Contractor’s Lawsuit Against Architect for Tortious Interference Allowed to Proceed

A U.S. District Court Judge for the District of Massachusetts has allowed a lawsuit to proceed brought by a contractor against an architect, alleging the architect falsely certified grounds for termination to the project owner. In a November 18, 2015 written decision in the matter of Barr, Inc. v. Studio One, Inc., C.A. No. 3:15-40056, the Court denied the architect’s motion to dismiss the contractor’s claims against it sounding in tortious interference with contractual relations and tortious interference with advantageous relations. The Court determined that in both instances, the contractor must demonstrate that the architect acted with an “improper motive or means.” The lawsuit alleged that the architect certified to the project owner that the contractor breached its contract with the project owner by “repeatedly refusing or failing to supply enough properly skilled workers or other materials.” Per the terms of the contract with the contractor and owner, this was a specific ground for termination. In the lawsuit, the contractor alleged the architect knew this was not true, and project correspondence and meeting minutes established the project delays were not the fault of the contractor. The contractor also asserted that the architect caused the owner to terminate the contractor for the architect’s own financial gain and to secure benefits with respect to compensation for post-termination services that would otherwise not have been available.

In seeking to dismiss the lawsuit, the architect argued that the contractor did not allege it acted with “actual malice,” which is more stringent than the “improper motive” which was alleged. In rejecting this argument, the Court held that intentional interference torts – such as tortious interference with contractual relations and tortious interference with advantageous relations – do not require a showing of actual malice. The contractor’s allegations in the Complaint, including that that the architect knowingly certified false reasons to induce the owner to terminate its contract with the contractor, met the elements of the intentional interference torts alleged and were sufficient to survive a motion to dismiss.

Under the standard AIA contract used here, the owner could not terminate the contractor for cause without the architect’s certification of the grounds for termination. The Court’s ruling confirms that the contractor’s Complaint sufficiently alleged that the architect was not carrying out its contractual duties objectively and in good faith. Despite being hired by the owner, the architect still has a contractual duty to interpret and decide matters concerning performance under the contract in good faith, and without partiality to either the owner or the contractor, which the contractor alleged it failed to do.

Principal May Not Be Held Liable Under “Joint Action” Theory for Breach of Contract By Company, But May Have Individual Liability for Unfair or Deceptive Trade Practices

The Connecticut Supreme Court recently issued an opinion in Joseph General Contracting, Inc. v. Couto, (SC 19209) that preserved the limited liability of a principal for breach of contract claims against the company, but opened the door to individual liability for principals for unfair or deceptive trade practice act violations. The Connecticut Supreme Court reversed the trial court and first level appellate court decisions finding that the principal of a company could be held liable for breach of contract under a “joint action” theory with his companies. In a somewhat unprecedented action, the Connecticut Supreme Court rejected the factual findings of the trial court and concluded that there was no “blurring” of the distinction between corporate and personal liability for the original construction contract. It held that the trial court (and appellate court) improperly looked to other agreements to draw such a conclusion. Finding that the subsequent agreements between the principals and plaintiffs clearly distinguished between the principal’s personal obligations and the construction contract with the principal’s company, the court found no basis for imposing personal liability for breach of the construction contract.

On the other hand, the Connecticut Supreme Court found that the principal could be held personally liable under Connecticut’s version of the unfair trade practices act. The court adopted the test employed by federal courts in construing the Federal Trade Commission Act that an individual may be held liable for an entity’s violation of the unfair trade practices act if the individual “either participated directly in the entity’s deceptive or unfair acts or practices, or that he or she had the authority to control them.” It then concluded that “[a]n individual’s status as controlling shareholder or officer in a closely held corporation creates a presumption of the ability to control.” Since the principal in Joseph General was the sole shareholder exercising control over the company, the court concluded that he could be held personally liable.

New American Arbitration Association Construction Industry Arbitration Rules in Effect July 1

The American Arbitration Association has issued revised Construction Industry Rules and Mediation Procedures, which are intended to provide “a more streamlined, cost-effective and tightly managed process.”  Some of the most significant amendments include:

• A mediation step for all cases with claims of $100,000 or more (with both parties having the ability to opt out).
• Consolidation and joinder time frames and filing requirements to streamline these increasingly involved issues in construction arbitrations.
• New preliminary hearing rules to provide more structure and organization to get the arbitration process on the right track from the beginning.  
• Information exchange measures to give arbitrators a greater degree of control to limit the exchange of information, including electronic documents.
• Availability of emergency measures of protection in contracts that have been entered into on or after July 1, 2015.
• Enforcement power of the arbitrator to issue orders to parties that refuse to comply with the Rules or the arbitrator’s orders.
• Permissibility of dispositive motions to dispose of all or part of a claim or to narrow the issue in a claim.
  

