Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and David L. Hobson
1. Construction Manager’s Duty to Surety, Mid-State Surety Corp. v. Thrasher Eng’g, Inc., 2006 WL 1390430 (S.D.W. Va. May 16, 2006).
* What the Court Considered: The engineer of a water treatment facility agreed to serve as the owner’s project representative. After the contractor defaulted, the surety who had provided the payment and performance bonds for the contractor sued the engineer for negligence, alleging the engineer had negligently certified and made payments to the contractor. Specifically, the surety alleged the engineer had failed to pay its suppliers and had failed to properly monitor the contractor’s progress.
* What the Court Said: Because the engineer owed a duty to the surety, it could be held liable to the surety for negligence.
* What the Opinion Means: According to the Court, it is foreseeable that a surety might suffer harm where the engineer, who is the project representative, fails to discover that the contractor is not paying its suppliers. Likewise, it is foreseeable that a surety might suffer as a result of the engineer’s failure to monitor the contractor’s progress, resulting in overpayment to the contractor.
2. Construction Managers and Contractual Privity, Kaback Enters., Inc. v. Time, Inc., 813 N.Y.S.2d 54 (N.Y. App. Div. 2006).
* What the Court Considered: A commercial tenant contracted with a construction manager (“CM”) who then hired a subcontractor. The CM agreement contained a provision expressly precluding third party actions, and this provision was incorporated by reference into the subcontract. Subsequently, the subcontractor filed an action against the tenant. The subcontractor argued that it was in privity with the tenant because it contracted with the tenant’s CM rather than a prime contractor.
* What the Court Said: The subcontractor was not in privity with the tenant.
* What the Opinion Means: Citing New York case law, the Court ruled that, because of the provision barring third party actions, the subcontractor was not in privity with the tenant and thus its suit could not proceed. It did not matter that the subcontractor had contracted with a construction manager rather than a prime contractor.
3. Insurance Coverage for One’s Own Negligence, Evanston Ins. Co. v. Atofina Petrochemicals, Inc., 2006 WL 1195330 (Tex. May 5, 2006).
* What the Court Considered: A contractor hired to perform construction at an oil refinery was obligated by the contract to carry both comprehensive general liability (“CGL”) insurance and excess, or umbrella, insurance. The owner was named as an additional insured on both policies. The umbrella policy included a provision limiting coverage to that provided by the “underlying insurance.” After the owner was sued for wrongful death by the family of an employee of the contractor, it sought coverage under the umbrella policy.
* What the Court Said: The umbrella policy did not cover losses resulting solely from the owner’s negligence.
* What the Opinion Means: The underlying CGL policy excluded coverage for the owner’s sole negligence, and therefore the umbrella policy was similarly restricted. Thus, to recover under the umbrella policy, the owner must show that the accidental death was not the result of its sole negligence.
4. Recovery of Anticipated Profits, Lepi Enters., Inc. v. Nat’l Envtl. Svc. Corp., 440 F.3d 937 (8th Cir. 2006).
* What the Court Considered: A subcontractor hired to remove asbestos from a housing project was terminated for allegedly violating EPA and OSHA regulations. However, there was significant disagreement over whether these infractions actually occurred. Thereafter, the subcontractor sued the contractor for wrongful termination, seeking as part of its damages the anticipated profits on change orders necessary to remove asbestos not within the subcontractor’s original scope of work.
* What the Court Said: The subcontractor could recover the anticipated profits on change orders necessary to supplement the original contract.
* What the Opinion Means: To recover prospective or anticipated profits, a plaintiff must establish the amount with reasonable certainty. Here, there was evidence that a company in the subcontractor’s position would have successfully bid on the change orders associated with the original job. This was sufficient to allow a jury to conclude with reasonable certainty that the subcontractor would have reaped profits on the change orders.
5. Notice of Delay Claim, Barclay White Skanska, Inc. v. Battelle Mem’l Inst., 2006 WL 950375 (D. Md. Apr. 12, 2006).
* What the Court Considered: The construction contract included American Institute of Architects, General Conditions of the Contract for Construction Document A201 (1997), which contains a requirement that claims for extension of time be made within fourteen days of the commencement of delay. Document A201 also requires that delay claims include an estimate of cost and probable effect of delay. At the conclusion of the project, the owner paid less than the amount sought in the contractor’s final payment application, withholding an amount for defective work and disputed change order requests. Within fourteen days, the contractor responded by letter, saying it was “considering filing a claim for extension of general condition, since we received significant changes in scope.”
* What the Court Said: The contractor’s letter did not constitute proper notice of a delay claim.
* What the Opinion Means: Reviewing Maryland case law, the Court concluded that, because the contractor’s letter indicated only that it was considering filing a claim for delay, it did not provide actual notice of a delay claim. The owner’s knowledge that the project was not completed on time was not sufficient to satisfy the notice requirement.
6. Limitations Period for Payment Bond Claim, Casey Indus., Inc. v. Seaboard Surety Co., 2006 WL 1050646 (E.D. Va. Apr. 20, 2006).
