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. 15, No. 5 (May 2013).

Copyright 2013, ConstructionRisk, LLC               

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[Author’s comment]   It’s good to see the court’s candid observation about the negative impact on housing and the willingness of design professionals to undertake residential construction projects.  Particularly with regard to condominium projects, it may seem like the almost-inevitable claims by the condo association and unit purchasers would make these projects too risky for designers and their insurance carriers.  I sometimes compare it to insuring a burning building.  How do you price professional services when you know there is nothing you can do by contract to limit who can file a claim, when a claim can be filed, or to otherwise limit liability.  And how can an insurance carrier underwrite insurance for services on these projects when it is almost a sure thing that claims will be filed against the insured design professional?   Risk Management 101 admonishes us to wisely select our clients and projects, and then to appropriately allocate and reduce risk.  Good luck with that when choosing to design condominium projects in California.

Skidmore, Owings & Merrill LLP (SOM) and HKS Architects provided architectural and engineering services, as well as construction administration and construction management for the Beacon Residential Condominiums.   The homeowners’ association that manages the Project sued them and others for alleged construction defects.  The theory of the association complaint was that the design professionals had a duty of care to the association and future residents when designing the project and that their professional negligence caused the project to violate residential construction standards established in state Senate Bill No. 800.

One of the key defects alleged is “solar heat gain,” whereby the plaintiffs alleged that “the condominium units are rendered uninhabitable, unhealthy, and unsafe during certain periods due to excessively high temperatures.”  The plaintiff further avers that the solar heat gain resulted from the designer’s approval “of the substitution of less expensive, and ultimately nonfunctional, windows,” as well as a design lacking adequate ventilation within the residential units.

The trial court dismissed the complaint against the designers because it found they owed no duty of care to the association or its members and could therefore not be liable.  The court concluded that that the association had to show that the designers had “control” in the construction process and assumed a role beyond that of providing design recommendations to the owner.  No allegations of such control were made.  Moreover, the trial court found that “Even if [the designers] initiated the substitutions, changes, and other elements of design that [the association] alleges to be the caused of serious defects, so long as the final decision rested with the owner, there is no duty by [the designers] to the future condominum owners….”  [Author’s Note:  The reasoning of the trial court is consistent with court decisions in many (probably the majority) of states. The subsequent reasoning of the appellate court is not followed in as many states].

In reversing the trial court, the California Court of Appeal applied a series of balancing factors for rendering a determination of whether in a specific case the defendant will be held liable to a third person with whom it is not in privity of contract.  As explained by the court, the factors to be considered include “the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant’s conduct and the injury suffered, the moral blame attached to the defendant’s conduct, and the policy of preventing future harm.” (Citing Biakanja v. Irving, 49 Cal.2d 647.)

In a devastating rejection of the parties’ contractual intent with regard to avoiding any responsibly to third party beneficiaries, the court stated the following:

“In this case, Respondents attempted to limit their liability by providing in the HKS contract with the developer that: ‘Except as set forth in this section 12.1, or as expressly agreed in writing by Architect and Owner, no person other than the parties or their successors and assigns shall be a third-party beneficiary of the obligation contained in the Agreement or have the right to enforce any of its provisions. It is understood that (i) Owner reserves the right to sell portions of the Project to one or more condominium associations or purchasers during or after the conclusion of the Project; (ii) Architect is solely responsible to Owner and not to such condominium associations or purchasers for performance or Architect’s obligations under this Agreement; and (iii) no such condominium association or purchaser shall be a third-party beneficiary or third-party obligee with respect to the Architect’s obligations under this Agreement.’ This intended limitation, however, only serves to emphasize the fact that Respondents were more than well aware that future homeowners would necessarily be affected by the work that they performed. And, in any event, liability to foreseeable residential purchasers is determined by the scope of the duty of professional care, not whether those purchasers are, or are not, third party beneficiaries under contract. While a duty of care arising from contract may perhaps be contractually limited, a duty of care imposed by law cannot simply be disclaimed.”

Having found the contract language to be ineffectual at eliminating third party rights, the court reviewed the Biakanja factors described above and found nothing in those factors that would preclude imposition of liability upon the design professionals of residential construction for alleged negligence in the rendition of professional services.

