March, 2010

CSI Engineering, DC, P.C. (“CSI”) entered into a contract with a division of the U.S. Department of Labor to act as the general contractor for one of its construction projects. In turn, CSI subcontracted a portion of the work to A.A. Bellucci (“Bellucci”). The contract between CSI and Bellucci required mediation and arbitration to resolve disputes between them. To secure payment to all of its subcontractors, including Bellucci, CSI furnished Miller Act payment bonds from United States Surety Company (“Surety”) and U.S. Specialty Insurance Company (“Speciality”).

In August 2009, Bellucci initiated mediation proceedings with CSI in an attempt to recover $128,422 allegedly owed to it for work performed on the project. Before the scheduled date of the mediation, Bellucci also filed suit against Surety and Specialty in the United States District Court for the Middle District of Pennsylvania. In the lawsuit, Bellucci sought recovery on the payment bonds for the amounts allegedly owed to it by CSI.

Surety and Specialty filed a motion to stay the litigation pending the outcome of the contractually mandated mediation/arbitration proceedings between Bellucci and CSI. Surety and Specialty admitted that they would be bound by the outcome of any arbitration between CSI and Bellucci, and accordingly argued that postponing the litigation until such outcome would avoid the time and expense of potentially litigating the same issue twice.

The Court relied on a similar case out of the Western District of Pennsylvania for guidance. There, the subcontractor had likewise sued the surety under the Miller Act for payment on a bond issued to the general contractor. In that case, however, the sureties had not stipulated that they would be bound by the outcome of the arbitration. Accordingly, the subcontractor there was concerned that later the surety would argue it was not bound by the arbitration decision, and accordingly be required to litigate the same issues twice. Nevertheless, the Court for the Western District granted the stay pending outcome of the arbitration between the general contractor and subcontractor. The Western District held that although there was no controlling case law, the majority view among other circuits and the direction of the Third Circuit, was that an arbitrator’s decision is generally binding against a surety in a Miller Act case under certain circumstances.

Relying on that case, the Court for the Middle District granted the stay. The Court reasoned that staying the litigation would avoid unnecessary expense in litigating the same issue twice and would avoid inconsistent results. Moreover, here, unlike the Western District case, there was no concern that the sureties would later argue that they were not bound by the outcome of the arbitration. Finally, although the sureties had not stipulated to be bound by the outcome of mediation, the Court reasoned that there was no concern that mediation would unduly delay the litigation, since mediation was already under way.

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The United States Court of Appeals for the Sixth Circuit recently held that where a contractor’s defective foundation work required complete demolition and rebuilding of project that the defective work exclusion of commercial general liability policy did not preclude coverage for destruction of portions of the building not defectively constructed.

Frisch’s Restaurants, Inc. (“Frisch”) contracted with general contractor Fortney & Weygant, Inc. (“Fortney”) to build a restaurant. When the building was almost complete, soil shifted around the foundations, which broke an underground utility line. Upon examination, Frisch’s determined that the foundation Fortney had built was defective. To correct the defect, the entire structure had to be demolish and rebuilt.

Frisch filed suit against Fortney to recovery costs of replacement. The architect filed suit as well in a separate litigation. Fortney tendered its defense to its insurer, AMICO, who refused to defend or indemnify Fortney due to a policy exclusion for defective workmanship that stated insurance does not apply to property damage to “that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”

The district court granted AMICO’s motion on the pleadings finding that the exclusion applied and denied Fortney’s motion for summary judgment seeking a declaration of coverage, but the Court of Appeals reversed. Since the issue has not been addressed in the Sixth Circuit, the Court adopted the Fifth Circuit’s reasoning. In holding that AMICO had a duty to defend Fortney, the Court held that the exclusion applied only to the cost of repairing or replacing distinct component parts on which the insured performed defective work. The plain meaning of the CGL exclusion excluded only the property that the insurer performed defective work on. In this instance, the exclusion only applied to the building’s foundation.

