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. 
 

Friday, February 16, 2018

Its Good to be the King: GA County Avoids Payment on Thirty Open Change Orders by Claiming Sovereign Immunity

Fulton County, Georgia (County) entered into a contract with SOCO Construction Company, Inc. (SOCO) in 2013 to construct the Aviation Community Cultural Center.  The contract contained a performance period of 287 days from NTP or the start of the work, whichever came first.  The contract’s general conditions provided that changes in the performance period could be made due to changes in the scope of work, or delay events not the responsibility of SOCO. The specific change language required that, “the Contract Sum and the Contract Time may be changed only by approved Change Order pursuant to Fulton County Procedure 800-6…”

Fulton County Procedure 800-6 (800-6) requires that a change orders be a clearly defined “written, bilateral agreement” between the County and the Contractor.  800-6 allows for change orders for design deficiencies, unforeseen conditions, abnormal inclement weather, or owner directed changes to the work.  Additionally, 800-6 provides for “Extraordinary Circumstances” where the County Manager may execute change orders before the Board of Commissioners can act in the event of “delay to the critical path schedule.”

SCCO began construction of the project on May 29, 2013 and achieved substantial completion a year later on May 29, 2014.  SCCO claims that it could not achieve the performance period due to adverse weather, design driven delays, the untimely processing of change orders, and a federal government shutdown that impacted certain permits. As a result of these issues, the County’s program manager logged thirty change orders in its change log as of September 2014.  SCCO was not able to provide bilaterally executed copies of the open change orders and admitted than no extension of time had been given by the County.  Final retainage was withheld on the contract until January 2015 and an official Certificate of Substantial Completion was not issued until February 2015.  As a result, SOCO filed suit against the County for breach of contract and bad faith.

The County filed a motion for summary judgement which stated the court lacked subject matter jurisdiction due to sovereign immunity which the lower court rejected.  The County then appealed stating that although sovereign immunity may not apply to breach of contract actions, it was not waived for actions stemming from failure to follow change order procedures outlined within a contract.

To begin its analysis, the Court quoted the Georgia Constitution which states sovereign immunity is, “is hereby waived as to any action ex contractu for the breach of any written contract…” and “sovereign immunity of the [S]tate and its departments and agencies can only be waived by an Act of the General Assembly…” The Court then stated that the contract contained specific provisions for both obtaining a written change order and a means to bypass those provisions in the event of “extraordinary circumstances.” The lower court’s reasoning for rejecting the County’s motion for summary judgment was that SCCO change orders were required to avoid delay to the project schedule’s critical path which would fall under the “extraordinary circumstances” provision.

The Court rejected the lower court’s reasoning by pointing to the fact that the “extraordinary circumstances” provisions requires, “at a minimum” five specific procedures be followed which include a detailed description of scope and cost for the change, approval of the Purchasing agent, approval of the County Manager, 60 days after approval the change it shall be placed in the consent agenda, and timely processing of all change orders.  Of the thirty open change orders claimed by SCCO, none of them followed any of the five procedures the Court found.  The Court then referred back to previous rulings where it found sovereign immunity cannot be waived by the County’s actions outside of the written contract which would apply “to evidence [that] shows any agreements to extend did not meet the written contract requirement set forth in the applicable statute and constitutional provision relating to the waiver of sovereign immunity.”

Accordingly, the Court found it could not create an exception to the constitutional waiver of sovereign immunity due to SCCO’s reliance of the County’s requests for change orders or upon the County’s course of conduct. The Court remanded the case for further consideration.

FULTON COUNTY, GEORGIA v. SOCO CONTRACTING COMPANY, INC.


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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 3, 2018

Signature Required: The Nuances in the Tennessee Uniform Arbitration Act (TUAA) in Residential Construction, Interstate Commerce and the Federal Arbitration Act (FAA)



By: I’Ashea Myles-Dihigo, Esq.


