Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Cory Menees
1. Broad Limitation of Liability Clause Held Enforceable, Blaylock Grading Co. v. Smith, 658 S.E.2d 680 (N.C. Ct. App. 2008).
* What the Court Considered: A contract between a grading contractor and engineer contained a clause limiting the engineer’s liability to amounts specified in the contract, even in the event of “negligence, errors, omissions, strict liability, breach of contract or breach of warranty.” After the engineer mis-set benchmarks forcing the contractor to import fill material and spend over $500,000 correcting the engineer’s mistake, the contractor sued the engineer for negligence and breach of contract. Finding the liability-limitation clause to violate public policy, the trial court awarded damages in an amount well above the limitation imposed by the clause. The engineer appealed.
* What the Court Said: The trial court’s ruling was in error, as the liability-limitation clause did not violate public policy. Given the parties’ sophistication and equal bargaining strength, the provision could not be found unconscionable.
* What the Opinion Means: North Carolina courts, like those in many other states, have recently been willing to enforce even broad liability-limitation clauses despite traditionally having viewed such clauses as violating public policy. Note that the court in the case acknowledged that attempts to limit liability in so-called “public service” contracts, such as those relating to utilities and common carriers, will continue to be found void as against public policy in North Carolina.
2. Indemnities Entitle Surety to Reimbursement of Good-Faith Disbursements Made Pursuant to Bonds, Great Am. Ins. Co. v. Eugene McLain Constr. Co., 2008 U.S. Dist. LEXIS 13994 (W.D. La. 2008).
* What the Court Considered: A corporate contractor’s owner and, later, his wife executed agreements indemnifying a surety for expenses it might incur as a result of claims made against bonds obtained by the contractor. After the contractor abandoned work on a project prior to its scheduled completion, the surety stepped in to ensure the project was finished. The surety incurred significant expense in completing the project, including the payment of liquidated damages to the owner for delays resulting from the contractor’s non-performance. The surety sued the contractor and indemnitors for breach of contract, seeking to recover expenses incurred in ensuring the project’s completion and enforcing the indemnity agreements.
* What the Court Said: The surety was entitled to reimbursement for expenses it incurred in the good-faith fulfillment of its obligations under the bonds, including performance and payment losses. The surety was additionally entitled to recover legal expenses incurred in enforcing the indemnities, as the second indemnity agreement explicitly provided for such a recovery.
* What the Opinion Means: Where an indemnity agreement calls for the indemnitor to reimburse a surety for expenses incurred in execution of a bond, the surety’s good-faith belief that expenses are necessary will likely render them reimbursable under the agreement.
3. Conflicting Information in Bidding Documents Undermines Breach of Contract Action Based on Misrepresentation of Conditions, Int’l Tech. Corp. v. Winter, 523 F.3d 1341 (Fed. Cir. 2008).
* What the Court Considered: A contractor hired to remove DDT from contaminated soil at a Navy facility in California sued to recover unexpected costs incurred by a subcontractor after the soil was found to have a higher than expect clay content. The sub claimed to have relied on one of two bidding documents relating to soil content in preparing its bid. As the contract lacked a differing site condition clause, the contractor was forced to bring its sub’s pass-through claim as a breach of contract action.
* What the Court Said: Two bidding documents containing information on soil content were in “direct contradiction,” and claimed reliance on one but not the other could not be said to be reasonable. As the sub could not claim to have reasonably relied on a representation made by the owner, its claim necessarily failed.
* What the Opinion Means: Careful attention must be paid to bidding documents, as a claim based on misrepresentation of conditions will be undermined where the documents contained conflicting representations regarding the conditions.
4. Surety’s Obligations Not Triggered Where Bonded Sub Allowed to Continue Work, Contractor Fails to Comply with Terms of Bond, Current Builders of Fla. Inc. v. First Sealord Sur. Inc., Nos. 4D06-4076 and 4D07-132, 2008 WL 859341 (Fla. Dist. Ct. App. 2008).
* What the Court Considered: A GC dissatisfied with its plumbing sub’s performance sent the sub and its surety several letters declaring the sub in default. Despite declaring the default, the GC permitted the sub to continue working. The GC finally terminated the sub only upon learning that its workers’ compensation insurance had lapsed. Despite a provision in the bond requiring that the GC pay to the surety the subcontract balance upon termination of the sub’s right to complete its contract, the contractor failed to do so. The GC instead retained the balance and hired a replacement plumbing sub, later suing the surety to recover excess completion costs. At trial, the jury found that the GC had not fulfilled its obligations under the terms of the bond and judgment was entered in the surety’s favor. The GC appealed.
