Litigation


At first glance, this case looked like a personal injury case and I had very little interest.  But, as I read further, I quickly realized that this case turns on contract law and has serious implications for owners and contractors with respect to liability for third-party claims.  The case is called Estate of Pitts v. City of Atlanta, and the troubling decision was entered by the Georgia Court of Appeals on October 5, 2011.

Here’s what happened:

  • On June 14, 2007, a construction worker named Mack Pitts was killed on a project at the Atlanta airport when he was struck by a vehicle driven by an employee of A&G Trucking, Inc.
  • In an action separate from this case, the estate of Mr. Pitts sued and obtained a wrongful death judgment against A&G Trucking, but the judgment exceeded the limits of A&G Trucking’s auto liability insurance coverage
  • The estate of Mr. Pitts then sued the City of Atlanta and several contractors alleging that the City and the contractors breached their contractual duties to require that A&G Trucking carried the minimum required auto liability insurance; the estate further alleged that the City breached the ministerial duty to require A&G Trucking to carry insurance in the amount dictated by the contract
  • The trial court granted summary judgment in favor of the contractors and the City on the breach of contract claims on the grounds that the Estate lacked standing to enforce the contractual minimum insurance requirement, and granted summary judgment to the City on the ministerial duty claim (this part of the decision was not overturned by the Court of Appeals)
  • The Court of Appeals reversed the trial court’s summary judgment in favor of the City and the contractors on the breach of contract claims holding that Mr. Pitts was a third-party beneficiary to the construction contracts (the prime and subcontract) that contained minimum auto liability insurance requirements of $10,000,000

The most fascinating (and scary) part of this case is how the Court of Appeals persuaded itself that Mr. Pitts was an intended third-party beneficiary of the prime and subcontract.  Normally, to make a claim as a third-party beneficiary, a claimant has to show that the parties to the contract clearly intended to provide a benefit to that claimant.  The benefit can not be merely incidental, but must have been intended.  That’s usually a pretty high standard.  The defense raised several good arguments against finding that Mr. Pitts’ Estate had standing to sue for breach of contract.  After all, he wasn’t a party to any of these agreements and probably never even saw the contracts themselves or knew of their contents.  To conclude that the Owner, prime contractor, and subcontractor all entered into agreements with the intent to provide Mr. Pitts third-party benefits and rights to enforce those agreements on his behalf seems like a stretch.  But that’s exactly what the Court of Appeals held.

The Court was apparently persuaded by language contained in the OCIP (Owner Controlled Insurance Program) that stated its purpose was “to provide one master insurance program that provides broad coverages with high limits that will benefit all participants involved in the project.”  The Court looked to the definition of “participant” to determine that it was broad enough to include individual workers on the project, not just other contractors.

There was one argument buried deep in the decision that addressed a provision of the subcontract that expressly stated that no third-party benefits were created.  This seemed like a great argument and might well have changed the outcome of the case.  However, the provision was worded too narrowly.  The exclusionary language referred only to Subcontractor’s lower tier subcontractors and vendors.  Thus, the Court correctly found that this provision did not apply to Mr. Pitts because he was not a subcontractor or vendor the Subcontractor.

Some of the defendants are seeking the Court’s reconsideration of this decision, and given the impact of this decision, there may be further appeals to come.  But until the dust has settled and the final decision on this case has been made, there are at least two lessons that every owner, contractor, and construction lawyer in Georgia should take away:  (1)  be absolutely sure that contractors and subcontractors at every level are carrying the minimum insurance coverages required by their contracts; and (2) draft “no third-party beneficiary” clauses very broadly to expressly exclude rights of third-party beneficiaries of any kind.

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For all those that have been waiting to see whether the LEED rating system would spark litigation, the wait is over.  On October 8, 2010, a class action lawsuit was filed against the USGBC and its founders.  The suit was filed by Henry Gifford and his company Gifford Fuel Saving, Inc. on behalf of “consumers, taxpayers, and building design and construction professionals.” 

Gifford has apparently been an outspoken opponent of the LEED rating system for a while, and in his lawsuit he alleges that the USGBC falsely claims that the LEED rating system creates energy savings when it does not and by doing so deceives building owners, designers, and other building professionals into believing that LEED buildings are more energy efficient than non-LEED buildings.  Of course, I’m paraphrasing the allegations—you can download the actual complaint here to read all of the claims.

Shari Shapiro has written a great commentary on www.greenbuildinglawblog.com about whether the designated categories of plaintiffs are similarly situated enough in order to survive the fairly rigorous legal standards for certifying a “class action.”  I agree with her assessment that the types of plaintiffs and the ways in which they have allegedly been damaged by the LEED rating system do vary widely.   For this reason, I believe the attorney for the plaintiffs has an uphill battle to fight on the class certification. 

