Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Enforceability of Arbitration Provision After Project Completion and Final Payment, Warwick Township Water & Sewer Auth. v. Boucher & James, Inc., 851 A.2d 953 (Pa. 2004).
* What the Court Considered: Following completion of an expansion project for a wastewater treatment plant, the Warwick Township Water & Sewer Authority (the “Authority”) sued its contractor for breach of contract, breach of warranties, and negligence. The contractor sought to compel arbitration in accordance with the parties’ contractual arbitration provision, which required the parties to arbitrate all claims arising out of or relating to the contract. The trial court refused, finding that the provision applied only during construction – not after project completion and final payment.
* What the Court Said: Absent any contrary language in the contract, the arbitration provision required the parties to proceed to arbitration despite the fact the project was complete and final payment had been made by the Authority.
* What the Opinion Means: The contract provided as follows: “All claims, disputes and other matters in question between [the Authority] and [the contractor] arising out of or relating to the Contract documents or the breach thereof . . . will be decided by arbitration.” The contract’s waiver provision, which provided that certain claims were waived by final payment, did not apply to these claims. Therefore, the parties were required to proceed with arbitration.
2. Effect of Waiver of Written Change Order Requirement, Amprite Elec. Co. v. Ten. Stadium Group, LLP, 2003 WL 22171556 (Tenn. Ct. App. 2004).
* What the Court Considered: A subcontractor was hired to perform the electrical work in connection with the construction of an NFL stadium. The subcontract required that a signed change order precede the performance of any extra work. However, this requirement was abandoned by the contractor to prevent the project from falling behind schedule. For those changes performed without a written change order, the subcontractor billed the contractor using a pricing mechanism different from that provided for in the subcontract.
* What the Court Said: Although the written change order requirement was waived by the contractor, the mechanism for pricing changes that was set forth in the subcontract remained applicable.
* What the Opinion Means: The contractor disposed of the requirement that a signed change order be executed before extra work was to commence. However, this fact alone did not amount to a nullification of the entire contract. “[T]he parties essentially waived the requirement for written change orders, a common occurrence, but this waiver, or abrogation of the contractual provision, in no way affected the amount of the compensation for extra work to which [the subcontractor] was justly entitled.” Therefore, the pricing mechanism set forth in the subcontract was required to be used in calculating the cost of work performed without a signed change order.
3. Distinction Between Indemnification and Insurance Procurement Provisions, Cavanaugh v. 4518 Assocs., 776 N.Y.S.2d 260 (N.Y. App. Div. 2004).
* What the Court Considered: The employee of a sub-subcontractor on an interior renovation project was injured when the scaffolding on which he was working collapsed. In an ensuing trial, the jury found the general contractor 70 percent negligent and the subcontractor 30 percent negligent. Following trial, the court granted the general contractor’s motion to enforce an indemnification provision in its contract with the subcontractor. The subcontractor argued that it was not liable for indemnification because the general contractor was partially negligent.
* What the Court Said: The indemnification provision in the parties’ contract was void because it violated New York General Obligations Law.
* What the Opinion Means: Section 5-322.1(1) of New York General Obligations Law provides that any contractual indemnification provision that purports to indemnify a party for its own negligence in connection with bodily injury or damage to property is unenforceable. The indemnification provision at issue in this case ran afoul of the statute to the extent it purported to require the subcontractor to indemnify the general contractor for damage resulting from the general contractor’s own negligence. The fact that the subcontractor failed to comply with a separate and distinct insurance procurement provision of the contract, which required the subcontractor to obtain certain insurance for the benefit of the general contractor, was irrelevant.
4. Obligation to Pay Prejudgment Interest Despite Waiver of Consequential Damages, Siemens Westinghouse Power Corp. v. Dick Corp., 320 F. Supp. 2d 120 (S.D.N.Y. 2004).
* What the Court Considered: Two corporations formed a consortium to build a power plant. After the project was severely delayed, the project’s owners assessed liquidated damages against the consortium. According to the Consortium Agreement, one consortium member was required initially to pay the liquidated damages before the consortium members determined the proper allocation of liability between them. The district court ordered that consortium member to pay $15 million in damages. The non-paying consortium member then sought to amend the judgment to include prejudgment interest.
* What the Court Said: The paying consortium member was required to pay the additional prejudgment interest.
