Cases of the Month

Significant Cases and Decisions Impacting the Construction Industry

By: Ira Genberg and Cory Menees

September 2008

1.      Claim for Delay Costs Denied, Camo Construction Co., Inc. v. Town of Vidalia, 966 So. 2d 796 (La. Ct. App. 2007).

*     What the Court Considered: After completion of a project for the installation of drainage facilities was delayed, a contractor brought a contract action against a Louisiana town to recover overhead and delay damages and to recoup liquidated damages deducted by the town from the contract price.  The delays occurred before the contractor began work, but it failed to give notice of its claim for delay-related costs until after it had begun work and received three change orders including time extensions and price adjustments.  The contractor claimed the town was bound by an additional change order signed by the town’s engineer but not the mayor.

*     What the Court Said: The change orders adequately compensated the contractor for expenses resulting from pre-commencement delays.  Furthermore, the language of the contract barred the claim for delay-related costs, as the contractor failed to provide timely notice of the costs.  Finally, the authority of the engineer to bind the town was limited by the contract, and the additional change order concerned a matter beyond the scope of the engineer’s authority.

*     What the Opinion Means: Claims for damages arising from pre-commencement delays will be jeopardized where made after the parties’ agreement to change orders arguably providing compensation for the delays.  Contractors need to be sure change orders are executed by someone with the authority to bind the owner, particularly when the owner is a public entity.   Furthermore, contractors cannot afford to ignore contract notice requirements.   

2.      Latency of Defect Leaves Door Open to Third-Party Indemnity Claim After Settlement, Willdan v. Sialic Contractors Corp., 158 Cal. App. 4th (Cal. Ct. App. 2007).

*     What the Court Considered: After design deficiencies caused significant cost overruns, a contractor and city settled the contractor’s claim for increased costs relating to a roadway resurfacing project.  As part of the settlement, the contractor was shielded from all claims, other than those arising from enforcement of the settlement, breach of warranties, and latent defects.  Following settlement with the contractor, the city sued the project engineer for defective design.  The engineer in turn filed a third-party claim for comparative equitable indemnity against the contractor.  The engineer argued that the contractor’s use of improper materials in replacing the roadway was revealed only through destructive testing conducted after settlement was reached and, therefore, represented a latent defect.   The contractor won summary judgment at trial, arguing that California law provided that its settlement with the city shielded it from the engineer’s indemnity claim.  The engineer appealed, maintaining that the use of defective materials constituted a latent defect not covered by the settlement agreement.

*     What the Court Said: The use of defective materials represented a latent defect, and the engineer was not barred from seeking equitable indemnity from the contractor.   

*     What the Opinion Means: Under California law, comparative equitable indemnity is available not only to those joined as tortfeasors by a plaintiff, but to “joint, concurrent and successive tortfeasors” whose actions “combined to create an indivisible injury to the plaintiff.”

3.      Differentiating Between Claims for Delay Damages and Additional Work, Harrison & Burrows Bridge Constructors, Inc. v. State of New York, 42 A.D.3d 779 (N.Y. App. Div.  2007).      

*     What the Court Considered: A contractor entered into a contract with the State of New York for the repair and resurfacing of several bridges.   The contract’s delay provision limited the contractor’s ability to claim delay damages, leaving extension requests as the contractor’s only remedy in the event of delay.  After work on the project was delayed into the winter months and the contractor was forced to use expensive cold-weather curing techniques on cement it poured, the contactor sought compensation for increased costs.   After the state refused payment, the contractor sued and won at trial.  The state appealed, arguing that the contractor’s claims were for delay damages and barred by the contract.

*     What the Court Said: The trial court was reversed in part, as several of the contractor’s claims, including the claimed additional costs for concrete curing, were held to be for costs resulting from delays, not for additional work.  As to claims found to be for additional work performed irrespective of the delays, costs were awarded to the contractor. 

*     What the Opinion Means: Where faced with a no-damages-for-delay contract provision, a contractor must be careful to frame claims for additional costs.  A failure to show that the costs are attributable to additional work unrelated to the delay may result in the claim being denied as a claim for delay damages.

4.      Good-Faith Settlement Prevents Successful Suit for Contribution, Pierre Condominium Ass’n v. Lincoln Park West Assocs., LLC, 378 Ill. App. 3d 770 (Ill. App. Ct. 2007).

