Bar Against Forum Selection Clauses in Construction Contracts Extended to Design Professionals

Garret Murai | California Construction Law Blog | October 26, 2015

It’s a tactic as old as war itself.

You can often gain a strategic advantage by selecting the location of battle.

The same is true in litigation.

But as the next case illustrates, when it comes to disputes between contractors (and design professionals), it isn’t always the combatants who dictate where the battle will be fought.

Vita Planning and Landscape Architecture, Inc. v. HKS Architects, Inc.

In Vita Planning and Landscape Architecture, Inc. v. HKS Architects, Inc., Case No. A141010, California Court of Appeals for the First District (September 25, 2015), Texas architecture firm HKS Architects, Inc. (“HKS”) was hired to provide architectural services. HKS’ design service agreement included a Texas forum selection clause which provided:

As a condition precedent to the institution of any action [or] lawsuit all disputes shall be submitted to mediation” and “[a]ll claim , disputes, and other matters in question between the parties arising out of or related to the Agreement . . . be resolved by the . . . courts in . . . Texas.”

Later, Vita Planning and Landscape Architecture, Inc. (“Vita”), a landscape design firm in California, entered into negotiations with HKS to provide sub-consultant landscape design services. HKS sent Vita a sub-consultant landscape design contract. The landscape design contract incorporated the terms of the prime contract. However, it was never signed by HKS or Vita.

During the design phase of the project, the project owner began having financial problems and stopped paying for work. HKS later sued and obtained a judgment against the owner in 2010 for $1,617,073.70 but was unable to recover anything on the judgement.

In 2013, Vita filed a complaint in California against HKS seeking $370,650.53. In its complaint, Vita alleged that “[o]n or about September 11, 2007, [Vita] and [HKS] entered into [a] contractual agreement, evidenced, in writing, . . . whereby [HKS] agreed to pay for services rendered by [Vita].

Seven months into the litigation, HKS filed a motion to dismiss the action on the ground that the landscape design contract, while not signed by Vita and HKS, was adopted by performance by the parties, and that the landscape design contract incorporated the prime contract which included a Texas forum selection clause. The trial court granted HKS’ motion and Vita appealed.

The Court of Appeals Decision

On appeal, Vita argued that the Texas forum selection clause contained in the prime contract was inapplicable because Vita and HKS did not sign the landscape design contract which incorporated the prime contract.

However, the Court of Appeals for the Fifth District disagreed, citing Vita’s complaint and its reference to the landscape design contract, and holding that Vita’s complaint constituted a judicial admission:

The admission of fact in a pleading is a “judicial admission.” . . . it is a waiver of proof of a fact by conceding its truth, and it has the effect of removing the matter from the issues. Under the doctrine of “conclusiveness of pleadings,” a pleader is bound by well pleaded material allegations.

Moreover, the Court of Appeals disregarded Vita’s argument that the absence of a signed  contract rendered the landscape design contract unenforceable:

A “voluntary acceptance of the benefit of a transaction is equivalent to a consent to all the obligations arising from it, so far as the facts are known, or ought to be known, to them person accepting.” (Civ. Code, § 1589; see also Civ. Code § 1584 [“acceptance of the consideration offered with a proposal, is an acceptance of the proposal.”] Grant v. Long (1939) 33 Cal.App.2d 725, 736 [“[w]hile an express contract is one, the terms of which are stated in words . . . , one party may use the words and the other may accept, either in words or by his actions or conduct”].). Here, substantial evidence supports the court’s conclusion regarding the existence of a contract memorialized by a writing.

And just when it was looking bad for Vita, the Court of Appeals held that Code of Civil Procedure section 410.42 barred enforcement of the Texas forum selection clause. Section 410.42 provides:

(a) The following provisions of a contract between the contractor and a subcontractor with principal offices in this state, for the construction of a public or private work of improvement in this state, shall be void and unenforceable:

(1) A provision which purports to require any dispute between the parties to be litigated, arbitrated, or otherwise determined outside this state.

(2) A provision which purports to preclude a party from commencing such a proceeding or obtaining a judgment or other resolution in this state or the courts of this state.

(b) For purposes of this section, “construction” means any work or services performed on, or materials provided for, a work of improvement, as defined in Section 8050 of the Civil Code, and for which a lien may be claimed pursuant to Section 8400 of the Civil Code (whether or not a lien is in fact claimed) or for which such a lien could be claimed but for Section 8160 of the Civil Code.

