Ohio Appellate Court Awards Consequential Damages for Contractor’s Failure to Achieve Substantial Completion Due to Recklessness

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Alexandra Parriman | Bricker & Eckler

When a contractor indicated indifference to executing a project on schedule and failing to meet the substantial completion date, an Ohio appellate court found that the contractor’s actions constituted recklessness and, based on the terms of the contract, triggered the award of consequential damages.

This case arose out of a contract between Jay Bakhshi, sole owner and representative of Miami Valley Construction Group, LLC (MVCC) (Contractor), and Rick Baarlaer, owner of Marick, LLC (Tenant). The contract was formed for the purpose of renovating property in Springboro, Ohio, where the Tenant leased space intending to open a local tavern.

In July 2016, before any written contract was signed between the parties, the Tenant gave the Contractor $58,000 in order to allow the project to get started after delays in getting the plans drawn and approved. It was not until September 2016 that the parties entered into a written contract for $193,805.41, with an estimated completion date of October 17, 2016. At the same time the parties signed the contract, the Tenant issued a cognovit promissory note and security agreement, agreeing to pay the Contractor $40,000 for “value received.”

Due to delays, the parties executed a change order in November 2016 pushing the estimated completion date to December 8, 2016, and increasing the contract price by $4,600.

The project was not completed until March 2017, despite the Contractor’s continued assurances that it would be completed by December 8, 2016.

In June 2017, the Contractor initiated a suit against the Tenant and his company, arguing that he was owed $62,927.99 under the contract. The Tenant countersued for breach of contract asserting that the promissory note was void.

The trial court found in favor of the Tenant on his breach of contract claim and in favor of the Contractor on his unjust enrichment claim for work performed outside the contract. Both the Tenant and Contractor then filed cross appeals, and the Ohio Court of Appeals heard the case on several issues.

The appellate court first considered the issue of substantial completion. The Contractor argued that he did not breach the contract because his company substantially completed its obligations by December 8, 2016. The contract between the parties did not define substantial completion, so the Court of Appeals looked to Ohio Revised Code (“O.R.C.”) Section 2305.131, which statutorily defines substantial completion in the context of statute of limitations as “the date the improvement to real property is first used by the owner or tenant of the real property or when the real property is first available for use after having the improvement completed in accordance with the contract or agreement covering the improvement, including any agreed changes to the contract or agreement, whichever occurs first.” The Court of Appeals found “no question” that the Contractor failed to substantially complete the project because, among other concerns, drywall and fire-retardant panels were not installed until just before Christmas and only the rough electrical and plumbing were complete by December 8, 2016, the contractual date for substantial completion.   

Next, The Court of Appeals examined the issue of recklessness. The Court noted that the Tenant did not need to prove that the Contractor wanted to harm him, and instead cited the Ohio Supreme Court’s definition of recklessness as “conduct characterized by the conscious disregard of or indifference to a known or obvious risk of harm to another that is unreasonable under the circumstances and is substantially greater than negligent conduct.” The Court of Appeals agreed with the trial court that the Contractor was reckless. To determine this, the court considered factors such as the fact that the Tenant’s project was the only project the Contractor was working on at the time and the Contractor took multiple vacations during the project without leaving plans for work to be done in his absence. Additionally, the Tenant testified that he went to the project site on many occasions and there was no one working. The Court found that the Contractor’s actions indicated a “complete indifference to the obvious risk that [the Tenant] would be harmed by [the Contractor’s] failure to perform the contract in a timely manner” and concluded this amounted to recklessness.

The issue of recklessness was not only introduced by the Court for analysis, but was an integral part of the original contract signed by both parties on September 9, 2016. The contract stated in relevant part, “In no event shall either party hereto be liable to the other party for any consequential, indirect, incidental, special, exemplary, punitive, enhanced damages or lost profits relating to this agreement [except for liability arising, directly or indirectly, from reckless or willful acts of a party].” As such, effectively any claim to consequential damages was waived unless reckless or willful action was taken by either party.

Because the Court of Appeals found the Contractor’s actions to meet the recklessness standard, the award of consequential damages was appropriate under the contract terms and the Tenant was thus rightfully awarded consequential damages for the Contractor’s reckless conduct.

Finally, the appellate court considered the Contractor’s argument that consequential damages were not appropriate in this action because his actions were not willful. The trial court previously awarded $27,278 to the Tenant in consequential damages calculated by the Tenant’s expert, who analyzed lost profits. The appeals court restated that “lost profits may be recovered by the plaintiff in a breach of contract action if profits were within the contemplation of the parties at the time the contract was made, the loss of profits is the probable result of the breach of contract, and the profits are not remote and speculative and may be shown with reasonable certainty.” Finding that lost profits were considered and agreed to by the parties, as evidenced in their contract, the appellate court agreed with the trial court that the Tenant was entitled to damages for lost profits as a result of the Contractor’s failure to complete the project by the agreed-upon completion date.

