Supreme Court Upholds Onerous Forum Selection Clause

In Atl. Marine Constr. Co., Inc. v. U.S. Dist. Ct. for W.Dist. of Texas, __ U.S. __, 134 S. Ct. 568 (2013), the U.S. Supreme Court upheld a forum selection clause that required litigation to take place in a jurisdiction far from the site of the project.

In challenging the clause, the subcontractor argued that the forum selection clause imposed by the general contractor was unfair, inconvenience to the parties, and would result in several key witnesses being inaccessible for deposition and trial.  The Supreme Court disagreed.  “When private parties agree to a forum-selection clause, they waive the right to challenge the pre-selected forum as inconvenient or less convenient for themselves or their witnesses, or for their pursuit of litigation.”  Instead, the forum selection clause “represents the parties’ agreement as to the most proper forum.”

This case had received significant attention from the subcontractor community, which has lobbied to require that all litigation should take place in the jurisdiction in which the project at issue is located.

Texas Supreme Court: "Good and Workmanlike Manner" Clauses in CGL Policies Do Not Necessarily Void Coverage

In a decision that will give some comfort to general contractors seeking coverage from their Commercial General Liability Policies, the Texas Supreme Court in Ewing Construction Co., Inc. v. Amerisure Ins. Co., Case No. 12-0661, held that a contractual provision requiring a contractor to perform its work in a good and workmanlike manner did not constitute an assumption of liability under the contract such that the contractual liability exclusion would apply precluding coverage.
 
Ewing signed a contract with a school district in Texas to build tennis courts in a good and workmanlike manner.  Shortly after completion, the school district complained about a variety of problems with the quality of the tennis courts and ultimately filed suit against Ewing (and others) alleging faulty construction of the courts.  Ewing provided notice to its CGL insurer (Amerisure).  The insurer denied coverage on the grounds the contractual liability exclusion contained in the CGL policy precluded coverage because Ewing contractually undertook the obligation to construct tennis courts in a good and workmanlike manner and thereby assumed liability for damages if the construction did not meet that standard.

Ewing responded by bringing suit in the U.S. District Court for the Southern District of Texas arguing that its express agreement to perform the construction in a good and workmanlike manner did not enlarge its obligations and was not an “assumption of liability” within the meaning of the policy’s contractual liability exclusion.  Amerisure prevailed at the district court and Ewing appealed to the U.S. Court of Appeals for the Fifth Circuit.  The Fifth Circuit certified two questions for the Texas Supreme Court to decided regarding the scope of the contractual liability exclusion under Texas law.

The Texas Supreme Court disagreed with the insurer’s position regarding the scope of the contractual liability exclusion.  Looking at the exceptions to the exclusion, which included situations where the insured’s liability for damages would exist absent the contract,  the Court found that the requirement in the contract that the tennis courts be built in a “good and workmanlike manner” was substantively the same as an allegation that Ewing negligently performed the work under the contract.  Accordingly, the Court concluded that “good and workmanlike” language was essentially superfluous because it did not heighten the contractor’s duty to perform beyond what would already be assumed in the absence of the contractual provision.  Likewise, the Court rejected the insurer’s argument that refusing to apply the exclusion in this case would essentially transform CGL policies into a surety bond since they would open the door to any and all claims pertaining to the contracted for work in contravention of the intent of the exclusion.  The Court stated that its ruling did not mean that other exclusions would not apply to exclude coverage.

The practical reality is that most CGL policies carry a “your work” exclusion, which specifically excludes claims involving damage to the contractual work that was provided and the insurer in Ewing likely would have prevailed if it had raised that exclusion.  Nevertheless, this case is significant because it should provide some comfort to contractors and design professionals who frequently worry that these clauses will void their coverage in the event of an otherwise insured loss.  The mere promise to meet the standard of “good and workmanlike manner” does not assume a duty that would not otherwise exist.

Architect to Serve Jail Time Over Design and Construction Defects That Killed Los Angeles Firefighter

An architect recently pleaded no contest to an involuntary manslaughter charge stemming from the ceiling collapse at a luxury home that the architect designed and built. The architect was sentenced to three years of probation and one year in county jail. For more information regarding this story, see the recent ENR story, "Architect Will Serve Jail Term Over Blaze that Killed L.A. Firefighter."

While most construction professionals strive to meet their obligations based upon pride and professionalism, there are risks on any project that can go beyond those that can be insured.

Preti Flaherty attorney Kenneth E. Rubinstein has written on the topic in the Constructor Magazine and has spoken on the topic at the American Council of Engineering Companies 2012 Annual Conference. For further information, Ken can be reached at (617) 226-3868 or (603) 410-1568 or by email at krubinstein@preti.com.

