Contractors, be mindful of unit prices at bid time: Massachusetts court upholds rejection of REA for differing site conditions on $0.01/CY unit cost submitted in bid

On March 2, 2015, the Massachusetts Appeals Court affirmed a motion for summary judgment granted to the town of Avon in an action with Celco Construction.  The dispute resulted from a water main extension project and the rejection of a request for equitable adjustment for differing site conditions.



Celco was the successful bidder of a contract for the extension of a water main and the reconstruction of any disturbed roadways.  The bid documents required the submission of a series of unit prices for work activities that maybe encountered during construction.  The project bid documents further denoted an estimated quantity of 1,000 cubic yard of rock to be excavated.  A note on the bid documents gave the caveat that the 1,000 cubic yard quantity was for the purpose of bid comparison only. Celco submitted a unit price of $0.01/CY for the excavated rock in its winning bid.  Celco also listed $0.01 for unit prices of other work activities.



Celco commenced construction and found that the actual quantity of rock required for excavation far exceed the 1,000 cubic yard quantity in the bid documents.  Celco submitted a change request to increase the unit price of excavated rock from $0.01/CY to $220/CY.  A few months later, Celco submitted another change request for $190/CY of excavated rock, calling the increased quantity of excavated material a change from the bid plans and specifications.  The final total amount of rock excavated by Celco was 2,524 cubic yards. The town of Avon rejected these claims for equitable adjustment and Celco filed an action in Superior Court. The Superior Court granted the town of Avon’s motion for summary judgment.



The Appeals Court upheld the motion for summary judgment finding that Celco’s request for equitable adjustment failed to show that the type of rock encountered, and the means and methods required to excavate it, deviated in any manner from what could be anticipated in the bid documents.   The court stated that in a contract which contained multiple line items of unit prices “no equitable adjustment is warranted by reason of a variation in the estimated quantities, standing alone, as compared to a deviation in the condition or character of the physical condition”. Furthermore, the court stated that if Celco had submitted a true unit cost instead of a “wholly artificial and unrealistic value of one penny, it would be in no need of adjustment to the contract price.”



The ruling should give pause to companies who bid unit price contracts by burying or sprinkling costs in some unit prices, and ignoring other as a means of driving down overall unit costs for comparison and award purposes.  That strategy may win the project, but the risk of unforeseen quantities is one you own.

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This is the second case summary Brendan Carter, former Law School Liaison to the ABA Forum on Construction Law, wrote for The Dispute Resolver.  Thanks Brendan! He can be reached by email at bcarter@umassd.edu.

What Should the Remedy be when an Arbitrator Exceeds His Authority? Remand for Clarification or Vacate and Require a New Arbitration?

In an opinion issued on March 2, 2015, The United States District Court for the Southern District of New York joined other courts by ruling that an arbitrator who issues an improper form of award has in fact exceeded his power.  In the case of Tully Construction Company/AJ Pegno Construction Company, J.V. v. Canam Steel Corporation, No. 1:2013cv03037 - Document 27 (S.D.N.Y. 2015), the court ruled that an arbitrator who did not issue the “reasoned award” required by the Arbitration Agreement had exceeded his power, and the proper remedy is to remand the award back to the arbitrator for clarifications and a true “reasoned award”.

The dispute arises out of a project awarded to Tully Construction Company/AJ Pegno Construction Company, J.V (Tully) by the State of New York to replace a portion of the Whitestone Bridge.  Tully contracted with Eastern Bridge LLC (Eastern) for several million dollars to fabricate and deliver structural steel to the project.  In July of 2007, Canam Steel Corporation (Canam) entered into an Asset Purchase Agreement (APA) with Eastern and acquired the project contract. 

Steel fabrication and delivery disputes plagued the project in 2007 and 2008.  Tully and Eastern entered into a revised fabrication schedule and agreement in May of 2007.  The agreement stipulated that any disputes would be settled with binding arbitration in accordance with the rules of the AAA.  Tully filed a Demand for Arbitration with the AAA on December 30, 2009 seeking damages in excess of $20 million for breach of contract and intentional and negligent misrepresentation. Canam counterclaimed for nearly $5.25 million in damages for delays caused by Tully. 

