July/August Newsletters

• NEW YORK COURT DISMISSES CLAIM FORFAILURE TO STRICTLY COMPLY WITH NOTICE OF CLAIM PROVISION

• MISSOURI COURT FINDS REVISED ROOFING CONTRACT VALID DESPITE IRREGULARITIES AND AMBIGUITIES

• INSURER HAS A DUTY TO DEFEND AN INSURED CONTRACTOR AGAINST CLAIMS THAT ARE ARGUABLY COVERED UNDER A POLICY

• ARCHITECT NOT LIABLE FOR PLANS IT DID NOT DRAW .
  

 

Katz & Stone, L.L.P. Construction Newsletter
July/August 2005

NEW YORK COURT DISMISSES CLAIM FOR FAILURE TO STRICTLY COMPLY WITH NOTICE OF CLAIM PROVISION

Construction contracts often contain a notice of claim provision which requires either party to provide written notice of all claims to the other party within a specified time period.  Generally, failure to comply with a notice of claim provision is treated as a waiver of that claim.  As Kingsley Arms, Inc. v. Sano Rubin Construction Co., Inc., 16 A.D. 3d 813 (N.Y. App. Div. 2005) demonstrates, courts require that notice of claim provisions be strictly complied with prior to the commencement of an action.

In Kingsley Arms, defendant contractor entered into a subcontract with plaintiff subcontractor for site work and excavation.  The subcontract contained a notice of claim provision which stated that no claim could be asserted unless, as a condition precedent, the party asserting that claim complied with the notice of claim provision.  The notice provision further stated that written notice must be provided within 21 days after the occurrence of the event that gives rise to that claim.

In September of 2001, almost eleven months after the substantial completion date, the subcontractor sent written notice of its claim to the contractor seeking additional costs, alleging that other subcontractors who had not completed their work, precluded the subcontractor from completing its work by the agreed-upon date. The subcontractor subsequently commenced an action against the contractor for its claim.  The contractor moved for summary judgment arguing that the subcontractor had not complied with the notice of claim provision of the contract.  The trial court denied the contractor’s motion.

On appeal, the contractor contended that the subcontractor failed to comply with the notice provision by not submitting its claim within 21 days.  The subcontractor conceded that its written notice of claim did not strictly comply with the notice provision, but argued that the contractor was aware, through conversations with the subcontractor, that the subcontractor was unable to complete its work due to the failure of other subcontractors to complete their work.  The subcontractor provided no details of these conversations nor did it allege that the contractor somehow waived the written notice claim provision of their contract.

The court noted that it was clear that compliance with the notice of claim provision of the contract was a condition precedent to the subcontractor’s claim.  Therefore, the court held that subcontractor’s failure to strictly comply with the notice provision was a waiver of its claim against the contractor.  The complaint against the contractor was dismissed.

Kingsley Arms demonstrates the critical importance to contractors and subcontractors to be aware of, and comply with, notice of claim provisions in their contracts.  The result of failing to follow in detail the requirements of a notice provision can bar an otherwise valid claim

MISSOURI COURT FINDS REVISED ROOFING CONTRACT VALID DESPITE IRREGULARITIES AND AMBIGUITIES

While they may often dispute the interpretation of provisions of their contract, it is rarely unclear whether owners and contractors even have a contract to begin with.  However, as demonstrated in Eiman Brothers Roofing Sys. v. CNS Int’l Ministries, Inc., 158 S.W.3d 920 (Mo. Ct. App. 2005), courts typically look at all of the circumstances surrounding a purported contract to determine if the parties indeed have a binding agreement.

In Eiman Brothers, the owner hired the contractor to install a clay tile roof on its building.  Thereafter, the contractor realized that the plans provided by the owner underestimated the roof’s actual size, requiring additional materials and labor, and demanded a second contract.  The owner agreed to the contractor’s proposed modified contract, which increased the price of the work, but later alleged problems in the contractor’s performance and ordered the contractor to stop work.  The contractor sued for breach of contract, and was awarded the unpaid portion of the second contract, as well as its attorneys’ fees pursuant to a clause of the contract entitling the contractor to its collection costs.

