Inside this Issue

A1 - 90 Day Deadline for Filing Appeal to Civilian Board of Contract Appeals Strictly Enforced
A2 - Actual Malice Is Not Required For Claims of Tortious Interference With Contractual and Advantageous Relations
A3 - Owner Allowed to Sue Design Subconsultant Despite Lack of Contractual Privity
A4 - Waiver of Subrogation Upheld to Bar Insurance Carrier Claim against Contractor
A5 - Contractor that is Individual Member of LLC has no Personal Liability for Negligence as a “Professional”
A6 - Contract Negotiation Tip of the month: Prevailing Party Clauses

Article 1

90 Day Deadline for Filing Appeal to Civilian Board of Contract Appeals Strictly Enforced

See similar articles: Board of Contract Appeals | Filing Requirements | Timeliness

Contractor filed an appeal electronically (via email) at 4:35 p.m. Eastern Time on the 90^th day following receipt of a contracting officer’s decision. The Board dismissed the appeal, concluding that it lacked jurisdiction because the appeal was filed five (5) minutes late. According to the Board’s rules, an appeal can be filed by U.S. mail up until 11:59 p.m. on the 90^th day but must be filed no later than 4:30 p.m. if filed electronically. The lesson learned from this decision is that if you or your attorney are filing an appeal at the last minute, it may be prudent to use the good old fashioned U.S. Mail. Estes Brothers Construction, Inc. v. Department of Transportation, 15-1 BCA P 36166 (Civilian B.C.A.).

Under the rules of the Civilian Board of Contract Appeals (CBCA) the notice of appeal that is not “mailed” in the U.S. Mail is deemed filed when it is actually received by the Office of the Clerk of the Board. Mail and email are treated much differently, so a notice of appeal that is emailed is not “mailed.” A filing that is submitted by email is received on the day it is transmitted only if it is received by 4:30 p.m., Eastern Time, on that day. If the filing is received after that time, it is considered filed on the next working day. In this case, it was deemed received on September 10, and that was the ninety-first day after the contractor received the contracting officer’s decision – which made the notice too late to meet the Contract Disputes Act's ninety-day limitation on filing. That is considered a jurisdictional requirement and the Board thus found it lacked jurisdiction. Although this decision might appear somewhat draconian it actually just demonstrates that the rules will be strictly enforced and contractors must beware of the requirements and carefully follow them to the absolute letter. The Board pointed out that the contractor is not deprived of all opportunity for relief from the contractor’s decision since the contractor still had time remaining to file a timely appeal from the contracting officer’s decision to the United States Court of Federal Claims where claims may be filed within twelve months of the date the contracting officer’s decision is received.

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. 18, No. 4 (April 2016).

Article 2

Actual Malice Is Not Required For Claims of Tortious Interference With Contractual and Advantageous Relations

See similar articles: Delay | Malice | Termination | Time Extension | tortious interference

Gail S. Kelley, J.D., P.E.
ConstructionRisk, LLC

The plaintiff in this case, Barr Incorporated, was the general contractor (GC) on a project in Berlin, Massachusetts. After being terminated from the project based on a certification from the Architect, the GC sued the Architect for tortious interference with contractual and advantageous relations, and unfair and deceptive trade practices. The Architect filed a motion to dismiss GC's complaint, arguing that the GC was required to plead that the Architect had shown actual malice. The court denied the motion to dismiss, finding that Architect's argument was not supported by case law. Barr Incorporated v. Studio One, Inc., 2015 WL 7295492.

Under the construction contract for the project ("the Contract"), the Architect was responsible for reviewing claims that arose under the Contract and interpreting and deciding matters concerning the Contract Documents. Interpretations and decisions were required to be consistent with the intent of the Contract, made in good faith, and rendered without partiality to either the Owner or the GC.

The GC began work in December 2011 and according to its complaint, it performed its Contract obligations properly. However, before the Contract was executed, the Owner and Architect had become aware that changes to the work to be done under the Contract would be required. Because the Owner and Architect did not prepare alternative designs and obtain required approvals in a timely manner, there were delays. The GC asserted claims for an extension of time and an increase in payment, but its claims were denied.

During construction, the Owner encountered funding issues, failed to make timely payments to GC, and failed to ensure that it had sufficient funding to fulfill its obligations under the Contract. The GC asserted that the Architect knew of the Owner’s financial troubles and that the Owner and Architect colluded to fabricate grounds for terminating the GC in order to avoid paying it.

The termination notice included a Corrective Action Plan whose terms were so onerous and unfair that Owner and Architect knew the GC would not agree to them. It also included a certification by the Architect that sufficient grounds existed for the termination because under the Contract, the Owner could not terminate GC “for cause” without this certification. The GC alleged that the Architect caused the Owner to breach the Contract "to secure benefits to which it would not otherwise be entitled ... including, among other things, substantial compensation for post-termination services and opportunities that would not have been available to the Architect absent the wrongful termination of the GC."

