D.C. Circuit Favors Contractual Text Over Construction Norms in Design-Build Dispute

D.C. Circuit Favors Contractual Text Over Construction Norms in Design-Build Dispute

by: Anthony Sallah

On June 30, 2017, the D.C. Circuit Court of Appeals affirmed a district court’s grant of summary judgment in favor of an architecture and design firm. The D.C. Circuit held that a general contractor’s breach of contract claim was barred by the statute of limitations, and that the contract’s indemnification clause did not apply as between two contracting parties.

In Hensel Phelps Construction Company v. Cooper Carry, Inc., a design firm initially entered into a design agreement with an owner. Roughly two years later, the owner entered into a design-build agreement with contractor Hensel Phelps and assigned its rights and obligations under the original design contract to Hensel Phelps, with the design firm retaining complete design coordination. Less than six months later, the D.C. Department of Consumer and Regulatory Affairs informed the design firm that its design was not in compliance with the local fire code, which Hensel Phelps contended required significant excess changes in mechanical and electrical scopes.

After unsuccessful attempts to mediate, Hensel Phelps brought the designer to federal court, asserting a breach of contract claim along with an indemnification claim. The district court granted summary judgment for the designer on both issues, holding that the statute of limitations had already run on the breach of contract claim, and that the contract’s indemnification clause only applied to third-party claims. Hensel Phelps appealed to the D.C. Circuit.

On appeal, Hensel Phelps argued that the court should look to the moment of substantial completion of the project to find the first breach. Courts typically use substantial completion when determining first breach in construction contracts. Since substantial completion did not occur until April 2014, Hensel Phelps would not be time-barred from asserting the breach of contract claim. The designer countered that because the original contract was a design agreement, which was assigned to Hensel Phelps by the owner, the statute of limitations tolls from the moment Hensel Phelps accepted the defective designs in October 2010.

The D.C. Circuit stated that it was “unnecessary to wade into this debate.” Instead, the D.C. Circuit analyzed the text of the contract without regard to whether the contract was one of construction or design. The original contract, which Hensel Phelps did not change upon assignment, outlined a dispute resolution procedure the parties were obligated to follow. Since the only prerequisite to the dispute resolution process in the contract was whether there existed a material effect on the cost or progress of the project, the D.C. Circuit determined that Hensel Phelps was able to start that process in 2010 when the designer tendered defective designs.

Furthermore, the D.C. Circuit found that the contract did not contain any language suggesting that substantial completion play any role in dispute resolution. The D.C. Circuit ended its analysis by theorizing that Hensel Phelps must have felt the switch to a design-build agreement would insert the concept of substantial completion into the original contract, but that “this belief was never enshrined objectively in the text.”

Hensel Phelps also argued that the indemnification clause in the original contract was not limited to third-party claims. Looking to D.C. law, the D.C. Circuit found a strong preference for “strict construction of indemnification clauses.” Since the contract did not have “clear and unequivocal intent to include first-party claims,” the D.C. Circuit rejected Hensel Phelps’ argument for its inclusion. The D.C. Circuit also rejected Hensel Phelps’ contention that subcontractor claims passed on by Hensel Phelps were “third-party claims,” while Hensel Phelps’ own general conditions were “first-party claims.”

The case is Hensel Phelps Constr. Co. v. Cooper Carry, Inc., No. 16-7128 (D.C. Cir. June 30, 2017).

2017-07-17T11:35:04+00:00 July 17th, 2017|0 Comments

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