Inside this Issue

A1 - Contractor Under a GMP Contract Cannot Make Indemnification Claim against Engineer for Inaccurate Design Documents that Caused Extra Costs where there was no Third Party Claim
A2 - Prime Contractor not Liable for Injuries of Subcontractor’s Employee where Prime Retained no Control of Individual’s Work
A3 - Project Owner Not Liable for Injuries of Employee of Contractor

Article 1

Contractor Under a GMP Contract Cannot Make Indemnification Claim against Engineer for Inaccurate Design Documents that Caused Extra Costs where there was no Third Party Claim

By Kent Holland

Hensel Phelps Construction Co. (“Contractor”) was awarded a Guaranteed Maximum Price (GMP) contract for a Marriott Hotel in Washington, D.C. In preparing its GMP proposal, the contractor relied upon “Preliminary Design Documents” that had been prepared by an engineer working under contract directly to the project owner. After receiving the GMP contract award, the engineering firm entered into contract with the contractor to provide the balance of design services for the project. After completing certain construction phases, the contractor states that it determined that designs it was using were flawed, and it had to make midstream corrections to comply with various code requirements, and thereby incurred unexpected costs. The engineer filed a motion for summary judgment that was granted by the court, based on two distinct reasons: (1) The three year statute of limitations for breach of contract actions had lapsed and (2) A suit based on the indemnification clause of the contract could only seek damages if they resulted from third party claims against the contractor. The indemnity clause could not be used to make first party claims by the contractor to recover its financial losses. Hensel Phelps Construction v. Cooper Carry, Inc., 2016 WL 5415621 (U. S. District Ct., District of Columbia, 2016).

Comment: The indemnity ruling is quite instructive. Even though the indemnity clause did not on its face limit indemnity to damages caused by third party claims, the court explained that that is the only basis to find liability under an indemnity clause, and that for first party claims, a contractor is expected to just make a normal breach of contract claim against the other party. The court says, “if the Court were to read the indemnification clause in the way [contractor] urges – to cover [contractor's] damages, included [contractor’s] own liabilities for costs it incurred in fixing [engineer’s mistakes] – then it would be redundant.” This is precisely the argument that we make when negotiating indemnification clauses with project owners. Specifically, we revise the wording of the clause to expressly state that indemnity is only for damages and liabilities resulting from “third party tort claims.” That has historically been the purpose of indemnification. That is what the court here recognized to be the case even without the limiting language having been added to the clause.

Indemnification:

Under the indemnification clause in the design services contract, the engineer was required to:

“indemnify, defend and hold … harmless” [the contractor] from any claim, judgment, lawsuit, damages, liability, and costs and expenses, including reasonable attorneys’ fees, as a result of, in connection with, or as a consequence of [engineer’s] performance of the Services under this Agreement….”

As explained by the court, the engineer, “naturally, argues that his clauses refers only to liabilities [contractor] would face from third parties, not to [contractor’s] own “damage” and “costs and expenses” from contract breaches.” According to the court, “The words “damage” and “costs and expenses” in the indemnification clause are listed along with other words that clearly anticipate the problem of third-party litigation against [contractor] for problems that [engineer created…. [ ] Reading the indemnification clause in the most obvious way, it required [engineer] to cover [contractor]s] liabilities when and if a third party sues over problems caused by the [engineer’s] fault.”

Statute of Limitations.

Another important aspect of this case is the court’s determination concerning the date on which the statute of limitations began to run. The question for the court to decide was whether the statute began to run when the engineer delivered the initial design documents that the contractor relied upon for pricing the GMP, or did it begin to run only when the design services for the entire project were “substantially complete.”

The court explains that a breach of contract action usually accrues at the time when a party to the contract does not perform its duty under that contract. Once that breach has been committed, the statue of limitations begins to run even if the breaching party still has additional contract duties to perform. And that is true even if the full scope of the consequences from the breach of contract are not yet apparent and even if there is still opportunity to remedy the consequences of the breach to minimize or eliminate the damages.

