When a CM Issued Owner-Disputed Subcontractor Progress Payments, It Did so at Its Own Risk and Cannot Recover Costs Ohio Appeals Court Rules

In early 2004, Manley Architectural Group (MAG) entered into an architectural services agreement with Dr. Steven Santanello (Santanello) for a $1.6 million, 5,800 s.f. home complete with stable and riding area, sitework, pond, tennis court, and outdoor pool.  During contract formation, MAG also presented Santanello a cost savings option of utilizing it as a construction manager (CM) during construction. This would be done lieu of Santanello hiring a general contractor with Santanello holding all of the subcontracts. MAG’s CM services would include, “work[ing] directly for [Santanello] bidding out to the subcontractors and suppliers on your behalf and managing the entire construction process...Added benefits are we have more involvement in the details from start to finish, you have access to all of the subcontractor bids and we can make sure the construction is performed properly.” Santanello elected for the CM option presented by MAG.

During the course of construction, the barn project suffered water infiltration problems at the roof as well as water level retention issues at the pond project.  At that time Santanello stopped paying progress invoices submitted by MAG.  A number of years after construction was finished, MAG filed suit against Santanello for breach of contract to which Santanello filed a counterclaim for breach of contract based upon improperly supervising the construction of the pond and barn. 

A bench trial was held and the trial court found the CM agreement did not make MAG a guarantor of the subcontractor’s work on the roof and pond. Furthermore, it found Santanello was in privity with the subcontractors and ultimately remained responsible for performance and deficiencies in the work.  But, it also reasoned MAG had a responsibility to monitor the work and inform Santanello of any non-conforming work.  

The trial court ultimately found MAG was owed compensation by Santanello for: 1) payments it made to subcontractors on MAG’s behalf, 2) unpaid design fees, and 3) unpaid CM fees with total interest in the amount of $224,270.  The court then found MAG was in breach as to monitoring of the roof installation at the barn awarding Santanello the cost of a replacement roof with inflation in the amount of $160,000.  Each party cross-appealed with Santanello asserting error in the award of payments to subcontractors and MAG claiming error in the award of the cost of the roof (among other errors).

The Tenth Appellate District Court first analyzed the payments MAG issued to subcontractors in the amount of $55,577.  The Court pointed to MAG's statements that it paid the subcontractors to keep them engaged and working so the project could be completed. It "made the decision on its own to start to pay some of these people just to get them back to finish the work."  The Court found that MAG did not have the authority to issue payments on the behalf of Santanello because in the CM arraignment MAG suggested, Santanello was to act as the de facto general contractor and hold all the subcontracts.  The Court further pointed to the fact that liens had been attached to the property by subcontractors and thus there was a remedy for disputes between them and Santanello.  Ultimately the Court reduced the damages award to just the design and CM fees in the amount of $27,179.

The Court next reviewed MAG’s cross-assignment of error that it was liable for the $160,000 cost for the barn roof.  The Court examined the trial court’s definition that MAG’s CM services do not require it to be the ultimate guarantor of the work, but then the trial court ultimately required MAG to guarantee the roof work by imposing all liability for leaks on it.  The Court again pointed to the record and MAG’s efforts to identify and correct the defective work going so far as hiring additional roofing companies and making structural changes to the work.  The Court found these remedial actions satisfied MAG's CM responsibilities and since it was not responsible for the ultimate installation, it should not be held responsible for a new roof system. Accordingly the Court vacated the $160,000 damages award to Santanello.

Manley Architecture Group, L.L.C. v. Santanello

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The author, Brendan Carter, Esq., is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA. He is a monthly contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  

Divided Massachusetts Supreme Judicial Court Holds Statute of Repose Bars Alleged Unfair and Deceptive Acts Claims Against Contractor

The Supreme Judicial Court of Massachusetts in Bridgwood v. A.J. Wood Construction, Inc., 2018 WL 4100644 (Mass. 2018) held that statute of repose barred the homeowner's claims that the defendant contractor and subcontractor had committed unfair or deceptive acts (per Mass. Gen. Law c. 93A, s. 2) by failing to perform electrical work in compliance with statutory building and home improvement standards.

 

In 2001, the Newburyport, MA homeowner contracted for a renovation including the replacement of several ceiling light fixtures.  The defendants failed to obtain the proper permits to do so nor arranged for an inspection of the electrical wiring.  This electrical work was not performed to code, but the homeowner was unaware of the non-compliance until the concealed wiring caused a substantial fire in and damage in 2012.  The homeowner filed suit in 2016.

 

In Massachusetts, home improvement contractors are governed, in part, by Mass. Gen. Law c. 142A, s. 1 et seq.  Mass. Gen. Law c. 142A, s. 17 lists a number of prohibited acts including: "violation of the building laws of the commonwealth or of any political subdivision thereof."  Id. c. 142A, s. 17(10).  This law has some teeth because "[v]iolations of any of the provisions of this chapter shall constitute an unfair or deceptive act under the provisions of [Mass. Gen. Law c. 93A]," which carries penalties in addition to direct damages, including the potential for double and treble damages along with attorneys fees.  Here, the Bridgwood homeowner "claim[ed] that the defendants failed to perform the electrical work in compliance with those standards and, therefore, committed unfair or deceptive acts." Bridgwood, 2018 WL 4100644, at *2.

 

For their part defendants argued the homeowner's claim was barred by Massachusetts's 6-year statute of repose of tort claims set forth in Mass.  Gen. Law. c. 260, s. 2B.  The statute of repose is not tolled until the cause of action accrues.  Rather, in Massachusetts, the statutory trigger is substantial completion of the project or when the work is "open[] for use." Id.

 

The homeowner disputed the application of the statute of repose, instead arguing that only the 4-year statute of limitation under c. 93A, triggered "when the cause of action accrued," is the controlling timeline.  The homeowner emphasized that "because the relief available under G. L. c. 93A is 'sui generis,' neither wholly tortious nor wholly contractual in nature, the [tort-based] statute of repose does not apply." Bridgwood, 2018 WL 4100644, at *4. 

The Court disagreed explaining first that a "plaintiff to avoid the statute of repose by relabeling what is essentially a tort claim as a claim under [ ] c. 93A" and instead courts must look at the "gist of the action" to determine whether tort or contract based.  Bridgwood, 2018 WL 4100644, at *4.  Here because the homeowner's "claim is essentially that the defendants failed to perform the electrical work in compliance with the standards set forth in [a state statute and building code], [i]t is indistinguishable from a claim of negligence. Therefore, it sounds in tort and, having been commenced well beyond the six-year deadline, is barred by [the statute of repose]." Id.

The Chief Justice filed a dissent  joined by two other justices that rejected the majority's analyses of c. 93A caselaw and disputed that the legislature intended (or even contemplated) that the prior-enacted statute of repose would control the later-enacted consumer protection statutes.

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Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island.