Inside this Issue
- A1 - Arbitration or Jury Trial- Which is the better choice for A/E’s?
- A2 - Indemnification Clause Unenforceable where Inconsistent with a State’s Contribution Act Applicable to Joint Tortfeasors
- A3 - Lead-Based Paint Is a "Pollutant" within CGL Pollution Exclusion
- A4 - Economic Loss Doctrine Does Not Bar Negligent Misrepresentation Claim against Design Professional
Article 1
Arbitration or Jury Trial- Which is the better choice for A/E’s?
See similar articles: Arbitration | Jury Trial
By: Steve Whitehorn
Whitehorn Financial Group, Inc
One big question my architect and engineer clients ask me often : “When I sign a contract, is it better to choose arbitration or jury trial, in the event we need to resolve a dispute?”
This is an important topic. It’s one of those things that may seem like a minor “hypothetical” detail, because after all, most disputes that arise during a project get resolved by the parties themselves.
Yet like most “minor details” in a contract, you may not think much about it now, until you’re in a dispute that cannot be resolved, at which point you wish you had gotten the right advice from an expert BEFORE making an irreversible decision.
No “Slam Dunk” Solution
In my experience, arbitration and jury trial each has its own benefits. With that being said, I believe a lot of A/E’s are not shown the whole picture by advisors when they make this decision, and could end up paying dearly.
Most of my clients tell me they’ve been led to believe that arbitration is always the way to go.
There are a few reasons why A/Es have believed arbitration is preferred:
- A professional arbiter gives you more control, as opposed to a jury where the rules are rigidly established
- The arbitration process moves much faster and has less red tape
- Arbiters have greater flexibility to resolve disputes in creative ways and find areas of compromise over the court system
The benefits of jury trial
As someone who has been involved with thousands of architectural and engineering projects over the last 30 years, I’ve gotten input from attorneys and insurance claims people who have repeatedly told me that A/E firms actually get BETTER results at a jury trial. There are several important reasons arbitration can be pretty risky:
- No legal parameters. Arbiters are not confined by a strict legal process or even contract agreements. While this can have benefits, it’s generally not advisable to surrender control to such an extreme level
- No need to explain reasoning.Arbiters are not required to justify their ruling, which can lead to them judging based on the wrong set of factors, or simply using their personal perception and “gut instinct” of the most fair approach.
- No discovery.Unlike a trial, you have no way of knowing what the other party will bring as evidence in advance, because there is no mandatory disclosure, which can put you at a disadvantage
- Limited appeal options. Once a ruling is issued through arbitration, you have few options if any to appeal. A court trial gives you a much better shot at winning, even if you lose the first round.
Some more things to keep in mind...
In addition to the above reasons, it’s important to realize that arbitration has come under intense scrutiny by the courts lately, and if you don’t follow the arbitration system properly, you may be unknowingly breaching your contract, which can lead to all sorts of legal problems and complications. (Click here to see an interesting article on recent court rulings about arbitration.)
Another thing to keep in mind is that not all construction projects are created equal. Don’t assume just because you or one of your colleagues had a good experience with arbitration in the past, that means it’s the best option every time. Ideally, you should speak with an expert advisor before signing any contract, who understands the advantage and disadvantages of each approach, and has a track record for successfully advising in these areas.
If you are going to choose the arbitration route, (or it is not a negotiable item by contract), one more important thing you should remember is that some insurance carriers require advance permission if you are going to select arbitration as the dispute mechanism. So it’s crucial to check with your carrier BEFORE you make that decision.
Takeaway: While arbitration can be tempting, and many owners prefer it, you need to decide the absolute safest route for you and your firm, to avoid risk, keep your reputation stellar, and maximize the odds that you will get paid in full on every project.
Steve Whitehorn
Whitehorn Financial Group, Inc.
44 Main Street, Ste. 3
Millburn, NJ 07041
(973) 564-9330
Steve@WhitehornFinancial.com
This article is published in ConstructionRisk.com Report, Vol. 19, No. 8 (Aug 2017).
Copyright 2017, ConstructionRisk, LLC
Article 2
Indemnification Clause Unenforceable where Inconsistent with a State’s Contribution Act Applicable to Joint Tortfeasors
See similar articles: Contribution | Contribution Act | Defense Costs | duty to defend | Indemnification clause
By: Kent Holland
A contract required the architect to indemnify its project owner client (a hotel) against damages and attorneys fees arising from injuries on hotel property. The hotel, architect and others entered into settlement agreements with a plaintiff that alleged slip and fall injuries. The hotel then sought to recover what it paid the plaintiff from the architect pursuant to the indemnification clause.
Despite being named an “indemnification clause”, the affect of the clause in this case was to require “contribution” by the architect toward the damages paid by the hotel. The right to contribution is established by a state “Contribution Act” that provides that a tortfeasor who enters into a good-faith settlement with a claimant is discharged from all liability for any contribution to any other tortfeasor and may not recover contribution from another tortfeasor whose liability in not extinguished in the settlement.
