Contractual Claims Protection: A Checklist for Owners

More and more public owners have come to the realization that their general conditions and “front-end” documents are inadequately protecting them. Here is a checklist of clauses for owners to consider including in contracts for protection against potential construction issues. The following, in no particular order of importance, are brief summaries of some of the key clauses that owners should consider including in their contracts.

Notice Provisions – These provisions require the contractor to provide the owner with prompt notice of an alleged change, delay, claim for additional compensation, or differing site condition. A well-drafted clause will strive to bar claims that did not comply with the notice provisions because the owner can argue that there was a lack of notice to be able to respond. The purpose of such provisions is to give the owner an opportunity to adequately investigate the situation in order to verify (or rebut) the contractor’s contention and to actively participate in the resolution and monitoring of the work. In the case of an alleged differing site condition, the notice requirement should be one of immediate notice, since an owner investigation is likely essential to protect evidence of the condition and to determine how the affected work will proceed.

Differing Site Conditions – It is important to define what a differing site condition is and how it will be treated should one be encountered during construction.  This clause is particularly important in projects involving significant earthwork, tunneling, work in highly developed areas or renovation projects due to the increased likelihood of encountering susceptible conditions unknown to the designer and bidders.

Scheduling Requirements – Owners must take a more active role in monitoring the contractor’s schedule submittals in order to protect against potential improper schedule manipulation which could lead to inflated delay claims.  In order to achieve this, owners must first have a solid specification with a mandate that requires the contractor to submit regular and meaningful schedule data.  The areas which the specification should cover include, at a minimum:

·       Technical requirements for the initial baseline submittal and updates

·       Review/acceptance procedures and timeframes

·       Updating and revisions requirements

·       Treatment of “early completion” schedules

·       Inclusion of submittals and procurement activities in the overall schedule

·       Means of submitting requests for time extensions, i.e., fragnets

Audit Provisions – An owner can obtain extremely valuable information for evaluating or rebutting a contractor’s change orders and claims by gaining access to the full volume of the contractor’s records, including all cost records and correspondence with subcontractors.  General contractors almost always have access to the public owner’s records by virtue of public records statutes, but often an owner can only get access to a contractor’s records after a formal litigation process has been initiated.  A well-drafted audit or access to records clause can provide the owner with the contractual right to have access to all the contractor’s and subcontractors’ records at all stages of construction, thereby giving the owner much more information to utilize when assessing a request for change order or a claim demand.

Defined Mark-ups – Many disputes arise because contract provisions are not clear as to what is or what is not included within a contractor’s and subcontractor’s mark-ups and what is allowable under the contract.  Better defined provisions will take away the guesswork and arguments associated with this common problem and will decrease the chances that an owner pays for “double-dipped” overhead on extra or changed work.

Escrow of Bid Documents – This is a procedure used on large projects whereby the contractor is required to place all of its bid preparation materials into an escrow.  Then, if a change order or claim arises that brings the contractor’s bid or original plan of performance into question, the owner and contractor can jointly review the bid documents to determine whether they support the contractor’s performance.

Claim Submittal Requirements – Often, owners are frustrated at the end of a project when the contractor submits a disjointed omnibus claim or a claim with too sparse details that it is virtually “non-analyzable”. The addition of a claim submittal clause can formally specify the format, content and level of back-up documentation that is required within the contractor’s claim to be valid; otherwise, it will be rejected until it meets the contract requirements.  

Liquidated vs. Actual Delay Damages – When drafting contracts, owners are faced with a choice in deciding how they are going to address the possibility of contractor-caused delays that extend a project completion date. The Owner can elect to include a liquidated damages provision which is a pre-determined amount included in the bid documents that “fixes” the contractor’s daily exposure or liability for contractor-cause delays. The other option is for the owner’s contract to be silent regarding the amount of damages that the contractor would be liable for in the event of a delay.  In that case, the owner could claim all reasonable, foreseeable damages caused by the contractor’s delay.

