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Ohio Court of Appeals reverses summary judgment; question of material fact existed as to whether Owner could enforce no-damage-for delay clause against Contractor.
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Cleveland Constr., Inc. v. Reynoldsburg City Schools,
1996 Ohio App. LEXIS 2751 (June 28, 1996).
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No-damage-for-delay clause in contract is not enforceable if the extent and magnitude of the delay was unforeseeable at the time the contract was executed and, therefore, summary judgment was improperly granted where question of material fact existed concerning the foreseeability of the delay.
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Cleveland Construction, Inc. ("Contractor") entered into a contract with the Reynoldsburg City Schools ("Owner") for the construction of several projects. The contract provided that the Contractor would begin its work in May 1993 and complete its work ten months later, by February 1994. The Contractor, however, was delayed for two months in beginning the project, was further delayed as a result of difficulties experienced by another of the Owner's contractors, and was at one point required to temporarily abandon its work and return to the project at a later time. In the end, the originally contemplated ten-month project became an eighteen-month project.
The Contractor sued the Owner alleging damages as a result of the delays caused by the Owner and the Owner's other contractor. The Owner moved for summary judgment arguing that the Contractor's claims were barred by the "no-damage-for-delay" clause in the contract. The no-damage-for-delay clause read as follows:
Regardless of other provisions in the Contract Documents to the contrary, Contractor will not be entitled to damages or additional compensation from the Owner or Architect or CM on account of delays caused by persons.
The trial court granted the Owner's motion for summary judgment and the Contractor appealed.
On appeal, the Contractor argued that the no-damage-for-delay clause should not be enforced because certain conditions arose during performance of the contract which were not within the contemplation of the parties at the time the contract was made. The court recognized that a no-damage-for-delay clause, while generally enforceable, will not be enforced if the delay was not foreseeable by the parties. Quoting from its opinion in Royal Electric Constr. Corp. v. Ohio State Univ., 1993 Ohio App. LEXIS 6181 (Dec. 21, 1993), the court noted that "while a certain amount of delay in a construction project may be foreseeable, the accumulation of delays can be of such a magnitude that, taken together, the extent of delay becomes unforeseeable." Relying on that language from Royal Electric, the court found that a material question of fact existed as to whether the extent and magnitude of the accumulation of delay was foreseeable and reversed the grant of summary judgment.
The Contractor also appealed from the trial court's grant of summary judgment on its claim for quantum meruit. The appellate court reversed the trial court's decision and held that "if the trial court finds that the extent and magnitude of the delays were within the contemplation of the parties to the contract, then the appellant would not prevail on its claim of quantum meruit as it would have received no benefit which was not contemplated; however, if the trial court finds that the extent and magnitude of the delays were not within the contemplation of the parties to the contract, then the court may decide whether appellant's claim of quantum meruit will prevail."
In sum, the factual issue whether the extent and magnitude of the delay was foreseeable precluded summary judgment. |
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New York District Court confirms arbitration award; reference to American Arbitration Assoc. Rules renders award binding notwithstanding redaction of subcontract provision for binding award.
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St. Lawrence Explosives v. Worthy Bros. Pipeline,
916 F.Supp. 187 (N.D.N.Y. 1996).
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| The Petitioner, St Lawrence, requested confirmation and judgment to be entered upon an arbitration award in favor of St Lawrence and against the Respondent, Worthy Brothers.
St Lawrence Explosives and Worthy Brothers Pipeline entered into a subcontract for construction of a gas pipeline within New York which would connect into an international pipeline. The subcontract was a Standard Form of Agreement Between Contractor and Subcontractor: AIA Document A401. Article 6.1 of the subcontract provided that if the Prime Contract did not provide for arbitration, then disputes would be resolved in accordance with the Construction Industry Arbitration Rules ("AAA Rules"). Article 6.4 provided that the award shall be final and judgment may be entered upon it. But, Article 6.4 in the above subcontract agreement was crossed out.
The Petitioner argued that the subcontract, by referring to the AAA Rules revealed an intent by the parties to have any arbitration governed by them, and the Rules provide for binding arbitration. But the Respondent countered, that by striking out Article 6.4, the parties intended the arbitration to be non-binding.
