Inside this Issue

A1 - Professional Liability Insurance doesn't Cover Actions for Tortious Interference with Business Expectancy or Intentional Breach of Contract
A2 - Questions Concerning whether there was Negligence and whether an Indemnification Obligation was Triggered must be Decided by Jury and not on Summary Judgment Motion
A3 - CPM Schedule is Required in order to Prove Delay Claim. Jury Verdict Method Approved for Measuring Damages in Absence of Detailed Documentation
A4 - Differing Site Condition Claim Win for Contractor

Article 1

Professional Liability Insurance doesn't Cover Actions for Tortious Interference with Business Expectancy or Intentional Breach of Contract

An Engineering firm (“GOAD”) had a client (Honeywell) that it was working with to submit a bid to a federal agency. GOAD decided it needed some technical assistance itself and found ITI, Inc. to provide certain engineering services as its subcontractor. At some point, GOAD decided to enter into a teaming agreement with ITI to work together to assist Honeywell. By this agreement, ITA promised not to solicit or compete directly or indirectly with Goad for the Honeywell business. GOAD claims that ITI violated the agreement by making misrepresentations and falsehoods to Honeywell for the purpose of steeling its business. In any event, Honeywell decided to contract directly with ITI, and not use GOAD.

GOAD filed suit against ITI for breach of the teaming agreement, breach of a commission agreement, tortious interference with business expectancy, and injurious falsehood. ITI tendered these claims to its insurance carrier, Crum & Foster, which had issued a policy that provided professional liability (errors & omissions), and commercial general liability (CGL). The carrier declined coverage on the basis that the claims did not arise out of professional services and professional liability. Summary judgment was granted in favor of the insurance company by the trial court and affirmed by the Vermont Supreme Court, which concluded that the GOAD complaint contained no claims that fall within the language of the policy because the claims didn’t arise from acts taken in the course of rendering professional services. Integrated Technologies, Inc. v. Crum & Foster, 217 A. 3d 528 (Vermont 2019).

Breach of Contract Claim

The way the court explained it is as follows:

“This breach-of-contract claim does not arise from “an act, error or omission in the rendering or failure to render ‘professional services’ by any insured.” ITI’s alleged breach of its contract with GOAD did not arise in the course of ITI’s provision of professional services to GOAD; rather, ITI was providing professional project-management services to Honeywell while acting as a business associate of GOAD. While ITI is alleged to have taken actions in rendering advice to Honeywell that breached its obligations to GOAD, such a breach of ITI’s business promises to GOAD cannot reasonably be likened to professional malpractice against GOAD.”

Tortious Interference Claim

The way the court explained it as follows:

“GOAD asserted in its complaint that “ITI intentionally interfered with GOAD’s valid business expectancy”; that it “lacked justification for intentionally interfering with GOAD’s valid business expectancy”; and that, “[a]s a result of ITI’s intentional interference, GOAD has suffered damages.” GOAD further alleged that “ITI knew of GOAD’s valid business expectancy”; it “intentionally interfered with GOAD’s valid business expectancy by causing Honeywell to remove GOAD from its role”; and it accomplished this by “misrepresent[ing] facts and breach[ing] its obligations to GOAD.”

As with GOAD’s claim for breach of contract, its claim for tortious interference arises from actions ITI took in the course of providing project-management services for Honeywell. The alleged breached of duty was not ITI’s duty of care to the client to whom it was providing professional project-management services—Honeywell—but, rather, was its common law duty to GOAD as a business competitor. “It is the source from which the plaintiff’s ... injury originates rather than the specific theories of liability alleged in the complaint which determines the insurer’s duty to defend.”(citation omitted) … Like GOAD’s breach-of-contract claim, its tortious-interference claim does not arise from acts undertaken in the course of rendering professional services to GOAD, and cannot be likened to a malpractice claim.

The court stated that the insurance policy here obligates Crum & Foster to pay damages “because of” and “resulting from” a “Wrongful Act.” It is not enough to show “an act flowing from mere employment of vocation.” “The policy cannot be construed so broadly as to encompass the alleged conduct here. It does not cover ‘the risk of conducting one’s business in an unfair and tortious manner.’”

