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American Bar Association

Construction Litigation

Practice Points

August 5, 2016

Fifth Circuit Considers Limits of the Spearin Doctrine


A contract is an exchange of promises, some written and others not. The written promises in a construction contract might be found in the documents the parties actually sign, or in other documents to which the signed document refers. Other promises are implied by the courts. Almost all construction practitioners are familiar with one promise that courts have implied into construction contracts known as the “Spearin warranty” or the “Spearin doctrine,” so-called because it was recognized in the United States Supreme court’s decision in the case of United States v. Spearin, 248 U.S. 132 (1918). Spearin has been read by most federal and state courts to hold that an owner impliedly warrants the adequacy of design specifications furnished to a contractor for its work. Accordingly, in many cases, if there is a defect in the design specifications which causes a failure or which makes the contractor’s work more difficult, the contractor has a defense or a potential claim against the owner for the increased cost of performance.


However, a recent decision by the U.S. Court of Appeals for the Fifth Circuit, Dallas/Fort Worth International Airport Board v. INET Airport Systems, Inc., et al., 2016 U.S. App. LEXIS 6646, 819 F.3d 245 (5th Cir. Apr. 12, 2016), reminds us that the implied warranty recognized in Spearin may in certain instances be subject to qualification by the express language of the parties’ contract.


This action arose out of a construction project in terminal E of the Dallas/Fort Worth International Airport (DFW), in which pre-conditioned air and rooftop air handling units were to provide conditioned air (cooling and heating) to passenger boarding bridges and aircrafts parked at terminal gates. In August, 2009, following a competitive bidding process, owner Dallas Fort Worth International Airport Board entered into a contract with contractor INET Airport Systems, Inc. to construct the project. The plans and specifications for the contract included detailed drawings, the precise rooftop units and parts to be used, approved manufacturers and performance requirements. Under the contract and these plans, the contractor was obligated to install operational rooftop units that were required to use 30 percent ethylene glycol/water supplied through DFW’s existing piping system. The contractor was not allowed to substitute products or designs for those agreed upon in the contract documents without authorization from the owner. The contract also required that if anything in the agreed-upon plans needed to be changed, the contractor would alert the owner and the parties would collaborate to come up with a workaround that would be incorporated into the contract by written change order issued by the owner with agreed prices for performing the change order work.


Trouble arose when the contractor expressed concern that the rooftop units specified in the plans might not function properly with the ethylene glycol/water mixture supplied by DFW’s existing piping system. In an October 2009 construction kick-off meeting, the contractor advised the owner that the plans needed adjusting because the coolant used in the rooftop units was kept at sub-zero temperatures, risking a damaging freeze. After receiving no immediate response to this concern, the contractor submitted a request for information asking how it should proceed. The parties’ ensuing discussions resulted in two proposals for how to add control sequences (control sequence proposal) or revised piping (revised piping proposal) to the units to prevent potential problems. While the contractor rejected the  control sequence proposal, the record was unclear as to what happened with the Revised Piping Proposal, other than that the parties did not formally price the change or incorporate it into their contract. Despite significant communication on the matter, the parties were never able to agree on how to proceed. Months later, the owner told the contractor it failed to meet the substantial completion deadline and subsequently refused to pay at least two invoices from the contractor. In 2012, after contracting with another company to complete the construction, the owner initiated litigation against the contractor in which each party accused the other of breaching the contract. Both the owner and the contractor moved for summary judgment on their claims.


The district court determined that the case turned on which party first breached the contract and concluded that the general rule implied in the contract placed the risk of defects in the designs and specifications on the owner, that the owner had admitted the designs and specifications were defective, and that the owner therefore breached the contract by failing to acknowledge the defects and issue appropriate change orders. As a result, the district court granted summary judgment for the contractor and, after a bench trial on damages, awarded damages and attorneys’ fees to the contractor in the amount of $1.29 million. The owner appealed.


The U.S. Court of Appeals for the Fifth Circuit concluded it was error for the district court to grant summary judgment for the contractor because the record contained disputed facts regarding which party first prevented performance by failing to fully cooperate in arriving at a solution once the parties discovered defects in the plans and specifications. Finding that there was no dispute that the plans and specifications were defective, the court focused on which party was responsible under the contract for defective plans and specification and what the contract required of each party once the contractor alerted the owner to a defect that would prevent its performance.


First, the court disagreed with the district court’s finding that the contract allocated the risk of defective plans and specifications solely to the owner. The court found that while the owner partly bore the risk of defective plans and specifications, the contract allocated some duties to the contractor as well, duties that required the contractor to cooperate or take other actions in this case to help resolve the discrepancy between the contract’s requirements and the plans and specifications. For example, the court noted that if the engineer or the owner determined that changes were necessary after the contractor pointed out a potential error, the contract required that the parties mutually agree upon the workaround and how to adjust for the change or modify the contract. Thus, the court looked to the contractual language to determine the parties’ intent to allocate the risk of defective design specifications. The court concluded that the contract contained a mixture of provisions that placed the risk of defects on both the owner and the contractor, and that both parties had a duty to cooperate in finding a solution to the defect.


The court then considered which party breached the contract by failing to participate in resolving the defect and agreeing to the associated change order or modification to the contract. The contractor acknowledged that it rejected the  control sequence proposal, but pointed to requests for information to support its claim that the owner breached the contract by failing to issue a change order and incorporate the Revised Piping Proposal into the contract. However, the owner argued that the contractor had rejected the Revised Piping Proposal as well, pointing to correspondence between the parties and deposition testimony on the subject. The court found that this non-conclusory evidence created a dispute of material fact as to whether the contractor rejected the Revised Piping Proposal outright or hindered the process of agreeing to this or another solution. The court concluded that, “[s]ifting through the evidence to determine whether the parties reached agreement on a contractual modification is a task ill-suited for summary judgment on this record. For these reasons, and because disputes of material fact remain regarding whether [the owner] or [the contractor] breached the contract by preventing an agreement about how to address defects in the contract’s plans and specifications, we reverse the district court’s grant of summary judgment for [the contractor].”


Consequently, the court reversed the district court’s grant of summary judgment for the contractor and remanded the case for the breach of contract claims to proceed to a fact finder.


The teaching of this case to contractors is, as in many other contexts, when a problem arises, we must read and comply with the terms in the contract. With respect to the risk of defective design specifications, contractors should not assume that the general rule will always apply to their agreement. In this particular case, had the contractor identified the problem, alerted the owner and created a record showing its efforts to agree to a solution, the burden of the defective design specification would have once again shifted to the owner.


Kenneth I. Levin and Jeffery R. Mullen are with Pepper Hamilton LLP, Philadelphia.


 

October 23, 2015

Washington Court Rules a Termination for Convenience Provision Is Not Illusory


The decision in SAK & Associates, Inc. v. Ferguson Construction, Inc., No. 72258-1-I, 2015 WL 4726912 (Div. 1, August 10, 2015) distinguishes Washington law from some jurisdictions that interpret the implied covenant of good faith and fair dealing to impose a limitation on termination for convenience provisions. The court ruled that a termination for convenience provision is not illusory, and the covenant of good faith and fair dealing will not trump express and unambiguous terms, as there cannot be a breach of good faith when a party simply stands on its rights according to a contract’s terms.


SAK entered into a subcontract agreement with Ferguson for the furnishing of concrete materials and paving services for the construction of hangars at an airport. SAK partially performed the contract between April 18, 2012 and July 27, 2012, and Ferguson terminated SAK from the project on July 27, 2012. The notice of termination referred to “phasing restrictions, site logistics, and basic convenience,” citing to the termination for convenience provision in the subcontract. Upon termination, Ferguson paid SAK its proportionate share of the contract for actual work performed.


On May 10, 2013, SAK sued Ferguson alleging breach of contract for wrongful termination without cause. Ferguson moved for summary judgment based on SAK’s failure to observe the procedural claim requirements set forth in the subcontract. SAK also filed a motion for summary judgment asserting the termination for convenience provision was unenforceable as a matter of law. The court denied both motions. Ferguson filed a second motion for summary judgment asserting it properly exercised the termination for convenience provision in the subcontract, and that it was enforceable as a matter of law. The court granted Ferguson’s second motion and dismissed SAK’s claims with prejudice.


On appeal, SAK argued the termination for convenience provision was an illusory promise and therefore unenforceable. SAK also raised issues with Ferguson’s notice of termination. The court, noting that in Washington the measure of an illusory promise is whether there is adequate consideration, stated that, “it is well recognized that partial performance provides adequate consideration for enforcement of what otherwise might be an illusory provision granting unilateral control to one party.” Because SAK had performed 24 percent of the contract and Ferguson paid the proportionate share of the contract price for the work performed, SAK failed to establish that the termination for convenience provision was illusory for lack of consideration.


Although SAK did not argue breach of good faith, the court opined Washington is not among the jurisdictions that read the implied covenant of good faith to limit the exercise of a termination for convenience provision. The court held that “as a matter of law, there cannot be a breach of the duty of good faith when a party simply stands on its rights to require performance of a contract according to its terms.” Covenants of good faith and fair dealing do not trump provisions in a contract that are express and unambiguous. Thus, Ferguson properly exercised its right to terminate for convenience, as it was a clause in the contract to which both parties agreed.


SAK also argued that Ferguson’s notice of termination was improper. SAK contended Ferguson’s references in the notice were mere pretextual excuses for increasing its own profits. The court disagreed holding the termination for convenience clause did not specify the content of the required notice, and that Ferguson’s notice stating “for convenience” was sufficient pursuant to the provision in the contract.


Keywords: termination for convenience, wrongful termination, good faith and fair dealing


Paul R. Cressman Jr. is with Ahlers & Cressman PLLC, Seattle.


 

October 22, 2015

Contractor’s Lien Rights Take Priority Based on First Date of Work


A recent case illustrates the significant benefits a contractor gains by having lien rights, and having priority dating back to the first date, and time, of work. Shelcon Construction Group, LLC v. Haymond, 187 Wn. App. 878, 351 P.3d 895 (Div. 2, May 27, 2015). The contractor who released its lien of record was allowed to re-record the lien and have priority over a lender based on contractor’s first date of work.


Scott Haymond hired Shelcon Construction Group LLC to perform earthwork, excavation, demolition, clearing, and grading for a real estate development project known as The Farm. On July 5, 2006, at 8:35 a.m., Shelcon marked the property boundaries with fluorescent ribbon to assist Shelcon’s employees in visually determining the boundary lines. Shelcon’s owner testified that he never clears and grubs without first marking the boundary lines. A few days later, on July 10, 2006, Shelcon employees actually cleared and grubbed The Farm.


On July 5, 2006, at 2:14 p.m., on the same day that Shelcon marked the property boundaries, Washington First International Bank recorded a deed of trust against the property to secure a $1,540,000 loan. Shelcon’s work continued, but it was not paid, and on June 20, 2008, it recorded a claim of lien with the Pierce County Recorder for $303,291. The lien reflected work beginning July 5, 2006.


Haymond required additional financing, and sought such financing from Anchor Bank. When Anchor Bank learned of Shelcon’s lien, it told Haymond that it would not lend to him unless the lien was released. Haymond asked Shelcon to release the lien, promising to pay Shelcon with the loan proceeds from Anchor Bank. On July 16, 2008, Shelcon recorded a release of lien that did not indicate it was limited or conditioned in any way.


After the lien had been released, Haymond contacted Anchor Bank and claimed that the lien had been a misunderstanding. He falsely claimed that he owed Shelcon $303,291 for a project unrelated to The Farm, and that he had fully paid that amount.


On August 22, 2006, Anchor Bank recorded a deed of trust on The Farm as security for a $3,900,000 loan, and a release of Washington First’s deed of trust. On September 8, 2008, Shelcon and Haymond amended their scope of work and contract price when Shelcon sent a letter and contract to Haymond. This contract summarized all of Shelcon’s work to date, and all of Haymond’s payments to date. It set out changes in the future scope of work and included new payment terms. These terms provided that Haymond pay Shelcon for future work at cost plus 15 percent, that any overdue payments would accrue interest at 18 percent, and that Shelcon would be entitled to attorneys’ fees for any enforcement action. Neither party signed the contract. Shelcon presented the contract to Haymond, it was discussed, and Haymond never objected to its terms. After the contract was presented, Shelcon began to charge Haymond cost plus 15 percent for work, and Haymond began paying that amount. Shelcon continued to work at The Farm until February 12, 2009.


On May 1, 2009, Shelcon recorded a second claim of lien on The Farm for $309,369. This amount included work Shelcon had initially included in its first lien. On December 31, 2009, Shelcon filed suit against Haymond and Anchor Bank seeking foreclosure of its lien.


Shelcon prevailed against Haymond with the court finding Haymond liable for the principal sum of $245,151, and that Shelcon was entitled to foreclose its lien. The court further found that the September 8, 2008 letter and contract were a written memorialization executed by the conduct of the parties, and that Haymond owed Shelcon 18 percent interest. The trial court further found that Anchor Bank stepped into the shoes of Washington First International Bank for lien priority purposes, as Anchor Bank had paid off Washington First International Bank.


The court of appeals affirmed the trial court, and found that the contract was not barred by the statute of frauds due to part performance by the parties. Part performance is established when: a contract is proven by clear, cogent, and convincing evidence, and part performance unmistakably points to the existence of agreement. The court of appeals found that the parties executed the agreement by their conduct.


The court of appeals further held that when Shelcon marked the boundaries of the property on July 5, 2006, at 8:35 a.m., it was performing professional services for which it was entitled to lien. Professional services are defined by RCW 60.04.011(13) as: “Surveying, establishing or marking the boundaries of, preparing maps, plans, or specifications for, or inspecting, testing, or otherwise performing any other architectural or engineering services for the improvement of real property.”


Because Shelcon performed professional services mere hours before the recording of Washington First International Bank’s deed of trust, Shelcon’s lien had priority over the interests of Anchor Bank in the property.


The court of appeals further awarded Shelcon reasonable attorneys’ fees based both on the attorneys’ fee provision contained in the contract and RCW 60.04.181(3), which provides that the prevailing party in an action to enforce a mechanic’s lien is entitled to attorneys’ fees.


Keywords: mechanic’s lien, lien priority, lien release


Paul R. Cressman Jr. is with Ahlers & Cressman PLLC, Seattle.

 

July 17, 2015

Unlicensed Contractors Not Entitled to Statutory Protections


The New Mexico Court of Appeals held that the strong public policy against unlicensed contractors not only prevents unlicensed contractors from using the court system to collect for work performed, but also denies them the benefit of statutory protections such as statutes of limitation or repose. S. Louis Little v. Paulette Jacobs, 2014-NMCA-105, 336 P.3d 398. In this case involving a 13-year-old deck, the Court of Appeals reversed the trial courts grant of summary judgment based on application of the 10 year statute of repose applicable to all construction projects.


In 2000, the appellant unlicensed contractor constructed a deck on rental property owned by defendant Jacobs. In 2009, the plaintiff stayed at the rental property and was injured when he fell off the deck and into a ditch. The plaintiff brought suit against the landlord in 2011 and upon learning in 2013 of the appellant’s involvement in the construction of the deck, amended the complaint to name the appellant as a party.


At the trial court, the appellant argued that New Mexico’s statute of repose applicable to construction projects, N.M.S.A. 1978, §37-1-27, barred the cause of action as it was brought more than ten years after substantial completion. The trial court agreed and granted summary judgment.


On appeal the Court of Appeals reversed the grant of summary judgment even though as noted by the Court the statute of repose does not specifically limit its application to licensed contractors. While not supported by the language of the statute itself the Court of Appeals found that it was a legislative policy to require licensing and that the statute of repose would apply only to those legitimately involved in the construction industry.


This case represents an entirely new approach to preventing unlicensed contracting. New Mexico, like some other states, has always prevented an unlicensed contractor from seeking affirmative relief in court. The Court of Appeals decision however goes further in limiting how an unlicensed contractor may defend itself in court. One issue not specifically reached in this decision is whether on remand the defendant may seek recovery of all amounts paid to the unlicensed contractor. In New Mexico an owner is entitled to recovery of all amounts paid to an unlicensed contractor, even for work properly performed and when the owner has knowledge of the unlicensed status, but this decision may mean that there is no time limit on when an owner may seek recovery against an unlicensed contractor.

 

Keywords: unlicensed contractors, statute of limitations, statue of repose


Sean R. Calvert is with Calvert Menicucci, PC, Albuquerque, New Mexico.


 

 

April 23, 2015

Washington Court Strictly Enforces Default Provision; Material Breach Can Still Excuse Performance


Recently, Division III of the Washington Court of Appeals strictly enforced a default provision requiring notice and the opportunity to cure, but found that the non-breaching party can still contend a material breach occurred that excused its performance, see DC Farms LLC v. Conagra Foods Lamb Weston, Inc., 179 Wn. App. 205, 317 P.3d 543 (Div. 3, January 30, 2014). A food processor was not excused from providing a contractually-required notice of default and opportunity to cure because it maintained that a farmer’s breach was incurable. Failure to provide the notice of default and opportunity to cure was a breach of contract by the food processor.


DC Farms, an Idaho potato grower, brought a legal action for breach of contract and other claims against Lamb Weston, a processor of frozen potato products, after Lamb Weston claimed to terminate and then refused to perform under a strategic potato supply agreement.


The situation arose after Lamb Weston discovered a broken light bulb in one of DC Farms’ cellars when removing potatoes, and two days later found a broken light bulb in a Tuff-Skin membrane on its potato processing line while DC Farms’ potatoes were being processed. There was a substantial factual dispute as to the extent of glass contamination in the eight cellars of potatoes that were the subject of the parties’ agreement.


The parties’ agreement contained the following default provision that required notice and opportunity to cure:


Default by [DC Farms]: Any of the following events that remain uncured after receipt of seven (7) days written notice of default, which notice shall describe the nature of the default, shall be considered a material breach and default by [DC Farms]:


* * *

(c)        The negligence or misconduct of [DC Farms], its employees or agents resulting in the loss of, or damage to, a material portion of the Crop.


* * *


7.2.2    [Lamb Weston]’s Remedies.

Upon any event of default … [Lamb Weston], in addition to any other remedy afforded it by law or by this Agreement:


  • May terminate this Agreement and may hire a farmer to fulfill [DC Farms]’s obligations under this Agreement or take such other measures as [Lamb Weston] deems are in its best interest to preserve and protect the Crop and [Lamb Weston]’s rights hereunder.
  •  

(Emphasis in original.)


Lamb Weston delivered a letter to DC Farms terminating their agreement, but did not provide a notice of default. The letter provided that:

DC Farms should “take this [letter] as notice that [Lamb Weston] hereby exercises its rights, pursuant to Section 7.2(c) of our Strategic Potato Supply Agreement dated January 29, 2009, to terminate that agreement with DC Farms for breach.”

(Emphasis in original.)


The trial court, on Lamb Weston’s motion for summary judgment, concluded that Lamb Weston was excused from providing the contractually-required notice of default and opportunity to cure because DC Farms’ breach was incurable. The court of appeals reversed. The court found that Lamb Weston was required to honor the notice and opportunity to cure provision despite its belief that the breach could not be cured, and found that a genuine issue of fact existed as to whether DC Farms remained able to substantially perform.


The court refused to accept Lamb Weston’s contention that service of an otherwise-required notice of default is excused if the breach is incurable. Lamb Weston contended that Washington law does not require someone to do a useless act, and relied upon a Missouri case that supported its position. In its opinion, the court pointed out that Washington courts have explicitly refused to apply the maxim that “the law does not require the performance of an idle or useless act” to excuse a party from providing a notice of default and opportunity to cure required by a notice-and-cure provision.


In rendering its opinion, the court set forth a number of general contract principles:


  • The general rule with respect to compliance with the terms of a bilateral contract is not strict compliance, but substantial compliance.

  • The doctrine of substantial performance is intended for the protection and relief of those who have faithfully endeavored to perform their contract in all material and substantial particulars, so that their right to compensation may not be forfeited by, e.g., inadvertent omissions or defects.

  • Although a plaintiff who has substantially performed a contract may maintain an action on the contract, the action is without prejudice to any showing of damage on the part of the defendant for the failure to receive a full and complete performance.

  • Substantial performance is said to be the antithesis of material breach; if it is determined that a breach is material, or goes to the root or essence of the contract, it follows that substantial performance has not been rendered, and further performance by the other party is excused.

  • Only a breach or nonperformance of a promise by one party to a bilateral contract so material as to justify a refusal of the other party to perform a contractual duty discharges that duty.

  • The materiality of a breach, and thereby the issue of substantial performance, is a question of fact.

  • The question of materiality depends on the circumstances of each particular case.

  • While the general rule is that a party who has substantially performed may maintain an action on a contract, the parties may contract for literal performance. Where the parties have not made it clear that literal and exact compliance are necessary, however, substantial performance will suffice, especially if requiring literal performance will result in forfeiture.

  • Where the parties’ contract includes a notice-and-cure provision, generally, a clear and unambiguous notice, timely given, and in the form prescribed by the contract is essential to the exercise of an option to terminate the contract.

  • As a general proposition, if a party who has the power of termination fails to give notice in the form and the time required by his reservation, it is ineffective as a termination.

The court went on and found that whether DC Farms committed a material, incurable breach was genuinely disputed, and Lamb Weston could still defend on the basis that the glass contamination could not be cured and caused it to refuse to further perform under the parties’ agreement. The court stated that mere proof that there was a breach of contract by a defendant, in this case Lamb Weston, without more, will not support a verdict in favor of a plaintiff, even for nominal damages.


The court advised that a genuine issue of fact remained as to whether Lamb Weston’s refusal to accept the crop, or much of it, complied with its obligations. In addition, genuine issues of fact remained concerning whether the location of the potatoes to be accepted by Lamb Weston under the agreement was material. In other words, could Lamb Weston refuse to accept potatoes from other cellars or refuse to accept delivery of potatoes from other sources provided by DC Farms? If DC Farms delivered substitute potatoes, would that constitute substantial performance of the parties’ agreement?


The court went on and stated that a material breach sufficient to allow rescission of a contract is one that substantially defeats the purpose of the contract. The court stated that a jury could find that even if DC Farms breached the contract, its breach was only partial. A breach need not be material to give rise to a cause of action for damages.


It is noteworthy that evidence existed that Lamb Weston had contracted for more potatoes in the specific crop year in question than it could use, that the market price for potatoes had dropped below the price set by Lamb Weston in its contracts with growers, and that Lamb Weston was looking for ways to refuse to honor contracts, and thereby limit its losses from excess potatoes.


