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July/August 2004 Newsletters
Katz & Stone, L.L.P. Construction Newsletter
July/August 2004
NO DAMAGES FOR DELAY CLAUSE
HELD UNENFORCEABLE
WHEN THE DELAY WAS NOT CONTEMPLATED BY THE PARTIES
In Atlantic Coast
Mechanical v. R.W. Allen Beers Construction, 592 S.E.2d 115 (Ga. 2003), the
Georgia Court of Appeals reversed a trial court that, relying
in part on a no damages for delay clause, had thrown out a subcontractor’s
suit which sought compensation for increased labor costs allegedly
incurred due to the actions of the general contractor. In short,
even though the parties’ subcontract barred delay claims,
and even though the general contractor had the right to sequence
the work and modify the schedule, the Court of Appeals construed
the subcontract to only bar additional compensation for delays
and hindrances the subcontractor could have foreseen.
In May 1996, Atlantic Coast Mechanical (“subcontractor”)
was hired by Beers Construction (“general contractor”)
to perform heating, ventilation, air conditioning, and plumbing
work for a construction project called the ‘Children's
Medical Center’ in Augusta, Georgia. In April 1998, the
subcontractor submitted a request for an equitable adjustment
(REA) for increased labor costs it claimed to have incurred because
of the general contractor’s disruptions. The general contractor
denied the claim and asked the subcontractor to withdraw its
REA.
Instead, the subcontractor sued. In the suit, the subcontractor
claimed that the general contractor had forced it to perform
work in a “radically different manner, method, and sequence” than
it had originally contemplated when bidding on the project. The
subcontractor claimed that it was unable to rough-in overhead
piping and equipment with rolling scaffolds and manlifts, as
it originally planned, because the concrete work was late and
out of sequence. Further, when the work areas finally became
accessible, the subcontractor alleged that the general contractor
required it to accelerate by demanding that it double the size
of its crews and work those crews overtime. At the same time,
the general contractor allegedly hampered the subcontractor’s
progress by instructing other trades to stockpile drywall and
other materials in the subcontractor’s work areas. The
subcontractor claimed that the general contractor's actions resulted
in a significant increase in labor costs, which it sought to
recoup in its REA.
Notwithstanding clauses in the subcontract giving the general
contractor the right to set the schedule for the work and barring
the subcontractor from claiming delay damages, the Georgia Court
of Appeals found that the subcontract did not bar the subcontractor’s
claims. The court allowed the claim to proceed because it found
that these clauses: (1) applied only to delays and hindrances
the subcontractor could have foreseen when it entered into the
subcontract and (2) were silent on the subcontractor's right
to additional compensation for costs caused by the general contractor's
actions.
Atlantic Coast Mechanical illustrates the tendency of courts
to carve out exceptions to the enforceability of no damages for
delay clauses. An exception many courts rely upon to permit delay
claims, notwithstanding a no damages for delay clause, involves
any claim arising out of delays or events not contemplated by
the parties at the time of contract formation. Thus, even in
the face of a contract provision that shifts the risk of certain
delays onto the party who is delayed, that party may yet have
the ability to prosecute and recover on claims arising out of
unforeseen or uncontemplated delays.
FEDERAL COURT FINDS FAULT WITH
A CLAIM FOR DELAY
DAMAGES BASED PURELY ON MATHEMATICAL FORMULA
A recent decision by the U.S. District Court
for the Southern District of New York reminds contractors seeking
to prove damages for extended overhead that courts disfavor damage
calculations based purely on a formula, with no connection to
the costs actually incurred during the delay period. In MacQuesten
General Contracting, Inc. v. HCE, Inc., 296 F.Supp.2d 437 (S.D.N.Y.
2003), the court held that a jury award of $149,065.72 based
on such a formula was not supported by sufficient evidence and
vacated that portion of the jury verdict.
MacQuesten arose from a contract between a property owner and
MacQuesten General Contracting, Inc. (“general contractor”)
for the construction of affordable housing units. The general
contractor executed two subcontracts with a foundation subcontractor
totaling almost three million dollars for foundation work and
plank installation.
The subcontractor encountered unanticipated rock and unsuitable
soil as it began excavating for the foundation. Then, as the
project continued, the gap between the amount invoiced by the
subcontractor and the total payments it received grew to approximately
$1.3 million. When the subcontractor sent a notice of intent
to file a lien on the project, the general contractor refused
to allow the subcontractor to return to work. The parties then
sued each other.