* What the Court Said: As there was ample evidence that the GC had not complied with the terms of the bond, the appellate court upheld the jury’s verdict.
* What the Opinion Means: Compliance with the plain language of a bond will consistently be found a prerequisite to recovery from the surety. Where the terms of a bond give the surety the option to elect its remedy, a contractor’s decision to preempt the surety’s election may bar a later action against the bond.
5. Sub’s Repudiation of Subcontract Found Not to Occur For Several Weeks After Its Disappearance from Job Site, John A. Russell Corp. v. Fine Line Drywall, Inc., 2008 U.S. Dist. LEXIS 13098 (D. Vt. 2008).
* What the Court Considered: A framing and drywall sub was sporadically absent from a jobsite. The contractor on several occasions attempted to contact the sub regarding its intentions relative to completion of the subcontract. When the sub failed to respond, the contractor sought an order compelling the sub and surety to submit to arbitration. The surety responded by claiming that the contractor’s motion to compel was untimely under the terms of the bond as the sub had not repudiated the contract. The contractor was found entitled to arbitration, and the surety filed a motion for reconsideration.
* What the Court Said: The sub’s absence from the job site did not, in and of itself, constitute repudiation of the subcontract. The sub was considered to have materially breached and repudiated the contract only when it refused to return the contractor’s calls and failed to complete performance of the subcontract.
* What the Opinion Means: Absence of a sub from a job site will not necessarily amount to its repudiation of a subcontract. A contractor must look for evidence beyond the sub’s absence to be assured that the sub has indeed repudiated the subcontract and its performance obligations thereunder.
6. Terms of Contract Held Implicitly Modified by Conduct of Parties, Cherne Contracting Corp. v. Marathon Petrol. Corp., 20008 U.S. Dist. LEXIS 10482 (D. Minn. 2008).
* What the Court Considered: An owner and contractor entered into a Letter of Intent in relation to the parties’ planned entry into a contract for revamp work at an oil refinery. The letter spelled out a number of contingencies, the occurrence of any one of which would give the owner the right to terminate the proposed contract pursuant to the terms of the as-of-yet executed contract. Despite the failure of the parties to execute the contract by a deadline imposed in the letter, the contractor continued to work and the owner continued to make payments pursuant to the terms of the letter. The owner eventually sought to terminate its relationship with the contractor. The contractor was forced to sue when the owner refused to pay two invoices, claiming that the invoices were for work beyond the scope of that provided for in the letter. The parties conceded that the course of their conduct established a contract but disagreed at to whether the terms of the Letter of Intent governed their relationship. Specifically, the parties disagreed as to whether the owner had the right and discretion to terminate the contractor as provided by the terms of the unsigned contract, the terms having been adopted by reference into the Letter of Intent.
* What the Court Said: Despite the fact that the contractor’s work exceeded the scope of the work contemplated by the Letter of Intent, the parties’ conduct showed their mutual assent to modification of the letter’s terms. As the parties impliedly agreed to an extension of the contract-execution deadline provided for in the letter, the parties’ relationship was still governed by the terms of the letter. That being the case, the owner was entitled to the benefit of the termination rights provided it in the letter.
* What the Opinion Means: An agreement between parties that would otherwise expire upon the occurrence of a contingency may, despite the occurrence of the contingency, be found extended based on the parties’ course of conduct.
7. Maintenance of General Supervisory Rights By Owner Found Not to Subject It to Liability in Premises Liability Action, Dalton v. 933 Peachtree, L.P., 2008 Ga. App. LEXIS 322 (Ga. Ct. App. 2008).
* What the Court Considered: Two employees of a subcontractor were electrocuted after materials they were hoisting on a man-lift came into contact with a high-voltage power line. The employees consequently brought a premises liability suit against the owner, claiming the owner had control over the site by virtue of the fact that its contract with the GC gave it the right to visit the site, ensure the conformance of project work to plans, and, if need be, stop work. Pursuant to the contract, the GC maintained direct supervisory control over work on the project and was vested with control over how construction was actually completed. Finding the owner to have lacked the requisite control over the project site, the trial court granted summary judgment in favor of the owner on the premises liability claim. The employees appealed.
