In a case of first impression, in April 2016 the Northern District of Ohio held in Eberhard Architects, LLC v. Bogart Architecture, Inc., 314 F.R.D. 567 (N.D. Ohio 2016), that a contractor and its subcontractors may have committed copyright infringement by continuing work after the architect terminated the nonexclusive license to use the architect’s instruments of service (“IOS”).
Eberhard Architects, LLC (“Eberhard”) agreed to provide architectural services to Lifecare Hospice (“Lifecare”) in accordance with AIA B101-2007 (the “Agreement”). Based on the standard language of AIA B101-2007, Eberhard granted Lifecare a nonexclusive license to use the IOS created by Eberhard in connection with the construction of a 12-bed hospice inpatient facility:
Upon execution of this Agreement, the Architect grants to the Owner a nonexclusive license to use the Architect’s Instruments of Service solely and exclusively for purposes of constructing, using, maintaining, altering and adding to the Project, provided that the Owner substantially performs its obligations, including prompt payment of all sums due, under this Agreement. The Architect shall obtain similar nonexclusive licenses from the Architect’s consultants consistent with this Agreement. The license granted under this section permits the Owner to authorize the Contractor, Subcontractors, Sub-subcontractors, and material and equipment suppliers, as well as the Owner’s consultants and separate contractors, to reproduce applicable portions of the Instruments of Service solely and exclusively for use in performing services or construction for the Project. If the Architect rightfully terminates this Agreement for cause as provided in Section 9.4, the license granted in this Section 7.3 shall terminate.
Eberhard obtained a copyright in connection with the IOS for the project. Lifecare later breached the Agreement by failing to make required payments and Eberhard terminated the Agreement. Eberhard brought suit against Lifecare for breach of contract, and also asserted claims for copyright infringement against Lifecare and the contractor and subcontractors (the “Contractor Defendants”) alleging that the Contractor Defendants continued to use Eberhard’s copyrighted IOS after Eberhard terminated the nonexclusive license.
Relying on the language of AIA B101-2007, the Court noted that the parties expressly agreed that Eberhard’s termination of the Agreement would also terminate the nonexclusive license. The Court therefore denied the Contractor Defendants’ motion to dismiss and allowed Eberhard to proceed with its copyright infringement claims against the Contractor Defendants.
The Eberhard decision demonstrates the full scope of the power an architect wields via its ability to grant and revoke a nonexclusive license. If the architect terminates its design agreement with the owner, it may be able to effectively halt work on the entire project until the dispute is resolved or the parties reach an agreement as to the continued use of the architect’s IOS. In light of this possibility, contractors desiring additional protection should consider including language in their contracts permitting them to suspend work (or even terminate the contract) if the architect terminates the design agreement and questions arise as to the validity of the license protecting the architect’s IOS.
On March 23, 2016, the United States District Court for the Eastern District of Pennsylvania granted a general contractor’s summary judgment motion as to a subcontractor’s claim against it as well as its own claim against the subcontractor. In doing so, the Court addressed the importance of construction lien waivers and releases and the practical importance of raising performance and interference issues in a timely fashion.
In Bricklayers & Allied Craftworker Local 1 of PA/DE, et. al. v. ARB Construction, Inc. et. al, the School District of Philadelphia (“Owner”) hired Ernest Bock & Sons, Inc. (“EBS”) as the general contractor for a construction project at the General Phillip Kearney School (the “Project”). Subsequently, EBS hired Arb Construction, Inc. (“AC”) to supply all labor and materials to complete the masonry portion of the Project at a cost of $777,500.00.
The subcontract terms at issue involved termination and payment. EBS had the right to terminate AC and/or subsidize AC’s work following 48 hours of written notice if EBS determined AC (1) delayed the project; (2) provided faulty workmanship; (3) failed to provide acceptable supervision, or (4) failed to pay its subcontractors or suppliers. The payment terms of the subcontract required AC to certify payrolls and release claims and liens with payment applications, among other things. Important to this action, AC was required to supply a release of liens from “subcontractors/ suppliers and any labor/union organizations before payment is made.”
Along with each payment application, AC submitted the release of liens and certified payrolls, signed and notarized by AC’s owners. These releases certified that AC had paid “all taxes, welfare and pension fund payments, and fringe benefits.”
