Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Recovery on a Public Payment Bond Under North Carolina Law, HIS N.C., LLC v. Diversified Fire Prot. of Wilmington, 611 S.E.2d 224 (N.C. Ct. App. 2005).
* What the Court Considered: A supplier to a second-tier subcontractor on a public project was not paid for materials it delivered to the site. Thereafter, the supplier gave written notice of a claim on the public payment bond within the statutorily prescribed time period.
* What the Court Said: Under North Carolina law, the supplier could maintain a claim on the project’s public payment bond.
* What the Opinion Means: North Carolina’s “Little Miller Act,” which governs public payment and performance bonds, provides that a claimant who has a direct contractual relationship with a subcontractor, but no contractual relationship with the general contractor, may assert a claim on a public payment bond. The Act defines a “subcontractor” as “any person who has contracted to furnish labor or materials to, or who has performed labor for, a contractor or another subcontractor in connection with a construction contract.”
2. Recovery of Lost Profits for Wrongful Rejection of Bid, Cementech, Inc. v. City of Fairlawn, 160 Ohio Ct. App. 3d 450 (2005).
* What the Court Considered: Although a contractor’s bid to construct a service road was wrongly rejected by the city, the contractor was denied injunctive relief. The city then hired another company to perform the work. The disappointed bidder sought to recover its lost profits. The city argued that the contractor’s damages should be limited to its bid preparation costs.
* What the Court Said: Because injunctive relief was improperly denied, the contractor was entitled to recover its lost profits.
* What the Opinion Means: Under Ohio law, the preferred method of resolving bidding disputes is through injunctive relief. Here, since the contractor was wrongly denied injunctive relief, an award of lost profits was necessary to ensure the contractor adequate relief. Allowing the recovery of lost profits protects the integrity of the bidding process even though it requires taxpayers to pay twice for the same work. However, “ensuring wronged parties receive meaningful relief outweigh[s] the risk of citizens paying twice for the same project.”
3. Modification of Written Change Order Requirement, Spraungel Constr., Inc. v. W. Bloomington Motel, Inc., 2005 WL 832063 (Minn. Ct. App. 2005).
* What the Court Considered: The owner of a motel hired a contractor to renovate its property. The parties’ contract required that all change orders be approved by the owner in writing. Despite this requirement, the contractor alleged that the owner had orally approved approximately $189,000 in changes throughout the project. The owner refused to pay for the changes because of the contractual written change order requirement.
* What the Court Said: Because the owner knew that the contractor was performing change work and that the contractor expected to be paid for the work, the owner was obligated to pay for that work.
* What the Opinion Means: Under Minnesota law, a written contract may be modified by the parties’ subsequent conduct. In this case, although the contract required that change orders be in writing, the owner waived the requirement by orally approving certain changes. In fact, project meeting minutes revealed the owner had discussed and approved the changes at those meetings.
4. Enforceability of Lien Subordination Agreements, Bellevue Tech. Tower, LLC v. DPR Constr., Inc., 2005 WL 827494 (Wash. Ct. App. 2005).
* What the Court Considered: The developer of an office and retail project experienced financial difficulties and was unable to pay its union workers. Thereafter, it obtained an interim bridge loan from one of its shareholders. As part of the loan, the contractor and subcontractors agreed to subordinate their lien rights to the deed of trust securing the loan. Although the loan agreement provided for a loan in the amount of $22 million, the priority agreements stated the loan amount would be $24 million. The project ceased when the owner failed to secure additional financing. The contractor and subcontractors attempted to foreclose on their lien claims, arguing that the priority agreements were unenforceable.
* What the Court Said: Because the actual loan amount differed from the amount in the priority agreements, the priority agreements were unenforceable.
* What the Opinion Means: Under Washington law, a contractor may agree to change the priority of its lien. However, such subordination agreements are strictly construed. Thus, the term of the priority agreements in this case, which contemplated a loan in the amount of $24 million, was unmet because the actual loan amount was only $22 million. Consequently, the priority agreements were unenforceable.
5. Recovery of Additional Costs for Differing Subsurface Site Conditions, Interstate Contracting Corp. v. City of Dallas, 2005 WL 928593 (5th Cir. 2005).
* What the Court Considered: A subcontractor hired to construct a levee and excavate two drainage lakes expected that the material from the lakes would be suitable to use in building the levee. Although a note on the drawings indicated the excavated material would be suitable for levee construction, the prime contract provided that “[a]ll risks of differing subsurface conditions shall be borne solely by the CONTRACTOR.” Additionally, the contract required that bidders visit the site and examine the local conditions prior to submitting a proposal. After commencement of the work, it was discovered that the excavated material was unsuitable for levee construction. The subcontractor incurred additional costs in manufacturing fill material, and the contractor brought a differing site condition claim on the subcontractor’s behalf.
* What the Court Said: Because the prime contract unambiguously placed the risk of differing site conditions on the contractor, the city was not liable for the subcontractor’s additional costs.