 

To download a copy of the revised Rules, click here.  Preti attorney Ken Rubinstein is a member of the American Arbitration Association’s Panel of Construction Industry Arbitrators, and is available to provide additional information regarding the implications of the revised rules.  If you have any questions, please contact Ken at 603-410-1568 or 617-226-3868.

NH Supreme Court Limits Applicability of Consumer Protection Act to Construction Defect Cases

The New Hampshire Supreme Court confirmed in Murray v. McNamara, No. 2013-630 (N.H. March 20, 2015) that contractors are exempt from liability under New Hampshire’s Consumer Protection Act (RSA 358-A) for transactions occurring more than three years prior to the plaintiff learning of the alleged violation of the statute (though they may still have liability under other causes of action).  This issue arose in the context of a construct defect claim based on defendants’ purported breach of the implied warranty of workmanlike quality.  The defendants, owners of a construction business, constructed the house for the original owner in 2004.  Four years later, the plaintiffs purchased the home. After living in the house for several months, the plaintiffs discovered mold in in the house that was so widespread it forced them to vacate the property while they attempted to remedy the problem. 

The Defendants argued that the transaction was exempt from liability under the CPA because it was brought more than three years after construction was completed.  RSA 358-A:3, IV-a provides that “[t]ransactions entered into more than 3 years prior to the time the plaintiff knew, or reasonably should have known, of the conduct alleged to be in violation of [the CPA]” are exempt from the CPA.”  The federal courts in New Hampshire had interpreted this provision as being different from a statute of limitation because it “focuses on the plaintiff’s knowledge of the defendant’s wrongful conduct” to determine whether a transaction is exempt from the CPA rather than “the plaintiff’s knowledge of his injury and its [causal] relationship to the defendants’ conduct.”  The NH Supreme Court had not yet considered the issue since the provision was amended in 1996, but concluded in Murray that it agreed with the federal court’s interpretation finding that

To determine whether a claim is exempt from the CPA, we look back from the time that the plaintiffs “knew or reasonably should have known” of the alleged violation. If the transaction at issue occurred more than three years before that time, then it is exempt. The person claiming the exemption bears the burden of proving that the transaction is exempt. See RSA 358-A:3, V (2009).

The Court found there was no dispute that the transaction at issue - defendants’ alleged construction of the house with latent structural defects -  was completed in 2004 and that plaintiffs purchased the home four years later.  Because the allegedly wrongful transaction occurred more than three years before the plaintiffs “knew or reasonably should have known” of it, the construction of the house was an exempt transaction pursuant to RSA 358-A:3, IV-a.  The Court therefore reversed the trial court’s ruling on the CPA  claim, but left in place the jury award on the warranty claim against the contractor.

 

CPA claims are regularly included in complaints by plaintiffs against contractors because they provide an opportunity to recover attorneys’ fees and double or treble damages.  This decision should help limit the potential exposure of contractors for past construction defect claims by removing the plaintiffs’ ability to recover damages under the CPA for projects completed more than three years before the plaintiff knew of the conduct giving rise to the claim.  Contractors, however, will continue to have potential exposure to liability under other causes of action such as breach of warranty or breach of contract.

Equitable Adjustment Not Available to Remedy “Wholly Artificial” Bids

The Massachusetts Appeals Court has declined to award an equitable adjustment to a contractor who bid $0.01 to excavate a cubic yard of rock from a project site. See Celco Construction Corp. v. Town of Avon, 87 Mass. App. Ct. 132 (March 2, 2014).  The contractor constructed its bid based on its belief that the amount of rock on the site would be considerably less than the unverified estimate indicated in the contract bid documents, so that its low unit price would give it a competitive advantage when compared to the other bidders who assigned a unit price to rock removal that more closely approximated the actual cost.  When the amount of rock turned out to be 2524 cubic yards, and not 1000 cubic yards, as estimated, the contractor sought an equitable adjustment.  Initially, the contractor sought to increase the contract from $0.01 per cubic yard to $220 per cubic yard, and eventually dropped the request to $190 per cubic yard.

