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Inside This Issue:

  • New OSHA Policy is Upheld – Rendering Prime Contractors Responsible for Hazards Created by their Subcontractors;
  • Faulty Workmanship Arising from Subcontractor Work is Covered by a CGL Policy;
  • Huge Penalty for False Claim is Enforced , and Forfeiture of Entire Contractor Claim is Affirmed;
  • Architect Failed to Prove Developer Infringed its Copyrighted Plans;
  • Corporate Veil Cannot be Pierced as Part of Supplementary Proceedings After Judgment was Rendered Only Against Architectural Corporation .

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Article 1
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New OSHA Policy is Upheld – Rendering Prime Contractors Responsible for Hazards Created by their Subcontractors

J. Kent Holland, Jr.

OSHA is permitted, under its new “controlling employer citation policy,” to issue citations against employers for safety violations even if their own employees are not exposed to any hazards related to the violations.  The U.S. Court of Appeals for the Eighth Circuit held that the applicable section of the Code of Federal Regulations does not prohibit application of an employer’s safety responsibility to employees of other employers such as its subcontractors.  To the extent that the regulation may have been ambiguous with regard to whether it could be applied to allow OSHA to cite a prime contractor for the failure of its subcontractors to protect the subcontractor employees, the court stated it was required to defer the Agency’s reasonable interpretation of its own regulation.  The key finding of the court was that the regulation, as reasonably interpreted by OSHA, does not preclude imposing a duty on employers to protect the place of employment, including others who work at the place of employment, so long as the employer also has employees at that place of employment.

In Solis v. Summit Contractors, 558 F.3d 815 ( 8th Cir. 2009), the issue on review was whether the Secretary of the Department of Labor’s new multi-employer worksite policy for “controlling” employers (“Controlling employer citation policy”) violated agency regulation 29 CFF 1910.12 (a).  The new policy provides that the Occupational Safety and Health Administration (OSHA) may issue citations to general contractors at construction sites who have the ability to prevent or abate hazardous conditions created by subcontractors through the reasonable exercise of supervisory authority regardless of whether the general contractor created the hazards or whether the general contractor’s own employees were exposed to the hazard. “

The OSH Act at 29 USC 654 (a) states that “Each Employer (1) shall furnish to each of his employees employment and a place of employment which are free from recognized hazard that are causing or are likely to cause death or serious physical harm to his employees.”   Subparagraph (2) of this section states that the Employer “shall comply with occupational safety and health standards promulgated under this chapter.”

According to the court, “Subsection (a)(1) creates a duty running only to any employer’s own employees, while subsection (a)(2) creates a specific duty to comply with standards for the good of all employees on a multi-employer worksite.”   The original multi-employer worksite policy of OSHA provided that OSHA could cite employers who exposed their own employees to hazardous conditions or who created a hazardous condition “endangering employees” whether or not those employees were his own or those of another employer at the site.   OSHA initially applied a narrow interpretation of this policy.   With the adoption of the new multi-employer worksite policy, however, OSHA is applying a much broader interpretation of the regulation to permit it to cite employers who have the ability to “control” the worksite even if they did not “create” the hazard or “expose” the worker to the hazard.

The key regulation at issue in this dispute is 29 CFR 1910.12(a) which provides:

“The standards prescribed … shall apply … to every employment and place of employment of every employee engaged in construction work.  Each employer shall protect the employment and places of employment of each of his employees engaged in construction work by complying with the appropriate standards prescribed in this paragraph.”

The facts giving rise to this case are these.  Summit Contractors was the general contractor for the construction of a college dormitory.  It subcontracted the entire project and had only four of its own employees at the site as project superintendants.    On two or three occasions Summit observed the subcontractor’s employees operating without personal fall protection on scaffolds that lacked guardrails. General contractor’s superintendant advised the subcontractor to correct the problems.  But each time the subcontractor moved it scaffolding to another location on the site, the employees would once again work without the fall protection.

