Construction Law Blog
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This is the second post in the “Top 10 Construction Provisions Blog.” This blog article pertains to indemnification. We probably receive more calls concerning indemnification provision than any other single contract clause, and therefore, believe it is an important one for our readers to understand and appreciate in contract negotiations.
Collapse Resulting From Advanced Decay of Support Walls Held Not to be a Separate, Ensuing Loss Covered Under Insurance Policy That Specifically Excluded Rot
In a split decision, the Washington Supreme Court held that advanced decay of fin walls supporting concrete decks on a home was not a separate, ensuing loss covered under an all-risk policy when specific exclusions existed for rot and defective construction.
Washington Court of Appeals holds that rock was not an unanticipated “changed condition”
New National Defense Authorization Act of 2013 Removes Contract Thresholds for Women-Owned Small Businesses (WOSB).
Washington Court of Appeals Reaffirms that 'Economic Loss Rule' Has Been Replaced by the 'Independent Duty Doctrine,' Opening the Doors to Tort Remedies Stemming From Contractual Relationships
In Key Development Inv., LLC v. Port of Tacoma,[i] the Port of Tacoma ("Port") initiated condemnation proceedings against a property owned by Superlon Plastic Company ("Superlon") as part of the "East Blair Project." Despite its plan to condemn the Superlon property, the Port wanted to retain Superlon's jobs in the Tacoma area. In August 2007, the Port approached Key Development Investment ("Key") about the possibility of selling its nearby property. At the time, Trinity Glass International ("Trinity") was the only tenant on the property.
During negotiations, the Port represented to Key and Trinity that the Port's condemnation of the Superlon property was a certainty, and it was committed to purchasing Key's property to accommodate Superlon's relocation. In response to a competitor's letter of intent, the Port told Key that it would be willing to pay $35,000,000 for its property. As negotiations progressed, however, the Port adjusted the estimated cost of acquiring the Superlon Property from $3,300,000 to $7,500,000. By February 2008, the Port's design team had developed alternatives that avoided the Superlon site altogether.
The Port did not inform Key or Trinity about this potential change of plans. Instead, on March 24, 2008, Key and the Port signed a Letter of Intent. Meanwhile, Key refrained from entering into two separate leases, in part, because the Port had demanded that any lease of Key's property be short term.
On April 24, 2008, the Port's Letter of Intent terminated on its own terms, but the parties continued negotiations. The Port again represented that it needed Key's property for Superlon's relocation. On May 21, 2008, however, news broke that there was a chance the Superlon property might not be needed for the East Blair Project. This caused negotiations to breakdown, and ultimately, the Port did not buy Key's property.
Key and Trinity sued the Port alleging various contract and tort claims, including tortious interference with business expectancies, fraudulent misrepresentation, and negligent misrepresentation. The Port moved for summary judgment dismissing Key's and Trinity's tort claims, arguing that the tort claims were barred by the economic loss rule. The trial court granted the Port's motion as to Key, stating that the economic loss rule limits Key to contract remedies because the loss was purely an economic one, and it had entered into a contract with the Port. The trial court denied the Port's motion as to Trinity, finding that it was not a party to the contract between Key and the Port.
On appeal, the Division II Court of Appeals found that the "trial court understandably 'misinterpreted' the economic loss rule because, when it rendered its decision in 2010, our Supreme Court had not yet issued its Jackowski opinion clarifying the economic loss rule and transforming it into the 'independent duty doctrine.'" The Court reasoned that Eastwood and Affiliated replaced, not supplemented, the former economic loss rule applied in Alejandre, upon which the trial court relied, and that Elcon and Jackowski later refined this new rule. The Court observed that:
[I]n Eastwood we directed lower courts not to apply the [independent duty] doctrine to bar tort remedies "unless and until this court has, based upon consideration of common sense, justice, policy, and precedent, decide otherwise."
Elcon Constr., Inc. v. E. Wash. Univ., 174 Wn.2d 157, 165, 273 P.3d 965 (2012) (quoting Eastwood v. Horse Harbor Found., Inc., 170 Wn.2d 380, 417, 241 P.3d 1256 (2010)). Furthermore, in Jackowski, the Court held that fraud claims are not barred under this rule because the duty not to commit a fraud is independent of contract obligations. Jackowski v. Borchelt, 174 Wn.2d 720,738, 278 P.3d 1100 (2012).