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Grasso Holding Acquisition, Inc. (“Grasso”) entered into a lease with Del-Frisco’s of Philadelphia (“Del-Frisco’s”) to occupy and renovate the bottom floors of the Packard Building in Philadelphia, PA for use as a restaurant. Building owners, Chest-Pac Associates, Inc. (“Chest-Pac”) and Grasso, reserved the right to review and approve the designs for the renovation. Once the lease expired, the renovation improvements were to become the sole property of Chest-Pac and Grasso. After negotiating the lease, Del-Frisco’s contracted with Lorient, LLC to serve as the general contractor for the renovations. Lorient then subcontracted with Plaintiff, Goldsmith Associates, Inc. (“Goldsmith”) to provide the electrical work. Goldsmith submitted invoices in the amount of $1,835,110.87 but was allegedly only paid $734,879.30. Goldsmith commenced an action against Del Frisco’s, Chest-Pac and Grasso, asserting a claim of unjust enrichment, and seeking to recover $1,100,231.57 in unpaid work. The defendants moved to dismiss the Complaint as legally insufficient.

In analyzing the defendants’ motion to dismiss, the Court recognized that, to state a claim for unjust enrichment, a plaintiff must plead the following elements: (1) benefits conferred on defendant by plaintiff; (2) appreciation of such benefits by defendant; and (3) acceptance and retention of such benefits under such circumstances that it would be inequitable for defendant to retain the benefit without the payment of value. In particular, with respect to an unjust enrichment claim by a subcontractor against an owner, the Court recognized that the Pennsylvania Supreme Court’s decision in D.A. Hill v. Clevetrust, 573 A.2d 1005 (Pa. 1990), requires a subcontractor to demonstrate that: (1) the owner requested the benefit or (2) the owner misled the subcontractor. The Court noted that “a contrary rule allowing subcontractors to recover directly from owners in other circumstances would destroy the balance of contractual relationships in the construction industry and reverse public policy of Pennsylvania as articulated by the Supreme Court.”

In support of its unjust enrichment claim, Goldsmith simply averred that defendants’ retention of the benefits Goldsmith provided would be unjust. The Court noted that, although the conferral of a benefit is a necessary condition of a valid unjust enrichment claim, the doctrine does not apply simply because the defendant may have benefitted as a result of the plaintiff’s actions. Rather, a subcontractor must allege facts showing that the owners specifically requested the benefits or misled the subcontractor. Because Goldsmith did not plead such facts, but instead “nakedly asserted” that defendants’ retention of the benefits would be “unjust”, the Court dismissed Goldsmith’s complaint as legally insufficient.

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Plaintiff, Addicks Services, Inc. (“Addicks”) sought damages for extra work and delay costs incurred while performing land improvement work for a residential development in Texas. Addicks’ claims were denied by the district court because Addicks executed monthly waivers and releases to receive progress payments which waived their claims for extra work and delay costs.

Addicks performed execution and grading work on a 500-acre site in Texas in preparation for construction of a residential development. Addicks and GGP-Bridgeland (“Owner”) executed a Standard Form of Agreement Between Owner and Contractor (the “Contract”). The Contract governed payment to Addicks and provided that Addicks would perform the work for $4,582,721 (later increased to $6,110,774 through executed change orders), and also provided for monthly progress payments. To receive a progress payments, the Contract provided that Addicks was required to submit a written application detailing the work performed to date accompanied by an executed lien waiver that would release Addick’s mechanic’s and materialman’s lien on the project. The “Waiver and Release of Lien upon Progress Payment” (the “Interim Waiver”) provided, in relevant part:

“[Addicks] in consideration for the sum of …, hereby waives and releases its lien and right to claim a lien for labor, services, or materials furnished through (date of this waiver)... [t]his waiver and release does not cover any retention or labor, service or materials furnished after the date specified… [t]his Waiver constitutes a representation by [Addicks] that the payment referenced above, once received, constitutes full and complete payment for all work performed, and all costs or expenses incurred …except for the payment of retainage.”

Addicks also “specifically waive[d], quitclaim[ed] and release[d] any claim for damages due to delay, hindrance, interference, acceleration, inefficiencies or extra work, or any other claim of any kind it may have against [Owner]…”

Although each Interim Waiver contained a blank space in which Addicks could have excepted outstanding claims from the scope of the release, Addicks never excepted any claims. Further, Addicks attested, at the bottom of each Interim Waiver, that payment was received and was deemed paid in full as of the date of the Interim Waiver. The Court of Appeals held the executed Interim Waivers operated to release all of Addicks’ outstanding claims, except for retainage payments, with the progress payment serving as the consideration for the overall release.

