Digging Below the Frost Line

The Winter 2005 CriticalPath In This Issue: New Risk for Architects and Engineers: Pennsylvania’s Message from the Editor-in-Chief… Highest Court Holds Economic Loss Doctrine No Longer a Digging below the frost line... Complete Defense to Contractor Claims in Unfortunately, we are at that time of the year again where we Pennsylvania—Page 2 must all concern ourselves with the possibility of inclement Projects in Profile—Page 3 weather in the form of sleet, ice, extreme cold and, let us not Breathing Life Into the forget, snow. Despite being a challenge for car tires, airplane Common Interest Doctrine: wings and water pipes, winter brings with it another set of A Fourth Circuit Opinion Offers Hope to Construction challenges for the construction industry. Included among the Lawyers—Page 4 appropriate methods of cold weather protection is digging and Non-Party Discovery in setting the foundation of a given structure deep enough in the Arbitration: Part 1—Are ground where it will be protected from the risks of frost heave Discovery Subpoenas to Non- Parties Enforceable?—Page 6 and other similar cold-induced impacts. In this issue, we, too, Developments in Virginia dig a little deeper to set a solid foundation of understanding on Public Procurement: Keeping issues of Attorney-Client Privilege, Discovery in Arbitration in Check the Blurring Line Proceedings, Public-Private Procurement in Virginia, and Pass- Between Public and Private Improvements—Page 8 Through Liability to Contractors and Subcontractors. We also are adding a new feature to The Critical Path. In this section, As BUILT… Intercepted Pass (Through) entitled “Projects in Profile,” we give you a glimpse of where we A Possible Limitation on have recently joined you in establishing a solid foundation for Indemnification Pass- your new developments, or an equally firm footing in your Throughs to Subcontractors Appears on the Horizon— construction-related disputes. However, we begin this issue with Page 10 very recent and breaking news, reporting on what has all the trappings of a landmark decision in Pennsylvania on the topic of the Economic Loss Doctrine. LONDON NEW YORK LOS ANGELES SAN FRANCISCO WASHINGTON, D.C. Edward B. Gentilcore PHILADELPHIA PITTSBURGH Pittsburgh Office OAKLAND PRINCETON NORTHERN VA WILMINGTON NEWARK MIDLANDS, U.K. CENTURY CITY RICHMOND reedsmith.com New Risk for Architects and Engineers: Pennsylvania’s Highest Court Holds Economic Loss Doctrine No Longer a Complete Defense to Contractor Claims in Pennsylvania

A new year has brought to economic loss. Thus, in the Pennsylvania a significant shift in absence of property damage, per- the Commonwealth’s legal land- sonal injury, or a direct contractual scape. The economic loss doctrine remedy, architects and engineers is no longer a complete defense for were essentially immune from con- Pennsylvania design professionals tractors’ suits in Pennsylvania. facing contractor claims. In its first opinion directly on point, The Pennsylvania Supreme The Pennsylvania Supreme Court however, the Pennsylvania Supreme Court has very recently has very recently ruled that a Court has now ruled that the oppo- building contractor can bring a site is the law in Pennsylvania: ruled that a building negligent misrepresentation claim [W]e hereby adopt Section contractor can bring a against an architect for alleged 552 [of the Restatement, deficiencies in the architect’s plans negligent misrepresentation Second, of Torts] as the law in for a public construction project. claim against an architect Pennsylvania in cases where Such a claim is viable even where for alleged deficiencies in information is negligently there was no contract between the supplied by one in the busi- the architect’s plans for a architect and the contractor, but ness of supplying information, public construction project. where the contractor reasonably such as an architect or design relied upon the deficiencies in sub- Such a claim is viable professional, and where it is mitting its winning bid and conse- even where there was foreseeable that the informa- quently suffered purely economic tion will be used and relied no contract between damages as a result. the architect and the upon by third persons, even if The January 19, 2005, decision, the third persons have no contractor, but where the rendered in Bilt-Rite Contractors, direct contractual relationship contractor reasonably Inc. v. The Architectural Studio, with the supplier of informa- relied upon the deficiencies specifically abrogates a 1992 opin- tion. In doing so, we empha- in submitting its winning ion from Pennsylvania’s intermedi- size that we do not view ate state appellate court, Linde Section 552 as supplanting the bid and consequently Enterprises, Inc. v. Hazelton City common law tort of negligent suffered purely economic Authority. In the absence of a misrepresentation, but rather, damages as a result. Pennsylvania Supreme Court deci- as clarifying the contours of sion, state and federal trial and the tort as it applies to those intermediate appeals courts had in the business of providing looked to the Linde Enterprises information to others. case as the primary authority in Section 552 has been the source of Pennsylvania regarding whether a great deal of debate across the architects and engineers could be country, and there is a split among held liable for negligent preparation the states about whether contrac- of plans and specifications provided tors or other similarly situated to contractors. In Linde Enterprises, third parties who, without a direct the Superior Court had ruled that contractual relationship, suffer only architects and engineers could not money losses, can sue a design pro- be held liable to contractors where fessional in tort. Pennsylvania is the only injury suffered was purely

