The facts of this case concern a public project (the Project) to renovate a building (the Building) owned by the City of New Orleans (City). The City entered into a construction contract (Construction Contract) with a general contractor, who in turn entered into a subcontract with Meza Services, Inc. (Meza), for demolition work (the Demolition Subcontract). The Demolition Subcontract included the general conditions of the Construction Contract (General Conditions). The City also entered into a design contract (Design Contract) with architect Verges Rome Architects (VRA), who in turn entered into an engineering consultation contract (Engineering Contract) with Morphy Makofsky, Inc. (MMI).
Meza’s employee (Plaintiff) was performing demolition work in a 10-foot by 10-foot cinderblock concrete room with a nine-foot-high concrete slab ceiling. While Plaintiff was performing the work, Plaintiff’s supervisor instructed him to stand on the vault’s ceiling with a hydraulic jackhammer and continue the demolition work. Soon after, the structure caved in, causing injuries to Plaintiff’s neck and back. Plaintiff brought suit directly against VRA and MMI “alleging negligence in the preparation and approval of the design plans and specifications, the failure to design and/or require support for the area being demolished, and the failure to monitor and supervise the execution of the plans to ensure safety at the job site.”
VRA moved for summary judgment, arguing that it owed no duty to oversee, supervise, or maintain the construction site or Plaintiff’s safety. The trial court granted VRA’s motion, but the Louisiana Court of Appeals reversed, finding genuine issues of material fact as to “VRA’s awareness the vault was being demolished in an unsafe manner and that deviations from the relevant contractual provisions/specifications had occurred.” VRA appealed to the Louisiana Supreme Court.
The court began its analysis by stating the “duty owed to an employee of a contractor by an engineer or architect is determined by the express provisions of the contract between the parties.”
Plaintiff’s primary argument was that a provision of the Design Contract requiring VRA make weekly site visits imposed a duty on VRA to “supervise and report any deviations from design specifications to ensure work site safety.” VRA countered that the Design Contract did not make it responsible for any “means and methods of construction and site safety[.]” Rather, VRA argued that the Design Contract only imposed a duty to ensure that the City “will have the building it contracted for.” Agreeing with VRA, the court held that the provision imposed no duty on VRA to ensure the safety of subcontractor employees, but rather was intended to ensure the Building was constructed according to specifications and that the “progress and quality of work” proceeded according to the specifications. Additionally, the court analyzed other contract provisions that clarified the scope of VRA’s duties. In particular, the court relied on a provision of the General Conditions holding that the “undertaking of periodic visits and observations by [VRA] or [its] associates shall not be construed as supervision of actual construction.”
Plaintiff also argued that there was “an extra-contractual duty imposed on VRA, as an architect, to use reasonable care to protect against injury to third parties [Plaintiff] who may reasonably be foreseen to be at risk by deviation from or inadequate supervision of design specifications.” In a footnote, the court stated that it declined to establish an extra-contractual duty owed to Plaintiff by VRA. Specifically, the court stated that it was not bound by lower court decisions purporting to impose such a duty. Moreover, the court also stated that the cases cited by Plaintiff in support of this theory were inapposite because they involved economic harm to contractors resulting from negligent service and not injury to a subcontractor’s employee.
Author’s Comments: When faced with the question of whether an architect owes an extra-contractual duty to contractors or subcontractors with whom they lack privity, some courts have held that architects need to carry out their services within the applicable standard of care. Where this duty is applicable, architects can generally be held liable if a deviation from the relevant standard of care causes harm to third-party persons or property. This standard of care, however, rarely includes the duty to ensure subcontractors perform their work safely, as doing so would likely be a difficult, if not impossible, task for an architect.
Bonilla v. Verges Rome Architects, 382 So. 3d 62 (La. 2024)
Seventh Circuit Grasps to Find “Other Property” Requirement in CGL Policies
In a recent decision issued by the Court of Appeals for the Seventh Circuit, the court determined that severe defects in the welds and curtain walls threatening the integrity of an entire structure did not constitute “property damage” under the relevant insurance policies at issue. The facts of the case begin in 2003, when the City of Chicago entered into a contract (the Construction Contract) with Walsh Construction Company (Walsh) to manage the construction of a canopy and curtain wall system at O’Hare Chicago International Airport. Walsh then entered into a subcontract agreement with Carlo Steel Corporation, who in turn entered into a contract with LB Steel (LB) to fabricate and install steel columns to support the wall and canopy. LB listed Walsh as an additional insured under its three relevant commercial general liability (CGL) policies with insurers St. Paul Guardian Insurance Company (St. Paul), Travelers Property Casualty Company of America (Travelers), and the Charter Oak Fire Insurance Company (Charter Oak) (collectively, the Insurers).
