Inside this Issue

A1 - Dispute under Design-Build Teaming Agreement and Subcontract may be Subject to Arbitration even if Statute of Limitations has Lapsed
A2 - Economic Loss Doctrine Applied to Dismiss Homeowner Suit against Geotechnical Firm that Issued Soils Report to Developer
A3 - Fraud Claims against Engineer Dismissed for Lack of Specificity

Article 1

Dispute under Design-Build Teaming Agreement and Subcontract may be Subject to Arbitration even if Statute of Limitations has Lapsed

A design-builder brought an arbitration action against its engineering subconsultant after the expiration of the statute of limitations. The engineer filed suit to stay the arbitration – arguing that the issues in dispute (concerning pre-bid quantify estimates) arose under the parties’ teaming agreement rather than under the subcontract, and were therefore not subject to arbitration. It also argued that the statute of limitations for filing suit or arbitration had lapsed. The circuit (trial) court agreed, but this was reversed on appeal. The appellate court explained the issues were: (1). Was Corman's demand for arbitration barred because it was not brought within three years of the date that Corman discovered the alleged negligence giving rise to the claim? and (2.) Did the circuit court err when it concluded that the claim asserted by Corman fell within the substantive scope of the arbitration provision in the Design Subcontract?

The court concluded, “Our answer to each of these questions is no. Corman's right to arbitration was not time-barred by the statute of limitations set forth in CJP § 5-101, even if its demand for arbitration was made more than three years after discovering Gannett Fleming's alleged negligence. And Corman's claim, even if just for extra material costs incurred as a result of Gannett Fleming's breach of the Teaming Agreement, falls within the substantive scope of the arbitration provision in the Design Subcontract.” Gannett Fleming, Inc. v. Corman Construction, Inc., 243 Md.App. 376220 A.3d 411 (2019)

Timeliness of the Arbitration Demand

The appellate stated that the agreement between Gannett Fleming and Corman does not contain a term that imposes any time limitation on the parties' ability to seek arbitration to resolve their disputes. The court noted that this is not a case in which Corman let litigation drag on only to assert, months or years later, a right to handle the dispute outside of court. “In our view,” says the court, “the expiration of a statutory limitations period does not render a demand for arbitration untimely—and, thus, the right to arbitration waived—unless the parties provide for this in their arbitration agreement…. On its face, CJP § 5-101 applies only to 'civil action[s] at law'. And arbitration proceedings are not civil actions at law…. Additionally, no other Maryland statute makes CJP § 5-101 applicable to demands for arbitration.”

The court further stated, “[O]ur courts engage with the facts of each case to decide whether the party seeking arbitration has intentionally and unequivocally waived that right. Finding a demand for arbitration untimely for failure to satisfy the statute of limitations for civil actions at law would substitute fact-bound analysis with a bright-line rule.”

Was the Dispute under the Teaming Agreement or the Subcontract?

The engineer argued that the circuit court's opinion erroneously blurred the two distinct contractual relationships created by the Teaming Agreement and the Design Subcontract. It argued that the design-builder’s claim relates only to the alleged negligent provision of pre-bid services under the Teaming Agreement, which contains no arbitration provision, and was therefore not subject to the arbitration provision of the subcontract. In reviewing that argument, the appellate court stated,

“Here, it is true that the Teaming Agreement and Design Subcontract are separate contracts, imposing differing duties on the parties. The Design Subcontract did not bind Gannett Fleming to perform any additional pre-bid services; the default provisions for pre-bid services were determined "[n]ot [a]pplicable" (i.e. , they were "stricken" from the modified form agreement). But, on its face, the language of the provision extends beyond disputes "aris[ing] out of" the subcontract agreement, and includes disputes "relat[ing] to" the agreement or its breach. The arbitration clause in the Design Subcontract is broadly worded, leaving vague the precise bounds of its scope.

In evaluating the substantive scope of the arbitration provision de novo , we cannot agree with Gannett Fleming that a dispute about faulty pre-bid estimates—upon which the bid was based and which presumably played some role in NCDOT's decision to award the contract to Corman—is not "relate[d] to" the parties' agreement to work together to build bridges and culverts in North Carolina. Indeed, it appears to this Court that the faulty pricing estimates for the project are intricately and inextricably related to the performance of the Design Subcontract or its breach. The information provided by Gannett Fleming under the Teaming Agreement was used to price and schedule all post-bid activities under the Design Subcontract. Corman asserts that the information provided by Gannett Fleming was flawed and that those errors led to project delays and increased costs as the parties worked to perform under the Design Subcontract. The Design Subcontract obligated Corman to pay Gannett Fleming for all services rendered for this project. This would include the pre-bid services provided under the Teaming Agreement. Otherwise, those services would have gone uncompensated.

