Contractor Submits $4.5M Claim for Differing Site Conditions, Fed Court Rejects and then Imposes Liquidated Damages for $400K

The U.S. Court of Federal Claims shows contractors once again the dangers that can exist when pricing a performance specification and the importance of giving owner’s proper notice for change orders in CKYInc. v. Unites States of America. 

In 2012, the Government awarded CKY, Inc. a $6.4M contract to widen and rehabilitate the Urban Presidio Levee located in Presidio, TX.  The work required CKY to excavate existing materials in a series of benches and then infill the benches with new materials.  The contract contained a material testing specification which required the new fill material meet certain requirements.  The existing “benched” materials was further required to meet a performance specification as to moisture content and compaction rates.

During the bid process, the Government released Amendment 003 which contained questions and answers from bidders to the Government.  Within that document, the Government stated:

•       “Due to contamination in situ and the Contractor’s excavation processes, [the Government] cannot state that excavated material will meet…requirements. The Contractor is required to meet the embankment specification regardless of the source of the embankment material.”
•     “Question: Will removal and disposal of any unsatisfactory material from the existing levee embankment be paid as a separate item, as it is unknown how much material will be unsuitable for use in the new embankment? Government Response: No.”

Furthermore, the bid documents contained a geotechnical report for the existing ground conditions, but the report included the following disclaimer:  

“The data and report are not intended as a representation or warranty of continuity of conditions between soil borings nor groundwater levels at dates and times other than the date and time when measured. The [Commission] will not be responsible for interpretations or conclusions drawn there by the Contractor.”

During construction, CKY had difficulty achieving the subgrade requirements for moisture and density which resulted in schedule delays. CKY alleged at this time it was directed by the Government to place new suitable materials over the “unacceptable, non-constructible subgrade.”

In August of 2016, CKY filed a complaint in the U.S. Court of Federal Claims claiming costs for: (1) differing site conditions; (2) defective specifications; (3) constructive change; and (4) breach of an oral and implied-in-fact contract.

The Government moved for summary judgement contending CKY’s interpretation of the contract and specification were improper and CKY had not provided adequate notice of differing site conditions. It then filed a counter claim for liquidated damages.

The Court began its analysis by stating the primary issue in the dispute is the suitability of the subgrade material and CKY’s entire claim is based upon its contract interpretation that the subgrade was to be “acceptable and constructible.” 

The Court first examined the Government’s assertion CKY’s interpretation of the contract documents and specifications were incorrect.  The Court reviewed the items contained within Addendum 003 and the geotechnical report disclaimer and found that a reliable contractor could not have relied on the subgrade soil to meet the requirements of the specifications.  The Court elaborated that, “When all parts of the contract are assigned meaning and understood in their entirety, CKY’s reliance on its own interpretation of the constructability and suitability of the subgrade material was unreasonable.”

The Court next reviewed the differing site condition claim and CKY’s argument that “constructive notice” had been given to the Government.  The Court noted constructive notice is allowed only if “the Government is not prejudiced by a lack of written notice.”  The Court reasoned that since it took CKY over a year to submit a REA for the subgrade materials, the Government was prejudiced because it could have stopped construction to evaluate all options other than a $4.5M change order.

Finally, the Court found that as a result of finding CKY had no basis for a claim and the project being 225 days late, liquidated damages as identified in the contract were appropriate in the amount of $1,885 per day.

In conclusion, the Government was granted summary judgement and awarded $424,125 in liquidated damages.

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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.

Ohio Supreme Court: Subcontractor Defective Work Not an "Occurence"

The Ohio Supreme Court, in Ohio Northern University v. Charles Construction et al. Slip Op. No. 2018-Ohio-4057, recently issued a decision impacting insurers and contractors in that state.  This Ohio outcome could eventually be adopted by courts or legislatures in other states.  In Ohio Northern, the Court held that defective work by a subcontractor is not within the meaning of an “occurrence” entitling a contractor to coverage under its commercial general liability policy.   By so deciding, the Court’s analysis ultimately ended at the issue of coverage, and did not reach the question of whether the policy’s “your work” exclusion was avoided by an exception under the Products-Completed-Operations-Hazard (PCOH) endorsement.  

The underlying facts involved the construction of a hotel and conference center.  After the project was completed, water leaks caused millions of dollars of damage.  The cause of the water infiltration was believed to be from the subcontractor’s defective work.  The owner filed suit against the contractor.  In turn the contractor submitted the claim to its insurer.   The insurer intervened and filed for declaratory judgment claiming that it had no obligation to defend or indemnify the contractor.  The trial court agreed, the appeals court reversed, and then the Ohio Supreme Court sided with the insurer.

