Inside this Issue

A1 - Architect Liable to an Airport Maintenance Person who was Electrocuted While Working on an Electric Switchgear Box that had No Warning Labels
A2 - Damages Not Recoverable Where Homeowner Failed to Prove the Reasonableness of Remedial Damages Incurred or the Difference-In-Value Damages
A3 - Project Owner Permitted to Pursue Negligence Claim Based on Breach of Contract
A4 - The Unrelenting Tide of the Duty to Defend
A5 - Attorneys Fees Recovered to Enforce Indemnity Agreement

Article 1

Architect Liable to an Airport Maintenance Person who was Electrocuted While Working on an Electric Switchgear Box that had No Warning Labels

Approximately four or five years after completion of the Hilton Hotel at the Boston Logan Airport, an employee of the airport authority was electrocuted while attempting to repair an electrical transformer that lacked required wiring diagrams and warning signs. The family of the deceased filed suit against the owner of the hotel as well as the architect that designed it, the consultant that did the electrical engineering services, the general contractor, and the electrical subcontractor, alleging negligence, gross negligence and breach of warranty. The hotel filed cross claims against the architect and the electrical engineer seeking indemnification and contribution.

The Supreme Court of Massachusetts held that claims for contribution were proper because the consultant owed an independent duty of care to the electrician to comply with its contractual obligations to the project owner to get the contractor to provide proper warning labels on the switchgear, and there were issues of fact to be determined by a jury as to whether the worker’s death was caused by the design firms’ failure to report that the contractors had not complied with the specifications. LeBlanc v. Logan Hilton, 974 N.E. 2d 34 (Mass. 2012).

Under its agreement with Hilton, the consultant was to “visit the site at intervals appropriate to the stage of construction to become familiar with the progress and quality of Work, and to determine, in general, if Work is being performed in accordance with the Construction Documents.” The agreement further provided, “[Consultant] shall promptly inform Hilton in writing of any deficiencies in Work and/or deviations from the requirements in Work and/or deviations from the requirements of the Construction Contract which come to [Consultant’s] attention.”

There was also a paragraph that acknowledged that “[Consultant] shall not be responsible to have control over or charge of and shall not be responsible for construction means, methods, techniques, sequences, or procedures, or for safety precautions and programs in connection with Work being performed at Site.” These are clauses from a standard form document of the American Institute of Architects (AIA).

Another section of the Agreement provided that the consultant would indemnify Hilton from and against all claims “arising out of and to the extent caused by the negligent acts, errors and omissions during the performance of professional services….”

Contract specifications for the switchgear in question required that it have a stenciled “mimic bus” diagram on the face of the cabinets that showed schematically the configuration of the equipment and the switching arrangement. Another section of the specification required a warning sign “on or adjacent to any switching equipment that read: ‘Warning – Load side of switch may be energized by backfeed.’”

Neither the mimic diagram nor the warning label was installed by the switchgear manufacturer. This was pointed out by a subcontractor that tested and inspected the installed switchgear during project commissioning, and issued a report recommending that “Signs should be installed … that inform operating personnel that fuses can be energized from several sources, both incoming lines and tie switch.”

The electrical engineer reviewed the report and wrote a letter to the manufacturer directing him that the wording and placement of signs was to be “submitted as a show drawing.” After the switchgear was subsequently activated, the electrical engineer did a field observation and issued a report to the Consultant acknowledging the gear had been started up but making no mention of the presence or absence of warning signs. The record did not reflect that the manufacturer ever submitted the shop drawing as it had been directed to do.

On a motion for summary judgment, the trial judge granted summary judgment for the consultant and electrical engineer, which he characterized as the “Design Team,” because he found that the limitation of responsibility set forth in the contract rendered them not responsible for the failure of the contractors to perform work according to the specifications. The judge held that the Design Team’s duty was limited to that which they controlled, and he granted them summary judgment on the issue of causation.

An intermediate appellate court reversed that decision because it found that although the Design Team had no authority or responsibility for controlling the work, it did, pursuant to the contract, owe a duty to Hilton to provide biweekly reports of work progress and competence, and “especially of any deficiencies or deviations from contractual requirements.”

Failure to notify Hilton of the manufacturer’s failure to install the warning signage, concluded the intermediate appeals court, constituted a contractual breach that posed a “field of risk for third parties likely to come into contact with the switchgear, and summary judgment should not have been granted since there was an issue of fact of causal negligence to be decided by trial.

In addition, the court held that expert testimony against the Design Team was not required because the issue of professional negligence in this case was “comprehensible to a lay person in view of the contractual duties, the special hazards of electricity, and the evidence of insufficient monitoring and notification.” That decision was appealed to the Supreme Court of Massachusetts, which issued the decision reported herein.

