Cases of the Month

Significant Cases and Decisions Impacting the Construction Industry

By: Ira Genberg and Cory Menees

February 2009

1.      Delay Damages Found to be Direct Damages Recoverable Pursuant to Terms of Contract, Tenn. Gas Pipeline Co. v. Technip United States Corp., 2008 Tex. App. LEXIS 6419 (Tex. App. 2008).

*     What the Court Considered: A project planned for seventeen months took the contractor three years to complete.  The contract between the contractor and owner provided that “indirect, special, incidental or consequential” damages were not recoverable by either party.  The owner sued for damages, including delay and other damages, claiming they were all direct damages.  The jury awarded the owner all damages sought, but the court limited the jury award to those damages related to defective work.  Both owner and contractor appealed.

*     What the Court Said: The owner was entitled to delay damages, as such damages were a direct consequence of the contractor’s delayed completion of the project, which constituted a breach of the contract.  Additional damages sought, like those for lost energy efficiency savings, were not recoverable, as they were consequential damages not necessarily resulting from the contractor’s breach.

*           What the Opinion Means: In Texas, contract provisions limiting recovery to direct damages will be construed to preclude the recovery of damages not arising both “naturally and necessarily” from the breach of contract.

2.      Acceptance Doctrine Remains Viable Defense in Georgia, Bragg et al. v. Oxford Constr. Co., No. S08G1031 (Ga. Feb. 9, 2009).

*     What the Court Considered: A couple filed suit against a road repair contractor following an accident that resulted in the stillbirth of the couple’s daughter.  The couple claimed the accident was caused by the contractor’s negligent performance of repairs, which led to pooling of water in the roadway.  The county for which the repairs were made approved and accepted the contractor’s work prior to the accident, and the contractor asserted the acceptance doctrine as a defense to the claims made against it.

*     What the Court Said: By a 4-3 vote, the Georgia Supreme Court upheld the trial court’s grant of summary judgment on the couple’s claim, agreeing that it was barred by the acceptance doctrine.        

*     What the Opinion Means: In Georgia, contractors may still assert the acceptance doctrine as a defense to negligent construction claims; however, as before, Georgia law recognizes several exceptions to the doctrine.          

3.      Release Functions to Bar Sub’s Claims Against Both Owner and GC, Kenneth Hantman, Inc. v. Whiting-Turner Constr. Co., 2008 U.S. Dist LEXIS 67071 (E.D. Pa. 2008).

*     What the Court Considered: A sub working under a prime contract with the Navy was delayed in the completion of its subcontract work.  Upon finishing its work, the sub executed a final release waiving claims against the Navy, as contemplated by the terms of the subcontract.  The sub later claimed it incurred damages as a result of delays caused by, among other things, an uncooperative Navy inspector; however, the sub had never reported problems with the Navy to the GC.  After making and withdrawing delay claims against the Navy, the sub sought to recover from the GC delay damages it believed were due to it from the Navy.  The GC argued that the sub had no right to recover from the GC, as the sub was due nothing from the Navy. 

*     What the Court Said: Given that the sub’s execution of the final release denied it the right to recovery from the Navy that was a necessary prerequisite to its claim against the GC, the sub’s claim against the GC was dismissed.

*     What the Opinion Means: A claim against a party premised on the success of an underlying claim against another party cannot be asserted where the underlying claim is barred by a release.    

4.      Prosecution for “Theft by Contractor” Results from Disproportionate Payment to Sub, State v. Keyes, 750 N.W.2d 30 (Wisc. 2008).

*     What the Court Considered: Wisconsin’s “trust fund statute” provides that subs must be paid proportionally where the balance remaining on a prime contract is not sufficient to cover the total amount owed to subs.  A criminal action was brought against a GC pursuant to the statute because it paid one of its principals, performing work as a sub, to the exclusion of other subs.  The payment was made despite the fact that, at the time of the payment, the contract balance was not sufficient to cover the amounts due other subs.  The GC claimed the payment to its principal was not a disproportionate payment to a sub, but payment of profit to itself.     

