Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and David L. Hobson
1. Enforceability of “Pay-If-Paid” Provision, Midamerica Constr. Mgmt., Inc. v. Mastec N. Am., Inc., 436 F.3d 1257 (10th Cir. 2006).
* What the Court Considered: A contractor hired to construct a fiber optic network through Texas and New Mexico hired a subcontractor to install a buried conduit. The subcontract contained a “pay-if-paid” clause. During construction, the owner filed for bankruptcy, after which time the contractor refused to make any further payments to the subcontractor.
* What the Court Said: The contractor did not have to pay because the “pay-if-paid” clause established a condition precedent to the contractor’s obligation to pay.
* What the Opinion Means: Applying both Texas and New Mexico law, the Court reasoned that a “pay-if-paid” clause is enforceable if the language clearly indicates the intent to create a condition precedent. Here, the clause was clear, as it stated that payments to the subcontractor were made “expressly contingent upon” the contractor’s receiving of payment from the owner.
2. Enforceability of Arbitration Provision, Advance Tank and Constr. Co. v. Gulf Coast Asphalt Co., 2006 WL 253600 (Ala. Feb. 3, 2006).
* What the Court Considered: The owner of a shipping terminal hired a contractor to construct steel tanks at the terminal. Attachment D to the contract incorporated by reference the contractor’s standard terms and conditions, which included an arbitration provision.
* What the Court Said: Because parties to a contract are bound by pertinent references to outside documents, the arbitration provision was enforceable.
* What the Opinion Means: Outside writings referred to in a written contract may be incorporated by the reference as a part of the contract. The owner’s argument that it did not assent to the arbitration provision because the terms and conditions were not attached to the contract when it was signed was without merit. Parties to a contract are responsible for reading the contract and are therefore deemed to have been put on notice of all of its provisions.
3. Recoverability of Delay Damages, United States ex rel. Tenn. Valley Marble Holding Co. v. Grunley Constr., 2006 WL 1348523 (D.D.C. May 17, 2006).
* What the Court Considered: A marble supplier to a stonework contractor alleged it suffered productivity losses as a result of the contractor’s failure to provide timely field verifications. The supply contract contained a “no damages for delay” clause, which provided that the only remedy for a contractor-caused delay was a time extension. The contractor argued that the supplier’s attempted recovery was barred by the clause. The supplier argued its damages were “impact damages” rather than “delay damages.”
* What the Court Said: Because the loss of productivity was a delay damage, recovery was barred by the “no damages for delay” clause.
* What the Opinion Means: Under Maryland law, contract language is given its “customary, ordinary, and accepted meaning.” The ordinary meaning of “delay” is the “act of postponing.” Therefore, the contractor’s untimely provision of field verifications was properly considered a delay, recovery for which was barred by the contract.
4. Defining “Occurrence” in a CGL Policy, Lee Builders, Inc. v. Farm Bureau Mut. Ins. Co., 2006 WL 1561294 (Kan. June 9, 2006).
* What the Court Considered: When the windows of a home it had built began to leak, the contractor made a claim under its commercial general liability (“CGL”) policy. The insurer denied the claim on the basis that the claim did not satisfy the definition of an “occurrence” under the policy. The policy defined an “occurrence” as “[a]n accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policy provided no definition for “accident.”
* What the Court Said: The claim constituted an occurrence under Kansas law.
* What the Opinion Means: The Court concluded, after reviewing the decisions of other Kansas courts, that Kansas law defines an occurrence to include damage that results from faulty workmanship as long as the insured did not intend for the damage to occur. Moreover, because the policy at issue was ambiguous, the construction most favorable to the insured prevailed.
5. Construction and Application of a CGL Policy, McDonald Constr. Co. v. Bituminous Cas. Corp., 2006 WL 1415421 (Ga. Ct. App. May 24, 2006).
* What the Court Considered: Following the renovation of a housing project, several vinyl composition tiles (“VCT”) began to delaminate. The contractor who had installed the tiles replaced the tiles and submitted a claim to its commercial general liability (“CGL”) insurer. The CGL policy covered sums the contractor is “legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’” caused by an “occurrence.” An “occurrence” was defined by the policy as an “accident, including repeated or continuous exposure to substantially the same general harmful conditions.”
* What the Court Said: The claim was not covered by the CGL policy because it did not arise from the contractor’s tort liability.
* What the Opinion Means: “The purpose of comprehensive liability insurance coverage is to provide protection for personal injury or for property damage caused by the completed product, but not for the replacement and repair of that product.” Here, there was no bodily injury and no property damage to other property. Also, the contractor’s responsibility to repair the tiles arose from its contract with the housing authority and not from any tort liability.
