July 2001 Newsletter

 

Katz & Stone, L.L.P. Construction Newsletter
July/August 2001
Volume XI, Number IV

 

FEDERAL COURT IN ILLINOIS STRIKES DOWN SET-ASIDE ORDINANCE; FINDS INSUFFICIENT EVIDENCE OF DISCRIMINATION WITHIN THE CONSTRUCTION INDUSTRY

Although challenging the constitutionality of disadvantaged business set-aside statutes is never an easy task, the recent decision of a federal court in Builder's Association of Greater Chicago v. County of Cook, 123 F. Supp. 2d 1087 (N.D. Ill. 2000) shows that such challenges can succeed when the governmental entity that enacted the legislation is unable to demonstrate that the set-asides are necessary to remedy discriminatory practices within the affected industry.

Builder's Association involved a Cook County (Chicago, Illinois) ordinance requiring that a minimum of 30 percent of the total value of any county construction contract be awarded to minority business enterprises ("MBEs") and 10 percent to women-owned business enterprises ("WBEs").  An association of general contractors and subcontractors challenged the ordinance in federal court, contending that the ordinance violated the Constitution by denying its members equal protection under the law.

In analyzing this issue, the court began with the premise that local governments have the power to remedy past instances of private discrimination when the discrimination can be identified with particularity.  However, the burden is on the government to demonstrate that its ordinance is necessary to remedy past discrimination.  In meeting this burden, the County could not simply rely on evidence of discriminatory practices within society at large or even within the construction industry as a whole.  In order to justify the ordinance, the County was required to produce strong evidence of a pattern of discrimination within the construction industry in Cook County itself.

During the trial and to meet its burden of proof, the County introduced the testimony of several witnesses that employees of certain general contractors had made comments that indicated prejudice against women and minorities.  The County also attempted to show that MBEs and WBEs had been denied the opportunity to bid on private contracts.  Specifically, the County pointed to the testimony of minority and women contractors that they had never been solicited to submit bids on private projects, even though they had requested to be considered for such work and had rendered satisfactory performance on County jobs.

Examining the entirety of the evidence presented at trial, the court came to a different conclusion.  First, the court found that the County's anecdotal evidence of derogatory statements by certain employees did not demonstrate a pervasive bias in the local construction industry.

Second, the mere fact that certain prime contractors had not solicited bids specifically from MBEs and WBEs did not demonstrate that these entities had systemically been denied the opportunity to bid.  Instead, the evidence showed that MBEs and WBEs had not been excluded from databases used by prime contractors to solicit bids and that prime contractors do consider unsolicited bids, regardless of whether the bid was from a MBE/WBE or a non-MBE/WBE.

Lastly, the court found legitimate explanations for why the testifying MBEs/WBEs had not been solicited for private work, including  the  fact  that  they  tended  to  be  newer and  smaller than non-MBEs/WBEs and that MBEs/WBEs were frequently hired on County projects only to fulfill the set-aside ordinance's requirements, not because they were the best qualified contractors for the jobs.

The court's decision in Builder's Association illustrates that set-aside statutes are not legally unassailable.  Builder's Association also demonstrates that such statutes may be found to violate the Constitution when the set-aside statutes are not  supported by particularized evidence of pervasive discrimination within the affected locality.

 

PARENT CORPORATION MAY NOT USE WORKER'S COMPENSATION STATUTE AS A SHIELD AGAINST TORT CLAIM BY SUBSIDIARY'S EMPLOYEE

The Indiana Court of Appeals recently affirmed a jury award of $55,000,000 in a suit brought by a truck driver against a national grocery store chain. See Ritter v. Stanton, No. 49A02-9912-CV-883, 2001 Ind. App. LEXIS 468 (Ind. Ct. App. March 14, 2001). The truck driver worked for a shipping company that was a wholly-owned subsidiary of the Kroger grocery store chain. The principal issue on appeal was whether the truck driver's claim should have been barred because of the exclusivity provision of the Indiana Worker's Compensation Act ("Act").

In Ritter, the driver sustained massive injuries when he was caught between a backing tractor and a parked trailer. The driver sued Kroger for negligence. Two years after the suit was filed, Kroger filed a motion to dismiss for lack of subject-matter jurisdiction on the basis that the driver's claims were barred by the exclusivity provision of the Act because the plaintiff was employed by a subsidiary of Kroger.

Specifically, Kroger based its motion on Indiana Code Section 22-3-2-6, which provides that the "rights and remedies granted to an employee... on account of personal injury or death by accident shall exclude all other rights and remedies of such employee... at common law or otherwise, on account of such injury or death...." Under the Act, it is clear that no tort action could be filed against the plaintiff's direct employer, the trucking company, as the only claim that could be brought against the trucking company would be a worker's compensation claim under the Act. In line with this reasoning, Kroger argued that it, the parent company, was the driver's employer at the time of the accident and, as a result, the plaintiff was prohibited from suing Kroger. The trial court noted that Kroger was in effect asking the court to permit it to "defensively 'pierce the corporate veil' erected when it formed its parent-subsidiary corporate structure and find that it was actually the employer of [the plaintiff] by virtue of the fact that it is [the trucking company's] parent company." The trial court ultimately denied Kroger's motion.

