Implied Waiver of Arbitration Clause Through Active Litigation -- Tuscan Builders Case Summary

Courts applying the Federal Arbitration Act and the state arbitration acts routinely impose a strong presumption against finding waiver of an agreement to arbitrate. 

In the case of Tuscan Builders, LP v. 1437 SH6 LLC, No. 01-13-00685-CV (Tex.App. [1st Dist.] Jan. 30, 2014), the appellate court affirmed the denial of a motion to compel arbitration finding that the moving party's "motion to compel more consistent with a late-game tactical decision than an intent to preserve the right to arbitrate." 

Here at Division 1, we are all familiar with this issue.  It particularly occurs where we represent clients in matters, such as mechanic's lien actions, that are required to be filed in court -- not through arbitration.  We know that the question of implied waiver of the arbitration provision is one for the Court to decide and it will turn on the particular facts and procedural history of the case.  The question always is: how much is too much? 

We thought a summary of this case would be a helpful refresher. 

The Facts

Plaintiff in the original action was the Owner of a new commercial building that was going to provide health related services. 

Owner contracted with Designer to design the building.  Owner and Designer signed a modified B141-1997 that excluded the mediation and arbitration provisions in favor of state court litigation.

Owner contracted with Contractor to construct the building.  Contractor provided the Owner with the A101-1997 agreement.  No modifications were made to the incorporated A201-1997 agreement thereby selecting mediation and arbitration as the dispute resolution mechanism.  Owner claimed it was never provided a copy of the A201 General Conditions. 

Owner sued Designer and Contractor.  Contractor answered without asserting the right to arbitrate.  Contractor also asserted third party actions against its subcontractors. 

The litigation ensued with written discovery, an inspection of the building demanded by the third party defendants, and a consented-to extension of the trial schedule. 

After the passage of one year and the closure of discovery, Contractor moved to compel arbitration.  Owner claimed that it never knew of the arbitration provision in the A201 and, even if the arbitration provision was binding and enforceable, Contractor waived its right to compel through its active involvement in the litigation. 

The trial court agreed with Owner and denied Contractor's motion.

Factors Considered For Implied Waiver of Arbitration Clause

The Tuscan Builders Court applied a five-factor test (the Perry Homes Factors): "In determining whether a party waived an arbitration clause, the courts can consider, among other factors,

1. whether the movant for arbitration was the plaintiff (who chose to file in court) or the defendant (who merely responded),
2. when the movant learned of the arbitration clause and how long the movant delayed before seeking arbitration,
3. the amount of the movant's pretrial activity related to the merits rather than arbitrability or jurisdiction,
4. the amount of discovery conducted, and
5. whether the movant sought judgment on the merits."

In applying these factors, the Court considers the moving party's conduct in the litigation and determines if it portrays the "kind of 'aggressive litigation strategy' that substantially invokes the litigation process." 

Under the facts of Tuscan Builders, the appellate court agreed Contractor had waived its right to enforce the A201 arbitration clause.  The facts most relied upon by the Court which caused the strong presumption against waiver to be overcome were:

• No mention (or reservation) of the arbitration agreement.
• Lapse of Time - 1 year.
• Contractor was presumed to be familiar with the arbitration provision because it presented the AIA form agreement to Owner.
• Perceived tactical strategy to use the tools of litigation and then go to arbitration. 
• Prejudice to Owner, Designer, and Court for piecemeal, inefficient proceedings. 

In this context, the court explained that the "[p]rejudice refers to the inherent unfairness caused by 'a party's attempt to have it both ways by switching between litigation and arbitration to its own advantage.'"

Division 1 Members, please feel free share similar cases you are aware of or your personal experience on the issue of how far can you go in litigation until impliedly waiving arbitration . . .

Division 1 Cocktail Party at House of Blues (4/10 after Welcome Reception)

 

Join Division 1 for a cash bar cocktail reception at the House of Blues after the welcome reception on April 10. 

 

Where: House of Blues, Third Floor (The Prayer Room is reserved for us), 225 Decatur Street, New Orleans, LA 70130

 

When: April 10 around 8:00PM (after the Welcome Reception)

 

More Info: Contact Division 1 Chair, Luis Prats (LPrats@cfjblaw.com)

Division 1 Supports ACE Mentor Program

SO YOU THINK YOU CAN NEGOTIATE A CONSTRUCTION CONTRACT DISPUTE?

Division 1 is teaming up with the Young Lawyers Division and Divisions 2, 3, 5, 6, 7 and 9 at the Forum's Annual Meeting to present live demonstrations of the ACE Construction Contract Negotiation activity module the YLD and ACE jointly created. 

The student negotiators attend the McDonogh #35 Senior High School in the historic Treme neighborhood.  They have participated in the ACE program for two years and receive school credit for their involvement in ACE. 




