Source: http://www.constructionrisk.com/newsletter/constructionrisk-com-report-january-2016/?utm_content=d54e9fb9e387c2af5c993bdaf55e6f37&utm_campaign=January%202016%20Report&utm_source=Robly.com&utm_medium=email
Timestamp: 2019-10-23 00:21:49
Document Index: 666659919

Matched Legal Cases: ['§ 1973', '§ 1973', '§ 552', '§ 27', '§ 8', '§ 8']

ConstructionRisk.com Report (January 2016)
A1 - Architect not Liable to Home Purchaser for Economic Losses Caused by Failed Sewage Disposal System that Architect Certified to Local Government as Meeting Permit Requirements
A2 - Statute of Repose Bars Homeowner Suit against Contractor for Work Performed More than 10 Years Before Suit
A3 - Prime Contractor Liable for Failing to Pay Sub Full Amount the Prime Received from Government for the Sub’s Work
A4 - Federal Court Holds Engineer May Be Liable to Contractor for Both Breach of Professional Duty and Negligent Misrepresentation
A5 - Developer is Third Party Beneficiary of Window Manufacturer’s Warranty but Economic Loss Doctrine Prevents Recover of Consequential Damages
See similar articles: Architect’s Certification | Code Compliance | Consumer Protection Act | Economic Loss | Negligent Misrepresentation | Reliance
Where a homeowner sued an architect for negligent misrepresentation and violation of the Consumer Protection Act (CPA) based on the fact that the architect prepared and submitted a certification to the local government as required by law, attesting that a wastewater system was installed in accordance with permit conditions and performed successfully, the appellate court held the architect was not liable for economic losses resulting from the failure of the system. The court did a thorough analysis of the requirements of the Restatement of Torts, Section 552, for finding a defendant liable for negligent misrepresentation and concluded that the government and not the homeowner was the intended recipient of the certificate, and therefore there could be no intended reliance by the homeowner.
Liability might have been imposed on the architect, however, under a different subsection of the Restatement if the homeowner could show it was with the class of persons for whose benefit the duty to file the certificate was created. Homeowner, however, failed to prove that it actually received and relied on the certificate when purchasing the home. Moreover, there was no CPA liability since the standard for imposing that liability is that a person be directly involved in the transaction that gives risk to the claimed liability, and here the certificate was never prepared for or given directly to the homeowner by the architect. Glassford v. Dufresne & Associates, 2015 WL 3634591 (Vermont 2015).
This certification was made pursuant to 10 V.S.A. § 1973, which requires a permit for “constructing, replacing, or modifying a potable water supply or wastewater system,” id. § 1973(a)(3), and imposes the certification requirement as follows:
“(e) No permit issued by the Secretary shall be valid for a substantially completed potable water supply and wastewater system until the Secretary receives a statement from an installer or licensed designer certifying that, in the exercise of his or her reasonable professional judgment, the installation-related information submitted is true and correct and the potable water supply and wastewater system:
The architect sent the state agency the certification required by the statute. Prior to the homeowners closing on the house purchase, the homeowner’s attorney requested and received a copy of the certification so he could complete the title work necessary for settlement.
The homeowners asserted that the system failed because the soil placed over the system was improperly graded. The architect argued, arguing that the reason for the failure was that the house was too large and the homeowners operated a daycare center that added to the wastewater entering the system.
In any event, the trial court found that the homeowner was entitled to rely on the certificate and that the architect could be liable. The appellate court reversed that decision, holding that it would adopt the definition of the common law tort of negligent misrepresentation, in the Restatement (second) of Torts, § 552, but that the architect could not be found liable under that section since the homeowners failed to prove that they actually relied on the certificate prepared by the architect.
Section 552 of the Restatement provides:
“(1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance the information, if he fails to exercise reasonable case upon or competence in obtaining or communicating the information.
(3) The liability of one who is under a public duty to give the information extends to loss suffered by any of the class of persons for whose benefit the duty is created, in any of the transactions in which it is intended to protect them.”
