Best Practices Construction Law : Construction Lawyer & Attorney : Matthew DeVries : Smith Cashion & Orr Law Firm : Green Building & LEED Litigation

Is it too late to discuss a case from 2009?  Nah.  Especially if the court released the opinion within the past two months.  And according to the decision in Shelby County v. Crews (pdf), there are times when it may be too late to withdraw a condemnation petition. That line in the sand appears to be the date after the public entity takes legal possession.

In Shelby County, the Court of Appeals of Tennessee recently held that the County was precluded from backing out of condemnation proceedings too late in the game. The County had possession of a small strip of land owned by the Crews. The County used the land as a parking area for a nearby penal farm and had gone as far as to pave the property. In the summer of 2004, the County filed a Petition for Condemnation of the strip of land pursuant to the condemnation statutes. The County offered approximately $40,000 as to the amount of compensation for the family land owners. The family did not contest the County’s right to acquire the property, but disputed the amount of compensation it should receive for the land. Thereafter, the trial court entered a Consent Order that granted “all property rights and ownership in fee simple” in the property to the County. The trial court scheduled a trial on the issue of compensation for a later date.

One week prior to the scheduled trial date, the County filed a Notice of Non-Suit, which is a document that gives notice of a voluntary dismissal of the condemnation proceedings.  The Crews filed an objection to the non-suit order, arguing that the County was not entitled to dismiss the case because it took possession of the property. The issue before the court was whether the County was entitled to voluntarily dismiss the condemnation after it took possession of the property.

In a short five-page opinion, the court held that the County was precluded from voluntarily dismissing the condemnation proceedings after it had acquired ownership and legal right to possession, leaving only the issue of compensation to be decided.

While this issue may seem like a no-brainer to you, the case is important because it establishes a limitation on a public entity's power to condemn property.  The public entity can no longer take possession of the property and later "back out" of the deal if compensation looks to fall in favor of the private owner.

Photo: Flickr | ToniVC

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Every construction litigator in the residential arena knows that a state's consumer protection laws are good grounds for disputes.  Will my client get treble damages?  Will they recover attorney fees for deceptive trade practices?  Does my client have any defenses to these types of claims?

In Fayne v. Vincent (pdf), the Supreme Court of Tennessee held that the Consumer Protection Act applied to real estate professionals engaged in the sale of their personal residence. The case involved problems with a septic tank that were discovered after sale of the residence to the purchasers.  Mr. Vincent was a builder and developer and his wife was a realtor. Mr. Vincent was the developer of the neighborshood and he constructed the home in question, moving into the house after it was completed. Mrs. Vincent signed the Tennessee Residential Property Condition Disclosure Statement in her dual capacity as owner of the property and as realtor for the property.

After the purchasers moved into the home, they began to notice odorous fluid seeping from around the septic tank. After investigation, the purchasers filed suit against the builder and the realtor for various claims including negligent misrepresentation, fraud, deceit, and violation of the Tennessee Consumer Protection Act.

Following a two-day jury trial in the trial court, an appeal to the Court of Appeals, a remand back to the trial court, and a subsequent appeal, the Supreme Court held that the sale of the home was covered by the Tennessee Consumer Protection Act (TCPA). Specifically, the Court recognized that the TCPA does not apply to sellers who are “not in the business of selling property as owners or brokers” and therefore that “persons making an isolated sale of their home [is] not covered.” The Court reasoned:

We adhere to the holding ... that homeowners participating in the casual and isolated sale of their personal residence and not in the conduct of trade or commerce cannot be sued for damages under the TCPA. This principle applies to developers, contractors and realtors who are selling their personal residence in a casual or isolated sale and who are not performing or providing professional services to facilitate or finalize the sale. However, we have also concluded that developers, contractors, and realtors cannot insulate themselves from liability under the TCPA simply by owning and briefly residing in a house before they offer it for sale as their personal residence.

Accordingly, the Supreme Court held that the TCPA applied to the facts of this case.

The Fayne case is a good reminder to developers, contractors, and realtors, as well as to purchasers of residential property, to know and understand the full breadth of your state’s consumer protection laws.  Imagine the case of where verbal abuse by the builder against a purchasing couple gives rise to a claim for intentional infliction of emotional distress and consumer protection act violations.  It happens.

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As reported by the Tennessee Bar Association, the 2010 Tennessee State High School Mock Trial Competition got underway yesterday with the release and publication of the mock problem. The case involves a dispute over the design and construction of a 400,000 square foot distribution center featuring a concrete slab-on-grade floor. The primary issue in dispute is whether the work performed by the contractor constituted a breach of contract or professional negligence. A copy of the problem may be downloaded on the TBA’s website.

