Utah Still Thinks Privity of Contract is Important

Parker A. Allred | Snell & Wilmer | July 16, 2018

In recent years, a few law firms have made a cottage industry of enticing condominium home owners associations to sue the project developers over many issues, very often for alleged construction defects. Numerous homeowners’ associations have filed lawsuits against developers, contractors, and builders for purportedly defective work. The recent Utah Supreme Court ruling in Gables v. Castlewood-Sterling, 2018 UT 04, reiterates what many courts seem to have forgotten. Specifically, Gables is a good reminder that unless a plaintiff has contractual rights, or has been assigned such rights, it cannot maintain a cause of action when privity of contract is an essential element of a claim.

In Gables, a developer planned a large residential development. Once the development was completed, the developer drafted and recorded the Declaration of Covenants, Conditions, and Restrictions (CC&Rs), by which the developer retained control of the HOA until a certain number of units were sold. In 2008, the target number of units had been sold and the developer turned over control of the HOA to the members. A short time later, the HOA claimed it began noticing many purported construction defects in the structural components of the development. As it investigated the extent of the damages, the HOA retained an expert who estimated that the damages exceeded $4,600,000.00. As a result, over the next several years, the HOA levied assessments on its members to pay for such costs, but then ultimately decided to sue the developer for damages.

Several parties were named in the suit, but whether the HOA was in privity of contract with the developer, and thus had standing to assert a claim for breach of implied warranty, was a key issue. There was no contract between the developer and the HOA; so, the HOA argued that the CC&Rs and the Real Estate Purchase Contracts created privity of contract. The trial court disagreed with the HOA and granted summary judgment in favor of the developer, finding that the HOA had no right to sue third parties for damages on behalf of its members. An appeal ensued.

On appeal, the HOA raised additional arguments, but the Utah Supreme Court really only considered whether the CC&Rs somehow established privity of contract between the HOA and the developer. Utah law requires privity of contract to assert a claim for breach of the implied warranty of workmanlike manner and habitability. In fact, Utah Code §78B–4–513 provides that “an action for defective design or construction may be brought onlyby a person in privity of contract with the original contractor, architect, engineer, or the real estate developer” (emphasis added), but that “[n]othing in this section precludes a person from assigning a right under a contract to another person, including to a subsequent owner or a homeowners association.” Ignoring this statutory proclamation of Utah policy, the HOA argued that the CC&Rs granted the HOA broad authority to act on behalf of its members, and inferred that under the CC&R’s, the members had effectively assigned the HOA their rights to assert claims against third parties.

Although the court recognized that claims could be assigned in this context, it also made clear that under Utah law, an assignment of claims required specific language that demonstrated a manifestation that the parties intended something be transferred or assigned. And here, the CC&Rs demonstrated no such intent. In particular, the court noted that if a contractual provision lacked the words “assumes” “assigns,” “transfers,” or “conveys” of a specific subject matter, then that provision fails to manifest an intent to transfer or assign a right. In other words, words matter. Thus, because nothing in the CC&Rs demonstrated any intent whatsoever of the HOA’s members to assign, transfer, or convey their contract rights to the HOA, the HOA had no rights to pursue against third parties. The Utah Supreme Court affirmed the lower court, and ruled that the HOA could not maintain an action against the developer for lack of privity.

While this case transcends construction litigation, it is a useful reminder that the participants in construction projects, from owner to the finish subcontractor, need to mind the contract p’s and q’s to keep and understand their rights.

Federal Court in California Holds That Subcontractor May Proceed With Claim for Delay Damages, Despite No-Damage-For-Delay Clause, Where Changes to the Work Amount to an Implied Abandonment of the Subcontract

John H. Conrad | Pepper Hamilton LLP | July 12, 2018

Rai Indus. Fabricators, LLC v. Fed. Ins. Co., 2018 U.S. Dist. LEXIS 74612 (N.D. Cal., May 2, 2018)

Sauer Incorporated (“Sauer”) contracted with the U.S. Army to design and construct the Operational Readiness Training Complex at Fort Hunter, California. Sauer subcontracted with Agate Steel, Inc. (“Agate”) for the erection of steel for the project. Agate’s subcontract with Sauer contained a no-damage-for-delay clause, which generally provided that extensions of time were Agate’s sole remedy for delay.

According to Agate, the project suffered from substantial delays because of the acts and omissions of Sauer. In particular, Agate alleged that Sauer failed to properly coordinate the work of its subcontractors, failed to follow the project’s schedules, failed to follow the subcontract’s change order procedures, and made unanticipated changes to the project’s scope and work flow sequence. Agate argued that these delays constituted a cardinal change and/or abandonment of the subcontract, which rendered the no-damage-for-delay clause unenforceable. Agate sued Sauer for damages from the delays and disruptions to its work.

