May, 2010

The Supreme Court of Wyoming recently reexamined its prior ruling barring a contractor’s assertion of negligence claims against design professionals economic loss rule.

The case pertained to a construction project for the replacement and improvement of water and sewer lines in the Town of Lovell, Wyoming.  The Town of Lovell entered into an engineering services agreement with HKM Engineering, Inc.  The Town also entered into a construction agreement with Excel Construction, Inc.  No contract existed between HKM and Excel.

Excel initially filed suit against the Owner for alleged unpaid contract amounts and extra work.  The Owner counterclaimed for damages arising from Excel’s alleged breaches.  Excel later joined HKM, asserting tort claims of misrepresentation, breach of a duty of good faith and fair dealing, intentional interference with contractual relationship, and negligence.

Excel alleged that it raised concerns to HKM during the Project that the amount of backfill called for in the specifications was insufficient.  HKM directed Excel to purchase the additional backfill and bill for the same at the end of the month rather than wait for a change order.  Excel was not paid for the additional backfill.  Excel further alleged that HKM released Excel from the Project pending completion of minor remaining work, but then attempted to assess liquidated damages for the period of time between Excel’s release and the time Excel returned to complete some minor work.  Excel further claimed that HKM improperly withheld certification of substantial completion which resulted in Excel’s retainage being withheld. 

HKM filed a motion to dismiss Excel’s claims.  HKM argued that Excel’s claims were barred by the economic loss rule as set forth in Rissler & McMurry Co. v. Sheridan Area Water Supply Joint Power Bd., 929 P.2d 1228 (Wyo. 1996).  The trial court converted the motion to dismiss to one for summary judgment and, relying on Rissler & McMurry, granted the motion in HKM’s favor.  Excel appealed the decision to the Supreme Court of Wyoming.

On appeal, Excel argued that the Rissler & McMurry ruling should be modified to permit a general contractor to assert negligence and negligent misrepresentation claims against a design professional.  Excel pointed out that such claims have been permitted in other jurisdictions.  The Court explained that the Rissler & McMurry case stood for the proposition that the economic loss rule bars recovery of claims in tort where the damages are purely economic and are not accompanied by personal or property damage and that the purpose was to keep a distinction between contract and tort claims.  The Supreme Court noted that the Rissler & McMurry court reasoned that, based upon the contract at issue, the contractor had a right of action against the owner based in contract for recovery of economic damages arising from the design professional’s negligence. 

In declining to modifiy the Rissler & McMurry ruling, the Court observed that general contractors have the right to allocate economic risk associated with the work during contract negotiation.  The Supreme Court further opined that general contractors do not fall within a special class needing tort protections.  The Court noted that several jurisdictions such as Colorado, Utah, Virginia and Washington follow the same principle.  Accordingly, the Supreme Court affirmed the dismissal of the negligence claims against HKM because they involved HKM’s performance of contractual duties.

The Supreme Court next examined whether Excel’s claims for tortuous interference with contractual relationships and intentional misrepresentation could survive the economic loss rule on the basis that those claims arise from a duty independent of contractual obligations.  With respect to the tortuous interference claim, the Court concluded that Excel did not allege actions by HKM outside its contractual obligations.  Relying on the principle that one cannot be liable for contractual interference if the allegations are against it as an agent for a contracting party, the Court upheld the dismissal of the claims for intentional interference with contract. 

With respect to the misrepresentation claim, the Court acknowledged that claims for intentional misrepresentation are not on-their-face barred by the economic loss rule.  However, the Court concluded that Excel’s claim was really one for negligent, as opposed to intentional, misrepresentation, and was barred by the economic loss rule.

With respect to Excel’s claim of breach of the implied covenant of good faith and fair dealing, the Court first held that no duty existed between Excel and HKM based upon the fact that there was no direct contract between them.

The United States District Court for the Northern District of Ohio denied a contractor’s claims against a project’s lenders, where the contractor’s claims were based on the lender’s representations that the contractor would be paid.   