Next, the court said that a purchaser of residential housing “is certainly more fairly characterized as a ‘consumer’ and residential housing as a ‘product,’ and numerous cases have done so.”  As a result, said the court, “While the individuals and entities participating in the development process may have the ability to privately order allocation of liability among themselves by contract or through structuring of insurance overage, the buyer does not.”

The court concluded that even if the design professionals had not been found subject to liability under common law, they would nevertheless be subject to suit by the homeowners pursuant to statutory law.  As explained by the court,

“The plain language of Senate Bill No. 800 provides that a design professional who “as the result of a negligent act or omission” causes, in whole or in part, a violation of the standards set forth in section 896 for residential housing may be liable to the ultimate purchasers for damages. The legislative history confirms the legislature’s intent. In construing a statute, our general goal must always be to effectuate the legislative intent. To the extent that a Biakanja/ Bily policy analysis is not otherwise dispositive of the scope of duty owed by design professionals to a homeowner/buyer, Senate Bill No. 800 is.”

Based on this reasoning, the court reversed the trial court.  The case will now proceed to trial for a jury to determine whether the design professionals breached the duty of care that the appellate court concluded they owed to the plaintiffs.

Comment:  This case is just one more example of the difficult legal climate in California for design professionals.   When contrasted with decisions in other states, we see how important a role legislative and judicial philosophy plays in the outcome.

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. 15, No. 5 (May 2013).

Copyright 2013, ConstructionRisk, LLC               

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The facts considered by the court were as follows:  The prime contractor repaired the damaged pipeline and sought reimbursement from Travelers Insurance, the sub’s carrier who had issued an additional insured endorsement for the benefit of the prime.  The endorsement named the prime as an additional insured for liability “caused by acts or omissions” of the named insured, subcontractor.  Travelers denied coverage.  The prime then sued the Sub.

A jury found the Sub was not negligent and awarded the prime zero damages.  Following the jury trial the district court granted summary judgment in favor of Travelers and the Sub on breach of contract claims, concluding that Travelers and the Sub had no obligation to reimburse the Prime for damages not caused by negligence of the Sub.   This was reversed by an intermediate appellate court but reinstated by the Minnesota Supreme Court.

On the project in question, the project owner hired Frontier Pipeline, Inc as its general contractor involving installation of an underground sewer pipeline.  Frontier subcontracted with Engineering and Construction Innovations (ECI) to install a lift station and force main access structures.  ECI further subcontracted with Bolduc (referred to throughout his article as “Sub” or “Subcontractor”) to build cofferdams over the pipeline at six locations by driving metal sheeting into the ground to act as walls for the pit during excavation and construction.  Per the subcontract, the Sub was to drive the sheets “per ECI location.”  Consequently, the Sub was not responsible for determining where to drive the cofferdams.

The Sub’s indemnity clause stated it would defend and indemnify ECI against claims and damages “caused or alleged to have been caused by any act or omission of Sub….” The Sub’s general liability insurance policy from Travelers was endorsed to make ECI an additional insured “If, and only to the extent that, the injury or damage is caused by acts or omissions of you or your subcontractor in the performance of ‘your work’” to which the “written contract requiring insurance” applies.  The person or organization does not qualify as an additional insured with respect to the independent acts or omission of such person or organization.

The clause of the contract provided as follows:

 “[Bolduc] agrees to protect, indemnify, defend, and hold harmless ECI and Owner, to the fullest extent permitted by law and to the extent of the insurance requirements below, from and against (a) all claims, causes of action, liabilities, obligations, demands, costs, and expenses arising out of injury to any persons or damages to property caused or alleged to have been caused by any act or omission of [Bolduc], its agents, employees or invitees, and (b) all damage, judgments, expenses, and attorney’s fees caused by any act or omission of [Bolduc] or anyone who performs work or services in the prosecution of the Subcontract. [Bolduc] shall defend any and all suits brought against ECI or Owner on account of any such liability or claims of liability. [Bolduc] agrees to procure and carry until the completion of the Subcontract, worker’s compensation and such other insurance that specifically covers the indemnity obligations under this paragraph, from an insurance carrier which ECI finds financially sound and acceptable, and to name ECI as an additional insured on said policies.

 ….

 [Bolduc] agrees to obtain, maintain and pay for such insurance coverage and endorsements as will insure the indemnity provisions and coverage limits above and to furnish ECI certificates of insurance evidencing the aforementioned coverage.”