The case materials for this year's problem were developed in large part by the Tennessee Association of Construction Counsel, which is an association of about 100 attorneys from across the state with practices serving contractors, building material and equipment suppliers, architects, engineers, and building owners and developers.

Marisa Lee Combs, the Chair of the Tennessee State Mock Trial Committee and a construction attorney at Lewis King in Nashville, is a product of the mock trial competition. In response to an inquiry, Marisa said, " If not for that experience, I am not sure I would have chosen a career in the law. Other classmates of mine were interested in drama, so they loved playing witness roles. To me, it is a great way to show the students how complicated and fun the law can be."  

To me, it is exciting to see a future generation of thinkers, problem solvers and litigators at such an early age in their education. I am also excited to see that this year’s problem focuses on a construction dispute that will provide for some very interesting trial arguments. (Since I am a construction lawyer who regularly litigates these types of disputes, I will refrain from providing any more commentary on this issue.)

Kudos to the Tennessee Bar Association and the Tennessee State High School Mock Competition for their extraordinary efforts in creating and supporting this great program. And a hearty good luck to all the young participants!

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I love seeing a case zig zag through the appellate process ... and I especially enjoy reading one where intermediate appellate court reverses the trial court and the highest court then reverses that intermediate appellate court.  I know, I'm sick.

In a decision released yesterday, Goff v. Elmo Greer & Sons Construction Company, the Supreme Court of Tennessee reversed the Court of Appeals and reinstated the trial court's decision approving an award of punitive damages in a construction case.  The owners of the property filed suit against the general contractor on a highway widening project.  The owners contracted with the general contractor to use their adjacent land as a lay down area in exchange for compensation.  When the contractor failed to pay the full contracted amount, the owners sued.

Following a trial, the jury found in favor of the land owner and awarded: (a) about $5,300 for the unpaid contract balance; (b) about $9,500 for damages resulting from blasting activities; and (c) about $3,300 for burying debris on the property.  The jury also returned a verdict of $2 million in punitive damages, which the trial court reduced to $1 million.

The Court of Appeals affirmed the trial court's judgment as to liability, but reversed the award of punitive damages based upon a finding that the trial court improperly considered Tennessee's environmental laws in approving the award.  The Supreme Court of Tennessee reversed, holding that the trial court properly considered Tennessee's environmental statutes in approving the award.

The Goff decision has a number of construction nuggets to analyze.  One of the more significant aspects of the opinion is the jury's award of punitive damages based upon various environmental laws without any finding of a violation of those laws.   The intermediate appellate court determined that because the jury found that the contractor had not committed an environmental tort, the trial court should not have relied on the environmental statutes and policies in affirming the award of punitive damages.  The Supreme Court disagreed:

The evidence supporting the nuisance claim was the proof regarding buried whole waste tires.  In order to determine the reprehensibility of burying whole waste tires, the trial court considered the State's policy regarding such action. To this end, the trial court correctly noted that the State has enacted legislation against burying whole waste tires, recited the public policy behind that legislation, acknowledged that [the contractor] was aware of the State’s policy against burying waste tires, and
observed that high civil penalties are permissible for burying waste tires. In our  view, the fact that the legislature has determined it necessary to prevent the improper burial of tires “to protect the public health, safety and welfare” is important in the discussion of the reprehensibility of [the contractor's] actions.

Interestingly, the Supreme Court did not decide whether a private right of action existed for a claimed violation of the state's environmental statutes because the jury did not find the existence of any "environmental tort" and neither of the parties raised the issue on appeal.

For the contractors out there, Goff is a good reminder of the total exposure (including significant punitive damages) for violation of state waste disposal and environmental laws.  For the legal practitioner, Goff instructs that a statute may be used to define the public policy for proving punitive damages even when there is no violation of the actual statute.

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What is the scope of coverage under a commercial general liability (CGL) insurance policy on a construction project?  As most attorneys will tell you, "It depends."  It truly depends on the express terms or language of the policy, the cause of the damage, and notably the jurisdiction of the dispute.

The Mississippi Supreme Court heard oral arguments on October 5, 2009 in the case of Architex Association Inc. v. Scottsdale Insurance Co. to determine what exactly is covered under the terms of a CGL policy.  The general contractor (Architex) filed suit against its insurance carrier after the owner the project sought damages from the general contractor for alleged defective work.  The insurer claimed that the defective work was performed by a subcontractor, which was not covered by the CGL policy.  The general contractor contended that any negligent work of the subcontractor should be covered under the "your work" provisions of the policy.  

