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Where design professionals agree by contract to indemnify a project owner for “any damages arising from any act, omission, or willful misconduct”, that provision cannot be enforced when the damages at issue arise out of violations of the Americans with Disabilities Act (ADA).   In the case involving Mandalay Bay Resort (Rolf Jensen & Associates v. Eighth Judicial Court of the State of Nevada, 128 Nev., Advance Opinion 42 (2012)), the court held that permitting indemnification claims would weaken an owner’s incentive to prevent violations of the ADA and therefore would conflict with the ADA’s purpose and intended effects.  “Simply put, such claims would allow owners to contractually maneuver themselves into a position where, in essence, they can ignore their nondelegable responsibilities under the ADA.” The court further concluded that “if owners were permitted to pursue indemnification for their own ADA violations, Congress’s goal of preventing discrimination would be frustrated.”

Mandalay argued that permitting indemnification claims would promote ADA compliance by encouraging owners to seek advice from ADA consultants.  In rejecting this argument the court stated “Owners are motivated to seek this advice to aid in their duty to construct facilities in compliance with the ADA; indeed that is the very point of seeking such assistance.  Mandalay’s suggestion that owners only contract with these consultants in order to obtain indemnification understates the role qualified consultants play in owners’ efforts to meet ADA requirements.”

Facts of the Case

Mandalay Corporation’s contract with Rolf Jensen called for Rolf Jensen to provide consulting services regarding construction of an expansion to the Mandalay Bay Resort and Casino in Las Vegas in compliance with the ADA.  After the resort expansion was constructed the U.S. Department of Justice (DOJ) began investigating alleged violations of the ADA arising from a lack of handicap accessibility at the resort.  Mandalay entered into a settlement agreement with the DOJ requiring it to bring the resort in ADA compliance, which Mandalay estimated would require $20 million for retrofitting.

Mandalay then sued Rolf Jensen to recover the costs of retrofitting the project.  The causes of action included in the complaint were (1) express indemnification, (2) breach of contract, (3) breach of express warranty, and (4) negligent misrepresentation.   Rolf Jensen moved for summary judgment on the basis the owner’s claims were preempted by the ADA and were also barred by the economic loss doctrine.  The trial court denied the summary judgment motion.  Rolf Jensen then filed a writ of mandamus to the Supreme Court of Nevada asking the court to consider its appeal before going through a trial on the merits, and the court agreed to do so, and issued this decision.

The Purpose of the Act

The court stated that ADA has a twofold goal of remedying discrimination against disabled individuals, and also preventing such discrimination from neglect and indifference. Thus, regardless of intent of an owner, when a facility is not constructed to be readily accessible to individuals with disabilities, the owner is liable for unlawful discrimination.

Mandalay’s Indemnification Claim

On appeal, Rolf Jensen argued that indemnification claims such as that by Mandalay are preempted by federal law because they diminish an owner’s incentive to comply with the ADA, thereby frustrating Congress’s goal of preventing disability discrimination.  Mandalay countered that its indemnification claim advances the ADA because if owners are able to seek indemnification from ADA consultants they will be more inclined to hire these consultants, with the overall effect of promoting ADA compliance.

As an editorial comment, this argument by Mandalay almost suggests that owners hire ADA consultants more for the purpose of shifting the risk of ADA compliance to them rather than for the purpose of actually accomplishing desired ADA compliance.   One would hope this was merely a poorly conceived legal argument and not truly indicative of what most project owners seek to accomplish by retaining consultants.  However, based on the number of increasingly onerous design professional contracts I’ve been reading lately, it does seem that some owners are more interested in avoiding their own reasonable risks and responsibilities by shifting them to their designers and contractors via uninsurable indemnification provisions.

In any event the court saw through the argument and concluded:  “In today’s commercial construction industry, it is surely an owner such as Mandalay – a highly sophisticated entity with ultimate authority over all construction decisions – who is in the best position to prevent violations of the ADA.”   The court also noted that prohibiting indemnification of the owner by the consultant does not relieve the consultant of all responsibility under the ADA since the consultant has liability under the ADA that runs to the disabled individuals rather than to the project owner.

As explained by the court in this decision, citing Equal Rights Center v. Niles Bolton Associates, 602 F.3d 597 (4th Cir. 2010), “Courts in other jurisdictions have ‘flatly rejected’ the type of indemnification claim brought by Mandalay.  Decisions of a number of United States District Courts were also cited for the proposition that this type of indemnification cannot be permitted because it is “antithetical to Congress’s purpose in enacting FHA and ADA” and would “frustrate the achievement of Congress’s purposes in adopting FHA and ADA.”  See U.S. v. The Bryan Company, 2012 WL 2051861 (S.D. Miss, 20120, Morgan City v. South Louisiana Electric Co-Op, 31 F.3d 319 (5th Cir. 1994); Equal Rights Center v. Archstone Smith Trust, 603 F. Supp. 2d 814 (D. Md. 2009); and U.S v. Murphy Development, LLC, 2009 WL 3614829 (M.D. Tenn. 2009)).

In conclusion, the court stated:  “We agree with these courts that permitting indemnification claims would weaken owners’ incentive to prevent violations of AFDA and therefore would conflict with the ADA’s purpose and intended effects.  Simply put, such claims would allow owners to contractually maneuver themselves into a position where, in essence, they can ignore their nondelegable responsibilities under the ADA.”

Negligence, Breach of Contract and Breach of Warranty Claims Also Preempted

Citing the Niles Bolton decision of the U.S. 4th Circuit Court, this court concluded that when the relief the owner seeks is recovery of all the losses arising from its violations of the ADA or FHA, such claims are “de facto indemnification claims, and thus preempted.”  Other cases cited by the court have held that breach of contract and professional negligence claims are preempted where they are wholly derivative of the owner’s primary liability under the ADA and FHA.  In this case, “Rolf Jensen asserts, Mandalay’s claims for breach of contract, breach of express warranty, and negligent misrepresentation are simply a subterfuge for Mandalay’s indemnification claim [and are therefore] preempted by the ADA.”

Mandalay’s claims against Rolf Jensen derive solely from Mandalay’s liability for its admitted violations of the ADA, says the court, which concludes: “While Mandalay argues that its claims have an independent basis, what Mandalay seeks to recover, and what each of its claims are predicated upon, is the cost of retrofitting the Resort as required by its settlement with the DOJ…. Accordingly, we conclude that Mandalay’s claims for breach of contract, breach of express warranty, and negligent misrepresentation are de facto claims for indemnification and thus are preempted by the ADA.”

Comment:  When reviewing indemnification provisions of design professional contracts, legal counsel and advisors to the designers seek to limit the indemnification coverage only to those damages caused by the negligence or willful misconduct of the designer.  Due to the uncertainty of what is required by laws such as the ADA, designers are advised not to warrant that their services will be in compliance with all laws such as the ADA – but instead represent only that they will comply with the generally accepted standard of care to comply with the laws.  Project owners sometimes take issue with designers that decline to provide warranty type language and indemnities for ADA violations, but what this case and others like it suggest, is that owners should cease attempting to shift the risk of ADA noncompliance onto their designers via indemnification clauses, because that is contrary to the Congressional intent to hold owners responsible for their project’s violations of the act.

 

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. 11 (Dec 2012).

Copyright 2012, ConstructionRisk, LLC