Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Troy Kiber
1. Attorney’s Fees for Foreclosure of a Mechanic’s Lien, Clark v. Hunter, 861 N.E.2d 1202 (Ind. Ct. App. 2007).
* What the Court Considered: An electrical subcontractor agreed to accept payment for work performed on a residence in two installments: one at the completion of rough-in, and one after final inspection. While the first payment was made without dispute, the general contractor withheld the second payment, citing deficient work as noted by the inspector. The subcontractor brought suit for breach of contract and foreclosure of a mechanic’s lien. The trial judge found that the subcontractor had completed 80% of its work, and awarded it a commiserate percentage of its unpaid balance as damages. The contractor appealed, seeking foreclosure of the lien and attorney’s fees.
* What the Court Said: Because the subcontractor recovered monetary damages, it was entitled to both foreclose its mechanic’s lien and to an award of attorney’s fees.
* What the Opinion Means: Mechanic’s lien statutes were created because money damages for a claim based upon labor or materials improving real estate are often inadequate. Once a court determines that a party with a lien claim is entitled to money damages, the court is required to order foreclosure of the lien. Even though Indiana recently altered the provisions governing recovery of attorneys fees for a lien foreclosure from "shall recover" to "may recover," the court was still required to award attorney’s fees. While the literal definitions of the words "may" and "shall" are different, interpreting them as such to effect a substantive change in the law was expressly barred by the legislature in its 2002 recodification. Thus, the new law was given the same interpretation as the prior law: attorney’s fees were mandatory.
2. Proving Modifications to Contracts, Veolia Water North America Operating Services LLC v. City of Atlanta, 2007 WL 624361 (N.D. Ga. Feb 22, 2007).
* What the Court Considered: The contract between the parties limited the means by which the contract could be modified by, for example, requiring all modifications to be in writing. The discovery of different conditions brought about a value-engineering exercise that developed a revised scope containing projects not within the original scope of work. After allegedly operating under this revised scope for a period of time, the city terminated the contractor. In its breach of contract action, the contractor alleged that the revised scope was inapplicable because the original contract was never modified as required.
* What the Court Said: Because contracts can be modified by the parties’ conduct, the city was entitled to complete discovery regarding that conduct before any judgment could be reached.
* What the Opinion Means: The city sought an extension to conduct discovery on the actions of the contractor that would show it operated under the revised scope. The contractor responded that such discovery would be futile because the contract could not be modified except in writing. However, a contract can be modified through the parties’ conduct even when the contract contains a "no waiver" clause or a written modification requirement. Thus, the city was entitled to discovery regarding the actions of the contractor that could have modified the contract.
3. Creation of Joint Venture, Schimpf v. Speas, 2007 WL 691647 (D. Colo. March 5, 2007).
* What the Court Considered: The wife of a defendant sought to remove herself from a lawsuit over construction of a residence. The contractor alleged that the wife, husband, and another business entity were engaged in a joint venture with the contractor to construct and sell a residence. The wife, the contractor alleged, entered into a joint venture agreement through her actions and statements concerning the project (allegedly managing the scheduling, providing building status updates, pooling her money, and handling banking and payment.)
* What the Court Said: Because the actions the wife allegedly took would create a joint venture agreement, she could not avoid the suit entirely.
* What the Opinion Means: A joint venture agreement exists when there is a joint interest in the property, an agreement to share profits and losses, and some action showing cooperation in the project. Joint ventures can be express or implied, and do not require any written agreement. If the wife indeed pooled her assets with her husband to invest in the project, planned to share in any profits, and managed the venture’s assets, she would be a participant in the joint venture susceptible to suit.
4. Proving Infringement of Copyrighted Plans, Lifetime Homes, Inc. v. Residential Dev. Corp., 2007 WL 624273 (M.D. Fla. Feb. 23, 2007).
* What the Court Considered: A design professional created and later copyrighted plans for a distinct three-bedroom two-bathroom home. He granted two parties a license to build these homes using slightly altered plans. After those parties allegedly violated their license, the designer brought and then settled a lawsuit. Some time later, the design professional discovered that the son of the previous licensee had constructed numerous homes based on a design similar to his copyrighted design. Another copyright infringement suit followed.
