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Arizona Court Enforces Limitation of Damages Provision in Engineering Agreement
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1800 Ocotillo, LLC v. WLB Group, Inc.
2008 Ariz. App. LEXIS 9 (Jan. 29, 2008)
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The Court of Appeals of Arizona held that a state statute prohibiting design professionals for contracting for indemnity for their sole negligence does not as matter of law prohibit the use of limitation of damages provisions in professional service contracts.
In 1998, a real estate developer, 1800 Ocotillo, undertook the development of a townhouse project in Phoenix that bordered the Arizona Canal. Developer hired an engineering-architectural firm, The WLB Group, to perform surveying, engineering and landscape architecture services on the project. Developer had its design-build contractor sign the contract with the engineering-architectural firm, which included a limitation of damages provision limiting its exposure to the amount of its fees. While the parties never specifically discussed this provision, the entire contract was incorporated into a supplemental contract between the Developer and the engineering architectural firm approximately two years later.
The engineering-architectural firm improperly performed a survey by failing to accurately identify existing right-of-ways. Thereafter, the firm prepared improvement drawings based on the erroneous survey. The ultimate impact was that the City of Phoenix refused to issue construction permits and required a redesigned. Developer sued engineering-architectural firm for breach of contract and professional negligence. The engineering-architectural firm counterclaimed alleging unpaid fees and sought a declaratory judgment regarding the enforceability of the contract’s limitation of damages provisions.
The trial court trial, on motion for summary judgment, declared the limitation of liability provision enforceable, capping damages at the fees actually paid. Developer appealed, arguing that these types of provisions in professional service contracts are void as a matter of law against Arizona public policy. In support this argument, Developer relied upon Arizona statutes rendering shareholders of professional corporations personally and fully liable for negligence while rendering professional services and prohibiting professionals from contracting for indemnity against their sole negligence.
On appeal, the Court held that these statutes did not, as a matter of law, bar the use of limitation of damages provisions in professional service contracts, while noting a split of authority decisions in other jurisdictions on the implication of anti-indemnity statutes on the enforceability of such provisions. However, the Court did agree with the Developer that under an Arizona statute requiring the enforceability of assumption of risk provisions to be submitted to the jury as a question of fact, the matter would have to be remanded to the trial court for resolution by a jury.
Note: In 1800 Ocotillo, LLC v. WLB Group, Inc., 196 P.3d 222, 2008 Ariz. LEXIS 203 (Ariz. 2008), the Arizona Supreme Court affirmed the ruling that the limitation of damages provision was enforceable, but disagreed that it was subject to the statute pertaining to assumption of risk which would have further required the issue of its enforceability to be submitted to the jury as a question of fact.
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Federal Claims Court Finds Contractor Entitled to Equitable Adjustment Based on Corps’ Defective Specifications and Misrepresentation
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Metric Construction Co., Inc. v. United States
2008 U.S.Claims LEXIS 5 (Fed. Cl., Jan. 7, 2008)
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| Metric Construction was awarded the contract to construct a warehouse for the United States Army Corps of Engineers at an Air Force base in Utah. After the roof developed serious leaks, the Corps required Metric to replace the roof. Metric then submitted a request for equitable adjustment in the amount of $2,173,091.85 for costs incurred in repairing water damage caused by the leaks, replacing damaged property in the warehouse, and installing a new roof, under the theory that the Corps’ design specifications for the structural steel underlying the roof were defective, and that defective specifications and the Corps’ communications with Metric regarding the roof installation were misrepresentations on which Metric relied to its detriment.
It was undisputed that the roof of the warehouse was to meet a performance specification provided by the Corps, which required Metric to select the appropriate means and assume the corresponding responsibility for its selection. At trial it was confirmed that the structural steel framework to which the roofing system was attached, however, was a design specification, over which Metric had no discretion. For this reason, the Corps had certain responsibilities for the design of the structural steel framework.
The roofing system specified by the Corps was a standing seam metal roof (SSMR), which consists of long thin sections of flat metal roofing material joined by raised seams. Because sheet metal expands and contracts with changes in temperature, the system must accommodate this movement, and “floating” clips are utilized to attach the roof to the joists for this purpose. If the clips do not permit free movement, the panels will grind against each other, causing damage likely to lead to leaks. Here, rather than a continuous 200 ft. panel, four 50 ft. panel sections were used, joined by “endlaps,” to make the 200 ft. run from ridge to eave.
