South Carolina Construction Law Blog
South Carolina Construction Law - Discussion of mechanic's liens, delay claims, coverage, and constr
Court Rules That Termination For Convenience May Not Be Enforceable If It Is For "Convenience" of Bid Shopping
A Maryland Court of Appeals in the case of Questar Builders, Inc. v. C.B. Flooring, LLC, 2009 MD.LEXIS627, considered the issue of whether private parties may terminate a contract for convenience whether a Termination for Convenience clause makes a contract voidable. The Court held that a Termination for Convenience clause may be enforceable so long as it is used in a manner to mitigate genuine risk. The Court held that Termination for Convenience clause may make a contract voidable if the party uses it for the mere purpose of shopping for additional bids.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Contract Modifications May Trigger Disruption Claims
A government agency hired a general contractor to construct a laboratory building. Bell BCI Co. v. United States, 81 Fed. Cl. 617 (2008). After nine months from the beginning of construction, the government asked that an additional floor be added to the building. The change resulted in over 200 modifications by the government and delayed the completion of the project by almost two years. Moreover, the government's modifications increased the cost to complete construction by $21 million.
When the government refused to pay the contractor the additional costs, the contractor filed suit. The government denied owing the contractor any money. To the contrary, the government claimed the contractor owed the government $447,678 in liquidated damages for not completing the project in time. See id. at 619.
The contractor brought a cumulative impact claim: it sought recovery for the total losses the government's changes caused to the contractor. The contractor's alleged damages totaled over $6 million and included an unpaid balance of the contract price, about $1.6 million in unresolved changes, about $1.6 million in delay damages, over $2 million in inefficiency costs due to the cumulative impact of the changes, and the lost profit on the inefficiency cost. See id.
The court first found that the contractor was not liable to the government for liquidated damages due to failure to complete the project within the timeframe specified in the contract. Furthermore, the court distinguished delay damages from disruption damages. Delay damages are costs resulting from not being able to work. Disruption damages are the costs of having to work less efficiently than planned. See id. at 636.
As the court noted, bilateral modifications will compensate a contractor for performing the changed work. However, these modifications do not pay the contractor for the impact such changes have on the rest of the project. The contractor must only assert a reasonable basis for its cumulative impact claim. The court found that such basis was established: the contractor's historical productivity data and project records showed the government's changes affected the contractor's performance of unchanged work. See id. at 638.
The court noted that none of the change orders approved on the project waived disruption, cumulative impact, or labor inefficiency claims. Without such express waiver, the court could not conclude there was meeting of the minds between the parties. The government, therefore, was liable for the cumulative impact its changes had on the contractor. See id. 639.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Failure to Raise All Related Claims at Once May Preclude Parties from Bringing Any Remaining Claims Later
The legal doctrine of res judicata or claim preclusion precludes parties from bringing suit for claims they should have brought up in earlier suits. "Res judicata" is a Latin phrase that means a matter already adjudged.
A simple example of the application of the doctrine is an owner who sues a builder for negligence in constructing his house (first suit). The court awards damages to the owner. The owner then brings a second suit, bringing claims of breach of implied warranties against the contractor (second suit). The owner is precluded from bringing the second suit against the contractor because he should have brought all claims in the first suit.
Under res judicata, subsequent claims are precluded if: (1) the judgment in the first suit was on the merits or final; (2) the parties in the first and second suit are either identical or in privity; and (3) the claims in the second suit arise "out of the same transaction or series of transactions" as the claims in the first suit. Bouchat v. Bon-Ton Dep't Stores, Inc., 506 F.3d 315, 326-27 (4th Cir. 2007) (citation omitted).
An important point to remember is that some construction contracts mandate certain procedures as initial steps to resolve claims between parties. If one of the party refuses to take part in such mandatory procedures, that party may lose its right to bring any claims against the other party later.
