Inside this Issue

A1 - GC Had No Site Safety Liability Since it did Not Exercise its Retained Control Over the Job Site to Such an Extent as to Affirmatively Contribute to the Injuries of a Subcontractor's Laborer
A2 - Economic Loss Doctrine Bars Suit against Design Firm Where there is No Privity of Contract Regardless of Whether Designer Might Have Deviated from Industry Standards
A3 - Injured motorist cannot sue design professional for the alleged negligent design of roadway beyond the statute of repose that is applicable to improvements to real property
A4 - Common Law Indemnity Allows Surety to Maintain Claim against Architect for Loss Allegedly Caused by Architect’s Negligence
A5 - Failure to Follow Change Order Request Procedure Results in Design-Build Subcontractors Forfeiting Right to Recover Their Costs for Extra or Changed Work They Performed

Article 1

GC Had No Site Safety Liability Since it did Not Exercise its Retained Control Over the Job Site to Such an Extent as to Affirmatively Contribute to the Injuries of a Subcontractor's Laborer

See similar articles: Construction Managers | Independent Contractor | Jobsite Safety | Retained Control

Where a masonry subcontractor employee was injured by slipping on a plastering subcontractor’s wet scaffolding, the laborer sued the project general contractor (GC) alleging his injuries were caused by the GC’s negligence in sequencing and coordinating construction work at the site, and failing to call a “rain day” to protect workers from dangerous conditions caused by slippery surfaces. Summary judgment was granted for the GC and affirmed on appeal, on the basis that the GC did not exercise control of the jobsite in a way that affirmatively contributed to the laborer’s injuries. Although the evidence showed that the GC was responsible for coordinating and scheduling the work of subcontractors and had authority to direct that the scaffold be removed (and had even agreed that the scaffold could remain in the area where the laborer was working), this was not deemed sufficient by the court to raise an issue of triable fact as to whether the GC affirmatively contributed to the laborer’s injuries. Brannan v. Lathorp Construction, 206 Cal. App.4^th 1170 (2012).

In this case, the laborer pled causes of action for negligence and premises liability. His negligence cause of action alleged, among other things, Lathrop failed to coordinate and control the work being performed on the job site in a safe and proper manner, thereby creating a risk of injury to workers. He alleged he was forced to work in and around scaffolding that prevented and blocked his access to his work, causing him to fall. His premises liability claim was based on essentially the same facts.

The essential underlying facts of the case are that the masonry subcontractor’s employees were working at ground level laying brick veneer. The masonry had a foreman on site the day of the accident whose job it was to make sure the site was safe for the mason’s employees. He did not need authority from the GC to call off work if he saw something was unsafe. He was aware of the plaster scaffolding in the area where the employees were working. The scaffolding was not being used on the day of the accident, but the masonry employees were working around it. The foreman did not have safety concerns about his workers working around the scaffolding, but he did feel the scaffolding would slow down their work. He asked the GC before the accident when the plaster scaffold would be removed. The subcontractor foreman had the authority to call work off if he believed rain (or any other condition) made conditions unsafe, but had no concerns about the rain or wetness on the day of the accident other than that it slowed down the work. The foreman believed his crews could work around the plaster scaffold, and had no safety concerns about them stepping onto the scaffold rungs to get to the other side. The GC did not direct the foreman or the laborer on how the masonry was to be laid.

At the time of the accident, the laborer was trying to cross over the plaster scaffold to gain access so he could lay masonry in an area underneath it. He alleges he stepped up onto the second rung of the scaffold believing there was no other way to access the area in which he was working. No one told the laborer to gain access the way he did. He alleges he slipped off the rung because it was wet and his feet were muddy. He filed a workers' compensation claim shortly after the accident and subsequently filed this suit against the GC.

Citing a recent California Supreme Court decision of SeaBright Ins. Co. v. U.S. Airways, Inc. (2011), the court summarized what is known in California as the Privette– Toland doctrine as follows: “Generally, when employees of independent contractors are injured in the workplace, they cannot sue the party that hired the contractor to do the work.... By hiring an independent contractor, the hirer implicitly delegates to the contractor any tort law duty it owes to the contractor's employees to ensure the safety of the specific workplace that is the subject of the contract.” One of the doctrine's underpinnings is the availability of workers' compensation to the injured employee: “[W]hen the person injured by negligently performed contracted work is one of the contractor's own employees, the injury is already compensable under the workers' compensation scheme and therefore the [law] should provide no tort remedy, for those same injuries, against the person who hired the independent contractor….” Because the workers' compensation scheme shields an independent contractor from tort liability to its employees, “applying the peculiar risk doctrine [allowing suit against the hirer] to the independent contractor's employees would illogically and unfairly subject the hiring person, who did nothing to create the risk that caused the injury, to greater liability than that faced by the independent contractor whose negligence caused the employee's injury.”

