Inside this Issue

A1 - “No Damages for Delay” Clause Enforced Against Contractor Claim
A2 - Architect’s Duty to Identify Contractor Deviations from Plans Extends to Home Guests
A3 - Additional Insured Contractor’s Right to be Defended & Incorporation of Prime Contract Indemnity Obligations into the Subcontract
A4 - Bid Protestor Successfully Challenges Bid Rejection Based on Unannounced Criteria

Article 1

“No Damages for Delay” Clause Enforced Against Contractor Claim

Where a contractor signed a contract with a municipality that included a clear and unambiguous “no damages for delay” clause, it was held that such a clause did not violate public policy, and that as a result of the clause the contractor was not entitled to recover its delay damages despite the fact that the delays were caused by the matters within the control of the municipality which were not contemplated by the parties. In Markwed Excavating v. City of Mandan, 791 N.W. 2d 22 (North Dakota, 2010), the contract was for installation of sewer pipes that included tunneling under three roads. The project was delayed by several weeks due to delays encountered by the city in obtaining certain temporary construction easements from a landowner. The city granted the contractor a time extension but denied the contractor’s request for monetary adjustment in the amount of $400,000. In the lawsuit that followed, the trial court granted summary judgment to the city, and the appellate court affirmed on the basis that the contract language did not authorize an exception to the “no damages for delay” for delays that were not contemplated by the parties. Thus, the only way the contractor could have recovered was if it proved the city was liable for negligent mispresentation. But, since the only duty the city owed to the contractor was based on contract, the court held that pursuant to the economic loss doctrine, a tort (negligence) claim could not be brought by the contractor against the city for the economic losses.

The “no damages of delay” clause of the contract provided as follows:

“Delays. The Contractor will not be entitled to any compensation for causes resulting in delays or hindrances to the work. Extensions of time will be granted for unavoidable delays, which in the opinion of the Engineer are clearly beyond the control of the contractor, resulting from causes such as Acts of Providence, fortuitous events and the like. The Engineer must receive written notice of claim for such delays from the Contractor before any extensions of time will be granted. Any extension of time will not relieve the Contractor or his sureties from their obligations which shall remain in full force and effect until the satisfactory discharge of the contract. The contractor will indemnify and hold harmless the owner and the engineer and their agents and employees from and against all claims, damages, losses and expenses including attorney's fees arising out of or resulting from the performance of the work, provided that any such claims, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property including the loss of use resulting therefrom; and is cause in whole or in part by any negligent or willful act or omission of the contractor and subcontractor, anyone directly or indirectly employed by any of them or anyone for whose acts, any of them may be liable.”

As explained by the court, “A no damages for delay clause exculpates a project owner from liability for damages resulting from delays in the performance of the contractor’s work by ordinarily limiting a contractor’s remedy to an extension of time and is generally enforceable….” Although some courts in other states have recognized an exception for delays that are beyond the contemplation of the parties, the court here found no public basis for doing so in this state. Indeed, the court explained, “Our law recognizes a major public policy of ‘freedom to contract on terms not specifically prohibited by statute.” The court further stated that “The clause serves an important function of protecting public entities contracting for public improvements on the basis of fixed appropriations. [Contractor] is a sophisticated contractor and could have protected itself against delays through a bid adjustment for the work.” In other words, the court is saying that a prudent contractor could choose to increase its fixed price bid to the city to cover the contingency that it might have delays for which it has forfeited its right to recovery damages.

Another interesting aspect of this case involves the manner in which the court addressed a belated effort by the contractor to amend its complaint to include a cause of action against both the city and its engineering firm, based on alleged negligent misrepresentation that that the contractor could use land identified in the contract for storage of its equipment and materials during work, for their obligation to procure appropriate easements. In rejecting the contractor’s plea to amend its complaint, the court stated that the language of the contract evidences an intent by the parties to the contract to limit the contractor’s remedies regardless of whether delays were caused by the city or some other contractor employed by the city, and this creates a “third party benefit to [City’s] other contractors, including [the engineer] for delays caused by their neglect.”

