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ConstructionRisk.com Report
http://www.ConstructionRisk.com

Vol. 9, No. 8, December 2007

Inside This Issue:   

• Attorneys Fees Recovery Granted by Court

• Building Information Modeling: The Wave of the Future?

• Surety Cannot Maintain Negligence Action against A/E for Alleged Failure to Adequately Inspect and Supervise Contractor’s Work

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The Construction SuperConference is in its 22nd year is recognized as the preeminent legal construction conference. With the guidance of the Advisory Board and the expertise and feedback from past participants and long-time supporters of the conference, a program has been established that will provide insight into some of the most complex legal and business issues facing the construction industry.

This year the conference has been organized into 4 tracks: Legal and Institutional, Business Related Issues, Contracts and Management, and Industry Specific. In addition there are three plenary session presentations, a breakfast session, and, for the first time, "deep dive" workshops. The workshops, offered on Friday afternoon, are an opportunity for attendees to get into very interactive sessions that will spend time on very specific and focused topics, strategies, services, or technologies that affect our industry. For an example, a session on e-discovery may have panelists and experts discussing the benefits, objectives, and case studies with regards to e-discovery. The workshop will then discuss deeper issues with regards to how you can implement e-discovery in your firm.

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Article 1

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Attorneys Fees Recovery Granted by Court

By: Nancy Zabala Graham

The California Court of Appeal in the third appellate district recently affirmed the award of almost $200,000 in attorney fees pursuant to a "prevailing party" attorneys' fees provision in a contract. What makes this case interesting is the fact that the property owner, who was awarded his attorneys' fees, was not in contract with the subcontractor who was ordered to pay the fees. The Court based its award on a contract between the general contractor and subcontractor and found that the owner was an intended third party beneficiary to that contract. Vincent Loduca, Jr. v. George Polyzos (2007) 153 Cal. App. 4th 334.

In 1989, Vincent Loduca, the project owner, retained MCM Builders to act as the general contractor to build his custom home. MCM, in turn, hired subcontractor QMC to manufacture and install custom cabinetry in the new home. The subcontract between MCM and QMC included a clause which stated that the prevailing party in any litigation arising out of the subcontract would be awarded its attorneys' fees.

Although QMC was directly in contract with MCM, Loduca paid for some of the subcontractor's services directly. In addition, toward the end of the project, Loduca and QMC entered into a separate agreement, where QMC agreed to deliver certain remaining components and Loduca agreed to pay $10,000 on delivery. When Loduca received the cabinets he noticed numerous problems with them and asked his bank to stop payment on the check sent to QMC. QMC then removed all of the cabinetry from the home without the owner's permission and litigation ensued. QMC filed a complaint against Loduca for recovery of unpaid amounts and Loduca filed a cross complaint for breach of contract, among other things.

The trial court entered judgment in favor of Loduca and awarded $65,000 in damages. At a subsequent hearing, the trial court awarded attorneys' fees to Loduca pursuant to the contract between MCM and QMC in the amount of $190,350. QMC appealed, claiming the court erred by awarding Loduca attorneys' fees because Loduca was not a party to the contract between QMC and MCM and therefore should not benefit from the attorneys' fees clause.

The court held that the homeowner was in fact "an intended third party beneficiary" who could enforce the subcontract and request attorneys' fees. A third party beneficiary, although not a party to the contract, may be entitled to enforce a contract if it proves that the contracting parties intended to benefit the third party with the contract.

In Loduca's case, the court concluded that Loduca was an intended beneficiary of the subcontract and therefore able to enforce the attorneys' fees provision for several reasons. First, the subcontract's "reference" line identified Loduca as the owner. Second, the subcontract stated the cabinetry was to be built according to plans developed for Loduca's home. Third, the contract contained a broad attorneys' fees clause which did not specify who could collect the attorneys' fees if they prevailed. The court thus applied this broad provision to extend to any court action that arose out of the contract even if was brought by a third party.