Based upon their interpretation of these cases, the Court of Appeals reversed the trial court's decision stating:
The trial court cannot automatically dismiss Key's tort claims against the Port based solely on the existence of a contract between them; instead, it must determine whether the Port's alleged breaches of claimed tort duties arose independently of the contract terms and it must do so on summary judgment taking the facts in the light most favorable to Key, regardless of the likelihood that Key would ultimately prevail on those claims at trial.
Furthermore, the Court observed that the Supreme Court has allowed tort claims to proceed based on fraud, negligent misrepresentation, and interference with contract in similar circumstances. Therefore, the Court held "that the independent duty rule does not bar Key's tort claims against the Port as a matter of law and that dismissal of these tort claims on summary judgment based on the economic loss rule was error."
[i] 173 Wn. App. 1, 292 P.3d 833 (Division II, January 23, 2013).
Firm's Founding Member Named One of State's Top Ten Super Lawyers, Seven Other Firm Members Recognized as Super Lawyers
Ahlers & Cressman PLLC attorneys have again been recognized as "Super Lawyers" in Washington State for 2013.
John P. Ahlers, one of the firm's founding partners, was again recognized as one of the Top 10 (overall) of all Washington Super Lawyers in 2013. The following seven other firm members were also recognized as Super Lawyers: Founding partner Paul R. Cressman, Jr., Scott R. Sleight (Partner), Bruce A. Cohen (Partner), and Douglas R. Roach (Of Counsel). In addition, Brett M. Hill (Partner), Ryan W. Sternoff (Partner), and Masaki J. Yamada (Associate) were selected as Super Lawyers Rising Stars. Over half of the firm's lawyers received Super Lawyers distinction.
Super Lawyers selects attorneys using a patented multiphase selection process. Peer nominations and evaluations are combined with third party research. Each attorney candidate is evaluated on 12 indicators of peer recognition and professional achievement. Only five percent of the total lawyers in Washington State are selected for the honor of Super Lawyers and no more than 2.5 percent are selected for the honor of Super Lawyers Rising Stars.
The honor of being named Super Lawyers can also be credited to all of the firm's hardworking and talented professionals, including associates, administrative staff, paralegals, and clerks. As always, we will continue to offer high-quality legal services to the construction industry.
John P. Ahlers was selected as a Top 10 Super Lawyer for 2013.
Mr. Ahlers was again distinguished as one of the Top 10 Super Lawyers in the entire state of Washington across all practicing industries in 2013. Mr. Ahlers is a founding member of Ahlers & Cressman PLLC, and has been selected as a Super Lawyer since 2003. His practice has focused on construction disputes since 1983. To read Mr. Ahlers's full profile, click here.
Paul R. Cressman was selected as a Super Lawyer in Construction Litigation for 2013.
Mr. Cressman was, for the eleventh year in a row, selected as a Super Lawyer in Construction Litigation. Mr. Cressman is a founding member of Ahlers & Cressman PLLC. To read Mr. Cressman's full profile, click here.
Scott R. Sleight (Partner) was selected as a Super Lawyer in Construction Litigation for 2013.
Mr. Sleight has been selected as a Super Lawyer in 2011 and 2012, and was named as a Rising Star from 2004 to 2010. Mr. Sleight is a founding member of Ahlers & Cressman PLLC. To read Mr. Sleight's full profile, click here.
Bruce A. Cohen (Partner) was selected as a Super Lawyer in Construction Litigation for 2013.
This is Ms. Cohen's second consecutive year being selected as a Super Lawyer. Mr. Cohen is a partner at Ahlers & Cressman PLLC, and his practice has focused on construction litigation and disputes since 1991. To read Mr. Cohen's full profile, click here.
Douglas R. Roach (Of Counsel) was selected as a Super Lawyer in Construction Litigation for 2013.
Mr. Roach was previously selected as a Super Lawyer in 2005 and receives the honor of being named a Super Lawyer again in 2013. Mr. Roach is of counsel at Ahlers & Cressman PLLC. Mr. Roach's practice has emphasized resolution of complex commercial and construction disputes. To read Mr. Roach's full profile, click here.