For these reasons, the court concluded that the alleged negligent misrepresentations do not prohibit enforcement of the clause. The court rejected the contractor’s argument that the clause was unconscionable, and instead held the contractor was bound by the plain and unambiguous language of the clause.

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.5 (May 2011).

Article 2

Architect’s Duty to Identify Contractor Deviations from Plans Extends to Home Guests

Where an architect designed a house and observed its construction during the construction phase, it had a duty to identify significant deviations from its plans and specifications that impacted the structural integrity of a balcony – causing it to collapse and seriously injure house guests. The duty extended not only to the client but also the house guests whose injuries were foreseeable. In the case of Black + Vernooy Architects, 2010 WL 5019659 (Tex., Dec 2010), the architect’s contract included both design and “construction administration services.” Within just seconds of walking onto the balcony of the new home, the balcony separated from the exterior wall of the house and collapsed, causing the two guests to fall almost 20 feet, rendering one of them a paraplegic. There were numerous construction defects where the contractor failed to comply with the specifications including nailing the rim joist or ledger board to the house instead of bolting it; nailing the joists to the ledger board instead of using joist hangers; use light-weight bearing support clips incorrectly used; and not bolting handrail to the house. During site visits the Architect photographed the progress of construction, including numerous photographs clearly showing the defects in the construction of the balcony, but the Architect failed to report the defects to the Owner. Expert witnesses testified that a reasonable and prudent architect would have identified the balcony defects when the photographs were taken and brought them to the attention of the contactor and required that they be corrected. The expert testified that the “defects should have been observed” by the architect because the required design elements were clearly missing. The expert witness of the defendant also agreed that the lack of the bolted rim joist was obvious in the photographs. The court found that under the applicable AIA B151-1997 contract, the architect had a duty to its client to “endeavor to guard” against such defects and the court held that the duty extended to those persons foreseeably subjected to the risk of personal injury.

In its appeal from the trial court decision, the architect argued that there was legally insufficient evidence to support the jury’s finding that it was negligent because it didn’t have a duty to the house guests to identify the balcony defects and bring them to their attention. It argued that any duty that it had was to its client only and not to anyone else such as foreseeable visitors to the house. The expert witness for the architect testified that regardless of how open, obvious, dangerous, or observable a defect is, an architect providing contract administration services who does not actually observe the defect has no duty to bring it to the owner’s attention. Rejecting that position, the appellate court concluded that although it agrees that the architect is not a guarantor or insurer of the general contractor’s work, it has a duty to “endeavor to guard” its client form defects and deficiencies in the work and may be held liable for a breach of its duty as a provider of information.

The court was careful in its analysis to explain that it was not imposing a duty on architects to identify every possible contractor deviation form the specifications, but that those which are obvious and should have been known to the architect, must be acted on. The court explained as follows:

“While an architect providing contract administration services does not have a duty to identify every possible deviation from the design drawings, we conclude that the architect does have a duty to identify observable, open, and obvious deviations that implicate safety and structural integrity and that were clearly presented to the architect. The evidence in this case is particularly unique in that the defects can be identified on photographs actually taken by the architects in the course of providing contract administration services. In contrast, in a situation where a defect is created and then immediately obscured by walls or ceilings so that it is never observable to the architect during a site visit, no duty to identify the defect would arise. Similarly, it is possible that no duty would arise if a defect is only visible from a certain vantage point and there is no evidence that the architect ever viewed the defect from that particular vantage point. In this case, however, Schmeil himself took photographs depicting the defects and deviations from the design drawings. There is no question that the defects were not only observable to Schmeil during his site visit, but also observable to both Schmeil and Black during their subsequent review of the photographs.”

In deciding whether the duty to the client extended to the third party guests of the client, the court said balancing factors such as the risk and foreseeability of injury and the consequences of imposing the burden on the architect must be considered. Here the court said that the factors weighed in favor of finding the architect had a duty to the third parties because:

“When an architect agrees to provide contract administration services, that architect's failure to notify the owner of observable and dangerous deviations from the architect's own design drawings, particularly in connection with an element like a balcony where construction in accordance with the design drawings is a critical safety issue, creates a foreseeable risk of injury for visitors lawfully on the premises.”

