Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Troy Kiber
1. Enforceability of a Subcontractor’s Bid, Fletcher-Harlee Corp. v. Pote Concrete Contractors, Inc., 482 F.3d 247 (3d Cir. 2007).
* What the Court Considered: In response to the solicitation of bids from a general contractor, a concrete subcontractor offered a written price quotation which clearly stated that it was for informational purposes only and should not be relied on. Contrary to these terms, the general contractor relied on the subcontractor’s quotation in preparing its bid and was awarded the project. When the general contractor attempted to reduce the quotation to a written contract, the subcontractor raised its price, forcing the general contractor to use another subcontractor. The general contractor sued for the price increase from the quotation to the actual price.
* What the Court Said: Because the quotation expressed an intention not to be bound, it could not be an offer to contract, and the general contractor could not sue for breach of contract.
* What the Opinion Means: A contract requires an offer and an acceptance. When the general contractor solicited bids it made an invitation to make offers. Typically, subcontractor’s responsive bids are firm offers which the general contractor may rely on. However, when the text of the bid specifically states that it is not an offer but a price quotation, it is not reasonable for the contractor to rely on that bid. If the contractor does rely on that bid, he cannot sue the subcontractor when the bid is altered. Because the quotation is not an offer, there can be no acceptance. The court noted that "[the subcontractor] may have exhausted any goodwill it had by bucking industry custom" by inserting disclaimer language, but that language was clear and must be enforced.
2. Duty to Award Work Under Subcontract, Eldeco v. Charleston County Sch. Dist., 642 S.E.2d 726 (S.C. 2007).
* What the Court Considered: A subcontractor agreed to perform electrical work in connection with construction of a school building containing an unfinished area for vocational training. After all contracts were signed, the owner decided to finish the vocational area and provide additional classrooms. Neither the prime contract nor the subcontract listed the additional classrooms or the finishes to the vocational area. The contractor obtained pricing from the electrical subcontractor for this additional work, but also sought pricing from, and eventually contracted with, a third party. The jilted electrical subcontractor sued, arguing it was entitled to perform this additional work.
* What the Court Said: Because additional work was not contemplated under the original contracts, but obtained via supplemental contracts, the subcontractor had no right to perform this work.
* What the Opinion Means: The subcontractor alleged that the additional work should be considered change order or change directive work that it would have a right to complete. However, the court found ample evidence that this work was not contemplated in the original contracts. Additionally, the subcontract limited the rights of the subcontractor to those possessed by the contractor under its contract with the owner. The original prime contract did not contemplate this work; rather, it was obtained via supplementary contracts. As this additional work was outside the prime contract, it was also outside the subcontract.
3. Effect of Arbitration Provision After Termination of Contract, Aucher Co. v. Zagloul, 949 So.2d 1189 (Fla. Dist. Ct. App. 2007).
* What the Court Considered: An owner and a contractor entered into a standard American Institute of Architects (AIA) contract for the construction of a home. Roughly two months after achieving a certificate of occupancy, the owner terminated the contract for breach and subsequently filed suit. The contractor responded with a motion to compel mediation and arbitration, arguing that the contract compelled such measures. The owner responded that the mediation and arbitration provisions did not survive termination of the contract.
* What the Court Said: Because the party seeking the benefit of the alternative dispute resolution provisions did not terminate the contract, those provisions survived the termination and were enforceable.
* What the Opinion Means: In Florida, arbitration provisions are to be given the broadest possible interpretation. These provisions should be construed to require arbitration even after termination of the underlying contract unless another intent is specified: no "savings clause" is required. While there are Florida decisions holding that a party that terminates a contract waives entitlement to its arbitration provisions, those decisions did not prevent the non-terminating party from seeking arbitration.
4. Insurance Coverage on Contractor’s Equipment, Certain Underwriters at Lloyd’s of London v. Rucker Const., Inc., 648 S.E.2d 170 (Ga. Ct. App. 2007).
