I'm Liable for What? - Employer Liability for Third Party Harassment

The recent U. S. Fourth Circuit Court of Appeals decision in Freeman v. Dal-Tile Corp., et al., decided April 29, 2014 adopts a negligence standard for an employer's liability for third party harassment under Title VII of the U. S. Code. As a result, the court in that case held that an employer can be held liable to its employees if the employer knows or should know of harassment by third parties, but fails to take "prompt remedial action reasonably calculated to end the harassment." As the court quipped, employer's cannot avoid liability by taking a "see no evil, hear no evil" strategy.

As noted in prior blogs, harassment of different levels is still not uncommon in the construction industry; and is clearly something to be avoided in any form. But this case serves as a warning shot that employers cannot just focus on their own employees harassing other employees; but also any third parties. Every day there are any number and types of third parties that intermix with construction employees, from those in the home office to those in the field. Such persons include vendors, inspectors, subcontractors, suppliers - the list goes on. The Freeman case illustrates the importance of employers taking any harassment claims seriously, and immediately nixing harassment, of any type and from any source, in the bud.

Follow Up: Since this post, I note that my law partner, Arlene Klinedinst - who focuses her practice on employment law - has been asked to comment about the Freeman case and has offered these thoughts:

1.  The Freeman case puts the focus on the need for "prompt, meaningful action to stop the conduct."

2.  Employers need to take a close look at supervisor authority, as that was not really addressed by the Freeman court, but can affect liability.

3.  When responding to employee complaints of third party harassment, employers have to walk a fine line with responses. Employee transfers, even if promotions, can become issues.

4.  For vendor or customer employees who are problems, employers should take decisive action, such as notifying the company president of the vendor / customer, and discussing options, including banning the offending visitor.

5.  If the offending person will not stop, employers then have to take additional steps.

Contractual Indemnity Provisions: Certain Provisions in Construction Contracts Void

As many know, construction contract indemnity provisions are one of the few examples of Virginia not strictly holding parties to their contracts because of the statutory override in Virginia Code Sec. 11-41. Discussing some related issues within our Construction Department reminded me of a very good summary of the issues prepared by my law partner, Pat Genzler, summarizing the Virginia Supreme Court's 2011 review of the issue in Uniwest Construction, Inc. v. Amtech Elevator Services, Inc., 280 Va. 428, 699 S.E.2d 223 (2010), modified on rehearing 281 Va. 509, 714 S.E.2d 560 (2011). I have included Pat's summary below: 

CONTRACTUAL INDEMNIFICATION AND THE “UNIWEST v. AMTECH” CASE

 

Pat Genzler, Vandeventer Black LLP

 

1.      As a general rule, Virginia is one of states that generally allows parties to contractually obtain indemnification for losses and claims caused by the indemnitee’s own negligence, so long as the indemnity provision is clear and explicit. Estes Exp. Lines, Inc. v. Chopper Exp. Inc., 273 Va. 358, 641 S.E.2d 476 (2007).  In the Estes case, the Virginia Court held that it was not against public policy of Virginia for parties to “… pre-determine how potential losses incurred during the course of a contractual relationship will be distributed between the potentially liable parties.”  The Court held that agreements to indemnify a party against claims for personal injury or property damage, even to the extent of the indemnitee’s own negligence, were not against public policy and were enforceable.

2.      However, the general rule allowing contractual indemnity agreements that will indemnify an indemnitee for its own negligence has been limited or abolished for most construction-related contracts.  Va. Code §11-4.1 provides:

 

§ 11-4.1. Certain indemnification provisions in construction contracts declared void.

 

Any provision contained in any contract relating to the construction, alteration, repair or maintenance of a building, structure or appurtenance thereto, including moving, demolition and excavation connected therewith, or any provision contained in any contract relating to the construction of projects other than buildings by which the contractor performing such work purports to indemnify or hold harmless another party to the contract against liability for damage arising out of bodily injury to persons or damage to property suffered in the course of performance of the contract, caused by or resulting solely from the negligence of such other party or his agents or employees, is against public policy and is void and unenforceable. This section applies to such contracts between contractors and any public body, as defined in § 2.2-4301.

 

This section shall not affect the validity of any insurance contract, workers' compensation, or any agreement issued by an admitted insurer.

