The “New Normal” In Litigation Might Not Be That “New”

The COVID-19 pandemic has nearly every industry reconsidering what “normal” actually means. And, as the pandemic continues, attorneys must adapt to the circumstances. While many courts have begun utilizing technology, none have held a virtual trial until now. In Collin County District Court, lawyers picked a jury to hear a case by videoconference.¹ This case could set the stage for courts throughout the nation to consider following in Texas’ footsteps. Even the U.S. Supreme Court has begun to hear oral arguments by teleconference. However, it is important to note the differences in these cases versus that of a typical jury trial. Still, “normal” for litigators will soon, if it hasn’t already, include setting up home or office studios in order to hold videoconferences and teleconferences for their clients.

According to the National Center for State Courts, five of the most common efforts state courts are taking to combat the coronavirus include restricting or ending jury trials, generally suspending in-person proceedings, restricting entrance into courthouses, granting extensions for court deadlines, and encouraging or requiring teleconferences and videoconferences in lieu of hearings.² However, as the country begins to reopen, implementing procedures for jury trials has varied depending on the state.

Most of the courthouses across the country have suspended jury trials. However, each state is dealing with the pandemic differently. In Arizona, in-person proceedings may begin June 1st, but local judges may determine how in-person proceedings should be phased in. Meanwhile, Texas is encouraging the use of videoconferencing to keep cases moving forward. On April 9th, Chief Justice Nathan Hecht of the Supreme Court of Texas held an interview with Thomas Reuters discussing the changes that Texas has implemented.

One of those changes includes utilizing Zoom to conduct jury trials. When asked about how Chief Justice Hecht envisioned a post-pandemic world, Chief Justice Hecht described what many others in the legal profession have expressed:

After the pandemic, lots of hearing will be held remotely. It’s easy to do, you’d get a specific time, if you do have to wait, you could put everything on mute and go on about your business. Trips to the courthouse are definitely going to be affected. We’ll then have to reexamine why we need courthouses. We’ll have to think about that because some things are more intensely in-person than other things, like jury trials, but some things are not. We’ll have to look at working at home…I’m getting memos, draft opinions, draft dissents from my colleagues, from the law clerks, every hour. People are actually working very hard. If they can do that, why shouldn’t they? … I think there’ll be a lot of changes.³

Chief Justice Hecht is not the only one considering practical changes to litigation. On May 14th, New Jersey announced the creation of a new virtual grand jury pilot program.⁴ The pilot program will be used to determine whether the New Jersey Judiciary expands remote grand juries to additional counties and state grand jury proceedings. The technology will be similar to the formats the New Jersey Judiciary currently uses for virtual hearings but will employ additional security measures to safeguard the rights and privacy of defendants, witnesses, victims, and jurors. As of May, the New Jersey Judiciary has conducted more than 23,000 virtual proceedings involving more than 189,000 participants.⁵ While states are leading the charge, federal courts are not far behind.

For the first time in U.S. history, the United States Supreme Court allowed the public to listen to oral arguments remotely.⁶ Historically, the US Supreme Court does not allow cameras or simultaneous audio broadcasts in the courtroom. However, earlier this May, the U.S. Supreme Court heard arguments regarding a trademark dispute case by teleconference. Justices asked questions in order of seniority and only a few technical issues were experienced.⁷ While the U.S. Supreme Court didn’t go as far as providing live video, as the Texas Supreme Court did earlier this month, it’s difficult to justify not continuing to hold oral arguments through teleconference.

The Second Circuit and the Seventh Circuit courts announced in late March that they would hold all oral arguments by teleconference. And, now that the U.S. Supreme Court has held oral arguments by teleconference, the opportunity to expand this practice to all courts has never been so strong. Still, district courts have been reluctant to hold jury trials through videoconference or teleconference. However, the Collin County District Court case proved that holding video conference jury trials is possible.

The takeaways from the Collin County District Court were as expected.⁸ First, like all trials, there is a chance for a few hiccups. Here, one of the prospective jurors wandered off-screen and could be heard talking on the phone. Second, walking jurors through how to set up their audio and video correctly was not as difficult of a task as some may have thought. Third, approaching the bench by way of a “breakout room” was mostly a success - minus the wandering prospective juror. And, fourth, and arguably most notable is that this case was a one-day summary jury trial. Yet, the question remains, will video conference trials become future practice beyond the pandemic?

Many law firms are already preparing for post pandemic hearings to remain virtual. As Chief Justice Hecht of the Texas Supreme Court explained, if hearings can be successfully held through video conference or teleconference, then why shouldn’t they? However, video conference jury trials present multiple legal concerns. Some of these difficulties include whether virtual trials would deprive defendants of their constitutional right to confront witnesses, an impartial jury, due process of law, and effective counsel. Moreover, ensuring high-speed internet so defendants and witnesses could appear would be problematic. These issues are difficult to overcome, especially in the face of a pandemic.

While hearings might shift towards video conferences and teleconferences, jury trials still have a long way to go. Although Texas proved that a one-day video conference summary trial was possible, there is little reason to believe that a jury trial that takes place over a week, or longer, would see the same level of success. Moreover, the issues on appeal would pave the way for the U.S. Supreme Court to make the final decision on whether constitutional rights could be upheld through video conference jury trials. Therefore, the “new normal” for litigators might not be that “new” after all. While attorneys might need to begin setting up home or office studios in order to hold videoconferences and teleconferences for their clients, virtual jury trials have many hurdles to overcome before litigators should expect any major changes.

