Inside This Issue:
- Contractor Negligent Misrepresentation Claim against A/E Cannot be Dismissed on Motion to Enforce Statute of Limitations Where Factual Question Exists as to when Contractor Discovered Injury;
- Negligent Misrepresentation Claim against Design-Build Firm is not Covered by CGL Insurance Policy;
- Statute of Repose Enforced to Bar Claim against Engineer;
- Partially at Fault GC Entitled to Indemnity by its Subcontractor;
- Complaint against Engineer Dismissed for Failure to File Certificate of Merit.
====================================== _________ Article 1 __________ Contractor Negligent Misrepresentation Claim against A/E Cannot be Dismissed on Motion to Enforce Statute of Limitations Where Factual Question Exists as to when Contractor Discovered Injury An architect was sued by its client, a country club, for structural problems that caused water leaks that were discovered after the project had been built and had been in use for several years. Among the allegations were that the architect failed to adequately review substitutions and modifications to the construction drawings and specifications made by contractors. The architect filed a third party suit against the construction contractor seeking contractual and common law indemnity. The contractor in turn filed a counterclaim against the architect for negligent misrepresentation. In support of this counterclaim, the contractor asserted that the architect’s plans, drawings, specifications and other information that were prepared or reviewed by the architect were done with knowledge that they would be used by the contractor during construction of the clubhouse, and that these documents “were false, contained numerous errors, omissions, discrepancies and ambiguities, and were not otherwise in compliance with building design requirements.” The architect moved to dismiss the contractor’s counterclaim on the basis that the claim was barred by a two-years statute of limitations. The court stated that it would be willing to grant a Rule 12(b)(6) motion to dismiss based on the statute of limitations only if, on its face, the complaint showed noncompliance with the limitations period. In this case, however, there was a factual dispute as to when the contractor should have “discovered” its injury and the basis for its cause of action against the architect. Since the matter was presented to the court on a motion to dismiss, the court explained that it could not look outside the pleadings to determine relevant facts concerning the date when the contractor should reasonably have been aware that it had suffered injury. Quoting from another decision, the court stated that “the point at which the complaining party should reasonably be aware that he has suffered an injury is generally an issue of fact to be determined by the jury; only where the facts are so clear that reasonable minds cannot differ may the commencement of the limitations period by determined as a matter of law.” Because, in this case, no bar to the contractor’s counterclaim was apparent on the face of the pleadings, the court declined to dismiss the counterclaim for negligent misrepresentation. Waynesborough Country Club v. Diedrich Niles Bolton Architects, 2008 WL 2856394 (E.D.Pa). About the author: All articles in this issue of the ConstructionRisk.Com Report are written by J. Kent Holland, 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 also founder and president of ConstructionRisk, LLC, a consulting firm 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. 11 No. 3 (March 2009). __________ Article 2 __________ Negligent Misrepresentation Claim against Design-Build Firm is not Covered by CGL Insurance Policy A homeowner sued its remodeling contractor for misrepresenting that it was licensed and would provide a design consistent with building code requirements. The complaint also alleged negligent performance of the contractor’s work. The court found that the damages were not covered by the contractor’s commercial general liability (CGL) policy because the alleged misrepresentations were not accidental “occurrences” within the meaning of the policy, and because the property damage arising out the work was excluded from coverage pursuant to the “your work” exclusion. The complaint alleged that the contractor had violated several provisions of state law concerning prohibited trade practices including “Misrepresentations.” The statue defined “misrepresentations” as making “any false, deceptive or misleading representation in order to induce any person to enter into a home improvement contract, to obtain or keep any payment under a home improvement contract, or to delay performance under a home improvement contract.” A jury found that the contractor did, in fact, make such “misrepresentations” in violation of the law. The jury also found the contractor negligent in both the design and construction of the remodeling project, and that this caused damages to the homeowner. On the question of whether the CGL policy would cover the damage award, the lower court of appeals concluded that the policy covered misrepresentation. The state statute did not require intent to deceive in order to find misrepresentation. The lower court, therefore, concluded that the misrepresentation could be an “accident” and, therefore, an “occurrence” covered by the policy. The court of appeals also found that the damages were “property damages” covered by the main coverage clause of the CGL policy. In reversing that holding, the Supreme Court of Wisconsin in the case of Stuart v. Weisflog’s Showroom Gallery, Inc, 753 N.W. 2d 448 (2008), held the alleged misrepresentation violations of the state statue are by definition intentional and, therefore, cannot