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

September 2016

1. Where two parties enter into contract negotiations for a federal construction project involving the construction of military operations facilities at various Army bases in North Carolina and Georgia, where the agreed upon subcontract contains a clearly-worded forum selection clause and a clearly-worded choice of law clause, those provisions will likely be enforced notwithstanding the fact that the actual construction project under which the dispute arose was in a state different than that identified in the parties’ subcontract. Tetra Tech Tesoro, Inc. v. JAAAT Technical Services, LLC, et al., 2016 WL 3751803 (Court of Appeals of Georgia; July 13, 2016).

* What the Court Considered: In a challenge to the forum selection clause in the parties’ subcontract agreement, the court determined that enforceability of the clause should be decided under federal law given the fact that the construction projects at issue took place on a federal installation. Here, both Federal law and the law of Georgia applied the same legal interpretation to the clause.

* What the Court Said: The trial court concluded that under federal law, the forum selection clause would be enforced absent “exceptional circumstances”. Here, the court concluded that no exceptional circumstances were presented and that the result of the legal interpretation would be the same whether under Georgia law or federal law. The court also explained that absent fraud, undue influence or overweening bargaining power, such clauses should be enforced unless the chosen forum would be so inconvenient as to deny the litigant of his day in court.

* What the Opinion Means: The opinion here means that if you enter into a contract agreement that contains a forum selection clause and a choice of law provision, the enforceability of that clause will be determined under the substantive laws of the actual state where the construction project is performed. In many instances, the court in the state where the project is located will uphold the forum selection and choice of law provisions agreed to by the parties. The party seeking to invalidate these clauses bears the burden of making a strong case free from substantial doubt that enforcement of the clause would prejudice the litigant and the public interest under the circumstances

2. The United States District Court for the Southern District of Florida has clarified that a contractor, intending to make a claim upon a performance bond supplied by a subcontractor, must strictly follow the terms and conditions of the subcontractor’s bond in order for the contractor’s claim to be honored by the surety. Failure to provide advance written notice to the bonding company and failure to provide the subcontractor and the surety with a meaningful opportunity to cure before the contractor unilaterally takes action, will negate the contractor’s rights against the surety under the subcontractor’s performance bond. International Fidelity Insurance Company and Allegheny Casualty Company v. Americaribe-Moriarty JV, 2016 WL 3647668 (June 22, 2016).

* What the Court Considered: The District Court addressed a motion for summary judgment filed by the subcontractor’s surety to dismiss the contractor’s claim under the subcontractor’s performance bond. According to the surety, the contractor failed to satisfy the express conditions precedent to assert a claim under the performance bond and the contractor materially breached the terms of the performance bond, thereby rendering the performance bond null and void.

* What the Court Said: Summary judgment will only be granted if the pleadings, depositions, answers to interrogatories and admissions on file, together with any affidavits, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. In ruling on a motion for summary judgment, the court is obligated to view all of the evidence and all of the factual inferences reasonably drawn from the evidence in the light most favorable to the non-moving party, and the court must resolve all reasonable doubts about the facts in favor of the non-movant. Here, the court ruled in favor of the subcontractor’s surety, thereby striking the contractor’s claim under the subcontractor’s bond.

* What the Opinion Means: To survive a motion for summary judgment directed to you, you must be able to demonstrate that there is a material issue of fact that remains unresolved such that a decision by the court, as a matter of law, would be premature and improper. The factual disputes that will prevent an award of summary judgment must run to material issues that would affect the outcome of the litigation under the governing law. A material fact will become critical if the evidence is such that a reasonable jury could return a verdict for the non-moving party. With respect to performance bonds, the party seeking to enforce its rights under a bond must follow the conditions precedent prescribed within the four corners of the bond as to notice to the surety and affording the surety a reasonable opportunity to act in advance of the claimant unilaterally initiating action on its own behalf

3. In a design-build contracting situation for a $72 million public detention facility, the U.S. District Court in Arizona found in favor of the design builder and against the architect on counterclaims asserted by the architect for additional services based on the monthly unconditional waivers and releases signed by the architect, as well as the final unconditional waiver and release signed by the architect to obtain payments from the design builder. Faulkner, USA, Inc. and Safeco Insurance Company of America v. The Durrant Group, Inc., et al., 2013 WL 11834262 (May 30, 2013).

* What the Court Considered: This was a motion for summary judgment by the design builder and counter motions for summary judgment by the architect and the architect’s sub-consultants. The design builder asserted claims against the design group for contribution as to liquidated damages imposed on the design builder due to alleged errors and omissions by the architect, while the architect and its sub-consultants sought compensation for alleged additional services, some of which were rendered prior to construction and were in the nature of value engineering, redesign services.

* What the Court Said: Here, it was the practice of the parties for the architect, as a condition to receiving both progress payments and to receiving its final payment, to sign and submit unconditional waivers and releases to the benefit of the design builder. The court found that the periodic waivers and releases signed by the architect, in addition to the final waiver, clearly and unequivocally released any claims on behalf of the architect or its sub-consultants. The court also found that the architect could not assert a claim for unjust enrichment because the services at issue fell within the reach of the unconditional waivers and releases submitted by the architect. The court also found that the architect’s argument that economic duress compelled the submission of the periodic and final waivers and releases was without merit because fear of financial distress alone, without evidence of wrongful conduct on the part of the design builder, was insufficient to support a charge of economic duress under Arizona law.

