7th Circuit Upholds Limitation of Liability Clause for Design Professional

By: William E. Kelley, Jr., LEED AP BD+C

In a decision that should have both Owners and Design Professionals taking close notice, the U.S. Court of Appeals for the 7^th Circuit recently upheld enforcement of a contractual limitation of liability clause, which resulted in the design professional’s liability being capped at $70,000, despite the Owner’s claim that its damages were over $4.2 Million.

In SAMS Hotel Group, LLC v. Environs, Inc., (7th Cir. 2013), the Owner contracted with the Design Professional, for architectural services related to construction of a six-story hotel development.  The contract between the parties provided that Owner would pay Design Professional a flat fee of $70,000.  In addition, the contract contained the following limitation of liability clause:

The Owner [SAMS] agrees that to the fullest extent permitted by law, Environs Architect/Planners, Inc. total liability to the Owner shall not exceed the amount of the total lump sum fee due to negligence, errors, omissions, strict liability, breach of contract or breach of warranty.

Soon after completion of the construction, there were serious structural defects discovered, and the county building department eventually condemned the hotel structure.  The hotel was demolished without ever opening, and the Owner estimated its loss at more than $4.2 Million.

In the ensuing lawsuit by Owner against Design Professional, Owner brought claims for both negligence and breach of contract.  On cross-motions for summary judgment, the U.S. District Court ruled that the negligence claim was barred under the economic loss rule, since there was no personal injury or damage to “other property” outside of the project itself, citing to the Indiana Supreme Court’s ruling in Indianapolis Marion County Public Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722 (Ind. 2010).  The District Court further ruled that the breach of contract claim was subject to the parties’ express limitation of liability clause, such that if the Design Professional was liable to Owner for breach of contract, that Design Professional’s maximum liability could not exceed $70,000 (i.e., the flat fee paid by Owner to Design Professional).  The parties proceeded to trial, and the Design Professional was found to have breached the contract with Owner.  Without deciding the total amount of damages incurred by Owner as a result of the breach of contract, the District Court held that Owner’s recovery was limited to the $70,000 fee.

On appeal, the Owner argued that the limitation of liability clause was not enforceable, arguing that the clause did not specifically state that it applied to the Design Professional’s own negligence.  The 7^th Circuit posed the question this way: “Is a limitation of liability clause in a professional services contract that generally refers to liability for ‘negligence’ and breach of contract, and that was freely bargained by two sophisticated commercial entities, enforceable in favor of a breaching party even though the clause does not specifically refer to that party’s own negligence?”

After examination of this issue under Indiana law, the 7^th Circuit concluded that the limitation of liability clause was enforceable, thus limiting the Design Professional’s liability exposure to $70,000.  In so holding, the 7^th Circuit noted that the Indiana Supreme Court had drawn a line between negligence claims and breach of contract claims in the Indianapolis Marion County Public Library case, where the Supreme Court noted that “when it comes to claims for pure economic loss, the participants in a major construction project define for themselves their respective risks, duties, and remedies in the network or chain of contracts governing the project.”  Once the Owner’s negligence claim was dismissed under the economic loss rule, the Owner was left with the express terms of its contract with Design Professional.  The 7^th Circuit noted that to ignore the contractual limitation of liability clause would be akin to providing an end-run around Indiana’s economic loss rule and the Owner’s own contract with the Design Professional.

The lesson for Owners and Design Professionals is clear:  Clauses in a professional services contract that define or limit a Design Professional’s liability are enforceable.  Consequently, both Owners and Design Professionals should take due care to review their contract agreements to identify these types of clauses, and also to confirm that the clauses accurately reflect the parties’ agreement.  While an Owner’s initial reaction may be to strike all such limitation of liability clauses from its contracts, Owners should at least consider that unlimited liability and risk exposure to Design Professionals may increase the costs of the design fees charged on the projects, so that the Design Professional can attempt to adequately cover the potential risks through insurance and other protections.  Design Professionals should consider, too, that limitation of liability clauses should probably not be arbitrary figures, but rather should be tied to some tangible basis, such as fees paid on the project, limits of available of insurance, or some figure or percent that represents a reasonable cap on a Design Professional’s liability in relation to the scope of the overall project.