Keywords: notice of default, opportunity to cure, material breach

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Paul R. Cressman Jr. is with Ahlers & Cressman PLLC, Seattle.


 

April 22, 2015

Lack of “Inexcusable Neglect” Allows Suit to Go Forward Despite Statue of Limitations


Washington’s Court Rule 15(c) allows a plaintiff who mistakenly sues an incorrect defendant to amend a complaint and add the correct defendant. The added party must have received notice of the action within the limitations period such that the party will not be prejudiced in maintaining its defense on the merits. The added party must have known or should have known that but for a mistake concerning his identity, the action would have been brought against it. Additionally, the plaintiff’s delay in adding the defendant cannot have been due to inexcusable neglect. Martin v. Dematic, 182 Wn.2d 281, 340 P.3d 834 (December 31, 2014), turned on how to interpret the rule.


On August 13, 2004, Donald Martin was killed by a machine at a Kimberly-Clark paper plant. His wife filed a wrongful death and survival action within the three-year statute of limitations on June 29, 2007. Among the defendants named was “General Construction Company dba/fka Wright Schuchart Harbor Company.” She served General Construction Company (GCC) with a summons and complaint on July 5, 2007, alleging that Wright Schuchart Harbor Co. (WSH) installed the machine, and that GCC was its corporate successor.


On July 24, 2007, unknown to Martin, GCC tendered the defense and demanded indemnity from Fletcher General, Inc. and Fletcher Construction Company North America (FCCNA). The letter stated that under a stock purchase agreement from 1996, Fletcher General, Inc. remained liable for events occurring before 1996, and that because WSH installed the machine around 1980, Fletcher General, Inc. was responsible for the resulting liability.


On October 19, 2007, more than two months after the statute of limitations had run, GCC filed its answer and included a third-party claim for indemnity against Fletcher General, Inc. This was the first time that Martin had notice of a Fletcher entity’s potential liability.


The complex corporate history is described below. When WSH installed the machine in 1981, WSH was a subsidiary of Wright Schuchart, Inc. (WSI), which WSI purchased the assets of a corporation known as General Construction Company in 1981. Thus, WSH and GCC were subsidiaries of WSI.


In 1987, WSI was sold to Fletcher Construction Company (Delaware), Ltd., which was a subsidiary of FCCNA, and FCCNA was a subsidiary of Fletcher Challenge, a New Zealand multi-national corporation.


In 1993, Fletcher merged several of its subsidiaries, including WSI, which included WSH and GCC, as subsidiaries, into Fletcher General, Inc, which assumed WSH’s preexisting liabilities.


In 1996, Fletcher sold the majority of Fletcher General, Inc.’s assets to Fletcher General’s managers, and the managers created a new company named General Construction Company. Thus, there were two GCCs. Originally GCC was a subsidiary of WSI. That GCC merged into Fletcher General, Inc. in 1993. However, a new GCC was formed in 1996 when Fletcher General, Inc.’s managers purchased the majority of Fletcher General, Inc.’s assets and formed a completely different company named GCC. It is this GCC that Martin sued in 2007, before the statute of limitations expired.


Fletcher General, Inc. continued to exist, and agreed under the asset purchase agreement to assume all of its preexisting liabilities occurring before July 1, 1996.


In 2001, Fletcher General, Inc. merged into FCCNA, and FCCNA thereby assumed Fletcher General, Inc.’s preexisting liabilities.


GCC filed a motion for summary judgment contending that Martin sued the wrong party, as GCC was not a successor in interest to WSH under the asset purchase agreement. The trial court granted GCC’s motion.


On January 22, 2010, Martin filed an amended complaint adding FCCNA as a defendant. On November 23, 2010, FCCNA filed a motion for summary judgment to dismiss it from the case based on the statute of limitations. The trial court granted FCCNA’s motion. The court of appeals affirmed. The supreme court reversed, holding that Martin’s amended complaint related back to the date of her initial complaint under CR 15(c), thus making it timely.


The standard of review for CR 15(c) determinations is de novo.

There are two textual requirements and a judicially-created requirement for relation back pursuant to CR 15(c). The textual requirements are that (1) the added party must have received notice of the action within the limitations period such that he or she will not be prejudiced in maintaining his or her defense on the merits, and (2) the added party must have known or should have known that but for a mistake concerning his or her identity, the action would have been brought against him or her. The party seeking to amend its complaint has the burden to prove these two elements are satisfied.


The non-textual requirement is that a plaintiff may not add a new defendant if he delays in adding him “due to inexcusable neglect.”


The court found that both textual requirements were met. The court then turned to whether the inexcusable neglect prong applied. Inexcusable neglect exists when the identity of a defendant is readily available, and the plaintiff provides no reason for failing to name the defendant. Delay due to a conscious decision, strategy, or tactic constitutes inexcusable neglect. The court noted that it has held that when a plaintiff could have discovered the identity of a defendant from any one of a variety of public sources and fails to do so, the plaintiff’s failure is inexcusable neglect.


The court noted that Haberman v. Wash. Pub. Power Supply Sys., 109 Wn.2d 107, 174, 744 P.2d 1032, 750 P.2d 254 (1987), first required that the record indicate that the defendant’s identity was easily ascertainable during the limitations period before requiring the plaintiff to give a reason for failing to name the defendant. The court noted that the defendant bears the initial burden of showing neglect by producing evidence that the defendant’s identity was easily ascertainable by the plaintiff. Once the defendant has produced that evidence, the burden shifts to the plaintiff to give a reason for failing to ascertain the identity of the defendant. If the plaintiff fails to give a reasonable excuse or show that he or she exercised due diligence, it is inexcusable neglect.


The court noted that it originally adopted the “inexcusable neglect” requirement from the federal courts and their analogous Federal Rule of Civil Procedure. The court noted that the U.S. Supreme Court has now eliminated “inexcusable neglect” from its analogous rule. Because the parties did not ask the court to consider eliminating its “inexcusable neglect” requirement, it left that issue for another day.


Applying the “inexcusable neglect” standard, the court found that FCCNA failed to show that its identity was easily ascertainable during the limitations period. As a result, Martin did not need to give a reason for failing to identify FCCNA, and there was no inexcusable neglect.


Keywords: Correcting Defendant, Adding Party, Statute of Limitations

 

Paul R. Cressman Jr. is with Ahlers & Cressman PLLC, Seattle.


 

April 22, 2015

Statute of Limitations Can Run from Termination of Services

In Dania, Inc. v. Skanska USA Building, Inc., ___ Wn. App. ___, 340 P.3d 984 (Div. 2, December 30, 2014), a Washington appeals court ruled that for the six-year time period specified in RCW 4.16.326(1)(g) to run from the termination of services, rather than substantial completion of construction, there must be some nexus between the construction work performed at the claimed termination of services date and the cause of action.


Dania contracted with Skanska USA Building, Inc. for the construction of a distribution warehouse in DuPont, Washington. Skanska subcontracted with McDonald & Wetle, Inc. (M&W) for the construction of the complete roof system.


A temporary certificate of occupancy was issued on December 21, 2005. In January 2006, Dania received permission from the city to use the full square footage of the warehouse.


A punch list was issued on February 14, 2006. The list showed among the remaining work, installation of a final layer of roofing known as the “mineral cap sheet,” which M&W installed on June 21, 2006.


In November 2006, Dania noticed leaks in the building. M&W made initial repairs, but Dania eventually hired an outside contractor in 2010 to repair the roof.


On April 4, 2012, Dania filed suit against Skanska and M&W. Dania alleged that the roof was leaking because the roofing materials, including the mineral cap sheet, were not properly installed, and claimed damages of almost $400,000.


Skanska moved for summary judgment, arguing that Dania’s complaint was untimely because it was filed more than six years after January 2006, the project’s substantial completion date. Skanska also argued that the June 2006 roof work did not postpone the running of the statute of limitations, because the work was unrelated to Dania’s complaint.


Deposition testimony from Skanska’s project manager indicated that the roof was still watertight without the mineral cap sheet. During the trial court’s summary judgment proceedings, Skanska maintained that the limitation period could not start running when the mineral cap sheet was installed in June 2006, because the June work had nothing to do with the leaks. The trial court eventually agreed with Skanska that the lack of any evidence that the mineral cap sheet caused the leaks caused the limitation period to run from the date of substantial completion, and that Dania’s action was time barred. Dania appealed, and the court of appeals reversed.


The applicable statute was RCW 4.16.326(1)(g), which provides in pertinent part:

  1. Persons engaged in any activity defined in RCW 4.16.300 may be excused, in whole or in part, from any obligation, damage, loss, or liability for those defined activities under the principles of comparative fault for the following affirmative defenses:

  2.  

* * *

(g)        To the extent that a cause of action does not accrue within the statute of repose pursuant to RCW 4.16.310 or that an actionable cause as set forth in RCW 4.16.300 is not filed within the applicable statute of limitations. In contract actions the applicable contract statute of limitations expires, regardless of discovery, six years after substantial completion of construction, or during the period within six years after the termination of the services enumerated in RCW 4.16.300, whichever is later.


As noted, RCW 4.16.326(1)(g) terminates any construction contract claim six years after substantial completion or termination of services enumerated in RCW 4.16.300, whichever is later.


The court stated that substantial completion occurs when the entire improvement, not just a component part, may be used for its intended purpose. The fact that additional contract work remains, including punch list work, does not affect the conclusion that a project is substantially complete if it is otherwise fit for occupancy. Dania conceded that the warehouse was substantially complete when it was ready for use in January 2006. Relying upon Parkridge Associates, Ltd. v. Ledcor Industries, Inc., 113 Wn. App. 592, 599-600, 54 P.3d 225 (2002), the court stated that the language contained in RCW 4.16.300, describing actions or claims “arising from” various services shows that there must be a nexus between the service performed after the date of substantial completion and the cause of action in order for the termination of services date to extend the limitations period. The court stated that this requirement protects those who perform earlier services from remaining exposed to liability until all services are completed by all contractors.


Skanska argued that the nexus requirement is satisfied only with evidence of a causal link between the final services and the cause of action. Because Dania did not respond with any such evidence, Skanska maintained that dismissal was appropriate. Dania, on the other hand, maintained that there was an issue of fact concerning the nexus requirement without the evidence of causation that Skanska required.


The court found that the required connection was arguably satisfied in this instance by the location and timing of the June 2006 roof work and the November 2006 leaking. The court found that the fact that the roof was watertight in January did not show, in and of itself, that the subsequent cap installation did not affect the roof’s ability to withstand moisture. The court rejected Skanska’s argument that additional evidence of a causal link was required to withstand summary judgment. The court declined to interpret the nexus requirement to impose the burden Skanska sought to impose on Dania. Viewing the evidence in the light most favorable to Dania, the non-moving party, a genuine issue of material fact was raised as to whether a connection existed between Skanska’s final roof work in June 2006 and the leaking that followed in November 2006.


A concurring opinion was filed by Judge Brad Maxa, who agreed with the majority opinion that the trial court’s grant of summary judgment in favor of Skanska should be reversed. He concurred because he believes that under RCW 4.16.326(1)(g), the statute of limitations begins to run at termination of the defendant’s construction services, even if those services do not relate to the plaintiff’s claim, rather than at substantial completion, assuming that the date of termination of services is later than the date of substantial completion.


Keywords: statute of limitations, termination of services, substantial completion

 

Paul R. Cressman Jr. is with Ahlers & Cressman PLLC, Seattle.


 

April 22, 2015

Washington State Courts Can Have Civil Jurisdiction over Tribal Courts


In Outsource Services Management, LLC v. Nooksack Business Corporation, 181 Wn.2d 272, 333 P.3d 380 (August 21, 2014), Washington’s supreme court ruled that its state courts have jurisdiction over a civil case arising out of a contract in which a tribal corporation waived its sovereign immunity and consented to jurisdiction in the state’s courts.


Nooksack Business Corporation (Nooksack), a tribal enterprise of the Nooksack Indian  tribe, signed a contract with Outsource Services Management LLC to finance the renovation and expansion of its casino. The contract contained the following clause related to sovereign immunity and jurisdiction:


Limited Waiver of Sovereign Immunity; Waiver of Rights in Tribal Court. Subject to the limitations on recourse in Section 8.30, the Borrower hereby expressly grants to the Lender and all Persons entitled to benefit from any Loan Document an irrevocable limited waiver of its sovereign immunity from suit or legal process with respect to any Claim. In furtherance of this waiver, the Borrower hereby consents with respect to any Claim: (A) to arbitrate in accordance with the provisions of Section 8.27, and (B) to be sued in (i) the United States District Court for the Western District of Washington (and all federal courts to which decisions of the United States District Court for Western District of Washington may be appealed), (ii) any court of general jurisdiction in the State (including all courts of the State to which decisions of such courts may be appealed), and (iii) only if none of the foregoing courts shall have jurisdiction, or only to permit the compelling of arbitration in accordance with Section 8.27, or the enforcement of any judgment, decree or award of any foregoing court or any arbitration permitted by decree or award of any foregoing court or any arbitration permitted by Section 8.27, all tribal courts and dispute resolution processes of the  tribe. The Borrower hereby expressly and irrevocably waives any application of the exhaustion of tribal remedies or abstention doctrine and any other law, rule, regulation or interpretation that might otherwise require, as a matter of law or comity, that resolution of a Claim be heard first in a tribal court or any other dispute resolution process of the  tribe.


(Emphasis in original.)


Nooksack failed to make a payment due on the loan. Outsource and Nooksack executed three successive forbearance agreements, but after Nooksack failed to make required payments, Outsource sued Nooksack in Whatcom County Superior Court. Nooksack acknowledged that it waived sovereign immunity, but argued that the court did not have subject matter jurisdiction because it involved a contractual dispute with a tribal enterprise that occurred on tribal land.


The trial court denied Nooksack’s motion to dismiss, ruling that it had subject matter jurisdiction, because Nooksack both waived sovereign immunity and consented to the jurisdiction of the Washington state courts. Nooksack appealed, and the court of appeals affirmed and issued a broader holding than the trial court, concluding that the waiver of sovereign immunity alone was sufficient to give the superior court subject matter jurisdiction in the case.


On appeal, the state’s supreme court affirmed, holding that Washington state courts had jurisdiction where the trial corporation both waived its sovereign immunity and consented to jurisdiction in Washington state courts. The court specifically did not adopt the court of appeals’ reasoning that Nooksack’s waiver of sovereign immunity was enough, in and of itself, to confer subject matter jurisdiction on Washington state courts. This issue was not presented in the case, and the supreme court took no position on it.


In rendering its opinion, the supreme court noted that Washington courts generally have jurisdiction over civil disputes in Indian country if either the state has assumed jurisdiction pursuant to federal Public Law 280, or asserting jurisdiction would not infringe on the rights of the tribe to make its own laws and to be ruled by them.


The subject dispute did not fall within the scope of civil jurisdiction that Washington assumed pursuant to Public Law 280. The question was whether asserting jurisdiction would infringe on the rights of the  tribe. The court found that asserting jurisdiction would not infringe on the  tribe’s right to self-rule when its own tribal enterprise decided to consent to jurisdiction of Washington state courts for claims related to the contract.


The court in fact stated that ignoring the  tribe’s decision to waive sovereign immunity and consent to state court jurisdiction would infringe on the  tribe’s right to make those decisions for itself.


The court further noted that if it adopted Nooksack’s position, it would impose a significant limitation on the rights of other tribes and tribal enterprises in Washington who may want to be able to assure parties with whom they contract that the parties can seek a remedy in Washington state courts. Adopting Nooksack’s position would prohibit them from doing so.


Where state court jurisdiction is limited solely to protect tribal sovereignty and a tribe’s right to self-rule, the limit does not apply when a tribal enterprise chooses to consent to such jurisdiction.


Keywords:  tribe, waiver of sovereign immunity, consent to jurisdiction

 

Paul R. Cressman Jr. is with Ahlers & Cressman PLLC, Seattle.


 

March 11, 2015

ďNo Damage for DelayĒ Not Enforceable to Preclude Breach of Contract by Owner


In Zachry Const. Corp. v. Port of Houston Authority of Harris County, Texas No. 12-0772, the Texas Supreme Court found unenforceable a “no damage for delay” clause that was so broad as to hold the owner harmless from delays resulting from its own misconduct.


Zachry entered into a construction contract with the port authority containing a “no damage for delay” clause drafted for the owner’s benefit that precluded recovery for damages:


… arising out of or associated with any delay or hindrance to the Work, regardless of the source of the delay or hindrance, including events of Force Majeure, AND EVEN IF SUCH DELAY OR HINDRANCE RESULTS FROM, ARISES OUT OF OR IS DUE, IN WHOLE OR PART, TO THE NEGLIGENCE, BREACH OF CONTRACT OR OTHER FAULT OF THE PORT AUTHORITY.


A jury awarded damages that were, according to the jury award, caused, at least in part, by the port authority’s breach of contract. The jury was not asked to determine whether the port’s conduct “constituted arbitrary and capricious conduct, active interference, bad faith and/or fraud,” a previously established exception to enforcement of a “no damage for delay” clause.


On appeal the Houston Court of Appeals ruled that the language of the “no damage” clause was not only broad enough to exculpate the port from breach of contract damages but would also serve to exculpate the port if the jury had made a specific finding of the arbitrary and capricious standard.


At the supreme court the port argued that this contract clause gave them the right to delay Zachry for any reason whatsoever. Bristling at such a notion the court stated that a contractual provision exempting a party from tort liability for harm caused intentionally or recklessly is unenforceable on public policy grounds. It concluded that the same rule should apply regarding contract liability.


Thus, while “no damage for delay” clauses are generally and broadly enforceable in Texas, a party may not step over the line of exempting itself from delay damages caused by its own misconduct and breach of contract.


Keywords: Texas, Houston, no damage for delay, owner caused delays

 

Robert M. Pitkin is with Horn Aylward & Bandy, LLC, Kansas City, MO.


 

March 11, 2015

Economic Loss Rule Does Not Bar Homeowner Claim Against Builder's Subcontractor


In yet another case involving the “economic loss rule,” the Texas Supreme Court held that a homeowner could maintain a cause of action for negligence against a builder’s plumbing subcontractor.Chapman Custom Homes, Inc. v. Dallas Plumbing Co.
No. 13-0776, 2014 WL 4116839 2014.


The plumbing subcontractor was found to have negligently and defectively installed connections from the water supply system to a  hot water system. This resulted in water flooding a house and damaging the structure.


The court of appeals upheld a summary judgment against the homeowners based upon the economic loss rule on the theory that the claim of the homeowner was based on a contract obligation of the plumbing subcontractor to which the homeowner was not a party.


The supreme court reversed, stating that a “common law” (implied) duty to perform with care and skill accompanies every contract and failure to meet the standard may provide a basis for recovery by a third party who is damaged as a result. The court noted that the damage claimed was not to the subject matter of the contract with the builder as would be required for the economic loss rule.


Keywords: Texas, subcontractor, economic loss rule, implied duty to perform with care


Robert M. Pitkin is with Horn Aylward & Bandy, LLC, Kansas City, MO.


 

March 11, 2015

Texas Supreme Court Rejects Contractor Action for Negligent Misrepresentation


The Texas Supreme Court recently carved out a construction contract exception to the tort of negligent misrepresentation that had been consistently applied in business transactions in Texas for some 50 years.


 In LAN/STV v. Martin K. Eby Construction Co., Inc.  455 SW2d 234 (Tex. 2014), a contractor, Eby, claimed that the architect/engineer, LAN, provided plans and specifications to the owner, Dallas Area Rapid Transit (DART), for Eby’s use in preparing its bid, and that the documents were replete with false information causing Eby financial loss. This theory was consistent with prior law in Texas where, for example, an attorney who prepared an inaccurate title opinion for a mortgage company was held liable to a land purchaser who the attorney could reasonably expect to rely on for that opinion, McCamish, Martin, Brown and Loeffle v. F.E. Appling Interests, 991 SW2d 787 (Tex. 1999)


A jury sided with Eby and awarded $5 million. The Dallas Court of Appeals upheld that judgment based on a careful analysis of prior case law and the evidence at trial.


At the supreme court LAN argued, as it had at the court of appeals, that the “economic loss rule” should preclude recovery against LAN, a third party to its contract with DART. The Texas Supreme Court sided with LAN, effectively emasculating the well established cause of action for negligent misrepresentation in a construction contract context.


Keywords: economic loss rule, architect/engineer liability to contractor, negligent misrepresentation

 

Robert M. Pitkin is with Horn Aylward & Bandy, LLC, Kansas City, MO.


 

March 3, 2015

“Pay If Paid” Not Easily Waived


Pay-if-paid clauses in construction contracts are intended to shift the risk of owner nonpayment for a subcontractor’s work to the subcontractor, so that the general contractor is not obligated to pay if he is not paid by the owner. These clauses are enforceable in some states and not in others. In Georgia, a clearly drafted clause is enforceable. However, a recent court decision went further and announced that such a clause cannot be waived unless the evidence is so “clear and unmistakable” as to “exclude any other reasonable explanation”. Vratsinas Construction Co. v. Triad Drywall, LLC, 321 Ga. App. 451, 739 S.E.2d 493 (2013).


The case involved a drywall subcontractor’s payment claim against the general contractor on a shopping center construction project. The subcontract contained a pay-if-paid provision that payments were “expressly and unequivocally contingent upon … receipt of payment from Owner for the Subcontract Work.” It also provided that the subcontractor “expressly acknowledges that it relies on payment under the Subcontract on the creditworthiness of Owner, and not that of Contractor,” and the owner’s acceptance of the work and payment to the general contractor (GC) were “express, independent conditions precedent to any obligation” of the GC to pay the subcontractor.


The GC defended the claim based on the pay-if-paid clause and nonpayment by the owner, and the subcontractor argued that the clause was waived. There was evidence that the subcontractor’s co-owner met with the GC’s project manager when concerns arose about the project owner’s solvency and ability to pay. According to the subcontractor, the GC told the subcontractor not to worry about the owner’s finances and to keep working, and the GC would pay the subcontractor from its own pocket if necessary. Thereafter, the GC paid the subcontractor’s next pay request in full, even though the GC was not paid in full by the owner. However, the GC did not pay seven subsequent pay requests totaling more than $465,000 based on nonpayment by the owner.