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1 Nate Raymond, Texas Tries a Pandemic First: A Jury Trial by Zoom, Thomas Reuters Technology News (May 18, 2020), https://www.reuters.com/article/us-health-coronavirus-courts-texas/texas-tries-a-pandemic-first-a-jury-trial-by-zoom-idUSKBN22U1FE.^↩
2 National Center for State Courts, https://www.ncsc.org/newsroom/public-health-emergency.^↩
3 Meera Gajjar, 'The American Justice System Will Never Be The Same': Texas Supreme Court Chief Justice Nathan Hecht, Thomas Reuters COVID-19 (April 24, 2020), https://blogs.thomsonreuters.com/answerson/the-american-justice-system-will-never-be-the-same-texas-supreme-court-chief-justice-nathan-hecht/^↩
4 Peter McAleer & Maryann Spoto, Judiciary Launches Virtual Grand Jury Pilot Program, Richard J. Hughes Justice Complex (May 14, 2020), https://njcourts.gov/pressrel/2020/pr051420a.pdf.^↩
5 Id.^↩
6 Robert Barnes, Supreme Court Takes Modest But Historic Step With Teleconference Hearings, The Washington Post Courts & Law (May 4, 2020), https://www.washingtonpost.com/politics/courts_law/supreme-court-teleconference-hearings-bookingcom/2020/05/03/f5902bd6-8d76-11ea-a9c0-73b93422d691_story.html^↩
7 Id.^↩
8 Angela Morris, Hold Please? Juror Takes Phone Call as Texas Tests First Jury Trial Via Zoom, Legaltech News (May 18, 2020), https://www.law.com/legaltechnews/2020/05/18/juror-walks-off-to-take-phone-call-as-texas-tests-first-jury-trial-via-zoom-397-34291/^↩

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

Maybe Relief for Public Contractors Should Come from Thoughtful Legislation

With loss, comes suffering; and, when it comes to the coronavirus, loss exists in many forms. Attorneys across the country – particularly those representing contractors on public projects – are asking themselves, generally, “how can my client suffer less?” Or, more pointedly, “is there an argument to support my client’s right to entitlement to compensation for COVID-19-related costs?”

On public projects, the short answer is maybe not until the government steps in. Construction lawyers are faced with the unfortunate reality that public sector contracts appear to preclude contractors from seeking adjustments to the contract price because these contracts commonly include (1) a clear “no-damages-for-delay” provision, (2) time as the sole remedy for “force majeure” delays, and (3) a “compliance with laws” provision that is silent as to which party bears the risk of a change in laws. These provisions help public owners properly protect the interests of the citizens by appropriately allocating their tax dollars to a construction project that follows a carefully thought-out contract. However, as a result of these well-intentioned owner-friendly provisions, public contracts can make it difficult for contractors to receive compensation for COVID-19-related costs.

One can draw a parallel between public contracts and some of the insurance industry’s business interruption coverage policies. Of course, every insurance policy is different and must be analyzed on a case-by-case basis; however, the business interruption policies at issue often (1) have a clear “virus” exclusion, (2) require “property damage” to trigger coverage, and (3) are silent as to the application of the “civil authority” exclusion when it comes to partially mandated shutdowns (i.e. when the case is that construction offices, but not jobsites, may have been required to shut down). As a result, policyholders’ business interruption claims arising from COVID-19 are facing blanket denials from insurance carriers.

However, the denials of claims in both the insurance and construction industries alike can have potentially crippling effects. With respect to insurance, the consensus is becoming somewhat clear: the federal and/or state governments may need to step in. In response, several states (including Massachusetts, Rhode Island, New York, and New Jersey) have sponsored bills to provide long-term reimbursement relief to insurance companies and even to create exceptions to the policies’ strict exclusions, like the “virus” exclusion. As follows, attorneys are advising policyholders to follow the old adage “a claim never made is a claim never paid.” Therefore, attorneys who want to help their clients suffer less should encourage strict compliance with the “prompt” notification mechanisms to preserve claims under their insurance policies.

Similarly, attorneys are encouraging contractors to comply with the claim procedures in their public contracts, despite the currently-present contractual roadblocks. This advice is perhaps motivated with the hope that relief will be provided, whether it comes from the owner or as a part of a government-sponsored relief scheme similar to that of the insurance industry. The good news is: over one-hundred and thirty-five members of Congress agree with this approach, at least when it comes to supporting State Departments of Transportation (DOTs). On May 11, 2020, Representatives Conor Lamb and Bob Gibbs led the House in calling on Speaker Pelosi and Leader McCarthy to support approximately $49.95 billion in federal funding for State DOTs in the next COVID-19 response package.¹ The request explained how support of State DOTs can help ensure planned transportation projects proceed as planned, which in turn supports the economy by protecting the jobs of State DOT employees and construction workers. Comparably, the Under Secretary of Defense released a memorandum on March 30, 2020, with the subject “Managing Defense Contracts Impacts of the Novel Coronavirus,” stating that “Where the contracting officer directs changes in the terms of contract performance, which may include recognition of COVID-19 impacts on performance under that contract, the contractor may also be entitled to an equitable adjustment to contract price using the standard FAR changes clauses (e.g., FAR 52.243-1 or FAR 52.243-2).”² This memorandum suggests that contracting officers may have the authority to treat COVID-19 impacts as compensable delays under the FAR Changes clause.