The court went on to explain that “Thus, subject to certain exceptions, when a general contractor hires a subcontractor, the general contractor is not liable for injuries that occur to the subcontractor's employees.” The exception at issue in this case was one that was first explained in the case of Hooker v. Department of Transportation (27 Cal.4th 198, 2002), which stated, “Thus, subject to certain exceptions, when a general contractor hires a subcontractor, the general contractor is not liable for injuries that occur to the subcontractor's employees.” The exception in issue here is described in Hooker v. Department of Transportation (27 Cal.4th 198, 2012). “In Hooker, the court considered whether the hirer of an independent contractor could be held liable for injuries to the contractor's employee resulting from the contractor's negligence under the theory the hirer retained control of the work but negligently exercised that control. The high court held in Hooker ‘a hirer of an independent contractor was not liable to an employee of the contractor merely because the hirer retained control over safety conditions at a worksite, but was liable to such an employee insofar as its exercise of retained control affirmatively contributed to the employee's injuries.’ ”

What the court here concluded was that although the Defendant was responsible for coordinating and scheduling the work of subcontractors on the project, and had the authority to direct that the plastering scaffold be removed, this did not constitute affirmative contribution to the laborer’s injuries. The GC’s exercise of retained control in this instance, concluded the court, did not affirmatively contribute to the accident. “[GC] did not direct [laborer’s] work, and did not tell [laborer] to gain access under the plaster scaffold the way he did. Although [laborer] contends he was left with no other option than to climb over the rungs of the scaffold, that fact does not distinguish this case from Hooker.” The GC’s act of allowing the scaffolding to remain in place while the masonry work proceeded likewise was found not be an exercise of retained control over safety. Finally, the GC’s failure to call a rain day is also unavailing. As stated by the court, “The undisputed evidence showed “[the masonry] foreman had the authority to call a rain day himself without [GC’s] approval if he thought the conditions made the masonry work unsafe. [The foreman] testified he had no concerns about the rain or wetness in the work area the day of the accident other than that it slowed down the work. He did not have any safety concerns about his workers stepping onto the rungs of the scaffold to gain access to where they were working.”

For all these reasons, the court found the GC had not exercised its retained control over the jobsite to such an extent as to affirmatively contribute to the injuries, and, therefore, as a matter of law the case was correctly dismissed on a summary judgment motion without going to the jury for consideration of the factual merits of the matter.

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. 14, No. 10 (Nov 2012).

Article 2

Economic Loss Doctrine Bars Suit against Design Firm Where there is No Privity of Contract Regardless of Whether Designer Might Have Deviated from Industry Standards

See similar articles: Economic Loss Doctrine | Limitation of Liability | Privity of Contract

Suit was filed by an entity with an ownership interest in the project against two engineering firms that were subcontractors to one of the engineering firms that the general contractor (GC) contracted with to provide design services for a thermal energy system (an alternative air conditioning unit designed to make ice). Summary judgment was granted for the sub-subcontractor/engineers, and affirmed on appeal, holding that the economic loss doctrine was a complete bar to an action against the engineers for economic losses regardless of whether or not the plaintiff was in privity of contract with the designer and regardless of whether there were allegations that the designer failed to meet the standard of care in performing it services. The court found in favor of sanctity of the contract – holding that all entities on the project had the ability to negotiate contracts and the court would honor those contracts as written. The main engineering firm had a limitation of liability (LoL) clause in its subcontract with the GC limiting its liability to the amount of its fee. In this case, however, where the suit against the main engineer was not by the GC, with whom it had a contract, but was instead by a project related owner against subcontractors of the engineer with whom they had no privity of contract. The LoL clause therefore did not come into play. Affirming the application of the economic loss doctrine to bar such a suit, the court also stated that sub-engineers had no liability whatsoever because they owed no duty to anyone independent of their subcontracts. Even if the court was to find that the sub-engineers deviated from the applicable standard of care, it held that this would not constitute an exception to the economic loss doctrine. Leis Family Limited Partnership v. Silverword Engineering, 273 P.3d 1218 (Hawaii 2012).

