Friday, June 23, 2017

Construction Vignette on Personal Jurisdiction

Recently the United States District Court for the District of Rhode Island offered a concise refresher on personal jurisdiction and through the lens of construction contractors.  In Sugar Fox 218, LLC v. Greython Constr., LLC, No. CV 16-470S, 2017 WL 1906963 (D.R.I. Mar. 17, 2017), rep. & rec. adopted sub nom. 2017 WL 1900273 (D.R.I. May 9, 2017), the court walked through the several factors that established general jurisdiction in Rhode Island over a defendant contractor who had performed the disputed work for a project in neighboring Connecticut.  Recall that, "[u]nlike specific jurisdiction, which focuses on the cause of action, the defendant and the forum, general jurisdiction is dispute blind with the sole focus on whether the defendant is 'fairly regarded as at home' in the forum." Id. (quoting Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915 (2011)).  The Court's step-wise analysis serves as an important reminder that a contractor's business touches in a state can add up to "minimum contacts" and being haled to court in a state even though the dispute did not even stem from work in that state.  

To confer general jurisdiction, the Court recounted that "(1) the defendant must have sufficient contacts with the forum state; (2) those contacts must be purposeful; and (3) the exercise of jurisdiction must be reasonable under the circumstances." Id.  In Sugar Fox 218, the defendant's main location was in Connecticut, it was organized under Connecticut LLC law, its employees all resided in Connecticut, and it did do much work there.  However, Court determined that the following purposeful contacts all weighed in favor of exercising general jurisdiction over the contractor as though Rhode Island was its "home":
  • website included locations in Providence and Watch Hill, Rhode Island (noting that "the website alone would not be sufficient to confer general personal jurisdiction in this case")
  • routinely sent employees into Rhode Island
  • completed at least seven projects in Rhode Island in the months prior to suit
  • currently is completing projects in Rhode Island
  • maintained a permanent “on call” status for one project in Rhode Island
  • registered as a contractor to do business in Rhode Island
  • its proximity to Rhode Island
            As far as the fairness and reasonableness of exercising jurisdiction, the "gestalt" factors, the defendant contractor was not able to carry its burden that the Rhode Island jurisdiction was unfair. The Rhode Island courthouse was actually more convenient for the defendant in terms of distance, the plaintiff was from Rhode Island and selected Rhode Island as its forum, and there was no injustice for a Rhode Island federal court interpreting Connecticut law.  Note also that the defendant contractor  was unable to carry its burden to transfer the venue to Connecticut, which analysis was similarly based on convenience and fairness.

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            The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

            Sunday, June 18, 2017

            Illinois Court Rejects Subcontractor’s Quantum Meruit Claim for Extra Work due to the Existence of a Valid Subcontract

            Archon Construction Co. v. U.S. Shelter centers on a dispute for the replacement of defective sewer pipe for a new subdivision in the City of Elgin, Illinois. The plaintiff was an underground utility contractor, subcontracted by the defendant-developer/builder, to install a sanitary sewer and storm water system for the subdivision.  The work’s plans and specifications, which were incorporated into the contract, contained a section entitled “City of Elgin General Notes” which required that all underground construction comply with the City’s and Illinois’s engineering and construction standards.  As part of the General Note section, there was also a requirement that all sanitary sewers shall be televised and tested prior to acceptance. The plaintiff’s proposal also specifically stated that the sanitary sewer system would be constructed exclusively with PVC pipe; the General Notes gave the option of utilizing either ductile iron or PVC pipe.  The plaintiff started installation of the sanitary sewer in April of 2005 and continued until August 2005.  During its construction activities, the plaintiff replaced three installed fittings that were not of the specified material strength at no cost to the defendant. 

            In August of 2005, the sewer system passed both an air and mandrel test whose results were accepted by the local water authority and the project’s engineer certified to the defendant that the work complied with the contract plans and specifications, the City’s specifications, and Illinois’s specifications. The City required that the televised testing be performed a year after installation to account for any settling that may occur.  The plaintiff engaged a third-party testing agency to perform the televised testing in early 2007 which the City reviewed, and then it performed its own televised testing.  In July of 2007, the City rejected the work and required that certain sections of the installed PVC pipe be replaced with ductile iron pipe.  The plaintiff completed the necessary repairs and submitted a bill to the defendant for the extra work in the amount of $247,432.41, which the defendant refused to pay, and the parties moved to litigation.  In 2013, this same Illinois Appellate Court overturned the defendant’s motion for summary judgment award on the plaintiff’s breach of contract claim for the extra work.  On remand, the plaintiff voluntarily dismissed its breach claim and proceeded solely on its quantum meruit claim. The trial court found for the defendant concluding that quasi-contract relief was not available to the plaintiff.  The plaintiff appealed.

            The Court began its analysis by defining quantum meruit as, “an expression that describes the extent of liability on a contract implied in law (also called a ‘quasi-contract’); it is predicated on the reasonable value of the services performed.” Barry Mogul & Associates, Inc. v. Terrestris Development Co., 267 Ill. App. 3d 742, 749 (1994).  The Court then provided the four elements of quantum meruit required of plaintiff for recovery. The plaintiff must prove:
            1. It performed a service to benefit the defendant;
            2. It did not perform the service gratuitously;
            3. The defendant accepted the service;
            4. No contract existed to prescribe payment for the service.

