Archive: January 2007

1
K&L Gates’ Arbitration World, Winter 2006/2007
2
Contract Specifications Defense Applies to Both Private and Public Contractors
3
Owner Who Pays Contractor After Receiving Subcontractor’s Lien Notice Becomes Personally Liable to Subcontractor, Even Though Owner Retains More than Lien Amount
4
New York Public Policy Against Pay-If-Paid Provision Does Not Apply to Contracts Governed by Jurisdictions That Do Not Share That Policy
5
California Business and Professions Code § 7031(a) Bars Recovery for Unlicensed Contract Work Even if Contractor Receives a License Prior to Completion; Contractor Must Have License Before Starting Work
6
Court Finds Contractor Has No Claim for Implied Indemnity or for Contribution Against Subcontractors
7
Statute Adopting Several Liability in Tort Actions Does Not Apply to Contractual Indemnification Actions
8
Existence of “Good Faith Dispute” Allows Contractor to Withhold Payments and Avoid Prompt Payment Penalties
9
New York Law Allows Subcontractors’ Assignees to Recover From Sureties
10
Contractors Must Follow Contractual Notice Procedures

K&L Gates’ Arbitration World, Winter 2006/2007

By K&L Gates attorneys Ian Meredith, Michael D. Napoli, Martin J. King, Andrew H. Davies, Douglas J. Simmons, Ben Morgan, Clare Tanner, Brian R. Davidson, Kari M. Horner, Sarah A. Munro and Rachel G. Stephens.

Arbitration World highlights the significant developments and issues in international arbitration that matter to in-house counsel and company executives with responsibility for dispute resolution.

Welcome to the third edition of “Arbitration World” and the first edition, we are proud to say, following the combination of Kirkpatrick & Lockhart Nicholson Graham LLP with Preston Gates Ellis LLP, effective 1 January 2007, to form Kirkpatrick & Lockhart Preston Gates Ellis LLP – “K&L Gates.”

In light of this development, page 3 of this issue includes a short commentary on arbitration in Asia and a profile of the firm’s Asian offices which enable the firm to advise clients in arbitration in this increasingly strategic part of the world.

For those reading for the first time, “Arbitration World” aims to highlight significant developments and issues in international arbitration that matter to in-house counsel and company executives with responsibility for dispute resolution.

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Contract Specifications Defense Applies to Both Private and Public Contractors

Craig Johnson Constr., L.L.C. v. Floyd Town Architects, P.A., 142 Idaho 797, 134 P.3d 648 (2006)

Town entered into a contract with Dean to prepare plans for condominiums in Ketchum.  Once Dean received the plans, Dean contracted with Johnson to build the condominiums according to Town’s plans.  The condominiums were built in two phases.  In Phase one Johnson deviated from the plans, but did not do so in building phase two.  The first winter the condominiums were completed, ice dams formed on the roofs of individual units in both phases of construction.  All three parties then brought actions against each other for breach of contract, negligence and indemnification. 

At trial, the jury found Johnson to be 90 percent at fault and Town only 10 percent at fault.  The court held that “a public or private contractor following plans and specifications prepared by another party is not liable in negligence where defects in the plans and specifications cause injuries, so long as the contractor should not have reasonably known about the defects.”  The court affirmed the jury’s verdict since there was sufficient evidence in the record to show that Johnson was negligent and failed to follow Town’s plans. 

Owner Who Pays Contractor After Receiving Subcontractor’s Lien Notice Becomes Personally Liable to Subcontractor, Even Though Owner Retains More than Lien Amount

O & M Indus. v. Smith Eng’g Co., 360 N.C. 263, 624 S.E.2d 345 (2006)

In this case, the subcontractor served a notice of claim of lien on funds owed to it by the contractor.  The owner paid the contractor after the subcontractor served notice, but also retained funds in excess of the subcontractor’s lien.  The subcontractor sued when neither the contractor nor the owner paid it.  The subcontractor moved for summary judgment, alleging that the owner was personally liable because it paid the contractor after the subcontractor served notice.  The owner also moved for summary judgment.  The trial court granted the subcontractor’s motion for summary judgment and denied the owner’s.  The Court of Appeals reversed, but the North Carolina Supreme Court reversed the Court of Appeals, holding, among other things, that the Court of Appeals failed to properly apply the applicable lien statutes, and that the owner’s retention of funds exceeding the lien did not relieve the owner of personal liability.

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New York Public Policy Against Pay-If-Paid Provision Does Not Apply to Contracts Governed by Jurisdictions That Do Not Share That Policy

Welsbach Elec. Corp. v. MasTec N. Am., Inc., 7 N.Y.3d 624 (2006)

Welsbach involved a general contractor engaged to construct a telecommunications network in New York.  The agreement between the general contractor and sub-contractor included a pay-if-paid clause and a Florida choice of law provision.  The New York Court of Appeals decided that New York’s public policy against pay-if-paid contract provisions was not so fundamental that it would override the parties’ choice of law.

The significance of this ruling is that it is now possible for a subcontractor to find that its lien rights are imported if it does business under the law of a non-West-Fair state.

