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In this issue:

  • Inspection of subcontractor’s Word Does Not Make Owner and
    Prime Contractor Liable for Safety

  • Miller Act Surety Requirements Amended
  • Environmental Consultants Are Sued for Cleanup Costs
  • Recovery of Attorneys Fees: Indemnity Obligation

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Inspection of subcontractor’s Work Does Not Make Owner and Prime Contractor Liable for Safety

Where a project owner had the contractual right to inspect the contractor’s work progress for the purpose of monitoring compliance with the plans and specifications, a court held that this did not give the owner control over the sight for the purpose of assuring safety.

The contract stated that the “City shall not supervise, direct, or have control over, or be responsible for, Contractor’s means, methods, techniques, sequences or procedures of construction, or for the safety precautions and programs incident thereto.” An employee of a subcontractor was injured on the job when a plank in a flying concrete form fell away from the concrete. That individual sued both the prime contractor and the project owner, arguing that their daily inspection of the work should have led them to detect and correct the safety violations at the site.

According to the court, the inspection had been performed for the limited purpose of determining compliance with plans and specifications and had nothing to do with site safety. The work in question had been under supervision and control of the subcontractor’s project superintendent. As explained by the court: “Liability attaches only when the owner or general contractor retains control over the operative details of the hired work. In the absence of direct management over the means and methods of the independent contractor’s work or the provision of the equipment which caused the injury, no legal duty is created.” Zamudio, v. City and County of San Francisco, 82 Cal. Rptr. 2d 664 (Cal. App. 1 Dist 1999).
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Miller Act Surety Requirements Amended

By: Edward G. Gallagher, Esq.

Since 1935, performance and payment bonds on federal construction projects have been required by the Miller Act, 40 U.S.C. 270a, et. seq. Other than increases in the contract value for which bonds are required, the Miller Act had not been amended in any substantive aspect until August 17, 1999, when President Clinton signed the Construction Industry Payment Protection Act of 1999.

The 1999 Act, which was the result of bargaining among many industry groups, makes three changes to the current law. First, it raises the amount of the payment bond to 100 % of the contract amount unless the contracting officer finds that such a bond is unavailable. Prior law had a formula to set the minimum amount of the payment bond at 4- – 5-% of the contract amount but with a cap of $2.5 million. In actual practice, the government had not exercised its authority to require more than this minimum, and for large projects $2.5 million could be inadequate.

The Miller Act requires a claimant not in privity of contract with the prime contractor furnishing the bond to give 90 days written notice by registered mail to the prime that it is looking to the bond for payment. The courts consistently held that any means that resulted in delivery was acceptable, and the registered mail requirement came into play only if the contractor denied receipt of the notice. With presumed knowledge of that interpretation of prior law, Congress amended the statute to require a written, third party verification of receipt.

On could argue that the 1999 Act has changed the law, and regular mail will no longer be sufficient even if receipt were admitted. On the other hand, the clear intent of the amendment is to increase protection for subcontractors and suppliers not to reduce it. When the issue reaches the courts, they will probably hold that the current rule continues in force and any method of delivery is sufficient if the contractor admits receipt.

The third change voids waivers of Miller Act rights unless made in writing after the claimant commences work on the project. A waiver clause in a subcontract is void unless the subcontract is signed after the subcontractor started work.

An interesting question is whether this provision voids arbitration clauses or provisions requiring that disputes be passed through to the government. That was not the intent, and the legislative history explicitly states that arbitration or other dispute resolution clauses are not voided. It also states, however, that issues arising under the Miller Act (timeliness, notice, etc.) are to be decided exclusively by the U.S. District Court. The claimant must sue the surety on the bond within the one year limitations period, and the court will then stay the suit pending resolution of the amount owed the subcontractor through the arbitration. The surety’s liability for that amount would still be decided by the U.S. District Court.

