The Texas Supreme Court recently ruled that a “no-damages-for-delay” clause would not be enforced where the delay was caused by the owner. The court’s ruling flies squarely in the face of the contract language that attempted to insulate the owner from any delay claims, even those it caused.
In the case of Zachary Construction v. Port of Houston underlying contract, proposed by the Port of Houston, was heavy handed, to say the least. The contract provided:
[Contractor] shall receive no financial compensation for delay or hindrance to the Work. In no event shall the Port Authority be liable to [Contractor] … for any damages arising out of or associated with any delay or hindrance to the Work, regardless of the source of the delay or hindrance, including events of Force Majeure, AND EVEN IF SUCH DELAY OR HINDRANCE RESULTS FROM, ARISES OUT OF OR IS DUE IN WHOLE OR IN PART, TO THE NEGLIGENCE, BREACH OF CONTRACT OR OTHER FAULT OF THE PORT AUTHORITY. [Contractor’s] sole remedy in any such case shall be an extension of time.
Wow, that’s some one-sided language. If the contract was enforced, the contractor could not get any damages for delay, even those damages caused by the active interference of the Port of Houston.
During construction, the Port of Houston expanded the scope of the project. The parties entered into a change order with pricing based on the contractor’s proposed method of completion. After the change order, the Port of Houston insisted that the contractor resubmit plans to perform the work. Ultimately, the Port of Houston required the contractor to complete the project using the methods required by the Port of Houston, which caused delays and increased costs.
Not surprisingly, the contractor demanded that the Port of Houston compensate it for the increased costs of using the Port of Houston’s construction methods. The Port of Houston refused, citing to the no-damage-for-delay clause in the contract. The case went to trial and the jury found in favor of the contractor. Perhaps the juror realized that enforcing the no-damage-for-delay clause would simply not have been fair.
The case was appealed and the intermediate appellate court reversed. The case was then heard by the Texas Supreme Court, which reinstated the jury verdict. The Texas Supreme Court found that a no-damage-for-delay clause would not be enforced when an owner actively interferes with a project.
Takeaway: Fundamental fairness tells us that an owner should not be able to interfere with a contractor’s work and then expect to rely on a no-damage-for-delay clause to avoid liability. But, today’s legal environment also tells us that proving that the owner’s conduct was simply not fair can take a long time (8 years) and perhaps negotiating better contract language upfront will make the project run more smoothly.
The Nebraska Court of Appeals has ruled that a home builder that fails to adequately compact the soil does not have insurance coverage to repair damages to the home caused by the settling soil. In “insurance speak”, there was no occurrence to trigger coverage.
In this case, Cizek Homes, Inc. v Columbia National Insurance Company, a home builder contracted with a buyer to build a house. A lot was selected and the home was built. After the buyer moved in, the house started to settle, causing damage to the house. The buyer told the builder about these problems and the builder agreed to fix the problems. The builder also contacted its insurance company and requested coverage for the buyer’s claim. The insurer rejected the claim, determining that the buyer’s claim was not covered by the builder’s Commercial General Liability (CGL) insurance.
The insurer then filed suit asking the court to interpret the insurance policy and to determine whether the CGL insurance covered the claim. The court looked to the buyer’s allegations that the builder failed to construct the home in accordance with accepted construction and industry standards and that the builder was negligent in designing and constructing the home. The builder admitted that it was obligated to pay for the costs of repairs, but denied that it was negligent in constructing the home.
The first question for the court was whether there was an occurrence under the policy. Under the policy, an occurrence is defined as an accident including continuous or repeated exposure to substantially the same harmful conditions. Relying on established case law in Nebraska, the court determined that faulty workmanship, standing alone, is not an occurrence under a CGL policy. This means that if the faulty workmanship only damages the work, such as a roofer’s faulty work damaging only the roof, there is no occurrence.
Looking again to the allegations between the buyer and the builder, the court found that the there were no facts presented that would support an inference that the damage was caused by anything other than the builder’s negligence. Moreover, the only damage claimed was to the house, which means that the only damage was to the work itself, and thus there was no occurrence. Because there was no occurrence, coverage was never triggered.
This opinion makes clear in Nebraska that a contractor’s faulty work, that only damages the work that contractor performed, will not be covered by the contractor’s commercial general liability insurance.
Join us for our Fall Lunch & Learn
Thursday, October 16th at 11:30.
We will be discussing How to Prepare a Winning Request for Compensation.
The topics we will cover include:
- Developing a Roadmap to Prepare the Claim
- Determining Applicable Contract Terms
- The Impact of Change Orders
- Identifying the Important Documents
- Calculating the Amount Owed
Seating is limited, so please RSVP to Craig Martin, (402) 397-7300, or via e-mail: firstname.lastname@example.org.
Two more courts have weighed in on the “your work” exclusion in commercial general liability (CGL) policies, finding that contractors did not have coverage for work performed improperly. These cases highlight that whether you have coverage for poor workmanship will depend on the state’s law applied. It now appears that if you are in South Carolina or Massachusetts, you will not have coverage.
