CONSTRUCTION LAW REVIEW

April 2005

DOES STUFF “JUST HAPPEN”?

In a legitimate effort to understand why they often get into legal trouble and how they might avoid it, clients have asked us to step back and tell them why construction claims and disputes come about. While it is true that some construction claims and disputes come about because nobody could have predicted the problem in advance, such as unsuitable soil or poor performance by an established subcontractor, our answer often surprises our clients. Contents:

Most construction claims and disputes occur because of imperfect busi- Does Stuff “Just Happen”? 1 ness practices that allow issues to go unaddressed in the preconstruction and contract negotiation phase, and then manifest themselves during Announcements 3 the course of a construction project. While everyone is justifiably wary of too much paperwork and bureaucracy in the fast-paced world of com- Case and Legislative mercial construction, it is manifestly true that most of the disputes we Updates By State 3 handle for our clients could have, and should have, been identified early California 3 in the project – but were not because the client did not have a process designed to capture and deal with the issue in a rational manner. Florida 3

Some clients, for example, do not have effective control over the contract Georgia 4 documents (and ancillary forms such as surety bonds, change order forms, lien waiver forms, etc.) that are used by the company, particularly North Carolina 4 where there are multiple offices across the country. Frequently a variety South Carolina 5 of forms are used by different people, and those forms are completed and negotiated by different people, depending on who is in charge of a Mark Your Calendar 5 particular project. There is often a complete absence of control over the legal and contractual risks that are being documented in the contract, Current Focus: and little or no oversight with respect to the finished product. The Effect of Tort Reform on Construction Litigation 5 In this regard, problems arise when haphazard attention is paid to risks and scope issues that ought to be dealt with and addressed in the same In the News 7 proactive manner throughout the company. For example, on one particular project a client decided to have the site work contractor “buy” the site or soils on an unclassified basis, even though the typical method employed by the company was to purchase this work on a classified basis. True to form, the scope documents (including the drawings and specifications) indicated that there would be no extras for unforeseen soil conditions. However, because there was no oversight of contract preparation, the standard form agreement was pulled out and used – an agreement that contained express rights on the part of the site contractor to get extra

www.alston.com compensation for unforeseen soil conditions. As a result, when the contractor decided that its purchase of the site on an unclassified basis was a poor decision, it pursued a claim due to the ambiguity created by the conflicting provisions in the contract.

The forms and documents received during the course of a project are even more problematic. Surety bonds and certificates of insurance are often received, but never reviewed by the insurance broker, in-house counsel or anyone else who can identify problems and defects in those documents. Lien waivers are received, but infrequently checked to determine whether the correct form has been used, whether language has been altered, etc. Change orders are imperfectly drafted and signed at the field level, where careful attention to complicated items is required, leaving issues to be debated later that should have been resolved by the change order itself.

When there is an absence of internal procedures for the processing and review of these kinds of documents, errors are common. In one case, a client required and paid for surety bonds, but did not actually receive them. This fact did not become apparent until it was time to call upon the surety because no single person was assigned the task of making sure the surety bonds were actually received on a timely basis. In another case, a client was angered over a subcontractor’s sudden assertion of a delay claim when there had been no notice or discussion of delay issues with this subcontractor. When the subcontractor’s records were pulled, it was apparent that the subcontractor had been consistently paid by the contractor’s accounting department despite the fact that it had submitted lien and claim waiver forms that had an important notation typed into them: “All claims for delay are excluded from this waiver” – thus making the waiver absolutely useless in the prevention of “end of the project” claims.

The same lack of attention to strong internal procedures applies to problems that develop in the field during construction. For example, when a construction defect issue begins to develop on a project, a company without an established procedure for dealing with the issue is likely to run into the following problem experienced by yet another client. When the construction defect issue first became a disputed item, the project manager hired an “expert” engineer to review the issue and produce a short letter report, all without consultation with the company’s in-house or outside counsel. This letter report was then used as a basis for a series of accusatory letters to the design firm indicating that the defect was created by a design issue.

