No Damages for Delay Clause? How About Damages for a Cardinal Change? Steel Erector Claims its 301 Day Delay Constitutes an Abandonment of the Subcontract and CA Fed Court Agrees.

Sauer Incorporated (Sauer) entered into a design-build contract with the U.S. Army Corps of Engineers for the design and construction of the Operational Readiness Training Complex at Fort Hunter Ligget, California.  Sauer then executed a subcontract with Agate Steel, Inc. (Agate) for the structural steel (install only) scope of work. The subcontract required that Agate provide all labor, materials, equipment, and tools required to complete the ‘Structural and Miscellaneous Steel (Erection)’ scope of work.  The subcontract also contained a ‘no damages for delay’ clause that provided Agate’s sole remedy for a delay on the project was a commensurate extension of time and Agate waived any rights to financial claims based upon delay.

The scope of work required Sauer to provide structural steel to Agate in accordance with the plans and specification through Sauer’s fabricator. Additionally, the contract specifically called for steel stairs to be delivered fully assembled and ready for final install by Agate. The subcontract also contained references to the project schedule with a defined duration of 121 days for Agate’s work.  

During the execution of the work, Agate experienced numerous delays and disruptions claiming significant revisions to the contract drawings resulted in changes to the steel fabrication and erection sequences; that Sauer’s fabricator delivered hundreds of non-conforming pieces of steel to the project which then required field modifications; the contract documents underrepresented the amount of steel clips required for the work by 4,000 pieces; and the steel stairs were delivered in pieces which the required labor intensive field fabrication.  As a result of these delays, Agate’s installation duration ultimately was 422 days, a 301-day delay.

As a result, Agate filed suit against Sauer for: 1) breach for outstanding contract balances plus unpaid change orders in the amount $649,739; 2) breach for delay and disruption in the amount of $698,253 in extended field & office overhead plus attorney’s fees; 3) unjust enrichment for the reasonable value of materials it had not been paid for; and 4) breach of good faith and fair dealings for lost revenues, profits and opportunities for the extended duration it was onsite.  Sauer moved to dismiss the second, third and fourth claims.

The Court began its analysis of Agate’s claim for delay and disruption by identifying the subcontract did include a valid 'no damages for delay' clause as allowed in federal contracting.  Agate argued that the kind of delay it experienced throughout the project was not within the contemplation of the parties when the contract was formed, and the ‘no damages for delay’ clause should not be enforceable. The Court pointed to Sauer’s inability to properly schedule trades, unwillingness to process change orders, and numerous design changes as detriments to Agate’s efficient work flow and found them as a plausible basis to seek relief for a delay and disruption claim.

The Court also addressed Agate’s argument that the ‘no damages for delay’ clause is unenforceable because through its actions, Sauer abandoned the subcontract.  Agate points to California case law that states, “[P]rivate parties may impliedly abandon a contract when they fail to follow change order procedures and when the final product differs substantially from the original." Amelco Electric v. City of Thousand Oaks, 27 Cal. 4th 228 (2002).   

In its review of whether the contract was abandoned, the Court again pointed to the facts that the subcontract stipulated Sauer would furnish complete and correct steel, but numerous field modifications were required due to design changes and incorrectly fabricated materials.  The Court further acknowledged the 4,000 steel clips installed not depicted in the contract documents, stairs pieces that arrived loose and required field assembly contrary to the subcontract, and Sauer not adhering to the contractual process for change order work.  Agate alleged that those "foregoing, cardinal changes to the Erection Subcontract and material departures from the reasonable expectations of the Parties, at the formation of the Erection Subcontract, constitute abandonment of the Erection Subcontract."

The Court found the totality of these allegations was sufficient to show the contract had been abandoned and the ‘no damages for delay’ clause was not enforceable.  The Court allowed the claims to proceed beyond the pleading state without a determination of damages.

Based upon the finding that the subcontract was abandoned, the court then found Agate’s third claim of unjust enrichment in quasi-contract could precede because no contract existed between the parties and relief could be sought in equity. 

The fourth claim of breach of good faith and fair dealings was dismissed.  

Rai Indus. Fabricators, LLC v. Fed. Ins. Co. (N.D. Cal., May 2, 2018)

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The author, Brendan Carter, Esq., is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA. He is a monthly contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He may be contacted at 781.786.8916 or carter@agcmass.org.

Practice Tip: Clawback Agreements

As construction attorneys, we're no strangers to voluminous productions of client documents and communications, both in electronic and hardcopy formats, during discovery.  Even with proper safeguards in place during document review, there exists the possibility that some privileged material may accidentally slip over to an opposing party.  Production of such material to a third party, especially an adversary, runs the risk of waiving attorney-client privilege or attorney work product privilege.