In 2004 and 2005, the City discovered cracks in the welds performed by LB that led the City to question the structural integrity of the canopy system. The City and Walsh entered into a “limited settlement agreement” over these defects and Walsh agreed to conduct repairs at its own expense. The City then brought suit against Walsh for breach of contract and Walsh agreed to pay the City’s damages claims for $10 million (Walsh had tendered his defense to the Insurers when the City brought this action, but the Insurers did not provide a final coverage decision and did not defend). In 2008, Walsh brought suit against LB for breach of contract, professional negligence, and fraud. Walsh prevailed at trial and was awarded $19,187,304. Shortly thereafter, LB filed for bankruptcy and eventually the parties reached a bankruptcy settlement whereby LB provided Walsh with $3,367,350 and a $24,132,650 unsecured claim against LB’s bankruptcy estate. In 2015, the Insurers brought suit against Walsh “seeking a declaratory judgment that LB Steel’s CGL policies do not cover the $19 million judgment against LB Steel or the subsequent bankruptcy settlement.” The federal district court ruled in favor of the Insureds on summary judgment; Walsh then appealed the ruling.
Affirming the ruling of the lower court, the Court of Appeals for the Seventh Circuit determined that the Insurers did not have a duty to indemnify Walsh. The court began its analysis by examining the language of the relevant insurance policies. The St. Paul policy defined “property damage” as “physical damage to tangible property of others.” While the policies of the other Insurers did not include this exact limitation, those policies did include exclusions for “‘[p]roperty damage’ to ‘your product’ arising out of it or any part of it.” Each of the policies defined “your product” as “[a]ny goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by … you.” As such, the court determined that Walsh had to demonstrate “some physical injury to tangible property beyond the steel elements fabricated by [LB].”
Walsh made two primary arguments for why its damages constituted physical injury to “other property.” First, Walsh argued that “once the welding in the columns holding the canopy’s weight cracked, the entire canopy structure became structurally unstable.” The court rejected this argument upon the finding that Walsh presented “no evidence that this ‘structural instability’ had manifested itself in any physical way (other than in the [LB] columns themselves).” Further, the court stated that future property damage does not itself constitute property damage. On this point, the court stated that Walsh was able to take preventive measures to prevent future property damage to “other property.” Thus, according to the court, the only damage that Walsh suffered was economic damage, which was not recoverable under the relevant policies.
Walsh’s second primary argument proposed that the LB defects were “so intertwined with the canopy structure that damage to the steel columns necessarily means damage to the canopy as a whole.” In support of this argument, Walsh relied on an opinion issued by the Illinois Appellate Court holding that property damage could include property that has “been diminished in value or made useless irrespective of any actual physical injury to the tangible property.” Rejecting this argument, the Seventh Circuit focused on the fact that the relevant CGL policies in the cited opinion, unlike the policies in the instant case, did not require “physical” injury to tangible property. The opinion cited by Walsh also held that when the definition of property damage requires physical injury, property damage “does not take place upon the occurrence of an economic injury, such as diminution in value.” Finally, the court distinguished between the defects at issue in the cited opinion and the defects caused by LB. In the cited opinion, the defects were economically impossible to fix. In the instant case, repairs to the defects were economically viable, as evidenced by Walsh’s own mitigation efforts.
Author’s Comments: In a case discussed in the last edition of this column, the Illinois Supreme Court recently affirmed that “property damage” in the context of CGL policies does not require damage to “other property,” but instead, like any contract, the terms at issue should be interpreted by the policy language itself. This case shows that, in some cases, courts may still apply the “other property” requirement where the contract language permits.
St. Paul Guardian Ins. Co. v. Walsh Constr. Co., 99 F.4th 1035 (7th Cir. 2024)
Supreme Court Adds Needed Clarity to the Federal Arbitration Act in Unanimous Decision
It is rare for a non-construction case to merit inclusion in this column, but such cases can make the cut when they clarify longstanding, frequently recurring issues related to arbitrability. In the following case, the US Supreme Court clarified that, when a case is referred to arbitration by a federal court, the underlying case should be stayed rather than dismissed.
