Monthly Archives: December 2020

Yet Another Reminder that Tort and Contract Don’t Mix

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Christopher G. Hill | Construction Law Musings

I have stated on numerous occasions here at Musings that in Virginia, contract claims and tort claims (read fraud) don’t mix.  A recent case from the Federal District Court for the Eastern District of Virginia presents another example of this principle.  In Itility LLC v. The Staffing Resource Group, Judge Ellis of the Alexandria Division, considered ITility’s claims of fraud and breach of contract against SRG and one of its officers based upon SRG’s alleged violation of its duties under a teaming agreement.  The claim by ITility was that TSRG provided false and misleading resumes and thus damaged ITility.  SRG filed a Motion to Dismiss and the Court was therefore required to resolve the following issues: (1) whether plaintiff’s fraud claim is barred by Virginia’s “source of duty” rule; (2) whether plaintiff’s claim for tortious interference with a business expectancy is barred by SRG’s participation in the business expectancy, and (3) whether the teaming agreement between the parties bars plaintiff’s claims for consequential and punitive damages.

Unsurprisingly, the Court determined for the defendant, SRG on all three points.  On the question of whether a fraud count could be sustained by ITility, the Court rejected ITility’s argument that the Teaming Agreement didn’t require SRG to provide any representations or warranties regarding its performance under the Teaming Agreement and therefore the fraud claim was outside of the contract.  The Court further fleshed out its ruling on this point as follows:

The question raised by a source of duty analysis is not whether the contract obligated the defendant to certify its performance or not to commit fraud. Rather, the source of duty rule asks whether the alleged tort is based on the defendant’s performance of a contractual duty. Here, SRG had a contractual duty to provide resumes and certifications, and failed in that duty. Therefore, plaintiff’s sole remedy is contract.

The Court then went on to reject the tortious interference and punitive damages claims because SRG was not a third party that could interfere with the contract and punitive damages are not available in contract respectively.

This case continues the long legal history in Virginia that with few exceptions, where a contract exists fraud will not be an available cause of action.  As always, be sure to consult with an experienced Virginia construction attorney to determine if your case may meet one of these exceptions.

Contractor Loses Effort to Bind Remote Home Purchaser to Arbitration Clause

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Jon Paul Hoelscher and Amendeep S. Kahlon | Buildsmart

On December 8, 2020, in Taylor Morrison of Texas, Inc. v. Kohlmeyer, a Texas Court of Appeals rejected a contractor’s appeal of a trial court order denying the contractor’s motion to compel arbitration in a home construction defect dispute. The appellate court concluded that the theories of direct benefits estoppel and implied assumptions did not permit the contractor to bind a subsequent purchaser to mandatory arbitration required under the original purchase agreement.

In 2013, the contractor, Taylor Morrison, executed a purchase agreement with a homeowner for the construction of a new home in League City, Texas. The purchase agreement included a mandatory arbitration provision and provided that it may not be assigned without the prior written consent of Taylor Morrison. In March 2016, the homeowner sold the house, and, later that year, the property was sold again to the Kohlmeyers. In 2018, the Kohlmeyers sued Taylor Morrison “asserting that the house had a substantial amount of mold growth throughout resulting from numerous water and moisture sources caused by construction defects.” Taylor Morrison moved to compel arbitration under the doctrines of equitable or direct benefits estoppel and implied assumption, but the trial court denied the motion. Taylor Morrison then appealed.

The appellate court confirmed the trial court’s decision. The appellate court acknowledged that an arbitration agreement may bind a non-signatory such as the Kohlmeyers but only when one of the following six theories — none of which were applicable here — applies: “(1) incorporation by reference, (2) assumption, (3) agency, (4) alter ego, (5) equitable estoppel, and (6) third-party beneficiary.” Taylor Morrison only argued assumption and equitable estoppel applied in the instant action.

