Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Disappointed Bidder’s Liability for Attorney’s Fees, Cornell Pump Co. v. City of Bellingham, 98 P.3d 85 (Wash. Ct. App. 2004).
* What the Court Considered: A city requested bids on sewage pumps and other equipment for an upgrade to a pump station. A company, whose bid failed to meet many of the required technical specifications, obtained a temporary restraining order (“TRO”) after it was not named the successful bidder. In its bid protest, the company acknowledged that its bid failed to conform to several of the specification requirements, but argued that “because it did not ‘take any exceptions’ to the specifications in the bid, it would comply with the requirements in its final submittal.” The trial court dissolved the TRO and granted the city’s motion for attorney’s fees and costs incurred in responding to the company’s TRO request.
* What the Court Said: Because the company had no reasonable basis upon which to seek a TRO, it could be compelled to pay attorney’s fees.
* What the Opinion Means: “A trial court may require a party that wrongfully obtains a [TRO] to pay the costs and fees associated with dissolving the order.” In the public bidding context, however, the court cannot look simply to whether the TRO was later dissolved. “Rather, the court must determine whether it was reasonable for the bidder to seek injunctive relief initially.” Here, because the company admitted in writing that its bid failed to conform to the required technical specifications, it had no tenable basis upon which to challenge the city’s bid award.
2. Right to Recover for Extra Work Under Quantum Meruit Theory, N. Clearing, Inc. v. Larson-Juhl, Inc., 688 N.W.2d 784 (Wis. Ct. App. 2004).
* What the Court Considered: As a result of improper staking by a surveyor, approximately seventy percent of a construction site needed to be refilled to raise the elevation. After discussions with the owner’s manager, the grading subcontractor agreed to perform the work necessary to remedy the problem. Consequently, the subcontractor performed significantly more work than had been originally contemplated by refilling, compacting, and regrading the site. The subcontractor later sought to recover from the owner the value of the extra work on an implied contract, or quantum meruit, theory.
* What the Court Said: Because the additional work was not gratuitous, but instead was performed at the owner’s direction, the subcontractor could recover the reasonable value of its work.
* What the Opinion Means: To recover in quantum meruit under Wisconsin law, “there must be sufficient competent evidence in the record which shows that the services were performed at the instance of the person to be charged and that the performer expected reasonable compensation.” Here, the owner participated in discussions regarding excavation changes and extra work, the grading subcontractor’s additional services were accepted by the owner without objection, and the subcontractor was entitled to fair compensation.
3. Unlicensed Subcontractor’s Right to Recover for Unjust Enrichment, Barry v. Pac. W. Constr. Co., 103 P.3d 440 (Idaho 2004).
* What the Court Considered: During a dispute over a subcontractor’s scope of work, a general contractor asked whether the subcontractor held a public works license, as required under Idaho law on all “publics work construction.” When the subcontractor admitted he was unlicensed, the general contractor offered to make the problem “go away” if the subcontractor would perform the disputed work at no additional cost. When the subcontractor refused, the general contractor barred the subcontractor’s crew from the site. The subcontractor sued for breach of contract.
* What the Court Said: The subcontractor could not recover contract damages because its contract was illegal; however, he could recover under a theory of unjust enrichment.
* What the Opinion Means: Because the subcontractor did not hold the requisite public works license, its contract with the general contractor “constituted an agreement to perform an illegal act.” Courts in Idaho will not enforce illegal contracts. Therefore, the subcontractor was not entitled to damages for the general contractor’s breach of contract. However, the subcontractor could recover to the extent the general contractor was unjustly enriched, although it could not recover its lost profits on the unperformed work.
4. Annulment of Liquidated Damages for Sequential Delay, R.P. Wallace, Inc. v. United States, 2004 WL 3088634 (Fed. Cl. 2004).
* What the Court Considered: A contractor was hired to renovate a naval facility, including “replacing all the existing exterior windows. The specifications required the use of historically accurate “true” window muntins that could withstand a wind load of almost 160 miles per hour. Nearly three weeks after the original completion date, the contractor notified the Navy of the impossibility of building the specified windows because the only aesthetically pleasing windows capable of withstanding the specified wind load would contain “false” muntins. The Navy acknowledged its specifications were defective and approved a variance for the muntins. The Navy also instructed the contractor to apply for a time extension. When the contractor failed to do so, the Navy unilaterally approved a 36-day extension. When the project was delayed further due to fabrication and installation problems, the Navy began assessing liquidated damages against the contractor’s invoices.
