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ConstructionRisk.com Report
http://www.ConstructionRisk.com

Vol. 11, No. 6, June 09

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Inside This Issue: 

•  Quantum Meruit Recovery for Architect that Worked without a License;

•  Limitation of Liability Clause Unenforceable to protect Individual Professional;

•  ADA and FHA Bar Indemnification of Building Owner by Design Professional ;

•  Economic Waste Doctrine Prevents Owner from Recovering Excessive Damages from Contractor;

•  Time Limit for Filing Suit Shortened by Contract Condition;

•  Acceptance Doctrine Bars Subsequent Claim against Contractor for Negligence

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Article 1  
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Quantum Meruit Recovery for Architect that Worked without a License

J. Kent Holland, Jr.

Where an Architect performed services for a project in a state where it did not obtain a license until part way through the time it was providing its services, the project developer asserted that it  didn’t have to pay for the services because the architect lacked the required license.  It was held that the architect was entitled to paid on a quantum meruit basis for the value of its services rendered after it obtained its license, and that it was entitled to be paid on an unjust enrichment basis for services it performed prior to obtaining its license.

Since the original contract was signed before the architect had the appropriate state license it was void.  The court found that once the architect obtained its license, the services performed after that date were chronologically separable from the illegal services and an “implied-in-fact” contract must be recognized for services performed after that date, requiring payment to the architect on a quantum meruit basis.  Quantum meruit permits recovery of the reasonable value of the services rendered or the materials provided, regardless of whether a party such as the developer was enriched by those services.  In contrast, the theory of “unjust enrichment” allows recovery where a party such as the developer has received a benefit from another that would be inequitable for that party to retain without compensating the other for the value of the benefit.   In this case the court held that the architect may be entitled to both types of relief.

In the case of Farrell v. Whiteman, 200 P.3d 1153 (Idaho 2009), an architect licensed in Michigan and one of his long-time friends (also from Michigan) decided to join together in an undertaking to build a condominium project in Idaho.  The architect understood that he and his friend the developer would be partners in the project in exchange for his professional services to design the building, secure the site plan approval, and oversee the construction.  No formal agreement or contract was ever reached.

At some point, the developer terminated the architect from the project and refused to pay him anything for his services even though the project was eventually completed and condo units were successfully sold.  The developer claimed he owed the architect nothing because the architect violated the state licensing law by performing without a license at least at the outset of the services. 

As explained above, the appellate court held that the architect was entitled to be paid.  But the court disagreed with the reasoning of the trail court in a couple key issues.  First, the court stated that the trial court went too far in interpreting the state statute as only requiring architects to be licensed at “critical times” during their performance.  Instead, the court concluded that architects must be licensed at “all times.”  Any services performed prior to the date of licensure would have been performed pursuant to an illegal contract.  Consequently, there could be no quasi contract or implied-in-fact contract for those services that would entitle the architect to quantum meruit compensation for services rendered before he was licensed.  This did not mean, however, that the architect should not be compensated for those services, but instead that the trial court needed to evaluate a different reason and method for determining the compensation – specifically to consider the “unjust enrichment” theory. 

The explanation of the court is as follows:

This case is one in which awarding some damages is necessary to protect the public interest.  Although Farrell had an obligation to ensure that he was properly licensed while he practiced architecture in Idaho , it would be contrary to the public interest to allow a developer to avoid any payment for architectural services when the work performed was sub-standard, the building was actually constructed, and several units were sold.  The architect licensing statutes aim to protect buyers and the public-who lack knowledge and expertise about architecture-from shoddy work and untrained individuals posing as architects.  In this case, although Farrell was not licensed in Idaho for the entirety of his performance, he was a licensed architect in another state.  The district court found that Farrell did not breach his duty of care, and that no defects existed in the building Farrell designed.  Therefore, to leave the parties as the Court finds them would result in a windfall to Whiteman [the developer], who obtained the benefit of a trained and capable architect at zero cost.” 

