Lid On North Carolina Engineer’s Liability Cap

A grading contactor working on a Fort Bragg housing project entered into a written contract with an engineer/surveyor. The contract included a "Risk Allocation" clause limiting the engineer's liability to the greater of $50,000 or the engineering fee. Due to a 1.7 foot grade benchmarking error by the engineer, the grading contractor had to install additional compacted fill exceeding $638,000. The engineer offered to pay the grading contractor $50,000 – the maximum amount under the "Risk Allocation" clause, but the grading contractor refused. The case went to trial and the jury found against the engineer for approximately $575,000. See: Blaylock Grading Company, LLP v. Neal Everett Smith and Neal Smith Engineering, Inc., Harnett County North Carolina Superior Court Docket No. 06-CVS-00070.

The engineer argued against numerous alleged irregularities in trial, including the court's determination that the "Risk Allocation" clause was unenforceable as a matter of law as violating public policy. It is not clear whether the court was persuaded by the grading contractor's argument that the "Risk Allocation" clause is against public policy simply by virtue of the fact that the engineer is a licensed professional under NCGS Chapter 89C; or the novel argument that the engineer's attempt to limit liability is prohibited by NCGS Chapter 22B – presumably NCGS Chapter 22B-1 - which appears to be the anti-indemnity statute (the liability cap being analogous to the engineer being indemnified for its own negligence).

As to enforceability of limitation of liability clauses, states that reject them see them as unenforceable indemnity agreements; and states that allow them see them as the mere shifting of risk. North Carolina courts have generally endorsed limitations of liability clauses. However, it will be interesting to see how a North Carolina Court will rule on the narrower issue of whether the NCGS Chapter 22B-1 anti-indemnity statute applies to a design professional's contractual limitation of liability clause.

This case is reportedly heading to appeal and is being closely watched by professional architect (AIA North Carolina) and engineering (PENC) organizations in North Carolina, who have told this writer that they plan to file friends of the court briefs in support of a design professional's ability to contractually limit its liability.

Stay tuned for a Court of Appeals decision that will either be a blessing or curse for the North Carolina design professional community. (This entry was published by Ken Michael of Womble Carlyle's construction and real estate development group).

Good News for Owners Worried About the Rising Tide of Construction Costs

While there is always the opportunity for a contractor to argue for extra compensation due to an unintended assumption of drastic price changes in the market , as noted at http://www.constructionchannel.net/Cases_Feb2007.html. In the case of In re Spindler Constr. Corp., ASBCA No. 55007 (2006), the Armed Services Board of Contract Appeals did not, under the facts of this case, find the increase in steel prices- albeit a 23 percent increase- to make the performance of the subcontract commercially impracticable. The subcontract price overrun considered in the context of the whole of the subcontract price was only five percent. Neither the prime contract nor the subcontract contained a price adjustment clause for material cost changes. Furthermore, because the steel subcontract was a fixed-price contract, the subcontractor bore the risk of market fluctuations. A contractor asserting commercial impracticability must show that a supervening event made performance impracticable. Here, the supervening fluctuation in the steel price was not found to make performance impracticable. (This entry was published by John Springer of Womble Carlyle's construction and real estate development group.)

"Unintended Liability Transfers" In the World of BIM

An interesting article on building information modeling (BIM) appeared in the December 2006 issue of Under Construction, the newsletter of the ABA Forum on the Construction Industry. Written by Derek Cunz and Dwight Larson of M.A. Mortenson Company, the article raised thought-provoking issues about what the authors called "unintended liability transfers" created by increased collaboration among owners, designers, contractors and suppliers.

The authors give as an example of where this can occur: the parties collaboratively detecting and resolving design, constructability, coordination, materials availability and other problems with the digital models delivered to them by the designer at various stages of design. The solutions to these problems can then be incorporated into the next stage of design. But what are the "rules" for this collaborative process? Who manages and controls the collaborative process? And who documents the decisions that are made, so that not only the solutions but also the analysis, evaluation and decision-making rationale behind the solutions are preserved --- and find their way into the change order process, if appropriate? New contractual provisions will have to be developed by the industry to address this collaborative process, which is at the very heart of BIM's value proposition. (This blog entry was published by Karen Carey of Womble Carlyle's construction and real estate development group.)

Green is the thing

"Green" is the color for development and new construction, and it is getting brighter. Architects from the North Carolina Triangle area are responding to growing interest in earth-friendly buildings by expanding their capabilities to include experts in green design. No longer is LEED certification a novelty, it's big business. As reported in the News & Observer (Raleigh), "in the past two years, as energy prices have ridden a roller coaster and as municipalities from Washington, D.C., to Chapel Hill have tried to legislate green development, more developers are getting on board." Public schools are also beginning to enjoy an eco-friendly environment, including the newly-opened Northern Guilford Middle School, and at Wake Technical Community College. See here. (Today's entry was published by Liz Riley of Womble Carlyle's construction and real estate development practice group.)

Red Dirt Muddies the Waters

Ken Michael's January 25 blog entry focused on a recent unpublished North Carolina Court of Appeals decision that leaves parties and practitioners in a quandary when faced with the potential application of a statute of limitations.

Red Dirt Properties, LLC v. Prime Building Company Inc. of North Carolina (North Carolina Lawyers Weekly No. 07-16-0119), diminishes the impact of a limitations statute even when an owner has written notification of the existence of a construction problem. Statutes of limitation often result in a hardship to one of the parties, and the results can be unfair. So this court's rationale for letting the owner off the hook is puzzling.

The decision also begs these and other questions: What is an owner's duty when it learns of a possible construction deficiency? Can an owner rely solely on the assurances of the contractor (who is responsible for the problem), rather than undertaking an independent review of the situation? And, what if personal injuries were involved? Then, would the owner have been able to stand behind an estoppel argument in asserting its claim against the contractor?

Lawyers should consider the individual facts and equities of each case before advising owner clients that they are safe simply to rely on assurances of a contractor; and or advising contractor clients that they are protected by a statute of limitations. An outcome driven court may end up dishing out some mud pie. (Today's entry was published by Laura Luger of Womble Carlyle's construction and real estate development group.)