* What the Court Said: The liquidated damages provision was valid despite the existence of sequential delay.
* What the Opinion Means: The contractor urged the court to follow a previous Supreme Court decision, which ruled that liquidated damages provisions should be annulled where there is sequential delay. The court, however, followed a later Supreme Court case in which it was decided that “the mere existence of a sequential delay does not require a court to annul a liquidated damages provision [unless] . . . the contract documents in question no longer provide a valid reference date which to calculate liquidated damages.” Here, because a reference date could be determined simply by adding the 36-day extension approved by the Navy to the original completion date, the liquidated damages provision remained valid.
5. Arbitration Limitation in a Subcontract, Holt & Holt, Inc. v. Choate Constr. Co., 2004 WL 2809228 (Ga. Ct. App. 2004).
* What the Court Considered: A drywall subcontractor’s contract provided that any dispute would first be resolved by the general contractor. If the subcontractor objected to any decision by the general contractor, it was allowed 30 days within which to commence arbitration. In March and April, the general contractor notified the subcontractor that, unless it immediately remedied its defective performance, the general contractor would hire additional or replacement workers at the subcontractor’s expense. On May 29, the general contractor informed the subcontractor by certified letter of its decision to carry through with the threatened action. Thereafter, the general contractor executed three change orders totaling $67,345. The subcontractor filed a demand for arbitration on November 5.
* What the Court Said: Because the subcontractor failed to commence arbitration within 30 days of the May 29 decision, it was bound by the decision.
* What the Opinion Means: The plain language of the subcontract placed the burden on the subcontractor “to arbitrate any decision made by [the general contractor] or be bound by it.” The subcontractor argued that the May 29 decision was ineffective as a formal decision under the contract because it failed to employ formal terminology. The subcontract did not, however, use any language modifying the word “decision.” Accordingly, the May 29 letter was “a written contractor’s decision within the plain language of the contract.”
6. Clarification of Nonresponsive Bid Under California Law, Pall Corp. v. Orange County Water Dist., 2004 WL 2943822 (Cal. Ct. App. 2004).
* What the Court Considered: Two county districts solicited proposals to provide microfiltration services and equipment in connection with a water reclamation project. The “Invitation to Proposers” included a requirement that the successful bidder warrant that its filtration system was fit for the purpose of treating municipal secondary effluent, including all foreseeable chemicals. One bidder’s proposal included a statement that “the presence of any cationic polymers in the secondary effluent feedwater would void the warranty.” The bidder was informed that this exclusionary language rendered the proposal nonresponsive. The districts allowed the bidder to delete the limitation, then awarded that bidder the contract. When a disappointed bidder sought an injunction against the award of the contract, the trial court granted summary judgment in favor of the districts.
* What the Court Said: Because the deletion of the warranty exception amounted to more than a mere clarification of the bid, summary judgment was improper.
* What the Opinion Means: Under California law, “a bidder determined to be nonresponsive is entitled to notice of that fact and is entitled to submit materials, in a manner defined by the district, concerning the issue of responsiveness.” Thus, a “nonresponsive bidder must be given the opportunity to explain why its bid, as submitted, was, in fact, responsive.” However, a nonresponsive bidder is not entitled to change its bid. Here, the districts allowed the successful bidder to remove from its proposal an exclusion to its warranty “that was central to the entire proposal.” Therefore, a trial was necessary to determine whether the inclusion of the warranty exception affected the amount of the bid or gave the bidder an advantage not afforded other bidders.
7. Definition of “Statutory Employer” Under Colorado Law, Elliot v. Turner Constr. Co., 381 F.3d 995 (10th Cir. 2004).
* What the Court Considered: A general contractor hired to construct a stadium was required to place a temporary pedestrian bridge over a nearby river. The company from which the bridge was leased agreed to provide a site demonstrator for three days during the construction of the bridge. The demonstrator’s responsibilities included studying the bridge’s assembly and overseeing its construction. During the launch of the bridge, the demonstrator observed a subcontractor attempting to remove a nylon strap connecting the bridge to a crane. Fearing that removal of the strap would cause the bridge to fall, the demonstrator crossed the bridge and gave the OSHA all-stop signal. The bridge collapsed, severely injuring the demonstrator. The demonstrator sued the general contractor for negligence.
