Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Requirement That Public Contract Be Awarded to Lowest Responsible Bidder, Rath v. City of Sutton, 673 N.W.2d 869 (Neb. 2004).
* What the Court Considered: A contractor located in Lincoln, Nebraska (“Lincoln Contractor”), submitted the low bid in response to an invitation for bids by the City of Sutton, Nebraska (“City”) for the construction of improvements to the City’s wastewater treatment facility. A second contractor, located in Sutton (“Sutton Contractor”), submitted a bid that was identical to the Lincoln Contractor’s bid, except that the Sutton Contractor’s bid was $16,000 higher. Nonetheless, the City awarded the contract to the Sutton Contractor. Upon a bid protest by the Lincoln Contractor, the City argued that the Sutton Contractor’s bid was superior because the Sutton Contractor was a local contractor that would be more familiar with the varied types of soil in the area, would be immediately available for future repairs and maintenance, and had previous experience working with the project engineer.
* What the Court Said: The City was required to award the contract to the lowest responsible bidder, which was the Lincoln Contractor.
* What the Opinion Means: The bids at issue were identical in every respect except price. Moreover, none of the alleged advantages to the Sutton Contractor’s bid, as identified by the City, were based upon factors within the scope of the bid or the bidding specifications. Accordingly, under Nebraska public bidding law, the City had no discretion to award the contract to any party other than the lowest responsible bidder.
2. Government’s Right to Cancel Invitation for Bids After Bid Opening, Matter of: First Enterprise, 2004 U.S. Comp. Gen. LEXIS 1 (Comp. Gen. 2004).
* What the Comptroller General Considered: After the low bidder for the construction of a prosthetic and eye clinic center withdrew its bid due to a mistake, the Department of Veteran’s Affairs (“VA”) decided to reject all remaining bids and cancel the invitation for bids (“IFB”) because, among other reasons, all remaining bids exceeded the amount of funding available for the project. The VA then amended the solicitation to include an additional alternate deductive item and converted the IFB to a request for proposals, which consequently was awarded to another bidder. The contractor, which would have been awarded the contract as the remaining low bidder under the original IFB, alleged that the VA had no compelling reason to cancel and covert the IFB to a negotiated procurement.
* What the Comptroller General Said: The contractor’s protest was denied.
* What the Opinion Means: “Cancellation of a solicitation after bids have been opened and prices have been exposed is only permitted where a compelling reason exists to cancel.” However, because a government agency cannot create obligations that exceed available funds, a determination that funds are insufficient for its proposed contract obligation is a sufficient and compelling reason to cancel a solicitation. Accordingly, the VA’s decision to reject all remaining bids and cancel the IFB was proper under the circumstances.
3. Extension of Lien Filing Period Based Upon “Gratuitous” Work, Crème de la Crème (Kansas), Inc. v. R & R Int’l, Inc., 85 P.3d 205 (Kan. Ct. App. 2004).
* What the Court Considered: An electrical subcontractor completed the work within the scope of its subcontract on the construction of a daycare facility, then submitted a request for final payment on September 20, 1999, which stated that the subcontractor’s work was “100 percent complete.” When the general contractor failed to make final payment, the subcontractor filed a mechanic’s lien on the project owner’s property on December 23, 1999. The owner argued that the lien was untimely because it was filed more than three months after the last date the subcontractor furnished supplies, materials, or equipment to or performed labor on the project, as required by the Kansas mechanic’s lien statute. The subcontractor argued that its lien filing period was extended because it returned to the site to perform additional work on September 23 and 24, 1999, as orally requested by the owner’s representatives.
* What the Court Said: The subcontractor’s lien was not timely filed.
* What the Opinion Means: Under Kansas law, the test for whether a mechanic’s lien was timely filed is “whether the final work was necessary under the terms of the original contract to complete the job and to comply with the requirements of the contract.” Here, the additional work performed by the subcontractor was determined to be “gratuitous” and “merely incidental” work outside the scope of the subcontract. Such “courtesy” work could not be used to extend the time in which to file a mechanic’s lien.
4. Liability Under False Claims Act for Intentional Underbidding, United States ex rel. Bettis v. Odebrecht Contractors of California, Inc., 297 F.Supp.2d 272 (D. D.C. 2004).
* What the Court Considered: The Army Corps of Engineers (“COE”) entered into a multi-million dollar contract with a contractor for a six-year dam construction project. The contractor’s bid was almost $30 million below the second lowest bid. During construction, the contractor received more than $100 million over its bid through requests for equitable adjustment, but nonetheless incurred a loss in excess of $30 million on the project. A False Claims Act (“FCA”) against was brought against the contractor based upon allegations that, among other things, the contractor had fraudulently induced COE to award it the contract by submitting an intentionally low bid on the project, while intending to seek modifications during construction to make up the difference in price.
