constructionattorneyblog

Florida Supreme Court follows Texas' Lamar Homes

On December 20, 2007, the Florida Supreme Court issued a ruling in United States Fire Insurance Company v. J.S.U.B., Inc. Here is an excerpt:

We conclude that defective work performed by a subcontractor that causes damage to the contractor’s completed project and is neither expected nor intended from the standpoint of the contractor can constitute "property damage" caused by an "occurrence" as those terms are defined in a standard form commercial general liability policy. Accordingly, a claim made against the contractor for damage to the completed project caused by a subcontractor’s defective work is covered under a post-1986 CGL policy unless a specific exclusion applies to bar coverage. In this case, the terms of the policy included an exception to the "Your Work" exclusion for faulty workmanship by a subcontractor and did not include a breach of contract exclusion.

This follows the lead of the Texas Supreme Court in Lamar Homes, Inc. v. Mid-Continent Cas. Co., 50 Tex. Sup. Ct. J. 1162, 2007 WL 2459193 (Tex., Aug. 31, 2007)

Limitation of Liability in new AIA Document

One of the new 2007 AIA documents is B103 -- Owner-Architect Agreement for a Large or Complex Project. This document differs from the flagship owner-architect agreement, B101, in that the owner is expected to hire cost and scheduling consultants, and it also anticipates that the project will be done as phased or fast-track construction in most cases. However, one of the more interesting provisions in this document that does not show up in the other new 2007 owner-architect agreements is a limitation of liability provision. Here it is:

§ 8.1.3 The Architect shall indemnify and hold the Owner and the Owner’s officers and employees harmless from and against damages, losses and judgments arising from claims by third parties, including reasonable attorneys’ fees and expenses recoverable under applicable law, but only to the extent they are caused by the negligent acts or omissions of the Architect, its employees and its consultants in the performance of professional services under this Agreement. The Architect’s duty to indemnify the Owner under this provision shall be limited to the available proceeds of insurance coverage.

Note that this paragraph starts out as an "indemnification" of the owner by the architect. This seems to be very pro-owner and is something that we would normally strike from any contract proposed by an owner. The indemnification, however, is limited to the negligent acts or omissions of those for whom the architect is responsible. This is not an expansion of the architect's liability as the architect would be responsible for such acts or omissions in the absence of such language.

The more interesting part of this paragraph is the last sentence wherein the architect's liability under this paragraph is limited to the available insurance proceeds. Owners should be aware that such a limit may be somewhat illusory, since most of the professional liability policies are of the "declining balance" variety, wherein the costs of defense, notably attorneys fees, reduce the available limits as a case progresses. Also, if another claim is made against the architect's policy in the same policy period, both matters would erode the available limits.

To offset this problem, B103 permits the owner to require the architect to carry additional insurance (at the owner's expense). See Section 11.8.1.8 of B103. If the owner invokes this option, the owner should require, and pay for, insurance that extends several years after completion of the project, otherwise the architect will revert to the prior policy limits at the conclusion of the project and latent defects not discovered until later will not be subject to the greater insurance limits expected by the owner.

A final interesting question is whether the architect may be liable to the owner for errors or omissions outside of this indemnification paragraph. If so, the limitation of liability will not protect the architect to the extent that it may appear on first reading this provision since the limitation covers only the architect's duty to indemnify the owner under "this provision." Presumably, the answer is that any claims by the owner for an error or omission by the architect, employees of the architect, or consultants to the architect are subject to this paragraph. If there is a claim by the owner that is not a "negligent act or omission," the limitation may not apply. We await a court's determination of this issue.

Seventh Circuit Rules for Injured Construction Worker - Interprets Section 414 of Restatement

In Aguirre v. Turner Construction, decided September 7, 2007 by the Seventh Circuit, the plaintiff was injured when he fell from a scaffold while working for a masonry subcontractor. He sued the general for negligence based on Section 414 of the Restatement of Torts and res ipsa loquitur. The district court granted the general summary judgment based on the general not having retained sufficient control over the subcontractor's work to give rise to any duty of care or supply a basis for liability on the res ipsa theory.

The Seventh Circuit reversed, after analyzing several Illinois cases that had analyzed Section 414. The theory is often called the "retained control" theory of negligence liability. The court explained that Section 414 allowed for direct liability against a general contractor by an injured worker for a subcontractor based on the existence of a duty of reasonable care. That duty is triggered when the GC has retained supervisory control over the independent contractor without retaining control over all operative details of a project. Liability then arises when the GC knows or by the exercise of reasonable care should know that the sub's work is being done dangerously, and has the opportunity to prevent it by exercising the power of control which the GC has retained. Liability also arises if the GC knows or should know that the sub has carelessly done its work in such a way as to create a dangerous condition, and fails to exercise reasonable care either to remedy it himself or by the exercise of his control to cause the sub to do so.