During construction, Metric noticed that there appeared to be excessive camber in the joist girders, causing a “roller coaster” effect from ridge to eave, causing concern that the roof plane would not lay flat as necessary for the roofing system enough once all dead loads were applied. Metric alerted the Corps to the issue and submitted an RFI stating that the camber of the joist girders caused an uneven top surface, raising concern that the roof panels may be distorted beyond tolerances, and asking for guidance from the Corps before the roof was installed. The Corps responded by saying that if the joist girders had been fabricated in accordance with the applicable specification, that they should be at the recommended tolerance level and that where tolerances are exceeded, shims under the fasteners may be required.
At trial, it was undisputed that the many of the leaks were related to damage at the endlaps where sufficient movement was not accommodated by the floating clips, and Metric was able to show that the residual camber in the joist girders was the primary cause of the failure of the endlaps.
The evidence showed that the roof it selected was designed to perform satisfactorily based on the dead loads in the drawings, but that the dead loads on the Corps’ drawings were more than double the actual dead loads. As a result, when the lighter dead loads were placed on the joist girders, the joist girders did not deflect sufficiently, causing them to remain bowed upward to an excessive degree and creating a plane that was not as flat as expected. The court found that the dead loads on the Corps’ drawings were incorrect, the error was not patent, and that the joist girder manufacturer relied on the erroneous information in fabricating the joist girders. The court further found that when Metric reasonably inquired into the issue, the Corps had misrepresented the residual camber of the joist girders in its response to Metric’s RFI by stating that they would be within tolerance if manufactured in accordance with the specifications and that Metric had relied on this misrepresentation when it proceeded with the roof installation.
In assessing causation and damages, the Federal Claims Court found that 90 percent of Metric’s costs were related to endlap failure, and that 70 percent of the endlap failure were shown to have been related to the residual camber of the joist girders, for which the Corps was liable. Accordingly, Metric was entitled to an equitable adjustment of $1,323, 214.20, plus interest under 41 U.S.C.S. § 611.
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Superior Court of Rhode Island Holds Property Damage Caused By Faulty Work of Subcontractor to Property Other Than Its Own Work Is Covered By CGL Policy
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WM Hotel Group, LLC v. Pride Construction, Inc.
2008 R.I.Super.LEXIS 9 (2008)
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| WM Hotel, owner of the Hampton Inn & Suites, located in Middletown, R.I. initiated a lawsuit against Pride Construction, the general contractor for the construction of its hotel, Antcil Plumbing & Mechanical Contractors, Inc., the plumbing subcontractor that installed the hotel bathtubs and Travelers, Antcil’s insurer under a CGL policy.
Antcil installed the tubs, tested them for leaks, placed “tub protectors” in each and transferred control of them to Pride. The tubs began evidencing cracking, rust, and sagging. WM Hotel asserted that 93 of the 95 tubs were defective as manufactured and/or installed and that it was Antcil’s faulty installation that resulted in the damage to the tubs. Forensic testing and analysis indicated that a styrofoam sound deadening pad was missing from beneath the tubs, and that the omission could have contributed to deflection of the bathing surface. Travelers filed a motion for summary judgment asserting that the CGL policy issued on behalf of Antcil did not provide coverage for the damage incurred. Travelers asserted that the damages were not the result of an “occurrence” as defined in the policy and that exclusionary language in the policy precluded coverage.
Travelers argued WM Hotel’s damages did not result from an “occurrence” as defined by the policy. The policy stated that it applied to “property damage” only if it was caused by an “occurrence.” “Occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.” Travelers maintained that WM Hotel sought recovery for Antcil’s allegedly defective workmanship and that “faulty workmanship” does not constitute an “occurrence” under the policy.
