Inside this Issue

A1 - Register for the Upcoming Webinar on Ethical Challenges for Engineers
A2 - Court will not litigate case until parties first go through mediation as required by contract
A3 - Economic Waste Doctrine Might Prevail – but no Summary Judgment Granted
A4 - Additional Insured Prime Contractor Entitled to be Defended under Subcontractor CGL Policy Where Plaintiff Merely Alleged “Damage to Other Property”

Article 1

Register for the Upcoming Webinar on Ethical Challenges for Engineers

In this webinar, we will discuss ethical challenges for engineers. We will present several recent Board of Ethical Review decisions issued by the National Society of Professional Engineers.

Learning Objectives

Become more familiar with the National Society of Professional Engineers (NSPE) Code of Ethics for Engineers;
Learn lessons from review of recent BER ethics decisions;
Learn to recognize potential issues that might create violations of the code of ethics; and
Learn some ideas for negotiating with clients to avoid violating ethical obligations.

REGISTER HERE.

This article is published in ConstructionRisk Report, Vol. 24, No. 10 (December 2022).

Article 2

Court will not litigate case until parties first go through mediation as required by contract

See similar articles: Mediation

Subcontractor filed suit against the prime contractor seeking money allegedly owed. Prime moved to dismiss the suit or stay the suit until the parties could submit the dispute to mediation as required by contract. The court agreed that because the contract clearly stated that parties must go through mediation before filing suit, the case could not be tried in court until after unsuccessful mediation. United States, ex rel El Paso Glass Company v. David Boland, Inc., 2018 WL 1566834.

This decision demonstrates the significance of including requirements in contract stating that before going to litigation or arbitration parties must first have their senior principals attend a “negotiation” sessions or “mediate” before filing suit.

In this case the contract expressly required claims to be submitted to mediation before initiating suit. The contract states the following in this regard:

Any claim arising out of or related to the Subcontract Agreement, other than those subject to Paragraph 13A, above, shall be submitted to the Contractor for an initial decision in its sole discretion. Thereafter, should Subcontractor disagree with the Contractor’s decision, such claim shall be subject to non-binding mediation, to be held in Orange County, Florida, as a condition precedent to the institution of legal or equitable proceedings by either party.... No legal or equitable proceeding may be filed until the conclusion of the mediation process and the Subcontractor agrees that it will stay any such proceeding that is instituted until the completion of mediation. ….

If the Prime Contract incorporated herein is one for which the Contractor has provided any bond(s) pursuant to 40 U.S.C. § 270a, the “Miller Act,” ... then the Subcontractor expressly agrees to stay any action or claim under this Subcontract Agreement against the Contractor and against the Contractor’s surety and its Payment Bond and Performance Bond pending the complete and final resolution of ... the Subcontract Agreement’s mediation procedure, as required by Paragraph 13, above.

The Plaintiff argued that the Defendant waived the mediation requirements by virtue of having disputed Plaintiff's requests for payment and not returning calls to the Plaintiff. The Plaintiff also argued that I thought mediation would be futile because it believed the Defendant was going out of business. No legal authority was cited by the Plaintiff in support of its arguments to ignore the requirements of the contract to mediate. Consequently, the court found mediation was required and that the best time for such “mediation in this case is now….”

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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 24, No. 10 (December 2022).

Article 3

Economic Waste Doctrine Might Prevail – but no Summary Judgment Granted

See similar articles: Economic Waste | public private partnership

A subcontractor on a federal project installed fiber-reinforced manholes instead of the specified steel-reinforced manholes meeting the ASTM requirements. When government demanded that these be replaced (after they had already been installed) the subcontractor argued that this constituted economic waste. Expert witnesses for the government and the subcontractor had opposing views on whether the fiber-reinforced manholes were adequate. Both parties moved for summary judgment, which was denied because the Court concluded that factual issues were in dispute as to whether the economic loss doctrine overrode the requirement of strict compliance with the contract. David Boland, Inc. v United States, 161 Fed. Cl. 303 (2022).

This project involved a wastewater collection system being built for the government which would be owned and operated by a private firm – Aqua Engineers, Inc. Aqua hired Boland, Inc. as a subcontractor to perform the construction of the system. The contract between Aqua and the government incorporated ASTM C478, and that standard required steel reinforcement of manholes. That standard further provides that manhole components failing to conform to any of its requirements are subject to rejection. The contract required strict compliance with its terms and conditions.

