(Re)Defining “Waters of the United States” Under the Clean Water Act – Part II: The States Strike Back

By: Erik S. Mroz

If my job as a lawyer does not work out, I may be able to make a living telling the future. Back in February, I advised our readers to keep an eye on a proposed rule defining “Waters of the United States” (or “WOTUS Rule”). Written by the U.S. Environmental Protection Agency (“EPA”) and the Army Corps of Engineers (“ACE”), the WOTUS Rule defines (and arguably expands) EPA’s and ACE’s jurisdiction under the federal Clean Water Act (“CWA”). I concluded that article by stating: “Assuming the proposed rule goes final … we should expect a new round of CWA litigation.” The final WOTUS Rule was issued by EPA and ACE on May 27, 2015; and, as of this writing, a majority of states (27) have already sued the federal government to stop the WOTUS Rule in its tracks.

As explained previously, Under the CWA, federal jurisdiction (the power of EPA and ACE) to regulate impacts to surface water is limited to the “Waters of the United States.” The term “Waters of the United States” is vaguely defined to include navigable waterways and associated wetlands. Whether a watercourse or wetland can be defined as a “Waters of the United States” determines whether it is subject to NPDES permitting, Section 404 Dredge and Fill permitting, and whether an activity can be subject to a citizen’s suit under the CWA.

Under the WOTUS Rule, traditional navigable waters will remain subject to CWA jurisdiction. The controversies arise from new definitions and standards for other per se jurisdictional waters and other waters considered jurisdictional on a case-by-case basis. Under the WOTUS Rule, “tributaries” are considered per se jurisdictional waters. The term is defined expansively to include natural and man-made waters, and includes streams, canals and ditches. “Adjacent waters,” which are also per se jurisdictional, are waters “bordering, contiguous or neighboring” a jurisdictional water, including tributaries. “Neighboring” waters are broadly defined to include:

  • All waters located within 100-feet of the ordinary high water mark of a jurisdictional water;
  • All waters located within the 100-year floodplain of a jurisdictional water and not more than 1,500 feet from the ordinary high water mark of such water; and,
  • All waters located within 1,500-feet of the high tide line of a jurisdictional water.

“Ordinary high water mark” is defined in the WOTUS Rule as a “line on the shore established by the fluctuations of water and indicated by physical characteristics such as a clear, natural line impressed on the bank, shelving, changes in the character of soil, destruction of terrestrial vegetation, the presence of litter and debris, or other appropriate means that consider the characteristics of the surrounding areas.”     Commentators note that this expansive definition may allow the agencies to use their discretion to expand the CWA’s reach over per se jurisdictional waters to previously unregulated areas and potentially leaving the regulated community guessing as to what its regulatory obligations actually are.

The WOTUS Rule also includes two new categories of waters that may be considered jurisdictional under the CWA on a case-by-case basis if there is a “significant nexus” to a traditionally navigable water. This means that some areas, which are not per se jurisdictional, may nevertheless be subject to CWA jurisdiction as determined by the agencies on a case-by-case basis. The first category includes the following specified waters: “Prairie potholes,” “Carolina bays and Delmarva bays,” “Pocosins,” “Western vernal pools,” and “Texas coastal prairie wetlands.” The second new category is defined to include all waters located within the 100-year floodplain of a traditionally jurisdictional water and all waters located within 4,000 feet of a high tide line or ordinary high water mark of a jurisdictional water, including all tributaries and impoundments of tributaries.

The WOTUS Rule went final on May 27, 2015. On June 29, 2015 the WOTUS Rule was published in the Federal Register. Under federal law, the WOTUS Rule is to become effective on August 28, 2015.

As of this writing, four lawsuits, filed by twenty-seven states[1], have been filed challenging the WOTUS Rule. In the various complaints, the states allege that the WOTUS Rule exceeds the agencies’ authority under the CWA, extends the agencies’ authority beyond the limits of federal power, violates state sovereignty under the 10th Amendment to the U.S. Constitution, violates procedural mandates under the National Environmental Policy Act, is arbitrary and capricious and otherwise in violation of the Administrative Procedures Act. The states are asking the courts to invalidate the WOTUS Rule and block its implementation.

