constructionattorneyblog

IDAHO SUPREME COURT ALLOWS ARCHITECT TO RECOVER DESPITE THE ABSENCE OF A WRITTEN CONTRACT, AND DESPITE THE LACK OF A LICENSE WHEN SOME OF THE SERVICES WERE PROVIDED

The Idaho Supreme Court, in a case decided earlier this year, Farrell v. Whiteman, 268 P.3d 458 (Idaho 2012), took up for the second time a dispute between two former friends.  The defendant, Whiteman, is an attorney who went into real estate development.  The plaintiff, Farrell, is an architect who, as of 2003, was licensed in several states, but not the location of the subject project:  Idaho.  Nevertheless, Farrell went to work on the project in 2003, at Whiteman's request.  Farrell eventually did obtain his Idaho architectural license in February 2004.  The parties failed to enter into a written contract, because they were never able to agree on the terms of the architect's compensation.

At the first trial, the district court held that there was an implied in fact contract between the parties, and allowed Farrell quantum meruit damages.  Whiteman appealed.  Pursuant to the opinion entered in that first appeal, Farrell v. Whiteman, 200 P.3d 1153 (Idaho 2009), the Idaho Supreme Court remanded and directed the lower court to "determine the quantum meruit recovery due for services rendered after Farrell received his Idaho license . . . and the unjust enrichment recovery due, if any, for services rendered prior to licensing."  Because the services provided before licensure were so provided by way of an illegal contract, reasoned the court, any damages could only come by way of an unjust enrichment measurement, not quantum meruit.

On remand, a second trial was held before the district court.  This time, the trial court allowed Farrell $130,000 for services provided after obtaining his license, as well as $13,408.58 in reimbursables for costs incurred prior to the issuance of the license, and also interest, attorneys' fees and court costs.

Whiteman again appealed, this time challenging the district court's damage calculation, pointing out that the amount awarded the second time was $9,000 more under quantum meruit than had been awarded the first time.  However, the Idaho Supreme Court upheld the district court's damages determination:  "it is appropriate to consider the quality of the work in order to adequately determine the value of the services rendered."

It should be noted that, while this architect was able to obtain a judgment despite not being licensed at the inception of the project in question, not all architects have been so lucky.  See, e.g., Kaplan v. Tabb, 657 N.E.2d 1065 (Ill. App. Ct. 1995).  The more prudent, safer course obviously would be for design professionals to make sure they are properly licensed in any jurisdiction where they are working, before even entering into a contract, let alone before undertaking any professional services.

FEDERAL APPEALS COURT HOLDS THAT PLAINTIFF MUST ARBITRATE WITH COMPANY WHICH ACQUIRED HIS ACCOUNT

In a case decided earlier this year, Gore v. Alltel Commc'ns, 666 F.3d 1027 (7th Cir. 2012), the Seventh Circuit overturned a lower court's ruling and granted the defendant's motion to compel arbitration.  The plaintiff, Gore, entered into a two-year contract in October 2005, with First Cellular for four wireless lines.  This agreement did not provide for arbitration.  In May 2006, First Cellular was acquired by Alltel.

Gore apparently lost service on some of his lines.  He was also offered the choice of terminating for $250 or, in the alternative, entering into a new contract which called for him to buy an Alltel-compatible phone and also pay $109 a month for service.  Gore first opted for the new contract, then brought a class action against both First Cellular and Alltel, raising multiple causes of action.  In November 2006, he had received an Alltel invoice stating that, by paying the bill, he would thereby be agreeing to the "customer service agreement" on the Alltel website.  That customer service agreement included an arbitration clause.

