Friday, September 23, 2016

NJ Superior Court Halts End Run Around the Statute of Repose



https://www.thenaturalhome.com/img/septic/infiltratorandpipe.jpg

In the matter Caprioti et al. v. Beazer Homes Corp., the Superior Court of New Jersey halted some artful pleading by the Plaintiffs seemingly intended to avoid the state statute of repose.
The homeowner plaintiffs claimed that the builder had violated the New Jersey Consumer Fraud Act “by selling homes . . . without including allegedly pertinent information regarding the type of septic tank used on the properties.” All the homes included a septic system comprised of a chamber tank rather than a conventional stone and pipe system. This chamber characteristic is noteworthy because chamber systems fail prematurely more often than the conventional systems.  The plaintiffs argued is that a reasonable person would want to know this information prior to purchasing the home as it speaks to the homes useful life. They also claimed that the builder had concealed or omitted this information from the plaintiffs.  Many of the plaintiffs did indeed experience major problems including failure of the system, backup, odor, and the cost of more frequent service.

The builder moved for summary judgment on the plaintiffs’ complaints that “were more than 10 years after the purchase of their homes, and are thereby beyond the applicable 10-year Statute of Repose." See N.J. Stat. 2A:14-1.1(a) (“No action, whether in contract, in tort, or otherwise, to recover damages for any deficiency in the design, planning, surveying, supervision or construction of an improvement to real property . . . . shall be brought against any person performing or furnishing the design, planning, surveying, supervision of construction or construction of such improvement to real property, more than 10 years after the performance or furnishing of such services and construction.").  The builder framed the issue as one of alleged inadequate or inferior construction whereas the homeowner plaintiffs stated that their claims “[arose] out of defendant’s unlawful sales practices, not negligent design, planning or construction of their homes.”

The Superior Court sided with the builder and summarily decided and dismissed the plaintiffs’ claims.  In so deciding, the Court emphasized that statutes of repose are intended to be read broadly to “limit the expanding liability of contractors . . . .”  The Court also focused on the fact that the plaintiffs did not dispute that the chamber septic system was an “improvement to real property” alleged to be “insufficient, inadequate, and not functioning properly.”  The Court reasoned that although couched as a misrepresentation “but for the alleged septic system failures, there would be no cause of action.”
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Monday, September 19, 2016

Fundamentals of Construction Law: Learning From The Pros - November 4, 2016


On November 4, 2016, the ABA Forum on Construction Law will present, in four cities across the counry, "Fundamentals of Construction Law."  The concepts covered apply to projects ranging from a single building to complex infrastructure improvements.

Taught by leading construction lawyers in each locale, this program presents a unique opportunity for new construction lawyers or experienced lawyers who occasionally practice construction law as well as non-lawyer and construction professionals to learn the essentials from those who practice it daily at its highest levels.  The program concisely covers the gamut of construction issues including the roles of the key participants in a project, the structure of project delivery systems, the bidding and construction process, insurance and bonding, government construction contracts, and dispute resolution.  This affordable, conventiently-located program provides an excellent way for firms and companies of all sizes to provide an exceptional training opportunity to their lawyers and construction professionals.  Tuition includes the Fundamentals of Construction Law (2nd Ed.) book, plus lunch and a full day of CLE instruction. 

Register today at Fundamentals of Construction Law: Learning From the Pros
                            
Additional Information:

PDF Document                

New Jersey Supreme Court Holds CGL Policy Covers Claims of Consequential Water Damage Resulting from Alleged Defective Subcontractor Work

On August 4, 2016, the New Jersey Supreme Court held that a developer/prime contractor’s commercial general liability (“CGL”) policy covered claims of consequential water damage resulting from alleged defective work by subcontractors. See Cypress Point Condominium Assoc., Inc. v. Adria Towers, L.L.C., 2016 WL 4131662 (N.J. 2016).

The case arose from the construction of Cypress Point, a fifty-three unit, luxury condominium complex in Hoboken, New Jersey.  Id.  Adria Towers, LLC, Metro Homes, LLC, and Commerce Construction Management, LLC (collectively “Developer”) jointly served as both the project’s developer and prime contractor.  Id.  At issue were four CGL policies covering the time period from May 30, 2002, to July 15, 2006, that Evanston Insurance Company (“Evanston”) issued to the Developer and which were modeled after the standard form CGL policy promulgated by the Insurance Services Office, Inc. (“ISO”).  Id.

Those policies provided that “’[p]roperty damage’ includes ‘physical injury to tangible property including all resulting loss of use of that property’”.  Id. at *2.  The policies defined an “occurrence” as “’an accident, including continuous or repeated exposure to substantially the same general harmful conditions.’”  Id.  The policies also contained the typical “your work” exclusion, but stated that the exclusion “’does not apply if the damaged work or the work out of which the damage arises was performed on [the insured’s] behalf by a subcontractor’”.  Id.

Roof leaks and water infiltration at the interior window jambs and sills of the residential units and water intrusion into common areas and other interior areas were the damage at issue.  Id.  The plaintiff Cypress Point Condominium Association (“Association”) sought a declaration that Evanston’s CGL policies covered its claims against the Developer for the damages.  Id.

The insurers contended that “a subcontractor’s faulty workmanship does not have the fortuity element required for the faulty workmanship to constitute an ‘accident’”, and therefore, is “not an ‘occurrence’ under the terms of the policies”.  Id. at *3.  The insurers further argued that because there is no coverage the outset, the exceptions to the “your work” exclusions for subcontractor work were of no moment.  Id.

The Association argued that a ruling in favor of coverage for consequential damages caused by subcontractors’ work is consistent with judicial precedent and the plain policy language.  Id. at *4. 

The trial court concluded that faulty workmanship does not constitute an “occurrence” and that the resulting consequential damages were not “property damage” under the policy terms.  Id.  The Appellate Division reversed, holding that “’unintended and unexpected consequential damages [to the common areas and residential units] caused by the subcontractors’ defective work constitute ‘property damage’ and an ‘occurrence’ under the [CGL] polic[ies]’”.  Id. at *3.

Noting “’ a strong recent trend in case law [of most federal circuit and state courts] interpret[ing] the term ‘occurrence’ to encompass unanticipated damage to nondefective property resulting from poor workmanship’”, the New Jersey Supreme Court ruled in favor of coverage.  Id. at *9 - *14.  While the policies did not define “accident”, the court found that the term, as used in the policies at issue, encompassed unintended and unexpected harm caused by negligent conduct, and therefore, the alleged negligence of the subcontractors at issue was an “occurrence”.  Id. at *11.  The Court next found that the policies’ “your work” exclusion did not apply because the alleged damage arose from work by a subcontractor.  Id. at *13.

Linked here is a copy of the New Jersey Supreme Court’s decision.

