Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Enforceability of Oral Loan Agreements Under Ohio Law, Stonecreek Props. Ltd. v. Ravenna Sav. Bank, 2004 WL 1559725 (Ohio Ct. App. 2004).
* What the Court Considered: A developer approached a bank to obtain financing for construction of a 19-unit condominium project, which was to cost approximately $1.8 million. According to the developer, a bank loan officer orally agreed the bank would finance the entire project. The loan application prepared by the bank was in the amount of $550,000 and was secured by all property used on the project. When these funds were exhausted, the developer sought additional financing from the bank to complete the project. When the bank refused, the developer sued for breach of an oral contract.
* What the Court Said: Because the agreement to finance the entire project was not in writing, the bank was not obligated to finance completion of the project.
* What the Opinion Means: Under Ohio’s statute of frauds, certain loan agreements must be in writing and the terms of such loans are determined solely from the applicable written loan agreement. Because the loan agreement in this case was within the scope of the Ohio statute of frauds, it was not enforceable because it was not in writing. The developer also argued that it was seeking to enforce a promise by the bank to fund the entire project, of which the individual loans were only a part. However, to be enforceable under Ohio law, such option contracts also must be in writing and supported by additional consideration. Here, neither requirement was satisfied.
2. Nonmaterial Breach of Contract as an Excuse for Nonperformance, KC Excavating and Grading, Inc. v. Crane Constr. Co., 141 S.W.3d 401 (Mo. Ct. App. 2004).
* What the Court Considered: During the course of its work, an excavation subcontractor argued that it would be required to excavate more dirt than indicated in the contract documents. The contractor alleged that the subcontractor was not working quickly enough to keep the project on schedule and directed the subcontractor to discontinue excavation until the dispute was resolved. The contractor then terminated the contract and hired another company to complete the excavation. When the contractor refused to pay for a portion of the work, the subcontractor sued for breach of contract. The contractor argued that its obligation to pay had been excused by the subcontractor’s prior breach of the contract.
* What the Court Said: The contractor’s obligation to pay was not excused because the subcontractor’s activities did not amount to a material breach of the contract.
* What the Opinion Means: Under Missouri law, “[a] party cannot claim the benefit of a contract that it was the first to breach, but this rule applies only when the breach is material.” In this case, the contractor alleged that the subcontractor materially breached the contract by walking off the job, not attending to burn pits, and leaving the site early each afternoon, thereby excusing the contractor’s obligation to pay under the contract. Even if these acts violated the contract, however, the contractor failed to establish that such acts constituted a material breach of the contract. Because the subcontractor did not materially breach the contract, the contractor was obligated under the contract to pay for all work performed.
3. Supplier’s Liability for Defective Product, Guidry v. Dwight Manuel, Inc., 877 So. 2d 346 (La. Ct. App. 2004).
* What the Court Considered: A concrete supplier was required by contract to provide concrete with a compression strength of 3000 pounds per square inch (“psi”) for a construction project. After completion of the project, the concrete began cracking, and testing revealed the concrete’s strength to be only 1750 psi. Testimony confirmed that the concrete was weakened because it had been diluted with water at the job site. The project owner sued the contractor, and the contractor filed a third-party claim against the concrete supplier. The jury found the contractor wholly at fault.
* What the Court Said: Because there was sufficient testimony that the contractor was responsible for directing and supervising the pouring of concrete, the jury’s decision was upheld.
* What the Opinion Means: Although the concrete supplier delivered concrete of adequate strength, the contractor argued that the supplier’s duty to provide concrete extended to the pouring of the concrete. However, the contractor admitted that the supplier did not add water to the concrete. Furthermore, expert testimony confirmed that the responsibility for the quality of the concrete once it is poured “shifts to the person who represents the general contractor or the finisher.” Accordingly, the contractor was the sole responsible party at the time the water was added to the concrete.
4. Misinterpretation of Bid Documents as Basis for Bid Rescission, Mid-States Gen. v. Town of Goodland, 811 N.E.2d 425 (Ind. Ct. App. 2004).
* What the Court Considered: A town council requested bids for the renovation of an elementary school. The bid documents provided a space for the “Stipulated-Sum Bid Price,” as well as spaces for certain allowances. The low bidder to whom the contract was awarded did not include the allowances in its stipulated-sum bid price. As a result, the town council subsequently awarded the contract to the second-lowest bidder and sued the low bidder, alleging breach of contract and forfeiture of bond. The low bidder argued that the bid documents were ambiguous.