2 The Critical Path

one of the last states to come down see a significant shake-out period, Editor’s Note: Bruce with a definitive ruling on the ranging from an initial increase in E. Stanley, a partner issue. However, its decision to direct contractor actions against in the Pittsburgh recognize such claims represents design professionals to exploration office, has litigated something of a recent trend. See, of alternative contracting arrange- numerous cases e.g., Eastern Steel Constructors, Inc. ments, particularly those involving involving construc- v. City of Salem, 549 S.E.2d 266 private sector design-bid-build proj- tion projects. He (W.Va. 2001) (even absent a con- ect delivery efforts. There will also also has extensive tract, design professional owes a likely be a reaction from the insur- experience in commercial and corpo- duty of care to contractor because ance community, who may now be rate litigation matters such as minori- of “special relationship” that exists called upon to respond to greater ty shareholder disputes, employment matters, contract disputes, and busi- between them). claims exposure of its insured ness torts. Bruce is an adjunct lectur- design professionals. Especially revealing is the Bilt-Rite er of law on construction law topics at court’s public policy rationale: Bruce E. Stanley the West Virginia University College Pittsburgh Office of Law. As is demonstrated by the existing case law from Pennsylvania and other jurisdictions, and given the tenor of modern business practices Projects in Profile with fewer generalists and more experts operating in the Here is a sample of the recent projects with which Reed Smith’s business world, business per- Construction Industry Group has been involved: sons have found themselves $17 million addition and renovation of a Northern Virginia in a position of increasing Country Club reliance upon the guidance of those possessing special A multi-million dollar collegiate arts and cultural center in expertise. Oftentimes, the Pittsburgh, Pennsylvania party ultimately relying upon Public-Private Procurements for public safety and public school the specialized expertise has improvements throughout the Commonwealth of Virginia (be no direct contractual relation- certain to read Tom Folk’s article on the latest developments in ship with the expert supplier this area) of the information, and there- fore, no contractual recourse LEEDS-Certified Developments including a $90 million high if the supplier of the informa- school replacement project in Alexandria, Virginia tion is well aware that the Representing the owner in a multi-million dollar gas cleaning third party exists (even if the project for a steel mill in Gary, Indiana supplier is unaware of his Claims involving the expansion and renovation of the Philadelphia specific identity) and well International Airport knows that the information it has provided was to be relied Disputes over unjust enrichment and related claims on the Town of upon by that party. Section Upper Occoquan Sewage Authority in Virginia 552 is not radical or revolu- Representing a major EPC contractor defending claims by subcon- tionary; reflecting modern tractors, as well as pursuing claims against a power producer over business realities, it merely construction of a 545 MW gas-fired, combined cycle facility in recognizes that it is reason- Eastern Pennsylvania able to hold such professionals to a traditional duty of Claims over supply of equipment on a major steel mill construc- care for foreseeable harm. tion project in Southern Alabama As a result of the Bilt-Rite decision, Representing utility and designer of 2000 MW coal-fired plant in the construction community should West Virginia in defense of claims for delay damages and extras

3 Breathing Life Into the Common Interest Doctrine: A Fourth Circuit Opinion Offers Hope to Construction Lawyers

While corporations and other privilege by doing so? The United business entities are entitled to States Court of Appeals for the protection under the attorney- Fourth Circuit (the “Fourth client privilege, the scope of that Circuit”) recently addressed this protection has been narrowed in question and stated that, at least the wake of the recent accounting under certain circumstances, the scandals at Enron, Worldcom, and answer is “no.” other companies. Courts are now In Hanson v. United States Agency looking with a skeptical eye at In the construction context, for International Development, assertions of privilege that years questions regarding the 372 F.3d 286 (4th Cir. 2004), the ago may have gone unchallenged. scope of the attorney- Fourth Circuit considered a claim client privilege arise One area of the attorney-client of privilege by the United States privilege that has been the subject Agency for International when contractors, of particular scrutiny is the “com- Development (“USAID”) with project engineers, and/or mon interest” doctrine. The regard to a document sought by a owners share privileged common interest doctrine has contractor’s attorney pursuant to information with each traditionally extended the scope the Freedom of Information Act other. Do they commit a of the attorney-client privilege to (“FOIA”). USAID was funding a third parties who share a common construction project in Egypt for waiver of the privilege by business or legal interest with the the building of certain waste and doing so? The United attorney’s client. In that way, legal sewage treatment facilities. In States Court of Appeals advice shared with a third party by connection with the project, for the Fourth Circuit (the the client’s attorney does not cause USAID retained a project engineer a waiver of the privilege and may to design the facilities and offer “Fourth Circuit”) recently be protected. other construction-related services. addressed this question and The lines separating parties who The contractor for the project stated that, at least under share a common interest with eventually made a claim for certain circumstances, the those who do not are sufficiently $38 million based on time delays. answer is “no.” fuzzy such that common interest At USAID’s urging, the project claims have been the target of engineer retained a construction abuse by lawyers seeking to extend expert to evaluate the contractor’s the scope of the attorney-client claim and consider settlement privilege to third parties. As one options. The expert retained by commentator noted, “The com- the project engineer was an attor- mon interest exception [to the ney who had extensive experience attorney-client privilege] is in in the construction field. The serious need of rethinking.” expert drafted a report and released it to USAID and a representative of In the construction context, ques- the Egyptian government. tions regarding the scope of the attorney-client privilege arise When the dispute did not settle, when contractors, project engi- an attorney for the contractor sub- neers, and/or owners share privi- mitted an FOIA request to USAID leged information with each other. requesting, among other things, Do they commit a waiver of the the expert’s report. USAID refused

