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Black & Veatch (“B & V”) contracted with Portland General Electric (“PGE”) to engineer, procure and construct a power generating facility called the Port Westward Power Plant, and it subcontracted to a specialty subcontractor to install the combustion turbine and associated air inlet filter house and air inlet filter duct.  The combustion turbine was manufactured by Mitsubishi Power Systems who supplied it directly to PGE pursuant to a separate agreement, which was assigned in part by PGE to Black & Veatch.   After the turbine, filter house, and duct work were erected and installed by the subcontractor, they were successfully started-up and operated, but during a later scheduled outage of the turbine, a walk-through of the filter house discovered “foreign object damage” to a number of the compressor blades.    Various foreign objects were found, including a cutoff bolt, a welding rod, and a half-moon shaped cut metal plate. B&V paid PGE for the damage to the combustion turbine and then sought from the subcontractor, pursuant to the indemnification clause of the subcontract, $1.5 million in direct costs to repair the damage, and another $2.1 million due to delays caused by the damage.  Summary judgment for B&V was granted by the court, finding that the indemnity language was broad enough to require indemnity for all damages, including delay damages, and finding that the waiver of consequential damages clause was inapplicable because that clause expressly stated that the waiver of consequential damages would not apply to liability obligations incurred under the indemnity clause.  Black & Veatch Construction, Inc. v. JH Kelly, LLC, 2011 WL 1706223 (U.S. District Court, D. Oregon, 2011)

In defending against the indemnification claim, the subcontractor did not dispute that B&V may seek reimbursement for the actual repair costs (although it denied liability for those damages), but it disputed recovery of the delay costs, which it call “consequential” damages.  It argued that an agreement to indemnify for “physical damage to third party property” is not an agreement to indemnify for economic delay damages. In rejecting that argument, the court quoted the language of the clause that required the subcontractor to indemnify “for any and all liability [and] costs” and concluded that it is broader than just an obligation to repair the damage to third party property.  As stated by the court:  “In other words, [subcontractor’s] negligence in causing ‘physical damage to third party property’ is the trigger for application of the indemnification provision, at which point [subcontractor], as the indemnitor, becomes responsible for ‘any and all liability’ with which the indemnitee had previously been charged.”

A waiver of consequential damages clause in the contract provided for what appeared to be an absolute waiver of consequential damages by all parties under a “legal theory, for cost of capital, loss of profits or revenue, loss of anticipated profits or revenue, loss of use or increased expense of equipment or plant, loss of power or production, … or for any special, indirect, incidental, consequential, exemplary, or punitive loss or damages.”

The court said this clause would prevent B&V from recovering the delay costs in question from the subcontractor, but for the very next clause of the contract that stated the clause “will not apply to: (a) damages of any third party for which Subcontractor has an indemnification obligation under this Subcontract….”

Another interesting aspect of this case is that the subcontractor sought common law indemnification from Mitsubishi, alleging that Mitsubishi was at least partly responsible for the claim concerning the foreign object damage because the contract between Mitsubishi and PGE called for Mitsubishi to inspect the inlet filter house and ductwork for debris prior to start-up.   But nothing in that PGE contract, according to the court, required Mitsubishi to inspect or take responsibility for or guaranty the work of the subcontractor who had an independent duty under its contract with B&V to clean the equipment.  Under the B&V subcontract, the subcontractor could have liability to B&V for the damage caused by the foreign objects, even if the source of those objects was unknown.   The court concluded that the subcontractor failed to identify any contractual duty Mitsubishi breached for which Mitsubishi could be responsible to B&V, and therefore owe any indemnity obligation to the subcontractor for the damages claimed by B&V.   An alternative theory of a right to common law indemnity by the subcontractor against Mitsubishi based on tort was rejected by the court since B&V did not make a negligence based claim against Mitsubishi.  A contribution action was also rejected by the court because “a claim for common law contribution must be premised on the existence of common law liability, such as co-debtorship, common ownership of property, or common contractual obligations” none of which are present here.

Comment:  Among other things, the case demonstrates the importance of the language used in the indemnification provisions of the contract and also the importance of carefully considering how any waiver of consequential damages clause will or will not be applied to indemnification provisions.  The waiver of consequential damages provision in the contract at issue here would have barred B&V from recovering the delay damages from its subcontractor if it had not been for the sentence in the contract stating that the waiver of consequential damages provisions would not be applied to claims under the indemnification provisions of the contract.

About the author: Article written by J. Kent Holland, Jr.,  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. 14, No.1 (Jan 2012).

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