Case Summaries – Page 26 – Construction Law

“No Damage for Delay” Clauses Are Generally Valid and Enforceable, with Certain Limited Exceptions

Jan 01 2007

Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 377 (1983)

In Kalisch-Jarcho, the city entered into a contract with a contractor for the construction of a ventilation system in police headquarters. The contract contained an exculpatory clause, by which the contractor agreed to make no claims for delay damages occasioned by any act or omission by the city. After trial on the scope and validity of the delay damages clause, the Court of Appeals ruled that clauses barring a contractor from recovering damages for delay in the performance of a contract are valid, but they will not prevent the recovery of damages resulting from the contractee’s grossly negligent or willful conduct which “smacks of intentional wrongdoing.”

“Pay if Paid” Clauses Are Void and Unenforceable as Against Public Policy Because They Interfere with Subcontractor’s Constitutional Right to Assert Mechanic’s Lien

Jan 01 2007

Wm. R. Clarke Corp. v. Safeco Ins. Co., 15 Cal. 4th 882 (1997)

In this case, general contractor Keller Construction Company was hired to perform work on a commercial building. Keller entered into subcontracts with various subcontractors, including Wm. R. Clarke Corporation, and each subcontract contained a “pay if paid” provision. An addendum to each subcontract stated that the “pay if paid” limitation did not waive the subcontractor’s lien rights and provided that each subcontractor’s mechanic’s lien rights were to be the subcontractor’s sole remedy in the event that the owner failed to pay Keller. Pursuant to the terms of the prime contract, Keller obtained a payment bond from Safeco Insurance Company that was intended to protect the owner from mechanic’s lien claims brought by any subcontractor. The bond terms stated that, if Keller failed to pay claims brought by subcontractors, Safeco would assume the obligation to pay. The building owner became insolvent and stopped making payments to Keller, and Keller declined to pay subcontractors who had recorded mechanic’s liens and filed actions on the payment bond. The trial court ruled in favor of the subcontractors on the payment bond claim against Safeco. Safeco appealed, the court of appeals affirmed, and Safeco appealed to the California Supreme Court.
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Equity May Allow Contractor Who Submits an Incorrect Bid for Public Contract to Rescind Bid Without Forfeiting Bid Bond

Jan 01 2007

Boise Jr. Coll. Dist. v. Mattefs Constr. Co., 92 Idaho 757, 450 P.2d 604 (1969)

Mattefs Construction submitted a bid for the construction of a building for Boise Junior College. The bid contained a clerical error that omitted one item that constituted 14 percent of the bid. The court held a contractor is entitled to the equitable relief of rescission if he can establish the following conditions: “(1) the mistake is material; (2) enforcement of a contract pursuant to the terms on an erroneous bid would be unconscionable; (3) the mistake did not result from violation of a positive legal duty or culpable negligence; (4) the party to whom the bid is submitted will not be prejudiced except by loss of his bargain; and (5) prompt notice of the error is given.” The court concluded that the clerical error in submitting a bid, which was 14 percent of the total bid, was substantial and material and did not result from culpable negligence. The court further found that Boise Junior College would not suffer a substantial hardship since Mattefs informed them of the error before they had attempted to accept the offer. The court did note that not all mistakes entitle a bidder to withdraw his bid, but distinguished this case on the basis that this was a clerical error and not an error in judgment, such as underestimating cost or labor. Since the court found Mattefs satisfied all five factors, equity required the bid to be withdrawn without forfeiting the bid bond.

Sub-Subcontractor Has No Direct Cause of Action against General Contractor or Landowner

Jan 01 2007

F. Bender, Inc. v. Jos. L. Muscarelle, Inc., 700 A.2d 374, 304 N.J. Super. 282 (N.J. Super. Ct. App. Div. 1997)

In this case, the plaintiff sub-subcontractor sued the general contractor and property owner seeking to recover in quantum meruit for construction work on a parking facility. The general contractor hired a sub-contractor to perform all of the concrete work who in turn hired the plaintiff. The sub-contractor was eventually terminated for failure to adequately perform its subcontract agreement with the general contractor. Plaintiff had no contract with the general contractor or the property owner but sued them for his losses nonetheless. The court held that where the plaintiff sub-subcontractor had no contractual agreement with the defendants, recovery based upon quantum meruit was precluded.

In so holding, the court pointed out that the plaintiff was not without protection but that he had “failed to protect his rights by filing an appropriate mechanic’s lien” as provided by the Mechanic’s Lien Law. The court also noted that the result of this opinion did not render the plaintiff helpless to recover but that recovery would properly come from action against the subcontractor.

