Alert: Massachusetts High Court Clarifies Construction Manager’s Role

The Massachusetts Supreme Judicial Court issued a very significant ruling yesterday regarding the use of the CM-At Risk delivery method, particularly on public jobs.

In Coghlin Electrical Contractors, Inc. v. Gilbane Building Company, the Court held that a construction manager who performed preconstruction services to assist in the development of plans and specifications did not waive the owner’s implied warranty as to the sufficiency of the plans and specifications. In addition, the Court held that the contract’s language requiring the construction manager to indemnify the owner from any subcontractor claims did not bar the construction manager from suing the owner – even to pass along a subcontractor’s claim – for a claim based upon errors in the plans and specifications.

The Massachusetts Division of Capital Asset Management and Maintenance (“DCAM”) entered into a contract with Ellenzweig Associates to prepare designs to build a psychiatric facility at the site of the Worcester State Hospital (“Project”).

When the designs were partially completed, DCAM entered into a contract with Gilbane Building Company (“Gilbane”) as the CMAR. Gilbane then entered into a subcontract with Coghlin Electrical Contractors, Inc. (“Coghlin”), to perform electrical work. The subcontract incorporated by reference the terms of the contract between DCAM and Gilbane. A dispute arose between Coghlin and Gilbane regarding additional costs that Coghlin alleged resulted from various scheduling, coordination, management, and design errors. After Coghlin filed suit against Gilbane, Gilbane filed a third-party complaint against DCAM, asserting that, "in the event that Coghlin proves its claims against Gilbane," DCAM committed a breach of its contract with Gilbane by refusing to pay Gilbane the amounts claimed by Coghlin. DCAM filed a motion to dismiss the third party complaint claiming that Gilbane could not obtain indemnification for design defects when Gilbane had participated in the development of plans and specifications for the Project.

The Massachusetts Superior Court had originally held that a Construction Manager who provides design assist services could not make a claim against the owner when later problems arise on the job due to defects in the plans and specs. That lower court held that although Massachusetts recognizes the “Spearin Doctrine,” in which the project owner gives an implied warranty regarding the feasibility of the designer’s plans and specs, the CM could not raise that warranty, given their role in developing the plans and specs. The Court also held that the contract’s indemnification language (which required the construction manager to indemnify the owner from subcontractor claims) constituted a further waiver in this case, since the dispute originated with a subcontractor’s complaint regarding the plans and specs.

The reversed the lower court’s decision, holding:

“(1) under our common law, a public owner of a construction management at risk project gives an implied warranty regarding the designer's plans and specifications, but the scope of liability arising from that implied warranty is more limited than in a design-bid-build project; (2) the construction management at risk contract in this case did not disclaim the implied warranty; and (3) the indemnification provision in the contract did not prohibit the CMAR from filing a third-party complaint against the owner that sought reimbursement under the implied warranty for damages claimed by the subcontractor arising from the insufficiency of or defects in the design.”

The SJC reached its decision in part based on the fact that “t]he possibility that the CMAR may consult regarding the building design does not suggest that the CMAR should be the guarantor against all design defects, even those that a reasonable CMAR would not have been able to detect.” The SJC found that the scope of the implied warranty will depend upon whether the CMAR “acted in good faith reliance on the design and acted reasonably in light of the CMAR's own design responsibilities.” In making such determinations, courts will need to consider the “CMAR's level of participation in the design phase of the project and the extent to which the contract delegates design responsibility to the CMAR.” The SJC signaled that “[t]he greater the CMAR's design responsibilities in the contract, the greater the CMAR's burden will be to show, when it seeks to establish the owner's liability under the implied warranty, that its reliance on the defective design was both reasonable and in good faith.”

This is a significant decision because the lower court’s ruling, if upheld, would have a chilling effect on construction using the CM-At Risk method as builders would be far more hesitant to provide design assist services, if they thought that doing so would make them responsible for the entire design.

For further information, please contact Ken Rubinstein at 617.226.3868 / krubinstein@preti.com; or Nathan Fennessy at 603.410.1528 / nfennessy@preti.com.

