Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Subcontractor’s Recovery under Miller Act Payment Bond for Delay Damages, Lighting & Power Svcs., Inc. v. Roberts, 354 F.3d 817 (8th Cir. 2004).
* What the Court Considered: A government contractor was required to obtain a payment bond under the Miller Act to protect subcontractors and suppliers. The construction project was scheduled for completion in six months, but ultimately took more than twenty-two months because of government-caused delays. A subcontractor filed suit against the contractor to recover additional construction costs pursuant to the Miller Act. The subcontractor used the total cost method to calculate its damages, whereby the “total cost” is defined as “the actual cost minus any cost already paid on the contract.” The contractor argued that it could not be liable to the subcontractor unless the contractor had some responsibility in causing the subcontractor’s actual losses.
* What the Court Said: The subcontractor was entitled to recover on the Miller Act payment bond under the total cost method without showing that the general contractor was responsible for the subcontractor’s delay damages.
* What the Opinion Means: The Miller Act does not require that the general contractor be at fault for the subcontractor to recover on the Miller Act payment bond. Also, the use of the total cost method to calculate damages does not require a showing that the general contractor was at least partially responsible for the subcontractor’s losses.
2. Waiver of Claims for Equitable Adjustment, Roxco, Ltd. v. United States, 2004 U.S. Claims LEXIS 59 (Fed. Cl. 2004).
* What the Court Considered: The government awarded a contractor an $18.9 million contract for construction of new housing units at an Air Force base. During construction, disputes arose between the contractor and the government regarding alleged differing site conditions, constructive changes, and government-caused delays and breaches of contract. The contractor sent numerous letters to the government contracting officer (“CO”) regarding these disputes, requesting relief in the form of extra payment and time extensions and noting that the contractor was reserving its right to an equitable adjustment under the contract. Then the contractor sent an “abandonment” letter in which it stated that the contractor “irrevocably and voluntarily abandon[ed] and terminate[d] the…construction Contract” because it was financially unable to complete the project. After the government issued a default termination of the contract, the contractor submitted a claim under the Contract Disputes Act (“CDA”) seeking equitable adjustment in the amount of $7,840,497.40. The CO rejected the claim as untimely and the government argued that the contractor’s abandonment letter constituted a waiver of both the contractor’s rights under the contract and its rights to obtain equitable adjustment under the CDA.
* What the Court Said: Although the contractor’s abandonment letter acknowledged the contractor’s default in performance under its contract, it did not acknowledge abandonment of claims for equitable adjustment under the CDA.
* What the Opinion Means: “Waiver consists of a voluntary and intentional relinquishment of a known right.” Nothing in the contractor’s abandonment letter, particularly when read in the context of its many pre- and post-abandonment communications with the government in which the contractor expressly reserved its right to submit an equitable adjustment claim, indicated an intention by the contractor to waive voluntarily its rights to equitable adjustment.
3. Enforceability of Contractual Waiver of Lien Rights under Nevada Law, Dayside Inc. v. The First Judicial District Court of the State of Nevada, 75 P.3d 384 (Nev. 2003).
* What the Court Considered: In its contract for the construction of an apartment building, a contractor agreed that it would not file a mechanic’s or materialman’s lien or maintain any claim against the owner’s real estate or improvements. When the owner later allegedly refused to pay the contractor amounts due under the contract, the contractor recorded a mechanic’s lien and then joined a subcontractor’s ongoing suit against the owner, asserting contract and tort claims and seeking to foreclose on the lien. The owner argued that the contractor had waived its lien rights, but the contractor argued that the contractual lien waiver was void as against public policy.
* What the Court Said: Clear and unambiguous waivers of mechanic’s liens rights in construction contracts are enforceable under Nevada law.
* What the Opinion Means: Nevada’s state legislature has not enacted a proclamation against lien waivers. Therefore, a waiver of mechanic’s lien rights in a construction contract is not contrary to public policy. Further, a mechanic’s lien, once waived, cannot be revived by the owner’s failure to abide by other independent covenants in the contract, including a breach of the owner’s failure to pay the contractor.
4. Collateral Estoppel as Bar to Relitigation of Issues Resolved in Previous Arbitration, Riverdale Dev. Co., LLC v. Ruffin Bldg. Sys., Inc., 2004 Ark LEXIS 87 (Ark. 2004).