Alltel removed the case to federal court, and moved to compel arbitration.  The district court refused to compel arbitration.  Applying the state law of Illinois, the appellate court reversed.  Interestingly, it first concluded that the Alltel agreement did not incorporate the First Cellular one.  Instead, the case turned on the scope of the arbitration provision.  Here, the clause in question provided for arbitration of "any dispute arising out of this agreement or relating to the services and equipment."  The reviewing court then went on to carefully examine each claim and determined that all of them, including not only breach of contract, but also conspiracy, aiding and abetting, unjust enrichment and consumer fraud, were subject to arbitration under this very broad language.

Although this case had nothing to do with construction, it has strong implications for any construction-related contract which includes an arbitration clause.  AIA contracts, for example, are also very broadly worded when it comes to arbitration, e.g., claims, "disputes or other matters in question between the parties . . . arising out of or relating to this Agreement . . . shall be subject to and decided by arbitration . . . ."  Gore shows just how wide-ranging the interpretation and enforcement of the obligation to arbitrate can and likely will be, encompassing even statutory or tort causes, or claims for breach of separate and distinct contracts which, on their face, did not even call for arbitration.

Construction Contract's arbitration provision is separable, based on Rent-A-Center

The Eighth Circuit Court of Appeals has issued a decision involving a dispute between Mortenson, a contractor, and Saunders, the concrete subcontractor. Mortenson demanded arbitration and Saunders opposed. Mortenson won the issue.

The contract contained four paragraphs related to arbitration. Section 21.1 provided that if arbitration is provided for in the "Contract Documents," Mortenson "in its sole discretion" may demand arbitration of any dispute under the subcontract. The third paragraph,  §  21.3,  directed that if  the  "Contract Documents provide administrative procedures for resolution of disputes," the subcontractor will comply with those  procedures and refrain from "legal or other  proceedings"  against Mortenson until the administrative procedures have been exhausted.

Section 21.2, the second paragraph, is the significant one for this case.  It directed that "if Mortenson, in its sole discretion, elects to demand arbitration with Subcontractor," then "any dispute  arising between Mortenson and Subcontractor under the Agreement . . . shall be decided by arbitration in accordance with [the rules of the  American Arbitration  Association]" and proceedings "shall be held in Minneapolis,  Minnesota."  Section  21.2 applies where,  as in this case,  "the Contract Documents do not provide for arbitration."

The final paragraph, § 21.4,  governed situations where the subcontractor asserts claims against the owner or architect.  It provided that "Subcontractor agrees not to institute (and to stay) legal or other remedies against Mortenson until all legal proceedings against Owner with respect to such claim are final and complete." Further, the subcontractor's right of recovery arising from the owner or architect's conduct is limited to what is “recovered from Owner and Mortenson shall not be liable to Subcontractor for any monies or other relief except those paid to Mortenson by Owner for the benefit of Subcontractor."  Section 21.4 concludes, "Subcontractor. . . agrees to make no claim to further payment beyond the Subcontract Price arising out of the acts, errors, or omissions of Owner or Architect, . . . other than to the extent that Mortenson may receive funds from Owner on behalf of Subcontractor. . . ."

In its  arguments opposing Mortenson's  motion to compel arbitration, Saunders contended that § 21.4 of the subcontract contained a "pay-if-paid" provision which violated New York lien law, and that therefore the entire Disputes article was unenforceable.  It also argued that the arbitration agreement was unconscionable.

The trial court granted Mortenson's motion to compel arbitration, finding that it did not need to address whether Section 21.4 was in violation of New York law because § 21.2, the arbitration provision Mortenson sought to enforce,  was a  "separate  provision  containing  a  specific agreement to arbitrate," relying on the Supreme Court's decision in Rent-A-Center, West, Inc.  v. Jackson,  130 S. Ct. 2772,  2778 (2010). 

The appellate court upheld the lower court. Relying on Rent-A-Center, it found that each of the four sections of the Disputes article governs a separate and distinct type of dispute, and they are not parts of a unified arbitration provision. Thus, they are separable and can be read independently. If one provision is invalid or illegal, the other provisions can survive.