The trial judge decided that there was a question of fact as to whether there was a waiver of the pay-if-paid clause and let the jury decide the question. The jury returned a verdict in favor of the subcontractor for $465,000 plus interest. On appeal, however, the judgment was reversed.


The appellate court reasoned that a waiver of an important contract right would not be inferred unless the waiver was “clear and unmistakable. And because waivers are not favored under the law, the evidence must so clearly indicate an intent to waive the right as to exclude any other reasonable explanation. Under this standard, the evidence of waiver was insufficient to create a jury issue. Therefore, the trial court should have entered judgment for the GC.


Even though there was evidence that the subcontractor was told to keep working and he would be paid, and even though a jury was persuaded by the evidence, the appellate court concluded the claim was barred by the pay-if-paid clause. The costly lesson for this subcontractor is instructive for others. If you have a pay-if-paid provision in your contract and you think the general contractor has agreed to pay you despite owner nonpayment, get it in writing.


R. Daniel Douglass and Walter L. Booth Jr. are with Stites & Harbison, PLLC, Atlanta.


 

February 20, 2015

Mechanicís Lien Claimants Entitled to Due Process Notice of Tax Foreclosure Sale


The Supreme Court of Missouri has upheld a trial court’s decision that mechanic’s lien claimants are entitled to notice of a tax foreclosure sale involving property covered by their liens under the Due Process Clause of the 14th Amendment of the Constitution and accordingly upheld the setting aside of the tax foreclosure sale to Realty Acquisition, LLC, the appellant.( In the Matter of Foreclosure Liens for Delinquent Taxes by Action in Rem: Collector of Revenue, by and through the Director of Collections for Jackson County, Mo. v. Parcels of Land Encumbered with Delinquent Land Tax Liens; Realty Acquisition, LLC, --- S.W.3d --- , 2015 WL 195897 (Mo. banc Jan. 13, 2015))


Respondents Beemer Construction, Inc. and Seal-O-Matic Paving were unpaid subcontractors on a residential development owned by Sunnypointe, LLC. Both Beemer and Seal-O-Matic timely filed valid mechanic’s liens against the development in 2007: $164,879.76 by Beemer and $187,494.80 by Seal-O-Matic. A timely mechanic’s lien foreclosure action was then filed against the property. There were no unpaid taxes at the time of the mechanic’s liens or the filing of the foreclosure action.


While the mechanic’s lien case was pending, the director of collections for the county filed a separate tax foreclosure action in 2010 and a judgment of foreclosure in the tax case was entered against Sunnypointe for unpaid taxes totaling less than $500. Neither Beemer nor Seal-O-Matic was a party to the tax foreclosure case and they were not aware that it had been filed. The property was sold to Realty at the tax foreclosure sale in 2011 for $51,000. The collector notified Sunnypointe and its lender of the tax foreclosure sale before it occurred, but not Beemer or Seal-O-Matic.


Immediately after finding out about the tax sale, Beemer and Seal-O-Matic entered appearances in the tax foreclosure action to oppose confirmation of the tax sale, arguing that the failure to give them prior personal notice of the tax sale violated their due process rights because of their interest in the property represented by their respective mechanic’s liens. The trial court set aside the tax sale as null and void and Realty appealed. Following an opinion by the court of appeals affirming the trial court, the Supreme Court granted transfer.


Realty argued on appeal that the collector was only required under Mo.Rev.Stat. § 141.540 to provide prior notice of the tax sale to the owner (Sunnypointe) and that the only notice required for mechanic’s lien claimants was publication notice under Mo.Rev.Stat. § 141.540.3. Beemer and Seal-O-Matic argued that their mechanic’s liens constituted substantial property interests that entitled them to due process protection, including the giving of personal notice by mail of the tax sale.


In what appears to be a case of first impression in the United States, the court agreed with Beemer and Seal-O-Matic. Specifically, the court held that the principles underlying decisions of the U.S. Supreme Court similarly require notice of a tax sale be given by mail, rather than merely by publication, to a holder of a mechanic’s lien on land subject to the tax sale when the lien has been properly filed with the clerk as required by Missouri law and the holder’s name and address thereby are reasonably ascertainable.


As noted above, this appears to be a case of first impression in the United States. Following prior U.S. Supreme Court precedent involving owners and lenders, the case firmly establishes that mechanic’s lien claimants are similarly entitled to be notified of a tax sale so that they—like owners and lenders—can protect their interests in the property.


Robert M. Pitkin is with Horn Aylward & Bandy, LLC in  Kansas City, MO.


 

February 20, 2015

Personal Liability for Submitting False Lien Waivers and Payment Applications


A Missouri  appeals court decided that individual owners of a construction company were personally liable for fraudulent misrepresentations made on lien waivers and payment applications.  (John Knox Village v. Fortis Construction Company, LLC, 449 S.W.3d 68 (Mo.App. W.D. 2014))


The owner, John Knox Village, filed an action against its construction contractor, Fortis Construction Company, LLC, and its individual owners for failing to pay subcontractors on two construction projects at the owner’s property. A bench trial resulted in judgments against Fortis and the individual owners, which included actual damages of $124,299.23, prejudgment interest, and punitive damages of $150,000. The judgment was based on theories of fraudulent misrepresentation, fraudulent conveyance, and civil conspiracy, which were grounded on claims and findings that the defendants submitted false lien waivers and payment applications to induce payments by the owner to Fortis. The payments were then used for personal gain rather than being remitted to unpaid subcontractors and suppliers.


On appeal, the defendants made three arguments. First, they argued that the trial court lacked subject matter jurisdiction, claiming that the bankruptcy court for one of the defendants had exclusive jurisdiction under 28 U.S.C. § 1334(e)(1). Second, defendants argued that the evidence was insufficient to support the trial court's finding of personal liability against some of the individual defendants. Third, defendants argued that the trial court misapplied the law in determining the amount of damages.


The court affirmed the judgment as to all defendants on all counts. Specifically, the court found that there was ample evidence that the individual defendants “absconded” with monies paid by the owner instead of properly paying project obligations. The award of punitive damages was also upheld because defendants improperly used project funds with knowledge that the owner would suffer the risk of paying unpaid subcontractors and project obligations twice.


Robert M. Pitkin is with Horn Aylward & Bandy, LLC in  Kansas City, MO.


 

January 23, 2015

Oregon’s Anti-Indemnity Statute Prevents General Contractor’s Recovery of All Attorneys’ Fees from Subcontractor


The Oregon Court of Appeals upheld a trial court’s decision holding that Oregon’s anti-indemnity statute voided a subcontract’s indemnity provision to the extent that it required the subcontractor to defend the general contractor against allegations of the general contractor’s or other subcontractors’ negligence.


In Sunset Presbyterian Church v. Anderson Construction Company, 268 Or App 309 (2014), a church sued its general contractor for construction defects, and the general contractor tendered defense of the action to several of its subcontractors. The subcontractors rejected the tender. Following this rejection, the general contractor filed a third-party complaint alleging that, among other things, the subcontractors breached their subcontracts by refusing to defend the general contractor.


Before trial, the general contractor settled with the church. As part of that settlement, the general contractor assigned to the church its claims against the subcontractors. The church moved for partial summary judgment on the duty and breach elements of the assigned duty-to-defend claims. While the trial court was considering the church’s motion, all of the church’s claims were settled, except the duty-to-defend claim against one subcontractor.


The trial court determined that the remaining subcontractor had a duty to defend the general contractor against claims based on the subcontractor’s work. The parties then proceeded to litigate the amount of damages.


During the damages phase, the church argued that the subcontractor’s defense obligation was to provide a complete defense against the claims and requested the entire amount of the general contractor’s attorneys’ fees and costs incurred in litigation. Although the trial court instructed the church to segregate the attorneys’ fees and costs incurred in defending allegations related to the subcontractors’ work, the church declined to do so. The trial court ruled that Oregon’s anti-indemnity statute limited the subcontractor’s liability for defense fees and costs to the extent the allegations implicated the subcontractor’s work. Oregon’s anti-indemnity statute, ORS 30.140, states that “any provision in a construction agreement that requires a person . . . to indemnify another against liability for . . . damage to property caused in whole or in part by the negligence of the indemnitee” is void. Because the church did not segregate the attorneys’ fees and costs based on allegations and claims, the trial court declined to award any damages.


On appeal, the church argued the subcontractor’s duty to defend included all of the claims asserted in the complaint, regardless of whether those claims implicated the subcontractor’s work. The church also contended that the duty to defend is different from (and much broader than) the duty to indemnify. According to the church, this distinction rendered Oregon’s anti-indemnity statute inapplicable to the subcontractor’s obligation to defend. The church also contended that the plain language of Oregon’s anti-indemnity statute is limited to contracts to “indemnify” and does not provide a similar limitation on the duty to defend.


In the alternative, the church argued that if Oregon’s anti-indemnity statute limits the subcontractor’s duty to defend, the case should be remanded and the trial court required to allocate damages between the general contractor and subcontractor.


The Court of Appeals determined that a promise to indemnify triggers a duty to defend and determines the scope of the promisor’s defense obligations. The appeals court observed that, if the church was permitted to require the subcontractor to pay costs of defending claims against the general contractor, this would shift the risk of the contractor’s own negligence to the subcontractor. Accordingly, the Court of Appeals held that Oregon’s anti-indemnity statutes limits a subcontractor’s duty to defend the general contractor. Thus the trial court’s denial of damages to the church was proper.


The appellate court also considered the church’s alternative argument and declined to remand the case for an allocation of damages. The Court of Appeals reasoned that, because the church had the burden of proving damages on any particular theory, it should have segregated its damages accordingly.


The Court of Appeals holding in Sunset Presbyterian is consistent with previous Oregon cases broadly applying Oregon’s anti-indemnity statute to contractual risk-shifting provisions that could be interpreted to require a subcontractor to indemnify a general contractor against its own negligence. Lawyers drafting construction contracts subject to Oregon law should carefully consider whether risk-shifting provisions could violate ORS 30.140. This case also illustrates the importance of presenting evidence supporting alternative theories so that there is a sufficient basis for recovery under those theories.


Sean Gay is a partner with Stoel Rives LLP, Portland, Oregon.

 

November 21, 2014

Oregon Court Clarifies Statute of Limitations in Real Property Cases


What was once unsettled law on the applicable statute of limitations for claims of negligent construction in Oregon has now been resolved by the Oregon Court of Appeals. In the recent Riverview Condominium Association v. Cypress Ventures, Inc. et al (Case No. A150586 (October 29, 2014)) case, the Court of Appeals took on the long awaited task of addressing the statute of limitations and statute of repose for claims alleging construction defects. The court held, among other things, that construction defect claims alleging negligent injury to the interest of another in real property (such as negligent construction) are subject to ORS 12.080(3), which provides a six-year statute of limitations that is triggered by discovery. Further, the statute of repose for those same claims is 10 years from the date of substantial completion, as provided for in ORS 12.135.


Plaintiff-appellant Riverview Condominium Association was the homeowner’s association (HOA) for a condominium development called Riverview Condominiums. The HOA filed suit against the defendants-respondents, the developer and the general contractor who built the condominiums, in Multnomah County Circuit Court for alleged damages suffered as a result of water intrusion. The defendants moved for summary judgment, arguing that the HOA’s construction defect claims were time-barred pursuant to both the statute of limitations and the statute of repose. The trial court ruled that the HOA’s post-construction negligence claims were barred by the two-year statute of limitations set forth in a footnote in the case of Abraham v. T Henry Construction, Inc., 350 Or 29, 249 P3d 534 (2011). The trial court also applied ORS 12.115’s 10-year statute of repose, governing negligent injury to person or property, to bar the HOA’s claims. The HOA appealed.


First, the Court of Appeals considered the HOA’s argument that the applicable statute of repose for a claim for injury to real property, negligent, contractual or otherwise is governed by ORS 12.135, not ORS 12.115. ORS 12.135 provides a 10-year statute of repose that runs from the date of substantial completion of the project. Subsequent to the trial court’s ruling, the Oregon appellate courts had considered a similar argument and held that ORS 12.115 is inapplicable when the claim arises from construction or an improvement to real property. Thus, the trial court erred in dismissing the HOA’s construction defect claims on the basis that the statute of repose had expired prior to the HOA filing suit. Since the ORS 12.135 repose period ran from the date of substantial completion, the Court of Appeals went on to analyze the legal and factual details of substantial completion in this case and ultimately reversed the trial court’s ruling.


Next and perhaps most importantly, the Court of Appeals considered the statute of limitations. The HOA argued that the applicable statute of limitations for construction defects claims is found in ORS 12.080(3), which provides a six-year statute of limitation for “interference with or injury to any interest of another in real property.” In addition, the HOA argued that ORS 12.080(3) is subject to the discovery rule. Respondents’ countered that construction defect claims based in negligence are subject to a two-year statute of limitations as provided in footnote no. 3 in the Abraham case.


The court recognized that it needed to reconcile the tension in the case law regarding the statute of limitations for, in particular, negligent construction claims. The court looked back to Beveridge v. King, 292 Or 771, 643 P2d 332 (1982), wherein the court applied the six-year statute of limitations to negligent construction claims. Beveridge was controlling in Oregon for nearly thirty years until the Oregon Supreme Court decided Abraham, which tossed the negligent construction statute of limitations into question with a single footnote stating that negligent construction claims are governed by the two-year statute of limitations set forth in ORS 12.110. The Court of Appeals observed that the issue before the Supreme Court in Abraham was not related to the statute of limitations, but that the Supreme Court nevertheless included a footnote which stated that tort claims for negligent construction have a two-year time period. The Court of Appeals explicitly stated that the Abraham footnote had no precedential value, noting that it is “unquestionably” dictum considering that the statute of limitations was not at issue.  The Court of Appeals found it “highly unlikely” that the Supreme Court would do away with precedent by way of a footnote. Thus, the Court of Appeals held that, construction defect claims alleging injury to the interest of another in real property, are governed by the six-year statute of limitations in ORS 12.080(3), which is triggered by discovery.


The Oregon Court of Appeals has now clarified the effect of footnote number 3 in Abraham, which has caused construction defect lawyers and courts around the state significant distress over the past three years and resulted in varying outcomes.


Jonathan Dirk Holt and Ryan Lee are with Scheer & Zehnder LLP in Seattle and Portland, Oregon.

 

September 16, 2014

Equitable Garnishment Judgment Against CGL Insurer Upheld

 

In the recently decided Village at Deer Creek Homeowners Association, Inc. v. Mid-Continent Casualty Co., 432 S.W.3d 231 (Mo.App. 2014) , the court decided that a judgment awarded to a homeowners association against the CGL insurer of its contractor was for property damage caused by an “occurrence” as defined in the insurance policies and accordingly upheld the judgment in excess of $4,000,000.


The declarations of a homeowners association (HOA) required the HOA to “maintain, repair and replace . . . the exterior portions of all [townhome] Units” subject to exceptions not applicable in this case. The declarations further permitted the developer (who was also the builder/general contractor) to control the HOA until such time as it was required to be turned over to the control of the homeowners.


Prior to the time of the turnover, homeowners complained about water leaks to the developer, who then tried to fix them with funds of the HOA. After the turnover, the HOA and 47 homeowners sued the developer/contractor in Kansas for the water leaks, including damage to both the interior and exterior of their townhomes. The developer/contractor notified its CGL insurers of the lawsuit, both of whom accepted the defense under a reservation of rights.


Prior to trial, the plaintiffs indicated their willingness to settle all claims against the developer/ contractor within the limits of the CGL policies. The insurers, however, would not agree to a settlement and would not agree to their insured’s subsequent demand to withdraw their reservation of rights. As a result, the insured terminated the insurers’ defense and then reached an agreement with the plaintiffs that any recovery obtained would be collected solely from the CGL insurers. In exchange, the developer/contractor agreed not to offer evidence at trial or cross-examine witnesses. Not surprisingly, the Kansas court found in favor of the plaintiffs and entered a judgment against the developer/contractor in excess of $7,000,000.


Following the judgment, the plaintiffs filed an equitable garnishment action against the CGL insurers in state court in Missouri. The developer/contractor also asserted claims for bad faith failure to settle, breach of fiduciary duty and breach of contract. After a trial of the equitable garnishment action, the Missouri court found in favor of the HOA and entered a total judgment commensurate with the underlying Kansas judgment in excess of $7,000,000. One of the CGL insurers reached a settlement with the HOA, while the other insurer moved forward with an appeal.


The remaining insurer/appellant made several arguments on appeal: (1) the underlying Kansas judgment against the contractor/insured was not for “property damage” but rather the cost to repair defective construction; (2) the underlying judgment did not property allocate the association’s damages between covered property damage and uncovered costs to repair defective construction; (3) the Missouri trial court should have permitted the insurer to amend its Answer to include a “your work” exclusion; and (4) damage to the townhomes was not an occurrence as defined by the CGL policy.


The court of appeals decided that the Kansas judgment was for property damage that was the result of an occurrence as defined by the CGL policy. Specifically, the court found that the installed exterior cladding system failed, which permitted water intrusion that not only damaged the exterior but also other components of the exteriors of each townhome. It was not contested that there was also water intrusion into each of the 137 townhomes as a result of defective construction by the insured.


This case is interesting because it contributes to the continuing evolution of the application of CGL policies to defective construction as to what is and is not covered.


Robert M. Pitkin is with Horn Aylward & Bandy, LLC in  Kansas City, MO.

 

September 12, 2014

Court Permits Assignment by Equitable Subrogation Pre-construction Liens

In late August, in The Weitz Company v. Heth, the Arizona Supreme Court resolved one of the financial messes left by Phoenix’s construction bust in favor of real estate purchasers. In the mid-2000s, the Summit at Copper Square, LLC borrowed more than $60 million to build a high rise commercial and condominium complex in downtown Phoenix. The loan was secured by deeds of trust against the property. The lender, First National Bank of Arizona, and Summit agreed that the bank would release individual condominium units from the deeds of trust as third parties purchased the units and a portion of the purchase money was paid to Bank.


Summit hired the Weitz Company, LLC as the general contractor for the project. Although Summit paid Weitz for approximately two years, in 2007, as the project neared completion, Summit owed Weitz $4 million, which it did not pay. Around this same time, Summit began selling completed units. As it sold these units, the bank released its lien on the individual units and the purchasers’ lenders’ assumed the first-place lien position.


In 2008, when Summit had sold 85 units, Weitz recorded a mechanics’ lien against the project and six months later, sued to foreclose the lien against Summit, the unit owners, and the unit owners’ lenders. The unit owners and their lenders moved for summary judgment, contending that because they had paid the portion of the construction loan allocated to their units, they were equitably subrogated to Bank’s deed of trust position and had priority over the mechanics’ lien. Weitz argued that, under the Arizona Revised Statues § 33-992(A), its lien had priority because Weitz had begun work before any units were sold. The trial court agreed. On appeal, the Arizona Court of Appeals agreed that Weitz’s lien had priority, but it did so because it concluded that, by statute, equitable subrogation could not be applied to the lien.


Last month, the Arizona Supreme Court reversed the court of appeals. It found that the lower courts had misapplied the doctrine of equitable subrogation, neglecting that, in purchasing the units, the buyers and their lenders did not extinguish the original lien, but rather were “in the same position as if the superior lienholder had expressly assigned the superior lien.” ¶ 15. It concluded that nothing about Arizona’s statute indicates that the legislature intended for an intervening mechanics’ lien to take priority over a superior lien. Further, it concluded that public policy does not bar equitable subrogation in the mechanics’ lien context and that contractors’ rights are not prejudiced by its application because the mechanics’ lien remains in the same position that it occupied before subrogation.


In addition to concluding that equitable subrogation was permissible, the court also rejected Weitz’s claim that the buyers were not entitled to equitable subrogation because they had not discharged the entirety of Summit’s lender’s lien, but rather only the liens on individual units. Finding that “permitting equitable subrogation when a party discharges only part of an obligation secured by a single mortgage on multiple properties but obtains a release of the lien on the property at issue coincides with the Restatement’s expansive view of equitable subrogation,” the court distinguished between equitable subrogation that divides the security between the original obligee and a subsequent payor and equitable subrogation that releases a specific property from the obligation apportioned to that property.


William F. Auther is with Bowman & Brooke, LLP, Phoenix.

 

September 3, 2014

PIH Beaverton v. Super One: "Substantial Completion" under Oregon Statute of Repose


The Oregon Supreme Court in the PIH Beaverton case narrowly construed the term “substantial completion,” which initiates the ten-year statute of repose for construction defect claims under Oregon Revised Statute 12.135. The statute defines substantial completion as “the date when the contractee accepts in writing the construction…as having reached that state of completion when it may be used or occupied for its intended purpose or, if there is no such written acceptance, the date of acceptance of the completed construction…by the contractee.”

Super One, a general contractor, built a hotel for VIP Industries.  In February 1997, VIP posted a “completion notice” to initiate the time period for asserting a construction lien, and obtained a certificate of temporary occupancy.  VIP began accepting guests soon thereafter.  A Certificate of Substantial Completion, which was contemplated by the AIA prime contract between Super One and VIP, was never issued by the architect.


Read the full case note.


Keywords: construction, litigation, Oregon, substantial completion, statute of repose


Jonathan Dirk Holt, Scheer & Zehnder, LLP, Portland, OR


 

August 25, 2014

Atlanta Airport Case Reveals Complicated Law Surrounding Sub-Subcontractors


When a construction worker is killed or injured on a project, the remedy typically involves workers’ compensation or liability insurance. So, how could it result in a breach of contract claim? The answer lies in the facts of a recent noteworthy Georgia case. Estate of Mack Pitts v. City of Atlanta, et al, 323 Ga. App. 70, 746 S.E.2d 698 (2013). 

The case involved construction of a new international terminal at the Atlanta airport. A worker was killed when struck by a vehicle driven by the employee of a sub-subcontractor trucking company. The worker’s estate obtained a wrongful death judgment against the company and driver, which exceeded the limits of the company’s automobile liability insurance coverage. 

Read the full case note.


Keywords: construction, litigation, Georgia, wrongful death, workers' compensation, breach of contract


R. Daniel Douglass, Stites & Harbison, PLLC, Atlanta, GA


 

July 16, 2014

Provision Providing for Early Accrual of Statute of Limitations Held Inapplicable


The Oregon Supreme Court reversed a trial court’s decision that, by the terms of the parties’ contract, plaintiff’s tort claims accrued on the date of substantial completion and were time-barred.


