Court will Uphold Liquidated Damages so long as Reasonable at the Time of Contracting

Originally posted on July 16, 2013 by Ansley

K-Con Building Sys., Inc. v. United States, 97 Fed. Cl. 14 (2011).

K-Con, a design-build contractor, entered into three separate contracts with the United States Coast Guard for the design and construction of pre-fabricated metal buildings in three cities. As it relates to the Elizabeth City contract, K-Con brought suit seeking to convert its termination for default into a termination for convenience and for recoupment of liquidated damages. K-Con moved for summary judgment on the grounds that the liquidated damages (“LDs”) assessed by the Government were arbitrary and inconsistent with the actual damages incurred.

Various delays over the course of the contract’s term, to include worldwide steel shortages, shipping delays and issues with defective specifications, resulted in K-Con’s inability to meet the extended contract completion date. The Government terminated K-Con for default and used the remaining funds under the contract in reprocurement.

K-Con argued at summary judgment that the LD rate of $551 per day was arbitrary because the other two contracts K-Con and the Government were involved in had different LD rates. K-Con also argued that the Government was not permitted to include personnel and administrative costs with the LDs.

Judge Sweeney held that the different rates used in the other contracts were irrelevant to the Elizabeth City contract rate. The court looks to the time of the contract’s execution to determine whether or not an LD provision is reasonable. The court will not enforce LD clauses intended as a penalty, but the purpose of these provisions is to “allocate the consequences of a breach before it occurs.” For this reason, the Court upheld the LDs in the Elizabeth City contract as reasonable because K-Con could not prove that at the time of contract execution the Government could not have reasonably expected to spend the LD amount as a result of the breaching party’s breach.

The Court also upheld the Government’s inclusion of administrative and personnel costs in the LDs. In so holding, the Court found that since a contractor can recover its overhead from the Government in LDs, the Government should likewise be able to recover the same when the contractor is in breach.

This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.

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Act’s Definition of “Occurence” Only Applies Prospectively

Originally posted on December 6, 2012 by Ryan

The South Carolina Supreme Court held unconstitutional the retroactivity clause in S.C. Code Ann. Section 38-61-70, which was made effective on May 17, 2011. The Act defines “occurrence” in a commercial general liability policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions and property damage or  bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself.”

The Act’s retroactivity clause provides: “This section applies to any pending or future dispute over coverage that would otherwise be affected by this section as to all commercial general liability policies issued in the past, currently in existence, or issued in the future.”

The S.C. Supreme Court held that this clause unconstitutionally violates the Contract Clause of both the U.S. and S.C. Constitutions because retroactive application of this definition would substantially impair existing contractual relationships. The Court addressed whether the Act was reasonable and necessary to effectuate a legitimate legislative purpose and held that it was not.

This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.

Notice of Arbitration Must Appear on First Page of Master Deed to be Enforceable

Originally posted on November 19, 2012 by Ansley

In Richland Horizontal Prop. Regime Homeowners Ass’n, Inc. v. Sky Green Holdings, Inc., the Court of Appeals upheld the trial court’s ruling that an arbitration clause on a master deed was unenforceable. In this case, a developer created a horizontal property regime by master deed. The master deed included  a cover page and then a second page where the arbitration provision was found. The developer later created a supplemental master deed, also including an arbitration provision, to add a new unit to the existing regime and reduce the proportionate share of common area ownership held by the original unit owners. The original unit owners filed suit seeking a declaratory judgment that the supplemental master deed violated the original master deed. The developer moved to compel arbitration, which motion was denied.

The court held that the arbitration clause failed to comply with the Uniform Arbitration Act which provides in § 15-48-10(a): “Notice that a contract is subject to arbitration pursuant to this chapter shall be typed in underlined capital letters, or rubber stamped prominently, on the first page of the contract and unless such notice is displayed thereon the contract shall not be subject to arbitration.”

The developer argued that the cover page of the master deed should not be included because the second page contains the following statement: “This is the first page of the Master Deed for The Richland Horizontal Property Regime. In the event other pages including, but not limited to cover pages, indexes, or tables of contents are placed in front of this page, those pages shall not be deemed to be the first page. This page and only this page shall be deemed the first page of the Master Deed for all legal purposes.

