Cases of the Month

Significant Cases and Decisions Impacting the Construction Industry

By: Ira Genberg and Cory Menees

November 2008

1.      Sub Found to Assent to Contract Terms Contained in Purchase Order, Compass Envtl. Inc. v. Polu Kai Serv., LLC, 882 N.E.2d 1149 (Ill. App. Ct. 2008).

*     What the Court Considered: A sub hired to perform roofing repairs in the wake of Hurricane Katrina claimed it had not assented to contract terms – specifically a forum selection clause – contained in a purchase order used to secure its work.  The front of the purchase order, originally sent to the sub via email, referenced terms and conditions on the reverse and required that the sub call the contractor with any questions.  The reverse side of the order was not emailed to the sub prior to the time it began work but was received in hard copy four days after the sub had begun its work. 

*     What the Court Said: As the sub did not inquire into the missing terms and conditions, began work prior to their receipt, and continued work after their receipt, it assented to the terms and conditions through its conduct.      

*     What the Opinion Means: Asking no questions and beginning work may be taken as assent to contract terms a contractor was effectively offered the opportunity to review prior to beginning its work.      

2.      Retained Control Doctrine Applies Where GC Has Control Beyond a General Right of Supervision, Wilkerson v. Paul H. Schwendender, Inc., 884 N.E.2d 208  (Ill. App. 2008).

*     What the Court Considered: An employee of a subcontractor sued the GC after sustaining injuries as a result of a fall from the top of a nine foot (9’) wall frame.  While the sub was responsible for supervising its own employees, the GC employed three supervisory employees on the job site, all with the authority to stop the sub’s work for safety-related reasons.

*     What the Court Said: Summary judgment was reversed and the case remanded for additional consideration, as the GC’s activities on the job site showed that it retained control over the project beyond a general right of supervision.  Despite the significant control given the sub over its employees and the conduct of its work, the control maintained by the GC could have been found adequate to trigger liability under the retained control doctrine.   

*     What the Opinion Means: In Illinois, significant control given to a sub will not necessarily preclude a court from finding a GC maintained a level of control sufficient to subject it to liability under the retained control doctrine.  Courts will closely examine the on-site presence and activities of GCs in determining whether the GC has control subjecting it to the liability pursuant to the doctrine.

3.      Despite Notice Given to Agent, Insurer Held Not Bound to Defend or Indemnify Party Due to Its Failure to Promptly Inform Insurer of Claim, Owners Ins. Co. v. Gordon, 2008 U.S. Dist. LEXIS 14663 (N.D. Ga. Feb. 26, 2008).

*     What the Court Considered: A party’s GCL policy required that it notify its insurer as soon as practicable after an event having the potential to give rise to a claim.  When the insured was named as a defendant in a lawsuit, he informed his insurance agent within days and was told that his insurance would not cover the claims brought against him.  Over six months after initially meeting with the agent, the insured against contacted the agent, who forwarded a copy of the complaint to the insurer.  The insurer thereafter sought a declaratory judgment ruling that it had no duty to defend or indemnify its insured, as the insured failed to provide the insurer with timely notice of the claim.         

*     What the Court Said: As the agent had no apparent authority to receive notice of the suit in lieu of the insurer, notice provided to the insurer did not satisfy the policy’s requirement that the insurer be given notice of a claim as soon as practicable. 

*     What the Opinion Means: In Georgia, parties must be particularly mindful of the notice requirements contained in their GCL policies.  When providing notice of a claim or potential claim, insured parties would be well served by inquiring into whether the notified agent has the authority to accept notice on behalf of the insurer.

4.      Flow-Down Provision Allows GC to Enforce Prime Contract’s Forum Selection Clause Against Sub, ESI Cos. v. Ray Bell Constr. Co., 2008 Tenn. App. LEXIS 115 (Tenn. Ct. App. 2008). 

*     What the Court Considered: The Commonwealth of Kentucky contracted for the design and construction of a corrections facility.  The prime contract contained a forum selection clause and a flow-down provision entitling the contractor to the same rights against subs as the Commonwealth would have against the contractor.  The sub brought suit against the contractor in a forum other than that specified by the forum selection clause.  The contractor’s motion for a change of venue was dismissed, and the contractor appealed.     

*     What the Court Said:  The terms of the prime contract were binding on the sub, as they contained a flow-down provision and were incorporated by reference into the subcontract.  That being the case, the forum selection clause contained in the prime contract was binding on the sub.   

*     What the Opinion Means: In Tennessee, where a prime contract contains a flow-down provision and the subcontract incorporates the terms of the prime contract by reference, the terms of the prime contract will likely be found binding on a sub.      

5.      Contract Found to Limit Contractor’s Liability for Consequential Damages, Regent Ins. Co. v. Storm King Contracting, Inc., 2008 U.S. Dist. LEXIS 16513 (S.D.N.Y. 2008).

*     What the Court Considered: Five years after its installation, a sprinkler system failed to work, contributing to the total loss of a hotel to fire.  The hotel owner’s insurer sued both the GC and sub responsible for installation of the sprinklers.   After the district court found the insurer’s claim improperly attempted to recover tort damages in a breach of contract action, the insurer claimed it was entitled to recovery of the replacement cost of the hotel based on the terms of the contract between owner and contractor.  The contract contained an express limitation on the contractor’s liability for consequential damages.  Although “physical damage” was not listed in the contract as a consequential damage from which the contractor was immune, the consequential damages provision provided that the contractor was immune from liability for types of damages in addition to those listed.          

