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Minnesota Court of Appeals Affirms Summary Judgment rulings that the assertion of a right to liquidated damages was a "claim" under a contract and therefore governed under the time limits for asserting claims; and, an owner waived its right to enforce completion date by requesting changes in the construction after the scheduled completion date had passed.
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A. Hedenberg & Co., Inc., v. St. Luke's Hospital of Deluth,
1996 Minn. App. LEXIS p. 379 (Minn. Ct. App. April 2, 1996).
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| In July 1992, St. Luke's Hospital of Deluth ("Hospital") contracted with A. Hedenberg & Co., Inc. ("Contractor") to build a hospital addition. The contract provided for a 240-day construction period and allowed $500 per day as liquidated damages for work not completed within that time period. The contract also included a provision entitled "Claims and Disputes," and defined claim as:
a demand or assertion by one of the parties seeking, as a matter of right, adjustment or interpretation of contract terms, payment of money, expenses and time or other relief with respect to the terms of the contract. The term "claim" also includes other disputes and matters in question between the Owner and Contractor arising out of or relating to the Contract. Claims must be made by written notice.
The contract further required the claimant to submit written notice within 21 days after the occurrence of the event giving rise to such claim or within 21 days after the claimant first recognized the condition giving rise to the claim, whichever was later. The scheduled completion of the construction project was March 8, 1993.
During the course of the project, ten change orders were executed, all at the Hospital's request. Each change order indicated that the contract time was to remain unchanged. However, three change orders were executed after the scheduled completion date of March 8, 1993 and increased the total value of the contract by nearly $50,000.
Substantial completion was achieved on August 27, 1993. On September 7, after receiving the final payment request, the Hospital claimed an entitlement to liquidated damages because the project was completed 180 days late and informed the Contractor that it would be withholding $90,000 from future payments. Contractor subsequently sued the hospital.
The Contractor moved for summary judgment on two grounds: first, that the Hospital's claim for liquidated damages is barred because it was not timely asserted under the "Claims and Disputes" provision of the contract; and, second, the Hospital waived the right to enforce the scheduled completion date because it requested change orders after that date. The District Court granted the Contractor's motion on both grounds and the Hospital appealed.
The Court of Appeals initially found that the contract defined "claim" very broadly. Given the terms a plain and ordinary meaning, the Court found that the Hospital was making a "demand or assertion. . .seeking, as a matter of right. . .payment of money." Indeed, the Court noted that the Hospital's director of facility used the word "claim" numerous times in referring to the Hospital's attempt to assess liquidated damages. Against this back drop, the Court held that the Hospital's attempted assessment of liquidated damages was a "claim" subject to the time limits contained in the "claims and dispute" provision of the Contract.
Because the Hospital failed to provide written notice of its "claim" for liquidated damages within 21 days, as it was required to do under the contractual notice provisions, the Court found that the trial court properly ruled that the Hospital failed to provide the required notice of its claim. The Court rejected the Hospital's argument that the claim did not arise until the project was completed because that is the point at which damages could be fixed or determined. In particular, the Court found that the contract plainly allowed the Hospital to begin withholding payments the moment the scheduled completion date had passed, which was on March 9, 1993. The Court also focused on the fact that the project's architect testified that the Hospital had discussed with him, and was contemplating a claim for, liquidated damages as early as October 12, 1992, five months before the scheduled completion date.
The Court also affirmed that by requesting change orders after the scheduled completion date, the Hospital "waived" the right to enforce the scheduled completion date. Borrowing from Texas law, the Court held that the Owner may waive or extend the time within which a building contract is to be performed by the Contractor. The waiver or extension may be implied as well as expressed. However, if after the time for completion of the work has expired, and the owner assents the continuance of the work without objection to the delay, he will be deemed to have waived the provision as to time of performance.
The Court found that it was undisputed that the Hospital executed three change orders after the scheduled completion date. The Court further found that there could be little doubt that the Hospital realized that the completion date would be delayed even further by the requested changes. Against this backdrop, knowing the completion of such change orders would run beyond the completion date of the contract, and giving some change orders after that date, the Hospital had waived its right to enforce the completion date and the resulting retention of moneys for failing to complete on time. |
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THE NORTH CAROLINA COURT OF APPEALS Upholds multi-million dollar verdict allowing subcontractor to recover sub-subcontractor's losses.