*     What the Court Considered: A condominium building suffered damage during the excavation of an adjacent lot in preparation for construction of a high-rise.  As a result, the condo association brought an action against the adjacent lot owner, its general contractor, and excavation subcontractor.  The lot owner cross-claimed against the excavation subcontractor, seeking indemnity under the AIA standard form subcontract’s indemnity provision.  The sub then chose to settle directly with the condo association, agreeing to pay approximately 80% of the amount sought in its suit.  The lot owner thereafter claimed that even if the settlement was in good faith, the sub could still be sued for contractual contribution, as the Illinois Contribution Act only protected the sub from suits for statutory contribution.

*     What the Court Said: The Illinois Contribution Act would be eviscerated if parties were allowed to contract out of the Act’s good-faith-settlement provision.  A good-faith settlement protects a settling party from suits for both contractual and statutory contribution.

*     What the Opinion Means: In Illinois, a contracted-for contribution provision may not be enforced where the party sued for contribution has entered into a good-faith settlement agreement with the party bringing the original action.

5.      Failure to Promptly Adjust Claim Renders Insurer Liable for Consequential Damages, Panasia Estates, Inc. v. Hudson Ins. Co., __ N.Y.3d __, 2008 N.Y. LEXIS 275 (N.Y. Feb. 19, 2008).

*     What the Court Considered: A rental property owner maintained builder’s risk coverage with its insurer.  During renovations performed by a contractor, significant interior damage was caused to the property when heavy rains fell through an opening in the building’s roof.  The owner alleged that, despite the prompt filing of a claim with its insurer, it was several weeks before the insurer investigated and adjusted the claim.  Three months later, the insurer denied the claim based on the conclusion that the water damage had been caused over time, not exclusively during the contractor’s work on the property.  As a result, the insurer held that the damage was not of the sort covered under the builder’s risk policy.   The owner sued its insurer for breach of contract for failure to properly investigate the claim and sought both direct and consequential damages.  The insurer moved for summary judgment on the basis that the policy contained an exclusion for “consequential loss.”

*     What the Court Said: A divided New York Court of Appeals upheld the lower court’s denial of the motion for summary judgment.  The court articulated its rational in a companion case reported the same day: “consequential damages from a breach of the covenant of good faith and fair dealing may be asserted in an insurance contract context, so long as the damages were within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting.” 

*     What the Opinion Means: In New York, a provision in an insurance policy barring recovery of “consequential losses” will not prevent recovery of consequential damages resulting from the insurer’s failure to abide by its duty of good faith and fair dealing.   

6.      Federal Arbitration Act Governs Forum Selection, Aspen Spa Properties, LLC v. International Design Concepts, LLC, 527 F.Supp.2d 469 (E.D.N.C. 2007).

*     What the Court Considered: An owner developing property in North Carolina entered into a contract with a Seattle, Washington-based architect for design of a building.  The contract contained an arbitration provision requiring that any legal action instituted pursuant to the contract was to be filed in King County, Washington and governed by the laws of the State of Washington.  The owner filed suit in the Superior Court of Wake County, North Carolina.  The architect successfully removed the suit to the U.S. District Court for the Eastern District Court of North Carolina, where it argued that the contract required the case to be arbitrated in Washington.  The owner conceded that the dispute was subject to arbitration but asserted various theories supporting the contention that venue was proper in North Carolina.

*     What the Court Said: The District Court ruled that the Federal Arbitration Act (“FAA”) was controlling in the case and required that arbitration be conducted in Washington. 

*     What the Opinion Means: Where applicable, the FAA governs forum selection and preempts North Carolina law (N.C. Gen. Stat. § 22B-3) voiding litigation or arbitration in venues outside of the state when the contract was executed in North Carolina. 

7.      Contractor Held to Possess Knowledge it Claimed to Possess in Contract, Rapid Demolition Co., Inc. v. State, No. 2006-09259, 2008 WL 803125 (N.Y. App. Div. Mar. 25, 2008).

*     What the Court Considered: A contractor hired to demolish a bridge sued the State of New York for breach of contract, as the contractor incurred unexpected expenses when the bridge was discovered to have a thicker than expected concrete deck overlay.  The contractor was awarded $750,000 at trial despite contract language disclaiming the right of the contractor to sue on the basis of “estimates, tests, or representations of any officer or agent of the State.”  The contract further provided that the contractor had secured its information about the bridge from “personal investigation and research” and that, prior to entering into the contract, the contractor was “fully informed regarding all of the conditions affecting the work to be done and labor and materials to be furnished.”  The state appealed on the basis of the plain language of the contract.

*     What the Court Said: Costs which would have been anticipated had an inspection actually been conducted as represented in the contract cannot give rise to a claim for unanticipated costs. 