be accidental occurrences covered by the CGL policy. In this regard, the court explained its reasoning that the ordinary meaning of the word “accident,” as used in insurance policies, is “an event which takes place without one’s foresight or expectation.” As further explained by the court, the issue is not whether or not the result of an event (such as misrepresentation) is unexpected, but rather whether the causal event is itself an accident. The court next considered whether that part of the jury award that was for damages due to negligent design and performance were covered by the policy. The “your product” exclusion of the policy would not apply in this case to bar coverage, said the court, because the definition of “your product” has an exception for “real property” such as that involved here. The “your work” exclusion, however, was found to bar coverage because that term is defined to include performance of the work, as well as representations about the quality of the work. In this regard, the court analyzed the interplay of the “products-completed-operations hazard” definition of the policy and the “your work” definition. One final important point made by the c
ourt in this case was the fact that the allegations in the complaint were against the contractor and did not involve allegations of defective work performed by subcontractors. Therefore, the subcontractor exception to the “your work” exclusion did not come into play. The court stated: “In this action, the subcontractors performed at the direction and under the supervision of [contractor]. Absent and showing of independent subcontractor negligence, the subcontractor exception to the “your work” exclusion is simply not applicable here.” Comment: The comment by the court concerning the subcontractor exception to the “your work” exclusion is interesting. It does not appear from the decision that anyone argued that because work was performed by a subcontractor the exclusion should not apply. And it appears that the work was, in fact, performed at least in part by subcontractors. What the court focused on in this regard, however, was that “the subcontractors performed at the direction and under the supervision of [the contractor]” and there was no showing of “subcontractor negligence.” To get out from under the “your work” exclusion of the CGL policy, the insured prime contractor would, therefore, have to show that the damages were caused by the negligence of its subcontractor. A question that comes to mind in reviewing this decision is why there was no discussion of the fact that the damages were awarded at least in part due to negligent “design” services. The typical CGL policy does not cover damages arising out of professional “design” services. According to the court, the homeowner entered into a “Remodeling Architectural Contract” with the contractor (somewhat different name) for “architectural drawings” almost a year before it entered into a separate contract with the contractor to perform the construction work on the project.” It would seem that a firm signing a contract to provide architectural drawings would have obtained a professional liability policy. It would also seem that the CGL carrier would have argued that in addition to the various reasons it successfully argued for excluding coverage, it would have argued that the CGL policy is simply not intended to cover professional services. _________ Article 3 __________ Statute of Repose Enforced to Bar Claim against Engineer In response to a complaint filed by Jefferson Parish, Louisiana against an engineer with allegations of improper design, fabrication and construction of a radio tower that collapsed during Hurricane Katrina, an engineer successfully moved the court to dismiss the action on the basis that the time limit imposed by a five year statute of repose had passed and the plaintiff was barred from bringing suit. The plaintiff responded to the motion by trying to get out from under the statute of repose by arguing that its claim was based on a breach of warranty rather than negligent professional services. In rejecting the plaintiff’s argument, the court noted that the contract was titled “Engineering Agreement”, and that it spelled out professional duties such as preparing construction plans, specifications and construction contract documents. Moreover, it included a typical standard of care provision stating the engineer’s services would be performed in a manner consistent with that level of care and skill ordinarily exercised by members of the profession. The contract contained no warranties guaranteeing the engineer’s performance. Based on the face of the pleadings, the court applied the applicable law to promptly dismiss the case. In Lee v. Professional Construction Services, Inc., 982 So.2d 837 (La.App.5 Cir., 2008), the contract in question required the engineer to provide a competent project engineer to administer the construction contract and to observe and inspect he materials and construction procedures a the site of the work as it progressed, said the court. Language in the contract further provided: “The professional and technical adequacy of designs, drawings, specifications, documents, and other work products furnished under this Agreement will be conducted in a manner consistent with that level of care and skill ordinarily exercised by members of the profession….” The provision of the state statute of repose reads as follows: “A. No action for damages against any professional engineer, surveyor, engineer intern, surveyor intern, or licensee as defined in R.S. 37:682, or any professional architect, landscape architect, **7 architect intern, or agent as defined in R.S. 37:141, or professional interior