Claims for Indemnity and Defense Brought Prior to a Liability Determination Are No Longer Premature

The 2014 Legislative Session brought new possibilities for large construction projects under the Public Contract Law. Generally, a public entity is required to separately hire a design professional to design the project, and let the project out for public bid for the construction work. "Design-build" contracts, in which the public owner contracts with one entity for the design and construction of the facility, are prohibited under Public Contract Law. However, the Legislature has now given public entities another option under the Public Bid Law: Construction Management at Risk Delivery Method (CMAR).

As a precursor to the new law, the Legislature granted special approval for use of the construction management at risk delivery method for several projects, to include the new airport terminal for the New Orleans Aviation Board at the Armstrong International Airport. This CMAR delivery method required two separate contracts for design and construction, but allowed selection of the construction contractor based on factors other than lowest construction cost. In other words, the design professional was selected in accordance with Public Contract Law, and the owner secured a lead construction firm during the design phase through an evaluation of the contender construction firms' qualifications, experience and history.

Under a construction management at risk delivery method, the selected lead contracting firm commits to deliver the final project for a maximum price. The owner has the option to award the construction contract to the firm after the design phase. Because the design professionals and the contractor are on the same team during the design phase, many industry leaders believe the construction management at risk method will help public entities control costs by allowing the contractor and designer to work together on scheduling, budgeting and constructability during the design phase. The goal also is to minimize the risk of construction and design disputes through the collaborative effort.

In 2014, via Act 782, the Legislature enacted La. R.S. 2225.2.4 which allows a public entity to use the CMAR method for projects estimated to cost 25 million dollars or more. The statute defines a CMAR contractor as one who is properly licensed, bonded and insured and can provide construction experience to the owner or its design professional and/or contracts with the owner to construct the project for a guaranteed maximum price, thus eliminating the need for a separate bid phase.

Under the statute, the public entity must advertise a request for qualifications to award a contract to a CMAR contractor for preconstruction and construction services in the official journal and website of the public entity. After the responses to the RFQ are received, a selection review committee makes a recommendation to the owner. This committee consists of one design professional not involved in the contract, one licensed contractor not involved in the contract, a representative of the owner and two members from the general public.

Once the CMAR contractor is awarded the contract, the contractor and the design professional are required to furnish the owner with a probable cost of the project at the 60% and 90% design completion phases. The CMAR contractor must provide the public entity a guaranteed maximum price for construction of the project. If the owner agrees with the guaranteed maximum price and the construction phasing and sequencing, the owner can award the construction contract to the CMAR contractor. If the public entity and the CMAR contractor cannot agree, the construction phase of the project will be re-advertised and let out for public bid.

Intuitively, contracting parties in commercial transactions understand that legal consequences follow a breach of contract: If a party fails to deliver a product as promised, the breaching party can be liable for the cost to correct the breach; but what is that cost?

Say, for example, a business cancels an order to provide parts to a long-time customer because the relationship has gone sour. Legally, the liability for that breach of contract may extend beyond the cost of the order. A breaching party is liable for damages that are a direct consequence of the failure to perform and that were foreseeable at the time the contract was made, which may include lost profit. If the breach was intentional or malicious, the party's liability may extend even to direct damages that were not foreseeable.

The business that cancelled the order now faces a jury’s decision to identify the direct and foreseeable losses, a decision that, by its nature, is vague. However, the law imposes a limit on the jury’s prerogative to decide the damages. Even for a bad faith breach of contract, liability arises only for the direct, immediate consequences of the breach and there should be no liability for damages determined to be remote, indirect, or that have no necessary relation to the breach.

In a recent case, a jury found that a defendant boat engine manufacturer breached its contract with plaintiff boat manufacturer by cancelling a purchase order for engines, and further, that the engine manufacturer was in bad faith. The jury awarded $1.8 million in foreseeable lost revenues and $1.3 million in unforeseeable lost profits. The trial court threw out the “unforeseen” portion of the award because it was not a direct damage, and emphasized that a breaching party does not “become the insurer for all misfortunes that may arise from the breach.”

