Harmon & Davies, P.C.

Posts Tagged ‘construction contract’

Which Members of the Construction Industry Are Held Strictly Liable for a Defective Product?

by HDlawblog Posted: Monday, 5/20/2013

In 2008, a worker was performing maintenance on the conveyor system at the Lancaster Municipal Authority Waste Water Treatment Plant when a large chunk of debris got caught in a roller at the end of a conveyor. The worker tried unsuccessfully to clear the debris by spraying it with a hose. When that didn’t work, the worker used his putty knife, while the conveyor was still running, to scrape the debris away from the roller. In the process, the worker’s arm became caught in the conveyor’s pulley system and was amputated just below the elbow.

[Tip: Employers, employees should be trained in safety procedures and advised never to attempt to make repairs while a machine is running. Violations of safety procedures should be taken seriously and addressed in accordance with the company’s policies.]

Following his injury, the worker sued several parties on theories of negligence and strict liability. The sued parties included: (1) the engineering company that developed and designed the specifications for the conveyor system (“Buchart Horn, Inc”); (2) the company that manufactured the conveyor system and sold it to the construction company (“WRC”); (3) the construction company that sold and installed the pre-assembled conveyor to the plant (“Johnston Construction Company”); (4) the company that designed and manufactured the safety stop mechanism for the conveyor (“Material Control” parent company of “Conveyor Components”); and (5) the company that represented the manufacturer of the conveyor system in the sale of the conveyor to the construction company (“Kappe Associates, Inc.”). The defendants tried to have the case dismissed before it went to trial. Here are the lessons to be learned:

Lesson No. 1: If you sell any product to an owner as part of your construction or installation contract, you might be held strictly liable for defects in the product.

The court refused to dismiss the strict liability action against Johnston Construction Company because Pennsylvania has adopted Section 402A of the Restatement (Second) of Torts, which says that one who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer. Although the term “seller” is not defined in Section 402A, the Lancaster County Court of Common Pleas court found that Johnston Construction Company was clearly a seller within the meaning of Section 402A because it sold the conveyor to the Plant as part of the installation contract.

For this same reason the court refused to dismiss the company that designed and manufactured the safety stop mechanism for the conveyor. Despite these holdings, but for the case settling, a jury still would have had to decide whether the Johnston Construction Company’s failure to install a guard at the point on the conveyor where the plaintiff was injured did, in fact, render the conveyor defective and unsafe for its intended purposes.

Lesson No. 2: Engineers not in the business of manufacturing or distributing equipment may not be held strictly liable, but may be held liable for negligent design.

With regard to the defendant that developed and designed the specifications for the conveyor system, the court stated that in Pennsylvania, engineers have a duty to exercise that degree of skill and care in performing those services that ordinary and reasonable members of the engineering profession would exercise in the same or similar circumstances. Here, Buchart was the engineering firm designated by the City of Lancaster to develop and design the conveyor system at issue. Based on the findings in the plaintiff’s expert report, the court stated that whether Buchart breached its duty to employees of the Plant to use due skill in the design of the conveyor system raises a material question of fact. Accordingly, the court found that there was sufficient evidence for a jury to consider whether Buchart negligently designed the conveyor system.

However, the court held that Buchart could not be subjected to a strict liability claim because it was not a seller within the meanings of Section 402A of the Restatement (Second) of Torts because it was not in the business of manufacturing or distributing equipment.

Lesson No. 3: Manufacturer’s agents may be held strictly liable:

Kappe, the company that represented the manufacturer of the conveyor system in the sale of the conveyor to the construction company, unsuccessfully argued that it was not a seller within the meaning of Section 402A and therefore could not be subject to the claim of strict liability. In rejecting this argument, the court noted that the Pennsylvania Superior Court has held that all entities in the chain of distribution may be strictly liable for a defective product. In another case, a manufacturer’s agent was found to be subject to a strict liability claim, despite the agent never having taken title to or possession of the product, because the court reasoned that it was not the means of marketing, but rather the fact of marketing which is fundamental to the rule of strict liability. Here, Kappe represented WRC, the manufacturer, in finding a buyer/installer for the conveyor. Kappe is in the business of selling and marketing maintenance equipment to wastewater treatment plants. Kappe facilitated the sale of the conveyor between WRC and Johnston. Accordingly, while Kappe did not select the particular product to be sold, it introduced the manufacturer to the purchasers or installer and helped to facilitate the marketing chain in the sale of a particular product. As such, the court held that Kappe was subject to claims of strict liability.

This article is authored by attorney Shannon O. Young and is intended for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice. Any particular questions should be directed to your legal counsel or, if you do not have one, please feel free to contact us.

