Case Summaries – Page 3 – Construction Law

New Jersey Appellate Court Holds That Coverage Exists for Consequential Damages Caused By Subcontractors’ Defective Work

Nov 23 2015

By Denise N. Yasinow, Loly G. Tor, and Christopher A. Barbarisi, K&L Gates, Newark

This past summer, the Superior Court of New Jersey, Appellate Division issued a favorable decision for owners, real estate developers, and general contractors regarding insurance coverage for damages caused by the faulty work of their subcontractors. In Cypress Point Condominium Association, Inc. v. Adria Towers, LLC,[1] the Court held that unexpected and unintended consequential damages caused by a subcontractor’s defective work constitutes “property damage” caused by an “occurrence” under a commercial general liability (“CGL”) insurance policy. Thus, these types of consequential damages are recoverable.

The Cypress Point decision roundly rejected the Third Circuit’s opinion in Pennsylvania National Mutual Casualty Insurance Co. v. Parkshore Development Corp.,[2] which concluded that faulty workmanship performed by a contractor or a subcontractor that causes damage to the general contractor’s work is not an “occurrence.”

Harris v. West Bay Builders: Award of Attorney’s Fees Not Mandatory Under California Prompt Payment Statutes

Oct 01 2015

By Timothy L. Pierce and Hector H. Espinosa, K&L Gates, Los Angeles

California’s prompt payment statutes, found at Business and Professions Code section 7108.5 and Public Contract Code sections 7107 and 10262.5, each contain a fee-shifting provision, stating that the prevailing party “shall” be entitled to his or her attorney’s fees and costs. In James L. Harris Painting & Decorating, Inc. v. West Bay Builders, Inc. (No. C072169), the California Court of Appeals confirmed that a trial court can, in its discretion, choose not to award either party attorney’s fees under the prompt payment statutes if the trial court determines that neither party “prevailed.”

FTR v. Rio: Penalties Assessed Against School District for Withholding Contractor Funds

Sep 24 2015

By Timothy L. Pierce and Benjamin Kussman, K&L Gates, Los Angeles

In East West Bank v. Rio School District, 235 Cal. App. 4th 742 (2015), the California Court of Appeals upheld a trial court’s assessment of $1,537,404.96 in statutory penalties against the Rio School District (the “District”) for the District’s failure to timely release contractor funds pursuant to Public Contract Code Section 7107. The Court concluded, in what constitutes a departure from another recent Court of Appeals ruling interpreting the same statutory provision[1], that Section 7101 does not allow a public entity to withhold contractor retainage on the basis of a dispute over the cost of contract work.

FIDIC Update: Further clarity provided by Obrascon Huarte Lain SA v HM Attorney General for Gibraltar

Aug 20 2015

By Mike R. Stewart and Mary E. Lindsay, K&L Gates, London

We wrote recently on the case of Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC). The case provided welcome clarity on the interpretation of Sub-Clauses 4.12 (Unforeseeable Physical Conditions) and 20.1 (Contractor’s claims) and Clause 15 (Termination). The matter was appealed and dismissed unanimously in Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2015] EWCA Civ 712 (http://www.bailii.org/ew/cases/EWCA/Civ/2015/712.html).

The dispute arose out of the design and construction by Obrascon Huarte Lain SA of a road and tunnel under the runway of Gibraltar airport. The contract was an amended form of the FIDIC Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant, and for Building and Engineering Works, Designed by the Contractor, 1st edition, 1999; the Yellow Book.

In the first instance case, Mr Justice Akenhead was required to consider whether the employer was entitled to terminate.

In addition, the judgment clarified that, under Sub-Clause 20.1 of the FIDIC Conditions (Contractor’s Claims), time does not start running for the Contractor to give notice until the date on which he is aware (or should have been aware) of the delay resulting from a particular event or circumstance. The court only considered Sub-Clause 20.1 in relation to the extension of time, but the same principle is expected to apply to claims for additional payment made pursuant to the same provision.

