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Washington Court Holds Owner May Not Sue Subcontractor As Third Party Beneficiary Of Subcontract
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Somerset Village Townhomes Condominium Owners’ Association v. Allied Construction, Inc.
2008 Wash App. LEXIS 2178 (September 2, 2008)
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Developer, Far Northwest Development Co, LLC (“Far Northwest”) contracted with Steinvall Construction (“Steinvall”) for the construction of the Somerset Village Townhomes. The contract between Far Northwest and Steinvall stated that “[t]he Contract Documents shall not be construed to create a contractual relationship of any kind . . . between the Owner and a Subcontractor . . .” Steinvall subcontracted portions of its work. The subcontracts incorporated the general conditions of the Far Northwest –Steinvall contract and also imposed certain obligations on the subcontractors concerning Far Northwest, including, inter alia, obtaining insurance to protect its interests and indemnifying Far Northwest for certain claims.
After completion of construction, the Somerset Village Townhomes Condominium Association (“the Association”) filed suit against Far Northwest based on certain construction defects. Far Northwest filed suit against the subcontractors, contending that it was a third-party beneficiary of the subcontracts between Steinvall and the subcontractors. On summary judgment, the trial court dismissed Far Northwest’s claims against the subcontractors. The Association, as assignee of Far Northwest’s contract rights, appealed contending that Far Northwest was an intended third party beneficiary of the subcontracts between Steinvall and the subcontractors.
The Court noted that, in the construction context, an owner is not an intended third party beneficiary of a contract between a general contractor and a subcontractor, unless the intent to confer such third party rights appears in the contract documents. In the absence of words showing a clearly contrary intent, the subcontractors’ promises are intended to be for the benefit of the general contractor, not the owner, and the owner will not be deemed an intended third party beneficiary. Here, the Court held that, although certain of the subcontract provisions reflected a desire to benefit Far Northwest, none of the provisions clearly showed an intent to confer on Far Northwest a direct right of action against the subcontractors. Moreover, any doubts about whether the parties intended to create a third party beneficiary contract were dispelled by the express disclaimer of any contractual relationship between the Owner and subcontractors.
In sum, the Court held that by incorporating the “no contractual relationship” language into their contracts, Steinvall and the subcontractors unambiguously expressed their intent that there be no third party beneficiary relationship between Far Northwest and the subcontractors. Because the contract language did not manifest an intent by Steinvall and the subcontractors to create a third party beneficiary contract, the Court held that the Association lacked standing to maintain an action against the subcontractors. |
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Wyoming Court Upholds Delay Damage Award To Contractor For Owner’s Breach Of Implied Covenant Of Good Faith And Fair Dealing Even Though The Owner Did Not Breach Contract’s Express Terms
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City of Gillette v. Hladky Construction, Inc.
2008 Wyo. LEXIS 139 (November 14, 2008)
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The Supreme Court of Wyoming upheld an award to a Contractor of more than one million dollars against an Owner for a breach of an implied covenant of good faith and fair dealing even though the Owner did not breach the contract’s express terms.
The City of Gillette (“City”) hired Hladky Construction, Inc. (“HCI”) for the remodel and expansion of City Hall. The project specifications called for the installation of precast concrete exterior panels that matched those on the existing structure. Further, there was a requirement that the plant at which the precast panels were to be manufactured be certified under the Precast/Prestressed Concrete Institute Plant Certificate Program prior to the start of their production. HCI submitted a bid that unknown to it named an precast manufacturer which had not yet received the required certification. Both the City hired architect and structural engineer were aware prior to bid acceptance that HCI’s precast manufacturer was in the process of obtaining certification, but was not yet certified. Despite knowing that HCI’s manufacturer was not certified and a contract provision requiring the architect to notify bidders of any bid objections, no City representative objected or informed HCI about its uncertified precast manufacturer.
At a meeting shortly after HCI signed its contract, HCI was informed by the architect that prior to ordering the precast panels that HCI needed to produce the certification from its manufacturer. This was beyond the limitation of the project specifications. HCI sought to persuade the City’s representatives to permit it to place the order pending certification. When this request was refused, HCI submitted two change order requests to the City to allow substitution of a certified precast manufacturer. The first was ignored and the second was denied. This resulted in a series of delays and increased costs of approximately $1.3 million dollars.
