Cases of the Month
Significant Cases and Decisions Affecting the Construction Industry
By: Craig F. Martin
Lamson, Dugan & Murray, LLP
1. Texas contractors cannot recover purely economic losses from architect where there is no contract between the parties. LAN/STV v. Martin K. Eby Const. Co., Inc., 11-0810, 2014 WL 2789097 (Tex. June 20, 2014).
* What the Court Considered: In this case, Dallas Area Rapid Transit Authority (DART) contracted Eby Construction Co. (Eby) to build a light rail transit line. When Eby started construction, it found that 80% of the plans contained errors and caused Eby to lose around $14 million on the project. Eby sued both DART and the architect for negligence and negligent misrepresentation. DART settled for $4.7 million and the jury returned a verdict against the architect for $2.25 million finding that the architect was 45% negligent, DART was 40% negligent, and that Eby was 15% negligent. On appeal, the Court of Appeals affirmed the trial court and the architect appealed to the Supreme Court of Texas on the theory that the economic loss rule barred recovery by Eby for purely economic losses where there is no contractual privy. The economic loss rule restricts recovery of purely economic damages unaccompanied by injury to the plaintiff or its property.
* What the Court Said: The Supreme Court of Texas reversed the judgment of the appellate court and found that Eby was barred from recovering against the architect under the economic loss rule. The Court reasoned that contractors are in a better position to negotiate terms to cover the associated risks in their contracts with the owner and in turn, the owner can negotiate with the architect to address those risks. Contractors are also in the best position to evaluate whether they need to acquire insurance for potential economic losses. Because Eby was not in a contractual relationship with the architect and because Eby was not a party to the agreement between DART and the architect, the economic loss rule barred Eby from recovering for negligence claims against the architect.
* What the Opinion Means: In Texas, under the economic loss rule, a contractor cannot recover for purely economic losses against a project owners’ architect.
2. In West Virginia, the term “prime contractor” may not mean what you think it means. Kokosing Constr. Co., Inc. v. Center Pt. Terminal Co., LLC, 2014 U.S. Dist. Lexis 31550 (N.D. W.Va. March 12, 2014).
* What the Court Considered: Kokosing Construction Co., Inc. (Kokosing) filed suit to enforce a mechanics lien against Center Point Terminal J&W, LLC (J&W), the current owner of property in Weirton, West Virginia (the Weirton property). Kokosing alleged that Weirton Port Authority, Inc. (WAPA) failed to pay Kokosing for completed work on the Weirton property. The only contract was between Kokosing and WAPA and Kokosing identified WAPA as a “prime contractor” in the amended complaint. J&W filed a motion to dismiss arguing that (1) Kokosing cannot recover from J&W because there was no contract between the two parties, and (2) that identifying WAPA as a “prime contractor” implies that Kokosing is a subcontractor and is precluded from recovery because Kokosing failed to provide the proper notice under West Virginia state law. Kokosing argued that it is not a subcontractor and only needed to record the lien.
* What the Court Said: The Court found that the terms “prime contractor” and “general contractor” are used interchangeably in West Virginia case law. Thus, Kokosing identifying WAPA as a “prime contractor” in the amended complaint does not lead to the implication that Kokosing is a “subcontractor”. Further, because the purchase order identifies Kokosing as a contractor and three other entities as subcontractors, the Court found that Kokosing had pled sufficient facts to support the contention that Kokosing is a contractor and not a subcontractor.
* What the Opinion Means: In West Virginia, proper notice must be provided to foreclose on a construction lien and your status as a subcontractor or contractor changes the notice requirements. But, identifying a party as a “prime contractor” in West Virginia does not imply that all other parties are subcontractors because the terms “prime contractor” and “general contractor” are used interchangeably with unclear definitive meanings.
3. In Louisiana, public entities do not catch a financial break when their contractor performs defective work under a public works contract. Quality Design and Constr., Inc. v. City of Gonzales, 2014 La. App. Lexis 621 (1st Cir. March 11, 2014).
