In this week’s cases:

• Waiving the right to arbitrate
• Time limits for claims under a payment bond
• Third party beneficiaries are held to terms in a payment bond despite absence of written agreement
• Without evidence, claims that a subcontractor first breached a contract failed
• Supplier entitled to payment under payment bond even though contract was terminated
• Contractor has three years to make claims under a builder’s risk policy in North Carolina
• A subcontractor may not sue an owner directly for payments due from a contractor
• An insured homeowner is entitled to repairs to damaged property rather than the cost of the repairs
• To recover under a “had and received claim,” a homeowner must prove that the contractor obtained money that it had no right to in law or equity
• Defective work within the scope of the construction contract is excluded from coverage by a CGL insurance policy’s contractual limitation exclusion
• Walking off a project and telling subcontractors to walk off the job was not willful or malicious injury to a homeowner under the bankruptcy statute
• Injunctive relief against an Alabama county does not require notice within 12 months of the claim’s accrual
• Unlicensed Arizona contractor permitted recovery in arbitration
• The expert offering a certificate of Merit in Texas must have knowledge, skill, experience, and training that relates to the specific professional negligence issue in its claim

Waiving the right to arbitrate.
In Mattie v. Rizzo Construction Pool Co., 128 Conn. App. 537, 2011 Conn. App. LEXIS 232 (2011), the court held that the right to arbitration may be waived if a subcontractor participates in attorney fact finding referred from legal proceedings without insisting on its right to arbitrate. The United States Navy had contracted for repairs and maintenance at the Groton submarine base. The general contractor subcontracted for the repair of a pool lining. The subcontract contained an arbitration provision. The Navy was displeased with the work of both the general contractor and subcontractor. Ultimately, the Navy entered into a settlement agreement with both the general contractor and subcontractor that contained an indemnification provision and also expressly preserved the subcontractor’s warranty for the work performed under the original contract. Subsequently, the Navy discovered a problem with the pool lining. The general contractor requested that the subcontractor honor its warranty. The subcontractor refused to honor the warranty until it was fully paid. In order to make the subcontractor honor the warranty and repair the pool, the general contractor paid the subcontractor. The subcontractor repaired the pool lining. In 2006, the general contractor filed suit and sought to recover the amount it paid to the subcontractor. The case was referred to an attorney fact finder.

The hearing was originally scheduled for September 2008 but the subcontractor successfully continued the proceeding until December 1, 2008. Thirty four days into the hearing, the subcontractor filed a motion to stay the proceeding arguing that the general contractor was obligated to participate in arbitration per the subcontract. The trial court found that the subcontractor had waived its right to arbitration. The motion to stay the proceedings was denied and the attorney fact finder recommended a judgment in favor of the general contractor. The subcontractor argued that it never waived its right to arbitration. The act of going to trial without insisting upon arbitration was considered a waiver of the right to arbitration. The subcontractor filed the motion to stay the proceeding two years after the suit was filed and thirty four days after the hearing commenced. That the subcontractor filed a motion to continue the hearing was evidence that it had actively participated in the proceedings. The trial court’s denial of the motion to stay was not erroneous.

Time limits for claims under a payment bond.
In Travelers Casualty & Surety Co. of America v. University Facilities, Inc., 2011 U.S. Dist. LEXIS 44411 (E.D. La. Apr. 25, 2011), the court held that surety in Louisiana could impose a contractual time limitation for claims against the bond so long as there are no other applicable statutory peremptive limitations. University Facilities, Inc., a private corporation, had entered into a ground and building lease agreement with a state university to develop and construct student housing facilities. The corporation contracted with a developer for the construction of the facilities. The developer contracted with a general contractor to construct eight dormitory buildings for a contract price of $33 million. A surety issued two payment bonds with multiple riders. The developer was the named principal and the corporation was named as the owner on the bonds. The riders named the general contractor and the university as additional obligees. The bond required that claims of the bond be filed within two years of the completion of the work. The general contractor completed construction of eight dormitory buildings in December 2005. In May 2009, the construction defects were discovered and the corporation sued the developer.

The corporation filed an arbitration demand against the surety. The surety argued that any claims under the two bonds were time-barred by the bond’s contractual two year limitation period. The corporation argued that claims on the bonds were not time barred because the contractual period was not applicable. The corporation further asserted the claims were governed by La. Civ. Code’s art. 3500 ten year prescriptive period. Under Louisiana law, a performance bond could contractually limit a suretyship in any lawful manner. A contractual time limitation controlled over a statutory prescriptive period but not over a statutory peremptive period. The statute provided a statutory prescriptive period. The statute’s limitation was not applicable. Because the corporation failed to provide evidence of any applicable peremptive period the bond’s two year time limitation was applicable. Because the claims on the bond were filed more than two years after work on the project was completed, the corporation’s claims were time barred.

Third party beneficiaries are held to terms in a payment bond.
In Travelers Casualty & Surety Co. of America v. University Facilities, Inc., 2011 U.S. Dist. LEXIS 44411 (E.D. La. Apr. 25, 2011), the court held that a payment bond’s contractual time limitation is enforceable against a third party beneficiary even if the beneficiary fails to sign the bond agreement. A surety had argued that a corporation’s claims on the two bonds were barred by the two year contractual limitation period included in the bond. The corporation argued that, as a third party beneficiary, the two year contractual limitation was only enforceable if it agreed to the limitation. The corporation further asserted that the two year contractual time limitation was not applicable because it had not signed the bond form and therefore had not agreed to the limitations. Instead, the corporation claimed that the La. Civ. Code art. 3500’s ten year prescriptive period was applicable and its claims on the bonds were valid. A contractual time limitation was controlling over a conflicting prescriptive period. Therefore, the statute’s ten year prescriptive period was only applicable if the two year contractual limitation was found invalid. It was undisputed that the corporation was third party beneficiary of the bond agreements. Under Louisiana law, a contractual time limitation was enforceable even if the third party beneficiary had not expressly assented to the contractual provision. The corporation’s failure to sign the bonds had no effect on the enforceability of the two year contractual limitation. The bonds’ two year contractual limitation provisions were valid and the statute’s ten year prescriptive period was not applicable. Because the corporation failed to file suit until more than two years after the work on the project had been completed, its claims on the bonds were time barred.

Without evidence, claims that a subcontractor first breached a contract failed.
In United States ex rel. Thyssenkrupp Safway, Inc. v. Tessa Structures, LLC, 2011 U.S. Dist. LEXIS 46044 (E.D. Va. Apr. 27, 2011), the court held that only evidence of a material breach will excuse a non-breaching party from performing under a contract. A general contractor for the restoration and repair of the FBI Academy in Quantico, Virginia furnished a Miller Act payment bond. The general contractor subcontracted with for the masonry repair work on the project. The subcontractor hired a sub-subcontractor for the supply of scaffolding on the project. The subcontractor and the sub-subcontractor entered into a rental agreement for the scaffolding effective from January 2009 through October 22, 2009. The general contractor terminated the subcontractor from the project on October 7, 2009. The sub-subcontractor was not notified that the subcontractor had been terminated from the project. The sub-subcontractor tendered invoices to the subcontractor which were never paid. The subcontractor claimed that the sub-subcontractor’s work had been deficient. The sub-subcontractor filed suit against the subcontractor for breach of contract. The subcontractor denied that it had breached the contract because the sub-subcontractor had breached the contract first with its deficient work. The sub-subcontractor also filed suit against the general contractor and surety and sought payment pursuant to the Miller Act. The subcontractor argued that the summary judgment on the sub-subcontractor’s breach of contract claim was not appropriate because the sub-subcontractor’s work was deficient. The subcontractor claimed that summary judgment was not appropriate because a dispute existed as to whether the subcontractor could recover for a breach of contract when it had provided deficient work. A non-breaching party was excluded from subsequent performance under a contract if the breaching party materially breached the contract. A breach was considered material if it was so fundamental that the failure to perform defeated an essential purpose of the contract. The subcontractor failed to provide any evidence, other than its own allegations, that the sub-subcontractor actually breached the contract. No reasonable jury could have found that any alleged breach by the sub-subcontractor was material without such evidence. Because the sub-subcontractor had not materially breached the contract, the subcontractor was not excused from performing under the contract. The subcontractor’s failure to pay the sub-subcontractor was an unexcused breach of the contract. The sub-subcontractor’s motion for summary judgment on its breach of contract claim was granted.

Supplier entitled to payment under payment bond even though contract was terminated.
In United States ex rel. Thyssenkrupp Safway, Inc. v. Tessa Structures, LLC, 2011 U.S. Dist. LEXIS 46044 (E.D. Va. Apr. 27, 2011), the court held that a supplier that reasonably believes in good faith that its materials are used on a federally bonded project is entitled to protection under the Miller Act bond even though the subcontract had been earlier terminated. A general contractor and its surety had argued that a sub-subcontractor’s Miller Act claim was not appropriate because the general contractor had paid the subcontractor in full for the sub-subcontractor’s work. The general contractor and surety also asserted that the sub-subcontractor sought recovery for work performed after the subcontractor had been terminated from the project. A supplier that reasonably believed, in good faith, that the materials it was supplying were being used on a bonded project was protected by the bond. The subcontractor had been terminated on October 7, 2009. The sub-subcontractor was not notified of the subcontractor’s termination and continued to deliver supplies until October 22, 2009. The sub-subcontractor reasonably believed, in good faith, that the supplies it provided up to October 22, 2009, were being used on the bonded project. The sub-subcontractor was entitled to the protection of the bond for all the supplies it provided, including those delivered after the subcontractor was terminated from the project. The general contractor and surety were not relieved from liability under the Miller Act payment bond merely because they had paid the subcontractor in full. Because the general contractor and surety were liable under the bond and the sub-subcontractor reasonably believed that it was supplying equipment for use on a bonded project, summary judgment on the Miller Act claim was granted.

