Increased Workforce Is Not "Delay" - Massachusetts Appeals Court affirms subcontractor award despite no-damage-for-delay clause

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In Central Ceilings, Inc. v. Suffolk Construction Company, Inc., et al., - N.E.3d - 91 Mass.App.Ct. 231 (Mar. 29, 2017), the Massachusetts Appellate Court affirmed a $321,315 damages award against a general contractor in favor of a subcontractor.  The subcontractor claimed that as a result of the general contractor's mismanagement of the dormitory construction project (at Westfield State University) it was less productive and therefore incurred costs. 

Indeed the subcontractor, who installed exterior and interior wall systems, illustrated that properly sequencing its work "floor by floor, exterior to interior, building by building" was key to meeting its cost and time bid. The evidence presented showed that general contractor "struggled" coordinate the other trades who needed to complete their work before the subcontractor could begin, failed to timely survey the locations for the subcontractor to line up its panels, delayed making the building weather tight, among other delays.  The delays caused the subcontractor to perform costly extra work mobilizing and demobilizing and to incur project administration costs.  In addition, the subcontractor was not given extra time to do this work due to the looming liquidated damages that the general contractor would owe if the project was not completed on time (though the general contractor later attempted to dispute that the subcontractor had ever asked for extra time).  Instead the subcontractor was "compressed" and forced to assign, and pay for, extra personnel on the project. To support its claim, the subcontractor introduced an expert who opined, using the total cost method, that the loss was "best quantified through the impact it had on [the subcontractor's] manpower." After confirming the subcontractor's bid was "reasonable," he examined what the subcontractor actually spent to complete the project, what change orders were already paid, and concluded that the difference, $321,315, was the subcontractor's lost productivity.

In response, the general contractor pointed to the contract's no-damages-for-delay clause and asserted that the demanded recovery was wholly precluded. In pertinent part, the clause stated:

The Subcontractor agrees that it shall have no claim for money damages or additional compensation for delay no matter how caused, but for any delay or increase in the time required for performance of this Subcontract not due to the fault of the Subcontractor, the Subcontractor shall be entitled only to an extension of time for performance of its Work. Written notice of all claims for any extension of time shall be submitted to Contractor within ten (10) days of the date when Subcontractor knows (or should know) of the event which causes such delay, or such claim shall be considered waived by Subcontractor

The trial judge held, and the appellate court affirmed, that the unambiguous provision was inapplicable to the subcontractor's claim for two reasons.

First, the only remedy under the no-damages-for-delay clause was the extension of time but, here, no extensions were allowed in contravention to the agreement. The general contractor protested on appeal that no extension requests from the subcontractor were ever received, but the general contractor did not raise that issue at the trial court and the record belied that position anyway.  

Second, the trial court held and the appellate court affirmed that in strictly construing the draconian language of the clause, the subcontractor's damages claimed, lost productivity, were not "for delay" (precluded by the clause) but rather "it had been forced to increase its workforce due to the compression of the schedule occasioned by [the general contractor's] breaches" (not precluded by the clause). The trial court observed that the general contractor's "breaches did not affect [the subcontractor's] ability to complete its work on time . . . but, rather, with its ability to complete its work on budget."

Accordingly the award, and the total cost method for calculating the award, were affirmed.
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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.

KY Appeals Court Allows General Contractor’s Negligent Misrepresentation Claim for Defective Plans and Specifications Against Architect to Proceed

The case of D.W. Wilburn, Inc. v. K. Norman Berry Assocs. involves a dispute stemming from a project for the renovation of the North Oldham High School in Goshen, Kentucky. The defendant was the project’s architect who was contracted by the Oldham County Board of Education to provide design and construction administration services for the project.  The plaintiff was a general contractor who contracted with the Board for the four phases of construction with a completion date of May 31, 2009.  The general contract contained four fairly common payment provisions: 1) executed change orders must be signed by the architect; 2) claims for extra costs must be submitted within 21 days of the event giving rise to the claim; 3) executed changes resolved all claims related to that change; and 4) acceptance of final payment by the contract constituted a waiver of all claims not previously submitted to the owner at the time of acceptance.

