Wednesday, September 6, 2017

The Dispute Resolver is pleased to introduce its newest regular contributor, I’Ashea Myles-Dihigo of the Leitner, Williams, Dooley & Napolitan, PLLC firm in Nashville, Tennessee.  I'Ashea  focuses her practice on litigation and dispute resolution specifically in the areas of construction law, real estate law, commercial litigation, and employment law.  As a construction law attorney, I'Ashea regularly handles matters related to the building and development of both commercial and residential property. Her experience includes representing owners, contractors, subcontractors and suppliers in federal and state courts. She also counsels contractors and developers at the beginning of projects to avoid the need for litigation. She advises her clients with bid negotiations, contract drafting, liens, employment law matters and compliance with changing regulations. 

Thank you I’Ashea for your contributions to Division 1 and the Forum.  Enjoy her post:   

“Cost-Plus Contract and the Disorganized Contractor”






Some contractors are better at record keeping than others.  I always seem to run into this issue when I working with a client and I’ve asked them to provide me with all of their records regarding the project.  The usual answer that I get is, “I don’t keep those kinds of records,” or “All I have are text messages.”  Depending on the type of contract dispute, the lack of accurate record keeping may not be such a big deal, however, when there is a dispute regarding a cost-plus contract, recording keeping can become a central issue.  This concept is explained by the Tennessee Court of Appeals in the case of Forrest Construction Company, LLC v. Laughlin.

Generally speaking in Tennessee, when a contractor seeks to recover unpaid fees relative to a cost-plus contract, and the owner denies owing fees, the contractor must show the court an itemization of each expenditure made on the project.  In Forrest Construction Company, LLC v. Laughlin, homeowner entered into a cost plus contract with Forrest Construction Company to build a home. Forrest Construction Company, LLC v. Laughlin, 337 S.W. 3d 211 (Tenn. Ct. App. 2009).  Prior to completion, of the house, Forrest Construction and the homeowner began to have disputes about payment.  Id. at 216.  Forrest Construction stopped work on the home, filed a lien, and thereafter filed a breach of contract action against the homeowner and an action to recover damages based on the doctrine of quantum meruit. Id. at 218.  Forrest Construction claimed that homeowner breached the contract by failing to timely pay pursuant to the terms of the parties’ agreement. Id.  Defendant homeowners filed a counter-claim against Forrest Construction for negligent construction, gross negligence, negligence per se, breach of contract, and violations of the Tennessee Consumer Protection Act.  Id. at 218-219. 


The contract at issue in Forrest Construction required that the contractor retained a detailed accounting and back-up documents for all expenditures and draw requests on the project.  When the homeowner asked Forrest Construction for the accounting records on the project, the contractor could only provide a “two foot thick pile” of unorganized receipts.  Id. at 224.  The Court found this type of record keeping to be unacceptable when it said,  "In any cost-plus contract there is an implicit understanding between the parties that the cost must be reasonable and proper." Id. at 223-224; Kerner v. Gilt, 296 So. 2d 428, 431 (La. App. 4 Cir., 1974). "The contractor is under a duty of itemizing each and every expenditure made by him on the job and where the owner denies being indebted to the contractor the latter has the burden of proving each and every item of expense in connection with the job." Id. (citing Wendel v. Maybury, 75 So.2d 379 (Orl. La. App. 1954); Lee v. National Cylinder Gas Co., 58 So. 2d 568 (Orl. La. App. 1952)); see also 17A Am Jur. 2d Contracts, Sec. 495 (2008). Forrest Construction never itemized the expenditures it sought to recover from the homeowner. Id. Instead, it submitted essentially unsubstantiated requests for draws. Id. Moreover, when called upon to provide proper documentation and itemization of the costs, it provided a wholly disorganized, un-itemized box of documents, many of which were unrelated to the actual project.  Id. As a result of this finding, the Court reversed the trial court’s decision in favor of the contractor and instead held that the contractor materially breached the contract first. 


The take away from this case is when a contractor chooses to work under a cost-plus contract agreement, the contractor should be sure that they are able to maintain the heightened accounting requirement that goes along with that type of agreement. This means fully documenting each expenditure in an organized manner. If your client is like many of my clients, the fixed-fee agreement may work better because it does not require the heightened accounting in order to recover on a dispute of non-payment.

Friday, August 25, 2017

Contractor's "Speech" SLAPP-ed in Massachusetts?

Cohasset, MA

http://www.cohassetma.org
Recently, the First Circuit faced an interesting issue concerning contractor "speech."  In fact, the appellate court in Steinmetz v. Coyle & Caron, Inc., 862 F.3d 128 (1st Cir. June 29, 2017), certified the question to the Massachusetts Supreme Judicial Court to clarify the Commonwealth's law prohibiting strategic lawsuits against public participation (more commonly known as "anti-SLAPP" statutes). The result, which is pending, may cause some contractors to pause before selecting certain projects.

Underlying the case was a residential construction project in Cohasset, Massachusetts, a coastal community located near Boston.  Before construction could begin, the plaintiff owner needed permits and approvals from various local sources including the town conservation commission.  A group of neighbors opposed the planned construction and to make their point, hired the defendant design contractor to prepare renderings of the proposed structure for the commission.  According to the plaintiff owner, these renderings were "false, fraudulent, and defamatory" and "depicted a 'hideous behemoth looming over the tree line of the island.'" Also at least one of the renderings had been posted on a Facebook page created by the neighborhood group. The commission ultimately denied the construction project and the plaintiff owner sued the defendant contractor alleging negligence, gross negligence, defamation, and violation of the Massachusetts consumer protection statute, Mass. Gen. Laws ch. 93A.

In turn, the defendant contractor filed a "special motion" to dismiss relying on the Massachusetts anti-SLAPP statute, Mass. Gen. Laws ch. 231, § 59H.  (Note that about 1/2 of the 50 states have adopted similar statutes as well.)  Anti-SLAPP statutes are aimed at preventing lawsuits that serve to chill the valid exercise of free speech.  In other words, prohibiting suits that try to silence or intimidate critics by making them spend time and money to defend claims brought against them. Motions to dismiss these lawsuits are granted unless the lawsuit-filing plaintiff can show the criticism "was devoid of any reasonable factual support or any arguable basis in law" and the criticism caused "actual injury." Mass. Gen. Laws ch. 231, § 59H.  Massachusetts recently adopted a gloss to this shifting standard by allowing non-moving party (lawsuit-filing plaintiff) to demonstrate that the claims were not "primarily brought to chill" the petitioning activities and that there is "'some reasonable possibility’ of a decision in the party's favor."  Blanchard v. Steward Carney Hosp., Inc., 75 N.E.3d 21 (2017).

