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Inside This Issue:

  • New Book — Risk Management & Contract Guide for Design Professional
  • Store Owner not Liable for Injuries Sustained by HVAC Contractor’s Employee
  • DeFacto Takeover:  Are a Surety’s Rights Protected?
  • Indemnity Clause Requires Subcontractor to Indemnify Prime for Injuries Arising out of Prime’s Own Negligence

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NEW BOOK – AVAILABLE in October– a/e ProNet’s Risk Management & Contract Guide for Design Professionals by J. Kent Holland

In this a/e ProNet book authored by Kent Holland, detailed examples of over 30 contract clauses are provided.  The discussions include risk management ideas and suggestions for negotiating contracts with reasonable allocation of risk between the contracting parties.  Much attention is given to explaining how contract language may affect the availability of insurance coverage for claims against design professionals.  Several chapters address managing communication and documentation, with particular emphasis on e-mail, and records maintenance, retention, and destruction.  Three continuing education courses are included.  Each is registered with the AIA.  Additional payment is required to receive credit for taking the courses.  The cost of the book is only $39.95.  A separate announcement will be e-mailed to you in a few weeks providing the information on how you can purchase the book.

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ARTICLE #1
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Store Owner not Liable for Injuries Sustained by HVAC Contractor’s Employee, by J. Kent Holland

Where a contractor’s employee was injured by falling from a ladder it borrowed from the owner of the location where he was repairing an HVAC system, the court held the owner was not legally responsible for the individual’s injuries because the availability of the ladder was at most a favor to the person doing the work.  This was nothing more than a mere gratuity, for which the owner owed no duty to the individual.

In the case of Semler v. Sears, Roebuck and Company, 268 Neb. 857, 689 N.W. 2d, 2004, Lawrence Semler, an employee of The Waldinger Corporation was dispatched by his employer to the Sears store to repair the heating unit.  Upon his arrival at the store, Semler noticed a ladder leaning against the heating unit, and he climbed it in order to take a look at the heating problem.  He came back down, went to his truck to get an electric meter, then returned to the heating unit and climbed the ladder a second time.  While he was on the ladder, the bottom slipped out across the floor, causing him to fall to the ground.

Semler testified at trial that he believed the ladder’s lack of rubber shoes caused the ladder to slip out on the concrete floor.  He also testified that he “most likely” adjusted the ladder before climbing it, but that he did not notice until after the accident whether the “shoes” on the ladder had rubber on them.  He further testified that his employer, Waldinger, provided all the tools needed for the job, including an extension ladder which was on the roof of the truck he drove to the job.  He said he chose not to use that ladder, however, because there was already a ladder on the premises.   The trial court weighed conflicting testimony and concluded that Sears employees did not retrieve or move the ladder for Semler to use, but that Semler, himself, made an independent decision to use the ladder without any involvement by Sears.

The appellate court stated that the issue for consideration was not whether Sears had retained control over Semler’s work.  Nor did the court believe there was a legal issue of whether or not Sears had a non-delegable duty to provide a safe workplace for Semler.  In fact,  Semler did not argue that  Sears had retained control over an independent contractor who had caused him harm.  And he did not argue that Sears had vicarious liability for actions of an independent contractor.   Nor did he argue that his injuries were due to Sears’ failure to protect him form a condition or activity existing upon its land.  Instead, Semler sued Sears for direct negligence in supplying a defective ladder for his use on its premises.

The trial court found no legal basis for the claim and granted a summary judgment in favor of Sears against Semler.  On appeal, the appellate court affirmed the summary judgment, finding that, “At most, the presence of the ladder leaning against the unit could be viewed as a ‘favor to the person [Semler] doing the work.”  As such, “its availability would be nothing more than a mere ‘gratuity.”  Consequently, under the Restatement of Torts, Sec. 392, as cited by the court, Sears owed no duty to Semler.

About the author: Kent Holland is a construction lawyer with the law firm of Wickwire Gavin, P.C., in Tysons Corner, Virginia, and is risk management consultant for the environmental and design professional liability unit of Arch Insurance Group in New York.  He is also publisher of ConstructionRisk.com Report.

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ARTICLE #2
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De Facto Takeover:  Are a Surety’s Rights Protected?

By Michael J. Carrato, Esq.