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Metric Constructors, Inc. v. Hawker Siddeley Power Engineering, Inc. and Panda Rosemary Corp.,
468 S.E. 2d 435 (N.C. Ct. App. 1996).
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Defendant Hawker Siddeley Power Engineering, Inc. (HSPE) was the Design/Build contractor on a co-generation power plant in Roanoke Rapids, North Carolina. As the general contractor, HSPE subcontracted with plaintiff Metric Constructors, Inc. (Metric) for construction of the power plant. In turn, Metric subcontracted with a wholly-owned subsidiary, Electrical and Special Systems, Inc. (ESSI) for specialized work. Because all of the designs for the plant prior to the commencement of construction were not complete, the project was deemed "Fast Track."
Pursuant to its contract with Metric, HSPE was responsible for engineering design drawings and procurement of major equipment items. The contract had an inflexible completion date of October 30, 1990 and, in contract negotiations and in the contract, HSPE promised to issue drawings at a pace that would allow Metric to finish its work on time. The contract further provided that Metric would receive a bonus of $9,000 per day for early completion.
Upon completion of the project, to recover its expenses and losses, Metric filed a lien on the property and brought suit to enforce the lien. HSPE answered and counterclaimed alleging that Metric had breached its obligations under the contract between the parties. The trial court found that HSPE failed to deliver its promised performance from the outset of the project, issuing drawings weeks or even months after the issue dates that it provided Metric. Some revisions to drawings required Metric to demolish and reconstruct its work. The trial court further found that HSPE's conduct forced Metric to expend considerable sums to complete the project on schedule, but HSPE refused to pay Metric for the cost overruns and extra work caused by delayed performance. The jury awarded Metric $6,615,863 in damages against HSPE for breach of contract and denied in its entirety HSPE's counterclaim.
On appeal, HSPE argued, inter alia, that Metric lacked standing to assert a claim on behalf of ESSI. Article 4 of the contract between HSPE and Metric provided:
4.1 All proposed Lower Tier Subcontracts must be submitted to HSPE for written approval. If so approved, subcontractor shall bind all Lower Tier Subcontractors to the provisions of the Subcontract Documents.
4.2 Neither this Subcontract nor any Lower Tier Subcontract shall create any contractual relationship between any Lower Tier Subcontractor and HSPE nor any obligation of HSPE to Lower Tier Subcontractor.
4.3 Notwithstanding the existence of any Lower Tier Subcontract, Subcontractor shall be liable to HSPE for performance hereunder as if no Lower Tier Subcontractor exists.
Pursuant to Section 4.2, HSPE argued that it had no contractual obligation to ESSI as a Lower Tier Subcontractor, and therefore could not be liable to ESSI for damages to ESSI caused by any breach of its contract with Metric. In support of this argument, HSPE cited a 1983 North Carolina case that provided a subcontractor may not do indirectly through plaintiff higher tier contractor what it can not do directly by a suit against the defendant. Thus, HSPE argued that since ESSI could not bring a claim directly against HSPE, ESSI cannot present a claim indirectly through Metric.
The court rejected HSPE's argument. Although the court agreed that ESSI could not sue HSPE directly, the court held that Metric may recover ESSI's losses on the project as part of its contract damages. The court reasoned that unless the contractor was permitted to include the subcontractor's claim as part of its own, there would be no means of recovering the damages incurred by the subcontractor. The court also focused on the fact that ESSI was never a plaintiff in the instant case and was not trying to bring its own claim against HSPE. Rather ESSI sought to recover its damages caused by HSPE's conduct through a well/documented claim against Metric itself, and Metric, faced with a liability for that claim under its contract with the ESSI, included the amount of the claim as a subset of its damages against HSPE.
