Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and David L. Hobson
1. Surety’s Reliance on "Pay When Paid" Clause, Casey Indus., Inc. v. Seaboard Surety Co., 2006 WL 2850652 (E.D. Va. Oct. 2, 2006).
* What the Court Considered: A concrete subcontractor filed an action upon a payment bond issued in favor of the general contractor. The surety raised as a defense the "pay when paid" clause in the concrete subcontract.
* What the Court Said: The surety could not rely on the "pay when paid" clause as a defense to the payment bond claim.
* What the Opinion Means: Unless the "pay when paid" provision is expressly incorporated into the bond agreement, the surety may not assert the "pay when paid" language in the subcontract as a defense to a claim against the bond. The defense was unavailable as a matter of law.
2. Statute of Limitations Defense Available to Surety, Housing Auth. of Huntsville v. Hartford Accident and Indem. Co., 2006 WL 2790037 (Ala. 2006).
* What the Court Considered: Following the renovation of a housing facility, the housing authority discovered that the contractor had improperly installed the fire-alarm systems. However, the authority waited until five years after completion of the project to assert a claim against the contractor’s performance bond.
* What the Court Said: Although the surety was not an architect, engineer, or contractor, it could assert the statute of limitations as a defense to the bond claim.
* What the Opinion Means: Under the applicable statute of limitations, civil claims against an architect, engineer, or contractor must be commenced within two years after the cause of action accrues. Furthermore, Alabama law permits a surety to assert as a defense the statute of limitations available to the principal even if the principal fails to raise it.
3. Surety’s Reliance on Notice Requirement, RLI Ins. Co. v. St. Patrick’s Home for the Infirm and Aged, 452 F.Supp.2d 484 (S.D.N.Y. 2006).
* What the Court Considered: When the project was not completed by the completion date, the owner and contractor executed a change order extending the completion time to December 31, 2000. The change order included a liquidated damages provision. When the work was not completed by the revised completion date, the owner, contractor, and surety agreed to an Interim Funding Agreement ("IFA"). The IFA provided that the owner would waive liquidated damages if the work was completed by May 31, 2001. When the work was not complete by May 31, the owner declared the contractor in default and sought to enforce the performance bond.
* What the Court Said: The owner was entitled to recover liquidated damages under the IFA.
* What the Opinion Means: The surety argued that it was not obligated to pay liquidated damages because the owner failed to provide timely notice of the contractor’s default. However, the performance bond did not contain an explicit notice requirement. In addition, the surety could not rely on the 21-day notice requirement contained in the construction contract.
4. Arbitration Against Architect Under AIA Contract, Med. Svcs., LLC v. GMW & Co., 2006 WL 3692430 (Ala. Dec. 15, 2006).
* What the Court Considered: The owner hired a contractor to renovate a building for use as a medical facility. The individual architect listed in the "Standard Form of Agreement Between Owner and Contractor" was an owner of the contractor. Paragraph 4.6.4 of the AIA contract provided that the architect may not be a party to any arbitration relating to the contract without the written consent of the architect, owner, and contractor. The owner filed separate claims against the architect and contractor, and the contractor attempted to have the cases consolidated into one arbitration.
* What the Court Said: Paragraph 4.6.4 of the contract precluded consolidation of the cases.
* What the Opinion Means: Because the duty to arbitrate is a contractual obligation, a party cannot be required to arbitrate any dispute that it has not agreed to submit to arbitration. Citing paragraph 4.6.4, the court decided that, to the extent the owner’s complaint sought damages against the architect in his capacity as an architect, those claims must be excluded from the owner’s arbitration against the contractor. It did not matter that the architect was both an agent and employee of the contractor.
5. Rescission by Third Party Beneficiary, Aquatrol Corp. v. Altoona City Auth., 2006 WL 2540797 (W.D. Pa. Aug. 31, 2006).
* What the Court Considered: As part of its contract to upgrade a water treatment facility, a contractor hired a subcontractor to upgrade the software of the facility’s computers. Due to complications, the work was not completed as planned. The subcontractor then submitted a direct proposal to the owner for a new upgrade procedure. This new proposal included an additional $53,000 for additional labor and expenses. The owner refused to pay the additional labor and expenses but agreed to the new upgrade procedure at the original subcontract amount. The subcontractor rejected the owner’s counteroffer and demanded that it be paid the original subcontract amount plus additional labor and expenses provided at the owner’s request. The subcontractor then sued both the owner and the contractor. The contractor argued that the subcontractor’s behavior constituted a rescission of the original subcontract.
* What the Court Said: The original subcontract was not rescinded by the behavior of the subcontractor.
* What the Opinion Means: Under Pennsylvania law, parties to a contract may abandon, modify, or change it either by words or conduct. Although the contractor argued that the subcontractor’s behavior in dealing with the owner constituted rescission, the subcontractor submitted proof that it never accepted the owner’s counteroffer. In addition, as a mere third party beneficiary to the subcontract, the owner did not have authority to rescind it.
