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January 2001 Newsletter
Katz & Stone, L.L.P. Construction Newsletter
January/February 2001
Volume XI, Number I
REMEDIAL WORK AND CORRECTIVE
TESTS ARE NOT "LABOR" FOR PURPOSES OF THE MILLER ACT STATUTE OF
LIMITATIONS
Under the federal Miller Act, a claimant must
file suit against the payment bond surety no later than "one year
after the day on which the last of the labor was performed."
An issue often arises whether corrective work constitutes labor
for purposes of this one-year statute of limitations. In Interstate
Mechanical Contractors, Inc. v. International Fidelity Co.,
200 F.3d 456 (6th Cir. 2000), the U.S. Circuit Court of Appeals
for the Sixth Circuit officially adopted the "correction-or-repair
versus original contract" test as a framework for determining when
the one-year statute of limitations begins to run.
The key facts are as follows. In November 1993, the subcontractor
entered into a contract to provide and install heating, ventilating,
and air-conditioning systems at a U.S. Department of Commerce facility
in Morristown, Tennessee (the "facility"). The prime contractor
posted a Miller Act payment bond to guarantee payment under the
contract. In June 1994, the subcontractor completed its construction,
including installation of two electric duct heaters. In late
September or early October 1994, while preparing final reports for
the project, it was discovered that the ducts heaters were not performing
to specification. The subcontractor ultimately replaced the
heaters in early October, which necessitated a third round of testing.
On October 18, 1994, the subcontractor's tester returned to the
facility to confirm that the new heaters were functioning as specified.
Exactly one year later, on October 18, 1995, the subcontractor filed
suit against the payment bond surety in federal district court in
Tennessee to recover the unpaid contract balance of $30,967.00.
Under the Miller Act, suits to recover against a payment bond must
be filed no more than "one year after the day on which the last
of the labor was performed." The issue before the court was
whether the test of replacement components (the inspection and testing
of the second set of heaters on October 18, 1994) qualified as "labor."
On cross-motions for summary judgment, the magistrate judge held
that the subcontractor's complaint had not been filed within the
Miller Act's one-year statute of limitations and dismissed the subcontractor's
bond claim as untimely.
On appeal, the 6th Circuit affirmed the magistrate's decision and
officially adopted the "correction-or-repair versus original contract"
test. Pursuant to this test, remedial or corrective work or
materials (or inspection of work already completed) does not
toll the Miller Act's statute of limitations while work performed
as "part of the original contract" will toll the statute.
Since the October 18, 1994 tests were of corrective work performed
by the subcontractor, and thus not performed as part of the original
contract, the court held that such tests were not "labor" for purposes
of the Miller Act.
The test followed by the 6th Circuit court is utilized by a growing
number of federal courts to determine statute of limitations questions
under the Miller Act. As such, prudent subcontractors should
always take a conservative approach in deciding when to file suit
on a bond claim. As this case illustrates, subcontractors
should endeavor to determine their last day of labor performed (not
counting remedial or corrective work) as early in the process as
possible and should strive to file suit sooner rather than later
to avoid the harsh consequences of the Miller Act's statute of limitations.
NEW YORK APPELLATE COURT APPLIES
AIA INSURANCE PROVISIONS
Construction contracts often assign responsibility
to obtain the various types of insurance coverage needed on a
project between the contractor and owner. While the insurance
provisions are not typically the subject of substantial negotiation,
the operation of these clauses can have significant financial
consequences to the parties. In the recent case, Mu Chapter
of the Sigma Pi Fraternity v. North East Construction Services,
et al., 709 N.Y.S.2d 677 (2000), a New York State appellate
court applied the insurance provisions of the AIA general conditions
in the aftermath of a jobsite fire.
In Mu Chapter, a fraternity contracted with a general contractor
to renovate the existing fraternity house and construct a four-story
addition. The very day the general contractor commenced
work on the addition, a fire broke out which resulted in a total
loss of the existing structure. The fraternity received
a payment of $670,000.00 from its property insurance carrier to
cover the damages resulting from destruction of the existing fraternity
house. The fraternity filed suit against the contractor alleging
negligent use of acetylene torches and sought recovery of uninsured
losses and consequential damages sustained as a result of the
fire. Additionally, the insurance carrier, as the subrogee
of the fraternity, filed a separate suit against the contractor
to recover the $670,000.00 paid to the fraternity covering the
destroyed structure. Following the joinder of the two cases,
the contractor moved for summary judgment against both plaintiffs.
The trial court granted both motions and dismissed each claim
in its entirety. The plaintiffs appealed.
At issue in both cases were the terms of the insurance requirements
contained in the AIA General Conditions (1987 version).
