Inside this Issue

A1 - Common-Enterprise Defense Prevents Employee that Recovered Workers Compensation from also Recovering from Other Contractor
A2 - Indemnity Obligation Includes First Party Attorneys Fees Based on Language of the Clause
A3 - Architect Cannot Enforce Mechanic’s Lien for Design Services Performed Offsite Where it Failed to Provide Actual Notice to Landowner that it was Performing Services
A4 - Corporate Asset Purchaser Not Liable as a Mere Continuation of the Corporation

Article 1

Common-Enterprise Defense Prevents Employee that Recovered Workers Compensation from also Recovering from Other Contractor

See similar articles: Common Activity | Common-Enterprise | Similar Hazards | Site Safety | Workers compensation

An employee of a general contractor was electrocuted while working alongside employees of a subcontractor to move sections of pipe culvert in a streambed. This apparently occurred because a crane being operated by the subcontractor contacted an electrical wire. His family recovered workers compensation from his employer and then sought to recover damages from the subcontractor. It was held that no recovery could be had against the subcontractor via separate legal action because it was immune from liability because it was a “common enterprise” with the workers employer and therefore protected by the workers compensation statute.

The workers were working together in a common activity. Although the two crews of workers had distinct functions, those functions were interdependent and required close, contemporaneous coordination. The crew that the deceased was part of could not have moved the culvert section without the other crew positioning, attaching, and maneuvering them. The one crew could not have placed the culvert sections without the other crew directing and operating the crane. The court also found that the workers were working in such fashion that they were subject to the same or similar hazards. For these reasons, the court held that summary judgment was properly granted. Kelly for Washington v. Kraemer Construction, Inc., 896 N.W. 2d 504 (Minnesota 2017).

The court explained that, “Cases analyzing the common-activity requirement have focused on the types of work performed, the interdependence of the work, and whether the work was closely coordinated. That the workers share a common goal is a necessary, but not sufficient, condition for finding a common activity.” Applying these principles here, the court stated that it concluded,

“The crews were working together in a common activity. “Neither crew could have accomplished the day’s goal of setting the culvert sections without the contemporaneous assistance of the other crew; their work was “interdependent.” Kraemer relied on Ulland to push the culvert sections into the rigging area, attach them to the crane, and guide them into position. Ulland relied upon Kraemer to lift, swing, and lower the 22,000-pound sections, which Ulland did not have the proper equipment to lift. The procedure was complicated enough that working together was “essential to avoid chaos at the site.” Further, Kelly’s argument that the crews’ duties were “distinct” is not dispositive.”

“We hold that Kraemer met its burden of showing that no genuine issue of material fact exists concerning the second requirement, working together in a common activity. Though the two crews had distinct functions, as the district court found, those functions were interdependent and required close, contemporaneous coordination. The Kraemer crew was working together in a common activity with the Ulland crew as a matter of law because the Kraemer crew could not have moved the culvert sections without the Ulland crew positioning, attaching, and maneuvering them, and the Ulland crew could not have placed the culvert sections without the Kraemer crew directing and operating the crane.”

Next, the court considered whether the Ulland and Kraemer employees were working “[i]n such fashion that they are subject to the same or similar hazards.”

The court stated,

“But the record is clear that several other shared risks existed as the crews worked to install the culverts. Poukka spent the day going back and forth from the rigging area in the road to the streambed, and he worked side-by-side with three of the Ulland employees. All of these employees, by virtue of working near the crane load, were subject to the risk of being hit by the load, struck by a piece of the culvert section if it broke apart, or injured by a failure of the crane cable or boom. As Poukka and Wright walked up and down the stream bank between riggings, they were at risk of slipping in the muddy conditions of the dewatered streambed. And all employees in the streambed could have been hurt by the bulldozer as it traveled back and forth from the rigging area. These risks are not so speculative that they should be ignored, and they establish that the two crews were subject to similar hazards.”

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. 10 (Nov 2017).

