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Fall 2015 Newsletter

December 16, 2015


Construction Law Newsletter  [Volume 12, Issue 2 – Fall/Winter 2015]


David S. Coats [dcoats@bdixon.com]
David S. Wisz  [dwisz@bdixon.com]
John T. Crook [jcrook@bdixon.com]

Bailey & Dixon, LLP
434 Fayetteville Street – Suite 2500
Post Office Box 1351
Raleigh, North Carolina 27602-1351
Telephone (919) 828-0731
Facsimile (919) 828-6592
Website: www.bdixon.com
 


Should you have questions about any of the recent developments discussed in this issue of Bailey & Dixon’s “Construction Law Newsletter,” please do not hesitate to contact us.  If you would like to receive future copies of this newsletter via e-mail in lieu of hard copy, please e-mail your contact information to dwisz@bdixon.com to be added to our e-mailing list.


Inside this Issue:

Court of Appeals discusses the practical effect of a Building Code violation as negligence per se (See page 2 for details)  

Federal District Court holds that mere repairs or attempts to repair do not serve to equitably toll the statute of limitations (See page 3 for details)

Federal District Court holds that delay damages are not allowed in breach of contract action if both parties contributed to the delay and there is no clear proof of apportionment (See page 4 for details).

Federal District Court analyzes the accrual date for timely filing of claims under the Miller Act (See page 5 for details)

North Carolina Business Court construes meaning of the term “building or construction contractor” for purposes of the North Carolina Revenue Act (See page 6 for details)

Court of Appeals finds that party to a construction contract expressly waived its right to compel arbitration of breach of contract claim (See page 7 for details)


I. Court of Appeals discusses the practical effect of a Building Code violation as negligence per se.

          The elements of a cause of action for negligence are duty, breach, causation, and injury.  It is well-settled in North Carolina that evidence of a defendant’s violation of a safety statute constitutes negligence per se and establishes the element of breach.  In the recent case of Estate of Coppick v. Hobbs Marina Properties, L.L.C., et al., 2015 N.C.App. LEXIS 278 (Apr. 7, 2015), the North Carolina Court of Appeals explored the practical application of the negligence per se doctrine in a personal injury action involving a violation of the Building Code.

          In Coppick, the plaintiff’s decedent was a marina employee who was killed when large gasoline explosion occurred while he was refueling an 80-foot charter vessel.  Video surveillance footage showed that Mr. Coppick inserted the gasoline line into the receptacle at the rear of the boat, and then headed to the front of the boat to perform other chores.  After 6 minutes, a vapor cloud was visible on the port side of the boat in close proximity to the fueling area, and a large explosion occurred just as the video showed Mr. Coppick stepping off a ladder from the second deck onto the stern of the boat.  The estate ultimately resolved its wrongful death claims against numerous other parties but proceeded to trial against Petroleum Equipment & Service, who provided the fuel dispensing system equipment to the marina.  At trial, Plaintiff’s primary evidence of negligence against Petroleum was the testimony of representatives of the Office of State Fire Marshall and the Department of Labor that the gasoline nozzle supplied by Petroleum violated the North Carolina Building Code because it contained a non-pressure-activated “hold-open latch.” The jury found that Petroleum was negligent and awarded the Estate $1.5 million and Petroleum appealed, alleging that that trial court erred in its instructions to the jury on negligence and negligence per se and/or by failing to grant its motion for judgment notwithstanding the verdict. 

          The Court of Appeals initially noted the general rule that “violation of a public safety statute constitutes negligence per se,” and that the Building Code is such a safety statute.  The Court then rejected Petroleum’s argument that it could not be held liable under a negligence per se theory absent a showing that it knew or should have known of the Code violation.  The Court initially noted that there was evidence that Petroleum was a licensed general contractor, and as such was presumed to have knowledge of the Building Code.  Furthermore, as the Court stated, “despite defendant’s contention that the Code does not specify who is responsible for compliance with the section that regulates nozzles and hoses at marine fueling stations, plaintiff’s evidence showed that responsibility for complying with the Code fell upon the marina and upon the person or entity who installed the nozzles.”  Consequently, the Court concluded that it was Petroleum’s duty to provide the marina with Code-compliant nozzles, and thus plaintiff’s evidence was sufficient to support the trial court’s instruction on negligence per se

