Construction Channel

Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry

By:  Ira Genberg and Troy Kiber

 

July 2008

1.  Creation of a Contract by A Guarantee to Pay, EBC, Inc. v. Clark Bldg. Sys.,  2007 WL 4563518 (W.D. Pa. Dec. 21, 2007).

* What the Court Considered:  When an owner became concerned that the contractor could not pay the subcontractors, the owner contacted the subs directly.  It sent two materials suppliers substantially identical letters, stating that the owner would, with the contractor’s permission, pay the subs for any materials they supplied to the contractor for the owner’s project.  The suppliers contended that the letters created enforceable contracts.  However, one supplier testified that she did not expect to be paid by the owner if the owner had already paid the contractor.

* What the Court Said:  The letter could create an enforceable agreement, but not with respect to the supplier that testified that they did not believe that it did create such an obligation.

* What the Opinion Means: The outward and objective manifestations of assent determine the intent of parties to a contract.  Here, manifestations that a supplier did not believe a contract was formed convinced the court as such.  Also of note: deposition testimony can quickly defeat a cause of action.

2.  No Damages For Delay Clauses, Part I., The Law Co. v. Mohawk Constr. & Supply Co., 523 F.Supp.2d 1276 (D. Kan. 2007).

* What the Court Considered:  In its agreement with the contractor, a subcontractor agreed to make no claims for a variation in schedule and "specifically acknowledge[d] that extension of time shall be Subcontractor’s sole remedy for delay" barring intentional delay by the general contractor.  Nonetheless, the subcontractor brought claims for labor escalation, extended general conditions, equipment rental, rework, and loss of productivity.  The subcontractor’s expert agreed that there was no claim that the owner or general contractor intentionally delayed the project.

* What the Court Said:  The no damages for delay clause is enforceable as written: the subcontractor’s claims were barred.

* What the Opinion Means:  While many jurisdictions are wary of no damage for delay clauses, Kansas takes a more deferential attitude, stating that limitations of liability are valid and enforceable so long as they were "fairly and knowingly entered into and [] not in violation of other provisions of law."

3.  No Damages For Delay Clauses, Part II., James Corp. v. North Allegheny Sch. Dist., 938 A.2d 474 (Pa. Cmwlth. 2007).

* What the Court Considered:  A contractor bid and won a contract for the construction of an elementary school.  The contract contained a  no damages for delay clause, and the delays were multiple.  To begin with, the notice to proceed was two weeks late and the contractor could not begin earthwork until a month after that, due to delays attributable to the architect.  Nonetheless, the project was completed on time.  The contractor sought acceleration payments from the district, alleging the district refused to recognize delays and adjust the completion date.  The district pointed to the no damages for delay clause as its defense.

* What the Court Said:  Because the district failed to act in an essential manner under the contract, the no damages for delay clause was disregarded.

* What the Opinion Means:  No damages for delay clauses cannot be utilized in Pennsylvania where there is positive owner interference or a failure of the owner to act in some essential manner necessary to the prosecution of the work.  Here, failure to obtain necessary permits, failure to develop a sequencing schedule and refusal to adjust the completion date were failures to act as required.

4.  Subjects of Materialmen’s Liens, BMC West Corp. v. Horkley, 174 P.3d 399 (Id. 2007).

* What the Court Considered:  A materials supplier filed a lien on the owner’s land and improvements: a restaurant and a storage building.  The portable insulated storage building was located on land adjacent to restaurant, but owned by a third party, and was completed last.  Citing these facts, the owner sought to dismiss the lien, arguing that the portable building was not part of the project, making the lien untimely, and  that the lien could not attach to a building upon the lands of others.

* What the Court Said:  The building was not mere chattel but an improvement specific to the land, and the fact that a third party owned the land did not stop the lien from attaching to the building itself.

* What the Opinion Means:  In Idaho, liens can be based upon material supplied for "the construction, alteration or repair of any ... building...or any other structure" or an improvement on land.  This building sat on a foundation and was uniquely tailored to fit the slope of the land and complement the adjacent restaurant - thus, it was an improvement to that land.  Also, liens on buildings may exist separately from the land, so the fact that a third party owned the land did not prevent the lien from attaching to the building itself.

5.  Claims, Change Orders, and Settlements, Steel Serv. Corp. v. Bd. Of County Commr’s of Hamilton Co., Ohio, 2007 WL 4561497 (6^th Cir. Dec. 27, 2007).

* What the Court Considered:  In response to a contractor’s claim for acceleration, the parties executed a change order reserving judgment on quantum and entitlement but nonetheless advancing the contractor some $700,000 for its additional costs.  Over the course of the project, the owner issued multiple CCDs, which the contractor responded to with Constructive Change Proposals (CCPs) which contained proposed adjustments to the Contract.  During the mediation, the parties executed a change order that did not list acceleration as a change but purported to be a "full final and complete waiver and settlement with respect to all claims [listed]" and "settle[] all ...CCP’s submitted by [Contractor] with the exception of [three enumerated]."  The owner alleged that this change order settled the contractor’s claim for acceleration.

* What the Court Said:  Because the change order did not list acceleration as a change and CCPs are not equivalent to claims, the contractor’s claim was not waived.

* What the Opinion Means:  The change order also reserved "any and all rights, claims, demands, defenses ... not settled."  Even though the contractor usually submitted a CCP covering any anticipated Contract adjustment, that term was not listed in the contract and was not listed in the already-submitted claim.  Claims are demands for compensation, while CCPs are mere proposals.  Thus, the change order at issue did not settle the outstanding claim.

6. Recovering for Specially Fabricated Materials under the Miller Act, Argonaut Great Cent. Ins. Co. v. DiTocco Konstruction, Inc., 2007 WL 4554219 (D. N.J.  Dec. 20, 2007).