Tully and Canam entered into an ad-hoc, private arbitration in November of 2012 governed by the AAA rules.  The arbitrator heard seventeen days of testimony from nine fact and two expert witnesses along with more than 800 exhibits of evidence.  The arbitrator released his two page final award with monetary awards for Tully in nine individual line items and one grand total in the amount of $6,883,936.00. Canam’s award was identified in seven individual line items with one grand total in the amount of $366,914.00.  There was no language expressly giving the rationale behind the awards.  Two days after the award, Canam requested that the arbitrator withdraw his final award and issue a final award in accordance with the Arbitration Agreement’s “reasoned award” requirement.  The arbitrator responded to Canam that his final award was a “reasoned award” and Tully moved to confirm the award. Canam filed an opposition to Tully’s petition and cross-moved to vacate the award. 

 The court examined Canam’s claim that the arbitrator failed to issue a “reasoned award”.  It found that a “reasoned award” was required as part of the private Arbitration Agreement citing Rule 44 and L-6 of the AAA Arbitration Rules for Complex Construction Cases. The court also found that all parties expected a “reasoned award”, not a line item award as issued.

The court examined what constitutes a “reasoned award” and settled upon the definition offered in Cat Charter, LLC v. Schurtengerger, 646 F.3d 836, 844 (11^th Cir. 2011), that “a reasoned award is an award that is provided with or marked by the detailed listing or mention of expressions or statements offered as a justification…[for] the decision of the [arbitrator].”  The court further cited Rain CII Carbron v. ConocoPhillips Co., 674 F.3d 469 (5^th Cir 2012) and the Fifth Circuit’s decision that the award in that controversy was “reasoned” because in the, “eight page [award], the arbitrator laid out the facts, described the contentions of the parties, and decided which of the two proposals should prevail.” The court found that the arbitrator’s line item award did not satisfy either of those criteria and therefore was an improper award.

The Second Circuit has not addressed whether an improper award constitutes an arbitrator exceeding his authority.  Therefore, the court looked to rulings of the Third, Fifth, Sixth, and Ninth Circuits to determine that an improper award does exceed an arbitrator’s authority.  The multiple circuit court cases the court examined framed the issue of an improper award within a contractual framework. The parties private Arbitration Agreement stipulated that the AAA Arbitration Rules for Complex Construction Cases would govern.  Those rules required a “reasoned award”.  The arbitrator’s line item award did not comply with the agreement and therefore the authority granted to the arbitrator in the agreement was exceeded, and accordingly, the award cannot stand. 

Tully presented the argument that if the line item award was found to be improper, the proper remedy would be to remand it back to the arbitrator for an actual “reasoned award”.  The court presented the view from two district courts that a remand to the same arbitrator would be improper due to functus officio. Citing T.Co. Metals, LLC v. Dempsey Pipe & Supply, Inc. 592 F.3d 329, 342 (2d Cir. 2010), the court defined, functus officio as a “doctrine [which] dictates that, once arbitrators have fully exercised their authority to adjudicate the issues submitted to them, ‘their authority over those questions is ended,’ and ‘the arbitrators have no further authority, absent agreements by the parties, to redetermine th[ose] issues.’”  The court also presented three exceptions to the doctrine, the third and most relevant stated an exemption exists in order, “to clarify an ambiguity in an otherwise seemingly complete award.” Cat Charter, 691 F. Supp. 2d at 1345

Looking to the circuit courts, the court found that functus officio has been rejected in similar circumstances of an improper award.  The circuit courts pointed to the third exception to functus officio stating, “the purpose of this exception is to permit the arbitrator to complete and assigned task…”Green v. Ameritech Corp., 12 F. Supp. 2d 662, 666. The court further found that the circuit courts require remand back to an arbitrator in order for the arbitrator to explain his award so that it can be effectively enforced. Functus officio is not applicable because the duty charged to the arbitrator has not been completed and remand “serves to give the parties what they bargained for – a clear decision from the arbitrator.” Galt v. Libbey-Owens-Ford Glass Co., 397 F.2d 439, 442 (7^th Cir. 1968).