GEM Industrial was the mechanical contractor for the construction of an ethanol production plant owned by GOE Lima, LLC.  Due to budget overruns and cash flow problems, GOE fell behind on monthly payments to GEM.  Eventually, GOE requested that GEM enter into a formal payment deferral.  Before agreeing to the deferral, GEM asked to meet with representatives of the project’s debt and equity investors, SunTrust Bank and Paladin Homeland Security Fund, LP and Paladin Capital Group, LLC to confirm that sources of funding were available to pay construction costs.  GEM asserts that, during its calls with SunTrust and Paladin, representatives for both entities promised and assured GEM that it would be paid for both its already completed work and its work going forward on the plant.  After its calls with SunTrust and Paladin, GEM agreed to the payment deferral and continued to perform its mechanical work at the plant.   

The project continued to experience cash flow problems.  Although GEM was eventually paid by GOE for work performed before GEM’s calls with SunTrust and Paladin, GEM did not receive payment for work performed after those calls.  GEM sent payment demands to GOE, SunTrust and Paladin and eventually issued a stop work notice, halting its performance on the plant.  GOE filed for bankruptcy shortly thereafter.    

GEM eventually filed an action in the United States District Court for the Northern District of Ohio to recover $2.2 million for its work on the plant, asserting claims for breach of contract, promissory estoppel and negligent misrepresentation against SunTrust and Paladin.  The defendants moved for summary judgment, seeking to dismiss all of GEM’s claims.  

The Court first addressed GEM’s breach of contract claims.  GEM argued that it entered into oral contracts, or alternatively, implied-in-fact contracts with SunTrust and Paladin, based on the representations made by SunTrust and Paladin during its calls, and that SunTrust and Paladin breached the contracts by refusing to pay GEM for work performed at the ethanol plant.  SunTrust and Paladin disputed that they entered into enforceable contracts with GEM, arguing that the parties never agreed to the essential terms of a contract. 

The Court held that even construing the record in a light most favorable to GEM, the evidence was too vague to support the existence of an enforceable oral contract.  The Court reasoned that the parties had not agreed to the essential contract terms such as price, duration, or timing of the payments, which is required in order for there to be an oral contract.  The broad assertions by GEM of affirmatives promises made by SunTrust and Paladin were too indeterminate.  For example, the Court pointed to the fact that even if the terms of the GOE contract were incorporated as the essential terms of the contract between GEM and the lenders, there was no way to determine which party (GOE, SunTrust, or Paladin) was responsible for paying GEM in the first instance.  Further, it was unclear how many contracts there were as between all of the parties.  Such uncertainty about the identity of the parties to the contract and their relative obligations was fatal to GEM’s contract claim.  

The Court also found that GEM’s assertion that an implied-in-fact contract was formed suffered from the same difficulty as the oral contract claim: namely, that the alleged contract (or contracts) did not clearly delegate responsibility for payment among SunTrust, Paladin and GOE.  Further, the Court reasoned that the conduct and declarations of the parties, which is important in determining whether an implied-in-fact contract was formed, did not support GEM’s assertions.  To the contrary, the conduct of the parties pointed in the opposite direction.  GEM continued to send invoices to GOE for its work, and never sent any invoices or requested any payments from SunTrust or Paladin until GOE failed to pay.  

The Court next considered GEM’s claims for promissory estoppel and negligent misrepresentation.  With respect to GEM’s promissory estoppel claim, the Court held that there was no clear and ambiguous promise.  As to GEM’s negligent misrepresentation claim, GEM could not meet the false information element, which requires a representation as to past or existing facts, not promises or representations relating to future actions or conduct.  As the Court pointed out, GEM’s allegations of negligent misrepresentation focused on a promise of future conduct (that it would pay GEM in the future for its work going forward), rather than a false statement of existing fact.  Accordingly, the Court dismissed all of GEM’s claims against SunTrust and Paladin.

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The Court of Appeals of Kansas recently upheld a trial court’s decision to strictly enforce a written notification of differing site conditions provision in a construction contract. 