HCI filed suit alleging that the City breached the implied covenant of good faith and fair dealing both when it refused to allow HCI to order the precast panels from its original manufacturer until it was certified and also when it failed to approve the change order requests. The City argued that it was entitled to judgment as a matter of law because it could not have been in breach since the architect making the statements did not have the authority to bind the City under the Contract. The court denied the motion and the jury found in HCI’s favor.
On appeal, the Wyoming Supreme Court examined the implied covenant of good faith and fair dealing. The implied covenant requires that neither party to a commercial contract act in a manner that would injure the rights of the other to receive the benefit of the agreement. It also requires the parties to act in accordance with their agreed common purpose and each other’s justified expectations. The Court found that the City’s actions, through the architect, interfered with and hindered HCI’s performance of the contract. Further, the City concurred in the architect’s the statements refusal to allow HCI to place the order for the panels prior to certification of the manufacturer. The Court also found that the City’s failure to act on HCI’s change orders was a breach of the covenant of good faith and fair dealing. The court held that a party can be liable for a breach of the implied covenant of good faith and fair dealing for conduct which does not breach an express term of the contract.
The court also rejected arguments raised by the City pertaining to notice, “no damage for delay” and proof of damages.
Click here for full text opinion provided courtesy of LexisNEXIS. |
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United States District Court in Virginia Holds That Prime Contract Provision Concerning Accrual of Statute of Limitations “Flowed Down” to Afford Subcontractor Defense to Defective Work Claim
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Steadfast Insurance Co v. Brodie Contractors, Inc.
2008 U.S. Dist. LEXIS 88448 (October 31, 2008 W.D. Va.)
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Steadfast Insurance Co., as subrogee of Skanska USA Building Co., the general contractor, alleged claims for breach of contract and breach of warranty against Brodie Contractors, Inc., a masonry subcontractor, concerning replacement of brick veneer on the Danville Regional Medical Center. Brodie moved for summary judgment alleging that the lawsuit was barred by Virginia’s statute of limitations.
Virginia’s contract statue of limitations states that a suit for breach of a written contract claim must be brought within five years after the cause of action accrues. Brodie argued that by virtue of the prime contract’s “flow-down” provision, the prime contract’s “Commencement of Statutory Limitation Period” provision, tying accrual (at the latest) to substantial completion, governed claims for breach of the subcontract, as well,. If so, the contractor’s claim would have accrued more than five years before the filing of the lawsuit and would be time barred. The Plaintiff, on the other hand, asserted that the claim did not accrue until a later date when the owner sent a letter formally rejecting the work so that the lawsuit was timely.
The Court agreed with the Brodie and dismissed the claim as time barred under the statute of limitations. The Court held that Virginia courts recognize the flow-down relationships between prime contracts to subcontracts in the construction industry, and held that the prime contract and subcontract terms clearly effectuated a flow-down of the prime contract provision regarding accrual of the statute of limitations.
The prime contract’s “flow-down” provision stated, in pertinent part:
… Each subcontract agreement … shall allow to the Subcontractor, unless specifically provided otherwise in the subcontract agreement, the benefit of all rights, remedies and redress against the Contractor that the Contractor, by the Contract Documents, has against the Owner.
The Subcontract explicitly incorporated the Prime Contract, stating:
The Contract Documents for this Subcontract consist of this Agreement and any exhibits or attachments hereto, the Agreement between the Owner and Contractor for the above-referenced Project, all Conditions to the Agreement between the Owner and Contractor (General, Supplementary and any other Conditions)….
The Court held that the all contracting parties intended the general conditions of the prime contract to be integrated with the subcontract. The prime contract contained the following provision pertaining to accrual of the statute of limitations:
Before Substantial Completion. As to acts or failures to act occurring prior to the relevant date of substantial completion, any applicable statute of limitations shall commence to run any alleged cause of action shall be deemed to have accrued in any and all events not later than such date of substantial completion.
Because the subcontract in the did not have a conflicting provision, the accrual of statute of limitations clause from the prime contract governed the subcontract, as well, so that the claim against Brodie was time-barred.
Click here for full text opinion provided courtesy of LexisNEXIS. |
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United States District Court in New Jersey Considers Effect of Waiver of Consequential Damages and Damages Cap on Indemnification Provisions Contained in Architect’s Contract
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Atlantic City Associates LLC v. Carter & Burgess Consultants, Inc.
