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In This Issue:

* Who Sues A/E’s?

* Quantum Meruit Recovery by Contractor Against Cher

* Contractor Can’t Recover Insurance for Damages Caused by Its Breach of Contract

* OSHA Standards Create no Liability for Engineer and Contractor for Injuries to Non-employee
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About this Newsletter

This newsletter is edited by J. Kent Holland, Jr., Esq., and published by e-mail once per month. Archived issues (plus this current issue) are maintained on our website at http://www.constructionrisk.com.  The formatting on the website is easier to read and print.  At our website you will find an extensive library of risk management materials, including articles indexed by subject matter.  It is organized as a free construction risk management library. offered as a public service by J. Kent Holland, Jr., an attorney with 20 years of legal experience as a construction lawyer and risk management professional.   Articles in this newsletter are written by Mr. Holland unless otherwise indicated.
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Who Sues A/Es?

According to a benchmarking study by CNA/Schinnerer for the AIA Trust, claims data show that the majority of claims against the design professional are brought by the owner client.  As reported in AIA Architect (May 2000), 55 to 60 percent of claims against architects are brought by owners.  And an even higher percentage (65 to 70 percent) of claim dollars are from owner claims.  The balance of claims against architects are reported to be 13 percent by contractors and subcontractors, 12 percent by injured nonworkers, 10.4 percent for other property damage or economic loss and 7 percent for worker injuries.

As suggested by the AIA article, the fact that over three fourths of all claims against architects are made by parties that have direct contact (but not necessarily contract) with them, “good communication and cooperation [are] paramount in preventing or mitigating professional liability claims.”  A separate review of claims against Zurich American Insurance Company insureds likewise reveals that owners account for the most significant percentage of claims.   Risk management continuing education courses by Zurich, CNA/Schinnerer and others, consequently, stress the importance of good communication starting with contract negotiations and continuing through project management and documentation. 
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Quantum Meruit Recovery by Contractor Against Cher

Contractor began construction on a $4.2 million home for Cher (movie star and singer/entertainer) based on a oral agreement that Cher would execute a written contract that had allegedly been negotiated between the parties.  Although Cher is alleged to have promised to sign the contract, she never signed it.  The contractor performed work under the oral agreement based upon its understanding and belief that Cher would honor an alleged promise to pay for the work being performed.  Ultimately, however, Cher terminated the work and refused to pay the contractor over $400,000 that was then due.

In the suit for breach of contract against Cher, the trial court dismissed the complaint because the contractor didn’t obtain a signed, written contract.  On appeal, the California Court of Appeal reversed that decision.  The court stated that the California Business and Professions Code requires that “every contract and any changes in a contract, between an owner and a contractor, for the construction of a single-family dwelling to be retained by the owner for at least one year shall be evidenced in writing signed by both parties.”    According to the court, this provision of law is intended to provide safeguards to consumers who contract for “home improvement” work.  And as a general rule, the court notes that a contract made in violation of a regulatory statute is void. Significantly, however, the court concluded that the general rule concerning a voidable contract has flexibility so that it does not have to be applied in its fullest rigor under any and all circumstances.

Citing other case precedent, the court stated that the purpose of the regulation is to protect “unsophisticated consumers.”  In this case, Cher was not an “unsophisticated consumer.”  Factors considered by the court were that Cher was a sophisticated homeowner who had prior experience with residential construction projects, she had the assistance of counsel in negotiating the contract (which was never signed),  she had permitted the contractor to complete a substantial portion of the work and finally, Cher would be unjustly enriched by not compensating the contractor for the work performed.

For these reasons, the court held that non-compliance by the contractor with the California code was not an absolute bar preventing the contractor from suing to enforce the oral agreement with Cher.  The case was reversed and remanded to the trial court for further proceedings, and presumably a trial.  Arya Group, Inc. v. Cher, 91 Cal. Rptr. 2d 815 (Cal. App. 2000).

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Contractor Can’t Recover Insurance for
Damages Caused by its Its Breach of Contract

A contractor sought recovery from its commercial general liability (CGL) policy for damages that the project owner claimed for water leakage and damage caused by the Exterior Insulation System furnished and installed by the contractor.  The insurance company filed a declaratory judgment action asking the court to declare that the insurance policy provided no coverage and that the company had no duty to defend the contractor in the litigation that was filed by the owner.

In the owner’s legal action against the contractor the owner alleged that the system installed by the contractor allowed water to leak into the building from the time tenants first leased the building all the way up to the present time.  Contractor did repair work under its warranty but this apparently failed to correct the problem.  The owner complains that the contractor also failed to repair interior drywall and ceiling tile and has made no further efforts to remedy the problem.  Owner alleges that “as a direct and proximate result of these breaches of contract by Defendant, [Owner] has incurred extensive structural and aesthetic damage to the exterior and interior” of the Building.

As basis for denying coverage for the above “damages” the insurance company argued in its court pleadings that the owner’s complaint does not alleged an “occurrence” as defined by the policy; there are no allegations of “property damage” as defined by the policy, and coverage is precluded by three separate exclusions in the policy.   In reviewing the policy, the court explained that as a general matter, CGL policies “are intended to provide coverage for injury or damage to the person or property of others; they are not intended to pay costs associated with repairing or replacing an insured’s defective work and products which are purely economic losses.”    CGL policies respond when an “occurrence” causes “damages.”  The policy defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  No definition of “accident” is provided.   But “when construing CGL policies, courts define an accident as ‘an unforeseen occurrence, usually of an untoward or disastrous character or an undesigned sudden or unexpected event of an inflictive or unfortunate character.'”

