Tuesday, November 22, 2016

No Flow-Down of a Waiver of the Statute of Limitations to Subcontractor

In the matter Hensel Phelps Construction Company v. Thompson Masonry Contractor, Inc. et al. the Supreme Court of Virginia considered whether a subcontract waived the applicable statute of limitations--meaning there was no time restriction to filing a lawsuit--by incorporating by reference the prime contract between the general contractor and the Commonwealth. The Court held that there was no waiver and therefore the general contractor's lawsuit against the subcontractors was time barred by the applicable statute of limitation.

The underlying project was for the construction of a health and fitness center at the Virginia Tech campus in Blacksburg, Virginia. The general contractor entered into the $15 million contract with Virginia Tech, a Commonwealth agency. By law, no statute of limitations period can run against Virginia Tech. Va. Code section 8.01-231. By contract, the prime contract stated that: Except
as otherwise specified, all work shall be guaranteed by the [general contractor] against defects resulting from the use of inferior materials, equipment or workmanship for one (1) year from the date of final acceptance of the entire project by [Virginia Tech] in writing[.]
Nothing in this section shall be construed to establish a period of limitation with respect to any other obligation which the [general contractor] might have under the Contract Documents, including liability for defective work under [the Warranty provisions].
In sum, besides the 1-year warranty, there was no statute of limitations applicable to claims or disputes under the prime contract.
The project undisputedly was finished in 2000. Twelve years later in April 2012, Virginia Tech found variety of construction defects, repaired them, and then brought a claim against the general contractor to recover over $7 million. The general contractor looked to its subcontractors for these repair costs. When they refused, the general contractor settled with Virginia Tech for $3 million, and then sued all its implicated subcontractors. The subcontractors invoked the statute of limitations, which in Virginia, is five years for an action on a written contract. Va. Code § 8.01-246(2).

In turn, the general contractor pointed to its subcontracts' flow-down provision, which stated that "[t]he subcontractor is bound to the [general contractor] by the same terms and conditions by which [the general contractor] is bound to [Virginia Tech] under the [prime] contract," and that the subcontractor's warranty period covers any time "prior to [the general contractor's] release from responsibility to [Virginia Tech] therefor as required by the Contract Documents." The general contractor argued that because the general contractor was obligated to Virginia Tech on its claims brought 12 years after the project concluded, the subcontractors too were subject to claims from the general contractor.

Virginia's highest court sided with the subcontractors holding that any waiver of a known right must be "express" in that it reflects both knowledge of the right and the clear intent to relinquish the right. It need not be in writing. Here, the Court continued, the subcontract incorporation by reference neither acknowledged the 5-year statute of limitation nor the clear intent to waive the benefit of the statute. Moreover, just because the prime contract was silent on the statute of limitations, the subcontract could not be held to incorporate a statute that existed outside the prime contract. As a result, the Court held that the statutory waiver of the statute of limitations was not incorporated into the subcontracts, the 5-year period had run, and therefore the general contractor had no claim against the subcontractors.

As an alternate argument, the general contractor focused on the accrual date for the claim. It argued that its claims against the subcontractors, which sounded in indemnification, did not accrue until it settled with Virginia Tech. But because Va. Code § 8.01-246(2) states that the accrual is "when the breach of contract occurs in actions ex contractu and not when the resulting damage is discovered," this too was a dead end for the general contractor. Another statute Va. Code § 8.01-249(5) for "actions for contribution or indemnification," established accrual when "the contributee or the indemnitee has paid or discharged the obligation." But, here, the indemnification provision in the subcontract was rendered void because it could be read as requiring indemnification for the general contractor's own negligence. The Court disagreed that other parts of the subcontract, cobbled together, could give rise to independent cause of action for indemnification. So again, the general contractor could not proceed with its lawsuit.

The lesson learned is that explicitness in a follow-down provision is necessary if a waiver of rights is involved.
The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Monday, November 21, 2016

Surety’s Motion to Stay ‘Little Miller Act’ Claim Until Resolution of General Contractor's Owner Claim Is Rejected by D.C. Court

In an effort to protect subcontractors on public works projects, the District of Columbia joined other states in enacting a statutory structure entitled the ‘District of Columbia Little Miller Act’ (DCLMA).  This and the other Little Miller Acts throughout the country are modeled after the Federal Miller Act which requires a general contractor on a public works project to secure a payment bond before work can commence on a project.  The intent of the Little Miller Acts is to provide subcontractors who do not received full payment from a general contractor a means to recover when a mechanic’s lien is not available due to the owner’s sovereign immunity protection.  Like the Federal Miller Act, the DCLMA has a 90 day accrual window from the last day of labor or material furnished until a subcontractor or supplier can submit a claim on a payment bond if full payment is not received.  This 90 day accrual period is to ensure a prompt resolution for the subcontractor.  In Strittmatter Metro,LLC v. Fidelity and Deposit Company of Maryland et al, U.S. District Court for D.C. ruled on whether a DCLMA payment bond claimant must exhaust dispute resolution procedures set out in the prime contract between the owner and general contractor before it can recover for non-payment.

