Construction Law

Legal issues, news, and regulations concerning the construction industry

1
Express Agreement to One-Year Claims Limitation Clause is Enforceable
2
“Pay When Paid” Provision Cannot Indefinitely Delay Payment to Subcontractor
3
Multi-Prime Contractors Have Right of Action Against Each Other If Made Third-Party Beneficiaries
4
Damages Awarded to Plaintiff Stopped from Completing Contract; Calculation Based on the Fair Price of the Entire Work and Lost Profits for Work Not Performed
5
Lack of Privity Does Not Bar Action Against Design Professional for Personal Injury
6
Excessive Changes to Contract Can Justify Abandonment Claim Even if Contract is Completed; Abandonment Damages May Be Calculated According to Total Cost
7
Installation of Air Conditioning Unit Not an “Improvement” within the Context of Statute of Limitations
8
Liquidated Damages Clause in Prime Contract is Incorporated in Subcontract when Subcontract Contains Conduit Clause
9
Increased Costs Due to Inaccuracy of Contract Drawings Are Recoverable
10
Owner Who Accepts and Takes Possession of Incomplete or Obviously Defective Building Waives Patent and Obvious Defects, but Does Not Waive Latent Defects

Express Agreement to One-Year Claims Limitation Clause is Enforceable

A.J. Tenwood v. Orange Senior Citizens Hous. Co., 491 A.2d 1280, 200 N.J. Super. 515 (N.J. Super. Ct. App. Div. 1985)

In this case, a construction contractor brought a claim for breach of contract against the owner of a housing project.  The contract between the parties included a one-year claims limitation clause.  The court upheld that one-year limitation relying on precedent that the statutory limitation on contract actions could be waived by the express agreement of both parties.  Therefore, as long as the period is reasonable and does not violate public policy, shortened statutes of limitation clauses are valid.
 

“Pay When Paid” Provision Cannot Indefinitely Delay Payment to Subcontractor

Seal Tite Corp. v. Ehret, Inc., 589 F. Supp. 701 (D.N.J. 1984)

In this case, a subcontractor sued the general contractor for failure to pay in a timely fashion, and moved for summary judgment.  Relying on the “pay when paid” provision of the subcontract, the general contractor claimed that it had not yet been paid in entirety by the owner and therefore the lack of payment to the subcontract was not in breach of the contract.  The court ruled that the “pay when paid” clause was designed to postpone payment by general contractor to subcontractor for a reasonable period after work has been completed to afford the general contractor the opportunity to procure from the owner the funds necessary to pay the subcontractor.  The purpose is not to require the subcontractor to wait to be paid for an indefinite period of time.  Accordingly, the court granted the subcontractor’s motion for summary judgment and awarded the amount due under the subcontract.

Multi-Prime Contractors Have Right of Action Against Each Other If Made Third-Party Beneficiaries

Broadway Maint. Corp. v. Rutgers Univ., 447 A.2d 906, 90 N.J. 253 (1982)

In this case, two prime contractors brought suit against the university for damages caused by delays in construction.  In the appeal, the Supreme Court of New Jersey looked at three issues:  (1) whether in an instance of multi-prime contractors each prime contract is liable to the other; (2) whether the owner has a duty to coordinate multi-prime contractors; and (3) whether the exculpatory clause in the prime contracts shielded Rutgers from liability.

The court found that each of the prime contractors, absent privity, had a right of action against the other as long as the contract between the owner and each prime contractor made the remaining contractors third-party beneficiaries.  Second, the court found that an owner entering into multiple prime contracts has the obligation to act in good faith to coordinate the various contractors to avoid unreasonable delay, if the owner has not delegated that responsibility to one of the prime contractors.  Finally, the court found that the exculpatory clause shielded Rutgers from all delays, not just reasonable delays.

Damages Awarded to Plaintiff Stopped from Completing Contract; Calculation Based on the Fair Price of the Entire Work and Lost Profits for Work Not Performed

Zulla Steel v. A & M Gregos, Inc., 415 A.2d 1183, 174 N.J. Super. 124 (N.J. Super. Ct. App. Div. 1980)

In this case, a subcontractor brought an action against the prime contractor for breach after contractor failed to make progress payments when due.  The plaintiff did not complete the project. The court found that the contractor’s failure to make timely payments constituted a material breach and that the plaintiff was therefore justified in terminating its performance.  The court held that the measure of damages in a matter where the plaintiff was stopped from completing the contract is “such a proportion of the entire price as the fair cost of that work bears to the fair cost of the whole work and, in respect to the work not performed, such profits as he would have realized as a result of the complete performance.”  Accordingly, the judgment of the trial court was affirmed, with slight modification.
 

