Timing is Everything: Defending Subcontractors Against Breach of Construction Contract Claims

Andrew T. Marshall | Butler Weihmuller Katz Craig | October 31, 2018

Transfer of risk and liability are common occurrences in the field of construction. National builders often employ a single licensed general contractor to oversee the totality of its construction projects throughout the state of Florida. While this use of a “qualifier” technically complies with Florida law, it leaves unlicensed superintendents with the lion share of day-to-day responsibility for the quality of a project’s overall construction. In order to shift the responsibility of quality construction away from the builder, subcontract agreements are often drafted in such a manner that requires every subcontractor to agree to comply with all applicable plans, specifications, building codes, ASTM and industry standards. Additionally, to ensure risk transfer is accomplished, builders mandate, through its subcontract agreements, the placement of the builder as an additional insured on the subcontractors commercial general liability (“CGL”) policy.

Residents who begin to experience damage to their property as a result of construction defects  often file suit against the builder directly. The builder in turn initiates suit against its subcontractors to effectively transfer its potential liability exposure. While builders often assert a multitude of claims against each subcontractor, it is almost guaranteed that a breach of contract claim will be one of the claims asserted. Two of the more common breach of contract allegations proclaim that pursuant to the contract, the subcontractor was obligated but failed: 1) to construct the project in accordance with the plans and specifications, applicable building codes, and industry standards, and 2) to name the builder as an additional insured on the subcontractors CGL policy.

Because builders often assert these claims several years after original construction, it is important to consider and evaluate the statute of limitations for every such claim. Generally, the applicable statute of limitations period for a breach of contract action is five (5) years. 95.11(2). However, an action founded on the design, planning, or construction of an improvement to real property must be brought within (4) years.  95.11(3)(c).  When two statutes ostensibly conflict, the more specific statute controls, even when the more specific statute provides for a shorter limitation period. Therefore, a claim for breach of a construction contract has a four (4) year limitations period.[1]

As with any statute of limitations analysis, the date of accrual is the most important factor involved.  As such, practitioners would be wise to also remember that accrual of a breach of contract claim begins at the date of breach.[2] Any breach of the contract based upon the subcontractor’s failure to construct in accordance with the plans must begin to accrue no later than the date the subcontractor’s work on the project was completed. If the subcontractor completed its work on the project over four (4) years prior to the filing of the lawsuit by the general contractor, a motion for summary judgment based upon statute of limitations should be filed.

Likewise, a similar analysis should occur when defending a subcontractor from a breach of contract claim based upon the failure to add the builder as an additional insured. Unless specified within the contract, the accrual date for this type of claim is more fluid as it is subject to when the subcontractor was required to add the builder to its CGL policy. The accrual date should be confirmed through requests for admissions, interrogatories or deposition testimony provided by the builder’s corporate representative.[3] Armed with a confirmed accrual date, a practitioner can determine whether suit was filed within the four (4) year limitations period and possibly secure dismissal through the filing of a dispositive motion.

[1] Suntrust Bank of Florida, Inc. v. Don Wood, Inc., 693 So. 2d 99 (Fla. 5th DCA 1997)“General rule that more specific statute controls when two statutes ostensibly conflict applies to construction of statutes of limitations, even when more specific statute provides for shorter limitation period.”

[2] Hartford First Ins. Co., 995 So. 2d 576 “We hold that in the context of a subcontract, where a contractor accepted the work of the subcontractor and paid in full for that work, the action accrued when the subcontractor finished its work.” See also Access Ins. Planners, Inc. v. Gee, 175 So. 3d 921 (Fla. 4th DCA 2015)(“For purposes of the statute of limitations, a cause of action for breach of contract accrues at the time of the breach”); State Farm Mut. Auto. Ins. Co. v. Lee, 678 So.2d 818, 820 (Fla.1996); Med. Jet, S.A. v. Signature Flight Support–Palm Beach, Inc., 941 So.2d 576, 578 (Fla. 4th DCA 2006) (“Florida has followed this general rule that a cause of action for breach of contract accrues at the time of the breach, ‘not from the time when consequential damages result or become ascertained.’ ”) (quoting Fradley v. Cnty. of Dade, 187 So.2d 48, 49 (Fla. 3d DCA 1966)).