In this case, the GC had extensive safety oversight. The sub was required to follow 23 rules specific to scaffold construction. The GC's employees regularly walked the site and could require the sub to correct any deficiencies observed in scaffolds. Finally, the GC imposed specific alternative design requirements on the scaffold from which the plaintiff fell.

Finality in the Initial Decision under the 2007 A201

One of the new provisions of the 2007 AIA Documents is the establishment of an Initial Decision Maker. See Section 15.2 of AIA Document A201. In the past, this role was fulfilled by the architect, but there were often problems with this setup. Many contractors, justifiably or not, believed this to be a conflict of interest for the architect. This new provision, if implemented by the parties (the owner and contractor), calls for a third-party neutral to be named in advance and to make preliminary decisions concerning disputes between the owner and contractor. If no one is named, then the architect undertakes this role by default.

Buried within the various paragraphs that discuss how this will work, is an opportunity for owners to limit future litigation if done properly. Here is the relevant paragraph:

§ 15.2.6.1 Either party may, within 30 days from the date of an initial decision, demand in writing that the other party file for mediation within 60 days of the initial decision. If such a demand is made and the party receiving the demand fails to file for mediation within the time required, then both parties waive their rights to mediate or pursue binding dispute resolution proceedings with respect to the initial decision.

What this contemplates is that an initial decision will be made by the Initial Decision Maker (either the architect or a third party) concerning a dispute between the owner and contractor. Most of these disputes will likely revolve around changes or extras to the contract. Often, the contractor will make a claim for additional money that will be the subject of such an initial decision. Once that initial decision is made, under most circumstances, nothing else will happen until the conclusion of the project, when the unhappy party (most likely the contractor) will aggregate all of these decisions and begin the final claims process consisting of mediation first, followed by either arbitration, if selected, or litigation (the default). The more of these unsuccessful claims there are, the more likely it is that the contractor will pursue litigation to obtain relief after the conclusion of the project.

However, if the owner is aware of Section 15.2.6.1, he can, effectively, cut off such future litigation by making a 30 day demand. Under this procedure, within 30 days of the date of an initial decision, the party in whose favor the decision is made can file a written demand with the other party to commence mediation within 60 days after the date of the initial decision. The failure to commence mediation (this would be done by filing a written demand for mediation with the American Arbitration Association) within this time period cuts off that particular claim and waives it for all future purposes.

Of course, this theoretically works the other way, with a decision in favor of the contractor by the Initial Decision Maker, followed by a 30 day written demand by the contractor served on the owner to commence mediation. If the owner fails to commence mediation within 60 days, the initial decision is final and, presumably, a change order to reflect that would be processed by the architect. In most cases, it can be assumed, this will not work in favor of the contractor, since most claims are by the contractor against the owner, not the other way around.

The parties, and their attorneys, should be aware of this powerful tool. While this is similar to Section 4.4.6 of the 1997 version of A201, this does not require any special language in the initial decision itself. The burden is on the parties to invoke this for their own benefit.

The new AIA Documents and Arbitration - What Rules Apply?

One subtle change in the new 2007 AIA documents involves the incorporation of the Rules of the American Arbitration Association into the agreement, assuming that arbitration is selected as the dispute resolution method. For example, AIA Document B101, Owner-Architect Agreement, states:

§ 8.3.1 If the parties have selected arbitration as the method for binding dispute resolution in this Agreement, any claim, dispute or other matter in question arising out of or related to this Agreement subject to, but not resolved by, mediation shall be subject to arbitration which, unless the parties mutually agree otherwise, shall be administered by the American Arbitration Association in accordance with its Construction Industry Arbitration Rules in effect on the date of this Agreement.

The end of this sentence sets the applicable rules as those "in effect on the date of this Agreement," at least according to the AIA, and this does appear to be what this says. However, if one reads the AAA rules, the very first rule of the AAA reads as follows:

R-1. Agreement of Parties

(a) The parties shall be deemed to have made these rules a part of their arbitration agreement whenever they have provided for arbitration by the American Arbitration Association (hereinafter AAA) under its Construction Industry Arbitration Rules. These rules and any amendment of them shall apply in the form in effect at the time the administrative requirements are met for a demand for arbitration or submission agreement received by the AAA. . . .

Thus, the AIA agreement incorporates this, and other, rules into the agreement. Note that Rule 1 states that the rules that apply are the ones "in effect at the time the administrative requirements are met for a demand for arbitration..." Thus, the rules that will govern the arbitration are not necessarily the ones in effect on the date of the Agreement, but the ones in effect at the time the arbitration is filed with AAA.

One might argue that the AIA agreement trumps Rule 1, but the reverse is true. The AIA document incorporates the AAA Rules, which specify which actual rules will apply. The AIA document does not change that, although a more careful drafting of the above-quoted language could have done so.