All the parties having entered into good faith settlements with the plaintiff, the court held that the hotel could not subsequently rely upon the contractual indemnity/contribution clause to recover its attorneys fees from the architect since such relief would be contrary to the public policy set by the Contribution Act. Sandlin v. Harrah’s Illinois Corporation, 62 N.E. 3d 362 (Illinois 2017).
The indemnity clause in question was as follows:
“5.1 Indemnification. To the fullest extent permitted by law, Architect, on behalf of itself and its agents (all of said parties are herein sometimes collectively referred to as the ‘Indemnitors’), shall fully indemnify, defend, save and hold Owner, its partners, all successor owners and/or partners and their agents, employees, partners and anyone else acting for or on behalf of any of them (all of said parties are herein collectively referred to as the ‘Indemnitees’) harmless from and against all liability, damage, loss, claims, demands, actions and expenses of any nature whatsoever including, but not limited to reasonable attorney’s fees which arise out of or are connected with, or are claimed to arise out of or be connected with: (i) any negligent act, error or omission or any willful misconduct or other fault by any Indemnitor in the performance of any services to be performed hereunder; (ii) any failure to comply with applicable laws, codes, rules, regulations or ordinances; (iii) any breach of any obligations of Indemnitors as set forth in this Agreement.”
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. 19, No. 8 (Aug 2017).
Copyright 2017, ConstructionRisk, LLC
Article 3
Lead-Based Paint Is a "Pollutant" within CGL Pollution Exclusion
See similar articles: Coverage Dispute | Lead Based Paint | Pollutant | Pollution Exclusion
By: Kent Holland
Where lead-based paint was ingested by a tenant's child, the tenant sued her landlord for injuries allegedly sustained by the child. The landlord tendered the claim to its commercial general liability (CGL) insurer who, instead of defending the case, filed a declaratory judgment action seeking a determination that the pollution exclusion of the CGL policy barred coverage for the alleged injuries. The Owner held that, although not specifically listed in the pollution definition as a "pollutant," lead-based paint is, in fact, a "pollutant" within the meaning of the policy. The policy's pollution exclusion was, therefore, applicable, and the insurer had no duty to defend and indemnify the landlord. See Georgia Farm Bureau Mut. Ins. Co. v. Smith, 298 Ga. 716, 784 S.E.2d 422 (2016).
The terms of the CGL policy required the insurer "to pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage'" ... "only if: (1) the 'bodily injury' or 'property damage' is caused by an 'occurrence' that takes place …." An occurrence is defined as "an accident." Coverage was subject to exclusions, including the pollution exclusion, which provided that the insurance does not apply to "(1) '[b]odily injury' or 'property damage' arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of 'pollutants': (a) [a]t or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured."
A "pollutant" is defined in the policy as "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste."
The trial court granted summary judgment for the insurer, finding that lead-based paint was a "pollutant," just like "carbon monoxide" had been found to be a "pollutant" by the Georgia Supreme Court in the decision of Reed v. Auto-Owners Ins. Co., 284 Ga. 286, 667 S.E.2d 90 (2008). In the Reed decision, the court had previously held that, although carbon monoxide was not explicitly listed in the policy as a pollutant, it fell within the policy's definition of a pollutant. The trial court applied the Reed decision's analytical framework to the facts of the lead-based paint involved here and concluded that it was constrained to find that lead, like carbon monoxide, was a contaminant meeting the policy definition of "pollutant."
The appellate court concluded that the question of whether lead-based paint was a pollutant was one of "first impression" that had never before been decided by the court. Rather than applying the Reed court analysis that dealt with carbon monoxide poisoning, the court looked to an appellate decision from Maryland—Sullins v. Allstate Ins. Co., 340 Md. 503, 667 A.2d 617 (1995)—that dealt specifically with the question of whether lead-based paint was a pollutant. Maryland held that lead-based paint was not a pollutant.
The Georgia appellate court cited the Maryland decision on the proposition that a reasonable insured could have understood the pollution exclusion to exclude coverage for injuries caused by certain forms of industrial pollution, rather than those caused by the presence of leaded materials in a private residence. The court concluded that the terms "contaminants" and "pollutants" used in a CGL policy's pollution exclusion were ambiguous and should be strictly construed against the insurance company.
The George Supreme Court reversed the appellate court and explained that, in construing the pollution exclusion, it has refused to adopt an approach that considered the purpose and historical evolution of pollution exclusions before looking to the plain policy language of the clause itself. The court reiterated that it rejects the notion that the pollution exclusion is limited to industrial and/or environmental harm. It cited numerous Georgia decisions that have found residential injuries are subject to the pollution exclusion, including carbon monoxide, asbestos released from floor tiles, smoke emanating from a residential premises, and gasoline. Georgia courts have, therefore, enforced the absolute pollution exclusion without requiring that the pollutant at issue be explicitly named in the policy.
The court found that the contractual language of the CGL policy unambiguously governs the factual scenario of lead-based paint injuries. In a rebuff to the lower court of appeals, the court stated, "the Court of Appeals had 'no more right by strained construction to make the policy more beneficial by extending the coverage contracted for than they would have had to increase the amount of the insurance.'"
