Home Builders and Developers Beware: SC Supreme Court Beats Up Hybrid Arbitration Clauses Mercilessly

Ned Nicholson | Best Practices Construction Law

If you are a homebuilder, residential housing developer, construction industry insurer, or any one of the many participants in the industry providing affordable and decent housing for the citizens of South Carolina, you are already aware that South Carolina courts have for decades prioritized the promotion of consumer (i.e., home buyer) rights, usually at the expense of the providers of housing.  There is nothing inherently wrong with that; the goal is laudable.  But as in so many things, the implementation has been extremely costly for the residential construction industry as a savvy plaintiff’s bar has taken advantage of grey areas that are inevitably created in our judicial system.

For example, years ago a South Carolina Supreme Court Justice proudly stated that “South Carolina, through both its courts and legislature, has previously been in the vanguard of protecting consumers, particularly in the area of home construction.”  Reynolds v. Ryland Group, Inc., 531 S.E.2d 917, 921 (S.C. 2000).  It is also no secret to builders and insurers that South Carolina’s joint and several liability rules mean that if a builder is only 1% negligent in the cause of construction defects, the builder can still get stuck with 100% of the damages, with the courts leaving it up to the builder to try and collect from other negligent parties.

It is therefore no surprise that in South Carolina, and nationally for that matter, homebuilders have attempted to bring some economic fairness to the table by inserting arbitration clauses in their construction and sales contracts.  Arbitration is a private dispute resolution method where parties to a contract agree that instead of going to court in a public lawsuit, any dispute will be handled by a neutral third party, usually an attorney, in a more informal and less expensive manner than the court system.  Usually the homebuilders attempt to ensure that arbitrators knowledgeable in the construction world will decide such disputes, so that experts truly decide the disputes.

Not surprisingly, plaintiff’s lawyers do not generally like arbitration, as they tend to believe their client homeowners would be more fairly treated by a jury or judge who are not construction experts and perhaps would be more sympathetic to a consumer in a close case.  Because of that, there are constant attacks on arbitration clauses in the courts as owners try to find creative ways to bypass binding arbitration.

Beware!  The South Carolina Supreme Court on September 14, 2022 embraced one of those creative bypasses in Damico v. Lennar Carolinas, LLC, et al, Op. No. 28114.  In Damico, the homebuilder had masterfully integrated special warranty clauses, arbitration clauses, and other contract documents to provide a clear, reliable outline and process for both the home buyer and the homebuilder to follow for dispute resolution by arbitration.  Or so the homebuilder thought.

To the surprise of the builder, the Court held that the arbitration clauses were “unconscionable,” and thus not enforceable.  The only way the Court could reach that conclusion was that the arbitration clause in this case did not say that issues of enforceability of the arbitration clause were for the arbitrator, not the courts, to decide.  (If a clause says that, the court must stop and defer to the arbitrator on that issue.)  Unfortunately for the homebuilder in this case, the elaborate arbitration clause missed that one checkpoint, which opened the door for the Court to attack the clause itself.

And attack it did.  With the adroitness of a prize fighter, the Court bobbed and weaved through various legal barriers that ordinarily may have ended its decision making process and made its way to the unconscionability holding.  The Court seized on the arbitration clause’s joinder provision that provided that the homebuilder at its sole option could join any subcontractors or other potentially liable parties in the arbitration.  The Court held that this seemingly minor procedural issue made the clause unconscionable and unenforceable because normally the plaintiff (home buyer) decides who to sue and this provision took that right away.  The Court believed it also could lead to inconsistent results in other forums and force the homeowner to litigate the same issues in court.

Of course, in the real world, there is almost always a chance of there being many forums.  The homeowner can always sue at fault subcontractors in court under other theories; that happens all the time.  The reasoning of the Court if taken to its extreme could undermine almost any arbitration clause since the home buyer does not have contracts with subcontractors and thus no arbitration clauses.

So how does a homebuilder avoid the trap created by the Court in Damico Perhaps a work-around could be if homebuilder includes in every subcontract an arbitration provision that allows a home buyer to demand arbitration against a subcontractor as well as joinder in an arbitration with the homebuilder.   Another way may be the well-known legal maxim of KISS (Keep It Simple Stupid.)  Drafters of arbitration clauses may want to keep the clause very vanilla—for example, beyond the basic language needed to ensure arbitration is applicable to a dispute, let the rules of a national arbitration association govern and do not insert any procedural hurdles that a court could in any way interpret to be unfair in some way to the consumer.  And of course, make sure that the arbitrator, not a court, will determine if a clause if unconscionable or not.

