Cases of the Month

Significant Cases and Decisions Affecting the Construction Industry

By: Ingram Yuzek Gainen Carroll & Bertolotti, LLP
(Robert A. Banner, Jessica L. Rothman, Peter M. Canty, Sean Scuderi, and Kimberly L. Quintano)

August 2016

1.  In considering whether to assess attorneys’ fees against a losing party under the Copyright Act, the United States Supreme Court held that factors other than the objective reasonableness of the losing party’s position should be considered. Kirtsaeng, DBA Bluechristine99 v. John Viley & Sons, Inc, 568 U.S. __. (Decided June 16, 2016)..

*  What the Court Considered: In this case, defendant Kirtsaeng sought attorneys’ fees of more than $2 million under the fee shifting provisions of the Copyright Act. Kirtsaeng had resold foreign made textbooks in the United States and maintained that was permissible under the “first sale” doctrine. At the time he did so, it was entirely unclear whether this was permissible as the Supreme Court had previously split 4-4 on the issue. In 2013, the U.S. Supreme Court reversed the Second Circuit and held defendant Kirtsaeng was permitted to re-sell foreign made books under the first-sale doctrine. The question for the Court was: given the objective reasonableness of plaintiff’s Wiley’s position at the time it brought the Copyright Act infringement case, should the lower court be prevented from awarding attorneys’ fees to the prevailing party, defendant Kirtsaeng?

*  What the Court Said: The U.S. Supreme Court vacated the decision of the Court of Appeals for the Second Circuit on grounds that the Second Circuit language raised a presumption against granting legal fees if the losing party’s legal position was objectively reasonable. The Supreme Court held that whether a party’s position was objectively reasonable should be a substantial factor in fee decisions and be given a lot of weight, but a Court must view all the circumstances of a case (e.g. motivation, litigation misconduct, overaggressive assertion of copyright claims, etc.) in determining whether to award fees. The Court believed that such an inquiry, instead of simply focusing on whether a case was a close call under existing law, would best advance the purpose of the Copyright Act to encourage and reward an author’s creations while also enabling others to build on that work.

*  What the Opinion Means: The opinions means that a party’s overall behavior will be in play in determining whether attorneys’ fees will be awarded under the Copyright Act and that decisions to bring and defend such cases should be evaluated accordingly.

Robert A. Banner is a Partner in the Construction & Design Group at Ingram Yuzek Gainen Carroll & Bertolotti LLP. Bob’s primary focus is in construction law and complex construction litigation. He has tried or arbitrated many complex construction cases and successfully mediated or settled dozens of others. Bob's construction law practice also includes negotiating and drafting construction agreements representing owners, contractors, and design professionals.

2. In Oregon, contracts for the sale of goods can be considered “construction agreements” and subject to certain statutory restrictions where a “specific structure was contemplated.” First Mercury Ins. Co. v. Westchester Surplus Lines Ins. Co., 2016 U.S. Dist. LEXIS 9397 (Dist. Or.) (Decided January 27, 2016).

*  What the Court Considered: In a prior action, general contractor Conway Construction Company obtained a judgment against its subcontractor ZellComp and sub-subcontractor Strongwell for construction defects associated with the replacement of a bridge’s decking system. ZellComp was the owner and designer of the decking system and retained Strongwell to manufacture the deck. Pursuant to this agreement, Strongwell maintained general liability insurance and named ZellComp as an additional insured. This action arose to determine whether ZellComp was covered as an “Additional Insured” under Strongwell’s insurance policies. Critical to this determination is whether the agreement between ZellComp and Strongwell is a construction agreement within Oregon statute. ORS § 30.140, declares void any indemnification agreement in a construction contract that requires a person or that person’s insurer to indemnify another for damage caused in whole or in part by the indemnitee. ZellComp argued that its contract was not a construction agreement within the meaning of the statute but for the sale of goods.

*  What the Court Said: The District Court of Oregon held that the agreement was a construction agreement within the definition of ORS § 30.140 and that the prohibition against indemnifying a party for the damages it caused applies. A “construction agreement” under ORS § 30.140 is defined as “any written agreement for the planning, design, construction, alteration, repair, improvement or maintenance of any building, highway, road excavation or other structure.” (emphasis added). The Court disagreed with ZellComp’s sale of goods argument and found that nothing in the statute suggests that a sale of goods cannot be a construction agreement for the improvement of the structure. The Court held that “the sale of goods can still be for the improvement of a structure where a specific structure is contemplated.” The most obvious example is customization because a customized part indicates that the contractors considered it for the improvement of a particular structure. Here, the Court found that ZellComp’s agreement with Strongwell was certainly a construction agreement because Strongwell was contracted to provide a specific output, with confidential and distinct specifications, for the bridge.