The trial court held that damages were not caused by an occurrence or accident since the work being performed by the subcontractor was an "intentional act."  The oral arguments on appeal can be found at the Mississippi Appellate Court Video Archive. (The appellate court has some great questions between 1:50pm-1:55pm and 2:01pm). 

In a prepared statement published in the Mobile Bay Business Journal, Architex's counsel, Dorsey Carson, indicated that a finding for the insurance carrier would render a contractor's CGL policy practically useless:

"It would exclude coverage for any damages if the act that caused the damage is in any way related to the act of construction. It is a matter of whether the insurer is going to cover its insured for acts that it received premiums for, and for a policy that it marketed to contractors expressly for this type of damage.”

A decision from the Mississippi Supreme Court is expected by the end of the year.  Many in the construction industry are watching this case as it will have a significant impact on insurance coverage disputes:

• “The insurance industry made a very conscious decision to provide this coverage and charge these premiums. We are asking the insurance industry to stand behind the language of the policy it has today.” Mike Kennedy, general counsel for Associated General Contractors of America.
• "The premise has always been that if the work of your subcontractors is negligently performed and causes damage, it's covered." Chris Solop, Mississippi Associated General Contractors.

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Released in 1968, the lyrics from Steppenwolf's psychedelic rock song blare out: "I like to dream, right between my sound machine..."  Yep, you remember ... the Magic Carpet Ride!

The Maryland Court of Appeals recently decided a construction case based upon a set of pre-contract discussions that Judge Harrell described as a "complicated series of events from which this appellate 'magic carpet ride' springs..."  In Questar Builders v. CB Flooring, the court upheld the duty to act in good faith and deal fairly in construction contracts. The appellate court reversed and remanded the trial court's decision for a determination of whether the contractor (Questar) acted in bad faith when it terminated for convenience the flooring subcontractor (CB Flooring).

Questar received bids from three subcontractors to install the "magic carpet" in the luxury midrise apartment and townhome complex.  CB Flooring submitted a bid for $1.12 million and CTI submitted a bid for $1.24 million.  Interestingly, the third subcontractor's bid was so low that it left Questar with the impression that the subcontractor misunderstood the scope of the project.    (...I wonder if all the low estimates being submitted on public contracts these days fall into this category? Certainly not! ... Sarcasm ... )

Ultimately, disputes arose between Questar and CB Flooring about design changes in the selection of the carpet and the resulting increases in the cost of work.  Questar reportedly used CB Flooring's original bid to obtain CTI's agreement to perform the same work for $1,000 less than the original winning bid.  Meanwhile, Questar terminated CB Flooring, alleging breach of contract, as well as a contractual right to terminate for convenience.

The trial court held that CB Flooring did not breach the subcontract agreement with Questar.  The court also rejected Questar's claim that it had a right to terminate for any reason.  Based upon the evidence presented, the judge found that the subcontract was improperly terminated.

On appeal, the appellate court held that the termination for convenience clause "may" be enforceable, but that the trial court failed to determine whether the termination was made in good faith and in accordance with fair dealing.  Therefore, the case was remanded to the trial court for a determination of that issue.

The opinion is a long read (...50 pages...), but sheds some light on the limitations inherent in a contractual right to terminate:

"Questar's contention that it was entitled to terminate the Subcontract for any reason whatsoever goes too far and is inconsistent with the terms of the Subcontract. To be sure, a right to terminate in the absence of the other party's breach does not equate necessarily with the right to terminate based on a whim. We shall not read into the Subcontract such unfettered power."

This point was highlighed by the American Subcontractors Association, which filed an amicus brief in the appellate proceedings.  In its brief, ASA argued that an exception to the scope of the good faith and fair dealing covenant would "not only poison business relationships and eliminate business certainty, but also does great damage to the ability of subcontractors to rely on their signed contracts as a reliable indicator of future work and expected revenues" and would otherwise make subcontracts "illusory and meaningless."

This case provides a good warning to contractors: Beware of subcontractor shopping after you have already entered an agreement with another party.  While you may have the contractural right to terminate for cause, do not make a decision in haste without adequate basis for the termination.  These magic carpet ride cases often involve hotly disputed facts leading up to the termination and you may find yourself defending a lawsuit.

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You don’t always say what you mean. And you don’t always mean what you say. 

