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Archive for May, 2021

Forum Selection Clause Dooms Subcontractor Suit

Posted on: May 28th, 2021

By: Ben Dunlap

The First Circuit Court of Appeals recently affirmed the dismissal of a subcontractor’s suit against a construction contractor, holding that the trial court correctly enforced the terms of the parties’ agreement as to where a lawsuit could be filed. The case focuses attention on an often-overlooked area of construction law contracting: the forum selection clause.

Atlas Glass & Mirror, Inc. v. Tri-North Builders, Inc., arose out of a hotel renovation project in Framingham, Massachusetts. The defendant Tri-North Builders, Inc., was the general contractor. After preliminary discussions, the plaintiff Atlas Glass & Mirror, Inc. submitted a one-page proposal to supply and install windows on the project. The proposal identified the window types, estimated prices, and specified the work, which called for the supply and installation of over 250 windows. It contained very few other terms. Tri-North neither signed nor returned the contract proposal. Instead, it requested that Atlas supply and install a sample window, and sent along an eight-page contract (the “Subcontract”), governing the installation of the sample window. The Subcontract identified the window to be installed, the work to be done, and the price. It also included additional “Terms and Conditions,” one of which specified Wisconsin as the forum and venue for any litigation or arbitration. Atlas signed and returned the Subcontract to Tri-North. After Atlas installed the sample Lockheed window, it supplied and installed another sample window at Tri-North’s request. Atlas then sent two invoices to Tri-North corresponding to the two sample-window installations. Each invoice specified “Terms” as “Per Contract” and identified the Subcontract as the pertinent contract.

Thereafter, Tri-North notified Atlas that it would send “a contract your way with the anticipated cost for all windows.” The parties never exchanged any new contract proposals. Instead, Atlas proceeded to supply and install additional windows, using the window specifications in its proposal, and invoicing Tri-North with reference to the Subcontract. 

The parties eventually disagreed over the amount and timing of payments due to Atlas. After efforts to settle failed, Atlas sued in Massachusetts Superior Court for amounts due, again referring to the Subcontract.

Tri-North moved to dismiss, arguing that the forum selection clause in the Subcontract barred Atlas’s Massachusetts suit.

The forum selection clause provided that in the event of any dispute arising from the Subcontract, Tri-North could choose whether the parties would resolve the dispute through (1) litigation, (2) the dispute resolution clause of the agreement between Tri-North and the project owner, or (3) binding arbitration in accordance with (at Tri-North’s option) either Wisconsin Statutes Chapter 788 or the Construction Industry Arbitration Rules of the American Arbitration Association then currently in effect. The provision then stated that “[f]orum and venue for any arbitration or litigation shall be Dane County, Wisconsin,” and that Atlas “consents to the jurisdiction of the courts of Wisconsin.” Finally, the provision stated that the Subcontract and “any dispute arising under” it “shall be governed and interpreted with the Laws of the State of Wisconsin.”

Atlas opposed the motion by arguing that the forum selection clause in the Subcontract was not applicable because the Subcontract had “no relationship to the work performed by Atlas . . . for which it is seeking to be paid.” The Trial Court disagreed and dismissed Atlas’s complaint.

On appeal, the First Circuit concluded that the forum selection clause was binding and therefore the suit was properly dismissed. The Court reasoned that although the Subcontract may not have contained all terms governing Atlas’s supply and installation for windows on the project (as it identified only the sample window), the terms and conditions of the Subcontract, including the forum selection clause, were clearly a part of the agreement between Atlas and Tri-North.

Atlas argued additionally that the forum selection clause should not be enforced because of the unequal bargaining positions of the parties. The Court considered but rejected this argument, noting that even though Atlas was a small 10-person company and Tri-North was a large contractor with revenues estimated in the hundreds of millions, that inequality alone does not make the forum selection clause unenforceable.

As a result, Atlas’s remedy lay not in Massachusetts where it is based and the project was located, but in Wisconsin, the home turf of Tri-North.

For more information, please contact Ben Dunlap at [email protected].

Contracting by Design: Understanding the Spearin Doctrine’s Effects on Express and Implied Warranties in Construction Projects

Posted on: May 27th, 2021

By: Ryan Mayo

Owners, contractors, and subcontractors should be aware of the importance of detailing warranties in construction contract clauses. Failure to clearly state such warranties could result in a party’s liability for violation of implied warranties should litigation occur.

Prior to the U.S. Supreme Court’s decision in United States v. Spearin, 248 U.S. 132 (1918), contractors generally bore all construction risks under the law, subject to two exceptions: (1) express exception made in the contract; or (2) when performance was made impossible by an Act of God or Nature. This remains the general rule today. However, the Spearin Court changed the balance of these risks considerably by imparting an implied warranty on owners under certain circumstances.  