Arbitration continues to be the preferred method in the resolution of many construction dispute cases. Many residential general contractors and others working in the residential construction industry place a general arbitration agreement in their contracts in an effort to control the venue for dispute resolution. Because arbitration requires a written agreement, it is usually easier to  negotiate the terms of the arbitration before the dispute arises. Therefore, clients should be advised to give some attention to the language used when drafting such agreements to avoid costly disputes regarding the interpretation on the back end. Clients should also be advised to give attention to any state statutory schematics that may determine if a particular arbitration agreement is enforceable or not. So, what happens if you don’t want to arbitrate, or like many industry professionals, don’t pay attention to the paperwork? Do you still have to arbitrate, or can you force another party to do so?


The answer to those questions depends on the type of contract you are dealing with when it comes to residential construction. In Tennessee, Tennessee Code Annotated § 29-5-302 (a) governs arbitration agreements relative to residential construction. It states in pertinent part, “A written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable save upon such grounds as exist at law or in equity for the revocation of any contract; provided, that for contracts relating to farm property, structures or goods, or to property and structures utilized as a residence of a party, the clause providing for arbitration shall be additionally signed or initialed by the parties.” Tenn. Code Ann. § 29-5- 302(a). The legislature in the state of Tennessee, as in many other states, intended to try to ensure that parties to a written contract understand full well that by entering into a [residential] contract, they are agreeing to resolve future disputes by arbitration and are waiving their right to pursue claims in state or federal court. Hubert, et al. v. Turnberry Homes, LLC, No. M2005-00955-COA-R3-CV, 2006 Tenn. App. LEXIS 648, *22 (Tenn. Ct. App. 2006).

In the case of Hubert, et al. v. Turnberry Homes, LLC, the Plaintiffs hired Turnberry Homes to construct a new house for them. Id. at *2. Once the construction was finished, they were dissatisfied with the work, and they sued the builder. Id. Turnberry filed a motion to compel arbitration and to stay the litigation pursuant to the FAA. Id. at *3. As a part of its motion, Turnberry filed an affidavit which identified various areas of interstate commerce that the building project touched. Id. The trial court ultimately denied Turnberry’s motion. Id. at *4.


When Turnberry appealed the ruling of the trial court, the Court of Appeals addressed the interplay between the FAA and TUAA. Under the TUAA, the legislature intended to provide a heightened duty requirement when seeking to enforce arbitration agreements relating to farm property, structures or goods, or to property and structures utilized as a residence of a party. Id. at *13-14. In those cases, the clause providing for arbitration shall be additionally signed or initialed by the parties. Id. However, the Court held that where the state has adopted the UAA's enforcement provision without modification, there was no conflict between the FAA and the state's arbitration act. Id. at *15. However, as in Tennessee, where the state legislature has placed additional restrictions on the enforcement of arbitration agreements that are not present in the FAA or the UAA, cases will arise where a state court will be required to enforce an agreement to arbitrate under the terms of the FAA but be prohibited from doing so under the state arbitration statute. Id. But Turnberry is distinguishable because it involved a purchase and sale agreement which, on its face, involves interstate commerce. What about other arbitration agreements in Tennessee that relate to farm property, structures or goods, or to property and structures utilized as a residence of a party but don’t touch interstate commerce?