In this case, the court says that there’s no dispute that the contractor could have brought a claim for breach of contract when it recognized that it would need to change the construction plans in order to accommodate the alleged errors in the engineer’s design documents. The contractor here had accepted engineers non—conforming designs at the time that it began to construct the hotel. Even if the engineer had other duties remaining to be performed under his overall contract with regard to the balance of the design for the Hotel, its official services were completed before the GMP priced proposal was submitted and the contractor could not credibly argue that the engineer still had time to perform contractual duties with respect to those initial phase services.

The key here is that the court found this was not a “unitary” contract case. The services were performed in distinct phases, with each distinct phase completed in sequence. “Accordingly, it was when [engineer] delivered those designs, not when it substantially completed all its design duties, the clock began to run. Accordingly, [contractor] is time barred from bringing its claim.”

Comment: Litigation Tip: The court’s analysis is something that can keep an attorney up at night with worry about whether the services involved might trigger the running of the statute of limitations before the overall design and construction is substantially completed for the project. One solution, if this is deemed to be a possibility, is to enter into a “Tolling Agreement” between the parties to toll (delay) the running of the statute of limitations and preserve the rights of the parties to litigate after the project is completed.

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. 3 (March 2017).

Article 2

Prime Contractor not Liable for Injuries of Subcontractor’s Employee where Prime Retained no Control of Individual’s Work

By Kent Holland

An employee of an independent contractor cannot generally recover damages from the one who hired the contractor for work-related injuries. One exception to this rule is where the hirer actually retained control of the work or otherwise caused or contributed to the injuries. In Khosh v. Staples Construction Company, 4 Cal. App. 5^th 712 (2016) an appellate court affirmed a trial court’s dismissal of a subcontractor employee’s case because the employee failed to present evidence that the prime contractor (“hirer”) retained control over the work and affirmatively contributed to his injuries. Although the contract between Staples Construction and the project owner required the prime contractor to “exercise precaution at all times for the protection of persons and their property,” and to “retain a competent, full-time, on site-superintendent to … direct the project at all times,” and otherwise made the prime contractor “exclusively responsible” for the health and safety of its subcontractors, and required it to submit “comprehensive written work plans for all activities affecting University operations,” this was not sufficient in itself to render the prime contractor in “control” over the work actually performed by the subcontractor’s employee.

The individual was injured while performing electrical work at the University project. His employer was a sub-subcontractor on the project. His direct employer on the day of the accident informed the prime contractor that it needed three days to accomplish its last task on the project, and that the electrical system needed to be shut down for it to perform its work. The individual arrived at the site two and a half hours before the shutdown was scheduled to occur, but rather than wait, he went ahead and performed work in the electoral substation where the switchgear was still energized. An electrical arc flash occurred and severely injured him. The flash occurred a half an hour before the shutdown was scheduled to begin. During this earlier than scheduled performance of work, the prime contractor had no personnel at the site.

Despite being injured because he worked on the switchgear with full knowledge that the electricity was still on but would be turned off shortly if he just waited until the schedule turn-off time, the individual sued the prime contractor for negligence. Unless he could succeed in a negligence action, he would be stuck with what recovery could be had under workers compensation. But, as explained by the court, “in order for a worker to recover on a retained control theory, the hirer must engage in some active participation.”

The court further explained that, “An affirmative contribution may take the form of directing the contractor about the manner of performance of the work, directing that the work be done by a particular made, or actively participating in how the job is done.” In this case there was no evidence that the prime contractor did any of these things. Moreover, the court concluded that, “A hirer’s failure to correct an unsafe condition, by itself, does not establish an affirmative contribution.” For these reasons, the injured individual was not entitled to proceed to trial against the prime contractor, and would instead be limited to the benefits available under workers’ compensation.

Article 3

Project Owner Not Liable for Injuries of Employee of Contractor

By Kent Holland

A subcontractor’s employee suffered a horrible injury when removing an abandoned railroad bridge. After recovering almost $1.5 million in workers compensation, he sued the railroad company that had hired the prime contractor that hired the subcontractor for whom he worked. His theories were that the Railroad (1) exercised control over the work, (2) negligently selected the prime contractor and (3) maintained conditions on its property that were dangerous and that it knew about or should have discovered. An appellate court rejected all three arguments and held that summary judgment must be granted in favor of the Railroad. First, the court looked at the terms of the contract between the Railroad and the prime contractor and noted that it clearly stated that the firm was an “independent contractor” responsible for “all superintendence.” Nothing in the contract showed any intent by the Railroad to retain control over the contractor. The court then looked beyond the contract to see if what happened in the field might create actual control or affirmative actions that could raise the potential for liability by the Railroad, but after a thorough analysis of the facts, and careful application of state law that was based on Restatement (Second of Torts), sections 342, 411, and 414, the court held there was no basis for finding the Railroad liable. Carney v. Union Pacific Railroad Company, 2016 IL 118984, 2016 WL 6137230 (2016).