WHEN: Friday, April 11, 2014, 12:30-1:30pm, Division Lunches

WHERE: The Roosevelt Hotel - New Orleans

Utilizing a Pre-Construction Contract Review to Minimize the Potential for Construction Billing Disputes

In Division 1, many of us tend to focus on how to resolve disputes after they have come to light.  This article, written by Curt Plyler, CFA, CCA of Fort Hill Associates, identifies a method for our clients to avoid disputes later in the game by doing the key legwork before construction even begins.  

Curt and I met at the meeting in Nassau, and he was kind enough to forward this article to me for our use in the Dispute Resolver.  Thank you, Curt!

Here's the article:

As a project moves from an idea towards construction inception, the Owner, Contractor, and their attorneys work together to create a construction contract designed to meet their mutual interests. Much effort and expense goes into this process, which is necessary given the potential risk exposures. However, once the Contract is set for execution, an essential step to minimizing future disputes is often omitted. A Pre-Construction Contract Review assists in identifying and mitigating many issues often arising from the Contractor’s billing practices.

Why Conduct a Pre-Construction Contract Review?

A Pre-Construction Contract Review enhances the efforts of the Owner’s representatives, attorneys, architects, and project managers in ensuring the underlying financial intent of the Contract is met. The additional intelligence provided by this review maximizes cost transparency, and as a result, the Owner’s fiscal responsibility. Most importantly, a Pre-Construction Contract Review establishes the proper expectations at project inception. A Contractor will seek to be compensated appropriately to complete a project not fully defined under a fixed price contract. 

As a result, Guaranteed Maximum Price (GMP) contracts are often utilized by Owners to get a better price on this type of construction project. The Contractor is normally paid the Cost of the Work plus a fee. Defining ‘cost’ is paramount. Assuming no language to the contrary, if the Contractor charges the Owner anything other than the cost incurred for labor, leased equipment, insurance, information technology, and etc., the underlying intent of the Contract has been changed. The Contractor can still utilize predefined rates to bill certain elements of project cost. However, the Pre-Construction Contract Review will validate the rates to be utilized to charge the project are representative of the actual cost incurred.

Step 1: Auditor Review of Contract Language

Ideally, a Pre-Construction Contract Review is done prior to Contract execution. The Contract is designed to eliminate ambiguities, but the complexities of a large construction project often leave the various parties with different understandings and assumptions related to project billings. The Auditor’s work complements the work done by both group’s attorneys. The attorneys are focused on a Contract to minimize their respective party’s risk, and the Owner’s Auditor (external or internal) seeks to minimize the potential for future billing disputes. These disputes often involve billing methodologies that alter or differ from the intent of the Contract. In most instances, the first step normally entails the Auditor reviewing the draft Contract language and identifying areas of concern.

Step 2: Review Labor Billing Methodology

Labor is the largest component of General Conditions and can be easily manipulated in the Contractor’s favor. The Contractor is entitled to recover the cost of payroll taxes, insurance, and customary benefits. These costs are often recovered through a labor burden billing based on the base wages. Since these costs will vary depending on who is assigned to the job, an estimated labor burden is often billed to the project. The Contractor’s estimate tends to be conservative, and each of the labor burden components is normally slightly overstated as a result. 

A Pre-Construction Contract Review proactively examines the proposed job roster and reviews employee payroll records. This review ensures the base wages billed are the actual wages paid to the employees. Additionally, the labor burden is reviewed to ensure it is representative of actual cost for both regular and overtime hours worked (many labor burden components are not applicable to overtime hours) for the Contractor’s hourly and salaried workforce. 

Other Contractors utilize labor billing rates, inclusive of base wages and labor burden, to charge the project. These billing rates may or may not be representative of actual Contractor cost. The Contractor’s payroll records should be reviewed during the Pre-Construction Contract Review to ensure these rates are representative of actual cost incurred.

Step 3: Review Contractor-Owned Equipment Rates

Many Contractors lease various pieces of their own equipment to the project. During the Pre-Construction Contract Review, the following items should be determined and/or validated:

• Fair market value of each item of equipment upon arrival on the project site
• A derivation of the components of the rate to be charged for each item of equipment
• The aggregate amount allowed to be charged for each item of equipment
• Any other charges to be billed separately and directly for equipment

It is recommended these rates be indexed to a respected industry source (for example, the AED Green Book). Additionally, the aggregate rental payments should not exceed a Predefined percentage of each item’s fair market value.

Step 4: Review Defined Rates for Other Items

Contractors will often insert Contract language allowing insurance to be charged at a stated rate, or they will bill the coverage at a rate despite Contract language stating only the premiums directly related to the project are allowed. As with the leased equipment and labor billing rates, it is very important to understand and validate the items comprising the insurance rate. It is not uncommon to find excess coverage and ‘home office’ insurance costs included in the rate.

