February, 2010

Homeowner hired defendant to inspect and clean its fireplace and chimney after observing chunks of mortar falling into the fireplace.  Homeowner showed defendant’s technicians the fallen mortar.  The technicians cleaned and visually inspected the chimney and reported to homeowner that it “looked good.”  Thereafter, an extensive fire swept through the house causing over $400,000 in damage.

Following the fire, homeowner’s insurer commissioned an inspection which revealed numerous signs of damage and disrepair to the chimney that suggested defendant’s technicians should have instructed homeowner not to use fireplace and chimney until repairs were made.

The insurer initiated a subrogation action in which it alleged that defendant had failed to perform its contractual obligations in a safe and professional manner and was liable for both breach of contract and negligence.  Defendant moved for summary judgment on breach of contract claim.  The court denied the motion for summary judgment, but independently raised the issue of whether the negligence claim was barred by the “gist of the action” doctrine.  Under this theory, a plaintiff is barred from bringing a tort claim that is merely repetitive of the underlying contract claim when the cause of action stems from contract.  Stated differently, if the “gist” of the action sounds in contract, a party cannot bring its claim in tort.

In holding that the “gist of the action” doctrine barred the negligence claim, the Court found that the matter before it arose from the contractual relationship between the parties.  The alleged breach of contractual duties was the essence of action.  Accordingly, Plaintiff could not maintain its overlapping negligence claim, which was dismissed.

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The Pennsylvania Supreme Court held that a utility company’s failure to properly mark the location of its lines under the Pennsylvania One-Call Act did not render it liable to an excavation contractor who struck the lines and suffered purely economic losses. It rejected the argument that the utility should be liable under § 552(3) of the Restatement (Second) of Torts because of its public duty to mark the lines.

The contractor for a waterline extension project, Excavation Technologies, Inc. (“Excavation Technologies”), requested that Columbia Gas Company of Pennsylvania (“Columbia Gas”) mark the location of its gas lines around the work sites pursuant to the One Call Act, 73 P.S. § 177(5)(i). The One Call Act requires facility owners to mark the position of underground lines upon request. Columbia improperly marked some lines and failed to mark others. As a result, Excavation Technologies struck various gas lines, which delayed its work and resulted in economic damages of $74,502.06. No physical injury or property damage resulted from striking the gas lines.

Excavation Technologies sued Columbia Gas for negligent misrepresentation under § 552 of the Restatement (Second) of Torts. Among other arguments, Excavation Technologies claimed that Columbia Gas’s negligence constituted a failure to comply with a public duty to provide information about the location of its underground lines under the One Call Act so that it should be liable for negligent misrepresentation under § 552(3). Columbia Gas demurred arguing that the economic loss doctrine precluded liability. The trial court sustained the objections and Excavation Technologies appealed.

On appeal, the Superior Court affirmed the decision finding that the economic loss doctrine generally precludes recovery in negligence actions for injuries which are solely economic. The Superior Court recognized that the Pennsylvania Supreme Court had carved out an exception to the economic loss rule in Built-Rite Contractors, Inc. v. Architectural Studio, 581 Pa. 484 (Pa. Super 2007). In that case, the Pennsylvania Supreme Court recognized a negligence cause of action against a design professional for purely economic losses, adopting § 552(1) and § 552(2). The Superior Court held that § 552(1) and § 552(2) did not apply to current case because unlike the architect in Bilt-Rite, Columbia Gas was not in the business of supplying information for pecuniary gain. Further, the Superior Court declined to adopt § 552(3), reasoning that the legislature did not intend to impose liability on utility companies for economic harm occasioned by an inaccurate response to the One Call Act.

The Supreme Court of Pennsylvania accepted an appeal from the Superior Court’s decision. The Supreme Court first found that the Superior Court correctly distinguished the case from Bilt-Rite. Accordingly § 552(1) and § 552(2) did not apply. The Court next turned to the novel issue of whether the One Call Act creates a public duty under § 552(3) so that violation of that duty could imposes liability for purely economic losses. The Supreme Court agreed with the Superior that the One Call Act does not impose such liability. The Court reasoned:

We find it apparent our legislature did not intend utility companies to be liable for economic harm cause by inaccurate response under the Act, because it did not provide for a private cause of action for economic losses. The economic loss doctrine was well-established in tort law when the Act was enacted, and when the Act was amended in 1986. The legislature was presumably aware of the economic loss doctrine when it established the statutory scheme governing the relationship among the entities required to participate under the Act.