Here, the defendant contractor claimed that the plaintiff owner's lawsuit was motivated to silence the speech of the neighborhood group -- of which the defendant contractor was hired to assist by preparing the renderings.  The First Circuit confirmed that if the anti-SLAPP regime applied here, the defendant contractor's renderings constituted a petitioning activity, the renderings were not void of factual basis, and the the plaintiff owner's claims were frivolous (it did not need to reach the question whether the claims "primarily brought to chill").  However the Court concluded that "given our uncertainty that the anti-SLAPP statute applies to third-party contractors . . . in the first place, we certify that question to the [Supreme Judicial Court]." Steinmetz, 862 F.3d at 136.  In so doing the Court commented that the Supreme Judicial Court "has warned several times, albeit in dicta, that the statute encompasses only parties who “petition their government as citizens, not as vendors of services" Id. 

Once the Supreme Judicial Court presents its answer to this question we will update this blog.  In the meantime contractors, especially in Massachusetts, are cautioned that the anti-SLAPP defense may not exist in its defense arsenal.
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Friday, August 18, 2017

Appeals Court of Massachusetts: The Statute of Repose for a Designer Standard of Care Claim Did Not Start Running with the Issuance of a TCO


In 2002, Defendant Carter-Burgess (Carter) entered into an “Architectural/Engineering Services Agreement” with the developer of a proposed retail complex located in Reading, Massachusetts. The agreement contained typical provisions which identified the agreed upon standard of care for design services as well as providing indemnification requirements. Also in the agreement, Jordan’s Furniture (Jordan) was identified as a “potential tenant.”  The complex Carter designed consisted of two retail stores stacked vertically in a single facility with Jordan occupying three floors. Jordan utilized the second floor as its warehouse space complete with a floor to ceiling “high rack” storage system and a “stockpicker” lift machine which acted as a forklift to access the upper reaches of the “high rack” system.  Carter’s design for the second floor deck was a suspended 135,000 S.F. reinforced concrete slab supported by girders and beams.  Carter later testified that it accounted for the 9,300 lbs. “stockpicker” when it designed the warehouse slab assembly incorporating additional structural members at specific locations. 

As construction operations were winding down, Carter requested a temporary certificate of occupancy (TCO) on September 2, 2004 which allowed Jordan’s employees to begin product display installations on the second floor.  Carter further requested an additional TCO on September 14, 2004 to allow for displays to be installed on the third floor.  At that time, 54% of the facility was available for Jordan’s employees to install its merchandise displays.  The store opened to the general public on October 29, 2004. 

In April of 2005, Jordan’s employees noticed that specific portions of the second floor slab were crumbling and notified Carter of the problem.  Carter recommended that a third-party consultant be engaged to diagnose the situation which Jordan accepted. The consultant produced a report in July of 2005 stating that the problem was a result of concrete freezing shortly after placement.  A second consultant concurred with the findings.  The recommended remediation procedure from Carter was to remove and replace a large section of the slab. The original general contractor, Suffolk Construction (Suffolk), assumed responsibility for the work and completed it in March 2006. In October of the same year, Jordan once again noticed cracking at the newly repaired slab areas and informed Carter.  Carter inspected and agreed to produce a report which it did nearly six months later in April 2007.  In its report, Carter identified the cracking was due to shrinkage of the newly installed concrete (not a structural integrity issue) plus Suffolk’s failure to properly install structural steel reinforcing members.  Suffolk rejected Carter’s claims confident it had installed the structural steel per the contract drawings and it contended once again that the cause of the deficient slab was Carter’s inadequate design for the rolling “stockpicker.” No resolution could be reached with Suffolk and Carter asserting blame to the other party. In 2009 Jordan engaged a forensic engineer who determined that the damage to the slab was the result of an inadequate design by Carter.

At a bench trial, it was determined that the second floor slab was, “inadequate for [its] intended use, and negligently designed, with the concentrated demand of the stockpicker exceeding the capacity of the floor as designed” and that negligent design, “constituted a deviation from the exercise of reasonable care required of members of the engineering profession engaged in the design of commercial facilities.” The judge awarded compensatory damages based upon the cost of necessary repairs in the amount of $1,744,793.  Both sides appealed with Jordan claiming that Carter contractually agreed to a higher standard of care and promised a specific result, thus breaching its contract and express warranty.  Jordan further asserted that it is entitled to indemnification from Carter for its attorney’s fees.  Carter argues that the suit is barred by the statute of limitations and statute of repose. 

The Court first examined Jordan’s claim for breach of contract and breach of express warranty claims.  The trial court judge found that these claims were duplicative of the negligence claim and dismissed them accordingly.  Jordan argued that the owner-architect agreement established a heightened duty of care for the designer. The Court sided with the trial judge by finding the relevant portions of the contract did not in fact require any additional standards beyond what is the generally accepted standard of professional practice for a designer.  The Court also rejected Jordan’s claim that as a matter of contract, it was entitled to be indemnified by Carter for fees and costs.  The Court stated that the owner-architect provision was narrowly drawn and there was not a reasonable inference by either party that a prospective building tenant would fall under the indemnification terms of the agreement.

The Court next reviewed the statute of limitations and statute of repose for architects who provide "`individual expertise' in the business of designing, planning, constructing, and administering improvements to real estate." Dighton v. Federal Pac. Elec. Co., 399 Mass. 687, 696 (1987).  The statute of limitations for such a negligence claim is three years.  The statute of repose for damages "arising out of any deficiency or neglect in the design, planning, construction or general administration of an improvement to real property . . . shall be commenced . . . [no] more than six years after the earlier of the dates of: (1) the opening of the improvement to use; or (2) substantial completion of the improvement and the taking of possession for occupancy by the owner." M.G.L  c. 260, § 2B .  Jordan filed its claim against Carter on September 17, 2010.  

The Court began its analysis with the statute of repose and Carter’s assertion that the TCO’s issued in September of 2004 marked the opening of the improvement for use.  The Court agreed with the trial judge and rejected that argument by finding that the TCO’s issues in 2004 had the narrow and specific purpose to allow Jordan’s employees to install merchandise.  The Court also noted that Jordan’s was not allowed to utilize the main entrance, the IMAX theatre, and other retail space on the second and third floors prior to the third October TCO.  Finally, it was noted that as of September 14th, Jordan’s main entrance, exterior fa├žade, warehouse, parking lot, and site work were not complete.  The Court next analyzed the statute of limitations claim with Carter asserting that Jordan had knowledge or sufficient notice that it was harmed before its cause of action could accrue. The Court once again agreed with the trial judge when it concluded that Jordan could not have reasonably known that any time prior to September 17, 2007 the cause of the deficient concrete was the result of Carter’s faulty design.  The Court further noted that Jordan had in fact acted diligently to ascertain the cause of the cracked concrete and Carter repeatedly insisted that it was the fault of others, which contradicts its position.

The Court affirmed the trial courts judgment in full and award of $1,744,793.


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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA.  He may be contacted at 781.786.8916 or carter@agcmass.org.



Friday, August 4, 2017

Thanks to Mary Jay Torres-Martin from Trauner Consulting Services, Inc. for being a friend of Division 1 and providing this blog post by her colleague Mark Nagata: 

 

Requesting Time Extensions: To Wait or Not to Wait?