* What the Opinion Means: Under New York law, prejudgment interest must be awarded as a component of breach of contract damages. Although the Consortium Agreement contained a waiver of consequential damages, that exclusion did not address prejudgment interest. “[P]rejudgment interest is the type of damages measure which ‘the law itself implies or presumes to have accrued from the wrong complained.’” In contrast, consequential damages are special damages not contemplated by the parties when the contract is made. Therefore, because the two types of damages are distinct, the consequential damages exclusion did not prevent the non-paying consortium member from recovering prejudgment interest.
5. Control of Premises as Requirement for General Contractor to Owe Duty to Subcontractor, Stovall v. Universal Constr. Co., 2004 Ala. LEXIS 146 (Ala. 2004).
* What the Court Considered: An employee of a subcontractor fell to his death while painting the interior wall of a rocket replica at night. The wife of the deceased worker sued the general contractor for failing to provide adequate lighting at the project site. The general contractor’s subcontract required it to provide temporary lighting for the subcontractor’s night shift workers. However, the general contractor argued that it owed no duty to provide adequate lighting for the plaintiff’s husband.
* What the Court Said: The general contractor owed no duty to provide adequate lighting for its subcontractor’s workers.
* What the Opinion Means: Under Alabama law, a general contractor does not incur a duty to the employees of its subcontractor unless it retains the right to control the manner in which the subcontractor’s work is performed. In this case, because the general contractor did not have the right to control the manner in which the lighting was used by the subcontractor’s workers, it owed no duty to provide adequate lighting. Further, the contractual provision requiring the general contractor to provide temporary lighting did not impose a duty to provide adequate lighting.
6. Subsequent Oral Modification of “Time and Materials” Contract, Dixie South Indus. Coating, Inc. v. Miss. Power Co., 872 So. 2d 769 (Miss. App. 2004).
* What the Court Considered: A power company hired a contractor to remove lead-based paint from a power plant. The parties executed a “time and materials” contract, whereby the contractor would charge an hourly rate for labor and equipment. During construction, the power company paid every invoice submitted by the contractor. The project then was delayed due to the power company’s insufficient budget for the project. During this period, the power company allegedly assured the contractor orally that it would be allowed to finish the work. Thereafter, the power company notified the contractor that another company would be finishing the work. The contractor sued for breach of contract damages, alleging the contract had been modified by the owner’s oral assurances.
* What the Court Said: Because the power company did not breach the contract, it was entitled to summary judgment.
* What the Opinion Means: A subsequent oral assurance by one party can modify a contract. However, in this case, the power company honored the clear terms of the contract by paying all of the contractor’s invoices. In addition, the contractor admitted that “[the power company] had the right to control the number of people working on the project, that the contract did not state that the entire job would be completed within the term of the contract and that it was unlikely to be completed within it, and that [the contractor] was paid in full for every invoice submitted.”
7. Definition of “Occurrence” in Commercial General Liability Policy, L-J, Inc. v. Bituminous Fire and Marine Ins. Co., 2004 WL 1775571 (S.C. 2004).
* What the Court Considered: A developer hired a contractor to construct roads for a subdivision. Four years after the work was completed, the roads began to deteriorate and the developer sued the contractor. The parties settled the lawsuit. The contractor then sought indemnification from the various Commercial General Liability (“CGL”) insurance providers who had issued policies during the period in question. When one of the insurers refused to pay, the other insurers and the contractor brought suit seeking contribution. The non-paying insurer argued that the road deterioration was caused by the faulty workmanship of the contractor and its subcontractors and that such faulty workmanship did not constitute an “occurrence” under the CGL policy.
* What the Court Said: Because the contractor’s faulty workmanship was not an “occurrence,” it was not covered under the CGL policy with the non-paying insurer.
* What the Opinion Means: The CGL policy covered bodily injury and property damage caused by an “occurrence” in the “coverage territory.” The damage to the subdivision roads was caused by the contractor’s faulty subgrade preparation and its failure properly to design the drainage system and curb edge details. These were examples of faulty workmanship and did “not fall within the contractual definition of ‘occurrence’ under [the] CGL policy.” Furthermore, the CGL policy did not cover property damage to the road itself but instead provided coverage only for damage to other property.
