|
|
|
|
|
|
Delaware District Court Reduces Contractor Recovery for Wrongful Termination
|
|
|
Donald M. Durkin Contracting, Inc. v. City of Newark
2008 U.S. App. LEXIS 28987 (D. Del. Apr. 9, 2008)
|
|
|
|
|
|
| The Delaware District Court held that a contractor who is improperly terminated is entitled to recover its expectation interest or the unpaid contract price less the amount it would have cost the contractor to complete the job. Other damages which are causally connected to the owner’s breach are recoverable as well, but costs of pre-termination performance or post-termination losses which are not causally connected are not recoverable. Further, the Court affirmed that Delaware follows the “American Rule’ which precludes recovery for attorneys fees incurred in consequence of the owner’s breach.
Following a jury verdict of $11.6 million in favor of the terminated contractor, the City of Newark, Delaware, renewed its motion for judgment of a matter of law on the measure of damages for the contractor’s breach of contract claim. The court reduced the jury award to $630,000, deciding that many of the components of the award were not recoverable under the circumstances of the case.
Under Delaware law, the standard remedy for breach of contract is based upon the “reasonable expectation of the parties.” In the construction context, courts find that this means that a contractor is entitled to receive “the contract price (or so much as remains unpaid) less the amount it would cost the builder to complete the job.” The Court found that the jury award had failed to offset the “cost to complete” against the unpaid contract balance and reduced the award accordingly.
Although, a contractor is also entitled to recover damages for other pre-termination costs resulting from the owner’s breach the District court found that the pre-termination costs awarded by the jury were not a result of the owner’s breach. The pre-termination costs were acknowledged to have been caused by severe weather rather than breach by the owner.
The Court held that the contractor was also entitled to recover any other losses beyond contract price, so long as those losses were caused by the City’s breach. By so holding, the Court recognized that a contractor is permitted to such recovery as necessary to put the contractor in the same position as if the other party had fully performed its contract.
However, the Court held attorney’s fees were not recoverable because Delaware follows the “American Rule” which bars recovery of attorneys’ fees as damages where the contract does not expressly authorize the recovery of such fees.
The Court also held that the contractor was could not recover damages for losses suffered by selling equipment to generate operating revenue. The Court held that the losses from selling equipment was not recoverable because there was no record evidence showing that these operating costs were in fact caused by the City’s breach, rather than alternative causes such as bad weather or , perhaps, trouble attracting new customers. Similarly, the Court also concluded that the contractor was barred from recovering costs and expenses associated with loans and expenses on life insurance policies and repayments of lines of credit as these damages were a combination of operating costs not recoverable with out proof of causation or litigation expenses not recoverable under Delaware law
Thus, the Court granted the City’s motion for judgment as a matter of law and recalculated the damages under Delaware law to which the contractor was entitled to the amount of $630,000.
|
|
|
|
|
|
|
|
DC District Court Finds Excavator’s Surety Not Liable Where Prime Contractor Delayed Notifying Surety of Excavator’s Default Until After Excavator’s Work Was Complete
|
|
|
Hunt Construction Group, Inc. v. National Wrecking Corp.
2008 U.S. LEXIS 27859 (D.D.C. Apr. 8, 2008)
|
|
|
|
|
|
| The United States District Court for the District of Columbia discussed the split of authority on the issue of when a surety’s obligations are triggered under a performance bond, ultimately holding that a surety is liable only if timely notice is given of the obligee’s default, allowing the surety to exercise its options under the performance bond.
Hunt Construction Group (“Hunt”) was the prime contractor on a hotel construction project in Washington, D.C. National Wrecking Corporation (“NWC”) subcontracted with Hunt to perform excavation and other work on the hotel project. In April 2004, approximately five months after entering into the subcontract, NWC completed the work. Hunt alleged that NWC delayed in completing the excavation work, and as a result, Hunt was required to accelerate other parts of the work, so that it incurred costs in excess of $800,000 due to NWC’s delay.
