Construction Law

• Publication year: 2020

Construction Law

Frank O. Brown Jr.

[Page 57]

Construction Law

by Frank O. Brown, Jr.^*

I. Introduction

This Article focuses on noteworthy decisions by Georgia appellate courts and Georgia federal district courts between June 1, 2018 and May 31, 2019, that are relevant to the practice of construction law.¹

II. Arbitration

In Web IV, LLC v. Samples Construction, LLC,² the defendants contended that the plaintiff construction company had waived its right to compel arbitration by allegedly failing to comply with a provision in the subject contract requiring a pre-arbitration attempt to resolve the dispute through the parties' respective representatives.³ The issue before the Georgia court of Appeals was whether the court or the arbitrator should decide the waiver issue.⁴

The court held that the arbitrator should decide that issue for several reasons, including that it was a threshold procedural issue rather than a threshold issue of substantive arbitrability.⁵ The court distinguished threshold procedural waiver issues that grow out of the dispute, such as the subject waiver issue, from threshold substantive conduct-based waiver issues.⁶

In deciding if the arbitrator, rather than the court, should decide the waiver issue, the court also relied on two other factors. one was the

[Page 58]

significant breadth of the parties' arbitration provision, which was actually rather standard in its breadth, and which stated that all claims "arising out of or relating to the Agreement" were subject to arbitration.⁷ The second factor was that the arbitration provision incorporated the American Arbitration Association Construction Industry Arbitration Rules, which gave the arbitrator "the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement."⁸

In Original Appalachian Artworks, Inc. v. Jakks Pacific, Inc.,⁹ the arbitrator awarded attorney's fees and expenses to Original Appalachian Artworks, Inc., after which Jakks Pacific, Inc. (Jakks) filed a motion seeking to vacate that award.¹⁰ The parties disagreed about whether the motion was to be determined under the relevant provision of the Federal Arbitration Act¹¹ or the Georgia Arbitration Code.¹² The United States District Court for the Northern District of Georgia did not decide that issue because it determined that the result would be the same under either provision.¹³

one of the grounds for vacating an award under the Federal Arbitration Act is that the arbitrator exceeded his power.¹⁴ Jakks argued the arbitrator had exceeded his power because he had awarded fees and expenses for a period of ten months of arbitration when the arbitration provision of the parties' contract stated that the arbitration should be conducted within sixty days from the demand for arbitration.¹⁵ The court rejected that argument, noting that under the cited case law, an arbitrator does not exceed his authority even if the award is based on an "incorrect legal conclusion" or a "manifest disregard of the law."¹⁶ The court determined that in order to uphold the award against a contention that the arbitrator exceeded his power, it is sufficient to demonstrate that the arbitrator even arguably interpreted the parties' contract.¹⁷ The court found that it was clear

[Page 59]

from the evidence that the arbitrator had, in fact, interpreted the arbitration provision of the contract.¹⁸

Another one of the grounds for vacating an award under the Georgia Arbitration Code is that the arbitrator manifestly disregarded the law.¹⁹ Jakks contended that the arbitrator manifestly disregarded the law, in part, because he should have limited attorney's fees and expenses to the sixty-day period mentioned in the parties' arbitration provision. ²⁰ The trial court noted that to prove manifest disregard of the law, a party must demonstrate more than that the arbitrator misapplied the law to the facts or incorrectly interpreted the law.²¹ Instead, the party must provide evidence of record that the correct law was communicated to the arbitrator, and the arbitrator intentionally and knowingly chose to ignore that law.²² The court concluded that Jakks had failed to provide that evidence.²³ Thus, the court also declined to vacate the award under the Georgia Arbitration Act.²⁴

III. Contract Disclaimers

An issue in Georgian Fine Properties, LLC v. Lang,²⁵ was whether the plaintiff homeowners' negligent construction claims against the seller, who was also the contractor that had renovated the home, were barred by a provision in the parties' agreement that "[i]n the event Buyer does not terminate this Agreement prior to the end of the Due Diligence period, then . . . Buyer shall have accepted the Property 'as is' subject to the terms of this Agreement[.]"²⁶ The plaintiffs did not terminate the agreement.²⁷

The Georgia Court of Appeals held that the "as is" provision did not bar plaintiffs' negligent construction claims. ²⁸ The court stated that the "as is" provision bars only breach of warranty claims, not negligent construction claims.²⁹

