Construction Risk

Prime Contractor that Relied on Subcontract Bid Can Recover Damages Based on Promissory Estoppel

admin — Thu, 26 Apr 2012 15:41:34 +0000

Subcontract bidder is found liable to a prime contractor that relied upon its subcontract bid when preparing the successful prime contract bid. The presumptive measure of damages applicable to promissory estoppel for the general contractor that relies upon a subcontractor’s unfulfilled promise is the difference between the nonperforming subcontractor’s original bid and the cost of the replacement subcontractor’s performance. The dispute arose when subcontract bidder “repudiated its obligations to [prime contractor] and refused to negotiate with [Prime Contractor].” The contractor thereafter contracted with three replacement subcontractors to complete the electrical work for the project and then brought suit against the subcontract bidder on the theories of breach of contract, promissory estoppel, and breach of the covenant of good faith and fair dealing. The trail court granted judgment to the prime contractor under the promissory estoppel cause of action – specifically awarding “expectation” damages which is, according to the Restatement of Contracts, an “attempt to place the plaintiff in the position that he or she would have occupied if the contract had been performed or if the promise had been kept.” The appellate court held that the trial correctly decided that the appropriate measure of damages was the difference between the nonperforming subcontractor’s bid and the bid of the substituted subcontractors that completed the work. Dynalectric Company of Nevada v. Clark & Sullivan Constructors, Inc., 255 P.3d 286 (NV 2011).

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 14, No. 6 (June 2012).

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No-Damages-For-Delay Clause Enforced Even When Owner and Other Contractors Caused Delay

admin — Thu, 26 Apr 2012 15:40:23 +0000

A no-damages-for-delay clause was held to prevent a contractor from recovering damages for delays even where there was evidence that poor planning and administration by the project owner contributed to delay and there was evidence that work by other contractors adversely impacted the schedule. This case involved a suit by a contractor against the Dormitory Authority of New York for over $10 million. The Authority countersued the contractor for $179,000. Following a bench trial, the trial court awarded judgment in favor of the contractor in excess of $10 million, with the judge finding that the Authority breached the contract by failing to fulfill its duty of scheduling and coordinating the work, failing to have an HVAC contractor in place at the beginning of the project, failing to notify the other contractors of a redesign of the HVAC system that delayed the work, failing to remove all books from the library so the contractor could work, and delaying full access to the project site for several months later than promised. The court found uncontemplated delays were incurred by the contractor but that the contractor was also responsible for some of the delay. This judgment was reversed on appeal – with the contractor getting nothing and the Authority being awarded $179,000. The appellate court held that the trial court erred in failing to enforce the no-damages-for-delay clause of the contract. Plato General Construction v. Dormitory Authority of State of New York, 89 A.D. 3d 819, 932 N.Y.S. 2d 504 (Supreme Ct Appellate Div., 2^nd Dept., 2011).

The relevant language of the contract was explained by the court to be the following:

Section 13.01(A) of the “General Conditions” of the contract provided:

“During the progress of the Work, other contractors may be engaged in performing work. The Contractor [Plato] shall coordinate the Contractor’s Work with the work of other contractors in such a manner as the Owner may direct.”

Section 11.02 of the “General Conditions” contained a no-damages-for-delay clause which stated:

“No claims for increased costs, charges, expenses or damages of any kind shall be made by the Contractor against the Owner for any delays or hindrances from any cause whatsoever; provided that the Owner, in the Owner’s discretion, may compensate the Contractor for any said delays by extending the time for completion of the Work as specified in the Contract.”

Section 13.01(D) provided:

“Should the Contractor sustain any damage through any act or omission of any other contractor having a contract with the Owner or through any act or omission of any Subcontractor of said other contractor, the Contractor shall have no claim against the Owner for said damage.”

Section 20.15 provided that Plato could not cancel the contract based upon DASNY’s breach thereof, and waived “any and all rights and remedies to which” Plato “might otherwise be or become entitled to because of any wrongful act or omission” of DASNY, except Plato’s right to damages. Provisions were made in the contract for changes and extra work.

Delays in the project were attributed to a number of causes. Consolidated Edison Company (hereinafter Con Edison) was installing “chiller lines” to run alongside the site; installation was to take 30 days, but was not completed for six months, interfering with demolition and construction for at least some of that period. Although the contract provided that Plato would have “[c]omplete access to the site after June 1999,” the library was not completely vacated until October 5, 1999. The contract for heating, ventilation, and air conditioning (hereinafter HVAC) was not awarded until August 19, 1999, but the selected HVAC contractor, Precision Mechanical, Inc. (hereinafter Precision), was removed from the project on December 6, 1999, by mutual agreement, because it could not meet deadlines or provide a schedule for its portion of the project. Precision was replaced in January 2000 with Roy Kay, Inc. (hereinafter RKI).

