Inside this Issue

A1 - Contractor Not Responsible for Foundation Failure Since Change Order Revised the Design
A2 - Economic Loss Rule Barred Claim against Contractor’s President
A3 - Settling Suit without Prior Approval of Insurance Carrier Causes Insured to Forfeit Coverage Regardless of Whether the Carrier was Harmed
A4 - Public Nuisance Suit against A/E Liable for Failing to Design Protective Fencing for a Retaining Wall Dismissed
A5 - Contractor May Recover on Differing Site Condition Despite Not Following the Notice Requirements of Contract

Article 1

Contractor Not Responsible for Foundation Failure Since Change Order Revised the Design

Where a contractor sought a request for clarification to the project architect concerning whether rebar was to be tied from the floor slab to the pile caps, the architect responded with a clarification, that ultimately became a change order, directing the slab rebar to be connected to the pile caps. This was not consistent with a recommendation that had been included in the geotechnical engineering report that was provided with the bidding documents. When the foundation failed, the building owner sued the contractor for breach of warranty and breach of contract. Contractor’s motion for summary judgment was granted, and affirmed on appeal, because contractor constructed the building in accordance with the plans and specifications as revised by the change order. Of note, the court concluded that the contractor was not obligated to notify the architect in its request for clarification that the specification conflicted with the recommendation in the geotechnical report. Moreover, said the court, the contractual requirement that the contractor carefully study the specifications was not for the purpose of discovering errors, omissions or inconsistencies in the design information, and such review was only in its capacity as a contractor and not as a licensed design professional. Maines Paper & Food Service, Inc. v. The Pike Company, Inc., 26 NYS 3d 646 (2016).

The court quoted from the contract that provided that the contractor was “not … required to provide professional services that constitute the practice of architecture or engineering unless such services are specifically required” and that the contractor was “not … responsible for the adequacy of the performance and design criteria specified in the Contract Documents.”

What the court felt the project was trying to do here was to suggest that the contractor was obligated to act as design professional and challenge the directing in the change order. But that obligation was not contained in the contract. The contractor raised the issue, by a request for clarification, concerning tying the slab to the pile caps, and the owner and architect responded by directing how the work was to be done. The court concluded that “even if it was contrary to the recommendation set forth in the [geotechnical] report, it was not contrary to any contractual provision applicable to the [contractor]. Since the change order was approved by the architect and owner, there was no material question of fact at issue and court, therefore, determined that a trial was not necessary, but that the matter could be appropriately resolved on a summary judgment motion – with judgment granted to the contractor.

One other important issue discussed in this decision was the question of whether the project owner could sue the contractor for negligence in addition to breach of contract. The court concluded it could not. As stated by the court, “It is a well-established principle that a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has be violated. This duty must spring from circumstances extraneous to, and not constituting elements of, the contract....” Since the owner did not allege that the contractor engaged in a negligent act or violated a legal duty distinct from the contract, there was no legal basis for a claim, or cause of action based on negligence.

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. 18, No. 7 (December 2016).

Article 2

Economic Loss Rule Barred Claim against Contractor’s President

An error was made by a surveyor in setting the level for a foundation pad for a church building. A construction contractor then proceeded to excavate dirt from the foundation area, believing the resulting level would be higher than required by the base flood elevation set by the applicable regulations. After the church was built, it could not obtain a certificate of occupancy because the foundation was 8 inches too low. The church refused to pay the builder the outstanding balance owed under the contract, and the builder filed suit to which the church filed a counter-claim against the builder corporation as well as a third party claim against the president of the builder for negligence. A jury found in favor of the construction company against the church for breach of contract but found in favor of the church against the corporate president as an individual. The judgment against the individual was reversed on appeal, with the court holding that the economic loss rule barred the action, and that the only remedies available to the church were those available under its contract against the construction company with which it had contracted. Beaufort Builders, Inc. v. White Plains Church Ministries, Inc., 783 S.E. 2d 35 (2016).

