Risk Management/Lessons Learned Design Professional ......1. We will learn risk management and...
Transcript of Risk Management/Lessons Learned Design Professional ......1. We will learn risk management and...
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Risk Management/Lessons Learned Design Professional Litigation (2016)
Presentation by
J. Kent Holland, J.D.
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Copyright Information © 2017
This presentation is protected by U.S. and International copyright laws. Reproduction, distribution, display and use of the presentation for internal use by attendees is granted. Other use without written permission is prohibited.
2 July19,2017
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1. Wewilllearnriskmanagementandcontractmanagementlessonsfromli=ga=oninvolvingdesignprofessionals.
2. Learntoiden=fyissueswithindemnifica=onandlimita=onofliabilityclausesandhowtobeDerdraEthoseclosestomanagerisk.
3. Learn to identify issues concerning standard of care and warranty clauses and how to draft them to avoid uninsurable risks.
4. Learn issues concerning site safety responsibility arising out of contract language and field activities, and how to manage the risk through contracts and services.
Learning Objectives
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Indemnification
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Indemnifica=onfor3rdPartyClaimsOnly• AEerKRreceivingGMPcontractaward,KRsubcontracted
engineeringfirmtoprovidebalanceofdesignservicesfortheproject.
• Later,KRclaimsA/Edesignswereflawed,andithadtomakemidstreamcorrec=onstocomplywithvariouscoderequirements,andtherebyincurredunexpectedcosts.
• MadeclaimagainstA/Eunderindemnityclause.• Courtheldagainsttheindemnityclaim
Suitbasedonindemnifica=oncouldonlyseekdamagesresul=ngfrom3rdpartyclaimsagainsttheIndemnitee(KR).Theindemnityclausecouldnotbebasisfor1stfirstpartyKRclaimstorecoveritsfinanciallosses.HenselPhelpsConstruc0onv.CooperCarry,Inc.,2016WL5415621(U.S.DistrictCt.,DistrictofColumbia,2016).(Seenexttwoslides)
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• Theclause:“indemnify,defendandhold…harmless”[thecontractor]fromanyclaim,judgment,lawsuit,damages,liability,andcostsandexpenses,includingreasonableaDorneys’fees,asaresultof,inconnec=onwith,orasaconsequenceof[engineer’s]performanceoftheServicesunderthisAgreement….”Courtsays,engineer,“naturally,arguesthathisclausesrefersonlytoliabili=esthat[contractor]wouldfacefromthirdpar=es,notto[contractor’s]own“damage”and“costsandexpenses”fromcontractbreaches.”Accordingtothecourt,“Thewords“damage”and“costsandexpenses”intheindemnifica=onclausearelistedalongwithotherwordsthatclearlyan=cipatetheproblemofthird-partyli=ga=onagainst[contractor]forproblemsthat[engineercreated….[]Readingtheindemnifica=onclauseinthemostobviousway,itrequired[engineer]tocover[contractor]s]liabili=eswhenandifathirdpartysuesoverproblemscausedbythe[engineer’s]fault.”
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HenselPhelpsAffirmedonAppeal
• U.S.CourtofAppealsDistrictofColumbiaaffirmedthetrialcourtsummaryjudgment,holdingthattheindemnifica=onclauseatissuedidnotcoverfirst-partyclaims.Thecourtstated,“Unques=onably,indemnifica=onclauseshavetradi=onallybeenusedandinterpretedasextendingonlytothird-partyclaims[].Intheini=alAgreement,theterms‘claim,judgment,lawsuit,damage,liability,andcostsandexpenses,’mustbeinterpretedinlightofthetradi=onalfunc=on.Furthermore,theD.C.CourtofAppealshasadvocatedforstrictconstruc=onofindemnifica=onclausestoavoidcovering‘anyobliga=onswhichthepar=esneverintendedtoassume.’”HenselPhelpsConstruc0onCo.v.CooperCarryInc.,(U.S.CourtofAppeals,DistrictofColumbia,No.16-7128(June30,2017).
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DoesIndemnityOnlyApplyto3rdPartyClaims?
• Bewareofcourtdecisionsthathaveheldthatevenfirstpartyclaimscanbemadeunderindemnityclauses.– e.g.,Wal-Martv.QoreEnvironmental
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EngineerRequiredtoDefendClientagainstRou=neContractorClaim
TrialcourtheldA/Eoweditsclient,thetown,adefenseagainstacontractorsuitthatallegedthattheplansandspecifica=onspreparedbytheengineerandprovidedbythetowntothecontractorforbiddingandconstruc=onweredefec=ve.Itwasarou=nebreachofcontractclaimbythecontractoragainsttheprojectowner,butthecourtconcludedtheindemnifica=onagreementintheengineer’sagreementwiththetownwasbroadenoughtoobligateittodefendthetownagainstthecontractor’sclaim.PentaCorpora0onv.TownofNewportv.AECOMTechnicalServices,Inc.,No.212-2015-CV-00-011(Merrimack,NewHampshireSuperiorCourt,2016).
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KRfiledsuitagainsttowntorecoverpaymentsitallegedwereoweditunderitsconstruc;oncontract.
• Complaintassertedconstruc=onwasinaccordancewithengineer’splansandspecsthatcalledforaspecificbrandofdiscfiltersforawastewatertreatmentfacilitythatwerenotcapableofhandlingrequiredwastewaterflow.
