Wrongful Conduct Found Not Covered by Insurance Policy
The City of Shawnee, Kansas, hired a contractor to perform work on a project. Utility lines ran throughout the job site. The bid solicitation documents indicated that the utility lines would be relocated not to interfere with the contractor's work. The city failed, however, to relocate the utility lines as asserted during the bid solicitation, and the contractor encountered delay damages as a result.
The contractor then sued the city for misrepresentations and resulting delay damages. The city then sued its insurer, Argonaut Insurance Company (Argonaut). See City of Shawnee v. Argonaut Ins. Co., 546 F. Supp. 2d 1163 (D.Kan. 2008). The policy included a part named "Public Officials' Liability Coverage Part" and provided coverage for "any act, error or omission by an insured." Id. at 1170. However, the policy excluded coverage for liability arising out of a breach of contract or faulty preparation of bid specifications.
The United States District Court for the District of Kansas heard the matter on a summary judgment motion. The court first found that it could not rule as a matter of law that the breach of contract exclusion applied. The bid documents and all other agreements between the parties did not specify that one or another party was responsible for relocating the utility lines. Therefore, the city's argument that the action for negligent misrepresentation arose out of tort rather than contract had some merit and summary judgment in favor of the insurance company was not proper.
As to the faulty preparation exclusion, the court noted that the language of the policy was ambiguous because it did not define "bid specifications." Any ambiguity in an insurance contract is resolved against the insurer. The court, therefore, found that Argonaut failed to show the exclusion applied and had to provide coverage for the claim against the city.
Nevertheless, the city fell out of luck. Evidence was presented that the city had knowledge of the contractor's claims and intent to sue before the January 1, 2006 effective date of the policy. The terms of the policy provided no coverage for claims arising before the effective date. Accordingly, the insurer was not liable.
This case is a contract lesson to both insurance companies and to bidders. While the bid documents asserted all utility lines would be relocated, this court did not consider such statements contractual warranties that would trigger a breach of contract exclusion. The court may expect more precise and clear language to impose a contractual obligation. As to the insurers, ambiguity in contracts could ultimately lead to unplanned losses. Defining all terms clearly and ensuring consistency of the entire agreement is critical.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
U.S. Senate Expresses Concern over Chinese Drywall Issues
On March 30, 2009, Florida senator, Bill Nelson, introduced to the Senate Bill S.Res.91. The bill is entitled: "A Resolution Calling on the Consumer Product Safety Commission, the Secretary of the Treasury, and the Secretary of Housing and Urban Development to Take Action on Issues Relating to Drywall Imported from China."
Between 2004 and 2007 the United States imported drywall from China, most of it for building houses after hurricane Katrina. The imported drywall turned out to be toxic, posing potential serious health threats to people and enraging and terrifying homeowners. While contractors and subcontractors may face accusations of negligence for using cheaper drywall at the expense of quality, the sky-high demand for building supplies post-Katrina may be a reasonable explanation for the increase in the quantity of imported Chinese drywall.
Senator Nelson's bill urges "the Consumer Product Safety Commission to: (1) initiate a formal proceeding to investigate drywall imported from China from 2004 through 2007; (2) prohibit further importation of drywall and associated building products from China; (3) order a recall of hazardous Chinese drywall; (4) seek civil penalties against the drywall manufacturers in China that produced or distributed hazardous drywall and their U.S. subsidiaries to cover the cost of the recall effort and associated remediation."
The defective Chinese drywall has reportedly been also used in building projects in South Carolina. You may learn more about the health effects and detection techniques of the Chinese drywall by reading the following article.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
No-Damages-For-Delay Clause May Be Unenforceable
Williams & Sons Erectors, Inc. v. South Carolina Steel Corp., 983 F.2d 1176 (2d Cir. 1993).
The parties to a contract may choose how to share liability. For example, the contract can address what amounts each party would owe or have to pay, when such amounts would be due, and who would be liable for additional costs. Similarly, the parties may agree how to deal with damages resulting from construction delays.
In the Williams & Sons Erectors case, the contract provided the following no-damages-for-delay clause: "No claims for increased costs, charges, expenses or damages of any kind shall be made by the Contractor against the Owner for any delays or hindrances from any cause whatsoever; provided that the Owner, in the Owner's discretion, may compensate the Contractor for any said delays by extending the time for completion of the Work as specified in the Contract."
The court nevertheless found the provision unenforceable. The reasoning behind the court's holding was that other language in the contract contradicted the no-damages-for-delay clause, which made the agreement as a whole ambiguous. For example, the contract included a clause imposing delay impact costs arising from charge orders. Because it concluded that the contract was ambiguous, the court allowed both parties to present extrinsic evidence in support of their assertions.
In conclusion, no-damages-for-delay clauses appear enforceable if clearly written and consistent with the rest of the contract.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Short Contract Law Lesson
Construction projects usually involve many parties, many tasks, and consequently many different agreements. Thus, understanding basic concepts of contract law is very important. Where any of the contract elements is missing, a valid contract does not exist, and an alleged promise cannot be enforced.