Thursday, September 8, 2016

D1 Steering Committee Meeting Minutes - August 15, 2016

Division 1: Litigation and Dispute Resolution conducts a monthly conference call of its Steering Committee and other friends/volunteers of Division 1.  Here is a link to the Minutes of the Steering Committee Meeting from August 15, 2016

Wednesday, August 31, 2016

US Supreme Court False Claims Act Decision in Escobar Has Significant Implications for Contractors

Marion T. Hack, Partner, Pepper Hamilton LLP
John H. Conrad, AssociatePepper Hamilton LLP

On June 16, 2016, the U.S. Supreme Court ruled in the matter of Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), changing the legal landscape for False Claims Act qui tam claims concerning the implied false certification theory of liability. This article will discuss the Escobar holding and examine relevant considerations for contractors in light of this ruling.

In Escobar, a teenage patient received counseling under Massachusetts’ Medicare program at a mental health facility, Arbour Counseling Services, which is owned and operated by a subsidiary of Universal Health Services, Inc. As part of the counseling process, the staff at Universal diagnosed the patient and prescribed medication. The patient had an adverse reaction to the mediation and subsequently died of a seizure. It was later determined that four out of the five Universal employees that treated the patient were not properly licensed to provide mental health counseling, prescribe medications or offer counseling services without supervision. Specifically, the person who diagnosed the patient had her psychologist license application rejected by Massachusetts, and the person who prescribed the medication was actually a nurse who lacked authority to prescribe medication without supervision, in violation of 130 Code Mass. Regs. § 429.22, et seq. Escobar, 136 S. Ct. at 1997-98.

During this time frame, Universal submitted requests for payment to the government for its personnel under Massachusetts’ Medicare program. Universal submitted these payment requests despite its knowledge that its personnel was improperly classified under the billing codes used by Universal.

The False Claims Act Claim

In 31 U.S.C. § 3730(b)(1) it states, “A person may bring a civil action for a violation of section 3729 for the person and for the United States Government. The action shall be brought in the name of the Government.” These suits are referred to as “qui tam” suits. Further, 31 U.S.C. § 3729(a) provides, “any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval . . . is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000,[1] . . . plus 3 times the amount of damages which the Government sustains because of the act of that person.”

Under the above provisions, the respondents in Escobar brought a qui tam suit, alleging that Universal had violated the False Claims Act and defrauded the government in billing for services that were not properly rendered as described in the billings, while failing to disclose serious breaches related to Massachusetts’ Medicare program. The respondents asserted that the government would not have reimbursed the claims had it known that it was billed for mental health services that were performed by unlicensed and unsupervised staff. Escobar, 136 S. Ct. at 1997-98.

Universal filed a motion for summary judgment to dismiss the respondents’ claims. The district court granted Universal’s motion “because none of the regulations violated by Universal was a condition of payment.” The U.S. Court of Appeals for the First Circuit reversed, holding that “every submission of a claim implicitly represents compliance with relevant regulations, and that any undisclosed violation of a precondition of payment (whether or not expressly identified as such) renders a claim ‘false or fraudulent.’” The First Circuit also held that the “regulations themselves provided conclusive evidence that compliance was a material consideration of payment.” Id. at 1998.

The U.S. Supreme Court rejected both the holding of the district court and the holding of the First Circuit and remanded to the district court for further determination of the matter utilizing the new standard for implied certification claims under the False Claims Act. Id. at 2004.

New Standard for Implied False Certification Claims

The Court in Escobar held:

[T]he implied false certification theory can, at least in some circumstances, provide a basis for liability. By punishing defendants who submit “false or fraudulent claims,” the False Claims Act encompasses claims that make fraudulent misrepresentations, which include certain misleading omissions. When, as here, a defendant makes representations in submitting a claim but omits its violations of statutory, regulatory, or contractual requirements, those omissions can be a basis for liability if they render the defendant’s representations misleading with respect to the goods or services provided.

Id. at 1999 (emphasis added).

In Escobar, Universal knowingly submitted payment applications that listed specific billing codes corresponding to certified and licensed personnel, where those individuals were not certified or licensed, thus misleading the government into paying the invoices. Id. at 1997. The Escobar Court clarified that the claims in the matter related to more than just demands for payment and that “representations that state the truth only so far as its goes, while omitting critical qualifying information[,] can be actionable misrepresentations.” Id. at 2000.

A critical determination in the new Escobar standard is whether the statements made qualify as actionable misrepresentations. The Court in Escobar provided examples of some statements that create actionable misrepresentations to guide future litigation. When a seller of property reveals that there are two new roads near a property for sale, but fails to disclose that a third potential road might bisect the property, the seller has omitted key information that would “materially affect the value of the purchase.” Id. (citing Junius Const. Co. v. Cohen, 257 N.Y. 393, 400 (1931)). An applicant for a position at a college makes actionable misrepresentations when his résumé lists prior jobs and then retirement, but fails to disclose that his “retirement” involved time in prison for a $12 million bank fraud. Id. (citing Sarvis v. Vermont State Coll., 172 Vt. 76, 78, 80-82 (2001)). Both of these examples point to the need for the misrepresentation to affect the basic value of the goods or services to be provided in order to be an actionable misrepresentation.

The Escobar Court also held a critical factor was that the “misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government’s payment decision in order to be actionable under the False Claims Act.” Id. at 1996 (emphasis added). The Court also held that liability is not limited to cases where the requirements involved were expressly designated as conditions of payment. Id. at 2001. To assist in interpreting this standard, the Court provided an example of a material misrepresentation. When a contract involves the supply of guns, and the contract does not state that the guns must actually shoot, but the supplier knows that the government routinely rescinds contracts if the guns do not shoot, the supplier has “actual knowledge” of the materiality of that requirement. Further, the seller’s failure to appreciate the materiality of that condition would amount to “deliberate ignorance” or “reckless disregard” of the falsity of the information. Id. at 2001-02. The Court also cited to United States ex. rel. Marcus v. Hess, where two contractors violated a non-collusion bidding requirement and withheld that information. This was implicit false certification because the government would not have funded the subsequent payments had it known of the violation. Id. at 2003 (citing Marcus, 317 U.S. 5379, 543 (1943)).

In the construction context, misstatements concerning the types of materials supplied or the qualifications of the individuals whose labor is billed could implicate this implied false certification theory of the False Claims Act. For example, consider a construction contract that calls for a specific material or equipment that is required to meet specified quality or regulatory requirements. If the contractor knowingly supplies a different and lesser quality item and then bills for the government per the schedule of values including the originally specified item, then the contractor may be liable for implicitly submitting a false claim. Where a design/build contract calls for engineering or oversight services to be performed by a licensed engineer, or where a construction management contract calls for licensed or certified personnel to perform services, and where the contractor supplies unlicensed or uncertified personnel for the positions involved, an implied false certification claim is possible. Another example is a time and material construction contract that specifies categories of workers, depending on specific worker classifications and training levels. If the contractor provides labor that does not meet those specified classifications within the contract (e.g., supplying apprentice labor and billing for journeymen), and the contractor submits billing for personnel based on the classifications that do not match the personnel qualifications, the contractor is potentially liable for an implied false certification claim.

