Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Troy Kiber
1. Compensation for Additional Work, Charles T. Driscoll Masonry Restoration Co. v. County of Ulster, 40 A.D.3d 1289 (N.Y.A.D. 3 Dept. 2007).
* What the Court Considered: A contractor agreed to perform renovations on the exterior of a public building. The contract called for all modifications to be in the form of written change orders. After numerous complaints by the owner, the contractor attempted new methods to appease the owner, but never sought a written change order. The owner eventually terminated the contractor, and the contractor sued for compensation for the additional work it had performed.
* What the Court Said: The contractor could not recover for the "additional" work it perform to mollify the owner’s concerns.
* What the Opinion Means: Given its voiced concerns, it was not clear that the owner intended to compensate the contractor for this work. When coupled with the fact that the parties had agreed to other written change orders during this time, but no writing governed this specific work, the Court could not find that the parties had waived the contract’s requirement that all changes be in writing. Also, in performing the additional work, the contractor was merely repeating work contemplated in the contract. This fact precluded recovery on quantum meruit or on under a separate independent contract.
2. Compensation for Additional Work, Young Heating & Cooling, Inc. v. J.O.A. Constr. Co., 2007 WL 1452907 (E.D. Mich. May 15, 2007).
* What the Court Considered: The agreement between a mechanical subcontractor and the general contractor excluded certain work. After numerous discussions, a sub-subcontractor’s bid was presented covering this additional work, and a "Memorandum of Understanding" was issued via e-mail from the owner. The subcontractor, through its subcontractors, completed its work. Rather than pay the amount the subcontractor presented, the owner made a unilateral change order. The subcontractor disputed the amount of the change order and sought compensation according to the Memorandum of Understanding.
* What the Court Said: The Memorandum was not a change to the subcontract, but a distinct contract that the subcontractor could enforce.
* What the Opinion Means: The subcontract itself limited the methods by which it could be altered to a change order or a constructive change directive. The emailed "Memorandum of Understanding" did not qualify as either. However, as it did contain all the essential elements of a contract, and was accepted by performance of the work, it was enforceable as a separate contract.
3. Determining The Scope of Work, S.M. Wilson & Company v. Urban Concrete Contractors, 2007 WL 1423881 (Tex. App. – San Antonio May 16, 2007).
* What the Court Considered: A general contractor solicited bids online via e-bidding. The package on which the subcontractor based its bid included, but was not limited to, two sets of plans then available. The subcontractor, believing that the then-available plans constituted a full set of construction plans, submitted the winning bid. After the project began the subcontractor realized it was expected to perform "additional" work, and sought and obtained assurances from the general contractor that it would be compensated for this "additional" work. When the subcontractor submitted a request for additional compensation, however, the general contractor refused to pay.
* What the Court Said: The alleged oral promise to pay for the "additional" work was unenforceable.
* What the Opinion Means: In order to be enforced, a contract must be supported by consideration. Consideration cannot be doing that which one is already obligated to do. The contract obligated the subcontractor to perform all of the work it now alleged was "additional." While the building plans then-available were incomplete, the agreement itself clearly contemplated performance of all of the site concrete work. Because performance of this work could not constitute consideration, there was no contract obligating the general contractor to pay the disputed amounts.
4. Implying Consent to an Arbitration Agreement, P. McGregor Enters., Inc. v. Denman Bldg. Producers, Ltd., 2007 WL 1201545 (Tex. App. – Amarillo Sept. 17, 2007).
* What the Court Considered: An ownership entity filed suit against a replacement contractor on a hotel project. The contractor answered with a motion to stay the suit and compel arbitration pursuant to the parties contract. The owner’s answer to this demand referred to a number of related ownership entities as respondents to the arbitration, but claimed it was answering "without prejudice" to those parties’ ability to challenge the jurisdiction of the arbiter. The arbitration concluded with only a casual mention of the jurisdictional matter. The respondent’s post-hearing brief was the first occasion where the respondents officially challenged the jurisdiction over the related entities.
* What the Court Said: The related ownership entities, though not parties to the contract calling for arbitration, impliedly consented to arbitrate.
* What the Opinion Means: An agreement to resolve a dispute through arbitration can be implied through a party’s conduct. This is a factual determination. Here, the respondents completed arbitration without formally challenging the jurisdiction and this was sufficient to find an implied agreement to arbitrate.
5. Arbitration and Nonsignatory Subcontractor, In re Cutler-Gallaway Services, Inc., 2007 WL 1481999 (Tex. App. – San Antonio May 23, 2007).
* What the Court Considered: An owner initiated arbitration proceedings against the general contractor for alleged defects in the stonework portion of a project. The contractor voluntarily agreed to participate, but its engineer subcontractor sought to avoid the proceedings, asserting that its contract contained no provision for arbitration.
* What the Court Said: The non-signing subcontractor was bound by the arbitration clause in the agreement between the owner and the general contractor.