In sum, the court found that the result urged by HSPE would work a "manifest injustice" to Metric, ESSI and other similarly situated subcontractors. Provisions similar to Article 4 would shield a general contractor from any liability for payment to a subcontractor for Lower Tier Subcontractor's damages while retaining the right to sue the subcontractor for the Lower Tier Subcontractor's work. The court found such a result illogical. Refusing to adopt a position that would, in effect, leave a Lower Tier Subcontractor with no remedy, the court held that under the circumstances of the case, Metric was not precluded from recovering as part of its damages the losses sustained by ESSI as a result of HSPE's conduct. |
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Georgia Court of Appeals Rules That A "Building" Is Not a "Product" Under CGL Insurance Policy.
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Stratton & Co., Inc. v. Argonaut Ins. Co.,
1996 Ga. App. LEXIS 303 (Ga. Ct. App., March 14, 1996).
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Provision in the standard form of comprehensive general liability insurance policy which excludes coverage for "property damage to the named insured's products arising out of such products or any part of such products," did not apply because the damage the "building" constructed was not the named insured's "product."
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| Stratton & Co., Inc. ("Contractor") completed the construction of an office building and parking deck for Goldome Credit Realty Corporation ("Owner"). After complaining about the quality of the Contractor's work, the Owner filed a lawsuit against the Contractor. The Contractor tendered the defense of that lawsuit to its insurance company, Argonaut Ins. Co. ("Insurer"), but the Insurer denied coverage and refused to defend the Contractor. Contractor ultimately settled the lawsuit with the Owner and paid $468,464.
The Contractor then filed the present lawsuit against its Insurer alleging a breach of the insurance policy and seeking reimbursement damages and costs of defense. The Insurer moved for summary judgment on the ground that the Contractor's loss was not covered under the insurance policy. The Insurer relied on the policy's Exclusion (n) which states that the insurance does not apply "to property damage to the named insured's products arising out of such products or any part of such products." The insurance policy also defines a "named insured's products" as "goods or products manufactured, sold, handled or distributed by the named insured." The trial court granted the Insurer's summary judgment holding that the office building and parking deck were the Contractor's "product" and that coverage was therefore precluded under Exclusion (n) of the policy.
The Court of Appeals began its analysis by noting that "there is no Georgia case law specifically addressing the issue of whether a building should be considered a 'product' of its builder." The court observed that the jurisdictions that have considered this issue in the context of the standard form comprehensive general liability insurance policy are split on this question. The appellate court reversed the grant of summary judgment concluding that "the better reasoned cases come from those jurisdictions that have adopted the insurance industry's own interpretation and found that real property, like the building and parking deck here, are not "products" and thus are not excluded from coverage by Exclusion (n) of the standard form comprehensive general liability policy." The court noted that in common parlance, buildings are not manufactured but are rather built, constructed or erected. The damages sought by the Owner in the previous lawsuit appeared to be caused by defective and incomplete site preparation; elements which are not products under the policy's definition. Finally, the Court noted that to hold otherwise, would be to disregard the distinction between "products" and "work performed," both of which are the subject of separate policy exclusions.
The court also rejected the Insurer's argument that coverage is barred under the "work performed" exclusion. This exclusion provides that insurance does not apply "to property damage to work performed by the named insured arising out of such work or any portion thereof, or out of such materials, parts or equipment furnished in connection therewith." The court agreed with the Contractor that this exclusion did not apply and that "the policy provides coverage for property damage to the building and parking deck resulting from the work performed and materials supplied by subcontractors on the project." (emphasis added). The policy's broad form endorsement in this case deleted the phrase "work performed by or on behalf of the named insured," which is found in Exclusion (o). The court also noted that its construction is supported by the insurance industry's own interpretation of the broad form endorsement. |
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Material Supplier Recovers on Payment Bond Despite Receiving Assignment from General Contractor.
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H. Verby Co., Inc. v. United States Fire Ins. Co.,
1996 E.S. Dist. LEXIS 3056 (March 13, 1996) (U.S.D.C., S.D.N.Y.).
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A material supplier was entitled to recover on the general contractor's payment bond even though it had received an assignment of two debts from general contractor; supplier had not made an "election of remedies" in accepting the assignment and there was no evidence that the contractor's assignment discharged the underlying debt upon which the supplier sued the surety.
