Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Binding Effect of AIA Arbitration Clause if No Architect is Used on Project, Ritchie’s Food Distributor, Inc. v. Refrigerated Constr. Servs, Inc., 2004 Ohio App. LEXIS 2003 (Ohio Ct. App. 2004).
* What the Court Considered: A contractor and owner executed a standard-form AIA contract for construction of a refrigerated warehouse. However, the parties expressly agreed that no licensed architect was involved in the project. When the contractor completed the work, the owner failed to make final payment and alleged that the construction was deficient. The contractor filed a demand for arbitration, then the owner filed suit and moved to enjoin the arbitration. The contract contained a mandatory arbitration clause in a section of the contract entitled “Architect’s Administration of the Contract,” which provided for a detailed dispute resolution process beginning with submission of claims to the architect. The owner asserted that because there was no architect involved in the project, it had assumed that none of the contract provisions related to an architect, including the arbitration clause, were applicable.
* What the Court Said: The arbitration clause was not applicable and the owner could continue with litigation.
* What the Opinion Means: Under Ohio law, arbitration “is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed to so submit.” In this case, the parties clearly did not intend an architect to be involved in the project. This intent was expressed by the parties initialing a notation of “N/A” in the space provided for the name of the architect and by the parties ignoring all provisions regarding the architect’s administration of the contract during construction. Accordingly, there was an ambiguity as to whether the parties had agreed to arbitrate their disputes and the parties were not bound by the arbitration clause.
* What the Court Considered: A subcontractor submitted a bid on the electrical work for two school construction projects. The general contractor used the subcontractor’s bid as part of its overall bid submitted to the project owner. After the general contractor was awarded the contract, the subcontractor informed the general contractor that it was unable to obtain the required bonds for the projects. As a result, the general contractor contracted with another subcontractor for the electrical work. The original subcontractor alleged that the general contractor had breached its subcontract by hiring another subcontractor to perform the work.
* What the Court Said: The general contractor did not breach the subcontract because no subcontract existed between the parties.
* What the Opinion Means: Under South Carolina law, a general contractor’s use of a subcontractor’s bid is not an acceptance that creates a contractual relationship between the parties if the general contractor becomes the successful bidder. In such a situation, the subcontractor’s bid is merely an offer to perform certain work for the general contractor. A contract only arises when there is an actual agreement by the parties in which the parties demonstrate a mutual intent to be bound. A general contractor’s use of the subcontractor’s bid in its overall bid to the owner is insufficient to manifest any such assent to the terms of the bid or the required mutual intent to be bound.
3. Validity of Mechanic’s Lien for Work Performed on Leased Property Without Owner’s Consent, John Cho d/b/a/ Ace Const. & Interior Design v. Purdue Research Found., 803 N.E.2d 1161 (Ind. Ct. App. 2004).
* What the Court Considered: A tenant leased commercial real estate from an owner pursuant to a lease agreement that expressly provided that the tenant could not make “alterations, changes, improvements or additions to the Leased Property without the prior written consent” of the owner. The tenant executed a contract with a contractor to construct a “clean room” for the manufacture of computer chips. The owner did not participate in negotiating or drafting the construction contract and did not sign the contract. In fact, the owner consistently told the tenant that the owner would not agree to allow the construction to begin until it had approved the construction plans and executed a lease for the additional space needed by the tenant for construction. The tenant made an initial payment towards the contract price, but failed to make any further payments, and the contractor filed a mechanic’s lien against the leased property.
* What the Court Said: The contractor’s mechanic’s lien was invalid because the owner did not actively consent to the work performed by the contractor.
* What the Opinion Means: Under Indiana’s mechanic’s lien statute, a lien can only exist when the claimant has complied with the applicable statutory requirements. One such requirement is that before a mechanic’s lien can attach to real property, the landowner must have consented to the improvements on which the lien is based. Such consent must be active consent; inactive or passive consent is insufficient. In this case, the owner continuously informed the tenant that its approval was required prior to any construction and the owner never provided such approval. Moreover, there was no active bargaining between the owner and contractor for the improvements at issue.
4. Owner’s Liability for Injury to Hotel Occupant, MAC International-Savannah Hotel, Inc. v. Hallman, 2004 Ga. App. LEXIS 251 (Ga. Ct. App. 2004).
* What the Court Considered: A hotel occupant fell and broke her ankle on steps of unequal height leading to a door on the outside of the hotel. The door that was not an entrance, but poor lighting caused the “exit only” sign to be unreadable without the occupant first climbing the stairs to look closely. The occupant stated that she did not know that the steps were of uneven height because the area was “shadowed and very unlit.” A civil engineer testified that the stairs were “extremely out of code and…a trip hazard” for numerous reasons.