Sauer moved to dismiss Agate’s claim for delay and disruption damages. Relying on the subcontract’s no-damage-for-delay clause, Sauer argued that Agate contractually waived its right to recover delay damages, and thus Agate had failed to state a claim on which relief can be granted. The district court denied Sauer’s motion.

In its decision, the court first noted that, in general, no-damage-for-delay clauses are valid and enforceable under California law, but, that such clauses are not an absolute bar to recovery. Instead, delay damages may still be recoverable where the delays are unreasonable under the circumstances, or where the parties have impliedly abandoned the contract. The court held that Agate alleged sufficient facts to support entitlement under either theory.

First, the court held that the motion must be denied because Agate alleged sufficient facts to create a question of fact as to the reasonableness of the delays under the circumstances.

As to abandonment, the court held that Agate alleged sufficient facts to support a finding that the parties impliedly abandoned the subcontract. Under California law, the parties may be held to impliedly abandon a contract where they fail to follow change order procedures and when the final product differs substantially from the original plan. Express intent to abandon is not required. The court found that Agate’s allegations support a finding of abandonment. Specifically, Agate alleged that Sauer significantly changed the project drawings, which, in turn, required significant changes to Agate’s scope of work; that Sauer furnished hundreds of defective steel pieces, which required significant field correction by Agate; and that Sauer failed to comply with the contract requirements for extra work. The court held that, at the pleading stage, these allegations are sufficient to support an implied abandonment of the subcontract, which would render the no-damage-for-delay clause unenforceable.

Sometimes You Get Away with Unwritten Contracts. . .

Christopher G. Hill | Construction Law Musings | July 10, 2018

I have spoken often regarding the need for a well written construction contract that sets out the “terms of engagement” for your construction project. A written construction contract sets expectations and allows the parties to the contract to determine the “law” of their project. An unwritten “gentleman’s agreement” can lead to confusion, faulty memories, and more money paid to construction counsel than you would like as we lawyers play around in the grey areas.

One other area where the written versus unwritten distinction makes a difference is in the calculation of the statute of limitations. In Virginia, a 5 year statute of limitations applies to written contracts while a 3 year statute of limitations applies to unwritten contracts. This distinction came into stark relief in the case of M&C Hauling & Constr. Inc. v. Wilbur Hale in the Fairfax, Virginia Circuit Court. In M&C Hauling, M&C provided hauling services to the defendant through a subcontract with Hauling Unlimited in 2014, the last of which was in July. M&C provided over 2000 hours of hauling and provided time tickets (that were passed to Mr. Hale on Hauling Unlimited letterhead and signed by Mr. Hale or his agent) and an invoice stating the price term of $75.00 per hour. No separate written contract between M&C and Hauling Unlimited or Mr. Hale existed.

In February of 2018, beyond the 3 year statute of limitations for unwritten contracts but prior to the expiration of the 5 year limitation period for written contracts. Needless to say, Hauling Unlimited filed a plea in bar to have the matter dismissed as being brought beyond the 3 year statute and argued that no signed or other written contract existed, therefore the 3 year limitation period applied. After review of the various precedents (which I commend for your reading), the Court determined that where a signature on a contract is not a condition of the contract itself being a written one. In doing so, the Court stated

In the immediate facts, although there was no signature by Defendant Hauling Unlimited, the parties did not make their signatures a condition of the contract being a written one. All the terms of the agreement between the Plaintiff and Defendant, including the rate and the hours worked, were committed to writing in the daily sales tickets and the invoice. These terms were unconditionally assented to by the parties.

In short, the Court determined that Hauling Unlimited and Mr. Hale assented to M&C’s terms and did not insist on a signature to make their contract a written one.

The lesson from this? At the very least be sure to provide consistent documentation of your work if you aren’t going to have a written contract. The better lesson? Don’t put yourself in this position. Call your friendly experienced construction attorney and get a written contract together that both keeps arguments such as these from looking like good ones and also extends your statute of limitations.

In Contracts, One Word Makes All the Difference

Christopher G. Hill | Construction Law Musings | July 4, 2018

Here at Musings, I sometimes feel as if I am beating the “contract is king” drum to death. However, each time I start to get this feeling, a new case out of either the Virginia state courts or the Fourth Circuit Court of Appeals here in Richmond reminds me that we all, lawyers and contractors alike, need to be reminded of this fact on a regular basis. The terms written into a construction contract (or any other contract for that matter) will control the outcome of any dispute in just about every case.