RKI had to provide drawings redesigning the duct work system because the original design based upon DASNY’s engineer’s drawings was not sufficient to maintain sufficient airflow through the buildings and was not field-verified as to the height of existing beams. Plato claimed that the plans prepared by DASNY’s architect were also defective for failing to identify all of the asbestos in the walls, resulting in additional asbestos abatement work which delayed demolition.

Completion of the project was delayed by Plato’s failure to complete brickwork in a timely manner, as well as the fact that Plato’s subcontractors would not or could not complete their work, requiring Plato to perform much of the interior finishing work itself. Occupancy of the library was not turned over to Brooklyn College until August 28, 2002, 526 days after the contract completion date of March 20, 2001.

Based on the above description of the contract, the trial court found that the contractor was responsible for some delay due to errors in masonry work, and failure of its subcontractors to complete their tasks on time, and concluded that the Authority was responsible for 66% of the 526-day delay and the contractor was responsible for the remaining 34% delay (179 days). On appeal, however, the appellate court held that regardless of who caused the delay, the contractor was not entitled to delay damages. The court said the purpose of the no-damages-for delay clause is to “extend acceptability to a range of unreasonable delay” by the [project owner] and that “the clause exonerates the defendant for delays by inept administration and poor planning.” Although such a clause will not bar recovery where the delays are caused by bad faith or willful, malicious, or grossly negligent conduct, or uncontemplated delays, or delays so unreasonable that they constitute an intentional abandonment of the contract by the project owner, the court found no evidence of any such causes of delay in this case.

Moreover, the court concluded that the contract specifically provided that the contractor could not sue the owner for damages resulting from acts or omissions of other contractors and that such delays were contemplated by the parties in any event and were not recoverable. Even faulty performance and defaults under contractors’ contracts were deemed by the court to be within the contemplation of the parties. For these and other reasons, the court reversed the trial court decision, and held in favor of the project owner against the contractor.

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What Warranty Notice to Contractor is Required Before Owner Retains Different Contractor to Repair and Replace Defective Work?

admin — Wed, 11 Apr 2012 19:28:35 +0000

Vinyl floors installed by contractor in the operating rooms of a new hospital suffered from bubbles and split seams, and created a rough and uneven surface. For over a year the contractor attempted to correct the problems, and did so for beyond the one year warranty period. When it became apparent to the hospital, however, that the problems were continuing and that the repairs by the contractor were failing to resolve the fundamental problems, the hospital retained another contractor to evaluate the problems and completely remove the vinyl, retreat the underlying concrete surface, and install all new flooring. In response to the hospital’s claim against the original contractor to recover the cost of replacing the floors, the contractor argued that it owed no duty to the hospital because the one year warranty period had expired and also because the hospital failed to give it adequate notice of the intent to hire another contractor to replace the floors without giving the original contractor the opportunity to do that work itself. A jury awarded over $300,000 to the hospital for breach of the express warranty. This was affirmed on appeal, with the court holding the hospital acted reasonably in giving up on the contractor’s ability to remedy the problem and hiring a new contractor for the work without giving the original contractor “written notice” and an opportunity to do the total repair itself. Berkshire Medical Center v. U.W. Marx, Inc., 644 F.3d 71 (1^st Circuit, 2011).

In its appeal, the contractor argued that the floor replacement took care of problems that developed after the one-year warranty period , but that to the extent bubbles and seam separations were within the warranty, the warranty required that the contractor be given the opportunity itself to do the repair work. The contractor also argued that the hospital waived any right to recovery because it failed to provide “written notice” to the contractor as required by the contract. A key question to be resolved on appeal was whether the bubbles and splits should be reviewed as separate events or as a single episode.

At trial, the jury instructions allowed the jury to conclude, if warranted by the facts, that the splits and bubbles were a manifestation of the same underlying problem regardless of whether they occurred before or after the one-year warranty period. It was reasonable, said the appellate court, to permit the jury to decide whether the problems were individual defects or manifestations of larger problems such that they were “symptoms of a disease”. Having concluded the latter, it was also reasonable to allow the jury to decide that adequate notice of the problem was given by the hospital to the contractor within the one-year warranty period and that the work to replace the entire floor after the one-year period was still within the warranty requirements.

As explained by the court, “[Contractor] was placed on notice of it once a succession of bubbles and splits appeared and were called to its attention even if neither side then fully understood the full scope of the problem.” Even if the hospital failed to give the notice, the court concluded that “any such failure was not likely a ‘material breach’ and, in any event, was ‘excused’ when [Contractor] accepted whatever notice was given and started to make the repairs.”

