Friday, August 3, 2018

Consequences for Exceeding the Limit…Maybe…


By: I’Ashea Myles-Dihigo
Leitner, Williams, Dooley & Napolitan

Sometimes I speed…okay, most times I speed.  Not anything dangerous, but I do keep up with the flow of traffic on the interstate.  Don’t judge.  With a daily commute into the office that is always over an hour, any bit of time savings is justified in my opinion.  

While I may be able to justify exceeding the speed limit as I travel down the interstate, the Tennessee Court of Appeals has recently clarified the effects of exceeding the monetary limits of your general contractor’s license in its holding in Pickens v.  Underwood.  In that case, timing was everything.  
General contractor, Pickens, entered into a contract to construct a house for the Underwoods. Pickens v. Underwood, No. E2017-02120-COA-R3-CV, 2018 Tenn. App. LEXIS 322, at *2-3 (Ct. App. June 12, 2018).  The parties entered into their contract on June 2, 2008. Id.   The dispute over final payment arose on May 9, 2009.  Id. at *3.  At the time the parties entered into the contract, Pickens’ limit on his contractor’s license was $350,000, yet at the time the project was complete, the final bill was over $670,000.  Id.  When the Underwoods failed to pay for the work, Pickens filed suit for breach of contract, unjust enrichment, promissory fraud and mechanics’ and materialmen’s lien. Id.  

The Underwoods counter sued for fraud, cost overruns, violations of the Tennessee Consumer Protection Act and for entering into a contract in excess of the contractor’s license limit. Id. The complaint in this matter was filed on July 21, 2009. Id. at *32.  Counsel for Pickens agreed to stipulate that he was an unlicensed contractor and thereby agreed to limit his damages to actual documented expenses.  Id. at *3.  The trial court disagreed with the stipulation and confirmed that Pickens, though over the monetary limit of his contractor’s license, was licensed for purposes of Tennessee Code Annotated §§ 62-6-101, et seq. Id. at *4.  The Underwoods appealed. 

The Court of Appeals affirmed. They reasoned that just prior to the filing of the parties’ complaint, the Legislature made a substantive change to Tennessee Code Annotated § 62-6-103 which governed the monetary limits on contractors’ licenses. Id. at *32.  The effect of the amendment expanded the limitation of actual documented expenses to any contractor required to be licensed under the statute and rules whereas before the limitation only applied to unlicensed contractors. Id.  

The Court held that the date the parties entered into the contract was controlling regarding which statute should apply in the case. Id. When Pickens entered into the contract and performed the work, he was not subject to the limitation because he was properly licensed under the old Tenn. Code. Ann. § 62-6-103.  The Court declined to apply the new code changes retroactively to the pre-existing contract.  Therefore, his recovery would not be limited to actual documented expenses as reflected in the new schematic. Id. at *33. 

While it is never a good idea to exceed the monetary limits of your contractor’s license, if you happen to find yourself in that position, you may still be able to recover the full contractual price as damages.  Based on the holding in Pickens, the Court will look to the law in effect at the time of the contract to determine whether or not your recovery is limited.

Wednesday, August 1, 2018

Federal Government Escapes Liability in Class Action Seeking Recovery of Damages Caused by Hurricane Katrina


This post comes from Mike Lane, a new contributor to the Dispute Resolver.  Mike practices construction law at Riess LeMieux, LLC in New Orleans, Louisiana.  Thanks, Mike!  Enjoy everyone.

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In St. Bernard Parish Government, et al. v. United States, No. 2016-2301, 2018 WL 1882913 (Fed. Cir. April 20, 2018), the Parish of St. Bernard and property owners in the City of New Orleans filed a class action suit against the federal government under the Tucker Act, 28 U.S.C. § 1491, for an alleged taking of property following Hurricane Katrina.  The plaintiffs claimed the federal government failed to maintain or modify the Mississippi River-Gulf Outlet channel (MRGO), which led to an increased storm surge that resulted in significant damage to their property.  The Court of Federal Claims ruled in favor of the plaintiffs and awarded a total of $5.46 million.  The United States Court of Appeals for the Federal Circuit reversed, holding the plaintiffs failed to show a causal link between the operation and maintenance of the MRGO navigation channel and the damages allegedly sustained. 

The Army Corps of Engineers (Corps) built the MRGO navigation channel in 1968 to increase commerce by providing a direct connection between the port of New Orleans and the Gulf of Mexico.  In addition to operating and maintaining the navigation channel over several decades, the Corps built several flood mitigation projects adjacent to the MRGO, including a vast levee system.  The plaintiffs contended that the levees would not have been breached, or would have held out longer and caused less damage to their property, if the Corps had properly maintained or modified the MRGO channel.  After a trial in December 2011, the Court of Federal Claims found a government taking occurred under the theory of inverse condemnation.  Specifically, the court ruled that the “continued operation of, and failure to maintain and modify MRGO caused erosion, increased salinity, wetlands loss, and a funnel effect, which in turn caused increased storm surge.”  After a separate trial on damages in November 2013, the Court of Federal Claims awarded the plaintiffs $5.46 million.  The federal government appealed both judgments.

The United States Court of Appeals for the Federal Circuit reversed the trial court decision, concluding that the plaintiffs failed to demonstrate that the Corps’ operation and maintenance of the MRGO navigation channel caused their alleged damages.  In so holding, the court focused on two errors by the lower court.  First, the trial court erred in finding that the failure to maintain or modify the MRGO served as a proper basis for a takings action.  The government cannot be liable for inaction in a takings claim; it may only be liable for affirmative acts.  Although the government’s failure to act may give rise to a tort claim, it “cannot be the basis of takings liability.”

The court next turned to whether any affirmative acts of the federal government proximately caused the damages of which the plaintiffs complained.   The plaintiffs argued that the construction and operation of the MRGO should be the only activity considered, not the separate flood mitigation projects constructed by the Corps in the same time period.  The court rejected this approach and held that the government’s separate flood mitigation projects must also be taken into account in the takings analysis.  On this point, the plaintiffs “failed to present evidence comparing the flood damage that actually occurred to the flood damage that would have occurred if there had been no government action at all.”  In other words, the “causation analysis must consider the impact of the entirety of government actions that address the relevant risk [i.e., flooding].” 

The appeals court ultimately held that the separate flood mitigation projects constructed by the federal government, composed primarily of the levee system, may have placed the plaintiffs in a better position than if the government had done nothing at all.  After noting the absence of supporting evidence and expert testimony, the court reversed the trial court judgments and ruled that the plaintiffs failed to prove their property damage was greater than the damage that would have occurred had the government not built the MRGO or the levee system in the first place. 

