Inside this Issue

A1 - Binding Arbitration Mandated by the Roof Shingles Wrapper
A2 - Broad Form Indemnification Clause Violated State Anti-Indemnity Statute
A3 - Indemnification not Owed by Engineer Inspectors to Design-Builder Whose Own Negligence caused Damages
A4 - Site Safety – No Duty of Care Owed by General Contractor to Subcontractor’s Employee
A5 - Termination of Subcontractor was Improper

Article 1

Binding Arbitration Mandated by the Roof Shingles Wrapper

A homeowners' class action lawsuit against a roofing-shingle manufacturer was subject to mandatory arbitration because the homeowners, through their roofers, had opened and used the shingles that were contained in wrappers that on their face clearly stated contract terms that included a requirement that any disputes must be submitted to binding arbitration. The homeowners' grant of express authority to their roofers to buy and install the shingles necessarily included the act of accepting the purchase terms on the homeowners' behalf, which included mandatory arbitration. Dye v. Tamko Building Products, 2018 WL 5729085, U.S. Court of Appeals, 11^th Circuit (Florida, 2018).

The pertinent facts of this case are that homeowners contracted with a roofer to replace shingles on the roof of a house. The contract with the roofer included delegating to the roofers the responsibility for purchasing shingles from a manufacturer. The roofer thus was acting as an agent of the homeowners with regard to its contractual commitments made with the shingle supplier. The owners delegated this responsibility to the roofer.

Two principal issues were considered by the court. First, was whether the arbitration provision printed on the shingles wrapper constituted an offer and acceptance creating a binding contract provision, and second, was whether the homeowner avoid the arbitration requirement since they themselves didn’t purchase the shingles directly from the supplier.

Each package wrapper displayed the all-capped word “IMPORTANT” and warned the purchaser:

MANDATORY BINDING ARBITRATION: EVERY CLAIM, CONTROVERSY, OR DISPUTE OF ANY KIND WHATSOEVER (EACH AN "ACTION") BETWEEN YOU AND TAMKO (INCLUDING ANY OF TAMKO'S [*4] EMPLOYEES AND AGENTS) RELATING TO OR ARISING OUT OF THE PRODUCT SHALL BE RESOLVED BY FINAL AND BINDING ARBITRATION, REGARDLESS OF WHETHER THE ACTION SOUNDS IN WARRANTY, CONTRACT, STATUTE, OR ANY OTHER LEGAL OR EQUITABLE THEORY.

The warranty further specifies that any action against Tamko must be arbitrated individually rather than as part of a consolidated or class action:

ANY ACTION BROUGHT BY USE AGAINST TAMKO WILL BE ARBITRATED (OR, IF ARBITRATION OF THE ACTION IS NOT PERMITTED BY LAW, LITIGATED) INDIVIDUALLY AND YOU WILL NOT CONSOLIDATE, OR SEEK CLASS TREATMENT FOR, ANY ACTION UNLESS PREVIOUSLY AGREED TO IN WRITING BY BOTH TAMKO AND YOU.

The trial court granted summary judgment for the manufacturer, dismissing the lawsuit and requiring homeowner actions to be brought by individual homeowners through arbitration instead of by class action in a lawsuit. This was affirmed on appeal, with the appellate court finding the shingle wrappers conveyed a valid offer of contract terms (including the arbitration provision), which was accepted by the homeowners when their authorized roofers opened the packages on their behalf and installed the shingles.

The court found that the packaging provided conspicuous notice of the offer—something a reasonable, objective person would understand in an invitation to contract. “For the homeowners’ part, opening and retaining the shingles was the (quite ordinary, reasonable) conduct from which their assent can be ‘inferred’”.

A nice comparison of what the court calls “shrinkwrap” agreements, is provided by the court. These are agreements that bind a software (or small-electronics) purchaser to an inside-the-box contract if they open the product and retain it for some specified time. Case law applicable to those agreements was applied by the court here with regard to the binding impact of “assent” to the terms of the offer and conditions printed on the packaging. Here, the court pointed out that the shingle manufacturer’s terms were available not only on its packaging but also on its website and over the phone, “such that a diligent consumer could easily have discovered and reviewed them before or after purchase.”

