Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and David L. Hobson
1. Construction Manager’s Duty to Contractor, Matrix Constr., LLC v. Malow, 2006 WL 399762 (Mich. Ct. App. Feb. 21, 2006).
* What the Court Considered: A construction manager’s (“CM”) contract with the owner required the CM to properly supervise and control the work. A contractor under a separate construction contract with the owner brought suit against the CM for negligent planning and coordination of the work.
* What the Court Said: Because the CM had no contract with the contractor, the CM owed no separate and distinct duty to the contractor.
* What the Opinion Means: Although in Michigan a design professional may be held to owe a duty to a third party contractor because it can reasonably foresee that a contractor may rely on the design, a CM owes no such separate and distinct duty to third party contractors. The CM had no duty to the contractor separate and distinct from the contractual duties it owed the owner.
2. Violation of Bidding Statute, Baltazar Contractors, Inc. v. Town of Lunenberg, 65 Mass. App. Ct. 718 (2006).
* What the Court Considered: In soliciting bids for a construction project to improve the town’s sewer system, the town failed to advertise the bid invitation in a local newspaper of general circulation as required by the state’s bidding requirements. Prior to the issuance of a notice to proceed, the town discovered its violation of the bidding requirements and terminated the contract. The low bidder to whom the contract had been awarded sued for termination costs under the contract’s “termination for convenience” provision.
* What the Court Said: Because the contract was deemed to be void, the contractor could not recover termination costs.
* What the Opinion Means: The statutory bidding requirements are designed to protect the public interest. A town’s failure to give proper public notice frustrates this legislative purpose and therefore renders the contract unenforceable.
3. Implied Warranty of Approved Manufacturer, A.G. Cullen Constr., Inc. v. State Sys. of Higher Educ., 2006 WL 625255 (Pa. Commw. Ct. Mar. 15, 2006).
* What the Court Considered: A contract for the renovation of a university administration building identified two approved manufacturers of wood-framed windows. When one of the approved manufacturers failed to provide shop drawings or sample windows, the contractor cancelled the supply agreement and entered into an agreement with the second approved manufacturer. The contractor completed the project late and was assessed liquidated damages. The contractor argued that, by naming the manufacturer an approved manufacturer, the owner had impliedly warranted the first manufacturer could produce the required windows.
* What the Court Said: Because the contract allowed the contractor to use a substitute manufacturer “with equal performance characteristics,” the owner was not at fault.
* What the Opinion Means: Where a public owner identifies a particular manufacturer by name but permits substitution of “an approved equal,” the specification carries no implied warranty. Here, because the contractor had meaningful discretion to use a substitute manufacturer, the window specification was properly characterized a “performance” rather than “design” specification. Design specifications carry an implied warranty by the owner that, if the specification is followed, satisfactory performance will result.
4. Definition of Public Works Project in Nevada, Carson-Tahoe Hosp. v. Bldg. & Constr. Trades Council, 128 P.3d 1065 (Nev. Mar. 2, 2006).
* What the Court Considered: A nonprofit corporation was to fund the construction of a hospital with economic development bonds authorized by the city Board of Supervisors. After a contractor was hired, the Building and Construction Trades Council was informed that the corporation did not intend to pay prevailing wages to construction workers on the job.
* What the Court Said: Because a public body was not a party to the construction contract, the corporation was not obligated to pay prevailing wages.
* What the Opinion Means: Under Nevada statute, prevailing wages must be paid in “[e]very contract to which a public body of this state is a party.” Here, as a private corporation contracted with a private contractor for the construction of a hospital on privately owned land, there was no public body involved. Also, public funds were not used to finance the project because the development bonds did not involve taxpayer money.
5. Enforcement of Pay-When-Paid Provision, Welsbach Elec. Corp. v. Mastec N. Am., Inc., 804 N.Y.S.2d 805 (N.Y. App. Div. 2005).
* What the Court Considered: A contractor hired for a project in New York City subcontracted the electrical work. The subcontract, which was governed by Florida law, included a “pay-when-paid” provision. Thereafter, the owner became insolvent, and neither the contractor nor the subcontractor received payment. When the subcontractor sued the contractor for moneys due under the subcontract, the contractor raised the “pay-when-paid” provision as a defense.
* What the Court Said: Because enforcement of the “pay-when-paid” provision would violate New York’s public policy, it was not enforceable against the subcontractor.
* What the Opinion Means: Although “pay-when-paid” provisions are enforceable in Florida, a New York court may choose to deny enforcement of the provision if it finds that enforcement would violate New York’s public policy. Here, enforcement of the provision would violate New York’s lien law policy, which is to protect those who have expended labor or materials to improve real property at the direction of the owner or contractor.