The complaints also indicate a concern for the regulated community. For example, the Texas complaint includes a flowchart to determine whether an area is subject to regulation under the WOTUS Rule:

For a landowner, including a state, to determine whether a particular water feature is subject to the Federal Agencies’ jurisdiction (and, therefore, subject to permitting requirements under the CWA), the landowner would be forced to perform – or, more likely, pay an expert to perform – the following analysis:

Step 1

Landowner must determine the location of the ordinary high water mark of the nearest traditional navigable water, interstate water, territorial sea, impoundment of a jurisdictional water, or tributary, as defined by the Final Rule;

arrowStep 2

Landowner must determine whether any part of the feature at issue is within 100 feet of the ordinary high water mark or within 1,500 feet of the high tide line. If so, then the entire water feature is subject to federal jurisdiction. If not, the landowner can proceed to Step 3

arrowStep 3

Landowner must determine where the 100-year floodplain is located and whether any part of the feature at issue is within the 100-year floodplain of a traditional navigable water, interstate water, territorial sea, impoundment of a jurisdictional water, or tributary, as defined by the Federal Rule. If so, proceed to Step 4. If not, proceed to Step 5.arrow

Step 4

Landowner must determine whether any part of the feature at issue is within 1,500 feet of the ordinary high water mark of the water found in Step 3. If so, then the entire feature at issue is subject to federal jurisdiction. If not, Landowner must proceed to Step 5.arrow

Step 5

Landowner must determine whether any part of the feature at issue is within 4,000 feet from the ordinary high water mark of a traditional navigable water, interstate water, territorial sea, impoundment of a jurisdictional water, or tributary, as defined by the Final Rule. If so, proceed to Step 6. If not, still proceed to Step 6.arrow

Step 6

If any part of the feature at issue is within the 100-year floodplain of a traditional navigable water, interstate water, or territorial sea or within 4,000 feet from the ordinary high water mark of a traditional navigable water, interstate water, territorial sea, impoundment of a jurisdictional water, or tributary, as defined by the Final Rule, Landowner must then have a case-by-case significant nexus analysis performed on the feature at issue and the relevant water.arrow

Step 7

If the Federal Agencies determine that the feature at issue has a significant nexus to the relevant traditional navigable water, interstate water, territorial sea, impoundment of a jurisdictional water, or tributary, the feature is subject to federal jurisdiction. If the Federal Agencies determine that the feature does not have a significant nexus to the relevant traditional navigable water, interstate water, territorial sea, impoundment of a jurisdictional water, or tributary, the feature at issue is not subject to federal jurisdiction.[2]

The Texas complaint concludes this analysis, stating:

It is unrealistic for the Federal Agencies to expect that landowners will possess the expertise, patience, and resources to employ this onerous test to determine whether their land can fall under the Final Rule’s definition of “adjacent waters.” Nor should the states and their taxpayers be forced to spend funds for such onerous jurisdictional determinations. Moreover, it is unrealistic for the Federal Agencies to expect that such a complicated standard con be applied predictable and consistently across the nation[3].

By filing these lawsuits, the states hope to stop the WOTUS Rule in its tracks. It remains to be seen how the Courts will respond to the various challenges and how long this process will take. The saga continues.

Erik S. Mroz is an attorney with Drewry Simmons Vornehm, LLP and practices in the areas of Environmental Law, Regulatory Matters, Insurance Coverage, and Litigation.  With three offices across the State of Indiana, Drewry Simmons Vornehm, LLP was originally founded as a boutique law firm focusing on the construction industry, including public and private owners, design professionals, general and trade contractors, construction managers, material suppliers, insurers and sureties.  With the growth of the law firm, Drewry Simmons Vornehm, LLP has expanded its legal practice to meet the wide-ranging needs of its clients. To speak with Mr. Mroz or another Drewry Simmons Vornehm, LLP attorney, please call us toll-free at 1 (866) 938-4848.