The crux of Ohio Northern expanded the holding of a 2012 case, Westfield v. Custom Agri Systems, 979 N.E. 2d 269 (Ohio 2012).  In that earlier decision, the Court observed that a CGL policy provides coverage for property damage and personal injury caused by an occurrence, but held that a contractor’s own defective work was not an “occurrence.”  Applying that same analysis here, the Court again focused on the plain language of the definition of “occurrence” under the policy: “An accident, including continuous or repeated exposure to substantially the same generally harmful conditions.”  The undefined word, “accident,” the Court said necessarily meant “fortuitous” and that a subcontractor’s defective work is not fortuitous. Rather the defective work is a known business risk that the contractor can control and manage.  In sum, although the water leaks caused property damage and the damage was discovered after the project was complete (which would trigger the PCOH), the prerequisite linchpin was an “occurrence” and that element was missing.

The Court acknowledged that other jurisdictions have gone the opposite direction from its conclusion about subcontractor defective work not being fortuitous.  It also noted that after a similar decision in Arkansas, that state legislature stepped in to pass a statute requiring any CGL policy sold in that state to include “faulty workmanship” within the definition of occurrence.  For Ohio contractors, beyond waiting for the Ohio general assembly to possibly consider new piece of legislation, they may wish to contact their brokers and explore options for defective work endorsements.  Contractors outside of Ohio may want to consider the same to stay ahead of any future decisions in their states.

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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.

When a CM Issued Owner-Disputed Subcontractor Progress Payments, It Did so at Its Own Risk and Cannot Recover Costs Ohio Appeals Court Rules

In early 2004, Manley Architectural Group (MAG) entered into an architectural services agreement with Dr. Steven Santanello (Santanello) for a $1.6 million, 5,800 s.f. home complete with stable and riding area, sitework, pond, tennis court, and outdoor pool.  During contract formation, MAG also presented Santanello a cost savings option of utilizing it as a construction manager (CM) during construction. This would be done lieu of Santanello hiring a general contractor with Santanello holding all of the subcontracts. MAG’s CM services would include, “work[ing] directly for [Santanello] bidding out to the subcontractors and suppliers on your behalf and managing the entire construction process...Added benefits are we have more involvement in the details from start to finish, you have access to all of the subcontractor bids and we can make sure the construction is performed properly.” Santanello elected for the CM option presented by MAG.

During the course of construction, the barn project suffered water infiltration problems at the roof as well as water level retention issues at the pond project.  At that time Santanello stopped paying progress invoices submitted by MAG.  A number of years after construction was finished, MAG filed suit against Santanello for breach of contract to which Santanello filed a counterclaim for breach of contract based upon improperly supervising the construction of the pond and barn. 

A bench trial was held and the trial court found the CM agreement did not make MAG a guarantor of the subcontractor’s work on the roof and pond. Furthermore, it found Santanello was in privity with the subcontractors and ultimately remained responsible for performance and deficiencies in the work.  But, it also reasoned MAG had a responsibility to monitor the work and inform Santanello of any non-conforming work.  

The trial court ultimately found MAG was owed compensation by Santanello for: 1) payments it made to subcontractors on MAG’s behalf, 2) unpaid design fees, and 3) unpaid CM fees with total interest in the amount of $224,270.  The court then found MAG was in breach as to monitoring of the roof installation at the barn awarding Santanello the cost of a replacement roof with inflation in the amount of $160,000.  Each party cross-appealed with Santanello asserting error in the award of payments to subcontractors and MAG claiming error in the award of the cost of the roof (among other errors).

The Tenth Appellate District Court first analyzed the payments MAG issued to subcontractors in the amount of $55,577.  The Court pointed to MAG's statements that it paid the subcontractors to keep them engaged and working so the project could be completed. It "made the decision on its own to start to pay some of these people just to get them back to finish the work."  The Court found that MAG did not have the authority to issue payments on the behalf of Santanello because in the CM arraignment MAG suggested, Santanello was to act as the de facto general contractor and hold all the subcontracts.  The Court further pointed to the fact that liens had been attached to the property by subcontractors and thus there was a remedy for disputes between them and Santanello.  Ultimately the Court reduced the damages award to just the design and CM fees in the amount of $27,179.

The Court next reviewed MAG’s cross-assignment of error that it was liable for the $160,000 cost for the barn roof.  The Court examined the trial court’s definition that MAG’s CM services do not require it to be the ultimate guarantor of the work, but then the trial court ultimately required MAG to guarantee the roof work by imposing all liability for leaks on it.  The Court again pointed to the record and MAG’s efforts to identify and correct the defective work going so far as hiring additional roofing companies and making structural changes to the work.  The Court found these remedial actions satisfied MAG's CM responsibilities and since it was not responsible for the ultimate installation, it should not be held responsible for a new roof system. Accordingly the Court vacated the $160,000 damages award to Santanello.

Manley Architecture Group, L.L.C. v. Santanello

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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.  

Divided Massachusetts Supreme Judicial Court Holds Statute of Repose Bars Alleged Unfair and Deceptive Acts Claims Against Contractor

The Supreme Judicial Court of Massachusetts in Bridgwood v. A.J. Wood Construction, Inc., 2018 WL 4100644 (Mass. 2018) held that statute of repose barred the homeowner's claims that the defendant contractor and subcontractor had committed unfair or deceptive acts (per Mass. Gen. Law c. 93A, s. 2) by failing to perform electrical work in compliance with statutory building and home improvement standards.