Injurious Falsehood Claim

The court also found that the injurious falsehood didn’t rest on a claim of sub-par ITI professional services to Honeywell but rather on alleged false statements about GOAD. The crux of GOAD’s claim, states the court, is that “ITI ‘pulled a bait and switch by convincing Honeywell to remove GOAD,’ through various improper means, ‘so that ITI could increase the scope of its own role at Honeywell’s expense and at GOAD’s expense.” The provision of professional services was a mere backdrop for ITI’s alleged publication of injurious falsehoods. The “gravamen of GOAD’s claim is a tortious injury to GOAD, not malpractice in the provision of consulting services.”

For these reasons, the court found no coverage. As stated by the court, “The policy does not cover the risk of intentionally making false representations to undermine a competitor.”

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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 22, No. 3 (March 2020).

Article 2

Questions Concerning whether there was Negligence and whether an Indemnification Obligation was Triggered must be Decided by Jury and not on Summary Judgment Motion

In a decision we previously reported on (see our article link), a federal district court granted summary judgment to two engineering firms, concluding as a matter of law that the allegations in the complaint did not raise questions of negligence to be determined by a jury, and that no obligations were owed by the engineers to the contractor pursuant to the indemnify obligations of the contracts. This judgment was reversed on appeal, with the court holding that the indemnification clauses of the engineering contracts were at best ambiguous and must be left to the jury to interpret and apply to the facts of the case. W.C. English, Inc. v. Rummel, Klepper & Kahl, LLP (RK&K) et, al., 934 F. 3d 398 (4^th Cir. 2019).

The underlying facts of this case are that the Virginia DOT awarded W.C. English, Inc. a construction contract to build a bridge over an Interstate highway. The contractor retained the services of two engineers – one to provide “quality assurance” (QA) and the other to provide “quality control” (QC) services.” After much of the concrete deck of the bridge had been poured, VDOT required the contractor to tear down and rebuild the bridge due to incorrect depth of concrete over the deck’s rebars that resulted from improper placement of the rebars.

The QC Contract and the QC Engineering Firm

The contractor filed suit against the engineers, asserting breach of contract for failure to adhere to the requirements of reporting “noncompliant work” and submitting a “non-conformance report” as it alleged was required by the three classification levels identified in the QC Plan for the project, and in particular a Level 3 non-conformance, which stated that the QC firm “will immediately notify the [construction manager] if materials or workmanship do no comply with the specifications.” The contractor also claimed it was entitled to indemnification of its damages from both engineering firms.

In granting the summary judgment to the QC firm the lower court held that a reasonable jury would be required to find that it fulfilled its contractual obligations and that the contractor’s damages arose out of its own negligence. In reaching that decision, the court apparently concluded that the height on the rebar slab runners didn’t present a Level 3 non-conformity.

But the question of whether it was a Level 3 non-conformity, and whether a non-conformity report was required to be issued, were factual questions that, according to the appellate court, should have been left to the factfinder. On remand, the court says the factfinder will need to determined whether the firm breached its contractual obligations, and if it did so, “whether and to what extent [the contractor] is entitled to damages.

Comment: It should be noted that a jury could very well conclude that the contractor was solely responsible for its damages and cannot recover from either of the professional consultants.

The QA Contract and the QA Engineering Firm

With regard to the contractor’s suit against the QA firm, the court focused on the indemnification articles of the contract and concluded that they were too ambiguous for the court to enforce on a summary judgment motion, and that the factfinder would have to hear evidence and apply its interpretation of the contract language to the facts at issue.

The indemnity clauses in question that were negotiated during contract formation and at the request of the QA firm have changes made by the QA which are shown in italics in the quoted clauses below. The court’s analysis of the terms of the indemnity provisions is so educational that we are quoting it in detail.

“11. Indemnity. To the full extent permitted by law, [RK&K] agrees to indemnify and save harmless [English and VDOT], and their servants and employees, from and against any claim, cost, expense, or liability (including attorney’s fees), attributable to bodily injury, sickness, disease or death, or to damages or destruction of property (including loss of use thereof), caused by the negligent performance of the Work by [RK&K], its subcontractors, or their agents, servants, or employees, provided, however, [RK&K’s] duty hereunder shall not arise if such injury, sickness, death, damage, or destruction is caused by the negligence of a party indemnified hereunder, or by their subcontractors or consultants of any tier. [RK&K’s] obligation hereunder shall not be limited by the provision of any workmen’s compensation or similar act.

