Inside this Issue
- A1 - Liquidated Damages Imposed on Contractor Even Where Contract was Terminated for Convenience and There was No Proof of Actual Damages
- A2 - Court Holds New Jersey Affidavit of Merit must be from Like-Licensed Professional
- A3 - Private Engineering Firm that Functioned as City Engineer Entitled to Official Immunity
- A4 - Indemnity Clause Void & Unenforceable Because Sub was not Sole Cause of Damages
- A5 - Economic Loss Rule Bars Concrete Supplier's Claim Against Design Engineer
Article 1
Liquidated Damages Imposed on Contractor Even Where Contract was Terminated for Convenience and There was No Proof of Actual Damages
See similar articles: Delay | Liquidated damages | Notice Requirements | Termination for Convenience | Time of the Essence
Kent Holland, J.D.
ConstructionRisk, LLC
Where a contractor was late in performance, a town terminated the contract for convenience and subsequently claimed liquidated damages (LDs) against the contractor. Both the trial court and appellate court concluded that the town’s election to exercise the termination for convenience clause of the contract did not forfeit its right to claim liquidated damages. In addition, the town was not required to prove that it suffered actual damages or the amount of damages suffered. Change orders in which the contractor made reference to future entitlement for time extensions, because owner caused part of the delays, failed to satisfy the contractually imposed notice requirements for submitting a claim, and therefore did not relieve the contractor from LDs. Old Colony Construction, LLC v. Town of Southington, 113 A.3d 406 (Connecticut 2015).
The contractor argued that the town was barred from collecting LDs because (1) the termination for convenience precluded any default based remedies, such as LDs, that might have otherwise been available to the town, and (2) the town contributed to the delay.
Notice Requirements not Satisfied to Preserve Delay Claim
The argument about town contribution to the delay was quickly disposed of by the appellate court finding that to make that argument the contractor was required to have made a detailed formal notice of request for equitable adjustment when it was being impacted. The contract had a set procedure for doing so. Although the contractor received certain change orders that itemized unit costs for additional work, the contractor merely included on the order directly above the cost details, a heading of description that the court said “noted ... the impact to the schedule had not been determined and that additional time was warranted or would be incorporated into the schedule. Nothing in the change orders indicated how much additional time would be warranted or whether further documentation would be necessary.” This, said the court, did not constitute mutual assent by the town that additional time would be granted. As seen by the court, the contractor filed to strictly comply with the notice and claim requirements for obtaining adjustments due to delay. The approved change orders did not preserve a time extension claim under the circumstances.
Liquidated Damages Not Eliminated by Termination for Convenience
The contractor argues that as a general principle a project owner cannot legally terminate a contract for convenience but also claim liquidated damages as though the contract had been terminated for default. The court considered that argument but decided regardless of the “abstract proposition” of law argued by the contractor, “the present case is governed by the express terms a contract under which the town may recover liquidated damages.”
The liquidated damages provision of the contract stated that the parties recognized that time is of the essence of the agreement and that the town would suffer financial loss if the work was not completed within the times specified. The clause also stated that the parties recognized the delays, expense, and difficulties involved in proving the actual loss suffered by the town if work was not completed on time and stated, “Accordingly, instead of requiring such proof, [the town] and contractor agree that as liquidated damages for delay (but not as a penalty) [contractor] shall pay [the town $400] for each day that expires after the time specified … for substantial completion.”
After the contractor was seriously late in performance, the town opted to terminate the contract for convenience. In doing so it relied upon a contract clause that provided, “Upon seven days written notice to [contractor] and ]the project engineer], [the town] may, without cause and without prejudice to any of the right or remedy of [the town], elect to terminate the contract.” Applying this language about preserving its rights, the court found that the preservation of remedies must be given full effect absent evidence of a more limited intent that was not shown here.
