Inside this Issue

A1 - Will Floodgates of Litigation Open against Engineers for Failure to Design to Avoid Damages from Extreme Weather?
A2 - Indemnification
A3 - Wrongful Termination-Interference with Contract
A4 - Economic Loss Doctrine Prevents Subcontractor from Suing Engineer
A5 - Rejected Low Bidder Lacks Third Party Beneficiary Right to Sue Engineer for Contract Interference

Article 1

Will Floodgates of Litigation Open against Engineers for Failure to Design to Avoid Damages from Extreme Weather?

See similar articles: design duty flood | Extreme Weather | FEMA | flood | Standard of Care

With news of increased flooding throughout the United States, what is a design professional’s standard of care when it comes to designing buildings that could foreseeably be damaged? My Briefing Paper of Summer 2018 suggested that even if designers comply with existing codes and FEMA flood plain requirements, they may still be sued if flooding was foreseeable and they failed to account for it in their designs. [See Paper here]. Now, a federal district court has confirmed that federal law does not preempt all state court causes of action against engineers who are alleged to have violated the standard of care even though they may have met FEMA flood plain requirements. Alexander v. The Woodlands Land Development Company, 325, F.Supp. 3d 786 (2018).

The federal law only preempts state law claims that arise under federal flood insurance policies. Here the homeowners alleged that the engineers failed to conform to the standards of care applicable to the professional engineers or developers. The court concluded, “Because the underlying duty exists under state law, state law controls whether Defendants’ were negligent or grossly negligent.” “Because Plaintiffs challenge Defendants’ professional judgment and representations, not the accuracy of FEMA’s [flood plain] determinations, no federal issue is actually disputed and substantial.”

Design professionals, and their insurance carriers, are going to need to take very seriously the potential for litigation by property owner’s who suffer damages from extreme weather (such as floods and fires) that should have been foreseeable and accounted for in the designs.

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.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. 5 (June 2019).

Article 2

Indemnification

See similar articles: Indemnification clause | indemnity

A fire marshal was injured while conducting an inspection at an office building under construction. In suing the building owner, he alleged he tripped on a pile of construction debris. The owner filed an indemnity claim against its fire sprinkler contractor (“STT”) and a third-party action against the general contractor (GC) who then asserted an indemnification claim against STAT as well. STAT moved for summary judgment on the indemnity claims on the basis that the owner and GC couldn’t prove themselves free of negligence. Held: the motion should have been granted. Fedrich v. Granite Building, 86 N.Y.S.3d 566 (NY, 2018).

On appeal, the court held the motions should have been granted as to contractual and common-law indemnification because the Indemnitees themselves had certain responsibilities with regard to removal of the construction debris. Based on evidence submitted, the Indemnitees would not be able to prove themselves free from negligence in the event that the injured plaintiff was successful in his claims against the owner. The court explained:

“Here, the indemnification provision in the contract between Granite and STAT required STAT to indemnify Granite and Kulka “from and against all claims, demands, suits, [and] damages . . . arising out of or resulting from the performance of the Work, provided that such claims, demands, suits, [and] damages . . . are caused in whole or in part by negligent acts or omissions of [STAT].” The court concluded that: “STAT demonstrated its prima facie entitlement to judgment as a matter of law dismissing Grantie’s contractual indemnification third third-party cause of action and Kulka’s contractual indemnification cross claim against STAT by submitting evidence that, during the course of the construction, the trade contractors were piling their debris on the floor of the subject building, which was then removed by laborers employed by and/or under the supervision of Granite and Kulka. STAT demonstrated that Granite and Kulka had certain responsibilities with respect to the removal of the construction debris and, thus, that they would not be able to prove themselves free from negligence in the event that the injured plaintiff was successful on his claims against Granite.”