In granting Owner’s motion for summary judgment, the Court found the language of the Interim Waivers unambiguous in releasing Addicks’ claims. The Court also found no merit with respect to Addicks’ additional theories, waiver and promissory estoppel, in support of its extra work and delay claims.

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Plaintiff, Bell BCI Company (Bell), a general contractor, sued the United States (the “Government”) for damages plus interest under the Contract Disputes Act for the unpaid balance of the contract price, unresolved change order claims, delay damages, labor inefficiency costs and profit thereon. Bell also asserted claims on behalf of five subcontractors.

Bell contracted with Government to construct a laboratory building for the National Institute of Health (the “Agency”). After 9 months of construction, the Agency added a new floor, issued over 200 modifications that delayed completion by 19 ½ months and increased the price by 34 percent or $21.4 million. To govern the contractual changes, the parties entered into Modification 93 on October 2, 2000, which included a price increase to pay for the new floor, and set forth a revised completion date, fourteen substantial completion milestones, and a liquidated damages clause for delay. Modification 93 contained release language providing that “[t]his modification provides full compensation for the changed work, including both Contract cost and Contract time. The Contractor hereby releases the Government from any and all liability under the Contract for further equitable adjustment attributable to the Modification.” Subsequent modifications for changes also included this same release language. Shortly after Bell completed construction, Bell asserted an impact claim for the cumulative effect of the changes on Bell’s overall performance and asserted pass-through impact claims on behalf of five of its subcontractors. The Government denied liability based on the defense of accord and satisfaction and claimed that Bell was liable for $447,678 in liquidated damages for failing to complete the project on time.

The United States Court of Federal Claims found for Bell in all regards and awarded Bell $2 million for inefficiency costs attributable to the cumulative impact of changes; $1.6 million for delays remaining on the Project after April 30, 2001 (the revised substantial completion date taking into account all extensions); $366,000 for profit on the delay and labor inefficiency costs; $563,000 as the unpaid contract balance; and $1.6 million for unresolved changes not included in any prior change order.

On appeal, the Court of Appeals found that while it agreed with the trial court’s finding that Bell suffered a cumulative impact, the issue was whether Bell had released the Government from liability for that impact by virtue of the release language in the modifications. The trial court determined that the release language in the modification was ambiguous and considered parole evidence to conclude that there was no meeting of the minds, and thus there could not be accord and satisfaction. The Court of Appeals held that parole evidence could not be considered because the language of the modification was unambiguous. The Court of Appeals concluded that the language of the modification plainly stated that Bell released the Government from any and all liability for equitable adjustments attributable to Modification 93. The Court of Appeals also concluded that adequate consideration was provided for Bell’s release as the Government paid Bell over $2 million. The Court of Appeals remanded to the Court of Federal Claims for a determination of which of Bell’s cumulative impact claims, if any, are “attributable to” modifications other than those modifications that contain the release language.

The Court of Appeals also concluded that the release language in Modification 93 released the Government from any liability for Bell’s delay claims. The Court of Appeals remanded to the Court of Federal Claims to determine which delays, if any, are “attributable to” modifications other than those modifications that contain the release language. Having remanded Bell’s cumulative impact and delay claim, the Court of Appeals also vacated the trial court’s award of 10% profits on those claims.

The Court of Appeals affirmed the Court of Federal Claims’ methodology of calculating delays and damages, the award of the balance of the contract price, the extra work orders that were not incorporated into any modification, the award to a subcontractor, and the decision to deny the Government liquidated damages.

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The United States District Court for the Eastern District of New York (“EDNY”) recently considered whether a surety could maintain a breach of contract claim against a construction project owner’s architect based upon the architect’s alleged wrongful certification of payments occurring prior to the execution of a takeover agreement. In rendering its opinion, the EDNY concluded that expert opinions were not required where the claim sounded in contract, rather than in tort. The EDNY also found that summary judgment was defeated because there remained genuine issues of material fact as to the extent of the architect’s scope of construction phase services and whether the architect failed to satisfy its construction phase service obligations.

The matter before the EDNY involved the construction of the Payton Lane Nursing Home in Southampton, New York (the “Project”). The Project owner, Payton Lane Nursing Home, Inc. (the “Owner”) hired defendant Perkins Eastman Architects, P.C. (the “Architect”) to provide architectural services for the Project. Perkins’ architectural services were divided into two phases – design phase services and construction administration services. Among other things, the Architect was responsible for making observations at the Project site and evaluating the contractor’s payment applications to determine the amount due to the contractor. As part of that process, the Architect was to issue Certificates for Payment and report all observed deviations from the contract documents.

