Cases of the Month

Significant Cases and Decisions Affecting the Construction Industry

By: Joseph H. Bucci, Esquire
Saul Ewing LLP

July 2016

1.  In New York, where a subcontractor has entered into an agreement with a general contractor containing a condition precedent-type notice provision, the subcontractor’s claim will be denied as having been waived by the subcontractor where the subcontractor fails to strictly comply with the notice requirement. Schindler Elevator Corporation v. Tully Construction Co., Inc., 2016 WL 2889691 (May 18, 2016).

*  What the Court Considered: The appellate court considered a decision from the trial court sitting without a jury that found in favor of allowing the subcontractor’s claim to be evaluated where the subcontractor failed to strictly comply with a condition precedent type notice requirement.

*  What the Court Said: In overruling the trial court, the appellate court said that when a subcontractor brings a breach of contract action against a general contractor seeking damages allegedly incurred as a result of delays in the performance of the work, in order for the subcontractor’s claim to be valid, the subcontractor must comply with a contractual condition precedent notice provision.

*  What the Opinion Means: The appellate court noted that where a bench trial is held below, on appeal the appellate court has broad power to render the judgment it finds warranted by a review of the facts and law anew. The appellate court also made clear that express conditions precedent in a construction contract must be literally performed, and that substantial performance will not suffice. Failure by a claimant to strictly comply with condition precedent notice requirements will constitute a waiver of the claim.

2. The Court of Appeals of Mississippi has concluded that arbitration agreements are tantamount to a settlement between the parties where the arbitration agreement would be the exclusive source of rights and liabilities of the parties arising under a construction contract. As such, judicial review of an arbitration award is narrowly limited such that a motion to vacate, modify or correct an arbitration award is not an opportunity to re-litigate issues decided in the arbitration. . The City of Hattiesburg, Mississippi v. Precision Construction, LLC, 2016 WL 2860742 (May 17, 2016).

*  What the Court Considered: In this case, the contractor and the City took their disputes to an arbitration proceeding that lasted two days, resulting in an award in favor of the contractor. The City made an untimely appeal of the arbitrator’s award and challenged certain findings and damage calculations included in the arbitrator’s award.

*  What the Court Said: The court made clear that where by statute there is a 20-day time limit to request reconsideration of an arbitration award, an untimely request for reconsideration will be denied. Additionally, where an arbitrator’s award is challenged and there is no transcript of the actual arbitration proceeding, the court will not interpose its judgment for that of the arbitrator.

*  What the Opinion Means: Under Mississippi law, in the absence of a transcript of an arbitration proceeding, a court asked to review an arbitrator’s award will defer to the judgments made by the arbitrator who heard the evidence and ruled on the credibility of the witnesses. Judicial review of an arbitrator’s award is limited and will be narrowly exercised with all applicable statutes governing the appeal of an arbitrator’s award being strictly construed.

3. Under a government contract, the contractor’s duty to continue performance under the standard “Disputes” clause is not absolute where the government fails to provide reasonable clarification of the contract’s scope of work upon request from the contractor. . Vanguard Construction, Inc. v. United States, 123 Fed.Cl. 130 (United States Court of Federal Claims; September 8, 2015).

*  What the Court Considered: The Court of Federal Claims was asked to consider a challenge to a decision by the U.S. Air Force to a termination for default of the construction contractor on a project for the replacement of a roof at Edwards Air Force Base in California. The contractor argued that the termination for default was improper because completion of the roof was not possible after having discovered a latent defect in the existing stem wall or parapet around the perimeter of the roof. The contractor also argued that the Government failed to cooperate with the contractor’s requests for information needed to devise a solution to the problem. The relief sought by the contractor was conversion of the default termination into a termination for convenience.