In all of these possible scenarios posed above, contractors need to be vigilant in verifying that the labor or materials supplied by the contractor or its subcontractors do in fact meet the specifications and/or regulatory requirements for any project. Otherwise, the contractor could be exposed to significant per act penalties and treble damages under the False Claims Act. Should any of these issues arise, a contractor should seek assistance in resolving the matter at the earliest time to avoid or minimize the potential penalties.

[1] The government revised the penalties in 2015 via 28 C.F.R § 85.3(a)(9) to a minimum of $10,781 and a maximum of $21,563 per occurrence.

Article originally posted August 26, 2016 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group. 

Thursday, August 18, 2016

Materials "Considered" by Construction Expert Are Off Limits


The Rhode Island Supreme Court, in Cashman Equipment Corporation, Inc. v. Cardi Corporation, Inc. interpreted Rule 26 of the R.I. Superior Court Rules of Civil Procedure to hold that the Plaintiff subcontractor could not discover all materials that the Defendant general contractor's testifying expert considered when formulating his opinions.

The underlying matter concerned work on a bridge that spans the Sakonnet River in eastern Rhode Island.  Plaintiff served as the bridge foundation subcontractor on the project. Plaintiff alleged that it incurred additional costs because the Defendant general contractor issued a defectively designed cofferdam and materials to Plaintiff.  Defendant disagreed and tapped an engineering expert who opined that cofferdam design was not defective.  Plaintiff sought to investigate the underpinnings of that opinion and requested "all materials and documents, less core attorney work product, including all computer models and drafts of materials and documents, developed and considered by [Defendant's] testifying expert . . . in the process of formulating his written expert opinions.”  Defendant refused to produce the drafts of its expert's models and documents.  Plaintiff retorted with a motion to compel thatthese materials "considered" by the expert were within the scope of Rule 26, were discoverable, and were necessary to "assure effective cross-examination of testifying experts." The Superior Court disagreed and denied the motion to compel.

On writ of certiorari on the interlocutory issue, the Supreme Court started with the section of Rule 26 that embraces expert discovery:
A party may through interrogatories require any other party to identify each person whom the other party expects to call as an expert witness at trial, to state the subject matter on which the expert is expected to testify, and to state the substance of the facts and opinions to which the expert is expected to testify and a summary of the grounds for each opinion. A party may depose any person who has been identified as an expert expected to testify when the expert interrogatory has been responded to by the other party.

Rule 26(b)(4)(A) of the R.I. Superior Court Rules of Civil Procedure.  With a nod to the reasonableness of the Plaintiff's request, but constrained by this plain language in the rule, the Court concluded that investigation of experts "is confined by its very terms to discovery through interrogatories or deposition." As a result, Plaintiff was not entitled to review Defendant's expert's documents considered.  The Court went on to hint that a rule change may be in order.

After reaching this decision, the Supreme Court observed that Rhode Island's current Rule 26 diverges from the current Federal Rule, which does require a party to disclose a testifying expert witness's report along with, inter alia, "the data or other information considered by the witness in forming the opinions."
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Friday, August 12, 2016

Is 30 Days Enough Time to Fully Arbitrate and Issue an Award for a Claim on a Partial Parking Garage Collapse? Federal Court Says Let the Arbitrator Decide

The plaintiff in Tribal Casino Gaming Enterprise v. W.G. Yates & Sons Construction Company et al entered into a contract for the expansion of an existing facility at Harrah’s Cherokee Casino in Cherokee, North Carolina with defendants in April of 2008.  The project included the construction of two parking structures, one, an eight level 2,300 space facility and the other a six level, 1,200 space facility connected to the hotel structure.  Defendant then contracted with its co-defendant to furnish and erect the precast parking garages. An arbitration clause contained within the prime contract stated in part that:

“Any controversy or claim arising out of or relating to this  Agreement shall…be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association…The parties agree that the only grounds for appeal of any arbitration award…shall be...where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy, or any other misbehavior by which the rights of any party have been prejudiced…The arbitration panel shall be required to render a decision within thirty (30) days after being notified of their selection.”
In February of 2015, a ramp located in the hotel parking garage partially collapsed and the plaintiffs filed suit in February 2016 for damages related to breach of contract, breach of warranty, negligence, gross negligence, and unfair and deceptive trade practices. Plaintiff also filed a demand for arbitration with the AAA at that time.  In May 2016, plaintiff filed a motion to stay pending arbitration and to compel arbitration, and then chose its designated arbitrator. This gave the defendants fifteen days to designate its arbitrator, and then gave those arbitrators fifteen days to select the third member of the panel, with a final decision having to be rendered thirty days later.  Defendants jointly filed a motion to stay the arbitration.

The Court began its analysis by presenting the plaintiff’s argument that the arbitration is enforceable against the defendant based upon the Federal Arbitration Act and the North Carolina Revised Uniform Arbitration Act.  In turn, the defendants do not challenge the validity of the contract, but “contend that [plaintiff’s] claim falls outside the scope of the arbitration clause, or alternatively, that the arbitration clause itself is unenforceable due to its unreasonably short time period within which the arbitration panel must render a decision.” The Court next proceeds to examine if the claim itself is arbitrable.

In order to determine whether the claim itself is arbitrable, the Court begins by pointing to the fact that the contract was signed in 2008. The 2007 AAA’s commercial rules regarding arbitrability read, “"The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement."  The Court contrasts this to the 2013 update which states, “"The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim."  By not incorporating similar language to the AAA’s 2013 rules on arbitrability, the Court finds that it has the jurisdiction by stating, “the language that the parties actually incorporated into their agreement, however, only delegated the substantive arbitrability issues of existence, scope and validity. As to all other issues of substantive arbitrability, including enforceability, the presumption is not rebutted, and these issues are left for the Court.”

Finding that it had the jurisdiction to rule on the arbitrability of the plaintiffs claim, the Court presented the defendant’s arguments that the clause is unenforceable because of, “contractual impossibility due to unreasonable time constraints, or constitutional invalidity based upon due process and fundamental fairness.” The court does agree with the defendant that allowing an arbitration panel thirty days to review and assess liability for a partial-collapse of a parking garage years after the project was completed “would be a Herculean feat, if not utterly impossible.” But the Court does not find that the arbitration provision is unenforceable. 

The Court acknowledged that such a thirty day arbitration clause is desirable and even necessary for mid-construction disputes because some issues arise that would require immediate attention, but the contract’s arbitration clause does consider such issues or claims that are more complex and require an extended period of deliberation. “The arbitration clause provides that an arbitration award may be vacated for misconduct of the arbitration panel if the panel, upon sufficient cause, (1) refuses to postpone the hearing, or (2) refuses to hear evidence pertinent and material to the controversy.”  The Court found that the arbitration panel does possess the power to “extend the date for the final disposition hearing and to set discovery deadlines within that timeframe.”  Accordingly, the arbitration clause is not unconscionable, illegal, or unconstitutional, and it does not render the arbitration provision unenforceable.