Should [VDOT] or any other person assert a claim or institute a suit, action or proceeding against [English] involving the manner or sufficiency of the Work, [RK&K] shall indemnify and save harmless [English] and its servants and employees, from and against any liability, loss, damage, or expense arising out of or relat[ing] to such claim, suit, action, or proceeding, to the extent directly caused by the negligence of subcontractor but not to the extent caused by the acts or omissions of [English] or its subcontractors or consultants of any tier.

* * *

Damage. Except if due to [English’s] negligence, [English] shall not be liable or responsible for any loss or damage to the equipment, tools, facilities, or other personal property owned, rented, or used by [RK&K], or anyone employed by [RK&K], in the performance of the Work; and [RK&K] shall maintain such insurance and take such protective action as it deems desirable with respect to such property. Except if due to [English’s] negligence, [English] shall not be liable or responsible for any loss or damage to the Work, and [RK&K] shall be responsible for the correction or restoration of any such loss or damage to the Work, or to the work of [English] or any other subcontractor, resulting from the operations of [RK&K], or its subcontractors, agents, servants or employees hereunder. [RK&K] shall take reasonable precautions to protect the Work from loss or damage prior to acceptance by [VDOT].”

The appellate court explained as follows:

“In granting summary judgment to RK&K, the district court agreed with RK&K’s argument that, even assuming that it had breached its contract, the breach caused no damage because “the terms of the contract absolve[d] RK&K of liability if English was negligent” and that “English has no right to indemnity because ... the terms of the contract exempt RK&K from liability if English was negligent.” The district court read Sections 11 and 23 together, reasoning that even though the provisions employed differing language, they could “be reasonably reconciled.” The court’s reconciliation of the provisions led “to a reading that [was] similar to the tort concept of contributory negligence: if English was the cause of its own damages it cannot collect.” Accordingly, the court held that because English was as a factual matter at least partly responsible for the decision to use the 1.75-inch slab runners, it was barred from recovering any damages from RK&K.”

***

“Although the court acknowledged that the second paragraph of Section 11 “could possibly be read to anticipate something akin to the tort concept of comparat[ive] negligence,” it discarded that interpretation by focusing on Section 11’s “use of the word ‘directly,’ ” explaining:

‘The use of this word here is best read as “proximately.” See, e.g., Estate of Moses ex rel. Moses v. Sw. Virginia Transit Mgmt. Co., 273 Va. 672, 679, [643 S.E.2d 156] (2007) (equating “proximate cause,” “direct,” and “efficient contributing cause” in the tort context). When read this way, this sentence states that RK&K is liable for damages “to the extent [proximately] caused by the negligence of [RK&K] but not to the extent caused by the acts or omissions of [English].” This reading demonstrates that RK&K agreed to liability when the dual requirements of contributory negligence were satisfied: RK&K would be liable for damages and would indemnify English when RK&K’s conduct consisted of “negligence and proximate causation.” Rascher v. Friend, 279 Va. 370, 375, [689 S.E.2d 661] (2010). But RK&K would not be liable if damages were caused by English, unless it (RK&K) directly or proximately caused the injury.’

“English contends that the district court’s interpretation was erroneous, arguing that Section 11’s second paragraph unambiguously “invokes a comparative scheme, not a contributory negligence scheme” and pointing to courts that have interpreted similar “to the extent” language as employing such a comparative scheme.”

The appellate court goes on to explain how the wording is potentially ambiguous and subject to different meanings that must be left to the fact finder to decide.