Rule 502(b) of the Federal Rules of Evidence creates somewhat of a safety net for inadvertent disclosures, but requires compliance with a number of steps that, without a prior agreement between the parties, the compliance could be challenged.  Fed. R. Evid. 502(b) ("disclosure does not operate as a waiver in a federal or state proceeding if: (1) the disclosure is inadvertent; (2) the holder of the privilege or protection took reasonable steps to prevent disclosure; and (3) the holder promptly took reasonable steps to rectify the error, including (if applicable) following Federal Rule of Civil Procedure 26 (b)(5)(B) [concerning inadvertent production of trial preparation materials].") Note also that the term "inadvertent" is not defined.

Clawback agreements, pursuant to Federal Rule 502(d) & (e) and equivalent state rules, are aimed at avoiding waiver of privileges without having to resort to proof under Rule 502(b). See Fed. R. Evid. 502(d) ("A federal court may order that the privilege or protection is not waived by disclosure connected with the litigation pending before the court—in which event the disclosure is also not a waiver in any other federal or state proceeding."); Fed. R. Evid. 502(e) ("An agreement on the effect of disclosure in a federal proceeding is binding only on the parties to the agreement, unless it is incorporated into a court order.").  Likewise, scheduling orders under Rule 16 of the Federal Rules of Civil Procedure contemplate the Court approving the parties' clawback agreement in this regard ahead of time.  Fed. R. 16(b)(3)(iv) ("The scheduling order may . . . include any agreements the parties reach for asserting claims of privilege or of protection as trial-preparation material after information is produced, including agreements reached under Federal Rule of Evidence 502"). 

Here's the concern with clawback agreements - in the event of a dispute between parties, a court, depending on the circuit or state, may not be willing to enforce a generally stated agreement unless it explicitly speaks to the Rule 502(b) standard.  For example, in IRTH Solutions, LLC v. Windstream Communications, LLC, No2018 WL 575911 (S.D. Ohio Jan. 26, 2018), the district court confirmed the magistrate judge's decision that, per Federal Rule of Evidence 502(b), the defendant had waived its attorney-client privilege by twice producing 43 privileged documents to plaintiff’s counsel notwithstanding that the parties had a clawback agreement.  Though the defendant's counsel did not dispute that the production of the 43 documents was "reckless," the defendant's counsel argued that the clawback agreement should trump the requirements of 502(b), which avoids waiver only upon an "inadvertent" disclosure.  The district court disagreed instead focusing on whether the parties' agreement even spoke to dispensing with Fed. R. Evid. 502(b)(2) requirement to "take reasonable steps to prevent disclosure."  The Court noted that "the clawback agreement [in IRTH] lacked any language to support a finding that the parties came to an understanding that there would be no pre-production review [and] [m]oreover, the email memorializing the parties' clawback agreement also contained a provision requiring the parties to provide privilege logs  . . . [indicating to the Court] that the parties did in fact contemplate meaningful pre-production privilege review."  Accordingly, the Court concluded that the defense had waived the privilege by producing the documents notwithstanding the clawback agreement. 

The IRTH case recently was granted an interlocutory appeal to the Sixth Circuit to answer the question "what is the legal standard for determining whether a clawback agreement displaces the test under Rule 502(b) for evaluating if an inadvertent disclosure of privileged documents constitutes waiver of the attorney-client privilege? Defendant argued that a clawback agreement, no matter how cursory, always prevails, such that an inadvertent disclosure does not waive the privilege."
Therefore additional guidance in this circuit is forthcoming.  However, regardless of the circuit or state, drafting clawback agreements so each  Rule 502(b) element is identified and addressed is a good rule of thumb to avoid the possible waiver of privileges.

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Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island. 

Bienvenue a Montreal!

 

Forum's Fall Meeting Oct. 4-5, 2018

Mark your calendar, make your reservations, and check those passports - The ABA Forum on Construction Law’s Fall Meeting is traveling to the historic city of Montreal, Canada on October 4-5, 2018. With direct flights from many U.S. cities, Montreal is easy to get to, and offers a wonderful cosmopolitan venue in the largest French-speaking city in North America.