Tort May Arise from a Contractual Relationship

The first point the court made was that “It is settled that a claim in tort may arise from a contractual relationship … and may be available to persons who are not parties to the contract…. [A] defendant under a contractual obligation ‘is liable to third parties not parties to the contract who are foreseeably exposed to danger and injured as a result of its negligent failure to carry out that obligation.’” Here, said the court, there was sufficient evidence that the Design Team breached their contract by failing to report to Hilton that the manufacturer failed to comply with the specifications regarding the mimic bus and the warning signage.

Expert Testimony was not Required

No expert testimony was presented to attest that failure to report the noncompliance with the specifications constituted a breach of the professional standard of care. The court began its analysis by citing several case precedents for the proposition that professionals “do not have a duty to be perfect in their work, but rather are expected to exercise ‘that skill and judgment which can be reasonably expected from similarly situated professionals.’”

From there, however, the court cited case precedent holding that violation of the standard of care can only be demonstrated by expert evidence. But it went on from there to “where, as here, there was evidence that the Design Team actually knew of the deficiencies but failed to fulfill its contractual duty to report the deficiencies to Hilton, and where the deficiencies presented so obvious a risk to the safety of any person who would operate the switchgear, we [conclude] that the evidence is sufficient without expert opinion to permit a finding of negligence.”

Evidence that Third Party Harm was Caused by Professional Negligence

With regard to the question of whether summary judgment should have been granted as to causation, the supreme court concluded that “there is a genuine issue of material fact whether reporting the deficiencies to Hilton and refusing to declare the project completed until the deficiencies were corrected would have caused the mimic bus diagram and warning signage to be installed before [the maintenance worker] was electrocuted.”

In other words, the court is saying that the Design Team’s failure to do what it was supposed to do per its contract could be professional negligence as to the third party and a jury must be permitted to decide whether the negligent breach of the contract “caused” the death of the worker.

As the court put it, “Because the evidence in the summary judgment record is sufficient to support a finding that [the worker’s] death was caused by the professional negligence of the Design Team based on their failure to report known deficiencies to Hilton that posed a serious safety risk to anyone who operated the switchgear, the judge erred in granting summary judgment to the Design Team on the cross motions for contribution….”

No Prime Consultant Duty to Indemnify Hilton

The supreme court found that the prime Consultant had no duty to indemnify Hilton under the terms of its contract because even if they were negligent for failing to report the contractor’s failure to install diagrams and warning signage, the indemnity agreement stated that indemnification shall “shall not apply” where the losses “result from the negligent acts or omissions of … other parties for which [Consultant] is not responsible.”

Pursuant to the sections of the contract quoted earlier in this case note, the court found that the Consultant had no control over the work of contractors and was not responsible for their failure to install the diagrams and warning signs. Furthermore, the court held that where Hilton’s indemnification claim of negligence against Consultant rests on the failure to report the contractor’s negligent work, “any losses resulting from [Consultant’s] negligence would also result from [contractor’s] negligence, a party “for whom [Consultant] is not responsible.”

For these reasons, the court held that the trial court motion for summary judgment should not have been granted as to the contribution claim but should have been granted as to the indemnification claim. The case was remanded for trial on the contribution claims, and this means that a jury will have to determine whether the failure of the Design Team to report the contractor’s errors to Hilton caused the death of the worker.

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. 15, No. 1 (Jan 2013).

Article 2

Damages Not Recoverable Where Homeowner Failed to Prove the Reasonableness of Remedial Damages Incurred or the Difference-In-Value Damages

Although construction defects caused water leaks that resulted in mold growth that required major remediation of a newly constructed house, the homeowner was denied damages by a court because it failed to prove that the remediation costs it paid were reasonable, and it failed to prove the difference in value of the house as constructed and its value if it had been constructed according to the contract. The Texas Supreme Court therefore threw out a $651,000 jury verdict because it found the evidence was not sufficient to support the jury’s finding. McGinty v. Hennen, 372 SW 2d 625 (2012).

Shortly after moving into his new home, the owner noticed water leaks and a few months later mold began to grow. A contractor inspected the house and provided a $651,000.00 estimate to rid the house of mold and rebuild areas of the house that were affected by the mold remediation. The owner then sued the homebuilder for negligence, breach of express and implied warranties, and breach of contract.

On each claim, the jury was asked to find two damage awards; “(1) the difference, as of the date of closing, in the value of the home as it was received and the value it would have had if it had been as represented, and (2) the reasonable and necessary cost to repair the home.” The jury found the difference in value to be $262,885.83 and the reasonable and necessary repair costs to be $651,230.72.