On appeal, the owner argued that the second contract was invalid.  First, the owner contended that, because the owner did not sign the proposed contract in the “Acceptance of Proposal” portion thereof, and that portion purports to bind only the “undersigned” to the contract, the owner was not bound by the proposal.  However, the appellate court held that the placement of a signature is not dispositive of the signer’s intent, and the owner’s signature elsewhere on the proposal was sufficient to form a contract.  Second, the owner alleged that the contract was unenforceable for lack of consideration, because the contractor was already obligated to perform the same roofing work under the original contract.  The appellate court, however, determined that the contractor’s obligations under the two contracts were not identical.  The original contract required the contractor to roof the property according to the first set of plans, which called for a smaller roof, while the second contract required the contractor to provide the owner with additional labor and materials for the larger roof in return for the owner’s payment of additional monies.  These new obligations, the court concluded, were sufficient consideration for the second contract, and thus the contract was valid and binding.

The owner also contended that the trial court erred in granting attorneys’ fees under the second contract because the collection costs provision was incomplete and thus unenforceable.  Specifically, while the original contract stated that the owner agreed to pay all collection costs, finance charges, and reasonable attorneys’ fees incurred by the contractor in the collection of the contract amount, the second contract’s collection clause was missing the reference to the contract amount.  However, the appellate court rejected the owner’s argument because there was sufficient evidence that the parties had intended the same collection provision to be included in the second contract as was in the original contract.  The appellate court concluded that, because the second contract’s provision was ambiguous, the trial court, in seeking to ascertain the intent of the parties, properly considered the original contract’s provision and held that the parties intended that it be included in full in the second contract.

As Eiman Brothers shows, irregularities or ambiguities in a contract do not necessarily make it invalid. 

INSURER HAS A DUTY TO DEFEND AN INSURED CONTRACTOR AGAINST CLAIMS THAT ARE ARGUABLY COVERED UNDER A POLICY

An insurance company has a duty to defend its insured contractor against lawsuits for damage allegedly caused by defective construction when the damage arguably occurred within the time period in which the policy was in force.  This lesson is illustrated in the case of Westfield Ins. Co. v. Kroiss, 694 N.W.2d 102 (Minn. Ct. App. 2005).

In Westfield Ins. Co., a contractor purchased a commercial general liability (CGL) insurance policy from an insurance company.  The contractor’s insurance policy was an occurrence policy, and contained a provision requiring the insurance company to defend and indemnify the insured contractor for property damage which occurred during the time the policy was in force. 

Several homeowners brought suit against the contractor alleging that there were construction defects in their homes, which were built during the time the contractor’s CGL policy was in effect.  In these suits, the homeowners alleged that the contactor’s defective construction allowed water intrusion into their homes causing extensive damage.  The homeowners, however, did not specify when the water damage occurred.  In addition, the homeowners did not allege that the water damage occurred during the time period that the contractor’s insurance policy was in effect.       

The contractor asked the insurance company to defend the suits and the insurance company refused.  The insurance company sought a court order establishing that it did not have a duty to defend the contractor against the homeowners’ claims.  In response, the contractor sought a court order establishing that the insurance company did in fact have a duty to defend the contractor against such claims.    

The insurance company contended that because there was no indication that the water damage occurred during the time the contractor’s insurance policy was in effect, the lawsuits were not within the insurance company’s scope of coverage.  In addition, the insurance company argued that the homeowners specifically needed to allege that the water damage occurred during the time the contractor’s GGL policy was in effect and provide evidence of such. 

The contractor argued that the insurance company had a duty to defend the contractor against the homeowners’ suits.  The contractor contended the homeowners all asserted that the contractor’s defective construction occurred during the time that the contractor’s CGL policy was in effect.  In addition, the contractor pointed out that the homeowners’ suits all alleged that the contractor’s defective construction led to the water intrusion and subsequent water damage.  The contractor reasoned that since the defective construction allowed the water to penetrate into the homes and cause damage, it was possible that the damage occurred during the time period the contractor’s insurance policy was in effect.    

The court agreed with the contractor and held that the insurance company had a duty to defend the contractor against the homeowners’ claims.  The court stated that if the insurance company wished to avoid the expense of defending the contractor’s lawsuit, it had the burden of showing that the damage did not occur during the time period that the insurance policy was in effect.  Given that the homeowners alleged that the construction defects occurred while the contractor’s CGL policy was in effect, it was possible that the water damage occurred during the period of policy coverage.  The court noted that the issue of whether the water damage to the homes actually occurred during the policy coverage was a question of fact to be determined at trial.  However, the court ruled that because the homeowners’ claims were arguably covered by the CGL policy, the insurance company had a duty to defend the contractor against such claims.  

