by Robert K. Cox, Senior Partner

Since the last newsletter, the state and federal courts of Virginia have not slowed in their issuance of new rulings applicable to the Commonwealth’s construction industry.  Five of those new rulings are summarized here, followed by some questions for you to consider.

Virginia Supreme Court Limits Locality’s Taxation of Contractor’s Business Receipts Earned Outside of Locality

In City of Lynchburg v. English Construction Company, Incorporated, 2009 WL 1026836 (Va. April 17, 2009) the Virginia Supreme Court held that the City did not have authority to tax a local contractor’s gross receipts earned from construction projects located in other Virginia localities even though those other localities had not taxed those receipts.

For years the City had assessed business license taxes on the gross receipts of general contractors having their principal offices in the City, including receipts from construction projects in other Virginia localities, subject to a deduction for license taxes the contractor had actually paid to the other localities on the same receipts.  In this case, the Court considered the City’s authority to assess business license taxes on gross receipts the contractor earned on a project in another Virginia locality when that other locality did not tax those earned receipts. The Virginia Supreme Court reviewed the Virginia statutory taxation provisions and ruled: 1) a locality may tax a contractor’s gross receipts from services performed in that locality if the contractor has a definite place of business there, and no other locality has authority to tax those receipts, 2) if the contractor’s services are performed in a locality in which it has no definite place of business, gross receipts therefrom are attributed to the definite place of business from which the services were directed or controlled, and 3) if, however, the contractor received gross receipts in excess of $25,000 in any year from services performed in a locality in which it has no definite place of business, that locality may tax those receipts despite the lack of a definite place of business there, and the contractor may deduct those receipts from those reported to the locality from which the services were directed or controlled.  In this case, because the outside locality had the authority to tax the contractor’s receipts earned in that locality, but did not do so, the City in which the contractor was headquartered could not tax those receipts. While few localities in Virginia pass up the opportunity to tax receipts locally generated, those Virginia contractors who set up branch offices for out of town jobs in non-taxing localities will definitely benefit from this ruling. The Court left unanswered what constitutes a “branch office”; which, in turn, begs the question - is a project trailer a “branch office”?

Arbitration Clauses In Prior Contracts Encompassed Current Dispute Between The Parties

In A&G Coal Corporation, et al. v. Integrity Coal Sales, Inc., 600 F. Supp. 2d 709 (W.D. Va. 2009), the parties had entered into a series of coal purchase/sale contracts, all with identical arbitration agreements.  A dispute arose relating to the latest purchase order, also containing the same arbitration agreement, but the plaintiff contended the dispute was not arbitrable because the latest purchase order allegedly never came into effect.  The arbitration clauses included the terms “[a]ny dispute or controversy arising from or relating to the parties to this Agreement shall be settled by binding arbitration conducted by the American Arbitration Association…”

The federal district court did not rule on whether the challenged purchase order came into effect.  Instead, the court looked to the prior purchase orders, which no one disputed came into effect, and ruled 1) the parties had agreed to arbitrate their disputes, and 2) because of the language of those agreed arbitration clauses, i.e., “[a]ny dispute or controversy arising from or relating to the parties…”, any dispute between the parties goes to arbitration.  The fact that the arbitration agreements appeared in contracts other than the purchase order at issue did not inhibit their application to the current dispute between the parties.  To the court, the parties’ intent was clear, the language unambiguous and the parties’ current dispute came within the terms of their arbitration agreements.  The Court ordered the dispute to arbitration.

In contrast, most arbitration clauses refer to disputes arising from or relating to the contract, not the parties as here.  What does your arbitration clause say?

Developer’s Delay in Obtaining Wetlands and Storm Water Permits Did Not Excuse Builder’s Agreement To Purchase Lots

In Farmville Investment Group, LLC v. Prospect Homes of Richmond, Inc., (April 17, 2009) the Circuit Court of Henrico County, Virginia ruled that the defendant home builder, Prospect, could not assert the plaintiff developer’s delay in obtaining wetlands and storm water permits as a material breach excusing the defendant builder’s agreement to purchase the developer’s lots.

The developer and builder had two contracts for the builder’s purchase of multiple lots in multiple subdivisions from the developer upon the developer performing certain site work. Over time, after closing on the purchase of a number of the lots, the builder’s business turned down, and the builder refused to purchase the remaining lots.  The developer declared the builder in default for failing to complete the purchase of the remaining lots.

At the time the developer declared the builder in default of the purchase agreement, the builder contended it was excused from the agreement because the developer had failed to obtain wetlands and storm water permits, mandatory for the start of construction.  In the meantime, thereafter, the developer complied with the permitting agencies without extensive effort or unreasonable delay.  The court concluded from reading the purchase contracts that the subdivisions were large tracts requiring multiple, on going tasks that sometimes progressed quickly, and some times not so quickly, and the contracts contemplated give and take on many unspecified obligations.  Further, the regulatory issues the builder raised after the developer’s declaration of the builder’s default were evident before the purchase closing date but were not raised until the builder wanted relief from the developer’s declaration of default.  The court found the developer’s delay in obtaining the permits was not a material breach of the purchase agreements.  Instead of excusing the builder from the purchase agreement, the Court ruled the builder liable for over $1.4 million in damages plus the developer’s loan carrying costs.

