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Acceptance of Subcontractor’s Work by General Contractor Relieves the Subcontractor of Liability to Employee of Following Subcontractor
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Webber v. McBride & Sons Contracting Co.
No. ED86076, 2005 Mo. App. LEXIS 1846 (Mo. Ct. App. Dec. 13, 2005)
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| A painter suffered personal injuries after falling through a stairwell hole in the floor of an unfinished single-family residence. The stairwell hole had been cut by predecessor subcontractors no longer on the site. At the time of the fall, the general contractor, which also owned the residence, had already accepted the work of the subcontractors as completed.
The painter brought a negligence action against the subcontractors. As part of his burden of proof, the painter relied upon the doctrine of res ipsa loquitur, a rule of evidence which permits a jury to infer from circumstantial (as opposed to direct) evidence of a defendant’s purported negligence. Among other things, the doctrine requires a showing that the defendant had control over the instrumentality causing the injury.
The subcontractors moved for dismissal, claiming that, as a matter of law, under the acceptance doctrine they could not be held liable. Under Missouri law, “acceptance by the general contractor of a sub-contractor’s work relieves the sub-contractor of liability as to a third person.” The rationale of the acceptance doctrine is that “by occupying and resuming possession of the work, the owner deprives the [sub] contractor of all opportunity to rectify the wrong.” The trial court granted the subcontractors’ motion and dismissed them from the action.
The Missouri Court of Appeals affirmed. It concluded that since control is at the “core” of both the res ipsa loquitur and acceptance doctrines, a finding that a defendant did not exercise control over the location where a negligent act occurred relieves the defendant from liability as a matter of law. Reaffirming the continuing validity of the acceptance doctrine in Missouri law, the court held that “once control is no longer in the defendants’ hands the defendants owes no duty as to negligence.”
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Payment Bond Does Not Cover Major Repairs to Heavy Construction Equipment Akin to Capital Improvements
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Beckwith Machinery Company v. Asset Recovery Group, Inc.
2005 Pa. Super. 429, 2005 Pa. Super. LEXIS 4276 (Pa. Super. Ct. 2005)
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| In Beckwith Machinery Company v. Asset Recovery Group, Inc., et al., 2005 Pa. Super. 429 (Pa. Super. Ct. 2005), the Court held that invoices for major repairs in the nature of capital improvements to heavy construction equipment were not covered by the terms of a payment bond. The Court reasoned that the repairs referenced in the invoices at issue could not be classified as ordinary maintenance performed for consumption over the course of the project, but rather were services which a contractor would retain the benefit of on the completion of work to be used by him in a like manner on subsequent projects.
The matter arose out of the University of Pittsburgh’s plan to demolish its football stadium in 1999, so that a new convocation center could be built. In connection with the planned demolition, the Department of General Services (“DGS”) contracted with Dore & Associates Contracting, Inc. (“Dore”) to act as general contractor on the matter, performing all work on the project and supplying all necessary materials to complete the project in a timely manner. In accordance with Pennsylvania statutory requirements, Dore was required to post both payment and performance bonds on the project. Dore contracted with National Union Fire Insurance Co. (“National Union”), to provide both the payment and performance bonds required for the project.
Dore entered into a subcontract with Asset Recovery Group, Inc. (“ARGI”), for certain work, to be completed by April 1, 2001. ARGI in turn contracted with Beckwith Machinery Company (“Beckwith”), to provide service and repairs to the heavy construction equipment to be used on the project. Dore eventually terminated its subcontract with ARGI in mid-April 2001 because the project was still incomplete.
After Dore terminated AGRI, Beckwith made a written claim with National Union under the terms of Dore’s payment bond for work which Beckwith already completed, but had not yet been paid for. National Union denied Beckwith’s claim, and Beckwith sued ARGI and National Union. Beckwith’s action focused on fifteen specific invoices totaling approximately $52,000, all of which National Union disputed. Each of the invoices related to the installation and/or replacement of an engine and various engine components for the heavy construction equipment used at the project site.
The Court of Common Pleas of Allegheny County, Civil Division, concluded that pursuant to the terms of the payment bond, National Union was obligated to pay Beckwith the full amount of the challenged invoices, and entered judgment to that effect. On appeal, the Superior Court determined that the threshold question was whether Beckwith furnished material and labor “in the prosecution of the Work,” as contemplated by the terms of the bond.
National Union argued that its obligation as surety did not extend to work that largely constituted capital improvements to ARGI’s equipment. Beckwith argued that its work did not constitute capital improvements, but rather service and repairs necessary to keep the equipment operational during the time that it was used on the project.
Relying on the 1939 holding of the Pennsylvania Superior Court in Philadelphia School District ex rel. Crow v. B. A. Shrages Co., Inc., 134 Pa. Super. 533 (Pa. Super. Ct. 1939), the Court decided that all of the disputed invoices involved major repairs in the nature of capital improvements to heavy construction equipment which a contractor would be expected to retain the benefit of on completion of the work, and thus outside the terms of the payment bond.