At the end of the day, the point is simply this: modern consumers are on notice that products come with warranties and other terms and conditions of purchase. And they are free to research (or not), request (or not), and read (or not) those terms before unwrapping their purchases. As to the case before us, Florida law makes clear that providing conspicuously printed product packaging is an OK way to convey purchase terms. Florida consumers who purchase, open, and retain a product are thus bound in accordance with warranty terms conspicuously printed on that product's packaging, whether they actually take the time to read them or not.

The fact that it was the roofer, and not the homeowner, that actually opened the packaging and installed the shingles makes no difference to the applicability of the terms of the roofer’s conditions on the homeowner. Because the roofer was expressly delegated by the homeowners with the task of purchasing the shingles, the roofer became an agent for the homeowners and “An agent can bind a principal to an arbitration agreement just like any other contract.”

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 ConstructionRisk 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. 21, No. 4 (Apr 2019).

Article 2

Broad Form Indemnification Clause Violated State Anti-Indemnity Statute

An indemnity clause in an architect’s contract with its client (building developer) was found void for violating anti-indemnity statute applicable to “contractors” performing work on “any contract relating to construction” because it required indemnity “for any and all losses, liabilities, expenses, claims …. relating to the services performed by the Architect.” The indemnification obligation made no exception for cases in which the negligence of the Owner was the sole cause of damages. It required only that the liability “relate to” the Architect’s services, such a “low bar”, said the court, that this “could lead [Architect] to indemnify [Owner] for [Owner’s] own negligence” [and] Indemnification of a party for that party’s own negligence is precisely the situation forbidden by [the statute].” The Travelers Indemnity Company of Connecticut v. Lessard Design, Inc., (,U.S. Dist. Ct., E.D. Virginia 2018).

This indemnification litigation arises out a previously decided copyright infringement case in which Lessard Design, Inc. and its client, the project owner were sued by Humphreys & Partners Architects for alleged copyright infringement concerning the design of a condominium building. Lessard and the owner were successful in their defense and prevailed by obtaining summary judgment dismissing the action against them. By the time all appeals were resolved affirming the summary judgment, the Owner as a “prevailing party” sought recovery of $990,995 in attorneys’ fees from Lessard. This amount was reduced to $792,796 by the federal district court upon remand, and the parties ultimately agreed upon $745,000 for the attorneys fees.

The indemnification dispute in this current case arose because when Humphrey’s sued the owner, the owner tendered defense of the claim to Lessard, and Lessard declined to provide the defense. As a consequence, the Owner was able to get its own general liability carriers, Travelers Insurance, to provide the defense on its behalf.

After successfully defending against the copyright infringement case, Travelers sought, by way of a subrogation claim, to recover those defense costs from Lessard by way of the indemnity agreement in the contract between Lessard and its client.

“The indemnity provision provided in pertinent part the following:

[i]ndemnify, defend and hold the Owner, Owner’s Developer, and Owner’s and Owner’s Developer’s wholly owned affiliates and the agents, employees and officers of any of them harmless from and against any and all losses, liabilities, expenses, claims, fines and penalties, costs and expenses, including, but not limited to reasonable attorneys’ fees and court costs relating to the services performed by the Architect hereunder . . .”

When Lessard declined Travelers requests of indemnification, Travelers filed a complaint alleging breach of contract and quantum meruit. Lessard moved to summary judgment by asserting that a Virginia statute invalidated the indemnification clause. As set forth by the court,

4.12 Section 11-4.1 invalidates indemnification provisions “by which [a] contractor performing” work on “any contract relating to construction” is required to indemnify other parties to the contract for negligence relating to the performance of the contract. Thus, the statute invalidates an indemnification provision if:

(i) the contract containing the indemnification provision is a “contract relating to construction[,]”

(ii) the indemnifying party is a “contractor[,]” and

(iii) the indemnification provision requires the contractor to indemnify other parties to the contract against liability for damage caused by the other parties’ sole negligence.”

The first question to be decided by the court was whether the Architect’s Agreement was a “contract relating to the construction alteration, repair or maintenance of a building” within the meaning of the statute. Based on the facts here, the court found Lessard had duties and responsibilities related to the “Construction Phase” of the building process as well as to the design phase. It was required to “administer the contract between the Owner and contractor and to perform periodic site visits”. Given that the Agreement imposes these obligations on Lessard, it follows that the Agreement falls squarely within the category of contracts “relating to construction” within the meaning of Sec. 11-4.1.