About the Author: Edward G. Gallagher, is an attorney is the Virginia office of the law firm of Wickwire Gavin, P.C.. His legal practice emphasizes fidelity and surety law and construction contracts. He may be reached at 8750 Boone Blvd., Vienna, VA 22181; Phone (703) 790-8750 or by e-mail at egallagher@wickwire.com. Copyright Ó 1999, Wickwire Gavin, P.C. Originally published in the Fall 1999 issue of the firm’s legal newsletter, “Legal Foundations,” and reprinted here at ConstructionRisk.com with permission.
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Environmental Consultants Are Sued for Cleanup Costs

An owner of a property adjacent to gasoline station that was contaminated by leaking underground storage tanks sued professional consultants who had investigated and removed contamination from the tanks, arguing that they had failed to prevent contamination from the site migrating onto their property. One legal theory by the plaintiff was the consultants were strictly liable under the New York Navigation Law, as discharges of petroleum. Although the state statute provides for an immunity defense for those who have responded to discharges of petroleum for purposes of corrective action, the defendants failed to raise the immunity defense during their trial. The appellate court held that the case should not be dismissed on a summary judgment motion because there were triable issues of fact raised by the plaintiff concerning the consultants’ responsibility under the state law and the various common law theories. Hilltop Nyac Corp. V. TRMI Holdings, Inc., Nos. 98-07500, 98-07503 (N.Y. Ap. Div., 2d Dept. Aug 30, 1999).
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Recovery of Attorneys Fees: Indemnity Obligation

As a general rule, attorneys fees that one party expends in litigation cannot be recovered from another party in the absence of an express contractual provision requiring it. But is there a different result when a defendant in a case is required to pay damages to a plaintiff and that defendant is entitled to recover in indemnity from a third party? Can he recover legal costs from the third party which he was required to pay to the plaintiffs pursuant to a trial court judgment in favor of the plaintiff?

In the case of Toufic Nassif v. Sunrise Homes, Inc. Coast Quality Construction Company, 739 So. 2d 183, 1999 LA LEXIS 1705 (1999), the court held that where the third party was required to indemnify the defendant in the trial court action, that party was also required to indemnify the defendant for the attorneys fees that the trial court awarded to the plaintiff. This case in interesting in that it explains the principles of indemnification quite well. The court explained that indemnity “in its most basic sense means reimbursement, and may lie when one party discharges a liability which another rightfully should have assumed. It is based on the principle that everyone is responsible for his own wrongdoing, and if another person has been compelled to pay a judgment which ought to have been paid by the wrongdoer, then the loss should be shifted to the party whose negligence or tortious act caused the loss.”

A party that is not actually at fault but whose liability results from the faults of others, may recover by way of indemnity from such others. This is so even if there is not contractual requirement to do so. The duty arises at common law. It is an imposed liability that is variously called “technical, constructive, vicarious and derivative.” Such indemnity has been allowed a contractor from his subcontractor and/or supplier, so long as the exclusive fault producing liability has been that of such subcontractor and/or supplier. The basic principle behind indemnity from the party that is a fault is that “no one ought to enrich himself at the expense of another.”

In considering whether attorneys fees should be treated differently from other damages, the court considered a situation where the jury returns a verdict in favor of the contractor against a subcontractor for the full amount that had been awarded against the contractor to the plaintiff homeowner in the original trial. In such a situation, the contractor would not be entitled to recover the attorneys fees it incurred in pursuing the third-party claim against the subcontractor in the absence of express contractual language permitting the recovery of attorneys fees by the prevailing party. On the other hand, the court stated that the contractor would be entitled to recover from the subcontractor the attorneys fees that the plaintiffs recovered from the contractor in the original trial court action, since the contractor had been compelled to pay those attorneys fees as part of the plaintiffs’ “damages.”

An action for indemnity is, therefore, deemed by the court to be a separate substantive cause of action, independent of the underlying wrong, and is, therefore, distinct from an action for attorneys fees. “In light of the foregoing concepts, we conclude that the equitable principle of restitution applies in an action for indemnity to allow a defendant who is only technically or constructively liable for a plaintiff’s loss to recover from the party actually at fault the attorneys fees it was compelled to pay the plaintiff, even in the absence of a statute or contract of indemnification.”
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