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Inside This Issue:

  • Engineer Not Liable for Breach of Implied Warranty of Design
  • The Ball’s In My Court (Because I Drafted the Contract) and I’m the Referee (Or Chief Executioner)
  • No Coverage Under CGL Policy for Loss Arising Out of Product Containing Asbestos
  • Contractor Terminated for Default for Failure to Adequately Respond to Cure Notice

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Engineer Not Liable for Breach of Implied Warranty of Design

When an engineer designed a road that failed because the impermeability of the underlying soil caused water to accumulate between the soil and the asphalt, resulting in the road floating and the asphalt cracking, the project owner sued  for negligence and breach of implied warranty.  Because the soil condition was an unanticipated, differing site condition, the trial judge found the engineer was not negligent.  Surprisingly, however, the judge found the engineer liable under the warranty theory.  This was reversed on appeal because the engineer could not reasonably be held to a warranty standard when the failure of the road was based on a differing site condition.

In response to the owner’s argument that the adverse soil condition was “knowable,”  the court found “there was no evidence that any engineer knew or should have known that the soil beneath the road would not drain at all.”  A satisfactory remedy for the soil condition was implemented by the engineer using the recommendation of a geotechnical engineer that it retained for the purpose.  This involved the installation of lateral drains to remove the water.  These drains, according to the court, were not within the typical scope of an engineer’s work in designing a road. For these reasons, the court held in favor of the engineer. K.B. Weygand & Assocs. V. Deerwood Lake Land Co., 1991216, 1991344, 2001 Ala. LEXIS 120 (Ala. 2001).

Note: Since the lateral drains were a necessary part of the work, the costs of these would have been incurred by the owner whether the site condition was discovered before or after construction began.  As such, the necessary costs of installing the drains could not be attributed to the engineer in any event.  Assuming for purposes of argument that the engineer could have somehow been held liable, the extent of the damages owed to the owner would not include the cost of work and material for the lateral drains themselves, but only those extra costs (if any) attributable to removing and repairing previously installed work, and the extra costs caused by installing the drains after the fact instead of during the initial construction.  Costs that an owner would have incurred even if the project had been designed perfectly from the beginning cannot be attributed to the responsibility of the engineer.

Copyright ã 2001, ConstructionRisk.com, LLC – Virginia

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International Risk Management Institute

IRMI is a research and publishing company focusing on risk management and insurance issues.  It publishes practical reference manuals, books, and newsletters. The IRMI Construction Risk Conference is the premier forum for sharing ideas and techniques for improving the ways we do business. More than 1,000 representatives of the construction and insurance industries, as well as many project owners, attend each year for its exceptional educational value and its unparalleled networking opportunities.  This year’s conference is scheduled for October 29 through November 1 in New Orleans.  For more information visit http://www.irmi.com.

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Hill International, Inc. – Founded in 1976, Hill provides innovative approaches to both avoidance and resolution of construction disputes.  It also offers clients a full spectrum of project management services, including a unique form of objective project oversight designed to better assure that capital projects are completed on schedule and within budget. Hill is ranked in the top 15 largest Construction Management Firms by ENR magazine.  Visit http://www.hillintl.com.

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The Ball’s in My Court (Because I Drafted the Contract)
and I’m the Referee (or Chief Executioner)

By:  William J. Postner, Esq    .

Dispute resolution provisions in public contracts empowering the public owner to render binding, final decisions on all disputes arising under the contract, subject to limited judicial review, have been upheld in numerous states as not being in violation of public policy.  New York is one such a state.  In contrast, such a provision has been held to violate public policy in other states such as New Jersey.  Recently, in the case of Ferguson Elect. CO. v. Kendal At Ithaca, Inc., 274 A.D.2d 890 (2000), New York extended the rule from the public contract to the private contract context and held that such a provision in a subcontract between a general contractor and its subcontractor did not violate public policy.