California Business and Professions Code § 7031(a) Bars Recovery for Unlicensed Contract Work Even if Contractor Receives a License Prior to Completion; Contractor Must Have License Before Starting Work

MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc., 36 Cal. 4th 412 (2005)

In this case, the California Supreme Court expanded on the body of licensing law set forth in Hydrotech Sys. Ltd. v. Oasis Water Park, 52 Cal. 3d 998 (1991).

In MW Erectors, subcontractor Niederhauser Ornamental & Metal Works Company was hired to perform specialized metal work on a project.  Niederhauser awarded two contracts to MW Erectors, one for “structural” steel work and one for “ornamental” steel work.  MW Erectors began work on the structural contract on December 3, 1999, but did not receive a steel contractor’s license until December 21, 1999.  MW Erectors began work on the ornamental contract in early January.  MW Erectors subsequently sued Niederhauser and its payment bond surety for amounts due on both contracts.  The trial court granted summary judgment in favor of Niederhauser.  The court of appeals reversed, and held that MW Erectors was entitled to prove amounts due for its work on the structural contract after the license was issued.
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Court Finds Contractor Has No Claim for Implied Indemnity or for Contribution Against Subcontractors

Kaleel Builders, Inc. v. Ashby, 161 N.C. App. 34, 587 S.E.2d 470 (2003)

In this case, homeowners hired an architect to design their residence, and also hired Kaleel Builders, Inc., as contractor to construct the residence.  Kaleel in turn hired several subcontractors. In the fall of 1996, the homeowners halted construction, and filed an arbitration demand against Kaleel alleging defective construction, including the work by the subcontractors and the design/supervision of the architect.  While the arbitration was pending, Kaleel filed a complaint seeking indemnification and/or contribution against the subcontractors and architect in July of 2001.  The trial court dismissed the claims against the subcontractors.  The claims for breach of warranty and breach of contract were dismissed on statute of limitations grounds, and the claims for negligence, indemnity, and contribution were dismissed for failure to state a claim.  The trial court also granted summary judgment for the architect.  The North Carolina Court of Appeals affirmed the trial court’s decision on all claims.

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Statute Adopting Several Liability in Tort Actions Does Not Apply to Contractual Indemnification Actions

Moen Co. v. Island Steel, 128 Wash. 2d 745, 912 P.2d 472 (1996)

Here, a general contractor, Moen, who had settled with an employee of the subcontractor, Island, injured in an accident at a construction worksite sought contractual indemnification from the subcontractor pursuant to RCW 4.24.115.  The principle issues in this case were:  (1) whether the contractor could enforce its indemnification agreement in which the subcontractor waived its employer immunity under RCW Title 51 and which purports to shift liability to the extent of the subcontractor’s negligence (despite RCW 4.22.070 which adopts several liability in tort cases), and (2) to what extent the subcontractor was liable to contractor, if at all. Read More

Existence of “Good Faith Dispute” Allows Contractor to Withhold Payments and Avoid Prompt Payment Penalties

Alpha Mech., Heating & Air Conditioning, Inc. v. Travelers Cas. & Sur. Co. of Am., 133 Cal. App. 4th 1319 (2005)

In this case, subcontractor Alpha Mechanical, Heating & Air Conditioning sued general contractor RAS Builders and payment bond issuer Travelers after RAS withheld a final payment on the grounds that Alpha Mechanical had damaged other trades’ work.  At trial, Alpha Mechanical argued that RAS failed to comply with California prompt payment statutes because RAS failed to give timely notice of any good faith dispute.  Travelers countered that the existence of a good faith dispute precluded the award of prompt payment penalties, and that RAS offered evidence that Alpha Mechanical had been notified of every backcharge.  The trial court awarded Alpha Mechanical the principal amount owed, penalty interest, prejudgment interest and attorneys fees and costs.
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New York Law Allows Subcontractors’ Assignees to Recover From Sureties

Quantum Corporate Funding, Ltd. v. Westway Indus., Inc., 4 N.Y.3d 211 (2005)

In Quantum Corporate Funding, a subcontractor sold its accounts receivable to an assignee.  When the general contractor failed to pay its debts, the assignee, or factor, brought suit against the surety for the State Finance Law § 137 payment bonds that the general contractor had been required to purchase.  The surety refused payment and the factor brought suit.  Though the statute is silent on who may sue on the bond, the Court of Appeals ruled that State Finance Law § 137 allows subcontractors’ assignees to recover payment from bond sureties.

Contractors Must Follow Contractual Notice Procedures

Absher Constr. Co. v. Kent Sch. Dist., 77 Wash. App. 137, 890 P.2d 1071 (1995)

In this case, a contractor and subcontractors brought action against a school district for breach of public contract for the construction of an elementary school.  Subcontractor Emerald was hired to work on the school’s HVAC system for Chapman, to whom Absher had subcontracted mechanical work on the project.  Absher’s contract with the school district required all claims to be filed in writing with the district within 14 days of events giving rise to these claims.  Absher did not provide notice of Emerald’s claims until months after Emerald had completed all of its work.  The Superior Court, King County, entered summary judgment for the school district.  The contractor and subcontractors appealed. Read More

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