Construction Law Newsletter
Construction Law Newsletter
[Volume 12, Issue 2 – Fall/Winter 2015]
David S. Coats [dcoats@bdixon.com]
David S. Wisz [dwisz@bdixon.com]
John T. Crook [jcrook@bdixon.com]
Bailey & Dixon, LLP
434 Fayetteville Street – Suite 2500
Post Office Box 1351
Raleigh, North Carolina 27602-1351
Telephone (919) 828-0731
Facsimile (919) 828-6592
Website: www.bdixon.com
Should you have questions about any of the recent developments discussed in this issue of Bailey &
Dixon’s “Construction Law Newsletter,” please do not hesitate to contact us. If you would like to receive
future copies of this newsletter via e-mail in lieu of hard copy, please e-mail your contact information to
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Inside this Issue:
Court of Appeals discusses the practical effect of
a Building Code violation as negligence per se
(See page 2 for details)
Federal District Court holds that mere repairs
or attempts to repair do not serve to equitably
toll the statute of limitations (See page 3 for
details)
Federal District Court holds that delay damages
are not allowed in breach of contract action if
both parties contributed to the delay and there
is no clear proof of apportionment (See page 4
for details).
North Carolina Business Court construes
meaning of the term “building or construction
contractor” for purposes of the North Carolina
Revenue Act (See page 6 for details)
Federal District Court analyzes the accrual date
for timely filing of claims under the Miller Act
(See page 5 for details)
Court of Appeals finds that party to a
construction contract expressly waived its right
to compel arbitration of breach of contract
claim (See page 7 for details)
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Construction Law Newsletter
I.
Court of Appeals discusses the practical effect of a Building Code violation as negligence per
se.
The elements of a cause of action for negligence are duty, breach, causation, and injury. It is
well-settled in North Carolina that evidence of a defendant’s violation of a safety statute constitutes
negligence per se and establishes the element of breach. In the recent case of Estate of Coppick v.
Hobbs Marina Properties, L.L.C., at al., 2015 N.C.App. LEXIS 278 (Apr. 7, 2015), the North Carolina
Court of Appeals explored the practical application of the negligence per se doctrine in a personal
injury action involving a violation of the Building Code.
In Coppick, the plaintiff’s decedent was a marina employee who was killed when large
gasoline explosion occurred while he was refueling an 80-foot charter vessel. Video surveillance
footage showed that Mr. Coppick inserted the gasoline line into the receptacle at the rear of the
boat, and then headed to the front of the boat to perform other chores. After 6 minutes, a vapor
cloud was visible on the port side of the boat in close proximity to the fueling area, and a large
explosion occurred just as the video showed Mr. Coppick stepping off a ladder from the second deck
onto the stern of the boat. The estate ultimately resolved its wrongful death claims against
numerous other parties but proceeded to trial against Petroleum Equipment & Service, who
provided the fuel dispensing system equipment to the marina. At trial, Plaintiff’s primary evidence
of negligence against Petroleum was the testimony of representatives of the Office of State Fire
Marshall and the Department of Labor that the gasoline nozzle supplied by Petroleum violated the
North Carolina Building Code because it contained a non-pressure-activated “hold-open latch.” The
jury found that Petroleum was negligent and awarded the Estate $1.5 million and Petroleum
appealed, alleging that that trial court erred in its instructions to the jury on negligence and
negligence per se and/or by failing to grant its motion for judgment notwithstanding the verdict.
The Court of Appeals initially noted the general rule that “violation of a public safety statute
constitutes negligence per se,” and that the Building Code is such a safety statute. The Court then
rejected Petroleum’s argument that it could not be held liable under a negligence per se theory
absent a showing that it knew or should have known of the Code violation. The Court initially noted
that there was evidence that Petroleum was a licensed general contractor, and as such was
presumed to have knowledge of the Building Code. Furthermore, as the Court stated, “despite
defendant’s contention that the Code does not specify who is responsible for compliance with the
section that regulates nozzles and hoses at marine fueling stations, plaintiff’s evidence showed that
responsibility for complying with the Code fell upon the marina and upon the person or entity who
installed the nozzles.” Consequently, the Court concluded that it was Petroleum’s duty to provide
the marina with Code-compliant nozzles, and thus plaintiff’s evidence was sufficient to support the
trial court’s instruction on negligence per se.
