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Designer's Breach Occurred When Contractor 'Discovered' It

Wednesday, August 30, 2017 05:18 am

 

According to the finding in Hensel Phelps Construction Co. v. Cooper Carry Inc., 2017 U.S. App. Lexis 11671 (D.C. Cir. June 30, 2017), a design-build contractor should have sued for damages as soon as it took over a project and discovered that an architect's defective design would cost $8.5 million to remedy. Nevermind that to do so would have meant suing its own design subcontractor for contract breach a year before project completion---perhaps even before full knowledge of the impact of the defects.

Mid-project conversion from standard contract to design-build

In 2008, under an initial $14.3 million agreement with project owner Marriott International (Marriott), architect Cooper Carry, Inc. (Cooper Carry) agreed to design a Washington D.C. hotel and then later, under a second contract, to perform construction administration. Cooper Carry progressed sufficiently with its design to prepare contract documents for a general contractor's use. Then Marriott changed its concept for the contract from a standard format in which an architect is responsible for preliminary design to one in which all design and construction responsibility rests with one company---Hensel Phelps Construction Company (Hensel Phelps).

Under a fixed-price contract, effective October 26, 2010, Marriott hired Hensel Phelps to complete the project for $354.5 million and assume Marriott's rights and obligations under the initial contract with Cooper Carry. Thus, the architect became a sub to Hensel Phelps, and the architect's drawings, which turned out to contain defects, became Hensel Phelps' headache.

In 2011, the D.C. Department of Consumer and Regulatory Affairs determined that Cooper Carry's electrical and mechanical design was unacceptable. The agency found fire code violations that required correction and resubmittal. According to Hensel Phelps, the revisions cost $4.4 million and more than 10 months of delay---and additional design defects brought the total damages up to more than $8 million.

Cooper Carry's contract included continuous architect responsibilities that entailed additions and corrections to its drawings throughout construction, and the record showed the last of these revised drawings was completed in early 2014. The project was substantially complete in April 2014.

In January 2015, in accordance with the contract, Hensel Phelps initiated a mediation with Cooper Carry that was deemed a failure by October 2015. Hensel Phelps then sued, alleging breach of contract and indemnification claims. D.C. has a three-year statute of limitations for breach of contract, and a trial court, on summary judgment, dismissed Hensel Phelps' complaint based on this statute. The court also ruled that the parties' indemnification contract clause did not cover first-party claims. This appeal followed.

Dispute resolution provision permitted during-project litigation

Hensel Phelps argued that the project was governed by "a unitary construction contract, under which courts typically interpret first breach as occurring upon 'substantial completion' of the Project." Cooper Carry countered that the first breach occurred much earlier, in 2010, when Hensel Phelps assumed Marriott's rights under the initial agreement---which it termed the "design agreement"---and accepted the defective designs.

The court bypassed the debate over whether or not there was a unitary contract and zeroed in on the dispute-resolution provision contained in the initial agreement. That provi[...]

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