Cases of the Month
Significant Cases and Decisions Affecting the Construction Industry
By: Ingram Yuzek Gainen Carroll & Bertolotti, LLP
(Larry F. Gainen, Maurizio Anglani, Joseph M. Conley, Sean Scuderi, and Kimberly L. Quintano)
1. A Washington, D.C. corporation brought a lawsuit against its former corporate contractor and its sole owner for breach of contract and fraud arising out of the defendants’ conduct during the renovation of the plaintiff’s headquarters in Washington, D.C. The plaintiff sued the contractor for substandard work, mismanagement of project funds, abandonment of the project, and fraud. The interesting part of the decision concerns plaintiff’s allegations that the individual defendant, the construction company’s president, made repeatedly false representations regarding the status of completion, and knowingly charged the plaintiff for change orders and mismanaged the project, including requesting additional funds in advance of the payment schedule, and beyond the agreed-upon price. In this case, the plaintiff’s attempt to hold the corporate president of the contractor personally liable for fraud in connection with the company’s performance of its work on the project was unavailing and the causes of action for fraud were dismissed. Motir Servs. v. Ekwuno, No. 15-1180 (BAH), 2016 U.S. Dist. LEXIS 75810 (D.D.C. June 10, 2016).
* What the Court Considered: In this case, the plaintiff alleged that the principal of the contractor repeatedly made false representations regarding the status of completion of the project and also fraudulently charged the plaintiff for change orders that were uncompleted and which were not performed as directed in the change order. The plaintiff charged that the individual defendant had knowledge of the falsities. The defendant argued, however, and this is critical that the fraud claim against the individual defendant should be dismissed because the plaintiff’s allegations were not independent from the contractual obligations of the construction company and from the breach of contract claim against the construction company.
* What the Court Said: The United States District Court for the District of Columbia held that although conduct occurring during the course of a contract dispute may be the subject of a fraudulent or negligent misrepresentation claim, the facts supporting the fraud claim must be separable from the terms of the contract. The law required that the factual basis for a fraud claim be separate from any breach of contract claim that may be asserted against the corporate defendant. In other words, the tort had to stand as a tort even if the contractual relationship did not exist.
* What the Opinion Means:
This decision is significant in that it emphasizes the point that where, as in this case, the principal shareholder of a corporate contractor is sued for what are the same claims that are made against the corporate contractor, and thus there is no independent basis for its fraud claim, separate and apart from the contract, a fraud case will not lie against the individual defendant. This decision is instructive because owners frequently try to exert leverage against a contracting company whose performance has been deficient by asserting separate claims against the individual owner of the contracting company. In such instance, a separate claim for fraud will not lie.
Larry F. Gainen is a founding partner of Ingram Yuzek Gainen Carroll & Bertolotti, LLP and a member of the Construction & Design Group. Larry represents architects, engineers, contractors, construction managers, and owners. Larry has tried numerous cases in state and federal court involving design and construction disputes; he has arbitrated and mediated many others. Larry also focuses on negotiating and drafting construction and design agreements. He is extensively involved in counseling the participants in the construction process in project management and the ongoing operation of their businesses.
2. Under 8th Circuit Court of Appeals decision, a contractor’s claim that a State violated procedural due process rights in bidding process is unlikely to succeed. Demien Const. v. O'Fallon Fire Protection, 812 F. 3d 654 (8th Cir. 2016).
* What the Court Considered: Plaintiff, Demien Construction Co. (“Demien”) filed suit in the Eastern District of Missouri against the O'Fallon Fire Protection District (“District”), a political subdivision of the State of Missouri. In the lawsuit, Demien claimed that a representative from the District asked Demien to submit a bid for the award of a general construction contract in connection with the construction of a new firehouse. According to the instructions to bid, the contract was to be awarded to the lowest responsible bidder but the District reserved the right to reject any and all bids in its discretion. The District ultimately awarded the contract to another general contractor. Demien contended that it submitted the lowest responsible bid for the contract and that it should have been awarded the contract. Demien sued the District in federal court alleging that the District violated Demien’s Fourteenth Amendment due process rights under the U.S. Constitution.
