Inside this Issue

A1 - Private Engineering firm Qualifies for governmental immunity when working as City Engineer
A2 - Subcontract Bidder Must Honor its Bid to GC (Promissory Estoppel)
A3 - Subcontract Bidder Excused from Executing Contract with Prime Contractor
A4 - Teaming Agreement is Unenforceable: Merely an Agreement to Agree in the Future
A5 - Engineer Liable for Rainwater Tank Collapse Where it Failed to Provide Appropriate RFI Responses to Contractor

Article 1

Private Engineering firm Qualifies for governmental immunity when working as City Engineer

See similar articles: City engineer | Governmental Immunity | Immunity

A private engineering firm, under contract to a city to act as the City Engineer, was entitled to have a negligence and nuisance suit against it dismissed based on official or governmental immunity that was extended to it as an agent of the city acting as a “public official” when designing a storm-water drainage system. Official immunity turns on the conduct at issue, whether the conduct is discretionary or ministerial, and, if discretionary, whether it was willful for malicious. The fact that the engineer had malpractice insurance as required by its contract, did not deprive it or the city of the protective benefits of the official immunity doctrine. Kariniemi v. City of Rockford, 882 N.W.2d 593 (Mn. 2016).

The trial court granted summary judgment on the negligence action, but declined to do so on the nuisance count of the complaint, concluding that more evidence was needed. On appeal, the court held that the official immunity doctrine applied equally to the negligence and nuisance allegations and the entire complaint should have been dismissed.

Instead of having a full time employee serve as “City Engineer,” the City instead contracted via a Professional Services Agreement (PSA) with a with a private firm for provision of those services. The contract stated that the City desired “to retain [engineering firm] from time to time to provide such professional services for general engineering needs as well as for the planning, design, and construction of public works….”

Pursuant to its contract, the engineer designed and oversaw construction of certain storm water runoff improvements. Owners of a home in the vicinity claimed that as a result of the engineer’s negligent services, their property was flooded. The homeowners filed suit against the city as explained above. It was the city’s motion for summary judgment that was decided by the court. It does not appear from the decision that the engineer, itself, was sued by the homeowners. The way the court framed the legal issue was that the engineer was entitled to official immunity, and because he had that immunity, the city vicariously had the same immunity.

Comment: This decision once again demonstrates the power of governmental immunity, or official immunity, as it may be called. In some cases, the government entity is entitled to immunity directly, and then the engineer or contractor may be able to claim that as an agent of the city it gets to clothe itself with that same immunity when acting in its capacity as engineer for the government. If an engineer or contractor may be legally entitled to raise governmental immunity protection as a defense against third party claims, a public owner should not deprive the firm of that defense. A number of contracts that I review include language whereby the public owner requires their design professionals and contractors to waive any governmental immunity defenses they might otherwise be entitled to. I don’t believe this makes any sense. If a defense could be available, how does it benefit the public owner to deprive its private contractors of the use of that defense – unless the public owners are just trying to make trial lawyers and citizens happy by being able to recover where they otherwise could not.

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. 19, No. 1 (January 2017).

Article 2

Subcontract Bidder Must Honor its Bid to GC (Promissory Estoppel)

See similar articles: promissory estoppel | Reasonable Reliance | Subcontractor Bid

Where a general contractor (GC), Weitz Company , LLC, was awarded a contract to construct a nursing home and had based the heating, ventilation, air conditioning (HVAC) portion of its bid on a subcontract bid from an (HVAC) subcontractor, (H&S Plumbing and Heating), the sub reneged on its bid. The GC substituted a different subcontractor to perform the HVAC work and subsequently sued H&S, on theories of breach of contract and promissory estoppel, to recover the increased costs of having the second HVAC sub perform the work. The trial court granted judgment based on promissory estoppel based on the conclusion that H&S’s bid was a promise to perform on which reliance by the GC was foreseeable, and the GC in fact relied to its detriment on the subcontract bid.