The elements of a valid contract include: offer, acceptance, consideration, and meeting of the minds. Some reasons for not enforcing an agreement are lack of capacity of one or more parties to the contract, illegality, misrepresentation, duress, unconscionability, ambiguity, or mistake.
Remember, if the offer specifies a certain method of acceptance, the offeree, or the party receiving the offer, must follow the specified method in order to validly accept the offer. Also, taking an offer, adding or modifying some of its terms, and sending it back to the offeror (whoever made the original offer) turns the offer into a counter-offer. The original offeror must accept the additional or new terms for the contract to be formed.
The United States Court of Appeals for the Eleventh Circuit analyzed a contract law situation in South Cent. Steel, Inc. v. McKnight Constr. Co., 2008 Fed. Appx. 806 (2008). McKnight Construction Company (McKnight) hired Huston Steel Fabricators/Erectors (Huston Steel) to perform steel fabrication and erection work. Huston Steel then subcontracted the work to South Central Steel, Inc. (South Central).
When South Central ordered a considerable amount of steel from its suppliers and McKnight refused to pay, South Central sued for breach of contract. Evidence did show that South Central insisted on dealing directly with McKnight because of Huston Steel's financial troubles. However, the concluded a contract between McKnight and South Central did not exist.
Initially, McKnight mailed a purchase order to South Central. The purchase order had clear instructions that a valid acceptance required that South Central sign and return the purchase order, and also that McKnight then sign the purchase order too. Instead of signing the order, however, South Central sent a different letter with different terms, indicating that signature by McKnight was sufficient to accept the offer. McKnight refused South Central's counter-offer.
South Central then sued arguing it had an enforceable contract with McKnight. The court first noted that the letter South Central sent to McKnight was a counter-offer and not an acceptance because the terms were not the same that McKnight initially set forth. South Central then tried to argue that South Central later signed the purchase order McKnight had mailed. However, South Central's counter-offer terminated McKnight's offer. Even if South Central signed the purchase order later, there was no offer to accept at that point. Moreover, McKnight's purchase order specified that McKnight were to sign the purchase order upon receiving it back. McKnight never signed that purchase order.
The court therefore granted summary judgment to McKnight. South Central did not receive payment for the additional steel it ordered. South Central's loss is just one of the many reasons parties involved in ramificated construction projects should seek legal advice when entering into contracts and delegating or assuming obligations.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
A Promise by E-Mail Must be Supported by Consideration
Inland Constr. Co. v. Cameron Park II, Ltd., LLC, 640 S.E.2d 415 (2007).
A contractor sued a corporation for money owed by the corporation under the terms of their construction contract. The contractor constructed improvements to a building owed by the corporation. The agreement provided that any modifications to the project had to be done through a change order. The corporation then refused to pay for a heating, ventilation, and air conditioning unit not agreed to in the original contract. No change order referring to the change was presented in court.
The corporation alleged that an e-mail sent by an officer of the contractor that alleged the contractor would add the unit at its own cost was a valid offer, contractually binding on the contractor. The court noted that the e-mail was not accompanied by any consideration. The e-mail said: "The owner [the corporation] will have no cost associated with this change in the mechanical system." Nevertheless, because of lack of consideration, this promise was found unenforceable and the contractor was able to charge the corporation for the additional changes.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
When Does a Claim for Defective Work Arise?
Lee v. Prof’l Constr. Servs., 982 So. 2d 837 (La. Ct. App. 2008).
A Louisiana Court of Appeal barred a claim against an engineer because it was brought beyond the limitations of the statute of repose.
Plaintiffs sued the engineer for the improper design, fabrication, and construction of a radio communication antenna tower. The parties entered into the contract in 1998. Plaintiff discovered the alleged faults in 2005 and sued in 2006.
The statute limiting the timeframe within which a claimant may sue referred specifically to professional engineers. It was enacted in 2003. Plaintiffs first argued that a different statute applied to the contract in question. They claimed that the contract was one of warranty rather than one for engineering services and that a ten-year statute of repose period applied. The court disagreed. It found that the contract did not provide any guarantees by the engineer for his performance.
Next, plaintiffs argued that applying the 2003 statute to the contract retroactively would violate the
The court held the exception of preemption applied and dismissed plaintiffs’ claim.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Commercial General Liability Insurance Carrier Did Not Cover Liability for Professional Services
Wimberly Allison Tong & Goo, Inc. v. Travelers Prop. Casualty Co. of Am., 559 F. Supp. 2d 504 (D.C. N.J 2008).
This case involved an architect who was sued by several parties who either sustained injuries or lost loved ones when a parking garage colapsed. Defendant, the architect, argued that its general commercial liability (GCL) insurance carrier and excess GCL insurance carrier had an obligation to defend under the architect's policy. The insurers, however, rejected the architect's claims, noting that the exclusion for liability resulting from professional services applies.
