Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and David L. Hobson
1. AIA Waiver of Subrogation Clause, Knob Noster R-VIII Sch. Dist. v. Dankenbring, 2007 WL 445365 (Mo. Ct. App. Feb. 13, 2007).
* What the Court Considered: A school district entered into a contract for window replacement and air conditioning work. The contract included the AIA A201 General Conditions of the Contract for Construction, which obligated the district to procure Builder’s "All Risk" Insurance to cover damage to the Work. Paragraph 11.4.7 of the A201 provided that the parties waive subrogation rights against each other for damages to the extent covered by the insurance obtained pursuant to the contract. During the project, the masonry subcontractor negligently applied an acid wash solution, damaging a portion of the roof. The insurer paid for the repairs. The district then filed a subrogation action against the subcontractor.
* What the Court Said: The AIA waiver of subrogation provision did not preclude the district from recovering from the subcontractor.
* What the Opinion Means: By its express terms, the waiver of subrogation applied only to damage covered by the Builder’s Risk insurance. The Builder’s Risk insurance only covered damage to the Work. Therefore, because the roof was outside the scope of the Work, the waiver of subrogation did not apply.
2. Completion and Acceptance Doctrine in New York, Davis v. Baugh Indus. Contractors, Inc., 150 P.3d 545 (Wash. 2007)
* What the Court Considered: A contractor was hired to build a network of subterranean pipes for a processing facility. Three years after completion, a leak developed in one of the pipes. While inspecting the leak, an employee of the owner was killed when a nearby wall collapsed.
* What the Court Said: The negligence suit against the contractor could proceed.
* What the Opinion Means: Under the doctrine of completion and acceptance, a contractor is shielded from liability for negligent work after that work has been completed and accepted by the owner. One rationale for the rule was that, if owners inspect and accept the work, they, and not contractors, should be liable for defects. Today, given the highly complex nature of modern construction, the rule is no longer justified. Therefore, the Court joined the 37 other states that have abandoned the rule.
3. Indemnification for Future Personal Injuries, W.R. Hall, Inc. v. Hampton Roads Sanitation Dist., 641 S.E.2d 472 (Va. 2007).
* What the Court Considered: While installing a sewer line under a railroad, an employee of the contractor was injured. Pursuant to an indemnification provision in the utility line agreement between the railroad and the sanitation district, the district assumed the railroad’s defense of the personal injury suit. Thereafter, the district demanded that the contractor hired to install the sewer line pay all costs incurred by the district in defending against the suit. An indemnification provision in the contract between the district and the contractor obligated the contractor to indemnify the district for personal injuries caused, in whole or in part, by the contractor’s negligence.
* What the Court Said: A provision indemnifying a party for future acts of negligence causing personal injury is not void as against public policy.
* What the Opinion Means: In a previous case, the Court held that a party may indemnify itself against liability for personal injury caused by its own future negligence. In this case, the provision at issue indemnified the district for loss resulting from the contractor’s negligence. Thus, it would be inconsistent for the Court to rule that the provision at issue is void as against public policy.
4. Tortious Interference With Business Relationships, Wagner-Smith Co. v. Ruscilli Constr. Co., Inc., 861 N.E.2d 612 (Ohio Ct. Com. Pl. 2006).
* What the Court Considered: A prime electrical contractor sued the project construction manager ("CM") for tortious interference with the contractor’s business relationship with the owner. The suit was based on the CM’s alleged mismanagement of the project.
* What the Court Said: The claim was dismissed because the CM had a "qualified privilege" to act as it did.
* What the Opinion Means: A defendant is not liable for the tort of interference of business relationships if it had a "qualified privilege" to act as it did. In analyzing the relationship of the parties in this case, the Court found that the CM was privileged to act as it did. Specifically, the CM’s contract with the owner necessarily provided legitimate justification to the CM to be involved in scheduling and other matters that directly affected the contractor.
5. No Damages for Delay Clause, Scoccolo Constr., Inc. v. City of Renton, 145 P.3d 371 (Wash. 2006).
* What the Court Considered: A contractor’s contract with a city included a "no damages for delay" clause. The contractor was delayed by utility companies operating under franchise agreements with the city.
* What the Court Said: Because the utility companies were "persons acting for" the city, the contractor was entitled to recover delay damages attributable to these entities.
* What the Opinion Means: Washington law invalidates "no damages for delay" clauses where the delay is caused by the contracting party or "persons acting for" that party. When a city has the power to compel a utility company to act under a contract, the utility company is "acting for" the city.
