Inside this Issue
- A1 - Engineer Sued by City for Negligently Recommending Acceptance of Low Bidder
- A2 - Subcontract Claim against General Contractor Barred by Waiver and Release Agreement
- A3 - Contractor not Liable under Superfund Law for Accidently Damaging Methanol Pipeline with Backhoe Causing Environmental Damages
- A4 - Government Contractor Defense not Available to Bar Katrina Class Action Suit against Firm that provided Excavation and Remediation Services on Canal
Engineer Sued by City for Negligently Recommending Acceptance of Low Bidder
Where an engineer was required by contract with a city to recommend a contractor following competitive bidding, a court held that because the bid by the contractor that the engineer recommended be accepted was dramatically lower than the other bidders, it was foreseeable that the contractor could not, or would not, perform the services for the promised price. Since the engineer also should have reasonably foreseen that the city would rely upon its recommendation to award to the low bidder and that the City would have to pay extra re-procurement costs if the recommendation was negligent, it was appropriate to find in favor of the city against the engineer on the basis of a negligent recommendation.
In Sunland Construction Company v. Wilbur Smith, Inc., 387 Fed Appx. 361 (C.S.4 (S.C.), 2010), the court of appeals held that there was sufficient evidence to support the trial court’s finding of negligence on the part of the engineer in making the recommendation to award to the low bidder. The law suit was initiated by Sundland, the contractor, against the city and the engineering firm of Wilbur Smith Associates, after the city terminated its contractor for the installation, by horizontal direct drilling, of three large storm water sewer pipes under the City of Myrtle Beach and approximately 1000 feet out to sea. The contractor refused to complete the project, and the city terminated it for that reason. The contractor then sued the city for $3 million in costs it said it incurred while attempting to perform the work under what it claimed to be defective specifications and it also sued the engineer for the allegedly defective specifications.
Following an eight-day bench trial, the court concluded that the engineer was not liable to the contractor for negligence but that it was liable to the city. The negligence determination was based on findings by the court that the engineer negligently recommended that the city award the contractor in view of how much lower the bid was from others and that the engineer had not adequately investigated the bid prior to recommending it. Further, the court found it significant that the engineer was not independently qualified to render a recommendation on the horizontal bidding proposal, and the engineer retained a subconsultant for that purpose -- without advising the city. The engineer eventually fired the subconsultant prior to making its recommendation to the city.
On appeal, the engineer argued even if it had been negligent, that negligence was not the “but for” cause of the city’s injuries because, even in the absence of a negligent recommendation, the city may have still contracted with the low bidder since not to do so would have opened the city up to public criticism and lawsuits. The appellate court found that the trial judge did not clearly err in finding the engineer was the cause of the city’s injuries, and the court also found that there was ample evidence supporting the city’s contention that it was not required to award to the lowest bidder but had instead been persuaded to do so based on the engineer’s recommendations.
With regard to the engineer’s argument that it was not the legal or proximate cause of the city’s injuries, the court stated that a plaintiff does not have to prove a defendant’s negligence was the sole proximate cause of his injuries, but instead merely has to show that it was foreseeable that the defendant’s act or omission could cause, or be a contributing cause, to the plaintiff’s injury. Thus, says the court, “It is sufficient if the evidence establishes that the defendant’s negligence is a concurring or contributing proximate cause.” Even if the contractor’s conduct contributed to the city’s injuries, “this fact alone does not sever [engineer’s] liability for its initial negligence, which set into motion all of the events that ultimately, and foreseeably, lead to the City’s injury.” Having found the engineer’s conduct to be a substantial factor in the harm to the city, the court concluded that “the mere fact that [Engineer] ‘neither foresaw nor should have foreseen the extent of the harm or manner in which it occurred does not negate its liability.’” The trial court judgment in favor of the city against the engineer was affirmed accordingly.
Subcontract Claim against General Contractor Barred by Waiver and Release Agreement
A subcontractor sued the general contractor for breach of contract and quantum meruit, and also the contractor’s surety on a Miller Act claim. What the subcontractor sought was payment for unanticipated costs incurred in constructing a federal law enforcement training center. It alleged that it had performed additional work in reliance on oral promises that it would be reimbursed its costs. In submitting pay requests, and certain change order requests, however, the subcontractor accepted interim and even final payments containing release language.
