A recent decision of the Pennsylvania Commonwealth Court emphasizes the need for public school districts (and other public owners) to undertake extra precautions in drafting settlement agreements to ensure protection against latent defects in construction activities.  In the case of North Pocono School District v. EI Associates, et al. (Docket No. 2154 CD 2005), the Commonwealth Court found that a general release contained in a settlement agreement with a contractor precluded the District from seeking to recoup damages associated with latent defects discovered after the execution of the agreement.  The Court also found that the contractor’s surety was also released by virtue of the settlement agreement, insofar as the surety had available to it all of the same defenses that its principal (in this case the contractor) had.  The defects that the District was unable to recoup for included sustained deflection, deterioration, failure, and/or threatened failure of numerous areas of the roof, stone coping, flashing and stone and brick facing on the building.  The settlement agreement that was entered into between the District and the contractor was unrelated to these issues and dealt with other issues relative to the satisfactory performance of the contractor.  Because the release was drafted to apply to all claims arising out of the construction of the school, latent defects were deemed to be subsumed within the release.

The District could have protected itself by simply inserting a clause in the settlement agreement that would have exempted out from the release any and all latent defects that were unknown at the time of the execution of the agreement.  Although such a provision would not have prevented a challenge as to whether the defect was actually known or knowable at the time of the execution of the agreement, it would have provided the District with a contractual basis to assert the claim in the first instance.  This recent decision of the Commonwealth Court underscores the importance of carefully drafting settlement agreements relative to construction projects undertaken by public owners in general, and public school districts in particular.

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Mr. Winfield is the Administrative Chair of Rhoads & Sinon LLP’s Construction Law Group.  If you have questions regarding a planned or existing public project, or would like additional information regarding the topic of this article, you may reach Mr. Winfield at (717) 237-6703, or by e-mail at mwinfield@rhoads-sinon.com.

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