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Inside This Issue:
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Alert! Are Terrorists Requesting Copies of Building
Plans?
In a letter to AIA members,
Norman L. Koonce, Executive Vice President/CEO of the
American Institute of Architects wrote:
A number of firms
from the design and engineering community have contacted
us to report recent or past requests for building plans that, in light
of
the attacks of September 11, 2001, appear unusual due to the structures
identified in the requests or the type of information solicited. The
American Institute of Architects and the National Society of
Professional
Engineers, in conjunction with the U.S. General Services Administration,
are coordinating with the Federal Bureau of Investigation (FBI) to
provide
design firms with information on this situation.
Please follow
this link ( http://www.aia.org/letter/ ) for details and for
guidance on contacting the FBI if you or anyone in your firm has
received
unusual or suspicious requests for information.
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Online Continuing Education
ConstructionRisk.com is now are offering an online continuing education
course created by Kent Holland. It is titled: Risk Management for the
Design Professional: Contract Terms and Conditions. This is a 3 credit
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course and answer the test questions at your leisure, entering and
leaving the course as many times as you like, until you have completed
it. Upon successful completion you will receive a certificate of
completion, and if you are a member of the AIA, we will submit your
credits directly to the AIA Office of Continuing Education.
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Fee Offset May be An Insured Claim
Where a
subcontract filed suit against the general contractor to collect the
balance of its fee and the general contractor defended itself by
claiming the right to an offset in the fee to cover damages that it
alleged were caused by the subcontractor, a court held that the offset
constituted a claim for damages that created a duty of the subcontractor’s
insurance carrier to defend the subcontractor.
A general
contractor (SHC) retained CPS Security Services to provide security on a
construction project. After the project was damaged by fire, the
contractor withheld approximately $27,000 in fee from CPS. CPS sued SHC
for the fee it claimed was owed. In its answer to the pleadings, SHC
pleaded as an affirmative defense that it was entitled to "an
offset" pursuant to common law and/or the Code of Civil Procedure,
as a result of CPS’s deficiencies in performance which resulted in
damage to the construction project.
CPS tendered
the defense of the affirmative defense to its insurance carrier, but the
carrier refused to defend the matter, and CPS proceeded to employ its
own attorney to defend the affirmative defense. While the matter was
pending the contractor settled the case with CPS, with CPS forgiving
part of the amount in question plus paying attorneys fees incurred by
the contractor. CPS then sued its insurance carrier (TIG Specialty
Insurance Company) for reimbursement, plus punitive damages. TIG asked
the court to dismiss the action on the basis that the affirmative
defense in the action between the contractor and the insured did not
constitute a "suit" as defined by the policy and in case law,
and that there was consequently no suit triggering a defense duty on TIG’s
part. TIG also asserted that the contractor was only seeking to mitigate
its own damages but did not seek any "damages" against CPS, as
required for coverage. The trial court agreed with the insurance carrier
and dismissed the case.
The appellate
court reversed the decision, and held that the pleading of an offset
"rose to the level of a suit." According to the court,
"damages are money ordered by a court" and an offset comes
within this definition of damages. It didn’t matter that the
contractor elected to assert an offset as an affirmative defense instead
of bringing a counter-complaint or cross-complaint against CPS. The
court cited cases from other jurisdictions that have held an
"offset claim was in substance and effect a suit against the
insured seeking damages for legal malpractice." Construction
Protective Services, Inc. v. TIG Specialty Insurance Company, 90
Cal. App. 4th 149 (June 27, 2001).
Risk Management Note: It is somewhat surprising that there are
not more reported cases of disputes between insurance carriers and their
insureds over the question of whether a fee offset constitutes an
insured damage or claim. In the majority of cases in which a contractor
or design professional sue their client for fee, the client defends
itself with a counter-claim or offset claim alleging that they do not
owe the fee since the plaintiff was negligent or otherwise failed to
adequately perform the services required under the contract. The
standard professional liability policy, for example, states that fee
disputes do not constitute insurable damages or claims. As seen by the
reported case, the matter may be less than perfectly clear.