The jury also awarded $750,000 in exemplary damages and $200,000 in attorney’s fees. The trial court denied contractor’s motion for judgment notwithstanding the verdict, based on lack of evidence supporting the verdict.

On appeal, the contractor argued that the homeowner presented no evidence that the repair costs were reasonable and necessary and, indeed, that those costs were so high as to constitute “economic waste.” The Contractor argued that the only recoverable measure of damages would be the difference in market value of the house, and that because the owner failed to produce evidence to prove the difference in market value, a jury could award no damages.

The Supreme Court agreed with the contractor and found that the only evidence was questionable expert testimony and an estimate by a remediation contractor.

The court stated “Estimated out-of-pocket expense, like paid out-of-pocket expenses, do not establish that the cost of repair was reasonable. Some other evidence is necessary. Neither the [owner’s] damage expert nor any other witness testified to the reasonableness of the estimated cost.” The court rejected the argument that because the expert testified extensively about how he derived his pricing estimate, that was good enough as proof. “That explanation may explain how the figure was derived, but it does not in itself make the figure reasonable.”

As for the difference-in-value damages, “the jury was required to determine an award based on the value of the house at the time of closing, and [owner] offered no evidence of the house’s value at that time.” He had only testified on his own behalf without expert or fact witness on that issue, stating, “In my layman’s ability to do so, I have an idea of what I think it is worth today.” He then testified that his house was worth between $450,000 and $475,000 and that “without all these problems it would be worth $875,000.” The owner offered no evidence as to what the house was worth at the time of closing. It is that evidence that was required for a jury to render a decision.

Due to the lack of evidence to prove the extent of his damages, the Supreme Court held the Owner was entitled to no relief at all.

Article 3

Project Owner Permitted to Pursue Negligence Claim Based on Breach of Contract

See similar articles: Breach of Contract | Duty of Care | Economic Loss Rule | Negligence

It can be a perplexing issue whether a project owner that believes its contractor or design professional has breached its contract due to defective work or faulty performance can sue under a theory of negligence as well as for breach of contract. Where the alleged breach of contract does not cause property damage or personal injury but only results in extra costs being incurred by the owner to correct the defective work, a good argument can be made that these are merely “economic damages” and should not be recoverable under a “negligence” cause of action.

A good argument can also be made that if the only reason the contractor or designer has a duty to the owner was because of the contractual requirements, there is no independent duty owed to the Owner at common law, and without such a duty a tort claim such as “negligence” cannot be pursued. In Haward Baker, Inc. v. Shirttail Gulch Road District, Inc., 2012 WL 3929211 (United States District Court, South Dakota 2012), the court held that while the obligation to provide an appropriate design and proper construction arose out of the contract, a duty existed to provide such services using such skill and care ordinarily exercised by others in the same profession. The negligence claim was therefore properly pleaded.

The failure to exercise reasonable care had the potential of increasing the risk of harm, and the Owner relied upon the firm to exercise reasonable care in designing and constructing an earth retention system. “The court finds this case is the type of situation foreseen by the South Dakota Supreme Court when it said, ‘[a] contract may establish a relationship requiring exercise of proper care, and acts or omissions in performance of such duty may give rise to a tort liability.’” Based on the allegations of the complaint, the court found that the firm owed a duty of care to the owner, “the violation of which gives rise to tort liability.”

The firm argued that the economic loss rule barred the Owner from recovering damages. In rejecting that argument, the court determined that the rule would apply to manufactured goods under the uniform commercial code but that in this case what was provided by the firm constituted “services” not “goods” and the economic loss doctrine would, therefore, not bar the negligence claim.

Article 4

The Unrelenting Tide of the Duty to Defend

See similar articles: CH2 | Crawford | duty to defend | Indemnification clause

By Brian K. Stewart, Esq. and Kevin J. Engelien, Esq.– Collins Collins Muir & Stewart, LLP.

The immediate contractual duty to defend, once thought by some to be isolated to the “not so golden anymore” state of California as a result of two important court decisions, one by the California Supreme Court in Crawford v. W eather Shield Manufacturing, Inc. (2008) 44 Cal.4th 541 and the other by the Court of Appeal in UDC-Universal Development, L.P. v. CH2M Hill (2010) 181 Cal. App. 4th 10, appears to have grown some traveling legs. Based on some cases, these legal issues and the problems related to them have spread from the west coast to the east coast.