The Court held that there was no statutory basis to impose liability for economic harm under the circumstances of the case.

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The Court of Appeals of Texas for the Fourteenth District held that a general contractor’s acceptance of final payment barred its claims for compensation for extras. The Court relied on the express release language in the parties’ contract to support its ruling.

The City of Longview, Texas (the “Owner”) retained McKinney & Moore, Inc. (“MMI”) to serve as a general contractor for the construction of the Lake O’ the Pines Raw Water Intake Structure (the “Project”). The parties’ contract contained various provisions related to subsurface conditions and the Owner supplied reports regarding such conditions. Among other things, the contract also provided that the Owner was responsible for design accuracy and sufficiency of the contract documents. The contract further addressed circumstances under which MMI would be entitled to reimbursement for damages and the effect of MMI’s acceptance of final payment.

During the Project, MMI sought approval of multiple change orders seeking extensions of the Project schedule. The Project schedule was subsequently extended due to unexpected rainfall and the existence of iron ore rock not shown in the Owner-provided subsurface reports. Prior to completion of the Project, MMI sought compensation for the added costs it incurred as a result of these conditions. The Owner denied the request for additional costs. Thereafter, MMI submitted a final payment application to the Owner together with a cover letter indicating that MMI continued to seek an equitable adjustment of the contract sum. The Owner paid, and MMI accepted without protest the amount set forth in the final payment application.

MMI later sued, seeking an equitable adjustment in the contract sum. The Owner filed motions contending first, that MMI’s claim sounded in tort and was, therefore, barred by the doctrine of sovereign immunity and second, that MMI’s claims were barred by the provision in the contract whereby acceptance of final payment served as a release of all other claims. The trial court granted the Owner’s motions. MMI appealed to the Court of Appeals.

The Court of Appeals first reversed in part the trial court’s holding with respect to sovereign immunity. The Court found that the claim as to the accuracy of the subsurface reports sounded in contract and MMI was able to seek compensation from the Owner based upon the contractual provisions which (i) allowed MMI to rely on the accuracy of the reports, and (ii) permitted MMI to recover from the Owner where damages arose from the “act, neglect, omission, mistake or default” of the Owner. The Court further rejected the Owner’s position that the equitable adjustment sought by MMI was consequential in nature and thus barred by the Local Government Code. The Court opined that the damages sought by MMI were contemplated by the contract and were direct, rather than consequential.

The Court finally turned to MMI’s appeal of the grant of summary judgment on the issue of final payment. The Court affirmed the trial court’s ruling primarily addressing the Owner’s contention that MMI’s acceptance of final payment was a ban on recovery of additional compensation. Relying on the contract provision which provided that “acceptance by the [contractor] of the final payment shall be a bar to any claim,” the Court found that MMI waived any future claims to compensation when it accepted and deposited the Owner’s payment.

The Court rejected MMI’s argument that it reserved its rights when submitting its final payment application with a cover letter setting forth its renewed request for equitable adjustment. The Court further rejected MMI’s argument that the submission of a second, modified final payment application, adding $2,040 to the amount sought, resulted in the first final payment application no longer being “final.” The Court explained that, despite an earlier reservation of rights and modified final payment application, upon receipt of the last payment from the Owner, MMI had the option to (i) refuse payment and assert claims for additional sums or (ii) accept payment and waive its alleged additional costs. Because MMI chose to accept and deposit payment, by operation of the unambiguous contract terms, MMI waived any claims of additional costs.

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The court denied the contractor’s claim for summary judgment, which was based on the theory that the subcontractor’s claims were barred by the releases it submitted with partial payment requests, holding that the contractor’s submission of the subcontractor’s claims to the government as part of an equitable adjustment request supported an inference that the parties by course of performance did not regard the releases as barring the claims. Further, the court held that notwithstanding Pennsylvania law to the contrary, federal law allows recovery of delay costs under a Miller Act payment bond.

