Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and David L. Hobson
1. Continuous Employment and Worker’s Compensation Coverage, Ray Bell Constr. Co. v. King, 642 S.E.2d 841 (Ga. 2007).
* What the Court Considered: A contractor hired an out-of-state superintendent for a project, providing him with an apartment near the jobsite and a company truck. On a Sunday after a week spent on medical leave, the superintendent used the company truck to move some family furniture from a location near the jobsite to another city. While returning from this personal trip, the superintendent was involved in a fatal vehicular collision in the general vicinity of the jobsite The superintendent’s heirs moved for worker’s compensation benefits for his minor children.
* What the Court Said: By returning to the general vicinity of the jobsite, the employee resumed his otherwise continuous employment as a traveling employee, and thus his injuries were compensable.
* What the Opinion Means: While an injury must arise out of and in the course of employment to be compensable, "traveling employees" are, in effect, in continuous employment for purposes of worker’s compensation in Georgia. Such an employee may depart from employment by undertaking a personal mission unrelated to the health and comfort of the employee, but resumes employment upon entering the general proximity of the place where he was employed to be.
2. Res Judicata and Arbitration Agreements, Bryan County v. Yates Paving & Grading Co., 638 S.E.2d 302 (Ga. 2006).
* What the Court Considered: A contract between the public owner and the Contractor included an arbitration clause, which provided that all matters arising out of or relating to the contract would be decided by arbitration. After the owner ordered the contractor to halt construction, the contractor invoked the arbitration clause, and eventually obtained an award of damages. Three years later, the contractor filed another demand for arbitration, asserting that the public owner’s conduct rendered the contractor unable to bid on other governmental contracts. The owner asserted that the new claims were barred by res judicata because they were not raised in the first arbitration.
* What the Court Said: Because res judicata is not a claim arising out of or relating to the contract, the trial court could decide that issue and was not required to send the matter back to arbitration.
* What the Opinion Means: Res judicata is a procedural bar to claims that have already arisen; it is not a claim arising out of the contract. Requiring the trial court to send a procedural matter to arbitration would defeat the purpose of providing a swift and inexpensive means of resolving disputes.
3. The Definition of "Occurrence" in CGL Policy, The Travelers Indem. Co. of Am. v. Moore & Assocs., Inc., 216 S.W.3d 302 (Tenn. 2007).
* What the Court Considered: A hotel construction project suffered water damage as a result of the window installation subcontractor’s faulty workmanship. When the owner filed an arbitration demand against the general contractor, the contractor argued that its commercial general liability ("CGL") insurer had a duty to defend the contractor against the claim. The "insuring agreement" of the policy provided that the insurer will defend the contractor against any suit seeking damages caused by an "occurrence." Under the policy, an "occurrence" is defined as "an accident."
* What the Court Said: Because the damage was caused by an occurrence, the insurer had a duty to defend the contractor against the suit.
* What the Opinion Means: According to the Court, the term "accident" as used in the CGL policy in this case meant an unforeseen or unexpected event. Further, the Court considers foreseeability from the perspective of the insured. Here, the Court found that the negligent window installation was not foreseeable.
4. The Definition of "Event" in CGL Policy, Adair Group, Inc. v. St. Paul Fire and Marine Ins. Co., 477 F.3d 1186 (10th Cir. 2007).
* What the Court Considered: After a $2.5 million arbitration award against a contractor for construction deficiencies in work performed by its subcontractors, the contractor sought indemnification from its commercial general liability ("CGL") insurer. The CGL policy under consideration covered property damage caused by an "event."
* What the Court Said: Because the loss was not an "event" under the policy, it was not covered.
* What the Opinion Means: The Court rejected the contractor’s argument that the unanticipated failure of some of the subcontractors to perform their work in a workmanlike manner constituted an event under the policy. According to the Court, a CGL policy is not intended to provide an anticipatory guarantee of quality work.
5. Application of Economic Loss Doctrine in Pennsylvania, McElwee Group, LLC v. Mun. Auth. of the Borough of Elverson, 476 F. Supp. 2d 472 (E.D. Pa. 2007).
* What the Court Considered: A contractor sued an engineering firm that performed engineering work for the draining of a lagoon and the construction of a wastewater facility. The contractor and engineer were not in contractual privity. The contractor alleged the engineer had fraudulently misrepresented the complexity of the drainage and construction project. Specifically, the engineer allegedly represented to the contractor that only 100 tons of sludge would have to be removed from the lagoon. In fact, over 4400 tons of sludge were removed.
* What the Court Said: The economic loss doctrine did not prohibit the contractor’s suit against the engineer.
* What the Opinion Means: The economic loss doctrine bars tort actions where the only injury is economic loss. The application of the doctrine in Pennsylvania is currently unclear. However, the Pennsylvania Supreme Court recently held that the doctrine did not prevent a contractor from pursuing a negligence action against an architect. The Court here found that the Supreme Court’s reasoning applied with even more force to intentional torts.