• Uponreceiptofthesuit,thetownsenttheengineerademandforadefenseagainstthecontractor’ssuitpursuanttothetermsoftheindemnifica=onclauseinthecontractbetweentheengineerandthetownandtheengineer.Theengineerrespondedtothetown’sdemand,sta=ngitwouldnotdefend(orindemnify)thetownbecausetheallega=onsofthecontractorwerenotdirectedattheengineer.
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TheIndemnityClauseCourtfoundbroaddutytodefendbasedonthislanguage:“shallindemnify,exonerate,protect,defend(withcounselacceptabletotheTown...),holdharmlessandreimbursetheTown...fromandagainstanyandalldamages(includingwithoutlimita=on,bodilyinjury,illnessordeathorpropertydamage),losses,liabili=es,obliga=ons,penal=es,claims(includingwithoutlimita;on,claimspredicatedupontheoriesofnegligence,fault,breachofwarranty,productsliabilityorstrictliability),li;ga;on,demands,defenses,judgments,suits,proceedings,costsdisbursements,orexpensesofanykindornaturewhatsoever,includingwithoutlimita=on,aDorneys’andexperts’fees,inves=ga=veanddiscoverycostsandcourtcosts,whichmayatany;mebeimposedupon,incurredby,assertedagainst,orawardedagainsttheTown...whichareinanywayrelatedtotheEngineer’sperformanceunderthisAgreementbutonlytotheextentarisingfrom(i)anynegligentact,omissionorstrictliabilityofEngineer,Engineer’slicenses,agents,servantsoremployeesofanythirdparty,(ii)anydefaultbytheEngineerunderanyofthetermsorcovenantsofthisAgreement,or(iii)anywarrantygivenbyorrequiredtobegivenbyEngineerrela=ngtotheperformanceofEngineerunderthisAgreement.”
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DutytoDefendAppliedto“ALL”Claims–NotJustTortClaims
• Thecourtnotedthatthedutytodefendappliesto“claims,”“li=ga=on,”and“suits”thatare“assertedagainst”thetownandrelatedtotheengineer’snegligentcontractperformance.
• Significantly,thecourtconcluded,“Thislanguagean=cipatesunprovenallega=ons,meaningthedutytodefendwouldnecessarilyarisepriortoanyfactualfindingasto[theengineer’s]negligenceorbreach.”
• Thecourtsaid,“If[theengineer’s]dutytodefendonlyrequiredittoreimbursetheTownforthecostofadefensefollowingadjudica=onof[theengineer’s]negligenceorbreach,thentheTownwouldnecessarilyhavetochooseitsowncounsel,thusrenderingthe[choiceofcounsellanguageintheclause]meaningless.”
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“ArisingOutOf”isVeryBroadTerm
• A/Earguedthatlanguageoftheclausereading“butonlytotheextentarisingfrom”servedasastrictlimita=onontheengineer’sresponsibility.
• Thecourtrejectedthatargument,sta=ng,“Thephrase‘arisingoutof’hasbeenconstruedasa‘verybroad,generalandcomprehensiveterm’meaning‘origina=ngfromorgrowingoutoforflowingfrom’.”
• Thephrase,accordingtothecourt,“indicatesintent‘toenterintoacomprehensiveriskalloca=onscheme.’‘Arisingoutof’doesnotmeanthatanylossesorclaimsmusthavebeencausedby[theengineer’s]negligenceorbreach.Nordoesitnecessarilyrequireanac=onfornegligenceorbreach.Aclaimmerelyhastoinvolveanallegednegligentactoromissionintheperformanceofthecontract.”
• Thus,thecourtconcludedthattheengineer’sasser=onthataddingthewords“totheextent”infrontof“arisingfrom”didnotalterthebroadintentofthewords“arisingfrom.”
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DraEClausetoLimitIndemnitytoThirdPartyTortClaims
• Theneedtoadd“thirdparty”asamodifierof“claim”wasrevealedinthedecisionofWal-MartStoresv.Qore,Inc.,647F.3d237(5thCir.,2011)inwhichacourtconcludedthatWal-MartcouldmakeafirstpartyclaimagainstQoretorecoverlossesincurredontheprojecteventhoughnothirdpartyclaimwasevermadeagainstWal-Mart.
• ThatdecisionimposedaDorneys’feesonQorebyconcludingthatthedefenseobliga=onintheindemnifica=onclausemeantthatQorewasresponsiblefortheaDorneys’feesincurredbyWal-Martinprosecu=ngaclaimagainsttheengineerandcontractor.
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ASampleClauseforYourConsidera=on
• “Consultantshallindemnifyandholdharmless(butnotdefend)the
Client,itsofficers,directors,andemployees,fromandagainstthosedamagesandcoststhattheClientislegallyobligatedtopayasaresultofthirdpartytortclaims,includingthedeathoforbodilyinjurytoanypersonorthedestruc=onordamagetoanytangibleproperty,totheextentcausedbythenegligenceoftheConsultantoranyoneforwhomtheConsultantislegallyresponsible,subjecttoanylimita=onsofremediesorliabilitycontainedinthisAgreement.”
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Limitation of Liability
(LoL)
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EnforcingLimita=onofLiabilityClauses
• Whereahousingdeveloperwonajuryverdictformorethan$9.5millionagainstageotechnicalengineer,thecourtappliedthelimita=onofliability(LoL)clauseinthegeotech’scontracttocaptheliabilityat$550,000.ThedeveloperaDemptedtoavoidtheLoLbyarguingthatthegeotech’sconductwaswillfulandwanton.Thetrialcourtallowedevidenceinthatregard,butthejuryfoundtheconductwasnotwillfulandwanton.Therefore,theLoLclausewithstoodthechallenge.