8. Project Manager’s Objection to Owner’s Settlement Agreement, IPSCO Steel (Alabama), Inc. v. Blaine Constr., 371 F.3d 141 (3d Cir. 2004).
* What the Court Considered: After a design-build contractor abandoned a steel plant construction project, the owner and its project manager agreed that the project manager would pursue damages from the contractor and an insurance company, hired by the owner, that had provided coverage for the project manager and the contractor. While these claims were being pursued, the owner separately sued the project manager, seeking, among other damages, cost overruns related to the contractor’s abandonment of the project. The insurer paid for the project manager’s defense to the owner’s lawsuit, and, under the terms of the policy, the defense costs reduced the total amount of available coverage. Thereafter, the owner, the contractor, and the insurer agreed to a settlement whereby the owner would release all claims against the contractor and insurer, and the insurer would pay the owner $6 million. The owner directed the project manager, as its agent, to approve the settlement, but the project manager refused.
* What the Court Said: Because the project manager was the owner’s agent with respect to the litigation of claims, it could not withhold its consent to the settlement agreement.
* What the Opinion Means: As the owner’s agent, the project manager owed the owner a duty of loyalty and was required to protect the owner’s interests at all times. Therefore, the project manager “was required to do [the owner’s] bidding,” which included consenting to the settlement. The fact that the settlement might indirectly harm the project manager’s future financial interests by subjecting it to penalties for exceeding a guaranteed maximum price as set in its project management agreement did not excuse the project manager from protecting the owner’s interests by approving the settlement.
9. Application of Indiana’s Anti-Trust Act to Municipalities and Their Subdivisions, Brownsburg Cmty. Sch. Corp. v. Natare Corp., 880 N.E.2d 148 (Ind. Ct. App. 2004).
* What the Court Considered: The Brownsburg Community School Corporation hired an architect to design a building with a swimming pool. The architect retained a pool consultant that was a distributor of prefabricated pools. The project specifications provided for the construction of a cast-in-place pool. The alternate specifications, which were drafted by the pool consultant, called for the installation of a prefabricated pool tank. A competing manufacturer of pools sued the school corporation, the architect, and the pool consultant, alleging that they had conspired to exclude it from consideration as a supplier for the project because the project specifications contained requirements that could be met by only the pool consultant’s pools. The school corporation moved to dismiss the claim on the basis that it was not included in the definition of “person” in the Indiana Anti-trust Act.
* What the Court Said: A municipality and its subdivision are “persons” under the Indiana Anti-trust Act and can be sued for violating the Act.
* What the Opinion Means: Indiana’s Anti-trust Act provides that “[a] person who engages in any scheme, contract, or combination to restrain or restrict bidding for the letting of any contract for private or public work . . . commits a Class A misdemeanor” and is subject to suit for treble damages and attorneys fees. Because the statute applies to public work, which necessarily involves the government, statutory construction did not favor a decision for the school corporation. In addition, the school corporation failed to provide any overarching policy basis for interpreting the Anti-trust Act to exclude municipalities and their subdivisions.
10. Government Contractor’s Right to Recover Under Eichleay Formula for Government-Caused Delay, Department of Transp. v. Heritage Eng’g Constr., Inc., 2004 WL 1637638 (Cal. Ct. App. 2004).
* What the Court Considered: The Department of Transportation (“DOT”) hired a contractor to construct a sound wall along a freeway. The project was intended to be completed in 120 days. However, due to design delays and requests for extra work, the contractor took 17 months to complete the project. As part of a subsequent claim against the DOT, the contractor requested $168,082 for extended home office overhead costs based upon an application of the Eichleay formula. The DOT argued that the contractor was not entitled to recover such damages because the contractor was able to work on other projects during the delay periods.
* What the Court Said: The contractor was entitled to recover its extended home office overhead costs.
* What the Opinion Means: The Eichleay formula “allocates the contractor’s home office overhead costs . . . in proportion to the income generated by the project.” The DOT cited federal law for the proposition that a contractor cannot recover extended home office overhead costs if it is able to perform work on other projects during the delays. However, the DOT failed to address California law or whether and to what extent federal law should apply to this case. “Moreover, even if we assumed that under California law a contractor is entitled to recover extended home office overhead costs only if the contractor was unable to take on other work, [the DOT’s] failure to meaningfully discuss the evidence on point is a waiver of the issue on appeal.”
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.