While Code of Civil Procedure section 410.42 is limited to “contract[s] between “contractor[s]” and “subcontractor[s],” explained the Court of Appeals, those terms are not defined, and are thus not limited to contracts between construction contractors and construction subcontractors but to…

To finish reading this article

Insurer’s Claim Denial may Violate State Consumer-Protection Statutes even when the Insurer has no Duty to Defend

Gabe Weaver | Ball Janik | October 6, 2015

As I wrote in an earlier blog post (see my August 10, 2015 article here), insurers have a duty to defend their policyholders against any potentially covered loss, which means that insurers are required to defend and attempt to settle claims on behalf of their policyholders even when coverage for the underlying claim is uncertain or doubtful. But as a recent case from the Washington Court of Appeals illustrates, insurers may not be off the hook even if the duty to defend does not apply. Washington, like a number of other states, has enacted consumer-protection statutes that can provide powerful remedies to policyholders whose insurers failed to properly investigate claims before denial.

On August 24 2015, Division 1 of the Washington Court of Appeals issued a decision that is certain to make insurers tremble. In Xia v. ProBuilders Specialty Insurance, the court upheld a summary-judgment order holding that the insurer did not breach its duty to defend, but nonetheless left open the possibility that the insured could recover damages under Washington’s Insurance Fair Conduct Act (“IFCA”) and/or the state’s Consumer Protection Act (“CPA”).

The underlying dispute in Xia was a personal-injury claim for carbon-monoxide poisoning that occurred as a result of an inadequately vented hot-water heater in a newly constructed home. The plaintiff, Zhaoyun Xia, settled with the homebuilder for a $2 million judgment, which included an agreement not to execute on the judgment and an assignment of the homebuilder’s rights against its insurer, ProBuilders. ProBuilders denied the claim due to, among other things, the insurance policy’s “pollution exclusion.”

co1After ProBuilders denied her claim, Xia sued for breach of the insurance contract, bad faith, and for violations of the CPA and IFCA. The trial court granted summary judgment in ProBuilders’ favor, holding that the allegations in Xia’s complaint fell squarely within the insurance policy’s pollution exclusion, and that the insurer had no duty to defend or indemnify. The trial court also dismissed Xia’s bad faith, CPA, and IFCA claims.

The Washington Court of Appeals affirmed the trial court’s decision granting summary judgment in favor of the insurer on the breach of insurance contract and bad faith claims, but reversed the trial court’s summary dismissal of Xia’s CPA and IFCA claims. The Court of Appeals held that…

To finish reading this article

Owner’s Claim for Defective Work not Barred by Prior Arbitration

Stan Martin | Commonsense Construction Law LLC | October 26, 2015

A contractor who successfully pursued payment in arbitration objected when the public authority owner subsequently filed a lawsuit claiming defective work. The contractor argued that the lawsuit was barred by doctrines of res judicata or collateral estoppel, but the Appellate Court of Connecticut has ruled in favor of the owner. Thus continues a lengthy battle. But there is more to the story.

The project for twenty-two buildings was started in 1991 and completed in 1996. Issues then arose concerning the construction and alleged defects. The contractor eventually filed for arbitration, seeking the contract balance. In that arbitration, the contractor attempted to assert a claim for declaratory judgment, in effect seeking a decision that the work was “free from defect.” But the public authority objected, arguing that the attempted declaratory judgment action was barred by CT General Statutes §4-61, in that the contractor had not given the proper notice to pursue this claim. The authority further stated that it was reserving the right to pursue claims concerning defects in a different forum.

The arbitration had focused on delays in the project, and ended with an award in favor of the contractor for $82,812.81. No claims for defective construction were advanced in the arbitration. In fact, the arbitrator decided that he lacked jurisdiction to hear the contractor’s attempted declaratory judgment claim.

On this record, the trial court in the subsequent lawsuit held:

The conduct of the arbitration and its resolution by the arbitrator demonstrates that the [public authority] never asserted in arbitration the claim of defective construction it makes here. Furthermore, when the [contractor] attempted to force the issue by its proposed amendment of the arbitration complaint, the arbitrator refused to entertain the amendment because he lacked jurisdiction to do so. Finally, whether or not [the contractor]’s performance was in conformity with its contract with the state was never litigated in the arbitration, the arbitrator ordering payment of the retainage based on the state’s admission of that allegation for purposes of the arbitration.

The appellate court noted, first, that…

To finish reading this article

Arbitration Rulings are Final, Even When the Arbitrators Get It “Wrong on the Law”

David K. Nelson | Kean Miller | August 13, 2015

Parties involved in the construction industry have long been familiar with mandatory arbitration as a dispute resolution procedure.

Originally arbitration was said to be more efficient and less expensive than litigation. Over time, experience has shown that arbitration is not necessarily more efficient or more timely.