The statutory text of § 3 of the Federal Arbitration Act (FAA) provides that when a court issues an order compelling arbitration, the court “shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement[.]” Despite the plain language of the statute requiring a “stay,” the Ninth Circuit, in contravention to the majority of federal circuit courts, interpreted the FAA to allow for the dismissal of a case without prejudice after an order compelling arbitration in lieu of a stay. In a recent opinion rejecting the Ninth Circuit’s interpretation, the Supreme Court held that the statutory text, structure, and purpose of the FAA all point to the conclusion that federal courts must stay an underlying proceeding after issuing an order compelling arbitration.
The facts of the dispute in question involved delivery drivers (Petitioners) who sued their former employer (Respondents), an on-demand delivery service operator, alleging violations of state and federal employment law. The action was originally brought in state court and, after its removal to federal court, Respondents moved to compel arbitration and dismiss the action. Petitioners agreed that their claims were subject to arbitration but argued that dismissal was not proper under the FAA’s plain statutory text requiring courts to stay a proceeding in the event an order compelling arbitration was issued. Siding with Respondents, the federal district court dismissed the action without prejudice and Petitioners appealed. The Court of Appeals for the Ninth Circuit also sided with Respondents under the theory that, notwithstanding the plain language of the FAA, the Ninth Circuit was bound by circuit precedent recognizing the district court’s “discretion to dismiss.” Petitioners again appealed and the Supreme Court granted certiorari.
Reversing the decisions of both lower courts, the Supreme Court began its statutory interpretation by focusing on the plain language of the relevant text of § 3 of the FAA. First, the court noted that the use of “shall” in the text “creates an obligation impervious to judicial discretion.” Thus, because “§ 3 says that a court ‘shall . . . stay’ the proceeding, the court must do so.” Respondents argued, however, that “stay” means only that a court must stop litigation, which may be accomplished through dismissal. Rejecting this argument, the court analyzed the meaning of “stay” and found that, even at the time of the FAA’s enactment, it meant the “‘temporary suspension’ of legal proceedings, not the conclusive termination of such proceedings.” Moreover, the Court found that the FAA’s text ensures that parties can return to federal court if the arbitration breaks down. As such, Respondents’ interpretation failed because the dismissal of actions denies parties the “return ticket” to federal courts.
The Court then moved to an analysis of the structure and purpose of the FAA, again finding that both supported a conclusion that federal courts must stay proceedings after issuing an order compelling arbitration. As to the structure of the FAA, the Court stated that upon the denial of a request for arbitration, § 16 of the FAA authorizes an immediate interlocutory appeal. On the other hand, where a court issues an order compelling arbitration, the order compelling arbitration is not immediately appealable. According to the Court, this structure reflected the purpose behind the FAA, which is “to move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible[.]” Respondents’ position that dismissal was appropriate would frustrate this purpose because the dismissal of a suit gives rise to the right of an interlocutory appeal (which appeal is avoided by staying an action instead of dismissing it).
Finally, the Court held that staying rather than dismissing suits comports with the supervisory role that the FAA places upon courts. Specifically, the FAA provides mechanisms for courts to assist parties in arbitration by appointing an arbitrator, enforcing subpoenas issued by arbitrators to compel testimony or produce evidence, and facilitating recovery on an arbitral award. Therefore, keeping suits on the docket facilitates these supervisory protections and avoids the unnecessary burdens that would arise if parties were forced to bring a new suit and pay a new filing fee to invoke them.
Author’s Comments: As readers will be well aware, arbitration is a common dispute resolution mechanism to resolve claims arising from construction projects. Arbitration provides many benefits in the construction context, particularly the ability to select an arbitrator who is familiar with the nuances of construction and construction law doctrines. Despite this, courts can still play a crucial role in ensuring arbitration is fair, efficient, and final. As such, the Supreme Court’s unanimous decision holding that federal courts must stay proceedings after issuing an order compelling arbitration is an important step in ensuring parties engaged in arbitration have access to the courts without wasting resources. Moreover, the decision is also important in that it simply provides clarity and finality to a recurring issue in construction-related disputes.
Smith v. Spizzirri, No. 22-1218, 2024 WL 2193872 (U.S. May 16, 2024)