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ConstructionRisk.com Report
http://www.ConstructionRisk.com
Vol. 10, No. 5, December 08
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Inside
This Issue:
• Copyright
to Documents May be Enforced by Architect Several Years after
Normal
Passing of Statute of Limitations;
• Contract
Mods With General Release Language Did not Establish Accord and
Satisfaction Defense for Government against Impact Claims Not Expressly
Released
;
• General
Contractor’s CGL Policy Covers Damages Caused by Subcontractor,
Including Damage to the Work (Stucco) as well as Resulting Water
Infiltration;
• Certificate
of Payment Did not Render Architect and CM Liable to Surety for
Overpayment to Defaulted Contractor
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Article
1
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Copyright to
Documents May be Enforced by Architect Several Years after
Normal
Passing of Statute of Limitations.
When an Architect brought a copyright infringement
suit against its former client (a project owner) who had terminated the
architect’s services before completion, the trial court applied the
three-year statute of limitations to dismiss the complaint on the basis
that the architect should have discovered the grounds for its complaint
and filed much sooner than it did. On
appeal, this was reversed. The
court found that there were no facts compelling the trial judge to
determine that the architect was on notice of the alleged copyright
violation prior to the passing of the statutory period.
In addition, the court reviewed the AIA contract agreement and
held there was no basis for finding that the architect’s plans were
“work for hire” or that the project owner had any contractually
based copyright interest in the architect’s plans.
A termination agreement between the parties also addressed the
use of the plans and was an important consideration by the court.
In Warren
Freedenfeld Associates, Inc. v. McTigue et al., 531 F.3d 38 (1st
Cir. 2008), a veterinarian retained an architect to design a veterinary
hospital. The contract that
was used for this purpose was an AIA document.
Although the court does not state which particular AIA document
was used, it is likely that it was B 141 (1987) since the court refers
to Article 6 as pertaining to ownership of documents.
As stated by the court, the contract (article 6)
provided that the architect would be “deemed the author” of all
plans and drawings prepared for the project, and would “retain all
common law, statutory and other reserved rights [therein], including the
copyright.”
The relationship between the architect and owner
soured, resulting in negotiations to terminate the contract.
While negotiations were going on, the architect sent a letter to
the owner warning that the plans and drawings it had produced were
proprietary and that neither the owner nor any successor architect could
use them to complete the project. In
response, the owner wrote back stating that the plans and drawings were
“useless” and that they had been “rolled up and discarded.”
The owner also complained that he would have to pay another
architect “tens of thousands of dollars” to finish the project.
While the negotiations dragged along, the architect
decided to protect itself by filing a formal copyright application for
the plans and drawings with the U.S. Copyright Office.
Ultimately, the parties reached a termination
agreement, which among other things stated that Article 6 (Use of
Architect’s Drawings) would remain “in full force and effect.”
The agreement further provided that the owner would not “use
any of the work solely produced by [architect].
The word “solely” was a handwritten insertion by the owner
that was initialed by the architect.
Four years later, the architect came across an
article in a magazine featuring a drawing of the floor plan of the
veterinary hospital that was ultimately built by the owner.
The drawing apparently looked much like what the architect had
produced for the owner. He,
therefore, went to the city and obtained a copy of the building plans
and concluded that his copyright had indeed been infringed.
Almost six years after the termination settlement agreement had
been executed, the architect filed his copyright infringement suit
against the building owner. The
defendant filed a motion to dismiss the suit – claiming it was barred
by the three year statute of limitations.
The trial court ruled in favor of the defendant on
the summary judgment motion, finding “overwhelming” evidence that
any “reasonably diligent person” in the architect’s position would
have learned of the alleged infringement no later than the date when the
veterinary hospital opened. On
a separate issue of whether the veterinarian was granted sole ownership
of a portion of the architect’s copyrighted work and enjoyed joint
ownership of other portions of that work, the trial court granted
summary judgment for the architect, finding the veterinary had no
ownership interest in the plans and drawings that were filed with the
copyright office.
On appeal, the appellate court held that until the
architect saw the magazine article he had no duty to inquire or discover
the alleged copyright infringement.