The contractor appealed on the grounds that the court had incorrectly found that contamination encountered was foreseeable, failed to find that documents provided by the engineer constituted variations and failed to find that the employer had invalidly terminated the contract. The contractor’s appeal against Mr Justice Akenhead’s decision was unanimously dismissed by the Court of Appeal. The appeal judgment provides contractors with some helpful explanation in respect of each of these grounds of appeal.

(i) What would constitute unforeseeable physical conditions under Clauses 1.1.6.8 and 4.12?

In this respect, the Court of Appeal was reluctant to overturn findings of fact made at the first instance, particularly in the case of appeals from a specialist court such as the English Technology and Construction Court (the TCC).

However, the Court of Appeal did note that Mr Justice Akenhead had “held that an experienced contractor would make its own assessment of all available data. In that respect the judge was plainly right. Clauses 1.1 and 4.12 of the FIDIC conditions require the contractor at tender stage to make its own independent assessment of the available information. The contractor must draw upon its own expertise and its experience of previous civil engineering projects. The contractor must make a reasonable assessment of the physical conditions which it may encounter. The contractor cannot simply accept someone else’s interpretation of the data and say that is all that was foreseeable.”

(ii) Had the Engineer issued instructions which varied the Works?

Again, on some points, the Court of Appeal was reluctant to interfere in the findings of the TCC.

The Court of Appeal found that the documents referred to it did not amount to instructions to vary the contract. They were either matters which were the contractor’s obligations in any case, concessions by the employer which could be withdrawn and were not contractual or matters which the contractor had not, in fact, acted upon.

The analysis here (at paragraphs 101 to 112) of the judgment gives some indication of the Court’s interpretation of a variation instruction.

(iii) What would give rise to a failure to proceed with the works under Clause 8 and so justify termination pursuant to Clause 15.2?

The first instance court had summarised the relevant legal principles. These were not challenged but the contractor appealed the court’s application of the principles.

The Court of Appeal first addressed the contractor’s claim that it was undertaking a re-design of the works with which the employer and contractor had elected. However, the Court of Appeal found “it is clear that neither GoG nor the Engineer made an election which committed them to adopting the re-design and rejecting the original design of the tunnel. The Engineer made it plain that the original design was perfectly satisfactory and capable of being constructed without any risk to health or safety. The Engineer was simply considering the re-design as a modification put forward by OHL”.

In addition, when the engineer considered the contractor’s design under Clause 5.2, he was considering whether the design was technically acceptable and whether, if the design was implemented, the completed works would accord with the contract. If the re-design is satisfactory in all those respects, it is not for the Engineer to reject the design because he thinks it will take too long to build as the contractor claimed.

The Court of Appeal then considered termination under Clauses 15.2(b) and 15.2(c)(i) and the obligation under Clause 8 of the FIDIC Conditions to “proceed with the works with due expedition and without delay”. The Court decided that the obligation under Clause 8 is not directed to every task on the contractor’s to-do list. Rather it is directed to activities which “are or may become critical”.

The Court of Appeal then considered whether there was a “reasonable excuse”, within the meaning of clause 15.2(c), for the contractor’s failure to proceed with the works. On examination of the facts, it found there was no reasonable excuse.

As we have said, the appeal was unanimously rejected and agreed that the employer had validly terminated the contract. The decision provides helpful clarity and reasoning to understand the FIDIC Conditions and should, combined with the first instance judgment, provide some welcome guidance in the areas considered.

State v. Perini: New Jersey Supreme Court Has Its Say on Statute of Repose

Jul 23 2015

By Denise N. Yasinow, Christopher A. Barbarisi, and Loly G. Tor, K&L Gates, Newark

Recently, the New Jersey Supreme Court shed some new light on an old question impacting construction claims, i.e., when does the statute of repose commence? In New Jersey, the statute of repose[1] bars actions “arising out of the defective and unsafe condition of an improvement to real property” that are brought “more than 10 years after the performance or furnishing of such services and construction.”[2] In State v. Perini Corporation,[3] the Court examined the question in the context of a claim involving an improvement that serviced a larger, phased construction project. The Supreme Court affirmed, as modified, the Appellate Division’s decision,[4] holding that the statute of repose did not commence until the date of substantial completion of the entire overall phased project. Read More

“Badges” of Fraud Allow a Construction Contractor to Pierce the Corporate Veil of an Insolvent Developer and Hold the Principals Personally Liable

Apr 20 2015

By Jesse G. Shallcross, K&L Gates, Chicago

In a recent decision from the 1st District Appellate Court of Illinois, A.G. Cullen Constr., Inc. v. Burnham Partners, LLC, defendants husband and wife were held personally liable for roughly $450,000 due to unpaid construction work performed under contract with the limited liability company controlled by the couple.

