Inside this issue:

Acceptance of Initial Design Documents in Divisible Design Contract Triggers Accrual of a Breach of Contract Action Against Design Professional

Limitation of Liability Provision May Not Preclude Recovery Under Chapter 93A if Claim is Based Upon Fraudulent Conduct

New Hampshire Supreme Court Rules Municipalities Have Limited Time to Bring Lawsuits Against Design Professionals for Municipal Contract Breaches

Considering the Costs of Contract Arbitration Clauses

By Brian C. Newberry, Esq.

Acceptance of Initial Design Documents in Divisible Design Contract Triggers Accrual of a Breach of Contract Action Against Design Professional

On September 27, 2016, the U.S. District Court for the District of Columbia (“court”) issued an opinion entering summary judgment in favor of an architectural firm alleged to have breached its design services contract by failing to design a hotel in accordance with local building code requirements, and failing to indemnify the builder for the increased expenses that were incurred in fixing the design mistakes. The court’s decision in Hensel Phelps Construction Co. v. Cooper Carry Inc. was based on its findings that the builder’s claims surrounding design errors were time-barred by the three-year statute of limitations applicable under D.C. law, and that the indemnification clause referred only to third-party claims against the builder.

Factual Background

In October 2010, the contractor entered into a contract with the owner to build a hotel (“project”) for a guaranteed maximum price (“GMP”) of $350 million (“construction contract”). Included in the construction contract was a listing of the “preliminary design documents” on which the contractor relied to calculate the GMP (“GMP documents”). The GMP documents were created by the architect pursuant to a design services contract dated March 2008 with the owner (the “design contract”). The owner then assigned the design contract to the contractor as part of the construction contract.

The design contract included five phases: (1) conceptual design; (2) schematic design; (3) design development; (4) construction document (“CD”); and (5) contract administration. The architect completed the first three phases in 2008. In October 2010, when the construction contract was executed, the architect was in the process of developing CDs of which 60% submission was required by January 15, 2011. The contractor relied upon the architect’s 60% CDs to commence construction.

After construction was initiated, it became clear that the architect’s designs contained some deficiencies. In its decision, the court identified 18 different deficiencies. The only deficiency described in detail, however, was the architect’s failure to comply with the local building code’s fire containment requirements. According to the contractor, it was only after construction commenced that issues with the design were discovered. Notwithstanding the design deficiencies and project modifications, the project was substantially completed by April 2014.

In January 2015, the contractor initiated a private claims process against the architect in accordance with the design contract dispute resolution process. In support of its claim, the contractor filed a detailed narrative of the issues that arose during the project (“claims narrative”). In November 2015, after the resolution process reached a standstill, the contractor filed suit against the architect in federal court. In its complaint, the contractor alleged that the architect breached its design contract by issuing a defective design and failing to indemnify the contractor for the costs incurred to remediate the errors.

The architect moved to dismiss the complaint or, in the alternative, for entry of summary judgment (“motion”). In its motion, the architect advanced two theories: (1) the contractor’s claims were time-barred by the three-year statute of limitations applicable to contract claims; and (2) the design contract indemnification clause applied only to the contractor’s third-party liability.

Summary Judgment Motion

The court analyzed the motion under the federal summary judgment standard because the motion referenced more information than that contained in the contractor’s complaint. For example, the architect employed the contractor’s own claims narrative in lieu of a fact summary, and the contractor conceded that the architect’s summary was factually accurate for purposes of summary judgment. In interpreting the claims narrative in the light most favorable to the contractor, the court concluded that the contractor’s claims were legally foreclosed for two reasons: (1) the statute of limitations barred the claims; and (2) the indemnification clause was inapplicable to the contractor’s own damages allegedly caused by the architect’s deficient design.

Statute of Limitations

In essence, the court was tasked with determining whether the statute of limitations commenced in 2010 upon delivery of the GMP documents to the contractor; or in 2014 when the architect’s design services were substantially completed. In this instance, the three-year statute of limitations applied to the contract claims,^[1] and began to accrue when the contract was first breached.^[2] According to the court:

[O]nce the breach is committed, the statute of limitations begins to run even if the breaching party still has additional contract duties to perform, even if the full scope [of] the consequences from the breach are not yet apparent, and even if there is still an opportunity to remedy the consequences of the breach to minimize or eliminate damages.^[3]

Although the court recognized exceptions, it reemphasized the general rule that “once the plaintiff can bring a breach of contract claim, the clock starts running against it.”^[4] The court held that the statute of limitations began to accrue in 2010 when the architect delivered the GMP documents and construction commenced. In support, the court held that “there can be no dispute that [the contractor] could have brought a claim for breach of contract when it recognized that it would need to change construction plans to accommodate for the errors in [the architect’s] design documents.”^[5] Accordingly, it drew a reasonable inference that the contractor had accepted the architect’s designs when it initiated construction using those designs. That time was of the essence in completion of the architect’s services, further supported the court’s finding. The court held that its finding was not negated merely because the architect still had outstanding obligations under the design contract, which was a divisible, not unitary, contract. In unitary construction, a breach cannot occur partway through the construction process because the time for delivery and acceptance occurs when a project is substantially complete. As such, the contract is governed by a more lenient requirement tolling the statute until substantial completion.