4 The Critical Path

to disclose the report, claiming USAID, because it would ultimately Editor’s Note: that it was exempt from disclosure have to pay any settlement or Matthew R. under 5 U.S.C. § 552(b)(5) as judgment; and (4) USAID and the Sheldon, a partner attorney work product. project engineer both received in the Falls Church “common counsel” from the expert. In its analysis of USAID’s claim, the office, has a practice which focuses on Fourth Circuit considered whether Although Hanson was decided in commercial litiga- communications between the the context of a government FOIA tion at the trial expert and USAID were subject to request, and the court was influ- court and appellate level. His experi- the attorney-client privilege. In enced—at least to some degree— ence includes commercial litigation concluding that the communica- by USAID’s argument that the and business torts, medical malprac- tions were privileged, the court “public’s interest” in furthering the tice defense, patent litigation, real discussed the common interest agency’s mission would be served estate contract disputes, and appellate doctrine, noting that the doctrine by prohibiting disclosure of the work before the Virginia Supreme applies “when two or more parties expert’s legal advice—the Fourth Court. Matt also has considerable consult or retain an attorney con- Circuit’s opinion lends support to experience advising corporate counsel cerning a legal matter in which the common interest doctrine in on issues relating to the attorney- they share a common interest. In the construction context. client privilege. this context the communications Significantly, the court found the Editor’s Note: between each of the clients and the common interest doctrine applied Alexander “Sandy” attorney are privileged against third even though there was no agree- Thomas is a partner parties, and it is unnecessary that ment between USAID and the in the Falls Church there be actual litigation in project engineer to jointly retain office. He focuses progress for this privilege to apply.” counsel or share legal information, his practice on commercial litigation The court first rejected the con- litigation with the contractor was with an emphasis tractor’s argument that the expert neither actual nor imminent on antitrust and trade regulation, and was not an “attorney.” Instead, (although the contractor had intellectual property matters. He has the Fourth Circuit reasoned that, threatened to sue), and it was not successfully defended clients accused because the expert had a law clear the parties had an exact iden- of patent infringement, monopoliza- degree and had utilized his legal tity of legal interests. The absence tion and attempted monopolization, skills in forming the report, there of these factors could suggest a trade secrets misappropriation, and was a basis to invoke an attorney/ “softer” approach to invoking the violations of state and federal unfair client-related protection from common interest doctrine in juris- competition laws. Sandy regularly disclosure. dictions embraced by the Fourth counsels businesses in claims arising Circuit. out of breach of contract. He also has Next, the court determined that considerable experience advising cor- USAID and the project engineer Looking forward from here, porate counsel on issues relating to were “united” in a common interest Hanson could be used as ammuni- the attorney-client privilege, and has to resolve the construction dispute. tion by those attorneys seeking to written and spoken extensively on the The court considered several factors keep confidential legal communi- subject. in deciding that the two parties cations among contractors, project shared a common interest, includ- engineers, and/or owners, regarding: (1) the expert was hired by less of whether litigation is actual the project engineer at the urging of or imminent. Whatever the ulti- USAID; (2) the contract between mate impact of the opinion, the the expert and the project engineer Fourth Circuit’s decision in Hanson expressly stated that the expert’s shows that the common interest report would be submitted to doctrine is not dead yet. USAID; (3) even though the expert Matthew R. Sheldon was not hired by USAID, the “real Alexander Y. Thomas party in interest” in the dispute was Falls Church Office

