ConstructionRisk.com Report
Vol. 3, No.4 – July 2001
Inside
This Issue:
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Engineer
Not Liable for Breach of Implied Warranty of Design
When an engineer designed a road that failed because the impermeability
of the underlying soil caused water to accumulate between the soil and the
asphalt, resulting in the road floating and the asphalt cracking, the project owner sued for negligence and breach of implied
warranty. Because the soil
condition was an unanticipated, differing site condition, the trial judge found
the engineer was not negligent. Surprisingly,
however, the judge found the engineer liable under the warranty theory.
This was reversed on appeal because the engineer could not reasonably be
held to a warranty standard when the failure of the road was based on a
differing site condition.
In response to the owner’s argument that the adverse soil condition was
“knowable,” the court found “there was no
evidence that any engineer knew or should have known that the soil beneath the
road would not drain at all.” A
satisfactory remedy for the soil condition was implemented by the engineer using
the recommendation of a geotechnical engineer that it retained for the purpose.
This involved the installation of lateral drains to remove the water.
These drains, according to the court, were not within the typical scope
of an engineer’s work in designing a road. For these reasons, the court held
in favor of the engineer. K.B. Weygand & Assocs. V. Deerwood Lake Land Co.,
1991216, 1991344, 2001 Ala. LEXIS 120 (Ala. 2001).
Note:
Since the lateral drains were a necessary part of the work, the costs of
these would have been incurred by the owner whether the site condition was
discovered before or after construction began.
As such, the necessary costs of installing the drains could not be
attributed to the engineer in any event. Assuming
for purposes of argument that the engineer could have somehow been held liable,
the extent of the damages owed to the owner would not include the cost of work
and material for the lateral drains themselves, but only those extra costs (if
any) attributable to removing and repairing previously installed work, and the extra
costs caused by installing the drains after the fact instead of during the
initial construction. Costs that an
owner would have incurred even if the project had been designed perfectly from the
beginning cannot be attributed to the responsibility of the engineer.
Copyright ã 2001,
ConstructionRisk.com, LLC - Virginia
=====================================================
International
Risk Management Institute
IRMI
is a research and publishing company focusing on risk management and insurance
issues. It publishes practical
reference manuals, books, and newsletters. The IRMI Construction Risk Conference
is the premier forum for sharing ideas and techniques for improving the ways we
do business. More than 1,000 representatives of the construction and insurance
industries, as well as many project owners, attend each year for its exceptional
educational value and its unparalleled networking opportunities.
This year’s conference is scheduled for October 29 through November 1
in New Orleans. For more
information visit http://www.irmi.com.
====================================================
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====================================================
The
Ball's in My Court (Because I Drafted the Contract)
and I'm the Referee (or Chief Executioner)
By:
William J. Postner, Esq .
Dispute resolution provisions in public contracts empowering the public
owner to render binding, final decisions on all disputes arising under the
contract, subject to limited judicial review, have been upheld in numerous
states as not being in violation of public
policy. New York is one such a state.
In contrast, such a provision has been held to violate public policy
in other states such as New Jersey. Recently, in the case of Ferguson Elect. CO.
v. Kendal At Ithaca, Inc., 274 A.D.2d 890 (2000), New York extended the rule
from the public contract to the private contract context and held that such a
provision in a subcontract between a general contractor and its subcontractor
did not violate public policy.
Christa, the general contractor for a nursing home project owned by
Kendal, subcontracted the plumbing and heating work to Tougher.
The subcontract contained the following dispute resolution provisions:
(1)
Christa’s representative was authorized “to decide all questions of
any nature whatsoever, arising out of, under, or in connection with, or in any
way related to or on account of, this Contract and his decision shall be
conclusive, final and binding;” (2)
If Tougher protested the determination of Christa’s representative,
“the Contractor [sic] may commence a lawsuit . . . it being understood the review of
the Court shall be limited to the question of whether or not the . . .
determination is arbitrary, capricious or grossly erroneous to evidence bad
faith;” and (3) “Exhaustion of
these procedures shall be a precondition of any lawsuit.”
Tougher and another unpaid subcontractor filed mechanic’s liens.
