Inside this Issue

A1 - Homebuilder Successfully Offered Express Limited Home Warranty That Waived Implied Warranty of Good Workmanship
A2 - Engineer That Did Work without Written Change Order Not Entitled to Be Paid for Additional Services
A3 - Subcontractor Had Rights as Third Party Beneficiary Under Federal Government Contract
A4 - Design Professional Had no Liability for Worker’s Injuries Because Intervening Acts of Contractor Prevented Designer’s Alleged Acts from Being the Proximate Cause
A5 - Architect Entitled to Insurance Defense for ADA and FHA Claims Arising out of Services Performed for Condominium Developer

Article 1

Homebuilder Successfully Offered Express Limited Home Warranty That Waived Implied Warranty of Good Workmanship

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Where a homebuilder, Centex Homes, entered into a sales agreement to construct a new home, it included a paragraph stating that it would provide its standard Limited Home Warranty covering defects in materials and workmanship and that “Purchaser’s agree that there are no other warranties either expressed or implied and hereby waive and relinquish any and all implied warranties of habitability and fitness and agree to rely solely on Seller’s Limited Home Warranty.” Buyers of a couple of the homes filed suit against Centex alleging breach of contract, breach of express and limited warranties, negligence, and failure to perform in a workmanlike manner – based on allegations that the metal floor members were magnetized and this interfered with televisions, telephones and computers. The trial court granted summary judgment, which was affirmed on appeal, because the buyers had contractually agreed to waive any claims for property damage other than claims covered under the Limited Home Warranty and therefore could only proceed on a claim for breach of the Limited Home Warranty.

Arguments that state law does not allow for waiver of the implied duty to construct a home in a workmanlike manner were rejected by the court which concluded that the law of a majority of jurisdictions have adopted the view that waiver of the implied warranty is permissible. Such a waiver was not contrary to public policy or unconscionable, said the court. And, the language, although not made any more conspicuous than other language of the contract, was at least the same size and not hidden. The cover of the limited warranty itself was explicit in clearly stating that in the Limited Home Warranty was the exclusive remedy for defective workmanship. This language, according to the court, as well as the contract language, “is clear and unambiguous and not susceptible to differing interpretations.”

The buyers also argued that they should be relieved of consequences of their agreement to the waiver of implied warranties because of their relative inexperience in home purchases, and the fact that they did not have an attorney review the documents. One of the buyers also argued they felt some pressure to move into the neighborhood for the schools and to be close to a relative. In rejecting this argument, the court noted that the buyers were in their 30s and 40s and that it was their own choice not to have counsel assist them. The court noted “a party … is presumed to have read what he signed and cannot defeat the contract by claiming he did not read it.” Moreover, the court quoted case law that “parties have complete freedom to enter into a contract…. Thus, in the absence of an ‘overwhelming public policy concern, the concept of freedom of contract is considered to be fundamental to our society.”

On the argument by the buyers that “the limited warranty failed in its ‘essential purpose’ by not providing for the repair of the magnetized joists in their homes” the court stated this argument erroneously relied upon a doctrine found in the Uniform Commercial Code (UCC) which has no applicability to alleged defects in a house which are a non-UCC breach of warranty claim.

Jones v. Centex Homes, 189 Ohio App.3d 668 (Ohio 2010).

Comment: This decision is instructive in numerous ways concerning the importance of effective use of contract language to allocate risk and limit potential remedies and liabilities. As noted by the court, when writing contract language to limit remedies it is important that the language be clear and unambiguous. The court was not concerned that the language was not in larger text or more boldly pointed out in the body of the contract. However, depending upon your jurisdiction, that might be a factor considered by a court. The use of UCC type warranty arguments by the plaintiffs in this case is more than a nuisance. I am finding more contracts by sophisticated project owners including UCC type warranty language both for construction contracts and design professional agreements. Such language has no place in these contracts and should be stricken during the contract negotiation. As explained by the court in this case, construction of projects is not intended to be covered by the UCC or legal principles akin to UCC type warranties. Contractors and designers should be wary of including language in their contracts that would suggest applicability of UCC type warranties. As stated by the court in this case, “freedom of contract is considered to be fundamental to our society” and if parties to a contract either agree to certain types of warranties or agree to waive any otherwise applicable warranties, courts generally should enforce the contract. So, be careful what you agree to in 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. 13, No.8 (Aug 2011).