For these reasons, the appellate court remanded the case back to the trial court to determine the amount to be awarded to the architect.

About the author:   All articles in this issue of the ConstructionRisk.Com Report are written by J. Kent Holland, 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 also founder and president of ConstructionRisk, LLC, a consulting firm 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. 11 No. 6 (June 2009). 

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Article 2

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Limitation of Liability Clause Unenforceable to protect Individual Professional

J. Kent Holland, Jr.

A Florida appellate court has found that the limitation of liability clause in a contract between a design firm and its client cannot be applied to limit the liability of an individual professional that is an employee of the firm.  “A cause of action in negligence against an individual professional exists irrespective, and essentially independent of a professional services agreement,” says the court.  A judgment in excess of $4 million against an individual engineer was allowed to stand because the court held the LoL in the design firm agreement did not apply to actions directly against individual employees, and that even if the clause were applicable to individual employees it would be unenforceable as contrary to law.

In the case of Witt v. La Gorce Country Club, Inc., 34 Fla.L. Weekly D1161a, the case involved a law suit by a country club against G.M. Witt and Associates (“GMWA”).  The county club entered into contracts involving the design and construction of a reverse osmosis water treatment process for its golf course.  A design-build contract with ITT Industries was for the design and construction of the treatment system.  The club entered into separate contracts with GMWA was for hydrogeologic consulting services and overall project coordination.  The system suffered many problems and ultimately failed completely. 

The club filed suit against GMWA and its principal employee, Mr. Witt, alleging malpractice, breach of contract, and fraud.   The trial judge determined that Witt and GMWA were liable for professional malpractice – with the limitation of liability (LoL) provision of the contract applying only to GMWA and not the employee.  In finding Witt personally liable but not protected by the LoL, the trial court concluded:

This damage limitation is not applicable to Witt’s liability for malpractice.  I find it is not applicable both because he was not a party to the agreements and, therefore, not entitled to the benefit of any limitation, and because [Moransais v. Heathman, 744 So. 2d 973 (Fla. 1999)] … suggests that, ‘it is questionable whether a professional, such as a lawyer, could legally or ethically limit a client’s remedies by contract in the same way that a manufacturer could do with a purchaser in a purely commercial setting.”

The LoL clause in question provided as follows:

“In recognition of the relative risks and benefits of the project to both La Gorce and [GMWA], the risks have been allocated such that La Gorce agrees, to the fullest extent permitted by law, to limit the liability of [GMWA] and its subconsultants to the total dollar amount of the approved portions of the scope of the project for any and all claims, losses, costs, damages of any nature whatsoever or claims expenses from any cause or causes, so that the total aggregate liability of [GMWA] and its subconsultants to all those named shall not exceed the total dollar amount of the approved portions of the Scope or [GMWA’s] total fee for services rendered on this project, whichever is greater.  Such claims and causes include, but are not limited to, negligence, professional errors or omissions, strict liability, breach of contract or warranty.”

In refusing to apply the LoL clause to the action against the individual, the court concluded that although there are no Florida cases specifically addressing whether an LoL provision extends to an individual professional, the Moransais decision of the Florida Supreme Court would provide useful guidance to suggest the clause would not apply because (1) the cause of action was deemed by the court to be “extra contractual” in nature and (2) it concluded that individual professional services by individuals such as attorneys cannot limit their liability. (The court essentially equates professional legal services and professional design services in this regard).  By finding the plaintiff’s “cause of action in negligence against the individual professional to exist irrespective, and essentially independent of a professional services agreement,” the appellate court found the “limitation of liability provision was, as a matter of law, invalid and unenforceable as to Witt.”

Comment:  This is an unfortunate, and poorly reasoned decision.  As an initial matter, it should be noted that the court wrongly applied the Moransais logic to the facts of this case.  Contrary to the court’s suggestion, lawyers and design professionals are not treated the same when it comes to enforcing limitation of liability provisions in contracts.  Attorneys are often prohibited by their Codes of Ethics and state licensing laws from limiting their liability to their clients by way of a limitation of liability provision.  Yet design professionals in many of those same states are permitted to limit their liability.

