Construction Law - Dana R. Grantham, David L. Hobson, and David J. Mura, Jr.

• Publication year: 2007

Construction Lawby Dana R. Grantham^*

David L. Hobson^** and David J. Mura, Jr.^***

This Article surveys construction law decisions handed down by Georgia courts and construction-related legislation enacted by the Georgia General Assembly between June 1, 2006 and May 31, 2007. The cases this year are divided into four general categories: (1) contracts, (2) torts, (3) liens and bonds, and (4) arbitration. Recent legislation is summarized in Section V of this Article.

I. Contracts

A. Contractual Obligation to Maintain Liability Insurance

Depending on the ultimate resolution of Vakilzadeh Enterprises v. Housing Authority,¹ termination for cause on a construction project may become more difficult if the nondefaulting party fails to act immediately upon the other party's breach. In addition, notwithstanding the standard construction contract provision that requires thirty days prior written notice of cancellation or nonrenewal of the contractor's or subcontractor's liability insurance, the following case underscores the importance of calendaring the date when the required liability insurance coverage will expire so that notice of breach, if applicable, may be timely given.²

In Vakilzadeh Affordable Housing Development Corporation of DeKalb ("Affordable") hired Vakilzadeh Enterprises, Inc., doing business as Allstates Construction Co. ("Allstates"), as its general contractor on a subdivision construction project and entered into a written construction agreement with Allstates. After Allstates allegedly breached its contract, the Housing Authority of DeKalb County ("Housing Authority"), as Affordable's assignee, terminated the agreement. Allstates subsequently sued the Housing Authority for wrongful termination. The trial court granted the Housing Authority's motion for summary judgment on the ground that the Housing Authority was authorized under the contract to terminate the agreement with Allstates because Allstates had failed to comply with a standard contract provision which required it to maintain liability insurance without interruption until the completion of the project.³ Allstates appealed, and the court of appeals reversed, determining that there were material issues of fact (a jury question) about whether Allstates' noncompliance with the liability insurance provision entitled Affordable to terminate the parties' contract.⁴

In the underlying case, Affordable and Allstates entered into a construction agreement that required Allstates to provide all labor, materials, equipment, and services required to complete a residential subdivision for an adjustable contract price of approximately $1.9 million. The subdivision was to be built in three phases. The parties agreed that before Affordable would authorize Allstates to proceed with the second two phases, Allstates had to satisfactorily complete construction of the first phase of the subdivision ("Phase One").⁵

The parties' construction agreement authorized Affordable to terminate Allstates if it refused to supply enough workers or materials, failed to pay its subcontractors for work performed, persistently disregarded any applicable laws, or substantially breached the contract. The agreement also required Allstates to (1) maintain liability insurance covering itself and its subcontractors without interruption from the time work commenced until completion of the project and (2) provide certificates of insurance prior to commencing work showing that coverage would not be cancelled or nonrenewed without thirty days prior written notice to Affordable. Allstates provided a certificate of general liability insurance for the period of November 15, 2001 through November 15, 2002 before beginning Phase One, which was completed in April 2003, about four months after the certificate expired.⁶

Allstates was then asked to start the second phase of the project ("Phase Two"), even though the previous certificate of insurance had expired; unlike before, the owner did not request Allstates to provide a current certificate of insurance. In September 2003, during the construction of Phase Two, a subdivision water line was broken, and the Housing Authority notified Allstates that it was going to hold Allstates, as general contractor, responsible for the damages. The Housing Authority also informed Allstates that it understood Allstates may have allowed its liability insurance to lapse and instructed Allstates to provide a certificate of current liability coverage immediately. The contractor produced a certificate of insurance for the period of December 1, 2003 through December 1, 2004 but did not provide the Housing Authority with any evidence showing that it had maintained insurance between November 15, 2002 and December 1, 2003. In January 2004 the Housing Authority terminated Allstates, citing several reasons, including Allstates' failure to maintain continuous liability insurance coverage.⁷