In holding that the termination for convenience clause did not operate to cut off the town’s rights to assess LDs in this instance, the court explained that there are a number of court decisions holding that a project owner cannot have it both ways – to terminate the contract for its own convenience but to then treat the contractor like it had been terminated for default and assess reprocurement costs and other actual damages that the contractor might have been able to mitigate if it had been given a cure notice as required before default termination. But where, as here, the delay had already occurred and the contractor already owed the LD’s before the contract was terminated, there could be no prejudice or harm to the contractor by terminating it for convenience and not giving it a cure period. There was nothing to correct. The delay had already occurred and the LDs were owed. Therefore, the court declined to apply case law that might have otherwise treated the contractor differently due to the termination for convenience.
Owner Need Not Prove Actual Damages to Recover Liquidated Damages
The court rejected the contractor’s argument that the town could not prevail on its claim for liquidated damages in the absence of a specific finding, or proof, of actual loss. The contractor relied on an earlier court decision that held that “no provision in a contract for the payment of a fixed sum as damages, whether stipulated for as a penalty or as liquidated damages, will be enforced in a case where the courts sees that no damage has been sustained.” But in that earlier decision, the court went on to say, “This is not to say that any burden is placed on a plaintiff to prove actual damage in order to recover under a valid contract for liquidated damages. The proposition is only that equitable principles will be invoked to deny recovery when the facts make it apparent that no damage has been suffered.”
In the present case, the court concluded that the record did not support a finding that “no damage has been suffered” by the town, and, “Moreover, we note that requiring proof of actual damages is in direct tension with the rationale for permitting liquidated damages.”
Comments:
This decision provides useful guidance on several different legal principles, including:
(1) Obtuse or vaguely worded reservations of rights in change orders to submit a future request for equitable adjustment for time extension are likely insufficient to preserve rights. If a contractor intends to reserve rights to delay it needs to say so, and if the contract has requirements concerning the details of what must be submitted and when it must be submitted, those requirements must be satisfied.
(2) A contract can grant a party certain specific rights such as terminating a contract for convenience but also reserve all rights the party might have had – including the right to assess liquidated damages. In this regard, remedies and damages can be cumulative rather than exclusive. It is important to negotiate the contract to determine what is intended in that regard.
(3) Actual damages need not be proved in order for liquidated damages to be enforced by a court. Indeed, as this court explains, one of the benefits of establishing a liquidated damages provision is that it is used when the parties believe it will be difficult to prove what actual damages are. It is a useful tool and one that is respected by courts.
(4) There is some good dicta in this case suggesting that in the event that it can be proved that there were no actual damage whatsoever resulting from the delay, a court could deny the imposition of LDs since that would in fact look just like a penalty and nothing more.
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. 17, No. 6 (September 2015).
Copyright 2015, ConstructionRisk, LLC
Article 2
Court Holds New Jersey Affidavit of Merit must be from Like-Licensed Professional
See similar articles: Affidavit of Merit | Certificate of Merit | Expert
Gail S. Kelley, J.D., PE
ConstructionRisk, LLC
As of 2015, about a dozen states have passed so-called “Certificate of Merit” laws that establish a threshold requirement for filing professional negligence claims against design professionals. These laws, which evolved from the tort reform movement of the 1980’s and 1990’s, can provide valuable protection to design professionals. A recent case in New Jersey, Hill Intern., Inc. v. Atlantic City Bd. of Educ., 438 N.J. Super. 562, 106 A.3d 487, provides insight into that state’s law as well as the general principles of these laws. Most significantly, in this decision, the court held that the affidavit of merit must be from a professional having the same kind of professional license as the defendant who is being accused of negligence.
Background
After its contract for a New Jersey school construction project was terminated for default, the general contractor (GC) sued the school board for breach of contract. The GC also sued the architectural firm and an architect at the firm, alleging that the architects wrongfully induced the school board to breach the construction contract and negligently deviated from professional standards in both the design of the project and the administration of the contract. The GC alleged that the School Board and the architects “impeded and interfered” with its ability to complete the Project on schedule. These impediments allegedly included:
errors and omissions and lack of coordination and direction in the plans and specifications; failures to timely secure permits and approvals for the Project; failures to timely process Cobra's applications for payment; and failures to timely grant proper change order and time extension requests.