5 Non-Party Discovery in Arbitration: Part 1—Are Discovery Subpoenas to Non-Parties Enforceable?

The propriety and extent of discov- Part 1 of this Article discusses the ery in complex commercial arbitra- applicable arbitration law and the tion has been the subject of split of authority among the courts extensive debate. While the of appeals interpreting Section 7 …while an arbitrator can exchange of potential exhibits and of the Federal Arbitration Act issue a subpoena duces identification of witnesses prior to (“FAA”). In the next issue, Part 2 the arbitration is required by the will discuss the divergence among tecum to require a non- rules of most arbitral institutions, state arbitration acts regarding party to appear for all other aspects of discovery, non-party discovery in arbitration, deposition and/or to including the extent of document and will offer practical suggestions produce documents in exchange, the use of expert reports, designed to create more certainty the permissibility of depositions or in the arbitration process. advance of the arbitration, interrogatories, and the issuance of What Law Governs the Arbitration? the arbitrators cannot subpoenas compelling discovery Anne Devens, a partner in our from non-parties, are generally left enforce the subpoena if a Virginia Trial Group, recently to the discretion of the arbitrators. non-party fails to comply. authored an article entitled, In the court proceeding to Because arbitration is a creature of “Federal versus State Arbitration enforce the arbitrator’s contract, the parties are free to Laws: Whose Law Applies and subpoena, the central craft the procedures that will gov- Why Does it Matter?” ern their arbitration, including the (http://www.vba.org/comm/Fed%20 question is whether the nature and extent of discovery v.%20State%20Arbitration%20Final arbitrator had the legal among the parties. However, third .pdf). In this article, Ms. Devens authority to compel the parties are generally not bound by concludes the FAA generally gov- non-party to produce the the terms of an agreement to arbi- erns the conduct of the arbitration trate to which they are not signa- unless the parties specifically agree documents in advance tories. Consequently, while an that the arbitration shall be gov- of the hearing and/or arbitrator can issue a subpoena erned by the arbitration law of a appear for the discovery duces tecum to require a non-party particular state. For example, deposition. Unfortunately, to appear for deposition and/or to language such as the following produce documents in advance of demonstrates an objective intent the answer to that question the arbitration, the arbitrators can- that the agreement to arbitrate be depends upon the law not enforce the subpoena if a non- subject to a given state’s arbitration governing the arbitration party fails to comply. In the court laws rather than the FAA: “This proceeding, as well as the proceeding to enforce the arbitra- arbitration, and any subsequent location in which the tor’s subpoena, the central question proceeding to enforce, modify, is whether the arbitrator had the vacate or confirm the arbitration arbitration is being legal authority to compel the non- award, shall be governed by the conducted. party to produce the documents in Pennsylvania Arbitration Act of advance of the hearing and/or 1927.” An unequivocal expression appear for the discovery deposi- of contractual intent to be bound tion. Unfortunately, the answer to by a state arbitration act will not be that question depends upon the preempted by the FAA unless the law governing the arbitration pro- state arbitration law conflicts with ceeding, as well as the location in the purposes of the FAA. However, which the arbitration is being con- the majority of cases hold that a ducted. general choice of law provision

