Inside this Issue

A1 - Notice of Claim Requirement Flows Down from Prime Agreement and is Strictly Applied to Disallow Subcontractor Claim
A2 - “No-Damages-for-Delay” Clause Enforced Even If Project Ineptly Planned and Managed
A3 - Contractor’s Tortious Interference Judgment against County Engineer Reversed because Engineer Acted Within Scope of Contract
A4 - Insurance Carrier Not Liable to Homeowner for Injuries and Damages Allegedly Caused by Defective Repairs Performed by a Contractor Recommended by Carrier
A5 - Project Owner May Lose Right to Use A/E’s Copyrighted Documents Due to Failure to Pay Invoices

Article 1

Notice of Claim Requirement Flows Down from Prime Agreement and is Strictly Applied to Disallow Subcontractor Claim

Where an elevator subcontractor filed a breach of contract claim against the general contractor for damages resulting from delay to the performance of the work, the general contractor moved for summary judgment on the basis that the subcontractor failed to comply with a notice provisions that flows down from the prime agreement and requires any delay claims to be submitted within 45 days of incurring the delay. The trial court apparently concluded that the GC had actual notice of the delay, even if not formally notified by the sub, and therefore denied the summary judgment motion and allowed a jury to decide damages, which were awarded in the amount of $209,000. This was reversed on appeal, with the court holding that strict compliance with the notice provision was a condition precedent, and this specifically included the requirement that “verified statements” that detailed the amount of damages incurred must be submitted. Schindler El. Corp., v. Tully Construction Co., Inc., 139 A.D. 3d 930, 30 N.Y.S.3d 707 (2016) .

Although some courts have been somewhat lenient in what constitutes adequate notice, and some courts have held that unless prejudice resulted from the lack of notice, the requirement will not be strictly enforced, this decision is an excellent reminder of how important it is for contractors and subcontractors to know the detailed notice requirements of their contracts and follow those requirements precisely.

Of particular note is the fact that the notice provision in question was contained in the prime contract and established a 45-day notice requirement for the prime contractor to submit claims to the project owner. Courts in New York have stated that only material terms of the prime contract flow down as a result of an incorporation by reference clause in a subcontract. It has never been very clear to me what clauses will be deemed to flow down by way of a general incorporation by reference clause versus what clauses must be specifically called out as being flowed down. Some New York practitioners are very cautious and identify all clauses of a prime contract that will specifically be flowed down.

This court decision, by this particular appellate division, suggests that notice requirements from prime agreements are material terms that will be flowed down via a general incorporation by reference clause. Perhaps one of my New York attorney colleagues could comment on this.

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 19, No. 2 (February 2017).

Article 2

“No-Damages-for-Delay” Clause Enforced Even If Project Ineptly Planned and Managed

See similar articles: Delay | Delay Claim | Exculpatory Clauses | No-Damages-For-Delay

Subcontractor filed a complaint for delay damages allegedly caused by the project owner and construction manager’s inept administration and poor administration. Defendants’ motion for summary judgment was granted, and this was affirmed on appeal, on the basis that the claims were barred by the no-damages-for-delay provisions of the contract. The court concluded that the sub failed to demonstrate any basis that might be argued as an exception to applying the clause. Further, the court rejected the sub’s contention that there is a material distinction between damages caused by delay and those caused by “disruption”, which the sub contended were not barred by the exculpatory provisions. Weydman Electric, Inc. v. Joint Schools Construction Board, et al., 140 A.D. 3d 1605 (NY 2016).

As the court explained, a clause that exculpates an owner from liability to a contractor for damages resulting from delay is valid and enforceable, and is not contrary to public policy, if the contract of which it is a part satisfies the requirements for the validity of contracts generally. But there are exceptions to enforcing the clause. These include the following: “(1) delays caused by the contractee’s bad faith or its willful, malicious, or grossly negligent conduct, (2) uncontemplated delays, (3) delays so unreasonable that they constitute an intentional abandonment of the contract by the contractee, and (4) delays resulting from the contractee's breach of a fundamental obligation of the contract.”

Here the court found that the defendants met their prima facie burden of showing that the damages were barred from recovery due to the clause. The sub then had what the court called, a “heavy burden” of establishing the applicability of one of the exceptions, and it failed to meet that burden because “No evidence was presented that the conduct alleged was the result of [defendants’] gross negligence or willful misconduct.” “Claims … that the work was performed out of sequence, poorly coordinated, and plagued by design changes were clearly contemplated by the exculpatory provisions of the contract.” For these reasons, the summary judgment against the subcontract was sustained.

Comment: A no-damages-for-delay clause is a serious risk-shifting clause in a construction contract. These clauses even show up in design professional contracts. In my view, a party that suffers damages or loss due to delays and disruptions caused by, or under the control of, the party with whom it is contracting, should be compensated. That means the clause needs to be removed from the contract or significantly revised to allow recovery.

