Build On This!

On October 26, 2005, the Ohio Supreme Court ruled in Corporex Dev. & Constr. Mgt., Inc. v. Shook, Inc. (2005) 106 Ohio St. 3d 412 that a building project owner cannot sue a subcontractor directly for monetary losses if there is no contract between the owner and the subcontractor.

This case arose from the construction of an Embassy Suites Hotel in Dublin, Ohio. The owner, Dublin Suites, Inc. (DSI), contracted with its “sister company,” Corporex Development and Construction Management, Inc. (Corporex), for the construction of the hotel. Corporex subcontracted all of the concrete work to Shook, Inc. DSI was not a party to the Corporex/Shook subcontract. When the hotel opened 4 ½ months late, DSI and Corporex sued Shook, asserting claims based on breach of contract and on tort claims of negligence and breach of implied warranty.

In a 5-2 decision last week, the Ohio Supreme Court ruled that DSI could not sue Shook directly for economic losses. The Court stressed that Shook owed no independent duty to DSI (in tort or otherwise). In a case such as this, the owner’s only remedy is to sue the contractor. The contractor can then sue the subcontractor for any breaches of its subcontract duties.

DSI had argued that it was a foreseeable beneficiary of the Corporex/Shook contract because Corporex and DSI were owned by the same individual, and Shook knew it. The Court rejected that position, however, out of concern that such an argument would allow any subcontractor to be held liable to a project owner simply because the subcontractor knew the owner’s identity. The Court emphasized that even though Shook knew of the relationship between Corporex and DSI, that knowledge did not impose any independent duties on Shook towards DSI. In addition, the Court noted that although it may be possible to have a relationship that can create liability even where there is no contract, it takes more than merely knowing the name of the project owner to create that relationship. Since Shook owed no duty towards DSI, and Shook was not in contractual privity with DSI (meaning that Shook and DSI did not have a contract with each other), DSI could not assert any claims for monetary damages against Shook.

The decision is generally consistent with prior Ohio Supreme Court rulings addressing what is known as the Economic Loss Rule. That “Rule” provides that in the absence of a contractual relationship one party in a construction project cannot be liable to another for economic damages such as delay related expenses or corrective work costs. The Court has acknowledged that there can be an exception to the Rule where there is sufficient nexus (as in a relationship or interaction between the parties). While the Court in its Corporex v. Shook decision indicated that knowledge about another party’s identity did not create sufficient nexus to overcome the lack of privity to allow a cause of action, the Court did not provide any further guidance on what would create that sufficient nexus.

Janice Casanova is an associate in the Columbus, Ohio office of Buckingham, Doolittle & Burroughs, LLP and a member of the Real Estate and Construction Practice Group. Before joining Buckingham, Ms. Casanova was an associate at Maguire & Schneider, LLP, counsel for DSI, and was involved in preparing the Supreme Court argument for DSI.

The New York Times reports that the U.S. House approved H.R. 4127 entitled the “Private Property Protection Act of 2005” by a vote of 376 to 38 on Thursday, November 3, 2005. The bill would deny federal economic development assistance to any State or local entity that uses the power of eminent domain for economic development and would prohibit Federal agencies from engaging in this practice. The bill would also specifically prohibit State and local governments from taking private property and conveying or leasing that property to another private entity, either for a commercial purpose or to generate additional taxes, employment, or general economic health.

A State or local government found to have violated this prohibition would be ineligible for certain federal economic development funds for two years, but could become eligible by returning or replacing the property. The bill would give private property owners the right to bring legal actions seeking enforcement of these provisions and would waive States’ constitutional immunity to such suits.

The bill was introduced in response to the U.S. Supreme Court decision, Kelo v. City of New London. In Kelo, the Court held that economic development as a public use for the taking of private property under the U.S. Constitution's Fifth Amendment.

A similar bill is under consideration in the U.S. Senate.

Contractors should be aware that the 2005 Ohio Fire Code (OFC) took effect on September 1, 2005. The previously existing code was replaced in its entirety by this new fire code. The 2005 OFC took effect after completing Ohio's legislative review process for administrative rules, which included a July 28, 2005 hearing before the Ohio General Assembly's Joint Committee on Agency Rule Review (JCARR). The 2005 OFC was filed with the Legislative Service Commission, the Ohio Secretary of State and JCARR on August 22, 2005. The newly adopted fire code gives departments more involvement on the ground floor of new buildings before they are built. For more on this story, click here.

Don Leach of the Real Estate and Construction Practice Group was recently elected to the Upper Arlington City Council. Mr. Leach has been involved with the electoral and political process for many years, but election to Council is his first race for office. He was one of the top vote getters and finished ahead of both incumbents on the ballot. Prior to receiving his legal degree, Don was a legislative assistant to the President of the Ohio Senate, and he has been the long time Treasurer for both the Columbus and Upper Arlington School Levy Campaigns. Mr. Leach is a shareholder at the law firm of Buckingham, Doolittle & Burroughs, LLP, and serves as the Managing Partner of the Columbus office.

Mr. Leach was also recently named as one of Ohio’s leading construction law attorneys in the 2005 edition of Chambers USA Guide To America's Leading Lawyers. The law directory is unlike any other US legal directory. Chambers USA researchers conduct over 5,000 in-depth interviews with leading private practice attorneys and key in-house counsel. The directory also contains detailed and independently researched editorials describing each listed law firm and its strengths, details of recent work, quotes from clients and peers, and a list of active clients within each practice.