In this case a scrap metal company named Happ’s Inc., purchased abandoned railroad bridges from the Railroad for the purpose of tearing them down and salvaging the metal. Happ’s subcontracted the demolition work to Carney Group, Inc., a specialist in demolition. During the demolition work, when a crane operator attempted to lift one of the bridge girders, a crossbeam at the other end of the girder got “pinched.” A worker then cut into the crossbeam to free it, the crossbeam snapped, and part of the girder fell. When the girder fell it caused a gravel-covered steel plate that extended from the bridge about 10 feet into the roadway to suddenly tilt up. Most tragically, the son of owner of Carney Group, Inc. was standing on top of the hidden plate, and when the plate moved up it caused him to slide forward under another girder that fell and severed both of his legs.

The son filed a complaint against the prime contractor and the Railroad. All claims and counterclaims in the matter were settled out of court with the exception of the claim against the Railroad. The plaintiff alleged that the Railroad was negligent in failing to discover and disclose to the prime contractor or the plaintiff the presence of the steel plate. He further alleged that the Railroad retained control over the work and safety of the demolition project but negligently failed to develop a demolition plan and supervise the work. Finally, he alleged that the Railroad was negligent in hiring the prime contractor.

The Railroad filed a motion for summary judgment, which was granted by the trial court. An intermediate appellate court reversed this on appeal. The Illinois Supreme Court reversed the appellate court and held that the trial court properly granted summary judgment.

Hirer not Liable unless it Retained Control of Contractor’s Work

The court began its analysis of the law by reiterating that “Under the common law, one who employs an independent contract is not liable for harm caused by the latter’s acts or omissions.” The reason for this rule is that, “the hiring entity has no control over the details and methods of the independent contractor’s work, and is not in a good position to prevent negligent performance….”

However, quoting from the Restatement (second) of Torts, section 414, the court explained that despite the general rule concerning independent contractors, the hiring entity may yet be liable for its own negligence where it retains some control over the independent contractor. The key to finding liability, however, is that the hirer is liable only for its own negligence and not merely for vicarious liability, under agency principles, for the contractor’s negligence.

Deciding whether the hirer retained control can be decided as a matter of law via summary judgment motion and need not await a jury decision. Here, the court concluded that there was no issue of fact as to whether the Railroad retained control. The court emphatically stated, “It did not.”

Important language that the court cited as evidence of no hirer control included a provision that the contractor and its agents and employees, “are not and shall not be considered as employees of [Railroad],” and that the contractor “shall be and remain an independent contractor,” and that the contractor was to furnish at its own expense, “all superintendence, labor, tools, equipment, materials, and supplies.” The court said that the requirement that the contractor “provide all superintendence placed responsibility for supervision of the bridge removals with [contractor], not [Railroad].”

The court rejected the plaintiff’s argument that because the contract provided the Railroad could require removal of equipment used by the contractor that it determined was unsafe for use in the railroad right of way, this created responsibility of the Railroad. Instead, the court focused on contract language that specifically placed control of job safety with the contractor, by stating that the contractor was “to keep the job site free from safety and health hazards and ensure that its employees are competent and adequately trained in all safety and health aspects of the job.”

Having thus determined that the contract language would absolve the Railroad of responsibility of job site safety, the court turned to actions in the field, because regardless of what the contract says, the conduct of the parties must be evaluated to determine whether they took on job site responsibilities not otherwise required of them by the contract. As explained by the court, “We consider whether [Railroad’s] conduct was at variance with the terms of [the contract].