Principal May Not Be Held Liable Under “Joint Action” Theory for Breach of Contract By Company, But May Have Individual Liability for Unfair or Deceptive Trade Practices

The Connecticut Supreme Court recently issued an opinion in Joseph General Contracting, Inc. v. Couto, (SC 19209) that preserved the limited liability of a principal for breach of contract claims against the company, but opened the door to individual liability for principals for unfair or deceptive trade practice act violations. The Connecticut Supreme Court reversed the trial court and first level appellate court decisions finding that the principal of a company could be held liable for breach of contract under a “joint action” theory with his companies. In a somewhat unprecedented action, the Connecticut Supreme Court rejected the factual findings of the trial court and concluded that there was no “blurring” of the distinction between corporate and personal liability for the original construction contract. It held that the trial court (and appellate court) improperly looked to other agreements to draw such a conclusion. Finding that the subsequent agreements between the principals and plaintiffs clearly distinguished between the principal’s personal obligations and the construction contract with the principal’s company, the court found no basis for imposing personal liability for breach of the construction contract.

On the other hand, the Connecticut Supreme Court found that the principal could be held personally liable under Connecticut’s version of the unfair trade practices act. The court adopted the test employed by federal courts in construing the Federal Trade Commission Act that an individual may be held liable for an entity’s violation of the unfair trade practices act if the individual “either participated directly in the entity’s deceptive or unfair acts or practices, or that he or she had the authority to control them.” It then concluded that “[a]n individual’s status as controlling shareholder or officer in a closely held corporation creates a presumption of the ability to control.” Since the principal in Joseph General was the sole shareholder exercising control over the company, the court concluded that he could be held personally liable.

New American Arbitration Association Construction Industry Arbitration Rules in Effect July 1

The American Arbitration Association has issued revised Construction Industry Rules and Mediation Procedures, which are intended to provide “a more streamlined, cost-effective and tightly managed process.”  Some of the most significant amendments include:

• A mediation step for all cases with claims of $100,000 or more (with both parties having the ability to opt out).
• Consolidation and joinder time frames and filing requirements to streamline these increasingly involved issues in construction arbitrations.
• New preliminary hearing rules to provide more structure and organization to get the arbitration process on the right track from the beginning.  
• Information exchange measures to give arbitrators a greater degree of control to limit the exchange of information, including electronic documents.
• Availability of emergency measures of protection in contracts that have been entered into on or after July 1, 2015.
• Enforcement power of the arbitrator to issue orders to parties that refuse to comply with the Rules or the arbitrator’s orders.
• Permissibility of dispositive motions to dispose of all or part of a claim or to narrow the issue in a claim.
  

 

To download a copy of the revised Rules, click here.  Preti attorney Ken Rubinstein is a member of the American Arbitration Association’s Panel of Construction Industry Arbitrators, and is available to provide additional information regarding the implications of the revised rules.  If you have any questions, please contact Ken at 603-410-1568 or 617-226-3868.

State May Not Disclose Trade Secrets Submitted as Part of RFP Response

If you have ever agonized about whether to include certain confidential business information in a bid for a state contract in New Hampshire because of concerns that your competitors might get their hands on it, you should find some comfort in the New Hampshire Supreme Court’s recent decision in CaremarkPCS Health, LLC v. New Hampshire Department of Administrative Services, No. 2014-120.  In 2010, the Department issued a Request for Proposals (RFP) for pharmacy benefit management services for the State of New Hampshire’s health plan.  Caremark submitted a bid and ultimately obtained a contract with the State to perform the work.   

In 2011, the Department received multiple requests to inspect and copy Caremark’s bid and the final contract. Two of the requests were made by Caremark’s competitors. Caremark, after being informed by the Department of the requests, responded that certain confidential information contained in the bid and final contract was exempt from disclosure under the Right-to-Know Law. The Department and Caremark disputed whether certain information was subject to disclosure.  When the parties failed to resolve the dispute, Caremark filed a petition for declaratory and injunctive relief seeking to enjoin the Department from disclosing certain information.

After Caremark prevailed at the trial court level, the Department appealed to the New Hampshire Supreme Court claiming that the Uniform Trade Secrets Act did not trump the public’s right to information under the Right to Know Law.  The Supreme Court disagreed.  The Court concluded that the Department’s disclosure of Caremark’s trade secrets to its competitors would constitute “misappropriation” under the Uniform Trade Secrets Act and therefore constituted an exception to New Hampshire’s Right to Know Law.  It also rejected the Department’s argument that public policy favored disclosure concluding that when the legislature enacted the Uniform Trade Secret Act it “made the policy determination to prohibit the misappropriation of trade secrets.”