By Mark Nagata

Construction contractors struggle with the eternal question: “When is the right time to request a time extension from the owner?” Even when the owner is clearly responsible for critically delaying the project, they may be reluctant to submit a time extension request right away.

The window for submitting a time extension request can vary from during or directly after the owner critically delays the project to after the project is complete. Contractors often put off submitting a time extension request. The reasons may include believing they can’t develop a convincing and properly documented request or delaying the submission to “maintain a good working relationship” with the owner.

The Consequences
Not requesting a time extension in a timely manner may have unintended contractual, financial, and delay-mitigation consequences. Potentially, these are:

·        Contractual: Most contracts contain notice requirements that are imbedded within specific contract provisions, like the time extension provision, that require the contractor to submit a request for additional contract time within a specific time frame. By not submitting within the required time frame, the contractor may waive its right to recover additional compensation related to that delay. By waiting until the end of the project and choosing not to submit a time extension request in accordance with the contract, the contractor may inadvertently waive its right to recover extra contract time and delay damages.
 
·        FinancialIf the contractor can demonstrate that the owner delayed the project and caused it to incur delay damages (extended field office overhead, unabsorbed home office overhead, idle labor, idle equipment, etc.), then resolving the issue now will avoid the need for the contractor to finance the cost of these impacts.
 
By waiting until the end of the project, the contract has effectively put itself into the position of having to decide to either accelerate the project to finish on time using its own funds or finishing late and running the risk of being charged liquidated damages. Simply put, choosing to wait until the end of the project causes the contractor to take on the substantial financial risk for the delay.

·        Delay MitigationIf the contractor provides immediate notification, a reasonable owner should recognize the situation and work with the contractor to quickly identify the problem and resolve the issue. Because impacts are generally much cheaper to mitigate and resolve at the beginning of a project and tend to become more difficult and expensive to resolve over time, an owner should see the wisdom in resolving the issue as early as possible. 
 
This approach is also more consistent with the intent of most contracts, which is to work as a team to achieve mutually beneficial outcomes. By waiting until the end of the project to request a time extension, the contractor gives the owner two options: (1) pay for the impact or (2) not pay for the impact. 

When the owner has its completed project, it may opt for the latter, taking the position that the contractor did not follow the contract and, thereby, did not afford the owner with the ability to mitigate the impact. Therefore, to best protect your risk and retain the protection provided to you under the contract, don’t wait: request that time extension now.

Mark Nagata is a Director/Shareholder of Trauner Consulting Services, Inc. and is an expert in the areas of critical path method scheduling, delay and inefficiency analysis, and construction claim preparation and evaluation. He loves to get questions at mark.nagata@traunerconsulting.com.

Thursday, August 3, 2017

The King’s Time Is Up: Arizona Supreme Court Holds That the Statute of Repose Bars Untimely Claims by State Entities and Overrides the Doctrine of Nullum Tempus Occurrit Regi    

City of Phoenix v. Glenayre Elecs., Inc., 2017 Ariz. LEXIS 121 (Ariz. May 10, 2017)

Between 1960 and 2000, Carlos Tarazon (“Tarazon”) performed work installing and repairing water piping for various contractors and developers in the City of Phoenix, Arizona (the “City”).  In 2013, after developing mesothelioma from exposure to asbestos while working on these projects, Tarazon filed a personal injury suit against numerous defendants, including the City and the various contractors and developers for whom he had worked.

The City filed a third-party complaint against the contractors and developers, alleging that they had agreed to defend and indemnify the City against negligence claims relating to these projects.  With respect to the contractors, their various contracts with the City each expressly required the contractor to indemnify the City from all suits arising from their work. 

The City brought these indemnity claims more than eight years after the completion of the construction projects at issue.  However, Arizona’s statute of repose states that “notwithstanding any other statute…no action or arbitration based in contract may be instituted…more than eight years after substantial completion of the improvement to real property.”  A.R.S. § 12-552(A).  Consequently, the contractors moved to dismiss the City’s claims, arguing that they were based in contract and therefore time-barred by the statute of repose.

The City opposed the motion, arguing that the statute of repose does not apply to the state’s political subdivisions because: (1) the common law doctrine of nullum tempus occurrit regi (“time does not run against the king”) allows for state entities to bring claims that would ordinarily be barred by the applicable statute of limitations and (2) the express language of A.R.S. § 12-510 codifies this doctrine and provides that claims by state entities are not barred by statute of limitations.  The Superior Court rejected the City’s argument and ruled that neither Section 12-510 nor the doctrine of nullum tempus exempt the City from the statute of repose.  The Court of Appeals of Arizona affirmed.

On appeal, the Supreme Court of Arizona agreed with the lower courts, holding that “the statute of repose controls over other, potentially conflicting state laws[,]” such as the nullum tempus doctrine and A.R.S. § 12-510.  While Arizona common law has “consistently recognized” the nullum tempus doctrine, both that doctrine and its codification in Section 12-510 serve only to exempt the state from the statute of limitations, and not from the statute of repose.  In support of this holding, the Court reasoned that the statute of repose expressly applies “notwithstanding any other statute” which “makes clear” that it “controls over other, potentially conflicting state laws.”

Accordingly, the Supreme Court affirmed the dismissal of the City’s indemnity claims against the contractors because they were: (1) based in contract and (2) brought more than eight years after the completion of construction.  Thus, the statute of repose barred the City’s claims despite the doctrine of nullum tempus.

The author, Kristopher Berr, is an associate in the Philadelphia office of the Pepper Hamilton Construction Practice Group.

Saturday, July 22, 2017

Dispute Avoidance for Green Projects (Redux)


Taiwan's World Games Stadium,
http://inhabitat.com/taiwans-solar-stadium-100-powered-by-the-sun/
By now you likely have heard that the American Institute of Architects (AIA) released its revised construction contract documents. See Press Release dated Apr. 27, 2017 ("2017 AIA Contract Documents Now Available").  In this update, the AIA considered and analyzed industry  developments and then incorporated edits throughout its key contract documents used by owners, contractors, architects, and subcontractors.  Pertinent to sustainable or "green" building, the AIA released the brand new E-204-2017 called the "Sustainable Projects Exhibit." 

Recall that back in May 2016 this blog touched upon this intersection of green building and dispute avoidance.  In that post, we noted that for this specialized context, the AIA offered D503-2013 as a guidance document, which collected the various Sustainable Project (SP) agreements (variations of the A101, A201, etc.), illustrated how the contract language is modified from the base agreement.  The provisions in these SP versions were intended to avoid the unique issues that can arise on these green projects. 

Now in 2017, the AIA, owning to the fact that green building has become significantly more prevalent in the construction industry over the last decade, the AIA has simplified its approach. Rather than requiring parties to use separate SP versions of each  contract document, the AIA now offers a one-stop exhibit that parties can simply attach to any AIA contract document if the project includes a green objective, rating, or certification (e.g.  LEED® -- Leadership in Energy and Environmental Design).  Below is a look at the new and improved ways that E-204-2017 anticipates and avoids disputes on green projects.

