Inside this Issue

A1 - Design Firms Held Unaccountable for Failing to Design in Compliance with ADA and FHA Requirements: Project Owner Cannot Sue for Breach of Contract or to Enforce Indemnity Obligations
A2 - Appeal Filed with the Civilian Board of Contract Appeals by Subcontractor Allowed to Go Forward in Name of Prime Contractor
A3 - Virginia Workers’ Compensation Act Strictly Enforced to Bar Personal Injury Claim against a Subcontractor by an Injured Employee of General Contractor
A4 - Why A/E Firms Should Opt to Litigate instead of Arbitrate

Article 1

Design Firms Held Unaccountable for Failing to Design in Compliance with ADA and FHA Requirements: Project Owner Cannot Sue for Breach of Contract or to Enforce Indemnity Obligations

By: J. Kent Holland
ConstructionRisk, LLC

Design Professionals that fail to design in compliance with ADA requirements cannot be sued by their clients for indemnification or breach of contract to recover the rectification costs to bring the building into compliance. This is the surprising conclusion in multiple federal court decisions, the most recent of which is Chicago Housing Authority v. Destefano and Partners, Ltd., (45 N.E.3d 767 Illinois 2016). It would appear that designers need not worry about language in their contracts guaranteeing compliance with the FHA and ADA requirements or promising to indemnify their clients for damages resulting from non-compliance. The decision in this case is one of a growing number of decisions holding that federal ADA law preempts state law and contract language so that a building owner cannot be indemnified by its design professional for costs resulting from failure of the design to meet FHA and ADA requirements. Chicago Housing Authority v. Destefano and Partners, 45 N.E. 3d. 767 (Illinois 2015).

Chicago Housing Authority (CHA) filed a breach of contract complaint against the firm that designed renovations of a public housing project, to recover substantial costs it incurred in bringing the project within compliance with federal fair housing and accessibility laws as a result of the designer’s failure to provide a design meeting the federal requirements. The trial court dismissed the lawsuit on the grounds that the suit was impermissible under federal law. This was affirmed on appeal.

The United States Department of Housing and Urban Development (HUD) had provided funding for the renovation project with the condition that the Authority must take certain actions to ensure that the project could adequately meet the needs of the disabled. The Authority planned the overall renovations to meet the requirements of Section 504 of the Rehabilitation Act of 1973 by constructing 5.3% of the units to accommodate mobility impaired individuals and 2.1% of the units to be accessible to individuals with sensory impairments.

The Authority entered into a contract with a design firm by which the designer agreed “to provide professional architectural and engineering services in connection with the Project as are usually and customarily performed, rendered or done by architect preliminary to and in connection with the preparation of plans, designs and specifications and the construction, rehabilitations and completion of residential buildings.” The contract included a requirement that the designer certify that all work performed conforms to city, state and federal accessibility codes as well as to the United States Fair Housing Act (FHA).

While the work was being performed, HUD did a review and notified the Authority that the work was not in compliance with the Rehabilitation Act or with the Americans with Disabilities Act (ADA), and detailed a range of deficiencies that the court stated were both major and minor. After the project was completed, the Authority negotiated a voluntary compliance agreement obligating it to correct the purported deficiencies. It then hired a new architecture firm to perform work necessary to comply with its obligations under the compliance agreement and incurred over $4.3 million to bring the buildings into compliance with the federal accessibility standards.

The Authority’s suit included one count for breach of contract and one count for Indemnity. The breach of contract count alleged that the designer materially breached the contract by failing to “report that the rehabilitations and renovations work performed … did not conform to the requirements of applicable federal laws, regulations, and guidelines,” including the ADA. It also alleged the designer failed to provide accurate certifications that the work conformed to the federal accessibility standards and the ADA.

The damages being sought were to recover costs the Authority incurred in bringing the project into conformance with the applicable state and federal laws, regulations and guidelines.

In granting summary judgment for the designer, the trial court found that the federal statutes precluded the Authority from delegating its duty to comply with the federal accessibility standards. In affirming that dismissal, the appellate court concluded that the state law claim was preempted by federal legislation. The Authority argued that its breach of contract claim based on the designer's failure to meet its obligations to follow federal accessibility standards, does not conflict with federal law, but instead supports it. It argued that its attempt to enforce the parties’ contract is a means to hold the designer accountable so that taxpayer money is not misused and disabled persons do not suffer discrimination.