There are other lessons to be learned from Damico, and the homebuilders will certainly face a new round of attacks on their contracts as lawyers and courts start applying the opinion in not just the homebuilder industry, but consumer transactions in general.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

The Importance of Third-party Beneficiary Clauses in Contracts

C. Andrew Gibson | Stoel Rives

In resolving construction contract negotiations and disputes, we’ve seen a number of overlooked clauses carry significant importance: a 20-year roof warranty limited to material replacement costs (no tear-out, no install) and only if the owner gives notification of a defect within 60 days; limitations of liability clauses that cap damages significantly below insurance coverage the owner paid for; and, in perhaps the most egregious example, an attorney’s fees clause written in reverse that had the winner pay the loser’s legal fees!

Whether you’re building your dream vacation home, renovating an existing commercial structure, or developing a multimillion-dollar mixed-use project, construction contract terms matter. Interpretations of one often overlooked clause—addressing contractual “third-party beneficiaries”—varies considerably from state to state. Consistent inconsistency makes it prudent to address the issue at contract formation to manage the risk inherent in blindly agreeing to default form contract language.

A third-party beneficiary (TPB) is a person or entity who, though not a party to the contract, stands to benefit from the contract’s performance. Typically, the TPB needs to be expressly named in the contract from which it stands to benefit. For example, if a contractor and a subcontractor agree to a subcontract that specifies the subcontractor will render some performance to a project for the express benefit of the owner as a TPB, then that owner is a third-party beneficiary of the subcontract, even though it is not a party to the subcontract. TPB status may exist up and down the contractual chain.

TPB status carries substantial benefits. In the preceding example, an owner may assert claims directly against the subcontractor for breach of the subcontract, breach of warranty, negligence, or other claims arising out of the subcontracted work for the project. This allows the owner flexibility to pursue the potentially liable parties rather than having to first seek recourse from its prime contractual partner—the general contractor. These direct rights can also help avoid an economic loss rule defense by the offending party (the economic loss doctrine generally provides that a party cannot recover in negligence for purely “economic loss”—i.e., not personal injury or property damage). There are risks, however, because if not drafted correctly, a TPB clause could grant unintended rights, such as giving a subcontractor direct claims against the owner, or a general contractor direct claims against a project lender.

Interestingly, default form contract language is largely silent on the TPB issue. The AIA’s B101-2017 Owner-Architect agreement states at section 10.5, “Nothing contained in this agreement shall create a contractual relationship with or a cause of action in favor of a third party against either the owner or architect,” but does not address the desired TPB situation. This means the parties are left to the applicable law of the place in which the project is located, which can vary considerably from state to state.

In Oregon, to the benefit of owners, the Supreme Court ruled that where an owner, even as a remote purchaser, can demonstrate actual property damage rather than purely economic loss, the economic loss rule does not bar a negligence claim for construction defects. Thus, even if an owner is not a TPB of a subcontract in Oregon, that owner may have direct rights of recovery against a subcontractor for actual property damage to the owner’s property.

In Washington, the situation is different. Washington’s Supreme Court rebranded the economic loss rule as the independent duty doctrine. It provides that an injury is remediable on a negligence theory if it traces back to the breach of a duty arising independently from the contract terms. In the context of a defective construction case, Washington courts have explained there is no independent duty to avoid economic loss—i.e., the bargained-for quality, absent an independent duty or other risk of harm. These cases suggest that in Washington, without a TPB clause, the upstream party needs to show an independent duty or harm separate from the construction defect in order to maintain a direct action against a non-contracting construction party.

And in Utah, we find the rule directly opposite to that in Oregon. There, the Utah Legislature has actually codified the economic loss doctrine to make it clear that an action for defective design or construction is limited to breach of contract. Absent a TPB clause in a Utah contract then, an owner has little recourse against a construction party with whom it lacks privity of contract.