Limitations on “Early Completion” Damages – Another damages-related area where an owner can protect itself is in limiting the types of damages a contractor can claim in the event of owner-caused delays or disruptions.  One type of claim that is quite prevalent is “early completion” whereby the contractor alleges that it would have finished the project earlier than the required contract completion, but the owner caused the delay, so the contractor is thereby entitled to the extended overhead costs. Owners can include clauses in their contracts that prohibit the recovery of damages based on missed early completion dates, forcing bidders to accept language that specifically acknowledges this premise.  A contractor may argue that in the public sector such a clause is rendered unenforceable under certain state-enacted statutes, which essentially makes wholesale no-damages-for-delay clauses difficult to sustain. However, the distinction that the clause only limits a contractor’s right to claim for early completion delays is not a wholesale denial of liability for all owner-caused delay similar to most typical no-delay-for-damages clauses.  Like any contract provision that restricts a contractor’s ability to recover, the mere potential for disagreement should not hinder an owner from including such a clause in its contracts.   

Defining Submittal Review Times – An area of frequent dispute and delay allegations involves the time taken by owner’s representatives to review required contractor submittals.  When a contract is silent about how long an owner’s representative has to review submittals, there is often a difference of opinion as to what a reasonable review period is. This can result in protracted arguments and even claims.  An easy way to address this from the outset is to simply specify in the bid documents the timeframe, (e.g., 20 calendar days) that the owner has to review submittals.  This forces the contractor to schedule its work accordingly based on the assumption that the owner contractually has “X” number of days for review.  Consideration should also be given in the specifications as to whether the review “clock” fully or partially starts over when a submittal is properly rejected and has to be resubmitted/re-reviewed.  In addition, owners should consider prohibiting the transmission of a large number of submittals simultaneously which could effectively overwhelm the owner’s project staff.  

Estimating Requests for Information (RFI) Times and Volume – Often, claims by contractors include allegations devoted to “untimely responses” or “excessive volume” of RFIs. Both of these subjects can be addressed by the owner in the contract.  The first, dealing with turnaround time, can be resolved by simply specifying a contractual turnaround time.  Many owners accuse contractors of failing to plan their work ahead and then demand instantaneous responses to RFIs.  To fairly set the turnaround time, the owner must take into consideration the complexity and duration of the project.  With regard to the volume of RFIs, a clause can be put into the contract stating that the contractor should expect “X” number of RFIs. This way, the owner can establish a reasonable baseline for denying “excessive” RFI-related claims and establish a baseline for contractor expectation.  The owner must also be on the lookout for contractors that may submit unnecessary RFIs to circumvent the baseline. 

The contract provisions discussed in this article are only a handful of the key clauses that an owner should consider to help protect against untimely or inflated claims. Because each project brings a different set of circumstances and complexities, it is always advised that owners engage a construction claims expert as early as possible to resolve potential issues arising on a project.

Mark Guevara, Esq., CFCC, PSP, PMP is a Principal Claims Analyst with ARCADIS and has over 35 years of experience in the areas of construction dispute and claims analysis and resolution.  He has appeared before dispute review boards, panels, mediations, trial and appellate courts, and has testified as an expert witness. He served as Chairman of the Certified Forensic Claims Consultant (CFCC) Certification Board, AACE International (AACEi) and currently serves as Chairman (Elect) of the Construction Law Section, Orange County Bar Association.

Pennsylvania Superior Court Places Time Limit on Good Faith Withholding Under Prompt Payment Act

Constructural Dynamics, Inc. v. Thomas P. Carney, Inc., No. 1104 EDA 2021, 2022 Pa. Super. Unpub. LEXIS 1500, 2022 WL 2390125 (Pa. Super. July 1, 2022), reargument denied (Sept. 8, 2022).

Like many prompt payment acts, Pennsylvania’s Contractor and Subcontractor Payment Act (CASPA) permits owners and contractors to withhold payment for good faith claims — but not forever. Owners and contractors who wait too long could find themselves litigating prompt payment claims and paying the penalties those acts impose on procrastinating payors. A recent decision by the Pennsylvania Superior Court provides some guidance on how long is “too long” to withhold.

The decision arose from a breach of contract action by concrete supplier Silvi Concrete Products, Inc. (Silvi) against contractor Thomas P. Carney, Inc. (Carney). Silvi supplied concrete to Carney for the construction of a Philadelphia luxury hotel. Initial tests of Silvi’s concrete indicated that it broke at lower-than-expected compression strengths. Carney immediately terminated Silvi and hired a replacement supplier. Supplemental testing was conducted, during which Carney withheld payments to Silvi. The project engineer ultimately accepted Silvi’s concrete. Even after acceptance, Carney continued to withhold payment.