* What the Court Said: Under Missouri law and the due process clause of the Fourteenth Amendment, a bidder on a construction project has no property right in the award of the contract, especially where the public body reserves the right to reject any and all bids. As such, the unsuccessful bidder cannot show that it was deprived of a protected property interest without due process of law, as required by the Constitution.
* What the Opinion Means:
The decision limits an unsuccessful bidder’s opportunities to seek redress against public bodies in federal courts. Additionally, though state rules concerning public bidding procedures vary according to the jurisdiction, contractors are usually very limited by state law as well. Contractors wishing to challenge bidding decisions should pay close attention to the appeal procedures contained in the information for bidders and bidding documents, as these may be the most significant steps in order to assert their rights.
Maurizio Anglani is an associate in the Construction & Design Group at Ingram Yuzek Gainen Carroll & Bertolotti, LLP. Maurizio represents owners, architects, engineers, construction managers and contractors in a variety of commercial matters, including litigation and contract drafting. His primary focus is on prosecuting and defending commercial cases involving construction issues such as defective construction, delays, breach of contract, negligent design, payment disputes, mechanic’s liens, and suretyship.
3. In Louisiana, the Eastern District dismissed the claims of a contractor for failure to prosecute. 84 Lumber Co. v. Paschen, No. CV 12-1748, 2016 WL 2594798 (E.D. La. May 5, 2016)
* What the Court Considered: In a case involving two school construction projects in New Orleans and a number of contractors and surety companies, the district court stayed proceedings in the lawsuit and compelled arbitration pursuant to a master service agreement. The claimant, a construction management company, failed to initiate arbitration after nearly three years and multiple extensions from the court. When the claimant finally submitted an arbitration demand to the AAA, the AAA denied the application and notified claimant that its demand was deficient. When the claimant failed to cure the deficiency, the other parties moved to re-open the case and dismiss claimant’s claims for failure to prosecute. In opposition, claimant argued that it cannot be compelled to arbitrate because it could not afford the costs of arbitration. In considering whether to dismiss the action for failure to prosecute, the court considered the presence of at least one of three aggravating factors: (1) delay caused by plaintiff himself and not his attorney; (2) actual prejudice to the defendant; or (3) delay caused by intentional conduct.
* What the Court Said: The U.S. District Court, Eastern District of Louisiana, granted the motion to re-open the case and dismissed claimant’s claims with prejudice. After considering the history of the case, the court found a “clear record of delay and contumacious conduct intentionally caused” by the claimant and that “lesser sanctions would not prompt diligent prosecution.” In reaching its decision, the court further noted that “[a]s time passes, memories fade, evidence becomes harder to locate, and the litigation process becomes more difficult for the parties involved.”
* What the Opinion Means:
This decision serves a strong reminder that, while courts will generally grant leeway to the parties to allow them to resolve disputes outside of the courthouse doors, the court will not tolerate repeated dilatory conduct, especially if that conduct prejudices other parties. Additionally, developers, contractors, and subcontractors should consider the costs of arbitration when negotiating construction agreements.
Joseph M. Conley is an associate in the Construction & Design Practice Group of Ingram Yuzek Gainen Carroll & Bertolotti, LLP. Joe represents property owners and contractors in construction-related litigation with a particular focus on cases involving violations of the New York State Labor Law.
4. In New York, Second Department, failure to strictly comply with a condition precedent-type notice provision in a construction contract will constitute waiver of a claim. . Schindler El. Corp. v. Tully Constr. Co., Inc. 139 A.D.3d 930 (2d Dep’t 2016) (decided May 18, 2016).
* What the Court Considered:
Defendant, Tully Construction, Co., Inc. (“Defendant”), entered into a contract with the City of New York Department of Sanitation (the “City”) to construct a garage. In furtherance of this project, Defendant entered into a subcontract with plaintiff, Schindler Elevator Corporation (“Plaintiff”), to furnish and install elevators. Plaintiff commenced this action to recover damages incurred as the result of defendant’s delays at the project.