 

In 2001, the Newburyport, MA homeowner contracted for a renovation including the replacement of several ceiling light fixtures.  The defendants failed to obtain the proper permits to do so nor arranged for an inspection of the electrical wiring.  This electrical work was not performed to code, but the homeowner was unaware of the non-compliance until the concealed wiring caused a substantial fire in and damage in 2012.  The homeowner filed suit in 2016.

 

In Massachusetts, home improvement contractors are governed, in part, by Mass. Gen. Law c. 142A, s. 1 et seq.  Mass. Gen. Law c. 142A, s. 17 lists a number of prohibited acts including: "violation of the building laws of the commonwealth or of any political subdivision thereof."  Id. c. 142A, s. 17(10).  This law has some teeth because "[v]iolations of any of the provisions of this chapter shall constitute an unfair or deceptive act under the provisions of [Mass. Gen. Law c. 93A]," which carries penalties in addition to direct damages, including the potential for double and treble damages along with attorneys fees.  Here, the Bridgwood homeowner "claim[ed] that the defendants failed to perform the electrical work in compliance with those standards and, therefore, committed unfair or deceptive acts." Bridgwood, 2018 WL 4100644, at *2.

 

For their part defendants argued the homeowner's claim was barred by Massachusetts's 6-year statute of repose of tort claims set forth in Mass.  Gen. Law. c. 260, s. 2B.  The statute of repose is not tolled until the cause of action accrues.  Rather, in Massachusetts, the statutory trigger is substantial completion of the project or when the work is "open[] for use." Id.

 

The homeowner disputed the application of the statute of repose, instead arguing that only the 4-year statute of limitation under c. 93A, triggered "when the cause of action accrued," is the controlling timeline.  The homeowner emphasized that "because the relief available under G. L. c. 93A is 'sui generis,' neither wholly tortious nor wholly contractual in nature, the [tort-based] statute of repose does not apply." Bridgwood, 2018 WL 4100644, at *4. 

The Court disagreed explaining first that a "plaintiff to avoid the statute of repose by relabeling what is essentially a tort claim as a claim under [ ] c. 93A" and instead courts must look at the "gist of the action" to determine whether tort or contract based.  Bridgwood, 2018 WL 4100644, at *4.  Here because the homeowner's "claim is essentially that the defendants failed to perform the electrical work in compliance with the standards set forth in [a state statute and building code], [i]t is indistinguishable from a claim of negligence. Therefore, it sounds in tort and, having been commenced well beyond the six-year deadline, is barred by [the statute of repose]." Id.

The Chief Justice filed a dissent  joined by two other justices that rejected the majority's analyses of c. 93A caselaw and disputed that the legislature intended (or even contemplated) that the prior-enacted statute of repose would control the later-enacted consumer protection statutes.

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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.


 

But There’s a Catch—California’s Wage-Credit Restrictions on IAFs Still Stand

*Thanks to Rebecca D. Takacs, a construction litigator, with Oles Morrison Rinker &Baker LLP in Oakland, California.  Rebecca is a member of the Division 1 Publication Committee.  Her contact information is below.  Enjoy the post!   


The California Legislature passed Senate Bill 954 in 2016 (http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201520160SB954) for the express purpose of prohibiting payments to industry advancement funds as wage credits on public works projects where such credits were not expressly required by collective bargaining agreements. Plaintiff-Appellants Interpipe Contracting, Inc. and Associated Builders and Contractors of California Cooperation Committee, Inc. (“ABC-CCC”) challenged the amendment to the labor code’s wage-credit limitation in Interpipe Contracting, Inc. v. Becerra (9th Cir., July 30, 2018, No. 17-55248) 2018 WL 3613378 (https://www.ca9.uscourts.gov/media/view_video.php?pk_vid=0000012920).

Interpipe Contracting, Inc., is a pro-open shop contractor that prior to SB 954 went in effect took wage credits for contributions to ABC-CCC. ABC-CCC is an industry advancement fund that opposes project labor agreements on public works projects in favor of open shop arrangements. The plaintiff-appellants challenged SB 954 after Interpipe stopped making payments to ABC-CCC due to the new restrictions on wage-credits.  

SB 954 was intended to have a large effect on the construction industry in California. The Bureau of Labor Statistics estimates that just under 15% of construction industry labor nationally is union labor or union represented. (https://www.bls.gov/news.release/union2.t03.htm) SB 954 was intended to prevent employers from funding industry advancement funds that might support efforts contrary to workers interests. At the time of SB 954’s passage, industry opponents considered the SB 954 to be an outright ban on contributions to industry advance funds that might advocate for open shop policies.  

The lower court action challenged the constitutionality of SB 954 and sought a preliminary injunction. The district court denied the request for injunctive relief and dismissed the case on the basis that SB 954 was not preempted by federal labor laws and did not violate ABC-CCC’s free speech or equal protection rights.  