The court further explained its conclusions regarding the foreseeability factor as follows:

“The foreseeability factor in this case is based, in part, on the public's reliance on design professionals to properly perform their contractual obligations as a matter of public safety. When a visitor to a residence, lawfully on the premises, walks out onto a balcony, the personal safety of that visitor depends on certain professionals having non-negligently performed their contractual duties with respect to the balcony. In a case where an architect was hired to perform contract administration and to “endeavor to guard” the owner against defects and deficiencies in the work, the visitor's safety depends on the architect having fulfilled this duty using the level of care, skill, and diligence that would be exercised by a reasonably prudent architect under similar circumstances.”

Several times the court seemed to go to great pains in this decision to explain that it did not intend to make design professionals into building inspectors or guarantors that construction was done perfectly. For example, the court said:

“To be clear, BVA did not have a duty to ensure that the construction site was a safe place to work, verify that Nash was following federal safety regulations, or fulfill any other obligation dependent on the right to control the means or methods of construction.... BVA's liability in this case is not based on any duty that would require control of the means or methods of construction, but on BVA's “nonconstruction responsibility” to “visit, to familiarize, to determine, to inform[,] and to endeavor to guard” against defects and deficiencies in the work. … We also reiterate that an architect providing contract administration services does not act as a guarantor or insurer of the work of the general contractor. Our holding today is limited to the facts of this case, in which the architects agreed to provide contract administration services, took and reviewed photographs of multiple open and obvious defects that negatively affected the structural integrity of a balcony that they designed, the safety of which was critical, and failed to observe those defects. Under the circumstances presented here, the jury was entitled to determine whether BVA was negligent. The potential for negligence was based on the BVA's duty as a provider of information, rather than as a guarantor of the contractor's performance.”

For these reasons, the court affirmed the trial court judgment against the architect.

Comment: This is an example of the old adage that “Bad facts make bad law.” The court in this case was so persuaded by the bad facts of this case, with photographs of obvious defects actually having been placed by the Architect on its own website to show off its work, that the court found that even if the Architect didn’t actually know about the defects, it should have known, and under its contract with its client it had a duty to “endeavor to guard” against such defects – and in this case the foreseeability of injury from such structural defects was so apparent, that the architect was properly subject to a jury verdict finding it liable. AIA B101 – 2007 has removed the language “endeavor to guard”. In light of this decision, this looks like a wise change in the contract form. Under the bad facts of this case, it is doubtful that the deletion of those words from the architect’s contract would have made any difference in the court’s decision.

Article 3

Additional Insured Contractor’s Right to be Defended & Incorporation of Prime Contract Indemnity Obligations into the Subcontract

Two employees of a subcontractor sued the prime contractor for their personal injuries resulting from a fall. The prime contractor in turn sued the subcontractor and the subcontractor’s insurance carriers for breach of a duty to defend and indemnify the contractor in the employee’s action. For various reasons, the trial court determined the indemnification provision in the subcontract was so broad that it violated the state anti-indemnity statute that prohibits one from being indemnified for its own negligence and that neither the subcontractor nor insurers had any duty to the prime contractor. On appeal, it was held that although the anti-indemnity statute was indeed applicable to make the subcontract indemnification void, the subcontractor had a separate duty to defend and indemnify the contractor pursuant to the terms of prime contract clauses that were incorporated by reference into the subcontract. In addition, an insurance exhibit to the subcontract expressly required the subcontractor to install it to work in accordance with certain specifications that required it to name the prime contractor as an additional insured to its insurance policies. As a result of the incorporated prime contract clause requiring defense and indemnity, and the insurance requirements that were incorporated into the specifications, both the subcontractor and its insurance carriers of the subcontractor owed the prime contractor a defense. Uniwest Construction v. Amtech Elevator Services, 699 S.E.2d 223 (VA 2010).

