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Construction Law: Summary of Va. State Law Developments, Fall 2010

9/5/2011

Recently, the Supreme Court of Virginia issued two decisions which have some potentially far-reaching implications for construction and development contracts. First, the Supreme Court issued an opinion in Uniwest Construction, Inc. v. Amtech Elevator Services, Inc., 280 Va. 428, 699 S.E.2d 223 (2010), which involved several issues regarding the scope and effect of certain indemnification provisions typically seen in development and/or construction contracts. Second, the Supreme Court issued an opinion in Commonwealth v. AMEC Civil, LLC, 280 Va. 396, 699 S.E.2d 499 (2010), which involved an interpretation of (1) notice requirements in public contracts and (2) differing site conditions clauses in construction contracts.

Uniwest Construction v. Amtech Elevator Services

In Uniwest, the parties appealed from a trial court order, raising questions concerning the scope and effect of indemnification provisions in a construction subcontract. Uniwest Construction, Inc. (“Uniwest”) was the general contractor on a project owned by Fountains at Logan Square, LLC (“Fountain Square”). Uniwest hired Amtech Elevator Services, Inc. (“Amtech”), as a subcontractor responsible for modernization of three existing passenger elevators and installation of a new service elevator. Two employees of Amtech were working on a scaffold in an elevator shaft when the scaffold collapsed, causing severe injuries to one of the workers and causing the death of the other. The surviving worker and the estate of the deceased worker (the “Injured Workers”) filed suit and obtained a settlement with Uniwest and its insurers for $9,500,000.00. 

The construction contract between Fountain Square and Uniwest (the “Prime Contract”) contained a provision from form American Institute of Architects documents which obligated Uniwest to indemnify Fountain Square “from and against claims . . . from performance of the Work . . . but only to the extent caused in whole or in part by negligent acts or omissions of [Uniwest, the subcontractors, or anyone employed by them].” (“Paragraph 3.18.1”) The Prime Contract also obligated Uniwest to require each subcontractor to be bound to Uniwest by the terms of the prime contract and to assume the same obligations and responsibilities toward Uniwest that Uniwest assumed towards Fountain Square.

By its terms, the subcontract between Uniwest and Amtech incorporated the Prime Contract, evidenced by a provision by which Amtech agreed “to be bound to Uniwest by all the terms of the [Prime Contract] and to assume towards Uniwest all of the obligations and responsibilities that Uniwest has . . . assumed toward [Fountain Square].” (“Paragraph 3”) The subcontract also required Amtech to defend and indemnify Uniwest “for any and all damages or injury of any kind or nature whatever . . . to all persons . . ., whether or not such claim(s) are based upon the negligence of Uniwest or [Fountain Square].” (“Paragraph 10”) Finally, the subcontract required Amtech to conduct the elevator work in accordance with specification prepared by Zipf Associates, Inc. (the “Zipf Specifications”), which specifications required Amtech to name Uniwest as an additional insured to its insurance policies. 

Amtech was the insured in several insurance policies. First, Amtech had a commercial general liability insurance policy from Continental Casualty Company (the “Continental Policy”) with a $1,000,000.00 coverage limit, the first $500,000.00 of which was a self-insured retention managed by an Amtech-related entity. The Continental Policy included a provision which stipulated that a person or organization that Amtech was required to insure and which Amtech inadvertently failed to add as a named insured to the policy was considered an insured under the policy. Second, Amtech had a commercial umbrella insurance policy from AIU Insurance Company (the “AIU Policy”) with a $25,000,000.00 coverage limit. The AIU Policy insured any entity covered by the Continental Policy (“Subdivision E-4”) and any person Amtech was required to provide insurance by virtue of any written insured contract (“Subdivision E-7”).

The issues before the Supreme Court arose out of AIU’s refusal to defend and indemnify Uniwest under the AIU Policy. Uniwest filed suit against Amtech alleging that Amtech breached its duty to defend and indemnify Uniwest for the damages sustained by the Injured Workers. Subsequently, Amtech and AIU filed a complaint seeking a declaratory judgment that they were not liable to Uniwest “in any amount or on any basis.”