WM Hotel acknowledged that the faulty workmanship of Antcil was not an “occurrence”, but contended that its claim was for “after the fact” damages covered by the CGL policy. WM Hotel stated that Antcil’s “work” was the installation of the tubs, and that the damage did not occur until three to four months after the completion of the installation and that was not directly inflicted by Antcil employees. WM Hotel asserted that “after the fact” damage to the bathtubs was the kind of fortuitous event that us covered by the CGL policy. The Court, however, noted noted the definition of “work” as expressed in the policy included material, parts or equipment furnished in connection with such work or operations. Because the bathtubs were clearly materials, parts or equipment furnished in connection with such work or operations, the bathtubs themselves must be considered part of Antcil’s “work”, so that Travelers could not be held liable for any damage to the bathtubs themselves.
WM Hotel also alleged that the negligence or improper work of Antcil caused it to suffer damage for the “cost of the reconstruction of the premises inherent in the replacement of [the] tubs.” WM Hotel sought damages for the reconstruction of the premises and replacing the tubs. The Court found that property damage sustained by WM Hotel likely included damage caused while removing and replacing the tubs, such as damage to the wall and tile work covering the flanges of the tubs. The Court held that such damage could not be considered “impaired property” within the meaning of an exclusion cited by Travelers because it did not constitute Antcil’s product or work, and therefore did not fall under the definition of either “your product” or “your work” as defined in the policy. The Court determined that the CGL policy’s exclusion did not apply to damage to other property in addition to the tubs installed by Antcil because the exclusion only applied to “that particular part of any property that must be restored, repaired, or replaced because Antcil’s work was incorrectly performed on it.”
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Minnestota Court Holds City’s Damages Limited to Amount of Bid Bond on Withdrawal of Bid
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City of Lonsdale v. NewMech Companies, Inc.
2008 Minn. App. Unpub. LEXIS 31 (Minn. App. 2008)
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| The City of Lonsdale solicited sealed bids for construction of a wastewater-treatment plant. According to the terms of the bid form, each bidder submitting a bid form:
“Propose[d] and agree[d], if [the] Bid is accepted, to enter into an Agreement with City in the form included in the Bidding Documents to perform all Work as specified or indicated in the Bidding Documents for the prices and within the times indicated in the Bid and in accordance with the other terms and conditions of the Bidding Documents.”
To be considered for the project, bidders were required to submit a completed copy of the bid form by 2:00 p.m. on the bid opening date. As security for the bid, bidders also were required to include a bond worth five percent of the submitted bid price. Bidders could withdraw without penalty a submitted bid within 24 hours after the bid opening if the bid contained a "material and substantial mistake." If awarded the contract, the bidder would be required to sign and return a number of copies of the Agreement and other documents included in the bidding packet.
NewMech (“Contractor”) submitted a bid on the project. Before doing so, Contractor solicited subcontractor bids to perform various aspects of the project. Contractor received BNR's (“Subcontractor”) bid to perform the necessary excavation work approximately 20 minutes before the bidding deadline. Contractor noticed that Subcontractor’s bid was over $ 1,000,000 lower than the competing excavation bid that Contractor had received about one and one-half hours earlier. Because the other bid specifically excluded certain work items, including a PVC pond liner, Contractor contacted Subcontractor to confirm the bid. Subcontractor assured Contractor that its bid was complete. Using Subcontractor's bid, Contractor submitted a bid form stating that it "will complete the Work . . . for the . . . lump sum price [of] $ 4,910,000" and attached a bid bond of $ 245,500.
Contractor's bid was the lowest by a margin of $ 863,600. Because City was concerned about the large difference between the two bids, City requested that Contractor “go back and sit down with [Subcontractor]" and notify City of Contractor’s decision by 2:00 p.m. the following day. By the end of the meeting the next morning, it was clear that Subcontractor’s bid failed to include several items. Rather than withdraw however, Contractor and Subcontractor "assumed they would be able to resolve their differences and proceed with the project." Contractor therefore, informed City that, although Contractor had "discovered some discrepancies," it "would proceed with [its] bid."
Subcontractor subsequently attempted to revise its bid by adding approximately $730,000 for items that it failed to include in its initial bid. Contractor rejected Subcontractors revised bids and informed Subcontractor that it expected it to honor its initial bid.