It is also illogical to suggest that in the absence of the contract that created a duty of the firm to the client, the individual design professional would have owed any independent duty to a client of the engineering firm for whom he was employed.  The engineering firm does not exist in a vacuum.  It exits only because it contains a number of individual licensed design professionals working for it and on its behalf. 

A firm cannot provide professional services without individual licensed professionals. In this case the licensed professionals worked within the scope of their employment for the engineering corporation.  They were not acting ultra vires – outside or contrary to their employment.  Their employer was fully responsible for their actions. 

Any professional liability policy this employer had would have not only insured the corporation, it would also insure each employee acting within the scope of its employment.  The fact that insurance policy (contract) treats the corporation and its employees as all part of the same “insured” further demonstrates flaws in the court’s reasoning in which the court created an artificial wall between the corporation and the individual. 

If the LoL provision is enforceable to protect the corporation, it must also be enforceable to protect the individuals working for the firm.  (Note:  An improvement to the LoL clause would have been to specifically state that it applies to all principals, directors, officers, employees, agents and servants of the firm. The absence of that language in this case, however, was not an issue in the court’s reasoning, and does not change the obvious intent of the clause).   

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Article 3

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ADA and FHA Bar Indemnification of Building Owner by Design Professional

J. Kent Holland, Jr.

In litigation against a property owner alleging violations of the Fair Housing Act (FHA) and Americans with Disabilities Act (ADA), the owner settled litigation with the plaintiff, a non-profit group that files suits to enforce the FHA and ADA .  By settlement it agreed to pay $1.4 million in damages, plus attorneys fees, costs and other expenses.  It also agreed to survey and retrofit 71 properties to bring them into compliance with the FHA and ADA .  The owner then sought to recover its damages from the architect pursuant to an indemnification clause in the architect’s contracts.  The court held that the federal statutes prevented the owner seeking indemnification under the theories of breach of contract and professional malpractice -- alleging the firm specified incorrect dimensions or other details in its construction documents.  The court granted the design firm’s motion for summary judgment on the basis that under the FHA and ADA , the owner is barred from seeking indemnification or contribution against the design firm. 

In Equal Rights Center v. Archstone Smith Trust, 603 F.Supp. 814 (D.C. Md. 2009), the court cited a U.S. Supreme Court decision of Northwest Airlines, Inc. v. Transport Workers Union of America, for the proposition that there can be no right to indemnification under the FHA or the ADA because there is no expressed right under the statutes and there is no evidence that Congress intended to create a private remedy.  Numerous federal court decisions are cited by the court as having held that no claim for indemnity or contribution exists in connection with liability under the two laws. 

Since no federal law afforded Archstone the right to indemnity or contribution against the design professional, Archstone argued it was entitled to such remedy under state law.  Archstone argued that in addition to a statutory duty owed to the plaintiffs, the designer had contractual and professional duties to the defendant to design consistent with the FHA and ADA .  In the face of breach of those duties, Archstone argued that the designer should be liable to it under state law for negligence and for breach of contract. In addition, Archstone argued that under the express indemnification provisions of its contracts with the design firm, indemnity was available as a contractual duty.   The court rejected both of these arguments.

The court states that both the design firm and the owner had non-delegable duties to design ADA/FHA compliant dwellings, and that the design firm’s failure to fulfill its independent obligation under the federal statutes subjects it to liability directly to the plaintiffs on first-party claims under the FHA and ADA if claims were properly asserted.  Nothing in the federal law, however, would make the designer liable to Archstone on a derivative indemnification claim based on the FHA or the ADA .     As a matter of law, the court also concluded that the state law claims for breach of contract and professional negligence “are wholly derivative of Archstone’s primary liability and are therefore what federal law regards as de facto claims for indemnification. “Accordingly, those state law claims are barred because any recovery by Archstone would frustrate the achievement of Congress’ purposes in the FHA and ADA .” 