The Court next rejected Petroleum’s argument that there was insufficient evidence to
establish that its conduct proximately caused the explosion, which was still required even if the jury
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Construction Law Newsletter
found negligence per se. According to the Court, however, expert testimony as to the cause or
origin of the explosion was unnecessary. In this regard, the videotape evidence showing a vapor
cloud at the time of the explosion, plus the testimony of a marine customer that he encountered a
fuel spill using the “hold-open latch” a few days earlier, were sufficient circumstantial evidence for
the jury to find that Petroleum’s violation of the Building Code was a proximate cause of the
explosion.
Even though it is a personal injury action, the Coppick case is instructive in all cases involving
allegations of defective construction. Evidence of a Building Code violation essentially guarantees
that a negligence issue will be submitted to the jury, and the jury will be allowed to find causation
flowing from the same (in some cases, even without expert testimony as to causation).
II.
Federal District Court holds that mere repairs or attempts to repair do not serve to equitably
toll the statute of limitations
A common issue in construction defect litigation is whether a party’s attempt to repair
damages precludes it from later arguing that an owner’s claim against it is barred by the statute of
limitations. In Petty v. Marvin Lumber and Cedar Company, 2015 U.S. Dist. LEXIS 121369 (E.D.N.C.,
Sept. 11, 2015), a federal district court judge found that repairs or attempted repairs were not alone
sufficient to preclude reliance on a statute of limitations defense.
In Petty, the plaintiffs’ house was constructed by their general contractor from 2008 to
2009. Plaintiffs purchased all of their windows from Marvin in July 2008 and had them installed by
the builder. A certificate of occupancy was issued for the residence in June 2009. Following a
September 2010 storm, plaintiffs observed window leaks and contacted both Marvin and their
builder about the same. Marvin ultimately serviced the windows in May 2011, but the windows
leaked again in June and October 2012. In November 2012, plaintiffs’ builder performed another
leak test which showed that the windows continued to leak. Plaintiffs thereafter filed a Complaint
against Marvin in September 2013 asserting claims for breach of contract and breach of warranty.
Marvin sought dismissal of the Plaintiffs’ claims on the basis of the 3-year statute of
limitations for breach of contract and 4-year statute of limitations for breach of warranty claims, and
the Court agreed. The Court noted the general rule in North Carolina that “a statute of limitations is
tolled during the time the seller endeavors to make repairs to enable the product to comply with a
warranty.” According to the Court, however, it was up to the plaintiffs to further plead sufficient
facts giving rise to such equitable tolling. Reviewing the plaintiffs’ Complaint before it, the Court
noted that although there were allegations about the repair attempts by Marvin in May 2011,
plaintiffs failed to “specify how long these assessments and repairs took.” Furthermore, plaintiffs
failed to detail any representations made by Marvin which might have induced them to delay the
filing of their lawsuit. As such, plaintiffs’ claims for breach of contract and breach of warranty were
barred by the statute of limitations.
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The Court’s decision in Petty is instructive on the issue of when repairs (or attempted
repairs) are alleged to preclude a defendant from relying on a statute of limitations defense. Merely
stating that such repairs were made or attempted is insufficient, and the Complaint should allege
facts sufficient for the Court to determine how long those repairs took along with any
representations by the defendant as to whether the repairs had “fixed” the problem.
III.
Federal District Court holds that delay damages are not allowed in breach of contract action
if both parties contributed to the delay and there is no clear proof of apportionment.
Claims for “delay damages” frequently arise when a contractor believes that its
performance of contractual obligations is delayed for reasons outside the contractor’s control. A
common defense to such claims is that the contractor also has some responsibility for the project
delays. In the recent case of Flatiron-Lane v. Case Atlantic Company, 2015 U.S. Dist. LEXIS 102539
(M.D.N.C., Aug. 4, 2015), a federal district court considered the impact of such concurrent delays on
the contractor’s claim for delay damages.