In Sunset Presbyterian, a church contracted with a contractor to construct a new church facility.  In early 1999, the church began using the facility and later held a dedication ceremony. The contractor continued to perform work through the summer and the project’s architect approved final payment in late November 1999. In early 2009, the church allegedly discovered extensive water damage and filed suit alleging tort claims against the contractor.


Read the full case note.


Keywords: construction, litigation, Oregon, contracts


Sean Gay, Stoel Rives LLP, Portland, OR


 

April 22, 2014

Amended Lien Relates Back to First Commencement of Services


Washington’s Court of Appeals held that: (1) the priority of a lien for unpaid engineering services pertaining to a contract with five subsequent amendment dates from the first commencement of services; and (2) reasonable mitigation can involve continuing to perform services despite nonpayment.


The dispute involved the priority of a mechanic’s lien filed by an engineering firm, Gibbs & Olson, Inc. (G&O), and the Deed of Trust of First-Citizens’ Bank & Trust Company (First-Citizens). Winlock planned to turn its 50-acre pasture into a 200-lot subdivision. In July 2005, Winlock and G&O executed a contract for engineering and survey services. The contract contained estimates for the cost of completion of the design work and a description of further engineering services necessary to complete the entire project in five phases. The contract provided for future amendments with Winlock’s written authorization and approval.


Read the full case note.


Keywords: construction, litigation, lien, priority, mitigation, contract amendment


Paul R. Cressman, Jr., Ahlers & Cressman PLLC, Seattle, Washington


 

April 22, 2014

General Contractor's Duty to Provide a Safe Workplace is Non-Delegable


Washington’s Court of Appeals affirmed that general contractors have a non-delegable duty to provide a safe place to work for employees of subcontractors, and reversed a jury verdict in favor of a general contractor in a case where a subcontractor’s employee was killed on the job.


The facts are tragic: While installing signs for a highway project, Daren Lafayette, a 19-year-old employee of Sharp-Line Industries, Inc., a subcontractor for N.A. Degerstrom, Inc.(Degerstrom), noticed that the company’s auger truck had begun to roll away from where he was working. He ran after the truck and jumped in the cab, but was apparently unable to stop it. It went over a cliff, and he was killed.


Read the full case note.


Keywords: construction, litigation, non-delegable duties, workplace safety, wrongful death


Paul R. Cressman, Jr., Ahlers & Cressman PLLC, Seattle, Washington


 

April 22, 2014

Contractor Has Lien Rights for Unpaid Change Orders


Washington’s Court of Appeals ruled that (1) the parties’ conduct mutually waived written change order requirements contained in a contract, and (2) a contractor has mechanic’s lien rights for unpaid oral change orders that are not part of the original contract price and recovered in quantum meruit.


This case involved the construction of a custom “prototype” residence by Top Line Builders, Inc. (Top Line) for the Bovenkamps in Blaine, Washington. The construction began in February 2008. Top Line indicated it believed it agreed to construction on a “cost-plus” basis, but the executed contract was a “fixed-price contract.”


The contract required written and signed change orders, and authorized the contractor to proceed with changed work at the owner’s verbal direction, but indicated that the contractor would follow up with a written change order “within the current month.” In practice, when the need for changes in the scope of work arose, Top Line and the Bovenkamps often discussed the changes and “sometimes—but not always—agreed to the costs associated with those changes.” The parties never executed any written change orders or submitted any such change orders to the project lender, U.S. Bank.


Read the full case note.


Keywords: construction, litigation, lien priority, change order, waiver, quantum meruit


Paul R. Cressman, Jr., Ahlers & Cressman PLLC, Seattle, Washington


 

April 22, 2014

Union Trust Funds Not Preempted From Recovering Subcontractor's Debts


The Washington Supreme Court overturned a 30-year-old decision protecting general contractors’ payment bonds and retainage from claims by unions and their associated trust funds.


Under Washington’s public works statutes (RCW 39.08 and 60.28), general contractors who perform public works are legally required to post payment bonds and have retainage withheld to, in part, pay subcontractors, suppliers, and others that are not paid. An issue arises when union subcontractors who become insolvent fail to pay the union dues and trust fund contributions (i.e., health and security trust, retirement trust, vacation trust, etc.). The trust funds may file lawsuits under ERISA (Employment Retirement Income Security Act) and LMRA (Labor Management Relations Act) in federal courts directly against the subcontractor/employer for payment. However, because the subcontractors are insolvent in many of these cases, the trusts also seek recovery under the state bond and retainage claim statutes by lodging claims against the general contractor’s bond and retainage.


Read the full case note.


Keywords: construction, litigation, payment bond, retainage, union, ERISA, preemption


Paul R. Cressman, Jr., Ahlers & Cressman PLLC, Seattle, Washington


 

April 22, 2014

Mechanic's Lien Claimants Entitled to Constitutional Notice of Tax Sale


In a case of first impression in Missouri, the Missouri Court of Appeals decided that mechanic’s lien claimants were entitled under the Due Process Clause to notice of a tax sale.   


The appellant argued that only compliance with the statutory procedures was required.  Specifically, they claimed that the collector of revenue for the county is only required to provide written notice of delinquent real estate tax foreclosure proceedings to the owner and a mortgage holder of record, not to third-parties like the mechanic’s lien claimants in this case.  The Due Process Clause, they claimed, is satisfied by the publicly recorded, constructive notice by publication.


The mechanic’s lien claimants argued that actual notice of the tax sale was required.  Specifically, they argued, the Due Process Clause requires actual written notice before property rights are taken for delinquent taxes.  Just like the holder of a mortgage, a mechanic’s lien claimant has a property interest in the real estate that should be protected from a covert tax sale.


Read the full case note.


Keywords: construction, litigation, Missouri, mechanic’s lien


Robert M. Pitkin, Esq., Horn, Aylward & Bandy, LLC, Kansas City, MO


 

April 3, 2014

"Active/Primary" Fault Versus "Passive/Secondary" Fault


The court of appeals in the Eclectic Investment case determined that the dispositive analysis for a common-law indemnity claim is whether the purported indemnitor should have paid the obligation instead of the indemnitee. Whether the alleged indemnitor’s fault was active or primary and the alleged indemnitee’s fault was passive or secondary is still relevant to a common-law indemnity claim, but it is not dispositive.


Defendant McAllister was an excavator hired by the property owner plaintiff, Eclectic Investment, LLC, to excavate a dirt embankment to enlarge the plaintiff’s parking lot. The defendant, Jackson County was the local authority that inspected and permitted the project. The plaintiff’s lawsuit sought damages resulting from a landslide involving the parking lot embankment after a rainstorm. At trial, the defendants successfully defeated the plaintiff’s claims by attributing the majority of fault to the plaintiff (55 percent). Although not reported, it is presumed by the facts that the plaintiff failed to produce a site plan or address concerns of the County regarding erosion problems or compaction issues. As a result, the plaintiff collected nothing due to its contributory negligence. The jury allocated seven percent fault to Jackson County and four percent fault to McAllister. In a cross-claim, Jackson County sought common-law indemnity from McAllister to recover its attorney fees incurred in defending the plaintiff’s claims. The trial court found in favor of McAllister, concluding that although McAllister was more active in creating the harm, Jackson County was not completely passive. As such, McAllister should not owe indemnity to Jackson County for it cost of defense when considering the totality of the circumstances.


Read the full case note.


Keywords: construction, litigation, common-law indemnity claim, Oregon


Jonathan Dirk Holt and Robert Kirsher, Scheer & Zehnder LLP, Seattle, WA and Portland, OR


 

April 1, 2014

Suit Against Architect Barred by Statute of Limitations


The Illinois Appellate Court held an action against an architect for actions concerning the design, management, or supervision of the construction was barred by the stature of limitations under section 13-214 of the Code of Civil Procedure, which provides a four-year statute of limitations for actions “against any person for an act or omission of such person in the design, planning, supervision, observation or management of construction, or construction of an improvement to real property.”


In J.S. Riemer, Inc. v. Village of Orland Hills,the Village of Orland Hills brought suit against the architect for actions concerning the design, management, or supervision of the construction of its new community center. The community center was substantially completed in 2001. In 2002, the concrete floor of the community center began sinking into the ground because it was built over peat, which was being compressed by the weight of the building. The Village claimed the architect gave its approval for the pouring of the concrete floor before all the excavation work required was complete. The architect told the Village that it was the fault of the excavator for not compacting the earthwork and fill under the floor. The architect also called for measurements to be made at various times from November 2002 to February 2005, measuring the depths to which the floor was sinking. However, according to the Village, the architect continued to deny that its design was defective and continued to blame the excavator for the problems with the building. The Village filed suit against the architect in 2006 based on its reliance upon their expertise.


Read the full case note.


Keywords: construction, litigation, architect, statute of limitations, Section 13-214 Civil Procedure


Ty Laurie, Laurie & Brennan LLP, Chicago, IL


 

April 1, 2014

Illinois Appellate Court Expands Rights of Homeowners


Continuing the trend of protecting the innocent purchaser of a residential property, the Illinois Appellate Court recently answered two certified questions to allow homeowners to assert claims against contractors or subcontractors where the builder-developer or general contractor is insolvent, even if the builder-vendor or contractor becomes insolvent during the course of litigation. The court clarified and expanded the application of the holding in Minton v. Richards Group of Chicago, 116 Ill. App. 3d 852 (1st Dist. 1983). The case gave rise to three appellate decisions analyzing the application of the implied warranty of habitability to subcontractors. Pratt is a construction defect lawsuit arising from the faulty construction of a residential condominium building built in 2005 in Chicago, Illinois. The first appellate decision, Pratt I, the court expanded the reach of the implied warranty of habitability by holding that the warranty applies to builders of residential homes regardless of whether they are involved in the sale of the home. The second Illinois Appellate Court decision, Pratt II,acknowledged that it had recently expanded the reach of the implied warranty of habitability itself in Pratt I when it extended the implied warranty of habitability to apply to builders who are not vendors of the new homes. The Pratt II court again expanded the application of the implied warranty of habitability by reversing the trial court and holding that a waiver of the implied warranty of habitability does not extend beyond the contracting parties that agreed to the waiver. The Pratt II court also confirmed that to extend the implied warranty of habitability to subcontractors, the builder-vendor had to be insolvent. 


Read the full case note.


Keywords: construction, litigation, homeowner, contractor, warranty


Ty Laurie, Laurie & Brennan LLP, Chicago, IL


 

April 1, 2014

Repair or Replacement Does Not Constitute an Improvement to Real Property


The Illinois Appellate Court recently confirmed that mere replacement or repair to an improvement to real property does not trigger anew the 10-year statute of repose for construction claims in Illinois. In Schott v. Halloran Construction Co., Inc., a police officer was injured while on patrol when he fell off a retaining wall that did not have a guard rail. The officer filed a complaint against the contractor that originally installed the retaining wall. The officer’s fall occurred in 2001 and the retaining wall was originally installed in 1990.


During the course of the trial court proceedings, the contractor repeatedly raised the statute of repose as a defense and that defense was repeatedly rejected by the trial court. Ultimately, the case was tried to a jury and the jury entered a verdict in favor of the injured police officer. On appeal, the Fifth District reversed the decision of the trial court finding that the 10-year statute of repose applied to bar the plaintiff’s claims.


Read the full case note.


Ty Laurie, Laurie & Brennan LLP, Chicago, IL


 

January 17, 2014

Subcontract's Indemnity Provision Remains Enforceable


The Oregon Court of Appeals reversed a trial court’s decision that a subcontract’s indemnity clause was void under the state’s anti-indemnity statute, Oregon Revised Statutes (ORS) 30.140.


In Montara, a contractor hired a subcontractor to install siding and trim in a townhouse development. Several years after construction was completed, the development’s homeowners association filed a construction defect action against the contractor. The contractor filed third-party claims against several additional parties, including a siding and trim subcontractor. Those claims included a contractual indemnity claim under the subcontract’s indemnity provision, which stated that:


“[subcontractor] specifically and expressly agrees to indemnify and save harmless [contractor], its officers, agents and employees, from and against any and all suits, claims, actions, losses, costs, penalties and damages, of whatsoever kind or nature, including attorney’s fees, arising out of, in connection with, or incident to [subcontractor’s] performance of the subcontract, whether or not caused in part by [contractor], [its] employees or agents, but excepting that caused by the sole negligence of [contractor], [its] employees or agents.”


259 Or. App. at 676–77 (fifth and seventh brackets in original).


Read the full case note.


Sean Gay, Stoel Rives LLP, Portland, OR


 

December 20, 2013

Are Forum Selection Clauses Enforceable in Your State?


Although the United States Supreme Court has decided that venue selection clauses in contracts between private parties are enforceable, it has left the effect of state law open for argument. In its December 3, 2013, decision in Atlantic Marine Construction Company, Inc., Petitioner v. United States District Court for the Western District of Texas, et al., 371 U.S. ____, 2013 WL 6231157 (2013), it held that 28 U.S.C., §1404(a) provides a mechanism for the enforcement of forum-selection clauses that call for venue in a particular federal district, and that the clause should be given controlling weight in all except the most compelling cases. Further, if the designated venue is proper under federal venue rules, it does not matter whether it is a federal or a nonfederal forum.


The Court noted that when the parties have agreed to a contractually valid forum-selection clause, a federal district court should ordinarily transfer the case to the forum specified in that clause, or retain the case if it is pending in the designated district and the defendant is seeking to transfer the case to another district.


Read the full case note.


Gerald G. Stamper, Barrow & Grimm, P.C., Tulsa, OK


 

November 19, 2013

Waiver of Subrogation Clause Does Not Bar Owner's Claim Against Contractor for Pollution Damage


In Allen County Public Library v. Shambaugh & Son L.P. et al, ____ N.E.2d _____, 2013 Ind. App. LEXIS 519 (Ind.Ct.App. Oct. 22, 2013), the Indiana Court of Appeals concluded an owner’s claim to recover damages related to the clean-up of pollution allegedly caused by defendant contractors and designers was not barred by the waiver of subrogation clause in the parties’ AIA contracts because the pollution damaged property outside the defendants’ scope of the work.


The Library contracted with the defendants to design and construct improvements to its facility. The improvements included the installation of diesel storage tanks in the basement of the facility. These tanks connected to an emergency diesel generator via copper piping. The Library discovered that a hole in the copper piping caused 3,000 gallons of diesel fuel to leak into the ground underneath the facility. The Library sued the defendants seeking to recoup the $490,000 in cleanup costs it incurred.


The contracts between the Library and defendants contained the standard AIA provisions regarding insurance, waiver of subrogation, and the scope of the work. To summarize, the provisions required the Library to procure property insurance covering the “Work,” the “Work” was defined as “the construction and services required by the Contract Documents…”, the defendants were obligated to procure insurance to protect them from claims that they may be legally liable and claims for damages “other than to the Work itself, because of injury to or destruction of tangible property…”, and the waiver of subrogation clause provided that the Library and defendants waived all rights against each other “for damages caused by fire or other perils to the extent covered by property insurance obtained” by the Library under the applicable provisions or “other property insurance applicable to the Work.”


To meet its contractual obligations, the Library procured a “Builders Risk Plus” insurance policy. The policy contained a specific coverage extension for “Pollutant Clean Up and Removal” covering up to $5,000 in expenses to clean-up pollutants from land or water at the job-site resulting in loss to “Covered Property.” The insurer paid the $5,000 limit to the Library for clean-up costs. The trial court granted the defendants’ motions for summary judgment asserting the Library had waived its ability to assert claims for the clean-up costs due to the contract provisions, its procurement of pollution clean-up coverage, and the payment from the insurer.


Read the full case note.


Nathaniel M. Uhl, Ice Miller LLP, Indianapolis, IN


 

October 25, 2013

Apportioning Fault Against Dismissed Defendants


The New Jersey Supreme Court decided that under the Comparative Negligence Act and Joint Tortfeasors Contribution Law, it is appropriate to apportion fault to parties who have obtained dismissal by virtue of the statute of repose and that in the absence of agreement on the date of substantial completion, the date of a first Certificate of Occupancy can be the date of substantial completion.


In Kearny, an owner argued that it was improper to allocate fault and apportion liability to a structural engineer and a soils engineer that had been dismissed as parties on the basis of the statute of repose. The owner argued, when the claims against an individual or entity are dismissed pursuant to the statute of repose, liability should not be apportioned to that individual or entity, because the Comparative Negligence Act, authorizes apportionment only to “the parties to a suit.” The owner argued that the structural engineer and a soils engineer are distinguishable from various categories of parties to whom fault may be apportioned. Instead, the owner contended that the dismissed defendants were analogous to an employer protected from civil liability by the workers’ compensation bar, to which fault may not be apportioned.


The designers, whose work on the project continued longer and had not been dismissed on the basis of the statute of repose, argued that allocation of fault to the structural engineer and a soils engineer is consistent with the protective goals of the statute of repose because those defendants would not be compelled to pay damages to the owner no matter what the outcome of the liability trial. The designers argued that failing to allocate fault would effectively penalize them because of the owner’s failure to file a timely action against the structural engineer and a soils engineer. The designers contended that the dismissed codefendants in this case are analogous to settling defendants that cannot be sued by virtue of statutory immunity and to defendants who are dismissed because of a defect in the plaintiff’s complaint, but are nonetheless considered in the allocation of fault.


Read the full case note.


Frank A. Hess, Esq., Peckar & Abramson, P.C., River Edge, NJ


 

September 30, 2013

Bid Shopping Ruling Under Washington's RCW 39.30.060 Subcontractor Listing Statute


For a disappointed electrical contractor to prevail under RCW 39.30.060, Washington’s Subcontractor Listing Statute, it must establish bid shopping by the prime contractor. The statute’s definition of bid shopping does not include hiring one subcontractor to perform work at a higher price for the scope of work than another subcontractor has bid.


Killian Construction was a prime bidder for a new residential hall for Central Washington University. ETCO Services provided a $5,052,000 bid to Killian to perform the plumbing work on the project. Killian mistakenly assumed that ETCO’s bid was for the entire mechanical scope, including HVAC and controls, and listed ETCO for the entire mechanical scope of work. ETCO’s price was lower by $448,000 than the $5,500,000 price of JRT Mechanical, whose bid was for the entire mechanical scope of work. JRT was listed by almost every other prime bidder.


The mistake was discovered shortly after the bid was submitted. Killian labored to determine what its correct course of action should be. ETCO initially indicated it would provide a revised price for the entire mechanical scope of work the Monday following the week in which the bid was submitted. About one month later, it submitted a revised price, which was in excess of $7,000,000. Killian eventually subcontracted with JRT for the entire mechanical scope of work for $5,446,000, lower than JRT’s bid price.


ETCO sued Killian pursuant to RCW 39.30.060, Washington’s Subcontractor Listing Statute, contending that Killian’s actions constituted bid shopping, and sought more than $1,000,000 in damages.


Killian moved for summary judgment dismissing ETCO’s claims, which motion was granted. ETCO appealed.


Read the full case note.


Paul R. Cressman, Jr., Ahlers & Cressman PLLC, Seattle, WA


 

September 30, 2013

Washington Appeals Court Rules Failure to Follow Procedure Does Not Constitute Waiver of Claims


A Washington State Court of Appeals opinion concludes that absent waiver language, failure to comply with a contractual claim procedure will not result in forfeiture. The opinion is noteworthy because it holds that if a contract has a mandatory procedure for resolving claims, but does not state that the failure to follow that procedure will operate as a waiver of such claim, then a forfeiture will not be found despite lack of compliance.


This case involves a residential construction dispute over a project performed in 2000 with a long litigation history dating back to 2002. The decision that is the subject of this article is the Court of Appeals’ third decision in the matter!


In 2001, the Contractor (Shepler) sent the Owner (Leonard) a letter recommending that the Owner should initiate the contractual dispute resolution process with respect to the Owner’s allegations of construction defects. The Owner admittedly failed to respond and did not initiate the contractual process. The Contractor then filed a lien, and brought a foreclosure action. In 2008, the Contractor obtained a Summary Judgment Order precluding the Owner from asserting counterclaims for construction defects on the grounds that the Owner failed to initiate binding arbitration as required by the parties’ contract to resolve allegations of construction defects.


In dismissing the Owner’s claims for construction defects, the trial court was persuaded that the Owner’s breach of the agreement by failing to seek arbitration required dismissal of all of the Owner’s claims for construction defects that should have been arbitrated.


Read the full case note.


Paul R. Cressman, Jr., Ahlers & Cressman PLLC, Seattle, WA


 

September 30, 2013

Insurance Policy Exclusion for EIFS Enforced


An insurance policy exclusion was enforced that provided no coverage for defective work on any exterior feature of a building or home, if EIFS is used on any part of the structure.


Exterior Insulation Finish Systems, commonly known as EIFS or synthetic stucco, are multi-layered exterior wall systems used on both commercial buildings and residential homes. These systems, as illustrated below, are usually composed of five layers: (1) an exterior finish; (2) a reinforcing mesh to protect the system; (3) an insulator (i.e. Expanded Polystyrene (EPS) foam); (4) an adhesive substance binding the insulator to the building; and (5) a substrate to which the insulator is attached.


When EIFS was introduced nearly 30 years ago, commercial and residential property owners and developers were attracted to the stucco-like appearance that allows broad design and color flexibility at low costs. The benefits of low maintenance, durability, and increased energy efficiency also added to its initial popularity. However, problems began to arise over time where the systems were not installed, caulked, or sealed properly. Rainwater, wind-driven rain, or moisture, in many cases, penetrated poor-quality window and door openings, causing water to be trapped behind the EIFS exterior. The waterproof design of EIFS that was supposed to keep water out actually prevented water from leaving the system. With nowhere to go, the water began soaking into wall studs and plywood sheathing, which in most cases leads to rot.


Insurers issuing general liability policies to construction contractors caught on to the rot problem quickly and began drafting exclusions in their policies. Exclusions for construction defect claims involving EIFS are now common and vary in breadth from excluding coverage for any work performed on EIFS to any property damage arising out of or caused by EIFS. Naturally, this caused many contractors to stop installing EIFS or parts that interfaced with the system.


A recent decision by the U.S. District Court of Washington (at Seattle) should give further pause to those contractors that do any work on any exterior component, fixture, or feature of a structure where EIFS is used on any part of the building or home.


Read the full case note.


