Massachusetts Decision Limits Spearin Doctrine in CM-at-Risk Contracts on Public Projects

On September 2, 2015, the Massachusetts Supreme Judicial Court issued a long-awaited opinion in Coghlin Electrical Contractors, Inc. v. Gilbane Building Company et al., SJC Docket No. SJC-11778.  Among other issues decided in the case, the Court held that the scope of a public-awarding authority's implied warranty of adequacy and sufficiency of the plans and specifications is more limited in the context of a construction-management-at-risk contract than a traditional design-bid-build contract.  

This case represents the first time that the highest court in Massachusetts has looked at the Spearin Doctrine in the context of the CM-at-Risk delivery method under the state's relatively new CM-at-Risk statute (M.G.L. c. 149A, Sections 1-13).  Under this law, public awarding authorities are permitted to retain construction managers early during the project's design phase in order to involve them in project planning and design development.  

In Coughlin, the Court recognized the the relationship between the awarding authority and a construction manager at risk is different from the traditional relationship in the design-bid-build context, insomuch as a construction manager may be engaged to participate extensively in the design phase and, therefore, has an opportunity to influence the final plans and specifications. However, despite several noted differences between CM-at-Risk and design-bid-build delivery, the Court was not persuaded that the implied warranty should not apply. In construing the relevant statutory language, the Court determined that "the legislative intent in providing the construction management at risk alternative [to design-bid-build] was to permit the [construction manager at risk] a greater consultative role regarding the project's design, not to eliminate the owner's responsibility for design defects."  The Court concluded that the proper scope of the implied warranty in the CM-at-Risk context should be limited to instances where the construction manager acts in good faith and acts reasonably in light of its design responsibilities.  Therefore, on projects where the construction manager's design responsibilities are greater, the construction manager will have a higher burden to show that its reliance on the defective design was reasonable.

Links to more information regarding this case, including the text of the opinion, all appellate and amicus briefs, as well as video of the oral argument, are below.

Full Text Opinion

Oral Argument Webcast

Link to Docket and Appellate Briefs

The Basics of Litigating the Typical "Multifamily" Construction-Defect Case

Sanjay Kurian contributed the following post concerning the basics of litigating a typical "multifamily" construction-defect case on behalf of a property owner:

In this blog post, I wanted to touch on some basics of the typical “multifamily” construction defect case. Whether the project is a condominium, apartment, assisted-living facility or hotel, disputes concerning multifamily properties share many of the same issues.  There are six primary considerations in bringing these claims but each of those has many subparts which depend on specific facts of the project.

The first consideration is to identify the true owner and determine whether that entity is able to recover for the defective construction.  Is there a condominium association or building owner? Maybe it is the hotel or facility operator that is the aggrieved party or is the developer of the building?  Knowing who has the rights to make the defect claims is a critical first step.

The second consideration is to determine against whom any claims may be asserted.  Is there a claim against the developer of real property who designed, built, and sold the units or buildings in question? Or maybe there are claims against the general contractor and subcontractors who coordinated and performed the work?  What about the design professionals who designed the building improvements?  The reality is that all of these entities could be responsible for defects in the improvements.  How much each of them is responsible for is dependent upon the warranties, contracts and legal theories at play where the property is located as well as any contracts that may exist between the parties.

The third consideration is what types of claims available, which depends greatly on the jurisdiction you are in.  There may be contractual express warranties that arise out of the contracts negotiated between the parties. There could be implied warranties pursuant to the common law at play.  In some jurisdictions and depending on the type of property, Florida condominiums for example, statutory implied warranties may exist that protect the owner.  Most states still allow claims for negligence in the construction or design of the structures.  An important note is that not every claim can be made against every party. Careful consideration is needed as to what claims should be asserted against whom.

The fourth consideration is the type of recovery available.  Generally the cost of repairing the defective condition is the damage that can be recovered.  In the event that such repair would be economically wasteful, courts may consider diminution of value to be a valid damage.  In addition, depending on the type of property there may also be claims for lost rents other lost profits for the time that the property was not able to be used for its intended purpose in whole or in part.  Attorney's fees are often not recoverable in defect claims in most jurisdictions. The exception to the "American Rule" is where the fees are awarded to the prevailing party through contract or statute, or what is called a "proposal for settlement" or "Offer of Judgment."  The question of recovery is maybe the most important one for owners because no one wants to spend money on experts and lawyers where the damages do not warrant such claims.

