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The recent decision by the Texas Supreme Court in Ewing Constr. Co., Inc. v. Amerisure Ins. Co., No. 12-0661, 2014 WL 185035 (Tex. Jan. 17, 2014), has insureds in Texas and throughout the country breathing a sigh of relief. The decision confirms the limited scope of the Texas Supreme Court’s earlier decision in Gilbert Texas Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010), and makes clear that the contractual liability exclusion in general liability policies does not preclude coverage where an insured contractually undertakes to perform its work in a good and workmanlike manner.

Ewing Construction Company served as the general contractor to renovate and build additions to a school in Corpus Christi, Texas, which work included the construction of tennis courts. Shortly after the tennis courts were completed, they began to flake, crumble and crack, rendering them unusable. Ewing was sued by the school district that hired it for breach of contract and negligence.

Ewing tendered the suit to its liability insurer, who denied coverage. The insurer argued that the claims, which were all tied to Ewing’s breach of contract for failure to perform its work in a good and workmanlike manner, were precluded by the contractual liability exclusion. The district court, relying in large part on Gilbert, 247 S.W.3d 118, agreed with the insurer. The district court explained that Gilbert “stands for the proposition that the contractual liability exclusion applies when an insured has entered into a contract and, by doing so, has assumed liability for its own performance under that contract.” Ewing Constr. Co. v. Amerisure Ins. Co., 814 F. Supp.2d 739, 746-48 (S.D. Tex. 2011).

The case of Gilbert involved the construction of a light rail system for the Dallas Rapid Transit Authority (“DART”), with Gilbert Texas Construction serving as the general contractor. The contract between Gilbert and DART required Gilbert to protect adjacent property, including property of a third party, and to repair any damage to that property resulting from a failure to comply with the requirements of the contract or a failure to exercise reasonable care in performing the work. Heavy rains during construction caused flooding to a building adjacent to the work site. The building’s owner, RTR, sued Gilbert for, among other claims, breach of contract as a third-party beneficiary of Gilbert’s contract with DART. After motions for summary judgment, only RTR’s claim for breach of contract remained.

Gilbert then settled with RTR and sought indemnification from its liability insurer. Gilbert’s general liability insurer denied Gilbert’s request based on the contractual liability exclusion. Agreeing with the insurer’s denial of coverage, the Texas Supreme Court explained:

The obligation to repair or pay for damage to RTR’s property “resulting from a failure to comply with the requirements of this contract” extends beyond Gilbert’s obligations under general law and incorporates contractual standards to which Gilbert obligated itself. The trial court granted summary judgment on all RTR’s theories of liability other than breach of contract, so Gilbert’s only potential liability remaining in the lawsuit was liability in excess of what it had under general law principles. Thus, RTR’s breach of contract claim was founded on an obligation or liability contractually assumed by Gilbert within the meaning of the policy exclusion.

Gilbert Texas Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 127 (Tex. 2010).

The Texas Supreme Court found that the facts in Ewing were different from those in Gilbert. The court explained that Ewing’s agreement to construct the tennis courts in a good and workmanlike manner did not enlarge Ewing’s obligations beyond any general common-law duty Ewing already had. By contrast, the obligation assumed by Gilbert – to protect adjacent property and to repair or pay for damage to property of third parties “resulting from a failure to comply with the requirements of this contract” – did enlarge and extend beyond Gilbert’s obligations under general law. Ewing, 2014 WL 185035 at *6.

In short, the court held that the contractual liability exclusion applies only where the “insured has assumed a liability for damages that exceeds the liability it would have under general law.” Id. The court concluded “that a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract, thus it does not ‘assume liability’ for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion.” Id. at *7.

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On January 16, 2014, Pillsbury attorney John E. Jensen  published his alert titled Affiliates of Indicted Contractor May Face Longer Suspension, which discusses the U.S. Court of Appeals for the Eleventh Circuit decision in Agility Defense & Government Services, Inc. v. United States Department of Defense, No. 13-10757, 2013 WL 6850891 (11th Cir. Dec. 31, 2013). Gavel.jpgAmong other things, the Court of Appeals confirmed that the Government has the ability to suspend “affiliates” of a suspended contractor, even though there is no allegation that the affiliates themselves had done anything wrong. This decision reversed the holding of an Alabama federal district court, which had held the affiliates’ suspension past 18 months impermissible.