Brett M. Hill (Partner) was selected as a Rising Star in Construction Litigation for 2013.
Mr. Hill has been selected as a Rising Star since 2010. Mr. Hill is a partner at Ahlers & Cressman. His practice focuses on construction disputes and litigation. To read Mr. Hill's full profile, click here.
Ryan W. Sternoff (Partner) was selected as a Rising Star in Construction Litigation for 2013.
Mr. Sternoff has been selected as a Rising Star since 2010. Mr. Sternoff is a partner as Ahlers & Cressman and concentrates his practice on representing clients in construction, real estate, and complex commercial disputes. To read Mr. Sternoff's full profile, click here.
Masaki "Saki" J. Yamada (Associate) was selected as a Rising Star in Construction Litigation for 2013.
Mr. Yamada was selected as a Rising Star for 2013. Mr. Yamada is an associate at Ahlers & Cressman and his practice focuses on dispute resolution for general contractors, subcontractors, developers, and design professionals. To read Mr. Yamada's full profile, click here.
Ahlers & Cressman attorneys will be presenting a seminar this summer covering the American Institute of Architects (AIA) contract documents and key contract provisions. The seminar is on July 31, 2013 in Seattle. The seminar is put on by Lorman Education Services, who has graciously allowed Ahlers & Cressman to provide a 20% discount on Lorman's regular registration fee to our blog readers. You will need to provide the discount code listed below when you register.
The seminar will cover the following topics:
- Overview of AIA Contract Documents (Contract Formation Issues and Other Considerations During Negotiations)
- Key Clauses in the AIA A201-General Conditions of the Contract for Construction (Contractor's Perspective vs. Owner's Perspective)
- Analysis of the AIA Design-Build Documents
- Analysis of the AIA Integrated Agreement Contract Forms
- Key Clauses of the AIA A102-Standard Form Agreement Between Owner and Contractor (Guaranteed Maximum Price)
- Analysis of AIA B101-Standard Form Agreement Between Owner and Architect
For a full description of the topics covered during the seminars and speaker information, click here for the Seattle seminar.
Here are the specifics for Seminar:
Date: July 31, 2013
Location: Washington State Convention Center
800 Convention Place
Seattle, WA 98101
Registration: Register online at http://www.lorman.com or call at (866) 352-9539
Discount Code: R7158413
Cost: $359 (before discount)
Earlier this year, the Oregon Court of Appeals provided further clarification on the application of Oregon's 10-year "statute of ultimate repose" - ORS 12.135(1) - which bars construction defect lawsuits from being filed 10-years after the statutory period. (For information on Washington's statute of repose see our blog articles dated March 5, 2013, and August 7, 2012). Oregon's statute of ultimate repose provides, in relevant part, that:
"[a]n action against a person, whether in contract, tort or otherwise, arising from such person having performed the construction, alteration or repair of any improvement to real property * * * shall be commenced within 10 years from substantial completion or abandonment of such construction, alteration or repair of the improvement to real property.
* * * *
"(3) For purposes of this section, 'substantial completion' means the date when the contractee accepts in writing the construction, alteration or repair of the improvement to real property or any designated portion thereof as having reached that state of completion when it may be used or occupied for its intended purpose or, if there is no such written acceptance, the date of acceptance of the completed construction, alteration or repair of such improvement by the contractee."
(ORS 12.135(1) and(3)). In a recent case the Oregon Court of Appeals consolidated three appeals to discuss Oregon's statute of ultimate repose in a case involving the construction of a hotel and to decide whether (1) the owners' negligent construction claim is barred against the general contractor and (2) the general contractor's third party claims for indemnity are barred against two subcontractors.[i][ii] On February 13, 1997, the owners filed a "Notice of Completion" (for lien purposes under ORS 87.045), Washington County issued a Certificate of Temporary Occupancy ("TCO"), and the hotel began operations and accepting guests. Washington County issued the final Certificate of Occupancy ("C of O") on September 24, 1997, after additional work was completed and county approvals were made. The owners subsequently sold the hotel in 2006, and the new owners discovered multiple, significant construction defects with the "building's envelope and other components," resulting in water intrusion and property damage.