(1) Defines Responsibilities.

Likely the most important pre-project-commencement step is that the parties are on the same page with what the project is seeking to achieve in terms of sustainability, how to measure that achievement, and who is responsible for each step. Accordingly, first and foremost, Article 1 of E-204-2017 requires the parties have a meeting of the minds to outline each element of their sustainability objectives include substance and deadlines.  In the follow-on sections, Articles 2, 3, and 4, the responsibilities of each project member are defined -- architect, contractor, and owner.  For example, at section 2.3, it is the architect's responsibility to convene a Sustainability Workshop and prepare the Sustainability Plan before the conclusion of the design phase in order to establish the green certifications, schedule, and budget. Other examples include that the contractor is unambiguously required to arrange for proper waste disposal (including a establishing a process for salvage and recycling) whereas the owner is unambiguously required to arrange for the final commissioning of the project. See section 4.5.  Communications about criteria and responsibilities in the first instance is a clear way to avoid ambiguities and therefore avoid disputes in the future.

(2) Defines Consequences.

The AIA E-204-2017 forestalls various disputes by limiting the consequences.  For example, the contract document addresses use of copyright materials, the architect's plans, and clearly states how exactly the owner may use them for reaching the sustainability objectives, see section 2.8.  Another example, is green materials.  Green building criteria frequently includes selecting certain sustainable materials for construction, which materials may not perform as intended (or be available) given they may not have been tested or verified previously.  The AIA E-204-2017 anticipates this potential dispute and at sections 2.5.2 and 3.5  requires the owner to sign off on the use of the green materials after the architect and contractor advise about the same.  The architect and contractor are thereby insulated from liability in the event the materials do not perform as intended.  Similarly, although the architect is responsible for marshaling the green certification process and the contractor is to build the green project as defined, neither the architect nor contractor is offering any warranty or guarantee to the Owner that the sustainable objective will, in fact, be achieved. See section 2.7 and 3.9.2.  This is a reasonable disclaimer given that "achieving the Sustainable Objective is dependent on many factors beyond the Contractor's and Architect's control."  See section 6.1.  Likewise, consequential damages are waived. See Article 5.

(3) Substantial and Final Completion.

Along the lines of not requiring the architect and contractor to guarantee the achievement of the green objective, substantial completion is not tied to the green achievement either.  Which the architect and contractor must fulfill their responsibilities toward achieving the green objective, actually achieving the green objective "shall not be a condition precedent to issuance of the final certificate of payment." 3.9.2.

In sum, the AIA E-204-2017 provides a concise (6 page) way to incorporate a green objective into a project without wholly reinventing the wheel of the familiar construction contract.  It flags the issues that can crop up in a green project and addresses them in the first instance a manner that seeks to avoid ambiguity.  At the same time, the AIA still provides flexibility for the parties to divine their own particular terms and conditions. See Article 7.

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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts.  She is an associate at Pierce Atwood, LLP in Providence, Rhode Island.  She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.



Saturday, July 8, 2017


Supreme Court of Wisconsin Holds That Private Subcontractor Is Immune to Property Damage Claims by Adjoining Landowners Because it Followed Specifications Provided by the Wisconsin Department of Transportation

Melchert v. Pro Elec. Contrs., 2017 Wis. Lexis 169 (April 7, 2017)

The Wisconsin Department of Transportation (“DOT”) contracted with Payne & Dolan (“P&D”) as General Contractor on a road improvement project. P&D in turn contracted with Pro Electric Contractors (“Pro Electric”) to install concrete bases for new traffic signal poles. DOT provided Pro Electric with detailed plans and specifications for the project (“Project Plan”) that specified the location of the concrete bases and the excavation equipment to be used. Pro Electric was required to comply with the Project Plan and could only make deviations if approved by DOT’s engineer.

While excavating one of the specified locations, Pro Electric unknowingly severed a sewer line, causing sewage backup and flooding on adjoining private property. Pro Electric then backfilled the excavation site without inspecting the sewer line for damage. The private property owners (“Owners”) brought a negligence action against Pro Electric. The trial court granted summary judgment in favor of Pro Electric, ruling that it was immune from liability because it was merely implementing DOT’s design decisions. The court of appeals affirmed, and Owners appealed to the Supreme Court of Wisconsin.

The Supreme Court held that Pro Electric was entitled to immunity for severing the sewer line. The court explained that in adopting the Project Plan, DOT had exercised its legislative or quasi-legislative function as a state agency to “direct, undertake and expend state and federal aid for planning, promotion and protection activities” of highways. As such, DOT’s adoption of the Project Plan was entitled to governmental immunity. This immunity was then conferred upon Pro Electric because the Project Plan included reasonably precise specifications for the location, dimensions, and method of excavation for the concrete bases; Pro Electric had no discretion to vary from these specifications; and Pro Electric complied with them exactly.

The Supreme Court held that Pro Electric was not entitled to immunity for backfilling the excavation site. The Project Plan, which only required Pro Electric to “coordinate construction activities with a call to Digger’s Hotline… as required per statutes” and “use caution to ensure the integrity of underground facilities,” did not provide reasonably precise specifications for how Pro Electric should perform this responsibility. Because Pro Electric had ample discretion in performing the backfilling, it was not entitled to immunity.

Nevertheless, the Supreme Court upheld the trial court’s grant of summary judgment in favor of Pro Electric, finding that it had not been negligent in performing the backfilling. The Wisconsin statute governing excavation called for Pro Electric to call the Digger’s Hotline at least 3 days prior to excavation, which Pro Electric had done. The statute also mandated that Pro Electric “inspect all transmission facilities exposed during excavation” and make any necessary repairs to damaged facilities. The facts did not show that the sewer line was a “transmission facility exposed during excavation” because there were no sewer line markings, and the excavation did not reveal the presence of the sewer line. Thus, the facts did not support the inference that Pro Electric breached a duty in performing the backfilling.

The author, Robert Gallagher, is an associate in the Pittsburgh office of the Pepper Hamilton Construction Practice Group.

Owners Beware: Washington Appellate Court Holds Playing ‘Gotcha’ With Project Submittal Review Could Breach the Duty of Good Faith and Fair Dealing

Nova Contr., Inc. v. City of Olympia, No. 48644-0-II, 2017 Wash. App. LEXIS 913 (Ct. App. Apr. 18, 2017)

This case arose out of a public project in which the City of Olympia (“City”) hired Nova Contracting, Inc. (“Nova”) to replace a culvert. A prior City project on which Nova completed work ended with Nova receiving extra compensation due to the City’s design errors and, as a result, a grudge held by some City staff against Nova. The present contract required Nova to send submittals describing its plans for bypass pumping and excavation to the City’s engineer for approval before it could begin work. The City’s decision regarding submittals was final and Nova bore the risk and cost of delay due to any non-approval.