[1] Ohio in The State of Ohio v. United States Army Corps of Engineers, et al., Case No. 2:15-cv-02467-EAS-NMK (S.D. Ohio); North Dakota, Alaska, Arizona, Arkansas, Colorado, Idaho, Missouri, Montana, Nebraska, Nevada, South Dakota, Wyoming, the New Mexico Environmental Department and New Mexico State Engineer in States of North Dakota, et al. v. United States Environmental Protection Agency, et al., Case No. 15-59 (Dist. ND); Texas, Louisiana and Mississippi in State of Texas, et al. v. United States Environmental Protection Agency, et al., Case No. 15-cv-162 (S.D. Tex.); and Georgia, West Virginia, Alabama, Florida, Kansas, Kentucky, South Carolina, Utah, Wisconsin and Indiana in State of Georgia, et al. v. Regina A. McCarthy, Administrator of the United States Environmental Protection Agency, et al., _________ (S.D. GA).
[2] Complaint, pp. 17-18.
[3] Complaint, pp. 18-19.

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Indiana Supreme Court Interprets AIA’s Waiver of Subrogation Clause

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

A waiver of subrogation clause is a typical (but often overlooked) contract provision in design and construction contracts, especially for parties using standard form contracts, such as the American Institute of Architects (AIA) forms.  In general, the term “subrogation” refers to situations where an insurance company pays for damages covered under its policy, then, in turn, seeks to recoup some or all of those damages from other entities that may have caused or contributed to the loss.  For example, the insurance company for a property owner pays for damages caused by a water leak, and then seeks to recoup those damages from contractors who may have caused the water leak through their construction activities.  The insurance company stands in the shoes of its insured, and has no greater rights than the insured would have.  Therefore, if the insured has already waived certain claims by contract or other agreement, then the insurance company cannot pursue those waived claims.

The waiver of subrogation clause refers to an agreement between contracting parties, whereby the parties agree they will not sue each other for certain classes of claims covered by insurance.  So, in the water leak example, the waiver might apply to bar the insurance company from recovering from the contractor, even if the water leak was partially caused by construction defects.  In that instance, the owner’s insurance company would pay for the damages, and the contractor might have no liability to the owner or insurance company for the amounts paid for damages under the insurance policy.

There have been multiple cases involving this contract language, and Indiana courts have split in their interpretation of that clause.  The major issue?  Interpreting the scope of the waiver.  Or, in other words, what claims have been waived and what claims are still viable.  Several court decisions from across the country (Indiana included) have been divided into two camps on the issue of the scope of the waiver.

In the first camp, some courts have interpreted the waiver of subrogation to hinge on a “work vs. non-work” analysis.  Under that analysis, the waiver would apply to damages to the contractor’s work, but it would not apply to damages to property outside the scope of the contractor’s work.  In the second camp, other courts interpret the waiver of subrogation to hinge on the “any insurance” analysis.  Under this approach, if the damages at issue are covered by “any insurance”, namely property insurance maintained by the owner for the project, then subrogation claims for those damages are waived.

The Indiana Supreme Court has now weighed in on interpretation of the AIA contractual waiver of subrogation clause to provide some clarity on this issue.  In Board of Commissioners of the County of Jefferson v. Teton Corporation, issued on May 13, 2015, the Indiana Supreme Court analyzed the waiver of subrogation clause in the AIA A101-1987 and A201-1987 contract forms, and it formally adopted the “any insurance” approach.  The case involved a fire that occurred during renovations to the Jefferson County (Indiana) courthouse.  The Indiana Supreme Court noted that the owner (Jefferson County) procured an “all risk” property insurance policy that covered not only the existing property at the courthouse, but also the ongoing construction operations.

The parties apparently agreed that the damages at issue in the fire were all covered and paid by the property insurance company for Jefferson County under the “all risk” insurance policy.  Nonetheless, the owner and its insurance company argued that the waiver of subrogation only applied to damages to the contractor’s work, since the construction contract only required the owner to purchase builder’s risk insurance for the construction work at issue.  However, the Indiana Supreme Court noted that the waiver of subrogation was broader than just the coverage for the “work” on the project, and specifically applied to all damages paid by under any property insurance policy maintained by the owner.  Even though the owner had broader insurance coverage than required under the contract, the waiver still applied to all covered damages, since the waiver language specially applied to damages “to the extent covered by property insurance obtained pursuant to this Paragraph 11.2 or other property insurance applicable to the Work…”  The Supreme Court also noted that this language clearly only applied to property insurance maintained by the owner, and was not so broad to also include damages covered under the liability insurance policies that the parties agreed to maintain for the project.