NLRB Holds Engineering Firm Committed Unfair Labor Practice

By: Christopher S. Drewry

Over the course of the past year, the National Labor Relations Board (“NLRB”) is the federal agency that has arguably made the biggest push to expand its reach and relevance.  While the National Labor Relations Act (“NLRA”) has always protected the rights of all employees – both union and non-union – the focus of the NLRB has traditionally been on unionized workplaces.  However, the NLRB has shifted its focus from traditional labor matters toward the rights of non-union employees.  Such decisions have impacted companies on business-related issues involving their employment “at-will” disclaimers, social media policies, confidentiality of investigations, as well as other employee handbook policies.  Non-union companies involved in the construction industry (and even those not engaged in traditional labor activities) should take note of this trend by the NLRB, including a decision handed down last week in Jones & Carter, Inc./Cotton Surveying Company v. Teare.

In Teare, the NLRB addressed the viability of an employer’s confidentiality rule prohibiting discussions among employees about their salaries.  The case involved allegations that Jones & Carter, an engineering and surveying firm located in Houston, unlawfully maintained a rule in its employee handbook that prohibited such discussions.  Further, Teare was alleged to have been terminated because she engaged in concerted activities with other employees for the purposes of mutual aid and protection by discussing salaries and because she violated Jones & Carter’s unlawful rule.  One of the basic issues in the case was whether Jones & Carter’s confidentiality rule that prohibited employees from discussing their salaries was overly broad, thereby resulting in an unfair labor practice in violation of §8(a)(1) of the National Labor Relations Act (“NLRA”), which prohibits an employer from interfering with, restraining, or coercing employees in the exercise of their §7 rights (i.e., those rights to self-organize, to form, join, or assist labor organizations, to bargain collectively, and to engage in other concerted activities for  the purpose of collective bargaining).

At trial, Jones & Day said the employee was terminated for “harassing” other workers.  However, the Administrative Law Judge (“ALJ”) found that Teale was, in fact, fired for discussing salaries with other workers, and that sharing such information was a “pet peeve” of the company.  The ALJ and the NLRB (upholding the ALJ’s determination) held that the engineering firm unlawfully fired the employee for discussing salary information with co-workers, and ordered Jones & Day to offer reinstatement and to pay back wages for the time out of work.  Additionally, under the NLRB order, the company also must rescind its policy of forbidding employee discussion of salaries on the basis that the NLRA protects the rights of workers to discuss their terms and conditions of employment, including wages.  Ultimately, Jones & Day had to pay Teare (who declined reinstatement to her former position) back pay, 401(k) contributions, medical expenses and interest in the total amount of $107,000.

From an employment law standpoint, the NLRB’s decision that this type of confidentiality rule is prohibited is not unexpected in light of prior cases extending the trend toward increased transparency among employees at least with respect to salaries.  However, Teare is also part of the ongoing trend wherein the NLRB has sought to expand its reach to non-traditional labor matters and, more significantly, to non-union workplaces.  From that standpoint, Teare stands as yet another warning to both union and non-union employers alike to review and update their employee handbooks to account for the increased NLRB focus on employment policies and procedures.

“Crowdfunding Architecture” – AIA Examines Innovative Approach to Project Financing

By: William E. Kelley, Jr., LEED AP BD+C

What is “crowdfunding”?  By definition, it is “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”  Many individuals, groups, and small businesses (especially startups) have attempted to tap into crowdfunding as an alternate to loans, private financing, angel investors, or venture capitalists in order to launch new products, services, or business ventures.

As outlined in an article from Forbes.com, until last year, “crowdfunding sites were only permitted to operate on a reward or donation basis, essentially offering a product or enticement in exchange for monetary funding.”  That prohibition may soon be obsolete, however, thanks to the launch of the JOBS Act, which is short for Jumpstart Our Business Startups.  Under the JOBS Act, the SEC is empowered to issue regulations on crowdfunding, which set forth rules under which the general public can receive company equity in exchange for funding.  Once the SEC issues those regulations, then crowdfunding sites may go beyond reward and donation basis funds, and offer would-be investors equity or other forms of return on investment.