Article 2

Indemnity Obligation Includes First Party Attorneys Fees Based on Language of the Clause

An indemnity clause in an easement agreement required the indemnitor (contractor) to pay the Indemnitees (adjoining property owner) first party attorneys fees that were incurred in suing the contractor for property damages. This was a “Crane Swing, Tie Back and Swing Scaffold Easement Agreement” permitting the contractor an easement during construction for the property adjoining a high rise tower it was constructing. During excavation, certain damages occurred to the foundation and structure of the neighboring buildings. Pursuant to the indemnity article, the contractor was obligated to defend and indemnify (including attorneys' fees) the property owner from “all claims, demands, debts, actions, causes of action, suits, obligations, losses, costs expenses, fees, and liabilities … arising out of … breach of any terms of this Agreement.”

Although indemnity is generally for third party claims and the losses resulting from such third party claims, the court found the clause in this instance also applied to first party claims for the owner’s own losses and damages, and this included the right of the property owner to recover its attorneys fees.

Lesson Learned: Decisions like this one demonstrate why it is important to carefully craft indemnification clauses so that they apply only to third party claims and the losses arising out of those claims. In its final analysis, the court parsed the actual words and phrases and punctuation of the indemnification clause to find that although the words “defend and hold harmless” refer to third-party claims, this did not serve as a limitation on the breadth of what was covered by the promise also included in the clause, i.e., “Indemnification.”

Pay close attention to this! The court explains, “Each item in a string of items, separated by the disjunctive ‘or,’ is given independent meaning.” Therefore, Article 19’s reference ‘defend and hold harmless’ language does not limit ‘indemnity’ to third party claims.”

Read my more extensive comment in the full article, below, and consider the example clause in which I set forth one approach I use for clarifying that the only damages that are being indemnified are those arising out of third party claims.

Bainbridge St. Elmo Bethesda Apartments, LLC v. White Flint Express Realty Group, 454 Md. 475, 164 A. 3d 978, (Maryland 2017).

The full text of the indemnity article provided the following:

“Indemnity. Bainbridge hereby indemnifies, and agrees to defend and hold harmless White Flint ... from any and all claims, demands, debts, actions, causes of action, suits, obligations, losses, costs, expenses, fees, and liabilities (including reasonable attorney’s fees, disbursements, and litigation costs) arising from or in connection with Bainbridge’s breach of any terms of this Agreement or injuries to persons or property resulting from the Work, or the activities of Bainbridge or its employees, agents, contractors, or affiliates conducted on or about the White Flint Property, including without limitation, for any rent loss directly attributable to any damage to the White Flint Property caused by the construction of the Project, however Bainbridge shall not be liable for matters resulting from the negligence or intentional misconduct of White Flint, its agents, employees, or contractors. The indemnification obligations set forth herein shall survive the termination of this Agreement indefinitely.”

During construction of the apartment tower next door, the neighboring White Flint property owner (Indemnitee) detected damage and notified Bainbridge (the Construction Manager) who in turn notified its general contractor (Turner). Turner stopped the excavation and braced the White Flint’s buildings to prevent further damage.

White Flint declared Bainbridge to be in breach of its contract, and then terminated the contractor and filed suit for declaratory judgment to enforce the indemnification obligations under the contract, which it claimed survived the contract termination. The trial judge granted summary judgment finding that Bainbridge’s obligations survived the termination; and that it materially breached the agreement, it owed continuing duties to White Flint, and must pay White Flint’s attorneys fees.

With regard to the attorneys fees, it was not necessary for the indemnity provision to expressly state that it applied to “first party claims,” in order for the court to find that it contained a first-party attorneys fee shifting to the contractor. Instead, the court looked at the overall “language and structure” of the article to conclude that the damages, losses and attorneys fees were not limited to those arising out of third party claims. “The inclusion of the words ‘attorneys fees’ together with a reference to damages ‘arising out of … breach’ constituted an express provision authorizing first-party fee shifting….” (Court of Special Appeals decision).

The Court of Appeals affirmed this decision and further explained that the indemnification article ties payment of attorneys fees to an action for “breach” of the contract; and “it confirms the intent of the parties to cover first-party counsel fees by referring to ‘rent loss.’ A first party loss arising from a breach of the Agreement.”

Lesson Learned: In its final analysis, the court parsed the actual words and phrases and punctuation of the indemnification clause to find that although the words “defend and hold harmless” refer to third-party claims, this did not serve as a limitation on the breadth of what was covered by the promise also included in the clause, i.e., “Indemnification.” Pay close attention to this! The court explains, “Each item in a string of items, separated by the disjunctive ‘or,’ is given independent meaning.” Therefore, Article 19’s reference ‘defend and hold harmless’ language does not limit ‘indemnity’ to third party claims.”