• TaylorMorrisonofColorado,Inc.v.TerraconConsultants,Inc.,2017WL2180518,2017COA64(2017).
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LoLClauseBroadlyApplied
• ThecourtstatedthattheLoLclause“capped[geotech’s]totalaggregateliabilityto[developer]at$550,000foranyandalldamagesorexpensesarisingoutofitsservicesorthecontract.”
• ClausemusthavemetalltherequirementswithregardtodraEingastrongLoLclausethatwillbebroadlyapplied.
• Itapparentlyspecificallystatedthatthecapappliedtodamageswhetherallegedtobecausedbybreachofcontract,breachofwarranty,negligence,errorsoromissionsoranyothertheories.
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SampleLoLClause
• Limita;onofLiability• TothefullestextentpermiDedbylaw,thetotalliability,inthe
aggregate,ofConsultantanditsofficers,directors,partners,employees,agents,andsubconsultants,toClient,andanyoneclaimingthroughorunderClient,foranyclaims,losses,costs,ordamageswhatsoeverarisingoutof,resul=ngfromorinanywayrela=ngtothisProjectorContract,fromanycauseorcauses,includingbutnotlimitedtotort(includingnegligenceandprofessionalerrorsandomissions),strictliability,breachofcontract,orbreachofwarranty,shallnotexceedthetotalcompensa=onreceivedbyConsultantor$100,000,whicheverisgreater.TheClientmaynego=ateahigherlimita=onofliabilityforanaddi=onalfee,whichisnecessarytocompensateforthegreaterriskassumedbyConsultant.
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WavierofConsequen=alDamagesClause
• MutualWaiverofConsequen;alDamagesConsultantandClientwaiveallconsequen=alorspecialdamages,including,butnotlimitedto,lossofuse,profits,revenue,businessopportunity,orproduc=on,forclaims,disputes,orothermaDersarisingoutoforrela=ngtotheContractortheservicesprovidedbyConsultant,regardlessofwhethersuchclaimordisputeisbaseduponbreachofcontract,willfulmisconductornegligentactoromissionofeitherofthemortheiremployees,agents,subconsultants,orotherlegaltheory,eveniftheaffectedpartyhasknowledgeofthepossibilityofsuchdamages.Thismutualwaivershallsurvivetermina=onorcomple=onofthisContract.
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Site Safety:
Responsibility and Liability
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WhenA/EisSuedforContractorinjuries,doesProfessionalorCGLCoverageRespond?
• ProfessionalLiabilityExclusioninCGLPolicyBarsA/EfromGCLAddi=onalInsuredCoverageforLaborer’sInjuriesFromAllegedFailuretoPlanforSafeRemovalofDigesterTankLid;
• Sparksfromacutngtorchbeingusedtoremoveboltsfromawastewaterdigestertankignitedamethanegasexplosionthatkilledanemployeeofaconstruc=onsubcontractorandinjuredanemployeeofanothersubcontractor.
• Bothsubcontractor’swererequiredbytheircontractstonametheprojectdesignprofessional(DP)asanaddi=onalinsuredontheircommercialgeneralliability(CGL)polices.
• WhenclaimswerebroughtonbehalfofthesubcontractoremployeesagainsttheDP,theDPtenderedtheclaimstothesubcontractorCGLcarriersfordefense.
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InsuranceforInjuriescon=nued
• TheCGLcarriersrefusedtodefend.• Courtheldthatregardlessofhowunderlyingcauseofac=onwas
framed,“Thesubstanceoftheunderlyingclaimsisthat[DP]isliableforfailingtoproperlyplanfor,andtakepreventa=vemeasurestoensure,thesaferemovalofthedigestertanklids.…Theunderlyingplain=ffsallegethat[DP]hadadutyastheproject’sconsul=ngengineeringfirmtodoso.Evenifsomeoftheunderlyingfactualallega=onsimplicatetasksthatdonot,inandofthemselves,involveaspecializeskill,suchactsandomissionsarereasonablyrelatedto[DOP’s]overallprovisionofprofessionalservices.”
• DP’sownprofessionalliabilitycarrierdefendeditinthetwoac=onsandthecourtconcludedthattheCGLpolicieswere“neverintendedtocoverprofessionalnegligenceclaims.”Orchard,Hiltz&McCliment(OHM)v.PhoenixInsuranceCo.,2017WL244787(U.S.CourtofAppeals,6thCir.,2017).
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Scaffolding Collapse: Engineer, Architect, Project Owner Not Liable for Injuries
• Summaryjudgmentforarchitectandanengineer,againstemployeesofacontractorthatwereinjuredwhenscaffoldingfailedundertheweightofaconcreteslabthatwasbeingpoured.
• Nobasisforclaimagainstfirmsthatdesignedandobservedtheprojectbecausetheywerenotinvolvedinactualsupervisionandcontrolofthecontractorswork.
• Ci=ngtheAIAB141agreement,thecourtfoundtheengineer“wasnotobligatedtoinspectthescaffoldingtoensurethatitwasincompliance”withtheplansandspecifica=ons.
McKeanv.YatesEngineeringCorp.,2015WL5118062(Mississippi2015).
