Monday, October 24, 2016

10 Days Means 10 Days: Ohio Appeals Court Upholds Decision Requiring Strict Compliance with Time and Notice Claim Requirements in State Construction Contract

The plaintiff in IPS Electric Services, LLC v. University of Toledo was an electrical contractor contracted with the University of Toledo to construct a new enclosure at existing buildings and remodel existing space at the UT Health Science Campus.  The contract included provisions for contract modifications and dispute resolution. During the course of the project, problems were encountered that impacted the completion date.  In response to the defendant issuing a new completion schedule, the plaintiff began documenting these impacts beginning on October 24, 2012.  The new schedule would require the plaintiff to add additional manpower, additional shifts, and overtime thereby increasing costs significantly.  On December 24, 2012, the plaintiff sent a letter to the defendant stating it was experiencing compensable costs related to the defendant’s late delivery of air handling units and slow RFI responses resulted in a delay to the metal framing and overhead duct installation. 

On January 22, 2013, the plaintiff sent another letter to the defendant stating that, “we are arguably obligated under the contract documents to provide additional support for our claims as a follow-up to our prior submissions.”  Plaintiff then presented costs associated with schedule acceleration labor, disruption, and additional general conditions. Plaintiffs followed up on February 21, 2013 with detailed costs and formal change order requests.  Finally, on April 25, 2013, the plaintiffs submitted a certified claim for the above costs, adding an additional $100,000 to the disruption total.  In its claim, plaintiff stated “IPS gave notice of delay and potential costs impacts in its October 24, 2012, December 24, 2012, January 22, 2013 and February 21, 2013 letters."  In September of 2013, plaintiff filed a complaint in the Court of Claims alleging breach of contract and unjust enrichment. 

The Court of Claims dismissed the plaintiff’s unjust enrichment claim finding that a written contract governed the relationship between the parties.  The Court of Claims further found that even though the actions of the defendant could constitute a breach of contract, by a preponderance of the evidence the plaintiff failed to comply with the dispute resolution procedures contained within the contract which resulted in the irrevocable waiver of any related claim.  The Court rejected the plaintiff’s argument that it could only know the full amount of damages it suffered at the completion of the project, which in turn would not allow for strict adherence to the notice and time requirements in the contract.  The plaintiffs appealed the Court of Claims decision for the defendants.

The Appeals Court began its analysis by presenting excerpts from Article 8 of the contract that provided the dispute resolution procedures for the project.

8.1.2 Except as provided under paragraph 2.15, the Contractor shall initiate every claim by giving written notice of the claim to the A/E and the Contracting Authority within 10 days after the occurrence of the event giving rise to the claim[.]

8.1.4 The Contractor's failure to initiate a claim as and when required under this paragraph 8.1 shall constitute the Contractor's irrevocable waiver of the claim.

The plaintiff argued in its appeal that the contract violates Ohio’s “no damage for delay” statutory prohibition through the inclusion of a ‘no damage for delay’ clause found in Article 4.  The plaintiff further contended that the waiver conditions in Article 8 constituted a no damage for delay cause as well. The Court was not swayed by these arguments pointing to the fact the clause referenced in Article 4 addressed delays caused by other contractors, not by the defendant and therefore is not prohibited by the statute.  The Court further found that the Article 8 claim provisions do not contain “no damages for delay” language.  Article 8 deals with procedural matters for claims, not the substance of the claim and is not the type of contract term that would be barred by the statute either.

The Court next addressed the plaintiff’s claim that the Court of Claims created a “windfall” for the defendant by not finding it liable for the breach of contract claim.  The plaintiff’s argument was that it was unfair for the lower court to require strict compliance with Article 8 because 1) it was waiting for change orders to be executed under Article 7; 2) it had sent repeated notices to the defendant that its actions had caused schedule delays; 3) it was not possible to quantify the extent of the damages until the project was complete. The Court pointed to Ohio case law in order to discount the plaintiff’s argument that adherence to Article 8 would have been a “vain act” by stating, “the Article 8 process remains operative even if the contractor can demonstrate that the Article 8 adjudicators were unlikely to provide the relief sought.” Cleveland Constr., Inc. v. Kent State Univ., 10th Dist. No. 09AP-822, 2010-Ohio-2906.  The Court further stated that the plaintiff was contractually required to inform the defendant with a written notice within ten days of an occurrence that would give rise to a claim.  The Article 8 provision did not require a fully priced change order proposal to accompany that notice.  The Court stated, “initiation of a claim pursuant to the contract's dispute resolution procedures was not contingent on IPS's ability to precisely calculate its damages.”

