Tag: damages

Legal Bites: Negligence and Gross Negligence: What’s the Diff?

Posted on by Beverly Tompkins
legalbites_logo_002a-18

Negligence and Gross Negligence: What's the Diff?

Frankfurt, Germany - September 30, 2022: Building worker on construction site of a skyscraper in the city center of Frankfurt, Germany

We often encounter language in our contracts with clients that includes the legal concepts of negligence and gross negligence. These terms are typically found in the indemnity clause of a contract and can also appear in exclusions in limitation of liability and waiver of consequential damages clauses, but what do they actually mean?

Negligence

The Iegal definition of negligence is made up of four distinct elements. First, there needs to be a duty owed to the party who is claiming negligence. A duty can be established by contract, a duty to exercise reasonable care, and even customary norms. DG's professional services are measured by an industry standard of care which is that degree of care and skill ordinarily exercised by those practicing the same profession, under the same circumstances, and in the same location. In other words, the measure of DG's services is subject to evaluation by its peers.

Second, for negligence to be established there needs to be a breach of a duty owed to the claimant. If a claimant establishes evidence through expert witness opinion that DG's services fell below its standard of care, DG can be found negligent.

Third, a claimant needs to establish that the damages they are claiming were caused by the party they allege was negligent. DG's projects often have over 100 subcontractors working on them, as well as other parties hired directly by our Owner clients. By way of a somewhat silly example, our client's office cleaning vendor should not be held responsible for damages caused by a plumbing contractor's defective installation of plumbing fixtures as the cleaning vendor did not cause the Owner's damages.

Fourth, the claimant must suffer damages to prevail on a negligence claim. A prime example in our business is if DG prepares drawings and specifications for a project and they contain several deficiencies that are not caught until after construction. The Owner in this case would be entitled to recover the monetary damages they sustained in having to pay a contractor to de-install and re-install what was constructed. On the other hand, if the claimant incurs no monetary damages, they cannot prevail on a negligence claim. To illustrate where this might occur is if DG corrects errors and omissions that it catches in its designs before construction at no cost to the Owner and no further damages flow from the same errors and omissions. In this case, the Owner should not be able to recover monetary damages.

Gross Negligence

Gross negligence is also a breach of the duty of care, but unlike ordinary negligence, gross negligence is so severe of a breach that it constitutes recklessness. Reckless conduct implies that a party was aware - or should have been aware - that their actions would harm another person, yet they still chose to act. Gross negligence can best be described as conscious conduct that is so careless that it appears deliberate.

Gross negligence is commonly alleged in cases involving personal injury and fatalities on construction projects. The following case illustrates how a jury found a General Contractor to be grossly negligent when a worker for a glass subcontractor fell ten stories to his death while working on a hospital construction project in Texas. The Court of Appeals affirmed the trial court's award of $7.9 million in compensatory damages and $5 million in punitive damages. The Court concluded that (1) the General Contractor retained the right to control its subcontractor's fall protection measures and thus owed a duty to the worker, (2) the General Contractor's failure to ensure adequate fall-protection measures proximately caused the worker's fall, and (3) the General Contractor was grossly negligent.

The Court found gross negligence on the part of the General Contractor because it would be apparent to anyone in the General Contractor's position that there was an extreme risk of serious injury to anyone working on the tenth floor of the building where the only fall protection observed was a safety belt and lanyard when there should have been an independent lifeline. As further evidence of the General Contractor's gross negligence, a representative for the General Contractor testified that they were aware of the inadequate fall protection used by the worker, but consciously chose to do nothing about it.

Key Takeaway

While DG has an excellent safety program and record and our safety professionals assume great responsibility for the health and safety of persons on our projects, the above case is a stark reminder that if someone is injured or dies on one of our projects, our conduct and practices leading up to the injury or death will be closely scrutinized. Deviations from observing safety rules and regulations, conduct that does not conform to applicable safety policies and procedures (including those of our own), and an attitude of indifference can result in a finding of gross negligence. A gross negligence verdict can result in excessive punitive damages above and beyond direct damages typically associated with ordinary negligence.

Legal Bites: Work Now, Dispute Later

Posted on by Beverly Tompkins
legalbites_logo_002a-18

Work Now, Dispute Later

three worker team working wet cement on floor by use trowel with long Tools spreading poured concrete for strong street after dry.

Who doesn’t like a good story? From time to time, I will attempt to teach our readers about risk management using case law. Most court cases start with a story. In the case of litigation involving construction projects, these stories can be quite familiar to us and relatable to our business.
In this month’s issue of Legal Bites, I share a story from a case about a subcontractor who refused to perform work until they received a written change order. Read on to learn how things turned out for both the subcontractor and general contractor.

The backstory

The case of McCarthy Concrete, Inc. v. Banton Construction Company stemmed from a large train station project in Rensselaer County, NY. Banton was the general contractor. McCarthy was a concrete subcontractor. The bid documents for the project required that concrete be poured. McCarthy’s subcontract excluded “concrete pumping”. However, after the project had already started, McCarthy was informed that the remaining concrete on the project had to be pumped (among other changes).

McCarthy informed Banton that the change from poured to pumped concrete would result in a price increase which Banton did not dispute. However, McCarthy and Banton could not agree on the amount of the price increase. Banton issued a 72-hour notice to McCarthy stating that if McCarthy failed to commence the extra work within the 72 hours, Banton would terminate McCarthy for default. McCarthy refused to proceed with the extra work as directed by Banton without an executed change order. As a result, Banton terminated McCarthy’s contract and retained another concrete sub to complete McCarthy’s scope of work.

