Originally posted Thursday, 11 September 2014

Written by John Sier

There are always legal developments that affect Owners and construction projects, and each development merits a detailed discussion to determine the significance of the local impact and on the broader stage. What worked on one project in a given year may no longer be feasible or even possible in the following year or in a different location. Even before a dispute arises, the participants to a construction project should always be aware of the legal environment in which the work is being done. It is too late to correct an erroneous assumption as to the law after a dispute has arisen. COAA is a great resource for staying current on industry practices and identifying the correct questions to ask to avoid assuming that a past practice remains correct. Construction lawyers bring this same value to a project, whether through allocating risk or assessing claims.

Massachusetts Court Holds that There is No Implied Warranty of Plans to a Construction Manager at Risk

Many states and the federal government hold that an Owner impliedly warrants the suitability of the plans and specifications that are issued to a contractor in a design-bidbuild traditional setting. In Coghlin Electrical Contractors, Inc. v Gilbane Building Company, Docket No. 2013-1300-D (June 24, 2014) the Worcester County Superior Court found that such a warranty does not apply to a construction manager who has provided design review services.

Following substantial completion of the project, subcontractor Coghlin Electrical Contractors asserted a claim for additional compensation against the construction manager Gilbane resulting from mismanagement of the project, including various design changes. Gilbane, in turn, asserted a claim against the Owner due to the design errors and omissions that were encountered on the project. The court examined the common law principles applicable to a design-bid-build project and found the underlying concept to be inapplicable.

Massachusetts adopted a law in 2004 authorizing public construction contracts using construction manager at risk “alternative delivery method” in which “a construction management at-risk firm provides a range of preconstruction services and construction management services which may include cost estimation and consultation regarding the design of the building project, the preparation and coordination of bid packages, scheduling, cost control, and value engineering, acting as the general contractor during the construction, detailing the trade contractor scope of work, holding the trade contracts and other subcontracts, prequalifying and evaluating trade contractors and subcontractors, and providing management and construction services, all at a guaranteed maximum price, which shall represent the maximum amount to be paid by the public agency for the building project, including the cost of the work, the general conditions and the fee payable to the construction management at risk firm.” (M.G.L. 149A, Section 2). The court found that the construction manager by definition takes on additional duties and responsibilities for the project, especially when reviewing the particular contract language pertaining to estimating, design and constructability reviews [Note: The contract used by the State of Massachusetts was not based on an industry form agreement, but some of the language was very similar to that found in an AIA A133- 2009, AIA A201-2007 and ConsensusDOCS 500]. In light of those additional responsibilities and greater involvement in the design process, the court found that the protections afforded to a general contractor in a lump sum bid are not available to a construction manager at risk.

Further, the court found that the indemnification obligations “arising out of or resulting from the performance of the Work” also encompasses claims asserted by subcontractors for defects in the design documents. In rejecting Gilbane’s arguments that the indemnification obligation was not intended to apply to this type of claim, the court construed the language of the indemnification provision very broadly resulting in a legally impossible “circuity of obligation”— requiring indemnification of one’s own claim. The court dismissed the construction manager’s claim against the state since the state would have been entitled to indemnification from the very claim asserted.

This may not be the last opinion in this case, and it was not issued by an appellate court, but it does provide some insight that there may be some limitations to the owner’s implied warranty of the designs when the construction manager is involved in reviewing and assessing the designs as a part of preconstruction services.

Contractual notice is still enforced by some courts as a condition for recovery

Owners and contractors have occasionally encountered a contractual notice of claim provision that purports to have serious consequences for noncompliance. However, some courts have found exceptions to the application of the notice provision or found the strict application too draconian under equitable principles. However, two cases in different parts of the country have enforced the notice requirement as a condition of pursuing a claim regardless of equitable arguments.