Robert Halpin owned defendant Burnham Partners, LLC (“Burnham”), a real estate development company with a 90 percent stake in defendant Westgate Ventures, LLC (“Westgate”), and Halpin’s wife, Lori, ran the bookkeeping for both companies. Westgate engaged plaintiff A.G. Cullen Construction, Inc. (“Cullen”) to build a warehouse and distribution facility in Big Beaver, Pennsylvania.

During the course of construction, Westgate refused to approve one of Cullen’s payment requests for work performed, and Cullen took the dispute to arbitration. The arbitrator awarded Cullen $448,406.87 for the unpaid work and associated expenses and penalties, and the award was reduced to a judgment in Allegheny County, Pennsylvania.

Shortly before the arbitration hearing, Westgate sold the project and Halpin began winding up Westgate’s affairs and liquidating its assets, using the proceeds of the sale to pay other creditors. He also paid a $400,000 developer’s fee to Burnham and transferred roughly $97,500 to himself and his wife, leaving a zero balance in the operating account of Westgate and no means with which to pay the Pennsylvania judgment.

Cullen filed suit in Cook County, Illinois against Westgate, Burnham and the Halpins to recover the amount owed by Westgate on the Pennsylvania judgment. In attempting to hold Burnham and the Halpins liable for Westgate’s debts, Cullen argued that Burnham, through Halpin, perpetrated a fraud by transferring all of Westgate’s assets to themselves and other creditors. The trial court ruled in favor of the defendants, however, finding that Cullen failed to present “undisputed evidence” of fraud.

The appellate court reversed the trial court’s decision and ruled in favor of Cullen, finding that the activity of the defendants presented nine of the 11 factors or “badges of fraud” set forth in the Illinois Uniform Fraudulent Transfer Act (UFTA) (740 ILCS 160/5) which give rise to an inference or presumption of fraud:

There was a transfer of funds to a company “insider”, which term includes individuals who control the company and the relatives of such individuals, such as Robert and Lori Halpin.
The action of transferring assets out of Westgate was concealed from Cullen.
The transfer of Westgate’s assets to Burnham served to remove or conceal the assets themselves from Cullen.
Before any of the transfers occurred, Cullen’s demand for arbitration had put the defendants on notice of a threatened lawsuit.
Substantially all of Westgate’s assets were transferred.
Westgate did not receive “reasonably equivalent value” in exchange for (a) its payment of a $400,000 development fee to Burnham or (b) its repayment of a $120,000 “loan” from the Halpins, the original payment of which, the court found, should have been a capital contribution from Burnham to Westgate under the terms of the company operating agreement.
Westgate became insolvent after the transfers.
The transfers occurred just 10 months after Cullen’s demand for arbitration and two months before the arbitration award was entered.
Westgate had transferred assets to Burnham, a lienor, and Burnham then transferred those assets to the Halpins, who were insiders.

The court found that the defendants’ transfers of Westgate’s assets to themselves and other unsecured creditors when they knew about Westgate’s potential liability to Cullen amounted to fraud in violation of the UFTA.

While this finding of fraudulent activity of the defendants was a victory for Cullen, it did not necessarily follow that each of the defendants would be held personally liable for the obligations of Westgate to pay Cullen. This is because a company is ordinarily treated as a separate legal entity, the debts and liabilities of which its shareholders or principals are not responsible for.

However, the common law system has developed a legal doctrine by which the principal of a company may be held liable for the debts and obligations of the company. Where the principal has, for example, treated the company as a mere “alter ego”, failed to obey corporate formalities, or engaged in fraudulent activity, courts may “pierce” or “lift” the corporate veil to hold the principals liable for the actions of the company.

