Cases of the Month

Significant Cases and Decisions Impacting the Construction Industry

By: Ira Genberg and Cory Menees

December 2008

1.      Negligent Misrepresentation Claims Against Architect and Construction Manager Found Not to Fit Within Exception to Economic Loss Rule, RLI Ins. Co. v. Indian River School Dist., 556 F. Supp. 2d 356 (D. Del. 2008).

*     What the Court Considered: A surety brought a negligent misrepresentation claim against an architect and construction manager, contending that they had provided misinformation in certificates for payment issued to a contractor who had fallen behind schedule.    

*     What the Court Said: Both the architect and construction manager were granted summary judgment, as the surety’s claims were barred by the economic loss rule.  The court found that neither the architect nor construction manager was in the business of supplying information.  As the provision of information in payment certificates was incidental to the roles of the architect and construction manager on the project, negligent misrepresentation claims based on the information did not come within the negligent misrepresentation exception to the rule.        

*     What the Opinion Means: In Delaware, a negligent misrepresentation claim will survive the economic loss rule only if brought against a party whose primary job responsibilities include information provision.  

2.      Liquidated Damages Provision Enforced Following Delay, Carrothers Constr. Co., L.L.C. v. City of S. Hutchinson, 184 P.3d 943  (Kan. Ct. App. 2008).

*     What the Court Considered: A city withheld almost $150,000 from a contractor following a six-month delay in the completion of a water treatment plant, claiming the amount as liquidated damages pursuant to a provision in the contract for the plant’s construction.

*     What the Court Said: The court rejected the contractor’s argument that the liquidated damages provision was penal, ruling the provision enforceable after finding that it was (1) reasonable at the time the parties entered into the contract and in light of the total value of the contract; and (2) that the city incurred damages and the actual damages suffered by the city would have been difficult to prove. 

*     What the Opinion Means: In determining whether a liquidated damages provision is conscionable, Kansas courts will inquire into, among other things, whether the provision “is reasonable in view of the value of the subject matter of the contract and of the probable or presumptive loss in case of breach.”

3.      Terms of Subcontract Render GC Liable for Worker’s Negligence Pursuant to Borrowed Servant Doctrine, Odum v. Superior Rigging & Erecting Co., 662 S.E.2d 832 (Ga. Ct. App. 2008).

*     What the Court Considered: A collision between two cranes knocked a piece of equipment into a worker who consequently fell and was injured.  The worker sued his employer, the sub who had subcontracted with the GC for provision of cranes and crane operators to the project.  The subcontract gave the GC the right to both supervise and fire the operators.  The sub won summary judgment, claiming the GC was liable for the actions of the allegedly negligent operator, as the operator was properly considered a borrowed servant of the GC. 

*     What the Court Said: Upholding the grant of summary judgment, the court ruled Georgia’s three-part test for determining whether an employee is a borrowed servant was satisfied.  On the date of the worker’s injury, the GC had complete control and direction over the crane operator, the sub had no such control, and the GC had the right to discharge the servant.   

*     What the Opinion Means: In Georgia, courts continue to adhere to a three-part test in determining whether an employee is a borrowed servant.  Where a contract grants a party complete supervisory control over and the ability to fire another’s workers, the party must be aware that the workers may be found borrowed servants.   

4.      Forum Selection Provision Voided by N.C. Statute, Price & Price Mech. of N.C., Inc. v. Miken Corp., 661 S.E.2d 775 (N.C. Ct. App. 2008). 

*     What the Court Considered: A North-Carolina based sub was hired to provide work on a retail store to be constructed in N.C.  The Florida-based GC included a provision in the subcontract requiring that disputes be litigated in Florida under Florida law.  The sub sued the GC in a North Carolina court after the GC cancelled the sub’s work order.  The trial court granted the GC’s motion to dismiss for improper venue, and the sub appealed.       

*     What the Court Said:  Dismissal of the case was improper, as the forum selection and choice of law provisions in the subcontract were invalid pursuant to N.C. Gen. Stat. § 22B-2, which voids such provisions as a matter of public policy where they are contained in a contract for the improvement of real property located in North Carolina.   

*     What the Opinion Means: Forum selection and choice of law provisions contained in contracts for the improvement of real property in North Carolina are void where they call for litigation to take place out-of-state or to be governed by another state’s laws.

5.      Claim Alleging Arbitrator Partiality Fails, ALS & Assocs. v. AGM Marine Constructors, Inc., 557 F. Supp. 2d 180 (D. Mass. 2008).

*     What the Court Considered: A contractor hired by a town to install a dock system found itself in a dispute with the docks’ manufacturer after the docks failed in a storm.  The dispute between the contractor and manufacturer was arbitrated, and the arbitrator found for the contractor.  The manufacturer filed a motion to vacate the award pursuant to the FAA, alleging, among other things, that the arbitrator was partial to the contractor.  The arbitrator had failed to investigate and disclose a possible conflict created by his representation of a client in an unrelated case involving an adverse party represented by the law firm representing the contractor.            

*     What the Court Said: The arbitration award was confirmed, as the manufacturer could not show that the arbitrator’s failure to investigate and disclose the potential conflict was evidence of the arbitrator’s partiality in the matter before him. 

*     What the Opinion Means: Where an arbitrator fails to adequately investigate and disclose potential conflicts, the failure will lead to vacation of an arbitration award only where the failure can be connected to the arbitrator’s alleged partiality.          

6.      Contractor Denied Compensation For Work Knowingly Performed Without Permits, EMCE Elec., Mech. & Constr. Co., Inc. v. Lennox Apartments, No. 07-2146, 2008 U.S. Dist. LEXIS 41335 (E.D. Pa. 2008).