 No Indemnification Duty Owed by Subcontractor

The Minnesota anti-indemnity statute provides:

 “An indemnification agreement contained in, or executed in connection with, a building and construction contract is unenforceable except to the extent that: (1) the underlying injury or damage is attributable to the negligent or otherwise wrongful act or omission, including breach of a specific contractual duty, of the promisor or the promisor’s independent contractors, agents, employees, or delegatees[.]”

  The court found that “the damage to the pipeline was not due to Bolduc’s negligence, wrongful act, or breach of a specific contractual duty”.  The Prime argued that even if the Sub was not negligent, the indemnity clause was not limited to negligent acts, errors and omissions but was broad enough to encompass all acts of the Sub.  It argued that in hitting the pipeline, the Sub breached its obligation to perform its work “efficiently, properly and promptly,” and by failing to pay for the repairs, breached its agreement to bear “complete responsibility’ for its work.

The court found that the Prime presented no evidence that the Sub breached the subcontract in performing its work despite having hit the pipeline with the sheeting while installing the sheets.  The jury’s finding of no negligence constituted a finding that the Sub was not in breach of its contract.  According to the court, “the negligence and breach of contract for performance of work claims both arose out of the same duty; therefore, the jury’s determination on the negligence issue allowed the district court to properly determine that there was no evidence to find Bolduc in breach of its performance of work obligations.”

Because the court found the Sub was “not at fault for the pipeline damage” any obligation to indemnify the Prime that was not accompanied by a coextensive insurance agreement would violate the anti-indemnity statue.

Additional Insured Analysis

The language of the additional insured endorsement provided that ECI is an addition insured under the policy as follows:

“a) Only with respect to liability for ‘bodily injury’, ‘property damage’ or ‘personal injury’; and

 b) If, and only to the extent that, the injury or damage is caused by acts or omissions of you or your subcontractor in the performance of ‘your work’ to which the ‘written contract requiring insurance’ applies. The person or organization does not qualify as an additional insured with respect to the independent acts or omissions of [ECI].”

 In reviewing this additional insured language, the state Supreme Court stated that the language “caused by the acts or omissions of [Bolduc]” provided coverage to ECI as an additional insured “only in instances of ECI’s vicarious liability for Bolduc’s negligent acts or omissions.”   Therefore, unless ECI had liability for property damage it would not be entitled to coverage.  And the court found it had no such vicarious liability, since a jury had found the Subcontractor itself not negligent.  Consequently, Travelers owed ECI no duty under the policy.  Even if the indemnity agreement were deemed to have created contractual liability, the court held that the policy would not cover it since the contractual liability exclusion of the policy bars coverage arising out of indemnity clauses except to the extent of tort liability assumed by the indemnitor.

The court reasoned that tort liability is defined under the policy as “a liability that would be imposed by law in the absence of any contract or agreement” and, therefore, “damages resulting from other contractual liabilities –including ECI’s possible assumption of liability in its contract with Frontier for Bolduc’s breach of the subcontract—are plainly excluded from coverage under the policy.”

Comment:  The reasoning of the court in this decision, particularly with regard to equating “acts and omissions” with “negligence” is not necessarily followed in other jurisdictions.  The court itself acknowledged that other courts have found additional insured provisions similar to the one here to be ambiguous and therefore to be interpreted against the insurance company to, therefore, provide coverage to the additional insured.  One lesson to be learned from this decision is the importance of understanding how the applicable anti-indemnity statutes will be interpreted and applied to the language of an indemnification clause.

If it is known the court is going to limit indemnification provisions that contain what appears to be broad language such as “acts and omissions” so that it applies only to “negligent acts,” perhaps an indemnitee such as a subcontractor need not worry quite so much about agreeing to what we normally consider onerous language. On the other hand, do you really want to litigate through trial, intermediate appellate court and state Supreme Court to find out what the clause means?  Why not just use plain English to restrict the indemnification to damages to the extent caused by the indemnitee’s negligence and avoid all the uncertainty and litigation?

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. 15, No. 5 (May 2013).

