Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Troy Kiber
1. Notice Required Under A Bond, CC-Aventura, Inc. v. The Weitz Co., LLC, 2007 WL 2986371 (S.D. Fla. Oct. 10, 2007).
* What the Court Considered: The owners of a senior living facility brought suit against the builder for construction defects. The builder asserted claims against its subcontractors and the surety that issued bonds covering the subcontractor’s work. The surety sought to avoid the suit by arguing that the builder could not recover on the bond because it did not provide adequate notice. To rebut this claim, the builder cited a letter it had mailed to both the subcontractor and the surety demanding that the subcontractor complete its work and informing the surety that it intended to look to the bond if the subcontractor did not fulfill its obligations.
* What the Court Said: Because the builder did not provide the surety with direct and unambiguous notice of the subcontractor’s default, the obligations under the bond were not triggered and the surety could avoid the suit.
* What the Opinion Means: A declaration of default sufficient to trigger a surety’s obligations on a bond must be direct and unambiguous. Here, the notice provided by the builder stated only that it would consider the contract in default at some future time. Additionally, it provided notice that it would look to the bond "in the event that" the subcontractor did not complete its work, a contingency that showed the subcontractor was not yet in default.
2. Termination of a Subcontract, United States ex rel. Quality Trust, Inc. v. Cajun Contractors, Inc., 486 F. Supp.2d 1255 (D. Kan. 2007).
* What the Court Considered: A subcontractor sued the contractor for breach of contract, alleging that the contractor delayed its performance and then unjustifiably terminated it. The subcontractor argued that a provision stating in part "Subcontractor assumes all obligations and responsibilities and duties that the Contractor has by the Contract Documents assumed toward the Owner" operated as a general flow down clause which incorporated certain federal regulations applicable to the Contractor. These federal regulations made the owner liable to the contractor if the owner terminated because of an excusable delay. The subcontractor sought to apply these regulations to its relationship with the contractor.
* What the Court Said: Because the subcontract did not generally incorporate federal regulations, but imposed only obligations upon the subcontractor, the federal regulations did not apply.
* What the Opinion Means: Some "flow down" clauses might incorporate the federally imposed rights and obligations, such as one fashioned to say "Subcontractor shall have the benefit of all rights, remedies and redress … which the Contractor has against the Owner." The clause at issue here, however, spoke of obligations only, and did not incorporate the protections the subcontractor sought.
3. Negotiations Creating a Contract, TLT Constr. Corp. v. RI, Inc., 484 F.3d 130 (1 Cir. 2007).
* What the Court Considered: Negotiations between a contractor and a subcontractor continued over a period of eight months, with both parties indicating the importance of a written contract. The parties exchanged multiple draft contracts, but never mutually executed any contract. At one point, the subcontractor made five changes to the proposed contract concerning insurance limits, permits and fees, requirement of union labor, bonding requirements, and shop drawings. The next written communication from the subcontractor mentioned only the bonding requirements and union labor. However, the next draft contract incorporated only the proposed changes regarding union labor. The subcontractor eventually raised its price, and the contractor sued for breach.
* What the Court Said: Because the final draft contract did not incorporate four of the five changes requested by the subcontractor, there was no meeting of the minds and thus no contract.
* What the Opinion Means: While each of the five requested changes may not, standing alone, be material, the combination of the four coupled with the repeated mutual desire for a finalized written contract convinced the court that there was no contract between the parties. Additionally, neither party acted in reliance on the existence of a contract, showing that neither believed a contract had been formed.
4. Documents Forming a Written Contract, Harris v. Baker, 2007 WL 2965087 (Ga. Ct. App. Oct. 12, 2007).
* What the Court Considered: In Georgia, written contracts are subject to a six-year statute of limitations, while oral or parol contracts are subject to a four-year statute of limitations. An owner brought a breach of contract action against a contractor, alleging that the contract consisted of a set of plans and a proposal. The plans were universal and did not address any specific site. The proposal contained the name of the owner, but not the contractor, and did not describe the location or payment terms and did not contain any signatures. Additionally, neither document referred to the other.
* What the Court Said: As neither of these documents referred to the other, and both were not contemporaneously created, they could not be read in conjunction to create a single written contract: the four-year limitations period applied.
* What the Opinion Means: While a contract can be formed between two or more documents, one such document must refer to or incorporate the other documents. Additionally, even if read together these documents would not create a single contract because the documents failed to reflect essential terms or assent thereto.
5. Contract Specifications Defense, Craig Johnson Constr., LLC v. Floyd Town Architects, P.A., 134 P.3d 648 (Idaho 2006).
* What the Court Considered: A contractor, sued for a construction defect, sought to instruct the jury that it would only be liable for improper workmanship and the designer should bear sole responsibility for any design defects. Instead, the court gave the jury a regular negligence instruction, and the jury found the contractor 90% liable and the designer 10% liable.
* What the Court Said: The contractor was entitled to a jury instruction on the contract specifications defense.
* What the Opinion Means: A public or private contractor following plans and specifications prepared by another party is not liable in negligence where defects in the plans and specifications cause injuries, so long as the contractor should not have reasonably known about the defects.