Christa, the general contractor for a nursing home project owned by Kendal, subcontracted the plumbing and heating work to Tougher.  The subcontract contained the following dispute resolution provisions:  (1)            Christa’s representative was authorized “to decide all questions of any nature whatsoever, arising out of, under, or in connection with, or in any way related to or on account of, this Contract and his decision shall be conclusive, final and binding;” (2)  If Tougher protested the determination of Christa’s representative, “the Contractor [sic] may commence a lawsuit . . . it being understood the review of the Court shall be limited to the question of whether or not the . . . determination is arbitrary, capricious or grossly erroneous to evidence bad faith;”  and (3) “Exhaustion of these procedures shall be a precondition of any lawsuit.”

Tougher and another unpaid subcontractor filed mechanic’s liens.  The other unpaid subcontractor commenced a lien foreclosure action and, as required by the Lien Law, named Christa and Tougher as defendants in that action. Tougher interposed a claim to foreclose its lien, and cross-claimed against Christa for breach of subcontract. On motion by Christa, the trial court held that the subcontract’s dispute resolution provisions were mandatory and obligatory.  The Appellate Court agreed, holding: “Clearly, the public policy of this State favors and encourages arbitration and ADR resolutions . . . and ADR mechanisms reflecting the informed negotiation and endorsement of the parties are valid and enforceable. . . .  Tougher chose, “with its business eyes open, to accept the terms, specifications and risk of the [subcontract], including the ADR clause.”

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This article by William J. Postner of the law firm of  Postner & Rubin, has been edited and abridged from an article appearing in the Spring 2001 issue of the firm’s newsletter, Construction and the Law.  The firm is a nationally recognized firm with an emphasis in construction law.  Mr. Postner may be contacted at Battery Place, New York, NY 10004 – (212) 269-2510.  The website is http://www.postner.com.

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No Coverage Under CGL Policy for Loss Arising
Out of Product Containing Asbestos

Where a contractor on a school renovation project applied adhesives not knowing that they contained asbestos, it sued the material supplier of the material to recover its costs of tearing out and replacing the materials.   The supplier’s commercial general liability (CGL) carrier refused to defend the suit because the suit was not for a claim arising out of bodily injury or property damage, as required for coverage.  The appellate court agreed that the insurance carrier owed no duty to defend the suit since there was no potential coverage.

The contractor’s action was based on the alleged economic loss it incurred in removing the adhesives.  It asserted lost profit, delay, extra work, breach of contract, breach of warranty, negligence, negligent misrepresentation, fraud, and false advertising.   Since the contractor did not own the property on which it was working, it did not seek recovery of property damage.  And, since no one was physically injured by the asbestos, the contractor did not seek recovery for bodily injury.   Without either property damage or bodily injury, there was no basis for recovery under the policy.  In addition, the contractor’s claim against the supplier for false advertising and misleading trade practices (based on the supplier’s representation that the materials did not contain asbestos) was not covered by the policy because the representation did not fall within the Advertising Liability Offense definition of the policy.  Structural Building Products Corp. v. Business Insurance Agency, Inc., No. 2000-00252, 2001 NY App. Div. LEXIS 3055, (N.Y. App. Div., 2d Dep. 2001).

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Zurich Insurance – For information on the Zurich Default Insurance program (Subguard),  please contact Zurich Construction at 952-841-2300.  You may also send an e-mail to webmaster@constructionrisk.com with the word “Subguard” in the subject line, requesting a packet of information describing the product.  Include your name, address and phone number in your e-mail.

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Contractor Terminated for Default for Failure to
Adequately Respond to Cure Notice

By:  J. Kent Holland, Jr.

Where contractor failed to respond adequately to the Navy’s reasonable request of assurances of timely performance, the Navy was entitled to regard the contractor’s failure to provide such assurances as a breach of the contract. The issuance of a cure notice may be justified even if the circumstances at that point do not justify a termination for default. When the government issues a cure notice the contractor has an obligation to take steps to demonstrate progress, or give assurance that progress is being made, toward timely completion.  Failure to adequately respond to the notice justifies termination for default.

In Richard Danzig v. AEC Corporation, 224 F.3d 1333 (Fed. Cir. 2000), the Navy became concerned when the progress of the contractor’s work began to fall behind schedule.   The contractor was apparently having financial difficulties with its surety, and this was delaying the work.   As a result of the schedule slippage the Navy issued a cure notice demanding the contractor to get back on schedule.  This resulted in a meeting at which the contractor and Navy agreed to a revised schedule.  The Navy agreed not to terminate the contractor if made progress according to that new schedule.

