Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Subcontractor’s Liability for Improper Payment Arrangement with Project Owner, Environmental Energy Partners Inc. v. Siemens Bldg. Technologies Inc., 2005 WL 2741452 (Mo. Ct. App. 2005).
* What the Court Considered: An HVAC subcontractor on a hospital construction project sued its general contractor and the hospital for breach of contract and to recover on a mechanic’s lien. The subcontractor negotiated an agreement with hospital to be paid for its work in exchange for releasing its lien on the hospital property and defending the hospital against the general contractor’s claims against the hospital in the litigation. The general contractor then sued the subcontractor for tortious interference with general contractor’s contract with hospital.
* What the Court Said: Because the subcontractor lacked justification to cause the hospital to divert the general contractor’s payment to the subcontractor, it had tortiously interfered with the general contractor’s contract with the hospital.
* What the Opinion Means: Subcontractors are entitled to assert mechanic’s liens to protect their payment rights. However, when a subcontractor then strikes a deal with the owner of a project to divert payment away from the general contractor and to the subcontractor, it may be liable for interfering with the general contract and liable to the contractor. Where, as here, the subcontractor’s actions are found to have been reprehensible and unconscionable, a court may award punitive damages to the general contractor.
2. Enforceability of “Pay-if-Paid” Clauses, Richard F. Kline, Inc. v. Shook Excavating & Hauling, Inc., 885 A.2d 381 (Md. Ct. Spec. App. 2005).
* What the Court Considered: A subcontractor sued its general contractor for failing to make payment to the subcontractor for hauling contaminated soil from a project site. The general contractor did not pay the subcontractor because the owner refused to pay the general contractor for the extra cost of the hauling work. The general contractor argued that its refusal to pay the subcontractor was based on a valid “pay-if-paid” clause in the subcontract.
* What the Court Said: The general contractor was obligated to make payment to its subcontractor despite having not been paid for the work by the owner.
* What the Opinion Means: Under Maryland law, in order for a subcontract to shift the risk of nonpayment by the owner from the general contractor to the subcontractor, the contract must specifically state that owner’s payment is a “condition precedent” to payment to the subcontractor. Absent such clear language in this case, the court was reluctant to interpret the subcontract in a manner that forced the subcontractor to forfeit its right to payment.
3. Impact of Breach of Contract on Waiver of Subrogation Clause, S.C. Nestel, Inc. v. Future Constr., Inc., 836 N.E.2d 445 (Ind. Ct. App. 2005).
* What the Court Considered: After a warehouse collapsed during construction by a sub-subcontractor, the general contractor’s risk insurer sued the subcontractor and the sub-subcontractor for breach of contract and negligence. The subcontract between the subcontractor and the general contractor included a waiver of claims clause that put risk of loss solely on the insurer and a clause that prohibited the subcontractor from further subcontracting its work on the project.
* What the Court Said: The insurer could not recover from the subcontractor or sub-subcontractor.
* What the Opinion Means: Under Indiana law, when the clear intent of contract documents is to allocate risk of loss to one party, that intent will survive even a breach of the contract. Accordingly, even though the subcontractor breached its subcontract by further subcontracting its work without permission from the general contractor, because the subrogation of claim provision clearly intended to put all risk of loss on the insurer, it could not recover from the subcontractor or sub-subcontractor.
4. Awarding Design/Build Contracts in Compliance with Competitive Bidding Statute, Sloan v. Dep’t of Transp., 618 S.E.2d 876 (S.C. 2005).
* What the Court Considered: A taxpayer brought suit against the Department of Transportation (“DOT”) for violating the DOT’s own statutory bidding requirements. The DOT had awarded a design/build contract to the lowest bidder; however, the taxpayer alleged the design/build contracting process did not comply with the mandatory Invitation For Bids (“IFB”) process.
* What the Court Said: The award of design/build contracts by the DOT violated the state’s competitive bidding statute.
* What the Opinion Means: When a competitive bidding statute exists for government contracts, South Carolina courts will read the statute strictly to ensure that the bidding process is competitive and non-exclusionary. Three important differences existed in this case between the IFB process and the design/build contract process which made strict enforcement necessary: (1) the design/build project had one contract for both design and build while the IFB had two separate contracts; (2) the design/bid method allowed for subjective evaluation of the bids when making an award so the lowest responsive bidder might not have be selected; and (3) the design/build method might have reduced competition by excluding contractors that did not have design capability.
5. Construction Manager as an Owner’s Agent, Aladdin Constr. Co. Inc. v John Hancock Life Ins. Co., 914 S.2d 169 (Miss. 2005).