At trial, the jury denied the general contractor’s claims
and awarded the subcontractor over $1.7 million, which included
$149,065.72 for extended overhead damages. The general contractor
moved to set aside the jury’s award, arguing that the award
for extended overhead was improper because the subcontractor
had used an impermissible formula for calculating delay damages.
The District Court agreed with the general contractor, holding
that the subcontractor’s proof of its overhead damages
was legally insufficient. According to the court, even when the
amount of damages is difficult to determine, there must be a
definite and logical connection between what a party claims and
what that party is able to prove. In MacQuesten, the subcontractor
had simply taken the amount of overhead it had projected for
the contract, changed that amount into a per diem figure based
on the length of the contract, and multiplied that figure by
the number of days the work was delayed. The calculation was
based only on unreliable price elements of the subcontractor’s
bid, and was not supported by evidence that the delays at issue
actually caused any increase in overhead. Finally, the court
noted that the subcontractor did not claim that reliable evidence
of the subcontractor’s actual costs was unavailable. Accordingly,
the court held that the general contractor was entitled to a
new trial on this element of the subcontractor’s damages.
MacQuesten shows the importance of contractors adequately documenting
and developing their claims for damages. As MacQuesten illustrates,
attempts to short-cut a properly supported claim presentation
are likely to turn potential victories into sure defeats.
SUBCONTRACTOR SUCCESSFULLY
LIMITS LIABILITY UNDER INDEMNIFICATION CLAUSE
Construction contracts often contain an indemnity
clause which obligates the contractor to indemnify any number
of entities for losses arising from a variety of events. In drafting
or reviewing such provisions, one of the most important questions
to bear in mind is whether such a clause is drafted so as to
require the contractor to indemnify other entities for damages
arising out of their own negligence. Contractors seeking to limit
their liability will agree to indemnify losses caused only by
their own acts or omissions. The case of Nusbaum
v. City of Kansas City,100 S.W.3d 101 (Mo. 2003), illustrates a successful attempt
to limit indemnification liability to such an extent.
In Nusbaum, an individual fell and sustained injuries on a walkway
owned by a theater, which was adjacent to a construction project.
The individual brought suit against the theater and the construction
project’s general contractor on the theory that a light
pole knocked down during construction had caused damage to the
walkway which, in turn, had caused the individual’s fall.
The general contractor then sued one of his subcontractors, who
had knocked down the light pole. After all parties had settled
the claims of the injured individual, the theater sought indemnification
from the general contractor, and the general contractor then
sought indemnification from the subcontractor. The trial court
ruled in favor of the theater and general contractor, ordering
the general contractor to indemnify the theater for the amount
of the theater’s settlement with the individual and a portion
of the theater’s attorneys' fees and expenses, and ordering
the subcontractor to indemnify the general contractor for the
general contractor’s indemnity obligation to the theater,
the general contractor’s settlement with the individual
and a portion of the general contractor’s attorneys' fees
and expenses. The subcontractor appealed.
On appeal, the subcontractor argued that its subcontract with
the general contractor did not require it to indemnify the general
contractor’s own negligence. The subcontract’s indemnity
clause, similar to that found in AIA Document A401, provided
that the subcontractor had to indemnify the general contractor “against
claims, damages, losses and expenses... but only to the extent caused in whole or in part by negligent acts or omissions of
the Subcontractor, the Subcontractor's Sub-subcontractors, anyone
directly or indirectly employed by them or anyone for whose acts
they may be liable, regardless of whether or not such claim,
damage, loss, or expense is caused in part by a party indemnified
hereunder.” (emphasis added). The subcontractor contended
that its liability was limited to only those claims, damages,
losses and expenses caused by the negligence of the subcontractor
or those under its supervision. The general contractor countered
that, because the indemnity provision applies regardless of whether
or not damages are caused in part by an indemnified party, the
subcontractor was also obligated to indemnify the general contractor
for damages caused by the general contractor’s own negligence.
