R.I. Supreme Court Overturns Arbitration Award - Manifest Disregard Lives On

It is a rare event for a court to vacate an arbitration award, but the Rhode Island Supreme Court in the recently decided opinion Nappa Construction Management, LLC v. Flynn, No. 2015-211-Appeal, --- A.3d--- (R.I. Jan. 23, 2017) held that vacatur was warranted. In reaching this outcome, the Court was divided 3 justices to 2 with a filed dissent.

The underlying case concerned the construction of automobile repair shop that did not proceed smoothly.  The focal issue was the cement floor and foundation. The owner was displeased with the installation and ordered the contractor to stop work.  Nonetheless, the contractor submitted a pay application for the floor work, which went unpaid by the owner.  The contractor, claiming material breach for non-payment, terminated for cause. The owner sued the contractor for wrongful termination. The case ultimately ended up in arbitration with the contractor claiming it was owed for work performed.  There, the arbitrator held that both parties were at fault and therefore the contractor could not terminate for cause. Instead, the arbitrator held that the contractor terminated for convenience by the contractor. As such, the arbitrator awarded the contractor its fair and reasonable value of the work performed.

The parties next applied to superior court with the owner moving to vacate the award while the general contractor moved to confirm.  The superior court confirmed and the owner appealed arguing that the arbitrator "manifestly disregarded a contractual provision by holding that the contract was terminated for convenience" by the contractor.

The majority of the Court agreed with the owner.  The three justices acknowledged that "judicial review of arbitration awards is extremely limited," but held that the case met the threshold for vacatur under the R.I. General Laws.  The Court explained that where "the arbitration award fails to ‘draw its essence from the agreement, if it was not based upon a passably plausible interpretation thereof, if it manifestly disregarded a contractual provision, or if it reached an irrational result" the Court must vacate the award.  Here, the majority concluded that the arbitrator exceeded his authority by "manifestly disregard[ing] a contractual term or ignor[ing] 'clear-cut contractual language.'” In sum, because the AIA contract's termination for convenience clause could only be exercised the owner completely in the owner's discretion, the arbitrator had ignored and manifestly disregarded that distinction by applying the clause in favor of the contractor.  Accordingly, the Court ordered the award vacated.

As for the dissent, the two justices focused on the great deference the Court affords to an arbitrator's decision and that "review of the contract as a whole reveal[ed] that the arbitrator's award did not exceed the language of the agreement." In essence, because the clause was present in the contract and the arbitrator did not create the contractual basis out of whole cloth, the dissent was satisfied that arbitrator could interpret and apply the contract as such.  And at the least, the dissent concluded, this Court was not empowered to second guess that interpretation.

Putting aside that this case was decided under state law, it is important to note that in the federal sphere, under the Federal Arbitration Act 9 U.S.C. §§ 10 & 11, the "manifest disregard" rationale for vacating an arbitration award has more limited applicability and not all Circuits recognize the standard.
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Massachusetts Appeals Court Awards Attorneys’ Fees for Public Works Bond Claim and then Vacates Fees for Unfair and Deceptive Business Practice Claim

The Plaintiff in Aggregate Industries – Northeast Region, Inc. v. Hugo Key & Sons, Inc., 90 Mass.App.Ct. 146 (2016) contracted with the Defendant to supply and install asphalt for a public works project in Salem, Massachusetts.  The project’s Defendant general contractor furnished a payment bond as required by state statute (Bond Statute).  In January of 2011, the Plaintiff submitted a bid for the asphalt scope of work that contained two qualifications: 1) costs for additional grader services at $400/HR, and 2) the cost of asphalt material would escalate accordingly with the price of liquid asphalt.

The Plaintiff submitted two revised bids in May 2011, neither of which were accepted by the Defendant because of the asphalt escalation clause.  With no agreement in place, the Defendant sent a purchase order to the Plaintiff in mid-May 2011 for the revised bid price but did not include the grader costs or escalation clause.  The Plaintiff returned the purchase order marked up to include the grader unit costs and escalation clause which the Defendant immediately rejected.  The Defendant then issued another purchase order which identified the unit cost of asphalt in order to expressly exclude the escalation clause. Plaintiff signed this purchase order and executed the work.  During the course of the project, the Defendant required the Plaintiff to perform grading activities which the Plaintiff completed and subsequently submitted pricing with the $400/HR unit cost.  The Plaintiff submitted its final invoice on July 6, 2011 in the amount of $89,989.90, $11,400 of which was for the grader rental and asphalt escalation costs.  With not payment received as of October 31, 2011, the Plaintiff filed a complaint in Superior Court.

The Plaintiff’s complaint alleged breach of contract and quantum meruit claims under the state’s Bond Statute.  The complaint also contained claims for violations of the state’s unfair and deceptive business practice statute (Business Statute) for withholding payments due at the completion of the project.  Following the filing of the complaint, the Defendant issued a check to the Plaintiff for $68,525.40 and offered to negotiate for reasonable grader costs.  The Plaintiff refused the payment and the Defendant then counterclaimed violations of the Business Statute.

The trial court found that the contract entered into by the parties did not contain the asphalt escalation clause nor the $400/HR grader unit cost, but under the quantum claim, the Plaintiff was entitled to reasonable grader cost in the amount of $7,125. The trial court further found that “fairness would be the victim” if recovery under the Bond Statute and its attorneys’ fees were allowed.  The trial court reasoned that the Defendant was “ready, willing, and able to resolve at [a] fair and reasonable” cost the disputed work. The trial court also ruled for the Defendant on the cross-Business Statute claim calling the Plaintiff’s claims under the Bond Statute “extortion.” Instead of awarding damages under the Business Statute, the court withheld pre and post-judgement interest on the quantum claim and then awarded attorneys’ fees to the Defendant in the amount of $67,319.  The Plaintiff appealed.

