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Construction & Design Industry Legal Commentary

Washington Supreme Court affirms denial of engineer’s summary judgment motion because factual questions prevent application of the independent duty doctrine

Posted in Construction Contracts, Legal Developments, Washington Supreme Court

In Donatelli v. D.R. Strong Consulting Engineers, Inc., a 5-4 decision issued on November 14th, the Washington Supreme Court affirmed the denial of an engineer’s summary judgment motion seeking dismissal of claims for professional negligence and negligent misrepresentation under the independent duty doctrine (formerly the economic loss rule).

The Donatellis hired D.R. Strong in 2002 to develop their King County property into two short plats. In their amended complaint, the Donatellis alleged that D.R. Strong represented that the project could be completed in approximately eighteen months. Five years later, however, the project was not complete. As a result, the Donatellis alleged they suffered substantial financial losses and eventually lost the property in foreclosure. The Donatellis sued D.R. Strong for breach of contract, CPA violations, negligence and negligent misrepresentation claiming over $1.5 million in damages.

The Donatellis likely asserted the negligence and negligent misrepresentation claims to avoid application of a contractual limitation of liability clause, which limited damages to the greater of D.R. Strong’s professional fee or $2,500.

In an effort to constrain the Donatellis to their contractual remedies, D.R. Strong moved for partial summary judgment on the CPA, negligence and negligent misrepresentation claims. The trial court granted the motion on the CPA claim, but denied summary judgment as to the negligence and negligent misrepresentation claims. On discretionary review, the Court of Appeals affirmed.

In its majority opinion, the Washington Supreme Court considered whether it could apply the independent duty doctrine, stating, “The Court of Appeals found that the independent duty doctrine did not bar the Donatellis’ claim for negligence. We agree but find that the independent duty doctrine cannot apply to this case because the record does not establish the scope of D.R. Strong and the Donatellis’ contractual duties.”

In reaching this decision, the Court concluded (internal citation and quotation marks omitted):

The independent duty doctrine is an analytical framework that is used to determine whether one party to a contract can bring tort claims against another party to the contract. The independent duty doctrine will allow a plaintiff to pursue tort claims against a defendant when the plaintiff can prove defendant’s breach of a tort duty arising independently of the terms of the contract.  To determine whether a duty arises independently of the contract, we must first know what duties have been assumed by the parties within the contract.

Because there are genuine issues of material fact regarding the scope of D.R. Strong’s contractual duties to the Donatellis, we cannot apply the independent duty doctrine to say, one way or the other, whether D.R. Strong had a duty independent of the contract to avoid professional negligence.

In affirming the denial of D.R. Strong’s motion for summary judgment on the negligent misrepresentation claim, the Court concluded that the duty to avoid the alleged misrepresentations that induced the Donatellis to contract with D.R. Strong was independent of any contract the parties might have agreed to.

Chief Justice Madsen, in a spirited dissent joined by Justices Wiggins, James Johnson, and Charles Johnson, asserted that summary judgment should have been granted because (1) the Court’s 1994 Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist. No. 1 decision was dispositive, (2) the Donatellis’ claims did not involve personal injury or property damage, and (3) the parties’ written contract contained a limitation of liability clause covering both the negligence and negligent misrepresentation claims.

The Court’s decision means that the case will likely be remanded to the trial court to further develop the factual record regarding the scope of the parties’ contractual relationship.

Latest Architecture Billings Index shows continued improvement in 2013

Posted in BIM, Construction Economy

One of the leading indicators of construction activity recently reached its second highest level of the year. The Architecture Billings Index (ABI) for September shows a steady rise in the demand for design services. The September ABI score was 54.3, an increase from 53.8 in August. An ABI score over 50 represents growth in billings. The chart from calculatedriskblog.com illustrates the steady increase since the beginning of the year.

