The Construction Advantage

In the Mid-Winter edition of The Construction Advantage, we bring to you our view of a proposed bill in Augusta (L.D. 536) that would wipe out the effect of mechanics liens on residential property, when “may” means “shall” in an arbitration clause in Alabama, and a “special relationship” in California between a mechanical subcontractor and a designer that ended up in over a million dollars in liability.  We welcome your thoughts and comments on all three of our articles in this issue, and if you would like to let us know your thoughts on L.D. 536, please let us know!

“An Act to Protect Homeowners from Debt Collectors”

A bill submitted to the House Judiciary Committee entitled “An Act to Protect Homeowners from Debt Collectors,” (LD. 536), is actually a bill that would negate the effect of a mechanics lien on any residential property in ME. Bernstein Shur’s Construction Practice Group is proud to represent many members of the construction and lumber products industries in ME, and we believe that this proposed bill is ill conceived and unnecessary. ME has one of the strongest, but also one of the fairest, mechanics lien statutes in the country. We welcome comments and thoughts from others in the industry who may not have been aware that this bill was submitted in Augusta. Please click here for the text of the bill, and here for the letter from Bernstein Shur’s Construction Law Practice Group to the House Judiciary Committee.  

In Contract, You “May” Arbitrate Could  Mean You “Shall” Arbitrate

Asha Echeverria

In The Hanover Insurance Co. v. Kiva Lodge Condominium Owner’s Assoc., Inc., the Alabama Supreme Court ruled that the usually permissive contract term “may”, in an arbitration clause, can create a binding arbitration clause as if the word “shall” was used instead. In Kiva, the Court reviewed the arbitration clause between an owner, Kiva Lodge Condominium Owner’s Assoc., Inc., and a general contractor, Hudak & Dawson Construction Co., Inc. The original form contract stated, “Claims not resolved by mediation shall be decided by arbitration . . .” (emphasis added), but the parties modified this language so that in the final version of the agreement the term read, “Claims not resolved by mediation may at the election of either party be decided by arbitration . . .”  (emphasis added). The owner sought to enforce the arbitration clause over the objection of the general contractor and referred the matter to the American Arbitration Association for an award and damages.

In its objection and appeal of the trial court decision, which  stayed the litigation and enforced the mandatory arbitration clause, the general contractor argued that the parties change to the contract language from “shall” to “may” permitted arbitration only if both parties mutually agreed to arbitrate the issue in question. The court rejected this argument and ordered that the language as modified permits litigation but requires the parties to arbitrate the dispute if one party elects arbitration as the method to settle the dispute. Though the court recognized that the word “may” usually indicates a discretionary or permissive act rather than a mandatory act, “‘may’ in an arbitration provision generally does not denote permissive arbitration because ‘the arbitration clause would be meaningless if it were construed as permissive.” This is because after all, the parties can always at any time both agree to submit a dispute to arbitration. If that is the interpretation, why have the term in the contract at all. As the court stated, “A permissive arbitration clause is not necessary.” The court went on to note that as to arbitrability, the provision says nothing about mutual consent being required; in contrast, the arbitration clause calls for the Construction Industry Arbitration Rules of the American Arbitration Association to be employed “unless the parties mutually agree otherwise.” (emphasis added).

Overall, if the parties intended for arbitration to only occur if both parties mutually consented, they could have deleted the arbitration clause in its entirety and they would have retained that right. The fact that they chose to retain the clause as modified suggests that the parties intended that once a party elected arbitration as the method of resolution of the dispute, as the owner did here, the other party was bound to arbitrate the matter.

As a secondary matter, the court was asked to look at whether the statute of limitations had run on the owner’s claims. The court, upholding the trial court, noted that its initial review was limited to arbitrability and a  “statute-of-limitations defense relates to the ultimate viability of [a party’s] claims –not the availability of arbitration.” Therefore, given the arbitration requirement in the contract, such a defense must be ruled upon by the arbitrator, not the court.

Economic Loss Doctrine – Beware the “special relationship”

Meredith Eilers

A recent California federal court decision concluded that a subcontractor’s negligence claim against a designer (with whom there was no privity of contract) was not barred by the economic loss doctrine, because the subcontractor and the designer had a “special relationship.” As a result, the architect was potentially liable to the subcontractor for over $1.1 million in damages for extra work performed by the subcontractor.