The Petitioner contended that any matter stricken from a form contract was extrinsic evidence which would only be referred to if ambiguity arose in the contract. Article 6.4 was essentially "redacted" and should only be referred to when the intent of the parties is not clear from the language used in the contract. Therefore, Article 6.1 stands alone.
The Court agreed that this argument made sense, and a Tenth Circuit decision [Hughes v. Samedan Oil Corp., 166 F.2d 871 (10th Cir. 1948)] held that language that was merely crossed out could in fact constitute extrinsic evidence. The Respondent argued that even if Article 6.4 is not considered, Article 6.1 was in fact ambiguous and placed limits on the applicability of the AAA Rules, by referring to the Rules in a different manner than other contract provisions in relevant caselaw.
The Court explained that federal policy favors arbitration and the lower courts do not draw fine distinctions between types of references to the AAA Rules. Under these standards, Article 6.1 which contemplates arbitration that would be binding, should stand.
The Respondent finally argued that the arbitration award should be vacated on the grounds that the arbitrator's decision was "biased, arbitrary and capricious, and affected by manifest disregard of the law." This motion was founded on 9 U.S.C. [[section]] 10 which lays out criteria to be fulfilled if an arbitration award is to be vacated.
The Court held that authority to vacate an award under Section 10 is read very narrowly and not all the grounds under Section 10 were fulfilled. Although the Court was not given a transcript of the arbitration proceedings, after it weighed the allegations of both parties against each other, it held that the Respondent did not demonstrate to the Court that the arbitrator made improper comments or was biased in any way. For an award to be vacated based on "manifest disregard for the law" the error must have been obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator. This intimates that the arbitrator recognized the clearly governing legal principle but decided to disregard it. The Court decided that even if the arbitrator made an error, it would not be an obvious one, and the Respondent also failed to point out "the governing law" that had been disregarded.
For the foregoing reasons the District Court confirmed and entered judgment upon the arbitration award and held that there was no ground for vacatur of award. |
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District Court for District of Columbia declares liquidated damages clause unenforceable.
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Kingston Constructors, Inc. v. Washington Metropolitan Area Transit Auhority,
1996 U.S. Dist. LEXIS 8427 (D.D.C. June 6, 1996).
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Corps of Engineers Board of Contract Appeals erred in reducing amount of contractual liquidated damages from $1000 to $500 per day; Board should have declared provision unenforceable and awarded actual damages.
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| The defendant Washington Metropolitan Area Transit Authority ("WMATA") contracted with plaintiff Kingston Contractors, Inc. ("Kingston") to remove and destroy existing electrical transformers in WMATA's rapid transit rail system, and procure and install replacement transformers. The contract contained a liquidated damages provision which provided for $1000 for each calendar day of delay beyond a specified completion date.
Kingston subcontracted the manufacturing of the transformers to Power Energy Industries ("PEI"). Contractually required pre-installation testing of the manufactured units revealed that they contained misplaced insulation which caused a short circuit defect. In addition, when the first unit was installed, it functioned for only a few minutes before failing and releasing a cloud of smoke.
In an attempt to assure that the transformers would still be capable of performing as required, the parties then subjected the transformers to additional tests, beyond those required in the contract. Six out of 11 transformers failed these tests. WMATA also rejected another solution proposed by Kingston, because WMATA thought that the proposed solution might compromise the structural integrity of the transformers and shorten their useful lives.
When two transformers failed another round of tests, WMATA rejected the entire lot of 22 transformers that had already been manufactured, stating that it had completely lost confidence in the ability of the PEI transformers to function as required. Kingston was forced to reprocure the transformers, at substantial additional cost. Also because of the reprocurement, Kingston was unable to finish on time and, as a result, incurred liquidated damages costs.
Kingston asked the Board to grant it a time extension and an equitable adjustment in the amount of the contract. The Board granted an equitable adjustment for costs and delays associated with the additional extra-contractual testing, and reduced the amount of liquidated damages from $1000 per day to $500 per day. Kingston then appealed to the district court, challenging, inter alia, the Board's decision to reduce the liquidated damages. Kingston claimed that the Board's only alternative was to declare the clause unenforceable.
