Inside this Issue

A1 - Economic Loss Doctrine Precluded Negligence Claim against Design-Builder Because Design-Build Project Considered a “Product” not a “Professional Service”
A2 - Negligence Claim Barred Where Issues Arise Under Contract Performance, and Breach of Contract is the Sole Proper Remedy
A3 - Statute of Repose Period Began to Run Only When Contractors Substantially Completed the last of their Overall Project Work Rather than the Date When Defective Materials Were Installed and Accepted for Beneficial Use
A4 - Project Owner Has No Cause of Action Against Subcontractor With Whom it Has No Contract: Economic Loss Doctrine Applies
A5 - CM Not Responsible for Jobsite safety or Liable to Contractor’s Employee for Injuries

Article 1

Economic Loss Doctrine Precluded Negligence Claim against Design-Builder Because Design-Build Project Considered a “Product” not a “Professional Service”

In Wisconsin, where the economic loss doctrine does not bar malpractice suits against professional service providers such as architects and engineers, a court concluded that a contractor who designed and constructed a resort and conference center that included an indoor water park, hotel units and lobby, and a restaurant, provided a completed “product” to its customer rather than a “professional service”. Because contract called for a product as well as some professional service, the court evaluated the “predominant purpose” of the contract to determine whether it was predominantly for a product or a service. Having determined it to be primarily for a “product” the court granted summary judgment (affirmed on appeal) in favor of the contractor by enforcing the 10 year statute of repose applicable to suits based on defective products. Kalahari Development, LLC v. Iconica, Inc., 811 N.W2d 825 (Wisconsin 2012).

Almost ten years after the design-build project was completed, the developer filed suit against the design-builder alleging that vapor barriers in certain walls were “defectively designed and/or defectively installed” causing moisture damage. The complaint contained two claims: one for breach of contract and the other for professional negligence related to the contractor’s performance of architectural and construction services under the contract.

In affirming the circuit court’s summary judgment in favor of the contractor, the appellate court first did a thorough review of the state statue of repose and explained that although the statute was “difficult to follow” it must be reasonably interpreted to mean that an action not only must be brought within the 10 year maximum period, but it also must be brought within the time permitted by any relevant statute of limitations. In this case the six year statute of limitations applicable to breach of contract actions had long since lapsed and the suit was correctly dismissed because “a contract cause of action accrues at the moment the contract is breached.”

On the negligence cause of action, the Developer apparently sought to avoid a short statute of limitations by arguing that it filed within the statutory period permitted after discovery of its injury and basis for claim. The court did not expressly address that issue, but instead applied the strict statute of repose of ten years. As explained by the court, the courts of Wisconsin “use the predominant purpose test to determine whether a mixed contract for products and services is predominantly a sale of a product and therefore subject to the economic loss doctrine, or predominantly a contract for services and therefore not subject to the economic loss doctrine.”

The Developer argued that the economic loss doctrine was inapplicable to negligence claims based on “professional services.” In evaluating that argument, the court considered previous court precedent and stated: “Our supreme court has addressed construction contracts involving both construction services and materials, and has concluded that those contracts were predominantly for a product, namely, the final structure.” Developer argued that this precedent was not applicable because it “provided architectural and engineering services.” The court acknowledged that professional services were indeed provided but stated that the overall amount paid for such services was a little over $1 million of a $26 million contract, or “about 4%”. Thus, the court concluded that the Developer primarily contracted for a “water park resort and convention center” and not primarily for professional services.

The Developer argued that other case precedent in Wisconsin stood for the proposition that the economic loss doctrine was not meant to bar tort claims for malpractice against professionals such as architects. Indeed, the Court of Appeals of Wisconsin, in a previous decision, stated that the Wisconsin Supreme Court “has specifically stated that the [economic loss] doctrine should not apply to causes of action in tort for professional malpractice.” But the court in the instant case said its previous decision which involved one where it had already been determined that the contract was services rather than a completed product, “places an unfortunate emphasis on ‘professional’ but it was not meant to suggest that the economic loss doctrine never applies when alleged negligence involves professional negligence.” Where, as here, the court determines the predominant purpose of the contract to be for a product, the economic loss doctrine will be applied to prevent a plaintiff from suing based on negligence to recover for economic losses.

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 14, No. 9 (Oct 2012).

Article 2

Negligence Claim Barred Where Issues Arise Under Contract Performance, and Breach of Contract is the Sole Proper Remedy

See similar articles: Breach of Contract | Economic Loss Doctrine

A project owner/developer successfully recovered on most aspects of its complaint against a contractor for defective workmanship that caused window leaks and underground parking garage wall leaks, but its negligence claim was dismissed by summary judgment with the court finding the contractor owed no independent duty to the Owner outside of the duties assumed by the contract. Where duties are owed that “result solely from the contractual relationship between the parties, the plaintiff’s negligence is barred because there is no independent duty arising in tort.” 2300 Pennsylvania Avenue, LLC v. Harkins Builders, Inc., 2012 WL 691579 (E.D. VA 2012).

