Suit Up: Fla. Supreme Court Holds Statutory Defect Notice is a "Suit" Under CGL Policy

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Recently, the 11th Circuit was presented with an appeal concerning a commercial general liability ("CGL") insurer's duty to defend a general contractor.  At issue was whether statutory-required notice from an owner to the general was a "suit" under the policy triggering the defense duty.

The 11th posed this certified question to the Florida Supreme Court:

Is the notice and repair process set forth in chapter 558, Florida Statutes, a “suit” within the meaning of the commercial general liability policy?

The Court, in Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. SC16-1420, 2017 WL 6379535, at *1 (Fla. Dec. 14, 2017), answered yes, Chapter 558 defect notice is a suit for purposes of CGL coverage. As such there insurer had a duty to defend. The holding has potential implications for insurers in other states that subscribe to similar defect notice schemes or rights to repair. See, e.g., Cal. Civ. Code §§ 895 et seq.; Colo. Rev. Stat. § 13-20-801 et seq.; Tex. Prop. Code. Ann. §§ 27.001 et seq. There are upwards of 30 states nationwide.

First of all, what is Fla. Stat. chapter 558?  In Florida, before suit can be commenced by any owner claiming that a construction defect exists, the owner must follow a certain notice and response procedure. Basically the owner must give notice to the contractor or design professional of the alleged defect.  Then those receiving notice provide notice to any lower-tier subcontractors that may have responsibility for the defect in question and all recipients can respond to the owner.  If the owner does not receive adequate responses, it then can file suit.  The legislative findings specifically identified this process as an "alternative dispute resolution mechanism" such that the inspections involved and any findings or settlement offers made as a result of the inspections become inadmissible if there are future proceedings.

Under the CGL policy, the insurer has the "right and duty to defend the insured against any 'suit' seeking those damages [of personal or property damage]." The definition of a "suit" is a "civil proceeding in which damages . . . to which this insurance applies are alleged." It also includes "an arbitration proceeding . . . to which the insured must submit or does submit with our consent" or "any other alternative dispute resolution proceeding . . . to which the insured submits with our consent."

Therefore, the question was whether Fla. Stat. ch. 558 notice is a "suit."  The Court analogized the notice to "other alternative dispute resolution proceeding" (especially given the legislative history) and confirmed it was indeed a suit.  The issue of insurer "consent" was a hurdle that the Court did not need to cross in the decision.  The Court observed that "whether [the insurer] consented to [the general contractor's] participation in the chapter 558 process . . . is outside the scope of the certified question and an issue of fact disputed by the parties."

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The author, Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She is an associate at Pierce Atwood, LLP in Providence, Rhode Island.  Katharine thanks Anthony Lehman, Esq. of Hudson Parrott Walker in Atlanta, Georgia for his input on this post.

Are Your Punch Lists Signed Off and O&Ms Submitted? NJ Court Rules not Delivering all Closeout Items Could be a Basis for Withholding Final Payment for Over Two Years

General Contractor Wallace Brothers, Inc. (Wallace) entered into a contract with the East Brunswick Board of Education (Board) for the construction of the New Memorial School in the amount of $18,233,000.  During the course of the project, the Board paid Wallace a total of $19,713,664.11 through the change process. Even though the school had been in use by the Board for two years, it was holding a contract balance of $366,130.26 that it refused to issue to Wallace.  The Board claimed that it had issued several punch lists for Wallace to complete but were still outstanding.  Conversely, Wallace claimed that it did not receive a final punch list from the Board until this current action was initiated. The trial court granted summary judgment to Wallace finding that the Board had delayed the issuance of punch lists and then only provided punch lists full of maintenance related items wholly separate from the contract.  The Board appealed.

As there were numerous material facts disputed at trial, the Court began its analysis by reviewing some of the conflicted details.  At trial, the Board presented evidence that its architect issued two signed Certificates of Substantial Completion, one in November 2012 and another in October 2013.  In the certificates, the architect struck language from the forms that denoted a punch list was enclosed.  The architect claimed that the strike-through merely represented that the punch list was not attached. Wallace countered the strike-through language meant that construction was in fact complete. 

The Board further claimed Wallace was issued a punch list in April 2013, before litigation ensued in March 2014. That April 2013 punch list was referred to as the “Final Punch List” by the architect and it contained about 300 yet to be completed items.  Updates to this punch list were released in August 2013, October 2013, and November 2014.  Items that remained on the updates included:

“caulking all exposed steel, removing "stub conduit," touching up paint on a door frame, repairing a damaged wall, installing the vinyl base at a casework counter, removing paint from an entry frame, installing a "backer rod," patching bolts at a side-court basket, sanding and painting "hose bibbs," replacing crumbling grout, and installing concrete floor sealer.”