On appeal, H&S argued that GC reliance was unreasonable because subcontractor bidders were not required to leave their bids open for any set period of time. The court rejected that argument. H&S argued reliance was unreasonable because the GC could have pulled its own bid from the owner. The court rejected that argument, saying H&S could not expect the GC to abandon the project merely because H&S decided not to honor its subcontract bid.

H&S also argued that because the GC had a track record of asking subcontract bidders to agree to subcontract terms and conditions materially differing from those offered in the subcontract bid, a subcontractor could withdraw its bid. The court rejected this argument and stated, it was a mere hypothetical in this case, but that as rule, “A general contractor can reasonably rely on a sub’s bid even if the GC and sub contemplate signing a formal subcontract with additional standard terms after the bidding process. But a GC cannot demand that a sub agree to unusual and onerous terms awhile still holding the subcontractor to its original bid.” Weitz Company, LLC v. Hands, Inc., 294 Neb. 2015, 882 N.W. 2d 659 (2016).

Comment: This decision is particularly interesting in the context of the other article in this newsletter that allowed a subcontract bidder to refuse a subcontract because the terms and conditions of the subcontract form differed so materially from those submitted with the subcontract proposal. The court here would not necessarily have disagreed with that other decision. Under the facts of the current situation, however, the issue never came down to one concerning the terms and conditions of the contract. The subcontractor attempted to withdraw its bid before it ever received any proposed terms and conditions. Perhaps it would have fared better if it had waited to receive the subcontract form, which it said previous experience contracting with the GC, differed from its subcontract proposal.

Article 3

Subcontract Bidder Excused from Executing Contract with Prime Contractor

See similar articles: Battle of the Forms | promissory estoppel | Reasonable Reliance | Subcontractor Bids

Where a subcontractor submitted a glazing work bid to a general contractor to be considered and used in the general contractor’s bid to construct a new building for a college, it contained numerous terms and conditions that the general contractor (GC) rejected when it attempted to award a subcontract based on materially different terms. When the parties failed to negotiate their differences to reach an acceptable subcontract, the subcontract withdrew its offer. The general contractor then subcontracted with a different glazing firm and filed suit on the basis of promissory estoppel, to recover the difference in the subcontract prices. The trial court determined that the general contractor did not act reasonably in relying upon the subcontract bid, and that the terms and conditions that the general contractor sent to the subcontractor constituted a “counteroffer” that the subcontractor had the right to reject. This was affirmed on appeal. Flintco Pacific, Inc. v. TEC Management Consultants, Inc., 1 Cal. App. 5^th 727, 205, Cal. Rptr. 3d 21 (2016).

The TEC bid that was submitted on May 17 to the GC stated a fixed amount bid price, under which was typed in all capital letters; “A DEPOSIT OF 35% IS REQUIRED FOR THIS WORK.” Other conditions included in the TEC bid were that the bid could be withdrawn if not accepted within 15 days and that the proposed price was “subject to a minimum 3% escalation, per quarter, after 15 days acceptance period.” On July 5, the GC sent a “letter of intent” to TEC stating its “intent to issue a Subcontract Agreement to TEC” The letter stated that the “contract award is contingent upon the following terms and conditions,” including (1) a requirement that TEX accept liquidated damages and retention provisions, and (2) agree on a complete scope of work. On July 14, the GC sent TEC a standard-form contract that was a sample template but not an actual contract since it was not filled out with the names of the parties, the scope of work, and the price.

Upon receipt of the letter of intent and draft contract, TEC called the GC to say there were “some major differences that we need to discuss,” including TEC would not accept newly imposed bonding requirements, the liquidated damages requirements, and would not accept the contract without the 35% deposit requirement. There were back and forth discussions between the GC and TEC, but eventually TEC refused to accept the contract on the terms being demanded by the GC.