Paul R. Cressman Jr., Ahlers & Cressman PLLC, Seattle, WA


 

August 21, 2013

Limitations to a General Contractorís Claims against Subcontractors


The Marton court decided that a general contractor could not maintain a negligence claim against subcontractors because its damages were solely economic in nature. The court also held that a general contractor could not pursue contribution and common-law indemnity claims after entering into a Mary Carter agreement. The plaintiff was a building owner that brought a claim against the general contractor for negligent construction. The general contractor filed contribution and common-law indemnity claims against several subcontractors and suppliers. The plaintiff and the general contractor entered into a Mary Carter agreement, whereby the general contractor was to remain in the litigation but its exposure was limited to $100,000. The subcontractors sought to dismiss the general contractor’s claims against them based, in part, on the agreement.


The subcontractors argued that the negligence claim was barred because the general contractor sought recovery for its economic loss. In the absence of a special relationship between the parties (e.g., doctor/patient or attorney/client), a claimant cannot recover for its economic loss. With respect to the contribution and indemnity claims, the subcontractors argued that the general contractor’s settlement with the plaintiff did not extinguish the liability of the subcontractors, which they argued was a necessary element of such claims.


The general contractor argued that the negligence claims were derivative of the plaintiff’s claims for property damage. Therefore, the nature of the general contractor’s negligence claim was for property damage instead of its economic loss. With respect to the contribution and common-law indemnity claims, the general contractor argued that Oregon Rule of Civil Procedure (ORCP) 22C allowed it to join as a third-party defendant anyone who may be liable for the claims against it.


Read the full case note.


Jonathan Dirk Holt and Robert W. Kirsher, Scheer & Zehnder, LLP, Seattle, Washington


 

August 8, 2013

Economic Loss Doctrine Extends its Protection to Design Professionals


In Leis Family Ltd. Partnership v. Silversword Engineering, 126 Hawaii 532, 273 P.3d 1218 (Haw. 2012), the Hawaii Supreme Court decided that:


  • professional negligence tort claims may be barred by the economic loss doctrine even if there is no privity of contract between the parties,
  • professional designers have no tort duty to prevent economic loss, particularly if it would disrupt the contractual relationships between the parties,
  • and there is no exception to the economic loss doctrine that allows tort claims against professionals who do not perform up to industry standards.

  • The owners of a building, Plaintiff-Appellants Leis Family Ltd. Partnership (Leis Family), sued the designers of the building’s air conditioning system for negligent design claiming the system had numerous problems from its start. The building’s general contractor hired a mechanical engineering firm to provide engineering and construction services for the project, and in turn, the engineers subcontracted the design of the air-conditioning system to Silversword Engineering (the Designers). The Designers invoked the economic loss doctrine arguing that they could not be held liable for purely economic losses. The circuit court agreed with the Designers and granted summary judgment in their favor, and the building owners appealed.


    Read the full case note.


    Robert E. Badger and J. Kainoa Tabar, Badger Arakaki LLLC, Honolulu, HI


     

    July 22, 2013

    The Architect Is Liable, but Has Coverage


    Oklahoma public officials who fail to require that “Little Miller Act” payment bonds be provided for public improvement projects cannot be held liable for losses sustained by subcontractors and suppliers who cannot collect what is owed to them by the prime contractor. (See 61 Okla. Stat. 2011, §§ 1–2). Until 2000 that immunity included project architects, and the law placed the burden upon beneficiaries of the Act to determine that a bond was in place before work began.


    In that year, the Oklahoma Supreme Court reversed its prior decisions and held that “[S]ubcontractors should be able to assume that the private party responsible for certifying payments has verified the existence of the bonds. To do otherwise would thwart the purpose and intent of the bond statutes.” Boren v. Thompson & Assoc., 2000 OK 3, 999 P.2d 438. In that case, the architect was responsible for reviewing applications for payments as the work progressed. He continued to approve payment applications with knowledge that the prime contractor had not provided the required payment bond, and he was held responsible for the subcontractors’ losses.


    Read the full case note.


    Gerald G. Stamper, Barrow & Grimm, P.C., Tulsa, OK


     

    July 16, 2013

    Contractor Not Entitled to Setoff Costs of Repairing Subcontractor's Defective Work


    The Oregon Court of Appeals affirmed a trial court’s decision that a contractor may not terminate its subcontractor for convenience and setoff costs incurred in repairing the subcontractor’s defective work.


    In Shelter Products, a contractor hired a subcontractor to supply and install structural steel for the construction of a Home Depot regional distribution center in Salem, Oregon. After the subcontractor began work on the project, the contractor’s project manager sent the subcontractor a letter addressing several issues related to the schedule and quality of the subcontractor’s work. The project manager concluded his letter by stating that he would continue to evaluate the subcontractor’s work and determine how best to help the subcontractor perform its obligations. A few days later, the contractor terminated the subcontract for convenience.


    Read the full case note.


    Sean Gay, Stoel Rives LLP, Portland, OR


     

    July 16, 2013

    Unlicensed Contractor Allowed to Pursue Equitable Claim Despite Void Contract


    In Ground Control, the Mississippi Supreme Court held that an unlicensed contractor could pursue the equitable claims of unjust enrichment and quantum meruit despite the fact that an unlicensed contractor’s contract is null and void by law in Mississippi. Section 31-3-15 of the Mississippi Code states:


    [N]o contract for public or private projects shall be issued or awarded to any contractor who did not have a current certificate of responsibility issued by said board at the time of the submission of the bid, or a similar certificate issued by a similar board of another state which recognizes certificates issued by said board. Any contract issued or awarded in violation of this section shall be null and void.

    (emphasis added). The legislative purpose for requiring a certificate of responsibility is “to protect the health, safety and general welfare of all persons dealing with those who are engaged in the vocation of contracting and to afford such persons an effective and practical protection against incompetent, inexperienced, unlawful and fraudulent acts of contractors.” Miss. Code Ann. § 31-3-2. Therefore, in an earlier decision, the Mississippi Court of Appeals held a breach of contract claim is not available in Mississippi to an unlicensed contractor to collect an unpaid contract balance because the contract is null and void. United Plumbing & Heating Co. v. AmSouth Bank, 30 So.3d 343 (Miss. Ct. App. 2009).


    In fact, two weeks prior to the Mississippi Supreme Court’s decision in Ground Control, the Mississippi Court of Appeals upheld a trial court’s ruling that an unlicensed contractor could not pursue a quantum meruit claim holding that allowing such an equitable claim “would circumvent the legislative decision to declare such contracts void.” Ace Pipe Cleaning, Inc. v. Hemphill Constr. Co., 2013 Miss. App. LEXIS 276 (Miss. Ct. App. May 21, 2013) (This firm was counsel for the Appellee.). Nevertheless, the supreme court took the opposite position in Ground Control holding that an unlicensed contractor could pursue a claim under the equitable doctrine of unjust enrichment or quantum meruit.


    Read the full case note.


    Alexander F. Guidry, Mockbee Hall & Drake, P.A., Jackson, MS


     

    June 28, 2013

    Montana Supreme Court Addresses Several Issues


    In Total Industrial Plant Services, Inc., v. Turner Industries Group, 2013 MT 2, 368 Mont. 169, 294 P.3d 363, the Montana Supreme Court addressed several issues. First, the court addressed whether a subcontractor has a basis for additional compensation under quantum meruitwhere the compensation and the provisions for contract modification are contained in an express, written contract. Among other collateral issues, the court also determined that the subcontractor was entitled to the return of retainage with interest because the general contractor filed a substitution bond that rendered a release of lien bond unnecessary as a condition precedent.


    The case arose from an agreement between Turner Industries and Total Industrial Plant Services (TIPS) for TIPS to install insulation at a refinery’s “coker” unit. The original contract provided that the start date was to be May 2007 with a completion date of December 31, 2007. The agreement also provided that TIPS would assume the costs and expenses for all labor, services, and materials unless the parties modified the agreement in writing. The subcontract specifically stated that a written change order must be submitted to Turner for any additional costs or time extensions. Due to weather delays, the work of other subcontractors, and the inability to obtain materials, it soon became apparent that TIPS would not finish the work by the agreed upon completion date. TIPS submitted multiple change orders and Turner approved and paid for all submitted change orders. Between May 2007 and July 25, 2008, TIPS and Turner revised the subcontract five times to increase TIPS’ compensation. TIPS’ original compensation was $2,336,967.00. After five separate revisions, TIPS’ compensation was increased to $13,250,000.00. TIPS was paid the final revised price but claimed a right to an additional $1,283,704.08 in compensation. TIPS filed a lien against the refinery and Turner filed a substitution bond to clear the lien.


    Read the full case note.


    Neil G. Westesen & Brad J. Brown, Crowley Fleck, PLLP, Bozeman, MT


     

    June 28, 2013

    Court Addresses the Validity of a Construction Lien


    In Mountain West Bank v. Cherrad, 2013 MT 99, ___ Mont. ____, 301 P.3d 796, the Montana Supreme Court addressed the validity of a construction lien filed by the estate of a contractor. The court first addressed whether the district court erred in determining that the Estate of Craig Kinnaman (Estate) did not have a valid construction lien because the Estate failed to comply with the procedural requirements in the lien statutes.


    This case arose out of business transactions involving the development of six condominiums in three buildings. The owners of Cherrad—a development company—purchased property on Hauser Lake and entered into a construction contract with Craig Kinnaman—the sole proprietor of CK Design—to build the condominiums. To secure financing from Mountain West Bank, Cherrad and CK Design entered into two AIA contracts. The contracts provided that CK Design would be paid a total of $1,300,000 plus a 10 percent management fee for constructing the condominium buildings.


    Instead of following the AIA contract provision for biweekly payments, Cherrad paid CK Design as each condominium unit was sold. Payments were made following the sale of the first two completed units and then construction began on additional units thereafter. Before the completion of these additional units, Cherrad informed CK Design that it could no longer proceed on the project. Thereafter the parties entered into an “Agreement Regarding Outstanding Debts” in an effort to finalize their payment rights and obligations. Despite this agreement, the Estate recorded a $3,300,000 lien against the condominium project. The district court later invalidated the Estate’s lien for failing to follow the procedural requirements of the lien statutes. Following the court’s ruling, Cherrad sold four of the previously liened units to bona fide purchasers for value.


    Read the full case note.


    Neil G. Westesen & Brad J. Brown, Crowley Fleck, PLLP, Bozeman, MT


     

    June 21, 2013

    Nebraska Court Rules on Standard of Proof to a Breach


    The Nebraska Court of Appeals reviewed the standard of proof applicable to a breach of implied warranty claim for water leaking into a basement in the recent case of Oettinger v. Hiatt, A-12-468, 2013 WL 2106666 (Neb. Ct. App. May 7, 2013). At issue was whether a homeowner could prove breach of implied warranty of workmanlike performance by proving a construction defect that allowed water to enter the home’s basement without proving the actual source of the water. The Nebraska Court of Appeals held, in its unpublished opinion, that a homeowner need not demonstrate with certainty the source of the water to prove a breach of implied warranty for suitable home construction.


    The plaintiffs in Oettinger had purchased a newly constructed home from the defendants in May of 2006. After only a few months in the home, the plaintiffs discovered water in the home’s basement and contacted the defendants. The defendants took limited remedial measures at that time. Nevertheless, water continued to seep into the home during 2007, 2008, and 2009, causing extensive damage. At that time, the parties worked together to excavate the sidewalk around the home and address downspout issues. Unfortunately, the issues continued to increase in 2010.


    As a result of the continued issues, the plaintiffs filed a lawsuit. At trial, the plaintiffs argued that construction defects in the foundation allowed water to enter the home. The plaintiffs produced testimony from four different contractors who had observed the water issues and considered their cause. Each of the experts testified that the water was entering as a result of certain construction defects, but did not testify as to the exact source of the water.


    Read the full case note.


    Tanya J. Hansen, Esq., Leininger, Smith, Johnson, Baack, Placzek, & Allen, Grand Island, Nebraska


     

    June 13, 2013

    Seventh Circuit Enforces Limitation of Liability Clause in Owner-Architect Agreement


    In SAMS Hotel Group, LLC v. Homewood Suites Hotel, the Seventh Circuit strictly enforced a clause in an owner-architect agreement limiting the architect’s liability to the owner to the amount of its fee, preventing the owner from recovering millions in damages it incurred.


    In this case the architect entered into a contract with the owner to design a hotel in Fort Wayne, Indiana. The contract contained the following limitation of liability clause:


    The Owner agrees that to the fullest extent permitted by law, [Architect's] total liability to the Owner shall not exceed the amount of the total lump sum fee due to negligence, error, omissions, strict liability, breach of contract or breach of warranty.


    The Architect completed its design, and construction followed. When the hotel was near completion, serious structural defects were discovered. The structural flaws could not be remedied, the building was ultimately condemned, and the owner demolished the hotel. The owner estimated its loss was more than $4.2 million.


    The owner filed negligence and breach of contract claims against the architect. The court dismissed the negligence claim due to Indiana’s economic loss rule, and then it issued a ruling enforcing the limitation of liability provision. After a bench trial, the court found that the architect breached the contract in numerous respects and awarded the owner $70,000, the amount of the architect’s fee.

     

    Read the full case note.


    Nathaniel M. Uhl, Ice Miller LLP, Indianapolis, IN


     

    June 12, 2013

    City that Fails to Secure Payment Bond Does so at Its Risk


    The South Carolina Supreme Court recently ruled that a city can be held liable to a subcontractor for failing to require the general contractor on a project to secure a payment bond.


    In Shirley’s, the city of Union (the City) contracted with Gilbert, a general contractor, for the design and construction of a building. Gilbert contracted with various subcontractors, including the respondents in this action. The City did not require Gilbert to secure a payment bond and no payment bond was secured. Ultimately, Gilbert failed to fully compensate all the subcontractors after completion of the project.


    The City owed $111,270 on its contract with Gilbert. After the City was notified of Gilbert’s failure to pay the subcontractors, the City offered to distribute to the subcontractors the balance of the money owed to Gilbert in exchange for release of the City’s liability. Each respondent refused the offer, and the City distributed the respondents’ pro rata portions to the other unpaid subcontractors.

     

    Read the full case note.


    J.W. Matthews, III, Haynsworth Sinkler Boyd, P.A., Greenville, South Carolina


     

    June 12, 2013

    Arbitrator Award Vacated for Manifest Disregard of Law


    The South Carolina Supreme Court recently held that an arbitrator manifestly disregarded the law when he failed to dismiss an action filed by a contractor who did not have a valid license.


    In C-Sculptures, plaintiff/respondent C-Sculptures, LLC, a general contractor, agreed to build a home for petitioners Gregory and Kerry Brown. The contract price was in excess of $800,000. However, C-Sculptures only possessed a “Group II license,” entitling them to only work on construction projects not exceeding $100,000.


    After a dispute arose, C-Sculptures filed an action seeking to enforce a mechanic’s lien. The parties went to arbitration. The Browns sought to have the matter dismissed after they learned that C-Sculptures held only a Group II license. It was the Browns’ contention that, since C-Sculptures did not have a valid license, they were prohibited from bringing an action to enforce the contract.


    The arbitrator denied the Browns’ motion to dismiss and C-Sculptures prevailed at arbitration. The Browns challenged the award, arguing that the arbitrator’s denial of their motion amounted to a manifest disregard of the law. The circuit court and court of appeals affirmed the award. The supreme court granted certiorari to review the decision.


    Read the full case note.


    J.W. Matthews, III, Haynsworth Sinkler Boyd, P.A., Greenville, South Carolina


     

    June 12, 2013

    Insurance Company Exclusion for Correction of Work Enforced


    The South Carolina Court of Appeals recently held that an insurance company had no duty to defend a contractor in arbitration where the insurance policy excluded coverage for “any property that must be restored, repaired, or replaced because your work was incorrectly performed on it.”


    In Walde, the Waldes owned residential property in Aiken, South Carolina and planned to build a barn and paddock to accommodate their horses. To build the barn, the Waldes had to obtain a special exception and a variance from Aiken’s Board of Zoning Appeals (the BZA). The Waldes needed a special exception because the barn was not for commercial use, and they needed a variance because the barn was being built too close to the neighbors’ homes. The Waldes hired Johnson Construction Company (Johnson) to represent them before the BZA.


    The BZA approved Johnson’s application. Subsequently, the Waldes and Johnson entered into a contract for construction of the barn and an apartment on top of the barn. Johnson completed 80 percent of the barn by June 2008. That month, an Aiken building inspector notified Johnson of problems with the barn. Specifically, the barn was not built in the correct spot and the BZA had not approved of the apartment. The apartment caused the barn to exceed the height and size limits set out by Aiken ordinances. 


    Thereafter, Johnson requested a new variance and special exception from the BZA. That request was denied, and the BZA ordered the barn to be torn down. The Waldes terminated the contract with Johnson and sought a variance and special exception on their own. The BZA granted this request, and allowed the barn to remain if the apartment was removed.


    In September 2008, the Waldes filed an arbitration demand with the American Arbitration Association. Johnson had a commercial general liability policy (the Policy) with its insurer, Association Insurance Company (AIC). Johnson notified AIC of the demand, but AIC refused to defend or indemnify.


    Read the full case note.


    J.W. Matthews, III, Haynsworth Sinkler Boyd, P.A., Greenville, South Carolina


     

    June 10, 2013

    Courts Uphold Negotiated Agreements for Unknown Construction Defects


    California joins other states in allowing sophisticated contracting parties to agree when a construction claim first accrues for purposes of an early start of the statute of limitations clock. While perhaps not applicable to homeowner claims, such an agreement effectively waives the “discovery” exception to the statute of limitations, which otherwise would extend the time to bring claims.


    The right to effectively negotiate a shorter time duration in which to bring construction and design defect claims has enormous practical implications. If you are an owner, the inadvertent inclusion of such a waiver may significantly limit, if not eliminate, your rights. On the other hand, if you are a contractor or designer, the successful inclusion of such waiver may shave off as many as six years of exposure to latent construction defect claims, depending on the statute of repose in the particular jurisdiction.


    Read the full case note.


    Roger C. Haerr, McKenna, Long & Aldridge, LLP, San Diego, CA

     


     

    May 28, 2013

    Hotel Project Barred from Recovering Liquidated Damages

     

    In RCR Building Corp. v. Pinnacle Hospitality Partners, the Tennessee Court of Appeals held that an owner of a hotel project was barred from recovering liquidated damages for late completion from a contractor because the owner failed to comply with the notice of claims procedure in a modified AIA contract.


    The owner refused to make final payment to the contractor, claiming, in part, it was entitled to withhold $237,000 in liquidated damages because the project was not completed on time. The contractor argued that the owner was not entitled to liquidated damages because, among other reasons, the owner had failed to make a timely claim for liquidated damages under the contract. There was no dispute that the owner did not make its first claim for liquidated damages until months after the project was completed and the parties had agreed to final payment of an amount that did not include a deduction for liquidated damages.


    Read the full case note.


    ––Brian M. Dobbs and L. Wearen Hughes, Bass Berry Sims, Nashville, TN


     

    May 28, 2013

    Recent Tennessee Legislation Affecting the Construction Industry

     

    The 108th General Assembly of Tennessee passed earlier in 2013 several bills of interest to owners, contractors, subcontractors, architects, and others in the construction industry.


    Underlicensed Contractors / No Lien Rights / Attachment of Mechanic’s Liens
    A bill clarifies that it is unlawful for any person to bid or contract for any project in Tennessee unless that person has a sufficient monetary limitation on its license for the project. This codifies a requirement previously set forth in an administrative regulation. The same bill amends the licensing and mechanic’s lien statutes to clarify that contractors and subcontractors are not entitled to a lien if they have not complied with the contractor licensing laws, including the monetary limitation. The bill also amends the definition of “visible commencement”––which establishes the date on which a mechanic’s lien attaches to real property––to exclude placement of above-ground utility lines. As originally presented, the bill also would have voided “pay if paid” provisions as unenforceable in Tennessee, but that portion of the bill was removed by amendment. The bill has been sent to the governor for signature.


    Roofing Contractors
    Another licensing bill, which has been signed by the governor, requires all roofing contractors to have a roofer’s contracting license from the Board for Licensing Contractors before bidding upon or beginning roofing work where the roofing portion of the project is $25,000 or more.


    Workers’ Compensation Reform
    A new law completely reforms the workers’ compensation system in Tennessee. Claims by injured workers now will be handled as part of an administrative process in the newly created Court of Workers’ Compensation Claims within the Division of Workers’ Compensation. The law also creates a new ombudsman program within the Division to assist unrepresented employees and employers, narrows the definition of work-related injury and establishes medical treatment guidelines. The changes do not take effect fully until July 1, 2014.


    Prevailing Wage Act
    A new law repeals the prevailing wage requirements for all state funded, vertical building construction projects in Tennessee. It also eliminates mandatory certified payrolls and other paperwork required to be submitted to the state on those projects. The new law does not affect highway (TDOT) projects. The changes take effect January 1, 2014.


    Bonds on Public Works
    A new law requires that bonds on public projects by any city, county, or state authority be “good and solvent,” and requires building or bidding authorities to reject bonds that do not meet the requirements. A “good and solvent” bond means, among other things, a bond written by a surety or insurance company listed on the U.S. Treasury Dept.’s list of approved bonding companies.


    Public Labor Agreements
    The governor has signed a bill that prohibits certain practices in public contracting and purchasing, including requiring a bidder, contractor, or subcontractor to enter into or comply with an agreement with a labor organization, and creates cause of action to challenge a public works contract in violation of the section. This prohibits a municipality from implementing a Project Labor Agreement on a construction project.


    Keywords: construction, litigation, Tennessee, bills


    ––Brian M. Dobbs and L. Wearen Hughes, Bass Berry Sims, Nashville, TN


     

    May 13, 2013

    Lien Agents Now Required in North Carolina

     

    North Carolina has joined those states requiring the appointment of, and advance notice to, a lien agent thanks to a push from title insurance companies. The statutory scheme implementing this change is primarily found in Chapter 44A of the North Carolina General Statutes. Subject to a few exceptions, this new scheme does not supplant existing lien law requirements but instead adds to the steps a potential lien claimant must take to ensure it protects its lien rights.


    Effective April 1, 2013, North Carolina requires designation of lien agents for improvements to privately-owned real property. A “lien agent” is a title insurance company or agency that is registered as a lien agent with the N.C. Department of Insurance and designated by the property owner. The owner must designate a lien agent whenever a construction project exceeds $30,000.00 in cost when the original building permit is issued. A lien agent is not required if the improvements are made to an existing single-family dwelling used by the owner as a residence.