As explained by the court, “plaintiffs were not the intended recipient of the certificate. The certificate was provided to the Agency for determining compliance with the permitted design and was not intended for use by homebuyers in deciding whether or not to effect a purchase.” The homeowner was therefore not able to rely upon the certificate and could not recover under Subsection 2 of Section 552 of the Restatement.
Turning to subsection (3) of Section 552, the court considered the public duty exception that could give rise to liability to a “class of persons for whose benefit” the public duty to give the information exists. Here, the court found that the homeowners fell within the class of persons for whose benefit the statutory duty to provide the information was created. But because they failed to demonstrate actual or direct reliance on the certificate, they had no cause of action against the architect.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 18, No. 1 (January 2016).
Copyright 2016, ConstructionRisk, LLC
Statute of Repose Bars Homeowner Suit against Contractor for Work Performed More than 10 Years Before Suit
See similar articles: Construction Defect | Consumer Protection Act | Expert Testimony | Statute of Limitations | Statute of Repose
A homeowner’s negligence suit against a contractor for construction defects resulting in water damage to the home was held to be untimely because it was filed more beyond the 10 year period established by the state’s Statute of Repose. Every winter following the original construction of the home in 2001, the owner noticed water damage in different areas of his ceiling and each time he asked the contractor to inspect the house, the contractor informed him that he inspected and repaired the problem. In 2012, after once again notice water damage, the owner had the situation inspected by another contractor who reported that the water damage was caused by improper ventilation in the roof – an issue never identified by the original contractor. The trial court and appellate court determined that the owner’s negligence and negligent misrepresentation claims arising from the water damage were barred by the two year statue of limitations and the ten year statute of repose because they relate to the 2001 construction. The fact that the contractor inspected and repaired the house each year after that did not start the clock for measuring the time limits set by those statutes. A two year statute of limitations also barred the Consumer Protection Act claims against the contractor for all but the two most recent years during which repair work was performed. Hein v. Sott, 380 Mont. 85 (2015).
The statute of limitations for general tort actions, including negligence and negligent misrepresentation in Montana is three years. Section 27–2–204, MCA. The statute of repose for actions for damages arising out of work on improvements to real property, § 27–2–208(1), MCA, provides:
[A]n action to recover damages ... resulting from or arising out of the design, planning, supervision, inspection, construction, or observation of construction of any improvement to real property ... may not be commenced more than 10 years after completion of the improvement....
Accordingly, the appellate court explained that “even if the statute of limitations is tolled, a tort action related to construction damages may not be brought more than ten years after construction is completed.”
The homeowner attempted to avoid the bar set by the statutes by arguing that each and every time the contractor inspected and repaired the home constituted a new act of negligence or negligent misrepresentation. The court did not agree. It said that in reviewing the complaint it was clear that the only injury alleged with respect to the home’s roof was water damage due to the contractor’s alleged failure to properly vent the roof. As stated by the court, the complaint did not allege that any of the contractor’s subsequent inspections or repairs created a new or separate injury. For this reason, the appellate court affirmed that the trial court correctly determined that the homeowner’s claims derived solely from the 2001 injury and were therefore barred by the statutes of limitations and repose.
Another count of the complaint alleged liability under the state’s Consumer Protection Act (CPA). Most of this claim was likewise deemed barred by a two statute of limitations, specifically applicable to CPA claims. Because the homeowner knew of the water damage every year and had it inspected and repaired every year, but nevertheless waited until 2013 – eleven years after construction was completed – to ask for a second opinion from a different contractor, the court concluded that the homeowner did not exercise due diligence to discover the cause of his injury, and the two year statute of limitations therefore must be enforced to bar the claims for damages occurring more than two years before the complaint was filed.
