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Owner Waives “Time Is Of The Essence” Provision Of The Contract And Right To Delay Damages Where It Continued To Issue Change Orders And Construction Change Directives After The Substantial Completion Date Had Passed
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RDP Royal Palm Hotel, L.P. v. Clark Construction Group
Nos. 04-16203 and 05-11713, 2006 U.S. App. LEXIS 3815 (11th Cir. Feb. 17, 2006)
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| RDP Royal Palm Hotel, L.P. v. Clark Construction Group, Nos. 04-16203 and 05-11713, 2006 U.S. App. LEXIS 3815 (11th Cir. Feb. 17, 2006) held that an Owner could not enforce the substantial completion date where the Owner continued to issue change orders and construction change directives after this date had passed. As a result of this waiver, the court further held that the Owner could not hold the Contractor liable for any damages incurred by the Owner as a result of the failure to achieve substantial completion by the substantial completion date.
Clark Construction Group entered into a contract with RDP Royal Palm Hotel, L.P., pursuant to which Clark agreed to construct the Royal Palms Crowne Plaza Resort in Miami Beach, Florida. The deadline for substantial completion of the resort was 518 days from the date of commencement of work. On September 28, 1998, RDP issued formal notice to proceed to Clark, establishing a substantial completion date of February 28, 2000.
Shortly after Clark commenced work, it faced delays and disruptions to its performance in the form of changed conditions and change directives issued by RDP. Clark requested additional compensation and an extension of time as a result of these changes. In response, RDP repeatedly assured Clark that the substantial completion date would be extended appropriately.
Eventually, the substantial completion date of February 28, 2000, passed. However, RDP permitted construction to continue without comment. Indeed, RDP issued hundreds of change orders and construction change directives after February 28, 2000. Clark continued to construct the Resort in accordance with these modifications, and RDP continued to accept the performance.
In March 2002, RDP stopped paying Clark for work completed pursuant to the change orders. Clark ceased work as a result. In response, RDP hired a replacement contractor to complete the Resort. It subsequently sued Clark for breach of contract, seeking, among other things, damages incurred as a result of Clark’s failure to achieve substantial completion by the substantial completion date.
The District Court held, and the Appellate Court affirmed, that RDP waived the right to enforce the February 28, 2000 substantial completion date. Both courts reached this conclusion because RDP continued to issue change orders and change directives, and continued to accept Clark’s performance of the work, even after the substantial completion date had passed. Because RDP had waived the right to enforce the February 28, 2000 substantial completion date, RDP also waived any right to recover damages incurred as a result of Clark’s failure to achieve substantial completion by the substantial completion date.
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Contractor Could Not Maintain Suit Against Construction Manager For Negligence
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Matrix Construction, LLC v. Barton Malow and Schoolcraft College
2006 Mich. App. LEXIS 429, No. 265156 (February 21, 2006)
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| In Matrix Construction, LLC v. Barton Malow and Schoolcraft College, 2006 Mich. App. LEXIS 429, No. 265156 (February 21, 2006), the Court held that a contractor could not maintain a suit against a construction manager for negligence where the alleged duty arose under the construction manager’s contract with the owner.
Contractor, Matrix Construction, LLC entered into a contract with Owner, Schoolcraft College to furnish and install numerous items for a construction project. Owner also contracted with Construction Manager, Barton Malow to manage and supervise Contractor’s work on the project. Contractor filed suit against Construction Manager alleging that Construction Manager negligently managed the project by failing to properly “supervise, coordinate, plan and schedule the work performed on the project.”
Construction Manager filed a motion for summary judgment asserting that Contractor failed to state a claim on which relief could be granted. Construction Manager argued that it owed no duty to Contractor as a matter of law. Further, any duty Construction Manager had with regard to the project arose solely under its contract with Owner. For its part, Contractor argued that under Michigan Law, a construction manager that supervises a project owes a duty to subcontractors regardless whether the subcontractor is in privity of contract with the construction manager.
