Best Practices Construction Law : Construction Lawyer & Attorney : Matthew DeVries : Stites & Harbison Law Firm : Green Building & LEED Litigation

Where is the best place to start when you have been away from work for a family emergency? Naturally, you go back to the basics.  In my next few posts, I review some of the "basic building block" or "essential" construction cases every contractor should know.  The first two are Spearin and Luria Bros.

U.S. v. Spearin, 248 U.S. 132 (1918) is perhaps the most important construction case to understand.  Spearin established the well-known rule that the government/owner impliedly warrants the adequacy of its design. The United States Supreme Court held that detailed specifications describing the work "imported a warranty that if the specifications were followed, the sewer would be adequate. This implied warranty is not overcome by general disclaimer clauses requiring the contractor to examine the site, check the plans and specifications and assume responsibility for the work until completed." The rule, which has come to be known as the Spearin Doctrine, has, for years, allowed contractors to recover the costs incurred as a result of defective design specifications provided by the government. The Spearin Doctrine has been adopted by most states.

In Luria Bros. v. U.S., 369 F.2d 701 (Ct. Cl. 1966), the Court of Claims further expanded upon the Spearin Doctrine to make clear that the government must timely correct its defective design. The court found that the original specifications were defective.  When defective specifications delay the work, the court reasoned, the contractor is entitled to recover damages. In Luria Bros., the government was dilatory in recognizing the need for and in revising defective specifications, which constituted a breach of the implied obligation not to do anything that would hinder or delay the contractor’s performance.

Both Spearin and Luria Bros. provide a legal assurance to contractors that additional costs may be recovered for defects in the design by the owner.

Next post features what is an equitable adjustment.

Image: stevendepolo

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If you are a contractor, you love hearing about these types of boxing tales: Contractor works his butt off. Owner benefits from the accelerated work. Contractor seeks early completion bonus. Owner rejects the claim based upon technicality. Contractor fights in court ... fights on appeal ... and wins! 

That is exactly what happened in Ray Bell Construction Co. v. TDOT (pdf), a 2-1 "split decision" released by the Court of Appeals of Tennessee on November 29, 2010.  In RBCC, the claims commissioner awarded Ray Bell Construction Company a $2.5 million early completion bonus.  The primary issue in dispute was whether the completion date in the parties' contract could be amended or moved to account for the impact of increased quantities and other delays.  TDOT argued that the completion date could be modified for purposes of the disincentive payment and liquidated damages, but under no circumstance could the date be modified for purposes of the incentive payment.  The contractor argued that the date could be modified for all purposes, including the incentive payment.

The primary issue in the litigation was whether the contractor could rely on evidence of other projects where TDOT had granted an extension to the incentive date.  During the dispute, the contractor learned from TDOT officials that there was a list of "existing" projects where TDOT and its financial participant, the Federal Highway Administration, had agreed in a set of letters between them that the incentive date could be moved, despite a change in FHWA policy.  Although the RBCC project was existing at the time of the TDOT-FHWA letters, it was not included on the list of "existing" projects. 

In the majority opinion, the court of appeals affirmed the claims commissioner's finding that “a definite latent ambiguity exist[ed] for which parol evidence not only is admissible, but frankly, absolutely necessary in both understanding and deciding the issues in this case."   In his dissenting opinion, Judge Swiney believed that the parties' contract was "crystal clear" in not allowing a modification to the incentive payment date.   The RBCC decision is a worthy read for a number of reasons:

1. The decision provides a good overview of the public contracting claims process. Like many other jurisdictions, the Claims Commission in Tennessee resolves claims involving tax recovery, state employee workers' compensation, negligence by state officials or agencies, and contract claims involving the State. The RBCC dispute went to trial before a claims commissioner and was appealed to the court of appeals.
2. The decision summarizes the two sides to a contract interpretation question.  Like almost every construction dispute, the contract will determine the rights and obligations of the parties.  In this case, a $2.5 million early incentive payment was at stake and the decision turned on whether there was an ambiguity in the parties' contact and what evidence could be used to resolve that ambiguity.  The majority and the dissent describe both sides to the issue.
3. The decision involves a truly "interesting" factual story.  As noted above, the dispute involved a multi-million dollar claim ... design delays ... easement delays ... unexecuted change orders ... quantity overruns ...  contract ambiguities ... a compelling letter by the state agency ... a compelling letter by the federal agency ... and much more.

Will there be a Round 3?  Don't know.  TDOT can file an application for permission to appeal to the  Tennessee Supreme Court, which must be filed within 60 days of entry of judgment by the Court of Appeals.  According to the appellate rules, the application shall be granted if two members of the Supreme Court are satisfied that the application should be granted.  In determining whether to grant the application, the Court looks to: (1) the need to secure uniformity of the decision; (2) the need to secure settlement of an important question of law; (3) the need to secure settlement of questions of public interest; and (4) the need for the exercise of the Supreme Court's supervisory authority.  At this point, it is a waiting game on whether there will be Round 3.