 

In Uniwest Construction, Inc. v Amtech Elevator Services, Inc., 280 Va. 428, 699 S.E.2d 223 (2010), modified on rehearing 281 Va. 509, 714 S.E.2d 560 (2011), the Supreme Court reviewed both the express indemnity provisions in a subcontract, and those indemnity provisions in the general contract of construction that were “flowed down” or incorporated into the subcontract by reference.  The case arose when one employee of an elevator installation subcontractor was killed, and another injured, and the estate of the deceased man and the injured man sued the general contractor in negligence.  The Supreme Court held that

 

(a)    An indemnity agreement arising out of a construction contract that purports to indemnify or hold a party harmless for a claim due to the indemnitee’s own negligence – whether the sole cause or partial cause of the injury -- is void pursuant to §11-4.1. [1]

 

(b)   If the indemnification language in the clause violates §11-4.1, the entire clause was void.  The Court would not rewrite or “carve out” of the clause the offending language, so as to leave those provisions that did not violate §11-4.1.  Thus, an indemnity provision that violates §11-4.1 is likely to be void in its entirety.

 

(c)    A broad and general “flow down” of the prime construction contract into a subcontract[2] was broad enough to flow down the general contractor’s obligation to indemnify the owner, into the subcontract, obligating the subcontractor to indemnify the general contractor to the same extent.  Thus, even if the specific indemnity clause in the subcontract was void, the indemnification provisions of the general contract of construction, including its indemnity provisions, did not violate §11-4.1 and therefore obligated the subcontractor to indemnify the general contractor for the claims made by the subcontractor’s employees.

 

3.      The Uniwest case also illustrates some of real risks in broad indemnity agreements and flow down provisions.  Ultimately the dispute was about insurance coverage, and whether the subcontractor, Amwest, was obligated to include the general contractor, Uniwest, as an additional insured on the subcontractor’s general liability and umbrella liability policies.  The contract specifications required the subcontractor to name the general contractor as an additional insured under its liability insurance policies.  Ultimately even though Uniwest was not expressly named as an additional insured  on the general liability insurance policy, an endorsement to the policy granted “additional insured status” to any indemnified party.  Further, the umbrella liability policy also extended additional insured status to any person who was required to be insured by the underlying general liability policy.    However, this decision turned on the specific language of the policies, and in other circumstances, there could very well be no coverage for an assumed indemnification obligation.

 

CONCLUSION

 

The Uniwest case is the Supreme Court’s most recent decision on the validity of indemnification agreements on construction contracts and so we must regard the decision as the latest statement of the law.  Clearly, any indemnification clause in a construction contract that expressly purports to indemnify another party for damages arising from the indemnitee’s own negligence  - whether the sole cause of the loss or a partial cause -- is likely to be found void under Va. Code §11-4.1.

 

Another question is whether you can “draft around” this issue by simply saying that the subcontractor will indemnify the general contractor “… to the maximum extent permitted by law …” or “consistent with applicable law.”  Such clauses have been upheld in some cases, but each clause stands on its own. 

 

Finally, the area where there is real cause for concern is the effect of insurance coverage and broad flow down provisions in subcontracts on the subcontractor’s indemnity obligations.  Without careful reading of the general contract (“prime contract”) and a review of the insurance policies, a subcontractor can be put into the situation of having to honor an unexpected indemnity obligation, and one that is not insured.

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[1]   The void indemnity agreement stated:

 

[Subcontractor] hereby assumes entire responsibility for any and all damage or injury of any kind or nature whatever, including death resulting therefrom, to all persons, whether employees of [Subcontractor], its subcontractors or agents. If any claims for such damage or injury be made or asserted, whether or not such claim(s) are based upon the negligence of General Contractor or [Owner], [Subcontractor] agrees to indemnify and save harmless General Contractor from any and all such claims, and further from any and all loss, costs, expense, liability, damage or injury, including legal fees and disbursements, that General Contractor may sustain, suffer or incur as a result thereof. Further [Subcontractor] agrees to and does hereby assume the defense of any action at law or in equity which may be brought against General Contractor or [Owner] arising by reason of such claims.

 

[2]   The flow down provision stated:

[Amtech] agrees to be bound to Uniwest by all the terms of the [Prime Contract] and to assume towards Uniwest all of the obligations and responsibilities that Uniwest has by the [Prime Contract] assumed toward [Owner]. All terms and conditions contained in the [Prime Contract] which, by the [Prime Contract] or by operation of law, are required to be placed in [the] Subcontract[ ] are hereby incorporated herein as if they were specifically written herein.

The Prime Contract contained the following indemnity language, which the Court held obligated the Subcontractor to indemnify the General Contractor:

[Prime Contractor shall indemnify Owner to] the fullest extent permitted by law ... from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or injury to or destruction of tangible property, (other than the Work itself) including loss of use resulting therefrom, but only to the extent caused in whole or in part by negligent acts or omissions of [Prime Contractor], a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder.