The United States Court of Appeals for the Ninth Circuit was presented with two issues: (1) whether the National Labor Relations Act (“NLRA”) preempted SB 954, and (2) whether SB 954 violated the First Amendment and the Fourteenth Amendment’s Equal Protection Clause by limiting industry advancement funds’ speech in the form of fundraising. The Ninth Circuit affirmed the lower court. 

The Ninth Circuit outlined the current state of prevailing wage requirements in California. Prevailing wages are either all cash wages or a combination of cash wages and benefits including: (1) health and welfare, (2) pension, (3) vacation, (4) travel, (5) subsistence, (6) apprenticeship or other training, (7) worker protection and assistance programs or committees, (8) industry advancement and administrative fees, provided they are required within the locality, and (9) other similar purposes to the above categories.  Cal. Lab. Code § 1773.1(a). In 2004, credits expanded from the first six categories to include industry advancement fees. The restrictions on industry advancement fees arose in 2016 with the passage of SB 954. The thrust of plaintiff-appellants challenge relied on Machinists v. Wisconsin Employment Rel. Comm'n, 427 U.S. 132 (1976). The Machinists doctrine bars states from interfering with the collective bargaining process and regulating non-coercive labor speech by an employer, employee, or an employee’s union. State minimum labor standards are generally saved from preemption by the NLRA. The Ninth Circuit held SB 954 was a legitimate minimum labor standard that does not regulate labor speech. The distinction hinged on the fact that a restriction on funding an employer’s speech was not an unlawful regulation of the speech itself.  

ABC-CCC argued it had a First Amendment right to receive monetary contributions from wage-credits. The Ninth Circuit rejected ABC-CCC’s theory holding that the First Amendment does not establish a right to receive funds necessary for speech. The Ninth Circuit evaluated whether SB 954 was viewpoint discriminatory toward open shop advocates. Relying on the recent Supreme Court case of Janus v. American Federation of State, County, and Municipal Employees, Council 31, et al., 138 S.Ct. 2448 (2018) (https://www.supremecourt.gov/opinions/17pdf/16-1466_2b3j.pdf), the Ninth Circuit found SB 954 to be facially neutral and rejected ABC-CCC’s discrimination arguments. 

Finally, the Ninth Circuit rejected the equal protection claim by ABC-CCC because SB 954 did not regulate industry advancement funds and it was not an employer.  

Rebecca D. Takacs is a contributing writer to The Dispute Resolver. She practices construction litigation at Oles Morrison Rinker & Baker LLP in Oakland, California. She may be contacted at takacs@oles.com.

Consequences for Exceeding the Limit…Maybe…

By: I’Ashea Myles-Dihigo
Leitner, Williams, Dooley & Napolitan

Sometimes I speed…okay, most times I speed.  Not anything dangerous, but I do keep up with the flow of traffic on the interstate.  Don’t judge.  With a daily commute into the office that is always over an hour, any bit of time savings is justified in my opinion.  

While I may be able to justify exceeding the speed limit as I travel down the interstate, the Tennessee Court of Appeals has recently clarified the effects of exceeding the monetary limits of your general contractor’s license in its holding in Pickens v.  Underwood.  In that case, timing was everything.  
General contractor, Pickens, entered into a contract to construct a house for the Underwoods. Pickens v. Underwood, No. E2017-02120-COA-R3-CV, 2018 Tenn. App. LEXIS 322, at *2-3 (Ct. App. June 12, 2018).  The parties entered into their contract on June 2, 2008. Id.   The dispute over final payment arose on May 9, 2009.  Id. at *3.  At the time the parties entered into the contract, Pickens’ limit on his contractor’s license was $350,000, yet at the time the project was complete, the final bill was over $670,000.  Id.  When the Underwoods failed to pay for the work, Pickens filed suit for breach of contract, unjust enrichment, promissory fraud and mechanics’ and materialmen’s lien. Id.  

The Underwoods counter sued for fraud, cost overruns, violations of the Tennessee Consumer Protection Act and for entering into a contract in excess of the contractor’s license limit. Id. The complaint in this matter was filed on July 21, 2009. Id. at *32.  Counsel for Pickens agreed to stipulate that he was an unlicensed contractor and thereby agreed to limit his damages to actual documented expenses.  Id. at *3.  The trial court disagreed with the stipulation and confirmed that Pickens, though over the monetary limit of his contractor’s license, was licensed for purposes of Tennessee Code Annotated §§ 62-6-101, et seq. Id. at *4.  The Underwoods appealed. 

The Court of Appeals affirmed. They reasoned that just prior to the filing of the parties’ complaint, the Legislature made a substantive change to Tennessee Code Annotated § 62-6-103 which governed the monetary limits on contractors’ licenses. Id. at *32.  The effect of the amendment expanded the limitation of actual documented expenses to any contractor required to be licensed under the statute and rules whereas before the limitation only applied to unlicensed contractors. Id.  