In further explaining why the express indemnification obligations in the design professional contract would be unavailing to Archstone in this case, the court stated that the goal of the statutes is to make each responsible party meet the purposes of the laws.  The court believed those goals would be undermined if parties could “contract around’ their non-delegable duties imposed by statute by using indemnification provisions of contracts with others. 

Based on the court’s reasoning, it found that the express indemnity claim based on the contract language “is barred by federal law every bit as much as its implied indemnity claim is barred.”

 Risk Management Note:  This decision should be carefully studied by design professionals and their counsel to determine what it means to the enforceability of certain contract terms and conditions.   Assuming the logic of this decision is adopted by other courts it appears to mean that the design professional’s liability for ADA and FHA violations is limited to the persons intended to be protected by the laws, and that the design professional’s client cannot be indemnified by the design professional for its share of damages for ADA and FHA violations, regardless of what language is contained in the professional services agreement. 

 In the indemnity provisions of design professional contracts, attorney and insurance professionals typically advise that indemnification by the design professional be limited to damages actually caused by negligent performance of services by the design professional.  In the “compliance with law” provision of design professional contracts, design professionals are generally advised to agree only to exercise the generally accepted standard of care to comply with laws, codes, regulations, etc. (hereinafter “laws”).  The reasoning is that it is inappropriate and uninsurable for a design professional to warrant or guarantee that its services will meet the requirements of all laws. 

Laws, ordinances, and regulations may be ambiguous, or subject to more than one reasonable interpretation, or just so arcane that not every reasonable person even knows that they apply, or how they apply, to a situation.   Instead of assuring compliance with all laws, the design professional should exercise reasonable care to comply.  Not every error or mistake is a negligent one.  It is important to remember, that professional liability insurance only covers “negligent” acts, errors and omissions.  If liability is imposed and damages sustained by the design professional to the third-party plaintiff due to its negligent failure to comply with the ADA, FHA or other laws, there might be coverage for  some of the damages under the policy (although fines and penalties will probably be excluded).  On the other hand, if the design firm was not negligent -- since it met the standard of care in endeavoring (but yet failing) to comply with the laws -- it would have no insurance coverage to cover losses that its client might try to recover from it based on the design firm’s broad-form (non-negligence based) indemnification or unconditional promise/guarantee to comply with all laws. 

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Article 4

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Economic Waste Doctrine Prevents Owner from Recovering Excessive Damages from Contractor

J. Kent Holland, Jr.

Where contractor built a house at 7.5 feet elevation instead of the specified 8.5 feet, the home owner claimed he was entitled to damages of almost $1 million to tear down the house and rebuild it.  The contractor argued that the cost to cure the elevation defect was unreasonable and that under the economic waste doctrine the proper measure of damages was the diminution in the value of the home as a result of the lower elevation.  The trial court and appellate court both agreed with the contractor that there was only a “nuisance” diminution in value of $25,000 to which the homeowner was entitled. 

The court cited the Restatement of Contracts in support of its decision, citing a comment in the Restatement as follows: “The purpose of money damages is to put the injured party in as good a position as that in which full performance would have put him; but this does not mean that he is to be put in the same specific physical position”…”Sometimes defects in a completed structure cannot be physically remedied without tearing down and rebuilding, at a cost that would be imprudent and unreasonable.” … “The law does not require damages to be measured by a method requiring economic waste.”  Restatement (first) of Contracts, Sec. 346(1)(a), comment b.

The court rejected the homeowner’s argument that the language in the contract barred application of the economic waste doctrine.  As explained by the court, a standard form contract was used by the parties.  That contract provided that [t]he Contractor shall promptly correct Work…failing to conform to the requirements of the Contract Documents, whether observed before or after Substantial Completion, and whether or not fabricated, installed or completed” and that [t]he Contractor shall bear costs of correcting such rejected Work….”  