The GC explained that it believed it could enforce the award of the contract on the terms it desired without regard for the fact that the terms and conditions offered by TEC differed materially. According to the GC, “Conflicts between bid conditions and contracts are normally resolved and specific terms and conditions are negotiated only after the project contract is awarded…. Specific terms and conditions in a subcontractor’s bid are not relevant to the scope of work, are typically boilerplate and conflict with [GC’s] sub and prime contracts. Thus on bid day, [GC] disregards terms and conditions of a subcontractor’s bid except for scope of work, price, length of time the bid would remain open, and bonding. The stated ‘purpose of reviewing the terms and conditions in a subcontractor’s bid prior to the bid deadline is to find ‘red flags.’ The issue … is whether ‘we are going to be fighting about something.’ The GC’s project manager said it was fair to say that an unusual term of condition might escape his attention because of the cursory nature of his review of bids on bid day.”

The trial court ruled in favor of the subcontract bidder because it found the GC “did not satisfy every element of promissory estoppel.” Specifically, “Its reliance on TEC’s bid price only, without regard to material conditions that related directly to TEC’s bid price, was not reasonable.”

Comment: This case addresses the very first aspect of what is commonly known as the battle of the forms when a question later arises as to whether a general contractor’s terms and conditions or the terms and conditions proposed by a subcontractor apply. Here, the court determined that there was no obligation to commit to the subcontract because the general contractor essentially rejected the contract proposal of the subcontractor and merely made a counter-offer, which the subcontract bidder rejected – as was his right. It is interesting to note the explanation by the general contractor concerning why it believed it could rely upon the subcontract bidders number without even studying the terms and conditions proposed by the subcontractor. As explained by the general contractor, in the heat of last minute bid day calculations, it is probably doubtful that a general contractor can actually evaluate much in the subcontract offers other than their prices and a few of the most material terms. The court here is not stating as a broad based matter that a general contractor is required to review and analyze the entirety of the terms and conditions before it can reasonably rely on the subcontract bid, but it is saying that it will be a case-by-case analysis of whether the terms and conditions were so significant that a general contractor could not reasonably have accepted the bid with the expectation that the subcontractor would subsequently accept counter-offered terms that materially differed. This could be tricky to figure out and lead to a lot of litigation if subcontractors decided more often not to honor their bids and use the offer/counter-offer argument as their way out of the anticipated deal.

Article 4

Teaming Agreement is Unenforceable: Merely an Agreement to Agree in the Future

See similar articles: NDA | Non Disclosure Agreement | Subcontracts | Teaming Agreement

Once again a Teaming Agreement subject to the law of State of Virginia has been declared unenforceable because it did not contain any requirement that the prime member of the team award subcontracts to the other team members, and it did not contain contract sum or reasonable method for determining a sum. The Supreme Court of Virginia concluded that, “The rules of contract law do not apply to the Teaming Agreement because it is merely an agreement to agree to negotiate at a future date.” Navar, Inc. v. Federal Business Council, 291 Va. 338 (2016).

This case involves a dispute by two contractors (Federal Business Council (“FBC”) and Worldwide Solutions Inc. (“Worldwide”) that desired to bid on a contract being awarded by the United States Defense Threat Reduction Agency to use private contractors to provide labor and materials for conferences and events it hosts. Because those were ineligible to bid the work themselves under the Small Business Act, they approached another firm (Concentric, LLC, a wholly owned subsidiary of an Alaska Native Corporation (“ANC”) which was later substituted by its corporate affiliate, Navar. They asked Navar to serve as the prime contractor for submitting a bid. They entered into a non-disclosure agreement with Navar and a separate Teaming Agreement that provided that if Navar were awarded the prime contract it would negotiate in good faith with the FBC and Worldwide and “upon arriving at prices, terms and conditions acceptable to the parties,” enter into subcontracts. The Teaming agreement stated that it would expire if the parties were unable, “negotiating in good faith to reach agreement on the terms of a subcontract.” An exhibit to the agreement provided that Navar will receive, at a minimum 51% of the labor hours and labor dollars in accordance with directed [section] 8(a) awards.