The South Carolina case, Precision Walls, Inc. v. Liberty Mutual Fire Insurance Company, involved a subcontractor hired to tape insulation. After taping the insulation, a brick veneer was installed on the exterior. During the brick installation, the mason reported that the tape was losing its adhesion and the subcontractor was instructed to repair the problem. In order to access the tape, portions of the brick veneer had to be removed and re-installed. The subcontractor then sought coverage for the costs associated with repairing the tape.
The insurer denied coverage and the subcontractor sued its insurer. The court ruled in favor of the insurer, finding that the defective tape was “your work” because it was “material furnished in connection” with the subcontractor’s work. The policy specifically excluded from coverage damage to property caused by “your work”. Thus, there was no coverage for the subcontractor.
The Massachusetts case, Pacific Indemnity Company v. Lampro, also found there was no coverage. There, the landscape subcontractor failed to abide by the environmental restrictions required by the permits and clear cut trees and brush. The homeowner’s property insurer paid $100,000 to fix the damage and the insurer then sued the contractor and its general liability insurer to recoup the money it paid to restore the property.
The court found that the general contractor’s CGL policy did not provide coverage, again, because of the “your work” exclusion. This policy excluded coverage for real property that must be repaired or restored because “your work” was incorrectly performed. The court also found that there was no occurrence under the policy because the subcontractor’s failure to abide by the permit restrictions was not an accident, but rather a risk of doing business.
Take Away: Getting an insurer to pay for damage to the work under a CGL policy is becoming increasingly difficult. You would be well advised to review your state’s laws to determine whether you have coverage.
As is often the answer in this blog, maybe. And, it will likely depend on which state’s law is applied. Over the last few weeks, courts around the country have reached differing conclusions on whether a general contractor may sue an architect that it did not hire.
Here’s the situation: The owner hires an architect to draft plans for a project. The project is then put out for bid and the owner hires a general contractor for the work. The general contractor and architect do not enter into a contract with each other.
If, during construction, the general contractor finds fault with the plans, it may seek Request for Information and Change Orders, to shore up the perceived problems with the plans. Ultimately, the general contractor may sue the architect to recover damages it suffered in completing the project.
Architect’s Defense: Typically, an architect sued by a general contractor will argue that it is not liable to the general contractor because it does not have a contract with general contractor and owed no duty to the general contractor. Instead, the general contractor’s claim is properly asserted against the owner.
Diverging Opinions: Over the past few weeks, courts have addressed this very situation in which an architect was sued by a general contractor that did not hire the architect. Although the underlying facts were nearly identical, two courts reached opposite conclusions on whether the architect could be held liable.
In a recent New Jersey case, a general contractor sued an architect alleging that the architect was professionally negligent in drafting the plans for the project. The architect moved to dismiss the claim, arguing it had no relationship with the general contractor and could not be held liable to the general contractor. The court disagreed, ruling that the general contractor could sue the architect directly, even though the architect and general contractor had no contractual relationship.
In a recent Texas case, the general contractor also sued an architect alleging that the architect was professionally negligent in drafting plans for a project. The Texas Supreme Court ruled that the general contractor could not sue the architect because there was no relationship between the two. Instead, the Texas court determined that any problems with the plans should have been addressed in the contract between the owner and the general contractor.
Take Away: Courts are split on whether a general contractor can sue an architect hired by the owner. Any determination will rely heavily on the contract between the owner and the general contractor and the applicable state’s law.
Associated General Contractors recently reported that employment expanded in 65% of the metro areas it surveyed. While this is great news for the construction industry, of great concern is that 25% of the companies responding to the survey noted that they were turning down jobs because of labor shortages.
The survey revealed that construction management employees, including project managers, supervisors, and superintendents, are in the shortest supply, followed closely by carpenters, equipment operators and estimators. The shortage in these positions is so severe that over 80% of the responders indicated that they were willing to increase wages to obtain the skilled labor.
The labor shortages reported by contractors and subcontractors emphasize the need to actively pursue training programs to help prepare future construction workers. As set forth in AGC’s Workforce Development Plan, government officials at the local and national level must adopt measures that would make it easier for schools, construction companies and even AGC chapters to establish training programs.
Labor shortages in the construction industry are looming on the horizon. Training programs must be revitalized and expanded or the labor shortage will only get worse.
Engineering News-Record had an interesting editorial commenting on the bid protests on the New Orleans airport. The article analogized bid protests to video reviews at a football game — they cause delays, but more often than not, they provide a clearer picture of what occurred. The same can be said of bid legitimate protests.
Bid protests allow for a review of the decision making process. In the New Orleans airport situation, two members of the board selecting the builder for the project incorrectly completed the voting forms. The contractor that was not selected protested the award and the process was reviewed. Once it was discovered that two board members improperly completed their ballots, the award was rescinded and the project was again. Now the board must again review the bids and select the winning bid.
In my experience, bid protests can shed important light on a decision and reveal errors in the process. Of course, every losing bidder should not protest a bid. But, if a review of the outcome reveals a failure to follow the proper process, a protest should be considered.
