Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and David L. Hobson
1. Enforceability of Arbitration Provision, TC Arrowpoint, L.P. v. Choate Constr. Co., 2006 WL 91767 (W.D.N.C. January 13, 2006).
* What the Court Considered: During construction of an office building, the developer who had signed the contract assigned its interest in the contract to an affiliated entity. Thereafter, the affiliated entity made payments under the contract. When the exterior wall panels began to fail, the affiliated entity filed a demand for arbitration against the contractor pursuant to the contract’s arbitration provision. Eventually, an arbitration hearing was held and a decision was entered in favor of the affiliated entity.
* What the Court Said: The contractor was bound to arbitrate the dispute even though the claimant was a nonsignatory to the contract.
* What the Opinion Means: Because arbitration decisions are entitled to a special degree of deference, the court would not overturn the arbitration decision. Notwithstanding the court’s deferential view of the arbitration award, the court stated that the contractor should have been required to submit to the arbitration even though the affiliated entity was a third party to the contract because the contractor had received a direct benefit from the entity under the terms of the contract. Specifically, the contractor had received payments from the entity in excess of $20 million.
2. Enforceability of Exculpatory Clause, Rosenberg v. Cape Coral Plumbing, Inc., 920 So. 2d 61 (Fla. Dist. Ct. App. 2005).
* What the Court Considered: After the house it built flooded, the contractor sued its plumbing subcontractor for breach of contract and negligence. The subcontract contained an exculpatory clause, which provided that the subcontractor is not responsible for damages incurred as a result of the water being turned on before the subcontractor has thoroughly tested the plumbing.
* What the Court Said: The exculpatory clause did not prevent the contractor from pursuing its breach of contract and negligence claims against the subcontractor.
* What the Opinion Means: Exculpatory clauses are enforceable in Florida provided they are clear and unequivocal. Here, the clause was unclear because it did not specify whether the subcontractor could be liable if it turned on the water itself. Also, because the clause did not say explicitly, as it must under Florida law, that the party is released from liability for its own negligence, the clause did not preclude the negligence claim against the subcontractor.
3. Enforceability of Accrual Provision, Gustine Uniontown Assocs., Ltd. v. Anthony Crane Rental, Inc., 892 A.2d 830 (Pa. Super. Ct. 2006).
* What the Court Considered: A contractor’s design agreement with the architect provided that causes of action shall be deemed to accrue on the date of substantial completion for acts or failures to act occurring before this date. The Certificate of Substantial Completion was issued on September 8, 1993. In 1995, the contractor discovered pervasive cracking in the walls, sidewalks, and parking lots but did not file suit against the architect until July 30, 1999.
* What the Court Said: Because both the 4-year limitations period for contract actions and the 2-year limitations period for tort actions began to run on the date of substantial completion, the action was untimely.
* What the Opinion Means: The design agreement unambiguously precluded application of the discovery rule, which provides that the statute of limitations begins to run on the date the latent defect is discovered. Furthermore, the language of the accrual provision was not limited to the contract claims and therefore applied equally to tort claims.
4. Accrual of Statute of Limitations, ABL Plumbing and Heating Corp. v. Bladen County Bd. of Educ., 623 S.E.2d 57 (N.C. Ct. App. 2005).
* What the Court Considered: On March 1, 2001, a general contractor defaulted on its obligations. A separate plumbing contractor with the Board of Education submitted a claim to the Board on April 24, 2001, alleging it had suffered damages as a result of the general contractor’s default. The plumbing contractor and the Board agreed to a remobilization agreement, whereby the plumbing contractor would continue to perform and would submit another formal claim to the Board by August 31. The contractor’s August 31 claim was rejected by the Board. On August 26, 2003, the contractor filed suit against the Board for failure to properly supervise the general contractor.
* What the Court Said: Because the statute of limitations had expired, the claim was untimely.
* What the Opinion Means: North Carolina law establishes a 2-year limitations period for claims against “a local unit of government upon a contract, obligation or liability arising out of contract, express of implied.” Furthermore, this limitations period begins to run as soon as the injury becomes apparent or should reasonably become apparent. Here, the injury was apparent to the contractor by at least the date it submitted its initial claim to the Board. The lawsuit was filed more than two years later.
5. Limitations Period Within Which To Enforce Arbitration Provision, Haycraft v. Mid-State Constr. Co., 915 So. 2d 1117 (Miss. Ct. App. 2005).
* What the Court Considered: Following its termination, a subcontractor filed suit against the general contractor. The general contractor filed a motion to dismiss based on the subcontract’s arbitration provision, which gave to the general contractor the exclusive right to choose to arbitrate. The judge subsequently dismissed the action, holding that “said claims shall be submitted to arbitration.” Seven years later, the subcontractor filed a motion to enforce the court’s original order because the general contractor had never initiated arbitration proceedings.
* What the Court Said: The 3-year limitations period within which to enforce an arbitration clause had elapsed.