Negotiations broke down over the division of the work through subcontracts and Navar failed to extend subcontracts to FBC and Worldwide. Navar submitted a bid to the government without the subcontractors and was awarded the contract. The jilted subcontractors then filed suit against Navar alleging breach of the NDA by Navar using their confidential information to obtain the contract; and breach of the teaming agreement by failing to award a subcontract to them. A jury found that Navar breached the teaming agreement and awarded the plaintiffs damages. The trial court set aside the verdict on the breach of the Teaming Agreement.

On appeal the Supreme Court held that the trial court did not err in finding the Teaming Agreement was unenforceable. Cased cited as authority by the court included W.J Schafer Associates v. Cordant, Inc., 254 Va 514 (1997) and Cyberlock Consulting, Inc. v. Information Experts, Inc., 939 F.Supp.2d 572 (E.D. Va 2013), aff’d, 549 Fed. Appx. 211 (4^th Cir. 2014). Here, said the court, “the Teaming Agreement does not contain a sum, or any reasonably certain method for determining a sum, or any requirement that Plaintiffs and navar mutually agreed that Plaintiffs would be the actual subcontractors hired by Navar once the prime contract was awarded.” With regard to whether a contract amount could be determined from the Teaming Agreement, the court stated, “plaintiffs did not present any expert evidence to support their argument that the standard in the industry was the subcontractors were guaranteed 49% of the work share. The evidence showed email exchanges mentioning workshare percentages, but no written documents were produced regarding any actual agreement governing the workshare split.

Comment: Virginia appears to be somewhat unique in how strict it is with the requirements for the enforceability of Teaming Agreements. In any event, when using Teaming Agreements in Virginia, it is important to follow the strict requirements for contracts that there be an absolute obligation of the parties to perform and that a method be clearly established for calculating the contract sum to be paid.

Article 5

Engineer Liable for Rainwater Tank Collapse Where it Failed to Provide Appropriate RFI Responses to Contractor

Engineering firm designed site plans for a rain tank system to be buried under a parking lot for a new church sanctuary. As a contractor began constructing the project, it inquired of the engineer via a Request for Information (RFI) about concerns about the suitability of the tank for the location, given the high water table, and included questions about installation and performance. Without addressing the performance issues or reevaluating the choice of the tank system in light of the contractor’s concerns, the engineer referred to information in the manufacturer’s drawings to assure the contractor that their ground water concerns would not impact the functionality of the tank. Only a few months after it was installed, the tank collapsed under the parking lot. In litigation that followed, the trial court found the engineer breached its professional standard of care by (1) failing to conduct due diligence regarding the suitability of the tank, (2) incorporating a manufacturer’s specifications into its own plan without verifying them, and (3) failing to respond to appropriate questions during construction.

The suit against the engineer was found to be timely filed pursuant to the statute of limitations for breach of contract for negligent design because the limitations period did not begin to run until the plan was approved by the county, even though that was two years after the plans had been finalized by the engineer. The decision was affirmed on appeal, with the court explaining that an action for the negligence of a design professional is an action for breach of contract and therefore governed by the statute of limitations applicable to contracts instead of the statute of limitations applicable to negligence actions. William H. Gordon Associates, Inc. v. Heritage Fellowship, 291 Va. 122 (2016).

The engineering contract contained a terms and conditions rider prepared by the engineer, and it included the following standard of care provision:

“Gordon will perform its services using that degree of care and skill ordinarily exercised under similar conditions by reputable members of our professions practicing in the same or similar locality and in compliance with any applicable codes, statutes and/or regulations.” This is a fairly typical standard of care provision that tracks pretty closely with what the common law would require.

Another paragraph provided, “In performing its services, Gordon shall be entitled to rely on the accuracy and completeness of work and information supplied by third parties, the Client and his authorized representative and the public record.” It appears from the court’s discussion that the engineer sought to apply this clause to its right to rely upon the rain tank manufacturer’s information, and thereby demonstrate that it met the standard of care.