As explained by the court, the question to be determined in this
regard is whether a reasonably prudent person in the architect’s shoes
would have discovered the alleged infringement.
This is a fact-sensitive question and requires a trial court to
explore the idiosyncratic circumstances of each individual case, says
the appellate court.
In this situation, the appellate court concluded
that prior to the architect’s chance encounter with the magazine in
five years after he had terminated his contract, there were no facts
sufficient to mandate a conclusion that a reasonable person would have
suspected that the copyrighted material had been used in an unauthorized
manner. This is especially
so, says the court, in light of the written warning by the Architect to
the owner not to use his plans, and the written response by the owner
stating that the plans were “useless” and had been “discarded.”
The veterinarian argued that the availability of
the as-built plans, and the fact that the veterinary hospital was open
in June 2000, put the architect on inquiry notice concerning the use of
the plans and drawings. In
rejecting this argument, the court stated, “Architects have no
general, free-standing duty to comb through public records or to visit
project sites in order to police their copyrights.”
In an interesting argument by the veterinarian,
which the court found to be unpersuasive, the veterinarian argued that
by inserting the word “solely” into the termination agreement to
preclude the owner from using material “solely produced by
[architect]”, was sufficient to put the architect on notice of the
owners intent to use the plans. The
court, however, found nothing about that phraseology gave rise to a
reasonable suspicion that skullduggery was afoot.
The plain terms of the Termination did not authorize the
defendants to use any copyrighted material, nor did those terms hint at
a clandestine intention to violate the very copyrighted interest that
the agreement preserved.”
For
these reasons, the appellate court held that summary judgment should not
have been granted against the architect, and reversed that aspect of the
trial court decision.
On the question of whether the veterinarian had any
basis for claiming a copyright interest in the documents, the court
found there was no basis for the veterinarian’s claim to be a sole
owner of any part of the copyrighted plans and drawings, nor was there
basis to find him to be a joint owner of any part.
As explained by the court, the veterinarian’s “work for hire
theory suffers from obvious flaws.”
“A commissioned work can be considered a work made for hire,”
says the court, only “if the parties expressly agree in a written
instrument signed by them that the work shall be considered a work made
for hire.”
In this case, the court points out that neither the
AIA Agreement nor the Termination Agreement “makes even a veiled
reference to works for hire, nor does either contract contain any
language remotely suggesting an intention to establish a work for hire
relationship.” Again,
the court made short work of the veterinarian’s argument that the
Termination Agreement restricting him from using “any of the work
solely produced by [architect] confers upon him ownership of work not
solely produced by [architect].” This
says the court is “an attempt to pass an elephant through the eye of a
needle.”
Comment:
Bravo to the appellate court for taking this veterinarian behind
the barn for a good verbal thrashing.
It seems that the veterinarian tried to argue he had out-smarted
the architect by adding the word “solely” so he could circumvent the
otherwise clear intent of the AIA Agreement and Termination Agreement
that the architect’s plans and drawings would not be used.
It is encouraging to see the clarity in which the court saw
through what it apparently deemed to be spurious arguments, and
essentially chastised the veterinarian for even raising them.
As demonstrated by the holding in this case, the
AIA contract documents preserve for the architect the copyright of the
Instruments of Service. Many
project owners, however, are revising and reversing this language to
state that the copyright of the documents will be given to the project
owner instead of the architect. The
“work made for hire” language is more frequently being included in
contracts that are generated by project owners - thereby attempting to
deprive the architect of the copyright and use of his own documents.
A couple pointers are in order concerning the
contract language pertaining to ownership and copyright of documents.
The architect or other design professional that is creating
Instruments of Service should include appropriate language in the
contracts to preserve its copyright interest in the documents.
If the project owner is granted ownership of the actual documents
instead of a nonexclusive license as is done by the standard form
agreements, the architect should nevertheless maintain copyright
interest in the documents. The
phrase “work made for hire” should be stricken from agreements.
In the event that for some reason the design
professional decides to grant copyright interest to its client, then at
a minimum the design professional should maintain joint ownership of the
copyright. The design
professional should also be careful not to grant such broad language
that it gives away the copyright to its own standard documents and
standard features it has developed over the years.