Finally, the court addressed the issue of whether the agreement was unconscionable. The fact that Saunders had no ability to negotiate the terms of the agreement was not sufficient to render it unconscionable under New York law. Also, the fact that Mortenson had the sole discretion to determine whether or not to arbitrate is also not unconscionable.

The appellate court affirmed the lower court's ruling ordering arbitration.  M.A. Mortenson Co. v. Saunders Concrete Co, Inc., 2012 U.S. App. LEXIS 8683 (8th Cir. April 30, 2012)

Florida court holds that statute of limitations does not apply to certain arbitrations

A Florida appellate court has affirmed a trial court ruling that Florida's statute of limitations does not apply to an arbitration where the arbitration provision does not expressly state that the statute of limitations applies.  The court based this, in part, on its determination that an arbitration was neither a "civil action" or a "proceeding" as those terms are used in the Florida statute of limitations.  Raymond James v. Phillips, 2011 Fla. App. LEXIS 18182 (Nov. 16, 2011).

The agreement between the parties, an investment services company and its clients, contained the following provisions:

(a)  No dispute, claim, or controversy shall be eligible for submission to arbitration under this Code where six (6) years have elapsed from the occurrence or event giving rise to the . . . claim. 

(b)  This Rule shall not extend applicable statutes of limitations; nor shall the six-year time limit . . . apply to any claim that is directed to arbitration by the court.  

It also provided the following:

(d)  Nothing in this agreement shall be deemed to limit or waive the application of any relevant state or federal statute of limitation, repose or other time bar.  Any claim made by either party to this agreement which is time barred for any reason shall not be eligible for arbitration.  The determination of whether any such claim was timely filed shall be by a court having jurisdiction, upon application by either party.

In this case, the investment services company had argued that the clients had filed the arbitration after the statute of limitations had expired.  The appellate court stated:

In sum, Raymond James did not expressly include the Florida statutes of limitations in the contract. Since the contract is construed against the drafter and since the language of the statute does not state that it applies to arbitration, we hold that Florida's statutes of limitations do not apply to arbitrations where the arbitration agreement does not expressly provide for their application. Thus, the trial court correctly determined that Florida's statutes of limitation do not bar the Account Holders' claims. 

The matter was certified to the Florida supreme court, where the matter is currently pending.

The American Institute of Architects' documents avoid this problem with specific language addressing statutes of limitations. For instance, here is the applicable clause from the 2007 version of A201 General Conditions:

§ 15.4.1.1 A demand for arbitration shall be made no earlier than concurrently with the filing of a request for mediation, but in no event shall it be made after the date when the institution of legal or equitable proceedings based on the Claim would be barred by the applicable statute of limitations. For statute of limitations purposes, receipt of a written demand for arbitration by the person or entity administering the arbitration shall constitute the institution of legal or equitable proceedings based on the Claim.

 

New York court holds that contractor installing cogeneration system not entitled to a mechanics lien

A New York court has held that a subcontractor who furnished labor and materials for a cogeneration system was not entitled to a mechanics lien.  The opinion can be read here.  Chapeau entered into a "Discount Energy Purchase Agreement" ("DEPA") with Macy's to provide discounted electrical power and thermal energy through a cogeneration system that Chapeau constructed, owned and operated. Trystate was hired by Chapeau as a subcontractor for the system on two buildings. Trystate claimed that there was an unpaid balance of some $250,000 for both buildings. 

Chapeau filed bankruptcy.  Later, Trystate commenced a mechanics lien action, seeking to be paid its claims.  The court dismissed, finding that the DEPA established that the parties did not intend to make the cogeneration system a "permanent improvement" within the meaning of the applicable act.  The building owner's only obligation was to pay for energy sertices and it did not contribute any funds for the construction work.

