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Construction Risk.com Report

December 2010, Vol. 12, No. 8

Inside this Issue:

  • Architect’s Copyright Infringement Action against Another Architect was Properly Dismissed by Trial Court on a Motion to Dismiss;
  • Contractor Suit against Project Owner’s Lender for Failing to Pay for Work Performed on Project is Dismissed;
  • Contractor Entitled to Recover Additional Compensation Due to Project Owner’s Failure to Disclose Material Information During Bidding Process – Even Where Nondisclosure was not Done with Affirmative Intent to Conceal the Information
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All articles in this issue of the ConstructionRisk.Com Report are written by J. Kent Holland, a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is also founder and president of ConstructionRisk, LLC, a consulting firm providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  Readers are welcome to republish or reprint these articles with attribution to the article and to ConstructionRisk.com Report, Vol. 12 No. 8 (Dec 2010).

Article 1

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Architect’s Copyright Infringement Action against Another Architect was Properly Dismissed by Trial Court on a Motion to Dismiss

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Architect that was terminated from a project filed a copyright infringement complaint against an architect that “re-designed” the project allegedly copying the essence of the original design as well as a number of specific design features.  The federal district trial court granted a 12(b)(6) motion to dismiss the action — making a determination that the two designs were not substantially similar and that the original copyrighted design was not infringed.   On appeal, it was held that the district court acted properly in considering the question of non-infringement as a matter of law on a motion to dismiss instead of having to allow the question to go to a jury as a question of fact.    The complaint, together with the architectural drawings that were attached as an exhibit to the complaint, provided sufficient information for the district court to evaluate the allegations on the face of the complaint and reach a determination that the complaint did not adequately allege substantial similarity between the second architect’s work and that of the original architect.

In Peter F. Gaito Architecture, LLC v. Simone Development Corp., 602 F.3d 57 (3rd Cir. 2010), the plaintiff architect, Peter F. Gaito, teamed with a development company to jointly submit a proposal to the City of New Rochelle, NY for a project.  The architect drafted plans that included the design contents, concepts, zoning information and statistics regarding the proposal to make to the city.  The proposal consisted of plans for a residential high-rise tower, retail space at the base of the tower, a new pedestrian plaza, a public park, and an above-ground parking garage.  The city awarded the project to this team, and the architect then proceeded to prepare additional schematics and registered its designs with the U.S. Copyright Office.   A couple months later, the architect and the developer got into a fee dispute.  Due to the fee dispute, the developer terminated its agreement with the architect and retained the services of a different architect (“defendant” or “second architect”).

The first architect filed suit against the developer and the second architect alleging that the “re-design” for the project was based largely on the plaintiff architect’s designs.  Thirty five similarities between the designs were alleged.   According to the court:

“They include similarities as to location (such as the placement of a new park, parking garage, public plaza, “plaza connection,” “elevator stair entry tower,” and “public landscaped open space”); similarities as to certain features and functions (such as the inclusion of a new parking garage, a “landscaped street level plaza,” “on site parking for both residential and retail use,” a water feature, public art, active retail space at the base of a residential tower, boutique shops with “the flexibility for a potential single larger tenant,” “architecture that was light, airy, transparent, made of glass with hints of traditional materials,” a tower with a “slender profile,” balconies for the residential units, a parking garage with a pre-cast masonry facade, as well as certain similarities with respect to the orientation of the project); and similarities as to parameters (such as a floor-area-ratio of 5.5, a parking garage with 850 parking spaces, retail space of 44,000 square feet, and professional office space of 2,500 square feet). Id. ¶¶ 131-204. Plaintiffs’ designs and SLCE’s re-designs are attached to the Amended Complaint as Exhibits C and N.”

In affirming the district court decision that there was no substantial similarity in the designs, the appellate court explained that:

“With respect to that question, the district court compared the various features and design elements of the “predominant” high-rise building in each design, and concluded that “[t]he overall visual impressions of the two designs are entirely different,” and that “[n]o reasonable juror would be disposed to … regard their aesthetic appeal as the same.” Id. at 9 (internal quotation marks omitted). With respect to the various specific similarities identified by plaintiffs, the district court concluded that such “features are common to countless other urban high-rise residential developments,” and thus amounted to mere “abstract ideas or concepts” that are not protected under the Copyright Act. at 10. Based on this analysis, the district court dismissed plaintiffs’ copyright infringement claim, concluding that there was no substantial similarity between defendants’ re-design and the protectable elements of plaintiffs’ design.”