Photo: Martin Bowling, Taken on November 16, 2011 – Creative Commons

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On January 8, 2014, Pillsbury attorneys Jeffrey A. Knight and Alina J. Fortson, and Joseph Ferranti, Environmental Division Director of InDepth Corporation, published their alert titled Be Careful What You Look For: EPA Updates “All Appropriate Inquiries” Environmental Diligence Standard. The alert discusses the EPA’s recent amendment of its “All Appropriate Inquiries” rule. epa.jpgThis rule sets out the standard for environmental due diligence in commercial and industrial property transactions in order to qualify for certain defenses to liability under the federal “Superfund” law.

Photo: TexasGOPVote.com, Taken on Feb. 14, 2011 – Creative Commons

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On January 16, 2014, Pillsbury’s Insurance Recovery & Advisory team published their alert titled Insurance and the Polar Vortex: Recovering Losses from the Big Chill of 2014 discussing anticipated insurance coverage issues stemming Globe Polar Vortex.jpgfrom the extraordinary weather disaster during the first two weeks of 2014. Among other things, the big chill froze pipes and sprinkler systems, interrupted chemical manufacturing and disrupted transportation systems, causing extensive property damage and business interruption as a result of freezing temperatures.

Photo: AIRS, the Atmospheric Infrared Sounder, Taken on January 10, 2014 – Creative Commons

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UPDATES: Stanford engineers develop state-by-state plan to convert U.S. to 100% clean, renewable energy by 2050; Energy Department Offers Conditional Commitment to Cape Wind Offshore Wind Generation Project (Jul. 1, 2014); Energy Department Announces $10 million for Wave Energy Demonstration at Navy’s Hawaii Test Site (Apr. 28, 2014)

On December 12, 2013, in its article titled For Major Cities, Offshore Wind Farms Could Provide Both Electricity And Hurricane Protection, The Huffington Post reported on Stanford University’s recent presentation at the American Geophysical Union fall meeting on the feasibility of building “tens of thousands of wind power turbines off the shores of some of America’s cities most vulnerable to extreme weather to reduce wind speeds and lessening sever storm surges.” wind turbine.jpgReportedly, Stanford civil and environmental engineering professor Mark Z. Jacobson and his research team “concluded that the wind turbines could have sapped Katrina of so much energy that wind speeds would have been reduced by up to 50 percent at landfall and the hurricane’s storm surge could have been reduced by about 72 percent.” In addition, it “would have generated 0.45 terawatts of wind power.”

Jacobson isn’t just garnering the media attention of the likes of The Huffington Post for his and Stanford’s ambitious wind, water and solar-related renewable energy initiative. Just months earlier, on October 9, 2013, Jacobson talked about this ambitious renewable energy initiative with David Letterman (part 1) and (part 2). Stanford’s website confirms that “Jacobson and his co-authors have published studies on how to switch to all solar, wind and water energy sources for the world, the United States and New York state. They will soon publish a study for California, and they have plans to do studies for all 50 U.S. states.” It further confirms that there is “confidence in U.S. ability to attain all-renewable energy by 2050.”

Additional Sources: Wind Energy Symposium, University of Delaware, Taming Hurricanes With Arrays of Offshore Wind Turbines, Mark Z. Jacobson, Cristina Archer, Willet Kempton (Feb. 27, 2013); Stanford University; Scientific American, A Path To Sustainable Energy By 2030, Mark Z. Jacobson and Mark A. Delucchi (Nov. 2009); The Huffington Post, For Major Cities, Offshore Wind Farms Could Provide Both Electricity And Hurricane Protection (Dec. 12, 2013); RenewEconomy, Offshore wind farms could protect against hurricanes (Dec. 11, 2013); Climate Central, Offshore Wind Farms Could Protect Cities from Hurricanes (Dec. 9, 2013); Wikipedia; Pillsbury, The Yin and Yang of offshore wind power
 (Mar. 21, 2012)

Photo: CGP Grey, Taken Jul. 12, 2009 – Creative Commons

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UPDATE: The Sacramento Bee, SPI Solar and KDC Solar Announce Joint Ownership of Mountain Creek Project (Feb. 21, 2014)