Legal interpretations vary and construction contract terms matter. The oldest advice remains the best: If you want something done right, do it yourself. When negotiating your next construction contract, consider adding your own TPB clause clarifying the upstream parties benefiting from the work have direct rights of action against downstream parties in order to equitably hold each party accountable for deficiencies in each party’s work. Protect your rights by not leaving your contracts open to default form contract terms and the law of unintended consequences.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Modern Tools Are Key to Future-Proofing the Construction Industry

Guillaume Le Gouic | Construction Executive

The U.S. construction industry is facing a tech revolution that’s upending the roles of skilled workers. Many traditional contractors are struggling to embrace the new technologies customers increasingly demand, while the industry struggles to attract young professionals. According to the latest American Community Survey data, the median age of a construction worker is 41.

This is particularly concerning given the confluence of two trends: the construction industry is facing a critical workforce shortage that’s only expected to intensify, and the workforce is aging—NCCER is predicting around 40% are expected to retire by 2031. Industry leaders must prioritize using the latest industry solutions and innovations to modernize construction work, transform the construction industry and appeal to the next generation of contractors.

Throughout COVID-19, the construction sector experienced a higher number of workers quitting jobs as opposed to being laid off, indicating the older workforce likely took the opportunity to retire early, along with more than three million other Americans who did the same. Currently, industry leaders are not doing enough to communicate opportunities to help shift the career perception of electrical contractors from simply being “blue collar” and un-exciting. A 2019 National Association of Home Builders (NAHB) found only 3% of people ages 18 to 25 were interested in pursuing a construction career, with most respondents noting the desire for a less physically demanding job.

The passage of the Infrastructure Investment and Jobs Act last fall will pump billions in new spending into the nation’s most critical infrastructure—funding critically needed to efficiently modernize and repair outdated and crumbling roads, bridges, buildings and more. But achieving that modernization cannot happen without skilled workers and innovative technologies to ensure infrastructure is built in the most efficient and safe way that also ensures resiliency against climate change and cyber-attacks.

Specifically, the introduction of a new toolbox for contractors focused on devices, mobile software, safety and training opened up new opportunities for trade workers, especially among millennials and Gen Zers entering the workforce. While seasoned contractors may have years of field experience, younger workers have a grasp of technology that must be tapped into to modernize contractor work.

Embracing digital solutions will not only help construction companies and contractors drive efficiency gains and overcome industry hurdles but also help improve the overall job appeal, particularly to millennials, who are now the largest generation in the U.S. labor force. In addition to being well-versed in digital technologies, millennials are a key force in advancing workplace safety across industries—an area this new set of digital tools can help augment. A recent report confirms that focusing on infrastructure investments in digital technologies will help mitigate the worker shortage by leading to new job opportunities, as well as having environmental benefits and longer-lasting economic growth. These investments are vital for bigger-picture infrastructure improvements but also trickle down to the level of daily functionality.

Given that these new technologies are designed to streamline processes and digitize operations, the modern contractor role is nowhere near as labor intensive as the traditional job, mitigating the main concern of younger generations. The lack of initiative to clearly relay this shift in contractor work and jobs, if continued, poses a significant disadvantage to the health of the industry, which will depend entirely on new skill sets and specializations in the coming years.

In addition to appealing to a key target audience to fill the workforce shortage, innovative tools that leverage artificial intelligence can help contractors, system integrators, distributors, and facility managers maintain systems, improve sustainability efforts and optimize the construction lifecycle. Contractors need access to digital platforms that provide simplified and customized insights into their work. These platforms hold tremendous benefits for improving productivity, uncovering new strategies and techniques to lower energy consumption, and managing multiple complex projects simultaneously with minimal downtime. Implementing digital platforms can not only help partners but also drive business efficiency on a larger scale.

The shift toward more technologically smart devices means today’s contractors can equip themselves to tackle a broad range of challenges, including sourcing products more quickly, accessing expert advice in real-time, managing system operations and responding to any potential customer issues as they arise. By consolidating this data into one centralized platform, more valuable insights are readily accessible to any user that may need them. We must break down the prevalence of data silos and pursue fully integrated data solutions.

The modern contractor faces more unique challenges than ever: growing urbanization, increased consumer and enterprise demands for smart technologies, operating their own business, and the movement to service-centric business models. As we look toward the promise of modern infrastructure, adopting new tools is critical for digitization, improved safety and efficiency, and attracting the next generation of skilled workers. In a nutshell, the future of the construction industry is on the line. 

