New Hampshire Supreme Court Interprets "Your Work" Exclusion in CGL Policy

The NH Supreme Court issued an important ruling yesterday, clarifying the “Your Work” exclusion under a standard Commercial General Liability (CGL) Policy. See Cogswell Farm Condominium Association v. Tower Group, Inc.

Executive Summary

Under the Court's ruling, the “Your Work” exclusion in the standard CGL policy only bars coverage for property damage to the defectively constructed portions of a contractor’s work. It will not preclude claims for damage to the non-defective parts of the work. In other words, if a contractor’s defective work causes damage to other non-defectively built portions of the project, the contractor cannot recover its costs for repairing the defectively performed work, but can claim coverage for the damage to the non-defective work.

Discussion

In Cogswell, a contractor’s defective work (a leaky water barrier) caused water damage to several condo units that the contractor had properly constructed. The property owner sued the contractor and sought to recover under the contractor’s CGL policy. The contractor’s insurance carrier, however, denied coverage based upon the policy's “Your Work” exclusion in policy. This exclusion precludes coverage for property damage for “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” The carrier argued that this clause precluded any claim for damage to the contractor’s own work.

The trial court found in favor of the insurer, but the New Hampshire Supreme Court overturned the decision, holding that while the insurer’s interpretation was reasonable, the policy could also be read in a more limited fashion, only barring claims for the cost of repairing the defective work. The court held that since either interpretation was reasonable, the policy was ambiguous, and the ambiguity must be resolved in favor of the insured. Accordingly, the court concluded by stating that:

[The “Your Work” exclusion] bars coverage for property damage to the defectively constructed portions of the condominium units...however, [the exclusion] does not bar coverage for damage to those portions of the units that were not defectively constructed by [the Contractor] but were damaged as a result of the defective work.

Important Note

Courts nationwide have disagreed sharply on this issue. Accordingly, while Cogswell is good law in New Hampshire, courts in other jurisdictions may not follow the same rationale, and contractors should check the law in their specific jurisdiction when dealing with this issue.

Who is Entitled to Receive a “Refund” in NH of Impact Fees May Surprise You

We usually think that the word “refund,” refers to money being returned to the person who paid it.   The NH Supreme Court, in the recent case of K.L.N. Construction Company, Inc. v. Town of Pelham, 2013-0374, turned this notion on its head in concluding that a “refund” of impact fees could be paid to current property owners that never paid the impact fee in the first place.

The Town of Pelham adopted an impact fee ordinance in 1999 (pursuant to RSA 674:16 and RSA 674:21, V) assessing fees on new development in order to pay for capital improvements.  The ordinance provided that, if the Town had not spent or otherwise encumbered the impact fees within six years, “[t]he current owners of property on which impact fees have been paid may apply for a full or partial refund of such fees, together with any accrued interest.” (emphasis added).    Subsequent to the enactment of the  ordinance, the Town required certain residential real estate developers to pay impact fees to the Town.  After paying the fees, the developers sold the properties to individual homeowners.

Certain of these residential developers sought the refund of impact fees that they had paid more than six years earlier.  The Town argued that because these developers no longer owned the properties which had been developed, they lacked standing to seek a refund of the impact fees.  The trial court agreed with the Town finding that the statute did not prevent municipalities from choosing to direct refunds to the current property owners.  The developers then appealed and the NH Supreme Court affirmed.

The NH Supreme Court reached its conclusion primarily by considering how the term “refund” was used in connection with unused exactions in another statute (RSA 674:21, V(j)). Exactions are fees charged to a developer for off-site improvements needed for the occupancy of a development.  When an exaction is predicated upon a municipality paying a portion of the improvement’s cost, and the municipality fails to appropriate its share of the cost within six years, the statute provides that “a refund of any collected exaction shall be made to the payor or payor’s successor in interest.”  The residential developers argued a similar interpretation should apply to impact fees.  The Court concluded, however, that the absence of the “payor or payor’s successor in interest” language in the impact fee statute, which was enacted a decade before the exaction statute, indicated that the legislature did not intend the two sections to have identical meanings.  The Court then concluded that the Legislature must have intended the potential recipients of impact fee refunds to be broader than the residential developers who paid them or their successor’s in interest.  Thus, the Town properly interpreted the impact fee statute in making its decision to refund such fees to current property owners rather than the residential developers who paid them.