To Register: http://ambar.org/FCLFall18

Program Overview
Our program, It’s Lonely At the Top: Building a Successful Team with the Owner, takes a 360° view of a project and focuses on best practices for building a successful project team and how to address the inevitable challenges that arise. Topics include:

• project delivery: who’s using what, and the implications for your project
• public private partnerships (PPP)
• effectively assessing risk and negotiating contract and subcontract clauses
• construction financing and insurance/bonding
• tips and best practices in proactively addressing delays and disputes as the owner
• effective dispute resolution tactics and technical considerations when facing the owner
• grappling with corruption in procurement and construction – ethics and evolving practices

We are also honored to host a special plenary featuring a conversation with The Right Honourable Beverley McLachlin, who was the 17^th Chief Justice of the Supreme Court of Canada, the first woman to hold this position, the longest serving Chief Justice in Canadian history and a co-author of The Canadian Law of Architecture and Engineering.

Beyond the Program
But there is MORE! Stay right in the heart of the city at the LeCentre Sheraton Montreal Hotel, steps from historic sites, the Underground City, charming Old Town, and the nearby vistas of Mount Royal.  Take advantage of the favorable exchange rate for great shopping on nearby Saint Catherine Street.  Join your colleagues at the celebrated Windsor Station for a Welcome Reception soirée!

Subcontract Provision Requiring Subcontractor to Pass Through its Claims Does Not Prevent the Subcontractor From Suing to Recover Against Miller Act Bond

Pinnacle Crushing & Constr. LLC v. Hartford Fire Ins. Co., 2018 U.S. Dist. LEXIS 67965 (W.D. Wa. Apr. 23, 2018)


The Army Corps of Engineers (the “Corps”), as owner, and Cherokee General Corporation (“CGC”), as prime contractor, entered into a contract (the “Contract”) in connection with work at the Yakima Training Center (the “Project”). CGC subcontracted with SCI Infrastructure (“SCI”) for certain work related to the Project (the “SCI Subcontract”), and SCI subcontracted with Pinnacle Crushing & Construction, LLC (“Pinnacle”) (the “Pinnacle Subcontract”). CGC obtained a Miller Act payment bond (the “Bond”) from Hartford Insurance Co. (the “Surety”) to provide coverage for labor and materials supplied in carrying out the work.

After the Corps terminated the Contract with CGC, CGC submitted a claim under the Contracts Disputes Act. As required by the SCI Subcontract, CGC asserted SCI’s pass through claims against the Corps, which included amounts allegedly owed to both SCI and Pinnacle.

Separately, SCI and Pinnacle sued CGC and the Surety to recover under the Bond for the work they performed under the subcontracts, but for which CGC had not paid them.

CGC and the Surety moved to dismiss or stay the claims arguing that the Surety was not liable to SCI and Pinnacle under the Bond because their damages were the responsibility of the Corps and were being resolved through the Contract Disputes Act process, and the claims were not ripe because that process was still pending. SCI and Pinnacle opposed, arguing that any contract provisions requiring them to wait before pursuing their Miller Act claims were invalid under the Act, and that a stay would be prejudicial because the claims process will take years to resolve.

The Court held SCI and Pinnacle’s Miller Act claims were ripe because they had alleged a specific injury in fact (i.e., they were owed money for completed work on the Project) and had satisfied the condition precedent to bringing a Miller Act claim (i.e., they had still not been paid 90 days after completing their work).

The Court rejected CGC and the Surety’s argument that SCI and Pinnacle were precluded from bringing a Miller Act claim because, under the subcontracts, they agreed that their claims would be resolved by the dispute resolution process set forth in the Contract (i.e., as pass through claims in CGC’s claim against the Corps). Courts construe the Miller Act liberally to protect subcontractors, and any waiver of Miller Act rights must be clear and explicit, in writing, signed by the person whose right is waived, and executed after that person has furnished labor or material used in performing the contract. The SCI Subcontract did not clearly waive SCI’s Miller Act rights because it did not contain any explicit statement that SCI was waiving those rights. Even though, in the Pinnacle Subcontract, Pinnacle agreed not to pursue any independent litigation, including under the Miller Act, Pinnacle did not waive its Miller Act rights because it had not yet furnished labor or material to the Project at the time it signed that Subcontract.

The Court also declined to order a stay pending resolution of the pass through claims against the Corps because neither Pinnacle nor SCI waived their Miller Act rights under their respective subcontracts. A provision in the Pinnacle Subcontract requiring a stay of Miller Act claims pending the resolution of pass through claims did not warrant a stay because the provision was an impermissible waiver of Pinnacle’s right to sue under the Miller Act, not an agreement as to the timing of bringing a Miller Act claim. The Court reasoned that if Pinnacle were to be delayed until the final determination of the administrative action, it might lose its ability to return to court to enforce its Miller Act rights.

Article originally posted July 5, 2018 on Constructlaw by Emily D. Anderson, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group.