Copyright 2013, ConstructionRisk, LLC               

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 Following a three-month trial, a jury awarded a contractor judgment of approximately $19 million for breach of contract by the Port of Houston.  These damages represented the contractor’s increased costs of switching from its proposed frozen wall cutoff design due to the Owner having rejected its shop drawing submittal.  The basis for the award was stated by the jury as “delay and hindrance” to the contractor’s work by the Port.  Although the contract contained a very tough no-damages-for-delay clause, the trial court declined to enforce it.  This was because the court determined, as a matter of law, the Port could not enforce it to preclude delay or hindrance damages resulting from any action by the Port that constituted arbitrary or capricious conduct, active interference, bad faith, or fraud.  On appeal, the judgment was reversed on the basis that the exceptions to a no-damages-for-delay clause should not have been applied.  Port of Houston v. Zachry Construction, 377 S.W. 841 (Tex. 2012).

The appellate court acknowledged that courts in many other jurisdictions give only a “restrained approval” of such provisions because of their harshness, but the court concluded that where a contract in Texas clearly contemplates that the clause will be applied to deny damages regardless of what the Owner might have done, the clause will be enforced.   As stated by the court,

 “However, the parties are free to negotiate and agree upon the conditions under which (1) the contractor will recover damages for delay, and (2) another remedy is available to the contractor for any such delay. In June 2004, Zachry unambiguously agreed that it would perform the contract without the benefit of delay damages, even if the delay was caused by the Port’s breach of contract, negligence, or other fault. Zachry faced significant delays; delays it alleged—and the jury agreed—were caused by the Port’s breach of contract. In November 2005, Zachry proceeded with construction “in the wet,” knowing the contract afforded no damages for delay. We cannot rewrite the provision without depriving the Port of the benefit of the bargain the parties reached in June 2004.”

 The contract clause in question provided:

 “The Contractor shall receive no financial compensation for delay or hindrance of the Work. In no event shall the Port Authority be liable to the Contractor or any Subcontractor or Supplier, any other person or any surety for or any employee or agent of any of them, for any damages arising out of or associated with any delay or hindrance to the Work, regardless of the source of the delay or hindrance, including events of Force Majeure, AND EVEN IF SUCH DELAY OR HINDRANCE RESULTS FROM, ARISES OUT OF OR IS DUE, IN WHOLE OR IN PART, TO THE NEGLIGENCE, BREACH OF CONTRACT OR OTHER FAULT OF THE PORT AUTHORITY. The Contractor’s sole remedy in any such case shall be an extension of time.”

 In reviewing this contract language the court stated that although the parties had already stated the source of the delay was immaterial, “they gave special emphasis to their intent that delay due even in part to conduct by the Port was something they were specially contemplating.”  Moreover, said the court, the clause used all capital letters for the matters regarding the Port’s conduct to set it off from the rest of the paragraph.   And, “Finally, to give utmost emphasis, the parties described three categories of fault: (1) negligence, (2) breach of contract; or (3) other fault.”   All of this was enough for the court to conclude that the parties intended that the waiver of damages was to apply to situations including that at issue in this case.

The appellate court also allowed recovery of $10.5 Million in attorneys fees by the Port as the “prevailing party.”  Almost $15 million was claimed in legal fees and the court noted that although this was almost half the amount of the entire claims in the case, it did not render the fees unreasonable per se.  In fact, the court noted that other cases had allowed prevailing parties’ attorneys fees that exceeded the dollar amounts of the underlying claims in dispute.

Comment:  Courts in most states apply a common law standard like that used by the trial judge in this case to limit enforcement of a no-damages-for-delay clause.  In Texas, however, as demonstrated by the appellate decision here, the courts generally favor enforcing contracts just the way they are written (with a few exceptions) so long as the language is clear and unambiguous, and not otherwise contrary to law or public policy. This decision really demonstrates the importance of negotiating contract terms and conditions that reasonably allocate risk.

With regard to the prevailing attorneys fees that were awarded, this case may cause contract drafters to think twice before including such a clause in the contract.  Although they can be great when you are the prevailing party, they can also greatly increase the risk of loss for the non-prevailing party.  This clause could impact decisions on whether to push all the way through to a litigated decision versus settling for less than one believes is due in order to avoid paying the other party’s attorneys fees.

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. 15, No. 4 (April 2013).

Copyright 2013, ConstructionRisk, LLC

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The court explained that “The gist of the complaint is that [Engineer’s] duties as a construction manager included the obligation to manage the construction project in a way that would allow [Contractor] to perform its own contractual duties owed to the Owner.”  The court found that Louisiana recognizes an action for negligent professional undertaking, the essential elements of which are established based upon the facts alleged.  Harris Builders, LLC v. URS Corporation, 861 F.Supp. 746 (E.D. Louisiana 2012).