In Flatiron-Lane, the plaintiff served as the general contractor for a highway bridge
construction project pursuant to a contract with the Department of Transportation. Case Atlantic
was a subcontractor involved in the construction of the bridge foundation, in particular the drilled
shafts. When the project took longer than expected, Flatiron-Lane and Case became involved in
litigation against each other seeking several categories of additional costs and other damages
associated with the project. The parties ultimately stipulated to a bench trial, which lasted several
weeks. On the issue of delay damages, Flatiron-Lane argued that since the drilled shafts took 44
weeks to complete and the subcontract and project schedule only allocated 22 weeks for that work,
it was entitled to recover damages from Case for 22 weeks of extra work. Included within this claim
were extra charges for crane rental, the cost of removing excavated material, and the cost of field
engineers due to extended period of the drilling. Case disputed both the nature and extent of
damages being claimed, and argued that Flatiron was responsible for other delays on the project.
In considering Flatiron’s claim, the Court initially noted that while delay damages are
recoverable under North Carolina law, “the plaintiff must present whatever evidence is available to
tie the loss to the period of undue delay attributable to the defendant, and must also demonstrate
why better or more certain evidence is not obtainable.” Furthermore, “under the construction law
principle of concurrent delay, where two or more parties proximately contribute to the delay of the
completion of the project, none of the parties may recover damages from the other delaying
parties, unless there is proof of clear apportionment of the delay and expense attributable to each
party.” On the facts before it, however, the Court found that each party took an “all or nothing
approach” and blamed each other for the entire delay without “giving the court any way to
apportion the delay.” Consequently, even though Flatiron had established that Case was in breach
of the parties’ subcontract, because the court was “not put . . . in a position to say, with reasonable
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Construction Law Newsletter
certainty, what measure of damages [Flatiron] is entitled to recover,” the Court refused to aware
Flatiron any delay damages.
The Court’s decision in Flatiron-Lane is instructive on the nature and extent of the
allegations and proof required to establish a claim for delay damages for breach of contract. Even if
party seeking such damages is convinced that is has no responsibility for the delay in completion of
the construction project, it would appear important to provide the Court with some alternative basis
upon which to allocate the delay damages or else a meritorious claim could be defeated solely by
evidence from the defending party that each party bears some responsibility (however minor) for
the project delay.
IV.
Federal District Court analyzes the accrual date for the timely filing of claims under the Miller
Act
The Miller Act requires a contractor on a federal construction contract of more than
$100,000 to furnish a payment bond through a satisfactory surety for the protection of all persons
supplying labor or materials on the project. It further authorizes any person having a direct
contractual relationship with a subcontractor to bring a civil action on the payment bond “on giving
written notice to the contractor within 90 days on which the person did or performed the last of the
labor or furnished or supplied the last of the material for which the claim is made,” 40 U.S.C. §
3133(b)(2), as long as the lawsuit is thereafter filed “no later than one year after the day on which
the last of the labor was performed or material was supplied by the person bringing the action.” See
40 U.S.C. § 3133(b)(5). In Innovative Metals Company, Inc. v. Southwest Sheet Metal of NC, LLC,
2015 U.S. Dist. LEXIS 55301 (April 28, 2015), the federal district court analyzed these accrual
provisions in ruling against surety’s argument that a subcontractor’s bond claim was untimely.
In Innovative Metals, the plaintiff supplied certain materials and inspection labor for the
roofing installation portion of a project that involved the construction of a child development center
for the U.S. Department of Navy. Westfield was the surety who issued a payment bond as part of
the general contractor’s obligations under the Miller Act. The plaintiff was under contract with both
the general contractor and the first-tier roofing subcontractor, and allegedly furnished all labor and
materials between August 15, 2011 and May 21, 2013. When the roofing subcontractor failed to
pay the plaintiff the full amount it claimed was properly due and owing, the plaintiff served written
notice upon the general contractor on August 19, 2013, and then filed suit against the general
contractor, roofing subcontractor, and Westfield on May 20, 2014.