The other unpaid subcontractor commenced a lien foreclosure action and,
as required by the Lien Law, named Christa and Tougher as defendants in that
action. Tougher interposed a claim
to foreclose its lien, and cross-claimed against Christa for breach of
subcontract. On motion by Christa, the trial court held that the subcontract’s
dispute resolution provisions were mandatory and obligatory.
The Appellate Court agreed, holding: “Clearly, the public policy of
this State favors and encourages arbitration and ADR resolutions . . . and ADR
mechanisms reflecting the informed negotiation and endorsement of the parties
are valid and enforceable. . . . Tougher chose, “with its business eyes open, to
accept the terms, specifications and risk of the [subcontract], including the
ADR clause.”
________________
This article by William J. Postner of the law firm of Postner & Rubin, has been edited and abridged from an article
appearing in the Spring 2001 issue of the firm’s newsletter, Construction and
the Law. The firm is a nationally
recognized firm with an emphasis in construction law. Mr.
Postner may be contacted at Battery Place, New York, NY 10004 – (212)
269-2510. The website is http://www.postner.com.
==============================================
No
Coverage Under CGL Policy for Loss Arising
Out of Product Containing Asbestos
Where a contractor on a school renovation project applied adhesives not
knowing that they contained asbestos, it sued the material supplier of the
material to recover its costs of tearing out and replacing the materials.
The supplier's commercial general liability (CGL) carrier refused to
defend the suit because the suit was not for a claim arising out of bodily
injury or property damage, as required for coverage. The appellate court agreed that the insurance carrier owed no
duty to defend the suit since there was no potential coverage.
The contractor’s action was based on the alleged
economic loss it incurred in removing the adhesives. It asserted lost profit, delay, extra work, breach of
contract, breach of warranty, negligence, negligent misrepresentation, fraud,
and false advertising. Since
the contractor did not own the property on which it was working, it did not seek
recovery of property damage. And,
since no one was physically injured by the asbestos, the contractor did not seek
recovery for bodily injury. Without
either property damage or bodily injury, there was no basis for recovery under
the policy. In addition, the
contractor’s claim against the supplier for false advertising and misleading
trade practices (based on the supplier’s representation that the materials did
not contain asbestos) was not covered by the policy because the representation
did not fall within the Advertising Liability Offense definition of the policy.
Structural Building Products Corp. v. Business Insurance Agency, Inc.,
No. 2000-00252, 2001 NY App. Div. LEXIS 3055, (N.Y. App. Div., 2d Dep. 2001).
======================================================
Zurich
Insurance
- For information on the Zurich Default Insurance program (Subguard),
please contact Zurich Construction at 952-841-2300.
You may also send an e-mail to webmaster@constructionrisk.com
with the word "Subguard" in the subject line, requesting a packet of
information describing the product. Include your name, address and phone
number in your e-mail.
===================================================
Contractor
Terminated for Default for Failure to
Adequately Respond to Cure Notice
By:
J. Kent Holland, Jr.
Where contractor failed to respond adequately to the Navy’s
reasonable request of assurances of timely performance, the Navy was entitled to
regard the contractor’s failure to provide such assurances as a breach of the
contract. The issuance of a cure notice may be justified even if the
circumstances at that point do not justify a termination for default. When the
government issues a cure notice the contractor has an obligation to take steps
to demonstrate progress, or give assurance that progress is being made, toward timely
completion. Failure to adequately respond to the notice justifies termination for
default.
In Richard Danzig v. AEC Corporation, 224 F.3d 1333 (Fed. Cir. 2000), the
Navy became concerned when the progress of the contractor’s work began to fall
behind schedule. The
contractor was apparently having financial difficulties with its surety, and
this was delaying the work. As
a result of the schedule slippage the Navy issued a cure notice demanding the
contractor to get back on schedule.
This resulted in a meeting at which the contractor and Navy agreed to a
revised schedule. The Navy agreed not to terminate the contractor if made progress according to that new schedule.
For reasons not explained by the court, the surety
subsequently froze the project’s bank account, and the number of workers doing
productive work on the project began to decline.
Due to the decreasing number of man-hours being devoted to the job, the
Navy advised the contractor that its failure to diligently pursue completion was
a condition endangering performance of the contract, and must
be cured within 10 days otherwise the Navy would consider terminating the
contractor for default. Contractor
responded by advising the Navy that the meeting the completion date was
impossible due to many changes and delays caused by the Government.