The court reviewed deposition testimony of a number of employees of the contractor and found that no representative of the Railroad was even present at the bridge at the time of the accident. The testimony about the Railroad was that the Railroad’s only interaction on the job was that “a railroad representative would come by and ‘check out the jobs.’” As found by the court, “[Railroad’s] mere presence at the job site, without more, is insufficient evidence of retained control for purposes of [Restatement of Torts] Section 414”.

Fact Question Existed as to Whether Contractor was Negligently Selected

The hirer of a contractor may be found liable in tort for failing to exercise reasonable care in selecting a careful and competent contractor. The amount of care that is required when selecting a contractor is that which “a reasonable man would exercise under the circumstances.” In considering the record evidence (mainly deposition testimony), the court found, although the prime contractor had no experience taking down steel bridges, the Railroad had no knowledge of that, but the Prime contractor subcontracted the removal work to a highly experienced subcontractor. The court concluded that a fact question existed as to whether the Railroad failed to exercise reasonable care in selecting the contractor, but that, for the reasons explained below, this did overcome the summary judgment motion.

The Injured Laborer was Not a “Third Party” to Whom Railroad Owed a Duty. This Eliminates the Negligent Hiring Claim.

The plaintiff’s employment status was deemed critical by the court in evaluating the negligent hiring claim. The individual was an employee of the company that did the bridge removal work. He attempted to claim that he was a “bystander” at the time of the accident, and for that reason the Railroad owed him a duty. Most courts that have considered this question have concluded that “an employee of a negligently retained contractor is not a third person for the purposes of section 411 of the Restatement of Torts. The court stated,

“We conclude that the plaintiff here is not a ‘third person’ to whom the duty recognized by section 411 of the Restatement applies. Unlike members of the general public who might have been travelling on [the street] on the day of the accident, plaintiff was in a position to protect himself against the risks involved in the bridge removal. … Further, because plaintiff was employed by [subcontractor], he could and did receive workers’ compensation benefits. A member of the public, had he or she been injured, would likely not be in that position and would, instead, be left to the risks and unpredictability of litigation to receive compensation for his or her injuries.”

No Dangerous Condition on Railroad’s Land

The plaintiff argued that permitting the steel plate from the bridge to extend out into the roadway, where it was buried by gravel, constituted a dangerous condition for which the Railroad was responsible. In rejecting this argument, the court found that the steel plates were not a condition on the land but were instead a part of the bridge that the contractor was to remove. The bridge had been sold to the contractor and the contractor was responsible for removing all of the bridge, including any steel plates that were part of the bridge and extended into the roadway. The court stated, “Because the record affirmatively demonstrates that defendant did not build the bridge, did not possess the plans for the bridge, did not use the bridge, and had no reason to know that the steel floor plate extended several feet into the roadbed, we hold that the trial court did not err in entering summary judgment in favor of defendant on plaintiff’s premises liability claim.”

Comments

This decision demonstrates several important principles with regard to proving liability on the part of one who hires an independent contractor to perform work. As explained by the court, the starting point in any analysis of jobsite safety is the contract between the contractor and the entity that hires the contractor. For protection of the hirer, it is important that the contract clearly state that the contractor is an “independent contractor.” It is also important that the contract clearly state the contractor’s independence and responsibilities with regard to deciding means, methods, procedures and safety requirements to implement. The case is also an important reminder that no matter how clear the contract language may be, the court will still evaluate what actually happened in the field to determine whether the hirer may have taken control over the contractor’s work or otherwise taken actions that caused or contributed to the injuries.

The power of a summary judgment motion is also demonstrated by this decision and the other decision reported in this newsletter. In both cases, the hirers could be dismissed out of litigation before a jury might have awarded huge judgments.

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ConstructionRisk.com Report (March 2017)

Inside this Issue

Article 1

Contractor Under a GMP Contract Cannot Make Indemnification Claim against Engineer for Inaccurate Design Documents that Caused Extra Costs where there was no Third Party Claim

Article 2

Prime Contractor not Liable for Injuries of Subcontractor’s Employee where Prime Retained no Control of Individual’s Work

Article 3

Project Owner Not Liable for Injuries of Employee of Contractor

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Contract Guide for Design Professionals

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Risk Management Workshops

Life Skills Workshop Slides

Contract Clauses – Papers and Articles

Construction Risk Management