Accordingly, the Court affirmed the judgment of the Court of Claims for the defendant. 

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 in Boston, MA.  He may be contacted at 617.748.8311 or

Sunday, October 16, 2016

Contractors Exposed to Copyright Liability Where Owner Breaches Agreement with Architect

A federal court in the case Eberhard Architects, LLC v. Bogart Architecture, Inc. et al., 314 F.R.D. 567 (N.D.Ohio 2016) recently held that contractors and subcontractors cannot, as a matter of law, avoid liability if an owner uses an architect's plans and drawings without a license.

In Eberhard, the Architect entered into an AIA contract with the Owner to provide architectural services in connection with the design of a 12-bed hospital facility.  Per the contract the Architect granted the Owner a "nonexclusive license" to use its plans and drawings, the "instruments of service," for the hospital project unless Owner failed to make payments.  In such instance, the contract stated that the license in favor of the Owner would be cancelled.

When the Owner failed to make payment to the Architect, the Architect issued cease and desist letters to all project participants - Owner, Contractor, Subcontractor - to stop using its instruments of service as they were protected by copyright law.  The Contractor and Subcontractors, who did not have a contractual relationship with the Architect and who did not have a basis in their contract with the Owner to stop work, continued to use the drawings and plans.  The Architect then filed a lawsuit against all project participants.  The Contractor and Subcontractors moved to dismiss. The federal court denied the motion.

The Contractor and Subcontractors first argued that case did not “arise” under the Copyright Act and was really a contract dispute concerning nonpayment of fees. The court disagreed holding that the complaint sounded in infringement by Contractor and Subcontractors and therefore arises under the Act. The court commented that it did not matter that the Defendants would raise an affirmative defense that they were not infringers in light of the nonexclusive license.

Then the court likewise discarded the arguments from the Contractor and Subcontractors that they did not exceed the scope of the license because the instruments of service were used on the exact project that the architect had intended.  According to the Contractor and Subcontractors, the Owner did not breach its agreement with the Architect (entitling the Architect to withdraw the license in full) because complete payment was not a condition precedent to the Owner-Architect Agreement.  The court pointed out that the Architect-Owner contract granted the license “upon execution” and "therefore, by granting the license before full payment was due, the parties clearly did not intend the full payment to be a condition precedent to the license itself." And furthermore, by agreement of the parties, the license indeed "ceased to exist" upon the architect's rightful termination of which non-payment was rightful reason. In sum, the Owner and Architect had agreed that the license  would be extinguished.Accordingly, by proceeding to use the instruments of service without a license all project participants, including the Contractor and Subcontractors, were potentially liable under the Copyright Act.

Beyond this case--where, in light of the cease and desist letters, the Contractors and Subcontractors arguably were aware that the license was potentially expired--it is important to note that civil violations of the Copyright Act need not be willful or knowing. See generally R. Anthony Reese, Innocent Infringement in US Copyright Law: A History, 30 Colum. J.L. & Arts 133 (2007).  As such, contractors and subcontractors who use plans and drawings that are unlicensed, whether they know so or not, may expose themselves to liability.
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

Friday, October 7, 2016

Division 1 Sponsored Advocacy in Arbitration Practicum Kicks Off Forum’s 2016 Fall Meeting in Chicago

The Forum on Construction Law’s Beatles themed 2016 Fall Meeting - I Should Have Known Better - Construction & Design Defects & Project Delays is underway this week in Chicago.  The programming portion of the meeting commenced on Wednesday afternoon with the Advocacy in Arbitration Practicum sponsored by Division 1, The Young Lawyers Division, and the Forum Leadership Circle.  The Practicum was a great success with almost sixty attendees participating in the three hour session. 

The practicum was moderated by Division 1’s Tom Dunn of Pierce Atwood  with a panel comprised of Former Division 1 Chair Buzz Tarlow of Tarlow and Stonecipher, the Leadership Circle’s John R. Heisse of Pillsbury Winthrop Shaw Pittman LLP, and the YLD’s Haim Benjamin of Becker & Poliakoff. The practicum centered on a fact pattern of an EPCM power plant project that went off the rails with a change order dispute between the owner and general contractor.  Topics covered include the arbitration agreement, arbitrator selection, information exchange, and vacatur and appeals.  Attendees were divided into Claimant and Respondent teams and mock cross examinations held with the assistance of Erin Krejci of Laurie & Brennan and Brendan Carter of Navigant Consulting, Inc. playing the roles of the owner's and general contractor’s project managers.

Tom Dunn moderates the conversation.