In denying the Engineer’s motion to dismiss the contractor’s complaint, the court looked at what it called a balancing test that courts in Louisiana had previously established for determining whether third parties not in privity of contract may sue an architect.  In doing so, the court noted that previous cases had dealt with architects and the present case concerns an engineer, but that for purposes of the law, engineers would be considered the same as architects.    The balancing test is as follows:

“[T]he extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant’s conduct and the injury suffered, the moral blame attached to defendant’s conduct, and the policy of preventing future harm.”

 The court concluded that the contractor’s complaint passes muster under the balancing test for the following reasons:

 “URS’s construction plan preparations and instructions to Harris to redo certain work were acts that URS had to have known would directly affect Harris. It was foreseeable and fairly certain that Harris would suffer economic harm if URS managed the project poorly, and URS’s development of project specifications directly affected the work Harris performed. In short, Harris asserts a high degree of economic control by URS that was the purpose recognized in Colbert as supporting a cause of action.”

 An unjust enrichment claim by the contractor against the Engineer was dismissed, however, because the court found that so long as there was a viable way to recover under the negligence count of the complaint there was no basis for recovery under an unjust enrichment theory.  Unjust enrichment is only applicable to fill a gap in the law where no other remedy is provided for by law.

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. 15, No. 4 (April 2013).

Copyright 2013, ConstructionRisk, LLC

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This case involves a subcontractor negligence claim against the architect.  The prime contractor had already settled its own claim against the project owner (not the architect) for additional time and extra work due to conflicting plans and specifications.

In analyzing the facts and law, the appellate court stated its decision by explaining that the California Supreme Court has recognized exceptions to the economic loss rule and set forth guidance for courts making the policy determinations as to whether a duty of care exists in a particular case and provided the following guidance:

 “The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are [1] the extent to which the transaction was intended to affect the plaintiff, [2] the foreseeability of harm to him, [3] the degree of certainty that the plaintiff suffered injury, [4] the closeness of the connection between the defendant’s conduct and the injury suffered, [5] the moral blame attached to the defendant’s conduct, and [6] the policy of preventing future harm.”

 The appellate court quotes another Supreme Court decision that added three additional factors to be considered:

 “(7) the degree to which there might be a potential liability out of proportion to fault, (8) the level of sophistication of the plaintiff in the context of the transaction (including the potential for what the court called “ ‘private ordering’ ” to contractually protect against the risk), and (9) the balance between, on the one hand, efficient loss spreading, and, on the other hand, and the potential for dislocation of resources.”

 The court was apparently satisfied that the subcontractor had pleaded sufficient facts to suggest that there could be a duty of care owed to it by the architect.  For example, the court stated the following:

 “For instance, the SAC and the attached portions of the Agreement show that N+G was aware that the plans and specifications would be part of the bid package and, thus, would be used by bidders in submitting bids on the Project. In addition, the SAC alleged that N+G knew or should have known that the plans and specifications also would be used in the construction of the Project. Thus, it is reasonable to infer that County and N+G intended the plans and specifications to be relied upon by (1) the various contractors and subcontractors bidding on the Project and (2) the successful bidders in building the Project.”

 After reviewing the allegations contained in the complaint, the court concluded they did not provide enough information to properly evaluate the nine factors set forth above to reach a conclusion as to whether the architect owed a duty of care to the subcontractor.  Because there was a chance under California law, that notwithstanding the normal application of the economic loss doctrine, a subcontractor could present sufficient facts to prevail against the architect for breach of a duty of care, the court stated: “We are reluctant to reach a conclusion based on matters that are not set forth in the pleadings …[and] we direct the trial court to grant Olson leave to amend to include allegations directed at the [nine factors].”

Comment:  This decision and others like it in California are unfortunate because they throw the door wide open to suits against design firms by any project participant at any tier, and circumvent the normal contractual requirements and expectations that the proper recourse for recovering economic losses is from the party with whom one has a contractual relationship.  Where the economic loss rule is accepted as a general rule, but exceptions are permitted, there is a tendency for the exceptions to swallow the rule.  That is particularly problematic on construction projects where parties should reasonably be expected to recover for breach of contract rather than under creative tort (i.e., negligence) theories.

