In Gongloff Contracting, L.L.C. v. L. Robert Kimball & Associates, Architects & Engineers, Inc., 2015 Pa. Super 149 (Pa. Super. Ct. July 8, 2015), the Superior Court of Pennsylvania reversed the trial court’s decision and held that a claim for negligent misrepresentation could be based on faulty design documents under Section 552 of the Restatement (Second) of Torts. The case was brought by a structural steel subcontractor (Gongloff) against the architect-engineer (Kimball) for a university convocation center. Kimball provided Gongloff and others with the design of the steel structure and repeatedly denied allegations of errors in the design. But Gongloff alleged that the “never-before-utilized” design was in fact defective, and that Gongloff experienced various problems and significantly increased costs as a result of changes made to correct the design. Continue reading
Florida’s Third District Court of Appeals recently held that whether “prompt” notice was given to an insurer of a claim occurring over three and a half years after a hurricane caused damages to a condominium is a question of fact that must be given to the jury. This ruling confirms that the date on which an insureds’ duty to report a claim is triggered under an insurance policy’s notice provision is an issue of fact not ripe for summary judgment. The case is Laquer v. Citizens Property Insurance Corporation.
A unanimous panel of the Illinois Appellate Court recently held that three insurers have a duty to defend any case in which the bare underlying allegations – if proved – would render their insured liable, regardless of extrinsic facts. This sweeping ruling confirms that the duty to defend is a form of “litigation insurance,” protecting the insured against the costs of being wrongly sued, however groundless the claims against it may be. The case is Illinois Tool Works Inc. and ITW Finishing LLC v. Travelers Casualty and Surety Company, et al.
On December 9, 2014, the U.S. Civilian Board of Contract Appeals (“CBCA”) decided Kiewit-Turner, a Joint Venture v. Department of Veterans Affairs, in which general contractor Kiewit-Turner (“KT”) scored a major victory against the Department of Veterans Affairs (“VA”). The CBCA ruled that a change order required the VA to deliver a design that could be built for costs that were capped at a specified amount — shifting risk to the owner from the contractor.
Recently, the National Labor Relations Board (NLRB), in a 3-2 decision, in Purple Communications, Inc. and Communications Workers of America, AFL-CIO. Cases 21-CA-095151, 21-RC-091531, and 21-RC-091584, considered the right of employees under Section 7 of the National Labor Relations Act (Act) to effectively communicate with one another at work regarding self-organization and other terms and conditions of employment. Ruling on this question, the NLRB concluded that “employee use of email for statutorily protected communications on nonworking time must presumptively be permitted by employers who have chosen to give employees access to their email systems.” In doing so, it overruled the NLRB’s divided 2007 decision in Register Guard, 351 NLRB 1110 (2007), to the extent it holds that employees can have no statutory right to use their employer’s email systems for Section 7 purposes because its “analysis fails ‘to adapt the Act to changing patterns of industrial life'”; the NLRB majority in Register Guard accepted the employer’s contentions there that an email system is analogous to employer-owned equipment and that prior cases had established that employers could broadly prohibit nonwork use of such equipment. It further found it appropriate “to apply our new policy retroactively.
New Jersey’s Appellate Division recently reversed a trial court’s dismissal of a general contractor’s claim against a performance bond, holding that the bond must cover the general contractor as the intended obligee, even though the general contractor was not expressly named in the bond.
In Allied Building Products Corp. v. J. Strober & Sons, LLC, et al., A-1113-12T4 (NJ App. Div., September 5, 2014), Dobco, Inc. (“Dobco”) was the general contractor for a science hall renovation project at William Paterson University. J. Strober & Sons, LLC (“Strober”) bid for and was awarded a roofing subcontract on the project. The subcontract between Dobco and Strober required Strober to obtain payment and performance bonds, in the form annexed to the Dobco-Strober subcontract (which required that Strober be named obligee on the bonds).
Strober was awarded the subcontract with Dobco, but in accordance with the company’s procedure, Colonial did not review the actual subcontract. Nevertheless, an underwriter approved issuance of the performance bond, and Strober paid for the bond.
