Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg
1. Notice Requirements Under AIA A201 Regarding Concealed or Unknown Conditions, Robert W. Carlstrom Co. v. German Evangelical Lutheran St. Paul’s Congregation of the Unaltered Augsburg Confession at Jordan, 662 N.W.2d 168 (Minn. Ct. App. 2003).
* What the Court Considered: A roofing contractor encountered unusually deep bird-mouth cuts and bizarre framing on a project, which the contractor verbally reported to the owner’s architect. These roof conditions were previously unknown because the owner had refused to allow bidders access to a substantial part of the roof prior to bidding. The owner later refused to pay the additional costs as requested in a change order.
* What the Court Said: The contract did not require the contractor to give written notice of a concealed or unknown condition; therefore, the owner was required to pay for the additional work caused by such condition.
* What the Opinion Means: As distinguished from other claims that must be in writing under AIA A201, paragraph 4.3.6 does not require a contractor to give written notice of discovery of a concealed or unknown condition. This paragraph shifts the written notice requirement to the architect after completing an investigation of the condition.
2. “Actual Notice” as Exception to Compliance with Mandatory Contractual Protest and Claim Provisions, Mike M. Johnson, Inc. v. County of Spokane, 2003 Wash. LEXIS 730 (Wash. 2003).
* What the Court Considered: A construction contract required the contractor to comply with mandatory notice, protest, and claims procedures for additional compensation, time extensions, and changed conditions. The contractor filed no written statement of protest; instead, the contractor sent the owner a series of letters indicating its concern over a change order and its expectation of additional compensation for its work under the change order.
* What the Court Said: The owner’s actual notice of the contractor’s grievances did not satisfy the formal protest and claim procedures under the contract, and did not excuse the contractor from complying with the contractual requirements.
* What the Opinion Means: Washington law requires a contractor to comply with contractual notice provisions unless the procedures are waived, either expressly or impliedly, by the owner. Implied waiver, by reason of the owner’s conduct, requires unequivocal acts of conduct evidencing an intent to waive. Absent such waiver, the owner’s actual knowledge of a protest or claim is insufficient to satisfy mandatory protest and claim procedures.
3. Engineer’s Duty of Care to Construction Workers, Hobson v. Waggoner Eng’g, Inc., 2003 WL 21789396 (Miss. Ct. App. 2003).
* What the Court Considered: Under a contract with the city, an engineering firm designed a wastewater treatment plant and maintained an onsite representative to monitor compliance with the plans and specifications for the project. The city entered into a separate contract with the general contractor. A subcontractor’s employee drowned in a sewage lagoon that was part of the construction project. The employee’s estate sued the engineering firm for wrongful death, alleging that the engineering firm had a duty to warn workers of the danger posed by the lagoon based upon the engineering firm’s supervisory responsibilities.
* What the Court Said: The engineering firm did not have a duty to warn workers of jobsite dangers. The general contractor was solely responsible for safety of workers on the site.
* What the Opinion Means: Under Mississippi law, an architect or engineer does not have a duty to warn workers of hazardous conditions on a construction site unless the architect or engineer has assumed the duty of supervision by contract or conduct. In this case, the city’s contract with the general contractor required that the general contractor maintain responsibility for supervision and safety of the project. The engineering firm’s contractual responsibility was limited to assuring compliance with the plans and specifications by the general contractor.
4. Subcontractor’s Right to Choose Installer, Diamond “B” Constructors, Inc. v. Granite Falls Sch. Dist., 70 P.3d 966 (Wash. Ct. App. 2003).
* What the Court Considered: A subcontractor submitted a bid for mechanical and electrical work on a school modernization project based upon its planned use of a specific equipment installer. After the subcontractor signed a contract based on the low bid from its proposed installer, the owner required the subcontractor to use a more expensive installer. The subcontractor requested compensation from the owner for the difference in costs of the two installers.
* What the Court Said: The owner, having insisted that the subcontractor use a more expensive installer, was liable for the additional costs incurred by the subcontractor.
* What the Opinion Means: Because the plain language of the contract required only that a specific type of equipment be installed, but not that a specific installer be used, the subcontractor properly based its bid on the installer of its choice. The owner could have specified a required installer, as it specified a required type of equipment, but did not do so.
5. Application of Statute of Repose to Asbestos Claims, J. M. Foster, Inc. v. Spriggs, 789 N.E.2d 526 (Ind. Ct. App. 2003).
* What the Court Considered: The plaintiff sued several contractors for the wrongful death of a pipe fitter that allegedly contracted lung cancer by inhaling asbestos at several jobsites. Although the contractors never manufactured or sold asbestos or asbestos-containing products, the plaintiff claimed that the employee had been exposed to asbestos-containing products that were installed or removed by the contractors. The contractors argued that the Indiana construction statute of repose barred the suit because it was filed more than ten years after the contractors completed their work at the sites where the pipe fitter could have been exposed to asbestos. The plaintiff claimed that statutes of repose and limitations did not apply in asbestos cases.
* What the Court Said: The Indiana statute of repose barred the lawsuit because application of the statute of repose did not violate the constitutional rights of asbestos victims.
* What the Opinion Means: Indiana’s construction statute of repose prohibits wrongful death actions that arise out of “a deficiency in the design, planning, supervision, construction, or observation of construction” of an improvement to real property unless such actions are commenced within the earlier of ten years from the date of substantial completion of the improvement. The contractors’ removal or installation of products containing asbestos could be considered a “deficiency” so that the statute of repose applied to bar the action.
6. Contractual Time Limits for Demanding Arbitration, White Constr. Co., Inc. v. Dep’t of Transp., 2003 WL 22358717 (Fla. Dist. Ct. App.).
