Inside this Issue

A1 - Subcontractor Entitled to Recover Costs of Removing Asphalt Pavement instead of Limited Amount of Concrete Pavement as Specified
A2 - Contractor Cannot make Performance Bond Claim when it Failed to Terminate its Subcontractor
A3 - Contractor had no Professional Liability Coverage under CGL Policy

Article 1

Subcontractor Entitled to Recover Costs of Removing Asphalt Pavement instead of Limited Amount of Concrete Pavement as Specified

See similar articles: Architect Final Decision | Quantum Meruit | Scope of Work | Unjust Enrichment

GC and its subcontractor disagreed over whether the scope of work of the subcontract required the Sub to remove all pavement in a parking lot or only the concrete portion of the pavement. The bidding documents described the work of subcontractor bidders to include removing “pavement,” “cement concrete pavement,” “existing Portland cement concrete pavement,” and “existing PCC pavement.” The subcontract included a Scope of Work statement requiring the Sub to demolish “the existing concrete pavement.” The GC bid the project to the owner assuming the entire parking lot, including driveway, was concrete and that the subcontractor’s bid covered removing all of it. When the Sub objected to the extra work, it nevertheless performed under protest at the GC’s direction, preserving its legal argument for recovery of its extra costs. In the subsequent litigation, the trial judge granted summary judgment to the subcontractor. This was affirmed on appeal based on the theories of quantum meruit and unjust enrichment – with the court finding no actual contract remedy available. F.H. Paschen, S.N. Nielsen & Assoc. v. B&B Site Development, Inc., 311 So.3d 39 (FL 2021).

The GC argued that the removal of all asphalt was within the scope of the subcontractor’s work and the subcontractor disagreed. They came to no agreement so the subcontractor performed the work under protest and provided the GC with its cost proposal for performing the additional work. The GC responded that the project architect would review the costs and proposals to “ensure that this area was not already included” in the subcontract. The architect reviewed the matter and opined that the asphalt area was included in the cost of the project. The GC then refused the subcontractor’s change order request and this law suit was filed.

First Issue. The trial court properly determined that the scope of the subcontractor’s work was limited to the concrete removal. To the extent that some work was general such as removing “pavement,” other wording of the bidding documents specifically referenced removal of “concrete pavement.” The appellate court explained that specific provisions in a contract control over the general provisions. Nothing in the subcontract stated that the Sub was required to remove all asphalt from the parking lot. Nor did the subcontract state that the Sub was required to remove pavement from the “entire” parking lot instead of just the portion that was paved with concrete. The subcontract even specified the thickness of the concrete to be removed, but provided no similar specification for the existing asphalt.

The court also addressed the GC’s argument that because the contract stated that the work was “not limited to” the enumerated tasks, including disposal of the existing concrete pavement, “this phrase cannot be used to expand the required tasks beyond the “contract plans and specifications.”

Second Issue. The dispute resolution clause of the contract cannot be used to rewrite the express language in the contract regarding the scope of work. The clause stated that should any dispute arise respecting the true construction and interpretation of the plans, specifications and contract documents, the decision of the Owner or Owner’s designated representative would be final. The court states, “The law does not permit a party to use such a clause to rewrite the express language of a contract.” “The Florida Supreme Court has cautioned that ‘construction contracts cannot leave the arbitrary or fraudulent decision of an architect or engineer or the like to operate as a conclusive settlement of matters in controversy.”

In this case, says the court, the GC appears to argue for an interpretation of the subcontract that would preclude judicial scrutiny of even an arbitrary interpretation of the scope of the subcontract.” In rejecting such an argument, the court concluded, “In this case, to the extent that the Postal Service’s architect determined the scope of the project specifications in the subcontract, the determination was a “gross mistake” and was manifestly arbitrary,” since the only reasonable interpretation was that the subcontract didn’t encompass the removal of the existing asphalt on the parking lot.

The balance of this interesting decision deals with why the court reversed the trial judge with regard to award of monetary damages based on breach of contract. The court found that this added scope of work was not subject to the contract and could not be a contract dispute. The court then explained how the theories of quantum meruit and unjust enrichment were applied to grant the subcontractor relief. The matter was remanded to the trial court to hear evidence concerning damages to be awarded under those two legal theories.

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. 3 (May 2021).

Article 2

Contractor Cannot make Performance Bond Claim when it Failed to Terminate its Subcontractor

See similar articles: Condition Precedent | Default Termination | Performance Bond | Surety

GC barred from recovering from the surety for damages allegedly incurred due to faulty work of subcontractor because it failed to meet the conditions precedent to the performance bond responsibility. The surety bond expressly provided that obligations of the surety only arise after the subcontractor is declared to be in default and is, in fact, terminated. In this case the GC failed to terminate its Sub but instead hired other subcontractors to complete the allegedly defective work and then sent the surety firm an invoice for the costs. Federal District Court granted the declaratory judgment for the surety firm, holding that the bond was clear and unambiguous concerning the condition precedent and the surety owed no duty unless the subcontractor was terminated – which the GC chose not to do. Arch Insurance Co. v. Graphic Builders, LLC, 2001 WL534807 (U.S. D.C, Mass. 2021).