[3] Make certain that the corporate representative deposition is properly noticed and that you have identified the subcontract and the requirement of additional insured placement as a topic of inquiry within the Notice of Taking Deposition.

Teaching An Old Dog New Tricks: The Spearin Doctrine and Design-Build Projects

John Castro | Construction Law Blog | October 5, 2018

The United States District Court for the Southern District of California has now held that the Spearin doctrine applies to design-build subcontractors where the subcontractor is expected to design a portion of their work. The case is United States for the use and benefit of Bonita Pipeline, Inc., et al. v. Balfour Beatty Construction, LLC, et al. (“Bonita Pipeline”) (Case No. 3:16-cv-00983-H-AGS).

In Bonita Pipeline, a subcontractor sued the general contractor and its sureties alleging breach of contract, breach of implied warranty, declaratory relief, and recovery under the Miller Act. The subcontractor then filed a motion for partial summary judgment against the general contractor on its declaratory relief cause of action, seeking a finding that the general contractor could not shift legal responsibility for its defective plans and specifications to the subcontractor.

The evidence presented in support and opposition of the motion showed that the general contractor provided incomplete design documents to the subcontractor at the bid stage, and expressly stated they were incomplete. The subcontractor was ultimately awarded the bid, which included design-build structural steel, metal decking, and other amenities. The parties admitted that the plans and specifications could be refined with further design, whereby the subcontract contained language stating that the subcontractor would assume risk of further change (“refinement”) of the plans and specifications. Further, the subcontract stated that the subcontractor was not entitled to additive change orders or an increase in its bid price for “refinements” resulting from the design-build process. Instead, the subcontractor would only be entitled to additional compensation for enhancements requested by the owner.

During the project the subcontractor sought additional compensation for design errors and changes, with the court noting 93 requests for information and 37 change order requests. The subcontractor also finished its work 290 days late.

The Spearin doctrine (named after United States v. Spearin (1918) 248 U.S. 132) generally holds that an owner (or here, general contractor) impliedly warrants the information, plans, and specifications it provides to the general contractor (or here, subcontractor). Citing case law that state law controls the interpretation of Miller Act subcontracts to which the United States is not a party, the Bonita Pipeline court noted that the California Supreme Court approved and applied of the Spearin doctrine, citing Souza & McCue Constr. Co. v. Superior Court of San Benito County (1962) 57 Cal.2d 508, 510 and E.H. Morrill Co. v. State (1967) 65 Cal.2d 787, 792-793. Citing Coleman Eng’g Co. v. N. Am. Aviation, Inc. (1966) 65 Cal.2d 396, 404, the Bonita Pipeline court also noted that the California Supreme Court has extended application of the Spearin doctrine to construction contracts even where there is no government entity involved.

The general contractor argued that the Spearin doctrine did not apply because the project was one of design-build, and the parties expressly acknowledged that the plans and specifications were incomplete at the time of bidding. The subcontractor, in turn, argued that it acknowledged it assumed the risk that the plans and specifications would be “refined,” but the general contractor nonetheless still impliedly warranted that the plans and specifications provided would be correct, even if incomplete.

Ultimately, the Bonita Pipeline court found the subcontractor’s position persuasive, finding that the Spearin doctrine applies to design-build projects. Regardless, the Bonita Pipeline court denied the plaintiff subcontractor’s partial motion for summary judgment, finding that there were insufficient facts in the record to determine whether the contractor’s extra work was due to errors in the plans and specifications, or whether the extra work was due to the design work expected of the subcontractor.

In support of its ruling, the Bonita Pipeline court relied on a United States Court of Federal Claims case, AAB Joint Venture v. United States, 75 Fed.Cl. 414 (Fed.Cl. 2007). In AAB Joint Venture, the plaintiff contractor won a bid to construct a military storage base in Israel, whereby the project was in a design-build format. The plaintiff was provided specifications from the government, and after construction commenced the plaintiff contractor submitted a request for information questioning the accuracy of the specifications. After further requests for information and responses thereto, the plaintiff contractor (and its subcontractors) performed earthwork using 3-inch stone fill, as opposed to a 6-inch maximum stone fill as specified in the contract. The use of the smaller fill, however, precluded use of the contract-specified density test, as the test could not be used on the smaller fill. Thereafter, plaintiff contractor sought an equitable adjustment as a result of the defective specifications and increased costs, which was denied.

