Turning Off the Spigot of Damages in Construction Cases: The Doctrine of “Avoidable Consequences”

Jeff Wertman | Berger Singerman LLP | February 15, 2018

“Damage control” is often associated with measures taken to offset or minimize damage to reputation, credibility, or public image caused by a controversial act, remark, or revelation. However, the concept of damage control has been and continues to be prevalent in construction cases.

The doctrine of “avoidable consequences”, also sometimes referred to as the “duty to mitigate” damages, is an affirmative defense in construction cases and prevents a party from recovering those damages inflicted by a wrongdoer that the injured party could have reasonably avoided. Under the doctrine of avoidable consequences, a party must make reasonable efforts and exercise reasonable care to reduce the resulting damages as much as is practicable under the circumstances of the particular case or that party cannot recover damages flowing from consequence which reasonably could have avoided. However, a party need not make extraordinary efforts, including those which would require undue effort or expense.

A recent Florida case, Penton Business Media Holdings, LLC v. Orange County, Florida, Case No. 5D16–3935, 2018 WL 559684 (Fla. 5th DCA Jan. 26, 2018), illustrates why it is critical for a plaintiff seeking damages in a construction case to reasonably avoid the consequences of the damages caused by a wrongdoer.

The lawsuit in Penton arose out of an incident at the Orange County Convention Center (the “Convention Center”), which is owned by the plaintiff, Orange County. The defendant, Penton, leased several exhibit spaces from Orange County for a trade show at the Convention Center. Penton, in turn, leased one of the exhibit spaces to co-defendant, Ultratec. Penton advised exhibitors, including Ultratec, prior to the show that demonstration rooms (rooms for exhibitors to demonstrate or test their products) were also available for the show. Penton and Ultratec discussed the use of a demonstration room for a flame test display Ultratec wanted to conduct at the show. Thereafter, Ultratec hired co-defendant, Art F/X, to obtain a permit from Orange County, for the flame test. The permit was approved by Orange County and stated the flame test would involve the use of different theatrical flame effects.

Ultratec conducted its flame test and the display was monitored and supervised by the Orange County Fire Department. The sprinkler system became activated during Ultratec’s flame test. Although Orange County was in control of the demonstration room and owned the Convention Center, it did not initially know how to turn off its sprinkler system. As a result, the sprinkler system ran for approximately 30 minutes causing substantial water damage. Orange County subsequently sued based on theories related to strict liability and negligence against the lessee, Penton; the entity that obtained the permit, Art F/X; and the exhibitor, Ultratec.

Penton alleged in one of its affirmative defenses, the doctrine of avoidable consequences – the County’s damages to its property were created or enhanced by its failure to shut down or disengage the sprinkler system when reasonably possible. According to Penton, had the Convention Center shut off the sprinkler system when reasonably possible, its damages would be significantly less.

In its written opinion, the appellate court reversed part of the final summary judgment, which awarded damages to the County, concluding the County had not conclusively refuted Penton’s affirmative defense that the County failed to exercise ordinary and reasonable care in disconnecting the sprinkler system and had it done so, the water damage could have been avoided.

The doctrine of avoidable consequences is sometimes confused with the doctrine of comparative negligence. Both doctrines are affirmative defenses in construction cases which must be alleged and proven by a defendant, however, the avoidable consequences doctrine pertains to a plaintiff’s duty to prevent further injury and applies after a legal wrong has occurred. In contrast, the doctrine of comparative fault, which allows partial liability to be assigned to multiple parties, involves a party’s duty not to contribute to causing the initial injury.

The doctrine of avoidable consequences can have a substantial impact limiting damages in construction cases. Construction participants, including owners, developers, contractors, and sureties, should be familiar with this important principle.

Effective Use Of Examinations Under Oath In Pipe Freeze Claims

Seth I. Weinstein | Lewis Brisbois | March 9, 2018

While the weather has temporarily warmed in parts of the Northeast, January brought bitter cold temperatures throughout the East Coast and elsewhere. A deluge of claims have followed associated with frozen pipes.

Many claim disputes pertain to whether an insured utilized “best efforts,” “due diligence,” or “reasonable care” to maintain heat in an insured property. Further, many claim disputes pertain to whether a property was vacant, unoccupied, or under construction at the time of a loss. It is imperative that insurers request and obtain the necessary documents and information from an insured to evaluate these coverage issues. Utility and maintenance records should be requested and analyzed, as well as documentation concerning the occupancy and use of the property. Third parties reported to be tenants/occupants can be questioned and in many cases on-site inspections of the property reveal alternative and/or contributing causes to pipe bursts often blamed on freeze conditions.