Recently, State Issue 1 was passed by a majority of voters in the State of Ohio. State Issue 1 proposed an amendment to the Ohio Constitution, and authorizes over $2 billion in bonds for public works and research. You can download the text of the Constitutional Amendment here. A story discussing the practical effect of State Issue 1 can be read here.

An interesting aspect of State Issue 1 that has not received much attention involves its provision discussing eminent domain. Section 3(F) of the Constitutional Amendment provides, in relevant part, that: “This section shall otherwise be implemented in the manner and to the extent provided by law by the General Assembly, including . . . provision for restricting or limiting the taking of private property under Section 19, Article I for disposition to private sector entities for the purposes of division (A)(2) and (3) of this section or restricting the disposition of that property to private sector entities or individuals . . .” Divisions (A)(2) and (3) of the Constitutional Amendment sets forth as proper development purposes “research and development in support of Ohio industry, commerce and business” and “development of sites and facilities in Ohio for and in support of industry, commerce, distribution, and research and development purposes.”

So how does one read this provision? At first glance one may say there is a bit of an ambiguity here. Does this provision permit the taking of private property through eminent domain for economic development so long as the taking is either for (1) research or development in support of Ohio industry, commerce and business or (2) the development of sites and facilities in Ohio for and in support of industry, commerce, distribution, and research and development purposes? Or does one read it to mean that the taking of private property through eminent domain is prohibited for any of the purposes set forth in Division (A)(2) and (3) of the Constitutional Amendment?

On October 21, 2005, the 11th Appellate District rendered a decision in Brown v. Painesville Twp. Bd. of Zoning Appeals (Oct. 21, 2005), 11th App. Dist. No. 2004-L-047, 2005-Ohio-5608. In Brown, the 11th District rejected an appellant's self-imposed hardship argument on the basis that the Board of Zoning appeals did not specifically make a finding on that issue. Because "there was no finding by the BZA that [the applicant] was denied the use variance . . . on the basis of self-imposed hardship * * * we cannot address [her] issue of self-imposed hardship." Id. The Brown court went on to say that "any inferred finding of self-imposed hardship would be extraneous to the BZA's decision that [the applicant] failed to meet her burden of showing an unnecessary hardship." Id.

Another interesting aspect of Brown is the court’s treatment of takings and use variance law. In State ex rel Shemo v. Mayfield Heights (2002), 96 Ohio St. 3d 379, 496, the Ohio Supreme Court held that “a compensable regulatory taking could occur either if the application of the zoning ordinance to the particular property is constitutionally invalid, i.e., it does not substantially advance legitimate state interests, or denies the landowner all economically viable use of the land.” Similarly, in a use variance hearing, the “critical issue in the determination of whether to grant a requested use variance is whether a literal enforcement of the resolution will result in an unnecessary hardship to the party requesting the use variance.” In re Appeal of Dinardo Constr. Inc. (March 31, 1999), 11th App. Dist. No. 98-G-2138. Ohio courts have held that a zoning regulation imposes an unnecessary hardship sufficient to support the granting of a use variance if the only permitted uses are not economically feasible. Consequently, one could say that the legal standards in takings and use variance laws appear to be the same.

However, the 11th District held in Brown that a finding of economic infeasibility in a takings case does not prove economic infeasibility for a use variance. The Brown court noted that in a use variance request, an applicant must prove that the unique characteristics of the property render it economically infeasible to put the property to its legal use - - much like in a takings case. However, in addition, the applicant must prove that the proposed use is in the public interest. A takings, on the other hand, only seeks compensation. As such, a takings analysis only addresses the first requirement of a use variance (i.e., economic infeasibility) but does not address the second requirement, that the proposed use is in the “public interest."

Governor Bob Taft signed Senate Bill 167 yesterday placing a moratorium on the exercise of eminent domain for economic development purposes. The bill goes into effect immediately after it is signed and filed with the Ohio Secretary of State. The bill also creates a committee charged with the tasks of examining Ohio's eminent domain laws and making recommendations for reform. For more information, take a look at these previous entries.

The American Arbitration Association (AAA) recently announced that its Cleveland Regional Office will close. The Cleveland regional office will maintain a small staff until December 16, 2005 to transition pending cases to their new administrative location in Detroit, Michigan. The AAA provides conflict management and dispute resolution services in a number of fields, including those involving construction and real estate disputes. The Real Estate and Construction Practice Group at the law firm of Buckingham, Doolittle & Burroughs, LLP has represented a number of clients in construction and real estate arbitration matters before the AAA.

Law.com reported that the Florida Redevelopment Association, a Tallahassee-based consortium of municipal redevelopment officials and planners, recently proposed changes in Florida’s takings law. The changes include affording property owners advanced notice of condemnation hearings and as much as 150 percent of the government-appraised value of their land. Under Florida law now, property owners get no notice of hearings and only the appraised value of their land. Representative Jack Seiler of Pompano Beach also recently stated that property takings will be one of the top issues in the Florida legislature in March, 2006.

Eminent Domain Watch blog reports that Scott Wolstein will be making offers soon to property owners on the east bank of the Flats in Cleveland, Ohio. Mr. Wolstein recently proposed a major plan to redevelop 14 acres on the east bank of the Flats for a mixed-use development composed of 300 housing units (both condominums and apartments) and commercial and retail uses. If property owners reject Wolstein’s offer, it has been reported that the Cleveland-Cuyahoga County Port Authority stands ready to take the land through eminent domain. To read more about Wolstein's Cleveland Flats project, click here.