Article 2

Engineer That Did Work without Written Change Order Not Entitled to Be Paid for Additional Services

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Oral authorization for engineer to perform additional design services on a municipal golf course was not binding on city because the contract mandated that written change orders be executed to authorize such services. On the engineer’s breach of contract action against the City of Carlsbad, California, a jury awarded the engineer $109,000 for its extra work. This was reversed on appeal based on the contract’s requirement for a written change order, with the court stating that unlike private contracts, public contracts that require written change orders cannot be modified orally or through the parties’ conduct. Consequently, even if the engineer had sufficient proof of oral authorizations of a city employee for extra work, the matter should not have been submitted to a jury but summary judgment should have been granted instead.

In P&D Consultants, Inc. v. City of Carlsbad, 190 Cal.App.4^th 1332 (California 2010), the city retained the engineering firm of P&D Consultants, Inc. to redesign the city’s municipal golf course. Scope of work and contract price were well defined in the contract that provided that no amendments, modifications, or waivers of contract terms would be allowed absent a written agreement signed by both parties. An integration clause in the contract further provided that the contract and any written amendments thereto embody the parties’ entire agreement.

Four written amendments to the contract were issued. For each of these, the engineers submitted a proposed change order with a fixed price to the city, and the city, typically a few weeks later, executed an amendment to the contract. A fifth, and final, written amendment was executed on a time and materials basis, with a not to exceed maximum amount. In most instances the city orally authorized the engineer to begin the extra work before the amendments were executed.

Amendment Number 5 stated: “It is the intent of the Parties that Amendment No. 5 shall provide all final and complete services by [Engineer] to City required to produce the final, approved, signed, and complete sets of plans, specifications, and estimates required by City to bid the Project…. No additional compensation shall be requested by [Engineer] nor shall be approved by City related to this scope of work.”

Subsequent to Amendment No. 5, the engineer sought more compensation from the City for work that it stated was not included in Amendment No. 5. When the city refused to pay, the engineer sued for breach of contract under the theory that the contract’s written change order requirement had been modified by a city project manager’s oral authorization to perform the additional work and by the previous dealings with work being authorized for Amendment number 1 through 4 before the amendments were ultimately signed.

In rejecting the engineer’s argument the court stated:

“Any oral authorization by [project manager] for extra work beyond the work contemplated in Amendment No. 5, or supposed modification of the written change order procedure based on the handling of Amendments Nos. 1 through 5, is insufficient to bind the City. The plain language of the contract limits the City’s power to contract to the prescribed method. By ostensibly relying on [Project Manager’s] oral authorization or direction to begin or perform extra work without a written change order, P&D acted at its peril. The purpose of including a written change order requirement in a municipal works contract is obviously to protect the public fisc from the type of situation that occurred here.”

For these reasons, the appellate court reversed the judgment that had been awarded in favor of the engineer and held that the engineer was entitled to no recovery.

Article 3

Subcontractor Had Rights as Third Party Beneficiary Under Federal Government Contract

Where the federal government contracting officer issued a contract modification to the prime contract to require the government to issue a two-party check jointly to the prime and a subcontractor that had complained about not being paid, the subcontractor had rights against the government as a third party beneficiary when the government failed to issue a two-party check and instead made a direct electronic deposit of all the funds into the prime contractor’s account as had been done prior to the contract modification. The Court of Federal Claims found that the subcontractor was an intended third party beneficiary of the contract modification, and had reasonably relied on the modification to confer a direct contractual benefit. This is a highly unusual decision in finding a subcontractor can recover directly against the government. FloorPro, Inc. v. United States, 2011 WL 1289061 (Fed.Cl. 2011).

In this case, the government (U.S. Department of the Navy) had provided the prime contractor with names and contact information of potential subcontractors that were recommended to perform flooring work. One of these recommended subs was selected by the prime. After completing its flooring work and submitting its invoice, the sub was not paid by the prime, apparently because the prime was having some financial difficulties. As a result of the subcontractor’s call to the contracting officer complaining about not getting paid, the contracting officer emailed to the prime stating, “I feel obligated to see [sub] get paid because I asked them to sub-contract with [prime].” In response, the prime volunteered to enter into a two-party check arrangement and the government issued a contract modification to implement that new payment procedure.

