Podcast Highlights (No. 1): Design Professional's Guide to Construction Law

As the litigation and dispute resolution division of the Forum, D1 members deal with a variety of aspects of construction law and many are discussed on the Forum’s podcast “Construction Law Today.” This podcast was established in 2019 and created by Buzz Tarlow, one of D1’s ADR neutrals. As an additional benefit to members, the D1 blog is spearheading a series summarizing the Forum podcast episodes.

Episode 22: Design Professional’s Guide to Construction Law

(Click title for the full podcast episode)

This is a summary of the podcast discussion, which focused on the new book “Design Professional’s Guide to Construction Law”, published in 2021,  and edited by the three guests Matt Ninneman, Buck Beltzer, and Mark Mercante. Their practice expertise ranges the whole gamut from transactional to insurance risk management, litigation, arbitration, and acting as arbiters. Unlike the previous edition of this book, that covered construction manager issues along with design professionals, this edition focuses only on design professionals and emphasizes risk management strategies for attorneys to use when counseling these professionals. It also includes recent developments in legislation and case law. 

This book was developed because design professionals are at greater risk than most project participants due to variations in state law, updates to contract forms, and shifts in project delivery systems, with an increase in construction-manger-at-risk projects and end-design builds, which have created new risks for which designers and legal practitioners, did not traditionally account. For example, on the design-build side, there is risk that design professionals may face the same treatment as subcontractors, with offsets, etc. On the construction-manager-at-risk side, design professionals begin working with general contractors earlier in the development of the entire project and there is case law that suggests that design professionals, unless it is stated otherwise, might take on additional risk as representative of the owner. Furthermore, design professionals have weakened ability to minimize risk as projects progress. For example, design professionals, particularly subconsultants, can find themselves doing large expensive projects with sophisticated designs that require licensure and significant education and if the contractor does not build in accordance with the plan and makes changes without the designers’ input, the design professional is stuck in the middle with risk on both sides with the typical design professional malpractice insurance policy eroding, with defense costs being taken out of policy limits.

The book examines ways to minimize risk within the contract setting, including consequential damage waivers, waiver of subrogation and setting limitations of liability to the design professionals’ fee or insurance coverage limits, or some set number to which the design professional can agree. On a related note, the book includes a rewritten examination of insurance policies and how to minimize risk using them. This includes a review of standard language, like indemnity provisions. What are they? What restrictions are there on indemnity provisions? Who is covered? What is covered? Who has a duty to defend and when is it triggered? What are coverage positions of former employees? What is the impact on additional insureds? What is excluded from coverage? What is contractual liability? What is the warranty language? What is heightened standard of care? (and more)…

Readers of this book will also see an in-depth examination of numerous doctrines, including heightened standards of care; betterments—which has been better developed recently; and the economic loss doctrine, which has evolved and varies by state. The book also addresses recent modifications to AIA form provisions which incorporate recent state legislation and important case law developments that should be incorporated into design professionals’ form contracts. 

Another specially treated issue in the new book is licensing, including the stamping and sealing obligation of various states. (FYI, the Forum’s Division 3 has a 50-state survey on this issue.) The vast differences in process and procedure are quite surprising.  For example, who is stamping? When do you stamp? What are you stamping? What is the reporting obligation for malpractice? What is the scope? Is there a threshold value? Each state has some expectations for self-reporting, which are also addressed. Finally, the text touches on intellectual property, and how to protect specialized knowledge of structures and advancements in engineering.

In summation, this book is a valuable resource for practitioners and the design professionals that they counsel, as it is comprehensive and current, addressing new trends in the industry that all players must know and incorporate into their contract negotiations and risk management planning.

Blog contributor Kanita Williams is the Principal at The Law Office of Kanita C. Williams, PC, in Washington, DC. Her practice is criminal litigation, real estate and landlord/tenant matters, and construction law.

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

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.