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Indemnity: What You Don’t Know Can Hurt You!

Caitlin Kicklighter and Bill Shaughnessy | ConsensusDocs

Risk allocation between the parties is a critical component of any construction contract. Indemnity obligations can be some of the important risk-shifting provisions of any design or construction contract. Indemnity provisions typically require one party, the Indemnitor, to agree to “hold harmless,” and/or reimburse another party, the indemnitee, from claims and liability arising out of the party’s work. Considering the financial consequences that an indemnity provision can have on a construction project, it is critical that all parties to a construction contract know the legal implications of the contract indemnity provisions and understand any limitations in enforcing the indemnity provisions depending on the controlling jurisdiction. While most indemnity clauses and obligations are enforceable, many states have enacted anti-indemnity statutes prohibiting or restricting specific indemnification provisions. These anti-indemnity statutes afford protection to contractors and subcontractors not generally in a position to protect themselves from overly extensive indemnity obligations.

This article highlights several examples of indemnity provisions typically seen in construction contracts, the measures are taken by a growing number of states to protect parties with less bargaining power in the form of anti-indemnity statutes, and offers practical considerations when negotiating or drafting indemnity provisions.[1]

Indemnity Provisions: Many Shapes and Many Sizes.

Indemnity clauses can come in various forms and transfer different risks. Common indemnification clauses include indemnification of economic losses, payment, insured contracts, and indemnification for breach of contract. Generally speaking, broad indemnification clauses require the Indemnitor to bear the financial risk for all damages or losses incurred by the indemnitee. More narrow/limited clauses may only require the Indemnitor to be responsible to the indemnitee for losses or harm it caused.

ConsensusDocs, as one example, employs a more limited or narrow indemnification provision whereby a party is only responsible for its negligence and not the negligence of others. ConsensusDocs also includes reciprocal indemnity language, meaning that both parties to the contract are required to indemnify one another.[2] Example language of the reciprocal indemnity clause contained in ConsensusDocs 200 “Standard Agreement and General Conditions Between Owner and Constructor,” Article 10, INDEMNITY, INSURANCE AND BONDS is set forth below:

10.1.1 To the fullest extent permitted by law, the Constructor shall indemnify and hold harmless the Owner, the Owner’s officers, directors, members, consultants, agents and employees, the Design Professional, and Others (the Indemnitees) from all claims for bodily injury and property damage, other than to the Work itself and other property insured, including reasonable attorney’s fees, costs, and expenses, that may arise from the performance of the work, but only to the extent caused by the negligent acts or omissions of the Constructor, Subcontractors or anyone employed directly or indirectly by any of them or by anyone for whose acts any of them may be liable. The Constructor shall be entitled to reimbursement of any defense costs paid above the Constructor’s percentage of liability for the underlying claim to the extent provided for by the subsection below.

10.1.2 To the fullest extent permitted by law, the Owner shall indemnify and hold harmless the Constructor, its officers, directors, members, consultants, agents, and employees, Subcontractors, or anyone employed directly or indirectly by any of them or anyone for whose acts any of them may be liable from all claims for bodily injury and property damage, other than property insured, including reasonable attorneys fees, costs, and expenses, that may arise from the performance of work by the Owner, the Design Professional, or Others, but only to the extent caused by the negligent acts or omissions of the Owner, the Design Professional, or Others. The Owner shall be entitled to reimbursement of any defense costs paid above the Owner’s percentage of liability for the underlying claim to the extent provided for by the subsection above.

Therefore, under the ConsensusDocs 200, contractors and owners are responsible for their negligence, and the indemnification obligations cover insurable risks such as personal injury and property damage. Also, either party is entitled to reimbursement of defense costs paid in excess of that parties’ percentage of liability for their underlying claim.

While AIA contracts also include a limited or narrow indemnification provision, limiting liability to only the contractor (or architect’s) negligence, the contractor’s indemnity obligations are not reciprocated by the owner. The standard indemnification in the current AIA A201 – 2017 edition provides in the relevant part:

§ 3.18.1 To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses, and expenses, including but not limited to attorneys’ fees, arising out of or resulting from the performance of the Work, provided that such claim, damage, loss, or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them, or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss, or expense is caused in part by a party indemnified hereunder.