Article 3

Contractor’s Tortious Interference Judgment against County Engineer Reversed because Engineer Acted Within Scope of Contract

A road contractor’s claim for entitlement to compensation for installing double the amount of fill material than was estimated in the bidding documents by the county engineer was untimely filed after the contract was completed, and when the engineer recommended that only a partial amount of the claim be paid, the contractor sued the county for breach of contract and the engineer for tortious interference with its contract. Before filing suit, the contractor failed to first submit a “pre-suit notice” as required by the state law when suing a governmental entity. The trial court rejected motions to dismiss and a jury awarded judgment of almost $200,000 against the engineer. On appeal, the court reversed the judgment against the engineer because (1) the engineer was entitled to interfere because it did so within the scope of its contract, providing advice to its client, and there was no showing that the engineer acted with malice and bad faith; and (2) the county engineer was entitled to the protections afforded a governmental employee, including the requirement that no suit could be brought against it without a pre-suit notice first being filed. Springer v. Ausbern Construction Co., Inc., 2016 WL 4083981 (Mississippi 2016).

The project in question was subject to regulations found in a state specifications book known as the “Green Book.” According to the book, the county engineer is responsible for “inspecting the contractor’s work, measuring and keeping track of the actual unit quantities placed by the contractor, preparing monthly estimates of the work actually performed by the contractor, and reporting that quantity and corresponding earned contract amounts to both the State Aid Division and the County.” Another section of the book states, “the Contractor shall notify the Engineer in writing of an intention to make such claim for additional compensation before beginning the work on which the Contractor bases the claim or for such extension of time as soon as the facts first become known on which the Contractor bases the claim for adjustment,” and that “then Contractor hereby agrees that failure to provide written notice has denied the Board and the State Aid Engineer the prerogative of verifying [the claim].”

The contractor did not bother, during contract performance, to notify the county engineer that it was installing more fill material than the county had estimated. It waited instead until the project was completed and then submitted an invoice for unit price payment for double the amount of fill than had been estimated. One can imagine the county was quite surprised and not in a mood to make payment when the state rules so clearly stated that failure to make a timely claim would be deemed a waiver of any right to make a claim.

In any event, for reasons unknown, the State Aid Department reviewed the claim and advised the county to pay it. The county, however, delayed payment pending approval by the county engineer who corresponded with the contractor and attempted to negotiate a settlement instead of paying based on the full unit price. Rather than negotiate an amount, the contractor filed suit as discussed herein.

Comment: It is perplexing how the contractor was able to prevail against the county and the engineer at trial in light of its clear failure to meet the requirements of the Green Book with regard to filing a claim during construction before doing the extra work, and also failing to meet the state law requirement of filing a pre-claim notice against the sovereign government and its employee.

Only the engineer appealed and it obtained reversal of the jury verdict. The county, for reasons not explained in the decision, chose not to appeal despite the fact that the pre-claim notice requirements were not met and the appellate court likely would have reversed the judgment against the county for the same reasons it reversed it against the engineer.

Article 4

Insurance Carrier Not Liable to Homeowner for Injuries and Damages Allegedly Caused by Defective Repairs Performed by a Contractor Recommended by Carrier

See similar articles: Joint Venture Liability | Roof Repair | Vicarious Liability

When a house sustained hail damage to its roof, the homeowner reported a claim under their homeowner’s policy, and their insurer agreed to pay for the repairs and referred the homeowner to a contractor from the insurance company’s approved list of contractors. Repair work by the roofing contractor was allegedly defective, causing water and mold damage to the interior of the house. The homeowner filed suit to recover its damages from the carrier on the theory that the carrier was vicariously liable for the defective workmanship of the contractor they recommended either as the result of a joint venture relationship between the carrier and contractor, or because the carrier had the right to control the work of the contractor, making it an employer-employee relationship with vicarious liability. The trial court and appellate court rejected the homeowner’s arguments and dismissed the case. Rubin v. American Insurance Co., 193 So3d 408 (Louisiana 2016).

The homeowner’s alleged that the carrier selected the contractor who performed the repairs and that after the contractor removed the roof, it failed to immediately install a new roof before it began raining for several days, causing extensive water damage as well as mold contamination. The homeowner’s repair claim was handled by the carrier under what was called a “Direct Contractor Repair Program” wherein a company named Project Time & Cost, Inc. (PTC) would pre-screen contractors within its network and assign them to claims submitted to PTC by the carrier.

The agreement between the carrier and PTC provided, “No agency, partnership, joint venture or other similar relationship is intended by this engagement….”

The carrier’s moved for a directed verdict, arguing that the homeowner failed to present any evidence showing that the carrier controlled the work of the contractors it referred to the homeowner. Without such control, the carrier argued it could be found to have been the employer of the contractor for purposes of vicarious liability. It also argued that the homeowner failed to present any evidence of a business venture carried out for a joint profit among the parties, and thus no joint venture existed. In sustaining the summary judgment for the carrier, the appellate court sated that the state’s Supreme Court has held that the single most important factor to consider in determining whether the employer-employee relationship exists for the purposes of vicarious liability is the right of the employer to control the work of the employee.

