Cases of the Month

Significant Cases and Decisions Impacting the Construction Industry

By: Ira Genberg and Cory Menees

January 2009

1.      Disappointed Bidder Lacks Standing to Sue for Alleged Violations of Bidding Procedures, EBI-Detroit v. City of Detroit, 279 Fed. Appx. 340 (6th Cir. 2008).

*     What the Court Considered: A low-bidding contractor not awarded a contract after being found non-responsible asserted a breach of contract claim against the City of Detroit, claiming the City, sewer department, and certain City officers and employees breached a contract by rejecting its bid.  The contractor had been notified that it was the low bidder but was informed that award of the contract was contingent on the contractor being found responsible.    

*     What the Court Said: A “unilateral hope” of winning a contract does not give rejected bidders standing to sue in contract for violations of bidding procedures.  A bidder gains standing to bring a contract action only after being awarded a contract.        

*     What the Opinion Means: Under Michigan law, when contract-awarding officials have broad discretion to determine the contract winner, losing contractors will be found to lack the standing necessary to sue in contract for irregularities in bidding procedures.          

2.      Bond Claim Delayed by Bankruptcy Court Ruling Rejected as Untimely Filed, In re Contractor Tech, Ltd., 529 F.3d 313 (5th Cir. 2008).

*     What the Court Considered: A contractor paid a supplier for materials by check, but the checks failed to clear before the contractor filed for bankruptcy.  That being the case, the bankruptcy court deemed payments for the materials to be post-petition transfers and forced the supplier to return the payments to the contractor’s bankruptcy trustee.  Almost immediately thereafter, the contractor sought payment from the surety, initiating a bond claim by sending notice and a statement of account to the surety, as required by Texas law.  The surety argued that the contractor failed to perfect its bond claim, as the surety was not given notice of the claim by the fifteenth (15th) day of the third month following the month during which the materials were delivered to the contractor, as statutorily required. 

*     What the Court Said: Despite the fact that the supplier did not need to make a bond claim until the bankruptcy court avoided the contractor’s payment to the supplier, the court still ruled the claim to be statutorily barred as untimely filed.

*     What the Opinion Means: In Texas, inflexible application of the bond act (McGregor Act) may frustrate bond claims, the filing of which is delayed by a court ruling.  

3.      Inadequate Identification of Document Incorporated into Subcontract by Reference Costs Contractor Choice of Forum, Livers Bronze, Inc. v. Turner Constr. Co., No. WD68692, 2008 Mo. App. LEXIS 840 (Mo. Ct. App. 2008).

*     What the Court Considered: A subcontract provided that it was to be governed by the terms of the prime contract, which was identified in the subcontract as an agreement between the owner and GC executed on a date certain.  When the sub sued the GC, the GC sought to enforce the forum selection clause contained in an agreement the GC claimed was the prime contract.  Although the agreement presented by the GC as the prime contract did not meet the description of the prime contract contained in the subcontract, the trial court found the agreement to be incorporated by reference into the subcontract and granted the GC’s motion to dismiss based of forum in the court being improper.  The contractor appealed. 

*     What the Court Said: Reversing the grant of summary judgment, the appellate court ruled that the subcontract did not describe the incorporated prime contract with sufficient detail to allow it to be identified.  That being the case, the trial court erred by enforcing the forum selection clause in the agreement presented to it by the GC as the prime contract.     

*     What the Opinion Means: Special caution must be exercised where documents incorporated into an agreement by reference affect the procedural and substantive legal rights of the parties to the agreement.  To avoid a situation like that encountered by the contractor in Livers Bronze, it is best not to incorporate by reference, but to include terms affecting such rights in the agreement itself.    

4.      Agreement to Enter into Future Contract Rendered Unenforceable by Statute of Frauds, Hartford Ins. Co. v. C. Springs 300, L.T.D., 2008 Tex. App. LEXIS 3939 (Tex. Ct. App. 2008). 

