LAW: The Contractor's Side

Can't question impact of top cases

Article July 01, 2001
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In this, the 95th anniversary issue of <i>ROADS & BRIDGES</i>, I will provide my top construction cases of the 20th century


In this, the 95th anniversary issue of ROADS & BRIDGES, I will provide my top construction cases of the 20th century. In choosing these cases, I approached it much like I would choosing the top 10 records. Specifically, they have been recognized as standards over time.


Spearin: For me, U.S. v. Spearin, 248 U.S. 132, (1918) is the most important construction case of the 20th century. Spearin established the well-known rule that the government/owner impliedly warrants the adequacy of its design. The Supreme Court held that detailed specifications describing the work "imported a warranty that if the specifications were followed, the sewer would be adequate. This implied warranty is not overcome by general disclaimer clauses requiring the contractor to examine the site, check the plans and specifications and assume responsibility for the work until completed." The rule, which has come to be known as the Spearin Doctrine, has, for years, allowed contractors to recover for costs incurred as a result of defective design specifications provided by the government. The Spearin Doctrine has been adopted by most states.


Luria: In Luria Brothers and Co. v. U.S., 369 F.2d 701 (Ct. Cl. 1966), the Court of Claims further expanded upon the Spearin Doctrine to make clear that the government must timely correct its defective design. The court found the original specifications defective, and when defective specifications delay the work, the contractor is entitled to recover damages. In Luria, the government was dilatory in recognizing the need for and in revising defective specifications, which constituted a breach of the implied obligation not to do anything that would hinder or delay the contractor’s performance.


Eichleay: Although formula recoveries for home office overhead have existed for years, the Eichleay formula [Eichleay Corp., 60-2 B.C.A. ¶ 2688 (ASBCA 1960)] is most often cited. In that case, the government delayed Eichleay, causing its workforce to sit idle; Eichleay sought recovery for overhead costs. The board explained that "overhead costs, including the main office expenses . . . cannot ordinarily be charged to a particular contract. They represent the cost of general facilities and administration necessary to the performance of all contracts. It is therefore necessary to allocate them to specific contracts on some fair basis of proration." The formula allows contractors to calculate a daily rate of overhead, based on all jobs occurring simultaneously, that can be applied to each specific job. This daily rate is used to determine a contractor’s damages when the government has indefinitely delayed some or all of the work on that contract. The Federal Circuit has in recent years attempted to explain the circumstances under which the contractor can recover home office overhead using the Eichleay formula. Contractors also have successfully used the Eichleay formula in private contract disputes.


Bruce: Bruce Construction Corp., et al. v. U.S., 163 Ct. Cl. 97 (1963) is the case of the 20th century that explains how equitable adjustments should be determined when the government makes changes to a contract. "Equitable adjustments . . . are simply corrective measures utilized to keep a contractor whole when the government modifies a contract. Since the purpose underlying such adjustments is to safeguard the contractor against increased costs engendered by the modification, it appears patent that the measure of damages cannot be the value received by the government, but must be more closely related to and contingent upon the altered position in which the contractor finds himself by reason of the modification." The burden is on the contractor to prove that costs incurred and which are sought to be added to the contract price are reasonable. On the other hand, the burden to show that the value of a reduction made on account of a deletion in the original work is reasonable rests with the government.


Croson/Peña: Minority and Disadvantaged Business Enterprise were hotly contested over the last 20 years. In a 1980 case, Fullilove v. Klutznick, 448 U.S. 448 (1980), a divided Supreme Court upheld a Congressionally mandated Minority Business Enterprise program. That case led to other Congressionally mandated programs as well as state and local government programs. The pendulum began to swing the other way in Richmond v. Croson, 488 U.S. 469 (1989). There, the Supreme Court set forth the constitutional standard that must be met in local governmental Disadvantaged Business Enterprise (DBE) programs which utilize racial preferences. Any such program is subject to "strict scrutiny" by the courts and is deemed an unconstitutional violation of the Equal Protection Clause of the Fourteenth Amendment, unless the particular preference (a) "serves a compelling governmental interest" and (b) "is narrowly tailored to further that interest." In 1995, the Supreme Court took the next step in Adarand v. Peña [Adarand v. Peña, 515 U.S. 200 (1995)] and held that the strict scrutiny standard applied in Croson is applicable to U.S. Department of Transportation DBE programs. The Supreme Court reinforced that: (1) race-conscious affirmative action programs are subject to strict judicial scrutiny; (2) the program must be based on a compelling government interest (e.g., remedying the effects of discrimination); and (3) must be narrowly tailored to meeting its objective. In response, the U.S. DOT issued new DBE regulations and Adarand is back on appeal to the Supreme Court for the third time. Maybe this time we will have an idea of which programs are constitutional and which ones are not.


