Inside this Issue

A1 - Subcontractor Failure to do Soil-Compaction Testing was Covered by General Contractor’s CGL Policy as an Occurrence that Caused Damages to Building
A2 - Arbitration Provision of Prime Contract Incorporated by Reference into Subcontract, Requiring Subcontractor to Arbitrate its Claims
A3 - Contractor Cannot Sue Project Engineer as Owner's Agent on Implied-in-Fact Contract. Signing Check that contained the words “Final Payment” Constituted Accord and Satisfaction
A4 - Contractor’s CGL Policy Professional Liability Exclusion Precludes Coverage for Damages from Subcontracted Land Surveyor’s Error
A5 - Spearin Doctrine Applies to Design-Build Contracts allowing Trade Subcontractor to Rely on Designs Provided by Engineer/Subcontractor

Article 1

Subcontractor Failure to do Soil-Compaction Testing was Covered by General Contractor’s CGL Policy as an Occurrence that Caused Damages to Building

Where a subcontractor failed to conduct soil-compaction testing before construction, the house that was built on non-compacted soil sustained settlement damage. The homeowners sued both the general contractor (GC) and subcontractor for damages. The GC tendered the claim to its commercial general liability (CGL) carrier to defend and indemnify. The insurer filed a declaratory judgment action asking the court to deny coverage because the failure to perform contractually required work did not constitute an “occurrence” as defined by the policy. The court held that this was a covered occurrence. It also held that exclusions j(7) and I (eye) didn’t apply because they only apply to bar coverage to repair the defective work, which in this case was the soil compaction testing, and not the actual damages to portions of the constructed house. Owners Insurance Company v. Tibke Construction, Inc., 901 N.W. 2d 80 (South Dakota 2017).

Whether the damages alleged by the Browns were caused by an occurrence as defined by the CGL policy.

The insuring clause is set forth in § I of the policy and provides:

“1. Insuring Agreement

[Owners] will pay those sums that the insured becomes legally obligated to pay as damages because of ... “property damage” to which this insurance applies.

This insurance applies to ... “property damage” only if:

(1) The ... “property damage” is caused by an “occurrence[.]”

Section V defines occurrence and property damage:

“Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

....

“Property damage” means:
Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
Loss of use of tangible property that is not physically injured. All such loss shall be deemed to occur at the time of the “occurrence” that caused it.”

The court concluded,

“Whether the CGL policy provides [GC] coverage for the alleged damages to the house initially depends on whether there was property damage caused by an occurrence. It is undisputed that the Browns suffered property damage as a result of construction on unstable soil. Accordingly, the only issue relevant to the initial question of coverage is whether the alleged failure to test the soil was an occurrence.”

The Insurer argued that “a claim for damages arising from incorrectly performed work,” like failing to test the soil beneath a construction site, does not constitute an accident because the CGL policy is not meant to cover faulty workmanship. Further, Owners argues that the alleged faulty workmanship in this case is not a covered occurrence because it arose “from the defendants’ intentional choice not to conduct soil testing and their deliberate decision to construct the house on that soil despite their choice not to test it.”

The court cited previous case precedent for the proposition that:

“[i]f inadvertent faulty workmanship causes unexpected injuries to people or property, it may constitute an accident and thus an occurrence. “Currently, the majority of state supreme courts who have decided the issue of whether inadvertent faulty workmanship is an accidental ‘occurrence’ potentially covered under the CGL policy have decided that it can be an ‘occurrence.’ ”

The court held,

The failure to test the soil was an occurrence because it was an accident—an unexpected event. This occurrence allegedly caused property damage to the house in the form of excessive settlement, cracking, and structural unsoundness. [GC] has established that coverage exists under § I of the CGL policy.

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. 20, No. 3 (Mar 2018).

Article 2

Arbitration Provision of Prime Contract Incorporated by Reference into Subcontract, Requiring Subcontractor to Arbitrate its Claims

A subcontractor sued the general contractor (GC) and project owner to enforce liens it put on the property for non-payment. The defendants filed a motion to compel arbitration. Court held that the arbitration provisions of the prime agreement were incorporated by reference into the subcontract, thereby requiring the subcontractor to first seek mediation and then ultimately resolve disputes through arbitration instead of litigation. Frohberg Electric Company, Inc. v. Grossenberg Implement, Inc., 297 Neb. 356 (Nebraska 2017).

The general contract included a mandatory arbitration clause for “any Claim ... not resolved by mediation pursuant to [the general conditions].” The general contract was also referenced in several sections of the subcontract, including one (Section 11) in which Subcontractor agreed “[t]o be bound to ... Contractor by the terms of the General Contract” and “to conform to and to comply with the provisions of the General Contract.” Another section (Section E), under the heading “The Contractor Agrees as Follows,” provided: “If arbitration of disputes is provided for in the General Contract, any dispute arising between ... Contractor and ... Subcontractor under this Subcontract, including the breach thereof, shall be settled by arbitration in the manner provided for in the General Contract.”