Article 3

CPM Schedule is Required in order to Prove Delay Claim. Jury Verdict Method Approved for Measuring Damages in Absence of Detailed Documentation

A contractor filed a request for equitable adjustment (REA) to the District of Columbia (D.C.) government asserting that the District caused $1.2 million in delay and impact costs, and other damages arising out of a road reconstruction project. It appealed a deemed denial to the D.C. Contract Appeals Board (CAB). The CAB found in favor of the contractor on all its claims based on defective specifications or differing site conditions, but remanded to D.C. to negotiate the quantum of damages. D.C. then concluded that quantum was equal to “Zero” and the contractor appealed to the CAB, which awarded equitable adjustment in the amount of only $155,000 on the claim because the contractor failed to use a Critical Path Method (CPM) to prove its critical path was impacted and failed to keep good financial records of the damages claims. This decision was affirmed by the D.C Court of Appeals in Rustler Construction, Inc. v. District of Columbia, 2111 A.3d 187 (2019). Of note are the following holdings:

1) Contractor was unable to recover under a theory of “overall delay” because it failed to submit appropriate evidence to show the extent of delay to itmes on the critical path;

2) Contractor was unable to prove the amount of damages because it didn’t break down its costs by task; and

3) Contractor’s failure to demonstrate it was unable to keep detailed records doesn’t necessarily preclude the use of the jury verdict method to award the contractor a portion of its claimed damages.

The claim for Overall Delay

The contractor wanted to use the number of days by which completion was delayed as a proxy for extra costs incurred. But overall delay only occurs when delay by the government/owner affects items that are on the critical path. If the government causes delay to the completion of items outside the critical path, a contractor may not recover based on a theory of overall delay.

“The best way to establish the critical path is by presenting CPM schedules.” The court noted, “It is a well-accepted principle that contactors must modify and update the CPM schedules when issues arise during the course of construction.”

In this case, although the contract specifically required the contractor to frequently and regularly update the CPM schedules, it only submitted four CPM schedules throughout the course of the contract, and two of those were submitted before construction even began. “The only CPM schedules that [contractor] produced after construction began were insufficient to establish the effect of delay on the critical path.”

Although delay damages may sometimes be proven through expert testimony in the absence of up-to-date CPM schedules, the contractor failed to produce such expert testimony.

Jury Verdict Method used to Calculate Damages for Additional Tasks and Out-of-Sequence Work

The Board awarded the contractor damages for 28 days of additional tasks and out-of-sequence work. Due to Contractor’s failure to break down the costs by task, the amount of damages awarded was significantly less than the contractor requested. The contractor wasn’t happy with the award amount and contended that, “since it proved entitlement [during the entitlement stage of the Board proceedings], it should receive at the quantum stage all of the damages it requested.” In rejecting that argument, the Court noted that the regulations pertaining to the Board permit it to reserve the determination of the amount of recovery for another proceeding.

There is no lighter evidence rule for proving damages before the Board

The contractor argued that it was only required to “prove the amount with sufficient certainty such that the determination of the amount will be more than mere speculation.” The court agreed that “a claimant need not prove his damages with absolute certainty or mathematical exactitude,” but that “the same preponderance of the evidence standard of proof that applies to an entitlement showing ‘also applies to proof of the amount of [a contractor’s] increased costs.”

Use of Jury Verdict Method was Appropriate

The D.C. government argued that use of the jury verdict method was inappropriate because the contractor didn’t demonstrate a justifiable inability to produce evidence of its actual costs or cost estimates, and that the jury verdict method should only be used to resolve conflicting testimony.

The court began its analysis of this issue by stating that there “is some confusion about the jury verdict method and its application,” and that it can cover a variety of techniques to allow contract appeals boards and courts “to fashion a price adjustment that best compensates the contractor yet does not force the government to pay an amount that is unfair in the circumstances.” (quoting, from Nash & Cibinic, Administration of Government Contracts 709 (4^th Ed. 2006).

Following federal precedent, the court states “we have held that the jury verdict method may be used only when it is determined ‘(1) that clear proof of injury exists; (2) that there is no more reliable method of computing damages; and (3) that the evidence is sufficient for a court to make a fair and reasonable approximation of the damages.’”

All three conditions were found by the court here. The D.C. government didn’t argue to the contrary. Instead, they argued that the method can’t be used because contractor didn’t demonstrate that it was “justifiable unable to provide actual cost data concerning the additional or out-of-sequence work it performed.”

The court held “that a contractor’s failure to demonstrate that it was unable to keep better records does not necessarily preclude use of the jury verdict method. However, we do not retreat from our prior statements that the use of the jury verdict method is disfavored.”