The Owner also contracted with IDI Construction Company, Inc. (“IDI”) to provide general construction services. During the Project, the Owner terminated IDI and demanded that IDI’s sureties, American Manufacturers Mutual Insurance Company and American Motorists Insurance Company (the “Sureties”), satisfy the performance bond relative to the Project. As a result, a takeover agreement was entered into between the Sureties and the Owner. The Sureties retained and entered into an agreement with a completion contractor to complete the Project.

Following its commencement of work on the Project, the completion contractor identified numerous construction defects which were not identified by the Architect in its payment application review process. The Sureties argued that the items found to be defective had been certified by the Architect as complete during the payment application review process and payment had been issued to IDI for the same. As a result of these alleged deficiencies by IDI and in the Architect’s certification of payment, the Sureties filed a lawsuit against the Architect. The Sureties alleged, among other things, a breach of contract claim based upon the contract between the Architect and the Owner. The Sureties argued that the Architect failed to fulfill its contractual obligations to the Owner for construction administration phase services and that the Sureties were subrogated to the rights of the Owner.

The Architect moved for summary judgment seeking dismissal of the Sureties’ claim for breach of contract. The Architect argued that (a) there was no expert proof in support of Sureties’ claim; (b) there was no evidence of breach on the part of the Architect; (c) the Architect’s certifications of payment were subject to certain conditions; and (d) the Owner did not suffer any damages.

With respect to the Architect’s first point, the EDNY concluded that because the Sureties’ claim was one for breach of contract, and not for professional architectural malpractice, expert testimony was not required. The EDNY explained that the Architect’s construction administration phase services were expressly identified in and governed by the contract. Based upon that fact and the absence in the complaint of allegations by the Sureties of malpractice or negligence, the EDNY declined to construe the Sureties’ claim as one for architectural malpractice requiring expert testimony.

The EDNY next considered the Architect’s second point in favor of its motion for summary judgment. The Architect argued that the agreement between the Architect and the Owner contained limits of its construction phase services, which terms were similar to that found in the AIA architectural services form agreements. The Sureties argued, however, that because this was HUD-funded project, the Architect was also bound by a HUD-issued handbook pertaining to architectural analysis and inspections. After reviewing the parties’ moving and opposition papers, the EDNY found that there existed material issues of fact as to the Architect’s scope of work for construction administration phase services. The EDNY further opined that there remained genuine issues of material fact in dispute with respect to whether the steps taken by the Architect during the Project fulfilled its contractual obligations. Because there remained material issues of fact in dispute, the EDNY concluded that the matter was not ripe for summary judgment.

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The Court held that the consent of surety submitted by Nova Crete, Inc. (“Nova Crete”) did not comply with the bid specifications provided by the City of Elizabeth because its issuance was conditioned on an event other than the award of the contract to Nova Crete, and it therefore did not comply with the applicable New Jersey statute. Furthermore, this defect was material and could not be waived or cured. As a result, Elizabeth properly determined that Nova Crete was not the lowest responsible bidder on the project.

Elizabeth publicly solicited bids for the Elizabeth Avenue Streetscape Enhancement Construction Project (the “project”). Each bidder received a packet of information stating that “[e]ach bidder must submit with his bid a certificate from a responsible surety company stating that the said surety company will provide, in the event that he should be the successful bidder, a surety bond in the amount of one hundred (100%) of the contracted price.” The bid package also advised all bidders that, pursuant to N.J.S.A. 40A:11-22, the submission of the certificate from a surety company was mandatory, and that the failure to submit same may be cause for the bid to be rejected.

Elizabeth received nine bids. Nova Crete’s was the lowest; JOGI Construction, Inc.’s (JOGI’s) was the second lowest. However, Nova Crete’s bid failed to provide an unconditional consent of surety, which was a material defect. Specifically, it stated that the surety “hereby consents and agrees that if the Contract for [the project] be awarded to Nova Crete…the undersigned surety agrees…to execute the final bond as required by the specifications and to become surety…provided we are requested by [Nova Crete.]” The bid was deemed nonresponsive and rejected, and the contract was awarded to JOGI.