A Miller Act surety needs to be aware of certain notice requirements if it decides to take over performance for its principal on a federal construction contract.  Informal or “constructive” notice that a surety intends to take over management of a project may not be enough to protect the surety’s interest in the contract balance.  A recent decision from the United States Court of Federal Claims illustrates the problems which may arise if a surety does not provide the contracting officer with formal notice.

In American Ins. Co. v. United States , 62 Fed. Cl. 151 (September 28, 2004), American acted as surety for G&C Enterprises, Inc. on an Air Force construction contract.  G&C requested and received progress payments from the Air Force during the course of construction.  However, as the project neared the contractual completion date, G&C began to experience difficulties.  Concerned that its principal, G&C, might default, American assumed de facto managerial control of the contract and engaged another contractor to complete the work.  American did not formally notify the Air Force that it had assumed responsibility for its principal’s contractual obligations.

After assuming control of the project, American discovered that G&C had been paid 97% of the contract price by the Air Force while only performing 80% of the work.  American filed a suit against the Air Force claiming damages in the amount of $842,000, which represented the difference in the amount paid to G&C by the Air Force and the value of the work it had performed.  American argued that it should be equitably subrogated to the United States in the amount of the overpayment.

In granting summary judgment for the Air Force, the Court held that before an obligation arises on the part of the Government to withhold or divert contract funds, the Government must be notified that the surety believes the contractor is in default and cannot complete the contract.  Absent such notice, the Government owes no duty to the surety to protect the contract balance.  Because the surety may decide that its interests are best served by continuing to have the Government make progress payments to its principal, constructive notice that a contractor has defaulted and that the surety has taken over the performance of the contract is insufficient.  Only when the surety becomes a party to the contract with the United States by entering into a takeover agreement with a federal agency does the Government owe the surety any duty.  Based on the undisputed facts of the case, American’s rights to equitable subrogation never attached.  It not only failed to properly notify the Air Force to stop making payments to the contractor, but instead asked the Air Force to continue making payments to G&C.

Further, the Court held that American failed to demonstrate that the Air Force departed from the terms of the contract in making the overpayments to G&C.  Under the payment provisions in the contract, the contracting officer was vested with discretion to pay a contractor in excess of the value of the work performed.  Pursuant to that language, the contracting officer could use his/her discretion in balancing the Government’s interest in proceeding with the contract against possible harm to the surety.  The Court found that the contracting officer in this case did not abuse that discretion.  The overpayments were made to provide G&C with the cash flow to complete the project.  Based on these findings, the Court held that American was not entitled to recover any amount of the overpayments made to G&C.

Comment:

According to the American Insurance decision, a surety faces a tricky decision when its principal is experiencing financial difficulties.  On the one hand, encouraging the Government to continue making progress payments to its principal could help the contractor address its difficulties and successfully complete the contract.  However, such payments reduce the funds available to the surety to complete the work in the event its principal defaults.  Diligent monitoring by sureties of their principals’ performance under their bonded contracts and financial condition is key to avoiding the situation the surety faced in the American Insurance case.  To the extent a surety is convinced that its principal cannot complete the contract, it should promptly and explicitly notify the contracting officer to stop payments to the contractor.  Additionally, once a principal has defaulted, the surety should, with the assistance of counsel, promptly negotiate an appropriate takeover agreement with the Government.

About the Author: Michael J. Carrato is an attorney with the law firm of Wickwire Gavin, P.C., located at 8100 Boone, Blvd., Suite 700 , Vienna , VA , with a practice focusing on construction law and litigation.  He is also a certified engineer.  He can be reached at 703-790-8750 or at mcarrato@wickwire.com.

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RED VECTOR.COM — ON-LINE COURSES by KENT HOLLAND
Currently available risk management courses written by Kent Holland for RedVector, (http://www.redvector.com/instructors/view_related_courses.asp?id=195) include the following:; Contract Guide for the Design Professional, Design Build Professional Liability Risk Management and Insurance; Site Safety Risk and Liability; Risk Management for the Design Professional; Managing Communication, Documentation and Reports; Insurance for Design-Build and Complex Projects; Construction Contract Law; Contract Claims against Design Professionals; Insurance Coverage Disputes; and Environmental Claims.  This is an efficient, easy and cost-effective to get your continuing education credits.

