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ConstructionRisk.com Report with Kent Holland
http://www.ConstructionRisk.com

Vol. 5, No. 4, May 03
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Inside This Issue:

*  Boilerplate Can Burn!

*  Accord and Satisfaction Language on Endorsed Check Barred Contract Claim

*  Differing Site Conditions, Defective Specifications: One Coin, Two Sides

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ConstructionRisk.com BOOK: “Construction Law & Risk Management: Case Notes and Articles”

Now in one well-indexed book, with 27 chapters,  you can read the case notes and articles that have been published in the ConstructionRisk.com Report between 1999 and 2002. 

It is priced at about 1/3 of the cost of comparable books and newsletters This book compiles and organizes case notes, articles and papers written by well known and respected attorneys and professional consultants for original publication in a number of newsletters published by a variety of organizations including law firms, claim consultants, financial services providers, accountants, design professionals and contractors.  The cases and articles that are included in this book were selected based on their value for demonstrating risk management principles to be considered and applied.  The intent is to give a sampling of issues and cases, providing risk management ideas and information to serve as a useful resource for the reader.  310 Pages.  Chapters include:

1.0           Americans with Disabilities Act

2.0           Conflicts of Interest

3.0           Contract Language – Terms and Conditions

4.0           Contractor Suits against Design Professionals

5.0           Copyright Ownership

6.0           Cost Issues

7.0           Damages

8.0           Design-Build

9.0           Differing Site Conditions & Other Changes

10.0         Dispute Resolution

11.0         Documentation

12.0         Economic Loss Doctrine – Bars Suit in absence of Contract

13.0         Environmental

14.0         Expert Witness Evidence Required

15.0         Indemnification

16.0         Insurance

17.0         Limitation of Liability

18.0         Scheduling

19.0         Site Safety Risk and Responsibility

20.0         Statute of Limitations

21.0         Statute of Repose

22.0         Subrogation Waivers

23.0         Substantial Completion

24.0         Surety

25.0         Suspension and Debarment

26.0         Termination of Contract

27.0         Warranties

For More Information, go to this link: http://www.constructionrisk.com/constructionlawbook/index.htm

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ARTICLE # 1
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Boilerplate Can Burn!  

By:  Lawrence Moss, Esq.

There are no “industry standard” construction form documents.  But the forms issued by the American Institute of Architects (AIA) come close, being widely used.  One key provision to be considered is the issue of consequential damages.

“Consequential damages” are damages, losses or injuries which do not flow directly and immediately from the wrongful act of a party, but rather from some consequence of that act, such as lost profits or damage to reputation. 

Some years ago, in the case of Perini Corp. v. Great Bay Hotel, a New Jersey appellate court upheld a fourteen million dollar consequential damages award against a general contractor for the owner’s lost profits resulting from late completion – where the general contractor’s total compensation was only $600,000!

In response to this and similar cases across the country, the AIA, at the urging of contractors, included the mutual waiver of consequential damage in the 1997 forms (see Paragraph 4.3.10) of the General Conditions to the Contract for Construction, AIA Document A201 (1997); there are analogous provisions in the current Owner/Architect agreement forms.).  By eliminating consequential damages, the AIA intended that contractors and architects be protected against damages awards which are grossly disproportionate to the compensation received for their services.

Although the waiver is mutual, owners, contractors and architects need to consider the potential impact of this provision. 

For example, consider the development of a luxury condominium project.  The owner/developer probably won’t see a dime of net income until the project is completed and it starts unit closings.  During construction, however, the owner is incurring costs: interest and financing fees; taxes, insurance and other carrying costs; administrative costs, overhead and salary of sales and development personnel.  The owner’s hope of making money is premised, in part, upon construction being completed in time to get units closes and costs paid or eliminated before those costs eat away any chance of profit – or worse.

If the contractor fails to complete by the promised completion date, the owner will pay interest and carrying costs longer than planned.  Equity investors, who have a preferential return on capital, will earn more money, leaving less bottom line for the developer.  Buyers might be able to terminate their contracts because of a missed delivery date.  Contractors can be delayed, too.  Drawings may be incomplete and may need to be revised, resulting in extra delay and expense.