The South Carolina Court of Appeals dealt with this issue in 2004 when it barred a contractor's defective work claims against a subcontractor. See Palmetto Homes, Inc. v. Bradley, 357 S.C. 485 (Ct. App. 2004). The construction contract mandated the American Arbitration Association rules to govern arising disputes between the parties. Therefore, the Court held that the contractor had to either submit his claims to the arbitration proceeding or be barred by res judicata. The contractor could not bring a second suit to assert claims either actually arbitrated, or claims that could have been arbitrated. See id. at 495-96.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Exception to the Economic Loss Rule Extended to Commercial Construction
The economic loss rule is a court-created doctrine that bars liability in tort where the only damages are injuries to the defective product itself: this means no personal injuries or damages to other property exist. See Kennedy v. Columbia Lumber & Mfg. Co., 299 S.C. 335, 341 (1989). The rule only applies where the duty owed by the wrongdoer to the aggrieved arises out of a contract.
In 2008, the Supreme Court of South Carolina considered the applicability of the economic loss rule in the context of commercial context. See Colleton Preparatory Acad., Inc. v. Hoover Universal, Inc., 379 S.C. 181 (2008)Colleton Preparatory Acad., Inc. v. Hoover Universal, Inc., 379 S.C. 181 (2008). Plaintiff, a private school in Walterboro, South Carolina, sued Defendant for negligence and reckless/gross negligence. Defendant manufactured the fire retardant used to treat the wood on Plaintiff's roof. The school alleged that the roof's truss system had to be replaced for safety reasons because the retardant caused the wood to deteriorate.
The Court noted that like builders who have a legal duty outside of the contract to meet industry standards, manufacturers owe the expected users of their products the duty of care to conform with industry standards also. The focus is the defendant's actions, rather the consequences of their conduct. Accordingly, the court found that defendant manufacturer of the retardant owed more than a contractual duty to the school. Therefore, the economic loss rule was not applicable.
The important part of the decision was with regard to commercial plaintiffs versus home buyers or other consumers. Namely, the Court noted that commercial users or owners also do not have to wait until a defective product causes personal injuries or damages to other property to have a tort claim.
Manufacturers owe commercial plaintiffs the duty to manufacture products that do not pose a "serious threat of physical harm." Id. at 191. This duty is separate and apart from contractual duties. See id. Importantly, however, the Court limited this duty to serious threats of injury. Damages would then be the costs to repair or remove the dangerous product. Id. at 193.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Contractors, Remember to Perfect Your Mechanic's Lien to Stay Protected
Section 29-5-10 of the South Carolina Code of Laws Annotated allows providers of labor or materials for the repair, alteration, or erection of a structure to file a lien either on the structure or on the owner's interest in the land on which the structure is located. The materials must be actually used in such repair or erection to be "lienable".
Contractors must remember, however, to follow the statutory procedures for filing and perfecting a lien to be able to enforce their right to payment against owners. First, file the mechanic's lien within 90 days of the completion of the work in the county where such work was performed. S.C. Code Ann. Section 29-5-90. You may file such lien either in the Register of Deeds Office or with the Clerk of of Court. Remember to serve the owner with a copy of the lien. Perfection is valid only if the filed statement adequately describes the affected property and identifies the property owner's name.
Contractors must foreclose the lien either six months from the last day labor or materials were provided or six months from the date the lien was filed, whichever is earlier. S.C. Code Ann. Section 29-5-120. Note, however, that warranty or repair work by the contractors may revive the contractors' opportunity to file a lien if they had failed to do so initially. If an owner asks the contractor for additional repairs or other obligations under a warranty, the time for filing a mechanic's lien starts with the last day the latest work or materials were provided. Butler Contracting, Inc. v. Court St., LLC, 369 S.C. 121, 130-31 (2006). BUT, such additional labor or materials must be "done in good faith at the request of the owner OR for the purpose of fully completing the contract." Id. at 130. If the contractor provides the owner with such additional labor or materials merely as a gratuity or a friendly accommodation to the owner, the period for filing a lien will not restart. Id. Good faith means that the contractor is not doing the additional work solely to get a new chance to file the lien.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Wrongful Conduct Found Not Covered by Insurance Policy
The City of Shawnee, Kansas, hired a contractor to perform work on a project. Utility lines ran throughout the job site. The bid solicitation documents indicated that the utility lines would be relocated not to interfere with the contractor's work. The city failed, however, to relocate the utility lines as asserted during the bid solicitation, and the contractor encountered delay damages as a result.