* What the Opinion Means: A basic principle of contract law is that an unambiguous contract will be enforced as written. Here, although the plans indicated that the excavated material would be sufficient to build the levee, the contract unambiguously placed the risk of inadequate plans with the contractor.
6. Willful Exaggeration of a Mechanic’s Lien Claim, J. Sackaris & Sons, Inc. v. Terra Firma Constr. Mgmt. & Gen. Contracting, LLC, 788 N.Y.S.2d 424 (N.Y. App. Div. 2005).
* What the Court Considered: A subcontractor filed a mechanic’s lien, then failed to respond timely to the contractor’s demand for an itemized and verified statement of lien. Furthermore, according to the contractor, the lien claim willfully exaggerated the amount of the lien.
* What the Court Said: The contractor failed to show that the subcontractor had intentionally exaggerated the lien amount.
* What the Opinion Means: To prove willful exaggeration of a lien claim under New York law, the contractor must demonstrate that the lien claimant deliberately and intentionally exaggerated the lien amount. Here, the contractor could make no such showing. In addition, the trial court did not err in deciding that the lien claim could continue despite the claimant’s late response to the contractor’s demand for an itemized and verified statement of lien.
7. Application of New York’s Scaffold Act to Workers’ Activities Subsequent to Repair Work, Beehner v. Eckerd Corp., 821 N.E.2d 941 (N.Y. 2004).
* What the Court Considered: After repairing the owner’s air conditioning unit, a worker was injured when attempting to retrieve the serial and model numbers from the unit. The worker sued the owner under New York Labor Law section 240, known as the New York “Scaffold Act.”
* What the Court Said: Because the Scaffold Act does not cover an injury occurring after an enumerated activity is complete, the plaintiff could not recover against the owner.
* What the Opinion Means: New York’s Scaffold Act provides that owners contracting for, among other things, the repair of a building must furnish the “scaffolding, hoists, stays, ladders, slings, hangers, blocks, pulleys, braces, irons, ropes, and other devices” necessary for the proper protection of workers. In this case, the retrieval of the model and serial numbers occurred after the repair work had been completed. Thus, the Scaffold Act was no longer applicable to the owner.
8. Application of Nebraska’s Scaffold Act to Independent Contractors, Semler v. Sears, Roebuck & Co., 689 N.W.2d 327 (Neb. 2004).
* What the Court Considered: A worker dispatched by his employer to repair a heating unit at a retail store was injured when the ladder he was provided by the owner slipped. According to the worker, the ladder slipped because of its lack of “rubber shoes.” The worker sued the owner under Nebraska’s “Scaffold Act,” Neb. Rev. Stat. § 48-425.
* What the Court Said: Because the worker was an independent contractor of the retail store owner, the Scaffold Act did not apply to hold the owner liable for the worker’s injury.
* What the Opinion Means: Nebraska’s Scaffold Act provides that ladders be “erected and constructed in a safe, suitable and proper manner.” As interpreted by Nebraska courts, however, this duty applies only in the employer-employee context. Independent contractors are not protected by the Act.
9. Accord and Satisfaction Under Kansas Law, Al Muehlberger Concrete Constr., Inc. v. McQuaid Bros. Remodeling Co., 319 B.R. 663 (D. Kan. 2005).
* What the Court Considered: A subcontractor invoiced its general contractor for work completed under the parties’ contract. After its initial invoices went unpaid, the subcontractor did not again seek payment until two years later. The general contractor then sent a check marked “Final Payment” for half the amount owed. The accompanying letter set forth the general contractor’s position that, because the subcontractor had waited so long to seek payment, it was entitled to only half the invoiced amount. The subcontractor subsequently cashed the check after crossing out the words “Final Payment.”
* What the Court Said: Because the check was tendered as full satisfaction of the debt, the subcontractor was not entitled to the other half of the invoiced amount.
* What the Opinion Means: The doctrine of accord and satisfaction provides that when a party against whom a claim is asserted tenders an instrument as full satisfaction of a claim over which there is a bona fide dispute, the claim is discharged unless the claimant objects. Here, the contractor clearly rendered the check as full and final payment of the debt. In addition, the parties agreed there was a bona fide dispute over the claim. Because the subcontractor accepted the check, the claim was discharged.
10. Implied Warranty of Good Workmanship, Hayden Bus. Ctr. Condo. Ass’n v. Pegasus Dev. Corp., 105 P.3d 157 (Ariz. Ct. App. 2005).
* What the Court Considered: A company that had performed construction-related services for the developer of a condominium complex was sued by the subsequent purchasers of the condominium units for breach of the implied warranty of good workmanship. The suit arose out of construction defects in the building.
* What the Court Said: Because the condominium purchasers did not have a contractual relationship with the company, they could not recover for breach of an implied warranty.
* What the Opinion Means: Under Arizona law, breach of implied warranty of good workmanship is a contract-based claim and only parties to a contract may bring an action for such claim. Although an exception to this general rule exists for purchasers of homes, the exception applies only as against the homebuilder-vendor. Here, the exception did not apply because the defendant company was not the developer or vendor of the units, but was simply a contractor that worked for the vendor.
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.