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Background. A newspaper publisher hired an engineering company under an engineering design contract and a construction contract to design and supervise construction of a new sanitary sewer, fire protection and domestic water delivery systems. The design contract called for the engineering company to design the sanitary sewer including underground piping systems in accordance with the local governmental building code standards. The engineering company agreed to monitor the construction and advise its customer of any problems for two years after completion. The engineering company gave a five-year warranty to rectify any work not performed in accordance with professional engineering standards. Over a year later, the newspaper publisher signed a construction contract with a general contractor, who agreed to ensure that the facilities were constructed in accordance with the engineering company's specifications. The general contractor also agreed to perform the work in accordance with a high standard of care. The general contractor subcontracted the plumbing work to a third party, who allegedly failed to comply with any standards and allegedly was so far from complying that it was grossly negligent. Faulty Services. The publisher alleged that the construction company, under the engineering company's supervision, placed the pipes at inappropriate depths, with inappropriate sheathing to protect pipes from collapse, and inappropriate amounts of landfill to distribute the weight of passing trucks. Due to these problems with the sanitary sewer, the publisher also incurred problems with related storm sewers. Faulty Reporting. The publisher experienced sewage backups and reported the problem to the general contractor, who said its videoscope inspection showed no problems. The publisher relied initially on the general contractor's assurances and paid for repair work. Then the publisher hired an independent inspector who discovered that portions of the line had sunk, causing more than 150 breaks. Given the location of the affected pipes under the facility, the publisher claimed the entire facility was at risk of having to be entirely reconstructed. The publisher claimed that the general contractor made a faulty report and wrongfully failed to correct the faults, in violation of its contracts, professional responsibilities and duty of care. Consequential Damages from Faulty Services, and Further Negligence. The failure of the sanitary sewer caused backup problems with storm sewers that were also being designed by the same engineering company and built by the same general contractor. Similarly, the fire prevention system allegedly required reconstruction due to faulty design and non-conforming construction of the sanitary sewer and the storm sewer. Gross Negligence. It may be simply negligence for a service provider to fail to meet the contractual specifications or standard of care. But when the service provider engages in a series of acts of negligence that affect the entire facility being constructed and managed, the customer may be able to prove "gross negligence." Here, the publisher complained that the engineering company that had developed the specifications for all the underground systems and knew or should have known that the actual construction ignored these specifications, and the foreseeable result was that the systems were inevitably bound to fail. "Multiple acts of negligence may cumulatively amount to gross negligence." The New York Times Newspaper Division of the New York Times Co. v. Lehrer, McGovern Bovis, Inc., __ N.Y.S. 2d __ , NYLJ Sept. 12, 2002, p. 18, col. 4, citing In the Matter of Peter J. Cortines v. State Board of Professional Medical Conduct, 267 A.D. 2d 796 (3rd Dept. 1999). Public Policy and Disclaimers of Gross Negligence. Most well-drafted commercial contracts contain some form of limitation of liability. Disclaimers are useful for promotion of commerce in goods and services because they allow the parties to allocate risk and the consequences of the risks. This allows service providers to carry lower insurance coverages and reduce their prices by the savings on higher insurance premiums. But public policy in many jurisdictions may not allow the parties to contractually allocate loss arising from gross negligence. This principle arises from the concept that rational contracting parties do not have the capacity, or are not obtaining adequate consideration, when a defaulting party engages in conduct that disregards the applicable standard of care and the disregard is either willful or so utterly complete that it amounts to being willful. Many jurisdictions thus do not permit the partners to allocate liability for willful torts. When so applied, the principle reflects a public policy that prohibits contractual exculpation or disclaimers of liability for willful or wanton misconduct. At this point, the service provider's conduct would "cross the line" from contractual breach to quasi-intentional tort. Accordingly, the court held that multiple acts of negligence can constitute gross negligence, and the case was allowed to proceed to trial. Implications of Gross Negligence. Under this principle, service providers engaged in gross negligence due to repeated negligent acts or omissions could suffer in various ways. First, they could lose their contractual limitation of liability as a matter of applicable law. Second, under such applicable law, the service providers might be liable for punitive damages, which otherwise might be validly disclaimed by contract. Third, the service provider might be subject to triple damages and attorneys' fees under a theory of antitrust law or under a federal statute, the Racketeering-Influenced and Corrupt Organizations Act. Fourth, the failure to respect the contractual standards of care from the very beginning of the relationship invites a claim that the service provider never intended to comply with the standard of care, justifying holding the service provider liable as a matter of common law fraud. Question whether Customer can Validly Cumulate Claims for Fraud and Breach of Contract. Naturally, the engineering company in this case argued that the customer was trying to convert a simple breach of contract case into a cause of action for fraud and gross negligence. In response, the customer cited numerous judicial decisions holding that a service provider's misrepresentation or concealment of facts can give rise to a cause of action for fraud separate from the breach of contract claim. See, e.g., Freedman v. Pearlman, 271 A.D. 2d 301 (1st Dept. 2000). Definition of Duty of Care. New York courts have determined that an injured party can claim a tort in addition to a breach of contract, both arising out of the same or related circumstances. But this may depend on the existence of a special professional standard of care, such as that offered by an architect, accountant, engineer, or other licensed professional, or where the service provider possesses expertise on which the customer justifiably relied. In this case, the newspaper publisher claimed to have relied on the engineering company's specialized expertise in complying with local government building codes and professional standards of care. As a result, the New York Times court found that the alleged breach of such duty and the customer's reliance on the duty was a just cause for claiming gross negligence, a tort, independently of the breach-of-contract claim. Contract Strategies for Service Providers. We recommend that the service provider be prudent and perform the services in accordance with the contract. Since perfect performance might not always be possible, the service provider should apply mutually agreed methodologies that are inspected, reviewed and approved by the customer. However, the service provider cannot rely on this strategy to insulate itself from its own faults, so it must find ways to make good on its promises. The service provider should also be honest in reporting all failures. Dishonesty in reporting could impair the validity of the service provider's contractual and statutory defenses and limitations on liability. In the case of the newspaper publisher, the construction company lost all credibility when it improperly inspected and improperly denied the customer's complaints about the cause of the sanitary sewage backup. (The court did not answer the question whether the reports contained the equivalent of sewage backup.) Contract Strategies for Customers. We recommend that customers take several steps to avoid the kind of "sanitary sewage backup" from filling their contracts! First, customers should evaluate and engage service providers based on whatever special expertise is considered necessary. The question is whether the service provider is willing to claim it has and will deliver on such expertise. There are alternative contract structures, and if an alternative applies, it should be evaluated with legal counsel. Second, having selected the service provider, the customer must provide clear definitions of the standards of performance. Third, when there is a faulty service delivery, the customer should monitor the results and take the necessary steps to protect its economic interests and legal rights. Litigation may be avoided, or best planned for, through proper contracting and contract management procedures.
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