Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and David L. Hobson
1. Definition of “Pollutant” in Total Pollution Exclusion, Firemen’s Ins. Co. of Washington, D.C. v. Kline & Son Cement Repair, Inc., 474 F. Supp. 2d 779 (E.D. Va. 2007).
* What the Court Considered: An employee at a warehouse developed respiratory problems after inhaling the fumes of an epoxy concrete sealant. The contractor and subcontractor who installed the epoxy sought a declaratory judgment that the commercial general liability insurer had a duty to defend them. The policy contained a Total Pollution Exclusion, which excluded coverage for bodily injury resulting from the “discharge, dispersal, seepage, migration, release or escape of ‘pollutants.’” The policy defined “pollutant” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”
* What the Court Said: Because the epoxy was deemed a “pollutant,” the insurer had no duty to defend the contractor and subcontractor.
* What the Opinion Means: Under Virginia law, where an insurance policy is complete on its face, courts must look to the plain meaning of the policy. Ambiguities are construed against the insurer. Here, the policy defines a “pollutant” to include “any irritant or contaminant, including . . . fumes.” Based on a material data sheet for one of the epoxy’s ingredients, which stated that the ingredient “[m]ay cause moderate irritation to the respiratory system,” the court found the epoxy to be a pollutant.
2. Enforceability of Arbitration Award Against Nonparticipating Surety, United States ex rel. Davis Contracting, L.P. v. B.E.N. Const., Inc., 2007 WL 1246229 (D. Kan. April 27, 2007).
* What the Court Considered: A court confirmed an arbitration award, which found a contractor and a surety jointly and severally liable even though the surety was not a party to the arbitration. The surety, who had not participated in the arbitration, challenged the confirmation, claiming it did not have sufficient notice of the arbitration. The court initially found that the surety had ten days notice of the arbitration, did not claim that it was prejudiced by not being a participant, and could have asked to be included in the arbitration proceedings. The surety then filed a motion to alter or amend, claiming the lack of sufficient notice violated due process.
* What the Court Said: Because the surety could have submitted to the arbitration, and had notice sufficient for due process, the motion was dismissed.
* What the Opinion Means: While the relevant American Arbitration Association rules
do not provide for intervention of a third party, a third party could submit to an arbitration even absent a contract. Also, the guidelines for appropriate notice satisfying due process are not set by the Federal Rules of Civil Procedure but by another lines of cases, which the surety did not address. Here, there was no lack of due process where the surety knew of the proceeding ten days in advance.
3. Undocumented Worker Entitlement to Prevailing Wages, Reyes v. Van Elk, Ltd., 148 Cal. App. 4th 604 (Cal. Ct. App. 2007).
* What the Court Considered: Four allegedly undocumented workers brought suit against their employer, claiming they had not been paid the prevailing wage for welding work performed on a public works project.
* What the Court Said: Undocumented workers are entitled to receive prevailing wages on public projects in California.
* What the Opinion Means: On any public works project in California, employees must be paid the prevailing wage rate. According to case law, earned but unpaid wages are considered vested property rights. Further, California’s constitution grants to noncitizens the same property rights as citizens. Finally, the Court held that federal legislation designed to curb illegal immigration does not prevent California from providing wages to undocumented workers. The Court reasoned that allowing employers to pay illegal aliens less than the prevailing wage tends to encourage employers to hire illegal aliens, which in turn encourages illegal immigration.
4. Noncontractual Indemnity for ADA Violations, Access 4 All, Inc. v. Trump Int’l Hotel and Tower Condominium, 2007 WL 633951 (S.D.N.Y. Feb. 26, 2007).
* What the Court Considered: An owner of a hotel and condominium was sued for a violation of the Americans with Disabilities Act (“ADA”). The owner then brought suit for common law indemnification against the architects who designed the building.
* What the Court Said: Because noncontractual indemnity is not available to those sued under the ADA, the claim was dismissed.
* What the Opinion Means: There are two ways a right of indemnity or contribution could have been created for ADA violations. First, the statute could have provided for a right of indemnification. Second, such a right could arise out of federal common law. The owner did not argue the ADA provided for a right of indemnification. Its argument that the Court should create such a right was rejected. Federal courts are loath to create any federal common law rights of indemnity in areas where Congress has created comprehensive legislative remedies.
5. Contractor Reliance on Subcontractor Bids, Fletcher-Harlee Corp. v. Pote Concrete Contractors, Inc., 482 F.3d 247 (3d Cir. 2007).
* What the Court Considered: A contractor solicited subcontractor bids. The solicitation letter stipulated that bids must be held open for 60 days and that subcontractors must agree to be accountable for the prices and proposals submitted. A concrete subcontractor submitted a bid that stated it was for informational purposes only and should not be relied upon. The contractor incorporated the subcontractor’s bid into its general bid. When the contractor was awarded the work, the subcontractor raised its price.
* What the Court Said: The contractor’s claim for breach of contract was dismissed.
* What the Opinion Means: For a contract to be formed, there must be both an offer and an acceptance of that offer. Even if the solicitation letter constituted an offer, which the Court does not decide, the subcontractor’s bid was not an acceptance of that offer because its terms were materially different from those in the solicitation letter.