designer, or licensee as defined in R.S. 37:3171, or other similar licensee licensed under the laws of this state, or real estate developer relative to development plans which have been certified by a professional engineer or professional architect, whether based upon tort, or breach of contract, or otherwise arising out of an engagement to provide any manner of movable or immovable planning, construction, design, or building, which may include but is not limited to consultation, planning, designs, drawings, specifications, investigation, evaluation, measuring, or administration related to any building, construction, demolition, or work, shall be brought unless filed in a court of competent jurisdiction and proper venue at the latest within five years from: (1) The date of registry in the mortgage office of acceptance of the work by owner[.] … C. The five-year period of limitation provided for in Subsection A of this Section is a peremptive period within the meaning of Civil Code Article 3458 and in accordance with Civil Code Article 3461, may not be renounced, interrupted, or suspended. Comment: In previous risk management comments, we have suggested that the design professional include language in its contract to specifically limit the amount of time after substantial completion of the project by which its client can file suit. The new AIA B101 -2007 provides a ten year limit for filing suits, OR the period established by the state statutes – whichever is shorter. If your manuscript contracts establish a specific time limitation it may be appropriate to revise the language to track more closely with the B101 language. It would be unfortunate to see the protective contract language misused by a project owner to argue that the parties intended to extent the time peri
od for filing suit beyond the shorter time periods established by state statutes. This would not be an issue, however, in a state such as Louisiana where, as the court notes, the period set by the state statute cannot be “renounced, interrupted, or suspended.” Each state’s statutes are different and should be carefully considered. _________ Article 4 __________ Partially at Fault GC Entitled to Indemnity by its Subcontractor A general contractor was entitled to contractual indemnification by its subcontractor against a claim by an employee of the subcontractor who fell at a construction site while installing a steel girder on a highway overpass. The question was whether a general contractor that had been found partially at fault for the laborer’s injuries was entitled to enforce an indemnification provision against its subcontractor for that portion of the damages caused by the subcontractor. In reviewing the state’s anti-indemnification statute, the court concluded that it permits a partially negligent general contractor to seek indemnification from its subcontractor pursuant to a contractual indemnification clause so long as the that clause does not purport to indemnify the GC for its own negligence. In Brooks v. Judlau Contracting, Inc., 898 N.E.2d 549, 869 N.Y.S.2d 366, 2008), the indemnification clause of the contract read in relevant part as follows: “[t]he Contractor shall not be liable for any loss or casualty incurred or caused by or to the Subcontractor. The Subcontractor shall maintain full and complete insurance on its work until final acceptance of the General Contract. The Subcontractor assumes all risk of loss for all of its work regardless of whether the Subcontractor had previously been paid for it. The Contractor is not responsible to provide any protective service for the Subcontractor’s benefit. The Subcontractor shall, to the fullest extent permitted by law, hold the Contractor and the Owner, their agents, employees and representatives harmless from any and all liability, costs, damages, attorneys’ fee, and expenses from any claims or causes of action of whatever nature arising from the Subcontractor’s work, including all claims relating to its subcontractors, suppliers or employees, or by reason of any claim or dispute of any person or entity for damages from any cause directly or indirectly relating to any action or failure to act by the Subcontractor, its representatives, employees, subcontractors, or suppliers. The Subcontractor acknowledges that specific consideration has been received by it for this Indemnification.” The question for the court was whether the language of this contract clause violated the provisions of the state law that reads as follows: “[a] covenant, promise, agreement or understanding in, or in connection with … a contract or agreement relative to the construction, alteration, repair or maintenance of a building … purporting to indemnify or hold harmless the promisee against liability for damage arising out of bodily injury to persons or damage to property contributed to, caused by or resulting from the negligence of the promisee, his agents or employees, or indemnitee, whether such negligence be in whole or in part, is against public policy and is void and unenforceable.” The law in New York does not allow a party to be indemnified for its own negligence. The key to the court’s decision was whether the contract provision called for the GC to be indemnified for its own negligence that was in part the cause of the laborer’s fall and injuries. The court concluded: “enforcement of the indemnification provision currently before us will not result in [GC] being indemnified for its own acts of negligence; rather, it is being indemnified only for those acts attributable to the subcontractor.” The court went on to say that for it to hold that a partially negligent GC could never seek contractual indemnification for the wrongful actions attributed to its