In defense of the fraternity's suit for uninsured losses, the
contractor argued that Article 11 of the General Conditions required
that the fraternity purchase property insurance in the amount
of the contract sum, or notify the contractor of its decision
not to purchase the insurance. In the event of the fraternity's
failure to do either, by virtue of Article 11.3.1.2, the fraternity
was to "bear all reasonable costs attributable to such failure."
Thus, the contractor argued that the fraternity's failure to obtain
the required property insurance barred its claim for uninsured
losses. The appellate court disagreed.
The Appellate Division of the Supreme Court of New York held that
the purpose of the insurance required by Article 11 was to insure
the value of the work performed at the time of loss, as
well as any equipment and materials on site belonging to the contractor
and any of the subcontractors. Accordingly, the court held
that the fraternity's breach of Article 11 did not preclude its
claim for uninsured damages to the existing structure resulting
from the contractor's negligence. Instead, the fraternity's
breach merely subjected it to liability to the contractor for
the value of the contractor's destroyed work, materials and equipment.
The contractor further argued that pursuant to Article 11.3.7
of the General Conditions, the fraternity and contractor waived
all rights against each other for damages caused by fire "to the
extent covered by property insurance". Although the court
recognized that the Article 11.3.7 waiver applied to the money
paid to the fraternity by its property insurance carrier, the
fraternity's claim against the contractor was for uninsured
losses, which had not been waived by Article 11.3.7.
With respect to the fraternity's claim
for consequential damages, the contractor argued those claims
had been waived by Article 11.3.3 which provides that the "owner
waives all rights of action against contractor for loss of use
of the owner's property, including consequential losses due to
fire however caused." As a result, the appellate court upheld
the trial court's ruling that the fraternity was barred from pursuing
any claim of consequential damages resulting from the fire.
Lastly, and with respect to the insurance carrier's subrogation
claim, the appellate court held that the insurance carrier was
precluded from seeking damages as a subrogee under the insurance
policy. The court cited Article 11.3.5 of the General Conditions
which provides that if the owner insures property adjacent to
the contract work under a policy separate and apart from the builder's
risk policy required by the General Conditions, the owner waives
all rights to damages caused by fire that were covered by the
insurance policy insuring the adjacent property. In this
case, the court determined that the property insurance which covered
the fraternity's existing structure was insurance that was
separate and apart from the insurance required by the contract.
Accordingly, the court held that the fraternity had waived any
claims against the contractor for damages caused by the fire to
the extent covered by insurance and that, as a result, the insurance
carrier was barred from recovering against the contractor as a
subrogee.
The Mu Chapter case illustrates the important division
of rights and responsibilities pertaining to insurance coverage
found in the AIA General Conditions. Contractors and owners
need to be familiar with these provisions to ensure they have
obtained proper insurance coverage for their projects and further
that any losses which may be sustained are borne by the appropriate
carrier.
VIRGINIA'S WORKERS' COMPENSATION
STATUTE DOES NOT PRECLUDE AN OWNER'S EMPLOYEE FROM BRINGING A
PERSONAL INJURY ACTION AGAINST THE ARCHITECT OR CONTRACTORS
Every state has laws that
protect employees in the event they are injured on the job.
These workers' compensation statutes give an injured employee
the right to receive certain benefits for an injury directly from
his or her employer regardless of fault. Typically, the
injured worker's remedy against its employer is limited to the
relief authorized by the workers' compensation statute.
In many states, workers on a construction project are deemed to
be statutory "fellow employees" of all contractors and subcontractors
working on the project and an injured worker's recovery is thereby
limited to workers' compensation benefits. In Virginia,
this exclusive remedy protection is limited only to those employers
who are engaged in the same trade, business or occupation.
In the case of Stone v. Door-Man Manufacturing Company,
2000 Va. LEXIS 134 (2000), the Virginia Supreme Court addressed
whether an injured employee of a project owner could bring a personal
injury action against the project architect and various project
contractors. Given the particular facts found in Stone,
the Court ruled that the statute did not preclude such
a suit.
In Stone, an employee of Ford Motor Company was injured
when an overhead door unexpectedly closed and struck him as he
drove a tow-motor vehicle beneath it. The employee was paralyzed
from the mid-chest down. The door was located in a body shop that
had been renovated several years earlier. After recovering
from his employer Ford under the workers' compensation statute,
the employee then brought a personal injury action against the
architect who had designed the door and various contractors who
had either installed or manufactured the door during the renovation.
The suit alleged that the "inductive loops" which opened and closed
the door automatically had been negligently designed and/or installed
and sought compensatory and punitive damages in excess of $30
million.