* What the Opinion Means: First and foremost, this case shows the important significance of periodic waivers of lien and/or claim that are typically submitted by parties to a construction project in order to obtain progress payments and the final payment. Arguments of economic duress as being the reason why these partial and final releases are executed will not be sufficient to sustain a claim asserted at a later point in time arising out of the project or the contract for which the release was provided.

4. The Court of Appeals of Arizona has concluded that on a public works project falling under the state’s Miller Act, a surety on a payment bond may not be sued by a subcontractor for bad faith, notwithstanding the recognition by the Arizona Supreme Court, in a case that was distinguishable from this particular case, that recognizing a claim of bad faith against a surety on a performance bond would deter the type of conduct on the part of a surety that had the potential for creating great financial and personal hardship to a claimant. . S&S Paving & Construction, Inc. v. Berkley Regional Insurance Company, 239 Ariz. 512, 372 P.3d 1036 (May 12, 2016); citing to Dodge v. Fidelity & Deposit Co. of Maryland, 161 Ariz. 344, 778 P.2d 1240, 1242 (1989).

* What the Court Considered: A claim, which was filed untimely and beyond the statute of limitations, against a payment bond surety on a public works project where the subcontractor alleged breach of contract by the general contractor and a tort claim of bad faith directed to the insurance company who issued the performance bond. Here, the court considered the viability of the subcontractor’s claim, as well as the subcontractor’s bad faith allegation against the insurer who issued the payment bond.

* What the Court Said: The court granted summary judgment in favor of the insurance company who issued the payment bond because the subcontractor’s claim was untimely under the applicable state statute which had a one-year statute of limitations for actions on payment bonds. The court also dismissed the contractor’s bad faith claim, concluding that there was no contractual relationship or special relationship between the subcontractor and the insurance company who issued the payment bond.

* What the Opinion Means: If you are a claimant under a payment bond for public work, your claim rights are strictly defined by the provisions of the applicable state statute. Any suit on a payment bond must therefore be filed within the time period proscribed in the statute. Filing beyond the time provided in the statute will render your payment bond claim null and void. Unlike cases in the private sector alleging bad faith against a surety, prevailing on a claim of bad faith on a public project with a clearly defined statutory scheme presents an obstacle for the claimant that will not likely be upheld by the court.

5. The U.S. District Court for the Northern District of Illinois has held that an insurance company for a subcontractor had a duty to defend both the subcontractor and the general contractor, an additional insured, in a faulty workmanship case arising out of the construction of a 24-story condominium building under the subcontractor’s occurrence type comprehensive general liability policy. . Westfield Insurance Co. v. National Decorating Service, Inc., J. McHugh Construction Co., et al., 147 F.Supp. 3d 708 (ND Illinois, Eastern Division November 25, 2015).

* What the Court Considered: The District Court considered whether or not there was an “occurrence” under a standard form CGL policy when the named insured subcontractor’s faulty workmanship causes damage to a building that is beyond the scope of its own work.

* What the Court Said: The costs to repair and replace the faulty work of the insured was not covered under the CGL policy. However, as to those damages which the subcontractor caused to other parts of the building that were beyond the subcontractor’s scope of work, the court found that whether or not insurance coverage existed to other portions of the work would turn on whether this particular property damage resulted from an “occurrence”, meaning per the definitions of this policy, an “accident”. The court then looked to the factual allegations in the underlying complaint to determine whether a duty to defend existed. If the underlying complaint alleges facts within or potentially within policy coverage, then the insurer is obligated to defend the policyholders, even if the underlying allegations are groundless, false or fraudulent. A court will declare that the insurer owes no duty to defend only if it is clear from the face of the complaint that the stated facts do not fall within the scope of coverage. The court also found that in determining whether or not a duty to defend runs to an additional insured, such as a general contractor, on a policy procured by the subcontractor, the issue of coverage applicable to the additional insured depends on the scope of the subcontractor’s work as the named insured and not the scope of work of the additional insured. This court also found that the purpose behind CGL Insurance was persuasive, that being to protect the policyholder from liability for damage to the property of others and not to pay the costs associated with repairing or replacing the policyholder’s self-performed defective work. This court concluded that there was “property damage”, resulting from an “occurrence”, for any damage the insured caused to parts of the 24-story condominium building “beyond the scope of the subcontractor’s work”, whereupon coverage is triggered and the insured has a duty to defend.

* What the Opinion Means: When faced with an issue regarding whether or not coverage exists, and whether or not the insured has a duty to defend either its insured, or additional named insureds on the case alleging property damage flowing from what is described to be defective work by the insured, it is the scope of work of the insured (not the scope of work of the additional insured) that is scrutinized to determine whether or not the resulting property damage constitutes an occurrence under the applicable CGL policy. If the resulting property damage is beyond the direct scope of the named insured, then there will likely be coverage and a duty to defend will exist.

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, architects, engineers, construction managers, design builders, sureties and government agencies related to construction and/or real estate development projects.