South Carolina Construction Law - Discussion of mechanic's liens, delay claims, coverage, and constr

Contract Modifications May Trigger Disruption Claims

Ryan McCabe — Mon, 08 Jun 2009 12:41:00 GMT

            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

Ryan McCabe — Tue, 19 May 2009 12:31:00 GMT

            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

Ryan McCabe — Wed, 13 May 2009 21:01:00 GMT

            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

Ryan McCabe — Wed, 13 May 2009 18:12:00 GMT

            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

Ryan McCabe — Wed, 06 May 2009 13:23:00 GMT

                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

Ryan McCabe — Thu, 30 Apr 2009 20:13:00 GMT

            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

Ryan McCabe — Mon, 13 Apr 2009 12:47:00 GMT

        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

Ryan McCabe — Thu, 09 Apr 2009 12:05:00 GMT

            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

Ryan McCabe — Tue, 07 Apr 2009 16:45:00 GMT

    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.

When Does a Claim for Defective Work Arise?

Ryan McCabe — Mon, 06 Apr 2009 15:20:00 GMT

    Lee v. Prof’l Constr. Servs., 982 So. 2d 837 (La. Ct. App. 2008).

            A Louisiana Court of Appeal barred a claim against an engineer because it was brought beyond the limitations of the statute of repose.

            Plaintiffs sued the engineer for the improper design, fabrication, and construction of a radio communication antenna tower. The parties entered into the contract in 1998. Plaintiff discovered the alleged faults in 2005 and sued in 2006.

            The statute limiting the timeframe within which a claimant may sue referred specifically to professional engineers. It was enacted in 2003. Plaintiffs first argued that a different statute applied to the contract in question. They claimed that the contract was one of warranty rather than one for engineering services and that a ten-year statute of repose period applied. The court disagreed. It found that the contract did not provide any guarantees by the engineer for his performance.

            Next, plaintiffs argued that applying the 2003 statute to the contract retroactively would violate the Louisiana constitution. Again, the court dismissed the argument. A cause of action accrues when the party has the right to sue. Plaintiff acquired the right to sue when they discovered the damage in 2005. Therefore, the 2003 statute and the five-year statute of repose applied.

            The court held the exception of preemption applied and dismissed plaintiffs’ claim.

            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.

Commercial General Liability Insurance Carrier Did Not Cover Liability for Professional Services

Ryan McCabe — Fri, 20 Mar 2009 12:27:00 GMT

        Wimberly Allison Tong & Goo, Inc. v. Travelers Prop. Casualty Co. of Am., 559 F. Supp. 2d 504 (D.C. N.J 2008).

            This case involved an architect who was sued by several parties who either sustained injuries or lost loved ones when a parking garage colapsed. Defendant, the architect, argued that its general commercial liability (GCL) insurance carrier and excess GCL insurance carrier had an obligation to defend under the architect's policy. The insurers, however, rejected the architect's claims, noting that the exclusion for liability resulting from professional services applies.

            The architect's argument in support of his position that the exclusion was inapplicable was that plaintiff's causes of action for "nuisance" and "negligence" were something "other than professional services." Also, the architect stated plaintiff did not mark the "professional malpractice" when filling out the Civil Case Information Statement.

            The New Jersey District Court rejected the architect's argument and found the "professional services" exclusion applicable. The court stated that the causes of action against the architect were not based on general business services, but on the particular professional services that fall under the policy exclusion. The insurance carriers had no duty to defend.

            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 Surety's Potential Liability

Ryan McCabe — Tue, 10 Mar 2009 18:20:00 GMT

            RLI Ins. Co. v. Indian River School Dist., 556 F. Supp. 2d 356 (D. Del. 2008).

            A surety was found responsible for a contractor’s financial obligations resulting from overpayment by owner. The owner made payments in reliance on payment applications submitted by the architect that did not reflect the actual construction progress. Upon learning of the nonconformity, the owner terminated the contractor.

            The surety sued the architect, construction manager (CM), and the owner for negligent misrepresentation, seeking to avoid having to pay the owner. The court concluded that the presented facts warranted a judgment in defendants’ favor. It found that the surety did not have a claim against the architect and CM because there was neither a contract with them, nor an independent basis for a tort claim. The decision was affirmed on appeal.

            The surety argued that the restatement of torts allowed an action against a defendant who supplies information to plaintiff for use in business transactions with others. The CM pointed out that the provision only applied to administrative, management and related services, which the CM did not provide. Also, the CM’s contract with the owner specified that there was no contract between CM and a third party dealing with the owner. The architect made the same arguments as the CM. The court further noted that the construction of the project, rather than the provision of information, was the purpose for which the architect and the CM were hired. The information was “incidentally supplied … as part of the project.”