The matter before the Court of Appeals involved construction of a sanitary sewer line in Southern Johnson County, Kansas.  Defendant the Johnson County Board of County Commissioners contracted Plaintiff Razorback Contractors of Kansas, Inc., the successful bidder on the Project, to provide construction services in connection with the Project. 

The contract between the parties contained a provision requiring written notification of differing site conditions.  That provision required Razorback to provide the project engineer written notice of its claim for extra compensation due to differing site conditions within 30 days after the start of the event giving rise to the claim.  The notice provision further required Razorback to provide the project engineer with the amount of the claim along with supporting data within 60 days after the start of the event giving rise to the claim.

According to Razorback, it first reported that it had encountered unanticipated water conditions, during a September 2004 progress meeting.  Razorback alleged that it continued to report unanticipated conditions on several later occasions, including at December 2004 and January 2005 progress meetings, in a letter dated February 2005, and in a June 2005 formal written request to increase the contract price based upon differing conditions.

On July 5, 2005, Johnson County Wastewater denied Razorback’s June 2005 formal written request to increase the contract price, stating that Razorback failed to provide the required written notice of differing conditions within the time specified in the contract.  As a result, Razorback sued the Board for breach of contract.  When the Board moved for summary judgment, the trial court granted that motion, finding that Razorback failed to comply with the notice requirements of the contract.  Razorback then appealed that decision.

The Court of Appeals upheld the ruling, stating that the Board was entitled to notice in accordance with the provisions of the contract that the parties freely and voluntarily entered into.  According to the court, Razorback failed to comply with those provisions.  It did not provide formal written notice of the changed conditions or of its intent to seek additional compensation, until June 2005, approximately 9 months after the wet conditions were first encountered.  In support of its holding, the Court of Appeals citied to other states (New York, Connecticut, Indiana, Washington, Wyoming, Iowa, and Ohio), all of which, applying their own state contract laws, have strictly construed similar written notice provisions.

In reaching its decision, the Court of Appeals addressed several arguments raised by Razorback.  First, it determined that federal common law did not apply because no federal interest existed to justify applying it to this state court proceeding.  Second, it found that substantial performance does not alleviate a party’s obligation to comply with formal notice requirements because parties are free to contract for any type of notice that they desire.  Finally, the Court of Appeals determined that the Board did not waive its right to timely notice of a claim for additional compensation by extending Razorback’s performance time. 

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Cardi contracted with the State of Rhode Island for the construction of a new bridge over the Providence River on Interstate I-95.  Cardi subcontracted with Raito to install a series of concrete foundation shafts for the bridge.  With regard to the subcontract, Raito, as principal, and Western Surety Company, as surety, executed a standard AIA A312 performance bond. 

Cardi alleged that Raito failed to perform its work in a timely and acceptable manner, resulting in delays to the Project and costs and damages to Cardi.  Despite the alleged delays, Cardi never gave notice that it was considering declaring a default, nor did it attempt to arrange a conference with Raito and Western, but instead “back-charged” delay costs against amounts due to Raito for its work.  Raito filed an action against Cardi to recover monies allegedly due.  Cardi counterclaimed against Raito and Western for damages caused by Raito’s alleged failure to timely and effectively perform the work.  Western moved for summary judgment, arguing that Cardi failed to issue a notice of default and failed to terminate Raito’s subcontract prior to filing the action, both of which Western alleged were preconditions to filing an action against Western.

As an initial matter, the Court held that Paragraph 3 of an unmodified AIA Performance Bond does create preconditions to a surety’s liability (i.e. (1) the Owner must notify the Contractor and the Surety that the Owner is considering declaring a Contractor Default and has requested and attempted to arrange a conference with the Contractor and the Surety to discuss methods of performing the contract; (2) the Owner has declared a Contractor Default and formally terminated the Contractor’s right to complete the contract; and (3) the Owner has agreed to pay the balance of the contract price to the Surety or to a contractor selected to perform the contract). 