Similar to insurance, many Contractors attempt to insert Contract language specifying a rate (a predefined percentage or an amount per labor hour of work) for information technology (IT), or they will charge a rate despite Contract language specifying actual cost incurred for direct project-related expenses. Any IT billing method utilizing a rate needs to be reviewed to ensure the components comprising this rate are reimbursable
pursuant to the underlying Contract. These IT components should not be billed directly if included in a predefined rate. Additionally, any rate based on a charge per work hour should be restricted to regular time wages only. 

Other items, including document reproduction and document retention, are often charged to the project with pre-defined rates. The Auditor should request the Contractor provide a list of all rates to be utilized in lieu of actual cost during the Pre-Construction Contract Review. All of these rates should be reviewed to ensure they are representative of actual cost incurred.

Step 5: Define a Budget for Daily/Interim Cleaning

Daily or interim cleaning charges can create issues of contention as a project progresses. In most Subcontracts, the Subcontractor is responsible for maintaining a clean job site. Thus, if the Contractor is not self-performing work on the project, the Owner may perceive a duplicate billing when daily/interim cleaning charges are billed to the project (if the Contractor is self-performing work, keeping that portion of the job site clean should be within their scope). The responsible Subcontractor should be back charged for any further cleaning required as a result of their work. 

In reality, though, it is nearly impossible to determine the responsible party for cleaning in all instances, especially given the common areas used by multiple Subcontractors. During the Pre-Construction Contract Review, it is recommended the daily/interim cleaning budget be reviewed and agreed-upon. This budget should be capped to prevent abuse.

Step 6: Defining the Required Documentation

The Pre-Construction Contract Review is the ideal time to specify the documentation required to approve Owner Change Orders, payment applications, and allowance/contingency usage.

• Change Orders should be fully supported, including templates specifying allowable markups for labor, equipment, and materials.
• Allowance and contingency expenditures should be reviewed with the Owner prior to the incurrence of these costs. Utilizing a ‘no cost’ Change Order to track usage provides the proper transparency to the Owner.
• Each payment application should be fully supported with Subcontractor payment applications, invoices for all expenditures above a predefined threshold, and a job cost report inclusive of a reconciliation for that month’s billing. 
• Monthly labor and leased equipment reports are also recommended to ensure visibility is provided for individuals and equipment moving to and from the project. 

Interim/Closeout Construction Reviews

The Pre-Construction Contract Review validates the basis for a Contractor’s billings to the Owner at project inception. On larger projects, periodic audit reviews are recommended every six to nine months of activity after project inception and the Pre-Construction Contract Review. These reviews are done for two reasons. First, it should be determined whether the Contractor has billed in a manner compliant with any understandings reached during the Pre-Construction Contract Review. Second, staff turnover -- both with the Contractor’s and the Owner’s project management teams -- often leads to misunderstandings regarding the agreed-upon billing methodologies. The findings in an interim or closeout audit should be minimal in the absence of large clerical errors. 

Conclusion

From the Owner’s perspective, eliminating billing issues upfront eliminates negotiating for a partial credit later on in the project for a ‘difference of interpretation’. From the Contractor’s perspective, the upfront review eliminates the bad feelings that can arise if the Owner calls in to question the Contractor’s billing methodologies later in the project. Thus, the ‘rules’ by which the game will be played are clarified. The Pre-Construction Contract Review is fair for both parties, and successful financial oversight of the project will be significantly enhanced when these reviews are employed. 

Curt Plyler is a Principal with Fort Hill Associates, LLC. Fort Hill is a consultancy specializing in construction contract audits and pre-construction reviews with offices in Raleigh, NC and Greenville, SC.

Texas Jury Sentences General Contractor to Three Years in Prison for Fraudulent Nonpayment of Subcontractors

The Dallas Morning News reports that a jury in Fort Worth, Texas recently gave the principal of a general contractor a three-year prison sentence for fraud in connection with his failure to pay amounts due to subcontractors for work performed on the construction of a car dealership. According to the article, the Tarrant County District Attorney's Office stated that the criminal conviction, which came after a week-long trial, was the first of its kind in the country.

The press release from the Tarrant County District Attorney's Office offers some additional details about the case. It states that the general contractor had submitted payment applications to the owner claiming all subcontractors were being paid. This turned out not to be the case, as subcontractors filed seven liens totaling about $100,000 against the owner's property. The owner filed a complaint against the general contractor's principal with the Tarrant County District Attorney's Office. The principal was then indicted, arrested, and tried on a felony charge of making a false statement to obtain property or credit.