The U.S. National Parks Service (“NPS”) awarded Defendant, Pride Enterprises, Inc. (“Pride”) a contract for construction and site improvements at the Grey Towers National Historic Landmark in Pike County, Pennsylvania. Great American Insurance Company provided a payment bond to Pride for the project. Pride subcontracted certain work to Pioneer Construction Company (“Pioneer”). Article 2.3 of the subcontract required Pioneer to furnish a release of all liens and claims arising out of the work as a condition to receiving any partial or final payment.

Pioneer submitted periodic payment applications during the project and, in some instances, Pride paid Pioneer without requiring submission of releases required by Article 2.3. However, Pioneer did sign at least fifteen partial releases during the course of the Project. In submitting the releases, Pioneer did not insert any language limiting the scope of or otherwise exempting any delay claims from the language of the release.

The project was delayed by 520 days. Before Pioneer demobilized, Pride contacted Pioneer regarding the project delays and requested Pioneer’s assistance in documenting a delay claim against the NPS. In response, Pioneer sent Pride its claim for equitable adjustment. Pride indicated that the claim should be treated as a certified claim under the Contract Disputes Act. Pride never advised Pioneer that the Claim would not be certified because it was barred by any partial release. Thereafter, the NPS Contracting Office denied Pioneer’s claim, stating that, although Pioneer did incur delays, the Government compensated Pride for delays, including delays incurred by Pioneer, through bilateral modifications that contained releases from Pride.

Pioneer filed suit against Pride seeking to recover its delay costs. Pride filed a motion for summary judgment, asserting that the partial releases signed by Pioneer barred its claim for delay damages. The Court held that the parties’ course of conduct during the Project, including Pride’s failure to require a release to accompany the first three payments and its encouraging Pioneer to prepare a delay claim supported an inference that the parties did not intend the release clause to bar future claims. The Court held that a question of fact remained regarding the interpretation of the partial releases, and thus, it denied Pride’s motion for summary judgment.

The Court also rejected Great American’s contention that delay damages cannot be recovered from a surety. The Court found Pennsylvania state law cases refusing to hold a surety liable for delay damages to be unpersuasive, as the bond was issued under the Miller Act. Citing to decisions of the Eastern District of Pennsylvania, as well as decisions of the various Courts of Appeals, the Court held that delay damages should be viewed as compensation for the increased costs of labor, services and materials - items for which payment is guaranteed by a bond. Thus, the Court held that the purpose of the Miller Act would be maintained by allowing a Pioneer to seek delay damages from Great American.

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The District Court for the Eastern District of Kentucky held that a general contractor, who had performed excavation work on a site in accordance with the plans and specifications, could not be held liable for breach of contract as a matter of law, but could potentially be held liable to the owner for negligence if the contractor breached the duty of care it owed the owner.

The dispute arose out of a project to construct a fast food restaurant. The plaintiff, Charter Foods, Inc., leased an undeveloped commercial lot in Kentucky with plans to construct and operate a Taco Bell restaurant on the lot. Before signing the lease, Charter Foods determined that the site was suitable for construction and hired an architect to develop the plans. The plans included specifications for the excavation work. Charter Foods did not consult any construction experts to verify the site’s suitability for excavation and did not investigate the stability of the adjacent property before leasing the lot. Charter Foods then hired a general contractor, Derek Engineering, to construct the project. In turn, Derek Engineering hired a subcontractor to prepare the site and perform the excavation work. Neither the general contractor nor the subcontractor were involved in the development of the site plan or engineering.

A few days after the commencement of the excavation work on the site, Charter Foods directed the general contractor to stop all excavation work because soil on the adjacent lot had shifted several feet. The parties disputed when the general contractor discovered that the hillside on the adjacent lot was unstable and how much work was done before and after the instability was discovered. There was evidence that the general contractor gave the owner advice at the outset of the project that the project could be built within the site. There was also evidence that the general contractor continued the excavation work after it first learned that the stake marking the corner of the adjacent lot had shifted. The parties did not dispute that all excavation work was performed in accordance with the plans and specifications.

After directing the contractor to stop, Charter Foods decided not to construct the project and sought to cancel it lease. After settling its dispute with its landlord, Charter Foods sued its general contractor and the subcontractor for negligence and breach of contract relating to excavation work. Charter Foods sought to recover damages it incurred to secure the release of its obligations under its lease, expenses incurred in preparing the site for construction and lost profits from the anticipated operation of the restaurant. The contractor brought cross claims against its subcontractor for breach of contract and indemnity. The contractor and subcontractor moved for summary judgment against Charter Foods, challenging the claims of negligence and breach of contract..

