Construction Law - Brian J. Morrissey and Timothy N. Toler

• Publication year: 1999

Construction Lawby Brian J. Morrissey^* and

Timothy N. Toler^**

I. Introduction

The decisions rendered by the Georgia Supreme Court and Georgia Court of Appeals during this one-year survey period included a small opening in lender liability, a minimalist view of the requirements of evidence as it pertains to the law of fraud, an extensive discussion of the law of damages as it applies to construction contracts, and a harsh result because of failure to comply with the requirements of the mechanic's and materialmen's lien statute. This Article addresses these significant movements in the law and some of the reaffirmations of existing law in the construction field between June 1, 1998, and May 31, 1999.

II. Lender Duties and Liabilities

A. Disbursement of Funds

In Construction Lender, Inc. v. Sutter,¹ although it remanded the case on other grounds, the court of appeals agreed with a trial court verdict that a lender's president bound the lender by voluntarily undertaking a duty to secure approval from the lender's borrowers before disbursing loan funds to a building contractor.² Construction Lender, Inc. ("TCL"), in its loan documents with Robert and Sandra Sutter, declined to undertake any duties with respect to the quality and performance of the construction work. After construction began, however, problems arose with the general contractor's work, and the borrowers asked the lender not to make any further disbursements without their approval. The lender agreed and followed this procedure for the next three draws. However, the lender paid the final draw without the borrowers' approval, increasing the final contract price above the agreed amount of $211,500, which the lender should have disbursed. The general contractor then declared bankruptcy. At trial the borrowers presented evidence of damages, including amounts paid in excess of the contract price, draws paid without approval, and the costs of completing the house resulting from delays in completion caused by the general contractor's abandonment of the job. These damages included removal of materialmen's liens, the continued interest on the construction loan, and the refinancing of that loan to obtain additional construction funding.³

The borrowers presented their case to a jury on two tort theories: (1) that the lender and its president had a duty to ensure that payments made on the loan were timely and were for work actually performed; and (2) that they negligently failed to discharge the duty voluntarily undertaken to obtain the borrowers' approval before disbursing the final loan amounts to the general contractor. After a jury verdict in favor of the borrowers, the bank president and lender appealed the denials of their motions for directed verdict and for judgment notwithstanding the verdict.⁴

The court of appeals found that "'[w]here one undertakes an act which he has no duty to perform and another reasonably relies upon that undertaking, the act must generally be performed with ordinary or reasonable care.'"⁵ The lender, through its president, "voluntarily undertook the duty to obtain approval from the . . . [borrowers] before disbursing the . . . [funds] and breached that duty."⁶ The bank's president, as the person who personally spoke on behalf of the lender and as an officer of the corporation, could also be personally responsible for that tort.⁷ In essence, the bank's president created the duty and by his actions breached that duty both on his own and the lender's behalf.

The court, however, found the duty was limited merely to obtaining authorization before disbursal and did not encompass ensuring that materialmen's liens were paid or that the work was properly completed in whole or in part.⁸ Accordingly, the court found that so long as the amounts disbursed without authority would not have been paid to the general contractor otherwise, the borrowers were entitled to recover these amounts but not additional damages.⁹ Consequential damages, including the cost of completion and the additional expenses resulting from the discharge of materialmen's liens and other personal expenses incurred by the borrower, were not a reasonably foreseeable result of the lender's breach of its voluntary duty.¹⁰

With respect to the alleged duty to ensure payment for work actually performed, the court found it to be purely contractual in nature and not an independent duty arising in tort.¹¹ "Mere breach of the contract's terms is insufficient to create a tort cause of action" unless one breaches "an independent duty created by statute or common law."¹²