With respect to estoppel, Taylor Morrison contended that the Kohlmeyers’ claim sought a direct benefit of the original purchase agreement relating to the quality of workmanship and construction. According to the court, for Taylor Morrison’s direct benefits estoppel theory to apply, Taylor Morrison must show that the Kohlmeyers’ claims depended on and were unable to stand independently of the purchase agreement. Mere relation of the claims to the purchase agreement was insufficient to apply the estoppel theory to bind the Kohlmeyers to arbitration. The appellate court concluded that the Kohlmeyers’ claims did not arise solely from the purchase agreement because the Kohlmeyers did not allege breach of the purchase agreement, the economic loss doctrine could not be applied to bind the Kohlmeyers on a contract they never signed, and the Kohlmeyers’ claims for breach of implied warranties did not arise solely from the purchase agreement.

The appellate court also rejected Taylor Morrison’s argument for binding the Kohlmeyers to the arbitration clause under the theory of implied assumption because the purchase agreement had not been assigned to the Kohlmeyers. According to the court, an implied assumption of contract obligations arises when a contract is assigned to an assignee (here, the Kohlmeyers) and the benefit received by the assignee is so entwined with the burden imposed by the assignor’s contract that the assignee is estopped from denying assumption and the assignee would otherwise be unjustly enriched. Taylor Morrison argued the implied warranties in the purchase agreement had been automatically assigned to the Kohlmeyers when they bought the house and that the benefits of the implied warranties under the purchase agreement were entwined with the arbitration provision.

The court disagreed. Per the court, the alleged automatic assignment of the implied warranties was inapposite because there was no dispute that the purchase agreement (i.e., the contract) had not been assigned to the Kohlmeyers. Indeed, the appellate court noted that assignment of the purchase agreement was contingent on Taylor Morrison’s written consent, which the record showed had not been provided. Therefore, the court rejected the implied assumption theory and held that the Kohlmeyers could not be compelled to arbitrate.

Lessons from Taylor Morrison

Since arbitration is typically an animal of contract, it is important for contractors to understand how their arbitration clauses will be interpreted by a court. While attempts to compel arbitration of non-signatories to an agreement may invite some creative application of the applicable theories described above, a belt-and-suspenders approach in drafting a dispute resolution clause may provide more options to the party attempting to compel arbitration. Here, the appellate court appeared wary of applying a purchase agreement’s arbitration provision to a homeowner who was two-times removed from the original purchase agreement transaction. However, the court noted that three of the potential theories to enforce the arbitration clause were inapplicable based on how the agreement was structured.

Be a Good Neighbor: Techniques to Mitigate the Risk of Claims From Adjacent Landowners

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Joshua Levy, Josh Neudorfer and Madeleine Bailey | Construction Executive

In May 2020, a real estate developer performing excavation work in New York was sued by a neighboring property owner for property damage. A court overturned an injunction preventing the developer from continuing excavation work after reviewing a preconstruction assessment that showed the damage to the neighboring property was preexisting—not caused by the excavation (see Feldman v. 3588 Nostrand Ave. LLC as an example)

A preconstruction assessment is one of the most important tools in the arsenal of a developer protecting itself from neighbors bringing claims for property damage. Part two of this series will review the benefits of risk mitigation tools recommended for developers such as postconstruction assessments and monitoring during construction.

PRECONSTRUCTION ASSESSMENT OVERVIEW

A preconstruction assessment is a review of a property adjacent to a site where demolition and/or construction activities are to take place. The goal of the assessment is to establish baseline conditions by conducting an inspection of buildings and infrastructure, including identification of existing damage to improvements, so that causation of any alleged damages can be more easily determined.

The types of construction activities that would warrant a preconstruction assessment include foundation work in close proximity of adjacent structures; overhead work such as scaffolding and overhead crane access; demolition work generally, and particularly where blasting work or explosives are used; delivery routes where heavy hauling will occur; and construction work above existing utilities or transportation lines (i.e. subway tunnels).

The following items should be included in a preconstruction assessment:

  • Location of the proposed structure and adjacent structures;
  • Evaluation of potential concerns and sensitive buildings and/or infrastructure;
  • Location and conditions of existing structures or monuments;
  • Existing roads and parking lots to be retained;
  • All utility lines, gas lines, phone lines or cable lines near the proposed construction area;
  • Any existing objects to be demolished, and any existing trees or vegetation to be retained;
  • Observed deficiencies and anomalies;
  • Identification of conditions such as background noise, lighting, vibrations, water conditions and ambient air quality sufficiently in advance of project commencement; and
  • Still photos, videos and survey documentation of existing conditions in addition to a written summary of findings.