The contractor then sued the city for misrepresentations and resulting delay damages. The city then sued its insurer, Argonaut Insurance Company (Argonaut). See City of Shawnee v. Argonaut Ins. Co., 546 F. Supp. 2d 1163 (D.Kan. 2008). The policy included a part named "Public Officials' Liability Coverage Part" and provided coverage for "any act, error or omission by an insured." Id. at 1170. However, the policy excluded coverage for liability arising out of a breach of contract or faulty preparation of bid specifications.
The United States District Court for the District of Kansas heard the matter on a summary judgment motion. The court first found that it could not rule as a matter of law that the breach of contract exclusion applied. The bid documents and all other agreements between the parties did not specify that one or another party was responsible for relocating the utility lines. Therefore, the city's argument that the action for negligent misrepresentation arose out of tort rather than contract had some merit and summary judgment in favor of the insurance company was not proper.
As to the faulty preparation exclusion, the court noted that the language of the policy was ambiguous because it did not define "bid specifications." Any ambiguity in an insurance contract is resolved against the insurer. The court, therefore, found that Argonaut failed to show the exclusion applied and had to provide coverage for the claim against the city.
Nevertheless, the city fell out of luck. Evidence was presented that the city had knowledge of the contractor's claims and intent to sue before the January 1, 2006 effective date of the policy. The terms of the policy provided no coverage for claims arising before the effective date. Accordingly, the insurer was not liable.
This case is a contract lesson to both insurance companies and to bidders. While the bid documents asserted all utility lines would be relocated, this court did not consider such statements contractual warranties that would trigger a breach of contract exclusion. The court may expect more precise and clear language to impose a contractual obligation. As to the insurers, ambiguity in contracts could ultimately lead to unplanned losses. Defining all terms clearly and ensuring consistency of the entire agreement is critical.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
U.S. Senate Expresses Concern over Chinese Drywall Issues
On March 30, 2009, Florida senator, Bill Nelson, introduced to the Senate Bill S.Res.91. The bill is entitled: "A Resolution Calling on the Consumer Product Safety Commission, the Secretary of the Treasury, and the Secretary of Housing and Urban Development to Take Action on Issues Relating to Drywall Imported from China."
Between 2004 and 2007 the United States imported drywall from China, most of it for building houses after hurricane Katrina. The imported drywall turned out to be toxic, posing potential serious health threats to people and enraging and terrifying homeowners. While contractors and subcontractors may face accusations of negligence for using cheaper drywall at the expense of quality, the sky-high demand for building supplies post-Katrina may be a reasonable explanation for the increase in the quantity of imported Chinese drywall.
Senator Nelson's bill urges "the Consumer Product Safety Commission to: (1) initiate a formal proceeding to investigate drywall imported from China from 2004 through 2007; (2) prohibit further importation of drywall and associated building products from China; (3) order a recall of hazardous Chinese drywall; (4) seek civil penalties against the drywall manufacturers in China that produced or distributed hazardous drywall and their U.S. subsidiaries to cover the cost of the recall effort and associated remediation."
The defective Chinese drywall has reportedly been also used in building projects in South Carolina. You may learn more about the health effects and detection techniques of the Chinese drywall by reading the following article.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
No-Damages-For-Delay Clause May Be Unenforceable
Williams & Sons Erectors, Inc. v. South Carolina Steel Corp., 983 F.2d 1176 (2d Cir. 1993).
The parties to a contract may choose how to share liability. For example, the contract can address what amounts each party would owe or have to pay, when such amounts would be due, and who would be liable for additional costs. Similarly, the parties may agree how to deal with damages resulting from construction delays.
In the Williams & Sons Erectors case, the contract provided the following no-damages-for-delay clause: "No claims for increased costs, charges, expenses or damages of any kind shall be made by the Contractor against the Owner for any delays or hindrances from any cause whatsoever; provided that the Owner, in the Owner's discretion, may compensate the Contractor for any said delays by extending the time for completion of the Work as specified in the Contract."