* What the Court Considered: A Payment Bond obligated potential claimants to file their claims within one year of the date on which the last labor was performed by anyone under the prime contract. After the contractor was terminated by the owner, the surety hired a completion contractor to complete the project. The completion contractor requested that a subcontractor to the original contractor perform corrective work. The subcontractor was not provided with a new subcontract for this work. More than a year after termination of the prime contract but within a year of the date of its last provision of labor to the project, the subcontractor filed a claim under the bond.
* What the Court Said: Because the corrective work was arguably performed under the original prime contract, the subcontractor’s claim was timely.
* What the Opinion Means: The subcontractor interpreted its notice to proceed with the corrective work as a demand that it complete its obligations under its original subcontract with the original contractor. However, had the subcontractor been provided with a new subcontract for the corrective work, that work would not have been deemed to have been performed under the original prime contract, and the claim would therefore have been untimely.
7. Acceptance of Subcontractor Bid, Rotondo Wierich Enters., Inc. v. Rock City Mech., Inc., 2006 WL 950188 (E.D. Ky. Apr. 12, 2006).
* What the Court Considered: A mechanical subcontractor on the construction of a prison was asked by the concrete subcontractor to submit pricing for the mechanical design inside the cells. This bid was incorporated into the latter’s bid, which was accepted by the general contractor. Thereafter, the concrete subcontractor failed to communicate acceptance of the bid to the mechanical subcontractor. Also, the concrete subcontractor began to self-perform the mechanical design work without first asking the mechanical subcontractor to proceed with the work.
* What the Court Said: Because the concrete subcontractor did not accept the bid, the mechanical subcontractor was not obligated to perform the work.
* What the Opinion Means: A contractor’s use of another’s bid in its bid package is not an acceptance of the bid and does not create a contractual relationship. Here, there was no written acceptance or any other written evidence of a contract. The fact that certain employees of the concrete subcontractor allegedly told the mechanical subcontractor’s project manager that the bid had been accepted was irrelevant because these employees had no authority to bind the concrete subcontractor to a subcontract.
8. Discretionary Arbitration Clause, Albert M. Higley Co. v. N/S Corp., 445 F.3d 861 (6th Cir. 2006).
* What the Court Considered: A dispute arose between a contractor and its subcontractor over whether the subcontractor would be constrained to comply with the “Buy America” provisions of the subcontract. The subcontract also contained an arbitration clause, which provided that any disputes shall be decided through arbitration “at the sole discretion of [the contractor].” Following an unsuccessful mediation of the dispute, the contractor filed suit in federal court.
* What the Court Said: Because the arbitration clause gave sole discretion to the contractor, the contractor had the option of pursuing litigation rather than arbitration.
* What the Opinion Means: The subcontractor argued that the discretionary language in the arbitration provision meant only that the contractor had sole discretion to decide whether a dispute continued to exist after mediation but did not authorize the contractor to pursue litigation. The Court disagreed, finding that such an interpretation would lead to the irrational result that the contractor could stall the resolution of any dispute by simply denying its existence.
9. Existence of Agency Relationship, Greentex Greenhouses, BV v. Pony Express Greenhouse, LLC, 2006 WL 994632 (D. Neb. Apr. 12, 2006).
* What the Court Considered: An individual investor instructed a manager to proceed with the construction of a greenhouse to produce hydroponic tomatoes. The manager entered into a contract with a contractor to construct the greenhouse. Thereafter, the individual investor formed an investment corporation. Though the investment corporation did not sign the contract and relinquished all supervisory control of the project to the manager, the contractor was paid by the corporation. Eventually, the contractor sued the investment corporation, claiming it was unpaid for additional work requested by the manager.
* What the Court Said: Because there was sufficient evidence for a jury to conclude that the manager was the agent of the investment corporation, the suit could proceed.
* What the Opinion Means: Where one “affirmatively, intentionally, or by lack of ordinary care” causes another to reasonably believe that a third is acting on its behalf, an apparent agency relationship exists. Here, though the investor never expressly authorized the manager to serve as its agent, there was nevertheless sufficient evidence for a jury to conclude that an apparent agency relationship existed.
10. Effect of False Lien Waiver, Lazar Bros. Trucking, Inc. v. A & B Excavating, Inc., 850 N.E.2d 215 (Ill. App. Ct. 2006).
* What the Court Considered: An owner hired a contractor to perform excavation work. The contractor provided a lien waiver, falsely indicating that no subcontractors had worked on the excavation. In fact, a trucking company had been hired by the contractor to haul debris from the site, but the trucking company did not provide notice to the owner that it was performing work on the project. When the contractor did not pay for the hauling, the trucking company filed a lien on the property.
* What the Court Said: Because the trucking company could present no evidence that the owner accepted the lien waivers in bad faith, the lien was extinguished.
* What the Opinion Means: A contractor’s affidavit and lien waiver will provide no protection to the owner if the owner has notice that the affidavit is false. Here, the burden was on the trucking company to present some evidence that the owner knew the lien waiver was false. Furthermore, the trucking company could have protected itself by providing notice to the owner of its work on the project.
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. David L. Hobson is an Associate at Smith, Gambrell, & Russell, LLP. For more information or if you have any questions, contact us at: firstname.lastname@example.org.