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This case summary was written by Brendan Carter, former Law School Liaison to the ABA Forum on Construction Law.  Brendan is a recent graduate from the University of Massachusetts, Dartmouth School of Law.  He has worked in the construction industry for many years, most recently for a general contracting company in Massachusetts.  

It's Not Far Down to Paradise

That is Christopher Cross's 1979 hit Sailing, from which the title to this post comes.  It is an appropriate title as well, since Divisions 1 and 13 are going sailing in Boca Raton on a catamaran.

In fact, we are going sailing on THIS catamaran:

On Friday afternoon, April 17, starting at 2:30 PM, Divisions 1 and 13 are teaming up to hold a Catamaran Sail social event.  It will be a 2-hour cruise on an ocean-sailing catamaran yacht.

Participation is limited to 49 passengers on a first-come, first-serve basis, and the cost for each participant is $55.  The cost includes snacks, beverages, music, and gratuities.

If you are interested in joining in the fun or if you have any questions, please contact Cassidy Rosenthal of Stites & Harbison PLLC in Lexington, Kentucky to RSVP and to pay the fees for the trip.

Overview of AAA and DecisionQuest's CaseXplorer Arbitration

In our large, complex jury trial cases, many Division 1 members are likely using focus groups and mock juries to assist in the development of themes, evaluate the effectiveness of witnesses, and to develop presentation strategies. 

What about arbitration?  Are mock juries and focus groups worthwhile? 

I (Tom Dunn) talked about this issue with Michael Powell at a conference a couple of months.  Mr. Powell is a Vice President of the American Arbitration Association.  He oversees the Western States: Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, and Washington.  He told me about a new service offered by AAA and DecisionQuest that offers "mock arbitration" services.  The service is Called CaseXplorer Arbitration.  I asked Mr. Powell if he could write up a brief summary about the service. It is below. 

Open Questions for D1 Members: What have you done to test themes in the context of your construction arbitrations?  Have you attempted to find "mock arbitrators" that share some of the characteristics of your selected arbitrator?  Other evaluative tools? Has anyone had an opportunity to use the CaseXplorer Arbitration service?

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Have you ever wanted cost-effective feedback on your case from a mock arbitration panel, just to be sure that you are giving your client an objective assessment of their case? Well, the American Arbitration  Association^® (AAA^®) and DecisionQuest^® teamed up to create the online tool CaseXplorerArbitration, a lower cost alternative to in-person mock arbitrations. It enables users to receive an objective evaluation of their case from experienced arbitrators. CaseXplorer Arbitration can be utilized before an arbitration case has been filed or while the actual arbitration is pending. 

With the CaseXplorer Arbitration online case evaluation tool, users are able to obtain feedback on their arbitration case from three or five AAA evaluative arbitrators who are not associated with the actual arbitration. The user provides the selected arbitrators with written materials—facts and legal arguments—along with questions. Documents and videos may be provided as well. The arbitrators’ written responses are provided to the user once all the arbitrators have completed their responses. This process usually takes three to four days. At minimum, users will learn more about their case, and the arbitrators’ feedback may allow for cases to be resolved sooner.

Selecting the arbitrators can be the most critical and challenging component of a construction mega project arbitration. Unlike traditional arbitration where parties select a local arbitrator or panel of arbitrators, construction mega project disputes often involve parties from different states and/or countries. Consequently, it is likely the parties will need to deal with an unfamiliar sole or tripartite panel of arbitrators. CaseXplorer Arbitration’s online arbitrator search can help parties in these challenging situations.