This decision clarifies that a claimant’s burden of proving causation in a takings cause of action against the federal government may only rely on affirmative acts of the government and must take into consideration all government acts related to the pertinent risk of harm. 

Saturday, July 28, 2018

No Damages for Delay Clause? How About Damages for a Cardinal Change? Steel Erector Claims its 301 Day Delay Constitutes an Abandonment of the Subcontract and CA Fed Court Agrees.


Sauer Incorporated (Sauer) entered into a design-build contract with the U.S. Army Corps of Engineers for the design and construction of the Operational Readiness Training Complex at Fort Hunter Ligget, California.  Sauer then executed a subcontract with Agate Steel, Inc. (Agate) for the structural steel (install only) scope of work. The subcontract required that Agate provide all labor, materials, equipment, and tools required to complete the ‘Structural and Miscellaneous Steel (Erection)’ scope of work.  The subcontract also contained a ‘no damages for delay’ clause that provided Agate’s sole remedy for a delay on the project was a commensurate extension of time and Agate waived any rights to financial claims based upon delay.

The scope of work required Sauer to provide structural steel to Agate in accordance with the plans and specification through Sauer’s fabricator. Additionally, the contract specifically called for steel stairs to be delivered fully assembled and ready for final install by Agate. The subcontract also contained references to the project schedule with a defined duration of 121 days for Agate’s work.  

During the execution of the work, Agate experienced numerous delays and disruptions claiming significant revisions to the contract drawings resulted in changes to the steel fabrication and erection sequences; that Sauer’s fabricator delivered hundreds of non-conforming pieces of steel to the project which then required field modifications; the contract documents underrepresented the amount of steel clips required for the work by 4,000 pieces; and the steel stairs were delivered in pieces which the required labor intensive field fabrication.  As a result of these delays, Agate’s installation duration ultimately was 422 days, a 301-day delay.

As a result, Agate filed suit against Sauer for: 1) breach for outstanding contract balances plus unpaid change orders in the amount $649,739; 2) breach for delay and disruption in the amount of $698,253 in extended field & office overhead plus attorney’s fees; 3) unjust enrichment for the reasonable value of materials it had not been paid for; and 4) breach of good faith and fair dealings for lost revenues, profits and opportunities for the extended duration it was onsite.  Sauer moved to dismiss the second, third and fourth claims.

The Court began its analysis of Agate’s claim for delay and disruption by identifying the subcontract did include a valid 'no damages for delay' clause as allowed in federal contracting.  Agate argued that the kind of delay it experienced throughout the project was not within the contemplation of the parties when the contract was formed, and the ‘no damages for delay’ clause should not be enforceable. The Court pointed to Sauer’s inability to properly schedule trades, unwillingness to process change orders, and numerous design changes as detriments to Agate’s efficient work flow and found them as a plausible basis to seek relief for a delay and disruption claim.

The Court also addressed Agate’s argument that the ‘no damages for delay’ clause is unenforceable because through its actions, Sauer abandoned the subcontract.  Agate points to California case law that states, “[P]rivate parties may impliedly abandon a contract when they fail to follow change order procedures and when the final product differs substantially from the original." Amelco Electric v. City of Thousand Oaks, 27 Cal. 4th 228 (2002).   

In its review of whether the contract was abandoned, the Court again pointed to the facts that the subcontract stipulated Sauer would furnish complete and correct steel, but numerous field modifications were required due to design changes and incorrectly fabricated materials.  The Court further acknowledged the 4,000 steel clips installed not depicted in the contract documents, stairs pieces that arrived loose and required field assembly contrary to the subcontract, and Sauer not adhering to the contractual process for change order work.  Agate alleged that those "foregoing, cardinal changes to the Erection Subcontract and material departures from the reasonable expectations of the Parties, at the formation of the Erection Subcontract, constitute abandonment of the Erection Subcontract."

The Court found the totality of these allegations was sufficient to show the contract had been abandoned and the ‘no damages for delay’ clause was not enforceable.  The Court allowed the claims to proceed beyond the pleading state without a determination of damages.

Based upon the finding that the subcontract was abandoned, the court then found Agate’s third claim of unjust enrichment in quasi-contract could precede because no contract existed between the parties and relief could be sought in equity. 

The fourth claim of breach of good faith and fair dealings was dismissed.  

Rai Indus. Fabricators, LLC v. Fed. Ins. Co. (N.D. Cal., May 2, 2018)

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The author, Brendan Carter, Esq., is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA. He is a monthly contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He may be contacted at 781.786.8916 or carter@agcmass.org.

Saturday, July 21, 2018

Practice Tip: Clawback Agreements

As construction attorneys, we're no strangers to voluminous productions of client documents and communications, both in electronic and hardcopy formats, during discovery.  Even with proper safeguards in place during document review, there exists the possibility that some privileged material may accidentally slip over to an opposing party.  Production of such material to a third party, especially an adversary, runs the risk of waiving attorney-client privilege or attorney work product privilege.

Rule 502(b) of the Federal Rules of Evidence creates somewhat of a safety net for inadvertent disclosures, but requires compliance with a number of steps that, without a prior agreement between the parties, the compliance could be challenged.  Fed. R. Evid. 502(b) ("disclosure does not operate as a waiver in a federal or state proceeding if: (1) the disclosure is inadvertent; (2) the holder of the privilege or protection took reasonable steps to prevent disclosure; and (3) the holder promptly took reasonable steps to rectify the error, including (if applicable) following Federal Rule of Civil Procedure 26 (b)(5)(B) [concerning inadvertent production of trial preparation materials].") Note also that the term "inadvertent" is not defined.

Clawback agreements, pursuant to Federal Rule 502(d) & (e) and equivalent state rules, are aimed at avoiding waiver of privileges without having to resort to proof under Rule 502(b). See Fed. R. Evid. 502(d) ("A federal court may order that the privilege or protection is not waived by disclosure connected with the litigation pending before the court—in which event the disclosure is also not a waiver in any other federal or state proceeding."); Fed. R. Evid. 502(e) ("An agreement on the effect of disclosure in a federal proceeding is binding only on the parties to the agreement, unless it is incorporated into a court order.").  Likewise, scheduling orders under Rule 16 of the Federal Rules of Civil Procedure contemplate the Court approving the parties' clawback agreement in this regard ahead of time.  Fed. R. 16(b)(3)(iv) ("The scheduling order may . . . include any agreements the parties reach for asserting claims of privilege or of protection as trial-preparation material after information is produced, including agreements reached under Federal Rule of Evidence 502"). 