The takeaway from this case is that contractors, owners, and designers should focus on risk-shifting contract language.  Parties can cover certain risks by agreeing that one party will assume the risk and defend others for any claims that may arise (e.g., indemnity clauses), and also through agreements to purchase specific insurance products for the project, which shifts the risk to the insurance companies involved.  Where parties have agreed to cover certain risks through insurance, and further where the parties agree to waive claims against each other for claims covered by insurance, the Indiana Supreme Court’s decision makes clear that Indiana law favors enforcement of those waivers.  Further, the waiver language under the typical AIA contract form will be interpreted to cover all damages covered by property insurance, regardless of whether the scope of coverage is broader than what is contractually required.  The policy behind this decision is that Indiana law supports avoidance of protracted litigation for claims where parties have already agreed to waive those claims and to instead cover the risk through property insurance.

All parties involved in negotiation of design and construction contracts should carefully review the insurance requirements in those contracts, and develop an understanding of the scope and purpose of risk shifting clauses such as the waiver of subrogation clause.

Appellate Court Reviews Indiana’s Rules Governing Spoliation of Evidence

By: David L. Simmons

The Indiana Court of Appeals considered the principles governing the spoliation of evidence in the recent case of Wesco Distribution, Inc. v. ArcelorMittal Indiana Harbor, LLC, —N.E. 3rd—, 2014 WL 5819375 (Ind. App.), which was issued on November 10, 2014. In Wesco, ArcelorMittal sued Wesco for breach of implied warranties and breach of contract resulting from the failure of the braking system on an overhead crane. The failure of the crane caused molten iron to be spilled across the floor of the plant, igniting a fire that caused extensive damage to the facility. A jury found in favor of ArcelorMittal and awarded damages in the amount of $36,134,477. Wesco appealed the verdict on several grounds, including the failure of the trial court to impose sanctions on ArcelorMittal for destruction of evidence that was critical to its defense.

After the accident, ArcelorMittal removed fractured blowout coils from the crane and subsequently determined that the blowout coils likely caused the failure. Wesco was able to inspect the blowout coils during its investigation and preparation for trial. However, ArcelorMittal did not photograph or otherwise document the blowout coils in place within the contactors before removing them. The controller was disassembled after the incident, and several internal components were replaced and discarded. In addition, Wesco failed to document the condition of the controller, contactors, and mechanical brakes at the time of the incident. While the crane was down due to the incident, ArcelorMittal employees performed routine periodic maintenance on the brakes.

ArcelorMittal filed a motion for sanctions against Wesco pursuant to Trial Rule 37, claiming that it was prejudiced by virtue of not being able to examine the discarded parts. The trial court declined to impose sanctions on Wesco and further declined to instruct the jury regarding inferences that could be drawn.

On the issue of spoliation, the Indiana Court of Appeals upheld the decision of the trial court, finding that sanctions against ArcelorMittal were not appropriate under the circumstances. In reviewing the appeal, the court noted that Trial Rule 37 provides a trial court with all the necessary tools to enforce compliance with the discovery process. This rule provides that a trial court may impose a range of sanctions, including dismissal, if a party fails to comply with an order to compel discovery. The determination of the appropriate sanction is left to the trial court’s discretion, and an appellate court reviews the decision only for an abuse of that discretion. Although there was no apparent order that Wesco was seeking to enforce, it is undisputed that the evidence at issue had been altered and disposed of by ArcelorMittal.

The Court stated that there must first be a determination that spoliation of evidence occurred before reaching the issue of possible sanctions. Spoliation of evidence is the intentional destruction, mutilation, alteration, or concealment of evidence. Relying on the opinion of the Indiana Supreme Court in Howard Reg’l Health Sys. v. Gordon, 952 N.E.2d 182 (Ind., 2011), the court described various principles that govern the spoliation of evidence and the sanctions that may be applied.

