Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Claiborne Smith
1. Owner’s Settlement Agreement with General Contractor Acts as a Release of the Contractor’s Surety Unless the Settlement Agreement Explicitly Maintains Rights Against the Surety, Kiski Area School Dist. v. Mid-State Surety Corp., No. 27 WAP 2008, 2008 Pa. LEXIS 2260 (Pa. Dec. 17, 2008).
* What the Court Considered: The trial court originally granted the surety’s, Mid-States, motion for summary judgment against the owner, Kiski School District. The trial court based its decision on the language of the settlement agreement between the owner and general contractor. The release contained in the settlement agreement excluded any mention of Mid-State, and the court ruled that the release of Mid-States’ principal discharged any additional liability to the surety. The superior court reversed and remanded the case back to the trial court, using a “totality of the circumstances” test to determine whether a surety was released.
* What the Court Said: The Pennsylvania Supreme Court adopted a bright-line rule that an owner’s settlement with a general contractor will release the general contractor’s surety, unless the settlement expressly limits the release from liability to the general contractor.
* What the Opinion Means: Pennsylvania courts will interpret silence in a settlement agreement between an owner and its general contractor as a release of all claims against the general contractor’s surety as well.
2. An Express Assignment of the Implied Warranty of Workmanship is Allowed to A Subsequent Purchaser of Commercial Property, Highland Village Partners, LLC. v. Bradbury & Stamm Construction Co., 195 P.3d 184 (Ariz. App. 2008)..
* What the Court Considered: The court looked at a contract between the original owner of an apartment complex and the subsequent purchaser. The contract included an express assignment of “all presently effective warranties or guaranties in [the owner’s] possession from any contractors.” The court also closely examined Arizona’s law of implied warranty of workmanship and habitability and its existence as a contractual right imposed by law.
* What the Court Said: The court rejected the public policy argument that allowing assignment of the implied warranty of workmanship and habitability would encourage owners to transfer their right to enforce the warranty to subsequent owners. Instead, the court, invoking a party’s freedom to contract, held that implied contractual rights can be assigned in the same manner as express contractual terms.
* What the Opinion Means: In Arizona, the original owner of commercial real estate can expressly transfer the implied warranty of workmanship to a subsequent purchaser, absent the existence of an anti-assignment clause between the original owner and the General Contractor.
3. Under New Jersey Law Crafted from the Revised Uniform Arbitration Act Section 10(a), Changes in the Composition of an Arbitral Panel and Delay of Ten Months Constitutes Prejudice and will Prevent Consolidation, Biber Partnership P.C. v. Diamond Hill Jt. Venture, LLC, 960 A.2d 774 (N.J. Super., App. Div. 2008).
* What the Court Considered: Bider, an architect, contracted with McManus, a structural engineering consultant, to assist in a contract Bider entered into with an owner. The contract between the owner and architect contained an arbitral clause invoking a standard three arbitrator panel in accordance with the Construction Industry Arbitration Rules of the AAA. However, the contract between the architect and engineer contained no provisions regarding arbitration. After the owner terminated its contract with Bider, Bider demanded arbitration with the owner and entered into a settlement agreement with McManus, calling for arbitration by a single designated arbitrator. The arbitrations proceeded in parallel for 20 months until Bider moved for consolidation of the arbitrations under 10(a) of the Revised Uniform Arbitration Act. McManus objected and the trial court refused to consolidate the arbitrations.
* What the Court Said: The court found that changing the McManus arbitration from one arbitrator to a panel of three would substantially alter the original settlement agreement between McManus and Bider, and would result in prejudice to McManus. Furthermore, the court found that the 20 month delay by Bider in instituting consolidation militated against finding in his favor.
* What the Opinion Means: In jurisdictions that have adopted the RUAA, parties looking to consolidate arbitration hearings should do so early in the proceedings. After-the-fact expansion of the arbitration panel may be prevented by claimed prejudice to an objecting party.
4. Plans and Designs Created for a Proposed, but Never Erected, Strip Mall Constitute Practice of Architecture in Oregon, Davis v. Board of Architect Examiners, 193 P.3d 1019 (Or. Ct. App. 2008).
* What the Court Considered: The Oregon Court of Appeals considered an order issued by the Board of Architect Examiners against James Davis imposing a $5,000 fine for practicing architecture without a license. The court accepted without review all the facts found by the Board and reviewed the statutory definition of “practice of architecture.” The question presented was whether the practice of architecture encompassed drawings and plans that were created for a client, but never erected.