6. Enforcement of Engineer’s Exculpatory Clause Against Surety, Lyndon Prop. Ins. Co. v. Duke Levy and Assocs., LLC, 475 F.3d 268 (5th Cir. 2007).
* What the Court Considered: When a public sewage collection system project failed to proceed as planned, the owner terminated the general contractor and the surety funded completion of the project. The replacement contractor found numerous deficiencies with the previous contractor’s work. The surety spent considerable sums correcting and testing work that had been approved by the engineer, and sought to recover these sums through a negligence action against the engineer. As a defense, the engineer of record pointed to an exculpatory clause in its contract denying any duty or responsibility to the contractor or surety for any "authority to act . . .[or] decision made by Engineer in good faith either to exercise or not exercise such authority."
* What the Court Said: Because the exculpatory language was somewhat unclear, the clause did not insulate the engineer from liability to the surety.
* What the Opinion Means: Courts strictly scrutinize exculpatory agreements involving the public interest. A public owner cannot bargain away an engineer’s duty to a surety that might arise when the surety steps into the owner’s shoes under equitable subrogation.
7. Equitable Estoppel and Agreements to Revise a Modification, P.J. Dick, Inc. v. Gen. Servs. Admin., 2007 WL 994570, CBCA No. 461 (Civilian B.C.A. Mar. 23, 2007).
* What the Board Considered: After encountering differing ground water and soil conditions, the contractor alleged that it received permission from the owner to modify the contract by using "placeholder" rates for excavation work. These rates, which would be included in subsequent cost proposals to calculate partial payments, were less than the actual costs being incurred, but would be "trued up" with supplemental modifications to reflect actually-incurred costs. When the contractor submitted the actually-incurred costs to replace the "placeholder " rates, the owner refused to pay, claiming the first modifications settled all claims.
* What the Board Said: The contractor could assert that the owner was equitably estopped from denying the existence of the agreement to "true-up" costs.
* What the Opinion Means: Where a party relies upon a representation of an existing or past fact, that party can use equitable estoppel to prevent the party who made the representation from later denying the fact. Here, the agreement to "true-up" the "placeholder" rates allegedly existed before the issuance of the first modifications reflecting the "placeholder" rates. Therefore, the existence of the "true-up" agreement was an existing fact which the contractor could estop the owner from denying.
8. Implied Indemnity in Illinois, Danny’s Constr. Co. v. Travelers Cas. and Sur. Co. of Am., 2007 WL 715756 (N.D. Ill. Mar. 7, 2007).
* What the Court Considered: When a sub-subcontractor was not paid by the subcontractor with which it had contracted, it sued the payment and performance bond surety. The surety then sued the owner for implied indemnity, alleging the sub-subcontractor’s damages arose out of defective designs provided by the owner.
* What the Court Said: The surety’s implied indemnity claim against the owner was dismissed.
* What the Opinion Means: An implied indemnity claim would only be available if the surety could be held derivatively liable for a tort committed by another party. Here, an implied indemnity claim was unavailable because the surety’s liability arose out of a contract, namely the payment and performance bond.
9. Professional Negligence Requires Expert Testimony, J & A Mech., Inc. v. Wimberly Allison Tong & Goo, KBJ, 2006 WL 3388450 (M.D. Fla. Nov. 21, 2006).
* What the Court Considered: A subcontractor alleged that deficiencies in the plans and specifications issued by the architect delayed and disrupted its work. As evidence supporting its claims, the subcontractor offered testimony of the president of a construction management and consulting organization, who purported to be an expert in construction administration but not architectural services.
* What the Court Said: Because the subcontractor offered no evidence of the standard of care of architects, it could not advance a claim of negligent design.
* What the Opinion Means: When professional negligence is alleged, Florida courts require expert testimony to establish the standard of care of similar professionals in the community under similar circumstances. Only an architect could offer expert testimony about the standard of care of architects.
10. Response Time to Submittals, U.S. Eng’g Co. v. United Excel Corp., 2007 WL 471132 (D. Kan. Feb. 8, 2007).
* What the Court Considered: A subcontractor sued the contractor for unpaid contract balance. The contractor sought to stay the action, arguing that the subcontract required the subcontractor to pursue mediation. The subcontractor argued that the contractor could not rely on the subcontract because it breached the subcontract by failing to respond to submittals within fourteen days. The subcontract provided that "[f]ourteen (14) days must be allowed for return of shop drawings."
* What the Court Said: The contractor did not breach the subcontract by failing to respond to the subcontractor’s submittals within fourteen days.
* What the Opinion Means: The subcontractor’s reliance on the fourteen-day response provision was misplaced. The provision does not require the contractor to respond to submittals within fourteen days.
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.