Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Submission of Subcontractor Lien Waivers as Condition Precedent to Final Payment, TA Operating Corp. v. Solar Applications Eng’g Inc., 2005 WL 2401879 (Tex. App. 2005).
* What the Court Considered: A contractor sued an owner based on a legal theory of substantial performance in the construction of a truck stop. Although the owner had issued a certificate of substantial completion, it had withheld final payment because the contractor failed to provide subcontractor lien waivers as required by the parties’ contract.
* What the Court Said: Because subcontractor lien waivers were a condition precedent to full payment, the owner was justified in not making full payment until the contractor provided those waivers.
* What the Opinion Means: Under Texas law, when a construction contract establishes a specific condition precedent for final payment, the condition must be fulfilled before a contractor can make a claim against the owner under the contract.
2. Right to Assert Pass-Through Claims Pursuant to Liquidating Agreement, North Moore St. Developers LLC v. Meltzer/Mandl Architects, 799 N.Y.S.2d 485 (N.Y. App. Div. 2005).
* What the Court Considered: The owner of a delayed construction project sued its architect for breach of contract and professional malpractice. Previously, the owner had executed a liquidating agreement with its general contractor by which the owner admitted liability to the contractor for increased costs, agreed to assert the contractor’s claims against the architect, and agreed to pass through a portion of any recovery from the architect. The architect sought to dismiss the contractor’s pass-through claims because the contractor and architect were not in privity of contract.
* What the Court Said: The liquidating agreement was enforceable, thereby allowing the owner to pursue the contractor’s claims against the architect.
* What the Opinion Means: Liquidating agreements are recognized as “a valid mechanism for bridging the privity gap between owners and subcontractors who sustain damages as the result of the others’ actions.” The liquidating agreement in this case was valid because it contained the three required elements under New York law: (1) the imposition of liability upon a party for a third party’s increased costs, thereby providing the first party with a basis for legal action against the party at fault; (2) a liquidation of liability in the amount of the first party’s recovery against the party at fault; and (3) a provision for the pass-through of that recovery to the third party.
3. Pricing Information as a Trade Secret, Sunbelt Rentals Inc. v. Head & Engquist Equip., LLC, 620 S.E.2d 222 (N.C. Ct. App. 2005).
* What the Court Considered: A construction equipment rental company, having acquired another similar company, sued its competitor and the former employees of the acquired company for misappropriation of trade secrets. Upon learning that their company was being acquired, the employees left the acquired company to work for the competitor, taking with them pricing information from the acquired company.
* What the Court Said: Because the information used by the employees at their new company was information that was costly and difficult to develop, it constituted proprietary trade secrets that were property of the acquiring company.
* What the Opinion Means: Under North Carolina law, business information that qualifies as trade secrets is the property of the company developing that information and may not be used by former employees.
4. Binding Effect of Surety’s Litigation on Principal, ADF Int’l Inc. v. Steelcon Inc., 2005 WL 2396999 (E.D. Mich. 2005).
* What the Court Considered: During the construction of Ford Field, a sub-subcontractor successfully sued the general contractor’s surety on a payment bond. Despite not being a party to that litigation, the general contractor was found to be liable to the sub-subcontractor. The general contractor was then barred from bringing suit against its subcontractor for exposing the general contractor to liability from the sub-subcontractor.
* What the Court Said: Because the general contractor had the same interest in the previous lawsuit as its surety, it was bound by the outcome of that prior action.
* What the Opinion Means: Under Michigan law, a surety “steps in the shoes” of its principal and is allowed to assert all rights and defenses that could have been asserted by the principal. As a result, the principal is bound by the outcome of the surety’s litigation of those rights and defenses.
5. Enforceability of “No Damage for Delay” Clauses Under Nebraska Law, Kiewit Constr. Co. v. Capital Elec. Const. Co., Inc., 2005 WL 2563042 (D. Neb. 2005).
* What the Court Considered: A subcontractor sued its general contractor for delays to the subcontractor’s work arising from sequencing and coordination errors by the general contractor. The court enforced the “no damage for delay” clause in the parties’ subcontract to prohibit the subcontractor’s claim for monetary damages arising from the alleged delay.
* What the Court Said: Despite the general contractor’s failures in scheduling and sequencing of work, the subcontractor was not entitled to recover monetary damages from the general contractor for delay to its work.
