Construction Channel

Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry

By:  Ira Genberg and Ryan Stinnett
 

March 2004

1.  Distinction Between “Delay” and “Disruption” Damages, Atlantic Coast Mech. v. R.W. Allen Beers Constr., 2003 Ga. App. LEXIS 1468 (Ga. Ct. App. 2003).

* What the Court Considered:  A subcontractor submitted a request for equitable adjustment (“REA”) to its trade contract agreement based on increased labor costs incurred as a result of disruptions allegedly caused by the contractor.  The subcontractor claimed that, based upon restricted site access and the contractor’s mismanagement of the project schedule and the work of other subcontractors, it “was forced to perform its work in a radically different manner, method and sequence than that reflected in the project schedules or contemplated by [the subcontractor] at the time it bid on the project.”  The contractor said that the REA was precluded by terms of the subcontract and various change orders, including a “no damages for delay” provision in the construction management agreement between the contractor and owner, which was binding on the subcontractor by virtue of the terms of the subcontract.

* What the Court Said:  The subcontractor’s REA was based on disruption damages, rather than delay damages; thus, the subcontractor was not precluded from recovery of such damages.

* What the Opinion Means:  The contractual defenses asserted by the contractor, including the “no damages for delay” clause, would prevent the subcontractor from seeking “delay” damages.  However, the subcontractor in this case sought recovery of “disruption” damages for being forced to perform its work in an unexpected and inefficient manner.  Under Georgia law, the “fundamental distinction” between a disruption claim and a delay claim is that “unlike the delay claim, the disruption claim is intended not to redress [the subcontractor’]s loss from being unable to work, but to compensate [the subcontractor] for the damages it suffered from [the contractor’]s actions that made its work more difficult and expensive than [the subcontractor] anticipated and than it should have been.” 

2.  Applicability of Performance Bond Reinsurance Agreement to Cancelled Payment Bond, Airport Industrial Park, Inc. d/b/a P.E.C. Contracting Engineers v. United States, 59 Fed. Cl. 332 (Fed. Cl. 2004).

* What the Court Considered:  As required by its contract, a government contractor obtained a payment bond and performance bond for a construction project, as well as a performance bond reinsurance agreement.  The surety on the bonds became insolvent prior to completion of the work and notified the government that its bonding of the contractor was cancelled.  The government required the contractor to deliver “acceptable performance and payment bonds” to the owner within ten days or a stop work order would be issued.  The contractor responded that its reinsurance agreement “clearly contemplate[d] and cover[ed] both the performance bond and the payment bond.”  The government issued a cure notice, to which the contractor failed to respond, and the government terminated the contractor for default.  The contractor challenged its termination, claiming that both the payment and performance bonds (1) were marked with the same bond number and would have been issued as a single “performance and payment bond” had the surety not been required to use the government’s bond documents and (2) were covered by its reinsurance agreement.

* What the Court Said:  The government’s default termination of the contractor was justified because the contractor breached its contract by failing to replace its payment bond.

* What the Opinion Means:  The Miller Act requires separate payment and performance bonds on all federal construction projects; this distinction is important because the bonds are meant to protect different parties, with the payment bond guaranteeing payment to laborers and materialmen and the performance bond guaranteeing completion of the work for the benefit of the owner.  Also, the reinsurance agreement referenced only performance, and not payment, obligations.  Accordingly, the contractor’s assertion that the reinsurance agreement covered both its payment and performance bonds was unsupported by the facts of the case and the applicable law.          

3.  Right to Withdraw Erroneous Bid Based Upon “Excusable Neglect,” James Cape & Sons Co. v. Mulcahy, 672 N.W.2d 292 (Wis. Ct. App. 2003).

* What the Court Considered:  Approximately one hour before a contractor submitted its proposal for a Wisconsin Department of Transportation (“DOT”) road construction contract, a prospective subcontractor notified the contractor that the subcontractor had to increase its quoted price.  The contractor’s bid would have increased by $450,450 due to the subcontractor’s changed price.  The contractor decided to submit its bid anyway, along with a $100,000 “proposal guaranty,” but it mistakenly failed to increase the subcontractor’s price in its final bid schedule prior to submitting it to the DOT.  The contractor submitted the low bid on the project, but realized its mistake prior to being awarded the contract.  The DOT denied the contractor’s request to withdraw its bid and said the contractor forfeited its “proposal guaranty” when the contractor refused to sign the contract.  

* What the Court Said:  The contractor’s error was “excusable neglect;” thus, the contractor was entitled to withdraw its mistaken bid and recover its “proposal guaranty.”

* What the Opinion Means:  Under Wisconsin law, a bidder may withdraw a mistaken bid if the error was based upon “excusable neglect.”  To be “excusable,” the error must not be a “misjudgment or omission in determining the cost of items necessary to the bid” or involve a “lapse[] in procedure, staffing or knowledge” by the bidder.  In this case, the mistake was “excusable” because the contractor simply made a clerical error in its bid schedule. 

4.  Self-Interested Settlement of Claims by Surety, PSE Consulting, Inc. v. Frank Mercede and Sons, Inc., 838 A.2d 135 (Conn. 2004).