Under this provision of the AIA, the contractor is not required to indemnify the owner for every possible claim that may arise. Rather, the contractor’s indemnity obligations are limited such that the claim must arise from the contractor’s work, must be for bodily injury or property damage, and only to the extent caused by the negligence of the contractor or its subcontractors.

Enforceable Provisions While Ensuring Maximum Protection.

Anti-indemnity statutes vary from state to state based on the contract type and the restrictions in place. There are essentially three categories of anti-indemnity statutes:

  1. Statutes barring indemnification for indemnitee’s sole negligence
  2. Statutes barring indemnification for indemnitee’s negligence
  3. Statutes barring indemnification of design professionals

The first category of anti-indemnity statutes prohibits an indemnitee from being indemnified for its sole negligence. California’s anti-indemnity statute, for example, states that “any provision that indemnifies a party for a loss arising from its sole negligence, willful misconduct, or for defects in a design furnished by the indemnitee is void and unenforceable.” Cal Civ. Code § 2782(a). Under this provision, the Indemnitor in a construction project cannot be held responsible for the damages caused solely by the indemnitee’s own negligence.

However, some anti-indemnity statutes that fall under this category may provide special circumstances where indemnification would still be allowed. For example, unlike California’s statute, indemnitors in Florida may be liable for the indemnitee’s sole wrongdoing if certain circumstances exist, despite no wrongdoing of their own. Florida’s anti-indemnity statute provides, that “any provision that requires a party to indemnify another for a liability caused by an act, omission, or default of the indemnitee is void and unenforceable unless the contract both contains a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents.” Fla. Stat. § 725.06(1).

North Carolina’s anti-indemnity statute is an example of a statute that bans the indemnitee from being indemnified for losses if the indemnitee partly or wholly contributes to the loss. North Carolina’s anti-indemnity statute reads in relevant part, “any agreement that seeks to indemnify a party against liability resulting from its own negligence (in whole or in part) is against public policy and is void and unenforceable.” N.C.G.S. § 22B-1. This particular statute significantly limits what indemnity provisions are enforceable in North Carolina.

Some anti-indemnity statutes ban design professionals from an indemnification for their negligence in providing their services. New York’s anti-indemnity provision is an example of such a targeted statute. New York’s anti-indemnity statute reads in relevant part, “an agreement by an owner, contractor, subcontractor, or supplier to indemnify an architect, engineer, or surveyor from a liability for bodily injury or property damage arising out of a design defect is void and unenforceable.” N.Y. Gen. Oblig. Law § 5-324.

Some states do not have an anti-indemnity statute in place. However, this does not translate to indemnity provisions being free reign. States such as Alabama, Maine, and North Dakota typically rely on court-made law that the language in indemnification provisions be clear and unequivocal; the contract must explicitly state indemnification.

Drafting and Reviewing Indemnity Provisions: Things to Consider

All parties must have a clear understanding of the contract language when reviewing and negotiating indemnity provisions, as well as industry standards when faced with negotiating indemnity provisions. While indemnity provisions have customarily shifted risk down the contract chain, the reciprocal obligations utilized in ConsensusDocs are becoming more universally accepted in the industry. Below are some practical considerations for next time your company may be faced with negotiating or drafting indemnity provisions:

  • Does the indemnity obligation only apply to the contractor? Or does the provision include other named parties such as the design professional? It is important to consider the protected class defined under the provision.
  • Does the provision cover specific claims and damages? Are damages limited in any capacity? Reflecting on the scope of the damages covered is critical for each party involved.
  • Does an insurance policy exist that may mitigate any type of risks assigned to parties through the indemnity clause? Parties frequently fail to assess and compare the risks associated with indemnity clauses and their insurance coverage.
  • Does an anti-indemnity statute or judge-created law exist in the jurisdiction where the work is being performed? These limitations can vary from state to state, affecting indemnity provisions’ enforceability.

[1] It is important to note that indemnity clauses may also include the duty to defend by the indemnitor. This is a different duty requiring the indemnitor to defend a claim or lawsuit against the indemnitee, which is not addressed in this article.

[2] To read additional materials regarding indemnification provisions in ConsensusDocs, see:


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Is the Removal and Replacement of Nonconforming Work Economically Wasteful?