The architects filed a motion to dismiss, stating that the GC had not complied with New Jersey’s Certificate of Merit law because the required affidavit of merit (AOM) had been obtained from an engineer rather than an architect. The trial court denied the motion, holding that there was considerable overlap between the practice of engineering and the practice of architecture, and the engineer in question had sufficient experience in the matters for which he had supplied the affidavit. The architects appealed and the Appeals Court reversed the decision.
Basis for the Appeal
Under New Jersey’s Certificate of Merit law (N.J.S.A. 2A:53A), a plaintiff pursuing a professional negligence case against certain types of professionals must file an affidavit of merit from an appropriate licensed person. Section 26 of the law lists the various professions that are covered. Engineers and architects are listed separately; the list also includes lawyers, accountants and physicians. Per Section 27 of the law:
“In any action for damages for personal injuries, wrongful death or property damage resulting from an alleged act of malpractice or negligence by a licensed person in his profession or occupation, the plaintiff shall, within 60 days following the date of filing of the answer to the complaint by the defendant, provide each defendant with an affidavit of an appropriate licensed person that there exists a reasonable probability that the care, skill or knowledge exercised or exhibited in the treatment, practice or work that is the subject of the complaint, fell outside acceptable professional or occupational standards or treatment practices.
… the person executing the affidavit shall be licensed in this or any other state; have particular expertise in the general area or specialty involved in the action, as evidenced by board certification or by devotion of the person's practice substantially to the general area or specialty involved in the action for a period of at least five years.”
[N.J.S.A. 2A:53A–27 (emphasis added by the Appeals Court).]
The law is designed to thwart baseless lawsuits against professionals by requiring an affidavit from “an appropriate licensed person” who attests to a “reasonable probability” that the defendant's conduct deviated from the relevant professional standards of care. However, the law does not define an “appropriate licensed person.” In explaining its decision that the AOM must be from a like-licensed professional, the Appeals Court in this case stated:
Construing the AOM statute to require such like-licensed affiants is consistent with norms of fairness as well as a recognition of the reasonable expectations of a licensed professional. A licensee practicing within his or her profession or occupation who makes a mistake and harms another person should reasonably anticipate that he or she can be held to account for that mistake by the professional board that has issued him or her a license to practice. The board may revoke, suspend, or otherwise take adverse action against the licensee, applying the profession-specific laws and regulations that are administered by that board. … The professional has a right to expect that those standards of care by which his or her conduct will be measured will be defined by the same profession in which he or she holds a license, and not by some other profession.
The Appeals Court noted that architects and engineers are designated separately in Section 26 of the law and that this was consistent with the fact that there are different licensing laws for architects and engineers. Under New Jersey law, the State Board of Architects is authorized to issue licenses to architects and regulate their professional activities. A separate board, the State Board of Professional Engineers and Land Surveyors, regulates engineers. In addition, the laws governing the practice of architecture are different from the laws governing the practice of engineering. Although these laws acknowledge that the two professions have a degree of common ground, their licensure requirements and core areas of practice are different.
Exceptions to the Requirement for an AOM
An AOM is not required when the defendant professional's allegedly negligent conduct did not implicate the standard of care within the defendant’s profession. In such cases, the allegedly negligent conduct would be “ordinary negligence” as opposed to professional negligence. The Appeals Court cited Murphy v. New Road Construction, 875 A.2d 955 as illustration of this principle. In Murphy, an architectural firm working for a construction management firm was sued by a worker who had fallen off a roof. The court ruled that an AOM was not required if the architectural firm’s involvement in the accident arose from assisting the construction manager, as opposed to being part of their responsibilities as an architect.
