Originally posted Monday, 19 May 2014

Written by John Sier

A great deal of ink is spilled in describing essential contract clauses that provide the greatest clarity of the expectations of the parties on their relative performance obligations. However, if the language that was so dearly bargained for at the outset of the project is not enforced, those benefits could be lost. Whether the contact required a specific notice provision or excluded certain categories of cost from the price of the project, lax enforcement or a failure to object could result in that provision becoming ineffective. For example in Allstate Interiors, Inc v Stonestreet Construction, LLC, No. 12-2431 (1st Circuit, September 20, 2013), the First Circuit Court of Appeals affirmed the trial court’s award of delay damages that included amounts for “secretaries and estimators” at the contractor’s home office despite a contractual exclusion of those costs. The Owner and the Contractor agreed to payment of lump sum general conditions, and those “overhead items” were explicitly included in the Contractor’s breakdown of the lump sum general conditions. The Owner paid 13 requisitions without objection. Both courts found that the Owner had waived that contractual exclusion when it agreed to the lump sum general conditions containing those line items and when it paid those requisitions without objection.

Another provision that can be troublesome is the notice provision in the event of an actual or potential claim. In Bovis Lend Lease (LMB), Inc. v. Lower Manhattan Development Corp., 2013 NY Slip Op 03804 (Appellate Division, May 28, 2013), the trial court was affirmed in denying relief to the “deconstruction” contractor for By Jon Sier Owner Alerts claimed extras resulting in part from excessive intervention by regulators during the asbestos abatement process. The contract assigned virtually all risks of delay to the contractor, but allowed that the contract could seek additional compensation for extra work if the contractor provided the owner with notice of the extra work within 72 hours of complying with an order to perform the extra work. The extra work could only be compensated through a written change order signed by both parties. While the court noted that the notice and the written change order provision can be waived by the parties through conduct, the court found that the owner did not waive the protection of either the notice provision or the written change order requirement and was entitled to insist on strict compliance with the contract.

The other side of enforcing the contract language is making sure that the language comports with the legal requirements in the applicable jurisdiction. While an owner of contractor may want complete and absolute indemnity and to be absolved from any responsibility for its own negligence and will insist on such language being included in contracts and subcontracts, that language may be legally unenforceable. There are some states that will allow a party to be indemnified from its own negligence so long as the party is not solely negligent [Michigan, MCLA 691.991], but there are also other states that provide “every covenant, promise or agreement to indemnify or hold harmless another person from that person’s own negligence is void as against public policy and wholly unenforceable.” Ill. Rev. Stat. ch. 29, section 61. Even attempting to get around such a prohibition by requiring the other party to purchase insurance could itself be void; “[a] provision that requires a party to provide insurance coverage to one or more other parties, including third parties, for the negligence or intentional acts or omissions of any of those other parties, including third parties, is against public policy and is void and unenforceable.” Minn. Stat. § 337.05, Subd. 1(b). When negotiating contracts, the parties must be certain of the applicable law and the limitations imposed by that jurisdiction.

The contract is the most important document describing the legal and financial relationships of the parties, but a contract that is not enforced provides no protection, and a contract that does not comport with legal requirements provides false security. Negotiating, executing and enforcing a contract with the assistance of counsel versed in the various requirements and limitations are the first steps in managing risk.

Insurance Broker May Owe Duties to Additional Insured to Procure Appropriate Insurance

Many Owners require the general contractor to procure specific forms of insurance and name the owner as an Additional Insured. Yet, the impact of that contractual requirement typically does not get reviewed unless there is a major claim that reveals defects in the coverage. The decision from the Sixth Circuit Court of Appeals illustrates that catastrophic claims can arise from narrow contracts. Cleveland Indians Baseball Co. L.P. v. New Hampshire Insurance Co., 12-1589 (6th Cir. 2013).

The Cleveland Indians hired National Pastimes to produce some family fun day events, including one with an inflatable slide. National Pastimes was responsible to purchase insurance and name the Indians as an additional insured. National Pastimes hired CSI as the broker to procure the insurance, and the application disclosed that inflatables were going to be used at the event. CSI procured insurance from New Hampshire Insurance Company (NHIC), but the insurance from NHIC specifically excluded claims relating to inflatables.