On January 8, 2014, SPI Solar announced that it has “executed agreements with KDC Solar and China Development Bank (CDB) to provide immediate financing for the previously announced Imclone [solar power] project,” securing its receipt of a $28.5 million cash payment, enabling it to remove $28.5 million of the Imclone project construction loan liability from its balance sheet, and paving the way for it to obtain funding for other solar projects. SPI Solar is a self-proclaimed “global turnkey [vertically integrated] developer and EPC contractor for large-scale solar energy facilities.” SPI Solar’s completed solar projects include the Staples Center and Nokia Theater located in Los Angeles, California, Aerojet located in Folsom, California, and Twentieth Century Fox Motion Picture Studios located in Los Angeles.

Other Sources: The Wall Street Journal; pv tech; The Sacramento Bee

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In their article Solar Power Craze on Wall St. Propels Start-Up, authors Diane Cardwell and Julie Creswelljan remark on the “solar power craze that is sweeping Wall Street,” acknowledging the companies “riding a wave of exuberance over the industry.” “The broad stock market is coming off its best year since 1997 — the Standard & Poor’s 500-stock index rose nearly 30 percent in 2013 — and the shares of many young companies have leaped from one high to another.” They note that “[d]epending on whom you talk to, the rise of SolarCity and similar companies is either a sure sign that solar power is finally having its day or that yet another mania has gripped the markets.” Their article also touches on some of the growing pains felt by the industry. Others in the industry are weighing in as well on investing in solar in 2014, see additional sources below.

Additional Sources: The New York Times, Solar Power Craze on Wall St. Propels Start-Up (Jan. 3, 2014); Seeking Alphae, The Pros Pick 4 Solar Stocks For Energy Investments (Jan 2, 2014); TopStockAnalysts, The Best Solar Investment Of 2014 (Jan. 6, 2014); Forbes, The Riskiness Of Renewable Energy Investments (Jan. 8, 2014); pv magazine, Deutsche Bank Expects Solar Gold in 2014 (Jan. 8, 2014); The Globe and Mail, Solar Energy Stocks Riding A Hot Streak (Jan. 8, 2014); DailyFinance, Should You Stay Away From Solar Stocks in 2014 (Jan. 12, 2014); The Huffington Post, California More Than Doubles Solar Energy In 2013 (Jan. 13, 2014)

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UPDATE: The Sacramento Bee, E-cigarettes face restrictions as cities update smoking ordinances (Mar. 10, 2014)

Recently, the California Office of the Attorney General (“AG”) issued its Opinion No. 12-901 (Dec. 20, 2013), answering the question: “Under what circumstances does an owner-operated business with no employees nevertheless constitute a ‘place of employment’ under Labor Code section 6404.5, which prohibits smoking in a workplace?” Section 6404.5 provides, in relevant part: “No employer shall knowingly or intentionally permit, and no person shall engage in, the smoking of tobacco products in an enclosed space at a place of employment.”

Smoking

The AG confirmed that “[a]n owner-operated business with no employees nevertheless constitutes a ‘place of employment’ under [S]ection 6404.5 when employment of any kind is carried on at the business location — that is, even when such employment is carried on by persons who are employed by someone other than the business owner.” As a result, “if employment is being carried on in an owner-operated business, then the owner-operator and all other persons are forbidden from smoking in any enclosed space therein, whether or not the owner-operator is the direct employer of those carrying on the employment.”

In its analysis, it noted that the term “employee” means “every person who is required or directed by any employer to engage in any employment or to go to work or be at any time in any place of employment” (Cal. Labor § 6304.1(a)) and the term “employer” uses the same broad definition used in the workers’ compensation context, i.e., “[e]very person including any public service corporation, which has any natural person in service” (Cal. Labor Code § 6304). Like these terms, the phrase “place of employment” is broadly defined and means “any place, and the premises appurtenant thereto, where employment is carried on … ” Cal. Labor § 6303(a).

Applying these definitions, the AG first found that “where, for example, a business owner-operator performs all of his or her own services–without utilizing the services or assistance of any compensated employees on any occasion–that owner-operator would fall outside the definition of ’employer’ because he or she does not have ‘any natural person in service,’ and that business location would similarly fall outside the definition of “place of employment” because no “employment is carried on” there. Under these narrow circumstances, then, the Section 6404.5 smoking prohibition would not apply.

