But What About My Machines Just Sitting There? Fed Court Rules Only Some Idle Equipment Costs are Allowable in a Payment Bond Claim

In 2010, the United States Army Corps of Engineers (USACE) entered into an agreement with Hirani Engineering & Land Surveying, PC (Hirani) for the construction of a levee wall on the National Mall to prevent the Potomac River from flooding into Downtown Washington. Hirani in turn then subcontracted out most of the work to a single firm, American Civil Construction (ACC).  For the next two plus years, the project was plagued with delays, changes, and disputes and consequently USACE terminated Hirani in April of 2013.  ACC then vacated the work site in the days following the termination.  USACE made a claim on Hirani’s Performance Bond and its surety Colonial Surety Company (Colonial) hired a contractor team to complete the project.

ACC filed suit against Hirani and Colonial in April of 2014 in the United States District Court for the District of Columbia for $2,172,285.23 in damages, prejudgment interest, attorney's fees, and costs.  In turn, Colonial counter-sued in the amount of $723,049.14 for work ACC had failed to complete. The bulk of ACC’s requested damages fell under at Miller Act-Payment Bond claim against Colonial for work ACC claimed was performed but not paid for by Hirani.

In its bond suit, ACC claimed quantum meruit damages which contained $138,135.34 for costs related to idle equipment.  ACC identified the idle equipment costs as, "the standby costs of having its owned equipment idling at the site as part of the reasonable value of ACC's owned equipment furnished in connection with the Project."  ACC asserted the figure did not represent rental values or other profit opportunities the equipment could have been used for.

The Court began its analysis by stating the Miller Act allows a contractor who "furnish[es] labor or material in carrying out work provided for in a contract" to make payment bond claim.  The court then goes on to state that idle equipment costs “cannot be viewed as an indivisible whole.” The Court presented two scenarios to exemplify this.  The first is when a contractor brings machines to a site and uses them over the course of weeks, but not every day.  The second scenario is one in which a contractor brings equipment to a job sixty days before it is ultimately used in the execution of contract work.   

The Court differentiated the two scenarios by stating in the first, a contractor cannot be expected to remove equipment from a work site every time it is not used so long as there are other activities that require its use, but in the second, a contractor cannot claim equipment is “furnished” for “carrying out work” if the equipment is not used absent a reasonable explanation.  The Court drew examples from the claim pointing to a skid steer that was brought to the job site early and used throughout the course of the project, but not every day, and compared it to an excavator brought in December of 2011, used a few times in January of 2012, and then used only one more time while sitting onsite for the duration of the project.

In its decision, the Court examined a submitted schedule of equipment utilized and determined ACC was entitled to $38,897.62 for standby expenses for idle equipment.

United States ex rel. Am. Civ. Constr., LLC v. Hirani Eng'g & Land Surveying, P.C.

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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.

Midwinter Meeting Lunch Presentation: Los Angeles Rams Stadium

 

Fantastic panel discussion about the Los Angeles Rams Stadium Project, currently under construction, including the unique and challenging aspects of the multi-billion dollar project.  Imagine placing two airplanes on 9 columns with only 1/8" tolerance!

 

 

Thank you to our speakers John D. Hanover, Partner, Alston & Bird; Richard C. Bach, Senior Vice President, Turner Construction Company; and Reed McMains, Vice President, Turner Construction Company. 

 

 

Economic Loss Doctrine - New from Rhode Island

The Rhode Island Supreme Court recently weighed in on the application of the economic loss doctrine to a construction dispute between two commercial entities. In Hexagon Holdings, Inc. v. Carlisle Syntec Inc. et al, --A.3d-- (Jan. 17, 2019 R.I.), the Court's majority framed the question as whether "the owner of a commercial building may circumvent [its] contractual privity with a general contractor by suing the subcontractor to evade application of the economic loss doctrine." The Court "answer[ed] this question in the negative." Accordingly, the Court affirmed that "summary judgment was appropriate as to [the owner]’s claim for negligence against [the subcontractor].")