If
the project owner is being granted ownership, or copyright interest, in
the Instruments of Service, the design professional should obtain
language in the contract requiring the Owner to indemnify the design
professional for damages arising out of the use of the documents on any
project or for any purpose other than for which they were produced under
the agreement. An example of
such a provision in a contract recently reviewed is the following:
“To the fullest extent permitted by law, the Owner shall
defend, indemnify and hold the Design Architect, its officers,
directors, shareholders, partners, principals, agents, employees,
consultants, successors and assigns, harmless from and against all
liability, loss, damages, costs and expenses, including attorneys’
fees and disbursements, which any of them may at any time sustain or
incur by reason of any revision or addition to, misuse of or deviation
from the Instruments of Service occurring subsequent to the Design
Architect's completion of services under or the earlier termination of
this Agreement.”
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Article
2
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Contract
Mods With General Release Language Did not Establish Accord and
Satisfaction Defense for Government against Impact Claims Not Expressly
Released
J. Kent Holland, Jr., Esq.
The U.S Court of Federal Claims finds that a
contractor (Bell BCI Company (“Bell”)) that built a new laboratory
building at the National Institutes of Health (NIH) facility in
Bethesda, Maryland was entitled to recover on its impact claim for the
cumulative effect of changes to its performance resulting from a series
of over 200 contract modifications that addressed over 730 Extra Work
Orders (EWOs). The court
rejected the government’s defense that the claim was barred by accord
and satisfaction. The court
also rejected the government’s claim that
Bell
was liable for liquidated damages for failure to complete the project on
time. None of the contract
modifications included any payment for cumulative impact or labor
inefficiency.
Although when executing the contract Modifications,
Bell
did not expressly reserve a right to submit an impact claim,
Bell
never expressly released its cumulative impact claim in any
modification. The facts
giving rise to the multiple changes and the cumulative impact at issue
are that that nine months after construction began, NIH decided to add
an extra floor to the five floor building under construction.
This delayed project completion by a year and a half, and
increased the contract price by approximately
$21 million or 34 percent.
In awarding
Bell
over $6 million, plus interest under the Contract Disputes Act (CDA),
the court said “there is evidence that NIH failed to satisfy its
implied duty of good faith and fair dealing in the administration of
this project.” The
judgment included delay damages for “extended general conditions
costs” such as project management, field supervision staff, clerical
support, field engineering, office trailers, equipment, supplies,
storage facilities, pick-up trucks, fuel, temporary toilets, and
utilities.
In addition to these delay damages and labor
inefficiency costs, the court also applied a 10 percent profit for
Bell
on top of those costs. The
court also granted a “pass through” claim of one of the
subcontractor’s in the amount of $812,092, plus CDA interest.
Facts of the
Case
According to the court, the NIH lost control of the
project because it failed to prevent the scientists who were going to be
occupying the new building from demanding changes – including the
addition of a new floor after construction had begun.
Adding the new floor, said the court, “proved to be a
disastrous idea, particularly causing many mechanical and electrical
changes after the work already had been installed.”
Much rip out and replacement of the contractor’s and
subcontractors’ work had to be done at tremendous time, cost, loss of
efficiency and cumulative impact. NIH
made matters worse by directing
Bell
to perform the extra work without time extensions, or authorizing
acceleration of performance.
Bell
and the NIH negotiated for the addition of the new floor in three
phases. The first
phase was for structural steel and concrete work for the fourth floor
– adding $1,579,127 and extending the schedule 30 days.
The second phase was for changes to the fourth floor that NIH
made after
Bell
submitted its price proposal. This
added $6,891,118 for the phase two added work.
It also extended the schedule for an additional 30 days.
The phase three negotiation was for construction related to the
final design plans that NIH issued for the new floor.
When the parties couldn’t agree, NIH issued a unilateral
Modification 078 directing
Bell
to proceed with the specified work at a price of $1.8 million pending
further negotiation. It
extended the contract completion another 30 days.
Mod 93 was subsequently negotiated with the parties agreeing to
change this price to approximately $2.3 million and further extend the
scheduled completion date. It
is this Modification number 93 that NIH argues releases any right of
Bell
to recover impact costs on the project.