The subcontract was in the amount of $135,000 to replace floor tiles in the building cafeteria. According to the subcontract, no additional amounts would be due unless the subcontractor gave the prime contractor written notice of claims and the claims were reduced to written change orders. For each payment application, the subcontract required that a lien waiver be submitted. And the contract had a typical clause stating that final payment would constitute a waiver of all claims by the subcontractor relating to its work.
During the time that the subcontractor was performing it was issued two change orders totalling approximately $24,000. The sub asserts, however, that the contractor owes it an additional $75,000 for unanticipated costs incurred in reliance on oral promises to reimburse it for costs that it asserts the contractor’s operations manager authorized it to incur and said would be approved as change orders as soon as “clerical problems” in the contractor’s office were cleared up. Following a summary judgment hearing, the U.S. District Court in the case of Artistic Stone Crafters v. Safeco Insurance, 2010 WL 2977894 (E.D. Va), granted summary judgment against the subcontractor.
In opposing the summary judgment motion, the sub argued the motion should not be granted because there were material questions of fact that must be decided by a jury. First, the sub states that there was a factual dispute as to whether the prime knew it contested the amounts being paid despite the signed release. This issue was quickly disposed of by the court, finding that even if the contractor knew the sub contested the amounts being paid that was not relevant since the sub signed a valid release waiving its rights. Second, the sub asserted that there was a question of fact as to whether it was told it had to sign the waiver in order to be paid. This, however, was not deemed an issue by the court since the contractor didn’t deny requiring the sub to sign releases.
Looking at the language of the subcontract, the court explains that it provided that “as a condition precedent to any payment … a Partial Waiver and Release of Lien” must be signed as evidence that “all payrolls … material bills, and other indebtedness applicable to [sub’s] work have been paid.” The subcontract also required as a condition precedent to final payment, the sub must also provide a “Final Waiver and Release of Lien.” The sub, in fact, signed that document with its final payment request. The document provided as follows:
For a valuable consideration (in the amount of $10,593.46), the receipt of which is hereby acknowledged, the undersigned hereby waives, releases, and relinquishes all claims for labor performed, materials furnished, equipment and/ or machinery supplied and further states that no other person has any right to a lien of claim against the owner on account of work performed or for material supplied in or on any and all property owned by Tesoro Corporation ... for job located at Kitchen Venthood Retrofit ... Glynco, VA 31524. (emphasis added by Court).
Where language of a release agreement is clear and unambiguous, as was the case here, the agreement is controlling. The release agreement contains two distinct waiver clauses. The first of these waives all claims against the prime contractor. The second waives liens against property owned by the prime contractor. The sub’s claims fall within the waiver of “claims” against the contractor and were, therefore, waived pursuant to the waiver of claims provision of the release agreement.
Having disposed of the subcontractor claims on the basis of the release clause, the court went further and stated that the breach of contract complaint against the prime contractor must be dismissed as a matter of law because the subcontract required written change orders and no such written change order was ever granted to the sub for the work in question. The sub argued that the oral promise of the prime contractor to pay for the costs constituted a waiver of the written change order requirement. This was rejected by the court with the following explanation:
“Under Virginia law, contractual provisions containing written change order requirements are binding upon the parties to the contract (citation omitted). Written change order requirements maintain order and predictability in the construction business and are mean ‘to avoid subsequent disagreement, and prevent just such a controversy as has arisen in this case.’ For this reason, ‘where there is a method under the contract by which a party can insure the recovery of the cost of extra work, that party is not entitled to recovery where it fails to follow that method. This is a sound and logical rule.”
A final count of the sub’s complaint was based on allegation that the sub was entitled to payment on a quantum meruit theory. This is an equitable action theory to provide relief where a party has been unjustly enriched by the labor of another. Since the contract was valid, clear and unambiguous and there was no misunderstanding concerning the price to be paid for the work, the quantum meruit theory was determined by the court not to be available under state law.
Finally, the sub’s Miller Act claim against the surety company on the payment bond was dismissed, with the court stating that since the sub had no legitimate claim for payment against the contractor it could have not claim for reimbursement under the payment bond. For these reasons, every count of the sub’s complaint was dismissed with prejudice.