* What the Court Said: Upholding the trial court’s grant of summary judgment, the appellate court found that the CG was contractually granted what amounted to unfettered decision-making power over the means by which the project was completed. That being the case, control over the premises was effectively vested in the GC. The owner could not be considered to have control over the premises where it maintained only the basic right to inspect and stop work.
* What the Opinion Means: Where a GC is given near-complete control over how a project is to be constructed, the GC may be said to have control of the construction site to the effective exclusion of the owner.
8. FAA Trumps Indiana Law Prohibiting Contract Provisions Requiring Out-of- State Arbitration, LaSalle Group, Inc. v. Electromation of Del. County, Inc., 880 N.E.2d 330 (Ind. Ct. App. 2008).
* What the Court Considered: A provision in a subcontract relating to a construction job in Muncie, Indiana required that disputes arising under the subcontract be arbitrated in Michigan. When the sub sued the GC, the GC moved to have the lawsuit stayed and the arbitration provision enforced. The sub argued that the provision was rendered unenforceable by § 32-28-3-17 of the Indiana Code. The code section voided any provision in a contract for the improvement of real estate in Indiana purporting to subject the contract to the laws of another state or requiring arbitration in an out-of-state forum. The GC countered that it was entitled to the stay, as Indiana law was preempted by the FAA. The trial court refused to grant the GC’s motion, and it appealed.
* What the Court Said: The specific code section argued by the sub to be applicable to the contract was preempted by the FAA, as the code section presented “an obstacle to the congressional intent to ‘foreclose state legislative attempts to undercut the enforceability of arbitration agreements.’”
* What the Opinion Means: The FAA has consistently been found by courts to allow parties wide latitude in selecting forums for arbitration. To the extent any state law attempts to restrict parties’ ability to freely select the forum, the law is questionably enforceable.
9. Sub’s Performance of Work While Unlicensed Bars Recovery for All Work under Subcontract, Great Western Contractors, Inc. v. WSS Indus. Constr. Inc., No. B191662, 2008 WL 820759 (Cal. App., 2d Dist. 2008).
* What the Court Considered: Prior to being issued its corporate contractor’s license by the State of California, a corporate subcontractor submitted a bid to a CG, entered into the subcontract, prepared shop drawings, ordered specialized materials, and invoiced the GC. The sub’s license was issued within weeks, before it performed any of what it considered substantive work under the subcontract. When the sub filed suit to recover amounts it was allegedly owed under the subcontract, the GC moved for dismissal of the suit, arguing that the sub’s claim was barred by a Cal. Bus. & Prof. Code § 7031(a). Section 7031(a) provides that a person acting in the capacity of a contractor and engaged in work requiring a license cannot bring a suit for recovery of compensation “without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract” for which compensation is sought in the suit. The trial court denied the GC’s motion for non-suit, and the GC appealed.
* What the Court Said: As some of the activities performed by the sub prior to issuance of its license required licensure and were in furtherance of the subcontract, § 7031(a) acted to bar recovery for work done under the subcontract both before and after the sub’s license was actually issued.
* What the Opinion Means: In California, the performance of any work requiring licensure prior to actual issuance of a contractor’s license will jeopardize the contractor’s later ability to recover damages in a lawsuit. Note that the sub in this case, a corporate contractor, was deprived of its right to sue despite the fact that both its president and managing officer were individually licensed.
10. Economic Loss Rule Frustrates Condo Association’s Claim Against Architect, Spring Creek Condo. Ass’n v. Colony Dev. Corp., No. 07AP-671, 2008 WL 802729 (Ohio Ct. App. 2008).
* What the Court Considered: A condo association brought a malpractice action against the architect who had designed and supervised construction of the condo building, seeking to recover purely economic damages. The architect moved for dismissal of the suit given the lack of contractual privity between she and the plaintiffs.
* What the Court Said: The lack of privity between the condo association and owners and the architect prevented recovery from the architect for economic losses in a tort action.
* What the Opinion Means: While in other jurisdictions the economic loss rule’s protection is less clearly afforded to architects, in Ohio architects are still entitled to full protection of the rule.
Ira Genberg is a Partner at Troutman Sanders LLP in Atlanta, Georgia, and is General Counsel for Associated Owners & Developers (AOD) in McLean, Virginia. Cory Menees is an Associate at Troutman Sanders LLP. For more information, or if you have any questions, contact us at firstname.lastname@example.org.