In addition, the contractor claimed its surety was interfering with
and hampering its progress on the job by blocking the release of funds
sufficient to enable it to pay its subcontractors and meet other project
expenses. This action by the surety
was termed "financial strangulation” by the contractor which “made it
impossible to predict an ultimate completion date at this time.”
The Navy reacted to this bad news by directing the contractor to provide
a detailed response to substantiate its allegations with regard to delays
allegedly caused by changes and government-caused delays.
Instead of giving the required detailed response, the contractor wrote a
short letter back to the Navy referring the Navy to earlier
correspondence which it stated described the details of the problems caused by
the government.
After this, the Navy gave the contractor a letter directing it to show
cause why the contract should not be terminated for default, and once again directed the
contractor to respond within 10 days. During
the next 10 days the contractor did not respond to the letter and, in fact,
appeared to maintain only a handful of workers on the job.
When the Navy subsequently default terminated it, the contractor appealed
to the Armed Services Board of Contract Appeals, arguing that the termination
was improper because the Navy had not proved that the contractor could not
complete performance by the extended contract date.
The Board agreed with the contractor and held against the Navy.
In appealing the adverse decision to the Federal Circuit Court of
Appeals, the Navy argued that the Board focused on the wrong issue.
Instead of ruling on whether there were sufficient grounds for
termination, the Board should have looked instead at the question of whether the
contractor had adequately responded to the 10 day cure notice by providing
adequate assurances that it would, in fact, complete the project on schedule.
The court agreed with the Navy’s position and reversed the Board,
explaining that when the government has reasonable grounds to believe that the
contractor may not be able to perform the contract on a timely basis, the
government may issue a cure notice as a precursor to a possible termination of
the contract. Once that notice is issued, the contractor has an obligation
to take steps to demonstrate or give assurances that progress is being made
toward timely completion. Contractor’s
response to the cure notice did not satisfy its obligation to provide those
assurances. In fact, the contractor
reiterated that its financial strangulation by its surety made it impossible to
predict an ultimate completion date. A
contractor’s financial difficulties are not a legitimate excuse, says the
court, for failure to make progress. In
view of this, the court held that as a matter of law, the contractor failed to
respond adequately to the Navy’s reasonable request for assurances.
Risk
Management Note: The
decision does not offer any explanation for what was happening between the
contractor and its surety that caused the surety to take the action it did with
regard to the project financing. Unfortunately,
there are occasions when a surety (for good reason) may take actions that, while
protecting its position, do not release funds in a prompt manner to foster
timely project completion. In
response to the perceived need for a new type of product to respond to defaults
or threatened defaults, Zurich Insurance has created default insurance to be
used in lieu of surety bonds. This
product is titled "Subguard." ™
A
detailed paper was presented by Kent Holland at the last conference of the Forum
on Construction of the American Bar Association.
A copy may be obtained by sending an e-mail to webmaster@constructionrisk.com,
including your name and address, and including the words ABA PAPER in the regard
line.
Copyright ã 2001,
ConstructionRisk.com, LLC - Virginia
====================================================
Red
Vector
- Continuing Education
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======================================================
Web
Design By Dynamic Horizon
-For
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as discussed in detail in an article in a recent issue of Constructech magazine.
======================================================
Disclaimer
This newsletter is independent of any insurance
company, law firm, or other entity, and is distributed with the understanding
that ConstructionRisk.com, LLC, and the editor and writers, are not hereby
engaged in rendering legal services. Further, the comments in this newsletter
are for general distribution and cannot apply to any single set of specific
circumstances. If you have a legal issue to which you believe this newsletter
relates, we urge you to consult your own legal counsel. ConstructionRisk.com
expressly disclaims any responsibility for damages arising from the use,
application, or reliance upon the information contained herein.
====================================================
Copyright ã 2001,
ConstructionRisk.com, LLC - Virginia
Editor:
J. Kent Holland, Jr., J.D.
1313 Dolley Madison Blvd.
Suite 333
McLean, VA 22101
703-623-1932
Webmaster@constructionrisk.com
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