This case pertains to the design, construction and installation of a thermal energy system in a building. The owner contracted with a general contractor (the “GC”) to provide construction services for the system. The GC subcontracted with the Dorvin Leis Company (the “Subcontractor”) to provide mechanical engineering and construction services related to the system and that firm in turn subcontracted with Silversword Engineering to design the system. The contract between the Subcontractor and Silversword Engineers contained a limitation of liability (LoL) clause providing, “To the maximum extent permitted by law, liability for [Subcontractor’s] damages will not exceed the compensation received under this Agreement.”

Silversword in turn further subcontracted down to two separate additional design firms (hereinafter “Sub-Engineers”) to provide design assistance and electrical engineering assistance respectively. An entity with an ownership interest in the project or system brought suit not against the GC or even the GC’s engineer, but rather against the sub-engineers, alleging professional negligence. The sub-engineers motion for summary judgment was granted and affirmed for numerous reasons as explained herein.

In beginning its analysis of the matter, the appellate court explained the premise of the economic loss doctrine which “bars recovery for purely economic loss,” stating that,

“It ‘marks the fundamental boundary between the law of contracts, which is designed to enforce expectations created by agreement, and the law of torts, which is designed to protect citizens and their property by imposing a duty of reasonable care on others’ [and] was designed to prevent disproportionate liability and allow parties to allocate risk by contract.’ ”

The appellant’s argument was that the economic loss doctrine does not apply to negligence claims against design firms that are not in privity of contract with the claimant. In the event, however, that the court was to determine that the doctrine applied, the plaintiff asserted an alternative argument that the doctrine should not apply to the facts of this case due to an exception to the economic loss doctrine where there has been a deviation from industry standards. Previous case law in the state had applied the doctrine in instances where there was privity of contract between the plaintiff and defendant. Now the court takes it one step further in specifically and affirmatively holding that the doctrine also applies where there is no contract between the parties to the suit.

Rejecting the appellant’s argument that because the claims against the engineers were based on allegations of negligence the economic loss doctrine would not be applied, the court concluded there was no independent duty of care owed. The court explained its position by quoting from a previous case precedent as follows:

“Under the economic loss, ‘a manufacturer in a commercial relationship has no duty under either a negligence or strict products liability theory to prevent a product from injuring itself’ [citations omitted]. Even in the absence of a privity of contract between the design professional and a project owner, the law does not impose a duty in tort if it would ‘disrupt the contractual relationships between and among the various parties.’” [citations omitted].

Because the appellant had the opportunity to negotiate contracts to its satisfaction with the GC and any of its subcontractors, “Its failure to do so, and irrespective of Appellant’s reasons for not bringing suit against those with whom it was in privity of contract, does not warrant creation of a duty in tort (negligence) on the part of the Designers.” Further, said the court,

“Allowing Appellants to recovery purely economic loss under a tort theory would allow a commercial project owner to recover product-related damages under a tort theory as a consequence of the owner’s deliberate choice not to contract with the third party (the design professional), but instead require the second party (the general contractor) to do so. There is no reason that we can perceive to make tort liability against design professionals contingent on the project owner’s election to hire a general contractor and thus ‘blur the distinction between contract and tort law.’”

In rejecting the appellant’s further argument that a “deviation-from-industry-standards” exception must be applied to the economic loss doctrine in this case, the court cited the important decision of the Nevada Supreme Court in the case of Terracon v. Mandalay Resort Group, that applied the economic loss doctrine to protect the engineer against large claims. The court in Terracon reasoned that the purpose of the doctrine was “to shield defendants from unlimited liability for all the economic consequences of a negligent act, particularly in a commercial or professional setting….” The Terracon court, as quoted by the court in this current case, stated:

“In the context of engineers and architects, the bar created by the economic loss doctrine applies to commercial activity for which contract law is better suited to resolve professional negligence claims. This legal line between contract and tort liability promotes useful commercial economic activity, while still allowing tort recovery when personal injury or property damage are present….”

…

“We perceive no significant policy distinction that would drive us to permit tort-based claims to recover economic losses against design professionals, such as architects and engineers, who provided their professional services in the commercial property development and improvement process, when we have concluded that such claims are barred under the economic loss doctrine if brought in physically constructing improvements to real property. The work provided by construction contractors or the services rendered by design professionals in the commercial building process are both integral to the building process and impact the quality of building projects. Therefore, when the quality is deemed defective, resulting in economic loss, remedies are properly addressed through contract law.”