The problem for the subcontractor was that the owner was not paying for any improvements to its property, it was merely allowing another party to place its equipment there for a limited time.  Under the DEPA, the project was funded by Chapeau, who intended to recoup its investment through the payments for energy by the owner.  Chapeau also owned all of the equipment and was entitled to remove it after the DEPA terminated.  Although mechanics lien laws vary widely among the states, this outcome may well be followed elsewhere if the facts are similar.  This may particularly apply to "green" projects, such as cogeneration systems (such as here), solar panels, and the like.

Fiduciary Duty by Design Professionals?

The AIA Trust has published a white paper authored by Michael M. Edwards, an attorney with Byron & Edwards in San Diego, CA, providing an overview of cases alleging a breach of fiduciary duties by design professionals.  The complete document can be downloaded here.  Most of the cases involve architects, probably because architects have more contracts with owners, compared to engineers who often act as subcontractors to architects.  The author notes that an allegation of breach of fiduciary duty can act as a powerful sword in the arsenal of a plaintiff's attorney, even if there is no justification for such a charge.  This can influence the design professional's insurance carrier to settle at an early stage in the litigation, or sway a jury if the charge is not dismissed by the court before trial.

The white paper also urges architects and other design professionals to pay closer attention to their contracts and avoid giving warranties.  The standard of care expressed in the contract should also be a reasonable one, without giving an owner cause to believe that the designer can achieve miracles.  Owners tend to overreach in their contracts with design professionals, and such contracts must be reviewed by knowledgeable attorneys and the designer's insurance advisor.

In almost every case, an architect or other design professional is not a fidiciary. The legal landscape today, however, means that allegations of breach of fiduciary duty will find their way into complaints involving run-of-the-mill contract disputes. As the white paper points out, the best defense is provided at the contract stage.

EXTRAS POTENTIALLY RECOVERABLE IN QUANTUM MERUIT

The Fourth District Appellate Court of Illinois has issued an important opinion in the case of Stark Excavating v. Carter Constr., 2012 Ill. App. LEXIS 222 (4th Dist. 2012), dealing with the recovery of extras.  The plaintiff in that case was a subcontractor which sued for nonpayment for work, including extras.  The complaint included counts for breach of contract, but also quasi-contractual claims:  quantum meruit and unjust enrichment, respectively.  The trial court granted partial summary judgment to the defendant general contractor on the plaintiff's specific claim for extra work for winter protection of the premises.  The plaintiff subcontractor appealed; and the appellate court reversed and remanded.

The Fourth District first held that the plaintiff could recover for the extras if it could prove the elements which have long been considered necessary to such a claim, which elements were first set forth in the case of Watson Lumber Co. v. Guennewig, 226 N.E.2d 270 (5th Dist. 1967).  However, the court then went further.  It began by noting that, as "a general rule, given an express contract between the parties, there can be no quasi-contractual recovery."  Nevertheless, such relief could be available to the subcontractor, Stark Excavating, because, assuming "Carter [the general contractor] demanded the concrete work be done at a specific time and the winter protecton work, which was specifically excluded from the contract between Carter and Stark, was necessary to complete the concrete work in a workmanlike manner at that time, then Carter may have received a valuable benefit without paying for it."  This case holds out the possibility of obtaining damages for a party which provided additional work, but for whatever reason cannot succeed with a breach of contract cause. 

 

Non-Lawyers cannot represent corporation in Arkansas arbitration

The Arkansas Supreme Court has held that non-lawyers cannot represent a corporation in an arbitration proceeding in Arkansas, as that constitutes the practice of law. NISHA LLC v. Tribuilt Constr. Group, 2012 Ark. 130; 2012 Ark. LEXIS 157 (March 29, 2012). There was a construction dispute between the parties and the trial court ordered arbitration. When the contractor's attorney withdrew during the arbitration, the contractor's president wanted to represent the corporation. The other side opposed this and sought an injunction from the court. The trial court refused the injunction, finding that this was an issue for the arbitrator to decide, and the case wound up before Arkansas' highest court. 