Historically, if a contractor sustains damages as a result of defective specifications, it makes a claim against the project owner with whom it contracted. The owner generally is held responsible for the defective specifications, pursuant to the Spearin doctrine, whereby courts hold that owner’s grant an implied warranty of specifications when they provide an architect’s plans and specifications to contractors to construct.  Through the contract it is possible for parties to allocate and limit their risk.  When courts allow contractors and their subcontractors to do an end-run around the contract risk allocation, this dishonors the intent of the parties and the contract and does harm to the design and construction process.

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. 15, No. 4 (April 2013).

Copyright 2013, ConstructionRisk, LLC

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Comment:  This decision quotes extensively from the contract to show how clearly, in the court’s opinion, the owner placed the site conditions risk on the bidder. And this was regardless of how different the conditions may be from what was erroneously shown in the reports provided to the bidders by the owner. In contrast, under Federal contracts, courts generally find it contrary to the intention of the mandatory differing site conditions clause to allow the government to attempt to shift the risk to bidders through general disclaimers and requirements that the bidder perform its own site investigation before bidding.

Mastec, the successful bidder, was awarded the contract for $3,690,960, substantially lower than the average bid for the project that was $8.1 million. It is apparent that other bidders included large contingencies in their bids in anticipation of being unable to make a DSC claim. Mastec, although an experienced contractor, was new to pipeline construction and apparently was unfamiliar with the way site conditions were handled under pipeline contracts for this owner.

Lessons learned from this case include (1) Carefully read the contract and know what limitations will be applied to the ability to make differing site conditions claims or any other requests for change orders, (2) Either have prior experience performing the particular type of work and contract – or hire managers that have requisite prior experience, and (3) Be prepared for Courts to enforce the contract as written and not to reform the contract to be fair or reasonable.

Contract provisions that were quoted by the court include the following:

“7.1 REPRESENTATIONS AND WARRANTIES

[MasTec] represents and warrants to [El Paso]:

 (e) That its duly authorized representative has visited the site of the Work, is familiar with the local and special conditions under which the Work is to be performed and has correlated the on site observations with the requirements of the Contract and has fully acquainted itself with the site, including without limitation, the general topography, accessibility, soil structure, subsurface conditions, obstructions and all other conditions pertaining to the Work and has made all investigations essential to a full understanding of the difficulties which may be encountered in performing the Work, and that anything in this Contract or in any representations, statements or information made or furnished by [El Paso] or any of its representatives notwithstanding, [MasTec] assumes full and complete responsibility for any such conditions pertaining to the Work, the site of the Work or its surroundings and all risks in connection therewith.”

 ***

“8.1 CONTRACTOR’S CONTROL OF THE WORK

(a)(7) [MasTec] represents that it has had an opportunity to examine, and has carefully examined, all of the Contract documents and has fully acquainted itself with the Scope of Work, design, availability of materials, existing facilities, the general topography, soil structure, substructure conditions, obstructions, and all other conditions pertaining to the Work, the site of the Work and its surrounding; that it has made all investigations essential to a full understanding of the difficulties which may be encountered in performing the Work; and that anything in any of the Contract documents or in any representations, statements or information made or furnished by [El Paso] or its representatives notwithstanding, [MasTec] will regardless of any such conditions pertaining to the Work, the site of the Work or its surrounding, complete the Work for the compensation stated in this Contract, and pursuant to the extent of [MasTec's] liability under this Contract, assume full and complete responsibility for any such conditions pertaining to the Work, the site of the Work or its surroundings, and all risks in connection therewith.”

***

The court also stated:

 “Exhibit C to the contract contains a lengthy collection of “Construction Specifications” for the project, which include the due diligence language on which MasTec relies. Specification LP–5, titled “Ditching,” states under the heading “Company Foreign Line and Utility Crossings” that “[El Paso] will have exercised due diligence in locating foreign pipelines and utility line crossings. However, [MasTec] shall confirm the location of all such crossings and notify the owner prior to any ditching activity in the vicinity of the crossings.” Near the end of Exhibit C, Specification LP–17, titled “Horizontal Directional Drilling,” states under the heading “Foreign Line and Utility Crossings” that “[El Paso] will have exercised due diligence in locating foreign pipelines and/or utility line crossings. However, [MasTec] shall confirm the location of all such crossings and notify the owner prior to any [horizontal directional drilling] activity in the vicinity of the crossings.”