Contractor has three years to make claims under a builder’s risk policy in North Carolina.
In Cleveland Construction, Inc. v. Fireman’s Fund Insurance Co., 2011 U.S. Dist. LEXIS 46368 (W.D.N.C. Apr. 29, 2011), the court held that the applicable statute of limitations period for a breach of contract claim in North Carolina was three years. Mecklenburg County had contracted for the construction of a new courthouse. An insurer issued the county a builder’s risk insurance policy. The insurance policy excluded coverage for defective workmanship. On March 2, 2006, the general contractor was informed that it was being held responsible for repairing damaged drywall. On March 22, 2006, the general contractor received notice that it was being held responsible for the damage to the roof. The general contractor submitted claims to the insurer for the costs it incurred in repairing the courthouse’s roof and drywall. The insurer refused to pay arguing that the claims were excluded under the policy because the damage had been caused by the general contractor’s defective work. On April 15, 2009, the general contractor filed suit against the insurer for breach of the insurance contract. The insurer argued that the general contractor’s breach of contract claim was barred by the applicable statute of limitations. Under N.C. Gen. Stat. § 1-52(1), the applicable statute of limitations for a breach of a contract claim was three years. The statute required the filing of all breach of contract claims within three years after the insured gained knowledge of the loss or damage. The general contractor was notified of the loss no later than March 22, 2006 but failed to file the breach of contract claim until over three years later on April 15, 2009. The general contactor’s breach of insurance contract claim was barred by the applicable statute of limitation. The court granted the insurer’s motion for summary judgment.

A subcontractor may not sue an owner directly for payments due from a contractor.
In Truland Services Corp. v. McBride Electric, Inc., 2011 U.S. Dist. LEXIS 45668 (D. Md. Apr. 27, 2011), the court held that a subcontractor could not recover from a property owner under the theories of unjust enrichment and quantum meruit when the subcontractor had a contract with the general contractor but no contract with the property owner. Home Depot had contracted for the installation of electrical systems and new power generators at multiple retail stores. The contractor subcontracted for the electrical labor and materials on the project. The subcontractor furnished the labor and materials as directed by the contractor. The subcontractor claimed that the owner was aware of and fully accepted its work. The subcontractor claimed that neither the contractor nor the owner paid it for the work and materials it furnished on the projects. The subcontractor filed suit against the owner for quantum meruit and unjust enrichment. The owner argued that the contractor had been paid in full for the subcontractor’s work. The owner argued that the subcontractor’s quantum meruit and unjust enrichment claims were not appropriate because the contractor had been paid in full for the subcontractor’s work. The owner also asserted that, upon nonpayment by a general contractor, a subcontractor’s only course of action was to either sue the general contractor or file a mechanic’s lien. The owner claimed that the subcontractor’s claims were merely attempts to rectify its failure to avail itself of the proper course of action. The subcontractor failed to present any applicable law which would permit a subcontractor to recover from a property owner for unjust enrichment or quantum meruit when the subcontractor had a contractual relationship with the general contractor but not with the property owner. The subcontractor never contracted with the owner. The subcontractor was not permitted to recover from the owner on the theories of quantum meruit or unjust enrichment. The subcontractor lacked a plausible claim for relief and granted owner’s motion to dismiss the subcontractor’s quantum meruit and unjust enrichment claims.

An insured homeowner is entitled to repairs to damaged property rather than the cost of the repairs.
In Smith v. Alacrity Services, LLC, 2011 U.S. Dist. LEXIS 42829 (D. Md. Apr. 20, 2011), the court held that a homeowner could recover for unjust enrichment from a general contractor that repaired damage for an insurance company, but only if the contractor benefitted by infringing on the homeowner’s interests. Amy Smith’s house caught fire and incurred roughly $36,000 in damage. The homeowner submitted a claim to its insurer. Alacrity Services, LLC was a corporation that maintained a network of contractors across the country to repair insured damage. The member contractors agreed to pay the corporation 2.8% of any monies received as a result of referrals made by the corporation. The insurer frequently used the corporation when it needed a local contractor to perform repair work under its insurance policies. The first step of the network process was for the corporation to select a contractor. The selected contractor was then presented for approval by both the insured and the insurer. If the contractor was approved, the insurer would deposit the agreed-upon amount into an account that was managed by the corporation. The corporation supervised the contactor’s draws and confirmed the completion of the work to the insurer. The corporation provided an approved contractor and the insurer deposited funds into an account managed by the corporation. Upon completion of the repair work, the corporation withheld for itself 2.8% from the funds in the account. The homeowner claimed the corporation wrongfully withheld for itself 2.8% of the total insurance claim that she was entitled to without her knowledge or consent. The homeowner claimed that the corporation had no right at law or equity to the 2.8% it withheld for itself. The homeowner filed a claim for unjust enrichment and another claim for money had and received against the corporation. The homeowner argued that the corporation had received a benefit by infringing on her interests in the money. The homeowner was entitled to have the insurer pay for the repairs to her property. However, the homeowner could only recover the 2.8% if she was able to prove that she was entitled to a certain amount of money for the repairs. The homeowner failed to establish that she was entitled to anything more than the repair of her property. The homeowner’s property had been completely repaired. The homeowner was unable to prove that she had an interest in the withheld money. Because the homeowner failed to prove that the corporation had received a benefit by infringing on her interests, the corporation’s motion for summary judgment on the unjust enrichment claim was granted.

To recover under a “had and received claim,” a homeowner must prove that the contractor obtained money that it had no right to in law or equity.
In Smith v. Alacrity Servs., LLC, 2011 U.S. Dist. LEXIS 42829 (D. Md. Apr. 20, 2011), the court held that a homeowner was wrong with she had argued that a contractor had no right in law or equity to the money it withheld for its fees for repairing insured damage to her home. The homeowner claimed that she had been entitled to the money withheld by the contractor because it was part of her insurance claim. To recover under the money had and received claim, the homeowner was required to show that the contractor received money, as a mistake of law or fact, that it had not had a right to obtain. The homeowner failed to provide any evidence that she was actually entitled to the disputed money. The court held that without other evidence, the homeowner’s claim that she had a right to the money was insufficient to prove that the contractor had mistakenly received money in which it had no right to obtain. The money “had and received claim” failed and the court granted summary judgment in favor of the corporation.

Defective work within the scope of the construction contract is excluded from coverage by a CGL insurance policy’s contractual limitation exclusion.
In Ewing Construction Co. v. Amerisure Insurance Co., 2011 U.S. Dist. LEXIS 45827 (S.D. Tex. Apr. 28, 2011), the court held that a contractor’s defective work within the scope of the construction contract is excluded from coverage by the CGL insurance policy’s contractual limitation exclusion. A school district had contracted with a general contractor for the construction of a tennis facility in Texas. The general contractor was issued a CGL policy that covered property damage that was caused by an occurrence. The insurance policy contained a contractual liability exclusion provision which excluded coverage for liability that the general contractor assumed pursuant to a contract. The general contractor completed construction on the project. Subsequently, cracks formed which made the tennis court unusable. The school district claimed that the general contractor deficiently constructed the tennis facility and filed suit against the general contractor for breach of contract and negligent construction. The general contractor tendered the district’s breach of contract claim to the insurer for a defense. The insurer denied that it owed a duty to defend arguing that the coverage was excluded by the policy’s contractual liability exclusion. The general contractor argued that the insurer was obligated to provide it with a defense because the district’s claim was covered by the insurance policy. Generally, the insurer was obligated to defend any lawsuit that was brought against the general contractor that alleged an event potentially covered by the policy. The policy covered property damage that was caused by an occurrence. The district’s claim potentially fell within the policy’s coverage unless there was a policy exclusion that applied. The policy’s contractual limitation exclusion excluded coverage for liability assumed by the general contractor pursuant to a contract. The contractor assumed liability for its own construction work pursuant to its contract with the district. The contractual limitation exclusion was applicable unless there was a valid exception to the exclusion. Liability that the general contractor would have incurred in the absence of the contract was an exception to the policy’s contractual liability exclusion. Despite the fact that the allegations against the general contractor included a claim for negligence, the court refused to find that liability would have existed in the absence of the contract because recovery was only sought for property covered under the contract. The exception to the contractual liability was not applicable. The district’s claims were not covered by the insurance policy and the insurer had no duty to provide a defense. The insurer’s motion for summary judgment was granted.