QMC argued the separate agreement between Loduca and QMC demonstrated the parties did not intend for Loduca to be able to recover attorneys' fees because this agreement did not contain an attorneys' fees provision. However, the court disagreed and held the QMC-Loduca agreement did not state that it superseded the MCM-QMC agreement but it simply changed the terms of payment and imposed additional penalties.

In addition, the court based its decision on the close relationship between the subcontractor and the property owner. Loduca made a separate agreement and paid QMC directly. The court held that the alteration by the QMC-Loduca agreement to the original contract effectively made Loduca a party to the contract, thereby entitling and burdening him with the attorneys' fees provision. The court concluded that in these circumstances, where such a close relationship exists between the contracting parties and the third party beneficiary, the contracting parties intended for the owner to have a right of enforcement of the prevailing party attorneys' fees clause.

A few lessons may be learned from this case. First, all construction participants should be acutely aware of any prevailing party attorneys' fees clauses in their contracts. These provisions can vastly increase a party's exposure and most insurance policies do not cover their contractually agreed upon transfer of risk. In order to avoid potential liability to a third party, contracts should specify the parties who can enforce the prevailing party clause. Good drafting techniques can assist in avoiding this type of third party liability. Further, all construction participants should always be aware of the established contractual relationships and their associated chains of communication. Deviating from the norms could unknowingly subject you to the terms, and obligations of a contract between others.

About the Author: Nancy Zabala Graham is a law clerk Gordon & Rees, LLP; 275 Battery Street, Suite 2000; San Francisco, CA 94111; Phone: (415) 986-5900.  Website:  http://www.gordonrees.com.

The Construction Practice Group at Gordon & Rees represents design professionals, developers, contractors, subcontractors and suppliers. Projects with which the group has had experience includes site developments, residential developments, commercial buildings, hospitals, jails, airports, bridges, dams and power plants. The group has experience with all aspects of construction-related litigation, including design or construction defects; delay, disruption and acceleration; earth movement; job-site injury and many others.

This article is published  in ConstructionRisk.com Report, Vol. 9, No. 8.

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Article 2

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Building Information Modeling: The Wave of the Future?

By: Gary Prather – Travelers

Building Information Modeling (BIM) promises to reshape the future design – and the way design professionals do business, but these basic risk management considerations should be taken into account to determine if BIM is right for you. To boldly go where no man has gone before. Such was the mission of the Starship Enterprise and its crew in the hit sci-fi TV series Star Trek. And such is the mission of the design technique known as Building Information Modeling (BIM). 

BIM is a design method using computer technology to represent building components and systems, both functionally and graphically, and allows for the ongoing coordination among various parties. Design information for every aspect of the project is input into one database, so it can be accessed by various people. It also allows for additional drawings and information to be added to the database and enhances the coordination process, as it allows, for example, the architect’s drawings and shop drawings to be integrated into one coordinated model.

The result? When fully implemented, BIM will enable multiple users to collaborate in the design process. Indeed, BIM is on the mind of every owner, project/construction manager, and builder across the country. And while human transporters à la Star Trek are not yet a reality, BIM promises to reshape the face of future design.

How Does BIM Work?

BIM essentially leverages 3-Dimensional computer-aided design and drafting (CADD) by incorporating component-rich databases for all relevant design elements. Thus, rather than having only two-dimensional drawings to work from, designers and contractors can have access to all information, being able to readily flip through the models to glean information from the various designs. Through the collection and integration of all pertinent design information, a more coordinated, efficient, and error-free design process results.

As the use of this technology grows, 3-D BIM models should ultimately replace today’s plans and specifications, serve to streamline the cumbersome submittal process, and transform today’s solo-driven design-construction industry into a more collaborative process that benefits from the skills and expertise of all of the participants in the design process.

 Is BIM The Way To Go? 

As the design-construction industry grapples with cyber design, design professionals will face a barrage of questions about the new model. For example, designers may question how BIM will change the way they do business, and whether their instruments of service change from paper files to electronic media or from two-dimensional drawings to three-dimensional models.  