The court acknowledged that the language in the contract required the hospital to give the contractor a chance to remedy the problems itself before the hospital resorted to a replacement contractor. The court explained:

[T]he agreement make[s] clear that the contractor is entitled to be told of and given a chance to remedy the defect by itself; nowhere does the agreement suggest that the contractor’s obligation is to let the owner choose some other contractor to implement some other remedy. Nevertheless, the court concluded: “But, while the contractor gets first crack, there has to be some end point. If the contractor refused to do anything, the owner could do the job itself and sue for the cost; the result cannot be otherwise if, after repeated efforts over an extended period….” We think a reasonable jury could find, even if not compelled to do so, that Berkshire properly invoked the warranty. Two years and a number of spot repair efforts by Marx had not led to any solution; a hospital can hardly be expected to tolerate indefinitely unsafe conditions….

***

As for giving Marx the option of doing the replacement job itself, Berkshire had little reason to think that Marx either could be trusted to do it or would have any interest in doing so. Replacing the entire floor in phases, while the hospital continued to perform surgeries in less blemished segments of the suite, was obviously a drastic and very expensive proposition. Marx never volunteered to do it and even now does not suggest that it would have done so if asked.

For these and other reasons, the court affirmed the judgment against the contractor.

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Statute of Limitations for Breach of Contract Rather Than Negligence Applies to Lawsuit against Engineer That Performed Services Pursuant to Written Contract

admin — Wed, 11 Apr 2012 19:26:22 +0000

A suit against an engineering firm for professional malpractice was timely filed even though the four year statute of limitations period for tort actions had lapsed, where the services were performed pursuant to a written contract, because the six year statute of limitations applicable to breach of contract actions applies to all actions concerning the contracted work regardless of whether the alleged breach stems from the express terms of the agreement or duties that are implied in the agreement as a matter of law. The Supreme Court of Georgia considered two sections of the state civil code addressing time limits for filing actions. One section applicable to unwritten agreements stated “All actions … upon any implied promise or undertaking shall be brought within four years after the right of action accrues.” The other section applicable to written agreements stated “All actions upon simple contracts in writing shall be brought within six years after the same become due and payable.” The issue in the case was which code section was applicable to the suit against the engineer since the underlying basis for the breach of contract claim was alleged professional malpractice in the performance of services concerning an allegedly failed design of a concrete platform around a facility to control drainage. An earlier Court of Appeals decision in this matter concluded that because the issue “calls into question the conduct of professionals in their area of expertise, it [was] a claim for professional malpractice, and the four-year statute of limitation applied.” In this final Supreme Court decision, however, that judgment was reversed, and the court held that where the services are performed pursuant to a written contract, the longer statute of limitation applicable to breach of contract actions must be applied. In Newell Recycling of Atlanta v. Jordan Jones and Goulding, 703 S.E. 2d 323 (Supreme Court, Georgia 2010).

Comment: This decision is included in the newsletter as a counterpoint to casenote in last month’s ConstructionRisk.com Report discussing a similar case decided in another state, which reached a different result. The cases show that the interpretation and application of the statutes of limitations vary. It can be tricky to determine which statute applies when it comes to claims for breach of contract where the breach was due to negligence in the performance of professional services.

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Indemnity Obligation Not Owed to Client for Claims Partially Caused by Client’s Negligence. Duty to Defend Only Applies to Claims Directly Attributable to Indemnitor’s Actions within Scope of Work

admin — Wed, 11 Apr 2012 19:24:38 +0000

Where an indemnity clause did not expressly state that the subcontractor was required to indemnify its client, the prime contractor, for all damages including those caused partially by the client’s own negligence, the subcontractor’s indemnification obligations were limited to those damages determined by a jury to have been caused by the subcontractor’s own negligence only. Although the clause stated that the subcontractor was required to indemnify for all claims “save and except claims or litigation arising through the sole negligence” of the prime contractor, this was not deemed sufficient by the court to constitute an express agreement to indemnify for damages caused by the prime contractor’s own negligence – even if caused only in part by the prime contractor. In reversing the trial court’s award to the prime contractor of almost $1 million in defense attorneys fees under the duty to defend section of the indemnification clause, the appellate court held the court erred in awarding the fees incurred in defending against the third party claims without first apportioning those fees incurred in defending claims “directly attributable to [subcontractor’s] scope of work, if any.” Reyburn Lawn & Landscape Designers v. Plaster Development Company, 155, P.3d 268 (Nevada, 2011).

