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South Carolina Court Holds Architect Can Be Liable To Subcontractors For Certifying Payments To Prime Contractor If It Knows That Subcontractors Are Not Being Paid
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Cullum Mechanical Construction, Inc. v. South Carolina Baptist Hospital
Case Volume, Reporter: 344 S.C. 426, 544 S.E.2d 838 (2001)
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| Jenkins, Hancock & Sides Architects & Planners, Inc. (the “Architect”) entered into a design contract for the renovation of a medical center. Under its contract, the Architect was responsible for reviewing the General Contractor’s payment applications and certifying amounts due. Moreover, the Architect had the ability to withhold certification if the General Contractor failed to pay its subcontractors.
Miller-Sharpe, Inc. (“General Contractor”) was to serve as the general contractor for the renovations. Under its contract, the General Contractor was required to post a payment bond to ensure payment to its subcontractors. The General Contractor, however, failed to obtain a bond.
The General Contractor, in turn, entered into a subcontract with Cullum Mechanical Construction for the HVAC and plumbing work on the project.
During the project, the General Contractor was late in paying Cullum. Cullum informed the Architect that the General Contractor was not paying its subcontractors. After several other complaints and upon request from the owner, the Architect asked to see the General Contractor’s payment bond. The General Contractor did not submit a payment bond but rather submitted an indemnification agreement.
Although the Architect knew that (1) there was no payment bond and (2) the subcontractors were not being paid, it continued to certify payments. Moreover, the Architect reduced the retainage from ten percent to five percent.
After the project was complete, Cullum had not been fully paid. It brought an action against, inter alia, the owner, the Architect and the General Contractor. The Architect moved for summary judgment. The trial court granted the motion finding that the Architect owed no duty to Cullum. An intermediate appellate court affirmed.
The Supreme Court of South Carolina, however, reversed the award of summary judgment. The court held that, while an architect does not generally owe a duty to subcontractors, “special conditions” in these particular contracts may have given rise to a duty of care owed by the Architect. The court stated that these special conditions may have created a duty arising independently of any contract and that there was no logical reasons to insulate architects for tort liability to third parties. Because the question – whether a special relationship existed between the Architect and Cullum such that the Architect owed a duty of care – raised a factual issue, summary judgment was improper.
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Washington Court Holds Subcontractor Has No Right Of Action Under Subcontractor Listing Statute
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McCandlish Electric, Inc. v. Will Construction Co.
No. 18935-0-III, 2001 Wash. App. LEXIS 1364 (June 28, 2001)
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| Will Construction Co. (“Will”) was awarded a contract from the City of Leavenworth for renovations to a wastewater treatment plant. In its successful bid, Will had used a bid from McCandlish Electric, Inc. (“McCandlish”) submitted for the electrical subcontract. Will also listed McCandlish, pursuant to contract, as the electrical subcontractor in its bid submission to the City.
Upon learning that it’s bid was significantly lower than the next lowest bid, Will equivocated about whether it was going to accept the contract with the City and asked McCandlish if it could reduce any costs from the electrical bid. McCandlish responded by making some adjustments.
Will accepted the City contract. After the contract was awarded, however, Will asked the City to allow it to hire a different electrical subcontractor. After several denials and a threat of suit from the substitute subcontractor, the City agreed, and Will hired a substitute electrical subcontractor.
McCandlish then filed suit against Will for damages claiming a cause of action under Washington’s subcontractor listing statute. The statute reads:
Every invitation . . . shall require each bidder to submit as part of the bid, or within one hour after the published bid submittal time, the names of the subcontractors . . . with whom the bidder, if awarded [*3] the contract, will subcontract for performance of the work designated on the list . . . .
Wash. Rev. Code §39.30.060 (1995). At trial, Will’s motion to dismiss was granted at the close of McCandlish’s case. McCandlish appealed.
Although the Court of Appeals criticized Will’s conduct as unethical “bid shopping,” it nevertheless affirmed the lower court’s dismissal. The court recognized that the statute implies that prime contractors will award subcontracts to those subcontractors listed pursuant to the statute. The statute, however, does not “definitively state that a prime contractor may not, under any circumstances, substitute another subcontractor for the listed subcontractor.” Moreover, the statute does not provide for a cause of action for a subcontractor. Rather, as the court noted, the subcontractor listing statute was enacted to standardize and regulate the bidding process. Therefore, despite its disapproval of Will’s “bid shopping”, the court affirmed the dismissal of McCandlish’s suit.