State Agency Entitled to Liquidated Damages Even Though Agency Caused Delay

Jan 01 2007

Southeast Alaska Constr. Co., Inc. v. Dept. of Transp. & Public Facilities, 791 P.2d 339 (Alaska 1990)

This case concerned a public construction project that suffered from design and material deficiencies. When the contractor failed to complete the project, the agency sued and won on a claim for liquidated damages. The contractor appealed, arguing that because the agency was responsible for the delay, it should not be entitled to damages.

Termination Clauses that Provide Profit for Breaching Party Void as Against Public Policy

Jan 01 2007

Saxon Constr. & Mgmt. Co. v. Masterclean of N.C., Inc., 641 A.2d 1056, 273 N.J. Super. 231 (N.J. Super. Ct. App. Div. 2004)

In this case, the court found a termination clause void as against public policy. The plaintiff, Saxon, a general contractor was awarded a contract to renovate a building owned by the Veterans Administration. Saxon entered a subcontract with defendant, Masterclean, for asbestos abatement and removal. Masterclean defaulted and Saxon terminated the contract. The termination clause of the contract provided that if the subcontractor defaulted and the unpaid contract value was less than the expense of finishing the project, then the subcontractor was entitled to the difference. Saxon was able to procure a substitute contractor at a price lower than Masterclean’s initial contract price. Masterclean, therefore, invoked the clause to claim the difference between its contract price and the amount paid to the new contractor. The court found that that type of termination clause violated public policy because it permitted a defaulting party to profit by its breach and discouraged the non-breaching party to minimize its losses.

Lost Profits Recoverable as Consequential Damages if Foreseeable

Jan 01 2007

Perini Corp. v. Greate Bay Hotel & Casino, Inc., 610 A.2d 364, 129 N.J. 479 (1992)

In this case, a casino owner sought judicial enforcement of an arbitration award of lost profits against the general contractor hired to manage the casino renovation project. The project took longer to complete than anticipated and the casino was not fully operational for its peak summer season. The court held that lost profits may fall under the category of consequential damages and are therefore recoverable as long as they are foreseeable at the time of contract.

Withholding Monies Owed on Unrelated Project Constitutes Material Breach

Jan 01 2007

Vinen Corp. v. Alan W. Nau Contracting, Inc., 557 A.2d 1056, 232 N.J. Super. 589 (N.J. Super. Ct. App. Div. 1989)

In this case, the court looked at an action by a contractor against the construction manager for breach of contract for withholding monies from payment that were owed on an unrelated project. The defendant entered into a contract with the property owner to act as construction manager on a shopping center construction job. Subsequently, the defendant entered into a subcontract with the plaintiff to act as the site contractor for the project. During the course of construction, the plaintiff discontinued performance because the defendant withheld $11,000.00 from payment to the plaintiff for monies owed by the plaintiff to the defendant on a different project. The defendant also insisted that the plaintiff sign a release of lien and threatened that failure to do so would result in defendant’s refusal to pay plaintiff any of the money it was owed for work up to that time. The plaintiff filed suit for breach and defendant filed a counterclaim. The court found that the withholding of money constituted a material breach and that the plaintiff was entitled to discontinue performance and was not liable for breach.

Subcontractor’s Indemnity Clause Must Contain Explicit Waiver of Immunity of Workers’ Compensation Act

Jan 01 2007

Brown v. Prime Constr. Co., 102 Wash. 2d 235, 684 P.2d 73 (1984)

In this negligence suit filed by an injured employee of a subcontractor against the general contractor, the latter filed a third-party indemnification claim against the subcontractor. The case involved the validity of an indemnity provision in a contract between a general contractor and its subcontractor. The Superior Court, King County, granted summary judgment, and on appeal, the Washington Supreme Court affirmed, holding, among other things, that the subcontractor’s indemnity clause did not clearly and specifically contain a waiver of immunity of the Workers’ Compensation Act. Therefore, the indemnity clause was not enforceable to compel subcontractor to indemnify general contractor for damages paid to subcontractor’s employee who was injured on the job and sued general contractor for negligence.

State Liable for Damages When Delay Results from State’s Failure to Disclose Material Facts

Jan 01 2007

P.T. & L. Constr. Co. v. N.J. Dep’t of Transportation, 531 A.2d 1330, 108 N.J. 539 (1987)

In this case, P.T. & L. Construction Co. was awarded a contract to perform work on a portion of Route 78. Due to extremely poor working conditions, the project, which was contracted to end on November 15, 1974, was not completed until June of 1976. P.T. & L. filed suit to recover damages, attributing the delay to the State’s failure to inform them of the actual conditions of the land. Specifically, where P.T. & L. expected to work in normal or dry conditions, they instead faced wet conditions, including flooding of the work area. The court, looking at the issue of whether an owner can be liable for damages where it fails to disclose certain critical information regarding the project to bidders, found that a sufficient factual basis existed to warrant recovery for nondisclosure of material facts.

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