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Inside This Issue:

  • Limitation of Liability Clause Enforced in A/E Agreement;.
  • Indemnification Provisions of AIA Contract Did Not Require Contractor to Indemnify Client for Economic Losses Claimed by Adjacent Property Owner;Contractor Could Not Recover From
  • Engineer for Interference

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Article 1
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Limitation of Liability Clause Enforced in A/E Agreement

A North Carolina court has ruled that a limitation of liability clause in an engineering services agreement did not violate the laws of North Carolina or Georgia . Additionally, the clause applied to direct contract damages, consequential damages and claims for professional malpractice.

In this case, Mosteller Mansion LLC hired Mactec Engineering and Consulting of Georgia Inc. to assess the subsurface conditions of a 16-acre tract of land in Buncombe County , N.C. , where Mosteller intended to develop an apartment complex. The engineering services agreement, which stipulated that it would be governed by the laws of the state of Georgia , where Mactec was headquartered, called for Mactec to recommend foundation designs and site preparation procedures. The contract also contained two clauses entitled “Indirect Damages” and “Limitation of Liability.” Unlike the rest of the agreement, these two clauses were printed entirely in capital letters.

The Indirect Damages clause said neither party would be responsible “for any economic, consequential or indirect damages (including, but not limited to, loss of use, income, profits, financing or reputation) arising out of or relating to this Agreement.” The Limitation of Liability clause read in part as follows:

“To the maximum extent permitted by applicable law and for additional compensation of $10.00 from [Mactec], [Mosteller] hereby expressly agrees that the liability of [Mactec] … for any cause of action based upon breach of contract, strict liability, negligent professional acts, errors or omissions, or negligent misrepresentation arising out of or in connection with this Agreement and/or services provided or work product developed pursuant to this Agreement, shall be limited to the aggregate sum … of $50,000 or the total fees paid to [Mactec] by [Mosteller] under this Agreement, whichever is greater.”

Mactec drilled 19 soil test borings at the site, presented its findings, recommended foundation designs, and billed $8,900 for its services. Three years later, Mosteller sued Mactec for more than $3 million in damages allegedly incurred because of unsuitable soils. The damages included not only the cost of removing and replacing the soil, but also testing and engineering services, loss of business, insurance premiums, and interest on borrowed funds. The suit alleged breach of contract and professional negligence.

Mactec moved for summary judgment, relying on the Indirect Damages and Limitation of Liability clauses. A North Carolina trial court, applying Georgia law, ruled in favor of Mactec. Mosteller appealed, arguing that the law of North Carolina , where the project was located, should govern and that the contract clauses in question were unenforceable because they violated the public policy of the state of North Carolina .

The Court of Appeals of North Carolina said the choice of law provision in the contract was clear and enforceable— Georgia law would govern all claims under the contract. The court agreed with Mosteller that the law of North Carolina , where the project took place, should govern all negligence claims outside the contract.

The court went on to rule that the Limitation of Liability clause, an express allocation of financial risk between two business entities, negotiated at arm’s length, did not violate the public policy of Georgia. The limitation was enforceable against Mosteller.

The Indirect Damages disclaimer was also enforceable. Mactec did not attempt to exculpate itself from responsibility for personal injury, public safety or property damage. Like the Limitation of Liability clause, this was a contractual allocation of financial risk between two business entities. It did not offend public policy.

The court also addressed the professional malpractice claims, governed by the law of North Carolina . Both clauses expressly applied to negligence claims. The court ruled that the clauses should be enforced accordingly.

“People should be entitled to contract on their own terms without the indulgence or paternalism by courts in the alleviation of one side or another from the effects of a bad bargain.… The parties were sophisticated professionals and the result of their bargain does not elicit a profound sense of injustice. Moreover, Mosteller’s assertion to the contrary, all of Mosteller’s damages were economic, indirect and consequential and the health and safety of the public are not implicated.”

The facts of this case illustrate the rationale behind the allocation of risk established in these clauses. The engineer provided $8,900 in services. The owner was attempting, in effect, to hold the engineer responsible for the overall viability of the entire project, seeking recovery of more than $3 million in alleged damages.