The Contractor’s failure to demonstrate the project was substantially complete by the amended project completion date, along with his perceived indifference to executing the project on schedule, led to a seemingly clear-cut decision by the appellate court that the Contractor failed to perform his responsibilities under the contract.

Expansion of Premises Liability for Construction Owners

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Ryan T. Kinder and Marcus Miller | Buildsmart

A property owner is generally liable for hazards on the property that injure others. On construction projects, this presents a significant risk for owners because there are always multiple hazards present, and the owner, generally, has very little control or knowledge of all the work being performed. Chapter 95 of the Texas Civil Practice and Remedies Code alleviates some of this risk by limiting a commercial property owner’s liability for personal injury claims by contractors and subcontractors under specific circumstances. The Texas Supreme Court’s recent decision in Los Compadres Pescadores, L.L.C. v. Juan G. Valdez and Alfredo Teran expands the applicability of Chapter 95 for the benefit of owners.

Chapter 95 requires an injured contractor or subcontractor to prove the owner had control over the work and actual knowledge of the hazardous condition causing the injury. This is a greater burden than under Texas common law, which imposes liability on a property owner who “reasonably should have known” of a condition or danger. However, Chapter 95 is limited in scope and only applies to claims that “arise from the condition or use of an improvement to real property where the contractor or subcontractor constructs, repairs, renovates, or modifies the improvement.”

The purpose of Chapter 95 is to shift risk back to the contractor for hazards that would normally be encountered during its work unless the owner exercises control and has knowledge of the hazard. However, Texas courts have grappled with determining the scope of Chapter 95 over the years. The Texas Supreme Court previously held the contractor’s injury must result “from a condition or use of the same improvement on which the contractor (or its employee) is working when the injury occurs.” Courts then had difficulty determining the breadth of the term “improvement.” One court held Chapter 95 did not apply to a repairman who was injured when he fell through a roof while working on an air conditioner unit because the roof was not part of the air conditioner (i.e., the “improvement”) on which the repairman was hired to work. In another case, Chapter 95 applied to a contractor hired to repair a furnace in a petrochemical plant even though he was injured when a valve burst in a different furnace nearby. Even though there were separate furnaces, the court stated that they were all connected as part of a single process system within the plant and, as such, were part of the same improvement.

In Los Compadres Pescadores, the Texas Supreme Court provided further clarification to Chapter 95’s application. In that case, the owner was building a condominium in South Padre Island. The owner hired a contractor to construct the pilings for the foundation. The pilings were drilled and pumped full of concrete using a crane. The contractor would then insert 20’ pieces of rebar into the pilings. The contractor notified the owner that there was a high-voltage powerline running about 20’ above the property line. The owner told the contractor that the line could not be de-energized or moved and instructed the contractor to finish the work. While working on a piling about 10’ from the powerline, the plaintiffs were electrocuted when the rebar they were installing touched the powerline.

The court first sought to define the “improvement” in this situation. The court rejected the owner’s argument that the entire condominium project was the improvement because “a workplace may include several different improvements, and each improvement may possess numerous conditions.” While the pilings were part of the foundation, which was in turn part of the condominium building, the court held that the “improvement” in this case should be defined narrowly to just the pilings, since that is all the contractor was hired to perform.

Under prior decisions, since the powerline was not part of the pilings (i.e., the “improvement”) Chapter 95 should not have been applicable. But the court expanded the scope of Chapter 95 in this case by focusing on whether the powerline could be a “condition… of an improvement.” If the dangerous condition “creates a probability of harm” due to its proximity to the improvement, then it is a “condition of the improvement” for purposes of Chapter 95. The court noted that if the building were on a large tract and the powerline were hundreds of yards away, then it wouldn’t be a “condition” of the pilings. Since it was nearby, its proximity made it a condition of the work being done such that Chapter 95 would apply.

The decision in Los Compadres Pescadores provides some clarification and gives courts the flexibility to apply Chapter 95 as it was intended. It certainly broadens the current scope of Chapter 95 to limit an owner’s liability for hazards that are likely to be encountered by the contractor. Even so, owners in Texas must still be aware that they could face liability despite the limitation in Chapter 95 if they exert control over the work being performed.

Try Med-Arb as an Alternative to the Typical Alternative Dispute Resolution

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Brian Gaudet | Kilpatrick Townsend & Stockton

An alternative to traditional alternative dispute resolution called med-arb, a combination of mediation and arbitration, should be strongly considered in small and uncomplicated cases.