The courts uniformly condemn spoliation, and the intentional destruction of potential evidence in order to disrupt or defeat another person’s right of recovery is highly improper and cannot be justified. Once spoliation is found, potent responses exist under Indiana Trial Rule 37(B) authorizing trial courts to respond to discovery violations with such sanctions “as are just,” which may include dismissal of all or any part of an action. Determining whether sanctions are warranted and, if so, what they should include, requires a court to consider both the spoliating party’s culpability and the level of prejudice to the party seeking discovery.

Culpability can range along a continuum from destruction intended to make evidence unavailable in litigation to inadvertent loss of information for reasons unrelated to the litigation. Prejudice can range along a continuum from an inability to prove claims or defenses to little or no impact on the presentation of proof. A court’s response to the loss of evidence depends on both the degree of culpability and the extent of prejudice. Even if there is intentional destruction of potentially relevant evidence, the sanctions may be limited if there is no prejudice to the opposing party. In addition, even if there is an inadvertent loss of evidence but severe prejudice to the opposing party, that too will influence the appropriate response, recognizing that sanctions require some degree of culpability.

The Court concluded that ArcelorMittal did not destroy the evidence for an improper purpose. Both parties’ witnesses agreed it would have been better for their evaluation to have the additional evidence, but the Court of Appeals upheld the trial court’s finding that ArcelorMittal did not realize the importance of the evidence for some time after it was altered and discarded, and therefore did not act with intent to prejudice Wesco in this litigation. Moreover, because the evidence was destroyed before either side had a chance to inspect it, the prejudice to the parties was approximately equal: Wesco could not conclusively prove the screws on the controller were tight on the day of the incident, and ArcelorMittal could not prove they were loose. Both sides were required to prove their theory of causation by logical inference and deduction. Therefore, the trial court did not abuse its discretion in declining to sanction ArcelorMittal for the failure to preserve the evidence, especially with the extreme sanction of dismissal.

The legal doctrine of spoliation has become a significant threat to destroy or limit claims in litigation over the last 10 years. While Indiana has not yet recognized a first-party duty to preserve evidence, parties should make reasonable efforts to preserve evidence that relates to any litigation in which they may be involved, whether as a plaintiff or a defendant. The failure to do may result in having valuable claims and defenses limited or dismissed altogether.

This case is a good reminder that any party involved in a claim or lawsuit should consult with their attorneys regarding the protection of potential evidence. The party should meet with counsel early on to prepare a preservation plan for all relevant evidence and determine the length of time that may be required to allow inspection by third parties.

Waiver of Subrogation Applies to All Damages, Regardless of Whether Owner Secures Required Insurance

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

The Indiana Court of Appeals, in a split decision, recently held that a waiver of subrogation clause in a construction contract serves to waive all claims for damage, where those damages are covered—or should be covered—by the contractually required insurance to be procured by the Project Owner.  In The Board of Commissioners of the County of Jefferson v. Teton Corporation, the Indiana Court of Appeals addressed interpretation of several American Institute of Architect (AIA) contract provisions relating to the procurement of insurance by the owner and the associated waiver of claims for damages covered by that insurance.

The case involved a repair and renovation project to the Jefferson County courthouse in Madison, Indiana.  During the course of the project, a fire occurred that caused over $6 Million in damages.  The property insurer for the Project Owner made payments for damages caused by the fire.  The Project Owner then sued several of the contractors involved in the project, alleging negligence, breach of implied warranties, and breach of contract in relation to the fire and the resulting damages.

The Project Owner’s contract was an AIA contract form that included several provisions relating to insurance.  The contract provided:

  •  The Project Owner would purchase and maintain property insurance;
  •  The property insurance would be “all risk” to insure against the perils of fire;
  •  If the Project Owner decided not to purchase the required insurance, then the Project Owner agreed to notify the Contractor, so that Contractor could procure the insurance and pass the cost to the Project Owner through a Change Order;
  •  The Project Owner and Contractor mutually waived all rights against each other for damages caused by fire or other perils “to the extent covered by property insurance obtained pursuant to [the Contract]…”

The Project Owner argued that (1) the waiver of subrogation only applied to the “Work” as defined in the construction contract, and not to “non-Work” or other property not part of the project; and (2) the damages sought against the contractors included both damages covered by the Project Owner’s property insurance and damages that were not covered by the property insurance.