The contract between the contractor, Plaster Corp. and the subcontractor, Reyburn Corp., contained the following indemnification clause:

INDEMNITY: … Subcontractor agrees to save, indemnify and keep harmless Contractor against any and all liability, claims, judgments or demands, including demands arising from injuries or death of persons (Subcontractor’s employees included) and damage to property, arising directly or indirectly out of the obligation herein undertaken or out of the obligations conducted by Subcontractor, save and except claims or litigation arising through the sole negligence or sole willful misconduct of Contractor, and will make good to and reimburse Contractor of any expenditures, including reasonable attorney’s fees. If requested by Contractor, Subcontractor will defend any such suits at the sole cost and expense of Subcontractor.

This case began when home owners filed a class-action complaint against the developer/general contractor alleging that their perimeter retaining walls and sidewalls were defective as a result of improper design, preparation, materials, and construction. Over a year and half after the suit was filed, the contractor notified the subcontractor and demanded a defense of the claims pursuant to the indemnification clause. The subcontractor didn’t take over the defense as demanded and the contractor brought a third-party claim against the subcontractor for indemnity and/or contribution, and also asserted a breach of contract claim against the Sub for failing to defend.

In resolving this appeal, the court began by explaining that strict interpretation is applied to indemnification clauses. “When the duty to indemnify arises from contractual language, it generally is not subject to equitable considerations; rather, it is enforced in accordance with the terms of the contracting parties’ agreement.” In this regard, the court cited a recent decision in which it stated:

We adopted the rule that, while the parties are free to contractually agree to indemnify another for its own negligence, “an express or explicit reference to the indemnitee’s own negligence is required.” Therefore, “contracts purporting to indemnify a party against its own negligence will only be enforced if they clearly express such an intent and a general provision indemnifying the indemnitee ‘against any and all claims,’ standing alone, is not sufficient.”

The holding concerning indemnification was stated as follows:

Here, Plaster argues that the agreement’s scope was intended to indemnify Plaster for its own negligence so long as Plaster was contributively, not solely, negligent. Plaster explains that because the agreement expressly excludes indemnification for its sole negligence, the parties intended that Plaster would be indemnified for its contributory negligence. Therefore, according to Plaster, once it demonstrated that it was not solely negligent in causing the defects, the indemnification agreement was triggered. The district court agreed and determined that Plaster only needed to demonstrate that it was not solely negligent in order to invoke the indemnity clause and thus granted Plaster’s motion for judgment as a matter of law. We disagree and conclude that because the indemnity clause is not explicit about whether Reyburn is required to indemnify Plaster even if Reyburn is not negligent, and as to whether the scope of the agreement includes indemnity for Plaster’s contributory negligence, the clause necessarily covers only Reyburn’s negligence.

According to the indemnity clause at issue here, Plaster must be indemnified for “any and all” liabilities that “aris[e] directly or indirectly out of” Reyburn’s obligations under the subcontract. Consistent with our holding in Brown, we determine that this phrasing does not unequivocally condition Reyburn’s duty to indemnify Plaster upon anything other than Reyburn’s actions, and it does not explicitly state that Reyburn has to indemnify Plaster for Plaster’s own negligence. Because the clause at issue here is not explicit, and because we must strictly construe the indemnity clause’s language, (citation omitted), we conclude that there must be a showing of negligence on Reyburn’s part prior to triggering Reyburn’s duty to indemnify Plaster. Otherwise, Reyburn’s duty to indemnify could arise from another subcontractor’s obligation or scope of work, which should trigger that subcontractor’s duty to indemnify, if any, not Reyburn’s. Moreover, the indemnity clause does not contain a clear and unequivocal statement of the parties’ intent for Reyburn to indemnify Plaster for Plaster’s own negligence. … Thus, we conclude that because the indemnity clause does not expressly or explicitly state that Reyburn would indemnify Plaster for Plaster’s contributory negligence, Reyburn is required to indemnify Plaster only for liability or damages that can be attributed to Reyburn’s negligence.

In its holding addressing whether the subcontractor had a duty to defend the indemnitee, the court began by acknowledging that the duty to defend is broader than the obligation to indemnify in that “[t]he duty to defend is broader than the duty to indemnify” because it covers not just claims under which the indemnitor is liable, but also claims under which the indemnitor could be found liable. The court concluded:

We now hold that unless specifically otherwise stated in the indemnity clause, an indemnitor’s duty to defend an indemnitee is limited to those claims directly attributed to the indemnitor’s scope of work and does not include defending against claims arising from the negligence of other subcontractors or the indemnitee’s own negligence….

