What the Courts Are Saying . . .
Reprinted from April 2008 Brickerconstructionlaw.com
Each month, Brickerconstructionlaw.com summarizes recent decisions of
state and federal courts that may affect construction projects and those
involved with them in Ohio, Indiana, Kentucky and Michigan. From time to time,
we may even include cases from other states, if they seem particularly
relevant. We highlight what the courts have said in these cases to keep you
informed about decisions that may affect your business and your interests, but
the summaries themselves are neither legal advice nor legal opinion. If we
overlook a case that you think is significant, E-mail us with your suggestions.
We can always use feedback, and we would enjoy hearing from you!
Our case summaries for the month of April begin with an opinion from the Court of Appeals for Medina County. A contractor working on a public project violated prevailing wage laws by failing to pay prevailing wage to employees working at an off-site shop. The employees were fabricating duct work that would be used in the completion of the public project. Our second decision, from the Southern District of Ohio, Eastern Division, looks at whether either a principal or an obligee may bring a bad faith claim against a surety.
Prevailing Wage Must Be Paid
to Off-Site
Workers on Public Projects
Read opinion discussed in this article
If you are involved in public projects, you need to understand the requirements of prevailing wage law. Under Ohio law, contractors must pay prevailing wage to employees working on public projects. What about employees who work in the shop preparing materials that will be used on a project? Do they need to be paid prevailing wage?
According to the Ohio Court of Appeals, Ninth District, in Sheet Metal Workers’ International Association, Local Union No. 33 v. Gene’s Refrigeration, Heating & Air Conditioning, Inc., 2008-Ohio-1005, a contractor must pay off-site workers prevailing wage if those workers are fabricating materials to be used in the completion of a public project.
In Sheet Metal, a contractor was awarded a public project that involved on-site construction work and the off-site fabrication of ductwork. The contractor paid the on-site workers prevailing wage and paid its off-site workers their normal non-prevailing wage rates. A union filed suit against the contractor on behalf of all employees that worked on the public project alleging that the contractor violated Ohio’s prevailing wage laws.
The contractor relied on an Ohio Supreme Court ruling from 1934 in the case of Clymer v. Zane. In that decision, the court decided that an off-site private operation, owned by a contractor, was not necessarily a part of a public project simply because the contractor was using materials from the private operation on a public project. The Supreme Court based its rationale on the complexity of tracing all possible employees that contributed labor to a public project and the likelihood of conflicting with wage regulations in other industries.
The union referred to legislation passed the year following the Clymer v. Zane decision. The legislation provides that a prevailing wage rate must be
paid to “laborers, workmen, or mechanics upon any material to be used upon or in connection with a public work.” The court in Sheet Metal found that this language expressly states the legislature’s intent to include off-site workers.
The court also based its decision on the purpose behind the prevailing wage law. The Sheet Metal court agreed with the reasoning of the Ohio Supreme Court in
Internatl. Union of Operating Engineers, Local 18 v. Dan Wannemacher Masonry Co. (1988), 36 Ohio St. 3d 74, where the “primary purpose” of the prevailing wage law was to “support the integrity of the collective bargaining process by preventing the undercutting of employee wages in the private construction sector.”
The court did not find credence in the contractor’s concern regarding the difficulty in tracking all materials it may use on a public project. The language of the statute makes a distinction between materials fabricated “to be used” in the public project and “prefabricated materials made in the ordinary course of business by suppliers.” The court concluded that it would not be difficult to track materials made for a specific public project and to determine which employees are subject to prevailing wage law.
The contractor also argued it would be difficult to determine which prevailing wage rate to apply to off-site workers. The court again referenced statutory language. The statute states that the prevailing wage rate “shall be in the location where such public work is being performed and where the material in its final and completed form is to be situated, erected, or used.”
Contractors working on public projects should consider consulting their legal counsel before each project begins to determine the prevailing wage requirements that must be met for each specific project.
Court Determines Who May Assert a
Bad Faith Claim Against a Surety
Prior to this month, no court in Ohio has directly taken on the question of whether a
construction surety has a duty of good faith to its principal (the contractor). That changed when the Untied States District Court for the Southern District of Ohio,
Eastern Division, handed down its decision in the case of International Fidelity Ins. Co. v. Vimas Painting Co., 2008 U.S. Dist. LEXIS 27018.
Vimas was the successful bidder for two Ohio Department of Transportation projects where work included the painting of two interstate bridges. Vimas was required to obtain a performance and payment bond for each project and to obtain a five-year warranty maintenance bond. IFIC provided all three bonds with Vimas as the principal and ODOT as the obligee.
