Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and David L. Hobson
1. Application of Eichleay Formula in Oklahoma, United States ex rel. Steel-Fab, Inc. v. Wynn Constr. Co., 2006 WL 1207621 (E.D. Okla. May 2, 2006).
* What the Court Considered: According to the contractor, its subcontractor was late in delivering gate hoists and housing units. In its claim against the subcontractor for breach of contract, the contractor attempted to recover for extended home office overhead by using the Eichleay formula.
* What the Court Said: Because the Eichleay standard does not satisfy the requirement of definiteness, the contractor could not use it to calculate damages.
* What the Opinion Means: Oklahoma has not adopted the Eichleay measure of damages. Furthermore, under Oklahoma law, damages for breach of contract must be determined by reference to some “definite standard.” According to the Court, the Eichleay formula is not sufficiently definite, as it yields only a rough approximation of extended home overhead costs.
2. Additional Insured Status, St. Paul Fire and Marine Ins. Co. v. Tip Top Builders, Inc., 2006 WL 1234922 (N.D. Ill. May 5, 2006).
* What the Court Considered: A subcontractor obtained a commercial general liability (“CGL”) policy and provided the contractor with a certificate of insurance naming the contractor as an additional insured. The CGL policy stated that additional insured status is only provided to “any person or organization you [the subcontractor] are required in a written contract to show as an additional protected person.” When a pipe burst on the project, the contractor sought coverage from the insurer. The insurer argued that it was not obligated to defend or indemnify the contractor because the subcontractor was not obligated by any written contract to name the contractor as an additional insured.
* What the Court Said: The insurer could argue that it was not obligated to cover the contractor, despite the existence of a certificate of insurance naming the contractor as an additional insured.
* What the Opinion Means: According to the Court, the issuance of a certificate of insurance to the contractor does not necessarily mean that the contractor actually qualifies as an additional insured. Thus, the insurer would be allowed to argue that the contractor did not qualify for coverage by virtue of the fact that no written contract obligated the subcontractor to name the contractor as an additional insured.
3. Application of Business-Risk Exclusion in CGL Policy, W. Am. Ins. Co. v. Kamadulski Excavating & Grading Co., 2006 WL 1235751 (S.D. Ill. May 4, 2006).
* What the Court Considered: When a contractor was sued for destroying trees belonging to adjacent landowners, it tendered its defense to its CGL insurer. The insurer argued that it was not obligated to defend the contractor because the alleged property damage was subject to a business-risk exclusion in the policy. That exclusion applied to prevent coverage for a party’s inadequate performance under a contract.
* What the Court Said: Because the adjacent landowners had no contractual relationship with the contractor, the exclusion did not apply.
* What the Opinion Means: The business-risk exclusion reflects the principle that CGL coverage is for physical damages arising from tortious conduct—not for economic loss resulting from the insured’s inadequate performance of a contract. Here, the insured had no contract with the adjacent landowners. Therefore, the exclusion did not apply.
4. Notice of Delay, Lake Eola Builders, LLC v. Metro. at Lake Eola, LLC, 2006 WL 1360909 (M.D. Fla. May 17, 2006).
* What the Court Considered: The owner of a hotel renovation project fired the contractor, alleging it had breached the contract by failing to complete the project by the contractual substantial completion deadline. The contractor claimed it was entitled to several hundred days’ worth of extensions to the original deadline. The owner responded that the contractor had failed to satisfy the contract’s notice provision. That provision obligated the contractor to provide notice within ten days of any event giving rise to a delay and then to submit a claim within thirty days of the notice setting forth the probable effect of delay on the progress of the Work.
* What the Court Said: The owner was not entitled to summary judgment on the notice issue.
* What the Opinion Means: In deciding whether the owner is entitled to summary judgment, the court evaluates the facts in a light most favorable to the contractor. Here, the contractor pointed to a number of e-mails and meeting minutes containing notices of delay-causing events and estimates of the extent of the resulting delays. Because these might satisfy the contract’s notice requirement, the owner was not entitled to summary judgment.
5. Kansas Closed-Door Statute, Alliance Steel, Inc. v. Piland, 134 P.3d 669 (Kan. Ct. App. 2006).
* What the Court Considered: Because it had not been paid, a supplier of building materials filed a lien on the property. The owner argued that the supplier, an Oklahoma corporation, was precluded from foreclosing on the lien because it was not registered to do business in Kansas.
* What the Court Said: Because the supplier was not required to comply with the Kansas registration statute, its suit could proceed.
* What the Opinion Means: Under Kansas law, a foreign corporation doing business in Kansas is required to register. Where the corporation is not registered, it may not maintain an action in Kansas. However, a corporation cannot be required to register if its business is limited entirely to interstate sales. Here, the supplier maintained no office in Kansas, nor did it deliver products to be resold in Kansas. Its business consisted solely of delivering products within interstate commerce.