When the OSHA Compliance Officer saw the laborers working without fall protection or guardrails he issued a citation not only to the subcontractor, but also to the prime contractor ( Summit ) on the basis of the new policy for “controlling employer” responsibility.

Summit contested the citation, arguing that 29 CFR 1910.12(a) places a duty on employers to protect only its own employees, not those of any subcontractor.  In evaluating whether OSHA acted within its appropriate discretion in interpreting the regulation as it did, the court concluded that there are two distinct parts to the quoted regulation.  The first part of 1910.12(a) applies to an employer’s duty to protect its own employees.  The second part of the paragraph, however, states that the employer is “to protect the places of employment” where the employer actually has employees.  This is broad enough, says the court, that “the plain language of part (2) does not preclude an employer’s duty to protect the place of employment, including others who work at the place of employment, so long as the employer also has employees at that place of employment.”

For these reasons, the court held that OSHA may continue to implement its new “controlling employer citation policy” to issue citations against “controlling employers” such as prime contractors that have neither created the hazard or exposed their own employees to any hazard.

Comment:

Summit , the prime contractor, was supported in this appeal by a number of trade associations that believe this is an ill-conceived policy as well as contrary to law.  These included Associated General Contractors of America , National Association of Home Builders, Associated Builders and Contractors, National Federation of Independent Business Legal Foundation, Contractor’s Association of Greater New York, Texas Association of Builders, and Greater Houston Builders Association.  They argued that the controlling employer citation policy is counterproductive to the goals of the OSH Act.  What potential benefits, they ask, can be gained in citing both a subcontractor and the general contractor that had informed the subcontractor of the violation on several prior occasions?  They argued that although the general contractor plays a role in setting safety standards at worksites, “OSHA is an intricate and function-specific regulatory regime such that each employer on a worksite may be uniquely situated to know of the very specific regulatory requirements affecting its particular trade.   The new policy places an enormous new responsibility on a general contractor to monitor all employees and all aspects of a worksite (and apparently take direct action to prevent unsafe conditions that it did not itself create.   The court’s response to these philosophical arguments was to state “These policy concerns should be addressed to Congress or to the Secretary and not to the courts.”  Unfortunately, in the current political environment it would appear unlikely that Congress would grant any relief or that the Department of Labor would revise its regulation – regardless of how sensible it might be to do so. 

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. 7 (July 2009).

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Article 2

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Faulty Workmanship Arising from Subcontractor Work is Covered by a CGL Policy

Claims of faulty workmanship against a builder were held to be claims for “property damage” covered by a Commercial General Liability (CGL) policy.  The “actual-injury” rule was applied by the court to find that since actual physical damage to property occurred during the policy period, the CGL policy during that period of time would cover the damage.   Several homeowners sued the contractor for construction defects related to the Exterior Insulation and Finish System (EIFS) that they alleged caused water damage to their homes.  An additional homeowner sued the contractor for alleged water damage due to improper design and construction of columns and a balcony.  The contractor tendered defense of the claim to its insurance carriers who denied any duty to defend.   An EIFS exclusion in the policy was the basis for one of the carriers denial of any duty to defend and an intermediate appellate court affirmed summary judgment in favor of that carrier.  As to the other carrier that did not have an EIFS exclusion, however, the court found a duty to defend the contractor against the four homeowner suits that alleged subcontractor installation defects caused their alleged damage.

In Pine Oak Builders v. Great American Lloyds Insurance, 279 S.W.3d 650 (Tex. 2009), the Supreme Court of Texas reviewed the CGL policies and the allegations contained in the plaintiff’s complaint to determine whether those allegations fell within the policy and required  the insurance company (Great American Insurance) to have a duty to defend the contractor.  Great American argued that the faulty workmanship claims did not alleged “property damage.”  The court held that pursuant to the case law established in Lamar Homes v. Mid-Continent Casualty, 242 S.W.3d 1 (Tex. 2007), faulty workmanship claims against contractors are claims for property damage caused by an occurrence under a CGL policy.

