What's Up with Division 1 (No. 1 | July 2020)!

I hope you all are enjoying your summer so far and staying healthy and safe.  In this message, I want to announce a couple of changes with Division 1 (Litigation & Dispute Resolution) and some upcoming events / ideas.

Announcements New Division 1 Leadership

Division 1's Liaison to Special Programs and Education Committee (SPEC).  

After many years of dedicated service on serving as our liaison, Anthony Osborn, Gehling Osborn Law Firm, PLC, is stepping down as our SPEC liaison. Thank you Anthony for all your years of service in this role and for your future involvement in other Division 1 activities!

Longtime Division 1 member, George Fink, BRG, is stepping into this role.  George is energetic about getting involved in this committee.  We look forward to your ideas and feedback on how Division 1 can greater contribute to the SPEC Committee.








Division 1's Liaison to Diversity and Inclusion Committee.  

Kelsey Funes, Phelps, a Division 1 Steering Committee Member, has become an at-large member of the D&I Committee.  In her role as Division 1's liaison, Kelsey has been a leader on numerous initiatives including but not limited to planning numerous D&I breakfasts at the national meetings.

I am excited to announce that Jessica Sabbath, King & Spalding, has agreed to take-on the liaison role to the D&I committee. Nick Holmes, a past chair of Division 1, is the Chair of that Committee and we wanted to send one of our best new, active members to help him.  Good luck and thank you Jessica!






Division 1's Liaison to Technology Committee 

Like Kelsey, Katie Kohm, Pierce Atwood LLP, has served as the Technology Liaison for many years.  In that role, Katie has taken on almost every initiative and become the technology specialist and go-to Forum volunteer because of her skill and commitment.  Most recently, Katie is the volunteer in charge of coordinating updates to ABA Connect -- which is a very important role given that is our means to communicate with each other.  Katie has been appointed as an at-large member of the Technology Committee.

Brett Henson, Shumaker, has agreed to jump into this role.  Brett is very active in the Florida Bar construction litigation section.  I am confident that he will bring fresh ideas and perspective into Division 1 from his experience working with that group.  With COVID, the Technology Committee has increased importance to find new and creative ways to reach and collaborate with Division 1 members. Thanks Brett for taking this on.  I look forward to working with you.





Upcoming Programs and Ideas

Division 1 has started a few working groups to find ways to foster communications and sharing of information with each other during this period.  Some of them are highlighted below:

• Division 1 ADR Neutral Feature Series.  We are the litigation and dispute resolution division of the Forum.  Our members regularly serve as arbitrators, mediators, and other neutrals to resolve disputes.  To promote and educate our membership about our talented neutrals, we decided to start a series on The Dispute Resolver blog to feature our Division 1 Neutrals.  The first of those features will be published next month.  
• Law School Outreach Program.  We are in the planning stages of putting on a Division 1 / Forum law school outreach program to provide an overview of construction law and ADR to law students.  We are communicating with the Membership Committee and Forum leadership to get this scheduled for mid to late September.  There will be a panel followed by a brief networking session.  If you are interested in helping out with this program, please contact me (rtdunn@pierceatwood.com).  
• Distance Learning CLEs.  Our steering committee member, Rob Ruesch, Verrill, heads up the Forum's distance learning CLEs / webinars. There will be in increased focus with webinars in the coming months and we want to help Rob's team out as much as possible. Bill Shaughnessy, Jones Walker, and George Fink are going to lead up our team to help generate CLE content for distance learning in the coming months. If you have ideas or would like to be involved in this group, contact me, Bill, or George.  

We have other ideas that we are in the early implementation stages such as scheduling a series of discussion / round-table series on a variety of topics.  

Big thanks to Lexie Pereira who was instrumental in helping me and Division 1 get the ADR Neutral Series and Law School Outreach program off the ground.  Lexie is a law student at Boston College Law and a contributor to The Dispute Resolver blog.  

As you can see, Division 1 has room for many to contribute.  We invite your ideas -- especially those that are creative and embrace how we can help each other with our practices during the COVID era.  Reach out to me and any other Division 1 Steering Committee Member.  

Make sure to join us on D1's ABA Connect Page and follow our blog - The Dispute Resolver!  

On a personal note, since March, my daughter demanded a new pet.  In fact, she wanted a pet ferret!!!  After many, many, many discussions about it, we decided to add a third cat to our family.  Here are two photos of pumpkin!  A kitten has to make you smile and read this post, right! 

Pumpkin visiting me at my home office desk.

Pumkin likes playing in dirt. Here he is our pepper plant.  We had to take all of these outside :)

I hope you enjoy the rest of your summer!  I look forward to hearing from you!