Mosteller Mansion LLC v. Mactec Engineering and Consulting of Georgia Inc., May 20, 2008, COA07-664.   This is an unpublished opinion of the North Carolina Court of Appeals and does not constitute controlling legal authority. Citation is disfavored, but may be permitted in accordance with the provisions of Rule 30(e)(3) of the North Carolina Rules of Appellate Procedure.

About the Author: This case note was originally published in Construction Claims Advisor, and is republished here in ConstructionRisk.com Report (Vol. 10, No. 3, July 2008) with permission.

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Article 2

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Indemnification Provisions of AIA Contract Did Not Require Contractor to Indemnify Client for Economic Losses Claimed by Adjacent Property Owner

The issue is in this case was whether a contractor was required to indemnify its client (project owner) for damages claimed by a third party (neighboring landowner) when the contractor’s backhoe struck an underground power cable that supplied electricity to the neighbor’s property.  The ultimate appellate court decision held that indemnification was not required by the AIA A201/CM  contract because there was no evidence that contractor was negligent, plus the damages claimed were purely economic.

In the case of Watral & Sons, Inc.  v. OC Riverbend 58, Inc. (NY, 2008), the court interpreted the indemnification clause of the 1980 edition of AIA Document A201/CM .  Watral & Sons (Contractor) executed this contract form with OC Riverbend (Owner) to provide excavation, drainage and sanitary work necessary to build an Applebee’s Restaurant on the Owner’s property.  While excavating for the sewer line, Contractor struck an underground power cable that serviced a neighbor’s adjacent property.

Before doing the excavation, Contractor called “New York One Call” to request marking the electric line.  This was done.  Subsequently, however, an unidentified electrician relocated the cable.  Contractor had no knowledge of the relocation and was working 10 to 15 feet from the flags that marked the supposed location of the cable when its backhoe struck it.    This was repaired immediately, with Contractor paying for the material costs of the repair and the electrician providing the labor.  This might have been the end of the story but for the fact that two weeks later the cable was again broken when a Contractor employee was excavating in the same area and the ground near the cable collapsed.  The collapsing ground dragged the cable and damaged it in the sample place it had been previously repaired.  Contractor again paid for the materials to fix the damage to the cable.

Owner paid the contractor only half of the total contract price and withheld the balance due to a claim against the owner by the neighbor for damages arising out of the power interruption.  The owner paid the neighbor almost $70,000 to resolve that claim and withheld the same amount from the contractor.  The contractor then filed a mechanic’s lien against the property to recover the balance of the contract price.  Contractor subsequently filed suit to foreclose on its lien.  In its answer and defense, the owner asserted that the contractor was required to indemnify the owner for the third party claim pursuant to the indemnification clause of the contract and the “Safety of Persons and Property” clause.

The trial court found in favor of the contractor on the basis that the contract required indemnification by the contractor only for its own negligent acts.  There was no evidence here of contractor negligence.  That decision was reversed by the intermediate appellate court.  The court agreed that the contractor was not required by the indemnification clause (Article 4.18) to indemnify the owner since there was no contractor negligence. However, applying the “Safety of Persons and Property” clause of paragraph 10, the court held the contractor had a broader indemnity obligation under that clause to indemnify the owner even if the contractor was not negligent.

Subparagraph 10.2.1.3 of the contract provides: “the Contractor shall take all reasonable precautions for the safety of, and shall provide all reasonable protection to prevent damage, injury or loss to: . . . property at the site or adjacent thereto, including trees, shrubs, lawns, walks, pavements, roadways, structures and utilities not designed for removal, relocation or replacement in the course of construction; ….”

Subparagraph 10.2.5 provides further:  “The Contractor shall promptly remedy all damages or loss . . . to any property referred to in Clause … 10.2.1.3 caused in whole or in part by the Contractor . . . for which the Contractor is responsible under Clause . . . 10..2.1.3, except damage or loss attributable to the acts or omissions of the Owner, the Architect, the Construction Manager or anyone directly or indirectly employed by any of them, or by anyone for whose acts any of them may be liable, and not attributable to the fault or negligence of the Contractor.  The foregoing obligations of the Contractor are in addition to the Contractor’s obligations under Paragraph 4.18.”