Engineer Found to have Violated Standard of Care for Design and for Construction Oversight

During the trial, competing experts testified concerning what caused the collapse. The experts for the contractor and owner both testified that the engineer’s negligent design of the rain tank caused the collapse. In contrast, the contractor’s expert testified that the tank would not have collapsed but for construction errors of the contractor and that the engineer met its standard of care “by relying on information from the rain tank manufacturer.”

After weighing all the evidence and expert testimony, the trial judge found “the sole proximate cause of the collapse of the Rain Tank stormwater management structure in the parking lot … was the failure of the civil engineer to meet its standard of care….” The court also found that “any failures by the general contractor … were not material and not a proximate cause of the collapse.”

On appeal, the appellate court sustained the finding of negligence and causation. Of particular concern of the court was what it concluded was the engineer’s failure to respond with any evaluation or analysis for the concerns raised by the contractor. The court considered the expert’s testimony that “construction oversight requires an engineer to provide quality oversight during construction to ensure that certain elements of the plans are property specified and verified in the filed.” Here, the court concluded that “Gordon’s responses would appear to have violated Gordon’s duty to provide oversight assistance … in a manner consistent with the industry’s standard of care and skill.”

In concluding that breach of the duty to provide oversight proximately caused the collapse, the court looked at the remedy for the collapse that was subsequently proposed by the engineer in which he recommended a different system better suited to the site. The court found that recommending that different system was “indicative that had Gordon reassessed the plan in response to [contractor’s] RFI, the change would have been made at that time, avoiding the collapse.” It should be noted here that attorneys during trial make every effort to exclude from evidence the corrective actions that were later taken, so that they can’t be used to suggest that those new designs are evidence that the original design was flawed.

Contract did not shift responsibility for design failures to the Contractor

In its defense, the engineer argued that the construction contract placed liability for any failure and remediation of the tank on the contractor. The court found that the contract required the contractor to adhere to its submittals that had to be based on the prescriptive specifications provided by the engineer, and that the contractor did not deviate from its submittals. The contract left no design discretion to the contractor and even forbade the contractor from making any design changes without express written consent of the engineer. The contractor was required to supply and install the precise system as required by the plans and there was ample evidence that this is what he did.

Comments: The standard of care is well explained by the court in this decision. Of note is the fact that each party to this dispute had multiple experts to testify to the standard of care and to causation of the damages. Experts also testified to proper interpretation of the specifications with regard to whether they were prescriptive design specifications that bound the contractor to provide a tank meeting the prescribed details, or whether the contractor could have chosen to install a different tank or a tank using different methods of installation. An expert also testified concerning the contractor’s compliance with the specifications.

An aspect of the decision that engineers should pay special attention to is that in finding the engineer failed to meet the standard of care, the court quoted from one of the plaintiff’s experts who testified that the standard of care was violated by failing to respond to suitability concerns raised in the RFI and relying on information from standard manufacturing literature to respond to performance concerns, rather than conducting its own review of the product and the situation at the site. On large, complicated projects, it is quite common for engineers to incorporate and rely upon name brand or equal equipment specifications written by manufacturers of that equipment. Some projects are so large and complex that the project engineer could not reasonably be expected to know all the engineering details of all the equipment and systems being specified for the project. What the court is saying here, however, is that the engineer must do more than rely on the manufacturer’s literature, and when asked RFI questions by a contractor, must conduct its own review of the product and situation at the site.

The question about the statute of limitations presents two important points. (1) Even though the basis for the claim against the engineer is a “negligent” act, error or omission, the complaint against the engineer is actually based on breach of contract and not negligence. The contract may have been breached due to the engineer’s negligence, but that does not turn a breach of contract into a negligence cause of action. Consequently, the limitations period for breach of contract will be applied. In most states, the time limit for filing breach of contract claims is longer than it is for filing negligence claims. The other important point about the running of the statute of limitations is that the court found that the statute did not begin to run when the engineer completed its services but instead when the county finally approved the plans a couple years later.

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ConstructionRisk.com Report (January 2017)