SeediscussionNextSlide
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• Courtstatedonlylimitedcircumstanceswhereengineerhasdutytowarnemployeesofthecontractororsubcontractorofhazardouscondi=ons.
• Engineerhadoneini=alsitevisitandthenavisitaEerthecollapse.
• Courtconsideredfactorstodetermineifsupervisorypowerswentbeyondprovisionsofcontract:
• (1)actualsupervisionandcontrolofthework;(2)reten=onoftherighttosuperviseandcontrol;(3)constantpar=cipa=oninongoingac=vi=esattheconstruc=onsite;(4)supervisionandcoordina=onofsubcontractors;(5)assump=onofresponsibili=esforsafetyprac=ces;(6)authoritytoissuechangeorders;and(7)therighttostopthework.
Con;nuedonnextslide
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EngineerHadnoDutytoWarn
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• Court said: “the scaffolding was a means to build the project's second-story floor”, and “nothing in the contract made the architect responsible for ensuring that the engineer’s scaffolding design was adequate.”
• Court found no contractual duty to inspect the scaffolding before the concrete was poured. Quoted the contract that stated the DP “shall visit the site at intervals appropriate … to determine that the Work when completed will be in accordance with the Contract Documents.”
• General authority to “reject” non-conforming work did not create a special duty, because the architect “had no authority to stop the work. Only [the owner] had the authority to stop work on the project.”
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Architect/Design-BuilderResponsibleforConstruc;onSubcontractor’sSiteSafety
• Onadesign-buildprojectwhereanarchitectheldtheprimecontractunderDBIAforms530and535,itwasliableforoverallsitesafety–includingthatwhichithadbysubcontractexpresslydelegatedtoitsconstruc=onsubcontractor.
• Becausethelanguageoftheprimeagreementimposedsafetydu=esontheprimedesign-builder,thecourtheldthatthosedu=escouldnotbeavoidedordelegateddowntoasubcontractor.Ryanv.TCIArchitects/Engineers/Contractors,Inc.,72N.E.3d908(Indiana2017).
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• Employeeofsub-subcontractorsustainedaworkplaceinjury.Theinjuredindividualfiledsuitagainstthedesign-buildertorecoverforitsinjuries.
• Thetrialcourt,onthebasisthatthesubcontractagreementbetweentheprimeandsub,statedthatallsitesafetyresponsibilitywasdelegatedtothesubcontractorgrantedsummaryjudgmentforthedesign-builder.
• Thisdecisionwasreversedandremandedonappeal,withtheappellatecourtexplainingthattheprimecontractorhadexpresslyagreedbythetermsoftheprimecontractwiththeprojectownertoacceptsitesafetyresponsibility,andthiscouldnotsubsequentlybedelegatedaway.Thecourtexplainedasfollows:
– “ThelanguagethatRyanpointstoasaffirma=velydemonstra=ng[Prime’s]intenttoassumeadutyofcareisfoundinthecontract[Owner]and[Prime]enteredinto—specificallyForm535.
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WhohasResponsibilityforJobsiteSafetyisDeterminedbyContractLanguage(RyanCon;nued)
• Courtfoundthatthedesign-builderassumedadutyofsafetytoallworkersonthesite,includingthoseofitssubcontractor.
• Languageinthesubcontractpurpor=ngtoshiEresponsibilitytothesubcontractorforsafetyofthesubcontractor’semployeesdidnoteliminatethedesign-buildersownresponsibilitythatitundertookpursuanttoitsprimecontract–DBIAForm530.
• Theresultofthecourt’sanalysiswasthatthe1998DBIAFormNo.530createdresponsibilityandliabilityforthedesign-builder/generalcontractorwithrespecttoinjuriesofsubcontractoremployeesontheProjectsite.
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SafetyAspectsImposedbyAgreement(RyanCon=nued)
• TheCourtnotedthattheFormagreementspecifiedthatTCI,thedesign-builder:• “(1)“[TCI]recognizestheimportanceofperformingWorkinasafemannersoastoprevent
damage,injuryorlossto...allindividualsattheSitewhetherworkingorvisi=ng...”;• (2)[TCI]assume[s]responsibilityforimplemen=ngandmonitoringallsafetyprecau=onsand
programsrelatedtotheperformanceoftheWork;• (3)[TCI]was“todesignateaSafetyRepresenta=vewiththenecessaryqualifica=onsand
experiencetosupervisetheimplementa=onandmonitoringofallsafetyprecau=onsandprogramsrelatedtotheWork’”
• (4)TheTCISafetyRepresenta=vewasto“makerou=nedailyinspec=onsoftheSiteand...holdweeklysafetymee=ngwith...Subcontractorsandothersasapplicable”;
• (5)TCIandsubcontractors“shallcomplywithallLegalRequirementsrela=ngtosafety”;• (6)TCIagreedthatit“shallatall=mesexercisecompleteandexclusivecontroloverthemeans,
methods,sequencesandtechniquesofconstruc=on”;TCIwasresponsiblefortheperformanceofthe“WorkofSubcontractorsandactsandomissionsinconnec=onwithsuchperformance;”and
• (7)TCIwasto“provideallmaterial,equipment,toolsandlabor,necessarytocompletetheWork.”• TheCourtconcludedthat,takentogether,allofthissafetyspecificcontractlanguagemeantthat
TCIhadcontractuallyagreedtoassumeadutytokeeptheworksiteinareasonablysafecondi=on.Importantly,TCIarguedthatitssubcontractwithCraEinwhichTCIexplicitlyrequiredthesubcontractortomeetthesafetyrequirementsoftheProject,didnot“override”thelanguageinTCI’scontractwiththeProjectOwnertosomehoweliminateTCI’sliabilitytoRyan.