The underlying issue in this case was a leaking roof.  Hexagon Holdings, Inc. ("Owner") had contracted with A/Z Corporation ("General Contractor") to build a facility at a business park in Rhode Island. The General Contractor in turn subcontracted with McKenna Roofing & Construction, Inc. ("Subcontractor") to install a specified roofing system manufactured by Carlisle Syntec Inc. The roofing began leaking immediately. Owner later sued the Subcontractor in contract and tort alleging that the roof was not properly installed and therefore sought to recover the cost of replacing the roof.  Owner opted not sue the General Contractor noting as its reasons: "judicial efficiency and not choosing to damage a relationship with somebody that [it] had a positive relationship with." The Subcontractor moved for summary judgment relying on the lack of privity (and that the Owner was not a third-party beneficiary of the roofing subcontract) to dismiss the claims sounding in contract and warranty and relying on the economic loss doctrine to dismiss the negligence claim. The Superior Court granted the Subcontractor's motion. The Owner appealed.

With respect to the contract and warranty claims, the Supreme Court agreed with the Superior Court - there was not sufficient evidence in the record creating a question of fact that the Owner was an intended as opposed to incidental beneficiary of the Subcontract.  Accordingly, the Court held that the contract claims were properly dismissed.  Note that there was a dissent that the Owner's third-party beneficiary status actually was a "triable issue of fact" based upon the information in the record.

As for the negligence claim, the Owner had pointed out that there was no privity between the Subcontractor and Owner, therefore the economic loss doctrine could not apply to bar the claim. The Subcontractor disagreed claiming that the economic loss doctrine did apply because Owner’s claim concerned "pure economic loss" and because the parties were engaged in a commercial transaction. The Court sided with the Subcontractor citing the New Jersey case, Spring Motors Distributors, Inc. v. Ford Motor Co., 489 A.2d 660 (N.J. 1985), which held that "[g]enerally speaking, tort principles, such as negligence, are better suited for resolving claims involving unanticipated physical injury, particularly those arising out of an accident. Contract principles, on the other hand, are generally more appropriate for determining claims for consequential damage that the parties have, or could have, addressed in their agreement." The Court noted that under the economic loss doctrine this Owner "clearly" did not have viable claim against General Contractor for negligence.  As such, the Court concluded that, here, where the Owner had "deliberately avoided suing the General Contractor, [the Owner was also] barred from asserting a lack of privity with [Subcontractor] to avoid application of the economic loss doctrine." Accordingly, the Court held that the negligence claim against the Subcontractor were properly dismissed. 

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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.

Please remember to sign up for 2019 Midwinter Advocacy Practicum, which will take place on January 30, 2019 at 1:00 to 5:00 PST at the Millennium Biltmore Hotel.  Description and registration link below.   

https://www.americanbar.org/events-cle/mtg/inperson/346598580/

Advocacy Practicum–Advocacy in Writing the Perfect Brief: Tips From Expert Writers

 

Advanced Registration Only! Separate Registration Fee Required: Practicum Only - $325

 

If registering for the meeting - $200

The Forum is thrilled to be able to present an advocacy practicum dedicated to the elusive but laudatory goal of every construction lawyer—effective and crisp legal writing.

Bryan A. Garner’s extensive writing on the language of the law led The Green Bag to call him a "leading authority on good legal writing." A chorus of other publications—including The New York Times, Trial Magazine, and Harvard Law Review—have echoed that sentiment.

 

Garner is editor in chief of Black’s Law Dictionary and the author of many leading works on legal style, including Garner’s Dictionary of Legal Usage, The Elements of Legal Style, The Redbook: A Manual on Legal Style, The Winning Brief, Legal Writing in Plain English, and The Winning Oral Argument. He is co-author of two books with Justice Antonin Scalia, Reading Law: The Interpretation of Legal Texts and Making Your Case: The Art of Persuading Judges. He is also the author of Better Business Writing, a work focused on the art of communicating in the business world, published by the Harvard Business Review. His latest books are The Chicago Guide to Grammar, Usage, and Punctuation and The Law of Judicial Precedent, written with 12 judicial coauthors, including Justice Neil M. Gorsuch of the United States Supreme Court.