          The Court next rejected Petroleum’s argument that there was insufficient evidence to establish that its conduct proximately caused the explosion, which was still required even if the jury found negligence per se.   According to the Court, however, expert testimony as to the cause or origin of the explosion was unnecessary.  In this regard, the videotape evidence showing a vapor cloud at the time of the explosion, plus the testimony of a marine customer that he encountered a fuel spill using the “hold-open latch” a few days earlier, were sufficient circumstantial evidence for the jury to find that Petroleum’s violation of the Building Code was a proximate cause of the explosion.

          Even though it is a personal injury action, the Coppick case is instructive in all cases involving allegations of defective construction.  Evidence of a Building Code violation essentially guarantees that a negligence issue will be submitted to the jury, and the jury will be allowed to find causation flowing from the same (in some cases, even without expert testimony as to causation).


II.       Federal District Court holds that mere repairs or attempts to repair do not serve to equitably toll the statute of limitations

          A common issue in construction defect litigation is whether a party’s attempt to repair damages precludes it from later arguing that an owner’s claim against it is barred by the statute of limitations.  In Petty v. Marvin Lumber and Cedar Company, 2015 U.S. Dist. LEXIS 121369 (E.D.N.C., Sept. 11, 2015), a federal district court judge found that repairs or attempted repairs were not alone sufficient to preclude reliance on a statute of limitations defense.

          In Petty, the plaintiffs’ house was constructed by their general contractor from 2008 to 2009.  Plaintiffs purchased all of their windows from Marvin in July 2008 and had them installed by the builder.  A certificate of occupancy was issued for the residence in June 2009.  Following a September 2010 storm, plaintiffs observed window leaks and contacted both Marvin and their builder about the same.  Marvin ultimately serviced the windows in May 2011, but the windows leaked again in June and October 2012.  In November 2012, plaintiffs’ builder performed another leak test which showed that the windows continued to leak.  Plaintiffs thereafter filed a Complaint against Marvin in September 2013 asserting claims for breach of contract and breach of warranty. 

          Marvin sought dismissal of the Plaintiffs’ claims on the basis of the 3-year statute of limitations for breach of contract and 4-year statute of limitations for breach of warranty claims, and the Court agreed.  The Court noted the general rule in North Carolina that “a statute of limitations is tolled during the time the seller endeavors to make repairs to enable the product to comply with a warranty.”  According to the Court, however, it was up to the plaintiffs to further plead sufficient facts giving rise to such equitable tolling.  Reviewing the plaintiffs’ Complaint before it, the Court noted that although there were allegations about the repair attempts by Marvin in May 2011, plaintiffs failed to “specify how long these assessments and repairs took.”  Furthermore, plaintiffs failed to detail any representations made by Marvin which might have induced them to delay the filing of their lawsuit.  As such, plaintiffs’ claims for breach of contract and breach of warranty were barred by the statute of limitations.

          The Court’s decision in Petty is instructive on the issue of when repairs (or attempted repairs) are alleged to preclude a defendant from relying on a statute of limitations defense.  Merely stating that such repairs were made or attempted is insufficient, and the Complaint should allege facts sufficient for the Court to determine how long those repairs took along with any representations by the defendant as to whether the repairs had “fixed” the problem.


III. Federal District Court holds that delay damages are not allowed in breach of contract action of both parties contributed to the delay and there is no clear proof of apportionment.

          Claims for “delay damages” frequently arise when a contractor believes that its performance of contractual obligations is delayed for reasons outside the contractor’s control.  A common defense to such claims is that the contractor also has some responsibility for the project delays.  In the recent case of Flatiron-Lane v. Case Atlantic Company, 2015 U.S. Dist. LEXIS 102539 (M.D.N.C., Aug. 4, 2015), a federal district court considered the impact of such concurrent delays on the contractor’s claim for delay damages.