Motion to Dismiss for Failure to State a Claim

To prevail on its claim of tortious interference with a contract under Massachusetts law, the GC had to establish that:

(1) it had a contract with a third party; (2) the Architect knowingly induced the third party to break the contract; (3) the Architect’s interference, in addition to being intentional, was improper in motive or means; and (4) the GC was harmed by the Architect’s actions.

The elements of tortious interference with advantageous relations are similar: a known advantageous relationship; deliberate interference, improper motive or means; and resulting economic harm. Both claims therefore require a showing of improper motive or means.

The Architect however argued that the GC had a heightened burden of showing that the improper motive or means constituted “actual malice.” The Architect argued that actual malice is required to plead a claim of tortious interference in cases involving a corporate official acting within the scope of his capacity as a corporate official or a supervisor acting on behalf of the supervisor’s employer. The basis for this argument was that courts have found that the alleged tortfeasor in these cases has a conditional privilege to purposely cause the breach of contract, and that a heightened pleading standard applies because of that conditional privilege. In addition to citing previous Massachusetts cases, the Architect cited a New York case with very similar facts, BIB Construction Co. v. City of Poughkeepsie, 204 A.D.2d 947, (N.Y.App.Div.1994).

The court did not find the Architect's reasoning persuasive. As the GC pointed out, this case did not involve either a corporate official acting within the scope of his capacity as a corporate official or a supervisor acting on behalf of the supervisor’s employer. Additionally, the New York case did little to help Architect. The court in that case found that, while the architect, as the city’s agent, generally could not be held liable for inducing its principal to breach a contract, an exception arises “when an agent does not act in good faith and commits independent torts or predatory acts directed at another for personal pecuniary gain.”

The court held that a showing of malice was not required in order to prove these two intentional interference torts; it was only necessary to show that an “improper motive” existed. By alleging that Architect’s certification was knowingly false and motivated by the prospect of additional compensation in the event of the GC’s termination, the GC had alleged that the Architect’s actions were improper in motive or means. Accordingly, the Architect’s motion to dismiss was denied and the matter will proceed to trial on the facts of the matter.

Comment: Tortious interference with contractual and advantageous relations occurs when a person intentionally damages the plaintiff's business relationship with a third person. These common law torts attempt to strike a balance between the promotion of healthy economic competition and the protection of existing or reasonably certain contractual relations. While American contract law encourages free market competition, it also recognizes that interests, rights and obligations worthy of protection arise once a contract exists between parties. However, in Massachusetts law, as in most other states, proof that the defendant exhibited actual malice, defined as "a spiteful, malignant purpose, unrelated to the legitimate corporate interest" is only required in a narrow subset of tortious interference cases. Typically, it is only necessary to prove that the defendant's actions were improper in motive or means.

About the Author: As a professional engineer, Gail Kelley has performed structural design and analysis of post-tensioned structures, has performed constructability reviews, due diligence inspections, and condition assessments, and has provided litigation support for construction defect and delay claims in both state and federal court. She received her B.S. in Civil Engineering from Cornell University, and Master of Science in Structure and Materials from Massachusetts Institute of Technology (MIT), and she received her Juris Doctorate from American University, Washington College of Law. She provides risk management services for ConstructionRisk, LLC. This article is published in ConstructionRisk.com Report, Vol. 18, No.4 (April 2016).

Article 3

Owner Allowed to Sue Design Subconsultant Despite Lack of Contractual Privity

Gail S. Kelley, J.D., P.E.
ConstructionRisk, LLC

In an effort to revitalize a waterfront area along Lake Michigan, the City of Whiting, Indiana hired an engineering firm to design a lakefront park and marina. The Engineer, in turn, hired a Subconsultant to serve as the marine engineer for the project. When a revetment (retaining wall) designed by the Subconsultant failed, there was extensive damage to the City’s property and considerable remediation was needed.

The Engineer assigned to the City any claims it might have against the Subconsultant relating to the revetment failure. The City then sued the Subconsultant, asserting three claims as the Engineer’s assignee, and asserting breach of the Subcontract, negligence, and negligent misrepresentation in its own capacity. The Subconsultant filed a motion to dismiss, arguing that the City’s complaint failed to state a claim. While the court granted the Subconsultant’s motion to dismiss the City’s negligent misrepresentation claim, it denied Subconsultant’s motion to dismiss the other claims and found that the assignment of the right to sue on the contract was proper. City of Whiting, Indiana v. Whitney, Bailey, Cox, & Magnani, LLC, 2015 WL 6756857 (N.D. Ind. Nov. 5, 2015).

