Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and David L. Hobson
1. Payment Bond Claim Amount, Sierra Craft, Inc. v. T.D. Farrell Constr., Inc., 2006 WL 3290615 (Ga. Ct. App. Nov. 14, 2006).
* What the Court Considered: A supplier of fire sprinkler pipes provided a notice to contractor, which indicated that its contract price was $20,000. When it was not paid in full, the supplier filed a claim against the payment bond in the amount of $79,629. It also filed a claim of lien against the property in the same amount.
* What the Court Said: The subcontractor’s payment bond claim was not limited by the contract price indicated in the notice to contractor.
* What the Opinion Means: Georgia’s payment bond statute requires that the subcontractor include in its notice to contractor the contract price or anticipated value “if known.” The statute does not expressly provide that a party’s future claim is limited to this amount. Neither does it require that a party update the contractor in the event the contract price or anticipated value changes.
2. Additional Costs for an Unexpected Condition, Barnard Constr. Co. v. City of Lubbock, 457 F.3d 425 (5th Cir. 2006).
* What the Court Considered: Based on the engineer’s data, the bid form for a public pipeline construction project included a line item for rock excavation on only one of the fifteen pipelines. The bid form expressly stated that the engineer’s data was for informational purposes only and provided bidders an opportunity to drill their own test holes. The city also offered a question and answer session prior to bidding. The successful bidder did not drill its own test holes. During construction, it discovered that other pipelines also required rock excavation.
* What the Court Said: The successful bidder could not recover its costs for the additional rock excavation.
* What the Opinion Means: In construing a contract, the court must give meaning to each provision. Although the contract established a unit price for excavation, it also contained a line item for excavation for only one of the fifteen pipelines. In addition, the bidder failed to drill test holes and failed to address the need for additional excavation in the question and answer session.
3. Active Consent to Improvements, R.T.B.H., Inc. v. Simon Prop. Group, 849 N.E.2d 764 (Ind. Ct. App. 2006).
* What the Court Considered: A sporting goods company entered into a lease with the owner of a mall for the express purpose of constructing a sporting goods store. The owner had no interaction with the subcontractors during the course of the project. Following completion of the project, a subcontractor filed a lien on the owner’s interest in the property.
* What the Court Said: The subcontractor could not maintain its lien claim because the owner did not actively consent to the improvements.
* What the Opinion Means: For a lien to attach to real property, the improvements must be made under the authority and direction of the landowner. In fact, the lien claimant must show that the owner actively consented to the improvements. Here, although the owner was obviously aware of the construction, it had no interaction with the subcontractor. Also, the owner received only indirect benefits from the construction in the form of lease payments.
4. Right to Withhold Payment, James Talcott Constr., Inc. v. P&D Land Enters., 151 P. 3d 1200 (Mont. 2006).
* What the Court Considered: The architect on a condominium project withheld approximately $20,000 from the contractor’s payment application. The owner withheld an additional $10,000 on the ground that it suspected the contractor would not return to perform punchlist and warranty work. The contract authorized the architect to withhold payment to the extent reasonably necessary to protect the owner.
* What the Court Said: Because the owner breached the contract, the contractor was not obligated to pay for punchlist and warranty work.
* What the Opinion Means: A party’s material breach of a contract relieves the other party of its obligation to perform further. The contract authorized the architect—not the owner—to withhold payment. The owner breached the contract by withholding the additional $10,000, thereby relieving the contractor of its obligation to perform punchlist and warranty work.
5. Completion of the Work Required, Philadelphia Constr. Svcs., LLC v. Domb, 903 A.2d 1262 (Pa. Super. Ct. Oct. 3, 2006).
* What the Court Considered: A subcontractor stopped work due to the general contractor’s alleged breach of contract. Thereafter, the subcontractor filed a lien on the property.
* What the Court Said: Because the subcontractor admitted that it had not completed its work, its lien claim was invalid.
* What the Opinion Means: Pennsylvania’s lien statute requires that lien claims be filed within four months after completion of the work. Here, the subcontractor admitted that it had not completed its work prior to the filing of its lien claim. Therefore, it did not strictly comply with the lien statute.
6. Statute of Limitations for Breach of Warranty, Carlisle Corp. v. Med. City Dallas, Ltd., 196 S.W.3d 855 (Tex. App. 2006).
