Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Ryan Stinnett
1. Liability for Deceptive Business Practices on Complex Construction Projects, U.W. Marx, Inc. v. Bonded Concrete, Inc., 776 N.Y.S.2d 617 (N.Y. App. Div. 2004).
* What the Court Considered: Less than one year after being installed as part of a school renovation project, the concrete in certain sidewalks developed pock marks. The concrete supplier offered to remove the existing sidewalks and provide new concrete. However, the supplier refused to comply with the general contractor’s additional demand to pay the costs associated with installing new sidewalks. The general contractor sued the supplier for breach of contract and warranty, as well as deceptive business practices because the supplier allegedly knew that the concrete was defective prior to selling it to the general contractor.
* What the Court Said: Because this was a complex private business transaction, rather than one based on a standard-form contract addressed to consumers generally, the supplier could not be liable for deceptive business practices.
* What the Opinion Means:
New York General Business Law Section 349 provides private citizens a right of
action for deceptive acts or practices in the conduct of any business, trade, or
commerce. The threshold showing required for bringing a deceptive business
practices claim is that the challenged act or practice is consumer oriented, in
that it must have a broad impact on consumers at large. In this case, the
general contractor failed to make such a showing because “the contract at issue
was a private, arm’s length business transaction between two sophisticated
entities, each with substantial prior experience in commercial construction.”
Moreover, the dispute over whether the supplier breached its contract had “no
broad, consumer-oriented ramifications.”
2. Government’s Discretion to Reject All Bids and Readvertise for New Bids, Cummins v. Dep’t. of Transp., 845 A.2d 983 (Pa. Commw. Ct. 2004).
* What the Court Considered: A bidder on a Department of Transportation (“DOT”) bridge construction project attempted to submit its bid electronically via the DOT’s “Expedite Program.” An error with the “Expedite Program” resulted in the bid being labeled as “submitted with errors,” which rendered the bid unable to be opened publicly and read with the other bids. Although the bid itself was complete, it was rejected due to the computer error. Upon protest by the bidder, the DOT stated that it could not legally open the bid in private after the bidding date. Instead, it decided to reject all bids and rebid the entire project, to protect the integrity and fairness of the bidding process.
* What the Court Said: The DOT’s decision to rebid the project was a proper remedy.
* What the Opinion Means: “[A]bsent evidence of fraud or collusion,” Pennsylvania law allows for the rejection of all bids and readvertisement for new bids by public officials “in the exercise of their informed discretion to decide that it is in the best interest of the public.” In this case, by rejecting all bids and announcing a rebid of the project, the DOT provided the bidder with relief because the bidder had another opportunity to bid the project. Moreover, the DOT took steps to correct the problems with its computer system to ensure that all new bids could be opened. Accordingly, the bidder’s protest was rendered moot.
3. Justification for Default Termination by Federal Government, Bender GmbH v. Brownlee, 2004 WL 1799402 (Fed. Cir. 2004).
* What the Court Considered: The Army and a contractor executed a contract for work on a retaining wall. After issuing two cure notices citing the contractor’s failure to perform certain work, the Army instructed the contractor to suspend a certain portion of the work. The Army later terminated the contract for default pursuant to its second cure notice. The contractor argued that the default termination was not justified.
* What the Court Said: The Army’s default termination was justified.
* What the Opinion Means: Under Federal Acquisitions Regulation clause 52.249-10, which provides the standard language for default in a fixed-price government construction contract, termination may be justified if the contracting officer is “justifiably insecure about the contract’s timely completion” based on “events, actions, and communications leading to the default decision.” The Army cited the contractor’s repeated delays extending over two years, its inability or unwillingness to protect the work site from flooding damage, and its unwillingness to continue work on other areas of the project after the Army issued the partial suspension of the work. These reasons were sufficient to demonstrate that the Army was “justifiability insecure” of whether the contractor could complete the project by the contractual completion date and, because the contractor was unable to demonstrate an excusable delay, the default termination was justified.
4. Property Damage Under Standard Commercial General Liability Policy, F & H Const. v. ITT Hartford Ins., 118 Cal. App. 4th 364 (2004).
