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Missouri Court of Appeals holds that numerous small claims aggregated into a single large claim were still subject to contract provision for arbitration of small claims.
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Fru-Con Constr. Co. v. Southwestern Redevelopment Corp. II,
1995 Mo. App. LEXIS 1443 (Mo. Ct. App. Aug. 15, 1995)
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Arbitration Claims Limit - The Contractor submitted a $20 million claim and then commenced lawsuit against the Owner. After nearly two years of litigation, the Owner requested the architect to evaluate claim and the architect determined that the claim was actually a group of small claims, all of which (except one) were less that $200,000 and, therefore, subject to arbitration provision in contract.
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Fru-Con ("Contractor") and Southwestern Redevelopment ("Owner") entered into a contract in excess of $100 million for the construction of a new data center in St. Louis. Pursuant to the contract, claims or disputes between the Contractor and the Owner were to be submitted initially to the architect. The contract also contained an arbitration provision as follows:
All claims, disputes and other matters in question between the Contractor and the Owner arising out of or relating to the Contract Documents or the breach thereof . . . shall be decided by arbitration . . . , if the total amount of damages arising from the claim or dispute, as estimated by the Architect, are less than $200,000. Any claim, dispute or other matter in question for which the amount of damages is estimated by the Architect to be greater than $200,000 is not subject to arbitration unless the parties mutually agree otherwise.
During the construction of the project, the Contractor submitted numerous Contractor Change Proposals ("CCPs") evaluation of CCP 297 and found that the claim "was comprised of multiple events giving rise to a series of different claims, only one of which exceeded $200,000 and was, therefore, outside the arbitration requirement." After receiving the architect's evaluation, the Owner served its demand for arbitration on the Contractor and filed a motion to stay the present proceedings. The trial court denied the motion to stay, finding the Contractor's "claim" exceeded $200,000 as the term "claim" is used in the contract. The Owner appealed.
The appellate court reversed finding that the Federal Arbitration Act, 9 U.S.C.A. 1-16, applied to this matter and relying heavily on the strong federal policy in favor of arbitration. The court found it significant that the parties gave the architect the power to determine initially all claims, disputes and other matters in question between the Owner and the Contractor. The architect determined that CCP 297 was actually an accumulation or amalgamation of claims encompassing different phases of the work and requiring different elements of proof. The Contractor claimed that all of its cause of action was premised upon bad plans and poor supervision and administration. The court, however, was "unable to conclude that the strong presumption in favor of arbitration can be overcome by combining a series of claims into one grand claim tied together by amorphous generalized allegations of bad plans and poor supervision and administration." The court also rejected the Contractor's argument that it should not be forced to litigate and arbitrate simultaneously these related contract claims, citing several federal cases requiring a similar result. |
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Second Circuit holds Corinno Civetta exceptions to "no damage for delay" clauses inapplicable to UCC exclusion of consequential damages.
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McNally Wellman Company v. New York State Electric & Gas Corporation,
1995 U.S. App. LEXIS 23312 (2d Cir. August 18, 1995)
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Exclusion of Consequential Damages - A no-damage-for-delay clause insulated a construction supplier from liability for delays in delivery of six spillway gates on a dam project. The application of the UCC prevented the project owner from invoking the common law exceptions to enforcement of a no-damage-for-delay clause.
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| The project owner, NYSEG, entered into a contract with McNally to supply six spillway gates on a project to refurbish a dam in New York State with each gate being 111 feet in length and weighing approximately 500,000 pounds. The contract provided that McNally would deliver the gates on specific dates but would have no responsibility for their assembly and installation. McNally entered into a subcontract with Ellwood City Iron & Wire Company (Ellwood) to fabricate the gates according to the schedule in the contract. After commencing work, Ellwood experienced both financial and labor difficulties that ultimately delayed delivery of the spillway gates to the project. McNally eventually terminated Ellwood's subcontract after Ellwood had completed only four of the six gates and then retained a third party to complete the remaining two gates. McNally delivered the last two gates five months after the original scheduled date for delivery.
McNally filed a diversity action in the District Court after NYSEG withheld McNally's final payment on the project. NYSEG counterclaimed for breach of contract seeking recovery of standby costs which the installation contractor incurred during the delay period and its own additional financing corm or condition of this Contract . . . . [A]ll costs related to the assembly and erection of the equipment in the field shall be deemed special, indirect, incidental or consequential and shall in no case be the responsibility of Contractor.