However,  the court determined that the bond at issue was a “modified” AIA performance bond, because the bond incorporated the parties’ subcontract, which contained language regarding termination.  Specifically, Article IX(a) of the subcontract stated that, if the subcontractor was refusing or failing to diligently perform its work, the Owner, after providing notice and an opportunity to cure, could terminate the Subcontractor.  Further Article IX(b) stated that, if the Owner decides not to terminate, the Subcontractor must continue the work and he and his sureties will be liable for any resulting damage. 

The Court held that Article IX did not conflict with or negate Cardi’s obligations under Paragraph 3 of the performance bond.  The Court noted that, if Cardi decided to terminate Raito as provided in Article IX(a), it was required to follow the conditions outlined in Paragraph 3 of the bond in order for Western to be liable.  Further, the Court held that, although Article IX(b) provided that Western would be liable even if Cardi did not terminate Raito, action under Paragraph 3 was still applicable.  Specifically, before the declaration of a default or termination, Cardi was required to notify both Raito and Western that it was considering declaring a default, hold a conference with both parties, and allow Raito an opportunity to cure its deficiencies. Similarly, under Article IX(a), the Court held that termination was only proper after notification of the deficiencies and an opportunity to cure. 

In sum, the Court held that Cardi had the option to terminate Raito under Article IX(a) and take over construction or not terminate under Article IX(b) and “backcharge” Raito for its alleged deficiencies.  Although Cardi ultimately decided not to terminate Raito, Cardi was not excused from complying with Paragraph 3 of the Bond and notifying Western that it deemed Raito to be untimely and improperly performing and allowing Western an opportunity to mitigate its damages.  As such, the Court held that Cardi did not comply with a condition precedent when it failed to notify Western and hold a conference in accordance with Paragraph 3.  Accordingly, the Court granted Western’s motion for summary judgment.

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In a contract dispute, the trial court granted motions for summary judgment filed by the general contractor and owner, dismissing counterclaims asserted by the subcontractor, and denied the subcontractor’s motion for summary judgment as to liability for such counterclaims.  On appeal, the Appellate Division reversed the trial court’s order to the extent it granted the general contractor’s and owner’s motions for summary judgment.

The underlying dispute arose out of Richter & Ratner Contracting Corp. (“R&R”)’s direction to Absolute Electrical Contractors, Inc. to work overtime during the last three weeks of the project.  R&R instructed Absolute not to bother with tickets that were usually used as the basis for change order requests, but “just to get the work done” and it would be paid.  R&R argued in its summary judgment motion that it did not have to pay for the overtime because there were no written tickets or change orders covering the three week period.

On appeal, the Appellate Division assumed that the no-oral-modification clause of the prime contract between R&R and Uniqlo USA Inc., the owner, was incorporated into Absolute’s subcontract, and that the subcontract itself contained an effective no-oral-modification clause.  There was deposition testimony by R&R’s representatives that R&R directed Absolute to work overtime with a promise to pay, and an instructed Absolute not to complete tickets for the extra work.  Absolute argued that these directions waived the no-oral-modification clause.  The court held that under New York law, oral directions to perform extra work, or the general course of conduct between the parties, may modify or eliminate contract provisions requiring written authorizations or notice of claims.  The court also found that R&R could not rely on a “no damages for delay” clause as Absolute was not seeking to recover damages caused by delay, but rather to be paid for overtime that R&R directed and for which it had agreed to pay.

The court found that there was an issue of fact as to whether R&R had fully paid Absolute for Absolute’s overtime work during the three week period.  The court found that even though R&R presented executed partial lien waivers, the waivers were treated as mere receipts of the amounts stated in the waivers, and not as complete waivers of all claims to that point. 

The court also held that the trial court had improperly shifted the burden of proof on the owner’s motion for summary judgment by finding that the claim against the owner should be dismissed because Absolute failed to demonstrate that the owner still owed money to R&R at the time that Absolute filed its lien against the project.  The Appellate Court held that it is the proponent who bears the initial burden of coming forward with evidence showing prima facie entitlement to judgment as a matter of law, and, unless that burden is met, the opponent need not come forward with any evidence at all.  The Appellate court held that the owner had not demonstrated that full payment to R&R had been made by the owner prior to the filing of the lien, or ever.  Thus, the owner had failed to meet its burden and an issue of fact existed, preventing the grant of summary judgment to the owner.