The online search allows users to peruse the AAA’s full roster of CaseXplorer Arbitrators by keyword, expertise and locale to select three or five participating arbitrators.  As part of the process, users are required to provide party information regarding themselves as well as the other side to the dispute (i.e., names of persons, firms, companies) in order to facilitate conflict checks and disclosures by prospective CaseXplorer Arbitrators.

If you are interested in learning more about CaseXplorer Arbitration and how you can use this process for your arbitration cases, please contact Michael Powell at PowellM@adr.org or 213.362.1900.

 

Book your hotel rooms for Boca NOW if you want the conference rate!

Here is the link for the hotel reservations:

https://aws.passkey.com/event/11646664/owner/10914323/home

To register for the Forum on Construction Law's Annual Meeting in Boca Raton, Florida, visit: http://shop.americanbar.org/ebus/ABAEventsCalendar/EventDetails.aspx?productId=169461063

Come to the Annual Meeting: A Word from Forum Chair Steve Lesser

Are you planning on attending the Annual Meeting in Boca Raton?  Good! You should attend.  This meeting will be a great way to meet people, get excellent CLE, learn about business development from Cordell Parvin, and also have some fun.

Are you on the fence about coming to the meeting?  The Chair of the Forum on Construction Law, Steven B. Lesser of Becker & Poliakoff in Fort Lauderdale, would like to provide you with some good reasons why you should come.

Thank you, Jason Cagle!

Since November of 2012 -- a full year before we transitioned to a blog format for Division 1's news, information, and articles -- Jason Cagle was a member of the Editorial Staff for the Dispute Resolver. Over that time, Jason has been a reliable contributor here, providing us with an excellent view of construction law from Dallas, Texas.

In that time, Jason has become more involved with the ABA Forum on Construction Law -- even starting up a blog for Division 12 called "The Owner's Authority."  Jason also co-authored a chapter on third-party claims with Kimberly A. Davison of his firm which was published in the ABA Publication Green Building and the Construction Lawyer: A Practical Guide to Transactional and Litigation Issues.  Finally, his peers in Texas voted him to be a SuperLawyers Rising Star in Construction Law for both 2013 and 2014

This past week, Jason informed the rest of the Dispute Resolver Editorial Staff that he would be stepping down from his role with the Dispute Resolver.  All of us on the Editorial Staff wish him well.  Indeed, each of us wanted to pass along our thanks to Jason in our own words:

Tom Dunn, Pierce Atwood, Providence, RI:

I enjoyed working on the Dispute Resolver with Jason (even though he implemented all of our ideas to our friends in Division 12).  He was a great editor and is a good friend. I especially enjoy exchanging ideas with Jason about streamlining disputes and efficiently advocating for clients in e-discovery disputes. Thanks, Jason, for all your help with the Dispute Resolver.

Anthony Osborn, Goosmann Law Firm, Sioux City, IA:

It takes a solid team to keep Division 1’s blog running on all cylinders.  Jason was an important part of the team and will be missed.  He did a great job keeping us updated regarding case law developments in the Southern and Southeastern United States, and always provided thoughtful and relevant analysis on a broad array of topics.  Many thanks to Jason for his contributions to The Dispute Resolver.  He will be missed!    

Mark Frilot, Baker Donelson, Mandeville, LA:

As a reader of and eventual co-contributor to the Dispute Resolver, I always looked forward to Jason’s posts and insights regarding the issues unique to resolution of disputes on construction projects. While his Forum leadership will remain, his contributions to our publication will be missed. Thanks, Jason, for helping to launch the Dispute Resolver into a successful, thought-provoking newsletter and blog for our members.

Tony Lehman, Cohan Law Group, Atlanta, GA: 

Jason has been a great help in getting The Dispute Resolver launched after we made the decision to go to an online format. His involvement with Division 12 led to that Division also embracing the blog format, and his good work continues there. Hopefully, he will remain involved with Division 1 even as his participation with the blog comes to a close. Jason, thank you very much for all of your hard work, your ideas, and your time.