During construction operations, the project completion date was adjusted through the issuance of twenty change orders which were all signed by the Board, defendant, and plaintiff as required by the general contract.  One of these, a comprehensive change order issued on February 2, 2010, addressed all issues related to claims for the final schedule and new completion date.  A final change order that incorporated punch list and closeout items was executed in February 2012 with submission of the final application for payment shortly thereafter. In May of 2012, the plaintiff forwarded an extended general condition cost request from its electrical subcontractor that was dated March 2009.  At the completion of the project, the electrical subcontractor filed suit against the plaintiff claiming, among other items, damages related to schedule delay. The plaintiff then filed a third-party complaint against the Board seeking indemnity and contribution for delays caused by the Board.  The plaintiff also filed a third-party complaint against the defendant alleging that it caused a project delay by failing to properly prepare plans and specifications which would allow for a timely issuance of a building permit.  The Board and defendant were both granted summary judgement by the trial court, with the plaintiff conceding it should be granted the Board due to the project record, and the trial court finding the lack of privity of contract between the Plaintiff and Defendant as a bar to recovery. The plaintiff appealed summary judgement granted to the defendant.

The Court of Appeals began its analysis of the case by reviewing the tort of negligent misrepresentation within the context of construction projects in Kentucky.  The Court found that the Kentucky Supreme Court had already found that Restatement of Torts § 552 negligent misrepresentation was available to third parties to a contract because, “duty, rather than privity, is a fundamental element under modern tort law” and a plaintiff could recover from a defendant for an “independent duty.”

The Court then looked other jurisdictions for an architect’s duties under § 552.  The Court quoted Davidson& Jones, Inc. v. New Hanover Cty.,41 N.C. App. 661, 666, 255 S.E.2d 580, 583-84 (1979) when it reviewed an architect’s duty under § 552.  The Davidson court stated:

“An architect, in the performance of his contract with his employer, is required to exercise the ability, skill, and care customarily used by architects upon such projects…Where breach of such contract results in foreseeable injury, economic or otherwise, to persons so situated by their economic relations, and community of interests as to impose a duty of due care, we know of no reason why an architect cannot be held liable for such injury. Liability arises from the negligent breach of a common-law duty of care flowing from the parties' working relationship.”

Accordingly, the Court concluded that the trial court errored when it found that the defendant did not owe a duty outside of the purely contractual ones owed to the Board.  Since the plaintiff claimed it reasonably and foreseeably relied upon the plans prepared by the defendant, and those plans were negligently prepared resulting in rejection by the approving authority, which in turn caused project delays, the Court was not in a position to say that the Plaintiff could not prove the elements of negligent misrepresentation.

The Court next examined the defendant’s argument that even if the plaintiff had stated a claim for negligent misrepresentation, it cannot recover damages because of the economic loss rule. The Court examined the evolution of the economic loss rule in Kentucky and ultimately concluded that since the economic loss rule is a function of contract, and there is no privity between the parties, it would not apply to a claim under § 552. The Court stated:

“It is the very purpose of the tort to compensate purely economic losses when there is no contractual remedy available but there is a breach of the duty described in [§ 552]. To apply the rule would essentially eviscerate the tort. We agree with the Court in Bilt-Rite, 581 Pa. at 484, 866 A.2d at 288, that the result would simply be "nonsensical." "[I]t would allow a party to pursue an action only to hold that, once the elements of the cause of action are shown, the party is unable to recover for its losses."”

Finally, the Court examined the defendant’s claim that even if the plaintiff could proceed based on negligent representation, the claim would be barred due to all claims for delay damages were closed with the issuance of the February 2012 change order and the acceptance of the application for final payment.  The Court did not find this argument persuasive because the defendant was not party to the contract between the Board and plaintiff where the waiver of claims language was located. The Court also found that the requirement that the defendant sign all change orders “did not constitute a contract between [the plaintiff] and the [the defendant].”

The Court reversed the granting of summary judgment for the defendant and remanded the case for further proceedings.  