The Court of Appeals took up this exact issue in Wells v. Tennessee Home Safe Inspections, LLC. In that case, Ms. Wells entered into a contract and an addendum to the contract which was an agreement to arbitrate as part of her home inspection contract with Tennessee Home Safe Inspections (THSI). Wells v. Tenn. Home Safe Inspections, LLC, No. M2008-00224-COA-R3-CV, 2008 Tenn. App. LEXIS 802, *1-2, (Tenn. Ct. App. 2008). Ms.Wells signed the addendum, and her realtor signed as well; however, no representative from THSI signed the addendum. Id. at *2. Ms. Wells sued THSI when she purchased a home and used THSI as the inspector because they failed to identify some issues with the home. Id. THSI filed a motion to compel arbitration in the Circuit Court. Id. When that motion was denied by the court, it appealed to the Court of Appeals. Id. The Court distinguished this case from Turnberry when it held that, “there is nothing in the record to suggest that the home inspection contract at issue involved interstate commerce.” Id. at *8. Where there is no conflict between the FAA and the UAA or state statute, the state’s statute will apply to the arbitration agreement. Turnberry, 2006 Tenn. App. LEXIS 648 at *15. Therefore, the Wells Court held that that home inspections do not involve interstate commerce, and the FAA did not apply. Wells, 2008 Tenn. App. LEXIS 802 at *8. Where the FAA does not apply to an arbitration agreement, the state statute does apply. Turnberry, 2006 Tenn. App. LEXIS 648 at *15. Therefore, the Wells Court held that the heightened duty requirements set forth in Tennessee Code Annotated § 29-5-302(a) require that in contracts involving a party's residence, the arbitration clause must be "additionally signed or initialed by the parties." Wells 2008 Tenn. App. LEXIS 802 at *6. Because THSI failed to sign the arbitration agreement with Ms. Wells, the arbitration agreement was unenforceable and Ms. Wells did not have to submit to arbitration. Id. at *9.

Therefore, for those who want to make the most of the arbitration process, it is critically important for the client to know the type of contract that they are dealing with and what the statutes in your specific state say about enforcement. In Tennessee, the law is clear, the FAA will apply to purchase agreements involving interstate commerce, but in other agreements, that do not involve interstate commerce, the TUAA’s heightened duty requirements will apply to certain agreements involving residences…so to be on the safe side, make sure to have everyone sign the arbitration agreement.

Wednesday, January 24, 2018

Midwinter Meeting - D1 Breakfast Program - Getting it Right Early: Expert Retention Best Practices

It's no secret that construction disputes frequently involve one or more expert witnesses on each side. Our Division 1 panel -- Joshua B. Levy of Husch Blackwell LLP and Bill Manginelli and Mary Jay Torres-Martin both from Trauner Consulting Services, Inc. -- offered some best practices for those expert engagements starting at the initial meeting through the expert's trial testimony.

Joshua Levy and Bill Manginelli

Using a creative presentation approach (and apropos for the upcoming 2018 Winter Olympics), Joshua, Bill, and Mary Jay set the scene for a dispute between Olympic Mechanical and Bobsled Contractors over the mechanical subcontractor's claimed costs for extra work and delay.  Joshua served as counsel for the defendant Bobsled Contractors and Bill was Bobsled's expert.  Over the course of three acts marshaled by Mary Jay, Joshua and Bill held mock meetings to discuss the claims, exchange of documentation, initial opinions, written reports, and preparation for depositions and trial. The pair offered important and practical reminders to ensure the expert testimony will meet the requirements of the rules of evidence and civil procedure.  As a coda to the presentation, Eric J. Meier also from Husch Blackwell LLP, played the opposing expert for Olympic and faced stiff cross-examination from Joshua.  This mock cross-examination illustrated the worst case scenario if best (or even good) practices for preparing experts are not followed.  

Saturday, January 20, 2018

Risky (shifting) Business: Pay-if-Paid Provision Enforced to Subcontractor's Detriment


https://www.roadstone.ie
In Baker Concrete Const., Inc. v. A. Pappajohn Co., No. FSTCV166028187S, 2017 WL 4106383, at *1 (Conn. Super. Ct. 2017), at issue was the age-old dispute of non-payment for work performed.

