Inside this Issue
- A1 - Why a Project Owner Isn’t Made an Additional Insured Under a Design Professional Policy
- A2 - Contract Language Made Code Compliance a separate Duty from the Standard of Care Duty
- A3 - Subcontractor Indemnification to Prime for Arbitration Award to Homeowner is Barred because Award did not explain basis for decision and would violate anti-indemnity statute if Prime was negligent
- A4 - Statute of Limitations Began to Run on Date Homeowner Saw Rust on Roof and not from Date Leaking Began
- A5 - Texas Certificate of Merit Requirement Does not apply to Third-Party Contribution Claims
Article 1
Why a Project Owner Isn’t Made an Additional Insured Under a Design Professional Policy
See similar articles: Additional Insured
Design professionals do not name project owners or contractors as additional insureds under their professional liability policies. This paper from the library of articles and papers hosted on the ConstructionRisk.com website explains why.
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. 5 (May 2018). Copyright 2018, ConstructionRisk, LLC
Article 2
Contract Language Made Code Compliance a separate Duty from the Standard of Care Duty
See similar articles: Betterment | Code Compliance | grammar | Indemnification clause | Standard of Care
Architect is subject to potential liability for failure of design to comply with fire code requirements regardless of whether the generally accepted standard of care was satisfied. This is because it agreed to contract language stating it would comply with the Standard of Care AND would comply with code requirements. This created two separate duties – making the duty to comply with codes absolute and not dependent on meeting the standard of care.
This is an issue that we deal with when redlining changes to a/e contracts. When we see a representation that the a/e “shall comply with all applicable laws, codes and ordinances…” we revise that to read: “The a/e shall exercise the standard of care to comply with all applicable laws, codes and ordinances.” Issues addressed in this case include indemnification clauses, betterment arguments, and the importance of grammar in contract drafting. School Board of Broward County v. Pierce Goodwin Alexander & Linville, 2014 WL 1031461 (Fla. App., 4th Dist, 2014).
Broward County, Florida School Board contracted an architect to perform design services for a high school renovation. After the design was completed and construction began, the School Board concluded that the design was not code-complaint regarding fire safety – specifically that the code required a third floor balcony to have an emergency exit in case of fire. While the project was being designed, a peer reviewer contended that an emergency exit was required. The architect “disagreed and suggested an alternative solution to meet the fire code standards.” The peer reviewer “repeatedly disagreed with the architect’s alternative solution.” But ultimately the design was finalized as the architect proposed, with what the architect thought was approval by the building code official “based on oral statements made by the official during a meeting.” After construction commenced, the official concluded that the design plans were not code-compliant. This resulted in paying more for the renovation because the contractor’s bid did not contemplate the construction of a staircase, and the initial construction had to be reworked.
Language in the Contract Addressing Standard of Care and Code Compliance
In litigation against the architect to recover its increased construction costs, the school board alleged that the designer breached its contractual obligation to provide a design consistent with code. The architect’s defense that it met the standard of care in its interpretation of what was required by code was rejected by the court, which found that the contract held the architect to both a generally accepted standard of care, plus a separate duty to design to code.
It was the specific language of the contract that caused this result. This demonstrates the importance of exercising great caution in drafting language in the contract addressing standard of care, code compliance and indemnification – all which came into play here.
Because the standard of care paragraph stated that the architect would comply with the “customary professional standards currently practiced by firms in Florida AND in compliance with any and all applicable codes, laws, ordinances, etc.,” the appellate court held that compliance with code was separate and apart from the normal standard of care requirements. It reversed the lower court decision that had required the county to prove the architect was negligent. Please read the commentary below for drafting tips to avoid this outcome.
The appellate court concluded they erroneously interpreted the contract and applied an incorrect standard of care. It accepted the position of the school board, which argued that the standard of care usually applicable to architects was heightened by three provisions of the contract:
“2.1.3 As to all services provided to this Agreement, the Project Consultant [the architect] shall furnish services by experienced personnel and under the supervision of experienced professionals licensed in Florida and shall exercise a degree of care and diligence in the performance of these services in accordance with the customary professional standards currently practiced by firms in Florida and in compliance with any and all applicable codes, laws, ordinances, etc….
