May 2000

In This Issue

• State Responsible for Steel Delays
• Prompt Pay Interest and Attorney's Fees May Be Recovered in Arbitrations
• Can Homeowners Recover for Their Emotional Distress?
• Ohio Has No Statute of Repose
• Sub Held to Prime's Schedule Requirements
• Federal Bill Would Require Bid Listing
• Post-Bid Phone Call Is Permitted
• Contractor May Recover Cumulative Impact Damages from Multiple Changes
• Congratulations to the Butler Transportation Improvement District

State Responsible for Steel Delays

Donald W. Gregory, Construction Law Chair

Recently contractors and subcontractors have encountered delays in receiving domestic steel or other construction materials from suppliers.

In the case of Carter Steel v. ODOT, Judge Leach of the Court of Claims addressed an issue of first impression — whether liquidated damages could be assessed by the State against a Contractor for steel delays when the cause of the delay was a supplier who was apparently the sole domestic supplier of the steel necessary for the project.

The Court noted that while a contractor is generally responsible for the shortcomings of its subcontractors and suppliers, there is an exception where the owner specifically requests that the contractor use a particular subcontractor or supplier or a "single source" of those materials. In this case as the non-performing supplier was the sole supplier of domestic steel available during this time frame to handle the project the Court found that a time extension should have been granted, because the cause of the delay was beyond the reasonable control of the contractor.

This case may give subcontractors and contractors an additional basis for a time extension and additional compensation when a "single source" supplier cannot deliver on time.

Prompt Pay Interest and Attorney's Fees May Be Recovered in Arbitrations

The Prompt Pay Act provides that the prevailing party may recover 18% interest per annum and attorney's fees but it was somewhat unclear whether these statutory items were recoverable in an arbitration rather than in litigation in the courts. The Tenth District Court of Appeals in Franklin County has now answered that question and held that attorney's fees and prompt pay interest are both recoverable in arbitrations as well as court cases. RWS Building Co. v. North Market.

This means that prompt pay claimants will maintain the leverage to recover to the maximum extent of the Prompt Pay Act — even in an arbitration setting.

Can Homeowners Recover for Their Emotional Distress?

While homeowners frequently complain about the emotional trauma created by a negative building experience, they typically have not been able to recover emotional distress type damages on their contract claims arising from poor workmanship.

However, a recent Ohio case has opened the door to the recovery of such non-economic damages. The Court of Appeals for Cuyahoga County permitted a jury award of $19,000 for "loss of enjoyment" of the home due to the annoyance caused by severe roof leaking and other problems caused by unworkmanlike construction. Kishmartin v. William Bailey Const. Inc. This case appears headed for Ohio's Supreme Court.

In contrast, a California judge, obviously well versed in the realities of a residential building project, denied such claims and had this to say about the process:

"The Erlichs may have hoped to build their dream home and live happily ever after, but there is a reason that tag line belongs only in fairy tales. Building a house may turn out to be a stress-free project; it is much more likely to be the stuff of urban legends - the cause of bankruptcy, marital dissolution, hypertension and fleeting fantasies ranging from homicide to suicide. As Justice Yegan noted below, 'No reasonable homeowner can embark on a building project with certainty that the project will be completed to perfection. Indeed, errors are so likely to occur that few if any homeowners would be justified in resting their peace of mind on [its] timely or correct completion....'"

Erlich v. Menzes, 21 Cal. 4th 543 (1999). 

Ohio Has No Statute of Repose

The Ohio Supreme Court dealt a blow to the entire construction industry in this state when it again threw out Ohio's "statute of repose" as unconstitutional. While a "statute of repose" is not a "statute of limitations," it limits the number of lawsuits that can be asserted against design professionals, contractors, subcontractors and the like by preventing lawsuits filed more than a certain number of years after the construction was completed.

While a statute of limitations is generally a shorter period than a statute of repose, because courts in many circumstances have allowed the statute of limitations to commence only when the injured party "knew or should have known" of the defect, this means that a lawsuit could now be asserted 20, 30 or more years after the work was performed.

This created an unenviable problem for the construction industry who was faced with keeping project records almost indefinitely and relying upon recollections and employees that have long since disappeared. This new found open-end liability was a nightmare for those in the construction industry faced with defending claims years after the fact when records, employees and memories have been lost.