John R. Heisse leads the discussion on preliminary hearings.

Haim Benjamin discusses information exchange between the parties.

Buzz Tarlow strategizing with his team for cross examination.

Friday, September 30, 2016

Do All Those Qualifications on Subcontractor Bids Really Mean Anything? California Appeals Court Says Yes and it is Unreasonable to Disregard Them

The plaintiff in Flinto Pacific, Inc. v. TEC Management Consultants, Inc. was a general contractor who was awarded a building project at the Diablo Valley College in Pleasant Hills, California. Two months earlier on bid day, the defendant submitted a proposal for the glass and glazing package in the amount of $1,272,090. The proposal contained qualifications that stated a deposit of 35% was required for the work, the defendant would not accept responsibility for liquidated damages, all bonds were excluded, and the bid could be withdrawn if it was not accepted within 15 days. It further stated that the bid was subject to a 3% escalation per quarter after that 15 day acceptance period. In its winning bid for the project the plaintiff carried the defendant’s number and identified it as the curtain wall and glazing subcontractor. 

On the day it was awarded the project, the plaintiff held a meeting with the defendant to discuss the upcoming project.  A few days later a letter of intent was sent to the defendant which stated the "contract award is contingent upon the following terms and conditions," which included the requirement that the defendant accept liquidated damages and agree to a complete scope of work. The next week the plaintiff sent its standard subcontract to the defendant which did not include a scope of work or price information.  Defendant reviewed the contract and alerted the plaintiff that the boilerplate language of the contract was in conflict with the qualifications in its bid, specifically the deposit, bond, and 3% escalation provisions.  Conversations regarding the contract continued into the next month with the plaintiff sending the defendant another subcontract which had not been modified to address any of the defendant’s bid qualifications. Just prior to the second subcontract being sent, the defendant notified the plaintiff that it decided not pursue the contract any further. Two more correspondence exchanges were had with the defendant stating it was within its rights to withdraw its bid per the 15 day acceptance qualification.  Ultimately, the plaintiff found a new subcontractor for the glass and glazing package.

The plaintiff filed suit against the defendant alleging promissory estoppel in the amount of the $327,000. At trial, the plaintiff stated that on a typical bid days when it is pulling together all the subcontractor bids, it generally, “disregards all terms and conditions of a subcontractor's bid except for scope of work, price, length of time the bid would remain open, and bonding.” Plaintiff’s project manager also admitted that he had not reviewed the defendant’s proposal until after it was listed in the winning bid.  The trial court ruled in favor of the defendant stating that the plaintiff’s reliance on the submitted bid without regard for the material conditions was not reasonable.  

Plaintiff appealed to the Court of Appeals of California, Second District contending that the trial court erred in ruling that the elements of promissory estoppel had not been met. 

The Court began its analysis by establishing that the four elements of promissory estoppel are “(1) a promise clear and unambiguous in its terms; (2) reliance by the party to whom the promise is made; (3) [the] reliance must be both reasonable and foreseeable; and (4) the party asserting the estoppel must be injured by his reliance.” US Ecology, Inc. v. State of California (2005) 129 Cal.App.4th 887, 901; Kajima/Ray Wilson v. Los Angeles County Metropolitan Transportation Authority (2000) 23 Cal.4th 305, 310.  The Court centered its review of the case on the reasonableness element.  It found the trial court’s conclusion that, “TEC's bid contained conditions that were material to its bid price, and which if omitted, would have considerably increased the price…therefore… Flintco's reliance on the bid price alone was not reasonable.”  The Court also pointed to the trial court’s examination of the record with the defendant’s clear 35% deposit requirement, rejection of liquidated damages liability, unwillingness to provide a bond, and 15 day rejection period as “evidence [supporting] the trial court's finding that Flintco's reliance on the bid price alone while ignoring the material terms and conditions was unreasonable.”

The Court further reviewed the plaintiff’s argument that the conditions of the defendant’s qualifications to the bid are irrelevant based upon custom and practice in lump-sum contracting.  The Court pointed to the plaintiff’s cited cases and stated that, “unlike the cases Flincto [cited]…where the bids were made orally and were comprised of price only, TEC's bid was written and contained terms and conditions that were underscored and material because they affected the price. Nor does TEC claim it made a mistake in the bid. Thus, the justification in Drennan for invoking the equitable doctrine of promissory estoppel does not apply here.”

The Court affirmed the trial court’s judgment. 

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

Friday, September 23, 2016

NJ Superior Court Halts End Run Around the Statute of Repose

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.”
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

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."
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

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. 

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

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.
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

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.
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

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.