* What the Court Considered: Following a roofing renovation in 1991, the manufacturer of the roofing material provided to the owner a 20-year warranty against “premature deterioration to the point of failure”. The roof began to leak in 1991, and leaks continued to appear through 2000. In 2000, the owner hired a consultant to analyze the roof. The analysis revealed premature aging of the roof. The owner’s attorney alerted the manufacturer to the roof deterioration and demanded the manufacturer fulfill its warranty obligations. The manufacturer did not respond, and, beginning in October 2002, the owner replaced the roof. It then sued the manufacturer for breach of warranty.
* What the Court Said: The claim was not barred by the statute of limitations because the breach was not discovered until 2001.
* What the Opinion Means: The four-year statute of limitations on claims for breach of this type of warranty begins to run when the breach is discovered. Here, the owner discovered the breach when the consultant provided its report in 2001 showing that the roof had deteriorated to the point of failure. Although the leaks first occurred in 1991, the owner did not discover until 2001 that the leaks resulted from premature deterioration and not faulty workmanship.
7. Right to Compel Arbitration, F.L. Crane & Sons, Inc. v. Malouf Constr. Corp., 2006 WL 2522795 (Ala. Sept. 1, 2006).
* What the Court Considered: A prime contract for the construction of condominiums required binding arbitration in the event of a dispute between the owner and contractor. The exterior finishes subcontract contained no binding arbitration provision. However, the subcontract stated that it incorporated the terms of the prime contract. When the condominium unit owners sued the contractor, the contractor filed a third-party complaint against the exterior finishes subcontractor. The subcontractor sought to compel arbitration based on the arbitration provision in the prime contract.
* What the Court Said: Because the subcontract controlled disputes between the contractor and subcontractor, arbitration was not mandatory.
* What the Opinion Means: The subcontract only incorporated the plans and specifications of the prime contract. It did not incorporate the prime contract’s arbitration provision. Thus, the contractor was not required to arbitrate its third-party claim against the subcontractor.
8. Lien Claim on Public Property, North Bay Constr., Inc. v. City of Petaluma, 143 Cal. App. 4th 552 (Cal. Ct. App. 2006).
* What the Court Considered: A developer leased land from a city for the purpose of constructing a sports complex. Claiming it had not been paid, the grading contractor filed a mechanic’s lien on the property.
* What the Court Said: Because the project was on public property, the lien claim was dismissed.
* What the Opinion Means: California law provides that liens for labor or supplies on public property are not permitted. A right to impose a lien on public property must be expressly conferred by statute. It did not matter that the city held a quasi-private proprietary interest in the privately developed sports complex.
9. Attorney’s Fees in Lien Actions, Pennington & Assocs., Inc. v. Evans, 932 So.2d 1253 (Fla. Dist. Ct. App. 2006).
* What the Court Considered: After the developer who had leased the property went into bankruptcy, the general contractor filed a lien on the property. The contractor attempted unsuccessfully to foreclose on the lien.
* What the Court Said: Because the owner successfully defended against the lien foreclosure action, it was entitled to receive its attorney’s fees and costs.
* What the Opinion Means: According to Florida’s lien law, the prevailing party in an action to enforce a lien is entitled to recover its reasonable attorney’s fee. In the words of the court, “in a construction lien suit, the award of fees to the prevailing party is mandatory.”
10. Work Performed at the Request of the Owner, Wing Aviation, LLC v. Balmanno, 2006 WL 2439757 (Tex. App. Aug. 24, 2006).
* What the Court Considered: A subcontractor was hired to install exhaust ducts at a paint booth facility at an airport. The owner asked the subcontractor to perform some additional duct work outside the scope of the subcontract. The subcontractor invoiced the owner directly. When the owner failed to pay, the subcontractor sued the owner. The owner argued that it could not be liable to the subcontractor directly but only through a “pass through claim.”
* What the Court Said: Because the work requested by the owner was outside the scope of the subcontract, the owner was liable to the subcontractor directly.
* What the Opinion Means: Whether the owner was directly liable to the subcontractor depended on whether a separate agreement existed between the owner and subcontractor. Here, because the work requested by the owner was sufficiently outside the scope of the subcontract, a distinct agreement between the owner and subcontractor was deemed to have been formed.
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: firstname.lastname@example.org.