Inside this Issue

A1 - Malpractice Statute of Limitations applies to Breach of Contract Claims asserting Negligent Supervision but Indemnification Obligations Extend Time for Filing Suit
A2 - Negligence Claim against Architect Governed by Malpractice Rather than Contract Statute of Limitations

Article 1

Malpractice Statute of Limitations applies to Breach of Contract Claims asserting Negligent Supervision but Indemnification Obligations Extend Time for Filing Suit

Statute of Limitations for causes of action for negligent supervision and breach of engineering contract are both deemed professional malpractice claims subject to a three year statute of limitations for negligence actions, and began to run when firm completed its services. A separate cause of action on a contractual indemnification claim, however, was governed by the six year statute of limitations that didn’t begin to run until the plaintiff had made payment to third parties to which it was entitled to recover from the engineer under the indemnification clause.

Comment: The case demonstrates several problems arising out of indemnification clauses including, extending the time for filing suit beyond what would otherwise exist; creating broad indemnity that applies to first party claims as well as third party claims; and incurring an obligation to defend or pay defense costs that would not otherwise exist. It also explains that, at least in New York, where the underlying allegations concern malpractice, the statute of limitations for malpractice will be applied regardless of whether a breach of contract claim can also be asserted. WSA Group, P.E. v. DKI Engineering & Consulting, USA PC, 178 A.D. 3d 1320 (NY 2019).

An engineering firm (WAS Group, P.E., P.C., the plaintiff) on a Department of Transportation project subcontracted certain inspection services to a subconsultant inspection firm (DKI). An employee of the inspection firm was convicted of falsifying an inspection report of one of the bridges covered by the subcontract. As a result, the plaintiff incurred various costs including the cost of reimbursement to DOT for sums paid to the inspection firm. DKI declined the plaintiff’s demand for indemnification of these costs, and this litigation ensued.

Plaintiff’s action against the inspection firm stated causes of action for negligent supervision and breach of contract, and seeking to recover damages pursuant to the indemnification clause of the contract. Summary judgment was granted for the inspection firm dismissing the negligent supervision claim because it was filed more than three years after the three-year malpractice statute of limitations began to run. That part of the summary judgment was affirmed on appeal.

The trial judge, however, also dismissed the indemnification claim based on the same malpractice statutes. That aspect of the summary judgment was reversed on appeal, with the court holding that the indemnification article created a separate contractual obligation completely distinct from any duty owed with regard to the quality of professional services.

When does Malpractice Statue of Limitations Apply?

“A three-year statute of limitations governs action[s] to recover damages for malpractice, other than medical, dental or podiatric malpractice, regardless of whether the underlying theory is based in contract or tort…. In determining whether a cause of action denominated in tort or contract should be so construed, “[t]he pertinent inquiry is thus whether the claim is essentially a malpractice claim.”

The plaintiff argued that its malpractice claims were timely because they couldn't be pleaded until the damages resulting from the falsified report were in fact incurred. In rejecting that argument, the court reiterated the rule that “a claim for professional malpractice against an engineer or architect accrues upon the completion of performance under the contract and the consequent termination of the parties’ professional relationship.”

When does the Statute of Limitation for the Indemnification Accrue?

“Turning to plaintiff’s contractual indemnification claim, the subcontract required defendant to “indemnify and save harmless and defend [DOT and plaintiff] ... from and against any claim, demand or cause of action of every name or nature arising out of the error, omission or negligent act of [defendant]” or its employees. Plaintiff alleged that defendant breached this provision by refusing to reimburse and indemnify plaintiff for the costs it incurred as a result of Ahmad’s misconduct. With regard to plaintiff’s claim for the reimbursement it paid to DOT for Ahmad’s work, Supreme Court determined that defendant’s voluntary contractual agreement to indemnify plaintiff was not an “ordinary professional obligation” of an engineer (citations omitted) and that this claim was thus governed by a six-year limitations period that accrued upon that payment and was not time-barred (citations omitted). We agree. The cause of action for indemnification is not “a disguised professional malpractice claim subject to a three-year statute of limitations, as it does not allege that [defendant’s] professional services were negligently performed, but instead alleges a breach of the [subcontract]” consisting of defendant’s separate failure to comply with its indemnification obligation.”

Indemnification was for First Party Claims and not only for Damages from Third Party Claims

The court stated that the indemnification article in the contract was written so broadly that it applied not only to damages from third party claims but also to first party damages. In other words, the plaintiff could recover under the indemnification clause for its own damages even it those damages didn’t result from a third party claim against the plaintiff. The court explained that, “It is a familiar principle that a cause of action for common-law indemnification must be based upon a defendant’s breach of duty to a third party,” but that the instant matter didn’t involve common-law indemnification. “Instead, the scope of defendant’s obligation is governed by the parties’ intent as revealed by the plain language of the indemnification provision that they agreed upon.”

No Claims Excluded from the Indemnification Obligations

The court stated:

“Nothing in the provision’s broad language, which requires defendant to indemnify plaintiff “against any claim, demand or cause of action of every name or nature,” reveals that the parties intended to exclude claims such as this from its coverage or to limit its scope to breaches of duty to third parties. Instead, the parties “chose to use highly inclusive language in their indemnification provision, which they chose not to limit by listing the types of proceedings for which indemnification would be required.”

Indemnification clause also Covered Plaintiff’s Attorneys Fees

The court found that nothing in the indemnification provision expressly excluded counsel fees or other direct expenditures on plaintiff’s part.