Many insureds are represented by public adjusters who provide limited information on behalf of insureds with regard to efforts made to maintain heat and/or to establish a property was not vacant or unoccupied. Further, often allegations are made that construction was underway at a property at the time of the loss with no supporting documentation.

Utilizing an examination under oath to address and investigate these issues is very often an efficient and important investigation tool. Conducting an examination under oath with coordinated document/information requests will provide an insurer with the opportunity to obtain necessary information which will enable prudent coverage determinations to be made. An examination under oath is an important investigative tool, which permits an insurer to determine the merits of legitimate claims in addition to exposing fraudulent claims.

It is widely recognized that examinations under oath are too infrequently used in claims that do not involve suspicious circumstances. An examination under oath assists the insurer to possess itself of all knowledge and information in regard to the facts, which will enable the insurer to decide upon its obligations under a policy and to protect from false claims.

Although some examinations under oath can be a day long and detailed, many are simple and often take 1 to 2 hours. Examinations under oath provide a cost-effective means to evaluate claims and often lead to the avoidance of litigation. Examinations under oath can be conducted in many claims on an expedited basis, which enables prompt coverage positions to an insured.

The Importance of Timely and Proper Notice of a Claim Under a Contract

Michael Wilson | Greensfelder Hemker & Gale PC | February 22, 2018

The author has practiced construction law for nearly 40 years and continues to be amazed or disappointed, as the case may be, by the frequency of one type of problem: Non-compliance with what are usually simple contract terms for giving notice of a claim for additional compensation, damages or time.

Why does this happen? Sometimes, it amounts to inattention. It can also be attributed to unawareness of the governing notice clause. And frequently, the contractor or subcontractor prefers the personal touch by informally discussing or negotiating the matter rather than providing a “cold,” seemingly formal notice of claim. While the author appreciates the dynamics of a good relationship and that a claim can be seen to muddy a good rapport, one must be mindful that contractual notice provisions are part of the bargain that was struck. The parties agreed to this procedure for handling claims, and therefore no one should be surprised or shocked over a contracting party that honors the contract terms. In today’s construction world, “claim” is not a four-letter word, and one can present a notice of claim in a persuasive, and yet not necessarily adversarial or confrontational, manner.

A notice of claim can serve a valuable purpose. By way of example, suppose the general contractor believes a revised drawing to “clarify” the work to be performed actually amounts to a change that will increase construction costs. The owner may be unaware of the contractor’s position absent notification. Once notified in writing, the owner may elect to take steps to eliminate or reduce the change, or to choose a less expensive alternative.

Unfortunately for the contracting party wishing to preserve its claim, many courts and arbitrators will strictly enforce a notice of claim clause even when enforcement has adverse, even dire, economic consequences for the claimant. Enforcement is even more likely when the claim provision warns the prospective claimant that the claim is deemed waived if the notice of claim is untimely or omits the necessary content. Reported cases from around the country are replete with claim denials based on the failure to honor a notice provision.

Depending on the circumstances, the lack of the notice can sometimes be overcome. Examples of defenses to lack of proper notice are: (1) no prejudice — the other contracting party was not prejudiced by the lack of strict compliance; (2) substantial compliance — notice was effectively given by another means (such as discussion recorded in meeting minutes); and (3) waiver — the parties proceeded to discuss the merits of the claim notwithstanding a lack of timely or proper notice, or the parties have adopted a course of conduct in handling claims that varies the contractual terms. But why risk forfeiting a claim on what could be argued to be a technicality?

Know your contract — this fundamental principle cannot be overemphasized. It may be worthwhile to prepare a matrix or table identifying the different notice clauses by: contract citation; subject matter (e.g., claim for a differing site condition, claim for changed work, claim for a time extension, etc.); deadline for notice; and a summary of the content needed.

Standard forms of construction contracts and design-build contracts include notice clauses. Where contract negotiation is possible, change the notice provisions to meet your expectations.

Two key notice clauses in the 2017 edition of the AIA A201 General Conditions are summarized below (but beware!—the actual notice terms and conditions should be reviewed and followed, not this summary): (1) Notice of a “Claim” (for time and/or money) shall be submitted within 21 days after the later of: (a) the event that gave rise to the Claim or (b) the claimant first recognizes the condition giving rise to the Claim (section 15.1.3); and (2) Notice of a claimed differing site conditions shall be given promptly before the conditions are disturbed and in no event later than 14 days after their observance (section 3.7.4).

