Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Reinstatement of Mechanic’s Lien under Washington Law, DKS Constr. Mgmt., Inc. v. Real Estate Improvement Co., 102 P.3d 170 (Wash. Ct. App. 2005).
* What the Court Considered: An HVAC subcontractor recorded a mechanic’s lien on an owner’s property. After the lien had been filed, the subcontractor came to believe that its last work had not been performed within the 90-day period required by statute. Consequently, the subcontractor voluntarily released the lien. The subcontractor then discovered its last work had in fact occurred within the statutory period and asked the court to reinstate the lien.
* What the Court Said: The lien could not be reinstated.
* What the Opinion Means: Washington’s mechanic’s lien statute is strictly construed and must be strictly complied with by lien claimants. Therefore, the court did not have the power or authority to equitably reinstate the lien once it had been released voluntarily.
2. Surety’s Interest in Retainage, Am. States Ins. Co. v. U.S., 324 B.R. 600 (N.D. Tex. 2005).
* What the Court Considered: A subcontractor hired to work on a convention center renovation project defaulted on its contract. The surety that had issued the payment and performance bonds on the subcontractor’s behalf paid to complete the work. When the subcontractor subsequently declared bankruptcy, the surety and the Internal Revenue Service (“IRS”) each claimed entitlement to the amounts retained from the subcontractor’s progress payments.
* What the Court Said: Because the surety had an interest in the retained amounts, those amounts did not become part of the bankruptcy estate.
* What the Opinion Means: One purpose of retainage is to supply “a salvage fund for the contractor’s surety in the event it makes good on defaults for which it is bound.” The fact that a surety has an equitable interest in the retained amounts prevents those amounts from becoming a part of the bankruptcy estate. Therefore, the surety—not the IRS—was entitled to the retainage.
3. Critical Path Methodology, Sunshine Constr. & Eng’g, Inc. v. U.S., 64 Fed. Cl. 346 (2005).
* What the Court Considered: A contractor filed a delay claim against the government, alleging its work was delayed more than 200 days due to defective plans and specifications provided by the government. The contractor’s expert presented a “Time Entitlement Analysis,” in which he compared the project’s critical path with end-of-the-month updates to determine how many days of delay occurred in each month. The government’s expert prepared a “Critical Path Method Schedule Delay Analysis,” in which he reviewed the as-planned schedule, schedule updates, progress payments, and other project documentation in order to construct an as-built schedule. The Critical Path Analysis attributed most of the delay to the contractor.
* What the Court Said: The contractor’s analysis failed to demonstrate that the delay was caused by the government.
* What the Opinion Means: When a contractor asserts a delay claim, it must prove “the extent of the delay, that the delay was proximately caused by government action, and that the delay harmed the contractor.” Here, the contractor’s analysis did not represent an accepted critical path methodology. Therefore, the contractor failed to prove the requisite causation to recover on its delay claim.
4. Compliance with Contractual Notice Requirement, Kingsley Arms, Inc. v. Sano Rubin Constr. Co., 791 N.Y.S.2d 196 (N.Y. App. Div. 2005).
* What the Court Considered: A subcontractor filed a notice of claim alleging that its general contractor’s agreements with other subcontractors prevented the subcontractor from completing its work on time. Although the claim was presented after the 21-day notice period required by the subcontract, the subcontractor argued the general contractor was aware from oral conversations of the delays to the subcontractor.
* What the Court Said: The subcontractor waived its claim by failing to comply with the contractual notice requirement.
* What the Opinion Means: Compliance with the notice provision was a condition precedent to the subcontractor’s claim. The subcontractor’s failure to comply with the provision constituted a waiver of its claim. Furthermore, a two-page affidavit of the subcontractor’s secretary/treasurer regarding the alleged oral conversations was insufficiently detailed to establish waiver by the general contractor of the notice provision.
5. Recovery of Attorney’s Fees for Wrongful Withholding, McAndrew v. Hazegh, 27 Cal. Rptr. 3d 836 (Cal. Ct. App. 2005).
* What the Court Considered: A contractor agreed to perform drywall work for a property owner. Although the parties’ contract provided that the entire contract price would be paid after completion of the work, the contractor billed, and was paid, for the work in installments. The owner did not withhold any retainage from its payments. The contractor subsequently succeeded in a suit to recover for unpaid change work and sought attorney’s fee under California Civil Code section 3260.
* What the Court Said: The contractor could not recover attorney’s fees because section 3260 did not apply.
* What the Opinion Means: California Civil Code section 3260 provides for the recovery of attorney’s fees upon the wrongful withholding of retainage. Here, the contract did not call for installment payments and therefore did not contemplate the withholding of any retainage amounts.
6. Construction Manager’s Liability Under New York’s Scaffold Act, Walls v. Turner Constr. Co., 2005 WL 1036444 (N.Y. 2005).