In order to obtain the bonds, Vimas and its owners, individually, entered into an Indemnity Agreement with IFIC where they agreed to “exonerate, indemnify, and keep indemnified the Surety from and against any and all liability for losses and/or expenses of whatsoever kind or nature.” They also agreed that IFIC was entitled to charge them “for any and all disbursements made by it in good faith.”
Vimas completed the projects and was paid in full by ODOT. During a later warranty inspection, ODOT discovered numerous defects in the paint job and demanded that Vimas and IFIC honor the obligations under the maintenance bond. When Vimas and IFIC failed to do so, ODOT filed an action in the Court of Claims seeking recovery.
IFIC established a $500,000 reserve and demanded that Vimas provide, pursuant to the terms of the Indemnity Agreement, an equal sum. Vimas filed a counterclaim against ODOT alleging that ODOT had no statutory authority to require maintenance bonds of its contractors. Vimas also complained that the bid specifications only required a maintenance bond in the sum of the cost of surface preparation, approximately $850,000, and ODOT demanded and received from IFIC a maintenance bond for $1.6 million.
Vimas offered to defend IFIC, but the offer was refused. IFIC engaged its own counsel to answer the complaint and simply sought to decrease the amount of the maintenance bond. IFIC did not argue that ODOT lacked the statutory authority to require the maintenance bond.
IFIC filed a separate suit against Vimas and the individual indemnitors seeking performance of the Indemnity Agreement by Vimas and the individual indemnitors. In turn, Vimas and the individual indemnitors filed a counterclaim against IFIC alleging that IFIC breached its duty of good faith by, among other things, failing to accept Vimas’ offer of representation, failing to argue that ODOT had no statutory authority to require the maintenance bond, and demanding that they post excessive collateral.
IFIC filed a motion with the court asking it to dismiss the counterclaim because it failed to state a claim upon which the court could grant any relief.
IFIC argued that Ohio does not recognize a claim of bad faith filed by a principal (the contractor) against its surety.
The court started its analysis by viewing Vimas’ claim as a claim for breach of contract. Generally, a breach of contract does not rise to the level where more than the economic loss may be awarded. That is to say, a breach of contract, no matter how willful or malicious, does not give rise to a tort action, such as bad faith, unless there is a special or fiduciary relationship between the parties.
Ohio courts have determined that this relationship exists between an insurer and an insured, and that an insurer has an implied duty to act in good faith in handling the claim of its insured. Because of this relationship, it is well established that an insured may pursue a claim of bad faith against the insurer. The question in this case is whether the same relationship exists between a principal (the contractor) and its surety.
The Court looked to the Ohio Supreme Court for guidance. In Suver v. Personal Insurance Company (1981). 11 Ohio St.3d 6, the Supreme Court examined the differences between insurance policies and surety agreements. In an insurance setting, the policy is a contract between two parties which is written for the benefit and protection of the insured. The insurer must pay if the insured suffers a covered loss and may not seek reimbursement from the insured.
By comparison, in a surety setting, the agreement is a three party contract written for the benefit of the obligee. If the surety has a claim, it may seek indemnification from the principal who remains primarily liable.
The issue in Suver was whether the issuer of a financial responsibility bond, issued in lieu of obtaining automotive insurance, had a duty to act in good faith in the handling of a claim by a third party injured by the principal. The Supreme Court found that the relationship between the injured third party and the surety was similar to the relationship between a policyholder and an insurance company. As the law clearly allows a policyholder to bring a bad faith tort claim against its insurer, the injured third party could also bring a bad faith claim against the issuer of the financial responsibility bond.
The District Court also examined what the Suver case did not say. Nowhere in that case did the Supreme Court say that the principal could pursue a bad faith claim against the surety.
In addition, the District Court cited several cases for the position that a principal may not bring a bad faith claim against a surety,
but an obligee (usually the owner of the project) may raise such a claim.
[W]hile a surety owes a duty of good faith to the obligee, a surety owes no such duty to the principal. . . . . [T]he relationship between a surety and the
obligee is analogous to the relationship between the insured and the insurer. The obligee requests a bond to protect itself from loss in case the principal defaults.
The bond is issued for the benefit of the obligee, not the principal. The principal, who remains primarily liable, does not look to the surety for
protection as the insured does to the insurer. Therefore, while an obligee may bring a bad faith claim against the surety, a principal may not.
Since Vimas’ counterclaim was not recognized in Ohio, the Court dismissed the counterclaim
