HawaiiConstructionLaw.com

Should Liquidated Damages Be Measured Against Actual Or Anticipated Damages? New Hawaii Fed. Case Says Both

In American Electric Co. LLC v. Parsons RCI, Inc., 2015 U.S. Dist. LEXIS
26087, the Hawaii U.S. Dist. Court was asked to rule on a summary judgment motion to eliminate a claim for liquidated damages in a construction project based upon the allegation that, in fact, the complaining party had suffered no damages and therefore, could not claim liquidated damages. 

In analyzing this argument, the court attempted to predict what Hawaii's appellate courts would say on this issue.  While it is not in dispute that under Hawaii law, liquidated damages must bear some relationship to a party's damages, the open question is which damages are to be measured -- actual damages, or anticipated damages?  In other words, if parties anticipate at the time of contracting that they will suffer great damages in the event of delayed completion, but end up suffering minimal or no damages, can they still make a liquidated damages claim? 

In the Parsons case, the contractor argued that in fact the complainant suffered no damages, because it was never itself assessed with any liquidated damages, and in fact received a bonus for completion of the job.  The complainant argued that at the time of contracting, both sides agreed and understood its damages would be great if performance was delayed, and that in fact it did receive a lesser bonus than it would have if the job was completed on time, plus it had to pay certain monies to remedy defective work in order to secure additional time for the contract and avoid its own liquidated damages liability. 

The court found under Hawaii law, it is clear that courts look to actual damages to measure against liquidated damages to determine if they are enforceable.  However, the court also found that Hawaii's courts have never stated that anticipated damages are not to be likewise used as a measure against liquidated damages and that certain cases cites by Hawaii's courts take just such an approach.  Thus, the court looked to both, ultimately finding issues of fact on both such approaches prevented a finding of summary judgment.

For drafting practitioners seeking enforcement of their liquidated damages clauses, this case emphasizes the importance of being able to demonstrate that the liquidated damages number used in the contract was actually discussed, negotiated, and agreed-upon, and not simply plucked from thin air and dropped into the agreement.   Conversely, from the Contractor's side, if you are anxious not to have to pay liquidated damages in the event no delay damages are incurred, you should definitely include such a provision in the contract's liquidated damages clause, i.e.,  "Notwithstanding the above, in no event shall any liquidated damages be sought or obtained in the event no actual damages are suffered."

ICA Decision Doubles Down on Important Finding that a Contractor Assumes the Role of an Insurer If it Contracts to Defend and Indemnify

AIA contract language on indemnification typically requires contractors to hold harmless and indemnify against claims arising out of their performance of work.  Simply translated, this means if an owner is sued and ultimately it is determined that the contractor or its representatives or subcontractors were the source of the suit, the contractor must indemnify the owner for the damages it incurred as a result of being sued. 

 Painful litigation experiences have driven industry participants to routinely attempt to alter this clause to include a simple addition, that contractors must "defend," hold harmless and indemnify... and this simple addition has created a host of issues for unwitting contractees who sign off on this provision without accounting for the potential risk associated with it.  

Newest case in point:  Arthur v. State of Hawaii, et al., Nos. CAAP-13-0000531, 552, and 615 (Haw. Ct. App. February 27, 2015).  In this case, Hawaii's ICA was asked to revisit its Pancakes v. Pomare decision regarding private indemnity agreements, in which the ICA basically held that when a private contractee contracts to "defend" as part of an indemnity agreement, it takes on the role of an insurer who likewise contracts to defend insurers who are sued in civil actions. 

The Arthur case arose out of a wrongful death case in which a homeowner fell down a steep hillside and suffered a mortal head injury.  The homeowner's husband sued, claiming negligence against the State which originally owned the land, the developer who developed it, the designer who designed its improvements, the contractor who graded it, and finally the chain link fence subcontractor who, for $18,000, constructed a two foot high chain link fence at the base of the hill.  In their contracts, all of the parties had signed off on "defend and indemnify" provisions promising to defend against claims arising out of their contracts.  

At issue on appeal were various rulings at the Circuit Court level regarding the effect of these multiple indemnification and duty to defend clauses but for purposes of this post, the case boils down to three important findings.   

Pancakes Is Still The Law:  First, though specifically requested, the ICA refused to reconsider its decision in Pancakes vs. Pomare, which essentially held that when a private party contracts to defend and indemnify, it will be held to the same standards of "defense" as an insurer, meaning the duty will be determined by and enforceable upon, the allegations of the complaint, and not after trial and a determination of fault. This means that, like insurers, if there is even the possibility of a finding against the indemnitor based upon the allegations of the complaint, the indemnitor must defend against the entire complaint.  Industry consternation that private contracting parties are not the same as insurers, i.e. they do not have the capitalization, they are not likewise governed by statute, and most importantly that is not their business, apparently does not and will not sway the court from its original finding. 

Hawaii's Insurance Statute Prohibiting Indemnification for One's Own Negligence, Is Not Very Protective:  the designer in Arthur attempted to point out to the ICA that by putting indemnitors into the shoes of insurers, the court was violating HRS 431:10:222 , which provides that for construction projects, courts will not enforce indemnity agreements where one party claims indemnification for a party's sole negligence.  Focusing on the language "sole negligence," the ICA stated that the plaintiff's complaint did not allege "sole" negligence on the part of the contractor.  Therefore, the designer could not claim the indemnification clause was unenforceable under Hawaii law. 

The duty to defend is not a flow through duty unless specifically contracted to be one:   Despite finding that Pancakes is still governing law and that the duty to defend puts the indemnifier into the same shoes as an insurer who likewise contracts to defend, the ICA was unwilling to assign to the fencing subcontractor a flow through duty to the defend not just the entity with whom it contracted, but the develop and Architect as well, because of flow through provisions in the parties' contracts.  Because the Contractor contracted to defend and indemnify the Owner and because the Designers did likewise, they could not disclaim their responsibility to pay for a portion of the defense.