However, when the performance bond was issued, it named William Paterson University as the obligee, rather than Dobco. Dobco advised Strober that it rejected the bond, because it was required to name Dobco as obligee. As a result, Strober issued payment and performance bonds naming Dobco as obligee, using a power of attorney and Colonial’s seal. Colonial asserted that the bonds were a nullity, because Strober was only authorized to issue bid bonds using Colonial’s seal and power of attorney, in accordance with its “partnership account.” Nevertheless, Dobco rejected these bonds as well, and demanded that Colonial issue the bonds with various documents that ordinarily accompany payment and performance bonds. Strobco did not procure the bonds, but nevertheless began its work on the project.
During the project, Dobco became concerned with Strober’s performance, and requested the bonds that had not been delivered. Strober repeatedly contacted Colonial, but was advised several times that the bonds were “still in underwriting,” even though Colonial had already accepted the premium. Eventually, Dobco terminated Strober, and Strober filed for bankruptcy protection. Dobco filed a claim against the bond, but it was denied because Dobco had rejected both sets of bonds, and Colonial maintained, therefore, that they were not in effect.
On cross-motions for summary judgment, the trial court dismissed Dobco’s claim against the bond, citing established New Jersey law that a surety is “chargeable only according to the strict terms of its undertaking and its obligation cannot and should not be extended either by implication or by construction beyond the confines of its contract.” Since Dobco rejected both bonds, the trial court found that there was no valid contract between Colonial and Dobco.
The Appellate Division reversed, noting that, when a bond incorporates a contract by reference, the bond and the contract must be considered as one integrated document in ascertaining the meaning of the bond’s provisions. The Appellate Division held that “strict construction” should have only applied after the extent of the surety’s undertaking was determined; it should not have been used to interpret the language creating the surety’s obligations under the bond. Thus, the Court held that the bond was intended to secure Strober’s contractual obligation to Dobco, which required Strober to obtain a performance bond, naming Dobco as obligee. In so holding, the Court stated, “[W]hen Colonial agreed to bond [Strober’s] performance, it undertook the obligation to do so in the form required by the contract. That Colonial chose not to review the contract it bonded cannot relieve it of obligations voluntarily undertaken.” The Court was unmoved by Colonial’s argument that Dobco rejected both bonds, and ordered the bond reformed, consistent with the Dobco-Strober subcontract.
On August 26, 2014, the D.C. Circuit Court of Appeals decided the case of Sierra Club, et. al. v. Jewel, a case involving the National Register of Historic Places (Register), which is administered by the Department of the Interior. The Court of Appeals held, over the dissent of Senior Circuit Judge Sentelle, that the plaintiffs, a coalition of environmental groups and historic preservation organizations, have standing to challenge the decision of the Keeper of the Register that the “Blair Mountain Battlefield”, the scene of a historic and violent encounter between coal miners and coal companies in the 1920’s, and located in Logan County West Virginia, should not be included in the Register because the initial listing process was defective.
It appeared that the consent of the majority of property owners of the proposed listing — the Battlefield area is privately-owned by members of the Coal Association — was not obtained, and they objected to the listing. When the Battlefield was removed from the Register, the Sierra Club, the Ohio Valley Environmental Coalition, and other organizations (collectively, the Coalition) filed a lawsuit in the U.S. District Court of the District of Columbia, arguing that the Keeper’s decision was arbitrary and capricious. The district court granted the Department of Interior’s motion for summary judgment, agreeing that the Coalition did not have standing to bring the action.
The majority of the Court of Appeals reversed, holding that the Coalition indeed had standing because they were able to demonstrate an injury in fact in that their aesthetic interests in the Battlefield’s history was concrete and particularized, and this interest would be injured if the existing coal mining permittees exercised their permit rights and began coal mining operations. (Apparently, a listing in the Register would substantially rule out any additional coal mining in the area of the Battlefield.) The Court of Appeals agreed that the members of the Coalition had no legal rights to enter the area of the Battlefield, but this fact did not disqualify their interests. Also, there was a substantial probability of injury to their interests since coal mining operations are currently being conducted in the area today, and could be expanded (a number of coal mining permits have been issued by the State of West Virginia).