* What the Court Considered: A construction contract incorporated by reference a standard Florida Department of Transportation (“DOT”) specification requiring that arbitration requests be commenced within 820 calendar days following the date of final acceptance of work. After DOT’s final acceptance of a project, the contractor filed suit against DOT for breach of contract. The contractor then obtained a stay of the court proceedings and filed a request for arbitration more than 820 days after final acceptance.
* What the Court Said: The contractor’s request for arbitration was time-barred because it was filed beyond the 820 days provided for in the parties’ contract.
* What the Opinion Means: Under Florida law, where contracting parties agree to a specific time limit for demanding arbitration, compliance with that contract provision is a condition precedent to pursuing a claim for arbitration. Unless the party demanding arbitration has a legal excuse or the parties modify their agreement, failure to submit the dispute to arbitration within the contractually required time period precludes judicial enforcement of the right to arbitration.
7. Enforceability of Indemnification Agreements from Municipalities, CSX Transp., Inc. v. City of Garden City, et al., 2003 Ga. LEXIS 895 (Ga. 2003).
* What the Court Considered: A city executed agreements with a transportation company to use a railroad right-of-way to install water and sewer lines. The city agreed to indemnify and hold harmless the company for all liabilities the company incurred in connection with the project for which the company was not the sole cause. The city also agreed to maintain insurance to cover its indemnity obligations. The company sought indemnification from the city for property damage and liability to injured third parties when a passenger train collided with a tractor trailer operated by the city’s subcontractor.
* What the Court Said: Because the Georgia legislature had not authorized the city to contractually indemnify the company, the indemnification agreement was void as an ultra vires contract.
* What the Opinion Means: Under Georgia law, the state legislature has the sole authority to enact a law that specifically waives a city’s sovereign immunity. Georgia law does not permit a municipality to waive its sovereign immunity by contracting to indemnify a third party.
8. Liability Under Payment Bond of Parties to Joint Venture, Gen. Asphalt Constr. Co. v. Grace Lutheran Found., Inc. et al., 2003 Iowa App. LEXIS 884 (Iowa Ct. App. 2003).
* What the Court Considered: Two general contractors contracted with an owner to build a retirement complex. The first general contractor executed a payment bond in favor of the owner; the payment bond did not reference the second general contractor. The second general contractor entered into a contract with a subcontractor. The payment bond provided that claimants having a “direct contract” with the contractor could file their claims at any time, while claimants that did not have a “direct contract” with the contractor were required to file their claims within 90 days of completing their work. The subcontractor filed a claim more than 90 days after completing its work. The contractors argued that the subcontractor did not have a “direct contract” with the contractor that provided the performance bond.
* What the Court Said: The two general contractors worked as a joint venture on the construction project, and, as a result, the subcontractor had a “direct contract” with both contractors for purposes of the payment bond.
* What the Opinion Means: Under Iowa law, a joint venture is “an association of two or more persons to carry out a single business enterprise or a common undertaking in which they combine their property, money, efforts, skill, or knowledge.” Characteristics of a joint venture include (1) a common undertaking; (2) joint proprietary interest in the subject matter; (3) a mutual right to control; (4) a right to share in the profits; and (5) a duty to share the losses. Where multiple parties are part of a joint venture, each party will be considered a contractor for purposes of liability under a payment bond, regardless of whether each party has signed the bond.
9. Claims for Diminution in Property Value Under CGL Policy, Auto-Owners Ins. Co. and Owners Ins. Co. v. Carl Brazell Builders, Inc., et al., 2003 S.C. LEXIS 252 (S.C. 2003).
* What the Court Considered: The plaintiffs alleged that defendant contractors knew of the presence of hazardous materials in a subdivision and failed to disclose such information prior to the plaintiffs’ home purchases. The only damages claimed by the plaintiffs were economic in nature, that is, damages based upon diminution in the value of their properties. The contractors’ insurance companies argued that they were not obligated to indemnify and defend the contractors for such economic claims under the commercial general liability (“CGL”) policies at issue.
* What the Court Said: The insurance companies were not required to indemnify or defend the contractors. The diminished value of tangible property did not constitute “property damage” under the CGL policies.
* What the Opinion Means: The CGL policies provided coverage for “property damage” caused by an “occurrence.” “Property damage” was defined under the policies as either “physical injury to tangible property, including all resulting loss of use of the property” or “loss of use of tangible property that is not physically injured.” Because economic damages based upon diminution in the value of property were not “property damage,” there was no covered “occurrence” under the CGL policies.
10. Insurer’s Duty to Defend Under a “Fronting” Policy, Phillips Petroleum Co. v. St. Paul Fire & Marine Ins. Co., 113 S.W.3d 37 (Tex. App. 2003).
* What the Court Considered: As required under a construction contract, a contractor named the owner as an additional insured on its commercial general liability (“CGL”) policy. The policy was a “fronting” policy, which meant that the amount of the deductible payable by the contractor equaled the amount of the liability limits, and the contractor was required to reimburse the insurer for all claims and expenses, including attorneys’ fees, incurred by the insurer in defense of the claim under the policy. Following an accident at the owner’s facility, the insurer agreed to provide a defense for the owner, subject to a reservation of its rights under the policy. The owner claimed that the insurer owed the owner an unlimited defense to the lawsuits.
* What the Court Said: Once the insurer had expended the policy’s per-event bodily injury liability limit, the insurer had no further obligation under the policy.
* What the Opinion Means: The construction contract did not expressly require the contractor to purchase a “traditional” CGL policy with an unlimited duty to defend. Instead, the contractor was allowed to purchase a “fronting” policy under which the insurer’s contractual obligation to defend the owner terminated once it had expended $1 million in attorneys’ fees, regardless of whether a settlement or judgment had been paid.
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. For more information or if you have any questions, contact us at: firstname.lastname@example.org.