Likewise, an AOM is not required when a plaintiff's allegations against a professional are based on “common knowledge” and do not require proof of a deviation from a professional standard of care. An example would be when the professional allegedly engaged in fraudulent billing.
Another exception to the general need for an AOM arises when the claim against the professional does not involve negligence but instead rests on another theory of liability. For example, if a licensed professional intentionally spread falsehoods about a client who refused to pay its bill, an AOM would not be required to support a defamation claim against the professional. Such intentional wrongdoing is outside of the sphere of professional malpractice litigation that the law is designed to regulate.
Appeals Court’s Ruling
Despite the GC’s failure to supply an AOM from an appropriate licensed professional, the Appeals Court did not dismiss the GC’s claim. Instead, the Court remanded the case to the trial court to allow the GC an opportunity to procure a suitable AOM.
The court noted that it was doing so for two reasons. First, because the law was unclear, the GC’s counsel might not have been readily predicted that the court would require an AOM from an architect. Second, the trial court did not conduct a required case management conference. Under New Jersey law, the trial court in professional negligence cases must conduct a case management conference before the expiration of the time in which the plaintiff is required to file its AOM. The conference is to remind the plaintiff's counsel that it needs to file an AOM, or, if an AOM has already been filed, to determine whether the defendant’s counsel has any objections to it. The Appeals court felt that the lack of this conference contributed to the GC’s failure to supply a substitute AOM in a timely fashion.
About the Author: As a professional engineer, Gail Kelley has performed structural design and analysis of post-tensioned structures, has performed constructability reviews, due diligence inspections, and condition assessments, and has provided litigation support for construction defect and delay claims in both state and federal court. She received her B.S. in Civil Engineering from Cornell University, and Master of Science in Structure and Materials from Massachusetts Institute of Technology (MIT), and she received her Juris Doctorate from American University, Washington College of Law. She provides risk management services for ConstructionRisk, LLC. This article is published in ConstructionRisk.com Report, Vol. 17, No. 6 (September 2015).
Copyright 2015, ConstructionRisk, LLC
Article 3
Private Engineering Firm that Functioned as City Engineer Entitled to Official Immunity
See similar articles: Immunity | Official Immunity | Sovereign Immunity
Kent Holland, J.D.
ConstructionRisk, LLC
Where a city retained a private engineering firm to perform the services of “City Engineer,” including to “provide planning, design, and construction related services for public improvement projects.” Acting as city engineer, the firm designed and approved storm-drainage improvements for a town house development. About ten years after construction, a severe rainstorm caused damage to the home of a property owner adjacent to the town houses. The Owners sued the city, alleging negligence in designing, approving and constructing the storm-drainage system. The trial and appellate courts found that the city was “vicariously immune to the [ ] negligent design claim because [the engineer] was immune under the common-law doctrine of official immunity for its design while acting as the city engineer.” Kariniemi v. City of Rockford, 863 N.W. 2d 430 (Minnesota 2015).
In analyzing whether the official immunity doctrine would be applied, the court looked to a United States Supreme Court decision for guidance (Filarsky v. Delia, 132 S.Ct. 1657 (2012). In that decision, the Supreme Court reviewed the common-law doctrine of the official immunity doctrine, noting that in the nineteenth-century, local governments were to a significant extent administered by members of society who temporarily or occasionally discharged public functions. Accordingly, the Supreme Court noted that “the common law did not draw a distinction between public servants and private individuals engaged in public service in according protection to those carrying out government responsibilities.”
In applying the reasoning of the Filarsky decision, the Minnesota court in this case concluded that because the engineering firm was functioning as the city’s engineer, it enjoyed official immunity for discretionary acts in the role, including its design of the storm-drainage system. Official immunity, notes the court, “protects the kind of discretion that is exercised on an operational rather than policymaking level.” “Design involves the application of expertise and discretion, balancing the often-competing considerations of cost, quality, and aesthetics….”