So why should architects (or anyone in the construction industry, for that matter), care about crowdfunding?  In what has been extremely difficult economic times for a lot of design and construction professionals, crowdfunding may provide an alternate approach to project financing.  At least this is the theory examined by the American Institute of Architects (AIA) in a commissioned white paper titled, “Crowdfunding Architecture”.  A copy of that white paper can be downloaded here.

“Crowdfunding Architecture” outlines the various models for crowdfunding, including donation-based and reward-based crowdfunding, and crowdfunding with financial returns.  As outlined in the white paper, each of these models carries potential benefits and deterrents for investors and owners alike.  For example, under the donation-based model, there is no tangible reward or return on investment for donors.  Donors under this model have to be emotionally connected to the cause or project in order to be motivated to contribute financially.  Projects seeking financing under this model also have to avoid potential pushback from doubters who question why no other financing or funding vehicle is available for this particular project.  As the white paper notes, this model requires the most carefully thoughtful communications strategy and the most persistent communications effort.

“Crowdfunding Architecture” also addresses real life examples of crowdfunding used successfully and unsuccessfully for various projects.  For example, after thunderstorms and tornadoes damaged buildings throughout Joplin, Missouri in 2011, a group known as Rebuild the Joplin Mosque organized a crowdfunding campaign, seeking $250,000 to rebuild the Joplin Mosque, which had been damaged not only by tornadoes, but also by fire damage that caused it to burn to the ground.  The Rebuild the Joplin Mosque not only raised the $250,000 needed in one week, but it exceeded its goal, by raising more than $400,000.  Through its crowdfunding site, the organizers disclosed that any proceeds above the $250,000 goal would be used to finance additional safety features, expansion of the original structure, and access roads.

Clearly the Rebuild the Joplin Mosque effort is a huge success story for crowdfunding.  There are misses in the crowdfunding world as well.  For example, “Crowdfunding Architecture” points to a Kansas City campaign to fund the KC Streetcar Starter Line.  The campaign did not succeed, but not for a lack of community outreach or creative reward structures under the crowdfunding model.  Instead, the campaign failed because its funding goal was $10 Million, and “Crowdfunding Architecture” notes that “for something like that to happen, a campaign needs intensive promotion way in advance of the campaign, and preferably a strong signal (a pledge of funds) that shows that the campaign has secured a considerable amount of pledges from day one.”

So can crowdfunding help launch stalled projects and give the design and construction industries a much-needed economic boost?  Perhaps.  The point made by “Crowdfunding Architecture” seems to be that small, community-based projects are likely the best candidates for crowdfunding, especially those with some tangible reward for investors and/or the presence of matching funding from other public or private contributors.  In other words, crowdfunding might be good for communities looking to leverage available funds in order to take on larger projects that might not otherwise get off the ground without other funding.  “Crowdfunding Architecture” also touches on some of the potential risk and liabilities for organizations seeking to utilize crowdfunding.  Organizers cannot expect to set up a crowdfunding site and simply wait for the funds to roll in.  Successful crowdfunding campaigns involve a tremendous amount of planning and effort.

It will be years before we can fully analyze whether or not crowdfunding will serve as a viable financing tool for design and construction projects.  At the very least, though, it is a creative approach to the question of how to jumpstart not only small businesses, but also design and construction projects.

Court Holds Recess Appointments to the NLRB Were Unconstitutional

By: Christopher S. Drewry

On January 25, 2013, the D.C. Circuit Court of Appeals handed down its decision in the case of Noel Canning v. National Labor Relations Board.  While the facts of the case itself involve an unfair labor practice charge against Noel Canning for allegedly refusing to reduce to writing and then execute a collective bargaining agreement, the key issue on appeal became whether President Barack Obama’s recent appointments to the National Labor Relations Board (“NLRB”) were legal.  Specifically, Noel Canning questioned the NLRB’s authority to issue its order on the basis that (1) the NLRB lacked authority to act because there was not quorum, as three members of the five-member NLRB were never validly appointed because they took office under recess appointments which were made when the Senate was not in recess, and (2) that the vacancies the three members filled did not occur during the recess of the senate, as required by the United States Constitution.