subcontractor would “leave the general contractor liable for the negligent actions of it subcontractor” and that “such an outcome would be contrary to the intent of [the law] that payment of damages be made according to fault.” For these reasons, the court held that the GC was entitled to be indemnified for the portion of the damages caused by the subcontractor. Comment: In an interesting “kitchen sink” type argument, the plaintiff threw a red-herring into the mix by asserting that because the indemnification clause stated that the subcontractor must indemnify the GC “to the fullest extent permitted by law,” this somehow broadened the subcontractor’s liability to require full contractual indemnification –to include the GC’s own negligence, and that this would render the contractual provision void under law. The court found no more logic in that strained argument than would any normal reader of the clause. As well explained by the court: Our holding that the phrase “to the fullest extent permitted by law” limits rather than expands a promisor’s indemnification obligation is supported by the holdings of other courts that have likewise held that such phrases create a partial indemnification obligation on behalf of the subcontractor promisor. It is sound contract drafting to include the phrase “To the fullest extent permitted by law” in the indemnification clause so that if for any reason the court determines that the clause goes too far and consequently violates state law or policy requirements, the court may nevertheless enforce the expressed intent of the parties to the greatest extent that the law will otherwise permit. _________ Article 5 __________ Complaint against Engineer Dismissed for Failure to File Certificate of Merit Where a project owner sued its engineer for negligence but failed to file a certificate of merit with the complaint as required by state statute, the court granted the engineer’s motion to dismiss the complaint for that failure. In its opposition to the motion, the plaintiff argued that it was not suing the engineer for professional negligence but rather ordinary negligence. Based on the face of the complaint and answer that both showed professional services and allegations of professional negligence to be the issue, the court granted the motion for the engineer and dismissed the case. In Dental Care Associates v. Keller Engineers, Inc., 954 A.2d 597 (PA, 2008), the owner had retained the engineering firm to provide professional engineering services associated with a new office for dental care and other commercial services. After construction was completed, problems arose with the storm water management system designed by the engineer. The owner filed a complaint against the engineer for negligence and unjust enrichment. The negligence count alleged that the engineer breached its duty to the owner to “use the degree of knowledge, skill, and judgment ordinarily possessed an
d used by the average engineer in the profession.” In answer to the complaint, the engineer stated that its services were provided “according to the appropriate standard of care and conformed to recognized standards and practices, as well as federal, state and local codes, ordinances, and regulations.” It sought dismissal of the complaint based on the state statute of repose that requires the following: (a) In any action based upon an allegation that a licensed professional deviated from an acceptable professional standard, the attorney for the plaintiff […] shall file with the complaint or within sixty days after the filing of the complaint, a certificate of merit signed by the attorney or party that either: (1) an appropriate licensed professional has supplied a written statement that there exists a reasonable probability that the care, skill or knowledge exercised or exhibited in the treatment, practice or work that is the subject of the complaint, fell outside acceptable professional standards and that such conduct was a cause in bringing about the harm, or (2) the claim that the defendant deviated from an acceptable professional standard is based solely on allegations that other licensed professionals for whom this defendant is responsible deviated from an acceptable professional standard, or (3) expert testimony of an appropriate licensed professional is unnecessary for prosecution of the claim. […]. As stated by the court, this rule applies to professional liability claims against licensed professionals, including engineers. A certificate of merit must be filed with the complaint or within 60 days of filing the complaint. What happens in Pennsylvania is that when the plaintiff fails to file the certificate, the defendant may file a praecipe with the court to have a judgment of non pros entered. That is what happened in this case, and the plaintiff sought to have the case reopened on the basis that the certificate was not necessary under the facts of the pleadings. The key argument of the plaintiff was that because it did not name individual engineers in the complaint as licensed engineers, and it did not name the defendant engineering firm as a “licensed professional”, it was exempt from filing a certificate of merit. In rejecting this argument, the court stated that the substance of the claim was professional liability regardless of whether or not the plaintiff specified that it was suing a licensed professional. For these reasons, the court held in favor of the engineer and declined to reopen the matter. ===================================== 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 2009, ConstructionRisk, LLC Publisher & Editor: J. Kent Holland, Jr., Esq. 1950 Old Gallows Rd Suite 750. Vienna , VA 22182 703-623-1932 Kent@ConstructionRisk.com