The Appellate Court modified the trial court’s order and denied the general contractor’s and owner’s motions for summary judgment, and affirmed the remaining parts of the order.

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The Court of Appeals for the Sixth Circuit affirmed a District Court decision that a “no damage for delay” clause was void and unenforceable pursuant to Section 4113.62 of the Ohio Revised Code.  The clause contained provisions requiring that any “delay must be reported in writing and an extension of time shall be the sole and exclusive remedy of Contractor for any such delays or suspensions, but only to the extent that a time extension is obtained from the Owner,” and that “no claims will be accepted for costs incurred due to delays caused by others except to the extent that such delays exceed four (4) months.”

In April 2006, Toltest, Inc. entered into a contract with Whiting-Turner Contracting Co. to conduct hazardous waste abatement and demolition of buildings owned by the Georgia Institute of Technology.  Toltest then subcontracted the portions of the contract involving demolition and related site work to Acme Contracting, Ltd.  The agreement was executed in the form of a Purchase Order in June 2006. 

In February 2007, Acme initiated an action against Toltest and others asserting claims for breach of contract and quantum meruit.  Specifically, Acme alleged that Toltest caused multiple delays to Acme’s demolition work and failed to pay Acme for additional work outside its original scope.  Acme asserted that Toltest failed to perform the required abatement work on the buildings in accordance with its own work plan, thereby delaying Acme’s demolition work and causing Acme to suffer damages.

The District Court found that Acme had established it was entitled to total damages in the amount of $2,033,756.02, including $1,088,715.15 in delay damages.  Toltest timely appealed.  It asserted that the District Court committed a number of errors.  Among them, Toltest argued that the District Court erred in concluding that Ohio statutory law barred enforcement of the terms of the agreement that limited delay damages.

The Court of Appeals determined that the District Court properly applied Ohio’s statute prohibiting “no damage for delay” clauses when the cause of the delay results from the action or inaction of the contractor. 

Toltest argued that its notice and approval requirement and prohibition of recovery of damages for delays less than four months “merely define[d] the circumstances under which delay damages [were] recoverable.”  The District Court and the Court of Appeals disagreed.  Citing Cleveland Construction, Inc. v. Ohio Public Employees Retirement System, the District Court found that provisions limiting the remedy for delay to an extension of time, requiring written notice and approval from the owner for any time extension, and allowing claims for costs incurred as a result of delays caused by others only if the delays exceeded four months, when considered together, operated to insulate Toltest from any liability for delays it caused.  Therefore, the limitations were void and unenforceable as against public policy under Ohio Revised Code § 4113.62 (C) (2).

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Lillibridge Healthcare Services, Inc. sued Hunton Brady Architects, P.A. and Heery International, Inc. for breach of contract, negligent design, and negligent misrepresentation.

Hunton had entered into an agreement with Mediplex Medical Building Corporation (“MMBC”) to prepare documents and to provide other services for the construction of a four story, steel frame medical office building located in Celebration, Florida.  MMBC assigned its rights under that contract to Lillibridge.  Heery had assumed obligations under a subcontract with Hunton to perform the engineering work for the Project.

During and after construction, three alleged design problems relating to applicable code arose giving rise to Lillibridge’s claims.  First, code officials rejected engineering documents for the HVAC system for a floor of the building because for violating code, because they specified a single air handling unit for both an ambulatory surgical center and physician offices.  Second, the electrical plan was rejected as non-code compliant because ground fault protection was not specified for all circuits.  Third, the lighting system design improperly specified stem lengths for lighting fixtures in the port cohere , and were as a result damaged by a truck when the building opened.

Hunton and Heery moved for summary judgment on Lillibridge’s claims asserting that Lillibridge’s expert, an engineer, was not qualified to testify as to either the architectural standard of care or the standard of care for engineers.

