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In This Issue:

  • Risk of Differing Site Condition Not Shifted to Contractor
  • A/E Not Liable for Negligence or Negligent Misrepresentation Without Expert Testimony
  • Substantial Completion Not Granted Until Fire Alarm System is Successfully Tested

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Risk of differing site condition not shifted to contractor

Contract provisions requiring contractors to perform site investigation and inspection prior to bidding did not impose the risk of subsurface conditions on the contractor, and therefore, did not preclude a claim for equitable adjustment.  When the contractor began work it discovered a deep scour hole in the river bottom that prevented it from building cofferdams where indicated on the plans.  Additional work and expense was required to solve the problem.  The public authority acknowledged that the scour hole would require additional work but rejected the contractor’s demand for almost $200,000 in additional compensation.  The trial court ruled that the contractor was not entitled to change orders.  This was reversed on appeal, with the court holding that although the authority could legally shift all the risk to the contractor, it’s ambiguous contract language had failed to accomplish that.

In reviewing the legality of shifting the risk to the contractor, the court noted that under federal contracts, the contractor is entitled to be compensated for changed conditions despite language requiring pre-bid investigations and site inspections.  It also noted that under New Jersey law, a public owner may allocate the risk of the unknown to the contractor so long as it contains a strong clause imposing the risk of subsurface conditions on the contractor.  The language in this particular contract provided the following:

“The contractor acknowledges that he has satisfied himself as to the nature and location of the work, the general and local conditions, particularly those bearing upon transportation, disposal, handling and storage of materials, availability of labor, water, electric power, roads and uncertainties of weather, floods or similar physical conditions at the site, the topography and conditions at the ground, the character of equipment and facilities needed preliminary to and during the execution of the work, and all other matters upon which information is reasonably obtainable and which can in any way affect the work or the cost thereof under this Contract.  The Contractor further acknowledges that he has satisfied himself as to the character, quality and quantity of information regarding the above that is reasonably ascertainable from an inspection of the site, including all exploratory work done by the Authority or Engineer, as well as information contained in Drawings and Specifications forming a part of this Contract…. Any failure of the Contractor to acquaint himself with all the available information will not relieve him from the responsibility for estimating properly the difficulty or cost to successfully perform the work.”

The trial court granted summary judgment in favor of the Authority, saying that it had made no “affirmative misrepresentation” regarding existing conditions.  Although the appellate court agreed that there had been no affirmative misrepresentation concerning the scour hole in the river bottom, it held that the contract was ambiguous concerning whether the contractor had assumed the risk concerning subsurface conditions.   Rather than being responsible for all subsurface conditions, the contractor was responsible only for those that were reasonably ascertainable from information that was reasonably obtainable.  These standards, said the court,  imply that conditions not known to the Authority or the contractor, and which cannot be reasonably ascertained by the contractor, may be the basis for a claim for extra work.   For these reasons, the court reversed the lower court decision and sent the matter back for a trial on its merits. SMC Corporation, Inc. v. New Jersey Water Supply Authority, 759 A.2d 1223 (N.J. Super.A.D 2000).

Copyright ã 2001, ConstructionRisk.com, LLC – Virginia

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A/E not liable for negligence or negligent misrepresentation without expert testimony

A court dismissed a developer’s suit for fraud, negligent misrepresentation, and breach of warranty against the design firm (A/E) that provided engineering and surveying services for the development of a residential community.  The developer argued that the A/E was negligent in failing to perform various tests to determine the extent to which the land was within the 100-year flood plain, and either intentionally or negligently misrepresented the actual status of the land.  The court concluded that the negligent misrepresentation claim had to be dismissed because the plaintiff failed to present expert testimony showing that the A/E had not complied with the proper standard of care.  Since the claim was based on the tort of negligence and not breach of contract, the court held that the breach of warranty claim also had to be dismissed.  And finally, because there had been no showing that the A/E made representations knowing them to be false or with reckless disregard of whether they were true or false, the fraud count was also dismissed.