The subcontractor in this matter was R.C.M. Modular Inc. (“RCM”). The GC was The Graphic Builders LLC (“TGB”), which had a prime contract to construct apartment buildings. It subcontracted RCM to do certain modular construction work. Arch Insurance provided a performance bond covering RCM’s work on the project. That surety agreement bound Arch and RCM to perform the contract for TGB, and provides that the surety’s obligations arise on after (1) TGB “provides notice to [RCM] and the Surety that [TGB] is considering declaring a Contractor Default….” And (2) TGB “declares a Contractor Default, terminates the Construction Contract and notifies the Surety….”

Shortly after RCM fabricated and installed its modular units TGM complained that the exteriors of the modules were misaligned and 260 windows were leaking. Despite those defects, however, TGB didn’t terminate RCM but instead unilaterally arranged for various third-party subcontractor’s to remediate RCM’s work at a cost of more than $2.8 million. TGM subsequently sent the surety a demand to indemnify it for the remediation costs. Only when the surety refused to pay did TGM months later send letters to the surety stating that TGM was considering declaring RCM in default.

A year after the remediation work had been performed by others, TGM still had never declared RCM to be in default, but TGM sent the surety a letter declaring RCM in default but at the same time stating that TGB was “not yet terminating is subcontract with RCM.” The surety responded with a written letter to TGB refusing the request for indemnity payments, and this litigation was subsequently filed by the surety seeking declaratory judgment that it owed no duty to TGB. The surety filed a summary judgment motion on the basis performance bond unambiguously provided conditions precedent to the obligation to perform under the bond agreement and TGB failed to meet those conditions. TGB argued that the conditions did not apply in this matter. The court granted the surety’s motion for the reasons explained herein.

The court cites other numerous court decisions in the state that considered analogous language in performance bonds and concluded that the bonds establish specific conditions that must be satisfied before the surety owes any duty. Applying the identical surety bond language in another case, the court there stated “Compliance with the conditions precedent … is necessary in order to invoke the surety’s obligation under the performance bond and failure to do so is fatal to the obligee’s claim for coverage.”

Here, the court concluded that the bond clearly set forth the condition that TGB must terminate its subcontract with RCM to obligate the surety’s performance. Since TGB indisputably failed to terminate the subcontract, the court finds it breached the Performance bond and that the surety must be discharged from any and all liability related to the bond.

Article 3

Contractor had no Professional Liability Coverage under CGL Policy

See similar articles: Insurance Dispute | Professional Liability

When a swimming pool builder was sued by an individual that suffered injury in the pool that the builder contracted with the health club to design and construct. The complaint alleged negligent design. The builder tendered the claim to its commercial general liability (CGL) carrier and excess CGL carrier to defend. The carriers refused to defend – asserting that the professional liability exclusion in their policies barred such coverage. Summary judgment was granted to the carriers based on the fact that the complaint filed by the plaintiff alleged negligent design, and such design services were expressly excluded from coverage under the policies. Citizens Insurance Co. v. Panzica Building Corp., 2020 WL 7338495 (U.S.N.D. Indiana 2020).

Both insurance policies contained the typical professional liability exclusion found in GCL policies. The court found that claims regarding the negligent design of the pool and the failure to warn are not insured because the alleged negligence was not an “occurrence” as required under the policy, but were instead based on “professional errors and omissions.” “Occurrences”, ordinarily don't include contractual obligations, explains the court, which states that “In contrast to professional errors and omissions, a CGL policy insures against ‘slip and fall accidents and the like.” The court states, “The failure to meet a standard of care under a contractually assumed duty is not an ‘accident.’”

In this case, the underlying litigation involved a contractual relationship with a health club and a builder, which required the builder to design and construct the Health & Lifestyle Fitness Center – including the pool. The contract stated that architectural services would be provided by the principal of Panzica and by another named individual acting as a subconsultant. The court states that the Center “sought out PBC for its design expertise.” Looking at the words in the Complaint, the plaintiff asserted that the injuries occurred due to the rendering of or failure to render professional services.

Three exclusions in the CGL policies specifically reference architectural and engineering work and both policies contained the following two exclusions:

“(1) the preparing, approving, or failing to prepare or approve, maps, shop drawings, opinions, reports, surveys, field orders, change orders, or drawings or specifications; and (2) supervisory or inspection activities performed as any related architectural or engineering activities.”

"In determining whether the professional liability exclusion applies to a given situation, “the focus must be on whether the claimant is seeking to impose liability for acts which were taken in the course of providing professional services and which drew upon … the professional’s training, skill, experience, or knowledge.”

PBC asked the court to review and analyze the facts in the underlying litigation, but the court stated it wouldn’t do that because that is beyond the scope of the case. Instead, the court “looks only to the complaint to see if coverage would attach if proven true.” Because the complaint on its face alleges negligent design by PBC that is all the court will rely upon in rendering its decision.

Risk Management Comment: Builders and contractors who offer design services as part of their work proposals should obtain professional liability coverage rather than argue that their CGL polices will cover their professional exposures. It is surprising how many court cases there are similar to the one reported here.

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ConstructionRisk Report (May 2021)