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Inside This Issue:

•  What Happens When Green Becomes Code: Do Buildings Get Better or Are Lawsuits Inevitable?

Electronic Discovery Requires Cooperation between Opposing Counsel;

Construction Manager not Required to Have Contractor’s License;

Indemnification Clause Required Design Professional to Defend City against Claims City was Negligent

 

Contractor Entitled to Rely upon Engineer’s Soil Testing Reports and Directly Sue Firm for Negligence –  (Economic Loss Doctrine not mentioned).

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Article 1
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What Happens When Green Becomes Code: Do Buildings Get Better or Are Lawsuits Inevitable?

George DuBose, Liberty Building Forensics Group

The inevitable is about to happen and most people don’t even know it is coming — green buildings are going to become, by codification, the law of the land. For some firms, this will just mean business as usual. For other firms, this change will be cataclysmic.

ASHRAE produces standards that are adopted by most model building codes and the ASHRAE Draft Standard 189.1P is the new “Standard for the Design of High Performance Green Buildings Except Low-Rise Residential Buildings.”

This new ASHRAE Standard (currently in its final draft) is written in code language and will have the impact of mandating that all new buildings will be green buildings, thus eliminating the option of constructing anything less robust. Even if this standard is not adopted by all model codes, it will become the de facto standard of care. On the surface this sounds like a very good thing — mandating better performing, more energy efficient buildings, and it certainly has many redeeming aspects.

Here’s the downside:

  • Lack of Experience Will Increase Design and Construction Deficiencies – Many of the optional aspects of the current USGBC LEED® guidelines will now be mandatory for designers and contractors. This means that, even if your designer or contractor doesn’t fully understand the key technical issues (e.g., envelope air barriers), they will still be required to use them. This practice of forcing designers and contractors to implement building features that they don’t fully understand creates a dilemma in the industry: either represent yourself as technically savvy or face certain extinction. Given these as choices, failure becomes more inevitable as firms design and construct buildings with components that they do not understand in an effort to keep the work coming in.
  • Standard of Care Will Be Elevated – These new code requirements will automatically raise the required standard of care for the design and construction industry. This will increase the risk profile of their projects and may (at least initially) trigger some exclusion clauses in their current insurance policies. What are now considered “best practices” will soon be considered the minimum standard of care.
  • Regional Issues Not Addressed – The new standard mandates national green building requirements throughout the country with very little regard of the unique regions of the country where certain concepts may not be appropriate. This is almost always a problem when national standards are uniformly imposed on climates with unique requirements (e.g., hot and humid, very cold, or very rainy climates).

The inevitable result is that everyone will quickly morph into a green practitioner and the true marketplace differentiators (those with experience and unique technical expertise) will become difficult to discern. While codes can dictate that the industry follows certain standards, it cannot mandate that they get correctly implemented — with an increase in design and construction deficiencies and lawsuits being the inevitable result.

Recognizing that this new standard (due to be issued in final form in 2010) could be a game-changer in the building marketplace, what’s the path forward?

  • Review a copy of the current draft version of ASHRAE 189.1P and begin to understand the impact of the new requirements on your firm’s business, insurance, risk management, and technical expertise. (Note: This is available on line from www.ASHRAE.org).
  • Identify what requisite skills and knowledge your firm will need once this new standard  is implemented.
  • As this draft standard is finalized, expect more updates from Liberty Building Forensics Group with our analysis on its impact.

About the Author: George DuBose is with Liberty Building Forensics Group, located at 3700 Dohnavur Drive, Zellwood , FL 32798 ; phone 407.703.1300; e-mail g.DuBose@libertybuilding.com. http://www.libertybuilding.com.

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Article 2
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Electronic Discovery Requires Cooperation between Opposing Counsel

In a construction defect case between a contractor and owner, the owner agreed to produce electronically stored information (ESI), including e-mails of the construction manager for the project who was not a party to the lawsuit.  The parties could not agree to what “keyword” search terms were appropriate for conducting the electronic discovery.  The owner proposed just a few keyword terms.  The plaintiff, in contrast, proposed thousands of search terms that would have caused the CM to turn over its entire email data base covering all of its projects worldwide instead of limiting the search to the individual project.  A magistrate judge for the United States District Court for the Southern District of New York had to  step in to prevent unduly burdensome discovery by admonishing counsel in the action to cooperate with each other to “carefully craft the appropriate keywords, with input from the ESI’s custodians as to the words and abbreviations they use, and the proposed methodology must be quality control tested to assure accuracy in retrieval and elimination of false positives.”