Next the court considered the question of what triggers coverage under a CGL policy.  The homes in question were built in 1996 and 1997.  The Great American policies were written to cover one year consecutive periods from April, 1993 through April 2001.  Great American argued that the date the damages were manifested is the date that triggers the policy.  Since that did not occur during the time that Great American Insured the contractor, it argued it had no duty to the contractor.  The court disagreed and held that it would follow the “actual injury rule” . . . “under which property damage occurs during the policy period if ‘actual physical damage to the property occurred’ during the policy period.”  The key date, says the court, “is when injury happen, not when someone happens upon it.”    Quoting from another case, the court says the key focus should be “when damage comes to pass, not when damage comes to light.”  Applying that principal, the court found that property damage occurred under the Great American policies “when a home that is the subject of an underlying suit suffered wood rot or other physical damage.”

How the “your work” exclusion applies to bar the claim for defects in the balconies.

Four of the homeowner suits alleged on the face of their complaints that the damages related to EIFS were caused by subcontractors working for the prime contractor with whom they had their contracts.  These allegations of subcontractor fault pulled the complaint out from under the “your work” exclusion since there is an exception to that exclusion for work that is performed by subcontractors in contrast to work that is performed by the insured contractor itself.  The fifth lawsuit, however, did not allege subcontractor fault as the basis of the claims against the contractor for defective columns and balconies.  On the face of the complaint, the allegations alleged that the prime contractor itself was at fault for the alleged defective work.   As stated by the court, that complaint did not accuse any subcontractor of defective work or other legally actionable conduct, nor allege that the prime contractor was liable under any theory for the conduct or work of its subcontractor.  The complaint did not allege negligent supervision of a subcontractor or any other third party.  It alleged only that the prime contractor was liable for its own actionable conduct.  As such, the “your work” exclusion to coverage under the GCL policy must be applied, concluded the court, to deny any duty to defend.

The contractor sought to present extrinsic evidence (evidence outside the four corners of the plaintiff’s complaint) to argue that it was the subcontractor’s work that caused the alleged defects in the columns and balconies at issue.   In rejecting consideration of such extrinsic evidence, the court explained: “The policy imposes no duty to defend a claim that might have been alleged but was not, or a claim that more closely tracks the true factual circumstances surrounding the third-party claimant’s injuries but which, for whatever reason, has not been asserted.  To hold otherwise would impose a duty on the insurer that is not found in the language of the policy.”

For these reasons, the court held the carrier had no duty to defend the suit concerning the balconies that alleged on prime contractor defects in workmanship, and it held the carrier hade a duty to defend the four EIFS claims arising out of alleged subcontractor defective workmanship.

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Article 3

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Huge Penalty for False Claim is Enforced , and Forfeiture of Entire Contractor Claim is Affirmed

Court of Fed Claims Affirmed decision in Daewoo Engineering  and Construction v. U.S. holding that where contractor sued government for $64 million based on alleged defective specifications and impossibility of performance, the lower court did not err in finding that $50 million of the claim was fraudulent and that the government was entitled to assess a $ a  $50 million penalty under the Contract Disputes Act plus a 10,000 penalty under the False Claims Act.   Since the court upheld the penalty it also concluded that the lower court was correct in finding under 28 U.S.C section 2514, that the contractor’s entire claim, including any part of the claim that might not have been fraudulent, is  forfeited.  The court stated that unlike the antifraud provision of the Contract Disputes Act, 41 USC, sec. 604, under which a contractor may incur liability only for the unsupported part of a claim, the forfeiture under 28 USC 2514 requires only part of the claim to be fraudulent in order to find that the entirety of the contractor claim is forfeited.