In construction contracts, parties attempt to use plain and ordinary words to describe their respective obligations. For example, when the parties use the word “shall” in their agreement, they generally understand that the obligation specified is mandatory. Or when parties use the word “may” in their contract, performance is permissive or optional given the plain meaning of the word. Consider the following construction contract provisions:

“If the Owner fails to make payment for a period of 30 days, the Contractor may, after seven days written notice, terminate the Contract and recover from the Owner payment for Work performed.”

“The Work may be suspended by the Owner as provided in Article 14 of the General Conditions.”

“Payments may be withheld on account of (1) defective Work not remedied, (2) claims filed by third parties, or (3) failure to carry out the Work in accordance with the Contract Documents.”

In all of theses examples, it seems clear that the parties agreed to allow—but not require—the specified performance. The word “may” was permissive in nature.

According to some courts, however, this traditional line of reasoning is no longer the trend in the context of arbitration provision in construction contracts. For example, in TM Delmarva Power v. NCP of Virginia, the Supreme Court of Virginia held that the parties’ use of the word “may” in the dispute resolution provisions of their construction contract required mandatory participation in arbitration at the election of one of the parties. The arbitration agreement provided:

“If any material dispute, disagreement or controversy concerning this Agreement is not settled in accordance with the procedures set for in [previous section] . . . then either Party may commence arbitration hereunder by delivering to the other Party a notice of arbitration.”

The court held that the above provision was mandatory at the election of one of the parties: “The word ‘may’ . . . means that either party may invoke the dispute resolution procedures, but neither party is compelled to invoke the procedures. . . . [But] once a party invokes the arbitration provision, the other party is bound to arbitrate.”  The Delmarva court reasoned that the disputes provision would be “rendered meaningless” if the word "may" was interpreted as permissive because parties to a commercial contract can always choose to submit their disputes to arbitration.  The Fourth Circuit reached the same dcision in United States v. Bankers Ins. Co.

Given the trend that the courts have interpreted the term “may” as “shall” in the context of arbitration agreements, parties to a construction contract must be careful in understanding both the plain, ordinary meaning and the legal meaning of the particular words used. In the above examples, if the parties wanted arbitration of disputes to be permissive and non-mandatory, they could have clarified their contract by including more explicit language (i.e., "any and all disputes, upon mutual agreement, may be arbitrated" or "with the consent of the other party, either party may commence arbitration").  It is important in contract drafting that you say what you mean and you mean what you say.

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As I was driving to work, a super-hero-like voice interrupted my morning news program on the radio: "Green Power Switch is coming to a neighborhood near you!  Green Power Switch will allow you, the consumer, to choose to purchase “green” energy from the companies that sell the power that TVA generates."

That’s right! The Tennessee Valley Authority and local power companies are banding together to offer their customers various alternatives of renewable energy (i.e., solar, bio fuels and wind).

Self, I ask, what’s the big deal with that? The big deal is that the speeches and PowerPoint presentations we’ve heard on renewable energy legislation and its effects on the construction industry are becoming a reality.  

Just a few weeks ago, the Green Ribbon Committee on Environmental Sustainability issued its recommendations to Nashville Mayor Karl Dean, including the following: 

• "Implement program at NES to switch from petroleum oil to a soybean-based oil for transformers used city wide."
• "Develop a Metro Green Fleet program to expand the use of electric vehicles, hybrids and bio-diesel to help diversify energy supplies, decrease emissions and support regional economic activity."
• Adopt an Advanced Metering Infrastructure (AMI) system for NES residential customers that would enable them to manage their energy consumption and conservation efforts.

From government initiative ... to legislative enactment  ... to industry standard ... to consumer incentive ... renewable energy will have a dramatic effect on the construction industry as a whole. Already, we are seeing green-related ordinances that affect the day-to-day business operations of your hard-hat construction contractors, laborers and suppliers.  Take, for example, the green cement ordinance in Dallas, Texas that requires use of cement from "dry kilns" versus "wet kilns."  That's good news if you operate a dry kiln ... not so good news if you operate a wet kiln.  In other instances, the issue is finding its way into the court system like City of Albuquerque v. AHRI, which blocked enforcement of various state energy conservation codes in New Mexico on preemption grounds. The plaintiffs were a group of HVAC and water heating equipment trade organizations, contractors and distributors.  (Steve Del Percio discusses the City of Albuquerque v. AHRI case on www.greenbuildingsNYC.com.)  

These are just a few examples of the 411 (... information ...) that you can find here at Best Practices Construction Law.  Check back soon for an overview of other green-related legislation affecting the construction industry.

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