Questions may also arise about what level of financial investment will be required in order to access the new technology and, perhaps more importantly, what the return/payback period for BIM will be. Designers will also want to know whether their liability risks are going to change, and if so, whether their insurance will also change in order to be consistent with their needs. 

While there are more questions today than answers, before implementing BIM, design professionals need to consider some basic risk management ideas to determine if BIM is right for them. Some of those considerations include: 

Process Changes – BIM requires new business models, hardware, software, and human capital. The costs and risks associated with the hardware and software investments may pale in comparison to those costs involved in hiring and training staff to manage BIM-driven project delivery. Younger design professionals will embrace BIM, while older, experienced staff will likely struggle with the move from CADD to BIM. Meanwhile, firm leadership will need to balance the cultural change to BIM to ensure the new technology does not replace practical design experience.  

Management Practices – New business processes require new management practices. Managing BIM’s fluidity and blurred lines of authority and accountability demand more control and understanding of the technology driving the model. Project managers need to become skilled in all aspects of the firm’s selected BIM platform. CADD is a drawing tool that is relatively easy to manage without understanding the technology. BIM is a complex design tool that requires an in-depth understanding of the software to effectively manage and satisfy design accountability.  

Contract Considerations – For the most part, professional associations are taking a wait-and-see approach to BIM. BIM-related service agreements, for the foreseeable future, will be authored by owners, design professionals, and their legal counsel. Design firms are cautioned against executing BIM agreements without first having their legal counsel and professional liability carrier review the agreements for insurability. 

Going forward, the industry will develop a better appreciation of how the risks should be distributed among the design-construction team, including the owner, designer, contractor, subcontractors, and suppliers. To realize the potential benefits of BIM, the risks need to be shared equally, as information also needs to be shared. 

Equal Considerations – Inputting a manufacturer’s proprietary software information into a BIM model has the potential of creating a closed specification. Designers need to use care in building the model so that the Building Information Model they use is not limited to a single source, unless an owner specifically requests this.  

Software Warranties – Software manufacturers are careful not to over-promise or guarantee the adequacy of their products, which puts design professionals squarely at odds with the project owners who, in order to fully reap BIM’s benefits, want everyone on the project to have access to the BIM. Thus, the coordination process through BIM could mean the industry will struggle with this risk vs. reward debate until all parties work together to develop new contract forms that clearly address, assign, and share risk equitably.  

Design Creep – The ease by which design changes in BIM can be made increases the risk of design and scope of services. Information, including design elements, is input into the BIM database, and the database interconnects elements of a building design. So when a change is made to one aspect of the design, for example, all related designs would be reconfigured accordingly. The urge to use BIM’s flexibility to make change upon change right up to and including bidding and construction must be aggressively managed and purposefully constrained. While making changes in BIM may be easy, budgets and design-construction schedules are not as pliable.  

Blurring of Design Responsibility – BIM may make some design professionals uncomfortable and others downright fearful when it comes to affixing their seal to the design documents. What control over the design will be relinquished to the software providers, contractors, subcontractors, manufacturers, and suppliers? Where is the line between the designer-of-record and the other entities supplying input to the model? Can the designer-of-record demonstrate his/her control over the design without being a “BIM Expert”? Without adequate supervision, is BIM similar to the risks associated with off shore outsourcing? Until these questions are answered, the industry can expect that BIM models will be used as design tools, and the two-dimensional drawings and specifications will continue to serve as the contract documents that everyone relies upon.  

A Higher Standard of Care? – BIM touts its ability to eliminate design conflicts, reduce errors, and limit omissions. But a question remains – will the use of BIM raise the standard of care? Will design professionals using BIM be held to a standard of care equal to perfection or something very close to it? It will be a long while before there is case law addressing these questions. In the short term, designers need to be proactive in defining and reinforcing the concept that the standard of care for BIM-delivered projects as being the same as the standard of care for conventionally-delivered designs.  

Model Control & Maintenance – BIM project teams will need strong individuals to manage model input and changes. Controlling access to all the “pieces and parts” will be a daunting task. Updating and tracking model changes requires a sound document control protocol to assure all team players are using the most current version of the model. More challenging is assigning work packages that allow design teams to work independently as well as collaboratively while coordinating their efforts. The BIM gatekeeper must possess the technical and managerial skills to effectively control model inputs and outputs.  