We hope you will join us in thanking Jason for his 2-1/2 years of excellent service to Division 1 through his participation as a member of the Dispute Resolver Editorial Staff.

Thank you Jason!

Arbitration Panel Awards $10 Million In Sanctions In What Some Might Argue Is a Re-“Cycle”ed Proceeding

On February 16, 2015, SCA Promotions, Inc. filed its Original Petition for Confirmation of Arbitration Award against Lance Armstrong and Tailwind Sports, Inc. The petition seeks to confirm a February 4, 2015, arbitration award against Armstrong and Tailwinds in favor of SCA that includes $10 million in sanctions. Beyond the general public interest surrounding the award, it excites additional attention from those of us who, along with our clients, resolve commercial disputes in arbitration because the award was issued in what might be argued to be a “re-opening” of a prior arbitration among the parties before the panel.

The underlying arbitration concerned whether Armstrong and Tailwind should be sanctioned for perjury in a prior arbitration proceeding among the parties. The panel awarded SCA $10 million in sanctions after finding that Armstrong had engaged in “an unparalleled pageant of international perjury, fraud and conspiracy” and had “used perjury and other wrongful conduct to secure millions of dollars in benefits” from SCA.

The prior arbitration concerned an agreement that required SCA to pay Tailwind a specified amount of prize money if Armstrong won the Tour de France in 2002, 2003, and 2004. Armstrong won all three races, and SCA paid the prize money for the 2002 and 2003 victories. But SCA withheld payment for the 2004 victory because there were allegations that Armstrong might have cheated.

In the arbitration that resulted from the dispute, both Armstrong and another Tailwind representative testified under oath that Armstrong never used performance-enhancing drugs in his career and had won the 2002, 2003, and 2004 Tour de France races legitimately and without cheating.

In 2005, before conclusion of the arbitration, the parties entered into a settlement agreement. The agreement provided that the arbitration panel retained and had exclusive jurisdiction over disputes arising under the settlement agreement and prior prize agreement.

Then, in 2013, we all know what happened. But as alleged by SCA, Armstrong admitted to Oprah Winfrey in a television interview that he used performance-enhancing drugs in every Tour de France race he had won, that he had lied under oath in the prior arbitration with SCA, and that he had tried to intimidate and harass witnesses who had otherwise tried to tell the truth about him and his conduct. Based on those admissions, SCA filed suit against Armstrong and Tailwind, asserting various claims, including fraud, unjust enrichment, civil contempt, and conspiracy.

In June 2013, SCA moved to reconvene the prior arbitration. SCA sought sanctions against Armstrong and Tailwind for perjury in connection with arbitration and also sought forfeiture of all prize money paid to Armstrong because Armstrong had been stripped of all of his Tour de France titles.

Armstrong and Tailwind argued that the panel lacked jurisdiction to hear the dispute or issue sanctions. The panel disagreed based in part on the language of the parties’ prior settlement agreement that retained the panel’s jurisdiction.

Following unsuccessful challenges by Tailwind and Armstrong Texas courts, the panel conducted an evidentiary hearing on September 4 and 5, 2014. On February 4, 2015, the panel rendered its award, including the $10 million sanction.

So, what do you think? Does this award offend the finality of arbitration awards that is attractive to many claimants and respondents? Regardless of your position, you might pay close attention to dispute resolution provisions of settlement agreements to ensure the language is consistent with your and your client’s positions on the finality of awards.

Copies of SCA’s Original Petition for Confirmation of Arbitration Award and the award at issue (which is attached to the Petition) can be found here.

Reminder re: Annual Meeting in Boca Raton, FL

Hey Division 1, just a friendly reminder - if you have not registered for the Forum's Annual Meeting in Boca Raton, Florida, the "early bird" registration period ends on March 7th. Sign up now to save a little money. It's going to be a fantastic event! Lots of practical advice to be learned by all. As a further reminder, the event takes place from April 16-18 at the Boca Raton Resort & Club.