What to do to clarify indemnity clauses so they apply only to damages from third party claims. I have been revising the indemnity articles to expressly state that the obligations only apply to “third party tort claims.” The typical clause mixes together terms like “claim,” “action,” and “proceeding” that require a defense with terms such as “damages,” “losses,” “judgments,” and “expenses,” that logically required only indemnification. In order to make clear that the indemnity will not be for first-party losses such as economic losses that the Indemnitte has in the absence of a third party claim against it, consider revising the order of the words in the article by moving all words requiring a duty to defend to the beginning of the phrase, followed then by words that require only indemnification. Then be sure to state that the only damages to be indemnified are those that arise out of third party claims.

The example clause below is from a contract I reviewed and revised. As originally written, it didn’t limit the indemnity to third party claims. Please note that I am not suggesting this example as being ideal. I just worked with the language that had been provided in the owner’s contract form and attempted to make the fewest revisions possible to that language so that it could be acceptable.

Note that in this clause we did not delete the duty to defend. But we limited it to general liability claims only. We did this by adding a phrase to the end stating, “The duty to defend shall not apply to professional liability claims.”

Indemnity Right. Consultant shall indemnify, hold harmless and defend (with counsel acceptable to Owner), Owner, its successors, assigns and affiliates, and its respective officers, directors, controlling persons (if any), employees, and shareholders (the “Owner Indemnitees") from, against and in respect of any and all third-party tort claims, suits, actions, and proceedings, and the judgments, damages, settlements, liabilities, damages, and legal and other expenses (including reasonable legal fees and expenses of attorneys) arising out of such third party claims to the extent caused by the negligent acts, errors or omissions of Consultant in the performance of its services hereunder. The duty to defend shall not extend to professional liability claims.

Article 3

Architect Cannot Enforce Mechanic’s Lien for Design Services Performed Offsite Where it Failed to Provide Actual Notice to Landowner that it was Performing Services

See similar articles: Actual Notice | Architect Lien | Mechanic's Lien

An Architect provided millions of dollars worth of design services for condominium project and was not paid by the developer with whom it was under contract. The developer didn’t own the property, but it had a contract to purchase it from the owner. Financing for the project fell through, and the purchase was never closed. The Architect filed a mechanic’s lien on the property. The owner successfully had the lien removed and all rights of the Architect extinguished because the Architect had failed to file a notice with the landowner when first beginning its off-site design services.

The owner successfully argued that failure to provide written notice was fatal to the lien rights, and that actual notice exception to the legal requirement was not applicable. The court held “the actual notice exception does not extend to offsite architectural work performed pursuant to an agreement with a prospective buyer when no onsite work of improvement has been performed on the property.” Iliescu v. Steppan, 394 P. 3d 930 (Nevada 2017).

The state statute requires mechanic’s and materialmen’s lien claimants to deliver written notice of right to lien the owner of the property after they first perform on or provide material to a project. Substantial compliance with the technical requirement for written notice has been held by the Nevada courts to be sufficient to create a lien where the owner of the property receives actual notice of the potential lien claim and is not prejudiced.

In this case the court had to determine whether the actual notice exception should be extended to offsite work and services performed by an architect for the prospective buyer of the property. The architect entered into an initial stop-gap agreement in 2005 under which it would bill hourly until an American Institute of Architects (AIA) Agreement was signed in 2006. Design work began in October 2005. Schematic design phase services were completed but the architect’s client didn’t pay for the services because it never obtained financing for the project.

The architect recorded a mechanic’s lien against the owner’s property in November 2006 but it didn’t provide the owner with a pre-lien notice as required by the statute.

In reviewing whether the Architect could be excused from filing the pre-lien notice in 2005, by virtue of the owner having actual knowledge that the work was performed by the Architect, the court had to address whether the actual notice exception applies to offsite work when no work has been performed on the property itself.

Regular inspection of the property would not have revealed that this Architect was preparing schematic plans – working offsite. Even though the owner acknowledged that it had seen some of the schematic plans as they were being developed, he stated that he didn’t know what specific Architect the buyer was using to create those plans, and didn’t know when the services were performed.