On appeal, the Second Circuit found that the UCC governed its review of the contract as the contract's essential terms predominantly concerned the sale of goods. NYSEG, however, contended that the common law exceptions to enforcement of the contract's no-damage-for-delay clause as set forth in Corinno Civetta Constr. Corp. v. City of New York, 502 N.Y.S.2d 681 (N.Y. 1986) still apply even though the UCC governed the contract. The Court disagreed finding that the UCC supplants common law when the operation of common law produces a different result than the UCC. In contrast to the four exceptions to enforcement under Corinno, 2-719(3) of the UCC which governs the exclusions of consequential damages requires enforcement unless the clause is unconscionable with no other explicit exception. As a result of this inconsistency, 2-719(3) displaced Corinno and the Court declined to review whether the Corinno exceptions applied under the circumstances in this case.
The Court went on to reject NYSEG's arguments that the exculpatory clause failed in its purpose which rendered it unenforceable under 2-719(2) of the UCC; and that McNally both acted in bad faith and breached a fundamental obligation under the contract. |
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CLAIMS COURT reviews standards for False Claims Act and Contracts Disputes Act liability for inaccurate claims.
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Al Munford, Inc. v. United States,
1995 U.S. Claims LEXIS 163 (Cl. Ct. August 15, 1995)
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False Claims Act - Federal contractor violated the False Claims Act, 41 U.S.C. 3729 (1988) when it submitted a certified claim to the contracting officer which included amounts which the Government had previously paid.
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The Federal Government awarded the Munford Construction Company a contract to build and repair washracks at Fort McClellan, Alabama and subsequently terminated Munford for default approximately eight months later. Munford filed an action in the United States District Court seeking to reinstate the contract and recover monetary damages. As part of this District Court action, Munford subpoenaed the contracting officer and attached a certified claim for alleged damages, arising from the termination of the contract, to the subpoena. As the issue of reinstatement became moot, both parties filed a joint motion for dismissal agreeing that Munford would pursue its monetary claims in the United States Court of Federal Claims. Munford subsequently filed an action in the Federal Claims Court after the contracting officer denied Munford's claim. The Government responded by filing counterclaims for civil fraud, alleging that Munford had submitted a fraudulent claim under both the False Claims Act, 31 U.S.C. 3729 (1988) and the Contract Disputes Act 41 U.S.C. 604 (1988).
The False Claims Act imposes a civil penalty on a party "who knowingly presents . . . to an officer or employee of the United States Government . . . a false or fraudulent claim for payment or approval." The Act deems a claim false if the moving party proves by a preponderance of the evidence that the non-moving party acted with knowledge of the false information containedovernment had already paid Munford and for costs which Munford had not yet incurred. These unrealized costs included $123,476.57 for material and labor which Munford had already invoiced and received payment and $95,000 for anticipated legal expenses. During the discovery phase of the litigation, Munford admitted that its claim included all of the false costs, asserted by the Government. Munford, however, contended "unbelievably" that it never had any intention of double-billing the Government or of claiming amounts which it was not entitled.
Focusing on the amounts already paid rather than the costs not yet incurred, the Claims Court held that Munford violated the False Claims Act when it submitted the claim for an amount already paid by the Government which amounted to recklessness with regard to the validity of the claim. In reaching this decision, the Court clearly set forth the claimant's duty when preparing a claim against the Government:
Every party filing an action in this court has a duty to examine its records to determine what amounts the government already has paid. A failure to make this type of minimal examination is nothing more than deliberate ignorance.
To find otherwise would allow any party filing an action to double bill the government and then cloak itself behind a veil of "feigned ignorance." The Court went on to reject the Government's counterclaim for fraud under the Claims Dispute Act because the Government failed to provide any direct evidence that Munford intended to deceive or mislead the Government when it submitted its claim. |
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Ohio Supreme Court holds contractor entitled to prejudgment interest on damages for delay and disruption; liquidated/unliquidated damages dichotomy rejected.
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Royal Electric Construction Corp. v. Ohio State University,
73 Ohio St. 3d 110, 652 N.W.2d. 687, 1995 Ohio LEXIS 18905 (Ohio Sup. Ct. Aug. 15, 1995)
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Prejudgment Interest - Contractor that succeeded on delay and disruption claim was entitled to pre-judgment interest from the date of substantial completion; Ohio rejects rule that pre-judgement interest is only available when claim is "liquidated" or "capable of ascertainment."
