Inside this Issue

A1 - Pay-if-paid Provisions Not Per Se Unenforceable in Nevada
A2 - Contractor Entitled to Recover Delay Damages including Overhead Costs
A3 - Insurance Carrier Was Correctly Dismissed from Litigation Against Engineer

Article 1

Pay-if-paid Provisions Not Per Se Unenforceable in Nevada

See similar articles: Pay-If-Paid | Payment

Where a general contractor failed to pay its subcontractor and used the pay-if-paid clause of the subcontract as the reason for not making payment, the Supreme Court of Nevada held that the contract provision was not per se void and unenforceable in light of the state’s Prompt Payment Act; but must instead be reviewed on a case-by-case basis. Here, the court held that the pay-if-paid provision was not enforceable because it limited the sub’s rights under the Prompt Payment Act. Apco Construction, v. Zitting Bros. Construction, 473 P.3d 1021 (2020).

The decision cites earlier case law for the principles that pay-if-paid clauses are generally unenforceable, but can be enforceable in limited circumstances subject to certain restrictions. Most specifically, the court held the following:

“Such provisions are unenforceable if they require subcontractors to waive or limit rights provided under NRS 624.624-.630, relieve general contractors of their obligations or liabilities under NRS 624.624-.630, or require subcontractors to waive their rights to damages, as further outlined under NRS 624.628(3). Because provisions in the subcontract considered here condition payment on the general contractor receiving payment first and require the respondent subcontractor to forgo its right to prompt payment under NRS 624.624 when payment would otherwise be due, such provisions are void under NRS 624.628(3) and cannot be relied upon by appellant general contractor for its nonpayment to respondent for work performed. Furthermore, because appellant’s evidence in support of its other conditions-precedent defenses is precluded and the plain language of NRS 108.239(12) permits a subcontractor to sue a contractor for unpaid lien amounts, we affirm the district court’s grant of summary judgment and award of attorney fees and costs in favor of respondent.”

After going further in analyzing the facts and the law, the Supreme Court concluded that the pay-if-paid provisions in this subcontract were unenforceable because they limited the sub’s rights to prompt payment as required under the state law. “Accordingly, such pay-if-paid provisions limit Zitting’s right to prompt payment under NRS 624.624(1) and limit Zitting’s recourse to a mechanics’ lien. We therefore hold that the pay-if-paid provisions in the parties’ subcontract are void and unenforceable under NRS 624.628(3)(a).”

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 ConstructionRisk 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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 23, No. 1 (Jan 2021).

Article 2

Contractor Entitled to Recover Delay Damages including Overhead Costs

See similar articles: Delay Damages

An appellate court reversed the trial court judgment that held a Contractor was not entitled to costs associated with delays (including overhead) on a city building project. The city argued that the contractor was late in submitting its claim for damages and it also argued that the city was not responsible for causing the delay to the contractor’s work. Specifically, the contract permits a contractor to recover for “any increase in the cost of performance of the contract (excluding profit),” if the contractor’s performance of all or any part of the work is, for an unreasonable period of time, delayed by the contracting officer’s act or failure to act. The only type of damages expressly precluded by the contract were “profit.” Plaintiff-Appellant, Jindal Builders & Restoration Corp. v. Cincinnati Metropolitan Housing Authority, 157 N.E.3d 279 (Ohio 2020)

The court found that the city was the sole cause of the contractor’s delay and it found that the contractor gave notice of the delay within 20 days as required by the contract. The fact that it did not file suit until months later did not cause it to lose its right to litigate over the properly noticed claim. On the notice of claim issue, the court analyzed the contractual requirements and concluded that although there were two distinct requirements applicable to a contractor filing a delay claim, the contractor need not tender this “written monetary claim” within 20 days of experiencing the increased costs, but instead “as soon as practicable after the termination of” the delay.

“Jindal needed only to submit written notification (not a full claim delineating costs incurred) within 20 days from when it should have notified CMHA of the outset of the delay. And this makes sense—the purpose of the first provision is to place the contracting officer on notice in order to ameliorate any damage, and it would be unrealistic to expect the contractor to completely itemize all of its damages on such short notice (particularly when the harm might be on-going)….”

“[We] find that Jindal satisfied the notice requirements for the period between July 27 and October 17. As established above, July 26 represented the actual start date for Phase II. Jindal satisfied the 20-day notice requirement by sending various emails in mid-August notifying CMHA of Jindal’s inability to begin work on Phase II and warning of the increased costs that would be incurred from this delay.”

“Although this notice came five months after Jindal commenced work, based on the facts of this case, we find that Jindal tendered CMHA its written claim for overhead damages “as soon as practicable” after the termination of the delay pursuant to section 30(c)(2), especially in light of Jindal’s hiring a CPA to calculate the overhead damages for the relevant period. Certainly, it submitted a little over eight months after the termination of the delay satisfied the “as soon as practicable” requirement). Certainly, it tendered this claim well in advance of “final payment.” For these reasons the court granted the contractor a partial reversal of the underlying adverse court determination.”

