November 2001

In This Issue

• Supreme Court Allows Emotional Distress Claims Against Builders
• Court Rejects Sub's Unjust Enrichment Claim Against City
• The Risk of Utilizing Additional Insureds
• Subcontractor on Quantum Meruit Claim Could Not Recover Prompt Pay Interest and Attorney's Fees
• Anti-Project Labor Agreement Statute Upheld

Supreme Court Allows Emotional Distress Claims Against Builders

Donald W. Gregory, Construction Law Chair

Until recently no Ohio homeowner was ever able to recover against the builder for non-economic type damages, such as loss of enjoyment, annoyance and discomfort. However, a Court of Appeals case out of Cuyahoga County found that such recovery was permissible and the Ohio Supreme Court elected to hear the case.

The Ohio Supreme Court decided to join the minority of courts that allow emotional distress damages in contract disputes between homeowners and builders. The Supreme Court stated that its decision "will not open the floodgates" because in order to recover for emotional distress the breach of contract must have also caused bodily harm or be "of such a kind that serious emotional distress was a particularly likely result." Kishmarton v. William Bailey Constr., Inc. (2001), 93 Ohio St.3d 226.

However, whether the floodgates are now open to emotional distress claims in residential cases remains to be seen, as is the issue of whether commercial owners may assert such claims against contractors.

Court Rejects Sub's Unjust Enrichment Claim Against City

A subcontractor performing runway work at the Cleveland airport was unable to collect from the general contractor and sued the City on an unjust enrichment theory.

The Court of Appeals for Cuyahoga County ruled that the doctrine of unjust enrichment did not apply to a municipal corporation. G.R. Osterland Co. v. Cleveland (2000) 140 Ohio App.3d 574.

The Court also pointed out that (to prevent double recovery) the subcontractor on an unjust enrichment claim can only collect from the owner when "the contractor is unavailable for judgment and the contractor is unable to pursue the owner."

The Court's decision related specifically to municipalities and did not clarify whether unjust enrichment claims can be asserted against other public owners in Ohio.

This case means that public owners will have another tool to defend unjust enrichment claims by subcontractors and that subcontractors and suppliers must carefully rely upon their mechanic's lien and payment bond rights when a contractor becomes insolvent.

The Risk of Utilizing Additional Insureds

The construction industry has increasingly utilized "additional insured" requirements where the owner, architect or contractor are to be named additional insureds by the subcontractor. This endorsement gives these third party additional insureds (often contractors) the right to make claims directly against the subcontractor's insurance policy. This means that the subcontractor's insurance policy will ultimately pay for any loss, regardless of who is at fault.

This practice also means that the benefits of Ohio's anti-indemnity statute are lost in that the subcontractor is agreeing to a "broad form indemnity" otherwise unenforceable in Ohio.

Examples of insurance provisions for a subcontractor to avoid include:

• Blanket additional insured endorsements (particularly the general contractor who is more likely to be involved in accidents than the owner);

• Waivers of subrogation for claims covered by third party insurance — such as worker's compensation and general liability insurance.

Subcontractors are also warned to avoid subcontract language requiring "additional insured" on the "11/85" form or any other that includes "completed operations coverage" in that many insurers are refusing to provide this coverage, particularly in Western states experiencing a flood of construction defect claims.

Some general contractors will allow subcontractors to substitute Owners and Contractors Protective (OCP) liability insurance in lieu of "additional insured" coverage. This is a more subcontractor friendly approach. Another good alternative, and one favored by the AIA documents is for the general contractor to purchase a Project Management Protective Liability (PMPL) policy.

If forced to use an additional insured endorsement, subcontractors are encouraged to provide a "manuscript" endorsement saying that the additional insured is covered only "to the extent of bodily injury and property damage caused by the negligent acts or omissions of the subcontractor."

Regardless of the insurance strategies utilized, we strongly recommend that the client fax a copy of the relevant insurance and indemnity provisions to its insurance agent and request the precise type of policy necessary to cover this risk. 

Subcontractor on Quantum Meruit Claim Could Not Recover Prompt Pay Interest and Attorney's Fees

In Wild-Fire, Inc. v. Laughlin (Clark Cty. 2001), 2001 Ohio App. LEXIS 976 (unreported), a dispute arose between a general contractor and a subcontractor regarding payment for the installation of three electric services. The subcontractor claimed that its original bid included only one electric service, and that the general's failure to pay was a breach of contract; conversely, the general claimed that the original bid included all three electric services and consequently denied liability for any additional payment under the contract. The lower court decided in the general's favor on the scope of the original bid, but then awarded the subcontractor a somewhat lower amount of recovery in quantum meruit (the reasonable value of the work performed).

On review, the Clark County Court of Appeals followed its prior decision in Soloman v. Excel Marketing, holding that a plaintiff recovering damages in quantum meruit cannot recover interest or attorney's fees under the Prompt Payment Act (R.C. §4113.61), because the statute requires a valid and enforceable contract claim as a basis for recovery. Because the plaintiff recovered under a theory of quantum meruit, and not for breach of contract, recovery of interest and attorney's fees under the Prompt Payment Act was inappropriate. The court went on to hold that recovery under the Prompt Payment Act was inappropriate because there was credible evidence of a good-faith dispute between the parties — namely the dispute over what was included in the original bid and contract. Existence of a good-faith dispute precluded recovery of interest and fees under the Prompt Payment Act.

Anti-Project Labor Agreement Statute Upheld

Ohio's "Open Contracting Act" became law on July 13, 1999. O.R.C. Chapter 4116. The Act was designed to restrict Project Labor Agreements (PLAs) where employees of contractors and subcontractors working on the project would have become members or pay dues to a union.

Labor challenged the Act and argued that it was pre-empted by the National Labor Relations Act ("NLRA") and therefore unconstitutional under the Supremacy Clause of the U.S. Constitution. The trial court in Cleveland agreed and enjoined the enforcement of the Act.

The Court of Appeals for Cuyahoga County recently ruled that the Act was not pre-empted and was constitutional in that it did not prohibit PLAs outright but merely prevented public owners from entering into PLAs with objectionable terms (such as mandatory union membership).

The dissent argued that this was a distinction without a difference in that a PLA to be effective must require contractor compliance with the terms entered into between the union and public owner (such as mandatory union membership).

This case may well find itself into the Ohio Supreme Court, but in the interim, PLAs will have to be very narrowly drafted or will be ineffectual.