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| H. Verby Co., Inc. ("Supplier") contracted with a Contractor to supply roofing waterproofing and insulations materials for a school roof replacement project. The Defendant, United States Fire Ins. Co. ("Surety") and the Contractor executed a labor and material payment bond in favor of the Owner. After the Contractor refused the Supplier's demands for payments, the Supplier brought the present action against the Surety for $61,068.44, the amount of the outstanding balance due.
Prior to bringing this action, however, the Contractor assigned two debts owed to the Contractor to the Supplier. The first assignment was of $20,000 on a different owned to Contractor on a different construction project and the second assignment was of $40,000 of the debt that the Owner on the present construction project owed to the Contractor. The Supplier was unable to collect on either of the debts that had been assigned to it.
In the present action, the Supplier seeks from the Surety the entire amount owed to it by the Contractor. In response to the Supplier's claims, the Surety asserts that the Supplier's acceptance of two assignments from the Contractor constituted an election of remedies precluding the Supplier from recovering under the payment bond. The Plaintiff moved for summary judgment arguing that it is entitled to recover the amount owed to it by the Contractor. The Surety opposed the Motion arguing that issues of fact remain concerning whether the two assignments were accepted in complete satisfaction of the Contractor's obligation to the Surety.
The court began its analysis by noting that where a claim is assigned in payment of a pre-existing debt, acceptance of the assignment does not extinguish the underlying debt, absent an agreement to the contrary. And, further, the assignment of third party debts to pay a pre-existing debt will discharge that debt only if the parties agree that the assignment discharges the debt.
Thus, the court concluded that the Surety must show that the Supplier agreed to accept the assignments in absolute payment of the amount owed by the Contractor. The Surety did not disagree with the court's statement of the law, but argued that genuine issues of fact existed which precluded summary judgment. The court examined the assignments themselves and the parties' conduct and found no evidence of an agreement that the assignments constituted absolute payment. The court noted that "it makes no sense that [the Supplier] would have agreed to accept the assignments in satisfaction of a $61,068.44 obligation without any assurance that the assigned debts would be paid. There simply is no evidence that [the Supplier] agreed to accept the assignments in full satisfaction of the Contractor's debt." The court, therefore, granted the Supplier's motion for summary judgment. |
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Second Circuit holds that pay-when-paid clause violates public policy expressed in New York Lien Law.
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West-Fair Elec. Contractors v. Aetna Casualty & Surety Co.,
78 F.3d 61, 1996 U.S. App. LEXIS 3912 (2d Cir. March 6, 1996).
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Neither general contractor nor surety could assert pay-when-paid clause as defense to payment claim by subcontractor because clause, which operated as a condition precedent to payment, constituted a prospective waiver of lien rights and therefore violated New York Lien Law.
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Defendant Gilbane Construction Co. ("General Contractor") was the general contractor on a construction project in White Plains, NY. General Contractor hired plaintiff L.J. Coppola, Inc. ("Subcontractor") to perform a portion of the work. General Contractor maintained a payment bond with defendant Aetna Casualty and Surety Co. ("Surety") for the benefit of all its subcontractors.
The contract between General Contractor and Subcontractor contained a "pay-when-paid" clause which provided:
It is specifically understood and agreed that the payment to the trade contractor is dependent, as a condition precedent, upon the construction manager receiving payments, including retainer from the owner.
When owner became insolvent and did not pay General Contractor, Surety and General Contractor relied on this provision in defending against Subcontractor's suit for payment of $220,000 for work performed.
The trial court in the Southern District of New York entered summary judgment in Subcontractor's favor, finding that the pay-when-paid clause was unenforceable as against public policy. On appeal, the Second Circuit certified to the New York Court of Appeals the question of whether a pay-when-paid clause such as this one, which transfers the risk of an owner's default from the general contractor to a subcontractor, violates New York public policy.