6. Contractor’s Obligation to Hire DBEs, Jet Asphalt & Rock Co. v. Angelo Iafrate Constr., 431 F.3d 613 (8th Cir. 2005).
* What the Court Considered: A contractor on a state highway project was required to subcontract 10% of the work to disadvantaged business enterprises (“DBEs”). According to the contractor’s bid, $361,727 of the hauling work was to be performed by a designated approved DBE. Although a subcontractor hired to perform a portion of the work was bound by its subcontract to the same extent as the contractor, it did not hire the designated DBE to perform the hauling work. The state highway department subsequently issued a deductive change order in the amount of $290,367 for the contractor’s failure to use approved DBEs. The subcontractor sued the contractor for withholding moneys due under the subcontract.
* What the Court Said: Because the contractor was aware the subcontractor intended to use an unapproved DBE, the subcontractor’s failure to use the designated DBE was excused.
* What the Opinion Means: In Arkansas, a party’s breach of a condition of a contract may be excused if the other party permits the breach. Here, the contractor was aware that the subcontractor was going to use an unapproved hauling company. Therefore, the subcontractor’s failure to use the designated DBE was excused. Also, the contract was unclear about which party, the contractor or subcontractor, was to obtain approval from the state to use a substitute DBE.
7. Agency’s Duty to Assure Payment Bond Is in Place, Sloan Constr. Co. v. Southco Grassing, Inc., 2006 WL 1071999 (S.C. Ct. App. Feb. 21, 2006).
* What the Court Considered: A contractor on a state highway project was required to provide proof that it had acquired a payment bond worth 100% of the contract amount, which it did. Thereafter, the surety became insolvent. A subcontractor who had not been paid in full sued the Department of Transportation (“DOT”), claiming it had a duty to assure that the payment bond remained in effect until full payment.
* What the Court Said: The subcontractor had no right under the state’s statutory scheme to being a private suit against the DOT.
* What the Opinion Means: South Carolina’s Little Miller Act requires payment bonds for certain government projects. However, because the statute deals solely with government contracts, an individual has no private right of action under the statute to bring a suit against the government for failing to assure that the payment bond remains in effect.
8. Performance In Accordance with the Project Schedule, Modern Mosaic, Ltd. v. Sweet Assoc., Inc., 23 A.D.3d 880 (N.Y. App. Div. 2005).
* What the Court Considered: A subcontract for the fabrication and installation of exterior concrete panels required the subcontractor to perform “in accordance with the project schedule developed by [the contractor].” Although the initial schedule reflected a start date in May, the schedule was later changed to reflect a September start date. The subcontractor sued for delay damages.
* What the Court Said: Because the contractor had the right to make changes to the schedule, the subcontract could not recover for delay.
* What the Opinion Means: The project schedule was not made a part of the subcontract, and the subcontractor failed to reserve the right to limit changes to the schedule. Therefore, because the contractor had the right to make changes to the schedule, the subcontractor’s delay claim was invalid.
9. Change Order Agreement Invalid Under Competitive Bid Law, Bd. of Sch. Comm’rs v. ,Coastal Builders, Inc., 2005 WL 3445986 (Ala. Civ. App. 2005).
* What the Court Considered: A winning bidder to construct an elementary school informed the Board of School Commissioners that it had inadvertently excluded the price for an HVAC control package from its bid. At a preconstruction meeting, the parties discussed adding the cost for the control package as a change order. The contractor subsequently signed the contract at the original price. Later, the Board notified the contractor that it would not pay for the control package.
* What the Court Said: Because contracts involving more than $7,500 must be competitively bid, any agreement made during the preconstruction meeting was without effect.
* What the Opinion Means: Alabama’s Competitive Bid Law requires that contracts in excess of $7,500 be made under competitive bidding. Here, the cost of the control package exceeded $7,500. Therefore, any agreement by the parties to add the control package as a change order later was void and unenforceable.
10. Payments to Contractor After Notice of Lien, O & M Indus. v. Smith Eng’g Co., 360 N.C. 253 (2006).
* What the Court Considered: A subcontractor, believing the general contractor to be in financial difficulty, served a Notice of Claim of Lien on the owner. Thereafter, the owner made two payments to the general contractor. The subcontractor sued on the lien, alleging the owner was personally liable.
* What the Court Said: Because the owner made payments to the general contractor after the Notice of Claim of Lien had been served, it was personally liable to the subcontractor.
* What the Opinion Means: Under North Carolina law, a first-tier subcontractor is entitled to a lien upon funds owed to the contractor with whom the subcontractor dealt. After notice of a claim is given, the owner must retain funds in an amount equal to the amount of the lien. If the owner makes further payments to the contractor, it becomes personally liable to the subcontractor.
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.