To invoke the duty to defend, the plaintiffs’ complaint must have sufficiently alleged negligence on the part of Reyburn, or their claims must have concerned Reyburn’s scope of work for the project…. We conclude that the indemnity clause in this case does not unequivocally or explicitly state that Reyburn would be required to indemnify Plaster, even if Reyburn was not negligent, and does not clearly require indemnification for Plaster’s contributory negligence. Therefore, the indemnity clause must be interpreted against Plaster, meaning that Plaster must prove negligence on the part of Reyburn before the clause is triggered and that Plaster may be indemnified only for damages associated with Reyburn’s negligence….

Because Reyburn’s duty to defend Plaster is limited to those claims directly attributed to Reyburn’s scope of work and does not include defending against the negligence of other subcontractors or Plaster’s own negligence, we conclude that whether the homeowners’ complaint sufficiently alleged negligence on the part of Reyburn, triggering its duty to defend, was also a material issue of fact for the jury to decide. Thus, we conclude that the district court erred in granting judgment as a matter of law on Plaster’s breach of contract cause of action as well.

For these reasons, the court reversed the trial court judgment against the subcontractor, and concluded that the matter must be decided by a jury as a question of fact rather than as a matter of law.

Comment: The Nevada court in this case cited favorably the California decision of Crawford v.Weathershield, and stated that it was following the principles of that decision with regard to determining whether the subcontractor had a duty to defend the contractor.

In crafting indemnification clauses, the case demonstrates the importance of choosing the language carefully to avoid any uncertainty as to what is expected of the indemnitor.

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No Common law Indemnification Duty Owed by General Contractor to Project Owner for Subcontractor Employee Injuries Where GC Did Not Control and Supervise the Subcontractor’s Work

admin — Wed, 11 Apr 2012 19:21:39 +0000

Where a general contractor performing a build-out for a store tenant (not the project owner) retained the services of a subcontractor for certain work and an employee of the subcontractor was injured by falling from a ladder, the project owner sued the contractor for common law indemnification and contractual indemnification for damages for which the Owner had been found vicariously liable under the state’s statutory law. Although the general contractor had not itself been found to be directly liable or vicariously liable for the subcontractor employee injuries, the property owners argued they were entitled to common law indemnification. They asserted the general contractor contractually assumed sole responsibility and control of the entire project, and had the contractual authority to (1) direct, supervise and control the means and methods of plaintiff’s work, and (2) institute safety precautions to protect the workers. The Owner asked the Court to adopt a general rule that a party may be liable for common-law indemnification upon a showing that the party (i.e., the proposed indemnitor) either was actually negligent or had the authority to direct, control or supervise the injury-producing work, even if it did not exercise that authority. What the Owner asked to court to do was equate a party that merely has authority to direct, control or supervise the work with a party who is actively at fault in bringing about the injury suffered by the plaintiff. The appellate court held that in the absence of proof of any negligence or actual supervision of a general contractor, the mere authority the general contractor has to supervise the work and implement safety procedures is not a sufficient basis to require common law indemnification of the project owner. McCarthy v. Turner Construction, Inc., 953 N.E. 2d 794, (New York, 2011).

In rejecting the project owner’s argument the court held:

A party cannot obtain common-law indemnification unless it has been held to be vicariously liable without proof of any negligence or actual supervision on its own part. But a party’s (e.g., a general contractor’s) authority to supervise the work and implement safety procedures is not alone a sufficient basis for requiring common-law indemnification. Liability for indemnification may only be imposed against those parties (i.e., indemnitors) who exercise actual supervision (Citation omitted). Thus, if a party with contractual authority to direct and supervise the work at a job site never exercises that authority because it subcontracted its contractual duties to an entity that actually directed and supervised the work, a common-law indemnification claim will not lie against that party on the basis of its contractual authority alone.

Here, Gallin and nonparty Ann Taylor, Inc., not the property owners, entered an agreement under which Gallin was Ann Taylor, Inc.’s general contractor/construction manager. Further, Gallin engaged a subcontractor (Linear), which, in turn, engaged its own subcontractor (Samuels), the entity which employed plaintiff. Although the agreement, inter alia, required Gallin to supervise and direct the work at the premises owned by the property owners, this fact alone was insufficient to establish that Gallin actually supervised or directed the injured plaintiff’s work, especially in light of the fact that Gallin contracted the work [out to a subcontractor,] that resulted in plaintiff’s injury, and Supreme Court’s findings that Gallin (1) had no supervisory authority over Samuels’s (plaintiff’s employer’s) work, (2) would not have directed plaintiff as to how to perform his work, and (3) did not provide any tools or ladders to the subcontractors who worked at the site.

Although the GC interacted with the subcontractor and the sub-subcontractor firm whose employee was injured, the GC had no supervisory authority over the sub-subcontractor’s work and it provided no tools or ladders to subcontractors that worked at the site.