In July 2004, more than three months after NWC completed the excavation work and was no longer on site, Hunt sent NWC a Notice, declaring it in default for its failure to perform the subcontract work diligently and for causing delays to the project. Hunt also wrote to NWC’s performance bond sureties, notifying them of NWC’s default and demanding that they arrange for performance of NWC’s obligations under the subcontract (which was not possible, because the work was complete). Consultants hired by the sureties to investigate Hunt’s demand attempted to contact Hunt on numerous occasions, but never information from Hunt regarding the status of NWC’s work.
At the end of January 2004, Hunt filed a suit against NWC in the United States District Court for the District of Columbia, eventually adding the Sureties as defendants, alleging breach of their bond obligations. The Sureties filed motions for summary judgment. In considering the summary judgment motions, the Court framed the issue as not whether NWC delayed the project, but whether Hunt timely notified the sureties of NWC’s default so as to require that they remedy the default.
First, the Court identified the widely adopted rule that a surety’s obligations are measured by the terms of the bond. Accordingly, the Court examined the terms of the parties’ performance bond to determine when the sureties’ obligations were triggered.
In its analysis of the issue, the Court discussed the conflicting authorities on the issue. First, the court recognized the line of cases cited as support by the Sureties for their interpretation that the bond triggered the Sureties obligations only after NWC was in default and Hunt had declared NWC in default. These cases cited hold that actions of an obligee, such as Hunt, which deprive the Surety of its options to protect itself under the performance bond, render the performance bond null and void.
The Court also recognized the opposing precedent, relied upon by Hunt, which holds that a sureties’ liability is immediately triggered upon default of the principal/obligor, such as NWC, and is not conditioned on a declaration of default by the obligee, such as Hunt. The Court, however, declined to adopt this holding, reasoning that it would essentially turn the surety into a commercial guarantor.
Accordingly, the issue came down to whether Hunt gave the Sureties reasonable notice of NWC’s default as required by the bond. The Court specifically pointed to Hunt’s failure to do anything for an extended period after it knew that NWC would not complete the work on time. The Court held that Hunt failed to give the Sureties reasonable notice of NWC’s default, and, therefore, the Sureties liability was never triggered.
|
|
|
|
|
|
|
|
Ohio Appellate Court Holds Statute Barring Enforcement Of No Damage For Delay Clauses In Cases of Owner Fault Also Precludes Limiting Recovery of Inefficiency And Acceleration Damages Flowing From Owner Delay
|
|
|
Cleveland Construction, Inc. v. Ohio Pubic Employees Retirement System
Cleveland Construction, Inc. v. Ohio Pubic Employees Retirement System, No. 07AP-574, 2008 Ohio 1630
|
|
|
|
|
|
| Appellant, Ohio Public Employees Retirement System (“PERS”) is the owner of an office tower project (the “Project”) in Columbus, Ohio. PERS entered into a $6.3 million interior trades contract with Appellee, Cleveland Construction, Inc. (“CCI”) to build portions of the $90 million office tower. The jury in the lower court case found that PERS materially breached its contract with CCI by failing to properly schedule and coordinate the project work.
On appeal, PERS did not did not challenge the jury’s finding that PERS and its construction manager failed to properly schedule and coordinate the Project, instead PERS asserted the trial court misinterpreted the language of the contract and the applicable statute, which invalidates no damage for delay clauses. The appellate court reviewed the contract language in conjunction with the statute. The “no damage for delay” clause contained in the contract was similar to those “no damage for delay” clauses that were enforceable in Ohio until 1988, when the legislature declared invalid these types of clauses when “the cause of the delay is a proximate result of the owner’s act or failure to act.”
