Member Article

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
[email protected]

 

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