This decision clarifies that Georgia courts will apply the definition of "pollution" or "pollutant" in a manner to broadly encompass any number of potential residential pollution or contaminant situations and will not find the exclusion to be ambiguous.
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. 19, No. 8 (Aug 2017).
Copyright 2017, ConstructionRisk, LLC
Article 4
Economic Loss Doctrine Does Not Bar Negligent Misrepresentation Claim against Design Professional
See similar articles: Economic Loss Doctrine | Environmental Site Assessment | ESA | Negligent Misrepresentation | Phase 1
By: Kent Holland
A professional negligent misrepresentation claim was filed against a professional environmental/geotechnical firm by the project developer that was its client. The suit sought to recover economic losses the developer incurred when it discovered that a an abandoned landfill encroached on part of the land it had purchased in reliance upon a Phase I environmental site assessment (ESA) performed by the consultant. On appeal, a summary judgment that had been granted to consultant on the basis of the economic loss doctrine was reversed. The court held that because this case concerns an alleged negligent misrepresentation, it falls under Section 552 Restatement (Second) of Torts negligent misrepresentation exception to the economic loss doctrine rule, which would have otherwise barred the developer from seeking purely economic losses in a tort action instead of a breach of contract action. Atlantic Geoscience, Inc. v. Phoenix Development and Land Investment, LLC, 341 Ga. App. 81 (2017).
The developer hired the consultant to conduct the Phase I ESA, which results in a report based on a field and paper study that that does not involve any subsurface or intrusive investigation. The report concluded that an adjacent landowner had encroached on and was using a small portion of the property as a “soil/stone storage yard.” The report advised that the consultant did not recommend any additional environmental investigation.
After the developer purchased the property it learned from the adjacent property owner that the encroachment was a “landfill” and not merely a yard for “soil/stone storage.” Due to the landfill, it was determined that the land could not be developed as planned because this made it economically unviable. It then sued the consultant to recover the amount it would have earned if it had been able to have the land developed as intended.
This was dismissed by the trial court on a summary judgment motion because the judge found that the damages were not recoverable under the economic loss rule and, alternatively, that there was no evidence that the damages were proximately caused by the consultant’s alleged negligence. The appellant court disagreed, and therefore reversed that decision, explaining:
“Georgia permits the recovery of certain types of economic losses in an action, such as this, where the plaintiff alleges professional negligence resulting in a misrepresentation. (citations omitted). Georgia has adopted the rule, enunciated in Restatement (Second) of Torts § 552, that
one who supplied information during the course of his business, profession, employment, or in any transaction in which he has a pecuniary interest has a duty of reasonable care and competence to parties who rely upon the information in circumstances in which the maker was manifestly aware of the use to which the information was to be put and intended that it be so used.
(citation omitted). This rule can apply to claims for professional malpractice in cases asserting that a professional made a misrepresentation in the breach of his or her professional duties.”
The case will have to go back to trial to decide whether the consultant was negligent and if so what damages resulted. But the court stated that most of the damages sought by the developer cannot be granted at trial. Specifically, the court stated:
“ … Georgia law does not allow the bulk of the damages Phoenix has sought. Phoenix must prove actual economic loss proximately resulting from Atlantic’s alleged misrepresentations. (citation omitted). Our Supreme Court has explained that this type of loss is measured by an “out-of-pocket” standard, not a “benefit-of-the-bargain” standard (citation omitted). Consequently, Phoenix cannot measure its damages by the benefit of the bargain that it hoped to achieve when it bought the property in reliance on the representations made by Atlantic in connection with the environmental study. The evidence of the benefits Phoenix would have attained under its agreement with SMIG does not demonstrate Phoenix’s “out-of-pocket” losses.”
Comment: (1) There seem to be a number of cases recently holding that an allegation of negligent misrepresentation gets the plaintiff out from under the bar of the economic loss doctrine. This results in an erosion of the protection of the rule. (2) This being a phase 1 ESA it is likely that the consultant’s fee was only a few thousand dollars. The risk of suit seeking millions of dollars for the loss of a real estate development deal are so significant that most firms providing ESAs routinely request and obtain, limitation of liability (LoL) clauses in their contracts to limit their liability to the amount of their fee or some specified dollar amount, whichever is higher. The profit earned on an ESA simply would not justify performing the services without some reasonable LoL.
The limitation of liability clause we see in many ESA agreements provides something like the following:
“Limitation of Liability
To the fullest extent permitted by law, the total liability, in the aggregate, of Consultant and its officers, directors, partners, employees, agents, and subconsultants, to Client, and anyone claiming through or under Client, for any claims, losses, costs, or damages whatsoever arising out of, resulting from or in any way relating to this Project or Contract, from any cause or causes, including but not limited to tort (including negligence and professional errors and omissions), strict liability, breach of contract, or breach of warranty, shall not exceed the total compensation received by Consultant or $25,000, whichever is greater. The Client may negotiate a higher limitation of liability for an additional fee, which is necessary to compensate for the greater risk assumed by Consultant.”
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. 19, No. 8 (Aug 2017).
Copyright 2017, ConstructionRisk, LLC
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