PERS argued that the statute did not apply to the claim because CCI asserted a claim for acceleration costs, not delay damages and that the statute did not expressly include the terms “acceleration costs,” “loss of productivity,” or other types of “inefficiency costs,” and therefore the legislature intended to exclude them from the statute. The trial court interpreted the concept of delay broadly and found that acceleration and loss of efficiency are embodied in the concept of delay, consistent with case law in Ohio and other jurisdictions. The appellate court affirmed the trial court’s finding that in construction litigation, a project owner’s delay can give rise to a number of different types of damages, including inefficiency costs, acceleration costs, loss of productivity costs, and unabsorbed home office overhead costs. The appellate court went on to note that acceleration costs are closely associated with project delay, and that statute’s apparent purpose is to prevent owners from escaping liability when they have caused a project delay. “The statute does not simply preclude recovery of delay damages, rather it precludes the waiver of liability for delay. Liability, in this context, means consequences -- an owner cannot cause a delay, and then avoid the natural consequences for causing the delay by using boilerplate contract language.” The court held that contract language was unenforceable and did not preclude CCI’s damages award.
|
|
|
|
|
|
|
|
Florida Court Holds That Contractor’s Failure To Provide Notice Of Default In Accordance With Terms Of Performance Bond Discharged Surety From Its Obligations
|
|
|
Current Builders of Florida, Inc. v. First Sealord Surety, Inc.
2008 Fla. App. LEXIS 4698 (April 2, 2008)
|
|
|
|
|
|
| The Court of Appeals of Florida held that a jury finding that a contractor which terminated a subcontractor failed to provide notice in accordance with the terms of a performance bond was sustainable, given that the contractor did not tender the remaining contract balance to the surety or give it an opportunity to provide for the completion of the work. Accordingly, the surety’s obligations under the bond were not triggered.
Current Builders of Florida, Inc. (the “Contractor”) served as the general contractor for a residential project. The Contractor entered into a subcontract with Morgado Plumbing Corporation (the “Subcontractor”) to install plumbing fixtures for the project (the “Subcontract”). The Subcontract required the Subcontractor to furnish the Contractor with a performance bond, which was issued by Sealord Surety, Inc. (the “Surety”).
The Contractor became unhappy with the Subcontractor’s work early on in the project and sent several letters complaining of Subcontractor’s performance. Each letter declared the Subcontractor in default and demanded that the Surety be responsible for any delays and damages. Upon ostensibly learning from a wed site that Subcontractor’s workers compensation insurance had lapsed, the Contractor terminated the Subcontractor about a year into the project. The Contractor hired a replacement subcontractor and notified both the Subcontractor and the Surety. The Surety did not respond and the Contractor filed a complaint against the Surety for breach of the performance bond.
At a jury trial, the Surety argued that the Contractor did not provide proper notice under the bond to trigger the Surety’s obligation. The Surety presented testimony that performance bond required “a declaration of default, a termination and probably an agreement to release the remaining project funds to the surety.” The Surety acknowledged the several “notices of default” sent by the Contractor but testified that as long as a the Subcontractor was working, the Surety had no obligation. The Surety testified that it only received a letter informing it that the Contractor had hired a new subcontractor and such a “termination” letter did not comply with the terms of the performance bond. The jury agreed with the Surety and found that the Surety did not receive proper notice under the performance bond and thus the Surety’s obligations under the bond were discharged.
On appeal, the Court considered whether the evidence presented a trial supported the jury’s finding. The Court evaluated the relevant performance bond terms which state:
“4.2 The Contractor has declared a Subcontractor [sic] Default and formally terminated the Subcontractor’s right to complete the Contract; and
“4.3 The Contractor has agreed to pay the balance of the Contract Price, if any, to the Surety in accordance with the terms of the Construction Contract or to a subcontractor selected by Surety to perform the Construction Contract in accordance with the terms of the Contract with the Contractor.”