Only damages occurring during the last two years before the complaint were filed would be allowed to go to trial as not being barred by the statute of limitations. A separate issue before the court concerning the CPA claim was whether the homeowner was required to have the testimony of an expert witness in order to maintain the CPA claim. The court held that the trial court erred in granting summary judgment due to the lack of an expert. But because the CPA aspect of the complaint was based solely on the allegation of breach of contract for failure of the contractor to complete work on an entirely separate aspect of the house (an addition that was undertaken in 2011), the court held expert testimony was not necessary. This is because the claim was based on the allegation that the contractor failed to perform work for which he billed and was paid. It had nothing to do with the quality of the work but rather the allegation that the work was not done at all. An expert witness was not required to prove that aspect of the claim.
Prime Contractor Liable for Failing to Pay Sub Full Amount the Prime Received from Government for the Sub’s Work
See similar articles: Breach of Contract | Lump Sum | Miller Act | Subcontractor claim | Surety | Unit Price | Unjust Enrichment
A subcontractor performing masonry work for renovations of buildings at the Langley Air Force Base recovered in a breach of contract action against the Prime Contractor who, after receiving full payment for the subcontractor’s invoices from the government, failed to pay the subcontractor for the work that had been accepted by the government. In assessing the amount owed to the subcontractor, the court found that the subcontract for one aspect of the project contained a lump sum amount entitling the subcontractor to full payment of that amount, even though the actual work needed was only a small fraction of what had been anticipated by the government and the contractor when bidding the project. The court explained that the subcontractor gets the full financial benefit of having to do less work than anticipated, just as it would have to take the full loss if it had to do more work than it had estimated under the lump sum priced contract.
The court also found that where a deductive change order was issued for one of the work items, the Prime was only entitled to withhold from the subcontractor the amount that the Prime negotiated with the government for that deduction. The Prime had withheld a much higher amount “in order to make up for lost profits on other aspects of [the] prime contract. The court found that the credit for the deductive change that the Prime had negotiated with the government was reasonable and the Prime “cannot now seek to recoup its losses by demanding a higher credit amount.”
Judgment was also entered against Hanover Insurance Company, the surety for the Prime, based on joint and several liability under the Miller Act.
U.S. ex rel. Sprinkle Masonry, Inc. v. THR Enterprises, Inc., 2015 WL 1518900 (United States District Court, E.D. Va. 2015).
Partial Payment on Invoices – Unjust Enrichment. Per the subcontract, the subcontractor submitted monthly payment applications to the Prime each month, the amounts of which were then submitted to the federal government the following month as part of the Prime’s pay application. The Prime was obligated to pay its subcontractors within 15 days of receiving payment from the government. The court reviewed numerous invoices submitted by the subcontractor which showed that the Prime was paid in full for those invoices by the government, but then withheld part of the payment from the subcontractor. The court found that this was a breach of contract, or in the alternative, the subcontractor was entitled to recover the full amounts of its invoices under the legal theory of “unjust enrichment.” The court explained,
Under Virginia law, a viable breach of contract claim has three elements: “(1) a legally enforceable obligation of a defendant to a plaintiff; (2) the defendant’s violation or breach of that obligation; and (3) injury or damage to the plaintiff caused by the breach of obligation.”Filak v. George, 594 S.E.2d 610, 614 (Va.2004). “Under Virginia law, an action for unjust enrichment ‘will lie whenever one has the money of another which he has no right to retain, but which ex aequo et bono he should pay over to that other.’” Fed. Ins. Co. v. Smith, 144 F.Supp.2d 507, 523 (E.D.Va.2001) (quoting State of Qatar v. First Am. Bank of Va., 880 F.Supp. 463, 466 n. 4 (E.D.Va.1995)). Therefore, to prove its unjust enrichment claim, [the subcontractor] must prove first, “that it had a preexisting right to the money,” and second, “that the defendant justly should not retain the money.” Id.
Mobilization Costs. As part of the litigation, the subcontractor claimed it was entitled to interest on $10,000 in “mobilization” costs associated with stopping and starting its work. The court said there was no dispute that the subcontractor was entitled to the mobilization costs but that there was a dispute concerning when the Prime was obligated to pay those costs. This was relevant, since interest would accrue from that date.