2.1.4 As to any drawings, plans, specifications or other documents or materials provided or prepared by Project Consultant or its Sub–Consultants, the Project Consultant agrees same: … Comply with all applicable laws, statutes, rules and regulations, building codes and Owner’s [the school board] guidelines and regulations, which apply to or govern the Project …
2.1.5 All professional design services and associated products or instruments of those services provided by the Project Consultant shall:
.1 Be in accordance with all applicable codes, laws, and regulations of any governmental entity, including, but not limited to, [list of regulatory entities] with the Owner serving as the interpreter of the intent and meaning of … any other applicable code[.]”
(emphasis added). In opposition, the architect argued that the applicable standard of care was governed by the indemnification article of the contract at section 8.1.1., which provides:
To the fullest permitted by law, the Project Consultant shall indemnify and hold harmless the Owner … from and against any and all liability, claims, causes of action (by whomever brought or alleged and regardless of the legal theories upon which the liability, claims or causes of action are based), losses, damage, costs, expenses and fees … which are or may be imposed upon, incurred by or asserted against Owner … to the extent said liability, claims, causes of action, losses, damages, costs, expenses and/or fees are caused by the Project Consultant’s negligent, reckless or intentional wrongful acts or omission, error, misconduct, or commission. (emphasis added).
The appellate court concluded that although Article 2.1.3 described a generally accepted standard of care as being the applicable standard by which the designer would be judged, Article 2.1.4 added another requirement over and above that. Specifically, Article 2.1.4 mandated compliance with all applicable laws and codes and did not make such compliance subject to the standard of care provision. In other words, code compliance was a separate requirement that the designer agreed to without any limitation.
In addition, the court concluded that even within the Article 2.1.3 standard of care clause, there were two separate requirements, one being to meet the standard of care but the other being “AND in compliance with any and all applicable codes, laws, ordinances, etc…” If the designer intended that compliance with code be subject to reasonable efforts pursuant to the generally accepted standard of care, it needed to more accurately write the clause to state that intent. By the placement of the word “and,” the court concluded compliance with code was a requirement additional to what was required by meeting the standard of care.
In another effort to demonstrate that the standard of care was limited to the generally accepted standard (i.e., non-negligent), the designer argued that the indemnity clause at article 8.1.1. showed that intent. The court rejected that argument for several reasons, including (1) the indemnification article was only for third party claims and not for first party claims such as the one brought by the designer’s client, the school board; (2) the placement of the word “or” in the relevant language had the grammatical result of causing the designer to be obligated to indemnify against claims caused by its negligence “OR omission, error, misconduct, or commission.”
The court explained, “If ‘negligent, reckless or intentional wrongful’ were intended to modify ‘omission, error, misconduct, or commission,’ the disjunctive ‘or’ would not have been used, and the last portion of section 8.1.1 would have been written as follows: ‘… to the extent said liability, claims, causes of action, losses, damages, costs, expenses and/or fees are caused by the Project Consultant’s negligent, reckless or intentional wrongful acts, omissions, errors, misconduct, or commissions.’ ”
The court stated that with regard to indemnification, “the rights and remedies for indemnity regarding negligence pursuant to article 8 were in addition to, and not a limitation upon, the rights, and remedies for breach of performance required by article 2.” In conclusion, the court stated, “The fact that all three sections specifically state that all design plans were to be in compliance with all applicable codes, and only once makes reference to ‘customary professional standards,’ persuades us that the architect committed itself to a higher standard.”
Comment on the Importance of Grammar. This decision demonstrates how important the placement in a sentence of the words “and” and “or” can be. If the intent is to limit the design professional’s indemnification duty to only negligent acts, errors and omissions, the word “negligent” needs to be in a position such as just shown in order that it applies to and modifies each of the words “acts,” “errors,” and “omissions.” It is not uncommon to see contract language that instead reads something like this: “Consultant will indemnify … for damages … from acts, errors or negligence.” Note that the placement of “negligence” after the “or” means that it does not modify the “acts, errors.” In other words, the designer must indemnify for all acts and errors even if not negligent.
Another example of such a result is “negligence, acts, errors, or omissions.” By putting a comma between “negligence” and “acts” this results in the words “acts, errors, or omissions” standing on their own, separate from “negligence.”
From a contract drafting perspective, when it comes to committing to code compliance, it is prudent and appropriate to limit the obligation by stating that the designer will exercise the standard of care to comply with code. Another possibility is to state the designer will exercise the standard of care so that the project will comply with code.