The Board had found that, in determining the $1000 liquidated damages figure, WMATA had included a $500 contingency for the possible assessment of Environmental Protection Agency penalties associated with the work, even though WMATA already knew that the EPA was not going to assess such penalties. Citing the general rule that a liquidated damages provision which is an unreasonable approximation of damages must be stricken as an unenforceable penalty, the district court agreed with Kingston that WMATA had acted unreasonably in setting the liquidated damages amount, and that the Board had erred in reducing the liquidated damages amount rather than striking the clause altogether.
The court disagreed, however, with Kingston's assertion that striking the damages clause was the only course of action open to the Board. Rather, the court held that actual damages should be awarded instead of liquidated damages, and it remanded the case for a determination of the amount of such damages. The case may have been a Pyrrhic victory for Kingston, since WMATA claimed that its actual damages were more than $1000 per day.
In other sections of the opinion, the District Court upheld the Board's findings of fact that the transformers had more than one defect and that they had an "excessive" number of test failures, and affirmed the Board's conclusion that WMATA had not committed "economic waste" by rejecting the transformers instead of accepting the proposed repair solution. |
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Eleventh Circuit reverses grant of summary judgment in favor of contractor on basis of releases executed by subcontractor.
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Allgood Electric Co. v. Martin K. Eby Constr. Co.,
85 F.3d 1547, 1996 U.S. App. LEXIS 15252 (11th Cir. June 25, 1996).
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Under Georgia law, subcontractor's release of all claims against property on which project was located did not operate to release claims against contractor, nor was contractor entitled to benefit of release in which contractor was not mentioned by name.
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Plaintiff Allgood Electric Company ("Allgood") was the electrical subcontractor on a prison project for the Georgia Building Authority ("GBA"). Defendant Martin K. Eby Construction Company, Inc. ("Eby") was the general contractor. Allgood sought to recover increased costs allegedly caused by Eby's failure to coordinate various aspects of the project. Allgood also claimed entitlement to retainage.
In defense, Eby moved for summary judgment, asserting that certain provisions in a completion certificate signed by Allgood, as well as provisions in twenty-four applications for payment signed by Allgood, operated as a release of Allgood's asserted claims. Eby also claimed that Allgood's claims had been waived by virtue of Allgood's failure to comply with certain contractual notice requirements.
The district court agreed that Allgood had released all of its claims and granted summary judgment in favor of Eby. Because it found that the claims had been released, the court did not reach Eby's contentions regarding notice. Allgood appealled this decision to the Eleventh Circuit.
On appeal, the court first addressed the lower court's finding that the completion certificate executed by Allgood operated as a release of Allgood's claims against Eby. The court noted that under Georgia law, a release is only effective as to parties identified in the release by proper name or such other description as leaves no doubt as to the identity of the party released. Since the completion certificate only released claims against the "Owner" of the property, and did not mention Eby by name, the Eleventh Circuit held that the district court had erred in finding that it operated to release claims against Eby.
The court next addressed Eby's claim that certain language in the payment applications barred Allgood's claims. Again relying on Georgia precedent, the court found that Allgood's relinquishment of "all claim or rights of lien . . . upon the premises" only released lien claims against the property; it did not release causes of action against Eby under the subcontract.
However, the court found that Allgood's claims might be barred by a provision in the payment applications which read as follows:
I hereby certify that the work performed and the materials supplied to date, as shown on the above, represent the actual value of accomplishment under the terms of the contract (and all authorized changes thereto) between the undersigned and Martin K. Eby Construction Co., Inc., relating to the above referenced project.
The court held that by this provision, "Allgood seems to have certified that the amount billed represented the actual value of its performance for the periods of time indicated . . . . This would seem to bar recovery for any additional costs allegedly incurred during the course of construction for the periods of time represented by the invoices."