The Massachusetts Appeals Court examined the case and found the trial court’s finding of fact accurate that a valid contract did exist which excluded the asphalt escalation clause and grader unit costs of $400/HR.  Accordingly, no breach of contract occurred based upon the Defendant's issuance of payment for the base contract scope of work.  The Court next reviewed the Bond Statute claim and the Plaintiff’s claims for attorneys’ fees under that statute.  The Plaintiff argued that the once the trial court found damages in quantum for the grader rental, the Bond Statute provision of attorneys’ fees must apply because the elements of the statute were satisfied.  The Court agreed.

The Court reviewed the Bond Statute’s elements along with its attorneys’ fees provision which requires a judgement in favor of a claimant “shall include reasonable legal fees.” The Court found the Plaintiff plainly met the requirements by 1) filing an action with the Superior Court, 2) within the one-year period from completion of the work, 3) which alleged nonpayment within sixty-five days of the last invoice, and 4) prosecuted the claim "to final adjudication and execution for the sums justly due the claimant as provided in this section."  Accordingly, the Court found the compulsory usage of “shall” required the award of attorneys’ fees to the Plaintiff.

The Court next reviewed the Plaintiff’s argument that its refusal to negotiate with the Defendant over the asphalt escalation and grader unit costs “did not constitute unfair or deceptive acts or practices in the course of trade or commerce” as required by the language of the Business Statute.  The Court once again agreed with the Plaintiff finding that “ordinary contract disputes, or the failure to negotiate a settlement in lieu of litigation, however, typically fall outside the reach of the statute.” The Court further mused that even if the Plaintiff’s claims were weak, it was within its rights to file suit and litigate them.

The Court remanded the Bond Statute claim back to the trial court to award of pre and post-judgement interest plus reasonable attorneys’ fees and then vacated the award of attorneys’ fees for the Defendant’s Business Statute claim.

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based in Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com

Fees to the Prevailing Party: Tennesse and the American Rule

I’Ashea Myles-Dihigo
Hagan Law Group, PLLC

Tennessee generally follows the American Rule regarding the payment of attorneys’ fees, which permits the recovery of fees in very limited situations. Many clients are disappointed when they win their case but still have to pay their attorney’s fee.

 

Contractual provisions, which provide for attorneys’ fees, have become a regular practice in contract drafting to hedge against the outcome of American Rule for the prevailing party.  These provisions are a very important consideration for construction industry clients and were the discussion of a recent Tennessee Court of Appeals case.

 

In Barrett v. Ocoee Land Holdings, LLC the Court strictly construed the terms of the parties’ construction contracts regarding a claim for an award of attorneys’ fees.  In that case, the homeowners sued the homebuilder, real estate developer, and other individuals involved in those entities related to the purchase of, and planned construction of a house on a lot in a subdivision.  The homeowners sued under various theories including breach of contract, civil conspiracy to commit wrongdoing, the Consumer Protection Act, and the Fraudulent Conveyance Act.  The case was tried before a jury, and the homeowners lost their claims.  There was a provision in the contract between the homeowners and defendants, which provided an award for attorneys’ fees for the prevailing party.  The jury never heard any proof about the attorneys’ fees, and there was no space on the jury verdict form for an award of fees.  The trial court reserved the issue of fees and ultimately denied defendants’ claim for an award of attorneys’ fees and expenses.

 

The defendants appealed the decision of the trial court, and the Court of Appeals reversed.  The Court of Appeals held that, “Tennessee allows an exception to the American Rule where the contract specifically or expressly provides for the recovery of attorneys fees.” The Court went on to explain that the litigation between the parties fit the exact situation contemplated by the fee provision, as the parties contract stated that they “agree to an award of reasonable attorney’s fees and expenses to the prevailing party in litigation ‘arising out of [the] Contract.”  Based on the terms of the contract, the defendants were ‘each entitled to the enforcement of their contractual right to recover reasonable attorney’s fees and expenses’ under the ‘plain terms of the attorney’s fee provision.’”

 

So, at least in Tennessee, those prevailing party fee provisions in construction law contracts are very important to the outcomes in litigation as an exception to the American Rule.

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The author, I'Ashea Myles-Dihigo, is a contributor to The Dispute Resolver and Of Counsel Attorney with Hagan Law Group, PLLC based in Murfreesboro, TN.  She may be contacted at 615.546.4066 or iashea@hanganlg.com.

Part of Contractor's Settlement Payment Covered by Insurer under the Duty to Defend

The California Court of Appeals in Navigators Specialty Insurance Co. v. Moorefield Construction, Inc. concluded that a general contractor's general liability (CGL) insurer must pay the general contractor for at least part of its settlement obligation notwithstanding there was no coverage.

The general contractor entered into a contract with the owner to construct a Best Buy store.  Years after the project was completed, the owner of the building sued the general contractor (and others) for breach of contract and negligence based on "claims the flooring had failed." The insurer accepted tender of defense from the general contractor with a  reservation of rights.