In arguing that this Section didn’t apply to it, the subcontractor asserted that the title was “The Contractor Agrees…” instead of the “Subcontractor Agrees….” This was apparently a typographical error in the contract. It was obvious to the court that the intent was for this to apply to the subcontractor regardless of the wording of the subheading. In any event, the court explained that subtitles in contracts don’t take precedence over or change the content in the text that follows.

In reviewing the trial court decision the appellate court explained, “The district court determined that Subcontractor’s claims were not subject to arbitration. By purportedly enforcing the express terms of the contract, the court concluded that Section E was binding on Contractor only. In doing so, the district court adopted a restrictive interpretation of the section.”

The appellate court stated,

“While two conflicting interpretations of Section E can be advanced, only one of them is reasonable. The district court’s restrictive interpretation disregards Section E’s broad language and effectively rewrites the section by limiting its applicability to those disputes complained of by Contractor and not Subcontractor. A contract is ambiguous when a word, phrase, or provision in the contract has, or is susceptible of, at least two reasonable but conflicting interpretations or meanings. Because the restrictive interpretation of Section E was unreasonable, Section E was unambiguous and should have been enforced by its express terms.”

The court accordingly reversed the trial court and held that the subcontractor must adhere to the alternative dispute process set forth in the contract, including the requirement that it must first submit the matter to mediation and then to arbitration in the event that mediation fails.

Comment: The decision provides a good example of the importance of the incorporation by reference or flow down clauses in the subcontract. A subcontractor is bound by the terms of the prime contract that it agrees to have incorporated into its contract. If it takes issue with any of the prime contract clauses that are going to be applied to it, the subcontractor must take exception to those clauses during contract negotiations.

In this case, if it was important to the subcontractor that disputes be resolved through litigation instead of arbitration it needed to negotiate that into the subcontract to take precedence over the arbitration provisions in the prime agreement. As a practical matter, however, if the prime contractor was bound by a requirement to arbitrate its disputes with the project owner, it would not be likely to agree to litigate disputes with a subcontractor. It would be judicially inefficient and costly to have separate arbitration and litigation where the parties and issues could not be consolidated into a single forum for dispute resolution.

Article 3

Contractor Cannot Sue Project Engineer as Owner's Agent on Implied-in-Fact Contract. Signing Check that contained the words “Final Payment” Constituted Accord and Satisfaction

Contractor for a wastewater treatment plant sued the municipal owner and its project engineer for breach of contract for interfering with its work by failing to obtain easements in time for the contractor’s construction work to proceed. Although the contract was, on its face, only between the contractor and owner, the contractor argued that the engineer was also a party to the contract because its seal was affixed to the contracts cover and the engineer was designated as the project’s engineer in the contract's terms, and the engineer acted as the agent and representative of the owner and was designated in the contract as having decision making power for matters affecting the contractor.

The trial court granted summary judgment for the engineer, which was sustained on appeal, with the court holding there was no express or implied contract with the contractor, and no implied-in-fact duty for the engineer to obtain easements for the contractor. In addition, by signing and cashing the project owner’s check that contained the words “Final Payment,” the contractor waived any claim against the owner and engineer because this constituted an accord and satisfaction, regardless of a contemporaneous letter from contractor’s letter stating an intent to preserve its claim. Triangle Construction Company, Inc. v. Fouche and Associates, Inc., 218 So. 3d 1180 (Mississippi 2017).

The contractor pointed to Section 3.01 of the Contract, which provides that the project engineer (“Fouche”) “is to act as [Onwner’s] representative, assume all duties and responsibilities, and have the rights and authority assigned to [Engineer] in the Contract Documents in connection with the completion of the Work in accordance with the Contract Documents.” Triangle maintained that, as Owner’s representative, the engineer was liable for failing to obtain the easements in a timely manner, pursuant to Section 4.01 of the Contract that required Owner—as the project-owner—to “obtain in a timely manner and pay” for easements necessary for completing the project. Triangle also referenced Section 12.03 of the Contract, which provides:

If [Owner], [Engineer], or other contractors or utility owners performing other work for [Owner] as contemplated by Article 7, or anyone for whom [Owner] is responsible, delays, disrupts, or interferes with the performance or progress of the Work, then Contractor shall be entitled to an equitable adjustment in the Contract Price or the Contract Times, or both.