Walking off a project and telling subcontractors to walk off the job was not willful or malicious injury to a homeowner under the bankruptcy statute.
In Stanley v. McLain (In re McLain), 2011 Bankr. LEXIS 1602 (Bankr. W.D. Tex. Apr. 29, 2011), the court held that a contractor that intentionally ceased work on a project before its completion had not willfully or maliciously injured a Texas homeowner for purposes of the Bankruptcy Code’s dischargeability exception. Homeowner had contracted for the renovation of an existing home. Under the contract, the homeowner agreed to pay the contractor $117,511 for his work. The homeowner obtained a one year construction loan to finance the project. The homeowner claimed that the contractor represented that the project would take six to eight weeks and that the home would be habitable during construction. The contractor denied making the representations. The homeowner became displeased with the quality and pace of the contractor’s work. The homeowner claimed that after eight months of construction, the project had been at best forty percent complete. The homeowner also asserted that his house was inhabitable during the project. After receiving complaints from the homeowner, the contractor ceased work on and instructed all subcontractors to walk off the job. The homeowner filed suit against the contractor for breach of contract and violations of the Texas Deceptive Trade Practices Act. A jury returned a verdict in favor of the homeowner. Subsequently, the contractor filed for Chapter 7 bankruptcy. The homeowner filed suit against the contractor arguing that the judgment it obtained in the earlier trial was not dischargeable under 11 U.S.C.S § 523(a)(2) or 11 U.S.C.S. §523(a)(6). The homeowner argued that judgment debt owed was not dischargeable under § 523(a)(2) because the contractor made knowingly false representations regarding the completion date of the project and the habitability of the home during construction. The homeowner also argued that the judgment debt was not dischargeable under §523(a)(6) because it was willfully and maliciously injured by the contractor when it intentionally ceased work on the project and told the subcontractors to walk off the job. Debt obtained by false representations or fraud was not dischargeable under § 523(a)(2). Under § 523(a)(2), the homeowner had to prove that the contractor knowingly made a false representation. The homeowner failed to present sufficient evidence that the contractor actually made the alleged representations. § 523(a)(2) was not applicable. Debt for willful or malicious injury was excepted from discharge under §523(a)(6). The fact that the contractor ceased work on the project and told the subcontractors to walk off the job was insufficient to show that the contractor willfully or maliciously injured the homeowner. Additionally, the fact that the contractor was found liable for intentional violations of the Act was insufficient to activate §523(a)(6)’s dischargeability exception. Because neither sections were applicable, the judgment debt was dischargeable.

Injunctive relief against an Alabama county does not require notice within 12 months of the claim’s accrual.
In Hobbs v. Mobile County, 2011 Ala. LEXIS 55 (Ala. Apr. 22, 2011), the court held that a claim for injunctive relief was not subject to requirements that an Alabama county be notified within 12 months of the accrual of a claim against the county. Homeowners purchased real property in Alabama. The homeowners spent substantial time and money improving the property, including the construction of a five acre pond. A few years after the homeowners purchased the property, the county designed and modified its storm water capture and drainage system. As a result of faulty design and construction of the drainage system, large amounts of storm water began flowing onto the homeowners’ property. The homeowners’ home, land, and pond were all damaged by the storm water. The homeowners filed suit against the county alleging nuisance, negligent design, and negligent construction. The homeowners also asserted a claim for injunctive relief. The county argued that it was entitled to a dismissal because the homeowner failed provide notice of their claims before filing suit as was required under Ala. Code §§ 6-5-20 and 11-12-8. The statute required all claimants to provide notice of their claims against the county to the county commission within 12 months of accrual. The homeowners argued that the statute’s notice requirement was not applicable. The homeowner claimed that relief that was historically equitable, including injunctive relief, was not subject to the statute’s notice requirements. The homeowners failed to provide the county with notice of its claims before it filed suit. However, claims in which a plaintiff sought a historically equitable remedy were an exception to the statute’s notice requirement. The homeowner’s suit included a claim for injunctive relief. Injunctive relief was a historically equitable relief. The homeowners had no obligation to provide the county with notice prior to filing its suit for injunctive relief. On the other hand, the homeowners’ claims for negligence and nuisance were not considered historically equitable relief and therefore were subject to the statute’s notice requirement. The appellate court affirmed the circuit court’s decision to grant the motion to dismiss on the negligence and nuisance claims and reversed as to the injunctive relief claim.

Unlicensed Arizona contractor permitted recovery in arbitration.
In Smith v. Pinnamaneni, 2011 Ariz. App. LEXIS 59, 607 Ariz. Adv. Rep. 35 (Ariz. Ct. App. Apr. 28, 2011), the court held that an Arizona construction contract is not always unenforceable because the contractor was not licensed when it signed the contract. A homeowner had contracted for the construction a new home. The contract contained an arbitration clause which provided that all claims that arose out of the contract were subject to arbitration. During construction, a dispute arose regarding the contractor’s work. The homeowner terminated the contractor from the project. The contractor demanded arbitration and sought relief against the homeowner for wrongfully termination and for payments owed. At the same time, the homeowner was engaged in litigation with a different company that was headed by the contractor’s president. The homeowner refused to arbitrate claiming that a stay of the arbitration proceedings was appropriate until its lawsuit with the related company was resolved. The arbitrator informed the homeowner that the arbitration was not stayed and encouraged participation. The homeowner still refused to participate in the arbitration. During this time, the homeowner discovered that the contractor had not been licensed at the time it signed the contract or during the first year of construction. The arbitration hearing was held without the homeowner and the contractor was awarded roughly $38,000. The contractor applied to the superior court for confirmation of the arbitration award. The homeowner opposed the award confirmation arguing that the contractor had fraudulently entered into a contract without a contractor’s license as required by Ariz. Rev. Stat. § 32-1153. The contractor asserted that the homeowner waived the licensing argument by failing to raise it in arbitration. The Arizona statute prohibited a contractor from maintaining any action in state court for the collection of compensation relating to contracted work when the contractor was not licensed at the time the contract was signed. However, a contract was not per se unenforceable merely because an unlicensed contractor violated the statute. An unlicensed contractor could still recover under a contact if it was able to show that it substantially complied with the licensing requirements. The burden was on the homeowner to affirmatively raise the lack of licensure defense. The contract expressly required arbitration for all claims brought under the contract. The arbitration hearing was valid and the homeowner should have raised all of its claims and affirmative defenses during the arbitration proceedings. A failure to plead an affirmative defense resulted in the waiver of the defense. The homeowner was deemed to have waived the lack of licensure defense because it failed to raise it in the arbitration proceedings. The superior court had not erred when it confirmed the arbitration award.

The expert offering a certificate of Merit in Texas must have knowledge, skill, experience, and training that relates to the specific professional negligence issue in its claim.
In Howe-Baker Engineers, Ltd. v. Enterprise Products Operating, LLC, 2011 Tex. App. LEXIS 3237 (Tex. App. Houston 1st Dist. Apr. 29, 2011), the court held that the Texas certificate of merit only required that one negligent act must be presented and supported by an expert affidavit. An owner had entered into a contract with an engineer to provide engineering design, procurement, and construction management services to build two gas processing plants in Wyoming and Colorado. Two years after the completion of the project, the owner filed suit against the engineer seeking to recover fees it overpaid as well as other damages for construction costs. The owner provided a certificate of merit from an expert engineer with the original petition and in accordance with the Texas Civil Practice and Remedies Code section 150.002. The expert was a registered engineer with experience in the gas-processing industry. The certificate focused on only one of the two construction projects and specifically identified three alleged acts, errors, or omissions committed by the engineer. Ten months after the initial suit was filed, the owner joined the engineer’s parent company as a vicariously liable additional defendant. The owner alleged that the engineer and parent company were alter egos of each other. The engineer argued that the owner’s certificate of merit did not satisfy the requirements of the Texas statute because the expert practiced an area of engineering which was different than the engineer. The engineer argued if the expert failed to meet the qualifications, then the certificate of merit was invalid. However, the statute only required that the expert was “competent to testify” and practiced in the same area of practice as the defendant. Furthermore, the statute required the owner to establish that the expert has knowledge, skill, experience, and training in gas-processing plants. The trial court found that the expert shared the same area of practice with the engineer and the expert had investigation and work experience in the gas-processing industry. The trial court correctly denied the motion for dismissal of the owner’s petition.

Construction Case Law Summaries 

In this week’s cases:

• Common law indemnity requires the parties share a common duty
• Personal liability in a Limited Liability Corporation
• Architect not entitled to a mechanic’s lien
• Equitable Contribution an available remedy between a subcontractor and a manufacturer
• A Nebraska excavator is strictly liable for damages to underground facilities if it fails to call the One-Call center
• Effective date of a lien’s attachment in Michigan
• There is no implied warranty claim for purely economic damages caused by a defective product for a commercial buyer in Ohio
• The New Jersey statute of repose only applies if improvements to real property result in a defective and “unsafe” condition
• Owner indemnified for its own negligence
• Oral agreements for additional work are arbitrated if the work is similar to the contracted work
• Project engineer not responsible for contractor’s compliance with laws and regulations
• Federal Act relieves contractor from conformance with General Bridge Act
• Texas certificate of merit requires only one negligent act to be identified for a lawsuit to proceed

Common law indemnity requires the parties share a common duty.
In Black & Veatch Construction, Inc. v. JH Kelly, LLC, 2011 U.S. Dist. LEXIS 48379 (D. Or. May 5, 2011), the court held that to recover under a common law indemnity claim from another party, the other party must have a common duty with the plaintiff. Portland General Electric had contracted with Black and Veatch Construction, Inc. for the construction of a power generating facility. Black & Veatch subcontracted with JH Kelly, LLC for the installation of a combustion turbine, associated air inlet filter house, and air inlet filter duct. The subcontract contained an indemnity provision which provided that JH Kelly would indemnify Black & Veatch for any and all liability incurred for physical damage caused to the owner’s property. The combustion turbine and the air inlet filter house and duct were all manufacturer by Mitsubishi Power Systems, Inc. JH Kelly completed the installation by connecting the combustion turbine with a compressor. Subsequently, the owner discovered that the compressor had been damaged by loose nuts and bolts. Black & Veatch paid for the damage to the compressor, the filed suit against JH Kelly claiming that it breached the subcontract by failing to clean the air inlet filter and duct. Black & Veatch sought indemnification from the subcontractor for the $1.5 million it spent on repairing the compressor and for an additional $2.1 million due to delays caused by the damage. JH Kelly sought indemnity and contribution from the manufacturer, Mitsubishi Power Systems. The manufacturer argued that JH Kelly’s indemnity claim was appropriate because there was no “common duty.” To recover under a common law indemnity claim, JH Kelly was required to show that it and the manufacturer owed Black & Veatch a “common duty.” JH Kelly was liable to Black & Veatch for a breach of the subcontract. The manufacturer was not a party to the subcontract nor was it liable for a breach of any other contract. Therefore, JH Kelly and manufacturer lacked a “common duty” and summary judgment was appropriate to the manufacturer.