Judge Sentelle’s dissent is rather pungent. He states that the coalition is asserting an interest “in viewing the property of others. I know of no legal protection for that interest”. Indeed, none of the cases cited by the majority “would lead me to suppose that my neighbor has a legally protected right that I have invaded when I trim the grass and behead the clovers which he enjoys seeing”. According to Judge Sentelle, therefore, the plaintiffs do not have a legally protected interest.
Last month, in its decision in Transtar Electric, Inc. v. A.E.M. Electrical Services, Corp., Slip Opinion No. 2014-Ohio-3095, the Ohio Supreme Court ruled that the inclusion of term “condition precedent” in a contractual payment provision was an explicit statement of the parties’ intent to transfer the risk of the project owner’s non-payment from the general contractor to the subcontractor. This decision is significant for Ohio, a state that enforces the validity of pay-if-paid provisions, unlike other states that have found them void as against public policy.
Transtar involved a contract between a general contractor and an electrical subcontractor for the construction of a pool at a Holiday Inn. The subcontractor fully performed its work under the subcontract, but the general contractor failed to pay the last three of the subcontractor’s invoices because the owner had not paid the general contractor for the work reflected in those invoices. The subcontractor filed suit alleging both breach of contract and unjust enrichment, and both sides moved for summary judgment. While the general contractor did not dispute the facts asserted by the subcontractor, it argued that, under the contract, it did not have to pay the subcontractor until it received payment from the owner. The trial court agreed with the general contractor, but the appeals court reversed, stating that the contract’s payment provision was not sufficient to shift the risk of non-payment by the owner to the subcontractor. The Ohio Supreme Court then reinstated the judgment of the trial court.
The contract between the general contractor and the subcontractor contained the following language:
RECEIPT OF PAYMENT BY CONTRACTOR FROM THE OWNER FOR WORK PERFORMED BY SUBCONTRACTOR IS A CONDITION PRECEDENT TO PAYMENT BY CONTRACTOR TO SUBCONTRACTOR FOR THAT WORK
The Ohio Supreme Court acknowledged that, for a pay-if-paid clause to be valid, the parties’ intent to transfer the risk of owner non-payment must be clear. The court held that the language in the contract at issue satisfied this standard because the use of the term “condition precedent” negates the need for additional language to demonstrate the parties’ intent to transfer the risk.
For parties contracting in Ohio – and perhaps other jurisdictions that enforce pay-if-paid provisions – the Transtar opinion makes clear that special attention should be given to the term “condition precedent” when negotiating a payment provision. And going forward, understanding this bright-line rule announced by the Ohio Supreme Court could simplify payment disputes between contractors and subcontractors.
In an opinion filed July 3, 2014, the California Supreme Court provided some clarification to California law concerning an architect’s liability to foreseeable third-party purchasers of residential units for design errors and omissions. In Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP (July 3, 2014) ____Cal.4th ____; 2014 WL 2988058, Cal. July 03, 204 (NO. S208173), the Court held that a principal architect (defined by the Court as an architect who in providing professional design services is not subordinate to other design professionals) of a residential project owes a duty of care to future homeowners.
Beacon concerned a dispute over a residential condominium project in San Francisco. The original developers of the project engaged two architects to provide architectural and engineering services. Although the finished units were rented out for two years after construction, a condominium association had been created prior to construction, and eventually the finished units were sold as condominiums.
The condominium association sued the original developers of the condominiums, along with the architects, alleging numerous design defects. As against the architects, the association asserted causes of action in negligence and violations of California’s Right to Repair Act (Cal. Civil Code sections 895 et seq.). The architects, who had allegedly been paid more than $5 million for their work, demurred on the basis that they owed no duty of care to the association or its individual members. The trial court agreed with the architects that they owed no duty of care, as final design decision authority rested in the developers.
The appellate court reversed the trial court, applying the multi-factor test set out in California’s principal duty of care case, Biakanja v. Irving (1958) 49 Cal.2d 647, to determine that the architects owed the association a duty of care.
On review, the California Supreme Court affirmed the appellate decision. In California, the existence or absence of a duty of care in negligence in the absence of privity is governed primarily by a multi-factor test set out in Biakanja. The Beacon court found that the Biakanja factors demonstrated a duty of care if the facts as alleged in the condominium association’s complaint were proven:
(1) [The architects’] work was intended to benefit the homeowners living in the residential units that [the architects] designed and helped to construct.