In JEM Contracting, Inc. v. Morrison-Maierle, Inc., the Montana Supreme Court found that a contractor’s notice 18 days after discovery of a differing site condition during which time the condition was disturbed did not comply with the contractual five-day notice requirement despite the assurances from the independent project engineer that the costs would be paid if other savings were achieved during the project. Galatin and Madision Counties awarded a road improvement contract to JEM Contracting in which Morrison-Maierle was the engineer. On the first day of work, JEM encountered a differing site condition, and JEM discussed the issue with the onsite engineers—not all of who agreed that the condition varied from the project specifications. The work and discussions continued for 18 days before JEM sent a written notice of the differing conditions under the contract. During the discussions, JEM claimed that the engineer assured JEM of payment if JEM could achieve offsetting cost savings. Upon completion of the work, JEM requested payment for the additional costs because the offsetting savings had been achieved. When the county denied the claim as untimely, JEM sued the counties as well as the engineer for misleading JEM. While JEM settled with the Counties, the engineer sought dismissal of the claims against it. The trial court’s dismissal was affirmed by the Montana Supreme Court finding that JEM’s failure to comply with the contractual notice provision was not excused by anything that the engineer said or did.

Similarly, the Michigan Court of Appeals in T.R. Pieprzak Company, Inc. v. City of Troy, Docket No. 314451 (June 24, 2014), found that the contractor on a water main replacement project performed extra excavation work to identify the location of the underground services that could have entitled the contractor to additional compensation as provided in the agreement, but the contractor failed to submit the labor and equipment rates to the engineer for approval before conducting the work as required by the unambiguous provisions of the agreement. That incorrect sequence barred the contractor’s request for additional compensation despite subsequent letters and conversations that may have even included varying interpretations of the provisions of the agreement or even constructive notice. The Michigan statute on differing site conditions at MCL 125.1592 actually confirmed the contractual sequence. In short, the agreement and the statute required the contractor who encounters a differing site condition to stop work, not disturb the physical condition encountered, and allow the owner to investigate the condition to make a determination of whether there is entitlement to an equitable adjustment of the contract time or amount.

The AIA A201-2007 at Section 3.7.4 and ConsensusDOCS 200 at Section 3.16.2 and ConsensusDOCS 500 at Section 3.18.2 contain provisions describing the same sequence of activities. Whether using an industry form contract or a more custom-drafted provision, be mindful of the notice periods and sequence relative to extra work or differing site conditions so that the contractual protections allow the owner to make an informed decision pertaining to the possibility for additional compensation or time for performance.

Discovery of Construction Defects Starts Timing for Bringing Claims

While the Owner may desire to avoid litigation, there are times where that may be the only option to preserve certain claims pertaining to defective construction. Waiting too long to commence litigation can result in the claims being barred—even though the Owner may not fully understand the nature of the claims or extent of the defects. In East Side Lutheran Church of Sioux Falls, South Dakota v. NEXT, Inc., the South Dakota Supreme Court found that whether the Owner waited too long to bring its claims of defective design and construction depend on when a jury finds that the Owner was on notice of the extent of the defects.

The church hired NEXT for the design and construction of an addition and renovation of the existing structure. Following substantial completion in August 2003, several problems were encountered, and many of the problems related to water infiltration. The church and NEXT continued to investigate the causes and attempt various repairs over the following years to the point in 2009 at which NEXT indicated that no further repairs would be performed. In 2010, the church hired a consultant who identified several design and construction errors pertaining to the water intrusion and other problems, and the church initiated litigation in July 2010, nearly seven years after substantial completion. NEXT asserted that the six-year statute of limitation barred the church’s claims; the trial court agreed and dismissed the lawsuit. The South Dakota Supreme Court agreed in part that the claims pertaining to water intrusion were time barred, but a jury needed to make the determination as to whether a reasonable and prudent person would have made further inquiry to discover other defects in design and construction. While the Supreme Court sent the case back to the trial court on that narrow issue, this illustrates that the time needed for investigation as to the underlying causes for defects.

Periods of limitations start from the date of accrual, which generally means the date on which the injured party know or should reasonably have known that there was a legal claim to be asserted for the injury or loss. Construction issues can lie dormant for periods before becoming apparent, or be intermittent or seasonal—all of which can extend the time period for discovery and investigation. However, those tendencies may not extend the statute of limitations in any given case. Even though the parties may be cooperating in investigating the cause of the problems and the likely solutions, the owner needs to be aware of the applicable limitations period so that decisions can be made with legal counsel about the appropriate actions to preserve any legal claims.

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