The fifth consideration is the defenses available.  I have never handled a defect claim where there was no claimed defense by one of the parties identified above.  The typical defenses are that the owner failed to maintain the condition, that the damages were not mitigated, lack of notice of the condition, failure to comply with a statutory notice procedure, the proposed repair is a betterment, the repaired items consist of first costs that the owner would have incurred anyways.  The determination as to the validity of a given defect claim or defense rests with the trier of fact, whether that be a judge, jury, or arbitrator.  The applicability of a defense is based upon the specific facts of each case.

The sixth consideration is the cost in moving forward with such claims and the prospects of recovery. Given the complicated nature of these cases they often settle.  Driving settlement is the cost of moving forward in the litigation as well as likelihood of recovery from the named defendants or their sureties or insurance carriers. Not evaluating these items at each step of a case is a trap for the unwary client or counsel.

I have represented numerous owners, condominium associations, contractors and developers in these types of cases and I can guarantee that none of them wanted to be in this type of litigation.  However, sometimes construction projects go wrong and everyone bears some of that eventual cost.

Division 12 Has Changed Its Name

We are Division 12 - Owners and Project Finance.  No longer "Owners and Lenders," our name change reflects our broad purpose and fundamental initiative in service to our Owner clients.  Our division leads the way to educate our Forum members regarding issues impacting the construction owner in the design, construction, and financing processes.  

As Owners are building again, they are seeking responsible and appropriate financing options to support the construction, maintenance, and operations of their capital projects.   We are pleased to benefit our Forum members and the construction industry as we present monthly topical presentations and discussions on how Owners can proper and avoid costly claims on their projects.

Texas Bars Contractors’ Premises-Liability Claims Against Owners Even Where the Owners Were Partially At Fault

The Texas Supreme Court recently applied a statutory bar to contractors’ claims for premises liability against property owners. The statute invalidates the injured contractor’s claims even if the injuries were caused by the negligence of the owner or another contractor, as long as the injured contractor was working on construction, renovations, or repairs to the property at the time of the injury. Abutahoun v. The Dow Chem. Co., No 13-0175 (Tex. May 8, 2015) (interpreting Tex. Civ. Prac. & Rem. Code ch. 95).

Chapter 95 of the Texas Civil Practice and Remedies Code sets forth circumstances in which an owner is not liable for negligence claims brought by independent contractors or their employees. The relevant portion of Chapter 95 states that an owner is not liable for injury or property-damage claims by a contractor that constructs, repairs, renovates, or modifies an improvement to the property, unless the owner exercises or retains control over the manner in which the work is performed, has actual knowledge of the danger or condition, and fails to adequately warn the contractor. Tex. Civ. Prac. & Rem. Code § 95.003.

In Abutahoun, the plaintiff was the estate of a construction worker who contracted and died from mesothelioma as a result of asbestos exposure. The decedent was an employee of an independent contractor that installed asbestos insulation around pipes on the owner’s property. The owner’s own employees were also performing similar tasks. The actions of the employee, independent contractor, and owner’s employees all contributed to the decedent’s death. In the trial court, there was a jury verdict in favor of the plaintiff in excess of $2.5 million. The trial court justified its decisions by distinguishing the negligent acts of the independent contractor and the negligent acts of the property owner, and holding the owner liable for its comparative negligence.

The owner appealed, arguing that Chapter 95 does not make such a distinction and that all of the plaintiff’s claims should be barred. Interpreting the statute, the Court agreed with the owner that as long as the injured party was performing construction, renovation, or repair, it could not sue the owner in negligence for that injury even if the owner’s negligence caused the injury.

The Court did not express an opinion on the exceptions to Chapter 95, which would allow an injured contractor to sue the property owner for negligence if the property owner had control over the independent contractor’s work, knew of the dangerous condition, and failed to warn the contractor. This exception was not at issue in the case - the plaintiff argued only that Chapter 95 did not apply at all.

Abutahoun v. The Dow Chem. Co., No 13-0175 (Tex. May 8, 2015).

Thanks to Nick Brooks at Griffith Davison & Shurtleff, P.C. for his help with preparing this post.