 

Contractor's Construction Fraud Implied

It is not unusual for a contractor to obtain any advance for construction work or materials. While that is done more often with residential construction, it is also done on some commercial projects or with individual subcontractors. What if they don't then follow through? Virginia makes "construction fraud" a crime, and in the recent appellate decision of Dennos v. Commonwealth of Virginia, 63 Va.App. 139, 754 S.E.2d 913 (2014) the Virginia Court of Appeals discussed the state's burden of proof and the application of the single larceny doctrine.

First, what does the construction fraud statute say? Here's the text:

§ 18.2-200.1. Failure to perform promise for construction, etc., in return for advances.
If any person obtain from another an advance of money, merchandise or other thing, of value, with fraudulent intent, upon a promise to perform construction, removal, repair or improvement of any building or structure permanently annexed to real property, or any other improvements to such real property, including horticulture, nursery or forest products, and fail or refuse to perform such promise, and also fail to substantially make good such advance, he shall be deemed guilty of the larceny of such money, merchandise or other thing if he fails to return such advance within fifteen days of a request to do so sent by certified mail, return receipt requested, to his last known address or to the address listed in the contract.
First, regarding proof of the construction fraud:

- The court confirmed that fraudulent intent can be inferred from conduct and representations of the contractor. In that case, the defendant fraudulently promised to do certain work (he took money but then never bought materials or performed work) and also fraudulently misrepresented the required work scope (telling the owner the roof needed replacement when it only needed repair).

- The court discussed that while the fraudulent intent must have existed at the time the contractor made the misrepresentations (in that case took the advance), circumstances were sufficient to imply the fraud, including the subsequent failure to perform the work, the failure to use the advanced funds to purchase supplies or hire needed labor and the refusal to return the advanced funds.

The court reviewed the evidence presented and found "ample evidence from which a rational factfinder could conclude that [the contractor] committed construction fraud . . . ,"

Second, regarding the single-larceny doctrine:

- The court noted the continuing applicability of that "common law" doctrine, as being one of the principles older than the Commonwealth itself, and which for some cases benefits prosecutors and for others defendants.

- The court held that the standard for applying the doctrine required that the series of larcenous acts have been done pursuant to a single impulse and in execution of a general fraudulent scheme; and so the doctrine does not apply to larcenous acts that are part of a general scheme but not individually the product of a single impulse.

The court reviewed the evidence and, giving the required deference to the factfinder, concluded that the contractor in that case committed at least two larcenous acts that were not done pursuant to a single impulse and execution of a general fraudulent scheme. Specifically, the contractor procured two separate advances on two separate dates involving two different promises. Thus, he could probably be charged and convicted respecting both.

The Virginia construction industry is overall extremely professional, but there are some "bad seeds" with any group as big as the contractor community; and this lesson provides guidance regarding the ramifications for fraudulent construction, and associated rights of the public.

Disclosure of Investigation Documents Granted for Qui Tam Realtor

My law partner Mike Sterling forwarded this summary of a recent qui tam movant's motion to compel contractors to product documents relating to their codes of business conduct investigations. It's an important issue for any government contractor. Here's Mike's summary:

 

Recently, the District Court for the District of Columbia granted a qui tam relator’s motion to compel contractors to produce documents relating to the contractor’s code of business conduct investigations. United States ex rel. Barko v. Halliburton Co., No. 1:05-cv-1276 (D.D.C. Mar. 6, 2014) According to the court, neither the attorney-client privilege nor the work product doctrine prevented disclosure. The relator sought almost 100 documents related to internal audit and fraud investigations conducted by one of the contractors. The disputed documents, were reviewed by the court reviewed in camera and described as "eye-openers.” The documents showed that a subcontractor received preferential treatment and evidence of pay-offs from the subcontractor to steer business to the company. Also, the subcontractor continued to receive subcontracts despite unsatisfactory performance, failure to complete projects and repeated double-billing. Investigation documents can be protected from disclosure only under certain circumstances. The court will consider several factors including the existence of a written code of business conduct that is followed by the company, a request for legal advice, attorney oversight of the investigation, written instructions from the attorney to any investigators,  Upjon Warnings to all current and former employees explaining that the interviews are for the purpose of providing legal advice to the company, restrictive labels on documents, reports addressed to the attorney and a documented threat of litigation. Every company should have a written code of business conduct, and investigations should be planned with care.