During the litigation it was revealed that the "flooring tiles had been installed on top of a concrete slab that emitted moisture vapor in excess of specifications." Worse, evidence came out that the general contractor knew about the excessive moisture vapors, but had directed its subcontractor to install the flooring anyway. The cost to repair the floor was $377,404.  The general contractor settled for $1,310,000. The insurer contributed the policy limits of $1 million and then filed suit that it had no duty under the policies to defend or indemnify the general contractor.

After a non-jury trial, the court agreed with the insurer and ordered the general contractor to reimburse the insurer for the entire $1 million that the insurer paid. The general contractor appealed and the Court of Appeals reversed in part.

The Court was faced with two questions - was the floor failure an "occurrence" giving rise to coverage? And did the supplementary payments provision of the policies require the insurer to still pay a part of the settlement?


For the first question, the Court answered "no" because "occurrence" under the policies was defined as an "accident." There could be no accident from the general contractor's deliberate act. As such: the insurer had no duty to indemnify the general contractor for damages and "was entitled to recoup that portion of the $1 million paid toward settlement that was attributable to damages."

As for the second question, however, the Court held that the standard CGL provision--"with respect to any claim . . . or any `suit' against an insured we defend," the insurer will pay "all costs taxed against the insured"--did require the insurer to pay for settlement "costs" and that those costs includes attorneys' fees when there, as here, was a "prevailing party attorney fees under a contract."  The Court concluded that the insurer's "duty [to defend] was not extinguished by the determination that [the insurer] had no duty to indemnify" for the damages the insured caused. The case was remanded "for a new trial limited to the issue of the amount of the $1 million paid by [the insured] that is attributable to damages, not attorney fees and costs of suit under the supplementary payments provision."
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Florida Court’s Decision Should be a Caution to General Contractors to Precisely Follow a Performance Bond’s Procedural Requirements

In Arch Insurance Company v. John Moriarty & Associates of Florida, Inc., 2016 U.S. Dist. LEXIS 172173, the U.S. District Court for the Southern District of Florida granted Summary Judgment to a surety after finding that a general contractor did not satisfy the procedural requirements of a performance bond before it submitted a bond claim.  The Defendant was a general contractor who subcontracted the bond’s principal to furnish labor and materials on a project.  The subcontract required the provision of a performance bond which the subcontractor acquired through the Plaintiff.  At some point during the course of the project, the Defendant notified the Plaintiff that it was considering to declare the subcontractor in default. Later at the completion of the contract, the Defendant demanded a $995,239.83 payment from the Plaintiff on the bond due to the performance of the subcontractor.

The terms of the performance bond addressed specific procedures that must have been followed in the event of the subcontractor’s termination for default.  The bond required that: 1) Notice be provided to the subcontractor and Plaintiff that Defendant is, “considering declaring a Contractor Default”; 2) "Declares a Contractor Default, terminates the Construction Contract and notifies [Plaintiff]"; and 3) "Agree[s] to pay the Balance of the Contract Price…to [Plaintiff] or to a contractor selected to perform the Construction Contract." Once those three condition precedents had been met, the bond required that the Plaintiff be given the opportunity to mitigate its damages through arranging for the completion of the defaulted work.  Finally, seven days’ notice must be provided before Defendant can make a demand on the bond. 

The Court found the first requirement was met by Defendant when it alerted the Plaintiff that it was considering declaring a default.  The Court then went on to find that none of the other bond’s default or termination requirements were met.  The Defendant never declared the subcontractor to be in default, never terminated the subcontractor, nor paid the contract balance to the Plaintiff to complete the work.  In fact, the Defendant admits in its response that it, "did not declare [subcontractor] in default, did not terminate the Subcontract, and continued to administer the Subcontract substantially as it had before the Pre Default meeting, with a few additions." The Court stated that, “There can thus be no dispute that [Defendant] never allowed [Plaintiff] to mitigate its damages by arranging for the completion of the subcontract itself. By depriving [Plaintiff] of its completion options, [Defendant] materially breached the bond.”

In its ruling, the Court found that the Defendant failed to comply with the terms of the bond and as a result the Plaintiff was not liable for the nearly $1 million demand.  

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based in Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com

The AAA Permitted to Pull Rank to Disqualify a Named Arbitrator

In the recently decided case, LD Miller Construction, Inc. V. Kirschenbaum, - P.3d - (N.M. App. Dec. 1, 2016) the Court of Appeals of New Mexico affirmed the hearing justice's order that the American Arbitration Association ("AAA") indeed could disqualify an arbitrator from arbitrating a dispute between a contractor and homeowners for the failure of the arbitrator to follow the AAA Rules.

The Homeowners hired the Contractor to do concrete and framing work on their property in Santa Fe, New Mexico.  Contractor completed the work, but the Homeowners disagreed that is was done properly.  They hired someone else to correct the work.  A short time later, the Contractor submitted an invoice for the concrete and framing work to the Homeowners.  The Homeowners only paid half of what was claimed owed by the Contractor.  Apparently in recognition that a dispute had arisen, about two weeks later, the Homeowners and Contractor entered into an arbitration agreement:

Contractor and Owner agree to binding arbitration under AAA (American Arbitration Association) for any dispute (claim, work, material, etc.) between Contractor and Owner . . . . Contractor and Owner agree that the designated arbitrator shall be Roger Lengyel.

Fast forward two years later, the Contractor filed a complaint in court for the unpaid amount.  The Homeowners answered with an affirmative defense that the action must be dismissed in light of the arbitration agreement. The Court agreed and issued an order that stated in pertinent part:

the parties are compelled to arbitrate this matter pursuant to the terms of the arbitration agreement, requiring binding arbitration under the [AAA] with . . . Roger Lengyel as the designated arbitrator.