In William A. Gross Construction Associates v. American Manufacturers Mutual Insurance Company, 256 F.R.D. 134 ( U.S. S.D. New York , 2009),  the case involved a multi-million dollar dispute over alleged defects and delay in the construction of the Bronx County Hall of Justice.  The project owner was the Dormitory Authority of the State of New York (DASNY).  The owner’s construction manager was Hill International.  The owner agreed to produce Hill’s email related to the project and proposed a number of keywords to be used in search the Hill email data base to produce the documents.  Opposing counsel, however, according to the court “requested the use of thousands of additional search terms, emphasizing the construction issues they were involved in, such as “sidewalk,” “change order,” “driveway,” “access,” “alarm,” “budget,” “build”, “claim,” “delay,” “elevator,” “electrical,” – you get the picture.”

This use of such extensive keywords, said the court, “would require production of the entire Hill email database, since Hill’s business is construction management, and those terms would be used for any construction project.”    The court “found itself in the uncomfortable position of having to craft a keyword search methodology for the parties, without adequate information from the parties (and Hill).”   With obvious frustration at the situation, the court stated:

“This case is just the latest example of lawyers designing keyword searches in the dark, by the seat of the pants, without adequate (indeed here, apparently without any) discussion with those who wrote the emails.”

While keyword searches are recognized by the court as appropriate and helpful for ESI search and retrieval, “the proper selection and implementation obviously, involves technical, if not scientific knowledge.”  Quoting from another U.S. Magistrate decision, the court says the proper selection of keywords “requires careful advance planning by persons qualified to design effective search methodology.”

“The implementation of the methodology selected should be tested for quality assurance; and the party selecting the methodology must be prepared to explain the rationale for the method chosen to the court, demonstrate that is appropriate for the task, and show that it was properly implemented.”

In conclusion, the court ordered the following:

“Electronic discovery requires cooperation between opposing counsel and transparency in all aspects of preservation and production of ESI.  Moreover, where counsel are using keyword searches for retrieval of ESI, they at a minimum must carefully craft the appropriate keywords, with input from the ESI’s custodians as to the words and abbreviations they use, and the proposed methodology must be quality control tested to assure accuracy in retrieval and elimination of “false positives.”  It s time that the Bar—even those lawyers who did not come of age in the computer era—understand this.”

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. 10 (Dec 2009).

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Article 3

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Construction Manager not Required to Have Contractor’s License

Where a construction manager is working in an agency relationship to assist the project owner, coordinating the activities of the various contractors and workers, but is not performing any construction work itself or through subcontractors, it is not required to have a state contractor’s license.

In Fifth Day, LLC v. Bolotin, 172 Cal. App. 4th (2009),  the construction manager sued the project owner for the balance of its fee and the owner responded with a summary judgment motion to dismiss the action based on the failure of the CM to have a contractor’s license.  The trial court agreed and dismissed the CM’s complaint.  This was reversed on appeal because the appellate court determined that the CM not an at-risk CM but was serving only in an agency capacity with no responsibility for performing construction activities.    The court pointed out that the state licensing law does not identify CMs as workers requiring licensure.  The owner argued, however, that various decisions of the California Supreme Court made it clear that an entity that provides supervision or management services for any construction project must be licensed as a general building contractor so as to protect the public from dishonesty and incompetence in the administration of the contracting business.  In rejecting this argument, the court concluded: “Defendants’ position is untenable.”   According to the  court:

“A review of Plaintiff’s duties under the [agreement] reveals that it was to assist, on behalf of the Owner, in coordinating the activities of the various workers to enable them to complete their assigned tasks in an organized and efficient manner, on time and on budget; to maintain records such as insurance certificates, as well as the financial books and records for the project; to keep the Owner apprised of the status of the project; to be the on-site ‘point person’ to respond to issues as they arose; and generally to act as the Owner’s agent with respect to the various parties connected with the development of the project.  [CM] had no responsibility or authority to perform any construction work on the project, or to enter into any contract or subcontract for the performance of such work.”

