Inside this Issue

A1 - CM Did not Breach Fiduciary Duty and was Entitled to Recover for Delay Period Caused by Client
A2 - Subcontractor Permitted to File Suit against Project Owner Corporation and Corporate Officer in Individual Capacity
A3 - AIA Contract Clause Setting Time Limit to Bring Suit after Substantial Completion Upheld
A4 - A/E Statutory Duty to Safeguard Public Safety and Welfare Does not Establish a Duty of Care Owed to Specific Condominium Purchasers

Article 1

CM Did not Breach Fiduciary Duty and was Entitled to Recover for Delay Period Caused by Client

See similar articles: Construction Manager | Equitable Adjustment | Fiduciary Duty | Unjust Enrichment

On a home building project in excess of $5 million, the homeowner contracted with a construction manager to oversee the project for a $375,000 fixed fee for a specified scope of services that included preparing a budget, soliciting bids for major contracts, supervising and coordinating construction, ensuring that materials and workmanships met quality, and supervising completion of punch list items. Fiduciary language was included in the agreement that provided that the CM “shall, at all times, act in a fiduciary relationship of trust and confidence” with the homeowner. The owner alleged the CM breached its fiduciary duty based on several allegations including, it (1) failed to solicit competitive bids for major contracts; (2) improperly reserved work for itself without seeking competitive bids; (3) didn’t prepare a revised budget; (4) didn’t perform certain CM services; (5) improperly installed a water line; and (6) exceeded the amount allocated in the estimate for “direct overhead.”

Both the trial court and appellate court found that the homeowner failed to present sufficient evidence to support the allegations of breach of fiduciary duty. Although the court, in fact, found that the CM had indeed failed to do some of the items alleged, it also found that the homeowner had accepted the work the way it was performed without complaint at the time it was performed and didn’t take up the CM on its offer at that time to correct certain issues. In this regard, the trial court had concluded that the parties had modified the terms of the contract by their actions, and thereby relieved the MD from its obligation to provide certain services within the scope of the work. Spagnuolo Builders v. Martinelli, 2013 WL 1776080 (NJ 2013).

The court found in favor of the CM on its claim for payment of the balance of the contract that the owner had withheld. Moreover, the court found the CM was entitled to additional fees and costs due to having to perform its services for a much longer period of time than bargained for. The trial court stated that although the scope of work had not changed, the owner was nevertheless required to pay the CM an equitable adjustment for the extra time in which it was required to provide the services. The contract time changed from an anticipated 14 -18 months into an ultimate 31 months.

The appellate court agreed, and explained, “We are nevertheless convinced that the award of additional fees to the [CM] was warranted as an equitable remedy to avoid unjust enrichment. This remedy may be employed when, as in this case, a contract does not expressly provide for remuneration.” The court concluded that it was appropriate for the CM to recover on the basis of unjust enrichment because it had showed that the owner “received a benefit and that retention of that benefit without payment would be unjust.”

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. 15, No. 10 (Oct 2013).

Article 2

Subcontractor Permitted to File Suit against Project Owner Corporation and Corporate Officer in Individual Capacity

See similar articles: Misrepresentation | Third party beneficiary | Ultra Vires

Subcontractor suit was permitted against a project owner as well as an officer of the project owner in his individual capacity for negligent misrepresentation on the basis that the project owner had represented the General Contractor to be acting on behalf of the Owner as an agent with authority to issue change orders. It is unusual for a subcontractor to have an action directly against the owner instead of having to sue the general contractor that employed it. But this was a unique situation. The allegations were that the corporate officer entered into a contract with the GC to obtain a reduced price for construction of his personal home in exchange for the GC inflating his compensation under a separate contract for an auto park that the corporate officer was having built for his corporation. Coppola Construction v. Hoffman Enterprises, 721 A.3d 480 (Ct. 2013).

It was alleged that the officer entered into a scheme to obtain lower bid estimates in an attempt to have the bank fund the auto park initially and then to provide change orders after the fact to force the bank into further financing. The subcontractor averred that it was not aware of the scheme and was promised by the officer that he would pay for all change orders and extras that were ordered. Later, however, the officer alleged that the GC was not his agent for purposes of the construction of the auto park and did not have authority to act on his behalf.

The court held that the subcontractor complaint was sufficiently pleaded to allow it to go forward on a claim of negligent misrepresentation against the corporation. And the claim could also go forward against the corporate officer as an individual because the allegations were sufficient that his actions were taken “in an independent capacity or ultra vires… in a personal capacity to assist him in completion of his residence…., and that he “would pay for change orders and extras with respect to the construction of the auto park, and that the GC was his agent for purposes of the construction project.”

Article 3

AIA Contract Clause Setting Time Limit to Bring Suit after Substantial Completion Upheld

See similar articles: Freedom of Contract | Statute of Limitations | Time Limitations

Where a hotel developer agreed by contract with its builder to limit the time for filing suits to four years following substantial completion, a California court of appeal held that this did not conflict with public policy. Parties are permitted the freedom of contract to forego the rights they might have otherwise had, based on late discovery of a latent discovery, to bring a suit many years after substantial completion. In Brisbane Lodging v. Webcor Builders, 216 Cal.App.4^th 1249 (Cal. 2013), the court explained that although courts around the country have upheld and enforced contract provisions similar to the one in question here that limit the time for filing suit, the California courts had not yet been confronted with the question.