The Indiana Court of Appeals affirmed the trial court's denial of the motion and upheld the jury's multimillion dollar award. The appellate court concluded that although there was a certain degree of "interconnectedness" between the companies, there was a deliberate attempt on the part of the two businesses to keep a significant portion of the businesses separate. Kroger may have overseen the trucking company's operations, reported their earnings, shared a worker's compensation policy and performed some accounting functions, but these characteristics were deemed insufficient by the court to disregard the corporate structure in place. The court stated that if Kroger intended to maintain separate corporate entities for tax or other purposes, then "it should not be permitted to disregard that corporate form when it is convenient for it to do so to avoid potential liability."

Turning to the size of the jury's damage award, the Indiana appellate court explained that an award will not be deemed the result of improper considerations if the size of the award can be explained on any reasonable grounds. The court found the record replete with evidence of devastating injuries, permanent disabilities, continuing pain and suffering, and loss of consortium. To warrant reversal, the award "must appear to be so outrageous as to impress the Court at 'first blush' with its enormity." The court concluded that the amount of the award in this case, though sizeable, did not require the conclusion that it was outrageous given the evidence. As such, the court affirmed the $55,000,000 verdict.

While other states might deem Kroger to be the statutory employer of the driver (and thus immune from suit), contractors who have subsidiaries should be conscious of the potential for tort liability to the injured employees of their subsidiaries. As the Ritter case demonstrates, a parent corporation may not be protected by the "exclusive remedy" provisions of state worker's compensation statutes and may therefore be liable for injuries sustained by an employee of a wholly-owned subsidiary even though the two related companies share a common worker's compensation policy.

 

VIRGINIA CIRCUIT COURTS ARE SPLIT ON PROPERTY OWNERS' ABILITY TO MAINTAIN SUITS AGAINST EIFS MANUFACTURER

Mirroring a trend across the country, property owners in Virginia have begun to institute actions against Dryvit Systems, the manufacturer of synthetic stucco also known as EIFS.  Two recent decisions from Virginia Circuit Courts in the Tidewater area indicate there is a split on the question of whether a property owner may properly maintain an action directly against a product manufacturer for breach of implied warranty.

In Bay Point Condominium Association, Inc. et. al. v. Dryvit Systems, et. al, Docket #: CL99-475, Circuit Court of the City of Norfolk) (March 30, 2001), Judge Joseph A. Leafe, held that the Bay Point Condominium Association ("Association") could not recover damages it sustained as a result of the installation of defective synthetic stucco ("EIFS") from the EIFS manufacturer, Dryvit Systems.  The court based its ruling largely on the fact that the Association and the manufacturer did not have a direct contractual relationship.

The Association originally brought suit against the manufacturer and RML, the developer and general contractor of the Bay Point condominium complex to recover for alleged defects in the condominium units and "common elements" of the condos.  Specifically, the Association asserted that the 'Units and Common Elements' of the condos contained many defects as a result of poor workmanship including leaks, failure of the buildings to meet code standards, and rotten structural components.

The developer had selected EIFS for the cladding of the exterior walls of the units, and its subcontractor installed EIFS in the Bay Point units.  The Association was not involved in the decision to use or select the EIFS.  Indeed, the Association had not purchased any EIFS directly from either the manufacturer or the developer.  The claims on which the Association based its suit against the manufacturer were: (1) that the manufacturer breached the implied warranty of merchantability in selling EIFS, and (2) that the manufacturer, by selling EIFS, breached the implied warranty of fitness for a particular purpose.  Under Virginia law both of the implied warranties on which the Association sued arise only under the Uniform Commercial Code ("U.C.C."), which applies solely to the sale of goods.

In its motion for summary judgment, the manufacturer argued that the Association's claims against it should be dismissed as a matter of law because the Association's members had purchased "completed condominium units" which was a real estate transaction, not a sale of "goods," and thus was not governed by the   U.C.C.  If the sale of EIFS was not covered by the U.C.C., then both of the Association's implied warranty claims against the manufacturer would fail as a matter of law.

In response, the Association argued that to determine whether something constitutes "goods" covered by the U.C.C., the court should focus on the point in time where the product (here,  EIFS) was purchased by the developer from Dryvit.  At that point in time, the Association asserted, EIFS remained a distinct product, that being "maintenance free Dryvit."  The Association also argued that under a Virginia "anti-privity" statute, the lack of privity (a direct contractual relationship) between it and the manufacturer did not bar its recovering damages from the manufacturer.

