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The Construction Advantage

Conor Shankman, Meredith C. Eilers, Michael R. Bosse

Economic Loss Doctrine Fails To Protect Contractor From Professional Negligence Claim In Wastewater Project in New Hampshire

by Mike Bosse

In a case decided in late November in the Merrimack Superior Court, Justice McNamara denied a motion to dismiss by Penta Corporation of claims brought by the Town of Newport related to a wastewater treatment plant upgrade project. The case, which the Construction Law Group at Bernstein Shur will continue to follow, provides the current state of the economic loss doctrine in New Hampshire.

In Penta Corporation v. Town of Newport, the project concerned a waste water treatment plan that discharges treated water into the Sugar River. In response to an administrative order by the Environmental Protection Agency regarding effluent limitations in its permit to the town, the town hired AECOM as its engineer to evaluate upgrades needed to respond to the administrative order. AECOM performed the design phase, ultimately resulting in a final design, drawings, and specifications that were provided to bidders. Part of the bid required contractors to design certain elements of the project so that certain filters could operate continuously at various flow rates, and Penta was ultimately awarded the project in 2012. After several tries, however, Penta and its subcontractors were unable to provide equipment that met the performance conditions required by the specifications. The town shut down the filter system in April of 2015, rendering the project a “total loss.” Penta then sued the town after the town refused to pay Penta sums under the contract for the project, the town sued Penta and AECOM, and AECOM and Penta asserted claims against each other.

Part of the town’s counterclaim against Penta asserted a claim for professional negligence, which Penta claimed in a motion to dismiss was barred by the economic loss doctrine in New Hampshire. The Superior Court noted that the economic loss doctrine is a judicially created doctrine that precludes contracting parties from pursing tort remedies for purely economic losses stemming from their contractual relationship. In New Hampshire, one exception to the doctrine is when there is an “independent duty of care outside the terms of the contract.” Here, the court noted that the town was pleading that Penta took on part of the professional responsibility for the design, namely, to meet the performance specifications supplied by AECOM.

Although the opinion discusses other issues, including indemnity between the parties, the economic loss doctrine discussion is important to provide the construction community with the current contours of the doctrine in New Hampshire. The decision is on a motion to dismiss, where the court has to assume that the facts as pleaded are true. Surely, discovery will continue and the merits will be hotly contested by all parties in what the court very clearly described as a totally failed project.

Differing Site Conditions Claim Fails in Washington State

by Meredith Eilers

A recent decision from an appeals court in Washington State is a reminder of the difficulties in proving a differing site conditions claim, and the importance of contract documents in asserting that claim.

In King County v. Vinci Construction Grands Projets, — P.3d —, No. 70432-01, 2015 WL 6865706 (Wash. App. Nov. 9, 2015), the Court of Appeals of Washington affirmed the trial court’s conclusion that the contractor had not proven its differing site conditions claim. Vinci Construction Grands Projets (“VPFK”) was hired by King County to construct portions of the tunneling work for a major expansion of the County’s wastewater treatment system. While tunneling, VPFK encountered a number of problems that resulted in significant delays in completion of the project,  asserting that it encountered soil conditions materially different from what was anticipated. Specifically, VPFK claimed that the frequency of transitions between one soil condition and another was higher than expected and caused substantial slowing of the progress of tunneling because equipment operators had to adjust equipment more often to account for the changes.

The county rejected it’s request for a change order related to the differing site conditions and the trial court granted summary judgment in favor of the county on that issue, dismissing VPFK’s claim for differing site conditions based on the transitions between plastic and non-plastic soils.

VPFK then appealed the dismissal of its differing site conditions counterclaim, asserting that it encountered more frequent changes between plastic and non-plastic soils than the contract documents indicated. The appeals court disagreed, referencing two earlier decisions in its jurisdiction, noting the following requirements for establishing a differing site condition claim:

  • The contract documents indicated certain conditions
  • The contractor reasonably relied on those indications when making its bid
  • Actual conditions materially differed from those which were indicated in the contract
  • The materially different conditions were not foreseeable

The court concluded that VPFK had failed to establish its claim with respect to the first two elements. First, that the contract documents made no representation, whether implicit or explicit, regarding the frequency or number of transitions; the documents indicated only that that soil conditions were variable. Further, the documents explicitly stated that bidders should make their own interpretations and draw their own conclusions about soil conditions along the tunnel. Second, that VPFK had failed to establish that it reasonably relied on the contract indications when preparing its bit. The experts that VPFK claimed it had retained to analyze the site conditions had not made any explicit predictions regarding transitions.

This case is yet another reminder of the importance of contract documents in asserting or defending a differing site conditions claim and the difficulties in succeeding in prosecuting a claim. The risk of unforeseen conditions can often fall on the general contractor, with disastrous results.

Minnesota Supreme Court Concludes Accrual Date of Claim Was Before End of Construction

by Conor Shankman

Can a statute of limitations start to run in a construction case before substantial completion? In a case from late November, the Minnesota Supreme Court answered the question in the affirmative.

For those who may not know, statutes of limitations are time limits which prevent parties from bringing stale actions or law suits to court. They are determined by the legislature and establish the maximum duration of time that can pass between the occurrence of an event that gives rise to a cause of action, and the filing of that law suit. A law suit brought after a governing statute of limitations has run is time-barred, forever, no matter how meritorious the cause of action may be.

In 328 Barry Avenue, LLC v. Nolan Properties Group, LLC, construction began on a three-story commercial building in Wayzata, Minnesota. In October of 2009, near the punch list phase of the project, water intrusion was discovered around a window elevation on the east side of the building. The owner believed the issue was remedied at that time, and the project was “substantially complete” in May of 2010. In August of 2010, however, there was further water intrusion in the same location, and efforts were undertaken throughout 2011 and 2012 to investigate the possible causes.

The building owner, 328 Barry Avenue, LLC, sued the general contractor in June of 2012. The general contractor argued that a two-year statute of limitations for actions in contract, tort, or otherwise to recover damages in an action related to real property barred the law suit. Under the statute, the cause of action accrued at the time of “discovery of the injury,” and the contractor argued that the owner “discovered” the injury in the fall of 2009. The trial court agreed and dismissed the action.

On appeal however, the owner argued that the statute of limitations “cannot be triggered prior to substantial completion of a construction project. . . . [because] discovery of a defect during construction is different than the discovery of an actionable injury and is therefore insufficient to trigger” the statute of limitations. Thus, the leaking observed in August of 2010 should be the accrual date, making the June 2012 filing timely under Minnesota law. The leaking that occurred back in 2009, claimed the owner, was something that the contractor could still fix as part of the construction project, and indeed, the owner believed that had happened.

The Minnesota Supreme Court said its only duty was to interpret the statute. The statute used the “discovery of the injury” as the accrual date, and said nothing about “substantial completion” or the completion of the construction project. Because there was no question that the owner knew there was a water leak in the fall of 2009, the complaint filed almost three years later was time-barred.

This case serves as a reminder that time is of the essence when defects are identified on a job site. It is important to familiarize yourself with your local jurisdiction’s statute of limitations so that if necessary, you can initiate legal action before it is too late. Thinking that the accrual date can be no earlier than substantial completion, or the end of the project, may cause you to miss your filing deadline, and have your claim forever barred from the courts.