The AAB Joint Venture court found that the Spearin doctrine applied to the design-build project. It held that “[t]he purpose of the specifications is to serve as a guide to the contractor … The contractor should be able to rely on a reasonable interpretation of the contract.” “The standard that must be met under the implied warranty is that the specifications will result in a satisfactory, acceptable, or adequate result; short of that, the specifications are defective and the contractor is entitled to an equitable adjustment.” There, the specifications provided a range of sizes for fill that could be used by the subcontractor, though some sizes in turn precluded use of the contract-specified density test. The AAB Joint Venture court held that the fact that the specifications allowed for some satisfactory results did not preclude a finding that they were defective. In other words, “[d]efective specifications may be found when the full scope of the dimension tolerances set forth in the specifications do not produce satisfactory results.”

The Bonita Pipeline court also relied on a Civilian Board of Contract Appeals case, Drennon Constr. & Consulting, Inc. (“Drennon”), 13 B.C.A. (CCH) ¶ 35,213 (2013). In Drennon, the plaintiff contracted with the Bureau of Land Management (“BLM”) to widen a road at a campground in central Alaska. Widening the road required excavating a hillside, and building a gabion wall along the cut. The hillside ultimately collapsed, and the contractor’s work was placed on suspension. Ultimately, the road was widened without the use of a gabion wall, and the contractor sought recovery for its costs during the suspension period, as well as the cost of purchasing gabions for which it no longer had use. The contractor contended that the geotechnical information provided in the BLM’s solicitation was defective. In contrast, the BLM argued that the contract was one of design-build, and that the contractor was not entitled to any recovery because of the contractor’s own faulty design.

The Drennon panel sided with the contractor, finding that the hillside would have collapsed regardless of the approach undertaken by the contractor. The court pointed out that the solicitation included a road design and specifications from the civil and geotechnical engineer. The engineer testified that the digital terrain model it utilized for its design contained inaccurate control points, and that the BLM denied the engineer’s request to perform a survey to address the inaccuracies. On that basis, the engineer testified that they intentionally added language to the solicitation that would have warned potential bidders of the inaccuracies of the model. The Drennon panel found this directly contributed to the increased costs suffered by the contractor. The Drennon panel also found that the engineer’s geotechnical report was defective, noting that the site conditions experienced by the contractor were materially different than what was described in the report.

Bonita Pipeline shows that the Spearin doctrine is still alive and well, and even permeating into modern construction projects. The doctrine’s application to a design-build project at the United States District Court level shows that it is moving of specialized venues such as the Federal Court of Claims and Board of Contract Appeals. The Spearin doctrine reaches its centennial anniversary this year on December 9, 2018.

Contract Scope Limits Tort Liability

Stan Martin | Commonsense Construction Law LLC | October 26, 2018

From the Massachusetts Appeals Court comes a reminder that a contract scope of services may serve to control or limit the scope of tort liability.

New homeowners sued the contractor and designer, hired by the former homeowner for a replacement septic system, when that system failed only a few years after installation. Turns out the contractor had placed “construction and other debris in the leaching fields” (apparently as “filler”), instead of using only sand.

The designer moved for summary judgment, on the basis that its contract required the designer to view the work when the hole for the new leaching field had been dug (but before placement of the sand and laterals), and again once the leaching field had been completed. It did so. But of course the designer was not present, and did not see, when the contractor used improper materials.

The trial court dismissed the homeowners’ claims against the designer, and the Appeals Court upheld the dismissal. If the designer was obligated to view the site on two occasions, and did so, the new homeowners could not establish that the designer had any other duty to inspect or observe the conditions. And thus they could not establish that the designer had failed to carry out its duty, in a tort sense. Per the court: “we would conclude, given both the scope and the limitations of the Design Team’s contractual responsibilities, that laymen could not reasonably infer without expert evidence that its failure to learn of the deficiencies constituted professional malpractice.”