The Court held that the date the parties entered into the contract was controlling regarding which statute should apply in the case. Id. When Pickens entered into the contract and performed the work, he was not subject to the limitation because he was properly licensed under the old Tenn. Code. Ann. § 62-6-103.  The Court declined to apply the new code changes retroactively to the pre-existing contract.  Therefore, his recovery would not be limited to actual documented expenses as reflected in the new schematic. Id. at *33. 

While it is never a good idea to exceed the monetary limits of your contractor’s license, if you happen to find yourself in that position, you may still be able to recover the full contractual price as damages.  Based on the holding in Pickens, the Court will look to the law in effect at the time of the contract to determine whether or not your recovery is limited.

Federal Government Escapes Liability in Class Action Seeking Recovery of Damages Caused by Hurricane Katrina

This post comes from Mike Lane, a new contributor to the Dispute Resolver.  Mike practices construction law at Riess LeMieux, LLC in New Orleans, Louisiana.  Thanks, Mike!  Enjoy everyone.

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In St. Bernard Parish Government, et al. v. United States, No. 2016-2301, 2018 WL 1882913 (Fed. Cir. April 20, 2018), the Parish of St. Bernard and property owners in the City of New Orleans filed a class action suit against the federal government under the Tucker Act, 28 U.S.C. § 1491, for an alleged taking of property following Hurricane Katrina.  The plaintiffs claimed the federal government failed to maintain or modify the Mississippi River-Gulf Outlet channel (MRGO), which led to an increased storm surge that resulted in significant damage to their property.  The Court of Federal Claims ruled in favor of the plaintiffs and awarded a total of $5.46 million.  The United States Court of Appeals for the Federal Circuit reversed, holding the plaintiffs failed to show a causal link between the operation and maintenance of the MRGO navigation channel and the damages allegedly sustained. 

The Army Corps of Engineers (Corps) built the MRGO navigation channel in 1968 to increase commerce by providing a direct connection between the port of New Orleans and the Gulf of Mexico.  In addition to operating and maintaining the navigation channel over several decades, the Corps built several flood mitigation projects adjacent to the MRGO, including a vast levee system.  The plaintiffs contended that the levees would not have been breached, or would have held out longer and caused less damage to their property, if the Corps had properly maintained or modified the MRGO channel.  After a trial in December 2011, the Court of Federal Claims found a government taking occurred under the theory of inverse condemnation.  Specifically, the court ruled that the “continued operation of, and failure to maintain and modify MRGO caused erosion, increased salinity, wetlands loss, and a funnel effect, which in turn caused increased storm surge.”  After a separate trial on damages in November 2013, the Court of Federal Claims awarded the plaintiffs $5.46 million.  The federal government appealed both judgments.

The United States Court of Appeals for the Federal Circuit reversed the trial court decision, concluding that the plaintiffs failed to demonstrate that the Corps’ operation and maintenance of the MRGO navigation channel caused their alleged damages.  In so holding, the court focused on two errors by the lower court.  First, the trial court erred in finding that the failure to maintain or modify the MRGO served as a proper basis for a takings action.  The government cannot be liable for inaction in a takings claim; it may only be liable for affirmative acts.  Although the government’s failure to act may give rise to a tort claim, it “cannot be the basis of takings liability.”

The court next turned to whether any affirmative acts of the federal government proximately caused the damages of which the plaintiffs complained.   The plaintiffs argued that the construction and operation of the MRGO should be the only activity considered, not the separate flood mitigation projects constructed by the Corps in the same time period.  The court rejected this approach and held that the government’s separate flood mitigation projects must also be taken into account in the takings analysis.  On this point, the plaintiffs “failed to present evidence comparing the flood damage that actually occurred to the flood damage that would have occurred if there had been no government action at all.”  In other words, the “causation analysis must consider the impact of the entirety of government actions that address the relevant risk [i.e., flooding].” 

The appeals court ultimately held that the separate flood mitigation projects constructed by the federal government, composed primarily of the levee system, may have placed the plaintiffs in a better position than if the government had done nothing at all.  After noting the absence of supporting evidence and expert testimony, the court reversed the trial court judgments and ruled that the plaintiffs failed to prove their property damage was greater than the damage that would have occurred had the government not built the MRGO or the levee system in the first place. 

This decision clarifies that a claimant’s burden of proving causation in a takings cause of action against the federal government may only rely on affirmative acts of the government and must take into consideration all government acts related to the pertinent risk of harm. 

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.

One Out of Eight Ain’t Bad: NH Court Rules First Reservation of Rights on Final Release for Project Long Claims is Enough to Sustain Lien Rights

Design/builder IPS-Integrated Project Services (IPS) entered into a subcontract with Fraser Engineering (Fraser) for work on a new pharmaceutical manufacturing facility in Portsmouth, NH.  Fraser signed the contract in February of 2016 for the mechanical and plumbing scopes of work in the amount of $5,312,100.00.  During the course of contract negotiations starting in the fall of 2015, IPS and the owner made Fraser aware that it may be required to accelerate its work on the project for certain schedule considerations.  In December of 2015 IPS directed Fraser to institute an overtime program for the project which ended up lasting for months.  During this time, IPS and Fraser were in communication about the costs and labor inefficiencies associated with such a prolonged overtime schedule. Ultimately Fraser worked an additional 59,845 manhours on the project.