The court ultimately held that the design contract was not unitary construction because the contractor accepted the design and actually commenced construction based upon it; not waiting for completion of the design. Accordingly, the court held that the contractor’s claims were time-barred by the three-year statute of limitations.

Indemnification

Here, the court was required to determine whether the contractual indemnification clause was applicable to remedial costs incurred by the contractor to resolve the design deficiencies, or whether it applied only to third-party claims asserted against the contractor.

The court initially noted that, “indemnification clauses are generally interpreted narrowly against the party seeking indemnification.”^[6] Here, the clause required the architect to “indemnify, defend and hold [the contractor]…harmless… from and against any claim judgment, lawsuit, damage, liability, and costs and expenses, including reasonable attorneys’ fees, as a result of, in connection with, or as a consequence of the architect’s performance of the Services under the Agreement…”^[7] The court reasoned that “damage” and “cost and expenses,” along with other words that “clearly anticipate” the issues associated with third-party litigation commenced against the contractor, clarified that the clause pertained only to liabilities to which the contractor might be subjected from third-party claims, and did not include the contractor’s own “damage” and “cost and expenses” it sustained allegedly due to the architect’s design deficiencies. The court then expressly held that it would be redundant to read the indemnification clause so that it encompassed the contractor’s own costs that it incurred in remediating the architect’s errors. Specifically, the clause was applicable only in the event that the contractor incurred costs in defense of a third-party claim based on issues resulting from the architect’s design, and granted the architect’s motion; that judgment is now on appeal.^[8] One potential avenue of appeal would be if the contractor were to argue that the phased design contract is equivalent to a prime contract, and that the division of the work into phases is comparable to progress payments.^[9] The contractor would then argue that a cause of action for breach of contract did not accrue until the project was substantially complete.10 Whether this argument is viable will depend upon whether the appellate court determines it was properly raised below.

Conclusion:

In an effort to clearly identify the tolling of a statute of limitations, it would be beneficial for design professionals entering into contracts with owners that require work to be performed in phases to incorporate terms demonstrating the divisibility of a contract. Further, as demonstrated in this case, limiting indemnification provisions to third-party claims is often useful to avoid the time and expense of defending otherwise frivolous claims.

[1] D.C. Code Ann. § 12-301(7) (2009).
[2]Capitol Place I Assocs. LP. V. George Hyman Constr. Co., 673 A.2d 194, 198-99 (D.C. 1996) (abrogated on other grounds).
[3] Hansel Phelps Const. Co. v. Cooper Carry, Inc., Civil Case No. 15-1961 (RJL) (D.D.C. Sep. 27, 2016).
[4] Id. [emphasis added]
[5] Id. [emphasis added]
[6] Id.
[7] Id.
[8] Hensel Phelps Construction Co. v. Cooper Carry, Inc., 2016 WL 5415621 (D.D.C. 2016), appeal filed, Docket No. 16-7128.
[9] Under Fast-Track Contract, Contractor’s Acceptance of the 60 Percent Design, Used to Calculate the Guaranteed Maximum Price and Begin Performance, Triggered Accrual of Its Assigned Breach of Contract Claim Against the Architect, 37 No. 12 Construction Litigation Reporter NL 1 (December 2016).

Limitation of Liability Provision May Not Preclude Recovery Under Chapter 93A if Claim is Based Upon Fraudulent Conduct

In ABCD Holdings, LLC v. Hannon, SUCV2015- 1367-BLS2 (Massachusetts Superior Court, December 7, 2016) a Superior Court judge sitting in the Business Litigation Session denied a motion to dismiss in which the defendant Patrick Hannon (“Hannon”) argued that a limitation of liability (“LOL”) provision in a Limited Guaranty capped his liability at $109,879.50 plus collection costs. While not an appellate decision, ABCD Holdings is instructive regarding the effect of fraud on the enforceability of LOL provisions. The Superior Court ruled that the language of the Guaranty could not be clearer, because it stated:

Anything to the contrary in this Guaranty notwithstanding, the liability of Guarantor under this Guaranty is limited to the repayment of (i) no more than $109,879 of the Guaranteed Obligations (the Limited Liability Limit) plus (ii) 100% of any and all collection costs or expenses incurred by Lender against Guarantor, including reasonable attorneys’ fees and expenses . . .