            In addition, the court noted that the owner was obligated under contract to pay the payment applications. The owner had acted in good faith and the surety had to pay even if the contract terms relating to payments had not been followed.

            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.

Scope of Contractors' General Liability Insurance

Ryan McCabe — Tue, 10 Mar 2009 17:53:00 GMT

            Auto Owners Insurance Co. v. Newman, a 2008 case in the South Carolina Court of Appeals, involved a commercial general liability (CGL) insurance policy issued to a contractor. The subcontractor in the case installed stucco siding defectively, which allowed water to seep into the home and cause damage. Consequently, the owner sued the contractor for breach of contract, breach of warranty, and negligence. The court sided with the owner. The contractor’s insurance provider, Auto Owners Insurance Company, then asked a court to declare that their policy did not cover the damages assessed against the contractor. The lower court disagreed and found that the insurance company had to pay the judgment against the contractor.

            The CGL policy at issue was a standard Insurance Services Office (ISO) form. The policy covered injury or damage from an occurrence - an accident or continuous exposure. Because the insurer did not define the term “accident”, the court said it was an unexpected happening that harmed a person without that person intending such harm. The court also noted that only damage to the work itself (the stucco siding) and resulting from faulty workmanship is excluded from the CGL policy. Repeated water intrusion caused damage beyond the stucco itself; it damaged the exterior sheathing and wooden framing. Thus, the court said the water intrusion was a continuing harm and met the definition of “occurrence.”

            The court further explained that the “your work” exclusion did not apply. A “your work” exclusion means that the policy will not cover property damage to a contractor's own work. However, the court noted that the "your work" exclusion does not apply if the damaged work or the work out of which the damage arises was performed on the contractor's behalf by the subcontractor.

            Finally, the court stated that the CGL policy covered the stucco itself because the damaged substrate could not be fixed without removing the top layer. It seems that the carriers agree with the court’s findings or else they would change the policy forms.

            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.

Impact Claims Must Be Released Expressly

Ryan McCabe — Tue, 10 Mar 2009 17:35:00 GMT

            The United States Court of Federal Claims allowed a contractor to recover losses suffered due to over 200 contract modifications by the defendant, a government entity called the National Institutes of Health (NIH). Bell BCI Co. v. United States, No. 03-1613C (2006). The contractor, Bell BCI Company (“Bell”), built a new laboratory building for NIH. After completion, Bell filed a so-called impact claim – a cause of action to recover for the cost born by the contractor because of the great number of contract changes by the owner.

            The NIH contract changes added great cost and inefficiency to the project. One such change was the decision to add a whole another floor after the construction had already begun. NIH initially directed Bell, without Bell’s consent, to proceed with the work on the new floor. Later, NIH and Bell negotiated Modification 93 (Mod 93) in which the parties agreed to work on the new floor for $2.3 million. Mod 93 stated that both parties agreed to increase the contract price as an adjustment for the remaining cost and for any delays from changes by NIH on or before August 2000. Mod 93 also said the contractor released the owner from any liability for other adjustment resulting from “the Modification.” The court said Mod 93 did not mention a cumulative impact claim release.

            Following the execution of Mod 93, NIH issued other changes, but did not authorize resources to speed up performance and avoid delays in schedule. Rather, NIH started withholding payments and threatened to charge Bell liquidated damages if the completion dates were not met. Liquidation damages are a fixed amount of money specified in the contract that a party must pay to the other if it does not perform according to contract terms.

            Upon completion of the project, Bell submitted to NIH a Request for Equitable Adjustment (REA) – a request that NIH pay for the additional cost born by Bell because of project modifications. NIH rejected the request and claimed liquidated damages and back charge claims – charges to make adjustments for previous transactions. The court found that NIH did not act in good faith and dealt unfairly in negotiating with Bell. Facts showed NIH did not really have back charges, but just claimed such to gain an advantage in negotiation.

            The court started its analysis by explaining that an impact claim covers the “cost of working less efficiently than planned” – in other words the cost for more difficult and expensive work. The damages claimed needed to be proven with reasonable certainty only, even if they were an approximation. The court interpreted the contract to provide for an equitable adjustment to the contractor if multiple changes affected the total cost.

            NIH also claimed accord and satisfaction as a defense. That means NIH argued that Bell agreed to the changes in performance and NIH performed accordingly. The court rejected such claim and found that nothing in the contract specifically addressed a cumulative claim by Bell or showed that Bell agreed to give up an impact argument. Also, NIH presented no evidence to give merit to an accord and satisfaction defense.

            The government’s bad behavior throughout the project probably influenced the court’s decision. In conclusion, the opinion seemingly indicates that where a contract does not mention expressly that a contractor waives or promises not to raise an impact claim, the interpretation is that the contractor has not in fact waived that right.