In the case of Daewoo Engineering and Construction Co., Ltd v. United States , 557 F.3d 1332 (Fed. Cir., 2009), the U.S. Court of Appeals for the Federal Circuit, the matter concerned a certified claim by Daewoo in the form of a request for equitable adjustment (REA) seeking adjustment of the contract price and time to perform its contract to build a 53 mile road.  The REA alleged that the contract used defective specifications, that the government breached its duties to cooperate and to disclose superior knowledge, and that the contract was impossible to perform within the originally specified time period.  When the contracting officer denied Daewoo’s claim, Daewoo filed a complaint with the Court of Federal Claims seeking an increase in monetary relief in the amount of approximately $64 million.

The government counterclaimed for damages, seeking $64 million under the Contract Disputes Act (CDA) and $10,000 under the False Claims Act.  The government also entered a special plea in fraud and sought forfeiture of Daewoo’s claims under 28 USC 2514.  The Court of Federal Claims found in favor of the government on all the issues.     In affirming that decision, the court of appeals started with an explanation of the antifraud provision of the Contract Disputes Act, 41 USC 604, “[i]f a contractor is unable to support any part of his claim and it is determined that such inability is attributable to misrepresentation of fact or fraud on the part of the contractor, he shall be liable to the Government for an amount equal to such unsupported part of the claim.”   Under 41 USC 601(9) A “misrepresentation of fact” is “a false statement of substantive fact material to proper understanding of the matter in hand, made with intent to deceive or mislead.”

The lower court held that Daewoo “filed at least $50 million of the [$64 million certified] claim in bad faith”.  In challenging the lower court’s penalty assessment under the CDA, Daewoo argued on appeal that its certified claim was neither a claim for $64 million under the CDA nor was it fraudulent.  The contractor also argued that even if the claim was in part fraudulent, it was not fraudulent to the full extent of $50.6 million.

What was fraudulent about the claim according to the trail court was the project cost calculation used by the contractor.  The court did not find Daewoo’s theories of the government’s breach of contract to be fraudulent – although it ultimately found these theories to be without merit.  The problem with the calculation according to the court was that it “assumed that the government was responsible for each day of additional performance beyond the original 1080-day contract period, without even considering whether there was any contractor-caused delay or delay for which the government was not responsible.  The calculation then simply assumed that Daewoo’s current daily expenditures represented costs for which the government was responsible.”

Moreover, stated the appellate court, “Daewoo apparently used no outside experts to make its certified claim calculation, and at trial made no real effort to justify the accuracy of the claim for future costs or even to explain how it was prepared.”  The court stated that, at the trial, Daewoo’s experts on damages “treated the certified claim computation as essentially worthless, did not utilize it, and did not even both to understand it.”  The trial court consequently found that the certified claim was simply a “negotiating ploy,” and that Daewoo “did not honestly believe the Government owed it the various amounts stated when it certified the claim.”  The trial court found the entire $64 million calculation likely was fraudulent, but it assessed only a $50.6 million penalty because it thought the remaining $13 million incurred costs could have been ultimately supported by alternative methodologies.

The appellate court understood Daewoo’s argument to be that a claim can be fraudulent only if it rests upon false facts rather than on a baseless calculation.  The court disagreed.  It explained that  since the claim by Daewoo was certified under 41 USC 605(c)(1) it was required to be made in good faith and be supported by data that are accurate and complete.  The claim by Daewoo was found to be baseless and therefore fraudulent.  For these reasons, the court sustained the $50.6 million penalty under the CDA.

A certified claim may be a source of liability under both the CDA and False Claims Act.  The trail court did not find that the government incurred actual damages from Daewoo’s false claim.  It, therefore,  assessed only the statutory penalty of $10,000 under the False Claims Act  — in addition to the much larger penalty under the CDA.

Finally, the appellate court affirmed the trial court decision that the government “showed by clear and convincing evidence that [Daewoo] knowingly presented a false claim with the intention of being paid for it” and thus that Daewoo’s claims against the government were forfeited under sec. 2514.”  Consequently, even if Daewoo could have documented and supported the bases for the $13 million portion of its claim that might have had merit, the court held that this claim was forfeited.