As a matter of public policy, government intervention in line with the above makes sense. Despite the general rules that deny contractor recovery in the face of (1) a clear “no damages for delay” provision,³ (2) time as the sole remedy,⁴ and (3) a silent compliance with law provision,⁵ these rules are unfair (and perhaps unlikely to be upheld) considering the ongoing global pandemic. For example, on lump sum and GMP projects in particular, it would be inequitable for a public owner to completely deny claims for additional costs – like those of COVID-19-required demobilization and remobilization – on the basis of (1) a clear “no damages for delay” provision, (2) time as the sole remedy, and (3) a silent compliance with law provision. What’s more, public contracts are often procured via competitive bidding, which naturally means that contractors cut as many costs as safely as possible, not pricing out a ‘just in case a global pandemic shuts down this project for a couple weeks’ cushion. In fact, because public owners want to ensure that workplaces, including construction jobsites, are operating safely and in full compliance with new COVID-19 safety measures, they have a competing interest when it comes to compensating COVID-19-related costs. Since their competing interest brings with it some additional costs that were in no way contemplated by contractors when they priced their jobs, they ought to have some skin in the efforts for recovery as it would be unfair for public owners to ask contractors to simply absorb COVID-19-related costs.

Indeed, the ramifications of allowing owners (and insurers) to benefit from such harsh claim denials could have detrimental effects on the entire construction industry. Consider the alarming fact that if contractors continue to be denied compensation for COVID-19-related costs, then numerous contractors, subcontractors, and suppliers will inevitably goes out of business, thereby crumbling the industry and, likewise, the economy. While public owners and insurance companies may suffer in the short-term in light of legislation that requires exceptions to their contracts, they are in a much more stable position to weather this storm over the long-term. In other words, at present, they are not the string that will make the sweater unravel. After all, the greater suffering ought to be borne by the owner anyway, even if it is the state. One can reason that even though neither the owner nor the contractor could have ever predicted COVID-19, it is the owner – not the contractor – who remains the ultimate beneficiary of the project. As follows, maybe relief for public contractors should come from thoughtful legislation, like that already pending for the benefit of the insurance industry.

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1 https://www.agc.org/sites/default/files/State%20DOT%20House%20Support%20Letter_Signed.pdf^↩

2 https://federalconstruction.phslegal.com/2020/04/articles/contractor-information-sources/delays-resulting-from-coronavirus-may-be-both-excusable-and-compensable/; https://www.nationaldefensemagazine.org/articles/2020/3/16/industry-may-find-relief-for-coronavirus-delays; https://www.jdsupra.com/legalnews/delays-resulting-from-coronavirus-may-58448/^↩

3 Although a contract has a clear “no damages for delay” clause, the contractor is not necessarily foreclosed from recovery if there exist other avenues for recovery within the contract. In fact, in many jurisdictions, “no damages for delay” clauses are not enforced where the delay for which recovery is sought was not reasonably contemplated by both parties at the time of contracting. JWP/Hyre Elec. Co. v. Mentor Village Sch. Dist., 968 F. Supp. 356, 360 (N.D. Ohio 1996); see Corinno Civetta Const. Corp. v. City of New York, 493 N.E.2d 905, 910 (N.Y. 1986). That is not necessarily the case in Massachusetts; however, there exist other ways a contractor can avoid the harsh effects of a “no damage for delay” clause. Joel Lewin & Eric Eisenberg, Delays, Suspensions and interruptions—No damage for delay clauses—Exceptions, Massachusetts Practice Series on Construction Law § 6:22 (2018). For example, a contractor may point to other contract provisions that provide relief. Id. (citing Stone/Congress v. Town of Andover, 6 Mass. L. Rptr. 330, 1997 WL 11737 (Mass. Super. Ct. 1997) (denying a summary judgment motion in favor of a contractor that argued that its damages were not for delays, but rather for changes in the work for which it was entitled to compensation under the changes clauses in the general contract). A closer look into the specific contract language is necessary in order to determine whether there exist other avenues for recovery.^↩

4 Despite the fact that the sole remedy is time, there may still be room for a claim for additional compensation if contractor has a separate delay claim. “Force majeure” events, like abnormally bad weather and presumably the COVID-19-related costs at issue here, normally entitle the contractor to time, but not money. However, similar to the idea above that a contractor can avoid the harsh effects of a “no damage for delay” clause by pointing to other contract provisions, a contractor may recover for “force majeure” events when they are coupled with other compensable delay events. See id.; Philip J. Bruner & Patrick J. O’Connor, Jr., §3.7.2—Contractor’s Compliance with Law, Bruner & O’Connor on Construction Law, § 5:80 (Jan. 2020 Update). For example, in Appeals of Bechtel Environmental, Inc., a contractor was adversely affected by weather when a government-caused design delay pushed toxic waste landfill remediation activities into the hotter summer months, resulting in lower efficiency. Philip J. Bruner & Patrick J. O’Connor, Jr., §15.1.6.2—Weather delays, Bruner & O’Connor on Construction Law, § 5:80 (Jan. 2020 Update) (citing Appeals of Bechtel Environmental, Inc., E.N.G.B.C.A. No. 6137, E.N.G.B.C.A. No. 6166, 97-1 B.C.A. (CCH) ¶ 28640, 1996 WL 686423 (Corps Eng'rs B.C.A. 1996)). Perhaps the express language in the AIA A201-2017’s § 8.3.3 provides the support for this: “This Section 8.3 does not preclude recovery of damages for delay by either party under other provisions of the Contract Documents.”^↩

5 As a general rule, if the contractor agrees to perform the work for a stipulated sum and further agrees to comply with all laws and regulations governing the performance of the work, then, in the absence of any contractual provision permitting relief, it bears the risk. Philip J. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law, § 5:80 (Jan. 2020 Update) (citing DiCara v. Jomatt Const. Corp., 52 Misc. 2d 543, 276 N.Y.S.2d 11 (Dist. Ct. 1966) (contractor who agreed to sell a house at a specified price bore a responsibility for increased costs due to a 2% sales tax made applicable to the sale after the parties had reached agreement); Edwards v. United States, 19 Cl. Ct. 663 (1990) (government contract's “permits and responsibilities” clause obligated the contractor to comply with all local laws and regulations regardless of whether they became effective before or during the term of the contract and applied to zoning changes affecting the work)).^↩