The Defendant’s motion to hold the arbitration clause unenforceable was denied. 

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based out of Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com.

Friday, August 5, 2016

In the U.S. Fifth Circuit, It Remains Undecided Whether Manifest Disregard of the Law or an Award’s Violation of Public Policy Are Grounds to Vacate an Arbitration Award

While most posts on this blog usually discuss notable court decisions that resolve otherwise undecided issues, this post discusses a recent case that is notable because the court did not resolve an undecided issue of law in that circuit, deciding the case instead on a factual ground and never reaching legal question presented. 

In McKool Smith, P.C. v. Curtis International, Limited, 2016 WL 2989241 (5th Cir. 2016), the U.S. Fifth Circuit addressed a party’s claim that an arbitrator’s alleged manifest disregard of the law and the award’s alleged violation of public policy remained grounds for vacating an arbitrator’s award. 

The case arose from an arbitration award in favor of a law firm, McKool Smith, P.C. (“McKool”) against its client, Curtis International, Limited (“Curtis”), following McKool’s representation of Curtis in a prior patent litigation.  Curtis sought to vacate the award, claiming that the arbitrator manifestly disregarded the law by allowing McKool to recover for block-billed time entries and that the award violated Texas public policy for similar reasons.

The court noted that, since the U.S. Supreme Court’s decision in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S.576, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008), the court had acknowledged that arbitration awards only could be overturned on statutory grounds under the Federal Arbitration Act.  However, Curtis urged the Fifth Circuit to rule - as other courts have ruled - that an arbitrator’s manifest disregard of the law or an award’s violation of public policy were statutory grounds because in those situations arbitrator has “exceeded [his or her] powers” within the meaning of 9 U.S.C. § 10(a)(4).

The 5th Circuit, however, held that, even if the court were to consider that manifest disregard of the law or violation of public policy were statutory grounds to vacate an arbitration award, the arbitrator in the pending case had not manifestly disregarded the law and the award did not violate Texas state public policy.  Therefore, in the 5th Circuit, whether manifest disregard of the law or violation of public policy are statutory grounds for vacating an award remains unresolved.


For your reference, linked here is a copy of the 5th Circuit’s unpublished decision.

Wednesday, August 3, 2016

Western District of Virginia Confronts Several Legal Issues That Frequently Impact Multi-Party Construction Disputes – Economic Loss, Damage to Other Property, Third Party Beneficiary Status, Warranties, Subrogation, and Third-Party Joinder

Robert A. Gallagher, Associate, Pepper Hamilton LLP

Allstate Insurance Company v. Structures Design/Build, LLC, 2016 U.S. Dist. LEXIS 34349 (WD VA March 17, 2016)

This construction dispute case arises from a failed pipe connector that caused water damage to a facility and insured personal property, which Hillel at Virginia Tech, Inc. (“Hillel”) owned in Blacksburg, Virginia. Hillel contracted Structures Design/Build, LLC (“Structures”) to design and construct the facility. Structures, in turn, subcontracted PJ Little Plumbing, Inc. (“PJ”) for plumbing and mechanical installation. PJ purchased the failed pipe connector from CMC Supply, Inc. (“CMC”). Allstate Insurance Company (“Allstate”) insured Hillel for the damage to the facility and the personal property.

As Hillel’s subrogee, Allstate filed a complaint against Structures and PJ. Allstate sued Structures for various state law claims. It sued PJ for negligence and breach of express and implied warranties. PJ filed a third-party complaint to join CMC on a breach of implied warranty theory. PJ and CMC moved to dismiss the claims against them.

The court granted in part and denied in part PJ’s motion. It dismissed the negligence claim against PJ with respect to damages arising from harm to the facility, because the facility was the subject of Hillel’s construction contract. The court denied the motion with respect to damages to personal property stored within the facility, because it represented damage to other property. The court denied PJ’s motion to dismiss Allstate’s implied warranty claim because it found Hillel to be a third party beneficiary to PJ’s subcontract with Structures, and all such construction contracts in Virginia contain an implied warranty to perform services in a good, safe, and workmanlike manner, free of defects. The court dismissed Allstate’s express warranty claim because it failed to plead sufficient facts to support the existence of any express warranty between PJ and Hillel.

The court granted CMC’s motion in its entirety. The court held that PJ’s third-party complaint failed to state a claim for derivative liability under Rule 14 of the Federal Rules of Civil procedure because it alleged facts that were factually distinct from those alleged in the original complaint. PJ alleged that CMC was liable to Hillel because it manufactured a defective connector, whereas Allstate alleged that PJ was liable on the basis that it improperly installed or selected an unsuitable connector. The court noted that if Allstate succeeded in proving that PJ failed to properly install or select the connector it would do little to support PJ’s claim against CMC that the connector was defective.
The following summarizes the court’s reasoning for its conclusions:

Allstate’s Negligence Claim Against PJ

PJ argued that the economic loss doctrine barred Allstate’s negligence claim. The court considered two factors: (i) whether the alleged breach involved duties outside of those assumed under contract, and (ii) whether the property damage included property that was not subject to the agreement between the parties. The court first found that the complaint failed to allege that PJ breached any duty imposed by law, as opposed to the parties’ contract.

The court next found that damage to the facility could not be recovered in tort because it represented only economic loss. According to the court, Hillel had purchased a “package” for the construction of its facility and one component of that package – the pluming work – damaged other parts of the construction package. The court found the case of Sensenbrenner v. Rust, Orling & Neale, Architect, Inc., to be instructive. 374 S.E.2d 55 (Va. 1988). In Sensenbrenner, the owner contracted a building company to design and construct a house with a pool. When a defect in the pool caused damage to the house’s foundation, the owner sued in tort to recover for damages to the pool and the house. The Virginia Supreme Court found that the owner alleged nothing more than “disappointed economic expectations,” because the owner contracted for the purchase of a package, which was “alleged to have been defective” as “one or more of its component parts was sufficiently substandard as to cause damage to the other parts.”

The court, however, held that Allstate could recover for damage to the personal property stored at the facility because that property was not part of Hillel’s contractual package for the construction of the facility. The court noted that PJ had appeared to concede that this part of Allstate’s claim could go forward. The court did not allow the mere existence of this other property damage to open the door for recovery for damages that related to property within the construction package. So the court permitted Allstate to proceed on its negligence claim against PJ for only damages to the personal property stored at the facility.

Allstate’s Breach of Warranty Claim Against PJ

Allstate alleged that PJ breached express and implied warranties. PJ argued that Allstate could not support its claims because neither Hillel nor Allstate had a contract with it. The court found that while PJ did not contract directly with Hillel, it was the third party beneficiary to PJ’s subcontract with Structures, because the subcontract contained several provisions whereby PJ agreed to provide indemnity to Hillel. Although the court found one of the indemnity provisions void under Virginia’s anti-indemnity laws, it believed that the remaining provisions were sufficient to show that Hillel was an intended beneficiary of the subcontract.