* What the Court Said: Because a reasonable fact-finder could find that the designs were substantially similar, the alleged infringer was not entitled to summary judgment.
* What the Opinion Means: Without any direct evidence of copying, a party alleging copyright infringement must show that the infringers had access to the design, and that the alleged copies are substantially similar to the copyright protected work. Substantial similarity is defined as that which an informed neutral party recognizes as having been appropriated from the copyrighted work. Here, the two designs were "strikingly similar," but the defendant presented a list of over 50 dissimilarities between the two. The Court noted that the possible number of combinations of elements of a standard home was finite, thus some similarity was to be expected. However, a reasonable fact-finder could find "substantial similarity." Thus the alleged infringer was not entitled to a summary judgment in its favor.
5. Incorporating Arbitration Clauses by Reference, Weatherguard Roofing Co. v. D.R. Ward Const. Co., 152 P.3d 1227 (Ariz. Ct. App. 2007).
* What the Court Considered: An owner served a demand for arbitration on the general contractor, seeking damages related to water intrusion. When the general contractor asserted that the subcontractors were liable and must indemnify it, the roofing subcontractor asserted that no provision of its subcontract required it to submit to arbitration. The only provision of the subcontract dealing with arbitration was contained in the general conditions that were separate from and not attached to the contract. Additionally, these provisions addressed only arbitration between the owner and the general contractor. After the general contractor settled with the owner, the subcontract claimed that it was not required submit to arbitration concerning disputes between it and the general contractor.
* What the Court Said: The subcontractor was required to submit to arbitration because the general conditions of its subcontract incorporated by reference the arbitration provisions of the prime contract.
* What the Opinion Means: The statement "the attached general conditions are part of the subcontract" was enough to incorporate those provisions even when they were not physically attached. Language in those provisions assuming "all obligations of Contractor in the General Contract" and giving the general contractor "the same rights and privileges as against the Subcontractor as the Owner … has against the General Contractor" meant that, because the general contractor was required to submit to arbitration with the owner, the subcontractor was required to submit to arbitration with the general contractor. The incorporating language need not specifically reference arbitration in order to incorporate those provisions.
6. Recovering the Reasonable Value of Extra Work, Parris Roofing & Sheetmetal Co. v. SCR Electric, Inc., 2007 WL 596396 (Tenn. Ct. App. Feb. 27, 2007).
* What the Court Considered: While renovating a school, an electrical contractor encountered difficulty routing electrical work, and was forced to either route the conduit underground or route it over the roof. The electrical contractor met with the roofing contractor to discuss the dilemma, and the parties agreed to route the work over the roof. The roofer claimed the agreement was cost-plus, while the electrician claimed that the parties only agreed to route the work over the roof because the roofer claimed that method would be cheaper than the $1,800 it would cost to route the work underground.
* What the Court Said: The roofer was entitled to recover the reasonable value of the work to the electrician: an amount equal to the $1,800 it would have cost the electrician to achieve its objective.
* What the Opinion Means: Where work is performed without a contract, a party may sue based upon an implied promise to pay a reasonable amount for the work performed. That recovery is based on the reasonable value of the benefit conferred, not the cost of the party conferring the benefit. Thus, although the roofer presented evidence that its costs of performing the work in excess of $1,800 were reasonable, that evidence was not relevant in the face of evidence that the value of the benefit conferred was $1,800.
7. Recovering the Reasonable Value of Contract Work, Pepi Corp. v. Galliford, 2007 WL 441582 (Tex. App.-Hous. (1 Dist.) Feb. 8, 2007).
* What the Court Considered: After not receiving payment from the general contractor, a subcontractor contacted the owner. The owner assured the subcontractor that it would be paid, and the subcontractor continued to work and submit invoices to the contractor, eventually completing its work in full. The contractor later declared bankruptcy, and the subcontractor sued the owner for the reasonable value of the work it had performed
* What the Court Said: Because the subcontractor completed its work under an express contract with the contractor, it could not sue for the reasonable value of the work.
* What the Opinion Means: Generally, a party cannot sue for the reasonable value of the work where there is an express contract covering the services rendered. There are exceptions to this rule: when a breach by either party prevents full performance under the contract, and when the contract is unilateral. None of these were available here as the subcontractor fully performed. Because the subcontractor completed its work under the express contract, its only avenue of recovery was a suit based upon that express contract.