*     What the Court Considered: An owner seeking to finance the construction of an apartment complex through a HUD program was required by HUD to obtain a “certificate of completion” or “bondability letter” from the contractor selected to construct the complex.  The contractor contacted its surety and was provided with a letter noting that the surety “stood ready” to issue performance and payment bonds.  Two months after issuance of the letter, following the contractor’s loss of over a million dollars, the surety informed the contractor that bonds would no longer be issued.  The owner was forced to find another contractor at a contract cost above that bid by the original contractor.  The owner thereafter filed suit against the original owner, its surety, and its surety’s agent, claiming that the surety had breached a contract represented by the bondability letter by later refusing to issue bonds.  The owner won $4.7M at trial, and the surety appealed.         

*     What the Court Said:  The jury’s decision was reversed, as the bondability letter was subject to the statute of frauds as an agreement to enter into a future contract.  As the agreement did not set out the essential terms of the future contract, it was rendered unenforceable by the statute of frauds.   

*     What the Opinion Means: In Texas, application of the statute of frauds to an agreement to enter into a future contract will prevent enforcement of the agreement unless it sets out the essential terms of the contract, including consideration.

5.      Owner’s Alleged Selective Communication of Material Facts Bearing on Contractor’s Performance Gives Rise to Suit, Los Angeles Unified School Dist. v. Great American Ins. Co., 78 Cal. Rptr. 3d 99 (Cal. App. 2d Dist. 2008).

*     What the Court Considered: The Los Angeles school system (owner) hired a contractor to finish a project begun by another.  The owner provided the replacement contractor with a “pre-punch list” identifying work to be corrected and yet to be done on the project.  The list made clear that it was not the final inspection punch list, and the contract provided that the contractor was to both complete items on the pre-punch list and correct deficiencies in work performed by the prior contractor.  A dispute arose between the owner and contractor about the contractor’s responsibility for work not on the list.  The owner paid amounts above the contract price demanded by the contractor and later filed suit for recovery of those amounts.  The owner won summary judgment on its claims and the contractor’s cross-claims, and the court ordered the contractor to return all amounts above the contract price paid by the owner.  The contractor appealed the grant of summary judgment, arguing that the owner had breached the contract by misrepresenting the scope of work to be performed.                

*     What the Court Said: Summary judgment on the contractor’s breach of contract claim was reversed.  As a jury could find the owner failed to disclose material facts bearing on the contractor’s bid for and work on the project, summary judgment was improper on the cross-claim given that it was based on a failure to disclose.    

*     What the Opinion Means: In California, if a party can be shown to have possessed and failed to communicate knowledge of material facts bearing on contract performance, a breach of contract action based on non-disclosure of information may survive summary judgment.  The plaintiff does not have to show that the defendant intentionally concealed facts.            

6.      Potential Liability under False Claims Act Limited, Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (U.S. 2008). 

*     What the Court Considered: Former employees of a sub-subcontractor brought a qui tam suit under the False Claims Act (the “Act”) against a number of parties for allegedly fraudulent invoicing.  The employees presented invoices submitted between various contractors but never presented invoices submitted from a contractor to any government entity.  The district court granted judgment to the defendants as a matter of law, having found no evidence of the submission of a false claim to the government.  The appellate court reversed, ruling that the Act required only that the evidence show a party intended a fraudulent claim to be paid with government funds. 

*     What the Court Said: Unanimously reversing the appellate decision, the Supreme Court found that a party was liable under the Act only where it intended for the government itself to pay a fraudulent claim.  Liability under the Act was not triggered where the intention was to fraudulently induce payment by a non-government entity using government funds.      

*     What the Opinion Means: The Supreme Court’s narrow reading of the False Claims Act effectively immunizes parties not seeking payment directly from government entities from liability under the Act.        

7.      Parties Unable to Contractually Alter Standard of Review Required by FAA, Hall Street Associates, L.L.C. v. Mattel, Inc., 128 S.Ct. 1396 (U.S. 2008).

*     What the Court Considered: Parties to a dispute concerning indemnity for environmental clean-up costs agreed to arbitrate the dispute under the FAA.  The arbitration agreement drafted by the parties and approved and entered by the district court as an order provided that the court could review the arbitrator’s decision for legal error.  After the court vacated the arbitrator’s initial award for legal error, appellate courts were called upon to determine whether the FAA permitted the vacation of an award on such a basis.     

*     What the Court Said:  Sections 10 and 11 of the FAA provide the exclusive bases for the vacation or modification of an award granted pursuant to the FAA.  As the Sections do not provide for vacation of an award of the basis of mistake of law, the district court’s vacation of the award was in error.      