The parties attempted arbitration but it quickly devolved with the Contractor sending a letter to the AAA requesting disqualification of the arbitrator for non-neutrality.  According the Contractor, the arbitrator was having ex parte communications with the Homeowners and setting rules that only served to delay the arbitration (which benefited the Homeowners). The Homeowners insisted that the Court's order had designated the named arbitrator and usurped AAA's power to disqualify him.  The AAA sought clarification from the court.  The hearing justice concluded based on the language of the order that the AAA could disqualify. AAA did just that.  The Homeowners appealed.

On appeal, the court applied New Mexico contract law for the interpretation and construction of the agreement. Because neither party argued that the agreement was ambiguous, the court simply was to determine "what do the words of the agreement mean and what is their legal effect"? The Homeowners argued for an "integral-ancillary" bifurcation of the agreement under the Rivera v. Am. Gen. Fin. Servs., Inc., 259 P.3d 803 (N.M. 2011).  They claimed that because the designation of the arbitrator was introduced with the precatory "shall be Roger Lengyel," this provision is integral and must be abided, whereas the "under the AAA" was merely ancillary. The Court explained that Rivera was limited to its facts, where the parties had "clearly intended to use a designated institutional arbitration provider" but that provider no longer existed. As a result, the Rivera court held that the arbitration provision would have to stricken in its entirety because arbitrating with the chosen provider was integral to the agreement and the section could not be rewritten by the court.  The Court continued that the instant dispute was much different. To treat the two cases as the same "would unreasonably treat as equivalent an unavailable arbitration provider and a disqualifiable arbitrator" with an available provider. Plus the Court noted that Rivera did not even get to the issue presented by the Homeowners -- weighing the relative value of two, separate provisions.

In the Court's de novo review of the agreement's language, the Court held that "most reasonable construction of this language is that 'under AAA' incorporates all of the AAA rules normally applicable to proceedings held under AAA's auspices." There was nothing in the agreement that limited the AAA's powers or made certain rules inapplicable.  The Court acknowledged that the use of "shall" to designate the arbitrator is strong evidence that the parties agreed to use him. However there was nothing in agreement that this arbitrator could be non-neutral, which is contrary to the AAA rules. If this arbitrator could be non-neutral in violation of the AAA Rules, then it would "potentially cause [the Rules] to have no meaning." In sum, the Court held that "The most natural construction of the Arbitration Agreement is that the parties intended to arbitrate disputes between them concerning [the Contractor's] construction work under all of the AAA rules, with Lengyel serving as a neutral arbitrator. To interpret the Arbitration Agreement designating Lengyel to trump the AAA rule permitting replacement of a neutral arbitrator in certain circumstances would risk rendering the AAA Rules meaningless." Accordingly, the hearing justice's order and the AAA's disqualification were affirmed.

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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Certified, Schmertified: Federal District Court Rules Against Subcontractor’s Breach and Quantum Claims Due to its Fraudulent Davis-Bacon Payrolls

The Plaintiff in METRIC ELECTRIC, INC., v. CCB, INC. and THE HANOVER INSURANCE COMPANY was an electrical subcontractor who was contracted by the Defendant to provided electrical services for a GSA project at the John F. Kennedy Federal Building in Boston. The subcontract was executed on December 2, 2013 for a value of $1,380,301 with the project to be completed over four phases.  The project fell under the Davis-Bacon Act which required that working tradesmen be paid the geographically designated Department of Labor prevailing wage rate.  The Davis-Bacon Act, along with the subcontract, required that subcontractors submit weekly payroll reports that certify under signed oath the tradesmen on the project were paid for all hours worked for the appropriate prevailing wage. In accordance with the Davis-Bacon Act and the specific language in the subcontract, the Plaintiff submitted signed certified payrolls during the course of the project from December 21, 2013 until April 26, 2014.

In March of 2014, six employees of the Plaintiff filed a lawsuit for unpaid wages in Massachusetts District Court and summary judgement was issued on April 6, 2014 in favor of the employees.  When the Defendant learned of this judgement, it advanced funds to the Plaintiff to pay the back wages, but ultimately the Plaintiff’s employees quit the project on April 23, 2014. The Defendant later found that the funds it provided were not paid to the employees until three months later in July 2014.  On May 16, 2014, the Defendant put the Plaintiff on notice of breach for failure to maintain schedule, and then formally terminated the Plaintiff on June 10, 2014, citing the failure to pay wages and to timely perform the contract schedule.  At the time of termination, Plaintiff had only completed 75% of the Phase I work and was 44% complete on the entire job.

In May of 2015, the Plaintiff filed suit against the Defendant in federal district court for: 1) breach of contract; 2) quantum meruit; 3) violation of the Miller Act; and 4) violation of the Massachusetts unfair business practices act. Defendant counterclaimed for breach of contract and violation of the unfair business practices act, plus a cross-complaint against the Plaintiff’s owner for fraud.

The Court began its analysis of the Plaintiff’s claim by simply stating that the Plaintiff’s failure to pay its employees in a timely fashion, as required both by the Davis-Bacon Act and the subcontract, was a material breach.  That material breach in turn relieved the Defendant of any duty to make payments on the contract to the Plaintiff.  The Court then rejected the Plaintiff’s argument that the act of the Defendant paying the employee’s back wages constituted waiver of that breach.  The Court discounted this argument by stating there was no “clear, decisive, and unequivocal conduct” indicating waiver by the Defendant.