The United States District Court for the Middle District of Florida denied Hunton’s and Heery’s Motions.  Specifically, the court held that because Lillibrdige’s claims were based on alleged failures to ensure code compliance, they were not of such a technical or specialized nature that expert testimony was required.  According to the court, record evidence existed that various systems on the project were rejected because they failed to comply with relevant code.  As such, the ultimate issues were who was at fault and who was legally responsible for the fact that the systems did not comply with the code.  Those issues, based on the court’s holding, did not appear to require, or perhaps did not even permit, presentation of expert testimony.

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Defendant Western Mechanical Services, Inc. entered into a contract with the state of South Dakota to replace boilers on the South Dakota School of Mines and Technology campus Western, in turn, solicited bids for the boilers.  Western accepted Plaintiff Blesi-Evans Co.’s proposal to supply one of the boilers.  A dispute arose out of the delay in the production and delivery of that boiler.

Neither Blesi’s proposal, nor Western’s purchase order, contained an expected shipment or delivery date for the boiler.  Western’s contract with the state of South Dakota provided that the work would be substantially completed by October 13, 2006.  Western asserted that Blesi promised to deliver the boiler by September 23 or 28, 2006.  Blesi’s supplier was unable to provide the boiler by any of those dates.  As a result, Western had to furnish a temporary boiler, at its own cost, for the Boiler Project.  Finally, in December 2006, Blesi supplied the boiler, but it was not up and running until January 2007.

Blesi sent Western an invoice for the boiler and related work.  Western refused to pay on that invoice, but sent its own invoice to Blesi for all of the costs Western incurred in installing, maintaining, and returning the temporary boiler.  Blesi brought suit against Western for failing to pay for the boiler after Blesi delivered it.  Western asserted that, if Blesi were entitled to damages, then Western had right to set-off the amount of the expenses that Western incurred as a result Blesi breaching its obligation to provide the boiler by the agreed-upon delivery date.  Both parties moved for summary judgment on their claims.

The United States District Court for the District of South Dakota denied both motions for summary judgment.  The court determined that the parties agreement was predominantly a contract for the sale of goods and therefore governed by Article 2 of the Uniform Commercial Code (“UCC”).  The court noted that, under the UCC, parties may agree on a definite time for shipment or delivery, but in the absence of such an agreement, Article 2 provides that the time for shipment or delivery shall be a “reasonable time.  Reasonable time, stated the court, depends upon what constitutes acceptable commercial conduct in view of the nature, purpose, and circumstances of the action to be taken, and therefore evidence as to a definite date of delivery can be found in the contractual circumstances and course of performance.

In reaching a decision on Blesi’s motion, the court found that disputed issues of material fact existed regarding whether Blesi delivered the boiler on time under the parties agreement.   According to the court, although the delivery date was not specified in the proposal or purchase order, after contract formation, various correspondence between the parties discussed delivery times which suggested that the parties possibly reached an oral agreement on delivery time.  On the other hand, the court noted that Western’s correspondence to South Dakota’s agent on the Boiler Project used conditional language regarding delivery dates suggesting that the parties had not reached an agreement.  Taken as a whole, the court found that the correspondence created a factual question regarding whether the parties agreed to a delivery time.

The court rejected Blesi’s argument that the post-purchase correspondence was barred by the parol evidence rule, because the correspondence could show that the parties modified their agreement to add a specific delivery date.  Even if Blesi were to prevail on its argument that the correspondence is barred, the court stated that a question will remain for the jury to determine what is a “reasonable time” for shipment or delivery. 

In denying Western’s motion, the court found that Western was not entitled to a set-off as a matter of law.  It reached that conclusion because recovery depended on several disputed facts. First, whether Western provided the UCC required notice to Blesi of its intent to seek a set-off.  Second, whether Western rightfully revoked its acceptance of the boiler.  Third, whether Western obtained the temporary boiler in good faith and without unreasonable delay.  Finally, whether Western rented the boiler as an intended substitute for the boiler ordered from Blesi.

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