ConstructionRisk.com Report

* Contractor may sue construction manager for negligent misrepresentation and supervision.

* Architect may legally limit time period for being sued, but may be equitably estopped from enforcing the limitation.

* Cost of replacing contractor’s defective workmanship not covered by CGL policy.

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This newsletter is edited by J. Kent Holland, Jr., Esq., and published by e-mail once per month. Archived issues (plus this current issue) are maintained on our website at http://www.constructionrisk.com. The formatting on the website is easier to read and print. Electronic newsletters provide prompt information but, unfortunately, cannot be formatted into a professional looking layout. At our website you will find an extensive library of risk management materials, including articles indexed by subject matter. It is organized as a construction risk management portal to make it easy for you to find all kinds of valuable information on the web. And it’s completely free – offered as a public service by J. Kent Holland, Jr., an attorney with 20 years of legal experience as a construction lawyer and risk management professional.

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E-COMMERCE IN INSURANCE AND CONSTRUCTION

This is the title of a seminar I am co-presenting at the International Risk Management Institute (IRMI) construction risk conference in November. We will be covering web-based risk management tools, construction project management tools, insurance on-line, and related topics. If you have a favorite site, company, or tool that you believe should be reviewed as part of the presentation, please let me know by e-mailing me at the address below. Two project management web-based systems that look interesting include http://www.constructware.com and http://www.bamboosolutions. I have not yet studied several other promising looking systems that are now on the market. If you have had experience (good or bad) with any of these products, please send me an e-mail telling me what about it.

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CONTRACTOR MAY SUE CONSTRUCTION MANAGER FOR NEGLIGENT MISREPRESENTATION AND SUPERVISION

Contractor sued a construction manager (CM) for breach of contract and negligence, claiming that the CM had negligently supplied information, and that it relied on those misrepresentations and incurred damages as a result. Contractor also claimed that the CM was negligent in its coordination and supervision of the contractors. The trial court dismissed the case on a summary judgment motion because the contractor had no contractual relationship with the CM. The CM and contractor were under separate contracts directly to the project owner. On appeal, the appellate court reversed and held that the CM had an independent duty to avoid misstatements intended to induce reliance.

The main issue in this case was whether the Kentucky courts would adopt the Restatement (Second) of Torts, section 552 (1977) ("Restatement") and allow negligence claims by contractors against construction managers with whom they lack privity of contract. The Contractor (EH Construction), claimed it was required to restore much of the work it had already completed due to changes and improper scheduling by CM which led other contractors and subcontractors to destroy work that EH had already finished. In considering the issues, the favorably cited a Tennessee Supreme Court decision that applied the Restatement of Torts to allow a contractor suit to go forward against a CM on similar allegations. See, Morse/Diesel, 819 S.W. 2d 428. The court explained that "In line with the inclination of Kentucky courts to dispense with the requirement of privity as a prerequisite for actions in tort in other cases, we follow the approach taken by the Tennessee Supreme Court in Morse/Diesel and adopt section 552 of the Restatement."

Section 552 of the Restatement is entitled "Information Negligently Supplied for the Guidance of Others." It provides the following:

(1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.

(2) Except as stated in Subsection (3), the liability in Subsection (1) is limited to loss suffered:

(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intents to supply it; and

(b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in substantially similar transaction.

(3) The liability of one who is under a public duty to give the information extends to loss suffered by any of the class of persons for whose benefit the duty is created, in any of the transactions in which it is intended to protect them.

According the contract between the CM and owner, the CM:

* "shall provide administrative, management and related services to coordinate scheduled activities and responsibilities of the Contractors with each other and with those of the Construction Manager, the Owner and the Architect to endeavor to manage the Project in accordance with the latest approved estimate of Construction Cost, the Project Schedule and the Contract Documents."

* "shall coordinate the sequence of construction and assignment of space in areas where the Contractors are performing Work."

* "shall schedule and coordinate the sequence of construction in accordance with the Contract Documents and the latest approved Project construction schedule."

Interestingly, after listing out these duties, the appellate court stated that the CM’s duty to the contractor did not rest on these contractual duties owed by the CM to the owner. The court also stated that the duty "does not rest on any professional duty." Instead, the court held that the CM’s duty is "based on an independent duty to avoid misstatements intended to induce reliance." The court cites Safeway Managing General Agency, Inc. v. Clarke & Gamble, 985 S.W.2d 166, 169 (Tex. Ct. App. 1998) in support of this proposition. Thus, the court concludes "[CM] had additional, independent duties pursuant to section 552."