*  What the Opinion Means: The District Court of Oregon, for the first time, established a test to determine if the sale of goods can be considered a construction agreement within the meaning of ORS § 30.140 and, thus, subject to the indemnification restrictions. This test focuses on whether a “specific structure” is contemplated. This decision significantly broadens the definition of a “construction agreement” to reach certain manufacturers and suppliers, potentially exposing them to increased and unexpected exposure in the event defects arise during construction. First Mercury applied the “specific structure” test to an obvious example involving customized parts, and it is still yet to be seen how far Oregon federal courts will expand the reach of the “construction agreement” definition. However, the Court did recognize its limitations but stating it would be difficult to see how a party’s agreement to sell nails to a construction company could constitute a construction agreement.

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.

3. In Texas, general contractor was not considered a “seller” of construction materials and thus, was not entitled to the protection of the Texas Products Liability Act, which allows sellers to be indemnified by product manufacturers in a products liability action. Centerpoint Builders GP, LLC v. Trussway, Ltd., 2016 Tex. Lexis 505 (decided June 17, 2016).

*  What the Court Considered: A general contractor on a construction site sought indemnity from truss manufacturer under Texas Products Liability Act (the “TPLA”), which provides sellers of allegedly defective products a statutory right to indemnity from product manufacturers, after worker was injured on when truss over which he was walking broke. After the injured plaintiff settled with all the defendants, the trial court found that the general contractor was entitled to indemnification from the truss manufacturer on the basis that it qualified as a “seller” under the TPLA since it had provided the trusses as material for the project. The Court of Appeals reversed and the Supreme Court heard the case on the sole issue of whether a contractor who provides materials on a construction project is considered a “seller” under the TPLA.

*  What the Court Said: The Texas Supreme Court upheld the ruling of the Court of Appeals and denied the contractor’s indemnification claim. The Supreme Court defined the term “seller,” for purposes of the TPLA, as a person “engaged in the business of commercially distributing products” and not just a person “who places a product in the stream of commerce.” The Supreme Court determined that the general contractor’s providing of materials for the project could not be disassociated from its contract to provide services and, thus, it was not a “seller” under the TPLA.

*  What the Opinion Means: This decision negatively affects general contractors and other trades who provide materials to job sites. A contrary result would have provided these entities with valuable statutory protection against common claims arising on construction sites. However, now these defendants will have to fend for themselves on products liability claims for which they are not responsible.

Peter M. Canty is an associate in the Construction & Design Group at Ingram Yuzek Gainen Carroll & Bertolotti LLP. Peter primarily represents property owners and contractors in construction-related litigation, with a particular focus on cases involving violations of the New York State Labor Law. He also represents design professionals in a variety of property damage and professional malpractice actions.

4. When a subcontractor makes it clear before negotiations begin that it intends to be bound only after reviewing the prime contract and executing a formal subcontract, it will not be bound until the formal subcontract is executed, and a contractor cannot rely on the subcontractor’s bid if it delays acceptance of the prime contract while negotiating with the subcontractor. . C.G. Schmidt, Inc. v. Permasteelisa North Am., 2016 U.S. App. LEXIS 10920(7th Cir. June 16, 2016).

*  What the Court Considered: Plaintiff-general contractor C.G. Schmidt (“CGS”), filed an action against defendant, Permasteelisa North America (“PNA”), a subcontractor, alleging breach of contract and promissory estoppel, after PNA backed out of a project in Wisconsin after its bid had been selected, requiring CGS to retain a different subcontractor at a higher cost. Prior to backing out, PNA and CGS had engaged in extensive negotiations, but did not enter into a formal subcontract.