Considering the clarity of the provision, if the plaintiff had alleged only a breach of the Limited Guaranty, “this would be the end of the story,” according to the court, because the LOL provision would be enforceable. But the allegations in the amended complaint (“complaint”) asserted more than breach of a contractual obligation, including conduct by the plaintiff that sounded in tort, and was sufficient to state a claim that the defendant had engaged in unfair and deceptive practices in violation of G.L. c. 93A §2. In ABCD Holdings the court explained that “[w]here the case involves a contract with a limitation of liability provision, that cap will not necessarily bar a broader recovery under chapter 93A: if the chapter 93A claim depends entirely on the breach of contract claim, it will, but if the conduct at issue is more tortious in nature, it will not.”

The complaint in ABCD Holdings alleged that Bright Horizons, an entity owned by a Boston attorney, made a loan of $219,759 to two companies, Ware Real Estate (“Ware”) and ABC&D Recycling (“Recycling”). The loan was payable in full upon demand, pursuant to a promissory note (“Note”) signed by Hannon, as manager of Ware and president of Recycling. Hannon also executed the Limited Guaranty, which contained the above-quoted LOL provision, and also prohibited him from accepting or receiving any payment or reimbursement from Ware or Recycling, with the caveat that if he did receive any money from either company, it was required to be held in trust. Hannon allegedly breached this provision of the Limited Guaranty by accepting payments totaling at least $580,000 as well as $40,000 from the sale of certain property, for a total of $620,000. The complaint alleged further that Ware and Recycling failed to pay amounts owed under the Note, and that Hannon owed $976,879 pursuant to the Limited Guaranty (the LOL amount of $109,879, collection costs of $247,000, and $620,000 of “additional interest”). The defendant and his wife filed for bankruptcy protection, but the Bankruptcy Court denied the defendant’s request to discharge his debts. Bright Horizon assigned all of its rights under the Note and Limited Guaranty to the plaintiff, ABCD Holdings, an entity owned by the Boston attorney who made the loan.

According to the allegations in the complaint, Hannon then “embarked on a course of conduct to make his assets unavailable for creditors.” In particular, while the bankruptcy was pending, he allegedly “funneled money to a girlfriend with whom he cohabited” and she “purchased a house in Uxbridge for $458,000 in cash – money that the Amended Complaint alleges she obtained from [the defendant].” Additionally, the complaint alleged that three entities, RHR, Similar Soils and Agritech are sham corporations controlled by the defendant for the fraudulent purpose of hiding his assets. On these facts, the court determined that the LOL provision did not preclude recovery under Chapter 93A. As the decision notes, the defendant “is accused of draining the assets of Ware and Recycling, which not only made it impossible for them to pay off the loan but also rendered the stock warrants that plaintiff had received as part of that loan transaction essentially valueless.”

In denying the motion to dismiss, the court cited as authority the Appeals Court’s decisions in Standard Register Co. v. Bolton Emerson, Inc., 38 Mass. App. Ct. 545 (1995) and V Mark Software, Inc. v. EMC Corp., 37 Mass. App. Ct. 610 (1994). In Standard Register Co., after a bench trial, the trial judge issued a memorandum of decision which found that the defendants made intentional misrepresentations and fraudulently induced the plaintiff to place a purchase order for a label machine.^[1] The trial court awarded the plaintiff the lost profits caused by the defendants’ unfair and deceptive acts, and declined to enforce a LOL provision that would have limited damages. The Appeals Court affirmed, holding that the “limitation clause has no effect on a claim under chapter 93A founded on a tort-based theory of fraud irrespective of its validity and meaning.”^[2] Similarly, in V Mark Software, the Appeals Court reasoned that “[w]hether particular conduct merits c. 93A condemnation always depends on the unique facts of each case.”

In ABCD Holdings the Superior Court correctly denied Hannon’s motion to dismiss because in ruling on a motion to dismiss, the court must accept the allegations in the complaint as true, and the complaint alleged the type of fraudulent conduct that will preclude enforcement of a LOL provision under Massachusetts law. The decision is necessarily limited to its facts, and the allegations of fraud; and it should be recognized that in other circumstances, courts will enforce LOL provisions. For example, in Canal Elec. Co. v. Westinghouse Elec. Corp., 406 Mass. 369 (1990), the Appeals Court held that a LOL provision in a commercial contract could bar recovery for a claim under G.L. c. 93A §11 which arose from a breach of warranty, because a 93A claim founded on breach of warranty is “duplicative of a traditional contract claim.” The Superior Court’s decision in ABCD Holdings should not affect enforcement of a standard LOL provision in the contracts of design professionals, even where claims for violation of Chapter 93A are alleged, if the claims of unfair or deceptive practices are founded on activities that more closely resemble a traditional breach of contract action or professional malpractice claim.