Federal Court in Pennsylvania Holds Design Professionals’ Negligence Claim Against Pump Supplier Barred By Economic Loss Rule

Kristopher Berr, Associate, Pepper Hamilton LLP

Elliot-Lewis Corp. v. Skanska USA Building, Inc., 2015 U.S. Dist. LEXIS 98405 (E.D. Pa. July 27, 2015)

This dispute arises out of a major renovation and expansion of the Franklin Institute in Philadelphia (the “Project”). Plaintiff Elliot-Lewis Corporation (“ELCo”) was a subcontractor hired to install the piping and controls for the Project’s heating, ventilation and air conditioning (“HVAC”) system. The Project’s schedule required that start up and testing of the HVAC system begin by February 23, 2013 and that the system be operational by April 1, 2013. But, when the HVAC was started for testing, flooding issues arose due to problems with the condenser pumps specified in the HVAC system’s specifications. Ultimately, the HVAC system was not operational by April 1 and ELCo was required to perform additional work and install temporary cooling equipment so that the Franklin Institute could open during the summer. ELCo was never paid by the prime contractor for this additional work.

ELCo filed a complaint against the prime contractor for breach of contract. In turn, the prime filed a third party claim for negligent misrepresentation against a number of design professionals who had performed design work on the Project (the “Design Defendants”), alleging that ELCo’s additional work had been caused by errors in the Project’s plans and specifications.

The Design Defendants filed a fourth-party complaint sounding in negligence against the manufacturer and supplier of the condenser pump (the “Pump Suppliers”), alleging that they had relied upon inaccurate information provided by the Pump Suppliers. The Pump Suppliers moved to dismiss, arguing that the economic loss rule barred the claims against them.

The Design Defendants argued that the economic loss rule was inapplicable. First, they argued that Section 522 of the Restatement (Second) of Torts, which was adopted by the Pennsylvania Supreme Court in Bilt-Rite Contractors v. The Architectural Studio, 581 Pa. 454 (2005), provides an exception to the economic loss rule where the defendant is in the business of supplying information. Next, they argued that this exception should apply under the circumstances because the Pump Suppliers provided information to the Design Defendants in the course of transacting the sale of condenser pumps and were aware that the Design Defendants would rely on the information in creating the Project’s design documents.

The court rejected the Design Defendants’ argument and dismissed the claims against the Pump Suppliers. The court reasoned that the Pump Suppliers “are not in the business of supplying information”, which is a “necessary predicate to be subject to liability under Section 522.” While the Pump Suppliers did in fact supply information to the Design Defendant as part of the sale of the condenser pump, the “sale of a product is fundamentally different from the sale of information, even if the seller provides information about the product to consummate the sale.” If the supply of information in those circumstances  could subject a seller to Section 522 liability, the court determined that Section 522 would  “eviscerate the economic loss doctrine.” Thus, the court held that the economic loss rule applied to bar the Design Defendants’ claim against the Pump Suppliers. 

Article originally posted November 5, 2015 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group. 

Sixth Circuit Allows Lawsuit Against Indirect Parties Following Consolidated Arbitration

Jones Day recently posted an interesting article about a case allowing a subcontractor to proceed with a lawsuit against design professionals, even though the subcontractor, the design professionals, and others had previously participated in a consolidated arbitration.

Arbitration for One is Not Arbitration for All: Sixth Circuit Allows Lawsuit Against Indirect Parties Following Consolidated Arbitration

Recently, the U.S. Court of Appeals for the Sixth Circuit allowed a subcontractor's lawsuit against design professionals to proceed even though all parties had previously participated in a consolidated arbitration proceeding over the same issues. W.J. O'Neil Co. v. Shepley, Bulfinch, Richardson & Abbott, Inc., No. 12-2320, 2014 U.S. App. LEXIS 16607 (6thCir. Aug. 28, 2014). The design professionals were brought into the arbitration via indemnification claims by the owner, and there was no arbitration agreement between the subcontractor and the design professionals. Given this, the court found that the subcontractor's claims against the designers were not a part of the arbitration and not barred byres judicata. The court applied a technical approach to res judicata based on the principle that a party cannot be forced to arbitrate a claim against another party with whom it has not agreed to arbitrate.