Silvi filed a complaint against Carney, alleging breach of contract, violation of CASPA, and unjust enrichment. Carney counterclaimed for breach of contract. A jury found in favor of Silvi on its breach of contract claim and awarded its unpaid $160,000 contract balance and $1 million in lost profits. In a subsequent bench trial, the court denied Silvi’s CASPA claim, finding that Carney had withheld payment in good faith. Carney appealed, and Silvi cross-appealed.

Silvi asserted that the trial court abused its discretion in denying its CASPA claim. It argued that in finding that Carney breached the parties’ contract, the jury implied that Silvi’s CASPA claim was valid. Silvi also argued that Carney did not prove that the amount it withheld was reasonably related to the value of its claim.

The appeals court concluded that the jury’s finding that Carney breached the contract was irrelevant to the validity of Silvi’s CASPA claim. Despite the breach, Carney had good faith basis for withholding payment — at least initially. And the amount withheld ($160,000) was reasonable since it was significantly outweighed by the potential cost to remove and replace the concrete ($13 million to $19 million). The court remanded for the trial court to reexamine whether Carney’s withholding after the project engineer accepted the concrete was in good faith, and whether Silvi could receive CASPA penalties as a result.

In its cross-appeal, Carney argued that the trial court erred by allowing Silvi to present evidence of its lost profits because its claim for lost profits was in essence a “lost volume seller” claim. Pennsylvania disallows “lost volume seller” claims because “[a]pplication of the doctrine would encourage the non-breaching party to do nothing to minimize its damages.”

The appeals court rejected Carney’s argument. Despite disallowing “lost volume seller” claims, “Pennsylvania permits a non-breaching party that has reasonably attempted to mitigate its damages to recover damages for lost profits.” The trial court specifically found that Silvi “made every reasonable effort to mitigate the lost sales and damages it suffered at the hands of Carney by reselling the material, thereby fulfilling the non-breaching party's duty to mitigate losses.” The trial court thus properly allowed the lost profits evidence.

Author Rachael Cain is an associate in the Litigation practice of Troutman Pepper Hamilton Sanders LLP, and a member of the Construction practice group. Prior to joining Troutman Pepper, Rachel served as Land Use and Real Estate General Counsel for Building & Land Technology. Her experience includes negotiating and drafting construction, design, architectural, and service contracts, as well as presenting zoning applications. Rachael has experience in both litigation and transactional matters and has appeared in state and administrative courts. 

 Author Jane Fox Lehman is an associate at Troutman Pepper Hamilton Sanders LLP, and a member of the Construction practice group. Jane has substantial experience representing a variety of construction project participants in disputes arising from industrial, commercial, and multifamily residential construction projects. In addition to representing clients in state and federal courts and alternative dispute resolution proceedings, Jane assists clients with bid protests, contract review and negotiation, project management issues, and risk assessments. She is the co-editor of the firm’s construction law blog, Constructlaw.com.

Jurisdiction – Employee Training, Alone, May Subject You to a Foreign State’s Jurisdiction

Turner Specialty Servs., LLC v. Horn, 2022 Tex. App. LEXIS 8139 (Tex. App.—Houston Nov. 3, 2022). 

Counsel have to analyze jurisdictional possibilities and understand that clients may be subject to jurisdiction in states not initially contemplated. Likewise, contractors need to understand that the location of certain activities, such as employee training, can lead to claims in the locale of those activities. Under certain circumstances, such training may subject contractors to foreign state jurisdiction that the contractor did not initially anticipate.

On November 3, 2022, the Court of Appeals for the First District of Texas ruled that the 55th District Court for Harris County, Texas has jurisdiction over a Louisiana-based limited liability company where the company’s employee, a Texas resident, passed away while working in Alabama. Turner Specialty Servs., LLC v. Horn, 2022 Tex. App. LEXIS 8139 (Tex. App.—Houston Nov. 3, 2022).

Turner Specialty Services, LLC (“Turner Specialty”) is a Louisiana limited liability company headquartered in Baton Rouge, Louisiana. The company provides turnaround maintenance services at refineries and petrochemical facilities, including catalyst work. Catalyst work is highly specialized and “involves working in enclosed spaces, such as large tanks and reactors, in an inert atmosphere lacking oxygen.” Id. at 3.

