Inside this Issue

A1 - Safety Consultant May be Liable for Death of Client’s Employee
A2 - Construction Manager Not Liable for Defective Work by Contractor
A3 - Contractor Cannot Sue Engineer for Damages Allegedly Caused by Construction Administration
A4 - Contractor Suit against Engineer for Negligent Design Dismissed
A5 - Contractual Liability Exclusion in Homeowner Policy Does not Bar Carrier’s Duty to Defend against Tort Claims for Damages arising out of Negligent Excavation

Article 1

Safety Consultant May be Liable for Death of Client’s Employee

See similar articles: Duty of Care | HR Mobile | negligent undertaking | Site Safety | wrongful act

A safety consultant retained by a California employer owes a duty of care to its client’s workers. The trial court incorrectly granted summary judgment on the ground that the consultant owed no duty of care because its allegedly negligent omissions were not affirmative misfeasance and therefore not “wrongful in their nature” for purposes of being tortious conduct under a state statute. Because the consultant had only an oral contract (established by a handshake) and could not dispositively show the limits on its scope of service with regard to its role with respect to safety training, meetings, and inspections, the appellate court concluded the question of liability must be left for a jury to determine at trial to consider how much responsibility the consultant assumed when it agreed to assist its client in carrying out workplace safety. It was not necessary to show that the consultant fully assumed safety obligations in order for it to be found liable. This decision demonstrates the importance of having a written contract with a well defined scope of service. Peredia v. HR Mobile Services, Inc., 25 Cal. App. 5^th 680 (2018).

Text from the decision is most useful for explaining the analysis of the court.

“[Consultant] acknowledges it agreed to assist, and did assist, Double Diamond in carrying out its workplace safety obligations, but asserts it did not agree to fully assume Double Diamond’s workplace safety obligations to the employees working at the dairy…. In HR Mobile’s view, it agreed to and accepted a secondary role with respect to quarterly safety meetings, quarterly site safety inspections, accident investigations, and safety training, while Double Diamond remained responsible for compliance with safety, site safety inspections, correcting hazards, safety training and record keeping.”

“Based on this description of the elements of a negligent undertaking claim, plaintiffs contend HR Mobile owed a duty of care to the deceased on two grounds. First, HR Mobile undertook to perform safety duties that Double Diamond owed to its employees. Second, Double Diamond relied on HR Mobiles’ safety program and IIPP and, thus, did not consider or implement further safety measures.”

The appellate court stated:

“[To] establish a negligent undertaking cause of action against HR Mobile, plaintiffs must establish that (1) HR Mobile undertook to render services to Double Diamond; (2) the services rendered were of a kind HR Mobile should have recognized as necessary for the protection of the employees of Double Diamond; (3) HR Mobile failed to exercise reasonable care in the performance of its undertaking; (4) the failure to exercise reasonable care resulted in physical harm to [worker]; and (5) either (a) HR Mobile’s carelessness increased the risk of such harm, or (b) the undertaking was to perform a duty owed by Double Diamond to the employees, or (c) the harm was suffered because of the reliance of Double Diamond or the employees upon the undertaking (citation omitted). Under this formulation, a duty of care exists when the first, second and fifth elements are established.”

As explained by the court, the problem the consultant had in having the case dismissed on summary judgment was that it failed to demonstrate how the scope of its safety role to its client and the client’s employees was limited. There was no written contract or written scope of work. There was apparently not even any email or correspondence between the consultant and its client that could set forth evidence of the intended scope of service despite the fact that it was agreed that the consultant would be paid $24,000 per year for its services.

The undisputed facts were that the consultant actually rendered services to its client, and the services included conducting a site safety inspection and an employee training meeting. The court concluded that the consultant therefore failed to demonstrate that the plaintiffs would be unable to establish it had undertaken a duty to render services. The court concluded, “HR Mobile undertook to assist Double Diamond in carrying out its workplace safety obligations and accepted a role (the extent of which is disputed) in conducting safety inspections and safety training. Thus, it appears that [HR Mobile] undertook to provide services which were recognized as involving safety concerns.”

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. 21, No. 1 (Jan 2019).