6 The Critical Path

determines the substantive law ing of special need or hardship.” FAA in venues such as New York, applicable to the underlying trans- COMSAT Corp. v. Nat’l Science Chicago, California, Florida, or action, but is not sufficient to Foundation, 190 F.3d 269, 276 (4th Texas remains an open issue. invoke the arbitration law of that Cir. 1999). At the opposite end of Second, while the availability of state. Consequently, in the absence the spectrum from Hay, the Eighth document discovery from non- of a specific agreement as to the Circuit has held that the power to parties in advance of an arbitration law governing the arbitration, the compel non-parties to produce hearing is an open issue in many FAA will apply so long as the arbi- documents prior to the arbitration federal circuits, relatively few federal tration agreement involves inter- hearing is “implicit” in the authori- courts have interpreted Section 7 of state or international commerce. ty granted to arbitrators in Section the FAA to authorize a discovery 7 of the FAA, and that the “effi- deposition of a non-party. In a Third-Party Discovery Under the cient resolution of disputes practical sense, the logic seems to FAA: Section 7 of the FAA express- through arbitration” is furthered be that the more intrusive the third- ly grants arbitrators the authority by permitting limited third-party party discovery sought, the less like- to summon “any person to attend discovery. Arbitration between ly a court will find the arbitrator before them or any of them as a Security Life Insurance Company had the authority under Section 7 witness and in the proper case to and Duncanson & Holt, Inc., 228 of the FAA to order that discovery. bring with him or them any book, F.3d 865, 870 – 71 (8th Cir. 2000). record, document or paper which The rules invoked in Hay and The Sixth Circuit, in a case arising may be deemed material as the evi- COMSAT may very well appear under Section 301 of the Labor dence indicates.” Consequently, impractical in today’s world of Management Act of 1947 and the FAA expressly permits an arbi- complex commercial arbitration. decided prior to Duncanson, also trator to compel a non-party to However, stay tuned for Part 2 of commented that the FAA “has been attend the arbitration and/or to this article in the next issue of The held to implicitly include the produce documents to the arbitra- Critical Path, where we will address authority to compel the production tors at the arbitration. However, the divergence among state arbitra- of documents for inspection by a federal courts are split over tion laws regarding non-party dis- party prior to the hearing.” Am. whether Section 7 permits an covery in arbitration, and will offer Fed’n of Television & Radio Artists v. arbitrator to order a non-party to practical suggestions to create more WJBK-TV, 164 F.3d 1004, 1009 produce documents or appear for certainty in the arbitration process (6th Cir. 1999). While several dis- a discovery deposition. and to allow for third party discov- trict courts have also addressed this ery in appropriate circumstances. In a recent case in which Reed issue, the remaining federal circuit Smith was involved, the United courts have not ruled upon the Albert Bates, Jr. IV States Court of Appeals for the availability of third-party discovery Pittsburgh Office Third Circuit held that an arbitra- in arbitration proceedings. tor’s subpoena power under the Editor’s Note: Albee As can be seen from the above, fed- FAA is limited to ordering a non- Bates, Jr. IV is a eral law on these issues is not set- party to appear before the arbitra- partner in the tled. Still, two general points can tor during the arbitration hearing Pittsburgh office of be gleaned from these cases. First, Reed Smith. He is a to testify or produce documents. the location of the arbitration may trial lawyer whose Hay Group, Inc. v. E.B.S. Acquisition determine the extent to which practice emphasizes Corp., 360 F.3d 404, 407 (3rd Cir. third-party discovery requests are the litigation, arbi- 2004). The Fourth Circuit has enforceable under Section 7 of the tration, and mediation of construction taken a more tempered approach, FAA. For example, under current claims and other complex technical holding that the FAA does not and contractual disputes. He is a law, permissible discovery upon grant an arbitrator the authority to member of the American Arbitration non-parties under the FAA is far demand that a non-party produce Association’s prestigious National broader in an arbitration conducted documents for pre-hearing discov- Environmental and National in St. Louis than in one conducted ery, but suggesting in dicta that an Construction Panels of Neutrals, and in Philadelphia. The extent of per- arbitrator may order discovery serves as a member of its Pittsburgh missible third-party discovery in upon a non-party “under special Construction Advisory Committee. arbitrations conducted under the circumstances” and “upon a show-

7 Developments in Virginia Public Procurement: Keeping in Check the Blurring Line Between Public and Private Improvements

Often it seems that the only Transportation (“VDOT”), Virginia constant is change. Perhaps the counties are beginning to turn to biggest change in Virginia public the Public-Private Transportation procurement in 2004 and expected Act of 1995 (“PPTA”) to address in 2005 is in practice, rather than new road building requirements. in the law. Virginia public entities For example, Loudoun County, the and private developers and con- nation’s fastest-growing county, structors have turned increasingly adopted its own PPTA implement- toward the use of public-private ing procedures in 2004. This Virginia public entities partnerships for procurement and trend is in contrast to past practice and private developers delivery of public infrastructure. under the PPTA, which has been at and constructors have Since enactment of the Virginia the state level through VDOT. Public-Private Education Facilities In contrast to major changes in turned increasingly and Infrastructure Act of 2002 actual practice, legal developments toward the use of public- (“PPEA”), some 10 to 20 public in 2004 and those likely to occur infrastructure procurements have private partnerships for in 2005 appear minor. Of course, taken place under that law. procurement and delivery with the General Assembly in ses- Procurements under the PPEA sion, things could change. The of public infrastructure. have included ones for schools, following is a summary of some Since enactment of the public safety facilities, offices, and developments: Virginia Public-Private detention facilities. Most PPEA Education Facilities and projects have involved schools. 1. In its 2004 session, the Virginia Virtually all PPEA procurements General Assembly amended the Infrastructure Act of 2002 have been conducted using com- Public-Private Education (“PPEA”), some 10 to 20 petitive negotiation and best-value Facilities and Infrastructure Act public infrastructure selection criteria. Most of these of 2002 (“PPEA”), Va. Code procurements have taken projects have been design-build. § 56-575.1, et seq., in several place under that law. Often, successful proposals have significant respects. First, effec- been initiated by unsolicited pro- tive July 1, 2004, and thereafter, posals, and awardees frequently all PPEA projects require the have not been those with the same performance and payment lowest cost proposal. This is a bonds as are required under the marked change from prior prac- Virginia Public Procurement tice. Before the PPEA, Virginia Act. Va. Code § 56-575.9A.1. public bodies typically used a Second, responsible public design-bid-build delivery system, entities that are not agencies and construction services almost or authorities of the always were obtained by soliciting Commonwealth (e.g., counties, competitive sealed bids on a com- cities, towns, school boards, pleted design. local authorities) must engage qualified professionals not Similarly, with funding for new employed by them to provide projects not being forthcoming independent analysis of propos- from the Virginia Department of