Alternative dispute resolution in the construction context typically means arbitration and mediation. Dispute review boards and executive negotiations are some others, but those are far less frequently used. There are alternatives to traditional alternative dispute resolution (hi low arbitration, baseball arbitration, med-arbs, neutral case evaluation, and other creative variations of trying to figure out who gets what from whom). One such method that I would ask folks to consider is the med-arb, a combination of mediation and arbitration. The parties first try to mediate the case to resolution and in the event the mediation is unsuccessful, the mediator turns into an arbitrator and renders a decision. Depending on the facts and complexity of the case, there may be nothing more needed after the mediation in order for the arbitrator to make a decision. Occasionally, additional documentation or witness testimony is required. A variation (called arb-med) is having a short arbitration first with the arbitrator putting a decision in a sealed envelope; the arbitrator then tries to mediate the parties to a mutually agreeable resolution in lieu of the decision. If the case is resolved in the mediation, then the arbitrator simply throws away the proposed award.

Med-arb should be strongly considered in small and uncomplicated cases. Parties usually do a pretty good job of setting out their position and the law during a mediation. With several back and forth trips of the mediator, the dispute is usually fairly well understood. After investing half a day talking about the facts and legal issues, it seems wasteful to repeat that process in court or an arbitration. A med-arb should start with the parties exchanging a position paper rather than a confidential mediation memo so that the mediator/arbitrator (“facilitator”) and the other party have an opportunity to understand the other sides position on the pertinent facts and the law.

One concern of the facilitator is whether the parties have agreed going into a mediation that it will be a med-arb. There may be reluctance to turn a mediation into a med-arb at the end of the day. Accordingly, this should be discussed in advance. The main criticism of the med-arb is the idea that parties may not be candid with the mediator during mediation (i.e. especially in disclosing weaknesses in their case), thereby preventing the mediation process from working appropriately and making an arbitration result much more likely. Theoretically that is possible, but one must question how vulnerable and candid parties become during a construction mediation to begin with. One criticism of mediation is sometimes parties do not attend with the intention of trying hard to resolve the case at mediation, but rather to find out more about the opposing parties case or to try to set up a resolution down the road. The benefit of the med-arb is that the parties last chance to resolve the matter themselves IS during the mediation… there is no tomorrow or later. The med-arb can be useful in making sure both parties are committed to trying hard to resolve the case in that moment. When the dollar amounts are lower and the issues are not complex, significant efficiencies in resolving the matter can be gained by trying a med-arb.

I have participated in a number of med-arbs as a party representative. In all but one case a mediated settlement agreement was reached. In the one instance it went to arbitration, the facilitator did not require any additional information from the parties and rendered a decision that was reasonable based on the evidence presented. Admittedly, there was some evidence not gathered that could have helped inform the decision, such as a site visit that would have taken a full day and/or several depositions. If the parties engaged in those activities, a mediated settlement would not have been a possibility, and the outcome of the arbitration may have differed. Or it may not have, but in either event both parties would have spent significantly more in legal fees than what the value of the dispute supported. In this instance, the legal expense was relatively low, the dispute was over even though the process was a little imperfect, and, in that sense, both parties got a great outcome overall.

Should I Skip an Opening/Joint Session in a Construction Mediation?

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Brain Gaudet | Kilpatrick Townsend & Stockton

Mediation is a dispute resolution process that involves people who have feelings, goals, and marching orders. It is not simply an emotionless calculator for determining a monetary settlement.

Let me get this off my chest.

Let me explain.

You and I need to talk.

Let me tell you what you did.

I want my day in court.

All of these common sayings are rooted in the same thing. People need to express themselves about things that happen to them as a way to process and get past it.

There recently appears to be a trend developing in construction mediations of avoiding a joint session to start the mediation. Given that you can have a joint session later in the process, for the sake of convenience, I will simply refer to this as the opening session. There are definitely certain circumstances in which an opening session might be very detrimental. There are other circumstances in which an opening session is ill-advised. For example, I recently represented a homebuilder in a pre-suit dispute with unrepresented homebuyers. After talking to the parties the mediator felt that the inequality in representation strongly suggested that an opening session not take place. In multi-party disputes there can be some complexity in mediations. If you represent one of many defendants in a construction defect case, you may want to push back on the owner as to responsibility and damages, but at the same time you may not want to embolden your co-defendants, who you want to contribute heavily to a potential settlement. If there is a good reason to skip or modify an opening session, then the parties and mediator should accommodate that.

