In December, we begin with a case that comes from the Court of Appeals for Ohio, Tenth Appellate District. The court was asked to determine when the statute of limitations began to run where a contractor sought additional compensation under a contract with the State. Our second case comes from the United States District Court for the Northern District of Ohio, Western Division. The issue before the court was whether a company who supplied crushed stone backfill to a general contractor is a “subcontractor” within the meaning of an insurance policy or merely a “material supplier.”

Statute of Limitations Bars Contractor’s Claim Against the State

Claims are typically required to be brought within a specific time period. This time period is often set forth in the Ohio Revised Code and is commonly referred to as a statute of limitations. Quite often a claimant will file an action after the statute of limitations has run resulting in the claim being barred by the applicable statute.

A two-year statute of limitations was at issue in The Painting Co. v. The Ohio State University, 2009-Ohio-5710. In The Painting Company, the owner hired the contractor to perform painting and wall covering work for $370,225. The contractor subsequently made the following claims for additional compensation:

  • The contractor sought additional compensation because the law governing the ratio of journeymen to apprentices allegedly changed, causing the contractor unanticipated expenses; and
  • The State allegedly failed to maintain the agreed construction schedule, made numerous design changes, and required additional work not in the contract. The claim resolution process first required the project administrator to consider the claims and then allowed the contractor to appeal to the State Architect for a final administrative decision.

The claim was rejected by the project administrator and the contractor appealed on August 23, 2005. The State Architect, in a letter dated January 6, 2006, addressed each claim individually by either denying the claim, requesting revisions or additional information, or postponing a ruling pending a review of the claim. The contractor allegedly failed to provide the requested additional information or revisions.

The State sent the contractor a letter on October 3, 2007, stating that the State Architect’s letter dated January 6, 2006 was the State’s final decision on the claims. The State also indicated that “the outstanding contract balance would be released once [the contractor] submitted its final close-out documents.” The contractor, however, apparently failed to submit the close-out documents for the release of the outstanding contract balance.

The contractor filed suit against the State on July 29, 2008, seeking the outstanding amounts due under the contract and the additional compensation it sought through the claim process.

The statute of limitations facing the contractor was a period of two years from the accrual date of the cause of action (R.C. § 2743.16). But when did the time period start to run? Was it when the State finally rejected the contractor’s claim on January 6, 2006? Was it when the State finally denied the claims in the letter dated October 3, 2007? Or, was there some other date?

The court looked to the Ohio Revised Code, specifically sections 153.12(B) and 153.16(B), for the answer. R.C. § 153.16(B) states that “any claim submitted under a [state] public works contract shall be resolved within 120 days.” Once the 120-day period runs, “the contractor shall be deemed to have exhausted all administrative remedies for purposes of division (B) of section 153.12 of the Revised Code.”

R.C. § 153.12(B) states that “if a dispute arises between the state and a contractor concerning the terms of a public improvement contract let by the state or concerning a breach of contract, and after administrative remedies provided for in such contract * * * are exhausted, the contractor may bring an action to the court of claims in accordance with” R.C. Chapter 2743.

According to the court, the “[contractor’s] cause of action for breach of contract accrued by December 21, 2005, when the 120-day period lapsed after [contractor’s] appeal to the State Architect, regardless of whether the State Architect subsequently issued a final decision on the validity of [the contractor’s] claims.” The time period to file the complaint ended on December 21, 2007, and as a result, the contractor’s claims for additional compensation were barred.

In addition, the contractor never submitted the requested close-out documents. The contractor “merged its claims for the amounts due under the contract into the breach of contract action filed in the court of claims.” Because the contractor’s breach of contract action was statutorily time-barred, “[the contractor was] barred from seeking further administrative or judicial review of its claims under the contract, including its claims for the outstanding balance due under the contract.”

Insurance Policy Exclusion—Material Supplier or a Contractor?

Insurance policies provide specific coverage in the event an accident occurs. The extent of the coverage must be gleaned from the policy language. Quite often a dispute will arise over something as simple as the meaning of a word in the policy and whether or not a party on a construction project fits that definition.

In Mosser Const., Inc. v. The Travelers Indemnity Co., 2009 U.S. Dist. LEXIS 99528, the issue was whether a company was a “subcontractor” or a “material supplier” according to the language in the policy. In Mosser, the owner hired a contractor to provide improvements to a wastewater treatment facility. The contractor hired Gerken Materials, Inc. to provide crushed limestone that was used as backfill.

The problems occurred when the backfill settled, allegedly the result of too much gypsum in the backfill. The gypsum allegedly leached out of the material when it was exposed to groundwater, thus causing the settling to occur.

The owner sued the contractor due to the damages that resulted from the improper settling. The contractor sought to have the insurer defend and indemnify the contractor from the lawsuit.

The problem, however, was that the insurance policy included an exclusion. The insurance did not apply to damage to the contractor’s work. Where the contractor performed the work or where materials were furnished in connection with the contractor’s work the exclusion applied and there was no coverage. However, where a subcontractor caused the damage, the exclusion did not apply and the policy would cover the damage.

As a result, the contractor argued that Gerken, the third party who supplied the limestone, was a subcontractor and not a material supplier.

For guidance, the court looked to the Miller Act, 40 U.S.C. § 3131, and to cases developing tests to distinguish between subcontractors and suppliers for purposes of providing protection under the Miller Act. Using those tests the court was to determine whether “Gerken’s involvement in the project was ‘substantial and important’ enough to warrant the label ‘subcontractor.’”

The Miller Act cases provide 13 factors that help determine if a party is a subcontractor or a material supplier.

(1) The product supplied is custom fabricated;

(2) The product supplied is a complex integrated system;

(3) A close financial interrelationship exists between the companies;

(4) A continuing relationship exists with the prime contractor as evidenced by the requirement of shop drawing approval by prime contractor or the requirement that the supplier’s representative be on the job site;

(5) The supplier is required to perform on site;

(6) There is a contract for labor in addition to materials;

(7) The term “subcontractor” is used in the agreement;

(8) The materials supplied do not come from existing inventory;

(9) The supplier’s contract constitutes a substantial portion of the prime contract;

(10) The supplier is required to furnish all the material of a particular type;

(11) The supplier is required to post performance bond;

(12) There is a backcharge for cost of correcting supplier’s mistakes; and

(13) There is a system of progressive or proportionate fee payment.

According to the court, Gerken satisfied only one of these 13 factors, and one out of 13 does not create a subcontractor relationship.

In addition, the court considered various factors indicating a party is a material supplier.

(1) A purchase order form is used by the parties;

(2) The materials come from preexisting inventory;

(3) The item supplied is relatively simple in nature;

(4) The contract is a small percentage of the totalconstruction cost; and

(5) Sales tax is included in the contract price.

Here Gerken met four of the five factors. The fifth, including sales tax in the contract price, was found to be irrelevant by the court as the general contractor likely supplied a sales tax exemption certificate to Gerken.

In light of these factors, the court determined that Gerken “is unambiguously not a subcontractor.”