To the extent that these damages are considered “consequential” damages, and a party signed an unmodified AIA contract, that party won’t recover a penny.

An alternative to deleting the waiver is to reconsider liquidated damages.  Liquidated damages are amounts recoverable in a fixed amount upon occurrence of a defined event.  If liquidated damages clauses are drafted properly so as not to be punitive, than after appropriate economic analysis, they are usually enforceable by the courts.

Liquidated damages have been generally anathema to contractors.  Since the adoption by the AIA of the mutual waiver language, however, more contractors are willing to negotiate a serious and meaningful liquidated damage remedy -- especially if the alternative is the deletion of the waiver of consequential damages clause, and the possibility of uncapped liability for the contractor.

The moral of the story: If you are presented with an unmodified AIA contract for signature, think twice, because the consequences of signing an unmodified AIA contract could be significant. 

ABOUT THE AUTHOR:  Lawrence Moss is an attorney with the law firm of D’Ancona & Pflaum LLC, 111 E. Wacker Drive, Suite 2800 , Chicago , IL 60601 ; Tel: (312) 602-2000.  The firm’s web site is: http://www.dancona.com.  

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ARTICLE # 2
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Accord and Satisfaction Language Barred Contract Claim

 By:  J. Kent Holland, Jr., Esq.  

Where a statement was conspicuously contained in a letter transmitting a check for final payment to a contractor stating that the check will constitute full satisfaction of a contractor claim, a court held this to be an accord and satisfaction, barring the contractor from claiming additional monies under its contract.  In Gelles & Sons General Contracting, Inc. v. Jeffrey Stack, Inc. (No. 012319, Fairfax County, VA 2002),  the contractor (“Gelles”) had performed brick laying work, and the its customer (“JSI”)  took issue with the amount and quality of the work and disputed the amount of compensation due.  The final paragraph of its letter transmitting the check in question stated, “JSI Paving and Construction stands by its final amounts as stated on the latest correspondence.... Enclosed, please find a check .... representing final payment of the contract.” Gelles cashed the check.  Then Gelles sued JSI for the balance that it deemed owed.  In response, JSI asked the court for summary judgment on the basis of accord and satisfaction.  The court granted the summary judgment for several reasons.   

Under the Virginia Code, section 8.3A-311, if a person tenders a payment instrument to a claimant as full satisfaction of the claim which was unliquidated or subject to a dispute, and the claimant obtained payment of the instrument [i.e., cashed the check], the following conditions apply.  “b) ... the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.”    

“Conspicuous,” as defined in the Code, means a term or clause that a reasonable person “ought to have noticed.”  There is no statutory requirement that the term or clause must be displayed in a particular font or size type.  Gelles argued that the language was ambiguous and would not lead a reasonable person to conclude that full satisfaction of the claim was intended.  The trail court found that a reasonable person could not have considered the language of the letters to be anything other than “a drop-dead letter that says, ‘This is it.  This is what we’re going to pay you.’”  The appellate agreed that “the entire course of conduct and communication between these parties made clear that JSI offered the [amount] as the final payment that it intended to make and that JSI considered that amount to represent the proper accounting under the contract.”

Risk Management NOTE:  I have had the experience while litigating a contractor claim to have a project owner successfully persuade a judge that through a combination of a change order, payment authorization, and partial waiver and lien release, the contractor had agreed to a total accord and satisfaction of any and all claims related to any work related to the change order.   This came as a surprise to the contractor who never intended by signing the documents and cashing the check to waive its entitlement to the amount that it alleged to remain contested.  Despite correspondence and documentation submitted to the owner by the contractor prior to the “accord and satisfaction,”demanding payment and seeking to preserve its rights, a court held that the subsequent contractor claim for the outstanding balance could be barred.  The lesson learned is that language asserting a release and satisfaction must be taken most seriously, and, to assure that any right to a claim for additional monies is preserved, appropriate communication and action must be taken  

ABOUT THE AUTHOR:  Mr. Holland is a construction lawyer with the law firm of Wickwire Gavin, P.C. in Vienna, Virginia and is the director of risk management services for the environmental and design professional liability unit at Arch Insurance Company in New York, NY.  He may be reached at Kent@kentholland.com or 703-623-1932. 