AC hired members of the Bricklayers & Allied Craft Workers, Local 1 (“Bricklayers”) to fulfill its labor obligations under the contract. Despite certifying it complied with the union fund obligations on the payment applications, AC was delinquent on its payments to the Bricklayers. Additionally, AC failed to provide a sufficient number of masons to complete the work in accordance with the Project schedule. EBS received multiple complaints from the Owner about AC’s work and the delay it was causing. AC claimed the delay was the fault of EBS, who AC alleged had failed to properly prepare the Project for the masonry phase. AC also claimed it was forced to expend its own resources to correct errors made by other subcontractors.
EBS notified AC it had 48 hours to increase its manpower, which it did by hiring another subcontractor. Subsequently, the Bricklayers stopped supplying masons to the Project because AC was still delinquent in its payment obligations to the benefit funds. EBS declared AC in breach of the contract and terminated the agreement. AC claims the termination was wrongful, as it was delayed because of EBS’ failure to properly manage the Project.
The Bricklayers filed suit against AC for its failure to pay contributions in violation of the collective bargaining agreement (“CBA”). AC in turn filed a third-party complaint against EBS, claiming it breached the subcontract by failing to pay money it owed to AC. EBS in turn counterclaimed against AC for breach of the subcontract. After discovery, EBS moved for summary judgment on AC’s breach of contract claim against it as well as its own breach of contract claim against EBS.
First, EBS argued it was entitled to summary judgment on AC’s breach of contract claim because AC released all of its claims against EBS. In the alternative, AC failed to provide releases from its own subcontractors to EBS, which was a condition precedent to payment.
The Court agreed, holding that EBS was entitled to summary judgment on AC’s breach of contract claim because AC released all claims it could have asserted through the signed releases. The releases were clear and unequivocal, and released all claims prior to the signing without preservation or exception. AC argued that the releases were unenforceable because EBS failed to provide it with a construction work schedule or a proper work area layout and failed to supervise other subcontractors who interfered with its work. Finally, AC argued that the releases were unenforceable because EBS failed to make full payment on the payment applications.
The Court rejected AC’s defenses. If AC had an issue with accounting issues or interference with performance, it had “clear options.” AC could have accepted payment and noted its objection on the application, or refused payment and refused to sign the accompanying release. Because AC did neither, it released its claims. Further, the fact that the notarization of the Releases did not adhere to Pennsylvania law did not render the Releases unenforceable.
Second, EBS moved for summary judgment on its counterclaim, asserting that AC breached the contract by 1) failing to supply adequate manpower and materials; 2) falsely certifying payment; 3) failing to timely complete its work; and 4) submitting non-compliant payment applications. Because the undisputed evidence demonstrated AC’s failure to comply with these terms, EBS was granted summary judgment on its own claims. The Court held that there was a genuine issue of fact however, with respect to calculating the damage amounts.
The takeaway point in Bricklayers is the importance of construction lien waivers and releases. The Court will interpret these as a “contract within a contract,” and they are regularly enforced in accordance with their terms. You should not assume that a waiver is limited to Mechanic’s Lien rights; depending on the language in the waiver, signing a waiver may constitute a release of all rights you may have for payment or performance issues during that particular phase of the work. As the Court noted, if you have an issue with performance and/or payment, you have options. This Court concluded that AC could have accepted payment and noted its objection on the application or refuse the payment and refuse to sign the release. When you sign the waiver and/or release, you will typically be held to those terms.
The employees of government contractors now have much greater protection from discrimination on the basis of sexual orientation and gender identity. In response to the General Assembly’s delay in passing the Pennsylvania Fairness Act (a bill intended to broaden protections available to all Pennsylvania workers that has seen no progress since it was referred to the State House on September 8, 2015), Governor Tom Wolf took action on April 7, 2016, signing two executive orders that protect not only state employees, but also employees of contractors doing business within Pennsylvania.
The first executive order, Order 2016-04, prohibits discrimination against “any employee or applicant for employment on the basis of race, color, religious creed, ancestry, union membership, age, gender, sexual orientation, gender expression or identity, national origin, AIDS or HIV status, or disability.” Order 2016-04 is premised on the belief “that the employment practices of the Commonwealth of Pennsylvania must be nondiscriminatory in intent and effect to promote public confidence in the fairness and integrity of government.” In addition to prohibiting discrimination, Order 2016-04 bans sexual harassment based on the above-referenced bases and empowers the Secretary of the Administration to “supervise the development, implementation, and enforcement of the Commonwealth’s equal employment opportunity programs through the Bureau of Workforce Planning, Development, and Equal Opportunity.” Order 2016-04 rescinds and replaces Executive Order 2003-10.