The New York Court of Appeals answered in the affirmative. It reasoned that when a pay-when-paid clause "operates as a true condition precedent, rather than as a mere schedule for the disbursement of payment," then the subcontractor's right to payment does not accrue until the general contractor is paid by the owner. Thus, if the owner never pays, the subcontractor's right to payment never accrues. Since a subcontractor cannot enforce its lien rights until its right to payment has accrued, a pay-when-paid clause such as the one at issue here in effect constitutes a prospective waiver of a subcontractor's lien rights in the event that the owner fails to make payment.
The New York Lien Law provides that any contract or agreement that waives a claimant's right to file or enforce a lien is void as against public policy and is not enforceable. N.Y. Lien Law [[section]] 34 (McKinney 1993). Relying on this statutory provision, the New York Court of Appeals concluded that a pay-when-paid clause that operates as a condition precedent to payment violates New York public policy.
In accordance with the New York Court of Appeals' decision, the Second Circuit found that neither General Contractor nor Surety could rely on the pay-when-paid clause as a defense to nonpayment, and upheld the grant of summary judgment in favor of Subcontractor. |
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Supreme Court of Ohio rules that award of lucrative right to be sole provider of solid waste management services not subject to competitive bidding law.
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Danis Clarkco Landfill Co. v. Clark County Solid Waste Mgmt. Dist.,
653 N.E.2d 646, 73 Ohio St.3d 590, 1995 Ohio LEXIS 1869 (Ohio, September 6, 1995).
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County solid waste management district was not subject to provisions of public bidding law in making "designation" of exclusive provider of solid waste management services, but was required only to adhere to bidding procedures it set for itself in its RFP.
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Danis Clarkco Landfill Company ("Danis"), a landfill operator, filed an action seeking declaratory and injunctive relief to prevent a county solid waste management district (the "District") from designating a rival bidder as the sole provider of waste management services for the District. The District had prepared a Request for Proposal ("RFP") seeking "proposals from qualified bidders to design, construct and operate solid waste management facilities" for the District.
The District intended to select the proposal it found most satisfactory and beneficial to the District, and then negotiate a contract with the successful bidder. The RFP indicated the basic procedures and criteria which would govern the selection process.
The successful bidder was to build the waste management facility at its own cost. The District would then designate the facility the sole provider of waste management services for all solid waste and recyclable materials generated in the District. The successful bidder would agree to accept waste at a pre-specified price per ton, or "tip fee," set by its contract with the District.
Ten proposals were submitted. Plaintiff Danis proposed construction of new landfill, and submitted a suggested "tip fee" of $34.13. However, the District selected the bid of Ogden Martin Systems ("OM") which proposed to build a mass-burn incineration facility which would produce electricity from the burning of refuse. The "tip fee" under OM's bid was $43.60.
Danis sought to invoke the provisions of Ohio's competitive bidding statutes to enjoin the District from designating OM as the sole provider of waste management services. The bidding statute applied to contracts "at a cost in excess of ten thousand dollars." Danis argued that the award to OM violated the statute's competitive bidding provisions because OM's bid was nonresponsive and because the procedure selected by the District allowed for negotiation of the contract after submission of proposals. In addition, Danis' proposed tip fee was lower than OM's.
The court rejected these arguments, finding that the competitive bidding statute did not apply. The court stated that:
[A] bidder responding to the District's RFP sought to enter into a contract by which it would receive a "designation" in exchange for its agreement to build and operate a waste disposal facility for the use of residents of the District. The anticipated contract simply did not involve any monetary cost to the public or expenditure of public funds by the District.
Accordingly, the District was not required to follow all the statutory bidding procedures, but was only required to follow the procedures it had set up for itself to govern the RFP.
Thus the District was permitted to award the designation via an RFP followed by contract negotiations. Also, since the District had reserved to itself in the RFP the right to waive irregularities in bids and to select the proposal it deemed "in the best interest" of the District, the court rejected plaintiff's arguments that the District was precluded from accepting OM's bid because it was non-responsive or was not the lowest bid. Thus, plaintiff was not entitled to declaratory or injunctive relief.
A dissenting justice opined that the "designation" decision should be subject to the competitive bidding laws, noting that "although the District did not directly convey any public funds, the District arranged for OM to receive the benefit of millions of dollars of the public's funds." |
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