Article 2

Construction Manager Not Liable for Defective Work by Contractor

Professional Construction Manager is not a guarantor of work performed by a construction contractor who is under separate contract to the project owner even though it agreed to “make sure the construction work is performed properly.” The owner was entitled to recover from the CM the cost of installing new roof to replace the defective roof installed by the contractor. Manley Architecture Group, LLC v. Santanello, 2018 WL 2749344, 2018 Ohio 2200.

This litigation began when an architectural firm (construction manager) filed suit against its client for failing to pay its fees. As typically happens when a professional services firm sues its clients for unpaid fees, the client filed a counter suit. The counter suit claimed more damages against the CM than what the CM initially sued for in the way of unpaid fees. There is a lesson to be learned about suing for fees.

The contract between the architect and owner contained several provisions detailing the services to be performed by the architect as a CM for the construction of a barn. During construction, problems arose with the barn roof leaking. The countersuit by the owner alleged the CM breached its obligation to properly oversee the construction of the barn.

At a bench trial on the merits of the case, the judge found the CM was liable for the cost or the roof repair or replacement because even though the CM was not a guarantor of the contractor’s work, “it nevertheless had construction management obligations that were not met. The lack of thorough, timely inspection by [CM] allowed [contractor’s] substandard work to escape detection when, had work been checked, correction of deficient work would have been much easier and less costly.”

This was reversed on appeal. The court began its analysis by noting that the architect in question was not retained to perform “Construction Administration” but was in fact doing the more robust function of “Construction Management.” The project owner operated as its own general contractor. The Construction Management role was “only loosely defined” under the agreement said the court. Because of that, the trial court that the term “construction management” was ambiguous and it therefore decided to incorporate language from the architect’s cover letter into the agreement to define the role.

Courts only resort to using extrinsic or parol evidence when it is necessary to give effect to the intention of the parties because the language of the contract is unclear or ambiguous, or the circumstances surrounding the agreement invest the language of the contract with a special meaning.

The appellate court stated:

“As an initial matter, we agree with the trial court’s interpretation of the scope of those responsibilities. The trial court emphasized MAG’s assurance in the cover letter accompanying the agreement that it would “make sure the construction is performed properly.” (Nov. 18, 2016 Decision at 3.) The trial court did not construe this statement as a warranty or “guarantee” covering the work of the subcontractors. (Decision at 4.) MAG was not “an insurer of the work of trade contracts such as the contractor who erected the barn and leaking roof.” Id. Furthermore, “each contractor hired by Dr. Santanello remained responsible for their own performance, and any deficiencies in the work, ultimate responsibility for enforcing that work rested on the owner, not Manley Architecture Group.”

“We also agree with the trial court’s observation that when the parties agreed that MAG would perform “the overarching role of ‘construction manager,’ the parties plainly did contemplate that Manley would actively monitor ongoing work.” (Decision at 4.) Thus, it was MAG’s responsibility to “alert Dr. Santanello in a timely manner” when problems arose during construction, “so that the doctor could pursue appropriate remedial action with the contractor in question.”

Having agreed with the trial court concerning the role of the CM, however, the appellate court went on to disagree with the ultimate legal conclusion that the CM breached its contractual obligations by failing to monitor the barn roof installation. According to the appellate court, the owner testified that he knew about the leaking roof soon after it was completed and the CM then “worked hard at trying to figure out what the problem was” and “tried an attempt at once” to have the contractor fix it. The owner further testified that the CM then hired another contractor to look at the roof and make repairs. This testimony, says the court, demonstrates that the CM performed the “construction management” responsibilities as the parties intended under the agreement.

Comment: Several lessons can be learned from this decision. (1) Get a clear scope of services specified in the contract so that it is not necessary to go outside of the contract with extrinsic evidence to determine the intention of the parties; (2) professional consultants should endeavor to get timely paid and exercise caution with regard to filing suit against clients for unpaid invoices; (3) CM’s are not guarantors of work performed by independent contractors hired by the project owner but they do have a duty to exercise reasonable care to meet their contractual responsibilities with regard to monitoring the work performed by those contractors.