The appellate court acknowledge that the test for infringement of a copyright is vague, and that the “determination of the extent of similarity that will constitute a substantial, and hence infringing, similarity presents one of the most difficult questions in copyright law, and one that is the least susceptible of helpful generalizations.”  But the court states that the question of substantial similarity is not exclusively reserved for resolution by jury, and that a trial court can resolve that question as a matter of law, and that indeed,

“Where, as here, the works in question are attached to a plaintiff’s complaint, it is entirely appropriate for the district court to consider the similarity between those works in connection with a motion to dismiss, because the court has before it all that is necessary in order to make such an evaluation. If, in making that evaluation, the district court determines that the two works are “not substantially similar as a matter of law,”[citation omitted] the district court can properly conclude that the plaintiff’s complaint, together with the works incorporated therein, do not “plausibly give rise to an entitlement to relief.”

Having found that the district court was entitled to determine the question of copyright infringement as a matter of law, the appellate court turned to the question of whether the decision by the judge should be sustained on a de novo review of the case.  In this regard, the court states:

“The standard test for substantial similarity between two items is whether an ‘ordinary observer, unless he set out to detect the disparities, would be disposed to overlook them, and regard [the] aesthetic appeal as the same.’ ” [citation omitted]  In applying the so-called “ordinary observer test,” we ask whether “an average lay observer would recognize the alleged copy as having been appropriated from the copyrighted work.”

The court went on to explain the appropriate analysis as follows:

“[W]e have disavowed any notion that “we are required to dissect [the works] into their separate components, and compare only those elements which are in themselves copyrightable.” [citation omitted].  Instead, we are principally guided “by comparing the contested design’s ‘total concept and overall feel’ with that of the allegedly infringed work,” [citation omitted] as instructed by our “good eyes and common sense,” [citation omitted] (alteration omitted). This is so because “the defendant may infringe on the plaintiff’s work not only through literal copying of a portion of it, but also by parroting properties that are apparent only when numerous aesthetic decisions embodied in the plaintiff’s work of art-the excerpting, modifying, and arranging of [unprotectable components] …-are considered in relation to one another.”[citation omitted]  Thus, in the end, our inquiry necessarily focuses on whether the alleged infringer has misappropriated “the original way in which the author has ‘selected, coordinated, and arranged’ the elements of his or her work.”

After explaining key differences in the design details between the two designs in question, the court concluded that most critically, “it is patent that the overall visual impressions of the two designs are entirely different,” and that “after carefully considering the various alleged similarities between plaintiff’s design and defendants’ re-design, it is clear ‘that no more was taken than ideas and concepts.’”  Accordingly, the judgment of the district court was affirmed.

Article 2

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Contractor Suit against Project Owner’s Lender for Failing to Pay for Work Performed on Project is Dismissed

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Where a contractor brought a claim against a project owner’s bank that was funding the project, based on allegations that the bank made promises to the contractor that funds were available and would be paid to the contractor to complete the project, summary  judgment was granted in favor of the bank, with the finding no legal basis for the claims for breach of contract, promissory estoppels and negligent misrepresentation.  This case involved a contractor for construction of an ethanol production plant where the owner fell behind on monthly payments to the contractor and requested a formal payment deferral.  Before agreeing to the payment deferral, the contractor asked to meet with the projects debt and equity investors (hereinafter “bank’), and this was done.  Contractor alleges that the bank promised and assured it that it would be paid for the work on the plant, but that in fact $2.2 million worth of work performed after the meetings with the bank were never paid.  Since the project owner went bankrupt, the contractor sought to recover the unpaid balance of its contract from the bank.

The first issue the court considered in GEM Industrial, Inc. v. Sun Trust Bank, 700 F. Supp.2d 915 (D.C., N.D. Ohio, 2010)  was whether the case should be dismissed based on the statute of frauds since the contractor’s claim was based on the bank’s alleged oral promise to pay for amounts due for work under the contract to which it owed no obligation.  Pursuant to the statute of frauds, such a promise to “answer for the debt of another” must be in writing in order for it to be enforceable.  An exception to the requirement for written documentation exists, however, “when the promisor’s leading object is to subserve his own interest.”   In this case, the court found that to be the situation and, concluded therefore that the case would not be dismissed based on the statute of frauds.