The parties disagreed over whether Paragraph 10 of the subcontract was enforceable. Virginia Code § 11-4.1 provides that any provision in any construction contract by which a person purports to indemnify another party for claims caused solely by the negligence of the other party is void. Section 11-4.1 does not apply, however, to an insurance contract by an admitted insurer. Uniwest advanced two arguments in support of its position that Paragraph 10 was not void: (1) that the accident for which it sought indemnification was not the sole result of Uniwest’s negligence; and (2) that the admitted insurer exception applied in this case. The Court rejected both of these arguments. As to the first argument, the Court observed that Paragraph 10 applied broadly, and by its precise terms, required Amtech to indemnify Uniwest whether an accident was caused solely by Amtech’s own negligence or whether an accident was caused solely by the negligence of Uniwest. The Supreme Court held that §11-4.1 requires the Court to look at the contractual provision at issue, not the circumstances under which the provision is sought to be enforced. Because Paragraph 10 was written broadly enough to require indemnification where a claim was based on negligence on the sole part of Uniwest, the provision was held to be void ab initio, regardless of whether the claims were in fact caused by the joint negligence of the parties. As to the second argument, the Court held that Amtech was not an admitted insurer.

The parties also disagreed over whether Paragraph 3.18.1 of the Prime Contract required Amtech to indemnify Uniwest. The Court held that the plain meaning of Paragraph 3 was that Amtech had the duty to defend and indemnify Uniwest to the same extent that Uniwest agreed to defend and indemnify Fountain Square. As a result, the Court held that Amtech had a duty to indemnify Uniwest for the claims of the Injured Workers. Amtech, however, argued on appeal that the provisions of the prime contract were incorporated into the subcontract and applied only to the extent not otherwise modified by the subcontract. Because Paragraph 10 modified Paragraph 3.18.1, Amtech argued that it was not required to indemnify Uniwest pursuant to Paragraph 3.18.1. The Court did not consider this argument because it was not raised at the trial court level. However, the Court suggested that, because Paragraph 10 was declared void ab initio, it could not have modified Paragraph 3.18.1. Thus, the door was left open for this issue to be considered in the future.

Finally, the parties disagreed over whether AIU had a duty to defend and indemnify Uniwest. AIU argued that neither Subdivision E-4 nor Subdivision E-7 of the AIU Policy required it to indemnify Uniwest because the subcontract did not require Amtech to provide insurance to Uniwest. The Court disagreed, observing that the Zipf Specifications, which required Amtech to name Uniwest as an additional insured under its policies, were incorporated into the subcontract. AIU argued that the Zipf Specifications were incorporated for the limited purpose of providing the technical specifications by which Amtech was to perform its work. The Court disagreed because the subcontract provided that the Zipf Specifications were “incorporated . . . and made a part of [the subcontract] for all intents and purposes.” As a result, the Court’s previous holding in VNB Mortgage Corp. v. Lone Star Industries, Inc., 215 Va. 366, 209 S.E.2d 909 (1974), finding limited-purpose incorporation, was distinguished and held to be inapplicable to the subcontract. Because VNB Mortgage was carefully distinguished, however, this decision leaves the door open to carefully crafted provisions allowing for limited incorporation of specs requiring the provision of insurance by the subcontractor. 

In summary, the Uniwest decision makes clear that form provisions which require a person to indemnify for the negligence of another party must be tweaked during drafting if such provision is going to be effective. The Uniwest decision also makes clear that contractors and subcontractors must be especially mindful on the front end of precisely what provisions and requirements are being incorporated into a subcontract by reference to spec sheets and other supporting documents. If nothing else, the Uniwest decision should raise flags to subcontractors bidding on projects concerning the existence and scope of indemnification of the contractor and the scope of coverage in its own policies which might incidentally benefit the contractor. 

Commonwealth of Virginia v. AMEC Civil, Inc.

In AMEC, the Supreme Court faced several issues related to notice, differing site conditions, and damages common to public contracts. AMEC successfully bid on a contract with VDOT for construction of the Route 58 Clarksville Bypass in Mecklenburg County, the central component of which was a bridge spanning Kerr Lake (“Bridge 616”). The projected completion date of the project was November 1, 2003, but the construction was not substantially completed until June 2005. The delay was primarily attributable to elevated water levels in Kerr Lake and to difficulties in construction of concrete-filled shaft forming the foundation of Bridge 616. In May 2006, AMEC submitted an administrative claim under the contract seeking nearly $25,000,000.00 in additional compensation. After VDOT denied the claim, AMEC filed a breach of contract action against VDOT pursuant to Virginia Code § 33.1-387. 

Before discussing the specific claims for additional compensation made by AMEC, the Court looked to the language of § 33.1-387 and clarified the statutory requirements. Section 33.1-387 provides government contractors the right to file a civil action for any claim under a public contract, provided that a claim is submitted the VDOT “within the time and as set out in § 33.1-386.” The Court interpreted the time-manner requirement to be a prerequisite to filing suit against the Commonwealth under a public contract. As a result, the Court observed that notice given under § 33.1-386 is an element of a prima facie case brought under § 33.1-387.