 

 

The Cautionary Tale Of Drywall

by Christi-Anne H. Kudo Chock

As litigators, it is our job to know what laws apply to your business.  While we are immensely proud of our successes at trial and have our fair share of Perry Mason stories about victorious courtroom performances (My favorite raconteur? Charlie Bocken, who argued and won the landmark property case, Kaiser Aetna v. United States, in the United States Supreme Court), proof of some of our finest work is that we never had to appear in court on a client’s behalf. 

Our advice?  Early consultation is good business.  Lest you characterize that advice as merely self-serving or trite, consider the cautionary tale of drywall.

Sidebar: what is drywall? Find out here. 

The past decade was, in the words of Charles Dickens, the best of times and the worst of times to be in the drywall business.  According to Judge Eldon E. Fallon’s April 2010 decisions in Germano, et al. v. Taishan Gypsum Co. Ltd., et al. (Case No. 09-6687) and Hernandez v. Knauf Gips KG, et al. (Case No. 09-6050), the construction boom between 2000 and 2005 resulted in a shortage of building supplies.  Contractors and developers turned to international suppliers to obtain the materials they needed to keep up with the growing demand for housing.  Increased demand for drywall in particular after Hurricane Katrina hit in 2005, led some suppliers, including Florida-based Banner Supply Company (“Banner”), to sell Chinese drywall manufactured by Knauf Plasterboard Tianjin Co., Ltd. (a subsidiary of the German drywall-conglomerate the Knauf Group).  

As early as 2006, people who owned homes constructed with tainted drywall manufactured in China began reporting noxious fumes that smelled like rotten eggs or fireworks, and that electrical wires, plumbing and ventilation systems continuously failed.  Some even reported severe respiratory problems.

By June 2009, so many lawsuits had been filed that 9 class action suits were consolidated in a Louisiana federal court.  In April 2010, Judge Fallon found that health problems and property damage were tied to high concentrations of sulfur in the tainted drywall.  He ordered that the defendants (manufacturers including the Knauf entities, suppliers, importer/exporters, developers, builders, contractors and installers) remove and replace all of the drywall, as well as appliances, cabinets, electrical wiring, flooring and plumbing, in plaintiffs’ homes. 

Then, in June 2010, a Miami jury rendered a $2.4 million verdict for a Florida family whose dream home had been ruined by tainted drywall.  Armin and Lisa Seifart v. Banner Supply Co. (Case No. 09-38337 CA 01 (42)) was the first drywall jury trial, and only one of many cases brought against Banner.  The writing was on the wall.  Days after documents in the Miami case had been made public by a Florida daily (including a confidential 2006 agreement between Banner and Knauf to remain quiet about tainted drywall), Banner entered into a settlement and agreed to pay $55 million to Florida homeowners. Banner then filed its own cross-claims against Knauf on July 13, 2011, asking that the manufacturer answer for its role in the drywall debacle.  Based on information obtained during discovery, Banner alleges that Knauf executives knew about the sulfur and misrepresented known risks by claiming the smell was “no more than the difference between Chinese natural gypsum plasterboard and synthetic plasterboard.” Banner accuses Knauf of “cowardice and calculus” since the German parent and Chinese subsidiary have claimed they are not subject to U.S. jurisdiction and that no judgment could be enforced outside of the U.S.  

As more of our consumer transactions become global ones, new issues arise regarding the enforceability of contractual expectations and parties’ rights in the event of a breach.  Early consultation might have helped Banner understand the implications of imported drywall containing sulfur that exceeded federal and state regulations, as well as international standards for measuring environmental corrosive, or consider the ramifications of limited legal recourse against Knauf for breach of contract.  Legal consultation might have led to more effective crisis control when the first shipment of drywall arrived from China, or in 2006 when Banner secretly agreed to accept Knauf’s misrepresentations (without conducting its own independent testing) along with a shipment of American drywall in exchange for its silence (Banner replaced some of the tainted drywall for those who had complained but never warned its customer base). 

This cautionary tale is not limited to drywall manufactured in China. At least 97 homeowners in 4 states have joined lawsuits alleging similar claims against U.S. drywall manufacturers, including National Gypsum Company (one of the largest American manufacturers of drywall made with natural and synthetic gypsum). Synthetic gypsum made from coal ash raises new considerations about what laws and regulations should apply to what we can or should do with “recycled waste.”  The U.S. Environmental Protection Agency announced the first-ever national rule to regulate toxic coal ash in May 2010 – well after many of the lawsuits involving American and Chinese drywall had been filed.  Closer to home, a July 29, 2011, article in Pacific Business News reported that one of the business initiatives of newly formed Kokua Renewable Energy, Inc., a company focused on reducing waste accumulation in Hawaii, is to partner with other local organizations to recycle ash from the City and County of Honolulu’s H-Power plant.  

What about insurance? Although the insurers in the Louisiana cases escaped liability under a “faulty materials” exclusion, a Virginia court recently ruled that damage that had resulted from tainted drywall constituted individual “occurrences” covered by a homeowner’s insurance policy.  See Dragas Mgmt. Corp. v. Hanover Ins. Co., 2011 U.S. Dist. LEXIS 80178 (E.D. Va. July 21, 2011).  Damon Key attorney Tred R. Eyerly, follows these issues on his insurance blog, which has been recognized by LexisNexis as one of the top 50 blogs about insurance law. See this post for more. 

The moral of the story?  Early consultation allows you to make an informed assessment of risk, and avoid or prepare for litigation in a manner that makes the most sense for your business.  Let us help you ask and answer the right questions sooner rather than later.