Moving on to the question of whether there was an oral contract made by the bank with the contractor, the court stated this would depend upon whether there was evidence of mutual assent to the essential terms of the agreement.  Here, the court found that the evidence was too vague to support the existence of an enforceable contract.  The court considered the depositions and affidavits of the contractor’s managers concerning what statements were allegedly made to them by the bank representatives, and concluded that the alleged promises were only statements in very general terms that the contractor would be paid.  According to the court,

“This testimony contains no suggestion that Pirio or anyone else at SunTrust explicitly agreed to essential contract terms such as price, duration, or timing of payments during the April 28 phone conversation; it merely asserts that SunTrust promised to pay GEM for work at the plant. The other testimonial evidence submitted by GEM is similarly vague as to any affirmative promises made by SunTrust during the April 28 call. Without more, such broad assertions are too indeterminate to support an enforceable contract.”

The court concluded that uncertainty about the identity of the parties to the alleged oral contract and their relative obligations is fatal to the contractor’s contract claim.

Next, the court determined that even if there was evidence of an “implied-in-fact contract” between the bank and the contractor, after the date that the contractor claims to have entered into an implied-in-fact contract with the bank, the contractor nevertheless continued to send all its invoices for payment directly to the project owner and not the bank.  In any event, the claim based on implied-in-fact contract suffered the same problems as the oral contract claim in that the alleged contract did not clearly delegate responsibility for payment among the parties.

Promissory estoppel, as a cause of action was rejected by the court because it concluded that the first element of the four elements required under state law for proving promissory estoppels were not met – these being:

“(1) a promise clear and unambiguous in its terms; (2) reliance by the party to whom the promise was made; (3) the reliance was reasonable and foreseeable; and (4) the party relying on the promise was injured by its reliance.”  Here, the court found there was no evidence supporting the first element of a clear and unambiguous promise.

Finally, the court turned to the contractor’s claim against the bank on the basis of alleged “negligent misrepresentation.”   To be liable for negligent misrepresentation under the relevant state law, a party must:

“(1) in the course of his business, profession, or employment, or in any other transaction in which he has a pecuniary interest, (2) supply false information (3) for the guidance of others in their business transactions (4) causing pecuniary loss to the plaintiff (5) while the plaintiff justifiably relied upon the information (6) and while the defendant failed to exercise reasonable care or competence in obtaining or communicating the information.”

To satisfy the false information element there must be evidence that there was a representation as to “past or existing facts, not promises or representations relating to future actions or conduct.”  As explained by the court, “A tort claim for negligent misrepresentation is thus distinguished from a breach of contract claim, which is necessarily based on a promise of future conduct.”  In this case the allegations focused on a promise of future conduct with regard to future payment rather than a false statement of existing fact.  “An assurance of future payment for future work is quintessentially a contractual promise.”   There was no evidence of false statements of existing facts regarding project funding, but instead the alleged negligent misrepresentations all related to whether the contractor would be paid.  Even if such representations had been made by the bank, the court found that those statements would be irrelevant since as a matter of law, they would not support a claim for negligent misrepresentation.   For all these reasons, the court granted summary judgment against the contractor.

Comment: As the solvency of project owners and the ability to secure project funding continues to be a major problem, it is increasingly important that contractors take appropriate precautions to assure that they will be paid for their work.  Contract language can be drafted that gives the contractor the right to demand evidence of the project owner’s financial situation during performance of the contract.  Language can also be included that permits the contractor to stop work in the event of non-payment or even of failure of the owner to demonstrate an ability to continue making payment.  Such protective language is particularly important on large, complex projects like the one in this case, where large amounts of costs can be incurred by the contractor in a short amount of time and it is important to know that the owner can pay for the same.

From the reported decision, it appears the contractor genuinely believed that it had assurances from the bank that it would be paid for its work if it completed the project.  Unfortunately, as the court here explains, those assurances may not turn into an actionable claim in the absence of evidence that the elements of new contract were made between the contractor and the bank.  With this in mind, contractors may want to heed the warnings from this decision with regard to what is necessary in order to prevail against the owner’s lending institution.