[Page 60]

IV. Damages Limitations

Construction-related contracts sometimes include damages limitations and other exculpatory provisions. Although not involving a construction contract, Warren Averett, LLC v. Landcastle Acquisition Corporation,³⁰ addressed the enforceability of a damages limitation provision in a series of an accounting firm's audit contracts with a law firm.³¹ The provision stated that "[i]n any event, no claim shall be asserted which is in excess of the lesser of actual damages incurred or professional fees paid to us for the engagement."³² The fees paid by the accounting firm totaled about $87,000. The actual damages alleged by the plaintiff, which was an assignee of the law firm, were in excess of $17,500,000.³³ Thus, the enforceability of the damages limitation was critical to the defense of the claim.

The court of appeals affirmed the trial court's ruling that the damages limitation was unenforceable as a matter of law because it was insufficiently prominent.³⁴ According to the court, exculpatory clauses, including damages limitations, must be explicit, clear, unambiguous, and prominent.³⁵ The court noted that in determining whether an exculpatory provision is sufficiently prominent, courts consider a number of factors, including whether it is in a separate paragraph, has a separate heading, or is distinguished by features like font size.³⁶

The court held that the subject damages limitation provision failed the prominence element because it was in the same font as the rest of the subject agreements, was not capitalized, italicized, or set in bold type for emphasis, was not in a separate section that specifically and only addressed recoverable damages, and was not in a prominent place within the contracts that emphasized its importance, such as being next to the parties' signature lines.³⁷

In US Nitrogen, LLC v. Weatherly, Inc.,³⁸ the United States District Court for the Northern District of Georgia considered whether a contract provision was a permissible damages limitation or an impermissible indemnification provision in violation of O.C.G.A.

[Page 61]

§ 13-8-2(b),³⁹ which restricts indemnification provisions in construction-related contracts.⁴⁰ The subject contract provision stated "Weatherly's total aggregate liability to [USN], except with respect of Weatherly's cost of performing the Work under the Contract, for all causes including defects, Weatherly defaults, default of any warranties, or guarantees, patent infringement, or otherwise, shall not exceed fifteen percent (15%) of the Price."⁴¹

The district court concluded that this provision merely limited Weatherly's liability to US Nitrogen, not to third parties.⁴² Thus, it was an enforceable damages limitation provision and not an unenforceable indemnification under O.C.G.A. § 13-8-2(b) by US Nitrogen of Weatherly as to claims by third parties.⁴³

V. INDEMNIFICATION PROVISIONS⁴⁴

Construction and construction-related contracts frequently include indemnification provisions. At issue in Sherwood v. Williams,⁴⁵ was whether an indemnification provision covered the negligence of the indemnitee.⁴⁶ That provision stated that the tenant indemnitor would hold the landlord indemnitee harmless from any liability or damage, whether caused by the indemnitor's "operations or otherwise."⁴⁷ The indemnitee argued that this language covered claims against the indemnitee for the indemnitee's own negligence.⁴⁸

The court of appeals rejected that argument noting longstanding Georgia law that indemnification provisions do not cover losses caused by the indemnitee's own negligence unless the contract expressly, plainly, clearly, and unequivocally so states.⁴⁹ Some construction or construction-related contracts include broad indemnification provisions that nevertheless do not expressly state that the indemnitee's own

[Page 62]

negligence is covered by that provision.⁵⁰ Careful drafting of indemnification provisions is particularly important.

VI. Witness Value Testimony

The main issue in Woodrum v. Georgia Farm Bureau Mutual Insurance Company,⁵¹ a suit by homeowners against their homeowners insurer, was whether the trial court abused its discretion in granting a motion to exclude a contractor's testimony about the diminution in value of a house due to fallen tree damage.⁵²

The court of appeals first addressed whether the contractor should have been allowed to testify as an expert.⁵³ Applying O.C.G.A. § 24-7-702(b),⁵⁴ the court determined that the trial court had not abused its discretion in barring the contractor from testifying as an expert based on the trial court's determination that the contractor's estimate of diminution in value was not based on any market comparison or related methodology, and that his methodology was not sufficiently reliable.⁵⁵

In considering whether the trial court should have allowed the contractor to testify as a lay...