Notwithstanding Hillel’s status as a third party beneficiary to the subcontract, the court dismissed Allstate’s express warranty claim because Allstate failed to allege sufficient facts to support the existence of any express warranty between PJ and Hillel. The court concluded that Allstate had sufficiently stated a claim for breach of the implied warranty found in all construction contracts in Virginia, which require contractors to perform its services in a “good, safe, and workmanlike manner free from defects and in accordance with all applicable codes and standards.”

PJ’s Third-Party Complaint to Join CMC

CMC moved to dismiss the third-party complaint on the basis that it failed to state a claim for derivative liability under Rule 14 of the Federal Rules of Civil Procedure. Under Rule 14, a party may not implead a third-party merely because he may be liable to plaintiff. In other words, a third-party complaint that alleges “it’s him, not me” is improper under Rule 14. CMC argued that PJ’s third-party complaint simply contended that CMC was liable directly to Hillel because it manufactured a defective part, which if true wholly, or partly, excused PJ from liability.

According to the court, Rule 14 cannot be used to bring in matters that merely have some relationship to the original action. The court found that the original complaint’s allegations were factually distinct from those in the third-party complaint. PJ alleged that CMC was liable to Hillel for its damages because it manufactured a defective part, whereas Allstate alleged that PJ was liable for installing a connector that was not equipped to handle the high temperatures in the facility’s hot water system.

The court concluded that Allstate’s dispositive question was whether the connector was properly installed or selected, not whether it was properly manufactured. So if Allstate succeeded in proving that PJ failed to properly install the connector in the hot water system, such a claim would do little to support PJ’s claim against CMC that the connector was defective. The court also noted that PJ failed to allege that the parties were joint tortfeasors or that it had a right to indemnity or contribution from CMC if it were held liable to Allstate. The court ultimately dismissed PJ’s third-party complaint against CMC because it violated Rule 14 and because CMC’s dismissal promoted judicial economy and fairness.


Article originally posted July 14, 2016 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group. 

Thursday, July 21, 2016

There's no such thing as too much communication...Or is there?

In the matter of C.G. Schmidt, Inc. v. Permasteelisa North America the 7th Circuit decided that it indeed is possible for too much communication to scuttle a construction contract.  The appellate court affirmed the District Court's summary judgment decision that given the "extensive negotiations," the parties never entered into a binding contract. It also held that the General Contractor's promissory estoppel claim failed as a matter of law as well.

The project involved constructing an office building in Milwaukee, Wisconsin.  After protracted negotiations with the Subcontractor, the General Contractor bid on the project using a curtainwall Subcontractor's bid.  No written contract existed between the General Contractor and Subcontractor and indeed after submitting the bid the General Contractor continued to discuss terms with the Subcontractor.  The General Contractor successfully won the bid for the project.  Then the Subcontractor declined to provide the glass curtainwall due to "civil unrest in Thailand" where it would be producing the materials. The General Contractor brought suit against the Subcontractor for breach of contract and promissory estoppel.

The Wisconsin Uniform Commercial Code codifies that "offer and acceptance are defined more liberally than under Wisconsin common law." As such, "an enforceable contract may be formed by conduct, even without a signed writing embodying the agreement." The General Contractor therefore still had a viable contract claim even though the terms were not put into writing signed by both parties.  However, the General Contractor's breach claim still was defeated because "an intent to contract" did not exist. The Court observed that throughout the protracted negotiations (which included repeatedly updating the proposed contract price, debating terms, exchanging various versions of a production schedule, and jointly participating in project kick-off meetings) the Subcontractor made clear it only "intended to be bound after reviewing the prime contract [with the owner] and executing a formal subcontract with agreed upon language."  The General Contractor "never corrected this understanding nor expressed a contrary belief." Likewise, the General Contractor, the Court explained, acted as though there was no contract either -- where the General Contractor had internal policies to obtain "written agreements with all subcontractors" and to "clear [the subcontractor] with its risk management department" and where even the General Contractor's instant letter of intent stated that a future subcontract agreement would be executed to "supersede in all respects prior negotiations."  As the Court summarized "[t]o put this point another way, [the contractor] never accepted [the subcontractors] bid."  Therefore, no breach of a contract.

As for the promissory estoppel claim--that the General Contractor reasonably relied on the Subcontractor's bid when submitting its own bid to the owner--the Court was not persuaded as a matter of law. Wisconsin adheres to the general rule that "subcontractor should expect a general contractor to incorporate the subcontractor's bid" and if the general contractor gets the award, "it is only fair that [the general contractor] should have at least an opportunity to accept [the subcontractor's] bid."  However, here, where the General Contractor continued to discuss terms with the Subcontractor after submitting the bid and even after receiving the award, promissory estoppel could not lie.  As the Court explained:
This limit to the application of promissory estoppel exists because of the inequity in allowing the general contractor to shop for lower bids or negotiate with the subcontractor while holding the subcontractor to its bid. . . . . By limiting the application of promissory estoppel, the general contractor can either keep the subcontractor's bid open for a reasonable amount of time or seek a better deal, but not both.
Moreover, the Court pointed out, it was unreasonable for the General Contractor to rely on the Subcontractor's bid where the Subcontractor had advised "that it expected to review the prime contract [with the owner] and negotiate certain aspects of the subcontract prior to executing an agreement."  Such a "conditional promise" is not appropriate to rely upon.  Accordingly, the General Contractor's promissory estoppel claim was denied as well.
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts.  She is an associate at Pierce Atwood, LLP in Providence, Rhode Island.  She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Friday, July 15, 2016

Does a Change in Retention Payment Terms Trigger the Prompt Payment Statute? California Appeals Court Says No.


In Blois Construction, Inc. v. FCI/Fluor/Parsons, the defendant entered into a contract in 2006 with Exposition Metro Line Construction Authority (owner) to serve as the general contractor for a light-rail project that connected downtown Los Angeles with Culver City. Defendant in turn subcontracted with plaintiff for the associated underground work on the project. The prime contract allowed the owner to withhold 10 percent of the progress payments in retention and a subcontract provision allowed the defendant to withhold 10 percent of the plaintiff’s payments in retention. The retention provision in the prime contract allowed for the 10 percent retention to be waived at the sole discretion of the owner when the project was 50 percent complete.  In December 2009, defendant requested that the owner stop withholding retention and the owner agreed with the caveat that it maintained the right to resume withholding at a later time. The owner continued to withhold all previously collected retention and did so until May 30, 2014. 