Article 3

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Contractor Entitled to Recover Additional Compensation Due to Project Owner’s Failure to Disclose Material Information During Bidding Process – even Where Nondisclosure was not Done with Affirmative Intent to Conceal the Information

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Contractor is entitled to recover additional compensation due to a school district’s failure to disclose material information during the bidding process, and it is not necessary for the contractor to prove affirmative fraudulent intent to conceal the information.  This California Supreme Court decision resolves a question that had divided several Courts of Appeal in California.  One of the state appellate courts held that to recover for nondisclosure, the contractor must show the public entity affirmatively misrepresented or intentionally concealed material facts that rendered the furnished information misleading.  Another appellate court held that if the disclosure would have eliminated or materially qualified the misleading effect of facts disclosed, the contractor need not prove an “affirmative fraudulent intent to conceal.”  A third appellate court suggested that careless failure to disclose information may allow recovery if the public entity possessed superior knowledge inaccessible to the contractor.  And finally, the Court of Appeal from which the instant appeal was taken held that a contractor need show only that the public entity knew material facts concerning the project that would affect the contractor’s bid or performance and failed to disclose those facts to the contractor.

In resolving the question of what information must be disclosed by the public entity, the California Supreme Court, in the case of Los Angeles Unified School District v. Great American Insurance Company, 234 P.3d 490, 49 Cal.4th 739 (2010), held as follows:

“We hold a contractor need not prove an affirmative fraudulent intent to conceal. Rather-with the qualifications stated below-a public entity may be required to provide extra compensation if it knew, but failed to disclose, material facts that would affect the contractor’s bid or performance. Because public entities do not insure contractors against their own negligence, relief for nondisclosure is appropriate only when (1) the contractor submitted its bid or undertook to perform without material information that affected performance costs; (2) the public entity was in possession of the information and was aware the contractor had no knowledge of, nor any reason to obtain, such information; (3) any contract specifications or other information furnished by the public entity to the contractor misled the contractor or did not put it on notice to inquire; and (4) the public entity failed to provide the relevant information.”

The background on this case is that after default terminating a contract with a contractor for the construction of an elementary school, the Los Angeles Unified School District (District) advertised for proposals for another contractor to correct defects in the original contractor’s work and complete the project.  Copies of the original plans and specifications were provided by the District to the prospective bidders, along with 108 pages titled “current correction list” or sometimes referred to as “punch list” that catalogued work by the previous contractor that the District’s inspectors found to be defective, incomplete or missing. After receiving this information, Hayward Construction Company submitted a proposal to do the work on a time and material basis, with a maximum guaranteed price of $4.5 million.  Great American Insurance Company issued a performance bond for Hayward’s work.

After beginning the work, Hayward informed the District it had significantly underestimated the cost of the remedial work due to nonconformities and deficiencies in the previous contractor’s work that had not been noted on the pre-punch lists and which could not have been detected by simple observation of Hayward when bidding.   This is explained in some detail by the court as follows:

“For example, the pre-punch lists called for repairing and cleaning portions of the exterior stucco, but Hayward reported that upon removing some of the plaster surfacing, it discovered it could make acceptable repairs only by removing and replacing the entire exterior surface plus portions of an underlying material. The pre-punch lists also called for fixing tiles at a few locations, but Hayward reported that after removing selected tiles for repair, it determined the entire installation of tile was unacceptable. In the end, Hayward sought extra compensation in the amount of $2,847,592 for work necessitated by what it characterized as latent defects.”

Hayward alleged the District failed to disclose information that would have put the contractor on notice that some of its assumptions were erroneous about the scope of work required.  It alleged, for example, that the District failed to disclose a consultant’s repot that would have alerted Hayward to the defects in the stucco work, and that the District was aware that Hayward’s intended method for curing stucco discoloration would not be effective.

The District disputed that Hayward was entitled to any payment above the original $4.5 million GMP.  In the litigation that ensued between the District and Hayward and its surety, Great American, the trial court granted judgment for the District on the pleadings, rejecting Hayward’s claims of breach of contract by misrepresentation or nondisclosure because Hayward did not allege facts that would allow a conclusion that the District either actively concealed or intentionally omitted material information.  The Court of Appeal reversed trial court’s grant of summary adjudication and judgment on the pleadings, holding that “Hayward may maintain a cross-action for breach of contract based on nondisclosure of material information if it can establish that the District knew material facts concerning the project that would affect Hayward’s bid or performance and failed to disclose those facts to Hayward.”

In the decision on the District’s appeal to the state supreme court, the court reviewed decisions form appellate courts around the state, and even courts from other states, concerning a contractor’s right to rely upon information provided as well as what duty an owner has to provide information.  The court stated:

“[I]t is also settled that ‘ [a] contractor of public works who, acting reasonably, is misled by incorrect plans and specifications issued by the public authorities as the basis for bids and who, as a result, submits a bid which is lower than he would have otherwise made may recover in a contract action for extra work or expenses necessitated by the conditions being other than as represented.’” [citation omitted].