The City issued its Notice to Proceed on August 11, 2014, but Nova could not begin construction due to the City’s rejection of its submittals. Nearly one month later, the City declared Nova to be in default because it failed to provide satisfactory submittals and failed to mobilize to the site. Coincidentally, that same day, Nova had mobilized to the site; the City, however, later ordered Nova to cease work because it had commenced operations before obtaining the requisite approval. Nova protested the City’s declaration of default, but the City terminated the contract on September 24.

Nova filed suit against the City for breach of contract, claiming that its handling of the submittals imposed requirements that were not part of the project’s specifications, thereby delaying Nova’s performance to a point where the project could not be timely completed. In support thereof, Nova’s witnesses declared that the City had appeared to be reviewing the submittals with the goal of rejecting them as a sort of “gotcha” review employed to prevent Nova’s performance. The City moved for summary judgment, and the trial court granted its motion. Nova appealed, arguing that there existed genuine issues of fact as to why the project was not completed and that the City had breached its duty of good faith by preventing Nova from attaining its justified contractual expectations. The City argued that the duty of good faith did not apply because it had unconditional authority to accept or reject Nova’s submittals.

The appellate court reversed the grant of summary judgment, holding (1) that the duty of good faith applied to the City’s review of Nova’s submittals and (2) that Nova presented sufficient evidence to create a genuine issue of fact as to whether the City breached this duty. The court began by recognizing that the duty of good faith and fair dealing applies when a party has discretionary authority to determine a contract term and found that the City had such authority in its review of Nova’s submittals. As a result, the City was required to exercise its discretion in a manner consistent with the contract so that Nova could obtain its benefits.

The court then concluded that Nova had presented sufficient evidence to create a genuine issue of fact as to whether the City had breached its duty. Highlighted by testimony regarding the City’s alleged grudge against Nova, this evidence demonstrated that (1) the submittal approval process was contrary to industry standards; (2) the City’s requirements were unreasonable, improper, and nonsensical; (3) the City’s repeated rejection of submittals—which complied with contract requirements—required Nova to work in a more cumbersome and expensive manner than contemplated by the contract; (4) the City sent mixed messages regarding project commencement and submittal approval; and (5) the City acted in a manner calculated to prevent project performance.

Accordingly, the appellate court reversed the trial court’s entry of summary judgment and remanded the case for further proceedings.


The author, John Gazzola, is an associate in the Philadelphia office of the Pepper Hamilton Construction Practice Group.

Friday, June 23, 2017

Construction Vignette on Personal Jurisdiction

Recently the United States District Court for the District of Rhode Island offered a concise refresher on personal jurisdiction through the lens of construction contractors.  In Sugar Fox 218, LLC v. Greython Constr., LLC, No. CV 16-470S, 2017 WL 1906963 (D.R.I. Mar. 17, 2017), rep. & rec. adopted sub nom. 2017 WL 1900273 (D.R.I. May 9, 2017), the court walked through the several factors that established general jurisdiction in Rhode Island over a defendant contractor who had performed the disputed work for a project in neighboring Connecticut.  Recall that, "[u]nlike specific jurisdiction, which focuses on the cause of action, the defendant and the forum, general jurisdiction is dispute blind with the sole focus on whether the defendant is 'fairly regarded as at home' in the forum." Id. (quoting Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915 (2011)).  The Court's step-wise analysis serves as an important reminder that a contractor's business touches in a state can add up to "minimum contacts" and being haled to court in a state even though the dispute did not even stem from work in that state.  

To confer general jurisdiction, the Court recounted that "(1) the defendant must have sufficient contacts with the forum state; (2) those contacts must be purposeful; and (3) the exercise of jurisdiction must be reasonable under the circumstances." Id.  In Sugar Fox 218, the defendant's main location was in Connecticut, it was organized under Connecticut LLC law, its employees all resided in Connecticut, and it did do much work there.  However, Court determined that the following purposeful contacts all weighed in favor of exercising general jurisdiction over the contractor as though Rhode Island was its "home":
  • website included locations in Providence and Watch Hill, Rhode Island (noting that "the website alone would not be sufficient to confer general personal jurisdiction in this case")
  • routinely sent employees into Rhode Island
  • completed at least seven projects in Rhode Island in the months prior to suit
  • currently is completing projects in Rhode Island
  • maintained a permanent “on call” status for one project in Rhode Island
  • registered as a contractor to do business in Rhode Island
  • its proximity to Rhode Island
            As far as the fairness and reasonableness of exercising jurisdiction, the "gestalt" factors, the defendant contractor was not able to carry its burden that the Rhode Island jurisdiction was unfair. The Rhode Island courthouse was actually more convenient for the defendant in terms of distance, the plaintiff was from Rhode Island and selected Rhode Island as its forum, and there was no injustice for a Rhode Island federal court interpreting Connecticut law.  Note also that the defendant contractor  was unable to carry its burden to transfer the venue to Connecticut, which analysis was similarly based on convenience and fairness.

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            The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

            Sunday, June 18, 2017

            Illinois Court Rejects Subcontractor’s Quantum Meruit Claim for Extra Work due to the Existence of a Valid Subcontract

            Archon Construction Co. v. U.S. Shelter centers on a dispute for the replacement of defective sewer pipe for a new subdivision in the City of Elgin, Illinois. The plaintiff was an underground utility contractor, subcontracted by the defendant-developer/builder, to install a sanitary sewer and storm water system for the subdivision.  The work’s plans and specifications, which were incorporated into the contract, contained a section entitled “City of Elgin General Notes” which required that all underground construction comply with the City’s and Illinois’s engineering and construction standards.  As part of the General Note section, there was also a requirement that all sanitary sewers shall be televised and tested prior to acceptance. The plaintiff’s proposal also specifically stated that the sanitary sewer system would be constructed exclusively with PVC pipe; the General Notes gave the option of utilizing either ductile iron or PVC pipe.  The plaintiff started installation of the sanitary sewer in April of 2005 and continued until August 2005.  During its construction activities, the plaintiff replaced three installed fittings that were not of the specified material strength at no cost to the defendant. 

            In August of 2005, the sewer system passed both an air and mandrel test whose results were accepted by the local water authority and the project’s engineer certified to the defendant that the work complied with the contract plans and specifications, the City’s specifications, and Illinois’s specifications. The City required that the televised testing be performed a year after installation to account for any settling that may occur.  The plaintiff engaged a third-party testing agency to perform the televised testing in early 2007 which the City reviewed, and then it performed its own televised testing.  In July of 2007, the City rejected the work and required that certain sections of the installed PVC pipe be replaced with ductile iron pipe.  The plaintiff completed the necessary repairs and submitted a bill to the defendant for the extra work in the amount of $247,432.41, which the defendant refused to pay, and the parties moved to litigation.  In 2013, this same Illinois Appellate Court overturned the defendant’s motion for summary judgment award on the plaintiff’s breach of contract claim for the extra work.  On remand, the plaintiff voluntarily dismissed its breach claim and proceeded solely on its quantum meruit claim. The trial court found for the defendant concluding that quasi-contract relief was not available to the plaintiff.  The plaintiff appealed.