No Contractual Indemnification

Citing case law that stands for the proposition that through a contractual indemnification clause, an owner who is only vicariously liable by statute may seek full indemnification from the party that is wholly responsible for the accident, the court found in this case that there was no direct contractual relationship between the project owner the general contractor. The contract was in fact between the contractor and a store tenant of the project owner. In addition, the owner had no third party beneficiary rights under the contract between the contractor and the store tenant. For these reasons, the contractual indemnification was dismissed on summary judgment by the trial court and that dismissal was affirmed on appeal.

Common law Indemnification

Even in the absence of contractual indemnification, a contractor could have an indemnification obligation that is created by common law which “imposes obligations upon those actively at fault in bringing about the injury.” Reviewing decisions by various New York appellate division courts, the Court of Appeals observed that some courts had found a common law duty to indemnify based solely on the fact that a party had contractual authority to supervise the work at a site, whereas other courts limited the duty to those who had “actually supervised and controlled the injury-producing work.” After reviewing these cases, the court concluded that a preponderance of case law reveals the courts “have usually, consistent with the equitable principles of common-law indemnification and this Court’s teachings, imposed the obligation to indemnify on parties who were actively at fault in bringing about the injury.”

For these reasons, the court held that because the general contractor in this case “did not actually supervise and/or direct the injured plaintiff’s work, [Contractor] is not required to indemnify the property owners under the common law.”

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Default Termination of Contractor Defective for Failure of Owner to Provide Architect’s Certificate of Good Cause for Termination

admin — Wed, 28 Mar 2012 16:45:01 +0000

Where City terminated its contractor for cause, the contractor moved for summary judgment arguing that the termination was defective for lack of an architect’s certificate of good cause for termination as required by the applicable AIA A201 contract document. On the project, the city and contractor each accused the other of causing delay. The city issued a Notice of Termination, stating that its letter constituted a seven-day written notice of termination of the Contract, but it did not provide an architect’s certificate. An email to the city from an individual at the architectural firm called the “project coordinator” (who was not a licensed architect) stating that the contractor “continues to multiply the challenges of completion of the project” and asking the question, “Is this the point where we agree to call an end to this situation?” was found not to constitute an architect’s certificate of cause. The court concluded: “An architect’s certification not having been rendered, a condition precedent [to termination] failed…” Summary judgment was therefore granted and affirmed. The surety also filed for summary judgment, arguing that written notice of the termination was not given to it simultaneously and this prejudiced its ability to mitigate its loss. Town of Plainfield v. Paden Engineering Co., Inc., 943 N.E.2d 904 (2011).

Surety Discussion

In affirming summary judgment for the surety, the court held that the surety was not required to show actual prejudice arising from the city’s failure to give the surety timely notice of intent to default terminate and permit the surety to choose one of the five options available to it upon such a notice. The court made a point of distinguishing surety contracts and insurance policies and the differences in treatment of sureties and insurance companies, and explained that “A surety’s liability must be measured by the strict terms of his contract.” “Lack of timely notice was presumptively prejudicial.” “We may not rewrite clear and unambiguous language of a contract to alter the obligations of parties…. As such, we will not extend the coverage of the performance bond beyond that for which the parties have contracted. Nor will we re-allocate the opportunity for mitigation of damages bargained for by the Sureties and agreed to by [the city]. In short, [the city] is bound by the terms of the contract into which it entered and the Sureties are liable for no more than the contract provisions would dictate.”

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Economic Loss Doctrine Applied in Guam to Bar Design-Build Contractor’s Negligence Claim against its Design Professional Subcontractor for Purely Economic Losses

admin — Wed, 28 Mar 2012 16:43:44 +0000

Design-Build contractor (Maeda Pacific Corp) engaged a design firm to prepare a cost estimate that it used in preparing a bid to the U.S. Naval Facilities Engineering Command (“Navy”) for a water supply system at the Andersen Air Force Base in Guam. After being awarded the design-build contract, the contractor engaged the design firm to provide design engineering for the project as well as construction quality control management. The design-builder awarded a design-build subcontract to another contractor (“Smithbridge”) to design and construct a water tank for the facility, and that firm in turn awarded a design subcontract to another design firm for structural engineering services for the tank. When the tank was substantially complete, the tank roof collapsed during a test of the water pumping system. A forensic engineer later determined the cause of the collapse to be a gross overload due to the absence of air vents that had not been designed for the tank. Maeda sued the two design firms, alleging breach of contract and negligence, claiming that it “seeks only damages associated with repairing and replacing” physical damage to its work. Both designers moved for summary judgment, arguing that the cost of repairing the damage caused by the collapse are “economic losses” that are not recoverable in a negligence cause of action. Opposing the motion, the design-builder argued that the rule does not apply to parties that lack a contractual relationship, or when there is a contractual relationship but the law imposes a duty independent of the contract. After doing a nice explanation of the history and purpose of the economic loss doctrine, the Supreme Court of Guam in the case of Maeda Pacific Corp. v. GMP Hawaii, Inc., 2011 WL 5825988 (Guam 2011), held that “in the context of commercial construction litigation, where a party in privity of contract with a design firm is seeking to recover economic damages, and no personal injury or damage to property other than the subject of the contract is alleged, such a party is limited to contractual remedies, and a negligence action may not be maintained.” In addition, the court held that the doctrine also barred an action against the designer with whom the design-builder was not in privity of contract.

