Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Troy Kiber
1. Cardinal Changes, Global Eng’g & Constr., LLC v. Merchants Bonding Co., 2007 WL 1752463 (S.D. Ga. June 15, 2007).
* What the Court Considered: A subcontractor agreed to replace six roofs "down to the roof deck." When the prime contractor ordered the subcontractor to remove and replace what the subcontractor considered to be the roof deck itself, the subcontractor asserted that this was a "cardinal change," and abandoned the project. The prime contractor sued the subcontractor, arguing that the parties contracted around the cardinal change doctrine by agreeing that "under no circumstances, relating to a change order, or modification, shall subcontractor....discontinue performance."
* What the Court Said: A cardinal change is a material breach that relieves a contractor from its obligations under the contract.
* What the Opinion Means: The clause at issue did not specify "cardinal change," but only "change order" and "modification." Thus, it was merely an ordinary disputes clause, which did not affect the cardinal change doctrine: The subcontractor could treat a cardinal change as a material breach and abandon the project. The court noted that the prime contractor offered no authority for the position that the parties could contract around the cardinal change doctrine.
2. Duty to Examine Conditions Prior to Beginning Work, United States v. Norquay Constr., Inc., 2007 WL 1839279 (D. Ariz. June 26, 2007).
* What the Court Considered: A subcontractor agreed to install carports in accordance with specifications and contract documents. Those specifications obligated parties to examine subsurfaces and report any detrimental conditions, because commencement would be construed as acceptance of the subsurface conditions. A soil report was compiled before the subcontractor signed its contract, but there was a dispute as to whether or not it was identified in the contract documents. The subcontractor sough recovery for costs associated with "hard dig" conditions associated with the subsurface.
* What the Court Said: The subcontractor was obligated to inspect the subsurface conditions and commencement of work constituted acceptance of those conditions
* What the Opinion Means: The dispute over the soil report was irrelevant in light of the general duty to inspect the site. That duty was reinforced by the specifications incorporated in the contract that explicitly stated that commencement equaled acceptance of the subsurface.
3. Interest on Arbitration Awards, State Dep’t of Corrections v. Flour Daniel, Inc., 161 P.3d 372 (Wash. 2007).
* What the Court Considered: A contractor sought to recover prejudgment interest on an arbitration award against a public entity from the time the award was handed down until it was converted into a judgment.
* What the Court Said: Because the award was not completely fixed until it was entered as a judgment, prejudgment interest was not available.
* What the Opinion Means: A party is entitled to prejudgment interest if the damages awarded are liquidated. Here, there is no argument that the damages were liquidated prior to the award, but the contractor argued that, as of the date of the award, the amount due was certain and interest should be available. The court noted that if this dispute was decided in litigation no prejudgment interest would be available. Also, to allow the recovery of prejudgment interest would permit inappropriate modifications of arbitration awards and ignore the statutory process by which awards are converted to judgments.
4. Applying an Arbitration Provision to a Nonsignatory, Pullen v. Victory Woodwork, Inc., 2007 WL 1847633 (E.D. Cal. June 27, 2007).
* What the Court Considered: The contract between the owner and the prime contractor contained an arbitration provision, but was explicit that it created no contractual relationship with any subcontractor. A subcontractor’s agreement with the prime contractor also contained an arbitration provision. The owner brought negligence and breach of warranty claims against the subcontractor in federal court. In response, the subcontractor sought to compel arbitration.
* What the Court Said: By asserting rights and benefits under the subcontract, the owner was bound by the subcontract’s arbitration provision.
* What the Opinion Means: While there was no explicit agreement between the owner and the subcontractor, a nonsignatory could be bound by ordinary contract and agency principles. Here, the owner was asserting claims associated with the contractual duties of the subcontractor and was thus prevented, or estopped, from avoiding the arbitration provision that subcontract contained.
5. Notice Required Under a Bond, Colorado Structures, Inc. v. Ins. Co. of the West, 167 P.3d 1125 (Wash. 2007).
* What the Court Considered: When a subcontractor fell behind on its work, the prime contractor began supplementing that work, notifying the subcontractor’s bond of the "breaches" and supplementation efforts. The prime contractor did not formally declare the subcontractor in default until after substantial completion, and the surety refused to pay on the bond because of this fact. The bond was a standard AIA A311 that contained the language "if Principal shall promptly and faithfully perform said subcontract; then this obligation shall be null and void, otherwise it shall remain in full force and effect" before describing the surety’s obligations "whenever principal shall be, and declared by oblige to be in default under the subcontract."
* What the Court Said: Because the only condition on the surety’s liability was that the principal "promptly and faithfully perform," the prime contractor was not required to formally declare the subcontractor in default.
* What the Opinion Means: The section of the contract outlining the surety’s obligations "whenever principal shall be, and declared by oblige to be in default under the subcontract," conditioned remedies, but not liability. The bond could have conditioned liability by adding the italicized phrase: "this obligation shall be null and void, otherwise it shall remain in full force and effect, subject , however, to the following conditions...."
6. Project Documents as Trade Secrets, San Jose Constr. v. S.B.C.C., Inc., 155 Cal. App. 4 1528 (Cal. App. 6 Dist. 2007).