Contractor not Liable under Superfund Law for Accidently Damaging Methanol Pipeline with Backhoe Causing Environmental Damages
The United States Court of Appeals for the Fifth Circuit held that a contractor has no “arranger” liability under the Superfund law (CERCLA) for unconsciously denting a methanol pipeline that several years later cracked, thereby resulting in the release of methanol and causing environmental damage. In the absence of intentional steps or plans by the contractor to cause the disposal of a hazardous substance such as methanol, there is no CERCLA liability.
An employee operating a backhoe for a contractor, Martin K. Eby Construction Company unknowingly struck and dented a methanol pipeline belonging to the Celanese Corporation while installing an underground water pipeline. In order to install part of the pipeline segment underneath the methanol pipeline, the contractor had to first uncover those pipelines. While doing so, its backhoe operator struck and dented the pipeline without knowing it. Years later, the dented areas of the pipe deteriorated and cracked, allowing methanol to leak from the pipe during methanol transfer. The leak was discovered when a patch of dead grass along the pipeline was noticed. Celanese worked with the state and federal agencies to clean up the site and prevent contamination of nearby groundwater.
Celanese sued the contractor under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and Texas Solid Waste Disposal Act (SWDA) to recover its clean-up costs. CERCLA, at 42 U.S.C. § 9607(a), imposes strict liability for environmental contamination upon four broad classes of potentially responsible parties (PRPs):
(1) the owner and operator of a vessel or a facility,
(2) any person who at the time of disposal of any hazardous substance owned or operated any facility at which such hazardous substances were disposed of,
(3) any person who by contract, agreement, or otherwise arranged for disposal or treatment, or arranged with a transporter for transport for disposal or treatment, of hazardous substances owned or possessed by such person, by any other party or entity, at any facility or incineration vessel owned or operated by another party or entity and containing such hazardous substances, and
(4) any person who accepts or accepted any hazardous substances for transport to disposal or treatment facilities, incineration vessels or sites selected by such person, from which there is a release, or a threatened release which causes the incurrence of response costs, of a hazardous substance ....
Celanese’s complaint that the contractor had liability under CERCLA and SWDA was based on the allegation that the contractor was an “arranger” as defined by the statutes. In the lower court, it was found that the release of methanol at the site would not have occurred but for the damage to the pipeline by the contractor. Despite the finding, however, the trial court found that the contractor was not liable as an arranger because it didn’t know it had damaged the pipeline and because the contractor was “not a person responsible for solid waste under the SWDA.”
On appeal, Celanese raised an argument it had not made in the trial below – that the contractor was liable for consciously disregarding an obligation to investigate what it hit in a pipeline corridor and rectify any damage. The court of appeals refused to consider this argument since it was not raised below, and the sole issue to be decided on appeal was whether the trial court erred as a matter of law that there was no arranger liability. But the court went on to state that even if the argument had been raised below, it is a losing one. The court stated: “We hold that Celanese’s consciously disregarded allegations do not establish arranger liability under CERCLA.” This was because the court found that conscious disregard of a duty to investigate is not tantamount to intentionally taking steps to arrange for the disposal of methanol.
In reaching its decision in this case, Celanese Corporation v. Martin K. Eby Construction Company, 620 F.3d 529 (5th Cir. 2010), the Fifth Circuit relied heavily upon the decision of the U.S. Supreme Court in the case of Burlington Northern & Santa Fe Ry. Co. v. United States, 129 S.Ct. 1870 (2009) which held that an entity’s knowledge that its action will result in a spill or leak is insufficient, by itself, to establish arranger liability; instead, the entity must take “intentional steps” or “plan for” the disposal of the hazardous substance. The Fifth Circuit concluded: “Hence, under Burlington, Eby is liable as an arranger only if it took intentional steps or planned to release methanol from the Celanese Pipeline.” The record in the case, said the court, didn’t support a finding of intentional damage to the pipeline, but only showed that the backhoe operator knew it had struck something but didn’t know what. In a nicely explained final summation the court explained its holding as follows:
“The district court found, and Celanese does not dispute, that Eby did not intentionally damage the pipeline. In fact, Eby did not even know that it had struck a pipeline; it only knew that it had struck something with a backhoe. Still, Celanese insists that Eby intentionally took steps to dispose of methanol by disregarding its obligations to investigate the incident and backfilling the excavated area where the incident had occurred. In other words, Celanese argues that Eby's conscious disregard of its duty to investigate is tantamount to intentionally taking steps to dispose of methanol. Burlington, however, precludes liability under these circumstances. In Burlington, the Court declined to impose arranger liability for a defendant with more culpable mens rea. The defendant had actually arranged to ship hazardous chemicals under conditions that it knew would result in the spilling of a portion of the hazardous substance by the purchaser or common carrier. See Burlington, 129 S.Ct. at 1880. Given that there was no arranger liability under those circumstances, we fail to see how we can impose such liability here when Eby did not even know that it had struck the Celanese pipeline. Therefore, we hold that Eby is not liable as an arranger under CERCLA.”