Article 3

Statute of Repose Period Began to Run Only When Contractors Substantially Completed the last of their Overall Project Work Rather than the Date When Defective Materials Were Installed and Accepted for Beneficial Use

See similar articles: Statute of Limitations | Statute of Repose | Substantial Completion

When the State of New Jersey brought suit against a number of contractors involved in constructing a state prison, alleging that the centralized underground system that distributed hot water throughout multiple buildings of the prison was defective, the contractors obtained summary judgment because the trial court concluded that the10 year statute of repose had run on claims concerning the hot water system that had been installed and accepted as part of substantially completed portions of the project more than 10 years earlier. This was reversed on appeal, with the appellate court holding that because the hot water system was not, according to the contract, a separate “improvement” that was subject to substantial completion before all buildings to which the system was connected were deemed complete, the only trigger date for the statute of repose for the hot water system was the date that the all the contractors substantially completed their final work on the project. In addition, the statute of repose would be totally inapplicable to the manufacturer of the pipe because the action against the pipe manufacturer was based on a defective “product” rather than defective design or construction services. New Jersey v. Perini Corp., et al., 425 NJ Super, 62, 39 A.3d 918 (2012).

The prison was built in the mid 1990s and the hot water system began failing in 2000. The state filed suit April 28, 2008 against five firms that were responsible for the design, construction and materials in building the prison’s hot water system. That date was more than ten years after most of the facilities at the prison were put into use, but it was three days short of ten years from the date that the state issued the last of its certificates of substantial completion on the entire project.

New Jersey’s statute of repose provides as follows:

“No action, whether in contract, in tort, or otherwise, to recover damages for any deficiency in the design, planning, surveying, supervision or construction of an improvement to real property, … nor any action for contribution or indemnity for damages sustained on account of such injury, shall be brought against any person performing or furnishing the design, planning, surveying, supervision of construction or construction of such improvement to real property, more than 10 years after the performance or furnishing of such services and construction….”

The dispute in this case concerned, dates from which the ten-year period began to run, thus triggering the statue of repose. The contractors argued that the relevant trigger date occurred more than 10 years before the suit was filed because the state had signed off on dozens of substantial completion certificates for various buildings and parts of the building more than 10 years previous and had occupied and used the entire prison facility more than 10 years before filing suit. For example, the central plant building housing the boilers was certified as substantially complete in May of 1997 and the State took control of operating and inspecting the hot water system as of June of 1997, almost 11 years prior to the suit being filed.

Over thirty (30) certificates of substantial completion for various parts of the construction project were issued by the state prior to May of 1998. Each certificate stated that a specifically designated part of the project was substantially complete and suitable for occupancy or use by the State. The project was built in multiple phases, and 28 of the certificates of substantial completion covered Phases I and II A in their entirety, as well as parts of Phase II. However, none of the total of 30 certificates of substantial completion designated the hot water system as a separate facility or component of the construction project that was substantially completed.

The State argued that a bright-line starting date should apply to the statutory period of repose “so that construction litigation retains a level of certainty and predictability.” The contractors argued just the opposite – that the statute of repose for each issue must run from the date of the applicable substantial completion certificate covering the affected work. In finding against the contractors, the court explained how the trigger date would, and would not, be affected by multiple phases of completion and multiple certificates of substantial completion on different parts of the project. The court said:

“We reject application of separate trigger dates of repose for components of project, whether multi-phase or not, that are not clearly identified in the documentary record as distinguishable ‘improvements to real property.’”

On the other hand, the court concluded that “Any number of components of construction may be substantially completed before the entire structure or project is completed and ready for use…. Subcontractors whose work on any of these components has been completed and who have no further duties may rely on the running of a statute of repose because their participation in the project will be clearly delineated by the date they finished working. But the statute of repose does not run against the general contractor, the project supervisor, or other contractors who have continuing duties. As to them, applying a separate trigger date to a component of a construction project can result in unending and complex periods of time in determining what claims for injuries or damages are timely brought. For contractors who remain on the job, the statute is triggered when their own work on the project is substantially completed.

In this case, since all the contractors except the pipe manufacturer had continuing duties on the project after April 27, 1998, the statute of repose didn’t begin to run as to actions against them before that date, and the suit by the State was therefore timely filed. As to the pipe manufacturer, the court held it did not fall in the class of “contractors, builders, planners and designers” but was instead a product manufacturer that was subject to “product liability” and, therefore, not protected by the statute of repose.