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| Ohio State University ("Owner") hired Royal Electric Constr. Corp. ("Contractor") to perform electrical renovations on two dormitories at the university. At the completion of the projects, the Contractor sued the Owner for damages resulting from Owner-caused delays and disruptions. After a lengthy trial, the trial court found in favor of the Contractor and awarded damages, including pre-judgment interest. In calculating the amount of pre-judgment interest, the trial court held that the interest should be calculated from the time the Contractor substantially completed the project.
On appeal, the Owner challenged only the award of pre-judgment interest, arguing that under Ohio law, pre-judgment interest is awarded only where the claim is "liquidated" or "capable of ascertainment by reasonably certain calculations." The Ohio Supreme Court recognized that "courts in Ohio have attached great significance to the liquidated-unliquidated dichotomy, or have refined this rule and allowed pre-judgment interest in situations where the claim is unliquidated but `capable of ascertainment.'" The court noted that the judicially created rules have caused much confusion among the courts in determining when to award pre-judgment interest.
In affirming the trial court, e period of time between accrual of the claim and judgment, regardless of whether the judgment is based on a claim which was liquidated or unliquidated, and even if the sum was not capable of ascertainment until determined by the court."
The supreme court also affirmed the trial court's determination that the damages sustained by the contractor as a result of the delays and disruptions accrued -- or became due and payable -- at the time that the contractor had substantially completed the project. Therefore, the pre-judgment interest was properly calculated from the date of substantial completion. |
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District Court in Illinois holds that warranties of AIA Doc. A201/CM incorporated in Owner/Contractor Agreement written on AIA Doc. A101/CM even though Agreement did not expressly incorporate A201/CM.
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Resurgence Properties., Inc. v. W.E. O'Neil Construction Co., et. al.,
1995 U.S. Dist. LEXIS 11633 (E.D. Ill. August 11, 1995)
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Incorporation by Reference - AIA standard form of agreement between owner and contractor, AIA Document A101/CM, incorporated general conditions, AIA Document A201/CM, by reference even though agreement never specifically identified AIA Document A201/CM. Contractor's warranty to developer also protects Architect as a third party beneficiary.
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| Resurgence, a successor-in-interest to a developer, brought an action against the architect, Daly, and the prime contractor, O'Neil, on a shopping center project. Resurgence alleged that the defendants permitted the use of an unspecified and unapproved backfill material around the foundation walls and column footings of the structure which expanded causing substantial damage to the concrete floor. Daly subsequently filed a cross-claim against O'Neil contending that the general conditions of O'Neil's contract with the developer (AIA Documents A201/CM and A101/CM respectively) contained a warranty against the use of defective materials and that this warranty also protected Daly as a third-party beneficiary. In response, O'Neil filed a motion to dismiss Daly's cross-claim on the basis that the contract never expressly incorporated the general conditions (which contained the warranty) by reference and, therefore, the warranty was not part of the contract.
The District Court held that the plain language of AIA Standard Form of Agreement Between the Owner and Contractor (AIA Document A101/CM) manifested the parties intent to incorporate the General Conditions (AIA Documenta party protected by the warranty provisions. |
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Wisconsin Court of Appeals holds that filing of mechanics lien claim without adequate investigation as to timeliness can subject attorneys to liability for slander of title.
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Tym v. Ludwig,
1995 Wisc. App. LEXIS 974 (Wisc. Ct. App. Aug. 9, 1995)
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Slander of Title - Lawyer who filed a mechanics' lien against a homeowner's property on behalf of contractor that constructed the home was not entitled to summary judgment on homeowner's slander of title claim because the record had not been sufficiently developed regarding the issue of whether the lawyer had a reasonable ground or believing the truth of the facts pleaded in the mechanics' lien claim.
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| The Tyms ("Homeowner") hired Lemel Homes, Inc. ("Contractor") to construct their new home. After moving into the home, the Homeowner notified the Contractor that certain work remained to be completed and withheld a final payment. The Homeowner and Contractor eventually amended the contract by outlining the items of work to be completed by the Contractor and by setting forth the amount of the final payment. Thereafter, the Contractor did not complete all the work and the Homeowner was forced to do so.