            Cove Management v. AFLAC, Inc., 2013 IL App (1st) 120884,

            The Courts stated that the last element would be controlling, and as a result of the dispute being based upon a claim of extra work on a contract, the Court reviewed the nature of “extra work.”
            By its nature, the Court mused, a claim for “extra work” establishes that a contract was present because an element of the claim is that the “extra work” was work performed outside of the scope of the original contract. Inherently, a contract must have existed.  The Court next attempted to define a line of where “extra work” is considered to be within a contract which provides a mechanism for recovery, and when “extra work” falls outside of a contractual agreement and into in the realm of quantum meruit.  In order to illustrate the difference, the Court compares the cases of StarkExcavating, Inc. v. Carter Construction Services, Inc., 2012 IL App (4th) 110357 and Industrial Lift Truck ServiceCorp. v. Mitsubishi International Corp., 104 Ill. App. 3d 357, 361 (1982).

            In Stark, a concrete subcontractor claimed unjust enrichment and quantum meruit against the general contractor for unpaid costs related to placing concrete under winter conditions. In that instance, the Appellate Court held that as a result of the subcontractor specifically excluding winter conditions in its proposal, the “extra work” did not involve the same subject matter as the contract, and accordingly the quantum meruit claim could proceed.  In contrast, the Appellate Court in Industrial found that there was no quantum meruit claim available to the plaintiff.  Industrial centered around a dealership agreement between a foreign manufacturer and domestic seller of forklifts in which the plaintiff made changes to the design of the forklift that it felt would make them more attractive to the American market.  At some point, the defendant terminated the agreement, and the plaintiff filed suit claiming quantum meruit for its design work in modifying the forklifts. In this case, the Appellate Court found that the quantum claim could not proceed because the design modifications fell within the same “general subject matter” of the contract.

            The Court in the present case found that the plaintiff’s “extra work” of replacing the installed sewer pipe was “part and parcel” of the original subcontract to install a sanitary sewer system acceptable to the city. “[The plaintiff’s] quantum meruit claim seeks to recover for repairing and reinstalling that very same sewer system. That work unquestionably involved the same “general subject matter” as the contract.  The Court further discounted the plaintiff’s argument that it was contracted to install PVC pipe (as per its proposal), and not the iron pipe required by the City engineer for the replacement work by stating:

             “that does not change the fact that the subject matter of the contract between the parties was the installation of an acceptable sanitary sewer system; [Plaintiff’s] claims for its costs to repair and replace portions of that installed system, as required for the city’s approval, concerned that same subject matter. Thus, [plaintiff] cannot avoid the effect of the general rule that the law will not imply a contract where an express contract already exists between the parties on the same subject matter.”
             
            Finally, the Court pointed to the fact that as part of the plaintiff’s proposal, it stated that any additional work for the project would be completed on a negotiated or time and materials basis, thus giving the plaintiff a contractual remedy for its “extra work claims.”

            The Court affirmed the trial court’s judgment in favor of the defendant.

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            The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based in Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com

            Thursday, June 8, 2017

            Federal Court in Alaska Holds Insurer Liable Under E&O Policy to Indemnify and Defend Construction Manager for Claims by Subcontractor That Construction Manager Failed to Properly Perform Construction Management Services


            KICC –Alcan Gen. v. Crum & Forster Specialty Ins. Co., 2017 U.S. Dist. LEXIS 37560 (March 16, 2017)

            A Contractor/Construction Manager, KICC-Alcan General (“KICC”), entered into a subcontract with an MEP subcontractor, Superior Group (“Superior”), concerning the construction of two buildings at an airforce base in Alaska. Superior sued KICC for approximately $2 million in costs it incurred in excess of the contract value, allegedly caused by KICC’s failure to properly manage the project.  KICC tendered Superior’s claims to its Errors and Omissions insurance carrier, Crum & Forster Specialty Insurance Company (“C&F”).  C&F denied both defense and indemnity of Superior’s claims.  KICC settled its claims with Superior prior to trial.  KICC then sued C&F for its breach of the duty to defend and indemnify against Superior’s claims, as well as a breach of its duty of good faith.

            The terms of KICC’s E&O policy provided coverage for “damages… because of… an act error or omission in the rendering or failure to render professional services by any insured.”  The contract defined “professional services” as “those functions performed for others by you or by others on your behalf that are related to your practice as a consultant, engineer, architect, surveyor, laboratory or construction manager.”

            Superior alleged that KICC: mismanaged a soil contamination issue at the beginning of the project; failed to provide timely responses to requests for information and contract modifications; and directed other subcontractors to work in the same areas at the same time as Superior, resulting in delays and added costs to Superior on the project. Superior submitted a request for equitable adjustment (“REA”) for these costs and delays, but KICC denied the REA.  In its lawsuit, Superior asserted claims for breach of contract and quantum meruit.