The trial court was not swayed by the Board’s argument on the April 2013 punch list or its contents stating that its items were “maintenance things that would occur in the ordinary course of using the premises, but basically it sounds like you're holding their money hostage to make them come and do repairs that they would not have been called upon to do.”

Notwithstanding the above, the Board additionally argued that the trial court had disregarded material disputes of fact such as the final payment balance contained almost $56,000 worth of back charges and approximately $170,000 of liens on the project.   Wallace’s contract required it to refund any lien amounts back to the Board.  The Board further stated it was within its rights to withhold the contract balance as the trial court ignored the fact that contractually required close out documents such as “proof of payment of all vendors, proof of insurance, subcontractor waivers, recorded drawings, proof of tests and inspections, and the maintenance package containing manufacturers' warranties” were never submitted by Wallace to the Board.  Finally, the Board pointed to the November 2014 punch list which denoted $163,890 worth of work remained and the architect had yet to issue its final Certification for Payment, which is a condition precedent for final release of all contract sums per Wallace’s contract.

Ultimately, the Court reversed and remanded finding that there were material facts in dispute as to whether Wallace fully completed the contract.

WALLACE BROS., INC. v.EAST BRUNSWICK BOARD OF EDUCATION

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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.

The early bird deadline to sign up for the Midwinter Meeting in Fort Myers, Florida, is tomorrow! This program, which is focused around issues particularly relevant to subcontractors, will be an excellent opportunity to hear the latest issues and trends that subcontractors across the country are dealing with. You can save $60 by signing up before the end of the day tomorrow. The brochure can be viewed at this link. 

The Division 1 practicum featuring Jason Rodgers-da Cruz, Joe Imperiale, Stuart Sobel, Terry Brookie, and Esther Mignanelli  is limited to 60 attendees and is going to be a great program.  The details are as follows:   

Wednesday, January 17, 2018

2:00 P.M - 5:00 P.M.

Young Lawyer Practicum

Construction cases are technical and complex matters that may not be easily understood by the Jury or even the Judge or Arbitrator. As construction trial lawyers, we must distill such technical and complex matters and present them in easily understood and relatable concepts. While we develop the case, we must also navigate the evidentiary and presentation issues that, as trial lawyers, routinely confront us. The practicum focuses on utilizing the fundamental building blocks to build your construction case whether prosecuting or defending one. Separate Registration Fee: $75 per person

Sponsored by: Division 1 - Litigation and Dispute Resolution, Young Lawyers Division, and the Forum Leadership Circle

Please sign up for the practicum and make your travel arrangements now to arrive in time for the practicum.

Montana Supreme Court Holds That a Waiver of Consequential Damages and a Partial Limitation of Liability in a Design Contract Are Not Contrary to Montana Law

    

Zirkelbach Constr., Inc. v. DOWL, LLC, 2017 Mont. Lexis 591 (Mont., Sept. 26, 2017)


In interpreting a state statute which makes contractual limitations on a party’s liability unenforceable in certain instances, the Supreme Court of Montana recently upheld the validity of a contract provision in a professional services agreement between a general contractor and a designer in which the parties waived consequential damages against each other and limited the liability of the designer to $50,000.00.


Zirkelbach Constr., Inc. (“Zirkelbach”) and DOWL, LLC (“DOWL”) entered into a professional services agreement (the “Agreement”), whereby DOWL agreed to provide design work to Zirkelbach, a general contractor, for the construction of a FedEx Ground facility in Billings, Montana.  The original contract price was $122,967, but was adjusted to approximately $665,000 after the parties made several addenda to the Agreement to account for additional services.
The Agreement contained a provision (the “limitation of liability clause”) – which the parties did not renegotiate when they modified the Agreement through addenda – in which the parties agreed to waive against each other “any and all claims for or entitlement to special, incidental, indirect, or consequential damages arising out of, or resulting from, or in any way related to the Project,” and also agreed that DOWL’s total liability to Zirkelbach under the Agreement “shall be limited to $50,000.”


After Zirkelbach brought suit against DOWL asserting claims of negligence and breach of contract in the amount of $1,218,197.93 for problems allegedly caused directly by DOWL’s design plans, DOWL filed a motion for partial summary judgment arguing that DOWL could not be liable to Zirkelbach in any amount exceeding $50,000 due to the limitation of liability clause. The District Court granted DOWL’s motion and Zirkelbach appealed.


On appeal, Zirkelbach argued that the limitation of liability clause was unenforceable as against public policy under Section 28-2-702, MCA, which provides:

All contracts that have for their object, directly or indirectly, to exempt anyone from responsibility for the person’s own fraud, for willful injury to the person or property of another, or for violation of law, whether willful or negligent, are against the policy of the law.