The plaintiff in Strittmatter is a site contractor who was contracted by a general contractor (GC) for work at the Ballou Senior High School in the amount of $4.9 million.  The Master Subcontract Agreement contained provisions allowing for the expansion of the scope of work as the project progressed. The plaintiff claims that it performed its contractual scope of work and is owed additional payments in excess of $1.2 million and has made a claim on the GC furnished payment bond in accordance with the DCLMA.  The GC’s prime contract with the District contains dispute resolution procedures which include mandatory mediation. If mediation fails, all disputes are then brought to the District of Columbia’s Board of Contract Appeals.  The GC has initiated a claim against the District and entered into this mediation.  The GC’s claim is inclusive of the plaintiff’s $1.2 million claim as well. The defendant is the payment bond issuer and has submitted a motion to dismiss or stay the DCLMA action pending resolution of the GC’s claim with the District.

The defendant argues that due to a clause in the plaintiff’s subcontract which fully integrates the terms of GC’s prime contract, the plaintiff must enter into the mediation and District of Columbia’s Board of Contract Appeals procedures outlined in the GC’s contract.  To counter, the plaintiff points to a clause in the prime contract that states the District is not in privity with any subcontractors and as such subcontractors cannot seek compensation from the District.  Plaintiff contends that as a result of this, it is not possible for it to enter into a dispute resolution procedure that is not available to it. The Court reviewed Miller Act case law and found that the intent of the Miller Act is to deal with this lack of privity between the government and a subcontractor; the payment bond is there to bridge that gap and protect the subcontractor.  The Court further found that the District’s prime contract language disavowing subcontractor claims and payment only further proves the intent of the Miller Act. Accordingly, the court rejected the requirement that the plaintiff enter into mandatory dispute resolution procedures before initiating a DCLMA claim.

The Court next reviewed the defendant’s assertion that the plaintiff must await the completion of the GC’s dispute resolution procedures with the District before it can present a DCLMA claim.  The Court too rejected this argument by stating that the plaintiff lacks control over any proceeding involving the GC and District, even with the inclusion of the plaintiff’s $1.2 million claim.  The Court reasoned that such waiting period is counter to the “express purpose of the DCLMA to provide a prompt remedy to an aggrieved subcontractor.” If the plaintiff were required to wait for the GC’s dispute resolution process to complete, and the GC did not prevail with plaintiff’s claim, the Court mused the plaintiff might be put in a situation where it would statutorily time barred from recovery under the DCLMA.  Putting a subcontractor in such a situation would once again run counter to the intent of the Miller Act.

Accordingly, the Court denied the Defendant’s Motion to Dismiss or Stay the Proceeding. 

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 brendan.carter@navigant.com

Wednesday, November 16, 2016

Thanks to Philip Bruner and JAMS Global Engineering and Construction Group for the following contribution to the Dispute Resolver:  

Settle Now, Argue Later: Expedited Construction Adjudication Is Coming to North America

Construction adjudication, the dispute resolution method credited with reducing construction litigation by more than 80 percent in the United Kingdom, is coming to North America. The adjudication method requires disputes arising during construction to be submitted to an adjudicator for a prompt initial decision that is binding until completion of the contract, and subject to challenge in arbitration or litigation only thereafter. Construction participants wryly refer to it as the “settle now, argue later” approach to final dispute resolution.

Adjudicators with expertise in construction and selected by the parties seek to make their decisions within 30 days of submission of the disputes. Adjudication thus offers a more structured process than the neutral evaluation or expert determination dispute resolution methods. Although parties may challenge the adjudicator’s decision after the contract is completed, British experience is that parties accept the adjudicator’s decision in nearly 85 percent of the cases and thus avoid later litigation altogether.

In the United States, adjudication has been introduced on large, public-private partnership (P3) projects through surety performance bonds, which guarantee contract completion and provide for adjudication of disputes as to whether contractors are in default. Prior to initiation of the concept, the primary performance security on such P3 projects has been demand letters of credit, which tie up contractors’ bank credit lines and which can be drawn down by owners without any showing of default on the underlying construction contract by the contractors or even upon review by neutral third parties.

The focus of the adjudication process in the P3 performance bond is obtaining prompt review of and final decisions on the critical issue of the performance bond obligation—has a contractor default occurred that triggers the surety’s performance under the bond? The adjudication process thus offers both the contractor and surety some semblance of due process not offered by a demand letter of credit. In turn, it provides the owner (or obligee) of the construction project time certainty for prompt resolution of disputes.