* What the Court Considered: Contractors on a mall renovation project sought payment from the project owner after the construction manager misappropriated funds paid into escrow by the owner that were intended to then be paid to the contractors. The owner claimed that the construction manager was solely responsible to the contractors.
* What the Court Said: Even though the contract between the owner and the construction manager indicated that the construction manager was an independent contractor, the construction manager was essentially an escrow agent of the owner, and therefore the owner was liable to the contractors.
* What the Opinion Means: Under Mississippi law, determination of an agency relationship is based upon the actions of the parties and the intentions reflected by those actions, rather than merely the labels given to the parties. As in this case, where a construction manager acts as an agent of the owner, the owner will be responsible for the construction manager’s actions.
6. Entitlement to Prejudgment Interest, Smith-Hunter Constr. Co., Inc. v. Hopson, 616 S.E.2d 419 (S.C. 2005).
* What the Court Considered: A builder brought suit against a homeowner for breach of contract and foreclosure of a mechanic’s lien. Among other damages, the builder sought prejudgment interest on the amount allegedly due to the builder at the completion of the project. The homeowner claimed that prejudgment interest should not be awarded because the total due at project completion was not a sum certain.
* What the Court Said: The builder was entitled to recover prejudgment interest.
* What the Opinion Means: The fact that an amount of money due a party is disputed does not automatically mean that the amount is uncertain. If, as in this case, the sum was capable of being reduced to a certainty at the time the claim arose, a court may award prejudgment interest on that amount.
7. Negligence as an “Occurrence” Under Insurance Policy, Archon Investments, Inc. v. Great American Lloyds Ins. Co., 174 S.W.3d 334 (Tex. App. 2005).
* What the Court Considered: A homeowner sued a general contractor for negligently failing to install requisite flashing on his home, a mistake which resulted in significant water damage. The general contractor’s insurance company sought relief from defending the general contractor, claiming the negligent failure to install the flashing was not an “occurrence” under its insurance policy because the contractor acted intentionally when building the home.
* What the Court Said: The insurance company was obligated to defend the general contractor.
* What the Opinion Means: Under Texas law, an “occurrence” in the context of an insurance policy includes the negligent acts of the insured. Accordingly, since the contractor did not intentionally forget to install the flashing, its negligence was an “occurrence” covered by its insurance policy.
8. Requirement of Arbitrating Claims Without Contractual Arbitration Clause, Questar Homes of Avalon, LLC v. Pillar Constr., Inc., 882 A.2d 288 (Md. 2005).
* What the Court Considered: A condominium association brought claims against a general contractor and its subcontractors and suppliers for negligent construction. The subcontractors had each entered into similar subcontracts that included arbitration clauses, but the suppliers did not have such contract clauses. At the request of some subcontractors, the trial court ordered arbitration for all parties.
* What the Court Said: The suppliers could not be forced to arbitrate their claims.
* What the Opinion Means: Arbitration arises from a contractual agreement between parties. Therefore, parties that have not contractually agreed to arbitration clauses may not be required to arbitrate their claims.
9. Constitutionality of New Hampshire Statute of Repose, Winnisquam Reg’l Sch. Dist. v. Butler Mfg. Co., 880 A.2d 369 (N.H. 2005).
* What the Court Considered: A school district sued a contractor for negligent design and construction of a replacement roof for a school. The contractor defended against the suit by asserting New Hampshire’s eight-year statute of repose, which prohibits claims against a contractor arising from improvements to real property that are brought more than eight years after the improvement. The school district alleged that the statute was unconstitutional.
* What the Court Said: The statute of repose is constitutional and may bar recovery against the contractor.
* What the Opinion Means: The public policy behind statutes of repose is intended to prevent contractors from facing infinite liability for their work. Since that public policy is applied equally in New Hampshire, such statutes are constitutional in that state.
10. Liability for Ultrahazardous Construction Activities, Suire v. Lafayette City-Parish Consol. Gov’t, 907 So.2d 37 (La. 2005).
* What the Court Considered: A homeowner whose home was allegedly damaged during the dredging of a drainage channel sued the city and its contractor and engineering firm for, among other claims, strict liability under a Louisiana statute that imposes absolute liability for the ultrahazardous activity of “pile driving.” The dredging contractor was installing metal sheeting when vibration damage occurred at the house.
* What the Court Said: The defendants could not be held liable under the absolute liability statute.
* What the Opinion Means: A party will not be held strictly liable under a Louisiana ultrahazardous activity statute unless that party was performing the specifically named act in that statute. In this case, the court determined that the statute was inapplicable because the installation of metal sheeting by the contractor was not “pile driving.”
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