In concluding that the Terracon holding is consistent with Hawaii law, the court here stated that,

“The application of the economic loss doctrine encourages parties to negotiate and state clearly the limits of their liability in a contract, and ‘preserves the right of design professionals to limit their exposure to liability through contract.’”

Perhaps most significantly, the court explained that no exceptions to the economic loss doctrine would be applied here. In its concluding paragraphs, the court’s decision states:

“[A] deviation from industry standards exception to the economic loss doctrine generally does not apply to design professionals. If work falling below industry standards was excepted from the economic loss doctrine, it would, for all practical purposes, destroy the design professional’s ability to contract for protection from liability. In virtually all suits in negligence against a design professional, the crux of the claim is that the design professional’s work product was substandard. Because a duty to conform to industry standards would run parallel to any contract, the design professional would constantly be subject to litigation, the costs of hiring a design professional would inevitably rise.”

For the reasons explained herein, the court affirmed that the economic loss doctrine was properly applied to bar the suit against the engineers.

Article 3

Injured motorist cannot sue design professional for the alleged negligent design of roadway beyond the statute of repose that is applicable to improvements to real property

See similar articles: Highway Design Safety | Jobsite Safety | Statute of Repose | Third Party Beneficiaries

Suit against a design professional by a motorist that was injured due to an out-of-control drunk driver in a January 2009 accident was dismissed because the design services of the professional had been performed more than eight years before the accident, and the eight year period established by statute of repose for actions involving “improvements to real property” was found applicable by the court. In Feldman v. Arcadis US, 728 S.E.2d 792 (Ga. 2012), the basis of the suit was the alleged negligent performance of design services for a stretch of highway. The primary issue to be decided by the court was whether highway design and construction should be deemed an “improvement to real” property as that term is used in the relevant state statute. Because “the road is permanent in nature and added value to the property by allowing the public to efficiently traverse the county,” the court found it was indeed an “improvement.” The court explained that “Although it is true that no one actually lives on the road in order to “occupy” it …, countless vehicles traverse the road each day, and such daily public “occupation” in this manner would lead to the discovery of any such flaw within the reasonable time frame as a design flaw in a building.” Therefore, applying the statute of repose is appropriate since “The statute of repose serves to limit the time for discovery of a design or construction flaw to a reasonable number of years, because such flaws would be discovered through the normal use of an improvement….”

The state statute of repose in this case states:

No action to recover damages: (1) For any deficiency in the survey or plat, planning, design, specifications, supervision or observation of construction, or construction of an improvement to real property; (2) For injury to property, real or personal, arising out of any such deficiency; or (3) For injury to the person or for wrongful death arising out of any such deficiency shall be brought against any person performing or furnishing the survey or plat, design, planning, supervision or observation of construction, or construction of such an improvement more than eight years after substantial completion of such an improvement.

Article 4

Common Law Indemnity Allows Surety to Maintain Claim against Architect for Loss Allegedly Caused by Architect’s Negligence

See similar articles: indemnity | Indemnity at Common Law | Performance Bond | Surety

Where a General Contractor that entered into a contract with a nursing home was required to have a performance bond from a surety company (Safeco) and was default terminated by the project owner, the surety completed the project and sued the “obliges” under the bond, and the project architect to recover the cost of approved change orders. As basis for the claim against the architect, the surety claimed common law indemnity rights based on the architect having a “special relationship”, with the contractor and surety – and therefore commensurate responsibilities. The court dismissed the architect’s motion for summary judgment, concluding that the surety can maintain a claim against the architect where the allegations are that the architect’s professional negligence caused or contributed to the loss.

For a party to succeed on a claim of common law indemnity, the court explained that the party must satisfy a two-prong test. First, the party seeking indemnification must be without fault, and its liability must be vicarious and solely for the wrong of another. Second, indemnification can only come from a party who was at fault. Safeco alleged that as a professional architect, the architect in question here supervised the project and had a special relationship with the contractor and with Safeco as a surety for the contractor and owed them both a duty of care in the design of the project and in contract administration. Safeco Insurance Company of America v. Victoria Management, LLC, 2012 WL 1606101 (S.D. Fla. 2012).