Nova Crete filed a complaint seeking temporary injunctive relief and an order awarding it the contract. The judge entered the temporary restraints and set the matter down for a hearing. After the hearing, the judge entered an order permanently enjoining Elizabeth and JOGI from proceeding under the contract, but he denied Nova’s Crete’s request to rescind the JOGI contract and award it to Nova Crete.

JOGI sought reconsideration. It argued that Nova Crete’s consent of surety was not unconditional, thus making the bid nonresponsive. Nova Crete countered that the judge had properly determined that the consent of surety was acceptable, that its bid was fully responsive, and that it was the lowest responsible bidder.

On appeal, the decision of the lower court was reversed. The Court first noted that public contracts must be awarded “to the lowest bidder that complies with the substantive and procedural requirements in the bid advertisements and specifications. Any material departure invalidates a nonconforming bid as well as any contract based upon it.” In this case, Nova Crete did not provide the proper consent of surety, which gives the local government some assurance at the time of the bid submission that the low bidder will have the capacity to perform the contract and that the surety would issue the required performance bond. This requirement has always been deemed non-waivable, even before the enactment of N.J.S.A. 40A:11. If it were not, the stability of the public-bidding process would be threatened because successful bidders who did not provide an unconditional consent of surety could unilaterally cancel the award by failing to obtain the bond after the fact. The court concluded that because the certificate submitted with Nova Crete’s bid was conditioned upon a further request by Nova Crete to the surety, it did not meet the specifications, and it was an invitation to further litigation if the bond was not issued over whether the issuance of the bond was properly requested. Therefore, the contract was properly awarded to JOGI, as the lowest responsive bidder.

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S&B/BIBB Hines PB3 Joint Venture, S&B Engineers and Contractors, LTD (“S&B) agreed to perform engineering, procurement and construction on a fixed-price basis (the “Contract”) for two electric generating plants in Polk County for the project owner and defendant, Project Energy Florida, Inc. (“Project Energy”). During the course of construction, four hurricanes struck Polk County resulting in a shortage of labor and materials and a corresponding increase in the cost of construction for S&B. S&B sought approximately $40 million in additional compensation as a result of this extraordinary event. S&B’s claim for additional compensation was denied by Project Energy and S&B filed suit. The district court dismissed the majority of S&B’s breach of contract and other claims on a Rule 12(b)(6) motion holding that the fixed price Contract precluded additional compensation beyond the Contract price.

On appeal, the Circuit Court affirmed the decision. S&B argued that despite the fixe-price nature of the Contract, the fixed price does not include S&B’s costs incurred due to unforeseeable force majeure events. The Contract’s force majeure provision, however, limited the contractor’s relief for delay resulting from a force majeure event to an extension of time, providing:

Should contractor be delayed in the commencement, performance or completion of the Work due to any of the conditions provided for under Section 37B, Force Majeure, Contractor shall be entitled to an extension of time only, provided however, that in no event shall Contractor be entitled to any increased costs, additional compensation, or damages of any type resulting from such Force Majeure delays, upon the conditions as permitted and provided for under Section 37B. Contractor shall use all reasonable means to minimize the extent of any interference, disruption, hindrance, or delay as aforesaid and to mitigate any and all costs from or related to any such cause or occurrence.

[emphasis added by Court]

S&B interpreted the provision to impose an express obligation on S&B to mitigate costs related to a Force Majeure event and a corresponding implied obligation on Project Energy to compensate S&B for any costs it incurred in responding to a Force Majeure event. The Court disagreed, finding the provision to “unambiguously foreclose the recovery of additional compensation for costs incurred due to Force majeure events…”. The Contract further provided that the “Contractor’s sole and exclusive remedy for a Force Majeure event is an extension of time. Under no circumstances whatsoever shall Contractor be entitled to compensation as the result of a Force Majeure event.” [emphasis added by Court]. The Court concluded that no “natural reading” of the S&B’s obligation to mitigate costs in the event of a Force Majeure event implicitly required Project Energy to reimburse S&B for non-delay costs. Further, a plain reading of the Contract as a whole indicated that the parties “intended to include all labor and materials costs in the firm, fixed price, even those arising from Force Majeure events.” In sum, the Court found that Project Energy had no contractual obligation to compensate S&B above the Contract price.

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