* What the Court Considered: In the process of changing jobs between competitors, a project manager copied and retained information concerning pending projects. These documents included budgets, proposals, correspondence between owners and architects, subcontractor bids, estimates, and RFIs and their responses. All of this information had either been generated by or disclosed to third parties. Thus, when sued for misappropriation of trade secrets, the competitor that arguably benefited from luring the project manager and this information away argued that it could not be a trade secret as it possessed no independent economic value.
* What the Court Said: Because the overall compilation of project information was not readily available to competitors, but could be available only through the expenditure of time and money, that compilation could be classified as a trade secret.
* What the Opinion Means: The court considered the length of time it took to create all of the proposals and estimates at issue, and the time-pressures on a contractor to begin work, and decided that the compilation of information was valuable. Even though each component could be independently re-created, the sum of information was not easily duplicated.
7. Waiving a Time is of the Essence Clause, Banks Bldg. Co. v. Malanga Family Real Estate Holding, LLC, 926 A.2d 1 (Conn. App. Ct. 2007).
* What the Court Considered: An owner appealed a finding that it had waived a provision of its contract obligating the builder to complete its work by a specific date. The builder continued to work past the original completion date with no notice from the owner, and the parties also modified their agreement after the contractual date.
* What the Court Said: Because the evidence supported a finding that the "time is of the essence" clause was waived, that finding was upheld.
* What the Opinion Means: A finding of waiver without any evidence would, of course, be clearly erroneous and overturned. Here, however, there was evidence that the owner modified the agreement after the completion date and took no affirmative steps to demand timely performance or withhold monies for work performed after the contractual date. This conduct was "more than mere acquiescence" to the builder completing the work, but an actual relinquishment of the right to demand timely performance.
8. Determining Who is a Subcontractor under the Miller Act, United States ex rel. E&H Steel Corp. v. C. Pyramid, Enters. Inc., 509 F.3d 184 (3d Cir. 2007).
* What the Court Considered: C. Pyramid Enterprises, Inc. ("Pyramid"), hired by the Army Corps of Engineers to build a Hangar, issued a purchase order for custom fabricated structural steel to Havens Design Build ("Havens"). Havens, in turn, contracted with E&H Steel ("E&H") to fabricate the steel and deliver it to the site. Havens prepared shop drawings, designed the connections, and performed some design-assist work, but Pyramid erected the steel itself. While Havens was paid by Pyramid, Havens declared bankruptcy with debts to E&H outstanding. E&H brought suit against Pyramid, asserting entitlement to reimbursement from the payment bond.
* What the Court Said: Because Havens had a substantial and important relationship with the general contractor, it was a subcontractor and not a mere supplier - thus E&H could recover on the bond.
* What the Opinion Means: In order to recover under the Miller Act, a party must have a contractual relationship with the prime contractor or a subcontractor. The test enunciated by the Supreme Court for determining whether an entity is a subcontractor hinges on the "substantiality and importance of [its] relationship with the prime contractor." The complexity of either the materials provided or the project itself is not determinative. Neither is the relative value of the materials provided - here only 7.8% of the total project costs. Only a few subcontracts were issued for this project, and the value of the Havens contract was the largest considering these facts and the detailed communication between Havens and Pyramid, the court was convinced that Havens had a substantial and important relationship qualifying it as a subcontractor.
9. Notice Required Under a Subcontract, Guinn Bros., LLC v. Jones Bros. Inc. of Tennessee, 2007 WL 2874593 (W.D. La. Sept. 26, 2007).
* What the Court Considered: In its agreement with the prime contractor, a subcontractor agreed to provide notice in writing for all claims it alleged were the responsibility of the owner. The subcontract also incorporate the prime contract, which required detailed information on any claim. The subcontractor failed to make adequate notice, but argued that the contractor had actual notice, or that, because time was of the essence in the contract, the Civil Code provided that default was automatic and notice was not required.
* What the Court Said: Notice was required as specified in the Contracts.
* What the Opinion Means: The subcontract governed the relationship of the parties. That contract incorporated provisions of the prime contract, and its notice requirements. The provisions of the Civil Code were "suppletive, not mandatory" and were displaced by the specific notice requirements of the contracts.
10. Recovering Attorneys’ Fees on a Lien Claim, Gale Indus, Inc. v. Trytek, 960 So.2d 805 (Fla. 5th DCA 2007).
* What the Court Considered: While working on a new home, an insulation contractor damaged electrical work. The owner had another entity complete the repair work, and presented the invoice to the insulation contractor for payment. That contractor declined to pay the bill, calling it unreasonably high, and eventually recorded a lien. In the enforcement suit, the owner agreed to the amount of the lien, but counterclaimed for the electrical repair costs. The trial court foreclosed the lien of the contractor, but awarded the homeowner a portion of its costs, leaving that contractor a relatively small judgment. Both parties sought attorneys’ fees as the prevailing party.
* What the Court Said: Because the contractor recovered damages in excess of any counterclaim in its lien foreclosure action, it was entitled to attorneys’ fees as the prevailing party.
* What the Opinion Means: The trial court awarded attorneys’ fees to the homeowner because it found that the only real issue was how much money should be set off against the lien and the homeowner proved its set-off claim. However, when a party actually recovers a judgment on a lien claim in Florida, it is always the prevailing party for purposes of attorneys’ fees.
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: email@example.com.