In an effort to find a solution that the Ohio Supreme Court might consider constitutional, the Ohio General Assembly in the 1996 Tort Reform Bill (Am. Sub. H.B. 350) instituted a fifteen (15) year statute of repose. This new law became effective on January 27, 1997 but has already been declared unconstitutional by Ohio's Supreme Court. This means that the construction industry is again faced with retaining records indefinitely to defend against potential open-ended liability in that Ohio no longer has a "statute of repose" in place limiting suits on old projects.

Sub Held to Prime's Schedule Requirements

Many subcontracts require the subcontractor to follow the contractor's schedule, but often that schedule is not in place when the subcontract is signed. A Pennsylvania court has ruled that in that circumstance the subcontractor had agreed to comply with the prime's scheduling requirements even though no schedule was then in existence. Allied v. Dick Enterprises, 972 F. Supp. 922 (U.S.D.C. E.D. Pa).

If subcontractors want to avoid this problem their specific scheduling sequence or assumptions should be listed as conditions of their bid and later specifically referenced in the subcontract.

Federal Bill Would Require Bid Listing

At the insistence of ASA, H.R. 4012 has been introduced in Congress to require subcontractor bid listing on federal projects over $1,000,000 in an effort to eliminate "bid shopping" or "bid peddling."

A subcontractor relied upon on bid day could only be substituted for good cause and with the consent of the contracting officer. Among other sanctions, a contractor replacing a subcontractor without consent would face sizeable liquidated damages.

Post-Bid Phone Call Is Permitted

The Ohio Court of Claims has ruled that a DAS official did not abuse his discretion by contacting a bidder by phone after bid opening to confirm that the bid price was the price for the entire project when the bid did not include the second phase specifications as required by the pre-bid instructions. The bidder attributed the omission to a clerical error and faxed the specifications to the governmental official within minutes of the telephone call. The Court held that the failure to include the specifications with the bid did not render the bid non-responsive because it did not give the bidder a competitive advantage. Lewis & Michael v. ODAS.

Contractor May Recover Cumulative Impact Damages from Multiple Changes

Many change order forms, including those utilized by most public authorities, provide that all direct and indirect costs associated with the change are extinguished by signing the change order. Many contractors believe it is inequitable and impractical to expect a contractor to understand the full impact of the change or "ripple effect" without knowing what changes will follow. Some contractors will attempt to limit the language in such change orders by adding "reservation of rights" language excluding the cumulative impact of multiple change orders.

A recent Veteran's Administration Court of Appeals decision held that such change orders did not extinguish the contractor's right to claim for "indirect" or "cumulative impact" damages in that a cumulative impact is a separate constructive change to the contract that would survive general release language in the individual change orders. Centex Beteson Construction Co., Inc., VABCA - 4613.

Congratulations to the Butler Transportation Improvement District

Ohio authorized by statute certain county transportation improvement districts (TIDs) to partner with ODOT to design, construct, improve and maintain streets, highways, bridges, interchanges and other defined transportation projects. Because of a TID's flexibility in innovative financing, concurrent engineering and faster construction schedules, costs are reduced and benefits accelerated. From its inception, our firm represented the first such TID (Butler County) to get such a road building program off the ground.

The Butler TID consisted of a major new interchange at I-75 and Union Centre Boulevard, connecting S.R. 747 to Cincinnati-Dayton Road opening access to I-75 from all parts of southeast Butler County, and a new 10.7 mile divided highway connecting downtown Hamilton to I-75. This component was the largest single road building contract in Ohio history and featured an aggressive schedule and innovative bonus program for early completion. As a result, the Michael A. Fox highway was completed in record time - eight months ahead of an already ambitious schedule - and without claims or disputes. The contractor received a $4.75 million bonus for his performance and the citizens of southwestern Ohio received a quality product, under budget and in record time. It has received national recognition for the quality of its construction and pavement.

The award-winning highway and other local roadway improvements have helped alleviate traffic congestion and are expected to have a huge impact on economic development in the area.

Congratulations to the Butler TID and all members of the design and construction team for an outstanding and innovative project that may form the model for many others to come.