(2) It was foreseeable that these homeowners would be among the limited class of persons harmed by the negligently designed units.
(3) [The association’s] members have suffered injury; the design defects have made their homes unsafe and uninhabitable during certain periods.(4) In light of the nature and extent of [the architects’] role as the sole architects on the Project, there is a close connection between [the architects’] conduct and the injury suffered.
(5) Because of [the architects’] unique and well-compensated role in the Project as well as their awareness that future homeowners would rely on their specialized expertise in designing safe and habitable homes, significant moral blame attaches to [architects’] conduct.
(6) The policy of preventing future harm to homeowners reliant on architects’ specialized skills supports recognition of a duty of care. Options for private ordering are often unrealistic for typical homeowners, and no reason appears to favor homeowners as opposed to architects as efficient distributors of loss resulting from negligent design.
The Beacon court further found that a negligence action against the principal architects was permitted by the Right to Repair Act. The architects had argued, in the face of language in the Act addressing “design professionals,” that nevertheless the Right to Repair Act was not intended to impose a duty greater than that imposed under common law. The Beacon court noted that even if the architects were correct regarding the intent of the Act, a duty of care existed at common law.
Beacon is a win for condominium associations and individual homeowners in these circumstances, in that it allows them potential recourse for design defects against the principal design professionals engaged by the developers.
In late March, a trial court in Bergen County, New Jersey dismissed a condominium association’s construction defect claims against several construction entities for failure to comply with the applicable statute of limitations. This decision’s appellate aftermath will be interesting to follow, because the trial court stripped away some of the protection that New Jersey’s discovery rule affords to property owners who become aware of latent defects well after a project is substantially completed.
Pursuant to the discovery rule, “a cause of action will be held not to accrue until the injury party discovers, or by an exercise of reasonable diligence and intelligence should have discovered that he may have a basis for an actionable claim.” Lopez v. Swyer, 62 N.J. 267, 272 (1973). And unlike some states, New Jersey’s discovery rule applies in contract cases involving latent construction and design defects. Torcon, Inc. v. Alexian Bros. Hosp., 205 N.J. Super. 428, 432 (Ch. Div. 1985). What this means is that the statute of limitations for design deficiencies and construction defects begins to run upon substantial completion. Mahoney-Troast v. Supermarkets General, 189 N.J. Super. 325, 329 (App. Div. 1983).
In Palisades at Fort Lee Condo. Ass’n v. 100 Palisade, 2014 N.J. Super. Unpub. LEXIS 743, *3 (Law Div. Mar. 31, 2014), construction was deemed substantially complete on May 1, 2002. The Association hired a consultant to perform inspections in November 2006, and in May 2007, the consultant issued a report identifying various construction and design defects. The Association, however, did not file a Complaint until March 2009, almost seven years after the date of substantial completion. The trial court held that although the Association’s claims may not have accrued until May 2007, when it received the report, it still had until May 2008 to file suit. The trial court stated, “[i]t has been well established in New Jersey case law that if the plaintiff has sufficient knowledge of its claim and there remains a reasonable time under the applicable limitations period to commence a cause of action, the action will be time barred if not filed within that remaining time.” Id. at *8. One of the reasons the court dismissed the Complaint is because the Association had one year to file suit after becoming aware of its potential claims.
The Palisades court cited to Torcon (another trial court opinion) for this proposition, although the Torcon court’s holding in this regard related to application of equitable estoppel in the context of a contractor’s misrepresentation or concealment of material facts. By contrast, the intent of New Jersey’s discovery rule is to toll the accrual of the statute of limitations, and the Association’s six-year statute of limitations should have commenced in May 2007, if that is the date when it knew or should have known that it may have claims arising out of defective construction.
Nevertheless, the Palisades decision should give pause to property owners and their attorneys to carefully monitor early signs of faulty workmanship, and to not assume that the discovery rule will automatically extend the six-year time period to bring claims for construction defects. A Notice of Appeal has been filed in Palisades and it will be interesting to see how the Appellate Division handles this issue.