The court says that the “mere failure of a product to perform as warranted is not beyond the realm of expectation and is foreseeable by the parties.”  Moreover, the court says that the law is well settled “that the natural results of negligent and unworkmanlike construction of a building do not constitute an “occurrence.”  In this case, the owner’s complaint alleges damages caused solely by the contractor’s breach of contract in failing to properly install the System and in failing to remedy the problem, and the court concludes that the damages alleged were the natural and ordinary consequences of the alleged breach of contract.  As a result, the court concludes that the damages alleged in the underlying owner’s complaint were not the result of an “occurrence” and are not covered, or potentially covered, under the CGL policy.  Consequently, the insurance carrier was not required to defend the contractor.  American Fire & Casualty Company v. Broeren Russo Construction, 54 F.Supp.2d 842 (C.D. Ill. 1999).

An interesting twist to this case is that the contractor argued that its situation was different from others cited by the court because  the owner’s complaint alleged damage to property other than that which was supplied by the contractor, such as interior drywall and ceiling tile.  Regardless of the fact that this other property was damaged, the court concluded that “the resulting damages were clearly were ‘encompassed by the normal expectancies which are inherent in the risk of product or performance failure.'” The underlying complaint did not include a claim for damage to property other than the building itself and, therefore, the court finds no “occurrence” and no coverage.

One final argument that was rejected by the court was that if the damages resulted from negligence of subcontractors rather than the insured prime contractor, there would be coverage.  The court stated that even if the damages were caused by subcontractors, the alleged damages from water leaking were still the foreseeable result of negligent and unworkmanlike conduct in installing the system.  “Accordingly, the damages alleged in the underlying complaint were not the result of an “occurrence.”

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OSHA Standards Create no Liability for Engineer and Contractor for Injuries to Non-employee

An employee of  a project owner sued the engineer and contractor for injuries he sustained when he fell through a partially open hatch door on the mezzanine level of a catwalk in his employer’s production area.  He claimed that the engineer (CRS Sirrine) was negligent is designing the hatch door and that the contractor (Flour Daniel) was negligent in constructing it.  He also argued that both had violated OSHA rules and regulations.  The employee (Mr. Duncan) worked as a production coating operator and was apparently working  at the time of his fall.

In answer to Duncan’s complaint, the engineer admitted that it had designed the hatch door.  Subsequently, however, during a deposition, a structural engineer for CRS Sirrine testified that, in fact, Sirrine was not involved in the design of the platform or hatch.  Based on this new information, Sirrine file a motion for summary judgment and the trial court granted judgment in its favor.   On appeal, the appellate court held that permitting Sirrine to amend its answer to the complaint to deny having designed the hatch was appropriate since pleadings should be amended in the interest of justice.

Flour Daniels also asked the trial court to grant a motion for summary judgment on the basis that it had only provided maintenance and fabrication services and never provided any engineering, design, or drafting services related to the hatch.  Deposition evidence stated that the owner had reviewed Flour’s installation performance “and would not have accepted the work if Flour Daniel’s construction failed to meet the design, assembly, quality, or safety specifications provided by [owner].”  The trial court granted this motion for summary judgment.

With regard to the alleged OSHA violations, Duncan asserted that OSHA and ANSI standards imposed a duty on Flour to ensure an open hatch was guarded.  Duncan also contended that an implied warranty of workmanship burdened Flour with a duty to fulfill its construction obligations in accordance with OSHA standards.  Whether OSHA’s regulations imposed a duty on Flour under a negligence theory depends, says the court, on whether Flour Daniel is subject to the OSHA regulations.

The court’s conclusion is that the “OSHA standards protect employees working for any business qualifying as an employer under the [Act]. . . . The key factor in determining whether a party constitutes an employer under OSHA regulations is whether the party has the right to control an employee’s work.”  Since Duncan didn’t produce any evidence showing Flour had the right to control his work, the court concluded that Flour was not constituted as his employer and that the OSHA regulations were, therefore, inapplicable.  As concerns the ANSI standards, they “only purport to be a guide and thus do not impose any extra duty on Flour Daniel.”

As a final basis for ruling in favor of Flour Daniel, the court stated that OSHA and ANSI standards do not impose liability on a contractor when the contractor merely assembled a project with design specifications provided by a third party.  The court cited a long accepted notion that “the contractor is not liable if he has merely carried out carefully the plans, specifications and directions given him, since in that case the responsibility is assumed by the employer, at least where the plans are not so obviously defective and dangerous that no reasonable man would follow them.”  Since the plaintiff’s own expert testified that one solution to render the area safe while the hatch door was open would be to station a person to guard the hatch, and this solution is completely unrelated to construction, would ameliorate the potential hazard, the design specifications were not so obviously defective as to require Flour Daniel to supplement the design on its own.  Duncan v. CRS Sirrine, 524 S.E.2d 115 (S.C. App. 1999).

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Editor: J. Kent Holland, Jr., J.D.
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