The new owners filed suit for negligent construction against the general contractor on May 23, 2007 - more than 10 years after the "notice of completion" was recorded, but less than 10 years after the C of O was issued on September 24, 1997. The general contractor filed a third-party lawsuit for defense and indemnity against relevant subcontractors. The general contractor moved for summary judgment and dismissal arguing the owners claims were barred by ORS 12.135(1) because the "notice of completion" issued on February 13, 1997, constituted a qualifying "written acceptance" under the first clause of the ultimate repose statute. The trial court decided the "notice of completion" did not constitute a "written acceptance" under the first clause of the statute. However, the trial court reasoned that the existence of the notice in combination with select terms of the construction contract, evidence that the hotel was occupied and commenced operations, and lack of evidence that work performed after February 13, 1997, were a subject of the owners' claims, meant the project was substantially completed, which satisfies the second clause of the statute that provides absent "written acceptance" the statute begins to run on "the date of acceptance of the completed construction…" The subcontractors also moved for summary judgment under ORS 12.135(1) against the general contractor's indemnity claims, and the trial court also granted their summary judgment motions. The owners appealed the general contractor's summary judgment, and the general contractor appealed the subcontractors' summary judgments.
The Court of Appeals first held, "no matter how much work has been done on an improvement to real property, that improvement will be considered 'substantially complete' under the first clause of ORS 12.135(3) only if the contractee has accepted in writing that it has 'reached that state of completion when it may be used or occupied for its intended purpose.'" The Court of Appeals then agreed that nothing about the February 13, 1997, "notice of completion" purports to constitute "written acceptance" under the first clause of the statute. The Court disagreed, however, that the notice or any other evidence established - as a matter of law under the second clause of the statute - that the original owners had "accepted" the "completed" improvement on February 13, 1997. The Court of Appeals held that "substantial completion" only applies to the first clause of the statute and that use of the term "completed" under the second clause "does not incorporate any notion of less-than-total completion." The Court cited to Webster's Dictionary to distinguish "substantial completion" from actually "completed." The Court of Appeals then held that a jury could infer from the evidence that the original owners would not have "accepted" the construction as "completed" until all the remaining work was finished and final approvals from the County were obtained on September 24, 1997. Thus, the summary judgment against the owners was reversed and remanded.
In the same decision, the Court of Appeals upheld the trial court's dismissal of the general contractor's indemnity claims against the subcontractors. The general contractor's primary argument was that the duty to indemnify does not "arise from" the subcontractor's performance of construction, but from the indemnity provisions in the contract. The Court of Appeals disagreed and held (again, with the help of Webster's dictionary) that "arise from" as stated in ORS 12.135 applies to indemnity actions against subcontractors because any "contractual right to indemnity  necessarily would arise from the subcontractors' performance of their contractual construction-related duties." Once the Court of Appeals established the statute of ultimate repose applied to the indemnity claims, the court then held that the indemnity claims were barred because the general contractor conceded in its summary judgment and appeal that its indemnity claims were not commenced within the 10 years of the hotel's substantial completion. The Court does not elaborate whether the general contractor's concession qualifies as a "written acceptance" of "substantial completion."
This is obviously a tough decision against general contractors. An owner is not barred from pursuing claims against the general contractor based on when the owner accepts a "completed" project, yet under the same facts the statute bars a general contractor from seeking indemnity from the subcontractors because the general contractor concedes the building was substantially completed. Under this scenario, how does a general contractor successfully bar an owner's claim under the statute without conceding substantial completion? Ironically, the Oregon Court of Appeals concludes its decision by quoting the following from a previous decision:
"As with other statutory periods of ultimate repose, the 10-year period in ORS 12.135(1) serves two purposes: (1) to avoid "the lack of reliability and availability of evidence after a lapse of long periods of time;" and (2) to allow people, "after the lapse of a reasonable time, to plan their affairs with a degree of certainty, free from the disruptive burden of protracted and unknown liability." (internal citations and quotation marks omitted)."
The Court goes on to state, "[w]e perceive no reason why those rationales do not apply as strongly to general contractors' claims against subcontractors as they do to property owners' claims against general contractors…" It appears Oregon's statute of ultimate repose does not only apply as strongly, but more strongly against general contractors.
[i] PIH Beaverton LLC v. Super One, Inc., 254 Or.App. 486 (2013).