Accrual of Prompt-Payment Act Interest During Disputes Over Latent Defects

Claramargaret H. Groover has asked for our thoughts and experience regarding the following issue arising under a construction contract:

An owner that has not yet paid a contractor discovers a latent defect with the contractor's work. The contractor has not remedied the defect. Would a Prompt-Payment Act impose statutory interest on the owner if it withholds the funds needed to remedy the defect?

Analyses under any jurisdiction's law are welcome, particularly with any statutory or judicial authority in support.

Ninth Circuit Vacates Order Disqualifying Arbitrator in Dispute Over Condominiums

On his Business Conflict Blog, arbitrator and mediator Peter Phillips recently posted an interesting summary of a Ninth Circuit case addressing a dispute between sellers and purchasers of condominiums:

Ninth Circuit Reminds Us When Courts Intervene - and When They Don't - In Arbitration

The Ninth Circuit Court of Appeals recently issued a writ of mandamus directing a district court to vacate an order disqualifying an arbitrator, while the arbitration was pending.  Its succinct opinion in In re Sussex (No. 14-70158, January 27, 2015) serves as a clear lesson in the limitations of judicial intervention in arbitration.

[Read more]

A hat tip to Suzanne McSorley for suggesting this article.

Claims against a general partner for partnership debts do not accrue until after the judgment against the partnership

The Texas Supreme Court recently held that Texas partnership law does not require a plaintiff, seeking to enforce a partner’s liability for partnership debt, to bring a claim against the partner within the limitations period on the underlying claim against the partnership. Am. Star Energy and Minerals Corp., v. Stowers, --- S.W. 3d ----, 2015 Tex. LEXIS 151 (Tex. Feb. 27, 2015). 

The four respondents (collectively the “Partners”) formed a general partnership (the “Partnership”) in Texas. In 1980, American Star Energy and Minerals Corporation (the “Creditor”) entered into an agreement with the Partnership to manage certain oil and gas properties. In the early 1990’s, the Creditor sued the Partnership for breach of that agreement and eventually prevailed on its claims. After various appeals, the Creditor’s judgment against the Partnership became final in 2009. 

In June 2010, the Creditor brought an action against the individual Partners to satisfy the debts the Partnership owed to the Creditor. In response, the Partners asserted that the action was barred by the four-year statute of limitations that applies to the underlying breach-of-contract claim. The trial court agreed and granted summary judgment in favor of the Partners.

The Texas Supreme Court analyzed whether the statute of limitations barred the Creditor’s cause of action against the Partners, which depended on when the action against the individual Partners accrued. General partnerships are entities distinct from the partners, but partners are jointly and severally liable for the partnership’s obligations. TEX. BUS. ORGS. CODE §§ 152.056, 152.101. A creditor seeking to hold a partner liable may either join the partner in the suit against the partnership or file a separate lawsuit against the partner. However, the creditor cannot obtain a judgment against the partner assets until at least 90 days after the judgment has been rendered against the partnership. Id. at §152.305.

The Supreme Court was left to establish a rule of accrual for partner liability suits. Generally, a cause of action accrues “when facts come into existence [that] authorize a claimant to seek a judicial remedy.” Exxon Corp. v. Emerald Oil & Gas Co., 348 S.W. 3d 194,202 (Tex. 2011). When the Legislature employs the term “accrues” without an accompanying definition, the courts must determine what cause of action accrues and thus when the statutes of limitations commences to run. Moreno v. Sterling Drug, Inc., 787 S.W.2d 348, 351-52, 354 (Tex. 1990). Here, a creditor cannot obtain a judgment against a partner until 90 days after the judgment is issued against the partnership. Thus, the Court found that the Creditor’s claims did not accrue until the 90-day period after the judgment against the Partnership had expired. Summary judgment in favor of the Partners was reversed and remanded.

This case has benefits and drawbacks for partners in general partnerships. On the one hand, it extends the period in which creditors of the partnership may seek to enforce the judgment against the partners. Given that civil lawsuits can take years to reach judgment, this de facto extension of the limitations period could be significant. On the other hand, this ruling removes some incentive for the creditor to join the partners to the original lawsuit with the general partnership. The creditor may obtain its judgment against the partnership before deciding whether to incur the additional time and expense of seeking judgments against individual partners.