            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.

An Architect Could Enforce Copyrights Several Years after the Statute of Limitations Expired

Ryan McCabe — Tue, 10 Mar 2009 17:26:00 GMT

            In Warren Freedenfeld Associates, Inc. v. McTigue et al., 531 F.3d 38 (1st Cir. 2008), the court of appeals reversed the trial court’s decision to dismiss an architect’s complaint because the period during which he could sue had expired. The court found no facts that showed the architect had notice of the alleged copyright violation before the limitations period passed.

            The defendant in this case hired plaintiff, the architect, to design a veterinary hospital. According to Article 6 of the contract between them, the architect was to retain all rights to the plans and drawings prepared for the project. After the relationship between the two began to spoil, the architect filed a formal copyright application for his plans with the U.S. Copyright Office. The owner and the architect eventually signed a termination agreement that said Article 6 was still in effect. Also, the agreement prohibited the owner to use any work solely produced by the architect.

            Four years after signing the termination agreement, the architect saw the floor plan of the veterinary hospital and realized his copyright had been infringed. He filed a copyright infringement suit against the owner six years later. The trial court sided with the owner and found that the architect should have known about the infringement for more than three years because any “reasonably diligent person” in the architect’s position would have found out about it. So the court charged the architect with knowledge for more than three years and said he sued the owner too late – the period during which he could sue had passed. The trial court also determined that the owner had no rights in the plans and drawings filed with the copyright office.

            The architect appealed. The court of appeals disagreed with the trial court and found that the facts were insufficient to conclude that a reasonable person in the architect’s position would have known of the copyright infringement. For example, the owner had responded to the architect’s written warning not to use his work by saying the plans had been discarded. The court also rejected the owner’s argument that the word “solely” in the termination agreement gave the architect notice. The termination agreement did not authorize the owner to use any copyrighted work.

            The court of appeals also rejected the owner’s claim that he had an interest in any of the copyrighted materials because it constituted work for hire. The contract must expressly state “work for hire” for such interest to exist.

            Many owners draft contracts with hired professionals and include the “work for hire” language. An architect should strike the language “word for hire” and include appropriate language in the contract to preserve the architect's copyright interest in the documents. At most, an architect should share ownership with the owner and not to give ownership rights to standard forms that have been developed over years. If an architect gives up ownership to the owner, the architect should include a provision that requires the owner to pay for any losses that result from the use of the documents outside the uses provided in 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.

Obtain a Subcontractor's Proof of Insurance for Each Job

Ryan McCabe — Tue, 10 Mar 2009 12:51:00 GMT

            In February, 2009, in Hardee v. McDowell, the South Carolina Supreme Court addressed a contractor's ability to shift liability under the South Carolina Uninsured Employer's Fund. The subcontractor worked on various job sites for the contractor. While the subcontractor presented the contractor with proof of insurance purporting to last a year, it turned out that the policy was cancelled a day before an employee was gravely injured.

            The contractor sought reimbursement from the Uninsured Employer's Fund. The South Carolina Court of Appeals interpreted S.C. Code Section 42-1-415 to require a contractor to obtain proof of insurance from a subcontractor for each particular job for which the subcontractor is engaged to perform work.

            The South Carolina Supreme Court affirmed, finding that a contractor must obtain proof of insurance for each job. In addition, the court clarified that a contractor must obtain proof of insurance every time the subcontractor is actually hired to perform work. Thus, if the contractor hires the subcontractor for a job in January, then for another one in February, the contractor must make sure the subcontractor has insurance coverage at the time of the February engagement.

             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, You Cannot Contract Out of Liability for Your Own Negligence

Ryan McCabe — Fri, 06 Mar 2009 14:01:00 GMT

            A general contractor may enforce an indemnification clause against its subcontractor for the damages attributable to that subcontractor's negligence.

            In Brooks v. Judlau Contr., Inc., 2008 N.E.2d 549 (N.Y. 2008), the Court of Appeals of New York interpreted a New York statute that stated, in essence, that a promise related to a construction contract meant to hold the promisee (the one to whom the promise is being made) not liable for injuries resulting from the promisee's or the promisee's agents' negligence was against public policy.

            An ironworker was injured when he grabbed onto a perimeter safety cable installed by the general contractor and the cable came lose causing the worker to fall 18 feet to the pavement below. The worker sued the contractor, and the contractor brought a third-party claim against the subcontractor seeking indemnification for the damages attributable to the subcontractor's negligence.

