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By Kent Holland

Hensel Phelps Construction Co. (“Contractor”) was awarded a Guaranteed Maximum Price (GMP) contract for a Marriott Hotel in Washington, D.C. In preparing its GMP proposal, the contractor relied upon “Preliminary Design Documents” that had been prepared by an engineer working under contract directly to the project owner. After receiving the GMP contract award, the engineering firm entered into contract with the contractor to provide the balance of design services for the project. After completing certain construction phases, the contractor states that it determined that designs it was using were flawed, and it had to make midstream corrections to comply with various code requirements, and thereby incurred unexpected costs. The engineer filed a motion for summary judgment that was granted by the court, based on two distinct reasons: (1) The three year statute of limitations for breach of contract actions had lapsed and (2) A suit based on the indemnification clause of the contract could only seek damages if they resulted from third party claims against the contractor. The indemnity clause could not be used to make first party claims by the contractor to recover its financial losses.   Hensel Phelps Construction v. Cooper Carry, Inc., 2016 WL 5415621 (U. S. District Ct., District of Columbia, 2016).

Comment: The indemnity ruling is quite instructive. Even though the indemnity clause did not on its face limit indemnity to damages caused by third party claims, the court explained that that is the only basis to find liability under an indemnity clause, and that for first party claims, a contractor is expected to just make a normal breach of contract claim against the other party. The court says, “if the Court were to read the indemnification clause in the way [contractor] urges – to cover [contractor’s] damages, included [contractor’s] own liabilities for costs it incurred in fixing [engineer’s mistakes] – then it would be redundant.” This is precisely the argument that we make when negotiating indemnification clauses with project owners. Specifically, we revise the wording of the clause to expressly state that indemnity is only for damages and liabilities resulting from “third party tort claims.” That has historically been the purpose of indemnification. That is what the court here recognized to be the case even without the limiting language having been added to the clause.

Indemnification:

Under the indemnification clause in the design services contract, the engineer was required to:

“indemnify, defend and hold … harmless” [the contractor] from any claim, judgment, lawsuit, damages, liability, and costs and expenses, including reasonable attorneys’ fees, as a result of, in connection with, or as a consequence of [engineer’s] performance of the Services under this Agreement….”

As explained by the court, the engineer, “naturally, argues that his clauses refers only to liabilities [contractor] would face from third parties, not to [contractor’s] own “damage” and “costs and expenses” from contract breaches.”   According to the court, “The words “damage” and “costs and expenses” in the indemnification clause are listed along with other words that clearly anticipate the problem of third-party litigation against [contractor] for problems that [engineer created…. [ ] Reading the indemnification clause in the most obvious way, it required [engineer] to cover [contractor]s] liabilities when and if a third party sues over problems caused by the [engineer’s] fault.”

Statute of Limitations.

Another important aspect of this case is the court’s determination concerning the date on which the statute of limitations began to run. The question for the court to decide was whether the statute began to run when the engineer delivered the initial design documents that the contractor relied upon for pricing the GMP, or did it begin to run only when the design services for the entire project were “substantially complete.”

The court explains that a breach of contract action usually accrues at the time when a party to the contract does not perform its duty under that contract. Once that breach has been committed, the statue of limitations begins to run even if the breaching party still has additional contract duties to perform. And that is true even if the full scope of the consequences from the breach of contract are not yet apparent and even if there is still opportunity to remedy the consequences of the breach to minimize or eliminate the damages.

In this case, the court says that there’s no dispute that the contractor could have brought a claim for breach of contract when it recognized that it would need to change the construction plans in order to accommodate the alleged errors in the engineer’s design documents. The contractor here had accepted engineers non—conforming designs at the time that it began to construct the hotel. Even if the engineer had other duties remaining to be performed under his overall contract with regard to the balance of the design for the Hotel, its official services were completed before the GMP priced proposal was submitted and the contractor could not credibly argue that the engineer still had time to perform contractual duties with respect to those initial phase services.

The key here is that the court found this was not a “unitary” contract case. The services were performed in distinct phases, with each distinct phase completed in sequence. “Accordingly, it was when [engineer] delivered those designs, not when it substantially completed all its design duties, the clock began to run. Accordingly, [contractor] is time barred from bringing its claim.”

Comment: Litigation Tip: The court’s analysis is something that can keep an attorney up at night with worry about whether the services involved might trigger the running of the statute of limitations before the overall design and construction is substantially completed for the project. One solution, if this is deemed to be a possibility, is to enter into a “Tolling Agreement” between the parties to toll (delay) the running of the statute of limitations and preserve the rights of the parties to litigate after the project is completed.

 

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. 19, No. 3 (March 2017).

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