Personal liability in a Limited Liability Corporation;”
In Integrated Architecture, LLC v. New Heights Gymnastics, LLC, 2011 U.S. Dist. LEXIS 49362 (N.D. Ohio May 9, 2011), the court held that an employee of an owner’s limited liability corporation may not be held personally liable for an owner’s breach of contract merely because he is a manager of the company. New Heights Gymnastics, LLC was a limited liability company in Ohio. The company sought to expand its facility. The company’s director of operations was married to the company’s owner. The director was given primary responsibility over the construction project. The company selected an architect to provide architectural services for the expansion project. The architect sent the company a proposed contract. The company refused to execute the proposed contract until it could obtain financing. Despite the lack of an executed contract, the architect began working on the project by preparing schematic drawings. The company was unable to obtain financing and informed the architect that the project had been terminated. The architect demanded $43,196 from the company for the architectural services it had provided. The company refused to pay and the architect filed a mechanics line against the company’s property. Additionally, the architect filed suit against the director personally for breach of contract, breach of the obligation of good faith and fair dealing, and unjust enrichment. The company argued that the mechanic’s lien was invalid. The director argued that he was not personally liable for any alleged breach because the company was a limited liability company. Under Ohio Rev. Code § 1705.48, a manager of a limited liability company was not personally liable to satisfy any judgment merely for being a manager of the company. The director was acting within the scope of his employment. Therefore, the director was acting as a manager of the company and was not personally liable for the alleged breaches. The employee’s motion for summary judgment was granted.

Architect not entitled to a mechanic’s lien…….
In Integrated Architecture, LLC v. New Heights Gymnastics, LLC, 2011 U.S. Dist. LEXIS 49362 (N.D. Ohio May 9, 2011), the court held that an architect was not entitled to a mechanic’s lien merely for drawing plans and specifications. An owner argued that an architect’s mechanics lien was invalid. The owner had asserted that the mechanic’s lien was invalid because the architect’s creation of schematic drawings had not physically improved the property. An architect was only entitled to a mechanic’s lien if it contributed to physical improvements on a property. An architect was not entitled to a mechanic’s lien for drawing plans and specifications. It was undisputed that the architect’s lien was based solely on the preparation of architectural drawings and that no work had been performed on the property. The architect was not entitled to a mechanics lien. The court awarded summary judgment in favor of the owner.

Equitable Contribution an available remedy between a subcontractor and a manufacturer.
In Black & Veatch Construction, Inc. v. JH Kelly, LLC, 2011 U.S. Dist. LEXIS 48379 (D. Or. May 5, 2011), the court held that under Oregon law, equitable contribution was a recognized theory of recovery not limited to disputes between insurers. A subcontractor had argued that it was entitled to recover from a manufacturer the subcontractor had hired to design and manufacture a combustion turbine under the theory of equitable contribution. The manufacturer argued that the equitable contribution theory of recovery was limited to disputes between insurers. Equitable contribution was a recognized theory of recovery and was not limited to disputes between insurers. Recovery under the theory of equitable contribution required a showing of a shared common liability. It was clear that that the subcontractor was liable to the general contractor for a breach of contract but there was no evidence that the manufacturer had breached any contract. The subcontractor and manufacturer had not shared a common liability and summary judgment in favor of the manufacturer on the equitable contribution claim was appropriate.

A Nebraska excavator is strictly liable for damages to underground facilities if it fails to call the One-Call center.
In Hallam v. L.G. Barcus & Sons, Inc., 281 Neb. 516, 2011 Neb. LEXIS 43 (2011), the court held that an excavator that did not call the state’s one-call center before it commenced excavation was strictly liable for any damage caused to an underground facility under Nebraska’s statutes. A tornado struck the village of Hallam, Nebraska and caused damage to grain storage facilities owned by Farmer Cooperative, Inc. After the tornado struck, the village hired a company to inspect the sanitary sewer system. The inspection company determined that the sanitary system was undamaged. Subsequently, the owners of the Farmer Cooperative contracted with McPherson Concrete Storage Systems, Inc. for the concrete work involved in repairing the damaged grain bins. The contractor subcontracted for the installation of an AugerPile foundation for the grain bins. Installation of the AugerPile foundation consisted of drilling a hole into the ground and filling it with grout. Nebraska had a one-call notification center that identified underground facilities to excavators. The subcontractor never contacted the center and began installation of the foundation. Soon after, the village received reports that sewage was backing up in homes and businesses west of the owner’s property. The village determined that the sewage was backing up because the sewer system had been damaged. The village repaired the sewer system at a cost of $96,007. The village filed suit against the subcontractor arguing that the subcontractor was strictly liable under Nebraska’s One-Call Notification System Act because it failed to call the center before installing the AugerPile foundation. The court granted the village’s motion for summary judgment on its strict liability claim against the subcontractor. The subcontractor argued that the village was barred from recovering under the Nebraska statute because the village was not considered an “operator” because it had not been a member of the state one-call center as required by the act. The subcontractor contended that the village was barred from recovering under the act because it had failed to satisfy the act’s membership requirement. The act required membership in the state one call center by “operators” of underground facilities. The village was an “operator” for purposes of the act despite the fact that it was not a member of the one-call center. Under the act, an excavator who failed to call the center was strictly liable to the “operator” of any underground facility damaged by the excavation. The subcontractor failed to call the center. The village’s failure to satisfy the membership requirement was not a defense to the subcontractor’s failure to call the center. The subcontractor was strictly liable for the damage caused to the underground facility caused by its excavation.

Effective date of a lien’s attachment in Michigan
In Michigan Pipe & Valve-Lansing, Inc. v. Hebeler Enterprises, 2011 Mich. App. LEXIS 803 (Mich. Ct. App. May 3, 2011), the court held that a suppliers’ lien in Michigan attached to a real property on the date a test well was drilled because it was a physical improvement to the property. A developer intended to develop a property into a 77-unit residential subdivision. On February 8, 2005, the developer contracted with a contractor to drill a well to collect water samples. Ultimately, the well was capped when the developer decided to use the municipal water supply instead. The developer obtained financing for the project. The lender recorded its mortgage on February 10, 2005. Subsequently, construction on the project was initiated. The developer hired contractor for the subdivision’s infrastructure and roads. The infrastructure contractor purchased supplies from two suppliers. The developer paid the infrastructure contractor in full. However, the infrastructure contractor failed to pay the suppliers. Both suppliers filed liens on the developer’s property. The lender argued that its mortgage had priority because the drilling of the well had not constituted an “actual physical improvement” under Michigan statute MCL 570.1103. The trial court held that the drilling had been an actual physical improvement for purposes of the statute and therefore that the liens of the suppliers had priority over the lender’s mortgage. The lender argued that the drilling of the well had not constituted an “actual physical improvement” to the developer’s property. The lender further argued that the well was not an “actual physical improvement” because it had not added any value to the property. Finally, the lender argued that the drilling of the well was not an “actual physical improvement” because it was performed in preparation for the actual physical improvement. Under the Michigan statute, the suppliers’ liens had priority if the lender’s mortgage was recorded subsequent to the first “actual physical improvement” to the developer’s property. “Actual physical damage” was a physical change in the real property, pursuant to a contract, which was readily visible. However, labor provided in preparation of the actual physical improvement was an exception and not considered an “actual physical improvement” under the statute. Digging the well was physical change to the developer’s real property which would have been readily visible. Nothing under the statute required that an “actual physical improvement” add value to the property. The supplier’s liens had priority unless the digging of the well fell under the statute’s exception. The statute named numerous exceptions that were not considered “actual physical improvements” such as surveying, soil testing, and preparation of engineering plans. The digging of a well was not one of the named exceptions. The court held that the digging of a well was not an exception under the statute. The suppliers’ liens attached on the date the well was drilled and were prior to the lender’s mortgage.