Having found the contractor was not liabile for arranger liability under CERCLA, the court also held there to be no liability under the state statute, SWDA, since the Texas Supreme Court had instructed that the federal court should look to “federal case law for guidance in interpreting the term “otherwise arranged” to dispose of solid waste, which is not defined in either SWDA or CERLA.”
Comment: This is an important decision, applying the principles set forth by the U.S. Supreme Court in the case of Burlington Northern & Santa Fe Ry. Co. v. United States. It is refreshing to see that common sense and reason are being applied by the courts in interpreting these environmental statutes. The federal and state environmental protection agencies misconstrued CERCLA for many years in lawsuits alleging strict liability against individuals and companies where there was no evidence of any intent or plan to arrange for the disposal of hazardous substances. One of my early American Bar Association (ABA) presentations, after I left the U.S. Environmental Protection Agency (EPA) where I had been an attorney with the General Counsel’s Office for five years, was entitled “Superfund: Is it Super? Does it Fund?” My cynical conclusions expressed in my paper stood the test of time and are still good reading if you are so inclined.
Government Contractor Defense not Available to Bar Katrina Class Action Suit against Firm that provided Excavation and Remediation Services on Canal
Homeowners whose property was damaged by flooding after Hurricane Katrina sued the contractor that provided engineering and remediation services to the U.S. Army Corps of Engineers in connection with a canal that later breached during Hurricane Katrina. The trail court granted summary judgment for the contractor based on the government contractor defense – but this was reversed on appeal. The Fifth Circuit Court of Appeals in the case of Katrina Canal Breaches Litigation v. Washington Group International, Inc., 620 F.3d 455 (5th Cir. 2010), held that the contractor was not entitled to the government contractor defense since the Corps provided only general specifications that were not precise and did not dictate the manner in which the work was to be done.
The contractor had an indefinite delivery/indefinite quantity contract with the Corps known as the Total Environmental Restoration Contract (TERC). The contract set forth general requirements for all anticipated work by the contractor with the understanding that the Corps would approve a specific Statement of Work (SOW) for each Task Order it issued to the contractor.
Work on the canal in question was performed by the contractor pursuant to a SOW that contained a brief description general description of the work to be done to characterize contaminants at the area and remediate the site in accordance with any applicable environmental standards. Based on the SOW, the contractor submitted a more detailed work-plan to the Corps for review – which after much back and forth resulted in agreement for how to perform the work in the form of a final Recommendation Report. After that Report was completed, the Corps issued another SOW with more general directions to the contractor consistent with that Report. From that SOW, the contractor drafted work plans and submitted them to the Corps for approval.Additional SOWs and work plans later followed due to differing site conditions that were encountered during the work. Of particular note is the fact that the contractor submitted a proposal that dealt with the excavation and disposal of the newly discovered subsurface structures, and the Corps rejected that proposal as too costly. The Corps suggested ways to cut costs—including to use on-site borrow matter as the primary source of backfill material. The final proposal submitted by the contractor incorporated that suggestion by the Corps, and the contractor proceeded to complete the work according to the approved plan.
