December 7, 2006
- Overview
- Settle At Your Own Risk
- Inadvertent Disclosure of Privileged Documents During Discovery Process Risks Waiver of Any Privilege
- For More Information
- Disclosure
Overview
This past summer, the Ohio Supreme Court decided the question of what damages are recoverable when a city violates competitive-bidding laws in awarding a public contract. Can the disappointed bidder receive lost profits as damages for the harm done to the contractor by the city’s wrongful conduct? Or, is the contractor merely entitled to the amount of money it spent in preparation for the bid? In a decision favoring municipal entities, the Ohio Supreme Court, in Cementech, Inc. v. City of Fairlawn, 109 Ohio St. 3d 475 (2006), unanimously decided that the answer to this question was the latter.
In the winter of 2001, the city of Fairlawn publicly advertised that it was accepting bids for a service-road project. A few days after the advertisement period ended, Fairlawn issued an addendum, requesting additional work for the project not mentioned in the initial specifi-cation. Cementech prepared its bid based upon the initial requests. When the bids were opened, the city law director informed Cementech that its bid was rejected for being non-responsive on the grounds that it had failed to include material mentioned in the subsequent addendum. Despite the fact that Cementech advised Fairlawn it was ready, willing and able to perform the additional addendum work – the planting of trees – without increase to its bid price, Fairlawn awarded the contract to another bidder.
Cementech filed a lawsuit against Fairlawn, arguing that the city had failed to properly follow procedures for public competitive bidding, and seeking injunctive relief that would prohibit the other contractor from performing the work. When the trial court rejected Cementech’s request for injunctive relief, Cementech chose to pursue its claim for damages in front of a jury rather than pursue an appeal of the court’s refusal to issue an injunction. At trial, the court decided that while Cementech could recover its cost of bid preparations, the company was not entitled to recover its anticipated profits on the contract. Cementech appealed this deter-mination to the Court of Appeals for the Ninth Appellate District. The appellate court reversed the trial court decision and ruled that a disappointed bidder was entitled to recover its lost profits, becoming the first court in Ohio ever to do so.
When the Ninth District rendered this decision, it created a split in Ohio law among appellate courts. The Supreme Court seized the case to unify the conflict among Ohio courts. In its unanimous opinion written by Justice Alice Robie Resnick, the Supreme Court emphasized the waste that the Ninth District’s decision would lay unto Ohio taxpayers by forcing public entities to pay twice for the same project. The court acknowledged that a ruling allowing lost-profit damages would protect contractors from corrupt practices and would also enhance the integrity of the public bidding process. The court decided, however, that those important interests were adequately served by the issuance of an injunction, which an aggrieved contractor may seek when a city violates the public bidding laws. For that reason, the Supreme Court overruled the Ninth District and declared that a contractor cannot receive lost profits as damages for harm done by a city’s violation of laws regulating competitive bidding for public contracts.
Now that this issue has been settled by the state’s highest court, a disappointed bidder that believes it has been harmed by a public entity’s violation of competitive bidding laws has, as a practical matter, one course of action in Ohio: the immediate seeking of injunctive relief in the Court of Common Pleas, and then in the Court of Appeals if necessary, prohibiting another bidder from performing the work.
Settle At Your Own Risk
Two recent decisions by Ohio courts demonstrate that parties to construction contracts cannot necessarily rely on Ohio courts to uphold indemnification clauses contained in construction contracts. These decisions suggest that parties should think twice before settling lawsuits that implicate indemnification clauses.
In C. J. Mahan Construction Company v. Mohawk Re-Bar Services, Inc., 2005 Ohio 5427 (Stark Cty. 2005), C. J. Mahan was the general contractor for a bridge reconstruction project, and Mohawk was a subcontractor hired to supply and install rebar. Two Mohawk employees were electrocuted, and they sued Mohawk for intentional tort and Mahan for intentional tort and negligence. Both Mahan and Mohawk settled with the plaintiffs, and then Mahan attempted to recover its settlement amount from Mohawk, alleging that the subcontract required Mohawk to defend and indemnify Mahan. The indemnification clause in the subcontract provided that Mohawk would indemnify Mahan when Mahan’s liability resulted from an act or omission of Mohawk or “as a result of the joint or concurrent acts” of Mahan and Mohawk. The Stark County Court of Appeals held that the “joint or concurrent” language clearly indemnified Mahan for damages claimed as a result of its own joint or concurrent negligence; therefore, the indemnification clause was void under Ohio Revised Code Section 2305.31, which bars indemnification clauses that purport to indemnify a contractor for damages resulting from its own negligence.
Mahan attempted to argue that only Mohawk was liable for negligence, but the court stated that the plaintiffs claimed Mahan was independently negligent, and Mahan settled such claim. In essence, the court held that by settling with the plaintiffs, Mahan abandoned its right to claim that it was not negligent. In addition, Mahan did not reserve its rights against Mohawk in the settlement agreement. Mahan, therefore, gave up the right to allege that Mohawk was solely liable. The Ohio Supreme Court refused to hear Mahan’s appeal.