6. Accrual of Statute of Limitations, Northeast Knox Util. Dist. v. Stanfort Constr. Co., 2006 WL 1328779 (Tenn. Ct. App. May 16, 2006).
* What the Court Considered: On January 13, 2000, an excavation subcontractor sent a letter to the contractor explaining that it had incurred an additional $83,000 in excavation expenses due to incorrect test borings and inaccurate bid documents. Although it had been informed that the owner was considering its claim for additional rock excavation, it later learned that the owner and contractor had closed out the project without granting its claim. On April 8, 2003, the subcontractor brought a claim for negligent misrepresentation and fraudulent concealment against the owner’s general manager and the project engineer.
* What the Court Said: Because the statute of limitations had run, the claim could not proceed.
* What the Opinion Means: Tennessee law provides that actions for injuries to real property must be commenced within three years of the date the plaintiff discovers its injuries. Here, the subcontractor was aware of its injury by January 13, 2000, though it was not yet aware of the specific nature of the defendants’ tortious conduct.
7. Delay Damages in Contract Actions, Touloumes v. E.S.C. Inc., 899 A.2d 343 (Pa. 2006).
* What the Court Considered: A roofing contractor hired to renovate a motel roof was sued when water began to infiltrate the roof after a significant snow storm. The owner was awarded damages to replace the existing roof. Thereafter, the owner attempted to use Pennsylvania’s Rule of Civil Procedure 238 to recover damages for the contractor’s delay in compensating the owner.
* What the Court Said: Because this was a contract action, Rule 238 delay damages were unavailable.
* What the Opinion Means: Pennsylvania Rule of Civil Procedure 238 provides that delay damages shall be added to compensatory damages in a civil action for property damage. In interpreting this rule, the Court found that its intention was to provide delay damages in tort actions only. For contract actions, “pre-judgment interest is the appropriate vehicle to secure monies for the delay of relief.”
8. Statute of Repose and Common Law Claims, Evans Withycombe, Inc. v. W. Innovations, Inc., 133 P.3d 1168 (Ariz. Ct. App. 2006).
* What the Court Considered: Eight years after construction of their home, homeowners sued the contractor for defective construction. Two years later, the contractor filed third party claims against its subcontractors for both breach of contract and common law indemnity.
* What the Court Said: The contractor’s contract claim against its subcontractors was barred by Arizona law, while the common law indemnity claim was not.
* What the Opinion Means: An Arizona statute provides that no action based in contract may be instituted against a person who performs construction of an improvement to real property more than eight years after substantial completion. However, the claim of common law indemnity is based on separate legal principles from a contract indemnity claim. Therefore, the statute did not apply to the common law claim.
9. Time For Filing of Mechanic’s Lien, Butler Contracting, Inc. v. Court Street, LLC, 631 S.E.2d 252 (S.C. 2006).
* What the Court Considered: A subcontractor provided labor and materials to the project on a regular basis from 1999 until December 2000. In early 2001, the contractor requested that the subcontractor deliver one box of ceiling tiles to replace tiles damaged by water leaks. One month later, the subcontractor filed a mechanic’s lien, alleging it was owed $177,001 on its subcontract. The owner argued that the mechanic’s lien was not filed timely and that the subcontractor’s delivery of tiles in early 2001 was a contrived effort to revive its lien rights.
* What the Court Said: Because the tiles were delivered at the request of the contractor, the 90-day period for filing of a lien began to run at that time.
* What the Opinion Means: When an unreasonable period of time has elapsed since substantial completion of the work, a subcontractor’s furnishing of trivial materials generally will not extend the time for filing of a lien. However, where those materials are provided by the subcontractor at the request of the contractor, the time period for filing of a lien is extended.
10. Definition of Statutory Employee, Mackiewicz v. Essex Crane Rental Corp., 191 S.W.3d 66 (Mo. Ct. App. 2006).
* What the Court Considered: A contractor had an agreement with its concrete subcontractor whereby the subcontractor would use the contractor’s employees to perform the concrete work. While performing concrete work, a crane operator employed by the contractor was injured when the crane tipped over. Thereafter, he sued the subcontractor for negligence. The subcontractor argued that the crane operator was the subcontractor’s statutory employee and that therefore the subcontractor was shielded from negligence liability by the workers’ compensation statute.
* What the Court Said: The crane operator was the statutory employee of the subcontractor.
* What the Opinion Means: Under Missouri’s workers’ compensation law, an individual is a statutory employee if he is performing work pursuant to a contract. Here, the contractor and subcontractor had an employee sharing arrangement. Therefore, although the crane operator was primarily an employee of the contractor, he was deemed a statutory employee of the subcontractor under the workers’ compensation statute.
Ira Genberg is a Senior Partner at the Smith, Gambrell & Russell, LLP law firm in Atlanta, Georgia, and also General Counsel for Associated Owners & Developers (AOD), McLean, Virginia. David L. Hobson is an Associate at Smith, Gambrell, & Russell, LLP. For more information or if you have any questions, contact us at: firstname.lastname@example.org.