The Baker Court first recounted the direct avenues for collecting on a construction project when payment is not made in the regular course: "[A] mechanic's lien may be available, and in connection with public works projects, a payment bond is statutorily required given the unavailability of a mechanic's lien in such projects."   That said, "[d]epending upon the equity in the property . . . a mechanic's lien may be insufficient (especially if a project has been financed with a mortgage placed on the property as a first lien)." Even with these direct avenues along with filing suit, insolvency of the parties in the project chain can thwart any collection efforts of the lower tier contractors.  In addition, contractual language, for example a pay-if-paid provision, too can arrest an unpaid party's effort to be paid. The Baker Court considered the requirements for applying such provisions. In Baker, the general contractor-subcontractor contract stated, in pertinent part, that:
Progress payments to the Subcontractor for satisfactory performance of the Subcontractor's Work shall be made only to the extent of and no later than ten (10) working days after the receipt by the Contractor of payment from the Owner for the Subcontractor's Work. The Subcontractor agrees that the Contractor shall be under no obligation to pay the Subcontractor for any Work until the Contractor has been paid by the Owner . . . The Subcontractor expressly acknowledges and agrees that payments to it are contingent upon the Contractor receiving payments from the Owner.
By its plain language, this pay-if-paid provision appeared to foist all risk of the owner's potential insolvency onto the subcontractor.  For its part, the subcontractor argued that "the provision is a timing issue (or should be interpreted and applied as such) rather than a risk-shifting provision." In other words, notwithstanding that the general contractor was not paid by the owner in a reasonable period of time after the work was performed by the subcontractor, the subcontractor was still entitled to be paid.  The court disagreed.

After disposing of a burden of proof argument raised by the subcontractor, the Baker Court resolved the contract interpretation question. It examined the caselaw and observed that where the provision does not explicitly "creat[e] a condition precedent to payment" the courts will construe the provision as "setting the time of payment" rather than establishing a defense to payment. However here, the contingency was explicit and moreover the contract provision also put the risk of insolvency explicitly onto the subcontractor: "The Subcontractor expressly accepts the risk that it will not be paid for the Work performed by it if the Contractor, for whatever reason, is not paid by the owner for such Work. The Subcontractor states that it relies primarily for payment for Work performed on the credit and ability to pay off the Owner and not of the Contractor[.]"

In light of the foregoing the Baker Court held that there was no ambiguity in the terms and therefore the contract's pay-if-paid provision would be enforced as written.  The court summed up the reality of working in the construction industry (and frankly any industry): "It is clear that the defendant [contractor] took advantage of its superior bargaining position in this contract; the plaintiff [subcontractor], however, seemingly made a conscious decision to [get the job by] sign[ing] a contract containing this risk-assumption provision which, in these unfortunate circumstances, has come into play."

As an aside, observe that Connecticut's statutory prompt payment provisions do not preclude contractual pay-if-paid clauses. See Conn. Stat. 42-158i et seq.

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

Sunday, January 14, 2018

Court Finds Arizona’s Prompt Payment Act does not Apply to Federal Projects in a Subcontractor Payment Dispute

In 2013, The National Park Service (NPS) contracted with Caymus Corporation (Caymus) in the amount of $292,300 to furnish and install road signs within the Grand Canyon National Park.  Caymus was prepared to furnish bonds for the project in accordance with the Miller Act, but the NPS told Caymus bonds were not required as it was services contract, not a construction contract.  Caymus then subcontracted the actual sign fabrication and installation activities to Zumar Industries (Zumar) in the amount of $92,793.  In March 2014, Zumar delivered sign panels to the jobsite and NPS immediately identified deficient and missing sign panels which lead to a multi-month discussion among the parties regarding the sign work.  On June 30, 2014, Caymus submitted a payment application to NPS where it certified the sign installation work was 100% complete.  Caymus issued $59,278 in payment to Zumar, withholding $35,632 pending satisfactory performance.  

In response to Caymus withholding its contract balance, Zumar entered into discussions with NPS to recover the funds, even proposing a series of joint-checks for work completed at one point.  Caymus would not agree to any payment terms unless Zumar warrantied the sign panels or NPS agreed to accept them as is.  In December 2014, NPS issued a punch list for the sign scope of work that included twenty-two signs in need of repair with an additional three that were missing.  Zumar completed the punch list work at a cost of $15,000. Earlier in September, Zumar filed the present breach of contract claim against Caymus, seeking $35,632 and prevailed in compulsory arbitration.  Caymus appealed and Zumar was awarded summary judgement for violations of state and federal prompt payment laws which constituted a material breach of the contract. Caymus again appealed.