In holding the federal law prohibited the Authority from making either a breach of contract claim or indemnity claim against its architect/engineer to recover the costs it incurred in bringing the project into compliance with the ADA, the appellate court cited the U.S. Fourth Circuit decision in the case of Equal Rights Center v. Niles Bolton Associates, 602 F.3d 597, 602 (4th Cir. 2010) that held it would lesson the owner’s incentive to ensure compliance with the ADA and Fair Housing Act if the owner were permitted through an indemnification claim to recover its losses for non-compliance.

In the current case, the court followed the Equal Rights Center holding to dismiss the indemnity claim. With regard to the breach of contract claim, the court determined it to be a de facto indemnity claim and therefore applied the same holding to it as well. This is because the court found that “the alleged breach of defendant’s duties to comply with the federal accessibility standards necessarily arose from its failure to comply with the duties imposed by HUD.”

The Authority argued that its claim could not be preempted by federal law where the costs it incurred in correcting the work to comply with the FHA and ADA requirements resulted from a voluntary compliance agreement with HUD and it was thus not technically a “wrongdoer” under the FHA. The court disagreed, concluding that the Authority was a “wrongdoer” in “the sense that it failed to ensure the subject premises complied with the applicable federal accessibility standards in order to prevent discrimination.” The court concluded, “CHA failed to uphold the responsibilities required of building owners under the federal accessibility standards. A defendant who has violated the FHA is “clearly not among the class which the statute is intended to protect, but rather is the party whose conduct the statute is intended to regulate.”

The final crux of the decision is stated as follows: “In structuring the FHA, Congress failed to provide a contribution or indemnification remedy for one defendant against a third-party co-defendant. The failure to include such a remedy ‘raises the presumption that Congress deliberately intended that each co-defendant have a non-indemnifiable, non-delegable duty to comply.” Wrapping up, the court stated, “In sum, despite CHA’s argument that its claim has an independent basis in the parties’ contract, what the claim was predicated on and what it sought to recover was the cost of retrofitting the residential units in the seven buildings worked on by [designer]…. Allowing CHA to seek indemnification from [designer] would effectively insulate it from liability. Such an outcome is contrary to the goal of the ADA of preventing and remedying discrimination against disabled individuals. Because allowing the state-law claim would interfere with Congress’ goal, CHA’s breach of contract claim is preempted under the obstacle preemption doctrine.”

Commentary by Kent Holland:

I disagree with the reasoning and conclusions of this court. The Authority should have been able to recover from its design firm if it could prove it incurred costs for redesigning and reconstructing the project due to negligent performance of professional’s services that constituted a breach of contract. My thinking is this:

1) Permitting a project owner to hold its design firm accountable for its design, including requirements to design consistent with laws, codes, and ordinances is not inconsistent with the purposes of upholding the principles of FHA and ADA. In fact, a project owner cannot on its own design a building to meet the requirements. Not being a licensed designer an owner must rely on a qualified designer to perform the design services.

2) By contractually obligating a designer to design facilities consistent with all laws including the FHA and ADA, a project owner is acting in a manner consistent with the laws in an effort to accomplish their stated goals of accessibility.

3) Contrary to the decision of this court and others like it, the designer was not a “co-defendant” to whom the owner is attempting to delegate its legal responsibilities. It is likely that the design firm would have been protected by the economic loss doctrine from lawsuits by third parties asserting economic loss due to the failure of the design to meet FHA and ADA requirements. How then, was the designer a real or potential co-defendant to whom the law preempted another defendant under the law from delegating its responsibility?

4) When design firms negotiate their contracts with project owners, their attorneys and risk managers are generally careful to craft obligations concerning compliance with laws and codes so as not to create warranties of compliance, but rather commit to exercising the applicable professional standard of care to create a design that complies with the requirements. Advisors likewise advise design professionals not to agree to indemnify their clients for damages arising out of any and all acts, errors or omissions, or non-compliance with laws, but instead to limit the indemnification to NEGLIGENT acts, errors or omission, or NEGLIGENT non-compliance. Based on the decision of this court and others like it, it appears there is no reason to worry about indemnification obligations concerning compliance with the FHA and ADA. It seems according to this decision that design professionals get a free ride with no liability for damages they cause their clients due to non-compliance.

5) What if the project owner were a small, undercapitalized entity that could not afford to do the corrective action necessitated by the ADA/FHA non-complying design and construction? Who fixes the building? If designers were held accountable, there might be professional liability insurance to participate in the damages to the extent caused by the designer's negligent non-compliance with the statutes. How is that not a good thing to encourage compliance with the ADA and FHA?