*     What the Court Considered: An estimate tendered by a contractor and agreed to by an agent of the owner provided that the owner would obtain the necessary permits for electrical work on an apartment building.  The contractor performed the work knowing that the owner had not obtained the needed permits.  When a dispute arose between the owner and contractor over outstanding payments allegedly owed to the contractor, the owner argued it owed the contractor nothing because the work had been performed without the required permits.

*     What the Court Said: The contractor’s unjust enrichment and quantum meruit claims were dismissed on summary judgment, as the contractor had been fully aware that permits were needed but had not been obtained.  That being the case, the court found the contractor to be complicit in the failure to secure the permits and denied its claims for compensation for the un-permitted work.    

*     What the Opinion Means: Courts are disinclined to grant equitable relief, as is awarded pursuant to an unjust enrichment claim, where the claimant’s hands are unclean.        

7.      Installation of Wrong Building Materials Not “Property Damage” For Purposes of CGL Coverage, Down Under Masonry, Inc. v. Peerless Ins. Co., No. 2007-235, 2008 WL 1747904 (Vt. 2008).

*     What the Court Considered: A contractor hired to construct a garage and accompanying studio apartment mistakenly used the incorrect shingles in roofing the structure.  The contractor’s CGL insurer agreed to defend against the suit brought against the contractor by the owner, but the insurer refused to indemnify the contractor against the resulting judgment.  The insurer sought declaratory relief, arguing that the CGL policy did not insure against the contractor’s mistake because use of the wrong building materials did not constitute “property damage” for purposes of the policy. 

*     What the Court Said:  The court agreed with the insurer, finding that the contractor’s claim was for displeasing aesthetics, not property damage.    

*     What the Opinion Means:  As might be expected, the mistaken incorporation of the wrong building materials into a structure will not necessarily be considered to damage either the structure or incorporated materials for purposes of triggering insurance coverage.     

8.      Evidence Spoliation Results in Dismissal of Owner’s Claim Against Contractor, Chrysler Realty Co. v. Design Forum Architects, Inc., No. 06-CV-11785, 2008 U.S. Dist. LEXIS 4271 (E.D. Mich. 2008).

*     What the Court Considered: An architect designed and installed an HVAC system at a car dealership.  After the system failed, the owner replaced and scrapped the system before notifying the architect of its failure.  The architect sought dismissal of the professional liability claim brought against it by the owner, arguing that the owner’s scrapping of the system had deprived the contractor of the opportunity to inspect the system and amounted to spoliation of evidence.      

*     What the Court Said:  The owner’s professional liability claim was dismissed as a sanction for evidence spoliation.  By replacing and scrapping the system before the architect was given an opportunity to inspect it, the owner deprived the architect of any meaningful opportunity to investigate possible causes of the system’s failure that might have been raised as defenses. 

*     What the Opinion Means: In Michigan, courts are charged with imposing sanctions aimed at “leveling the playing” field after a party is found to have lost or destroyed evidence.  As severe a sanction as dismissal of the owner’s claim may seem, it was the only option left to the court given that the scrapping of the HVAC so system seriously impaired the architect’s ability to develop a defense.     

9.      Approvals Given by Representative with Limited Authority Found to Be Invalid, S & M Mgmt. v. United States, 82 Fed. Cl. 240 (2008).

*     What the Court Considered: A dispute arose over whether a contractor had properly completed punchlist items pursuant to a contract with a federal agency.  The government maintained that the contractor was required by the contract to complete certain items, and the contractor argued that it had satisfied contract requirements, as evidenced by the fact that its work had been inspected and approved by the contracting officer’s designated technical representative.      

*     What the Court Said: As the contract required that any delegation of authority by the contracting officer be in writing, the technical representative did not have the authority to accept and approve the contractor’s work.  Any approvals given by the representative for work inconsistent with the requirements of the contract were therefore invalid.    

*     What the Opinion Means: Caution must be exercised to ensure that the individual purporting to accept and approve work has the authority to do so pursuant to the terms of the contract.  Be wary of federal contract terms differentiating between inspection and acceptance.  Mere inspection may not constitute acceptance.          

10. Improperly Licensed Contractor Denied Payment for Work Performed Pursuant to Unenforceable Contract, Meyer v. CDI Contrs., LLC, No. CV 02-6804, 2008 Ark. App. LEXIS 416 (Ark. Ct. App. 2008).

*     What the Court Considered: A sub fraudulently obtained an Arkansas contractor’s license, falsely attesting in an affidavit that at the time of its application for licensure it was not working on any project valued in excess of $20,000.  When the contractor who had hired the sub learned that the sub’s license had been obtained based on false information, it cancelled the subcontract.  The sub then sued for breach of contract and fraudulent inducement.    

*     What the Court Said: The trial court’s summary dismissal of the sub’s claims was upheld.  The appeals court ruled that the sub could not avoid Arkansas’s statutory limitations on the ability of parties to bring claims on contracts rendered unenforceable by failure to adhere to Arkansas law governing contractor licensure. 

*     What the Opinion Means: In Arkansas, the policy reasons underlying statutory limitations on the ability of unlicensed and improperly licensed contractors to bring suit for non-payment and breach of contract will likely frustrate creative legal theories aimed at skirting the limitations. 

Ira Genberg is a Partner at Troutman Sanders LLP in Atlanta, Georgia, and is General Counsel for Associated Owners & Developers (AOD) in McLean, Virginia.  Cory Menees is an Associate at Troutman Sanders LLP.  For more information, or if you have any questions, contact us at hlk@constructionchannel.net.