Once the matter went into litigation, and a true expert was retained to review the matter, it was revealed that the defect was attributable to poor workmanship by the trade contrac- tor. At that point, the client was faced with a host of evidence that it had generated that was contrary to the position it was taking in the litigation, all because the response to the defect problem was not coordinated through senior management and legal counsel.

As is evident from the above examples, having strong, established internal controls and procedures is the centerpiece of any effort to avoid construction claims and disputes. These controls and procedures will identify and deal with most of the issues that are “foreseeable,” and thereby limit a company’s litigation misery to matters that are truly unforeseeable and not subject to elimination through proactive business management and practices.

– Brook A. Clark 2 3 ANNOUNCEMENT The Construction and Government Contracts Group of Alston & Bird LLP is pleased to announce that two members of the group, Jeffrey A. Belkin and Brian K. Fielden, have been elected partners in the fi rm, effective January 1, 2005.

CASE UPDATES

California

Subcontractor’s Structural Engineer Does Not Owe Duty of Care to Owner and General Contractor in Connection With Design of Retaining Wall

In Weseloh Family Ltd. Partnership v. K.L. Wessel Constr., the California Court of Appeals ruled that a subcontractor’s structural engineer could not be held liable to the owner or general contractor in negligence because it owed them no duty of care. A retaining wall, which was designed by the engineer, failed and the owner and general contractor brought suit in negligence. The engineer was not in contractual privity with the owner or general contractor; instead, it had a contract with the general contractor’s retaining wall subcontractor. It had also not directly supervised construction of the retaining wall. The appellate court considered these facts, as well as various policy factors, and affirmed summary judgment for the engineer on the ground that the owner and general contractor did not meet their burden of showing that the engineer owed them a duty of care. The court did not create a general rule for all cases; rather, its ruling was limited to the facts of the case, holding that the owner and general contractor did not meet their burden of showing that a duty existed based on the evidence presented. 125 Cal. App. 4th 152 (2004)

Florida

Court Had No Authority to Order Severe Sanctions for Failure to Pay an Ordered Increase in a Lien Transfer Bond

In Smith Original Homes, Inc. v. Carpet King Carpets, Inc., a Florida appellate court confronted, for the first time, a Florida court’s power to impose sanctions for failing to comply with a court order to increase the amount of security for a lien transfer bond under Fla. Stat. § 713.24(3). In this case, the defendant deposited cash with the court to transfer the plaintiff’s lien to the deposited security, as allowed by § 713.24. The defendant, however, failed to comply with the court’s order requiring that it increase the amount of the security by $28,000, claiming that compliance was impossible since it was no longer an ongoing entity. The court granted the plaintiff’s motion for sanctions, struck the defendant’s pleadings, and entered judgment for the plaintiff. The appellate court reversed, holding that there is no express statutory authority for sanc - tions for failure to pay an ordered increase in a lien transfer bond; even if such

2 3 authority did exist, the trial court made no findings of “willful disregard, gross indifference, or deliberate callousness” that would be necessary to warrant such severe sanctions. 2005 WL 415082

Georgia

Contractor’s “Decision” Under a Dispute Resolution Provision is Binding on Subcontractor

In Holt & Holt, Inc. v. Choate Constr. Co., the Georgia Court of Appeals enforced a dispute resolution provision under a subcontract, which provided that a contractor’s “decision” as to claims and disputes between the contractor and subcontractor would be “final and binding,” unless the subcontractor commenced arbitration proceedings within 30 days after receipt of notice of the contractor’s decision. After giving the subcontractor notices of default and opportunity cure, the contractor notified the subcontractor in writ- ing of its “decision” to supplement the subcontractor’s forces and of its intent to back charge the subcontractor for any resulting damages. Thereafter, the contractor sent change orders setting forth the amounts it would be charging for the supplementation. The court held that the contractor’s letter was a “decision” within the plain meaning of the contract; and this decision was conclusive since the subcontractor failed to com- mence arbitration within 30 days of that decision. The court also held that the parties were free to contractually stipulate a shorter limitation period, so long as it does not violate public policy. The subcontractor did not show that 30 days was unreasonable. 609 S.E.2d 103 (Ga. Ct. App. 2004)

North Carolina

Court Holds That “Economic Loss Rule” Does Not Preclude a Negligence Action by General Contractor Against Architect