Tom Dunn

Incoming Division 1 Chair

Pierce Atwood LLP

401-490-3418 (d)

508-838-9779 (m)

rtdunn@pierceatwood.com

Why Every Lawyer in the Construction Industry Should Pay Attention to Level 10 Construction v Sea World LLC

“We will not process outstanding payments to contractors or subcontractors until the pandemic restrictions are lifted.”

Since the pandemic began, I have wondered what courts across the country would do when businesses started breaking contractual obligations and blaming, or using, pandemic restrictions as their defense. Most lawyers would agree that a force majeure clause would likely be the deciding factor in these types of breach of contract claims. However, the United States has never experienced the pandemic restrictions we have faced over these last few months and many companies recognize that their force majeure clause might not be as reliable as they might have once hoped. Now, we have the unique ability to witness what a California federal court will rule regarding this exact argument.

On June 8, 2020, California contractor Level 10 Construction, LP (“Level 10”) filed a Complaint in the United States District Court for the Southern District of California alleging Sea World declined to pay for construction of a 2020 theme park attraction until Sea World reopens. Specifically, Level 10 alleges that the payment for work, originally over $11 million, “was not conditioned upon Sea World San Diego’s theme park being open for business to the public,” that Sea World San Diego repudiated the contract by stating “Sea World San Diego would not process any outstanding payments until the parks open,” and that “Sea World San Diego understands they are in breach of contract.” As a result, Level 10 is claiming damages in the principal amount of not less than $3,278,471.30 plus interest.

The fact that Sea World has recognized that they are in breach of contract means that they may be relying on their force majeure clause or the doctrine of impossibility to justify their delayed payments to Level 10. Typically, the party relying on their force majeure clause may be granted relief from performing their contractual obligations if certain events render performance untenable or impossible.

As a refresher, the legal definition of force majeure, or “act of God,” describes any event that is unexpected by all parties, not caused by any party, and affects the relationship between them. A force majeure clause indicates that a party owes no liability to the other in the event force majeure makes performance impossible. A force majeure clause includes not only natural events but also acts by a human agency that are usually not within the scope of “acts of God.”

The pivotal moment in Level 10 Construction v Sea World LLC might be whether the pandemic restrictions make Sea World’s contractual obligations “impossible.” Performance of a duty is excused when a change of circumstance renders it impossible. Impossibility of performance of a duty under a contract is a defense for a claim of breach for non-performance of that duty when the performance of the duty becomes impossible due to unforeseen but changed circumstances.  Simply stated, impossibility is a condition in which an event cannot physically or lawfully take place.  Sure, the pandemic could easily be argued as an unforeseen event, but is the contractual obligation impossible?

SeaWorld Entertainment, Incorporated owns Sea World San Diego, and, according to their most recent Securities and Exchange Commission Form 10-Q filing (quarterly period ending March 31, 2020), they have roughly $192,760,000 in cash and cash equivalents. Sea World San Diego will likely need to show how meeting their contractual obligation is impossible due to the COVID-19 pandemic restrictions, when they seem to have enough cash on hand to pay Level 10. While this seemingly simple breach of contract case might depend on Sea World’s force majeure clause or the doctrine of impossibility, the effects of this case are potentially deafening.

Assume for a minute that Sea World San Diego argues that they are, for all intents and purposes, bankrupt due to COVID-19. An argument which is not so absurd because it was reported that SeaWorld Entertainment recently raised $227.5 million through a private offering that it could use to help pay its bills after projecting a revenue decease of roughly 32%. The court might be put in a position to determine just how far they are willing to stretch the definition of impossibility. Having to raise money in order to make ends meet might be enough to make courts agree with Sea World’s defense.

Every industry, especially the construction industry, should be paying attention to Level 10 Construction v Sea World LLC. If Sea World is successful, then businesses that have requested a Paycheck Protection Program loan might have an argument that the doctrine of impossibility applies in their contractual obligations. This could lead to thousands of businesses refusing to honor their contractual agreements and significantly increase the number of cases in an already inundated court system.

Author Christopher M. Wise is an attorney and the Managing Member of Wise Law, LLC in Louisville, Kentucky. He focuses on contractor-subcontractor litigation and family law litigation.

SCOTUS Allows Atlantic Coast Pipeline to Cross Appalachian Trail

The two energy companies constructing the Atlantic Coast Pipeline have abandoned their six-year bid to build it.  Despite the recent U.S. Supreme Court win discussed below, the companies cite high costs and regulatory uncertainty behind their decision to discontinue the project.

The Atlantic Coast Pipeline is a planned $8 billion, 600-mile natural gas pipeline from West Virginia to North Carolina. Petitioner Atlantic Coast Pipeline, LLC seeks to build the pipeline, which would traverse 21 miles of national forests and require crossing of 57 rivers, streams and waterways in those forests.

