Cases of the Month

Significant Cases and Decisions Impacting the Construction Industry

By: Ira Genberg and Cory Menees

August 2008

1.      Statute of Limitations Tolled Where Claim Related to Defective Condominium Construction, Landale-Cameron Court, Inc. v. Ahonen, 155 Cal. App. 4th 1401 (2007).

*     What the Court Considered: A condominium developer entered into an agreement tolling the limitations period during which the homeowners’ association (“HOA”) would be permitted to bring an action against the developer.  Over three years after the condominium building leaked during heavy rains, the HOA brought a negligence action against both the developer and a contractor hired by the developer.  The developer settled the claim while the contractor defended on the basis that the action was time-barred by California’s three-year statute of limitations on negligence actions.  The trial court agreed that the action against the contractor was time-barred, and the HOA appealed.

*     What the Court Said: The tolling agreement applied to actions brought against the contractor despite the fact that it was not a party to the agreement.  The California Civil Code provides that notice by an HOA to a condominium developer complaining of construction defects tolls the statutes of limitations applicable to an action brought against “all parties” potentially liable for the claimed defects. 

*     What the Opinion Means: In California, statutes of limitations applicable to actions against contractors arising from defects on condominium projects may be tolled, even where the contractor is neither a party to a tolling agreement nor given notice of the defects directly.

2.      Architect’s Services Lienable, Weber v. Pascarella Mason Street, LLC, 930 A.2d 779 (Conn. App. Ct. 2007).

*     What the Court Considered: After an owner failed to pay him for his services, an architect filed a mechanic’s lien.  The owner argued that the architect’s services were not lienable under Connecticut law, which provides that “services rendered . . . in the improvement of any lot or in the site development of any plot of land” are lienable.  The architect maintained that his professional services were lienable because they were used by the owner to obtain a building permit and market the building to prospective tenants.

*     What the Court Said: An architect’s design services were lienable insofar as they “laid the groundwork for the physical enhancement of the real property.”

*     What the Opinion Means: In Connecticut, professional services directly aimed at facilitating the physical enhancement of property are lienable.  Not all professional services provided in relation to real estate development are lienable.  For example, services provided by lawyers, lenders, and insurers are not lienable.

3.      Owner Not Indemnified from Purely Economic Damages by AIA Form, Watral & Sons, Inc. v. OC Riverhead 58, LLC, 34 A.D.3d 560 (N.Y. App. Div. 2008).

*     What the Court Considered: The New York Court of Appeals was called on to construe the indemnity provisions of American Institute of Architects Document A201 / CM (1980), a form contract containing indemnity provisions “substantially identical” to those found in the more recent AIA Document A201 / CMa (1992).  An owner argued that, through the contract’s indemnity provisions, it was indemnified by the contractor from damages claimed by an adjacent landowner as a result of power outages accidentally caused by the contractor.  The contractor twice disturbed the line supplying power to the adjacent landowner, leading the owner to make payments to its neighbor in an effort to head off a lawsuit.  The owner in turn withheld payment from the contractor, purportedly because the owner was “forced” to make the payments to the adjacent landowner as compensation for losses attributable to the power outages.

*     What the Court Said: As the owner failed to show that (1) the contractor had been negligent; and (2) its payments to the adjacent landowner had been paid as compensation for “property” damage as opposed to purely economic damage, the contractor was not bound to indemnify the owner for the claimed damage.

*     What the Opinion Means: Owners wishing to pass through to contractors liability for claims asserted by third parties for purely economic damages resulting from non-negligent acts or omissions of contractors should augment the form language of AIA form contracts to ensure adequate indemnification by contractors.   

4.      Landlord Consent to Lien, Madigan v. Trace Construction, Inc., 71 Mass. App. Ct. 1 (2007).

*     What the Court Considered: A contractor and subs filed liens against certain property after a tenant of the property contracted for improvements and failed to make payments on the contract.  After the tenant abandoned the property, the landlord filed an action to have the liens dismissed because the prime contractor had contracted not with the owner, but with a tenant.  The owner argued that where a claim for a lien arose from a contract entered into by a tenant, Massachusetts law required the owner’s consent for the lien to attach to the property.  

*     What the Court Said: The owner’s reading of the mechanic’s lien statute made little sense in that it rendered meaningless the statutory language conditioning the ability to file a lien on the owner’s consent to the contract between the tenant and contractor.  Beyond that, the question of whether the owner had given consent remained open, making dismissal of the liens improper.

*     What the Opinion Means: In Massachusetts, the key consideration in whether property is lienable as a result of a tenant’s failure to pay on a contract is the owner’s consent to the contract, not the owner’s consent to the lien. 

5.      Consequence of Terminating for Convenience, Paragon Restoration Group, Inc. v. Cambridge Square Condominiums, 42 A.D.3d 905 ( N.Y. App. Div. 2007).  

*     What the Court Considered: A contract’s termination for convenience clause provided that a contractor was entitled to payment for work performed, costs related to stopping work, and “reasonable overhead and profit” on work not performed as a result of termination under the clause.  After an owner terminated for convenience, the contractor sued to recover amounts due under the clause.  The owner counterclaimed, seeking to recover damages allegedly incurred in curing defects in the contractor’s work.

*     What the Court Said: The owner was found liable on summary judgment, but the amount of damages recoverable was not properly determined on summary judgment, as the owner offered evidence suggesting that the contractor’s claim for profits from work not performed was excessive.  The owner’s counterclaim was impermissible, as it had terminated for convenience.     

