Owner Did Not Waive Right to Damages by Terminating Design Contract for Convenience

Christine Fan | Pepper Hamilton | October 25, 2019

Chinese Hosp. Ass’n v. Jacobs Eng’g Grp., Inc., 2019 BL 330340, 2 (N.D. Cal. Sept. 03, 2019)

This case arises out of the alleged breach of contract and defective design for the construction of a new hospital in San Francisco. During construction, property owner and plaintiff Chinese Hospital Association (“Chinese Hospital”) became aware of alleged defects involving the designs provided by its subcontractor, architect-defendant Jacobs Engineering Group, Inc. (“Jacobs”). Chinese Hospital terminated its contract with Jacobs for convenience mid-construction.

To complete the project, Chinese Hospital and Jacobs entered into a Termination and License Agreement that allowed for Chinese Hospital to hire a replacement architect. Chinese Hospital ultimately completed the project with significantly increased costs and filed suit against Jacobs.

Jacobs moved for summary judgment and argued that Chinese Hospital waived its rights to recover damages under the contract. The Northern District of California disagreed.

First, the court rejected Jacobs’ argument that, under the contract, Chinese Hospital waives its rights to recover damages if it terminates the contract for convenience and not for cause. The contract contains separate provisions detailing early termination both for cause and for convenience. The for-cause provision provides that should Jacobs fail to cure its performance defaults within seven days of written notice from Chinese Hospital, then Chinese Hospital “may without prejudice to any other remedy terminate the employment of [Jacobs].”

In contrast, the court stated that there is nothing in the for-convenience provision or anywhere else in the contract that provides a similar waiver should Chinese Hospital terminate the contract without cause (i.e. for convenience). Based on the contract terms and the lack of clear indication that the parties intended otherwise, the for-cause provision does not apply to bar Chinese Hospital’s remedies following a termination for convenience.

The court found that it is unclear the for-cause termination provision is either the exclusive remedy or a remedy at all in cases of early terminations. Indeed, specifying that a termination is without prejudice to a remedy is not the same as actually providing a remedy, let alone an exclusive one. Under these circumstances, the court could not find as a matter of law that Chinese Hospital waived its rights to claim damages.

Further, the parties’ later Termination and License Agreement contained indemnity and no-waiver provisions that expressly reserved Chinese Hospital’s rights to claim damages against Jacobs. These later provisions effectively modified any waiver that might have occurred under the original contract. Ultimately, there is sufficient ambiguity in the contract to at least create a material issue of fact as to whether Chinese Hospital indeed waived its rights to claim damages.

Finally, Jacobs also failed to meet its burden in proving its other affirmative defenses. As to the doctrine of prevention, Jacobs failed to address the parties’ express reservation of rights or prove that it could have performed the contract had Chinese Hospital terminated the contract with cause. As to implied waiver, the court noted that not every trier of fact would find that Chinese Hospital intended to waive its damages claims.

The Conflict Between Choice-of-Law Provisions in Insurance Policies and a State’s Fundamental Public Policy

Matthew Lewis | Property Casualty Focus | October 18, 2019

Many contracts include a choice-of-law provision in which the parties agree to use a particular jurisdiction’s set of laws to govern the contract. These provisions promote predictability. No matter where a dispute may arise under the contract, the contract will always be interpreted under the laws of the chosen jurisdiction. This practice of including choice-of-law provisions extends to policies of insurance.

However, these choice-of-law provisions are not always enforceable. Section 187 of the Restatement (Second) of Conflict of Laws indicates that the parties’ choice-of-law provision would not govern if it conflicts with a state’s fundamental public policy, and if that state has a materially greater interest in the determination of the issue than the contractually chosen state.

Recently, the Supreme Court of California addressed this issue as it pertained to a choice-of-law provision in an insurance policy in Pitzer College v. Indian Harbor Insurance Co., 8 Cal. 5th 93 (Cal. 2019). In this matter, the insurer, Indian Harbor, denied coverage to Pitzer College following an environmental remediation of land conducted by the school.

The insurance policy at issue contained a choice-of-law provision that indicated New York law would govern the policy. Additionally, the policy included a notice provision requiring Pitzer College to provide notice to Indian Harbor of any pollution condition it discovered, which resulted in a loss or remediation expense as a condition precedent to coverage. Finally, the policy included a consent provision requiring that no “costs, charges, or expenses shall be incurred, nor payments made … without [Indian Harbor’s] written consent.” However, the consent provision did provide an exception that Pitzer College could incur costs on an emergency basis, so long as it notified Indian Harbor “immediately thereafter.”