During the event, an inflatable slide collapsed and killed one of the attendees whose estate sued the Cleveland Indians. When the Indians tendered the defense, New Hampshire Insurance denied coverage based on the exclusion, and that denial was affirmed by the trial and appellate courts. The Indians also sued CSI, the broker for National Pastimes, for negligence in failing to procure the correct insurance; the District Court dismissed the claim based on the lack of duty of a broker to an additional insured.

The Court of Appeals reversed and found in a 2-1 decision that the broker did in fact owe a duty to the additional insured to procure the correct and adequate coverage. While the decision was based on a review of Michigan law, the principles discussed could be similar in states where the economic loss rule has been limited in application. The opinion noted that similar results could occur in Iowa, Colorado, Utah and Illinois based on a review of cases involving claims against an insurance broker for negligently procuring insurance. The majority observed that “a contracting party owes a separate and distinct common law duty of care to all those whom the party knew or reasonably should have foreseen would be injured by the party’s negligent acts or omissions.” The Court noted that this principle has applied to cases involving attorneys, title abstracters and engineers. While the economic loss rule has been invoked to preclude recovery of damages under a tort or negligence theory in the absence of physical harm, the court found the concept of responsibility for foreseeable harm more compelling and allowed the lawsuit t proceed against the broker.

This decision provides an Owner a possible avenue for recovery against a contractor’s insurance broker who fails to procure the required insurance on which the owner was to be an additional insured.

American Arbitration Association Issues Optional Appellate Arbitration Rules

Every party to commercial and construction contracts has a perspective on arbitration as a means of dispute resolution, and not all of those perspectives are positive. While one of the purported benefits of arbitration is finality and lack of judicial review, that is also an objection frequently raised by reluctant parties who are concerned about “rogue” arbitrators who either refuse to follow the law or incorrectly apply the facts to the applicable law. Partly in answer to those concerns, the American Arbitration Association issued the Optional Appellate Arbitration Rules (Appellate Rules) to provide parties a standardized process for review of arbitration awards [and as an alternative to the appellate procedures promulgated by some other ADR providers].

Typically, an arbitration award is given great deference by the federal and state courts, and the legal and factual findings of an arbitrator are not reviewed by a court. Rather, the judges only examine the process and arbitrator’s conduct for indicia of fraud or bias. The AAA Appellate Rules would allow a broader review for material and prejudicial errors of law and clearly erroneous findings of fact by a specially appointed appellate panel. The Rules could only be invoked upon mutual agreement of the parties to submit the underlying award to appellate review, but the Appellate Rules do not replace the process for modifying or correcting the award under the rules applicable to the original proceeding.

In essence, if the parties agree, the Appellate Rules allow a party to file a Notice of Appeal within 30 days of issuance of the underlying reasoned award that would identify the portions of the award being appealed and a description of the errors together with a statement of the description of the qualifications for the appellate arbitrators. Unless the parties otherwise agree, the AAA would appoint a panel of three arbitrators from the AAA Appellate Panel. There is a relatively quick briefing schedule that could be completed in roughly three months from the date of filing the appeal if the schedule is not otherwise modified by the parties. The Appellate Rules dispense with oral argument unless specifically requested, and the arguments are to be scheduled within thirty days of filing the last brief. The Appellate Panel are expected to issue a decision within 30 days of oral argument or the filing of the last brief.

The concept of appellate review of an arbitration decision may be no more palatable to some owners than arbitration itself. Additionally, there is no clear indication how a court would review or consider a further inevitable appeal from an appellate arbitration ruling. The appellate examination of material and prejudicial errors of law and clearly erroneous determinations of fact could result in a new body of case law applying the principles of the Federal Arbitration Act to an appellate panel. The one certainty under the Appellate Rules is that the $6,000 Administrative Fee paid by the appealing party is non-refundable.

John Sier, with the firm of Kitch Drutchas Wagner Valitutti & Sherborook in Detroit, Michigan, is Associate Counsel to COAA.