* What the Court Said: A contractor does not incur liability under the FCA merely for intentionally submitting a low bid with the intent to seek payment in excess of that bid price through future requests for adjustments.
* What the Opinion Means: The FCA protects government funds and property from false or fraudulent claims. Unlike for an artificially inflated bid, the FCA does not impose liability merely for submitting an artificially deflated bids. Since there are numerous legitimate adjustments that could increase a contract price beyond the bid price, proof that a contractor fraudulently induced the government to enter into a contract by making an intentionally low bid, then attempted to obtain monies in excess of the bid price, is alone insufficient to create liability under the FCA. Instead, to incur liability, the contractor must make a claim “for money to which [it] is not legitimately entitled.”
5. Union’s Right to Recover on Lien for Contractor’s Failure to Make Contributions to Trust Fund, R. Betancourt v. Storke Housing Investors, 82 P.3d 286 (Cal. 2004).
* What the Court Considered: A plumbing subcontractor employed laborers under a collective bargaining agreement between its general contractor and the laborers’ union. The collective bargaining agreement required that the employers of union members pay cash wages and make contributions to the union’s trust fund for the benefit of laborers. Although the subcontractor paid the union members’ wages, it did not make the trust fund contributions. The union and several individual union members filed a mechanic’s lien on the owner’s property in an effort to secure payment of the required contributions. The project owner argued that the union could not recover on the lien because California’s mechanic’s lien statute had been preempted by ERISA, the comprehensive federal statutory scheme that regulates the administration of employee benefit plans.
* What the Court Said: The union could maintain a suit on the mechanic’s lien to secure compensation for mandatory trust fund contributions.
* What the Opinion Means: Generally, ERISA preempts state laws that “relate to” employee benefit plans. However, California Civil Code § 3110, under which the union filed its lien, is “a law of general applicability” that does not “relate to” ERISA plans and does not constitute an alternative enforcement mechanism to ERISA. Accordingly, the state mechanic’s lien statute was not preempted by ERISA.
6. Recovery on Miller Act Payment Bond Despite Potential Loss on Subcontract, United States ex rel. Metric Electric, Inc. v. EnviroServe, Inc., 301 F.Supp.2d 56 (D. Mass. 2003).
* What the Court Considered: The general contractor on an Army Corps of Engineers (“COE”) contract failed to make an initial progress payment to its electrical subcontractor allegedly because it “experienced a financial setback…due to a non-payment issue” on another construction project. The subcontractor filed a claim against the general contractor’s Miller Act payment bond and the general contractor terminated the subcontract the following day. The COE then terminated the general contractor’s prime contract. The general contractor’s surety alleged that the subcontractor’s claim against the payment bond was inflated because it had under-bid the subcontract and was in a loss position.
* What the Court Said: The subcontractor was entitled to the reasonable value of its labor and materials furnished to the project.
* What the Opinion Means: Where, as here, a general contractor wrongfully breaches a subcontract, the subcontractor may recover in quantum meruit on a Miller Act payment bond for the reasonable value of its labor and materials furnished to the project. Further, a subcontractor’s recovery on a Miller Act payment bond is not limited to the subcontract price. Instead, the subcontractor may recover the value of its services even if the subcontractor would have incurred a loss in completing performance, such as loss resulting from having under-bid the subcontract, which it could not recover in a breach of contract action.
7. Applicable Statute of Limitations for Owner’s Suit Against Engineer, Nerco Minerals Co. v. Morrison Knudsen Corp., 2004 Ida. LEXIS 59 (Idaho 2004).
* What the Court Considered: An owner entered into a contract with an engineer for the development of a heap leach pad, which is used in mines to salvage precious metals from low-grade ore. After construction of the pad by another contractor according to the engineer’s pad design, conceptual planning, and preliminary drawings, the pad began to fail. The owner sued the engineer as a result of this failure and the engineer moved for summary judgment under Idaho’s two-year statute of limitations for malpractice actions. The owner argued that the five-year statute of limitations for breach of contract claims applied.
* What the Court Said: Because the owner’s claims were properly classified as claims for professional malpractice, rather than breach of contract, those claims were barred by the statute of limitations for malpractice actions.