* What the Opinion Means: When a principal is bound under an arbitration provision, its agents may be similarly bound. Also, non-signatories that operate under and received the benefits of contracts with valid arbitration clauses may later be estopped from denying the applicability of that clause. Here, as either theory could bind the engineering subcontractor, that entity could not show that it was an abuse of discretion for the trial court to order it to participate in the arbitration.
6. A Surety’s Right to Settle Claims, Fidelity & Deposit Co. of Maryland v. Tri-Lam Co., 2007 WL 1452632 (W.D. Tex. May 15, 2007).
* What the Court Considered: After claims were made on the contractor’s bond, the surety settled the claims and sought to recover based on its indemnity agreement with the contractor. The indemnity agreement stated that the contractor would indemnify the surety "whether or not such liability, necessity or expediency existed."
* What the Court Said: This indemnity agreement granted the surety the right to settle a claim on the bonds without a judicial determination of liability.
* What the Opinion Means: When a surety is granted the right a settle a claim without a determination of liability, that right will be enforced. The reasonableness of the settlement and the duty of good faith and fair dealing are not considerations. The principal is bound to pay the surety the amount the surety paid to settle the claims.
7. Executing a Bond, Samda Inv. Group, LLC v. Western Sur. Co., 651 S.E.2d 152 (Ga. Ct. App. 2007).
* What the Court Considered: The owner of an apartment complex requested and obtained a surety bond securing payment of the water bills for the complex. The owner executed an indemnity agreement in favor of the surety, but never executed the bond. When the owner failed to pay the water bills, the surety did so, and sought indemnity from the owner.
* What the Court Said: The bond was binding upon both the surety and the owner (principal) despite the owner’s failure to sign the bond.
* What the Opinion Means: Because the bond was made at the behest of the owner, acted upon, and honored by the surety, the owner was estopped from denying the bond’s validity. Because the owner had received the benefits of the bond, he could not now deny its existence.
8. Recovering for Negligent Design Against Contractor, EBWS, LLC v. Britly Corp., 928 A.2d 497 (Vt. 2007).
* What the Court Considered: A contractor agreed to construct a creamery for a dairy farmer without a third-party design. The contractor was not an architect and did not retain an architect. The owner sued for various defects, alleging among other things, negligent design and construction.
* What the Court Said: Because the contractor did not hold itself out as a professional architect, it owed no special duty of care to the owner and the owner could not recover purely economic losses for an alleged tort.
* What the Opinion Means: The economic loss rule bars recovery in tort of purely economic losses. A violation of professional duty creates an exception to this rule, because a special duty of care is created by that special relationship. Here, the contractor did not present itself as a provider of a specialized professional service, and did not charge fees commiserate with the services of a professional designer. Accordingly, this was not an exception to the economic loss rule.
9. Measuring Construction Defect Damages, Kennedy v. John Thurmond and Assocs., Inc., 649 S.E.2d 642 (Ga. Ct. App. 2007).
* What the Court Considered: An owner engaged a contractor to repair fire damage to a home. Unsatisfied with the repairs, the owner brought suit, and presented evidence of the cost to repair various aspects of the work. The trial court granted a verdict for the contractor because the owner did not present any evidence of the fair market value of the home after the allegedly faulty repairs.
* What the Court Said: The proper measure of damages is the cost to correct the defects in workmanship.
* What the Opinion Means: Fair market value is relevant to one measure of damages – the difference between a defect-free home and the home in its current state, but it was not necessary to present this evidence. Generally, the proper measure is simply the cost of repair. When the cost of repair outweighs the value of a defect-free home, however, a court can award merely the difference between the as-is home and the defect-free home.
10. Foreclosing a Mechanic’s Lien, Hutto Constr. Co. v. Buffalo Holdings, LLC, 488 F.Supp.2d 1180 (M.D. Ala. 2007).
* What the Court Considered: While a project was ongoing, the owner notified the contractor that he would be mortgaging the property. A few months later, the contractor sued the leasee of the property for unpaid bills. After obtaining a judgment, the contractor filed a lien on the project. The contractor sued the principals of the leasee entity, but did not seek to foreclose upon the lien until two years later. In the interim, the property was foreclosed upon and sold. The contractor sought to enforce its lien against the new owner of the property.
* What the Court Said: Because the contractor did not join the bank that had foreclosed upon the property within six months of filing its suit to foreclose the lien, the new owner took the property free and clear of the lien.
* What the Opinion Means: The bank had obtained an interest in the property prior to the filing of the contractor’s lien, in the form of a mortgage. Thus, the contractor was on notice and required to join the bank in any suit to enforce the lien within six months. Even though the bank had actual notice of the lien when it foreclosed upon the property, the successor in interest took the property free and clear because the contractor did not sue the bank within the required time.
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. Troy Kiber is an Associate at Smith, Gambrell, & Russell, LLP. For more information or if you have any questions, contact us at: firstname.lastname@example.org.