8 The Critical Path

als for qualifying projects, Feb. 20, 2004), the Richmond Statute’s meaning and impact. The unless the governing board of Circuit Court held that sover- public-private construction initia- the responsible public entity eign immunity precluded a tives being developed and pursued determines the analysis shall be surety that took over for its in Virginia are no exception. done by the public entity’s own defaulted contractor from suing Thomas R. Folk employees. Va. Code § 56-57- the Virginia Department of Falls Church Office 5.4. Transportation for overpay- ments made to the contractor. 2. The Virginia Attorney General Editor’s Note: In the federal sector, such suits opined that a school board may Thomas R. Folk, a are allowed under the Tucker act as a responsible public enti- partner in Falls Act. However, the Virginia ty under the PPEA, but may Church, has been a Public Procurement Act, unlike Virginia lawyer for only enter into a comprehensive the Tucker Act, does not waive more than 25 years. agreement for a PPEA project sovereign immunity for claims He has extensive after receiving approval from based on implied contracts. experience with the local governing body (i.e., Virginia and federal public procure- the county, city, or town that 6. In Columbia Dentoform Corp. v. ment, with construction contracting, provides funding for the school Virginia Board of Dentistry, No. public infrastructure, and public- board). Va. Atty. Gen. Op. No. CH03-1972-1 (Richmond Ct. private partnerships. Tom has pro- 04-011. Mar. 11, 2004), the plaintiffs vided legal services to a number of successfully urged the Virginia public entities on public pro- 3. Legislation (House Bill No. Richmond Circuit Court to pre- curement and construction matters, 1945) has been proposed for liminarily enjoin a competitor’s including the Counties of Arlington, the General Assembly’s 2005 use of simulated teeth for state Spotsylvania, and Roanoke; the City of session under which projects Falls Church; the Town of Leesburg; licensing examinations for den- that qualify under the PPEA Alexandria City Public Schools; tists because the teeth were not would be expanded to include Stafford County, Loudon County, procured in accordance with “any improvements necessary Chesterfield County, and Warren the Public Procurement Act. or desirable to any unimproved County Public Schools; and the City state-owned real estate.” 7. Legislation (House Bill No. of Manassas Public Schools. He 2283) has been proposed for has assisted a number of Virginia 4. In the General Assembly’s 2004 jurisdictions with the Public-Private the General Assembly’s 2005 session, authority for coopera- Education Facilities and Infrastructure session that would address the tive procurements under Va. Act of 2002 (PPEA), and has lectured consequences of a public body’s Code § 2.2-4304A of the and written extensively on public failure to include in its con- Virginia Public Procurement procurement, construction, and tracts a procedure for consider- Act was expanded to allow the PPEA. ation of contractual claims. As Virginia public bodies to make currently drafted, this proposed cooperative procurements with legislation should not signifi- the U.S. General Services cantly change current practice Administration, including pur- or procedure. chases off of the GSA schedule. As with all new legislative enact- 5. In XC Specialty Ins. Co. v. ments, the passage of time and Commonwealth, Nos. CS3-3 and events will assist in defining the CS4-3 (Richmond Cir. Ct.

9 AsBUILT… Intercepted Pass (Through) A Possible Limitation on Indemnification Pass-Throughs to Subcontractors Appears on the Horizon

…Bernotas is now the law Generally speaking, construction proj- Contractor owes to the Owner by of the Commonwealth of ects have a decidedly downhill slope virtue of the Owner/General when defining project responsibility. Contractor agreement. Pennsylvania. This The Owner, seeking to protect its decision has two notable Previously in this column, caution has interests and investments, places a been urged to all parties that before consequences. One, the great deal of responsibility and risk on entering into an agreement containing effectiveness of broad the General Contractor performing broad incorporation provisions, all of the work (and in some instances the incorporation provisions the proposed documents to be incor- design professional). In turn, the porated must be made available for for all purposes in General Contractor passes much of actual review and consideration. The Pennsylvania is now that risk and responsibility on to its moral of that story was, and remains, Subcontractors who will be perform- that before a party can truly appreciate susceptible to attack, ing various segments of the work on particularly where the the risk and responsibility it is under- the project. The rationale for this taking, it must consider all of the obli- party challenging the “pass-through” is that the responsibil- gations identified in the contract clause can provide a ity of performance should equate to under consideration (including all the responsibility in terms of liability strong policy argument in documents incorporated into that for errors or other incidents relating to contract by reference). The case law is favor of avoiding liability. that particular work and vice versa. both wide and deep with examples of A second consequence of Frequently, this pass-through is clauses which are sprung upon unsus- the Bernotas decision is accomplished by virtue of contractual pecting Subcontractors by virtue of that it does provide provisions between the Owner and broad incorporation provisions con- the General Contractor and/or the tained in their General Contractor/ guidance to scriveners General Contractor and the Subcontractor Agreements. As such, of future construction Subcontractor. Typically speaking, the caution and counsel has been urged to contracts to craft Owner/General Contractor provision at least review all of these documents incorporation clauses will require the Contractor to assume so that true risks and responsibilities all responsibilities and liabilities for taken on can be evaluated. While that to specifically embrace any and all damage or injury of any cautionary tale is still worthy of the the obligation of kind caused by the execution of the utmost consideration, a new defensive indemnification for work on the project. Of course, the strategy can now be incorporated into General Contractor/Subcontractor a Subcontractor’s play book. By the an indemnitee’s own agreement could very well include a same token, this recent development negligence. As such, the greatly similar clause. However, what can be utilized as a guiding light decision provides both generally occurs is that the General for those Owners and General obstacle and opportunity. Contractor/Subcontractor agreement Contractors seeking to impose liabili- includes a broad incorporation clause ty upon others for negligence under a which requires the Subcontractor contractual indemnification theory. to assume towards the General In Bernotas v. Super Fresh Food Contractor all those responsibilities Markets, Inc., Case No. 96 MAP 2003 and obligations that the General 10 The Critical Path