Perhaps due to a clerical error, the government did not honor the contract modification but instead paid the prime directly by way of direct deposit, and the subcontractor never got paid for the work it had successfully performed. The sub filed suit in the U.S. Court of Federal Claims to recover damages pursuant to the contract modification. In response to the suit, the government filed a motion for summary judgment to dismiss the case based on lack of privity of contract between the subcontractor and government. The subcontractor filed a motion for summary judgment to enforce its third party rights under the contract modification.

In analyzing the issues, the court noted, “It is a long standing principle that the United States, as a sovereign, only consents to be sued by those parties ‘with whom it has privity of contract.’” There are exceptions to that rule, however, for plaintiffs who are not named parties to a contract but who are intended third-party beneficiaries of the contract. Quoting one of its previous decisions the court explained, “[F]or third-party beneficiary status to lie, the contracting officer must be put on notice, by either the contract language or the attendant circumstances, of the relationship between the prime contractor and the third-party subcontractor so that an intent to benefit the third party is fairly attributable to the contracting officer.”

In order to grant the relief sought by the subcontract, the court stated, “the Court must be able to answer the following two questions in the affirmative: (1) Did the contracting officer intend to benefit [sub] through the modification? and (2) Did the modification result in a direct benefit to [sub]?”

The exceptional circumstances leading the court to find in favor of the subcontractor in this case are probably best explained by quoting at length from the court’s decision as follows:

After canvassing the record, it is clear to the Court that the contracting officer, and indeed GM & W, intended to benefit FloorPro when negotiating the terms of the contract modification. The Court notes two particularly compelling points in which the contracting officer clearly demonstrates the requisite intent to benefit FloorPro. First, in an e-mail exchange between the contracting officer and a representative of GM & W, the contracting officer stated “I feel obligated to see they get paid because I asked them to sub-contract with you. Tell me how this can happen? ? ?” This sense of obligation, in turn, led to further e-mail exchanges between GM & W and the contracting officer in which the modification was discussed, and negotiated, as a means to directly facilitate payment to FloorPro.

Second, the contracting officer commented several times, via letter and e-mail, that the two-party check would be utilized as a means to ensure that FloorPro was paid for its work. For example, in a sworn declaration, the contracting officer stated, “I thought [the two-party check] might facilitate payment of the subcontractor's invoice.” (App. 105, ¶ 21.) Furthermore, on July 18, 2002, the contracting officer sent a letter to a FloorPro representative making the following representation:

It is understandable that you would be frustrated with receiving assurances that a joint payment would be made and then it not occur.... Please be assured that there is a continuing effort to see that the quality work performed for MCLB Albany by your company is paid for and that errors like this do not occur in the future.

After examining the record, it is clear to the Court that the modification was entered into with the sole intention of benefiting FloorPro, specifically by providing an assurance that it would be paid for the work it performed. Moreover, the Court notes that the Government has not provided any evidence to support the stance that the contracting officer lacked the requisite intent to benefit FloorPro by agreeing to the contract modification.

In the balance of the decision, the court explained that the subcontractor had reasonably relied on the contract modification to give it a benefit, and the court concluded that a statement of release in the modification had no legal effect since the government had failed to perform its obligations under the modification.

Article 4

Design Professional Had no Liability for Worker’s Injuries Because Intervening Acts of Contractor Prevented Designer’s Alleged Acts from Being the Proximate Cause