The subcontractor had performed approximately 80 to 85% of the total work required on one of the two buildings under its subcontract when the government issued a stop work order. After the work order was lifted, the subcontractor offered to return to the job but asked the Prime to arrange for the construction of concrete footers so the subcontractor could perform the brick-work for a new addition at the same time it completed the tuck pointing and washing on the original renovation work.
The court found that it would not have been cost-effective for the Sub to return to the jobsite unless it could complete all aspects of its work, including the renovation work and the brick work on the new addition. Since the Prime had not arranged for the concrete footers to be constructed as requested by the subcontractor as of the trial date, the court concluded that the Sub could not yet return to the job. But the Sub had “established that it is prepared to return to the jobsite, but is precluded from doing so by [the Prime]. Author’s note: This is an interesting conclusion in that the court essentially allowed the subcontractor to dictate the conditions under which it would return to the jobsite. This was apparently entirely for the convenience of the subcontractor and the court permitted this, and even blessed it.
Lump Sum vs. Unit Price Contracting. The aspect of this decision addressing the question of whether the Prime could refuse to pay the subcontractor the lump sum price that the sub bid for certain work is so well explained that it is being quoted at length below. The explanation concerning the risks and rewards that a contractor bargains for with a lump sum bid is excellent. The fact that the subcontractor might end up with a windfall if it does not have to do as much work as expected does not change the terms of the contract that obligate the government and the prime to pay the subcontractor the full amount of the lump sum.
Sprinkle agreed to repair 5,000 square feet of exterior brick as required for $41,771, making the total value of the original subcontract $167,303.
The 5,000 square feet of brick repair “as required” meant that the subcontractor would perform whatever repair work was necessary, including replacement of broken bricks, tuck pointing or other repair work, for as much as 5,000 square feet of area. As Joseph Ziegler, Sprinkle’s masonry and contracting expert witness explained, the amount bid by the subcontractor was his estimate of what it would cost to perform the necessary repair work for 5,000 square feet, plus a reasonable profit. The subcontractor bid the lump sum amount with the understanding that there was a risk that, if substantial repairs were required, his bid amount might be too low and he would lose money on the contract. Alternatively, the subcontractor would understand that, if substantial repairs were not required, then he would not lose money on his bid. His hope, of course, is that amount bid would cover whatever costs he incurred to repairing up to 5,000 square feet of brick, plus allow him a profit. The bid amount, therefore, was not a “unit price” bid meant to reflect a specific price per square foot of repair.
Had the subcontract meant to solicit a unit price, then such unit price would have been reflected in the bid proposal. It was not. THR calculated that the bid amount of $41,771 for 5,000 square feet of brick repair equaled a unit price of $8.35 per square foot. Consequently, THR contended that Sprinkle was only entitled to payment for the amount of brick repair work actually required to be performed. However, the bid proposal very clearly provides a lump sum amount for the brick repair work. The defect in THR’s position is apparent from its argument that Sprinkle only performed 15 square feet of brick repair. Under THR’s interpretation, Sprinkle would be entitled to $125.25 under the contract. Given that the parties’ determined that mobilization costs alone totaled $10,000, a contract agreement to perform as little as 15 square feet of repair work makes no sense.
Clearly, the government thought 5,000 square feet of repair work would be necessary, and Sprinkle factored in the extent of repair work which might be required when making its $41,771 bid. Had the government, THR, or Sprinkle intended this task to have been bid and awarded as a unit pricing contract, such designation would have been both explicit and apparent on its face. Accordingly, the Court FINDS that this is a lump sum, not a unit price, contract.