Here comes the lawsuit

McCarthy sued Banton for additional compensation, including retainage, and claimed that they had been wrongfully terminated by Banton. Banton asserted a counterclaim against McCarthy for breach of contract and recovery of the costs they incurred completing McCarthy’s work.

The trial court ruled in favor of McCarthy on the basis that the increase in McCarthy’s costs as a result of the change in concrete placement on the project was material. The trial court also dismissed Banton’s counterclaim. Unsurprisingly, Banton was unhappy with these results, so they appealed.

Focusing on the following language of the contract between McCarthy and Banton (which is commonly found in most construction contracts), the appellate court reversed the trial court’s decision.

“[p]ending resolution of any claim, dispute or other controversy, nothing shall excuse [McCarthy] from proceeding with the prosecution of the [w]ork.”

The court held that when McCarthy refused to do the extra work once Banton directed them do to it, McCarthy breached the contract and Banton was in the right to terminate them. The court said in its opinion:

“[McCarthy’s] refusal to perform the changed work without an express agreement as to increased costs has the effect of holding Banton hostage [because] the work, which was part of a much larger project, was stalled.”

So, the court held this way in the interest of economy. Delays are costly and it makes little sense to hold up an entire job fighting over the value of a change order.

The court also granted Banton’s counterclaim, allowing Banton to set off its completion costs against the subcontract retainage due to McCarthy.

Key takeaway

The key takeaway from this case for general contractors and subcontractors alike is that contract language requiring continuation of the work while disputes are resolved means just that. The best practice is to proceed with the work and maintain the right to pursue claims later, if necessary. In other words, work now and dispute later.

Legal Bites: Consequential Damages

Posted on by Beverly Tompkins
legalbites_logo_002a-18

Understanding Consequential Damages

Top view of worker standing by apple fruit crates in organic food factory warehouse.

To fully understand how contracts for DG projects should address consequential damages, it is important to understand what they are and how they differ from direct damages. 

Direct vs. Consequential Damages

arrow_direct - Copy
arrow_consequential - Copy

Direct damages are losses that one would reasonably expect to be incurred by a non-breaching party to a construction contract when the other party breaches the contract. Examples of direct damages include unpaid contract amounts and costs to repair defective work. 

Consequential damages, on the other hand, result from special circumstances that are not usually foreseeable by the contracting parties at the outset of a project. These damages flow indirectly from a breach of contract or performance of services on a construction project. Lost business revenue by an Owner is a good example of a consequential damage.

It is entirely reasonable for DG to contractually assume responsibility for losses that arise directly from our negligence, and we are appropriately insured to do so. However, because of their unpredictable nature and potentially exorbitant cost, we should avoid signing up for consequential damages. The following hypothetical illustrates why:

A Hypothetical Scenario:

Say DG is working on a large greenfield project. We are on budget and on target to complete the project before the end date memorialized in the contract. Equipment is getting delivered and installed. The PM is making vacation plans. Suddenly, a critical piece of product equipment starts malfunctioning. All attempts to fix it fail and the project is veering off schedule.

The Owner sends written notice to the project team informing them that they have been relying on the completion date to go into production and fill an order for their largest customer. The Owner informs the project team that they will hold DG responsible for any and all consequential damages as a result of project delays. The PM checks DG's contract. It does not contain a waiver of consequential damages.

The Owner's damages in this case are consequential in that they do not directly relate to the missed project completion date. Instead, the Owner's damages relate to loss of production. We can generally quantify what an Owner's direct damages might be if our services are negligently performed and need to be re-performed, or the work of our subcontractors is defective and needs to be repaired. However, the losses that the Owner would suffer if they could not make product are a huge unknown and it would be extremely difficult to anticipate DG's potential exposure and insure against such risk. For this reason, we should seek waivers of consequential damages in our contracts.

Contract Tips on Consequential Damages

1. It is critical to have a carefully drafted waiver of consequential damages clause that we can rely on if something goes wrong on a project. The following is an example of a reasonable waiver of consequential damages clause:

Contractor and Owner waive all claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes (1) damages incurred by Owner for losses of use, income, profit, financing, business and reputation, and (2) damages incurred by Contractor for losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work.

2. It is important to understand precisely what damages are and are not waived in a consequential damages clause. It is becoming more common to see exclusions in waivers of consequential damages that effectively render a waiver useless. Watch out for such illusory waivers of consequential damages.

3. Don't forget your subcontracts! DG's standard subcontract forms include a mutual waiver of consequential damages. This is beneficial for both DG and our subcontractors. However, it is important that we align any waiver of consequential damages (or lack thereof) in our agreement with the Owner with our subcontracts.

If we have no waiver of consequential damages in our contract with the Owner, we should not include a waiver of consequential damages in our subcontracts. Why? If a client alleges DG is responsible for consequential damages that arise out of the performance of our subcontractors, DG is responsible for covering the Owner's losses and cannot recoup them from our subcontractors.

If a waiver of consequential damages in our agreement with an Owner is effectively no waiver at all as discussed above, we should flow down the same language to our subcontracts so that there is no gap in what we owe to the Owner and what we can recover from our subcontractors.