Arbitration Clause Enforceable Despite Inconvenient Forum Argument

The United States District Court for the Western District of Kentucky, in Weddle Enters. V. Treviicos-Soletanche, J.V., 2014 U.S. Dist. LEXIS 146812 (WD. Ky. Oct. 15, 2014), recently held that an arbitration clause in a contract between a Massachusetts-based general contractor, and a Kentucky-based subcontractor, which called for all disputes to be arbitrated in Boston was enforceable, despite the subcontractor’s argument that the clause requiring arbitration in Boston was unfair, unreasonable and unenforceable.

The Court held that “while a court may recognize that enforcement of a forum-selection clause… in an arbitration agreement may be inconvenient and burdensome to the parties in some instances, the Court does not have the authority to invalidate a term of an arbitration agreement simply on the forum non conveniens argument that it is unfair, unreasonable, or inconvenient to one of the parties.” While the Court can review the “making of the agreement to arbitrate,” the only grounds upon which a court may refuse to enforce an arbitration agreement under the Federal Arbitration Act (“FAA”) are those that exist for the revocation of a contract – fraud, duress, or unconscionability. The Court noted that a determination of the location or venue of the arbitration is a procedural matter for the arbitrator.

The Court also dismissed the subcontractor’s claim that the arbitration agreement was not governed by the FAA because it does not evidence a transaction involving interstate commerce. The Court noted that the subcontract was between parties with principal places of business in Massachusetts and Kentucky, respectively; the subcontractor procured some equipment and material through interstate channels; the U.S. Government funded the project through the Army Corps of Engineers; and all payments to the general contractor by the Army Corps of Engineers were wired to the general contractor’s bank in New York. The Court found that all of these factors indicated the arbitration agreement was a transaction affecting interstate commerce.

This case shows the importance of paying close attention to dispute resolution clauses at the time a contract is entered into. Even though you may not want to envision any issues arising at the time you are first entering into an agreement, as evidenced by this case, courts show great deference to how and where parties agree to resolve disputes in a written contract they have entered into.

Court Limits Application of No-Damages-For-Delay Clause

In a widely watched decision, the Texas Supreme Court recently ruled in Zachry Construction Corporation v. Port of Houston Authority that a local government entity could not rely on a no-damages-for-delay provision to shield itself from liability for deliberately and wrongfully interfering with a contractor’s ability to perform construction of a wharf. The contractor had originally proposed an innovative means of completing the work by using soil it dredged from the canal to enable it to build the wharf “in the dry.” After the contractor commenced its work, the Port determined that the wharf needed to be longer than originally anticipated to accommodate the expected ships. The Port issued a change order for this additional work despite its reservations about the contractor using its innovative method of working “in the dry” for this the new section. Two weeks after issuing the change order, the Port ordered the contractor to revise and re-submit its plans and ultimately refused to allow the contractor to use its chosen means and method of performing the work for this new section of the wharf. The contractor then sued for $30 million in delay damages.

Although a jury found that the contractor’s delay damages resulted from the Port's “arbitrary and capricious conduct, active interference, bad faith and/or fraud,” the lower appellate court reversed the jury’s verdict holding that the no-delay-damages provision of the contract barred the contractor’s recovery of delay damages In reversing the appellate court, the Texas Supreme Court found that “[a]s a rule, parties have the right to contract as they see fit as long as their agreement does not violate the law or public policy.” It concluded, however, that enforcing the no-delay-damages provision in the parties’ contract would “allow one party to intentionally injure another with impunity” and therefore would violate law and public policy. The court also rejected the argument that the contractor was a large, sophisticated company that could have protected itself by not including such a provision finding that “the law's protection against intentional injury is not limited to the helpless.”

This decision should give some comfort to contractors that are forced to include similar no-damages-for-delay provisions in their contracts that the intent and purpose of such provisions is to cover ordinary delay that may be experienced on a contract and can reasonably be anticipated by a contractor. Such provisions, at least as determined by the Texas Supreme Court, are not intended to protect an owner from damages it may cause by intentionally interfering or obstructing with a contractor’s work.