During the policy period, Pitzer College discovered lead contamination in the soil on land where a new dormitory was being constructed. Approximately two months after discovery of the pollution, Pitzer College remediated the land itself, at a cost of about $2 million. However, Pitzer College did not notify Indian Harbor of the remediation until six months after the discovery of the pollution. Ultimately, Indian Harbor denied coverage for the loss on the basis that Pitzer College did not timely notify it of the loss, or the costs incurred, which was in breach of both the notice and consent provisions of the policy.

Pitzer College brought suit in federal court against Indian Harbor for alleged breach of contract. Specifically, Pitzer College alleged that under California law, an insurer can only deny coverage for an insured’s failure to timely notify of a loss if the insurer can show that it was substantially prejudiced by the delayed notice.

The district court disagreed with Pitzer College’s argument that Indian Harbor had the burden of showing that it was substantially prejudiced by the delayed notice. The court held that because New York, pursuant to the choice-of-law provision in the policy, had a strict no-prejudice law for policies of insurance delivered outside New York, Indian Harbor was not required to show prejudice in its denial of coverage to Pitzer College due to lack of timely notice. As such, the court granted summary judgment in Indian Harbor’s favor. Pitzer College appealed to the Ninth Circuit Court of Appeals.

On appeal, the Ninth Circuit certified two questions to the Supreme Court of California: (1) whether California’s notice-prejudice rule was a “fundamental public policy” for choice-of-law analysis; and (2) whether the notice-prejudice rule applied to the consent provision of the insurance policy.

In determining whether California’s notice-prejudice rule was a fundamental public policy, the Supreme Court of California noted that a rule is a fundamental public policy when it: (1) cannot be contractually waived; (2) protects against otherwise inequitable results; and (3) promotes public interest.

In this matter, the court found that all three elements existed to establish the notice-prejudice rule as a fundamental public policy of the state. For the first prong, the court noted that the notice-prejudice rule could not be waived, because it restricted freedom of contract and prevented the enforcement of a contractual term (technical forfeiture).

As for the second prong of its analysis, the court noted that insurance contracts were “inherently unbalanced” and “adhesive” and that the notice-prejudice rule protects an insured against inequitable results based on an insurer’s superior bargaining power. What is particularly interesting about this part of the court’s analysis is that it did not draw any distinction between the type of policy in this matter (between a large, sophisticated entity such as the Claremont University Consortium and Indian Harbor) and a more common type of insurance policy (between an individual without any bargaining power and a carrier).

As to the third prong, the court found that the notice-prejudice rule promoted objectives that are in the general public’s interest because the rule protected the public from bearing the costs of harm that an insurance policy purports to cover. In other words, by requiring an insurer to show that it incurred substantial prejudice because of untimely notice, the rule lessens the likelihood that a loss covered by the policy would be denied by the insurer based on a technicality. Essentially, the notice-prejudice rule helps to prevent an insurer from “reap[ing] the benefits flowing from the forfeiture” of an insurance policy with a strict notice provision and lessens the risk of placing the burden of the costs of the loss on the public.

As to the second question certified by the Ninth Circuit to the Supreme Court of California, the court held that the consent provision, as it regarded first-party claims, had much of the same effect as the notice provision. Both provisions had the underlying purpose to “facilitate the insurer’s primary duties under the contact and speak to minimizing prejudice in performing those duties.” Because both provisions were inherently the same to the court, the rationale of the notice-prejudice rule would also govern the consent provision. As such, Indian Harbor would have to show that Pitzer College’s failure to obtain consent, as prescribed under the policy, would not be grounds for denying coverage unless it could show that the failure to obtain consent substantially prejudiced Indian Harbor.

It is important to note that the court drew a distinction between first-party claims and third-party claims as it regards consent provisions. Because third-party claims involve liability coverage and the insurer assumes the defense of the matter once defense is tendered by the insured, the rationale behind the notice-prejudice rule would not apply to consent provisions in third-party claims.

By holding that the choice-of-law provision in the Indian Harbor policy would not be enforceable as it relates to the notice and consent provisions, the Supreme Court of California essentially ruled that California courts would not enforce any notice provisions in insurance policies unless the insurer can show that it suffered substantial prejudice due to the lack of timely notice by the insured.

