Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Repair Contract as Novation for Construction Contract, CTTI Priesmeyer v. K & O Ltd., 164 S.W.3d 675 (Tex. App. 2005).
* What the Court Considered: The owner of a warehouse sued a general contractor when cracks developed in the foundation of the warehouse. Prior to the litigation, the owner entered into a second contract with the same general contractor to repair the damaged foundation. The general contractor contended that the repair contract was a novation of the original construction contract.
* What the Court Said: Because the repair contract did not expressly declare a novation, and was not inconsistent with the previous contract, the repair contract was not a novation of the original construction contract.
* What the Opinion Means: A novation occurs when a new obligation completely replaces an existing obligation. Under Texas law, the intent for a novation must be clearly established, as novations are never presumed. Here, where the subsequent repair contract did not explicitly discharge the general contractor from its obligations under the original contract, the subsequent repair contract was not a novation, and the general contractor was still responsible for its failures under the original contract.
2. Accrual of Statute of Limitations on Defective Construction of New Home, Scully v. First Magnolia Homes, 279 Ga. 336 (2005).
* What the Court Considered: The owners of a new house sued the builder for breach of contract for installing defective stucco siding on their house. The suit was filed more than 6 years after the parties executed their purchase agreement, but less than 6 years from the date of closing. The builder alleged the suit was barred by a 6-year statute of limitations.
* What the Court Said: The statute of limitations began running when the owners closed on the house and actually took possession, not when they first entered into the contract. Since the case was filed within 6 years of the closing, the case was allowed to proceed.
* What the Opinion Means: Under Georgia law, a statute of limitations generally begins to run “when the plaintiff could have first maintained his action to a successful result.” Because the owners in this case could not have brought suit against the builders until they actually owned the house, and ownership transferred at closing, the date of the closing was the proper day to trigger the statute of limitations.
3. Contractors’ Liability for Acts of Gross Negligence, Daimler Chrysler v. Graves Sheet Metal, 827 N.E.2d 607 (Ind. Ct. App. 2005).
* What the Court Considered: The owner of a car manufacturing plant hired a contractor to upgrade the ventilation system at the plant. The contractor’s crane operator negligently crashed a crane into an operating manufacturing line, causing extensive damage and injuries. When sued by the owner, the contractor argued that the “hold harmless” clause in the parties’ contract prevented the owner’s claim.
* What the Court Said: Although the contract’s “hold harmless” provision did purport to limit the contractor’s liability, the provision did not apply to this situation because such provisions may not limit liability for gross negligence.
* What the Opinion Means: Under Michigan law, as applied in this case, a party may enter into a contract limiting the liability for harm caused by its negligence in performing a contractual duty. However, a party may not limit the liability for its own gross negligence. Here, because the crane operator did not merely breach his contractual duties, but was grossly negligent in crashing the crane into the plant, the contractor could be held liable for the accident.
4. Applicability of a Statute of Repose, Durham v. Herbert Olbrich GMBH & Co., 404 F.3d 1249 (10th Cir. 2005).
* What the Court Considered: An employee at a manufacturing plant was seriously burned when he was pressed into a hot oil drum while trying to clean the equipment. The builder of the plant sought protection under a statute of repose which barred recovery for tort damages arising 10 years or more after construction of an improvement to real property.
* What the Court Said: The employee’s claim was not time-barred by the statute of repose.
* What the Opinion Means: When determining whether equipment is an improvement to property under Oklahoma law, courts consider factors including the degree to which the equipment enhances the value of the property; whether the equipment is intended to be an improvement to property; the permanence of the equipment; and tax treatment of the equipment. Here, although the equipment was specifically designed for the site and bolted to the foundation of the property, several other factors suggested the equipment was not part of the real property.
5. Recovery for Negligence Without Proof of Duty, Butler v. Advanced Drainage Systems Inc., 698 N.W.2d 117 (Wis. Ct. App. 2005).
* What the Court Considered: A city hired a contractor to build a drainage system to reduce the water level in a lake. When the drainage system failed to reduce the level of the lake as intended, lakefront property homeowners sued the contractor alleging damage from the contractor’s negligence.
* What the Court Said: Even though the contractor was hired by the city to reduce the rising water level of the lake and failed to do so, the homeowners did not have proper to basis to sue the contractor for its failures under the contract.