Credit Prime Negotiated with Government on Deductive Change Must be Given in Total to the Sub (Ethical Issue)
After negotiating a $20,000 credit to the government for the subcontractor’s contract, the Prime sought to recoup almost $$48,000 in credit from the Sub, “ostensibly because this amount more accurately reflected the value of the work that was eliminated.” The court explains the Prime’s reasoning as follows:
THR [the Prime] contended that the subcontract specifically gave THR the right to issue change orders to reduce the scope of the subcontractor’s work. Further, THR contended that it was required to make other sacrifices to its bottom line in order to induce the government to accept its proposed contract modification. In THR’s view, all of its subcontractors should have had to share in THR’s cost sacrifice. The defect in THR’s argument is that, once THR negotiated with the government the specific amount of the credit for the elimination of the precast sills and lintels, THR was not free to exact from its subcontractor a higher credit, allowing it to keep the difference. Mr. Zeigler testified that such conduct would be unethical in the government contracting arena, and it certainly strikes the Court as so.
The court concluded that, “While THR may have made sacrifices to its bottom line in order to advance its overall interests in the prime contract, nothing in the subcontract gave it the right to exact concessions of this sort from Sprinkle [the subcontractor].”
Comment: This decision has so many lessons that can be learned that it would be easy to use this single decision to teach a short seminar on key principles of contract law and especially public contract law. This is a decision worth filing away for future reference.
Federal Court Holds Engineer May Be Liable to Contractor for Both Breach of Professional Duty and Negligent Misrepresentation
See similar articles: Baseline Report | Differing Site Condition | Negligent Misrepresentation | Professional Duty | Reliance
The United States District Court for the Northern District of California held that an engineer who prepares documents that contractors will rely on when preparing their bids owes a duty of care to the contractors, and thus can be held liable to these contractors for both breach of professional duty and negligent misrepresentation. Apex Directional Drilling, LLC v. SHN Consulting Eng’rs & Geologists, Inc., 2015 U.S. Dist. LEXIS 105537 (N.D. Cal. Aug. 11, 2015).
The dispute arose out of problems encountered by Apex Directional Drilling, the contractor on a construction project for the city of Eureka, California. The project involved installing a new wastewater pipeline using a technique known as horizontal directional drilling (“HDD”). Before the project was put out to bid, the engineer hired by city, SHN Consulting Engineers & Geologists, conducted geological studies and prepared reports describing the conditions on the project. One such report, the Geotechnical Baseline Report (“GBR”), was furnished to bidders so they could estimate the cost of performing the work. The GBR indicated that “the majority of the subterranean region targeted by the project was composed of stable soils suitable for HDD.”
Shortly after beginning work, however, the contractor ran into problems when it encountered mud and flowing sands that were very different from the soils described in the GBR. When the contractor reported these different conditions to the city and the engineer, the engineer “continued to maintain that the project was proceeding in the competent soils described in the GBR, and, on that premise, repeatedly gave Apex illogical instructions.” The contractor submitted change order requests seeking reimbursement for the cost overruns resulting from the adverse soil conditions, but the city, acting on the engineer’s recommendations, rejected the requests and ultimately terminated the contractor.
The contractor sued the city for breach of contract and then filed a separate complaint against the engineer asserting claims for breach of professional duty and negligent misrepresentation. The engineer argued that it could not be held liable to the contractor in tort because it did not owe the contractor a duty of care. However, the court disagreed and found that the engineer did owe the contractor a duty of care.
Claim for Breach of Professional Duty
The court observed that in the context of a negligence claim seeking economic damages where there is no contractual privity, California courts use a six-factor balancing test to determine whether a duty of care exists. The six factors are: 1) the extent to which the transaction was intended to affect the plaintiff; 2) the foreseeability of harm to the plaintiff; 3) the degree of certainty that the plaintiff suffered an injury; 4) the closeness of the connection between the defendant’s conduct and the injury suffered; 5) the moral blame attached to the defendant’s conduct ; and 6) the policy of preventing future harm.
Applying these factors, the court determined that the engineer did owe a duty of care to the contractor. In particular, the court found that the first, third and fourth factors favored imposing a duty of care, as the GBR was prepared for the purpose of establishing a baseline upon which the contractor would base its bid; mistakes in the GBR and the engineer’s subsequent actions caused the contractor to suffer considerable losses.