The agreements, each signed by both parties, contemplate each other and explicitly reference each other. As we see it, the Teaming Agreement was a foundational premise upon which the Design Subcontract was later crafted. It was step one of two for the overall project, making firm the pricing and scope of services to be provided by Gannett Fleming.

Here, the parties, working together to secure and then complete a highway-construction project, opted for a broad arbitration clause and imposed no hard deadlines on bringing claims. Because the parties' agreement did not limit the period in which arbitration can be demanded, Corman's right to arbitrate the dispute was not barred by the statute of limitations. And because the scope of the arbitration agreement extends to all disputes relating to the Design Subcontract or its breach, and because "any doubt over arbitrability should be resolved in favor of arbitration."

The court noted that its opinion reversing the circuit court decision does not definitively decide that this dispute is arbitrable. The court states, “We leave this determination to the arbitrator's "skilled judgment." Finally, the arbitrator may also decide, in its application and interpretation of the parties' agreement to arbitrate, that Corman's claim lies beyond the scope of the arbitration provision.”

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. 7 (Sep 2020).

Article 2

Economic Loss Doctrine Applied to Dismiss Homeowner Suit against Geotechnical Firm that Issued Soils Report to Developer

See similar articles: Economic Loss Doctrine | foundation | geotechnical | Haynes | soil

About a year after building a new home, the owners noticed cracks forming in the foundation and walls. They learned that the soil under the house was unstable. They then filed suit against the geotechnical services firm that ten years previously authored a geotechnical report for the developer. The suit alleged various negligence-based tort claims. The district court dismissed those claims, concluding that they were barred by the economic loss rule. That decision was affirmed on appeal for the reasons explained herein. Haynes v. Intermountain GeoEnvironmental Services, Inc., 446 P.3d 594 (Utah 2019).

The geotechnical firm (“IGES”) moved, pursuant to rule 12(b)(6) of the Utah Rules of Civil Procedure, to dismiss all of Plaintiffs’ claims against it, arguing that the tort claims were barred under both the statutory and common law version of Utah’s economic loss rule, and that Plaintiffs were not third-party beneficiaries of any contract with IGES.

By filing tort claims against IGES for faulty soils recommendations, Plaintiffs sought to blame IGES for damage to their house, moving expenses, and emotional distress, as well as diminution in value of their land. Given their nature, the court concluded that “these are actions "for defective design or construction," as that term is used in the statutory version of the economic loss rule. Utah Code Ann. § 78B-4-513. Moreover, these are not claims for damage to "other property."

In Utah, there is a statutory version of the economic loss rule that was enacted in 2008, and applies only to "action[s] for defective design or construction." See Utah Code Ann. § 78B-4-513. There is also a common-law version of the economic loss rule that continues to apply in situations that are beyond the scope of the statute.

“Utah’s statutory economic loss rule provides that "an action for defective design or construction is limited to breach of the contract," Utah Code Ann. § 78B-4-513(1), and that, in general, "an action for defective design or construction may be brought only by a person in privity of contract with the original contractor, architect, engineer, or the real estate developer," id. § 78B-4-513(4). The statute contains an exception, however, for "damage to other property." Id. § 78B-4-513(2). IGES contends that Plaintiffs’ tort claims against it constitute "action[s] for defective design or construction," and are therefore barred by the statutory economic loss rule. Plaintiffs resist this characterization, and in addition assert that the "other property" exception applies in any event. We conclude that Plaintiffs’ tort claims constitute actions for defective design and construction, as that term is used in the statute, and that the "other property" exception does not apply.”

The plaintiff sought to avoid the economic loss doctrine by asserting that their suit was not one "for defective design or construction." They argued that their tort claims against IGES are not for defective design or construction, and point out that IGES’s 2004 report was issued before any relevant structure—including their house—was designed or constructed, and they argued that the report "was a professional opinion on a state of facts concerning a lot later purchased by Plaintiffs," and further argued that "IGES is being sued because its opinion about the stability of the slope was wrong, not because it improperly designed a structure."