In its press release addressing the positive news, AIA Chief Economist, Kermit Baker commented:

The prolonged economic downturn that has affected the design and construction industry has actually resulted in the increased productivity levels as reported by architecture firms.  In addition to new approaches to business challenges, a very competitive marketplace, the utilization of new technologies, and a renewed focus on efficiency have architecture firms realizing all-time highs in workplace productivity, and these new efficiencies can greatly benefit clients from a project timeline and budget standpoint.

Notably, when we reported on the ABI at this time last year, billings in the West region were nearly flat. The West region, however, now leads the country with a score of 60.6. Billings for the commercial/industrial sector are also ahead of the multi-family residential, mixed practice and institutional sectors.

The recent ABI also reveals that 55% of firms reported that technology investments (including in BIM) are a major factor in an increase in productivity.

The ABI is considered one of the leading indicators of construction activity and is published by the AIA Economics & Market Research Group. The ABI provides a nine to twelve month glimpse into future non-residential construction activity. The ABI is computed as a three-month moving average to help minimize the random variation in monthly architecture billings. Construction companies use the index as a barometer of potential future demand for construction equipment and components.

The Arizona Supreme Court Refuses To Apply The Economic Loss Rule Where There Was No Contract Between The Parties

Posted in Legal Developments

In Sullivan v. Pulte Home Corp., 306 P.3d 1 (Ariz. 2013), the Arizona Supreme Court held that “if the homeowner does not have a contract with a homebuilder…the economic loss doctrine does not bar the homeowner’s negligence claims to recover damages resulting from construction defects.”  By limiting application of the rule to those situations where the parties to the lawsuit are also parties to the same contract, the case hampers defendants who would otherwise raise the economic loss rule as a defense, particularly against plaintiffs that are downstream purchasers.

In Sullivan, a home was constructed in 2000 and sold to the initial purchaser.  The initial purchaser resold it (to the Sullivan plaintiffs/homeowners) three years later, meaning that the homebuilder and the homeowners/plaintiffs were never parties to the same contract.  In 2009, the homeowners/plaintiffs started noticing irregularities with the home’s hillside retaining wall.  An engineer determined that the wall and home site had been constructed in a defective manner.  Due to Arizona’s statute of repose, the only claims available to the homeowners/plaintiffs were tort claims.

The homebuilder argued that the economic loss rule barred homeowners’/plaintiffs’ tort claims, but the Arizona Supreme Court rejected the homebuilder’s argument.  The Court concluded that Arizona’s economic loss rule only bars recovery of pecuniary or commercial damage that is itself subject of a contract between the plaintiff and defendant.  Because there was no contract between the parties, the Court reasoned the economic loss rule did not apply.  Instead, the Court explained, when it comes to tort-claims between non-contracting parties,” courts should instead focus on whether the applicable substantive law allows liability in the particular context.”

It is worth noting that although the Court refused to apply the economic loss rule, the Court expressed doubts the homeowners’ could maintain a negligence action against the homebuilder.

To read the Arizona Supreme Court’s opinion in full, click here.

Washington Legislature Updates School District Bidding Statute

Posted in Uncategorized

The Legislature passed HB 1633 to revise RCW 28A.335.190, the statute applicable to school district purchasing and public works.  The amendments primarily accomplish three things:  the statutory cost level for self-performed work was increased, the bidding requirements for public works less than $100,000 were deleted, and the inconsistency added during the 2008 update to the statute was corrected.  But, as so often has been the case, ambiguities remain.  For example, the revised statute fails to specifically address bidding requirements for public works expected to cost less than $100,000.

 The following table compares the updated requirements to the previous thresholds. 

 

Washington Legislature Clarifies Applicability of Statutes of Limitation to Arbitration

Posted in Arbitration / ADR

Through HB 1065, the Legislature amended RCW 7.04A.090 to clarify that the normal statutes of limitation apply to aribtration proceedings.  The amendment provides:  “A claim sought to be arbitrated is subject to the same limitations of time for the commencement of actions as if the claim had been asserted in a court.”  The revision takes effect July 23, 2013.