* What the Court Considered: A contractor left his bulldozer on a jobsite in a fenced in area but with the keys in the ignition. The bulldozer was stolen and driven into a nearby pond. When the contractor submitted a claim against his policy, the insurer denied coverage, asserting that the "Locked Vehicle Warranty" exclusion applied. This warranty excluded damages caused by theft from "any one vehicle" when the vehicle was not fully enclosed and the theft was made by forcible entry. The contractor argued that the exclusion did not apply to theft of the vehicle itself, and, at any rate, the bulldozer was not a vehicle but equipment. The jury found that the bulldozer was not a vehicle but contractor’s equipment not subject to the exclusion.
* What the Court Said: Because the policy was ambiguous, the jury’s finding was not contrary to law.
* What the Opinion Means: While there was evidence that Georgia courts have considered a bulldozer a vehicle, what is important in construing an insurance policy is not what others intend the terms to mean, but what the parties intend the terms to mean. This policy was ambiguous because it could be interpreted to cover only theft of personal property from a vehicle, or to cover theft of the vehicles themselves. Additionally, the policy defined "equipment" but not "vehicle." Ambiguous policies are strictly construed against the insurer in favor of coverage.
5. Modifying Government Contracts, Winter v. Cath-Dr/Balti Joint Venture,2007 WL 2333236 (Fed. Cir. August 17, 2007).
* What the Court Considered: A Contractor entered into a contract with the Navy for renovation of a historic facility. The contract referenced several standard government clauses and provided that only the Contracting Officer (CO) could bind the government to any changes in the contract. While the CO was required to attend a preconstruction conference, the officer did not. Instead, a Resident Officer in Charge of Contracts (ROICC) / Project Manager (PM) attended and interacted with the contractor. At this meeting, the government instructed the contractor that no change order work was to be performed without the written consent of the ROICC, and directed all Requests for Information (RFIs) to this individual. Throughout construction, the ROICC/PM responded to numerous RFIs and authorized numerous changes. When the contractor brought claims related to many of these changes, the government asserted that it was not bound because the changes were not authorized by the CO.
* What the Court Said: Because the ROICC lacked express and implied authority to authorize changes, the government was not liable for those claims.
* What the Opinion Means: Apparent authority of a government’s agent to bind the government is insufficient; the contractor must prove actual authority. The ROICC had no express authority: The contract clearly gave only the CO authority to authorize changes. While the contract contemplated delegating some authority to an engineer, it did not delegate the power to authorize changes. Additionally, federal regulations prohibited such a delegation. The ROICC also lacked implied authority to modify the contract because the contract itself clearly assigned such responsibility only to the CO. While noting that "[t]he government is not without blame," the contractor was could not recover under the contract for these changes.
6. Liability of Construction Manager, Burkoski v. Structure Tone, Inc., 40 A.D.3d 378 (N.Y.A.D. 1 Dept. 2007).
* What the Court Considered: An employee of a subcontractor was injured when he tripped over a stack of tiles that were awaiting installation into a raised flooring system. He alleged that the construction manager was liable under New York labor laws and for common law negligence.
* What the Court Said: Because the construction manager exercised no direct supervisory control over the project at issue, it was not directly or vicariously liable for the negligence of its subcontractors.
* What the Opinion Means: To recover under common-law negligence against an owner or contractor, the party must prove that the owner or contractor exercised direct supervisory control over the manner in which the activity alleged to have caused the injury was performed. It is not enough that the contractor had overall responsibility for the safety of the work performed by others. Here, as there was evidence that the construction manager did not tell the subcontractor or its employees how to perform their work, no negligence action could stand against the construction manager.
7. Limiting Amount of Design Professional’s Liability, Lanier at McEver, L.P. v. Planners & Engineers Collaborative, Inc., 646 S.E.2d 505 (Ga. Ct. App. 2007).
* What the Court Considered: An owner and developer brought suit against the engineer that designed the storm water drainage system. The agreement under which the engineer designed various elements of the entire project, including the water system at issue here, capped the engineer’s "total aggregate liability" to the owner to at an amount equal to the "total fee for services rendered on this project."
* What the Court Said: The limitation of liability was not against public policy but was a valid contractual provision binding on both parties.