8. Enforcement of Indemnity Agreement, Gilbane Building Co. v. Keystone Structural Concrete, 2007 WL 2130373 (Tex. App.-Hous. (1 Dist.) July 26, 2007).
* What the Court Considered: An employee of an injured subcontractor, prevented by workers compensation statues from suing his employer, brought a negligence suit against the general subcontractor. The subcontractor’s insurance carrier and the general contractor’s insurance carrier paid equal amounts to settle the suit. The general contractor then brought suit against the subcontractor, asserting that the subcontractor was required by its subcontract to indemnify the general contractor for its expenses in litigating the negligence action. That indemnity agreement required the subcontractor to "indemnify and hold harmless" the general contractor for "all claims arising out of or resulting from the performance or failure in performance of [the subcontractor’s] work … caused, in whole or in part, by any negligent act or omission of [the subcontractor]."
* What the Court Said: Because the indemnity agreement did not expressly provide that the subcontractor would indemnify the general contractor for the general contractor’s own negligence, the indemnity agreement was unenforceable here.
* What the Opinion Means: Only the general contractor was sued by the employee, and the subcontractor was not made a party to that action. In order to recover from the subcontractor under the indemnity agreement, the language of that agreement must be specific and conspicuous. The language was not specific enough to provide for indemnity for the general contractor’s own negligence nor specific enough to provide for comparative indemnity. Also, the court refused to consider the possible negligence of the subcontractor when the claims had already been settled in the suit against the general contractor.
9. Enforcement of an Indemnity Agreement, Twin City Fire Ins. Co. v. Ohio Cas. Ins. Co., 480 F.3d 1254 (11th Cir. 2007).
* What the Court Considered: A subcontractor’s employees were injured as a result of the actions of the general contractor. The resulting suit against the general contractor was settled with the participation of the subcontractor and its insurers, save the provider of the subcontractor’s umbrella policy. The umbrella insurer sought to avoid liability, arguing that, among other things, the indemnity agreement between the general contractor and the subcontractor did not apply when the injury results solely from the negligence of the general contractor. The indemnity agreement covered "any and all claims … arising out of or in any way related to the performance of the work by [the subcontractor] … in whatever manner the same may be caused, occasioned or contributed to by the negligence, sole or concurrent, of [the general contractor]."
* What the Court Said: The subcontractor’s umbrella insurer was liable under the indemnity agreement
* What the Opinion Means: "Arising out of" should be interpreted broadly to include all incidents that would not have occurred but-for the subcontractor’s presence on the job. Even if that language was found ambiguous, in Alabama it should be interpreted in favor of the insured. Additionally, this specific agreement included accidents whose "sole" cause was the general contractor’s negligence: exactly the situation presented in this matter.
10. Obtaining Government Contracts, Duty Free Air and Ship Supply v. City of Atlanta, 646 S.E.2d 48 (Ga. 2007).
* What the Court Considered: In response to a Request for Proposals ("RFP"), two subcontractors submitted bids to the city. The city’s Chief Procurement Officer selected one of these subcontractors, and the other appealed that selection to an administrative hearing officer, then to the Superior Court, and eventually to the Court of Appeals. While these appeals were pending, the city decided to cancel the original RFP and issue a revised RFP. The subcontractor selected from the first RFP filed a petition for a writ of mandamus, arguing that the acceptance of its proposal had become binding and the city should be compelled to immediately execute a contract.
* What the Court Said: Because the failure to execute a contract is an act of discretion, rather than a mere ministerial function, no writ of mandamus could be issued to compel the city to act.
* What the Opinion Means: The subcontractor argued that any remaining steps required prior to execution of the contract were merely ministerial acts that the court could compel. However, under the City Code, even after an award is made to an offeror responding to an RFP, the execution of a construction contract remains dependent on approval by the City Counsel and the Mayor. Georgia construction law contemplates such local requirements by providing that municipalities "shall execute and enter into contracts in the manner provided in applicable local legislation or by ordinance." Because the local law allowed for the discretion of the Mayor and the City Counsel, the court could not compel it to act.