On August 28th, City passed a resolution awarding Contractor the project. Subcontractor refused to honor its initial bid. Contractor then sent a letter to City informing it that "a material error in the bidding process," combined with "Subcontractor's unlawful withdrawal of its bid," significantly affected Contractor’s "ability to enter into a contract [for the project]." Contractor proposed two alternatives: (1) rebid the excavation subcontract and renegotiate the overall price for the project, or (2) permit Contractor to withdraw based on mutual mistake in the bidding process. City rejected Contractor's alternative proposals. Contractor subsequently informed City that it was withdrawing its bid.
City awarded the project to the next-lowest bidder, and then sued Contractor for breach of contract, seeking both $ 863,600, the difference between Contractor's bid and the next-lowest, and $ 245,500 as forfeiture of the bid bond. Contractor, in turn, impleaded Subcontractor as a third-party defendant.
The district court found that Contractor was liable only for the $ 245,500 owed under the bid bond, which was the maximum amount of liability under the bidding contract, and that Subcontractor was responsible for 50 percent of Contractor's liability, due to its negligence in submitting an incomplete bid.
Holding that Contractor breached only a “bidding contract” with City, as opposed to a “construction contract,” the Court of Appeals affirmed the district court’s decision to limit City’s damages to the amount recoverable under the bid bond - $245,500.
The Court of Appeals noted that had Contractor performed the ‘bidding contract,” the parties would have executed the construction-contract documents and City would have been required to return the bid bond. Contractor had no construction-contract obligations unless it executed the construction agreement. Therefore, Contractor incurred no liability for failure to perform at its quoted price. The bidding contract provided City with both security that Contractor would ultimately execute the construction agreement and a way to recover some of the additional costs in obtaining a substitute if Contractor did not do so.
Noting that neither "the bidding and award documents" nor "statutory or case law" directly addressed whether "recovery for a bidding breach may exceed the amount of the bid bond," the Court of Appeals held that City did not have a common-law right to expectation damages on a contract that was never formed and that "the more reasonable interpretation" of the parties' intent was to limit recovery to the amount of the bid bond. Therefore, the Court of Appeals affirmed the district court’s decision.
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U.S. District Court in Maryland Holds Contractor Barred from Recovering Consequential and Incidental Damages for Breach of Contract from Manufacturer of Steel Formwork Where Exclusive Remedy of Repair and Replacement Did Not Fail of Its Essential Purpose, But Denies Summary Judgment as to Some Negligence and Indemnity Claims
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Potomac Constructors, LLC v. EFCO Corp.
2008 U.S. Dist. LEXIS 1602 (D. Md, Jan. 9, 2008)
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| Plaintiff general contractor and Defendant manufacturer entered into a purchase order agreement under which Defendant would engineer and supply steel formwork used to cast concrete segments to be incorporated in the support structure for a bridge. The agreement contained a clause, which specifically limited the Defendant’s liability to the repair or replacement of any defective work, explicitly disallowing incidental, direct or consequential damages.
The Plaintiff sued the Defendant for damages for breach of contract, costs caused by the Defendant’s negligent design, and indemnification costs from third parties’claims. The Defendant moved for Partial Summary Judgment to exclude damages which precluded by the Agreement.
The Court first addressed the issue of damages for breach of contract. Under the Maryland Commercial Code, parties are free to limit damages in the event of breach provided they are not unconscionable. Here, the parties specifically agreed that the Defendant’s potential liability was limited to the damages enumerated in the contract. Further, the Plaintiff was barred from recovering incidental and consequential damages, because these damages were explicitly excluded in the Agreement.
Next, the Court determined whether the exclusive remedy clause was enforceable. Under the Maryland Commercial Code, an exclusive remedy for breach of contract is unenforceable only if “circumstances cause the remedy to fail of its essential purpose.” This ensures that at least a minimum adequate remedy is available to a non-breaching party. Here, where the exclusive remedy under the Agreement was the repair and replacement of defective work and the goods were of complicated design, the Defendant had to use its best efforts to keep the goods in repair and working condition. The Court held that the exclusive remedy did not fail of its essential purpose because the Plaintiff did not establish bad faith or inability to repair, and the Defendant, in fact, repaired the formwork. It also noted that even if repair were not possible, if the goods were experimental in character or of complicated design, good faith efforts on the part of the seller to keep the goods in repair and working condition would satisfy the obligation. Accordingly, the Court granted Defendant’s Summary Judgment Motion with respect to the contractual damages.