6. Enforceability of Indemnity Settlement, TSI Seismic Tenant Space, Inc. v. Superior Court, 149 Cal. App. 4th 159 (Cal. App. 4 Dist. 2007).
* What the Court Considered: An owner brought a construction defect suit against the contractor, geotechnical engineer, and structural engineer. The contract between the geotechnical engineer and the general contractor contained a clause limiting liability of the geotechnical engineer to $50,000. The contractor and geotechnical engineer submitted the enforceability of the limitation to a referee, who determined that the limitation of liability clause was enforceable. The geotechnical engineer then sought and obtained a determination that the resultant settlement was made in good faith, a determination barring further claims against it under California law. The structural engineer and the owner sought to vacate this determination and bring claims against the geotechnical engineer.
* What the Court Said: The determination of good faith was error because it did not consider the share of culpability of the geotechnical engineer and its potential liability to the owner and the structural engineer.
* What the Opinion Means: A party seeking a determination that a settlement was made in good faith must show that the amount it paid bears a reasonable relationship to the proportionate share of liability to all parties in the action, not just the party settling its claims. This limitation of liability clause only limited the liability to the contractor, and did not affect the owner’s or structural engineer’s claims for indemnity. Thus, the geotechnical engineer could not rely on its settlement with the contractor to cap its liability to others.
7. Claims Against Surety as Assignee of Contractor’s Claims, Nationwide Terminals, Inc. v. MC Const. Group, Inc., 2007 WL 1062562 (Fla. App. 3 Dist. Apr. 11, 2007).
* What the Court Considered: After filing suit for breach of contract and foreclosure of a lien, a contractor assigned and transferred all of its rights related to the suit to the surety. The surety was required to amend the complaint filed by the contractor to reflect the surety as the real party at interest. The owner then counterclaimed against the surety for failure to assume its obligations under the bond. The surety moved to dismiss these claims, asserting that it was a party to the suit only as a representative of the contractor, and was not appearing in its capacity as surety.
* What the Court Said: A party who maintains an action solely in its capacity as the representative of another is not an "opposing party" subject to claims related to its individual capacity.
* What the Opinion Means: The owner could assert any claims it had against the contractor in the action, but could not assert claims it may have against the surety because the surety was a party to the suit only in its role as representative/assignee of the contractor.
8. Scope of Arbitrator’s Authority, C.R. Klewin Northeast, LLC v. City of Bridgeport, 919 A.2d 1002, (Conn. 2007).
* What the Court Considered: A construction manager filed an application to confirm an arbitration award it had obtained against the city. The city asserted that the contract was illegally procured with help from a corrupt official, and was thus void, and that the Courts - not the arbitrators - had exclusive jurisdiction over that claim.
* What the Court Said: A claim that a contract subject to arbitration was illegally procured is a defense over which the arbitrator, and not the court, has jurisdiction.
* What the Opinion Means: If the arbitration clause itself was void for some reason independent of the contract as a whole, then the matter would be for the courts. However, issues like illegality of the contract itself point more towards the enforceability of the contract as a whole, and are proper issues for an arbitrator to consider.
9. Proper Party to Sign Lien, Williams v. Athletic Field, Inc., 139 P.3d 426 (Wash. Ct. App. 2006).
* What the Court Considered: After being ordered to leave a project it had partially completed, a sitework contractor filed a lien on the property. The Notice of Claim of Lien contained an attestation clause signed not by the contractor or its attorney, but by an employee of a lien filing service. The owners moved to dismiss the lien as invalid because the sample statutory form contemplated only the claimant, a responsible corporate officer, or the claimant’s attorney could sign the lien.
* What the Court Said: A claimant may appoint an agent for purposes of signing a lien claim, thus the lien was valid.
* What the Opinion Means: A claimant must attest to the validity of a lien, but need not sign the lien herself. A person "authorized to act on his or her behalf" may sign the attestation clause of a lien.
10. Owner’s Liability for Injury to Minor Worker, Benson-Jones v. Sysco Food Servs. of Atlanta LLC, 2007 WL 2695673(Ga. Ct. App. Sept. 17, 2007).
* What the Court Considered: A minor died from injuries sustained while operating a forklift at the owner’s warehouse. The supervisor of the subcontractor charged with unloading materials hired the minor, who was also his stepson, to work during the summer. The principle of the subcontractor realized the owner would "have a cow" if it discovered the minor working, but did not order the supervisor to banish the boy. After the boy’s death, his mother brought a wrongful death claim against the owner, alleging that it was negligent in allowing the boy to work on its property.
* What the Court Said: Because the owner had no knowledge that a minor was working on its property, it was not responsible for his injuries.
* What the Opinion Means: The owner was not negligent per se under the child labor laws because it did not employ the minor. Also, the owner was not vicariously liable for the violations of the child labor laws committed by the subcontractor. Finally, as there was no evidence that the owner should have known that a minor was working in its warehouse, there was no duty to warn the minor about the dangers of operating heavy machinery at his young age.