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PrimeContractornotLiableforInjuriesofSub’sEmployeewherePrimeRetainednoControlofIndividual’sWork
• Anemployeeofanindependentcontractorcannotgenerallyrecoverdamagesfromtheonewhohiredthecontractorforwork-relatedinjuries.Oneexcep=ontothisruleiswherethehireractuallyretainedcontroloftheworkorotherwisecausedorcontributedtotheinjuries.
• Appellatecourtaffirmedtrialcourt’sdismissalofasubemployee’scasebecausetheemployeefailedtopresentevidencethattheprimecontractor(“hirer”)retainedcontrolovertheworkandaffirma=velycontributedtohisinjuries.
• AlthoughcontractbetweenPrimeandtheprojectownerrequiredtheprimecontractorto“exerciseprecau=onatall=mesfortheprotec=onofpersonsandtheirproperty,”andto“retainacompetent,full-=me,onsite-superintendentto…directtheprojectatall=mes,”andotherwisemadetheprimecontractor“exclusivelyresponsible”forthehealthandsafetyofitssubcontractors,andrequiredittosubmit“comprehensivewriDenworkplansforallac=vi=esaffec=ngUniversityopera=ons,”thiswasnotsufficientinitselftorendertheprimecontractorin“control”overtheworkactuallyperformedbythesubcontractor’semployee.Khoshv.StaplesConstruc0onCompany,4Cal.App.5th712(2016)(NEXTSLIDE)
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SiteSafety(Reten=onofControl–2)
• Thecourtfurtherexplainedthat,“Anaffirma=vecontribu=onmaytaketheformofdirec=ngthecontractoraboutthemannerofperformanceofthework,direc=ngthattheworkbedonebyapar=cularmade,orac=velypar=cipa=nginhowthejobisdone.”Inthiscasetherewasnoevidencethattheprimecontractordidanyofthesethings.Moreover,thecourtconcludedthat,“Ahirer’sfailuretocorrectanunsafecondi=on,byitself,doesnotestablishanaffirma=vecontribu=on.”
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Code Compliance
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Standard of Care May Exceed Code Requirements
• Tragic death of a two-year-old child who fell to his death from the third floor of Staples Center in Los Angeles.
• Parent’s sued architect. Court dismissed based on statute of limitations applicable to “patent”, easily discovered defect
• Parent’s also claimed against the owner of the arena, arguing it negligently breached a duty of care owed to patrons.
• The appellate court reversed summary judgment for owner because foreseeable that someone would sit or stand on the shelf, and could suffer injuries or death from a fall.
• Even if the arena owner could prove it had conformed to building codes, that would not be a complete defense in a negligence action. The individual facts would have to be considered to determine what “reasonable care” required. Henry Tang v. NBBJ, LP, 2014 WL 555163 (Cal. Appl. 2 Dist. (2014).
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ContractornotExcusedfromViola;ngBuildingCodeEvenifHomeownerDirectsHimtoViolatetheCode
• Whereahomeownerdirecteditsroofingcontractortoperformworkinamannerthatviolatedthebuildingcode,thecontractorwasneverthelessliableforaperseviola=onofthecode.Thehomeowner’swaiverofthecoderequirementsdoesnotprecludethecontractor’sliabilityforviola=on.Inthiscase,thecodepermiDednomorethantwolayersofroofingonthebuilding.Thetrialcourtissuedajuryinstruc=onadvisingthejurythatiftheyfoundthecodeviola=onwastheresultofthehomeowner’sinstruc=on,theyneednotassessdamagesagainstthecontractor.Theappellatecourtreversedandhelditwasanerrortogivethatinstruc=onandmoreover,becausethejuryfoundthatthecontractorviolatedthecode,judgmentmustbegrantedtothehomeowner.Downeyv.ChutehallConstruc=onCo.,88Mass.App.Ct.795(2016).
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StandardofCareandWarran=es
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EngineerLiableforRainwaterTankCollapseWhereitFailedtoProvideAppropriateRFIResponsestoContractor
• Engineeringfirmdesignedsiteplansforaraintanksystemtobeburied
underaparkinglotforanewchurchsanctuary.Asacontractorbeganconstruc=ngtheproject,itinquiredoftheengineerviaaRequestforInforma=on(RFI)aboutconcernsaboutthesuitabilityofthetankfortheloca=on,giventhehighwatertable,andincludedques=onsaboutinstalla=onandperformance.Withoutaddressingtheperformanceissuesorreevalua=ngthechoiceofthetanksysteminlightofthecontractor’sconcerns,theengineerreferredtoinforma=oninthemanufacturer’sdrawingstoassurethecontractorthattheirgroundwaterconcernswouldnotimpactthefunc=onalityofthetank.OnlyafewmonthsaEeritwasinstalled,thetankcollapsedundertheparkinglot.Inli=ga=onthatfollowed,thetrialcourtfoundtheengineerbreacheditsprofessionalstandardofcareby(1)failingtoconductduediligenceregardingthesuitabilityofthetank,(2)incorpora=ngamanufacturer’sspecifica=onsintoitsownplanwithoutverifyingthem,and(3)failingtorespondtoappropriateRFIques=onsduringconstruc=on.WilliamH.GordonAssociates,Inc.v.HeritageFellowship,291Va.122(2016).