Other cases in which an owner commits but fails to obtain necessary permits have ended with such failures being material breaches. The twist in this case appears to have been the parties’ prior dealings, the builder’s acknowledged downturn in its business and the relative ease (though late) with which the developer obtained the permits diminished the materiality of the developer’s initial failure. The lesson here is that not all failures excuse contract performance.

Construction Contract Disclaimer Precludes Third-Party Beneficiary Status

In Travelers Property Casualty Company of America a/s/a Covenant Woods v. Premier Project Management Group, LLC, (Cir. Ct. Hanover County, May 7, 2009), the plaintiff property insurer had paid the loss caused by a fire during construction and thereafter filed suit against the defendant property manager hired to oversee the site during construction.  It was not determined who had caused the fire.  The defendant property manager asserted a third party complaint against the general contractor in charge of construction for contribution and contractual indemnity based on the general contractor’s contract with the property owner.  The property manager was not a party to that contract, but asserted third party beneficiary status.  Under the third party beneficiary doctrine, a party not in privity to a contract may maintain an action under that contract if a promise is made, in whole or in part, for its benefit.

In this case, however, the construction contract between the owner and contractor specifically disclaimed third party beneficiary status to any third party, stating:

The Contract is intended to be solely for the benefit of Owner and Contractor and their successors and permitted assignees and is not intended to and shall not confer any rights or benefits on any third party … not a signatory hereto.

Based on prior Virginia Supreme Court rulings, the Circuit Court ruled the contract clause dispositive and dismissed the property manager’s contract based claims; holding the property manager could not be a third party beneficiary by the terms of the contract.  Do your contracts, subcontracts and purchase orders address third party beneficiary status? Do you think you should have such terms in your contracts?

Low Bidder For Transit Authority Contract Rejected For Not Meeting DBE Goal or Showing Good Faith Efforts To Meet DBE Goal

In Suburban Grading & Utilities, Inc. v. Transportation District Commission of Hampton Roads d/b/a Hampton Roads Transit, (Cir. Ct. City of Norfolk, May 14, 2009), the state court upheld the Transit Authority’s rejection of the plaintiff contractor’s low bid as non-responsive and the bidder as non-responsible for not meeting the contract’s DBE goal, nor otherwise demonstrating good faith efforts to meet the goal.  By the terms of the Transit Authority’s Invitation For Bids, meeting the DBE goal of 24% participation, or failing that, demonstrating good faith efforts to meet the DBE goal were material terms of the procurement.

The Invitation For Bids was for the contract to construct a railway right of way for the light rail transit system for the City of Norfolk.  The Invitation For Bids specified that it was a matter of bidder responsibility and bid responsiveness to either show the 24% DBE participation goal or to demonstrate good faith efforts toward meeting the goal as part of the bid submission.  The plaintiff was the low bidder, but its bid reflected a DBE participation rate of only 1.82% and failed to include evidence of good faith efforts to meet the DBE goal.

The low bidder argued that it had not met the DBE goal nor been able to provide good faith efforts paperwork as part of its bid submission because the day before the bid closing date the anticipated DBE subcontractor (with whom the bidder would have met the DBE goal) submitted a bid the contractor found unacceptable.  The contractor contended the timing did not allow the contractor to find another DBE participant or to compile the required good faith efforts paperwork.  The Court found the contention unpersuasive on more than one ground, but particularly because the Invitation For Bids specified it to be a matter of responsiveness that all bids include evidence of meeting the DBE goal or demonstrate good faith efforts toward meeting the goal.  There being no evidence of either, the bid was nonresponsive and, as such, not eligible for contract award.

The Court also considered the contractor’s contention that its failure was an immaterial omission that the Transit Authority had discretion to waive.  The Court agreed that the Virginia Public Procurement Act allows a procuring agency to waive non-responsiveness in a bid if the deviation is an informality; that being a minor defect or variation in the bid or proposal that does not affect the price, quality, quantity or delivery schedule for the goods, services or construction being procured.  Here, however, the Court rejected the contractor’s contention saying the Invitation For Bids was clear that a bidder must present its evidence of good faith efforts with its bid as a matter of responsiveness.  Considering the DBE participation goal was 24%, and the bidder showed no more than 1.8% DBE participation and no evidence of good faith efforts to meet the goal, the contractor’s contention of a minor defect or variation in its bid was inconceivable.  The Transit Authority had no discretion to waive the contractor’s DBE submission.

The Court found no basis to uphold the contractor’s bid, dismissed the complaint and by that dismissal upheld the Transit Authority’s rejection of the bid.

Bidding contractors should track their subcontractor and supplier solicitation during the estimating phase.  This means tracking of phone call inquiries, recording bid package transmittals to potential subcontractors/ suppliers, follow-up telephone calls and recording of responses whether the response be no response, no interest or receipt of a bid.  Such documentation can provide evidence towards establishing good faith efforts to meet a DBE participation goal.  Look at your estimating/bidding procedures and ask yourself if in the event your anticipated DBE subcontractor or supplier unexpectedly withdraws or becomes unavailable shortly before your bid due date, would your procedures have generated records sufficient to demonstrate a good faith effort to meet a DBE participation goal?


The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.

Watt, Tieder, Hoffar & Fitzgerald is one of the largest construction law firms in the world, with a practice that encompasses all aspects of construction contracting, claims and disputes resolution, and transactional legal services. WTHF principally represents large general contractors, design firms, and sureties throughout the country and internationally.