The defendant had no prior felony convictions, and therefore faced punishment ranging from probation to ten years in prison. During the punishment phase, prosecutors presented evidence of prior civil lawsuits against the defendant filed by subcontractors, as well as repeated bankruptcy filings to avoid liability. After considering this evidence, the jury sentenced the defendant to three years in prison with a $10,000 fine.

As civil defense attorneys, we often view potential liability for nonpayment on construction projects in civil, rather than criminal terms. Has anyone else experienced situations where criminal charges were asserted? Is this the type of conduct that merits criminal punishment rather than civil liability for damages?

Score One For the Contractors - Federal Circuit Rejects “Specific Targeting” Requirement In Good Faith and Fair Dealing Claims Against the Government

In Metcalf Construction Co., Inc. v. United States, 2014 WL 51956 (Fed. Cir. 2014), the U.S. Court of Appeals for the Federal Circuit considered the scope of the federal government’s duty of good faith and fair dealing to a private contractor engaged to design and build military housing.  The case involved claims by the contractor against the government for differing site conditions and associated delays and the government’s assessment of liquidated damages against the contractor.  In addition to claiming the government’s material breach of specific contract provisions, the contractor claimed that the government’s actions breached the government’s implied duty of good faith and fair dealing under the contract.

Interpreting the Federal Circuit’s prior decision in Precision Pine & Timber, Inc. v. United States, 596 F.3d 817 (Fed. Cir. 2010), the trial court had held that a breach of the government’s duty of good faith and fair dealing could only be established by a showing that the government “specifically designed to reappropriate the benefits [that] the other party expected to obtain from the transaction, thereby abrogating the government’s obligations under the contract” - in short, “specific targeted action” against the contractor, regardless of any incompetence and/or failure to cooperate or accommodate a contractor’s requests.  The Federal Circuit, however, held that the trial court’s view of its Precision Pine decision was “unduly narrow” and that the trial court had misread the decision.  The Court clarified that its prior decision in Precision Pine did not purport to define the scope of good faith and fair dealing claims for all cases, let alone alter prior standards, and that the Precision Pine decision did not hold that the absence of specific targeting, by itself, would defeat a claim of breach of the implied duty.  Instead, the Court stated that the “specific targeting” language of the Precision Pine decision on which the trial court relied only meant that the implied duty of good faith and fair dealing depends on the parties’ bargain in the particular contract at issue.

Accordingly, the Metcalf decision clarifies that the government’s duties of good faith and fair dealing should be analyzed on a case-by-case basis and in the context of the contract - particularly, according to whether the government’s actions rise to the level of denying the contractor its benefits of the parties’ bargain in the contract.

Iowa Supreme Court - Waiver of Sovereign Immunity on Public Projects Involving "Targeted Small Businesses"

The Iowa Supreme Court recently issued a decision which requires the Iowa Department of Transportation (DOT) to pay three subcontractors after they completed work on state projects but were never paid by the general contractor, effectively implementing a waiver of sovereign immunity for claims by “Targeted Small Businesses”(TSB).

The case, Star Equipment v. State of Iowa (2014 WL 346521), involved improvements made to highway rest stops. The DOT hired the general contractor, Universal Concrete, which in turn hired some subcontractors. The general contractor was classified by the State of Iowa as a TSB, meaning it is minority-owned and exempted from the requirement of posting a surety bond to secure payments on the project. Thus, there was no surety bond from which the subcontractors could seek payment if the general contractor failed to pay them (Iowa Code Chapter 573 is Iowa’s counterpart to the Federal Miller Act). After the general contractor failed to pay the subcontractors, they sued both the general contractor and the Iowa DOT.

The trial court ruled that state law did not require the DOT to pay on the general contractor’s obligations. The Supreme Court reversed, finding that subcontractors of state-hired TSB general contractors can seek payment from the state if the general contractor fails to pay. In reaching this conclusion, the Supreme Court reasoned that Iowa Code Section 573.2 acts as a waiver of sovereign immunity when the requirement of a bond is waived (such as when a TSB is hired as a general contractor), thereby allowing the subcontractors to recover the balance owing directly from the DOT.

Do you agree with the decision? Are you aware of any other states that have similar statutes to protect targeted small businesses?

Check out this post from Skanska on project team collaboration and communication

Skanska blog - http://blog.usa.skanska.com/why-collaboration-and-communication-are-essential-to-project-success/.

George McLaughlin wrote a series of articles on this topic in the Dispute Resolver last year.

VALUABLE RESEARCH TOOL -- Forum's Construction Industry Knowledgebase

We all know the quality the Forum's written materials for its programs are excellent.  Through the oversight of the GC, the Program Co-Chairs and GC Liaison, to Program Coordinators (aka Cat Herders), the written materials are routinely law review quality. 

