Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Claiborne Smith
1. Court Upholds “Pay-to-Play” Statute Forbidding Award of Public Contracts to Contractors Making Large Political Contributions, In re Earle Asphalt Co., 966 A.2d 460 (N.J. 2009).
* What the Court Considered: A New Jersey statute prohibiting state agencies from awarding public contracts in excess of $17,500 to any business contributing more than $300 to the Governor, any candidate for Governor, or any political party during the 18 months prior to the contract’s award was challenged by a contractor who was disqualified from receiving a public highway contract after disclosing a $1,500.00 contribution to a political party. The contractor argued that the law was unconstitutional and that the anti-corruption provisions of the state’s public bidding laws were adequate to prevent misconduct in government contracting.
* What the Court Said: The court found that the statute was constitutional and did not violate a contractor’s freedoms of association and speech.
* What the Opinion Means: In New Jersey, contactors can be denied the award of a public contract, even after submitting a winning bid, if they violate statutorily imposed limits on political contributions.
2. Court Limits Contractor’s Ability to Recover Bad-Faith Damages from Surety, United States ex rel. SimplexGrinnell, LP v. Aegis, No. 1:08-CV-01728, 2009 U.S. Dist. LEXIS 2381 (M.D. Pa. Jan. 14, 2009).
* What the Court Considered: A contractor entered into a contract with the United States Navy to repair a depot. The contractor hired a subcontractor to provide the materials and labor for the project. The contractor subsequently failed to make payments and refused to respond to the subcontractor’s demands. The subcontractor then made a demand on the contractor’s surety for payment. The surety refused to pay and the subcontractor filed suit against the contractor and the surety, alleging that the surety acted in bad faith in denying payment. The surety argued that its surety bond was not an insurance policy under Pennsylvania law, and that, as a consequence, it was not liable for bad-faith damages the likes of which insurers could be ordered to pay when shown to have acted in bad faith.
* What the Court Said: The court found that Pennsylvania law allows for the recovery of interest, costs, or punitive damages when an insurer acts in bad faith. The legislative rationale for imposing special damages for bad faith actions by insurers is based on the direct contractual relationship insurers have with their insureds. The court found that a surety has only indirect contractual obligations to its obligee and should not be subjected to the same standard as an insurer with direct contractual obligations. Finding the surety not to be an insurer, the court refused to hold the surety liable for statutory damages recoverable specifically from insurers.
* What the Opinion Means: Pennsylvania law provides sureties certain protections not afforded them in other jurisdictions. Sureties are elsewhere subject to the same potential consequences for acting in bad faith as are insurers.
3. Contractors Can Recover Delay Damages and Home Office Expenses When Contract Clauses Violate Statutory No-Damages-for-Delays Laws, Martin Bros. Contractors, Inc. v. Virginia Military Institute, 675 S.E.2d 183 (Va. 2009).
* What the Court Considered: The Virginia Military Institute (VMI), a public corporation, hired a general contractor to renovate the campus dining hall. Over the course of the project VMI requested changes that resulted in a 270-day delay of the project. The cause of the delay was solely attributed to VMI, but VMI refused to pay the entirety of the general contractor’s delay damages. VMI argued that a contract provision prevented the recovery of home office expenses, precluding the general contractor from recovering the entirety of its claim. The general contractor argued that the contract provision relied upon by VMI was void under a Virginia law prohibiting no-damages-for-delay clauses in public works contracts.
* What the Court Said: The court found that any provision in a public works contract restricting a contractor’s right to delay damages was against public policy. The court also rejected VMI’s argument that a contractual clause allowing for a markup of 15% for overhead and profit was a formula for liquidated damages, which cannot be recovered under Virginia law. Ultimately, the contract provisions limiting recovery for delay damages were void and the contractor was entitled to full delay damages.
* What the Opinion Means: Virginia courts will closely adhere to the requirements of public-contracting laws and will invalidate contract provisions in conflict with their statutory mandate, potentially allowing contractors to collect delay damages incurred in performing under public works contracts.
4. Owner Compelled to Arbitrate Action For Deceptive Trade Practices Against Engineer, CEI Engineering Assoc., Inc. v. Elder Construction Co., No. 08-601, 2009 Ark. App. LEXIS 312 (Ark. App. Apr. 8, 2009).
* What the Court Considered: A contract between a developer and engineering firm contained a dispute resolution clause requiring the parties to arbitrate “all claims, disputes or controversies arising out of, or in relation to the interpretation, application or enforcement of the Agreement . . . .” When the developer sued the engineering firm for deceptive trade practices, the trial court refused to compel arbitration on the claim. The engineering firm appealed.
* What the Court Said: The appeals court reversed, rejecting the developer’s contention that the engineering firm’s actions constituted deceptive or unconscionable acts that would bring them within the purview of the Arkansas Deceptive Trade Practices Act. Instead, the appeals court found that the developer’s claims of over-billing, inadequate staffing and use of unqualified individuals were nothing more than contract claims. That being the case, the deceptive trade practices claim was subject to arbitration.
* What the Opinion Means: In Arkansas, counts or claim that sound in contract even if labeled otherwise are arbitrable.
5. California General Contractor Licensing Requirements Do Not Apply to an Owner’s Construction Manager, Fifth Day, LLC v. Bolotin, 172 Cal. App. 4th 939 (2009).
* What the Court Considered: A property owner entered into a contract with a firm to provide industrial real estate development and construction project management services. Under the contract, the firm was to serve as the owner’s construction manager and assist in coordinating construction and ensuring an organized and efficient job site. The owner subsequently entered into an agreement with a licensed general contractor to provide the actual construction services. Upon completion of the project, the construction manager sued the owner for its refusal to pay sums due under their contract. The trial court granted summary judgment in favor of the owner on the grounds that the construction manager lacked the requisite contractor’s license.
* What the Court Said: In a divided opinion, the California Court of Appeals reversed the trial court and held that a construction manager who does not actually provide any construction work itself – or through a subcontractor – is not required to comply with California’s construction licensure laws. The court looked to the statutory definition of “contractor” and found that the construction manager in the case before it did not meet the definition. The court found that California law specifically requires that construction managers on public projects be licensed as contractors, architects or engineers; however, there was no similar requirement for construction managers on private projects. That being the case, the owner was liable for amounts unpaid to the construction manager under the contract.
* What the Opinion Means: In California, on a private project it is not necessary for a construction manager to be licensed unless it is providing services that fall within the definition of a contractor.
Ira Genberg is a Partner at Troutman Sanders LLP in Atlanta, Georgia, and is General Counsel for Associated Owners & Developers (AOD) in McLean, Virginia. Claiborne Smith is an Associate at Troutman Sanders LLP. For more information, or if you have any questions, contact us at firstname.lastname@example.org.