Under Illinois law, efforts to pierce the corporate veil of a company are governed by the law of its state of incorporation. As Westgate was a Delaware limited liability company, the court applied Delaware law, which states that the corporate veil may be pierced where there is fraud. The presence of nine of the 11 “badges of fraud” was enough to convince the court that the defendants had engaged in fraud. As a result, the court ruled that Cullen may pursue each of Burnham and the Halpins for the $457,416.37 Pennsylvania judgment against Westgate.

Security of Payment Legislation and Set-Off Under Commonwealth Insolvency Laws

Apr 14 2015

By Jenny K. Mee and Jemimah Roberts, K&L Gates, Sydney

A recent Victorian Supreme Court case[1] has clarified the impact of Commonwealth insolvency set-off provisions on State-based security of payments legislation.

The case demonstrates that although a principal is generally precluded from relying on a set-off or counterclaim in certain contexts under the Building and Construction Industry Security of Payment Act 2002 (Vic) (BCISP Act), this does not apply if the claimant is in liquidation, due to the operation of section 553C of the Corporations Act 2001 (Cth) (Corporations Act).

The case also provides useful commentary on what is considered a ‘payment schedule’ for the purposes of the BCISP Act.

If you would like to read more about this case, please click here.

[1] Façade Treatment Engineering Limited v Brookfield Multiplex Construction Pty Ltd [2015] VSC 41.

No Contract, No Problem: HICPA Does Not Prevent Contractors From Recovery Under A Quantum Meruit Theory

Mar 23 2015

By Jackie S. Celender and Leigh Argentieri Coogan, K&L Gates, Pittsburgh

I. HICPA Does Not Foreclose Contractors From Recovery Under A Theory Of Quantum Meruit.

The Supreme Court of Pennsylvania recently held that the Home Improvement Consumer Protection Act, 73 Pa. C.S. § 517.1-517.18 (“HICPA”), does not preclude a contractor from recovering under the theory of quantum meruit in the absence of a valid and enforceable home improvement contract. Shafer Elec. & Const. v. Mantia, 96 A.3d 989 (Pa. 2014). The decision affirmed the holding of the Superior Court of Pennsylvania, albeit on slightly different grounds.

Instead of focusing on the General Assembly’s intent (as the Superior Court of Pennsylvania did),[1] the Court relied on Durst v. Milroy General Contracting, Inc., 52 A.3d 357 (Pa. Super. 2012), holding that “the plain, unambiguous language of Section 517.7(g)[2] does not prohibit the cause of action in quantum meruit.” Shafer Elec. & Constr., 96 A.3d at 996. The Court noted that “[i]t is well settled at common law . . . that a party shall not be barred from bringing an action based in quantum meruit when one sounding in breach of express contract is not available,” and that “[w]hile traditional contract remedies may not be available due to the contractor’s failure to adhere to Section 517.7(a) . . . Section 517.7(g) does not contemplate the preclusion of common law equitable remedies such as quantum meruit when a party fails to comply with subsection (a).” Id. The Court concluded that “[i]f the General Assembly had seen it fit to modify the right of non-compliant contractors to recover in contract or quasi-contract, statutory or common law, or otherwise, it could have done so,” but did not. Id.

The Court’s decision has important implications for contractors’ ability to use Pennsylvania’s mechanics’ lien law, 49 P.S. § 1101, et seq. as a tool in recovering unpaid amounts owed for work performed on a home improvement project. In Pennsylvania, mechanics’ liens must be based on a contract, either express or implied. See 49 P.S. § 1201 (defining “contractor” as one who, “by contract with the owner, express or implied, erects, constructs, alters or repairs an improvement . . . or furnishes labor, skill or superintendence . . . or supplies or hauls materials, fixtures, machinery or equipment reasonably necessary for and actually used . . .”) (emphasis added). The Court’s holding preserves a home improvement contractor’s ability to file and obtain a judgment on a mechanics’ lien based on an implied contract and in the absence of an express contract (i.e., where the contract does not comply with Section 517.7(a) of HICPA).