Article 4

Project Owner Has No Cause of Action Against Subcontractor With Whom it Has No Contract: Economic Loss Doctrine Applies

See similar articles: Contract Privity | Economic Loss Doctrine | Third party beneficiary

After a project owner terminated its prime contractor and paid an outstanding invoice owed to the subcontractor, it subsequently filed suit against the subcontractor alleging negligent construction and breach of contract. Summary judgment was granted, and affirmed on appeal for the subcontractor, on the basis that (1) the Owner had no privity of contract with the subcontractor, (2) the Owner was not an intended third party beneficiary of the contract between the subcontractor and the general contractor, (3) the subcontractor owed no common law duty of due care to the Owner, and (4) the economic loss doctrine barred recovery by the Owner. McGreggor Enterprises, Inc. v. Hicks Construction Group, Inc., 2012 WL 28538 (TX 2012).

The subcontract in question was one that the court called an Associated General Contractors of America (AGC) “Standard Form of Agreement Between Owner and Construction Manager.” In response to the subcontractor’s motion to dismiss based on lack of contract between itself and the owner, the owner argued that it was an intended third party beneficiary. It based that argument on the following subcontract language:

“SUBCONTRACT WORK. To the extent terms of the agreement between the Owner and Contractor (prime agreement) apply to work of the Subcontractor, Contractor assumes toward Subcontractor all obligations, rights, duties and redress that Owner assumes toward Contractor. In an identical way, Subcontractor assumes toward Contractor all obligations, rights and redress that Contractor assumes toward Owner and others under the prime agreement.”

In reading that language, the court found no clear intention to create third party beneficiary status for the Owner.

The Owner, however, argued that even if the subcontract did not expressly create any third party beneficiary right for the Owner, there became a directly contractual relationship once the Owner paid the Subcontractor for the unpaid balance due on its services. In rejecting that argument, the court explained that the subcontractor’s work had already been completed as of the time the Owner terminated the general contractor, and the only matter remaining was for final payment to the Subcontractor. There was no assignment of the contract between the general contractor and the subcontractor. Nor was there any evidence presented about terms of any alleged contract between the subcontractor and the Owner. “Rather, [Owner] simply asserts that, because the final invoice was sent directly to [Owner] and was paid directly to [Subcontractor], the two had entered into a contract.” The court said the Owner was essentially asking the court to “imply a contract.” And this the court would not do, finding instead that “the payment was nothing more than the final act of the Subcontractor under the previously existing contract.”

Common law duty by the Subcontractor to perform its work in a good and workmanlike manner does not exist says the court. The only remedy the Owner has would be against the general contractor who could then bring an action against the Subcontractor.

Negligence based action against the Subcontractor was dismissed pursuant to the economic loss doctrine. The Subcontractor correctly argued that since it performed its work under contract to the general contractor “it only owed duties pursuant to the contract … and not duties relating to tort law.” The subcontractor asserted “the loss [Owner] is suing for is economic loss directly related to the subject matter of the contractual relationships between the parties and, therefore, is not a viable subject for a tort action. This is known as the economic loss rule.” The court agreed, and concluded “We hold that the economic loss rule would prevent [Owner] from maintaining a cause of action against [Subcontractor].”

Comment: The language of the subcontract in this case did not state that there would be any third party beneficiary rights for the project owner. If it had done so, the outcome of this decision would have been much different. The Subcontractor would have owed contractual duties directly to the Owner and the economic loss doctrine could not have been used as a basis for summary judgment. It is important when subcontractors are reviewing and negotiating contracts that they not, without careful consideration, agree to language making the project owner an intended beneficiary. I am seeing more subcontracts on major projects establishing such third party rights for the Owners, and I’m not sure that subcontractors are paying sufficient attention to the ramifications of doing so.

Article 5

CM Not Responsible for Jobsite safety or Liable to Contractor’s Employee for Injuries

See similar articles: Construction Management | Jobsite Safety

A construction manager (CM) is not liable for injuries suffered by a contractor’s employee where the CM’s contract with the project owner did not establish CM contractual responsibility for jobsite safety and where (1) the contractor’s contract with the Owner stated the contractor was the controlling employer responsible for its own safety programs and precautions for its employees and that the CM responsibility did not extend to direct control over or charge of acts or omissions of the subcontractor and its employees, and (2) the CM did not undertake any extra contractual responsibility in the field that would have created any legal duty or responsibility for the safety of all employees. These types of cases are rather typical where an employee can only recover workers compensation benefits and cannot sue its own employer – thus setting the stage for an attempt to obtain greater damages by asserting that someone other than the employer is at fault – such as the CM or possibly a project owner.

