May/June 2016 (Issue 9)
News and analysis for construction professionals, including architects, engineers, product manufacturers, owners, contractors, insurers and sureties.


 

Construction Contracts - Pay Close Attention to the Details
The Minnesota Court of Appeals recently issued an order which provides contractors with a harsh reminder that all entities in the construction industry must pay attention to and follow all contractual requirements in their agreements.

In Contractors Edge, Inc. v. City of Mankato, the Minnesota Court of Appeals heard a case involving a construction agreement for a road extension project. The agreement was between the City and Contractors Edge ("Contractor").  A payment dispute arose over the location where the Contractor was required to stock pile and store excavated materials. The agreement specified that a stock pile must be one-half mile away from the project.  The Contractor soon realized that the driving distance from the project site to the designated stock pile location was more than a half mile, thereby increasing the Contractor's hauling costs. The Contractor requested a Change Order to cover the increased hauling costs.  The City rejected the request, arguing that the straight line distance between the project and the stock pile location was actually less than one-half mile.  The agreement was ambiguous in that it did not specify whether the distance referred to "driving" or "straight line" distance.

The Contractor then submitted a written claim to the City to increase its contract sum.  The parties' agreement required the Contractor to submit written notice of any claim within a prescribed time period, and to provide "supporting data" for the claim.  The agreement further stated that the "responsibility to substantiate a Claim shall rest with the party making the Claim." The City rejected the Contractor's claim, stating that the Contractor failed to provide the required detailed evidence to support the Claim.

The Contractor then filed a lawsuit to recover the increased hauling costs. The City moved for summary judgment, and the district court granted the motion finding that the Contractor's "notice of claim" did not provide the "supporting data" as required by the parties' agreement. The Minnesota Court of Appeals agreed with the district court's decision, holding that the agreement required the Contractor to provide "supporting data" for its Claim.  The Contractor's failure to provide the data with its written notice did not fulfill the agreement's requirements to present a valid Claim.  This caused the Contractor's notice of claim to be ineffective.

Again, this case is a harsh reminder that contractors must follow all requirements within their agreements to ensure that they get paid.  The risk of having an otherwise valid claim rejected for a failure to comply should not be a risk that you are willing to accept.  Instead, avoid the risk by thoroughly reading, understanding, and comply with all contract terms.  

 

Case Law Update
 Feed Management Systems, Inc. v. Comco Systems, Inc., Comco Manufacturing, Inc. 

This is an Eighth Circuit Court of Appeals' opinion considering an appeal out of the District of Minnesota. Feed Management Systems, Inc. (FMS) and Comco Systems (Comco) entered into a management agreement under which FMS agreed to provide management services and work direction to Brilliant Alternatives, Inc. and Robert Brill (Brill) on behalf of Comco. The agreement also obligated Comco to indemnify FMS for all costs and expenses, including attorneys' fees, for any claims against FMS related to or arising out of the services contemplated in the management agreement. FMS was later sued by Brill and tendered defense to Comco, which rejected the tender. The total cost of FMS's defense, which resulted in summary judgment dismissal of Brill's claims, was $1,133,815.36 in attorneys' fees, costs, and other expenses.

FMS sought reimbursement from Comco for the full cost of its litigation with Brill. The district court granted partial summary judgment in favor of both parties, holding that Comco was obligated to (1) indemnify FMS against claims brought by Brill, and (2) reimburse FMS for $87,350 in attorneys' fees and other expenses but not the entire amount FMS claimed. The Eighth Circuit affirmed, concluding that the Brill's complaint arose from the management agreement because they arose out of FMS's performance under the management agreement and the indemnity provision did not shift liability for FMS's own negligence because it was not found liable for the conduct that Brill alleged. The court further concluded that FMS was only entitled to reimbursement for $87,350 - the costs it incurred - because, after Comco breached the contract, FMS mitigated its damages (as it was required to do under the law) by tendering defense to its insurer and arranging funding through its stockholders, thereby limiting FMS's damages to only those costs it actually incurred, not the entire cost of defense.

 Wilcox v. State Farm Fire and Casualty Co. 

This is a Minnesota Supreme Court opinion on a certified question from the United States District Court for the District of Minnesota. The federal court asked the state supreme court to answer the following question: When a homeowner's insurance policy does not define the term "actual cash value," may an insurer depreciate the cost of labor in determining the "actual cash value" of a covered loss when the estimated cost to repair or replace the damaged property includes both materials and embedded labor components?

The plaintiffs sought insurance coverage for hail damage to their home. The insurance policy stated that the insurer will pay "only the actual cash value at the time of the loss of the damaged part of the property" until the property has been repaired or replaced, at which time it will pay the full repair or replacement cost. The policy does not define "actual cash value" or the methods used to calculate actual cash value. In valuing the claim specifically with respect to siding, the insurer calculated the removal and replacement of the siding as a single cost, and then depreciated the removal-and-replacement cost as a whole. The supreme court answered "yes" to the certified question: "When a homeowner's insurance policy does not define the term 'actual cash value' or otherwise state whether embedded labor costs are depreciable for the purpose of calculating actual cash value, the trier of fact may consider embedded-labor-cost depreciation when such evidence logically tends to establish the actual cash value of a covered loss."

 

Upcoming Events
ACEC/MN Building Engineering & Construction Conference
 
October 18, 2016
7:30 AM -1 PM 

This conference will explore various topics related to building engineering and construction by offering three thematic tracks with informative sessions by industry leaders.

To learn more or to register for this event, please visit the ACEC of Minnesota website.

 

Established in Minneapolis in 1929, Meagher & Geer has earned a reputation as one of the leading litigation defense and insurance coverage firms in the Upper Midwest. We offer 80 lawyers in 20 practice areas. From our offices in Minneapolis, Minnesota, Bismarck, ND, and Phoenix, Arizona we represent businesses of all sizes, public entities, non-profit organizations, and individuals. 

 
Our nationally recognized trial lawyers have taken more than 125 cases to verdict since 2007.  During the same period, our appellate lawyers have handled more than 120 appeals in state and federal courts. At last count we represented more than 125 of the leading insurance companies in the U.S., and we also handle work for insurers based in London, Canada and Bermuda.
 

Our attorneys are licensed in many states, including Arizona, California, Georgia, Iowa, Illinois, Minnesota, Missouri, Montana, Nebraska, New Jersey, New York, North Dakota, South Dakota, Texas, Utah, Virginia, and Wisconsin.

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[email protected]

 

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