Perhaps another football analogy is appropriate when considering a bid protest. Much as the head coach only gets so many protests during the game, a contractor should seriously reflect on whether to challenge a bid. Before throwing out the red flag, a contractor should have had the bid process reviewed by experienced counsel and have concrete evidence on which to support its challenge. Although a contractor will not be charged a time out, an unsuccessful bid protest can be a time consuming process and impact your credibility with an agency from which future work may be obtained.
Take Away: Bid protests are a tremendous tool to challenge the award of a project. But, a bid protest should only be pursued when problems with the underlying process can be established through witnesses and documentary evidence.
Nothing puts your record keeping practices under a microscope like litigation. Every piece of paper that you created or kept on a project may be reviewed and analyzed. And, every decision to throw away a document will be assessed to figure out why you didn’t keep it. The best way to ensure you have the necessary documents to support your claim is to have a written document retention policy.
Do you have a written document retention policy?
A great place to start in creating a document retention system is to have a written policy. Consider the documents that you know you need on each project and list them in the policy. Simply stating that the project manager must maintain the fully executed contract, all requests for change orders, all correspondence relating to change orders, and fully executed change orders, can go a long way to maintaining consistent documentation on each project.
Do you have a designated employee to maintain the file?
Have you taken the time to figure out who is the best employee to keep the file on each project? Does it change project to project? Taking the time to figure out who will be responsible for the maintaining the file on the project will avoid finger pointing during the project and afterwards when documents cannot be found.
How are you keeping documents?
Given the proliferation of e-mails, it may make sense to keep an electronic file of all documents. Decide how your company is going to maintain the file, paper or electronic.
Train Your Employees on the Policy.
You must train your employees on your document retention policy. Your policy will only be effective if your employees know how to use it and they all consistently use it. Your file management system will turn into a nightmare if you have a few employees keeping their own file on the project. Everyone has to know who is responsible for keeping the documents and which documents should be kept.
Take Away: The time to adopt and implement a document retention system is before you need to rely on it. Take a look at your company’s document retention practices and adopt a policy that will ensure you can support your claim.
On July 31, President Obama issued yet another Executive Order to crack down on “federal contractors who put workers’ safety and hard-earned pay at risk.” The new Executive Order, called Fair Pay and Safe Workplaces, will require federal contractors to report certain labor law violations from the previous three years when submitting a bid on projects. It also prevents the use of arbitration agreements to resolve employment discrimination claims. These are significant changes that will impact the way contractors do business with the government.
Which Contracts Are Covered?
The new reporting requirements will apply to any procurement contract or subcontract in excess of $500,000. The “no-arbitration” requirements will apply to contractor and subcontracts in excess of $1,000,000.
What Are the Reporting Requirements?
When submitting a bid, contractors will be required to report labor law violations resulting from administrative merits determinations, arbitral awards and civil judgments based on employment and labor laws. Contractors will also have to report twice a year during the pendency of the contract. A few of the employment and labor laws are:
- Fair Labor Standards Act
- National Labor Relations Act
- Davis-Bacon Act
- Title VII
- Americans with Disabilities Act
- Age Discrimination in Employment Act
What Happens to Existing Arbitration Agreements?
Contractors submitting bids must agree that claims arising under Title VII or any tort related to sexual assault or harassment will not arbitrated unless the employee agrees after the complaint is lodged. The arbitration prohibition does not apply to existing arbitration agreements unless the employer has retained the discretion to unilaterally modify the agreements. The anti-arbitration requirement does not apply to collective bargaining agreements.
When Does the Executive Order Take Effect?
The Executive Order will not go into effect until after the Federal Acquisition Regulatory (FAR) Council issues implementing regulations, which are not expected until 2016.
Clients often times present problems with a project and explain the need to be compensated for the problems experienced. But, having a consistent theory for recovery and evidence that supports that theory is always paramount to recovery.
I was reminded of this perhaps obvious corollary when reviewing an Armed Services Board of Contract Appeals decision. The appeal involved a $35 million request for additional compensation based on differing site conditions, so not an insignificant claim.
The contractor claimed that it relied on the government’s geotechnical information to its detriment. But, the Board rejected the claim because the project was a design/build project and the contract specifically stated that geotechnical information was the contractor’s responsibility. More damaging to the contractor’s claims was the testimony from its own consultant that the contractor disregarded the consultant’s warnings and advice, including the consultant’s warning that its bid was too low. Perhaps the death knell to the contractor’s claim was testimony that it submitted the low bid because it wanted its foot in the door in the Middle East to secure other business.
As damaging was the contractor’s own expert’s testimony that the site condition reports contained conflicting information and lacked the data a prudent geological engineer would require in order to reach reasonable conclusions. The evidence also revealed that the contractor never visited the site, never requested a ground investigation and never hired geotechnical professionals to assess its proposed construction methods until after problems on site occurred.
Clearly the contractor had problems on this project, but even its own evidence, through the testimony of its consultants and experts, undermined its claim that it was harmed by relying on the government’s geotechnical reports.
Take Away: Having a theory of recovery is one step in the process to recovery. But, having evidence that will support that theory of recovery is as, if not more, important.