Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Economic Loss Rule as Bar to Owner’s Tort Recovery, Corporex Dev. & Constr. Mgmt. Inc. v. Shook Inc., 835 N.E.2d 701 (Ohio 2005).
* What the Court Considered: A project owner sued a subcontractor for negligence and breach of implied warranty for the subcontractor’s failure to perform under its subcontract.
* What the Court Said: The owner could not recover tort damages, based on claims such as negligence, from the subcontractor.
* What the Opinion Means: The “economic loss rule,” which stems from the recognition of the balance between contract and tort law, bars recovery of tort damages for purely economic loss due to a breach of contract. Here, because the owner suffered only economic damages, its remedy was through contract law, which meant pursuing recovery from the general contractor rather than the subcontractor.
2. Wrongful Termination of Contract as a Waiver of a Contractual Arbitration Clause, Aberdeen Golf & Country Club v. Bliss Constr. Inc., 2005 WL 2138798 (Fla. Dist. Ct. App. 2005).
* What the Court Considered: A country club terminated a construction contract in response to an adverse decision by the architect on the contractor’s claim for increased time and compensation under a contractual alternative dispute resolution framework. When the contractor sued the country club for its early termination of the contract, the country club sought to compel arbitration.
* What the Court Said: The country club waived its right to compel arbitration of the dispute when it wrongfully terminated the contract.
* What the Opinion Means: Because the country club’s actions constituted both a waiver of the right to arbitrate and anticipatory repudiation of the contract, the contractor was relieved of its contractual obligation to arbitrate the dispute. The country club should have continued to make previously approved progress payments and proceeded with the dispute resolution procedure as set forth in the contract.
3. Contractual “As Is” Clause as a Bar to Warranty Claim, Warner v. Design and Build Homes Inc., 114 P.3d 664 (Wash. Ct. App. 2005).
* What the Court Considered: When the purchasers of a new home discovered structural damage and significant mold growth in the house, they brought suit against the builder for breach of the implied warranty of habitability. The purchasers also sued a subcontractor for breach of the implied warranty of workmanlike construction.
* What the Court Said: The purchasers could not recover from the builder or the subcontractor.
* What the Opinion Means: Under Washington law, contractual “as is” clauses are valid and enforceable. Here, because the purchasers bought their house subject to such a clause, they effectively waived any implied warranties of habitability and had no remedy against the builder. The court also held that the purchasers could not sue the subcontractor because they were not third-party beneficiaries to the subcontract.
4. Compliance with Contractual Notice Requirements as Prerequisite to Recovery of Additional Damages, M.J. Lee Constr. Co. v. Oklahoma Transp. Auth., 2005 WL 3289416 (Okla. 2005).
* What the Court Considered: A government contractor submitted to the government a formal claim for delay damages. The contractor later sued the government for an amount greater than the damages it originally submitted and sought additional compensation for suspended work and a changed scope of work. The government argued that it was not liable for damages from suspended or changed work, since those damages were not submitted in the contractor’s original claim as required by the contract’s notice provisions.
* What the Court Said: The contractor could not recover for damages attributed to suspension of work or changed work.
* What the Opinion Means: Even though the court expressed hesitancy in allowing a contractual claim procedure to restrict the court’s ability to calculate damages, it relied on the specifications of the contract which called for examination of the contractor’s formal claim in determining the amount to which the contractor was entitled.
5. Enforceability of “Pay-if-Paid” Clauses to Relieve Contractor’s Obligation to Make Payments to Subcontractors, Welsbach Elec. Corp. v. MasTec North America Inc., 23 A.D.3d 639 (N.Y. App. Div. 2005).
* What the Court Considered: When an owner became insolvent and failed to pay its prime contractor for electrical work, the prime contractor in turn failed to pay its subcontractor. The subcontractor sued the prime contractor to recover for its unpaid work. The prime contractor denied liability based on a “pay-if-paid” clause in its subcontract.
* What the Court Said: The contractor was obligated to pay its subcontractor.
* What the Opinion Means: The enforceability of “pay-if-paid” clauses remains an issue of disagreement among courts, including courts within New York. Here, the court determined that the “pay-if-paid” clause violated New York public policy because it effectively negated the subcontractor’s mechanic’s lien rights. Even though another New York court had recently upheld a “pay-if-paid” clause under Florida law, this court was not convinced by the logic of that court and instead ordered payment to the subcontractor.