B. Fraud: Racketeer Influenced and Corrupt Organizations Statute

In Ali v. Fleet Finance, Inc. of Georgia,¹³ home purchasers sued a lender for fraud, negligent misrepresentation, and violations of Georgia's Racketeer Influenced and Corrupt Organizations ("RICO") statute.¹⁴ James Cooke made an initial purchase of a fire-damaged home from Fleet Finance under an "as is" agreement. Cooke reportedly made repairs on the home and remarketed it to Claudette and Dale Ali, also under an "as is" agreement. After taking possession, Ali discovered structural damage to beams, floors, and the roof, as well as electrical and plumbing problems allegedly a result of fire damage. Ali contended that Fleet Finance, as the mortgage holder on the property when Cooke owned it, either knew or should have known about these defects and failed to disclose them prior to the real estate closing. Fleet Finance contended it had no liability whatsoever because its sole involvement with Ali was as a lender under the assumed existing loan. The trial court granted summary judgment to Fleet Finance.¹⁵

On appeal the court found no duty flowing from Fleet Finance to Ali to disclose any known defects to the purchasers, limiting the doctrine of passive concealment to residential builders and sellers only.¹⁶ Moreover, the court concluded that a creditor has "no duty to determine or advise its debtor of the status of the collateral involved in the transaction."¹⁷

The court also summarily disposed of the RICO claim, finding that Fleet Finance's involvement with Cooke in over one hundred properties did not establish a pattern of racketeering activity or the requisite unlawful predicate acts sufficient to establish a RICO claim.¹⁸

C. Fraud: Truth in Lending

In Chandler v. MVM Construction, Inc.,¹⁹ the court of appeals reversed the grant of summary judgment to the lender in an action for fraud and violations of the Truth in Lending Act.²⁰ The borrowers, William and Marie Chandler, sued MVM Construction ("MVM") and Green Tree Financial Corporation ("Green Tree") for fraud on a home improvement contract. The Chandlers and Green Tree signed a retail installment contract, using the borrowers' home as security for the home improvement contract. The Chandlers were both over seventy-five years old, had extremely limited income, and were in poor health—Marie Chandler had been bedridden for years. Neither of the Chandlers graduated from high school, and William Chandler was barely literate.²¹

Under the Truth in Lending Act,²² a consumer has a right to rescind a transaction "until midnight of the third business day following the consummation of the transaction."²³ If the seller does not properly deliver or make the required notice or material disclosures, the consumer's right to rescind is extended until three years after consum- mation of the transaction.²⁴ The Chandlers claimed the contract they signed did not contain a required schedule of due dates for periodic payments and did not disclose the due and payable date of the first installment.²⁵ The court of appeals found sufficient factual issues to create a jury question concerning the existence of these contractual defects.²⁶

Moreover, the retail installment contract itself imposed potential liability on Green Tree. It allowed the debtor to assert against Green Tree (the holder of the consumer credit contract) any defenses available against MVM (the seller of the services or goods obtained).²⁷ The Chandlers alleged deficiencies and fraud in the performance of the home improvement by MVM.²⁸ The court concluded that jury questions existed as to whether the Chandlers, as a result of their infirm conditions, illiteracy, and poor eyesight, used proper diligence to ensure performance or to apprise themselves of the terms of the agreement.²⁹

III. Contract Formation, Construction, and Breach

A. Contract Formation and Construction

In North Georgia Ready Mix Concrete Co. v. L & L Construction, Inc.,³⁰ the jury awarded the contractor repair costs of $100,000 in a breach of contract claim against a concrete supplier. The contractor claimed the supplier changed the agreed concrete design mix, resulting in excessive curling and spalling. On appeal the supplier argued that the trial court erroneously denied its motion for directed verdict because the contractor failed to prove any express warranty regarding mix design.³¹

The court of appeals noted that "'[a]ny description of the goods which is made a part of the basis of the bargain creates an express warranty that the goods shall conform to the description.'"³² The contractor presented evidence at trial showing that the parties orally agreed to a concrete mix of at least eighty percent natural sand and a maximum of twenty percent manufactured sand.³³ The court construed this description to be an express warranty pursuant to O.C.G.A. section 11-2-313(l)(b) and found sufficient evidence for the jury to determine that the supplier's failure to meet the contract specifications caused the concrete to curl excessively.³⁴

B. Breach and Remedies

1. Action on Account. In Wheat Enterprises, Inc. v. Redi-Floors, Inc. ,³⁵ the floor covering subcontractor sued the general contractor after the general contractor refused to pay all invoices received for completed work. The invoices included the work as initially bid, as well as changes and additional work. The subcontractor claimed a...