Modification to Interior Layout of Home Does Not Avoid Liability for Copyright Infringement Where Exterior Façade Is Substantially Similar to Copyrighted Architectural Design

Posted in Copyright

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Builders and contractors beware:   a builder and a construction contractor that copied the exterior of a copyrighted architectural design were liable for copyright infringement even though the interior of the building was substantially different than the copyrighted design, so ruled the Eastern District of New York. Axelrod & Cherveny Architects P.C. v. T. & S. Builders Inc., No. 05 Civ. 5573 (DRH) (ARL), 2013 WL 1856655 (E.D.N.Y. May 2, 2013).

The plaintiffs, who are architects, obtained valid copyrights for residential home designs known as “Home Design 2434” and “Georgetown II.” The plaintiffs created a marketing brochure showing the exterior of the Georgetown II:

 

The defendants, a builder and a construction contractor of residential homes, built, marketed, and sold four homes under the model name “the Franklin.” But they advertised their Franklin homes using photos of the exterior of the Georgetown II:

 

The defendants obtained this image from the plaintiffs’ marketing brochures. Additionally, in three of the Franklin sales contracts, the defendants included copies of the Georgetown II floor plans, with some handwritten notations.  The plaintiffs brought an action for copyright infringement.

The court granted summary judgment of liability on the plaintiffs’ copyright infringement claims. Concerning the two elements necessary to establish a prima facie case of copyright infringement, the court noted that the parties did not dispute the first element—ownership of a valid copyright—and focused on the second element—unauthorized copying of the copyrighted work.  

In considering the second element, the court analyzed whether the plaintiffs had proved that (1) the defendants actually copied their work and (2) there was a “substantial similarity” between the defendants’ work and the protectable elements of the plaintiffs’ work. The court easily found “direct evidence of copying, since it was undisputed that the defendants attached Georgetown II sales literature, including pictures of the Georgetown II’s exterior as well as its floor plans.” Axelrod & Cherveny, 2013 WL 1856655, at *3 (internal quotation marks omitted).

Turning to whether the defendants’ works were substantially similar to the plaintiffs’, the court found that the defendants’ designs were substantially similar to plaintiffs’ designs and the exterior facades of the actual Franklin homes were substantially similar to the  exterior facades of the plaintiffs’ Georgetown II homes. The defendants argued, however, that because they had made substantial modifications to the interiors of the Franklin homes, they were not liable for copyright infringement. For example, the defendants submitted evidence that one home had more than 35 modifications from the original plan, that, as the court recited in an earlier opinion, included the addition of a sun room, the elimination of one of the garages, which was converted into living space, the addition of a room behind the garage and a second floor deck, and modification to the locations of the windows and doorways in the family room. Axelrod & Cherveny Architects P.C. v. T. & S. Builders Inc., 88 U.S.P.Q.2d 1088, 1090 (E.D.N.Y. 2008). 

After supplemental briefing, the court disagreed and granted summary judgment on liability for copyright infringement. Using the “ordinary observer test” (whether an average lay observer would recognize the alleged copy as having been appropriated from the copyrighted work), the court held that “even if the evidence presented at trial demonstrated that the interiors of the Franklin homes as constructed were not substantially similar to the Georgetown II interior design, the court’s prior finding of a substantial similarity between the exterior designs necessarily leads to a conclusion that plaintiffs’ copyrights were infringed.” Axelrod & Cherveny, 2013 WL 1856655, at *5. The court cited case law that substantial similarity should be analyzed in light of “‘the total concept and feel’” of the works. Id. at *4 (quoting Boisson v. Banian, Ltd., 273 F.3d 262, 275 (2d Cir. 2001)).   

The defendants have filed a notice of appeal.

Lesson Learned: This appeal will present an issue of first impression to the Second Circuit: whether copyright infringement of an architectural design can be established on the basis of infringing only the exterior, and not the interior, design of the building. The district court here followed other courts outside the Second Circuit in holding that copyright infringement can be established in such circumstances. The evidence of blatant, direct copying in this case may have influenced the district court’s analysis of substantial similarity. Regardless, developers, builders, and contractors should take note, as making modifications to a copyrighted design may not be enough to avoid liability for copyright infringement.

