MayJune 2006 Newsletters

• COURT DENIES RECOVERY TO AN OWNER WHERE THE OWNER SHOULD HAVE KNOWN OF THE DAMAGE TO ITS IMPROVEMENTS
  
  
• CONTRACTOR MAY BE LIABLE TO ARCHITECT FOR PROFITS EARNED ON CONSTRUCTION PROJECT IF CONTRACTOR INFRINGES ON ARCHITECT'S COPYRIGHTED DESIGN PLANS
  
  
• MARYLAND COURT RULES SUBCONTRACT PASS-THROUGH PROVISION IS NOT A "PAY IF PAID CLAUSE
  
  
• MASSACHUSETTS COURT FINDS THAT ARCHITECT IS GIVEN BROAD DESCRETION TO INTERPRET CONTRACT PROVISIONS

 

Katz & Stone, L.L.P. Construction Newsletter
May/June 2006

COURT DENIES RECOVERY TO AN OWNER WHERE THE OWNER SHOULD HAVE KNOWN OF THE DAMAGE TO ITS IMPROVEMENTS

A statute of limitations will bar recovery to a plaintiff where the plaintiff fails to act within a certain time to enforce its rights.  As Marseilles Hydro Power, LLC v. Marseilles Land and Water Co., 2005 U.S. Dist. LEXIS 34103 (N.D. Ill. 2005) demonstrates, courts will enforce a statute of limitations and deny recovery to an owner where the owner reasonably should have known of its damages and yet failed to act within the statute’s mandated timeframe.

In Marseilles Hydro Power, the operator of a hydroelectric plant filed suit to compel the owner of a canal that feeds the plant to repair a portion of the canal wall.  Shortly thereafter, the canal wall collapsed. On June 15, 2000, the owner sought leave to file a third-party complaint against the utility company. The owner argued that the utility company caused the canal wall to collapse by building utility poles and a parking lot adjacent to the canal.  On June 22, 2000, the district court denied leave to file the third-party complaint. Two years later, the Seventh Circuit Court of Appeals reversed the district court’s decision and permitted the owner to file the third-party complaint.

After the owner filed its third-party complaint, the utility company filed a motion for summary judgment arguing that any claims asserted by the owner were barred by the statute of limitations because the owner knew of the damage to the canal wall for decades. Since the applicable statute of limitations is only four years, the third-party complaint was not filed timely. Acknowledging the applicable statute of limitations, the court then noted that the owner’s injuries stemmed from a “single, discrete event”—damage to the canal wall—even though the effects “may have compounded over time.”

In determining when the applicable four-year limitation commences, the court observed that a limitation period will generally begin to run “when facts exist which authorize one party to maintain an action against another.”  Illinois courts apply “the discovery rule” under which the statute of limitations only commences after a party becomes aware of sufficient facts regarding his injury “to put a reasonable person on inquiry to determine whether actionable conduct is involved.”

The court found that the owners received several letters regarding the damage to the canal wall over several decades; the most recent of these letters was received on June 10, 1997.  Examining the facts in a light most favorable to the owners, the court concluded that the owners should have known about the damage to the canal wall on June 10, 1997.  The third-party complaint which the owner filed against the utility company was not filed until March 12, 2003—over four years after the date in which the statute of limitations began to run. Further, the court commented that the owner’s appeal did not toll the applicable statute of limitations period as to provide the owner with more time to file is third-party complaint.  Accordingly, the statue of limitations had accrued; the court dismissed the third-party complaint. 

Marseilles Hydro Power is an important reminder to owners of improvements to land.  Courts will enforce statutes of limitations that bar recovery for damages to those improvements where the owner should have reasonably known about the damage to such improvements, whether or not the owners actually knew of such damage. Caveat: The timing of when statutes of limitation begin to run varies from state to state. Be sure to check how your state treats this issue.

CONTRACTOR MAY BE LIABLE TO ARCHITECT FOR PROFITS EARNED ON CONSTRUCTION PROJECT IF CONTRACTOR INFRINGES ON ARCHITECT'S COPYRIGHTED DESIGN PLANS

A contractor using copyrighted design plans without permission of the copyright holder may be liable to the copyright holder for such profits the contractor earned through use of the plans.  This lesson on the intellectual property protection of design plans is illustrated in the case of Home Design Servs. v. Hibiscus Homes of Fla., Inc., 2005 U.S. Dist. LEXIS 32788 (M.D. Fla. 2005).

In this case, an architectural firm developed and sold floor plans for residential homes.  The architectural firm brought suit against the contractor, who developed and built residential homes in Central Florida, for copyright infringement. Specifically, the architectural firm alleged that the contractor unlawfully copied two of the firm’s copyrighted residential floor plans and used such plans in the construction of various homes.  In addition to seeking its actual damages and design fees, the architectural firm sought the recovery of the profits which the contractor earned from selling the homes constructed with the floor plans allegedly copyrighted by the architectural firm. 