“On the contrary, the provision requires defendant to “indemnify and save harmless and defend” plaintiff (emphasis added), revealing that the parties contemplated legal costs arising from defendant’s errors, omissions or negligence as part of the provision’s scope.¹ Accordingly, this aspect of plaintiff’s indemnification claim should not have been dismissed.”

Comment: Several lessons are learned from this decision. Note the importance of carefully drafting the indemnification clause of a design professional contract to apply only to damages from third party tort claims. The indemnity should not be so broad as to cover first party damages in the absence of third party claims. The second point is that an indemnity clause can extend the statute of limitations for filing suit against the Indemnitor (in this case a design subconsultant). When negotiating the terms of a contract, the parties should carefully consider the consequences of extending time periods for filing suit. This could even potentially extend the time for filing suit beyond the periods otherwise set in stone by state statutes of repose.

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 ConstructionRisk 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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 22, No. 5 (May 2020).

Article 2

Negligence Claim against Architect Governed by Malpractice Rather than Contract Statute of Limitations

Architect had contracted with a College District to perform services in accordance with “all applicable ... codes, laws, regulations, and professional standards, consistent with the standard of care of an architect experienced in California schools and college design.” The District sued the architect alleging that the services fell below the professional standard of care and that this also constituted breach of contract – including the alleged failure to comply with codes and laws. Summary judgment was granted and affirmed for the architect on the basis that the gravamen of the complaint was negligence which was time-barred by a two year statute of limitations. Marin Community College District v. Marcy Wong & Donn Logan Architects (Contra Costa County Superior Court, Ct. No. MSC-16-0087 unpublished decision, 8-20-19).

According to the court,

“District alleges the Architects provided “inadequate and inaccurate designs,” “late revisions to plans and design changes,” and “details that were incompletely drawn, incorrectly drawn, and/or drawn in an un-constructible manner.” The District also alleges the Architects failed to “comply with applicable codes and laws,” to perform the services “in accordance with the contractual standard of care,” and to “properly perform construction administration and observation services.” In its professional negligence cause of action, the District alleges the same conduct fell below the Architects’ professional standard of care.”

In opposition to the motion for summary judgment, the District conceded that the negligence cause of action was time-barred, but it argued that the contract cause of action was timely since it was under the four-year statute of limitations for contract actions. That was rejected by the trial court which explained,

“The gravamen of the contract breaches is negligence. Because the gravamen of the first cause of action for breach of contract arises out of the negligent manner in which the contractual duties were performed or out of a failure to perform such duties, the tort limitations period applies.”

On appeal, the court explained that a plaintiff cannot extend the statute of limitations by styling an action as a breach of contract when, in fact, its gravamen is professional negligence. As explained by the court,

“If the breach is both contractual and tortious, we must ascertain which duty is the quintessence of the action.” (citation omitted) The test is whether the defendant is sued for failure to perform a contractual promise to do a specific thing or, instead, is sued for performing negligently.”

The District alleged that the architect breached a contractual obligation to “review, update and verify all as-built information supplied by District concerning existing information supplied by District concerning existing structures, facilities, and utilities.” Specifically, the District argues that this breach occurred because the architect failed to anticipate hazardous materials abatement in walls and ceilings, which necessitated a change order and contributed to 26 days of delays and additional costs. The court stated,

“Although the District’s allegations may be mixed, we agree with the trial court that the gravamen of the District’s complaint is professional negligence. It does not allege injury based on the Architects’ failure to perform a contractual promise to do any specific thing…. The District simply alleges the Architects’ negligent performance of numerous contractual obligations caused delay and cost overruns. The trial court considered each of the alleged breaches, reviewed the evidence, and determined the District is essentially complaining about the competency of the Architects’ work. We agree.”

In conclusion, the court found:

“The District cannot circumvent the statute of limitations for professional negligence by labeling the action breach of contract. (citation omitted) Although a cause of action alleging negligent failure to perform contractual duties is hybrid in nature, California courts have routinely applied the two-year statute of limitations when negligence is the gravamen.”

Comment:

Compliance with Law. Note that the court did not address the wording of the Standard of Care provision that stated that the architect would do what some feel could be two separate obligations, the first being to “perform in accordance with all applicable codes, laws and regulations,” and the second being to perform in accordance with “professional standards, consistent with the standard of care of an architect experienced in California schools and college design.” Some would argue that by virtue of word “and” in the sentence, the architect had a contractual obligation to comply with codes and laws that went beyond its normal standard of care obligations otherwise agreed upon. This was addressed apparently because there was no specific code, regulation or law that was alleged to have been violated. The result of this decision might have otherwise been different.

Don’t Agree to Absolute Compliance with Code Requirements that are Subject to Multiple Reasonable Interpretations.

When reviewing and revising design contracts, it is important that a designer revise the contract wording concerning compliance with laws, regulations and codes so that an express and uninsurable warranty is not created. Since many codes are subject to different reasonable interpretations, the design firm should be entitled to exercise its professional opinion in deciding how to interpret and apply codes and regulations to a particular situation. That means revising the language to state something to the effect that, “The design professional will exercise the Standard of Care to comply with the applicable laws, regulations, codes, etc.”

Review of As-Builts and the Ability to Rely on Information Provided by Client

Note that there was apparently no provision in the design firm’s contract stating that the client (college) would be required to provide all information in its possession pertinent to the project to the architect, and that the architect would be entitled to reasonably rely upon such information. Instead, the college apparently provided certain as-built documentation that was inaccurate in that it failed to show that there were hazardous materials in certain existing walls and/or ceilings of the building. Instead of the architect being entitled to stop its work until those issues were resolved, the District sought to recover delay costs and environmental remediation costs from the architect. This seems completely backward from what one would hope would happen under a well crafted design professional agreement.

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