Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Troy Kiber
1. Contracting Around the Duty to Notify the Surety, Dooley and Mack Constructors, Inc. v. Developers Surety And Indem. Co., 972 So.2d 893 (Fla. 3d D.C.A. 2007).
* What the Court Considered: As is common, the bond covering a subcontractor’s obligation incorporated the subcontract. However, that subcontract included language giving the contractor the right to "take charge of and complete the performance of the work" while holding the subcontractor and its surety liable, with only an option - not an obligation - to notify the surety. The contractor indeed took charge of the subcontractor’s work without notifying the surety, and in the resulting suit against the surety the surety complained of this lack of notice.
* What the Court Said: Because the subcontract granted the contractor the right to supplement without notice, the surety was liable even without this notice.
* What the Opinion Means: Normally, a contractor must formally notify the surety of its right to cure the principal’s default. However, the contractor may be able to escape this obligation via language in the subcontract.
2. The Surety’s Duty to Defend, Schmitt v. NIC Ins. Co., 2007 WL 3232445 (N.D.Cal. Nov. 1, 2007).
* What the Court Considered: A general contractor obtained insurance by representing that it always engaged in certain liability-limiting practices - such as obtaining written contracts containing hold-harmless provisions with subcontractors. On the project at issue, the contractor did not engage in many of these practices and arbitration ensued. The Insurance company argued that it had no duty to defend the contractor based upon the contractor’s material misrepresentations.
* What the Court Said: Absent proof that the contractor’s representations were false when used to obtain insurance, the policy was not void: the contractor’s lack of compliance merely reduced coverage for subcontractor acts.
* What the Opinion Means: The fact that the contractor later did not obtain certain protections from subcontractors does not mean that it did not do so when it applied for insurance. Also, the duty to defend is larger than the duty to indemnify. To avoid the duty to defend the insurance company must show that there is no theory under which coverage would apply. Here, the insurance company was still required to defend the contractor against allegations of damages not caused by the contractor’s subcontractors that were not excluded.
3. Waiving the Requirement That Changes be in Writing, The Tupelo Dev. Agency v. Gray Corp., Inc., 972 So.2d 495 (Miss. 2007).
* What the Court Considered: A contractor sued an owner for extra work performed on a project. The owner, pointing to the contractual requirement that change orders be in writing, refused to pay for the additional work. However, the contractor alleged that the owner’s representative directed it to proceed with the work and to expect a change order at a later time, citing time constraints. Additionally, the contractor repeatedly received change orders after beginning work on other extra work.
* What the Court Said: The owner waived the contractual requirement that change orders be in writing by a pattern of issuing change orders after the extra work had already begun.
* What the Opinion Means: Normally, a contractor that proceeds with extra work without a written change order does so at his own risk. However, the contractor may recover for this work if it is orally ordered to do so. Additionally, a pattern of agreeing to change orders after work has commenced may waive the requirement that change orders be written.
4. The Duty to Purchase Insurance Under AIA Documents, Jalapenos, LLC v. GRC General Contractor, Inc., 939 A.2d 925 (Pa. Supr. Ct. 2007).
* What the Court Considered: An owner hired a contractor to renovate a restaurant. The standard AIA 101 contract required the owner to purchase and maintain builder’s risk insurance, or notify the contractor that it did not intend to purchase said insurance before the work began. Otherwise the Owner would bear all costs occasioned by the lack of such insurance. The contract also contained a provision waiving all claims of subrogation. The owner did not purchase this insurance, and the building was damaged by fire, which the owner attributed to a subcontractor. The owner argued that its own failure to obtain insurance should not exculpate the contractor from its own negligence, and thus the contractor should be liable to the owner under the indemnity provision of the contract.
* What the Court Said: Because the owner agreed that it would bear the costs of not obtaining insurance and waived all related claims of subrogation, it could not pursue claims for damages to the work against the contractor.
* What the Opinion Means: The indemnity provisions of the contract contemplated third-party claims, and excepted damages to the work itself. The insurance provisions were designed to allocate risk between the contractor and the owner. Here, that risk fell to the owner who was obligated to obtain insurance or to "bear all reasonable costs" itself, waiving subrogation against the contractor.
5. Recovering for Work Performed Outside of a Contract, Specialized Grading Enterprises, Inc. v. Goodland Constr. Inc., 2007 WL 3197096 (Colo. Ct. App. Nov. 1, 2007).
* What the Court Considered: In a project to rehabilitate a lake and park, the prime contractor subcontracted out some excavation work. The lake was drained, but the soil was not dewatered prior to the subcontractor’s arrival, so the subcontractor engaged in some dewatering activities and moved some saturated dirt. The subcontract did not contemplate dewatering but, naturally, the prime contract did. When the subcontractor sued for expenses related to this extra work, the contractor claimed that it could not recover in quantum meruit because that work was contemplated in the prime contract, and, at any rate, the subcontractor should have sought a change order.
* What the Court Said: Because the subcontract neither incorporated the additional work nor provided a mechanism for seeking a change order for that work, the work was outside the contract and the subcontractor could pursue a quantum meruit recovery.
* What the Opinion Means: Ordinarily, if an express contract exists there can be no recovery under an implied contract theory like quantum meruit. For instance, where a contract contains a change order provision allowing a party to seek additional compensation for, say, errors in the plans, recovery for additional work occasioned by those errors must be pursued via the change order provision. Here, the additional work was not occasioned by any eventuality contemplated in the contract, but by a failure of the prime contractor to perform its scope.