It went on, however, to consider whether individuals directly employed by someone else may be carrying out their employment on the owner-operator’s premises. The AG noted that the Occupational Safety and Health Appeals Board (“OSHA”) previously ruled that both primary and secondary employers must provide a safe workplace to the employees, relying on California Labor Code § 6400 which requires that “[e]very employer shall furnish employment and a place of employment that is safe and healthful for the employees therein,” citing In the Matter of the Appeal of: Labor Ready, Inc., Employer, 2001 WL 575152 (Cal. O.S.H.A., May 11, 2001); In the Matter of the Appeal of: Strategic Outsourcing, Inc., Employer, 2011 WL 5016849, at 3 (Cal. O.S.H.A., Sept. 16, 2011); see also In The Matter of the Appeal of: Kelly Services, Employer, 2011 WL 2881536 (Cal. O.S.H.A., June 15, 2011), at 2. It was persuaded that, for purposes of Section 6404.5, “the owner-operator of a particular business need not be the primary employer of persons working on the business premises for those premises to be characterized as a ‘place of employment.’ It is enough that the business location is a ‘place . . . where employment is carried on,’ even if the workers are directly employed by someone else and only secondarily employed by the owner-operator.”

Other Sources: O.S.H.A.
Photo: Fried Dough, Taken December 3, 2011 – Creative Commons

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The U.S. Supreme Court recently showed strong support for enforcing forum-selection clauses in Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, 571 U.S. ___ (2013). The Court’s decision discusses forum-selection clauses in contracts generally, but lays the foundation and support for enforcing a forum-selection clause in a construction contract. The Court concluded that “a proper application of [28 U.S.C.] §1404(a) requires that a forum-selection clause be ‘given controlling weight in all but the most exceptional cases.'” Absent extraordinary circumstances, a forum-selection clause is to be enforced by the courts under the Supreme Court’s modified balancing-of-interest standard. Accordingly, a forum selection clause is not a boilerplate provision to be ignored or disregarded.

The Underlying Action

Atlantic Marine Construction Co., Inc. involves a subcontract dispute between Atlantic Marine Construction, Co., Inc., a Virginia corporation (“Atlantic Marine”), and J-Crew Management, Inc., a Texas corporation (“J-Crew”). The subcontract included a forum-selection clause confirming that all disputes between the parties would be litigated in the Circuit Court for the City of Norfolk, Virginia, or the U.S. District Court for the Eastern District of Virginia, Norfolk Division. When a dispute arose under the subcontract, however, J-Crew filed suit in the Western District of Texas. Atlantic Marine moved to dismiss the case under 28 U.S.C. §1406(a) for “wrong” venue and Federal Rule of Civil Procedure 12(b)(3) for “improper” venue. In the alternative, Atlantic Marine moved to transfer the case under Section 1404(a), which allows a district court to transfer a civil action to any other district or division for the convenience of the parties and witnesses or to any other district or division where all the parties have consented.

The District Court denied both motions. The court held that §1404(a) is the exclusive mechanism for enforcing a forum-selection clause that points to another federal forum; that Atlantic Marine bore the burden of establishing that a transfer would be appropriate; and that the court would consider a list of public and private interest factors, of which the forum-selection clause was only one factor. The District Court held that Atlantic Marine failed to carry its burden. The Court of Appeal agreed with the District Court’s decision that §1404(a) is the exclusive mechanism for enforcing a forum-selection clause that points to another federal forum. The Court of Appeal, however, held that Rule 12(b)(3) would be the correct mechanism to enforce a forum-selection clause that points to a nonfederal forum. The Court of Appeal denied Atlantic Marine’s petition, holding that the District Court did not abuse its discretion in refusing to transfer the case after conducting the balance-of-interests analysis required by §1404(a).