In rejecting those attempted distinctions, the court stated that it found meaningful the statute’s use of the word "for," and see its use as a signal that—in order to determine if an action is truly one seeking redress in connection with defective design or construction—we should pay close attention to the claimed cause of the specific damages sought in the action…. Thus, to answer the question presented, we must examine the relief sought by Plaintiffs against IGES, as well as Plaintiffs’ basic underlying theory of causation.

The court considered the categories of damages claimed and concluded:

“The first three of Plaintiffs’ four categories of claimed damages clearly are aimed at seeking redress "for defective design or construction." Under Plaintiffs’ own version of events, IGES’s allegedly faulty slope stability recommendations led to Plaintiffs purchasing the lot, then constructing a house upon it, then to the house settling and cracking, and then to emotional distress and moving expenses. Indeed, the entire point of commissioning a geotechnical report in this case was to determine whether houses could safely be built in the proposed subdivision and, if so, what sort of foundation and support those houses would need.

Accordingly, the bulk of Plaintiffs’ lawsuit against IGES can comfortably be categorized as "an action for defective design or construction." A lawsuit that seeks recovery from a design professional—including a geotechnical engineer—for the diminution in value of (or costs to repair) a structure that has settled or sustained damage as a result of subsidence will nearly always be properly categorized as a lawsuit seeking recovery for defective design or construction. Therefore, to the extent Plaintiffs seek damages related to the structure itself—including claims for diminution in its value, repair costs, moving expenses incurred for having to leave the structure, or emotional distress related to living in it—their claims constitute actions for defective design or construction, and are covered by Utah Code section 78B-4-513(1).

Plaintiffs’ fourth category of damages—a claim for damage to the lot—presents a closer question. With regard to this category of damages, Plaintiffs’ claims do not directly implicate any actual structure; instead, Plaintiffs seek recovery of damages to the land itself. Although it is not entirely clear, at this stage of the proceedings, what this claim is designed to encompass—after all, IGES did not create whatever slope stability issues might inhere in Plaintiffs’ lot—Plaintiffs appear to be asserting that the value of their lot has diminished now that it is known that construction on the property will be problematic. Though Plaintiffs do not phrase it in exactly this way, they appear to be claiming that, when they purchased their lot, they did so in reliance on IGES’s recommendations, and paid a price for the lot commensurate with it being readily buildable, and that the lot is no longer worth what they paid for it because of the slope stability issues that have since come to light. Ultimately, however, we view this portion of the claim as one for defective design or construction also.”

For these reasons, the court found the statutory economic loss doctrine applied to all of plaintiff’s theories of the case, and the case must be dismissed accordingly.

Article 3

Fraud Claims against Engineer Dismissed for Lack of Specificity

See similar articles: Fraud | fraudulent enducement

Homeowner filed suit against its design-build contractor for defects in a $1 million swimming pool. In addition to claims for negligent design and construction defects, the homeowner asserted that the designer and design-builder were guilty of fraudulent educement, fraudulent misrepresentation, and fraudulent omission concerning the design and also concerning certain changes to construction that did not meet the original design specifications. In dismissing those allegations, the court found that the Complaint failed to state with particularity the circumstances constituting fraudulent inducement. It didn’t specifically allege that the plaintiff had any direct conversations with any representative of the engineer during contract negotiations, much less disclose the content of any such conversation, the identity of the person with whom the plaintiff had a conversation, or when it occurred. The court also found that the Complaint failed to state a claim for fraudulent misrepresentation, because it did not allege with particularity a false statement of fact by the engineer upon which the plaintiff relied. Hinman v. ValleyCrest Landscape, Inc. and Aquatic Design & Engineering, Inc., Case No. 3:19-cv-00551 (M.D. Tenn 2019)

The court explained that, "Because claims based on fraud pose 'a high risk of abusive litigation,' a party making such allegations 'must state with particularity the circumstances constituting fraud or mistake.'" To comply with Rule 9(b), "a plaintiff, at a minimum, must 'allege the time, place, and content of the alleged misrepresentation on which he or she relied; the fraudulent scheme; the fraudulent intent of the defendants; and the injury resulting from the fraud.”

