Cases of the Month

Significant Cases and Decisions Affecting the Construction Industry

By: Joseph H. Bucci, Esquire
Saul Ewing LLP

November 2016

1.  A dispute arose out of the construction of a luxury condominium complex in New Jersey consisting of 53 residential units. After the complex had been constructed and occupied, several condominium owners began to experience problems with roof leaks and water infiltration at the interior window jambs and sills. The Homeowners Association filed suit against the developer and several subcontractors alleging faulty workmanship during construction of the roofs, gutters, brick facades, exterior insulation and finishing systems for the siding, windows and doors. The Association claimed consequential damages, such as damage to steel supports, exterior and interior sheathing and drywall to the condominiums’ common areas and residential units. Although the trial court granted summary judgment to the insurance companies joined to the litigation under CGL policies, the Appellate Division reversed, concluding that consequential damages caused by the subcontractors’ defective work constituted ‘property damage’ and an ‘occurrence’ under the policies. Upon appeal to the Supreme Court of New Jersey, the decision of the Appellate Division was affirmed. Pavarini Construction Co., Inc. v. Ace American Ins. Co., 161 F.Supp.3d 1227 (U.S. District Court S.D. Florida, October 30, 2016).

*  What the Court Considered: The Court closely considered the language of several CGL policies of insurance to determine whether or not consequential damages flowing from subcontractors’ faulty workmanship constituted “property damage” and whether the resulting water damage from rain entering the interior of the property because of faulty workmanship constituted an “occurrence” under the language of the CGL policies.

*  What the Court Said: The insurance provisions that restricted coverage under the “Your Work Exclusion” did not apply if the damaged work or the work out of which the damage arose was performed on the insured’s behalf by a subcontractor. The Court rejected the insurance company arguments that CGL policies were only intended to provide coverage for damage caused by faulty workmanship to ‘other’ property and not to the project itself. The Court also rejected the insurance company’s arguments that a subcontractor’s faulty workmanship does not have the fortuity element required for the faulty workmanship to constitute an “accident”, and is therefore not an “occurrence”.

*  What the Opinion Means: This opinion is a departure from previously established New Jersey law as set forth in the 1979 Weedo v. Stone-E-Brick and the 2006 decision in Fireman’s Insur. Co. of Newark v. National Union Fire Ins. Co. Care is also required in using the appropriate ISO standard form CGL policy as there is a distinction between the 1973 version, as was used in Weedo, and the 1986 version, in which the courts have found that a subcontractor’s faulty workmanship may constitute an occurrence such that coverage will lie under the CGL policy.

2. A dispute arose out of the construction and renovation work at the South African Embassy in Washington, DC between the Contractor, a subcontractor who was at some point terminated, and the surety for the terminated subcontractor. After an arbitration proceeding had been commenced between the subcontractor and the Contractor, the Contractor notified the surety for the subcontractor of the arbitration proceeding, asserted a claim under the subcontractor’s performance bond, and sought to join the surety to the pending arbitration proceeding. Based on language in the bond calling for disputes to be resolved by litigation, the surety refused to consent to the joinder to arbitration and filed a complaint for declaratory and injunctive relief in the U.S. District Court seeking to enjoin the contractor from compelling arbitration with the surety. Western Surety Co. v. U.S. Engineering Co., 2016 WL 5675887 (U.S. Dist. Court, Dist. of Columbia, September 30, 2016).

*  What the Court Considered: The threshold question for the Court was whether or not the surety was bound by the arbitration clause in the subcontractor’s agreement with the Contractor. The Contractor argued that the language of the bond expressly incorporated by reference the underlying construction contract which provided for arbitration. However, the surety argued that another express term of the bond indicated that any proceedings under the bond would be instituted in a court of competent jurisdiction in the location where the work was performed.

