February 2002

In This Issue

• U.S. Supreme Court Ducks Affirmative Action Decision
• Ohio Decision Creates Loophole for Additional Insured Endorsements
• Party Could Decline Arbitration Even If Its Behavior May Have Constituted Bad Faith
• Watch Out for Liability from Above

U.S. Supreme Court Ducks Affirmative Action Decision

Donald W. Gregory, Construction Law Chair

A small Colorado guardrail contractor — Adarand — has been challenging the federal government's affirmative action efforts on highway contracting for years.

In the most recent Adarand case, the US Supreme Court was expected to decide, once and for all, whether the government can steer some of its contracts to minority-owned businesses. Adarand had challenged a practice of giving cash bonuses to prime contractors for hiring minority-owned firms. The government argued that since it had discontinued the bonus program in Colorado, there was no need to hear the appeal. Nevertheless, the US Supreme Court accepted the case.

On November 27, 2001, the U. S. Supreme Court reversed its earlier position and agreed that the appeal had been "improvidently granted." The Adarand appeal was dismissed and the construction industry will have to wait for another case to determine whether any race conscious measures are constitutional.

Ohio Decision Creates Loophole for Additional Insured Endorsements

Ohio has long had an anti-indemnity statute finding indemnity provisions in a construction contract unenforceable to the extent they try to hold one responsible for another's negligence. O.R.C. §2305.31.

On the basis of an earlier 1997 case it was thought that an additional insured endorsement could not be utilized to try to get around the anti-indemnity statute. However, a new Cuyahoga Court of Appeals decision has opened a loophole to allow "additional insured" endorsements to be used to circumvent the anti-indemnity statute. Stickovich v. Cleveland (2001), 143 Ohio App.3d 13.

In that case, the city by contract required that it be named as an additional insured by the contractor on his commercial general liability (CGL) policy. When the contractor's employees were injured in an electrocution arising from crane operations and sued the city for its negligence, the city demanded that the contractor's CGL policy cover the loss. The Court of Appeals ruled that the CGL insurance contract was not subject to the anti-indemnity statute concerning construction contracts and ordered the contractor's insurer to cover the city's liability.

This case means that owners or contractors named as "additional insureds" to a contractor's or subcontractor's CGL policy will have protection from their own negligent acts at the cost of the innocent contractor or subcontractor (or its insurer).

As a result, shrewd owners, contractors, or others insisting upon additional insured status will be able to accomplish indirectly what the anti-indemnity prohibits — the obligation to protect someone from their own negligence.

The end result should be greater risk and higher insurance premiums for subcontractors or others agreeing to provide additional insured status to those upstream on the "construction food chain."

Party Could Decline Arbitration Even If Its Behavior May Have Constituted Bad Faith

A construction contract contained an arbitration provision that allowed the owner to decline arbitration if any third party refused to participate in the arbitration. The trial court found that the owner had failed to act in good faith by encouraging third parties to refuse to participate in the arbitration, and compelled the parties to proceed to arbitration.

The Court of Appeals for Montgomery County reversed and held that even if the owner induced the third parties to decline arbitration with the intent of avoiding the arbitration and wearing the other party down through litigation, this conduct was permissible. The Court of Appeals upheld the arbitration clause — allegedly freely bargained by commercial entities at arm's length — and stated that the owner was right to decline arbitration when a third party refused to join the arbitration, for whatever reason. Montgomery Cty. v. Donnell (2001), 141 Ohio App.3d 593.

This case means that arbitration clauses which are drafted to allow one party the right to decline or "opt out" of arbitration under certain circumstances, after the dispute arises, will rarely be effectual as a practical matter. 

Watch Out for Liability from Above

Ohio's Administrative Code requires that:

"Overhead protection shall be provided for employees on a scaffold exposed to hazards from overhead."

Any violation of that specific safety requirement ("VSSR") allows an injured Ohio employee to receive not only regular workers' compensation benefits, but also to recover additional compensation against the employer as a "penalty." Therefore, the question arises as to what adequate "overhead protection" means. The Franklin County Court of Appeals has recently answered that question in a most surprising fashion which has created almost limitless liability for contractors or subcontractors utilizing employees on scaffolding or other elevated work platforms when there are others working overhead. State ex rel. John T. Mahoney v. Team America 3, Inc., Case No. 01AP-374, unreported decision dated December 31, 2001.

In that case, the employee was working on a scaffold when he was allegedly struck in the head by a falling stone. The scaffold on which he was working had no planks, plywood, or other protection directly positioned above his head to protect him. However, the employer utilized other precautions including: 1) requiring the use of hardhats; 2) requiring the use of toe boards on a different scaffold which was positioned above the scaffold where the employee was working; 3) using plywood on the end of the scaffolds; and 4) telling workers on the scaffolds not to work on the end of the scaffold closest to the higher scaffold. The Industrial Commission and the Magistrate reviewing the Commission's decision, found that these measures were adequate overhead protection. However, the Court of Appeals stated that while these four precautions listed above were "legitimate safety precautions, "they could not constitute "overhead protection" for workers on a scaffold which has nothing directly overhead. The Court of Appeals stated that while a hardhat is "the closest to overhead protection," it did not constitute adequate overhead protection because it didn't protect other parts of the body from being struck by falling stone or other objects.

This decision may well be appealed to the Ohio Supreme Court. However, in the interim it appears to expose Ohio construction employers to almost open-ended liability if there is no overhead scaffold or netting constructed over the work area to protect workers on scaffolding down below from falling objects. This decision may also mean that workers employed on scissor lifts or other work platforms may also have the ability to make claims, if they are injured by falling objects, even if they are required to wear their hardhats. As such, this decision may represent a radical departure in safety requirements from those traditionally employed in the construction industry and therefore put contractors and subcontractors at significant legal risk.