This holding introduces considerable uncertainty in choice-of-law analysis, which is already fraught with complications about where contracts are formed, the location of the risks insured, etc. Sometimes, the difference between certain jurisdictions’ laws are dispositive in insurance disputes. Moreover, not all states rely on the Restatement approach for conflict of laws, and thus the question of “conflict” with that state’s “fundamental polices” may not even come into play. However, if other states adopt the approach in Pitzer College, it may ultimately render choice-of-law provisions moot.

Is Your Indemnity Agreement Enforceable? How to Not Miss Out on this Critical Step in Risk Management

Maura Winters | Cozen O’Connor | September 30, 2019

Generally, indemnity agreements in construction contracts are a promise by which one party (the indemnitor) agrees to defend, indemnify, or hold harmless the other party (the indemnitee) for acts or omissions related to the project. The enforceability of indemnity agreements is a battle that will likely ignite, if construction litigation arises. This article is intended to map out the legislative landscape of indemnity statutes across the country, as a resource to determine whether the indemnification provision in your construction contract is enforceable.  As an initial matter, there are generally three forms of indemnification agreements: (1) the broad form, which includes the sole negligence of the indemnitee; (2) the moderate form, which includes all negligence, but the sole negligence of the indemnitee; and (3) the narrow form, which includes only the negligence of the indemnitor. Today, most of the states have adopted statutes that determine which type of indemnity agreements are enforceable within their jurisdiction.  

The following states do not have a statute that limits the enforceability of indemnification provisions in construction contracts, or have a provision that only applies in very limited circumstances: Alabama, Maine, Nevada, North Dakota, Pennsylvania, Vermont, Wisconsin, and Wyoming. Nonetheless, even in many of these states, courts have narrowly interpreted provisions that indemnify an indemnitee for its own negligence.  For example, Pennsylvania does not have a general anti-indemnity statute for construction contracts but it does provide a statute that prohibits the indemnity of design professionals. 68 Pa. Stat. Ann. § 491. As noted above, Pennsylvania courts are cautious when interpreting indemnification clauses, in an effort to avoid infinite liability. In fact, for the last 100 years, the Pennsylvania Supreme Court has held, “if parties intend to include within the scope of their indemnity agreement a provision that covers losses due to the indemnitee’s own negligence, they must do so in clear and unequivocal language. No inference from words of general import can establish such indemnification.” Perry v. Payne, 66 A. 553 (1907).  

NO ANTI-INDEMNITY STATUTE

“BROAD FORM” PROHIBITIONS

The following 15 states prohibit the broadest form of indemnity agreements, for the sole negligence of the indemnitee: Alaska, Arizona, Arkansas, Georgia, Hawaii, Idaho, Indiana, Maryland, Michigan, New Jersey, South Carolina, South Dakota, Tennessee, Virginia, and West Virginia.1 These states’ statutes prohibit an indemnitee from requiring others to indemnify the indemnitee for its own sole negligence.  Eight of these states, including Alaska, Georgia, Hawaii, Maryland, New Jersey, South Carolina, Virginia, and West Virginia, include a statutory provision that clarifies that the indemnification statute does not affect the validity of an agreement to procure insurance. This is called an “insurance savings clause.” 

“BROAD FORM” AND “MODERATE FORM”  PROHIBITIONS

The following states prohibit broad and moderate forms of indemnity agreements. In these states, the indemnitor can only be required to indemnify the indemnitee to the extent of the indemnitor’s own negligence.2

ArizonaIowaMissouriOhio
CaliforniaKansasMontanaOklahoma
ColoradoKentuckyNebraskaOregon
ConnecticutLouisianaNew HampshireRhode Island
DelawareMassachusettsNew MexicoUtah
IllinoisMississippiNew YorkWashington
  North Carolina 

ADDITIONAL INSURED COVERAGE

Oftentimes, contractors operating in states that prohibit Party A from indemnifying Party B for Party B’s negligence will try to circumvent the statutes by requiring Party A to name Party B as an additional insured on its insurance policy. The strategy is based on the theory that additional insured coverage is separate from indemnity, and agreements to procure insurance are not subject to statutory limitations applicable to indemnity provisions.  Both the Insurance Services Organization’s 2004 and 2013 AI endorsements extend coverage to an AI’s partial (but not sole) negligence. However, the 2013 endorsement provides that additional insurance coverage will only apply to the extent permitted by law. ISO CG 20 37 04 13 (“the insurance afforded to such additional insured applies to the extent permitted by law”). Therefore, the success of this strategy is difficult to predict and contingent upon what type of indemnification statute the state has enacted. Clearly, understanding the applicable indemnity statute is of great value to any risk management strategy. Depending on the jurisdiction, courts have made various rulings on this concept, so it would be best to consult the jurisprudence in your state to anticipate the exposure to liability you may face through your indemnity agreement.  