In Spearin, a contractor was hired to build a dry dock according to plans and specifications prepared and furnished by the owner, an agency of the federal government. The plans required a relocation of a sewer, and the government did not tell the contractor about a defect in a part of the sewer. After the sewer was relocated, a flood caused the sewer to break, and the dry dock excavation site was flooded. The contractor refused to continue building until the government assumed responsibility for existing and future damages from the sewer. In turn, the government had the project completed by another builder under revised plans. The contractor then sued to recover the amount that he spent on the project and to recover damages for the contract’s annulment. 

The Supreme Court affirmed the award by the court of claims in favor of the contractor and found that the government breached its implied warranty that the sewer would be adequate if the contract complied with the government’s specification in relocating the sewer. Specifically, the Court ruled “Where one agrees to do, for a fixed sum, a thing possible to be performed, he will not be excused or become entitled to additional compensation, because unforeseen difficulties are encountered.” Most important for risk allocation, however, the Court ruled “[I]f the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications.”

The Supreme Court of Georgia first interpreted the Spearin Doctrine in Decatur County v. Praytor, Howton & Wood Contracting Co., 165 Ga. 742 (Ga. 1928). In Decatur County, the Court ruled an owner was not liable for breach of contract because it “specifically represented” to the contractor particular adjustments to the piers of a bridge and contained allowances to adjustments in price based on construction changes. Because of the express disclaimer in the parties’ contract, the Court did not find the owner liable. 

The Spearin Doctrine has been examined in recent years by multiple courts across the country, and almost all 50 states have interpreted it in some form. In September of 2020, the Washington Court of Appeals in Lake Hills Invs., LLC v. Rushforth Constr. Co., 472 P.3d 337 (Wash. Ct. App. 2020) ruled a jury instruction misstated a contractor’s burden of proving its affirmative Spearin defense, reversing the trial court’s allowance of the instruction. The case is currently being petitioned for review by the Supreme Court of Washington, and an amicus brief submitted in support of the petition argues in part that the appellate court’s decision, if allowed to stand, would have negative effects on contractors’ abilities to use the Spearin Doctrine as a defense.

In Texas, lawmakers recently introduced legislation to realign the state’s law with the majority of states recognizing the Spearin Doctrine. The pending legislation, SB 219 and HB 1418, would largely reverse the law in effect since the Texas Supreme Court’s 2012 decision in El Paso Field Servs., L.P. v. MasTec N. Am., Inc., 389 S.W.3d 802 (Tex. 2012), which held that absent contract language allocating the risk, a contractor may be held liable for defects in the design documents provided by the owner or design professional.

These cases underscore the ongoing importance of assessing and negotiating construction risks on the front ends of projects and intentionally allocating these risks with express warranties. Where possible, contracts should use specific language that addresses individual aspects of projects. Carefully considered contractual language may be viewed favorably by courts in determining whether an express warranty was created before a project began. Parties who take these steps better protect their interests, potentially allowing them to avoid legal battles based on interpretations of Spearin and implied warranty.

For more information, please contact Ryan Mayo at [email protected].

Should I Stay or Should I Go?

Posted on: May 27th, 2021

By: Richard Smith

If I go there may be trouble, but if I stay it will be double…

These lyrics from the 80’s song by The Clash does a fairly nice job describing the dilemma that an insurance defense lawyer faces while the carrier that hired him to defend its insured reserves its own coverage defenses.   

Historically, a lawyer defending his client must defend all actions filed against his client in the same action.  When an insurer files a dec action its client must defend himself in order to preserve his coverage interest. By defending the client both on the liability and the coverage the lawyer faces the dilemma of giving advice to his client that may benefit the client’s defense but prejudice the client’s coverage position.  Often if not always these are in contravention to each other. Thus, the conflict.   

Because of the inherent conflict a lawyer cannot defend the insured on both the liability and the coverage issues nor can he limit his representation under informed consent.

The Kentucky Bar Association through its ethics opinion E-452 has provided succinct guidance for the insurance defense lawyer facing this possible dilemma. In a nutshell, the lawyer may defend the insured defendant when the insurer has reserved its coverage defenses in the following three scenarios:

  • Only where the declaratory action is filed in a completely different action
  • If the declaratory action intervenes in an existing action then it must be bifurcated and stayed while the liability issues are determined, or
  • If the insured has his own counsel that is self-selected to defend the coverage action against his insurer

Otherwise, a lawyer must withdraw his representation of the insured that he was hired to represent

….in other words, he must go….