The U.S. Supreme Court’s Ruling

The U.S. Supreme Court agreed with the Court of Appeal that Section 1404(a) is an appropriate provision to enforce a forum-selection clause referencing a federal forum. The Court, however, rejected the Court of Appeal’s findings that a forum-selection clause pointing to a state or foreign forum can be enforced through Rule 12(b)(3). The Court instead held that these provisions should be enforced through the doctrine of forum non conveniens, the doctrine codified by Section 1404(a) that permits transfer to a more convenient forum. Because both Section 1404(a) and the doctrine of forum non conveniens use the same balancing-of-interests standard, the Court held that courts should evaluate a forum-selection clause pointing to a nonfederal forum in the same way that they evaluate a forum-selection clause pointing to a federal forum.

Although the Court held that Section 1404(a) is the relevant statute, the Court rejected the Court of Appeal’s analysis of Section 1404(a) motions in cases involving a forum-selection clause. The Court held that a valid forum-selection clause requires courts to adjust their usual Section 1404(a) analysis in three ways. First, when a valid forum-selection clause exists, the plaintiff’s choice of forum has no weight. As the party defying the forum-selection clause, the plaintiff has the burden of establishing that transfer to the forum that the parties bargained for in the contract is unwarranted.

Second, a court evaluating a Section 1404(a) motion to transfer based on a forum-selection clause should not consider the parties’ private interests. When the parties agreed to the forum-selection clause, they waived the right to challenge the preselected forum as inconvenient or less convenient for themselves, their witnesses, etc. Thus, a court may only consider public interest factors. Public interest factors, however, will rarely defeat a motion to transfer unless extraordinary circumstances exist.

Third, a Section 1404(a) transfer will not carry with it the original venue’s choice-of-law rules. There is a Section 1404(a) exception to the general rule that requires a federal court to follow the choice-of-law rules of the state in which it sits. The Section 1404(a) exception allows the transfer court to apply the state law of the original court. The Court, however, held that this exception does not apply to cases where the motion is based on the enforcement of a forum-selection clause and the plaintiff has inappropriately filed a suit contrary to the forum contractually selected by the parties.

Finding that the District Court’s application of the Section 1404(a) did not comport with these principles, the Court reversed and remanded the case. The Court’s ruling, however, left open the possibility that forum-selection clauses could be enforced under Federal Rule of Civil Procedure Rule 12(b)(6), again, signaling the Court’s strong support for forum-selection clauses.

Whether the forum-selection clause points to a federal or non-federal venue, the Court’s ruling offers two mechanisms to enforce forum-selection clauses.

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UPDATE: CSLB, CSLB to Get Tough on RMO Abuses (Summer 2014)

Starting on January 1, 2014, amended Section 7068.1 of California’s Contractors State License Law, Bus. & Prof. Code §§ 7200 et seq., requires licensees’ qualifiers to exercise direct supervision and control over the licensees’ operations to ensure compliance with California’s Contractors State License Law. The amended law contemplates active involvement by the qualifier, and makes a violation of Section 7068.1 grounds for disciplinary action and a misdemeanor punishable by imprisonment in a county jail and/or a fine.

Section 7068 requires every license to have a qualifier, which may be a Sole Owner, Qualified Partner, Responsible Managing Officer (RMO), Responsible Managing Employee (RME), Responsible Managing Manager or Responsible Managing Member. The qualifier is the person who is listed in the Contractor State License Boards’ (CSLB) personnel of record, has demonstrated his/her knowledge and experience though the CSLB’s licensing process, and holds one or more license classifications.

The CSLB’s regulations, Cal. Admin. Code tit. 16, § 823, further define bona fide employee and direct supervision and control. “Bona fide employee” means “an employee that is permanently employed by the applicant and is actively involved in the operation of the applicant’s contracting business for at least 32 hours or 80% of the total hours per week such business is in operation, whichever is less.” Cal. Admin. Code tit. 16, § 823(a). “Direct supervision and control” “includes any one or any combination of the following activities: supervising construction, managing construction activities by making technical and administrative decisions, checking jobs for proper workmanship, or direct supervision on construction job sites.” Cal. Admin. Code tit. 16, § 823(b).

Contractor license applicants will also now be required to submit detailed information regarding the qualifier’s duties and responsibilities for supervision of the applicant’s construction operations.

Additional Resources: California Senate Bill 262; California Legislative History Online; CSLB Industry Bulletin – 12/31/2013; CSLB Winter 2012 Newsletter