The Court next reviewed the Plaintiff’s claim in quantum meruit for $158,823.14 in work it claimed to have performed before its termination.  To start this analysis, the Court pointed to the maxim of Equity that, “a party coming before the court seeking equitable relief must do so with clean hands.”  The Court declared that the Plaintiff in this instance not only failed to follow Federal law, it also failed to adhere the terms of the subcontract by paying its tradesmen in a timely fashion, and it finally then filed perjured certified payrolls, compounding the issues.  As such, a claim in equity for “quantum meruit…is a nonstarter.”

Based upon its ruling on the first two counts of the complaint, the Court rejected the Miller Act and unfair business practices claims outright and granted Summary Judgment in favor of the Defendant.

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based in Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com

No Flow-Down of a Waiver of the Statute of Limitations to Subcontractor

In the matter Hensel Phelps Construction Company v. Thompson Masonry Contractor, Inc. et al. the Supreme Court of Virginia considered whether a subcontract waived the applicable statute of limitations--meaning there was no time restriction to filing a lawsuit--by incorporating by reference the prime contract between the general contractor and the Commonwealth. The Court held that there was no waiver and therefore the general contractor's lawsuit against the subcontractors was time barred by the applicable statute of limitation.

The underlying project was for the construction of a health and fitness center at the Virginia Tech campus in Blacksburg, Virginia. The general contractor entered into the $15 million contract with Virginia Tech, a Commonwealth agency. By law, no statute of limitations period can run against Virginia Tech. Va. Code section 8.01-231. By contract, the prime contract stated that: Except

as otherwise specified, all work shall be guaranteed by the [general contractor] against defects resulting from the use of inferior materials, equipment or workmanship for one (1) year from the date of final acceptance of the entire project by [Virginia Tech] in writing[.]

Nothing in this section shall be construed to establish a period of limitation with respect to any other obligation which the [general contractor] might have under the Contract Documents, including liability for defective work under [the Warranty provisions].

In sum, besides the 1-year warranty, there was no statute of limitations applicable to claims or disputes under the prime contract.
The project undisputedly was finished in 2000. Twelve years later in April 2012, Virginia Tech found variety of construction defects, repaired them, and then brought a claim against the general contractor to recover over $7 million. The general contractor looked to its subcontractors for these repair costs. When they refused, the general contractor settled with Virginia Tech for $3 million, and then sued all its implicated subcontractors. The subcontractors invoked the statute of limitations, which in Virginia, is five years for an action on a written contract. Va. Code § 8.01-246(2).

In turn, the general contractor pointed to its subcontracts' flow-down provision, which stated that "[t]he subcontractor is bound to the [general contractor] by the same terms and conditions by which [the general contractor] is bound to [Virginia Tech] under the [prime] contract," and that the subcontractor's warranty period covers any time "prior to [the general contractor's] release from responsibility to [Virginia Tech] therefor as required by the Contract Documents." The general contractor argued that because the general contractor was obligated to Virginia Tech on its claims brought 12 years after the project concluded, the subcontractors too were subject to claims from the general contractor.

Virginia's highest court sided with the subcontractors holding that any waiver of a known right must be "express" in that it reflects both knowledge of the right and the clear intent to relinquish the right. It need not be in writing. Here, the Court continued, the subcontract incorporation by reference neither acknowledged the 5-year statute of limitation nor the clear intent to waive the benefit of the statute. Moreover, just because the prime contract was silent on the statute of limitations, the subcontract could not be held to incorporate a statute that existed outside the prime contract. As a result, the Court held that the statutory waiver of the statute of limitations was not incorporated into the subcontracts, the 5-year period had run, and therefore the general contractor had no claim against the subcontractors.

As an alternate argument, the general contractor focused on the accrual date for the claim. It argued that its claims against the subcontractors, which sounded in indemnification, did not accrue until it settled with Virginia Tech. But because Va. Code § 8.01-246(2) states that the accrual is "when the breach of contract occurs in actions ex contractu and not when the resulting damage is discovered," this too was a dead end for the general contractor. Another statute Va. Code § 8.01-249(5) for "actions for contribution or indemnification," established accrual when "the contributee or the indemnitee has paid or discharged the obligation." But, here, the indemnification provision in the subcontract was rendered void because it could be read as requiring indemnification for the general contractor's own negligence. The Court disagreed that other parts of the subcontract, cobbled together, could give rise to independent cause of action for indemnification. So again, the general contractor could not proceed with its lawsuit.

The lesson learned is that explicitness in a follow-down provision is necessary if a waiver of rights is involved.
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Surety’s Motion to Stay ‘Little Miller Act’ Claim Until Resolution of General Contractor's Owner Claim Is Rejected by D.C. Court

In an effort to protect subcontractors on public works projects, the District of Columbia joined other states in enacting a statutory structure entitled the ‘District of Columbia Little Miller Act’ (DCLMA).  This and the other Little Miller Acts throughout the country are modeled after the Federal Miller Act which requires a general contractor on a public works project to secure a payment bond before work can commence on a project.  The intent of the Little Miller Acts is to provide subcontractors who do not received full payment from a general contractor a means to recover when a mechanic’s lien is not available due to the owner’s sovereign immunity protection.  Like the Federal Miller Act, the DCLMA has a 90 day accrual window from the last day of labor or material furnished until a subcontractor or supplier can submit a claim on a payment bond if full payment is not received.  This 90 day accrual period is to ensure a prompt resolution for the subcontractor.  In Strittmatter Metro,LLC v. Fidelity and Deposit Company of Maryland et al, U.S. District Court for D.C. ruled on whether a DCLMA payment bond claimant must exhaust dispute resolution procedures set out in the prime contract between the owner and general contractor before it can recover for non-payment.