Comment: In a lengthy dissenting opinion, one judge strongly disagreed with the majority opinion and stated that he would find the CM was required to hold a contractor’s license, even though not performing construction work, because it was performing construction services, including supervising the work of other licensed construction workers. The judge believed the licensing statute was broad enough to require a license for such services.  If the dissenting opinion were adopted it might lead to interesting questions concerning what insurance policy would then apply to cover the CM for its acts, errors and omissions in the performance of its services.  If the services are of the nature that would require a contractor’s license, does this mean the commercial generally liability (CGL) policy would have to cover damages arising out of the CM’s services?  It is generally assumed that a CM serving in an “agency” capacity is performing professional services, and would be covered for its professional acts, errors and omissions under a professional liability policy instead of its CGL policy.  The CGL typically contains an exclusion for damages arising out of professional services. (Interestingly, the CM is not typically required to have a professional license to perform these services – but the services nevertheless fall within the definition of professional services found in most professional liability policies for design professionals.)

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Article 4

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Indemnification Clause Required Design Professional to Defend City against Claims City was Negligent

J. Kent Holland

An architectural/engineering (A/E) firm was required to defend the City of Albuquerque pursuant to an indemnification clause in the contract it signed with the city for the design and construction management of a new rental car facility at the airport.  A pedestrian sued a city and the design professional–alleging that he fell from a curb that was excessively high. When the city tendered defense of the claim to the A/E, the firm denied the request because it believed it was only required to defend if the claims against the city were due to the city’s vicarious liability from negligent performance by the A/E rather than due to active negligence of the city.  Both the trail court and appellate court found that the defense obligation under the indemnification clause was sufficiently broad to require the A/E defend against all claims because none of the claims of would have arisen but for the alleged negligence of the A/E.

In City of Albuquerque v. BPLW Architects & Engineers, Inc., 213 P.3d 1146, 146 N.M. 717 (2009),    the contract included the following indemnification clause:

“[A/E] agrees to defend, indemnify, and hold harmless the City … against all suits … brought against the City because of any injury or damage received or sustained by any person … arising out of or resulting from any negligent act, error, or omission of [A/E] … arising out of the performance of this Agreement.

Nothing in the Agreement shall be construed to require [A/E] to (defend) indemnify and hold harmless the City … form and against liability … caused by or resulting from in whole or in part the negligence, act or omission of the City … [1] arising out of the preparation or approval of maps, drawings, opinions, reports, surveys, change orders, designs or specifications by the City … or [2]  the giving or failure to give directions or instructions by the City … where such giving or failure to give directions or instructions is the primary cause of bodily injury to persons or damage to property.”

The court found that aside from these very specific and limited exceptions that relieve the A/E of its duty to defend if the cause of action arises from the City’s negligent approval or preparation of designs and specifications, “the contract does not contain any other limiting language excluding claims that the City was negligent.  [A/E’s] obligations to defend the City from all suits therefore includes causes of action alleging that the City itself was negligent, as long as the cause of action arises from [A/E]s] performance of the agreement.”  (emphasis in original).     The court noted that these exceptions to the A/E’s duty were apparently written to conform with the state’s anti-indemnity statute which “required the exclusionary language used by [A/E] and the City only if an indemnity agreement required an indemnitor to indemnify the indemnitee for the indemnitee’s own negligence.”  (emphasis in original)  Use of this language in the contract convinced the court that “the parties specifically intended [A/E] to indemnify and defend the City when the City is alleged to be negligent as long as the cause of action arises from [A/E’s] design or construction of the facility.”  (Editor’s Note: In several other parts of the decision, the court describes this duty as occurring when the claim arises out of the “negligent” performance of services by the A/E and not merely any performance by the A/E.  This more narrowly tailored holding appears to be the overall intent of the court).

Next the court addressed whether the injured plaintiff’s claims “arise out of” the A/E’s performance so as to trigger the indemnification obligations.  In setting forth its reasoning on this issue the court begins by explaining that “[t]he phrase ‘arising out of’ is given a broad interpretation by our courts and is generally ‘understood to mean “originating from,” “having its origin in,” “growing out of[,]” or “flowing from.’”  In this case, the court found that the A/E had “a contractual duty to defend the City for all claims that originate from, have their origin in, grow out of, or flow from the negligent performance of its contract with the City.  The undisputed facts indicate [A/E] was responsible for the design and supervision of the construction of the curb.  Thus, all of the allegations regarding the design and construction of the curb clearly arise from [A/E’s] allegedly negligent performance of the contract and therefore fall within the duty to defend.”

Additional analysis by the court concerning the A/E’s duty to defend was based on a review of case law applicable to insurance carriers that have a duty to defend their insureds—separate from their duty to indemnify the insured.  The court explained that the duty to defend is broader than the duty to indemnify and appears to intend this broader duty would apply equally when an A/E agrees to defend its client against claims.