The Court stated that the Contractor did not give notice to the Surety that it agreed to pay the balance of the contract to the Surety or to a subcontractor selected by the Surety. Instead the Contractor took over those obligations and thus did not allow the Surety to perform under the bond. Accordingly, the Court affirmed the trial court’s finding.
|
|
|
|
|
|
|
|
New Jersey Federal Court Holds that New Jersey Public Works Bond Act and Trust Fund Act Bars A General Contractor from Setting Off Potential Claims on Private Project Against Amounts Owed to Subcontractor on a Public Project
|
|
|
Atlantic City Associates LLC v. Carter & Burgess Consultants, Inc.
2008 U.S. Dist. LEXIS 25144 (D.N.J. Mar. 27, 2008)
|
|
|
|
|
|
| The United States District Court for the District of New Jersey recently had to decide whether it was proper for a general contractor to set off potential claims on a private project against amounts owed to the same subcontractor on a public project. Relying upon the New Jersey Public Works Bond Act and New Jersey Trust Fund Act, the District Court concluded that it was improper for the general contractor to set off the amounts because a contractual setoff provision was insufficient to rise to the level of a waiver of the subcontractor’s rights under the Acts.
Keating Building Corporation (“Keating”) served as the general contractor on a private project in Atlantic City for which it contracted with Thomas Company, Inc. (“Thomas”) to perform roofing services. Keating also served as the general contractor on a public project at Rowan College for which it again contracted with Thomas to supply roofing materials and services. Each of the subcontracts between Keating and Thomas pertaining to the public project contained an assignment and setoff provision permitting Keating to “set off against any money due [Thomas] under this Subcontract any claim or claims against Subcontractor, whether arising under this Subcontract, or any other Subcontract or Subcontracts between the parties[.]”
Keating was paid in full for the public project but withheld $184,649.55 from Thomas claiming it was entitled to withhold payment under the setoff provisions because it alleged that Thomas breached the subcontract pertaining to the private project. Thomas challenged the Keating’s position arguing that the setoff violated the Public Works Bond Act (“Bond Act”) and the Trust Fund Act and moved for summary judgment on its claims that Keating violated both Acts.
The parties agreed that the Bond Act and Trust Fund Act applied to the public project. Noting that the Trust Fund Act creates a trust fund for subcontractors and suppliers when the government pays the general contractor, the District Court explained that such a trust is created so that the general contractor is inhibited from diverting the funds to something unrelated to the public project. There was no dispute between the parties regarding the applicability of and effect of these Acts. Rather, the dispute primarily revolved around Keating’s contention that the setoff provisions of the subcontracts constituted a waiver of Thomas’ rights under the Acts.
Turning to contract interpretation principles, the court attempted to determine whether the setoff provisions were knowing waivers of Thomas’ statutory rights. The court also turned to previous court rulings regarding the waivability of statutory mechanic lien (as opposed to the more recent Construction Lien Law) rights since New Jersey courts had not yet addressed the issue of the waivability of rights under the Bond Act or Trust Fund Act. The court analyzed lien waiver cases which universally held that “clear and unmistakable” evidence of waiver was necessary to demonstrate that a party waived its statutory rights. As a result, the District Court concluded that the setoff provision did not function as a waiver, in part, because it fell under the heading “Assignment” and because there was no indication in the language itself that the provision was a meant to waiver any statutory or other rights. Without reference in the subcontract to the fact that Thomas was waiving its rights under either Act, the court concluded that “clear and unmistakable” evidence was lacking to justify a finding of waiver.
Ultimately, the District Court concluded that Thomas was an intended recipient of the protections of both the Bond Act and the Trust Fund Act and that there was no material issue of fact with regard to whether Thomas waived its protections under either Act. Accordingly, Thomas was entitled to payment of the $184,649.55.
This decision provides guidance to contracting parties as to the level of specificity necessary in an agreement when the parties intend to waiver rights, in particular, statutory rights. A clear and unmistakable expression of a waiver must be included in the agreement to be effective. It should be cautioned, however, that the courts have yet to determine whether rights under the Bond Act and/or Trust Fund Act can be waived.
|
|
|
|
|
|
|
|
Supreme Court of South Carolina Finds Public Owner’s Failure to Require General Contractor’s Compliance with Statutory Bond Requirements Supports Cause of Action by Subcontractor Against Owner under South Carolina Statute
|
|
|
Sloan Constr. Co. v. Southco Grassing, Inc.