Preconstruction Assessment Technology


The preconstruction assessment can be conducted using photo, video, survey tools including laser scanning, vibration monitoring equipment and a variety of other tools depending on the nature of the work being conducted. For example, decibel meters should be used when noisy work is anticipated, and passive and active collectors should be used when air quality will be affected. The preconstruction assessment should also evaluate subsurface conditions that are important to wave transmission such as localized geotechnical information and regional soil conditions and lithology. The preconstruction assessment can also be used to identify signs of structural issues on adjacent properties that should be monitored throughout the construction to monitor potential changes. The preconstruction assessment can ultimately be compared to a follow-up post-construction assessment to determine whether damage occurred during construction.

Who Should Conduct a Preconstruction Assessment?

A third-party engineering group should conduct the assessment to minimize conflicts of interest. The conducting party and the adjacent property owner may want to retain their own third-party investigators to provide separate condition assessments. This is acceptable, however, both parties should meet to review the condition assessments and confirm and agree as to the existing conditions on the neighboring property.

ESTABLISHING A REGULATORY BASELINE

In addition to establishing a baseline for structural site conditions, developers should consider involving relevant regulators in the project before project commencement, for example, by inviting the regulator to the jobsite prior to commencement. This way, the regulator is aware of baseline site conditions and is familiar with the site and the project scope. Early involvement of relevant regulators sets a productive tone for the relationship, and can be a cost-saving measure as it prevents delay-inducing surprises that can result from involving a regulator later in the project or after issues arise.

MONITORING DURING DEMOLITION/CONSTRUCTION

Monitoring during demolition and construction can allow developers to identify concerns quickly, allowing for rapid work modifications and proactive management of contractor behavior to limit more severe issues that might develop during field activities. Often, early discovery of a developing issue can lead to proper identification of the root source of the issue, potentially a source wholly unrelated to the work on site. Developers should consider use of monitoring tools that alert project managers of site conditions in real time.

The background assessment provides a key element to addressing potential concerns identified during the on-going monitoring process, as it allows for a comparison to baseline conditions. Monitoring detail will be addressed in part three of this series.

This is the second article in a three-part series. Part one reviewed how to avoid a lawsuit on a project in close proximity to other buildings.

Be a Good Neighbor: Protect Against Claims by an Adjacent Landowner During Construction

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Joshua Levy and Madeleine Bailey | Construction Executive

There’s nothing like working in an office while pilings are being pounded into the ground next door, leading to crashing sounds of pile driving and the attendant afternoon headaches. Fortunately, that’s often the extent of a neighboring project’s real inconvenience. In other cases, however, construction in close quarters can mark the beginning of costly and emotional disputes, which can escalate to costly legal battles during and after construction.

NUISANCE AND STRUCTURAL DAMAGE CLAIMS

Construction claims are often based on the concept of “nuisance,” or on structural damage to adjacent property. Nuisance claims are typically based on noise and dust from construction sites, while structural damage claims are based on direct physical damage caused by neighboring demolition, vibrations, excavation and dewatering. These types of claims can result in monetary damages for neighbor plaintiffs, loss of permits for contractors and reputational damage to the developer.

In one recent case in New York City, the developer faces up to $10 million in damages in a lawsuit with a neighboring property owner. The developer was conducting excavation, dewatering and installation of steel sheet piles, which the plaintiff alleges caused its five-story building to settle and shift, rendering doors inoperable and causing extensive cracking and separation of floors and ceilings from walls and supports. The plaintiff filed its complaint on Jan. 24, 2019, and the lawsuit is ongoing, exemplifying that construction claims such as these can be time consuming and costly (Complaint, 642 East 14th St. v. 644 E. 14th Realty [N.Y. Sup. Ct. January 24, 2019]).

Non-monetary costs associated with adjacent property damage claims can also be steep. In one infamous Philadelphia case, a construction crew destroyed a shared foundation wall while working underground, causing the ceiling of the neighboring rowhouse to cave in, and the stairs to separate from the wall. The city ordered demolition of the neighboring house, revoked the contractor’s permits and ordered a district attorney investigation of the incident.