There is no implied warranty claim for purely economic damages caused by a defective product for a commercial buyer in Ohio.
In Apostolos Group, Inc. v. BASF Construction Chemicals, LLC, 2011 Ohio 2238, 2011 Ohio App. LEXIS 1909 (Ohio Ct. App., Summit County May 11, 2011), the court held that commercial consumers in Ohio are not permitted to bring a common law tort claim, based on a breach of implied warranty theory, for purely economic losses from a defective product. The Akron Metropolitan Housing Authority hired a contractor to apply a deck coating on exterior balconies at an apartment building in Ohio. The architect for the project specified that the contactor use Sonoguard deck coating. The Sonoguard was manufactured by BASF Construction Chemicals, LLC. The contractor purchased the Sonogaurd deck coating from a retailer and not the manufacturer. The contractor used the specified deck coating on the project, but the coating failed to harden properly. The contactor stripped the defective coating off the decks and applied another batch of the same coating. The second batch of Sonogaurd deck coating performed to expectations. The contractor suffered economic damages by having to strip and recoat the decks. The contractor filed suit against the manufacturer alleging breach of implied warranty. The trial court held that breach of implied warranty claim for purely economic damages caused by a defective product was not available to a commercial buyer. The contractor argued that there was no distinction between commercial and non-commercial consumers in cases where there was no privity. The contractor argued that a commercial consumer was permitted to recover purely economic damages when there was no privity. A breach of implied warranty tort claim for purely economic loss from a defective product was not available to commercial buyers. The court refused to differentiate between commercial and non-commercial consumers even when there was a lack of privity. The contractor’s breach of implied warranty claim was barred and the trial court’s decision to grant the manufacturer’s motion to dismiss was appropriate.

The New Jersey statute of repose only applies if improvements to real property result in a defective and “unsafe” condition.
In Port Imperial Condo. Association v. K. Hovnanian Port Imperial Urban Renewal, Inc., 17 A.3d 283, 2011 N.J. Super. LEXIS 73 (App.Div. 2011), the court held that under the New Jersey statute of repose, claims against a contractor for defective construction were precluded if they were not filed within 10 years of when the work is substantially completed if an unsafe condition existed. K. Hovnanian Port Imperial Urban Renewal, Inc. had contracted with an engineer for the design of a residential condominium community in New Jersey. The design called for numerous ground improvements. Two contractors were hired for the ground improvement work on the project. The contractors completed their work in February 1998. Subsequently, the developer discovered numerous problems with the condominiums including cracked foundations. The developer was informed by an engineer that the only way to remedy the problem was to demolish and rebuild the condominiums. The developer filed suit against the engineer for negligence, breach of contract, and breach of implied and express warranties. In March 2010, the engineer filed a third party claim against the contractors. The contractors argued that the engineer’s claims were barred by the applicable statute of repose. Although the New Jersey statute of repose precluded construction defect claims against contractors who completed improvements to the real property 10 years before the claims were filed, the statute was only applicable if the improvements to the real property resulted in a defective and “unsafe” condition. The engineer argued that the statute of repose was wrongfully applied. The engineer argued that the statute of repose was not applicable because an “unsafe” condition had not existed. The statute of repose began running on the date the contractors substantially completed their work. The claims were filed in 2010 and the contractors had completed their work in February 1998. The appellate court determined that the defective construction created an unsafe condition. Because the claims were filed more than 10 years after the improvements had been substantially completed and the improvements resulted in an “unsafe” condition, the statute of repose was applicable and the developer’s claims were barred. The trial court’s decision to grant the subcontractor’s motions for summary judgment was appropriate.

Owner indemnified for its own negligence
In Flintlock Construction Services, LLC v. American Safety Risk Retention Group, Inc., 2011 U.S. Dist. LEXIS 50729 (N.D. Ga. May 12, 2011), the court held that an owner could be indemnified from its own negligence if the indemnification was made as a private agreement or stipulation in a court order. Well-Come Holdings, LCC had hired Flintlock LLC as the general contractor for the construction of a new office building. The contract between the two parties contained a provision which provided full indemnification to the owner by the contractor against any claims due to negligence, breach or default by the contractor. The contract also required that the contractor provide insurance for itself as well as the owner. The contractor provided the owner with two certificates of insurance that named the general liability insurer and the contractor was listed as the named insured on the policy. During the construction process, several lawsuits were filed against the contractor and the owner. The owner demanded that the contractor defend it, in accordance with the contract. The contractor refused to defend the owner. The contractor claimed that the owner could not seek indemnification for its own negligence under Georgia’s General Obligations Law § 5-322.1. The owner argued that the contractor was obligated to defend and indemnify it pursuant to the construction contract. The owner further asserted that indemnification was appropriate because the contractor agreed to an earlier stipulation which had resolved an earlier declaratory judgment action. The contractor conceded that it was obligated to defend the owner against claims which resulted from its own negligence. However, the contractor argued that the statute prohibited a party to seek indemnification for its own negligence in a construction contract. The statute provided that a construction contract’s indemnification provision was not applicable to parties seeking indemnification for their own negligence. The court found that the indemnification agreement was not included in the construction contract. The indemnification agreement was pursuant to the stipulation placed on the initial settlement of a declaratory judgment. The contractor at that time agreed to defend the owner and possessed full knowledge of the underlying actions against the parties. The owner had the right to indemnification from its own negligence due to the stipulation agreement reached between the parties at the termination of the declaratory judgment and indemnification from the contractor’s negligence pursuant to the construction contract. The owner’s motion for summary judgment was granted.

Oral agreements for additional work are arbitrated if the work is similar to the contracted work.
In Muigai v. IMC Construction, Inc., 2011 U.S. Dist. LEXIS 48686 (D. Md. May 5, 2011), the court held that an arbitration clause was enforceable for claims that arose from a subsequent oral agreements, when those claims arise out of the same facts, circumstances, or business relationship of the original contract. IMC Construction, Inc. had hired Joseph Muigai to complete a variety of tasks during the renovation of a shopping mall. A written contract was formed and included the work description and pay rate. The contract also included an arbitration clause for any disputes that arose out of or related to the subcontract. The subcontractor alleged that two oral contracts were created after the completion of its initial work. The first oral contract called for the performance of other subcontractor’s punch list work items and the second oral contract called for the moving and reconstruction of three kiosks. The subcontractor alleged that this additional work should have been compensated by the same unit rates it received pursuant to the original written contract. A written contract was not executed for the additional work and the subcontractor asserted that the work was completed under oral agreements. The subcontractor submitted invoices for payment from both jobs, but the payment requests were denied by the contractor. The subcontractor filed suit against the contractor for claims that arose from the non-payment of its work. The contractor filed for a motion to dismiss based upon the arbitration clause in the contract and pursuant to the Federal Arbitration Act. The subcontractor argued that it entered into two separate oral agreements with the contractor which were not related to the original subcontract. The subcontractor then argued that the arbitration clause was not binding on these claims because the oral agreements were silent regarding the forum for dispute resolution. The contractor argued that the work constituted change orders under the original contract and was therefore subject to the contract’s arbitration clause. The court applied a significant relationship test to conclude that all claims which were related to the original contract and arose out of the same facts, circumstances, project or business relationship, were subject to the arbitration clause. By its terms, the arbitration clause applied to any dispute which arose out of or related to the subcontract. In this case, all the work which was associated with the subcontractor’s claims was related to and arose out of the projects associated with the original contracted work. The court deferred the claims to the arbitration panel and the contractor’s motion to dismiss was granted.

Project engineer not responsible for contractor’s compliance with laws and regulations.
In Grab v. Traylor Bros., Inc., 2011 U.S. Dist. LEXIS 48154 (E.D. La. May 4, 2011), the court held that a project engineer’s duty to ensure the contractor’s compliance of all applicable laws at the job site cannot be assumed or implied. Boh Brothers, Taylor Bros., Inc., Kiewit Southern Co., and Massman Construction Co., worked as a joint venture for the construction of a twin span bridge over Lake Pontchartrain. Volkert & Associates, Inc. was a consulting engineer hired by the Louisiana Department of Transportation and Development. The engineer acted as the quality control coordinator and ensured that the contractor’s work was in accordance with the plans and specifications. The contractors erected four survey towers in the lake near the bridge. All of the towers stood seven to nine feet above the mean water line, consisted of a forty-two inch diameter base and were marked with white navigational lights in order to be visible at night. The towers were not painted a bright color and were not marked with geometrically shaped placards. After the construction of the survey towers, two iron workers employed by the joint venture and working were injured when their crew boat collided with one of the survey towers. The workers then brought suit against the contractors and the engineer seeking damages for their injuries. The workers argued that the engineer had a duty to ensure compliance with all applicable laws under its contract with the owner. The workers further asserted that due to the engineer’s special role in the project as the quality control coordinator, the duty was imposed on it to identify, prevent and solve problems that arose with the contractor’s work. The engineer argued its role as the project inspector only required it to ensure that the contractors performed their work in accordance with the plans and specifications provided by the owner. The engineer also argued that it had no duty or involvement with obtaining permits for the project. The engineer’s contract had explicitly stated that the engineer had a duty to ensure that it complied with all applicable laws, but the contract did not place a duty on the engineer to ensure that the contractors complied with all laws. The engineer was not contractually related to the contractor’s joint venture. Since the engineer was not a party of the contractor’s joint venture, it had no duty to ensure that the contractors complied with all applicable laws. Summary judgment was granted to the engineer and the workers claims against it were dismissed.