* What the Opinion Means: In order to recover in a negligence action under Wisconsin law, a plaintiff must demonstrate that the defendant was under a duty of care to the plaintiff, the defendant breached that duty, actual loss or damage was a result of that breach of duty, and a causal connection existed between the loss or damage and the breach. In this case, the homeowners were unable to show the existence of a duty of care on the part of the contractor to the homeowners. While the contractor could be liable to the city for breach of contract, it could not be liable to the homeowners who would have only incidentally benefited from the contract to which they were not a party.
6. Allowable Subject Matter for Expert Testimony, Lakeland Enterprises of Rhinelander v. Chao, 402 F.3d 739 (7th Cir. 2005).
* What the Court Considered: A contractor was hired by a city to install sewer and water lines. An unexpected inspection by the city resulted in the issuance of various safety violation citations, to which the contractor objected. At trial to determine the validity of the citations, the contractor presented its own safety consultant to testify as an expert witness. The witness was not allowed to testify as to jobsite conditions because he had not personally witnessed the site.
* What the Court Said: The trial judge was mistaken in not allowing the contractor’s witness to testify about the conditions of the jobsite. Although the witness had not viewed the jobsite personally, he had reviewed the record of the citations.
* What the Opinion Means: Expert witnesses, once qualified as experts, are not restricted to testifying only concerning matters about which they have personal knowledge. Although he never saw the actual jobsite, the expert should have been allowed to answer questions about the facts upon which he based his opinion.
7. Enforceability of Unconscionable Arbitration Clauses, Porpora v. Gatliff Building Co., 160 Ohio App. 3d 843 (2005).
* What the Court Considered: A homebuyer executed a contract with a builder to construct a new home. When the homebuyer later sued the builder, the builder sought to bind the homebuyer to the contract’s arbitration clause.
* What the Court Said: The arbitration clause was both procedurally and substantively unconscionable; thus, the homebuyer was not obligated to abide by its terms.
* What the Opinion Means: The arbitration clause was procedurally unconscionable because it was a mandatory term to which the party with lesser bargaining power was obligated to agree since the homebuyer had to agree to the clause if it wanted to deal with the builder. The arbitration clause was also substantively unconscionable because it was so skewed in favor of the builder that the homebuyer was left with little remedy if the builder breached the contract.
8. Enforceability of Waiver of Subrogation Clause, St. Paul Fire Ins. v. Universal Builders Supply, 409 F.3d 73 (2d Cir. 2005).
* What the Court Considered: A contractor was hired to build scaffolding for a high-rise construction project. The scaffolding collapsed, killing and injuring several people and causing significant economic loss. The insurance company that paid for the damage sued the contractor under the theories of gross negligence and strict liability. The contractor moved to dismiss the case, citing waiver of subrogation provisions in the various contracts among the parties.
* What the Court Said: The insurance company’s claims were prohibited due to the waiver of subrogation provisions of the various contracts.
* What the Opinion Means: Subrogation allows an insurer to stand in the shoes of its insured and seek indemnification from third parties whose wrongdoing has caused a loss for which the insurer is obligated to provide reimbursement. Waiver of subrogation clauses are intended to decrease the amount of litigation that might otherwise arise due to the existence of an insured loss. Because the insurance company waived its right of subrogation in this case, it could not proceed with the lawsuit.
9. Indemnitee’s Negligence as Bar to Recovery, Singh v. New York City Transit Authority, 17 A.D.3d 262 (2005).
* What the Court Considered: A contractor’s employee was injured during the course of his employment at construction jobsite. The contractor was required by the terms of its contract to indemnify the owner for all claims against the owner based on personal injury.
* What the Court Said: Because the owner’s negligence may have caused the employee’s injuries, the owner could not recover under the contractual indemnification clause.
* What the Opinion Means: Although the contract had agreed to indemnify the project owner for any claims based on personal injury, the right to recover through indemnification may be barred when the owner’s negligence is the cause of the injury.
10. Liabilities of “Alter-Ego” Companies, Midwest Precision Heating v. N.L.R.B., 408 F.3d 450 (8th Cir. 2005).
* What the Court Considered: An air-conditioning manufacturer acquired the assets of another manufacturer of similar products. The manufacturer then refused to honor the collective bargaining agreement that the predecessor manufacturer had reached with its employees’ union.
* What the Court Said: The successor manufacturer was bound by the collective bargaining agreement because it was merely the “alter-ego” of the predecessor company.
* What the Opinion Means: Companies which are essentially the same entity as their predecessor and are created as a mere “alter-ego” to avoid obligations will be held responsible for the obligations of the predecessor. Here, because the new company was managed by the same people, retained essentially all of the same employees except for union leaders, and retained all of the same customers as the predecessor company, the new company was an alter ego.
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.