6. Affirmative Defense of Set-Off, Turner Constr. Co. v. E & F Contractors, Inc., 939 So.2d 1108 (Fla. Dist. Ct. App. 2006).
* What the Court Considered: A subcontractor entered into four separate subcontracts to perform work for a contractor on four different construction projects. The subcontractor filed suit for unpaid contract balance on one of the subcontracts. The contractor acknowledged the amount was unpaid but asserted an affirmative defense of set-off based on the subcontractor’s deficient and defective work at the other projects.
* What the Court Said: Because the set-off defense was in the nature of a permissive counterclaim, the defense was striken.
* What the Opinion Means: A permissive counterclaim is one that does not arise out of the transaction or occurrence at issue in the present suit. If there is no evidence of prejudice, it is within the court’s discretion to decide whether to sever a permissive counterclaim from the main claim. Here, the court’s decision did not prejudice the contractor because the contractor still had the opportunity to litigate its set-off claims in separate suits against the contractor.
7. Arbitrator’s Decision on Statute of Limitations Defense, O’Keefe v. CED Constr. Partners, Ltd., 944 So.2d 181 (Fla. 2006).
* What the Court Considered: After a contractor repaired latent construction and design defects at a housing project it had constructed, the owner assigned to the contractor its right to make a claim against the architect. The contractor then filed a demand for arbitration against the architect. The arbitrator ruled against the architect on the architect’s statute of limitations defense. The architect subsequently filed suit, asking the court to rule on the architect’s statute of limitations defense.
* What the Court Said: It was for the arbitrator to decide whether the architect’s statute of limitations defense was valid.
* What the Opinion Means: Under Florida law, parties may agree in their contract to submit any controversy arising between them to binding arbitration. The arbitration provision at issue here encompassed all claims, disputes, and other matters arising out of or relating to the contract.
8. Vacation of Arbitration Award, Fininen v. Barlow, 142 Cal. App. 4th 185 (Cal. Ct. App. 2006).
* What the Court Considered: After several homeowners filed suit against a residential designer, the designer and homeowners agreed to submit the claims to binding arbitration. As required by the arbitration agreement, the arbitrator disclosed that he had previously served as mediator for cases involving both the homeowners’ attorney and the designer’s attorney. When the parties met to begin the arbitration, the designer recognized the arbitrator as having served as mediator in a previous case involving the designer. The arbitrator therefore stated that he would only agree to continue to serve as mediator if all parties agreed. The parties agreed the arbitration should continue. After the arbitrator rendered a decision in favor of the homeowners, the designer filed a petition to vacate the award on the basis that the arbitrator had failed to disclose his earlier involvement in the mediation.
* What the Court Said: The arbitration award should not be vacated because the designer consented to the arbitrator’s participation in the case.
* What the Opinion Means: California’s arbitration statute provides that an award shall be vacated if the arbitrator fails to disclose a ground for disqualification within the time required. In light of the fact that the designer consented to the arbitrator’s continued service and then waited until the arbitrator rendered a decision in favor of the homeowners, it would be absurd to apply the statute in this case.
9. Manifest Disregard of the Law, Progressive Plumbing, Inc. v. ABCO Builders, Inc., 637 S.E.2d 92 (Ga. Ct. App. 2006).
* What the Court Considered: During arbitration against the contractor, a plumbing subcontractor was awarded damages for unabsorbed home office overhead and lost labor productivity and inefficiency. The contractor sought to vacate the arbitration award on the basis that the arbitrators had manifestly disregarded the law applicable to these damage claims. By agreement of the parties, the arbitration hearing was not transcribed.
* What the Court Said: There was insufficient evidence to determine whether the arbitrators had manifestly disregarded the law.
* What the Opinion Means: Georgia’s Arbitration Act provides that an arbitration award shall be vacated if a party’s rights are prejudiced by the arbitrators’ manifest disregard of the law. To prove manifest disregard of the law, it must be shown that the arbitrators appreciated the existence of a clearly governing legal principle but decided to ignore it. Here, because no transcript of the hearing had been created, the court could not determine what law the arbitrators applied or that the arbitrators deliberately ignored the applicable law.
10. Contractor Liability for Injury of Subcontractor’s Employee, Moiseyev v. Rot’s Bldg. and Dev. Co., 860 N.E.2d 1128 (Ill. Ct. App. 2006).
* What the Court Considered: The employee of a subcontractor hired to perform the exterior finish work was injured when he fell from a scaffold. The employee sued the general contractor for negligence based on the general contractor’s supposedly failing to provide a safe scaffold.
* What the Court Said: Because the general contractor did not retain sufficient control over the work of the subcontractor, it was not liable for physical harm to the employee.
* What the
A contractor who entrusts work to a subcontractor but retains control of the
work is subject to liability for physical harm to employees of the
subcontractor. Here, the general contractor exercised no control over the means
and methods of the subcontractor, did not participate in training the employee,
and had no part in the construction or maintenance of the scaffold.
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.