The O'Neil decision is potentially significant for any consolidated construction arbitrations involving additional parties added through indemnification claims. Whether a contractor, project manager, or design professional, O'Neil holds that arbitration is binding and final only as to the parties who agreed to arbitrate the claims that are subject to arbitration. The result highlights the fact that the same claims may have to be relitigated in their entirety in a second proceeding—depriving everyone of a sense of finality. The risk of multiple proceedings and increased costs should be considered in determining how to proceed in a consolidated arbitration proceeding and how to draft arbitration clauses to minimize the risk of repeatedly litigating the same claims.

[...]

Here are links to the article's authors:

Scott W. Cowan

Kent W. Lindsay

Andrew D. Ness

Stephen V. O'Neal

Certificates of Merit are Not Required to Assert Third-Party or Cross-Claims Against a Design Professional in Texas.

In certain states, a plaintiff seeking to file a lawsuit against a design professional (such as an architect or engineer) based on the provision of professional services must include a “certificate of merit” with the initial pleading. In Texas, this certificate must be a sworn affidavit from a professional with the same license as the defendant that is knowledgeable in the defendant’s area of practice. Tex. Civ. Prac. & Rem. Code § 150.002. It must specifically describe the allegedly negligent acts of the defendant, including the factual basis for each claim. Id. Failure to file the certificate of merit with the initial pleading will result in dismissal, possibly with prejudice. Id.

As a practical matter, this requirement has created tactical problems for general contractors and other construction companies whose scope of work includes responsibility for design. If an owner sues a general contractor for damages arising from alleged design problems, the general contractor must evaluate whether to bring in its design professional as a third-party defendant to bear responsibility for the claims. If the certificate-of-merit requirement applies to such claims, then the general contractor is left with the dilemma of deciding whether to provide sworn proof of the design problems (potentially admitting the general contractor’s liability to the owner) or refraining from joining the design professional (and therefore giving up the benefits of seeking indemnity while the owner’s lawsuit is pending).

In Texas, this issue was recently resolved. In Jaster v. Comet II Construction, the Texas Supreme Court held, in a 5-4 plurality opinion, that defendants and third-party defendants who filed third-party claims or cross-claims against design professionals are not required to file certificates of merit accompanying those claims.

The Court’s decision rested on an analysis of the language of Chapter 150 which requires “the plaintiff” in “any action or arbitration proceeding for damages arising out of the provision of professional services by a licensed or registered professional” to file a certificate of merit (an affidavit signed by a design professional specifically stating what was done incorrectly) with the petition. The Court drew a distinction between “plaintiff” and “third-party plaintiff”/ “cross-claimant” by finding that a plaintiff initiates the lawsuit whereas a “third party-plaintiff”/ “cross-claimant” does not. The Court also found support for that distinction when it interpreted “action” to mean the filing of a lawsuit as opposed to “causes of action” which are the individual claims that make up a lawsuit. The action would be filed brought by the plaintiff as well as causes of action whereas only causes of action would be brought by third-party plaintiffs/cross-claimants.

The Court explicitly did not render an opinion as to whether, in multi-plaintiff suits, each plaintiff would be required to submit a certificate of merit, as that issue was not before the Court.

Notably, there is no majority opinion in this case, which means that the case technically cannot be used as binding precedent. However, the similarity of the concurrence written by Justice Willet to the plurality opinion written by Justice Boyd makes it likely that lower courts can and will consider the majority opinion binding. The concurrence takes the same textual approach as the plurality but instead of focusing on the distinction between “plaintiff” and “third-party plaintiff”/ “cross claimant” the plurality honed in on the phrasing of the statute that describe “the plaintiff” and “the complaint.” The concurrence found that the modifier “the” means a singular plaintiff, thus excluding later claimants, and the initial pleading, not subsequent causes of action added to the complaint. Thus, coming to the same conclusion as the plurality, that the first plaintiff filing the original petition must include a certificate of merit, but subsequent third-party plaintiffs and cross-claimants need not.

Jaster v. Comet II Const., Inc., No. 12-0804 (Tex. July 3, 2014).

Thanks to Nick Brooks at Griffith Davison & Shurtleff, P.C. for assistance with preparing this post.