          In Flatiron-Lane, the plaintiff served as the general contractor for a highway bridge construction project pursuant to a contract with the Department of Transportation.  Case Atlantic was a subcontractor involved in the construction of the bridge foundation, in particular the drilled shafts.  When the project took longer than expected, Flatiron-Lane and Case became involved in litigation against each other seeking several categories of additional costs and other damages associated with the project.  The parties ultimately stipulated to a bench trial, which lasted several weeks.  On the issue of delay damages, Flatiron-Lane argued that since the drilled shafts took 44 weeks to complete and the subcontract and project schedule only allocated 22 weeks for that work, it was entitled to recover damages from Case for 22 weeks of extra work.  Included within this claim were extra charges for crane rental, the cost of removing excavated material, and the cost of field engineers due to extended period of the drilling.  Case disputed both the nature and extent of damages being claimed, and argued that Flatiron was responsible for other delays on the project.

          In considering Flatiron’s claim, the Court initially noted that while delay damages are recoverable under North Carolina law, “the plaintiff must present whatever evidence is available to tie the loss to the period of undue delay attributable to the defendant, and must also demonstrate why better or more certain evidence is not obtainable.”  Furthermore, “under the construction law principle of concurrent delay, where two or more parties proximately contribute to the delay of the completion of the project, none of the parties may recover damages from the other delaying parties, unless there is proof of clear apportionment of the delay and expense attributable to each party.”  On the facts before it, however, the Court found that each party took an “all or nothing approach” and blamed each other for the entire delay without “giving the court any way to apportion the delay.”  Consequently, even though Flatiron had established that Case was in breach of the parties’ subcontract, because the court was “not put . . . in a position to say, with reasonable certainty, what measure of damages [Flatiron] is entitled to recover,” the Court refused to aware Flatiron any delay damages.

          The Court’s decision in Flatiron-Lane is instructive on the nature and extent of the allegations and proof required to establish a claim for delay damages for breach of contract.  Even if party seeking such damages is convinced that is has no responsibility for the delay in completion of the construction project, it would appear important to provide the Court with some alternative basis upon which to allocate the delay damages or else a meritorious claim could be defeated solely by evidence from the defending party that each party bears some responsibility (however minor) for the project delay.


IV. Federal District Court analyzes the accrual date for the timely filing of claims under the Miller Act

          The Miller Act requires a contractor on a federal construction contract of more than $100,000 to furnish a payment bond through a satisfactory surety for the protection of all persons supplying labor or materials on the project.  It further authorizes any person having a direct contractual relationship with a subcontractorto bring a civil action on the payment bond “on giving written notice to the contractor within 90 days on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made,” 40 U.S.C. § 3133(b)(2), as long as the lawsuit is thereafter filed “no later than one year after the day on which the last of the labor was performed or material was supplied by the person bringing the action.” See 40 U.S.C. § 3133(b)(5).  In Innovative Metals Company, Inc. v. Southwest Sheet Metal of NC, LLC, 2015 U.S. Dist. LEXIS 55301 (April 28, 2015), the federal district court analyzed these accrual provisions in ruling against surety’s argument that a subcontractor’s bond claim was untimely. 

          In Innovative Metals, the plaintiff supplied certain materials and inspection labor for the roofing installation portion of a project that involved the construction of a child development center for the U.S. Department of Navy.  Westfield was the surety who issued a payment bond as part of the general contractor’s obligations under the Miller Act.  The plaintiff was under contract with both the general contractor and the first-tier roofing subcontractor, and allegedly furnished all labor and materials between August 15, 2011 and May 21, 2013.  When the roofing subcontractor failed to pay the plaintiff the full amount it claimed was properly due and owing, the plaintiff served written notice upon the general contractor on August 19, 2013, and then filed suit against the general contractor, roofing subcontractor, and Westfield on May 20, 2014. 