The court rejected the Association's arguments noting that "goods" under Virginia law is a term that applies to all things that are moveable at the time of identification to the contract for sale.  The court reasoned that the EIFS at issue:

[W]as good at one time, but once it was incorporated into the walls of the units it ceased to be a 'good' in that it lost any distinct characteristic it once had.  To hold otherwise would be to hold that any 'building component' used in the construction of any building contains a manufacturers warranty applicable to remote plaintiffs simply because it was a good at some time.

Accordingly, the court concluded the U.C.C. did not apply and that the Association's claim failed as a result.  The court further noted that unlike the situation with fire retardant plywood, where the Virginia legislature created a specific statutory transfer of warranty rights to the end user, no such statute presently exists to accomplish this as to EIFS.

In direct contrast to the approach taken by the City of Norfolk Circuit Court, the Circuit Court for the City of Suffolk rejected identical arguments raised by the manufacturer and permitted a homeowner to pursue its implied warranty claims against Dryvit Systems in Stoney v. John A. Franklin, et al., Law No. CL00-387, Circuit Court for the City of Suffolk (June 18, 2001).  In reaching its decision, the Stoney court held the transaction from which the implied warranty arose involved a sale of goods and the subsequent use of the goods in the construction of the house was irrelevant.  The Stoney court held that Virginia's "anti-privity" statute (Va. Code § 8-2-318) prohibits a manufacturer from asserting lack of privity as a defense when the plaintiff is a person whom the manufacturer "might reasonable have expected to use, consume or be affected by the goods."

The above decisions illustrate the current split in Virginia on this important question.  Given the split, this issue may very well be decided by either the Virginia Supreme Court or the General Assembly in the near future.

 

CONNECTICUT COURT FINDS THAT INSPECTION FIRM DID NOT TORTIOUSLY INTERFERE WITH SUBCONTRACTOR'S WORK

Testing and inspection is an integral part of the construction process.  Oftentimes, as a result of their duties, testing and inspection firms find themselves in an adversarial position with the contractors they are hired to oversee.  In extreme cases, inspection firms become the target of lawsuits brought by disgruntled contractors and subcontractors.  Such was the scenario in the recent case, PAR Painting Inc. v. Greenhorne & O'Mara, Inc., 61 Conn. App. 317 (2001).

In PAR Painting, a painting subcontractor was hired by a general contractor to perform sandblasting and repainting work on three bridges for the Connecticut Department of Transportation.  The subcontractor's work was overseen by Greenhorne & O'Mara, the inspection firm retained by the department to ensure compliance with project specifications and environmental safeguards.  Although its work was to commence in April 1994, the subcontractor did not begin any work until August due to its failure to erect approved containment structures.  The subcontractor's work was further delayed by a lapse in its certification from the health standards authority and by the inability of some employees to work due to elevated blood lead levels.  Finally, after repeated clashes with the inspection firm over the subcontractor's performance, the subcontractor walked-off the job having completed only one-third of its work.

Thereafter, the subcontractor brought suit against the inspection firm and two individual inspectors, alleging that the firm and its inspectors had tortiously interfered with its business relationships with the general contractor and the department and had otherwise committed unfair trade practices by conducting inspections too slowly and in bad faith.  A jury found that the inspection firm had tortiously interfered with the subcontractor's business relationships and had violated the state's unfair trade practices statute and awarded the subcontractor $684,000.  The trial judge, however, set aside the verdict as contrary to the law and the evidence, and the subcontractor appealed.

On appeal, the Connecticut appellate court upheld the trial judge's decision.  The court determined that in light of the inspection firm's role on the project, the painting subcontractor's evidence was insufficient to support the jury's finding that the inspector had intentionally engaged in improper conduct.  Specifically, the court held that evidence that the inspection firm benefitted financially from longer and more in-depth inspections and the fact that one of the individual inspectors had once laughed when the subcontractor's equipment got stuck in the mud did not support the causes of actions alleged.  By contrast, substantial evidence indicated that the subcontractor's work was inadequate and that the inspection firm's criticisms were appropriate.  The court also held that even if the subcontractor had proven that the inspector's actions were maliciously motivated, the jury still could not have concluded that such actions caused the subcontractor's damages.  Rather, the evidence overwhelmingly indicated that it was the subcontractor's delay in erecting approved containment structures, the lapse of its certification, the high blood lead levels of its employees, and its inadequate performance were causes of the subcontractor's losses.  Notwithstanding its decision in favor of the inspection firm, the Connecticut appellate court declined to create a special qualified privilege for inspectors as some other jurisdictions have done.

As the PAR Painting case demonstrates, although a contractor's work may suffer due to what it perceives as unnecessary or unfair inspections, the contractor is unlikely to recover any losses directly from the inspection firm unless it can show that the inspection firm's actions were maliciously motivated, improper and undertaken in bad faith and that the contractor's damages resulted from those actions.