Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and David L. Hobson
1. Application of the Pre-Existing Duty Rule, Plante & Moran Cresa, LLC v. Kappa Enters., LLC, 2006 WL 1676411 (E.D. Mich. June 9, 2006).
* What the Court Considered: A project manager (“PM”) was hired to perform project management services for the design and construction of a hotel. The contract provided for a lump sum payment to the PM of $189,000. When the hotel was substantially completed, a sprinkler head burst, causing flooding. The PM claimed that the owner orally agreed to pay an additional $105,000 for project management services provided after the flood.
* What the Court Said: This alleged oral agreement was invalid for lack of consideration under the pre-existing duty rule.
* What the Opinion Means: Under the pre-existing duty rule, doing what one is already legally bound to do is not consideration for a new promise. The rule does not apply, however, if there is an unforeseen difficulty not contemplated by the parties. In this case, the parties anticipated that problems would arise on the project, as evidenced by the fact that the contract obligated the PM to “assist in resolving field problems.”
2. Application of “No Damages for Delay” Clause, Blue Water Envtl., Inc. v. Inc. Village of Bayville, 820 N.Y.S.2d 841 (N.Y. 2006).
* What the Court Considered: A contractor was hired to perform dredging services at a marina. The contract contained a “no damages for delay” clause. The parties understood that, by order of the Department of Environmental Conservation (“DEC”), dredging was prohibited between June 1 and September 30. Thereafter, the DEC extended the period to April 13 to September 30.
* What the Court Said: If the new DEC regulation was outside the contemplation of the parties, then the contractor could recover delay damages.
* What the Opinion Means: A “no damages for delay” clause is enforceable if the contract of which it is a part is enforceable. However, the contractor may recover delay damages if the delays were outside the contemplation of the parties. Here, the contractor could present evidence that the new DEC regulation was not contemplated by the parties.
3. Change Order Procedure, Holder Constr. Group v. Ga. Tech Facilities, Inc., 2006 WL 2807182 (Ga. Ct. App. Oct. 3, 2006).
* What the Court Considered: A construction manager (“CM”) entered into a stipulated sum contract on a project to construct apartments. After commencement, the CM experienced difficulties due to an increase in steel prices and the late delivery of steel materials. When the CM brought suit against the owner, the trial court granted summary judgment to the owner on the CM’s claims for 67 Change Order Requests (“CORs”) that had not been approved.
* What the Court Said: The owner was entitled to summary judgment because the CM failed to follow the contractual claim-filing procedure.
* What the Opinion Means: A party alleging that summary judgment was granted improperly has the burden of showing it affirmatively by the trial record. Here, the CM failed to demonstrate that it had provided sufficient information and that timely and proper notice was given for each COR.
4. Economic Loss Doctrine, Part I, Mosser Constr., Inc. v. W. Waterproofing Co., 2006 WL 1944934 (Ohio Ct. App. July 14, 2006).
* What the Court Considered: After completion of a public health building, water infiltration and mold were discovered. An investigation revealed that the water infiltration was the result of faulty design and construction of a trench drain. The contractor brought a negligence suit against the project architect to recover its costs to rebuild the drain.
* What the Court Said: Because the contractor and architect were not in contractual privity, the economic loss doctrine barred recovery.
* What the Opinion Means: In the absence of privity of contract, no negligence cause of action exists to recover economic damages against an architect unless there is a “sufficient nexus” between the parties. In this case, there was not a sufficient nexus between the parties to substitute for contractual privity because the architect did not exercise a substantial amount of control over the project.
5. Economic Loss Doctrine, Part II, 1325 N. Van Buren, LLC v. T-3 Group, Ltd., 716 N.W.2d 822 (Wis. July 11, 2006).
* What the Court Considered: A construction manager (“CM”) was hired to renovate an industrial warehouse into condominiums. The contract was the AIA “Standard Form of Agreement Between Owner and Construction Manager where the Construction Manager is also the Constructor.” Thus, in addition to providing the necessary materials for the renovation and construction, the CM was to provide construction management services. The project became seriously delayed and suffered accidental damage throughout. The owner sued the CM for negligence.
* What the Court Said: Because the contract was predominantly for construction, the economic loss rule prevented recovery for negligence.
* What the Opinion Means: The economic loss doctrine does not apply to a purely service contract. However, if the contract is a mixed contract for products and services, then the economic loss doctrine applies if the contract is predominantly for a product. The court decided the contract at issue was mixed but that it was predominantly for the delivery of condominium units. The court considered the language of the contract and the fact that the fee for construction management services was only 2.8 percent of the total contract price.
