Cases of the Month
Significant Cases and Decisions Affecting the Construction Industry
By: Joseph H. Bucci, Esquire
Saul Ewing LLP
1. On a $240 million Public Works Sewer Project, a subcontractor cannot recover on a breach of contract action against a general contractor for anticipated escalation costs where the subcontractor did not actually incur those damages. Additionally, where the terms and conditions of the prime contract, which was incorporated by reference into the subcontract, expressly provide a formula and a procedure for the recovery of overhead, where the definition of overhead includes unabsorbed home office overhead, the subcontractor will be prevented from recovering for unabsorbed home office overhead through use of the Eichleay Formula. Miles-McClellan Constr. Co., Inc. v. Kenny-Obayashi, et. al, 2017 WL 3209524 (U.S. District Court, S.D. Ohio, Eastern Division) (March 29, 2017).
* What the Court Considered: In the context of a motion to dismiss, the Court considered exhibits produced by the defendant that contained the underlying prime contract and the subcontract agreements, which plaintiff alleged had been breached by the defendants.
* What the Court Said: On a motion to dismiss, even though the Court is required to construe the complaint in the light most favorable to the plaintiff, to avoid dismissal, the plaintiff must prove more than mere labels and conclusions or the mere recitation of the elements of a cause of action. Under Ohio law, a plaintiff alleging breach of contract must show: (1) the existence of the contract; (2) performance by the plaintiff; (3) breach by the defendant; and (4) damage to the plaintiff as a result of the breach. If plaintiff cannot show all four elements, its breach of contract claim fails.
* What the Opinion Means: Where your agreement is based on a written contract document, and where the underlying contract document incorporates a prime contract, the subcontractor will likewise be bound by the terms of the prime contract. Where those terms are express as to the types and character of damages recoverable, you will be limited in your recovery based on the terms of the contracts that bind you.
2. In a case brought by a DBE subcontractor on a construction project administered by the Louisiana Department of Transportation (“DOTD”) wherein the subcontractor alleged that a DOTD inspector attempted to solicit bribes from the subcontractor, following a series of actions which the subcontractor alleged constituted retaliation, discrimination and damage to his business, following a jury trial, the subcontractor was awarded a verdict of $20 million for destruction of business and loss of future profits. Jeff Mercer, LLC v. State of Louisiana, through the Department of Transportation and Development, et. al, 222 So.3d 1017 (Court of Appeals of Louisiana, Second Circuit; rehearing denied August 4, 2017).
* What the Court Considered: On an appeal of the $20 million award to the subcontractor, the Court of Appeals closely reviewed the two assignments of error advanced by the appellants, the DOTD, regarding the instructions to the jury and the verdict form presented to the jury.
* What the Court Said: An appellate court must exercise great restraint before it reverses a jury verdict because of allegations of an erroneous jury instruction. Trial courts do have broad discretion in formulating jury instructions and a trial court judgment should not be reversed as long as the charge correctly states the substance of the law. However, when a jury is erroneously instructed by the trial judge, and the error probably contributed to the verdict, an appellate court must set aside the verdict. Ultimately, the determinative question is whether the jury instructions misled the jury to the extent that it was prevented from dispensing justice. Upon a thorough and complete review of the record below, the appellate court found overwhelming evidence that most, if not all, of the allegedly wrongful and malicious actions taken by DOTD and its employees were not done with the intention of putting the contractor out of business, but instead were done in furtherance of legitimate and protectable business interests, mainly, the Department’s statutorily mandated duties and obligations of overseeing and managing the construction of safe roads and highways. For these reasons, the judgment of the trial court was reversed.
* What the Opinion Means: Adequate jury instructions are critical to the case and to the rights of the parties on appeal. Adequate jury instructions fairly and reasonably point out the issues and must provide correct principles of law for the jury to apply those issues. Appellate courts have the ability to exercise restraint but may reverse a jury verdict where there is erroneous jury instructions.
3. A genuine issue of material fact arose as to whether the City of Atlanta exercised good faith in the performance of its obligation under a construction contract for a new fire station, including the City’s obligation to consider any claims for additional payment that would cause the total of payments to the contractor to exceed a “not to exceed” cost for the project, for which a city ordinance required approval of the city council and mayor, thereby precluding an award of summary judgment for the city. City of Atlanta v. Hogan Constr. Group, LLC, 341 Ga.App. 620 (Court of Appeals of Georgia; June 7, 2017).
* What the Court Considered: The Court of Appeals reviewed the record at the trial court below, as well as the underlying contract agreement between the parties, all applicable municipal laws and the city charter.
