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Groundbreaking Law

Construction & Design Industry Legal Commentary

Historic Construction Defects

By Dick Prentke on Posted in Uncategorized

The New York Times has recently reported that, after engineers successfully completed extensive renovations to reduce the tilt of the Leaning Tower of Pisa in Italy, sharply reducing its tilt, the repairs ended its status as leaning-est tower.

A few years ago, the Guinness World Records awarded the title of “Farthest Leaning Tower” to a solid red brick church in the northern German village of Suurhusen, which leans at an angle of 5.19 degrees, compared with the Pisa tower’s 3.9 degrees.  There are other contenders as well.

In the Swiss ski resort of St. Moritz, the 12th-century tower of St. Mauritius not only leans, but also stands on shifting ground that ensures that every few years hydraulic jacks must be called in to straighten it up.

Despite the leaning, no litigation is known to have been filed.

AGC Survey Results: Use of Building Information Modeling is Prevalent and Growing

By Brendan Peters on Posted in BIM, Construction Contracts

In preparation of its 2012 Construction Hiring and Business Outlook, the Associated General Contractors of America (AGC) received survey responses from over 1,300 construction firms in December 2011. The survey results show a dramatic increase in the use of Building Information Modeling (BIM). 

While construction firms reported using BIM on only 8% of projects in 2010, construction firms reported that they used BIM on 35% of projects in 2011.  Firms also expect BIM use to increase in the future. In particular, the healthcare and higher education sectors anticipate the greatest growth in BIM—with 53% of firms reporting that they plan to work on more BIM projects in 2012.

One likely reason for BIM’s expansion is the move to the Cloud for computing.  The AGC survey reveals that nearly 25% of firms plan to switch software applications to the Cloud in 2012. In addition to taking advantage of Cloud computing power, commentators elsewhere explain why BIM is even more important as a tool in 2012—including for increasing efficiency.

Using BIM, however, is not without risk. One way building owners, contractors and design professionals can help manage and allocate risk upfront is to use appropriate BIM-tailored contract documents. In an upcoming post, we will compare two of the most common standard BIM forms—the AIA E202-2008: Building Information Modeling Protocol Exhibit and the ConsensusDOCS 301 Building Information Modeling Addendum.

Subcontractors: Read Your Email, Especially When the Email Addresses Specifications

By Thomas Jantunen on Posted in Subcontractors

The Alaska Supreme Court recently held that the implied warranty of adequate specifications does not protect a subcontractor who fails read a transmittal email that clarifies the scope of work.  In this case, a the prime contractor solicited a bid by email from a subcontractor to build foundation piers.  The contractor attached the plans and the bid schedule to the email.  The email clarified the intent of the bid schedule, which was for double-pier foundations (i.e., each foundation line item in the schedule required two concrete piers.)  The estimator was not given the email and assumed that one pier, not two, was required for each foundation.  The subcontractor performed the work, realized it underbid the project by about eighteen concrete piers, and sued the construction company based on a breach of the implied warranty of adequate specifications. 

In Alaska, the implied warranty of adequate specifications is construed as a construction law principle, by which “contractors impliedly warrant the adequacy of the plans and specifications which they supply and require subcontractors to follow.”  The Alaska Supreme Court held that the implied warranty theory of liability did not apply here because there was no “defect” in the bid schedule, but, instead, a unilateral mistake by the bidder in not reading the plan or the email that clarified two piers per foundation.  Rather than expand the theory of an  implied warranty of adequate plans to the formatting of a bid schedule, the Court applied a more basic  principle of contracts: that a subcontractor bears the risk of mistake when it makes a bid without reading all pertinent information.  Handle Const. Co. v. Norcon Inc., ___ P.3d ___ (Alaska 2011) (Available at http://courts.alaska.gov/ops/sp-6616.pdf).