Westfield sought dismissal of the plaintiff’s claim under the Miller Act alleging that materials
were last delivered in June 2012 and that the provision of a written warranty in May 2013 was not
part of the subcontract work, but the federal court disagreed and found that plaintiff’s claim was
timely filed. Initially, the court noted that the “applicable legal test” for determining the accrual date
on a Miller Act claim is “whether the work was performed and the material supplied as part of the
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Construction Law Newsletter
original contract, as opposed to being for the purpose of correcting defect or making repairs
following inspection of the project.” On the facts set forth in the plaintiff’s complaint and
attachments, the Court identified that a factual issue existed as to the nature of the work involved in
the warranty delivery by the plaintiff and whether that was included as part of the subcontract
work, which precluded granting Westfield’s motion to dismiss. As the court stated, “to the extent
the work may be characterized on onsite inspection work taking place on May 21, 2013, it may be
included as work triggering the limitations period under the Miller Act. If, by contrast, it may be
characterized as offsite work, not provided for under the subcontract, it may not be included.”
V.
North Carolina Business Court construes meaning of the term “building or construction
contractor” for purposes of the North Carolina Revenue Act.
Pursuant to the North Carolina Revenue Act, a corporation which generates its income
from multiple states is required to apportion using a three-factor apportionment formula. Certain
“excluded corporations,” however, are entitled to use a single factor apportionment method. For
purposes of the Revenue Act, an excluded corporation includes any corporation “engaged in the
business as a building or construction contractor.” See N.C.G.S. § 104-130.4. In the recent case of
Midrex Technologies, Inc. v. N.C. Dept. of Revenue, 2015 NCBC LEXIS 92 (Oct. 7, 2015), the North
Carolina Business Court interpreted this statute to require that a corporation be responsible for
performance or direction of the actual building, erection, or assembly of a structure in order to be
entitled to use the single factor apportionment method.
In Midrex, the Petitioner was a North Carolina corporation which had developed a process
to convert iron ore into direct reduced iron (“DRI”) which can be used as a feed for making steel,
which process required the construction of a specialized processing plant. During the tax years at
issue, Midrex designed and sold processing plants in several foreign countries. The sale of such a
plant involved 3 different business segments: (a) engineering and design services which primary
took place in Midrex’s home office, (b) a Plant Sales Contract which included the technical
specifications for the construction of the plant, and (c) aftermarket sales. Midrex contended that it
was an excluded corporation for tax purposes because of its role in the Plant Sales Contract,
including providing on-site personnel to assist the owner’s general contractor (a separate company)
in scheduling and sequencing the construction, determining manpower requirements, providing
quality control, directing and supervising the installation of the specialized equipment, and
supervising the initial operation of the plant. The State disagreed, however, and the matter went
before the North Carolina Business Court upon a review of an administrative law judge’s decision in
the State’s favor.
The primary issue before the Court was the meaning of the term “building or construction
contractor” as used in N.C.G.S. § 105-130.4. As the term is not defined by the statute, the Court
initially looked at whether that term had a plain meaning. In that regard, the Court looked at
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dictionary definitions of the terms “building,” “construction,” and “contractor,” as focusing on the
actual erection or assembly of a structure. The Court further took note of another statute – the
Machinery Act – which defined “construction contractor” as “a taxpayer who is regularly engaged in
building, installing, repairing, or improving real property.” N.C.G.S. § 105-273(5a). In response,
Midrex argued that construction contracting can include work in the nature of project management
and supervision, and that its field advisory work qualified as construction management. According
to the Court, however, in the absence of evidence that the legislature intended to incorporate any
technical definition or terms of art into the statute, the Court’s interpretation of “building or
construction contractor” would be confined to the plain language of the statute. In that regard,
construction management that only involves oversight or scheduling, but does not include
responsibility for performance or the direction of the actual building or assembly, did not fit within
the plain meaning of the term “building or construction manager.”
As a result, where the Midrex contracts provided only for engineering services and
technical advice, but the client was responsible for the providing the physical construction,
installation, or erection of the plant, this did not constitute serving as a “building or construction
contractor.” Similarly, providing direct supervision over the commissioning (start-up) of the plant
equipment did not fall within the statute where the commissioning itself was performed by the
client’s employees. For all of these reasons, the Court concluded that Midrex was not an “excluded
corporation” for purposes of tax allocation of income.