The second statutory question was whether Lessard was a “contractor” within the meaning of the statute. Travelers argued that the term “contractor” did not include Lessard because it was a licensed Architect, not a contractor. In rejecting that argument, the court stated that, “if the contract ‘relates to’ construction of a building, then the party performing the contract is a ‘contractor’ covered by the statute whether or not that party is also an architect.” The definition of “contractor” in the statute “is broad enough to include architects involved in the supervision of construction contracts….”

The final issue resolved by the court was whether the indemnification provision could be saved and applied – basically because it didn’t expressly state that Lessard must indemnify the Owner for the Owner’s negligence. In holding the clause void, the court stated,

This indemnity obligation makes no exception for cases in which the negligence of the Owner or PDT Builders (the Owner’s Developer) is the sole cause of the liabilities and claims that arise. The indemnity obligation only requires that the liability “relat[e] to” Lessard’s services, a low bar that could lead Lessard to indemnify PDT for PDT’s own negligence. Indemnification of a party for that party’s own negligence is precisely the situation forbidden by § 11-4.1.

In sum, because Section 2.7 of the Agreement, the indemnification provision, required Lessard, as a contractor, to indemnify the owner of the building and PDT for the owner’s and PDT’s sole negligence, the provision is void pursuant to § 11-4.1.

Comment and Lessons Learned

1) Strike out the duty to defend. From this decision we learn again how important it is to strike any defense obligation in the indemnification clause of a professional services contract. A professional liability carrier will not cover such a duty to defend. If the duty to defend cannot be completely eliminated from the clause, it should at least be modified to state that the duty will apply only to the extent it is covered by insurance the design professional is required by the contract to maintain.

2) Limit indemnity to damages “to the extent caused by negligent performance.” The clause in the Lessard contract was far too broad. By stating that Lessard would indemnify for damages “relating to the services performed by the Architect hereunder” that was so open ended that it certainly didn’t limit indemnity to damages caused by negligence. Any damages obligation resulting from an indemnification clause that would not have been awarded at common law in the absence of the indemnity language is uninsurable. The contractual liability exclusion of the professional liability policy will bar such coverage.

3) Limit indemnity to damages arising out of “third party claims.” This clause said nothing about whether an Owner could recover its own first party damages and attorneys fees in the absence of a third party claim. Some courts will read a clause such as this, which fails to clarify first party versus third party claims, and will hold that the clause applies only to third party claims. See for example, Int. Fidelity Ins. Co. v. Americaribe, 906 F.3d 1329 (11^th Cir. U.S., 2018). But other courts will find that such a clause can also apply to first party claims. See for example, Bainbridge St. Elmo Bethesda Apartments, LLC v. White Flint Express Realty Group, 454 Md. 475, 164 A. 3d 978, (Maryland 2017).

Article 3

Indemnification not Owed by Engineer Inspectors to Design-Builder Whose Own Negligence caused Damages

See similar articles: anti-indemnity | Design-Build | Indemnification clause | sole negligence

A design-build contractor made changes to the size of steel supports for a bridge contrary to the design specifications and without approval of design engineer. It then built the bridge despite being advised of the non-conformities by its two subcontracted engineering inspection firms. When the state required the contractor to tear down and rebuild the bridge, the contractor sued its two inspection firms for indemnification of its damages. Summary judgment was granted to both engineers on the basis that the contractor ignored the inspection reports and was by its own negligence fundamentally responsible for its own damages. As stated the by court, the contractor changed the structure of the bridge and cannot hold its inspectors liable as guarantors of its work. W.C. English, Inc. v. Rummel, Klepper & Kahl, LLP, 2018 WL 1177358 (U.S. Dist. Ct. W.D Virginia, 2018).

W.C. English, Inc. entered into a design-build contract with the Virginia Department of Transportation to design and construct a bridge. It subcontracted with AECOM to complete the design of the bridge. Once the contractor submitted the final AECOM design to the state it was required to build the bridge consistent with the approved AECOM plans and specifications. No change could be made to the bridge design without AECOM approval. No approval for design changes could be accepted by AECOM unless the requested revision still met the VDOT standards.