The Court began its analysis by defining the purpose of the Arizona prompt payment act (PPA) as, “a framework for ensuring timely payments from the owner to the contractor and down the line to the subcontractors and suppliers whose work has been approved." Stonecreek Bld’g. Co., Inc. v. Shure, 216 Ariz. 36, 39, (App. 2007). The Court then presented the competing arguments. First, Caymus argued that federal agencies are not “owners” within the context of the PPA. Conversely, Zumar argued that the provisions of the PPA are not dependent on who the owner of a project is, but rather the PPA applies to the contractor-subcontractor relationship.  Furthermore, Zumar argued that the PPA does not impinge upon federal supremacy because “it does not regulate, compel, or otherwise apply to the federal government.” 

In its analysis, the Court examined the contractual relationship between Caymus and Zumar within the language of the PPA.  The Court found Caymus is a “contractor” because it has a "a direct contract with an owner to perform work under a construction contract” as the PPA defines.  Zumar is a subcontractor because it has a “"direct contract with a contractor...to perform a portion of the work under a construction contract" as the PPA further defines.  The Court then presented the PPA’s definition of an “owner” as a “person; firm; partnership; corporation; association or other organization; or any combination of those previously listed.”  The Court points out that absent from the definition is “any form of government, government agency, or political subdivision.”  Against these definitions, the Court rejected Zumar’s argument that the PPA is a contractor-subcontractor based statute.  The Court found at the crux of the legislation is the owner-contractor contractual relationship and any payment responsibilities that may flow down from contractor to subcontractor, start with the owner-contractor relationship.  Accordingly, if the federal government cannot be an “owner” within the definition of the statute, then the statute is not applicable to lower tiers of contracts between contractors and subcontractors.  

The Court next found that Zumar was not entitled to summary judgment for its breach claim based upon the Federal Prompt Pay Act (FPPA).  The Court stated that the FPPA applies to federal construction projects and requires payment from contractor to subcontractor with seven days of payment from the government.  The Court pointed to the fact that the bond requirements of the Miller Act were not required by the NPA for the project, and as a result it was not a construction project.  Therefore, the FPPA was not applicable and summary judgment should not have been granted.

In conclusion, the Court reversed and remanded the trial court and awarded Caymus its costs and reasonable attorneys' fees.


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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, December 23, 2017

Suit Up: Fla. Supreme Court Holds Statutory Defect Notice is a "Suit" Under CGL Policy

https://www.getrefm.com/wp-content/uploads/2015/03/condo_construction.jpg
Recently, the 11th Circuit was presented with an appeal concerning a commercial general liability ("CGL") insurer's duty to defend a general contractor.  At issue was whether statutory-required notice from an owner to the general was a "suit" under the policy triggering the defense duty.

The 11th posed this certified question to the Florida Supreme Court:
Is the notice and repair process set forth in chapter 558, Florida Statutes, a “suit” within the meaning of the commercial general liability policy?
The Court, in Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. SC16-1420, 2017 WL 6379535, at *1 (Fla. Dec. 14, 2017), answered yes, Chapter 558 defect notice is a suit for purposes of CGL coverage. As such there insurer had a duty to defend. The holding has potential implications for insurers in other states that subscribe to similar defect notice schemes or rights to repair. See, e.g., Cal. Civ. Code §§ 895 et seq.; Colo. Rev. Stat. § 13-20-801 et seq.; Tex. Prop. Code. Ann. §§ 27.001 et seq. There are upwards of 30 states nationwide.

First of all, what is Fla. Stat. chapter 558?  In Florida, before suit can be commenced by any owner claiming that a construction defect exists, the owner must follow a certain notice and response procedure. Basically the owner must give notice to the contractor or design professional of the alleged defect.  Then those receiving notice provide notice to any lower-tier subcontractors that may have responsibility for the defect in question and all recipients can respond to the owner.  If the owner does not receive adequate responses, it then can file suit.  The legislative findings specifically identified this process as an "alternative dispute resolution mechanism" such that the inspections involved and any findings or settlement offers made as a result of the inspections become inadmissible if there are future proceedings.