Fraudulent Educement Claim

In this case, the plaintiff didn’t allege that engineer was a party to the Contract or the Addendum or that it had any involvement in negotiating the terms of either. How the engineer, therefore, could have induced the plaintiff to enter into the contract is not set forth in the complaint. In dismissing the count of the complaint, the court explained that the claim fails at the first element: the identification of a false statement material to the plaintiff's decision to contract with the design-builder. “The Complaint does not specifically allege that [plaintiff] had any direct conversations with any representative of [Engineer] during contract negotiations, much less disclose the content of any such conversation, the identity of the person with whom the plaintiff had a conversation, or when it occurred. The Complaint utterly fails to state a fraudulent inducement claim against [Engineer], and certainly does not satisfy the Rule 9(b) standard".

Fraudulent Misrepresentation Claim

In dismissing the misrepresentation claim, the court stated,

“Similarly, any claims based on fraudulent misrepresentation are insufficient under Rule 9(b), because the Complaint does not identify with particularity any communications between the plaintiff and any representative of Aquatic that involved a knowingly false representation of a present or past fact, much less any reliance by the plaintiff on a false statement. The vast majority of the allegations concerning "misrepresentations" that Aquatic allegedly made to Hinman are too general to satisfy Rule 9(b). (See, e.g., Doc. No. 1 ¶ 22 ("Aquatic assured Ms. Hinman that the pool had been properly constructed and that any problems with it were either routine small issues that occur with any new construction or were maintenance issues that were her responsibility, rather than construction issues."); id. ¶ 24 ("Aquatic represented to Ms. Hinman that the improperly added expansion joint would solve whatever problems existed.").

In sum, the court finds that the Complaint fails to state a claim for fraudulent misrepresentation, because it does not allege with particularity a false statement of fact by Aquatic upon which the plaintiff relied.

Fraudulent Omission Claim

A plaintiff pleading a fraudulent omission must allege "(1) precisely what was omitted; (2) who should have made a representation; (3) the content of the alleged omission and the manner in which the omission was misleading; and (4) what [the defendant] obtained as a consequence of the alleged fraud." In this case, the court explained these requirements were not satisfied by the Complaint because,

“The Complaint alleges, regarding omissions specifically, that the plaintiff relied on Aquatic "to ensure compliance with the plans and drawings and to notify her of any deviations and the consequences of any deviations," including the failure to include an expansion joint in the original construction (Doc. No. 1 ¶ 20); that Aquatic misled Hinman as to, or concealed from her, the cause of the pool's leaking by falsely assuring her "that the pool had been properly constructed and that any problems with it were either routine small issues that occur with any new construction or were maintenance issues that were her responsibility, rather than construction issues" (id. ¶ 22); in responding to Hinman's warranty claims, Aquatic "failed to disclose [the defendants'] substantial deviations from the Contract documents that caused the problems" (id.); Martin refused to disclose to her, when asked, what change orders had been approved or by whom (id. ¶ 28); Martin's letter to BrightView "mentioned nothing about [the defendants'] deviations from the Contract documents that have caused the pool's serious problems" and constituted a "further cover-up" of the defendants' misconduct.”

With respect to the other alleged omissions regarding the alleged failure of the engineer to advise the homeowner of changes to the construction that differed from the original design, and other matters concerning construction, the court found that the plaintiff adequately alleged that the engineer “assumed a duty to disclose to her any material deviations from its plan, to the extent it was aware of such deviations, and, if asked, to disclose to the plaintiff any construction or design defects that were causing the plaintiff's problems, again assuming it was aware of such defects, when it entered into a contract with BrightView for the design of the plaintiff's Project and in undertaking to perform services for the plaintiff's benefit.”

But this did not cause the cause of action alleged by the complaint to survive the motion to dismiss, because “even accepting that Aquatic had such a duty, the plaintiff does not allege the 'the who, what, when, where, and how' of any of the alleged omissions…. Nor does she allege facts that reasonably permit the inference that Aquatic was aware of the alleged material deviations and construction defects.”

The court explained that the homeowner’s fraudulent omission claims based on the broad and general assertion that she relied on Aquatic to ensure compliance with the drawings and to notify her of any deviations and that she relied upon repeated false assurances by Aquatic that the pool had been properly constructed and all problems were maintenance issues that were her responsibility are not pleaded with the particularity required by Rule 9(b).

For these reasons, all aspects of the complaint alleging fraud were dismissed.

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