Sharing Model Data – Consultants, contractors, suppliers, and subcontractors all benefit from sharing project information. The very value of BIM is predicated on the electronic collaboration using the BIM model as the central depository for project data. Design professionals, when asked to provide BIM-related information, should require an executed disclaimer similar to those currently being used in conjunction with providing CADD files. There are simply too many unknowns today to settle for anything less.

As BIM technology advances and software reliability is tested under the fire of real world design-construction, more will be known about the quality of the BIM-generated information.  

Software Compatibility – The International Alliance for Interoperability (IAI) is taking the lead in making design-construction software work in concert with each other. IAI is closing the gap, but there is much yet to be done. The risks associated with working across software boundaries will continue to be a concern for the foreseeable future.  

The Devil Is In The Details – Managing the design process to allow for adequate detailing and quality assurance/control activities remain the biggest issues facing design professionals – BIM or no BIM. BIM is not a panacea for poor project management. Issuing construction documents without the proper attention to detail and quality reviews is almost always a function of budget and schedule failures that leave little or no time and money to do the job right. Sound project management, not BIM alone, will help solve this all too common problem. While BIM provides the promise of improved design coordination and fewer field conflicts, designers must still allocate the required resources to avoid problems. 

The cornerstone of any design firm, whether CADD driven or committed to BIM, is well-trained people supported by good business practices, sound risk management, and visionary leadership. There is much more to be written about BIM, its revolutionary promises, its efficiencies, and its risks. BIM has the potential of changing the way we all do business.  

Gary Prather is the director of Risk Management for the Architects and Engineers program at Travelers. He can be reached at 816.444.5065 or gprather@travelers.com. This article is used with permission by ArchNewsNow.com, see http://www.archnewsnow.com.  It is re-published here in ConstructionRisk.com Report, Vol. 9, No. 8.

Comment by K. Holland – Publisher: 

I am pleased to be able to re-print this important article in this issue of the ConstructionRisk.com Report because it highlights key issues and urges the kind of caution I’ve been arguing for in discussions with design firms that are getting more involved with BIM.  There are significant new risks that need to be taken into consideration.   I believe that until new risk management techniques have been worked out and new contract language has been developed to allocate more of the risk to the project owner and other parties instead of leaving all the risk with the design firms, BIM poses a serious new risk to design firms and the insurance carriers that insure them.  At this early point in the adoption of BIM, insurance carriers may be wondering whether to assign additional costs and premium for design firms undertaking significant projects utilizing BIM.  This will be an ongoing discussion.   At the upcoming Construction SuperConference being held in San Francisco, December 12-14 there are three separate sessions addressing BIM.  Based on the speakers and the agenda for these sessions, this may be a good way to quickly get up to speed if you are interested in learning more about BIM and project management and risk management issues surrounding BIM.  

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Article 3

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Surety Cannot Maintain Negligence Action against A/E for Alleged Failure to Adequately Inspect and Supervise Contractor’s Work

By J. Kent Holland, Jr.

Where a surety sued a project architect for alleged failure to adequately inspect and supervise a contractor who was default terminated due to defective work, the court dismissed the suit for failure to state a negligence claim upon which relief could be granted.  Although the surety had no contractual relationship with the architect, it argued that based on the totality of the circumstances, the architect had a legal duty to protect the surety against contractor’s defective work and that the surety was entitled to rely on the architect to conduct proper inspection and properly supervise that work.   In dismissing the case, the court stated that courts in Maryland apply the economic loss doctrine and that in the absence of a contract, the surety has no basis to recover economic losses.  The duty of an architect to exercise due care in its inspection services, said the court, extends only “to those persons foreseeably subjected to the risk of personal injury created.”  Even if the architect had a duty to its client, Towson University , for costs of correcting a dangerous condition created by the contractor, that duty did not create a separate duty to the surety of the contractor.  RLI Insurance Company v. John H. Hampshire, 461 F.Supp.2d 364 (D. Md. 2006).

