Construction Channel Cases of the Month

Cases of the Month

Significant Cases and Decisions Affecting the Construction Industry

By: Joseph H. Bucci, Esquire
Saul Ewing LLP

March 2017

1. Where the agreement between the General Contractor and the Subcontractor contains an expressly worded “pay-when-paid” clause, the Subcontractor will not be able to recover payments for base contract work, or for change order work, unless and until the General Contractor obtained payment for the Subcontractor’s work from the Owner. Young Electrical Contractors, Inc. v. Dustin Constr. Inc., 231 Md. App. 353 (2016).

* What the Court Considered: The Court looked at the Subcontract Agreement to determine whether or not the language was unambiguous and utilized an objective interpretation of the contract, giving meaning to the terms of the Agreement in their customary, ordinary and accepted meaning.

* What the Court Said: Using Virginia law, the Court found that the payment provisions in the Subcontract contained valid “pay-when-paid” clauses under Virginia law and established clear and unequivocal conditions precedent to the Subcontractor’s right of payment from the General Contractor. As such, the General Contractor is not legally obligated to pay the Subcontractor for any work for which the Owner, here George Mason University, did not pay to the General Contractor.

* What the Opinion Means: If you are a Subcontractor, be certain to review the payment terms very closely to determine whether or not your particular agreement is a “pay-when-paid” clause or if your rights to payment are unrelated to the Owner’s payment to the General Contractor. Realize that if you accept a “pay-when-paid” agreement, you are also accepting a portion of the risk of nonpayment from the Owner.

2. According to the Court of Appeals of Maryland, a General Contractor who is not in direct contractual privity with an engineer/architect shall not have a cause of action against the design professional for purely economic losses incurred by the Contractor under what is purported to be a defective design or a negligent misrepresentation made by the design professional to the detriment of the General Contractor who relied thereon. Balfour Beatty Infrastructure, Inc. v. Rummel Klepper & Kahl, LLP, 2017 WL 701441, filed February 21, 2017).

* What the Court Considered: The Appeals Court here considered whether or not the “Economic Loss Doctrine” bars a General Contractor’s professional negligence claim against a design professional under a theory of negligent misrepresentation, or under a theory of the intimate nexus test of Restatement (Second) of Torts, Section 552.

* What the Court Said: In affirming the judgment of the Court of Special Appeals and of the Circuit Court below, this Court found convincingly that the Economic Loss Doctrine barred a claim for purely economic losses by a Contractor directed against a design professional with whom there was no privity of contract. The Court’s holding was based largely on the fact that in the absence of contractual privity, physical injury, or risk of physical injury, design professionals do not owe a tort duty to those who bid on and contract with a government entity.

* What the Opinion Means: In a situation where there are no apparent safety concerns, where there is no physical injury or risk of physical injury, or where there is no intimate nexus between the parties to support a finding of a tort duty, a claimant who is not in direct privity of contract with a design professional will be precluded from seeking to recover purely economic losses or delay damages.

3. A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits; that he is likely to suffer irreparable harm in the absence of preliminary relief; that the balance of equities tip in his favor; and that an injunction is in the public interest. Zachry Industrial Incorporated v. AE Solar Energy Inc., 2014 WL 12573957 (U.S.D.C., D.Arizona (July 11, 2014)).

* What the Court Considered: Here the Court looked at the written terms of the parties’ purchase order agreement, as well as the statutory provisions of Arizona’s Prompt Pay Act.

* What the Court Said: The Court disagreed with the plaintiff’s emergency motion for a preliminary injunction for a number of reasons. First, the Court disagreed with the plaintiff’s interpretation of the Arizona Prompt Pay Act and found that the Act did apply to material suppliers like the defendant. Secondly, the Court found that certain provisions of the purchase order being relied upon by the plaintiff were unenforceable, thereby undermining plaintiff’s rights to an emergency preliminary injunction. Finally, the Court found that the plaintiff was unlikely to prevail on the merits of its claim.

* What the Opinion Means: In a situation where a party seeks the extraordinary measure of an emergency preliminary injunction, the burden remains on the party seeking the injunction to establish that it is likely to succeed on the merits; it is likely to suffer irreparable harm; that the balance of equities tip in its favor; and that an injunction is in the public interest. Economic injury alone will not support a finding of irreparable harm because this injury can be remedied by a damage award.

4. Where a fixed price indefinite delivery contract with the government was terminated for the convenience of the government, the contractor can recover damages for increased costs it incurred in performing the contract under a negligent estimate theory, which requires the contractor to show by a preponderance of the evidence that the government’s estimates were inadequately or negligently prepared, were not in good faith or were grossly or unreasonably inadequate at the time the estimate was made. Agility Defense & Government Services, Inc. v. United States, 2017 WL 475692 (February 6, 2017).

* What the Court Considered: The Court looked at Federal Acquisition Regulation 16.503 to determine whether or not the government provided the contractor with a realistic estimate for the requirements contract at issue, recognizing that contractors rely on the proffered estimates in formulating their bids.

* What the Court Said: The Claims Court found that the contractor did experience workloads that were much greater than the workload data the government provided at the time of calling for contractor estimates. As such, the Court found that the contractor was damaged by the government’s negligent estimates and that it was clear error for the Claims Court below to find that there was no causal link between the government’s negligent estimates and the contractor’s damages.

* What the Opinion Means: Where the government negligently estimated its needs in a solicitation for a requirements contract and where it can be shown that the contractor relied on the government’s estimates in submitting its proposal for the solicitation such that there is a causal link between the government’s estimates and the contractor’s damages, the contractor could recover damages for increased costs it incurred in performing the contract under a negligent estimate theory, even where the government provided the contractor with historical data at the time of bid.

5. A claim by a homeowner against a contractor for damages arising from defective construction accrues, for statute of limitation purposes, upon completion of performance under the contract irrespective of how the claim is characterized in the complaint because all liability for defective construction has its genesis in the contractual relationship of the parties. Kamath v. Building New Lifestyles, Ltd., 44 N.Y.S. 3d 532 (Supreme Court, Appellate Division, Second Department, New York; January 11, 2017).

* What the Court Considered: In ruling upon the homeowner’s appeal of a dismissal by the trial court in favor of the contractor based on the statute of limitations, the Court looked at factual dates when a certificate of occupancy was issued and when the homeowners moved into the dwelling.

* What the Court Said: The Court, after construing the applicable state statutes of limitation, held that an action upon a contractual obligation or liability, express or implied, must be commenced within six years of the date the cause of action arose. For a claim against a contractor seeking damages arising from defective construction, the cause of action accrues for statute of limitation purposes, upon completion of performance under the contract. Although actions to recover damages for an injury to property or for personal injury are governed by a three-year statute of limitations, there is an exception where the plaintiff’s cause of action is for damages resulting from exposure to toxic substances, in which case the cause of action accrues when the plaintiff begins to suffer the manifestations and symptoms of his or her physical condition, i.e., when the injury is apparent, not when the specific cause of the injury is identified.

* What the Opinion Means: A party seeking to assert a claim for defective construction or for damages resulting from exposure to toxic substances, must be very much aware of the applicable statute of limitations and when the cause of action will be deemed to have accrued for that particular statute of limitations.

Joseph H. Bucci is a Partner in the Construction Litigation Group at Saul Ewing LLP, and resides in the Pittsburgh office. Joseph represents contractors, subcontractors, owners, real estate developers, wind farm developers, public utilities, architects, engineers, construction managers, design builders, sureties and government agencies related to construction and/or real estate development projects.