The court cited previous court decisions for the proposition that “no negligence claim exists where all rights and remedies have been set forth in a contractual relationship.” As further cited by the court, “Generally, a breach of contract does not give rise to damages based on a negligence method of recovery even where the breach was due to negligence.” The court set out the “economic loss rule” as follows:

Simply stated, the economic loss rule prohibits recovery for purely economic loss in tort, as such claims are instead governed by contract law.... Thus, the rule encourages contracting parties to allocate risks for economic loss themselves, because the promisee has the best opportunity to bargain for coverage of that risk or of faulty workmanship by the promisor. For that reason, a tort action does not lie against a party to a contract who simply fails to properly perform the terms of the contract, even if that failure to perform was due to the negligent or intentional conduct of that party, when the injury resulting from the breach is damage to the subject matter of the contract. It is the law of contract and not the law of negligence which defines the obligations and remedies of the parties in such a situation.

Four exceptions that courts may consider to allow a claim despite the economic loss rule were found inapplicable. In particular, the promisee to the contract (i.e., church) and not a third-party, suffered the injury at issue. The injury was to the church building itself, the very subject of the contract. The builder was not acting in any capacity that would cause it by law to be considered a bailee or to have a due care to protect the owner’s property. And finally, there was no evidence to suggest that the injury was done willfully.

The individual’s presence at the construction site was at all times due to his company’s performance of the work and all his actions were on behalf of the company pursuant to the contract. The only injury the church suffered as a result of the individual’s acts “was the fact that it did not get the benefit of its bargain with [the builder]-- namely a properly constructed church building….”

Comment: This decision very succinctly sets forth the basis for defense counsel to file a motion to dismiss a negligence count in a complaint against a contractor or design firm where the only genuine cause of action that should proceed is one for breach of contract. The fact, or argument, that negligent performance of the work is what caused the contract to be breached, does not justify allowing a separate negligence count to be litigated.

Article 3

Settling Suit without Prior Approval of Insurance Carrier Causes Insured to Forfeit Coverage Regardless of Whether the Carrier was Harmed

The “no-voluntary payments” condition of an insurance policy was violated by an insured subcontracting concrete company, when it entered into a settlement with its prime contractor and paid damages for contractual liability for construction delays as well as for an accident, without first notifying its insurance carrier and obtaining prior approval to settle the dispute. When the subcontractor subsequently sought indemnification from its insurance carrier to be reimbursed the amount it had paid in damages, the carrier denied coverage. The issue of whether the coverage denial was appropriate was litigated and then appealed through several levels. The appellate court decision held that the subcontractor’s complaint against the carrier should have been dismissed on a motion for summary judgment without regard to whether the subcontractor might be able to demonstrate that the carrier was not prejudiced or harmed by the unauthorized settlement. Travelers Property Casualty Company v. Stresson Corporation, 370 P.3d 140 (Colorado 2016).

The requirement that an insured contractor must provide notice of a claim as required by the terms and conditions of a policy is a “fundamental terms of the contract,” and it is not necessary for a carrier to prove that it was prejudiced due to the failure of the claim to be timely reported. In fact, the court stated that “applying the notice-prejudice rule to excuse an insured’s noncompliance with such a contractual [policy] provision would essentially rewrite the insurance contract itself and effectively create coverage where none previously existed.” Here, the court explained that the “no voluntary payments” clause clearly excluded from coverage any payments voluntarily made or obligations voluntarily assume by the insured without consent…. The insurance policy emphatically stated that any such obligations or payments would be made or assumed at the insured’s own cost rather than by the insurer.

Comment: This case demonstrates the dire consequences of failing to comply with the terms and conditions of an insurance policy, particularly when it comes to providing the carrier with timely notice of a claim, and when it comes to obtaining prior approval before doing anything that might compromise or settle the claim.