[ii] The owners also argued that the statute of repose under ORS 12.115 should apply, should ORS 12.135(1) bar their claims against the general contractor. The Court of Appeals further held that ORS 12.135(1) controls construction claims over the more general negligence provision limiting suit under ORS 12.115.
Washington courts have applied the doctrine of equitable subrogation in many contexts. The doctrine is typically applied where one party has answered for the debt of another, usually by one creditor paying another creditor. The doctrine effectively operates as an equitable assignment to the party who has paid the debt, entitling that party to step into the shoes of the parties' interest they have paid (and maintain the priority of the corresponding lien interest) in order to prevent unjust enrichment of the debtor or another creditor. A traditional requirement of this rule is that the party seeking equitable subrogation must have acted under some duty or compulsion, and not acted as a volunteer or intermeddler.[i] The requirement that the party seeking equitable subrogation be acting to protect its interest has often been referred to as the "volunteer rule" or "volunteer exception" to application of the doctrine.
Recently, the Washington Supreme Court revisited the doctrine of equitable subrogation in the case Columbia Community Bank v. Newman Park, LLC. In 2004, Newman Park LLC ("Newman Park") purchased a Thurston County property. To pay for the property, Newman Park obtained a loan for around $400,000 from Hometown National Bank which was secured by a deed of trust on the property. Newman Park consisted of 12 members, including Landmark Development Ventures ("Landmark"), which held a 39% interest in Newman Park.
In 2008, Landmark went to a different bank, Columbia Community Bank ("CCB"), and took out a $1.5 million loan without the knowledge or permission of the other owners of Newman Park. CCB required that Landmark use the proceeds from the new loan to pay off the existing loan to assure that CCB would have a first priority lien position on the property. To CCB's demise, Landmark had no authority to refinance the property, as Landmark's operating agreement required that 80% of the membership approve any such transaction. CCB was unaware that Landmark lacked the authority to enter into the transaction. After a default on the loan, CCB took action to foreclose and Newman Park's investors objected that they had not consented to CCB's security interest on the property, and argued that CCB was a "volunteer" and thus could not benefit from the doctrine of equitable subrogation.
After discussing Washington's historical treatment of the doctrine of equitable subrogation, the Supreme Court rejected the traditional volunteer rule, and noted that the doctrine can be applied when a party has been induced to discharge another obligation by misrepresentation, mistake, duress, undue influence, deceit, or some other similar imposition provided that there was not any prejudice to an innocent person. The Court affirmed the decision to equitably subrogate CCB's deed of trust to the extent of the original lienholder's position because applying equitable subrogation would not prejudice Newman Park (it was in the exact same position as it would have been had CCB never paid off the loan).
While the doctrine of equitable subrogation is most often applied in the mortgage context, there are instances where the principles of the doctrine can potentially affect priority of construction liens, most often where a neglectful second lender is unaware of the intervening interest of a contractor. This was discussed in the January 31, 2013, blog entry found here.
Also of note in the opinion was the Supreme Court's strong statement regarding the broad equitable powers possessed by Washington courts:
The goal of equity is to do substantial justice. Equity exists to protect the interest of deserving parties from the "harshness of strict legal rules." Washington courts embrace a long and robust tradition of applying the doctrine of equity.
While at first glance this statement seems to give a court the power to do whatever it would like based upon the facts of the case, there are limits on a court's equitable power. A typical example of this is in the construction lien context where courts have repeatedly held that equity cannot remedy a party's failure to comply with the perfection requirements of the lien statute.[ii] In other words, contractors better be sure to comply with the requirements of the construction lien statutes in Washington, because in the context of construction liens, courts typically lack the equitable authority to relieve lien claimants from the "harshness of strict legal rules" if a contractor has blown its lien rights.
[i] See BNC Mortgage, Inc. v. Tax Pros, Inc., 111 Wn. App. 238, 254, 46 P.3d 812 (2002).
[ii] See e.g., Van Wolvelaere v. Weathervane Window Co., 143 Wn. App. 400, 409, 177 P.3d 750, 754 (2008) (noting, “[t]he Mechanics' and Materialmen's Liens statute must be strictly construed, and equitable considerations cannot ameliorate its effects.”)