The key is that the language be written in such a way that rather than being an absolute obligation to attain code compliance, it is only a commitment to exercise the standard of care in an effort to attain code compliance. The problem is that reasonable people can disagree on whether a design is code compliant. An absolute commitment to code compliance constitutes an uninsurable warranty or guarantee.
Consider using a clause such as “Design Professional will use reasonable care to comply with applicable laws and codes in effect at the time the services are performed hereunder.” Or if the “standard of care” has been properly defined in the contract, consider writing: “Design Professional will exercise the Standard of Care to produce plans and specifications that comply with applicable laws and codes….”
Comment on Indemnification Clause
In arguing that the indemnity clause should be interpreted to limit the standard of care owed to its client, the architect stretched the clause beyond its normal intent. The court concluded that the indemnification clause was not intended to establish standards or obligations applicable to the services of the architect to its client or applicable to first party claims brought by the county against the architect. Instead, the indemnity clause was solely to establish an obligation to indemnity the county against “third party claims.”
This “third party claim” aspect of indemnification clauses has been the historical norm. Many clauses will describe the indemnity as applying to damages the client sustains due to claims for bodily injury or property damage, i.e., claims by others against the indemnitee. More recently, however, we have been seeing more indemnification clauses that fail to reference bodily injury and property damage. Instead, they are stating all claims, damages, breach of contract, etc. Some courts have interpreted such clauses to apply to first party claims by the indemnitee (client) against the indemnitor for the client’s own damages, economic losses, etc.
Even change order costs that are paid to a construction contractor are being claimed by owner/Indemnitees as indemnification claims against design firms. To clarify that only third party claims are indemnified, consider a clause such as the following:
Indemnification. "Notwithstanding any clause or provision in this Agreement or any other applicable Agreement to the contrary, Consultant’s only obligation with regard to indemnification shall be to indemnify and hold harmless (but not defend) the Client, its officer, directors, employees and agents from and against those damages and costs (including reasonable attorneys fees and cost of defense) that Client is legally obligated to pay as a result of a third party claim concerning the death or bodily injury to any person or the destruction or damage to any property, to the extent caused by the negligent act, error or omission of the Consultant or anyone for whom the Consultant is legally responsible, subject to any limitations of liability contained in this Agreement.”
Comment on Betterment
The court decision also addressed a defense by the architect that alleged the county was not entitled to the full amount of damages awarded by the jury because part of those damages were actually “betterment” to which the county was not legally entitled. The court agreed in part, and explained the principles of betterment, or what it called “first cost.” The court concluded that “damages collected by the school board for the [change orders] should not include costs for construction that the school board would have incurred if the initial design plans matched the final design plans.” Or as further stated by the court, “the purpose of damages is to restore an injured party to the same position that he would have been in had the other party not breached the contract.” “In restoring the injured party to the ‘same position,’ he is not entitled to be placed because of that breach, in a position better than that which he would have occupied had the contract been performed.”
Using the term “first cost,” the court found that the amount the county would have incurred if the omitted change order item had been originally included in the design plans must be removed from the damages calculation. This is because if, for example, something like a staircase is left out of the plans, then the contractor never included any cost for that staircase in its bid. If the original plans had included the stairs, the contractor logically would have included costs in its bid for those stairs and that will be the “first cost” that the county would have had to pay if the original design had included the stairs as it should have.
When the change order is later granted to a contractor to install the missing stairs, the measure of damages will be the difference between what it costs to rip out work, make changes, and install the stairs now versus what it would have cost to have obtained the stairs if they had been designed and bid at the correct time. The county should not be entitled to a free set of stairs. That would be “betterment.” Or as analyzed by this court, it would be improperly removing the county’s “first cost.”
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 was originally published in ConstructionRisk.com Report, Vol. 16, No. 7 (July 2014) and is reprinted in ConstructionRisk.com Report, Vol 20, No.5 (May 2018).
Article 3
Subcontractor Indemnification to Prime for Arbitration Award to Homeowner is Barred because Award did not explain basis for decision and would violate anti-indemnity statute if Prime was negligent
See similar articles: Anti-Indemnity Statute | Arbitration | Indemnification clause
An arbitration award to a homeowner against a homebuilder/contractor only determined damages and did not provide any explanation for the basis of the award – such as who was at fault or even what elements of the complaint formed the basis for the award. A court determined that the builder could not recover those damages from its subcontractor under the indemnification clause of the subcontract.