[Note: I was one of the boxers in the ring, along with lead counsel Greg Cashion of Smith Cashion & Orr PLC, at the trial court and court of appeals, but I moved law firms before oral arguments in the appeal. Special thanks to Greg for allowing me to write about this victory.]

Image: Fonzie's Cousin

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I have often wondered whether there is such a thing as too small a dispute.  Well, the parties in Earl Faulkner v. Tom Emmett Construction Company (pdf) determined to take their $3,000 construction dispute to the Tennessee Court of Appeals.  In the end, the Court gave some good instructions on the "first material breach" rule, which applies in many states.

 The Owners hired the Contractor to build a new driveway at their home.  The total contract price was $18,000 and the Owners refused to pay the balance of $8,000 because they were dissatisfied with the workmanship of the driveway.  The Owner sued the Contractor, seeking the cost to remove and replace the allegedly defective driveway. The Contractor claimed that the driveway was properly constructed and filed a counterclaim for the remaining $8,000 balance owed on the oral contract.

The trial court concluded that any problems with the driveway were not sufficient to require that it be removed and replaced.  Because there was a problem with how the concrete on one portion of the driveway had been poured, the trial court ordered the Owners to pay only $5,000 of the remaining
$8,000 owed on the contract.

The appellate court affirmed the findings of the trial court, but modified the judgment.  The court held that the Contractor committed the first material breach of the contract when it failed to construct the driveway in accordance with the plans.  Accordingly, the Owner was relieved of any obligation to pay:

A party who has materially breached a contract is not entitled to damages stemming from the other party’s later material breach of the same contract. Thus, in cases where both parties have not fully performed, it is necessary for the courts to determine which party is chargeable with the first uncured material breach.

. . . We conclude that [Contractor's] admitted failure to use a gravel base prior to pouring the driveway extension constitutes a material breach of the contract, thereby prohibiting [Contractor] from challenging [Owner's] later material breach of failing to pay the balance of the contract price.

Based upon the above reasoning, the appellate court concluded that the Owner was not required to pay the remaining $3,000 breach of contract damages awarded by the trial court. 

While the amount in controversy in Faulkner does not seem significant, the decision provides a good illustration of the first material breach rule.

Image: DavidDMuir

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A fellow Twitter friend, @danielschwartz, promoted a technology symposium on his Connecticut Employment Law Blog yesterday.  In order to spread the word about the symposium, he challenged his readers and fellow Twitter followers to tweet about their favorite Supreme Court case in less than 140 characters.  

As I thought about the construction industry, there was only one decision that kept coming to mind.  It involved a contractor who agreed to build a dry-dock in the Brooklyn Navy Yard.  In order to build the dry-dock in the site selected for it, the contractor was required to relocate a portion of a sewer that ran through the specified site. The owner (the United States) provided the plans and specifications for the sewer that was to be relocated.  The contractor completed the work according to the plans and specifications.  The owner approved and accepted the work.  But wait ... about a year after the relocation of the sewer, a dam in a connecting sewer caused flooding in the area excavated for the dry-dock. This dam was not shown on the owner's plans and specifications.  That's the background and here is my tweet: 

US v. Spearin: Owner designs. Contractor builds. Owner accepts. Work sucks. Owner sues. Contractor absolved. Owner loses.

If you live in the government contracting world, don't start sending me emails about how wrong I have described the Spearin Doctrine above.  Let me expand my statement beyond 140 characters and give you some more information about the 1918 decision in United States v. Spearin:

• The Rule. The Spearin Doctrine is legal principle that holds that when a contractor follows the plans and specifications furnished by the owner, and those plans and specifications turn out to be defective or insufficient, the contractor is not liable to the owner for any loss or damage resulting from the defective plans and specifications.
• Exceptions to the Rule.  In 2007, the Ohio Supreme Court rocked the construction law world by significantly limiting the application of the Spearin Doctrine.  In Dugan & Meyers Construction Co. v. Ohio Dept. of Administrative Services, the trial court applied the Spearin rule in favor of the contractor based upon alleged damages from the impact of an excessive amount of design changes.  On appeal, the Ohio Supreme Court reversed, holding that the Spearin Doctrine did not apply to cases involving delays due to design changes. Rather, the court focused its decision on the “no damages for delay” and “written requests for time extension” clauses in the contract.  Specifically, the court concluded: “We observed that the Spearin Doctrine does not invalidate an express contractual provision.” 
• Applicability to Green Construction.  Last year, fellow blogger Chris Cheatham suggested that there could be a green Spearin Doctrine.  I am confident that the Spearin Doctrine would be applied equally to non-green construction projects and LEED certified projects, As noted by Chris, a guarantee by the contractor could invalidate any Spearin Doctrine defense by the contractor.  Sounds like the Ohio Supreme Court, right?  The Spearin Doctrine cannot invalidate an express contractual provision.

Any Spearin tid-bits that you would like to share? 

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