Mod 93 stated that the parties mutually agreed to:
“Increase the contract amount by $2,296,963 …
as full and equitable adjustment for the remaining direct and indirect
costs of the Floor 4 Fit-out (EWO) 240-R1) and full and equitable
adjustment for all delays resulting from any and all Government changes
transmitted to the Contractor on or before August 31, 2000.”
The Mod further provided:
“The modification agreed to herein is a fair and
equitable adjustment for the Contractor’s direct and indirect costs.
This modification provides full compensation for the changes,
including both Contract cost and Contract time. The Contractor hereby
releases the Government from any and all liability under the Contract
for further equitable adjustment attributable to the Modification.”
The court’s interpretation of this Mod language
is stated as follows: “Modification
093 does not contain any mention of a cumulative impact or inefficiency
claim.
Bell
did not receive in Modification 093 any consideration for the settlement
or release of a cumulative impact or inefficiency claim.”
After the contract Mod was issued, NIH issued 113
additional modifications, incorporating 216 Extra Work Orders.
Bell
wrote to NIH giving notice that the continued issuance of changes would
delay the project and impact
Bell
’s ability to meet the completion milestones.
Bell
advised NIH that to avoid impact to the schedule NIH needed to authorize
resources to accelerate performance. NIH
did not authorize an acceleration effort and did not respond to
Bell
’s letter.
Bell
’s attempt to include acceleration costs in its pay request was
rebuffed.
Instead of cooperating with
Bell
to get the project under control and pay acceleration costs to keep the
project on the revised schedule, the NIH decided to withhold payments.
It also threatened to assess liquidated damages if milestone completion
dates were not met. The
court explains that “NIH continued to issue change orders, demanded
compliance with milestone completion dates, and refused to authorize
Bell
to accelerate performance. NIH
would not extend the schedule, and even reneged on paying
Bell
for changes that had been negotiated and accepted by the Contracting
Officer.”
After completing the project, including all the
changed work,
Bell
submitted a certified Request for Equitable Adjustment (REA) to the NIH
Contracting Officer. The
C.O. denied the claim in its entirety, and asserted NIH claims against
Bell
for liquidated damages of almost $500,000, plus additional backcharge
claims of almost $400,000.
In suggesting that NIH failed to act in good faith
and fair dealing, the court explained that “The record further
indicates that NIH was not planning to assess any liquidated damages
against
Bell
unless
Bell
submitted a claim. Apparently,
upon the advice of NIH counsel, the agency asserted claims for
liquidated damages and backcharges against
Bell
as a means of gaining leverage in settlement negotiations.”
An e-mail from the NIH’s construction quality management firm
to Contracting Officer at
the time stated: “In summary, we have nothing to backcharge at this
point in time, but several potentials….. If we are going to negotiate
with them on the delay claim, I would throw this stuff into the mix.”
The
Court’s Legal Analysis
The court begins its analysis by explaining the
difference between a “delay claim” and a “disruption” or
“cumulative impact claim.” The
court summarizes that a “delay” claim captures the time and cost of not
being able to work, while a “disruption” claim captures the cost of
working less efficiently than planned.”
A disruption claim thus compensates for damages when the work is
more difficult and expensive than anticipated due to the changes.
On the issue of what proof of damages is required,
the court stated that the law only requires “reasonable certainty”
to support a damages award, and that “damages do not need to be proven
with mathematical exactness.” Quoting
other case precedents, the court explained “Rather, [i]t is sufficient
if [a claimant] furnishes the court with a reasonable basis for
computation, even though the result in only approximate.”
The Changes clause in the
Bell
contract was FAR 52.243-4, Changes (AUG 1987).
It provides the following:
(d) If
any change under this clause causes an increase or decrease in the
Contractor’s cost of, or the time required for, the performance of any
part of the work under this contract, whether
or not changed by any such order, the Contracting Officer shall make
an equitable adjustment and modify the contract in writing.”
By this clause, the court says the contract
“expressly contemplated the need for an equitable adjustment when the
cumulative impact of many change orders affected the contractor’s
performance of unchanged work.” Based
on its review of the facts, the court found there to be “a classic
environment for cumulative impact and labor inefficiency.”