The second half of the Practicum shall be a panel discussion of leading legal writers who will discuss best practices for lawyers on how to present the most persuasive arguments and evidence to a court or arbitration panel. Anticipated panelists include the country's preeminent legal writing instructor, a federal judge and a leading construction lawyer. Since this program is a special event with limited seating, attendees must register for it separately.

Federal Circuit, Citing the Christian Doctrine, Holds That Performance and Payment Bonds Are Required for All Construction Contracts, Even When the Bonding Requirement Is Not Expressly Stated in the Contract

K-Con, Inc. v. Sec’y of the Army, 2018 U.S. App. LEXIS 31196 (Fed. Cir., November 5, 2018)

In September 2013 K-Con, Inc. (“K-Con”) entered into two contracts with the government to supply and construct pre-engineered metal buildings for a laundry facility and a communications equipment shelter.  The government issued both contracts using Standard Form 1449, entitled Solicitation/Contract/Order for Commercial Items.  The contracts’ terms did not contain any requirement to provide a performance or payment  bond.  Nor did they include FAR 52.228-15, which requires performance and payment bonds on construction contracts.

In October 2013 the government directed K-Con to supply performance and payment bonds before a notice to proceed could be issued.  K-Con initially refused but ultimately provided the bonds two years later.  The contracts were then adjusted to add the cost of the bonds.
K-Con submitted a claim under each contract for increases in costs for the two year delay, for a total value of $116,336.56.  The Contracting Officer denied the claim on the basis that the agreements were construction contracts, for which performance and payment bonds were mandatory pursuant to FAR 52.228-15, and that that provision was incorporated into the contracts pursuant to the Christian doctrine under which a court may insert a clause into a government contract by operation of law if that clause is required under applicable federal regulations.  G.L. Christian & Associates v. Unites States, 312 F.2d 418 (Ct. Cl. 1963).  K-Con appealed to the Armed Services Board, which affirmed the denial of the claims.  K-Con then appealed to the United States Court of Appeals for the Federal Circuit.

K-Con argued that the contracts were not construction contracts, but were commercial agreements which do not include mandatory bonding requirements.  The Court found the contracts ambiguous, because although commercial forms were used, the contracts included numerous references to construction activities.  These clear inconsistencies would have placed a reasonable contractor on notice that the contracts were patently ambiguous.  Thus, because K-Con failed to seek a clarification before the bid, it could not argue that its interpretation was proper.

K-Con also argued against application of the Christian doctrine.  The Court held that to incorporate a clause under the Christian doctrine, it must find both that the clause is mandatory, and that it expresses a significant or deeply ingrained strand of public procurement policy.
The Court noted that the Miller Act states that the contractor “must” secure bonds before a construction contract of a certain value is issued and that FAR 28.102-3(a) specifies that FAR 52.228-15 “should be inserted in the solicitations and contracts for construction.”  Thus, the Court found that bonding requirements were mandatory.

As to policy, the Court noted that the Miller Act was enacted to protect subcontractors and suppliers on government construction projects, and to ensure the government receives full performance at the agreed-upon cost.  Because government property cannot be subject to subcontractor and supplier liens, the bonds provide an alternative remedy to protect those who provide labor or materials on a federal project.  On that basis, the Court found that performance and payment bonds are “deeply ingrained” in government procurement policy.

Accordingly, the Court held that the bond requirements were incorporated by operation of law into the contracts despite the fact that these requirements were not stated in the agreements.

The author, John Conrad, is an associate in the Los Angeles office of the Pepper Hamilton Construction Practice Group.