Debarred Contractors

By Dick Prentke on Posted in Prevailing Wages

Chapter 39.12 of the Revised Code of Washington requires that the hourly wages paid to workers on all public works contracts of the state or any county, municipality or political subdivision must equal or exceed the prevailing rate of wage in the same trade or occupation in the locality where the labor is performed.  A contractor violating the statutory provisions can be debarred—not allowed to bid on any public works contract.  Chapter 18.27 requires contractors to register with the State.  Chapter 50 requires unemployment compensation payments, and Chapter 51 requires the maintenance of industrial insurance (workers’ compensation).

The Washington State Department of Labor and Industries oversees prevailing wage, registration, unemployment compensation, and industrial insurance requirements for public works in the State.  It periodically updates a list of contractors that are not allowed to bid on public works projects—both as a prime contractor or a subcontractor.  Click here for the Debarred Contractors List published on January 24, 2012.

Some of the statutory provisions require more than one violation before debarrment occurs.  The Department has also recently updated the list of contractors that have violations of prevailing wage law, contractor registration law, or industrial insurance law.  If a company is on the Violations List but not on the Debarred Contractors List, it is still allowed to bid on public works projects.  Click here for the Violations List for Janaury 24, 2012

Questions can be directed to the Department’s Prevailing Wage program at 360-902-5335 or by email at pw1@lni.wa.gov.

Indemnity and Hold Harmless Provision Does Not Prevent Enforcement of Contract Rights Against Indemnitee

By Nick Gellert on Posted in Construction Contracts, Washington Supreme Court

Construction contracts often contain indemnity and hold harmless provisions.  The Washington Supreme Court issued a decision today that provides important clarification of the interplay between indemnity and hold harmless provisions and other contractual rights. 

In the case — City of Tacoma v. City of Bonney Lake – the City of Tacoma sought a judgment that municipalities with which it had contractual agreements to provide water were required to reimburse Tacoma for the cost of fire hydrants.   The first issue in the case was the proper interpretation of the contracts between Tacoma and the municipalities relating to the hydrants.  In addition, however, the municipalities argued — and the trial court agreed — that Tacoma was barred from pursuing the claim because the contracts included an obligation by Tacoma to indemnify and hold harmless the municipalities.   The trial court also had ruled that Tacoma was required to pay the legal expenses that one of the municipalities had incurred in defending Tacoma’s action. 

The contractual indemnity clause provided that Tacoma “releases, covenants not to bring suit and agrees to indemnify, defend and hold harmless … from any and all claims, judgments, awards or liability to any person.”   While the Supreme Court recognized that this provision was “undeniably broad,” it held that it did not prevent Tacoma from seeking to enforce its contractual rights against the municipalities.   The Court observed, “Concluding otherwise would produce the absurd result of precluding a party to a contract from disputing its obligations under that contract.”   The Court reasoned that an indemnified party should not be able to avoid its contractual obligations by arguing that such an enforcement action is a “claim” as that term is used in the indemnity context.   The Court reversed the ruling on the duty to defend on the same basis.

Construction Management Association of America’s Annual Survey of Owners

By Dick Prentke on Posted in Construction Costs

The Construction Management Association of America (“CMAA”) has recently released its 12th annual survey of owners.  The survey took place during the summer of 2011. 

More than half of the owner respondents found that many bids were priced well below the expected levels due to national economic conditions.  Nearly half said they were taking advantage of this opportunity to get work contracted at the lowest possible price.  Notwithstanding the low-price temptation, however, owners using best-value procurement policies have maintained that strategy and have not switched to bidding.

There was a split opinion on whether it was becoming more difficult to get a project fully completed than in past years. 

The survey also showed increasing desire by owners for construction management expertise in integrated project delivery and in transitioning their projects from construction to operations.

2012 Construction Cost Forecast

By Dick Prentke on Posted in Construction Costs

Engineering News-Record is forecasting a 2.1% increase in its construction cost index in 2012.  The construction cost index increase in 2011 was 2.5%.  The cost for special purpose building such as warehouses, office buildings, school buildings and power plants, increased between 3.3% and 4.3% last year. 

