Source: Beazley, A&E Reporter, Volume 7, Issue 1 – January 2012
By: Colleen M. Palmer, Esq.
Happy New Year from Beazley Group! As we begin the new year, we take this opportunity to highlight some important case law of 2011 affecting the design and construction industry.
Duty of Care:
Lack of median barrier creates legal obstacles
Many jurisdictions addressed whether design professionals had a duty of care to third parties and several courts issued positive decisions for design professionals. The Supreme Court of Illinois delivered a favorable ruling when it reversed the decision by the Appellate Court of Illinois regarding the interpretation of the standard of care language contained in design professionals’ agreements with their client. Thompson v. Gordon, et al., 241 Ill.2d 428, 948 N.E.2d 39 (2011). In this case, the plaintiff sued the engineers who designed a bridge and traffic interchange in the area where the plaintiff’s husband and daughter were killed in a car accident. The plaintiff alleged the engineers negligently designed the bridge deck and, specifically, should have considered designing a median barrier that would have prevented the accident.
The engineers’ professional services agreement included scope of services language requiring the engineers to provide design plans for “deck replacement” of the existing bridge and defined the standard of care as “the degree of skill and diligence normally employed by professional engineers or consultants performing the same or similar services.” The Supreme Court noted that the scope of services explicitly required the engineers to provide “improvements” with respect to various other aspects of the project, while the contract called for the “replacement” of the bridge deck. The Supreme Court presumed the parties used the words “improvements” and “replacement” purposefully and, therefore, concluded the engineers were not required to provide an improved bridge deck. (See, the April 2011 edition of the Beazley A&E Reporter, Volume 6, Issue 2 for a more detailed discussion of the decision).
Potential chemical contamination
In another good outcome, the Superior Court of Pennsylvania held that an engineering firm had no duty to inform residents who lived near a beryllium plant that the plant was emitting harmful beryllium particulates. Reeser v. NGK North American, Inc., 14 A.3d 896 (Super. Ct. Pa. 2011). The engineer was retained by the plant owners to conduct testing, which included measuring the amount of beryllium particulate discharged into the air. The engineer’s tests showed that the beryllium emissions significantly exceeded the allowable limit set by the EPA. The engineer reported its results to the owner, but did not report to any governmental agency or the residents living nearby. The plaintiff lived less than 6 miles away from the plant for over fifty years and sued the engineer after she developed an untreatable lung disorder caused by exposure to beryllium.
The plaintiff argued that the engineer knew that the purpose of its testing was to verify compliance with regulatory emission standards designed to protect public health, and that the engineer should have realized it had an obligation to protect the community. The Court rejected the plaintiff’s argument and held that the law did not impose a duty on the engineer because the engineer did not undertake a duty to protect the community either by contract or by affirmatively assuming responsibility for the safety of the community. Further, there was no contention that the engineer failed to perform its contractual duty of testing and reporting the results to the plant owner. The Court also opined that requiring an independent consultant to report its findings to the public when there is a need for remedial relief would inhibit owners from hiring qualified, independent consultants to learn whether a dangerous condition exists which would ultimately impede discovery and corrective action.
Architect exonerated in balcony collapse
The Court of Appeals of Texas also issued a victory for design professionals in Black + Vernooy Architects v. Smith, 346 S.W.3d 877 (Tex. App. 2011). In this case, guests of a homeowner filed a negligence action against the architects who designed the home and provided “contract administration services” after the plaintiffs were severely injured when the second-floor balcony collapsed while they were standing on it. A jury attributed 10% of the damages (which equated to approximately $400,000) to the architects and found the general contractor 70% liable and the framing subcontractor 20% liable.
On appeal, the Court addressed whether the architects’ contractual duty to the homeowners extended as a common law duty to the plaintiffs as the homeowners’ guests. The Court stressed that there was no allegation that the architects negligently designed the balcony or that the architects created the defects in the balcony. The Court examined the architects’ contract (which was based on industry standard AIA agreements) and concluded that the language outlining the architects’ construction phase duties were for the homeowner’s benefit, not any third party. The agreement also included standard AIA language disclaiming any third party beneficiaries. Further, the architects’ contract explicitly disclaimed responsibility for construction means and methods, while the general contractor’s agreement included a warranty that the work would be free from defects and would conform to the
requirements of the Contract Documents. Finally, there was no evidence that the architects exercised actual control over the construction of the balcony or that the architects observed the defects during any of its site visits. Viewing the factors as a whole, the Court ultimately refused to impose a common law duty on the architects in favor of the third parties under the circumstances in this case.
