Cases of the Month
Significant Cases and Decisions Affecting the Construction Industry
By: Joseph H. Bucci, Esquire
Saul Ewing LLP
1. In a case brought before the Supreme Court, Appellate Division, Third Department of New York, involving a public Dormitory Authority, the Court held that an express notice provision must be literally performed and actual notice or general awareness will not suffice to excuse the contractor seeking reimbursement for claims that arose on the project. Ridley Electric Co., Inc. v. Dormitory Authority of the State of New York, 60 N.Y.S. 3d 551, 2017 N.Y. Slip Op. 05907 (July 27, 2017).
* What the Court Considered: This project involved a prime electrical contractor engaged on a New York State Veteran’s Home where the contractor had difficulty completing the work due to certain issues related to the ceiling design. Approximately five months after achieving substantial completion, the contractor requested additional compensation for extra work that it performed without strict compliance with the contract’s notice of claim provisions.
* What the Court Said: Notice and reporting requirements in public contracts are very common and provide public agencies with timely notice of deviations from budgeted expenditures and allow early steps to avoid extra or unnecessary expense to mitigate damages and avoid the waste of public funds. Because of these important public policy considerations, an expressly agreed upon notice provision “must be literally performed” and a party who has failed to do so cannot prevail on a breach of contract claim.
* What the Opinion Means: Where you are engaged on a public works project that has an expressly worded advance written notice of claim provision and procedure, it must be followed strictly in order to preserve your rights to additional compensation. General awareness by some employees of the public entity, or even actual notice, will not suffice to constitute a waiver of the contractual written, advance notice provisions. Follow the terms and provisions of your contract closely whenever you are seeking additional compensation or damages arising from changed conditions.
2. A dispute arose between a painting subcontractor and the general contractor over the construction of a new fire station for the City of Mercer Island, Washington, where the subcontractor was found by the trial court to have caused delay to the completion of the project and therefore to be responsible, in part, for the 179 days of project delay and liquidated damages assessed to the general contractor. Thirteen days of the 179 were found to be caused by the painting subcontractor. Here, as a result of the settlement between the City and the general contractor where less than the stipulated amount of liquidated damages were assessed, the general contractor must then apportion its assessment of liquidated damages to the subcontractor based on the reduced amount of liquidated damages imposed by the City. These liquidated damages assessed by the general contractor to the subcontractor were described by the Court as “pass-along liquidated damages.” Cortinas Painting & Restoration, Inc. v. Corp Inc., Construction, et al., 2017 WL 4640326 (Unpublished Opinion of the Court of Appeals of Washington, Division 1; October 16, 2017).
* What the Court Considered: The Court of Appeals closely reviewed the transcript from the trial court as well as the underlying contract documents and the testimony of various expert witnesses on delay damages, critical path scheduling and concurrent delays.
* What the Court Said: During the course of appellate review, the trial court’s findings of fact are reviewed for substantial evidence. There is a presumption in favor of the trial court’s findings of fact and the party claiming error has the burden of showing that a factual finding is not supported by substantial evidence. For a construction delay to be compensable, it must be on the critical path of the project such that it delays completion of the entire project. It is not enough for an activity to be delayed: The activity delay must increase the time necessary for total performance of the work. Where concurrent delays occur such that both parties to the contract are causing some kind of delay, there must be an apportionment of responsibility among the parties. Additionally, a concurrent delay need not exactly overlap, it is sufficient that the delay need only be related by circumstances, not necessarily over the same period of time.
* What the Opinion Means: When you are a party to an agreement that exposes you to liquidated damages, unless you can demonstrate through critical path scheduling methodology that the events of delay for which you are charged did not impact an activity on the critical path, or were not subject to concurrency with other delaying events, an assessment of liquidated damages will be upheld by the court.
3. On a public works, federal government contract involving the Department of the Navy for improvements at an FBI academy in Quantico, Virginia, the claims of a subcontractor against the prime contractor and the payment bond surety are governed by the Miller Act, which cannot be contravened by the terms and conditions of the written subcontract agreement published by the prime contractor. U.S. on behalf of Kitchens to Go v. John C. Grimberg Co., Inc., 2017 WL 4698217 (U.S. District Court, E.D. Virginia; October 19, 2017).
* What the Court Considered: This matter involves the claim of a subcontractor for payment of its contract balance and claims for additional, extra work occasioned by a 14-month extension of the project beyond the agreed upon completion date. Here, because of the application of the Miller Act, the court construed both the provisions, purpose and intent of the Miller Act, as well as the conflicting terms and conditions of the subcontract agreement offered by the prime contractor and its surety to avoid payment of the Miller Act claim. Specifically, the court looked at Article 9 of the subcontract which contained a “No-Damages-For-Delay” clause and it looked at Article 15, which incorporated the dispute resolution procedure of the prime contract.
