Inside this Issue

A1 - Construction Manager Owes Independent Duty of Care to Contractor – Economic Loss Affords no Protection
A2 - Implied Contract Allows Subcontractor to make claim directly against project Owner for Unjust Enrichment and Get Around Pay-if-Paid Clause
A3 - Labor Shortage is Slowing Down Construction
A4 - Builders Risk Policy Faulty Workmanship Exclusion applied to Wall Collapse

Article 1

Construction Manager Owes Independent Duty of Care to Contractor – Economic Loss Affords no Protection

A construction contractor under contract to a school district sued the project owner’s construction management firm, Jacobs Project Management Company/CSRS Consortium (“Jacobs”) alleging breach of duty to conduct constructability reviews and oversee and administer the project according to the standard of care of other professionals. The CM’s allegedly wrongful acts were summarized as including: 1) unreasonable refusal to approve payment applications and schedules; (2) delayed responses to requests for information (RFIs); (3) refusal to provide responses to reasonable questions; (4) refusal to recommend substantial completion; (5) failure to manage the oversight of the project; (6) and overall interference with the progress and completion of the project.

Held: CM owes an independent duty to the contractor to perform its services in a non-negligent manner because the contractor was a foreseeable third party that would be affected by the CM’s services. Previous court decisions in this state eliminated the use of the economic loss doctrine as a defense by architects and engineers against contractor suits. Now this decision further reduces the use of the economic loss doctrine by holding that firms such as construction managers providing professional services have no protection by the economic loss doctrine either. Latham Company, Inc. v. State Dept. of Education, 2017 WL 6032333 (Louisiana 2017).

The CM argued that because its contract was with the project owner, and not with the contractor, it owed no duty to that contractor. A series of court decisions in Louisiana that are cited in this decision explain that architects and engineers who provide designs for a project have no independent duty to the project’s contractor, and that the economic loss doctrine protects them from suit by contractors. The question in this case was whether the economic loss doctrine would also apply to a CM who had no design functions and was not acting as an architect or engineer on the project.

The CM argued that it merely provided recommendations to the Owner based on its knowledge of how construction projects are supposed to proceed. The court found that if the CM failed to render its “management services” during the design phase of the project or negligently provided those services it was reasonably foreseeable that faulty design documents could result and this could cause economic harm to the contractor. The court also found that the CM was responsible for coordinating the management of invoices, contracts, change orders, RFIs, payment requests, and certificate of substantial completion—and that by delaying or negligently processing any of these, it would be foreseeable that the project would be delayed and this would adversely affect the work and profits of the contractor.

For these reasons, the appellate court held the CM was not entitled to summary judgment against the contractor claim, but that the matter will go to trial for a decision on the facts

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. 20, No. 4 (Apr 2018).

Article 2

Implied Contract Allows Subcontractor to make claim directly against project Owner for Unjust Enrichment and Get Around Pay-if-Paid Clause

See similar articles: Implied Contract | Pay-If-Paid | Unjust Enrichment

Pay-if-paid clauses are held by this decision to be enforceable in the state of Kentucky. This, however, did not prevent a subcontractor from recovering its costs for performing extra work. The pay-if-paid clause of a subcontract prevented the subcontractor from recovering its costs of extra work from the general contractor. The court held the subcontractor could recover directly from the project owner under the theory of implied contract where the owner would otherwise be unjustly enriched by receiving the free benefit of the extra work. The owner argued that the subcontractor had an adequate remedy elsewhere without having to resort to implied contract. Because the owner didn’t pay the general contractor (GC) for the work, however, the sub had no contractual remedy to recover its costs from the GC. After a careful analysis of case law from around the country, as well as the Restatement Third of Restitution and unjust Enrichment, the court found the Owner owed an implied contract duty to the subcontractor. Superior Steel, Inc. v. Ascent at Roebling’s Bridge, LLC, 2017 WL 6380218 (Kentucky 2017).

The court explained its reasoning with regard to the pay-if-paid provision as follows:

“The contract between Superior and D&M contains two sections which are germane to this discussion. First, Article 7.11, “Claims Payment”, states:

[n]o additional compensation shall be paid by the Contractor to the Subcontractor for any claim arising out of the performance of this Subcontract, unless the Contractor has collected corresponding additional compensation from the owner, or other party involved, or unless by written agreement from the Contractor to the Subcontractor prior to the execution of the Work performed under said claim, which agreement and work order must be signed by an officer of the Contractor.