II. Quantum Meruit Allows Recovery Of The Value Of The Work Performed.

The Supreme Court of Pennsylvania’s decision in Shafer makes clear that contractors found to have an invalid home improvement contract under HICPA are still able to recover money for work performed by bringing a quasi-contract claim under a theory of quantum meruit. Where a contractor is successful in bringing a cause of action in quantum meruit, the contractor is entitled to recover the value of the benefit conferred on the homeowners. See, e.g., Durst, 52 A.3d at 360 (quoting Am. & Foreign Ins. Co. v. Jerry’s Sport Ctr., Inc., 2 A.3d 526, 532 n.8 (2010) (“Quantum meruit is an equitable remedy to provide restitution for unjust enrichment in the amount of the reasonable value of services.”) (citing Black’s Law Dictionary (8th ed. 2004))); Com., Dep’t of Pub. Welfare v. UEC, Inc., 397 A.2d 779, 782 (Pa. 1979) (amount owed under a quantum meruit theory was “the reasonable value of the services performed”). As such, contractors should be prepared to prove the value of the services performed and materials provided on the project to recover under a theory of quantum meruit. Although the cost of materials and labor expended is normally a good proxy for the value conferred on a particular project, contractors should be mindful that under certain circumstances the value conferred may exceed the contractors’ costs and that, in those circumstances, relying on the contractors’ costs may undervalue the contractors’ quantum meruit claim.

III. The Case Law Interpreting HICPA Is Scarce.

There is a relative lack of caselaw interpreting HICPA and stating under what circumstances HICPA should apply. The legislative history of HICPA suggests that HICPA should not apply to all home improvement projects—in particular, those involving sophisticated homeowners (i) who have a contractor that fully performed, and (ii) who have obtained all of the benefits of the contract but have not complied with the burdens (i.e., payment).[3] Given the undeveloped nature of the caselaw interpreting HICPA, contractors attempting to recover payment for unpaid work based on a home improvement contract should (if the facts permit) assert causes of action (or facts supporting causes of action) for both breach of contract and, in the alternative, quantum meruit recovery.

[1] The Superior Court of Pennsylvania focused its rationale on canons of statutory construction to ascertain legislative intent. See Shafter Elec. & Constr., 96 A.3d at 996.

[2] Section 517.7(g) “Contractor’s recovery right,” provides:

Nothing in this section shall preclude a contractor who has complied with subsection (a) from the recovery of payment for work performed based on the reasonable value of services which were requested by the owner if a court determines that it would be inequitable to deny such recovery.

Shafer Elec. & Constr., 96 A.3d at 992.

[3] The General Assembly enacted HICPA to protect vulnerable consumers, such as the elderly, infirm, and first-time homebuyers from predatory contractors (i.e., contractors that abscond with homeowners’ money without completing the work). See 2008 Pa.H.R. Jour., No. 65 p.2292 (Statement of Representative Preston) (“If you care about the senior citizens or the young couple who is buying a first-time starter house and they want to be able to remodel it and not be able to be ripped off,” then “I am going to ask [those] members…to support the Tomlinson bill.”); 2008 Pa.H.R. Jour., No. 64, p.2199 (Statement of Representative Marsico) (the Pennsylvania Legislature’s intent behind HICPA was to “address the problems of home improvement contractors who take people’s money and leave town without doing the work”).

New Jersey Supreme Court Calls for More Specific Language in Arbitration Agreements: Atalese and Beyond

Mar 03 2015

By Christopher A. Barbarisi, Loly G. Tor, and Christopher J. Archer, K&L Gates, Newark

Introduction:

A recent decision by the New Jersey Supreme Court in Atalese v. U.S. Legal Servs. Grp., and subsequent opinions by New Jersey’s state and federal courts applying Atalese, strongly suggest that arbitration provisions contained in contracts relating to construction and engineering projects and services will not be enforceable under New Jersey law unless they contain clear and unambiguous language signaling that the parties are surrendering their rights to pursue their claims in court.

The Atalese Decision

In its September 2014 opinion in Atalese, the New Jersey Supreme Court reversed the rulings of the lower courts and held that an arbitration provision in a consumer contract was unenforceable because it “did not clearly and unambiguously signal to plaintiff that she was surrendering her right to pursue her statutory claims in court.” Atalese v. U.S. Legal Servs. Grp., L.P., 219 N.J. 430, 99 A.3d 306 (2014). A detailed discussion of the Supreme Court’s holding in Atalese can be found in our October 2014 Commercial Disputes Alert.