The Court next determined Defendant’s claim for negligence could proceed under the economic loss doctrine. The economic loss doctrine generally bars a plaintiff from recovering in tort for purely economic losses. Under an exception to this rule, a plaintiff may nonetheless recover for the cost of the “negligently created defects that produce a substantial and unreasonable risk of death.” A plaintiff should not have to wait until substantial injury occurs before repairing defective work. The Court held that the plaintiffs claims for damages based on delayed delivery were barred by the doctrine, because it did not create a substantial likelihood of injury or death. However, the Court held that the Plaintiff could recover for the damages associated with the cost of repairing defective formwork, because an issue of fact existed regarding whether Defendant was negligent in designing the formwork and whether the defective formwork created a substantial risk of injury or death. (However, the court noted that these damages would overlap with the costs of repair and replacement allowable on a breach of contract theory.) Accordingly, the Court granted in part and denied in part Defendant’s Summary Judgment Motion with respect to the costs associated with Defendant’s negligence.
Finally, the Court held that the Defendant was by contract obligated to indemnify Plaintiff for injuries to third parties stemming from Defendant’s negligence, and denied Defendant’s Summary Judgment Motion to that extent. However, the Court held that the indemnity provision could not be used to circumvent the contractual limitation of damages so as to permit plaintiff to recover damages for contractual obligations owed to other parties arising out of the Defendant’s delays.
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U.S. District Court in New York Holds That Completing Surety Could Assert Claims Against Other Project Participants Responsible For Costs of Remediation Work Which Had to Be Addressed to Complete Its Principal’s Work
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Liberty Mutual Insurance Company v. N. Picco & Sons Contracting Co., Inc.
2008 U.S. Dist. LEXIS 4915 (S.D.N.Y. Jan. 16, 2008)
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| The United States District Court for the Southern District of New York (“SDNY”) recently had to decide whether a surety was entitled to assert subrogation rights against other project participants when the surety completed the construction work abandoned by the general contractor and performed remediation work. The SDNY determined that the surety did not voluntarily undertake the remediation work and, therefore, was entitled to assert subrogation rights.
In 2000, the Board of Education of the Bronxville Schools (the “Board”) began to renovate its schools (the “Project”). The architectural firm of Rhinebeck Architecture & Planning, P.C. (the “Architect”) was hired by the Board to perform both architectural and engineering services. The Board then hired Turner Construction Co. (“Turner”) to serve as the Owner’s Representative/Project Administrator. The Board also entered into a series of agreements with co-prime contractors for plumbing, roofing, mechanical work and electrical work (the “Co-Primes”) and one prime contractor, N. Picco & Sons (“Picco”), for general construction work. As part of its contract, Picco purchased a surety bond (the “Bond”) from Liberty Mutual (“Liberty”) pursuant to a written agreement.
During the course of the Project, the Board declared Picco in default of its contract and called upon Liberty to complete the job pursuant to the Bond. As a result, Liberty and the Board entered into a takeover agreement under which Liberty was to complete the Project and the Board was to pay the remaining Picco contract balance to Liberty. Liberty completed the work plus performed water damage remediation work, claiming that such remediation work was not within the scope of its work, but was nevertheless required to complete the Project. The Board paid Liberty only a portion of the sums due under the takeover agreement. Liberty claimed that the Board did not pay the full amount due and failed to reimburse Liberty for the remediation work.
Due to the Board’s failure to pay, Liberty sued the Board for the unpaid amount. Liberty also sued the Architect, Turner, and the Co-Primes for breach of contract and negligence in connection with the water infiltration remediation work claiming that each party failed to prevent the water infiltration. In pursuit of claims against those parties, Liberty claimed that it was subrogated to the rights of the Board as the surety. Before the SDNY were the motions to dismiss of Turner, the Architect and the Co-Primes.