The District Court denied the contractor’s motion for summary judgment challenging the owner’s claim for negligence against the general contractor. In order to prove negligence, a party must prove (1) the existence of a duty, (2) breach thereof, (3) causation, and (4) injury. The District Court held that as a matter of law the general contractor owed a duty to the owner, which at a minimum would create a duty for the general contractor to prevent foreseeable damage to the property. Concerning the other elements of the claim – breach, causation and damages -the Court held that the facts were disputed so that it could not rule as a matter of law against the owner.

Specifically, the Court found that even though all work was constructed in accordance with the plans and specifications, the general contractor may have continued the work even after it learned that the adjacent site was unstable and may also have advised the owner that instability would not be a problem. Furthermore, there was evidence that the general contractor may have told the owner that the restaurant could be built at the site even though the Department of Transportation had denied the owner a 10 foot right of way. Thus, the Court found that there were facts suggesting that the contractor may have breached its duty of care owed to the owner. The Court also found that there were material questions of fact as to whether the contractor’s actions caused the injury suffered by the owner (causation). Finally, the Court noted that there was evidence of damages suffered by the owner.

The Court, however, granted the contractor’s summary judgment motion as it related to the owner’s breach of contract claim. The Court found that the parties agreed that the work was done in accordance with the plans and specifications, thus there could be no breach of contract. The Court also granted the subcontractor’s summary judgment motion, dismissing the owner’s negligence claim against the subcontractor. The Court found that none of the evidence supporting the owner’s potential claim for negligence against the contractor involved the actions or statements of the subcontractor or its employees.

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The Court held that a properly terminated subcontractor was nevertheless entitled to payment for contract work and extras performed prior to termination, less certain offsets for contractor’s damages. Subcontractor was also entitled to interest at 1% per month under a prompt payment statute, but because it was properly terminated was not entitled to lost profit on the terminated portion of the subcontract.

On March 15, 2004, the United States General Services Administration (“the GSA”) awarded the contract for the renovation of the Moorhead Federal Building in Pittsburgh, Pennsylvania to Burchick Construction Company (“Burchick”). Asbestos abatement was the most critical activity to the project schedule as other work could not proceed until it was completed, and to accommodate this situation, the project was divided into five phases spanning nearly five years. The GSA also retained URS Corporation (“URS”) to act as its agent and construction manager on the project. URS was responsible for the day to day inspection of the asbestos work.

Burchick let a contract for all of the asbestos abatement with Greenmoor, Inc. (“Greenmoor”), a licensed asbestos abatement contractor. The subcontract agreement called for Greenmoor to perform all its work “in a manner consistent with the highest generally accepted level of skill and care,” and to “perform all work…in strict accordance and full compliance with the terms of this Subcontract, and to the satisfaction of the Contractor and Owner.” Because URS was acting as the GSA’s construction manager and agent under GSAR 552.236-71(a), this term obligated Greenmoor to follow URS’s instructions and directives. Furthermore, the contract gave Burchick the right to terminate the agreement “at any time” for failure to “comply with all provisions of the Subcontract” or for default.

Burchick requested that Greenmoor obtain a bond for the entire project, but it was unable to do so. Ultimately, Greenmoor’s surety agreed to bond Phases 1 through 3 at the outset of the project, and to then bond Phases 4 and 5 when the first three phases were complete. As a result, Burchick also required Greenmoor to set up an escrow account to ensure that Greenmoor would eventually produce the requisite bonds. The agreement called for the funds to be released as soon as the bonds were produced. When the bonds were eventually produced, however, Burchick refused to accept them or to pay any monies from the escrow account claiming that the agreement had already been terminated.

Burchick’s refusal arose as a result of a dispute that began at or around the completion of Phase 1. Although Greenmoor’s work passed inspection and was certified by the Allegheny County Health Department, URS observed various deficiencies and it brought these problems to Burchick’s attention. URS discovered additional deficiencies during the attempted clean-up, citing recurring failures to meet the required standards of care, lack of supervision, and failure to follow its directives. Eventually, Burchick lost confidence in Greenmoor’s ability to remedy the defects in its performance, and it exercised its right to terminate the subcontract agreement. Greenmoor was than replaced by another subcontractor, but for a short time when a temporary injunction ordering its reinstatement was granted by the Court of Common Pleas.