Massachusetts General Laws, c. 30, § 39N, which governs equitable adjustments in public construction contracts, provides that in all public construction contracts (such as the one at issue here), there must be a provision allowing either party to request an equitable adjustment in the contract price “if, during the progress of the work, the contractor or the awarding authority discovers that the actual subsurface or latent physical conditions encountered at the site differ substantially or materially from those shown on the plans or indicated in the contract documents.”  The contractor argued that the approximately 1500 more cubic yards of rock presented an appropriate occasion for an equitable adjustment to compensate it for the increased costs it incurred to remove the additional rock.

The Court disagreed, noting that there was nothing to suggest that the nature of the rock itself, and the means to remove it, differ in any way from what was anticipated in the contract.  The Court decided that in a contract in which the contract price is comprised of the aggregate of line items for various elements of the work, which in turn are based on unit prices for the quantities involved in each line item, no equitable adjustment is warranted by reason of a variation in the estimated quantities, standing alone, as compared to a deviation in the condition or character of the physical condition.  The Court confirmed that an equitable adjustment is required only when the contractor encounters a material difference in the “actual subsurface or latent physical conditions . . . at the site . . . of such a nature as to cause an increase or decrease in the cost . . . of the work.” 

The Court included in its opinion advice for all contractors in bidding on public construction jobs (and on all jobs in general): “Had [the contractor] in its bid assigned to rock removal a unit price reasonably approximating its estimated cost for such removal, instead of assigning the wholly artificial and unrealistic value of one penny, it would be in no need of adjustment to the contract price.  Put another way, [the equitable adjustment statute] is designed to protect contractors from unknown and unforeseen subsurface conditions, not from the consequences of their decisions to bid a unit price for the performance of work that is wholly unrelated to their anticipated cost to perform the work.  In such circumstances, it defies logic to invoke ‘equity’ as a basis for adjustment to the contract price.”

An Alternative to Bid Protests – California Court Allows Second Low Bidder to Sue Low Bidder Directly

In Roy Allan Slurry Seal, et al. v American Asphalt South, Inc. (2/20/2015), the court held that if a low bidder is only able to secure the bid by paying its workers less than the required prevailing wage, then second low bidder is entitled to bring a direct law suit against the low bidder.

The broader facts are as follows.  From 2009 to 2012, American Asphalt outbid Roy Allan Slurry Seal and Doug Martin Contractor on 23 public works projects valued at more than $14.6 million.  The disappointed contractors, Allan and Martin, later jointly sued American Asphalt, contending that they would have been the low bidders on those projects if American Asphalt’s bid had included labor costs based on the statutorily required prevailing wage.  American moved to dismiss the claims, arguing that that Allan and Martin did not have the required existing relationship and reasonable probability of being awarded the contracts to show intentional interference with prospective economic advantage.  After various conflicting lower court rulings on the issue, the matter was eventually presented to the California Court of Appeals, which denied the motions, stating:

The second-place bidder on a public works contract [may] state a cause of action for intentional interference with prospective economic advantage against the winning bidder if the winner was only able to obtain lowest bidder status by illegally paying its workers less than the prevailing wage... if the plaintiff alleges it was the second lowest bidder and therefore would have otherwise been awarded the contract, because that fact gives rise to a relationship with the public agency that made plaintiff’s award of the contract reasonably probable. 

 

The usual course of action in a case such as this would be for the second low bidder to file a bid-protest with the awarding authority, or to challenge any subsequent bid based upon such conduct.  However, this carries strong implications as the same principle could allow a second low bidder to sue the low bidder directly any time that it can show that that a low bidder knowingly used cut corners to secure the bid.  For example, contractors who commit wage-hour violations may be subject to challenge from the second low bidder, contending that they carried a lower labor number than appropriate in their bid.  If the second low bidder can show that the difference allowed the winning contractor to secure the bid, the contractor may be subject to significant liabilities.

Architect to Serve Jail Time Over Design and Construction Defects That Killed Los Angeles Firefighter

An architect recently pleaded no contest to an involuntary manslaughter charge stemming from the ceiling collapse at a luxury home that the architect designed and built. The architect was sentenced to three years of probation and one year in county jail. For more information regarding this story, see the recent ENR story, "Architect Will Serve Jail Term Over Blaze that Killed L.A. Firefighter."

While most construction professionals strive to meet their obligations based upon pride and professionalism, there are risks on any project that can go beyond those that can be insured.

Preti Flaherty attorney Kenneth E. Rubinstein has written on the topic in the Constructor Magazine and has spoken on the topic at the American Council of Engineering Companies 2012 Annual Conference. For further information, Ken can be reached at (617) 226-3868 or (603) 410-1568 or by email at krubinstein@preti.com.