The plaintiff in Strittmatter is a site contractor who was contracted by a general contractor (GC) for work at the Ballou Senior High School in the amount of $4.9 million.  The Master Subcontract Agreement contained provisions allowing for the expansion of the scope of work as the project progressed. The plaintiff claims that it performed its contractual scope of work and is owed additional payments in excess of $1.2 million and has made a claim on the GC furnished payment bond in accordance with the DCLMA.  The GC’s prime contract with the District contains dispute resolution procedures which include mandatory mediation. If mediation fails, all disputes are then brought to the District of Columbia’s Board of Contract Appeals.  The GC has initiated a claim against the District and entered into this mediation.  The GC’s claim is inclusive of the plaintiff’s $1.2 million claim as well. The defendant is the payment bond issuer and has submitted a motion to dismiss or stay the DCLMA action pending resolution of the GC’s claim with the District.

The defendant argues that due to a clause in the plaintiff’s subcontract which fully integrates the terms of GC’s prime contract, the plaintiff must enter into the mediation and District of Columbia’s Board of Contract Appeals procedures outlined in the GC’s contract.  To counter, the plaintiff points to a clause in the prime contract that states the District is not in privity with any subcontractors and as such subcontractors cannot seek compensation from the District.  Plaintiff contends that as a result of this, it is not possible for it to enter into a dispute resolution procedure that is not available to it. The Court reviewed Miller Act case law and found that the intent of the Miller Act is to deal with this lack of privity between the government and a subcontractor; the payment bond is there to bridge that gap and protect the subcontractor.  The Court further found that the District’s prime contract language disavowing subcontractor claims and payment only further proves the intent of the Miller Act. Accordingly, the court rejected the requirement that the plaintiff enter into mandatory dispute resolution procedures before initiating a DCLMA claim.

The Court next reviewed the defendant’s assertion that the plaintiff must await the completion of the GC’s dispute resolution procedures with the District before it can present a DCLMA claim.  The Court too rejected this argument by stating that the plaintiff lacks control over any proceeding involving the GC and District, even with the inclusion of the plaintiff’s $1.2 million claim.  The Court reasoned that such waiting period is counter to the “express purpose of the DCLMA to provide a prompt remedy to an aggrieved subcontractor.” If the plaintiff were required to wait for the GC’s dispute resolution process to complete, and the GC did not prevail with plaintiff’s claim, the Court mused the plaintiff might be put in a situation where it would statutorily time barred from recovery under the DCLMA.  Putting a subcontractor in such a situation would once again run counter to the intent of the Miller Act.

Accordingly, the Court denied the Defendant’s Motion to Dismiss or Stay the Proceeding. 

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based in Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com

Settle Now, Argue Later: Expedited Construction Adjudication Is Coming to North America

Construction adjudication, the dispute resolution method credited with reducing construction litigation by more than 80 percent in the United Kingdom, is coming to North America. The adjudication method requires disputes arising during construction to be submitted to an adjudicator for a prompt initial decision that is binding until completion of the contract, and subject to challenge in arbitration or litigation only thereafter. Construction participants wryly refer to it as the “settle now, argue later” approach to final dispute resolution.

Adjudicators with expertise in construction and selected by the parties seek to make their decisions within 30 days of submission of the disputes. Adjudication thus offers a more structured process than the neutral evaluation or expert determination dispute resolution methods. Although parties may challenge the adjudicator’s decision after the contract is completed, British experience is that parties accept the adjudicator’s decision in nearly 85 percent of the cases and thus avoid later litigation altogether.

In the United States, adjudication has been introduced on large, public-private partnership (P3) projects through surety performance bonds, which guarantee contract completion and provide for adjudication of disputes as to whether contractors are in default. Prior to initiation of the concept, the primary performance security on such P3 projects has been demand letters of credit, which tie up contractors’ bank credit lines and which can be drawn down by owners without any showing of default on the underlying construction contract by the contractors or even upon review by neutral third parties.

The focus of the adjudication process in the P3 performance bond is obtaining prompt review of and final decisions on the critical issue of the performance bond obligation—has a contractor default occurred that triggers the surety’s performance under the bond? The adjudication process thus offers both the contractor and surety some semblance of due process not offered by a demand letter of credit. In turn, it provides the owner (or obligee) of the construction project time certainty for prompt resolution of disputes.

JAMS has developed rules for adjudication of surety bond disputes. Adjudicators under those rules are selected by parties from the neutral panel of the JAMS Global Engineering and Construction Group.  The selected adjudicator is accorded full authority to investigate the disputed issues surrounding the contractor’s alleged default and can require parties to produce documents, present employees for interviews and cooperate in ferreting out the relevant facts. The adjudicator then will present a decision on the dispute within 30 days of the commencement of the adjudication. 

As contractors, owners, designers and lenders on P3 projects gain experience with adjudication, the process is expected to spread beyond P3 projects. Parties desiring quicker resolution of disputes, even on an interim basis, than offered by mediation or neutral evaluation now will also have an expedited JAMS adjudication process available to them.

Philip L. Bruner, Esq. is a JAMS neutral based in Minneapolis.  He is director of JAMS Global Engineering and Construction Group and one of the world’s leading arbitrators, mediators and resolvers of construction, engineering and infrastructure claims.  Mr. Bruner can be reached at pbruner@jamsadr.com.