The circuit court reasoned that because there were no findings of law or fact in the arbitration award, there was no evidence that the award was attributable to property damage caused by defects in the materials supplied and installed by the subcontractor, might have been caused by the prime contractor instead. The indemnification clause was found unenforceable because it would violate the state’s anti-indemnity statute by requiring the subcontractor to indemnify the builder for the builder’s own negligence.
Comment: This is one of the problems with arbitration awards. They can create havoc with determining whether damages are subject to indemnification and whether they are subject to insurance coverage. My firm routinely strikes arbitration clauses out of contracts and prefers litigation. D.R. Horton v. Builder Firstsource-Southeast Group, LLC, 810 S.E.2d 41 (South Carolina 2018).
The contract included the following indemnification clause:
“To the fullest extent permitted by law, contractor hereby agrees to protect, defend, indemnify, and hold owner, its parent corporation, subsidiaries and affiliates, and any of their respective officers, directors, partners, employees, agents and insurers, ... free and harmless from and against any and all claims, demands, causes of actions, suits, or other litigation of every kind and character (including all costs thereof and attorneys’ fees), ... on account of bodily or personal injury, death, or damage to or loss of property, ... in any way occurring, incident to, arising out of, or in connection with: (I) a breach of the warranties, representations, obligations, and covenants provided herein by contractor; (II) the work performed or to be performed by contractor or contractor’s personnel, agents, suppliers, or permitted subcontractors; or (III) any negligent action and/or omission of the indemnitee related in any way to the work, even when the loss is caused by the fault or negligence of the indemnitee.”
The allegations by the homeowner against the builder included the following:
“D.R. Horton failed to properly install 1) the “siding and exterior wall system;” 2) “rough opening flashing and other flashing;” 3) a moisture barrier; 4) kick-out flashing; 5) framing; 6) the slab and driveway; 7) the roof and shingles; 8) and a gas hot water heater.”
The trial court determined D.R. Horton’s indemnification agreement violates section 32-2-10. That statute provides:
Notwithstanding any other provision of law, a promise or agreement in connection with the design, planning, construction, alteration, repair or maintenance of a building ... purporting to indemnify the promisee, its independent contractors, agents, employees, or indemnitees against liability for damages arising out of bodily injury or property damage proximately caused by or resulting from the sole negligence of the promisee, its independent contractors, agents, employees, or indemnitees is against public policy and unenforceable. Nothing contained in this section shall affect a promise or agreement whereby the promisor shall indemnify or hold harmless the promisee or the promisee’s independent contractors, agents, employees or indemnitees against liability for damages resulting from the negligence, in whole or in part, of the promisor, its agents or employees.
In reviewing the issues, the appellate court agreed with the trial court that the indemnification clause could not be enforced against the subcontractor. The court explained its reasoning as follows:
“The indemnification agreement in this case purports to require BFS to indemnify D.R. Horton for its own negligence in violation of section 32-2-10. Because the agreement violates the statute, we cannot require BFS to pay for damages caused by D.R. Horton.2 The inclusion of the illegal contractual indemnification term, along with an unreasoned award for damages only, proves fatal to D.R. Horton’s claim for indemnification. The record is devoid of any evidence presented to the arbitrator, and any attempt to devine the reasoning for the arbitrator’s award would be an exercise in speculation.”
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. 5 (May 2018). Copyright 2018, ConstructionRisk, LLC
Article 4
Statute of Limitations Began to Run on Date Homeowner Saw Rust on Roof and not from Date Leaking Began
See similar articles: Statute of Limitations
A homeowner sued the architect and contractor that designed and installed their metal roof, alleging defects due to negligence and breach of contract. The work was done 13 years before suit was filed. Just a year after installation the roof began leaking. The homeowner thought it was due to ice damming so they installed snow guards. Leaking continued in subsequent years and rust spots developed. The homeowner painted over the rust spots to help preserve the metal. When major leaks occurred almost 12 years after installation, the homeowner hired a builder to investigate the cause. He discovered widespread rusting on the underside of the metal panels and rotted underlayment, which in his opinion was due to inadequate insulation. Suit was then filed. The trial court granted a motion to dismiss because the 6 year statute of limitations had run.