Second, Article 8.2.5, “Time of Payment” reads in relevant part: “[r]eceipt of payment by the Contractor from the Owner for the Subcontract Work is a condition precedent to payment by the Contractor to the Subcontractor. The subcontractor hereby acknowledges that it relies on the credit of the Owner, not the Contractor for payment of Subcontract Work.”¹⁶

These contract provisions are not ambiguous. They clearly provide that D&M’s receipt of payment is a “condition precedent” to its obligation to pay Superior. “ ‘Condition precedent’ is a legal term of art with a clear meaning: ‘An act or event, other than a lapse of time, that must exist or occur before a duty to perform something promised arises.’ ” BMD Contractors, Inc., 679 F.3d at 650 (citing BLACK’S LAW DICTIONARY 334 (9th ed. 2009)). This “pay-if-paid” language, coupled with the express use of “condition precedent,” unequivocally allocates the risk of nonpayment by the Project owner to Superior and relieves D&M of the obligation to pay until it receives payment from [Owner] for the steel work performed. It is undisputed that [Owner] never paid D&M for the retainage or the disputed extra work.

Comment: Kentucky, by this decision from its Supreme Court, confirms that it will enforce pay-if-paid clauses. These clauses will not be found contrary to law or public policy in Kentucky. The decision offers some hope, however, for a subcontractor who is unable to recover from the general contractor in that it permits an action by the subcontractor directly against the project owner under certain circumstances. That is where facts can be shown to demonstrate that the work performed by the subcontractor was intended for the project owner’s benefit, it directly benefited the owner, and the owner would be unjustly enriched it if it did not pay for the work performed by the subcontractor. This is not going to be common outcome, however, and subcontractors should not accept pay-if-paid clauses with the hope that a court will allow it to recover directly from the project owner instead of the general contractor.

Article 3

Labor Shortage is Slowing Down Construction

See similar articles: Construction Slow Down | Labor Shortage

As of the fourth quarter of 2017, approximately 600,000 apartment units were under construction across the U.S., but only 220,000 units were delivered nationally. According to a new Yardi Matrix report, the difference between the number in construction and the number delivered has been attributed to the construction labor shortage, which caused the average project completion time to increase to 22 months during the same period, up from 16.5 months in the third quarter of 2013. Read more at Bisnow.

This article is published in ConstructionRisk.com Report, Vol. 20, No. 4 (Apr 2018).
Copyright 2018, ConstructionRisk, LLC

Article 4

Builders Risk Policy Faulty Workmanship Exclusion applied to Wall Collapse

See similar articles: Builders Risk Policy | Faulty Workmanship | Ground Movement | Wall Collapse

When a wall collapsed during renovation of a row house, the developer sought to recover repair costs under its Builders Risk Insurance policy. The carrier denied coverage based on an exclusion in the policy for defects in construction or workmanship. It also asserted the earth movement exclusion for denying coverage. The wall collapsed during excavation of the existing basement to make a larger living area. Structural drawings required excavation to be done a section at a time, with concrete underpinnings to reinforce each section before proceeding to the next. Contrary to the plans, the developer directed subcontractors to fully excavate the basement with no underpinning. Several people warned the developer against proceeding without underpinning. After the third day of construction, the basement had been fully excavated without any underpinning. A few hours after the workers left the site for the night, a basement wall collapsed. The trial court granted summary judgment to the carrier on the basis of both exclusions, and this was affirmed on appeal.

The court found that the damages associated with the collapse were the direct result of the failure of workmanship rather than a separate “resulting loss” that might have been covered as an “ensuing loss” under the policy. With regard to the earth movement exclusion, the developer argued that it didn’t apply since the movement was below street or ground level. The court held that although the wall collapse occurred below grade, it still involved movement of the earth surface, and the exclusion in the policy was therefore applicable to deny coverage. Taja Investments, LLC v. Peerless Insurance, 196 F. Supp 3d 587 (E.D. Va. 2016), affirmed in Taja Investments, LLC v. Peerless Insurance, 2017 WL 4534788 (U.S., 4^th Cir. 2017).

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ConstructionRisk.com Report (April 2018)