*  What the Court Said: Arbitration is a matter of contract and consent. A party cannot be required to submit to arbitration any dispute which the party did not agree so to submit. In determining whether or not parties agree to arbitrate a dispute, courts will look to ordinary state law principles that govern the formation of contracts. Here, the burden of showing that an enforceable arbitration agreement exists lies with the party seeking to compel arbitration. While the court found a liberal federal policy favoring arbitration agreements, the court did state that a heightened standard applies to the determination that the parties agreed to arbitrate such that clear and unmistakable evidence of agreement to arbitrate must be found. Here, the court found that the surety was not bound by the arbitration agreement in the subcontractor’s agreement because there was no clear and unmistakable evidence that the surety agreed to arbitrate claims or disputes. The court also looked at the arbitration clause in the subcontract and found that the language indicated that it applied to “disputes of the contractor against the subcontractor” or disputes “of the subcontractor against the contractor”. As such, the surety was not an intended party to the arbitration provision in the subcontract.

*  What the Opinion Means: A party intending to make a claim against a contractor or subcontractor, where a bond is available, must carefully consider the dispute resolution provisions of both the underlying contract agreement, as well as the bond itself if the claimant intends to join the surety. Where there is limiting language in an arbitration clause contained in a contractual agreement that conflicts with the language set forth on the face of a bond, a claimant may not be able to join a surety to an arbitration proceeding.

3. The False Claims Act makes it unlawful to (1) knowingly present a “false or fraudulent claim for payment or approval” to the U.S. government, or (2) knowingly make, use, or cause to be made or used a “false record or statement material to a false or fraudulent claim.” Under the Act, private individuals—referred to as “relators”—may file qui tam actions on behalf of the United States. To establish civil liability under the Act, a relator must show that (1) the defendant made a statement in order to receive money from the government; (2) the statement was false; (3) the defendant knew the statement was false; and (4) the false statement was material to the government’s decision to pay or approve the false claim. United States ex rel. Eric Uhlig v. Fluor Corp., 2016 WL 5905714 (U.S. Court of Appeals, Seventh Circuit; October 11, 2016).

*  What the Court Considered: An employee of the Contractor filed a qui tam civil action, on behalf of the United States, claiming that his former employer violated the False Claims Act by breaching a contract with the Army to perform electrical engineering work at military bases in Afghanistan and then improperly billing the government for those services. The employee (a “relator” under the FCA) also alleged that he was wrongfully terminated out of retaliation for his whistle blowing.

*  What the Court Said: On the issue presented by the relator, namely that the Contractor engaged electricians who were not properly qualified, certified or licensed, the Court found that the underlying contract between the Contractor and the Army did not require the type of qualifications, certifications or licensing alleged by the relator. The Court also found that the employee’s claims of retaliatory discharge failed because the employee was unable to prove that he was engaged in protected conduct and was fired because of carrying out protected conduct.

*  What the Opinion Means: In order to bring a qui tam civil action against the United States alleging a violation of the False Claims Act, the person bringing the claim must be engaging in protected conduct and must show that the Contractor knowingly made a false statement that was material to the government’s decision to pay or approve what is alleged to be a false claim under the Act. Additionally, an employee will not be able to successfully pursue a claim for unlawful retaliation unless the discharged employee can prove that it was engaged in protected conduct and was fired because of that conduct.

4. Electrical construction workers brought a federal court action against the subcontractor on a federally funded prime contract with the U.S. Department of the Navy to construct a facility at the National Naval Medical Center in Bethesda, Maryland alleging unpaid minimum and overtime wages under the Fair Labor Standards Act (FLSA). The workers argued that the subcontractor routinely required them to work over 40 hours each week and to arrive at the job site 15 minutes early each day to prepare the site but would not allow the employees to sign in on the sign-in sheet until the work shift’s official start time. Although the workers acknowledged some payments from their employer, they argued that they were not compensated for all wages owed for each hour worked and that they did not receive overtime at time and one-half their hourly rate as required under the FLSA. Following a decision at the district court level for the subcontractor/employer, the electrical workers appealed. . Jorge Amaya, et al. v. Power Design, Inc., 833 F.3d 440 (U.S. Court of Appeals, Fourth Circuit; August 15, 2016).

