Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and David L. Hobson
1. Owner’s Inspection Requirement, Memphis-Shelby County Airport Auth. v. Ill. Valley Paving Co., 2006 WL 2385300 (W.D. Tenn. Aug. 17, 2006).
* What the Court Considered: A contract for the extension of a runway obligated the owner to inspect, test, and approve all materials used in the work. The contract further provided that any work performed with unapproved materials shall be at the contractor’s risk. The owner nor its engineer inspected the underground airport lighting cable installed on the project. The owner eventually sued the contractor for installing nonconforming cable.
* What the Court Said: The contractor was not relieved of its duty to install the specified cable by the owner’s failure to inspect.
* What the Opinion Means: The goal of the court in interpreting a contract is to ascertain the intent of the parties. Here, according to the express terms of the contract, the owner’s breach of its duty to inspect did not relieve the contractor of its obligation to install conforming materials.
2. Recovery of Consequential Damages, Dynamic Air, Inc. v. Downey, Inc., 2006 WL 2257004 (E.D. Wis. Aug. 7, 2006).
* What the Court Considered: The general contractor accepted a supplier’s bid to supply a pneumatic conveying system as part of an expansion of a wastewater treatment plant. A warranty provision in the supply contract provided that the contractor’s exclusive remedy for a defect in the system was replacement of the defective part. The warranty provision also explicitly barred the contractor from seeking consequential damages. During construction, an issue arose over the final sizing of the ceramic lined components of the system. Eventually, the owner agreed to the installation of temporary piping, which would subsequently be replaced by the ceramic lined components. The contractor asserted consequential damages in the form of backcharges related to the supplier’s delay in providing the final components.
* What the Court Said: The warranty did not prevent the contractor from seeking consequential damages for the supplier’s delay in providing the final components.
* What the Opinion Means: The general rule in interpreting contracts is that the meaning of a particular provision is to be ascertained with reference to the contract as a whole. Although the warranty provision appears to prevent the contractor from recovering consequential damages, the provision is expressly limited to cases in which there is a defect or failure of a part of the system. Here, the contractor’s consequential damages claim was based on the supplier’s delay.
3. Assignment of Rights to Surety, Handex of Maryland, Inc. v. Waste Mgmt. Disposal Svcs. Of Maryland, Inc., 2006 WL 3091443 (D. Md. Nov. 1, 2006).
* What the Court Considered: The contractor and its surety, who provided payment and performance bonds on behalf of the contractor, entered into an Indemnity Agreement. The Agreement assigned to the surety all claims the contractor may have in the event of a breach or default. Subsequently, the surety and owner entered into a performance bond agreement. This agreement incorporated by reference the prime contract, which contained an express prohibition against the contractor’s assigning any of its rights without approval of the owner. When the contractor filed for bankruptcy, the surety sought to pursue the contractor’s claims against the owner.
* What the Court Said: The assignment provision in the Indemnity Agreement is valid despite the anti-assignment provision in the prime contract.
* What the Opinion Means: When faced with apparently contradictory provisions, the court must interpret the provisions together to effectuate their general purpose. Considering the nature of the tripartite relationship between owners, contractors, and sureties, the court found that the purpose of the anti-assignment provision in the prime contract is to prevent a stranger to the transaction from taking over the rights or duties of the contractor without the owner’s approval. The surety is not a stranger to the transaction, and therefore the assignment clause in the Indemnity Agreement is not subject to the anti-assignment provision in the prime contract.
4. Payment Bond Requirement of Contract Relationship, Gateco, Inc. v. Safeco Ins. Co. of Am., 2006 WL 2077011 (E.D. Pa. July 24, 2006).
* What the Court Considered: A payment bond issued on behalf of the contractor covered any entity with a contractual relationship with the contractor or one of its subcontractors. A sub-subcontractor hired to supply and install fences contracted with a corporate entity related to yet distinct from a subcontractor on the project. Specifically, the subcontractor and the related entity shared an address and some of the same employees and equipment.
* What the Court Said: Because the sub-subcontractor had no contract relationship with a subcontractor on the project, it could not recover on the payment bond.
* What the Opinion Means: The sub-subcontractor argued that the subcontractor and the related entity should be treated as one under the alter ego theory. This theory holds that two related entities should be treated as one where the controlling corporation ignores the separate status of the controlled corporation and so dominates and controls its affairs that its separate existence is a mere sham. Here, the only evidence presented by the sub-subcontractor to support this argument was that the two entities shared an address and some employees and equipment. The court deemed this evidence insufficient to justify its treating the two distinct entities as one.
5. Enforcement of Liquidated Damages Provision, Woodburn Constr. Co. v. Encon Pacific, LLC, 2006 WL 2401242 (W.D. Wash. Aug. 18, 2006).
* What the Court Considered: A supplier of precast concrete wall panels failed to deliver panels to the project in a timely fashion, thereby delaying the work of the erection subcontractor. To avoid the possibility of its being charged for delays asserted by the contractor on behalf of the erection subcontractor, the supplier agreed to take over the erection work at no extra charge. The contractor and supplier executed an amendment to the supply contract memorializing this agreement. The amendment also provided for liquidated damages in the event the panels were not erected by October 11, 2004. When the contractor attempted to recover liquidated damages, the supplier argued that the amendment was unenforceable for lack of consideration.
* What the Court Said: The contractor’s forbearance from asserting a pass-through claim from the erection subcontractor constituted consideration for the amendment.