* What the Court Said: The hotel could be held liable for the occupant’s injuries.
* What the Opinion Means: Under Georgia law, to recover for injuries sustained in a slip-and-fall action, an invitee (such as the hotel occupant) must prove (1) that the defendant had actual or constructive knowledge of the hazard; and (2) that the plaintiff lacked knowledge of the hazard despite the exercise of ordinary care due to actions or conditions within the control of the owner. In this case, the hotel owner swept the steps every day and pressure-washed the steps quarterly, and these acts were sufficient to create the inference that the owner had actual or constructive knowledge of the hazardous condition. Also, the occupant did not fail to exercise ordinary care, did not assume the risk of her fall, and did not have equal knowledge with the owner of the hazardous condition.
5. Assumption of Risk of Unforeseen Conditions, Kenaidan Constr. Corp. v. County of Erie, 4 A.D.3d 756 (N.Y. App. Div. 2004).
* What the Court Considered: A general contractor filed suit to recover additional compensation for unanticipated costs incurred by it subcontractor when drilling caissons for a project’s foundation. The general contractor asserted that the subsurface conditions encountered at the project site were substantially different from those represented by the County of Erie (“County”) in engineering reports provided to the bidders.
* What the Court Said: The general contractor could not recover costs incurred due to differing site conditions because it had assumed all risks contingent upon the nature of the subsurface conditions.
* What the Opinion Means: In its contract with the County, the general contractor acknowledged that it had satisfied itself as to the subsurface conditions and had agreed to “assume all risk contingent upon the nature of the subsurface conditions to be actually encountered,” including the risk that the general contractor may perform more work than originally anticipated. Accordingly, under New York law, the general contractor could not recover additional compensation for allegedly unanticipated costs relating to the subsurface conditions.
6. Engineer’s Financial Liability for Correction of Mistake that Did Not Fall Below the Standard of Care, Pinnacle Engineers, Inc. v. Heron Brook, LLC, 86 P.3d 470 (Idaho 2004).
* What the Court Considered: An engineering firm executed a contract to perform engineering work on a subdivision for a developer. In its contract, the engineering firm agreed to perform its work in a manner consistent with the standard of skill and care ordinarily exercised by civil engineers in Boise, Idaho. The developer contended that the engineering firm’s work fell below that standard in several respects, thereby constituting a breach of the contract and negligence. The developer asserted entitlement to a refund based upon unjust enrichment to the extent that its payments exceeded the reasonable value of the engineering firm’s work.
* What the Court Said: The engineering firm was not liable for the developer’s costs incurred to correct the engineering firm’s errors when those errors did not violate the applicable standard of care.
* What the Opinion Means: The plans drafted by the engineering firm included several errors, but expert testimony demonstrated that those errors were not below the applicable standard of care. However, the developer argued that it was a violation of the applicable standard of care for the engineering firm not to pay the costs incurred by the developer in correcting the errors. The court explained that the cost of remedying such mistakes reasonably could be related to maintaining client relations, rather than complying with the standard of care in providing engineering services. For that reason, the engineering firm was not liable for a breach of the contract or negligence.
7. Waiver of Right to Terminate Contract for Default, Appeal of B.V. Constr., Inc., 2004 ASBCA LEXIS 34, ASBCA No. 47766 (2004).
* What the Board of Contract Appeals Considered: A contractor was awarded a government contract to build a “space frame” patio cover at a National Aeronautics and Space Administration (“NASA”) visitor’s center. The contractor was required to complete the work by a stipulated date. During construction, the contractor discovered that the soil conditions did not comply with the contract specifications, requiring redesign and a work stoppage. As a result of the work stoppage, the contractor could not complete the work by the contract deadline. However, NASA did not terminate the contract for default or establish a new completion date, but instead allowed the contractor to continue performance. After some time, NASA terminated the contract for default and the contractor appealed the default.
* What the Board of Contract Appeals Said: NASA waived the right to terminate the contract for default on the grounds of late completion.
* What the Opinion Means: “When a performance date has passed and the contract has not been terminated for default within a reasonable time, time does not again become of the essence until the government issues a notice that sets a new time for performance, which is both specific and reasonable from the standpoint of the performance capabilities of the contractor at the time notice is given.” Accordingly, because NASA failed to reach agreement with the contractor on a new completion date, NASA was prohibited from terminating the contract for default; the default was converted to a termination for convenience of the government.
8. Required Proof of Causation for Delay Damages, PCL Constr. Servs, Inc. v. United States, 2004 U.S. App. LEXIS 6706 (Fed. Cir. 2004).