Nuisance claims can be similarly costly. In a Texas nuisance case, plaintiff homeowners sued a developer constructing a project near their homes, alleging that vibrations, lights and noise caused “loss of use and enjoyment” of their properties. The court upheld an award of more than $200,000 to the neighbors even though the developer held proper city permits. The court specifically relied on the facts that the contractor worked “around the clock” for approximately four months, including weekends and holidays, using bright lights placed directly behind the plaintiffs’ homes to illuminate the worksite at night. Some of this around-the-clock work included excavation work performed within 20 feet of one of the plaintiff’s homes. The court held that these actions were “abnormal and out of place.” ( C.C. Carlton Indus. v. Blanchard, 311 S.W.3d 654 [Tex. App.—Austin, 2010, no pet.])

RISK-MITIGATING MEASURES

High-risk projects in urban or high-density areas also put developers at risk of being sued by neighbors falsely claiming that preexisting damage was caused by the developer’s construction. Preconstruction surveys can save developers from opportunistic neighbors by debunking claims that they caused such damages.

One New York court reversed a previous injunction which prevented a developer from construction based on evidence shown in a preconstruction survey. In this case, the plaintiff alleged property damage resulting from excavation work. The court specifically relied on an independent engineering report showing that the damages alleged by the plaintiff were actually preexisting as shown by the preconstruction survey. (Feldman v. 3588 Nostrand Ave. LLC, 2020 NY Slip Op 31274 [U], ¶ 18 [Sup. Ct.])

Minimizing potential nuisance claims is a bit simpler. Developers can mitigate this risk by maintaining appropriate work hours and good worksite housekeeping practices. Also, developers should conduct a thorough review of the jurisdiction’s noise and vibration ordinances to ensure compliance. Proactive developers may consider visiting neighbors in advance to review the days and times when more obtrusive activities will take place.

Finally, while nuisance and structural damage claims can result in costly damage awards, the potential costs to goodwill between neighboring property owners should not be overlooked. Recognizing the disruption a project will cause and implementing disturbance mitigation measures can help owners and contractors avoid neighbor disputes.

This is the first article in a three-part series. Parts two and three will review preventative measures that can mitigate the relational fallout from construction incidents, and minimize the chances a construction project is tied up in costly and time consuming litigation.

Documenting Contract Changes in Construction

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J.D. Holzheauser | Construction Executive

Construction projects are almost inevitably subject to changes in the contract. A fundamental understanding of construction changes, how those changes are governed and what is necessary to ensure a complete change are of paramount importance to all parties involved in a construction project. This article is not a treatise on construction contract changes; rather, it provides advice on actions a contractor can take during construction that will help the contractor recover time or money when a contract’s schedule or scope of work needs to be changed.

CHANGES DEFINED

Changes to a construction project affect two broad spheres—timing and scope of work. Changes usually present themselves as either a change order or a change directive. Each may go by a different name depending on the contractual scheme in the project’s prime contract, but they essentially have the same characteristics.

The difference between a change order and a change directive is one of agreement. A change order (in the owner-prime contractor context) occurs when the contractor and the owner agree to a change in the timing or scope of work in the contract. Normally, the change order is a written agreement to change the contract and is executed by the contractor and owner.

A change directive is used when a change in the contract is warranted, but the parties cannot agree on the change. The American Institute of Architects A 201 Construction Contract contains a typical clause for a change directive. Section 7.3.1 states that a change directive “is a written order prepared by the Architect and signed by the Owner and Architect, directing a change in the Work prior to agreement on adjustment, if any, in the Contract Time or Contract Sum, or both.” In this situation, the adjustment to the contract sum or time will be assessed at a later date.

AUTHORITY TO MAKE CHANGES

Knowing who has the authority to agree to changes is one of the more important legal issues for a contractor. The person with the requisite authority to agree to changes binds their party to that change. Any person who does not have the requisite authority may not legally bind their party. 