This is a complicated case due to the number of insurance carriers and the different arguments made by each and the different decisions applicable to each. The bottom line conclusion of the appellate court, however, is quite straight forward: Even though the subcontract contained a void indemnification clause, the subcontractor and its carriers owed the prime contractor defense and indemnity pursuant to the terms of the prime contract that were incorporated by reference into the subcontract, as well as certain additional insured provisions of the subcontract that became applicable once the prime contract indemnification requirements were flowed down to the subcontract.

Provisions of the contracts that were most significant in this case include the following:

Paragraph 3.18.1 of the General Conditions obligated Uniwest to defend and indemnify Fountains

[t]o the fullest extent permitted by law ... from and against claims, damages, losses and expenses, including but not limited to attorneys' fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or injury to or destruction of tangible property, (other than the Work itself) including loss of use resulting therefrom, but only to the extent caused in whole or in part by negligent acts or omissions of [Uniwest], a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder.

The General Conditions also obligated Uniwest to “require each Subcontractor ... to be bound to [Uniwest] by [the] terms of the Contract Documents, and to assume toward [Uniwest] all the obligations and responsibilities which [Uniwest], by these Documents, assumes toward [Fountains].”

The subcontract expressly incorporated the Prime Contract “to the extent not otherwise excluded or modified by the terms of the Subcontract.” The incorporation language provided as follows:

[Amtech] agrees to be bound to Uniwest by all the terms of the [Prime Contract] and to assume towards Uniwest all of the obligations and responsibilities that Uniwest has by the [Prime Contract] assumed toward [Fountains]. All terms and conditions contained in the [Prime Contract] which, by the [Prime Contract] or by operation of law, are required to be placed in [the] Subcontract[ ] are hereby incorporated herein as if they were specifically written herein.

The court also explained that there was an insurance exhibit to the subcontract that was important here. The court stated:

Finally, Exhibit B of the Subcontract required Amtech to “[f]urnish and install elevator work in accordance with ‘Elevator Installation and Modernization Specifications for Logan Square East’ as prepared by Zipf Associates, Inc.” (the “Zipf Specifications”). The Zipf Specifications required Amtech to “name [Uniwest] as [an] *435 Additional Insured” to its insurance policies or “submit a separate ... Liability Insurance policy” for Uniwest.

As analyzed by the court, the relevant language of the incorporation clause quoted above is that:

“Subcontractor agrees to … indemnify towards Uniwest all of the obligations and responsibilities that Uniwest has by the [Prime Contract] assume toward [Fountains].” The plain meaning of these words is that Uniwest’s duty to defend and indemnify Fountains became a duty by Amteck to defend and indemnify Uniwest.

Based on the above-quoted language, the court determined that the subcontractor had contractually obligated itself to provide defense and indemnity to the prime contractor to claims such as those brought by the injured employees.

Next, the court turned to the language of the relevant insurance policies of the carriers that were denying they had any defense or indemnity duties to the prime contractor as an additional insured under their policies. What it found was that where the named insured subcontractor had agreed in advance, in writing, to provide additional insured coverage for its client, the prime contractor, the insurance company was obligated to defend and indemnify. The court’s reasoning was as follows:

Subdivision E-4 [of the insurance policy] requires AIU to defend and indemnify any entity insured under the CNA Policy. Under the errors and omissions endorsement of the CNA Policy, Continental insured any entity Amtech was required by a written agreement to provide with insurance “to the extent that it is required to be indemnified by [the] written agreement.” Similarly, Subdivision E-7 requires AIU to defend and indemnify any entity “to whom [Amtech was] obligated by a written Insured Contract to provide insurance.” For this purpose, an “Insured Contract” is defined as “any oral or written contract or agreement ... under which [Amtech] assumes[d] the tort liability of another party.”

Because the subcontract by virtue of the incorporation by reference of the prime contract language, required the subcontractor to defend and indemnify Uniwest, the additional insured obligations of the carrier likewise became applicable pursuant to the above-quoted insurance policy language.