Author Lexie R. Pereira is a J.D./M.B.A. student at Boston College Law School, studying to become a litigator, with a specialty in construction law. At school, Lexie is the President of the Real Estate Law Society and the President of the Eagle-to-Eagle Mentoring Program. Outside of school, she is a legal intern at Consigli Construction Co., Inc. and is on the Editorial Team of the ABA’s Forum on Construction Law’s Dispute Resolver blog. This summer, she was invited to rejoin Hinckley Allen as a Summer Associate with a focus in the Construction and Public Contracts group. Lexie earned her B.A. and a varsity letter from Boston College in 2017.

Contact Information: pereirle@bc.edu ; https://www.linkedin.com/in/lexie-pereira/

Force Majeure Provisions in Construction Contracts and Supply Chain Disruption During the COVID-19 Pandemic

The COVID-19 pandemic is having drastic effects on the construction industry across the United States. Various states have deemed residential and commercial construction work “essential,” and permitted to carry on amidst various business closures and stay-at-home orders. But construction law practitioners are expecting an uptick in various types of claims, and whether force majeure provisions will apply to events related to COVID-19 is a pressing question for clients and counsel.

The ABA Forum on Construction Law held the sixth session in the Leadership Roundtable Series on the impacts of COVID-19 on the construction industry on May 12, 2020, with panelists from different practice areas to discuss force majeure clauses and their application to construction industry clients. The panel was moderated by Chris Beirise, of the Kenrich Group, LLC, in Las Vegas, NV. The panelists included Kristen Sherwin, of Winstead P.C. in Dallas, TX, who represents owners and developers; Tracy Steedman, of Adelberg Rudow Dorf & Handler, LLC in Baltimore, MD, who represents subcontractors and general contractors; Rhonda Caviedes, senior corporate counsel with Jacobs Engineering Group, Inc. in Dallas, TX, and Anthony Gonzales, Managing Principal of Spire Consulting Group in Austin, TX.

A “force majeure” clause is a provision in a contract that excuses a party’s performance under the contract if a failure to perform is due to unforeseen or extreme circumstances outside the party’s control. These clauses are often used in all kinds of commercial contracts to allocate risk. Ms. Caviedes noted that many clients prefer to use custom contracts that they created themselves, but counsel should consider using form contract documents that are well-established in the industry instead. Form documents such as the AIA contracts or ConsensusDOCS can provide uniformity and certainty to clients, without counsel needing to interpret and revise clients’ custom contracts numerous times.
 
Force majeure provisions vary by contract. Often in construction contracts, a force majeure provision will be included in a delay provision. Some contracts include force majeure provisions, and some do not. Some have incredibly specific force majeure provisions, and some have very broad provisions. Some contracts have provisions that are functional equivalents of force majeure provisions but do not mention the phrase “force majeure.” Some examples of force majeure events are “acts of God,” economic conditions or financial hardship, pandemics or epidemics, floods, hurricanes and other weather-related events, labor strikes and performance delays, and government action.

Force majeure provisions are generally enforceable in all states and typically are narrowly construed. Not all states interpret force majeure provisions the same way, however. In Texas, as Ms. Sherwin noted, a force majeure event must have been unforeseen. The time of contract making is highly relevant to foreseeability. For instance, if a contract was formed in late March 2020, then events related to COVID-19 were almost certainly foreseeable at that time. Under Texas law, only an objective impossibility – that is, a complete inability to perform – will excuse a breach of contract. Ms. Sherwin cautions attorneys to pay close attention to choice of law provisions in contracts, and evaluate the chosen state’s treatment of frustration of purpose, impossibility, and foreseeability.

Ms. Caviedes noted that force majeure provisions are often heavily negotiated, and careful drafting is very important. Often, a force majeure provisions will include a “catch-all” provision, and the placement of the catch-all language is key to the force majeure provision’s interpretation. Courts typically interpret a catch-all provision at the end of the list as being one that relates back to the items that have been identified in the immediately preceding text. Courts find that if a general meaning had been intended, then specific listed events would not have been included. “[W]here the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure" (Belgium v. Mateo Prods., Inc., 29 N.Y.S.3d 312, 315 (1st Dep't 2016) (quoting Route 6 Outparcels, LLC v. Ruby Tuesday, Inc., 931 N.Y.S.2d 436, 438 (3d Dep't 2011)). Again, numerous jurisdictions have interpreted catch-all language following specific lists, so it is critical to evaluate the chosen state’s case law on this point when drafting contracts and consulting clients during construction and at the claims phase.

On the immediate effects of COVID-19 on clients, the panelists shared their experiences, which offer useful advice to practitioners. Ms. Steedman explained that subcontractors are sending notices to general contractors and submitting requests for change orders, both related to supply chain disruptions. Suppliers are not delivering materials on time. Subcontractors need to acquire more vehicles to comply with social distancing guidelines and to rearrange schedules to ensure that various trades are not working too much at the same time.

Ms. Sherwin offered an owner’s perspective, stating that subcontractor notices should be as specific as possible. Owners pass these notices along to investors or lenders, but owners prefer not a vague notice that a supply chain disruption has occurred or is imminent. Instead, owners desire to know what the actual supply chain impact is, as soon as it is known, so that a large claim for an extreme increase in cost is not a surprise down the road. Owners are also looking for general contractors to work with suppliers directly to find alternatives to obtaining similar supplies. The circumstances related to COVID-19 are sure to cause delays and cost increases, so it is even more important that all parties on projects work together to share relevant information on a timely basis.