At issue before the Supreme Court, in a major environmental case of this term, were two consolidated cases decided by the Fourth Circuit. The cases involved a 2017 permit granted by the United States Forest Service (“Forest Service”) to allow the Atlantic Coast Pipeline to cross the George Washington National Forest in Virginia. The permit also authorized construction of a tunnel consisting of a 0.1-mile segment of pipe 600 feet beneath the Appalachian Trail within forest limits. The Fourth Circuit vacated that permit, holding that the entire 2,100-mile Appalachian Trail is part of the National Park System and, therefore, under the Mineral Leasing Act, no pipeline rights-of-way may be built on the trail.

On June 15, 2020, the Supreme Court reversed the Fourth Circuit and ruled 7-2 that the Forest Service had authority to issue the permit over the trail.

The National Park Service (“Park Service”) administers the Appalachian Trail, even where the trail runs through national forests. The trail has been an official “unit” of the Park Service for fifty years, but that status alone, now, does not prohibit construction of natural gas pipelines under the Mineral Leasing Act, which prohibits federal agencies from authorizing a pipeline right-of-way through “lands” in the National Park System. The question before the Supreme Court was whether the entire Appalachian Trail is such a “land” as defined by the Mineral Leasing Act.

The Court ruled that the Park Service had an easement under the 1968 National Trails System Act (“1968 Act”) to run a footpath over the trail, but the trail itself remained fully under the jurisdiction of the Forest Service. After providing a thorough primer on the common law of easements, the Court found that the trail is not a “land” in the National Park System but is simply a right-of-way, subject to the administrative supervision of the Park Service. But because the trail remains under the jurisdiction of the Forest Service, the Forest Service had authority to approve the crossing under the trail by way of a tunnel 600 feet beneath the trail.

The majority reasoned that Congress never transferred jurisdiction over the trail from one agency to another in the 1968 Act, but rather described the trail as a “right-of-way” through land under the jurisdiction of other agencies. The 1968 Act gave administrative authority over the trail to the Secretary of the Interior, not to the Park Service. The Secretary of the Interior then delegated the authority over the trail to the Park Service in 1969. But the Court said, “We will not presume that the act of delegation, rather than clear congressional command, worked this vast expansion of the Park Service’s jurisdiction and significant curtailment of the Forest Service’s express authority to grant pipeline rights-of-way.”

Justice Sonia Sotomayor and Justice Elena Kagan argued in dissent that the majority’s private-law easement analogies were unconvincing and inapposite. Easements are rights of limited access granted by a landowner to another, but the federal government owns all the land at issue in this case. So, federal statutory commands, not private-law analogies, should govern. The dissenting Justices argued that the majority improperly separated the trail from the land it occupies. The Park Service administers the trail, and therefore, it must also administer the land upon which the trail sits. The Secretary of the Interior had already delegated responsibility for trail administration to the Park Service when Congress passed a 1970 statute making all lands administered by the Park Service part of the National Park System. In the dissent’s view, the majority did not construe the relevant statutes in a way that effectuated what Congress intended.

Notwithstanding administrative delegation of authority over the trail to the Park Service, and the statute characterizing all lands administered by the Park Service as part of the National Park System, the Court held that the trail is not “land” in the National Park System. Rather, the trail is a right-of-way, subject to administrative supervision by the Park Service but subject to the jurisdiction of the Forest Service.

This decision removes major obstacles to constructing the Atlantic Coast Pipeline. If the Fourth Circuit decision had been upheld, the pipeline likely would have had to be rerouted, resulting in tremendous expense and delay. Other obstacles to the pipeline remain, however, as the Fourth Circuit has vacated several other permits required for the project.

United States Forest Serv. v. Cowpasture River Pres. Ass'n, No. 18-1584, 2020 WL 3146692, at *3 (U.S. June 15, 2020)

Author Megan B. Burnett is an attorney in the Baltimore office of Miles & Stockbridge P.C., with offices in Maryland, Washington, D.C., and Virginia. She practices in the areas of commercial and business litigation, with a focus on construction law and commercial real estate disputes.

Disclaimer: This is for general information and is not intended to be and should not be taken as legal advice for any particular matter. It is not intended to and does not create any attorney-client relationship. The opinions expressed and any legal positions asserted in the article are those of the author and do not necessarily reflect the opinions or positions of Miles & Stockbridge, its other lawyers or the American Bar Association Construction Law Forum.

Courts to Decide COVID-19 Business Interruption Claims

The COVID-19 pandemic and resulting government orders helped grind construction projects to a halt. States varied significantly regarding the level of restrictions enacted. Some states allowed construction to progress relatively unimpeded while others permitted only “essential” projects to continue. Some jurisdictions enacted waiver programs where businesses could apply for exemptions. Several cities, including Boston and San Francisco, went beyond their state’s restrictions to stop all construction projects.