*     What the Court Said: The payment to the principal was held to be a disproportionate payment made in violation of the trust fund statute; however, the court found that the trust fund statute did not preclude GCs from paying themselves profit prior to making the statutorily required proportional payments to subs.   

*     What the Opinion Means: In Wisconsin, a criminal action may be brought against a GC for “theft by contractor” where proportional payments are not made to subs when the contract balance is not sufficient to cover the amounts due the subs.     

5.      Indemnitors’ Agreement to Payment by Surety Precludes Later Bad Faith Attack on Surety’s Decision to Make Payment, Fid.& Guar. Ins. Co. v. Star Equip. Corp., U.S. App. LEXIS 18390 (1st Cir. 2008). 

*     What the Court Considered: Principals of a contractor with an indemnity obligation to the contractor’s surety attempted to avoid their obligation by claiming the surety had made a settlement payment in bad faith.  A settlement memorandum of understanding, to which the principals and surety were parties, resulted from mediation of a dispute between the contractor and owner.  After the surety paid the owner pursuant to the terms of the memorandum, the principals claimed their agreement to the settlement was contingent upon the resolution of a separate dispute they had with the surety and that the payment made by the surety was in bad faith. 

*     What the Court Said:  The principals could not claim the surety acted in bad faith by fulfilling its obligations pursuant to a settlement agreement to which the principals were parties.   

*     What the Opinion Means: Where an indemnitor agrees to a payment by an indemnitee, the indemnitor cannot later argue the payment to have been made by the indemnitee in bad faith.

6.      Contract Provisions Provide Basis for Copyright Protection Afforded Architect’s Work, Thomas M. Gilbert Architects, P.C. v. Accent Builders & Developers,  2008 U.S. Dist. LEXIS 66504 (E.D. Va. 2008).

*     What the Court Considered: A company contracted with an architect for the drafting of plans for the construction of some townhouses.  The contract provided that the plans would remain the property of the architect and were to be used by third parties only with express permission.  The plans themselves contained a copyright notice.  The purchaser of the company that originally contracted with the architect requested changes to the plans, which the architect agreed to make for a fee.  Thinking the fee unreasonable, the purchaser copied the plans, made modifications himself, and provided the modified plans to subcontractors for construction of the townhouses.  The architect sued the purchaser for copyright infringement.               

*     What the Court Said: Provisions in the contract for the drafting of the plans and a copyright notice on the plans made clear that the architect intended to retain ownership of the plans, precluding the purchaser from using the plans pursuant to an implied nonexclusive license.  The purchaser was therefore liable for copyright infringement because he’d copied, modified, and circulated the plans without authorization.     

*     What the Opinion Means: When contracting for the drafting of architectural plans, the contract should make clear who owns and/or holds a license for use of the plans.  Such foresight in contracting will prevent an owner from being held hostage by the drafting architect should modifications to the plans subsequently need to be made.                

7.      No-Damages-For-Delay Provision in Subcontract Frustrates Pass-Through Claim Made Against Government, Harper/Nielsen Dillingham, Builders, Inc. v. United States, 81 Fed. Cl. 667 (2008). 

*     What the Court Considered: A subcontract for work under a prime contract with the Air Force contained a no-damages-for-delay provision.  After the sub was delayed in completing its work, the GC sponsored the sub’s claim against the government.  The government moved for summary judgment on the claim based on the Severin doctrine, which provides that a GC may not sponsor claims against the government for damages for which the GC would not itself potentially be liable.  The government invoked Severin based on the fact that the no-damages-for-delay provision in the subcontract immunized the GC from liability for the damages it sought from the government on its sub’s behalf.       

*     What the Court Said: Summary judgment was granted in favor of the government on the delay-related claims.  As California law provided that the no-damages-for-delay provision was enforceable such that delay damages were not recoverable from the contractor, the Severin doctrine was properly invoked to defeat the claim against the government.