A typical construction project will indicate who has the authority to make changes to the contract. An architect or engineer of record might have authority to make changes. But it is essential that every contractor know who has the authority to make a change to the project. The first step in making that determination should be to look to the contract. If the contract does not explicitly identify the person with authority, or the conveyance of authority is vague or confusing, confirm with the owner in writing who has the authority. 

Confirming authority to make changes is very important from a legal perspective. A contractor could find itself in a legal battle over extensions of the contract time, additional general conditions, or liquidated damages based solely on the fact that it did not engage the person with the proper authority to make changes. Legal battles can be largely diminished or altogether avoided by heeding the proper authority.

DOCUMENT, DOCUMENT, DOCUMENT

The typical clauses providing the procedures for change orders require an agreement in writing by the contract parties. If the process goes smoothly, an executed change order is the product.

But unknown and unknowable issues, occurrences or personalities can derail the smooth operation of the change order process. Documentation is necessary to record these events. Documentation is equally, if not more, important because any contract with a change clause will likely require several steps of the change order process to be recorded in writing. A contractor not following the change order clause procedures could find itself in a bad position.

A good example is the decision in PYCA Industries, Inc. v. Harrison County Waste Water Management District out of the U.S. Fifth Circuit Court of Appeals1. In that case, the court held that the general contractor was not entitled to delay damages because it had not provided the written notices required by the contract in order to recover those delay damages. The court held that the contractor’s failure was a waiver of its right to recover damages, even though the owner was not adversely affected by the contractor’s conduct.

The circumstances of every contract are different, but the legal principles applicable to construction contracts are generally applied uniformly in each jurisdiction. Far better for a contractor to protect itself on the front end than to convince a judge or jury it is entitled to damages despite failure to abide by the contract. Legal decisions similar to PYCA Industries, above, are common across the U.S. in both state and federal jurisdictions.

Every contractor, including their project managers, project engineers and superintendents, should be aware of the importance of documenting events that can and do lead to the need for a change order. Transmitting correspondence in the method as authorized by the contract to the owner or its authorized representative which records the events giving rise to the change should be standard operating procedure. Though each project and each contractor likely have a slightly different definition of standard operating procedure, the procedure should include, without exception, the directive to record events or issues that could have a pecuniary or temporal impact on the contractor or project. 

Documentation is of heightened importance in a situation that involves a change directive or similar unilateral change. Documenting the events should be done contemporaneously or as soon as possible after each event occurs. 

Contemporaneous documentation of events related to a unilateral change are very valuable to a contractor at a later date when the contractor is negotiating with the owner to account for the unilateral change.

IMPORTANCE OF DOCUMENTING CHANGES

Most construction projects encounter some event that requires a change in the contract and some culminate in some informal negotiation between the parties to close-out the project. While many projects are completed without any significant disagreements between the parties, some number result in formal dispute resolution proceedings such as litigation or arbitration. Typically, in those situations, changes to the construction contract will be necessary and be a part of the end-of-project negotiation or dispute resolution process.

Possession of documented evidence that demonstrates the contractor’s compliance with change order procedures and supports a contractor’s request for a change to the contract or compensation for a change directive is extremely valuable to the contractor. Another example of the importance of contemporaneous documentation in compliance with the contract is found in Razorback Contractors of Kansas, Inc. v. Board of County Commissioners of Johnson County by the Court of Appeals of Kansas2.  

In that decision, the court held that the contractor was required to comply with the contract’s notice provisions at the time the contractor became aware of a condition that required a change in the contract. The contractor was not able to recover additional compensation from the owner because the contractor had not notified the owner of the conditions requiring a change as required by the contract.

There are many examples that illustrate the value of documenting events on a project. Not all failures to properly document conditions by a contractor, nor the need for a change, have pecuniary or temporal impact for the contractor. The owner’s conduct in those situations is equally important in a court’s decision. But contractors can avoid circumstances where formal dispute resolution is necessary to recover money associated with a change by knowing and adhering to the contract requirements.

Proper documentation is not important in legal settings only. A contractor places itself in a better negotiating position at the end of a project if it has documented evidence to support its position. Papering the project is beneficial in the end, whether that end be project closeout or a formalized dispute resolution process. It eases the project closeout when changes are needed and helps to reduce legal fees if formal dispute resolution is necessary.