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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

Reallocation Actions and Settlement Agreements: What Did We Settle?

By Stacy L. La Scala, Esq.

The purpose of a settlement and release agreement is to fully and finally dispose of a disputed matter. However, more and more often, a dispute cannot be fully resolved where non-parties to the dispute have contributed defense and indemnity amounts on behalf of one or more of the parties and have reserved the right to seek recovery of those amounts in subsequent litigation. In particular, insurance carriers are typically not part of the action and are not signatories to the settlement agreement.

Who owns the right to pursue the claim?

An essential step in any settlement negotiation, and one that is often missed, is the determination of who owns the right to the claims being asserted. The question becomes complicated where the parties to a dispute have an underlying contractual relationship that includes a defense and indemnity obligation and an insurance carrier has agreed to defend. So if a party is being defended by an insurance carrier, does that party own the right to assert and recover those fees, or does the carrier that actually paid the fees own the right?

In many jurisdictions, in order for a party to pursue contractual damages in the form of defense fees, that party has to actually incur the fees. This concept pairs with the common law notion of subrogation, wherein a carrier is subrogated to the rights of its insured to the extent of its payments. A general liability insurer that has paid a claim to a third party on behalf of its insured may have an equitable right of subrogation against other parties who are legally liable to the insured for the harm suffered by the third party, including defense and indemnification agreements. These rights are derived from the contract of insurance and include its insured’s rights against tortfeasors principally responsible for the loss and contractual indemnitors.

So how can you limit potential reallocation actions?

In recognition of a non-party carrier’s putative rights, parties to the underlying litigation have responded with a number of strategies to expand the scope of the release agreement. For instance, the parties can:

1. Include any carriers as part of the negotiations and add them as releasing entities to the settlement agreement;
2. Include a requirement that the claimant defend and indemnify the settling parties as part of any settlement;
3. Require a pre-settlement assignment of claims to the claimant and have the claimant release those claims as part of a settlement; and/ or
4. Have the carrier intervene in the action or force the carrier into the action by way of a cross-complaint and include it in a global settlement.

Is counsel well-versed in these types of settlement agreements?

The pitfalls for the novice in negotiating the scope of a settlement agreement and release are plentiful. Counsel has to be conversant with not only the claims against her client, but also who owns the rights to those claims. Should there be known third-party claims, they have to be discussed, bargained for, and, if possible, included in the settlement agreement and release. Where the third-party claims are not part of the settlement, counsel needs to understand the potential for a subsequent action, advise her client on the risk, and negotiate release language to put the client in the best-possible position should subsequent litigation be filed. Of course, finding a neutral that understands non-party rights and the limitations in settlement negotiations can significantly contribute toward the successful resolution of the matter and substantially reduce the likelihood of future litigation.

Are unknown claims going to be released as part of the settlement?

Seeking a full and final resolution of the matter, which would eliminate any future litigation arising from the subject matter of the dispute, is a lofty goal. Typically, the parties must first acknowledge that a general release does not release all known and unknown claims (pursuant to public policy, common law, or statute). As such, the parties to the negotiation must negotiate and specifically waive any limitations for unknown claims. For instance, in California and many other jurisdictions, to obtain the broadest form of release, the parties must set forth the limitations contained in California Civil Code Section 1542 and specifically waive those provisions. While including and waiving this provision in a settlement agreement is a good step toward obtaining a full and final settlement among the signatories to the agreement, it does not necessarily resolve claims of non-parties to the action. In particular, a carrier’s potential rights against its insureds and its derivative rights against third parties can provide the basis upon which a subsequent action can be maintained against the settling parties. As such, the parties to the release, the scope of the release, and third-party rights need serious consideration by counsel when negotiating a settlement and drafting the terms of the settlement and release agreement.

Stacy L. La Scala, Esq. is a mediator and arbitrator with JAMS based in Orange, Calif. His practice focuses on a wide array of disputes, including construction, insurance, business/commercial and professional liability matters.  He can be reached at slascala@jamsadr.com.