[1] Standard Register Co., at 545-546.
[2] Supra at n.3.

New Hampshire Supreme Court Rules Municipalities Have Limited Time to Bring Lawsuits Against Design Professionals for Municipal Contract Breaches

In City of Rochester (“city”) v. Marcel A. Payeur, Inc., the New Hampshire Supreme Court (“Supreme Court”) has, for the first time, addressed the question of whether a municipality could be barred from commencing a breach of contract action against a design professional because the action was untimely filed.

The city filed a lawsuit in New Hampshire Superior Court (“trial court”) against four companies seeking to recover damages it sustained associated with a water storage tank that was part of the city’s municipal water supply. In 1985, one of the four companies designed the original water tank (“designer”) and another company constructed it that same year. Two other defendants designed and constructed water tank modifications in 2009. After being joined in the city’s lawsuit in 2014, the designer filed a motion to dismiss based upon the state’s statute of limitations. The trial court granted the motion ruling that the statute was applicable to the city, and dismissed the action against the designer.

Before trial commenced against the three remaining defendants, the city filed an interlocutory, or interim, appeal with the Supreme Court seeking a ruling that the statute of limitation did not apply to bar the city’s claim. In an interlocutory appeal, a party may appeal a legal ruling to the Supreme Court before trial is conducted. Once the legal ruling is final, it is then applied to the dispute in the underlying action. Where applicable, an interlocutory appeal can streamline litigation.

In its interlocutory appeal, the city asked the Supreme Court to decide: (1) whether the legal doctrine of Nullum Tempus Occurrit Regi^[1] (“Nullum Tempus”) was applicable to municipalities and, if so, does it enable a municipality to bring a lawsuit without regard to how much time has passed since the alleged wrongdoing; and (2) whether Nullum Tempus protected the city from losing its right to file a lawsuit through the application of R.S.A. 508:4, a New Hampshire statute of limitation.

Under Nullum Tempus, a sovereign’s right to bring and maintain a legal action against another party was not limited by the passage of time. (The saying “It’s good to be king” comes to mind.) Nullum Tempus has its origins in English Law and, essentially, was based upon the notion that a king, being just one person, was too busy with the activities of governing to attend to, in a timely manner, the legal rights of the general public. The doctrine formally established that the passage of time did not impair the right of a sovereign to bring a lawsuit or other type of legal action. The basis for this legal doctrine is that if a sovereign were precluded from enforcing the legal rights of his country, the interests and rights of the public would ultimately be harmed.

The city argued that the trial court erred in its application of New Hampshire Law when it ruled that Nullum Tempus did not apply to municipalities, and that the applicable statute of limitation prohibited the city from bringing its action against the designer which had completed its design services approximately 29 years earlier. The city argued that it stood in the shoes of a sovereign and was entitled to take advantage of the doctrine, thereby preserving the city’s right to bring the action against the designer despite the lengthy passage of time.

The Supreme Court recognized that Nullum Tempus was part of New Hampshire law, but that the purpose of the doctrine was to realize “the great public policy of preserving the public rights, revenues, and property from injury and loss, [as a result] of the negligence of public officers.” “Public policy” incorporating the ideals, concepts, and/or social mores that are held by the society and that reaffirm or promote the good of that society.

Although the Supreme Court acknowledged that Nullum Tempus had been employed in New Hampshire in other situations, it found that the public policy in applying Nullum Tempus in other cases (i.e. adverse possession claims, estate administration claims and fine enforcement) was to protect “public property rights from being lost or forfeited because the State failed to discover encroachments [to the State’s legal rights in public lands.]”

Here, the Supreme Court explained that the city’s action arose out of a contract between the city and the design professional. Since the city knew it entered into a contract, it could not take the position that it was unable to ascertain a breach of that contract. As such, the Supreme Court determined that the application of Nullum Tempus was “not supported by the public policy underlying [it]” and, therefore, it was not necessary to protect public rights. The Supreme Court also pointed out that, under New Hampshire law, municipalities have legal power to enter into contracts just as private corporations do, as well as to sue and be sued. The Supreme Court continued that municipalities are as equipped as another person or private company to timely enforce its rights against a party in one of its contracts. Finding that a municipality is not disadvantaged in the exercise of its right to enforce the contract, the Supreme Court concluded that application of Nullum Tempus was unnecessary.