*           What the Opinion Means: The Federal Court of Claims will construe no-damages-for-delay provisions to be enforceable under California law; therefore, the government will effectively enjoy the same protection from subs’ delay claims as is provided GCs by no-damages-for-delay provisions contained in subcontracts governed by California law.

8.      Broad Arbitration Clause Leads Court to Compel Arbitration on All Asserted Claims, Moresy Constructors, LLC v. Burns & Roe Enters., Inc., 2008 U.S. Dist. LEXIS 61847 (W.D. Ky. 2008). 

*     What the Court Considered: A sub-sub on a government project performed its work pursuant to a sub-subcontract containing a broad arbitration provision.  The provision did not specifically preclude the arbitration of any type of dispute.  When the sub-sub filed a suit against the sub and GC asserting several different causes of action, the defendants moved to compel arbitration pursuant to the terms of the arbitration provision.  The sub-sub argued that the arbitration clause did not require arbitration of all of the claims asserted.         

*     What the Court Said: The motion to compel arbitration was granted.  The sub-sub’s argument failed, as the defendants sought arbitration pursuant to a provision which did not specifically preclude the arbitration of any of the sub-sub’s claims.      

*     What the Opinion Means: In Kentucky, a broad arbitration provision will not be read to preclude the arbitration of a specific type of dispute where the provision does not evidence the contracting parties’ desire to limit the provision’s applicability.        

9.      Voluntary Submission to Arbitrator’s Authority Waives Right to Later Have Arbitrability Determined by Court, Envtl. Barrier Co., LLC v. Slurry Sys., Inc., 540 F.3d 598 (7th Cir. 2008).

*     What the Court Considered: A successor to a sub’s interests under a subcontract sued the GC for amounts it claimed the sub was owed.  The successor and GC arbitrated the dispute, and the arbitrator granted an award to the successor, which thereafter sought to confirm the award.  The district court confirmed the award, finding the successor had standing to enforce the subcontract and that the arbitration award was proper.  The GC appealed, claiming it was not obligated to enter into arbitration with the successor.         

*     What the Court Said:  The confirmation was upheld, as the GC’s failure to raise the issue of arbitrability prior to its participation in arbitration amounted to a waiver of its right to have the issue later considered by a court.      

*     What the Opinion Means:  A party’s failure to preserve an objection to the arbitrability of a dispute may prevent the party from later attacking an arbitration award on the basis of arbitration of the dispute having been improper.       

10. Notice Given a Year After the Fact Does Not Constitute “Prompt Notice” Required by Insurance Policy, AXIS Surplus Ins. Co. v. Lake CDA Dev. LLC, 2008 U.S. Dist. LEXIS 69020 (D. Idaho 2008).

*     What the Court Considered: A builder’s risk policy issued to an owner required that the owner promptly notify the insurer of loss or damage that might trigger policy coverage.  The owner hired a contractor to install a retaining wall, the failure of which required the installation of an additional wall at a cost of almost $200,000.  The owner did not notify the insurer of the first wall’s failure until almost a year later.  Before the insurer ever learned of the first wall’s failure, the replacement wall was installed at the owner’s direction.  The insurer argued that it was not liable for the cost of the replacement wall because the owner had failed to comply with the terms of the policy requiring that the owner provide the insurer with prompt notice of events giving rise to potential claims.              

*     What the Court Said:  Summary judgment was granted in favor of the insurer.  Because the owner had not provided prompt notice as required by the policy, the insurer was not required to cover the costs incurred by the owner in replacing the retaining wall.

*     What the Opinion Means: In Idaho, notice given to an insurer a year after the fact will not satisfy a “prompt notice” obligation contained in an insurance policy.  The failure to provide timely notice may free the insurer from a coverage obligation it might otherwise have under a builder’s risk policy.                    

Ira Genberg is a Partner at Troutman Sanders LLP in Atlanta, Georgia, and is General Counsel for Associated Owners & Developers (AOD) in McLean, Virginia.  Cory Menees is an Associate at Troutman Sanders LLP.  For more information, or if you have any questions, contact us at hlk@constructionchannel.net.