Collaborative Construction Claim (CCC) Process

Roy E. Wagner

Von Briesen & Roper, s.c.

Chair - Construction Law Section

411 E. Wisconsin Ave., Ste. 1000

Milwaukee, WI 53202

rwagner@vonbriesen.com

 

John W. Hinchey

JAMS International

Chartered Arbitrator, CIArb

One Atlantic Center

1201 West Peachtree, NW, Suite 2650

Atlanta, GA 30309

jhinchey@jamsadr.com

 

On October 6, 2016, at the Forum’s Fall Meeting, Roy Wagner and John Hinchey presented at the Division 1 Lunch Program. The Program was on the Collaborative Construction Claim (“CCC”) process. Division 1 members and guests learned that CCC is a party and lawyer-driven process to identify construction disputes and issues, followed by a collaborative process to solve those disputes by utilizing several different “currencies.” If allocation of financial responsibility cannot be achieved by the parties and lawyers, a neutral is engaged to push the deal over the goal line. The goal is to minimize attorney and expert fees and achieve a better and quicker net result.

The Program detailed how to implement CCC successfully and highlighted advantages such as the potential to fast track and that CCC fosters maintaining relationships on long term on-going projects. Further, the lawyer in the process is viewed as a problem solver, not a claims process beneficiary. The Program concluded that CCC is a lawyer driven, flexible and resolution centric process that reduces legal and expert fees, and leaves more money for repair and settlement.  If unsuccessful, CCC efforts can be leveraged for the claims process.

The Program was well attended and well received by the audience. We were thrilled to have knowledgeable presenters such as Roy and John at our lunch Program and thank them for their contribution to Division 1.

Register Now: What Advocates Can Learn From Walking In An Arbitrator’s Shoes

On December 14, from 2:30 to 3:30 pm EST, the American Arbitration Association will be presenting a webinar called “What Advocates Can Learn from Walking in an Arbitrator’s Shoes.”  Here are the particulars:

 

What Advocates Can Learn From Walking In An Arbitrator’s Shoes

Live Webinar | December 14, 2016

Faculty: 

Melinda Gentile, Peckar & Abramson, PC

Karen Layng, Scheck Industries

Danny Shaw, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC

Too often advocates do not properly consider how they are perceived by the arbitrator or give proper thought to the effectiveness of the tools they are providing to assist the arbitrator in rendering a decision. Every advocate should step into the shoes of an arbitrator—if just for a day—to see thing’s from an arbitrator’s perspective.

This 90-minute webinar will examine the steps an advocate can take to ensure optimal presentation of a case, that the arbitrator is receiving the resources and information that will enable him or her to come to an informed decision, and ultimately improve the chances of success. Areas covered will include—

• the vital tools and resources an advocate needs to provide to the arbitrator to support the decision making process and how these tools should be prepared and presented;
• how an advocate should collaborate with the opposition;
• what to do to show respect for the arbitration process;
• things to avoid when in front of an arbitrator;
• how to maintain credibility;
• disclosure responsibilities and transparency; and more.

WHO SHOULD ATTEND:  Advocates, arbitrators, academics, and anyone interested in the dynamics of arbitration.

CLE:  West LegalEdcenter is procuring continuing legal education (CLE) credits on behalf of American Arbitration Association. This program is available for CLE credits in Arizona, California, Georgia, Illinois, New Jersey, New York, Pennsylvania, and Texas. Credit amounts vary by attendance verification and jurisdictional rules. 

10 Days Means 10 Days: Ohio Appeals Court Upholds Decision Requiring Strict Compliance with Time and Notice Claim Requirements in State Construction Contract

The plaintiff in IPS Electric Services, LLC v. University of Toledo was an electrical contractor contracted with the University of Toledo to construct a new enclosure at existing buildings and remodel existing space at the UT Health Science Campus.  The contract included provisions for contract modifications and dispute resolution. During the course of the project, problems were encountered that impacted the completion date.  In response to the defendant issuing a new completion schedule, the plaintiff began documenting these impacts beginning on October 24, 2012.  The new schedule would require the plaintiff to add additional manpower, additional shifts, and overtime thereby increasing costs significantly.  On December 24, 2012, the plaintiff sent a letter to the defendant stating it was experiencing compensable costs related to the defendant’s late delivery of air handling units and slow RFI responses resulted in a delay to the metal framing and overhead duct installation. 

On January 22, 2013, the plaintiff sent another letter to the defendant stating that, “we are arguably obligated under the contract documents to provide additional support for our claims as a follow-up to our prior submissions.”  Plaintiff then presented costs associated with schedule acceleration labor, disruption, and additional general conditions. Plaintiffs followed up on February 21, 2013 with detailed costs and formal change order requests.  Finally, on April 25, 2013, the plaintiffs submitted a certified claim for the above costs, adding an additional $100,000 to the disruption total.  In its claim, plaintiff stated “IPS gave notice of delay and potential costs impacts in its October 24, 2012, December 24, 2012, January 22, 2013 and February 21, 2013 letters."  In September of 2013, plaintiff filed a complaint in the Court of Claims alleging breach of contract and unjust enrichment. 

The Court of Claims dismissed the plaintiff’s unjust enrichment claim finding that a written contract governed the relationship between the parties.  The Court of Claims further found that even though the actions of the defendant could constitute a breach of contract, by a preponderance of the evidence the plaintiff failed to comply with the dispute resolution procedures contained within the contract which resulted in the irrevocable waiver of any related claim.  The Court rejected the plaintiff’s argument that it could only know the full amount of damages it suffered at the completion of the project, which in turn would not allow for strict adherence to the notice and time requirements in the contract.  The plaintiffs appealed the Court of Claims decision for the defendants.