The court therefore affirmed
Bell
’s cumulative impact claim.
The next part of the court’s decision addressing
the government’s accord and satisfaction defense is so significant
that it is quoted at length as follows:
“None of the 206 contract modifications issued on
the project includes any NIH payment or other consideration to
Bell
for a disruption, cumulative impact, or labor inefficiency claim.
Similarly, none of the modifications contain any language
explicitly waiving or releasing such a claim.
While language sporadically appears in some modifications
purporting to reserve rights, the Court cannot say that any meeting of
the minds between the parties ever occurred.
There is no evidence that NIH ever provided any consideration to
Bell
to settle a cumulative impact claim.
Many of the events relevant to the cumulative impact claim did
not even arise until after the parties signed Modification 093.”
“Given the clear distinction in the law between
(1) the cost of performing changed work and (2) the effect of multiple
changes on unchanged work, prudent contracting parties surely would be
specific in describing the exact scope of any release or reservation of
rights. The fact that
Modification 093, or any other modification on this project, did not
expressly address
Bell
’s cumulative impact claim explains why the Court previously denied
cross-motions for summary judgment, and invited testimony at trial.”
The court then focused on the fact that at trial
the government offered no testimony in support of its accord and
satisfaction defense. Most
significantly, the court found that the Contracting Officer would have
been in the best position to know whether there was any merit to the
accord and satisfaction argument, and her failure to testify at trial
allows the court to “infer that her testimony would not have supported
Defendant’s [NIH’s] position.” Based on a review of the 206
contract modifications, and the circumstances above described, the court
concluded that NIH’s accord and satisfaction defense was without
merit.
Comment:
The court was undoubtedly influenced to issue such a tough,
precedent setting, decision against the government based in large part
on what the court deemed to be very bad behavior of the government
throughout the project. Asserting
the right to liquidated damages and backcharges must have been the final
straw that broke the back of the
government’s faith. Any
credibility the government had was surely lost at that point.
In government contracts, it can be difficult, to
impossible, to negotiate specific reservation of rights language into
the Contract Mods. Through
transmittal correspondence and other contemporaneous written
documentation, the contractor may endeavor to state a reservation of
rights to cumulative impacts, lost efficiency and other costs.
Sometimes the best that can be accomplished is that the
government includes direct costs and time in the Contract Mod and
remains silent concerning whether other costs are reserve or waived.
The Court’s decision here suggests that silence with regard to
waiver and release can reasonably be interpreted to mean that the
Contract Mod has not addressed impact claims and that the Contractor has
therefore not waived and release any right to recovery.
Only express releases or claims will apparently be deemed by the
Court to constitute “accord and satisfaction.”
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Article
3
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General
Contractor’s CGL Policy Covers Damages Caused by Subcontractor,
Including Damage to the Work (Stucco) as well as Resulting Water
Infiltration
A commercial general liability (CGL) policy issued
to a homebuilder, general contractor (GC) was held to cover a
homeowner’s claims for damages caused by the negligence of a
subcontractor who allegedly installed stucco siding defectively.
The claim was for breach of contract, negligence, and breach of
warranty, alleging that the stucco allowed water to seep into the home
and cause damage to framing and exterior sheathing.
An arbitrator awarded damages to the homeowner. Auto-Owners
Insurance Company insured the GC with a CGL policy.
It filed a declaratory judgment action asking a court to declare
that its policy did not cover the damages awarded by the arbitrator.
The trial court ruled against the insurance company, finding that
the damages resulted from an insured “occurrence” and that no policy
exclusions applied to bar the coverage.
On appeal, the trial court decision was affirmed.
This results in an appellate decision that strengthens the
arguments for finding construction defect coverage for the work itself
when that work is performed by a subcontractor.
In Auto
Owners Insurance Company v. Virginia Newman and Trinity Construction
Company (South Carolina 2008), the CGL policy in question is a
standard Insurance Services Office (ISO) form.
The policy states it will cover bodily injury or property damage
caused by an “occurrence.” The
term “occurrence” is further defined as an “accident, including
continuous or repeated exposure to substantially the same harmful
conditions.” The term
“property damage” is defined as “physical injury to tangible
property, including all resulting loss of use of that property.”