In response, the contractor made various arguments.  With regard to the underlying claim, the contractor maintained that it was not aware of the alleged copyright infringement of the floor plans until the architectural firm brought it to the contractor’s attention prior to filing suit. The contractor also argued that the floor plans were not copyrighted.  Further, the contractor asserted that even if the architectural firm could prove the contractor infringed on its copyrighted floor plans, the architectural firm’s damages should be limited to its design fees, as the design fees constituted the architectural firm’s sole basis for compensation.  With regard to the architectural firm’s arguments pertaining to its recovery of the contractor’s profits, the contractor argued that its profits from the construction of the homes were attributable to many factors and features beyond the floor plans.  In fact, the contractor believed that the architectural firm could not establish a casual connection between the contractor’s alleged infringement and the contractor’s profits on the homes.  Notwithstanding, the contractor noted that awarding the architectural firm the profits the contractor earned on the homes would provide a windfall to the architectural firm, far beyond its design fees and far beyond a reasonable level of compensation. 

The court reviewed all claims and affirmative defenses at the summary judgment stage.  Although the court determined that the floor plans were copyrightable, the court could not grant the architectural firm’s motion for summary judgment on the issues of ownership and whether the contractor had copied the floor plans due to issues of fact.  Notwithstanding, the court reviewed the damages aspect of the claim. The court decided that the architectural firm was required to offer at least some evidence of the casual link between the contractor’s alleged infringement of the floor plans and the contractor’s home construction profits.  Even though the architectural firm failed to offer direct evidence of the contractor’s profits on the homes utilizing the allegedly copyrighted floor plans, the court determined that the architectural firm was able to satisfy this causal link. Specifically, the court ruled that the architectural firm’s evidence on the sales price of the homes created a justifiable inference that the sale of the homes at issue were profitable for the contractor and that at least some of the profits the contractor received on the homes could be attributable to the floor plans.  In addition, the court found it significant that the contractor did not dispute the fact that it realized a profit on the sale of the homes constructed with the allegedly copyrighted floor plans. Ultimately, the court allowed the architectural firm to go forward in its claim against the contractor.  

As a result of this case, contractors and home builders should be aware of whether or not the design plans they utilize in construction are copyrighted by another firm.  And if a contractor or home builder uses such copyrighted plans without permission of the copyright holder, then it may be liable to the copyright holder for a portion of those profits realized from in the construction and sale of the project.

MARYLAND COURT RULES SUBCONTRACT PASS-THROUGH PROVISION IS NOT A "PAY IF PAID CLAUSE

More and more, contractors utilize condition precedent payment language, such as “pay if paid” clauses, in their subcontracts to shift the risk of non-payment by the owner to subcontractors.  However, as demonstrated in Richard F. Kline, Inc. v. Shook Excavating & Hauling, Inc., 885 A.2d 381 (Md. Ct. Spec. App. 2005), condition precedent provisions that are not carefully worded will typically fail to shift such risk.

Here, the contractor entered into a contract with a city to provide services related to the excavation and construction of a flood control project.  The contractor hired the subcontractor to provide excavation, grading and other related services.  The project site contained hazardous materials in the form of underground storage tanks and contaminated soils, and the general contract contained a contingent item (Item 220) for the removal of the contaminated soils.  Although the contractor was initially responsible for the handling of the contaminated soils and the subcontractor was only responsible for the removal of the tanks, the subcontractor hauled the contaminated soils from the site as directed by the contractor.  Eventually, the subcontract was amended to add Item 220, making the subcontractor responsible for handling the contaminated soils.

The city later informed the contractor to cease work on the contaminated soils because the project engineer had determined that the soils were not contaminated.  Nonetheless, the contractor continued to believe that the soils were contaminated, and the subcontractor proceeded with removing the soils pursuant to the amended subcontract and in accordance with the contractor’s instructions.  The subcontractor then demanded payment from the contractor in accordance with Item 220, and the contractor demanded payment from the city pursuant to a pass-through claim provision in the subcontract.  However, the city refused to pay and the contractor filed suit.  Holding that the contractor had failed to obtain necessary authorization from the project engineer and the state prior to removing the contaminated soils, the court rejected the contractor’s claim.  The subcontractor then sued the contractor. The contractor defended on the grounds that the pass-through provision worked as a condition precedent clause, which relieved the contractor of any obligation to pay the subcontractor unless or until the contractor received payment from the city, and thus, prevented the subcontractor from recovering payment because the city had failed to pay the contractor.