The second executive order, Order 2016-05, guarantees that “discrimination by reason of race, gender, creed, color, sexual orientation, or gender identity or expression does not exist with respect to the award, selection, or performance of any contracts or grants issued by Commonwealth agencies.” Order 2016-05 is premised on Pennsylvania’s continued commitment “to promoting the prosperity and economic growth of all businesses and citizens of the Commonwealth of Pennsylvania, regardless of race, gender, creed, color, sexual orientation, or gender identity or expression,” and designates “the Department of General Services as the central agency to develop and manage Commonwealth agency programs to ensure that discrimination . . . does not exist with respect to the award, selection, or performance of any contracts or grants issued by Commonwealth agencies.” Order 2016-05 rescinds and replaces Executive Order 2006-02.
Governor’s Wolf’s actions are intended to demonstrate Pennsylvania’s direct opposition to the recent North Carolina Bill requiring transgender individuals to use public restrooms corresponding to the biological sex on their birth certificate, as well as a Mississippi Bill allowing businesses to deny service to homosexual customers based on religious grounds. According to Governor Wolf, the passage of the North Carolina Bill, coupled with the stagnation of the Pennsylvania Fairness Act, is “a call to pass non-discrimination legislation in Pennsylvania now.” The passage of both executive orders garnered widespread support from a variety of anti-discrimination organizations, including the ACLU, the Anti-Defamation League, Equality Pennsylvania, the Human Rights Campaign, the National Gay & Lesbian Chamber of Commerce, as well as Philadelphia Mayor Jim Kenney and Philadelphia’s City Council.
It is not uncommon for contractors and subcontractors to be verbally directed to perform extra work on construction projects without written change orders. Construction attorneys frequently deal with payment claims for such work if payment for that extra work is not made voluntarily. The individual directing the change, however, generally does not think that they will be held individually liable for directing a contractor/subcontractor to perform extra work. Nevertheless, that issue was recently addressed in Scungio Borst & Associates v. 410 Shurs Lane Developers, LLC, No. 2493 EDA 2012 (Pa.Super. November 20, 2014).
In Scungio, 410 Shurs Lane Developers, LLC (“410 SLD”) hired Scungio Borst & Associates (“SBA”) as the general contractor to construct SLD’s condominium project in Philadelphia, Pennsylvania (the “Project”). SBA performed the work under the contract, as well as $2.6 million in extra work at the direction of 410 SLD and its President and fifty percent shareholder, Robert DeBolt. When SBA was not paid approximately $1.5 million incurred due to the extra work, it filed suit against 410 SLD (the company) and DeBolt (the individual). DeBolt subsequently filed a motion for summary judgment as to all claims pending against him individually, which included a claim for the alleged violation of the Contractor and Subcontractor Payment Act, 73 P.S. §§ 501-516 (“CASPA”). The trial court granted DeBolt’s motion.
SBA appealed, challenging the grant of summary judgment in favor of DeBolt on the CASPA claim. The issue before the Superior Court of Pennsylvania was whether SBA can maintain a CASPA claim against DeBolt, individually, based upon 410 SLD’s failure to pay SBA. SBA’s theory of liability was that DeBolt, as an authorized agent of 410 SLD who authorized the extra work, is an “owner” as that term is defined under CASPA. Alternatively, SBA argued that DeBolt was individually liable under CASPA for failure to pay pursuant to all written and verbal change orders. The Court rejected both arguments.
Under CASPA, “Owner” means a “person who has an interest in real property that is improved and who ordered the improvement to be made. The term includes successors in interest of the owner and agents of the owner acting with their authority.” 73 P.S. § 502 (emphasis added). “Person” means a “corporation, partnership, business trust, other association, estate, trust, trust foundation or a natural individual.” Id. The term “Agent,” however, is not defined under CASPA.