6. Enforceability of Alleged Verbal Promise for a Change Order, Bd. Of School Comm’rs of Mobile Cty. v. Coastal Builders Inc., 2005 WL 3445986 (Ala. Civ. App. 2005).
* What the Court Considered: The winning bidder on a school construction contract sued the school board to recover the cost of a change order for a scope of work that was not included in its bid. The contractor alleged it had reached an agreement with the board to be paid for an HVAC control system that it had accidentally omitted from its bid, but the school board said it had only agreed to consider making such payment.
* What the Court Said: The board was not obligated to pay the contractor for the change order.
* What the Opinion Means: Alabama’s competitive bid laws precluded the board from being required to pay for the cost of the inadvertently omitted HVAC control system. Agreements reached outside of the competitive bid process on government projects are not enforceable under Alabama law. If the parties had modified the actual contract, however, the modified contract would have been enforceable.
7. Subcontractor’s Right to Recover for Delay Caused by General Contractor, Modern Mosaic Ltd. v. Sweet Assoc., 23 A.D.3d 880 (N.Y. App. Div. 2005).
* What the Court Considered: A subcontractor hired to install a building’s exterior sued its general contractor, seeking to recover damages for delayed start of its work. The subcontractor was not able to start its work until approximately four months later than it had planned due to delays caused by the general contractor. The subcontractor also sought to recover the costs of transporting and storing its building materials until it was allowed to commence the work.
* What the Court Said: The general contractor was entitled to postpone the subcontractor’s work with no liability for delay damages.
* What the Opinion Means: Because the parties’ subcontract stated that the subcontractor would perform its work “in accordance with the project schedule developed by [the general contractor],” and the subcontract also gave the general contractor the right to change the schedule without limitation, the subcontractor’s delay claim did not have merit.
8. Engineer’s Duty of Care to Contractor, Fru-Con Constr. Corp. v. Sacramento Mun. Util. Dist., 2005 WL 1865499 (E.D. Cal. 2005).
* What the Court Considered: The contractor on a power plant construction project sued the engineering firm that designed the plant for the city. The contractor alleged that it incurred delay damages allegedly caused by defective design. The engineering firm moved to dismiss the case, claiming it did not owe the contractor a duty of care.
* What the Court Said: The contractor was prohibited from recovering damages from the engineering firm.
* What the Opinion Means: The engineering firm did not owe a duty of care to the contractor. Instead, the contractor had a remedy against only the city for any delay damages that it incurred.
9. Enforceability of Mandatory Arbitration Clauses in Contracts for Architectural Services, Ragucci v. Prof’l Constr. Serv., 803 N.Y.S. 139 (N.Y. App. Div. 2005).
* What the Court Considered: The purchaser of a new home sued an architectural firm for malpractice and breach of contract. The architectural firm sought to compel arbitration of the dispute.
* What the Court Said: The purchaser could not be compelled to arbitrate the dispute.
* What the Opinion Means: Under New York law, design professional services fall within the scope of consumer protection laws. Accordingly, a state statute prohibiting use of mandatory arbitration clauses in contracts for the sale of goods applied to the contract for architectural services. Because the statute broadly defined consumer goods to include architectural services, the court could not compel arbitration.
10. Recoverability of Delay Damages Arising from Incomplete Design, Dugan & Meyers Constr. Co. v. State of Ohio Dep’t of Admin. Serv., 834 N.E.2d 1 (Ohio Ct. App. 2005).
* What the Court Considered: The prime contractor on a campus building project sought to recover damages from the owner for breach of contract and delay. The contractor’s claims were based in significant part on its assertion that the original design documents provided by the owner were inadequate and unbuildable, as evidenced by the large volume of requests for information that the contractor had to submit during the project.
* What the Court Said: The contractor could not recover delay damages from the owner.
* What the Opinion Means: Under Ohio law, delay damages caused by unclear and incomplete design generally are not recoverable under the owner’s implied warranty of design adequacy. Also, because the design defects in this case did not actually delay proper construction of the project, the contractor could not recover delay damages.
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: email@example.com