            C&F’s main argument was that its policy covered only negligent acts on the part of KICC in its construction administration services, and that Superior’s claims were for contractual or quasi-contractual damages. C&F cited to Bell Lavalin v. Simcoe and Erie Gen. Ins. Co., 61 F.3d 742 (9th Cir. 1995), which held that “a professional liability policy did not provide coverage for a simple contract dispute in which [a subcontractor] performed work for which it was not paid.” Id. at 746.   In Bell Lavalin the general contractor refused to provide a contract extension to its subcontractor during a delay.  The subcontractor walked off the project after having been paid for approximately half of the services it had provided. Id. at 744.  The subcontractor sued the general contractor for its unpaid contract amounts, and prevailed at trial.  The general contractor then sued its insurer for indemnity.  The general contractor’s E&O insurance policy provided coverage for damages that “arise out of the insured’s performance as a project manager and are caused by an error, omission or negligent act.” Id. at 746.  The court held that the damages incurred by the subcontractor were not as a result of any act or omission of the general contractor’s project management, but rather were a result of a failure to pay the subcontractor for completed work. Id.  The claims were purely contractual and not covered under the E&O policy, thus the insurance company prevailed.

            The Court in this matter found that several key facts were different from those in Bell Lavalin.  Superior was not seeking payment of the base contract value, but was seeking additional compensation beyond the contract price.  Superior was required to prove that KICC wrongfully denied the contract extension or otherwise caused it to incur additional costs above the contract price to prevail.  The Court found that Superior’s claims were clearly based on KICC’s professional services, as the complaint referenced KICC’s mismanagement of the project as the cause of the damages.  The Court also found that pleading in contract does not automatically preclude coverage under this policy, which did not expressly exclude claims of contractual liability or those that arise from contract.  As a result, the Court held that Superior’s claims were covered by the C&F policy, and thus C&F had a duty to indemnify KICC for the settlement amount, as long as the settlement was reasonable and non-fraudulent.  The Court also held that C&F breached its duty to defend.
            Finally, the Court held that to prevail in its bad faith cause of action KICC would have to show that C&F’s actions “were objectively unreasonable under the circumstances.” The Court found that in light of the holding in Bell Lavalin, no reasonable jury could find that C&F’s actions were objectively unreasonable.

            The author, John Conrad, is an associate in the Los Angeles office of the Pepper Hamilton Construction Practice Group. 

            Friday, June 2, 2017

            Construction Liens Filed by Suppliers in New Jersey After Contractor’s Filing of Bankruptcy Petition Are Barred by the Automatic Stay Provision of the Bankruptcy Code  


            In re: Linear Electric Co., Inc., No. 16-1477, 2017 U.S. App. Lexis 5527 (3d Cir., March 30, 2017)
            This case concerns whether suppliers, Cooper Electrical Supply Co. and Samson Electrical Supply Co. (“Suppliers”), could file construction liens under New Jersey law, despite the fact that Linear Electric Inc. (“Contractor”), filed a petition for bankruptcy, which automatically stays any act to create or perfect any lien against the contractor’s property. Two weeks after Contractor filed for bankruptcy, the Suppliers filed construction liens against projects in New Jersey where the materials were incorporated.  Following a motion by the Contractor, the Bankruptcy Court held that the liens were in violation of the automatic stay provision of the Bankruptcy Code. The District Court affirmed the Bankruptcy Court’s holding that, under New Jersey law, the liens were claims against the Contractor’s accounts receivables, which receivables are part of the bankruptcy estate and protected by the automatic stay.  On appeal, the Third Circuit affirmed the ruling of the District Court.

            Under New Jersey law, if a supplier sells materials on credit to a construction contractor and the contractor incorporates those materials into property owned by a third party without paying the supplier, the supplier can apply for a lien on the third-party property. The owner of the property subject to lien discharges a lien by paying into a lien fund, from which claimants recover what they are owed.  However, no lien fund exists if, at the time of service of the lien claim, the owner has fully paid the contractor for the work.  In addition, if there is money left over in the fund after the lien claims of subcontractors and suppliers are paid, the remainder is received by the contractor.  The Court relied on this allocation process to determine that, although the Suppliers’ liens were ostensibly against the property of third-party owners, they were also against the Contractor’s accounts receivable because the payments from the owners to the Contractor would be reduced by the lien claims of the Suppliers.  Thus, the Suppliers’ liens were against the Contractor’s property and violated the automatic stay created by the Contractor’s bankruptcy.

            In addition, in coming to this conclusion, the Third Circuit distinguished New Jersey lien law from Pennsylvania lien law, where the lien of a supplier or subcontractor relates back to the date when work on the project first began. As a result of this, the Pennsylvania lien was considered to have been filed before the bankruptcy petition and therefore fell within an exception to the automatic stay. See In re Yobe Electric, Inc., 728 F.2d 207 (3rd. Cir. 1984).

            The author, Luke Nicholas Eaton, is an associate in the Los Angeles office of the Pepper Hamilton Construction Practice Group.