In Hunt Construction Group, Inc. v. Garrett (964 N.E. 2d 222, Indiana 2012), an employee of a concrete contractor (Baker Concrete Construction, Inc.) was injured in a workplace during construction of a stadium. While removing forming material from concrete, one of her co-workers dropped a piece of wood that struck her on her head and hand. Although employed by Baker, she sought to recover from the CM (Hunt). She alleged that the CM had a legal duty of care for jobsite-employee safety. The CM’s only contract was with the project owner. It had no contractual relationship with Baker Concrete or any other contractors on the project.

On cross motions for partial summary judgment, the trial judge ruled that the CM could be held vicariously liable for the actions of Baker Concrete that led to the claimant’s injuries. On appeal, the appellate court reversed the trial court’s judgment on vicarious liability, holding that the CM did not become liable for the contractor’s safety responsibilities merely because CM safety representatives inspected the site daily for violations of the project safety program and conducted safety committee meetings. The court found that where the contract did not obligate the CM to provide jobsite safety, the CM would not be deemed to have legally assumed a legal duty of care for safety unless it undertook specific supervisory responsibilities beyond those set forth in the original construction documents.

In deciding whether the CM owes a duty, the court explained that it focuses on determining “whether (1) such a duty was imposed upon the CM by a contract to which it was a party and (2) the CM assumed such a duty, either gratuitously or voluntarily.” In this case, the court found that no legal duty of care for jobsite-employee safety was imposed upon the CM by any contract to which it was a party. “First, the CM contract itself did not specify that the CM had any responsibility for safety whatsoever. Second, counterpart construction contracts signed by the contractors and subcontractors indicated that they had responsibility for project safety and the safety of their employees. Third, those contracts expressly disclaimed any direct or indirect responsibility on the part of the construction manager for project safety.”

Although there were safety requirements in the CM contract, the court noted “But none of the safety provisions in the CM contract here impose upon Hunt any specific legal duty or responsibility for the safety of all employees at the construction site.” In fact, the contract supports the opposite conclusion according to the court. “Hunt’s contract expressly states that its CM services are to be ‘rendered solely for the benefit of [the client] and not for the benefit of the Contractors, the Architect, or other parties performing Work or services with respect to the Project.’ Moreover, the contract provided that Hunt was not ‘assuming the safety obligations and responsibilities of individual contractors,’ and that Hunt was not to have ‘control over or charge of or be responsible for … safety precautions and programs in connection with the Work of each of the Contractors, since these are the Contractor’s responsibilities.’” The court concluded: “In short, Hunt did not undertake in its contract a duty to act as the insurer of safety for everyone on the project. Rather, Hunt’s responsibilities were owed only to [the Client], not to workers….”

The court also pointed out that with regard to the CM’s responsibility to review and monitor the contractor’s safety programs, the contract reiterates that Baker Concrete was “the controlling employer responsible for [its own] safety programs and precautions”, and Hunt’s reviewing and monitoring of these programs did not “extend to direct control over or charge of the acts or omissions of the Contractors, Subcontractors….”

It is important to note that the court was quite critical of what it called the plaintiff’s “all-or-nothing” proposition that by agreeing to certain safety items in its contract with the Owner the CM had become responsible for all jobsite safety – including that which pertained to employees of contractors. In rejecting that argument, it suggested that if this argument were accepted and CM’s were made liable in situations like this one, this would be bad for jobsite safety. As explained by the court, “[S]afety at construction sites, especially at large public-works projects like this one, should not be sacrificed for fear of exposure to liability. The contract at issue here reflects a way of promoting safety without exposing construction managers to suits like this one. We agree with Judge Friedlander that the position advanced by [claimant] would ‘make it virtually impossible for a contractor taking on the role of construction manager to limit its liability so as not to become an insurer of safety for workers of other contractors.’”

Having determined that the CM owed no contractual duty for jobsite safety, the court next focused on whether the CM undertook such responsibility by its actions in the field. As stated above, the court found that the CM did nothing in the way of safety actions that went beyond the requirements of its contract. Consequently, the CM had no liability based on assumed site safety responsibilities.

Comment: This case once again demonstrates the importance of having contract language that clearly delineates what job site safety requirements apply to the contractor and what apply to the construction manager. As shown by the example of the plaintiffs arguments in this case, even where there is good contract language, a creative argument may be made that the construction manager somehow exercised jobsite safety responsibilities that went beyond what was contractually called for, and that in doing so the CM assumed responsibilities (and consequent liabilities) related to the actions taken by CM staff in the field related to site safety. In this case, even though the CM did indeed participate in site safety meetings and do site safety reports and other safety related activities, the court found that all of these were within the scope of the contractually agreed upon services performed strictly for the benefit of the owner-client and not for the benefit of employees of any of the contractors. This seems to be the key in many of these decisions – that the CM demonstrates that by its contract and by its actions in the field it was only serving the interests of its client and not anyone else.

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ConstructionRisk.com Report (Oct 2012)