Here the court found that no onsite work had begun on the owner’s property at the time the lien was recorded and there was no evidence of any improvement to the owner’s property as a result of the designs that were performed for the prospective buyer.

“We thus conclude that the actual notice exception does not extend to offsite architectural work performed pursuant to an agreement with a prospective buyer when no onsite work or improvement has been performed on the property.”

Comment: This decision once again demonstrates the grave importance for design professionals to meet the written pre-lien notice requirements to protect their rights to eventually record a lien against a property. Another lesson from this case is that it is dangerous to jump out ahead and start performing services before all the ducks are lined up so that the architect knows it will be paid, and even more dangerous to perform professional services for several months without being paid.

Article 4

Corporate Asset Purchaser Not Liable as a Mere Continuation of the Corporation

See similar articles: Asset Purchase | Corporate Continuation | Successor Liability

A limited liability company (LLC) that completed an asset purchase of a corporation, was subsequently sued for damages allegedly caused by acts and omissions of a corporation that occurred long before the asset purchase. Summary judgment was granted for the LLC on the basis that it was not subject to liability for the actions of the corporation because it was not a “mere continuation” of the corporation.

The issue on appeal was whether the trial judge was correct in granting the LLC’s motion for summary judgment based on the well-settled general rule that a corporation that purchases the assets of another corporation is not liable for the debts or liabilities of the transferor corporation. Groves of Palatine Condominium Assoc. v. Walsh Construction Company, 77 N.E. 3d 687 (Illinois 2017).

This case arises as a result of a condominium association suit against its general contractor for alleged defects in construction. The contractor in turn filed a third party claim against its steel erection subcontractor, K&K Iron Works, Inc. (the “Corporation”) as well as against K&K Iron Works, LLC, (the “LLC”) that acquired the assets of the Corporation through an asset purchase agreement. All work on the project had been completed years before the asset purchase agreement.

After its dissolution, the corporation was purchased by K&K Iron Works Holding, Inc. (the “Holding Company”), which was the sole shareholder. Several years later, the LLC purchased the assets of the corporation from the Holding Company. The asset purchase agreement specifically excluded the corporation’s liabilities.

Neither the original corporation nor the Holding Company received any interest in the LLC under the asset purchase agreement. And the majority owner of the LLC was not an employee, officer, or board member of either the original corporation or the holding company.

In analyzing the facts of the case, the court provided a concise explanation of the “mere continuation “ exception to the rule against liability for the sellers debts and liabilities. The court stated,

“The continuation exception to the rule of successor corporate nonliability applies when the purchasing corporation is merely a continuation or reincarnation of the selling corporation. In other words, the purchasing corporation maintains the same or similar management and ownership, but merely ‘wears different clothes.’ … ‘The exception is designed to prevent a situation whereby the specific purpose of acquiring assets is to place those assets out of the reach of the predecessor’s creditors. To allow the processor to escape liability by merely changing hats would amount of fraud. Thus, the underlying theory of the exception is that, if a corporation goes through a mere change in form without a significant change is substance, it should not be allowed to escape liability.'”

The court further explained that the test is “whether there is a continuation of the corporate entity of the seller—not whether there is a continuation of the seller’s business operation…. Accordingly, ‘the majority of courts considering this exception emphasize a common identity of officers, directors, and stock between the selling and purchasing corporation as the key element of a ‘continuation.’”

In this case, the court concluded, from examining the entire ownership history of the corporation, there was no continuity of ownership. What added some twist to the facts in this case was that one of the owners of stock in the original corporation is also an owner of the current LLC that purchased the corporation’s assets from the Holding Company that owned it for about six years before the LLC did the purchase.

In this regard, the court said, “we cannot find that the acquisition of the assets of the corporation by a former owner after an arms-length sale to an unrelated company and several years spent under different ownership means that the LLC was merely a continuation of the original corporation.”

In reaching this decision the court also rejected arguments that because the LLC purchased the corporation’s leasehold interest in office space, as well as the corporate website, this somehow proved a continuation of the original corporation by the LLC. “The fact that the LLC chose to continue to operate out of the same facilities does not transform it into a mere continuation of the corporation.”

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