The Supreme Court disagreed.  In holding that the limitation of liability clause was valid under § 28-2-702, the Supreme Court emphasized the importance of the freedom of parties to mutually agree to the terms governing their private conduct, provided those terms do not conflict with public laws, and emphasized that Zirkelbach and DOWL were two experienced, sophisticated business entities with equal bargaining power.  The Court relied on case law in both Montana and California, which has an identical statute, in concluding that “it would be difficult to imagine a situation where a contract between relatively equal business entitles would be able to meet the required characteristics of a transaction that implicated public interest.”


Additionally, the Court noted that the limitation of liability clause only capped damages and did not exempt DOWL from all liability under the Agreement, as the Court had previously held that § 28-2-702, is not violated when business entities contractually limit liability, but do not eliminate liability entirely, or when a limitation of liability applies only to a narrow type of damages, but not all damages.  DOWL remained exposed to liability on the negligence claim asserted by Zirkelbach and for $50,000 under the Agreement.


Finally, the Court rejected Zirkelbach’s argument that the $50,000 limitation of liability indirectly exculpated DOWL from liability because it was a nominal amount compared to DOWL’s total adjusted fee.  The Court pointed out that the limitation was a much larger percentage of DOWL’s fee before the parties modified the Agreement to add additional services by addenda, and stressed that it would not “allow Zirkelbach to avoid a term of the contract simply because it [had] become more burdensome due to its own failure to renegotiate.”  Each time the Agreement was modified, Zirkelbach had an opportunity to renegotiate the cap on liability, but did not.


Accordingly, the Supreme Court affirmed the grant of summary judgment in DOWL’s favor.


The author, Emily D. Anderson, is an associate in the New York City office of the Pepper Hamilton Construction Practice Group.

Federal Court Holds That, Under Louisiana Law, a Contractor Need Not Show a Total Work Stoppage to Recover Extended Home Office Overhead Under Eichleay

     

Team Contrs., L.L.C. v. Waypoint NOLA, L.L.C., No. 16-1131, 2017 U.S. Dist. LEXIS 162172 (E.D. La. Oct. 2, 2017).


Waypoint NOLA (“Waypoint”) was the owner of a hotel construction project in New Orleans (the “Project”).  Waypoint contracted with Team Contractors (“Team”) to serve as the Project general contractor and HC Architecture (“HCA”) to serve as the Project architect.  HCA, in turn, subcontracted with KLG to prepare the mechanical, electrical, and plumbing (“MEP”) plans.
HCA delivered a complete set of specifications, including KLG’s MEP plans, to Team, and Team began work.  It was later discovered that the MEP plans did not comply with code requirements.  Team was forced to remove and reconstruct the MEP work before proceeding with its work as scheduled.


Team filed suit for breach of contract against Waypoint and for negligence against Waypoint, HCA, and KLG.  Team alleged it experienced delay and incurred damages when it was forced to remove and reconstruct the MEP work.  Its damages included extended home office overhead related to the delay.  Team’s expert used the Eichleay formula to calculate these damages.


In Louisiana, courts apply a three-prong test to determine if a claimant is entitled to recover damages under Eichleay:  First, the contractor must demonstrate that there was an unexcused delay. Second, the contractor must show that it incurred additional overhead expenses.  Third, the contractor must establish that it was required to remain “on standby” during the delay.  To show that it was “on standby,” a contractor must show (1) the delay was of an indefinite duration, (2) the contractor was required to return to work at full speed and immediately during the delay, and (3) most, if not all, of the contract work was suspended.


The Defendants filed a motion for summary judgment, arguing that Team could not recover damages under Eichleay, because there was no suspension or stoppage of the work.  In response, Team presented evidence that there was, at minimum, a “functional” stoppage of “all or most of the work performed” pursuant to the contract.


The District Court determined that Louisiana court decisions had not decided whether a “functional” work stoppage would satisfy Eichleay, and if so, what degree of work stoppage would be sufficient.  As such, the District Court was required to predict how the Louisiana Supreme Court would resolve the issue.  The District Court noted that the Louisiana courts which had decided the application of Eichleay had adopted the doctrine from the federal courts without alteration, and accordingly, federal analyses of this issue should weigh heavily in a prediction of what the Supreme Court of Louisiana would hold.


Because the federal courts applying Eichleay had held that a claimant need not show a total stoppage of work to recover extended overhead damages, the District Court held that it is sufficient, for purposes of establishing standby, if a contractor can demonstrate that work has stopped or significantly slowed.  Because Team had presented evidence of such a functional stoppage, the District Court denied the Defendants’ motion for summary judgment.


The author, Jane Fox Lehman, is an associate in the Pittsburgh, Pennsylvania office of the Pepper Hamilton Construction Practice Group.