Federal Act relieves contractor from conformance with General Bridge Act.
In Grab v. Traylor Brothers, Inc., 2011 U.S. Dist. LEXIS 48154 (E.D. La. May 4, 2011), two iron workers employed by the contractor and working were injured when their crew boat collided with one of the survey towers erected by the contractor to control bridge work over Lake Pontchartrain. The court in Grab v. Traylor Brothers ruled that the General Bridge Act relieves a contractor from fulfillment of the Code of Federal Regulations requirements when placing a structure in navigable waters. The workers had argued that the contractors had a duty to apply for a permit from the United States Army Corps of Engineers in order to erect the tower. The workers also argued that the contractors had a duty to paint the towers a bright color and mark it with geometrically shaped placards to make it more visible. The contractors argued that it was entitled to summary judgment because it complied with all the duties imposed upon it by the construction contract. The contractors further asserted that the only requirements imposed upon it were to notify the coast guard of the towers position and to place white navigational lights upon the tower. Title 33, part 64 of the Code of Federal Regulations required all individuals who place a structure in navigable waters of the United States to apply for a permit and the corps of engineers authorization. The statute also provided that the Coast Guard District in which the structure was located would then determine the marking requirements. However, the statute’s requirements were waived due to the General Bridge Act of 1946. Under the act, the contractor was relieved of the enhanced requirements imposed by the statute when Congress authorized the construction of the bridge over the navigable waters. The contractors had no duty to obtain a corps of engineers permit and authorization but a duty to ensure that the towers were plainly visible to mariners pursuant to the construction contract. Summary judgment was granted to the contractors regarding the alleged duties to obtain permits and its compliance with the statute.

Excess insurer liable for balance of liability even though contesting that primary insurer’s payment was not all properly due under the primary insurer’s policy.
In Edward E. Gillen Co. v. Ins. Co. of the State of Pa., 2011 U.S. Dist. LEXIS 48119 (E.D. Wis. May 3, 2011).a primary insurer and excess insurer are not jointly and severally responsible for the entirety of the risk, instead each insurer is only obligated to cover a specific portion of that risk. The general contractor for the demolition and construction of a new school building hired a subcontractor to design and install an earth retention system (ERS) to stabilize the ground and minimize the risk to neighboring properties. During the ERS installation process, an adjacent home sustained damage due to the subcontractor’s negligent installation of sheet piling. The project was stopped immediately in order to prevent any further damage to the home. The contractor brought a suit against the subcontractor seeking damages for the project delay and damages to the adjacent home. An arbitration panel awarded the contractor approximately $2.1 million in damages. The subcontractor’s primary liability insurer’s policy had a per-occurrence limit of one million dollars. The primary insurer paid its policy limit of one million dollars. The subcontractor’s excess liability insurer refused to pay any amount of the arbitration award. The subcontractor sought declaratory relief that it was entitled to indemnification for the balance of the arbitration award from the excess insurer. The primary insurer requested a declaration that it exhausted its policy limits and it owed no further duty to defend or indemnify the subcontractor. The excess insurer argued that the primary insurer was obligated to challenge the coverage and damage amount before it paid any amount of the arbitration award. The excess insurer argued that approximately $524,000 of the amount paid by the primary insurer was for economic losses due to the project delay and was not covered by the primary insurer’s policy. The excess insurer further asserted that since the primary insurer had not exhausted its applicable limits. The subcontractor was obligated to seek payment from the primary insurer first and not the excess insurer. The primary insurer argued that the challenge and undermining of its decision to pay out the coverage limits was not a defense available to the excess insurer. The primary insurer’s policy was a per-occurrence limit, which meant that its duty to defend and indemnify ended when it paid out up to the coverage limit. The individual insurers were not jointly and severally responsible for the entirety of the risk. Instead, each insurer contracted with the insured to cover a specific portion of the risk. The excess insurer’s argument that the primary insurer was obligated to contest the coverage was contrary to the law in Wisconsin which promoted settlements as opposed to costly litigation. The primary insurer’s motion for summary judgment was granted.

Texas certificate of merit requires only one negligent act to be identified for a lawsuit to proceed.
In Howe-Baker Engineers, Ltd. v. Enterprise Products Operating, LLC, 2011 Tex. App. LEXIS 3237 (Tex. App. Houston 1st Dist. Apr. 29, 2011), the court held that the Texas certificate of merit only requires that one negligent act must be presented and supported by an expert affidavit. An owner had entered into a contract with an engineer to provide engineering design, procurement, and construction management services to build two gas processing plants in Wyoming and Colorado. Over two years after the completion of the project, the owner filed suit against the engineer seeking to recover fees it overpaid as well as other damages for construction costs. The owner provided a certificate of merit from an expert professional engineer with the original petition and in accordance with the Texas Civil Practice and Remedies Code section 150.002. The expert was a registered engineer with experience in the gas-processing industry. The certificate focused on only one of the two construction projects and specifically identified three alleged acts, errors, or omissions committed by the engineer. Ten months after the initial suit was filed, the owner amended its petition joining the engineer’s parent company as a vicariously liable additional defendant. The owner alleged that the engineer and parent company were alter egos of each other. The engineer argued that the owner’s certificate of merit did not satisfy the requirements of the statute and filed for a motion to dismiss. The engineer asserted that the certificate failed to specifically assign error to the parent company. The engineer also argued that the certificate failed to assign claims to one of the two individual gas processing plant projects. Due to these requirement issues, the engineer argued that the certificate of merit was void and lacking this certificate requirement meant that the suit should be dismissed. However, the statute did not require a supporting affidavit for every individual factual allegation, but instead only required at least one negligent act to be identified for the lawsuit to proceed. The engineer’s arguments were not persuasive because the petition was directed toward a breach of contract that governed both projects and not a contract that governed only one project. The expert affidavit satisfied the statute’s requirement by mentioning multiple acts of negligence. The expert affidavit was not defective for lack of specific reference to either project. The trial court correctly denied the motion for dismissal of the owner’s petition.

Construction Case Law Summaries 

In this week’s cases:

• Accepted Work Doctrine in Texas trumps contractor duty to public
• The public disclosure bar for the federal False Claims Act
• Subsequent construction contract not signed does not invalidate a prior valid contract
• Construction Liens in Florida
• Public agency’s immunity from change order claims
• Enforcing an agreement to arbitrate in the District of Columbia
• Union not liable for substitution of non-union concrete supplier
• Certificate of merit is required with the first complaint of negligence against a licensed professional in Texas.
• Subrogation between coinsurers
• When property damage occurs
• Attorneys’ fees under the federal False Claims Act

Accepted Work Doctrine
In Allen Keller Co. v. Foreman, 2011 Tex. LEXIS 294, 54 Tex. Sup. Ct. J. 850 (Tex. 2011), the court held that under the “accepted work” doctrine, contractors owed no duty to rectify or warn of dangerous site conditions after the work has been approved by the property owner. A Texas county had hired a contractor to excavate an embankment and erect a concrete pilot channel next to a one lane bridge spanning a river. The contract between the county and contractor contained a provision that the contractor must adhere to the engineering specifications produced by an independent engineer. The engineering plans called for a widening of the gap between the guardrail and the embankment by at least ten feet. The contractor completed the project and the engineer certified that it was completed according to the specifications. After the engineer’s certification, the county accepted the contractor’s work. Seven months after completion of the project, decedent lost control of her vehicle and passed through the gap between the guardrail and the embankment. The vehicle then rolled into the river, where the decedent drowned. The decedent’s estate filed a wrongful death action against the contractor. The trial court granted the contractor’s motion for summary judgment. The Court of Appeals held that the contractor was not entitled to summary judgment because the estate had supported its claim that the contractor created a dangerous condition at the job site. The contractor argued to the Supreme Court that under the “accepted work” doctrine, contractors were immune from liability when the work was accepted by the property owner or where the contractor was not required by the contract to make the premises safe. The estate argued that the decision of Strakos v. Gehring was binding. This case held that a contractor who created any dangerous condition owed a duty of care to the general public, regardless of the circumstances. But the Engineer had certified the contractor’s compliance with the contract specifications and the County accepted and paid the contractor for the work. The contract required absolute compliance with the contract specifications. The contractor could not attempt to rectify the dangerous condition because that act would have altered the terms of the contract. The accepted work doctrine applied because the county was aware of the conditions at the site, and the work was certified by the engineer before the contractor left the project. The case argued by the estate was not binding since the contractor owed no duty to rectify the site conditions or to warn of them. The judgment of the court of appeals was reversed.

 Subsequent construction contract not signed does not invalidate a prior valid contract
In Sam Rodgers Properties v. Chmura, 2011 Fla. App. LEXIS 5943 (Fla. Dist. Ct. App. 2d Dist. Apr. 27, 2011), the court held that a subsequent construction contract that was not signed did not invalidate a prior valid contract. A homeowner had hired a contractor for the construction of a custom home. The homeowner signed a contract to build the house on a specified lot for a specified price. However, a second contract was submitted by the contractor calling for an additional ten thousand dollars. The contractor failed to attain the homeowner’s signature on the second contract or any other document indicating that the price had been changed. The homeowner sent letters to the contractor concerning the price increase but took no measures in stopping the construction of the home. The contractor requested two draw payments that the homeowner failed to pay. The contractor then halted construction and recorded a claim of lien for the work completed. In order to keep the investment safe from the elements and vandals, the contractor completed an additional amount of work on the home. An amended claim of lien was then filed within 90 days and reflected the additional amount of construction costs. Two months after the claim of lien was recorded, the contractor filed a lawsuit to foreclose the lien. The homeowner counterclaimed against the contractor for rescission. The trial court found the claim of lien was void. The homeowner argued on appeal that the contractor began construction of the home without a valid contract, that there was never a meeting of the minds, and no signed contract to prove otherwise. The contractor argued that even if the second contract was unenforceable, the homeowner was still bound by the original, enforceable written contract. A breach of contract required the contractor to prove that there was a “meeting of the minds” and mutual assent to all essential terms of the contract. The parties satisfied the meeting of the minds requirement by assenting to the lot chosen and the price of the lot as well as the initial base price for the construction of the house. The original contract was valid and enforceable. Because there was a binding initial contract, the breach of that contract by the homeowner entitled the contractor to damages. The trial court’s ruling was reversed.