* What the Court Said: The court found that the practice of architecture includes and encompasses the planning and the designing of a building regardless of whether the building comes to fruition. The court further found the definition of “practice of architecture” to meet the statutory purpose of the regulation by protecting the public. That being the case the state need not wait until erection occurs to protect the public from an unlicensed architects actions.
* What the Opinion Means: An architect, unlicensed in Oregon, by submitting plans and drawings to a client, may be held liable for violating statutes preventing the unlicensed practice of architecture even if the planned buildings are never constructed,.
5. Contractual Privity with a Subcontractor is not a Requirement for an Owner to Enforce an Arbitration Agreement Incorporated into the Subcontract by Reference, Drywall Systems Plus, Inc. v. Steel Systems, 2008 U.S. App. LEXIS 18390 (W.D. Tenn. Aug. 7, 2008).
* What the Court Considered: A subcontractor on a project sued the owner and general contractor for breach of contract. The owner filed a motion to stay the proceedings pending arbitration. The court looked at the two applicable contracts, the general contract between the general contractor and owner and the subcontract between the general contractor and the subcontractor. Both contracts included arbitration agreements and the general contract was incorporated into the subcontract.
* What the Court Said: Even without a contractual relationship between the owner and subcontractor, the owner has a right to enforce arbitration agreements against the Subcontractor through the subcontracts incorporation of the entire general contract.
* What the Opinion Means: In Tennessee, an owner may be able to force a subcontractor with which it has no direct contract into arbitration where the subcontract incorporates a prime contract containing an arbitration clause.
6. Indefinite Delivery/Indefinite Quantity (“IDIQ”) Contracts Approved for Use by Army Corps of Engineers in Designing and Constructing Military Facilities, Tyler Construction Group v. United States, 83 Fed. Cl. 94 (2008).
* What the Court Considered: A small business general contractor sued the Corps seeking declaratory judgment for violations of Federal Acquisition Regulations (“FAR”) allegedly resulting from the use of IDIQ procedures in large design/build military construction projects across the Southeast. The plaintiff alternatively alleged that the Corps violated the Small Business Act by improperly bundling construction contracts with a large geographic scope (eight state region) and cost ($300 million of contracts).
* What the Court Said: The court found that the Corps could use IDIQ procurement procedures because they were not in violation of any law, statute or regulation. Therefore, IDIQ procedures for construction of military facilities were not in violation of FAR and indeed were an innovative procurement procedure envisioned by FAR. When addressing the allegation of improper bundling the court held that the Corps had done ample market research in devising the new IDIQ acquisition procedures and found a number of benefits that would accrue to the Corps by using the IDIQ procedure; therefore, by relying on its extensive marketing research the Corps permissibly bundled the construction contracts.
* What the Opinion Means: Government agencies can create innovative procurement procedures under FAR as long as they are not in violation of any existing laws, statutes or regulations. Further, the increased use of indefinite deliver contracts by government agencies will likely increasingly implicate anti-bundling laws and policies.
7. Homeowner Can Receive Cost of Repair Damages Without Introducing Evidence of any Diminution in Value, John Thurmond & Associates, Inc. v. Kennedy, 284 Ga. 469 (2008).
* What the Court Considered: A homeowner sued the contractor who repaired his fire damaged home for negligent construction and breach of contract. The original repairs for the fire damage were $311,156, and at trial the homeowner presented evidence showing that the cost to repair the negligent repair work of the original contractor was $751,632. The contractor moved for a directed verdict on the grounds that the homeowner failed to introduce any evidence concerning the diminution of the fair market value of the home. The trial court granted the contractor’s motion, and the court of appeals reversed.
* What the Court Said: The Georgia Supreme Court affirmed the court of appeals reversal. The Court recognized that in Georgia cost of repair and diminution in value are alternative measures of damages in negligent construction cases. Generally, the owner is entitled to cost of repair unless it is clearly disproportionate to the diminution in value. The Court rejected the contractror’s assertion that the diminution in value acts as a cap for recovery of damages in negligent construction cases. Therefore, the grant of a directed verdict was in error.
* What the Opinion Means: In Georgia, the burden is on a defendant in a negligent construction case to show that the cost of repair is disproportionate to diminution in value. The clearly disproportionate standard will not be applied to limit a contractor’s liability unless the burden is met by a defendant.