After a detailed analysis of selected sections of CASPA and statutory construction principles, the Court held CASPA liability lies against “contracting parties” only. The Court recognized, “Performances by a contractor or a subcontractor …shall entitle the contractor or subcontractor to payment from the party with whom the contractor or subcontractor has contracted.” Id. § 504 (emphasis added). Since 410 SLD contracted with SBA, not DeBolt, DeBolt was not liable to 410 SLD under CASPA. The Court added, “The reference to authorized agents in the definition of owner merely reinforces that their conduct is imputed to and binding upon the owner. Since the term ‘agent’ is not defined in the statute, conceivably that term could include architects, project managers, and designated representatives who are acting on behalf of the owner in dealing with the contractor.”
Additionally, the Court held that DeBolt was not individually liable under CASPA because there were no allegations that his dealings with SBA created a new contract with him personally. The Court reasoned that DeBolt’s verbal authorizations were part of the construction contract between SBA and 410 SLD. Accordingly, the Court found no basis to subject DeBolt to personal liability based on his verbal authorizations and change orders.
Judge Bender filed a Dissenting Opinion, which Judges Mundy and Wecht joined. Judge Bender’s characterization of the facts is as follows: The parties entered into a construction contract on September 2, 2005, in which SBA was to receive $3.8 million for the labor and materials it supplied to the Project. SBA claimed it was directed to submit all bills to 410 SLD and DeBolt. However, at the end of June 2006, SBA stopped receiving payments, but was assured by DeBolt that payment would be forthcoming. Based upon these assurances, SBA continued its performance until November 8, 2006, when SBA was informed that the contract was terminated. At that time, SBA was owed $1,544,161, plus interest and costs, which related to change orders authorized by DeBolt. Finally, 410 SLD’s position was that oral change orders were not valid. Nevertheless, SBA asserted that it was often the practice that DeBolt would verbally authorize change orders and would not sign them. SBA argued that that because DeBolt had an active role in decision making and authorizing change orders, he should be considered an agent of the owner and subject to liability pursuant to CASPA. Judge Bender agreed. As such, Judge Bender concluded that genuine issues of material fact existed and that granting summary judgment in DeBolt’s favor was improper.
The take-away from this case is that this “agent of owner” argument could be used again if, for example, a corporate constituent or member of a limited liability company, representing an owner, makes first-person and informal statements to a contractor regarding payment from the owner. In fact, the Superior Court held that there was sufficient evidence to establish that a managing member of a limited liability company which constructed new homes assumed personal responsibility when the managing member assured the purchasers of one of the homes that he would take care of their concerns regarding problems that arose during construction and that he personally guaranteed the final quality of the home. See Bennett v. A.T. Masterpiece Homes at Broadsprings, LLC, 40 A.3d 145, 150 (Pa.Super. 2012) (“person acting as an agent may assume personal liability on a corporate contract where he executes a contract in his own name or voluntarily undertakes a personal responsibility”) (emphasis added).
The United States District Court for the Western District of Pennsylvania recently issued an opinion in a diversity action dismissing with prejudice a principal’s claims for tortious interference with a contractual relationship, breach of fiduciary duty and bad faith against its surety.
In Reginella Construction Company, Ltd. v. Travelers Casualty and Surety Company of America, Civ. A. No. 12-1047, 2013 WL 2404140 (W.D. Pa. May 31, 2013), Reginella Construction Company, Ltd (“Reginella”) sued its surety, Travelers Casualty and Surety Company of America (“Travelers”) for breach of fiduciary duty, tortious interference with a contractual relationship and bad faith. The court, however, granted Travelers Motion to Dismiss all claims against Travelers with prejudice.
Regarding Reginella’s breach of fiduciary duty claim, the court looked to Pennsylvania case law regarding sureties, insurers, and commercial guarantees, and concluded that (1) surety bond agreements are standard commercial contracts; (2) imposing a fiduciary duty relationship between parties to a contract is the exception rather than the rule; and (3) a surety is not an insurer. Based upon these conclusions, the court predicted that the Pennsylvania Supreme Court would not find a fiduciary relationship between a surety and its principal. Therefore, the court concluded that Travelers owed no fiduciary duty to Reginella.
The court then turned to Reginella’s tort claims (i.e. its bad faith and tortious interference with a contractual relationship claims) and held that Pennsylvania’s gist of the action doctrine barred Reginella’s ability to assert either claim. Specifically, Pennsylvania’s gist of the action doctrine bars tort claims (1) that arise solely from a contract between the parties; (2) where the duties allegedly breached were created and grounded in the contract itself; (3) where the liability stems from a contract; or (4) where the tort claim essentially duplicates a breach of contract claim or the success of which is wholly dependent on the terms of a contract. The court found that the relationship between Reginella and Travelers was purely contractual in nature, and therefore, the gist of the action contract barred Reginella’s tort claims.