The trial court was reversed, with the court ruling that it is up to the courts to regulate the practice of law. Representing a party, even if it is your own company, constitutes the practice of law, and only licensed attorneys can do that. Arkansas thus joins a handful of jurisdictions where corporations must have an attorney representing them in arbitration proceedings.

Federal Court dismisses sub's claim against GC because of arbitration provision. Liquidation Agreement did not supercede agreement to arbitrate.

A federal court in Missouri, in LaSalle Group v. Veterans Enterprise Technology, 2012 U.S. Dist. LEXIS 46151 (W.Dist. Mo., April 2, 2012), dismissed an action by a subcontractor against the general because there was an agreement to arbitrate in the subcontract.

The United States Army Corps of Engineers ("USACE") had hired Veterans Enterprise Technology Services ("VETS") to be the general contractor for a $19,100,000 dining hall at Fort Leonard Wood, Missouri. VETS, in turn, entered into a $15,566,000 subcontract with LaSalle to engage necessary trade subcontractors, materials and equipment suppliers, and laborers as necessary to complete work on the Project. The Subcontract incorporated the terms and conditions of the Prime Contract by reference. VETS also obtained a payment bond from Hanover.

During the course of their work on the Project, VETS and LaSalle incurred extra costs due to work and delays caused by the USACE. Because LaSalle was not in privity of contract with USACE, LaSalle needed VETS to sponsor its claim against them.  In order to do this, VETS and LaSalle entered into a liquidation agreement on December 15, 2010 ("the Liquidation  Agreement") relating to the Fort Leonard Wood Project and two additional projects between the parties. One purpose of the Liquidation Agreement was to prevent LaSalle and VETS from bringing claims against one another which might harm their collective position relative to USACE. As such, they agreed "cooperate with each other to complete the Projects and to prosecute all Claims made to [USACE]." Furthermore, in the Liquidation Agreement, the parties agreed to a mutual waiver and release of claims against the other.

The parties further agreed that as the parties recovered funds from USACE, they would divide those funds, with LaSalle receiving 69% and VETS receiving 31% of the net recovery up to $4.3 million. If the net recovery on the claims were to exceed $4.3 million, the percentages would change, with VETS receiving 65% and LaSalle receiving 35%. The Liquidation Agreement also provided that VETS would have the right to assist LaSalle in its negotiations with its subcontractors, that VETS' obligation to pay LaSalle was subject to the condition that VETS would not pay LaSalle until it was paid by USACE, and that the parties would consent in writing to any settlement.

LaSalle certified its costs on the Project to VETS, and VETS passed through LaSalle's portion of the claims to the USACE in an administrative process that began with the submission of a Request for Equitable Adjustment ("REA") and later became a certified claim for $3,580,472 ("the Initial Claim") under the Contract Disputes Act, 41 U.S.C. § 7101, et seq. Following VETS submission of the Initial Claim, VETS and LaSalle jointly negotiated with the U.S. government for payment and release of the Project funds remaining due them. However, the parties were unable to reach an agreement. VETS subsequently entered into a settlement agreement unilaterally with the USACE, presumably to satisfy LaSalle and VETS obligations under the Project contract. Under this agreement, the Government waived liquidated damages, agreed to release approximately $600,000 in retained funds, and agreed to pay VETS an additional $3,000,000 over and above its current contract with VETS. LaSalle claims VETS entered into this settlement agreement without LaSalle's authorization, and LaSalle rejected it.

LaSalle then brought suit against VETS and the surety, Hanover, for breach of contract and payment of bond liability under the Miller Act, seeking to recover the $6,336,285.82 LaSalle claims it is due on its contract, with payment to be made from the funds derived from VETS settlement agreement with the USACE. VETS moved to dismiss on the grounds that there was an arbitration agreement between the general and the sub. The subcontract incorporated the 2007 edition of the AIA general conditions A201. The parties did not dispute that there was a valid and binding arbitration agreement, but LaSalle argued that there was an unfulfilled condition precedent to arbitration, mediation.