Fraser’s subcontract contained two provisions related to additional work it might experience during the execution of the project.  The first required Fraser to report any unforeseen conditions resulting in a change and any failure to provide IPS notice would result in the waiver of claims for time or money.  The second provision required Fraser to submit conditional lien waivers with each monthly requisition of which Fraser submitted eight throughout the project. The first of the seven waivers Fraser submitted contained no reservation of rights related to the additional manhours for the IPS-directed acceleration, the eighth and final did. 

At some point Fraser submitted a claim for over $4 million of which $3,324,083.30 was related to labor inefficiencies due to the owner and IPS directed acceleration. Fraser further contended it was owed $1,554,867.29 in retainage and unpaid contract balances.  On January 26, 2017, Fraser filed a motion for and was granted an ex parte attachment to perfect a mechanic’s lien in Rockingham County Superior Court.  After objecting to the attachment in state court, the defendant removed the matter to federal court.

IPS argued that Fraser waived its lien rights by executing waivers throughout the project before finally reserving its rights for the acceleration claim on its final requisition. The Court rejected IPS’s lien waiver argument by pointing out in the record IPS had actual knowledge when the seven lien waivers were submitted that Fraser would seek additional costs related to the directed acceleration.  The Court identified Fraser’s numerous communications with IPS between December 2015 and August 2016 that it was experiencing labor inefficiencies due to the directed acceleration.  

The Court also discussed due to the “remedial nature” of the mechanic’s lien statute, it could not state with certainty the N.H. Supreme Court would “ignore the defendant’s awareness of the labor inefficiencies and strictly enforce the lien waivers.” 

Finally, the Court found that IPS made no attempt to separate costs for the additional work Fraser experienced between the seventh lien waiver in May 2016 and the eighth and final lien waiver in August 2016. Since IPS does not dispute the work was actually completed, it is impossible for the Court to reduce the lien amounts for work prior to May 2016.

Ultimately the Court found the lien enforceable in the amount of $4,917,122.20.

Fraser Engineering Company, Inc.v. IPS-Integrated Project Services, LLCand Lonza Biologics, Inc.  

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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.

A Contractor's Second Chance - The Massachusetts Supreme Judicial Court Relaxes Rules to Establish Contract Performance & Equitable Claims

In G4S Tech. LLC vs. Mass. Tech. Park Corp., SJC-12397, -- N.E.2d --, (Mass. June 13, 2018) the Supreme Judicial Court of Massachusetts clarified that to recover under the contract itself “complete and strict performance requirements” only applies to the provisions regarding “the design and construction work," but that for breaches of other provisions ordinary contract principles of materiality control.  The Supreme Judicial Court also overturned a line of cases that established the rule that intentional violations of contract provisions “precluded a finding of good faith to fully perform,” barring quantum meruit claims.  The Supreme Judicial Court articulated its new rule, “that intentional breaches, even those involving material breaches, alone are not dispositive of the right to equitable relief, at least when such breaches do not relate to the construction work itself.”

This contract dispute arose from a construction project to build a fiber optic network spanning 1,200 miles and 123 communities throughout western and central Massachusetts.  Massachusetts Technology Park Corporation (MTPC) received funding for this project from both state and federal government funding. MTPC awarded G4S Tech. LLC (G4S) the design-build project for a total contract value of $45.5 million.  Due to restraints imposed by the federal government based on its funding, the project had to be completed within a certain period of time. Thus the contract had several provisions regarding G4S’s liability and responsibility for not completing specified portions of the project by specific deadlines.  The project was completed over one year after the specified project deadline, however, the facts are disputed as to whether GS4 or MTPC was at fault for the delay.  Due to the delays in completion, MTPC refused to pay G4S the last $4 million owed under the contract,  withholding the amount as liquidated damages for the delays.  Further, MTPC later discovered that G4S violated a provision requiring that the subcontractors be paid on time, instead G4S delayed paying subcontractors until after their fiscal quarters closed, to show “a more favorable cash flow in its quarterly reports.”  G4S brought claims under breach of contract and quantum meruit theories, MTPC then brought a fraud claim against G4S.

Massachusetts’s rule for performance of construction contract terms is “that a contractor cannot recover on the contract itself without showing complete and strict performance of all its terms…” G4S argued that this rule was outdated and the Supreme Judicial Court should adopt the “materiality rule” per the Restatement (Second) of Contracts.  While the Supreme Judicial Court declined a wholesale adoption of the Restatement, it did clarify that this rule is limited only to “the design and construction work” and that other provisions “should be analyzed pursuant to ordinary contract principles, including the materiality standard[.]"  That said, in this case, the complete and strict performance requirement controlled because “paying subcontractors on time was an essential and inducing feature of the contract between MTPC and G4S.”  The Court noted that a public works project "prompt" payment is a "legislative purpose" and the Recovery Act's purpose, under which this project was funded, was to maximize jobs and improve the economy. By not properly paying the subcontractors, G4S was clearly frustrating that purpose.  The Supreme Judicial Court subsequently upheld the trial court’s granting of summary judgment to MTPC as to the contract claim.