Sewage plant accident dredges up serious issues
In a tragic accident at a wastewater treatment plant resulting in one worker’s death and severe injury to two others, the surviving workers sued the engineering firm hired by the city as an engineering consultant for a 10-year improvement project to upgrade the sewage plant. Michaels, 171 Wash.2d 587, 257 P.3d 532 (2011). The engineer’s scope of services included the design and management of the upgrade and redesign of the recirculation and heating systems for digesters which hold raw solids in an anaerobic process at 100 degrees Fahrenheit until they can be used as commercial fertilizer.
The digester tanks were not operating properly so the engineer made changes redirecting the flow of the waste sludge, but the plant workers were unaware of the effects of the changes. On the day of the accident, the workers noticed problems with the sludge flow and attempted to fix the issues. During their work, one of the digesters overflowed and collapsed causing one worker to fatally fall into the sewage sludge. The other two workers suffered significant broken bones and knee and back injuries.
The city of Spokane was immune under the Industrial Insurance Act, so the issue at trial was whether, and if so to what extent, the engineer was negligent. After a bench trial, the judge ruled for the plaintiffs and the Court of Appeals subsequently certified the case to the Supreme Court of Washington.
The Court began by reviewing that the plaintiffs’ negligence suit required them to “establish the existence of a duty, a breach thereof, a resulting injury, and proximate causation between the breach and the resulting injury.” The Court held that the plaintiffs satisfied all the required elements of negligence and found: 1. design professionals have a duty of care to “exercise the degree of skill, care, and learning possessed by members of their profession in the community” and that “the duty flowed, at the least, to those working on the property at the time the designs were being implemented”; 2. the engineer’s failure to perform an analysis of the impact of its changes and its failure to communicate to the workers the effects of the changes constituted a failure to exercise the generally accepted standard of care; 3. the engineer’s breach of duty set in motion events that were one of the causes of the accident and the causes of the plaintiffs’ injuries, and but for that breach of duty, the accident would not have occurred; and 4. the evidence supported the trial judge’s conclusion that there was no independent intervening cause that superseded the engineer’s negligence.
Fee Claim:
Beazley has long emphasized the importance of negotiating and executing professional services agreements prior to providing services, in part to ensure the parties’ obligations regarding payment are sufficiently detailed and defined.
Lack of agreement leads to legal gymnastics
Illustrating the dangers of providing services without an executed agreement, the District Court of Ohio dismissed an architect’s claim for $44,000 in fees for services, finding that the parties never executed a professional services agreement. Integrated Architecture v. New Heights Gymnastics, 2011 WL 1769006 (N.D. Ohio May 9, 2011). In this case, a gymnastics and dance school selected the architect for an expansion of its facility. The architect sent a proposed contract and request for a retainer, but the owner neither executed the contract nor paid the retainer. Nevertheless, the architect prepared schematic design drawings and later delivered them to the owner. In addition, the architect knew that the company was trying to secure financing for the project and would not execute the agreement until financing was obtained. The owner was ultimately unsuccessful securing the financing and told the architect that it would not pursue the project. At that point, the architect filed a breach of contract claim demanding payment of $44,000 in fees for services rendered.
The owner argued that it never executed a written contract with the architect and cited Ohio Administrative Code § 4703-3-09 which requires an architect to not only use a written contract when providing services, but to execute the contract prior to beginning work on any project. The architect contended that the Code was not a defense to its breach of contract claim, but the Court rejected the argument and dismissed the claim since there was no dispute that the company did not execute the agreement and the evidence indicated the company told the architect it would not execute the agreement until it had secured financing.
Breach of Implied Warranty:
It’s all about the view
In a disappointing decision, the Court of Appeals of Arizona held that a general contractor could maintain a claim for breach of implied warranty against an architect with whom the contractor had no written contract. North Peak Construction, LLC v. Architecture Plus, Ltd., 227 Ariz. 165, 254 P.3d 404 (Ct. App. Ariz. 2011). In this case, the principal of the contractor (North Peak) owned a premium parcel of land in scenic Scottsdale, Arizona and retained the architect to design a custom home specifically oriented to view the city lights. The principal then sold the lot to another owner and the new owner retained the architect to provide additional design services and North Peak to build the home.
It was discovered during construction that the architect’s plans positioned the home so that it faced a water tank instead of the city lights. As a result, North Peak demolished the home and allegedly spent $165,000 to rebuild it. Thereafter, North Peak sued the architect, claiming the architect breached an implied warranty by providing deficient and substandard workmanship in designing and positioning the home facing the water tank instead of the city lights. The lower court dismissed the breach of implied warranty claim and North Peak appealed.