* What the Opinion Means: While complete releases of all claims could contravene public policy in some instances, such as when a patient releases claims against a medical professional, this contract did not waive but merely limited liability. Additionally, the contract did not limit the liability to third parties, such as an individual injured from the engineer’s design or construction. Finally, the cap on liability was not an unenforceable liquidated damages penalty because it did not fix the measure of damages but merely placed a limit on that measure.
8. Enforcement of a Waiver of Subrogation, Universal Underwriters Ins. v. A. Richard Kacin, Inc., 916 A.2d 686 (Pa. Super. Ct. 2007).
* What the Court Considered: A contractor agreed to construct a automobile dealership under a standard American Institute of Architects (AIA) agreement containing a waiver of subrogation rights. After completion, a rainstorm caused a wall of the dealership to collapse. The owner’s insurance company paid for the damages, less the owner’s deductible, and both the owner and the insurance company sought subrogation from the contractor. The insurance company argued that because it did not bargain for, consent to, or have notice of the waiver it should not be bound by its terms.
* What the Court Said: Waivers of subrogation bind a third party seeking subrogation even when the third party had no notice of the waiver.
* What the Opinion Means: The court found that this was an issue of first impression in Pennsylvania. Some courts have held that it is inequitable to bind an insurer to an agreement it did not join, and thus require notice. However, subrogation is only derivative in nature; such that the insurer subrogee has only those rights that its subrogor has. Here, the subrogee owner waived its rights to seek subrogation from the contractor. Accordingly, the insurance company could not assert rights against the contractor that its subrogor did not possess.
9. Recovering Costs of Defending Claims, City of Watsonville v. Corrigan, 149 Cal. App. 4th 1542 (Cal. Ct. App. 2007).
* What the Court Considered: Purchasers of property sued the city and the developers that had sold them the properties for damages related to landslides and soil instability. The developers had contractually agreed to indemnify, or hold harmless, the city for any lawsuit related to these developments. While the suit was pending, the city did not request that the developers assume responsibility for defending the city. After the city settled claims against it, it sought to recover both its settlement expenses and the fees it paid attorneys to defend it. The developers argued that they were not liable for attorneys’ fees because the city never requested them to assume the defense.
* What the Court Said: The city was not required to ask the developers to defend it before it could seek attorneys’ fees under the indemnity agreement.
* What the Opinion Means: Because the agreement required the developers to hold the city harmless, and offered no limitations on this duty, it should be broadly construed. According to California law on interpreting indemnity agreements, the costs of defending against claims that are incurred in good faith are recoverable. As this ‘default’ provision was not altered contractually, it permitted the city to seek such moneys. Also, the agreement did not require the city to request the developers to defend it before seeking indemnity, and the court would not infer such a requirement.
10. Duty of an Insurance Provider to Defend an Additional Insured, Home Depot U.S.A., Inc. v. Nat. Fire Ins. Co. of Hartford, 2007 WL 846525 (N.D. Tex. March 21, 2007).
* What the Court Considered: Construction of the owner’s project allegedly caused damage to an adjacent property. The Owner of the adjacent property brought suit against the contractor and the owner, who demanded that the contractor’s insurance provider defend and indemnify it. The insurer refused to defend the owner, asserting that the complaint, as amended, asserted that the owner was directly, rather than vicariously liable, and thus the insurer had no duty to defend it.
* What the Court Said: Because at least one of the claims brought against the owner was based on vicarious liability for the actions of the contractor, the contractor’s insurer was required to defend and indemnify the owner.
* What the Opinion Means: The endorsement to this insurance policy limited coverage for additional insureds to those actions arising out of the work of the contractor. Thus, it did not cover negligence of the owner. In Florida, an insurance company’s duty to defend an insured is determined solely from the allegations of the complaint, rather than the actual facts or any defenses. While the amended complaint at issue here made some allegations based solely upon the acts or omissions of the owner (such as strict liability for a land owner), and did not expressly allege vicarious liability, it was clear that the thrust of the allegations was negligent construction; an act for which the owner would be only vicariously liable. When even part of an allegation is within the scope of coverage, the insurer is required to defend the entire suit.