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New York District Court Holds That Suit Must Be Stayed Pending Submission Of Claim To Dispute Resolution Board
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BAE Automated Sys., Inc. v. Morse Diesel Int’l, Inc.
01 Civ. 0217 (SAS), 2001 U.S. Dist. Lexis 6682 (S.D.N.Y. May 22, 2001)
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| The United States District Court for the Southern District of New York granted an order staying all proceedings in a construction dispute pending resolution by a dispute resolution board (“DRB”) in this case. This case involved a breach of contract claim brought by BAE Automated Systems, Inc. (“BAE”), a baggage handling subcontractor, against AMEC Construction Management, Inc. (“AMEC”), the construction manager of a project to build a new terminal at John F. Kennedy International Airport (the “Project”). AMEC then brought a third-party claim against the owner of the Project, Terminal One Group Association (“TOGA”).
AMEC moved to stay proceedings in the case pending resolution by the DRB established in the Prime Contract. In assessing the motion, the court employed three-prong test: 1) whether the parties had entered into a valid alternative dispute resolution agreement; 2) whether the dispute falls within the scope of that agreement; and 3) whether any conditions precedent have been met. Finding all three factors satisfied, the court ordered a stay.
Central to the district court’s decision was whether all parties had entered a valid dispute resolution agreement. The Prime Contract between TOGA and AMEC specifically described the DRB, comprising three members chosen by TOGA, AMEC, and the architect. In contrast, the Subcontract between BAE and AMEC simply incorporated the dispute resolution procedure of the Prime Contract into the Subcontract without expressly detailing the DRB. The district court found no ambiguity in the language of the Subcontract, however, determining that the Subcontract specifically incorporated the DRB. Having determined that the Subcontract specifically required submission of all claims to a DRB, the district court stayed the proceedings before it pending resolution by the DRB.
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New York District Court Strictly Interprets Contractual Indemnification Provision and Insurance Requirements
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Wausau Business Insurance Company v. Turner Construction Company
No. 99 Civ. 0682 (RWS), 2001 U.S. Dist. LEXIS 5821(SDNY May 9, 2001)
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| Turner Construction Company (“Construction Manager”) entered into a written agreement with Central Synagogue (the “Owner”) to provide construction management services in connection with renovations of the Central Synagogue Sanctuary (the “Agreement”). The Agreement provided that the Owner would “defend, indemnify and hold the Construction Manager harmless from claims arising out of the acts or omissions on the part of the architects, engineers, attorneys or contractors.” However, the Agreement qualified this obligation by stating that “it is understood and agreed that the Construction Manager shall be liable to the Owner . . . and shall indemnify Owner against Loss, liability, damages, costs and expenses . . . for any negligence or willful misconduct of Construction Manager . . . which results in any loss, claim or injury to the Owner, its successors or assigns.” The Agreement also provided that “Owner shall name the Construction Manager an additional insured party or cause its Contractors to so name the Construction Manager an additional insured party on the Contractors’ insurances.” The Owner opted for the latter, and the Construction Manager was named an additional insured on the contractors’ policies.
During construction, a fire started on the roof of the synagogue and destroyed the building. The fire was allegedly ignited by a propane torch operated by a roofing contractor working on the northeast tower of the synagogue.
Central Synagogue’s insurer, as subrogee, filed suit to recover for losses sustained as a result of the fire. The Construction Manager filed a timely motion for summary judgment arguing that it (1) might be held liable only for its own negligence or willful misconduct; (2) was entitled to indemnification by the Owner for the conduct of any other entity; (3) could not be held jointly and severally liable; and (4) was entitled to insurance coverage from the Owner. The Court denied the Construction Manager’s motion in all regards.
The first three components of the Construction Manager’s argument were premised on the express language of the indemnification clause in the Agreement. The Construction Manager argued that it contracted out of joint and several liability when it agreed to abide by the contractual indemnification clause which limited its liability to that caused by its own willful misconduct or negligence rather than the conduct of others.
The District Court rejected this argument stating:
"[a]lthough the Agreement clearly sets forth the ways in which liability is to be limited and apportioned between the parties in various scenarios, it includes no explicit abrogation of the otherwise applicable rule of joint and several liability. As a rule, indemnification clauses must be strictly construed to avoid reading into them a duty which the parties did not intend to be assumed. Under these circumstances, it would be improper to infer language limiting the imposition of joint and several liability."