On appeal, the Court looked to Donnelly Constr. Co. v. Oberg/Hunt/Gilleland, 139 Ariz. 184, 677 P.2d 1292 (1984), wherein the Arizona Supreme Court held that a claim for breach of implied warranty may be brought against a design professional even in the absence of a contractual relationship since the design professional makes an implied warranty that it has exercised her skills with care and diligence and in a reasonable, non-negligent manner. The Court of Appeals acknowledged that there was no contract between North Peak and the architect, but found the facts analogous to the Donnelly case and held that the contractor did not need a contract with the architect to bring its claim for breach of implied warranty.
This decision limits the application of the economic loss doctrine (ELD) and also conflicts with the generally held concept that although project owners give an implied warranty to the contractor that if the plans and specifications are complied with, the project will be adequate and the contractor will not be responsible for the consequences of defects in the plans and specifications, design professionals do not make any such implied warranty. The ELD stands for the general proposition that absent a contract between the parties, or an injury to the plaintiff’s person or property, a plaintiff cannot recover purely economic (monetary) damages under a tort theory of recovery. Under the ELD, the contractor would be precluded for seeking its damages from the architect. By allowing the contractor to pursue its claim, the Court broadened the architect’s exposure and weakened the protections of the ELD in Arizona.
Indemnity:
A $7 million wrongful death action
California continues to issue important decisions regarding contractual indemnity obligations. Searles Valley Mineral Operations, Inc. v. Ralph M. Parson Service Company, 191 Cal. App.4th 1394 (Cal. 2011). The defendant (Parsons) was retained by the Kerr-McGee Chemical Corporation (KM) to design and construct a soda ash processing plant. The contract included a contractual indemnity and defense obligation whereby Parsons agreed to “defend, indemnify and save [KM], its subsidiaries, and their officers and employees, harmless from and against any and all claims, demands, causes of action and liabilities for loss of use or damage to property… or for bodily injury or death arising out of [Parsons’] (or its subcontractor’s) negligence (including, as respect bodily injury, personal injury or death, the contributory negligence of [KM]) in connection with any work which [Parsons] (or its subcontractors) shall perform pursuant to this Agreement or any operations or activities of [Parsons] (or its subcontractors), in connection therewith.” The plaintiff (Searles) bought the plant from KM and under the purchase agreement, KM assigned to Searles its rights, including KM’s indemnity rights against Parsons pursuant to the contract. Searles also agreed to assume an indemnity obligation to KM for any accidents or injuries resulting in KM being sued.
Thereafter, one of Searles’ employees was killed while working at the plant and the heirs filed a wrongful death action against KM, Parsons, and Parsons’ subcontractor. KM tendered its defense to Parsons and Searles, but only Searles accepted the tender and spent over $800,000 in attorney fees defending KM. A jury awarded the heirs almost $7 million in damages. Notably, the jury assigned no fault to KM or Parsons, but found Parsons’ subcontractor 25% at fault and Searles 75% at fault. Searles filed a lawsuit against Parsons for reimbursement of the defense costs it incurred in defending KM.
The Court of Appeals had to decide whether the fact that Searles paid KM’s defense costs precluded Searles from recovering those costs, as assignee of KM’s indemnity rights, when KM did not actually incur any out-of-pocket losses. The Court found that KM’s right to a defense and indemnification were transferred to Searles because of the assignment of the indemnity rights to Searles when Searles purchased the plant. The Court rejected Parsons’ contention that Parsons did not have to pay under the indemnity provision because KM did not actually incur any costs since Searles paid for KM’s defense. Instead, the Court reasoned that “the fact that Searles paid KM’s defense costs, after Parsons refused to do so, did not absolve Parsons of its obligation to pay for KM’s defense costs simply because KM did not literally pay the fees.”
This case highlights the importance of carefully negotiating contractual indemnity language, including an explicit disclaimer of the duty to defend in agreements governed by California law given the significant ruling by the California Supreme Court in Crawford v. Weather Shield Mfg., Inc., 187 P.3d 424, 44 Cal.4th 541 (2008) (an indemnity provision in a contract between a sub-contractor and developer-builder obligated the subcontractor to defend the developer-builder in lawsuits alleging construction defects arising from the subcontractor’s negligence even though 1. a jury ultimately found that the subcontractor was not negligent, and 2. the provision did not require the subcontractor to indemnify the developer-builder unless the subcontractor was negligent). (See, the October 2010 edition of the Beazley A&E Reporter, Volume 5, Issue 4 for a more detailed discussion of the progression of California case law regarding contractual indemnity provisions).