Article 3

Wrongful Termination-Interference with Contract

See similar articles: contract interference | Termination for Convenience | wrongful termination

General contractor removed its roofing subcontractor’s equipment and materials from the job site based on alleged late performance, and it then terminated the roofer without following the contractually required notice requirements. Court held the GC interfered with subcontractor performance and the contract termination was wrongful. De Avila v. Espinsoz Metal Bldg. & Roofing Contractors, 564 S.W. 3d 150 (Tex. 2018)

A provision in the subcontract allowed the GC to terminate the sub without cause upon 48 hour written notice. The matter giving rise to the dispute was that when the roofing sub was almost complete with its work, other contractors on the project began drilling holes through the completed roof for HVAC installation -- resulting in the roofer having to install new insulation, bonding adhesive, roofing material, and counter flashing in order to maintain the manufacturer’s 20 year warranty.

The GC refused to accept and pay for the sub’s proposed change order for the extra work. At first, the GC simply failed to acknowledge or respond to the change order request. Instead, the GC, in the words of the court, started “a quarrel” with the sub regarding the quality of the work and ultimately wrote to the sub asserting that the sub failed to complete the roofing work in a timely fashion and demanded that it be corrected no later than December 10 – but did not even mention the HVAC issue.

Complying with the GC demand, the sub went to the project site on December 1 to perform the work only to discover that all of his remaining material and work supplies were missing. Believing them to have been stolen the sub called the police and was in the process of filing a report when the GC arrived at the site and explained that he was the one that had removed the materials and supplies.

The sub did no further work after this. It subsequently sued the GC for the damages under the subcontract and the GC countersued. The trial court found (affirmed on appeal) that the GC breached the contract due to wrongful interference with the sub’s ability to perform its work under the contract.

As to the GC’s argument that he was entitled to terminate the contract at his convenience, the court found that the GC failed to provide the required 48 hour notice, and had in fact continued to request the sub to complete the work right up until the point where he simply hired another subcontractor to do it.

Comment: Terminating a contractor is a big deal and has serious potential ramifications. This particular case didn’t involve any surety bond. If it had, the stakes would have been even greater. It is essential to meet the contract requirements concerning written notice of intended termination. This is a good reminder that project owners or contractors that might feel so inclined to remove or hide the materials and supplies of a contractor or subcontractor should discuss this with their attorney before doing so – because, as noted by the decision, that can most definitely establish intentional interference with performance of the contract and thereby relieve the contractor of further duty to perform.

Article 4

Economic Loss Doctrine Prevents Subcontractor from Suing Engineer

See similar articles: Economic Loss Doctrine

A dispute arose among a second tier-subcontractor, a first tier-subcontractor and the prime contractor on a U.S. Naval Shipyard project in Maine. It was resolved through arbitration. The second-tier sub then filed litigation in court against Stantec Consulting Services (successor in interest to the original engineering firm that was hired by the Navy to perform the design, engineering and supervision). The complaint asserted negligence and negligent representation. In applying Maine’s economic loss doctrine, the court held since there was no personal injury or property damage asserted, but only assertion of inadequate engineering design causes economic loss, the suit must be dismissed. Fletch’s Sandblasting & Painting, Inc. v. Fay, Spofford, Thorndike, d/b/a Stantec, 2019 WL 847731 (Main, 2018).

The dispute was over fireproofing installed in part by the second tier sub. The appellate court stated:

“The Maine Superior Court has held that the economic loss doctrine precludes tort recovery even when there is no privity of contract between the parties, pointing out that in [citation omitted] the parties were not in privity.... And Maine’s tort law treatise warns that the economic loss doctrine is often implicated in cases asserting liability against architects, engineers and contractors. [station omitted].

For the fireproofing at issue here, Stantec sold no physical product (unlike the window manufacturer in Peachtree). It did contract with the Navy to provide design and engineering services, but it had no contractual relationship with Fletch’s. Fletch’s entered into a subcontract with the prime contractor on the project, but not with Stantec. Fletch’s asserts no damages beyond the failures of the fireproofing product as it was applied in accordance with its subcontract with the prime contractor, and the expenses of attempting to remedy the failures—i.e., Fletch’s asserts no personal injury and no damage to other property such as its equipment.