In March of 2019, one of Turner Specialty’s employees reached out to Justin Horn, a Texas resident, seeking his catalyst services for one of their refineries in Alabama. After accepting the job offer, Turner Specialty directed Justin to a Beaumont personnel office; wherein, Justin filled out pre-employment paperwork, underwent drug testing, conducted a physical examination, and received basic online safety training with an accompanying eight-module safety test. Id. at 4. Importantly, nine other catalyst crew members also received training at the Beaumont personnel facility. Thereafter, Justin was transported to Alabama and received additional, more specific catalyst training covering confined spaces, air supply equipment, and emergency rescue procedures.

On March 26, 2019, Justin died while performing catalyst work at the Alabama facility. As a result, Justin’s wife and mother filed a wrongful death suit, asserting, among other things, gross negligence. Specifically, the Plaintiffs asserted that the Defendants “negligently trained, hired, and/or retained Texas residents. . .” and the “negligent training, hiring, and/or retention of Texas resident workers contributed to Justin Horn’s death.” Id. at 7. In response, Turner Specialty argued that the Texas district court lacked general and specific personal jurisdiction because Turner Specialty was not “doing business” or “essentially at home” in Texas. Particularly, Turner Specialty argued, among other things, that (1) the Texas safety training was fortuitous because all Turner Specialty employees received the generalized safety training at a location most convenient for the employee, (2) the Texas safety training does not have a “substantial connection” to the events that transpired in Alabama, and (3) the actionable conduct that is substantially related to the operative facts of the litigation concerns the training and supervision provided in Alabama, not Texas.

Addressing the fortuitous argument, the Court held that the training was not fortuitous. Turner Specialty representatives reached out to Justin and directed him to the Beaumont office for onboarding procedures, including safety training. There was no evidence to suggest that Justin decided where to receive the initial safety training.  Additionally, “sending Justin to the Beaumont office was not an anomaly” as two-thirds of the catalyst crewmates working in Alabama received safety training at the Beaumont facility. Finally, the court recognized that Turner Specialty benefited from training employees in Beaumont, as it “incentivized Texas residents to work for Turner Specialty. And, by doing so, Turner Specialty acquired workers, like Justin, who had skills that were in limited supply.” Id. at 19.

Next, the Court looked at whether alleged negligent training in Texas was substantially connected to Justin’s death, that is, whether the “relationship among the defendant, the forum, and the litigation – are sufficiently close to support specific jurisdiction.” Id. at 22. The Court, noting that the “relatedness inquiry does not require a strict causal relationship between the defendant’s in-state activity and the litigation” relying on the Plaintiff’s Complaint, stated that “the [Plaintiffs] allege that the improper training, at least in part, caused or contributed to Justin’s death. Thus, Turner Specialty’s liability, if any, arises directly from and relates to the Texas safety training.” Id. at 23.  

Finally, the Court disagreed with Turner Specialty that the more specific training in Alabama was the “actionable conduct.” The court, relying on Texas Supreme Court jurisprudence, stated that “just because Turner Specialty could be subject to personal jurisdiction in Alabama does not mean that it cannot be subject to jurisdiction in Texas.” Id. at 26.  Whether the training that occurred in Texas contributed to Justin’s death presented merit-based questions for the trial court to determine.

As a result, the Texas Court of Appeal concluded that “Turner Specialty purposely availed itself of conducting activities in Texas and that the [Plaintiff’s] gross negligence claim arises from or relates to those activities. . . . the allegations and the evidence establish that Turner Specialty had sufficient minimum contracts with Texas to be subject to specific personal jurisdiction.” Id. at 27.

The Texas Court of Appeals demonstrates why contractors need to be vigilant in where they conduct basic employee training. Under certain circumstances, a foreign state court may have jurisdiction over a corporation, even when the accident in question occurs outside that foreign state’s jurisdiction.

Author, Peter-Raymond Graffeo, is an attorney with D'Arcy Vicknair, LLC in New Orleans, Louisiana. As a former civil engineer, Peter-Raymond focuses his practice in construction and surety law, commercial litigation and business law.