Wage rates are expected to increase in 2012 by approximately 2%, but material costs are generally expected to be slightly higher.  Structural steel prices were up as high as 18% last year but are expected to fall in 2012.  ENR also observed that lumber prices have bottomed out and are not yet bouncing back.

Optimistic construction economists are expecting healthy construction markets to return in 2013, while the pessimists are forecasting a return no earlier than 2014.

Washington Court of Appeals Clarifies Breach of Contract Damages and Addresses Recoverability of Attorneys’ Fees Under RCW 18.27.040

By Andrew Greene on Posted in Washington Court of Appeals

In Brotherton v. Kralman Steel Structures, Inc., the Washington Court of Appeals clarified the types of damages recoverable in a breach of contract lawsuit involving defective construction, and separately addressed the recoverability of attorneys’ fees under RCW 18.27.040(6), a provision of Washington’s Contractor’s Registration Act.

Brotherton involved a defective driveway constructed at a private residence.  In late 2007, the Brothertons contracted with Kralman Steel, a licensed general contractor, to remove and replace an existing driveway and to build a garage at their home.  Kralman Steel’s concrete contractor began pouring the driveway in early September 2008 and completed pouring and cutting control joints within a few days.  When finished, the driveway did not slope correctly and drainage problems were apparent immediately.  Kralman acknowledged the problem and agreed to perform repairs.  In October 2008, Kralman Steel removed and replaced part of the driveway but it did not solve the drainage problem.  Moreover, after the attempted repair, the concrete experienced uncontrolled and unsightly cracking.

Eventually, the Brothertons filed suit against Kralman Steel and its surety (based on the statutory $12,000 RCW 18.27 bond issued by the surety) and the matter proceeded to trial.  Following trial, the trial court concluded that Kralman Steel’s work was defective and that the “uncontrolled, unsightly cracking, insufficient thickness, insufficient preparation of the base, and the puddling of water caused by improper drainage [were] more than de[ minimis] defects.”  For the proper remedy, the court relied on the testimony of the Brothertons’ experts that removal and replacement was required, noting that “it seems to be pretty common in the construction industry and in the concrete industry, that [if] you have a bad pour, . . . [y]ou rip it out and you do it right.”  The trial court awarded damages of $12,796.20 but capped damages against the surety at $12,000 based on the amount of the bond. 

On appeal, the Court first confirmed the types of damages recoverable in a breach of contract lawsuit involving defective construction.  The Court affirmed:

In Washington, “[c]ontract damages are ordinarily based on the injured party’s expectation interest and are intended to give the injured party the benefit of its bargain.”  A party injured by a breach of contract may recover all damages that accrue naturally from the breach, including any incidental or consequential losses the breach caused. 

When damages are a result of defective performance in construction, as distinguished from incomplete performance, “‘it may not be possible to prove the loss in value to the injured party with reasonable certainty.’”  In such cases, Washington has adopted Section 348 of the Restatement, which recognizes that the injured party can usually recover damages based on the cost to remedy the construction defects, as a “sensible and workable approach to measuring damages in construction contract cases.”  Following this approach, even if the cost to remedy defects and restore the injured party’s expectation interest results in “‘a recovery somewhat in excess of the loss in value to him, it is better that he receive a small windfall than that he be undercompensated by being limited to the resulting diminution in the market price of his property.’”  

(Citations omitted.)

A second issue on appeal was whether the Brothertons were entitled to recover costs and attorneys’ fees from the surety in excess of the $12,000 bond amount.  Interpreting RCW 18.27.040(6) and Cosmopolitan Engineering Group, Inc. v. Ondeo Degremont, Inc., 159 Wn.2d 292, 149 P.3d 666 (2006), a prior Washington Supreme Court decision addressing the statute, the Court affirmed that costs and attorneys’ fees cannot be awarded in excess of the bond amount.  Because Kralman Steel’s “$12,000 bond will be consumed by the award of damages, [ ] there is no bond amount remaining from which attorney fees could be awarded.”

Click here to read the opinion.