The primary issue the SDNY addressed was whether Liberty, as the surety to Picco, could sue the other parties for breach of contract and negligence. The court set forth the general legal principle that a surety which responds to the default of its principal, here Picco, is entitled to sue others because it is subrogated to claims that the defaulting principal, Picco, or the obligee, the Board, might have against others for alleged wrongful conduct causing the default. The court noted that the principle is akin to the insurance context. Consequently, the court held that Liberty could pursue claims to the extent that Picco or the Board had valid claims against the Architect, Turner and the Co-Primes. To establish such claims, the court opined that Liberty would need to prove that (1) it paid the Board for its loss or fulfilled the requirements of the performance bond, and (2) it undertook payment or the work under some obligation running from Liberty to the Board or Picco. Because there was no dispute as to the remediation work performed by Liberty, the remaining issue was whether Liberty performed such work voluntarily as opposed to under a contractual obligation.
In evaluating the question of volunteerism, the court noted that if the remediation work was not part of the obligation of Liberty and it nevertheless undertook the remediation work, Liberty would not be allowed to claim rights of subrogation. The court concluded that Liberty had to undertake the remediation work in the process of completing the Project because if it had not done so, the Project would have been unsafe and uninhabitable due to the water infiltration. Therefore, because Liberty was protecting all the parties’ interests in undertaking the remediation work and avoided additional costs in the long run because of such work, the court held that Liberty was not a volunteer and was entitled to claim rights of subrogation. Notably, the court also indicated that to hold otherwise would lay the path for others in the future to ignore defects and not undertake remedial work for fear of not being reimbursed for or being able to pursue claims against others for such work.
The next issue examined by the Court was whether the Co-Primes, Turner or the Architect had obligations to prevent water infiltration and in turn, whether Liberty could maintain claims of breach of contract and/or negligence against those parties. With regard to Turner, because there was a valid arbitration agreement between Turner and the Board and as subrogee, Liberty stood in the shoes of the Board, Liberty was required to arbitrate the claims against Turner. Thus, the Court concluded that because Liberty consented to be bound by the terms of the construction agreement by way of the takeover agreement, Liberty was required to arbitrate against Turner and the claims were dismissed as against Turner in favor of arbitration.
With regard to the contract claim against the Architect, because the Architect did not invoke an applicable arbitration clause, the Court indicated that it was able to consider whether valid claims existed against it. Under its agreement with the Board, the Architect was required to “endeavor to guard the Owner against defects and deficiencies in the Work.” Liberty claimed that the Architect failed to take steps beyond simple letter writing to guard against defects and to report problems to the Board. The Architect argued that it did not have control of the acts or omissions of the other Project participants and had fulfilled its obligations by sending multiple letters regarding the possibility of water infiltration. The Court concluded that providing notification to Turner of the issues, especially in light of the clause removing the Architect from responsibility for construction means and methods, was sufficient to satisfy the Architect’s duties to “observe and report” problems to the Board and to “endeavor to guard the Owner against defects and deficiencies in the Work.” Consequently, summary judgment was granted and the breach of contract claim against the Architect was dismissed.
With regard to the negligence claim against the Architect, the court noted that an owner may pursue claims in contract or tort against an architect with whom it has a contract so long as the owner alleges a legal duty separate from that required in the contract. The court concluded that Liberty established a prima facie claim for tort because it alleged that the Architect had failed to fulfill its common law duty to exercise reasonable case and skill in performing the contract. Thus, the negligence claim was not dismissed.
With regard to the claims against the Co-Primes, the court found that Liberty did not allege that the Co-Primes improperly completed their work required to maintain a breach of contract nor allege a breach of a duty separate from contractual obligations necessary to maintain a negligence claim. The court opined that to allow Liberty to maintain a claim against the Co-Primes for failing to prevent infiltration would create precedent that contractors could become liable for something over which they had no control. The Court declined to set such a precedent and dismissed all claims against the Co-Primes.
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U.S. District Court in New York Holds Economic Loss Rule Does Not Bar Recovery in Cases Involving Violation of Professional Duty
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Crown Castle USA, Inc., et al. v. Fred A. Nudd Corporation
2008 U.S. Dist. LEXIS 3416 (W.D. N.Y. Jan. 16, 2008)
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| The United States District Court for the Western District of New York held that the “economic loss doctrine” did not bar a professional negligence claim against defendant where plaintiff’s claims sought tort liability for defendant’s failure to exercise reasonable care in the design of a prefabricated product.
