CLM 2014 Construction & Environmental Conference August 1, 2014 Boston, MA. Expert Strategies for Managing Construction Defect Litigation

Who was contracted to construct the complex?
Did School District # 1 discover leaks at and around windows at the complex?
What did School District # 1 use to build the complex?

Transcription

1 CLM 2014 Construction & Environmental Conference August 1, 2014 Boston, MA Expert Strategies for Managing Construction Defect Litigation I. Background HYPOTHETICAL Lobster Bay, Massachusetts, School District #1 ( School District #1 ) engaged Nice Design Architectural Firm ( Nice ) to design a LEED Certified Gold Status public school complex in Chowder Ridge. (the complex ). School District #1 engaged Alpha General Contractor ( Alpha ) to construct the complex. School District #1 also engaged Built Right Engineers ( Built Right ) and GoGreen Consultant ( GoGreen ) as construction representatives and consultants to oversee the construction project. School District #1 used modified American Institute of Architect contracts signed under seal with Alpha, Nice, Built Right, and GoGreen. The contract between School District #1 and Alpha consists of an owner-contract agreement, general conditions of the contract for construction, plans, and specifications (the contract documents ). Pursuant to the general conditions, Alpha was obligated to perform the construction required by the contract documents, including all labor necessary to produce such construction, and all materials, and equipment incorporated or to be incorporated therein (the work ). The work required by the contract documents includes the requirements contained in the specifications and depicted in the drawings and plans. In addition, pursuant to the general conditions, Alpha expressly warranted that all work will be of good quality, free from faults and defects, and in conformance with the contract documents [and that]... work not conforming to these requirements... may be considered defective and, promptly after written notice of non-conformance, shall be repaired or replaced by the contractor with work conforming to such requirements. The general conditions also require Alpha to indemnify, hold harmless and defend the owner... from and against claims insured or uninsured and regardless as to cause, damages (consequential or otherwise), losses and expenses, including but not limited to attorney s fees and costs of investigation, arising out of or resulting from acts or omissions of

2 contractor, a subcontractor or anyone directly employed or otherwise engaged or controlled by contractor or a subcontractor in connection with performance of the work.... In addition, the owner contractor agreement requires Alpha to obtain a performance bond in connection with its work on this project. Alpha obtained the performance bond from XYZ Insurance Co. Alpha engaged numerous subcontractors to construct the complex. Alpha utilized custom subcontract agreements with each of its subcontractors. There is no written statement in the subcontracts that they are not signed under seal. The subcontract agreements include indemnity and insurance requirements in favor of Alpha. The subcontract agreements require each subcontractor to defend and indemnify Alpha in any dispute and to name Alpha as an additional insured with completed operations to its insurance policy. The subcontracts require the subcontractor to obtain a performance bond. Nice completed its design of the complex in 2001, construction began in 2002, and School District #1 opened the complex to students and classes on September 7, Alpha and its subcontractors completed punch list work for an additional year. A series of Nor easter storms impacted Massachusetts during the school year. The storms caused wind and water damage to the exterior of the complex. After the storms, teachers and students reported leaks at and around windows at the complex. The maintenance staff reported leaks in the roof. School District #1, at its own cost and expense, engaged the services of Built Right to investigate the causes of leaks and resulting conditions and to perform some remedial and repair work related to these conditions. School District #1 did not provide notice to Alpha or Nice about this investigation or the repairs. In order to investigate and repair these conditions, School District #1 temporarily closed the complex and bused students to other schools. During the same time period, the maintenance staff reported fire alarm system malfunctions, uneven air circulation and temperatures throughout the complex and inoperable light fixtures. On August 31, 2009, School District #1 commenced a lawsuit against Alpha, Nice, and Built Right to recover damages arising out of this public construction project. School District #1 alleges in its complaint that it discovered leaks at and around windows at the complex which caused water damage to sheet rocked walls, mechanical systems and other property located within the complex. It also alleges that there are leaks in the complex s roof system. School District #1 alleges that the windows and window flashings and the roof system are defective and are a direct and proximate cause of the leaks and water damage. It further alleges that there are design and construction defects and deficiencies associated with the complex s exterior facade which caused moisture to collect within the plenum area between the brick facade and steel superstructure and damage to MEP components. In addition to these allegations, School District #1 alleges that design and construction defects and deficiencies have caused the complex to lose its Green Building Gold Status. Furthermore, it alleges that the fire alarm system at the complex is defective as a result of malfunctions and reported false alarms. It alleges that light fixtures do not operate properly and require replacement. Lastly, it alleges that the complex s HVAC system is not providing even air circulation and temperatures throughout the complex. 2