*     What the Opinion Means: In New York, an owner’s decision to terminate for convenience may bar a later action to recover the cost of curing a contractor default.

6.      Defenses to Fraudulent Concealment Claim Limited, Windham v. Latco of Miss., Inc., 2005-CT-02086-SCT (Miss. 2008).

*     What the Court Considered: In an action against a roofing system manufacturer and the installing contractor, an owner alleged defective construction and sought to toll the running of Mississippi’s statute of repose based on fraudulent concealment.  The defendants’ motion for summary judgment was granted by the trial court and upheld by the court of appeals, both courts having found that the claim was time-barred by the statute’s six-year limit on claims.

*     What the Court Said: Fraudulent concealment equitably estops a defendant from asserting the statute of repose as a defense.  Furthermore, Miss. Code Ann. § 15-1-67, providing that a fraudulently concealed cause of action accrues only upon discovery of the cause of action, is properly applicable to the statute of repose.

*     What the Opinion Means: In Mississippi, a plaintiff still faces two “high” hurdles to proving a fraudulent concealment claim.  The plaintiff must prove (1) the defendant’s fraudulent concealment; and (2) that the plaintiff worked diligently to uncover the concealed defect. 

7.      Offer and Acceptance, Otay River Constructors v. San Diego Expressway, 158 Cal. App. 4th 796, 70 Cal. Rptr. 3d 434 (2008).

*     What the Court Considered: A contractor incorporated the price from a sub’s proposal into a bid for a contract to build a highway.  After winning the contract, the contractor sent the sub its standard form subcontract, which varied materially from the sub’s proposal.  The sub then refused to perform, at which time the contractor hired an alternate sub and sued the original sub.  The contractor sued on a theory of promissory estoppel, claiming that the sub was bound to perform by the inclusion of its proposal in the contractor’s bid.

*     What the Court Said: The form subcontract represented a counteroffer made by the contractor to the sub.  The counteroffer amounted to the legal rejection of the sub’s initial proposal by the contractor.  As it never accepted the initial offer, the contractor could not claim that the sub was bound to the terms of the offer.

*     What the Opinion Means: “Unless the acceptance is unconditional and without variance from the offer it is of no legal effect as an acceptance and operates as a rejection and a counteroffer.”

8.      Knowledge of Surety Industry Custom Attributed to Owner, BEGL Construction Co. v. Los Angeles Unified Sch. Dist., 154 Cal. App. 4th 970, 66 Cal. Rptr. 3D 110 (2007).

*     What the Court Considered: A trial court admitted evidence showing that a contractor lost profits when its bond capacity was diminished during a dispute with its bonding company.  Other sureties, in keeping with industry custom, limited the availability of bonds to the contractor during the pendency of the dispute.  The dispute arose after the contractor was terminated by the owner school district, which then filed a bond claim for completion of the contract.  The school district argued that evidence of profits lost by the contractor due to its diminished bond capacity was wrongly admitted at trial, as profits lost on projects with parties other than the school district were not foreseeable at the time the contractor and school district entered into their contract.

*     What the Court Said: The trial court did not abuse its discretion in admitting evidence of lost profits.  Such losses were foreseeable given the surety industry custom of limiting the availability of bonds to contractors in disputes with other sureties. 

*     What the Opinion Means: In California, an owner may be charged with knowledge of surety industry custom and its potential to impact a contractor’s bond capacity and profitability.  

9.      Owner Action Leads to Denial of Benefit of No Damages for Delay Provision, James Corp. v. N. Allegheny Sch. Dist., 938 A.2d 474 (Pa. Commw. 2007).

*     What the Court Considered: A contractor’s work on an elementary school was delayed by the owner school district’s failure to obtain permits and then interfered with by a fellow contractor.  After the delay and interference, the contractor coordinated with the construction manager to establish a new timeline for project completion for submission to the school district.  The district refused to grant the extension requested by the manager on the contractor’s behalf and allegedly instructed the manager to conceal the district’s awareness of the contractor’s need for additional time.  The manager was fired, and his replacement required that the contractor complete work on the original schedule.  The contractor completed the project on time, but at significant additional cost.  In response to the contractor’s suit for acceleration damages, the district argued that the contractor’s claim was barred by a no damages for delay provision in the contract.

*     What the Court Said: The no damages for delay provision was found unenforceable and the contractor awarded acceleration damages.  By refusing to grant the contractor an extension, the school district failed to act in an “essential manner” under the contract and was properly denied the benefit of the no damages for delay clause.

*     What the Opinion Means: Limitations on a contractor’s future remedies may be found unenforceable where the owner acts such that the contractor is denied the benefit of a contract provision designed to prevent the contractor from incurring additional, unnecessary costs. 

10. Limitations on Supplier Liability, Potomac Constructors, LLC v. EFCO Corp., 530 F. Supp. 2d 731 (D. Md. 2008).

*     What the Court Considered: A general contractor hired to construct a bridge contracted with a supplier for the provision of steel formwork to be used in casting the bridge’s concrete support structure.  When the supplier was late in delivering what turned out to be defective formwork, the entire bridge project was significantly delayed.  Despite the fact that the purchase order explicitly disclaimed the supplier’s liability for incidental and consequential damages, the contractor sued for damages resulting from the delay.

*     What the Court Said: The contractor was denied delay damages because the purchase order was entered into by sophisticated parties and made clear that the supplier’s liability was limited to the cost of repairing defective property delivered under the order.

*     What the Opinion Means: In Maryland, limitations on damages contained in supplier purchase orders may be enforced as written.

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 hlk@constructionchannel.net.