The Trial Court granted Construction Manager’s motion for summary judgment holding that the duty alleged by Contractor arose solely under Construction Manager’s contractual obligations to Owner and thus Contractor could not maintain a suit for negligence. The Michigan Court of Appeals affirmed the Trial Court’s decision holding that no relationship between Contractor and Construction Manager existed that gave rise to legal duty by Construction Manager which was separate and distinct from Construction Manager’s contract with Owner.
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Terms Of Subcontract Containing A “Pay-If-Paid” Clause Enforceable Under Both Texas And New Mexico Law
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MidAmerica Construction Management, Inc. v. MasTec North America, Inc., et al.
2006 U.S. App. Lexis 3022 (10th Cir. 2006)
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| In MidAmerica Construction Management, Inc. v. MasTec North America, Inc., et al., 2006 U.S. App. Lexis 3022 (10th Cir. 2006), the Court held that a subcontract agreement contained a “pay-if-paid” clause, and that the clause in question was enforceable under both Texas and New Mexico law. As a result, general contractors did not need to pay the subcontractor for the work that the subcontractor performed under the contract, because the general contractors had not been paid by the project owner for that work.
Project owner PathNet, Inc. contracted with defendant Renegade to help construct portions of a fiber optic network located in New Mexico and Texas. Defendant MasTec subsequently purchased Renegade. On January 31, 2001, MasTec and Renegade hired MidAmerica as a subcontractor to install conduit for fiber optic line. The parties’ agreement was embodied in a written subcontract.
MidAmerica began performing under the Subcontract Agreement. MasTec and Renegade made an initial payment of approximately $127,000 to MidAmerica in March 2001 for work performed in January and February of that year. PathNet filed for bankruptcy in April 2001. Subsequently, MasTec and Renegade refused to make any further payments to MidAmerica, asserting that they had not yet received payment from PathNet for the work MidAmerica performed.
MidAmerica brought suit against MasTec and Renegade in the United States District Court for the Western District of Oklahoma, alleging that MasTec and Renegade owed it approximately $1.9 million for work performed under the Subcontract Agreement. The district court denied MidAmerica’s motion for partial summary judgment and granted MasTec and Renegade’s counter-motion for summary judgment on all of MidAmerica’s claims, holding that a “pay-if-paid” clause in the Subcontract Agreement providing that “all payments to Subcontractor by Contractor are expressly contingent upon and subject to receipt of payment for the work by Contractor from Owner,” was “unambiguous and makes (MasTec and Renegade’s) receipt of payment for the work from PathNet a condition precedent to payment of MidAmerica.” MidAmerica appealed to the United States Court of Appeals for the 10th Circuit.
On appeal, the Court reviewed the types of language that constitute “pay-if-paid” and “pay-when-paid” clauses under both Texas and New Mexico law in a contract for a private-sector construction project. The clause in question in the Subcontract Agreement provided:
“Upon final acceptance of the Work by Contractor and Owner, Contractor will pay Subcontractor for the Work at the prices and schedule and in the manner described on the Work Order(s); provided that, all payments to Subcontractor by Contractor are expressly contingent upon and subject to receipt of payment for the Work by Contractor from Owner, even if (a) Contractor has posted a payment bond with Owner or (b) the Primary Contract is on a “cost plus” or other reimbursement basis requiring the Contractor to pay subcontractors prior to being reimbursed by Owner.”
The Court first reviewed the clause in question under Texas law and held that the clause properly constituted a “pay-if-paid” clause as a result of the “clear conditional language” in the Subcontract Agreement. The Court then reviewed the clause in question under New Mexico law and held that the clause, (1) through virtue of the parties’ clear intent to create a condition precedent, was not violative of New Mexico’s Retainage Act, N.M. Stat. Ann. §§ 57-28-1 - 57-28-11, and (2) through the “clear condition” contained in the Subcontract Agreement, constituted an enforceable “pay-if paid” clause under New Mexico law.