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ARTICLE #3
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Indemnity Clause Requires Subcontractor to Indemnify Prime for Injuries Arising out of the Prime’s own Negligence,

by J. Kent Holland, Esq.

Where the indemnity clause of a contract expressly exculpated a prime contractor from the consequences of its own negligence that resulted in injury to a subcontractor’s worker, the prime was entitled to be indemnified by the subcontractor because the claim arose out of the performance of the contract.

In Spawglass, Inc. v. E.T. Services, Inc., 143 S.W.3d  897  ( Tex. 2004),  the appellate court reversed a summary judgment that had been granted by the trial court in favor of the subcontractor.  The contractor, SpawGlass Construction Corporation had subcontracted with E.T. Services, Inc.(“ETS”)  for ETS to perform structural steel erection for a high school.  An employee of ETS, Brian Sanders, was working as a welder on the site. While he was rolling up an oxygen hose, he was struck by a sheet of plywood that blew off of the roof during a sudden storm.  Sanders sued SpawGlass for negligence.  SpawGlass in turn sought indemnity from ETS pursuant to the indemnity provisions of the contract.

SpawGlass contended that the contract clearly and unambiguously required ETS to indemnity SpawGlass for claims of injury to ETS’s workers attributable to SpawGlass’s negligence.  ETS, in contrast, contended that the indemnity provision applied only to injuries resulting from ETS’s performance.  Flying plywood, says ETS, did not arise out of ETS performance.  ETS argued that the indemnity may only be triggered if the incident arose out of its performance, not its mere presence on the site.

The appellate court rejected ETS’s argument completely.  First, the court found that the indemnity provision was clear and unambiguous with regard to meeting what is known as the “express negligence rule.”  That rule requires that the intent of the party seeking indemnity from the consequences of its own future negligence must be expressed in unambiguous terms within the four corners of the contract.   In this case, the court held that the language clearly required that ETS would indemnify SpawGlass from the consequences of SpawGlass’s own negligence that resulted in injury to ETS’s worker.

With regard to whether the injury arose during ETS’ “performance”, the court held that despite ETS’s argument that the injury arose from SpawGlass’s performance completely unrelated to the work that ETS and its employee were hired to perform, the injury occurred while all the parties were “engaged in the construction of a high school auditorium.”   Thus, the court concluded, “The claim asserted by Brian Sanders arises out of the performance of ETS’s contract with SpawGlass.  For these reasons, the appellate court reversed and remanded the trial court decision.

Comment

Based on the reasoning of this decision, it is important for parties that are negotiating indemnity provisions in contracts to carefully determine what they want to be indemnified and to craft the language to accomplish that.  As explained in this case, the “express negligence rule” that is applicable in most states means that if you want to be indemnified for your own negligence, you need to clearly state that intent in the contract.  The contract in this case accomplished that for the prime contractor.

It is also not uncommon to see language like that in the contract at issue here which states that the indemnity applies to injuries or damages arising out of “performance of the contract.”  This does not necessarily mean that the injury has to arise directly out of the performance of the work performed by the party that is the Indemnitor.  As explained in this case, just the fact that the worker was on the site because his employer was performing work for the primer under a contract was enough to trigger the indemnity obligation – and it didn’t matter whether the employee or his employer had anything to do with causing the plywood to blow off the roof.

If you want to limit the indemnity to apply only to damages and injuries caused by your own performance, you can clearly state this in the contract.  For example, if you are a design professional, you might state something to the effect that you will only indemnify the other party for damages “to the extent that they arise from the negligent acts, errors or omissions of the design professional.”   If you are a contractor, you might not be able to limit your indemnity to negligence based acts, but you might nevertheless limit your indemnity to apply only to damages “to the extent that they are caused” by you.

About the author: Kent Holland is a construction lawyer with the law firm of Wickwire Gavin, P.C., in Tysons Corner, Virginia, and is risk management consultant for the environmental and design professional liability unit of Arch Insurance Group in New York.  He is also publisher of ConstructionRisk.com Report.

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ABOUT THIS NEWSLETTER & A DISCLAIMER

This newsletter Report is published and edited by J. Kent Holland, Jr., J.D., risk management consultant for the Environmental and Design Professional Liability Units of Arch Insurance Group.  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.

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Copyright 2006, ConstructionRisk.com, LLC

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

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