* What the Opinion Means: Although the arbitration clause gave to the general contractor the exclusive right to determine whether to use arbitration, it did not prevent the subcontractor from initiating arbitration. Therefore, the limitations period began to run on the date the motion to compel arbitration was granted. Furthermore, the motion to compel merely prevents the aggrieved party from proceeding; it does not require the defendant to institute arbitration procedures against itself.
6. Application of Takings Doctrine in Georgia, Brown v. Penland Constr. Co., 623 S.E.2d 717 (Ga. App. 2005).
* What the Court Considered: A construction company was approached by a high school baseball coach interested in having the company construct an indoor practice facility. The company agreed to construct the facility without a written contract but with the understanding that it would be paid later. The company submitted numerous invoices to the county Board of Education, which were not paid.
* What the Court Said: The company was entitled to recover fair and adequate compensation because its property had been taken for a public purpose.
* What the Opinion Means: The Georgia Constitution provides that when property is taken for a public purpose by any governmental entity, fair and adequate compensation must be paid to the owner of the property. Here, because the company had provided the labor and materials to construct the facility, which was being used for a public purpose, it had a compensable property interest in the facility. The school district’s refusal to pay for the facility therefore amounted to a “taking.”
7. Subcontractor’s Duty to Defend, Travelers Indem. Co. v. S.M. Wilson & Co., 2005 WL 3143779 (E.D. Mo. Nov. 23, 2005).
* What the Court Considered: Following an electrical meltdown caused by a defective circuit breaker, suit was brought against the general contractor and the electrical subcontractor who installed the circuit breaker. The subcontract contained a provision obligating the subcontractor to indemnify and defend the general contractor against claims for injury to property on account of any act or omission by the subcontractor. Pursuant to this provision, the general contractor requested that the subcontractor defend it in the lawsuit. The subcontractor refused.
* What the Court Said: Because the subcontractor refused to provide a defense, it breached its duty to defend.
* What the Opinion Means: The duty to defend is distinct from the duty to indemnify. The latter requires a showing that the subcontractor engaged in actual wrongdoing. The former duty arises in the earliest stages of litigation regardless of whether the subcontractor is ultimately found to be liable.
8. Obligation To Make Final Payment on Public Project, Am. Rock Mechs., Inc. v. N. Abbonizio Contractors, 887 A.2d 322 (Pa. Super. Ct. 2005).
* What the Court Considered: A subcontract for drilling and earth removal services on a government sewer project obligated the contractor to make final payment within thirty days of project completion, which it did not do. The contractor claimed that its failure to provide final payment on time was excused by the fact that it had yet to receive payment from the township.
* What the Court Said: The contractor was obligated to make final payment within thirty days regardless whether it had been paid by the township.
* What the Opinion Means: Pennsylvania’s Procurement Code provides that, for public projects, payments to subcontractors must be made within fourteen days after the contractor receives a progress payment from the government. This code is meant to ensure that subcontractors receive payment for their work. It is not intended to supersede the payment schedule provided in the subcontract.
9. Guaranteed Maximum Price for CM Services, Retail Builders, Inc. v. Latham, 2005 WL 3508013 (Tenn. Ct. App. Dec. 22, 2005).
* What the Court Considered: Neither the owner nor the construction manager (“CM”) hired to manage the construction of a restaurant signed the AIA “Standard Form of Agreement Between Owner and Construction Manager” the parties had exchanged. However, the parties had signed an Amendment 1, reflecting that the parties had agreed to a $650,000 Guaranteed Maximum Price (“GMP”) for the work. During construction, the building type was changed and excess subsurface rock was discovered. According to the CM, the owner verbally agreed to pay for the resultant increased costs. The owner claimed it was told the CM might actually obtain cost savings on the project and that, in any event, it had not anticipated paying more than the GMP.
* What the Court Said: Although the AIA contract was unsigned, the parties had agreed to a $650,000 GMP.
* What the Opinion Means: To determine whether the parties agreed to a contract, courts apply an objective standard based on the parties’ manifestations. Here, in addition to signing the amendment, which reflected a $650,000 GMP, the CM submitted Payment Applications that listed the contract price as $650,000. Therefore, the CM was not entitled to compensation for the alleged cost overruns.
10. Economic Loss Doctrine Applied, E.J. Deseta, Inc. v. Goldner/Accord Ballpark, L.P., 2006 WL 51207 (Pa. Com. Pl. Jan. 10, 2006).
* What the Court Considered: An MEP subcontractor brought a negligence action against a concrete subcontractor for delays and inefficiencies the concrete subcontractor allegedly caused the HVAC sub-subcontractor. The MEP and concrete subcontractors were not in contractual privity with one another.
* What the Court Said: The economic loss doctrine prevented recovery by the MEP subcontractor.
* What the Opinion Means: Under the economic loss doctrine, purely economic losses are not recoverable from a defendant with whom the plaintiff is not in contractual privity. The only exception to the doctrine is for claims brought against a design professional, who is in the business of providing information to others. Here, the concrete subcontractor was not in the business of providing information to others, and therefore the exception did not apply.
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.