Turning to G4S’s quantum meruit claim, historically, a line of Massachusetts cases supported the rule that “[g]enerally, ‘[i]n the absence of special exculpating circumstances and intentional departure from the precise requirements of the contract is not consistent with good faith in the endeavor fully to perform it, and unless such departure is so trifling as to fall within the rule de minimis, it bars all recovery.’”  The Supreme Judicial Court decided, after sources have long criticized and questioned the rule, that “intentional breaches, even those involving material breaches, alone are not dispositive of the right to equitable relief, at least when such breaches do not relate to the construction work itself.”  Under this new rule, the Supreme Judicial Court reversed the granting of summary judgment to MTPC as to the quantum meruit claim due to disputed factual questions as to which party caused the delay in completion of the project.

Lastly, the Supreme Judicial Court reversed the trial court’s decision to dismiss MTPC’s fraud claim under a duplicative damages analysis. The Supreme Judicial Court determined that there were “separable and distinguishable acts forming the basis of recovery under the breach of contract and fraud claims.”  Accordingly, the Supreme Judicial Court remanded the quantum meruit and fraud claims to the Superior Court.

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Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island.  She thanks Brenna Riley, a rising 3L at Roger Williams University in Bristol, Rhode Island, for this noteworthy case review.

In a Matter of First Impression, the Supreme Court Reverses Trial Court: No "Evident Miscalculation" in Arbitration Award

auburn.family.edu

The Supreme Court of Mississippi in D. W. Caldwell, Inc. v. W.G. Yates & Sons Constr. Co., No. 2017-CA-00116-SCT, -- So.3d.-- (Miss. May 10, 2018) reversed and remanded a trial court's modification of an arbitration award for "evident miscalculation."  The Supreme Court held that "evident miscalculation of figures was not apparent from face of arbitration award, and thus, modification of the award was not warranted." The Supreme Court remanded for the trial court to confirm the award.

The underlying dispute concerned a roofing subcontract for a dormitory at Auburn University.  After the subcontractor started work, it discovered structural issues that needed to be addressed before roofing could begin.  The general contractor and the subcontractor agreed that the subcontractor would perform the structural repairs and then complete the roofing.  However, subcontractor was not paid in full for both the repair change order and the original roofing scope.  A dispute arose and the parties arbitrated.  The arbitrator issued a reasoned award in favor of the subcontractor. The general contractor requested clarification of this award, which the arbitrator denied, and then proceeded to Mississippi trial court on a motion to "alter, amend, or vacate the award." The subcontractor, for its party, moved to confirm the award. 

In Mississippi, like many other states, the grounds justifying an amendment or correction to an arbitration award are quite limited including only: "(a) an evident miscalculation of figures or an evident mistake in the description of any person, thing or property referred to in the award; (b) The arbitrators have awarded upon a matter not submitted to them and the award may be corrected without affecting the merits of the decision upon the issues submitted; or (c) The award is imperfect in a matter of form, not affecting the merits of the controversy."  Miss. Code. Ann. § 11-15-135.

The trial court "believing that an evident miscalculation was present as it related to the retainage amounts" denied the subocontractor's motion to confirm the award and instead allowed the general contractor to introduce new evidence and witness testimony as to the miscalculation.  The trial court held that there was a "facially evident miscalculation" as "the arbitrator had duplicated the labor costs for shingle installation in its award–once under the original subcontract and once under the oral agreement to repair the structural damage [and] amended the award, reducing the total by $104,507."

The subcontractor appealed the trial court decision and the Mississippi Supreme Court reversed holding that "arbitrator's award contained no evident miscalculations which would merit modification." The Court first focused on the extreme narrowness of arbitration review, but also acknowledged that "what amounts to an evident miscalculation" had not previously been decided by this Court.  After reviewing cases from other jurisdictions it decided on this definition: an "evident (plain, obvious, or clearly understood) miscalculation must be apparent from nothing more than the four corners of the award and the contents of the arbitration record." Indeed the moving party must be able to show "[w]ithout looking outside the undisputed facts or relying upon testimony from a witness in the trial court" that "a different, but correct, calculation could be made."  In the instant case, the Court examined "the thirteen-page award for any facially evident miscalculations or computational errors. In doing so, [it found] that no such errors [were] present. Looking next to the attorney-written arguments, oral arguments, and agreed-upon record evidence, [it] likewise failed to find such errors."  In sum, the court "fail[ed] to find that the arbitrator erroneously duplicated costs of labor and relied on such a duplication in making his award. Nor [did the Court] ascertain that the arbitrator erred by excluding the retainage totals."

