Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg
1. Parent Company’s Criminal Liability for Deaths of Subsidiary’s Employees, United States v. MYR Group, Inc., 2003 U.S. Dist. LEXIS 7401 (N.D. Ill. 2003).
* What the Court Considered: The Occupational Safety and Health Administration (“OSHA”) charged a company with violating provisions of the Occupational Safety and Health Act (the “Act”) relating to employee training when two employees of the company’s subsidiary were electrocuted while repairing high-voltage wires.
* What the Court Said: The parent company had no control over the worksite, and none of its own employees were on the site; therefore, it was not liable for the deaths of its subcontractor’s employees under a theory of failure to train or under the “multi-employer doctrine.”
* What the Opinion Means: The parent company could not be held criminally liable under a theory of failure to train because, although it provided training to the employees, the parent company did not have control over the work site. Further, without its own employees on site, the parent company had no obligations under the multi-employer doctrine.
2. Coverage Excluded Under a “Design Defect Exclusion Clause,” Swire Pac. Holdings, Inc. v. Zurich Ins. Co., 845 So.2d 161 (Fla. 2003).
* What the Court Considered: An owner alleged numerous errors and omissions by its structural engineer in the design for a condominium project, causing the owner to spend $4.5 million to bring the condominiums into compliance with government building codes. The owner filed a claim under its builder’s risk policy for those costs.
* What the Court Said: Since the builder’s risk policy contained a “design defect exclusion clause” that excluded coverage for “loss or damage caused by” design defects, the owner could not recover the costs of repairing structural deficiencies directly caused by design defects.
* What the Opinion Means: While an insured may recover under a “design defect exclusion clause” for a physical loss ensuing from the design defect, such as loss to other property, it may not recover costs directly caused by the design defect, such as the correction of structural deficiencies. Under these facts, no such ensuing loss occurred.
3. Contractor’s Negligent Design Claim Against Architect, Ex Parte Stonebrook Dev., LLC, 2003 WL 375321 (Ala. 2003).
* What the Court Considered: A contractor agreed to construct a roadway for a developer according to plans prepared by the developer’s architect. The contractor did not complete performance until several months later than required by the contract, which contained a liquidated damages clause. The contractor, having no contract with the architect, sued the architect for negligent design of the roadway, claiming the defective design caused it to be delayed in project completion.
* What the Court Said: A contractor’s negligent design claim against the architect accrues under Alabama law when a judgment for the owner or developer is entered against the contractor.
* What the Opinion Means: A contractor’s claim for negligence (as opposed to contractual breach) comes into play only after a judgment is entered against it, because only then does the contractor suffer actual loss or damage. A contractor may not assert a negligent design claim against an architect when such claim is based solely upon nominal damages or the threat of future harm to the contractor, such as a potential claim by the owner or developer for liquidated damages.
4. Enforceability of an Unlicensed Contractor’s Performance Bond, Kvaerner Constr., Inc. v. American Safety & Cas. Ins. Co., 847 So.2d 534 (Fla. Ct. App. 2003).
* What the Court Considered: The county required a contractor to stop construction of an assisted living facility because a steel erection subcontractor on the project was not licensed, as required by county ordinances. The general contractor declared the subcontractor in default for failure to have a license and demanded that the subcontractor’s surety remedy the default under its performance bond.
* What the Court Said: As a matter of public policy, the general contractor could not indirectly recover on its unenforceable subcontract by enforcing the performance bond against the surety.
* What the Opinion Means: The general contractor could not enforce its subcontract because contracts performed by unlicensed contractors are unenforceable under Florida law. Further, the general contractor knew, even before work started on the project, that the subcontractor was not licensed. A party to a construction contract may not “invoke the judicial process when, for [its] own financial benefit, [it] has participated in the very activity that law precludes, with the resulting danger that the law seeks to avoid.” Accordingly, the general contractor could not enforce a performance bond on its unenforceable subcontract.
5. Accord and Satisfaction of Contract Balance, Precision Drywall & Painting, Inc. v. Woodrow Wilson Constr. Co., Inc., 843 So.2d 1286 (La. Ct. App. 2003).
* What the Court Considered: A contractor issued a check to a subcontractor for less than the full amount owed under the subcontract. The check contained language that it was in “full and final payment” for all of the subcontractor’s work on the project. Although the subcontractor’s attorney notified the contractor that it rejected the check as full payment, the subcontractor cashed the check.
* What the Court Said: The contractor’s debt was extinguished when it issued a check for less than that owed to the subcontractor with the notation of “full and final payment,” and the subcontractor cashed the check.
* What the Opinion Means: The accord and satisfaction doctrine applies to extinguish a debt where (1) there is an unliquidated or disputed claim between a creditor and a debtor; (2) the debtor tenders payment for less than the sum claimed by the creditor; and (3) the creditor accepts the tender by negotiating (e.g., cashing) the check. While “mutual consent” of the parties is a requirement for accord and satisfaction of a debt, such mutual consent is established when a creditor cashes a check from its debtor expressly inscribed as “full and final payment.”