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Article 4

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Architect Failed to Prove Developer Infringed its Copyrighted Plans

At a bench trial, a court considered evidence in a complaint by an architect against a project developer alleging that the developer had infringed the architect’s copyrighted drawings.  The court found that (1) although the architect discussed ideas for the house plans with the developer and even provided the developer’s attorneys with copies of his plans, the developer didn’t have access to the architect’s plans; (2) the developer’s ultimate plans were not  strikingly similar to those of the architect; (3) the developer had provided a sketch of its conceptual ideas for the project to the architect as well as to the ultimate architect – and it was this sketch that was the common source for both firm’s copyrighted plans; (4) testimony by a lay witness with no personal knowledge of the facts of the case was excluded from evidence because it is the responsibility for the trier of fact (judge in this case) to decide form himself whether the plans were substantially similar and lay witness testimony attempting to give an opinion on that is of no benefit to the court.   This was affirmed on appeal to the U.S. Court of Appeals, 10th Circuit.

In La Resolona Architects v. Reno, Inc., 555 F.3d 1171 (10th Cir., 2009), the court of appeals  explained that there are two elements  to a copyright infringement claim: (1) proof of ownership of a valid copyright and (2) proof that the defendant copied constituent elements of the work that are original.  The plaintiff would thus have to prove that portions of its work were copied and that those elements of the work that were copied were “protected expression and of such importance to the copied work that the appropriation is actionable.”    In this case, although the architect couldn’t directly prove the defendant had access to its drawings, it might nevertheless indirectly prove access if it could demonstrate that the copyrighted work and the alleged infringing work are “strikingly similar.”  Courts have endorsed the legal principle under which a plaintiff may establish factual copying without any proof of access to the drawings when the similarity of the works is sufficiently striking such that copying can be inferred solely on that basis.

The trial court concluded that the plans were not strikingly similar to each other.  The appellate court saw no reason to find err in that decision wherein the trial court found “major differences in the kitchen area, living area, master bath and roof slope, placement of doors, placement of plumbing, [and] placement of door openings, all of which affect traffic-flow and articulation of space.”  The trial court also reasoned that “these differences so outweigh any similarities that the similarities are inconsequential within the total context of the work.”  Moreover, the court found that the similarities between the plans were explained by the fact that both sets of plans were derived from one common source – the defendant/developer who had provided both architects with a sketch showing what he had in mind for the houses.

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Article 5

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Corporate Veil Cannot be Pierced as Part of Supplementary Proceedings After Judgment was Rendered Only Against Architectural Corporation

After a plaintiff obtained judgment against an architectural firm for breach of contract, it learned during post-judgment, supplementary proceedings, that the firm had no assets from which to collect the judgment.  It also obtained evidence that arguably could serve as a basis to pierce the corporate veil and hold the sole shareholder of the firm individually liable on the basis that the corporation was merely the architect’s alter ego.  The plaintiff then filed a motion with the trial court to pierce the corporate veil and impose personal liability on the individual architect.  The trial court granted the motion.  In reversing that decision, the appellate court held that post-judgment supplementary proceedings cannot be used to reopen a matter and hold a third party liable under a corporate veil piercing theory.

In Green v. Ziegelman, 282 Mich. App. 292 (2009), the court focused on the misuse of the supplementary proceedings as the basis for its reversal, but it also noted that the architect argued that plaintiffs failed to satisfy the compulsory joinder rule by not joining a claim for breach of the architectural agreement, predicated on piercing the corporate veil, against the individual architect.  The architect also argued that res judicata barred entry of the judgment against the individual architect.  Both of these arguments seem solid,  but the court did not specifically rely on them or even address them since it based its reversal entirely on the manner in which supplemental proceedings are intended to be used.

Comment: An interesting aspect of this case is that there was apparently no professional liability insurance available to satisfy the judgment that had been granted against the architectural firm.  This may have been because of the nature of the claim – being for breach of an operating agreement between the architect and the developer of which the architect had a co-interest in the developer and the project.  The issue in dispute did not appear to be based on allegations of negligent performance of professional services.

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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 2009, ConstructionRisk, LLC

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