Regardless of its potential benefits, one fact remains absolute – an arbitration ruling is almost always final and therefore not subject to appeal or review.  The Louisiana Supreme Court recently confirmed this fact in the case of Crescent Property Partners, LLC v. American Manufacturers Mutual Insurance Company, et al; 158 So.3d 798, 2014-C-0969 c/w 2014-C-0973 (La. 1/28/15).  In Crescent, the general contractor and its subcontractors filed motions for summary judgment with the arbitration panel alleging that plaintiff’s claims were preemptive because they were not filed within five years of the issuance of the Certificate of Occupancy.  The arbitration panel, relying upon the case of Ebinger v. Venus Construction Corporation, 10-2516 (La. 7/1/11), 65 So. 3d 1279, found that Ebinger dictated the retroactive application of the 2003 amendment to La. R.S. 9:2772 and ruled that plaintiff’s claims were untimely asserted outside the preemptive period.  The defendants filed suit in district court to confirm the arbitration ruling.  Plaintiffs opposed the filing and moved to vacate the award on the grounds that the arbitration panel ruling was not in accordance with law. The district court denied plaintiff’s application to vacate the award and confirmed the arbitration ruling the judgment of the district court.

Plaintiffs, thereafter, sought review in the Court of Appeal. The Court of Appeal reversed the trial court finding that the arbitration panel had incorrectly concluded the 2003 amendment reducing the time limitation from seven years to five years could be retroactively applied to preempt plaintiff’s claims. The general contractor and subcontractor thereafter requested the Louisiana Supreme Court to consider the issue.  The Supreme Court granted the writ “to determine whether the Court of Appeal ruling vacating the arbitration panel decision was proper.”

The Supreme Court recognized that the grounds for vacating an arbitration award are very narrow, and are limited to the exclusive grounds set forth in La. R.S. 9:4210, which provides:

In any of the following cases the court in and for the parish wherein the award was made shall issue an order vacating the award upon the application of any party to the arbitration.

  1. Where the award was procured by corruption fraud or undue means.
  2. Where there was evident partiality or corruption on the part of the arbitrators or any of them.
  3. Where the arbitrators were guilty of misconduct and refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced.
  4. Where the arbitrators exceeded their powers or so imperfectly executed them that a mutual, final and definitive award upon the subject matter submitted was not made.

The Supreme Court ruled that the Court of Appeal erred…

To finish reading this article

Oregon’s Broad Duty to Defend Extends to “Additional Insureds”

Kevin Mapes | Ball Janik | August 19, 2015

On August 19, 2015, the Oregon Court of Appeals issued its opinion in West Hills Development Co. v. Chartis Claims, Inc., reaffirming the broad nature of an insurer’s duty to defend, even when that duty is owed to an “additional insured.”

Contracting parties rely on indemnity agreements and additional insured status to protect against liability arising from the other party’s negligence. Insurers, however, frequently ignore or summarily deny tenders from parties who qualify as additional insureds under the policies they issued. That is exactly what happened in West Hills. A general contractor was sued for alleged construction defects in a townhome project. The general contractor then tendered the defense of that lawsuit to a subcontractor’s insurer as an additional insured under the subcontractor’s insurance policy. The subcontractor’s insurer denied coverage, and the general contractor, West Hills, sued the insurer, Oregon Automobile Insurance Company (“Oregon Auto”), for breach of the duty to defend. The trial court agreed with West Hills, granting summary judgment in the contractor’s favor.

On appeal, Oregon Auto relied primarily on two arguments to justify its refusal to defend. First, the insurer argued that it could have no obligation to West Hills as an additional insured because the original construction defect did not identify its named insured, the subcontractor, by name. Noting the broad nature of the duty to defend under Oregon law, the Court of Appeals rejected that argument. “To trigger the duty to defend, a complaint needs only to make allegations with which a claim covered by the policy may be proven. The insurer is charged with the responsibility to recognize the insured’s exposure that the complaint presents.” The Court noted that the original complaint alleged damages arising from negligent supervision of subcontractors, and that Oregon Auto’s insured was a subcontractor, holding that “[i]t did not need to be identified in the complaint for the insurer to recognize its responsibility.”

Second, Oregon Auto looked to the language of its policy to support its failure to defend. Again, the Court of Appeals disagreed. The insuring language provided West Hills with additional insured status, “but only with respect to liability arising out of [the named insured’s] ongoing operations[.]” Oregon Auto argued that West Hills could not be an additional insured unless there were allegations of property damage while its insured subcontractor was still on the job. West Hills, in contrast, argued that there was coverage as long as liability arises from the subcontractor’s operations, even if the damage occurs later. The Court of Appeals declined to reach the reasonableness of the competing interpretations, finding it unnecessary.

This case involves only the duty to defend, and enough is alleged to have triggered the duty to defend – without resolution of the construction of this additional insured endorsement. The original complaint pleaded the possibility of damage occurring even within the narrower coverage Oregon Auto understands. The original complaint would permit proof of damages before [the named insured] finished its work.

For all policyholders, West Hills presents…

To finish reading this article