Mobil/Blake Const.: There are two cases that have provided quotes I often use in briefs to describe the difficulties of construction and the difficulties in dealing with a construction case in court. The first is Mobil Chemical Co. v. Blount Brothers Corp. 809 F.2d 1175 (5th Cir. 1987). There, the judge writing the opinion began with: "The parties to this action somehow built a chemical plant. They have been trying to figure out who should pay for it ever since." The second case is Blake Const. Co. v. C.J. Coakley Co. Inc. 431 A.2d 569 (D.C., 1981). There, the court stated:


"Except in the middle of a battlefield, nowhere must men coordinate the movement of other men and all materials in the midst of such chaos and with such limited certainty of present facts and future occurrences as in a huge construction project such as the building of this 100 million dollar hospital. Even the most painstaking planning frequently turns out to be mere conjecture and accommodation to changes must necessarily be of the rough, quick and ad hoc sort, analogous to ever-changing commands on the battlefield. Further, it is a difficult task for a court to be able to examine testimony and evidence in the quiet of a courtroom several years later concerning such confusion and then extract from them a determination of precisely when the disorder and constant readjustment, which is to be expected by any subcontractor on a jobsite, become so extreme, so debilitating and so unreasonable as to constitute a breach of contract between a contractor and a subcontractor."


Lowder: In state courts, North Carolina has had many interesting highway construction cases. There are two in particular that I believe have withstood the test of time. The first is Ray D. Lowder Inc. v. North Carolina State Highway Comm’n, 26 N.C. App. 622, 217 S.E.2d 682 (1975). There, the North Carolina appellate court made a significant statement as to the rights and responsibilities of the parties with respect to owner-provided subsurface information and differing site conditions. Lowder based its bid on a representation in the proposals calling for removal of 12,000 cu yd of undercut excavation. By the time the project was accepted, some six months late, the contractor had removed 259,729 cu yd of undercut excavation. The owner merely paid the contractor at unit bid prices.


In its decision, the court noted that when a contracting agency furnishes inaccurate information it may be held liable on a breach of warranty theory and that instructions to bidders to make their own independent subsurface investigations cannot be given their full literal reach. The court found Lowder had encountered a differing site condition and that excessive overruns and underruns were within a contract’s changed conditions clause. The court then turned to whether Lowder’s "compilation of damages" report qualified as a record made in the regular course of business so as to permit its admission into evidence. The compilation of damages summary was taken from a subsequent analysis of daily reports which was prepared by Lowder’s superintendent during the construction of the project.


The court found that entries must be original, made in the regular course of business, made contemporaneously with the events recorded and must be the personal knowledge of the person making them in order to be admissible. In this case, however, the court felt that the original daily reports were incomplete and that the contractor had prepared the report for use only in litigation—four years after the fact. Thus, Lowder won the battle entitlement but lost the war.


S.J. Groves: The second North Carolina case was S.J. Groves & Co. v. State, 273 S.E.2d 465 (N.C. App. 1980). In that case the appellate court applied the differing site conditions clause and the legal theory of mutual mistake to enable the contractor to recover when it encountered excessively wet soils which, because of their condition, could not be utilized as specified in the contract. Equally important for Groves, the court found Groves had given proper notice and that it kept accurate and detailed cost records based on its daily reports. Those reports, consisting of 14 volumes, recorded the weather conditions, the name of each operator and the particular piece of equipment he was operating, the actual hours each operator worked, the actual hours each piece of equipment was working and the actual hours each piece of equipment was idle. On the back of each daily report was the actual cut and fill stations where the equipment was working, the distances of the hauls, the quantity of unclassified excavation moved and pertinent remarks about the nature of the work. With these detailed records Groves overcame the problem Lowder had encountered.


I considered predicting what issues will be hot in the courts in the 21st century and then I thought how no one in 1901 could have predicted the importance of the issues discussed above.


I then decided to predict some issues that might be considered by the courts over the next 10 years.


First, I believe the courts will continue to rule on the constitutionality of DBE/ MBE/WBE programs with the third Adarand case leading the way. I further predict there will be cases on design-build. One or more important cases will be over disputes between the builder and the designer. These also will likely be disputes between design builders and state DOTs over the contract requirement calling for a warranty of the design. Design builders also may charge that the DOT’s design criteria were defective. And there will be increasing litigation on environmental issues as environmental groups try to derail highway construction projects.


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