By Sam Laurin, Bose McKinney & Evans LLP
This article will focus on three areas which construction lawyers address on a regular basis. The first case is Shiel Sexton Company, Inc. v. Towe, 154 N.E.3d, 827 (Ind. Ct. App. 2020). Shiel is another in a long line of cases that addresses who can be liable if an employee of a subcontractor is injured at a job site. The Indiana Trial Lawyers and the Associated General Contractors of Indiana both filed amicus briefs, which suggests that it was an important case for many parties. Shiel, like many other prior Indiana appellate decisions, addressed the issue of whether a general contractor assumes a non-delegable duty to protect all individuals at a job site. The trial court found that the general contractor did in fact assume such a duty, and the Court of Appeals reversed in part and affirmed in part.
For the purpose of this summary, the critical holding from the decision was that the general contractor did not assume a duty towards the injured employee. A complete analysis of why is beyond the space limitations of this article. In a nutshell, the Indiana Court of Appeals held that the master contract between the project owner and general contractor did not require the general contractor to assume sole responsibility for safety on the job site. Nor did the master contract provide that the general contractor assumed exclusive control for construction means and methods. The Court of Appeals did affirm that the employee’s subcontractor did in fact assume the duty. The basis for this decision was the Court’s finding that the subcontractor, in its subcontract with the general contractor, agreed to (i) take precautions for the safety of employees, (ii) comply with all applicable rules and regulations, and (iii) designate someone to prevent accidents. The decision in Shiel is yet another decision that is impactful for anyone who litigates job site injuries. It is also a reminder to those who draft construction contracts that what the contract says can have a significant impact when there is a job site injury.
The very recent decision in Sullivan Corporation v. Rabco Enterprises, LLC (2020 W.L. 7135006, December 7, 2020) addressed choice of law and venue provisions in construction cases. In Sullivan, a general contractor filed a complaint to foreclose a mechanic’s lien against the owner’s property, notwithstanding the fact that the contract had a choice of law provision that exclusive venue was in Florida. The owner argued that the case should be transferred to Florida because of the venue provision. The Indiana Court of Appeals reversed because of Indiana Code § 32-28-3-17, which provides in part that: “A provision in a contract for the improvement of real estate in Indiana is void if the provision: (1) makes the contract subject to the laws of another state; or (2) requires litigation, arbitration, or other dispute resolution process on the contract occur in another state.” Notwithstanding this statute (which has been in effect 18 years) the author has seen several construction contracts for Indiana projects with choice of law provisions other than Indiana. This is most likely the result of out of state lawyers not consulting Indiana lawyers.
While not a construction case per se, the recent decision of Symons v. Fish, 158 N.E. 3d 352 (Ind. Ct. App. 2020) addresses a common provision in construction contract contracts: liquidated damages. In Symons, the contract at issue had a liquidated damages provision which essentially provided that it was calculated based on three times the amount of any loss, liability claim or damage suffered by shareholders of a corporation. On its face this was a penalty. There was no prescribed rate of liquidated damages. Instead the rate was based on an amount that could be calculated, and then trebled. As a general rule, if you can calculate the amount of actual damages, then a liquidated damage provision is unenforceable. And the provision in Symons essentially admitted that actual damages could be calculated.
The court in Symons summarizes the law on liquidated damages as follows:
- A typical liquidated damages provision provides for the forfeiture of a stated sum of money upon breach without proof of damages. Liquidated damages provisions are generally enforceable where the nature of the agreement is such that when a breach occurs the resulting damages would be uncertain and difficult to ascertain. However, the stipulated sum will not be allowed as liquidated damages unless it may fairly be allowed as compensation for the breach.
- We are tolerant of provisions within contracts which provide for liquidated damages. Where the sum stipulated in the agreement is not greatly disproportionate to the loss likely to occur, the provision will be accepted as a liquidated damages clause and not as a penalty, but where the sum sought to be fixed as liquidated damages is grossly disproportionate to the loss which may result from the breach, the courts will treat the sum as a penalty rather than as liquidated damages. In determining whether a stipulated sum payable on a breach of contract constitutes liquidated damages or a penalty, the facts, the intention of the parties and the reasonableness of the stipulation under the circumstances of the case are all to be considered. The distinction between a penalty provision and one for liquidated damages is that a penalty is imposed to secure performance of the contract and liquidated damages are to be paid in lieu of performance. Notwithstanding a plethora of abstract tests and criteria for the determination of whether a provision is one for a penalty or liquidated damages, there are no hard and fast guidelines to follow. The question whether a liquidated damages clause is valid, or whether it constitutes a penalty, is a pure question of law for the court.
For a construction lawyer drafting a liquidated damages provision for an Indiana construction project, if you follow the guidelines stated by the Symon court, it should be enforceable. The author has seen some contracts where there is an actual explanation of how the liquidated damage amount was calculated. Done correctly, this extra step can ensure the enforceability of the liquidated damages provision.
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