            The Court began its analysis by defining quantum meruit as, “an expression that describes the extent of liability on a contract implied in law (also called a ‘quasi-contract’); it is predicated on the reasonable value of the services performed.” Barry Mogul & Associates, Inc. v. Terrestris Development Co., 267 Ill. App. 3d 742, 749 (1994).  The Court then provided the four elements of quantum meruit required of plaintiff for recovery. The plaintiff must prove:
            1. It performed a service to benefit the defendant;
            2. It did not perform the service gratuitously;
            3. The defendant accepted the service;
            4. No contract existed to prescribe payment for the service.

            Cove Management v. AFLAC, Inc., 2013 IL App (1st) 120884,

            The Courts stated that the last element would be controlling, and as a result of the dispute being based upon a claim of extra work on a contract, the Court reviewed the nature of “extra work.”
            By its nature, the Court mused, a claim for “extra work” establishes that a contract was present because an element of the claim is that the “extra work” was work performed outside of the scope of the original contract. Inherently, a contract must have existed.  The Court next attempted to define a line of where “extra work” is considered to be within a contract which provides a mechanism for recovery, and when “extra work” falls outside of a contractual agreement and into in the realm of quantum meruit.  In order to illustrate the difference, the Court compares the cases of StarkExcavating, Inc. v. Carter Construction Services, Inc., 2012 IL App (4th) 110357 and Industrial Lift Truck ServiceCorp. v. Mitsubishi International Corp., 104 Ill. App. 3d 357, 361 (1982).

            In Stark, a concrete subcontractor claimed unjust enrichment and quantum meruit against the general contractor for unpaid costs related to placing concrete under winter conditions. In that instance, the Appellate Court held that as a result of the subcontractor specifically excluding winter conditions in its proposal, the “extra work” did not involve the same subject matter as the contract, and accordingly the quantum meruit claim could proceed.  In contrast, the Appellate Court in Industrial found that there was no quantum meruit claim available to the plaintiff.  Industrial centered around a dealership agreement between a foreign manufacturer and domestic seller of forklifts in which the plaintiff made changes to the design of the forklift that it felt would make them more attractive to the American market.  At some point, the defendant terminated the agreement, and the plaintiff filed suit claiming quantum meruit for its design work in modifying the forklifts. In this case, the Appellate Court found that the quantum claim could not proceed because the design modifications fell within the same “general subject matter” of the contract.

            The Court in the present case found that the plaintiff’s “extra work” of replacing the installed sewer pipe was “part and parcel” of the original subcontract to install a sanitary sewer system acceptable to the city. “[The plaintiff’s] quantum meruit claim seeks to recover for repairing and reinstalling that very same sewer system. That work unquestionably involved the same “general subject matter” as the contract.  The Court further discounted the plaintiff’s argument that it was contracted to install PVC pipe (as per its proposal), and not the iron pipe required by the City engineer for the replacement work by stating:

             “that does not change the fact that the subject matter of the contract between the parties was the installation of an acceptable sanitary sewer system; [Plaintiff’s] claims for its costs to repair and replace portions of that installed system, as required for the city’s approval, concerned that same subject matter. Thus, [plaintiff] cannot avoid the effect of the general rule that the law will not imply a contract where an express contract already exists between the parties on the same subject matter.”
             
            Finally, the Court pointed to the fact that as part of the plaintiff’s proposal, it stated that any additional work for the project would be completed on a negotiated or time and materials basis, thus giving the plaintiff a contractual remedy for its “extra work claims.”

            The Court affirmed the trial court’s judgment in favor of the defendant.

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            The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based in Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com

            Thursday, June 8, 2017

            Federal Court in Alaska Holds Insurer Liable Under E&O Policy to Indemnify and Defend Construction Manager for Claims by Subcontractor That Construction Manager Failed to Properly Perform Construction Management Services


            KICC –Alcan Gen. v. Crum & Forster Specialty Ins. Co., 2017 U.S. Dist. LEXIS 37560 (March 16, 2017)

            A Contractor/Construction Manager, KICC-Alcan General (“KICC”), entered into a subcontract with an MEP subcontractor, Superior Group (“Superior”), concerning the construction of two buildings at an airforce base in Alaska. Superior sued KICC for approximately $2 million in costs it incurred in excess of the contract value, allegedly caused by KICC’s failure to properly manage the project.  KICC tendered Superior’s claims to its Errors and Omissions insurance carrier, Crum & Forster Specialty Insurance Company (“C&F”).  C&F denied both defense and indemnity of Superior’s claims.  KICC settled its claims with Superior prior to trial.  KICC then sued C&F for its breach of the duty to defend and indemnify against Superior’s claims, as well as a breach of its duty of good faith.

            The terms of KICC’s E&O policy provided coverage for “damages… because of… an act error or omission in the rendering or failure to render professional services by any insured.”  The contract defined “professional services” as “those functions performed for others by you or by others on your behalf that are related to your practice as a consultant, engineer, architect, surveyor, laboratory or construction manager.”

            Superior alleged that KICC: mismanaged a soil contamination issue at the beginning of the project; failed to provide timely responses to requests for information and contract modifications; and directed other subcontractors to work in the same areas at the same time as Superior, resulting in delays and added costs to Superior on the project. Superior submitted a request for equitable adjustment (“REA”) for these costs and delays, but KICC denied the REA.  In its lawsuit, Superior asserted claims for breach of contract and quantum meruit.

            C&F’s main argument was that its policy covered only negligent acts on the part of KICC in its construction administration services, and that Superior’s claims were for contractual or quasi-contractual damages. C&F cited to Bell Lavalin v. Simcoe and Erie Gen. Ins. Co., 61 F.3d 742 (9th Cir. 1995), which held that “a professional liability policy did not provide coverage for a simple contract dispute in which [a subcontractor] performed work for which it was not paid.” Id. at 746.   In Bell Lavalin the general contractor refused to provide a contract extension to its subcontractor during a delay.  The subcontractor walked off the project after having been paid for approximately half of the services it had provided. Id. at 744.  The subcontractor sued the general contractor for its unpaid contract amounts, and prevailed at trial.  The general contractor then sued its insurer for indemnity.  The general contractor’s E&O insurance policy provided coverage for damages that “arise out of the insured’s performance as a project manager and are caused by an error, omission or negligent act.” Id. at 746.  The court held that the damages incurred by the subcontractor were not as a result of any act or omission of the general contractor’s project management, but rather were a result of a failure to pay the subcontractor for completed work. Id.  The claims were purely contractual and not covered under the E&O policy, thus the insurance company prevailed.