JAMS has developed rules for adjudication of surety bond disputes. Adjudicators under those rules are selected by parties from the neutral panel of the JAMS Global Engineering and Construction Group.  The selected adjudicator is accorded full authority to investigate the disputed issues surrounding the contractor’s alleged default and can require parties to produce documents, present employees for interviews and cooperate in ferreting out the relevant facts. The adjudicator then will present a decision on the dispute within 30 days of the commencement of the adjudication. 

As contractors, owners, designers and lenders on P3 projects gain experience with adjudication, the process is expected to spread beyond P3 projects. Parties desiring quicker resolution of disputes, even on an interim basis, than offered by mediation or neutral evaluation now will also have an expedited JAMS adjudication process available to them.

Philip L. Bruner, Esq. is a JAMS neutral based in Minneapolis.  He is director of JAMS Global Engineering and Construction Group and one of the world’s leading arbitrators, mediators and resolvers of construction, engineering and infrastructure claims.  Mr. Bruner can be reached at pbruner@jamsadr.com.

Monday, November 7, 2016

Collaborative Construction Claim (CCC) Process

Roy E. Wagner
Von Briesen & Roper, s.c.
Chair - Construction Law Section
411 E. Wisconsin Ave., Ste. 1000
Milwaukee, WI 53202
John W. Hinchey
JAMS International
Chartered Arbitrator, CIArb
One Atlantic Center
1201 West Peachtree, NW, Suite 2650
Atlanta, GA 30309


On October 6, 2016, at the Forum’s Fall Meeting, Roy Wagner and John Hinchey presented at the Division 1 Lunch Program. The Program was on the Collaborative Construction Claim (“CCC”) process. Division 1 members and guests learned that CCC is a party and lawyer-driven process to identify construction disputes and issues, followed by a collaborative process to solve those disputes by utilizing several different “currencies.” If allocation of financial responsibility cannot be achieved by the parties and lawyers, a neutral is engaged to push the deal over the goal line. The goal is to minimize attorney and expert fees and achieve a better and quicker net result.

The Program detailed how to implement CCC successfully and highlighted advantages such as the potential to fast track and that CCC fosters maintaining relationships on long term on-going projects. Further, the lawyer in the process is viewed as a problem solver, not a claims process beneficiary. The Program concluded that CCC is a lawyer driven, flexible and resolution centric process that reduces legal and expert fees, and leaves more money for repair and settlement.  If unsuccessful, CCC efforts can be leveraged for the claims process.

The Program was well attended and well received by the audience. We were thrilled to have knowledgeable presenters such as Roy and John at our lunch Program and thank them for their contribution to Division 1.

On December 14, from 2:30 to 3:30 pm EST, the American Arbitration Association will be presenting a webinar called “What Advocates Can Learn from Walking in an Arbitrator’s Shoes.”  Here are the particulars:
What Advocates Can Learn From Walking In An Arbitrator’s Shoes
Live Webinar | December 14, 2016

Melinda Gentile, Peckar & Abramson, PC
Karen Layng, Scheck Industries
Danny Shaw, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC

Too often advocates do not properly consider how they are perceived by the arbitrator or give proper thought to the effectiveness of the tools they are providing to assist the arbitrator in rendering a decision. Every advocate should step into the shoes of an arbitrator—if just for a day—to see thing’s from an arbitrator’s perspective.

This 90-minute webinar will examine the steps an advocate can take to ensure optimal presentation of a case, that the arbitrator is receiving the resources and information that will enable him or her to come to an informed decision, and ultimately improve the chances of success. Areas covered will include—

  • the vital tools and resources an advocate needs to provide to the arbitrator to support the decision making process and how these tools should be prepared and presented;
  • how an advocate should collaborate with the opposition;
  • what to do to show respect for the arbitration process;
  • things to avoid when in front of an arbitrator;
  • how to maintain credibility;
  • disclosure responsibilities and transparency; and more.
WHO SHOULD ATTEND:  Advocates, arbitrators, academics, and anyone interested in the dynamics of arbitration.

 CLE:  West LegalEdcenter is procuring continuing legal education (CLE) credits on behalf of American Arbitration Association. This program is available for CLE credits in Arizona, California, Georgia, Illinois, New Jersey, New York, Pennsylvania, and Texas. Credit amounts vary by attendance verification and jurisdictional rules. 

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 brendan.carter@navigant.com

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 kkohm@PierceAtwood.com.

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 brendan.carter@navigant.com.

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 kkohm@PierceAtwood.com.

Monday, September 19, 2016

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

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

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

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

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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 kkohm@PierceAtwood.com.