The court explained its holding as follows:

We hold that the economic loss doctrine does indeed apply in Guam. We further hold that in the context of commercial construction litigation, where a party in privity of contract with a design professional is seeking to recover for economic loss damages, and no personal injury or damage to property other than the subject of the contract is alleged, such a party is limited to contractual remedies, and a negligence action may not be maintained. We reject the argument that a different standard of care should be applied to design professionals beyond what is applied to other parties. Finally, we hold that where a party reasonably could have, by contracts with the defendant or through an intermediary, protected itself from the loss, a lack of privity will not render the economic loss doctrine inapplicable.

Comment: The court does an excellent job of describing the economic loss doctrine and then explaining why it should appropriately be applied to claims against design firms for purely economic losses regardless of whether the claim is by someone in contract with the designer of someone with no contractual relationship.

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Contractor Owed Liquidated Damages Where it Failed to Timely Seek Change Order for Owner Caused Delay

admin — Wed, 28 Mar 2012 16:42:23 +0000

Where a general contractor failed to follow contract procedures to submit a time extension request, a city was entitled to collect liquidated damages from the contractor despite the fact that the city caused the delay. Since the contractor failed to follow the procedures to claim an extension of time, the trial court would not even consider the evidence of whether the late completion was caused by actions of the city. The appellate court affirmed that parties are permitted to specify by contract that a contractor intending to assert that delay was caused by the owner so as to avoid the effect of the contractor’s failure to complete its work on schedule must give written notice of its intention to assert such a claim within a reasonable time. The court explained that “To alter the contract by time—regardless of reason—the contract required the party seeking the alteration to obtain a change order either by mutual agreement or by submitting a claim to the engineer with a request for a formal decision in writing.” Since neither procedure was used, “the time was not extended, regardless of which party was to blame for the late completion.” The contractor argued that liquidated damages could not be awarded for any part of the delay caused by the city even if the contractor failed to follow the contract procedures for obtaining a time extension. In rejecting that argument, the appellate court in Greg Opinski Constr. v. City of Oakdale, 132 Cal.Rptr.3d 170 (2011), stated:

The court was correct to rely on [contractor’s] failure and enforce the terms of the contract. It makes no difference whether [Contractor’s] timely performance was possible or impossible under these circumstances. The purpose of contract provisions of the type authorized by [civil code] is to allocate to the contractor the risk of delay costs—even for delays beyond the contractor’s control—unless the contractor follows the required procedures for notifying the owner of its intent to claim a right to an extension.

Comment: The holding of this case should be a powerful reminder that contract terms establishing procedural conditions for changes are generally enforced by courts even when the results may seem unfair – such as imposing liquidated damages when the delays were not necessarily caused by the contractor. When a schedule is starting to slip because of conditions or changes beyond the control of the contractor, a contractor is well advised to promptly advise the owner in writing of the reasons for the schedule slippage and to follow the contractual requirements for promptly submitting a written request for a change order seeking a time extension.

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Hirer of an Independent Contractor Implicitly Delegates Site Safety Responsibility Other than for Its Own Employees

admin — Wed, 28 Mar 2012 16:41:12 +0000

The general rule that that employees of an independent contractor that are injured in the workplace cannot sue the party that hired the contractor to do the work applies even when the party that hired the contractor failed to comply with workplace safety requirements that were statutorily imposed by CAL-OSHA. US Airways hired an independent contractor to maintain and repair its luggage conveyor at the San Francisco International Airport. It did not direct the work and did not have its own employees participate in the work. The conveyor lacked certain safety guards required by applicable regulations and, while inspecting the conveyor, one of the contractor’s workers got his arm caught in its moving parts. After workers’ compensation insurance of the contractor paid benefits for the injury, the insurer sued US Airways, claiming the airline caused the injury. The trial court granted summary judgment because it found no evidence that the airline affirmatively attributed to the accident. This was reversed by the intermediate court of appeal — holding that under CAL-OSHA, the airline had a nondelegable duty to ensure that the conveyor had safety guards, and that it was a question of fact to be determined by a jury whether the failure to perform that duty “affirmatively contributed” to the injury. But this was reversed by the California Supreme Court which affirmed the summary judgment for the airline on the basis that the airline can indeed delegate to the contractor its tort law duty, if any, that it had to ensure workplace safety for the contractor’s employees. Seabright Insurance Company v. US Airways, Inc., 258 P.3d 737 (CAL 2011).