*     What the Court Said: Given the language of the contract, the insurer could only seek recovery of the cost of repairing defects in the sprinkler system existing at the time installation of the system was completed. 

*     What the Opinion Means: In New York, a contract provision waiving liability for consequential damages need not spell out the specific nature of the damages waived; however, parties will be well served by including contract language making clear that the waiver of consequential damages is not limited to damages of the type enumerated in the contract.        

6.      Absence of Additional Consideration Prevents Unilateral Substitution of Written Subcontract for Oral Agreed-To Subcontract, Evanston Ins. Co. v. Westchester Surplus Lines Ins., 546 F. Supp. 2d 1134 (W.D. Wash. 2008).

*     What the Court Considered: A contractor and sub entered into an oral agreement for the provision of personnel hoists on a job site.  After the sub had performed work under the oral agreement, it received a written purchase order and subcontract from the contractor containing indemnity and immunity provisions never before discussed between the parties.  The sub never signed the subcontract yet continued to work on the project.  Three of the sub’s employees later fell and were severely injured on the job site.  After the employees filed suit, the insurance companies representing the contractor and construction manager argued that the written contract was binding on the sub by virtue of its continued work on the project and failure to object to the written terms. 

*     What the Court Said: In the absence of additional consideration, the written contract did not bind the sub. 

*     What the Opinion Means: A sub’s compensation for work it had previously agreed to perform does not constitute new consideration supporting a unilateral contract modification by the contractor.     

7.      Unfulfilled Condition Precedent to Payment Frustrates Claim to Compel Payment, G&T Conveyor Co. v. Port of Seattle, 2008 U.S. Dist. LEXIS 18182 (W.D. Wash. 2008).

*     What the Court Considered: An owner requested that it be afforded time to review a request for equitable adjustment submitted by a contractor.  Having not received payment after what it felt was a sufficient amount of time, the contractor filed a declaratory judgment action seeking to recover the equitable adjustment amount it claimed it was owed.  In arguing for the court to compel payment, the contractor cited a contract provision requiring that progress payments be made within thirty (30) days of their approval by the project engineer. 

*     What the Court Said: As the project engineer had not approved the contractor’s equitable adjustment request, the contractual requirement that payments be made within thirty (30) days was not triggered. 

*     What the Opinion Means: Contractors need to be mindful of what, if any, approvals must be given by the owner or its representatives before a bargained-for prompt payment provision is triggered.     

8.      Corporate Contractor’s Claim Not Barred by General Partner’s Alleged Entry into Contract in Individual Capacity, Ron Medlin Constr. v. Harris, 658 S.E.2d 6 (N.C. Ct. App. 2008).

*     What the Court Considered: An individual unlicensed as a general contractor but employed as a general partner of a licensed corporate contractor signed a contract as the “contractor.”  After a dispute over costs arose, the owners of the home constructed pursuant to the contract refused to make payments and contested the contract’s validity.  The individual and corporate contractor thereafter sued the homeowners.  The individual sought a declaratory judgment holding that the house had been constructed not by the individual, but by the corporate contractor.  The contractor sought recovery from the homeowners under quantum meruit.  In response, the homeowners argued that the house had been built by the individual, and that the claims were barred under North Carolina law because the individual had entered into the contract despite being unlicensed as a GC.     

*     What the Court Said: Summary judgment in favor of the homeowners was reversed, as a reasonable person could have found the corporate contractor was the GC on the project under the contract.  Given that the corporate contractor was licensed, its claims were not barred under North Carolina law. 

*     What the Opinion Means: Caution must be exercised in the execution of contracts so as to avoid the impression that the contract is entered into by an individual in his individual capacity as opposed to as an agent for a corporate contractor.        

9.      Standard of Workmanship Expressed in Contract Controls Over Standard Implied by Law, Wilkes v. Shaw Enters., LLC, 2008 Tenn. App. LEXIS 150 (Tenn. Ct. App. 2008).

*     What the Court Considered: Purchasers of a new home discovered several construction defects in the home, which the home-constructing contractor failed to sufficiently correct at the owner’s request.  The homeowners thereafter sued the contractor for breach of contract and won a judgment equal to the cost of repairs, but the chancellor reduced the judgment, deciding damages were appropriately measured by the diminished value of the home.  The contract pursuant to which the home was constructed provided that the home would be built in accordance with plans and specification and good building practices.  The chancellor had measured the contractor’s performance against a standard based on contractors working in the area.     

*     What the Court Said: The chancellor measured the contractor’s work against the wrong standard of care.  Given that the contract provided the standard against which the contractor was to be measured, the trial court’s use of an implied standard was error.

*     What the Opinion Means: In Tennessee, courts will allow parties to contract for a standard of workmanship higher that that implied by law.

10. Differing Site Conditions Clause Protects Sub from Assuming Risk of Differing Subsurface Conditions, URS Group, Inc. v. Tetra Tech FW, Inc., 181 P.3d 380 (Colo. App. 2008).

*     What the Court Considered: A subcontractor hired to perform foundation demolition work encountered unexpected difficulty in removing the foundations.  It consequently sought additional compensation under the subcontract’s differing site conditions clause, claiming the foundations were not as represented in the RFP.  The trial court held the sub could not recover additional compensation, as it was working under a fixed price contract. 

*     What the Court Said: The trial court’s ruling was in error, as the subcontract incorporated the standard federal DSC clause by reference, meaning the sub did not assume the risk that subsurface conditions would be materially different from those represented in the RFP.

*     What the Opinion Means: In Colorado, a contractor does not bear the risk of differing subsurface conditions where its contract contains the standard DSC clause found in federal contracts.

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.