As a result of this case, insurers should be wary of refusing to defend an insured contractor in lawsuits for damage allegedly caused by the contractor’s defective construction if the damage could have arguably occurred during the time the policy was in force .

ARCHITECT NOT LIABLE FOR PLANS IT DID NOT DRAW

In Conopco, Inc. v. Allen & Hoshall, Inc., 129 Fed. Appx. 131 (6th Cir. 2005), the United States Court of Appeals for the Sixth Circuit affirmed a trial court’s decision granting summary judgment for an architectural firm on claims of breach of contract and professional negligence.  The court held that a “Conditional Additional Services” clause in the contract between the architectural firm and the owner did not require the architectural firm to ensure that another architect’s work was sound.  The Court of Appeals also held that there was no basis for concluding under Tennessee law that issuing architectural drawings, prepared by another architect, under seal creates liability for professional negligence.

Conopco, Inc. (“Slim-Fast”), hired Allen & Hoshall (“A&H”), an architectural firm, to design a warehouse including a concrete floor.  A&H submitted a design to Slim-Fast for the warehouse under the firm’s seal as required by Tennessee law.  Slim-Fast rejected A&H’s design.  Slim-Fast requested that A&H propose a concrete mix that would make the concrete floor white, but A&H declined to specify such a concrete due to its lack of expertise with concrete mixes.

In order to obtain a white concrete floor Slim-Fast retained another architectural firm to develop the desired design of the concrete floor.  The new firm submitted a floor design with several modifications to the original A&H design.  Before the floor was built, Slim-Fast requested that A&H approve the floor design with the modifications suggested by the new architectural firm.  As before, A&H declined due to a lack of expertise with the concrete mix specified to make the floor white.

After the floor was built in accordance with the new firm’s suggested modifications, A&H submitted an amendment to Slim-Fast incorporating all the changes that the new firm had recommended into A&H’s existing plans so that Slim-Fast would have a copy of “as built” drawings and specifications.  A&H had no part in the design alterations of the concrete floor, nor was the firm’s seal included in the amendment.  The new floor proved to be defective.

Slim-Fast sued A&H for breach of contract and professional negligence and the trial court granted summary judgment for A&H.  On appeal, as to the breach of contract claim, Slim-Fast argued that the contract required A&H to ensure that the new firm’s design for the floor was sound.  Slim-Fast based this argument upon a “Conditional Additional Services” clause which required A&H to notify Slim-Fast when additional architectural services were required due to events beyond A&H’s control.  The court noted that the purpose of the “Conditional Additional Services” provision is to ensure that A&H is compensated if additional services are performed, as well as to ensure that Slim-Fast is notified prior to A&H performing additional work. The clause, however, did not require A&H to make certain that the new firm’s design was sound. 

As to Slim-Fast’s claim for professional negligence, Slim-Fast argued that the amendment prepared by A&H was incorporated into the original documents in such a manner that the amendment was also under the seal that applied to A&H’s original plans.  According to Slim-Fast, because the plans were issued under A&H’s seal, any defects in the plans were professional negligence.

The court, however, disagreed with Slim-Fast that issuing plans under seal that the architect did not create liability for professional negligence.  Slim-Fast was unable to support its position that Tennessee law imposes “certain duties on architects with respect to plans issued under their seal.”  Further, the court noted that there is nothing in the language of the statute or case law to support the idea that application of a seal on plans the architect did not draw creates additional professional duty to ensure the plans are correct.  For these reasons, the court affirmed the trial court’s summary judgment for A&H on Slim-Fast’s claim of professional negligence.

Parties who rely on architectural plans should be aware that even though a specific set of drawings are incorporated into the architect’s plans, defects in those plans will not automatically be considered professional negligence, if the specific drawings are not drafted by the architect, even if they are issued under the architect’s seal.   Those relying on separately-drafted plans should be careful to ensure that the drawings have been reviewed and approved by the architect, or include language in the contract which makes the architect directly liable for defects in the other designer’s work.