For reasons not explained by the court, the surety subsequently froze the project’s bank account, and the number of workers doing productive work on the project began to decline.   Due to the decreasing number of man-hours being devoted to the job, the Navy advised the contractor that its failure to diligently pursue completion was a condition endangering performance of the contract, and  must be cured within 10 days otherwise the Navy would consider terminating the contractor for default.  Contractor responded by advising the Navy that the meeting the completion date was impossible due to many changes and delays caused by the Government.  In addition, the contractor claimed its surety was interfering with and hampering its progress on the job by blocking the release of funds sufficient to enable it to pay its subcontractors and meet other project expenses.  This action by the surety was termed “financial strangulation” by the contractor which “made it impossible to predict an ultimate completion date at this time.”

The Navy reacted to this bad news by directing the contractor to provide a detailed response to substantiate its allegations with regard to delays allegedly caused by changes and government-caused delays.  Instead of giving the required detailed response, the contractor wrote a short letter back to the Navy referring the Navy to earlier correspondence which it stated described the details of the problems caused by the government.

After this, the Navy gave the contractor a letter directing it to show cause why the contract should not be terminated for default, and once again directed the contractor to respond within 10 days.  During the next 10 days the contractor did not respond to the letter and, in fact, appeared to maintain only a handful of workers on the job.  When the Navy subsequently default terminated it, the contractor appealed to the Armed Services Board of Contract Appeals, arguing that the termination was improper because the Navy had not proved that the contractor could not complete performance by the extended contract date.   The Board agreed with the contractor and held against the Navy.  In appealing the adverse decision to the Federal Circuit Court of Appeals, the Navy argued that the Board focused on the wrong issue.  Instead of ruling on whether there were sufficient grounds for termination, the Board should have looked instead at the question of whether the contractor had adequately responded to the 10 day cure notice by providing adequate assurances that it would, in fact, complete the project on schedule.

The court agreed with the Navy’s position and reversed the Board, explaining that when the government has reasonable grounds to believe that the contractor may not be able to perform the contract on a timely basis, the government may issue a cure notice as a precursor to a possible termination of the contract.  Once that notice is issued, the contractor has an obligation to take steps to demonstrate or give assurances that progress is being made toward timely completion.   Contractor’s response to the cure notice did not satisfy its obligation to provide those assurances.  In fact, the contractor reiterated that its financial strangulation by its surety made it impossible to predict an ultimate completion date.  A contractor’s financial difficulties are not a legitimate excuse, says the court, for failure to make progress.  In view of this, the court held that as a matter of law, the contractor failed to respond adequately to the Navy’s reasonable request for assurances.

Risk Management Note: The decision does not offer any explanation for what was happening between the contractor and its surety that caused the surety to take the action it did with regard to the project financing.  Unfortunately, there are occasions when a surety (for good reason) may take actions that, while protecting its position, do not release funds in a prompt manner to foster timely project completion.  In response to the perceived need for a new type of product to respond to defaults or threatened defaults, Zurich Insurance has created default insurance to be used in lieu of surety bonds.  This product is titled “Subguard.” ™  A detailed paper was presented by Kent Holland at the last conference of the Forum on Construction of the American Bar Association.  A copy may be obtained by sending an e-mail to webmaster@constructionrisk.com, including your name and address, and including the words ABA PAPER in the regard line.

Copyright ã 2001, ConstructionRisk.com, LLC – Virginia

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Red VectorContinuing Education

RedVector’s mission is to provide its customers with the ability to manage their own time by offering quality continuing education online, backed by a commitment to superior customer service.  RedVector’s vision is to become the leading Internet resource for continuing education, information and communication. Visit http://www.RedVector.com.

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Web Design By Dynamic HorizonFor information on designing a website for design professionals, consultants and contractors, visit http://www.dynamichorizon.com, as discussed in detail in an article in a recent issue of Constructech magazine.

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Disclaimer

This newsletter 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. Further, the comments in this newsletter are for general distribution 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 expressly disclaims any responsibility for damages arising from the use, application, or reliance upon the information contained herein.

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Copyright ã 2001, ConstructionRisk.com, LLC – Virginia

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