* What the Opinion Means: The supplier argued that its promise to take over the erection of the panels was not supported by consideration from the contractor because the amendment added no value to the supply contract. Also, the supplier learned that the contractor and erection subcontractor had already settled all potential claims. The court disagreed, noting that it is not essential, to constitute consideration, that the potential claim be indisputable or legally certain. Although the validity of a potential pass-through claim from the erection subcontractor was doubtful, the mere existence of a possibility of recovery was sufficient to support the supplier’s promise to complete the erection.
6. Definition of Construction Agent, Henifin Constr., LLC v. Keystone Constr., 145 P.3d 402 (Wash. Ct. App. 2006).
* What the Court Considered: During construction, the general contractor signed several change orders increasing the price of the earthwork subcontract. The owner did not approve these change orders. The subcontractor filed a lien on the property in the amount of the change orders.
* What the Court Said: Because the general contractor was the owner’s construction agent for the purpose of establishing liens, the lien was valid and enforceable.
* What the Opinion Means: Washington’s lien statute gives a lien to any subcontractor performing work at the instance of the owner or the owner’s construction agent. “Construction agent” is defined to include any registered or licensed contractor having charge of any improvement to real property. The general contractor here was deemed to be the construction agent of the owner. The lien was therefore valid, irrespective of the fact that the prime contract required the contractor to obtain the owner’s approval before authorizing any extra work.
7. Recovery of Lost Profits, Scenicland Constr. Co. v. St. Francis Med. Ctr., Inc., 936 So.2d 247 (La. Ct. App. 2006).
* What the Court Considered: The contractor was hired to renovate 223 patient rooms at a medical center. After the completion of 90 rooms, the owner required immediate work on its rehabilitation unit, which was performed by the contractor. When the original room renovation project was not resumed, the contractor sued for lost profits on the remaining work.
* What the Court Said: Based on the contractor’s expert witness testimony, the court awarded approximately 33 percent of the gross contract amount as lost profits.
* What the Opinion Means: Lost profits are recoverable where the amount can be proved with reasonable certainty. Foreseeable profits may be considered as a measure of damages where there is no direct evidence of the exact extent of loss. The court sided with the contractor’s expert, who testified that, had the contractor been allowed to finish the work, it would have realized a profit of 33.6 percent. The court rejected the testimony of the owner’s expert, who challenged the contractor’s expert’s testimony on the basis that the average gross profit percentage in the construction industry is between 4.2 and 9.3 percent.
8. Constructive Acceleration, Murdock & Sons Constr., Inc. v. Goheen Gen. Constr. Inc., 461 F.3d 837 (7th Cir. 2006).
* What the Court Considered: A masonry subcontractor on a prison construction project estimated that its laborers could lay 150 blocks per day. From the beginning, however, its masons could lay only 50 blocks per day. Eventually, the subcontractor notified the contractor that it wanted more time and more money. When this request was denied, the subcontractor walked off the project. The subcontractor brought a claim for constructive acceleration, claiming it was entitled by the terms of the contract to an extension.
* What the Court Said: The claim failed because the subcontractor failed to prove that the delay was due to a cause beyond its control.
* What the Opinion Means: A claim for constructive acceleration arises when the owner requires the contractor to adhere to the original contract deadline even though the contract provides the contractor with periods of excusable delay. To recover on this claim, the contractor must prove that it experienced an excusable delay. Here, the subcontractor presented no evidence that the slow pace of its masons was due to a cause beyond its control.
9. Promissory Estoppel, Hanson Aggregates, Inc. v. Roberts & Schaefer Co., 2006 WL 2285575 (N.D. Tex. Aug. 9, 2006).
* What the Court Considered: A contractor was hired to design and construct a plant facility. Because the project was delayed and fraught with deficiencies, the owner terminated the contract and removed the contractor from the project. The owner subsequently sued the contractor. The contractor filed a number of counterclaims, including one for promissory estoppel based on the owner’s promise to pay the contractor.
* What the Court Said: The contractor can proceed on its counterclaim for promissory estoppel if the contract is deemed to be unenforceable.
* What the Opinion Means: To establish a claim for promissory estoppel, the contractor must show that the owner made a promise, that the owner could foresee that the contractor would rely on that promise, and that the contractor substantially relied on the promise to its detriment. Here, even if the contract is deemed to be unenforceable, the fact that it was written and signed is evidence that the owner made a promise to pay the contractor. Furthermore, it was foreseeable that the contractor would rely on that promise.
10. Enforcement of Arbitration Provision Under Federal Law, McKay Bldg. Co. v. Juliano, 2006 WL 2037161 (Ala. July 21, 2006).
* What the Court Considered: Following a home remodeling project, the owner sued the electrical contractor. The contractor sought to compel arbitration of the claims, citing an arbitration provision in the parties’ contract.
* What the Court Said: Because the transaction involved interstate commerce, the arbitration provision was enforceable under the Federal Arbitration Act.
* What the Opinion Means: The Federal Arbitration Act, which provides for the enforceability of arbitration agreements, is applicable if the transaction at issue involves interstate commerce. A transaction is deemed to involve interstate commerce if it uses the channels of interstate commerce. Here, although the contractor and owner were both from Alabama, the contractor testified that it had procured lumber from Oregon and light fixtures from Massachusetts.
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. David L. Hobson is an Associate at Smith, Gambrell, & Russell, LLP. For more information or if you have any questions, contact us at: firstname.lastname@example.org.