…. There was no privity of contract between Fletch’s and Stantec, but Fletch’s did have the opportunity to negotiate the terms of its subcontract with the prime contractor and thereby establish its risks and liabilities on the construction project. Likewise, Stantec had a contract with the Navy, which presumably established its risks and liabilities for the engineering and design services.”

Article 5

Rejected Low Bidder Lacks Third Party Beneficiary Right to Sue Engineer for Contract Interference

See similar articles: contract interference | low bidder | Third party beneficiary

An engineer that prepared a Request for Proposals (RFP) owed no duty to a bidder on a sewer authority project as a third-party who could foreseeably be injured or suffer economic loss due to engineer’s negligent performance of a contractual duty owed by the engineer to its client, the project owner. The low bidder asserted that information and comments provided by the engineer to the Authority resulted in rejection of the bid and thereby constituted intentional interference with its right to contract. The court found the engineer couldn't be sued for negligence because it owed the bidder no duty. John Rocchio Corp. v. Pare Engineering Corp., 201 A. 3d 316 (RI, 2019).

In rejecting the third party beneficiary claim, the court held that there was no evidence of intent for the contract between the engineer and the Owner to benefit anyone other than the owner. No action could stand for intentional inference because the record before the court lacked any indicia of intent to harm the bidder and there was no evidence that the engineer didn’t act in good faith in fulfilling his obligations to his client, the Authority.

Five companies bid on the project. The engineer reviewed the bids and prepared a memorandum to the owner providing its review and recommendations regarding the bidding process. In its memo to the Authority’s executive director, it concluded that, “it appears that [the low bidder] should be disqualified, at the discretion of the WAS, for failing to include the required EPA forms … as required by page 2 of Attachment F: Good Faith Efforts.”

The executive director subsequently met with the president of the low bidder and obtained from him the missing EPA forms. After that, the executive director asked the Authority’s Board of Directors to reject the low bid as non-responsive because the forms were omitted with the original bid and, even after being later submitted, there were “several irregularities.” The executive director also referenced several other projects that the low bidder performed on where there were performance concerns and lack of attention to detail. But the primary reason given by the executive director for recommending the rejection of the bid was “the research she had been doing with past experience on projects with the WSA.”

At the trail level of the case against the engineer, the hearing justice determined that the bidder failed to submit sufficient evidence of causation and on that basis dismissed all three counts of the complaint. It was the executive director that made the recommendation to reject the bid, and the Board that took action to reject the bid. There was insufficient evidence that the engineer caused the outcome.

On appeal, the appellate court agreed that the engineer couldn't’ be sued but for different reasons than stated by the trial judge. The court stated:

“In situations involving public requests for bids, it may be impossible to determine how many and which general contractors will submit bids for the project. [citation omitted] (holding that the plaintiff-purchaser of property “was neither known to nor identifiable to [the] defendant contractor” and that “[t]heir individual relationships with the original owner were wholly independent of each other * * * [so t]here was no foreseeable harm to a subsequent owner”). Here, a determination that [Engineer] owed a duty to [Bidder] under the circumstances present in this case would effectively be a determination that all engineers contracted by project owners owe a duty to all general contractors that could possibly submit a bid on any given request for proposal. We believe that would be an absurd result; and, accordingly, it is our view that there is a distinct difference between situations like [case precdent] and situations like the one before us, where a third party is unidentifiable and unforeseeable at the time of the alleged negligence.”

Comment: When a design professional is fulfilling its responsibility to its client by reviewing bids, change order requests, payment applications, and the like, it is important that these professionals be immune from third party claims by the contractors that submitted such documents (in the absence of bad faith and intentional wrong), otherwise this would impair the ability of the client to receive the benefit of the professional opinions from their design firm. A designer should be able to in good faith fulfill its contractual duties to its client without fear of recourse from a disgruntled contractor.

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