    The prudent potential lien claimant who furnishes labor or materials to a project that requires a lien agent will send a “Notice to Lien Agent” so that the lien agent receives the notice within 15 days after the potential lien claimant’s first furnish date. Failure to serve a notice to the lien agent, or to file and serve a claim of lien on real property, before the owner sells or otherwise transfers some interest in the property (such as conveyance, refinance, or mortgage) probably will result in all lien rights being lost. Service of a “Notice to Lien Agent” does not satisfy the service or filing requirements that apply to lien claims. Potential lien claimants still must timely file and/or serve their lien claims.


    On projects that require the designation of a lien agent, contractors and subcontractors, within three business days of contracting with a material supplier, are supposed to provide the supplier with a written notice containing the lien agent’s contact information. The contractor or subcontractor may include the contact information in a written subcontract entered with, or a written purchase order issued to, the supplier. Failure to provide the contact information will result in liability to the supplier for any actual damages the supplier incurs from the failure.


    The title insurance companies have developed a website to facilitate the designation of and notices to lien agents. The website also has an overview of the recent lien law changes.


    David A. Senter and Eric H. Biesecker, Nexsen Pruet, PLLC, Greensboro, NC


     

    May 2, 2013

    Insurance Recovery for Construction Damage

     

    When a property owner makes an insurance claim for damage to its building from a neighboring construction project, typically the amount recoverable is based on either the cost of repair or the diminished value of the building. But is it ever possible for the owner to recover both? Surprisingly, the Georgia Supreme Court says “yes.” Royal Capital Development, LLC v. Maryland Casualty Co., 291 Ga. 262, 728 S.E.2d 234 (2012).


    The case involved The Capital Building, an eight-story commercial building in the Buckhead area of Atlanta, which was damaged by construction activity on adjacent property. The owner submitted a claim on its property insurance policy, seeking both the cost of repairing the damage and the post-repair diminished value from the stigma of being a damaged building. The insurer paid more than $1 million for estimated cost of repairs, but denied responsibility for the alleged diminished value of the property.


    Read the full case note.


    R. Daniel Douglass, Stites & Harbison, PLLC, Atlanta, Georgia


     

    April 17, 2013

    Notice Found to Be Fatally Defective

     

    The issue before the Rhode Island Supreme Court was whether a notarial acknowledgement in a subcontractor’s notice of intention to file a mechanics lien satisfied the statutory requirement that such a statement be "under oath." The Rhode Island Supreme Court upheld the Superior Court in holding that the notary public’s “acknowledgement” was insufficient to satisfy the oath requirement and, as a result, the notice was fatally defective.


    The plaintiff was a subcontractor that entered into an agreement with a general contractor to install an air-pollution-control mechanism on property owned by the defendant. When the general contractor failed to pay the plaintiff the balance of its fee, the plaintiff filed a complaint to enforce a mechanics lien against the defendant. The underlying notice of intention stated as follows: "The foregoing instrument was acknowledged before me this 13th day of September, 2010 by James K. Towers, III of GSM Industrial, Inc., a Pennsylvania corporation, on behalf of the corporation[.] Mr. Towers is personally known to me or has produced valid state identification[.]"


    Read the full case note.


    Paul R. Cressman, Jr., Ahlers & Cressman PLLC, Seattle, WA


     

    April 17, 2013

    Motion Granted to Compel Arbitration in Ohio

     

    The U.S. District Court for the District of Rhode Island granted a motion to compel arbitration in Ohio, and stay proceedings in the interim, in spite of a Rhode Island statute that makes certain construction contract clauses requiring arbitration in other states voidable. The court determined that the Rhode Island statute interfered with and was contrary to the Federal Arbitration Act (FAA) as it related to where the parties were required to arbitrate their dispute.


     A general contractor was hired to construct a Walmart Superstore, who in turn hired the plaintiff under a written subcontract agreement. The plaintiff ultimately filed suit against the general contractor and others because it alleged it had been underpaid for additional work it performed on the contract. The subcontract agreement contained an arbitration clause that designated Ohio as the location for the resolution of any disputes between the parties.


    Read the full case note.


    Paul R. Cressman, Jr., Ahlers & Cressman PLLC, Seattle, WA


     

    April 9, 2013

    Court Holds Lenders to the Plain Language of the Notice to Lender Statute.

     

    Division I of the Washington Court of Appeals recently clarified the interpretation of Washington’s “Notice to Lender” Statute, RCW 60.04.221, in Pacific Continental Bank v. Soundview 90, LLC. The Notice to Lender Statute protects lien claimants when a lender is providing interim or construction financing. Specifically, any potential lien claimant (i.e., any person furnishing labor, professional services, materials, or equipment for the improvement of real property and who has complied with the provisions of RCW 60.04, et seq.) who has not received payment within five days after the date required by its contract, may notify the lender of the amount due and, in turn, the lender “shall withhold from the next and subsequent draws the amount claimed to be due as stated in the notice.” RCW 60.04.221(5). If the lender fails to comply, the encumbrance securing the lender (e.g., deed of trust) is “subordinated to the lien of the potential lien claimant to the extent of the interim or construction financing wrongfully disbursed.” RCW 60.04.221(7). The result is that the lien claimant will be able to recover its claimed amount before the lender.


    Read the full case note.


    Paul R. Cressman, Jr., Ahlers & Cressman PLLC, Seattle, WA


     

    April 9, 2013

    Release-of-Lien Bond Does Not Preclude Priority Dispute

     

    In June 2006, a builder and developer formed a company (Owner 1) to buy 11 properties (Property) for a phased residential development. Before Owner 1 bought the Property, however, it hired an engineering firm, Olson Engineering, Inc. (Olson), to perform surveying, engineering, and planning for the residential development. In December 2006, more than six months after Owner 1 hired Olson, Owner 1 closed on the Property, at which point Owner 1 became “owner” of the Property. The sale was financed by KeyBank National Association (Bank), and the Bank was granted a Deed of Trust secured by the Property. More than two years later, on October 1, 2008, Olson, who had been doing engineering on the project since June 2006, filed a lien against the Property as a whole––not against the individual 11 parcels or 4 subdivisions. That same month, Owner 2, an entity related to Owner 1, acquired title to the Property and Owner 1 (the builder and developer) and its principals declared bankruptcy.


    As a result of the bankruptcy, the Bank foreclosed on its Deed of Trust and filed a Release-of-Lien Bond pursuant to RCW 60.04.161. Thereafter, the engineering firm (Olson) filed an action to foreclose its lien claim.


    Read the full case note.


    Paul R. Cressman, Jr., Ahlers & Cressman PLLC, Seattle, WA


     

    April 9, 2013

    Claims of a PFD Against a General Contractor Were Not Barred By the Statute of Repose

     

    This suit arose out of the construction of the baseball stadium for the Seattle Mariners. In an earlier appeal, the Supreme Court held that the statute of limitations did not bar suit by the Washington State Major League Baseball Stadium PFD against the general contractor because the action was brought for the benefit of the State and the exemption from the statute of limitations contained in RCW 4.16.160 applied. At issue in this appeal was whether the construction statute of repose, RCW 4.16.310, barred the PFD’s suit against the general contractor, and if not, whether the general contractor’s claims against the subcontractors could proceed.


    Read the full case note.


    Paul R. Cressman, Jr., Ahlers & Cressman PLLC, Seattle, WA


     

    March 8, 2013

    Court Offers Strict Interpretations of "Substantial Completion"

     

    The Sunset Presbyterian Court decided when “substantial completion” of construction occurred in light of a contractual accrual clause and in the context of the Oregon Revised Statute 12.135, the 10-year statute of ultimate repose for construction defect lawsuits.  The plaintiff was a church who hired the defendant general contractor to build a new facility. The plaintiff began holding religious services in the new facility and held a dedication event for it more than 10 years before the plaintiff filed suit against the general contractor and certain subcontractors for alleged construction defects and damage.


    Read the full case note.


    Jonathan Dirk Holt and Robert W. Kirsher, Scheer & Zehnder, LLP, Portland, OR


     

    February 01, 2013

    Appellate Court Finds Error in Jury Instruction

     

    In Pope, the New Jersey Appellate Division found that the lower court erred by charging the jury on negligence as a separate cause of action when the action was essentially a breach-of-contract claim. The appellate court also found that plaintiffs’ consumer-fraud claim was improperly dismissed. The dispute between the parties arose out of a construction project for a home renovation. The plaintiffs alleged that the project was delayed, that work was not performed properly and that costs greatly exceeded estimates provided by defendant. During trial, the judge dismissed plaintiffs' consumer-fraud claims. Ultimately, the jury returned a verdict of $315,000 in plaintiffs' favor on their negligence claim and $37,500 on their breach of contract claim, and awarded $36,300 in defendants' favor on their counterclaim for unpaid fees.


    Read the full case note.


    Alexander X. Saunders, Esq. and Frank A. Hess, Esq., Peckar & Abramson, P.C., River Edge, NJ


     

    February 01, 2013

    Architect's Lien Has Priority Over Bank's Trust Deed


    In reversing a trial court’s decision, the Oregon Court of Appeals ruled that under Oregon’s construction lien law, an architect’s lien held priority over a bank’s previously recorded trust deed because the perfection of the lien relates back to the date of the “commencement of the improvement,” (i.e., when the contractor began work), which predated the bank’s recordation of its trust deed. The court further held that a creditor cannot invoke the doctrine of equitable subrogation where it had actual notice of facts that led to the creation of the construction lien.


    In Klahowya, a failed property development resulted in litigation between unpaid creditors, the architect, and a bank.  At issue was the priority of the claims. The contractor had cleared trees and existing cabins from the development site, but had not yet commenced construction before it halted work. Months later, the bank recorded a trust deed on the development property.  Subsequently, the architect recorded a claim of lien on the property. 


    Read the full case note.


    Peter Sax, Stoel Rives LLP, Portland, OR


     

    January 9, 2013

    Contradictory Contract Language Nullifies Arbitration Provision


    The Mississippi Supreme Court upheld the denial of a contractor’s arbitration demand holding that contradictory provisions of a work order nullified the arbitration provision in the terms and conditions attached to the work order. Therefore, since the work order was silent on arbitration, there was no agreement to arbitrate.


    A contractor subcontracted for the clearance a right of way. The subcontract consisted of a  work order with attachedterms and conditions. The contractor terminated the subcontractor after approximately a third of the work had been performed. The subcontractor filed suit and the contractor moved to compel arbitration per the subcontract’s terms and conditions.


    Read the full case note.


    Alexander F. Guidry, Mockbee Hall & Drake, P.A., Jackson, MS


     

    December 11, 2012

    Court Upholds Attorneys' Award in Favor of Defendant under MCPA


    In B Bar J Ranch, LLC v. Carlisle Wide Plank Floors, Inc., the Montana Supreme Court upheld an attorneys' fees award in favor of a defendant under Montana's Consumer Protection Act (MCPA).


    Under the MCPA, a successful claimant is entitled to recover his/her attorneys’ fees, however a defendant under the MCPA is only entitled to recovery of his/her fees if he/she can establish that the claimant’s MCPA claim is “frivolous, unreasonable, or without foundation, even though not brought in subjective bad faith.” Based on the fact that B Bar J Ranch knew it was operating its premises as a business instead of a residence, the district court found sufficient evidence to award Carlisle its attorneys’ fees in defeating the MCPA claim, an award which was upheld by the Montana Supreme Court. This case presents the first time the Montana Supreme Court has upheld an attorneys’ award in favor of a defendant defending against a claim under the MCPA.


    Read the full case note.


    Neil G. Westesen and Brad J. Brown, Crowley Fleck, PLLP, Bozeman, MT


     

    October 16, 2012

    No Lien for General Conditions Costs


    A lien is security for getting paid. If a contractor gets a judgment for amounts owed on a project and preserves its lien rights, it can pursue sale of the property to pay the judgment. Or can it?


    The answer depends on whether the state’s lien law allows a lien for the particular unpaid costs. The Georgia Court of Appeals recently announced that “general conditions” costs are not a “lienable” item, and a general contractor had to go back to trial to separate general conditions from other recoverable costs. 182 Tenth, LLC v. Manhattan Construction Co., 730 S.E.2d 495 (Ga. App. 2012).


    Read the full case note.


    R. Daniel Douglass, Stites & Harbison PLLC, Atlanta, GA


     

    June 13, 2012

    Party in Control of Work Site Is Best Positioned to Identify Risks


    The Iowa Court of Appeals and the Iowa Supreme Court reached different conclusions in unpublished opinions that explore the relationship between control and duty in the construction context. An employee of Little Sioux, the owner of an ethanol plant, was seriously injured while working on a switchgear cabinet at the end of a project Little Sioux undertook to expand the capacity of its plant. That expansion included the installation of a new electrical loop. Little Sioux hired an engineering firm to design the loop, purchased equipment needed for the loop from an supplier and hired a contractor, Schoon Construction, to do installation work that included the installation of new switchgears: large metal cabinets mounted on pads that received and transmitted high-voltage electricity and controlled the overall flow of electricity within the distribution system through mechanically operated switches. Schoon hired the defendant, Nikkel & Associates, to do work including hooking up electrical cables to the terminals in the switchgears.


    Read the full case note.


    Donald G. Thompson, Bradley & Riley PC, Iowa City, IA


     

    June 13, 2012

    85 Percent Is Not "Substantial Performance"


    The Iowa Supreme Court, in an unpublished opinion, addressed the question of whether a general contractor could enforce a mechanic’s lien after the contractor walked off the job when a dispute arose with the owner and the owner’s lender resulting in the suspension of payments to the contractor.


    While the contract involved the construction of a home, the fact that the case involved residential rather than commercial construction had no bearing on the court’s analysis. The dispute arose when the owner discovered that a materials package included a $20,000 markup that the contractor had not disclosed. While the markup did not increase the price the owner had agreed to pay the contractor to build the house, both the owner and the owner’s lender refused to pay the markup. When the owner and the lender stopped making payments because of the dispute involving the markup, the contractor stopped construction and filed a mechanic’s lien.


    Read the full case note.


    Donald G. Thompson, Bradley & Riley PC, Iowa City, IA


     

    April 26, 2012

    Lower-Tier Failure to Maintain Insurance May Fall on Contractors


    A recent decision from the Georgia Court of Appeals illuminates a potentially dangerous blind spot of risk for contractors. In The Estate of Pitts v. City of Atlanta, 312 Ga. App. 599, 719 S.E.2d 7 (Ga. Ct. App. 2011), the Georgia Court of Appeals ordered judgment in favor of the estate of a deceased worker who sued various contracting companies for their failure to enforce a contractually required automobile liability insurance obligation of a sub-subcontractor. The estate successfully argued that the decedent was a third-party beneficiary of the contracts that required the insurance and was harmed when the coverage was not available.


    Read the full case note.


    Stephen M. Reams, Stites Harbison, PLLC, Atlanta, GA


     

    March 22, 2012

    Improvement Repairs Do Not Toll or Extend Statute of Repose


    The six-year statute of repose for claims of defective design and/or construction of an improvement to real property is neither tolled nor extended as to claims against the original contractor and/or original designer of the improvement by subsequent repairs to the improvement.


    Read the full case note.


    Alexander F. Guidry, Mockbee Hall & Drake, P.A., Jackson, MS


     

    March 22, 2012

    Subcontractor Not Liable after GC Approves Completed Work


    A subcontractor is not liable for injuries occurring to a third person after the subcontractor has completed its work and the general contractor has accepted that completed work.


    In EMJ, an injured worker brought suit against the general contractor and a subcontractor after falling from a steel roof ladder installed by the subcontractor. The general contractor filed a countersuit against the subcontractor because the subcontractor did not install non-slip surfaces on the ladder’s steps.


    Read the full case note.


    Alexander F. Guidry, Mockbee Hall & Drake, P.A., Jackson, MS


     

    March 12, 2012

    GC Negligence Complaint May Still Trigger Subcontractor Duty


    This case required the New Mexico Court of Appeals to address the obligation of a commercial-general-liability carrier to defend a contractor, as an additional insured, under New Mexico’s anti-indemnity statute, NMSA 1978, § 56-7-1. L.C.I.2 was the general contractor for the construction of a recreation area, which included an enclosed swimming pool. L.C.I.2 hired Newt & Butch to install the roof on the structure over the pool. One of Newt & Butch’s employees, Bobby Windham, fell through an uncovered opening while installing the roof and brought suit against L.C.I.2 for negligence in failing to provide coverings for the cutouts for the skylights and in failing to implement safety rules and precautions. Newt & Butch, by contract, had provided additional insured status to L.C.I.2 under its commercial-general-liability policy issued by Nationwide Mutual Ins. Co.


    Read the full case note.


    Sean R. Calvert, Calvert Menicucci, PC, Albuquerque, NM


     

    March 12, 2012

    Delaware Court Addresses Unjust Enrichment and Quantum Meruit


    In Abacus Sports Installations, Ltd. v. Casale Construction, LLC, the issue addressed was whether a general contractor can pursue claims of unjust enrichment and quantum meruit against the new owner of property who received the deed just after substantial completion of a construction project. The short answer is yes.


    Read the full case note.


    Francis G.X. Pileggi, Eckert Seamans Cherin & Mellott, LLC, Wimington, DE


     

    March 7, 2012

    Washington Court Holds GC May Obtain Indemnity Damages


    This was the second appeal of this case involving a 25-building condominium complex in Bellevue. The owners association filed suit against the owner-developer, which filed a third-party complaint against Ledcor, the general contractor. Ledcor settled with the developer and filed a fourth-party complaint against several subcontractors, including Serock. Ledcor alleged Serock breached its subcontract and failed to fulfill its indemnification obligations. All subcontractors, except Serock, settled with Ledcor before trial. The trial court determined that Serock breached its contractual obligations on 11 of the 13 buildings, but the statute of limitations barred Ledcor’s contract claims on four of the buildings. The trial court awarded damages for the four buildings pursuant to the indemnification provision, and contract damages for the other seven buildings.


    Read the full case note.


    Paul R. Cressman Jr., Ahlers & Cressman PLLC, Seattle, WA


     

    March 7, 2012

    Small-Works Contractor Scores Big Against Public Utility District


    Tim and Terese Spradlin (contractor) own a construction company (Spradlin) in Grays Harbor County that hauls rock and builds roads. Since 2000, the Spradlins had been performing work for the PUD on a small-works-roster basis (contracts of less than $200,000). (Small works contracts allow the PUD to bypass the typical notice and bidding process required under former RCW 54.04.070 (2002) for individual public works projects costing less than $200,000. See RCW 39.04.155 (2001).  The current version of RCW 39.04.155 raised this amount to $300,000, but otherwise remains substantially the same as the former RCW 39.04.155.) The small-works contract provided that Spradlin would be paid $52.90 per hour for four pieces of operated equipment (the equipment was operated by Tim Spradlin, the owner, and a salaried supervisor; both were exempt from prevailing wages). The contract also provided that if the project required use of equipment not included in the contract, that Spradlin and the PUD would agree to negotiated rates for that equipment.


    Read the full case note.


    Paul R. Cressman Jr., Ahlers & Cressman PLLC, Seattle, WA


     

    March 7, 2012

    Award of Damages Did Not Include Damages for Betterment


    The Brothertons contracted with Kralman Steel Structures, Inc. to build a garage for their home. One of the options was for removal and replacement of the existing driveway, which option was exercised by the Brothertons. Following construction of the driveway by Kralman’s concrete subcontractor, drainage problems were noticed immediately, and water pooled and drained toward the Brothertons’ house. In addition, the concrete experienced uncontrolled and unsightly cracking.


    The Brothertons brought an action against Kralman and its contractor’s registration-bond surety seeking damages for breach of contract. The trial court awarded the Brothertons damages based upon a bid received from another contractor in the amount of $12,796.20, and capped damages against the registration-bond surety at the $12,000 amount of its bond.


    Read the full case note.


    Paul R. Cressman Jr., Ahlers & Cressman PLLC, Seattle, WA


     

    March 7, 2012

    Court May Entertain Challenge to Validity of Clause, Not Contract


    Four homeowners purchased homes from The Quadrant Corp., which was owned by Weyerhaeuser Real Estate Company (WRECO), which in turn was owned by Weyerhaeuser Co. Each couple entered into a purchase and sale agreement (PSA). The PSA contained an arbitration clause:


    Any controversy or claim arising out of or relating to this agreement, any claimed breach of this agreement, or any claimed defect relating to the property, including without 1imitation, any claim brought under the Washington State Consumer Protection Act (but excepting any requests by Seller to quiet title to the Property) shall be determined by arbitration.


    The homeowners brought suit against Quadrant, WRECO, and Weyerhaeuser alleging outrage, fraud, unfair business practices, negligence, negligent misrepresentation, rescission, and breach of warranty. They contended that Quadrant knowingly engaged in shoddy workmanship, and that this resulted in serious construction defects that caused personal injuries relating to mold, pests, and poisonous gases. They claimed that the PSA, as well as the arbitration clause contained therein, was unenforceable. Two actions were actually filed, which were consolidated.


    Read the full case note.


    Paul R. Cressman Jr., Ahlers & Cressman PLLC, Seattle, WA


     

    March 2, 2012

    Missouri Court Determines Mechanic's Lien Priority


    In the case of Altom Construction Co. v. BB Syndication Services, Inc., 2012 WL 503600 (Mo.App. S.D. 2012), the lender claimed that the majority of the loan proceeds involved money advanced to purchase undeveloped land. Consequently, the lender argued, most of its lien was based on “purchase money” that had priority over unpaid mechanic’s lien claimants.


    Read the full case note.


    Robert M. Pitkin, Levy and Craig, Kansas City, MO


     

    March 2, 2012

    Bankruptcy Court Resolves Various Mechanic's Lien Issues


    In the case of Trilogy Development Co. v. BB Syndication Services, Inc., 2011 WL 6888479 (Bankr. W.D. Mo. 2011), a bankruptcy court ruled on various mechanic’s lien issues involving a failed construction project that shut down soon after the owner filed bankruptcy in 2009.


    Read the full case note.


    Robert M. Pitkin, Levy and Craig, Kansas City, MO


     

    February 8, 2012

    Wisconsin Court Defers Fire Question to Jury


    Fontana Builders involved a claim for damages under a builder's risk policy related to a fire that destroyed a home. The builder, Fontana Builders, had obtained a builder's risk insurance policy from Assurance and submitted a claim arising from fire damage to a house that Fontana had constructed. When Assurance denied coverage, a trial ensued. The trial court held, as a matter of law, the builder's risk policy provided coverage. However, the court of appeals reversed and determined that the question of whether coverage existed on the day a fire consumed the house was a question of fact for the jury.