It did not matter to the court that the particular engineering firm in question could also be tasked under its contract with construction activities since it was not defective construction that was at issue in this case but rather the design decisions that went into the construction.
With regard to whether the immunity would extend to contractors doing construction work, the court said, no – it would not. The court stated, “For example, an architect prepares blueprints, and a builder executer the ‘specific duty arising from’ the design specified by those blueprints. Although the role of builder undoubtedly involves application of considerable skill and expertise, it cannot be said to be the same kind of discretion vested in the architect. The architect's role is professional., the builder's ministerial. Accordingly, armoring the architect with official immunity does not require also armoring the builder.… Similarly, holding that a road-construction contractor functioning as city engineer would be protected by official immunity for the design of a roadway does not in itself foreclose liability for defects in the same contractor's construction of the roadway.” For these reasons, the court concluded that the plaintiff’s “argument about destroying Minnesota’s Municipal Tort Liability Statute by extending official immunity to contractors performing city functions is therefore overblown.”
Lesson Learned: It seems that an increasing number of contracts between design firms and municipalities that we have been reviewing lately have included a provision requiring the designer to waive any right to claim the type of immunity described in this decision that it might otherwise have at common-law. I don’t understand why governmental bodies who are contracting their discretionary functions to consultants would want to deprive those consultants of the protection afforded by the immunity laws. This decision shows the importance of negotiating to strike such a waiver of rights from the contract.
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. 17, No. 6 (September 2015).
Copyright 2015, ConstructionRisk, LLC
Article 4
Indemnity Clause Void & Unenforceable Because Sub was not Sole Cause of Damages
See similar articles: Anti-indemnification Statute | Condominium Defects | Contributory Negligence | Indemnification clause
Kent Holland
ConstructionRisk, LLC
On a condominium project, where an indemnification clause on its face made a subcontractor responsible for indemnifying the prime contractor for damages caused “in whole or in part” by the subcontractor, it was held that the state’s anti-indemnity statute made the clause unenforceable. The court declined to apply the saving language that introduced the contract clause with, “To the fullest extent permitted by law,” to “blue line” the clause to pare it down to what would have been allowed under state law. Only indemnity language requiring the sub to indemnify others for property damage and bodily injury claims to the extent caused by the indemnitor, would be enforceable under the state law. Here, since the prime contractor’s pleadings asserted negligence on the part of multiple subcontractors (and there was even evidence that the prime itself was partly at fault), the court held there was no subcontractor duty to indemnify the prime.
Lesson learned: Write indemnity clauses to clearly state they are only for damages to the extent arising out of third party claims for bodily injury and property damage, AND state that the indemnity only applies to damages “TO THE EXTENT CAUSED” by the indemnitor.” New Bern Riverfront Development v. Weaver Cooke Construction, LLC, 515 U.S. Bankruptcy Court, Raleigh Division (2015).
The court's analysis is governed by North Carolina state law, and in particular N.C. Gen.Stat. § 22B–1, which provides:
“Any promise or agreement in, or in connection with, a contract or agreement relative to the design, planning, construction, alteration, repair or maintenance of a building, structure, highway, road, appurtenance or appliance, including moving, demolition and excavating connected therewith, purporting to indemnify and hold harmless the promisee, the promisee's independent contractors, agents, employees, or indemnitees against liability for damages arising out of bodily injury to persons or damage to property proximately caused by or resulting from the negligence, in whole or in part, of the promisee, its independent contractors, agents, employees, or indemnitees, is against public policy and is void and unenforceable. Nothing contained in this section shall prevent or prohibit a contract, promise or agreement whereby a promisor shall indemnify or hold harmless any promisee or the promisee's independent contractors, agents, employees or indemnitees against liability for damages resulting from the sole negligence of the promisor, its agents or employees.”
N.C. Gen.Stat. § 22B–1 (emphasis added).