Key notice provisions in the 2014 edition of the Consensus Docs 200 Standard Agreement and General Conditions Between Owner and Constructor are summarized below: Notice of a concealed or unknown site conditions shall be given promptly after stopping the affected work (section 3.16.2); Notice of a delay must be promptly given to the Owner (section 6.3.3); and Notice of a claim for additional compensation or time, including a notice of a delay claim (see sections 6.4), shall be submitted before commencing the work involved unless it is an emergency, and, in any event, the notice shall be given within 14 days after the later of: (a) the event that gave rise to the claim or (b) the claimant first recognizes the condition giving rise to the claim (section 8.4). In addition, the claimant under section 8.4 shall submit the supporting documents for its claim within 21 days after the notice of claim (section 8.4).

Both of the above-referenced standard documents include other notice provisions affecting the right to formally submit the claim to dispute resolution.

Timeliness: Meet the notice of claim deadline. Be aware of short-notice deadlines and don’t let them slip. Do not procrastinate.

Content: In addition, the content should comport with what the notice clause specifies. Insufficient content within the claim notice may be met with a refusal to consider the claim. So, a claimant should ensure that not only is the deadline for notice honored, but so, too, is the requisite substance and support.

Sometimes, a claim notice clause asks the impossible or near impossible. This can occur when the provision calls for a notice soon after an event or condition or action causing delay or disruption, and the contract terms specify that the notice include then-unknown details such as the full impact cost and time-wise. Suffice it to say that the law does not expect the impossible. Although specific legal advice is probably warranted, the claimant should furnish whatever claim-related information is available and commit to following up when more is known.

Delivery of the notice: Comply with the contractual provision, if any, which identifies the means by which a notice under the contract shall be given. While courts and arbitrators tend to be more sympathetic with a claimant who can prove the notice was actually received by the intended recipient regardless of the means of delivery, why risk it? If one of the authorized methods for notice delivery affords proof of receipt, use that method to avoid any later contention of non-delivery.

A timely, proper and persuasive notice of claim is the gateway to the claimant preserving the claim for ultimate resolution on the merits. Without compliant passage through that gateway, the route to claim resolution is uncertain and risky.

“Good Faith” May Not Be Good Enough: California Supreme Court to Decide When General Contractors Can Withhold Retention

Erinn Contreras and Joy O. Siu | Construction & Infrastructure Law Blog | March 7, 2018

It is industry standard in California for owners of a construction project to make monthly payments to a contractor for work it has completed, less a certain percentage that is withheld as a guarantee of future satisfactory performance. This withholding is called a retention. Contractors generally pass these withholdings on to their subcontractors via a retention clause in the subcontract. Under such clause, if a subcontractor fails to complete its work or correct deficiencies in its work, the owner and the general contractor may use the retention to bring the subcontractor’s work into conformance with the requirements of the contract.

When and how retention payments must be released are governed by, among other statutes, Civil Code section 8800 et seq. Specifically, Civil Code section 8814, subdivision (a), states that a direct contractor must pay each subcontractor its share of a retention payment within ten days after the general contractor receives all or part of a retention payment. Failure to make payments in accordance with Section 8814 can subject an owner or a contractor to a (1) two percent penalty per a month on the amount wrongfully withheld, and (2) claim for attorney’s fees for any litigation required to collect the wrongfully withheld retention payments. (Civ. Code, § 8818.)

However, there exists an important exception to the ten-day deadline: whenever a “good faith dispute exists between the direct contractor and a subcontractor,” a direct contractor may withhold from the subcontractor’s retention an amount not in excess of 150 percent of the estimated value of the disputed amount. (See Cal. Civ. Code, § 8814, subd. (c) (Section 8814(c)).) There is very little in the statute or case law, however, defining what constitutes a “good faith dispute” sufficient to justify withholding funds from the retention.

The California Supreme Court has decided to fill this void, and granted a petition for review in United Riggers & Erectors v. Coast Iron & Steel, Case No. S231549 (United Riggers). The California Supreme Court certified the issue of whether “a contractor [may] withhold retention payments when there is a good faith dispute of any kind between the contractor and a subcontractor, or only when the dispute relates to the retention itself in the case of.”

In United Riggers, 243 Cal.App.4th 151 (2015), the General Contractor, Coast Iron & Steel Co. (Coast), entered into a direct contract with an owner and a subcontract with United Riggers & Erectors (United). After the work was completed, and after Coast received its retention from the owner, Coast continued to withhold United’s retention on the ground that United had submitted various change order requests and damage claims that Coast disputed, citing Section 8814(c)’s good faith provision.