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Contemporaneous Expression of Intent to Seek Additional Compensation Saves Pass-Through Claim from Bar of Severin Doctrine Despite Accord and Satisfaction Language in Change Orders
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Appeal of M.A. Mortenson Company
No. 53761, 2006 ASBCA LEXIS 4 (ASBCA Jan. 26, 2006)
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| Appeal of M.A. Mortenson Company, No. 53761, 2006 ASBCA LEXIS 4 (ASBCA Jan. 26, 2006) held that the Severin doctrine did not prevent the prime contractor’s claims on behalf of its subcontractor where (1) there was contemporaneous evidence that the subcontractor expressed an intention to seek compensation in addition to amounts afforded via change order and (2) the prime contractor did not contend that such a claim was barred by the language of the change order.
M.A. Mortenson Company (“Mortenson”) entered into a contract with the U.S. Army Corps of Engineers (the “Corps”), pursuant to which Mortenson agreed to construct the Composite Medical Facility at Elmendorf Air Force Base. Mortenson subcontracted the mechanical portion of this scope to W.A. Bottling Company/The Poole & Kent Company, a Joint Venture (“BPK”).
During the course of the Project, the Corps issued a number of unilateral contract modifications to the mechanical work. Mortenson, in turn, issued change orders to BPK based on these unilateral modifications. Each subcontract change order provided that it was “a final and complete equitable adjustment in full accord and satisfaction for cost originating under any clause in the contract by reason of the facts and circumstances giving rise to the modification, with the exception of unforeseen cost due to multiplicity of changes or changes to unchanged work resulting from the modification.” In each case, BPK disagreed with the amount of compensation afforded by the Corps, and therefore sought to insert language in the change order that reserved its right to seek additional compensation. BPK subsequently agreed to strike this language from each change order in order to secure payment of undisputed sums. At the same time, however, BPK notified Mortenson that it intended to seek additional compensation for the changed work. Mortenson did not object or contend that such a claim would be barred by the change order.
The Severin doctrine, derived from Severin v. United States, 99 Ct. Cl. 435 (1943), precludes a pass-through claim where the prime contractor is not liable to the subcontractor. Citing this doctrine, the Corps claimed that each of the change orders executed by BPK released Mortenson from any further liability to BPK, and thus precluded Mortenson from bringing these claims on behalf of BPK. The Board disagreed.
The government cannot rely on Severin unless it establishes that an “iron-clad release or contract provision immunizes the prime contractor from any and all liability to the subcontractor for the government action at issue.” Turning to the contemporaneous actions of the parties in this case, the Board found no evidence of a release.
While the change orders referenced an accord and satisfaction, according to the Board, it was apparent that BPK’s execution of them did not reflect agreement with Mortenson that BPK was releasing its claim for additional monies. Rather, BPK was securing payment of undisputed amounts. As support for this holding, the Court relied on BPK’s contemporaneous notice to Mortenson that it intended to seek monies in addition to those reflected in the change order, and Mortenson’s failure to object or claim that the change orders barred such a claim. For these reasons, the Severin doctrine did not bar the pass-through claims.
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Engineer’s Decision Did Not Constitute an Arbitration Award
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City of Ferndale v. Florence Cement Co
2006 Mich. App. LEXIS 129, No. 254572 (January 17, 2006)
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| In City of Ferndale v. Florence Cement Co. and Hartford Casualty Insurance Co., 2006 Mich. App. LEXIS 129, No. 254572 (January 17, 2006), the Court held that the engineer’s decision under the disputes resolution provision of the contract did not constitute a final and binding arbitration award.
Plaintiff, City of Ferndale entered into a contract with Defendant, Florence Cement Company to install new concrete for a roadway in the City of Ferndale. The contract contained a dispute resolution clause which authorized the engineer to interpret the contract’s requirements and issue written decision on claims and disputes. In relevant part, the dispute resolution clause provided:
“ENGINEER’s written decision on such claim, dispute or other matter will be final and binding upon OWNER and CONTRACTOR unless…a written notice of intention to appeal from ENGINEER’s written decision is delivered by OWNER or CONTRACTOR to the other and to ENGINEER within thirty days after the date of such decision and a formal proceeding is instituted by the appealing party in a forum of competent jurisdiction …”
During the course of the project, the project Engineer notified Contractor that it was seeking replacement of 300 yards of defective concrete. Contractor denied responsibility for the defect and proposed an alternative remedy to replacing the defective concrete. The Engineer, however, continued to require full replacement of the concrete. When Contractor refused to perform the remedial work, Owner hired another cement company to perform the replacement. After Contractor refused to pay Owner’s invoice for the costs of replacement, Owner filed suit alleging breach of contract.