* What the Court Considered: Almost five years after a contractor completed a restaurant project, the restaurant caught fire and burned to the ground.  The fire marshal concluded that the fire occurred because the contractor and its subcontractors negligently installed various kitchen equipment.  Based on that fact, the owner’s insurer brought  an action against the contractor and subcontractors.  The contractor alleged that the owner had waived any subrogation action against it through two clauses in the A201 general conditions: Sec. 11.4.7 (waiving subrogation to the extent covered by insurance) and Sec. 1.4.5 (purporting to waive subrogation "after final payment"  if "insurance is to be provided on the completed Project through a policy or policies other than those insuring the Project during the construction period.")

* What the Court Said:  The owner waived any action against the contractor for the post-construction fire loss.

* What the Opinion Means:  The clear language of the contract controls, buttressed by the commentary to the AIA which contemplated an extended waiver.  This language did not require a continuation of the insurance policy in place at the time of construction, but waived subrogation to the extent any post-construction property insurance was obtained.

7.  A Surety’s Liability for Bad Faith failure to Pay, Intercon Constr., Inc. v. Wiliamsport Mun. Water Auth., 2008 WL 239554  (M.D. Pa. Jan. 28, 2008).

* What the Court Considered: When a contractor sued the owner of a public project, the owner counterclaimed and instituted a third-party complaint against the surety that issued the performance bond.  One count of that complaint alleged that the surety was liable under Pennsylvania’s bad faith Insurance statute for the manner in which it investigated and denied the owner’s coverage under the performance bond.  The statute allows a court to award interest and punitive damages against insurers for acting in bad faith towards insureds.  The surety moved to dismiss, arguing that a performance bond could not be considered an insurance policy for purposes of the statute.

* What the Court Said:  The provider of a surety bond cannot be liable under the bad faith insurance statute.

* What the Opinion Means: The surety relationship was distinct from the normal insurance relationship because there was no direct relationship between the surety and the beneficiary of the bond, unlike the insurer and its insured.  If the legislature had intended the statute to apply to sureties it could have provided so in the statute.

8.  A Surety’s Defensive use of a Paid-if-Paid Clause, United States ex rel. McKenney’s, Inc. v. Gov’t Technical Servs., LLC , 531 F.Supp.2d 1375 (N. D. Ga. 2008).

* What the Court Considered:  A subcontractor brought suit against the general contractor and its surety for work performed on a public project, alleging failure to complete payment.  The surety responded by pointing to a pay-when-paid clause in the subcontract specifying that this subcontractor would be paid only when the government paid the general contractor.  As the general contractor was allegedly not yet paid by the government, the surety asserted it could not be liable under the bond.

* What the Court Said:  The surety could not use the pay-when-paid clause as a defense where Federal Miller Act rights were at issue.

* What the Opinion Means:  In Georgia, pay-when-paid clauses are not merely timing mechanisms but complete bars to recovery where the condition precedent to payment is not met.  However, to allow non-payment by the government to hold up payment to the subcontractor would allow the subcontractor’s rights under the Miller Act to expire after one year.  That interpretation would turn a pay-when-paid clause into an implicit waiver of Miller Act rights.

9.  Construction Defects and Limitations Periods, Saltponds Condo. Ass’n, Inc. v. McCoy, 972 So.2d 230 (Fla. 3rd. DCA 2007).

* What the Court Considered: The association brought suit against the architect, alleging latent defects.  While the complaint asserted latent defects, the attached engineering report suggested that most, if not all, of the defects were patent.  For example, the report was based upon visual examination without any testing.  If the defects were patent, then the suit would be barred by the statute of limitations; or whereas in cases of latent defects the limitation period runs from the time the defect is discovered.  The architect moved to dismiss, citing the report and the statute of limitations. 

* What the Court Said:  Because the engineering report did not conclusively establish that the defects were patent, the suit could continue

* What the Opinion Means:  The listing of defects in an engineering report only means that they are obvious to trained professional engineers.  The inquiry is whether the defective nature of an object is obvious in the exercise of reasonable, not expert, care.  Additionally, the report also recommended further testing for some potential defects, showing the latency of defects.

10.  Duty to Third Parties, Luby v. Rotterdam Sq., L.P., 47 A.D.3d 1053 (N.Y. App. Div. Jan. 10, 2008).

* What the Court Considered:  As part of mall project, a contractor constructed handicapped accessible ramps.  The ramps were constructed in accordance with the plans and specs and approved by the construction manager and the city.  Some 14 years later, a shopper fell on the handicapped ramp and brought suit against the mall owner as well as the contractor.  The plaintiff could show that the ramp violated the then-existing code when it was constructed.  With respect to the contractor, the key issue was whether it "launched a force or instrument of harm" such that it owed a duty of care to the plaintiff.

* What the Court Said:  The construction of a handicapped ramp did not create a dangerous condition such that the contractor owed a duty to potential shoppers.

* What the Opinion Means: A breach of contract can only be used by third parties, such as the shopper, to show tort liability under certain circumstances, one being where the contract concerns a dangerous condition "launching a force or instrument of harm."  Here, the court could not conclude that such a condition existed.  In fact, the Court also sua sponte dismissed the mall owner’s indemnification claim against the contractor.

Ira Genberg is a Senior Partner at the Troutman Sanders, LLP law firm in Atlanta, Georgia, and also General Counsel for Associated Owners & Developers (AOD), McLean, Virginia.  Troy Kiber is an Associate at Smith, Gambrell, & Russell, LLP.  For more information or if you have any questions, contact us at: hlk@constructionchannel.net.