Fred A. Nudd Corporation (“Nudd”) fabricates steel products, including cellular phone towers (“monopoles”). On January 12, 2001, Crown and Nudd executed a construction services agreement (the “CSA”) where Nudd was to design, fabricate and/or construct twelve monopoles for Crown. In November 2003, a monopole designed by Nudd for another company collapsed. When Crown became aware of the collapse, it became concerned about the monopoles that Nudd designed and manufactured under the CSA. Crown alleges that it began an investigation which revealed that the monopole shafts, base plates, anchor rods and foundations for each of the monopoles were defective, overstressed and did not have the capacity to support the loads for which they were designed. Crown filed a complaint alleging that the monopoles which Nudd designed, fabricated and constructed contained design and construction defects. In its complaint, Crown’s only claim for damages is the costs to repair the allegedly defective monopoles.
Nudd filed a summary judgment motion contending that Crown’s professional negligence claims should be dismissed. Nudd asserts that the claims are barred by New York’s recognition of the “economic loss rule” because Crown alleges only economic damages as a result of the claims of professional negligence. Under the “economic loss rule”, a negligence action seeking recovery for economic loss will not lie. The rule provides the fundamental boundary between contract and tort liability. Accordingly, the Court noted that if the doctrine was applicable, Crown’s claim for negligence/malpractice would be barred. The Court, citing Second Circuit precedent, held that the economic loss rule allows recovery in the limited class of cases involving the violation of a professional duty. Because Crown alleged damage stemming from the negligent provision of professional services, the Court held the professional negligence exception to the economic loss rule applied and thus Nudd might be liable in tort for failure to exercise reasonable care, irrespective of the contractual duties.
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U.S. Fourth Circuit Court of Appeals Interprets Modified Version of AIA A201 to Require Agreement By Parties to Mediate as Condition Precedent to Arbitration
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Perdue Farms, Inc. v. Design Build Contracting Corp.
2008 U.S. App. LEXIS 2861 (4th Cir. Feb. 8, 2008)
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The Fourth Circuit held that where a condition precedent to arbitration, in this case voluntary mediation, was not fulfilled, a party to a contract had no right to force arbitration of the underlying dispute.
The case arose when an owner sued its general contractor in district court to recoup additional monies due to the owner after the owner directly paid the general contractor’s subcontractors monies in excess of the contract sum. The contractor moved to dismiss the lawsuit, or stay and compel arbitration between the parties, arguing that the dispute was subject to mandatory arbitration.
The underlying contract between the parties was a modified version of the AIA Standard Form of Agreement between Owner and Contractor (A101-1997) and incorporated a modified version of the General Conditions of the Contract for Construction (AIA A201-1997). The parties’ contract eliminated a broad mandatory arbitration clause usually found at Article 4.6.1 of the General Conditions. The modified contract instead provided that a claim is subject to mediation only “if mutually agreed by the parties.” The contract then provided that “[c]laims not resolved by mediation shall be decided by arbitration.”
The District Court held that the contract eliminated a broad mandatory arbitration clause and instead conditioned arbitration on voluntary mediation. The court held that as the parties chose not to mediate, and in fact did not mediate the dispute, arbitration was never triggered. The court also concluded that although there is a federal policy favoring arbitration in the Federal Arbitration Act, that policy does not compel arbitration where the parties’ contract itself does not require arbitration.
On appeal, the Fourth Circuit affirmed the findings of the District Court. The Fourth Circuit held that where a condition precedent to arbitration is not fulfilled, a party does not have a right to arbitrate. The Court held that the clause that all “claims not resolved by mediation shall be decided by arbitration” had to be interpreted in light of the clause providing that a claim is subject to mediation “only if agreed by the parties.” The Fourth Circuit concluded that arbitration was mandatory only where the parties mutually agreed to mediate the claims, in fact did attempt to mediate the claims, and failed. The Fourth Circuit also upheld the findings of the District Court regarding the Federal Arbitration Act, holding that the FAA “does not mandate the arbitration of all [contract] claims, but merely the enforcement … of privately negotiated arbitration agreements.” The Fourth Circuit concluded that the FAA cannot change the terms of a contract to make the contract more susceptible to arbitration than the contract itself provides.
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