract for further equitable adjustment attributable for the modification.”  After entering into the modification, the project was completed nearly 20 months late with a contract price overrun of 34 percent.

*     What the Court Said:  The United States Federal Circuit reversed the Federal Claims Court in part, finding that Plaintiff’s cumulative impact claims were unambiguously subject to the release set forth in the modification.  Applying the plain meaning rule, the court found that the language in the release extended to Plaintiff’s cumulative impact claims and that each modification of the contract acted as an accord and satisfaction since each modification increased the project time and compensation.

*     What the Opinion Means:  Clear unambiguous release language in a change order or modification on a government contract will be literally interpreted and contractors must specifically preserve each potential future claim.

5.      A Surety Providing Payment and Performance Bonds for both the Contractor and Subcontractor on the Same Project Cannot Apportion Damages Between Them, First National Insurance Co. v. Cam Painting, Inc., 173 Cal. App. 4^th 1355 (2009). 

*     What the Court Considered:  The same surety, coincidentally, issued payment and performance bonds to the contractor and subcontractor on the same public project.  A supplier of the subcontractor subsequently sued the subcontractor for breach of contract for nonpayment and filed a claim against the contractor’s payment bond as provided by California statute.  The surety paid the claim and sought to allocate the amount of the claim between both the contractor and subcontractor it had bonded on the project.  The trial court agreed with the surety, and split the judgment damages between the contractor and subcontractor.

*     What the Court Said:  The court of appeals reversed the trial court finding that the contractor had no duty to indemnify the surety.  The court reasoned that the claim should have been satisfied solely through the bond issued to the subcontractor and, additionally, to allow a split judgment would negate the purpose of the subcontractor’s bond which was to ensure a subcontractor’s payment of any suppliers’ claims.  The accidental occurrence of having the same surety bond the contractor and subcontractor should not inadvertently obligate the contractor to indemnify said surety.

*     What the Opinion Means:  A surety can only seek indemnification from the responsible party even if it has bonded other entities working on the same project.

Ira Genberg is a Partner at Troutman Sanders LLP in Atlanta, Georgia, and is General Counsel for Associated Owners & Developers (AOD) in McLean, Virginia.  Claiborne Smith is an Associate at Troutman Sanders LLP.  For more information, or if you have any questions, contact us at hlk@constructionchannel.net.