            The Court in this matter found that several key facts were different from those in Bell Lavalin.  Superior was not seeking payment of the base contract value, but was seeking additional compensation beyond the contract price.  Superior was required to prove that KICC wrongfully denied the contract extension or otherwise caused it to incur additional costs above the contract price to prevail.  The Court found that Superior’s claims were clearly based on KICC’s professional services, as the complaint referenced KICC’s mismanagement of the project as the cause of the damages.  The Court also found that pleading in contract does not automatically preclude coverage under this policy, which did not expressly exclude claims of contractual liability or those that arise from contract.  As a result, the Court held that Superior’s claims were covered by the C&F policy, and thus C&F had a duty to indemnify KICC for the settlement amount, as long as the settlement was reasonable and non-fraudulent.  The Court also held that C&F breached its duty to defend.
            Finally, the Court held that to prevail in its bad faith cause of action KICC would have to show that C&F’s actions “were objectively unreasonable under the circumstances.” The Court found that in light of the holding in Bell Lavalin, no reasonable jury could find that C&F’s actions were objectively unreasonable.

            The author, John Conrad, is an associate in the Los Angeles office of the Pepper Hamilton Construction Practice Group. 

            Friday, June 2, 2017

            Construction Liens Filed by Suppliers in New Jersey After Contractor’s Filing of Bankruptcy Petition Are Barred by the Automatic Stay Provision of the Bankruptcy Code  


            In re: Linear Electric Co., Inc., No. 16-1477, 2017 U.S. App. Lexis 5527 (3d Cir., March 30, 2017)
            This case concerns whether suppliers, Cooper Electrical Supply Co. and Samson Electrical Supply Co. (“Suppliers”), could file construction liens under New Jersey law, despite the fact that Linear Electric Inc. (“Contractor”), filed a petition for bankruptcy, which automatically stays any act to create or perfect any lien against the contractor’s property. Two weeks after Contractor filed for bankruptcy, the Suppliers filed construction liens against projects in New Jersey where the materials were incorporated.  Following a motion by the Contractor, the Bankruptcy Court held that the liens were in violation of the automatic stay provision of the Bankruptcy Code. The District Court affirmed the Bankruptcy Court’s holding that, under New Jersey law, the liens were claims against the Contractor’s accounts receivables, which receivables are part of the bankruptcy estate and protected by the automatic stay.  On appeal, the Third Circuit affirmed the ruling of the District Court.

            Under New Jersey law, if a supplier sells materials on credit to a construction contractor and the contractor incorporates those materials into property owned by a third party without paying the supplier, the supplier can apply for a lien on the third-party property. The owner of the property subject to lien discharges a lien by paying into a lien fund, from which claimants recover what they are owed.  However, no lien fund exists if, at the time of service of the lien claim, the owner has fully paid the contractor for the work.  In addition, if there is money left over in the fund after the lien claims of subcontractors and suppliers are paid, the remainder is received by the contractor.  The Court relied on this allocation process to determine that, although the Suppliers’ liens were ostensibly against the property of third-party owners, they were also against the Contractor’s accounts receivable because the payments from the owners to the Contractor would be reduced by the lien claims of the Suppliers.  Thus, the Suppliers’ liens were against the Contractor’s property and violated the automatic stay created by the Contractor’s bankruptcy.

            In addition, in coming to this conclusion, the Third Circuit distinguished New Jersey lien law from Pennsylvania lien law, where the lien of a supplier or subcontractor relates back to the date when work on the project first began. As a result of this, the Pennsylvania lien was considered to have been filed before the bankruptcy petition and therefore fell within an exception to the automatic stay. See In re Yobe Electric, Inc., 728 F.2d 207 (3rd. Cir. 1984).

            The author, Luke Nicholas Eaton, is an associate in the Los Angeles office of the Pepper Hamilton Construction Practice Group.   

            Friday, May 19, 2017

            Owner's Acceptance of Work Paves Way for Contractor's No Fault Decision

            In the matter captioned Wilson v. Dura-Seal, --S.W.3d (March 21, 2017), the Missouri Court of Appeals considered "negligent construction claim against paving contractor" where the injured party claimed that "that she fell as a result of the height differential between the gutter area and the new asphalt poured by contractor."  Id. The trial court had granted summary judgment in favor of the contractor and the appellate court affirmed.

            The defendant contractor had performed work, an asphalt overlay of a drive lane, at a school. The work was performed, invoiced, and paid by the school.  But apparently, the work was not up to par. It was undisputed that the contractor failed to pave up to the curb and instead left a “gutter area” where the "asphalt in the drive lane [was] taller than the gutter area in between the drive lane and the curb." The injured plaintiff claimed the height differential was "three to four inches." Id.

            In order for the plaintiff to proceed against the contractor, the plaintiff needed to present evidence that the school had not yet "accepted the contractor's work" and that the contractor "was still in control of or had a right to control the area." Otherwise,“[a]fter [an] owner accepts a structure, the general rule [under the Acceptance Doctrine] is that a general contractor is not liable to persons with whom he did not contract." Id. The court was not persuaded that the plaintiff had raised a question of fact as to control, especially where the contractor had been off the site for 2 months and had been paid by the school.  Likewise the court was unpersuaded that the plaintiff has raised sufficient way around the Acceptance Doctrine -- for example that the drive lane was left in "an imminently dangerous condition," which would "operate[] to impose liability on a contractor, even after the owner has accepted the contractor's work." The court noted that "the road was in plain view and discoverable through inspection" and therefore not imminently dangerous.  Moreover, that the contractor had warranted its work to the school for a year did not change the analysis either -- the contractor had not expressly assumed any "greater liability to third parties than is commonly the case under the acceptance doctrine." Id.

            Incidentally, the school had already settled with the injured party when the case against the contractor was commenced.  It was not evident from the decision whether the school ever attempted to recoup its settlement payments from the contractor.  Also worthy of note is that the Restatement (Second) of Torts § 385 takes a different approach to depart from the Acceptance Doctrine:  "One who on behalf of the possessor of land erects a structure or creates any other condition thereon is subject to liability to others upon or outside the land for physical harm caused to them by the dangerous character of the structure or condition after his work has been accepted by the possessor, under the same rules as those determining the liability of one who as manufacturer or independent contractor makes a chattel for the use of others."
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            The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

            Saturday, May 13, 2017

            Massachusetts Appeals Court: GC’s Non-Payment for a Scope Dispute with Subcontractor is a Willful Act, but not an Intentional One


            The plaintiff in D.A. Sullivan & Sons, Inc.V. City of Springfield was a general contractor who contracted with the defendant for a public-school construction project in Springfield, MA. Subsequently, the plaintiff contracted with a subcontractor to perform certain finish work on the project.  During the execution of that work, a scope dispute arose with the finish subcontractor as to who owned certain lath and plaster work.  The subcontractor completed the work under protest then filed suit seeking compensation for the “extra work.” The subcontractor prevailed in that suit and was awarded damages related to the disputed work.  The plaintiff in the current matter then initiated an action against the defendant for: 1) breach of contract; 2) unjust enrichment; and 3) indemnification. The trial court granted the defendant’s motion for summary judgement holding that the indemnification clause of the general contract bars the plaintiff’s claims due to the plaintiff’s obligation to indemnify the defendant for losses arising from the intentional acts of the plaintiff and its subcontractors.