See similar articles: Jobsite Safety | Negligence | Proximate Cause

Design Professional’s alleged errors were not the proximate cause of the death of a construction worker, and summary judgment was correctly granted because intervening negligent acts of the general contractor broke any causal connection between the alleged negligence of the engineer and the death of the worker. The engineer designed a storm sewer for a municipality utilizing a large, elliptical-shaped concrete pipe. After project completion, the pipe failed and had to be replaced. Having completed the replacement, the contractor then retained a consultant to test the reason for the failure. This testing was done at an off-site facility, and was done without the knowledge of the site designer or pipe manufacturer. During the testing, a worker stood on top of the pipe with a concrete saw and made a long cut along its top. This resulted in the pipe splitting in half and the worker falling and being crushed under the weight of the pipe as it rolled over on him. In the law suit against the site design engineer and pipe manufacturer, the worker’s family argued that “but for” alleged negligent decisions of the engineer and manufacturer in the use of the pipe for the project, the sequence of events that culminated with testing the defective pipe would not have occurred. The appellate court affirmed the trial court summary judgment, finding the acts or omissions were “too attenuated” to be a usual, likely or legally cognizable cause” of the fatal injuries. Edwards v. Anderson Engineering, Inc., 251 P.3d 660 (Kansas 2011).

In this case, the court explained that “In Kansas, an injured party's right to recover is limited to when the injury is a direct and proximate result of a defendant's negligence.” The state supreme court had recently defined proximate cause and noted the plaintiff's burden of proof as follows:

“Proximate cause is cause ‘which in natural and continuous sequence, unbroken by an efficient intervening cause, produces the injury, and without which the injury would not have occurred, the injury being the natural and probable consequences of the wrongful act.’ [citation omitted]. To satisfy the plaintiff's burden of proof on the causation element, the plaintiff must produce evidence that ‘affords a reasonable basis for the conclusion that it is more likely than not that the conduct of the defendant was a cause in fact of the result.’”

The court quoted from another Kansas Supreme Court decision that stated “[I]n considering proximate cause we retain the principle that an intervening cause component breaks the connection between the initial negligent act and the harm caused.” And another supreme court decision quoted by the appellate court explained:

“Whether the negligent conduct of the original wrongdoer is to be insulated as a matter of law by the intervening negligent act of another is determined by the test of foreseeability. If the original actor should have reasonably foreseen and anticipated the intervening act causing injury in the light of the attendant circumstances, his act of negligence would be a proximate cause of the injury. Foreseeability of some injury from an act or omission is a prerequisite to its being a proximate cause of the injury for which recovery is sought. When negligence appears merely to have brought about a condition of affairs or a situation in which another and entirely independent and efficient agency intervenes to cause the injury, the latter is to be deemed the direct and proximate cause and the former only the indirect or remote cause.”

In rejecting a finding of proximate cause, the court stated:

“In articulating their argument in a “but for” manner, the Edwards family has demonstrated the weakness in its “sequence of events” analysis. In retrospect it can often be said that, but for a certain fact, an injury would not have occurred; but the injury must be an ordinary and natural consequence of the negligence. [citation omitted]. As Justice Cardozo has said, “[p]roof of negligence in the air, so to speak, will not do.” [citation omitted]. And “natural and probable consequences” are those which human foresight can anticipate because they happen so frequently they may be expected to recur.”

For these reasons, the court concluded that the intervening events here were not “natural and probable”, and that if the court accepted the plaintiff’s argument, “virtually any accident happening after the removal of the defective pipe would be attributable to [the site designer and pipe manufacturer] --even a fatal collision involving the truck hauling the pipe to a disposal site. This overbroad conception of proximate cause is not consistent with Kansas jurisprudence.”

Article 5

Architect Entitled to Insurance Defense for ADA and FHA Claims Arising out of Services Performed for Condominium Developer

Where a developer of a condominium, and its design architect, were sued by a municipal equal opportunity housing opportunity council as well as by the state attorney general for alleged violations of not meeting federal and state requirements for handicap access, the developer cross-claimed against the architect alleging negligent failure to correctly identify and follow building code provisions governing access for disabled persons. The designer tendered a request to its professional liability carrier to defend the action, which the carrier refused to do. The case then settled with the developer agreeing to limit its recovery against the architect to the proceeds of the insurance policy, which it then sued the carrier to recover. On appeal it was held that the carrier owed both a duty to defend and indemnify under the policy because the key issue involved alleged design error and not “discrimination” by the architect that would have been subject to the “discrimination” exclusion of the policy. Fostill Lake Builders v. Tudor Insurance and H Design, 338 S.W.3d 336, (Missouri 2011).

