Risk Management/Lessons Learned Design Professional ......1. We will learn risk management and...

1

Risk Management/Lessons Learned Design Professional Litigation (2016)

Presentation by

J. Kent Holland, J.D.

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

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

3

Indemnification

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)

5

•  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.”

6

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).

7

DoesIndemnityOnlyApplyto3rdPartyClaims?

•  Bewareofcourtdecisionsthathaveheldthatevenfirstpartyclaimscanbemadeunderindemnityclauses.–  e.g.,Wal-Martv.QoreEnvironmental

8

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).

9

KRfiledsuitagainsttowntorecoverpaymentsitallegedwereoweditunderitsconstruc;oncontract.

•  Complaintassertedconstruc=onwasinaccordancewithengineer’splansandspecsthatcalledforaspecificbrandofdiscfiltersforawastewatertreatmentfacilitythatwerenotcapableofhandlingrequiredwastewaterflow.

•  Uponreceiptofthesuit,thetownsenttheengineerademandforadefenseagainstthecontractor’ssuitpursuanttothetermsoftheindemnifica=onclauseinthecontractbetweentheengineerandthetownandtheengineer.Theengineerrespondedtothetown’sdemand,sta=ngitwouldnotdefend(orindemnify)thetownbecausetheallega=onsofthecontractorwerenotdirectedattheengineer.

10

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.”

11

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.”

12

“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.”

13

DraEClausetoLimitIndemnitytoThirdPartyTortClaims

•  Theneedtoadd“thirdparty”asamodifierof“claim”wasrevealedinthedecisionofWal-MartStoresv.Qore,Inc.,647F.3d237(5thCir.,2011)inwhichacourtconcludedthatWal-MartcouldmakeafirstpartyclaimagainstQoretorecoverlossesincurredontheprojecteventhoughnothirdpartyclaimwasevermadeagainstWal-Mart.

•  ThatdecisionimposedaDorneys’feesonQorebyconcludingthatthedefenseobliga=onintheindemnifica=onclausemeantthatQorewasresponsiblefortheaDorneys’feesincurredbyWal-Martinprosecu=ngaclaimagainsttheengineerandcontractor.

14

ASampleClauseforYourConsidera=on

•  “Consultantshallindemnifyandholdharmless(butnotdefend)the

Client,itsofficers,directors,andemployees,fromandagainstthosedamagesandcoststhattheClientislegallyobligatedtopayasaresultofthirdpartytortclaims,includingthedeathoforbodilyinjurytoanypersonorthedestruc=onordamagetoanytangibleproperty,totheextentcausedbythenegligenceoftheConsultantoranyoneforwhomtheConsultantislegallyresponsible,subjecttoanylimita=onsofremediesorliabilitycontainedinthisAgreement.”

15

Limitation of Liability

(LoL)

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).

17

LoLClauseBroadlyApplied

•  ThecourtstatedthattheLoLclause“capped[geotech’s]totalaggregateliabilityto[developer]at$550,000foranyandalldamagesorexpensesarisingoutofitsservicesorthecontract.”

•  ClausemusthavemetalltherequirementswithregardtodraEingastrongLoLclausethatwillbebroadlyapplied.

•  Itapparentlyspecificallystatedthatthecapappliedtodamageswhetherallegedtobecausedbybreachofcontract,breachofwarranty,negligence,errorsoromissionsoranyothertheories.

18

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.

19

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.

20

Site Safety:

Responsibility and Liability

WhenA/EisSuedforContractorinjuries,doesProfessionalorCGLCoverageRespond?

•  ProfessionalLiabilityExclusioninCGLPolicyBarsA/EfromGCLAddi=onalInsuredCoverageforLaborer’sInjuriesFromAllegedFailuretoPlanforSafeRemovalofDigesterTankLid;

•  Sparksfromacutngtorchbeingusedtoremoveboltsfromawastewaterdigestertankignitedamethanegasexplosionthatkilledanemployeeofaconstruc=onsubcontractorandinjuredanemployeeofanothersubcontractor.

•  Bothsubcontractor’swererequiredbytheircontractstonametheprojectdesignprofessional(DP)asanaddi=onalinsuredontheircommercialgeneralliability(CGL)polices.

•  WhenclaimswerebroughtonbehalfofthesubcontractoremployeesagainsttheDP,theDPtenderedtheclaimstothesubcontractorCGLcarriersfordefense.

22

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).

• 

23

Scaffolding Collapse: Engineer, Architect, Project Owner Not Liable for Injuries

•  Summaryjudgmentforarchitectandanengineer,againstemployeesofacontractorthatwereinjuredwhenscaffoldingfailedundertheweightofaconcreteslabthatwasbeingpoured.

•  Nobasisforclaimagainstfirmsthatdesignedandobservedtheprojectbecausetheywerenotinvolvedinactualsupervisionandcontrolofthecontractorswork.

•  Ci=ngtheAIAB141agreement,thecourtfoundtheengineer“wasnotobligatedtoinspectthescaffoldingtoensurethatitwasincompliance”withtheplansandspecifica=ons.

McKeanv.YatesEngineeringCorp.,2015WL5118062(Mississippi2015).