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 ARTICLE # 3
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Differing Site Conditions, Defective Specifications: One Coin, Two Sides

 By:  Stephen J. Densmore, Esq.

 Unforeseen site conditions typically spawn two types of claims based on two distinct but related theories: differing site conditions (DSC) and defective specifications.  A contractor may attempt to circumvent the limitations on recovery under a DSC provision by characterizing its claim as one for breach of contract due to defective specifications.  In Comptrol Inc v. United States (Fed Cir. 2002) 294 F.3d 1357, a federal court recognized the close relationship between these two theories and blocked the contractor’s attempt to do an end-run around the recovery limits in the owner’s DSC provision.   

In Comptrol, the contractor claimed that during bidding, the government withheld material information concerning the presence of quicksand and the location of a subsurface pipeline.  Apparently unhappy with the recovery allowed by the DSC provision, the contractor tried to argue that its claim should be permitted as a claim for damages for breach of contract arising from defective specifications.  The court rejected this argument and held that although DSC claims and defective specifications claims are distinct in theory, “where the alleged defect in the specification is the failure to disclose the alleged differing site condition,” the two claims are “so intertwined as to constitute a single claim” that is governed by the DSC provision.”  

Contract Drafting NOTE:  DSC provisions typically contain a number of clauses relating to such things as notice, cost recovery, and continuous work that are valuable protections for the owner.  In order to preserve these protections, an owner should try to draft the DSC provision with language that limits the contractor’s ability to circumvent the DSC provision by characterizing its claim as one for “defective specifications.”  

ABOUT THE AUTHOR:  Steve Densmore is an attorney with the law firm of Kane, Ballmer and Berkman, 515 South Figueroa Street, Suite 1850, Los Angeles, CA 90071; Tel: (213) 617-0480. Email: sdensmore@kbblaw.com.  Website: http://www.kbblaw.com.  

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ARCH INSURANCE GROUP  

For information on design professional liability and environmental liability insurance available from ARCH, contact Richard Zarandona at 973-206-8025 (senior vice president), rzarandona@archinsurance.com; Victoria Szot, P.E., J.D. (professional liability underwriter), at 973-206-8026, vszot@archinsurance.com; Jim Boyes (environmental liability underwriter)  at 973-206-8027, jboyes@archinsurance.com; or Kent Holland (risk management) at 703-623-1932, kholland@archinsurance.com.   Underwriting is done out of the Arch Insurance Group office at 55 Madison Ave. , Morristown , NJ , 07960 .  

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ON-LINE RISK MANAGEMENT COURSES BY KENT HOLLAND

Currently available risk management courses written by Kent Holland for RedVector, (http://www.redvector.com/instructors/view_related_courses.asp?id=195) include the following: Risk Management for the Design Professional; Contract Guide for the Design Professional; Design Build Professional Liability Risk Management and Insurance; Site Safety Risk and Liability; Managing Communication, Documentation and Reports; Insurance for Design-Build and Complex Projects; Construction Contract Law; Contract Claims against Design Professionals; Insurance Coverage Disputes; and Environmental Claims.   

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ABOUT THIS NEWSLETTER & A DISCLAIMER 

This newsletter Report is published and edited by J. Kent Holland, Jr., Esq., Director of Risk Management Services for the Environmental and Design Professional Liability Units of Arch Insurance Group. The Report 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 or the practice of law. Further, the content and comments in this newsletter are provided for educational purposes and 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, LLC, and its writers and editors, expressly disclaim any responsibility for damages arising from the use, application, or reliance upon the information contained herein.

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Copyright 2003, ConstructionRisk.com, LLC

Publisher & Editor: J. Kent Holland, Jr., Esq. 
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