The written materials for the Forum's programs going back to 2002 are available online!  The Forum calls it the Construction Industry Knowledgebase. 

There are numerous ways to search for content and, unlike the current online member directory, it is fast!

So, for your next research project, remember to visit the Knowledgebase for a head start. 

In case the links don't work, the website is: http://www.americanbar.org/directories/construction_industry_knowledge_base.html

Effective Risk Management Planning - Step 1 - Identify Your Team

Our Division's name is the Dispute Avoidance and Resolution Division of the Forum on the Construction Industry.  A lot of our posts relate to "resolution" component of our name through mediation, arbitration, and litigation. 

In this series of posts, we focus on dispute "avoidance" strategies our clients can implement during the project.  We asked Andrew Englehart of Construction Process Solutions to provide us his views on effective risk management and claims avoidance. 

Mr. Englehart's first step about picking the risk management team is below.   

* * * 

Effective Risk Management and Claims Avoidance via a Project-Specific Plan

by Andrew T. Englehart, Principal, Construction Process Solutions, Ltd, www.cpsconsult.com

Step 1: Picking your Risk Management Team 

“Claims Avoidance” does not mean “document the #!$$%%##@& out of the project.” (That is another topic . . . how to minimize losses due to claims once you do find yourself embroiled in one. Another blog, another day.)  If that is your strategy to maximize project return, you are already acknowledging you are going to have some defeats in some battles, but hopefully not lose the war. (Though having a “standing army” of the right documentation (again, a different blog for a different day) is necessary to being a sovereign construction company (or project owner) in today’s world.)

Effective claims avoidance requires a plan that must be developed at the outset of the project during the “nuts & bolts” planning of the project. The first material step in developing the Risk Management Plan is to identify possible impediments to the success of the project. This is a large elephant and needs to be eaten 1 bite at a time. BUT, before even getting to that process, you must pick the right team members that will identify those (possible) risks, and who will then work through developing the Risk Management Plan. The team should have depth and breadth. Examples: Depth . . . team members should range from executive level personnel down to the key labor foremen on the project. Those tradesmen with boots on the ground are a construction company’s front line risk assessors and they have seen it all. The breadth should have a similar wide range, including the estimator who estimated the key parts of the project, and all the way to the safety coordinator, and perhaps even the shop manager. Perhaps the lead engineer or draftsperson?  Without these diverse perspectives and the information that can be provided, the resultant planning process will likely end in a myopic and distorted plan, ultimately being unsuccessful in its goal in maximizing project return via minimizing project risk.

It’s refreshing that this “team approach” to identifying risks and developing Risk Management plans is increasingly being used across a project, incorporating multiple organizations (owners, designers, contractors, etc.) in a collaborative fashion. Sadly, many of these planning processes, and the resultant plans, are defective because the teams are generally focused on the upper level management and executive level, and miss where the risk battles start, on the project front lines on a day to day basis among those with boots on the ground.  

 

Texas Court Clarifies What Is Required to Order a Party to Turn Over Hard Drives During Discovery

As with most complex commercial litigation, lawsuits over construction often involve investigations into electronically stored information (“ESI”). In Texas, a recent case has clarified the requirements necessary to order a party to turn over hard drives during disputes over production of ESI.

In 2013, a Texas Court of Appeals in Houston granted a writ of mandamus and vacated an order to compel production of computer and network hard drives.

In the lawsuit, several former co-owners of businesses had a falling out and sued one another alleging various claims. Central to the case was whether one of the parties had misrepresented his educational background to the other.

After several disputes regarding whether responsive ESI had been produced, the trial court issued an order requiring production of forensic images of the defendants’ computer hard drives and the drives of their network servers. Forensic images are digital duplicates of hard drives prepared used to prevent any changes being made to the original source of the ESI.

The defendants sought mandamus relief from the court of appeals, arguing the trial court had abused its discretion. They argued that the order was overly broad, giving the plaintiff “carte blanche to rummage through” their hard drives without any reasonable limits to address privilege, confidentiality, or privacy.

The court of appeals granted the writ of mandamus and vacated the order. It examined the Order in light of the applicable Texas Rules of Civil Procedure, as well as a seminal Texas Supreme Court case on electronic discovery, In re Weekley Homes, 295 S.W. 3d 309 (Tex. 2009). In Texas, courts have held that providing direct access to electronic information systems is particularly intrusive and should be discouraged. An order requiring electronic data storage systems to be turned over is not appropriate unless and until the moving party has shown that existing discovery responses were inadequate and the proposed searches of the storage systems could recover the relevant missing information.