* What the Court Said: The low bidder was not entitled to a rescission of its bid because the bid documents were unambiguous.
* What the Opinion Means: When read as a whole, the bid documents unambiguously required that the allowances be included in the stipulated-sum bid price. Accordingly, the low bidder breached its contract with the town council, and forfeited its bid bond, by failing to perform the work at its bid price. Although the low bidder argued that no contract had been formed because there was no “meeting of the minds,” the court concluded that the contractor’s bid on the project, “coupled with the unambiguous language of the bid documents, constitutes a manifestation of assent and a contract was formed between [the contractor] and the Town.”
5. Waiver of Contractual Insurance Requirement, Bott v. J.F. Shea Co., 2004 WL 2340016 (5th Cir. 2004).
* What the Court Considered: A joint venture contractor hired a subcontractor on a sewer construction project. Before the subcontract was executed, the joint venture’s contract administrator forwarded to the subcontractor instructions for obtaining insurance coverage. Although the subcontract required the subcontractor to name the joint venture as an additional insured on the subcontractor’s policy, the instructions provided by the contract administrator listed only the majority partner in the joint venture as the additional insured. The certificate of insurance obtained by the subcontractor listed only the majority partner as an additional insured, and this certificate was renewed without objection from the joint venture. After having been found liable for injuries sustained by an employee of the subcontractor, the joint venture contractor sued the subcontractor for breach of the subcontract’s insurance requirement.
* What the Court Said: The joint venture contractor waived the insurance requirement provision of the subcontract.
* What the Opinion Means: Under Texas law, “[w]aiver is an intentional relinquishment of a known right or intentional conduct inconsistent with claiming that right.” Moreover, a party’s “[s]ilence or inaction, for so long a period as to show an intention to yield a known right, is also enough to prove waiver.” In this case, the joint venture waived the insurance requirement by (1) giving erroneous instructions for the procurement of insurance and (2) receiving two non-conforming certificates of insurance without objection. Although the subcontract contained a non-waiver provision, Texas courts do not consider such a provision to constitute conclusive evidence of non-waiver.
6. Release of Mechanic’s Lien Rights Under California Law, Tesco Controls, Inc. v. Monterey Mech. Co., 19 Cal. Rptr. 3d 646 (Cal. Ct. App. 2004).
* What the Court Considered: A city hired a contractor to expand a municipal wastewater treatment plant. In exchange for a March 12, 1999 progress payment, an electrical subsubcontractor on the project executed a release of any mechanic’s lien, stop notice or bond right which might accrue for labor or materials furnished through January 31, 1999. When the progress payment check was returned for insufficient funds, the subsubcontractor filed a stop notice with the city. The subsubcontractor argued that the release applied only to the extent it had received payment.
* What the Court Said: The waiver and release executed by the subsubcontractor was valid as to all amounts owed to the subsubcontractor because it conformed to the requirements of the California Civil Code.
* What the Opinion Means: The California Civil Code provides for a release of mechanic’s lien rights “in exchange for a progress payment for services and materials furnished through the date specified in the release, whether or not [the subcontractor or materialman] receives compensation for all those services and materials.” In this case, if the subsubcontractor’s theory were adopted, the release would be rendered nothing more than a “glorified receipt,” because “’[n]o rights would be released that would not be released by virtue of the payment anyway.” (Emphasis in original.) Although the subsubcontractor had released its right to file a stop notice, however, “it did not waive its rights to pursue compensation for unpaid services and materials under the terms of the contract or as otherwise provided by law or equity.”
7. Government’s Liability for Delayed Approval of New Materials, In re Appeal of AST Analgen und Sanierungstechnik GmbH, ASCBA No. 49969 (2004).
* What the Board of Contract Appeals Considered: The Army hired a contractor to renovate three Army family housing buildings at a base in Germany. The project specifications contained very detailed requirements concerning the thermal insulation system. Although the insulation system most closely resembling the contract specifications was produced by a certain German company, the contractor decided to use another system manufactured by a different company. Because the Army was unfamiliar with the system chosen by the contractor, it delayed several weeks before deciding that the new system complied with the specifications. The contractor subsequently submitted a delay claim as a result of the Army’s failure immediately to approve the chosen system.