6. Notification of Cancellation of Policy, Gorham Co. v. First Fin. Ins. Co., 19 Cal. App. 4th 1532 (Cal. Ct. App. 2006).
* What the Court Considered: A general contractor on a publicly-owned project was named as an additional insured on its framing subcontractor’s insurance policy. The subcontractor had financed the policy through a lender. When the subcontractor failed to pay its loan premium, the lender exercised its right to cancel the policy. The insurer did not provide notice of the cancellation to the general contractor. The general contractor did not learn of the cancellation until its tender of defense to the insurer was denied.
* What the Court Said: The insurer was not obligated to notify the general contractor of the cancellation.
* What the Opinion Means: California’s Insurance Code provides that a policy may be cancelled by a lender to whom the right to cancel has been assigned. The code also requires that insureds be provided notice before the policy is cancelled. However, it does not require that any additional named insureds be notified.
7. Perfecting a Mechanic’s Lien, Britt Constr., Inc. v. Magazzine Clean, LLC, 623 S.E.2d 886 (Va. 2006).
* What the Court Considered: As a result of disputes arising out of a commercial car wash project, the contractor filed twelve separate memoranda of mechanic’s liens on the property between June and October. In December, the contractor recorded certifications that the liens had been mailed to the owner.
* What the Court Said: The liens were invalid because the certifications of mailing were not filed contemporaneously with the memoranda of lien.
* What the Opinion Means: Virginia’s lien statute expressly requires that a general contractor “file along with” the memorandum of lien a certification that a copy has been mailed to the owner. This is not merely a notice provision but requires that the certifications of mailing be filed contemporaneously in order to perfect the lien rights.
8. Overturning an Arbitration Award, City of Bridgeport v. Kasper Group, Inc., 899 A.2d 523 (Conn. 2006).
* What the Court Considered: After the scope of a public school project was expanded to include two more grades, the city decided to repeat the proposal and selection process for design firm. The design firm who had earlier been awarded the project filed a breach of contract action against the city. The parties agreed to submit the dispute to arbitration. The city argued that the contract was void from the beginning because the majority owner of the design firm had admitted to engaging in a bribery scheme with the mayor. After the hearing, the city asked the arbitrator to stay the proceedings until the conclusion of testimony in the mayor’s trial so that the trial transcript may be entered into evidence. The arbitrator denied this request and entered an award in favor of the design firm.
* What the Court Said: Because the exclusion of the transcript substantially prejudiced the city, the arbitration decision was reversed.
* What the Opinion Means: Although an arbitrator is accorded substantial discretion in determining the admissibility of evidence, he may be guilty of misconduct if he refuses to hear evidence pertinent and material to the controversy. The court reviewed both the evidence presented and the excluded transcript. It concluded that the arbitrator’s decision amounted to misconduct because the transcript was highly probative and very likely would have altered the outcome of the arbitration.
9. Unconscionable Arbitration Provision, State ex rel. Vincent v. Schneider, 194 S.W.3d 853 (Mo. 2006).
* What the Court Considered: A home developer’s standard home purchase contract contained an arbitration provision. The provision stipulated that the arbitrator would be selected by the President of the Homebuilders Association of Greater St. Louis, who was also the president of the developer. The provision also obligated any homeowner pursuing arbitration to pay all of the developer’s arbitration costs.
* What the Court Said: These elements of the arbitration provision were unconscionable and therefore unenforceable.
* What the Opinion Means: An unconscionable contract or clause of a contract will not be enforced. Even if the developer’s president was not the President of the Homebuilders Association, the arbitrator selection method was unconscionable because it required that an individual in a position of bias be the sole selector of an arbitrator. The provision obligating home purchasers to pay the developer’s arbitration costs was also unconscionable because it put all fees for arbitration on the consumer.
10. Third Party Beneficiary of a Subcontract, Cincinnati Ins. Cos. v. Barber Insulation, Inc., 2006 WL 1577847 (Ala. June 9, 2006).
* What the Court Considered: When a water pipe in a house burst, the homeowner’s insurer paid the owners and sued, among others, the subcontractor under a claim of third party beneficiary breach of contract.
* What the Court Said: The insurer could not sue the subcontractor for breach of contract because the homeowners were not third party beneficiaries of the subcontract.
* What the Opinion Means: A party claiming to be a third party beneficiary must establish that the contracting parties intended to bestow a direct and not merely an incidental benefit on the third party. In a typical construction subcontract, the owner is regarded as merely an incidental beneficiary. However, the owner will be considered a third party beneficiary where the subcontract specifically extends protection to the owner. The subcontract at issue in this case did not extend protection to the owner.
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.