In this case, the court found that a conclusory statement that “emails must exist” was insufficient to overcome the threshold question of whether there was an inadequate production. The moving party had to present actual evidence that the production was somehow deficient. Moreover, even with such a showing, the moving party had not shown that there was deleted relevant information which could feasibly be recovered by taking a forensic image of the hardware. To do so, the requesting party should have provided information from his forensic imaging expert as to why his methods would have produced relevant deleted information.

The court also examined the requests for production at issue, and found them insufficiently specific to justify the trial court’s order. The moving party made a blanket request for servers, tablets, and laptops, which was insufficient because it did not inform the opposing parties of the exact nature of the information sought.  Specific discovery requests must be aligned with the request for the production of hardware.

The widespread use of ESI to conduct business continues to require attorneys and courts to evaluate how far parties may go to uncover documents through discovery. This case suggests that a party seeking to search its opponents’ hard drives must prepare a detailed and thorough justification of the request before a trial court can permit the searches to proceed.

In Re Pinnacle Engineering, 405 S.W.3d 835 (Tex. App.—Houston [1st Dist] 2013, no pet.).

West Virginia Recognizes that Property Damage Caused by Defective Construction Is an “Occurrence” Under a CGL Policy

In July 2013, the Supreme Court of Appeals of West Virginia joined with a majority of states and ruled that defective workmanship resulting in property damage constitutes an “occurrence” under a standard Commercial General Liability (“CGL”) insurance policy. The case was styled Cherrington v. Erie Insurance Property and Casualty, Co.

The underlying case involved defects to a family’s home. There were three insurance policies in place: CGL, homeowners, and personal catastrophe. The lower court ruled that none of the three policies covered various defects in the home including an uneven concrete floor, water infiltration through the roof and chimney joints, and cracks in the drywall. The court found that these problems were economic losses and not property damage because the defects were caused by faulty workmanship, which was not an “occurrence” triggering coverage under a CGL policy.

The Supreme Court of Appeals reversed the decision, holding that property damage resulting from faulty workmanship is an “occurrence” under the CGL policy. In prior cases, the Court had held that faulty workmanship was not an occurrence under a CGL policy unless coverage is specifically included in the policy. It also had stated that CGL policies are not designed to cover poor workmanship. In this case, the Supreme Court of Appeals recognized that a majority of other jurisdictions had either legislatively or judicially found that poor workmanship was an occurrence under a CGL policy. The Court decided to join the majority.

The Court relied on two lines of reasoning. First, it examined the property damage in light of the policy’s definition of “occurrence,” which included an “accident.” The court found that faulty workmanship must be accidental because no contractor would hire subcontractors that would intentionally perform defective work. Thus, the property damage defective resulting workmanship was an “accident,” and therefore an “occurrence.” Second, the Court explained that excluding subcontractors’ defective work from coverage would violate the intent of the CGL policy, which is to provide coverage for subcontractors’ acts.

This case shows a continuing national shift towards expanding the scope of CGL policies and helps to resolve uncertainty about the scope of CGL policies in West Virginia.

Cherrington v. Erie Ins. Prop. & Cas. Co., 745 S.W.2d 508 (W. Va. 2013).

Admitting Animations into Evidence

Last week, before the Atlanta snowstorms so rudely interrupted my work week, I posted an article written by Ed Josiah from Nautilus Consulting regarding whether and how a construction lawyer can get what otherwise might appear to be a demonstrative exhibit admitted successfully into evidence.

Today, thanks to Paul McCullough at S-E-A -- another Forum sponsor -- we will walk through the  issues that Mr. Josiah raised using S-E-A's capabilities shown in the video above as our example.  I would like to thank Paul for giving Division 1 the right to use this video as a practical example to make the abstract more concrete.

S-E-A created this video from a point cloud.  Wikipedia defines a point cloud simply as "a set of data points in some coordinate system."  S-E-A uses a 3D scanner to create the point cloud you see in the video.  In essence and as Paul McCullough stated to me in an e-mail, "What you are looking at is not a 3D 'model' and it is not an animation.  [Instead] it is millions and millions of data points all with a relative x, y, and z location and a color.  The sum total of these millions of data points [is] the point cloud."  In other words, we have a three-dimensional survey of actual conditions at the project site -- not a modeled hypothesis of what someone believes exists at the project.

In identifying how to admit this point cloud into evidence and as Mr. Josiah's article stated, there are four factors to address to get this video admitted into evidence as an exhibit.  These factors are:

• Witness Competence to testify about the exhibit
• Relevance of the exhibit to an issue or issues in the case
• Proper Identification of the exhibit
• Trustworthiness/Authentication of the exhibit

Let's discuss each briefly after the jump.  For our discussions, we will assume that we have allegations of excessive slab deflection for a poured-in-place concrete floor.