David Adelstein | Florida Construction Legal Updates

There are times a contractor installs the wrong material or system contrary to the plans and specifications.  A nonconformity. The owner wants the already-installed material or system to be replaced in conformity with the plans and specifications.  However, what was installed is functionally equivalent to what the plans and specifications required and would be cost prohibitive, i.e., economically wasteful. If the contractor elects to remove and replace the nonconforming work, it may seek a change order because it is economically wasteful. Or, the contractor may refuse (typically, not the best approach) in furtherance of taking on the fight based on the economic wastefulness associated with the removal and replacement. A recent case, David Boland, Inc. v. U.S., 2022 WL 3440349 (Fed.Cl. 2022), talks about this exaction situation and the economic waste doctrine. This is an important doctrine for contractors to understand when faced with a similar predicament.

Here, a contractor was hired by the government to construct a wastewater collection system that was to be owned and operated by a private company. The contractor’s work was going to be incorporated into a larger sewer system that the private company already operated.  The contractor was required to install sewer manholes reinforced with steel in accordance with an ASTM standard. The manholes could be rejected if they did not conform to the ASTM standard.  Compliance with this ASTM standard was also required by the private company’s construction protocol for the infrastructure, which was incorporated into the contractor’s contract with the government. The contractor was required to strictly comply with the contract.

As it turned out, the contractor did not install sewer manholes reinforced with steel.  Instead, nineteen installed manholes were reinforced with synthetic fiber. The contractor requested a variance from the government suggesting certain guarantees and fixes.  They were not accepted by the government or private company. The government directed the contractor to remove and replace the manholes reinforced with fiber instead of steel. The contractor did so at the cost of $3.5 Million and sought its costs from the government under the economic waste doctrine.

The contractor claims when it sought its variance it provided an expert opinion that the “fiber-reinforced manhole sections could be expected to serve their purposes as well as steel-reinforced ones.” David Boland, supra at *3.  The government, through an expert, opined that fiber-reinforced manholes were more likely to have undetected defects that could reduce the manholes’ service life.  The private company also did not accept the fiber-reinforced manholes and there was an issue as to whether guarantees offered by the contractor were equivalent to assurances the private company was to receive from the government.  In other words, there was a dispute as to the functional equivalence of fiber-reinforced versus steel-reinforced manholes.

Whether the contractor would be entitled to the removal and replacement costs hinges on whether such work was economically wasteful.  While this determination would be through the trier of fact on a later date, the Court’s discussion of the economic waste doctrine is a worthwhile discussion for consideration where the issue was whether the $3.5 Million to remove and replace nineteen fiber-reinforced manholes with steel-reinforced manholes was economically wasteful.

A contractor can recover correction costs under the economic waste doctrine when two elements are met: “[1] [T]he cost of correction is economically wasteful and [2] the work is otherwise adequate for its intended purpose.”  When those elements are met, the government may obtain a downward adjustment of the contract price, but it is liable for net correction costs if it orders replacement of the contractor’s work.

As to the first element, a cost of correction is “economically wasteful” when it is disproportionate to the loss of value that resulted from noncompliance.  As to the second, work is “adequate for its intended purpose” when it “substantially complie[s]” with contractual specifications.  A contractor’s performance can be substantially adequate when it “departs in minor respects from that which ha[s] been promised,” but not where it is “fundamentally less than [what the parties] had … bargained for.”  Substantial compliance is a factual question that “depend[s] in large measure upon the character and extent of the partial failure — upon its relative importance to the party affected by it.” 

The underlying substance of the test is less complicated than it might seem. Both elements depend on comparing the value of the contractor’s actual performance with the performance the contract would have strictly required. The burden is on the contractor to prove that its rejected work (or proposed correction) substantially complied with the contract. 

Two aspects of the economic waste doctrine deserve emphasis. First, the doctrine applies even where — as here — the contract calls for strict performance.  As the Granite Construction court explained, although the government “generally has the right to insist on performance in strict compliance with the contract specifications and may require a contractor  to correct nonconforming work[,] … the government should not be permitted to direct the replacement of work in situations where” the economic waste doctrine applies. 

Second, when resolving factual questions about the adequacy of a contractor’s original nonconforming work, a court should look to all the evidence developed in litigation, not just the information available to the government at the time it ordered the work to be corrected. 

David Boland, supra, at *4 (internal citations omitted).

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.