NC Court of Appeals Holds That Risk Allocation Provision Does Not Violate North Carolina Anti-Indemnification Statute

Indemnification and limitation of liability provisions are commonplace in construction contracts. By statute in North Carolina (N.C. Gen. Stat. § 22B–1 (2007)), any contractual agreement relating to the design, planning, construction, alteration, repair or maintenance of a building, road, appurtenance or appliance purporting to indemnify a party against liability for damages caused by such party’s own negligence, in whole or part, is unenforceable. This rule extends to the party’s independent contractors, agents and employees as well.

Recently, the North Carolina Court of Appeals clarified that N.C. Gen. Stat. § 22B-1 (2007), North Carolina’s version of the so-called “anti-indemnification statutes” that have been enacted across the country, does not apply to a limitation of liability provision agreed to by parties to a contract in the context of construction.

In Blaylock Grading Co. v. Smith, 658 S.E.2d 680 (2008), the North Carolina Court of Appeals upheld a “risk allocation” provision contained in a construction contract that limited the amount of liability that could be imposed on the defendant for the consequences of his own negligence. In Blaylock, the plaintiff, a grading company, brought a claim of breach of contract and negligence against the defendant, the surveyor on the project. On the issue of liability, the jury determined that the defendant breached the contract with the plaintiff and was negligent in the performance of its surveying duties. On the issue of damages, the jury found that the defendant was liable for over $500,000. The defendant appealed arguing that the Risk Allocation provision in the contract limited the defendant’s ultimate liability to $50,000.

On appeal, the Court of Appeals held that § 22B–1 did not apply in this case, noting that the statute only prevents one party to a contract from agreeing to be liable for the negligence of the other party to a contract. By contrast, the Risk Allocation provision contained in the contract at issue only limited the amount of damages recoverable by one contracting party from the other and did not impose liability and damages on the plaintiff for the defendant’s negligence. Consequently, the Court held that the Risk Allocation provision did not violate N.C. Gen. Stat. § 22B-1 (2007).

Thus, the lesson to be learned for contract draftsmen is that risk allocation provisions are a viable and powerful means to limit prospectively the damages for which a company may be liable. (This entry was published by Culley Carson, a member of Womble Carlyle's construction law practice group.) (PDF)

Source: Blaylock Grading Co. v. Smith (PDF)

Mobile Art Pavilion will make stop in Central Park - Then Disappear...

According to a story in the July 24 New York Times, a traveling art building (of sorts) designed by London architect Zaha Hadid is heading to Central Park this fall. The "Mobile Art" pavilion will showcase works of contemporary artists as well as advertise for its sponsor, Chanel. The 7,500 square foot structure can be packed in 51 containers and shipped to various locations around the world. Mobile Art "will occupy the Rumsey Playfield, midpark at 70th Street, from Oct. 20 to Nov. 9. (It is Ms. Hadid’s first New York building, albeit temporary, and has already made stops in Hong Kong and Tokyo and is headed later for London, Moscow and Paris.) ...Ms. Hadid, who won the Pritzker Prize — architecture’s highest honor — in 2004, said that she liked the idea that a pavilion 'lands, creates a buzz and disappears.'" See full story, exhibition admission details and cool photos here. (This blog entry was published by Liz Riley, a member of Womble Carlyle's real estate development and construction law practice group.)

Builders Instituting Lender Liability Lawsuits

The Wall Street Journal reports that the "love affair" between lenders and builders that existed during the housing boom is over, and the lender liability lawsuits that characterized the real-estate downturn in the early 1990s are making a comeback.

Builders are beginning to file suits against lenders contending that the lenders forced the builders and their projects into insolvency by acting in bad faith. The bad faith allegations include delaying or stopping projects midstream by refusing to release funds from construction loans, launching lengthy audits and appraisals, and aggressively enforcing personal guaranties.

The Journal suggests that the clampdown is the result of financial institutions acting in the face of intense pressure from regulators and shareholders to reduce their real-estate exposure and avoid crippling losses.

For more information, see the Wall Street Journal.

Indemnification Provisions --- Owner-Architect Agreements

Owners routinely require an indemnification in their agreements with architects. Architects frequently ask that the indemnification obligation be mutual, citing "fairness" as the reason.

On the surface, it does seem fair for a contractual indemnity obligation to be mutual --- but in a professional design contract, it is actually fair for it to be one-sided, i.e., the design professional gives an indemnity to the owner, but not the other way around. Here's the reason:

The design professional, in designing a facility for the owner, is providing a valuable service to the owner based on the designer's unique knowledge, skill and judgment. If the design professional is negligent in performing that service, there is at least a reasonable chance that a third party could be harmed as a result of that negligence and if that happens, that the third party will bring a claim against the owner --- after all, it is the owner's facility and the owner may be held responsible, as to third persons, for the injury. It is right that the design professional indemnify the owner in such a circumstance.

On the other hand, the owner's main obligation under a design contract is to pay the designer. The owner is not providing a professional service which, if performed negligently, may cause injury to a third person who could then hold the designer responsible for the owner's actions. In other words, the risks of the respective parties under a design contract are not reciprocal and, therefore, the obligations under a design contract should not be reciprocal.

That this is the right way to think about it is borne out by the fact that the AIA, in its new edition of its standard form design agreements, includes an express indemnification from the architect to the owner, but does not make it reciprocal. (This post published by Karen Estelle Carey, a member of the construction practice at Womble Carlyle.)

Italian Architect Poised To Build 80-Story Tower With Revolving Floors Powered By Wind Turbines

It looks like Dubai will get yet another amazing feat of construction if David Fisher has his way. The Italian architect recently announced "the launch of a revolutionary skyscraper in Dubai dubbed as the 'world's first building in motion,' an 80-story tower with revolving floors that give it an ever-shifting shape." Fisher and his backers plan to offer apartments ranging from 1,330 square feet (at about $4 million) to a 12,900-square-foot villa (for almost $39 million,) as reported by a CBS affiliate. Although Fisher "is not well known, has never built a skyscraper before and hasn't practiced architecture regularly in decades," he plans to design similar buildings for New York and Moscow. Some of Fisher's credentials have recently been called into question, as well. See the Chronicle of Higher Education's blog, Buildings and Grounds. Images of the planned skyscraper may be viewed at wcbstv.com. (This entry published by Liz Riley, a member of Womble Carlyle's real estate development and construction law practice groups.)