(Pa. December 22, 2004), the Supreme cluded that the General Contractor/ Arizona and New York, which held Court of Pennsylvania addressed, Subcontractor agreement, by incorpo- that in order to impose upon one party among other things, the effectiveness rating the terms of the Owner/General liability for the other party’s own negli- of a broad general incorporation provi- Contractor agreement, contained a gence, that liability obligation would sion in a General Contractor/ pass-through indemnification obliga- have to be clearly and unambiguously Subcontractor agreement. The facts of tion which transferred to the stated. Based upon all the foregoing, that case involved, in some respects, a Subcontractor all of the obligations as well as the well-settled principle in very typical “trip and fall” claim made that the General Contractor owed to Pennsylvania “that provisions to by a patron of the supermarket in the Owner. This provision provided, indemnify for another party’s negli- question. The plaintiff had alleged innocuously enough, “[prime] gence are to be narrowly construed, that injuries were sustained when she Contract Documents form a part of requiring a clear and unequivocal fell into a hole in the floor at the con- this Subcontract, and are as fully a part agreement before a party may transfer struction site inside the store. The of this Subcontract as if attached to its liability to another party,” the hole itself appeared to be attributable this agreement and as if herein set Supreme Court of Pennsylvania held to work performed by an Electrical forth at length.” As such, the Superior that the broad incorporation provision Subcontractor. Court remanded the case back to the could not be construed to impose While the claim with the plaintiff was trial court for entry of an order direct- upon a Subcontractor pass-through settled, with each defendant contribut- ing the Electrical Subcontractor to pay liability for indemnification of the ing one-third of the settlement pro- the entire amount of the settlement indemnitee’s own negligence. As ceeds, the supermarket sought to reached to the ultimate plaintiff, the such, the order of the Superior Court recover indemnification under the supermarket. was reversed. terms of its contract with the General On appeal to Pennsylvania’s highest The decision of the majority of the Contractor. It pursued that indemnifi- court, the decision in favor of the Supreme Court of Pennsylvania pro- cation under a provision that allowed General Contractor was reversed. voked a strong dissenting opinion the supermarket to recover from the The Supreme Court of Pennsylvania from Justice Saylor, concluding that General Contractor provided that the concluded that the pass-through the court should have focused on the supermarket was not solely negligent. indemnification theory relied upon express indemnification provision The supermarket was found not to be by the Superior Court was contrary identified in the General Contractor/ solely negligent in a subsequent bench to the Supreme Court’s “holdings Subcontractor agreement instead of trial between and among the various requiring negligence indemnification discussing the pass-through provision defendants. Indeed, because the court provisions to be “expressly and which was the focal point of the determined the General Contractor unequivocally stated in a contract majority’s decision. In the process, and the Electrical Subcontractor had between two parties.” Justice Saylor discussed in detail the not provided a safe work area, the The Supreme Court of Pennsylvania mechanics of the pass-through clause General Contractor was ordered to began its analysis by evaluating the and why the express indemnification indemnify the supermarket. However, pass-through theory as considered provision more directly addressed the the General Contractor was not by other jurisdictions. The court circumstances at hand. awarded any amounts in its trial observed that provisions relating to Notwithstanding Justice Saylor’s dis- against the Subcontractor based upon arbitration, remedies and delay dam- sent, the majority opinion in Bernotas the incorporation clause contained in ages typically flowed through the pass- is now the law of the Commonwealth the General Contractor/Subcontractor through/incorporation clause of the of Pennsylvania. This decision has agreement which the General General Contractor/Subcontractor two notable consequences. One, the Contractor argued made the agreement so as to impose upon the effectiveness of broad incorporation Subcontractor liable for the entire Subcontractor the same obligations provisions for all purposes in settlement amount. An appeal was that the Contractor had assumed Pennsylvania is now susceptible to taken by the General Contractor to the towards the Owner. However, the attack, particularly where the party intermediate level appellate court in Court quickly recognized