Contractor filed a motion for summary judgment, arguing that the under the disputes clause of the contract, the engineer’s decision constituted an arbitration award which Owner did not seek to enforce within the one year statutory period for compelling enforcement, and thus the claim was time barred. Among other arguments, Owner countered that the provision was not an arbitration clause. The trial court ruled for the Contractor, holding that the engineer’s decision was final and binding, and therefore was an arbitration award subject to the one year statute of limitations.
On appeal, the Circuit Court reversed. Specifically, the Court held that the parties’ agreement did not reflect a valid agreement for common-law arbitration. “Consistent with the rule of finality, ‘an arbitration agreement is a contract by which the parties forego their rights to proceed in civil court in lieu of submitting their dispute to a panel of arbitrators.’” The dispute provision at issue allowed either party to exercise rights and remedies in a forum of competent jurisdiction. The Court held that because the parties’ agreement did not limit the scope of judicial review, the parties did not intend the engineer’s decision to be a final and binding arbitration award.
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Statute Of Limitations Not Tolled by Discovery Rule under AIA Article 9.3
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Gustine Uniontown Assocs., LTD v. Anthony Crane Rental, Inc.
2006 PA Super 12 (Pa. Super. Ct. 2006)
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| In conjunction with its construction of a shopping mall over a non-functioning coal mine, project owner Gustine entered into a standard American Institute of Architect form of agreement, AIA B141, with the project architect ASG. Article 9.3 of the contract stated:
“Causes of action between the parties to this Agreement pertaining to acts or failures to act shall be deemed to have accrued and the applicable statutes of limitations shall commence to run not later than either the date of Substantial Completion for acts or failures to act occurring prior to Substantial Completion, or the date of issuance of the final Certificate for Payment for acts or failures to act occurring after Substantial Completion.”
Before construction began, Gustine was informed that the subterranean characteristics of the land could result in earth movement that could cause structural damage to building on the land. On September 8, 1993, ASG issued certificates that all mall structures were substantially completed. Cracks appeared in mall retail stores in 1995, and by early 1998, every building sidewalk, and parking area in the mall had sustained damage from subterranean earth movement.
On July 30, 1999, Gustine instituted an action by filing a writ of summons. Six month later, it filed a complaint against thirteen defendants, including ASG, who had been involved in either pre-construction subsurface investigation, mall construction, or both, alleging causes of action sounding in contract and tort. ASG filed preliminary objections, arguing that the breach of contract claims were barred by a four-year statute of limitations and the tort claims by a two-year statute of limitations. Gustine countered that actions for latent defects involving contracts governing real estate construction were governed by a six-year statute of limitations and further that the applicable statute of limitations had been tolled by the discovery rule and the repair doctrine.
The trial court rejected application of the six-year statute of limitations to the contract counts, but overruled all of the defendants’ motions to dismiss, except for that of ASG. The court dismissed ASG as a party defendant based on Article 9.3 the contract. The court held this provision fixed the accrual date for both Gustine’s tort and contract claims against ASG at September 8, 1993, and since the action had been filed after September 8, 1997, that the statute of limitations had expired. The court thus implicitly found that neither tolling doctrine applied. On appeal, the Superior Court affirmed application of the two-year statute of limitations to all fraud and negligence counts but held that a six-year statute of limitations applied to contract actions alleging latent real estate construction defects. The Pennsylvania Supreme Court reversed, holding that a four-year statute applied to all actions sounding in breach of contract, even those involving latent defects in the construction of real property, and remanded for a determination of Gustine’s remaining claims.
On remand, Gustine argued that the discovery rule applied despite the language of Article 9.3, that it was unreasonable to prevent its application, and that Article 9.3 did not apply to tort-based claims. The Court found that the plain language of the Article, stating that “applicable statutes of limitations shall commence to run,” was specifically intended to preclude application of the discovery rule. Further, because the Article merely dictated when the statute would begin to run, but did not shorten it, precluding application of the discovery rule was not unreasonable. The Court stated that Gustine could not have reasonably expected that it could apply the discovery rule “because those expectations are erased by the clear terms of the contract it executed.” Reiterating that the contract was a standard form agreement and the stated policy of the Supreme Court is to enforce clear contract language, the Court further found that the Article’s broad reference to “causes of action” encompassed tort claims as well as contract claims and affirmed ASG’s dismissal from the action.
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Contractor’s Continued Acceptance of Subcontractor’s Performance Waives Right To Terminate
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Ed Kimber Heating & Cooling, Inc. v. Travelers Casualty & Surety Co.