Article 3

Contractor Cannot Sue Engineer for Damages Allegedly Caused by Construction Administration

Construction contractor was prohibited by contract from suing the project engineer for damages it claims were sustained as a result of the engineer’s alleged professional negligence in the interpretation and application of the plans and specifications of the project. A clause in the general conditions of the construction contract expressly stated that no decision made by the engineer is “good faith” would create any duty owed by the engineer to the contractor. The court found that the contract clause did not violate public policy and it found that even though there was testimony that the engineer made mistakes, there was no evidence that the standard of care was violated. Moreover, testimony established good faith was exercised. Domson, Inc. v. Kadrmas Lee & Jackson, Inc., 918 N.W. 2d 396 (South Dakota 2018).

Paragraph 9.9 of the general conditions provided the following:

“Neither Engineer’s authority or responsibility under this Article 9 or under any other provision of the Contract Documents nor any decision made by Engineer in good faith either to exercise or not exercise such authority or responsibility or the undertaking, exercise, or performance of any authority or responsibility by Engineer shall create, impose, or give rise to any duty in contract, tort, or otherwise owed by Engineer to Contractor, or any Subcontractor, any Supplier, any other individual or entity, or to any surety for or employee or agent of any of them.”

The trial court enforced article 9.9 to dismiss the suit. On appeal the Supreme Court of South Dakota did a nice review of case law concerning what duty of care an engineer might owe to a contractor, and whether contract provisions could waive that duty.

Both the trial court and appellate court recognized that under South Dakota law, an engineer can owe a duty to a contractor despite the lack of contractual privity of contract between the parties. But, both courts also concluded that the contract language insulated the engineer from liability for its “good faith acts and failures to act.” Therefore, although a duty may exist under the law, the court went on to examine the effect of paragraph 9.9 of the contract.

The contractor argued that the clause should be viewed as an indemnity provision that violated a state anti-indemnity statute. It also argued as a general matter that the clause violated public policy and must be declared void accordingly. The court concluded: “Although [state statute] mandates responsibility for injury caused by willful acts or want of ordinary care or skill, nothing in this statute prohibits one party from agreeing by contract to release a third party from liability for ordinary negligence.”

With regard to declaring a contract to be void as against public policy the court explained that it would do so only if there was no doubt about the contravention of public policy. As explained by the court, “[T]his Court has cautioned ever since territorial days” that “ ‘[t]he power of courts to declare a contract void for being in contravention of sound public policy, is a very delicate and undefined power; and, like the power to declare a statute unconstitutional, should be exercised only in cases free from doubt.’ ”

The court went on to further explain,

“Paragraph 9.09 is valid and enforceable in this case because [contractor] has not identified that Paragraph 9.09 contravenes sound public policy in this State under these particular circumstances. The exculpatory language unambiguously informed [contractor] that Dakota Engineering/KLJ would be immune from suit in tort or contract arising out of Dakota Engineering/KLJ’s good-faith acts and failures to act by the authority given to them under the contract and contract documents.”

“Based on our review of the record, Dakota Engineering/KLJ established a prima facie case of good faith against [contractor’s] claim of negligent interpretation and application, implicating the protections under Paragraph 9.09. Therefore, as the party resisting summary judgment, [contractor] was required to identify a material issue of fact in dispute on the question of Dakota Engineering/KLJ’s good-faith acts and failures to act.”

The court noted that the contractor opposed the summary judgment motion with an expert witness affidavit that alleged failure of the engineer to meet the standard of care in administering the contract. But that was not sufficient according to the court to counter the engineer’s prima facie showing that it had acted in good faith. As stated by the court, the contractor “relies on general allegations … that because [Engineer] performed below acceptable standards, their actions necessarily lacked good faith.” That was not sufficient to withstand the summary judgment motion.

Article 4

Contractor Suit against Engineer for Negligent Design Dismissed

Contractor sued engineer for damages it claimed it sustained as a result of negligent design that the engineer prepared for a project owner. Although an engineering firm could owe a duty to reasonably draft and interpret project specifications and it could be foreseeable that the contractor who was bound to follow the specifications could be harmed by the firm’s negligence in drafting and interpreting the specifications, the issue of liability comes down to whether the engineer violated the standard of care. As explained by the court, even the contractor’s expert witness acknowledged that “no set of documents are perfect, nor are field conditions exactly as described in those documents.” While the contractor’s evidence established that errors existed in the project and bid documents, it didn’t demonstrate a genuine, material issue for trial concerning whether errors constituted a breach of the applicable standard of care. For that reason, the court granted the engineer summary judgment which was affirmed on appeal. Domson, Inc. v. Kadrmas Lee & Jackson, Inc., 918 N.W. 2d 396 (South Dakota 2018).

