January 1, 2007 – Page 3 – Construction Law

Economic Loss Rule Bars Recovery for Construction Defects that do not Cause Property Damage

Jan 01 2007

Aas v. Superior Court, 24 Cal. 4th 627 (2000)

In this case, a condominium homeowners association and condominium owner sued the developer, general contractor and subcontractors who participated in the construction of the condominiums. The plaintiffs alleged a variety of construction defects related to nearly all components and aspects of the construction, and sought repair costs and damages for diminution in value of their residences. The defendants sought a motion in limine to exclude evidence relating to alleged construction defects that did not cause property damage. The trial court granted the defendants’ motions as to the plaintiffs’ tort claims, and the court of appeal denied the plaintiffs’ subsequent petition for a writ of mandate.
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Functional Equivalent of Privity is Required in Negligent Misrepresentation Cases that Produce Only Economic Injury

Jan 01 2007

Ossining Union Free Sch. Dist. v. Anderson LaRocca Anderson, 73 N.Y.2d 417 (1989)

In Ossining, the Court of Appeals expanded on the holding in Credit Alliance and ruled that a school district, which contracted with an architect, could sue engineers hired by the architect for damages suffered as a result of the engineers’ negligence and malpractice. The issue addressed by the court was whether privity of contract is required in a negligent misrepresentation case that produces only economic injury. The court held that a cause of action for negligent misrepresentation which produces only economic injury requires that the underlying relationship between the parties be one of contract or the bond between them so close as to be the “functional equivalent of contractual privity.” The court laid out a three-prong test following the guidance of Credit Alliance: (i) that the design professional be aware that its reports are to be used for a particular purpose; (ii) that a known person rely on the reports in furtherance of that purpose; and (iii) that there be some conduct by the design professional linking it to the reliant person and evidencing its understanding of the reliance.

Use of Total Cost Method of Calculating Damages Fails to Prove Cause of Damages

Jan 01 2007

Conom Alaska v. Bell Lavalin, Inc., 842 P.2d 148 (Alaska 1992)

In this case, when a dispute arose regarding the schedule for completing construction, the subcontractor sued the general contractor for professional negligence and breach of contract. The trial court granted the contractor’s motion to dismiss the professional negligence claim because the subcontractor failed to adequately establish a basis for the jury to determine the amount of damages. The subcontractor appealed.

“No Damage for Delay” Clause Does Not Preclude Delay Damages Caused Solely by Owner’s Failure to Disclose Material Information Related to Potential Delays

Jan 01 2007

Howard Contracting, Inc. v. G.A. MacDonald Constr. Co., 71 Cal. App. 4th 38 (1999)

This case arose out of a public works contract relating to a construction project to rehabilitate the Venice Canals located in Los Angeles. The project was owned and designed by the City of Los Angeles, which awarded the general contract to G.A. MacDonald Construction Co., Inc. The contract between the City and MacDonald contained a limited “no damage for delay” clause, which stated that a contractor was entitled to an extension of time to complete work delayed by unforeseen events but was not entitled to collect damages attributable to the delay. The contract did provide an exception, however, which specifically provided for payment for unreasonable and unanticipated delays caused by the City. MacDonald subcontracted portions of the work to Howard Contracting and Soil Retention Systems (“SRS”).

Architect and Interior Designer Liable for Tortious Interference with Contract Where General Contractor was Terminated on Their Recommendation

Jan 01 2007

DiMaria Constr., Inc. v. Interarch, 799 A.2d 555, 351 N.J. Super 558 (N.J. Super. Ct. App. Div. 2001)

In this case, the general architect and interior designer on a construction project recommended that the owner terminate the general contractor. The owner, on this advice, terminated the contractor who subsequently filed suit against the architect and interior designer for tortious interference with contract. In analyzing the claims, the court looked at the four elements of the tort of interference with a business relation or contract: (1) a protected interest; (2) malice in the sense that the defendant interfered without justification; (3) a reasonable likelihood that the interference caused the loss of the prospective gain; and (4) resulting damages. The court found that the architect and interior designer were liable for tortious interference. The court also addressed whether they were acting as agents of the owner and therefore escaped liability. The court found that question to be a factual issue that was implicitly answered in the affirmative in the jury’s finding of liability.

Notwithstanding “No Damage for Delay” Clause, Delay Damages May be Recovered in Certain Circumstances

Jan 01 2007

Corinno Civetta Constr. Corp. v. City of New York, 67 N.Y.2d 297 (1986)

In Corinno Civetta, the Court of Appeals reaffirmed that generally, “no damage for delay” clauses, which bar a contractor from recovering damages for delay in the performance of a contract, are valid and enforceable. However, even with such a clause, damages may be recovered for: (i) delays caused by the contractee’s bad faith or willful, malicious, or grossly negligent conduct; (ii) uncontemplated delays; (iii) delays so unreasonable that they constitute an intentional abandonment of the contract by the contractee; and (iv) delays resulting from the contractee’s breach of a fundamental obligation of the contract.

Professionals Can Be Liable to Non-Contracting Parties if Their Relationship Approximates Privity

Jan 01 2007

Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536 (1985)

In Credit Alliance, the Court of Appeals held that accountants could be liable to noncontractual parties if the relationship of the parties approached that of privity. Specifically, the court held that an accountant could be liable, absent privity of contract, to a party who relies to his detriment on a negligently prepared financial report if (i) the accountant was aware that the financial reports were to be used for a particular purpose, (ii) in the furtherance of which a known party was intended to rely, and (iii) there must have been some conduct on the part of the accountant linking him to that party which evinces his understanding of that parties’ reliance.

“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.

Archive:January 1, 2007