In the trial court case by the plaintiffs against the developer and architect, the court found that “H Design was negligent and that [Developer] had been damaged on account of H Design’s negligence.” Damages in the amount of $365,586 were awarded against the architect to the developer on the developer’s cross claim against the architect. A convoluted series of motions and actions by the insurance carrier ensued in which the carrier sought to challenge the judgment and avoid a finding of coverage under its professional liability policy.

As first matter of business, the appellate court held that since the carrier refused to defend the architect, it did so at its own risk and lost the ability to control the defense on behalf of the architect as well as the ability to assert affirmative defenses that might have been available to it. Since the carrier refused to defend the architect on the cross-claim for professional negligence, the court stated it couldn’t subsequently challenge the “reasonableness of the judgment” to avoid making payment under the policy.

In a suit by the carrier to essentially obtain a judgment that its policy provided no coverage, the trial court granted the carrier summary judgment on the basis that the claim was essentially a claim for discrimination, which was expressly excluded from coverage pursuant to the following exclusion of the policy:

“This policy does not provide coverage and the Company will not pay claim expenses or damages for ... D. any claim based upon or arising out of discrimination by the Insured on the basis of race, creed, national origin, handicap, age or sex.”

In rejecting that conclusion, however, the appellate court stated:

“We reject Tudor's characterization of [Developer’s] claim as one of discrimination. As set forth more fully below, we find that [Developer’s] claim against H Design was properly brought as one for professional negligence. [Developer’s] hired H Design to conduct a professional service—to design a safe and marketable condominium project that complied with all applicable building codes, including those pertaining to accessibility for physically disabled persons. [Developer’s] cross-claim against H Design does not allege direct discrimination, and [Developer] had no standing to allege discrimination against H Design.”

Even if the claim could have been properly characterized as “essentially a claim for discrimination,” the court found this would not unambiguously exclude coverage for this particular claim since there was no evidence that the architect intended to discriminate or that there had been a “purpose” of the architect to discriminate, which the court held must be read into the meaning of the discrimination exclusion of the policy. The court cited the American Heritage Dictionary for a definition of the term “discrimination” since the policy did not specifically define the term. The dictionary defines discrimination as “the act of discriminating” which is in turn defined as “marked by or showing bias; discriminatory.” As explained by the court, “This definition indicates a purpose to discriminate and not a mere negligent act that has the effect of making things more difficult for a certain class of persons.” Although the term “discrimination” was not defined in the policy, the court said it would “construe the term as would an ordinary lay person purchasing a policy” and that such an ordinary person would expect it to mean the exclusion would only apply “to situations where the architectural design firm purposefully discriminates on one of the bases enumerated in the policy exclusion.” For these reasons, the court found the exclusion in the policy to be ambiguous and therefore it must be construed against the insurance company.

In the final pages of its decision, the court explained the difference between the duty of an insurance company to defend its insured in contrast to the duty to indemnity the insured for damages awarded, and in this case found the carrier owed a duty to defend the architect. From previous case law, the court quoted, “An insurance company has a duty to defend an insured when the insured is exposed to potential liability to pay based on the facts known at the outset of the case, no matter how unlikely it is that the insured will be found liable.” The court quoted further from that case precedent as follows:

An insurance company has a duty to defend an insured when the insured is exposed to potential liability to pay based on the facts known at the outset of the case, no matter how unlikely it is that the insured will be found liable and whether or not the insured is ultimately found liable. To extricate itself from a duty to defend the insured, the insurance company must prove that there is no possibility of coverage. Coverage is principally determined by comparing the language of the insurance policy with the allegations in the pleadings. However, even though the pleadings do not show coverage, where known or reasonably ascertainable facts become available that show coverage[,] the duty to defend devolves upon the insurer.

The duty to defend is broader than the duty to indemnify, therefore, even if the carrier were ultimately correct that the discrimination exclusion was sufficient to prevent its having to indemnify for claims against the architect, “it does not necessarily follow that [the Carrier] had no duty to defend H Design in the first instance.” Because the court found that the policy exclusion did not clearly and unambiguously exempt the architect form coverage for allegations made against it in the underlying law suits, the court held the carrier had a duty to defend the architect in those suits.

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ConstructionRisk.com Report (Aug 2011)