6. Losing Bidder’s Request for Injunctive Relief After Construction Nearly Completed, Stoetzel & Sons, Inc. v. City of Hastings, 658 N.W.2d 636 (Neb. 2003).
* What the Court Considered: A losing bidder for a public contract sought injunctive relief based upon alleged irregularities in the bidding process, but waited six weeks after the city accepted the lower bid of another contractor before filing suit, and waited six months before seeking a temporary injunction, at which point the project was almost 50% complete.
* What the Court Said: The completion of the project rendered moot the losing bidder’s request for injunctive relief.
* What the Opinion Means: A moot cause of action is “one which seeks to determine a question which does not rest upon existing facts or rights, in which the issues presented are no longer alive.” A disappointed bidder’s claim may become moot when the issues presented by the bidder no longer exist.
7. Waiver of Contractual Right to Arbitration by Inconsistent Conduct, Wise v. Tidal Constr. Co., Inc., 2003 Ga. App. LEXIS 639 (Ga. Ct. App. 2003).
* What the Court Considered: Plaintiffs sued a construction company for negligence, breach of implied warranty, and breach of contract. In its answer, the construction company briefly stated that the case might be subject to mandatory arbitration under the construction contract. However, the construction company proceeded with the litigation, including conducting extensive discovery, filing a motion for summary judgment, entering a pre-trial order, setting a trial calendar, and selecting a jury.
* What the Court Said: The construction company waived its contractual right to mandatory arbitration because its conduct throughout the litigation was inconsistent with arbitration, even though the construction company raised the issue of mandatory arbitration in its answer.
* What the Opinion Means: Arbitration “is intended and designed to provide a quick and cost effective method of dispute resolution.” The construction company in this case first attempted to pursue litigation, but then sought to arbitrate the case just before the start of trial. Such conduct is “grossly inconsistent with the inherent purpose for arbitration” and, as a result, the construction company waived its right to arbitration.
8. Incorporation into Contract of Construction Industry Arbitration Rules, Independent Sch. Dist. No. 775 v. Holm Bros. Plumbing & Heating, Inc., 660 N.W.2d 146 (Minn. Ct. App. 2003).
* What the Court Considered: A construction contract required that all disputes be resolved by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association (the “Rules”); and that neither party could demand arbitration after the date when that party would be barred by the applicable statute of limitations from bringing such claim. The plaintiff argued that it did not have all of the information required for making a demand under the Rules until after the applicable two-year limitations period had passed for claims based upon improvements to real property.
* What the Court Said: The incorporation of the Rules does not alter what triggers the applicable statute of limitations.
* What the Opinion Means: The Rules provide that “the initiating party shall, within the time period, if any, specified in the contract” provide written notice of its intent to arbitrate. Although the Rules may require more specificity in a demand for arbitration than generally is required for filing a lawsuit, the Rules nonetheless mandate that the plaintiff comply with the limitations period as provided in the contract.
9. Failure to Strictly Comply With Notice Requirements of a Mechanic’s Lien Statute, Seasons-4, Inc. v. Hertz Corp., 788 N.E.2d 179 (Ill. App. Ct. 2003).
* What the Court Considered: A contractor failed to pay a subcontractor for a custom-built air conditioning unit. The subcontractor faxed a letter to the property owner that received the unit stating that it had not been paid, and would not honor any warranties related to the project.
* What the Court Said: The subcontractor failed to comply with the state mechanics’ lien act. The act did not expressly allow for notice by facsimile. Further, the letter failed to state that the subcontractor was asserting or claiming a “mechanic’s lien” and failed to describe its work or the project at issue.
* What the Opinion Means: Under Illinois law, as in many other jurisdictions, mechanics’ lien statutes are strictly construed and will be valid “only if each of the statutory requirements is scrupulously observed.” Lien claimants may waive their lien rights unless they comply fully with the statutory requirements.
10. Timeliness of Filing Lien Affidavit, Page v. Structural Wood Components, Inc., 102 S.W.3d 720 (Tex. 2003).
* What the Court Considered: An owner terminated its general contractor and hired third party contractors to complete a construction project. The state mechanic’s lien statute provided that a subcontractor could claim a lien on funds retained by the owner by filing a lien affidavit not later than the 30th day after the “work” was completed. A subcontractor of the original general contractor filed its lien affidavit 31 days after the original general contractor was terminated, but prior to completion of the project by the third party contractors.
* What the Court Said: The subcontractor was required to file its lien affidavit within 30 days of the termination of the original contract. Accordingly, the affidavit was untimely. The subcontractor waived its lien rights.
* What the Opinion Means: A subcontractor must file its lien affidavit within the statutory period after its respective general contractor completes work, even when completion of the general contractor’s work occurs by the contractor’s termination or abandonment.
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.