Having reviewed the facts and the law, the court concluded the provision in the standard form AIA contract used here, which essentially abrogated the delayed discovery rule by stating that the statute of limitations began to run on the date of substantial completion, was not contrary to public policy, and would, therefore, be enforced as bargained for by the parties.

In this matter, the hotel developer and Webcor entered into a contract in 1999 for the design and construction of a hotel. The contract was based on the 1997 standard form AIA contract that contained a provision stating, “any applicable statute of limitations shall commence to run and any alleged cause of action shall be deemed to have accrued in any and all events not later than such date of Substantial Completion.”

In early 2005, the developer learned of a kitchen sewer line break that caused waste to flow under the hotel. It notified Webcor who undertook temporary repairs and then instructed its subcontractor to make permanent repairs. In October 2007, the developer again notified Webcor of sewer problems. At that time, Webcor retained to the site and learned that its subcontractor had installed ABS pipe instead of the cast iron pipe that had been specified.

The developer then filed suit against Webcor for breach of contract, negligence, and breach of implied and express warranties. Webcor moved for summary judgment based on the time limitations of filing suit that were established by the contract. The trial court ruled as a matter of law that the contract clearly and unambiguously abrogated the delayed discovery rule, and barred the suit.

In the appellate decision affirming the summary judgment for Webcor, the court analyzed court decisions from other states that have affirmed the enforceability of the AIA contract language, and it went to great length to explain the deference granted to AIA contract language by the courts, by stating the following:

“This provision is the AIA standard accrual provision and, at the time, was in wide usage throughout the United States. It has been recognized that ‘for the construction industry the standard form contract – particularly the AIA Standard Document set—has in several respects served as a surrogate for a commercial code. The AIA contract developed gradually over the generations in company with an expanding body of experience in the field and in the courts, and was adopted verbatim, adapted, or parroted in a vast percentage (perhaps the majority) of private commercial contracts. It offers industry actors a degree of coherence, certainty and uniformity. Depending upon one’s point of view, it may also serve as a backdrop for performance which more or less reflects commercial realities and competing participant concerns.”

Comment: In addition to supporting the freedom of contract between commercial entities, the case certainly is supportive of the benefits of using AIA contract forms as a basis of creating a coherent contract that can be uniformly understood and applied. There would probably be less litigation over confusing and ambiguous contract forms if more project owners would rely upon AIA documents instead of inventing their own unique forms.

Article 4

A/E Statutory Duty to Safeguard Public Safety and Welfare Does not Establish a Duty of Care Owed to Specific Condominium Purchasers

See similar articles: Condominium | Duty of Care

Suit by Condominium Owners Association (COA) against consulting firm that prepared a property condition assessment (PCA) was dismissed by court on summary judgment motion for failure to show that consultant owed a duty of care to the condominium owners who purchased their units from a firm for whom the consultant previously prepared a PCA. The primary argument of the condominium association was that the consultant was providing engineering and consulting services when it prepared the PCA, and pursuant to state statute requiring engineers “to safeguard life, health, and property and promote the general welfare,” it owed a duty of care to the condominium purchasers. The association also cited a state statute of care for architects that states, “when practicing architecture, you must act with reasonable care and competence, and must apply the technical knowledge and skill which is ordinarily applied by architects of good standing, practicing in the same locality.”

Quoting from previous case precedent the court stated, “The broad pronouncements that engineers owe a general duty to the public welfare alone do not establish that engineers owe a duty to any identifiable group or individual.” And the court concluded, “The COA has not met its burden in articulating how the broad pronouncements in [the statute], which relates to engineers, impose a duty that [consultant] owed to the unit owners.” The court went on to explain that when the consultant entered into its contract with its client to do the property condition assessment, the condominium association was not its client or employer – and the purchase of the apartments and their conversion to condominiums had not yet even occurred. “Under these circumstances, there is simply no showing of any duty owed under the statutory or regulatory provisions on which the COA relies.” Madera West Condominium Association v. Mark/Okubo, 175 Wash. App. 1032 (Wash. 2013).

Comment: The condominium here asked the court to impose a duty of care in its favor by virtue of the quoted statute concerning a general duty of care owed to the public. But to prevail, the association was required to demonstrate that the condominium owners were within the class of persons the statue was enacted to protect. Just the fact that the consultant owed a general duty to the public does not, standing alone, establish a duty of care to an identifiable individual such as a condominium unit owner in this case.

It is because of cases like this one where condominium owner associations and unit owners seem to have a greater propensity to sue consulting firms that provided services for an original apartment house owner, that consultants may be concerned about the prospect that their client might convert a building into a condominium. Some consultants have sought assurance that their client does not intend to convert to condominiums, or if there is a chance of that happening, may require special limitations of liability and indemnification in the event such a conversion occurs.

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ConstructionRisk.com Report (October 2013)