3 School District #1 alleges that Nice failed to design the complex in compliance with applicable laws, codes and industry standards. School District #1 alleges claims of negligence, negligent misrepresentation and breach of contract against Nice. School District #1 alleges that Alpha failed to perform its work in a good and workmanlike manner and free from defects in workmanship. It also alleges that Alpha failed to perform its work on the complex in accordance with the contract documents. School District #1 s complaint asserts claims of negligence, breach of contract, breach of express warranty, and contractual indemnification against Alpha. School District #1 s complaint also asserts a breach of contract claim against XYZ Insurance Co. based on the performance bond. Lastly, School District #1 alleges that Built Right performed substandard supervision and/or made subsequent substandard repairs to the school. School District #1 asserts claims of negligence, negligent misrepresentation, breach of contract and contractual indemnification against Built Right. Alpha takes one month to investigate the allegations contained in the complaint and to report the complaint to its appropriate insurers. As a result of School District #1 s allegations in the complaint, Alpha files a third-party complaint against a number of its subcontractors on November 1, Alpha alleges third-party claims of contribution, contractual indemnification, breach of contract, and breach of warranty. [Photo Courtesy of LWG Consulting] 3

4 [Photo Courtesy of LWG Consulting] School District #1 seeks $18 million in recovery. School District #1 alleges that its damages include the cost to access and repair leaks in the roof and at and around windows. It alleges that it sustained costs to investigate and repair some damage to the exterior facade system and MEP components. It alleges that its damages include costs associated with repairing and replacing damaged mechanical equipment and other property within the building. It alleges that it sustained damages to repair and replace portions of the complex s fire alarm system. It alleges that it incurred and it will incur additional costs and expenses associated with repairing the HVAC system. Lastly, School District #1 alleges that it incurred costs associated with losing use of the complex and busing students to other schools to allow for repairs at the school. II. Expert Investigation Construction issues include, but are not limited to, the following areas: HVAC systems; Fire Alarm systems; Water intrusion at school building envelope (windows and exterior facade); Water penetration within areas of the roof membrane; NRCA Vegetative Roof Systems; Failure to properly construct school building components; Ongoing construction issues related to construction warranty activities, and service and follow up activities by defendants; and Inoperable light fixtures. Investigation into these areas of the building identified the following design and/or construction defects and deficiencies: 1) Water penetrated the roof structure due to the following design and construction deficiencies: Roof slope does not provide proper roof drainage; Roof drains do not allow for proper roof drainage; EPDM roof material does not tie into the various roof penetrations properly; 4

5 A lack of proper roof design results in ponded water and the ability for water to work its way through the roof system; Green Roof System installed does not reflect NRCA standards for a moderate vegetative roof; Lack of internal wall field splices to provide additional strength to joints and to protect the insulation; Lack of adequate protection when storing materials to prevent potential UV damage to the exterior shell and splices or patches; and Lack of adequate protection by HVAC company at the end of the plenum tap covers which allowed water and other debris to flow within the ducts. 2) Exterior facade does not have a proper ventilation space or vapor barrier within the plenum space between the brick facade and the steel superstructure and a result moisture collected within the plenum space damaging various MEP components. 3) A portion of the damaged HVAC showed the following: water appeared to have traveled down portions of the roof decking and onto or within plenum area ductwork through joints or seams; and cracking of seams within the ductwork caused by thermal expansion due to a lack of expansion control joints within encased ducts. 4) HVAC damage to the plenum ducting and sub-grade concrete enclosed duct area as a result of one or more of the following: Defective materials, shop splices, or finishes caused by the manufacturer; Improper handling or misuse of the product during installation; Lack of internal wall field splices to provide additional strength to the joints and to protect the insulation; Lack of adequate protection at the end of the plenum tap covers which allowed water and other debris to flow within the ducts; and Lack of protection when storing materials to prevent UV damage to the exterior shell and splices or patches. ABC Insurance Company which insured Alpha under a standard CGL policy received a defense and indemnity tender from Alpha. Insurance Company retained Attorney to defend. III. Questions for Discussion What initial steps should a party take to investigate the plaintiff s allegations? How does an insurer set reserves and proceed appropriately under an eroding limits policy? 5

6 What is the interplay between the General Contractor s and subcontractors CGL, umbrella and wrap policies? What defense strategy should the insurer, insured and defense counsel employ? When should a party consider a joint defense agreement and what are the pros and cons of such an agreement? What types of discovery tools are available? What defenses are available to a defendant contractor? What types of experts are necessary in a construction defect case? What strategies should a party employ to select its team of experts? What documents are necessary to investigate and defend claims? What and when should a party report to an insurer and client? How can the court assist with the litigation and its progress? What dispositive motions are available to a defendant and when should a party consider such a motion? What types of alternative dispute resolution mechanisms are available to a party and when should a party consider such an alternative to additional litigation? 6