No. 3:03cv2111 (SRU), 2006 U.S. Dist. LEXIS 3323 (D. Conn. Jan. 26, 2006)
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| Trataros Construction, Inc. (“Trataros”), the general contractor on a school addition and renovation project, subcontracted with Ed Kimber Heating & Cooling, Inc. (“Kimber”) for the performance of HVAC and plumbing work. Travelers Casualty & Surety Co. (“Travelers”) issued payment and performance bonds as the surety for Trataros.
Trataros made progress payments to Kimber throughout the project. In January of 2003, however, Trataros made out its progress payment check from an account which required approval by Travelers. Travelers refused to approve this payment. For reasons unstated by the court, Trataros subsequently became unable to complete the job, and Travelers hired a replacement contractor. The replacement contractor in turn employed another HVAC subcontractor, prompting Kimber to cease work on the project.
Kimber sued Travelers on the payment bond. Travelers counterclaimed, seeking the excess cost of completing Kimber’s work with the replacement subcontractor, as well as the cost of correcting certain deficient work by Kimber. Kimber moved for summary judgment on the portion of Travelers’ counterclaim related to the completion costs. Applying New York law as required by the subcontract, the court granted Kimber’s motion.
Kimber argued successfully that Trataros’ and Travelers’ failure to make the January 2003 progress payment constituted a material breach of the subcontract which justified Kimber’s cessation of performance. Travelers put forth several justifications for withholding the January payment, contending that it and Trataros had the right to terminate Kimber before failing to issue the payment. The court rejected each of these contentions.
First, the court found that neither Trataros nor Travelers had complied with the provisions of the subcontract requiring written notice prior to termination for default. The court held that this failure alone defeated Travelers’ claim of justified termination. However, the court addressed Travelers’ other arguments as well, and held that Kimber could not have been terminated even if proper notice were provided.
Travelers had alleged that Kimber committed numerous breaches of the subcontract which would have permitted termination. Among other things, Travelers maintained that Kimber had failed to secure the required license for its work, had failed to pay prevailing wages to its laborers, and had failed to obtain required worker’s compensation insurance. The court held that Trataros’ continual payments to Kimber in spite of these various breaches constituted acceptance of Kimber’s performance and waived any right to rely on these breaches as a ground for termination.
Finally, Travelers had argued that the subcontract allowed Trataros to withhold payment where it would be “reasonable” to do so. Travelers cited Kimber’s overstatement of the percentage of work it had completed to date as such a reason for its refusal to issue the January 2003 progress payment. However, the court noted that Travelers did not discover this overstatement until March of 2003, and thus could not reasonably have relied upon it at the time it withheld the payment.
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Liquidated Damages Clause Bars Separate Recovery for Lost Power Sales Even Though Loss is Many Times Greater Than Liquidated Damage Amount - Correction Damages, However, Are Separately Recoverable
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El Dorado Irrigation Dist. v. Traylor Bros., Inc.
No. 03-949, 2006 U.S. Dist. LEXIS 1354 (E.D. Cal. Jan. 4, 2006)
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| In El Dorado Irrigation Dist. v. Traylor Bros., Inc., No. 03-949, 2006 U.S. Dist. LEXIS 1354 (E.D. Cal. Jan. 4, 2006), the court construed the effect of a liquidated damages clause on plaintiff’s ability to recover other categories of actual damages. The plaintiff sued the defendant contractor, seeking recovery of liquidated damages, loss of power sales, loss of public grant funds, and other damages related to the late completion of the project. The contract contained a liquidated damages clause, which defined the “damages for Contractor delay” at $500 per calendar day.
Plaintiff not only sought to collect $191,000 in liquidated damages, but also argued that other damages related to defendant’s defective work were not precluded by the liquidated damages clause. Finally, plaintiff asserted that the liquidated damages clause was unenforceable as a matter of statutory law because its actual delay losses were disproportionately greater than the liquidated damages.
The court had earlier determined that costs related to remedying defendant’s defective work, even if those costs were time-related in nature, were not covered by the liquidated damages clause. To hold otherwise, the court concluded, would nullify a separate contractual provision that allowed the plaintiff to recover “correction damages.” Loss of power sales and public grant funds, however, did not constitute “correction damages” and thus recovery for such losses was subsumed by the liquidated damages provision. The court noted that in the absence of a specific provision elsewhere in the contract which provided for the recovery of those losses, the liquidated damages provision must prevail.
Plaintiff also argued the liquidated damages provision was unenforceable because it was “manifestly unreasonable” and offended certain California statutes. In particular, plaintiff concluded the provision was manifestly unreasonable because it bore no reasonable relationship to the range of actual damages that the parties could have anticipated from the breach. The loss of power sales was approximately $2.4 million, and the court noted the liquidated damages of $191,000 was relatively small in comparison. However, the court concluded plaintiff failed to provide a compelling reason for the court to look outside the four-corners of the contract and find that a “plainly bargained for” liquidate damages provision would not apply. Accordingly, the court dismissed the claim for loss of power sales.
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