* What the Board of Contract Appeals Said: Because the contractor did not stop working while the Army was evaluating the insulation system, the delay claim was without merit.
* What the Opinion Means: During the period in which the Army was evaluating the contractor’s chosen insulation system, the contractor built scaffolding and performed other work in preparation for the installation of the insulation system. Accordingly, the contractor “was not delayed by the Army with respect to the insulation issue” and the contractor’s delay claim was without merit.
8. Application of Arbitration Clause to Nonsignatory, Associated Glass, Ltd. v. Eye Ten Oaks Invs., Ltd., 2004 WL 1835930 (Tex. App. 2004).
* What the Court Considered: An owner sued a general contractor for damages arising out of alleged construction and design defects. The general contractor filed a third-party suit against two subcontractors, seeking contribution. The owner then sued each of the subcontractors directly. The two subcontractors sought to compel arbitration of the owner’s claims on the basis of arbitration provisions appearing in each of the subcontractors’ contracts with the general contractor. The owner argued it could not be bound by the arbitration provisions because it was not a signatory to the subcontracts.
* What the Court Said: Because the owner’s claims relied on the terms of the subcontracts, it was compelled to arbitrate those claims.
* What the Opinion Means: Under Texas law, a “nonsignatory’s claim must seek to enforce the terms of the written agreement containing the arbitration provision in order for the nonsignatory to be bound.” In this case, “[a]ll of the [the owner’s] factual allegations [arose] out of or relate[d] to [the subcontractors’] alleged duties to build and repair the buildings, duties that [arose] from the subcontracts themselves. Thus [the owner] relie[d] on the terms of the written agreement to establish its claims.” Therefore, the owner was compelled to arbitrate its claims despite being a nonsignatory to the arbitration provisions.
9. Liability of General Contractor for Negligence of Independent Subcontractor, Ormsby v. Capital Welding, Inc., 684 N.W.2d 320 (Mich. 2004).
* What the Court Considered: An employee of a steel erection subsubcontractor was injured while attempting properly to align unsecured joists. That employee sued the general contractor, alleging it had retained control of and negligently supervised the project.
* What the Court Said: Because the injured employee failed to prove all four elements of the “common work area doctrine,” the general contractor could not be held liable.
* What the Opinion Means: Although at common law a general contractor was not liable for the negligence of independent contractors and their employees, this rule has since been changed by the Michigan Supreme Court. Under current law, a general contractor can be held so liable if all four elements of the “common work area doctrine” are satisfied. In this case, the injured employee failed to prove two elements of the doctrine: “(3) . . . a high degree of risk to a significant number of workmen (4) in a common work area.”
10. Late Payment Under Construction Change Directive as Breach of Contract, Framingham Heavy Equip. Co. v. John T. Callahan & Sons, Inc., 807 N.E.2d 851 (Mass. App. Ct. 2004).
* What the Court Considered: A contractor hired to renovate a high school contracted with a subcontractor to perform the excavation. When unforeseen soil conditions required far more work than originally anticipated in November 1998, the contractor issued a construction change directive (“CCD”) for the removal of the unsuitable soil. The subcontractor requisitioned payment for this work in December 1998, January 1999, and February 1999, but the owner refused to pay for that portion of the work. On April 30, 1999, the subcontractor demanded payment from the contractor for the CCD work and accused the contractor of having breached the subcontract. The contractor maintained that, under the subcontract, it was not obligated to pay for the work until after it had received payment from the owner.
* What the Court Said: The contractor breached the subcontract by refusing to pay the subcontractor for the CCD work within a reasonable time.
* What the Opinion Means: Neither the subcontract (AIA Document A401) nor the General Conditions (AIA Document A201) contained a “pay when paid” provision. However, “even if the contract were to be viewed as containing ‘pay when paid’ provisions, . . . a CCD was treated specially under the contract documents.” Specifically, the contract documents implied that the contractor had only a reasonable period of time within which it must pay for CCD work. Because the CCD work, which was performed in December, January and February, had not been paid by April 30, the contractor had exceeded this reasonable period. Therefore, the contractor was in breach of the subcontract, and the subcontractor was excused from further performance.
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.