The court held that it could not determine whether the demand for arbitration was premature because the arbitration agreement incorporated the American Arbitration Association with its Construction Industry Arbitration Rules ("CIAR") in effect on the date of the Agreement. Rule 9 of the CIAR states that the arbitrator "shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement." CIAR Rule 36 also gives the arbitrator the authority to "take whatever interim measures he or she deems necessary, including injunctive relief and measures for the protection or conservation of property and disposition of perishable goods." It is therefore for the arbitrator, not the court, to determine whether arbitration is now appropriate.

LaSalle also argued that the arbitration provision does not apply to the Liquidation Agreement, which did not contain an arbitration provision. The court was not persuaded by this argument. There is no evidence in the Liquidation Agreement that it was intended to supersede, rather than supplement, the Subcontract. In fact, the language of the Liquidation Agreement states that the agreement "shall be governed by the applicable laws as set forth in the Contract between the Parties." Thus, the fact that the Liquidation Agreement does not contain an arbitration provision is not determinative.

The court dismissed the action by LaSalle against VETS and stayed LaSalles's action against the surety, Hanover, pending the results of the arbitration.

Louisiana does not give res judicata effect to an unconfirmed arbitration award

In Greer v. Town Construction, No. 2011 CA 1360 (Ct. App. 1st. Cir., March 23, 2012), the Greers brought suit for damages arising out of an allegedly defective foundation in their home that had been built by Town Construction. Town had brought a motion to dismiss on the basis of res judicata due to a prior arbitration proceeding, and the trial court dismissed the case. The appellate court reversed.

The Greers and Town had engaged in a dispute concerning costs, change orders, workmanship and timeliness issues. In March 2006, Town filed a demand for arbitration for the unpaid contract balance. The Greers filed a counterclaim in the arbitration, asking for reimbursement, repairs and diminution in the value of their home due to alleged construction defects and pursuant to a state statute.

The arbitration took place in two phases, in November 2006 and March 2007. On April 30, 2007, the arbitrator issued an award giving Town the full contract balance, and also granting the Greers damages for reimrusement, repair or replacement for "Structural Claims (incl[uding] foundation)" damages. The arbitrator specifically denied all other claims and counterclaims made by the parties in both phases of the arbitration. Rather than seeking a modification in the district court, the Greers filed a request with the AAA arbitrator for modification of the assessment of costs and fees that had been rendered solely against them. The Greers did not, however, seek any modification or correction regarding the actual merits of the arbitration award. Neither party ever confirmed the award.

Three years after the arbitration award was issued, the Greers discovered additional cracks in the floors and walls of their home. They filed a lawsuit against Town in the district court on May 27, 2010. The Greers sought damages in the form of repair costs and diminution in the value of their home as a result of an alleged "defective foundation" in their home. Town moved to dismiss based on res judicata, maintaining that the Greers' case should be dismissed because the claims between the parties had already been litigated through an arbitration process. After a hearing, the district court sustained the motion and the Greers appealed.

In Louisiana, the doctrine of res judicata is codified in statute, which provides that a judgment bars relitigation of causes of action. According to the appellate court, this statute explicitly applies only when there is a "valid and final judgment" between the parties. Relying on a Louisiana Supreme Court case, Interdiction of Wright, 2010-1826 (La. 10/25/11),  75 So.3d 893, 897, the appellate court reversed. That case held that an unconfirmed arbitration award is not a "valid and final judgment," because it was not "rendered by the court" and as such, the unconfirmed award has no res judicata effect. 

Parties should consider whether an arbitration award should be confirmed. In many cases, after an award is received, the losing party pays and it appears that there is no need to go to the trouble of confirmation. However, as this case demonstrates, there are reasons for confirming the award in any case. Check with your state's view of the effect of an unconfirmed award on potential future litigation.