The court also reasoned that practical considerations supported its holding — because the duty was owed to “a specific, foreseeable and well-defined class”, there would not be “unlimited liability to a nebulous group of future plaintiffs.” The court thus denied the engineer’s motion to dismiss the contractor’s claim for breach of professional duty. The court noted that courts in other states (Arizona, Florida, South Carolina and West Virginia) have reached similar holdings.
Claim for Negligent Misrepresentation
The court also denied the engineer’s motion to dismiss the contractor’s negligent misrepresentation claim. The court noted that under California law, “negligent misrepresentation is a separate and distinct tort from simple negligence and requires a unique duty of care analysis.” The California Supreme Court has adopted Section 552(2) of the Restatement (Second) of Torts as the test for identifying who can recover for negligent misrepresentation.
Under the Restatement, “a plaintiff must be a member of a ‘specific class of persons’ involved in a transaction that the defendant ‘supplier of information’ intends the information to influence.” Applying the Restatement test, the court concluded that the contractor fell within the category of plaintiffs that could recover based on alleged misstatements in the GBR, since the GBR was intended to influence the contractor’s bid. The court noted that its conclusion was further supported by a previous California case, M. Miller Co. v. Dames & Moore, 198 Cal. App. 2d 305 (1961).
Comment: Note that in its ruling, the court did not actually hold that the engineer was liable to the contractor. By denying the engineer’s motion to dismiss, the court was simply holding that the engineer could be liable to the engineer – and that the finder of fact (e.g. jury) must be allowed to make that determination. Nevertheless, this is a significant ruling as it removes a defense that engineers have typically relied on when sued by contractors – the defense that the engineer did not owe the contractor a duty of care.
See similar articles: Consequential Damages | Economic Loss | Express Warranty | Third party beneficiary | UCC | uniform commercial code
Where the developer of an apartment complex filed suit as an intended beneficiary under the contract between a window manufacturer and one of the subcontractors on the project, the trial court denied the manufacturer’s demurrer (the equivalent of a motion to dismiss) because for the purposes of the motion, the developer had not shown it was an intended beneficiary of manufacturer’s contract and express warranty. The court found that the Virginia Uniform Commercial Code (UCC) applied to construction renovation, that the windows were deemed “goods” because they were attached to the building, and that the developer had a viable UCC claim against the manufacturer. However, the court applied the economic loss rule to limit the developer’s recovery to the replacement costs of the windows and to prevent the recovery of consequential damages to other property of the project. 139 Riverview, LLC v. Quaker Window Products, 2015 WL 1417873 (Virginia Circuit Court, 2015).
The court explained that, “A third party may sue to enforce the terms of a contract even though he is not a party to that contract if the contracting parties intended that the contract benefit that third party. [citation omitted]. ‘[T]his third-party beneficiary doctrine is subject to the limitation that the third party must show that the contracting parties clearly and definitely intended that the contract confer a benefit upon him.’”
Windows used in construction of a home may be considered “goods” and manufacturers of products used in construction may be sued under the UCC for defects in those products.
“As to third parties, the UCC also protects intended beneficiaries by abrogating the lack of privity defense where a plaintiff brings a warranty action against a manufacturer and the manufacturer might reasonably expect plaintiff to use the goods. Va. Code § 8.2-318. Va. Code § 8.2-715(2X3), however, requires privity as a necessary condition for recovery of consequential damages. The Supreme Court of Virginia interpreted this contract requirement to apply ‘only where recovery of consequential damages is sought.’”
“The economic loss rule limits recovery in tort against parties not in privity with the purchaser of a product to cases in which negligent manufacture or design has resulted in a product which constitutes a danger to the safety of persons or property other than the product itself.” Sensenbrenner v. Rust, Orling & Neale, Architects, Inc., 236 Va. 419, 424 (1988) (emphasis added). Purely economic losses are also a form of consequential damages which require privity of contract in order to allow recovery. Beard Plumbing & Heating, Inc., 254 Va. at 245.”
For these reasons, the court found the developer could recover under the warranty but only for the replacement costs of the window.