Kegler Brown • Construction Law Newsletter

May 2007

In This Issue

Construction Manager Insulated From Prime Contractor Claim
AIA 2007 Revisions Coming
What Subcontract Changes Are Coming in '07?
Bidder & Surety May Be Liable For Low Bid
Firm News

Construction Manager Insulated From Prime Contractor Claim

Donald W. Gregory,
Construction Law
Chair

A contractor on a multi-prime contractor University project sued the construction manager for (1) negligence and (2) tortious interference with his contract because of alleged scheduling shortcomings and other mismanagement. The Common Pleas Court granted the construction manager’s motion to dismiss and ruled that such claims could not survive under existing Ohio law. Wagner-Smith Co. v. Ruscilli Construction Co., Inc., 2006 WL 3114403 (Ohio Ct. Common Pleas Sept. 25, 2006).

The Court reasoned that the negligence claim was barred by the economic loss rule (requiring privity of contract) in view of the recently decided Corporex case, and said that the contractor’s sole remedy was to sue the University, who would elect whether or not to bring the construction manager into the case. As to the tortious interference claim, the Court held that the construction manager’s actions with respect to the schedule were “privileged,” as the construction manager was presumably acting for the benefit of the University, and therefore protected.

This case emphasizes the practical difficulties associated with suing parties you do not have a contract with, under existing Ohio law, even if their actions directly impacted you on a multi-prime project or otherwise.

AIA 2007 Revisions Coming

AIA is preparing its revisions of most of its key contract documents for the first time in a decade. While these changes are not yet finalized, it is anticipated that the following changes will be featured:

• Additional insured coverage will be required of contractors and subcontractors by virtue of the A201 general conditions.
• There will be limitations on the contractor’s ability to request financial assurances from the owner.
• The architect can be replaced by an Initial Decision Maker (IDM) who will act as a third-party neutral in disputes between the owner and contractor. Those decisions could later be “appealed” to mediation and ultimately arbitration or litigation.
• Mandatory arbitration, in AIA documents since 1888, is out and the parties can elect arbitration or litigation by checking a box.
• Owners will be able to inquire about the payment status of subs/suppliers, and make joint check payments if necessary.

The final documents are expected to be released in the fall of this year.

What Subcontract Changes are Coming in '07?

In view of the proposed 2007 AIA revisions, including the revisions to the AIA A201 general conditions, which are incorporated by reference into the AIA A401, contractor and subcontractor groups are evaluating whether they want to continue to endorse the AIA A401 subcontract, which has been traditionally endorsed by ASA and ASC.

There is the possibility that both contractors and subcontractors concerned about the inclusion of “additional insured” will choose not to utilize the AIA A401 form any longer. Some contractors and subcontractors believe that an additional insured requirement in effect mandates a broad form of indemnity, which many believe is unfair because it shifts the risk and cost of another’s negligence upon a non-negligent party or their insurer.

A coalition group called the Construction Industry Contracts Council (CICC), consisting of subcontractor, general contractor, owner and surety associations, including ASA, ASC, AGC, COA, CURT and other industry groups, is drafting its own contract documents which may be available in 2007, together with the 2007 editions of the AIA documents.

The effect of these contract document changes on the industry remains to be seen.

Bidder & Surety May Be Liable For Low Bid

The case of White Hat v. Ohio Farmers Ins. Co., 167 Ohio App.3d 663, 2006-Ohio-3280, involved a contractor’s effort to withdraw a public bid on a school project. The low (very low) bidding contractor gave notice of the withdrawal of its bid after the bid opening (but presumably beyond the two-day period for withdrawal of a bid without liability in the event of a math or clerical error). The agent for the school owner said he had accepted the low bidder by submitting a contract that the low bidder refused to sign. The surety for the low bidder also denied liability on the bid bond.

At trial, the Court granted the contractor’s motion for a directed verdict agreeing with the contractor that no contract with a public authority is formed under R.C. §153.12 until a contract is formally signed. Ultimately, a jury found in favor of the surety on the bid bond as well.

However, on appeal the Court of Appeals reversed and found that a contract could be formed by the public owner orally accepting the bid (an oral contract) and ultimately memorializing that agreement into an executed written contract.

In addition, the Court of Appeals found the surety could not use the defense that the owner had not provided proof of financing, in that the surety had repudiated the contract by failing to pay on the bid bond.

This case means that low bidders and their sureties will have potential liability should the low bidder fail to properly withdraw a clerical or math mistake within the two-day statutory period, and still fail to enter into a contract with the owner. That liability is typically the cost difference between the low bid and the price of the second bidder who ultimately performs the work.

Firm News

Don Gregory spoke to the Ohio Asphalt Contractors on “Risk Management 101” on March 20, 2007.

Don Gregory presented a seminar to ABC on March 16, 2007 addressing how to best handle Article 8 claims.

Kegler, Brown, Hill & Ritter will be presenting a seminar on June 28, 2007 entitled “When Good Projects Go Bad.” The seminar will be held at the Fawcett Center on Olentangy River Road in Columbus.

Credits

Kegler, Brown, Hill & Ritter's Construction Law Newsletter is prepared by the Construction Law practice group.

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