Even a properly drafted indemnification clause that survives an attack under Ohio’s anti-indemnification statute (Ohio Revised Code Section 2305.31) may not adequately protect parties to construction contracts. For example, in Lubrizol Corporation v. Michael Lichtenberg & Sons Construction, Inc., 2005 Ohio 7050 (Lake Cty. 2005), a worker was injured at an Ohio construction site when he fell into an open pit. The worker sued only the property owner in a Texas court. The general contract contained a valid and enforceable indemnification clause, but the general contractor refused to defend or indemnify the property owner. The property owner’s assignee settled the lawsuit, and then sued the general contractor in an Ohio court for indemnification. The jury found in favor of the general contractor, and the assignee appealed, alleging that the trial court erred in not granting summary judgment in favor of the assignee based on the clear language of the indemnification clause. The Lake County Court of Appeals affirmed, finding that pursuant to the indemnification clause, the property owner’s assignee had to prove that the general contractor breached a contractual duty, and that such breach caused the worker’s injury. No such requirement appeared in the standard indemnification clause, so the court added this additional hurdle for parties seeking to enforce indemnification clauses in construction contracts. As with C. J. Mahan, the Ohio Supreme Court refused to hear an appeal.
In light of the Ohio Supreme Court’s refusal earlier this year to accept the requested review of either of these construction indemnification cases, the waters remain muddy for any party planning to settle a construction personal injury case and then pursue reimbursement in accordance with a contractual indemnification clause. The C.J. Mahan and Lubrizol cases offer three important lessons for parties to construction contracts: (1) An indemnification clause should be drafted to only indemnify a party for damages caused by the negligence of other parties, not the party’s own negligence or joint and concurrent negligence; (2) Where a plaintiff claims that a contractor is independently negligent, the contractor should not settle the case and subsequently claim it is not negligent and is entitled to indemnification from a contractor or subcontractor unless the settling party explicitly reserves its right to proceed against the contractor or subcontractor in the settlement agreement; (3) A party seeking to enforce a properly drafted, standard indemnification clause should be prepared to prove that the indemnifying party breached a contractual duty, and that the breach caused the damages at issue.
Inadvertent Disclosure of Privileged Documents During Discovery Process Risks Waiver of Any Privilege
The typical construction case involves thousands of documents — pay applications, change orders, plans and specifications, meeting minutes, etc. During the “discovery” process of a lawsuit, the parties are generally required to disclose and produce those documents to each other. Some things, however, are protected (privileged) and do not need to be produced. For example, conversations between attorneys and their clients are protected by the attorney-client privilege. What happens, though, when privileged information is voluntarily but inadvertently disclosed to the opposing side? The Franklin County Court of Appeals recently answered that question in Miles-McClellan Constr. Co. v. Westerville Bd. of Edn., 2006-Ohio-3439.
The Miles-McClellan case involved a dispute arising out of a construction project for the Westerville City Schools. In response to a discovery request, the attorneys for Westerville Schools voluntarily produced a number of Westerville Schools’ documents and records to the opposing parties. Westerville Schools’ attorneys later realized that there was privileged information in those documents — namely, documents covered by the attorney-client privilege. Upon learning that the opposing parties had possession of the privileged information, Westerville Schools and its attorneys sought an order from the trial court to compel the return of the documents. The trial court denied the request, and held that because the documents had been voluntarily (yet inadvertently) produced, Westerville Schools and its attorneys automatically waived the attorney-client privilege.
The Franklin County Court of Appeals ultimately reversed the trial court’s decision. According to the appellate court, the trial court must hold a hearing to determine to what extent, if any, there has been a waiver with respect to the allegedly privileged materials. Specifically, the court must apply a “balancing test,” weighing:
- the reasonableness of the precautions taken to prevent the disclosure;
- the time taken to rectify the disclosure;
- the scope and nature of the discovery proceedings;
- the extent of the disclosure in relation to a role in discovery proceedings; and
- the overriding issue of fairness.
The bottom line: Parties and their attorneys should carefully and meticulously review each and every document that they produce to the other side — before producing them. The risk associated with a trial court judge applying a “balancing test” to determine whether the attorney-client privilege (or any privilege, for that matter) has been waived is simply too great to do anything else.
For More Information
Please contact Jeffrey R. Appelbaum, Michael W. Currie, Daniel F. Edwards, Laura A. Hauser, Daniel M. Haymond, Thomas J. Kirkwood, Kimberly E. Ramundo, Patrick J. Sweeney, or Peter D. Welin or any member of our Construction practice group for more information.
Disclosure
This advisory may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgement of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel. This document may be considered attorney advertising in some jurisdictions. Some of the design images and photographs in this document may be of actors depicting fictional scenes.
Last modified: December 7, 2006
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