Insurance carriers can eliminate much of these issues by instructing its coverage counsel to file a completely separate action to resolve the coverage issues.   Should the court require the coverage issues to be part of the same action it must bifurcate and stay the coverage issues from the liability issues until all of the liability issues are determined. If neither of these occur the insurer should expect its defense counsel to have to withdraw because of the inherent conflict.   

For more information, please contact Richard Smith at [email protected].

Trademark Battle Questions Meaning of “Beer”

Posted on: May 27th, 2021

By: Ben Dunlap

What is the difference between beer and bubbly water? This is not a riddle. The distinction features prominently in a trademark suit between Anheuser-Busch InBev and Constellation Brands pending in the Southern District of New York.

The suit, filed in February 2021 by Anheuser-Busch’s Grupo Modelo, the global owner of the Corona brand, against Constellation, which sells the Corona brand in the U.S. market under a 2013 license from Modelo, alleges Constellation has been selling “hard seltzer” products (bubbly water with alcohol and flavoring) not included in the license.

Both parties rely on the “plain language” of the license, but they disagree on what the plain language means.

The issue has come to a head in recent filings by Constellation, arguing in a motion to dismiss the complaint that the license contains a broad definition of “beer” that includes “sugar-based brewed beverages” including “hard seltzers.”  

In response, Modelo argued Constellation had never referred to its hard seltzer as a beer, and that “an average person asking for a beer would be perplexed (and likely disappointed) when a bartender serves a Corona Hard Seltzer.”

The dispute serves as another example of the importance of words in intellectual property litigation, and it has substantial consequences as Constellation seeks to expand its share of the growing hard seltzer market in the United States.

For more information, please contact Ben Dunlap at [email protected].

Massachusetts SJC Expands Rights of Property Owners in Eminent Domain Cases

Posted on: May 26th, 2021

By: Marc Finkel

In a landmark ruling involving the rights of property owners under the Massachusetts “quick take” eminent domain statute (M.G.L. c. 79), the Supreme Judicial Court (“SJC”) recently determined that the “quick take” statute allows for a property owner to challenge the validity of the taking while also accepting a pro tanto (partial) payment from the government entity for the taking.  In the case, Abuzahara v. City of Cambridge, 486 Mass. 818 (2021), the City of Cambridge took Plaintiff’s property by eminent domain through exercise of M.G.L. c. 79.  This caused for the immediate transfer of ownership of the property from the property owner to the government entity without a prior determination of property valuation made by a court. 

M.G.L. c. 79 ordinarily requires either an offer of settlement or a pro tanto payment be made to the property owner within 60 days of the taking of the property by the government entity.  Under the statute, the property owner may also challenge the legal validity of the taking within three years from when the right to damages has vested.  Prior to the SJC’s decision in Abuzahra, it was not clear whether the aggrieved property owner could accept a pro tanto payment for the property and still simultaneously challenge the validity of the taking.

The City of Cambridge offered plaintiff in Abuzahra a pro tanto payment of $3,700,000.00 for property it took pursuant to M.G.L c. 79.  Plaintiff opted to challenge the lawfulness of the taking as permitted under the statute, and, also, made a demand for receipt of the pro tanto payment.  The City of Cambridge refused to turn over the pro tanto payment to plaintiff, and, instead, deposited the pro tanto payment amount in a separate savings account while the lawfulness of the taking was decided.  Ultimately, the SJC found that plaintiff was entitled to both the pro tanto payment from the City of Cambridge while also maintaining the right to challenge the taking in the Trial Court where such simultaneous rights are not expressly prohibited by the “quick take” statute.  

The SJC noted in its decision the importance that eminent domain statutes be strictly construed to protect an individual’s property rights.  Accordingly, by permitting a plaintiff to recover a pro tanto payment while simultaneously allowing a plaintiff to challenge the legality of the taking, the SJC found that the legislative purpose of M.G.L. c. 79 is met.  Specifically, as discussed by the SJC, “the statutorily mandated pro tanto payment ensures that property owners receive some initial recourse following the deprivation of their property, and also incentivizes taking authorities to exercise their significant eminent domain powers with discretion.”  Id.   

Abuzahra is a significant decision that strengthens the rights of property owners as contemplated by M.G.L. c. 79.  As this decision required the SJC to undertake its role in interpreting statutes and resolving ambiguities, it will be interesting to follow what, if anything, the Massachusetts Legislature does with the statutory framework of M.G.L. c. 79 in light of Abuzahra.   

If you have any questions or would like more information, please contact Marc Finkel at [email protected].