* What the Court Considered: A contractor initiated arbitration against an owner as required by its construction contract. The owner then filed suit against the contractor and the contractor’s supplier. The owner and contractor eventually arbitrated their dispute and the arbitrator ruled in the contractor’s favor, finding that the contractor did not materially breach the construction contract and was excused from further performance by the owner’s wrongful exclusion of the contractor from the project site. The arbitrator denied all of the owner’s claims and ordered the owner to pay the contractor the balance owing on the contract. The contractor then was dismissed from the pending trial court case. The supplier argued that it also should be dismissed because the owner’s claims against it were barred under the doctrine of collateral estoppel because all issues material to the case had been fully presented and determined before the arbitrator. The owner argued that the supplier could not be released from liability on the grounds of collateral estoppel based upon a finding in an arbitration proceeding to which the supplier was not a party.
* What the Court Said: Based upon the doctrine of collateral estoppel, the owner was barred from relitigating the same issues with the supplier that were resolved in the owner’s arbitration with the contractor.
* What the Opinion Means: “Collateral estoppel,” or issue preclusion, prohibits the relitigation of issues, law, or facts that were actually litigated in a previous suit. Collateral estoppel does not require mutuality of the parties. Accordingly, “a party not involved in a prior arbitration may use the award in that arbitration to bind his opponent if the party to be bound, or a privy, was before the arbitrator, had a full and fair opportunity to litigate the issue, and the issue was actually decided by the arbitrator or was necessary to his decision.”
5. Incorporation of AIA General Conditions’ Arbitration Clause into Non-AIA Subcontract, MPACT Constr. Group, LLC v. Superior Concrete Constructors, Inc., 802 N.E.2d 901 (Ind. 2004).
* What the Court Considered: When an owner failed to pay for work and supplies on a construction project, its general contractor and several subcontractors recorded mechanic’s liens against the owner’s property. One of the subcontractors filed suit to foreclose its lien and several counterclaims and cross-claims for foreclosure of the lien and breach of contract were filed among the owner, the general contractor, and the various subcontractors. The general contractor filed a motion to stay the litigation and compel arbitration. The construction contract between the owner and general contractor was an AIA Standard Form Agreement Between Owner and Contractor that incorporated by reference the AIA General Conditions for the Contract for Construction (the “General Conditions”), which contains an arbitration clause. However, the subcontracts were not AIA standard form contracts, but instead were contracts prepared by the general contractor that did not contain arbitration clauses. The general contractor argued that the arbitration provision in the General Conditions was incorporated by reference into the subcontracts.
* What the Court Said: Because the subcontracts contained no clear and explicit incorporation of the arbitration provision of the General Conditions, the subcontractors were not required to submit their claims to arbitration.
* What the Opinion Means: The determination of whether parties have agreed to arbitrate their disputes is a matter of contract interpretation based upon the parties’ intent. Under the Federal Arbitration Act, “an agreement to arbitrate may be validly incorporated into a subcontract by reference to an arbitration provision in a general contract.” In this case, however, the subcontract language was ambiguous as to whether it intended to incorporate the arbitration provision from the General Conditions. Such ambiguities are construed against the contract’s drafter, here the general contractor, and therefore there was no proof of a meeting of the minds between the general contractor and subcontractors as to an intent to incorporate the arbitration provision.
6. Government Contractor’s Duty to Provide Public Access to Government Data, WDSI, Inc. v. County of Steele, 672 N.W.2d 617 (Minn. Ct. App. 2003).
* What the Court Considered: A county hired a designer to provide design services for the construction of a correctional facility. A contractor that desired to bid on the installation of the correctional facility’s detention systems believed it may be excluded by the prequalification bid requirements. When the contractor asked the county for information related to the prequalification standards, the county told the contractor to request such information from the designer. The designer refused to provide such information because it said that its files were not converted into government data solely by reason of its contract with the government. The contractor then made a request for the information under the Minnesota Government Data Practices Act, Minnesota Statutes § 13.05 (the “MGDPA”) and sued the county to compel disclosure when the county refused to comply with the MGDPA request.
* What the Court Said: The designer, rather than the county, was liable to the contractor for violations of the MGDPA.
* What the Opinion Means: The MGDPA “regulates the collection, creation, storage, maintenance, dissemination, and access to government data in state agencies, statewide systems, and political subdivisions.” Under the MGDPA, a private party that contracts with a governmental entity to perform a governmental function, such as construction of a county correctional facility, has a duty to provide the public access to governmental data unless the governmental entity itself has such data. When the government does not possess the data at issue, and the private party refuses to provide public access to such data, the private party may be held liable for any costs, including reasonable attorney’s fees, incurred by a public citizen in compelling compliance with the MGDPA.
7. Recovery of Contractual Interest and Attorney Fees Under Mechanic’s Lien, National Lumber Co. v. United Cas. & Sur. Ins. Co., Inc., 802 N.E.2d 82 (Mass. 2004).