The plaintiff completed its contract work in 2011 by which time $500,000 of its progress payments had been held in retention by the defendant.  In 2012, plaintiff filed suit against the defendant and its sureties for 1) extra work on the project that it had not been paid for and; 2) for the balance of the retention on the contract. The suit was referred to a dispute review board by the courts for arbitration.  In November 2013 while the case was still pending before the board, the defendant released $534,909.89 in retention to the plaintiff.  The board ruled that all retention the defendant withheld had been required to be paid by September 2011 under the terms of the subcontract.  The board left the issue of penalties for late payment to the courts. The trial court decided that no penalties were to be incurred because the owner had not released retained funds to the defendant until 2014 and the plaintiff had been paid its full amount of retention by the end of 2013.  The plaintiff appealed.

The Court of Appeals of California, Second District, Division One started its analysis by identifying the language in California’s ‘prompt payment’ statute. California Public Contract Code Section 7107 states "within seven days from the time that all or any portion of the retention proceeds are received by the original contractor, the original contractor shall pay each of its subcontractors from whom retention has been withheld, each subcontractor's share of the retention received." The code further identifies penalties to prime contractors who do not adhere to this this time frame by stating that contractors who violate the code section, “shall be subject to a charge of 2 percent per month on the improperly withheld amount."

The plaintiffs argued that as a result of the change in payment terms where retention was no longer held on progress payments after December 2009, this constituted the “retention proceeds [being] received by the original contractor” and as a result defendant was required to pay the plaintiff its share of retention proceeds within seven days.  Plaintiff argues that by allowing the defendant and similarly situated prime contractors to continue to withhold retainage from subcontractors after the owner stops withholding would run counter to the spirit of the ‘prompt payment’ law.

The Court states that the defendant’s argument fails because Section 7107 is not applicable in this instance. The court points to the fact that even though the owner did stop withholding retention funds starting in 2010, it still withheld all previously withheld retention. The court then points to an alternate ‘prompt payment’ statute, Business and Professions Code section 7108.5, to discount the plaintiff’s “spirit of the law” argument.  Section 7108.5 requires a prime contractor to pay its subcontractors “not later than seven days after receipt of each progress payment, unless otherwise agreed to in writing, the respective amounts allowed the contractor on account of the work performed by the subcontractors."  The court finds that there is no evidence that the defendant did not adhere to this code section post December 2009 retention agreement and both “prompt payment” statutes “operated in tandem to ensure that there was no point at which [defendants] could receive payments from [owner] without paying [plaintiff] and other subcontractors their share of the proceeds.” 

The court found that as a result of the defendant not receiving retention proceeds from the owner until at least May 30, 2014, its obligation to pay plaintiff its share did not arise until that date and Section 7107 was satisfied when it paid the plaintiff in November 2013.  The ruling of the trial court was affirmed.
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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based out of Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com.

Tuesday, July 5, 2016

D1 Steering Committee Meeting Minutes - June 20, 2016

Division 1: Litigation and Dispute Resolution conducts a monthly conference call of its Steering Committee and other friends/volunteers of Division 1.  Here is a link to the Minutes of the Steering Committee Meeting from June 20, 2016



Friday, July 1, 2016

Fifth Circuit Considers Allocation of Risk of Defective Plans and Specifications in Reversing $1.29 Million Judgment Entered in Favor of Contractor

Jeffery R. Mullen, Associate, Pepper Hamilton LLP

Dallas/Fort Worth International Airport Board v. INET Airport Systems, Inc., et al., 2016 U.S. App. LEXIS 6646, 819 F.3d 245 (5th Cir. Apr. 12, 2016)

This action arose out of a construction project in terminal E of the Dallas/Fort Worth International Airport (“DFW”), in which pre-conditioned air and rooftop air handling units were to provide conditioned air (cooling and heating) to passenger boarding bridges and aircrafts parked at terminal gates (the “Project”).  In August, 2009, following a competitive bidding process, owner Dallas Fort Worth International Airport Board (the “Owner”) entered into a contract with contractor INET Airport Systems, Inc. (the “Contractor”) to construct the Project. The plans and specifications for the contract included detailed drawings, the precise rooftop units and parts to be used, approved manufacturers and performance requirements.  Under the contract and these plans, the Contractor was obligated to install operational rooftop units that were required to use 30 percent ethylene glycol/water supplied through DFW’s existing piping system. The Contractor was not allowed to substitute products or designs for those agreed upon in the contract documents without authorization from the Owner. The contract also required that if anything in the agreed-upon plans needed to be changed, the Contractor would alert the Owner and the parties would collaborate to come up with a workaround that would be incorporated into the contract by written change order issued by the Owner with agreed prices for performing the change order work.

Trouble arose when the Contractor expressed concern that the rooftop units specified in the plans might not function properly with the ethylene glycol/water mixture supplied by DFW’s existing piping system.  In an October 2009 construction kick-off meeting, the Contractor advised the Owner that the plans needed adjusting because the coolant used in the rooftop units was kept at sub-zero temperatures, risking a damaging freeze.  After receiving no immediate response to this concern, the Contractor submitted a request for information asking how it should proceed.  The parties’ ensuing discussions resulted in two proposals for how to add control sequences (“Control Sequence Proposal”) or revised piping (“Revised Piping Proposal”) to the units to prevent potential problems.  While the Contractor rejected the Control Sequence Proposal, the record was unclear as to what happened with the Revised Piping Proposal, other than that the parties did not formally price the change or incorporate it into their contract. Despite significant communication on the matter, the parties were never able to agree on how to proceed.  Months later, the Owner told the Contractor it failed to meet the substantial completion deadline and subsequently refused to pay at least two invoices from the Contractor.   In 2012, after contracting with another company to complete the construction, the Owner initiated litigation against the Contractor in which each party accused the other of breaching the contract.  Both the Owner and the Contractor moved for summary judgment on their claims.

The district court determined that the case turned on which party first breached the contract and concluded that the contract placed the risk of defects in the designs and specifications on the Owner, that the Owner had admitted the designs and specifications were defective, and that the Owner therefore breached the contract by failing to acknowledge the defects and issue appropriate change orders.  As a result, the district court granted summary judgment for the Contractor and, after a bench trial on damages, awarded damages and attorneys’ fees to the Contractor in the amount of $1.29 million.  The Owner appealed.

The United States Court of Appeals for the Fifth Circuit concluded it was error for the district court to grant summary judgment for the Contractor because the record contained disputed facts regarding which party first prevented performance by failing to fully cooperate in arriving at a solution once the parties discovered defects in the plans and specifications.  Finding that there was no dispute that the plans and specifications were defective, the Court focused on which party was responsible under the contract for defective plans and specification and what the contract required of each party once the Contractor alerted the Owner to a defect that would prevent its performance.

First, the Court disagreed with the district court’s finding that the contract allocated the risk of defective plans and specifications solely to the Owner.  The Court found that while the Owner partly bore the risk of defective plans and specifications, the contract allocated some duties to the Contractor as well, duties that required the Contractor to cooperate or take other actions in this case to help resolve the discrepancy between the contract’s requirements and the plans and specifications.  For example, the Court noted that if the engineer or the Owner determined that changes were necessary after the Contractor pointed out a potential error, the contract required that the parties mutually agree upon the workaround and how to adjust for the change or modify the contract.  Thus, the Court concluded that the contract contained a mixture of provisions that placed the risk of defects on both the Owner and the Contractor, and that both parties had a duty to cooperate in finding a solution to the defect.