The court nevertheless found the provision unenforceable. The reasoning behind the court's holding was that other language in the contract contradicted the no-damages-for-delay clause, which made the agreement as a whole ambiguous. For example, the contract included a clause imposing delay impact costs arising from charge orders. Because it concluded that the contract was ambiguous, the court allowed both parties to present extrinsic evidence in support of their assertions.
In conclusion, no-damages-for-delay clauses appear enforceable if clearly written and consistent with the rest of the contract.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Short Contract Law Lesson
Construction projects usually involve many parties, many tasks, and consequently many different agreements. Thus, understanding basic concepts of contract law is very important. Where any of the contract elements is missing, a valid contract does not exist, and an alleged promise cannot be enforced.
The elements of a valid contract include: offer, acceptance, consideration, and meeting of the minds. Some reasons for not enforcing an agreement are lack of capacity of one or more parties to the contract, illegality, misrepresentation, duress, unconscionability, ambiguity, or mistake.
Remember, if the offer specifies a certain method of acceptance, the offeree, or the party receiving the offer, must follow the specified method in order to validly accept the offer. Also, taking an offer, adding or modifying some of its terms, and sending it back to the offeror (whoever made the original offer) turns the offer into a counter-offer. The original offeror must accept the additional or new terms for the contract to be formed.
The United States Court of Appeals for the Eleventh Circuit analyzed a contract law situation in South Cent. Steel, Inc. v. McKnight Constr. Co., 2008 Fed. Appx. 806 (2008). McKnight Construction Company (McKnight) hired Huston Steel Fabricators/Erectors (Huston Steel) to perform steel fabrication and erection work. Huston Steel then subcontracted the work to South Central Steel, Inc. (South Central).
When South Central ordered a considerable amount of steel from its suppliers and McKnight refused to pay, South Central sued for breach of contract. Evidence did show that South Central insisted on dealing directly with McKnight because of Huston Steel's financial troubles. However, the concluded a contract between McKnight and South Central did not exist.
Initially, McKnight mailed a purchase order to South Central. The purchase order had clear instructions that a valid acceptance required that South Central sign and return the purchase order, and also that McKnight then sign the purchase order too. Instead of signing the order, however, South Central sent a different letter with different terms, indicating that signature by McKnight was sufficient to accept the offer. McKnight refused South Central's counter-offer.
South Central then sued arguing it had an enforceable contract with McKnight. The court first noted that the letter South Central sent to McKnight was a counter-offer and not an acceptance because the terms were not the same that McKnight initially set forth. South Central then tried to argue that South Central later signed the purchase order McKnight had mailed. However, South Central's counter-offer terminated McKnight's offer. Even if South Central signed the purchase order later, there was no offer to accept at that point. Moreover, McKnight's purchase order specified that McKnight were to sign the purchase order upon receiving it back. McKnight never signed that purchase order.
The court therefore granted summary judgment to McKnight. South Central did not receive payment for the additional steel it ordered. South Central's loss is just one of the many reasons parties involved in ramificated construction projects should seek legal advice when entering into contracts and delegating or assuming obligations.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
A Promise by E-Mail Must be Supported by Consideration
Inland Constr. Co. v. Cameron Park II, Ltd., LLC, 640 S.E.2d 415 (2007).
A contractor sued a corporation for money owed by the corporation under the terms of their construction contract. The contractor constructed improvements to a building owed by the corporation. The agreement provided that any modifications to the project had to be done through a change order. The corporation then refused to pay for a heating, ventilation, and air conditioning unit not agreed to in the original contract. No change order referring to the change was presented in court.
The corporation alleged that an e-mail sent by an officer of the contractor that alleged the contractor would add the unit at its own cost was a valid offer, contractually binding on the contractor. The court noted that the e-mail was not accompanied by any consideration. The e-mail said: "The owner [the corporation] will have no cost associated with this change in the mechanical system." Nevertheless, because of lack of consideration, this promise was found unenforceable and the contractor was able to charge the corporation for the additional changes.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