1 See Alaska Stat. § 45.45.900; Ariz. Rev. Stat. § 32-1159 (private contracts); Ark. Code Ann. § 4-56-104 (private contracts); Ark. Code Ann. § 22-9-214 (public contracts); Ga. Code Ann. § 13-8-2; Haw. Rev. Stat. § 431:10-222; Idaho Code Ann. § 29-114; Ind. Code Ann. § 26-2-5; Md. Code Ann., Cts. & Jud. Proc. § 5-401; Mich. Comp. Laws Ann. § 691.991; N.J. Stat. Ann. 2A:40A-1; S.C. Code Ann. § 32-2-10; S.D. Codified Laws § 56-3-18; Tenn. Code Ann. § 62-6-123; Va. Code Ann. § 11-4-1; W. Va. Code Ann. § 55-8-14. 

2See Ariz. Rev. Stat. § 34-226 (public contracts); Ariz. Rev. Stat. § 41-2586 (public contracts); Cal. Civ. Code § 2782.05; Colo. Rev. Stat. § 13-21-111.5 (private contracts); Colo. Rev. Stat. § 13-50.5-102 (public contracts); Conn. Gen. Stat. § 52-572k; Del. Code Ann. tit. 6, § 2704; Fla. Stat. Ann. § 725.06; 740 Ill.Comp. Stat. 35/1-3; Kan. Stat. Ann. § 16-121; Ky. Rev. Stat. Ann. § 371.180; La. Rev. Stat. Ann. § 38:2216G (prime contractors on public projects); Mass. Gen. Laws Ann. Ch. 149, § 29C; Minn. Stat. Ann. § 337; Miss. Code Ann. § 31-5-41; Mo. Rev. Stat. § 434.100; Mont. Rev. Code Ann. § 28-2-2111; Neb. Rev. Stat. §§ 25-21, 187; N.H. Rev. Stat. Ann. §§ 338-A:1, 338-A:2 (design professionals); N.M. Stat. Ann. § 56-7-1; N.Y. Gen. Oblig. Law § 5-322.1; N.C. Gen. Stat. Ann. § 22B-1; Ohio Rev. Code Ann. § 2305.31; Okla. Stat. Ann. tit. 15, § 221; Or. Rev. Stat. Ann. § 30.140; R.I. Gen. Laws § 6-34-1; Tex. Ins. Code Ann. § 151; Utah Code Ann. § 13-8-1; Wash. Rev. Code Ann. § 4.24.115.

Should You Use Integrated Project Delivery on Your Next Construction Project?

R. Thomas Dunn | Pierce Atwood | August 21, 2019

Complex construction projects have many moving parts and numerous stakeholders. Each project often contains its own unique challenges and obstacles. Finding the right solution does not often come by trying to utilize a one-size-fits-all approach. Indeed, complex issues call at times for customized responses.

Discerning the appropriate solution for particular problems involves a variety of decisions. Chief among many concerns is determining what the priorities are on a given project, and figuring out the best way to achieve those aims for all involved.

A contract solution that seeks to harness the potential of collaboration, and alignment of the priorities of all those involved in complex construction projects, is Integrated Project Delivery (“IPD”). IPD is a project delivery system that utilizes a team-based approach to construction projects where the risks and rewards of a project are shared by all of the stakeholders and, when done right, maximizes efficiency so projects are completed on time and on budget.

Like other tools, IPD is not a panacea. Nor is IPD the right solution for every project or every owner, contractor, or design professional. Still, for those willing and able to commit to true collaboration on complex construction projects, IPD offers promising potential for addressing many common problems in the construction industry.