Another component of force majeure provisions is mitigation of damages. Mr. Gonzales noted that contractors should itemize all damages related to COVID-19 in notices of claims. Additionally, it is important to analyze whether a duty to mitigate applies, and what mitigation measures should be taken and when. Given the complexity and sophistication of the global supply chain, even under the strain of COVID-19, there are often options to obtain labor, raw materials, or other supplies from alternative sources, as well as other solutions, to avoid time and money impacts.

As always, but especially in the time of COVID-19, it is critical for clients and counsel to understand their construction contracts, to comply strictly with all notice requirements to other parties, lenders, and insurers, and to evaluate whether a force majeure provision might be used offensively or defensively.

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

Join The Covid-19 Leadership Roundtable Discussion on Force Majeure, Supply Chain Disruption, Delays and Claims - May 12 at 4 pm EDT

A SPECIAL FORUM CRISIS SERIES

In order to serve and provide resources to our Forum members, the greater ABA, and the general public, the ABA Forum on Construction Law and strategic partners have developed a multi-part webinar series exploring how the COVID-19 pandemic is impacting construction and design and identifying options for response and risk management/mitigation. In these free, non-CLE webinars, industry leaders and attendees will have the opportunity to exchange information, learn from one another, raise questions, and offer options for addressing the deepening effects of the crisis. If you are a company leader or legal counsel, we invite you to join our conversation. 

Developed to help construction stakeholders
manage and prepare for the impact of COVID-19

PROGRAM DETAILS:

Format: Webinar, Expert Round Table Panel Discussion

Moderator: Chris Beirise, HKA

Panelists:

Anthony Gonzales, Spire Consulting Group

Kristen Sherwin, Winstead PC

Rhonda Caviedes, Jacobs

Tracy Steedman, Adelburg Rudow

Our panel will address the immediate impacts of the crisis such as, supply chain disruption, excusable delays, suspension, force majeure and adjustments to the project budget and schedule. This session will cover the range of contract and legal remedies and claims that are certain to be features of the construction landscape for the foreseeable future. Join this discussion about how owners and contractors are addressing these impacts.

FREE 90 Minute PROGRAM.
This program is for information sharing only, and not submitted for CLE.

May 12, 2020 | 4:00 to 5:30 P.M.ET

Multi-part Webinar Series Schedule

• 5/12: Force Majeure, Supply Chain Disruption, Delays And Claims
• 5/19: Post-Crisis Industry Impact – Expediting Use Of Technology; Virtual Depositions, Mediation/Arbitration; and Replacing In-Person Collaboration

Contact LaShaunda.Williams@americanbar.org or Tamara.Harrington@americanbar.org for more information.

Register Now

"Pay-When-Paid": Is there a "Reasonable Time" for Subcontractors to Wait for Payment Once Contractor-Owner Litigation Ensues?

Obviously, subcontractors prefer to be paid within a reasonable time, but the issue of what constitutes a “reasonable time” has been a conundrum many states have tackled over the years. From “pay-if-paid” to “pay-when-paid” provisions, states have either adopted one, both, or neither of these commonly controversial, heavily negotiated provisions. Recently, the California Court of Appeals has ruled on a “pay-when-paid” provision that might set the groundwork for subcontractors in other states arguing that “paid-when-paid” provisions should be against public policy.

Distinguishing Between Provisions

Both “pay-if-paid” to “pay-when-paid” provisions ultimately determine who will bear the financial risk of a construction contract. A “pay-if-paid” provision makes “payment by the owner to the general contractor a condition precedent to the general contractor’s obligation to pay the subcontractor for the work the subcontractor has performed.”¹ Under a “pay-if-paid” provision, the risk of non-payment falls on the subcontractor if the owner refuses to pay the general contractor. Many states, including California, have concluded that “pay-if-paid” provisions are unenforceable because they indirectly waive or forfeit the subcontractor’s mechanic’s lien rights in the event of nonpayment by the owner.²

Under a “pay-when-paid” provision, the general contractor agrees to pay the subcontractor within a period of time after the general contractor is paid by the owner.³ Thus, under a “pay-when-paid” provision, the risk of non-payment falls on the general contractor. While a “pay-when-paid” provision is not a condition precedent, there is an implied understanding that the subcontractor has an unconditional right to payment within a reasonable time. While many states depart as to whether “pay-when-paid” provisions are enforceable, the underlining issue for a “pay-when-paid” provision is what constitutes a “reasonable time.”

Crosno Construction, Inc. v. Travelers Casualty & Surety Co. of America

On April 17, 2020, the California Fourth Appellate District Court of Appeals ruled against enforcing a “pay-when-paid” provision that would postpone the plaintiff’s right to recover under a payment bond for an indefinite time period. The underlining issue was whether a surety may defend a public works payment bond action by invoking an expansive “pay-when-paid” provision in a construction subcontract that defers payment for an indefinite period of time.⁴

North Edwards Water District (District) selected Clark Bros., Inc. (Clark) as its general contractor on a public works project to build an arsenic removal water treatment plant. Clark hired subcontractor Crosno Construction (Crosno) to build and coat two steel reservoir tanks.⁵ The subcontract contained a “pay-when-paid” provision that stated:

“If Owner or other responsible party delays in making any payment to Contractor from which payment to Subcontractor is to be made, Contractor and its sureties shall have a reasonable time to make payment to Subcontractor. ‘Reasonable time’ shall be determined according to the relevant circumstances, but in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment, including (but not limited to) mechanics’ lien remedies.”⁶

A dispute arose between Clark and District halting the project. Crosno sought to recover payment owned under the public works payment bond that Clark had obtained for the project.