* What the Court Considered: The United States Bureau of Reclamation (“USBR”) provided a contractor with the drawings for construction of a parking structure and visitor’s center at the site of the Hoover Dam. Due to substantial inaccuracies in the drawings, the design of some of the parking structure’s supports had to be revised when the actual contours of the surface of the canyon were ascertained during construction. When the contractor failed to achieve substantial completion of the parking structure until more than one year after the contract deadline, it asserted that this delay resulted from USBR’s breach of contract in providing drawings containing substantial errors.
* What the Court Said: Even if USBR breached its contractual obligation to provide accurate drawings, the contractor failed to establish that the breach caused disruption or delay to substantial completion for which USBR was responsible.
* What the Opinion Means: The contractor sought to hold USBR responsible for the entire cost of the project’s delay. Under such circumstances, the contractor had the burden to “show the nature and extent of the various delays for which damages are claimed and…connect them to some act of commission or omission” by USBR. Although the contractor provided evidence of delay by USBR in providing revised drawings, the contractor failed to show a cause and effect relationship between USBR’s contract changes and the contractor’s increased costs. For example, the contractor failed to conduct a critical path analysis or otherwise establish that USBR was responsible for any quantified amount of delay attributable to specific errors in the drawings. Accordingly, the contractor failed to satisfy its burden of proof on the issue of causation.
9. Material Change Caused by Government’s Directive to Perform Work Outside Scope of Contract Drawings, Turner Constr. Co., Inc. v. United States, 2004 U.S. App. LEXIS 9321 (Fed. Cir. 2004).
* What the Court Considered: A contractor entered into a contract with the United States Department of Veterans Affairs (“DVA”) for construction of an addition to a DVA Medial Center. During construction, the contractor disagreed with the DVA resident engineer about whether the contract required certain fire-related electrical feeders and panelboards in the operating room area on the third floor of the addition. The DVA engineer directed the contractor to install the disputed materials and the contractor completed the work and sought the additional costs it had incurred for the work. Although the contract specifications and electrical drawings did not require such fire-related feeders, the DVA argued that the contract should have been read to include the fire-related electrical installations based upon the contract’s requirement of compliance with the applicable electrical codes, which took priority over any inadequacy in the contract specifications or error in the electrical drawings. Further, the DVA argued that the contract was ambiguous and the contractor had a duty to inquire during the bidding process about the erroneous drawings.
* What the Court Said: The DVA’s requirement that the contractor install additional fire-rated systems was a material change for which the contractor was entitled to recover its incurred costs.
* What the Opinion Means: In this case, despite the DVA’s assertions to the contrary, neither the contract, its specifications, the drawings, nor the electrical codes specified fire-rating for the operating room panels and electrical feeders. Accordingly, the contract was not ambiguous and the contractor’s reading of the contract and the electrical codes was that of a reasonable and prudent contractor. The DVA’s directive to install fire-rated systems not required by the original contract was a material change for which the contractor was entitled to additional compensation.
10. Supplier’s Liability for Negligence Absent a Duty to Owner, Building Materials Mfg. Corp. d/b/a/ GAF Materials Corp. v. T&B Structural Sys., Inc., 804 N.E.2d 277 (Ind. Ct. App. 2004).
* What the Court Considered: A contractor executed a purchase order with a material supplier for a Wire Wall to be used in the construction of a retaining wall on a railroad earthwork project. During construction, the retaining wall and earthen embankment began to settle. The engineer contacted the supplier, who stated, without actually visiting the project site, that such settling was normal and that the engineer should add more backfill to the earthen embankment behind the retaining wall to achieve settlement. About one month later, the retaining wall failed and backfill and other materials poured through the wall. The owner filed a negligence suit against the supplier.
* What the Court Said: The supplier could not be held liable for negligence because the evidence did not show that the supplier had assumed a duty of reasonable care to the owner.
* What the Opinion Means: Under Indiana law, to effectively assert a negligence claim against the supplier, the owner was required to show that (1) the supplier had a duty to exercise reasonable care under the circumstances; (2) the supplier breached that duty; and (3) the owner incurred damages as a proximate result of the supplier’s breach of duty. Thus, absent a duty owed by the supplier, there can be no breach and no recovery by the owner for negligence. In this case, the owner asserted that the supplier assumed a duty of reasonable care by assuring the engineer that the settling was normal and advising the engineer to add backfill to the wall. However, the supplier’s purchase order with the engineer expressly stated that it was “not responsible for the overall stability of the foundation soils below or behind the Structure, nor any slip surface external to the Structure.” Further, there was insufficient additional evidence to supersede the purchase order and demonstrate that the supplier had assumed such a duty towards the owner.
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.