A Refresher on the Duty to Defend

In both Crawford and CH2M Hill, the courts found that a contractual duty to defend arises immediately after the claim is made, and the defendant may owe all costs of defense, even if later found not liable for negligence at trial. At the time of these decisions, it was thought that maybe these rulings were the result of “bad facts make bad law” or simply wacky rulings by California judges. However, this appears to not be so. The rest of the country may be aligning with these decisions. Recently, in Massachusetts, two cases have been decided that have found that the duty to defend is immediate and not tied to the duty to indemnify.

The Massachusetts Courts Take on the Duty to Defend

In Siebe, Inc. v. Louis M. Gerson Co., Inc. (2009) 74 Mass. App. Ct. 544, the Court of Appeals found that Gerson ( a product manufacturer) owed Siebe (a product distributor) a contractual duty to defend and had to pay all of Siebe’s costs of defense, even if the underlying claim was later found to be without merit.

Likewise, just recently, in the case Siemens Industry, Inc., v. Eire Electrical Corp. (2012) U.S. Dist. LEXIS 168836, the defendant, Eire Electrical Corp. (subcontractor) was found not negligent. Regardless, the United States District Court for Massachusetts held that Eire owed a contractual duty to defend and pay the costs of defense to Siemens (general contractor).

In each of these cases, the courts’ rationale was the same; the term “claims” in a contract is synonymous with the term allegation. Applying this rationale to contracts which contain clauses that require a party to defend another for all “claims” arising from breach of the contract or negligent performance of services, a mere allegation of negligence or breach is sufficient to give rise to the duty to defend, even where the claim has no merit.

National Implications and What Appears to be a Trend

The decisions of Siebe and Siemens in many ways mirror the decisions by the California courts in Crawford and CH2M Hill. While these decisions in accordance with California and Massachusetts indemnity law and the even more important “duty to defend” issue may not exactly be sweeping the nation yet, there is at least some indication that there is a growing and negative trend with potentially disastrous results for design professionals. What these cases all have in common is some very unfavorable indemnity language that the courts have said is enforceable.

Don’t think that what you sign will not come back to haunt you like the ghost of Christmas past because it just might. The best advice is to remain vigilant, don’t sign unfair/unbalanced indemnity agreements and stay tuned….

For further information on this article or the issues discussed herein, please contact any of the Collin Collins Muir + Stewart offices in Northern and Southern California. Website: http://www.ccmslaw.com; 1100 El Centro Street South Pasadena, CA 91030 Phone: (626) 243-1100. bstewart@ccmslaw.com.

Brian K. Stewart, Esq. 1100 El Centro Street South Pasadena, CA 91030 Phone: (626) 243-1100

Fax: (626) 243-1111

bstewart@ccmslaw.com www.ccmslaw.com

Article 5

Attorneys Fees Recovered to Enforce Indemnity Agreement

See similar articles: Attorneys Fees | Choice of Law | Indemnification clause | Prevailing Party Attorneys Fees

A “choice of law” provision in a contract provides for the law of a specified state to govern the contract and disputes between the parties that arise out of the contract. Often the law of the state where the project is performed is selected as the governing law. It is also possible, however, to select the law of the state of any of the parties to the contract as the governing law even if that is far removed from the location of the project.

In an interesting case (Maxim Crane Works v. Tilbury Constructors, 208 Cal. App. 4^th 286 (2012), where the contract provided for Pennsylvania law to apply to a contract for services performed in California, the California court affirmed that Pennsylvania’s law would indeed apply and that this would prevent the supplier of a crane from recovering indemnification from the contractor that used the crane on a construction project resulting in injuries to that contractor’s worker.

The indemnification provision of the contract that was drafted by Maxim Crane Works would have required the contractor to indemnify the crane owner if California law had been applied. It would have also required indemnification under the Pennsylvania law if the injuries had occurred just one day later than they did.

Per Murphy’s law, however, the injuries happened on the very same day that the contract was executed, and under Pennsylvania law, indemnity provisions are only enforceable if included in a written contract executed “prior to the date” of a worker’s injury.

Another terrible twist for the crane owner was that a prevailing party’s attorney’s fees provision entitled the contractor to recover all its legal fees in defending against the injured worker’s suit as well as in specifically suing to enforce the indemnity obligation. This is because the court found the defense against the worker claim was so integral to the ability of the contractor to prove it was entitled to indemnity from the crane owner, that there was no need to segregate the injury defense cost from the indemnity case prosecution costs.

As aptly put by the appellate court, “Maxim Crane Works was hoist on its own petard when the trial court enforced an unfavorable choice-of-law provision in a form contract written by Maxim.”

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ConstructionRisk.com Report (Jan 2013)