Originally posted Tuesday, 27 March 2012

Written by John Sier

Perhaps the most consistent fact about the law is its inconsistency. Whether comparing state to state or court to court, every issue in each case is evaluated on its own merits, and the outcomes can appear to be very divergent. When you add the application of various state statutes to any analysis, you see why consultation with an attorney is important to the success of your construction project from the inception of the project through completion. Several states have made significant legislative changes that will impact construction projects in those states, and the Supreme Courts of other states have issued decisions that likewise will direct the interpretation of the laws in those states.

California passes bill to limit indemnity right of public and private Owners

California allowed broad form indemnification for Owners, including indemnification from the negligence of the Owner so long as the Owner’s negligence was not the sole cause of the accident or injury. As a result of the passage of Senate Bill 474, construction contracts shall not contain language that relieves a public or private Owner from liability for the active negligence of the Owner or its employees. Any provision that can be interpreted to violate the new statute will be unenforceable according to California Civil Code Sections 2782 and 2783. Several states have enacted or are considering similar legislation. When drafting or reviewing a contract, the parties need to pay particular attention to this risk allocation measure to make sure that the language complies with the requirements of the law current at the time that the contract is signed.

New Mexico invalidates out-of-state choice of law and forum selection clauses in construction contract

Many construction industry contract forms, including ConsensusDOCS, provide that the law of the state in which the project is located will control the interpretation and enforcement of the contract. However, multistate Owners and construction firms attempt to obtain some consistency in the interpretation of the contract language by choosing a particular state’s law to govern the interpretation and enforcement. Some states have differing rules on the interpretation and enforcement of those choice of law and forum selection provisions in construction contracts. New Mexico now explicitly prohibits making a construction contract for an improvement to real property in New Mexico subject to the laws of another state and further provides that any dispute resolution proceeding arising out of that construction contract must be conducted in New Mexico pursuant to NMSA (1978) 57- 28A-1 and 2. Any construction Owner, constructor, designer, or other vendor doing business in New Mexico should make certain that any contract complies with the many mandates or limits contained in New Mexico law.

Alabama Supreme Court clarifies when faulty workmanship can result in a covered “occurrence.”

Another frequent topic of legislative and judicial actions across the country is insurance coverage for construction defects. Many courts have struggled with the “your work” exclusion contained in General Liability policies, especially when combined with the subcontractor exception to that exclusion in finding that defective construction performed by subcontractors may be covered by insurance. However, many courts analyze the coverage question in the context of an “occurrence” as defined by the language of most General Liability policies:

an accident, including continuous or repeated exposure to the same general harmful conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the Insured.

The Alabama Supreme Court in Town & Country Property, LLC v Amerisure Insurance Company, reviewed recent cases in which the damages consisted of the need to repair the defective construction as compared with instances where the defective construction caused damage to other property. The Court concluded that defective workmanship itself is not an occurrence, but defective workmanship that subjects personal property or other parts of the structure to “continuous or repeated exposure” to some other “general harmful condition” that results in damage may constitute an occurrence. Any instance of potentially defective construction will need to be closely examined for the damages suffered as a result of the defects; if the damages are only the repair and reconstruction for the faulty work, insurance coverage may not be available to defray those costs.

Alaska Supreme Court determines a contract was for a fixed price despite inclusion of contractor’s unit price proposal in final agreement

Incorporation of any document into a final agreement can be fraught with hazards, especially when one of the documents being incorporated is an initial proposal from the contractor. In 3-D & Co. v Tew’s Excavationg, Inc., the contractor’s original proposal was based on unit price, but the executed Agreement also described a fixed price for the contract as a whole. The facts involved several different questions and issues that lead to disputes between the Owner and the contractor; one of the issues was whether the ambiguous contract was to be paid on a unit price basis or as a fixed price. The trial court and the Supreme Court reviewed evidence outside of the terms of the contract in order to resolve the ambiguity. The courts relied on the behavior of the parties following execution of the final Agreement, including interim payments by the Owner, in concluding that the parties intended the contract to be for a fixed price. Careful drafting, use of an order of precedence provision (similar to that in the ConsensusDOCS), and selective incorporation of specific documents for limited purposes can reduce these types of ambiguities.

John Sier leads the construction and commercial litigation group of Kitch Drutchas Wagner Valitutti & Sherbrook in Detroit, Michigan, and concentrates his practice in dispute avoidance and resolution of commercial, health care and construction contract issues.