Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Indemnification Rights of an Actively Negligent Contractor, McCrary Constr. Co. v. Metal Deck Specialists Inc., 35 Cal.Rptr.3d 624 (Cal. Ct. App. 2005).
* What the Court Considered: A general contractor sought indemnification from its sheet metal subcontractor after the general contractor paid damages for the wrongful death of a worker. The metal subcontractor had cut a hole in the roof of the building under construction, but failed to secure the hole before leaving the jobsite. Although the general contractor then ordered another subcontractor to cover the hole, that subcontractor also failed to secure the cover. When a worker lifted the covering and stepped forward, he fell through the hole to his death.
* What the Court Said: The general contractor was not entitled to indemnification from the metal subcontractor for its negligence.
* What the Opinion Means: If an indemnification clause does not address the issue of an indemnitee’s negligence, it is referred to as a general indemnification clause. While such clauses may be construed to provide indemnification for a loss resulting in part from an indemnitee’s passive negligence, they will not be interpreted to provide indemnification if an indemnitee has been actively negligent. Here, because the general contractor was actively negligent for failing to ensure the hole covering was secured, it was not entitled to indemnification from the metal subcontractor.
2. Multiple Sales of Defective Product as a Single Occurrence, Owners Ins. Co. v. Salmonsen, 622 S.E.2d 525 (S.C. 2005).
* What the Court Considered: A manufacturer was sued in a class action lawsuit for manufacturing defective stucco that allowed moisture to damage the plaintiffs’ property. The court determined that the manufacturer’s commercial general liability insurance policy provided coverage for the class action claims. In order to decide which of the policy’s coverage limits applied, the court then had to determine whether each individual sale of the defective product constituted a single “occurrence” or whether the general act of distribution was a single “occurrence.”
* What the Court Said: The insurer was responsible for coverage only to the extent of its per occurrence limit.
* What the Opinion Means: Because the distributor of the defective stucco did not take a distinctive action giving rise to liability for each individual sale, the act of placing the defective product into the stream of commerce was a single occurrence under the terms of the insurance policy. Accordingly, the policy’s “per occurrence limit” of $1 million applied, rather than the policy’s aggregate limit of $2 million.
3. Timeliness of Demand for Arbitration, May v. Anspach, 24 A.D.3d 671 (N.Y. App. Div. 2005).
* What the Court Considered: A contractor abandoned a project and claimed the homeowner owed him money for work already performed. Two years later, the contractor submitted his claim to the project architect for arbitration. The homeowner alleged that the request for arbitration was not timely and sought to permanently stay the arbitration.
* What the Court Said: The parties were required to arbitrate the dispute.
* What the Opinion Means: Under the broad arbitration terms of the parties’ contract, the contractor was required to submit his arbitration demand “within a reasonable time after the dispute had arisen.” The court believed that the contractor in this case did timely pursue his arbitration demand. More importantly, the timeliness of the arbitration demand was a decision to be made by the arbitrator, and therefore the trial court was mistaken in permanently staying the arbitration.
4. Unconscionability of Arbitration Clause, Harrington v. Pulte Home Corp., 119 P.3d 1044 (Ariz. Ct. App. 2005).
* What the Court Considered: Homeowners brought suit against a builder for breach of contract, consumer fraud, and negligence, alleging the builder did not inform the homeowners of their home’s proximity to a jet-engine testing facility. When the builder sought to compel arbitration, the homeowners argued that the contractual arbitration clause was unenforceable because it was both unconscionable and unreasonable.
* What the Court Said: The arbitration clause was neither unconscionable nor unreasonable.
* What the Opinion Means: In compelling the parties to arbitrate the case, the court determined that the arbitration clause did not unreasonably oppress the homeowners’ right to a jury trial. Also, it was not unconscionably expensive to arbitrate. Under Arizona law, the risk of prohibitive costs is too speculative to justify the invalidation of an arbitration clause.
5. Arbitrator’s Discretion to Award Attorney’s Fees, Taylor v. Van-Catlin Constr., 30 Cal.Rptr.3d 690 (Cal. Ct. App. 2005).
* What the Court Considered: Homeowners sought to enforce an arbitration award obtained in a dispute with a contractor that had remodeled their home. The contractor requested the removal of attorney’s fees from the award, pointing out that the homeowners had not requested attorney’s fees in their arbitration demand and that there was a genuine dispute as to the homeowners’ claim.
* What the Court Said: The award of attorney’s fees was authorized by statute and not subject to judicial review.
* What the Opinion Means: A court may not vacate or change an arbitration award merely because it disagrees with the arbitrator’s choice of remedy. Arbitrators, unless expressly restricted by the arbitration agreement, have substantial discretion to determine the scope of their contractual authority to fashion remedies. Parties entering into commercial contracts with arbitration clauses and wishing for the arbitrator’s remedial authority to be specially restricted should set out such limitations explicitly and unambiguously in the arbitration clause.