8. Contractor’s Challenge to a Corps of Engineers Performance Evaluation is a Claim Under the Contract Disputes Act and is Made As a Matter of Right, Todd Construction Co., v. United States, 85 Fed. Cl. 34 (2008).
* What the Court Considered: Todd, a contractor, completed repair work on a military facility for the Army Corps of Engineers in September of 2005. On March 26, 2006, the Corps issued proposed final evaluations of the work conducted by Todd and rated the work as unsatisfactory. Todd submitted comments to the contracting officer indicating why it believed the ratings to be unmerited, but the contracting officer issued the final unfavorable evaluations on July 23, 2006. Todd appealed to the Department of the Army, and its appeal was rejected. Upon suit in Federal Court, the Corps filed a motion to dismiss contending that the court lacked jurisdiction because Todd’s challenge to the evaluation was not a claim under the Contract Disputes Act and was not made as a matter of right because it did not relate to or arise from the contract but was a challenge to the Corps internal policies.
* What the Court Said: The court stated that federal regulations require evaluation of performance under construction contracts. Therefore, the performance reports must be subject to review in order to ensure their accuracy and fairness. The Court also found that the evaluations related to the contract because, without the contract, there would be no evaluations.
* What the Opinion Means: When a contractor challenges a performance evaluation issued by a contracting officer it must first file a claim with the contracting officer; however, if the claim is denied, courts will be receptive to a substantive challenge to an adverse performance evaluation.
9. A General Contractor Owes a Duty of Care to a Known Unlicensed Independent Contractor, Tafoya v. Rael, 193 P.3d 551 (N.M. 2008).
* What the Court Considered: A general contractor knowingly hired an unlicensed independent contractor to connect an apartment to the sewer line. The independent contractor was killed when the trench he dug collapsed on him. The independent contractor’s estate sued the general contractor under a theory of negligent hiring since the independent contractor was unlicensed and unqualified for the work. Both the trial court and court of appeals upheld the defendants summary judgment motion on the basis that the general contractor had no duty of care to independent contractors.
* What the Court Said: The New Mexico Supreme Court reversed the rulings of the lower courts. Stating that the public policy of the licensing statutes was to promote the general welfare and protect life and property, the legislative intent would therefore impose a liability on general contractors who knowingly retain unlicensed independent contractors.
* What the Opinion Means: In New Mexico, General contractors may be found liable not only to third parties injured by knowingly unlicensed independent contractors, but also to knowingly unlicensed independent contractors who are injured as a result of the knowingly unlicensed independent contractors’ own negligence.
10. Use of Ear-Protection Does not Mitigate Serious Violation of Construction Site Noise Violations, Mowat Construction Co. v. Department of Labor and Industries, No. 60765-1-I, 2009 Wash. App. LEXIS 432 (Wash. Ct. App. Feb. 23, 2009).
* What the Court Considered: The Washington Court of Appeals reviewed the Washington Department of Labor and Industries (“Department”) issuance of a citation to Mowat Construction Company (“Mowat”) for violation of the Washington Safety and Health Act regulations, providing that an employer must “reduce employee noise exposure, using feasible controls, wherever exposure equals or exceeds 90 dBA.” The citation was issued during Mowet’s construction of a sound wall between Interstate 5 and surrounding neighborhoods. The court found that there were four primary causes for the site noise: the idling forklift, the vibrator to prevent premature solidification of the cement, the generator, and the freeway traffic. In reviewing the Department’s administrative ruling, the court considered the testimony of the Department’s compliance officer as well the Mowat’s expert testimony.
* What the Court Said: The court recognized that the noise from the freeway was significant, but rejected the testimony of Mowat’s expert who stated that it was impossible to separate the background highway noise from that generated by the equipment. Instead, the court relied on the on-site measurements presented by the Department’s compliance officer. The court considered the violation “serious” and did not find the use of ear plugs to be a mitigating factor since the purpose of the regulation was to reduce the sources of workplace noise.
* What the Opinion Means: In Washington State, the use of earplugs does not act as a defense to a workplace noise violation, even on a loud highway construction site.
Ira Genberg is a Partner at Troutman Sanders LLP in Atlanta, Georgia, and is General Counsel for Associated Owners & Developers (AOD) in McLean, Virginia. Claiborne Smith is an Associate at Troutman Sanders LLP. For more information, or if you have any questions, contact us at firstname.lastname@example.org.