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Designer not Liable for Implied Warranty of Habitability on Condo
• Condoassocia=onfiledsuitagainstanumberofthepar=esinvolvedinthedesignandconstruc=onofthecondocomplex,allegingbreachofimpliedwarrantyofhabitability.
• Associa=onaDributedairandwaterinfiltra=ontolatentdefectsinthedesignthatwerenotdiscoveredun=l2007.
• Trialcourtdismissedsuitagainstdesigner,andappellatecourtaffirmeddismissal.
BoardofManagersofParkPointatWheelingCondominiumAss’nv.ParkPointatWheeling,LLC,2015ILApp(1st)123452Seenextslide
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• Courtcitedtheprinciplethatanarchitectdoesnotwarrantorguaranteeperfec=oninhisorherplansandspecifica=onsislongstanding
• Courtfoundimpliedwarrantyshouldbelimitedtosubcontractorswhowereinvolvedwiththephysicalconstruc=onortheconstruc=on-saleoftheproperty.
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• Courtemphasizedthatimpliedwarrantyofhabitabilityofconstruc=onarisesbetweenthebuilder-sellerandthebuyerbecauseoftheir“unusualdependentrela=onship.”
• Courtconcludedthatdesigner’sroleinthedesignofthecondominiumsdidnotcreatesucharela=onship.
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• Court rejected condo association's argument that DPs have an implied obligation to perform their tasks in a “workmanlike” manner.
• Citing to Black's Law Dictionary, the court noted a “workman” is a person who is “employed in manual labor, skilled or unskilled." – “Thus the term “workmen” does not include professional persons
such as design professionals, and design professionals are not obligated to perform their professional services in a workmanlike manner.”
• Contract Lesson: Architects and engineers should be careful not to agree to contract provisions that require them to perform their services in a "good and workmanlike manner." While the phrase is seemingly innocuous, a court could find that it imposes a higher standard than the professional standard of care.
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Designersarenot“workmen”
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EngineerCanbeSuedforBreachofWarrantyofProfessionalServices
PulteHomessuedtheengineeringfirmthatperformedcertainengineeringandtes=ngservicesforabuildingsiteonwhichitbuiltahome.ItallegedthatthehomedevelopedstructuralproblemsaEerconstruc=onduetodeficienciesintheengineer’ssiteworkandtes=ng.AEerresolvingdefectsassertedbythehomeownerthrougharbitra=onproceedings,Pultefiledsuitagainsttheengineerseekingtorecoverthedamagesitincurredwiththehomeowner.Thetheoriesofrecovery,inaddi=ontoabasicnegligencecount,includedacountbasedontherighttoindemnityarisingfrombreachofexpressorimpliedwarran=es.Pulteallegedthat“S&MEexpresslyorimpliedlywarrantedtoPultethatallworkperformedbythemwouldbeperformedinacareful,diligentandworkmanlikemanner,andthatanymaterialsand/orservicesdesigned,suppliedorsoldbythemforuseontheprojectwouldbemerchantableandfitfortheirintendedorspecificpurpose.”Inreviewingthecontractlanguage,thecourtagreedthatit“includeslanguagearguablyinthenatureofanexpresswarranty.”PulteHomeCorp.v.S&ME,Inc.,2013WL4875077(U.S.DistrictCourt,SouthCarolina,2013).Forasamplecontractclausetodisavowandavoidallwarran=es,readthecommentattheconclusionofthisar=cle.
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• DesignProfessionalsshouldbecarefulintheircontractlanguagetoavoidagreeingtowarran=es–par=cularlywithlanguagesuchasthatreferencedinthisdecisionconcerning“merchantability,workmanlikeservice,and/orfitnessforapar=cularorintendedpurpose.”Itisimportanttolimitthedesignprofessional’sresponsibilitytomee=ngtherequisiteprofessionalstandardofcare.Whentheclientofthedesignfirmisageneralcontractor,adesign-builder,orahome-builder,thoseen==esaremoreinclinedtoaDempttoinsertwarran=esintothedesignprofessionalcontract.Thedesignerneedstolookbeyondjustthestandardofcareclauseinitscontract,andstrikeoutallsuchexpressandimpliedwarrantylanguage.
• SomedesignprofessionalcontractsIreviewcontainsomanyblatantorhiddenwarran=esburiedthroughoutthefineprintoftheAgreementthatIhavefounditnecessarytocreateacatchallclausetoaDempttodisavowallwarran=es,justincaseoneslipsthroughthecracksevenaEerwehaveaDemptedtofindanddeletethemall.AclausethatIuseforthispurposeisasfollows:
• “StandardofCare.NotwithstandinganyclauseinthisAgreementtothecontrary,Consultantexpresslydisclaimsallexpressorimpliedwarran=esandguaranteeswithrespecttotheperformanceofprofessionalservices,anditisagreedthatthequalityofsuchservicesshallbejudgedsolelyastowhetherConsultantperformeditsservicesconsistentwiththeprofessionalskillandcareordinarilyprovidedbyfirmsprac=cinginthesameorsimilarlocalityunderthesameorsimilarcircumstances.NothinginthisAgreementshallbeconstruedtoestablishafiduciaryrela=onshipbetweenthepar=es.”
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Contractor Claims against A/E
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Contractor Sues Owner’s Engineer for Negligent Misrepresentation
• Sub-subcontractorexperiencednumerousproblemswithsteelerec=on,allegedlycausedbyengineer’sdefec=vedesign.