The Court also analyzed MidAmerica’s claim that the partial payment made by MasTec and Renegade to MidAmerica established that MidAmerica should have been paid regardless of whether MasTec and Renegade were paid by PathNet. Due to the lack of ambiguity in the Subcontract Agreement as to payment, the Court held that MidAmerica’s argument regarding partial payment failed under both Texas and New Mexico law.
As such, the Court held that that under either Texas or New Mexico law, or both, MasTec and Renegade were not obligated to pay MidAmerica for the work that MidAmerica performed under the Subcontract Agreement unless and until PathNet paid MasTec and Renegade for that work.
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Construction Manager Sued For Failure To Ensure Quality Of Contractor’s Work Could Not Sue Contractor’s Surety For Indemnity Or Contribution
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Carolina Casualty Insurance Company, et al. v. R.L. Brown & Associates, Inc., et al.
No. 1:04-CV-3537-GET, 2006 U.S. Dist. LEXIS 5261 (N.D. Ga. January 25, 2006)
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| In Carolina Casualty Insurance Company, et al. v. R.L. Brown & Associates, Inc., et al., No. 1:04-CV-3537-GET, 2006 U.S. Dist. LEXIS 5261 (N.D. Ga. January 25, 2006), a dispute arose between a surety that had provided a performance bond on a public works project and the project’s program manager. After the owner declared the general contractor in default for defective work, the surety finished the underlying contract under the terms of the performance bond. The owner sought additional damages from the surety. In an agreement settling those claims for additional damages, the owner assigned to the surety all of its own claims against third parties arising out of the defective construction and supervision of the project.
The surety thereafter commenced an action against, among other parties, the program manager, asserting breach of contract and tort claims. The surety sought damages arising from the program manager’s alleged breach of its purported duty to ensure the quality of the general contractor’s work before paying the general contractor. The program manager, in turn, asserted a counterclaim against the surety for contribution and indemnity, contending that the surety was, as the guarantor of the general contractor, liable for any damages arising out of the general contractor’s defective work.
The surety moved for dismissal of the counterclaim for failure to state a cognizable theory of liability. It argued that the scope of its obligations was strictly defined by the language of the performance bond and that it could not be held liable to the program manager as a matter of law under contract or tort theory. The United States District Court for the Northern District of Georgia agreed.
Applying Georgia law, the court first concluded that that the program manager had no legal basis to assert contractual indemnity. There was no contract between the surety and the program manager, and there was no intent expressed in the performance bond to benefit the program manager. Although the underlying contract was incorporated by reference into the performance bond, since surety contracts are interpreted strictly and in favor of the surety under Georgia law, the court found that the scope of the surety’s obligations could not be extended by implication beyond those expressly set forth in the performance bond, which benefited the owner only.
The court also found no basis in tort to permit a contribution or indemnity claim to go forward. Under Georgia law, unless the performance bond explicitly provides for third party liability coverage, third parties seeking to assert vicarious liability claims against the agent of a general contractor for wrongdoing can look only to third party insurance coverage, if any.
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Owner's Failure To Preserve Evidence Justified Dismissal Of Claims For Defect As Sanction For Spoliation Of Evidence
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Harborview Office Ctr., LLC v. Camosy Inc.
2006 Wisc. App. LEXIS 149 (Wis. Ct. App. Feb. 15, 2006)
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| Project owner Harborview entered into a contract for the construction of a three-story office building. After discovering significant water infiltration problems, Harborview filed suit against the parties who had provided services in its construction: the general contractor, the architectural firm, the installer of aluminum windows, and the installer of the Exterior Insulation and Finishing System (EIFS). Harborview alleged negligence and breach of contract against each and claimed that in order to resolve the water infiltration problem it would be necessary to remove and replace all of the building’s windows. Harborview hired an expert, who was an architect and engineer, to identify the causes of the problem, evaluate a correction process, and ultimately oversee the remediation process.