The court explained that the engineer disagrees and argues that it is not a party to the Contract. First, the engineer referenced Section 9.09(A) of the Contract, which provided:

Neither [engineer’s] authority or responsibility under this Article 9 or under any other provision of the Contract Documents nor any decision made by [Engineer] in good faith either to exercise or not exercise such authority or responsibility or the undertaking, exercise, or performance of any authority or responsibility by [Engineer] shall create, impose, or give rise to any duty in contract, tort, or otherwise owed by [Engineer] to [Triangle] ....

With regard to the language of the contract that the contractor asserted made the engineer an agent of the owner, the court said,

Triangle overlooks the critical language limiting Fouche’s role only to that specified by the Contract. Section 4.01 provides that [Owner] is responsible for obtaining the easements; Section 9.09(A) of the Contract provides that no provision of the Contract or behavior by Fouche will “create, impose, or give rise to any duty in contract, tort, or otherwise owed by [Fouche] to [Triangle].” These provisions explicitly limit Fouche’s duties and do not include the responsibility of obtaining easements. Triangle acquiesced to this language when it signed the contract. Thus, we find no merit to this argument.

Accord and Satisfaction

The contractor was given a check by the owner marked, “Final Payment.” He signed the contract and simultaneously provided a letter from his attorney to the Owner stating that the amount was insufficient payment “for all the work that Triangle performed on this job,” and that “Triangle does not waive, in any way, its contractual claims to additional funds under the terms of the bid contract.”

None of this language was effective, said the court, to change the fact that the contractor signed the final payment check, which under state law constituted accord and satisfaction. The court stated,

Mississippi law is clear that, despite whatever contentions a party may make to the contrary, cashing a check marked “final payment” constitutes an accord-and-satisfaction agreement, which precludes that party from bringing future claims for additional payment.

Although this accord and satisfaction would naturally apply to a claim by the contractor against the Owner, the court also found that it applied to bar the claim against the engineer. Ironically, it was the contractor’s insistence that the engineer was the owner’s agent and representative and was in a quasi contract relationship that tripped up the contractor here. As explained by the court,

Triangle argues repeatedly on appeal that Fouche acted as EMWA’s representative or agent, and that Fouche directly controlled the management of the construction project on behalf of EMWA. Further, the very letter written by Triangle asserting that it would continue to seek payment, despite cashing the “final payment” check, was written to Fouche, not EMWA. Triangle has centered much of its argument upon the contention that Fouche acted as EMWA’s agent. However, with respect to its argument regarding accord and satisfaction, it argues that EMWA and Fouche are separate entities. We refuse to allow Triangle to have it both ways. It cannot now argue that Fouche and EMWA are separate entities solely for the sake of its accord-and-satisfaction argument. Thus, we hold that Triangle’s claims against Fouche are barred pursuant to the doctrine of accord and satisfaction.

Comment: An important lesson from this decision concerns the importance of a contractor not accepting a check that states it is “final payment” if the contractor intends to pursue a claim for additional amounts. Here, the contractor, and its attorney, thought a claim had been adequately preserved by the contractor’s attorney letter specifically stating that the check amount was not sufficient to pay all that was owed to the contractor and that the contractor was preserving its rights to additional amounts that the contractor believed were due. That language did not change the legal affect of the wording on the contract. This may vary depending upon state law, but the law of Mississippi was clear in this regard.

Article 4

Contractor’s CGL Policy Professional Liability Exclusion Precludes Coverage for Damages from Subcontracted Land Surveyor’s Error

See similar articles: Land Surveyor | Professional Liability Exclusion | subcontractor | Western National

General Contractor (GC) constructed two condominium buildings too close to the adjoining property. This was due to an error made by the land surveyor who was working under subcontract to the GC. An occupancy permit would not be issued by the County unless the problem was remediated. Rather than tearing the buildings down, the GC paid the neighboring landowner for a strip of land along the property line and that resolved the set-back distance problem. The GC sought the property purchase costs as damages under its CGL policy.

The carrier denied coverage due to the professional services exclusion. The court agreed. Some of the interesting issues included an argument that a land surveyor was not a “professional” and also because he was a subcontractor, his services would be covered regardless. The court did a nice job explaining why a land surveyor is indeed a professional and also why it is not relevant whether the land surveyor is a subcontractor to the GC. Western National Mutual Ins. Co. v. TSP, Inc., 904 N.W. 2d 52 (2017).

The trial court granted summary judgment against the carrier, finding coverage under the CGL policy. Western National appealed, alleging there is no coverage under the policy for the surveying error because there was no property damage caused by an occurrence. In Western National’s view, this is because “[d]efective work which causes damage only to the insured’s work product itself is not an ‘occurrence.’ ” Additionally, Western National contends there was no damage to property as a result of the surveying error because the finished structures never impinged upon a third party’s property. Even if the policy covers the error, Western National submits that coverage is precluded by the “work-in-progress,” “faulty workmanship,” and “professional services” exclusions.