*     What the Opinion Means:  Parties arbitrating disputes under the FAA cannot contractually vary the standard of review used by courts to determine whether an award should be vacated or modified.       

8.      Limited FAA Preemption of California Arbitration Laws Allows Parties to Contract for Standards of Review Other Than Those Provided by CAA, Cable Connection, Inc. v. DIRECTV, Inc., 190 P.3d 586 (Cal. 2008).

*     What the Court Considered: Parties to a dispute over commissions due for the sale of satellite television equipment sought arbitration of their dispute under California law, as called for by the agreement governing the parties’ relationship.  The agreement provided, in part, that “arbitrators shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error.”  After the arbitrator entered an award in favor of the equipment dealers, DIRECTV petitioned the trial court to vacate the award on the basis that it relied on an erroneous interpretation of California law.  The trial court granted DIRECTV’s application, after which the dealers appealed, arguing that California law allowed parties to contract for standards of judicial review of arbitration awards other than those provided in the California Arbitration Act.            

*     What the Court Said:  The issue before the court concerned arbitration procedure; therefore, the CAA was not preempted by the FAA on the issue.  Under California law, arbitration awards may be reviewed on grounds other than those provided for in the CAA if the parties have agreed to an alternate basis for review.  That aside, the CAA provides that an arbitration reward may be reviewed where the arbitrator exceeds his powers in making the award.  The arbitrator in DIRECTV was not empowered “to commit errors of law or legal reasoning” like that underlying his initial decision.

*     What the Opinion Means: A much higher level of deference is given to parties’ freedom of contract under California arbitration laws than under similar laws in other states and the FAA.         

9.      “Completed and Accepted” Doctrine Found to Shield Contractor from Liability, Jones v. P.S. Development Co., Inc., 82 Cal.Rptr.3d 882 (Cal. App. 4th Dist. 2008).

*     What the Court Considered: An x-ray screener at LAX tripped over a bolt anchoring an x-ray machine to the floor.  The machine had been installed two months prior, and the screener was aware that the bolt posed a tripping hazard, having previously complained about the hazard to his supervisor.  The defendant sued the subcontractor responsible for installation of the machine for negligence.  The trial court granted the sub summary judgment on the basis of the “completed and accepted” doctrine and the screener appealed.   

*     What the Court Said: The doctrine was properly applied by the trial court, as the machine had been in place for two months and the screener was subjectively aware of the patent hazard that resulted in his injury.    

*     What the Opinion Means: In California, the completed and accepted doctrine is alive and well in cases where the injury-causing defect is obvious and the injured party can be shown to have been aware of the defect.  Interestingly, the court in Jones applied the doctrine despite the fact that, at the time of the plaintiff’s injury, the defendant was still working at LAX, installing additional x-ray machines pursuant to the contract under which it had installed the machine over which the plaintiff tripped.            

10.  Bribe Attempt Costs Contractor Payment of Contract Balance, FCI Group, Inc. v. City of New York, 54 A.D.3d 171 (N.Y. App. Div. 2008)

*     What the Court Considered: The president of a contractor hired by the City of New York left two City employees Christmas cards each containing $3,000 and a COR valued at $101,708.  The employees immediately reported the bribe attempt to their supervisors, after which the City cancelled the contractor’s contract due to misconduct and refused to make further payments.  The contractor filed suit for breach of contract, seeking to recover the contract balance, including the value of the COR.  The City defended the suit based in part on language contained in the City Charter calling for contracts to be voided following the attempted tender of improper gifts to City employees.  The trial court granted summary judgment to the contractor, and the City appealed.    

*     What the Court Said: “[T]he doors of our courts are closed to those who sue to collect the rewards of corruption.”  Given that the bribe attempts were made on the City employees with authority to grant the COR and payment of the contract balance, there was a direct link between the illegal conduct and the City’s remaining obligations on the contract.  That being the case, the bribery attempt was considered to be linked to the contractor’s performance under the contract, and recovery of the contract balance was barred.   

*     What the Opinion Means: In New York, illegal conduct by a contractor relating to its performance of a contract may prevent recovery of any balance owing on the contract.     

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.