The plaintiff, developer, began developing 31 acres that had at one time been designated by the Federal Emergency Management Agency (FEMA) as within the 100-year flood plain.  That designation had been recently revised so that only a small portion was within the flood plain according to the most current FEMA map.   The developer asked it’s A/E how many of the proposed building lots would be within the flood plain, and, according to the developer, the A/E advised that “three or four” would be in the flood plain.  The A/E testified that he told them that  “Five or more” lots would be in the flood plain.   After the project began, the flood administrator for the area determined that a total of thirteen lots were within the flood plain and would, therefore, require flood insurance.  In response to the developer’s appeal of that decision, FEMA concluded that all the land was in the flood plain.  The developer then sued the A/E for all the reasons stated above, and the trial court dismissed the case.

On appeal, the developer argued that the trial court erred by rejecting the negligence claim and negligent misrepresentation claim on the basis that it had failed to present expert testimony regarding what tests or investigations a reasonably prudent civil engineer and land surveyor in the A/E’s position would have performed in order to determine the true location of the 100-year flood plain.  It’s theory for why expert testimony was not required was that it believed that the A/E’s failure to perform simple tests could be understood by a lay person without the aid of expert testimony regarding the proper standard of care.  This was rejected by the court, which stated that proof of the standard of care and competence that a business or profession requires must necessarily be provided through expert testimony unless the lack of skill or care is so apparent as to be within the comprehension of laymen and requires only common knowledge and experience to understand and judge it.

In rejecting the plaintiff’s claim that the A/E had breached an express warranty of fitness of the lots for sale, the court held that even if the plaintiff’s testimony were accepted as true concerning what was said to him by the A/E concerning the number of lots that might or might not be able to be developed, the statements by the A/E fell short of being a warranty.  But even if the statement had risen to such a level, the court held that because the defendant merely made representations to the plaintiff in the course of his professional dealings concerning the development of the subdivision and was not selling something, this could not be a warranty case.  It must properly be viewed as sounding in tort (negligence), rather than contract.    For these, and other reasons, the appellate court affirmed the trial court’s decision dismissing the case.  Dickerson Internationale, Inc. v. Richard W. Klockner, 2000 WL 1513920 (Ohio App. 2 Dist, Oct. 13, 2000)

Copyright ã 2001, ConstructionRisk.com, LLC – Virginia

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Substantial completion not granted until fire alarm system is successfully tested

Where the government took beneficial occupancy of a building after the scheduled completion date, it assessed liquidated damages against the contractor for late completion.  This was on the basis that until the contractor successfully tested the fire alarm system it had installed, the work was not substantially complete.  The contractor argued that the project was substantially complete and that the building was ready for occupancy as of the date that the system was installed.   In deciding in favor of the government, the court focused on the contract provisions defining the parties’ expectations as to the owner’s reasonable use of its facility.

According to the court: “A finding of substantial completion is only proper where a promisee has obtained, for all intents and purposes, all the benefits it reasonably anticipated receiving under the contract.  The doctrine [of substantial completion] should not be carried to the point where the non-defaulting party is compelled to accept a measure of performance fundamentally less than had been bargained for.”  In this case, the court said the government bargained not only for operational installation of the fire alarm system, but for testing of that system to demonstrate that the system was operational.  “Clearly, fire alarm testing was an important requirement to the Air Force before the building could be used for its intended purpose.”  Finding that the decision of the Board of Contract appeals from which the contractor had appealed was not arbitrary and capricious, the court affirmed that decision.  Kinetic Builders, Inc. v. F. Whitten Peters, 226 F.3d 1307 (Fed. Cir. 2000).

Copyright ã 2001, ConstructionRisk.com, LLC – Virginia

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Copyright ã 2001, ConstructionRisk.com, LLC – Virginia

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

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