Flash back to one year ago in early 2012.  An administrative law judge had concluded that Noel Canning had violated the NLRA.  Thereafter, a three-member panel of the Board affirmed the findings in February of 2012.  At that time, the NLRB ostensibly had five members, two of which had been confirmed by the Senate in June of 2010, while the other three were all appointed by President Obama on January 4, 2012, purportedly pursuant to the recess appointments clause of the Constitution.  At the time of these appointments, the Senate was operating pursuant to a unanimous consent agreement which stated that the Senate would meet every three business days from December 20, 2011 through January 23, 2012.  During one of the sessions, the Senate acted to convene the second session of the 112^th Congress and to fulfill its constitutional duty to meet on January 3^rd as set forth in the 20^th Amendment.

The long and the short of it is that the NLRB is not allowed to issue decisions unless it has three or more members.  President Obama invoked his recess appointment powers to appoint three members to the Board while Congress was on break.  By doing so, the appointees did not have to be approved by the Senate.  Under the Recess Appointments Clause, an appointment made during a recess expires upon conclusion of the following congressional session.

Based on this, Noel Canning asserted that the Board did not have a quorum for the conduct of business on February 8, 2012, that being the date that the NLRB issued its decision.  Noel Canning argued that the NLRB cannot act without a quorum of three members and that the NLRB lacked a quorum on that date because the recess appointments of the last three members of the Board were invalid under the Recess Appointments Clause of the Constitution – namely because there was not an actual recess and the vacancies to be filled did not arise during an actual recess (i.e. the vacancies occurred during a congressional session).  The D.C. Circuit Court agreed that the appointments were constitutionally invalid and the NLRB therefore lacked a quorum.

The outcome of this case is significant…at least for the time being.  With this decision, the NLRB now lacks authority to act since it only has two valid members.  Likewise, every decision that has been issued since the “recess appointments” on January 4, 2012 is subject to attack and/or challenge based upon the same arguments made by Noel Canning.  This includes a large number of cases where the NLRB has expanded its focus to areas beyond the traditional labor context, including non-unionized employers.  The aforementioned caveat “at least for the time being” is made because the Noel Canning decision will likely be appealed to the United States Supreme Court, who could overturn the D.C. Circuit.  And, even if the Supreme Court upholds it, President Obama will have an opportunity during his second term to appoint new members to the NLRB, either through the senate or via valid recess appointments that could continue the same policies pursued by the 2012 Board.  In the meantime, the NLRB is expected to move forward with issuing decisions and orders, notwithstanding the possibility that those decisions risk being declared void and unenforceable.

Hunt Construction: Same Case, Slightly Different Result

By: Sean T. Devenney

Last Month the Indiana Court of Appeals issued a not-for-publication decision in the case of Clade v. Hunt Construction Group, Inc.   This case arose on the same Project (under the same contract) that we have discussed in prior blog posts relating to the Indiana Supreme Court case in Garrett v. Hunt Construction.  In this case, like Garrett, the injured employee Clade was injured while working for a subcontractor on the Project.   Clade could not sue his employer due to the exclusivity of the worker’s compensation remedy.  However, Clade did bring suit against Hunt, who was the Construction Manager Agent on the Project, claiming that Hunt owed him a non-delegable duty regarding jobsite safety on the ingress and egress routes to the Project site where Clade allegedly slipped and fell on ice.  Not surprisingly, Hunt argued that the Supreme Court case in Garrett controlled the outcome of the case and Hunt argued that since the case arose on the same Project with the exact same contracts at issue, Hunt was entitled to summary judgment.  The trial court agreed and found that Hunt did not owe Clade a duty to protect him from his slip and fall and granted Hunt’s motion for summary judgment.

The Court of Appeals, however, reversed.  The Court noted that there were two ways Hunt could be found to have assumed a duty to Clade:  (1) by contract; or (2) by conduct.  Presumably, the Court agreed with Hunt that the contracts (because they were the exact same as those analyzed in Garrett) did not create a duty to individual employees of subcontractors on the Project.  However, the Court found that there was no evidence presented by any party as to what, if anything, Hunt had actually done with respect to snow and ice removal in the particular spot where Clade allegedly fell.  Since there was no evidence presented on the subject, under Indiana’s liberal summary judgment standard Hunt was not entitled to summary judgment.  The Court did appear to leave open the possibility that Hunt could present evidence that it did not perform snow and ice removal on the Project in the area where the Plaintiff fell (prior to when he fell), in which case, presumably Hunt would be entitled to summary judgment.  Under Garret, it seemed that a construction manager might be able to insulate itself from assuming a duty for jobsite safety by drafting the appropriate contractual language and limitations.  However, the Clade case appears to require an examination by the court that looks beyond the contractual language to the parties’ conduct as well in order to determine whether or not the construction manager assumed a duty for jobsite safety.  What appeared to be clear direction from the Indiana Supreme Court may have just gotten murkier.