Construction liens in Florida
Sam Rodgers Properties v. Chmura, 2011 Fla. App. LEXIS 5943 (Fla. Dist. Ct. App. 2d Dist. Apr. 27, 2011), a contractor’s construction lien in Florida is timely filed if done 90 days before the final act of labor that benefits both the contractor and owner.  The contractor had asserted that the amended claim was filed under the statutory time restraints and the claim was based on the work performed to protect the partially completed home. Under the applicable Florida statute, a contractor has ninety days after the final act of labor, or service, to record a claim of lien. Based on this statute, the contractors filing of the lien was timely because it was filed before the ninetieth day after the additional construction was completed. The court found that the additional work to protect the unfinished home benefited both the contractor’s investment and the owner. The correct date which should have applied to the claim of lien was the final act of labor done to protect the unfinished home from the elements and vandals. The trial court erred by rejecting the amended claim of lien.

Public agency’s immunity from change order claims
In Kuhn Construction Co. v. Diamond State Port Corp., 2011 U.S. Dist. LEXIS 44635 (D. Del. Apr. 26, 2011), the court held that an agency has no right to Eleventh Amendment state immunity if the State treated the agency as separately incorporated and if the State was not responsible for the payment of judgments against the agency. The Delaware General Assembly had established a port authority with the purpose of owning, operating, and maintaining the Port of Wilmington. The actions and activities of the public agency were governed by a board of directors. The agency received funding from the State for improvement projects. The funding was given to the agency from the General Assembly in the form of bond bill appropriations and borrowings. A contractor entered into a contract with the agency at an agreed upon price of $10.75 million for all items, materials, work descriptions, project duration, and means of payment. During performance the contractor requested a variety of changes including additional work which should have been reflected in the contract. When these changes and additions were not added to the contract and the agency withheld payments, the contractor filed an action against the agency asserting claims for fraud and misrepresentation, civil conspiracy, and breach of contract. The contractor argued that the agency withheld payments for the additional work, which was not included in the original contract. In addition, the contractor also submitted claims to the agency for approximately $14 million for extra work and design changes. The agency argued that it acted as “an arm of the State” through the project funding and board of director’s relationship. The agency argued it was entitled to state immunity from claims by the Eleventh Amendment. The court applied a two factor test to determine whether Eleventh Amendment immunity applied to the owner. State immunity was not applicable to an agency when the State had no responsibility for the payment of a judgment against the agency, and the agency was treated as separately incorporated. The state treasury was not legally responsible for the judgment of any payments the agency might have been liable for due to a statutory disclaimer. The agency’s business was also a separately incorporated entity which had the right to sue, was taxed by the state and had no power to tax or issue bonds. Lastly, the agency exercised many different autonomous practices, such as adopting by-laws to organize and govern its affairs, entering into contracts under its own name, and conducting financial transactions under its own name. The practices and actions of the owner fell short of the state’s control requirements. The owner’s motion to dismiss for lack of subject matter jurisdiction under the Eleventh Amendment was denied.

Sovereign immunity as a defense to change order claims
In Beka Industries v. Worcester County Board of Education, 2011 Md. LEXIS 219 (Md. Apr. 26, 2011), the court held that an owner could not claim sovereign immunity as a defense to change order claims when the legislative waiver requirements were satisfied. A contractor had entered into a written contract to perform the site clearing and excavation work in the construction of a new public school for the Board of Education. The contract was signed by the County Superintendent. Before the written contract was executed, a total of three change orders were approved and agreed upon raising the contract by approximately $106,000. A variety of disputes arose over the subcontractor’s responsibilities under the original contract as well as the monetary consequences of modifications made by the owner. The subcontractor became dissatisfied with the method and amount of payment given by the owner, and filed suit. The owner denied liability and raised twelve affirmative defenses along with recoupment claims for credits, back charges, and/or setoffs. The trial court granted a judgment in favor of the subcontractor and denied the owner’s defense of sovereign immunity. The owner appealed the judgment and successfully obtained a reversal and an order for a new trial. The owner argued that the doctrine of sovereign immunity barred the subcontractor’s claim. The subcontractor argued despite whether or not the owner was entitled to sovereign immunity, the immunity was legislatively waived for its contract claim under Maryland Code § 12-201. The statute provided that the defense of sovereign immunity was not available to the state or its officers when based on a written contract that an official or employee executed for the state while acting within the scope of its authority. The contract between the owner and the subcontractor was reduced to writing, and was executed by the County Superintendent who acted on behalf of the board and also acted within the scope of his authority. The contract satisfied both requirements for the waiver of sovereign immunity and the trial court properly applied the sovereign immunity statute in regard to the subcontractor’s complaint. Sovereign immunity was legislatively waived in the action against the owner due to the written contract for the construction of the public school.

Enforcing an agreement to arbitrate
In Foulger-Pratt Residential Contractor, LLC v. Madrigal Condominiums, LLC, 2011 U.S. Dist. LEXIS 45167 (D.D.C. Apr. 27, 2011), the court held that under the Federal Arbitration Act, private agreements to arbitrate according to a state’s arbitration act should be enforced under the terms of the state’s statute. An owner had entered into a contract to build condominiums. Performance and payment bonds were provided for the project. The contract between the owner and the initial contractor included an arbitration provision. This provision governed claims and disputes which exceeded $100,000 and required submission to a three-member panel of arbitrators. All matters were to be arbitrated under the laws of the District of Columbia. Any judgment from the panel of arbitrators was considered final, binding and conclusive. Before the completion of the project, disputes arose and the initial contractor stopped paying its subcontractors. The surety engaged a replacement contractor to finish the project. The replacement contractor also accepted the existing contract including the arbitration provisions. Months before the completion of the project, disputes arose concerning payments to the replacement contractor. The disputes were submitted to an arbitration panel. During the arbitration proceedings, the owner asserted ten claims against the contractor. The contractor, in turn, brought three cross-claims against the owner. The arbitration panel issued their judgments on the issues based upon the Federal Arbitration Act guidelines. The owner filed a motion to vacate parts of the arbitration award and claimed the incorrect law was used by the arbitration panel in its review. The contractor asserted that based upon the parties’ contract and upon the statute’s preemption of state law, the federal act applied. The owner argued that the D.C. Revised Uniform Arbitration Act governed the consideration of the dispute because both parties expressly agreed to have all matters arbitrated under the law of the District of Columbia. The Federal act was to ensure the enforceability of private agreements to arbitrate according to the terms set forth by the parties. The contract included a specific clause stating that the agreement to arbitrate was enforceable pursuant to and interpreted under the laws of the District of Columbia. The D.C. Act governed all aspects of the arbitration process due to the clause written into the contract and in order to enforce the private agreement.

Union not responsible for substitution of non-union concrete supplier
In Shafer Redi-Mix, Inc. v. Chauffeurs, Teamsters & Helpers Local Union #7, 2011 U.S. App. LEXIS 9207 (6th Cir. Mich. 2011), the court held that to prove a violation of the unfair labor practices statute, the party must show that the union’s offending conduct was a substantial factor of the injury. A concrete subcontractor had solicited and received bids for the concrete from two suppliers. One supplier was a non-union supplier and the other was union. The non-union supplier was selected by the subcontractor because it provided the lowest bid. After the first supplier was selected, a representative from Chauffuers, Teamsters and Helpers Local Union #7 expressed reservations about the subcontractor’s choice to use a non-union supplier and mentioned that the best choice was to choose the union supplier to supply the concrete. The contractor became concerned about the choice to use the non-union supplier. The subcontractor was aware of these concerns. The project was covered by a Project Labor Agreement with a no picketing provision. Despite the contractor’s reservations about the non-union supplier, the subcontractor reviewed designs for the concrete mix from the non-union supplier. One day after the non-union supplier submitted its designs for review, the contractor received a phone call from three union representatives. The union indicated that a labor disruption by its sister union was a possibility if the non-union supplier was selected for the job. The agreement was not binding on the sister union. The contractor did not tell the subcontractor about this conversation. The union then called the subcontractor to confirm that the union supplier’s bid was higher than the non-union supplier. A new, lower price was later submitted by the union supplier to the subcontractor. After the subcontractor received the revised bid and after the subcontractor received a letter from the contractor approving the switch, the contract was given to the union supplier. The non-union supplier then filed suit against the union for engaging in a secondary boycott. The union filed a motion for summary judgment which was granted by the trial court. The non-union supplier argued that the union violated 29 U.S.C. § 158(b)(4) by supporting an illegal secondary boycott with the goal to remove it from the project. The non-union supplier also argued that the suit should have survived the summary judgment motion because all that was required was to establish some causal relationship between the threat to picket and the subcontractor’s decision to switch suppliers. The union argued that it had not provided any boycott threats and that the revised bid pricing and not the actions of the union was the proximate cause of the supplier switch. To satisfy the causation requirement, the non-union supplier was required to prove the unions conduct “materially contributed” or was a “substantial factor” in bringing about the injury. The subcontractor was aware of the contractors concerns about the non-union supplier. In addition, no evidence established that the subcontractor knew of the possible picket or work disruption. The actions of the union were never a factor in the subcontractor’s decision to switch contractors. The trial court’s decision to grant the summary judgment motion was appropriate.