So what, you might ask. Do the Rules ever change? Absolutely! Several years ago, the AAA instituted "consumer-friendly" rules. These were intended to apply to situations involving consumers and shifted most of the costs to the business. For instance, if a small architect or contractor were doing work for Michael Jordan (this is an example only, because he is very wealthy. I am not picking on him) on his multi-million dollar residence. Suppose that a dispute developed and a massive arbitration ensued. Under those rules (since changed, because of the ensuing uproar), the owner’s share of the fees was capped at less than $500, while the contractor or architect might have paid tens of thousands of dollars! Because of the ensuing outrage over this, the rules were again revised, but there is no telling when the rules may again be amended to the detriment of architects or contractors.

If the parties truly want the rules that are in effect as of the date of the agreement to be applicable, the standard AIA language needs to be tweaked. Since we are not giving legal advice, we will not make a suggestion, but any competent construction attorney should be able to structure something that will work.

New AIA documents and Arbitration

Much is being written about the 2007 AIA Documents, which were released in early November. One of the much-discussed differences in these documents is the fact that arbitration is no longer the default dispute resolution mechanism, being replaced by a "check-box" system whereby three options are provided: arbitration, litigation and "other." If none of the boxes is checked, then litigation is the default mechanism, following mandatory mediation.

It was with great interest that I opened the new documents using the AIA's Electronic Documents software system. I immediately printed out several of the new documents, including various owner-architect agreements and an owner-contractor agreement. At this point, I had not filled in anything. I was, therefore, astonished to find that the "arbitration" box had been checked on all of the documents where that option appeared. Thinking that I had made some type of mistake, I again started a brand new document and made sure not to check anything.  Once again, the arbitration choice was checked.

I mentioned this to several other people, one of whom apparently has a friend that worked on the electronic version of the documents, and I was informed (this was third or fourth-hand) that the reason this had occurred was that one of the boxes had to be initially checked in order to make the program work, and that the AIA did not favor arbitration. (note that I did not actually speak to this person directly, so I can't vouch for what was actually said). After thinking about this for about half a second, I realized that they could just as easily have selected the "litigation" check box as the one that was initially selected by the software, particularly as that choice is supposed to be the default.

The reason I bring this up is not to blame the AIA for anything. After all, arbitration was the preferred method in the AIA documents for decades. And, the paper documents do not have anything pre-checked. However, most users today are using the electronic documents and may not be aware that they actually need to check the litigation box if that is what they intend. If they just read the articles that claim that litigation is the automatic "default," they may not even look at this provision when drafting the documents if they actually want to have litigation as the real default. They may be surprised years later to receive a demand for arbitration. If they are attorneys, they may be open to a claim for legal malpractice if their client insisted on not using arbitration and they relied on the "default" litigation story.

Perhaps the real lesson is to always read every word of every contract.

False Claims lands Engineer in jail

In United States v. Vitillo, 490 F.3d 314 (C.A.3 (Pa.), 2007), an engineer was sentenced to 36 months' imprisonment for violation of 18 U.S.C. Sec. 666, which prohibits an "agent" of a local governmental agency that receives more than $10,000 in federal funds from stealing from that agency property valued at more than $5,000. The engineering firm was also fined more than $300,000.

The engineer and his firm provided consulting engineering and construction management services to a regional airport authority which received federal funding  for a terminal expansion project. The engineer billed at hourly rates. The trial evidence indicated that the firm created fraudulent invoices for work not performed.

Of interest is that this engineer was an independent, outside contractor. The court agreed with the prosecutors that this federal statute could be used against consulting engineers and contractors who overbill the government. Anyone who performs work for a governmental entity and who commits fraud in billing is subject to federal criminal prosecution.

Repercussions of Architect's failure to meet continuing education requirements

According to a recent article in the Oak Park Wednesday Journal, an Illinois architect failed to timely comply with state laws that required proof of continuing education. This resulted in his status as "non-renewed." When this was reported to local officials, the building department stopped construction on several projects involving the architect.

Architect can't profit from wrongful conduct

According to this post on the Contracts Prof Blog, an architect who had worked for the New York City Board of Education and approved a site for conversion to a school, and subsequently left the job to form his own firm and obtained a lucrative $300,000 contract to manage the project in violation of law. When this came to light, his contract was terminated and he sued. The appellate court reversed a finding in his favor, concluding that, “under the circumstances of this case, it is against public policy to permit the plaintiffs to enforce the subject contract and to profit from their wrongdoing."

Airport Design team sues Atlanta

According to this article in the Atlanta Business Chronicle:

The dispute between the airport and its design team for an international terminal has escalated to the courts.

The design team, a consortium that includes Leo A. Daly Co., Khafra Engineering Inc., Anthony C. Baker Architects and Planners PC, and Browder & LeGuizamon, filed a suit Tuesday, one day after receiving termination notice from the airport General Manager Ben DeCosta.

They are suing the city of Atlanta for breach of contract and punitive damages, and are asking for $10 million in payments and an additional $50 million for damaging their reputation.