The Appeals Court began its analysis by presenting excerpts from Article 8 of the contract that provided the dispute resolution procedures for the project.

8.1.2 Except as provided under paragraph 2.15, the Contractor shall initiate every claim by giving written notice of the claim to the A/E and the Contracting Authority within 10 days after the occurrence of the event giving rise to the claim[.]

…

8.1.4 The Contractor's failure to initiate a claim as and when required under this paragraph 8.1 shall constitute the Contractor's irrevocable waiver of the claim.

The plaintiff argued in its appeal that the contract violates Ohio’s “no damage for delay” statutory prohibition through the inclusion of a ‘no damage for delay’ clause found in Article 4.  The plaintiff further contended that the waiver conditions in Article 8 constituted a no damage for delay cause as well. The Court was not swayed by these arguments pointing to the fact the clause referenced in Article 4 addressed delays caused by other contractors, not by the defendant and therefore is not prohibited by the statute.  The Court further found that the Article 8 claim provisions do not contain “no damages for delay” language.  Article 8 deals with procedural matters for claims, not the substance of the claim and is not the type of contract term that would be barred by the statute either.

The Court next addressed the plaintiff’s claim that the Court of Claims created a “windfall” for the defendant by not finding it liable for the breach of contract claim.  The plaintiff’s argument was that it was unfair for the lower court to require strict compliance with Article 8 because 1) it was waiting for change orders to be executed under Article 7; 2) it had sent repeated notices to the defendant that its actions had caused schedule delays; 3) it was not possible to quantify the extent of the damages until the project was complete. The Court pointed to Ohio case law in order to discount the plaintiff’s argument that adherence to Article 8 would have been a “vain act” by stating, “the Article 8 process remains operative even if the contractor can demonstrate that the Article 8 adjudicators were unlikely to provide the relief sought.” Cleveland Constr., Inc. v. Kent State Univ., 10th Dist. No. 09AP-822, 2010-Ohio-2906.  The Court further stated that the plaintiff was contractually required to inform the defendant with a written notice within ten days of an occurrence that would give rise to a claim.  The Article 8 provision did not require a fully priced change order proposal to accompany that notice.  The Court stated, “initiation of a claim pursuant to the contract's dispute resolution procedures was not contingent on IPS's ability to precisely calculate its damages.”

Accordingly, the Court affirmed the judgment of the Court of Claims for the defendant. 

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based in Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com

Contractors Exposed to Copyright Liability Where Owner Breaches Agreement with Architect

A federal court in the case Eberhard Architects, LLC v. Bogart Architecture, Inc. et al., 314 F.R.D. 567 (N.D.Ohio 2016) recently held that contractors and subcontractors cannot, as a matter of law, avoid liability if an owner uses an architect's plans and drawings without a license.

In Eberhard, the Architect entered into an AIA contract with the Owner to provide architectural services in connection with the design of a 12-bed hospital facility.  Per the contract the Architect granted the Owner a "nonexclusive license" to use its plans and drawings, the "instruments of service," for the hospital project unless Owner failed to make payments.  In such instance, the contract stated that the license in favor of the Owner would be cancelled.

When the Owner failed to make payment to the Architect, the Architect issued cease and desist letters to all project participants - Owner, Contractor, Subcontractor - to stop using its instruments of service as they were protected by copyright law.  The Contractor and Subcontractors, who did not have a contractual relationship with the Architect and who did not have a basis in their contract with the Owner to stop work, continued to use the drawings and plans.  The Architect then filed a lawsuit against all project participants.  The Contractor and Subcontractors moved to dismiss. The federal court denied the motion.

The Contractor and Subcontractors first argued that case did not “arise” under the Copyright Act and was really a contract dispute concerning nonpayment of fees. The court disagreed holding that the complaint sounded in infringement by Contractor and Subcontractors and therefore arises under the Act. The court commented that it did not matter that the Defendants would raise an affirmative defense that they were not infringers in light of the nonexclusive license.

Then the court likewise discarded the arguments from the Contractor and Subcontractors that they did not exceed the scope of the license because the instruments of service were used on the exact project that the architect had intended.  According to the Contractor and Subcontractors, the Owner did not breach its agreement with the Architect (entitling the Architect to withdraw the license in full) because complete payment was not a condition precedent to the Owner-Architect Agreement.  The court pointed out that the Architect-Owner contract granted the license “upon execution” and "therefore, by granting the license before full payment was due, the parties clearly did not intend the full payment to be a condition precedent to the license itself." And furthermore, by agreement of the parties, the license indeed "ceased to exist" upon the architect's rightful termination of which non-payment was rightful reason. In sum, the Owner and Architect had agreed that the license  would be extinguished.Accordingly, by proceeding to use the instruments of service without a license all project participants, including the Contractor and Subcontractors, were potentially liable under the Copyright Act.

Beyond this case--where, in light of the cease and desist letters, the Contractors and Subcontractors arguably were aware that the license was potentially expired--it is important to note that civil violations of the Copyright Act need not be willful or knowing. See generally R. Anthony Reese, Innocent Infringement in US Copyright Law: A History, 30 Colum. J.L. & Arts 133 (2007).  As such, contractors and subcontractors who use plans and drawings that are unlicensed, whether they know so or not, may expose themselves to liability.

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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.