Construction Law - Brian J. Morrissey

• Publication year: 1995

Construction Lawby Brian J. Morrissey^*

I. INTRODUCTION

During the survey period, the appellate courts of Georgia continued to revisit certain issues that have displayed remarkable persistence in the trial courts.

For example, there were a number of attempts to impose liability directly against lenders on construction projects for the failure to insure that payments were made to contractors in such a way as to avoid the impositions of liens; however, the appellate courts failed to depart from traditional notions that lenders are typically not responsible for such failures.

Of particular significance during this survey period was the outline by the court of appeals of a new doctrine perhaps imposing obligations upon purchasers of products to look behind claims by sellers and manufactur-ers concerning the performance characteristics of those products. Indeed, arguably, the court of appeals may have imposed an obligation on at least a certain class of purchasers to duplicate test results employing technical specifications rather than merely relying upon test results performed by the seller or those in privity with it.

II. Lender Duties and Liabilities

Disbursement of Funds. In De Coudreaux v. Mutual Federal Savings & Loan Ass'n of Atlanta,¹ the court of appeals addressed whether duties to guarantee or inspect a construction project's progress prior to the disbursement of loan proceeds existed. The plaintiffs entered into a Construction Loan Agreement with Mutual Federal

Savings & Loan Association of Atlanta, Incorporated ("Lender") for the construction of a new home. The Loan Agreement provided in pertinent part:

[t]hat [Mutual] is authorized to disburse funds under its control in said construction loan account, together with the net proceeds of the loan, only in proportion to its inspector's report of progress or by Architect's or Superintendent's Certificate accompanied by a proper affidavit from the contractor.²

The plaintiffs contended that the Lender breached this provision of the agreement by disbursing funds to the general contractor despite knowledge of problems with the construction and further breached its fiduciary duties to the plaintiffs by failing to monitor the quality of the construction.³

The plaintiffs sued the contractor and the Lender, attempting either to rescind the construction agreement or to have the Lender pay for repair of certain defects.⁴ The Lender was granted summary judgment, and the plaintiffs appealed.⁵

The plaintiffs contended that the Lender's actions were beyond that of a conventional lender and, thus, created fiduciary and common law duties flowing from the Loan Agreement to insure that the work performed by the general contractor was workmanlike and to monitor the progress of the construction.⁶ The court reaffirmed the general rule that an inspection performed by a lender on a construction project is customarily only for the benefit of the lender, not the project owner, except when the lender's activities extend beyond that of a conventional construction lender.⁷ The exception to the general rule requires a

clear promise of the lender to perform certain protective functions, and upon a clear and distinct participation in the activity which resulted in the damage. It is certainly not enough to make general allegations that the lender inspected the work, since such inspections are presumed to be for its own financial purposes and are not intended to insure a quality of work. The lender is not an insurer of the work of the contractor, unless clear promises appear to the contrary.⁸

The court found that inspections performed by two loan officers of the Lender and the Lender's inspector and their correspondence about various problems concerning the construction did not constitute activity beyond that of a conventional lender.⁹

The court of appeals reached a similar result in Peterson v. First Clayton Bank & Trust Co.¹⁰ In that case, Stovall Buildings Supplies, Incorporated filed a complaint to foreclose a materialman's lien and to collect on an open account for materials supplied for the construction of a house owned by Robert and Gertrude Peterson. The Petersons filed a third party complaint against the construction lender, First Clayton Bank & Trust Company ["Lender"], alleging breach of contractual and fiduciary duties in disbursing loan proceeds. The Petersons contended that the Lender failed to insure that the builder paid subcontractors and suppliers.¹¹ Summary judgment was granted to the Lender from which appeal was taken.¹²

The construction contract between the Petersons and the general contractor provided that

the builder "[would] be required to furnish to the owner or bank representative, upon request or at times of withdrawals, a statement showing itemization of expenditures to date, items due and unpaid, and to support said statement with receipted bills, affidavits, waivers of liens, and other satisfactory evidence of payment."¹³