            The agreement between the subcontractor and contractor contained a provision that, according to the subcontractor, violated the New York statute because it purported to relieve the contractor of liability. The Court of Appeals disagreed. It noted that the contract provision did not violate the statute because the contractor only sought indemnification for another's negligence, not for contractor's own fault. The subcontractor, therefore, was liable to the contractor for any damages the contractor may have to pay for that did not result from the contractor's negligence but from the negligence of the subcontractor.

            See Section 33-2-10 of the South Carolina Code of Laws Annotated which, like the New York statute, renders unenforceable and against public policy any attempts of avoiding liability for one own's negligence.

            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.

Employers, Keep in Mind Possible OSHA Inspections

Ryan McCabe — Tue, 24 Feb 2009 14:13:00 GMT

            Employers should be prepared for a possible workplace inspection by the Occupational Safety and Health Administration (OSHA). An inspection may be conducted because of a complaint, fatality in the facility, a scheduled inspection, or a follow-up visit.

            Violations vary depending on the nature of the operations. Common violations include machine guarding, lockout/tagout, ladders and scaffolding, hazardous chemicals, and electrical safety. Even if an inspection is limited to the area, it can be expanded if the inspectors find something inside.

            The OSHA inspection has four steps. First, the employer and the inspector have an opening conference. The inspector provides a copy of the complaint, if any, but cannot mention the name of the employee who submitted it. The parties discuss the inspection process and relevant information. If lying, an employer can be subject to a fine up to $10,000 and up to a year in jail.

            Then, the inspector asks to see the OSHA 300 Log and all other forms pertaining to accidents and other safety problems. Next, for the walk-through, the inspector and his assistants must wear the required PPE. The inspector has the right to talk to employees and they have the right to answer, even privately if so requested. Take the direct route to the location if one was specified in a complaint.

            Fix any hazard that the inspector notes, even if it does not violate OSHA regulations. The company may refuse to let the inspector see machinery in operation. But it is better to allow such observation unless it is unsafe or out for repair. Keep all documentation of the walk-through.

            Finally, the closing conference reviews violations and suggests correction methods. The company has the opportunity to defend itself then.

            All requirements that an employer must meet are set forth in the Occupational Safety and Health Act ("Act"). The agency has compiled a OSHA Checklist for the Construction Industry to aid employers in complying with the Act. A company prepared for an inspection will be less worried about when OSHA might show up.

            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, Consider Upgrading Your License Over Risking Disciplinary Action

Ryan McCabe — Mon, 23 Feb 2009 14:12:00 GMT

            In South Carolina, general and mechanical contractors have limitations on the amount of money a project they undertake may cost, unless the contractors qualify for the unlimited group. The limit is calculated based on the licensee's net worth. There are five groups of limitations for mechanical and general contractors respectively. The groups range from limitations of up to $30,000 to unlimited cost on projects.

            The limit refers to the total cost of construction: all cost incurred by the owner, all contractors, subcontractors, and other parties, for labor, materials, equipment, and other expenses. Design expenses will only be included if the construction contract expressly includes them. The same rules apply to the cost of mechanical contractors.

            As a contractor, if you have a limited license you should be very careful. Unexpected additions to cost are not uncommon in the course of construction. Such increases could significantly exceed the licensee's limitation, which may lead to disciplinary action by the Contractors' Licensing Board. Consider upgrading your licenses instead of taking such risk. The form for upgrading your license is available at http://www.llr.state.sc.us/pol/contractors/Forms/DOC180T.dot.

            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 Contractor's Liability for Negligence

Ryan McCabe — Mon, 23 Feb 2009 13:27:00 GMT

            Contractors may be held liable for their negligent performance of a contract. Under the economic loss rule, economic loss alone precludes punitive damages—additional damages to punish for wrongful conduct.

            Parties to a contract owe to each other the duty to perform the tasks they agreed upon. Negligence in performing or nonperforming those tasks is both a tort and a breach of contract. One court specified that if the negligence (or even gross negligence) of a contractor only results in economic loss to the subject matter of the contract, punitive damages are not recoverable. Also, lost profit because of negligent performance of the contract did not constitute a tort. So, as James E. Smith and John W. Lynd note in their article Construction Contracts: Liability for Negligent Performance, the application of the economic loss rule is not clear because economic loss beyond the subject matter of a contract may permit punitive damages.

            To avoid liability in contract or tort, contractors can include “limitation of liability” clauses in their contracts. Smith & Lynd offer an example: “Notwithstanding anything to the contrary, the contractor shall not be liable for any special, indirect, consequential or incidental damages, including, without limitation, loss of profits or business interruption, even if the damage is to property beyond the subject matter of the agreement, and even if caused by the contractor’s negligence.”

            A court will enforce such limitation of liability clauses where the parties have a fair bargaining position and legitimate commercial reasons justify such clauses.

            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.