*  What the Court Said: The Court of Federal Claims found that the Government never fully responded to the contractor’s RFI regarding what the contractor described as a latent condition that prevented the contractor from performing its scope of work. The record also reflects that the contractor completed approximately 85 to 90 percent of the installation of the new roof before demobilizing from the project when no further work could be performed. Four months after the contractor demobilized, the Government issued a notice of default and terminated the contractor’s task order. The question for this court was whether or not the contractor’s failure to complete the roofing work was excused by the Air Force’s failure to provide reasonable clarification of the scope of work and whether the termination for default should be converted to a termination for convenience. Here, addressing a motion for summary judgment, the Court of Federal Claims concluded that factual information necessary for its determination was lacking. The court also noted that the “Disputes” clause, FAR 52-233-1(i), while seeming to impose an absolute duty on a contractor to continue performance while a dispute is pending, is not always absolute given the particular facts of the controversy.

*  What the Opinion Means: Where critical factual issues remain unresolved, a court will not be able to grant either party summary judgment. Additionally, where the Disputes clause is triggered in a government contract, while a contractor does have a duty to proceed notwithstanding the dispute, that duty is not absolute where the particular facts and circumstances at hand prevent or make proceeding impossible. Here, the contractor’s contention was engineering information was required before it could proceed.

4. Under Florida law, a “pay-when-paid” clause is enforceable, but under New York law, such clauses are void as against public policy. . Hugh O’Kane Electric Co., LLC v. Mastec North America, Inc., 19 A.D.3d 126 (Supreme Court, Appellate Division, New York: June 2, 2005).

*  What the Court Considered: The court was asked to review a decision below on a motion for summary judgment filed by the general contractor to defeat a subcontractor’s claim to recover payment for work performed under a subcontract. Here, the subcontract contained a “pay-when-paid” clause and was to be construed under Florida law. Given that the work was performed in New York, the court needed to evaluate whether the choice of law provision in the subcontract governing payment would be upheld, or whether it would be stricken due to the countervailing public policy position taken by New York courts.

*  What the Court Said: The appellate court evaluated the choice of law clause in the subcontract and found that the parties had bargained for application of Florida law, even though the work was being performed in New York. The court further found that enforcement of the pay-when-paid provision would not violate a fundamental principle of justice under New York law and therefore was enforceable under Florida law.

*  What the Opinion Means: When presented with a contract or subcontract that has a choice of law provision, be certain that you are familiar with how the controlling state will rule on exculpatory clauses in your particular contracting agreement.

5. In Pennsylvania, an exculpatory provision in a construction contract cannot be raised as a defense to delay damages asserted by a contractor when a public entity commits active interference. . John Spearly Construction, Inc. v. Penns Valley Area School District, 121 A.3d 593 (Commonwealth Court of Pennsylvania; July 24, 2015).

*  What the Court Considered: This was a case brought against a school district by its general contractor, who sought delay damages, penalties and attorney’s fees, as well as contract payments, that were allegedly wrongfully withheld by the school district. Following a nonjury trial and a verdict in favor of the contractor, the school district appealed, arguing that the trial court wrongly disregarded the “no damages for delay” clause and committed other errors in contract interpretation.

*  What the Court Said: The Commonwealth Court held that a “no damages for delay” clause will not be enforced if the owner either took positive action not reasonably anticipated under the contract, or failed to act as needed for a project to progress, or where the school district’s other prime contractors or the school district’s project manager delayed or interfered with the general contractor’s work. The court also noted that notwithstanding a formal written notice requirement in the contract agreement, where the school district had actual notice and was not otherwise prejudiced, strict compliance with a written notice of claim provision by the contractor under a “no damages for delay” clause is not fatal.

*  What the Opinion Means: This decision reinforces the rights of prime contractors performing under public contracts to recover damages for delay in certain situations where there is active interference by the government entity, its agents or the government entity’s other prime contractors, notwithstanding the existence of an exculpatory “no damages for delay” clause.

Joseph H. Bucci is a Partner in the Construction Litigation Group at Saul Ewing LLP, and resides in the Pittsburgh office. Joseph represents contractors, subcontractors, owners, real estate developers, architects, engineers, construction managers, design builders, sureties and government agencies related to construction and/or real estate development projects.