The contractual indemnification language at issue is set out in Article 16 of Weaver Cooke's subcontract (“the Subcontract”) with Lee Window & Door Co. (as assigned to and performed by Stock Supply), as follows:
“Article 16 Indemnification
16.1 Subcontractor shall be responsible to Contractor for the acts and omissions of Subcontractor's employees, sub-subcontractors and their agents and employees, and other persons performing portions of Subcontractor's Work under a contract with Subcontractor.
16.2 To the fullest extent permitted by law, Subcontractor shall indemnify and hold harmless Contractor, its agents and employees from and against claims, damages, losses and expenses, including but not limited to attorneys' fees, arising out of or resulting from Subcontractor's performance of Subcontractor's Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than Subcontractor's Work itself) including loss of use resulting therefrom, if caused in whole or in part by the negligent acts or omissions of Subcontractor, a subsubcontractor, 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. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity, which would otherwise exist as to a party or person described in this Article."
In its motion for summary judgment, the subcontractor asked the court to dismiss the prime contractor claim against it on the basis that the indemnity clause was void and unenforceable because it required the Sub to indemnity the Prime “regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder.” The clause also required the Sub to indemnify the Prime for damages caused “in part” by the Sub’s negligence. That left open the question of whether the clause ‘might require defendant to indemnify plaintiff from plaintiff’s own negligence’ [which] is deemed void.”
“It is readily apparent,” concluded the court, that the language of the indemnity article violates the state anti-indemnity statute. In response to the apparent violation of the state statute, the Prime argued that the court should apply the “self-limiting” language of the contract article that stated it was only to be applied “to the fullest extent permitted by law.” That limitation, together with the court’s ability to “blue-pencil the provision as necessary, could bring the provision into full compliance with the law, argued the Prime.
The court agreed that the “self-limiting” language can be effective in many instances, but found that it didn’t help the Prime here. This is because the court said that upon revision by the court, the Sub would be required (per state statute) to indemnify the Prime only for damages caused “wholly” buy the Sub or its agents and employees. In this particular case, the court found that there was no evidence that the Sub solely and wholly caused the Prime’s damages, and that the Prime didn’t even contend that in its pleadings which contained allegations and Counts against numerous other parties that it alleged were partly to blame for the damages.
Lessons Learned: When revising the indemnity articles of the many contracts and subcontracts that our firm reviews for clients, we apply a few rules of thumb, including:
- If the clause does not already limit indemnity to property damage and bodily injury claims, then amend it so that it either states that specifically, or in the alternative, state that indemnity applies only to liabilities and damages arising out of third party claims against the Indemnitees. It needs to be clear that indemnity does not apply to an indemnitor’s first party claims against the Indemnitee for economic losses or breach of contract claims that did not harm anyone other than the indemnitte.
- Amend language that state that the Indemnitor will indemnify the indemittee for damages “arising out or related to” the indemnitor’s performance to limit the indemnity to damages “to the extent caused by” the indemnitor.
- If it is a professional services contract, point two (2) above needs to be further revised to state that the indemnification is owed only for liabilities and damages arising out of third party claims to the extent caused by the “negligent” acts, errors or omissions” of the indemnitor.
- Always introduce the indemnity clause with language such as, “To the fullest extent permitted by law….” But don’t place too much reliance on the self-limiting language that is typically included in the indemnity clause that states it only applies “to the fullest extent permitted by law.” It might have worked to save the clause in this case but for the fact that the court found, based on the allegations and facts presented, there was just nothing left to save.
Additional comment: In an effort to get around the state statute that addressed the limitations on indemnification for third party claims arising out of bodily injury and property damage, the Prime contractor argued that separate provisions in the contract made the Sub responsible for all acts and omissions of the Sub and any of its employees. The Prime argued this was intended to require indemnification for purely economic losses and was not limited to property damage and bodily injury.