* What the Court Considered: A construction management firm was hired to oversee improvements to an elementary school. The construction management agreement obligated the construction manager to protect users of the site by stopping work when it noticed an unsafe condition. In addition, the construction manager was obligated to monitor the trade contractors’ performance and report to the owner any safety concerns. An employee of the window contractor, to whom no safety equipment had been provided by the owner or construction manager, was injured when he fell from a scaffold.
* What the Court Said: Because the construction manager was the owner’s agent, it could be liable under New York’s Scaffold Act.
* What the Opinion Means: Although a construction manager is generally not responsible for injuries under New York’s Scaffold Act, a construction manager may be vicariously liable if deemed an agent of the owner. Here, the construction manager had supervisory authority and control over the work. Also, because there was no general contractor, the construction manager was the “eyes, ears, and voice of the owner.” Accordingly, the construction manager could be liable as the owner’s agent.
7. Proper Forum for Appeal of Architect’s Decision, Beers Constr. Co. v. Pikeville United Methodist Hosp. of Ky., 2005 WL 977264 (6th Cir. 2005).
* What the Court Considered: A contractor was hired to construct an addition to a hospital. The contract, which borrowed language from form contracts of the Engineers’ Joint Contract Documents Committee and the American Institute of Architects, provided that any claims would first be decided by the architect. The architect’s decision was to be “final and binding on the parties but subject to legal proceedings.” The contract further provided in a section titled “Arbitration” that any claims arising out of the contract would be settled through “legal proceedings.” After an unfavorable decision by the architect, the contractor sued the owner in federal district court. The owner argued the case should be referred to arbitration.
* What the Court Said: The contract did not require arbitration of the parties’ claims.
* What the Opinion Means: The term “legal proceedings” refers to litigation, not arbitration. Thus, although the contract contained a provision titled “Arbitration,” the unambiguous intent of that provision was that disputes would be resolved through litigation. Therefore, the contractor could pursue its claims in court. Furthermore, the contract language subjecting the architect’s decision to “legal proceeding” operated to render the architect’s decision merely advisory.
8. Subcontractor’s Failure to Adhere to Modified Schedule, Guerrero-McDonald & Assoc., Inc. v. Graham, 2005 WL 1105189 (Tex. App. 2005).
* What the Court Considered: A concrete subcontractor was to begin its work on March 19, 2002 and complete a concrete slab by April 8, 2002. On March 27, the general contractor expressed concern over the subcontractor’s progress and provided a modified schedule, indicating the concrete formwork was to be completed on March 29. The original schedule did not provide a specific date on which the formwork was to be finished. The modified schedule provided for the concrete slab to be completed by April 12. The subcontractor failed to complete the formwork by March 29 and was terminated.
* What the Court Said: The termination was wrongful because the subcontractor could have completed the slab by the modified completion date.
* What the Opinion Means: Any alleged breach by the subcontractor was excused because the general contractor had preemptively breached the contract. It was not necessary for the formwork to be complete for the electricians and plumbers to begin their portion of work. Furthermore, the subcontractor would have completed the concrete slab by April 12 despite its failure to complete the formwork by March 29.
9. Affirmative Representations Regarding Site Conditions, Joel Lehmkuhl Excavating v. City of Troy, 2005 WL 994607 (Ohio Ct. App. 2005).
* What the Court Considered: A city hired a contractor to extend a sanitary sewer. The project specifications stated that no soil boring information was available, but that the contractor was permitted to conduct subsurface investigations. Although the contractor conducted some investigations, those investigations were not sufficiently extensive to reveal the presence of the groundwater. However, a geotechnical consultant had stated to the city his belief that shallow groundwater was present in the construction area. The contractor submitted a differing site conditions claim because the presence of groundwater at the site caused the contractor to incur numerous additional expenses.
* What the Court Said: Because the city made no affirmative representations as to the presence of groundwater at the site, the contractor’s claim failed.
* What the Opinion Means: Ohio law prohibits a city from making affirmative statements regarding site conditions and then holding a contractor responsible for any conditions differing from those asserted by the city, notwithstanding contractual provisions to the contrary. Here, although the city had some indication that groundwater might exist at the site, the city made no affirmative statements to the contractor concerning the presence or absence of groundwater.
10. Enforceability of Venue Provisions, Quality Concrete & Rental, Inc. v. K & A Lumber Co., 895 So. 2d 1230 (Fla. Ct. App. 2005).
* What the Court Considered: A supplier sued a subcontractor and general contractor in Palm Beach County. The subcontractor’s cross-claim for indemnification against the general contractor was transferred to Sarasota County pursuant to a venue provision in the parties’ subcontract. The subcontractor argued the transfer of its cross-claim would expose the subcontractor to the possibility of inconsistent results.
* What the Court Said: Because contractual venue provisions are valid and enforceable under Florida law, the cross-claim could be transferred to another county.
* What the Opinion Means: Under Florida law, venue selection clauses are valid and enforceable. Furthermore, the subcontractor would not be exposed to the possibility of inconsistent results since the supplier’s claim did not require the adjudication of the liability between the contractor and the subcontractor.
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.