The court also rejected the argument that the jury verdict method is only appropriate to resolve conflicting testimony. In this regard the court explained, “While resolving conflicting testimony may be a common purpose for using the method, it may be employed in other circumstances as well. It may, for example, be used to calculate “the amount of an adjustment when there are gaps in the evidence or the evidence is not completely persuasive,” Cibinic & Nash at 707, as was the case here. Indeed, … this court acknowledged that the jury verdict method “may be used when the board is not convinced by the contractor’s evidence of the precise amount owed, yet finds that some extra costs were incurred.”

Comment: When it comes to proving delay claim entitlement, the contractor can be held to the requirement to prove, through a critical path method analysis, that the items of work that were delayed were on the critical path. Without a CPM analysis, it is difficult or impossible to determine what is, or was, the critical path.

The court’s holding concerning the use of the jury verdict method in this case is helpful for clarifying when, and how, the method can be used. But even though the jury verdict method was used here to award some damages to the contractor, it must be noted that the contractor got only $155,00 out of its total $1.2 million claim. The jury verdict method is certainly no substitute for maintaining good cost records of each task that the contractor claims is impacted.

Article 4

Differing Site Condition Claim Win for Contractor

See similar articles: cofferdam | Differing Site Condition | subsurface | Type 1

A contractor prevailed under the differing site conditions (DSC) clause of a highway bridge construction contract by meeting the requirements of the so-called Stuyvesant test, which requires a contractor to prove that “(1) the conditions indicated in the contract differ materially from those it encounters during performance”; (2) “the conditions were reasonably unforeseeable based on all the information available to the contractor at the time of bidding”; (3) “it reasonably relied upon its interpretation of the contract and contract-related documents”; and (4) “it was damaged as a result of the material variation between the expected and countered conditions.”

The ultimate decision in favor of the contractor was based largely on drill hole data provided with the contract, as well as a depiction in contract documents of the existing bridge that was to be demolished sitting on a footing directly on a rock ledge at the depth the contractor stated the contract represented for the new footers. The Court found the contractor reasonably relied on the ledge elevations shown in the bidding documents in pricing and designing is cofferdam. W. M. Schultz Construction, Inc. v. Vermont Agency of Transportation, 203 A. 3d 1205 (Vermont 2018).

The project was funded in party with federal aid, and this meant that the standard federal contract DSC clause was required to be included in the contract. As explained by the court (quoting from case precedent), “The purpose of the Differing Site Conditions clause is to allow contractors to submit more accurate bids by eliminating the need for contractors to inflate their bids to account for contingencies that may not occur.”

The court explained that to be entitled to a differing site condition under the important case precedent of Stuyvesant Dredging Co. v. United States, 834 F.2d 1576, 1581 (Fed. Cir. 1987), a contractor must prove:

(1) “the conditions indicated in the contract differ materially from those it encounters during performance”;

(2) “[t]he conditions actually encountered” were “reasonably unforeseeable based on all the information available to the contractor at the time of bidding”;

(3) “it reasonably relied upon its interpretation of the contract and contract-related documents”; and

(4) “it was damaged as a result of the material variation between the expected and encountered conditions.”

The first Stuyvesant element was the “threshold” question that was of most significance in the court’s analysis. The court stated: “While there need not be ‘express representations as to the nature of conditions, ... at least insofar as subsurface or latent conditions are concerned, there must be reasonably plain or positive indications in the bid information or contract documents that such subsurface conditions would be otherwise than actually found in contract performance.”

The agency appeals Board that reviewed the initial dispute granted the contractor summary judgment because it found that the bid documents repeatedly stated that the approximately elevation of the existing ledge was 802 feet and they did not state that subsurface conditions were unknown, could vary, or were sloped. Numerous Plan Sheets showed elevations drawn to scale using the defined symbol for exposed ledge, “and each represented, sometimes in multiple places, existing ledge elevation at approximately 802.5 feet at Abutment #2.” The Court states that the Board found it important that the bid documents described the prior bridge and stated that the footing for the then-existing Abutment #2 was poured directly on the ledge.