Here's the concern with clawback agreements - in the event of a dispute between parties, a court, depending on the circuit or state, may not be willing to enforce a generally stated agreement unless it explicitly speaks to the Rule 502(b) standard.  For example, in IRTH Solutions, LLC v. Windstream Communications, LLC, No2018 WL 575911 (S.D. Ohio Jan. 26, 2018), the district court confirmed the magistrate judge's decision that, per Federal Rule of Evidence 502(b), the defendant had waived its attorney-client privilege by twice producing 43 privileged documents to plaintiff’s counsel notwithstanding that the parties had a clawback agreement.  Though the defendant's counsel did not dispute that the production of the 43 documents was "reckless," the defendant's counsel argued that the clawback agreement should trump the requirements of 502(b), which avoids waiver only upon an "inadvertent" disclosure.  The district court disagreed instead focusing on whether the parties' agreement even spoke to dispensing with Fed. R. Evid. 502(b)(2) requirement to "take reasonable steps to prevent disclosure."  The Court noted that "the clawback agreement [in IRTH] lacked any language to support a finding that the parties came to an understanding that there would be no pre-production review [and] [m]oreover, the email memorializing the parties' clawback agreement also contained a provision requiring the parties to provide privilege logs  . . . [indicating to the Court] that the parties did in fact contemplate meaningful pre-production privilege review."  Accordingly, the Court concluded that the defense had waived the privilege by producing the documents notwithstanding the clawback agreement. 

The IRTH case recently was granted an interlocutory appeal to the Sixth Circuit to answer the question "what is the legal standard for determining whether a clawback agreement displaces the test under Rule 502(b) for evaluating if an inadvertent disclosure of privileged documents constitutes waiver of the attorney-client privilege? Defendant argued that a clawback agreement, no matter how cursory, always prevails, such that an inadvertent disclosure does not waive the privilege."
Therefore additional guidance in this circuit is forthcoming.  However, regardless of the circuit or state, drafting clawback agreements so each  Rule 502(b) element is identified and addressed is a good rule of thumb to avoid the possible waiver of privileges.

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Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island. 

Bienvenue a Montreal!

 
Forum's Fall Meeting Oct. 4-5, 2018
Mark your calendar, make your reservations, and check those passports - The ABA Forum on Construction Law’s Fall Meeting is traveling to the historic city of Montreal, Canada on October 4-5, 2018. With direct flights from many U.S. cities, Montreal is easy to get to, and offers a wonderful cosmopolitan venue in the largest French-speaking city in North America.

To Register: http://ambar.org/FCLFall18

Program Overview
Our program, It’s Lonely At the Top: Building a Successful Team with the Owner, takes a 360° view of a project and focuses on best practices for building a successful project team and how to address the inevitable challenges that arise. Topics include:
  • project delivery: who’s using what, and the implications for your project
  • public private partnerships (PPP)
  • effectively assessing risk and negotiating contract and subcontract clauses
  • construction financing and insurance/bonding
  • tips and best practices in proactively addressing delays and disputes as the owner
  • effective dispute resolution tactics and technical considerations when facing the owner
  • grappling with corruption in procurement and construction ethics and evolving practices
We are also honored to host a special plenary featuring a conversation with The Right Honourable Beverley McLachlin, who was the 17th Chief Justice of the Supreme Court of Canada, the first woman to hold this position, the longest serving Chief Justice in Canadian history and a co-author of The Canadian Law of Architecture and Engineering.

Beyond the Program
But there is MORE! Stay right in the heart of the city at the LeCentre Sheraton Montreal Hotel, steps from historic sites, the Underground City, charming Old Town, and the nearby vistas of Mount Royal.  Take advantage of the favorable exchange rate for great shopping on nearby Saint Catherine Street.  Join your colleagues at the celebrated Windsor Station for a Welcome Reception soirĂ©e!

Monday, July 9, 2018

Subcontract Provision Requiring Subcontractor to Pass Through its Claims Does Not Prevent the Subcontractor From Suing to Recover Against Miller Act Bond

Pinnacle Crushing & Constr. LLC v. Hartford Fire Ins. Co., 2018 U.S. Dist. LEXIS 67965 (W.D. Wa. Apr. 23, 2018)


The Army Corps of Engineers (the “Corps”), as owner, and Cherokee General Corporation (“CGC”), as prime contractor, entered into a contract (the “Contract”) in connection with work at the Yakima Training Center (the “Project”). CGC subcontracted with SCI Infrastructure (“SCI”) for certain work related to the Project (the “SCI Subcontract”), and SCI subcontracted with Pinnacle Crushing & Construction, LLC (“Pinnacle”) (the “Pinnacle Subcontract”). CGC obtained a Miller Act payment bond (the “Bond”) from Hartford Insurance Co. (the “Surety”) to provide coverage for labor and materials supplied in carrying out the work.


After the Corps terminated the Contract with CGC, CGC submitted a claim under the Contracts Disputes Act. As required by the SCI Subcontract, CGC asserted SCI’s pass through claims against the Corps, which included amounts allegedly owed to both SCI and Pinnacle.

Separately, SCI and Pinnacle sued CGC and the Surety to recover under the Bond for the work they performed under the subcontracts, but for which CGC had not paid them.

CGC and the Surety moved to dismiss or stay the claims arguing that the Surety was not liable to SCI and Pinnacle under the Bond because their damages were the responsibility of the Corps and were being resolved through the Contract Disputes Act process, and the claims were not ripe because that process was still pending. SCI and Pinnacle opposed, arguing that any contract provisions requiring them to wait before pursuing their Miller Act claims were invalid under the Act, and that a stay would be prejudicial because the claims process will take years to resolve.

The Court held SCI and Pinnacle’s Miller Act claims were ripe because they had alleged a specific injury in fact (i.e., they were owed money for completed work on the Project) and had satisfied the condition precedent to bringing a Miller Act claim (i.e., they had still not been paid 90 days after completing their work).

The Court rejected CGC and the Surety’s argument that SCI and Pinnacle were precluded from bringing a Miller Act claim because, under the subcontracts, they agreed that their claims would be resolved by the dispute resolution process set forth in the Contract (i.e., as pass through claims in CGC’s claim against the Corps). Courts construe the Miller Act liberally to protect subcontractors, and any waiver of Miller Act rights must be clear and explicit, in writing, signed by the person whose right is waived, and executed after that person has furnished labor or material used in performing the contract. The SCI Subcontract did not clearly waive SCI’s Miller Act rights because it did not contain any explicit statement that SCI was waiving those rights. Even though, in the Pinnacle Subcontract, Pinnacle agreed not to pursue any independent litigation, including under the Miller Act, Pinnacle did not waive its Miller Act rights because it had not yet furnished labor or material to the Project at the time it signed that Subcontract.