Allstates then sued the Housing Authority, which then moved for summary judgment, contending that as a matter of law, good cause to terminate existed because Allstates had failed to maintain liability insurance during the entire contract period. Allstates argued that the parties had mutually departed from the requirement that it maintain insurance coverage and that the Housing Authority therefore waived the insurance requirement as a ground for termination.⁸

The court of appeals reversed the trial court's grant of summary judgment to the Housing Authority on the basis that a genuine issue of material fact existed about whether the Housing Authority, knowing that the original certificate of insurance expired in November 2002, waived the general contractor's obligation to maintain uninterrupted liability insurance by allowing Allstates to proceed with Phase Two of the project without ever receiving a current certificate of insurance.⁹ The court concluded that another question for the jury was whether Allstates' alleged breach of the contract provision which required it to maintain uninterrupted liability insurance coverage until completion of the project constituted a "'substantial breach of contract'" that authorized termination of the agreement.¹⁰

B. Verifying Contracting Authority on Public Works Projects

In Griffin Bros. v. Town of Alto,¹¹ the town of Alto (the "Town") decided to install a water pipeline and contacted Griffin Bros., Inc. ("Griffin"), a contractor, to provide a rough estimate of the cost. A few months later, Griffin was asked by a Town council member to provide a more detailed estimate in writing, which Griffin put together and supplied. Trying to avoid rising material costs, the Town mayor then telephoned Griffin and asked it to go ahead and order the pipe. After the materials were ordered, the mayor telephoned Griffin again and notified it that the Town intended to advertise the project for bid and that Griffin needed to submit a formal bid as part of that process.¹²

Only one company besides Griffin, Higgins Construction Co., ("Higgins"), submitted a formal bid. Griffin was the low bidder, but Higgins's higher bid price included a longer run of pipe that was more consistent with the Town's needs and bid solicitation. After the Town awarded the project to Higgins, Griffin filed a complaint against the mayor, the Town council members, and the Town, and it sought damages and injunctive relief.¹³

The defendants moved for summary judgment on the bases that the Town was not legally obligated to accept the lowest bid, and the mayor lacked authority to unilaterally bind the Town to a contract with Griffin. The trial court granted the defendants' motion for summary judgment, and Griffin appealed, contending that (1) the Town was obligated by statute to accept the lowest bid, (2) the Town was estopped from denying it had a contract with Griffin, and (3) the Town's prior course of conduct—having Griffin perform work based on informal instructions—justified Griffin's reliance on the mayor's request to purchase pipe for the Town's new pipeline.¹⁴

The court of appeals disagreed, determining that each of Griffin's contentions was without merit.¹⁵ First, Georgia's statutory requirement that public works construction contracts be awarded to the lowest responsible and responsive bidder through a competitive bid process does not apply to projects that can be performed for less than $100,000.¹⁶ The highest bid for the pipeline project, $89,989, was well under $100,000, so the Town was not required by statute to accept Griffin's lower bid.¹⁷ In addition, the court reasoned that consistent with the Town's invitation to bid, the winning bid included more linear feet of pipe and better met the Town's needs.¹⁸ Therefore, the court concluded that the Town acted properly and within the scope of its discretionary authority when it awarded the contract to the higher bidder, Higgins.¹⁹ Griffin next contended that the Town was estopped from denying that a contract existed between the Town and Griffin because Griffin had justifiably relied on the mayor's request to order pipe as an indication that it had been awarded the construction contract to perform the work.²⁰ Again, the court disagreed.²¹ The cost of the pipe materials ordered at the mayor's request was $15,729, but by resolution of the Town council, the mayor's unilateral authority to obligate the Town was limited to $2,000.²² The court explained that section 45-6-5 of the Official Code of Georgia Annotated²³ ("O.C.G.A.") provides that "'[a]ll persons dealing with a public officer'" have a duty to "'ascertain the extent of'" the officer's conferred authority.²⁴ As the court noted, those who fail to ascertain the extent of an officer's authority do so at their own peril.²⁵ If Griffin had endeavored to ascertain the extent of the mayor's authority before ordering the pipe, Griffin would have been able to determine that the mayor lacked authority to bind the Town to a contract with Griffin for expanding its water infrastructure.²⁶...