Washington Legislature Revises GC/CM and Design-Build Requirements

Posted in Public Contracting

As expected, the Legislature passed SHB 1466 to modestly amend the alternative public works (GC/CM, design-build and job order contracting) requirements in RCW 39.10 and extend the “sunset” of the statute from July 1, 2013 to 2021.

Contrary to some expectations, the Legislature did not significantly amend the statute.  The major change is an amendment to the definition of design-build project eligibility.  SHB 1466 also:

  • Eliminates the $10 million project threshold for certified public entities to use GC/CM or design-build;
  • Deletes the requirement that certified bodies receive CPARB permission for smaller projects;
  • Maintains the requirement that CPARB approve projects of all sizes for non-certified public entities on a project-by-project basis;
  • Expands the number of design-build projects that CPARB can approve between $2 million and $10 million;
  • Clarifies that a design-build process can be used for portables of any cost; and
  • Expands the design-build and GC/CM selection factors and protest procedures.

The revised statute will take effect June 30, 2013.

ENR Announces Global Best Project Winners

Posted in Uncategorized

ENR recently announced its 2013 global “Best Projects” winners.  ENR looked at 66 projects in a variety of categories, including airports/ports, bridges/tunnels, cultural, education, environmental, government, health care, office, industrial, rail, residential, mixed use, roads, and entertainment.  Among other factors, ENR examined the safety and innovation of the projects, as well as the extent to which the project overcame challenges.  ENR also placed special emphasis on the global diversity of the project team. 

 Somewhat interestingly, the majority of the winners are projects from outside North America.  One notable exception is the BC Place Revitalization project in Vancouver, which received the Sports/Entertainment award.  PCL Constructors was the general contractor for the project.

Arbitration risks

Posted in Arbitration / ADR

Arbitration can be a longer and more expensive path to justice than litigation.  The latest example, described in the April 2, 2013 decision of the U. S. Court of Appeals for the Sixth Circuit in Thomas Kinkade Co. v. White (No. 10-1634), raises questions about the effectiveness of American Arbitration Association’s process and the utility of the party-appointed arbitrator concept as well as the inherent risks intrinsic to arbitrator performance.

One of the potential benefits—as well as potential detriments—of arbitration is finality.  It is generally quite difficult to overturn an arbitration award.  However, the Sixth Circuit unanimously vacated a $1.4 million award in a case that “was a model of how not to conduct” an arbitration.

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Architecture Billings Index shows 2012 as the best year since 2007

Posted in Construction Economy

For the fifth straight month, architecture firms reported improving business conditions according to the Architecture Billings Index (ABI) for December. In 2012, architecture firms reported growth during eight of the twelve months of the year—the best performance year since 2007. The chart from calculatedriskblog.com depicts 2012’s results against more than five years of past performance. Although the score of 52.0 in December was down from November’s score of 53.2, any ABI score above 50 represents an increase in billings.

In its press release addressing the news, AIA Chief Economist, Kermit Baker commented:

While it’s not an across the board recovery, we are hearing a much more positive outlook in terms of demand for design services. . . . Moving into 2013 we are expecting this trend to continue and conditions improve at a slow and steady rate.  That said, we remain concerned that continued uncertainty over the outcomes of budget sequestration and the debt ceiling could impact further economic growth.

While nationally the results are positive, performance in the West continues to lag. When we reported on the ABI in September, firms in the West had reported a score in August of 51.2, which at that time was the first monthly increase in billings in five years. Since September, however, firms reporting in the West have experienced a decline in business conditions. December 2012’s ABI score was 49.6 for firms in the West. The commercial/industrial sector shows the greatest increase in growth over the fourth quarter of 2012.

The ABI is considered one of the leading indicators of construction activity and is published by the AIA Economics & Market Research Group. The ABI provides a nine to twelve month glimpse into future non-residential construction activity. The ABI is computed as a three-month moving average to help minimize the random variation in monthly architecture billings. Construction companies use the index as a barometer of potential future demand for construction equipment and components.