In reaching this holding, the Mississippi Supreme Court also held that the trial court had abused its discretion by hearing and crediting witness testimony during the award modification hearing.  The trial court took additional testimony regarding the cost of the structural repairs in order to determine whether and to what extent there was an evident miscalculation of figures in the award. The Supreme Court emphasized that "arbitration is meant to supplant litigation, not supplement it" and that the trial court's error "transformed . . . the very narrow and limited purpose of its review [impermissibly]  imbu[ing] it with the responsibility of the factfinder." Note that trial court's abuse of discretion was not the linchpin of its evident miscalculation decision.
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The author, Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island. 

Should You Sign an Owner’s Final Release before Settling with Subs? Federal Court Denies Contractor’s Claim for Missed Subcontractor Costs After Signing General Release

Merrick Construction (Merrick) was awarded a task order by the U.S. Army Corps of Engineers (USACE) in April of 2009 for work on a hurricane protection levee near New Orleans.  The contract incorporated the Federal Acquisition Regulation (FAR) Changes clause which stated, "[n]o proposal by the Contractor for an equitable adjustment shall be allowed if asserted after final payment under this contract."  Nearly two years later in March of 2011, USACE issued a unilateral change order to Merrick for the installation, operation, and monitoring of a temporary bypass pumping system (System).  The change order stipulated the System would be paid for on a monthly unit price basis with a formal Modification to be issued at a later time.  The pumps were delivered in July and fully accepted and operational in August.  Modification No. 3 was issued in July which included costs for the mobilization, three months rent for the System, and identified the monthly unit cost as $208,015.82.  Another Modification was issued in March of 2012 for an additional seven months of System rental and in September of that year, USACE directed the shutdown of the System. 

A final Modification was issued in January of 2013 for an additional three months of System rental which contained language that stated, “This adjustment constitutes compensation in full on behalf of the contractor and its subcontractors and suppliers for all costs and markups...”  This brought the total number of rental payment to thirteen months, but the System had been on site for a total of fourteen months. During the course of the project after the pumps had been removed, Merrick believed that an accounting discrepancy had occurred, and the System supplier had overcharged Merrick and it filed suit to recover those costs.  In July of 2015, Merrick submitted its final payment request to USACE and Merrick’s vice president signed a general release which stated:

"[Merrick] hereby releases the United States, its officers, agents, and employees from any and all claims arising under or by virtue of said contract or any modification or change thereof, except with respect to those claims, if any, listed below…”

Merrick did not provide any claims or reservations and final payment was issued in the requested amount. Later in September of 2015, Merrick became aware that the supposed over-payment to the System supplier was in fact an underpayment by the USACE.  Merrick submitted a claim to the USACE in May of 2016 for a one-month rental of the System and the USACE contracting officer denied the claim citing the general release.  Merrick appealed the decision to the Armed Services Board of Contractor Appeals (Board) and USACE moved for summary judgement.

The Board begins it analysis by presenting USACE’s argument that the signature of the general release bars any claims by Merrick after the fact.  The Board points to Clean by Lucy, Inc., ASBCA No. 58432, which states a release, "abandons a claim or relinquishes a right that could be asserted against another" and “[as] a rule, a general release, whether associated with final payment or not, which is not qualified on its face, bars any claims based upon events occurring before execution of the release.” However, the Board then identified that there are exceptions to the release such as fraud, mutual mistake, economic duress, or consideration of a claim after release.

Merrick argued that the general release should not bar its claim because USACE had superior knowledge of the discrepancy in payments for the System because of Merrick's mistake.  Merrick’s superior knowledge argument was centered around the fact that before the final release was signed, but after the final Modification for the System’s rental was executed, there was a change in project management by Merrick and USACE knew that the new project manager was not involved in any prior negotiations.  Merrick further argued USACE took advantage of this because it knew of the discrepancy between rental months paid and actual rental months onsite. Merrick further argued that through the act of bringing a suit against the System supplier, USACE knew or should have known that Merrick intended to preserve a claim against it. The Board rejected the superior knowledge argument because it was highly speculative and Merrick itself was not aware of the discrepancy until nearly three months after the general release was signed.

The Board next reviewed Merrick’s argument against summary judgement because of mutual or unilateral mistake.  The Board stated that Merrick’s ignorance of its own claim is not the type of mistake that would constitute an exception to general releases and quoted J. G. Watts Construction Co. v. United States, 161 Ct. Cl. 801, 806 (1963) which stated, "where it is shown that, by reason of a mutual mistake, neither party intended that the release cover a certain claim, the court will reform the release." Merrick admits that it did not know of the claim until after it signed the release and consequently could not have intended it to be exempt from the general release.  Furthermore, the Board pointed to Mingus Constructors, Inc.,  v. the United States,  812 F.2d 1387 (Fed. Cir. 1987) that held:

"failure by the contractor to keep adequate records to at least know the source and the amounts of its cost overruns is not a sufficient reason to entertain suits on claims otherwise released, especially when the terms of the contract require such information on the mandatory release at the end of the project."

The Board found that Merrick had not provided the basic facts which established entitlement to an equitable remedy for a unilateral mistake and the general release is enforceable.

Accordingly, the Board granted USACE’s motion for summary judgement.

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