Category Archives: Damages

What is not in your construction contract can be just as important as what is in the contract

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excludedEver wonder why lawyers like to write contracts that seem to go on, and on, and on? By nature, lawyers are doomsayers. We try to minimize risk, and sometimes that takes the form of a contract that “only a lawyer could love”.

We will cover important contract terms in future blog posts, but for now, did you know that what is not in your construction contract is just as important as what is in there? Many times the heart of a construction dispute stems from confusion or mistaken assumptions about what, exactly, was agreed upon.

In addition to having a very detailed “Scope of Services,” in which you specify exactly what you will be doing on a project, you should also develop a standard “Exclusions from Services” list, and that list should be a part of every contract.

Such an exclusion list should include:
— anything you were specifically asked not to perform
— anything the owner indicated was to be provided by others
— anything which involves specific contractor coordination (unless
you are providing this service)
— a listing of anything above and beyond normal conditions (for
example, “attendance at more than X meetings a month”)
— a general “catch all” statement that anything not specifically
specified in the Scope of Services is not covered

Of course, what specific things should be listed in your Exclusions list depends on what field of construction you are in. Design professionals need to focus on coordination issues, duties with respect to other design professionals on a large project, duties relating to oversight of contractor work, and related issues. Contractors should focus on their responsibility to work with and/or around other trades as well as related work that the owner does not intend to pay for which can result in scope creep.

While it might seem like wearing belts and suspenders at the same time to write out a Scope of Services and also include an Exclusion from Services list, the minimal extra effort in developing such an Exclusion list will pay you back in volumes should a dispute on the project ever arise.

Photo (c) Markus Spiske.

Failure to Coordinate in Design-Bid-Build case costly mistake

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In a recent Business Court decision, an architecture firm was hit with a $2.3+ million judgment stemming from the design and construction of the kitchen exhaust and HVAC ductwork systems in the Charlotte Bobcats Arena.

The project was a “fast track” project, and the architecture firm claimed they were only contracted to provide diagrammatical drawings of the arena’s ductwork system. Subcontractors on the project sued for their cost to perform extra work to remedy alleged design deficiencies. Post-trial relief is currently being sought by the architectural firm (including a motion for judgment notwithstanding the verdict, a new trial, or a new trial on the damages issue).

Whether or not such post-trial motions are granted, however, the case raises the very real issue as to architectural responsibility versus contractor coordination responsibility, especially in fast-track projects. This case highlights the risks to architects in failing to make their responsibilities and contractual limitations explicitly clear to both owners and contractors. The case also highlights the need to explicitly review shop drawings for coordination issues that might be present.

The case is Hunt Construction Group Inc. et al. v. City of Charlotte, North Carolina, and Ellerbe Becket Inc., case number 08-11915, in the Mecklenburg County Superior Court.

Exceptions to the Economic Loss Rule

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As discussed in my last post, there are exceptions to the economic loss rule which will allow you to recover under for your damages (that is, your “injury”) under a negligence theory, even though you have a contract with the other party which may otherwise limit your recovery.

The four exceptions are:

(1) The injury is to a person or property of someone other than the promisee;

(2) The injury is to property of the promisee other than the property which was the subject of the contract, or was a personal injury to the promisee;

(3) The injury to the property is one in which the promisor is charged by law, as a matter of public policy, with the duty to use care in the safeguarding, as in the case of a common carrier, an innkeeper or other bailee.

(4) The injury was intentional on the part of the promisor, or was a conversion of the property by the promisor.

These are generally called the Ports Authority exceptions to the economic loss rule. Ports Authority v. Fry Roofing Co., 294 N.C. 73, 81, 240 S.E.2d 345 (1978), rejected in part on other grounds, Trustees of Rowan Tech. v. Hammond Assoc., Inc., 313 N.C. 230, 242, 328 S.E.2d 274, 281 (1985).

Be aware that if one of these exceptions does not apply, the economic loss rule may bar any negligence action, including an action for contribution or indemnity.

For example, where the owner sues the general contractor for construction issues, the general contractor cannot bring a contribution or indemnity action against his subcontractors, as there is a contract between them and only contractual remedies will apply. Kaleel Builders, Inc. v. Ashby, 161 N.C.App. 34, 42, 587 S.E.2d 470, 476 (2003).

What is the “Economic Loss Rule” and how does it effect me?

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You may wonder why you cannot recover for certain damages on a construction project. The answer, in all likelihood, is the Economic Loss Rule. The Economic Loss Rule is a rule of law that says, essentially, if you have a contract with another party, and the only damages you suffer are to the project which is the subject of that contract, then no negligence action can lie. Essentially, you are stuck with basic breach of contract principals and remedies.

The rationale for the economic loss rule is that where there is a contract, the parties are free to include, or exclude, provisions as to the parties’ respective rights and remedies. See, e.g., Hospira Inc. v. Alphagary Corp., __ N.C. App. __, 671 S.E.2d 7, 14 (2009), discussing the rationale behind the rule. The effect of the rule is that in those situations, parties are limited to their contractual remedies. (Another reason for a well-drafted contract!). No consequential, incidental, or other type claims can be made unless expressly provided for in the contract.

This rule does not apply if no contract exists between parties (a situation called “lack of privity”). The parties are free in that case to sue under a negligence theory.

For example, an architect may be sued by the general contractor or its subcontractors working on a construction project for economic loss foreseeably resulting from breach of architect’s common-law duty of due care in the performance of his contract with the owner. Davidson v. Jones, 41 N.C.App. 661, 255 S.E.2d 580 (1979).

Are there exceptions to the economic loss rule? Yep. Those exceptions are detailed in my next post.

 

Happy New Year!

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Happy new year, everyone!  May your contracts always be clear, your projects always on time, and your budget always met!

If you haven’t already, now is the time to make a resolution to always review your contracts before you sign them, no matter how familiar you think they look!  You never know what hidden troubles lie therein!  An hour at the start of a contract can save you many hours of frustration later on, whether in construction, a business arrangement, or any other transaction.