Project Management Firm Not Liable for Subcontractor’s Injuries

The Suffolk (MA) Superior Court, in Rodrigues, et al. v. Tribeca Builders Corp., et al. (Civil Action No. 13-00730-C), recently granted summary judgment to a project management firm retained by a property’s landlord/owner, who was sued after the Plaintiff was injured at a construction site.  The Plaintiff was injured when a handicap chair-lift he was helping to move at the construction site fell on him.  The Plaintiff was employed by a subcontractor hired by the general contractor.  The Plaintiff brought claims against the general contractor, another subcontractor, and the project management firm hired by the landlord to provide project management services on its behalf.

The Court held that the project management firm owed no duty to the Plaintiff, and thus the Plaintiff could not assert a negligence claim against it.  In reviewing the contract between the landlord and project management firm, the Court found that the project management firm was to carry out a variety of logistical, managerial and administrative functions related to the construction, most of which involved monitoring the project’s adherence to its agreed budget and schedule.  The Court described the firm’s role as that of a conventional “Clerk of the Works,” functioning as they eyes and ears of the owner in respect to the administration of the project.  Nothing in the contract between the owner/landlord and the project management firm remotely suggested that the firm’s administrative functions extended in any way to matters of construction safety.  The Court also noted that the firm had no contractual relationship with the Plaintiff, the general contractor, or any subcontractors.

The Court also pointed out that even if the project management firm could somehow be deemed to owe a duty of care to the Plaintiff, the undisputed evidence was clear that the firm had nothing at all to do with the accident that injured Plaintiff.  The firm did not attend or participate in safety meetings, did not direct or instruct anyone regarding how their work should be performed, and had no knowledge of, involvement in, or communications regarding the handicap chair-lift that injured the Plaintiff, or the equipment used to move it. 

In sum, the Court noted that while the project management firm played a significant administrative role in coordinating the scheduling and other logistical aspects of the construction project, there is no evidence that it was in “control” of the job-site, directed the work of any subcontractors, or had any connection whatsoever to the operations or movement of the chair-lift that caused the Plaintiff’s injury.

Preti Attorneys Secure Significant Win for NH Construction Industry – NH Superior Court Rejects Bid to Expand Scope of Nullum Tempus

In City of Rochester v. Marcel A. Payeur, Inc. et al., the City of Rochester sued multiple parties after a water tower that it had built in 1985 sprung a leak.  New Hampshire has adopted the doctrine of Nullum Tempus, which means that statutes of limitations do not apply against the State.  The question for this case was whether cities and towns are immune from statutes of limitation.  Preti Flaherty attorneys Ken Rubinstein and Nathan Fennessy represented an ENR 50 Contractor who was named as a defendant in the litigation.

Although the NH Supreme Court has previously held that Nullum Tempus applies to claims brought by the State, the Superior Court soundly criticized the doctrine, and refused to allow municipalities to exercise the same rights.  This decision should help to limit the scope of liability for design professionals, contractors and subcontractors working on municipal projects, by allowing the statute of limitations to establish an outside date within which claims can be presented.

Maine Legislature Considers a Bill that Would Limit Indemnification Provisions in Construction Contracts

The Maine legislature is considering a bill that, if passed, would have a significant impact on Maine contractors and subcontractors.  LD-587 would make void and unenforceable any provision in a construction contract requiring the parties or their sureties or insurers to indemnify a promisee against liability arising from the negligence or willful misconduct of the promisee.  The bill has been referred to the Committee on Labor, Commerce, Research and Economic Development.

If passed, neither contractors nor subcontractors could be held liable for the actions of other parties to their contracts.  While there are currently some limits to what passes as an acceptable indemnity agreement in Maine, this law would significantly alter the risks of liability in many construction contracts, since owners frequently contract for broad indemnity agreements with their contractors.

The bill was introduced by Assistant Senate Majority Leader, Senator Andre Cushing (R-Hampden) at the request of the Associated Builders and Contractors of Maine.  While it is somewhat unusual for ABC Maine to support a bill limiting contractors’ rights to contract for indemnity from their subcontractors, ABC Maine states that it supports this bill because it holds parties responsible for their own actions, regardless of their leverage in contract negotiations. 

 A public hearing on the bill was held on March 17, 2015.  In oral testimony and written submissions, representatives of Maine contractors and subcontractors explained that they support this bill because they are frequently compelled to submit to onerous contract requirements given Maine’s competitive construction industry.  Opponents argued that the bill is vague, unnecessary, shifts risk from contractors to owners, and puts undue constraints on the free market.  They further argued that contractors should assume responsibility for workplace injuries since they should have primary control over the worksite and procure insurance for accepting that responsibility.

The bill currently remains pending in committee.  Similar bills have been brought before the Maine legislature several times in the past 20 years and have failed to pass.