Construction Law '85 - Looking Back Into the Future

Use of legal precedent is the technique of predicting how a court may rule on a particular issue based on how that court or other courts have previously ruled on similar issues in earlier cases. This is truly "looking back into the future."

For that reason, periodic reviews of notable construction cases (and legislative actions) are apropos. Here are a few 1985 items which may make legal history - or at least legal precedent.

"PAY-WHEN-PAID" CLAUSES

The Illinois Court of Appeals did make construction law history by ruling that a "pay-when-paid" clause in a subcontract meant exactly that. It ruled that if the general contractor did not get paid, the subcontractor was not entitled to payment from the general contractor either. A.A. Conte, Inc. v. Campbell-Lowrie-Lautermilch Corp., 477 N.E.2d 30 (I11. App. 1985). The majority of cases in other states have held otherwise-that a "pay when-paid" clause in a contract merely gives the general contractor time to collect, but he is nevertheless ultimately liable to his subcontractor for payment-even if he does not get paid.

The Colorado Supreme Court added a footnote to one of its decision declaring that a later-enacted section of the Colorado mechanic's lien statute prevailed over an older statutory provision covering the same subject matter. The court ruled that anyone who files a mechanic's lien for an exaggerated amount in Colorado will subject himself to having his lien forfeited and for the payment of his opponent's attorneys' fees. It also ruled that the forfeiture provision applied even if the party who filed the inflated lien did so without intent to cheat or defraud. E.B. Roberts Const. Co. v. Concrete Contractors, Inc., 704 P.2d 859 (Colo. 1985).

The Colorado legislature put to rest the long-debated question of whether equipment rental charges were covered under a public contractor s payment bond. It said "Yes." Sections 38-26-105 and 38-26-106, Colorado Revised Statutes (1986 Cum. Supp.).

The Colorado Court of Appeals decided that the vestibule added to the Colorado Springs Airport to cut down wind drafts was an improvement, not a product. That was a curious ruling since the vestibule was claimed to have been faulty and certainly no "improvement" to the wind draft situation. However, the "improvement" or "product" distinction deter mined whether a four-year or two-year statute of limitations would govern the time within which a lawsuit had to be commenced against the vestibule installer. Since the court ruled that the vestibule was legally an improvement to the real estate, it held that the two-year statute Of limitations applicable to contractors, designers and others in the construction industry would apply. Enright v. Colorado Springs, 716 P.2d 148 (Colo. App. 1985).

A 1985 Idaho Supreme Court decision ruled that a steel fabricator was a subcontractor rather than a materialman. That distinction allowed the raw steel supplier to succeed in his payment bond suit under statutory provisions which otherwise limited remedies to those who furnished materials to the general contractor or his subcontractors. LaGrande Steel Products v. A.S.C. Constructors, Inc., 702 P.2d 855 (Idaho 1985). The supplier-subcontractor distinction is often critical in bond claim and mechanic's lien cases.

In City of Florence v. Powder Horn Constructors, Inc., 716 P.2d 143 (Colo. App. 1985) (Cert. granted)~ the Colorado Court of Appeals ruled that a contractor was not entitled to withdraw its bid on a project when it discovered an error. The basis for that decision was that the contractor had failed to use reasonable care in the preparation of its bid, was therefore negligent and should therefore not be excused. This decision does not appear to be in line with the majority rule in other jurisdictions according to the attorney for the unsuccessful contractor in that case.

The Wyoming Supreme Court upheld that state s law giving hiring preference to Wyoming residents. State of Wyoming v. Antonich, 694 P.2d 60 (Wyo. 1985).

A federal court, applying Virginia law, has followed the general rule that in a negligence case the only damages recoverable are for injuries to one's person or property-not purely economic damages. Bryant Electric Co. v. City of Fredericksburg, 762 F.2d 1192 (4th Cir.1985). In that case the court ruled that a contractor could not recover its delay damages allegedly caused by the negligence of the project architect/engineer. The courts in the various states are split on this issue, but recently a greater number of courts appear to be allowing recovery for economic losses even in cases where there is no contractual relationship between the parties.

The Nebraska Supreme Court ruled that a contract arbitration provision requiring arbitration in case of any dispute between the parties was unenforceable. Overland Constructors, Inc. v. Millard School Dist. No. 17,369N.W.2d69(Neb.1985). The Court followed the old comrnon law rule under which arbitration-of-future-disputes agreements were held to be contrary to public policy because they deprived the parties of their right to seek relief in the courts.

That decision would invalidate the usual arbitration clauses found in the AIA General Conditions commonly in use in most states, including Nebraska. However, the courts of most other states welcome mandatory arbitration clauses as a means of relieving their docket congestion, and they therefore happily enforce contract arbitration requirements. Since the construction industry usually involves movement of equipment and material through interstate commerce, it may be possible to enforce arbitration requirements in federal courts in those states, like Nebraska, where the state courts will not enforce all agreements to arbitrate.

Whether punitive damages may be recovered in arbitration proceedings if one of the parties claims that the other's conduct was grossly negligent or willful, wanton or otherwise deserving of punishment was considered in several 1985 court decisions. The results were conflicting. A North Carolina appeals court decision suggested the punitive damages may have been awarded by the arbitrators. Rodgers Builders, Inc. v. McQueen 331 S.E.2d 726 (N.C. App. 1985). Likewise, a Texas Court of Appeals decision upheld an award of exemplary damages by arbitrators who decided a contractor-subcontractor dispute. Grissom v. Greener & Sun~mer Construction, Inc., 676 S.W.2d 709 (Tex. App. 1984).

Both the North Carolina and Texas cases were decided under those states' version of the Uniform Arbitration Act. Contrariwise, the New Mexico Supreme Court ruled that under the state's Uniform Arbitration Act claims of fraud which allegedly induced a party to enter into a construction contract and punitive damages were not arbitrable. Shaw v. Kuhnel & Associates, Inc., 698 P.2d 880 (N.M. 1985). 2

COUNTY LIABILITY

The Colorado Court of Appeals ruled that a county was legally liable for damages to an injured man who fell off a balcony constructed contrary to the county building code. Moreland v. Board of County Commissioners, 725 P.2d 1 (Colo. App. 1986). That decision reflects departures being FOR FAULT made by several courts from the concept that governmental bodies are not liable for their wrongs under an Old English doctrine that the "King can do no wrong." The future will undoubtedly see a substantial volume of litigation involving liability of building authorities arising out of their plan review and construction inspection activities.

Undoubtedly, courts dealing with the issues decided in the above mentioned cases will find assistance in those decisions-looking back into the future.

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1 Update Note: On March 17, 1986 the Colorado Supreme Court granted certiorari in this case. That means that the court is reviewing the Court of Appeals decision. That court has since reversed the Court of Appeals decision. Powder Horn Construction Inc. v. City of Florence, 754 P.2d 356 (Colo. 1988).

2 Update Note: Under a 1986 amendment to the Colorado statute, punitive damages are not awardable in cases that are arbitrated. Section 13-21-102(5), C.R.S. (1986 Cum. Supp.).