In U.S. f/u/b/o Penn Air Control, Inc. v. Bilbro Const. Co., Inc., Docket No. 3:16-cv-00003 (S.D. Cal. Aug. 26, 2016) , a subcontractor, Alpha Mechanical, Inc. (“Alpha”) filed a counterclaim for negligence against the architect on the project, Ferguson Pape Baldwin Architects (“FPBA”). Alpha was a subcontractor hired by the prime contractor, Bilbro Construction Company, Inc. (“Bilbro”), to perform certain work related to the renovation of a building. Bilbro contracted with FPBA to provide architectural design services for the project. Although there was no contract between Alpha and FPBA, Alpha alleged that FPBA failed to meet the applicable standard of care in performing its duties and this failure caused Alpha to suffer damages when Alpha was required to do extra work as well as supply extra materials to resolve problems with the project.

FPBA filed a motion to dismiss, claiming that Alpha’s negligence claim was barred by the economic loss doctrine. Most jurisdictions apply some variation of the economic loss doctrine, which bars recovery for purely economic loss in the absence of a contractual relationship (or statutory duty). In California, courts sometime impose a duty to prevent economic harm if the injured party is an intended beneficiary of a contract between the defendant and another party—typically referred to as a “special relationship”giving rise to a legal duty of care. California courts balance six factors:  ”

• The extent to which the transaction was intended to affect the plaintiff
• The foreseeability of harm to the plaintiff
• The degree of certainty that the plaintiff suffered injury
• The closeness of the connection between the defendant’s conduct and the injury suffered
• The moral blame attached to the defendant’s conduct, and
• The policy of preventing future harm. Id. ”

The court concluded that nearly all of the factors weighed in Alpha’s favor that there was a special relationship between the parties, which gave rise to a legal duty of care. First, the contractual scope of Alpha’s work on the project was “design/build mechanical, plumbing, electrical” and specifically required Alpha to submit its plans to FPBA, and FPBA was to review, revise and approve all of Alpha’s suggestions. Alpha was then required to implement FPBA’s suggestions, and no facts alleged that Alpha deviated from FPBA’s direction. Second, it was foreseeable that any negligence in FPBA’s plans would adversely affect Alpha. The issue that ultimately led to the extra work—compliance with noise level requirements—was discussed among Alpha, FPBA and Bilbro, FPBA’s recommendations to address the issue were communicated directly to Alpha, with Alpha required to implement the recommendations, which they alleged were in fact implemented regarding noise levels. Once the issues were identified, FPBA made various suggestions to solve the noise issues, which Alpha also implemented, but the suggestions failed to solve the problem. The fifth factor was not applicable, and the sixth factor was given less weight because although the court concluded that Alpha was a “sophisticated actor” and had a responsibility to protect itself, the factor was also impacted by the nature of the contractual relationship with Bilbro, which required Alpha to submit its proposed plans to FPBA and implement any changes or revisions.

Ultimately, the court seemed to conclude that because Alpha worked so closely with FPBA—and was required to do so by its contract with Bilbro—the facts, as alleged by Alpha, pointed to a “special relationship” giving rise to a legal duty. Essentially, the parties could, and should, have foreseen that FPBA’s actions could cause harm to Alpha.

Interestingly, another negligence counterclaim brought by Alpha against an acoustic expert retained by FPBA did not succeed. The Court dismissed this claim, largely because the factual allegations did not support a conclusion that the expert’s services were intended to affect Alpha, it was also not foreseeable to the expert that Alpha would act upon the expert’s suggestions, and the closeness of the connection was too tangential because there was no contractual obligation for Alpha to rely on the expert’s suggestions.

Here in ME, the ME Supreme Judicial Court has applied the economic loss doctrine in only one case, Oceanside at Pine Point Condominium Owners Assoc. v. Peachtree Doors, Inc., 659 A.2d 267 (Me. 1995). In that case, the Court concluded that owners whose condominium units were damaged by defective windows were precluded from recovering under court theories because the only damaged alleged was the damage to the unit itself. The Court described the economic loss doctrine as prohibiting “tort recovery for a defective product’s damage to itself.” Id. at 270. Although the Law Court has not expanded on this theory any further, federal courts applying ME law have predicted that ME law would extend the economic loss doctrine to professional service contracts not involving a fiduciary relationship. See Me. Rubber Int’l v. Envtl. Mgmt Group, Inc., 298 F. Supp. 2d 133, 137-38 (D. Me. 2004). ME trial courts have also concluded that parties need not be in contractual privity for the economic loss doctrine to apply. See Ne. Marine Towing & Constr. Inc. v. City of Ellsworth, No. CV-04-36, 2006 WL 6553747 (Me. Super. Mar. 13, 2006).

The legal landscape of the economic loss doctrine is varied and constantly changing. No matter where you work, or what kind of contractual relationship you enter into, the dynamics of whether, how, or to what extent parties may be able to recover for economic losses outside of the parameters the contract has an impact. If you have concerns about how a jurisdiction’s interpretation of the economic loss doctrine might impact your work, your contractual relationships, and your exposure to risk, do not hesitate to seek the advice of legal counsel.