For the foregoing reasons, the court ordered the case reversed and remanded to the trial court for the contractor to have an opportunity to present evidence. "In order to prevail on its claim against [CM] for negligent misrepresentation, EH must prove that (1) [CM] was acting in the course of its business, profession, or employment, or in a transaction in which it had a pecuniary (as opposed to gratuitous) interest; (2) [CM] supplied faulty information intended to guide others in their business transactions; (3) [CM] failed to exercise reasonable care in obtaining or communicating the information; and (4) EH justifiably relied upon the information and thereby incurred pecuniary loss." EH Construction, LLC v. Delor Design Group, Inc; Presnell Construction Managers, Inc, et al., 2000 Ky. App. LEXIS 29, No. 1998-CA-001476-MR (March 31, 2000).

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ARCHITECT MAY LEGALLY LIMIT TIME PERIOD FOR BEING SUED, BUT MAY BE EQUITABLY ESTOPPED FROM ENFORCING THE LIMITATION

A homeowner (Northridge) retained an architectural firm (JWFA) to provide design and contract administration services for the renovation of a residential townhouse complex. Leaks were found in the roofs shortly after construction was completed. It was not until several years later, however, that Northridge sued JWFA and its employee, Thomas Driscoll. The defendants filed a motion for summary judgment on the basis that a time limitation in the contract barred law suits filed more than three years after substantial completion of construction.

In opposition to the motion, Northridge argued that substantial completion had never occurred since it never signed a certificate of substantial completion or certificate for payment. The court rejected this argument and concluded that according to the terms of the contract, the architect, not the owner, was to decide when substantial completion occurred. The fact that the owner never signed a certificate didn’t show that substantial completion hadn’t occurred. If anything, it may show "the Owner’s refusal to accept the responsibilities assigned to it under the certificate." As to the enforcement of time limitation clauses in contracts, the court stated that Massachusetts courts honor such agreements between sophisticated business entities.

At this point in the decision, it appeared that the court was going to grant summary judgment. Instead, however, the court considered the arguments of the plaintiff "that the defendants had made knowing or reckless misrepresentations to Northridge that the leaks were not caused by any significant structural problem in order to deceive Northridge into not filing a negligence action." The court concluded that if these allegations were true, then the doctrine of equitable estoppel may prevent the defendants from enforcing the time limitations. According to the court, "Equitable estoppel is appropriate when (1) a party makes a false representation; (2) the party intends the other party to rely on that false representation; and (3) the other party does rely on that false representation to its detriment."

Since a jury could reasonably determine that the essential elements giving rise to an equitable estoppel are present in the case, the court held that the plaintiff must be permitted to proceed with its negligence claim against the defendants. Northridge Homes, Inc. v. John W. French & Associates, Inc. and Thomas Driscoll, 10 Mass.L.Rptr. 690, 1999 WL 1260285 (Nov. 15, 1999).

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COST OF REPLACING CONTRACTOR’S DEFECTIVE WORKMANSHIP NOT COVERED BY CGL POLICY

When a painting subcontractor’s work proved to be defective, the prime contractor expended $10,000 for stripping and refinishing cabinets and woodwork, and then submitted a claim to its commercial general liability (CGL) insurance carrier to recover the costs. The carrier declined coverage on the basis that there was no "accident" but only a breach of contract. The prime contractor sued the carrier, and the court dismissed the suit on a summary judgment motion in favor of the insurance company. This was affirmed on appeal.

The court summarized previous court precedent stating that there can be no "accident" within the meaning of a CGL policy when the resulting damage is merely a breach of contract. "Accident has a tortious connotation and exists only when damage results, in some sense, from a tort, i.e., a breach of some duty imposed by law. . . . Although negligent performance of a contract might cause damage by ‘accident,’ there is no tort and no ‘accident’ when the damage results solely from the complete failure of timely performance of a contract, generally actionable only as a breach of contract." In addition, the court quoted from what it called a "much quoted passage from Roger C. Henderson, Insurance Protection for Products Liability and Completed Operations – What Every Lawyer Should Know, 50 Neb L Rev 415, 441 (1971)" as follows:

"The insured, as a source of goods or services, may be liable as a matter of contract law to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity. This may even extend to an obligation to completely replace or rebuilt the deficient product or work. This liability, however, is not what the coverages in question are designed to protect against. The coverage is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained."

Although the same conduct might be actionable under both tort and contract theories, the court found in this case that the plaintiff’s claim arose solely from a breach of contract and is, therefore, not covered by the policy. Oak Crest Construction Company v. Austin Mutual Insurance Company, 329 Ore. 620, 2000 Lexis 92 (February 17, 2000).

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Copyright 2000, ConstructionRisk.com, LLC

Editor: J. Kent Holland, Jr., JD