2008 U.S. Dist. LEXIS 93684 (D.N.J. Nov. 13, 2008)
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The United States District Court for the District of New Jersey was asked to resolve the effect of liability limiting provisions on an architect’s indemnity obligations to an owner under a professional services agreement. Determining that the consequential damages provision and the indemnification provision contained in the agreement could be harmonized, the Court held that the architect would only be liable for indemnification of direct, and not consequential, damages. The Court held, however, that a damages cap contained in the architect’s proposal, which was made a part of the contract by incorporation, could not be harmonized with the indemnity clause, so that under the contract, the indemnity provision took precedence over the damages cap.
Plaintiff Atlantic City Associates LLC (the “Owner”) is the owner/lessee of The Walk in Atlantic City, New Jersey (the “Project”). The Owner entered into two separate contacts with defendant Carter & Bergess Consultants (the “Architect”) pursuant to which the Architect was to provide design services for the Project. The contracts incorporated the Architect’s proposal by reference, but only to the extent that the terms of the proposal did not conflict with the terms of the contracts.
The Project experienced delays and, as a consequence, the parties sought delay damages against one another. An issue arose as to whether the Architect’s liability to the Owner was limited by a waiver of consequential damages contained in the contracts or a limitation of liability provision contained in the proposa,l which capped the Architect’s liability to the total compensation it received. Also at issue was the effect of an indemnification provision in which the Architect agreed to indemnify the Owner for any and all damages resulting from its negligent acts, errors or omissions.
Applying New Jersey law, the District Court first found that the indemnification provision could be harmonized with the waiver of consequential damages provision. The Court concluded that the waiver only extended to consequential damages, not direct damages. Accordingly, the indemnification provision was construed to limit the Architect’s indemnification obligation to direct damages suffered by the owner.
The Court next turned to the question of whether the Architect’s liability was capped by virtue of the limitations of liability clause in the proposal. On this issue, the Court concluded that the limitation of liability contained in the proposal conflicted with the indemnification provision of the contract. The Court reasoned that the indemnification provision required indemnification against any and all damages caused by the Architect’s negligent acts, errors or omissions while the limitations of liability capped the liability. Given the contract’s provision which provided that if there was a conflict between the proposal and the contract, the contract would govern, the Court found that the indemnification provision controlled and the Architect’s liability was not capped at the amount of compensation received by the Architect.
Click here for full text opinion provided courtesy of LexisNEXIS. |
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Vermont District Court Declines To Apply Exception To Economic Loss Rule To Contractor’s Claims Against Architect
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Hunt Construction Group, Inc. v. Brennan Beer Gorman / Architects, P.C.
2008 U.S. Dist. LEXIS 93754 (D. Vt. 2008)
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In declining to apply an exception to the economic loss rule, the Court dismissed a contractor’s negligence claims against the project architect (and other design professionals).
In 2005, Spruce Peak Realty, LLC ("Owner"), retained Plaintiff, Hunt Construction Group ("Contractor"), to construct a resort hotel in Stowe, Vermont. Owner and Contractor executed a contract setting forth their respective rights and responsibilities on the Project. Owner then contracted with an architect, mechanical, electrical and plumbing engineers, a structural engineer, and an interior designer (collectively, the “Design Professional Defendants”). Contractor was to build the Project according to the plans and specifications the Design Professional Defendants provided under contracts with Owner.
Contractor alleged the Design Professional Defendants negligently failed to provide the plans and specifications on time, submitted plans and specifications that were replete with errors and omissions, and failed to respond promptly to Contractor’s requests for information and corrected drawings. Contractor also alleged these errors and omissions constituted misrepresentations of information that the Design Professional Defendants knew Contractor needed in order to comply with its own contractual obligations with Owner. Contractor did not allege that it suffered any physical harm, such as property damage, personal injury, or loss of life. Rather, Contractor sought damages for purely economic loss due to the increased costs and delays created by the Design Professional Defendants' alleged negligence.
The Design Professional Defendants filed a Motion to Dismiss, alleging that the Economic Loss Rule barred all of Contractor’s claims. While it admitted that its Complaint sought only economic damages, Contractor argued that because Defendants were professional architects and engineers, an exception to the economic loss rule applied. Under that exception, the Vermont Supreme Court has acknowledged "there might be recovery for purely economic losses in a limited class of cases involving violation of professional duty." EBWS, LLC v. Britly Corp., 181 Vt. 513, 524, 928 A.2d 497, 507 (Vt. 2007).