This was affirmed on appeal with the court holding that within just a few years of installation the homeowners “were award of facts sufficient to lead a reasonable homeowner to investigate the condition of the roof.” The question is not when the plaintiff’s actually discovered the true nature of the roof defect, but rather when a reasonable person should have discovered it. Abajian v. Truexcullins, Inc., 176 A.3d 524 (Vt. 2017)
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. 5 (May 2018). Copyright 2018, ConstructionRisk, LLC
Article 5
Texas Certificate of Merit Requirement Does not apply to Third-Party Contribution Claims
See similar articles: Certificate of Merit | contribution claim | Texas | third-part claim
Engineer sued its client for unpaid fee. The client counterclaimed, alleging that engineering designs contained errors, omissions, and other deficiencies that caused the owner to sustain damages. The Engineer, while denying that there were any defects in the engineering services, filed a third-party contribution petitions against its engineering subconsultant and sub-subconsultant, alleging that if the Engineer was found liable to the owner it would be because of defective engineering and design services of the subconsultants. It did not file a certificate of merit with its third part claims. The subconsultants moved to dismiss the third party complaint for failure to file a certificate of merit, and the trial court granted their motions. This was reversed on appeal, with the appellate court explaining that the Texas statute does not apply to third-party petitions, cross-claims, or counter-claims, and holding here that a certificate of merit is not required to be filed with a third-party claim. Engineering and Terminal Services, L.P. v. Tarsco and Orcus Fire Protection, LLC, 525 S.W. 3d 394 (TX 2017).
The Texas Code, at section § 150.002, Tex. Civ. Prac. & Rem., entitled “Certificate of Merit,” provides:
In any action or arbitration proceeding for damages arising out of the provision of professional services by a licensed or registered professional, the plaintiff shall be required to file with the complaint an affidavit of a third-party licensed architect, licensed professional engineer, registered landscape architect, or registered professional land surveyor....
The Engineer asserted that it was not required to file a certificate of merit with its third-party petition against the subconsultants because the certificate mandate applies only to the original plaintiff when it initiates an action against a licensed or registered professional arising out of the provision of professional services. ETS’s original petition initiating the present lawsuit did not assert a claim against a licensed or registered professional arising out of the provision of professional services. Rather, ETS sought payment for services it provided to the project owner.
A key court precedent that was relied upon in the current appellate decision was Jaster v. Comet II Construction, Inc., 438 S.W.3d 554, which held that counter-defendants are not required to file certificates of merit. The court here explained that:
“[W]e believe that ETS’s status as the original plaintiff, who subsequently filed a third-party petition against new third-party defendants, is not a fact that distinguishes the present case from Jaster in a legally meaningful way. First, as noted above, ETS filed its original petition against Buckeye for breach of contract based solely on Buckeye’s alleged failure to pay for services. Thus, while ETS was certainly a “plaintiff”, it did not initiate an action for damages arising out of professional services by a licensed or registered professional at the time it filed its original petition.”
***
[Had] the Legislature intended the certificate of merit requirement to apply to a party filing a third-party claim in response to a counterclaim, it could have used the broader term “claimant” instead of using language that ties the requirement solely to the pleading that initiates the lawsuit.
***
Indeed, as a counter-defendant, ETS is situated similarly to the defendants in Jaster. Buckeye’s counterclaim was the first assertion of a professional-negligence claim by any party in this suit. If the Jaster defendants were not required to file a certificate of merit, then ETS, as a counter-defendant here, is not required to file a certificate of merit either.
***
In short, the principle identified in Jaster applies equally to plaintiffs, defendants, or counter-defendants acting as third-party plaintiffs. Under Jaster, Buckeye was not required to file a certificate of merit. Yet, TARSCO and Orcus would impose that burden on ETS when ETS’s third-party petition asserted merely that appellees owed contribution to ETS if, in fact, Buckeye proved its allegations that their work was faulty or defective and proximately caused damages. ETS did not assert fault with TARSCO’s and Orcus’s work separately from the defects alleged by Buckeye, and ETS did not allege damages greater than those alleged by Buckeye.
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. 5 (May 2018). Copyright 2018, ConstructionRisk, LLC
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