In proceedings before the trial court, the various construction
defendants moved to dismiss the suit. The construction defendants
argued that the plaintiff's employer, Ford, was engaged in the
same trade business or occupation as them, that the plaintiff
was a statutory fellow employee of the defendants and therefore
could not sue the defendants for his injuries. Based on
the fact that Ford did much of the initial design for the body
shop, does some of its own design work on small construction projects
and employs a sizeable number of skilled tradesmen that install
doors similar to the one that caused the plaintiff's injury, the
trial court held that the construction defendants were in the
same trade or business as Ford and thereby could not be sued by
the plaintiff.
On appeal, the Supreme Court reversed the trial court, finding
that the defendants and Ford were not engaged in the same
trade, business or occupation. First, the court found that
Ford was engaged in the business of manufacturing and selling
motor vehicles and that the construction defendants were not engaged
in that business. Second, although recognizing that Ford
had performed design and construction work similar to that of
the defendants in the past, the court found that this limited
construction activity was not part of Ford's "normal work."
The court found it significant that Ford historically contracted
for design and construction services on larger projects, such
as the renovation project that lead to the installation of the
door at issue, and that none of Ford's own forces performed any
construction services on the renovation at issue. Thus,
the court concluded that the plaintiff and the defendants were
not in the same trade or business as Ford and that Virginia's
statute did not bar the plaintiff's personal injury claims against
the construction defendants.
The Virginia Supreme Court's holding in Stone illustrates
the general rule that an injured employee may maintain a tort
action against third-parties even though it has recovered workers'
compensation benefits from its employer. The Stone decision
further evidences the court's unwillingness to broaden the exclusive
remedy protection of Virginia workers' compensation statute to
owners, architects and contractors working on the same project.
WISCONSIN APPEALS COURT APPORTIONS
"PREVAILING PARTY" ATTORNEYS' FEES RECOVERY
Construction contracts often contain a provision
that should the parties to the contract institute litigation,
the "prevailing party" is entitled to recover its attorneys' fees
and litigation costs. But, as a Wisconsin appeals court
held in Sanfelippo Environmental Construction LLC v. Mews Companies,
Inc., 616 N.W.2d 922 (Wisc. 2000), recovering only a nominal
amount on a claim is not sufficient to be considered a "prevailing
party."
In Sanfelippo, the general contractor
for a highway project near Milwaukee, Wisconsin subcontracted with
a landscape subcontractor to perform landscaping work. When
the general contractor refused to pay the subcontractor's claim
for topsoil work performed, the subcontractor sued. At trial,
the prime contractor claimed that it had performed 95% of the topsoil
work itself and the court ultimately accepted the testimony of the
project owner's engineer that the prime contractor had performed
80% of the topsoil work. Accordingly, the court awarded
the subcontractor only 20% of its claim for topsoil work in the
amount of $1,162.00.
Pursuant to the "prevailing party" clause of the subcontract, the
trial court also awarded the subcontractor all of its attorneys'
fees and costs in the amount of $23,261.20. The general contractor
appealed this award, claiming that the term "prevailing party" as
utilized in the subcontract was ambiguous and that the court's "80/20"
ruling on the topsoil work meant that neither party ' or both parties
' had actually prevailed. In opposition to the general contractor's
appeal, the subcontractor cited Wisconsin case law that defined
a prevailing party as one who receives at least some of the relief
it requests. However, the appeals court relied on other case
law for its finding that a "prevailing party" as to some, but not
all, litigated issues can recover attorneys' fees and costs only
as to the issues on which it was successful. To hold otherwise,
the court stated, would encourage contractors to bring large, mostly
frivolous claims, and would produce unfair or unreasonable results.
On this basis, the appellate court concluded that the general contractor
and subcontractor were both prevailing parties, and remanded the
case to the trial court to award the general contractor 80% of its
attorneys' fees and costs and the subcontractor 20% of its fees
and expenses.
Successful litigants often view the losing side as responsible for
their incurring the costs of litigation, and just as often hope,
or even expect, to be reimbursed by the other party for those costs.
However, litigants are often disillusioned by the "American Rule,"
the nationwide standard that parties to litigation generally must
pay their own costs and fees, except when a statute or contract
provides otherwise. In an effort to discourage frivolous claims,
many contractors have incorporated "prevailing party" clauses into
their contracts. Although limited to Wisconsin, the Sanfelippo
case illustrates the proposition that a nominal positive recovery
does not necessarily make one a "prevailing party" for recovery
of attorneys' fees. Indeed, although the subcontractor ultimately
recovered 20% of its claim and 20% of its attorneys' fees and costs,
the subcontractor could very well end up reimbursing its opponent
in an amount far greater than its recovery.
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