Recent Decisions Applying Atalese

In the months since Atalese, New Jersey’s state and federal courts have already cited the Supreme Court’s opinion on several occasions and, in doing so, have rejected arguments that Atalese is limited to consumer contracts and that it does not apply to contracts involving sophisticated business parties and/or parties that are represented by counsel in connection with execution of the contract. To the contrary, New Jersey’s Courts have expanded the Atalese requirement for arbitration provisions to apply to a broad variety of contracts types:

Asset Purchase Agreements: In Rosenthal v. Rosenblatt, the Appellate Division of the New Jersey Superior Court applied Atalese to an arbitration provision contained in an asset purchase agreement for the sale of a dentistry practice. See A-3753-12T2, 2014 WL 5393243, at *4 (App. Div. Oct. 24, 2014). The court held that the arbitration provision was unenforceable because it did not contain “clear and unambiguous language that plaintiff is giving up his right to bring his claims in court or have a jury resolve the dispute,” as required by the Atalese decision, despite stating that all disputes between the parties “shall be exclusively resolved as provided herein through mediation and arbitration.” The court specifically stated that the Atalese requirement for arbitration applied even between parties engaged in sophisticated business transactions.

Condominium Purchase Agreements: In Dispenziere v. Kushner Cos. (the first published opinion to apply Atalese), the Appellate Division held that an arbitration provision contained in purchase agreements between a condominium developer and condominium unit purchasers was not enforceable because, like the provision involved in Atalese, it was “devoid of any language that would inform unit buyers such as plaintiffs that they were waiving their right to seek relief in a court of law.” 438 N.J. Super. 11, 18 (App. Div. 2014). The Appellate Division expressly rejected the position that Atalese—which only involved causes of action pursuant to the New Jersey Consumer Fraud Act and the New Jersey Truth-in-Consumer Contract Warranty and Notice Act—is limited to claims for statutory violations and, instead, held that Atalese applies equally to common-law causes of action. The Appellate Division also rejected the argument that Atalese should not apply when the parties are represented by counsel in connection with the execution of the contract.

Collective Bargaining Agreement: In the Appellate Division’s unpublished opinion in Kelly v. Beverage Works N.Y. Inc., the court applied Atalese to an employment discrimination case and held that an arbitration provision contained in a union employee’s collective bargain agreement (CBA) was unenforceable because the provision did not “put plaintiff on notice that he was waiving his right to try his claims in court.” L-1285-13, 2014 WL 6675261 (App. Div. Nov. 26, 2014). The Appellate Division specifically rejected the argument that Atalese applied only to “consumer service agreement[s],” explaining that it “discern[s] no reason to conclude that employees bound by a CBA should be charged with greater understanding of their rights than the average consumer.”

New Jersey’s federal courts have also applied Atalese on at least two occasions. In Guidotti v. Legal Helpers Debt Resolution, the District Court of New Jersey held that an arbitration provision contained in an agreement to provide debt-adjustment services was unenforceable because it failed to advise the plaintiff of the provision’s effect and significance, “namely, that it bars [plaintiff] from seeking court relief.” No. 11-1219, 2014 WL 6863183, *1 (D.N.J. Dec. 3, 2014). In Ricci v. Sears Hldg. Corp., the District Court cited Atalese and held that an arbitration provision in an employment agreement containing the following language was enforceable: “[This agreement to arbitrate] constitutes a waiver of [the employee’s] right to bring the current action in a court of law and, instead, requires arbitration of [the employee’s] claims.” No. 14-3136-RMB-JS, 2015 WL 333312, at *1, 5 (D.N.J. Jan. 23, 2015).