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Tags: Buchart Horn, construction company, construction contract, contractors, defective product, due skill in the design of the conveyor system, engineering company, engineers, Harmon & Davies, installation contract, Lancaster Municipal Authority Waste Water Treatment Plant, manufacturer's agent, negligence, Pennsylvania, safety procedures, safety stop mechanism for conveyor, Section 402A of the Restatement (Second) of Torts, Shannon O. Young, Shannon Young, strict liability
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Court Holds General Contractor’s Mechanics’ Lien Has Priority over Mortgagee’s Lien

by HDlawblog Posted: Thursday, 12/20/2012

In 2012 the Superior Court of Pennsylvania, in the matter of Commerce Bank/Harrisburg, N.A. v. Kessler et al., ruled in favor of a general contractor by finding that the general contractor’s mechanics’ lien had priority over the mortgagee’s lien. For those outside the construction industry this might not be titillating news, but for members of the industry (and their lawyers) who rely on mechanics’ liens to ensure payment, the holding is welcome news.

The story starts in October 2006 when the general contractor contracted with a couple to build them a luxury home in Harrisburg. Shortly thereafter, the GC started excavating. A few months later, in January 2007, the couple got a construction loan from what is now Metro Bank for up to $435,000, which loan was secured by an open-ended mortgage that was recorded that same month.

The home was substantially complete in August 2007. Unfortunately, the couple was unable to make their mortgage payments and Metro Bank filed a mortgage foreclosure action against the couple and obtained a default judgment against them for $403,994.84 in July 2008. The couple also failed to make their payments to the general contractor and the general contractor obtained a default judgment against the couple in the amount of $411,304.14 in February 2009.

Thereafter, Metro Bank and the general contractor became entangled in a legal battle over which judgment took priority, in other words, there was a dispute over which party was first in line to collect the proceeds from the sale of the home. The trial court entered an order holding that the judgment entered in favor of the general contractor took priority over the judgment entered in favor of Metro Bank. Metro Bank appealed.

Under the 2007 amendments to Pennsylvania’s Mechanics’ Lien Law, Section 1508(c) awards priority to a mortgage over a mechanics’ lien where the mortgage constitutes:

(2) An open-end mortgage as defined in 42 Pa.C.S. 8143(f) (relating to open-end mortgages), the proceeds of which are used to pay all or part of the cost of completing erection, construction, alteration or repair of the mortgaged premises secured by the open-end mortgage.

49 Pa.C.S.A. 1508(c)(2) (emphasis added). Metro Bank took the position that this section of the Mechanics’ Lien Law gave its mortgage priority over the general contractor’s mechanics’ lien, but the general contractor argued that the open-end mortgage upon which Metro Bank based its lien did not satisfy the requirements of Section 1508.

Indeed, it was undisputed that a portion of the proceeds of the open-end mortgage in this matter paid for expenses other than “completing erection, construction, alteration or repair of the mortgaged premises.” Rather, some of the proceeds were used to pay costs such as tax claims, closing costs, satisfaction of an existing mortgage on the property, and payment of other judgments and liens. The general contractor argued that to allow use of funds for reasons other than those expressly set forth in Section 1508(c)(2) would, for example, permit a lender and owner to defeat a contractor’s lien rights by using as little as $1.00 out of $1,000,000.00 for the enumerated purposes set forth in Section 1508(c)(2) and therefore Metro Bank could not rely on Section 1508(c)(2) to subordinate the general contractors mechanics’ lien on the property.

The Superior Court of Pennsylvania agreed with the general contractor finding that Section 1508(c)(2) only extends priority to mortgage loans where the proceeds were used to pay the expenses set forth in Section 1508(c)(2). The court interpreted the use of the term “the proceeds” to mean all of the proceeds and agreed with the general contractor that any other interpretation of the statute would permit lenders and owners to improperly manipulate the system to defeat lien rights

In ruling in favor of the general contractor, the court also disagreed with Metro Bank’s contention that the mechanics’ lien was invalid on the basis that it allegedly failed to contain the statutorily mandated statement of the kind and nature of materials furnished. Although the general contractor’s lien claim described the kind and character of the work as “all labor and materials required for the construction of a two story residential dwelling” and referred to the construction contract, Metro Bank argued that because the lien claim failed to attach the drawings and specifications referenced in the contract, the statement of the kind and character of the labor and materials furnished was too vague. As such, Metro Bank asserted that the mechanics’ lien was invalid.

The general contractor argued that his lien was not invalid because he substantially complied with the requirements of the Mechanics’ Lien Law. Again, the court agreed with the general contractor noting that multiple Pennsylvania cases interpreting the “contents of the claim” section of the Mechanics’ Lien Law have long held that “in considering a mechanics’ lien claim, it must be kept in mind that substantial compliance with the Act is sufficient” and that the express terms of Section 1503((5) only required a general statement of the kind and character of the labor and materials furnished. Accordingly the court held that the lien claim sufficiency described the nature of materials furnished.

Lesson Learned: If all the proceeds of a mortgage were not applied to the cost of completing erection, construction, alteration or repair of the mortgaged premises, a contractor’s mechanics’ lien claim should take priority over the lien of a mortgagee. Of course, these things can vary depending on the circumstances of an individual case and it is highly recommended that a general contractor consult with a lawyer to ensure that its lien rights are protected to the maximum extent possible.

This article is authored by attorney Shannon O. Young and is intended for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice. Any particular questions should be directed to your legal counsel or, if you do not have one, please feel free to contact us.