The Court also declined to order a stay pending resolution of the pass through claims against the Corps because neither Pinnacle nor SCI waived their Miller Act rights under their respective subcontracts. A provision in the Pinnacle Subcontract requiring a stay of Miller Act claims pending the resolution of pass through claims did not warrant a stay because the provision was an impermissible waiver of Pinnacle’s right to sue under the Miller Act, not an agreement as to the timing of bringing a Miller Act claim. The Court reasoned that if Pinnacle were to be delayed until the final determination of the administrative action, it might lose its ability to return to court to enforce its Miller Act rights.

Article originally posted July 5, 2018 on Constructlaw by Emily D. Anderson, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group.

Friday, June 29, 2018

One Out of Eight Ain’t Bad: NH Court Rules First Reservation of Rights on Final Release for Project Long Claims is Enough to Sustain Lien Rights



Design/builder IPS-Integrated Project Services (IPS) entered into a subcontract with Fraser Engineering (Fraser) for work on a new pharmaceutical manufacturing facility in Portsmouth, NH.  Fraser signed the contract in February of 2016 for the mechanical and plumbing scopes of work in the amount of $5,312,100.00.  During the course of contract negotiations starting in the fall of 2015, IPS and the owner made Fraser aware that it may be required to accelerate its work on the project for certain schedule considerations.  In December of 2015 IPS directed Fraser to institute an overtime program for the project which ended up lasting for months.  During this time, IPS and Fraser were in communication about the costs and labor inefficiencies associated with such a prolonged overtime schedule. Ultimately Fraser worked an additional 59,845 manhours on the project.

Fraser’s subcontract contained two provisions related to additional work it might experience during the execution of the project.  The first required Fraser to report any unforeseen conditions resulting in a change and any failure to provide IPS notice would result in the waiver of claims for time or money.  The second provision required Fraser to submit conditional lien waivers with each monthly requisition of which Fraser submitted eight throughout the project. The first of the seven waivers Fraser submitted contained no reservation of rights related to the additional manhours for the IPS-directed acceleration, the eighth and final did. 

At some point Fraser submitted a claim for over $4 million of which $3,324,083.30 was related to labor inefficiencies due to the owner and IPS directed acceleration. Fraser further contended it was owed $1,554,867.29 in retainage and unpaid contract balances.  On January 26, 2017, Fraser filed a motion for and was granted an ex parte attachment to perfect a mechanic’s lien in Rockingham County Superior Court.  After objecting to the attachment in state court, the defendant removed the matter to federal court.

IPS argued that Fraser waived its lien rights by executing waivers throughout the project before finally reserving its rights for the acceleration claim on its final requisition. The Court rejected IPS’s lien waiver argument by pointing out in the record IPS had actual knowledge when the seven lien waivers were submitted that Fraser would seek additional costs related to the directed acceleration.  The Court identified Fraser’s numerous communications with IPS between December 2015 and August 2016 that it was experiencing labor inefficiencies due to the directed acceleration.  

The Court also discussed due to the “remedial nature” of the mechanic’s lien statute, it could not state with certainty the N.H. Supreme Court would “ignore the defendant’s awareness of the labor inefficiencies and strictly enforce the lien waivers.” 

Finally, the Court found that IPS made no attempt to separate costs for the additional work Fraser experienced between the seventh lien waiver in May 2016 and the eighth and final lien waiver in August 2016. Since IPS does not dispute the work was actually completed, it is impossible for the Court to reduce the lien amounts for work prior to May 2016.

Ultimately the Court found the lien enforceable in the amount of $4,917,122.20.


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The author, Brendan Carter, Esq., is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA. He is a monthly contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He may be contacted at 781.786.8916 or carter@agcmass.org.

Friday, June 22, 2018

A Contractor's Second Chance - The Massachusetts Supreme Judicial Court Relaxes Rules to Establish Contract Performance & Equitable Claims

In G4S Tech. LLC vs. Mass. Tech. Park Corp., SJC-12397, -- N.E.2d --, (Mass. June 13, 2018) the Supreme Judicial Court of Massachusetts clarified that to recover under the contract itself “complete and strict performance requirements” only applies to the provisions regarding “the design and construction work," but that for breaches of other provisions ordinary contract principles of materiality control.  The Supreme Judicial Court also overturned a line of cases that established the rule that intentional violations of contract provisions “precluded a finding of good faith to fully perform,” barring quantum meruit claims.  The Supreme Judicial Court articulated its new rule, “that intentional breaches, even those involving material breaches, alone are not dispositive of the right to equitable relief, at least when such breaches do not relate to the construction work itself.”

This contract dispute arose from a construction project to build a fiber optic network spanning 1,200 miles and 123 communities throughout western and central Massachusetts.  Massachusetts Technology Park Corporation (MTPC) received funding for this project from both state and federal government funding. MTPC awarded G4S Tech. LLC (G4S) the design-build project for a total contract value of $45.5 million.  Due to restraints imposed by the federal government based on its funding, the project had to be completed within a certain period of time. Thus the contract had several provisions regarding G4S’s liability and responsibility for not completing specified portions of the project by specific deadlines.  The project was completed over one year after the specified project deadline, however, the facts are disputed as to whether GS4 or MTPC was at fault for the delay.  Due to the delays in completion, MTPC refused to pay G4S the last $4 million owed under the contract,  withholding the amount as liquidated damages for the delays.  Further, MTPC later discovered that G4S violated a provision requiring that the subcontractors be paid on time, instead G4S delayed paying subcontractors until after their fiscal quarters closed, to show “a more favorable cash flow in its quarterly reports.”  G4S brought claims under breach of contract and quantum meruit theories, MTPC then brought a fraud claim against G4S.

Massachusetts’s rule for performance of construction contract terms is “that a contractor cannot recover on the contract itself without showing complete and strict performance of all its terms…” G4S argued that this rule was outdated and the Supreme Judicial Court should adopt the “materiality rule” per the Restatement (Second) of Contracts.  While the Supreme Judicial Court declined a wholesale adoption of the Restatement, it did clarify that this rule is limited only to “the design and construction work” and that other provisions “should be analyzed pursuant to ordinary contract principles, including the materiality standard[.]"  That said, in this case, the complete and strict performance requirement controlled because “paying subcontractors on time was an essential and inducing feature of the contract between MTPC and G4S.”  The Court noted that a public works project "prompt" payment is a "legislative purpose" and the Recovery Act's purpose, under which this project was funded, was to maximize jobs and improve the economy. By not properly paying the subcontractors, G4S was clearly frustrating that purpose.  The Supreme Judicial Court subsequently upheld the trial court’s granting of summary judgment to MTPC as to the contract claim.