The Court focused on whether postponing Crosno’s right to recover under the payment bond until Clark’s litigation against the District concluded would result in an unreasonable impairment of Crosno’s statutory payment bond remedy. Crosno never executed a waiver and release required to validly “waive, affect, or impair” its payment bond rights. Applying precedent, the court reiterated that postponing payments:

“. . . earned by a subcontractor, itself without fault, until a dispute between the contractor and the owner is resolved, perhaps months or even years later … gives no reasonable assurance that such a dispute would ever be resolved. If the contractor lost the dispute, the contractor would be required to pay his subcontractor creditor from other funds. If the contractor won the dispute, the contractor would be required to apply all or a substantial part of the money he receives toward his subcontract obligations. . . the contractor’s interest would seem more likely to benefit from avoidance of any settlement with the owner.”⁷

A “reasonable time,” in this case, would include an indefinite timeframe. In fact, the litigation between Clark and District had already reached the two-year mark prior to this ruling. For many subcontractors, managing business in the wake of the COVID-19 crisis is difficult enough. If subcontractors were to be forced to wait until contractor-owner litigation were resolved prior to receiving payment, most subcontractors would fail to survive.

Conclusion

Crosno reminds lawyers representing subcontractors that the purpose behind a public works payment bond is to provide subcontractors a sufficient means of payment. This distinct remedy to public works subcontractors is in addition to the protection payment bonds provide in the event of a defaulting contractor. Moreover, Crosno provides a subtle reminder of the importance of drafting specific waiver and releases. Generally, a waiver and release of payment bond rights can be enforceable to the detriment of the subcontractor. While many states differ on their enforcement of “pay-if-paid” and “pay-when-paid” provisions, arguing the element of reasonableness to protect otherwise disadvantaged subcontractors caught in-between contractor-owner litigation might be your best option.

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1 Wm. R. Clarke Corp. v. Safeco Ins. Co., 15 Cal. 4th 882, 885 (1997).^↩
2 Id. at 886.^↩
3 Chapman Excavating Co. v. Fortney & Weygandt, Inc., 2004-Ohio-3867, ¶ 22 (Ct. App.).^↩
4 Crosno Constr., Inc. v. Travelers Cas. & Sur. Co. of Am., Nos. D075561, D075562, 2020 Cal. App.at *8-9 (Ct. App. Apr. 17, 2020).^↩
5 Id. at 1-2.^↩
6 Id. at 4-5.^↩
7 Id. at 17-18 (citing Yamanishi v. Bleily & Collishaw, Inc., 29 Cal. App. 3d 457, 463 (1972).^↩

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

What the 1918 Flu Can Teach Us About COVID-19

The COVID-19 pandemic shows no signs of sparing the construction industry. Nearly every jurisdiction has implemented some level of restriction on business activity, i.e. “essential” versus “non-essential,” and as a whole construction has been caught in the grey zone. Some jurisdictions have found that construction is “essential,” thereby allowing work to proceed. Others, including New York, Pennsylvania, New Jersey, and Vermont, have halted nearly all construction projects not serving an emergency or essential purpose.

State Restrictions on Construction Activity Vary

Some states have enacted significant limitations on construction projects. One of the most stringent is Pennsylvania, which on March 19, 2020, issued an executive order forcing the closure of any business not deemed “life-sustaining,” including a state-wide prohibition on construction activity. Days later, the executive order was amended to deem the construction of medical facilities and emergency repairs as “life sustaining.” On March 27, 2020, except for the construction of medical facilities and emergency repair, nearly all construction work state-wide was closed. On a case-by-case basis, the Pennsylvania Department of Community and Economic Development has granted some waivers/exemptions.

While Pennsylvania closed nearly all construction projects, both New York and New Jersey initially considered construction an “essential” business. However, as the fight against COVID-19 intensified, these states restricted their definitions of essential to be project-specific, e.g. medical facilities, infrastructure, and affordable housing. Now, New York is threatening fines of up to $10,000 against teams found working on non-essential or non-emergency construction projects. While New York has a robust and responsive waiver process, New Jersey has not instituted a formal waiver process. In some jurisdictions, municipalities responding to the COVID-19 with their own rules. Presently, there are several major metropolitan areas with significant restrictions on construction activities, including Boston and San Francisco.

On the other hand, many states including Texas and Florida have relied on federal guidance from the U.S Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA). CISA deems nearly all construction projects as essential, e.g. residential construction is essential “to combat the nation’s existing housing supply shortage.” California has also permitted most construction projects to continue.

In either case, COVID-19 has likely impacted the workforce and supply of readily available labor to work on any given construction project.

Lessons from the 1918 Flu

As clients continue to struggle with the full implications of the ongoing emergency, some experts suggest analyzing a similar pandemic from 100 years ago. As soldiers returned home from the battlefields of World War One, a global pandemic of influenza cast a pale over victory celebrations. The so-called “Spanish Flu” took over 50 million lives, about twice as many as the Great War itself. In the United States, it is estimated a staggering 29 million people contracted the 1918 Flu. Approximately 675,000 Americans lost their lives.