These clauses from Article 10 were held to require indemnification by the contractor without regard to negligence.  This decision, however, was reversed by the court of appeals.  As reason for the reversal, the court held that Article 10 only applied to “property” damage, and that the only property damage involved in this case was the property damage to the electric cable.  There was no evidence of any damage to the neighbor’s property.  Instead, the neighbor sustained only purely economic injury.  Such economic injury is not covered as property damage under Subparagraph 10.2.5 quoted above.  For that reason, the court stated it did not need to reach or express an opinion as to whether subparagraph 10.2.5 imposed a negligence or fault-type liability standard.  Since the clause in no event applied to economic losses, it would make no difference whether the contractor was at fault.  For these reasons, the court ordered that the trial court decision be reinstated in favor of the contractor.

Comment: The distinction recognized here by the court between the genuine “property” damage that is intended by the contract clause and economic loss of the type at issue in this case is an important one.  This same principle comes into play when making claims under various insurance policies to recover property damage.  This has been discussed in numerous case notes and articles previously presented in this newsletter.

About the author: J. Kent Holland is a construction lawyer located in Tysons Corner , Virginia , with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 10, No. 3 (July 2008).

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Article 3

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Contractor Could Not Recover From Engineer for Interference

The Idaho Supreme Court has ruled that a contractor could not recover from the project owner’s consulting engineer for alleged interference with the performance of the construction contract. The engineer was an agent of the owner and was protecting the owner’s interests when monitoring and testing the work.

The Pocatello Development Authority retained J-U-B Engineers Inc. to provide design and construction monitoring services for a utility, street and sidewalk reconstruction project. The Authority subsequently awarded the construction contract to BECO Construction Co. Inc.

The construction contract contained a number of provisions defining the role of the engineer, which included routing all owner communications to the contractor through the engineer. The engineer served as the owner’s representative throughout the project and had authority to monitor the progress and quality of the work. The engineer also had authority to test the contractor’s work product.

BECO Construction later complained that J-U-B Engineers unreasonably stopped work on the project and delayed BECO’s performance. BECO claimed that J-U-B had tested asphalt and aggregate compaction in an incompetent manner, resulting in improper rejection of street improvements. BECO sued J-U-B for tortious and intentional interference with the performance of the construction contract.

J-U-B moved for summary judgment, arguing that it had only been performing its responsibilities to the project owner, as defined in the engineering services agreement and the construction contract. A trial court granted summary judgment in favor of J-U-B Engineers. BECO appealed.

The Supreme Court of Idaho said a claimant could recover from another for interference with a contract only if the defendant was a stranger to the contract. One cannot “interfere” with a contract to which one is a party. J-U-B Engineers was not a party to the construction contract in the traditional sense; it was not a signatory to the contract. But, J-U-B was not a stranger to the contract, either.

The court noted that the construction contract spelled out in considerable detail the role and responsibilities of the engineer during construction. BECO was fully aware of this role. J-U-B was the agent of the project owner and was responsible for protecting the owner’s interests. The monitoring and testing performed by J-U-B were in keeping with its contractual responsibilities. Consequently, J-U-B Engineering could not be liable to BECO Construction for tortious or intentional interference with the performance of the construction contract.

“These [contract] provisions, along with a number of others, clearly provide J-U-B with broad discretionary authority to monitor BECO’s progress, and encompass those actions BECO complains of here. Although J-U-B was not a party to the construction contract in the traditional sense, it acted as the City’s agent by the very terms of the contract between BECO and the City.… Since J-U-B was an agent of a party to the contract and was acting for the benefit of such party, it is not a stranger to the contract and therefore cannot be liable for tortious interference with such contract.”

Contractors have had better luck pursuing construction monitors based on theories of professional malpractice or negligent misrepresentation. As explained by the court in this opinion, there is an inherent flaw in an interference claim.  BECO Construction Co., Inc. v. J-U-B Engineers, Inc., Supreme Court of Idaho, Case no.: 33378, Date filed: May 2, 2008.

About the author: This case note was originally published in Construction Claims Advisor, and is republished here in ConstructionRisk.com Report (Vol. 10, No. 3, July 2008) with permission.

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ABOUT THIS NEWSLETTER & A DISCLAIMER

This newsletter Report is published and edited by J. Kent Holland, Jr., J.D. 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.

Copyright 2008, ConstructionRisk, LLC

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J. Kent Holland, Jr., Esq.

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