2008 S.C. LEXIS 99 (S.C. Mar. 24, 2008)
|
|
|
|
|
|
| The South Carolina Department of Transportation (SCDOT) contracted with general contractor Southco Grassing, Inc. in connection with state highway maintenance project and, in accordance with the applicable statutory bond requirements, Southco provided a payment bond for the benefit of its subcontractors and suppliers in the full contract amount. Subsequently, Southco entered into a subcontract with subcontractor Sloan to perform asphalt paving work. In June 2001, before the paving work was completed, Southco’s payment bond was cancelled when the bond’s issuer became insolvent. Notice of the insolvency and cancellation was provided to SCDOT and SCDOT requested in writing that the Southco provide a replacement bond within seven days. Southco did not reply. In the meantime, Sloan completed its work, but in January 2002 notified SCDOT that it still had not received payment from Southco for its subcontract valued at approximately $52,000 and that the payment bond had never been replaced. In March 2003, despite that it had not made full payment to Sloan, Southco advised SCDOT that it had made all payments on the project, and SCDOT released final retainage to Southco.
Sloan brought an action against SCDOT for negligence in failing to ensure that Southco was properly bonded in accordance with the applicable statutory bond requirements and for breach of contract under the theory that Sloan was a third-party beneficiary of the contract between SCDOT and Southco and therefore that SCDOT had an obligation to Sloan to ensure that Southco was properly bonded. The county circuit court granted SCDOT’s motion to dismiss the subcontractor’s claims and the Court of Appeals of South Carolina affirmed. The subcontractor filed a writ of certiorari which the Supreme Court of South Carolina granted to determine the issue of whether a subcontractor may bring a private right of action against a government entity for failure to ensure that general contractors on government construction projects are properly bonded. The Supreme Court reversed, answering the question in the affirmative.
In analyzing the issue before it, the Supreme Court observed that South Carolina’s “Little Miller Acts” require that general contractors obtain both a performance bond to ensure the timely performance of the contract by the general contractor and a payment bond to cover payment to subcontractors and suppliers in the event of the general contractor’s default. Going a step further, in 2000, South Carolina’s legislature enacted the Subcontractors’ and Suppliers’ Payment Protection Act (SPPA) which contains a detailed bonding scheme and expands the protections afforded by the Little Miller Acts. The SPPA provides that when the government is party to a contract in excess of $50,000 to improve real property, that “the owner of the property shall require the contractor to provide a labor and material payment bond in the full amount of the contract…” and “it is the duty of the entity contracting for the improvement to take reasonable steps to assure that the appropriate payment bond is issued and is in proper form.”
The Supreme Court found that the SPPA was enacted for the purpose of providing protections to subcontractors and suppliers on government projects stronger than those contained in the Little Miller Acts and that although the SPPA does not specifically provide for a right of action against the contracting government body, such a right is implied by the inclusion of an affirmative duty on the part of the government. Accordingly, the Supreme Court found that an implied private right of action against the government exists under the SPPA for failure to ensure that a contractor is properly bonded.
The Supreme Court further found that Sloan’s breach of contract claim as a third party beneficiary was valid, relying on precedent in its reasoning that the SPPA’s bonding requirements are incorporated into public works construction contracts. The Court made clear, however, that the government’s liability under either theory is not unlimited. Like a subcontractor’s ability to recover under lien statutes, the subcontractor’s right to recovery against the government is limited to the remaining unpaid balance on the contract with the general contractor at the time the government is given notice of nonpayment by the general contractor. In so finding, the case was remanded to the trial court for a determination of SCDOT’s liability to Sloan.
|
|
|
|
|