The 1918 Flu pandemic shares some parallels with COVID-19, but there are also a few important differences. Whereas COVID-19 seems particularly dangerous for older demographics, the 1918 Flu seems to have attacked younger people between the ages of 20 and 40.¹ As a result, historians believe a greater proportion of construction workers likely fell ill. In fact, one study from Toronto indicated construction workers had one of the highest mortality rates.²

The government response to the 1918 Flu was also less consistent. While some state and local governments acted aggressively to help fight the spread of the virus, there seems to have been less of a response at the federal level. Many of the local government responses were similar to today, such as mandating the use of masks in public, banning public gatherings, and encouraging social distancing. Many local businesses were ordered to close. On the other hand, mandatory shelter in place orders were uncommon 1918. Although some of the data is anecdotal, there is general agreement the 1918 pandemic caused a sharp, but short economic contraction.³ Labor shortages caused delays, shortages, and rising wages.⁴ Unlike the COVID-19 pandemic, which to date has included significant and ongoing economic stimulus, the 1918 pandemic did not result in any significant government stimulus. Thus, even before accounting for “work from home” or “remote work” capabilities, a direct economic comparison may prove difficult.

Available case law indicates courts reached inconsistent conclusions regarding delays and interruptions arising from the 1918 Flu. Courts seem to have generally upheld the power of local governments to enact quarantines. Soap Co. v. Peet Bros. Mfg. Co., 50 Cal. App. 246, 194 P. 715 (Cal. Ct. App. 1920). Additionally, the “contingency or delay in performance” provision in a contract was triggered by an enforcement of a local quarantine order and excused the supplier’s delayed performance. Id.

Other courts facing contract issues arising from the 1918 Flu pandemic reached the opposite conclusion. Napier v. Trace Fork Mining Co., 193 Ky. 291, 235 S.W. 766 (1921). The plaintiff entered into an agreement to complete grading as part of a railroad sidetrack construction project. Due to the 1918 Flu pandemic, the plaintiff was unable to find enough labor needed to qualify for an early completion bonus. The court refused to apply an unforeseen circumstances analysis because, “defendant accepted the work as soon as it was completed and offered to pay plaintiff therefor in exact accordance with the plain and unambiguous terms of the contract.” Id. at 767. The court found plaintiff merely showed timely completion was more difficult and expensive, not that it was impossible.

The lesson from history is that these cases are fact-sensitive even during times of pandemic. In that regard, best practices include well-tailored requests for time or additional money, supporting documents and materials to demonstrate entitlement at the claim level, and prompt notice. Much like the contractor in Napier, parties cannot risk overplaying or overstating the impact of COVID-19 on contractual performance. It appears the divergence of judicial analysis resulting from the 1918 Flu may be on the verge of repetition 100 years later.

Conclusion

The current patchwork of government restrictions on construction activity has generated a plethora of legal issues. Some of these include force majeure clauses, excusable delay, change orders, cash flow problems, employment and supply chain issues, and business interruption coverage. Although the 1918 Flu may be an imperfect comparison, it suggests COVID-19 will likely have a significant, although hopefully transitory, economic impact on the construction industry.

---

1 “1918 Pandemic (H1N1 Virus),” Centers for Disease Control and Prevention, https://www.cdc.gov/flu/pandemic-resources/1918-pandemic-h1n1.html (last visited April 22, 2020).^↩
2 Peter Kenter, ‘”Unsung Heroes”: Toronto Construction Workers and The Spanish Flu Epidemic,” Daily Commercial News, https://canada.constructconnect.com/dcn/news/labour/2020/03/unsung-heroes-toronto-construction-workers-and-the-spanish-flu-epidemic (last visited April 22, 2020).^↩
3 Thomas A. Garrett, “Economic Effects of the 1918 Influenza Pandemic: Implications for a Modern-day Pandemic,” at 9, (Federal Reserve Band of St. Louis) https://www.stlouisfed.org/~/media/files/pdfs/community-development/research-reports/pandemic_flu_report.pdf (last visited April 22, 2020).^↩
4 Id. at 21.^↩

Co-authors Gaetano Piccirilli, partner and Patrick McKnight, associate, are members of the Litigation Department at Klehr Harrison Harvey Branzburg LLP in Philadelphia, Pennsylvania and serve on the Klehr Harrison Coronavirus Task Force.

INSIGHT: Best Practices for Conducting Remote Arbitration Hearings

Two King & Spalding attorneys were one week into a two-week arbitration hearing when New York City shut down due to the coronavirus pandemic. They learned valuable lessons from continuing the hearing via video and share their experience and some tips.

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Most businesses must now connect virtually, due to the coronavirus pandemic, and arbitration hearings are no exception. We were one week into a two-week arbitration hearing when New York City shut down, forcing the hearing to conclude via video. Video hearings may be the future of arbitration—at least in the short term.

Attorneys need to think about important considerations and best practices for conducting a hearing via video. This article also addresses applicable arbitral institution rules (or lack thereof) and discusses why this area is ripe for consideration by these institutions.

Technology Considerations

• Zoom vs. Alternatives: Zoom, a highly-popular video conference platform, is an inexpensive and effective means of conducting virtual hearings. It allows many individuals to participate, and the arbitral tribunal and speakers are visible to all participants. Screen sharing can be used to display exhibits, demonstratives, and PowerPoint presentations. Note, however, that the party initiating the meeting must have an upgraded Zoom account to utilize many features, included organizing extended meetings and virtual break-out rooms. Moreover, there have been security and privacy concerns about Zoom that are currently being investigated. Many court reporting services offer alternative platforms that provide similar features, but are generally more expensive than Zoom subscriptions.

• Transcription Services: Most court reporting services can provide transcription services via an online platform, including access to live transcription during the hearing for a daily fee.

