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In this Issue:

  • Limitation of Liability in Agreement Not Applicable to Causes of Action Arising Out of Contract Addendum
  • Reciprocal Waiver of Subrogation Bars Insurance Company Claim Against Contractor for Fire Damage to Building
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Limitation of Liability in Agreement Not Applicable to Causes of Action Arising Out of Contract Addendum

Where a limitations of liability (LoL) clause was located in an Agreement, the clause was held not to bar recover for damages incurred by a contractor due to work being suspended pursuant to a suspension of work clause that was located in the addendum to the contract. In this interesting case, the contractor (Perini Corporation) was directed to stop work two weeks after it began working on the reconstruction of a bridge in New York City. This was because the city did not have the engineering and construction support services in place. It was not until six months later that the city directed Perini to resume its work.

After completing the project, Perini sue the city for delay costs arising out of the suspension of its work. The basis for the suit was the “suspension of work” clause that was found in the addendum to the contract. This addendum contained numerous clauses required by the federal grant agency and was required to be an addendum to the contract. Perini also sued for misrepresentation.

In the city’s motion for summary judgment, the city argued that the suit was barred by time limitations under Article 53 of the agreement which stated: “No action shall lie or be maintained against City by the Contractor upon any claims based upon this Agreement unless such action be commenced within four (4) months” of the date the Agreement was concluded or the cause of action accrued, whichever occurred first.

According to the city’s argument, Perini’s action was barred because it accrued on the date that the city issued its stop work order. Perini did not file suit until the project was completed. The trial court agreed with this argument and awarded summary judgment to the city. On appeal, the circuit court reversed this decision and held that Article 53 did not apply to Perini’s delay claim because that article only applies to claims “based upon this Agreement” and the claim by Perini was based, in the opinion of the court, not on the “Agreement” but upon the Addendum to the contract. And its claim based on misrepresentation was for a violation of fundamental obligations of an owner that were not found in the Agreement.

The court stated that the basis for distinguishing between the “Agreement” and the contract addendum as being discrete parts of the overall contract was supported by Article by Article 1 of the Agreement which provided as follows:

The following … shall be deemed to be part of this contract.

1. The Advertisement and Proposal for bids.

2. The Bid.

3. The Agreement.. . .

7. All addenda issued by the Commissioner prior to the receipt of bids.

8. All provisions required by law to be inserted in this contract, whether actually inserted or not.

Based on the express reference to the “Agreement” being a “part” of the “contract”, the court concluded that Article 53’s reference to the Agreement may not be construed as referring to the contract as a whole. According to the court, the city could have phrased the LoL clause in such a manner to make it clear that it applied all claims arising under the contract, but it did not do so. Since any ambiguity in the contract is read against its drafter, the court found that it must be read against the city and, therefore, the court refused to apply the LoL clause to the suspension of work damages. Perini Corp. V. City of New York, No. 98-7946, 1999 U.S. App. LEXIS 9207, 1999 WL 304376 (2d Cir. May, 1999).

Risk Management Note

The reader should be weary of making the argument that succeeded in this case. A court could just as easily, in this Editor’s opinion, have concluded that the Addendum was part of the Agreement since it was an addendum to the Agreement and was required to be so pursuant to federal regulations. If this holding were applied broadly, it could eliminate the applicability of the LoL clauses in many contracts. This is because it is common to refer to “this agreement” just as was done in this case, without intending thereby to limit the applicability of the clause to only the matters in the “agreement” and not the other elements of the overall contract, including the addendum. If there is a lesson to be learned here it is that (1) courts certainly can be unpredictable and (2) it is important to draft the contract documents most carefully to assure that they mean what they say and say what they mean.

Article Copyright  ã 1999, ConstructionRisk.com, LLC – Virginia

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Reciprocal Waiver of Subrogation Bars Insurance Company Claim Against Contractor for Fire Damage to Building

Where a fire destroyed a building on the first day that the contractor began work, the owner recovered its loss from its insurance company (CNA) which in turn sued the contractor to recover what was paid to the owner. Pursuant to the AIA contract used on this project however, the court held that the right of CNA to bring a subrogation action against the contractor had been waived.

AIA Document A201 (1987 edition) was used in this case. The general conditions require that the project owner insure the interests of all parties for the full value of “the work.” The Agreement goes on to provide that each party waives any claim against the other for the casualty loss of insured property.

The fire started during or immediately after lunch break on the first day of work. Investigations by the police and fire departments concluded that it was probably caused by the improper use of welding torches that were used for the removal of metal fire escapes from the existing building structure to which the contract was to build an addition. The contractor, however, denied any responsibility, and no responsibility was determined. When CNA sued the contractor for subrogation, the contractor asserted that the project owner had waived its claim for an insured property loss pursuant to the AIA Agreement. CNA’s response was that the building was destroyed by fire prior to “work” being performed and before tangible property had been created by the contractor under the contract. This would mean that the reciprocal waiver would not apply.

In rejecting CNA’s argument, the court concluded that the definition of “the work” was not as restrictive as argued. As explained by the court, “Work” includes everything within the scope of the Agreement, whether it is completely or partially completed. Since the work had commenced on the existing structure, the renovation of which was within the scope of the Agreement, the owner’s waiver of the claim defeated CNA’s subrogation right. Mu Chapter of the Sigma Pi Fraternity of the U.S. Inc. v. Northeast Construction Services, Inc. 684 N.Y.S.2d 872 (N.Y.Supp. 1999).

Article Copyright  ã 1999, ConstructionRisk.com, LLC – Virginia

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Copyright ã 1999, ConstructionRisk.com, LLC – Virginia