In May of 1990, the Homeowner put the home up for sale. In July of 1990, the Contractor sent the Homeowner a Notice of Intent to file a claim and the Homeowner then withdrew the home from the real estate market. In August of 1990, the Homeowner wrote to the Contractor's attorney stating that the Contractor had not performed work on the home for at least 11 months and, therefore, the Contractor was not entitled to a lien. In September of 1990, the Contractor's attorney filed a claim for lien against the Homeowner's residence. Eventually, the Homeowner obtained a release of the lien claim as part of a settlement.
Thereafter, the Homeowner filed the present slander of title action against the attorney who filed the lien and her law firm ivilege. The trial court granted the motion on the ground that the Homeowner had not produced any evidence of loss, but did not address the second ground. The appellate court reversed concluding that a plaintiff need not allege and prove the loss of a specific sale to a specific potential purchaser in order to maintain a slander of title action. Rather, a plaintiff can produce evidence of a general decrease in the marketability of the home.
The appellate court went on to discuss the Lawyers' claim that they were entitled to a conditional privilege of qualified immunity in this slander of title action. The court noted that a defendant in a slander of title action is protected against liability for the truth of statements made in a claim by a conditional privilege. The protection, however, is subject to two conditions: "(1) the pleader must have a reasonable ground for believing the truth of the pleading and (2) the statements made in the pleading must be reasonably calculated to accomplish the privileged purpose." In the present case, the parties disputed whether there was a reasonable ground for the Lawyers to believe the truth of the claim for lien.
In Wisconsin, a valid construction lien must be filed within six months of the last day labor and materials are furnished by the claimant. Warranty or repair work on an original installation does not extend the time for filing a construction lien. The Lawyers argued that before filing the claim for lien they contacted the contractor to verify the information contained in the claim. The Lawyers claimed that the Contractor told them that work was last performed on the home on May 15, 1990 and that such work was not warranty work. The Homeowner argued, however, that the Lawyers' investigation into the facts and their reliance on the client's statements were inadequate because of letters that were sent by the Homeowner to the Lawyers stating that the Contractor had not performed any work since August of 1989.
The appellate court noted the reasonableness of an attorney's inquiry depends on the circumstances of each case and is a determination within the trial court's discretion. The appellate court held that the trial court did not have sufficient facts before it to determine whether the Contractor's attorneys had conducted a reasonable inquiry -- or whether they had a reasonable basis for believing the lien claim -- and remanded the case so that discovery could take place regarding the reasonableness of the inquiry undertaken by the contractors' attorneys. The appellate court noted that although the Lawyers had refused to answer certain discovery requests concerning conversations between the Contractor and the Lawyers on the grounds that the conversations were privileged, the trial court had compelled discovery of those conversations prior to dismissing the law suit. |
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DISTRICT COURT in Michigan holds that manufacturer of water treatment equipment may have action upon implied contract against Owner's engineer for costs of redesign and modification of equipment to make treatment system work.
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M.A. Mortenson Co. v. City of Grand Rapids,
1995 U.S. Dist. LEXIS 11626 (W.D. Mich. July 27, 1995)
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| For the construction of a walter filtration system, the City of Grand Rapids ("Grand Rapids"), as the owner of the project, contracted with, inter alia, Greeley and Hansen to provide engineering services, and Envirex, Inc. ("Envirex") for flocculation and sedimentation equipment (the "equipment"). After delivery and installation, the equipment allegedly did not work properly, and it sustained stress related damage. Several claims ensued.
In this action, Envirex sued Greeley and Hansen, claiming that the specifications for the equipment contained an insufficient number of baffles to control the velocity gradient for the flow of water through the system, causing the system to sustain stress related damage. Envirex alleged five counts against Greeley and Hansen: a third party beneficiary claim, which Envirex subsequently abandoned; breach of an implied contract in fact and law; negligence; indemnification; and, contribution. In turn, Greeley and Hansen moved to dismiss Envirex' third party complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure.
After rejecting to Greeley and Hansen's arguments that the language of the contract between Envirex and Grand Rapids barred Envirex's action, the Court addressed Envirex' claim under implied contract in law and in fact. The Court initially distinguished between an implied contract in fact, where the conduct of the parties implies a "meeting of the minds," and a contract implied in law, where one party has been unjustly enriched at the expense of the other and the law requismiss.
The Court then examined whether Greeley and Hansen breached a common law duty of reasonable care to Envirex. Greeley and Hansen argued that Envirex's negligence claim must fail because Greeley and Hansen only owed contractual duties to Grand Rapids, and therefore Greeley and Hansen owed Envirex no duty of reasonable care. The Court noted that Michigan law required a breach of duty separate and distinct from a breach of contract. However, the Court found that Michigan law had left open the issue whether an engineer owes a duty of reasonable care to contractors in providing designs and specifications for equipment.