Moving Forward

On January 21, 2015, the defendant in Atalese filed a Petition for Writ of Certiorari with the United States Supreme Court, arguing that the New Jersey Supreme Court’s decision contradicts the plain language of the Federal Arbitration Act and conflicts with the decisions of other federal and state courts. Whether the Court will grant the Petition in Atalese is questionable. The New Jersey Supreme Court framed the question in Atalese as one of purely New Jersey contract law, and the United States Supreme Court receives approximately 10,000 petitions for a writ of certiorari each year but grants only 75–80. For now, Atalese is binding precedent, and companies doing business in New Jersey should review their contracts to evaluate whether they comply with Atalese. Companies should be mindful that they may face uphill battles enforcing arbitration provisions that were routinely enforced prior to Atalese. Moreover, the opinions in Rosenthal, Dispenziere, Kelly, Guidotti, and Ricci demonstrate that courts will not limit Atalese to statutory claims, and may extend Atalese beyond consumer contracts. Companies should also be mindful that Atalese will apply in federal court when the contract is governed by New Jersey law.

European Court of Justice overturns additional requirements for the marketing of construction products in German Building Rules List

Jan 26 2015

By Christoph Mank and Eva Hugo, K&L Gates, Berlin

On 16 October 2014, the European Court of Justice[1] (ECJ) ruled that German law, which imposes additional authorization schemes on construction products even if they already bear the “CE” mark and are lawfully marketed in other member states of the European Union, violates the right on the free movement of goods on the single European market.

The facts

In the European Union, certain products are marked with the CE symbol to certify their compliance with product requirements under European Union law. Consequently, a CE-certified product is entitled to move freely on the European market and may be freely used for its intended purpose.

Nevertheless, German law, as reviewed by the ECJ, stipulates that CE-certified construction products are subject to additional approvals before their use and sale in the domestic market; such additional approvals are listed in building rules lists (Bauregellisten) A, B and C.

The present case solely referred to building rules list B and three construction products listed therein; namely, pipeline compressions, mineral wool insulating materials and gates, windows and exterior doors. All these construction products had in common was that they were marked with the CE symbol, which meant that they complied with requirements of the Construction Products Directive[2] of the European Union and, therefore, could be marketed and used freely on the European market. However, German public building law provides for additional national approvals for marketing the construction products on the German market.

Due to this practice, the European Commission received numerous complaints from manufacturers and importers who had difficulty in placing their construction products on the German market; the European Commission, therefore, launched infringement proceedings against Germany. Since Germany insisted during the preliminary procedure that the security of buildings cannot sufficiently be achieved by the CE marking alone, the European Commission decided to bring action before the ECJ.

The decision

The ECJ held that the additional approvals set out in building rules list B infringes article 4 paragraph 2 and article 6 paragraph 1 of the Construction Products Directive. According to those provisions, member states “shall not impede the free movement, placing on the market or use in their territory of products which satisfy the provisions of this Directive,” and were, correspondingly, CE-marked. The ECJ ruled that the German approval practice constitutes such an impediment.

The Court further stated that the Directive itself provides for specific procedures in the event that a member state considers the requirements of the Directive to be incomplete and insufficient. Due to the existence of those procedures, a member state is not allowed to arbitrarily impose its own additional requirements.

Consequences

Although the present decision refers only to the three aforementioned groups of construction products, the ruling will be applicable for all CE-marked construction products that are subject to further approvals according to German law. The European Commission, correspondingly, sees a precedent.

Nevertheless, it should be noted that the Court´s decision refers to the Construction Products Directive of 1989, replaced in 2013 by the Construction Products Regulation[3]. Hereafter, the CE marking no longer serves as a proof that the respective construction product complies with the requirements of European law. Now, it only shows that a declaration of performance has been issued by the manufacturer describing the performance of the construction product and its essential features; therefore, it is not clear whether, and to what extent, the member states are allowed to impose additional requirements under the new Construction Products Regulation. However, since the new Regulation also provides for special procedures in the event of incomplete and insufficient provisions, it can be assumed that member states will also not be allowed to impose their own additional requirements beyond the provided procedures. It remains to be seen if Germany will make use of those procedures.

Reactions to the present decision are quite different: while the European Commission and European associations welcome the decision with regard to the right of free movement of goods, German associations fear a decline in quality of construction products.

[1] Case no. C-100/13.

[2] Directive 89/106/EEC.

[3] Regulation EU 305/2011.

Catagory:Case Summaries