Demonstrative Evidence: Evidentiary Issues & Laying a Proper Foundation

In this post, we are reprinting an article (with the author's permission) that Ed Josiah, the Forum's tech guru from Nautilus Consulting, wrote regarding how attorneys can lay a proper foundation to turn what otherwise would be considered as demonstrative evidence into substantive evidence that a jury or fact finder can rely on in reaching its decision. Later this week, we will be using an example of this type of presentation to walk through the issues that Mr. Josiah raises in a practical manner.  At any rate, after the jump is Mr. Josiah's excellent discussion of these issues.

Information regarding the Division I Program in the Bahamas

The Division 1 program for the Mid-Winter meeting, entitled "How to Catch Flies – With Honey or a Fly Swatter?  Negotiation Tactics and Strategies," will consist of a panel discussion of various negotiation strategies and tactics designed to assist in the favorable resolution of disputes.  Panelists will include Frank Adams, Interface Consulting International Inc., Houston, TX;  Devon Coughlan, Conflict Solutions, Raymond, ME;  and George Meyer, Carlton Fields PA, Tampa, FL.  Scott Griffith of Griffith Davison & Shurtleff PC in Dallas, TX will moderate.

The decision of how one should approach and handle a dispute, especially when engaging the opposing party, can mean the difference between success and failure from a settlement perspective.  As with first impressions, the approach you take can have lasting consequences and will certainly impact the probability of a successful resolution.  Whether you have been negotiating disputes for years, or are still learning the ropes, we welcome you to join Division 1 in what will undoubtedly be a lively, informal discussion lead by an esteemed panel of experts in the field of negotiation strategies and techniques.

See you at Paradise Island! 

In Texas, Contractual-Liability Exclusions Do Not Exclude Coverage for Property-Damage Claims Based on Failure to Perform Work in a Good and Workmanlike Manner.

The Texas Supreme Court recently held that insurance coverage for property damage resulting from violations of a general contractor's contractual duty to perform work in a good and workmanlike manner are not excluded by the standard exclusion for "contractual liability" in a commercial general liability policy. Ewing Const. Co., Inc. v. Amerisure Ins. Co. --- S.W.3d ----, 2014 WL 185035 (Tex. Jan. 17, 2014).

 In Ewing, a general contractor had constructed some tennis courts for a school district. After construction was completed, the tennis courts began cracking and became unsuitable for use. The school district sued the general contractor for repairs, claiming the work had not been performed in a good and workmanlike manner.  

The general contractor sought defense and indemnity from its liability insurer, but the insurer denied coverage. In the ensuing coverage lawsuit in federal court, the insurer relied on the contractual-liability exclusion in the policy to deny it had any obligation to defend or indemnify the general contractor. 

Contractual-liability exclusions are common in commercial general liability policies in Texas.  The provision at issue in Ewing excluded coverage for property damage "for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.” The construction contract with the school district required the general contractor to perform its work in a good and workmanlike manner. As the school district claimed the problems with the tennis courts resulted from the general contractor's failure to meet this standard, the insurer argued the contractual-liability exclusion applied. 

The district court granted summary judgment in favor of the insurer based on the contractual-liability exclusion. The Fifth Circuit initially agreed with the district court, but then vacated its opinion and certified the question of whether the exclusion applied to the Texas Supreme Court. The Texas Supreme Court held that the exclusion does not apply.

Central to the Court’s decision was an opinion issued several years ago that interpreted the contractual-liability exclusion. In Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, a contractual-liability exclusion excluded coverage for claims based on liability outside of what the general contractor would have had absent the contract. 327 S.W.3d 118 (Tex. 2010). Specifically, the contractor in Gilbert had agreed to assume liability for damage caused to adjacent landowners' property. 

The Ewing Court distinguished its holding in Gilbert by pointing out that Gilbert addressed whether a CGL policy’s contractual liability exclusion applied to exclude indemnity coverage for a third party’s property-damage claim where the only basis underlying the claim was the insured’s contractual agreement to be responsible for the damage. The contractual agreement at issue in Gilbert specifically obligated Gilbert to repair or pay for damage “resulting from a failure to comply with the requirements of th[e] contract,” thus extending Gilbert’s obligations beyond what would exist under general principles of law.

            In Ewing, the general contractor's agreement to construct the work in a good and workmanlike manner did not enlarge its obligations beyond any general common-law duty it might otherwise have. In Texas, contractors are obligated to perform their work with skill and care even absent an express contractual provision requiring them to do so. The Court reasoned that the exclusion “means what it says,” and excludes liability for damages the insured assumes by contract, such that “assumption of liability” means liability for damages that exceeds the liability an insured would have under general law.  Thus, the Court concluded that a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract and does not “assume liability” for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion. 