After the grant of the preliminary injunction was reversed, Burchick reinstated its earlier termination of Greenmoor. Greenmoor then filed this breach of contract action alleging three general categories of damages: 1) payments it contended it was owed for work completed under the subcontract; 2) lost profits on those portions of the project it contended it was wrongfully precluded from performing; and 3) costs associated with labor inefficiencies allegedly caused by Burchick and URS. The first category of damages was further broken down into three subcategories including: 1) payments due under the Escrow Agreement before it was terminated; 2) payments due on unpaid payment applications; and 3) payments for backcharges and extra work. For each of the damages it claimed, Greenmoor also sought interest under Pennsylvania’s Contract and Subcontractor Payment Act (“CSPA”), which provides for strict payment deadlines and penalties on construction projects.

The Court concluded that Greenmoor failed to perform it obligations in the manner required by the Subcontract Agreement, and it was therefore in material breach. Further, the breach was substantial enough to justify termination, a result that was supported by explicit contract language permitting termination for default if “at any time” Burchick felt that Greenmoor did not comply with the agreement. Nonetheless, the Court also found that Burchick breached the Escrow Agreement by failing to release the escrowed funds to Greenmoor upon timely receipt of the bonds for Phases 4 and 5.

The Court also concluded that Greenmoor was entitled to some of the damages it claimed. Furthermore, even though Greenmoor had been rightfully terminated, it was still entitled to CSPA interest on some of the payments that Burchick wrongfully withheld prior to termination. First, Greenmoor was entitled to the entire escrow balance with CSPA interest accruing from the time the amounts were due and owing. Next, the court awarded damages for unpaid payment application amounts that Burchick admitted were due and owing. CSPA interest was also added to these claims accruing from the time when the applications should have been paid. Finally, the Court awarded damages, including CSPA interest, for change orders and backcharges where it determined that the work done was truly outside Greenmoor’s original scope of work. However, the court refused to award any damages for lost profits or labor inefficiencies because of its determination that the contract was rightfully terminated.

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The Commonwealth Court of Pennsylvania considered whether the Pennsylvania Procurement Code provides the exclusive remedy for aggrieved bidders to challenge the procedure and outcome of bidding contests in the context of a procurement for the Pennsylvania Lottery. The Court found that while the Procurement Code provides an exclusive remedy for substantive challenges (i.e., a general right of protest to an offeror who is aggrieved in connection with the solicitation or award of a contract), it did not provide a remedy for procedural challenges.   

In June 2007, the Pennsylvania Department of Revenue (the “Department”) issued a Request for Proposals to provide equipment and services for the Pennsylvania Lottery.  Proposals were submitted by Scientific Games International, Inc. (“SGI”), the incumbent vendor, and GTECH Corporation (“GTECH”).  Initially, the Department announced its selection of GTECH. Later, however, the Department solicited best and final offers from both GTECH and SGI, upon receipt of which the Department announced it had selected SGI instead of GTECH for the contract.  

GTECH filed a bid protest and demanded that the Department stay contract negotiations with SGI pursuant to the Procurement Code.  The Department, however, found the bid protest to be premature, alleging that the Procurement Code did not require action until a contract had actually been awarded.  It was not until over four months later, when the terms of the contract with SGI were reached, that the Department activated GTECH’s bid protest.  Still, the Department refused to stay execution of its contract with SGI pending resolution of GTECH’s protest, claiming that because its prior contract with SGI had expired, it was necessary to award the new contract without delay to protect the substantial interests of the Commonwealth.  At the bid protest proceeding, an impartial hearing officer denied GTECH’s protest, to which GTECH appealed in a separate action. 

Thereafter, GTECH Corporation brought an action against SGI and the Department, seeking, among other things, declaratory and injunctive relief to enjoin implementation of their contract.  GTECH’s action consisted of:  (1) a substantive challenge to the selection of SGI as the winning offeror, and (2) a procedural challenge to the Department’s handling of GTECH’s protest.   The Department and SGI filed preliminary objections to GTECH’s claims, contending that GTECH’s exclusive remedy was the bid protest proceeding set forth in the Procurement Code, not an original jurisdiction action such as the one filed in the case at hand.  