The contractor entered into a quality assurance subcontract with Rummel, Klepper & Kahl, LLP (RK&K) to inspect whether construction of the project conformed with the contract documents and VDOT standards. And it entered into a subcontract with CDM Smith (CDM) for quality control services which involved measuring “quality characteristics” and inspecting construction to determine that it conformed with the plans and specifications.

RKK and CDM jointly developed an overall quality assurance and quality control plan that specified the parties’ roles. Under the plan, the contract was “ultimately responsible for the quality of the construction.” Neither engineering firm had direct control over the contractor’s means or methods of construction.

The VDOT regulations required steel enforcement that would be covered with concrete, and these specified how much “cover” or concrete could be on top of the steel. The contractor started out installing 2.5 inch “slab runners.” When they were about half way through the job they started using 1.75 inch slab runners. This move to the shorter slab runners caused excess concrete over the top of the steel reinforcements, which became the source of the non-conformity that forced it to replace the bridge.

Inspectors from both RKK and CDM notified contractor employees, including the project manager and job foreman, that the slab runners with excess concrete cover over them did conform to the plans and specifications. The inspectors believed the contractor had cured their concerns before it poured the concrete. Unfortunately, that was not the case.

After construction of the bridge was almost finished, VDOT did an inspection and noted the excessive concrete cover (caused by the decrease in slab runner size) and required calculations to determine whether this affected the structural integrity of the deck – which it subsequently decided was the case.

To determine whether the inspectors owed any duty to indemnify the contractor for the costs incurred for the bridge replacement, the court reviewed the wording of the indemnification clauses of the inspection contracts. Both contracts contained language stating that the engineers would have no duty to indemnify the contractor for damages caused by the contractors negligence. The court quoted form the contract that “RK&K is liable for damages ‘to the extent directly caused by the negligence of [RK&K] but not to the extent caused by the acts or omissions of [English].’” It further quoted from the contract that RK&K agreed to indemnify the contractor for damages ‘caused by the negligent performance of [RK&K’s work]’ unless the injury is caused by the negligence of English.” The court quoted similar language in the CDM subcontract.

In granting summary judgment to the engineering inspectors, the court found that the contractor was responsible for ordering and installing the new slab runners that caused the non-conformance, that it knew of the non-conformance and did not obtain approval from AECOM to make the change, and that it poured the concrete after being advised by both inspection firms of the non-conformity. In light of this conduct the court concluded that the term’s of the subcontracts did not allow the contractor to seek contractual damages or indemnity from the inspectors.

Article 4

Site Safety – No Duty of Care Owed by General Contractor to Subcontractor’s Employee

See similar articles: Duty of Care | Jones Lang | Liberty Mutual | Negligence | Site Safety

Although contract between the general contractor (GC) and project owner required the contractor to assume supervisory and safety responsibility over the project, the contract also required the GC to require its subcontractors to assume the same responsibilities for the subcontracted work. Where a roofing subcontractor assumed those responsibilities, it alone was responsible for the injuries sustained by its employee. The subcontractor was in the best position to know about the particular dangers involved in its specialty work and to provide appropriate equipment and supervision to safely perform that work. Thus, the GC did not understand to render services necessary for the protection of the injured laborer because both the general contract and the subcontract required the subcontractor to strictly supervise, equip, and ensure that its employees worked in a safe manner. Grady v. Jones Lang Lasalle Construction Co., Inc. (193 A.3d 283 Supreme Ct. New Hampshire, 2018).

The accident giving rise to this case involved a laborer whose hand was burned when he lit a torch while performing roofing work on a cold windy day. The flame ignited the glove on this right hand. After receiving workers’ compensation benefits from his employer, the laborer sued the GC and project owner, alleging that they owed him a duty of care. Summary judgment was granted to the defendants and affirmed by the state Supreme Court.

An on-site job box was provided by the subcontractor to its laborer, and from that box the laborer obtained materials it needed for the roofing work. No fire-proof gloves or fire extinguisher were included in the box. The laborer asked his supervisor if there were any gloves available, but his supervisor informed him that there were none at the site.

Due to the cold weather, the laborer put on gloves of his own, and these were made of cotton, which caught fire and burned his hand.