            This decision is generally positive for contractors insured under CGL policies in Texas, as it reduces the substantial uncertainty about coverage of property-damage claims based on construction defects that arose after the Gilbert decision was issued in 2010. However, as the Court acknowledged in Ewing, CGL policies are not performance bonds. Claims based on faulty workmanship are often excluded from coverage by other exclusions specific to the construction industry. For example, CGL policies often exclude claims for property damage to the insured's own work under the "your work" exclusion.

Forum Webinar: Choosing Between Judge, Jury and Arbitrator: What’s the Real Difference?

Choosing Between Judge, Jury and Arbitrator: What’s the Real Difference?

Live Webinar:
Thursday February 6 - 1 pm ET
Click HERE to register

Join trial communication and strategy experts along with a construction trial attorney experienced in persuading judges, juries, and arbitrators to answer the following questions:
• Which fact finder is more likely to favor equities over the dictates of the law?
• Which fact finder is better suited to handle highly technical cases?
• Which fact finder is more likely to award reasonable damages?
• Which fact finder is more likely to have anti-corporate bias?


Register for the latest CLE specialty program from the American Bar Association here: http://apps.americanbar.org/cle/programs/t14cbj1.html?sc_cid=CET4CBJ-C

Great Div 1 Lunch Program on Negotiation Tactics and Strategies

Seventh Circuit (Posner, J.) Allows Limited Discovery To Proceed In US District Court Action Despite Parallel International Arbitration

In GEA Group AG v. Flex-N-Gate Corporation, Shahid Khan (decided 1/10/2014), the Seventh Circuit allowed limited discovery to proceed in an action brought in U.S. District Court despite the fact that an international arbitration was pending between the same parties on the same issues in Germany before the Arbitral Tribunal of the German Institution of Arbitration. 

The U.S. District Court action was different in that GEA named "Flex-N-Gate's CEO, board chairman, and controlling shareholder, the American billionaire Shahid Khan" as a defendant on various grounds from piercing the corporate veil to fraudulent inducement into the contract. The Seventh Circuit permitted the limited discovery because Shahid Khan was not a party to the arbitration or signatory as an individual to the arbitration agreement.  Judge Posner wrote for the Court:

Since fraud is a tort, GEA is entitled to make it the subject of a lawsuit.  But it is a serious charge and Khan is entitled to defend himself against it, which he can't do, it appears, without being able to conduct discovery.  Discovery may yield evidence germane to the arbitration as well, but if so - and, more to the point, if it yields evidence favorable to Flex-N-Gate - that is a consequence that GEA will have brought upon itself by its decision to sue Khan.  You cannot sue someone and prevent him from defending himself.

This case is an interesting read.  Judge Posner's opinion goes over the procedural history of the dispute commenting throughout in a direct manner about the strategic maneuvering and inter-relationship between international arbitration and US proceedings.

Relying upon Section 3 of the FAA, GEA had a sought a stay in the federal court proceeding mainly because it asserted that it would be prejudiced if Flex-N-Gate could use the discovery in the German arbitration (where such discovery would not be permitted).  A repeated theme and tone of the opinion was that GEA's federal court action may have been premature.  In addressing GEA's argument concerning the use of discovery, the Court wrote:

The ground is that Khan will convey the fruits of his discovery to Flex-N-Gate for use against GEA in the do-over arbitration proceeding.  But that is not a proper concern of the district court, or of this court.  It is the concern of the foreign arbitrators and the foreign courts.  Should Flex-N-Gate try to inject evidence into the arbitration from discovery conducted by Khan in the district court suit, GEA can object and the arbitrators will decide.  What business is it of an American court?  It was GEA that invoked German arbitration.  By doing so, it subjected its claim of breach of contract to the German arbitrators and judiciary.  If the arbitrators allow the fruits of Khan's discovery into the arbitration, and in doing that they are violating German law, there is always the High Regional Court in Frankfurt, and, if necessary, the Federal Court of Justice, for GEA to appeal to.

Read the opinion and let us know what you think. 

Join Us For The Division 1 Dinner - Bahamian Club Restaurant (1/30/2014, 8:30PM)

For those who are attending the Forum's Mid-Winter Meeting later this month in the Bahamas, email Tony Lehman (Anthony.Lehman@dlapiper.com) to sign-up for Division 1's Dinner on Thursday night (January 30, 8:30 PM).  Guests are welcome. 

Our dinner will be at the Bahamian Club at Atlantis.  It will be a price fix menu ($89 per person plus 15% gratuity). 

The three-course dinner menu is below:

Appetizers

Club House Salad or Bahamian Conch Chowder

Entrees

Sirloin Steak (14 oz) or Grilled Double Chicken Breast or Grilled Swordfish

Desserts

Coconut Creme Brulee or Chocolate Passion Fruit Tart

Email Tony now to reserve your spot.  See you in the Bahamas.