This is a reminder – more for designers than contractors – that the scope of services being undertaken may serve not only as a restriction on contract obligations, but also on tort liability or exposure. An important lesson to keep in mind. The case is Van Sicklin v. Nantucket Surveyors, LLC, 2018 Mass. App. Unpub. LEXIS 777 (Oct. 23, 2018).

Construction Law Practice Tip: The Discovery Rule Bar is High for Breach of Contract Claims

Pierre Grosdidier | Haynes and Boone LLP | November 5, 2018

Two cases from Houston appellate courts show the relatively high bar that breach of contract claims must meet to satisfy the discovery rule. The cases show that parties in the construction industry must mind the details and cede no opportunity to confirm contractual performance – or risk waiving potential breach of contract claims that will materialize years after the project’s completion.

Accrual, Limitations and the Discovery Rule

“A claim for breach of contract accrues when the contract is breached.”[1] But, in the construction industry, breaches can remain hidden for years. For example, a contractor might take a shortcut and sink fewer or shorter piles than specified, and let the owner discover the breach years later when the building’s façade starts to crack. Accordingly, in construction-defect cases, the general rule is that “limitations begin to run when an owner becomes aware of property damage.”[2]

The limitations clock starts ticking as soon as the claimant becomes “aware of enough facts to apprize him of his right to seek judicial remedy.”[3] Knowledge of an injury, “‘however slight,’” triggers accrual and the duty of reasonable diligence to inquire, “‘even if the fact of injury is not discovered until later, and even if all resulting damages have not yet occurred.’”[4]

The discovery rule tolls the accrual date of a cause of action “until the injured party learned of, or in the exercise of reasonable diligence should have learned of, the wrongful act causing the injury.”[5] Importantly, the limitations clock continues to run even if the plaintiff still ignores:

  • The specific cause of the injury
  • The party responsible for it
  • The full extent of it
  • The chances of avoiding it [6]

The judicial intent is to apply the discovery rule “in limited circumstances where ‘the nature of the injury incurred is inherently undiscoverable and the evidence of injury is objectively verifiable.’”[7] “‘An injury is inherently undiscoverable if it is, by its nature, unlikely to be discovered within the prescribed limitations period despite due diligence.’”[8]

The “discovery rule is a plea in confession and avoidance.”[9] Whether it applies is a question of law.[10] The Texas Supreme Court has expressly opined that it did not hold that the rule could “never apply to breach of contract claims.”[11] Instead, whether the rule applies “is decided on a categorical rather than case-specific basis; the focus is on whether a type of injury rather than a particular injury [or cause of action] was discoverable.”[12] Some contract breaches may qualify under the discovery rule, “[b]ut those cases should be rare, as diligent contracting parties should generally discover any breach during the relatively long four-year limitations period provided for such claims.”[13]

The discovery rule does not toll claims when facts are included in the contract that would place the plaintiff on notice of a potential injury.

In Ammerman v. Ranches of Clear Creek Cmty. Ass’n, Inc., the trial court granted summary judgment to the community association and one of its homeowners on limitations grounds, and the First Court of Appeals affirmed.[14] The Ammermans purchased a 30.6-acre parcel in a gated community in 2006 and built their residence in 2008. Each parcel in the community was sold with a pre-defined and carefully located “building envelope,” i.e., perimeters within which owners had to build their residences. The subdivision’s developers and the association had drawn the building envelopes with the intent of maintaining the secluded nature of the overall community, and had done so before placing the first parcel on sale.

The Wilsons also purchased a 16.8-acre parcel adjacent to the Ammermans’ in 2006, but waited until 2015 to build their retirement home within its three-acre envelope. In 2016, the Ammermans sued the community association, its architectural review committee, and the Wilsons for breach of contract, declaratory action, injunctive relief, and other claims. The Ammermans alleged that the Wilsons’ building envelope and residence location both violated the association’s covenants.

The trial court held that the Ammermans’ claims were time-barred, and the court of appeals agreed. The record showed that the Wilsons’ residence was within its prescribed envelope, and that the latter was established and disclosed when the Ammermans purchased their parcel in 2006. Any potential breach of the association’s covenants was discoverable by the Ammermans by 2006, at which time the limitations period started running. The Ammermans’ 2015 breach of contract and other claims were, therefore, past the applicable limitations periods.