The language in question from contract article 16.1 stated, “Subcontractor shall be responsible to Contractor for the acts and omissions of Subcontractor’s employees, subcontractors and their agents and employees, and other persons performing portions of Subcontractor’s Work under a contract with Subcontractor.” In rejecting the Prime contractor’s argument, the court stated, “a party acknowledging that it is ‘responsible to’ another party, is under no stretch of that language or this court’s imagination, sufficient in and of itself to require indemnification….”
I am pleased with the final aspect of the court decision explaining that when a party accepts responsibility for the actions of those for whom it is legally responsible, it is not creating some new contractual theory of liability such as an indemnification obligation. Some clients ask me if we need to modify language, such as that found in Article 16.1 quoted above, to state that responsibility is accepted only if the party is “negligent.” I don’t believe that is necessary in the context of this article because as this holds, the article basically is merely stating that the Subcontractor is accepting the duties that would be imposed on it by common law even in the absence of contract language.
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. 17, No. 6 (September 2015).
Copyright 2015, ConstructionRisk, LLC
Article 5
Economic Loss Rule Bars Concrete Supplier's Claim Against Design Engineer
See similar articles: Economic Loss | Economic Loss Doctrine | Implied Contract | promissory estoppel
Gail S. Kelley, J.D., PE
ConstructionRisk, LLC
In a dispute arising from defective concrete, State Ready Mix, Inc. v. Moffatt & Nichol, 232 Cal.App.4th 1227 (2015), the Appeals court found that the economic loss doctrine barred the concrete supplier's claim against the engineer that reviewed the mix design. In addition, the Appeals court found that the concrete supplier could not maintain a promissory estoppel claim based on engineer’s approval of the mix design and that the engineer did not owe the concrete supplier a duty of care based on public policy factors.
Background to the Dispute
In 2012, Bellingham Marine, Inc. (Bellingham), a marine project manager, hired Major Engineering Marine, Inc. (Major) to construct a travel lift pier at the Channel Islands Harbor. Bellingham hired Moffatt & Nichols (Moffat) to design the pier. Moffat's specifications required the concrete to have a compressive strength of 5,000 PSI at 28 days and between two and four percent air entrainment, where air entrainment refers to microscopic air bubbles in the concrete that increase the concrete's workability. Although Moffat's contract with Bellingham did not require it to review the mix design submitted by Major's concrete supplier, State Ready-Mix (State), Moffat nevertheless reviewed and approved the mix design at Major's request.
On February 14, 2012, State delivered seven truck loads of concrete to the project site. When the concrete was tested at 28 days, it was found to have a compressive strength of only 3,650 psi. It was subsequently discovered that State had experienced a mechanical failure in their chemical dispensing equipment and the amount of air-entraining admixture added to the mix was six and a half times the amount called for by the mix design. Although it appears the mix design required an excessive amount of air entrainment to begin with, increasing the amount six and a half times virtually guaranteed that the concrete strength would be lower than what was required.
Economic Loss Rule
After Major demolished and rebuilt the affected portion of the pier, it sued State for the money it spent removing and replacing the defective concrete. State then filed a cross-complaint for implied equitable indemnity and contribution against Moffat, alleging that Moffatt failed to use reasonable care in reviewing and approving the mix design. The trial court found that the cross-complaint was barred by the economic loss rule because Moffatt did not have a contract with either Major or State.
The trial court's ruling was affirmed by the Appeals court. In its ruling, the Appeals court went through each of State's claims in detail, explaining that the claims had no merit.
Claim for Indemnification
The Appeals court noted that State could not sue for equitable (noncontractual) indemnity or contribution because there were no facts to support a claim that Moffatt owed State a duty of care sounding in tort. Nor could State sue for equitable indemnification based on the theory that Moffatt negligently performed its contract with Bellingham. Conduct amounting to a breach of contract becomes tortious only when it also violates a duty arising from principles of tort law that is independent of the contract.
An omission to perform a contract obligation is not a tort unless it is also an omission of a legal duty. Without any action sounding in tort, there was no basis for finding joint and several liability on the part of defendants, thereby precluding a claim for equitable indemnity.