    Read the full case note.


    Brian R. Smigelski, DeWitt Ross Stevens S.C., Brookfield, WI


     

    February 8, 2012

    Wisconsin Court Mulls Whether Loss Doctrine Bars Subrogation Claims


    The Wisconsin Court of Appeals recently addressed insurance coverage for allegedly defective construction work on an animal-processing plant and whether subrogation claims were barred by the economic-loss doctrine.


    In Acuity, the owner of an animal-processing plant, VPP Group, LLC (VPP), contracted for the removal and reinstallation of a concrete wall on the south side of its "engine room" building. This building provided refrigeration and utility services to VPP's plant. As a result of Flint Construction's excavation of a trench adjacent to the wall, soil began to erode from under the concrete slab of the first floor of the engine room. Ultimately, the first floor of the engine room cracked and a portion deflected downward. This resulted in the second floor and roof likewise deflecting downward. The building damage disrupted utility service to the rest of the processing plant. Ultimately, VPP incurred costs for, among other things, additional personnel hours, extra freight, fuel charges, and other expenses, totaling approximately $380,000. Repairs to the floors, walls and ceilings were also necessary resulting in VPP submitting a claim with its insurer, Acuity, for a total of $636,466.39.


    Acuity then commenced a subrogation claim against two subcontractors and their insurer, Society Insurance, seeking to recover damages arising from the engine room collapse, and alleging claims for breach of contract and negligence.


    Read the full case note.


    Brian R. Smigelski, DeWitt Ross Stevens S.C., Brookfield, WI


     

    January 4, 2012

    Surety's Ability to Remove May Hinge on Terms of Contract


    A recent case issued by the U.S. District Court for the Southern District of Indiana will make it much more difficult for sureties to obtain federal jurisdiction when the contract between owner and contractor contains a forum-selection clause stating disputes must be resolved in state court.


    In this matter, Steel Supply & Engineering Co. entered into a construction contract with the City of Carmel. Ohio Farmers Insurance Company (Ohio Ins.) provided a performance bond covering Steel Supply’s work.

     


    Read the full case note.


    Robert L. Gauss and Nathaniel M. Uhl, Ice Miller LLP, Indianapolis, IN


     

    December 16, 2011

    Illinois Court Holds GC Not Insured Without Direct, Written Contract


    The Illinois Appellate Court, First District, recently held that a general contractor was not an additional insured under a sub-subcontractor’s insurance policy because there was no direct, written contract between the general contractor and sub-subcontractor.


    FCL Builders, Inc. (general) subcontracted the structural steel fabrication and erection to Suburban Ironworks, Inc. (subcontractor), who, in turn, subcontracted the steel-erection portion of the subcontract to JAK Iron Works, Inc. (sub-subcontractor). The general’s contract with the subcontractor required the subcontractor to obtain commercial general liability insurance to cover the general contractor. The subcontract required the subcontractor, if it entered into subcontracts, to maintain the same level of insurance and have the general included as an additional insured on insurance required under any such subcontracts.


    Read the full case note.


    Chad J. Shifrin, Laurie & Brennan, LLP, Chicago, IL


     

    December 6, 2011

    Louisiana Court Holds Surety Has Duty to Pay if GC Does Not


    Perhaps one of the most controversial issues in the context of construction contracting is who bears the risk of loss if the owner fails to make payments or becomes insolvent. Is it the general contractor or the subcontractor? The answer to this question is usually found in a “risk shifting” provision in the subcontract, commonly referred to as a “pay-when-paid” or “pay-if-paid” provision. Typically, these provisions transfer the risk of loss to the subcontractor by stating that the general contractor is only liable for sums due to the subcontractor if (or when) the general is paid by the owner. If the owner is late in making payments, or fails to do so altogether, the general is typically not obligated to pay the sub. But what about the surety that provides a payment bond on the project? Does the surety still have a duty to pay if the general contractor does not?


    Read the full case note.


    Russel W. Wray, Wray & Pierce, L.L.P., Baton Rouge, LA


     

    November 23, 2011

    Montana Supreme Court Holds Construction Lien Has Priority


    In Gaston Engineering & Surveying, P.C. v. Oakwood Properties, Inc., 2011 MT 44, 359 Mont. 341, 249 P.3d 75 (2011), the Montana Supreme Court held that an engineering firm’s construction lien had priority over a lender’s purchase money mortgage even though the developer the engineering firm performed work for did not own the property that was the subject of the lien until after the lender filed its purchase money mortgage.


    Read the full case note.


    Neil G. Westesen and Brad J. Brown, Crowley Fleck, PLLP, Bozeman, MT


     

    November 23, 2011

    Montana Supreme Court Holds GC Entitled to Foreclose on Lien


    In Dick Anderson Construction, Inc. v. Monroe Property Co., LLC, 2011 MT 138, 361 Mont. 30, 255 P.3d 1257, the Montana Supreme Court held that a general contractor was entitled to foreclose on its construction lien even though the party it had contracted with was not the owner of the real estate where the improvements were located.


    Read the full case note.


    Neil G. Westesen and Brad J. Brown, Crowley Fleck, PLLP, Bozeman, MT


     

    November 23, 2011

    Montana Supreme Court Reaffirms Attorney Fee Precedent


    In Harmon v. Fiscus Realty, 2011 MT 232, 362 Mont. 135, 261 P.3d 1031 (2011), the Montana Supreme Court reaffirmed that for a defendant to state a claim under Montana’s Unfair Trade Practices and Consumer Protection Act (CPA) to recover his or her attorney fees as the prevailing party in any such case, a court must first make a finding that the action was “frivolous, unreasonable, or without foundation, even though not brought in subjective bad faith.”


    Read the full case note.


    Neil G. Westesen and Brad J. Brown, Crowley Fleck, PLLP, Bozeman, MT


     

    November 23, 2011

    Montana Court Analyzes Whether Written Bid is Binding Contract


    In AAA Construction of Missoula, LLC v. Choice Land Corp., 2011 MT 262, ___ Mont. ___, ___ P.3d ___ (2011), the Montana Supreme Court analyzed two separate issues. First, the court was asked to determine whether a subcontractor’s written bid constituted a binding contract between it and the general contractor. Second, the court analyzed whether a party who had substituted a bond in lieu of a construction lien was still entitled to recover its attorney fees.


    Read the full case note.


    Neil G. Westesen and Brad J. Brown, Crowley Fleck, PLLP, Bozeman, MT


     

    November 18, 2011

    New Attorney Fee Statute in North Carolina


    A new North Carolina statute changes the analysis of whether clients suing to recover money owed on a construction project can recover their attorney fees from the adverse party. Generally, under North Carolina law, a judge or arbitrator is allowed to award attorney fees only if there is a statute that expressly authorizes him or her to do so.


    North Carolina’s lien-and-bond statute (N.C.G.S. Chapter 44A) allows the prevailing party in a dispute involving a lien or bond claim to recover its “reasonable” attorney fees from the losing party, but only if the prevailing party is able to show that the losing party unreasonably refused to fully resolve the claim. Whether to award attorney fees to the prevailing party is left to the discretion of the judge. As a result, attorney fees are seldom recovered in suits involving lien-and-bond claims.


    Another North Carolina statute (N.C.G.S. § 6-21.2) authorizes judges to enforce attorney-fees provisions contained in a note, conditional sales contract, or “other evidence of indebtedness.” An “evidence of indebtedness” was defined by the courts to be a “printed or written instrument which has been signed or otherwise executed by obligor and which evidences on its face a legally enforceable obligation to pay money.” Under this statute, only the party owed money under the contract had an opportunity to recover its attorney fees if the non-paying party breached the contract. The party paying for goods or services under a contract had no ability to recover attorney fees if the party providing the goods or services failed to perform. Fees recoverable under this statute are limited to a maximum of 15 percent of the outstanding balance sued upon.


    The North Carolina legislature recently enacted a statute that will significantly alter the ability of  parties to business contracts, including construction contracts, to recover attorney fees. On June 27, 2011, the governor signed Senate Bill 414 titled “An Act To Provide That Reciprocal Attorneys’ Fees Provisions In Business Contracts Are Valid And Enforceable Under The Laws Of This State.” The act became effective October 1, 2011, and applies to contracts entered into on or after that date.


    As is indicated by the title, the act applies only to business contracts and makes enforceable only “reciprocal” attorney-fees provisions. A “business contract” is a contract entered into primarily for business or commercial purposes” and expressly excludes “consumer contracts” and “employment contracts.” “Consumer contracts” are defined as contracts “entered into by one or more individuals primarily for personal, family, or household purposes.” “Employment contracts” are defined as “a contract between an individual and another party to provide personal services by that individual to the other party, whether the relationship is in the nature of employee-employer or principal-independent contractor.” A construction contract (other than perhaps a contract to build a home for a homeowner) would meet the definition of a “business contract.”


    A “reciprocal attorneys’ fees provision” is one that is applicable to all parties to the contract and requires the parties to pay or reimburse the other parties for attorney fees or expenses incurred in a suit, action, proceeding, or arbitration involving the business contract. For the reciprocal attorney fees provision to be enforceable, the business contract must be signed by hand by all parties to the contract.


    This statute will allow parties to a construction contract to include in the contract an enforceable attorney-fee provision. The contract may prescribe the terms and conditions under which fees may be awarded, as long as those terms and conditions are equally applicable to all parties to the contract. Thus, unlike under section 6-21.2, a party paying for goods or services under the contract will be entitled to an award of attorney fees if the other party to the contract fails to perform.


    The statute allows the court or arbitrator to award “reasonable” attorney fees and costs, and lists 13 factors that may be considered in determining a “reasonable” fee. Unlike under section 6-21.2, under the new statute, there is no presumption that a stated percentage is a “reasonable” fee and the court or arbitrator is not bound by a stated percentage contained in the contract. The only limitation is that the award of reasonable attorney fees and costs may not exceed the amount in controversy or the monetary damages awarded.


    This new statute significantly changes the law in North Carolina regarding the recovery of attorney fees and creates opportunities and risks for construction clients regarding whether to include a reciprocal attorney-fee provision in their contracts and the recoverability of the same in litigation or arbitration.


    David A. Senter, Nexsen Pruet, PLLC, Greensboro, NC


     

    November 18, 2011

    Illinois Court Rules Insurer Has Duty to Defend


    Subcontractor J.P. Larsen applied sealant to windows Weather-Tite, Inc. installed in a condominium project. The condominium association sued Weather-Tite claiming the windows leaked and caused water damage. Weather-Tite filed a third-party complaint against Larsen incorporating the language of the association’s complaint into its contribution claim. Larsen tendered its defense to its insurer, Milwaukee Mutual Insurance Co. Milwaukee denied coverage and sought a declaratory judgment that it had no duty to defend Larsen because the complaint alleged only construction defects and not “property damage” or “an occurrence” within the policy terms. The trial court found the insurer had a duty to defend Larsen and the appellate court affirmed.


    Read the full case note.


    Julie P. Shelton, Baker & Daniels LLP, Chicago, IL


     

    November 18, 2011

    Nevada Supreme Court Rules on Mechanic's Lien Case


    In Simmons, Rib Roof Inc. sought to foreclose upon mechanics’ liens for work performed on several different properties. The district court determined the lienable amount and entered judgment thereon. The district court however failed to allow for the sale of the properties to which the liens were secured.


    Under Nevada Rules of Appellate Procedure a court’s jurisdiction to consider an otherwise timely appeal depends on whether the district court has entered a final judgment. Rib Roof argued that the district court’s judgment was final despite its failure to order the property sold or foreclosed upon, because doing so is merely a post-judgment enforcement issue. The supreme court disagreed.


    Read the full case note.


    Michael W. Wadley, Holland & Hart LLP, Las Vegas, NV


     

    November 18, 2011

    Nevada Supreme Court Affirms Award of Expectation Damages


    In Dynalectric Clark and Sullivan solicited bids for a project. Dynalectric submitted a proposal to Clark and Sullivan. Clark and Sullivan incorporated Dynalectric’s proposal into its bid to the owner and was subsequently the low bidder and was awarded the project. Dynalectric repudiated its obligations to Clark and Sullivan. Clark and Sullivan sued Dyanlectric for damages under the theory of promissory estoppel and was awarded damages. Dynalectric appealed the award and asserted the district court should not have awarded Clark and Sullivan expectation damages. The Nevada Supreme Court disagreed.


    Read the full case note.


    Michael W. Wadley, Holland & Hart LLP, Las Vegas, NV


     

    November 16, 2011

    Tenn. Court Rules on Implied Duties, Delegation to Subcontractors


    In Federal Insurance Co. v. Winters, the Supreme Court of Tennessee held that all construction contracts carry an implied duty on the part of the contractor to perform in a “careful, skillful, diligent, and workmanlike manner.” This marks Tennessee’s adoption of the “general rule,” as the majority of states that have addressed the issue have adopted a similar rule. Perhaps more importantly for owners, builders, insurers, and sureties in Tennessee, the court also held that a contractor may not escape liability with regard to this duty simply by subcontracting the affected work.


    The plaintiffs in Federal Insurance entered into an oral contract with Martin Winters to install a new roof on their home. When the roof began leaking a few months after completion, Winters entered into a subcontract with Bruce Jacobs to perform the repairs. The subcontract stated that “[a]ny and all work will be the responsibility of Bruce Jacobs” and “[a]ny leaks/damages caused by work performed . . . will be [his] responsibility to repair or replace.” A few hours after Jacobs completed the repairs, a fire occurred, causing $871,069 in damages to the plaintiffs’ home and personal property. An investigation determined that the fire was caused by Jacobs’ use of a propane torch during the repairs.


    Read the full case note.


    Brian M. Dobbs and Wearen Hughes, Bass Berry & Sims, PLC, Nashville, TN


     

    September 20, 2011

    Oregon—Owner May Sue in Both Contract and Tort for Negligence


    In Abraham v. T. Henry Construction, Inc. 350 Ore. 29; 249 P.3d 534; 2011 Ore. LEXIS 207, the Oregon Supreme Court held that an owner may sue in both contract and tort for negligence in construction that results in property damage. Earlier case law had suggested that a claim in negligence might be unavailable to an owner in the absence of a “special relationship.”


    In Abraham, an owner contracted with the builder to construct a custom home. After the six-year contract statute of limitations had run, the owner discovered extensive property damage. The owner sued for negligent construction.


    Read the full case note.


    Guy A. Randles, Stoel Rives LLP, Portland, OR


     

    August 26, 2011

    Architects' Claim of Lien Had Priority over Bank's Deeds of Trust


    In August 2005, Zervas Group Architects commenced work for Bay View Tower LLC on a condominium tower project in Bellingham. Zervas provided architectural, design, and geological services, and authorized a geotechnical study.


    Bay View sought to finance soft costs, including preconstruction costs such as architectural and engineering expenses, and approached Whidbey Island Bank for two loans. Bay View represented that it had already paid $953,000 for soft costs. There was no discussion of services performed by Zervas.


    Read the full case note.


    Paul R. Cressman, Jr., Ahlers & Cressman PLLC, Seattle, WA


     

    August 26, 2011

    Washington Court Issues Three Opinions in Horse Harbor


    The court issued three opinions in this matter. The lead opinion was authored by Justice Fairhurst and signed by Justice Owens and Justice James Johnson. Justice Madsen wrote a concurring opinion that was signed by Judge Alexander. A second concurring opinion was written by Justice Chambers, which was also signed by Justice Charles Johnson, Justice Sanders, and Justice Stephens.


    Read the full case note.


    Paul R. Cressman, Jr., Ahlers & Cressman PLLC, Seattle, WA


     

    August 26, 2011

    Operating Company Can Bring Tort Action Even if Not Owner


    As with Eastwood v. Horse Harbor Foundation, Inc., there were three opinions, none of which constitute a majority by themselves. Justice Fairhurst wrote the lead opinion, which was also signed by Justice Owens. Justice Chambers wrote a concurring opinion that was also signed by Justice Charles Johnson, Justice Sanders, and Justice Stephens. Justice Madsen wrote a concurring and dissenting opinion that was also assigned by Justice Alexander and Justice James Johnson.


    Read the full case note.


    Paul R. Cressman, Jr., Ahlers & Cressman PLLC, Seattle, WA


     

    August 24, 2011

    Improvement Maintenance to Real Property Is Construction Services


    This case required the New Mexico Court of Appeals to address several issues left undecided after the enactment of a new anti-indemnification statute in 2003. Southern Union Gas Services, Ltd. owned and operated a gas-processing facility and hired Fulco Oil Services, LLC and two other entities as contractors to work on the processing plant. As part of the gas-processing facility, gas is run through a pressurized system called a “slug catcher” that requires periodic cleaning and maintenance to function. During routine cleaning of the slug catcher, Danny Holguin, an employee of one of the contractors, was injured. Holguin sued Southern Union who in turn sought indemnification from the contractors pursuant to indemnification clauses in the contracts.


    Read the full case note.


    Sean Calvert , Calvert Menicucci, PC, Albuquerque, New Mexico


     

    August 24, 2011

    Mississippi Case Law Agrees with Spearin Doctrine


    In Greenbriar Digging Serv. L.P. v. S. Cent. Water Ass’n, 2009 U.S. Dist. LEXIS 24048, at *5–6 (S.D. Miss. Mar. 26, 2009), a Mississippi federal district court held that even though Mississippi has not expressly adopted the Spearin doctrine, Mississippi case law agrees that an owner impliedly warrants the sufficiency of its plans and specifications and that the contractor’s adherence to those plans and specifications relieves the contractor of liability if those plans and specifications are defective.


    Read the full case note.


    Alexander F. Guidry, Mockbee Hall & Drake, Jackson, Mississippi


     

    August 24, 2011

    Contract Null and Void Due to Absence of Certificate of Responsibility


    In United Plumbing & Heating Co. v. AmSouth Bank, 30 So.3d 343 (Miss. Ct. App. 2009), the Mississippi Court of Appeals held a contractor’s contract was null and void because it did not hold the specific certificate of responsibility necessary to contract as a general contractor.


    Read the full case note.


    Alexander F. Guidry, Mockbee Hall & Drake, Jackson, Mississippi


     

    July 21, 2011

    Utah Uses a Plain Reading Interpretation of Mechanicís Lien Statue


    In General Construction & Development, Inc. v. Peterson Plumbing Supply, 248 P.3d 972, 2011 UT 1, 2011 WL 44707 (Utah Jan. 7, 2011), the Utah Supreme Court addressed whether a mechanicís lien was timely filed even though 180 days had passed after final completion of the original contract. In this question of statutory interpretation, the court found the mechanicís lien to be filed timely.


    Read the full case note.


    Nate Runyan, Holland & Hart LLP, Salt Lake City, Utah


     

    June 22, 2011

    Missouri Courts Rule on Mechanic's Liens


    The Eastern and Western Divisions of the Missouri Court of Appeals recently issued rulings involving mechanic's liens.


    Read the full case note.

     

    June 22, 2011

    Wisconsin Court Addresses Economic-Waste Rule


    The Wisconsin Court of Appeals recently addressed the economic-waste rule and affirmed the trial court’s decision that the owner of a home built with defective bricks was entitled to the cost to restore his property, rather than the cost to replace the bricks.


    Read the full case note.

     

    June 22, 2011

    Wisconsin Court Affirms Summary Judgment Denying Coverage


    In Lenzke v. Brinkmann Pools, LLC, the Wisconsin Court of Appeals addressed the propriety of the trial court’s summary-judgment decision denying insurance coverage to Brinkmann Pools for claims arising from Brinkmann’s sale and installation of a pool at the Lenzke’s home. Soon after the pool was installed, the Lenzkes observed cracks at the bottom of the pool. Ultimately, a sidewall began to bulge and water began to spurt from the pool’s pump, spraying water over the area surrounding the pool.


    Read the full case note.

     

    June 15, 2011

    Insurance Company Cannot Recoup Defense Costs from an Insured


    An important and emerging area of law that bears heavily on contractors being sued for construction defects, is the extent of an insurer’s ability to recoup defense costs that it advanced to an insured under a duty to defend, while purporting to “reserve its rights” under the policy. The debate arises only when the insurance policy does not contain language explaining the potential for a recoupment of defense costs. The law on this subject differs greatly depending on the state law that governs the issue. Until recently, no state or federal court in Massachusetts had taken a firm position on the question, but in February 2011, the U.S. district court in Massachusetts adopted a side. Before discussing the court’s opinion, it is important to analyze the two cases with which the court grappled in making its decision.


    To Recoup or Not to Recoup
    In the controversial decision of Buss v. Superior Court, the California Supreme Court was the first court to directly address the issue of whether an insurer is entitled to recoup costs for defending the noncovered counts of a third-party action against its insured. 939 P.2d 766 (Cal. 1997). In Buss, the insurer defended an entire action and sought restitution for its costs in defending the 26 out of the 27 counts that were not covered by its policies. Id. at 770. The court affirmed a primary insurer’s duty to defend an entire “mixed action” but held that the insurer had a quasi-contractual right to secure reimbursement for costs incurred in defending noncovered counts. Id. at 776. The Court further held, however, that an insurer is entitled to reimbursement only of defense costs “that can be allocated solely to the claims that are not even potentially covered.” Id.at 778.


    The court reasoned that the insurer could only recover defense costs allocated solely to the claims not even potentially covered because the insured paid premiums to the insurer to cover claims that are at least potentially covered by the policy. Id.The insured also paid premiums to cover defense costs that can be allocated jointly to both potentially covered and noncovered claims (i.e. mixed claims). Id.The court noted that defense costs that were required to defend actually or potentially covered claims, whether or not joined with noncovered claims, cannot be recovered by the insurer. Id. at 778, n.15.


    The other decision the Massachusetts Federal District Court considered was American & Foreign Insurance Co. v. Jerry’s Sport Center, Inc., 2 A.3d 526 (Pa. 2010). In Jerry’s Sport, the court determined that the insurer had an absolute duty to defend claims that are even potentially covered, and that an insurer must make a binding election about whether to advance defense costs to the insured. Id. at 542. If the insurer determines that there is no possibility of coverage, then it should deny its insured a defense. Id.However, if the insurer is incorrect in denying coverage, then it risks being liable for breach of contract. Id.


    The Jerry’s Sport court placed the duty solely on the insurer to determine coverage and the risks associated with an incorrect coverage determination. Following the Jerry’s Sport holding, an insurer has two choices: It can advance defense costs and have no claim for recoupment (even if the claims against the insured are not even potentially covered by the policy), or it can deny its insured a defense and risk breaching its contract with the insured.