6. CM Liability for Tortious Interference with Contract Relations, J. Kinson Cook of Ga., Inc. v. Heery/Mitchell, 644 S.E.2d 440 (Ga. Ct. App. 2007).
* What the Court Considered: A general contractor on a high school construction project failed to mobilize sufficient labor to the project site. Also, the subcontractors complained they were not being paid on time. As a result, the construction manager (“CM”) took emergency measures to complete the project, including paying the subcontractors directly. The contractor alleged the CM interfered with its subcontracts by interacting directly with the subcontractors during the project.
* What the Court Said: Because the CM was not a stranger to the subcontracts, it could not be liable for tortious interference with those subcontracts.
* What the Opinion Means: To maintain a claim for tortious interference, the plaintiff must show that the defendant intentionally and wrongfully attempted to interfere in the plaintiff’s contractual relationship with another. The plaintiff must also show that the defendant is a stranger to the contract at issue. Here, the entire project encompassed “a comprehensive interwoven set of contracts.” The CM was not a stranger to this arrangement, and its acts were undertaken in its capacity as the construction project manager.
7. Avoidable Liens In Bankruptcy, In Re Ahokas, 361 B.R. 54 (Bankr. D. Vt. 2007).
* What the Court Considered: After not receiving payment for additional work performed on a residence, a contractor filed a mechanic’s lien. Shortly after filing this lien, the contractor filed an action on the lien and for violation of the Vermont Prompt Payment Act. The contractor was awarded a verdict of $10,500 for the lien plus $44,374.81 in attorney’s fees and other expenses. The owner later filed for bankruptcy and sought to avoid the lien.
* What the Court Said: The portion of the award encompassing fees and expenses arose under the Prompt Payment Act and was therefore avoidable in bankruptcy.
* What the Opinion Means: In bankruptcy, while judicial liens are avoidable, statutory liens are not. A mechanic’s lien is statutory, and unavoidable, because it exists at the moment the work begins, depending upon the judicial process only for perfection. Awards arising under the Prompt Payment Act, however, are judicial because a court must determine whether any party substantially prevailed and what constitutes reasonable attorney fees. As Vermont’s Contractor’s Lien law does not allow recovery of attorney fees, penalties, or costs, while the Prompt Payment Act does, the award of costs and fees arose under the Prompt Payment Act and was avoidable in bankruptcy.
8. Utility Company’s Duty to Owner, Le-Nature’s, Inc. v. Latrobe Mun. Auth., 913 A.2d 988 (Pa. Commw. Ct. 2006).
* What the Court Considered: The Pennsylvania One Call Statute established “a single toll-free telephone number for contractors or designers or any other person covered by this act” to notify operators of utility lines of planned excavation work and to locate affected utility lines. A contractor planning to drill for caissons called this number. After almost three months without a response, the contractor commenced drilling and damaged a sewer line. The Owner of the project brought suit against the municipal authority and the City that operated the sewer line under negligence and breach of contract theories. The governmental defendants asserted that there was no duty flowing to the owner as “owner” was not enumerated in the statute.
* What the Court Said: An owner is owed a duty under the One Call Statute as an intended beneficiary under the language “any other person covered by this act.”
* What the Opinion Means: Owners clearly have an interest in the utility’s response through the One Call system. For example, this owner paid the contractor for fixing the sewer line and all of the resultant damage. However, this particular suit was precluded by governmental immunity because the owner could not establish that the failure to comply with the One Call statute rendered the sewer system dangerous or unsafe for the purposes for which it was intended.
9. Expert Testimony on Interpretation of a Contract, Hanspard v. Otis Elevator Co., 2007 WL 839994 (W.D. La. Jan. 12, 2007).
* What the Court Considered: An employee was injured when he backed his forklift into an open elevator shaft. An interlock normally keeps the hoistway doors that block this opening closed. The employee’s expert witness testified that recent repairs had left the interlock susceptible to damage and that the subsequent failure of the interlock most likely caused the hoistway doors to remain open. The expert also sought to testify to the elevator installer’s contractual obligation to inspect and repair the elevator in question.
* What the Court Said: Experts may not offer opinion as to the scope of contractual duties because these constitute legal conclusions.
* What the Opinion Means: An expert can offer circumstantial evidence of a product defect and of actual or constructive notice. However, an expert may not offer legal conclusions, even if qualified as an expert in contract interpretation.
10. Subrogation of Surety Without Payment of Obligation, Manhattan Constr. Co. v. McArthur Elec., Inc., 2007 WL 295535 (N.D. Ga. Jan. 30, 2007).
* What the Court Considered: A general contractor supplemented and then replaced a subcontractor. When the general contractor asserted a claim on that subcontractor’s performance bond, the surety refused to insure performance and made no payment under the bond. In response to the suit filed by the general contractor against both the subcontractor and the surety, the surety asserted a counterclaim based on subrogation to the rights of the subcontractor. The general contractor moved to dismiss this claim, citing the fact that the surety did not undertake any obligation under the bond.
* What the Court Said: A surety is not subrogated to the rights of its principal until the surety pays the obligation.
* What the Opinion Means: A right to enforce subrogation must be supported by valuable consideration, namely payment of the debt insured. A surety with no right to enforce its subrogation rights has no right to preserve its rights subject to the contingency that the surety may be liable at a later time.
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.