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Article 5

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Time Limit for Filing Suit Shortened by Contract Condition

J. Kent Holland, Jr.

Motion to dismiss complaint against design professional was correctly granted because, pursuant to the AIA form contract, the applicable four year statute of  limitations period began, to run on the date of substantial completion of project construction regardless of the fact that the plaintiff may not have discovered its alleged injuries until later and the limitations period would have otherwise run longer. Article 9.3 of the AIA contract form was held to control the accrual date of the applicable statute of limitations and precluded application of the discovery rule that would have otherwise have permitted the plaintiff to file its complaint four years after having discovered its injuries. 

In Federal Insurance Company v. Konstant Architecture Planning, Inc., 902 N.E. 2d 1213, 388 Ill , Appl3d 122 (2009), the plaintiff sued for breach of contract with respect to the design and building of a residence.  The contract contained the following provision concerning the time limits on filing suit:  “Causes of action between the parties to this Agreement pertaining to acts or failures to act shall be deemed to have accrued and the applicable statutes of limitation shall commence to run not later than either the date of Substantial Completion, or the date of issuance of the final Certificate for Payment for acts or failures to act occurring after Substantial Completion.” 

The home was built and substantially complete in 1997.   Water damage and mold infestation resulting from water intrusion were discovered by the homeowner in 2002, resulting in repair costs in excess of $300,000.  The homeowner’s insurance policy covered the cost. The insurance company then sued the design professional to recover the costs. 

In order to avoid the applicability of the contract language and the four year statute of limitations applicable to design and construction, the plaintiff insurance company made two curious arguments that were rejected by the court.  First the plaintiff argued that a 10 year statute of limitations applied instead of the four year statute cited by the design professional.  It also tried to argue that another section of the code established a 10 year statute of repose actually worked to lengthen the time by which to file suit against the design firm.  The court quickly disposed of that second argument concerning the statute of repose as essentially nonsensical (although the court didn’t put it in those succinct terms), since the statute was clearly intended to establish an final end point by which suits against design firms must be filed. 

With regard to the 10 year statue of limitations, the court said it is a general statute that applies,  to “actions on bonds, promissory notes, bills of exchange, written leases, written contracts, or other evidences of indebtedness in writing.” 

This ten year statue did not apply to design and construction, however, because as explained by the court, a separate section of the state statute specifically prescribes a four year time limit applicable to such suits.  It reads as follows: “Actions based upon tort, contract or otherwise against any person for an act or omission of such person in the design, planning, supervision, observation or management of construction, or construction of an improvement to real property shall be commenced within 4 years from the time the person bringing an action … know or reasonably should have known of such act or omission.”  

Plaintiff tried to argue that the state statute should be read as “an organic whole” to make the 10 year statute apply.  In rejecting that argument, the court followed the time-honored principle that the more specific provision governs over the generalized provision.  Since a section was specific to design and construction, that section of the law clearly applied to establish a 4 year time period for filing suit. 

With regard to cutting off the discovery period that would have otherwise existed under the 4 year statute to extend the time for filing suit, the court enforced the accrual date established by the AIA contract document and explained, “When construing the language of a contract, this court’s primary objective is to give effect to the intent possessed by the parties at the time they entered the agreement.”  Because the appellate court found there was nothing ambiguous about the contract language, and nothing prohibited enforcing the language, it held that the trial court correctly dismissed the complaint against the design professional as untimely.  

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Article 6  
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Acceptance Doctrine Bars Subsequent Claim against Contractor for Negligence

J. Kent Holland, Jr.

A construction company was sued by victims of a serious car accident for alleged negligent construction of the road where the accident occurred.  Summary judgment was granted, and affirmed, for the contractor on the basis of the “acceptance doctrine” whereby if a contractor performs its construction work consistent with someone else’s design and without negligence, and the work is accepted by the owner,  the contractor is not subject to liabilities resulting from the defective design of the work. 

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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 2009, ConstructionRisk, LLC

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

1950 Old Gallows Rd

Suite 750.

Vienna , VA 22182

703-623-1932

Kent@ConstructionRisk.com