• Sub-subsubmiDed81changeorderrequests;paymentwasstopped;andSubsuedowner’sengineerfornegligentmisrepresenta=onoftheadequacyofitsdesign.Trialcourtdismissedsuitforfailuretoiden=fyspecificnegligentmisrepresenta=ons.
• Issueconcernedapplica=onofEconomicLossDoctrineandtheexcep=onallowedbySec=on552oftheRestatement(Second)ofTortsfornegligentmisrepresenta=onclaims.GongloffContrac0ng,L.L.C.v.L.RobertKimball&Assocs.,ArchitectsandEng’rs,Inc.,2015Pa.Super149(Pa.Super.Ct.July8,2015)
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• Architects are subject to liability for Section 522 negligent misrepresentation claims” when it is alleged that those professionals negligently included faulty information in their design documents.
• “The design itself can be construed as a representation by the architect that the plans and specifications, if followed, will result in a successful project.”
• “ If, however, construction in accordance with the design is either impossible or increases the contractor’s costs beyond those anticipated because of defects or false information included in the design, the specter of liability is raised against the design professional.”
• Contractor was not required to explicitly pinpoint the specifics of the faulty design, i.e., it was not required to identify an express representation by the engineer.”
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Engineer May Be Liable to Contractor for Both Breach of Professional Duty and Negligent
Misrepresentation
• Engineerwhopreparesdocumentsthatcontractorswillrelyonwhenpreparingtheirbidsowesdutyofcaretocontractors,andcanbeheldliableforbothbreachofprofessionaldutyandnegligentmisrepresenta=on.
• Beforeprojectwasputouttobid,theengineerconductedgeologicalstudiesandpreparedreportsdescribingthecondi=onsontheproject.GeotechnicalBaselineReport(“GBR”),wasfurnishedtobidderssotheycouldes=matethecostofperformingthework.TheGBRindicatedthat“themajorityofthesubterraneanregion…wascomposedofstablesoilssuitableforHDD.”
ApexDirec0onalDrilling,LLCv.SHNConsul0ngEng’rs&Geologists,Inc.,2015U.S.Dist.LEXIS105537(N.D.Cal.Aug.11,2015).
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• Contractor encountered mud and flowing sands very different from the soils described in the GBR.
• When contractor reported these different conditions to city, the engineer “continued to maintain that the project was proceeding in the competent soils described in the GBR, and, on that premise, repeatedly gave Apex illogical instructions.”
• City, acting on the engineer’s recommendations, rejected change order requests and ultimately terminated the contractor.
• Contractor sued city for breach of contract and then filed a separate complaint against the engineer asserting claims for breach of professional duty and negligent misrepresentation.
• Engineer argued it did not owe the contractor a duty of care.
• Court found engineer owed the contractor a duty of care.
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• Courtobservedthatinthecontextofanegligenceclaimseekingeconomicdamageswherethereisnocontractualprivity,Californiacourtsuseasix-factorbalancingtesttodeterminewhetheradutyofcareexists.
• Factorsare:1)theextenttowhichthetransac=onwasintendedtoaffecttheplain=ff;2)theforeseeabilityofharmtotheplain=ff;3)thedegreeofcertaintythattheplain=ffsufferedaninjury;4)theclosenessoftheconnec=onbetweenthedefendant’sconductandtheinjurysuffered;5)themoralblameaDachedtothedefendant’sconduct;and6)thepolicyofpreven=ngfutureharm.
• Courtfoundthatfirst,thirdandfourthfactorsfavoredimposingadutyofcare,astheGBRwaspreparedforthepurposeofestablishingabaselineuponwhichthecontractorwouldbaseitsbid;mistakesintheGBRandtheengineer’ssubsequentac=onscausedthecontractortosufferconsiderablelosses.
• Thecourtstatedthatbecausethedutywasowedto“aspecific,foreseeableandwell-definedclass”,therewouldnotbe“unlimitedliabilitytoanebulousgroupoffutureplain=ffs.”
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Designvs.PerformanceSpecsImpactsWhoisLiableforProblems
• Contractorinstalledpinewooddeckingrenova=ngthefrontporchofahistoricalbuilding.
• Projectowner(anarchitect),insistedonuseofpinedespitethecontractor’s“repeatedrecommenda=onstouseadifferentmaterial”suchasvinylflooringbecausepinewasnotasuitablechoicefordeckingthenortheast.
• Owner’sinsistenceonpinecons=tutedadesignspecifica=on.• Courtconcluded,“Althoughthecontractdidnotexpresslystate
whetherthepar=esenteredintoaperformanceordesignspecifica=oncontract,itisabundantlyclearthatthepar=eswereworkingpursuanttoadesignspecifica=onagreement.”– CGMConstruc0on,Inc.v.Sydor,144A.D.3d1434,42N.Y.S.3d407(2016)– NEXTSLIDE
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Designvs.PerformanceSpecs(con=nued)
• Sinceadesignspecifica=oncontractrequiresacontractortousethematerialsselectedbytheowner,thecontractordoesnotbearanyresponsibilityifthedesignprovestobeinadequatetoachievetheintendedresult.CGMConstruc0on,Inc.v.Sydor,144A.D.3d1434,42N.Y.S.3d407(2016).ThisdecisionappliedtheSpearinDoctrine.NextSlide
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Designvs.PerformanceSpecs(con=nued)
• Whetheraconstruc=oncontractisoneofperformanceordesignspecifica=onturnsonthelanguageofthecontractasawhole,withconsidera=ongiventofactorssuchas“thenatureanddegreeofthecontractor’sinvolvementinthespecifica=onprocess,andthedegreetowhichthecontractorisallowedtoexercisediscre=onincarryingoutitsperformance”[cita=onsomiDed].”