In explaining why it found the contractor had willfully accepted the risk, the court stated:

 “Here, neither party contends that the terms of the contract are ambiguous. Indeed, the contract’s plain terms are clear. MasTec agreed that it had “fully acquainted itself with the site, including without limitation … subsurface conditions, obstructions and all other conditions pertaining to the Work.” It also agreed that it had “made all investigations essential to a full understanding of the difficulties which may be encountered in performing the Work.” In regard to potential work site conditions, MasTec “assume[d] full and complete responsibility for any such conditions pertaining to the Work, the site of the Work or its surroundings and all risks in connection therewith.” All of this was agreed to “notwithstanding” “anything in any of the Contract documents or in any representations, statements or information made or furnished by [El Paso] or its representatives.” These terms, in both Article 7.1(e) and Article 8.1(a)(7), clearly place the risk of undiscovered foreign crossings on MasTec. And they expressly resolve any tension between the due diligence specifications and the risk allocation provisions.

“…  MasTec is bound by the terms of this contract, regardless of whether it thought it contained different terms.”

 Regardless of language in the contract stating that the owner exercised due diligence in locating the foreign crossings, the court concluded:

 “MasTec assumes “all risks in connection with” “soil structure, subsurface conditions, obstructions and all other conditions pertaining to the Work,” “notwithstanding” anything else in the contract. The specified conditions relate to the physical environment of the pipeline’s path, precisely the risk involved with unknown underground foreign crossings. MasTec seems to have understood as much; its senior vice president testified at trial that foreign crossings were included in the risks covered by Article 7.1(e). Just as we have held in the insurance policy context that “ ‘all losses’ means all losses,” “all risks” in connection with the physical conditions of the pipeline’s path must mean all risks.”

 As further explained by the court:

 “The problem arises in this case because although MasTec understood the risk of underground surprises and knew it assumed the risk for such surprises, even including a contingency markup in its bid, MasTec, which was new to pipeline construction, underestimated the amount of that risk and submitted a very low bid. The role of the courts is not to protect parties from their own agreements, but to enforce contracts that parties enter into freely and voluntarily.”

 “Someone has to bear the loss of the additional costs of constructing the pipeline around the undiscovered foreign crossings. As in Lonergan, “the parties were each competent to contract, and there is no circumstance indicating the slightest unfairness in the transaction.” While MasTec was new to this type of construction project, it is a sophisticated party and presumably had experienced attorneys review the contract. (Citations omitted). And there is nothing to suggest that the contractual provisions at issue here are unique or novel. Sophisticated parties, like all parties to a contract, have “an obligation to protect themselves by reading what they sign.” (Citation omitted). Ultimately, this contract “constitute[s] the allocation by market participants of risks and benefits” regarding the pipeline’s construction. (Citation omitted). “The Court’s role is not to redistribute these risks and benefits but to enforce the allocation that the parties previously agreed upon.” (citing 11 RICHARD A. LORD, WILLISTON ON CONTRACTS § 31.5 (4th ed.2003)).”

 “We have an obligation to construe a contract by the language contained in the document. We have “long recognized Texas’ strong public policy in favor of preserving the freedom of contract.” (Citation omitted). “Freedom of contract allows parties to … allocate risk as they see fit.” (Citation omitted). Contract enforcement is an “indispensable partner” to the freedom of contract (citation omitted). Were we to hold in MasTec’s favor, and conclude that El Paso must bear the risk of unknown underground obstacles under this contract, we would render meaningless the parties’ risk-allocation agreement and ultimately prohibit sophisticated parties from agreeing to allocate risk in construction contracts. (Citation omitted). That result would undermine the longstanding policy of this state.”

 For all these reasons, the court held that the contractor was not entitled to recover on its differing site condition claim.

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. 15, No. 4 (April 2013).

Copyright 2013, ConstructionRisk, LLC

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Several employees of a contractor suffered injuries when a concrete I-beam, that they were standing on while installing a handrail on a bridge, collapsed, and they fell into the creek below.  The Illinois DOT and the U.S. OSHA did an immediate, same day inspection of the accident site.  The following day, the contractor destroyed the I-beam by breaking it up with a hydraulic hammer.  Sometime later, the laborers filed suit against the manufacturer of the I-Beam, and against the designer of the bearing assembly that supported the I-beam that was incorporated into the bridge deck.  They also sued their  employer, the contractor, based on negligent spoliation of evidence.  The other defendants made cross-claims against the contractor based on spoliation of evidence.

