RECENT DEVELOPMENTS IN CONSTRUCTION LAW
While the courts in Michigan and around the country produce a great many construction law decisions each year, few are truly unique or add much to the relevant body of case law. This last year was no exception - lots of decisions, little new substance. This said, several decisions applying Michigan law were important and could be significant depending on how they are viewed by other courts. In one, a court for the first time held a residential builder liable under the Michigan Consumer Protection Act for unapproved deviations from the blueprints, thus exposing the contractor to liability for the homeowner’s attorney fees. In another decision, a federal court of appeals, sitting in Missouri and applying Michigan law, issued a decision which, if incorrectly interpreted by Michigan courts, could effectively eliminate the cardinal change and implied abandonment doctrines where the construction contract contains a change order clause. Yet another court held that weather delays are not included within the scope of a “no-damages-for-delay" clause and in a separate case the Michigan Supreme Court disallowed a sub-subcontractor's standing as a "claimant" under a general contractor's payment bond. Finally, and while not discussed at length in this article, two Michigan courts issued conflicting decisions interpreting the strictness of the filing deadline for liens under the Michigan Construction Lien Act, the first, a Court of Appeals decision requiring mere substantial compliance with the 90-day filing requirement, and the second a Michigan Supreme Court decision rejecting the Court of Appeal's decision and returning the strict compliance standard which ended the year where we started.
MICHIGAN CONSUMER PROTECTION ACT NOW APPLIES TO RESIDENTIAL CONTRACTS
The Michigan Court of Appeals for the first time applied the Michigan Consumer Protection Act ("MCPA"), M.C.L.A. § 445.901 et seq., to disputes involving residential construction. Forton v. Laszar, 239 Mich. App. 711, 609 N.W.2d 850 (2000). Both the trial court and the Court of Appeals held the MCPA is applicable and violated where the defendant, a licensed residential builder, unilaterally deviates from the blueprints approved by the homeowner. Specifically, the court found that the builder breached its promise to construct the home in accordance with the plans and specifications and concluded that the breach constituted "an unfair, unconscionable or deceptive act" in violation of the MCPA. The Court stated that the deviations violated the MCPA's prohibitions against "gross discrepancies between the oral representations of the seller and the written agreement covering the same transaction or failure of the other party to the transaction to provide the promised benefits." M.C.L.A. § 445.903(l)(y). The opinion paves the way for previously unrecoverable awards of attorney fees in residential cases where the MCPA is found to be violated (See M.C.L.A. § 445.911(2)).
The Forton decision is of great import to residential builders because it arguably erodes the substantial performance doctrine. Under this doctrine, the contractor is entitled to be paid the full contract price if it substantially performed in accordance with the plans and specifications, minus only the proven diminished value of the building as a result of any deviations between the actual construction and the plans and specifications. This standard may not be applicable where the MCPA applies since any deviation between the actual construction and the approved plans is potentially a violation of the Act. Given this decision and the nature of residential construction, the homebuilder is now under even greater pressure to document the owner's approval of any changes.
Perhaps the most important aspect of Forton is the ability of the homeowner to recover attorney fees. This opens the door to a great many more suits which otherwise might not have been filed because of the potentially high cost of litigation. With the prospect of recovering attorney fees, it will be feasible to take even small disputes into litigation. As a result, contractors will have more incentive to participate in settlement discussions earlier to avoid escalating exposure to attorney fees. The possibility of the homeowner's recovery of attorney fees can be seen as balancing the contractor's prospect of recovering the attorney fees under the construction lien. It is unlikely that the Forton decision would apply to commercial construction because the MPCA applies only to "trade or commerce" that is “primarily for personal, family, or household purposes.” See M.C.L.A. § 445-902(d).
MICHIGAN IMPLIED ABANDONMENT DOCTRINE NOT APPLICABLE WHERE CONTRACT CONTAINS CHANGE ORDER CLAUSE
In R.M. Taylor v. GM, 187 F.3d 809 (8th Cir. 1999), cert. denied, 120 S. Ct. 1169 (2000), a Missouri jury awarded over $21 million in favor of RM Taylor, Inc. ("RMT") in its suit against General Motors in connection with design and installation of conveyor systems in a number of assembly facilities. The case was presented to the jury on an implied abandonment theory based on the contractor's claim that the owner's excessive changes and payment delays caused an abandonment of the contract. By using this theory, the contractor sought to avoid provisions of the contract that may otherwise have prevented recovery. However, the Federal Appeals Court for the 8th Circuit reversed the jury's award, holding that: (1) Michigan law applied; (2) Michigan had not extended the doctrine of implied abandonment to construction contracts which contained change order clauses; and (3) even if Michigan had expressly recognized implied abandonment in such cases, the contractor had not established an abandonment because the owner was found to have followed the change order and payment procedures and because the contractor waived its abandonment claim by continuing performance under the contract. Even though the court conceded that Michigan does recognize the abandonment doctrine in relation to construction contracts and that other states do recognize implied abandonment even where the contract contains a change order clause, the court nonetheless declined to extend Michigan law or to speculate on whether a Michigan court would do so, in the absence of a Michigan decision specifically applying the doctrine to a contract with a change order clause.