In Ellis-Don Constr., Inc. v. HKS, Inc., the United States District Court for the Middle District of North Carolina held that a contractor’s negligence claim against the owner’s design professionals, with whom the contractor had no contractual privity, was not barred by the “economic loss rule.” The contractor alleged that the owner’s design professionals were negligent in preparing the project plans and specifications, as well as coordinating and supervising the contractor’s construction work, resulting in substantial economic losses to the contractor. The court held that North Carolina allows contractors to sue design professionals for purely economic losses, even in the absence of privity of con- tract, stating that, “the courts of North Carolina have stated that the power of economic life or death an architect holds over a contractor requires that such a duty of care be recognized even in the absence of privity.” Here, the court noted that the contractor had alleged facts indicating that the design professionals had considerable control over the contractor’s operations on the project. 353 F.Supp.2d 603 (M.D.N.C. 2004)

4 5 South Carolina

South Carolina Supreme Court Holds That Economic Losses Resulting From Defective Work Did Not Result From an “Occurrence” Under CGL Policy

In L-J, Inc. v. Bituminous Fire & Marine Ins. Co., the South Carolina Supreme Court held that premature deterioration of a road system, resulting from a contractor’s faulty workmanship, did not constitute an “occurrence” thereby providing coverage under the contractor’s Commercial General Liability (CGL) insurance policy. The project developer sued the contractor, and the contrac- tor agreed to pay the developer a cash settlement. The contractor then sued its CGL carrier, arguing that the road damage was caused by an “occurrence.” In reversing the court of appeals, the supreme court concluded that the crack- ing in the road was not an “occurrence” under the insurance policy, but rather constituted economic losses resulting from defective work and was therefore not insurable. The supreme court also reversed the court of appeals’ decision that the “subcontractor work” exception to the “your work” policy exclusion restored coverage, stating that “an exclusion does not provide coverage but limits coverage.” 2004 WL 1775571 (S.C. 2004)

Jonathan A. Crumly is chairing a seminar titled “Toxic Mold: Strategies for Bring- ing, Managing & Avoiding Claims,” which will be held on April 29, 2005, at the Hyatt Regency Hotel in Atlanta, GA.

Robert L. Crewdson is speaking before the South Atlantic Chapter of the Con- struction Management Association of America on dispute resolutions on May 17, 2005, at the Crowne Plaza Perimeter Hotel in Atlanta, GA.

Robert L. Crewdson is speaking on performance and payment bonds at a seminar sponsored by Georgia’s Institute of Continuing Legal Education, titled “Construction Mechanics’ & Materialmen’s Liens,” which will be held on May

MARK YOUR CALENDAR YOUR MARK 26, 2005, at the Marriott Gwinnett Place Hotel in Duluth, GA.

CURRENT FOCUS: THE EFFECT OF TORT REFORM ON CONSTRUCTION LITIGATION

Many states are considering, or have passed, tort reform bills directed at curbing frivolous claims in medical malpractice, product liability, and mass tort cases. What many people do not realize is that these new statutes will have significant effects on construction cases involving multiple parties, expert witnesses, or claims of negligent design or construction. For example, in February 2005 the Georgia General Assembly passed a tort reform bill (the “Statute”) that will have a significant impact on newly filed construction cases as well as an immedi- ate impact on all construction suits pending in the Georgia courts. The most significant changes to Georgia law are:

