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.
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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.

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. 

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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 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

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.

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
rwagner@vonbriesen.com
 

John W. Hinchey
JAMS International
Chartered Arbitrator, CIArb
One Atlantic Center
1201 West Peachtree, NW, Suite 2650
Atlanta, GA 30309
jhinchey@jamsadr.com


 

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

Faculty: 
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.