* What the Court Said: Because the general contractor was a “statutory employer” under Colorado law, it was immune from liability for negligence.
* What the Opinion Means: Colorado’s statutory framework for workers’ compensation provides an injured employee compensation from the employer without regard to negligence and, in return, the responsible employer is granted immunity from common-law negligence liability. The test for a “statutory employer” for purposes of this provision is “whether the work contracted out is part of the employer’s ‘regular business’ as defined by its total business operation.” Here, the general contractor was a “statutory contractor” because its regular business included erecting bridges and, absent the demonstrator’s expertise, the general contractor would have had to hire its own employee to oversee the bridge’s launch.
8. Acceptance of Allegedly Defective Goods Under Georgia Law, Dan J. Sheehan Co. v. Ceramic Technics., Ltd., 605 S.E.2d 375 (Ga. Ct. App. 2004).
* What the Court Considered: A tile supplier provided tile to an installation subcontractor between February 16 and April 4, 2002, then the supplier submitted invoices in the amount of $178,532.32. In a June 18, 2002 letter to the supplier, the subcontractor provided “formal notice” that the tile was defective. The supplier sued to recover an unpaid balance of $54,000.
* What the Court Said: Because the subcontractor failed to reject the tile within a reasonable time of its delivery, the supplier was entitled to full payment.
* What the Opinion Means: Georgia law provides that “[w]here a tender has been accepted: (a) [t]he buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy.” Here, the June 18 notice was not sent in a reasonable time. Further, even if the subcontractor’s letter had been timely and clear, “because the tile remain[ed] installed, such continued use of allegedly defective goods constitute[d] reacceptance of them.”
9. Right to Withhold Retainage for Nonperformance, Stone Excavating, Inc. v. Newmark Homes, Inc., 2004 WL 1753377(Ohio Ct. App. 2004).
* What the Court Considered: A developer hired a paving contractor to install the streets in a subdivision in a series of progressive steps. After each step, the contractor applied for payment. All steps except the last were completed by March 1998. Each time the contractor requested permission to proceed with the final step, the developer declined, citing the need to complete other portions of its work. Finally, the developer stated it would likely be ready to proceed with the final step in October 2001. However, the contractor informed the developer that, due to prior commitments, it would be unable to complete the work at that time. Therefore, the developer completed the work itself. When the contractor demanded it be paid the retainage, the developer refused, accusing the contractor of breaching the contract.
* What the Court Said: Because the developer refused to allow the contractor to complete the work within a reasonable time, it could not withhold the retainage.
* What the Opinion Means: Under Ohio law, “[w]hen the performance period of a contract is undefined, the law implies that the parties intended and agreed that performance will take place within a reasonable time.” Here, the trial court reasonably concluded that the parties intended to complete the contract within two years. Because the contractor was prevented by the developer from completing its work within a two-year period, the contractor could not be liable for breach of contract. Therefore, the contractor was entitled to recover the retainage.
10. Contractor Responsibility for Performing to Specifications, Appeal of M. A. Mortenson Co., ASBCA No. 53394 (2004).
* What the Board of Appeals Considered: A contractor was hired to build a medical facility for the Air Force. The project specifications required the contractor to furnish and install a firestopping system using an Underwriters Laboratories, Inc. (“UL”) listed product that was designed specifically for closing moment frame beam penetrations. However, there was no such UL-listed product, nor was there a drawing detail showing how the moment frame beam penetrations were to be closed. Therefore, the contractor submitted a $54,991 claim for “additional costs to design and install seals at penetrations in moment frame beams,” which was denied by the government.
* What the Board Said: Because no UL listed product existed for sealing the moment frame bean penetrations, the contractor was not required to bear the cost of designing an acceptable system.
* What the Opinion Means: The contractor should have recognized the need for sealing moment frame beam penetrations, but only to the extent that the work could be accomplished by the procurement of an UL-listed firestopping product designed specifically for such purpose. Since no such product existed, the contractor was entitled to an additive change for the cost of designing an acceptable system. However, the contractor was not entitled to recover all labor and material costs associated with sealing the beam penetrations, as it “should have anticipated when it bid the contract that certain labor and material costs would be required to accomplish firestopping.” Only those labor and material costs in excess of what was reasonably anticipated when it bid the contract are recoverable.
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.