The Court of Appeal disagreed with Coast and held that this was not permissible under Section 8814(c), holding “a contractor is entitled to withhold a retention payment only when there is a good faith dispute regarding whether the subcontractor is entitled to the full amount of the retention payment.” (Emphasis added.) The Court of Appeal then remanded for an assessment of interest and attorney’s fees due to United for the delayed retention payment claim. In reaching this conclusion, the Court of Appeal reasoned that “[t]o excuse Coast in this case from paying United the retention payments would unduly increase the leverage of owners and primary contractors over smaller contractors and subcontractors by discouraging subcontractors from making legitimate claims for fear of delaying the retention payment.” Such a consequence was not to be borne, the Court of Appeal explained, in light of the “broader remedial purpose of the prompt payment statutes” to “encourage general contractors to pay timely their subcontractors and to provide the subcontractor with a remedy in the event that the contractor violates the statute.”

This policy concern was the primary focus of the California Supreme Court at the oral argument in United Riggers, which took place on March 6, 2018. Coast’s counsel began with a “plain meaning” analysis of Section 8814(c), juxtaposing its language with Civil Code section 8812—which expressly states that retention payments may only be held when “there is a good faith dispute between the owner and direct contractor as to the retention payment due.” (Emphasis added.) This predicated Coast’s argument that if the Legislature intended to limit the scope of disputes between direct contractors and subcontractors to those relating to the retention itself in Section 8814, the Legislature would have done so as it did in Section 8812 related to owners and direct contractors. The Court pushed back against this construction of the statute, positing whether under such interpretation, a general contractor would be able to withhold retention payments for a dispute related to any issue, even one outside the scope of the contract, such as a property border dispute. If this were the case, Justice Kruger cautioned, such interpretation would allow contractors to leverage the disbursement of retention payments to resolve separate disputes on unrelated projects.

The case has been submitted, and an opinion is expected to be issued in approximately 90 days. The opinion will certainly have wide-reaching effects in the construction industry. Namely, in the common event of contractor and subcontractor disputes, contractors will have to be cautious in assessing offsets against the retention, particularly in situations where the dispute involves mixed claims of changed and delayed work and subcontractor deficiencies, lest they be liable for prompt payment penalties and attorneys’ fees.

Are You Sure You’re an “Additional Insured”? The Second Circuit Says You May Not Be

Pillsbury Winthrop Shaw Pittman LLP | March 6, 2018

In a previous blog post we discussed a New York trial court decision in which the court granted additional insured status to entities that did not contract with the named insured, but were referenced by category in the named insured’s subcontract. But before concluding you’ve got additional insurance, there’s another opinion you should know about. Around the same time, the U.S. Court of Appeals for the Second Circuit came to the opposite conclusion holding that an Additional Insured endorsement did not cover the University of Rochester Medical Center, even though the subcontract specifically provided that the University would be an additional insured, and Harleysville Insurance Co. therefore had no obligation to defend or indemnify it in a suit filed by an injured construction worker.

In Cincinnati Insurance Co. v. Harleysville Insurance Co., et al., Jumall Little, an employee of The Kimmell Company Inc. was injured while making repairs at the Medical Center. Little sued the University, the general contractor on the project, and the subcontractor that engaged Kimmell to do the work Little was performing when he got injured.

As was required by its subcontract, Kimmel took out an insurance policy with Harleysville, which provided coverage for certain additional insureds through two separate endorsements, the Privity Endorsement and the Declaration Endorsement. Neither endorsement, though, expressly included either the University or the general contractor as an Additional Insured.

The Privity Endorsement provided additional insurance coverage to entities in contractual privity—a direct contractual relationship—with Harleysville’s named insured, Kimmel:

[w]hen you [Kimmel] and such person or organization [Kimmel’s subcontractor] have agreed in writing in a contract or agreement [the subcontract] that such person or organization [Kimmel’s subcontractor] be added as an additional insured on your policy.

The Second Circuit found that the “Privity Endorsement does not confer ‘additional insured’ status on [the University or the General Contractor] because the Privity Endorsement requires contractual privity,” and Kimmel did not enter into a contract with either entity directly. The panel held that while Kimmel contractually agreed to name the University as an additional insured, such an agreement does not modify the express terms of the insurance policy Kimmel actually purchased.

The University fared no better under the Declaratory Endorsement. That endorsement amended the policy “to include as an additional insured the person(s) or organization(s) shown in the Schedule.” The Corresponding “Schedule of Other Coverages” included “Owners, Lessees Or Contractors – Automatic Status When Required In Construction Agreement With You.” It did not name the University with particularity. The panel upheld the lower court’s ruling that the Declaration Endorsement did not confer “additional insured” status on either the University or the General Contractor because neither the University nor the General Contractor were specifically listed on the corresponding Schedule.

So, if you think you’re an additional insured, give it another thought. Don’t just rely on a representation that you’re covered! Make sure you take the time to review the Additional Insured Endorsement, just as you would any other insurance policy. And, as always, if in doubt, consult a coverage lawyer—preferably before you agree to additional insurance offered by your subcontractors.