* What the Court Considered: A subcontractor that provided lumber for a construction project filed a mechanic’s lien for the contract balance it was owed by the developer, plus interest on the unpaid balance and reasonable attorney’s fees incurred in securing payment of such balance. The interest and attorney’s fees were promised to the subcontractor in its contract with the developer. The owners filed a dissolve lien bond in the amount of the labor and materials claimed by the subcontractor in the notice of the lien. The subcontractor argued that the bond amount was insufficient because it did not include the interest and attorney’s fees.
* What the Court Said: The owner’s dissolve lien bond was of a sufficient amount to dissolve the lien.
* What the Opinion Means: Under Massachusetts’ statutory mechanic’s lien law, a recorded mechanic’s lien may not include amounts due for contractual interest or attorney’s fees incurred in enforcing the lien. Such interest and attorney’s fees cannot be considered part of the “amount due” to the lien claimant at the time the statement of lien is filed because such amounts have not yet been determined. Accordingly, a lien may be dissolved upon procuring of a bond in only the amount that the lien claimant may recover for “labor and materials.”
8. Duties Owed by Licensing Bond Sureties, O’Conner v. Star Ins. Co., 83 P.3d 1 (Alaska 2003).
* What the Court Considered: Owners sued their licensed general contractor for improper workmanship and sued the surety that had issued their contractor’s licensing bond for bad faith. The owners argued that the surety owed the owners a duty to independently investigate their claim against the contractor and the surety’s failure to do so was a breach of the implied covenant of good faith and fair dealing.
* What the Court Said: The licensing bond surety had no duty to independently investigate the owner’s claim against the contractor.
* What the Opinion Means: Under Alaska law, as a prerequisite to obtaining its certificate of registration to perform contracting work, a general contractor is required to file either a $10,000 cash deposit or a $10,000 licensing bond. However, there is no implied covenant of good faith and fair dealing created between a licensing bond surety and a customer of the bonded contractor. Payment and performance bond sureties have such an implied duty because those bonds are purchased in order to provide protection to owners (for performance bonds) or subcontractors (for payment bonds) and the amount of such bonds is tied to the amount of the project at issue. By contrast, licensing bonds are required by statute, the value of such bonds are not determined based upon the value of any certain project, and there likely is no additional licensing bond cost attributable to a particular project.
9. Requirement of Proving Pre-Bid Reliance for Constructive Change Claim, Appeal of Moore & Cowart Contractors, Inc., ASBCA No. 54014 (2004).
* What the Board of Contract Appeals Considered: A government contractor was awarded a contract to build a series of flood control basins and waterways. A dispute arose regarding whether the contract drawings required certain steel reinforcing bars in the wall footings. The contractor claimed that the government’s interpretation of the drawings resulting in a constructive change and the contractor sought additional payment for the increased steel that was required to comply with the government’s interpretation. The government argued that to be successful on its constructive change claim, the contractor was required to prove that it relied on its alleged interpretation of the drawings at the time of bid preparation.
* What the Board of Contract Appeals Said: Only the contractor’s interpretation of the contract drawings was reasonable. Therefore, the government’s insistence on different construction of certain vertical walls constituted a constructive change.
* What the Opinion Means: A government contractor may recover for a constructive change without proving that it relied on its interpretation of the drawings in preparing its bid. Instead, a showing of pre-bid reliance is necessary only where the contract is ambiguous.
10. Government’s Immunity for Negligent Pre-Emergency Construction, Vermef v. City of Boulder City, 80 P.3d 445 (Nev. 2003).
* What the Court Considered: Extensive flooding in Boulder City, Nevada, (the “City”) caused the City and the State of Nevada to declare a state of emergency. Afterwards, a homeowner sued the City alleging that the faulty construction of a drainage channel adjacent to his property was the proximate cause of flooding that caused property damage to the homeowner’s yard, driveway, and garage. The City argued that it was immune from liability under Nevada Revised Statutes § 414.110, which the City said granted immunity to municipalities for both pre-emergency negligence and emergency management activities. The owner argued that the City was not immune because the City’s installation of the drainage channel did not occur during an emergency.
* What the Court Said: The City was not immune from liability for its pre-emergency negligent construction.
* What the Opinion Means: The purpose of the Nevada statute is to provide immunity for government entities for actions taken during a sudden and unforeseen crisis. Thus, the statute does not provide immunity for pre-emergency negligence that was not “intertwined” with damage caused by later negligence in a municipality’s emergency management activities. In this case, although the owner’s damages occurred during an emergency, such damages were not a result of, or intertwined with, negligent emergency management by the City. Instead, the damages were caused solely by the City’s pre-emergency construction of the drainage channel.
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.