6) The point of federal preemption under the ADA and FHA is to hold wrong doers accountable. How is it consistent with the purposes of the ADA and FHA to penalize a project owner who acts in good faith to comply with those statutes by hiring a qualified professional to design its project and obligating that designer to design consistent with the ADA and FHA?

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. 18, No. 6 (September 2016).

Article 2

Appeal Filed with the Civilian Board of Contract Appeals by Subcontractor Allowed to Go Forward in Name of Prime Contractor

By: J. Kent Holland
ConstructionRisk, LLC

Where an appeal from an adverse contracting officer’s final decision was filed with the United States Civilian Board of Contract Appeals (CBCA) directly by the affected subcontractor instead of by the prime contractor that held the contract with the federal government, the Board denied the government’s motion to dismiss the appeal for lack of jurisdiction.

Reasons given by the Board for allowing the appeal to stand included, (1) the prime contractor authorized an appeal by the subcontractor; (2) the appeal, although filed by the subcontractor, noted in its text that it was only the subcontractor, and stated the name of the prime contractor in whose name the appeal was then docketed; and (3) an attorney for the prime contractor subsequently filed a notice of appearance as counsel for the prime contractor, thereby affirming the prior authorization by the prime contractor to subcontractor to file the appeal. Cooley Constructors Inc. v. General Services Administration, 15-1 BCA P 36001, 2015 WL 3599168 (2015).

Article 3

Virginia Workers’ Compensation Act Strictly Enforced to Bar Personal Injury Claim against a Subcontractor by an Injured Employee of General Contractor

By: J. Kent Holland
ConstructionRisk, LLC

The U.S. Federal District Court lacked subject matter jurisdiction over a suit by a general contractor’s employee against a construction subcontractor who was engaged in the general contractor’s trade, business and occupation. Under Virginia’s law, an injured employee who is covered by workers’ compensation cannot sue his employer. The courts have interpreted the workers’ compensation act as barring suits where, as here, injured employees of a general contractor attempt to sue a subcontractor who was engaged in the general contractor’s “trade, business or occupation.” The subcontractor is treated as a statutory co-employee of the injured worker and is entitled to the immunity afforded by the Act. Demetres v. East-West Construction, 776 F.3d 271 (4^th Cir. 2015).

A resident of North Carolina was working on a project in Virginia for his employer, Ashland Construction Company, a North Carolina based company. Ashland hired East West Construction Company as its subcontractor to perform site work. One of the subcontractor’s employees accidently backed over Ashland’s employee, causing severe injuries. The employee received workers’ compensation benefits under North Carolina law through his employment with Ashland. He then filed a personal injury suit in Virginia against the subcontractor. In its successful motion to dismiss the suit, the subcontractor argued that the exclusivity provision of the Virginia Workers’ Compensation Act barred the suit. In upholding the dismissal, the Circuit Court held because the court’s jurisdiction was based on diversity, the district court was required to apply Virginia law. The court explained that Virginia subscribes to the lex loic delicti principle for determining the applicable substantive law in tort suits, and that “According to that principle, the law of the place in which the injury occurred governs the substantive cause of action.”

Article 4

Why A/E Firms Should Opt to Litigate instead of Arbitrate

See similar articles: Arbitration | Dispute Resolution | Litigation

By: Terrence M. McShane, Esquire
Lee & McShane, PC

Among the critical clauses in design professional contracts are the Dispute Resolution Clauses.

For over twenty years, we have advised our clients to opt for Litigation rather than Arbitration as a means of ultimate dispute resolution in their contracts for a host of reasons. Some of those reasons include:

1) A Judge and Jury in Litigation as opposed to no Jury in Arbitration;

2) Discovery and depositions in litigation vs. limited and uncertain discovery in arbitration;

3) Mediation is typically required by the Courts in litigation, but that requirement doesn't exist in arbitration;

4) Dispositive motions can be made in litigation, however, that is not a right in arbitration;

5) You have a chance to obtain a complete defense verdict in litigation, whereas in arbitration, the arbitrator often "splits the baby";

6) You have the right to file post-trial motions in litigation, no such right exists in arbitration; and

7) You have the right to appeal the trial court verdict in Litigation - in contrast, there is essentially no right to appeal in Arbitration.

Over the years, the conventional wisdom among counsel representing Architects and Engineers was to opt for a bench trial in litigation, and waive your constitutional right to a trial by jury, because the facts might be "too technical" for the average lay juror. Accordingly, we routinely included a standard waiver of a trial by jury clause in our agreements. However, our litigation experience in recent years has caused us to change our prior thinking, and we now advise our A/E clients to seriously consider not waiving a trial by jury in their contracts on a project by project basis. Some of these recent cases are briefly outlined below:

In June 2014, my partner, Jim Lee litigated a case in Frederick County, Maryland involving a design professional. At the conclusion of a two week jury trial, the Jury rendered a complete Defense Verdict in favor of our client.

