Cases of the Month

Significant Cases and Decisions Affecting the Construction Industry

By: Joseph H. Bucci, Esquire
Saul Ewing LLP

July 2017

1.  On a Motion for Summary Judgment brought before the U.S. District Court for the Eastern District of Tennessee, a surety company filed suit against the indemnitors to recover losses sustained by the surety on performance and payment bonds for which the surety contends the contractor/principal defaulted. Here, the surety has the initial burden of demonstrating that no genuine issue of material fact exists and that it is entitled to judgment as a matter of law. Westfield Insur. Co. v. Rainey Contracting, LLC et. al, 2017 WL 2484273 (June 8, 2017).

*  What the Court Considered: The District Court considered the written Indemnity Agreement between the surety and the principals for whom the payment and performance bonds were issued. Under the clear terms of the Indemnity Agreement, the indemnitors were required to exonerate and indemnify the surety from and against all liability for losses and/or expenses of whatever kind the surety may sustain by reason of the failure of the indemnitors to perform or comply with the Indemnity Agreement.

*  What the Court Said: Under Tennessee law, Indemnity Agreements are to be specifically enforced. Here, the defendants did not contest that they executed the Indemnity Agreement nor do they contest the validity of the Indemnity Agreement. The only issue raised by Defendants that may constitute a disputed material fact is that the defendants object to the payment of one of the individual damages paid by the surety. The court here dismissed the defendants arguments because under the express terms of the Indemnity Agreement the surety was entitled to be reimbursed for all payments made, even if the payments where “under the belief” that such payments were due the claimant. Other defenses asserted by the defendants were evaluated but dismissed by the court.

*  What the Opinion Means: For a contractor or subcontractor who enters into an express Indemnity Agreement with a surety to obtain bonding for your projects, the terms and conditions of the written Indemnity Agreement will be strictly construed and specifically enforced by most courts who are called upon to review the actions of a surety company upon a contractor/subcontractor default of a bonded project.

2. In a dispute centered around a project undertaken by the U.S. Army Corps of Engineers involving the repair of levees along the Mississippi River in Louisiana, where a subcontractor filed a Miller Act payment bond claim against the prime contractor’s payment bond, the court stayed the subcontractors complaint pending compliance with the dispute resolution procedure set forth in the subcontract agreement. Upon a motion for the court to reconsider its decision to stay the litigation pending dispute resolution, the court denied the subcontractors motion for reconsideration of the stay. United States for Use and Benefit of GLF Construction Corp. v. FEDCON, et. al, 2017 WL 2653126 (June 20, 2017).

*  What the Court Considered: The subcontractor made its motion for reconsideration based on an allegation of manifest error being committed by the court under the argument that the Court’s interpretation of the subcontract between the parties was erroneously undertaken to require a stay of the entire litigation rather than only for specific claims asserted by the subcontractor.

*  What the Court Said: District Courts have considerable discretion to grant or deny a motion for reconsideration, which is itself an extraordinary remedy which should be granted sparingly. A moving party seeking reconsideration must satisfy at least one of the following criteria to prevail: (1) the motion is necessary to correct a manifest error of fact or law; (2) the movant presents newly discovered or previously unavailable evidence; (3) the motion is necessary to prevent manifest injustice; and (4) the motion is justified by an intervening change in the controlling law. Here, the court carefully considered the subcontractors motion but denied it for failure to comply with the provisions of Rule 59(e).

*  What the Opinion Means: In order to prevail on a motion for reconsideration of a prior order of court the moving party must show that the courts previous order was manifestly erroneous or that the moving party would suffer manifest injustice. These legal standards are not easily satisfied and courts do have considerable discretion in determining whether or not to grant relief on an extraordinary remedy that is sparingly approved.

3. In a recent decision by the Supreme Court of Alabama wherein an arbitration clause in an AIA contract was being challenged by the owner and the contractor, the court concluded that it is within the authority of the arbitrator to determine whether or not the procedural dispute resolution procedures are to be complied with or are to be discarded under a claim of fraudulent inducement. Rainbow Cinemas, LLC v. Consolidated Construction Company of Alabama, 2017 WL 2610506 (June 16, 2017).

*  What the Court Considered: The court reviewed the AIA documents between the parties, mainly and A101-2007 and the accompanying A201-2007 industry documents wherein a comprehensive dispute resolution procedure is set forth. The court also considered the Construction Industry Arbitration Rules as published by the American Arbitration Association.