The court remanded for the district court to consider the effect of this provision. It also ordered the lower court to address Eby's contention that Allgood's claims were barred by the notice provisions of the prime and subcontracts. Finally, the court ordered the lower court to examine Allgood's claim that it had complied with the notice provisions by sending letters to Eby complaining of delays, or, in the alternative, that it was unable to calculate the amount of its demand until after the completion of construction, and thus was excused from providing notice prior to that time. |
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Utah Supreme Court considers non-contractual liability of contractors for damages resulting from defective work.
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Interwest Construction v. A.H. Palmer & Sons,
292 Utah Adv. Rep. 27, 1996 Utah LEXIS 44 (Utah June 14, 1996).
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| The Supreme Court of Utah held that the intermediate court of appeals erred in holding that a tort action for negligence and strict liability arising out of a breach of contractually defined obligations was precluded. However, the Supreme Court of Utah also held that the tort claims should be dismissed because the claimant failed to prove causation between the alleged defect and the resultant injury.
In the fall of 1988, Thiokol Corporation ("Thiokol") contracted Interwest Construction ("Interwest") to build a wastewater treatment facility for Thiokol. In turn, Interwest subcontracted with A.H. Palmer & Sons ("Palmer") to supply the labor and materials and Palmer, in turn, contracted with Fiberglass Structures and Tank Company ("Fiberglass") for the purchase of three fiberglass wastewater storage tanks for the facility. Palmer's purchase order required Fiberglass to follow Thiokol's plans and specifications, unless prior approval was obtained from Thiokol.
Thiokol's plans and specifications designated the three tanks as T32, T33 and T34, and required the tanks to be constructed in accordance with "applicable requirements" of NBS/PS 15-69, the national standard governing the construction of fiberglass tanks. Through a gravity feed system, four smaller tanks would feed T32-T34 and because of the discrepancy in tank size, T32-T34 would remain less than 2/3 full at maximum.
On April 30, 1989, the three tanks had been constructed from prefabricated fiberglass panels. However, during a trial test, T34 burst along a vertical seam connecting two of the panels. Nevertheless, Thiokol inspected the facility on May 2, 1989, and issued a certificate of substantial completion. That same day, Palmer issued Thiokol a one-year warranty on all then-installed work. Following some repairs recommended by an independent consulting engineer retained by Thiokol, the facility commenced operations in June of 1989. Later that month, on its own initiative, Thiokol changed the tanks' filling system from gravity feed to an overhead, high-pressure pump feed.
On August 24, 1989, T33 ruptured, spiling its wastewater contents. The trial court found that the overhead feed had allowed the tank to be overfilled. After significant procedural maneuvering, Thiokol counterclaimed against Interwest, Palmer and Fiberglass for breach of contract, breach of express and implied warranties, negligence and strict liability.
After a two-week trial, and relying upon Beck v. Farmers Insurance Exchange, 701 P.2d 795 (Utah 1985), the trial court held that it would not address Thiokol's tort claims because the case was "entirely controlled by contract." The intermediate court of appeals affirmed the decision, finding that Thiokol's contract calling for a product "free from defects" supplanted any independent tort duties the suppliers might have had to deliver nondefective products or services.
Upon appeal, the Supreme Court held that Beck does not compel such a result. In particular, the Court limited its holding in Beck to a first-party relationship between an insurer and its insured. Although Beck acknowledged that such a limitation could extend beyond the insurer/insured relationship, each category of relationship must be analyzed to determine, as a matter of law and policy, whether in that setting a party to a contract owes any tort-type duties to the other beyond the duties spelled out in the contract. After a thorough analysis, the Court concluded that the "free from defects" contractual provision cited by the court of appeals is insufficient as a matter of law to exempt Thiokol's suppliers from strict tort or negligence liability.
In addressing the merits of the tort claims, however, the Supreme Court reached the same result and dismissed the negligence and strict liability actions. After setting out the applicable standards, the Court noted that to successfully prosecute such tort claims, the complaining party must prove that another party's breach of duty proximately caused the first party's injury. Here, Thiokol was unable to prove that any defect in the design or manufacture of T33 proximately caused the August 24, 1989 failure. |
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