In October 2014, I successfully litigated a three week jury trial in Baltimore City Circuit Court where I represented an architectural firm who was getting sued by a sympathetic religious non-profit who provided housing for seniors. The damages alleged were over $3 million. The case involved allegations of design errors and omissions causing water leaks and major water damage to the structure. Two successful motions in limine excluded potentially prejudicial evidence from ever getting to the jury. During a trial involving numerous technical issues and lengthy expert testimony, the jury was attentive and took voluminous notes. At the end of the trial, the jury rendered a complete defense verdict for our design client. No appeal was taken.

In January 2015, I successfully defended an Architect and his Firm in arbitration. The claimant was a wealthy residential homeowner who alleged claims of water damage to the home's structure due to the Architect's negligent failure to detect construction deviations by the General Contractor resulting in over $700,000.00 in damages. Construction was completed in 2001. The Demand for Arbitration was filed in late 2013. Although this was an arbitration matter, it provides an example of why design professionals are generally better off in litigation for ultimate dispute resolution. While we successfully achieved a decision in the Architect's favor after the hearings, it took significant time and legal fees to prepare for and defend the client at the arbitration hearings. In a litigation forum, the Architect would have had a straightforward Statute of Limitations/Statute of Repose winning defense. The Architect could have won the case prior to trial on a Motion for Summary Judgment. Instead, the Architect had to endure three intense and stressful weeks of preparation and hearings. Finally, the Architect incurred significant legal fees which he probably would not have incurred if we were in litigation.

In addition to the examples above, I could cite several other cases where our professional design clients opted for a trial by jury and we successfully obtained a complete defense verdict in their favor. These cases demonstrate some of the reasons why we advise our clients to consider opting for a jury trial on a project by project basis by striking the jury trial waiver from their standard form agreements in future contracts.

Some additional reasons for striking the jury trial waiver from your contracts are as follows:

1) You get to pick the jury in a jury trial, but you do not get to pick the judge;

2) You can have your attorney make motions in limine to exclude potentially prejudicial evidence from the jury (see senior housing case above) - in a bench trial the judge hears everything;

3) You can make a post-trial motion to set aside the jury's verdict (if they get it wrong), whereas a judge is far less likely to revisit his/her own verdict;

4) Juries are not perfect but they usually "get it right"; and

5) Design professionals as a whole usually have "jury appeal" and present well at a jury trial.

We are well aware that some project Owners will never agree to a jury trial; however, you can still use this as a bargaining chip in your contract negotiations. For example, seek to achieve a more favorable limitation of liability clause rather than "giving it away" by conceding a jury trial waiver from the outset. Finally, if you preserve your constitutional right to a trial by jury by demanding a jury trial in your answer to a complaint, you can always waive it at a later date if circumstances or facts change. Conversely, if you don't demand a jury trial at the outset, in many jurisdictions, you will have waived your right to a jury trial forever.

We advise clients who have standard form agreements previously drafted by us to consider striking the jury trial waiver clause from their standard form contracts. For all others, we strongly urge you to consider striking the jury trial waiver from your future contracts on a project-by-project basis. You may benefit from considering this change as some of your colleagues have.

About the author:

Terrence M. McShane, Esquire
Lee & McShane, PC
tmm@lee-mcshane.com
www.leemcshane.com

This article is published in ConstructionRisk.com Report, Vol. 18, No. 6 (September 2016).

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ConstructionRisk.com Report (September 2016)

Inside this Issue

Article 1

Design Firms Held Unaccountable for Failing to Design in Compliance with ADA and FHA Requirements: Project Owner Cannot Sue for Breach of Contract or to Enforce Indemnity Obligations

Article 2

Appeal Filed with the Civilian Board of Contract Appeals by Subcontractor Allowed to Go Forward in Name of Prime Contractor

Article 3

Virginia Workers’ Compensation Act Strictly Enforced to Bar Personal Injury Claim against a Subcontractor by an Injured Employee of General Contractor

Article 4

Why A/E Firms Should Opt to Litigate instead of Arbitrate

Search

Get the Newsletter

Connect

Contract Guide for Design Professionals

Recent Newsletters

All Newsletters

Risk Management Workshops

Life Skills Workshop Slides

Contract Clauses – Papers and Articles

IRMI Expert Commentary

Construction Risk Management