Since the policy form does not define the term
“accident” the court applied a definition that several courts have
used which is “an unexpected happening or event, which occurs by
chance and usually suddenly, with harmful result, not intended or
designed by the person suffering the harm or hurt.”
The court cited case law for the proposition that
only damage to the work itself that results from faulty workmanship is
not deemed an accident covered by a CGL policy.
The court went on to explain that a CGL policy may provide
coverage where a claim for faulty workmanship alleges third party bodily
injury or damage to other property.
In this case, the court relied upon the
arbitrator’s finding that the defective stucco caused the homeowner to
suffer damage because it allowed continuous moisture intrusion resulting
in water damage to the home’s exterior sheathing and wooden framing.
This, said the court, establishes that there was damage beyond
that of the negligently applied stucco itself.
The court found that the continuous water intrusion into the home
qualifies as an accident involving continuous or repeated exposure to
substantially the same harmful conditions – and therefore constitutes
an “occurrence” under the policy.
Apparently desiring to address the “your work”
exclusion in the CGL policy, and the subcontractor exception to that
exclusion, the court went further in its analysis and presented an
interesting explanation of the policy coverage as follows:
“A CGL policy in the home construction industry
is designed to cover the risks faced by homebuilders when a homeowner
asserts a post-construction claim against the builder for damage to the
home caused by alleged construction defects…. The primary exclusion is
the ‘your work’ exclusion which provides that the policy will not
cover ‘property damage’ to ‘your work’.
In 1986, the insurance industry amended the ‘your work’
exclusion to provide that even if the property damage is to the
builder’s own work, the ‘your work’ exclusion does not apply ‘if
the damaged work or the work out of which the damage arises was
performed on your behalf by a subcontractor.’… In doing so, the
insurance industry extended liability coverage for property damage to
the contractor’s completed work arising out of work performed by the
subcontractor. The facts in
this case establish exactly the type of property damage the CGL policy
was intended to cover after the 1986 amendment to the ‘your work’
exclusion.”
The insurance company also argued that even if the
faulty workmanship were an “occurrence” under the policy, an
exclusion in the policy that bars coverage for expected or intended
damages would nevertheless apply to deny coverage.
Specifically, the company argued that a professional contractor
would expect substantial moisture intrusion from defective stucco to
result in these types of damages. In rejecting this argument, the court
found it “unreasonable to believe the [contractor] expected or
intended its subcontractor to perform negligently.”
Finally, the insurance company argued that even if
coverage applied to damages to underlying substrate, it must not cover
the replacement of the actual stucco itself.
In disposing of that argument with a mere paragraph, the court
found “Because the underlying moisture damage could neither be
assessed nor repaired without first removing the entire stucco exterior
… replacement of the defective stucco was covered by the CGL policy as
a cost associated with remedying the other property damage that resulted
from an occurrence.”
Comment:
This decision is another in what appears to be an increasing
body of case law interpreting the GCL policy in a similar manner to find
coverage where the faulty workmanship was performed by a subcontractor
in contrast to being performed by a prime contractor.
With the amount of law now on point, it would seem that if
carriers do not agree with the manner in which the courts are
interpreting the policy language, the policy form would be revised.
________
Article
4
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Certificate
of Payment Did not Render Architect and CM Liable to Surety for
Overpayment to Defaulted Contractor
Where the Architect and construction Manager (CM)
on a project issued certificates of payment for a contractor that had
fallen behind in its work, the project owner continued to make payments
in reliance upon those certificates.
When the contractor was eventually default terminated, the owner
submitted a claim to the surety company.
The surety refused to pay – contending that the owner, by
issuing payments in excess of the work actually performed, had not
complied with its contractual obligations.
In its declaratory judgment action, the surety sued
the Architect, CM and owner for negligent misrepresentation.
Applying the economic loss doctrine, the court granted summary
judgment for the architect and CM because there was no contract between
the surety and those firms. Nor
was there an independent basis for a tort claim to be filed against
them. Summary judgment
was also granted for the project owner on the basis that the owner was
entitled to rely upon the payment certificates of the architect and CM
in making progress payments to the contractor. This decision was
affirmed on appeal.
