Category: Case Summaries

1
FIDIC Update: The Employer’s Claim to Liquidated Damages and Performance Security under the Yellow Book
2
Pennsylvania Superior Court Holds that Economic Loss Doctrine Does Not Shield Design Professionals from Liability for Faulty Information Implicitly Represented in Design Documents
3
Washington Court of Appeals Confirms Enforceability of Termination-for-Convenience Clauses and Holds that Implied Covenant of Good Faith Places No Limits on Express Termination-for-Convenience Clauses
4
New Jersey Appellate Court Holds That Coverage Exists for Consequential Damages Caused By Subcontractors’ Defective Work
5
Harris v. West Bay Builders: Award of Attorney’s Fees Not Mandatory Under California Prompt Payment Statutes
6
FTR v. Rio: Penalties Assessed Against School District for Withholding Contractor Funds
7
FIDIC Update: Further clarity provided by Obrascon Huarte Lain SA v HM Attorney General for Gibraltar
8
State v. Perini: New Jersey Supreme Court Has Its Say on Statute of Repose
9
“Badges” of Fraud Allow a Construction Contractor to Pierce the Corporate Veil of an Insolvent Developer and Hold the Principals Personally Liable
10
Security of Payment Legislation and Set-Off Under Commonwealth Insolvency Laws

FIDIC Update: The Employer’s Claim to Liquidated Damages and Performance Security under the Yellow Book

By Camilla de Moraes, K&L Gates, London

The English courts have recently considered a number of cases involving the FIDIC suite of contracts (see here, here, and here for our previous blog posts).  The most recent case of J Murphy & Sons Ltd v Beckton Energy Ltd [2016] EWHC 607 (TCC)arises out of a contract based on FIDIC Conditions of Contract for Plant and Design Build for Electrical and Mechanical Plant and for Building and Engineering Works designed by the Contractor First Edition 1999 (FIDIC Yellow Book) with amendments.

The court was required to consider the relationship between two clauses in the Contract, namely Sub-Clause 2.5 (Employer’s Claims) and Sub-Clause 8.7 (Delay Damages and Bonus) with reference also to Sub-Clause 3.5 (Determinations) and 4.2 (Performance Security).  The issue in dispute was whether determination by the Engineer of the contractor’s liability for liquidated damages was a pre-requisite to recovery of liquidated damages by the Employer.  The court held that the clause entitling the Employer to liquidated damages operated outside of the regime in Sub-Clause 2.5 and therefore the Engineer’s determination was not a pre-requisite to the Employer’s entitlement.  This case also confirms the traditionally held view that obtaining injunctive relief preventing a beneficiary from calling on a performance bond will rarely be possible.

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Pennsylvania Superior Court Holds that Economic Loss Doctrine Does Not Shield Design Professionals from Liability for Faulty Information Implicitly Represented in Design Documents

By Michael P. Cotton, K&L Gates, Pittsburgh

In its July 8, 2015 opinion, the Superior Court of Pennsylvania held that design professionals are potentially subject to liability for negligent misrepresentation claims when it is alleged that their design documents negligently included false information via implicit representations.  Gongloff Contracting, L.L.C. v. L. Robert Kimball & Associates, Architects & Engineers, Inc., 119 A.3d 1070 (Pa. Super. 2015).  In so doing, the Superior Court clarified the scope of Section 552 of the Restatement (Second) of Torts and found that the Section does not require a design professional to make an explicit negligent misrepresentation of a specific fact for a third party to recover economic damages.

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Washington Court of Appeals Confirms Enforceability of Termination-for-Convenience Clauses and Holds that Implied Covenant of Good Faith Places No Limits on Express Termination-for-Convenience Clauses

By D.C. Wolf, Brad Lewis, and Jesse O. Franklin, K&L Gates, Seattle

The contract law concept of a “termination for convenience” allows one contracting party to terminate a contract that has become inconvenient or unnecessary and settle with the terminated party for partial performance.  The doctrine originated during the U.S. Civil War to give the Union government flexibility when quickly changing battlefield conditions rendered a planned project or procurement overly costly or no longer necessary.[1]

In its recent decision in SAK & Associates, Inc. v. Ferguson Construction, Inc., No. 72258-1-1, 2015 WL 4726912 (Wash. Ct. App. Aug. 10, 2015), the Washington Court of Appeals, Division One, given very limited existing authority, clarified that partial performance of a construction project is sufficient consideration to support a termination-for-convenience clause and rejected the argument that the implied covenant of good faith and fair dealing limits a party’s ability to invoke such a clause.

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

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.”

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

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.”

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

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.

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

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

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

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:

  1. 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.
  2. The action of transferring assets out of Westgate was concealed from Cullen.
  3. The transfer of Westgate’s assets to Burnham served to remove or conceal the assets themselves from Cullen.
  4. Before any of the transfers occurred, Cullen’s demand for arbitration had put the defendants on notice of a threatened lawsuit.
  5. Substantially all of Westgate’s assets were transferred.
  6. 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.
  7. Westgate became insolvent after the transfers.
  8. The transfers occurred just 10 months after Cullen’s demand for arbitration and two months before the arbitration award was entered.
  9. 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

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.

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