          Westfield sought dismissal of the plaintiff’s claim under the Miller Act alleging that materials were last delivered in June 2012 and that the provision of a written warranty in May 2013 was not part of the subcontract work, but the federal court disagreed and found that plaintiff’s claim was timely filed. Initially, the court noted that the “applicable legal test” for determining the accrual date on a Miller Act claim is “whether the work was performed and the material supplied as part of the original contract, as opposed to being for the purpose of correcting defect or making repairs following inspection of the project.”  On the facts set forth in the plaintiff’s complaint and attachments, the Court identified that a factual issue existed as to the nature of the work involved in the warranty delivery by the plaintiff and whether that was included as part of the subcontract work, which precluded granting Westfield’s motion to dismiss.  As the court stated, “to the extent the work may be characterized on onsite inspection work taking place on May 21, 2013, it may be included as work triggering the limitations period under the Miller Act.  If, by contrast, it may be characterized as offsite work, not provided for under the subcontract, it may not be included.”


V. North Carolina Business Court construes meaning of the term “building or construction contractor” for purposes of the North Carolina Revenue Act.

          Pursuant to the North Carolina Revenue Act, a corporation which generates its income from multiple states is required to apportion using a three-factor apportionment formula.  Certain “excluded corporations,” however, are entitled to use a single factor apportionment method.  For purposes of the Revenue Act, an excluded corporation includes any corporation “engaged in the business as a building or construction contractor.” See N.C.G.S. § 104-130.4.  In the recent case of Midrex Technologies, Inc. v. N.C. Dept. of Revenue, 2015 NCBC LEXIS 92 (Oct. 7, 2015), the North Carolina Business Court interpreted this statute to require that a corporation be responsible for performance or direction of the actual building, erection, or assembly of a structure in order to be entitled to use the single factor apportionment method.

          In Midrex, the Petitioner was a North Carolina corporation which had developed a process to convert iron ore into direct reduced iron (“DRI”) which can be used as a feed for making steel, which process required the construction of a specialized processing plant.  During the tax years at issue, Midrex designed and sold processing plants in several foreign countries.  The sale of such a plant involved 3 different business segments: (a) engineering and design services which primary took place in Midrex’s home office, (b) a Plant Sales Contract which included the technical specifications for the construction of the plant, and (c) aftermarket sales.  Midrex contended that it was an excluded corporation for tax purposes because of its role in the Plant Sales Contract, including providing on-site personnel to assist the owner’s general contractor (a separate company) in scheduling and sequencing the construction, determining manpower requirements, providing quality control, directing and supervising the installation of the specialized equipment, and supervising the initial operation of the plant.  The State disagreed, however, and the matter went before the North Carolina Business Court upon a review of an administrative law judge’s decision in the State’s favor.

          The primary issue before the Court was the meaning of the term “building or construction contractor” as used in N.C.G.S. § 105-130.4.  As the term is not defined by the statute, the Court initially looked at whether that term had a plain meaning.  In that regard, the Court looked at dictionary definitions of the terms “building,” “construction,” and “contractor,” as focusing on the actual erection or assembly of a structure.  The Court further took note of another statute – the Machinery Act – which defined “construction contractor” as “a taxpayer who is regularly engaged in building, installing, repairing, or improving real property.” N.C.G.S. § 105-273(5a).  In response, Midrex argued that construction contracting can include work in the nature of project management and supervision, and that its field advisory work qualified as construction management.  According to the Court, however, in the absence of evidence that the legislature intended to incorporate any technical definition or terms of art into the statute, the Court’s interpretation of “building or construction contractor” would be confined to the plain language of the statute.   In that regard, construction management that only involves oversight or scheduling, but does not include responsibility for performance or the direction of the actual building or assembly, did not fit within the plain meaning of the term “building or construction manager.” 

          As a result, where the Midrex contracts provided only for engineering services and technical advice, but the client was responsible for the providing the physical construction, installation, or erection of the plant, this did not constitute serving as a “building or construction contractor.”  Similarly, providing direct supervision over the commissioning (start-up) of the plant equipment did not fall within the statute where the commissioning itself was performed by the client’s employees.  For all of these reasons, the Court concluded that Midrex was not an “excluded corporation” for purposes of tax allocation of income.