OSHA’s investigation concluded that the beam had rolled over, causing it to fall.  After the OHSA inspection, the beam was broken up with a hydraulic hammer and left where it had fallen – being turned to riprap in the creek.  The rebar was hauled to an auto shredder.  The embedded steel plates on the ends of the beam were saved and sent to the manufacturer to be used in the manufacturing of a replacement beam.

In explaining why he had destroyed the beam, the contractor testified he had been informed by the manufacturer that (1) the replacement beams could be manufactured more quickly if they retrieved the embedded steel plates and sent them to the manufacturer as soon as possible for use in the new beam, and (2) the Illinois DOT construction engineer advised that the beam needed to removed from the creek to prevent a condition called “scouring” – erosion caused by water washing up around the bridge abutment.

As far as the potential for litigation, the contractor testified that, although he knew the workers had been sent to the hospital, he assumed there would be workers’ compensation claims but that a lawsuit “really didn’t enter my mind at the time.”  He stated he did not receive any requests to preserve the beam from the plaintiffs, the manufacturer or the engineer.  The engineer, however, testified by affidavit of its vice president, that no personnel from the engineer were present at the construction site during the accident and that the contractor never contacted the engineer to inquire whether a representative wished to inspect the site. He further testified that the engineer was not aware of the accident until well after the I-beam had been destroyed.

At issue in the claims against the contractor by the plaintiff, the manufacturer and the engineer, for spoliation of evidence, was whether the contractor was entitled to summary judgment.   The Supreme Court held he was.  In reaching that conclusion, the court reviewed numerous court decisions addressing evidence and the duty to preserve it. The court stated that under Illinois law, spoliation is a form of negligence and that a plaintiff claiming spoliation must prove that (1) the defendant owed the plaintiff a duty to preserve the evidence; (2) the defendant breached the duty; (3) the loss or destruction of the evidence was the proximate cause of the plaintiff’s inability to prove an underlying lawsuit; and (4) as a result, the plaintiff suffered actual damages.

The general rule in Illinois, said the court, is that there is no duty to preserve evidence.  A plaintiff, in order to establish an exception to the no-duty rule, must meet a two-prong test.  The first test is that the plaintiff must show that an agreement, contract, statute, special circumstance, or voluntary undertaking has given rise to a duty to preserve the evidence.  Under the second test, the plaintiff must show that the duty extends to specific evidence at issue by demonstrating that “a reasonable person in the defendant’s position should have foreseen that the evidence was material to a potential civil action.”

In this case, the court found the evidence did not support a finding that the contractor owed a duty to preserve the I-beam, and that a summary judgment was appropriately granted for the contractor.

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. 15, No. 3 (Mar 2013).

Copyright 2013, ConstructionRisk, LLC               

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The court held that the claim for common law indemnity must be dismissed because under New York law an employer may only be held liable for contribution or indemnification at common law if there has been “grave injury” to the employee.  In this case, the court found there was no “grave injury” as that term is defined in the state statute.

With regard to the contractual indemnity claim, the court held it must be dismissed because there was no written agreement requiring the sub-sub to indemnify the others.  Although there was a prime contract containing an indemnification provision, that provision was not deemed to be incorporated by reference into the subcontract under New York law.  “Under New York law, incorporation clauses in a construction subcontract, incorporating prime contract clauses by reference into a subcontract, bind a subcontractor only as to the prime contract provisions relating to the scope, quality, character and manner of the work to be performed by the subcontractor.” The court concluded that the provisions of the prime contract related to contractual indemnification were not incorporated by reference because they did not concern “scope, quality, character and manner of the work.”  Lawrence Persaud v. Bovis Lend Lease, 941 N.Y.S.2d 208 (NY 2012).

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. 15, No. 3 (Mar 2013).

Copyright 2013, ConstructionRisk, LLC               

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A second issue in the case, however, was decided in favor of Bovis, with the court dismissing the Owner’s claim of “unjust enrichment” against  Bovis for fees previously paid for allegedly defective services.  The court explained that this claim must be dismissed because “Recovery for unjust enrichment is barred by the existence of a valid and enforceable contract….”  Genesse/Wyoming YMCA v. Bovis Lend Lease, 951 N.Y.S. 2d 768 (NY 2012).

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. 15, No. 3 (Mar 2013).

Copyright 2013, ConstructionRisk, LLC               

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