The Failings of an Outdated System

While there may not be one solution that solves all problems in the construction industry, there are nevertheless certain problems that impact many, if not all, complex construction projects. Studies have shown that in the last fifty years, while all other major industries have more than doubled their average productivity, the construction industry has in contrast declined in productivity.[i]

In fact, it’s presently estimated that half of all construction activity is not productive.[ii] Some researchers have found that the actual time spent working on certain projects can be lower than 20 percent.[iii] One explanation for the ability of these striking inefficiencies to persist is by way of resort to the tired cliché, that the definition of insanity is doing the same thing over and over and expecting a different result. For the construction industry, its inefficiencies flow in part from trying to utilize the same antiquated approaches to project delivery and expecting to yield better, more efficient results.

One of the major drivers of such inefficiencies is the traditional project delivery system itself. Traditional project delivery systemically breeds inefficiency because it inherently contemplates that each individual participant is only responsible for their separate silo of responsibility. Both the process and the goals of individual participants are fragmented. A project could be a complete and utter failure for an owner, yet one or even several subcontractors could walk away lining their pockets, viewing the project as a tremendous success because they were able to complete their discrete task. Even if each of the individual participants recognize that “profit is a worthwhile goal” each participant is only “focused on making their own profit rather than on optimizing project outcome and increasing profit for all.”[iv]

A Shift in Thought

One way to start to break away from the inefficient, compartmentalized mindset is for project participants to start thinking about the big picture, that is, to focus on the needs, risks, and rewards associated with the overall project. Such a focus is the foundation of an IPD mindset, which, put another way, is to get all participants thinking like owners.[v] An owner’s mentality does not narrowly focus on accomplishing individual tasks, but instead recognizes how each constituent part needs to come together as a unified whole. Every decision has an eye towards improving the success of the overall project.[vi]

The main shift is to develop a model for an IPD project that aligns each of the participant’s interests with the overall project goals.[vii] To work towards achieving such alignment, it is necessary to set the ground rules for the appropriate attitudes that need to be maintained both at the inception and throughout an IPD project. The three essential attitudes or behavioral principles for a successful IPD project are: (1) mutual respect and trust; (2) willingness to collaborate; and (3) open communication.[viii]

Each behavior is connected to the other. Mutual respect and trust is needed so that participants are willing to collaborate; open communication is more readily attainable when the parties have mutual respect and trust; and, open and honest communication is part and parcel to true collaboration.

Key Contractual Principles

Having the right mindset and attitudes, while critical, is only part of what it takes for the successful implementation of IPD. Without the proper contractual foundations, even with the most collaborative-minded of participants, a project would not be able to achieve the full benefits of IPD. Among the most critical contractual principles necessary for successful implementation of IPD are:[ix]

A successful IPD project utilizes the above contractual principles to effectively bind the participants together to achieve the common goal of an efficient and profitable project. These principles should ideally be discussed at a “pre-negotiation workshop” which provides the opportunity for all stakeholders to become acquainted with these key IPD principles.[x] Later, when negotiation of the actual IPD agreement or agreements takes place, certain critical decisions will need to be made, including determining which participants will actually end up as part of the group that will share in the risks and rewards of the overall IPD project.

The Benefits of Using IPD

No Litigation

Utilizing IPD can yield numerous benefits for all participants involved in such projects. One key benefit is that true IPD removes the cost and uncertainty of litigation from the construction process. At the turn of the millennium, studies had shown that construction litigation expenditures were increasing at an average rate of 10 percent per year for over a decade.[xi] Current trends show likely increases in litigation into the foreseeable future.[xii] True IPD seeks to remove litigation from the construction process entirely by having all of the parties enter into liability waivers.

Only True Change Orders

Some early case studies into IPD projects have shown successful completion of projects with no litigation.[xiii] Similarly, IPD seeks to remove change orders, as they are currently utilized, from the construction process. Some estimates show that change orders account for approximately 8 to 14% of the cost of capital construction projects.[xiv] However, under IPD, with liability waivers and other contractual language in place, change orders are not – and cannot – be utilized as a means of generating additional profit for contractors and subcontractors. Instead, ordinary change orders are pre-determined to become the responsibility of the entire team. The only change orders that remain are those in which the owner expressly decides to add scope to the project.