The boat manufacturer had argued that the cash flow expected from the sale of the boats rendered engine-less by the breach would have been invested in more personnel and capital to grow its northwest division. But, because of depleted cash flow from lost sales, that opportunity was lost. The court found, as a matter of law, that this loss was not a direct consequence of the breach, and thus, regardless of the bad faith, was not a recoverable contract damage. Simply, loss of cash flow in one part of the business that had a ripple effect in a separate division was too indirect to be a recoverable damage. See Marine Power Holding, LLC v. Malibu Boats, LLC, 2016 WL 7241560 (E.D. La. 12/15/2016).

By contrast, courts have found that loss of cash flow is recoverable where directly related to the damages suffered, such as where breach of a contract to deliver chickens to a chicken farmer caused the forced sale of the chicken farm. See Volentine v. Raeford Farms of La., 50-698 (La.App. 2 Cir. 8/15/16), 201 So.3d 325.

Failure to perform on a contract exposes a business to more than it may realize. Understanding this risk allows for smarter decisions before the breach.

A Louisiana court recently granted a motion for summary judgment in a case involving third-party criminal activity on a university campus. The motion initially was denied, but the Louisiana Supreme Court remanded the motion for reconsideration in light of its ruling in Evans v. Abubaker, Inc. After considering Evans in the context of a claim brought against an institution of higher learning, the court found Grambling University had no duty to provide additional security measures and could not have done anything within its scope of duty to prevent the murder of one of its students. See Augman v. Grambling State University.

In Augman, the plaintiff’s son, a student at Grambling University, was fatally shot at a party on the Grambling campus by another Grambling University student. The established facts confirmed the social gathering was on campus, that alcohol was consumed at the party, and that guns were present. In applying Evans to a higher education context and granting Grambling University’s Motion for Summary Judgment, the Third Judicial District Court reasoned:

There are allegations of breached policies by Grambling, i.e., allowing alcohol consumption on campus, allowing a pop-up party, and not searching for weapons in all the dorm rooms. Despite those allegations, there is no evidence presented in this summary judgment that shows that by following any of those policies to the T, Grambling would have prevented this incident. Likewise, the evidence presented on summary judgment does not show that there are additional security measures that Grambling could have taken to prevent this tragedy.

There is no indication Grambling had any duty to provide any additional security measures in this case. Likewise, there is no evidence presented that Grambling could have done anything within its duty or scope of duty, analyzed with regard to Evans, to prevent this tragedy.

The Louisiana Supreme Court’s opinion in Evans explained that preventing third party criminal activity by someone who intentionally engages in criminal conduct is not within the scope of duty of a business owner. The Evans court held, “Some risks that arise because of a defendant’s conduct are not within the scope of the duty owed to a particular plaintiff because they are unforeseeable.” Augman applied Evans’ reasoning in a higher education/alleged negligence on campus context and dismissed the claims brought against Grambling University because preventing the shooting of one student by another student on its campus was not within Grambling’s scope of duty.

Just one month after the Augman ruling, the Louisiana Supreme Court issued the opinion of Campbell v. Orient-Express Hotels Louisiana, Inc. For more detailed analysis of this case, see a July 28, 2025, Keogh Cox blog by John P. Wolff III. In Campbell, the Supreme Court did not modify the duty/risk analysis but clarified the separate analyses of “duty” and “scope of duty”, concluding that the scope of the duty owed by the defendant hotel did not encompass the risk of the harm and injury suffered by the plaintiff. Again, the Campbell Court focused on “foreseeability” of the criminal activity and considered evidence that the plaintiff’s own actions placed him in the path of peril.

The Louisiana Supreme Court’s reasoning in Campbell echoes its decision in Evans, suggesting that the issue of “scope of duty” for third-party criminal activity on university campuses analyzed in Augman would apply in cases involving claims against other institutions of higher learning as well.

References:

Evans v. Abubaker, Inc., 2023-00955 (La. 5/10/24), 384 So.3d 853.

Augman v. Grambling State University, Third Judicial District Court, Parish of Lincoln, Supplemental Summary Judgment Ruling with Reasons for Ruling, Feb. 07, 2025.

Campbell v. Orient-Express Hotels Louisiana, Inc., 2024-00840 (La. 3/21/25), 403 So.3d 573.