The court noted several decisions, and quoted the Restatement Second of Contracts, for the proposition that nondisclosure may be actionable.   But the court also noted:

“Thus, existing law holds that public entities have no obligation to investigate the costs of performance independent from the obligation to provide prospective bidders with correct plans and specifications. A public entity is not responsible for erroneous assumptions drawn by a contractor from accurate information provided by the public entity  … or for unsupported assumptions drawn from the public entity’s silence … nor does it have any duty to disclose information that is reasonably available or that the contractor knew or had a realistic opportunity to discover…. Moreover, although Public Contract Code section 1104 prohibits public entities from requiring bidders to assume responsibility for the completeness and accuracy of architectural or engineering plans and specifications, public entities retain the power to contractually disclaim responsibility for assumptions a contractor might draw from the presence or absence of information.”

The court went on to explain that the established law provides public entities substantial protection against careless bidding practices by contractors and forecloses the possibility that a public entity will be held liable when a contractor’s own lack of diligence prevented it from fully appreciating the costs of performance. “This being so,” says the court, “protection against careless bidding practices does not require that we allow contractors damaged by a public entity’s misleading nondisclosure to recover only on a showing the public entity harbored a fraudulent intent.”

The supreme court considered the District’s argument that allowing actions for nondisclosure will lead to burdensome practices and costly litigation by compelling public entities to disclose every scrap of information that might related to a project and encouraging contractors to comb through the entity’s files for material that might be used to support an actionable nondisclosure.  In response to that argument the court states:

“The danger, we think, is overstated. As explained earlier, significant restrictions already exist on the ability of contractors to recover from public entities on theories of tort or quantum meruit. And in actions for breach of contract, contractors can recover neither for extra work that would have been bid had they exercised due diligence nor for work occasioned by unanticipated conditions either unknown to the public entity or which the public entity had no reason to believe the contractor would not itself discover. Nondisclosure is actionable, moreover, only if the information at issue materially affects the cost of performance, reducing the possibility that a public entity soliciting bids on a project might easily overlook it. Given these limitations on recovery, as between a truly blameless contractor and the nondisclosing public entity that received the benefit of the contractor’s work, requiring the public entity to pay for that benefit is hardly unjust.”

For these reasons, the court explained that it agreed with the judgment of the court of appeal in favor of the contractor but the court stated that the court of appeal’s holding was overbroad for suggesting that recovery may be had for ANY failure to disclose material information.  In affirming the appellate court judgment, the supreme court remanded the matter with instructions for the appellate court to narrow its holding to meet the requirements of this new supreme court holding which is as follows:

“We hold that a contractor on a public works contract may be entitled to relief for a public entity’s nondisclosure in the following limited circumstances: (1) the contractor submitted its bid or undertook to perform without material information that affected  performance costs; (2) the public entity was in possession of the information and was aware the contractor had no knowledge of, nor any reason to obtain, such information; (3) any contract specifications or other information furnished by the public entity to the contractor misled the contractor or did not put it on notice to inquire; and (4) the public entity failed to provide the relevant information. The circumstances affecting recovery may include, but are not limited to, positive warranties or disclaimers made by either party, the information provided by the plans and specifications and related documents, the difficulty of detecting the condition in question, any time constraints the public entity imposed on proposed bidders, and any unwarranted assumptions made by the contractor. The public entity may not be held liable for failing to disclose information a reasonable contractor in like circumstances would or should have discovered on its own, but may be found liable when the totality of the circumstances is such that the public entity knows, or has reason to know, a responsible contractor acting diligently would be unlikely to discover the condition that materially increased the cost of performance.”

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ABOUT THIS NEWSLETTER & A DISCLAIMER

This newsletter Report is published and edited by J. Kent Holland, Jr., J.D. The Report is independent of any insurance company, law firm, or other entity, and is distributed with the understanding that ConstructionRisk.com, LLC, and the editor and writers, are not hereby engaged in rendering legal services or the practice of law.  Further, the content and comments in this newsletter are provided for educational purposes and for general distribution only, and cannot apply to any single set of specific circumstances. If you have a legal issue to which you believe this newsletter relates, we urge you to consult your own legal counsel. ConstructionRisk.com, LLC, and its writers and editors, expressly disclaim any responsibility for damages arising from the use, application, or reliance upon the information contained herein.

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