The court strictly construed the language of the statute and held that the “first page of the contract” meant  “preceding all others.” Since the cover page preceded the other pages in the master deed and it did not contain an arbitration provision, the court held that arbitration was not required.

This site and any information contained herein is for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.

Court Finds Developer not in Contempt for Stormwater Damage to HOA

Respondents/property owners filed suit against a developer for property damage caused by stormwater runoff. The circuit court judge issued an order granting a permanent injunction to the property owners, which enjoined the developer “from discharging sediment-laden stormwater onto [Respondents] property and causing damage thereto.”   Respondents later filed a motion to hold the developer in civil contempt for violation of the order. The circuit court held a hearing to determine if the developer was in contempt.  At the hearing, evidence was presented illustrating efforts the developer had taken to prevent the stormwater runoff, albeit unsuccessfully. The court found the developer in contempt and this appeal followed.

The court of appeals reversed the order of civil contempt.  “Contempt results from the willful disobedience of a court order, and before a court may find a person in contempt, the record must clearly and specifically reflect the contemptuous conduct . . . . A willful act is one . . . done voluntarily and intentionally with the specific intent to do something the law requires to be done; that is to say, with bad purpose either to disobey or disregard the law.”

The evidence in this case showed that the developer had taken steps to alleviate the runoff by hiring consultants and workers to monitor the property, and erecting silt fences, rock dams, and hay bales. Although these efforts did not completely stop the stormwater from entering onto Respondents’ properties, the court held that the developer’s “good faith attempt to comply with the order [did] not warrant a finding of contempt.”

This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.

Tenant’s Failure to Surrender Possession of Premises Allows Lessor to Retain Security Deposit

Originally posted on August 7, 2012 by Ryan

Atlantic Coast Builders & Contractors, LLC v. Lewis, No. 27044.

Atlantic entered into a commercial lease for property owned by Lewis.  After taking possession of the property and making improvements to it, Atlantic discovered that zoning restriction prohibited commercial use on the property. Atlantic continued possession of the premises but stopped paying rent.  The lease provided for a security deposit in the event of Atlantic’s default of its obligations. Atlantic filed suit against Lewis for negligent misrepresentation, unjust enrichment, breach of the lease, and breach of the covenant of quiet enjoyment. The master found for Atlantic and required Lewis to return the $3,500 security deposit.  The court of appeals affirmed the master’s findings and Atlantic petitioned the supreme court for writ of certiorari. The court affirmed the court of appeals, and then substituted this opinion after a petition for rehearing.

“[W]here a decision is based on more than one ground, the appellate court will affirm unless the appellant appeals all grounds because the unappealed ground will become law of the case.” Based on this rule, the majority determined that considerations of Lewis’s arguments were barred. Lewis appealed only the master’s findings of negligent misrepresentation and breach of contract, not unjust enrichment.

The court reversed the court of appeals on the issue of Atlantic’s entitlement to return of the security deposit. This issue was preserved on appeal since it was set out in Atlantic’s complaint, denied in Lewis’s answer, and presented through witness testimony before the master. Lewis was entitled to retain the security deposit based on the clear language of the lease and Atlantic’s failure to surrender possession of the premises. Further, the supreme court held that Lewis would not be unjustly enriched by retaining the deposit.

Chief Justice Toal disagreed with the court’s determination of the Two-Issue Rule in her separate opinion.  The Chief Justice did not believe this rule would preclude the court from considering Lewis’s arguments because “where the question of preservation is subject to multiple interpretation, any doubt should be resolved in favor of preservation.”  The Chief Justice likened this stringent application of the Two-Issue Rule to a game of “gotcha” where mistakes of attorneys are showcased.  The Chief Justice would have held that this was an unenforceable and illegal contract because the contemplated purpose of the lease was contrary to zoning restrictions.

This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.

Liability of a Parent Corporation for Construction Defects

Originally posted on August 7, 2012 by Ryan

Magnolia N. Prop. Owners Ass’n, Inc. v. HeritageComm. Inc., No. 4943.