Massachusetts Enacts New Retainage Act

Massachusetts has enacted a new Retainage Act intended to accelarate the closeout of private projects involving $3 million or more. The Retainage Act limits the amount of retainage that can be withheld on applicable projects and provides procedures to speed up the payment of retainage. For a more complete summary of the key features of the Act, see our recent Construction Law Update.

President Signs Executive Order Requiring Federal Contractors to Disclose Labor Violations and Eliminate Pre-Dispute Arbitration Agreements with Employees

On July 31, 2014, the President signed an Executive Order that will require will require prospective federal contractors to disclose labor law violations from the past three years before they can get a contract with the federal government. Contractors will also be expected to collect similar information from many of their subcontractors. The new disclosure requirements will apply to new federal procurement contracts valued at more than $500,000; however, according to the Fact Sheet put out by the White House it will be “implemented on new contracts in stages, on a prioritized basis, during 2016.” The Executive Order anticipates the creation of a website by the General Services Administration that will serve as the one location where contractors can report this information to avoid having to provide it with each new contract.

In addition to the new disclosure requirements, the Executive Order also includes a provision directing companies with federal contracts of $1 million or more not to require their employees to enter into predispute arbitration agreements for certain employment-related claims such as statutory claims under Title VII and tort claims related to sexual assault or harassment. This provision is not intended to affect employment agreements currently in place that include such arbitration provisions.

Economic Loss Doctrine Does Not Apply to Condo Associations Says the Massachusetts Supreme Judicial Court

The Massachusetts Supreme Judicial Court recently held that the economic loss doctrine does not apply to condo associations. In Wyman, et al. v. Ayer Properties, LLC. 469 Mass. 64, (July 10, 2014), the Plaintiffs, as trustees of a condo trust, sought damages stemming from the negligent construction of elements of a condominium building constructed by Ayer. The Plaintiffs alleged that Ayer, which had purchased and converted the building in question into condominiums, negligently constructed the window frames, the exterior brick masonry, and the roof of the building. The negligent construction allegedly led to damage to both the common areas of the building and individual residential units.

The SJC reviewed the history of the economic loss rule, noting that the rule was developed in part to prevent the progression of tort concepts from undermining contract expectations. The rationale for excluding tort recovery for economic loss is that, “when a product injures only itself,” a party should be left to its contractual remedies. The commercial user can protect himself by seeking express contractual assurances concerning the product (and thereby perhaps paying more for the product) or by obtaining insurance against losses. The rationale underlying the economic loss doctrine is that damage to a product itself means simply that the product has not met the customer's expectations, or, in other words, that the customer has received “insufficient product value.” The maintenance of product value and quality is precisely the purpose of express and implied warranties"). As a result, “when a product injures only itself the reasons for imposing a tort duty are weak and those for leaving the party to its contractual remedies are strong.”

The SJC pointed out that the nature of condo ownership supports their conclusion that claims such as those presented here do not fit into the rubric of claims intended to be covered by the rule, as condo ownership gives both exclusive possession and ownership of the unit, and an undivided interest in the common areas. The court noted that as part of the statutory structure of condo ownership, “condominium owners cede the management and control of the common areas to the organization of unit owners, which is the only party that may bring litigation relating to the common areas of the condominium development on their behalf.”

In applying the rationale of the economic loss doctrine to the underlying case, the SJC noted a problem arises where the party exclusively responsible for bringing litigation on behalf of the unit owners for the negligent construction of common areas (here, the trustees) has no contract with the builder under which it can recover its costs of repair and replacement. Phrased differently, they cannot recover economic losses caused by defective construction. The SJC noted that the fundamental purpose of the economic loss doctrine is to confine the indeterminacy of damages, not to nullify a right and remedy for a demonstrated wrong and its harm. The court wrote that the rationale for applying the rule in this instance is made even weaker where the trustees seek damages which are finite and foreseeable, as the rule is intended to preclude recovery for intangible and unknown damages for lost contract or economic opportunity. The court reasoned that here, there was no such danger, as a lengthy trial established Ayer’s fault, the harm suffered by the trustees (as representatives of the unit owners’ rights in the common areas), and the exact amount of the damages. There were no allegations of consequential damages, but simply a reliably proven amount needed to repair or replace the negligently constructed window frames, masonry and roof. The purposes of the economic loss rule have little applicability in this circumstance.