In analyzing the facts and the law, the court explained that a plaintiff can only recover for negligence if it can “demonstrate that the defendant owed a duty to the plaintiff, that the defendant breached that duty, and that the breach proximately caused injury to the plaintiff.” “Absent a duty, there is no negligence.”

On this project, the plaintiff’s employer, and not the GC, was responsible for providing the plaintiff with his equipment and ensuring his safety. It was his employer, and not the GC, who supervised him and provided him with the equipment he used. The applicable state case law precedent did not impose a duty upon general contractors to provide training, equipment, and oversight to subcontractor employees. For these reasons, the court held agreed with the trial court that the GC did not in this case owe the plaintiff a duty of care.

Article 5

Termination of Subcontractor was Improper

Subcontractor was 95 percent complete with its work when the general contractor (GC) made changes to the scope of work, failed to timely respond to change order requests, and failed to make payment of amounts then due under the subcontract. Without providing contractually required notice of intended termination, the GC terminated the subcontractor for default – which it subsequently argued it could also do as a convenience termination. Court found the termination was improper and the subcontractor was entitled to recover damages for breach of contract. DeAvila v. Espinoza Metal Building & Roofing Contractors (2018 WL 4113168, Tex. Court of Appeals, 2018).

The subcontract required the subcontractor to install a type of energy efficient roofing system for a fixed price. No schedule was provided but the contract stated that time was of the essence. A provision of the contract permitted the GC to terminate the contract with or without cause by providing a 48-hour notice of termination in writing.

The roofing system was almost completed when the GC decided to move HVAC units from the interior of the building onto the roof. This required holes to be drilled into the roof that the subcontractor had already installed, and this would impact the warranties of the roofing materials. In consequence, the subcontractor prepared a change order request to account for the need to install new insulation, bonding adhesive, roofing material, and counter flashing to maintain the 20-year warranty.

Initially, the GC didn’t respond to the change order request. Instead the GC sent an email to the subcontractor directing him to fix alleged roof leaks and also cut the penetrations for the HVAC equipment. The GC followed up with a letter directing the subcontractor to complete the penetrations no later than December 10. On December 1, the subcontractor went to the job site and found all of this remaining material and work supplies were missing. Assuming these had been stolen, the subcontractor called the police and began filing a crime report before learning that it was the GC who had removed the materials.

About a month later, the GC finally responded to the change order request that had been submitted several months earlier. Its response was a rejection of the pricing proposed, and a counterproposal for pricing instead. The sub signed the revised change order approving the reduced pricing but conditioning this upon advance payment of half of the additional cost. No response was given to this by the GC so the subcontractor performed no further work on the project.

Without first notifying the subcontractor of proposed termination, the GC hired a new subcontractor to complete the roof installation. The subcontractor then filed suit for breach of contract and quantum meruit. In its defense, the GC argued that the subcontractor refused to complete the work in the original agreement and alternatively argued that he was free to terminate the contract at his convenience and could therefore not be in breach of contract for removing the sub’s materials and forcing his workers off the job site.

The trial court found (and this was sustained on appeal) that the removal of the roofing materials and eviction of the crew for the site constituted a breach of contract and that this occurred prior to any alleged breach of contract by the subcontractor. “When a party to a valid and enforceable contract wrongfully makes another party’s ability to render its performance impossible, the party committing the interference is in breach of contract and the afflicted party is entitled to damages sustained by the breach.”

With regard to the argument that the GC was free to terminate the contract for convenience and could not be considered in breach of contract for doing so, the appellate court held that there was sufficient evidence for the trial court to find that by the GC expelling the subcontractor from the job site without 48 hour advance notice, the GC forfeited its right to claim a contractual right to a termination for convenience.

Comment: A couple points are particularly worth noting about this case. First, the termination notice requirements of a contract must be followed, otherwise the parties forfeit the rights they otherwise have to termination. Second, it is very risky for a general contractor to remove a subcontractor’s materials and supplies from a jobsite. Even if it could be legally done, it could influence a court against the GC. Third, ignoring a change order request for work that must be done may make it impossible for a subcontractor to perform its work – as happened here. Such failure to respond to the change order request in such a situation constitutes a breach of contract entitling the subcontractor from relief from the project schedule and excusing any potential liquidated damages recovery, as well as entitling the subcontractor to damages for breach of contract.

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ConstructionRisk.com Report (April 2019)