that none challenging the clause can provide a Pennsylvania. There, the Superior of these decisions applied the pass- strong policy argument in favor of Court reversed the trial court’s deci- through theory to a clause requiring avoiding liability. A second conse- sion, concluding that the Electrical one party to indemnify another party quence of the Bernotas decision is that Subcontractor was obligated to indem- for that party’s own negligence. There, it does provide guidance to scriveners nify the General Contractor. In deter- Pennsylvania’s high court reviewed of future construction contracts to mining that the General Contractor decisions from the states of California, was entitled to indemnification, it con- continued on page 12 11 “As Built” – continued from page 11 CONTRIBUTORS Albert Bates, Jr. IV craft incorporation clauses to specifi- Editor’s Note: Pittsburgh, PA cally embrace the obligation of Edward B. indemnification for an indemnitee’s 412.288.7222 Gentilcore, a [email protected] own negligence. As such, the deci- partner in the Thomas R. Folk sion provides both obstacle and Pittsburgh office, opportunity. Falls Church, VA has a practice 703.641.4294 In short, following the Bernotas deci- which places heavy [email protected] sion, existing incorporation provi- emphasis on con- Edward B. Gentilcore sions should be reviewed by all struction litigation. He has represent- Pittsburgh, PA parties to determine whether they ed owners, contractors, subcontractors 412.288.4274 still have the desired effect before and material suppliers in matters [email protected] involving a variety of construction- they are utilized further in a given Matthew R. Sheldon related issues including design-build, Falls Church, VA project’s agreement. If these provi- delays, extras, contract negotiation 703.641.4334 sions do not stand up to a post- and compliance, construction safety, [email protected] Bernotas scrutiny, and provided there payment and mechanics’ liens. He Bruce E. Stanley is still time to renegotiate that provi- has prepared and negotiated numer- Pittsburgh, PA 412.288.7254 sion, it would be best served to ous agreements for a wide variety [email protected] accommodate the concerns voiced of private, public, commercial and Alexander Y. Thomas in Bernotas so that risks and responsi- industrial projects. Ed’s concentration bilities can be allocated in the desired Falls Church, VA in construction litigation, as well as 703.641.4276 fashion. Regardless, all parties in design and construction contracts, [email protected] should be aware of the consequences has enabled him to serve on the of the Bernotas decision, because Construction Litigation Committee The Critical Path is published and distributed being certain about one’s rights and of the ABA Section of Litigation, by Reed Smith for the general information of its responsibilities provides all parties a where he is currently Co-Chair of clients, friends and newsletter recipients. The opinions expressed in The Critical Path are greater opportunity to adequately the Environmental Subcommittee, and those of the individual authors and not he frequently contributes articles on necessarily those of Reed Smith. The contents manage those risks so that they can of The Critical Path are not designed or keep building for the future! various construction-related topics. intended to be, nor should they be considered or used as, the sole source of analyzing or Edward B. Gentilcore resolving any legal problems. If you have, or think you may have, such a legal problem or Pittsburgh Office issue related to any of the matters discussed in The Critical Path, consult legal counsel. You may contact Edward B. Gentilcore, Editor-in- The Critical Path Editor-in-Chief Chief, or any one of the lawyers in our Construction Group at the numbers listed herein if you have any questions regarding Edward B. Gentilcore Pittsburgh 412.288.4274 [email protected] these or any other construction matters. “Reed Smith” refers to Reed Smith LLP and The Critical Path Regional Editors related entities. ©Reed Smith LLP, 2005. All rights reserved. Bernard J. Casey San Francisco 415.659.5959 [email protected]

Lawrence J. Reina New York 212.549.0255 [email protected]

Thomas R. Folk Falls Church 703.641.4294 [email protected] LONDON James A. Kosch Newark 973.621.3195 [email protected] NEW YORK LOS ANGELES SAN FRANCISCO @ Timothy J. Cornetti Pittsburgh 412.288.3169 tcornetti reedsmith.com WASHINGTON, D.C. PHILADELPHIA Construction Group Steering Committee PITTSBURGH OAKLAND S. Miles Dumville Richmond 804.344.3430 [email protected] PRINCETON NORTHERN VA WILMINGTON @ Edward B. Gentilcore Pittsburgh 412.288.4274 egentilcore reedsmith.com NEWARK MIDLANDS, U.K. Robert A. King Pittsburgh 412.288.4128 [email protected] CENTURY CITY RICHMOND Joseph S. Luchini Falls Church 703.641.4274 [email protected] reedsmith.com It’s not just business. It’s personal.