By Bennett D. Greenberg and Rachel A. Sens
Seyfarth, Shaw, Fairweather & Geraldson

Washington, DC…Construction and design firms joining forces to perform a design-build contract must take great care when structuring their relationship and allocating responsibility for satisfying the owner’s requirements.

The failure of one party to perform its function properly can expose the other member of the venture to significant losses. It is for this reason that parties joining forces must carefully choose who they work with, coordinate their work efforts and maintain close communications, and structure a contractual arrangement which will protect themselves from any loss they may incur as a result of the other party’s failure to perform faithfully their contractual obligations.

The case of CRS Sirrine, Inc. v. Dravo Corp., et al., 445 S.E. 2nd 782 (Ga App. 1994), aff’d, 464 S.E. 2nd 897 (Ga App. 1995), is an unfortunate example of the problems that can develop between members of a design-build joint venture when one party fails to perform in the manner anticipated by the other. In CRS Sirrine, Weyher/Livsey (a subsidiary of Dravo) and CRS Sirrine ("Sirrine") agreed to pursue a fixed price design-build contract for the construction of a power plant for the Navy. Weyher/Livsey had significant experiences constructing large power projects, while Sirrine had experience designing and engineering projects of this kind.

The parties entered into a letter agreement whereby Sirrine would assume the lead in preparing a technical proposal which was to be evaluated by the Navy. If the technical proposal was accepted by the Navy, Weyher/Livsey would assume the primary responsibility of preparing the bid to the Navy. The letter agreement further provided that although Sirrine was responsible for supplying the technical information needed to prepare the bid, Sirrine would not guarantee the accuracy of Weyher/Livsey’s estimates used in preparing the bid. Weyher/Livsey’s and Sirrine’s technical proposal was accepted, and a bid for $100 million dollars was submitted and ultimately accepted by the Navy. The parties then executed a Joint Venture Agreement setting forth their respective responsibilities.

Under the Joint Venture Agreement, Sirrine was responsible for taking steps to design the project within budget, tracking its design quantities and notifying Weyher/Livsey if budget quantities would be exceeded. Weyher/Livsey was responsible for the actual construction of the project. The Joint Venture Agreement also contained a number of other significant provisions that attempted to allocate responsibility for cost overruns. In Article 9, each party accepted full responsibility for its scope of work and would indemnify the other for damages resulting from untimely, defective and nonconforming work. Article 9.3 provided that notwithstanding any other provision, Sirrine shall have no risk or liability for construction material quantity overruns if the actual quantities are different from those bid to the Navy. This provision further provided that Weyher/Livsey would provide Sirrine with budget quantities for all functional areas of the project and Sirrine’s detailed design would make every reasonable effort to stay within those quantities within the requirements of the prime contract. Article 9.3 also provided that Weyher/Livsey would be notified promptly if Sirrine believed quantities would be exceeded.

Article 9.2 of the Agreement stated that notwithstanding Article 8.2 (the indemnity provision), Sirrine would only be liable to Weyher/Livsey for costs Weyher/Livsey incurred in excess of $750,000.00 as a result of Sirrine’s engineering errors. This limitation was conditioned on Sirrine providing Weyher/Livsey notice of its errors. Lastly, the Joint Venture Agreement made clear that it was the entire agreement between the parties, and that all prior written agreements were terminated and merged into the Joint Venture Agreement.

Weyher/Livsey incurred construction losses in excess of $30 million dollars and subsequently brought suit against Sirrine alleging that Sirrine’s breaches caused over $12.5 million dollars of Weyher/Livsey’s added construction costs. Specifically, Weyher/Livsey argued that a substantial portion of its damages resulted from the fact that quantities of materials needed for constructing the project greatly exceeded the estimates for construction material provided by Sirrine on which the joint venture’s fixed price bid was based. Sirrine, in turn, argued that Section 9.3 of the Joint Venture Agreement unambiguously released Sirrine from any responsibility for damages resulting from increases in construction material quantities.

The trial court disagreed with Sirrine’s arguments and found that Sirrine breached its contractual and fiduciary duties (1) to provide sufficient, accurate information to Weyher/Livsey upon which to base its bid, (2) to make reasonable efforts to design the project, (3) to track quantities in its design, and (4) to notify Weyher/Livsey that quantities would be exceeded. The trial court then apportioned fault between Weyher/Livsey and Sirrine and concluded that Sirrine’s breaches caused damages to Weyher/Livsey in the amount of $5,518,821.00. Both parties appealed.

On appeal, the Appeals Court determined that the trial court’s interpretation of the contract as ambiguous was correct and that it did not shield Sirrine from responsibility for increases in construction material quantities. Specifically, the Court agreed with the trial court’s interpretation that the intent of Section 9.3 of the Joint Venture Agreement was that Weyher/Livsey, and not Sirrine, should bear responsibility for damages caused by Weyher/Livsey’s own errors in estimating and in bid preparation, but that Sirrine should remain responsible for damages resulting from its pre-bid design and engineering errors. As far as the post-bid construction phase of the project, the Court noted that Section 9.3 imposed an affirmative obligation upon Sirrine to make every reasonable effort with its detailed design to stay within budgeted quantities and to notify Weyher/Livsey if Sirrine believed the quantities would be exceeded.

The Court also noted that evidence was introduced at the trial court where a Sirrine official admitted that it was not Sirrine’s intention to shield itself from liability regardless of the quality of Sirrine’s work. Furthermore, the Court agreed with the trial court that Article 9.2 constituted in effect a $750,000.00 deductible for damages resulting from engineering errors and omissions detected by Sirrine and noticed to Weyher/Livsey with the required notice of errors and omissions under this section.

The Appeals Court, however, remanded the case back to the trial court because it could not reconcile the trial court’s apportionment of damages with the amount of the verdict. On remand, the trial court again found that Weyher/Livsey was entitled to $5,518,812. This decision was later affirmed by the Court of Appeal.

The CRS Sirrine case clearly demonstrates that the success of a design/build project is dependent on design and construction firms understanding and fulfilling their respective obligations. This will obviously require that design and construction firms cooperate with each other and coordinate their activities to ensure that each party fulfills its obligations so as to permit the design/build team to satisfy its obligations under its contract with the Owner.

It is also clear from this case that parties should take great care in selecting the firms they are going to team with, and structuring their contractual agreements to shield and protect each party from the other party’s inability or failure to perform by its contractual obligations.

First appeared in Design-Build Institute of America DATELINE newsletter.