For these reasons, the court held that the A/E had a contractual duty to defend the city.

Comment: Design Professionals are well advised by their attorneys and risk managers to NEVER agree to contractual language requiring them to DEFEND their clients under any circumstances.  Professional liability carriers exclude costs resulting from such a contractually created defense duty.  The contractual liability exclusion of the policy is applicable to bar coverage for such defense costs that the Design Professional pays on behalf of its client.  To the extent any such defense costs might be subject to coverage it would only be as part of the ultimate damages imposed at the conclusion of a case — through appropriate dispute resolution such as litigation – finding that the design professional was in fact negligent and caused its client’s damages.

In addition to not agreeing to defend a client, DP’s should only agree to indemnify their clients to the extent that damages are the result of the DP’s own negligence.   Professional liability policies contain a contractual liability exclusion that bars coverage for liability assumed by the DP that the DP would not have had a common law.  In other words, it the court would not impose an indemnity obligation on the DP in the absence of the contract language, no coverage is available for the contractual indemnity under the policy.

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Article 5

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Contractor Entitled to Rely upon Engineer’s Soil Testing Reports and Directly Sue Firm for Negligence –  (Economic Loss Doctrine not mentioned)

Where a contractor had to remove and repair a concrete slab floor that settled and cracked due to fill material that had been improperly compacted by others, and that the soil testing engineer failed to discover and report, the Alabama Supreme Court held the contractor had standing to sue the engineer directly because the contractor was an intended beneficiary of the testing services and reports issued by the engineer to the project owner.

In Qore, Inc. v. Bradford Building Company, 2009 WL 1643346 (Ala. 2009), the general contractor built a concrete slab floor for a new Walgreens store per the project specifications, over an excavated fuel-tank pit that had been filled with material that was not properly compacted.  The tank had been removed by a different contractor under separate contract to the owner.  And another contractor, again under separate contract with the project owner, was responsible for filling in the pits with compacted fill pursuant to very exacting standards and compaction requirements.  The owner had another separate contract with Qore, to perform construction-materials-testing (“CMT”) services related to the site grading.

When the fill was being placed it was observed by the general contractor that the owner’s tank removal contractor was not compacting the fill dirt that was being placed in the large pits left by the removal of the underground storage tanks.  The contractor immediately advised the project owner of the problem.  The owner telephoned the excavator about the problem and was assured that the fill would be properly compacted.  The owner also instructed the general contractor to call the CMT firm about the matter, which he did.  According to the court, the general contractor “relied on [the CMT firm] to test the existing soil and inform them whether the soil met the necessary criteria before they began placing fill to level the site or proceeded with construction….”   The CMT firm had an individual to perform “subgrade evaluation” to determine whether the soil met the specifications and would support the slab and ultimately the building.   The CMT firm determined that the soil was adequately compacted.  The tests performed by the CMT firm failed to discover that the fill had not been compacted as required by the specifications.

Because the soils in the tank pits had not been properly backfilled, they began to settle, causing the slab to break.  The general contractor repaired the slab at a cost of $223,000.  At trial, the contractor explained that at the time the problem was encountered it made a business decision to pay the costs for repairing the “because at the time, it was unclear who, if anyone, was at fault for the broken slab or why the slab failed.”

Instead of seeking compensation from the project owner for its extra costs of construction, the contractor sued only the CMT firm.   The CMT’s summary judgment motion in the trial court asserted that the case must be dismissed as a matter of law because the contractor did not present sufficient evidence of the elements of a negligence claim.  Summary judgment was denied.  The appellate court agreed that the contractor was entitled to have his case decided by a jury on the question of fact as to whether the contractor had reasonably relied on the CMT firm to verify that the soil in the tank pits would bear the weight of the Walgreens building.

Comment: This case is particularly interesting in that the general contractor apparently made what he called a business decision to perform the extra work involved with repairing the slab at this own cost instead of seeking to recover on a change order from his client, the project owner.  Then, after the project was completed he filed suit – not against its client but rather against the CMT firm alone – based on a negligence claim.   The economic loss doctrine that is so prevalent in many states was not considered as issue here in Alabama since the court determined the contractor may sue a professional services for its economic losses if it can demonstrate that all the elements of negligence are met, including that it was entitled to, and did in fact, rely to its detriment upon the reports issued by that firm.

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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

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

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Suite 750.

Vienna , VA 22182

703-623-1932

Kent@ConstructionRisk.com