6. Remedies Available to Unlicensed Contractors, MW Erectors, Inc. v. Niederhauser Ornamental and Metal Works Co., Inc., 30 Cal.Rptr.3d 755 (Cal. 2005).
* What the Court Considered: A subcontractor brought a breach of contract claim against its general contractor for work performed as part of a hotel project. The general contractor argued that the subcontractor’s claim was barred due to the subcontractor’s failure to maintain proper licensing throughout the entire term of the parties’ subcontract.
* What the Court Said: The subcontractor’s suit was barred because it did not have a license throughout the entire performance of its work, as required by California law.
* What the Opinion Means: Although the subcontractor obtained a license after the commencement of its work, the subcontractor was already in violation of California’s strict Contractor’s State License Law. Under that statute, a contractor that fails to be properly licensed throughout an entire project may not maintain any action to recover compensation for its performance.
7. Statute of Frauds as a Bar to Quantum Meruit Recovery, In re The Palms at Water’s Edge, L.P., 334 B.R. 853 (Bankr. W.D. Tex. 2005).
* What the Court Considered: An architect brought a proof of claim against a bankrupt owner, alleging it was owed money for architectural services under an oral contract. The owner argued that the oral contract was unenforceable, based on the statute of frauds, because it was for work that could not be performed within one year of the date of contract execution.
* What the Court Said: Although the oral contract was barred by the statute of frauds, the architect was entitled to recover under a theory of quantum meruit.
* What the Opinion Means: Under Texas law, a quantum meruit recovery is an equitable remedy based upon a promise implied in law to pay for beneficial services rendered and knowingly accepted. Even though the oral contract could not be enforced, the owner accepted the valuable services furnished by the architect in a manner such that the architect expected to be paid, and therefore the architect was entitled to quantum meruit recovery.
8. Copyright Protection for Architectural Designs, Shine v. Childs, 382 F.Supp.2d 602 (S.D.N.Y. 2005).
* What the Court Considered: A student architect sued an architectural design firm for infringement of his original skyscraper designs. The student had presented his designs to a panel of experts that included the defendant firm, who then later presented a similar design in a contest to replace the World Trade Center.
* What the Court Said: Because the designs were original and entitled to protection, and a genuine issue of material fact existed as to whether the defendant firm’s design infringed student’s designs, the defendant’s motion for summary judgment was dismissed.
* What the Opinion Means: Architectural drawings and models are entitled to copyright protection, regardless of whether a building could actually be constructed from the designs. When, as in this case, there is a substantial similarity between the plaintiff’s and defendant’s designs, the plaintiff can maintain its claim under the “total concept and feel” legal standard.
9. Subdivision Infrastructure Work as Basis for Mechanic’s Lien, John Holmes Constr., Inc. v. R.A. McKell Excavating, Inc., 2005 WL 3110666 (Utah 2005).
* What the Court Considered: A subcontractor hired to perform infrastructure work involving the installation of roadways, utilities, and sewer lines in a residential subdivision filed a mechanic’s lien on the property when it was not paid in full. The developer of the subdivision sought the removal of the lien filed on its property, arguing that the work by the subcontractor was not an improvement to a “residence” under Utah law.
* What the Court Said: The mechanic’s lien was not valid, and was thus removed from the property.
* What the Opinion Means: Under Utah law, general infrastructure work in a subdivision is not considered to be an “improvement to a residence.” Accordingly, the infrastructure work does not entitled a contractor to recovery under Utah’s mechanic’s lien statute.
10. Dismissal with Prejudice as Bar to Similar Claim, Alpha Mech., Heating and Air Conditioning, Inc. v. Travelers Cas. & Sur. Co. of America, 35 Cal.Rptr.3d 496 (Cal. Ct. App. 2005).
* What the Court Considered: A subcontractor sued its general contractor and the general contractor’s surety for payment. The general contractor cross-claimed against the subcontractor for breach of contract and tort. The parties then settled the cross-claim and the general contractor dismissed its cross-claim with prejudice. The subcontractor later sought to bar the general contractor’s affirmative defenses in the original action because they mirrored the allegations of the general contractor’s cross-claim.
* What the Court Said: The general contractor was barred from presenting evidence for affirmative defenses that mirrored the issues in the settled cross-claim.
* What the Opinion Means: The doctrine of res judicata includes issue preclusion, which prohibits the re-litigation of issues argued and decided in prior proceedings. Here, the settled cross-claim was dismissed with prejudice, and the affirmative defenses in the original claim identically mirrored the allegations of the cross claim. Therefore, allowing the general contractor to present evidence on those issues would result in re-litigation of the same issues and would violate the doctrine of res judicata.
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.