* What the Court Considered: Quality Design and Construction, Inc. (QDC) was hired by the City of Gonzales, Louisiana (the City) to construct a “sprayground” at Jambalaya Park. After the project was substantially completed, the City refused to pay QDC because of defective claims and outstanding warranty issues. The trial court found for QDC for the full amount of the remaining balance less liquidated damages. The City continued to refuse to pay and QDC filed this action to compel payment. The City argued that because they hired and paid subsequent contractors to repair the defects, the total amount owed to QDC should be reduced by this amount.
* What the Court Said: The Louisiana Court of Appeals affirmed judgment for QDC for the full amount of the remaining balance from the public works contract less the liquidated damages. The Court found that even though the City had to pay subsequent contractors to repair the defects, the City could not withhold the remaining balance owed to QDC because the City could recover the funds paid to subsequent contractors in a separate action.
* What the Opinion Means: In Louisiana, a contractor under a public works contract may be entitled to final payment when the job is substantially completed, even if the public entity has to pay subsequent contractors for defective work on the project.
4. Oral contracts may be found binding over written contract because of parties conduct. Frank Novak & Sons, Inc. v. A-Team, L.L.C. 2014 –Ohio- 922.
* What the Court Considered: This case involved a general contractor, doing business as ServiceMaster, who was hired to perform a multi-million-dollar restoration project at the Cleveland Browns Stadium. The general contractor hired a subcontractor to perform painting, flooring, and wall covering work. While the subcontractor was performing the original work, the stadium was damaged. ServiceMaster asked the subcontractor to perform the cleanup on a time-and-materials basis. The subcontractor agreed. Weeks later, ServiceMaster sent the subcontractor a contract, which the subcontractor refused to sign. The parties disputed what type of contract they formed, an oral or written contract. If the parties formed a written contract, then the subcontractor would have been subject to an administrative fee of 20 percent and a pay-when-paid provision. The subcontractor sued the general contractor for failure to timely pay in full for the work.
* What the Court Said: The Court found that the parties formed an oral contract for the cleanup work with a time-and-materials agreement. It also found that the oral contract was binding because of the conduct between the parties, the written contract for the cleanup work was never signed, and the written contract was delivered to the subcontractor after they began performance.
* What the Opinion Means: In Ohio, the parties’ verbal agreement may control if the parties fail to execute a written contract. The conduct of the parties during performance may be evidence of an oral agreement that may be binding over a written contract.
5. Nevada Prompt Payment Act is preempted by federal law. The Erection Co. v. Archer Western Contractors, LLC, 2014 U.S. Dist. Lexis 36180 (D. Nev. March 17, 2914).
* What the Court Considered: A steel fabrication subcontractor, Postel Industries, Inc. (Postel), contracted to perform work on a Federal Aviation Administration project for the McCarren International Airport in Las Vegas. Postel hired another subcontractor, The Erection Company (TEC), to perform steel installation. Postel never paid TEC for its work, and TEC believing it was protected by the Nevada Prompt Payment Act, abandoned the project after three months. Shortly before TEC left the project, the general contractor paid TEC $54,645 as a progress payment, but still owed TEC $230,000. TEC sued the general contractor, and the general contractor counterclaimed for breach of contract.
* What the Court Said: The trial court found that TEC’s compliance with the Nevada Prompt Payment Act was irrelevant because it was preempted by federal law. Under the FAA’s Acquisition Management System, payment does not become due until the payor has obtained the funds. In addition, the Acquisition Management System does not grant the unpaid subcontractor the right to stop work.
* What the Opinion Means: If a subcontractor is performing work on an FAA project, the Acquisition Management System may preempt state Prompt Pay Acts and limits a subcontractor’s remedies.
Craig Martin is a partner in the firm of Lamson, Dugan & Murray, LLP, in Omaha, Nebraska and is the primary author of the Construction Contractor Advisor blog at www.constructioncontractoradvisor.com. For more information, or if you have any questions, please contact us at firstname.lastname@example.org.