4 5 • Expert Witnesses. All expert testimony in Georgia courts will now be subject to the stringent screening requirements of Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993) and Kumho Tire Co. Ltd. v. Carmichael, 526 U.S. 137 (1999). The Statute expressly adopts the Daubert and Kumho standard for application to all expert opinions offered in Georgia courts. This change applies to all pending cases and provides lawyers skilled in these issues with new opportunities to elimi- nate the testimony of unqualified or unprepared experts not previously afforded in the Georgia courts. • Apportionment of Fault. Responsibility for negligent design or construction can now be apportioned to non-parties. Under the Statute, non-parties who contribute to damage can be assigned a percentage of fault by the judge or jury, as long as the defendant provides a written notice designating the non-party’s name and last-known address at least 120 days prior to trial. Further, the Statute mandates that a jury apportion any damages according to the percentage of fault of each defendant. This portion of the Statute applies only to actions filed after July 1, 2005, the effective date of the Statute. • Offer of Judgment. Both plaintiffs and defendants in Georgia construction cases may now make an “offer of judgment” at any time prior to 30 days before trial. If a party rejects an offer of judgment made at least 30 days prior to trial, and if the recovery at trial is not more than 125% of the offer, the party that rejected the offer may be assessed all attorneys’ fees and costs incurred after rejection of the offer. • Frivolous Litigation. Prevailing parties can now request that a jury determine whether the opposing party presented a frivolous claim or defense at trial, and award damages including attorneys’ fees and litigation expenses. This procedure immediately follows the conclusion of the trial in which the allegedly frivolous claim or defense was presented, and is conducted before the same jury that tried the case on the merits. • Expert Affidavits. The 45-day grace period for filing expert affidavits has been eliminated. Now, a complaint will be dismissed if an expert affidavit is required and not filed contemporaneously with the complaint. Also, defendants may now challenge the sufficiency of an expert affidavit at any time before the close of dis- covery. Previously, all challenges to expert affidavits were required to be made with the Answer.

As more states adopt tort reform, companies with construction disputes in those states should stay informed about how changes in the law will impact their litigation.

– William H. Hughes, Jr.

6 7 John I. Spangler III, William H. Hughes Jr., and Robert L. Crewdson were listed in the 2005 edition of “Chambers USA America’s Leading Business Lawyers” for excellence in the practice of construction law.

Robert L. Crewdson has published the following construction law articles: “Substantial Completion Defined” and “Understanding Indemnity Provisions,” Commercial Builder (Summer and Winter 2004 eds.); “Wading Through the Meanings of Indemnity Clauses,” The National Law Review (Apr. 12, 2004).

Robyn E. Ice has submitted an article for the June issue of the New York Law Journal, titled, “The Power of Ashes and Dust: Allocating Building Risks in Post-9/11 New York.”

Brian K. Fielden was quoted extensively in an article in the February 21, 2005, edition of Hotel & Motel Management concerning risk management in hotel

IN THE NEWS THE IN construction and renovation projects.

Brook A. Clark published “Termination Clauses in Construction Contracts” in the Commercial Builder (Fall 2004).

Deborah Cazan published “Building Nationwide” and “Follow the Rules on Joint Checks” in Southeastern Construction (Nov. 2004 and Mar. 2005 eds.).

John I. Spangler III and William H. Hughes Jr. were voted by their peers as “Georgia Superlawyers” in the field of construction law.

6 7 This Construction Law Review is published by Alston & Bird to provide a summary of significant developments to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered advertising under the applicable court rules.

MEMBERS OF ALSTON & BIRD’S CONSTRUCTION AND GOVERNMENT CONTRACTS GROUP

John I. Spangler, III Practice Group Chair 404-881-7146 [email protected]

Jeffrey A. Belkin Daniel F. Diffley William H. Hughes, Jr. 404-881-7388 404-881-4703 404-881-7273 [email protected] [email protected] [email protected]

Deborah Cazan John S. Ducat, III Robyn E. Ice 404-881-7667 404-881-4394 212-210-9492 [email protected] [email protected] [email protected]

Brook A. Clark Brian K. Fielden Daniel J. O’Neill 404-881-4744 404-881-7496 212-210-9522 [email protected] [email protected] [email protected] ATLANTA Robert L. Crewdson J. Andrew Howard Stephen M. Reams One Atlantic Center 1201 West Peachtree Street 404-881-7291 404-881-4980 404-881-7731 Atlanta, GA 30309-3424 [email protected] [email protected] [email protected] 404-881-7000

CHARLOTTE Jonathan D. Crumly, Sr. Aubrey B. Waddell Bank of America Plaza 404-881-7336 404-881-4932 101 South Tryon Street [email protected] [email protected] Suite 4000 Charlotte, NC 28280-4000 704-444-1000

NEW YORK 90 Park Avenue New York, NY 10016-1387 212-210-9400

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