Construing the language of the statutes strictly, the Court observed that an administrative claim must set forth the facts upon which the claim is based, and the Court observed that the contractor must have provided clear, written notice of its intention to file a claim at the time of the occurrence or beginning of the work on which the claim is based. The Court held that failure to meet these requirements would bar suit under § 33.1-387. The Court also held that actual notice provided no substitute to the strict requirements of § 33.1-386. The Court concluded that written minutes of meetings memorializing oral notice of a claim do not fulfill the written notice requirement. 

Among the damages AMEC sought were expenses resulting from accelerated efforts to meet contractual timelines. The Court adopted the lower courts’ findings that AMEC first gave VDOT notice of its intent to file a claim for its acceleration efforts in April 2004. As a result, the Court held that AMEC was entitled to acceleration damages only for work performed after notice was given. While AMEC tried to recover pre-notice expenses by characterizing its acceleration damages as continuing in nature, the Court allowed only the damages incurred after notice was given.

AMEC also sought damages resulting from the delays caused by differing site conditions. The contract contemplated routine fluctuations in the water levels at Kerr Lake, and AMEC planned its work accordingly, expecting high water periods preventing most work on Bridge 616 from February through June of each year. In 2003, however, the lake water level remained high for six months, substantially delaying construction of Bridge 616. VDOT issued two work orders extending the project completion date, but VDOT denied AMEC’s claim for delay damages as a result.

AMEC sought to recover the delay damages asserting that they were causes by differing site conditions. Specification § 104.03 of the contract, entitled “Differing Site Conditions,”  provided for additional compensation to AMEC when either:  (1) subsurface or latent physical conditions differed materially from those indicated in the contract (“Type I”); or (2) unknown physical condition of an unusual nature differing materially from those provided for in the contract are encountered (“Type II”). VDOT argued that the high water levels were not a Type I differing site condition because they did not differ from the contractual indications, as no baseline or range of fluctuations was established in the contract, and VDOT argued that the high water levels were not a Type II differing site condition because fluctuating water levels was a known, predictable condition.

The Court observed that a contractor must show that (1) the conditions indicated in the contract (2) differ materially from those it encounters in order to show a Type I differing site condition. For Type II, the Court observed that a contractor must show that the encountered condition is one that could not be reasonably anticipated from review of the contract documents. The Court disposed of AMEC’s argument that the water levels were a Type I differing condition because the water levels were not “a subsurface or latent physical condition.” However, the Court observed that AMEC contemplated routine water fluctuations after consulting with available historical water level information, and, based on that review, the sustained high levels were not a condition capable of reasonable anticipation. As a result, the Court held that the high levels constituted a Type II differing site condition.

The parties also disagreed as to whether AMEC was entitled to cost marks ups as part of its delay damages related to differing site conditions. Because the contract provided for mark ups either for “extra work” or “force account work,” AMEC tried to fit the additional work caused by different site conditions into both of those categories. “Extra work” was defined in the contract as an “item of work that is not provided for in the contract as awarded but that is found to be essential to . . . fulfillment of the contract,” and “force account work” was defined in the contract as “prescribed work” or work required by VDOT to be done on a force account basis. Because the character of the work was anticipated under the contract, and because VDOT did not prescribe additional work or require work to be done on a force account basis, the Court held that AMEC was not entitled to cost mark-ups for the delay damages resulting from differing site conditions. 

Finally, AMEC argued that VDOT was responsible for the payment of pre-judgment interest, and VDOT defended this claim by asserting that sovereign immunity barred such damages. The Court held that pre-petition interest was a distinct measure of damages, and though the Commonwealth is liable for contractual debts to the same extent as private citizens, where there is no explicit contractual or statutory waiver of sovereign immunity for pre-judgment interest, no such damages are available against the Commonwealth on contract claims. 

By AMEC, the Supreme Court announced that it will continue to strictly adhere to the notice requirements set forth in §§ 33.1-386 and 33.1-387. Actual notice will not provide a substitute for timely written notice, and creative characterizations of damages to circumvent the requirements will be viewed skeptically. More, the Supreme Court signaled that it will allow a contractor to recover damages for differing site conditions when the differing conditions are outside the scope of those capable of reasonable anticipation even when the conditions are of a type directly contemplated by the contract. Finally, the Supreme Court held that parties cannot recover pre-judgment interest from the Commonwealth unless it obtains an explicit waiver of sovereign immunity for that purpose by contract or by statute.

If you have any questions, please contact: Spilman Construction Practice Group
Travis A. Knobbe
540.512.1824
tknobbe@spilmanlaw.com

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Michael J. Basile / Responsible Attorney
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