6. Election of Workers’ Compensation Benefits, Jones v. Martin Elecs., Inc., 2006 WL 1641944 (Fla. June 15, 2006).
* What the Court Considered: An employee injured in an explosion began immediately to receive workers’ compensation benefits from his employer’s workers’ compensation carrier without his ever having filed a claim for benefits. Thereafter, the employee filed a complaint against the employer, alleging his injuries resulted from the intentional conduct of the employer. The employer argued that the employee had elected workers’ compensation as his sole remedy for his injuries.
* What the Court Said: The employee’s claim against the employer could proceed.
* What the Opinion Means: The workers’ compensation system provides workers with limited medical and wage loss benefits in exchange for their relinquishing their rights to seek certain legal remedies from the employer. Where the employee evidences a conscious intent to elect the workers’ compensation system, he thereby waives his other rights. Here, the employee received benefits immediately without his having requested them. Therefore, he had not made a conscious and exclusive election of remedies.
7. Application of Arbitration Provision to a Non-signatory, Best Concrete Mix Corp. v. Lloyd’s of London Underwriters, 413 F. Supp. 2d 182 (E.D.N.Y. 2006).
* What the Court Considered: Following an injury to a subcontractor’s employee, the owner and contractor sought a declaratory judgment that they were entitled to coverage for the injury under the subcontractor’s insurance policy. The insurer moved for an order compelling arbitration pursuant to an arbitration provision in the policy. Neither the owner nor the contractor were signatories to the policy.
* What the Court Said: Because the owner and contractor sought to obtain benefits from the policy, they were subject to its arbitration provision.
* What the Opinion Means: Typically, because arbitration is a matter of contract, a party cannot be compelled to arbitrate a dispute he has not agreed to arbitrate. However, where a non-signatory seeks to avail itself of the protection and benefits afforded by the policy, it may be bound by the policy’s arbitration provision.
8. Contractual Limitation of Arbitration Jurisdiction, Baywest Constr. Group, Inc. v. Premcar Co., 2006 WL 242505 (Ohio Ct. App. Feb. 2, 2006).
* What the Court Considered: A contract for the construction of an office building contained an arbitration provision with the following limitation: “The arbitrators will not have jurisdiction . . . to consider . . . any controversy where the amount at issued [sic] is more than $100,000.” The contractor filed a suit in state court in excess of $200,000. The owner attempted to stay the litigation and compel arbitration.
* What the Court Said: Because arbitration jurisdiction was limited to cases of less than $100,000, the case could proceed in court.
* What the Opinion Means: Arbitration provisions are to be enforced according to their terms. Here, the provision at issue clearly provided that arbitrators lacked jurisdiction to decide cases of more than $100,000. The owner’s contrary argument that the provision constituted a cap on damages conflicted with the plain language of the contract.
9. Notice of Commencement Under Lien Statute, Roofing Supply of Atlanta, Inc. v. Forrest Homes, Inc., 2006 WL 1390729 (Ga. Ct. App. May 23, 2006).
* What the Court Considered: A housing developer properly filed its “notice of commencement” as required by Georgia’s Lien Statute. The developer was both owner and general contractor of the development, but the notice listed the developer as the general contractor. A supplier to the roofing subcontractor failed to provide Notice to Contractor within 30 days following its first delivery of materials to the site. When the supplier was not paid for its deliveries, it placed a lien on the property.
* What the Court Said: Because it failed to properly file a Notice to Contractor, the supplier forfeited its right to place a lien on the property.
* What the Opinion Means: The Court found that the supplier had failed to comply with the Lien Statute’s notice requirement, with which potential lien claimants must strictly comply. The supplier argued that, under the Lien Statute, the same entity cannot be both the owner and the general contractor and that therefore the roofing subcontractor was the true “contractor.” The Court rejected this interpretation as absurd.
10. Enforcement of Bid Award, Xavier Contracting, LLC v. City of Rye, 815 N.Y.S.2d 638 (N.Y. App. Div. 2006).
* What the Court Considered: A city solicited bids in connection with the renovation of a community center, intending to award seven separate contracts for the project. Subsequently, one of the bid awards was rescinded because the bidder failed to meet the bonding requirements. The city informed the other successful bidders to whom contracts had already been awarded that the city was reevaluating the project and would not proceed at this time. One of these successful bidders sued the city for breach of contract.
* What the Court Said: The city breached the contract by refusing to perform.
* What the Opinion Means: When a successful bidder is awarded its contract, a binding and enforceable contract comes into existence. The contract contained no express provision making it subject to the city’s acceptance of the other contract awards.
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.