          Although Midrex is a case involving the interpretation of the Revenue Act, its analysis and interpretation of the term “building or construction contractor” may have application in other construction law settings.  It is also noteworthy that the Court made no reference to the North Carolina General Statutes Chapter 87 governing “general contracting,” apart from a fleeting mention that the Revenue Act did not appear to require a company to be a licensed general contractor to qualify as an excluded corporation, despite the statutory definitions of “general contractor” (N.C.G.S. § 87-1) and construction management (21 N.C.A.C. 12.0208).  


VI. Court of Appeals finds that party to a construction contact expressly waived its right to compel arbitration of breach of contract claim.

          Many construction contracts contain a provision requiring the parties the conduct arbitration of any claims arising out of the contract in lieu of litigation.  A question sometime arises whether a party who invokes the arbitration clause after litigation has already commenced has waived their right to compel arbitration – either expressly or impliedly.  In the recent case of T.M.C.S., Inc. d/b/a TM Construction, Inc. v. Marco Contractors, Inc., (No. COA15-354, Dec. 1, 2015), the Court of Appeals held that failure to comply with a specific deadline set forth in the parties’ contractual arbitration clause constituted express waiver of the right to arbitrate.

          In TM Construction, the plaintiff (TM) was a North Carolina licensed general contractor who entered into an agreement with Marco, a construction management company based in Pennsylvania, to renovate a Wal-Mart retail store.  The parties’ contract contained a provision whereby “all claims or disputes between the Subcontractor (TM) and the Contractor (Marco) arising out of or related to this Subcontract or the breach thereof . . . shall be decided by arbitration, at the option of the Contractor” in accordance with the rules of the American Arbitration Association.  The provision further went on to say, however, that “notice of the demand for arbitration shall be filed in writing with the other party to this agreement and, upon acceptance by the Contractor, if required, filed with the AAA.  Such notice must be made within 30 days after the claim or dispute has arisen or within 30 days after the Subcontractor’s work under this Subcontract has been completed, whichever is later.”  After a dispute arose between the parties both as the scope of work and payment for the same, on September 4, 2013, TM filed a claim of lien on the real property and served Marco with a claim of lien on funds, and thereafter filed a Complaint in Forsyth Superior Court on its claim of lien.  Marco filed an Answer denying any liability, but it was not until September 2014 when Marco filed a motion to compel arbitration proceedings in Pennsylvania (pursuant to separate forum selection clause in the contract).  The trial court denied that motion, and Marco appealed.

          The Court of Appeals initially recognized that there is a distinction in North Carolina between an untimely demand for arbitration and a waiver of the right to arbitration.  Because the contract contained a specific deadline by which notice of a claim must be made, there was no question of “implied waiver” but instead the issue was whether Marco had forfeited its contractual right to demand arbitration.  Marco conceded that the contract contained a 30-day provision, but argued that it required the party asserting the claim (i.e., TM) to submit to the other party (i.e., Marco) a written notice of a demand for arbitration, and such notice would activate Marco’s option to accept the demand or instead allow the dispute to proceed in some other forum.  Consequently, since TM never demanded arbitration, Marco argued that its September 2014 demand was timely. 

          The Court agreed that the “at the option of the Contractor” phrase seemed to “stack the deck in [Marco’s] favor by reserving a unilateral right to decide whether any potential dispute would be arbitrated.”  On the other hand, the notice provisions were clearly bilateral in nature. Furthermore, since Marco drafted the contract, the language of the arbitration clause should be strictly construed against it.  As a result, the Court felt that both parties were subject to the 30-day time limit placed on arbitration demands related to disputes under the contract, and thus Marco’s failure to demand arbitration within 30 days after TM gave notice of the lien on funds and lien on real property constituted a waiver of the right to arbitrate.

          In this regard, the TM Construction case is instructive as showing that even though North Carolina courts generally favor alternative dispute resolution provisions, a party’s failure to comply with the express time deadlines set forth in the contract may constitute a waiver of such provision.