When Hurricane Katrina struck land, several levees and floodwalls failed—with two of the breaches being in levees near areas where the contractor had done extensive work. In a class action lawsuit against the contractor, the plaintiffs claimed that the failure of the levees was a result of the negligent and improper backfilling and compaction of the excavated locations by the contractor in violation of the standard of care. In reviewing whether the government contractor immunity (GCI) was applicable under the factual circumstances, the Fifth Circuit reviewed the applicability of a three-part test that was established by the U.S. Supreme Court in the case of Boyle v. United Technologies Corp., 487 U.S. 500 (1988) which held:
“Liability for design defects in military equipment cannot be imposed, pursuant to state law, when (1) the United States approved reasonably precise specifications; (2) the equipment conformed to those specifications; and (3) the supplier warned the United States about the dangers in the use of the equipment that were known to the supplier but not to the United States.”
Applying the Boyle test to the Katrina claims, the court stated that the first stop of Boyle “requires that the government approved reasonably precise specification [and] [t]hat entails both the existence of reasonably precise specifications and the approval of those specifications by the government.” Although the Corps in an effort to reduce costs approved specifications that mandated on-site material as the primary source of the backfill material, and also specified that the contractor could import off-site backfill if there was insufficient on-site material available, those specifications were deemed by the court to be “imprecise.” As stated by the court:
“First, the specifications that authorized the use of on-site backfill material were not reasonably precise in regard to how WGI should parse through all the on-site material to determine which was suitable. The Corps neither mandated the composition of the backfill material nor established precise procedures to test material for its suitability as backfill. The only Corps specification was that the material had to be clean, not contaminated, and not full of debris. Given, however, the wide variety in the types of matter that could be used as backfill material, that specification is not reasonably precise. The composition of the backfill used by WGI serves as one factor in plaintiffs' tort claim, so it cannot be said that “the specifications address, in reasonable detail, the product design feature, alleged to be defective.” (citation omitted). The Corps did not approve any specifications regarding the precise composition of the on-site backfill material….
“But there is no information in the record indicating that the Corps imposed additional requirements regarding the composition of the off-site material, nor is there any indication that the Corps applied any testing process to evaluate the off-site backfill material before approving its use.FN9 Given the absence of reasonably precise specifications in the proposal under which WGI was operating, any such additional evidence is necessary to find that the Corps approved reasonably precise specifications and did not merely allow WGI to exercise principal discretion over the composition of the off-site backfill material."
An argument was made by the contractor that the Corps approved compaction methods and was therefore responsible for the specification. The court found, however, that that there were no precise specifications for backfill compaction and did not specify what method the contractor should use for doing compaction.
“The question, however, is not whether the Corps approved of any decision regarding the compaction method. The relevant inquiry, instead, is whether the Corps approved sufficiently precise specifications, such that it is evident that the government was the primary agent of decision over the compaction method. “If the government approved imprecise or general guidelines, then discretion over important design choices would be left to the government contractor.” Trevino, 865 F.2d at 1481. By providing only general instructions regarding the compaction method, the Corps ensured that WGI would have significant discretion over the method chosen. The *465 exercise of that discretion by WGI is not protected by the GCI doctrine.”
In summing up the matter, the court stated “The government contractor defense in Boyle, ‘[s]tripped to its essentials,’ is fundamentally a claim that ‘[t]he Government made me do it.’ To adhere to this basic principle, it is essential that the specifications approved by the government are reasonably precise.” In this case, the court concluded that the Corps didn’t “make” the contractor use exact backfill material nor “require” it to select the compaction method that it used. Consequently, the government contractor defense was held to be inapplicable and unavailable.
Comment: Questions concerning the availability of the government contractor defense may be important in the context of the work performed by contractors on the oil spill remediation following the BP - Deep Water Horizon debacle. I reviewed the contracts that several oil spill response contractors were required to sign with different states and private organizations. Whereas it seemed those contractor should be protected by a government contractor type of defense under various federal statutes, some of those contracts required the contractors to either waive any potential immunity, and even worse, to indemnify, defend and hold harmless the states and private companies with whom they contracted – even for damages caused for reasons other than the contractor’s negligence. When the government contracts with a contractor to perform functions such as those that were performed on the canals in New Orleans or the oil spill at the Deep Water Horizon, there should be general support for the government contractor defense to protect these contractors against extraordinary risk they could not contemplate, could not price, and could not reasonably manage – particularly with the frugal budgets the government desires.