Claims Assigned by the Engineer

The court first addressed the three claims that the City brought against the Subconsultant based on the assignment from the Engineer — breach of contract, breach of warranty, and indemnity. The court observed that Indiana law both allows assignment of claims and recognizes the causes of action that the City was asserting through the assignment.

The court stated that Indiana law recognizes that a contract-based “chose in action” (right to sue), is assignable unless it is purely personal in nature. Generally, “an assignment gives the assignee neither greater nor lesser rights than those held by the assignor. Unless a contrary intent is shown, the assignee stands in the shoes of the assignor.”

The Subcontractor had seized on an error the City made in its complaint — the City stated that it sought to recover “its own damages” for the assigned claims. The Subcontractor argued that because this was an assignment from the Engineer, the complaint had to state that the City sought to recover the damages incurred by the Engineer. The court noted that while the City might have erred in its wording, federal pleading rules “do not countenance dismissal of a complaint for imperfect statement of the legal theory supporting the claim asserted.” The court thus denied the Subconsultant’s motion to dismiss the claims that the City asserted through the assignment.

The City’s Contract and Tort Claims

The Third–Party Beneficiary Claim

For a third-party beneficiary claim to survive a motion to dismiss, the complaint must show:

(1) a clear intent by the actual parties to the contract to benefit the third party; (2) a duty imposed on one of the contracting parties in favor of the third party; and (3) performance of the contract terms is necessary to render the third party a direct benefit intended by the parties to the contract.

The controlling factor is the contracting parties’ intent that the third party be a direct beneficiary; this intent “may be shown by specifically naming the third party or by other evidence” in the contract. The court found that the contract documents were ambiguous. While the City was not specifically named, the subcontract did not contain a “no third-party beneficiaries” and incorporated the prime contract’s terms and conditions, including the Engineer’s duties to the City. The court thus held that the City was entitled to seek discovery on the parties’ intent.

Negligence Claim

To hold a defendant liable in tort for negligence, a plaintiff must prove:

(1) the defendant has a duty to conform its conduct to a standard of care arising from its relationship with the plaintiff, (2) the defendant failed to conform its conduct to that standard of care, and (3) an injury to the plaintiff was proximately caused by the breach.

Under the law in most states, including Indiana, there are certain limitations on what the plaintiff can recover. In particular, the “economic loss rule” precludes tort liability for purely economic loss. When the plaintiff buys an inferior product, and the product does not perform its intended function, the plaintiff cannot sue in tort for the product’s diminution in value, damage to the product itself, or incidental and consequential losses such as lost profits. However, the economic loss rule does not shield a defendant from tort liability when there is personal injury or damage to property other than the product or service itself. Reviewing the language of the complaint, the court held that the City had alleged damage to property that could be considered “other property” and thus had sufficiently stated a claim for negligence.

Negligent Misrepresentation Claim

Although its general rule is “no tort liability for pure economic loss caused unintentionally”, Indiana courts allow certain exceptions. The City cited to a previous Indiana case where a mortgage lender was allowed to sue a title company for failing to disclose an encumbrance even though it was not in privity of contract with the title company. However, the court held that the facts of this case did not allow a similar exception. In particular, the court noted that the facts were very similar to the case Indianapolis–Marion Cnty. Pub. Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 838 (Ind.Ct.App.2010). The court in that case held that there is no liability in tort to the Owner for pure economic loss caused unintentionally by contractors, subcontractors, engineers, design professionals, or others with whom the Owner is connected through a chain of contracts. The court in this case held similarly – because the City was connected to the Subconsultant through a chain of contracts, the economic loss rule barred a claim for negligent misrepresentation.

Comment:

It is important to note that the court did not actually find that the Subconsultant was liable to the City for its damage; the issue here was only whether the City’s complaint had sufficiently stated a claim against the Subconsultant. Nevertheless, a defendant whose motion to dismiss is denied will often decide to settle the case rather than try to defend against the claims.

Article 4

Waiver of Subrogation Upheld to Bar Insurance Carrier Claim against Contractor

See similar articles: Insurance Carrier Claim against Contractor | Waiver of Subrogation

J. Kent Holland, J.D.
ConstructionRisk, LLC

A tire company entered into a lease of land on which to construct a distribution facility. The lease agreement provided that the Owner would lease the land, and would construct the building, with a requirement that the tenant (Tire Rack) obtain property insurance as well as insurance covering the tenant’s work, furniture, fixtures, furniture, machinery, equipment and stock and other personal property used in its business. A waiver of subrogation clause required waiver of rights against the contractors for damage to property. Two years after construction was completed, the roof of the distribution center collapsed, causing substantial damage to Tire Rack. After paying $2.5 million on Tires Rack’s insurance claim, its insurance carrier filed suit against the contractor to recover that amount. In granting the contractor’s motion for summary judgment to enforce the waiver of subrogation, the court found that the lease agreement clearly defined the rights and responsibilities of the parties and that the contractor was an intended beneficiary of the subrogation waiver. In reaching that decision, the court rejected the carrier’s argument that the waiver was unenforceable because it had not consented to the waiver. Affiliated FM Insurance Co. v. Slack, et al., 2015 WL 5023089 (Louisiana 2015).