The Supreme Court also reasoned that, when a municipality enters into a contract with a private party, it does so as a private party and has lost any characteristic of a sovereign. Since a municipality is not acting as a sovereign in contracting, it would not be proper to apply Nullum Tempus to benefit that municipality in a breach of contract case; to do so would be unusual under New Hampshire common law. It would undermine the public policy behind the statute of limitations which is thought to be good for society since it relieves its members from worrying that a lawsuit can be brought at any time, after memories fade or fail, key witnesses die, or documents and other information have been lost or destroyed, thereby placing the defending party at a significant disadvantage. In addition, statutes of limitation can be modified, which occurred here. Shortly after the designer completed its design services, the statute was amended to reduce the limitation from six to three years.

In conclusion, the Supreme Court found that the doctrine of Nullum Tempus cannot be applied to a municipality in a lawsuit over a breach of one of its own contracts. New Hampshire municipalities do not have an infinite amount of time to commence a lawsuit. Since the city commenced its lawsuit against the designer well after the time period established in the statute of limitations elapsed (measured from the date of completion of services), the city’s right to bring an action against the designer was extinguished and the trial court properly dismissed the claims against the designer.

[1] The legal doctrine of Nullum Tempus means that “time does not affect a king,” (also known as, a sovereign).

Considering the Costs of Contract Arbitration Clauses

By Brian C. Newberry, Esq.

In a lawsuit brought by the owner of a specialized facility against both the contractor and architect, the claims were heard by a panel of three construction arbitrators from the American Arbitration Association because the parties’ contracts contained mandatory arbitration clauses. Although the parties split the costs of arbitration, the fees for the arbitration panel alone caused this case to be significantly more expensive for all concerned than if it had been simply filed in superior court and heard before a judge and jury.

The underlying claim involved allegations relating to all aspects of the design and construction of the owner’s newly renovated and expanded facility, including HVAC, structural, geotechnical and civil engineering elements. The architect entered into joint defense agreements with all of the underlying sub-consulting engineers to minimize legal fees and expenses, curtail internal disputes among the design team members and to present a united front to the owner and contractor. In addition, unlike in many cases, the contractor and architect were able to cooperate favorably because both parties believed that the vast bulk of the claims were without merit.

As the matter developed it became apparent that the owner had missed the statute of limitations in filing its suit. The owner erroneously believed that a six-year statute of limitations for breach of contract applied but, under well-known Massachusetts law, breach of contract claims that are simply professional negligence claims in disguise are treated as tort claims and governed by a three-year statute of limitations. Both contractor and architect filed motion papers to this effect, seeking dismissal of the entire matter. Of course, as a practical matter, if the case had been dismissed on these grounds the owner’s attorneys would have been subjected to a legal malpractice claim. The arbitration panel, all excellent and well-respected attorneys, issued a very carefully parsed ruling and, while they dismissed some of the claims based on the statute of limitations, they left the door open for other claims to proceed to hearing with the caveat that there was still a large risk those claims could be found to be time-barred.

One never knows how a trial judge might rule, but a judge need not worry about professional relationships that may place a fellow attorney in a difficult or unfavorable situation. Furthermore, a judge has a crowded docket and if a judge is presented with a good reason to clear a complex construction matter off that docket, the judge will not hesitate to do so. Counsel for the contractor and architect were convinced that if this matter had been in court, the odds that a trial judge would have dismissed the entire claim on summary judgment would have increased significantly.

Ultimately, the case was mediated approximately one month before hearings were to begin and after most of the prehearing expense had been incurred. Faced with the possibility of losing its claims both on the merits and, just as importantly, due to a time bar, the owner accepted a relatively small settlement to save face and extricate itself from the situation. The settlement was larger than it might have been, however, simply due to the fact that both contractor and architect were still faced with the possibility of paying for nearly three weeks’ worth of arbitration hearings, including the arbitrators’ fees, as well as their own legal counsel.

The lesson to be drawn is that while most arbitrators are of the highest integrity and qualifications, by its very nature, arbitration is an expensive process; far more expensive than typically running through a court scenario. Both defendants in this situation would have been very happy to have this case resolved in superior court but, because of the contractual terms in their original agreements, they were unable to do so. Design professionals, in particular, are often successful as witnesses with juries and should think very carefully before agreeing to any contract with a mandatory arbitration clause; arbitration is generally not a favorable venue. Unfortunately, because the parties’ contracts contained mandatory arbitration clauses, the parties here had no choice.