But aside from the class action aspect of the lawsuit, Gifford’s main arguments are that the USGBC is perpetrating a huge fraud against the world by claiming that LEED certified buildings are energy efficient.  He claims that LEED does not require verification or actual energy use data to measure performance of energy savings strategies for which LEED points are awarded.  (Under the latest version of LEED—LEED 3.0—measurement and verification of energy performance is required following construction)   He also claims that the USGBC has manipulated data from a study performed by the New Buildings Institute (NBI) in March 2008 to falsely promote that LEED buildings are more energy efficient than non-LEED buildings.

Now, I obviously don’t know enough about the facts to make a judgment as to whether they are true.  But, I also feel like Gifford is not giving enough credit to his purported class of plaintiffs.  To believe Gifford’s allegations, you have to believe that sophisticated building owners and operators, as well as licensed design and construction professionals have all been misled by the USGBC to believe that LEED certification equals energy efficiency—end of story.  That ignores the fact that the LEED rating system has 5 other core areas of sustainable strategies that are part of the certification point system.  Energy efficiency is just one aspect of LEED, not the whole enchilada. 

 Is Gifford suggesting that building owners do not have any idea what they are bargaining for when they contract for a LEED-certified building?  Or does he simply believe that the value the owners place upon the LEED certification is solely based upon the energy efficiency strategies that are implemented rather than the cumulative impact of all of the sustainability measures that are part of a LEED building?

This case has just started and many bloggers and other green building professionals (including me) will be analyzing it and writing about as it progresses.   So, there will be more to come on this case.

What do you think about this lawsuit?  Do you think it has merit?

The title of this post is the first line of a judgment recently entered in a construction case by a federal judge in Atlanta.  The judge issued a 35-page opinion for a matter involving approximately $60,000 of extra work claims, which ultimately turned into a judgment of nearly $275,000 for the contractor.  The case is Circle Y Construction, Inc. v. WRH Realty Services, Inc. and WRH Hidden Colony, LLLP and a copy of the judge’s order is found here.

Here’s a brief summary of the facts:

  • WRH entities (owner) owned and managed an apartment complex in Georgia.  WRH entered into a standard AIA-form contract with Circle Y (contractor) to perform renovation work on certain units at the complex.
  • After the contractor completed the work, one or more of the owner’s employees/agents asked the contractor to perform additional work, which it did.
  • When the contractor invoiced the owner approximately $60,000 for the additional work, the owner took the position that it did not have to pay for the extra work because: (1) there were no executed change orders as required by the contract; and (2) the additional work was not authorized by employees or agents having authority to bind the owner.
  • The owner did not dispute that the extra work was done but simply disagreed with the amount being charged by the contractor—significantly, the owner believed the extra work was worth $37,000, but refused to pay the contractor any portion of the invoiced amount unless the contractor agreed to abandon its claim for the disputed portion of charges.
  • The judge, relying on long-established case law relating to construction claims, awarded the contractor every penny of its $60,000 claim (plus additional amounts for work that contractor had performed but failed to include in its original complaint), plus interest and attorneys’ fees totaling more the $196,000.  In the end, the judgment against the owner totaled approximately $275,000, which is more than 10 times the amount that the owner originally disputed as owing ($23,000).

There are some good lessons here for managing construction disputes—or, more precisely, for how not to manage them—and they include:

1.   Pay undisputed money—don’t withhold it as leverage to beat down “downstream” parties when there are disputes over and above the undisputed amounts;

2.  Don’t rely on a contractual requirement for change orders to be in writing—clauses requiring change orders to be in writing and/or requiring signatures by only “authorized” representatives are not always enforced and may not be valid defenses to non-contractual claims for relief; and

3.  Act in good faith—behaving badly may result not only in a bad result, but also in payment of the other side’s attorneys fees, even where those fees appear to be totally out of proportion to the amount in issue.

I found one point made by the judge to be of particular significance because it is a complaint that is commonly made by contractors and suppliers at every tier on a construction project about the payment process, and that is:  “Defendants were aware that the materials and labor for the invoiced work had to be paid by Circle Y, a small contractor, out of pocket, and calculated that if they waited long enough, Circle Y would agree to their pennies-on-the-dollar offer due to the financial pressures a small contractor faces in these difficult economic times.”

Do you agree that owners and upstream contractors are using cash-flow pressures as financial leverage in negotiating disputed (or undisputed) change orders or contract payments?

Note:  The case is on appeal, which means that it isn’t over yet.  We’ll follow it as it makes its way through the appeal process and keep you posted.