* What the Court Said: The court found that the subcontract’s no-damages-for-delay provision could not be utilized to contravene the provisions of the Miller Act or to otherwise deny reimbursement of delay costs to a subcontractor on a federal construction project. The court also said that the payment bond surety cannot rely on the subcontract’s dispute resolution clause requiring the subcontractor to await completion of dispute resolution proceedings between the prime contractor and the owner before an unpaid subcontractor brings a Miller Act suit. Importantly, the court held that a surety’s liability on a Miller Act bond must be at least coextensive with the obligations imposed by the Act itself if the bond is to have its intended effect. Moreover, the court stated that the Miller Act trumps the subcontract so that a surety is not entitled to rely on a subcontractual no-damages-for-delay cause to avoid Miller Act liability to a subcontractor for delay damages because to do so would contravene both the text and the purpose of the Miller Act. Here, the court found that the no-damages-for-delay clause not only contradicted the language of the Miller Act but also was inconsistent with the purpose of the Act.
* What the Opinion Means: If you are a subcontractor on a federal construction project and you have not been paid following the expiration of 90 days after the day on which you perform the last of your labor, your cause of action has accrued legally and you may immediately sue on the bond to recover your damages. Moreover, certain provisions included in the subcontract that might otherwise appear to preclude recovery of your payment bond claim will likely not be upheld by a reviewing court where they contravene and/or contradict the language or purpose of the Miller Act.
4. The U.S. District Court for the E.D. of Louisiana, recently reviewed a motion for partial summary judgment filed against a contractor seeking to recover damages for extended home office overhead arising from owner caused delay through use of the Eichleay Formula. The project was the development and construction of the Hyatt House Hotel in New Orleans. Here, after acknowledging that Louisiana courts uphold the Eichleay Formula according to a three-prong judicially determined test, this court found that there were factual issues preventing the award of summary judgment. Team Contractors, LLC v. Waypoint Nola, LLC, et al, 2017 W.L. 4368084 (October 2, 2017).
* What the Court Considered: The court reviewed the motion and the opposition on the issue of the recovery of Eichleay damages, as well as the prior Louisiana cases where the Eichleay Formula was at issue.
* What the Court Said: The court described the three-prong test to determine if a claimant is entitled to recover extended home office overhead damages in Louisiana as follows: (1) The contractor must demonstrate that there was a government-caused delay not excused by a concurrent contractor-caused delay; (2) The contractor must show that it incurred additional overhead expenses, either because the contract’s performance period was extended or because the contract would have finished prior to the unextended performance period’s close; (3) The contractor must establish that it was required to remain “on standby” for the duration of the delay. Explaining further, the court said that to show being “on standby”, a contractor must show: (1) the delay was not only substantial, but was of an indefinite duration; (2) the contractor was required to return to work at full speed and immediately during the delay; and (3) most, if not all, of the contract work was suspended.
* What the Opinion Means: Where you sustain extended project duration and/or delay due to an owner-caused event for which there is no concurrent delay attributable to you, you may utilize the Eichleay Formula as a means to recover indirect damages related to extended home office overhead. The issue of whether there was an actual work stoppage or you are “on standby” will turn on the facts of each case. If work is not advancing beyond routine tasks or only at a minor, minimal level, this may be a “functional work stoppage” that may satisfy the Eichleay requirements. Federal courts have already held that a claimant need not show a total stoppage of work to recover extended overhead damages. As such, a contractor’s performance of minor tasks during the suspension does not prevent it from recovering under Eichleay.
5. On a dispute between the general contractor and its insurance company arising out of the construction of the Bismarck Information Technology Division Building in North Dakota, suit was filed by the contractor to compel its insurance company to pay for damages incurred as a result of defective work by two key subcontractors under the CGL policy issued to the contractor by its insurance company. Following competing motions for summary judgment, the Court ruled in favor of the insurance company and denied coverage to the general contractor. Lexstar Construction, LLC v. United Fire & Casualty Company, 2017 WL 2985491 (May 19, 2017; U.S. District Court, D.North Dakota).
* What the Court Considered: The Court closely construed and applicable CGL policy, the inclusions and exclusions to the policy, as well as the factual allegations relating to the nature of the damage for which the general contractor sought insurance coverage.
* What the Court Said: The District Court construed the applicable CGL policy and found that according to the exclusions section of the policy, coverage did not apply to: (1) that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations; or (2) that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it. Here, the policy defined “your work” as including work performed by the subcontractors engaged by the general contractor. Following its review and analysis, the Court concluded that the general contractor could not establish any of the requirements for coverage under the terms of the applicable CGL policy.
* What the Opinion Means:
The language of your CGL policy, and in particular the inclusions and exclusions sections, must be closely scrutinized to determine whether or not any given claim falls within the coverage provisions of your policy. The “your work” exclusion does apply to work performed on your behalf, including the work that subcontractors perform on the project. Coverage under the “completed operations provisions” will also not likely be found where the damages or loss at issue occurred prior to completion of the construction work.
Joseph H. Bucci is a Partner in the Construction Litigation Group at Saul Ewing Arnstein & Lehr LLP, and resides in the Pittsburgh office. Joseph represents contractors, subcontractors, owners, real estate developers, wind farm developers, public utilities, architects, engineers, energy and pipe liners, construction managers, design builders, sureties and government agencies related to construction and/or real estate development projects.