EEOC Focus: Hiring

By: Melanie M. Dunajeski

The EEOC issued its draft Strategic Enforcement Plan (SEP) in September, setting out nationwide enforcement priorities for the Agency in the coming years.  One of the major areas where it appears  the EEOC will be focusing its attention is in the recruitment and hiring process.  The EEOC will be looking past ostensibly “neutral” hiring practices to find out whether protected groups have been adversely impacted by how these practices are applied. For example, the SEP suggests pre-employment screening tools such as pre-employment tests, background screens, and date of birth screens in online applications that adversely impact protected groups will be the target of the EEOC’s investigatory process, and that the EEOC will be looking for opportunities to pursue class-based enforcement actions. The EEOC also listed hiring or recruiting practices that have the effect of channeling or steering individuals into specific jobs due to their status as a member of a particular protected group or a restrictive application process as other enforcement targets.

What can employers do? Employers should examine their recruitment and hiring practices from top to bottom, including the ways that a job is made known, the application that is used, the process for review of applications, interviewing,  testing, and decision making. Of particular concern is to be sure that there is a single, unified recruitment policy and procedure and that managers are not permitted to create their own de facto systems.  Employers should also take care to maintain all of the application and hiring records required by the EEOC. For those interested in reading the whole SEP, see
http://www.eeoc.gov/eeoc/plan/sep_public_draft.cfm
.

Industry Groups Congratulate Obama on Re-election

By: Joseph M. Leone

Construction trade groups offered congratulations and admonitions to President Obama on his re-election.  Barry Rutenberg, chairman of the National Association of Home Builders (NAHB) offered his congratulations in a statement released on November 7.  “The National Association of Home Builders (NAHB) congratulates President Obama on winning a second term as President of the United States of America and all the lawmakers who were elected to the 113^th Congress.”  Mr. Rutenberg also admonished the President to address the upcoming “fiscal cliff.”  “In the closing weeks of the 112^th Congress, NAHB urges President Obama and congressional leaders to work together to resolve issues related to the ‘fiscal cliff’ by extending all of the 2001 and 2003 tax cuts while being mindful of how broad-based tax reform will affect the fledgling housing recovery.”

American Institute of Architects (AIA) President Jeff Potter urged both parties to work together to solve the country’s current economic problems “[n]ow that the election battle is over, we urge both the White House and the newly elected Congress to launch a new era of statesmanship by putting aside differences on the budget and by enacting policies that will help put the economy on a more solid footing for all Americans.”  Mr. Potter similarly implored both sides to resolve the looming fiscal cliff.  “In particular, we urge both parties to solve the impending budget impasse known as the ‘Fiscal Cliff,’ where mandatory budget cuts and tax hikes threaten to cost more than 60,000 construction jobs.”

American Road & Transportation Builders Association (ARTBA) President and Chief Executive Officer Pete Ruane stated, “[w]e congratulate President Obama on his hard fought victory; . . . the centerpiece of both campaigns was about growing the economy, creating jobs and getting America’s fiscal house in order.”  Mr. Ruane then put in a plug for the transportation industry, “[d]eveloping a comprehensive solution for the nation’s staggering transportation infrastructure challenges is one of these areas, and is wholly consistent with the economic and budgetary priorities shared by both parties.”

Notwithstanding Wall Street’s immediate negative reaction to the President’s re-election, there may be reason to be optimistic on the economy.  Overall construction volume has continued to grow at a steady pace for the last year and a half.  Residential construction in particular has shown strong growth especially in the last three to four months.  Of course, any hope for continued growth depends on resolution of the “fiscal cliff” before the end of the year.