In reaching its decision here, the Supreme Court of California did a thorough review of case precedent from various courts of appeal of California as well as previous California Supreme Court decisions, beginning with the case of Privette v. Superior Court, concerning delegation of responsibility to an independent contractor. In particular, the court discussed the interplay of workers’ compensation and the limitation upon suits that can be brought by employees against their employers, and how the same principles can apply when bringing suit against the one that hired the independent contractor that employed the work since “the hirer of an independent contractor generally has … ‘no right of control as to the mode of doing the work contracted for….’ ”.

The court explained that in a previous holding (Hooker v. Department of Transportation), it held that the hirer of the independent contractor cannot be found liable “merely because [it] retained the ability to exercise control over safety at the worksite,” but that it is fair to make the hirer liable if it “exercised the control that was retained in a manner that affirmatively contributed to the injury of the contractor’s employee.” The court also cited a decision in the case of Kinsman v. Unocal Corp., where it held that if the injured party is the contractor’s employee, and therefore entitled to workers’ compensation benefits, policy concerns regarding allowing the hirer to escape liability for bystanders who are injured by the contractor’s negligence do not apply. Thus under the Kinsman decision, “a hirer is presumed to delegate to an independent contractor the duty to provide the contractor’s employees with a safe working environment.”

The outcome of this case is so important, and the reasoning of the court is so well presented that rather than attempting to paraphrase or explain it, it is perhaps best to quote from the decision at length as follows:

The Privette line of decisions discussed above establishes that an independent contractor’s hirer presumptively delegates to that contractor its tort law duty to provide a safe workplace for the contractor’s employees. At issue here is whether the hirer can be liable to the contractor’s employees for workplace injuries allegedly resulting from the hirer’s failure to comply with safety requirements of Cal–OSHA and its regulations. That raises the question whether the tort law duty, if any, to comply with Cal–OSHA and its regulations for the benefit of an independent contractor’s employees is nondelegable, an issue we discuss below.

Before hiring independent contractor Aubry, defendant US Airways owed its own employees a duty to provide a safe workplace. We do not suggest that defendant could delegate that preexisting duty to Aubry (such that defendant could avoid liability if the conveyor had injured defendant’s own employee). But under the definition of “employer” that applies to California’s workplace safety laws (see § 6304), the employees of an independent contractor like Aubry are not considered to be the hirer’s own employees, and the issue here is whether defendant US Airways implicitly delegated to contractor Aubry the tort law duty, if any, that it had to ensure workplace safety for Aubry’s employees. The latter duty did not predate defendant’s contract with Aubry; rather, it arose out of the contract. Any tort law duty US Airways owed to Aubry’s employees only existed because of the work (maintenance and repair of the conveyor) that Aubry was performing for the airline, and therefore it did not fall within the nondelegable duties doctrine.

The policy favoring delegation in this case is bolstered by the same factors we considered persuasive in Privette (citation omitted) [which],noted that the cost of workers’ compensation insurance for an independent contractor’s employees is presumably included in the contract price the hirer pays to the contractor, and therefore the hirer indirectly pays for that insurance. Privette further noted that workers’ compensation guarantees compensation for injured workers, “spreads the risk created by the performance of dangerous work to those who … benefit from such work,” and “encourages industrial safety.” (citation omitted). Also, in light of the limitation that the workers’ compensation law places on the independent contractor’s liability (shielding the latter from tort liability), it would be unfair to permit the injured employee to obtain full tort damages from the hirer of the independent contractor—damages that would be unavailable to employees who did not happen to work for a hired contractor. This inequity would be even greater when, as is true here, the independent contractor had sole control over the means of performing the work. (Citation omitted) In sum, we see no reason to limit our holding in Privette simply because the tort law duty, if any, that the hirer owes happens to be one based on a statute or regulation.

Accordingly, plaintiffs here cannot recover in tort from defendant US Airways on a theory that employee Verdon’s workplace injury resulted from defendant’s breach of what plaintiffs describe as a nondelegable duty under Cal–OSHA regulations to provide safety guards on the conveyor.

As determined by the court, the key to a hirer of an independent contractor successfully delegating worksite safety responsibility to an independent contractor (including duties imposed by the hirer by requirements such as state OSHA regulations), is that the hirer does not exercise control over the independent contractor’s work.

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