Under the CGL policy, the insurer has the "right and duty to defend the insured against any 'suit' seeking those damages [of personal or property damage]." The definition of a "suit" is a "civil proceeding in which damages . . . to which this insurance applies are alleged." It also includes "an arbitration proceeding . . . to which the insured must submit or does submit with our consent" or "any other alternative dispute resolution proceeding . . . to which the insured submits with our consent."

Therefore, the question was whether Fla. Stat. ch. 558 notice is a "suit."  The Court analogized the notice to "other alternative dispute resolution proceeding" (especially given the legislative history) and confirmed it was indeed a suit.  The issue of insurer "consent" was a hurdle that the Court did not need to cross in the decision.  The Court observed that "whether [the insurer] consented to [the general contractor's] participation in the chapter 558 process . . . is outside the scope of the certified question and an issue of fact disputed by the parties."

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The author, Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She is an associate at Pierce Atwood, LLP in Providence, Rhode Island.  Katharine thanks Anthony Lehman, Esq. of Hudson Parrott Walker in Atlanta, Georgia for his input on this post.

Saturday, December 16, 2017

Are Your Punch Lists Signed Off and O&Ms Submitted? NJ Court Rules not Delivering all Closeout Items Could be a Basis for Withholding Final Payment for Over Two Years

General Contractor Wallace Brothers, Inc. (Wallace) entered into a contract with the East Brunswick Board of Education (Board) for the construction of the New Memorial School in the amount of $18,233,000.  During the course of the project, the Board paid Wallace a total of $19,713,664.11 through the change process. Even though the school had been in use by the Board for two years, it was holding a contract balance of $366,130.26 that it refused to issue to Wallace.  The Board claimed that it had issued several punch lists for Wallace to complete but were still outstanding.  Conversely, Wallace claimed that it did not receive a final punch list from the Board until this current action was initiated. The trial court granted summary judgment to Wallace finding that the Board had delayed the issuance of punch lists and then only provided punch lists full of maintenance related items wholly separate from the contract.  The Board appealed.

As there were numerous material facts disputed at trial, the Court began its analysis by reviewing some of the conflicted details.  At trial, the Board presented evidence that its architect issued two signed Certificates of Substantial Completion, one in November 2012 and another in October 2013.  In the certificates, the architect struck language from the forms that denoted a punch list was enclosed.  The architect claimed that the strike-through merely represented that the punch list was not attached. Wallace countered the strike-through language meant that construction was in fact complete. 

The Board further claimed Wallace was issued a punch list in April 2013, before litigation ensued in March 2014. That April 2013 punch list was referred to as the “Final Punch List” by the architect and it contained about 300 yet to be completed items.  Updates to this punch list were released in August 2013, October 2013, and November 2014.  Items that remained on the updates included:

“caulking all exposed steel, removing "stub conduit," touching up paint on a door frame, repairing a damaged wall, installing the vinyl base at a casework counter, removing paint from an entry frame, installing a "backer rod," patching bolts at a side-court basket, sanding and painting "hose bibbs," replacing crumbling grout, and installing concrete floor sealer.”

The trial court was not swayed by the Board’s argument on the April 2013 punch list or its contents stating that its items were “maintenance things that would occur in the ordinary course of using the premises, but basically it sounds like you're holding their money hostage to make them come and do repairs that they would not have been called upon to do.”

Notwithstanding the above, the Board additionally argued that the trial court had disregarded material disputes of fact such as the final payment balance contained almost $56,000 worth of back charges and approximately $170,000 of liens on the project.   Wallace’s contract required it to refund any lien amounts back to the Board.  The Board further stated it was within its rights to withhold the contract balance as the trial court ignored the fact that contractually required close out documents such as “proof of payment of all vendors, proof of insurance, subcontractor waivers, recorded drawings, proof of tests and inspections, and the maintenance package containing manufacturers' warranties” were never submitted by Wallace to the Board.  Finally, the Board pointed to the November 2014 punch list which denoted $163,890 worth of work remained and the architect had yet to issue its final Certification for Payment, which is a condition precedent for final release of all contract sums per Wallace’s contract.

Ultimately, the Court reversed and remanded finding that there were material facts in dispute as to whether Wallace fully completed the contract.


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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.