In the absence of any clear Michigan law to the contrary, the Court held that an engineer may have a common law duty of reasonable care to subcontractors, depending on the individual facts of the case.
The Court also dismissed Greeley and Hansen's argument that the economic loss doctrine bars Envirex's negligence claim. The Court noted how the economic loss doctrine provides that where a buyer's expectations are frustrated because a product is not working properly, that buyer's remedies sound in contract because the buyer's loss in only economic. However, the Court held that the economic loss doctrine fails where there is no contractual relationship between the parties. |
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District Court in South Carolina holds subcontractor for underground utility work not entitled to statutory lien applicable to erection, alteration or repairs of buildings; IRS takes priority.
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Bell South Communications, Inc. dba Southern Bell Telephone and Telegraph Co. v. Dekalb Concrete Pro
1995 U.S. Dist. LEXIS 11443 (D.S.C. July 27, 1995)
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BellSouth Telecommunications, Inc. ("Southern Bell") initiated interpleader proceedings to determine which one of three Defendants held priority in the debt owed by Southern Bell to the fourth Defendant, Kelly Green, Inc. ("Kelly Green"). Each of the three Defendants were creditors to Kelly Green. In June of 1993, Southern Bell contracted Kelly Green to perform miscellaneous work connected with burying underground telephone cable. Kelly Green, in turn, subcontracted a portion of the work to Defendant Dekalb Concrete Products, Inc. ("Dekalb"). Shortly thereafter, Kelly Green failed to pay Dekalb, Defendant, Internal Revenue Service ("IRS") for employment related taxes and Defendant King & Vernon, P.A. ("King & Vernon) for legal services rendered.
In April, 1994, Dekalb notified Southern Bell that it had not been fully paid under its contract with Kelly Green, which prompted Southern Bell to withhold $8,871.70 from its contract with Kelly Green. After receiving conflicting demands from the three creditors, Southern Bell initiated an interpleader action pursuant to the Federal Interpleader Statute, 28 U.S.C. 1335. Southern Bell paid the disputed amount into the court's registry and was discharged from any obligation to the three claimants.
The IRS assessed the tax liability claim against Kelly Green on April 5, 1993. Pursuant to 26 U.S.C. 6321 and 6322, a federal tax lien arose on the assessment date and attached to all Kelly Green property. For priority purposes, the federal tax was perfcreated by the assignment was filed with the Secretary of State on May 12, 1994 and August 1, 1994.
As the relevant dates were not in dispute, the question before the court was to determine which claim was entitled to priority so as to recover all the funds impleaded into the court.
The court initially disposed of King & Vernon's claim because it did not file its security interest until, at the earliest, May of 1994, whereas the federal tax lien was filed on June 22, 1993. Dekalb, conceding that its judgment was junior to the federal tax lien a year prior, relied upon the South Carolina's statutory subcontractor's lien, S.C. Code Ann. 29-7-10, which provides:
Any contractor in the erection, alteration or repairing of buildings in this state shall pay all . . . subcontractors and material men for their lawful services out of the money received for the erection, alteration, or repairs of buildings . . . and persons who shall furnish material for any such building shall have a first lien on the money received by such contractor for the erection, alteration or repair of such building in proportion to the amount of their respective claims[.]
In contrast to a traditional mechanics lien, to be accorded priority against adverse claimants, Dekalb was not required to file or serve a notice of its lien. Thus, Dekalb argued that it was entitled to the $4,704.25, the amount furnished to Kelly Green prior to the IRS's filing the tax lien.
The court rejected Dekalb's for two reasons. First, the statutory lien created by Section 29-7-10 does not come into existence until the contractor has received the money. In the case before the Court, Kelly Green never obtained possession of the disputed funds.
Second, in strictly construing the provisions of the statute at issue, the court held that the statutory lien had no application to the work performed by Dekalb. Section 29-7-10 provides a lien on money received by a contractor "for the erection, alteration or repair of a building." Dekalb, rather than erect, alter or repair a building, buried underground telecommunications wires, with occasional manholes. Citing South Carolina law, the court was constrained to read the term "building" literally, and thus the statutory lien provided no protection to Dekalb's furnishing of materials related to underground telecommunications equipment. |
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