In analyzing whether the limited exception applied, the Court stated that the "key" factor determining whether a claim falls within the professional services exception is the relationship between the parties. EBWS, 181 Vt. at 524-525, 928 A.2d at 508 (Vt. 2007). Vermont law requires "a special relationship between the alleged tortfeasor and the individual who sustains purely economic damages sufficient to compel the conclusion that the tortfeasor had a duty to the particular plaintiff and that the injury complained of was clearly foreseeable to the tortfeasor." Springfield Hydroelectric, 172 Vt. at 316, 779 A.2d at 71 (quoting Aikens v. Debow, 208 W. Va. 486, 541 S.E.2d 576, 589 (2000)). The Court explained that whether or not such a special relationship exists "turns on whether there is 'a duty of care independent of any contractual obligations.'" Id. at 316, 779 A.2d at 71-72 (quoting Grynberg v. Agri Tech, Inc., 10 P.3d 1267, 1269 (Colo. 2000)); accord EBWS, 181 Vt. at 524, 928 A.2d at 507-508 (2007).
The Court went on to hold that the Design Professional Defendants’ contracts with Owner established their duties of care, not any special relationship with Contractor. Accordingly, the Court granted the Design Professional Defendants’ Motion to Dismiss and dismissed Plaintiff Contractor’s claims in their entirety.
Click here for full text opinion provided courtesy of LexisNEXIS. |
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Pennsylvania Supreme Court Holds That, Absent Express Reservation Of Rights, Release Of Contractor Also Discharges Surety
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Kiski Area Sch. Dist. v. Mid-State Surety Corp.
2008 Pa. LEXIS 2260 (Dec. 17, 1988)
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Kiski Area School District (“the District”) entered into an agreement with contractor, Lanmark, for the construction and renovation of an elementary school. Mid-State Surety Corporation (“Midstate”) provided a performance bond for the project naming Lanmark as principal and the District as obligee.
The District became dissatisfied with the quality and timeliness of Lanmark’s work, declared it in default, withheld final payment and demanded that Mid-State assume responsibility for the remaining work. The District did not remit the remaining contract balance to Mid-State. Lanmark filed suit against the District seeking payment of the contract balance (the “Lanmark Matter”). The District counterclaimed and joined Mid-State. The District also filed a separate action against Lanmark and Mid-State (“the District Matter”), which was stayed pending resolution of the Lanmark Matter.
At a hearing on the Lanmark Matter, the District and Lanmark reached a settlement, which they placed on the record. The terms of the settlement required the District to pay Lanmark $430,000 and released all claims that Lanmark and/or the District had against each other arising out of the project. Following the hearing, counsel for the parties attempted to negotiate the release language. Lanmark and Mid-State requested that the release contain a provision that the District had released its claims against Mid-State. The District refused, claiming that it had reserved its rights against Mid-State. Because the parties could not agree on the language, the District and Lanmark executed a release limited to the verbatim terms of the release placed on the record at the hearing. The release was silent as to the District’s reservation of rights against Mid-State.
Thereafter, Mid-State moved for summary judgment in the District Matter, arguing that the release discharged Mid-State. The trial court granted the motion, reasoning that the broad, open-ended release of Lanmark discharged Mid-State. The District appealed and the Superior Court reversed, holding that there was a genuine issue of material fact as to whether the District reserved its rights against Mid-State because, although the release contained no express reservation, a reservation might be inferred from extrinsic circumstances, including the District’s declaration that it would not release Mid-State. Mid-State appealed.
On appeal, the Mid-State argued that it was discharged from all obligations once the District and Lanmark reached the settlement of all claims relating to Lanmark’s work, and that the District’s failure to expressly reserve its rights in the release was fatal to the District’s claim. In contrast, the District argued that, under the Restatement (Third) of Suretyship & Guaranty, §39(b)(ii), the language of the release must be evaluated in light of extrinsic evidence, including its refusals to release its claims against Mid-State. The Pennsylvania Supreme Court agreed with Mid-State and endorsed the bright-line rule that any reservation of rights against a surety on a performance bond must be expressly stated in the language of the release of the contractor. Because the release contained no mention of a reservation of rights against Mid-State, the Court held that the District did not effectively reserve its right to seek damages from Mid-State.