Article 5

Contractor that is Individual Member of LLC has no Personal Liability for Negligence as a “Professional”

See similar articles: construction contractors | Negligence | Personal Liability

J. Kent Holland, J.D.
ConstructionRisk, LLC

An individual who is a licensed contractor is not deemed a “professional” that owes an independent duty of care outside of the contractual obligations of the limited liability company (LLC) that signed a contract with a homeowner. Such an individual cannot be found personally liable for the defective work he performed through the LLC. A trial court held the individual was liable to the homeowner for constructing a new home at an insufficient elevation to satisfy permit requirements concerning flood elevations. The dispute was not over whether the homeowner could recover from the LLC, but whether she could also recover from the individual. She argued that the individual lost the protection of the limited liability afforded by an LLC because he was a professional with an independent duty to her and that he performed negligently, thereby causing her damage. The appellate court reversed the judgment and held the facts did not support piercing the corporate veil. Nunez v. Pinnacle Homes, LLC, 2015 WL 5972529 (Louisiana 2015).

The state legislature did not define the term professional as used in various statutes. But looking at the meaning of the word “professional” within the law of business entities, the court explained that construction contractors are not deemed professionals, which in Louisiana, are generally firms such as medicine, dental, accounting, chiropractic, nursing, architectural, optometry, psychology, veterinary medicine and architectural engineering professions.

The trial court held the individual contractor personally liable on the basis that he was an individually licensed contractor and not merely a member of a licensed contracting firm. This was specifically reversed by the appellate court, holding that the lower courts erred in imposing personal liability on the individually licensed contractor as a “professional.”

The four factors considered by the court in determining whether to hold a member of an LLC personally liable were the following:

“1) Whether a member’s conduct could be fairly characterized as a traditionally recognized tort; 2) whether a member’s conduct could be fairly characterized as a crime, for which a natural person, not a juridical person, could be held culpable; 3) whether the conduct at issue was required by, or was in furtherance of, a contract between the claimant and the LLC; and 4) whether the conduct at issue was done outside the member’s capacity as a member.”

On the first factor, the court found that the individual owed no duty to the homeowner outside the obligations of his contract through the LLC. A showing of poor workmanship arising out of the contract entered into by the LLC, in and for itself, is insufficient to establish a “negligent or wrongful” act. On the second factor, the court found no evidence that the actions could constitute a crime. On the third factor, the court found no evidence that the individual’s acts or failures to act did not arise in performance of the contract on behalf of the LLC. And on the fourth factor, the court found that the record established that the individual’s acts and failures to act fell within the context of his membership in the LLC and were not undertaken in a personal capacity. For these reasons, the judgment was reversed and judgment rendered for the individual contractor.

Article 6

Contract Negotiation Tip of the month: Prevailing Party Clauses

See similar articles: Contract Negotiation | Prevailing Party Clauses | Tip of the month

Contract Negotiation Tip of the month: Avoid including prevailing party clauses in contracts. But if your contract must include one, be sure to define the term "prevailing party."

Many contracts include a clause in the disputes provision of the agreement stating that the “prevailing party” shall be entitled to recover its attorneys fees from the other party. The problem is twofold. Of utmost importance is the fact that professional liability policies do not cover attorneys fees that an insured design professional is required to pay only as the result of a contractual liability clause such as the prevailing party attorneys fees clause.

The second problem is that the term “prevailing party” is undefined and ambiguous in its meaning. Courts can interpret it to mean anything they deem appropriate. It is even possible for a party to recover less than 10 percent of its claim and be awarded 100 percent of its attorneys fees as the “prevailing party.”

Since the prevailing party attorneys fees clause may create uninsurable losses, the preferred course of action is to strike this clause from design professional contracts. But if the project owner refuses to strike it, and the design professional is willing to assume the risk of these uninsurable attorneys fees, then at a minimum, the term “prevailing party” needs to be carefully defined.

In order to avoid confusion, never agree to a prevailing parties attorneys fee unless you add a definition such as the the one below. Note that there are numerous ways to draft a definition and different percentages can be used at the option of the parties.

***

Here is an example definition:

“Prevailing party” shall be defined (1) as a claimant that is awarded net 51 percent of its affirmative claim, after any offsets for claims or counterclaims by the other party, and (2) as a defendant/respondent against whom a net award of 50 percent or less of a claimant’s claim is granted. In claims for money damages, the total amount of recoverable attorney’s fees and costs shall not exceed the net monetary award of the Prevailing Party.

***

This article is published in ConstructionRisk.com Report, Vol. 18, No. 4 (April 2016).

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