The circuit court ruled, however, that the pass-through provision did not establish a condition precedent to payment.  Specifically, the clause at issue did not contain the language typically associated with the creation of a condition precedent—words and phrases such as “when,” “after,” “as soon as,” “subject to,” “provided that,” and “if.”  Moreover, in resolving doubts as to whether an event is made a condition of a party’s duty, courts prefer an interpretation that reduces the other party’s risk of forfeiture, unless the event is within its control or the circumstances indicate that it has assumed the risk.  The court concluded that neither the subcontract nor the Item 220 addendum clearly stated which party had a duty to obtain the required authorization to remove the contaminated soils.  Thus, there was no indication that the city's non-payment was an event within the subcontractor’s control, or that the subcontractor had assumed the risk of non-payment by the city.  Accordingly, the circuit court refused to find that the pass-through provision established a condition precedent to payment.

The appellate court affirmed this ruling. In order for the contractor to shift the risk of nonpayment from itself to the subcontractor pursuant to the pass-through provision, the subcontract must contain an express condition clearly showing that the parties intended to shift such risk.  The provision at issue contained no language which unmistakably showed such intent by the parties.  Although no particular language is required to create a condition precedent, the court concluded, words and phrases such as those cited by the circuit court have commonly been associated with creating express conditions; the pass-through provision did not contain those or any other language normally associated with the creation of a condition precedent.  If the provision was deemed to create a condition precedent, the likelihood of forfeiture by the subcontractor increased. Therefore, the court held that the pass-through provision was a “pay when paid,” as opposed to a “pay if paid,” provision; the subcontractor was entitled to payment by the contractor.

Many subcontracts contain pass-through provisions requiring payment claims by the subcontractor, arising from the acts of the owner, to be submitted to the owner by the general contractor.  Many of those clauses also provide that the subcontractor may not pursue those claims against the general contractor.  However, as the decision in Kline indicates, this does not necessarily create a “pay if paid” or other condition precedent to the subcontractor’s payment unless the pass-through provision also contains language which specifically and clearly establishes that the parties intended to shift the risk of the owner’s non-payment to the subcontractor.

 

 

MASSACHUSETTS COURT FINDS THAT ARCHITECT IS GIVEN BROAD DESCRETION TO INTERPRET CONTRACT PROVISIONS

Pursuant to the terms of the contract, an architect may be designated as a proper party to resolve disputes between subcontractors with regard to the interpretation of the contract.  In fact, as the case of Ostrow Electrical Co. v. J.L. Marshall & Sons, Inc., 59 Mass. App. Ct. 816, 798 N.E.2d 310 (Mass. App. Ct. 2003) indicates, an architect is often given broad discretion in determining the meaning of the disputed contract provisions.

In Ostrow, a dispute arose between the audiovisual subcontractor and the electrical subcontractor over who would be responsible for supplying and installing numerous “backboxes” for the loudspeakers in the Worcester Convention Center.  The contract specified that all disputes over the interpretation of contract provisions would be adjudicated by the architect. Therefore, the subcontractors submitted their claims to the architect for resolution.  After a thorough investigation, the architect found that the audiovisual subcontractor was responsible for performing the work at issue.  As a result, the audiovisual subcontractor performed the work under protest and later filed suit—claiming that the architect erred in its decision regarding the dispute between the subcontractors and that the architect acted in bad faith regarding same.

The court first determined whether the architect erred in his decision.  Upon examination of the contract documents, the court found that a conflict existed between the requirements of the audiovisual specifications and electrical drawings.  Specifically, the specifications assigned the duty to provide “backboxes” to the audiovisual contractor while the electrical drawings placed that duty upon the electrical contractor.   In order to resolve this conflict, the architect applied the order of interpretation presented in the contract itself—where the specifications and drawings conflicted, the provisions of the specifications would govern—and even interviewed the construction manager, the drafters of the specifications, and another architect.  The court found that the architect performed a reasonable investigation and rationally interpreted the conflicting documents; the architect’s decision to place the burden of installation upon the audiovisual subcontractor was not arbitrary and capricious.  As such, the court upheld the architect’s decision as final.

The court then briefly examined the audiovisual subcontractor’s claim for bad faith against the architect.  The court found that the contract was open to reasonable interpretation.  Further, the architect had performed a thorough analysis of the situation by reviewing all contract documents and discussing the matter with other experienced professionals.  Because the architect had conducted a reasonable investigation, the court concluded that the architect did not act in bad faith.

As Ostrow demonstrates, architects may be given broad discretion to interpret contract documents and determine the parties’ rights under the contract.  When given such discretion, architects must take the requisite care in performing a reasonable investigation.  And if such care is taken and contract documents are open to multiple interpretations, then a court will not overturn the architect’s decision.