6. Recovering for Work Performed Outside of a Contract, Quantum Elec., Inc. v. Scott & White Props., Inc., 2007 WL 3105757 (Tex. App. - Eastland Oct. 25, 2007).
* What the Court Considered: An owner, contractor, and subcontractor met to discuss various changes - agreeing to many. Subsequently, the contractor drafted and sent a letter - which the owner signed - authorizing the subcontractor to purchase material required by all of the changes at a set markup. The subcontractor eventually sued the owner for the additional costs - claiming that the owner had received the benefit of the additional work and was required to pay.
* What the Court Said: Because the additional work was contemplated by changes made to the construction contract, the subcontractor could not pursue a quantum meruit action.
* What the Opinion Means: Subcontractors often use quantum meruit actions to get around the requirement of contractual privity and sue the owner. Here, the numerous changes to the contract and the subsequent guarantee of payment were all modifications to the express contract - thus there can be no recovery under an implied contract theory like quantum meruit.
7. A Low Bidder’s Property Interest, Jana-Rock Constr., Inc. v. City of Syracuse, 2007 WL 3274801 (N.D.N.Y. Nov 5, 2007).
* What the Court Considered: Claiming defects in the work, the city refused to pay the contractor who, in turn, brought suit. While this suit was pending, the city let bids for another similar project - claiming that every bidder was to start with a "clean slate." The plaintiff was the low bidder in this process, but was not awarded the contract because the city subsequently deemed it an irresponsible bidder. The plaintiff sued, claiming a violation of due process.
* What the Court Said: Because no bidder has a vested property interest in a public works contract, there was no violation of due process.
* What the Opinion Means: As there was no property interest at stake, there could be no violation of due process under the United States Constitution. However, New York law requires a public entity to accept the bid of the "lowest responsible bidder" or "reject all bids and readvertise." As this city rejected only the plaintiff’s bid, there could be a violation of that law, but that claim was not raised.
8. Rescission of Agreements to Arbitrate, Liberty Mut. Ins. Co. v. Mandaree Public Sch. Dist., 503 F.3d 709 (8th Cir. 2007).
* What the Court Considered: The contract between the school district and the contractor contained a standard arbitration clause, along with language stating the contract would not be "construed to create a contractual relationship of any kind " between entities other than the district and the contractor. The surety’s bond, while purporting to incorporate the contract, contained a provision contemplating that disputes would be resolved in court. The district demanded arbitration and asked the arbitrator to add the surety, while sending a letter to the surety requesting that it "gather more information" in preparation of the arbitration. After consulting with the surety, the arbitrator denied the request. Later, the surety voluntarily submitted to arbitration, but then sought to avoid it. The district argued that the surety was bound to arbitrate, either through the contract or through acceptance of its offer to arbitrate.
* What the Court Said: The bond’s incorporation clause did not require it to arbitrate, and the surety was not bound to arbitrate because it never accepted any offer to arbitrate.
* What the Opinion Means: Arbitration is a matter of contract, and the surety could not be said to have agreed to arbitrate in the face of contrary language in its bond. Furthermore, the district’s demand that the surety participate could not be construed as an offer, and, at any rate, that offer was denied by the arbitrator. Thus, the surety’s subsequent consent to arbitrate did not accept any offer - and did not form a contract - and could be withdrawn.
9. Conditions Precedent to Arbitration, Hubbard Constr. Co. v. Jacobs Civil, Inc. , 969 So.2d 1069 (Fla. 5th D.C.A. 2007).
* What the Court Considered: A designer’s subcontract contained a provision whereby the Contractor’s decision on any dispute would be final unless the designer made a written demand for arbitration within 20 days of the receipt of that decision. Twenty days after a "final decision" letter from the general contractor, the designer requested additional time to review the matter. The designer later demanded arbitration, but the contractor asserted that the designer had waived its right to demand arbitration by not doing so within the twenty day period.
* What the Court Said: The designer had waived its right to arbitration by failing to comply with a contractual precedent to arbitration.
* What the Opinion Means: A claim alleging mere delay in seeking arbitration is to be decided by the arbitrators, whereas compliance with a condition precedent to seeking arbitration is an issue for the court.
10. Limitation of Liability for Designer’s Negligence, 1800 Octotillo, LLC v. WLB Group, Inc., 176 P.3d 33 (Ariz. Ct. App. 2007).
* What the Court Considered: A developer hired a firm to provide surveying, engineering and landscape architecture services. The contract contained a provision limiting the surveyor’s liability to the developer to the total fee paid to the surveyor. The survey was inaccurate, and as a result of this a third party disputed the plat and the government refused to issue permits. The developer sought damages above the amount paid to the surveyor, and sought to void the limitation of liability clause as against public policy.
* What the Court Said: The limitation of liability clause was not prohibited as against public policy, and was otherwise enforceable.
* What the Opinion Means: Parties are generally free to contract as they wish. While, like many states, Arizona does have a law that prohibits one party to a construction contract agreeing to indemnify another for the sole negligence of the indemnitor, that does not mean that limitations of liability are prohibited. Most states uphold such limitation of liability clauses.
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. Troy Kiber is an Associate at Smith, Gambrell, & Russell, LLP. For more information or if you have any questions, contact us at: firstname.lastname@example.org.