On the first argument, the Indiana Court of Appeals held that the “majority view” on application of the waiver of subrogation clause in the AIA contract is that the waiver applies to all damages covered by property insurance, regardless of whether those damages were to the “Work” or “non-Work” on the Project.  The Court noted that requiring the parties to determine what damages were “Work” and what damages were “non-Work” would lead to more litigation and expenses for the parties.  Therefore, the Court settled on what it deemed to be the clear intent of the AIA waiver of subrogation clause—to waive all claims for damages, where those damages were covered by property insurance, without requiring proof of whether the damages were to the “Work” or to other property.

On the second argument, the Court held that the Project Owner was contractually required to obtain “all risk” insurance for the Project, or, if it chose not to purchase that insurance, then to notify Contractor so that Contractor could procure the insurance.  The Court stated that the insurance procured by the Project Owner was property insurance, but was not builder’s risk insurance with the required “all risk” coverage.  The Court further stated that the Project Owner breached the contract by failing to notify the Contractor that it had not procured the insurance required under the contract.  In light of this breach, the Court held that since the Project Owner did not secure the contractually-required insurance, that it still waived its subrogation rights for any loss described within the AIA contract provisions.

Procedurally, the parties to the The Board of Commissioners of the County of Jefferson v. Teton Corporation case may seek a rehearing or even review by the Indiana Supreme Court.  We will have to wait and see whether there are any further proceedings on this issue.  But in the meantime, the lesson for project owners, contractors, and architects is clear:  Be very aware of the insurance requirements in your contracts, and make sure that you (and the other project participants with whom you are dealing) have the necessary insurance policies and coverages in place.  While the waiver of subrogation clause is an important risk sharing tool for the parties, it can have dire consequences for parties that fail to follow the insurance requirements in the contract.

The Fine Line Between Conditional Permits and Governmental Takings

By: Erik S. Mroz

Property owners and developers take notice.  The recent U.S. Supreme Court decision in Koontz v. St. Johns River Water Management District (June 25, 2013) has broadened a property owner’s right to bring Constitutional challenges to common conditions found in land-use and development permits.

In Koontz, a property owner sought to develop a 3.7-acre portion of a 14.9-acre tract of land located in Florida.  The property contained wetlands areas making the project subject to the permitting requirements of both the Florida Water Resources Act and the Warren S. Henderson Wetlands Protection Act.  Taken together, these statutes allow the government to impose permitting conditions in order to mitigate the risk of damage to wetlands.  While the permitting requirements at issue in Koontz arise under Florida law, the U.S. Supreme Court’s opinion is not specific to Florida and has national implications.

In 1994, the property owner applied for the requisite permits to begin the project.  To mitigate environmental effects caused by the development, the owner proposed deeding an 11-acre section of the 14.9-acre tract to the government as a conservation easement.  The government responded that the 11-acre conservation easement was inadequate and countered that it would approve the permit only if the owner agreed to one of two alternatives: (1) The owner agrees to reduce the size of the development to 1 acre and deed the remaining 13.9 acres to the government as a conservation easement; or (2) The owner could proceed with the 3.7-acre development with the 11-acre conservation easement, as originally proposed, but only if the owner also agrees to fund improvements to government-owned land several miles away.

The owner rejected the government’s mitigation demands as excessive and filed suit under Florida law, which allows owners to recover “monetary damages” if an agency’s action is “an unreasonable exercise of the state’s police power constituting a taking without just compensation.”  This is a state law variant of the Fifth Amendment’s “takings” clause:

No person shall be … deprived of life, liberty, or property without due process of law; nor shall private property be taken for public use, without just compensation.

Two previous U.S. Supreme Court rulings have defined the permissible scope of land-use conditions under the federal “takings” clause.  In Nollan v. California Coastal Comm’n., 483 U.S. 825 (1987), and Dolan v. City of Tigard, 512 U.S. 374 (1994), the Court held that “a unit of government may not condition the approval of a land-use permit on the owner’s relinquishment of a portion of his property unless there is a ‘nexus’ and ‘rough proportionality’ between the government’s demand and the effects of the proposed land use.”