The Court then considered which party breached the contract by failing to participate in resolving the defect and agreeing to the associated change order or modification to the contract. The Contractor acknowledged that it rejected the Control Sequence Proposal, but pointed to requests for information to support its claim that the Owner breached the contract by failing to issue a change order and incorporate the Revised Piping Proposal into the contract.  However, the Owner argued that the Contractor had rejected the Revised Piping Proposal as well, pointing to correspondence between the parties and deposition testimony on the subject.  The Court found that this non-conclusory evidence created a dispute of material fact as to whether the Contractor rejected the Revised Piping Proposal outright or hindered the process of agreeing to this or another solution.  The Court concluded that, “[s]ifting through the evidence to determine whether the parties reached agreement on a contractual modification is a task ill-suited for summary judgment on this record. For these reasons, and because disputes of material fact remain regarding whether [the Owner] or [the Contractor] breached the contract by preventing an agreement about how to address defects in the contract’s plans and specifications, we reverse the district court’s grant of summary judgment for [the Contractor].”

Consequently, the Court reversed the district court’s grant of summary judgment for the Contractor and remanded the case for the breach of contract claims to proceed to a fact finder.

Article originally posted June 28, 2016 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group. 

Thursday, June 23, 2016

Pair of Cases Concerning Pay-if-Paid Provisions

Within the last month, two decisions with two outcomes were issued concerning "pay-if-paid" provisions. Observe that a "pay-if-paid" provision is a true condition precedent in that a general contractor is not required to pay its subcontractor unless and until it receives payment from the owner.  A different result flows from a "pay-when-paid" provision which only allows the general contractor a reasonable time to pay the subcontractor after receiving payment from the owner, but the risk of non-payment from the owner is not shifted to the subcontractor.

In Midlantic Fire, LLC v. Ernest Bock & Sons, Inc., No. DC–8529–14, 2016 WL 3093075, at *1 (N.J.Super. Ct. June 3, 2016), the pay-if-paid clause stated:
Payment by Owner to the General Contractor for the work/materials invoiced by the Subcontractor/Supplier shall be a condition precedent to General Contractor's obligation to pay Subcontractor/Supplier. Accordingly Subcontractor/Supplier agrees and understands that it shall bear the risk of non-payment by the Owner and shall be entitled to no compensation from the General Contractor in the event of non-payment by the Owner for its work/materials.
The plaintiff subcontractor installed a fire protection system in accordance with drawings and plans supplied by the defendant general contractor.  Subsequent to installation, the general contractor learned that the sprinklers interfered with structural supports that needed to be installed.  The subcontractor issued a change order, which was approved by the general contractor.  The subcontractor performed the changed work.  When the general contractor submitted the invoice for payment, the owner declined to pay because there was a "lack of communication [and] coordination" between the general contractor and subcontractor. The general contractor, citing the pay-if-paid provision, then refused to pay the subcontractor.   The plaintiff subcontractor prevailed at trial, and the defendant general contractor appealed the application of the pay-if-pay by law.

Applying Pennsylvania law, per the contract, the court affirmed in favor of the subcontractor because "courts are reluctant to enforce a conditional payment provision against an unpaid subcontractor that is not responsible for the condition giving rise to the payment defense" and because "parties to a contract have an implied duty not to frustrate conditions precedent to their performance" (citing Quinn Constr., Inc. v. Skanska USA Bldg., Inc., 730 F.Supp.2d 401, 420 (E.D.Pa.2010)).  Because the subcontractor had relied on the plans and drawings submitted by the general contractor and therefore because all coordination among subcontractors was the general contractor's responsibility, the subcontractor was not responsible for the non-payment. Rather the defendant general contractor's own error spurred the need for the change order and the owners refusal to pay the change order. As such, the pay-if-paid provision was inapplicable and the general was required to pay the subcontractor.

In A. Zahner Company v. McGowan Builders, Inc., No. WD 78063, 2016 WL 2994022, (Mo.App. Ct May 24, 2016), the pay-if-paid stated:
[Subcontractor] agrees that [the general contractor] will not be responsible to make any payment, progress or final, to [subcontractor] for any and all of the goods identified in this Purchase Order unless and until [general contractor] receives payment for such goods from the Owner of the project . . . . If Subcontractor is not paid within 45 days of when a pay application is submitted, Subcontractor may stop the Work of this Subcontract until payment is received . . . .
The trial court had concluded that the above provision was ambiguous because the "unless and until" language was a condition precedent to payment shifting the risk of non-payment to the subcontractor whereas the "stop the Work" sentences "eased the burden" of risk to the subcontractor.  The appellate court disagreed and instead held that the entire provision could be read harmoniously. That court held that altogether the provision simply "distributes financial risk between the parties and provides both [with] a measure of financial protection."  In sum, the general contractor did not need to pay if owner did not pay.  As its recourse, the subcontractor did not need to continue work if it was not paid.  As such, the appellate court concluded that the pay-if-paid provision was applicable and remanded the case for fact-finding -- whether the owner indeed did not pay the general contractor.
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts.  She is an associate at Pierce Atwood, LLP in Providence, Rhode Island.  She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.


Friday, June 17, 2016

Ohio Supreme Court Reinstates Assessment of Liquidated Damages Equal to 40% of Original Contract Value in Public Works Project

In Boone Coleman Construction, Inc. v. TheVillage of Piketon (2016 Ohio 628), the Ohio Supreme Court reviewed its liquidated damages precedents within the context of a public works project for the first time.  The matter stems from the award of a $638,000 public works contract for the installation of a new traffic light and associated roadway improvements with a substantial completion duration of 120 days.  Contained within the contract was a liquidated damages provision in the amount of $700 per day for each day after the substantial completion date.  The project’s date of commencement was set for July 30, 2007 putting substantial completion on November 27, 2007.  Boone Coleman was granted an initial extension to May 30, 2008, but its second request for an extension was denied and Piketon put Boone Coleman on notice that liquidated damages would be sought for every day after May 30, 2008.  The project eventually reached substantial completion on July 2, 2009, 397 days after the schedule extension date of May 30, 2008.

Boone Coleman brought suit against Piketon for not paying $144,477 of construction costs and Piketon countered in the amount of $277,900 for liquidated damages.  The trial court granted Piketon’s motion for summary judgment and awarded liquidated damages.   The appeals court reversed that decision and found the liquidated damages to be “unreasonable and disproportionate.”  Piketon appealed to the Ohio Supreme Court.

The Court stated it would review the case for two propositions of law: 1) courts must review the validity of liquidated damages prospectively, not retrospectively, and 2) liquidated damages are not deemed to be a penalty simply because the construction is new and actual damages cannot be presented. It began by defining liquidated damages and pointed to Ohio’s three part test for determining whether a contract term is a liquidated damage or a penalty.  A term is a liquidated damage if:

(1)   [Damages are] uncertain as to amount and difficult of proof.