• Thecourtfoundthatthecontractor’sworkwascompletedaccordingtotheowner’sinstruc=onsandtheownerwas,therefore,responsibleforanydefectsthatresultedfromhisdesignandcouldnotescapepaymentofthebalanceowedthecontractorforthecompletedwork.
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Dispute Resolution
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WhyA/EFirmsShouldOpttoLi;gateinsteadofArbitrate
• 1)Payingarbitratorcosts(especially3personpanel)veryexpensive;• 2)Discoveryanddeposi=onsinli=ga=onvs.limitedanduncertain
discoveryinarbitra=on;• 3)Disposi=vemo=onscanbemadeinli=ga=on,however,thatisnota
rightinarbitra=on–orthearbitratorsmaynotconsiderthembeforethearbitra=onhearinganyway;
• 4)Youhaveachancetoobtainacompletedefenseverdictinli=ga=on,whereasinarbitra=on,thearbitratoroEen"splitsthebaby";
• 5)Youhavetherighttofilepost-trialmo=onsinli=ga=on,nosuchrightexistsinarbitra=on;and
• 6)YouhavetherighttoappealthetrialcourtverdictinLi=ga=on-incontrast,thereisessen=allynorighttoappealinArbitra=on.
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Se`lingSuitwithoutPriorApprovalofInsuranceCarrierCausesInsuredtoForfeitCoverageRegardlessofWhether
theCarrierwasHarmed
• The“no-voluntarypayments”condi=onofaninsurancepolicywasviolatedbyaninsuredsubcontrac=ngconcretecompany,whenitenteredintoaseDlementwithitsprimecontractorandpaiddamagesforcontractualliabilityforconstruc=ondelaysaswellasforanaccident,withoutfirstno=fyingitsinsurancecarrierandobtainingpriorapprovaltoseDlethedispute.
• WhenSubsubsequentlysoughtindemnifica=onfromitsinsurancecarrier,thecarrierdeniedcoverage.
• Held:Sub’scomplaintagainstcarriershouldhavebeendismissedonsummaryjudgmentmo=onregardlessofwhetherthesubcontractorcoulddemonstratethattheunauthorizedseDlementdidnotcauseprejudiceorharmedtothecarrier.TravelersPropertyCasualtyCompanyv.StressonCorpora0on,370P.3d140(Colorado2016).
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Disclaimer This information is not legal advice and cannot be relied upon as such. Any suggested changes in wording of contract clauses, and any other information provided herein is for general educational purposes to assist in identifying potential issues concerning the insurability of certain identified risks that may result from the allocation of risks under the contractual agreement and to identify potential contract language that could minimize overall risk. Advice from legal counsel familiar with the laws of the state applicable to the contract should be sought for crafting final contract language. This is not intended to provide an exhaustive review of risk and insurance issues, and does not in any way affect, change or alter the coverage provided under any insurance policy. Construc=onRisk,PLLCisnotasubsidiaryoraffiliateofArch/PUAanduseofConstruc=onRisk,PLLCproductsandservicesareindependentof,andnotincludedwithin,thePolicyoranyotherArch/PUAproductorservice.Arch/PUAandUSIexpresslydisclaimanyandalldamagesandothercoststhatmayariserelatedtotheuseoforrelianceupontheproducts,services,representa=onsorwarran=esmadebyoronbehalfofConstruc=onRisk,PLLC.
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Questions?
J. Kent Holland, Esq. ConstructionRisk, LLC 1950 Old Gallows Rd, Ste 750 Tysons Corner, VA 22182 703-992-9480 (o) 703-623-1932 (c) [email protected] Sandip R. Chandarana, J.D., CPCU, RPLU Director Professional Underwriters Agency A Division of NSM Insurance Group 2803 Butterfield Road, Suite 260 Oak Brook, IL 60523 Direct: 630-861-2330 Phone: 630-572-0600 x1601 [email protected] www.puainc.com
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CONTACT Information & DISCLAIMER • Contact Information: Kent Holland
Email: [email protected] WEBSITE: www.ConstructionRisk.com - Free Risk Report Phone: 703-623-1932
Disclaimer: This information is not legal advice and cannot be relied upon as such. Any suggested changes in wording of contract clauses, and any other information provided herein is for general educational purposes to assist in identifying potential issues concerning the insurability of certain identified risks that may result from the allocation of risks under the contractual agreement and to identify potential contract language that could minimize overall risk. Advice from legal counsel familiar with the laws of the state applicable to the contract should be sought for crafting final contract language. This is not intended to provide an exhaustive review of risk and insurance issues, and does not in any way affect, change or alter the coverage provided under any insurance policy.
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Questions?
J. Kent Holland, Esq. ConstructionRisk, LLC 1950 Old Gallows Rd, Ste 750 Tysons Corner, VA 22182 703-992-9480 (o) 703-623-1932 (c) [email protected] • For case notes and articles on design-build decisions and
other case law, visit: www.ConstructionRisk.com. For research or for free newsletter, visit: “ConstructionRisk.com Report”
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