Defendant argued that Plaintiff waived its delay claims by failing to strictly adhere to the contract’s notice provisions. Article 11 of the primary contract between Defendant and the City, which was incorporated into the subcontract, contains a condition-precedent type notice provision. Pursuant to Article 11.1.2, if Plaintiff sustained delay damages, it was required to submit, within 45 days from the time the damages are first incurred, verified statements of the details and amount of such damages with documentary evidence. Article 11.2 states that failure to strictly comply with 11.1.2 “shall be deemed a conclusive waiver by the Contractor of any and all claims for damages for delay arising from such condition.” Although Plaintiff provided notice of its delay damages, this notice did not contain verified statements of the amount of delay damages sustained and did not contain documentary evidence. Following a non-jury trial, the Supreme Court found that the Plaintiff substantially complied with the notice requirements and was entitled to delay damages. Defendant appealed this decision.
* What the Court Said: The Second Department reversed the Supreme Court’s decision and determined that Plaintiff failed to strictly adhere to the contractual notice requirements and, as a result, its delay claims were waived. The Second Department held that when a construction contract contains a condition-precedent type notice provision, strict compliance is required. Substantial performance is not sufficient, and failure to strictly comply with the notice requirements constitutes a waiver. The Second Department also rejected Plaintiff’s arguments that (1) Defendant’s actual knowledge of the delays relieved Plaintiff’s obligation to strictly adhere to the notice requirements; and (2) Defendant’s breaches of the subcontract excused Plaintiff from complying with the notice requirements.
* What the Opinion Means:
The Second Department confirmed that there is no alternative to strict compliance with condition-precedent type notice provisions in construction contracts. Failure to carefully adhere to these contractual requirements could result in a waiver of a party’s claims. A party cannot overcome these strict requirements by arguing strict compliance, actual notice, or that the other party breached the governing contract. Contractors and subcontractors must be fully aware of the contractual provisions relating to dispute resolution, particularly if those provisions contain a condition-precedent type notice provision. Failing to do so could jeopardize a party’s entitled to damages by risking a waiver of claims.
Sean Scuderi is an associate in the Construction & Design Group at Ingram Yuzek Gainen Carroll & Bertolotti, LLP. Primary focused in litigation, he represents institutional and individual owners, developers, architects, engineers, general contractors and construction managers in various commercial, real estate and construction disputes, involving construction and design defects, delay claims, professional liability, breaches of contract, negligence, fraud, property damage, breaches of fiduciary duties, employment and labor law, mechanic’s liens and adjacent construction issues.
5. When a construction administration contract requires that all disputes arising prior to final payment be resolved by arbitration after being referred to the architect for an initial decision, claims concerning post-construction defects are not subject to arbitration. . Blackman & Co. v. GE Bus. Fin. Servs., 2016 U.S. App. LEXIS 87904 (D.N.J. July 7, 2016).
* What the Court Considered:
In this case, defendants, GE Business Financial Services, Inc. and Riverwinds Urban Renewal, LLC (“GEBFS”), the owner and general contractor of a construction project, filed an arbitration demand against plaintiff, Blackman & Co., Inc. (“Blackman”), the construction administrator, alleging claims for post-construction defects. In response, Blackman filed an action seeking a declaration that the dispute with GEBFS was not subject to arbitration.
The contract at issue provided in relevant part that: “Any Claim arising out of or related to the Contract, . . . shall, after decision by the Architect or 30 days after submission of the Claim to the Architect, be subject to arbitration.” The contract also provided that an initial decision by the architect is “required as a condition precedent to mediation, arbitration or litigation of all Claims between the Contractor and Owner arising prior to the date final payment is due, unless 30 days have passed after the Claim has been referred to the Architect with no decision having been rendered by the Architect.”
* What the Court Said: The District Court for New Jersey held that the arbitration clause in the contract did not apply to disputes about post-construction defects. The Court explained that the arbitration provision could not apply to post-construction disputes such as the one at hand because it would not make sense for the architect to be designated as the first line arbiter in disputes that arose after the project was completed.
* What the Opinion Means:
In New Jersey, even though a contract may state that all claims arising out of or related to the construction contract are subject to mediation or arbitration, if the contract requires such claims to be submitted to an architect or engineer as initial decision maker before proceeding to arbitration, then the arbitration requirement may not apply to claims arising after the project is complete.
Kimberly L. Quintano is an associate in the Construction & Design Group at Ingram Yuzek Gainen Carroll & Bertolotti, LLP. Kimberly represents owners, architects, engineers, construction managers and contractors in a variety of aspects of the construction & design process.