SeediscussionNextSlide

24

•  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

25

EngineerHadnoDutytoWarn

•  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.”

26

Architect/Design-BuilderResponsibleforConstruc;onSubcontractor’sSiteSafety

•  Onadesign-buildprojectwhereanarchitectheldtheprimecontractunderDBIAforms530and535,itwasliableforoverallsitesafety–includingthatwhichithadbysubcontractexpresslydelegatedtoitsconstruc=onsubcontractor.

•  Becausethelanguageoftheprimeagreementimposedsafetydu=esontheprimedesign-builder,thecourtheldthatthosedu=escouldnotbeavoidedordelegateddowntoasubcontractor.Ryanv.TCIArchitects/Engineers/Contractors,Inc.,72N.E.3d908(Indiana2017).

27

•  Employeeofsub-subcontractorsustainedaworkplaceinjury.Theinjuredindividualfiledsuitagainstthedesign-buildertorecoverforitsinjuries.

•  Thetrialcourt,onthebasisthatthesubcontractagreementbetweentheprimeandsub,statedthatallsitesafetyresponsibilitywasdelegatedtothesubcontractorgrantedsummaryjudgmentforthedesign-builder.

•  Thisdecisionwasreversedandremandedonappeal,withtheappellatecourtexplainingthattheprimecontractorhadexpresslyagreedbythetermsoftheprimecontractwiththeprojectownertoacceptsitesafetyresponsibility,andthiscouldnotsubsequentlybedelegatedaway.Thecourtexplainedasfollows:

–  “ThelanguagethatRyanpointstoasaffirma=velydemonstra=ng[Prime’s]intenttoassumeadutyofcareisfoundinthecontract[Owner]and[Prime]enteredinto—specificallyForm535.

28

WhohasResponsibilityforJobsiteSafetyisDeterminedbyContractLanguage(RyanCon;nued)

•  Courtfoundthatthedesign-builderassumedadutyofsafetytoallworkersonthesite,includingthoseofitssubcontractor.

•  Languageinthesubcontractpurpor=ngtoshiEresponsibilitytothesubcontractorforsafetyofthesubcontractor’semployeesdidnoteliminatethedesign-buildersownresponsibilitythatitundertookpursuanttoitsprimecontract–DBIAForm530.

•  Theresultofthecourt’sanalysiswasthatthe1998DBIAFormNo.530createdresponsibilityandliabilityforthedesign-builder/generalcontractorwithrespecttoinjuriesofsubcontractoremployeesontheProjectsite.

29

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.

30

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)

31

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.”

32

Code Compliance

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).

34

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).

35

StandardofCareandWarran=es

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).

37

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

38

•  Courtcitedtheprinciplethatanarchitectdoesnotwarrantorguaranteeperfec=oninhisorherplansandspecifica=onsislongstanding

•  Courtfoundimpliedwarrantyshouldbelimitedtosubcontractorswhowereinvolvedwiththephysicalconstruc=onortheconstruc=on-saleoftheproperty.

Seenextslide

39

•  Courtemphasizedthatimpliedwarrantyofhabitabilityofconstruc=onarisesbetweenthebuilder-sellerandthebuyerbecauseoftheir“unusualdependentrela=onship.”

•  Courtconcludedthatdesigner’sroleinthedesignofthecondominiumsdidnotcreatesucharela=onship.

Seenextslide

40

•  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.

41

Designersarenot“workmen”

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.

42

•  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.”

43

Contractor Claims against A/E

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)

Seenextslide45

•  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.”

46

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).

Seenextslide

47

•  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.

See next slide

48

•  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.”

49

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

50

Designvs.PerformanceSpecs(con=nued)

•  Sinceadesignspecifica=oncontractrequiresacontractortousethematerialsselectedbytheowner,thecontractordoesnotbearanyresponsibilityifthedesignprovestobeinadequatetoachievetheintendedresult.CGMConstruc0on,Inc.v.Sydor,144A.D.3d1434,42N.Y.S.3d407(2016).ThisdecisionappliedtheSpearinDoctrine.NextSlide

51

Designvs.PerformanceSpecs(con=nued)

•  Whetheraconstruc=oncontractisoneofperformanceordesignspecifica=onturnsonthelanguageofthecontractasawhole,withconsidera=ongiventofactorssuchas“thenatureanddegreeofthecontractor’sinvolvementinthespecifica=onprocess,andthedegreetowhichthecontractorisallowedtoexercisediscre=onincarryingoutitsperformance”[cita=onsomiDed].”

•  Thecourtfoundthatthecontractor’sworkwascompletedaccordingtotheowner’sinstruc=onsandtheownerwas,therefore,responsibleforanydefectsthatresultedfromhisdesignandcouldnotescapepaymentofthebalanceowedthecontractorforthecompletedwork.

52

Dispute Resolution

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.

54

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).

55

56

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.

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) Kent@ConstructionRisk.com 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 sandip@puainc.com www.puainc.com

57

58

CONTACT Information & DISCLAIMER •  Contact Information: Kent Holland

Email: Kent@ConstructionRisk.com 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.

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) Kent@ConstructionRisk.com •  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”

59