Turning to G4S’s quantum meruit claim, historically, a line of Massachusetts cases supported the rule that “[g]enerally, ‘[i]n the absence of special exculpating circumstances and intentional departure from the precise requirements of the contract is not consistent with good faith in the endeavor fully to perform it, and unless such departure is so trifling as to fall within the rule de minimis, it bars all recovery.’”  The Supreme Judicial Court decided, after sources have long criticized and questioned the rule, that “intentional breaches, even those involving material breaches, alone are not dispositive of the right to equitable relief, at least when such breaches do not relate to the construction work itself.”  Under this new rule, the Supreme Judicial Court reversed the granting of summary judgment to MTPC as to the quantum meruit claim due to disputed factual questions as to which party caused the delay in completion of the project.

Lastly, the Supreme Judicial Court reversed the trial court’s decision to dismiss MTPC’s fraud claim under a duplicative damages analysis. The Supreme Judicial Court determined that there were “separable and distinguishable acts forming the basis of recovery under the breach of contract and fraud claims.”  Accordingly, the Supreme Judicial Court remanded the quantum meruit and fraud claims to the Superior Court.

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Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island.  She thanks Brenna Riley, a rising 3L at Roger Williams University in Bristol, Rhode Island, for this noteworthy case review.

Thursday, May 24, 2018

In a Matter of First Impression, the Supreme Court Reverses Trial Court: No "Evident Miscalculation" in Arbitration Award

auburn.family.edu

The Supreme Court of Mississippi in D. W. Caldwell, Inc. v. W.G. Yates & Sons Constr. Co., No. 2017-CA-00116-SCT, -- So.3d.-- (Miss. May 10, 2018) reversed and remanded a trial court's modification of an arbitration award for "evident miscalculation."  The Supreme Court held that "evident miscalculation of figures was not apparent from face of arbitration award, and thus, modification of the award was not warranted." The Supreme Court remanded for the trial court to confirm the award.

The underlying dispute concerned a roofing subcontract for a dormitory at Auburn University.  After the subcontractor started work, it discovered structural issues that needed to be addressed before roofing could begin.  The general contractor and the subcontractor agreed that the subcontractor would perform the structural repairs and then complete the roofing.  However, subcontractor was not paid in full for both the repair change order and the original roofing scope.  A dispute arose and the parties arbitrated.  The arbitrator issued a reasoned award in favor of the subcontractor. The general contractor requested clarification of this award, which the arbitrator denied, and then proceeded to Mississippi trial court on a motion to "alter, amend, or vacate the award." The subcontractor, for its party, moved to confirm the award. 

In Mississippi, like many other states, the grounds justifying an amendment or correction to an arbitration award are quite limited including only: "(a) an evident miscalculation of figures or an evident mistake in the description of any person, thing or property referred to in the award; (b) The arbitrators have awarded upon a matter not submitted to them and the award may be corrected without affecting the merits of the decision upon the issues submitted; or (c) The award is imperfect in a matter of form, not affecting the merits of the controversy."  Miss. Code. Ann. § 11-15-135.

The trial court "believing that an evident miscalculation was present as it related to the retainage amounts" denied the subocontractor's motion to confirm the award and instead allowed the general contractor to introduce new evidence and witness testimony as to the miscalculation.  The trial court held that there was a "facially evident miscalculation" as "the arbitrator had duplicated the labor costs for shingle installation in its award–once under the original subcontract and once under the oral agreement to repair the structural damage [and] amended the award, reducing the total by $104,507."

The subcontractor appealed the trial court decision and the Mississippi Supreme Court reversed holding that "arbitrator's award contained no evident miscalculations which would merit modification." The Court first focused on the extreme narrowness of arbitration review, but also acknowledged that "what amounts to an evident miscalculation" had not previously been decided by this Court.  After reviewing cases from other jurisdictions it decided on this definition: an "evident (plain, obvious, or clearly understood) miscalculation must be apparent from nothing more than the four corners of the award and the contents of the arbitration record." Indeed the moving party must be able to show "[w]ithout looking outside the undisputed facts or relying upon testimony from a witness in the trial court" that "a different, but correct, calculation could be made."  In the instant case, the Court examined "the thirteen-page award for any facially evident miscalculations or computational errors. In doing so, [it found] that no such errors [were] present. Looking next to the attorney-written arguments, oral arguments, and agreed-upon record evidence, [it] likewise failed to find such errors."  In sum, the court "fail[ed] to find that the arbitrator erroneously duplicated costs of labor and relied on such a duplication in making his award. Nor [did the Court] ascertain that the arbitrator erred by excluding the retainage totals."

In reaching this holding, the Mississippi Supreme Court also held that the trial court had abused its discretion by hearing and crediting witness testimony during the award modification hearing.  The trial court took additional testimony regarding the cost of the structural repairs in order to determine whether and to what extent there was an evident miscalculation of figures in the award. The Supreme Court emphasized that "arbitration is meant to supplant litigation, not supplement it" and that the trial court's error "transformed . . . the very narrow and limited purpose of its review [impermissibly]  imbu[ing] it with the responsibility of the factfinder." Note that trial court's abuse of discretion was not the linchpin of its evident miscalculation decision.
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The author, Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island. 


Saturday, May 19, 2018

Should You Sign an Owner’s Final Release before Settling with Subs? Federal Court Denies Contractor’s Claim for Missed Subcontractor Costs After Signing General Release


Merrick Construction (Merrick) was awarded a task order by the U.S. Army Corps of Engineers (USACE) in April of 2009 for work on a hurricane protection levee near New Orleans.  The contract incorporated the Federal Acquisition Regulation (FAR) Changes clause which stated, "[n]o proposal by the Contractor for an equitable adjustment shall be allowed if asserted after final payment under this contract."  Nearly two years later in March of 2011, USACE issued a unilateral change order to Merrick for the installation, operation, and monitoring of a temporary bypass pumping system (System).  The change order stipulated the System would be paid for on a monthly unit price basis with a formal Modification to be issued at a later time.  The pumps were delivered in July and fully accepted and operational in August.  Modification No. 3 was issued in July which included costs for the mobilization, three months rent for the System, and identified the monthly unit cost as $208,015.82.  Another Modification was issued in March of 2012 for an additional seven months of System rental and in September of that year, USACE directed the shutdown of the System. 