In addition, the Appeals court agreed with the trial court that because State's defective work caused only economic losses to Major, State's cross-complaint was barred by the economic loss rule. Moffatt had no contractual relationship with State or Major and no facts were alleged that the concrete injured a person or damaged other property.
Implied Contract—Promissory Estoppel
State's complaint stated that its mix design called for significantly more air-entraining admixture than the manufacturer recommended and that Moffatt should have known that using large amounts of the air-entrainment admixture would result in low compressive strength. Invoking the doctrine of promissory estoppel, State argued that because Moffatt reviewed and approved the mix design at Major’s request, an “implied contract” was created between Major and Moffatt and Moffatt “promised” the amount of Mico–Air in the concrete mix design would work. A promissory estoppel claim generally entitles a plaintiff to the same damages available on a breach of contract claim. The elements of promissory estoppel are (1) a clear promise, (2) reliance on the promise, and (3) substantial detriment because of the reliance. Damages are measured by the extent of the obligation assumed and not performed.
However, Moffatt worked for Bellingham, not Major or State. There was nothing to support a claim that Moffatt made a “clear and unambiguous promise” to Major, that Major detrimentally relied on Moffatt’s approval of the concrete mix design, or that Major’s damages are related to an “obligation assumed” but not performed by Moffatt.
Factors that Determine Whether a Special Relationship Imposes a Duty of Care
Relying on the case Biakanja v. Irving, 49 Cal.2d 647, 320 P.2d 16 (1958), State also argued that even though it did not have a contract with Moffatt, Moffatt owed it a duty of care because its review of the mix design had created a special relationship between the parties. Biakanja established six public policy factors that determine whether negligent performance of a contract may result in liability to a third party for economic losses, based on a special relationship with the third party.
When these factors favor the imposition of a legal duty of care, the fact there is no contract between the parties would not bar equitable indemnity. These factors are:
(1) the extent to which the transaction was intended to affect State; (2) the foreseeability of harm to State; (3) the degree of certainty that State suffered injury: (4) the closeness of the connection between Moffatt’s conduct and the injury suffered; (5) the moral blame attached to Moffatt’s conduct; and (6) the policy of preventing future harm.
The Appeals court noted that State's argument failed on every factor and thus did not owe State a duty of care. With respect to the first factor - Moffatt’s services were not intended to affect or benefit State. Moffatt agreed to help Major and review the concrete design mix but the contractual duties allegedly assumed by Moffatt were intended to benefit Bellingham, not State or Major. Furthermore, Moffatt’s review and approval of the mix design was not the cause of the defective concrete.
With respect to the second, third and fourth factors - foreseeability of harm, certainty of injury, and closeness of the connection between Moffatt’s conduct and the injury suffered - the concrete did not attain the required compressive strength because State added too much air-entrainment chemical. Moffatt did not know, and had no reason to know, that State had deviated from the approved mix design. The fifth factor, moral blame, failed because Moffatt had no control over either State’s performance or the contractual relationship between State and Major.
The final factor, preventing future harm, failed because, in the court's words, "Moffatt was not State’s insurer or guardian angel. It did not warrant that the concrete, if over-dosed with the Micro–Air additive, would work."
Conclusion
This case reminds design professionals that any time they undertake to review or approve the contractor's work or submittals, they expose themselves to potential liability. This is true even if the review and approval is not required by their contract.
About the Author: As a professional engineer, Gail Kelley has performed structural design and analysis of post-tensioned structures, has performed constructability reviews, due diligence inspections, and condition assessments, and has provided litigation support for construction defect and delay claims in both state and federal court. She received her B.S. in Civil Engineering from Cornell University, and Master of Science in Structure and Materials from Massachusetts Institute of Technology (MIT), and she received her Juris Doctorate from American University, Washington College of Law. She provides risk management services for ConstructionRisk, LLC. This article is published in ConstructionRisk.com Report, Vol. 17, No. 6 (September 2015).
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