Fewer Requests for Information

The early engagement of key participants as well as the increased role of all stakeholders in the design process also results in few Requests for Information (“RFIs”). RFIs are issued by contractors and subcontractors when they believe they need something regarding the design clarified.[xv] One study of non-IPD projects estimated that the average cost per RFI review and response was approximately $1,080 and there were an average of nearly 10 RFIs for every $1 million in construction cost.[xvi]

In an early case study of IPD projects, the majority of the projects analyzed had only between 100-300 RFIs, with a large percentage of those RFIs merely being used to document the ultimate decision made by the members of the project team.[xvii]

Early involvement of key stakeholders in the design process also benefits such contractors and subcontractors because it allows for them to better price their work as they have a more intimate understanding (as actual participants in the process) of the actual design.[xviii]

On Time, On Budget, Done Right

While the prospect of no litigation and a reduction in change orders and RFIs are desirable in their own right, the ultimate concern is whether the finished project meets expectations. One study found that approximately 75% of capital construction projects do not meet schedules and that 63% are over budget.[xix]

In contrast, a one study found the following regarding IPD projects:[xx]

All of which, because of the incentive structures in IPD, redounds to the benefit of all stakeholders.

Potential Risks of IPD

Notwithstanding the numerous benefits and potential of IPD, its implementation is not without risk. As with anything new, participants will have to adjust to its differences. Most of the key adjustments pivot around the impact of the more collaborative framework. The increased participation of more stakeholders early in the design phase shifts the bulk of the costs toward the beginning of IPD projects. Owners must be prepared to adjust their financing arrangements accordingly.

Additionally, the increased focus on collaboration places even more significant emphasis on trust between participants.[xxi] If participants are unfamiliar with each other, which can often occur in large, complex one-off projects, meaningful collaboration can be difficult. However, the biggest risk posed by IPD is that the owners bear the risk in the rare event of a catastrophic overrun, that is, cost overruns that are so significant that they completely consume all of the profit that was set aside to be potentially shared by the owner and non-owner participants.

Successful Implementation of IPD

With proper planning, IPD can be successfully implemented to avoid the potential risks. While there are some key factors that improve the likelihood of successfully implementing IPD, the lifeblood of an IPD project that must permeate every facet of such a project is a concrete commitment to collaboration by all stakeholders. This includes total buy-in on the part of the project owner. While all participants must fully engage in the collaborative endeavor, it is the owner who must first establish the collaborative tone.

Selection of the right team to collaborate with the owner is the next critical step.[xxii] Ideally, the more participants that have been exposed to IPD and collaborative design concepts the better. Still, prior exposure to such concepts, though important, is not necessarily as critical as the selection of participants with whom the owner has mutual respect and trust, and whom are willing to collaborate and embrace the IPD mindset. However, to supplement for any lack of familiarity with IPD among participants and also to bolster and facilitate the successful implementation of the IPD project, the guidance of IPD consultants and legal advisors should also be sought at as early as possible. In particular, legal counsel and consultants can help educate key participants, facilitate negotiations, and also address critical side issues like financing, insurance, and legal entity structure.

Once all of the key participants have been identified, each should be brought together for a “pre-negotiation workshop” which provides the opportunity for all stakeholders to become acquainted with the key IPD principles and concepts.[xxiii] Following this, the participants can then proceed to actual negotiations. As opposed to other forms of project delivery, IPD negotiations, at least initially, do not focus on the contractual terms. Rather, the focus is on setting the goals for the overall project, while also providing the opportunity for participants to express their interests and concerns. Later on in the negotiation (or likely subsequent negotiations), the parties will begin to distill the key terms that need to be addressed. Only after agreement as to the overall project goals are established and the key terms and issues have been addressed will the IPD contract then materialize.

In addition to embodying the overall project goals and addressing the key terms and issues, the IPD contract must also provide a stable (yet flexible) underlying framework. The contract must provide an appropriate balance between allowing for joint control and decision making, while also still recognizing the owner’s ultimate control over the entire project.[xxiv] Further, the contact needs to appropriately address the shared risks and rewards for the project by customizing the incentive structure for non-owner participants to drive shared accountability.[xxv]

Throughout the project, there are also certain best practices that can be utilized to help foster the collaborative framework established by the IPD contract. One is physical, the other is technological. As for the physical, best practices suggest that all key participants gather in person or co-locate on a continuous basis throughout the course of the project, otherwise called establishing the “Big Room.”[xxvi] Such close physical proximity fosters an environment for true collaboration by increasing the “quality and quantity of interactions” and helping to build “the relationships that create trust.”[xxvii]

On the technological side, best practices suggest utilizing Building Information Modeling (“BIM”). BIM is a “database that stores building information and translates it into a three-dimensional model.”[xxviii] BIM allows for the sharing and integration of all designs and specifications, which not only provides a common repository of all critical documents, but also helps to identify and correct design conflicts.