Article 3

Insurance Carrier Was Correctly Dismissed from Litigation Against Engineer

A commercial general liability (CGL) carrier was entitled to summary judgment that it owed no duty to defend an engineering firm against a lawsuit alleging that the firm had intentionally defrauded the homeowners in a community concerning the quality of their drinking water. The homeowners sued the engineer for assisting the village to conceal the release of contaminated water into their drinking water. That suit settled for $18.3 million without the participation of the insurance carrier who then declined the homeowner to pay the damages on behalf of the engineer. The reason the court affirmed the trial judge’s summary judgment was the plaintiffs failed to allege facts showing any accidental or unintentional act of the engineer. The carrier was not required to indemnify the Engineer for the settlement agreement, did not act in bad faith in denying coverage, and had no duty to defend Burke. General Casualty Insurance Company, v. Burke Engineering Corp., 2020 IL App (1st) 191648.

Perhaps the most essential background fact is reported as follows: “Between 1980 and 2006, Burke provided water engineering and consultation services to the Village, performing audits of its water supply and helping the Village prepare water usage reports for government agencies. With Burke’s advice and assistance, Village officials reported to the IEPA that the Village supplied its water from Lake Michigan and placed its well water on “emergency backup” status. This was not true. While telling its residents that water came exclusively from Lake Michigan and was safe to drink, the Village actually used Well Number 1 as a source and avoided testing it for chemical pollutants.”

In 2007 the plaintiffs discovered the Village was using contaminated Well Number 1 to pump millions of gallons of tainted drinking water to village residents. The Village mayor admitted this was true and in 2008 village citizens began suing the Village. The engineering was added as a defendant subsequently. The court points out how frustrating it is for the plaintiffs to get this adverse determination after 10 years worth of expensive litigation. But the court points out the following in this regard:

“After more than a decade of litigation, we realize that this is a disappointing result for the residents of Crestwood. In applying insurance law, though, the amount of harm is not, and should never be, taken into consideration. Otherwise, the law becomes unpredictable, totally arbitrary, and dependent on the whim of the individual judge, all of which is repugnant to the rule of law.”

During the discovery process the plaintiffs learned that the Engineer knew the Village had been using contaminated water from Well Number 1 but it nevertheless prepared false audit reports for state regulators concealing the well’s use. When the plaintiffs learned of this they amended their suit to name the engineer. The negligence count against the engineer alleged “by and through its agents breached their fiduciary duty by failing to disclose the harmful chemicals in the water to the public.” In the same count, the plaintiff-residents alleged Burke “intentionally concealed the fact that it was using well water contaminated with hazardous chemicals to supply tap water * * * to avoid the cost of making water safe.”

On its motion for summary judgment, the insurance carrier argued “it had no duty to defend Burke because the factual allegations of the underlying complaints did not fall within or potentially within the coverage of the policies. Specifically, General Casualty contended regardless of the label placed on the allegations, they all involved allegedly intentional conduct by Burke, which did not constitute an “occurrence” under the policies. General Casualty also argued that estoppel does not apply to create coverage when there is no duty to defend.” In granting the summary judgment, the court found that the factual allegations failed to allege an "occurrence'", namely, an accident, under the policies. Indeed, plaintiff-residents alleged intentional conduct, namely, that Burke knew the Village used water from the contaminated well and had intentionally advised the Village to hide that fact from the IEPA and the residents.

The court stated, "[t]hese factual allegations do not allege ‘an unforeseen occurrence’ or ‘sudden or unexpected event'." Rather, the factual allegations set forth only intentional conduct by Burke. The "negligence" counts were irrelevant because the “court looks at the actual factual allegations, not the label.” And, in the absence of “a single factual allegation” supporting the existence of an “occurrence” as defined by the policies, there was no potential coverage and no duty to defend. The trial court also found the allegations came within the policies’ exclusions for intentional conduct. Finally, the court granted summary judgment to General Casualty on the counterclaims and affirmative defenses on the basis that it had no duty to defend, did not breach its contract or act in bad faith, and could not be estopped from denying coverage.

In affirming this decision on appeal, the appellate court held that the underlying complaints alleged some combination of intentional misconduct as well as negligence. But the court concluded, “A court looks at the actual factual allegations, not the label.” In this case, the fact that the underlying complaints contained “negligence” counts was not relevant. This is because the court found:

“In the negligence count, the plaintiff-residents ‘repeat, adopt, and reallege’ all of the factual allegations made to that point. And those allegations state intentional conduct, which undermines the dissent’s premise that a court could find Burke acted negligently in failing to disclose the harmful chemicals to the public. … Moreover, the negligence count itself reiterates that Burke ‘intentionally concealed the fact that it was using well water contaminated with hazardous chemicals to supply tap water to the Plaintiffs.’ The underlying complaints do not contain any factual allegations supporting the existence of an ‘occurrence’ as defined by the policies.”

For these reasons, there was no insurance indemnity or duty to defend obligations owed by the carrier for the Engineer in this case.

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