Although many of these restrictions are gradually being lifted, the resumption of construction activity remains subject to important limitations regarding social distancing and other public health measures.

Will Business Interruption Insurance Cover Losses from COVID-19?

The COVID-19 pandemic is creating profound, ongoing interruptions to businesses operations across the country. “Non-essential businesses” closed by state government orders have lost income and furloughed employees. Millions of customers were ordered to shelter in place for months, depriving the economy of much-needed demand. Insurance industry experts estimate total business losses arising from the pandemic may soar above $200 billion.

Many businessowners pay for business interruption insurance. To their disappointment, their claims continue to be denied by insurers. The resulting wave of litigation has yielded several important trends. While it remains unclear how courts will rule in these cases, seldom-used policy exclusions are suddenly at the center of the debate. With billions of dollars on the line, the legal and economic stakes are both extraordinarily high. Although many of these high-profile claims involve restaurants, the same arguments apply to the construction industry. 

Business interruption insurance is separate form of first-party coverage which seeks to compensate policyholders for losses due to a suspension of operations.  Typical policy language states coverage will be triggered only by a “physical loss” or “physical damage.” 

Many business interruption policies also offer Civil Authority coverage. This provision has been cited widely in many of the pending business interruption lawsuits pending across the country. Civil Authority coverage is designed to protect policyholders from situations where a government authority prevents access to their place of business. Insurers argue this is not applicable to most COVID-19-related claims because many policies require a nexus of physical damage involving the insured premises.

What is a Physical Loss, Anyway?

Whether policyholders will prevail on their COVID-19 business interruption claims turns largely on the definition of a “physical loss.” In certain instances, courts have sometimes extended the definition of “physical loss.” In some examples, courts have held a large presence of ammonia or asbestos rendered a structure unusable.  

Arguably, the same logic could apply to certain COVID-19 claims, especially where the virus was present at the insured premises. Insurers argue this extension would not only be erroneous but lead to the widespread insolvency of carriers who did not price such coverage into premiums.

It’s important to remember that insurance remains in large part a creature of state law. Although many contract law principles will apply generally, many state courts have carved out important distinctions particular to their jurisdictions. This not only makes a generalized analysis difficult, it undermines the argument that business interruption cases warrant multi-district litigation.

What About Exclusions?

Virus exclusions are a relatively new limitation on coverage. In only the past 15 years they’ve become common in most business interruption policies. As coverage litigation proliferates in the wake of the COVID-19 pandemic, virus exclusions are poised to take center stage alongside traditional insurance law concepts like “physical loss” and “reasonable expectations.”

Insurers will likely argue a virus exclusion isn’t required to deny coverage because COVID-19 does not produce a physical loss sufficient to trigger coverage. However, this argument will lead to a predictable response by policyholders: If a virus exclusion isn’t needed to limit coverage, then why has the exclusion become standard on so many policies in the first place?

Other policy exclusions may address bacteria or fungi. These do not appear relevant to COVID-19. However, a surprising number of commercial liability policies don’t contain a virus exclusion at all. Several recent complaints filed by policyholders underscore the potential exposure of insurers to business interruption claims arising from COVID-19 in the absence of this exclusion.

Possible Legislation Could Require Coverage

Congress and several states have drafted legislation which could require insurers provide business interruption coverage under certain situations.  These proposals vary and thus far none seem to be gaining momentum.

Some of the most notable variables include, but are not limited to; whether coverage would be retroactive to cover losses arising from COVID-19 or only apply to future pandemic claims, whether the coverage will only apply to “small” businesses, and whether insurers will be eligible for reimbursement for coverage.

Conclusion

Policyholders should review their policies to determine whether it contains a virus exclusion. If a policyholder believes their losses are covered, filing a claim quickly is critical. Policyholders should file an accurate and complete proof of loss statement and be prepared to cooperate with their insurer during the claims-investigation process. If a virus exclusion was added during the renewal of a pre-existing policy, state law may limit its applicability if the insurer failed to disclose the new limitation. Finally, it’s important to note that impacted policyholders have a limited window of opportunity to enforce their existing contractual rights.

Regardless of the outcome of the hundreds of business interruption cases now before the courts, virus exclusions appear likely to become even more common in the wake of COVID-19.

Author Patrick McKnight is an associate in the Litigation Department at Klehr Harrison Harvey Branzburg LLP in Philadelphia, Pennsylvania. Patrick also serves on the Klehr Harrison Coronavirus Task Force. He can be reached at pmcknight@klehr.com.