Although Midrex is a case involving the interpretation of the Revenue Act, its analysis and
interpretation of the term “building or construction contractor” may have application in other
construction law settings. It is also noteworthy that the Court made no reference to the North
Carolina General Statutes Chapter 87 governing “general contracting,” apart from a fleeting mention
that the Revenue Act did not appear to require a company to be a licensed general contractor to
qualify as an excluded corporation, despite the statutory definitions of “general contractor”
(N.C.G.S. § 87-1) and construction management (21 N.C.A.C. 12.0208).
VI.
Court of Appeals finds that party to a construction contact expressly waived its right to
compel arbitration of breach of contract claim.
Many construction contracts contain a provision requiring the parties the conduct
arbitration of any claims arising out of the contract in lieu of litigation. A question sometime arises
whether a party who invokes the arbitration clause after litigation has already commenced has
waived their right to compel arbitration – either expressly or impliedly. In the recent case of
T.M.C.S., Inc. d/b/a TM Construction, Inc. v. Marco Contractors, Inc., (No. COA15-354, Dec. 1,
2015), the Court of Appeals held that failure to comply with a specific deadline set forth in the
parties’ contractual arbitration clause constituted express waiver of the right to arbitrate.
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In TM Construction, the plaintiff (TM) was a North Carolina licensed general contractor who
entered into an agreement with Marco, a construction management company based in
Pennsylvania, to renovate a Wal-Mart retail store. The parties’ contract contained a provision
whereby “all claims or disputes between the Subcontractor (TM) and the Contractor (Marco)
arising out of or related to this Subcontract or the breach thereof . . . shall be decided by
arbitration, at the option of the Contractor” in accordance with the rules of the American
Arbitration Association. The provision further went on to say, however, that “notice of the demand
for arbitration shall be filed in writing with the other party to this agreement and, upon acceptance
by the Contractor, if required, filed with the AAA. Such notice must be made within 30 days after
the claim or dispute has arisen or within 30 days after the Subcontractor’s work under this
Subcontract has been completed, whichever is later.” After a dispute arose between the parties
both as the scope of work and payment for the same, on September 4, 2013, TM filed a claim of
lien on the real property and served Marco with a claim of lien on funds, and thereafter filed a
Complaint in Forsyth Superior Court on its claim of lien. Marco filed an Answer denying any
liability, but it was not until September 2014 when Marco filed a motion to compel arbitration
proceedings in Pennsylvania (pursuant to separate forum selection clause in the contract). The trial
court denied that motion, and Marco appealed.
The Court of Appeals initially recognized that there is a distinction in North Carolina
between an untimely demand for arbitration and a waiver of the right to arbitration. Because the
contract contained a specific deadline by which notice of a claim must be made, there was no
question of “implied waiver” but instead the issue was whether Marco had forfeited its contractual
right to demand arbitration. Marco conceded that the contract contained a 30-day provision, but
argued that it required the party asserting the claim (i.e., TM) to submit to the other party (i.e.,
Marco) a written notice of a demand for arbitration, and such notice would activate Marco’s option
to accept the demand or instead allow the dispute to proceed in some other forum. Consequently,
since TM never demanded arbitration, Marco argued that its September 2014 demand was timely.
The Court agreed that the “at the option of the Contractor” phrase seemed to “stack the
deck in [Marco’s] favor by reserving a unilateral right to decide whether any potential dispute
would be arbitrated.” On the other hand, the notice provisions were clearly bilateral in nature.
Furthermore, since Marco drafted the contract, the language of the arbitration clause should be
strictly construed against it. As a result, the Court felt that both parties were subject to the 30-day
time limit placed on arbitration demands related to disputes under the contract, and thus Marco’s
failure to demand arbitration within 30 days after TM gave notice of the lien on funds and lien on
real property constituted a waiver of the right to arbitrate.
In this regard, the TM Construction case is instructive as showing that even though North
Carolina courts generally favor alternative dispute resolution provisions, a party’s failure to comply
with the express time deadlines set forth in the contract may constitute a waiver of such provision.
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