The surety asserted that its claims against the
architect and CM were brought under an exception stated in section 522
of the Restatement (second) of Torts that allows tort claims against
defendants who (1) have supplied information to the plaintiff for use in
business transactions with third parties, and (2) who are in the
business of supplying information.
Responding to that argument, the CM argued that its
responsibilities were limited to “administrative, management and
related services,” and that any information it transmitted was
incidental to the management services required by its contract.
It also cited the language of its contract with the owner that
states: “Nothing contained in this Agreement shall create a
contractual relationship with or cause of action in favor of a third
party against either Owner or Construction Manager.”
The architect offered a similar argument, saying
that as the producer of drawings, plans and specifications for the
Project, any information it supplied was ancillary to the purposes for
which it was engaged, i.e., the design and construction of a tangible
building. It likewise points
to the language in its contract with the project owner that states:
“Nothing in this Agreement shall create a contractual relationship
with or a cause of action in favor of a third party against the Owner or
Architect.”
In response to these arguments by the CM and
Architect, the Surety argued that those firms were engaged to provide a
number of services, at least one of which was “purely the provision of
information”, and that the negligent misrepresentation claim is based
upon those aspects of their services.
As explained by the court,
“ While [Architect and CM] did provide
information to [Owner], information upon which [Owner] relied in issuing
payment to [Contractor] , the Court finds that the Applications and
Certificates for Payment were not the ‘end and aim’ of the work
Indian River
hired [Architect] and [Construction Manager] to provide.
Instead, the ‘end and aim’ was the construction of the
Project.” The information
provided within the certificates was found by the court to be
“incidentally supplied ... as part of the project.”
The court granted summary judgment for the
architect and CM accordingly.
With regard to the Surety’s claim against the
project owner, the court held that since the owner was bound by its
contract with the contractor to make payments upon certification by the
Architect and CM, any overpayments that may have been made would not
excuse the Surety of its obligations under the performance bond.
The rule of law is that when an owner has acted in good faith
reliance upon the certifications of its architects or engineers, a
performance bond surety is not discharged from its obligations even if
there has been a material departure from contractual provisions relating
to payments and the security of retained funds.
In this case, although surety tried to get out from
under this rule by asserting that the owner had failed to act in good
faith when it released the funds to the contractor, the court found that
the surety had failed to present any evidence to support its contention
that the owner did not act in good faith.
Consequently, summary judgment was granted for the owner as well
as for the architect and CM.
RLI Insurance
Company v.
Indian River
School District
, et. al., 556 F. Supp.2d 356 (D.C.,
Del
, 2008).
Comment:
It is obvious from this correctly decided and well written
decision by the appellate court that the trial judge carefully read the
motions that were filed in the summary judgment proceeding and
considered the facts and evidence presented by the parties.
Rather than permitting this case to go to a jury to decide
whether there was sufficient evidence to find liability, the judge
specifically stated that the surety “adduced no evidence in support of
its contentions.”
It is unfortunate that so many judges today allow
non-meritorious actions to survive summary judgment despite the lack of
sufficient facts pleaded or presented by affidavit to support the cause
of action. Perhaps due to
laziness, or an over abundance of caution or shaky nerves, some judges
hesitate to grant summary judgments, and they instead allow parties to
waste years in discovery (documents and depositions) where they get worn
down and agree to settlements rather than risk further wasted cost at a
trial. It is satisfying to
see the trial judge and appellate court in this case take the stand they
did – and avoid an unnecessary trial.
About the author: All articles
in this issue of the ConstructionRisk.Com
Report are written by J. Kent Holland is 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. 10, No. 5 (December 2008).
=====================================
ABOUT THIS NEWSLETTER & A DISCLAIMER
This newsletter Report is published and edited by J. Kent Holland,
Jr., J.D. 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 only, 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.
Copyright 2008, ConstructionRisk, LLC
Publisher & Editor:
J. Kent Holland,
Jr., Esq.
1950
Old Gallows Rd.
Vienna
,
VA
22182
703-623-1932
Kent@ConstructionRisk.com
_____________________________________________
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