* What the Court Said: Granting summary judgment is only proper where the pleadings, depositions, answers to interrogatories and admissions, together with affidavits, show that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. An appellate court reviews a grant or denial on a motion for summary judgment de novo and must view the evidence, and all reasonable inferences therefrom, in the light most favorable to the nonmoving party. In Georgia, every contract imposes upon each party a duty of good faith and fair dealing in the performance of their respective duties and obligations. Here, the City had an express duty to consider any claims properly submitted by the contractor in a timely manner and to issue a written determination. Whether the city exercised good faith in the performance of the agreement with the contractor in the consideration of the contractor’s claims is a factual question for the jury to resolve. Finally, the appeals court stated that the Georgia Prompt Pay Act does not prevent parties to a contract from agreeing to payment terms different from those stipulated in the Payment Act.
* What the Opinion Means: An appeals court exercises total discretion over issues of law related to motions for summary judgment. However, factual issues that remain contested are for the jury to determine. Although you may conduct business in a state that has a Prompt Payment Act, you need to determine whether or not those statutes can be modified by contract such that the protections afforded may no longer be available to you.
4. A mechanic’s lien arose out of a $5.4 million subcontract on a high end hotel in Lake Tahoe, Nevada. Included among the damages in the subcontractor’s mechanic’s lien were dollars, not only for the unpaid contract balance agreed to by the parties to date through change orders, but also “disputed costs” for claims arising from acceleration that were not included in previously negotiated change orders. SMC Constr. Co. v. Rex Moore Group, Inc., 2017 W.L. 4227940 (U.S. District Court, D.Nevada; September 21, 2017).
* What the Court Considered: Mechanic’s liens are governed by state statutes. Here the Court closely construed the applicable mechanic’s liens statutes, as well as the underlying contract between the electrical subcontractor and the prime contractor.
* What the Court Said: Where a lien claimant’s interest is governed by a contract, then the lien claimant’s interest is limited to the unpaid balance of the price agreed upon for such work, material or equipment. Where a court finds that a lien is frivolous or excessive, the court has the power to either expunge or release the lien, or to reduce the amount of the lien as deemed proper by the court. Where the court either releases or reduces the lien, the court shall award reasonable attorney’s fees and costs to the party bringing the motion. Here, because the subcontractor’s lien clearly included dollars above and beyond the agreed upon unpaid contract balance, the lien was found to be excessive and was therefore reduced and limited to the unpaid contract price. Per Nevada statute, the prime contractor is entitled to seek attorney’s fees from the subcontractor.
* What the Opinion Means: In pursuing your rights under a mechanic’s lien, pay close attention to the applicable statutes and comply with them in every respect. Failing to do so will have a significant impact on your lien and may expose you to attorney’s fees from the challenging party.
5. On a claim by an insurance company to recover over $3.7 million in damages for a fire at a U.S. Department of Army building in Fort Belvoir, Virginia, where the fire was caused by the negligence of a subcontractor, the insurer who paid for the repairs may recover by default judgment from the subcontractor where the subcontractor failed to retain counsel or to defend in the federal court litigation. Pennsylvania National Mutual Casualty Insurance Company v. Y&J Construction, Inc., 2017 WL 4251254 (U.S. District Court, E.D.Virginia; September 1, 2017).
* What the Court Considered: The Court considered various motions by the insurer in the case as the subcontractor’s insurance company pursued a separate, declaratory judgment action providing that the subcontractor was not entitled to insurance or indemnification from its own insurance company. Following this separate decision, the subcontractor’s attorney, who was appointed by the subcontractor’s insurance company, withdrew its appearance and new counsel failed to appear for the subcontractor. Following notice and an opportunity to retain new counsel, the subcontractor failed to do so and ultimately, through various motions and opportunities to be heard, a default judgment was entered against the subcontractor in favor of the plaintiff.
* What the Court Said: A corporate defendant in a federal court proceeding must be represented by counsel. Rule 55 of the Federal Rules of Civil Procedure provides for the entry of a default judgment when a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend. A defendant who is in default admits the factual allegations in the complaint and a court may conduct a hearing to determine the amount of damages or to investigate any other matter.
* What the Opinion Means:
If you are a corporate defendant in a federal proceeding, you must be represented by counsel and you must appear in accordance with orders issued by the court exercising jurisdiction. Failure to do so can result in a default judgment where the plaintiff will be permitted to present and prove up its damages with your having admitted the factual allegations underlying the plaintiff’s complaint. Here, the insurance company was awarded $3.7 million, plus pre-judgment interest and post-judgment interest.
Joseph H. Bucci is a Partner in the Construction Litigation Group at Saul Ewing Arnstein & Lehr 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.