During the litigation process, Harborview established a protocol for discovery and retention of evidence relating to mold remediation and the removal and replacement of the windows. According to the plan, the remediation process would be documented through photographs and videotape and specific items removed during the process would be retained for evidentiary purposes. In addition, the parties in interest were invited to an inspection and demonstration of the work to be done during the remediation.
The planned remediation focused mainly on the replacement of windows, the application of sealant around the frames, and correction of the metal flashing. Although some work on the V-grooves in the EIFS was contemplated in the original remediation plan, its purpose was mainly cosmetic. However, once the remediation began, Harborview’s expert discovered that even with newly replaced windows, water was still leaking into the structure. After conducting water testing, he concluded that cracks in the V-grooves was a possible source of the infiltration and that they would require more work than initially anticipated. After reporting his findings to Harborview, the expert gave the order to rework all of the V-grooves in conjunction with the window replacement.
Although all parties had been aware that cracks had been discovered in the V-grooves early on in the process and knew that in general such cracks could potentially lead to water infiltration, since the beginning of the litigation and the remediation project, the focus had been on the windows and the window perimeter. It was not until 98% of the reworking of the V-grooves had been completed that the contractors learned that the cracks in the EIFS were a source of water infiltration. By this time, the contractors’ ability to gather evidence and to allocate responsibility for the problem amongst themselves had been seriously compromised.
As a result, the trial court found that Harborview’s failure to preserve evidence despite its knowledge of its responsibility to do so was egregious conduct justifying dismissal of its claims. The Court of Appeals of Wisconsin upheld the trial court’s decision, noting that when Harborview filed its complaint in December 2001, the exact cause of the water infiltration had not yet been determined, making this a key issue in the litigation. For this reason, Harborview had a duty to preserve evidence essential to the claims, Harborview’s behavior had been “a flagrant, knowing disregard of the judicial process” and the sanction of dismissal was appropriate.
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Subcontractor Can Recover Damages From Payment Bond Surety As Result Of Delay, But Only Actual Costs Of Labor And Materials
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Lexicon, Inc. v. Safeco Insurance Co. of America
No. 04-6086, 2006 U.S. App. LEXIS 3113 (6th Cir. Feb. 9, 2006)
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| Icon, Inc. served as a subcontractor on a steel plant expansion project in Kentucky. Pursuant to its subcontract, Icon secured a payment bond, with Safeco Insurance Company of America as surety. Lexicon, Inc. performed work on the project as a subcontractor to Icon. Lexicon incurred additional costs on the project as a result of delays for which it was not at fault. Lexicon brought a claim for these “delay and impact” costs against Safeco, as surety for Icon.
The lower court awarded summary judgment to Safeco. That court found that Lexicon may have been entitled to the actual costs it expended for labor and materials as a result of the delays, but held that Lexicon’s failure to segregate these costs from other, non-compensable damages (such as administrative costs and lost profits) precluded Lexicon from maintaining the claim.
On appeal, the Court of Appeals for the Sixth Circuit partially affirmed this holding. Citing authority from other jurisdictions and stating what it concluded was a general rule, the court agreed that Lexicon could recover the actual costs of labor and materials, but not related collateral expenses. The court also faulted Lexicon for failing to identify its damages specifically, and for consistently attempting to include such costs in its claim. Among other things, the court noted that Lexicon was attempting to recover additional profit on hourly wage rates which already encompassed a profit component. The court also criticized Lexicon for attempting to prove its claim on a “total cost” basis.
Nonetheless, the appellate court parted ways with the lower court by holding that Lexicon had produced at least some evidence indicating it could differentiate its actual costs from breach of contract damages such as lost profit and increased overhead. The court pointed to several documents which purported to provide an itemized breakdown of Lexicon’s claim. In remanding the case for trial on these issues, the court emphasized that Lexicon bore the burden of proving which specific costs in its claim were directly attributable to labor and material expenditures.
Click here to view decision in full text. |
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