Certificate of merit is required with the first complaint of negligence against a licensed professional in Texas
In Pakal Enterprises v. Lesak Enters. LLC, 2011 Tex. App. LEXIS 3202 (Tex. App. Houston 1st Dist. Apr. 28, 2011), a contractor had hired a surveyor to perform a survey of the property for a construction project. The survey provided by the surveyor was inaccurate. Due to the inaccurate survey, the contractor was required to make corrections to the construction and incur additional expenses. The contractor and owner sued the surveyor. The original petition was filed by the contractor and asserted claims of negligence, negligent misrepresentation, and breach of contract. The petition filed by the contractor failed to include a certificate of merit which was required under section 150.002 of the Texas Civil Practice and Remedies Code. The contractor amended the petition using the correct business title of the surveyor approximately three months after the initial petition. The amended petition was also without a certificate of merit. The contractor argued that the certificate was not required due to an exception under the statute that permitted an extension when the statute of limitation would expire within ten days of the amended petition. The surveyor argued that the statute required the contractor to file a certificate of merit with the first petition. The contractor argued that the statute’s exception was applicable since the amended complaint was filed within ten days of the expiration of the limitation period. However, the language of the statute explicitly stated that the first petition must be accompanied with a certificate. The first petition filed was the original complaint and not the amended version. Since the original petition qualified as the beginning of the lawsuit, the petition was not filed within ten days of the expiration of the statute of limitations. The statute’s exception was not applicable. The contractor’s claim against the surveyor was correctly dismissed by the trial court.    

Reports under the public disclosure bar of the False Claims Act.
In Schindler Elevator Corp. v. United States ex rel. Kirk, 2011 U.S. LEXIS 3542 (U.S. May 16, 2011), the Supreme Court held that an employee’s qui tam suit under the federal False Claims Act to recover a contractor’s fraudulently obtained federal payments could not rely on reports produced by a federal agency. Federal contractors were required by the Veteran Era Veteran’s Readjustment Assistance Act to certify the number of “qualified covered veterans” employed by the contractor. The employee was a Vietnam War veteran and also a former employee of the contractor. The employee believed that the contractor failed to meet the veteran act’s annual information reporting requirements. Copies of the contractor’s veteran act filings were provided by the Department of Labor to the employee. The filings provided by the department revealed that the contractor either filed no reports at all, or filed false information. The contractor’s motion to dismiss was granted by the trial court based on the statute’s public disclosure bar. The appellate court vacated the decision holding that the department’s responses were not an official “report” or an investigation but instead just a response to a request for information and the statute’s public disclosure bar was not applicable. The contractor argued to the Supreme Court that the statute’s public disclosure bar deprived the court of jurisdiction because a broad ordinary meaning of “report” was consistent with the scope of the statute’s public disclosure bar. The employee argued that the responses received from the department failed to constitute a “report” within the meaning of the public disclosure bar. The employee asserted that the adoption of a different or special meaning of the word “report” was applicable. The correct way to determine the meaning of one single word in the public disclosure act, was to look at the entire text as an integrated whole and to make the decision from the “neighboring words.” A “report” was something that gave information or a notification. The appellate court should have held that the department’s written responses to the employee were reports within the meaning of the public disclosure bar. The appellate court’s ruling was reversed. 

Subrogation between coinsurers
In Maryland Casuarly Co. v. Acceptance Indemnity Insurance Co., 2011 U.S. App. LEXIS 8436 (5th Cir. Tex. Apr. 25, 2011), the court held that a coinsurer has an obligation to defend or indemnify a contractor even when the contractor had been fully indemnified by another coinsurer. The owner hired a contractor to build a swimming pool at the owner’s home. Over the span of three years the pool underwent several repairs due to four large cracks which lead to extensive leaking. The owner filed suit against the contractor alleging that the contractor failed to exercise ordinary care in designing and building the pool which led to loss of use of the pool. The contractor tendered the owner’s claim to its two insurers. The contractor had a policy with insurer 1 for one year when the cracks began to form, and three years with insurer 2 when majority of the cracks began to leak. Insurer 1 agreed to defend the contractor against the owner’s claims. Insurer 2 denied any obligation to defend or indemnify the contractor and argued that its obligation was void due to the “ongoing damages” exclusion in its policy. Insurer 1 paid $590,000 to settle the lawsuit then brought suit against insurer 2, requesting a declaration that insurer 2 owed a duty to defend the contractor, and seeking insurer 2’s pro rata share of the costs that insurer 1 incurred to defend and settle the contractor’s claims. The jury found that the damage the owner incurred was an “occurrence” covered by insurer 2’s policy and the court awarded 75% of the $590,000 paid by insurer 1 to settle the owner’s claims. Insurer 2 argued that Texas law barred insurer 1 from recovering from insurer 2 under a theory of subrogation because the contractor had already been fully indemnified. The court found that Texas law did not bar contractual subrogation where an insurer had refused to defend or indemnify an insured. Recovery for insurer 1 on a claim of subrogation was not barred by precedent since insurer 2 refused to defend the contractor. The insurance policy created a right of contractual subrogation and since insurer 1 settled the contractor’s lawsuit it had the right to seek reimbursement. The trial court was correct to award insurer 1 damages in the subrogation claim.

When property damage occurs
In Maryland Casualty Co. v. Acceptance Indemnity Insurance Co., 2011 U.S. App. LEXIS 8436 (5th Cir. Tex. Apr. 25, 2011), the court held than physical damage to property does not first occur at the time of a negligent act, but instead first occurs at the time it becomes detectable. One Insurer had argued that property damage occurred after the contractor’s work had been performed under another insurer’s policy term. Insurer 2 argued that the “ongoing damages” exclusion in its policy modified the coverage agreement and relieved it of all obligations. The exclusion stated that insurer 2’s coverage applied to “property damage” only if the damage was caused by an occurrence and the property damage had to first occur during the policy period. In addition, insurer 2 argued that all the damage which occurred during the time of its policy was entirely caused by the contractor’s improper failure to properly set piers on solid rock. The appropriate process to determine when property damage occurred was to focus on the time of the actual physical damage to the property. The alleged negligent construction by the contractor was not relevant. The actual physical damage occurred during insurer 2’s second policy term after the contractor had left the site. The trial court was correct in awarding damages to insurer 1.

Attorneys’ fees under the federal False Claims Act
In United States ex rel. Miller v. Bill Harbert International Construction, Inc., 2011 U.S. Dist. LEXIS 50788 (D.D.C. May 12, 2011), the court held that a relator could recover attorneys’ fees pursuant to the False Claims Act when the relater was successful in one significant issue. The relator had alleged that the conspirators, which consisted of corporations, corporate entities and contractors, conspired to rig the bidding process for development projects funded by the USAID. The relator’s complaint focused on the bidding process for contract 20A and later included illegal bidding practices in two other contracts 29, and 07. A verdict was returned in favor of the relator. The court found that all of the conspirators conspired to defraud the United States. Subject to 31 U.S.C. § 3730(d), the relator being the prevailing party was awarded supplemental awards for additional attorneys’ fees and costs. The appellate court found that three mistakes were made at the trial court level. As a result, the claims relating to contracts 29 and 07 were reversed and dismissed. The judgment granted against three of the conspirators and related to contract 20A were reversed. Lastly, the judgments granted against two of the conspirators were affirmed related to contract 20A. The second group of two conspirators contested the attorneys’ fee award, arguing that the relator was no longer the prevailing party; and since the claims against it were related to the first group’s unsuccessful claim, the relator could not receive claims from any party. The relator argued that complete vacatur of the attorneys’ fee award was contrary to established law. The relator further asserted that the majority of the case focused on establishing the overall conspiracy which was engulfed in the 20A contract. The established law held that the prevailing party needed to succeed in only one significant issue of litigation. When determining liability for attorneys’ fees the normal practice had been that all defendants are jointly and severally liable. Therefore, the second group’s argument that the relator was no longer the prevailing party was contrary to normal practices. Since the relator was a prevailing party in its claims against the second group, the court should have held that the second group was liable for the entirety of the fee award, less any further reductions.

Attorneys’ fees under the federal False Claims Act
In United States ex rel. Miller v. Bill Harbert International Construction, Inc., 2011 U.S. Dist. LEXIS 50788 (D.D.C. May 12, 2011), the court held that when a plaintiff has prevailed on some but not all of its claims, the attorneys’ fees will be judicially determined by balancing the success achieved and the energy expended. The second group of two conspirators argued that since the relator was only successful in one of three development claims against the conspirators, the reduction of attorney’s fees by two-thirds was proper. The relator argued that the appropriate reduction in attorneys’ fees should parallel the reduction in overall damages resulting from the trial court’s reversal. Both arguments made were rejected by the court. Reducing the fees corresponding to the number of successful claims did not fairly reflect the actual time expended by counsel on each claim. An appropriate attorney fees’ award should account for both the success achieved as well as the energy expended. To determine these two factors the court reviewed the time allocation of certain practices throughout the case. The majority of the relator’s time was not focused on the individual contacts of the conspiracy, but instead on the conspiracy as a whole. The court determined that the relator spent 70% of its time and efforts to support the claims related to the overall conspiracy and contract 20A, and its remaining time on contracts 29 and 07. However, the relator achieved tremendous success in terms of damages by being awarded nearly 88% of the original damage award. Therefore, after balancing the success achieved and the energy expended, the court concluded that the relator was entitled to retain 80% of its original fee award with a 20% reduction which reflected the dismissal of certain claims.