The Court turned to the Procurement Code to determine whether it had jurisdiction to hear GTECH’s claims.  First, with respect to GTECH’s substantive challenges, the Court agreed that GTECH’s exclusive remedy was the bid protest proceeding in the Procurement Code.  Where the aggrieved bidder is unhappy with the outcome of such bid protest proceeding, only then, upon a final determination denying a protest, may the aggrieved bidder appeal the determination to the Commonwealth Court.  Accordingly, because GTECH had already availed itself of the protest remedy and the Department’s designated hearing officer had subsequently issued a final determination denying GTECH’s protest, GTECH’s remedy was to appeal the Department’s final determination to the Commonwealth Court, which it had done pursuant to a separate action.  As such, the Court sustained the preliminary objections and dismissed GTECH’s claims to the extent they attempted to challenge the Department’s selection of SGI. 

Next, the Court turned to GTECH’s procedural challenges.  The Court found that, unlike substantive challenges, the protest provisions in the Procurement Code do not address how a party aggrieved by the process of a protest (not just the result) may seek redress.  The Court agreed that GTECH was aggrieved by the process when the Department refused to take immediate action on GTECH’s bid protest and to stay contract negotiations with SGI.  The Department’s refusal was improper under Section 1711.1(k) of the Procurement Code, which requires a stay of the procurement proceeding upon filing of a protest “unless and until the head of the purchasing agency … makes a written determination that the protest is clearly without merit or that award of the contract without delay is necessary to protect substantial interests of the Commonwealth.” Although the Department had attempted to invoke the exception, the GTECH Court held that the Department could not invoke the exception when its own violation of the Procurement Code, i.e., its failure to act promptly on the bid protest, had caused the need for the exception.  Thus the Court denied the preliminary objections with respect to GTECH’s procedural challenges.  

Plaintiff, Hunt Construction Group (“Hunt”), commenced an action against one of its subcontractors, National Wrecking Corporation (“National”) and against two sureties (the “Sureties”) on National’s performance bond. The Sureties argued that Hunt failed to give timely notice of default depriving the Sureties of a realistic opportunity to exercise their rights under the bond to cure National’s defective performance.

Hunt contracted with National to perform certain excavation work for construction of an Embassy Suites Hotel in Washington, D.C. National agreed to complete the work by February 12, 2004. At around the time the work was to be completed, Hunt learned that the work would be delayed because, Hunt alleged, National was understaffed and failed to keep pace with the construction schedule. Hunt incurred additional expenses in accelerating other trades to meet the overall project deadline. National completed its work, almost two months later, on April 6, 2004.

Hunt sued National for breach of contract and sued the Sureties for damages under the performance bond. Although Hunt knew that National’s work would be delayed in February 2004, it neither declared National in default nor notified the sureties that it believed National’s delays constituted a default under the subcontract. Instead, Hunt, without consulting the Sureties, chose to use other subcontractors to make up for National’s failed performance. Not until July 13, 2004, more than three months after National’s work was completed, did Hunt declare National in default and notify the Sureties of its potential claim.

The performance bond incorporates the AIA A311 language providing that: “Whenever Principal [National] shall be, and be declared by Obligee [Hunt] to be in default under the Subcontract, the Obligee [Hunt] having performed Obligee’s [Hunt’s] obligations thereunder: (1) Surety may promptly remedy the default…or (2) Obligee [Hunt] after reasonable notice to Surety may, or Surety upon demand of Obligee [Hunt], may arrange for the performance of Principal’s obligation under the subcontract.”

Hunt argued that the A311 language does not require notice as a condition precedent, such that lack of notice would bar recovery under the Bond, but rather that the obligation to give notice was a covenant such that the sureties would have to prove a breach and quantify their damages from the breach. The Court reasoned that the provisions of the performance bond that create the condition are “nonsensical without an understanding that the surety’s duties depend on the obligee’s declaring the principal to be in default and giving notice of the declaration to the principal and the surety.” The Court explained that should Hunt as obligee not be required to give notice to the surety, the explicit grant to the surety of the right to cure would become meaningless.

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