A final Modification was issued in January of 2013 for an additional three months of System rental which contained language that stated, “This adjustment constitutes compensation in full on behalf of the contractor and its subcontractors and suppliers for all costs and markups...”  This brought the total number of rental payment to thirteen months, but the System had been on site for a total of fourteen months. During the course of the project after the pumps had been removed, Merrick believed that an accounting discrepancy had occurred, and the System supplier had overcharged Merrick and it filed suit to recover those costs.  In July of 2015, Merrick submitted its final payment request to USACE and Merrick’s vice president signed a general release which stated:

"[Merrick] hereby releases the United States, its officers, agents, and employees from any and all claims arising under or by virtue of said contract or any modification or change thereof, except with respect to those claims, if any, listed below…”
Merrick did not provide any claims or reservations and final payment was issued in the requested amount. Later in September of 2015, Merrick became aware that the supposed over-payment to the System supplier was in fact an underpayment by the USACE.  Merrick submitted a claim to the USACE in May of 2016 for a one-month rental of the System and the USACE contracting officer denied the claim citing the general release.  Merrick appealed the decision to the Armed Services Board of Contractor Appeals (Board) and USACE moved for summary judgement.

The Board begins it analysis by presenting USACE’s argument that the signature of the general release bars any claims by Merrick after the fact.  The Board points to Clean by Lucy, Inc., ASBCA No. 58432, which states a release, "abandons a claim or relinquishes a right that could be asserted against another" and “[as] a rule, a general release, whether associated with final payment or not, which is not qualified on its face, bars any claims based upon events occurring before execution of the release.” However, the Board then identified that there are exceptions to the release such as fraud, mutual mistake, economic duress, or consideration of a claim after release.

Merrick argued that the general release should not bar its claim because USACE had superior knowledge of the discrepancy in payments for the System because of Merrick's mistake.  Merrick’s superior knowledge argument was centered around the fact that before the final release was signed, but after the final Modification for the System’s rental was executed, there was a change in project management by Merrick and USACE knew that the new project manager was not involved in any prior negotiations.  Merrick further argued USACE took advantage of this because it knew of the discrepancy between rental months paid and actual rental months onsite. Merrick further argued that through the act of bringing a suit against the System supplier, USACE knew or should have known that Merrick intended to preserve a claim against it. The Board rejected the superior knowledge argument because it was highly speculative and Merrick itself was not aware of the discrepancy until nearly three months after the general release was signed.

The Board next reviewed Merrick’s argument against summary judgement because of mutual or unilateral mistake.  The Board stated that Merrick’s ignorance of its own claim is not the type of mistake that would constitute an exception to general releases and quoted J. G. Watts Construction Co. v. United States, 161 Ct. Cl. 801, 806 (1963) which stated, "where it is shown that, by reason of a mutual mistake, neither party intended that the release cover a certain claim, the court will reform the release." Merrick admits that it did not know of the claim until after it signed the release and consequently could not have intended it to be exempt from the general release.  Furthermore, the Board pointed to Mingus Constructors, Inc.,  v. the United States,  812 F.2d 1387 (Fed. Cir. 1987) that held:

"failure by the contractor to keep adequate records to at least know the source and the amounts of its cost overruns is not a sufficient reason to entertain suits on claims otherwise released, especially when the terms of the contract require such information on the mandatory release at the end of the project."
The Board found that Merrick had not provided the basic facts which established entitlement to an equitable remedy for a unilateral mistake and the general release is enforceable.

Accordingly, the Board granted USACE’s motion for summary judgement.

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The author, Brendan Carter, Esq., is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA. He is a monthly contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He may be contacted at 781.786.8916 or carter@agcmass.org.


Friday, April 13, 2018

Annual Meeting - Division 1 Breakfast Program - Litigation and Best Practices After the Storm

 

With moderator I'Ashea Myles-Dihigo guiding the discussion, an esteemed panel of Ed Everitt of Aptim; Dr. Norma Mattei, Dean of the University of New Orleans Civil and Enivronmental Engineering Department; David Kurtz, Baker, Donelson, Bearman Caldwell & Berkowitz; and Cynthia Dubberly, Trapolin Peer Architects & an adjunct professor at Tulane University analyzed the broad impacts of and reactions to super storms from the building code-based technical side and the claims-based litigation side.






Thursday, April 12, 2018

Michael D. Tarullo Honored with 2018 Cornerstone Award


The Cornerstone Award, honoring a member of the Forum who has rendered long-term exceptional service to the construction industry, to the public and to the legal profession, was presented to Michael D. Tarullo at the Construction Forum’s 2018 Annual Meeting in New Orleans, LA on April 12, 2018.  The Cornerstone Award is the highest award presented by the Forum on Construction Law.

Division 1 Practicum - Delay Claims

Handling delay claims can be one of the most confounding topics for construction litigators. During today's practicum, the experienced faculty consisting of Kelsey Kornick Funes, Robert D'Onofrio, Deborah Mastin, and Anthony Meagher reviewed the issues and strategy for handling delay claims from analyzing your client’s claims of delay to putting together a case that will convince your fact finder. The practicum provided those new to construction law with the tools needed to understand delay claims and provided an opportunity to learn from faculty with substantial trial experience in schedule delay claims as counsel, expert, and arbitrator. Attendees gained insight from observing faculty try a delay fact pattern, and the opportunity to practice on their own using a simple fact pattern.
 

Sunday, April 8, 2018

Warner Construction Consultants Reaction to I'Ashea Myles-Dihigo's Post: "Cost-Plus Contract and the Disorganized Contractor."


Warner had sent me a reaction to I'Ashea's post concerning cost-plus contracts and I thought I would pass it along.  Great dialogue and contribution.  Thank you!
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This article is a response to compliment the excellent blog article of the Division I Dispute Resolver, written by I’Ashea Myles-Dihigo of the Leitner, Williams, Dooley & Napolitan, PLLC firm in Nashville, Tennessee, “Cost-Plus Contract and the Disorganized Contractor.”  Ms. Myles-Dihigo’s article in reference to Cost-Plus Contract project delivery and a Contractor’s exposure as a result of inadequate cost record keeping and accounting is on point. The article specifically references risk of non-payment and non-entitlement in the event of inadequate cost records as support for payment.