* What the Opinion Means: “No damage for delay“ clauses are valid and enforceable under Nebraska law. The only recognized exceptions to enforcement of such clauses are misrepresentation, fraud, and bad faith, none of which was applicable in this case.
6. Tolling of Statute of Repose by Bankruptcy of Contractor, Inco Development Corp. v. Superior Court, 131 Cap.App.4th 1014 (Cal. Ct. App. 2005).
* What the Court Considered: Homeowners sued the developer of their subdivision for defective construction. The developer moved to dismiss the case based on California’s statute of repose, which bars construction defect actions brought more than ten years after substantial completion of the construction. The homeowners argued that the statute of repose was tolled during a period of time that the developer was in bankruptcy.
* What the Court Said: The court dismissed the case because the statute of repose was not tolled during the developer’s bankruptcy.
* What the Opinion Means: Statutes of repose are not tolled by the bankruptcy of a contractor under California law. Accordingly, claims arising from defective construction must be brought within the ten-year statute of repose regardless of such bankruptcy.
7. Enforceability of Judicial Reference Clauses, Trend Homes Inc. v. Superior Court, 131 Cal. App. 4th 950 (Cal. Ct. App. 2005).
* What the Court Considered: Homeowners sued the developer of their subdivision for construction defects in their homes. The developer sought enforcement of “judicial reference” clause in the parties’ home sales contracts, which required such disputes to be submitted to a judicial referee as provided for by California law.
* What the Court Said: Because the judicial reference clause in the sales contracts was not procedurally or substantively unconscionable, it was enforceable and binding on the parties to the contracts.
* What the Opinion Means: Judicial reference clauses, which refer disputes to judicial referees, are enforceable under California law unless those clauses are held to be unconscionable. A contract may be unconscionable if, for example, there is oppression of one party due to unequal bargaining power or an absence of real negotiation between the contracting parties. No such circumstance was found by the court in this case.
8. Defective Work as an “Occurrence” Under Commercial General Liability Policy, Webster Cty. Solid Waste Auth. v. Brackenrich, 617 S.E.2d 851 (W. Va. 2005).
* What the Court Considered: A county waste authority hired a professional engineering firm to upgrade its waste disposal site. When the upgrades failed, the county sued both the engineering firm and its insurance company.
* What the Court Said: Because the claim against the insurance company was based on the engineering firm’s defective work, and defective work did not constitute an “occurrence” under the insurance policy, the waste authority’s claim against the insurance company was without merit.
* What the Opinion Means: Commercial general liability policies are designed to insure against the risk of tort liability from accidents caused by the finished work, not to provide coverage for performance of defective work. In order to recover under such an insurance policy, a claim must be based on an occurrence as expressly defined in the policy.
9. Obligation to Make Full Payment of Arbitration Award, CalFarm Ins. Co. v. Krusiewicz, 131 Cal.App.4th 273 (Cal. Ct. App. 2005).
* What the Court Considered: Homeowners sued an insurance company for failing to pay a judgment the homeowners received against a contractor hired to build retaining walls around their property. During negotiations between the homeowners and the insurance company’s attorney, the attorney represented that the company would pay for all collateral property damage if the homeowners agreed to participate in binding arbitration. After the arbitration, the insurance company refused to pay the full arbitration award to homeowners.
* What the Court Said: Because the homeowners reasonably relied on the attorney’s representations regarding payment for resulting property damage, the insurance company was estopped from denying coverage.
* What the Opinion Means: When parties agree to arbitrate a case and an attorney represents to the opposing party that his client will pay the arbitration award in full, that party is barred from later denying payment of the award.
10. Interpretation of Ambiguous Language in Insurance Policy, 401 Fourth Street Inc. v. Investors Ins. Group, 879 A.2d 166 (Pa. 2005).
* What the Court Considered: An insured party sought coverage under its insurance policy for repairs made to a structural support wall in order to prevent the collapse of a building. The insurance company denied coverage because the building did not actually collapse.
* What the Court Said: The insurance policy encompassed repair to structural walls to prevent collapse because the policy’s language concerning “[r]isk of damage of collapse” was broader than the term “collapse.” If the insurance company wanted to limit coverage to the event of actual collapse only, it could have worded its policy with such specificity.
* What the Opinion Means: Under Pennsylvania law, ambiguous language in an insurance policy is construed in favor of the insured.
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.