The discovery rule does not toll claims when facts are discoverable in storage that would place the plaintiff on notice of a potential injury.

In B. Mahler Interests, LP v. DMAC Constr., Inc., Mahler sued DMAC for breach of contract and warranty for alleged defective construction of an event center.[15] Substantial completion occurred on October 25, 2006, but DMAC continued to work on punch list items and change orders into 2007. Mahler made its final payment in January 2008. An engineering firm it hired in August 2007 flagged several construction problems with the building. Additional building problems began to materialize in late 2010 and Mahler requested a second inspection in May 2012. Mahler sued DMAC on October 26, 2012, asserting breach of contract and warranty claims regarding issues with a porch roof, outside doors, and indoor flooring. Mahler invoked the discovery rule. The trial court granted DMAC’s limitations-based summary judgment motion.

The Fourteenth Court of Appeals affirmed. It held that the breach of contract “occurred at the latest by January 2008 when all construction was completed and final payment was made.”[16] Mahler’s claims were, therefore, time-barred unless the discovery rule applied. The court held that it did not. The record showed that by January 2008 at the latest, Mahler had been informed by the August 2007 report about the issue that formed the basis of his porch roof claim, that he actually knew about the issue behind his outside door claim, and that he had enough information to discover the issue behind his indoor flooring claim. As to the latter, Mahler claimed that he learned in 2012 that the contractor had installed residential-grade floors after he had allegedly represented and warranted to install commercial-grade floors. But, DMAC had left behind at the event center a box of surplus residential-grade flooring material. The court held that Mahler’s injury was, therefore, “not inherently undiscoverable” because Mahler could have contacted the manufacturer to confirm the flooring material’s grade. Mahler could not avail itself of the discovery rule because it had taken no measures to verify DMAC’s contractual performance.

Procedurally, a plaintiff seeking to avail itself of the discovery rule must affirmatively plead it, “either in its original petition or in amended or supplemental petition, in response to defendant’s assertion of limitations defense as matter in avoidance,” or it is deemed waived.[17] In Shipp v. O’Dowd, the Shipps signed a residential construction contract in February 1964.[18] The house was completed in May of that year. The subcontractor sank twelve fewer piers than the construction plans specified. The Shipps apparently discovered the alleged construction legerdemain, and resulting house settling and damage, in late 1966. They sued for breach of contract on November 1, 1968 but did not affirmatively plead the discovery rule. The court found that the suit was, “on its face . . . not filed within the statutory period” and held that it was barred by limitations.[19] One can infer that the court reasoned that the completion of construction marked, at the latest, the start of the limitations period, as in Mahler.

A Word to the Wise: The AIA Revised Contract Documents Could Lead to New and Unanticipated Risks – Part II

George Talarico | Construction Executive | September 18, 2018

Part I addressed general conditions, revised insurance terms, revisions that affect owner’s required insurance and revisions that affect contractor’s required insurance.

REVISIONS THAT AFFECT DISPUTE RESOLUTION

A seemingly minor but noteworthy change is to the definition of “Claim.” Under Section 15.1 a “Claim” is defined to:

  • include a request for a modification of contract time; and
  • exclude any requirement that an owner must file a claim to impose liquidated damages.

Notably, any request relating to contract time must be brought within the specified time period for Notice of Claim1 and in the prescribed manner2. There are at least two traps for the unwary. First, even though email is regularly used for communications among the parties, the revised contract documents do not recognize email as an acceptable form of delivery of a Notice of Claim. Second, an unwary contractor may wrongly assume that an owner’s failure to assert a claim for LDs means that LDs will not be imposed. This may lull the contractor into failing to timely assert its own claim for a time extension and thereby waiving its ability to do so.

There have not been any major revisions to the arbitration provisions of Section 15.4. Other changes, however, will influence dispute resolution. As before, a condition precedent to commencing Mediation and thereafter a possible arbitration or litigation, Claims must first be submitted to the Initial Decision Maker3. The IDM is normally the architect as the architect is designated as the default IDM4. The 2017 revisions, however, now include strong exculpatory language protecting the IDM from liability “for results of interpretations or decisions rendered in good faith5.” This broad protection from liability could place the architect (acting as IDM) in an uncomfortable and possible conflicted position if, for example, the Claim infers liability on the part of the architect (such as improper or defective design). Moreover, it raises possible struggles to ascertain the meaning of ‘good faith’ in the context of the architect’s actions6.