Although the Pennsylvania Supreme Court has not yet ruled upon the issue, Reginella suggests and supports the notion that a principal’s only cause of action against its surety under Pennsylvania law is one for breach of contract. Therefore, pursuant to Reginella, the terms of the contract between a principal and its surety will strictly govern the relationship and obligations between the parties.
In the recent decision of Cresci v. Martin, the Pennsylvania Superior Court issued an opinion qualifying the rule regarding prejudgement interest for breach of a construction contract. In October of 2004, Cresci Construction Services, Inc. (“Cresci”) and James H. Martin (“Martin”) entered into a construction contract (the “Contract”) wherein Cresci agreed to build a home for Martin in exchange for $184,730. The Contract did NOT contain a liquidated damages provision in the event that Cresci caused delays in completing construction, nor did it contain a “no damages for delay” clause, meaning that Martin could sue for his actual damages in the event that Cresci was late in constructing the hom.
Construction of the Martin’s home did not go smoothly, and Martin sued to recover his alleged damages. After a trial on the merits, the jury found that Cresci breached the Contract and entered a verdict awarding Martin $66,000.00. The jury’s verdict sheet did not subcategorize the amount of damages. After the verdict was entered, Martin filed post-trial motions seeking attorneys’ fees and prejudgment interest on the breach of contract damages. The trial court denied Martin’s motion, and Martin appealed to the Superior Court.
On appeal, the Superior Court affirmed. Regarding Martin’s claim for the prejudgment interest, the Superior Court explained that under Pennsylvania law, prejudgment interest is awarded automatically only when the damage resulting from the breach is liquidated at the time of breach. In all other circumstances, the decision whether to award prejudgment interest is left to the discretion of the trial court. The Superior Court concluded that because Martin’s damages were unliquidated, consequential damages (including items such as mortgage interest and the costs of maintaining two properties), an award of prejudgment interest on those damages was purely discretionary. The Superior Court found no abuse of discretion, and therefore affirmed the denial of prejudgment interest. The Cresci decision reinforces the significance of including liquidated damages provisions in construction contracts.
In Elk River Pipeline LLC v. Equitable Gathering LLC, S.D. W.Va. (2013), the United States District Court for the Southern District of West Virginia determined that West Virginia law governed a dispute between two parties to a construction contract despite the fact that the contract expressly stated that all disputes arising from that contract would be governed by the law of Pennsylvania.
In Elk River, Equitable Gathering LLC (“EQT”) entered into a Master Service Agreement with Elk River Pipeline LLC (“Elk River”) for the construction of a section of pipeline in West Virginia. The Master Service Agreement stated that it would be “construed, interpreted and enforced in accordance with and shall be governed by the laws of the Commonwealth of Pennsylvania, excluding its conflict of law rules.” Despite this language, Elk River contended that West Virginia law should apply to the contract. The Court agreed, holding West Virginia law governs construction of the Master Service Agreement and requires a determination of whether a “substantial relationship” exists with the jurisdiction whose law was selected by the parties. Ultimately, the Court found that the contract did not have a substantial relationship with Pennsylvania, and therefore, the Court refused to enforce the contract’s choice of law provision.
Following the Elk River decision, contractors entering into construction contracts for projects in West Virginia should be careful to ensure that the choice of law provision in that construction contract selects the law of a state that has a substantial relationship with the contract.
In Ribarchak v. Monongahela, 44 A.3d 706 (Pa. Commw. Ct. 2012), the Commonwealth Court held that a subcontractor (Ribarchak) could not assert a breach of contract claim against a general contractor (or the owner) based on the fact that the general contractor used the subcontractor’s quote (and identified the subcontractor) in its bid to the owner. Furthermore, even though the contract between the owner and the general contractor required that the general contractor substitute any subcontractors within thirty days after contract award date, the owner decided to permit the general contractor to make a substitution five months after the award, and the Court held that Ribarchak was not a third-party beneficiary of the 30-day substitution provision and therefore could not pursue a claim against the general contractor and/or the owner. This case means that absent a general contractor’s express acceptance of a subcontractor’s bid, there is no contract between the subcontractor and the general contractor.