The Court also held that the express language of the indemnification clause and New York law rendered the indemnification clause inapplicable if the Construction Manager were negligent in performing its duties. Thus, the Court concluded that until a jury determines if the Construction Manager acted negligently, it was premature to determine if the indemnification clause might be enforced.
Finally, the Court held that the Owner did not breach the Agreement by failing to name the Construction Manager an additional insured on the Owner’s insurance policy. The Court reasoned that although the Agreement required that the Owner provide insurance for the Construction Manager, it could be satisfied in two ways: by naming the Construction Manager an additional insured on the Owner’s policy or by the contractors naming the Construction Manager an additional insured. The Owner satisfied this requirement by having the contractors on the project name the Construction Manager an additional insured and, thus, did not breach the Agreement.
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Utah Court Assesses Impact Of “Anti-Assignment” Clause On Claims Against Design Professional Assigned By Owner In Settlement With Contractor
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SME Indus., Inc. v. Thompson, Ventulett, Stainback & Assocs., Inc.
C.A. No. 990869, 2001 Utah LEXIS 90 (June 26, 2001)
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| In SME Indus., Inc. v. Thompson, Ventulett, Stainback & Assocs., Inc., the Supreme Court of Utah addressed the ability to assign of claims for damages for breach of contract to a party who is not in privity with the alleged wrongdoer. That court determined that summary judgment was inappropriate because it was ambiguous whether the parties intended to include the assignment of causes of action under a “no assignment” clause. Id. at *16.
The suit arose out of a dispute concerning of the construction of the Salt Palace Convention Center in Salt Lake City, Utah (the “Project”). The owner, Salt Lake County (the “County”), contracted with Thompson, Ventulett, Stainback & Associates, Inc. (“TVSA”), for architectural and consulting services. TVSA, in turn, contracted with Gillies, Stransky, Brems & Smith and Jonathan Bradshaw (“GSBS”), to provide local architectural services and Reaveley Engineers & Associates, Inc. (“Reaveley”), to provide structural engineering services. The County then contracted directly with Hughes-Hunt (“Hughes”) as general contractor for the Project. Hughes then subcontracted the Project’s structural steel work to SME Industries, Inc. (“SME”).
During the Project, SME experienced problems with the structural steel specifications, and presented over 450 requests for information. After completing its work on the Project, SME submitted a claim for $2,193,000.00 to Hughes. Hughes forwarded SME’s claim to the County who settled with Hughes in exchange for $150,000.00 and the assignment of the County’s “rights, causes of action, and claims against the design team.” Hughes, in turn, settled with SME for $150,000.00 and the assignment of the rights it had obtained from the County.
SME then sued TVSA, GSBS, and Reaveley for delay damages and economic losses sustained. SME’s claims for breach of the TVSA-County Contract, breach of express and implied warranties, tort, and breach of third-party beneficiary were all summarily dismissed by the trial court. On appeal, the Supreme Court of Utah affirmed the trial court’s dismissal of the express warranty and third-party beneficiary claims because SME failed to prove either the existence of an express warranty or that it had third party beneficiary status under the design agreements. The court also affirmed the dismissal of SME’s tort claims as barred by the economic loss doctrine (i.e., no recovery in tort where party suffers neither property damage or personal injury). The court, however, reversed the trial court’s dismissal of SME’s breach of contract and breach of implied warranty claims, finding a question of fact existed as to whether the anti-assignment clauses of the design agreements precluded SME from prosecuting these assigned claims.
Central to the court’s decision to reverse the dismissal of SME’s breach of contract claim was the effect of the “no assignment” clause in the contract between the County and TVSA. The court explained the general rule that a “no assignment” clause in a construction contract does not ordinarily preclude the assignment of claims for damages for breach (as opposed to rights and privileges under a contract). The court continued, noting the exception to this general rule where “a contract expressly states that the right to sue for breach of contract is non-assignable.”
Applying the rule and the exception to the clause before it, the Supreme Court of Utah determined that the clause prohibiting the assignment of either party’s “interest in this Agreement,” was ambiguous concerning the parties’ intent to expressly prohibit such assignments. Therefore, the court ruled the issue unresolvable on a motion for summary judgment. Accordingly, the court remanded the claims to the trial court for resolution.
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