At-Risk, Owner’s Agent CM Barred from Objecting to Settlement Between Owner and Design-Build Contractor

At-Risk, Owner’s Agent CM Barred from Objecting to Settlement Between Owner and Design-Build Contractor

Source: http://www.constructionweblinks.com, April 9, 2007
By: Clark T. Thiel, Howrey LLP

Although it believed the proposed settlement to be detrimental to its own pecuniary interests, an at-risk construction manager’s fiduciary responsibilities to the project owner precluded it from objecting to the terms of the settlement between the owner and design-build contractor. As an agent of the owner, the construction manager was to protect and further the owner’s interests, even when those interests might be adverse to its own. IPSCO Steel (Alabama), Inc. v. Blane Construction Corp., 371 F.3d 141 (3rd Cir. 2004).

IPSCO Steel (Alabama), Inc. engaged Kvaerner U.S., Inc. as project manager for the construction of a steel plant in Alabama. Under the Project Management Agreement, Kvaerner agreed to “protect IPSCO’s interests at all times,” provide IPSCO with recommendations regarding construction contracts, act as “IPSCO’s agent for the purpose of administering” those contracts, and serve as IPSCO’s litigation manager with regard to any claims or disputes arising out of the project. Moreover, Kvaerner expressly warranted that the cost of the project would not exceed the Guaranteed Maximum Price of $182 million.

On Kvaerner’s recommendation, IPSCO entered into a design-build agreement with Blane Construction Corp. for the project’s primary buildings. Less than a year into the project, however, Blane discovered significant errors in its design work and abandoned the project. Estimating the resulting damages at $14 million to $18 million, IPSCO and Kvaerner jointly initiated a lawsuit against Blane and agreed that any recovery from Blane would be payable to IPSCO but would be credited against the total project cost for purposes of determining Kvaerner’s compliance with its Guaranteed Maximum Price commitments. In a separate action, IPSCO also sued Kvaerner, seeking recovery for more than $60 million in cost overruns on the project.

Blane and Kvaerner both tendered the claims against them to Liberty Mutual Insurance Co. under a $20 million wasting project policy. While Liberty Mutual picked up Kvaerner’s defense, it denied Blane’s claim, asserting that Blane was not a proper insured. Blane filed a separate action against Liberty Mutual and the insurance broker, Marsh USA, Inc., regarding the insurance coverage issues. Absent coverage, Blane had no ability to satisfy any judgment that might be entered against it in the IPSCO-Kvaerner action.

Given these dynamics, IPSCO, Blane, Liberty Mutual and Marsh engaged in settlement discussions, but Kvaerner declined to participate. Ultimately agreeing to settle their differences for $6.5 million in payments from Liberty Mutual and Marsh to IPSCO, the parties asked the court to approve the settlement and to dismiss all but the IPSCO action against Kvaerner. Kvaerner objected, asserting that $6.5 million for settling the claims against Blane and the insurance company was too low. (The Court of Appeals expressed its opinion that the settlement amount was reasonable in light of the inability to collect from Blane, the uncertainties of Blane’s coverage under the Liberty Mutual policy and the wasting limits of the policy.)

Reasoning that it was a named plaintiff in the action against Blane, that it had primary responsibility for all claims and disputes arising out of the project, and that it had an independent financial interest in the outcome of the actions, Kvaerner argued that it could not be forced to accept the settlement terms agreed to by the other parties and that the action could not be dismissed without its consent.

The trial court disagreed, and the Court of Appeals affirmed.

Relying on the terms of the Project Management Agreement, both courts found that Kvaerner was IPSCO’s agent and, as such, was bound to advance IPSCO’s interests over its own. Both courts agreed that Kvaerner “was required to do IPSCO’s bidding, which included Kvaerner’s consenting to the two settlements.” Thus, even though the settlement had an indirect effect on Kvaerner’s ability to perform within the Guaranteed Maximum Price, Kvaerner could not place its own interests ahead of those of IPSCO, even if Kvaerner believed that IPSCO was settling for too little.

Because the Project Management Agreement provided that Kvaerner was to act as “IPSCO’s agent” and “protect IPSCO’s interests at all times,” the facts that Kvaerner had an independent financial interest in the outcome of the settled actions, was a named party in those actions, and had primary responsibility for all claims and disputes arising out of the project were of no consequence. Rather, the owner was the real party-in-interest in the settled actions, and the construction manager could neither veto nor otherwise invalidate the settlements reached among the owner, the design-build contractor and project’s insurer. As a result, the construction manager was required to simply accept the terms of the owner’s settlement and apply it against the total project cost while still complying with its Guaranteed Maximum Price commitments.

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