    Massachusetts Makes Its Determination
    Relying on the reasoning of the two opposite holdings in Buss and Jerry’s Sport, the Massachusetts Federal District Court fell directly in line with Jerry’s Sport. In Welch Foods Inc. v. National Union Fire Insurance Co., the Massachusetts Federal District Court determined that an insurer must bear the risk of advancing defense costs to an insured. 2011 WL 576600, at *3 (D. Mass. Feb. 9, 2011). The Welch court agreed with Jerry’s Sport in that it is the insurer’s duty and risk to make the determination of whether a claim is covered. Id. The Court reasoned that the insurer is in the business of making that determination and therefore must do so in these situations without hedging its bet. Id. If the insurer later learns that its coverage determination was incorrect and regrets its decision to advance defense costs, the hindsight is “too little-too late” to recoup its defense expenses. The insured will not be required to reimburse the insurer for the insurer’s incorrect determination. See id.


    Although Welch is a federal opinion and therefore not binding authority over Massachusetts state courts, it does shed light on how legal reasoning is headed on this issue. One thing that is for sure, the Welch opinion will at least have a deterrent effect on Massachusetts insurance companies that are considering whether to seek reimbursement for defense costs advanced to insureds.


    Christopher A. Kenney Esq. and Adam M. Veness Esq., Kenney & Sams, P.C., Boston , MA


     

    June 2, 2011

    Chinese Drywall Decision Has Important Implications


    Practitioners take note; Florida’s Middle District’s recent Auto-Owners Insurance Co. v. American Building Materials., Inc. is not only an important decision in the field of Chinese drywall litigation, but is also a reminder of the importance of drafting a complaint to trigger insurance coverage.


    Read the full case note.

     

    May 27, 2011

    Construction Lien Had Priority Over Lender's Purchase Money Mortgage


    In Gaston Engineering & Surveying, P.C. v. Oakwood Properties, Inc., the Montana Supreme Court held that an engineering firm’s construction lien had priority over a lender’s purchase money mortgage even though the developer the engineering firm had worked for did not own the property that was the subject of the lien until after the lender filed its purchase money mortgage.


    Read the full case note.

     

    May 26, 2011

    Subcontractor's Lien Is Invalid Due to Failure to Serve 90-Day Notice


    The Illinois Appellate Court, First District, recently held that a subcontractor’s lien does not have priority over a lender’s mortgage when the subcontractor fails to send or serve notice of its lien claim within 90 days after completion of its work to a known lender.


    Read the full case note.

     

    May 20, 2011

    Failure to Comply with Termination Provisions Leads to Claims Waiver


    A recent Indiana Court of Appeals case establishes that a failure to follow contractual termination provisions in construction contracts and performance bonds will result in a waiver of claims. In Town of Plainfield v. Paden Engineering Co., Inc., the owner entered into a contract with the contractor to provide a steel package for an aquatic center. 943 N.E.2d 906–7. The contract documents included the AIA A201 General Conditions. Id.at 906, fn.3. With regard to termination of the contractor, Article 14.2.2 of the A201 provides the owner is obligated to obtain certification by the architect that sufficient cause exists to justify the termination of the contractor before termination. Id. at 907, 909. In addition, the contractor obtained a performance bond securing its performance. Id. at 907. The performance bond was written on the AIA A312 form, which provided that the bonding company’s obligations under the bond were only triggered after a number of conditions were met; one of the conditions was the owner’s formal termination of the contractor. Id.


    Read the full case note.

     

    May 12, 2011

    North Carolina Court Rules on Coverage for Water Infiltration Damage


    The North Carolina Court of Appeals issued a recent ruling interpreting coverage available to a contractor in a case involving damage due to water infiltration. In Builders Mutual Insurance Co. v. Mitchell, No. COA10-553 (N.C. App. 2011), the court of appeals issued the first ruling from a North Carolina state court directly addressing coverage available to a contractor where the contractor’s defective work resulted in water intrusion damage to the building on which the contractor was working. In Mitchell, a general contractor, Umstead, was hired to correct water intrusion damage to a home that was originally constructed by another contractor. After five years of repair efforts by Umstead, the homeowner sued Umstead alleging the repairs were faulty and had caused further water intrusion damage to the home. Umstead was insured by two different liability insurers over the period it worked on the project. One carrier, Builders Mutual, defended Umstead under a reservation of rights. The other carrier, Maryland Casualty, denied coverage. Builders Mutual then sued Maryland Casualty, seeking a declaration that Maryland Casualty had coverage for the claims asserted against Umstead by the homeowner.


    Read the full case note.

     

    May 12, 2011

    Nevada Supreme Court Addresses Visibility Requirement


    The Nevada Supreme Court addressed the visibility requirement for a mechanic’s lien claimant to obtain priority over a deed-of-trust holder. The court addressed four issues and held: 1) NRS 108.22112 governing “commencement of construction” plainly requires visibility of work performed, including preconstruction services, to establish priority; 2) the 2003 amendments to NRS Chapter 108 expanding the definition of “work” did not affect the long-standing requirement that work must be visible; 3) the statutory-visibility requirement for work may not be waived by a lender who has actual knowledge of offsite preconstruction services; and 4) preparatory placement of signs and removal of power lines does not constitute visible work.


    Read the full case note.

     

    May 12, 2011

    Nevada Supreme Court Favors Substantial-Compliance Doctrine


    The Nevada Supreme Court stated that the substantial-compliance doctrine regarding mechanic’s-lien formalities governed and as long as a property owner has actual knowledge that a lien claimant is working, a written pre-lien is not required.


    Read the full case note.

     

    May 12, 2011

    Nevada Supreme Court Clarifies Standard for Excessive Liens


    The Nevada Supreme Court clarified the (i) burden of proof required to defend and (ii) evidentiary analysis necessary to decide an NRS 108.2275 motion to expunge a frivolous or excessive lien. The court held that a full evidentiary hearing is not required of a district court, but rather it may decide based on affidavits and documentary evidence submitted by the parties. Also, the court clarified that in evaluating whether a lien is excessive, the district court must use a preponderance-of-the-evidence standard, rather than the reasonable-cause standard used for frivolous liens.


    Read the full case note.

     

    April 29, 2011

    Illinois Undercuts Lien Claimantís Priority in Foreclosure Proceedings


    LaSalle Bank involved a typical situation in which a lender, LaSalle Bank, loaned funds to a developer, Cypress Creek, and a mortgage was recorded prior to any development beginning. The developer thereafter began the development of a senior-housing project and the project continued successfully through eight monthly construction draws. The loan subsequently went into default and LaSalle Bank moved to foreclose on its mortgage. Two contractors recorded mechanics liens against the property and thereafter filed mechanics-lien foreclosure actions that were eventually consolidated with the mortgage foreclosure.


    Read the full case note.

     

    March 16, 2011

    Illinois Supreme Court Apportions Proceeds of Foreclosure Sales


    In this case, the Illinois Supreme Court prescribed the proper apportionment of foreclosure-sale proceeds between a mortgagee and mechanics-lien claimants under section 16 of the Mechanics Lien Act when the sales proceeds are insufficient to satisfy both.


    Read the full case note.

     

    March 16, 2011

    Illinois Homeowners May Assert Claims Against Non-Vendor Builders


    This Illinois appellate case dispels any doubt that homeowners may assert claims against non-vendor builders based on the implied warranty of habitability. The case also finds that neither storms nor a mold infestation constitutes an exception to the Illinois Moorman doctrine barring economic damages for negligence claims.


    Read the full case note.

     

    March 1, 2011

    A Misleading Materialman Cannot Recover on Payment Bond


    In September 2005, Viteri Construction Management, Inc. (VCMI) entered into a contract with the U.S. government to expand and modify a Coast Guard station in Chesapeake, Virginia. In compliance with the Miller Act, VCMI obtained a payment bond in the amount of $2,675,738 guaranteed by VCMI’s owners. VCMI employed H&L Mechanical, Inc. as the subcontractor responsible for installing new HVAC equipment. H&L engaged Damuth Trade as a materialman to supply the HVAC parts. On November 16, 2006, Damuth supplied H&L with $160,205.85 in HVAC equipment and support services. H&L promptly invoiced VCMI for $185,811.31 for work performed on the project, including the amount owed Damuth for equipment and services. As required by the subcontract, H&L certified that payments had been made to all its subcontracts for materials and labor used in connection with the contract. On January 5, 2007 VMCI paid H&L in full.


    Read the full case note.

     

    March 1, 2011

    The Statute of Repose Does Not Apply to a Building-Repair Project


    The subrogor, Three Flint Hill Partnership, RLLP, secured Simpson Unlimited, Inc. as an independent contractor on a building-construction project. By contract, Simpson was required to replace soffit on the terraces of the building and perform other maintenance work. Simpson received final payment on December 16, 2002. Two years later, on December 20, 2004, areas of the building were damaged by a water leak on the eighth floor. Travelers Indemnity Co. filed suit on March 18, 2009, claiming Simpson negligently performed its work, causing the water leak.


    Read the full case note.

     

    March 1, 2011

    ILSFDA Allows Condo Buyers to Rescind Their Purchase in Virginia


    The Nahigians alleged that they were misled by advertisements claiming the Creighton Farms development in Loudoun County would be a “Ritz-Carlton Managed Community.” Creighton Farms is a 900-acre luxury community planned around a Jack Nicklaus-designed golf course. The property was developed and sold by Juno Loudoun LLC, which promised in a brochure to contract with The Ritz-Carlton Hotel Co. or an affiliate for management of the golf club and master association. After the parties contracted, the real-estate decline led to unsold lots, unbuilt homes, and a lack of many planned amenities. The Nahigians closed on their lot in July 2007, with $1.67 million paid to Juno. In 2009, Ritz-Carlton parted ways with Juno. No Ritz golf clubhouse or Ritz daycare center was ever built at Creighton Farms. The community never materialized as planned. Disappointed that their prospective home would no longer be associated with Ritz-Carlton and its services, the Nahigians sued. Their amended complaint against both Ritz and Juno set out claims of fraud, violations of the Interstate Land Sales Full Disclosure Act  (ILSFDA), and a violation of the Virginia Consumer Protection Act. Parties filed cross motions for summary judgment.


    Read the full case note.

     

    February 3, 2011

    New Hampshire Supreme Court Interprets Mechanic's Lien Statutes


    This New Hampshire Supreme Court case concerns the interpretation of New Hampshire’s mechanic’s lien statutes. Many readers may know that New Hampshire still largely operates on the “writ” system that was long ago changed in most states. In this case, when the homeowner failed to pay an outstanding balance of $45,391.75, the builder petitioned the superior court for an ex parte attachment pursuant to the lien statutes. In New Hampshire, liens are achieved by an ex parte attachment. In the motion, the builder referred to the property as “any and all real estate” not limited to the specific address where the homeowner's land existed, and titled the pleading “Petition for Ex Parte Mechanics Lien.” The court granted the proposed writ of attachment; however, the proposed writ did not say that it was expressly for the purposes of securing a mechanics lien even though the accompanying petition clearly contained that information. The trial court sustained the homeowner's objections that the writ of attachment was defective because it did not explicitly specify that it was securing a mechanic’s lien.


    Read the full case note.

     

    February 3, 2011

    New Hampshire Supreme Court Reaffirms Meaning of "Occurrence"


    In this insurance-coverage action, a 34-home development known as Thurston Woods fell victim to numerous defective chimneys that had incorrectly sized flues. The homeowners filed suit against the general contractor, Green & Company Building, and the contractor made a demand upon Concord General to provide defense and indemnification coverage under the contractor’s Commercial General Liability Policy. Concord General did so under a reservation of rights but also initiated a declaratory judgment action to resolve the insurance coverage issues. While the lawsuits were pending, the general contractor placed carbon monoxide detectors in each of the homes and discovered unacceptable levels of carbon monoxide in numerous homes and began to receive complaints that flue gases were seeping into some of the homes. The general contractor ultimately either paid to have the defective chimneys repaired or reimbursed several homeowners who already had made repairs. Although the opinion is silent on this issue, presumably, this was done with the insurance company’s knowledge.


    Read the full case note.

     

    February 3, 2011

    New Hampshire Supreme Court Reviews Bond Statutes


    In this case, the New Hampshire Supreme Court had the occasion to review the unique statutes governing performance-and-payment bonds. Pursuant to New Hampshire RSA 447:17, a claimant must within 90 days after the completion and acceptance of the project by a contracting party file with the appropriate proper public entity “a statement of the claim.” A copy of that statement is sent by mail by the office where it is filed to both the principal and the surety. Then, pursuant to RSA 447:18, within one year after the filing of the notice of claim, a claimant must file a petition in the superior court to enforce the claim “with copy to the principal and surety, and such further notice as the Court may order.” In this case, the NH Supreme Court had an occasion to analyze the latter filing requirement and interpreted it strictly in disallowing a payment-bond claim.


    Read the full case note.

     

    December 23, 2010

    Indemnification Agreement Not Governed by Four-Year Statute of Limitations


    The Illinois Appellate Court, First District, recently held that the ten-year statute of limitations applicable to written contracts, rather than the four-year statute of limitations applicable to construction-related activity, applies to a property owner’s indemnification claim against another property owner for losses suffered as a result of a construction project. The court held that the liability at issue emanates from the breach of a contractual obligation to indemnify, not from construction-related activity. Water Tower Realty Co. v. Fordham 25 E. Superior, L.L.C., 936 N.E.2d 1127 (1st Dist. 2010) [PDF].


    In Water Tower Realty, property owner Fordham sought to construct a 50-story high-rise building in Chicago’s River North neighborhood. To obtain consent from its neighbor Water Tower, who owned a building across the street from the planned high-rise, Fordham agreed to indemnify Water Tower for any losses it suffered due to the construction. Five years after Fordham completed construction, Water Tower sued Fordham for breach of the indemnity agreement alleging that the construction activity rendered its property unsuitable for rental to commercial tenants.


    Fordham moved to dismiss the complaint asserting that the four-year statute of limitations for construction-related activity barred the claim. Water Tower responded that the ten-year statute of limitations for written contracts governed its claim because it sued for breach of the indemnification agreement, not for an act or omission related to construction. The trial court found that the four-year limitations period for construction claims governed, and dismissed the complaint with prejudice.


    On appeal, the appellate court reversed the trial court’s dismissal holding that the ten-year statute of limitations applied. The court relied heavily on the Illinois Supreme Court’s reasoning in Travelers Casualty & Surety Co. v. Bowman, 893 N.E.2d 583 (Ill. 2008) [PDF]. In Travelers the court refused to apply the four-year statute of limitations for construction-related activity when Travelers sought indemnity from a contractor for Travelers’ payment on performance bonds that were paid as a result of the contractor’s breaches of its construction contracts. The court held that the liability at issue emanated not from construction-related activity, but rather from the breach of a contractual obligation to indemnify payment on the performance bonds.


    Similarly, in Water Tower Realty the court focused on the nature of Water Tower’s injury and Fordham’s liability, not the cause triggering the indemnification obligation. The court noted that while the construction project allegedly caused Water Tower to lose rental income, the liability emanated from an indemnity obligation. Therefore, Fordham’s potential liability emanated from a contractual obligation to indemnify, not from construction-related activity, and the four-year statute of limitations for construction-related activity did not apply.


    Chad Shifrin and Michael Patterson are with Laurie & Brennan, LLP.


     

    December 8, 2010

    Integration Doctrine at Risk for Manufacturers in New Jersey


    On November 15, 2010, the New Jersey Supreme Court issued a ruling in the Dean v. Barret Homes, Inc. case holding that an exterior insulation and finishing system (EIFS) product (i.e., synthetic stucco) was not fully integrated into the house to which it had been applied, and thus denied the product manufacturer the significant protections that otherwise would have been afforded to it under the Economic Loss Rule.


    Under longstanding case-law precedent from across the country, component products integrated into a larger product become a part of that larger product for purposes of the protection offered by the Economic Loss Rule. This is referred to as the Integration Doctrine. The New Jersey Supreme Court’s decision significantly changes the pre-existing paradigm of how the Economic Loss Rule was applied to products integrated into buildings.


    Under the Economic Loss Rule, once a component part is integrated into a larger product, a plaintiff generally cannot recover in tort for damage to the product itself and must, instead, only pursue contract and/or warranty remedies. In the Dean v. Barret Homes, Inc. case, the plaintiffs sought to recover damages to their house caused by alleged defects in an EIFS product. If the Integration Doctrine had been applied, then the Economic Loss Rule would have barred recovery of tort-based damages to the house allegedly caused by the EIFS.


    However, the New Jersey Supreme Court held the synthetic stucco/EIFS product “did not become an integral part of the structure itself, but was at all times distinct from the house.” Accordingly, the court found the Integration Doctrine inapplicable and explained to the plaintiffs, “recovery must be limited to such damages as the EIFS caused to the house’s structure or to its environs.”


    The New Jersey Supreme Court’s ruling in the Dean v. Barret Homes, Inc. case may potentially impact the viability of claims asserted against manufacturers of other products installed into buildings, such as windows, doors, shingles, vinyl siding, aluminum siding, wood siding, insulation, etc.


    Charles Schoenwetter, William Auther, and Mary Kranzow, Bowman and Brooke LLP


     

    November 17, 2010

    Implied Warranty of Habitability Applies to Non-Vendor Builders

    1324 W. Pratt Condo. Ass'n v. Platt Constr. Group
    No. 1-10-0159, 2010 WL 3788057 (1st Dist. Sept. 28, 2010)


    The Illinois Appellate Court recently held that the implied warranty of habitability applies to builders of residential homes regardless of whether they are in privity of contract with the plaintiff homeowner.


    Read the full case note.


     

    November 12, 2010

    Tennessee Court Upholds Intrastate Venue-Selection Clause in Construction Contract

    Kampert v. Valley Farmers Cooperative
    M2000-02360-COA-R10-CV, 2010 Tenn. App. LEXIS 657 (Tenn. App. Oct. 19, 2010)


    Kampert Dairy Farm, LLC, contracted with Valley Farmers Cooperative (VFC) to construct a dairy facility for Kampert on land in Giles County, Tennessee. The contract contained a venue selection clause requiring that “venue for any litigation shall lie in . . . McMinn County, Tennessee.”


    Read the full case note.


     

    November 9, 2010

    Attorney Fees Not Taxable Against Subsequent Purchasers

    Action Plumbing Co, Inc. v. Bendowski
    402 Ill.App.3d 681, 934 N.E.2d 35, 343 Ill.Dec. 35 (Ill.App. 2 Dist., Jun 22, 2010)


    Action Plumbing filed 16 separate mechanics lien foreclosure lawsuits to recover amounts owed to it for residential plumbing work. The developer, Neumann Homes, with whom Action Plumbing contracted, went bankrupt after selling the subject properties to the defendant homeowners (collectively the subsequent purchasers). The trial court entered an order taxing Action Plumbing’s attorney fees against Neumann Homes and included an amount for the attorney fees Action Plumbing had incurred in the foreclosure decrees. The subsequent purchasers appealed, arguing that the inclusion of the attorney fees in the foreclosure decrees violated section 17(b) of the Illinois Mechanics Lien Act. 770 ILCS 60/17(b) (West 2006).


    Read the full case note.


     

    General Contractors May Not Bring Separate Claims Against Subcontractors For Implied Warranty Breach

    Jerry’s Homes, Inc. v. Walters d/b/a Walters Construction Services
    No. 9-544/08-1813 (Iowa Ct. App. 2009).


    General contractors in Iowa may not bring separate claims against subcontractors for breach of implied warranty, according to the Iowa Court of Appeals in Jerry’s Homes, Inc. v. Walters d/b/a Walters Construction Services, No. 9-544/08-1813 (Iowa Ct. App. 2009). In Walters, a general contractor sued its concrete subcontractor for breach of contract and breach of implied warranty after garage slabs at various Polk County developments began chipping, scaling, and cracking. After finding that “Iowa case law does not support a separate claim of implied warranty between a general contractor and a subcontractor” Id. at * 3, the court declined an invitation to extend the doctrine beyond the Iowa Supreme Court’s recent decision in Speight v. Walters Dev. Co., 744 N.W.2d 108 (Iowa 2008). In Speight, the Supreme Court extended the implied warranty of workmanlike construction to subsequent home buyers. Citing the doctrine’s consumer-protection rationale as discussed in Speight, the court of appeals in Walters held that the doctrine only runs between home builders and home buyers. Walters at *3. Because general contractors are experienced construction professionals, they “do not need a judicially-created doctrine to protect them.” Id. at *4. The Court observed that, in any case, the general contractor’s complaint that its subcontractor failed to perform in a good and workmanlike manner was covered by the breach-of-contract claim. The general contractor’s breach-of-contract claim failed, however, because the defects in the garage slab were traced to the absence of an expansion joint, something not required by the project’s plans and specifications.

     


     

    Construction Defect Claims Do Not Constitute an "Occurrence"


    The Intermediate Court of Appeals of Hawaii recently held, in Group Builders, Inc., et al. v. Admiral Ins. Co., et al., — P.3d —, 2010 WL 1985827, No. 29402 (Haw. App. May 19, 2010), that construction defect claims do not constitute an “occurrence” under a commercial general liability (CGL) policy. The ruling applies to breach-of-contract claims based on allegations of substandard performance, as well as tort-based claims derivative of contract claims.


    Read the full case note.


     

    California Court Upholds Binding Arbitration of Fee Dispute Under Retainer Agreement


    The California Court of Appeal upheld a law firm's assertion of a right to rely upon a binding arbitration provision in the firm's retainer agreement. Under this decision, a California law firm's insisting on binding arbitration must insert such a provision in its retainer agreement and must offer the client a right to non-binding arbitration under a statute governing legal fee recovery. If the client fails to exercise this right, however, the firm may rely upon the agreement as written.


     

    Proposed Federal Regulations Would Require All Government Contractors to Have a Compliance Program


    Under proposed regulations expected to become effective during the summer of 2007, all persons contracting with the Federal Government will be required to develop written codes of ethics and business conduct and display Inspector General fraud hotline posters. Currently only selected agencies had required such written programs.


     

    New Stakes in Doing Business With the Federal Government


    Two recent decisions in the United States Court of Federal Claims highlight the risks of exaggeration and when false statements when presenting and prosecuting construction related claims. These cases imposed tens of millions of dollars in fines and forfeitures without finding significant damage to the Government.