            The Court began its summary judgment analysis by examining indemnity agreements in Massachusetts by stating that, “[i]ndemnity agreements "are to be fairly and reasonably construed in order to ascertain the intention of the parties and to effectuate the purpose sought to be accomplished."” Shea v. Bay State Gas Co., 383 Mass. 218, 222 (1981)

            The Court next presented the prime contract’s indemnification agreement in dispute:

            "The [c]ontractor hereby agrees to and shall at all times defend, indemnify and hold the [c]ity…wholly harmless from any and all losses, cost, expenses..,claims, demands, suits by any person or persons, injuries, damages or death, and other liabilities of whatever kind or nature, caused by, resulting from, incident to, connected with, or arising directly or indirectly out of the negligent or willful act or omission by the [c]ontractor, any [s]ubcontractor, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable whether or not caused in part by any act or neglect on the part of the [c]ity, its officers, employees, agents or servants, or others, including parties indemnified hereunder. This indemnity shall survive termination of the contract.”
            The Court reviewed the lower court’s ruling on the above indemnity language where the lower court found there was “no ambiguity in this extremely broad indemnification clause” which it interpreted to mean that willful is intentional, but it does not necessarily imply a “malicious motive.”  Consequently, the lower court found an indemnity right existed because the plaintiff’s claims arose out of: 1) its direction to its subcontractor to perform the disputed scope; or 2) the subcontractor’s intentional act of actually performing the work.

            The Court stated that such an interpretation of the indemnity clause might be correct if the defendant was seeking indemnity for a tort, personal injury, or property action resulting from the activities of the plaintiff or its subcontractor.  The Court further stated that the plain language of the provision would not limit such an interpretation as it does not “expressly tie the city’s indemnity right to damage of a person or property caused by the work to be performed” or limits damages to specific types of actions or omissions, or even further explicitly excludes payment terms.  The Court found the provision “unusually broad” and it specifically identified the phrase “arising directly or indirectly out of the negligent or willful act or omission” as ambiguous.

            The Court also questioned whether the plaintiff’s actions of: 1) performing, or directing its subcontractor to perform the work was within its contractual obligation for the contemplated work; and 2) if performance of such an obligation would be considered “willful” within the context of the indemnity agreement, thus requiring the plaintiff to indemnify the defendant against the plaintiff’s own claims for payment.  The Court examined the meaning of the word “willful” and stated it could be synonymous with “intentional” or “deliberate” depending upon the circumstances, but “we question whether intentional or deliberate actions are necessarily willful in the instant context, where willfulness will arguably trigger an indemnity right as to payment claims arising from the very same acts alleged to be willful.” 

            Accordingly, the Court overturned the motion for summary judgement stating that it disagreed with the legal determination that “willful” within the indemnification clause was unambiguous and synonymous with intentional.

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            The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based in Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com

            Friday, May 12, 2017

            Alex Corey, Pepper Hamilton LLP


            Fifth Circuit Holds That Spearin-like Provision of Louisiana Civil Code Bars Negligent Failure to Warn Claim

            LaShip, LLC v. Hayward Baker, Inc., 2017 U.S. App. LEXIS 3694 (5th Cir. Mar. 1, 2017)
            Beginning in 2007, LaShip, LLC (“LaShip”) undertook the construction of a large shipbuilding facility in Houma, Louisiana (the “Project”), situated on its own private land as well as land owned by the Terrebonne Port Commission (“TPC) – a subdivision of the Louisiana state government. In July 2008, LaShip accepted a bid from Hayward Baker, Inc. (“HBI”) to complete the soil mixing and drill shaft work on the Project.

            The contract between LaShip and HBI (the “Contract”) provided for HBI to install subterranean soil-mix columns to form the foundation of the shipbuilding facility and prevent it from collapsing into the soft and compressible Louisiana soil. Pursuant to the Contract, HBI obtained soil samples to ascertain the columns’ strength.  Laboratory testing revealed that, in general, the soil possessed the requisite compressive strength provided for in the Contract.  Nevertheless, as the work progressed the columns exhibited spiraling, and HBI experienced several cave-ins during its installation of the drill shafts and unwanted settlement of the foundation columns.

            On January 21, 2011, LaShip filed suit against HBI in the Louisiana Federal District Court alleging that HBI violated Louisiana law by not warning LaShip about alleged defects in the design of the columns. TPC joined the lawsuit on March 6, 2013, also claiming that HBI acted negligently in failing to warn of a dangerous condition.  The District Court ruled that LaShip failed to prove by a preponderance of the evidence its claims against HBI.  LaShip and TPC then appealed.

            The Fifth Circuit reviewed the District Court’s ruling de novo and fully affirmed the decision.  In regards to LaShip’s arguments that HBI is liable for its failure to warn of the column defects, the Fifth Circuit found that HBI was “statutorily immune” from this claim under Louisiana Revised Statute 9:2771 (“LRS 9:2711”), which provides that:

            No contractor . . . shall be liable for destruction or deterioration of or defects in any work constructed, or under construction, by him if he constructed, or is constructing, the work according to plans or specifications furnished to him which he did not make or cause to be made and if the destruction, deterioration, or defect was due to any fault or insufficiency of the plans or specifications.

            Pursuant to LRS 9:2711, a contractor is shielded from liability for any defects that may arise as a result of the contractor’s adherence to plans and specifications that were provided to the contractor. This wording of the provision resembles the common law doctrine announced in Spearin.  See U.S. v. Spearin, 247 U.S. 128 (1918) (“if the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications”).  However, as the Fifth Circuit noted, a contractor will be liable “if he has a justifiable reason to believe that adherence to plans and specifications would create a hazardous condition.”

            Applying LRS 9:2711, the Fifth Circuit reviewed the record and found that the problematic settlement of the structure in the Project stemmed from a design defect in the length of the columns. As such, HBI was afforded immunity based on its installations of the columns according to specifications in the Contract.

            The Fifth Circuit rejected LaShip’s argument that based on HBI’s geotechnical expertise, its knew or should have known that the design was allegedly defective and thus had an affirmative duty to warn LaShip. The Fifth Circuit opined that such an argument would unduly broaden the affirmative tort duty of contractors under Louisiana law.  In affirming the District Court’s decision, the Fifth Circuit distinguished prior case law where a contractor was found to have breached a duty to warn the owner of a potential defect in the construction of a grain storage tank, noting that in that situation, the liable contractor “both designed and constructed” the storage tank.  HBI did not design the soil-mix column specifications.

            The Court also affirmed the dismissal of LaShip’s breach of contract claim, finding that HBI fulfilled its contractual requirement in confirming that the soil tested met the minimum threshold for unconfined compressive strength. The dismissal of TPC’s claims was also affirmed on the basis that TPC failed to initiate the action within the one-year prescription period provided by Louisiana law for tort claims not governed by a contract.