The various documentation presented by the state agency attempting to refute the differing site condition claim included soil borings from around the entire project and one plan sheet in particular (number 212) that the state agency asserted was controlling because it included “calculated dimensions rather than scaled dimensions” like those shown on other plan sheets. On the bottom of that plan sheet there was a notation for the Abutments #2 footing, indicating “el. Varies.” From that notation, the state agency argued that the contractor should have known that the elevation varied and that it could not depend upon the elevation being what was shown as being the 802 foot ledge elevation on all the other plan sheets.

In reviewing the opposing arguments, the court quoted a principle of law that

“A contractor does not need to show that its ‘interpretation of the contract is the only reasonable one, but it does bear the burden of showing that its construction is at least a reasonable reading.”

In this case the court concluded it was reasonable for the contractor to construe the contract as indicating that the elevation of the bedrock at Abutment #2 was approximately 802.5 feet.

The state agency argued that the “Existing Bridge Data” notation, which stated that the prior abutment was “spread footing on ledge,” didn’t necessarily mean that it rested entirely and directly on bedrock without any subfooter.” In finding that argument to be unpersuasive, the court explained:

“But this is not the question. The question here is how a reasonable contractor would construe the information provided. It was reasonable to read the notation to mean what it said. This is particularly true given the drawings that portrayed the existing bridge abutment footing as a level plateau with slopes on either side. Additionally, as the Board observed, nothing in the contract materials indicated that the ledge on which the existing abutment footer had been poured was at an elevation that differed from the bid documents’ several other ledge descriptions and data. No subfooting was depicted in the drawings for Bridge # 19, moreover, and there was no pay item for concrete for a subfooting.”

For these and other reasons explained more fully in the decision, the court affirmed the Board’s summary judgment in favor of the contractor – finding that the contractor was entitled to equitable adjustment on its differing site condition claim.

Comment: As explained by the court, quoting from the important precedent of Foster Construction v. U.S, the reason for including a DSC clause in a contract is that the clause:

“makes it clear that bidders are to compute their bids, not upon the basis of their own preaward surveys or investigations, but upon the basis of what is indicated and shown in the specifications and on the drawings. The clause should induce the bidder not to consider such contingencies as the latent or subsurface conditions, for which the Government has assumed responsibility.”

Project owners need to understand that they are doing themselves no favor by attempting to eliminate the ability of a contractor to make a bona fide differing site condition claims (DSC). This is particularly so for a public owner like a department of transportation that is going to have multiple construction projects.

As a hypothetical to demonstrate how attempts to insert language into a contract to eliminate or avoid DSC claims, an project owner actually harms itself and wastes money, consider the following:

(1) A department is going to have 10 projects during a year;

(2) The average project cost will be $20 million;

(3) The total for the 10 projects for the entire year would be $200 million

(3) One project has a DSC and it is for $2 million

(5) $202 million is the total expended by the department on the 10 projects if it pays the one DSC claim.

In contrast, consider what happens if the department prevents all DSC claims from the being filed:

(1) A department is going to have 10 projects during a year;

(2) The average project cost will be $20 million;

(3) The total for the 10 projects for the entire year would be $200 million;

(4) The bidders on all 10 projects inflate their bids by $2 million to account for contingency needed to cover the potential differing site conditions they might encounter on each project.

(5) $20 million is the amount of the total contingency amounts added to the ten projects.

(6) $220 million is the total amount incurred by the department for the ten projects

In the above hypothetical, the department wasted $18 million as a result of its ill-advised decision to eliminate differing site condition claims. It is unfortunate that we are seeing so many misguided project owners ignoring the wisdom of allowing differing site condition claims.

Risk Management Tip: On the design-build contracts, when advising a design professional or its insurance carrier with regard to the design subcontracts and the risks associated with those contracts, if I see that the prime design-build contract includes language making it difficult or impossible to the design-builder to make a bona fide DSC claim, I advise the designer and carrier to beware of the increased likelihood of litigation by the design-builder against the design professional to recover the DSC costs that cannot be recovered from the Owner. Eliminating DSC claims creates more claims and litigation between the design-builder and the design professional subcontractor.

Search

Get the Newsletter

Contract Guide for Design Professionals

Recent Newsletters

All Newsletters

Risk Management Workshops

Life Skills Workshop Slides

Contract Clauses – Papers and Articles

Construction Risk Management

ConstructionRisk Report (March 2020)