*     What the Opinion Means: Where a party represents in a contract that it has certain knowledge, the party cannot later claim to have lacked the knowledge for purposes of a claim for unanticipated costs.  In some jurisdictions, similar contract language requiring a pre-contract site investigation might be satisfied by a reasonable “sight” investigation.  In other jurisdictions, the risk of unanticipated site conditions is more easily transferred to the contractor.

8.      Government Potentially Liable for Failure to Ensure Proper Bonds for Contractors, Sloan Construction Co., Inc. v. Southco Grassing, Inc., Op. No. 26462, 2007 WL 5022447 (S.C. Mar. 24, 2008).

*     What the Court Considered: A contractor’s bond surety became insolvent during the contractor’s work on a project for the State of South Carolina.  Despite being informed by a sub that there was no bond on the project and that the sub was unpaid, the state made a final payment to the contractor.  The sub sued the state, arguing (1) that it was a third-party beneficiary to the prime contract; and (2) that the state had negligently failed to ensure that the contractor was properly bonded.  The trial court granted the state’s motion to dismiss, finding that a plaintiff was barred by South Carolina law from bringing a negligence action against the state for failure to enforce the public works bonding statute.  The court also dismissed the sub’s third-party claim because the sub lacked privity with the state.  Both dismissals were upheld on initial appeal.

*     What the Court Said: South Carolina’s Subcontractors’ and Suppliers’ Payment Protection Act (“SSPPA”) was enacted for the protection of subs and suppliers specifically, not the public generally.  That being the case, the South Carolina Supreme Court found that the SSPPA was properly interpreted to grant subs and suppliers an implied cause of action against the government for failure to ensure state contractors’ compliance with statutory bonding requirements.  The third-party action was also proper, as the SSPPA’s bonding requirements are necessarily considered part of public works contracts.  Subs, as the only parties with a financial interest in enforcement of the requirements, therefore have a direct interest in the contract allowing them to bring third-party claims.

*     What the Opinion Means: In South Carolina, the government’s failure to ensure proper bonding of public works projects may render the government liable for payment to subs where they are not paid by the general contractor.  However, the government’s liability is limited to the “remaining unpaid balance on the contract with the general contractor when the subcontractor notifies the government of the general contractor’s nonpayment.”

9.      Contractors Assume Non-Delegable Duties Only under Specific Circumstances, Eastlick v. Lueder Construction Co., 741 N.W.2d 628 (Neb. 2007).

*     What the Court Considered: A subcontractor’s employee was injured when the scaffolding on which he was working collapsed after he mistakenly unfastened a support brace.  Despite the fact that the scaffolding was owned, installed, and maintained by the sub, the employee sued the general contractor for negligence and violation of a non-delegable duty.  Non-delegable duties are created (1) by ownership, together with possession and control, of the premises; (2) statute; or (3) where the contractor’s work involves “peculiar risk.”  Summary judgment was granted in favor of the contractor.

*     What the Court Said: Summary judgment was proper, as the contractor had no non-delegable duty in relation to the scaffolding work.

*     What the Opinion Means: In Nebraska, activities that can be safely performed with reasonable precaution do not give rise to non-delegable duties on the part of the contractor.  The contractor is generally obligated to provide subs’ employees with a safe working environment, not to police the safety of tools and equipment provided by the subs for their own employees’ use.  

10. Restraining Order Issued Against Contractor, Norman Place, LP v. AA Communs., Inc., 2007 U.S. Dist. LEXIS 55159 (N.D. Miss. July 27, 2007).

*     What the Court Considered: An owner sought a restraining order and injunctive relief removing a contractor from a project where tax incentives were contingent on the project’s timely completion and the contractor had stopped working.  The owner argued that success on a breach of contract claim was highly likely given that evidence showed that the contractor was no longer working and had not paid its subs.  The potential harm to the owner if the contractor stayed on the job site was argued to far outweigh that which would be done to the contractor by an injunction, as the contractor had already stopped working on the project.  It was further argued that the forfeiture of tax incentives resulting from late completion of the project would result in “irreparable damage” to the owner and that it was in the public interest to expedite the completion of the project for low and middle income housing.

*     What the Court Said: All requirements for injunctive relief were met, and the contract binding the owner to the contractor was rescinded, allowing the owner to hire a replacement contractor to complete the project.

*     What the Opinion Means: Where a contractor has discontinued working but remains on a project site, a restraining order and injunction may be available to facilitate the removal of the contractor and hiring of a replacement.

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.