Why the Project Delivery Method Matters in Construction Litigation

The most common theme in construction litigation is a dispute between owners, contractors, and designers as to who was responsible for a construction defect that caused delays or additional costs. In these cases, the matter is often determined by which construction delivery method was being used by the parties involved.

Most construction is done on a design-bid-build model, meaning that the owner hires a designer (architect/engineer) to put together plans and specs, and then the owner hires a contractor to build to those plans and specs. When the owner hires the contractor, they are given an implied warranty (the Spearin doctrine) that if the contractor builds in accordance with the plans and specs that the design is sufficient so that the contractor will achieve the intended purpose. In other words, if an owner gives the contractor plans and specs that will result in a building envelop, the owner can't then blame the contractor when the contractor builds in accordance with the faulty design.

By contrast, some construction is done on a design-build basis in which the owner hires one firm that is responsible for both the design and construction of the building. In that instance, if something goes wrong, the owner doesn't have to figure out who is at fault - they have one firm that carries all of the responsibility. Notably, even in cases where the construction was generally done on a design-bid-build basis is not necessarily dispositive, because sometimes contracts will leave specific aspects of the construction (such as HVAC) to be done on a design build basis. In those instances, the designer will provide most of the design for the building, but will intentionally exclude certain systems, with the understanding that the contractor (or more likely his sub) will likely design the particulars of their solution anyway.

When litigating this issue, take a look at the plans and specs to find out whether the roof was being done on a design-build basis as that will be critical to your analysis. Part of that analysis is looking to see whether the contract provides a "design spec" or a "performance spec" for that aspect of the work. A design spec allows the contractor to determine the means and methods of construction (how to perform the work), but tells the contractor the specific materials or sizes that are required. Where a design spec is used, the owner (and by extension, the architect) retains responsibility for the design being used. A performance spec, by contrast, simply dictates the desired outcome, but leaves it to the contractor to determine how to achieve that outcome. In these instances (even where the contractor still has to provide shop drawings for their solution to be approved), the contractor ultimately bears all responsibility for all aspects of meeting the defined objective.

Mass Appellate Court Provides Another Reason to Ensure Indemnification Provisions Include Survival Clauses

Last week, the Massachusetts Court of Appeals ruled that a contractual indemnification clause does not necessarily survive termination, absent a survival clause keeping the obligation in force. While the Court applied Georgia law in reaching its decision, the principles that the Court applied would likely yield the same result using Massachusetts law.

In Fraco Products, Ltd. v. Bostonian Masonry Corporation, C.A. No. 12-P-933 (Mass. App. Ct., Sept. 26, 2013), an equipment manufacturer sold a piece of equipment to a masonry subcontractor on an installment payments basis. The contract included a “Transfer of Risk and Insurance” clause requiring the masonry subcontractor to indemnify the manufacturer from any losses caused by the equipment. The Transfer of Risk and Insurance clause did not state that it would survive the termination of the contract (while another section dealing with risk noted that that clause would survive termination).

After the final payment was made, there was an accident involving the equipment killing a passerby and two construction workers. The estate of one of the workers sued the manufacturer, and the manufacturer sued the subcontractor for indemnification.

The Court of Appeals dismissed the claim for contractual indemnity, stating that “Courts are to construe the language of an indemnification contract strictly against the party seeking indemnification.” The court went on to note that the “Transfer of Risks and Insurance” provision was “not followed by a survival clause.” Accordingly, since the “contract terminated by its own terms when [the subcontractor] made the final installment payment (sometime before the accident), the ‘Transfer of Risks and Insurance’ provision is not relevant here.”

This is another good reminder to contractors to make sure that their standard subcontracts include express language in their indemnification provisions that make clear that the subcontractor’s indemnification obligation survive termination.

Pay Promptly or Pay Penalties

The Vermont Supreme Court recently issued a ruling that should serve as a reminder to all contractors and owners of the importance of complying with prompt pay requirements.

In Dorr v. LaCoste, an owner refused to pay any part of a contractor’s inflated invoice. The Contractor sued. The court held that the owner was in the wrong for not paying the undisputed portion, and as a result, the court ordered the owner to pay its obligation, plus interest, and a penalty of 1% per month. The interest and penalties added up to nearly half of the original balance.

The takeaway from this case is that owners dealing with contractors (and contractors dealing with subs) should be extremely careful when withholding payment, and should only hold back money that is reasonably in dispute, and even then, it is essential to provide written notice of the basis for the withholding.

Contractor and Designer Tips to Improve Chances of Getting Paid

Engineering News Record (ENR) recently featured an article in its Viewpoint section authored by Preti Flaherty attorney Kenneth E. Rubinstein and Shawmut Design & Construction Chief Legal Officer, Doug Lareau focusing on strategies that contractors and designers can use to improve their chances of getting paid. A copy of this article can be found here.