At the time PNA’s bid was selected, CGS had not yet entered into a prime contract with the project owner or a Guaranteed Maximum Price Amendment, and throughout the negotiation process, PNA repeatedly indicated that it could not execute a formal subcontract until it reviewed the finalized prime contract. During negotiations, the parties exchanged several documents, including a letter of intent from CGS to PNA and a proposed schedule from PNA, which contemplated that the parties intended to enter into a formal subcontract agreement. Importantly, even after CGS entered into a prime contract and GMP Amendment with the owner, CGS did not accept PNA’s latest bid; instead, CGS countered with its own proposal. After a year of negotiations, PNA disengaged from the project.

*  What the Court Said: The U.S. Circuit Court for the Seventh Circuit held that PNA and CGS never entered into a binding agreement. The Court explained that under Wisconsin law, agreements to agree are not enforceable as contracts and the presence of intent to be bound is a question of fact to be determined objectively by looking at the parties words and actions. Here, the Court found that the parties never manifested an intent to be bound; in fact, the Court pointed out that if the parties had been bound from the time CGS selected PNA’s bid, many of the parties’ actions during negotiations, such as PNA’s request for a letter of intent from CGS, would have been redundant and unnecessary.

The Court also held that CGS’s reliance on PNA’s bid was unreasonable and, so, CGS’s promissory estoppel claim also failed. As a general rule, it is reasonable for a general contractor who uses a subcontractor’s bid in making its own bid to a project owner to rely on the subcontractor’s bid under a theory of promissory estoppel. However, when a general contractor attempts to renegotiate the subcontractor’s bid while delaying its acceptance of the prime contract or after being awarded the prime contract, it is no longer reasonable for the general contractor to rely on the subcontractor’s original bid. Here, the Court found that by delaying acceptance of the prime contract and simultaneously negotiating with PNA and the owner, and by countering PNA’s bid after the prime contract was finalized, CGS forfeited its right to rely on PNA’s bid.

*  What the Opinion Means: In Wisconsin, a contractor cannot hold a subcontractor to its original bid if the contractor attempts to negotiate a better price with the subcontractor after the general contract has been awarded, even if the contractor has not accepted the general contract yet. If the parties demonstrate an intent to enter into a formal contract by their words or actions, a subcontractor will not be bound during negotiations with a general contractor until the formal subcontract is executed.

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.

5. In New York, standard contract interpretation rules apply where a contractually shorter limitations period is at issue. . Monadnock Constr. Inc. v. Westchester Fire Ins. Co., 16-CV-0420 (E.D.N.Y.) (decided May 16, 2016).

*  What the Court Considered: Plaintiff, Westchester Fire Insurance Company (“WFIC”) moved to dismiss Monadnock Construction Inc.’s (“Monadnock”) complaint for breach of contract based on WFIC’s refusal to pay on performance bonds following the default notices required under the bonds. WFIC had issued the performance bonds to contractor Monadnock, covering two contracts with the curtain wall subcontractor for two mixed use projects. The performance bonds required any legal action to be taken within two years of notice of a default. Monadnock terminated the two curtain wall contracts on January 13, 2014, following repeated notices of default, and gave WFIC the requisite notice required under the bonds. Seeking dismissal of Monadnock’s March 1, 2016 complaint, WFIC argued that Monadnock’s claims were barred by the two-year contractual limitation period notwithstanding the parties’ Amendment Agreement which permitted the delayed, or deferred, completion of the curtain wall work. In opposition, Monadnock argued that the two-year contractual limitations period did not begin to run until a notice of default was given under the Amendment Agreement and that NY GOL 17-103, which allows parties to toll the limitations period, did not apply to the contractually-shortened limitations period; the statute only applies to statutory limitations periods.

*  What the Court Said: Under New York law, where a contractually shorter limitations period is at issue, standard contract interpretation rules can be applied so as to honor the parties’ intent.

*  What the Opinion Means: Where shorter contractual limitations periods are at issue, principles of equity may be prioritized over concerns about stale claims. Tolling by consent, which prioritizes the commencement of an action when a claim is ripe and not before there is a demonstrated need for the action, is good public policy.

Jessica L. Rothman is a Partner in the Construction & Design Group of Ingram Yuzek Gainen Carroll & Bertolotti LLP. Jessica handles litigation involving all aspects of construction projects including breach of contract, mechanic’s liens, negligence and professional malpractice issues. She has represented a wide range of property owners, contractors, architects and engineers in multi-party litigation concerning the performance of construction and design agreements, and in negotiating and drafting construction and design agreements.