A recent 4th Circuit case takes this to the extreme in pointing out the the choice which of two tiny words can change the entire set of procedural rules and even the courthouse in which your dispute will be decided. In FindWhere Holdings Inc. v. Systems Env. Optimization LLC, the Fourth Circuit looked at a forum selection clause found in a contract between the parties. In this case, the clause stated that any dispute would be litigated in the courts “of the State of Virginia.” When the defendants tried to remove the case from Virginia state court to the Eastern District of Virginia federal courts, the federal court remanded the case, sending it back to the Circuit Court of Loudoun County, Virginia.

On appeal of this ruling, the 4th Circuit agreed with the remand and contrasted the language found in the contract (i. e. “of the State of Virginia) with other standard language stating “in the State of Virginia.” In upholding the district court, the 4th Circuit stated that the language containing the word of expressed sovereignty as opposed to the mere location expressed in the language using the word in. In the first case, the 4th Circuit stated, the federal courts have no jurisdiction while in the second they do. As such, the case could not continue in federal court.

While this case does not involve construction, it is informative for all of us in the construction world who deal with written contracts on a daily basis. The Findwhere case is a great reminder to read your construction documents carefully, and draft them with even more care. The lesson of this case is that a change in just one two-letter word can completely change the whole direction of a construction contract dispute. For this reason, the advice, early in the contracting process, of a qualified construction attorney knowledgeable in the way these little words make a difference is key.

Subcontract Provision Requiring Subcontractor to Pass Through its Claims Does Not Prevent the Subcontractor From Suing to Recover Against Miller Act Bond

Emily D. Anderson | Pepper Hamilton LLP | July 5, 2018

Pinnacle Crushing & Constr. LLC v. Hartford Fire Ins. Co., 2018 U.S. Dist. LEXIS 67965 (W.D. Wa. Apr. 23, 2018)

The Army Corps of Engineers (the “Corps”), as owner, and Cherokee General Corporation (“CGC”), as prime contractor, entered into a contract (the “Contract”) in connection with work at the Yakima Training Center (the “Project”).  CGC subcontracted with SCI Infrastructure (“SCI”) for certain work related to the Project (the “SCI Subcontract”), and SCI subcontracted with Pinnacle Crushing & Construction, LLC (“Pinnacle”) (the “Pinnacle Subcontract”).  CGC obtained a Miller Act payment bond (the “Bond”) from Hartford Insurance Co. (the “Surety”) to provide coverage for labor and materials supplied in carrying out the work.

After the Corps terminated the Contract with CGC, CGC submitted a claim under the Contracts Disputes Act.  As required by the SCI Subcontract, CGC asserted SCI’s pass through claims against the Corps, which included amounts allegedly owed to both SCI and Pinnacle.

Separately, SCI and Pinnacle sued CGC and the Surety to recover under the Bond for the work they performed under the subcontracts, but for which CGC had not paid them.

CGC and the Surety moved to dismiss or stay the claims arguing that the Surety was not liable to SCI and Pinnacle under the Bond because their damages were the responsibility of the Corps and were being resolved through the Contract Disputes Act process, and the claims were not ripe because that process was still pending.  SCI and Pinnacle opposed, arguing that any contract provisions requiring them to wait before pursuing their Miller Act claims were invalid under the Act, and that a stay would be prejudicial because the claims process will take years to resolve.

The Court held SCI and Pinnacle’s Miller Act claims were ripe because they had alleged a specific injury in fact (i.e., they were owed money for completed work on the Project) and had satisfied the condition precedent to bringing a Miller Act claim (i.e., they had still not been paid 90 days after completing their work).

The Court rejected CGC and the Surety’s argument that SCI and Pinnacle were precluded from bringing a Miller Act claim because, under the subcontracts, they agreed that their claims would be resolved by the dispute resolution process set forth in the Contract (i.e., as pass through claims in CGC’s claim against the Corps).  Courts construe the Miller Act liberally to protect subcontractors, and any waiver of Miller Act rights must be clear and explicit, in writing, signed by the person whose right is waived, and executed after that person has furnished labor or material used in performing the contract.  The SCI Subcontract did not clearly waive SCI’s Miller Act rights because it did not contain any explicit statement that SCI was waiving those rights.  Even though, in the Pinnacle Subcontract, Pinnacle agreed not to pursue any independent litigation, including under the Miller Act, Pinnacle did not waive its Miller Act rights because it had not yet furnished labor or material to the Project at the time it signed that Subcontract.

The Court also declined to order a stay pending resolution of the pass through claims against the Corps because neither Pinnacle nor SCI waived their Miller Act rights under their respective subcontracts.  A provision in the Pinnacle Subcontract requiring a stay of Miller Act claims pending the resolution of pass through claims did not warrant a stay because the provision was an impermissible waiver of Pinnacle’s right to sue under the Miller Act, not an agreement as to the timing of bringing a Miller Act claim.  The Court reasoned that if Pinnacle were to be delayed until the final determination of the administrative action, it might lose its ability to return to court to enforce its Miller Act rights.