The architect's argument in support of his position that the exclusion was inapplicable was that plaintiff's causes of action for "nuisance" and "negligence" were something "other than professional services." Also, the architect stated plaintiff did not mark the "professional malpractice" when filling out the Civil Case Information Statement.
The New Jersey District Court rejected the architect's argument and found the "professional services" exclusion applicable. The court stated that the causes of action against the architect were not based on general business services, but on the particular professional services that fall under the policy exclusion. The insurance carriers had no duty to defend.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
A Surety's Potential Liability
RLI Ins. Co. v. Indian River School Dist., 556 F. Supp. 2d 356 (D. Del. 2008).
A surety was found responsible for a contractor’s financial obligations resulting from overpayment by owner. The owner made payments in reliance on payment applications submitted by the architect that did not reflect the actual construction progress. Upon learning of the nonconformity, the owner terminated the contractor.
The surety sued the architect, construction manager (CM), and the owner for negligent misrepresentation, seeking to avoid having to pay the owner. The court concluded that the presented facts warranted a judgment in defendants’ favor. It found that the surety did not have a claim against the architect and CM because there was neither a contract with them, nor an independent basis for a tort claim. The decision was affirmed on appeal.
The surety argued that the restatement of torts allowed an action against a defendant who supplies information to plaintiff for use in business transactions with others. The CM pointed out that the provision only applied to administrative, management and related services, which the CM did not provide. Also, the CM’s contract with the owner specified that there was no contract between CM and a third party dealing with the owner. The architect made the same arguments as the CM. The court further noted that the construction of the project, rather than the provision of information, was the purpose for which the architect and the CM were hired. The information was “incidentally supplied … as part of the project.”
In addition, the court noted that the owner was obligated under contract to pay the payment applications. The owner had acted in good faith and the surety had to pay even if the contract terms relating to payments had not been followed.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Scope of Contractors' General Liability Insurance
Auto Owners Insurance Co. v. Newman, a 2008 case in the South Carolina Court of Appeals, involved a commercial general liability (CGL) insurance policy issued to a contractor. The subcontractor in the case installed stucco siding defectively, which allowed water to seep into the home and cause damage. Consequently, the owner sued the contractor for breach of contract, breach of warranty, and negligence. The court sided with the owner. The contractor’s insurance provider, Auto Owners Insurance Company, then asked a court to declare that their policy did not cover the damages assessed against the contractor. The lower court disagreed and found that the insurance company had to pay the judgment against the contractor.
The CGL policy at issue was a standard Insurance Services Office (ISO) form. The policy covered injury or damage from an occurrence - an accident or continuous exposure. Because the insurer did not define the term “accident”, the court said it was an unexpected happening that harmed a person without that person intending such harm. The court also noted that only damage to the work itself (the stucco siding) and resulting from faulty workmanship is excluded from the CGL policy. Repeated water intrusion caused damage beyond the stucco itself; it damaged the exterior sheathing and wooden framing. Thus, the court said the water intrusion was a continuing harm and met the definition of “occurrence.”
The court further explained that the “your work” exclusion did not apply. A “your work” exclusion means that the policy will not cover property damage to a contractor's own work. However, the court noted that the "your work" exclusion does not apply if the damaged work or the work out of which the damage arises was performed on the contractor's behalf by the subcontractor.
Finally, the court stated that the CGL policy covered the stucco itself because the damaged substrate could not be fixed without removing the top layer. It seems that the carriers agree with the court’s findings or else they would change the policy forms.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Impact Claims Must Be Released Expressly
The United States Court of Federal Claims allowed a contractor to recover losses suffered due to over 200 contract modifications by the defendant, a government entity called the National Institutes of Health (NIH). Bell BCI Co. v. United States, No. 03-1613C (2006). The contractor, Bell BCI Company (“
The NIH contract changes added great cost and inefficiency to the project. One such change was the decision to add a whole another floor after the construction had already begun. NIH initially directed
Following the execution of Mod 93, NIH issued other changes, but did not authorize resources to speed up performance and avoid delays in schedule. Rather, NIH started withholding payments and threatened to charge
Upon completion of the project, Bell submitted to NIH a Request for Equitable Adjustment (REA) – a request that NIH pay for the additional cost born by Bell because of project modifications. NIH rejected the request and claimed liquidated damages and back charge claims – charges to make adjustments for previous transactions. The court found that NIH did not act in good faith and dealt unfairly in negotiating with
The court started its analysis by explaining that an impact claim covers the “cost of working less efficiently than planned” – in other words the cost for more difficult and expensive work. The damages claimed needed to be proven with reasonable certainty only, even if they were an approximation. The court interpreted the contract to provide for an equitable adjustment to the contractor if multiple changes affected the total cost.
NIH also claimed accord and satisfaction as a defense. That means NIH argued that
The government’s bad behavior throughout the project probably influenced the court’s decision. In conclusion, the opinion seemingly indicates that where a contract does not mention expressly that a contractor waives or promises not to raise an impact claim, the interpretation is that the contractor has not in fact waived that right.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