Comment: Several important lessons are learned from this decision. (1) Indemnification language in contracts needs to be carefully circumscribed to comply with the relevant state anti-indemnity statute. Despite the argument by the prime contractor that it was not asking to be indemnified for its own negligence, but rather for the negligence of the subcontractor, the court held that the circumstances of the underlying claims would not be considered in determining whether the clause on its face was contrary to the law and would therefore be void and unenforceable regardless of the facts. (2) The incorporation by reference provisions of prime contracts flowing down into subcontracts must be taken very seriously by all concerned and carefully reviewed and negotiated to provide appropriate risk allocation. In this case, the flow down provisions ended up providing the prime contractor the benefits it originally thought it was obtaining through the express subcontract language that the court found unenforceable. This was more than just an issue of belts and suspenders. (3) Be assertive in demanding your rights as an additional insured and suing to enforce those rights. The contractor (and its own insurance carriers) in this case might easily have given up after the trial judge (in a well reasoned decision) found that the indemnification language it had included in the subcontract was void. Instead, they stayed the course, and prevailed on the balance of the contract terms to enforce the right to additional insured coverage.

Article 4

Bid Protestor Successfully Challenges Bid Rejection Based on Unannounced Criteria

See similar articles: Bid Protest | bid rejection | bidder responsibility

Where a county government rejected an electrical contractor’s low bid for the sole reason that it believed the contractor had violated the prevailing-wage law, despite no administrative or legal rulings to that effect, the court held the county abused its discretion and must terminate the contract it awarded to another contractor, and review the low Bidder’s bid based only on the criteria properly included in the bid invitation. Since the Bidder had not included a request in its complaint that the county be ordered to award it the contract, the court declined to require the county to make the award to this Bidder, but nevertheless made it as clear as it could that the county would have to evaluate the bid on the bases of criteria other than prevailing wage issues. State ex rel. Gaylor v. Goodenow, 928 N.E. 728 (Ohio 2010).

In this case, Franklin County, Ohio was constructing a new animal shelter. It issued an invitation for bid (IFB) for the electrical-systems package for the project. The IFB listed 25 criteria that would be used in evaluating the low responsible bid. One of the criteria was “that the Bidder has not been debarred from public contracts or found by the state (after all appeals) to have violated prevailing wage laws more than three times in a two-year period in the last ten years.” As explained by the court, the county actually treats the issue of prevailing wage violations as dispositive such that if it is determined that the Bidder has violated the prevailing wage laws more than three times the county will ignore the other factors and simply reject the Bidder.

The Bidder in question had never been found to have violated the prevailing wage laws. It had, however, apparently, unintentionally underpaid some individuals and had settled without admitting liability and without any administrative or judicial finding of liability. When the county rejected its low bid, the Bidder brought legal action seeking a “Writ of Mandamus” to compel the county to fully and fairly consider whether its low bid was the best bid, without reliance on prevailing wage issues. Courts generally recognize mandamus as the appropriate remedy to correct an abuse of discretion by a public board in a decision that is not appealable, and is particularly appropriate, say the court, in matters of competitively bid public works contracts.

Citing a previous case precedent, the court said that “A board’s use of unannounced criteria to reject a bid on public-works contract constitutes an abuse of discretion that is remediable in mandamus.” Moreover, the court cited another case holding that the county’s practice of misapplying the prevailing wage criteria of the IFB to reject Bidders that had not been found by the state, after all appeals, to have violated prevailing-wage laws, constituted an abuse of discretion.

Although the county sought to argue that the electrical contractor had already begun its work and that it was too late for the contract to be stopped and potentially awarded to the protester, the court held that based on the affidavits submitted, it appeared to the court that work under the contract did not begin before the court had issued its stay on construction, and the other contractor had not filed to intervene in the case.

For these reasons, the court granted the Bidder a writ of mandamus to compel the county to reinstate its bid and to determine whether it should be awarded the contract solely on the basis of the published evaluation criteria.

Search

Get the Newsletter

Contract Guide for Design Professionals

Recent Newsletters

All Newsletters

Risk Management Workshops

Life Skills Workshop Slides

Contract Clauses – Papers and Articles

Construction Risk Management

ConstructionRisk.com Report (May 2011)