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"No Damage for Delay" Clause Not Enforceable
Where an
electrical contractor was delayed in completing its work, the project
owner, school district, asserted that the contractor’s claim for delay
damages was barred by a "no damages for delay" clause in the
contract. The trail court concluded that the clause did not bar the
plaintiff’s claim, and the appellate court agreed. Delays were caused
by actions of the owner as well as by the construction manager’s
failure to adequately supervise the coordinate the work of various
contractors and failure to prepare the coordinated construction
schedules and drawings.
The contract
stated: "Contractor expressly agrees for itself, its Subcontractors
and suppliers not to make, and hereby waives, any claim for damages on
account of any delay, obstruction or hindrance. Contractor’s sole
remedy for any delay, obstruction or hindrance shall be an extension of
the time in which to complete the Work." Despite clauses such as
this one, the court explains that damages may be recovered for (1)
delays caused by the owner’s bad faith or its willful, malicious, or
grossly negligent conduct, (2) uncontemplated delays, (3) delays so
unreasonable that they constitute an intentional abandonment of the
contract by the owner, and (4) delays resulting from the owner’s
breach of a fundamental obligation of the contract.
In this case,
Phase II of the construction was to be for 10 months and be finished in
February, but was finished in September instead. And Phase III was
completed almost a year later than planned. One of the causes of delay
was that the owner terminated both the construction manager and the
general contractor, and hired 30 subcontractors in lieu of replacing the
general contractor. According to the court, the project impediments were
wholly unanticipated and, according to expert testimony, were of a
character and magnitude not ordinarily encountered or anticipated by
parties to a contract of this nature. The court also found that the
construction management team failed to substantially fulfill the express
contractual obligation to schedule and coordinate the work, resulting in
extensive work interruptions or delays and inefficient labor deployment,
and that this justified the trial court finding a pervasive and ongoing
breach of contract.
Another
important aspect of this case concerns a 72 hour notice requirement that
"prohibited a contractor from obtaining an extension of time to
complete its work if it failed to issue a written request for such
relief within 72 hours of the delay." The court found the
requirement applied to the claim and barred damages incurred prior to
date the electrical contractor provided notice of its claim to the
owner. Clifford R. Gray, Inc. v. City School District of Albany, 277
A.S2d 843; 716 NYS 2d 795.
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International Risk Management Institute
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information visit http://www.irmi.com/rd/rd.asp?id=crr
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Architect May be Liable to Unpaid Supplier
Where the
project architect knew there was no payment bond and that subcontractor
was not being paid, yet continued to certify payments to the general
contractor and reduced the amount of retainage, it could be liable for
breach of duty to use reasonable care to ensure payment was being made
to subcontractors.
The architect’s
responsibilities under its contract included reviewing the general
contractor’s payment applications, certifying the amounts due, and
determining whether work had been performed according to the
requirements of the contract. It had the ability to withhold the
certification of payments if the contractor failed to properly pay the
subcontractors. Although the general contractor was required to obtain
performance and payment bonds it failed to do so. In addition, the
contractor was contractually required to submit to the architect with
each payment application satisfactory evidence that all indebtedness
connected with the part of the work for which application for payment
was made had been paid, and submit a subcontractor waiver of lien for
that work. The general contractor never submitted the lien waivers with
its payment applications. Despite knowing all of this and knowing that
the subcontractors were not being paid, the architect continued to
certify payments to the general contractor.
On the
question of whether an unpaid subcontractor had a cause of action
against the architect, the court stated that where there is a special
relationship between the design professional and the contractor, the
design professional may owe a duty to the contractor. In this case, the
appellate court held that this is a factual issue to be determined by a
jury and that the trial court erred in granting summary judgment in
favor of the architect. The case was, therefore, remanded so that a jury
may decide whether such a special relationship existed and whether the
architect’s actions constituted negligence. Callum Mechanical
Construction, Inc. v. South Carolina Baptist Hospital, 344 S.C. 426;
544 S.E. 2d 838.
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ConstructionRisk.com, LLC, and the editor and writers, are not hereby
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content and comments in this newsletter are provided for educational
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expressly disclaim any responsibility for damages arising from the use,
application, or reliance upon the information contained herein.
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Copyright 2001, ConstructionRisk.com, LLC
Editor: J. Kent Holland, Jr., J.D.
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