In addition to the article’s focus is the concept that: there is no such thing as a cost-plus Contract. This is in the sense that the Contractor thinks it can spend “whatever it costs” to execute a project, and expect payment in kind – i.e. “Hey, it’s a Cost-Plus Contract…”

Typically, Cost-Plus engagements are often much sought after and prized by Contractors due to the perception of a “softer” method of procurement and delivery. This is a typical, but mistaken approach on the part of some Contractors. They anticipate a project with less demand on tight/controlled management, supervision, and efficient execution. This is because there are not productivity targets necessary to achieve profitability and virtually no risk of financial loss, since costs will be paid as expended – efficient or not.

Nothing could be further from the truth.

In contrast to Cost-Plus contracts, is Stipulated Sum contract project delivery. Under this system the Contractor has a finite price for which to execute and deliver the project. As such, costs must be tightly managed and controlled in order for the Contractor to financially survive. Much can be (and has been) written and debated as to the merits of different Contract delivery systems, and most all of them uniquely depend upon specific project factors and variables. This includes the position that Cost-Plus is appropriate where project scope is not well defined and Stipulated Sum where project scope is well defined and detailed.

However limited project scope definition and Cost-Plus contract does not translate to no need for establishment of budgeted scope, quantitative, and cost targets, even if based on conceptual or schematic project definition.

In fact, Cost-Plus Contracts and project delivery arguably place, if not more, then equal pressure on the Contractor to tightly plan, execute, and account for the cost of the work. While cost-plus delivery implies unlimited budget, Contractors be warned that every project has a budget, and thereby funding limit. This is true whether the project is for a public entity or a wealthy private Owner/Client with implied unlimited funds and apparently little attention to cost. Cost-Plus delivery typically has more to do with limited project scope definition that it does ample available funds.

Uncontrolled execution of the work and cost expenditure will at some point catch the attention of the Client. At that point not only will the manner of cost management and record-keeping be brought into question, but attention will turn to overall project planning and execution in general. In all, this would be a very bad situation for a Contractor to find itself, and one that could be devastating to its reputation.

The subject article focuses on the demand for proper cost accounting and payment entitlement under a Cost-Plus Contract structure. However, proper cost management and accounting is also in the best interest of the Contractor’s financial performance, success, and survival. Proper, effective, and disciplined cost management and accounting, along with efficient work planning and productivity, is a necessary element of profitability, and therefore viability. Proper cost management also serves as the basis for the Contractor’s cost estimation and its ability to competitively procure work in an ever-more-competitive construction contracting market.

At the end of the day, a disciplined contractor’s cost management systems, processes, procedures, and controls should be established and implemented according to best practices regardless of Contract delivery method. Those systems can then be properly and credibly adapted and adjusted to different Contract requirements and processes across its portfolio of work. 

Myles-Dihigo , I. (2017, September 09). “Cost-Plus Contract and the Disorganized Contractor”. Retrieved November 15, 2017, from http://abaconstructionforumdivision1.blogspot.com/search?q=Cost-Plus%2BContract%2Band%2Bthe%2BDisorganized%2BContractor%E2%80%9D


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The author, Tony Manning, Vice President, Program and Project Management Group at Warner Construction Consultants, Inc., may be contacted at 301.670.9020 or tmanning@warnercon.com. 

Friday, March 23, 2018

Federal Circuit Affirms Absence of Differing Site Condition But Remands for Delay Claim

Mary C. Oswell collection, Bonita Museum,
available at http://sunnycv.com/southbay/exhibits/water.html 
The case Meridian Eng'g Co. v. United States, No. 2017-1584, 2018 WL 1386147, at *10 (Fed. Cir. Mar. 20, 2018) concerned a dispute between the federal government and a contractor related to the construction of flood control structures and the relocation of a sewer line in Chula Vista near San Diego, California.  After starting work, the contractor encountered "subsurface organic/unsuitable material” and “a layer of dripping saturated dark clay material under which a clean layer of sand is producing water.”  As a result the parties modified the contract - selecting larger pipes, reinforced concrete, more soil investigation, but to no avail.  The project was terminated after further structural failures.  The contractor then sought extra costs for what it deemed a Type I differing site condition ("DSC") and for delay costs for inclement weather. The Court of Federal Claims denied the claims and the contractor appealed to the United States Court of Appeals for the Federal Circuit.  The Appeals Court reviewed for "clear error."

Under this federal contract, a Type I DSC claim arises when the subsurface or latent physical conditions at the site differ materially from those indicated in the contract documents.  The Appeals Court recounted that typically whether "a contract contained indications of a particular site condition is a matter of contract interpretation." Id.  As part of its burden of proof, the contractor needed to show it acted as "a reasonable contractor [when] reading the contract documents as a whole [and] interpret[ing] them as making a representation as to the site conditions.”  Besides reliance on the contract and proof of damages, the contractor also needed to prove that “the actual site conditions were not reasonably foreseeable to the contractor with the information available to the particular contractor outside the contract documents” as well. Id.  The Appeals Court agreed with trial court's conclusion that the saturated soil conditions were reasonably foreseeable from the contract documents.  In particular, the contract stated that the worksite was located on a floodplain and the descriptions of the incorporated boring logs expressly stated that "variations may exist in the subsurface between boring locations."  The court also emphasized that "actual conditions at the site indicated such [saturated] conditions" and the contractor was charged with knowing information that could be gleaned from a pre-bid site visit.  The court found important that there was no testimony from the contractor otherwise regarding the actual conditions.

For the contractor's part, it argued that the contract had identified the areas of the project as "hard unyielding material.”  But the Appeals Court was unpersuaded in the face of disclaimer contract provisions noting "unstable material" and boring logs that were determined to indicate otherwise. The contractor also balked that trial court found that an "independent soils investigation" was something a reasonable contractor would have performed.  Again the Appeals Court disagreed concluding that the underlying decision actually did "not impose an improper requirement for investigation." Lastly, the Appeals Court disposed of the contractor's argument that the agreed-to modifications to the contract served as admissions by the government that a Type I DSC existed because "a contractor is not entitled to the benefit of any presumption arising from the [CO]'s decision." Id.

Although the contractor did not prevail on the DSC claim, the Appeals Court did breathe new life into the delay claim for having to work in inclement weather.  The trial court had dismissed this claim as well on account of an "accord and satisfaction" as a result of contract modifications. However, the Appeals Court disagreed noting that the contract modification did not represent a meeting of the minds to dispose of these inclement weather delay claims especially in light of the government's actions post-modification - requests for estimates, draft modifications with these claims included, offer to review further documentation.  Accordingly this delay claim was remanded for further hearings.

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The author, Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island.
  