Article 4

Public Nuisance Suit against A/E Liable for Failing to Design Protective Fencing for a Retaining Wall Dismissed

A man who fell from a retaining wall at a streetscape project being built for a city filed suit against the city as well as the architect (BL Companies, Inc.) for the project. The legal theory against the architect was that he had created a public nuisance by failing to provide protective fencing for the wall. The architect filed a motion for summary judgment asserting that it had no supervisory authority over the construction, no site safety responsibility and no control over the retaining wall – all of which were assigned to the construction contractor pursuant to contract between the city and the contractor.

The plaintiff argued in opposition to that motion, that each defendant, including the architect, had control over the project until it was completed, and that the designers can be liable in public nuisance for defective or dangerous construction that they create by their design. No professional negligence claim was made against the architect. The trial court granted summary judgment for the architect and this was sustained on appeal, with the appellate court holding that there was no basis to find a public nuisance since there was no evidence that the architect had actual control over the physical property. It rejected the plaintiff’s contention that the architect had control over the property because it had significant input into the design and construction of the project and failed to include a fence in its design.

The court found that neither the town nor the construction contractor included any input the architect had into the design of the wall. It is also found that any inspection duties the architect may have had did not create “control over the property.” No evidence was found of delegation to the architect of authority over the wall. Consequently the architect could not be deemed a “user of the property” which would have to be demonstrated in order to find public nuisance. Gregg Fisk v. Town of Redding, et. al., 138 A. 3d 410 (Conn.2016).

Article 5

Contractor May Recover on Differing Site Condition Despite Not Following the Notice Requirements of Contract

After final payment was made under its contract, a utility construction contractor submitted a written request for additional payment to the project owner seeking payment for extra work it performed as well as increased costs due to delays and disruptions during the project. When the owner refused to pay, the contractor filed a breach of contract complaint alleging that the owner failed to provide plans showing the location of underground facilities and was obligated to pay for extra work caused by differing site conditions. The work in question resulted from 122 incidents where other utility lines or structures were damaged because they were unmarked on the construction plans. The trial court found against the contractor – concluding that the risk of liability with respect to underground utilities was allocated by contract to the contractor. Moreover, the contractor claim was barred because it was untimely made. This was reversed on appeal with the court holding that the contract allowed for differing site conditions claims and did not assign all risk to the contractor, and that the written notice requirement was not fatal since the owner had actual notice of the claims through its onsite representative who documented each event as it occurred. J. F. Allen Corporation v. The Sanitary Board of the City of Charleston, WV, 785 S.E..2d 627 (W.VA. 2016).

The court cited earlier case precedent for the proposition that contract provisions providing for timely written notice of changes or claims can be amended, waived or abrogated by the conduct of the parties. Here, the contractor had sufficient allegations in its complaint concerning actual knowledge and action by the owner, that the complaint should not have been dismissed. The court cited a history of actions by the owner on this project in which the owner did not insist on adherence to the formal contractual requirements and even instances where the owner, in contravention to the formal requirements of the contract, instructed the contractor to bill in a manner different than called for by the contract and to perform work not specifically called for by the contract.

With regard to the extra work that was not formally required until after contract completion, the court found that the city had immediate, actual notice of the extra work as it was being performed and even directed the contractor to perform with the attendant expectation that the contractor would receive additional compensation. Consequently, the court found that the allegations in the complaint were adequate to support a claim for damages. On remand to the trial court, the contractor will have an opportunity for a trial on the merits but that whether it met the requirements of the contract, and whether the owner breached its obligations under the contract and whether elements of the contract were waived or amended by the parties are all questions of fact that will have to be resolved by the trier of fact.

Comment: This result is somewhat surprising in that “final payment” had already been made before the claims in question were submitted. It is a fundamental principle of filing claims that they must be filed before final payment. There are numerous decisions in state and federal courts holding that what might otherwise appear to be a late claim may, depending upon the facts, be deemed timely provided it was at least filed before final payment under the contract. But once the final payment request has been submitted that normally terminates any right to submit any other claims. The contractor is fortunate that the court held as it did. My advice to contractors is please follow the terms and conditions of the contract when it comes to submitting change order requests and claims. And submit all potential changes and claims before the final payment is accepted.

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ConstructionRisk.com Report (December 2016)