ADA Construction Compliance Deadline Approaching on March 15, 2012

By Brendan Peters on Posted in Americans with Disabilities Act (ADA), Schools

Until March 15, 2012, Title II (public entity) or Title III (commercial facilities and public accommodation) entities that alter or construct a new facility have a choice between using the Americans with Disabilities Act (“ADA”) 1991 or 2010 Standards for Accessible Design.  Although the specific rules are too detailed to be summarized in this post, the United States Department of Justice website provides an outline of the substantive differences between the 1991 and 2010 Standards and a summary of important deadlines.

On March 15, 2012, all newly constructed or altered facilities must comply with the 2010 Standards.  This deadline means that your design professional should probably use the 2010 Standards if the design of your project is in progress but the final building permit or start of construction will not occur until March 15, 2012 or thereafter.

The applicable regulation (28 C.F.R. § 36.406(a)(3)) specifically states:

New construction and alterations subject to §§ 36.401 or 36.402 shall comply with the 2010 Standards if the date when the last application for a building permit or permit extension is certified to be complete by a State, county, or local government (or, in those jurisdictions where the government does not certify completion of applications, if the date when the last application for a building permit or permit extension is received by the State, county, or local government) is on or after March 15, 2012, or if no permit is required, if the start of physical construction or alterations occurs on or after March 15, 2012.

Although “the start of physical construction or alterations” is not defined by the regulations, it specifically does not include “ceremonial groundbreaking” or “razing of structures prior to site preparation.” 

The March 15, 2012 deadline is also important for certain project components even if they are not being altered or newly constructed.  Existing facilities in compliance with the 1991 Standards are grandfathered and do not need to meet the 2010 Standards unless they are renovated or subject to new construction.  Certain specific elements, however, for which there were no applicable 1991 Standards—like pools and play areas—must comply with the 2010 Standards by March 15, 2012.  Of course, entities must still comply with local building code accessibility standards if they are more restrictive than the ADA.

Stay tuned as we monitor guidance from the DOJ on these issues.

Partner in Contracting Partnership Held Not a “Third Person” for Purposes of “Insured Contract” Coverage

By Nick Gellert on Posted in Insurance, Washington Court of Appeals

Commercial general liability policies typically have an exclusion for obligations assumed by contract.  However, these same policies typically provide coverage for indemnity obligations, through an “insured contract” exception to this exclusion.  The Washington Court of Appeals has just decided a case analyzing application of such an insured contract exception in the context of a partnership indemnitor, and the court concluded that the partnership did not have coverage.  This decision is worth bearing in mind if you are contracting with a partnership and expecting the partnership’s insurance to cover indemnity obligations.

In the case — International Marine Underwriters v. ABCD Marine, LLC – a partnership (ABCD) entered into a contract to provide welding services for NSI on NSI’s property.  The contract was executed by ABCD’s senior partner — Albert Boogaard.  Under the contract, ABCD was obligated to defend and indemnify NSI against liabilities arising from ABCD’s operations, and it also was required to have NSI added as an additional insured on ABCD’s insurance policy.  During operations,  Mr. Boogaard suffered an injury that he contended was NSI’s fault and he made a claim against NSI.  Unfortunately, ABCD did not timely fulfill its obligation to have NSI named as an additional insured under its policies — apparently only providing non-binding certificates of insurance.  NSI, therefore, sought relief under the defense and indemnity provisions.  In turn, ABCD sought insurance coverage under its policy, contending that the exception to the exclusion for assumed liabilities was applicable under the following definition of “insured contract” in the policy:

That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another to pay for “bodily injury” or “property damage” to a third person or organization. . . .

The insurer agreed with ABCD that ABCD’s indemnity obligation to NSI was an “insured contract”  generally.  It, however, disagreed that Mr. Boogaard qualified as a “third person” under this definition.  The court agreed with the insurer.  Distinguishing a case from another state that found that an employee of an indemnitor was a “third person,” the court concluded Mr. Boogaard’s status as a partner of the indemnifying partnership made him a direct party, not a “third person.”  As such, ABCD had no coverage for its indemnity obligation to NSI, to further compound its failure to get additional insured coverage for NSI.