*  What the Court Said: The court found that the contractor had met its initial burden of proving the existence of a contract calling for arbitration over a transaction affecting interstate commerce. Having done so, the burden then shifted to the owner to present evidence indicating that the arbitration clause was not valid or did not apply to the dispute in question. To avoid the operation of an arbitration clause, the party challenging the clause must provide substantial evidence of fraud in the inducement, particularly related to the arbitration clause. The court also found that it was appropriate for the arbitrator himself/herself to rule on issues relating to procedural arbitrability of the disputes in question.

*  What the Opinion Means: Challenges to the operation of a valid arbitration clause in a written contract document fall under the jurisdiction of the designated Arbitrator who is charged with the authority to determine whether or not conditions precedent to arbitration have been satisfied. In the absence of fraud being clearly proven, a court will not likely alter a decision by an arbitrator on issue of procedural arbitrability of disputes.

4. In ruling on a motion for summary judgment filed in a personal injury action filed by a construction inspector on a 26 wind tower installation project in Oklahoma, the U.S. District Court for the Western District of Oklahoma found that the injured construction inspector could proceed with a negligence claim against the owner of the project with whom the injured employee’s employer was in privety of contract under a theory of direct liability but not under a theory of agency-based vicarious liability. Thomas W. New v. Blackwell Wind, LLC et. al, 2017 WL 2414903 (June 2, 2017).

*  What the Court Considered: The Court considered a motion for summary judgment filed by the owner of the wind farm in an effort to be dismissed from the personal injury action filed by the employee of the owner’s construction inspection company.

*  What the Court Said: The court dismissed the plaintiff’s claims against the owner on a theory of agency-based vicarious liability finding that the express language in the agreement between the owner and the plaintiff’s employer clearly established that the employer did not retain, maintain or exercise a degree of direct control over how the plaintiff’s employer performed its scope of services on the project. As such, the court concluded that the owner of the wind farm could not be liable to the injured employee under an agency-based vicarious liability theory. However, the court was not convinced that the owner of the wind farm could escape liability under a theory of direct negligence. As such, the court left open for further proceedings certain factual issues in the case regarding whether or not the owner had a duty to warn the plaintiff; whether or not warning labels were installed and conspicuously visible; or whether or not the owner of the wind farm approved modifications that created an unsafe condition.

*  What the Opinion Means: Being dismissed totally from a personal injury action arising out of a construction project with multiple parties being involved at the summary judgment stage can be difficult to achieve. Carefully worded contractual agreements are helpful in this regard but factual issues can be presented as to post-contract activities or events that prevent a court from fully dismissing a party at the summary judgment stage.

5. The U.S. Court of Appeals, Federal Circuit, found that a government contractor’s appeal of a decision of the Armed Services Board of Contract Appeals denying the contractors damages claim arising out of a project to build housing units on U.S. Air Force bases was not plainly erroneous or inconsistent with the Air Force’s regulations and did not constitute constructive acceleration where certain intended employees of the contractor who were on a pre-release program were denied access due to their violent criminal histories. Garco Construction, Inc. v. Secretary of the Army, 856 F3d 938 (May 9, 2017).

*  What the Court Considered: Here, the contractor intended to provide employees from a local prison’s pre-release program and believed that these intended employees should not have been denied access to the site of the work where there were no outstanding warrants. However, the Air Force did have a regulation and a policy of denying access to persons with violent criminal histories on a complex where intercontinental ballistic missiles carrying nuclear payloads were present.

*  What the Court Said: The court considered certain FAR provisions which allowed contractors to employ ex-felons. The court also considered the Air Force’s base access policy which required screening of intended employees through the National Criminal Information Center database, which provided that unfavorable results from the background check would result in individuals being denied access where those individuals have outstanding warrants, are sex offenders, violent offenders, are on probation or are in a pre-release program. After having many of its intended employees denied access, the contractor submitted a request for equitable adjustment in the amount of nearly one-half million dollars, the cost associated with interviewing and hiring and training new workers. Here, the Court of Appeals concluded that the Air Force’s interpretation of its regulation governing access was not erroneous or inconsistent such that the contractor’s claim should be honored. The court also concluded that to the extent there was a change in the enforcement of the existing base access policy, it did not give rise to a constructive acceleration claim for the contractor.

*  What the Opinion Means: For government contracts, the Agency’s interpretation of its own regulations will be given controlling weight unless that interpretation is plainly erroneous or inconsistent with the underlying regulation. Additionally, to the extent that the Agency is perceived to be enforcing its regulations in a stricter sense than it may have in the past, any change in enforcement of existing base access policies will not give rise to a contractor’s claim for an equitable adjustment based on constructive acceleration of the contract. In such situations, although an equitable adjustment may not be available to the contractor, the contractor should also request an extension of time for performance.

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, wind farm developers, public utilities, architects, engineers, energy and pipe liners, construction managers, design builders, sureties and government agencies related to construction and/or real estate development projects.