The Petersons spoke several times with a bank loan officer who had reviewed the construction contract. The loan officer acknowledged that the Lender would handle disbursements, of payments to the contractor and that the Lender would regularly inspect the property to monitor progress of construction. The bank officer was aware that the Petersons lived in Florida at the time and could not regularly inspect the construction progress or handle payments to the builder. The loan officer also indicated that she would inform the Petersons about the progress of the work.¹⁴

The Construction Loan Agreement, executed on June 19, 1991, provided in pertinent part:

Borrower authorizes and directs Lender to pay any loan proceeds due under the terms of this agreement to [the builder]. Lender has no liability or obligation in connection with the project or the construction and completion thereof, except to advance loan proceeds as agreed in this document. Lender is not obligated to inspect any improvements, nor is it liable for the performance or default of any contractor or subcontractor or for any failure to construct, complete, protect or insure said improvements or for the payment of any costs or expenses incurred in the project. Nothing, including without limitation any disbursement or the delivery or acceptance of any document or instrument, shall be construed as a representation or warranty on Lender's part. Lender is not the agent or representative of the Borrower, and the Borrower is not the agent or representative of the Lender. This agreement does not reflect a partnership or joint venture on the part of the parties and shall only serve to represent and document the loan terms of Borrower's construction loan .... Lender reserves the right to require execution of any materialmen's lien affidavits, or release of materialmen's lien affidavits by any contractor or subcontractor or Borrower at any time during the term of this agreement .... The parties agree that the Lender may disburse the proceeds of the loan to pay any expenses or liens incurred in connection with the construction and completion of the single-family residence and payment or performance of any obligation of Borrower to Lender, and at its election, Lender may pay said proceeds to Borrower or to the contractor or to any other persons furnishing labor, supplies or services for construction of the residence or to the holder of any lien, charge or encumbrance on the premises or other property securing the loan, and the whole of such proceeds are hereby assigned, transferred and pledged to Lender for such purposes . . . ,¹⁵

The builder failed to pay suppliers and subcontractors on the construction project, and over $38,000 in liens accrued against the property. The Petersons were not able to satisfy the liens and defaulted under the terms of the Construction Loan Agreement. The property was subsequently foreclosed upon.¹⁶

The Petersons argued on appeal that the commitments made by the loan officer modified the Construction Loan Agreement despite the express limitation of responsibility in that agreement.¹⁷ The court of appeals determined that the promises made by the loan officer amounted to nothing more than promises to do what the Construction Loan Agreement had already authorized through the language of the agreement which allowed payment of proceeds to the builder. Nothing in these promises conferred an obligation upon the Lender to insure that subcontractors and materials suppliers were paid prior to disbursement of proceeds to the builder.¹⁸ The court found that the implied conditions argued by the Petersons were not clearly within the contemplation of the parties at the time of the making of the contract and, indeed, were contradicted by the specific language of the Construction Loan Agreement itself.¹⁹ Moreover, the Construction Loan Agreement did not create duties from which tort responsibility flowed.²⁰ The court found that the Petersons' allegations of negligence were simple breaches of the Loan Agreement, if anything, and were not breaches of duties imposed by law under any statute or recognized common law principle.²¹ The court found no common law duty for a lender to obtain lien waivers or payment affidavits or to otherwise insure that suppliers were paid before disbursing funds to a builder, unless the lender's activities extended beyond that of a conventional construction lender and the Lender "engages ... in activities actually connected to construction of the property."²²

III. CONTRACT FORMATION, CONSTRUCTION AND BREACH

A. Contract Formation

Promoter's Liability. In Weir v. Kirby Construction Co.,²³ Kirby Construction brought suit against Weir for the remaining contract balance for renovation of a "Patti Arbuckle's Restaurant." Weir entered into the contract as President of Patti Arbuckle's Productions, Incorporated; however, a certificate of incorporation had not yet been issued by the Secretary of State.²⁴ As no certificate of incorporation had issued...