Article 5

Failure to Follow Change Order Request Procedure Results in Design-Build Subcontractors Forfeiting Right to Recover Their Costs for Extra or Changed Work They Performed

See similar articles: Change Orders | Contract Procedures | Design-Build | Procedural Requirements | Quantum Meruit

Two design-build cases decided by the federal district courts in Virginia dismissed suits by subcontractors to recover for extra or changed work they performed, because even though there was no question that the work was performed and that the prime contractor and project owner benefitted from the extra or changed work, the subcontractors failed to follow the specific contractual procedures that required timely written request for change orders. In Carolina Conduit Systems, Inc. v. Mastec North America, Inc., 2011 WL 5042082 (E.D. VA Richmond Div. 2011), Carolina Conduit was a conduit supplier and installer under subcontract to Mastec on a Dominion Virginia Power project. Carolina determined shortly after beginning its work that the “project could not be built as designed” and that due to the field conditions encountered, there were numerous duct banks that would have to be installed in a horizontal configuration instead of vertically.

Instead of submitted a formal change order request, the subcontractor’s president met with the prime’s project manager and discussed the issue and was told “not to worry” about the extra costs “because plenty of funds were available.” In apparent reliance upon that response, the subcontractor completed its work in the more expensive manner, but when it ultimately invoiced the extra costs, the prime contractor rejected the invoice. In response to the subcontractor’s suit for breach of contract, the prime moved for summary judgment, arguing that the extra work claimed by the sub actually fell within the scope of the subcontractor’s services under its contract, but that if not, then the subcontractor was required by contract to submit a formal change order request, which it failed to do.

In reviewing whether the work was within the fixed price scope of services, the court stated that even if the work could not be performed as set forth in the design documents, the subcontractor was already aware of that before it signed the contract. It admitted that it learned that some duct banks would have to be constructed horizontally instead of vertically over four months before signing the Subcontract. It seems the court could have decided the case against the subcontractor based on that determination alone and stopped right there with its decision, but instead, the court went further to focus more on the subcontractor’s failure to follow the change order submittal process.

The court stated that “Virginia law provides that contractual provisions containing written change order requirements are binding upon the parties to the contract” and quoted case precedent that “where there is a method under the contract by which a party can insure the recovery of the cost of extra work, that party is not entitled to recovery where it fails to follow that method.” In the instant case, said the court, the subcontractor failed to provide evidence that it submitted change orders for the extra work at issue and also failed to prove that the parties had agreed to waive the change order procedure. In fact, the change order had been properly followed by the parties for other changed work on the project, and there was no evidence that the parties modified the subcontract through their course of dealing. The subcontractor offered no examples or evidence of any other instances where the prime contractor disregarded the change order provision as to the project. For these reasons, the subcontractor was not entitled to recover for its extra costs on the basis of breach of contract.

Quantum meruit was also argued by the subcontractor as an alternative basis for recovery, based on deserving to be paid the value of the services it provided, and because the prime contractor would otherwise be unjustly enriched. This was rejected by the court because when there is a written contract that governs the relationship there can be no basis for an equitable claims for relief outside the terms of the contract based on the theory of quantum meruit. As stated by the court, “Where a contract governs the relationship of the parties, the equitable remedy of restitution grounded in quasi-contract or unjust enrichment does not lie.”

Interestingly, another design-build decision addressed very similar issues and was decided the same month by another U.S. District Court in Virginia (SNC-Lavalin America, Inc. v. Alliant Techsystems, Inc., 2011 WL 4895217 (W.D. Va, Roanoke Div. 2011). In this case, certain work could not be performed as anticipated by the parties, and the project owner ultimately evaluated several alternatives suggested by the contractor and chose one of those. Design and construction changes were approved by the Owner but the parties were unable to agree on the additional costs required to install an acid-resistant concrete. The contractor nevertheless proceeded to perform the work requested by the owner.

Ultimately, the contractor sued for breach of contract and the owner moved for summary judgment, arguing that to the extent the contractor was seeking damages resulting from the owner’s delay in deciding to install acid-resistant concrete and the additional time required to install the floor covering, those damages would be barred by the contractor’s failure to comply with the contract’s written notice requirements. The court agreed. It cited the contract which stated “[f]ailure to provide written notice within the prescribed time period will serve as an absolute bar and complete waiver of Contractor’s right to recover for any increases in the Contract Price or Contract Time resulting from the change.” (Terms and Conditions Section 12.4.)

Moreover, even though the change was an “Owner-Directed Change” the court concluded that was of no consequence with regard to relieving the contractor of the obligation to submit a formal change order request for the change and the resultant compensation requested. The court went through a detailed review of the changes provisions of the contract and concluded that Owner-Directed Changes are just one category of change in which contractors must follow the normal written change order procedures. For these reasons, summary judgment was granted against the contractor on the extra costs claimed.

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ConstructionRisk.com Report (Nov 2012)