* What the Court Considered:  A subcontractor asserted a $1,123,551 claim against its contractor’s payment bond.  The surety’s claims analyst informed the subcontractor that the surety would not pay the claim because the contractor and surety had reasonable defenses to the claim.  The subcontractor sued the surety for bad faith refusal to pay and violations of the Connecticut Unfair Trade Practices Act (“CUPTA”).  The surety then settled the matter, over the contractor’s objection, by paying the subcontractor $200,000 for a full release of its claim.  The contractor refused to reimburse the surety for the amount of the settlement payment, alleging that the surety had acted in bad faith by settling a meritless claim in order to protect the surety’s own interests.     

* What the Court Said:  The surety was not entitled to indemnification from the contractor because it acted with bad faith in settling the subcontractor’s claim.

* What the Opinion Means:  Under Connecticut law, a surety is not entitled to indemnification from its principal if the surety settles a claim in bad faith, which is conduct involving “improper motive” or “dishonest purpose.”  A surety does not act in bad faith “simply because the principal objected to and raised colorable defenses to payment made by the surety to the claimant.”  However, in this case, the surety acted in bad faith because it: (1) failed to conduct a sufficient investigation of the subcontractor’s claim and (2) settled the claim solely to protect its own self-interest because it was fearful of an action by the insurance commissioner for failing to process the claim properly as required by the payment bond and because it hoped to release itself from the subcontractor’s claims that the surety had acted in bad faith and violated CUPTA.

5.  Retention Payment as “Final Payment” Under Subcontract, Decca Design Build, Inc. v. American Auto. Ins. Co., 2003 Ariz. App. LEXIS 161 (Ariz. Ct. App. 2003).

* What the Court Considered:  After completion of a construction project, the owner refused to pay the contractor because of alleged construction defects.  The contractor sued the surety of a subcontractor that was allegedly at fault for the defects.  The surety argued that the contractor’s suit was untimely under the express terms of the bond because it was filed more than two years after “final payment” became due under the subcontract.  The surety asserted that final payment to the subcontractor became due when the owner paid the contractor for the subcontractor’s work, which would have occurred in a progress payment more than two years before the contractor filed suit.  By contrast, the contractor argued that final payment was due only after it received payment from the owner for all of the work, that is, after the entire project was complete. 

* What the Court Said:  The contractor’s action against the surety was not time-barred because final payment had not yet come due under the subcontract.

* What the Opinion Means:  Under the terms of the subcontract, the final payment was the payment of retention amounts that the contractor was allowed to withhold on all progress payments until certain conditions were met: (1) project completion; (2) final acceptance; and (3) payment by the owner.  Here, regardless of whether “payment by owner” meant payment for the subcontractor’s work or payment for the entire project, the other two conditions (project completion and final acceptance by the owner) had not occurred.  Accordingly, because the conditions precedent had not been satisfied, final payment under the subcontract had not become due and the limitations period under the subcontractor’s bond had not yet begun to run.  

6.  Subcontractor’s Obligation to Comply with Final Plans Issued After Execution of Subcontract, Sunhouse Constr., Inc. v. Amwest Sur. Ins. Co., 841 So.2d 496 (Fla. Dist. Ct. App. 2003).

* What the Court Considered:  A subcontractor contracted to provide a “complete electrical package” for a design-build construction contract.  Only preliminary plans existed when the subcontractor submitted its bid for the project’s electrical work and the final drawings were issued approximately one month after the subcontract was executed.  The subcontractor abandoned the project after the owner had issued a certificate of completion, but prior to completing the electrical work, because the contractor refused to pay additional costs for “extra” work performed at the contractor’s direction. 

* What the Court Said:  The subcontractor breached its contract when it abandoned the project because the “extra” work was within the scope of its subcontract.

* What the Opinion Means:  The subcontractor agreed to provide an electrical package in accordance with the provisions of its subcontract and the plans and specifications as prepared by the architect.  It further agreed to perform its work in accordance with the contractor’s design-build agreement with the owner.  The subcontractor acknowledged that the architect’s plans and/or the scope of the subcontract could change, and as long as such changes were reasonable and consistent with the purpose and intent of the subcontract, the changes could not be disputed and would become incorporated into the subcontract.  Accordingly, the subcontractor was bound to conform its work to the final plans without additional compensation.  

7.  Bidder’s Affirmative Duty to Obtain Solicitation Documents for Government Contracts, Matter of: Allied Materials & Equipment Co., Inc., 2004 U.S. Comp. Gen. LEXIS 17 (Comp. Gen. 2004).

* What the Comptroller General Considered:  The Defense Logistics Agency (“DLA”) published a synopsis of an upcoming request for proposals (“RFP”) on the “FedBizOpps” website.  The notice informed potential bidders of the proposed closing date and included contact information for DLA contracting personnel.  The DLA failed to comply with the Federal Acquisition Regulation (“FAR”), which requires that the RFPs for any solicitations which are initially synopsized on the “FedBizOpps” website must  also subsequently be posted to that website.  A contractor protested that DLA’s failure to post the solicitation to “FedBizOpps,” as required by the FAR, improperly denied it the opportunity to compete for the contract.