Finding in favor of the subcontractor, the appellate court held
that the trial court had read the subcontractor’s obligations
under the indemnity clause too broadly. Relying on decisions
of courts from other jurisdictions interpreting virtually identical
AIA indemnification provisions, the court concluded that the
phrase “to the extent” limits an indemnitor’s
liability for damages to the indemnitor’s percentage of
fault for the injuries giving rise to the damages. The court
thus concluded that the subcontractor was only required by the
AIA indemnity clause to indemnify the general contractor for
that portion of the general contractor’s losses arising
from the subcontractor’s negligence, and to hold otherwise
would make meaningless the subcontract’s express limits
on the subcontractor’s duty to indemnify. Because the general
contractor conceded that it was due no amounts for its settlement
with the plaintiff if the indemnity provision did not require
the subcontractor to indemnify the general contractor’s
own negligence, the court held that the subcontractor did not
have to pay for the general contractor’s settlement. The
court then remanded the case for determination of whether the
theater’s settlement with the plaintiff included any monies
paid to settle negligence claims attributable to the subcontractor.
If so, the subcontractor’s obligation to indemnify the
general contractor for the theater’s settlement would only
extend to those monies.
Contractors who cannot avoid indemnification obligations in their
agreements are encouraged to expressly limit their obligation
to only those losses arising from their own negligence. Caselaw
such as Nusbaum gives contractors hope that, with such a provision
in place, they will only be held liable to the extent of their
comparative fault.
FEDERAL COURT FURTHER DEFINES
WHEN CLAIMS FOR DESIGN DEFECTS MUST BE BROUGHT UNDER VIRGINIA
LAW
Under Virginia law, a plaintiff is permitted
five (5) years to enforce a design defect claim based upon a
written contract, commencing at the time the defect or condition
causing the breach occurs, as opposed to the time when it is
discovered. Previous court decisions have established that a
cause of action for defective design in Virginia occurs, or commences,
when the allegedly defective plans were approved or accepted
by the plaintiff. The recent decision of a federal court in Lone
Mountain Processing, Inc. v. Bowser-Morner, Inc., 2004 U.S. App.
Lexis 6806 (4th Cir. 2004), affirmed this principle.
In Lone Mountain, a coal operation plant entered into a contract
on November 5, 1991 with a design firm for the design of a coal
slurry impoundment structure. The main function of the plant
was to clean coal in preparation for shipment. After a lengthy
period of regulatory review during the permitting process, the
design firm’s design of the structure was approved on March
20, 1995. Consequently, on March 24, 1995, the design firm issued
a final payment order to the coal operation plant. Under the
contract between the parties, “upon acceptance and approval
of the work,” the plant was to retain (10%) and forward
the remainder of payment within fifteen days of approval and
acceptance. On April 25, 1995, the plant paid the final payment
order without exercising any right of retainage.
On June 5, 1996, the plant filled the impoundment designed by
the design firm with coal slurry. During this operation a pipe
collapsed and contaminated water escaped. Two months later, contaminated
water again escaped from the slurry impoundment into an abandoned
coal mine. The plant was ordered to suspend operation until repairs
were made. After repairs were performed, the coal operation plant
restarted its operations. Later that year, however, a massive
leak in the impoundment allowed 3,000 gallons of contaminated
water per minute to flow into a creek that fed into the Powell
River, killing an estimated 11,000 fish. As a result of the release
of the contaminated water into the Powell River, which had been
designated by the government as a critical habitat area, the
plant was fined $85,000 and ordered to pay restitution in the
amount of $1,510,000.
On May 26, 2000, the plant sued the design firm in federal district
court for breach of contract, claiming that it breached obligations
under the contract by providing defective design services. The
firm asserted Virginia’s five-year statute of limitations
on design defect claims as an affirmative defense and moved to
dismiss the complaint. The district court agreed with the firm
and dismissed the case, finding that the plant had missed the
deadline to sue by a month.
On appeal, the Court of Appeals for the Fourth Circuit affirmed
the district court’s ruling. The Court of Appeals held
that the contractual design defect claim accrued upon payment
for the design by the owner because such payment constituted “approval
and acceptance” of the design. According to the firm’s
contract with the plant, “upon approval and acceptance
of the work, the [plant] shall retain ten percent (10%) and forward
payment of the balance within fifteen (15) days thereof.” The
design firm issued its final payment order on March 24, 1995.
In reply, the plant tendered full payment on April 25, 1995,
thereby indicating approval and acceptance of the work. Accordingly,
under applicable Virginia law, the plant’s defective design
claims arose on April 25, 1995 and the window to bring suit closed
on April 25, 2000.
Construction professionals should be aware of the limitations
on suits for design defects in Virginia. Because the time to
sue commences upon acceptance of plans, rather than upon discovery
of the defect, a potential plaintiff may have very little time
to bring suit once a latent defect is realized
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