Lack of Privity Does Not Bar Action Against Design Professional for Personal Injury

Conforti & Eisele, Inc. v. John C. Morris Assocs., 418 A.2d 1290, 175 N.J. Super. 341 (N.J Super. Ct. Law Div. 1980)

In this case, a general contractor sued the State and its design professionals for economic damage due to the faulty plans prepared by the design professionals and provided by the State.  There was no privity between the general contractor and the design professional defendants.  However, the court found that a design professional can be held responsible for the losses suffered by a contractor regardless of privity.  The decision was based on a line of New Jersey cases that look with disfavor on the privity doctrine especially with regard to design negligence and physical injuries sustained by third-parties.  The court created a test to determine whether liability should be imposed on design professionals when third-parties are injured.  The elements are:  (1) the extent to which the transaction was intended to affect the plaintiff; (2) the foreseeability of harm to him or her; (3) the degree of certainty that the plaintiff suffered injury; (4) the closeness of the connection between the defendant’s conduct and the injuries suffered; (5) the moral blame attached to the defendant’s conduct; and (6) the policy of preventing future harm.
 

Excessive Changes to Contract Can Justify Abandonment Claim Even if Contract is Completed; Abandonment Damages May Be Calculated According to Total Cost

C. Norman Peterson Co. v. Container Corp. of Am., 172 Cal. App. 3d 628 (1985)

In this case, Container Corporation of America appealed from a trial court judgment in favor of contractor C. Norman Peterson Company (“CNP”).  CCA had hired CNP to perform work to modernize a paper mill.  During the performance of the contract, numerous errors and changes to plan resulted in significant delays and extra costs.  CNP sued for the extra costs associated with the project, claiming the extra costs were caused by CCA’s excessive changes to the plan.  CCA argued that both parties were aware at the time the contract was formed that the plan would require significant revisions.  The trial court found for CNP, holding that CCA’s excessive changes after the project was commenced constituted breach of contract and abandonment.  CNP was allowed to recover its total costs expended and lost profit. CCA appealed.
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Installation of Air Conditioning Unit Not an “Improvement” within the Context of Statute of Limitations

Rolnick v. Gilson & Sons, Inc., 617 A.2d 288, 260 N.J. Super. 564 (N.J. Super. Ct. App. Div. 1992)

This case concerned a property that was severely damaged by a fire allegedly caused by a defective fan component in the air conditioning system.  The trial court applied the statute of limitations that bars claims over ten years after improvement, finding that the installation of an air conditioning system was an "improvement" within the meaning of the statute.  The appellate court reversed, finding that a mass produced and marketed attic ventilation fan was not an “improvement” within the meaning of the statute and thus the action was not barred.
 

Liquidated Damages Clause in Prime Contract is Incorporated in Subcontract when Subcontract Contains Conduit Clause

Indus. Indem. Co. v. Wick Constr. Co., 680 P.2d 1100 (Alaska 1984)

In this case, the Alaska State Housing Authority (ASHA) awarded a contract for the construction of a courthouse and office building to a general contractor.  The prime contract featured a liquidated damages clause limiting the contractor’s liability to $400 per day of delay.  The subcontract between the general contractor and subcontractor included a so-called “flow down” or “conduit clause” incorporating the liquidated damages clause from the prime contract.  When the general contractor sued the subcontractor for delays, the trial court awarded the general contractor $765,654.00 in total damages.  The subcontractor appealed, arguing that the liquidated damages clause applied.

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Increased Costs Due to Inaccuracy of Contract Drawings Are Recoverable

Golomore Assoc. v. N.J. State Highway Auth., 413 A.2d 361, 173 N.J. Super. 55 (N.J. Super. Ct. App. Div. 1980)

In this case, the court evaluated a claim by a contractor and subcontractor against the State for additional costs of construction. Plaintiffs claimed that the increased costs were due to faulty evaluations of ground elevation provided by the State prior to bidding. The bid submitted to the State was calculated using those faulty measurements and therefore did not adequately predict actual expenses. The court ruled in favor of the plaintiffs, finding that the elevations provided by the State constituted positive averments. Therefore, when the elevation data was shown to be incorrect, contractors were entitled to recover for additional costs.
 

Owner Who Accepts and Takes Possession of Incomplete or Obviously Defective Building Waives Patent and Obvious Defects, but Does Not Waive Latent Defects

Steltz v. Armory, 15 Idaho 551, 99 P. 98 (1908)

Steltz contracted with Armory for the construction of a building in the city of Genesee.  The building was erected and Armory moved in and continued to use it for six weeks, until a windstorm blew down the front of the building.  Armory then refused to pay Steltz arguing that the building was not constructed in a workmanlike manner and Steltz filed this action to recover payment due under the contract.  During trial, evidence was presented that showed the front wall blew down because it had not been properly tied into the rest of the building.  The court held that the defect of not tying the front wall into the building was not an obvious or patent defect, but was a latent defect.  The Court reasoned that if the defect were obvious or patent, then Armory would have accepted the defect by taking possession without conditionally doing so.  The court affirmed the lower court’s decision to offset the cost to repair the defect from the amount still owed under the contract.

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