In this case, RLI Insurance Company issued a performance bond for a construction subcontractor, Architectural Facades Incorporated (AFI) to provide indemnity on behalf of AFI for the benefit of Towson University , the project owner.  The subcontractor fell behind in the performance of installing wall panels.  Eventually, the general contractor declared the sub in default.  AFI then abandoned its work and a default termination was issued.  The subcontractor’s work was completed by another subcontractor (Hampshire).  That work was inspected by the architect and accepted by the general contractor and University. 

Subsequent to acceptance, however, the University found that six percent of the panels were not properly installed and some panels were falling off the building.  All panels had to be removed from the building.  The surety agreed to arrange for this the removal and repair, and engaged another contractor to perform the work because Hampshire refused to do it. The surety then sought in this litigation against the architect to recover its loss on the performance bond.  It argued it was entitled to contribution and common-law indemnity from the architect.  In reviewing the defense motion to dismiss, the court explained that in addition to considering the facts in the complaint, it was proper for the trial court to consider all documents referred to in the complaint and relied upon by the plaintiff in bringing the action.  (This is significant because it enables the moving party to include with its motion copies of relevant contract documents as well as relevant reports that may have been cited in the complaint.)

In Maryland , the existence of a legal duty is a question of law to be decided by the court. There can be no liability in negligence if there is no legal duty owed by the defendant to the plaintiff.   Moreover, the court explains, “If the risk created by negligent conduct is no greater than one of economic loss, generally no tort duty will be found absent a showing of privity or its equivalent.” (citing Jacques v. First National Bank, 307 Md. 527, 537, 515 A.2d 756 (1986).  In this case, since the surety suffered only economic loss and alleged neither contractual nor third party beneficiary relationship with the architect, a tort duty could only exist if the court found there to be “an equivalent of privity.”  The court here found that the surety failed to plead an “intimate nexus” between the architect and itself.  For these reasons, the court  granted the motion to dismiss as negligence.  In addition, on the question of contribution and common-law indemnity, the court dismissed the complaint as being premature because that is predicated upon a future event which may never occur.

Comment:  I am currently defending a design professional in a suit in Maryland in which the above-discussed case will be cited in our motion to dismiss for the same reasons successfully argued by the architect in the case discussed.  In our litigation, the plaintiff asserts it had a contract with the consultant but it sued for negligence as well as breach of contract. Since the complaint fails,  in our opinion, to plead sufficient facts to demonstrate that the consultant owed the plaintiff  a duty of care independent of the contract, we will ask the court to dismiss the negligence count, and other counts,  as lacking an independent basis and really being nothing more than a transparent effort to get around the limitation of liability clause contained in the contract.  

As with the case discussed, because the plaintiff cited the contract and the consultant’s reports in its complaint, we will be able to reference terms from those documents in our motion to dismiss – without thereby causing our motion to be treated as a motion for summary judgment due to relying on evidence that was not made part of the pleadings. This is important to us because our typical defense strategy is to seek to knock out as much of a plaintiff’s complaint as possible on a motion to dismiss without using anything outside the pleadings or documents referenced in the pleadings.  Whatever remains, if anything, after the court rules on the motion to dismiss, we then proceed to flesh out through discovery, and finally file a subsequent motion for summary judgment using evidence obtained during discovery – including expert witness affidavits and deposition testimony. 

It never ceases to surprise me how often plaintiffs fail to comprehend the magnitude of their burden of proof in professional liability cases.  Plaintiffs must present expert testimony to prove that the consultant failed to meet the applicable standard of care. Merely proving that the consultant made errors, omissions or mistakes is not good enough.  Only those acts, errors and omissions that are negligent can be the basis of professional liability.  

I think too many plaintiffs believe that all mistakes and errors of a consultant entitle the client to damages.  That, however, is certainly not the law.  With good expert affidavits and testimony for the defense, the court can grant summary judgment when the plaintiff has not adequately demonstrated with its own experts that there is evidence that the standard of care has been violated.