None of those issues were considered by the appellate court because it cut to the chase by holding that the “professional services” exclusion applies to defeat coverage.

With regard to the professional nature of land surveying services, the court stated that although the CGL policy did to expressly define “professional service”, the court had previously defined the term in CGL policies to mean “those acts or services entailing the performance of a vocation, calling, or occupation requiring learning and intellectual skill.” The court then went on to further explain, as follows:

“The Legislature has clearly identified land surveying as a professional service. Further, the nature of land surveying as a vocation requiring specialized knowledge and the application of intellectual skill support the inclusion of land surveying as a professional service under the endorsement. See also Minn. Stat. § 326.02 (imposing licensing requirements on persons engaged in a variety of professions including land surveying).”

“[The]argument that including land surveying as a professional service gives an overbroad meaning to the endorsement is unpersuasive. It may be true that the professional services endorsement “should not apply to construction work performed by contractors[.]” Scott C. Turner, Insurance Coverage of Construction Disputes § 39:3 (2d ed.), Westlaw (database updated June 2017). However, “[t]his distinction for contractors is part of the larger distinction between professional services which require specialized knowledge or training and involve the exercise of judgment and those services involved in the execution of a decision based on non-professional judgment.” Id. Land surveying requires intellectual assessments and the use of professional judgment in comparison to a general construction task like putting up a wall, which involves manually implementing an existing plan. Including land surveying as a professional service will not give this endorsement improper breadth. See Maine Mut. Fire Ins. Co. v. Tinker, 178 Vt. 522, 872 A.2d 360, 362 (2005) (holding the phrase “rendering or failing to render any professional service” unambiguously includes land surveying in a CGL policy exclusion).”

Article 5

Spearin Doctrine Applies to Design-Build Contracts allowing Trade Subcontractor to Rely on Designs Provided by Engineer/Subcontractor

See similar articles: Balfour Beatty | design defects | Design-Build | Miller Act | Spearin

On a design-build project involving MCAS Camp Pendleton, a subcontractor filed suit against Balfour Beatty Construction (“BBC”), the design-build contractor. This was under the Miller Act and alleged breach of contract and breach of implied warranty of specifications (Spearin Doctrine claim). The sub filed a motion for partial summary judgment asking the court to find that the design-builder could not shift legal responsibility for defective plans and specs onto its subcontractor/engineer. Its argument was that a construction contractor can seek relief under the Spearin Doctrine line of cases for extra work necessitated by defects in plans and specs that were provided to the contractor for bidding its work.

The design-builder argued that the Spearin doctrine does not apply here due to the design-build process where plans and specifications provided to subcontractors are expressly incomplete when the initial agreements are signed. In response, the sub argued that although it assumed the risk that the plans and specs would be “refined,” it did not assume the risk that they would be “defective.” The court concluded that (1) The Spearin doctrine may apply to design-build projects, but (2) the record in the case was not sufficiently developed to determine whether the doctrine applies to the facts in this case. U.S. for benefit of Bonita Pipeline, Inc. v. Balfour Beatty Construction LLC, et. al., 2017 WL 2869721 (U.S. District Ct., S.D. California).

According to BBC, the Spearin doctrine cannot be applied to the Subcontract because, by the very nature of the contract, the plans were not complete when the parties reached agreement. In support of its argument, BBC points to the provision of the Subcontract in which Bonita “knowingly assume[d] the risk of further refinement of the plans and specifications associated with the design build process.”

The sub counter-argued that it assumed the risk that the plans and specifications would be refined, not the risk that they would be defective. And it argued that the Spearin doctrine focuses on whether plans are correct, not on whether they are complete.

As stated by the District Court, In Spearin, the Supreme Court explained that contractors can recover for extra work due to "defects in the plans and specifications.” Spearin, 248 U.S. at 136. The "critical factor" in applying Spearin is to determine whether the "specifications [are] deficient.” The California Supreme Court has stated that contractors can recover when plans or specifications are “incorrect.” Coleman, 65 Cal. 2d at 404.

“Under Spearin, the responsibility to provide correct plans and specifications “is not overcome by the general clauses requiring the contractor, to examine the site, to check up the plans, and to assume responsibility for the work.” [citations omitted] But at this time, the record is not sufficiently developed for the Court to determine whether Spearin applies to this case. There are disputed issues of material fact regarding whether Bonita’s extra work was due to errors in the plans and specifications or whether the extra work was due to the expected design refinements provided for in the Subcontract.”

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ConstructionRisk.com Report (March 2018)