(2) The contract as a whole is not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intention of the parties.

(3) The contract is consistent with the conclusion that it was the intention of the parties that damages in the amount stated should follow the breach thereof.

The Court next discussed the inclusion of liquidated damage provisions in public works contracts.  The Court stated that, “The Supreme Court and many state and federal appellate courts also recognize that liquidated-damages provision in public contracts are particularly valuable given the unique difficulty in calculating the damages associated with a public contractor’s breach of its promise to timely complete a public improvement project.”  The Court then pointed to the statutory requirement passed by the Ohio legislature requiring public-improvement-construction contracts contain a liquidate damages provision.

The appeals court determined that the first and third parts of the above three part test were satisfied in the contract and the Court concurred, but it also found that the appeals court erred in determining the second part was not fulfilled.  The Court identified the fact that the appeals court incorrectly focused its analysis on the total amount of liquidated damages and not the per diem amount when it concluded that the provision was an unenforceable penalty. The Court stated, “[h]ere the appellate court improperly engaged in retrospective analysis, i.e., it looked, with hindsight, to the aggregate application of the per diem liquidated damages to conclude that the provision was unconscionable.  But it did not determine that the per diem amount was unconscionable at the time the parties entered into the contract.”

The Court further mused that with the appellate court’s reasoning, had the delay been only a few days and the liquidated damages did not accumulate to the level in the present matter, then the provision might have been enforceable. The court found this to be unacceptable so as to “relieve a breaching party of the consequences it agreed to by refusing to enforce a per diem liquidated-damages provision solely because the breach was an egregious one.” 


The Court vacated the judgment of the appellate court and remanded.

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based out of Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com.

Friday, June 10, 2016

Division 1 Steering Committee Meeting Minutes - May 16, 2016


Moving forward we will be posting the Division 1 Steering Committee Meeting Minutes to the Blog.  Here is a link to the Minutes from our May 16, 2016 Meeting

Wednesday, June 1, 2016

United States Court of Appeals for the Federal Circuit Provides Guidance on Accrual of Pass-Through Subcontractor Claims

In Kellogg Brown & Root Services, Inc. v. Murphy, the timeliness of prime contractor Kellogg Brown & Root Services, Inc.’s (“KBR”) May 2, 2012, claim to the Army was sole issue on appeal - particularly, whether KBR’s claim had accrued on or before May 2, 2006, for purposes of the Contract Disputes Act’s (“CDA”) 6-year statute of limitations.   The court held that the 6-year statute of limitations had not run.

The project at issue involved KBR’s contract with the Army to construct dining facilities and provide meal and related services for troops in Iraq.  KBR subcontracted with a joint venture between The Kuwait Company for Process Plant Construction & Contracting K.S.C. and Morris Corporation (AUST) PTY Ltd. (“KCPC/Morris”) to implement certain work release orders for the project.  On July 31, 2003, KBR terminated KCPC/Morris for alleged default.  KCPC/Morris disputed the termination but continued performance until transition to a new subcontractor on September 12, 2003.

In 2004, KCPC/Morris filed suit against KBR in the United States District Court for the Eastern District of Virginia based on the termination.  In the suit, KBR claimed that KBR and KCPC/Morris had reached an oral settlement and sought to enforce it.  On January 24, 2005, KBR and KCPC/Morris reached an agreement dividing KCPC/Morris’ alleged costs into two categories and converting the default termination to a termination for convenience.

As part of the agreement, KBR and KCPC/Morris agreed to cooperate to prepare invoices to the Army for KCPC/Morris’ termination costs.  On August 26, 2006, KCPC/Morris submitted to KBR a certified claim.  On November 3, 2006, KBR forwarded KCPC/Morris’ claim to the Army, but KBR did not certify the claim. 

The Army responded on May 30, 2007, that KBR was responsible for negotiating and discussing claims with its subcontractors and that the Army does not comment in advance whether a claim or costs are appropriate.  The Army also refused to meet with or correspond directly with KCPC/Morris.  The Army directed KBR to settle with KCPC/Morris, and then submit a claim to the Army.

On October 10, 2007, KBR “sponsored” KCPC/Morris’ claim and certified the claim on January 10, 2008.  However, on September 8, 2010, KBR withdrew the claim, stating it was a business dispute between KBR and KCPC/Morris.

On August 4, 2011, KCPC/Morris filed suit against KBR in the United States District Court for the Eastern District of Virginia regarding KBR’s handling and submission of KCPC/Morris’ claim to the Army.  KBR and KCPC/Morris ultimately settled the suit, and then on May 2, 2012, KBR submitted a certified claim with the Army for the settlement amount.  The contracting officer did not act on the claim, thereby placing it in the “deemed denied” status.  KBR appealed to the Board.

The CDA requires that a claim “shall be submitted within 6 years after the accrual of the claim”.  41 U.S.C. § 7103(a)(4)(A).  The Army claimed that the 6-year CDA statute of limitations had run and moved to dismiss.  The Board granted the Army’s motion, finding alternative dates for the accrual of the claim - the first on September 12, 2003, when KCPC/Morris ended its work, and the second on January 24, 2005, when KPB and KCPC/Morris agreed to submit KCPC/Morris’ alleged termination costs to the Army.  Both dates preceded the critical limitations date of May 2, 2006.

The court noted that the FAR defines “accrual” of a claim as:

the date when all events, that fix the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known.  For liability to be fixed, some injury must have occurred.  However, monetary damages need not have been incurred.
48 C.F.R. § 33.201.  The court also noted that the FAR, the conditions of the contract, and the facts of a particular case determine when a CDA claim accrues.

KBR argued that until KBR determined the amount of payment KBR would request from the Army, the claim did not yet exist and could not accrue.  KBR argued that until KCPC/Morris provided its costs on August 26, 2006, which KBR ultimately included in KBR’s certified claim to the Army, the claim had not accrued.

The Army presented a theory, which the Board adopted, that the payment of the remaining subcontractor costs following the termination was a “non-routine” request for payment, which accrued as of the date the subcontractor ended its work, in this case, on September 12, 2003.  The Army based its theory on jurisprudence that allows a contractor to immediately seek payment of damages flowing from some unexpected or unforeseen action of the government.  However, the court noted that termination of a subcontractor is not an unforeseen government action.

The court further noted that the limitations period does not begin to run if a claim cannot be filed because of mandatory pre-claim procedures, and here, the Army required KBR to resolve the disputed costs with KCPC/Morris, then submit the claim to the Army.

The court also rejected the Army’s various alternative theories of claim accrual and ultimately reversed the Board’s dismissal and remanded the case to the Board to determine the claim merits.  The court did not identify the date that KBR’s claim did accrue, only that the claim had not accrued before the critical May 2, 2006, date.

For your reference, linked here is a copy of the May 18, 2016, decision.