However, opening sessions should not be skipped without good reason. It is important for lawyers to keep in mind, especially new lawyers, that what a lawyer knows or remembers about a case (especially one they are preparing to mediate) may be much more advanced or comprehensive than what a representative of a party remembers. The parts your client representative or the other party representative remembers most may not even be the operative facts that might determine a legal outcome. It is important for your client representative to hear the important parts of the story presented again, weaved in with the law. It is also important for the other party’s client representative to hear it as well. While the mediator may have read a mediation memo and performed some preliminary research, they are not going to be experts in the facts and hearing the story from each party can help add nuance that wasn’t apparent in the mediation memo. The most important reason for opening session is to give the parties a chance to have their story told. It is cathartic.

Remember that settlement and mediation are not the same concept. Mediation is a process, and if successful, results in a settlement. The mediation process begins with the decision to mediate, the preparation for mediation, continues with the parties learning about the other parties position, learning more about their own position, developing a rapport with the mediator, engaging in the easy part of settlement discussions where not much is given up or gained, and then finally ends in engaging in the difficult settlement discussion where true compromises and sacrifices are hammered out. Sometimes the last part of the process does not occur until after the formal mediation session. While disputes are resolved through the payment or forgiveness of money, disputes are much more than money. In fact, sometimes money is not even the most important part of a dispute. Disputes are about some combination of failed expectations, embarrassment, frustration, lost trust, feelings of being taken advantage of, feelings of unjustness, anger, and disappointment. Mediation is a dispute resolution process that involves people who have feelings, goals, and marching orders. It is not simply an emotionless calculator for determining a monetary settlement. Do not overlook the human element. Take the time for the opening session. It is not a waste of time.

Who (Else) is Covered Under Your Professional Liability Policy?

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Sarah Nau | Phelps Dunbar

When does a Professional Liability policy cover individuals that work for an insured, an insured’s related entities (such as subsidiaries), and/or the insured’s contracting partners?

  • Individuals working for an insured and an insured’s related entities are not always automatically covered, meaning review of the policy’s Declarations and/or definition of “insured” is crucial.
  • Professional Liability policies do not typically provide coverage for an insured’s contracting partners, but an insured may accomplish this by requesting coverage via endorsement for a risk-transfer obligation (such as an agreement to defend and indemnify) between the insured and its contracting partner, or (albeit rarer in the Professional Liability context) naming the contracting partner as an additional insured.

How are an insured’s related individuals and entities covered under a Professional Liability policy?

  • The first named insured is listed on the Declarations page. An insured may also request that other related entities be scheduled as named insureds. Typically, this is accomplished by attaching an endorsement to the policy that lists these entities as named insureds in addition to the first named insured. The policy’s definition of “insured” may also include an insured’s subsidiaries and other related entities.
  • With respect to individuals who work for the insured, it is very common for past and present employees, partners, members, officers and directors to be included in the definition of “insured,” with the caveat that those individuals’ liability must arise from work performed for the insured.
  • Automatic insured status for an independent contractor performing work on behalf of the insured is uncommon. While some “insured” definitions include these independent contractors, many do not—and will not—unless the policy is specifically endorsed to cover them.

How are an insured’s contracting partners covered under a Professional Liability policy?

  • In General Liability policies, a subcontractor’s policy commonly includes additional insured endorsements, under which a general contractor will be covered as an additional insured if: (1) the subcontractor agreed in writing to name the general contractor as an additional insured and/or the general contractor is specifically scheduled as an additional insured; and (2) the general contractor’s liability arises out of the subcontractor’s work. An additional insured has all of the same rights under the policy as any other insured.
  • Conversely, Professional Liability policies rarely have additional insured provisions, and especially not “blanket” ones. Thus, if an insured professional contracts with an owner, general contractor or developer on a project, one cannot assume that those entities will receive coverage under the insured’s Professional Liability policy. In part, this is because, given the specific nature of a professional risk, those underwriting such a policy are unable to extend coverage to an entity whose risk exposure is unknown to them.   
  • Most Professional Liability policies exclude from coverage liability assumed by the insured under contract (including hold harmless and indemnity agreements) unless the insured would have been liable in the absence of the contract. While also uncommon, some Professional Liability policies will provide coverage for an insured’s contractual agreement to defend/indemnify a contracting partner if the contracting partner is sued; that would typically be accomplished by endorsement. 
  • Before determining whether a policy provides coverage for any risk-transfer provision, an insured must confirm whether the risk-transfer provision is valid. Many states have rules prohibiting an insured from agreeing to defend and indemnify a contracting partner for claims arising out of the partner’s own negligence unless the agreement to do so is sufficiently clear and conspicuous. Some states also have statutes prohibiting risk-transfer provisions entirely (a common example is anti-indemnity statutes for the oil and gas industry). Thus, careful review of a state’s laws regarding risk-transfer provisions is important before determining whether the policy may potentially cover the risk transfer.