REVISIONS THAT AFFECT SUPERVISION AND CONSTRUCTION PROCEDURE

In circumstances where the specifications do not prescribe construction means and methods, these remain the responsibility of the contractor. It appears, however, that the contractor is now being burdened with some of the architect’s design responsibilities, in circumstances where the specifications and/or drawings “give specific instructions concerning construction means, methods, techniques, sequences or procedures7.” Previously, if the contractor determined that the specified means, methods, techniques, sequences or procedures were unsafe, the contractor was required to provide the architect with timely notice and then stop the work it deemed to be unsafe, while awaiting further written instructions8. Now the contractor does not have the right to stop work and it is incumbent upon the contractor and not the architect to propose alternate means, methods, techniques, sequences or procedures9. The architect’s role has been diminished and is only required to review the contractor’s proposal, solely for “conformance with the design intent for the completed construction10.”

REVISIONS THAT AFFECT SHOP DRAWINGS

Another change which could shift some design responsibility from the architect to the contractor is contained in the section on Shop Drawings. On one hand this section adds an assurance that in preparing Shop Drawings the contractor is “entitled to rely upon the adequacy” of the architect’s design criteria, yet on the other hand it removes the language stating that “[t]he contractor shall not be responsible for the adequacy of the” design criteria contained in the Contract Documents11. This modification could be interpreted to mean that through submittal of Shop Drawings, the contractor is taking on responsibility for design criteria.

REVISIONS THAT AFFECT CONTRACT TERMINATION

Another deletion that could prove troubling for the contractor involves contract termination by the contractor. Both the prior and current versions are consistent in that each allows the contractor to terminate the contract if work is stopped for 30 consecutive days, for certain specified reasons, i.e. court order. The difference is that the prior version limited this option only to circumstance where the delay was not caused by the contractor, a subcontractor or “entities performing portions of the Work under direct or indirect contract with the contractor12.”The latest version deletes the underlined words and therefore implies that the contractor has no right to terminate if the delay is caused by any party performing work on the project regardless of whether or not the contractor has any control over that party.

In instances where the owner terminates ‘for convenience’ the contractor will no longer be permitted to receive payment for overhead and profit on work that the contractor performed as a result of the termination unless the contract otherwise provides. Since the contractor is entitled to a termination fee included the contract13, it is important that a contractor negotiate for inclusion of overhead and profit in its calculation for a termination fee.

While many of the 2017 revisions to A201 appear to be stylistic in nature, there are some changes which could affect the liability of the architect, owner and the contractor (including its subcontractors). In order to prevent unpleasant surprises, the parties need to recognize those revisions that:

  • effect the claims process;
  • increase and/or limit costs;
  • shift liability; and
  • change deadlines.

This will allow them to negotiate around the revisions, i.e. included overhead and profit in termination fee) and/or perform the contract in a manner that anticipates the impact of the revisions, i.e. filing a claim for contract time extension without awaiting the owners claim for LDs.

1 “Claims by either party under Section 15.1.3.1 shall be initiated within 21 days after occurrence of the event giving rise to the Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later.” A201-2017 § 15.1.3.1.

2 Pursuant to A201-2017 § 1.6.2 Notice of Claims must be delivered by registered or certified mail or by courier.

3 Note that there is no requirement that Claims submitted after the correction of work period be submitted to the IDM. A201-2017 § 15.1.3.2.

4 A201-2017 § 1.1.8.

5 Id.

See, e.g., MECO Systems, Inc. v Dancing Bear Entertainment, Inc., et al., 948 SW2d 185, 1997 Mo. App. LEXIS 1191 (the architect’s “actions raise genuine issues of fact regarding the architect’s partiality and good faith.” where the architect failed to demonstrate its compliance with contract provisions on timeliness and the contractor raised claims that construction delays were caused by the architect).

7  A201-2017 § 3.3.1.

8  Id.

9  Id.

10 Id.

11  A201-2017 § 3.12.10.1.

12  A201-2007 § 14.1.1 (emphasis added).

13 A201-2017 § 14.4.3.