This decision is not binding on Michigan courts and thus does not resolve the question of whether a Michigan court would extend the implied abandonment doctrine to a contract with a change order clause. Indeed, since the trend nationally appears to be in the direction of recognizing implied abandonment even in situations where the contract contains a change order clause, it is likely that a well presented case to a Michigan court would result in the extension of the abandonment doctrine, particularly since a Michigan court would not face the procedural barrier that prevented the 8th Circuit from reaching such a conclusion.
The cardinal change doctrine is also potentially implicated by the RM Taylor ruling. This doctrine recognizes that an owner's ability to make changes under a change order clause is limited by the scope of the original contract. Under this theory, courts have found a breach of contract where the owner has made excessive changes, particularly where the changes result in significant quantity increases (or decreases in the case of unit price contracts). The underlying rationale is that the contractor is entitled to assume in developing its bid that the changes on the project will be within the industry norms of 5% to 15% on new construction. It is well established that cost structures and dynamics can be significantly affected with a high number of changes, particularly where the changes occur during sensitive phases of construction. On its face, the court's abandonment ruling suggests that the owner has unlimited power to make changes which significantly increase the scope or change the environment in which the base work is performed. However, this would be a incorrect reading of the court's opinion.
First, the court noted that because the owner had made it clear in the contract documents that the conveyor design was not finalized and would have to be customized for each plant installation, the contractor should have expected significant changes between the preliminary design on which it based its bid and the final design for the installation. Second, the court concluded that the number of changes was not unusual, although it appeared to focus more on the number of changes as opposed to the quantitative and qualitative impact the changes had on the project. On whole, the court's factual ruling actually recognizes the basic precepts of the cardinal change doctrine and does not contain any express ruling as to the acceptability of the doctrine under Michigan law.
Contractors and their counsel should be wary of an incorrect application of this decision. If not carefully analyzed and distinguished before a Michigan court, there exists the possibility that a superficial application of the result could cause an erosion of Michigan's implied abandonment and cardinal change doctrines.
DAMAGES FOR WEATHER DELAYS ARE NOT PROHIBITED BY A “NO DAMAGE-FOR-DELAY” CLAUSE
Ruling in the context of a bankruptcy case, the court in In Re Sardo Corp. v. DeMaria Building Co., 1999 U.S. Dist. Lexis (E.D. Mich. April 16, 1999) found that a "no-damage-for-delay" clause prohibited a subcontractor from collecting weather-related delay damages, but permitted the recovery of weather-related extra work costs. On appeal, the court found that while the "no-damage-for-delay" provision in the owner/general contractor agreement was incorporated into the subcontract, its application was limited to delays or failures of the "owner and other contractors to complete work as scheduled." Moreover, since the owner/general contractor agreement specifically provided that "weather" was not the fault of the owner or contractor, the court concluded that weather delays were not contemplated by the "no-damage-for-delay" clause, and, as such, the terms of the subcontract allowed weather-related claim damages.
This decision represents a continuing national trend to narrowly interpret "no-damages-for-delay" clauses. It is a bit unusual in that most courts and standard contracts treat delays caused by extreme adverse weather as excusable delays and thus allow for time extensions as the sole remedy for weather delays. While most agree that neither party is in a position to control
the weather, many will also agree that the contractor is in the best position to mitigate weather related damages and thus the risk allocation philosophy of giving the contractor time relief only, it is argued, correctly motivates the contractor to control the effects of adverse weather. This rationale is giving way in many contract negotiations where the contractor has the leverage to demand both time extensions and additional compensation.
Both the owner and contractor should be aware when negotiating contracts that the courts disfavor "no-damage-for-delay" clauses. The owner should not expect that these clauses will be enforced and the contractor should be aware that despite the exceptions, these clauses are actually enforced once in a while.