Click here for full text opinion provided courtesy of LexisNEXIS. |
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Second Circuit Holds Arbitrators Cannot, Under the Federal Arbitration Act, Compel Pre-Hearing Discovery of Documents of Third Parties, Except That Production May be Compelled at a Preliminary Hearing Before an Arbitrator
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Life Receivables Trust v. Syndicate 102 at Lloyd’s of London
2008 U.S. App. LEXIS 24977 (Nov. 25, 2008)
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The Second Circuit held that section 7 of the Federal Arbitration Act (“FAA”) does not permit an arbitrator to compel pre-hearing document discovery from non-parties to the arbitration. However, the court noted that a non party could be subpoenaed to produce documents at a preliminary hearing on non-merits issues before one or more arbitrators.
The case arose out of a dispute involving mitigation of risk in purchasing life insurance policies of still-living individuals. Life Settlements Corp. d/b/a Peachtree Life Settlements (“Peachtree”) purchases life insurance policies from elderly insureds and offers them a cash payment at a discount to the face value of the policy. Peachtree’s purchase price is based on a variety of factors including an estimated life expectancy. Peachtree buys some policies for itself, and others for Life Receivables Trust (the “Trust”), a special purpose vehicle created for this sole objective. Peachtree still performs actuarial and financial work for all the policies purchased, but it transfers its interest in the policy to the Trust. As a hedge against the possibility that the insured may live beyond his or her projected life expectancy, Peachtree purchases contingent cost insurance from Syndicate 102 for the benefit of the Trust. When Syndicate 102 refused to pay the net death benefit on two certain policies, the Trust initiated an arbitration claim against Syndicate 102. Peachtree was not a party to the arbitration.
In an arbitration proceedings, Syndicate 102 sought discovery of Peachtree through the Trust in a variety of unsuccessful manners. Finally, Syndicate sought and was issued a subpoena by the arbitration panel to compel Peachtree to produce documents. Peachtree refused to comply with the subpoena and commenced a federal lawsuit to quash the subpoena on the basis that an arbitration panel could not compel pre-hearing discovery of a non-party.
The trial court granted Syndicate 102’s motion to enforce the subpoena against Peachtree holdings that there was “no reason to disturb the arbitration panel’s issuance of a subpoena to an entity that, while not a party to the specific arbitration at issue, is a party to the arbitration agreement.” Peachtree complied with the subpoena, and then filed an appeal arguing that the arbitration panel lacked authority to issue a pre-hearing document subpoena to a non-party. The only provision of the FAA related to subpoenas is section 7. Section 7 provides that “the arbitrators…may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record document, or paper which may be deemed material as evidence in the case.”
On appeal, the Second Circuit recognized that the circuits were split over whether section 7 of the FAA may be invoked as authority for compelling pre-hearing depositions and pre-hearing document discovery from non-parties. The Eighth Circuit held that although section 7 does not “explicitly authorize the arbitration panel to require the production of documents for inspection by a party…implicit in an arbitration panel’s power to subpoena relevant documents for production at a hearing is the power to order the production of relevant documents for review by a party prior to the hearing.” The Third Circuit held that section 7 “unambiguously restricts an arbitrator’s subpoena power to situations in which the non-party has been called to appear in the physical presence of the arbitrator and to hand over the documents at that time.”
The Second Circuit recognized that the FAA was enacted at a time when pre-hearing discovery in civil litigation was generally not permitted, and in fact Section 7 of the FAA mirrors the prior version of Rule 45 of the Federal Rules of Civil Procedure (“FRCP”). Although Congress subsequently amended Rule 45 of the FRCP to endow the poer to issue subpoenas for discovery on the federal courts, Congress did not similarly amend the FAA. The Second Circuit thus concluded that if Congress wanted to expand the arbitral subpoena authority, it was fully capable of doing so, yet had not yet done so. The Second Circuit thus joined the Third Circuit in holding that section 7 of the FAA does not authorize arbitrators to compel pre-hearing document discovery from entities not parties to the arbitration proceedings.
The Second Circuit observed that its construction of section 7 "does not leave arbitrators powerless" to order the production of documents. Consistent with the Third Circuit, it stated that arbitrators may, consistent with section 7, order "any person" to produce documents so long as that person is called as a witness at a hearing. Further, arbitral section 7 authority is not limited to witnesses at merits hearings, but extends to hearings covering a variety of preliminary matters. And, arbitrators also "have the power to compel a third-party witness to appear with documents before a single arbitrator, who can then adjourn the proceedings."
Click here for full text opinion provided courtesy of LexisNEXIS. |
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