 

Saturday, March 17, 2018

Substantial Completion or Final Acceptance? 11th Circuit Rules Statute of Limitations had Run on Supplier's Bond Claim

The timing of bond claims is the focus of the dispute in Devin Strickland v. Arch Insurance Company which was recently ruled upon by the Eleventh Circuit Court of Appeals. The plaintiff was Devin Strickland (Strickland), a supplier of sand to Douglas Asphalt Paving Company (Douglas) on a Georgia Department of Transportation (GDOT) road improvement project.  Douglas held a contract with the GDOT that included GDOT’s standard specifications which required: 1) the Contractor to provide repairs to the work until final written acceptance by GDOT; and 2) furnish documentation of payment to all material suppliers. Defendant Arch issued a payment bond to Douglas in 2003.  In 2007, the GDOT found Douglas to be in default and terminated its contract thus forcing Arch to hire a third party to complete the balance of the work.  Strickland did not provide any materials for the project after Douglas was terminated.

GDOT determined the work was substantially complete in August of 2010 and the following month a final inspection was performed which generated a punchlist for the third-party contractor to complete. The punchlist was completed in September of 2011 and Arch requested GDOT accept the project for maintenance citing the project had been 1) open to unrestricted traffic; 2) punchlist items were complete; and 3) all outstanding payments had been settled.  In February 2012, an area GDOT engineer requested that GDOT accept maintenance responsibilities which was granted in March 2012 retroactively to September of 2011.  Arch received semi-final payment in July of 2012.

In September 2012, Strickland sent a demand letter to Arch on Douglas’s payment bond.  Arch acknowledged the claim and requested further documentation which went unanswered by Strickland.  In 2014, Strickland learned from a GDOT engineer that the project was about to be closed and it needed to file any claims immediately, which Strickland did in August of 2014.  In September of 2014, GDOT issued its letter of final acceptance stating the project had been accepted since April 2012.

At trial, the court granted summary judgement for Arch due to Georgia’s one year statute of limitations having run on Strickland’s bond claim.  Strickland appealed.

The Court of Appeals began its analysis by pointing to the Georgia statute that states “[n]o action can be instituted on payment bonds or security deposits after one year from the completion of the contract and the acceptance of the public works construction by the proper public authorities.” O.C.G.A. § 13-10-65.  Additionally, the Court defined the start of the one-year period as “[commencing] at the completion of the actual construction work and acceptance thereof by the public authority.” U.S.F. & G. Co. v. Rome Concrete Pipe Co., 353 S.E.2d 15, 16 (1987)

Strickland presented three arguments to the Court.  The first was that the project was not completed until 2014 because GDOT’s standard specification contained language that a contractor had a repair requirement until final written acceptance of the work, which happened in September of 2014. Strickland’s second argument was that a genuine dispute of material existed due to the GDOT engineer’s email to Strickland that stated the project had “not received final acceptance and approval.” Finally, Strickland argued that the statute of limitations had not run on the payment bond and it remained in “full force and effect” until every supplier on the project was paid by the contractor.  The Court rejected each of these arguments.

Strickland’s first argument was rejected by the Court because it determined the project was substantially completed in 2010 when Arch requested GDOT’s final inspection and when the punch list items were completed in September 2011.  By any interpretation of Georgia’s definition of project completion, Strickland was outside of the one year statute of limitations when it filed its bond claim.

The Court further ruled that the GDOT engineer’s email to Strickland in 2014 stated the project had not received final acceptance and approval, but the engineer was only referencing final “written final acceptance.”  The two year gap between Archer’s semi-final payment in 2012 and final acceptance in 2014 was explained by GDOT because it was awaiting and processing test results before it could complete the project, a GDOT administrative function.  Georgia’s definition of completion of “actual construction work” does not rely upon such administrative functions.

Finally, Strickland’s third argument that the statute of limitations on the bond had not run because it had not been paid was rejected by Court.  The Court found that such an interpretation would make a statute of limitation meaningless because the limitations period would never start running so long as a supplier had not been paid.

The Court affirmed the lower court’s ruling that the statute of limitations had run on Strickland’s bond claims.

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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 the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA.  He may be contacted at 781.786.8916 or carter@agcmass.org.






Saturday, February 24, 2018

Pay-if-Paid Enforced Opening Door to Subcontractor Claim Against Owner

 
https://libeskind.com/work/the-ascent-at-roeblings-bridge/
In Superior Steel, Inc. v. Ascent at Roebling's Bridge, LLC, No. 2015-SC-000204-DG, 2017 WL 6380218 (Ky. Dec. 14, 2017), a subcontractor and a sub-subcontractor sued the general contractor and owner for the failure to pay for extra work. The general contractor and owner cross-claimed against the other for, inter alia, indemnification.  At the jury trial, the subcontractors recovered under theories of implied contract and unjust enrichment.  All parties appealed, in particular, as to the pay-if-paid jury instruction. The Court of Appeals vacated the judgment and remanded.  In turn, all parties petitioned to the Supreme Court of Kentucky.
 
The key questions in the petition were whether the pay-if-paid provision was enforceable as between the general contractor and subcontractors and, if so, whether the subcontractors could pursue the owner directly for payment notwithstanding the lack of privity between owner and subcontractors.
 
The Supreme Court concluded that, as a result of the pay-if-paid clause, the general contractor had not breached subcontract for the failure to pay for the subcontractor's extra work.  The relevant subcontract provisions stated:
  • "no compensation . . . for any claim arising out of the performance of this Subcontract, unless the Contractor has collected corresponding additional compensation from the owner, or other party involved"
  • And more directly - "payment [to] the Contractor from the Owner for the Subcontractor Work is a condition precedent to payment by the Contractor to Subcontractor. The Subcontractor hereby acknowledges that it relied on the credit of the Owner, not the Contractor for payment of the Subcontract Work."
Reading these together, the Supreme Court agreed that the general contractor's receipt of payment from owner was a condition precedent to its obligation to pay the subcontractors.  Because the general contractor did not receive payment from the owner, there could be no breach. The Court did note that "pay-if-paid clauses have fallen out of favor in some states, [but] the prohibition against their use has come from the legislature rather than the courts." In Kentucky, no such statutory prohibition existed.
 
However, because the subcontractors were left with no useful contract remedy against general contractor, the Court held that the subcontractors were not barred from bringing unjust enrichment claims against the owner.  The Court acknowledged that typically “unjust enrichment is unavailable when the terms of an express contract control.”  But noted that, here, the "adequacy" of a "legal remedy" (or the "actual realization of that contractual remedy") was absent due to the "contractual gridlock" caused by the owner.  Indeed, if the contract was the only avenue for the subcontractors to obtain relief, that result would allow the owner to take advantage of its own failure to pay after receiving "a substantial benefit" from the subcontractors' work.
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The author, Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island.