A property owners association (POA) filed suit for construction defects in a condominium complex. Appellants are three corporations: HCI (parent corporation), HMNI (seller) and Buildstar (general contractor).  HCI created separate corporations for every development it constructed for the purpose of operating as cost centers. HMNI was the cost center for Magnolia North POA and Buildstar supervised construction at Magnolia North.

The POA board of directors initially consisted of officers of the Appellant corporations.  During this time, unit owners discovered various construction defects. The officers assured POA members that the defects would be timely cured.  The POA filed suit after turnover of the board from the developer to the unit owners. The POA asserted causes of action of negligence, breach of express warranty, breach of warranty of workmanlike services, and breach of fiduciary duty.  The court affirmed the jury’s award of $6.5M in actual damages and $2M in punitive damages.

Amalgamation

Amalgamation is a theory of holding a parent corporation liable in place of its subsidiary where evidence shows that corporate interests, entities and activities are blurred to the point that separate legal distinctions can be ignored.  This is not piercing the corporate veil, as fundamental unfairness and fraud are not required elements. The court compared the instant case with Kincaid v. Landing Devel. Corp. where amalgamation was found between three distinct corporations.  In the instant case, the court pointed to the following facts for upholding the trial court’s finding of amalgamation:

  1. HCI, HMNI and Buildstar “shared officers, directors, office space and a phone number”
  2. The corporations shared employees
  3. HCI held itself out to the POA as the corporation responsible for construction defects in its written warranty

 Equitable Tolling

A three-year statute of limitations applied to the POA’s causes of action. Appellants argue the statute of limitations started when construction defects were discovered, marked by the POA’s first meeting on March 8, 2000.  The court disagreed and held that the statute did not begin to run until the date of turnover.

The court relied on the recent case of Hooper v. Ebenezer Senior Svcs and Rehab. Ctr., where the supreme court described equitable tolling as a “doctrine to suspend or extend the statutory period to ensure fundamental practicality and fairness . . . It has been observed that equitable tolling typically applies in cases where a litigant was prevented from filing suit because of an extraordinary event beyond his or her control . . . To deny [equitable tolling] would permit one party to suffer a gross wrong at the hands of the other.”

The POA board consisted of the corporations’ officers until turnover, so it is unreasonable to expect that the POA would have brought suit before the homeowners gained control of the board. As soon as turnover occurred, the POA promptly filed suit.  The court upheld the trial court’s ruling on equitable tolling.

Equitable Estoppel

The Appellant corporations were equitably estopped from asserting the statute of limitations as a bar to the POA’s claim because the Appellants induced the POA’s delay in filing suite.  The court held that deceit is not an essential element of estoppel; it is enough that the party “reasonably relied on the words and conduct of the party to be estopped in allowing the limitations period to expire.”  Appellants assured the unit owners that the construction defects would be repaired, so it was reasonable for the unit owners to give the Appellants time to make good on these promises before filing suit.

This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice.  Seek a competent attorney for advice on any legal matter.

Contractors: You Must Timely File Notice of Claims with Your CGL Carrier

Originally posted on February 27, 2012 by Ryan

Sheehan Constr. Co. v. Continental Casualty Co., 938 N.E. 2d 685 (Dec. 2010).

A contractor failed to provide its CGL insurance company with notice of claims against it for over two years.  The underlying claims were based on construction defects by the contractor’s subs.  The insurance company refused to tender coverage based on prejudice for the untimely notice.  The court sided with the carrier and held that although the underlying claims may have warranted coverage by the carrier, failure to provide timely notice was fatal to the contractor.  There was no need for the carrier to prove it was actually harmed because the contractor’s failure to notify allows the presumption of presumption of prejudice to arise in favor of the insurance company. That presumption then must be rebutted by the contractor (insured).  Because the contractor failed to set forth any evidence that its failure to provide notice did not prejudice the carrier, the court held that the denial of coverage was appropriate.

This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice.  Seek a competent attorney for advice on any legal matter.