In Koontz, the U.S. Supreme Court was faced with a different question that was not expressly answered by Nollan and Dolan.  As noted by Justice Alito, writing for the majority:

The [government] believes that it circumvented Nollan and Dolan because of the way in which it structured its handling of a permit application submitted by [the property owner]…  The [government] did not approve his application on the condition that he surrender an interest in his land.  Instead, the [government], after suggesting that he could obtain approval by signing over such an interest, denied his application because he refused to yield.

Despite the government’s attempt to side-step the Constitution, the U.S. Supreme Court found that the government’s action was subject to the “nexus” and “rough proportionality” requirements of Nollan and Dolan.  Again, Justice Alito, writing for the majority:

We have said in a variety of contexts that “the government” may not deny a benefit to a person because he exercises a constitutional right . . . Those cases reflect an overarching principle, known as the unconstitutional conditions doctrine, that vindicates the Constitution’s enumerated rights by preventing the government from coercing people into giving them up.

* * *

Nollan and Dolan “involve a special application” of this doctrine that protects the Fifth Amendment right to just compensation for property the government takes when owners apply for land-use permits.

                                                                          * * *

Nollan and Dolan . . . allows the government to condition approval of a permit on the dedication of property to the public so long as there is a “nexus” and “rough proportionality” between the property that the government demands and the social costs of the applicant’s proposal.  Our precedents thus enable permitting authorities to insist that applicants bear the full costs of their proposals while still forbidding the government from engaging in “out-and-out . . .  extortion” that would thwart the Fifth Amendment right to just compensation.

In other words, under Nollan and Dolan, a government can require an exaction of property as part of its approval of a land-use permit.  The government, however, must be able to show that there is a nexus between the exaction and the proposed development.  Any exaction must be proportional to the impact of the project.  Otherwise, the permit conditions rise to the level of a Fifth Amendment taking and the government is constitutionally required to provide just compensation.

Koontz broadens the holdings of Nollan and Dolan to situations where the government denies a permit because the owner refuses to accede to the government’s demands:

The principles that undergird our decisions in Nollan and Dolan do not change depending on whether the government approves a permit on the condition that the applicant turn over property or denies a permit because the applicant refuses to do so.

Koontz further broadens the holdings of Nollan and Dolan to situations where the government is demanding a payment of money in lieu of surrendering property:

Such so-called “in lieu of” fees are utterly common place, and they are functionally equivalent to other types of land use exactions.  For that reason . . . so-called “monetary exactions” must satisfy the nexus and rough proportionality requirements of Nollan and Dolan.

Koontz has broadened a land developer’s rights to raise Constitutional challenges to common conditions found in land-use and development permits.  It is unclear how states and local governments might attempt to modify their existing permit systems in light of this decision.  Developers are advised to seek the assistance of an experienced attorney to assist in negotiating permits where the government is demanding an exaction of property or monetary payment in return for a permit approval.

Erik S. Mroz is an attorney with Drewry Simmons Vornehm, LLP and practices in the areas of Environmental Law, Regulatory Matters, Insurance Coverage, and Litigation.  With three offices across the State of Indiana, Drewry Simmons Vornehm, LLP was originally founded as a boutique law firm focusing on the construction industry, including public and private owners, design professionals, general and trade contractors, construction managers, material suppliers, insurers and sureties.  With the growth of the law firm, Drewry Simmons Vornehm, LLP has expanded its legal practice to meet the wide-ranging needs of its clients. To speak with Mr. Mroz or another Drewry Simmons Vornehm, LLP attorney, please call us toll-free at 1 (866) 938-4848.

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 7th 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 7th 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 7th 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 7th 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 7th 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.


Daniel M. Drewry

Daniel M. Drewry

Daniel M. Drewry

About This Blog

The DSV Construction Law Blog is hosted by Daniel M. Drewry. Dan is a Partner with the law firm Drewry Simmons Vornehm, LLP and concentrates his practice in the areas of Construction Law and Litigation, and Labor & Employment Law.

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