* What the Opinion Means: Under Idaho statutory law, “professional malpractice” is defined as “wrongful acts or omissions in the performance of professional services by any person, firm, association, entity or corporation licensed to perform such services under the law of the state of Idaho.” In this case, the owner’s claim was properly characterized as a professional malpractice claim because the engineer’s alleged wrongful acts or omissions occurred within the course of performing its professional services. This was evidenced by, among other things, the fact that the contract was called a “Master Contract For Professional Service” and that the engineer had to be licensed to perform the services under the contract. Accordingly, the malpractice statute of limitations applied and the owner’s claim was untimely.
8. Failure to Establish Causal Link to Death Caused by Airborne Fungus, Piedmont Hosp., Inc. v. Reddick, 2004 WL 574805 (Ga. Ct. App. 2004).
* What the Court Considered: A patient died after contracting a fungal infection while being treated in a hospital. The decedent’s sister sued a construction company and an architectural firm, alleging that construction work being performed in or near the intensive care unit in the hospital “stirred up” dirt in the area, causing the deadly fungus aspergillus to become airborne and transmitted to the patient. The plaintiff argued that the defendants had failed to take the proper safeguards necessary to protect patients from the known dangers presented by the fungus during construction in hospitals.
* What the Court Said: The plaintiff’s claims against the construction company and architectural firm were without merit.
* What the Opinion Means: The construction company filed an affidavit stating that it was not working anywhere near the intensive care unit when the decedent was a patient. Moreover, the construction company stated that it sealed its work areas with protective plastic to contain construction debris and that its construction areas did not share a ventilation system with the areas occupied by the decedent. The architectural firm filed an affidavit stating that it was only minimally involved in designing the part of the intensive care unit where the decedent was located and had no participation in the construction work. These affidavits shifted the burden to the plaintiff to establish evidence supporting her allegation, possibly through expert testimony. The plaintiff failed to make this necessary connection, so she was asserting only “a mere possibility of causation” on “a matter of pure speculation or conjecture,” which is insufficient for liability.
9. Waiver of Right to Additional Compensation for Differing Site Condition, Gratech Co., Ltd. v. North Dakota Dep’t. of Transp., 676 N.W.2d 781 (N.D. 2004).
* What the Court Considered: A subcontractor encountered poor soil conditions on the site of a highway reconstruction project, requiring it to perform additional work. The subcontractor sought additional compensation from the owner, the North Dakota Department of Transportation (“DOT”), for such work. However, the subcontractor had failed to give written notice of the differing site condition to the DOT, as required by its subcontract and by a state statute requiring written notice of a claim by any person seeking additional compensation from the DOT for work not covered in the contract. Accordingly, the DOT denied the subcontractor’s claim for additional compensation.
* What the Court Said: The subcontractor was not entitled to additional compensation for its additional work on the project.
* What the Opinion Means: The subcontractor argued that its additional work was covered under the subcontract and, therefore, the notice requirements did not apply. However, the work for which the subcontractor sought additional compensation, including additional excavation, subcutting, plowing, discing, and drying required because the soil conditions differed from the plans and the contract, was not provided for in the subcontract. Accordingly, the subcontractor’s failure to provide written notice of its claims as required by contract and statute “constituted a waiver of its right to claim additional compensation and a failure of the condition precedent to demand arbitration of the matter.”
10. Abandonment of “Acceptance Doctrine” Under Indiana Law, Peters v. Forster, 804 N.E.2d 736 (Ind. 2004).
* What the Court Considered: A contractor was sued for negligence by a plaintiff who was injured by slipping on a ramp that the contractor had installed at a home. The contractor argued that he could not be liable for negligence as he owed no duty to the plaintiff because the homeowners “accepted and paid for” the contractor’s work.
* What the Court Said: The contractor could be liable for negligence despite the fact that the homeowners had accepted the work.
* What the Opinion Means: Historically, Indiana courts applied the “acceptance rule” to hold that “contractors do not owe a duty of care to third parties after the owner has accepted the work.” However, this court abandoned the “acceptance rule” and adopted the modern “foreseeability doctrine,” whereby a contractor remains liable for injuries to or death of third parties after the owner’s acceptance of the work if that work is “reasonably certain to endanger third parties if negligently completed.” However, a contractor’s liability under the “foreseeability doctrine” is not absolute; instead, it is based upon the contractor’s negligence, which requires proof of a duty owed by the contractor, breach of that duty, and an injury proximately caused by such breach. Accordingly, a contractor would not be liable for negligence merely for following the plans or specifications provided by the owner, unless they are “so obviously dangerous or defective that no reasonable contractor would follow them.”
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: email@example.com.