The contract of the carrier with PTC clearly stated there was no joint venture or other relationship between them. The homeowner also cited a Power Point presentation titled “Direct Repair Contractor Program,” in support of its argument that the carrier had the right to control the contractor's works. However, the court found that the homeowner failed to show that the Power Point slides (or even an internal manual by the carrier) are binding upon the contractor for purposes of establishing the right of the carrier to control the contractor's work.

The court also found that the homeowner failed to offer any evidence at trial that could have permitted a jury to find that the carrier was vicariously liable for the actions of the independent contractor. For these, reasons, the court held that the directed verdict was properly granted for the carrier.

Comment: Due to the circumstances described in the decision, the court could find there was no employer-employee relationship between the carrier and contractor, and no joint venture relationship or other relationship that could create vicarious liability. The contract language quoted by the court, which expressly stated, “No agency, partnership, joint venture or other similar relationship is intended by this engagement” was not emphasized as a basis for the decision. But it was certainly prudent for the carrier to include that language in its agreement with PTC, and the fact that it was quoted, I think, demonstrates why the typical contract between a project owner and contractor states that the contractor is “independent” and not under the control of the owner, etc. So for a number of reasons, a good contract risk management tip is to include these independent contractor clauses in contracts.

Article 5

Project Owner May Lose Right to Use A/E’s Copyrighted Documents Due to Failure to Pay Invoices

See similar articles: Copyright | copyright Infringement | Non-exclusive License

The question of what rights a project owner gets to the copyrighted plans and specifications prepared by its design professionals is one of critical importance that needs to be clearly addressed by contract. In Eberhard Architect's v. Bogart Architecture, Inc. et al., 314 F.R.D. 567 (U.S. District Court, N.D Ohio), when a project owner failed to pay its architect, the architect terminated its contract for default and terminated the owner’s nonexclusive license to use the architect’s documents. The owner and its new architect and contractors continued to use the documents over the protest of the architect. In response to the architect’s suit, the defendants moved to dismiss the complaint based on the argument that the payment requirement of the contract was a mere “covenant” upon which the architect could sue for damages, but was not a “condition precedent to the existence of the nonexclusive license.” The court concluded that this was indeed the law of the state, but it was the wrong argument to raise in this case. That is because, although the nonexclusive license came into existence “upon execution” of the Agreement before payment was due, the contract expressly provided for “termination” of the license for subsequent non-payment.” In other words, the parties agreed by contract that the license could be revoked. For this reason, the defendants’ motion to dismiss was denied, and the matter will go to trail unless a settlement is reached.

The project was a 12-bed hospice inpatient facility. The agreement between the owner and architect granted the owner a nonexclusive license to use the instruments of services created by the architect in connection with the Project. It further provided that any failure on the part of the owner to provide any payment due under the Agreement will result in a termination of the nonexclusive license. In addition the Agreement contains a provision that requires [owner] to reimburse and indemnify the architect for legal fees incurred in connection with the Project. The court found that the owner breached the contract by failing to make the required payments. The architect duly notified the owner of the breach and advised that the nonexclusive license was terminated.

The owner and follow-on architect and others ignored all notices to cease and desist using the architect’s documents. As explained, by the court, their basis for doing so was their belief that payment to the architect was a not a condition precedent to the existence of the license to use the documents. The court agreed with that argument but explained that this was only one-half of the issue.

The more important point was that the architect had been prudent enough to include language in its contract stating that even if a license was granted at the outset of a project, the license would automatically terminate upon failure of the client to pay the architect’s invoices.

The court pointed out that the defendants cited a number of cases in which courts have repeatedly held that a failure to pay invoices does not give rise to a copyright infringement claim. But none of those cases, says the court, contain an agreed upon termination provision expressly directed at the termination of the license. “Here, by agreement of the parties, the nonexclusive license ceased to exist upon plaintiff’s rightful termination of the Agreement. The Contractor Defendants cite no law suggesting that a copyright infringement claim will not lie even though the license was terminated in a manner agreed to by the parties.”

Comment: In reviewing design professional contracts for our design professional clients, we often add provisions similar to the one here. Many project owners now seek to obtain copyright interest in the design professional’s documents, or even state that the documents were prepared for the owner by the design professional who served as an employee for hire – and that the owner obtains exclusive rights to the copyright such that the design firm forfeits its own rights to the documents. They are many issues and concerns with that. But if a designer is going to agree to give the owner either a license or copyright to the documents, it is well advised to state that the license and copyright do not come into existence until payment is made (some states may permit that as a condition precedent) and that any license or copyright that has come into existence is automatically terminated for failure to make payment.

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ConstructionRisk.com Report (February 2017)