*  What the Court Considered: The court noted that the FLSA was enacted “to eliminate, as rapidly as practicable, substandard labor conditions throughout the nation” and “to raise living standards without substantially curtailing employment or earning power”. To do so, the FLSA set a federal minimum wage and maximum 40 hour work week for all covered employees and required covered employers to pay employees time and one-half for all hours worked in excess of 40 each week. Additionally, the FLSA provided a right of action to employees to sue in state or federal court for unpaid minimum wages and overtime compensation, plus liquidated damages.

*  What the Court Said: The court found that the scope of the FLSA, as intended by Congress, was to extend to employees of private contractors working on public projects, as was the case with the electrical employees who commenced this action. The court also found that the FLSA was not inconsistent with other federal laws, such as the Davis-Bacon Act or the Contract Work Hours and Safety Standards Act (CWHSSA). As such, the appeals court dismissed the position of the Contractor who employed the electrical workers, vacated the decision of the District Court and remanded the case.

*  What the Opinion Means: Essentially, there is no inconsistency or incongruity between the FLSA, the Davis-Bacon Act, or the CWHSSA with respect to how compensation for overtime is to be calculated on a project that is federally funded.

5. This is a civil case brought by an African-American subcontractor engaged by a property restoration company who alleges: (1) racial discrimination in contracting under 42 U.S.C. § 1981; and (2) unjust enrichment under Ohio law. Section 1981 prohibits intentional race discrimination in the making and enforcing of contracts involving both public and private actors. To prevail on such a claim in the absence of direct evidence of discrimination, the plaintiff bears the initial burden of establishing a prima facie case of discrimination. Plaintiff therefore must show that: (1) it is a member of a protected class; (2) it was qualified for the job; (3) it suffered an adverse employment decision; and (4) it was treated differently than similarly situated non-protected subcontractors. Once a plaintiff establishes its prima facie case, the burden shifts to the defendant to offer evidence of a legitimate, non-discriminatory reason for the decision. If the defendant articulates such a reason, the burden then shifts back to the plaintiff to show that the reason given was not its true reason, but merely a pretext for discrimination. . TLC Realty, LLC d/b/a TLC General Contracting, LLC v. Belfor USA Group, Inc., 166 F.Supp. 3d 919 (U.S. Dist. Ct., S.D. Ohio, Western Division) (January 8, 2016).

*  What the Court Considered: This proceeding was a motion for summary judgment filed by the defendant, Contractor, to dismiss the discrimination and unjust enrichment claims. A motion for summary judgment can only be granted if the evidence demonstrates that there is no genuine issue as to any material fact and that the movant is entitled to summary judgment as a matter of law. In a summary judgment proceeding, all facts must be viewed in the light most favorable to the non-moving party. The party opposing summary judgment must, by affidavits or testimony, set out specific facts showing a genuine issue exists for trial.

*  What the Court Said: In analyzing the four-part test to determine whether or not plaintiff established a prima facie case of discrimination, the court carefully reviewed the evidence and testimony and found that, when viewing it in a light most favorable to the plaintiff, sufficient facts remain to be resolved regarding whether or not all of the prima facie requirements could be overcome by the Contractor. In such situations, the granting of summary judgment is inappropriate.

*  What the Opinion Means: Contractors must be aware of the provisions of 42 U.S.C.A. § 1981 and cannot treat subcontractors differently based on racial factors. While the burden of proof to demonstrate discrimination lies first with the plaintiff, the four-part test a plaintiff must establish to proceed with its claim of discrimination is not overly burdensome and will in most instances preclude disposition of the case by summary judgment before trial.

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, public utilities, architects, engineers, construction managers, design builders, sureties and government agencies related to construction and/or real estate development projects.