* What the Court Considered: A contractor that was building a water facility pumping plant entered into a subcontract for the delivery of grade A-50 steel pile caps. After the contractor realized that grade A-36 steel pile caps had been provided, it modified the caps using stiffener ribs. The modified caps met the design requirements without damaging or weakening the piles in any way. However, the contractor sought a judgment against the subcontractor for $243,064 for the costs the contractor incurred in modifying the caps. When the subcontractor filed for bankruptcy, the contractor continued the suit against the subcontractor’s insurer under the subcontractor’s commercial general liability (“CGL”) insurance policy.
* What the Court Said: The subcontractor’s insurance company was not liable under the CGL policy because there was no “physical injury to tangible property.”
* What the Opinion Means: The standard definition of “property damage” currently in use in the insurance industry requires “physical injury to tangible property.” In applying that definition, most courts have arrived at the view that the incorporation of a defective component into a larger structure does not constitute property damage unless the defective component causes physical injury to some other part of the system. This view is considered to be consistent with the purpose of liability insurance, which “is not designed to serve as a performance bond or warranty of contractor’s product.” Here, because the contractor sought only intangible economic damages incurred in modifying the steel caps and not resulting from any physical injury to the structure, such loss was not covered by the CGL policy.
5. Architect’s Duty to Design-Build Contractor, Glacier Tennis Club at the Summit v. Treweek Const. Co., 87 P.3d 431 (Mont. 2004).
* What the Court Considered: The Glacier Tennis Club (the “Owner”) hired an architect to provide preliminary design parameters and building specifications for a tennis facility. The architect also periodically reviewed the design-build contractor’s plans and progress to confirm the contractor’s entitlement to progress payments. The Owner sued the contractor for design and construction defects, including a bulge in the floor and persistent leaking through the exterior walls. The contractor sought indemnification from the architect, alleging that the architect, with whom it had no contractual relationship, had been negligent in his preparation, review, and approval of the contractor’s construction plans.
* What the Court Said: Because the architect owed no duty, contractual or otherwise, to the contractor, he could not be held liable for the construction and design defects.
* What the Opinion Means: Under Montana law, a third party contractor may recover for economic loss against a design professional when the design professional knew or should have foreseen that the contractor was at risk in relying on the information supplied. In this case, the contractor failed to offer any evidence that the architect communicated professional information to the contractor with the intention that the contractor should rely on the information. The architect’s review of the contractor’s plans and progress was limited to determining the contractor’s entitlement to interim payments and did not extend to conveying professional information.
6. Material Breach of Construction Contract when Time is of the Essence, Mustang Pipeline v. Driver Pipeline, 134 S.W.3d 195 (Tex. 2004).
* What the Court Considered: An owner hired a contractor to build 100 miles of a 200 mile pipeline. During the bidding, the owner clearly stated that time was of the essence and that the pipeline must be completed by April 30, 1997, and, in response, the contractor increased its bid by ten percent. Due to heavy rains during construction, the contractor suspended construction on the pipeline in early March. By March 17, the contractor had not resumed construction, so the owner declared the contractor to be in default and hired another company to complete the pipeline.
* What the Court Said: Because there was virtually no chance that the contractor could complete the pipeline by the April 30 deadline, it materially breached the contract.
* What the Opinion Means: Timely performance of the contractor’s obligations under the contract was essential. Forty days prior to the deadline, 85 miles of the pipeline remained to be completed by the contractor. Therefore, the contractor materially breached its contractual obligation to perform the contract in a timely manner and the owner was justified in hiring another contractor to complete the work.
7. Doctrine of Wrongful Prevention as Legal Defense for Owner, Batteast Constr. Co., Inc. v. The Public Bldg. Comm. of Chicago, 2004 WL 42527 (N.D. Ill. 2004).
* What the Court Considered: The Public Building Commission of Chicago (“PBC”) terminated the contract of its general contractor (the “Contractor”) before completion of the construction of the Midwest Center for Green Technology Project (the “Project”). PBC sought to recover its costs to complete the Project that were over and above the contract amount with the Contractor. The Contractor argued that PBC was not entitled to those costs because PBC failed to obtain certification from the Project architect of those additional expenses, as required by the contract.
* What the Court Said: The Contractor was not entitled to summary judgment on PBC’s claim for additional expenses.