Article 5

Contractual Liability Exclusion in Homeowner Policy Does not Bar Carrier’s Duty to Defend against Tort Claims for Damages arising out of Negligent Excavation

A homeowner insurance policy was required to defend the homeowner/seller of a house against a personal liability lawsuit by a purchaser that alleged damages resulting from a rock slide allegedly caused by the seller’s breach of contract and negligence. The carrier refused to provide a defense because it argued the “contractual liability” exclusion of the policy barred coverage. On final appeal, the Supreme Court of Arizona held that tort duties can arise independently of contractual duties and in this case the stand-alone negligence claim was independent of the purchase contract. The negligence claim that rests on a builder’s common law duty to construct a home as a reasonable builder did not seek contract damages for defects in the excavation said the court, but instead sought compensation for property damage caused by negligent excavation. Therefore, any personal liability imposed on the seller would not necessarily originate from the contract, and the contractual liability exclusion would therefore not apply for the carrier to avoid its duty to defend against the negligence claim. Teufel v. Amercian Family Mutual Insurance Company, 244 Ariz. 383 (2018).

The buyer alleged that “[a]s a builder-vendor,” [Seller] “negligently performed or negligently supervised the hillside grading and slope cut” for the Longlook Property. [Buyer] alleges resulting property damage, including “damage to the outside HVAC units, broken bay windows, broken interior marble flooring, damage to the exterior stucco, [and] costs to remove rock.”

The insurance company, American Family Mutual Insurance Company, contends that [Buyer’s] negligence claim is not a stand-alone claim because the duty underlying that claim was created solely by the real estate purchase contract. Specifically, American Family argues that because [Buyer] sued [Seller] as a builder–vendor, any duty he owed [Buyer] arose at the time the parties executed the contract. And despite the negligence label used in the complaint, [Buyer’s] claim is based on [Seller’s] failure to fulfill its contractual duty to deliver the Longlook Property free of defects and in a habitable condition.”

The court began its analysis by citing case law explaining that the insurer’s duty to defend is separate from and broader than its duty to indemnify. The duty exists when a third-party suit “alleges facts that, if true, would give rise to coverage, even though there would ultimately be no obligation to indemnify if the facts giving rise to coverage were not established.” The court further explained that “if any claims fall within policy coverage, the insurer must defend against all claims, including ‘claims potentially not covered and those that are groundless, false, or fraudulent’.”

The contractual liability exclusion to personal liability coverage under the contract provided: “Contractual Liability. We will not cover personal liability under any contract or agreement.”

According to the court, “The dispute here concerns the meaning of ‘under any contract or agreement’ and whether it includes personal liability based on [Buyer’s] negligence claim. The policy does not define ‘under.’ And because fifteen other policy exclusions for personal liability use the term ‘arising out of,’ it is unclear whether “under” carries a different meaning.”

According to the insurance carrier, “’under’ should be broadly interpreted to mean that the exclusion applies to liability that could not exist ‘but for’ a contract, ‘irrespective of whether the liability is related to or independent of the contract.’” The carrier then argues “that [Buyer’s] negligence claim falls within the exclusion because “without entering into the real estate contract with [Seller], [Buyer] would not have been exposed to the effects of the alleged defective excavation.” In contrast the insured seller argued that the exclusion eliminated coverage only for pure contractual liability and did not apply to tort liability.

The court found applying the language of the policy, “the contractual liability exclusion applies to personal liability required by or originating from a contract; it is not triggered simply because a contract brought the injured party and the insured together.” Here, the court found that the insured’s reasonable expectations suggest that the contractual liability exclusion does not apply to liability based on a stand-alone tort claim that is viable apart from any contract between the injured party and the insured. In conclusion, said the court,

“[Buyer’s] negligence claim rests on a builder’s common law duty to construct a home as a reasonable builder would. That claim does not seek contract damages for defects in the excavation but instead seeks compensation for property damage caused by the negligent excavation. Any personal liability imposed on [Seller] would not be required by or originate from the contract with [Buyer].”

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ConstructionRisk.com Report (January 2019)