* What the Comptroller General Said:  The contractor’s protest was denied because seven weeks had passed after the closing date to contact the agency and inquire into the status of the procurement.

* What the Opinion Means:  Under the Competition in Contracting Act of 1984, federal contracting agencies have an affirmative obligation to use reasonable methods to publicize its procurement needs and to timely disseminate solicitation documents to potential bidders.  However, concurrent with the agency’s obligations in this regard, “prospective contractors also must avail themselves of every reasonable opportunity to obtain the solicitation documents.”  When a prospective bidder fails to satisfy this duty, the comptroller general will not sustain a the bidder’s protest challenging the agency’s failure to meet its solicitation obligations.  In determining whether the parties have satisfied their duties, the comptroller general “look[s] to see whether the agency or the protester had the last clear opportunity to avoid the protester’s being precluded from competing.”

8.  Waiver of Sovereign Immunity for Amounts Due “Under the Contract,” Battle Ridge Cos. v. North Carolina Dep’t of Transp., 587 S.E.2d 426 (N.C. Ct. App. 2003).

* What the Court Considered:  Upon the contractor’s completion of a highway widening and relocation project, the North Carolina Department of Transportation (“DOT”) withheld $233,850 in liquidated damages.  The contractor sued the DOT for remission of the liquidated damages and recovery of over $2.4 million in increased costs caused by DOT delay and defective plans and specifications.  The DOT claimed that it had sovereign immunity from the suit. 

* What the Court Said:  The DOT was not protected by sovereign immunity because the damages sought by the contractor arose “under the contract.”

* What the Opinion Means:  North Carolina General Statute Section 136-29 provides a statutory waiver of sovereign immunity that allows a government contractor to make a claim for amounts due “under the contract.”  This waiver of sovereign immunity is not limited to the balance due under a contract with a government agency.  Instead, a contractor may recover for delay damages and defective plans and specifications.  Accordingly, the contractor could recover for “duration-related costs” arising from the DOT’s acts or omissions and for defective design documents provided by the DOT because all DOT contracts contain an implied warranty of the accuracy and sufficiency of the plans and specifications.

9.  “Appearance of Impropriety” Insufficient to Disturb Public Owner’s Decision to Not Award Project to Lowest Bidder, Sicoli & Massaro, Inc. v. Grand Island Central Sch. Dist., 2003 N.Y. App. Div. LEXIS 10056 (N.Y. App. Div. 2003).

* What the Court Considered:  The bid instructions for a public improvement contract stated that “the Contract will be awarded to that qualified bidder whose base bid, together with any alternates which the [school district] may wish to accept, totals the lowest number of dollars.”  A bidder appeared to be the lowest bidder based upon the base bid, but it had chosen not to bid one of the alternates (“Alternate M”).  When the school district decided to have Alternate M completed, it awarded the contract to another bidder whose base bid was higher, but who had bid on Alternate M.  The protesting bidder filed suit to compel the school district to award it the contract as the lowest bidder.  It claimed that the school district violated General Municipal Law Section 103 because it failed to select bidders on alternates blindly or to prioritize alternates prior to bidding.  

* What the Court Said:  The protesting bidder’s claims were meritless because it failed to show “actual favoritism, fraud or similar evil” in the school district’s selection of alternates. 

* What the Opinion Means:  Under New York law regarding the awarding of public contracts, an “’appearance of impropriety’ is insufficient proof to disturb [a public owner’s] determination under the competitive bidding statutes.”  Instead, the disappointed bidder has “the burden to demonstrate ‘actual’ impropriety, unfair dealing or some other violation of statutory requirements when challenging an award of a public contract.”  Here, the school district provided a plausible explanation for not prioritizing the alternates, which was that its representative was unable to do so because it did not know the cost of each alternate until it opened the bids.  Also, the protesting bidder was on notice that, by not bidding on a particular alternate, its bid could be rejected as irregular. 

 10.  Time Limitations on Professional Malpractice Claims Against Architects, County of Rockland v. Kaeyer, Garment & Davidson Architects, P.C., 309 A.D.2d 891 (N.Y. App. Div. 2003).

* What the Court Considered:  An owner asserted a professional malpractice claim against an architect and a breach of contract claim against the architect’s consultant.  The defendants claimed that these causes of action were barred by the applicable statutes of limitations under New York law.

* What the Court Said:  The owner’s claims against both the architect and its consultant were time-barred.

* What the Opinion Means:  Under New York law, a professional malpractice cause of action asserted against an architect accrues upon completion of the architect’s performance, when the architect’s professional relationship with the owner ends.  In this case, the professional relationship between the owner and architect ended when the architect submitted its final addendum to its drawings.  The owner’s cause of action was commenced more than three years after that date and was time-barred under New York’s three-year statute of limitations for such professional malpractice claims.  The owner’s breach of contract claim against the architect’s consultant was also untimely because it was commenced more than six years after the date the consultant completed its work pursuant to its contract with the architect.  

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: hlk@constructionchannel.net.