6. Sufficiency of Evidence for Contract Modification, Cajun Constructors, Inc. v. Fleming Constr. Co. Inc., 951 So. 2d 208 (La. Ct. App. 2006)
* What the Court Considered: A general contractor entered into a lump sum contract with a subcontractor, which required any changes to be made by written amendment. During discussions with the owner, it was decided that one aspect of the subcontractor’s work would not be performed. Instead, the subcontractor performed a different scope of work, for which it was compensated on a time and material basis. However, no written change order was made to the contract to delete the scope that had not been performed. The subcontractor continued to bill for the full amount of the subcontract, and payment for the deleted scope of work was not otherwise discussed.
* What the Court Said: Because there was no amendment to the original contract, the subcontractor was entitled to payment for the full scope of work in that contract
* What the Opinion Means: Written contracts, even those requiring amendments in writing, may be modified by oral agreements or by conduct. The absence of any oral or implied modification precludes a change to the contract amount. Here, while it was clear that the disputed scope would not be performed, the fact that the subcontractor was never told to delete that scope from its bid price and that payment was never discussed persuaded the Court that no modification took place.
7. Recovery of Storage Fees Under a Payment Bond, Steward Mach. Co. v. White Oak Corp., 462 F. Supp. 2d 251 (D. Conn. 2006).
* What the Court Considered: A general contractor executed a purchase order for large-scale equipment with a subcontractor, secured by payment bond. The contract required the subcontractor to deliver the equipment, but the general contractor was not able to timely accept delivery. With no commercial storage facility available for such large equipment, the subcontractor stored the equipment on its own lot. The parties did not execute a contract or change order covering the storage fees, but the subcontractor billed for these amounts and the general contractor submitted those invoices to the owner.
* What the Court Said: Because the storage of the equipment was necessary for completion of the work, the subcontractor had a valid claim on the payment bond for those amounts.
* What the Opinion Means: Storage fees may qualify as "labor or material" under the Miller Act, even in the absence of a written contract, where the expenses are incurred through no fault of the subcontractor and are necessary for completion of the work. Such expenses are not akin to delay damages, which must actually be expended in order to be recovered from the surety when there is no facility to store the equipment and thus no opportunity to actually incur the expenses.
8. Circumstantial Evidence of Product Defect, Triplex Co. v. R.L. Pomante Contractor, 2006 WL 320534 (Ohio Ct. App. 10 Dist 2006).
* What the Court Considered: An owner brought suit against the manufacturer of vinyl siding, alleging there were defects in the siding. The manufacturer alleged that it was entitled to indemnification from the installer, whose negligent installation it claimed was the true source of the problems. The siding itself was available but not presented as evidence, and the owner’s expert testimony was excluded. Thus, the owner’s case was based solely upon circumstantial evidence of a product defect
* What the Court Said: Circumstantial evidence is potentially sufficient to demonstrate a defect even if direct evidence is potentially available.
* What the Opinion Means: For the owner to meets its burden of proof it must demonstrate that the problems in the siding were a result of a product defect and not other possibilities. However, the owner need not conclusively rule out all other possible reasons for the problems.
9. Definition of "Construction Work", Irizarry v. New York, 35 A.D.3d 665 (N.Y. App. Div. 2006)
* What the Court Considered: A contractor was hired to correct an electrical problem at a state hospital. While working at the hospital, an employee of the contractor was injured by an explosion in an electrical box. The employee brought suit under section 241 of New York’s Labor Law.
* What the Court Said: The state was not liable under section 241 because the employee was not engaged in "construction work."
* What the Opinion Means: Section 241 of New York’s Labor Law protects employees who are injured while performing "construction work." Although this project constituted extensive repair taking weeks to complete and requiring a large number of workers, it did not qualify as "construction work."
10. Agreement on Essential Terms, Chong v. Reebaa Constr., Inc., 2007 WL 866659 (Ga. Ct. App. Mar. 23, 2007).
* What the Court Considered: Shortly after a general contractor began work on a residence under an oral contract, the homeowner requested numerous changes and upgrades. The contractor informed the homeowner that the changes would cause additional expense and time but did not quote a specific price. The homeowner assented, stating that "price was no object." While the homeowner paid more than the original oral contract amount, he refused to pay the total amount claimed by the contractor.
* What the Court Said: Because no specific price was quoted or agreed upon, there was no evidence upon which to base a breach of contract action.
* What the Opinion Means: A contract is not complete without a meeting of the minds on all essential terms, including price. Where the parties do not discuss price, the proper action is for an implied contract.
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: email@example.com.