* What the Opinion Means: PBC raised a contractual defense similar to the doctrine of wrongful prevention, which generally holds that “nonperformance may be excused where expected performance was prevented by the other party to a contract." PBC argued that the Contractor’s alleged fraudulent concealment of certain subcontracts made it impossible to determine the “true plan, if any,” that the Contractor had for completing the work within the adjusted contract price. Accordingly, the architect could not certify that work performed by subcontractors or substitute contracts was within the scope of the Contractor’s contract.
8. Contractor’s Duty to Perform Construction in Workmanlike Manner, McMonigle Excavating Concrete, Inc. v. Riley, 2004 WL 6023124 (Ohio Ct. App. 2004).
* What the Court Considered: A contractor executed a contract with a homeowner to perform excavating for a new home and to set and pour footers and a column pad. However, the contractor placed the garage and porch foundations on soil that was not compacted. The owner refused to pay the contractor and asserted that the contractor had failed to complete its work according to the terms of the parties’ agreement, in a workmanlike manner, or according to standard practices. The contractor argued that it had no duty to compact the fill dirt under the owner’s porch and garage.
* What the Court Said: The contractor had a duty to perform the work at issue and breached it duty to perform in a workmanlike manner by failing to complete such work.
* What the Opinion Means: Under Ohio law, and the terms of the parties’ contract, the contractor had the duty to perform construction work in a workmanlike manner. This standard “requires a construction professional to act reasonably and to exercise the degree of care which a member of the construction trade in good standing in the community would exercise under the same or similar circumstances.” The owner presented witnesses who testified that it was the obligation of an excavator preparing the foundation to prepare the soil for concrete. Thus, by failing to perform such work, the contractor had failed to perform in a workmanlike manner.
9. Enforceability of “Waiver and Release of Claims” Clause, J.C. Equip. Corp. v. England, 360 F.3d 1311 (Fed. Cir. 2004).
* What the Court Considered: The Navy hired a contractor to repair a fresh water system and tank at a California Navy base. During construction, the parties agreed to 42 change orders. The parties’ contract contained a “Waiver and Release of Claims” clause, which required the contractor to include in each change order all types of adjustments, including those arising out of delay or disruption, to which the contractor claimed entitlement. After relations between the parties soured, the contractor filed 44 separate claims with the Armed Services Board of Contract Appeals seeking adjustments arising from change orders.
* What the Court Said: The contractor’s additional claims were waived at the time the change orders were executed because it failed explicitly to reserve them as required by the “Waiver and Release of Claims” clause.
* What the Opinion Means: The language of the contract was clear and unambiguous in requiring the contractor to include in a change order all items for which an equitable adjustment would be sought. Thus, many of the contractor’s additional 44 claims were released upon its execution of change orders that did not except such claims. Had the contractor wanted to preserve its rights to later pursue delay adjustments related to the change orders, it should have expressly excepted them from the releases.
10. Contractor’s Subrogation Right Against Architect for Inadequate Plans and Specifications, Sunrise Dev., Inc. v. Woodward, 2004 WL 574719 (E.D. La. March 22, 2004).
* What the Court Considered: After substantial completion of an assisted living facility, the owner began to experience heaving of the ground around and underneath the building and mold and mildew within the building walls. The owner and contractor agreed to a Remediation Agreement, pursuant to which the contractor agreed to perform certain corrective work, while reserving its rights to recover its costs from the owner or others. Eventually, the owner sued the contractor for breach of the construction contract, breach of Louisiana statutory warranties, and breach of the Remediation Agreement. The contractor sought subrogation from the architect and landscape architect, claiming that they were liable to the contractor for failing to provide adequate plans and specifications.
* What the Court Said: The contractor could maintain its suit against the architect and landscape architect because it was at least possible for the contractor to establish a right to subrogation from those parties.
* What the Opinion Means: Subrogation allows for the substitution of one person to the rights of another when that party pays a debt he owes for others and has recourse against those others as a result of the payment. In this case, the court agreed with the contractor’s contention that both it and the architects could be liable for remediation costs: the contractor was liable under the Remediation Agreement, while the architects were liable for failure properly to design the facility and its landscaping.
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.