Conclusion

Integrated Product Delivery, while not appropriate for every project or every owner, presents a unique opportunity for all members in the construction industry to come together to solve its deep rooted issues. It is an approach that allows all those impacted by the failures of the stubborn and static system that has grown ever more litigious and inefficient to take part in the solution. IPD is a fresh approach to old problems. It holds significant promise for those stakeholders willing to commit. Learning about the great potential of this revolutionary method is one of the first steps in the right direction. Working together with all those in the industry is the next step.

“I Didn’t Sign That!” – Applicability of Waivers of Subrogation to Non-Signatory Third Parties

Rahul Gogineni | The Subrogation Strategist | June 27, 2019

In Gables Construction v. Red Coats, 2019 Md. App. LEXIS 419, Maryland’s Court of Special Appeals considered whether a contractual waiver of subrogation in the prime contract for a construction project barred a third party – a fire watch vendor hired to guard the worksite – from pursuing a contribution claim against the general contractor. The court concluded that the general contractor could not rely on the waiver of subrogation clause to defeat the contribution claim of the vendor, who was not a party to the prime contract. As noted by the court, holding that a waiver of subrogation clause bars the contribution claims of an entity that was not a party to the contract would violate the intent of the Maryland Uniform Contribution Among Tortfeasors Act (UCATA).

When dealing with claims involving construction projects, there may exist multiple contracts between various parties that contain waivers of subrogation. The enforceability of such waivers can be limited by several factors, including the jurisdiction of the loss, the language of the waiver and the parties to the contract.

In Gables Construction, Upper Rock, Inc. (Upper Rock), the owner, contracted with a general contractor, Gables Construction (GCI) (hereinafter referred to as the “prime contract”), to construct an apartment complex. After someone stole a bobcat tractor from the jobsite, Gables Residential Services Incorporated (GRSI), GCI’s parent company, signed a vendor services agreement (VSA) with Red Coats to provide a fire watch and other security services for the project.

Within the prime contract, there was a waiver of subrogation clause. The waiver of subrogation clause barred subrogation claims between Upper Rock, GCI and their subcontractors with respect to insurance applicable to the work. Within the VSA, there was also a waiver of subrogation clause. This waiver of subrogation clause barred subrogation claims between GRSI (as well as its affiliates, including GCI) and Red Coats.

Approximately one month prior to completion of the project, a fire occurred within Building G of the project causing significant damage to the property. Subsequent to the fire, Upper Rock sued Red Coats and its security guard, Tamika Shelton. After settling with Upper Rock for $14 million (Red Coats paid $4 million of the settlement directly with the other $10 million being paid by insurance), Red Coats sued GCI for contribution. GCI, relying on the waivers of subrogation clause in the prime contract, filed a motion for summary judgment seeking dismissal of Red Coat’s contribution claim. The trial court denied GCI’s the motion, and after a trial, the jury awarded Red Coats $7 million in damages, GCI’s pro rata share of the settlement amount.

GCI appealed the lower court’s decision on its motion for summary judgment. Discussing the waiver of subrogation clause in the prime contract, the Maryland Court of Special Appeals held that, because Red Coats was not a party to the contract and could not enforce its terms, the waiver of subrogation did not extinguish Red Coats’ right of contribution. With respect to the waiver of subrogation clause in the VSA, the court held that it applied to Red Coats’ claims against GCI and barred Red Coats’ insurer from recovering the $10 million it contributed to the settlement. Accordingly, the court reduced the verdict to $2 million, which constituted half of Red Coats’ out-of-pocket expense.

Based upon the court’s reading of the contract in conjunction with the UCATA, it is arguable that the court has left an opening for pursuing subrogation claims against parties not specifically named within a prime contract. If that was not the court’s intent, then in the alternative, it is implicit in the court’s holding that Red Coats was not a subcontractor within the meaning of the waiver of subrogation clause in the prime contract. Presumably, this was because Red Coats was hired after the fact by GRSI and not to perform any of the construction work related to the project.

This case serves as a good reminder that contribution claims may be governed not only by a different subset of laws within respective jurisdictions but also by the terms of any applicable contracts. As such, practitioners should be aware that the mere presence of a waiver of subrogation clause may not preclude pursuit of a contribution claim.