Boland breached the contract by installing non-conforming manholes. When the government was about to require replacement of the manholes, Bolan sought a variance from the contract terms. It supported that request with expert reports stating that the fiber-reinforcement was satisfactory. The government seemed about to grant this variance request but later changed its mind because Aqua would not accept the covers without some kind of guarantee by the government that they were adequate. Since the government would not do that, Boland was required to remove and replace the manholes.

There was engineering evidence supporting Boland’s position. But the government experts opined that it was possible that during installation the manholes could have been damaged without the government’s knowledge, and this would subject them to greater likelihood of cracking in the future.

Discussion of the Economic Waste Doctrine.

The economic waste doctrine is governed principally by a decision issued in the case of Granite Construction Co. v. United States. In that case, the government required a contractor building a lock and dam to remove and replace waterstop that didn’t strictly meet the contract requirements. The court there held that this constituted economic waste and therefore allowed the contractor to recover from the government its costs of correcting the nonconforming work.

A contractor can recover correction costs under the economic waste doctrine when it can show that the cost of correction is economically wasteful and the work is otherwise adequate for its intended purpose. Courts hold that a cost of correction is “economically wasteful” when it is disproportionate to the loss of value that resulted from noncompliance. And work is deemed “adequate for its intended purpose” when it substantially complies with contractual specifications.

In this case, the court considered the expert evidence and concluded that it was not clear that the product provided by Boland would be adequate. That is a genuine dispute that will need to be decided at trial rather than by summary judgment.

Article 4

Additional Insured Prime Contractor Entitled to be Defended under Subcontractor CGL Policy Where Plaintiff Merely Alleged “Damage to Other Property”

See similar articles: Additional Insured | CGL insurance | duty to defend

A Commercial General Liability (CGL)Insurance carrier had a duty to defend a property developer who was an additional insured under a subcontractor’s CGL policy in a lawsuit by a homeowner association (HOA). While a lower court granted the carrier summary judgment holding that the complaint against the developer did not allege facts sufficient to create a duty to defend, this was reversed on appeal, with the court holding that merely general assertions in the complaint alleging that defective construction work by the subcontractor caused damage to “other property” were sufficient to create the duty to defend. Acuity c. M/I Homes of Chicago, LLC, 2022 Il App (1^st) 220023, 2022 WL 4115230).

Townhouse HOA filed suit for breach of contract and implied warranty of habitability against the developer. Developer asked the subcontractor’s CGL carrier to defend it as an additional insured under the CGL policy. The carrier refused to do so, and instead filed a declaratory judgment suit asking the court to decide it owed no such duty.

The underlying CGL policy was written on a form commonly used by CGL carriers. It only applied coverage for bodily injury and property damage caused by an occurrence. Exclusions in the policy stated that it would not apply coverage to damages to “(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the property damage arises out of those operation; or (6) That particular part of any property that must be restored, repaired or replaced because your work was incorrectly performed on it.”

In the complaint against the developer the HOA asserted that the developer “constructed and sold Townhomes with substantial exterior defects,” including moisture-damages or water-damaged fiber board, water-damaged OSB sheathing, deteriorated brick veneer, poor condition of weather-resistive barrier, improperly installed J-channel and flashing, and prematurely deteriorating support members below the balcony deck boards. All work was allegedly performed by subcontractors working for the developer.

The complaint alleged that defects “caused substantial damage to the Townhomes and damage to other property.” It further alleged that the HOA will be required to make “substantial repairs to the Defects and to repair damage to other property.”

The carrier argued, and the trail judge agreed, “the mere mention of damage to other property in the underlying complaint did not trigger its duty to defend because the Association was focused “on recovering for damage to the townhomes, and necessarily “other property.”

The appellate court analyzed the issues and held that the complaint sufficiently alleged damage to “other property” even though the complaint didn’t state what constituted such “other property.” For this reason, the court held that the developer was entitled to be defended as an additional insured under the CGL policy.

Comment: It seems somewhat surprising that an additional can be entitled to a defense by a CGL carrier when the complaint fails to include any genuine facts that might tend to show what “other property” was damaged. This holding might seem to support coverage in situations where no actual damage to property other than the “work itself” was sustained.

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