SUB-SUBCONTRACTOR IS NOT A QUALIFIED CLAIMANT UNDER GENERAL CONTRACTOR'S PAYMENT BOND
In W.T. Andrew Co. v. Mid-State Surety Corp., 461 Mich. 628 (2000), the Michigan Supreme Court affirmed a Court of Appeals decision that denied a sub-subcontractor's claim under the general contractor's labor and material payment bond. The claim was rejected because: (1) the bond defined "claimant" as an entity with a direct contract with the general contractor (while the claimant sub-subcontractor, who by definition has a direct contract with a subcontractor and not the general contractor, does not meet this definition); and (2) the plaintiff did not satisfy the notice requirements of the public works bond statute even though, for purposes of argument, the defendant Surety company acknowledged that the notice requirements under the bond were satisfied.
This case reaffirms the importance of obtaining copies of payment bonds on public projects. While the minimum content of these bonds is dictated by statute, it is well established that if the bond itself provides greater coverage, the greater coverage will be available to the potential claimants. Thus, even though the statute may not require that sub-subcontractors be treated as “claimants” under the payment bond, if the bond defines the term "claimant" more broadly, then the broader definition will most likely be enforced. It is also critically important to satisfy the notice requirements under the bond and to ensure that the general contractor for whom the work is being performed (in addition to the owner and the surety, just to be safe) are properly notified within 30 days of the commencement of the claimant's work. Failure to provide this notice is the most common basis upon which a recovery against an otherwise applicable bond is denied.
OTHER MICHIGAN CASES OF NOTE
In a series of lesser important decisions, it was held that where a plaintiff sought to recover expenditures made in his attempt to construct a building on defendant’s property, his lack of a residential builder’s license barred the claim (Kovach v. Sharma, Lawyers Weekly No. 36832, (unpublished)). Additionally, in Bond Constr. Co. v. Morgan, Lawyers Weekly No. 36544 (unpublished), the Court of Appeals affirmed a trial court’s decision that Defendants had been aware that off-site sand was being brought onto the project and that by their silence they assented to it, and that it was foreseeable that they would be charged for the sand. Finally, in Candelaria v. BC General Contractors, Inc., 236 Mich. App. 67 (1999), the court held that where an independent contractor working for a subcontractor died, the general contractor was not liable for damages because the general contractor did not control how the subcontractor conducted its work. This decision confirms the general rule that when an owner or general contractor hires an independent contractor to perform a job, the owner or general contractor may not be held liable in negligence to third parties or employees of the independent contractor, unless the owner or general contractor can be found liable under the doctrine of retained control.
IMPORTANT DECISIONS FROM OTHER JURISDICTIONS
In Fru-Con Construction Corp. v. United States, 43 Fed. Cl. 306 (1999), the court ruled that the lack of contemporaneous project documentation supported denial of a claim for extras. This case shows the importance of preparing proper documentation throughout the project.
In Metropolitan Dade County v. Recchi America, Inc., 1999 WL 294481 (Fl. Dist. Ct. App. 1999), a rapid transit contractor's breach of contract lawsuit against the public owner was dismissed because the contractor had not followed the contractually-stipulated process under which the county contracting officer had authority to resolve disputes (his decisions were final and conclusive unless found to be arbitrary, capricious, or made in bad faith.) This case shows the importance of ensuring that contract dispute resolution procedures are followed prior to any litigation.
In United States Fidelity and Guaranty Co. v. West Rock Development Corp., 50 F. Supp. 2d 127 (D. Conn. 1999), a contract for construction of a housing project for the elderly in New Haven used a required HUD contract form. The contractor defaulted and the performance bond surety entered into a takeover agreement. The form contract included a liquidated damages clause where the measure of delay damages was the actual cost of taxes and insurance during the period of late completion adjusted to reflect any net operating income the project would have generated during that period. Upon completion, the owner asserted a large claim for other delay damages. The surety successfully argued that the liquidated damages clause capped the recovery. This case demonstrates that liquidated damages provisions may be interpreted to be the owner's sole remedy unless the clause is carefully drafted to allow other provable damages.
Finally, in John Burns Construction Co. v. Indiana Insurance Co., 2000 WL 4603 (Ill), the Illinois Supreme Court held that a prime contractor who had been named as an additional insured on a subcontractor's policy had the right to choose which insurer (its own or the subcontractor's) should defend and provide indemnity. In making this ruling, the court rejected the subcontractor's insurer's claim against the general contractor's insurance policy for equal participation. This is a significant decision given that this is a common problem and because it increases the significance and value of additional insured status as required by many contracts.