• Translation Issues: One potentially complicating factor when conducting remote hearings is the need for translation. While many translators can provide services remotely, such translation would likely need to be sequential rather than simultaneous and would require speakers to be particularly careful not to speak over each other.

• Test the Technology: To ensure a smooth first day of the hearing, the parties, witnesses, tribunal, and court reporter should test the technology in advance. Witnesses will need to ensure they have cameras on their computers. Most importantly, everyone will need strong and reliable internet connections—particularly the tribunal, witnesses, court reporter, attorneys, and client representatives directly involved in the proceedings.

Agreed-Upon Protocol

• Implement a Written Protocol: Parties can minimize potential disputes by reaching an agreement on a detailed written protocol, including details about the schedule, exchange of exhibits, pre- and post-hearing deadlines, and other logistical matters.

• Exchange of Exhibits: The parties should outline how and when they will exchange documents and demonstratives in the written protocol, including the means for providing exhibits to be used during cross-examination to witnesses, opposing counsel, the tribunal, and the court reporter. It may be easier to exchange documents electronically, particularly during the coronavirus pandemic when many firms and document vendors have reduced onsite staffing.

• Reliability of Testimony: Possible safeguards to ensure the reliability of testimony include requiring witnesses to be alone when they testify and to affirm that they will not look at email or smartphones during the examination. If hard copy documents are sent to witnesses before they testify, the documents can be sealed in a box wrapped in colored tape that the witness must open on camera in the presence of opposing counsel and the tribunal immediately before testifying. Additional safeguards can be put in place by not providing cross examination bundles to opposing counsel until about 30 minutes before an examination is set to begin.

Presentation Considerations

• Displaying Documents: It is important to make sure the online platform chosen to host the video hearing includes a mechanism to display documents on the screen so all participants can see them. Most online video platforms, including Zoom, have this feature. It is helpful to pinpoint specific pages or sections of documents so that the process is as seamless as possible.

• Effective Cross Exam: The obvious difference when conducting a cross-examination via video is the loss of in-person, face-to-face contact with the witness, the tribunal, and opposing counsel. The witness should be positioned close enough to the camera to gauge facial expressions and other silent cues.

Arbitral Institution Rules

Most of the various arbitral institutions do not have rules in place specifically addressing videoconference hearings, or more generally, addressing what to do in times of local, national, or global crises.

For example, both the American Arbitration Association’s construction and commercial rules provide that an arbitrator may “allow for the presentation of evidence by alternative means including video conferencing.”

Similarly, pursuant to the JAMS arbitration rules, “[t]he Hearing, or any portion thereof, may be conducted telephonically or videographically with the agreement of the Parties or at the discretion of the Arbitrator.”

The International Institute for Conflict Prevention & Resolution is silent about videoconference hearings, providing only that unless the parties agree on the place for the arbitration, the tribunal shall decide “based upon the contentions of the parties and the circumstances of the arbitration.”

Rules promulgated by the International Chamber of Commerce , the London Court of International Arbitration, and the Singapore International Arbitration Centre provide for videoconferencing for emergency procedures. But none of these institutions appear to contemplate full merits hearings by video, much less provide specific rules for how such video hearings should proceed.

Although arbitral rules are aimed at providing individual arbitrators and parties significant control over hearing procedures, it would be helpful to have specific, consistent guidance from these institutions on how virtual hearings should be conducted.

More generally, parties would benefit from institutional guidance about how matters should proceed in the face of natural disasters or catastrophes. The Covid-19 pandemic hit the U.S. hard and fast. With many hearings already in progress, arbitrators, lawyers, and clients alike were faced with difficult decisions about whether to continue in-progress hearings in person or whether to adjourn hearings without any idea about when a live hearing could resume and no existing rules or protocols in place for continuing by video.

Although arbitrators generally have discretion to conduct a merits hearing as they see fit, explicit guidance about adjourning hearings during a global health crisis, national disaster, or other widespread catastrophe would be valuable for parties and arbitrators alike.

*This article previously appeared in Bloomberg Law.

Author Information

Jessica Sabbath is a senior attorney in King & Spalding LLP’s Trial and Global Disputes practice in Atlanta. She focuses on construction-related disputes, particularly those arising from large energy projects. She also has extensive commercial litigation experience in state and federal courts at the trial and appellate levels, as well as domestic and international arbitration experience.

Brianna E. Kostecka is a senior associate in King & Spalding’s International Arbitration practice in New York. She focuses on domestic and international litigation and arbitration of construction disputes involving large-scale projects primarily in the energy, oil and gas, and manufacturing industries. She has also represented clients in complex matters involving commercial agreements.

Recent Decisions Clarify Statute of Repose

A statute of repose bars claims against a defendant for a given period of time after completion of project. These statutes are stronger than statutes of limitation because tolling is not permitted. Clients including architects, engineers, builders, and contractors should understand their state’s statute of repose to effectively manage and mitigate risk.  Courts continue to interpret many of the most important aspects of their state’s statute of repose. Some of the most litigated issues remain:

1. What constitutes substantial completion sufficient to trigger the statute?
2. To which claims does the statute apply?

 Multi-Phase Construction in Massachusetts
Large projects often involve multiple phases. In D’Allesandro v. Lennar Hingham Holdings, LLC, 2019 WL 5550629, at *3 (D. Mass. 2019), a 150-unit condominium project in Massachusetts was completed over 24 phases. Several owners brought a suit for construction deficiencies and code violations involving the common areas of their buildings. The suit was filed two and half years after completion of the project.

The United States District Court for the District of Massachusetts agreed with plaintiff’s argument that the statute did not run from the time the architect signed off on substantial completion. Instead, it held Massachusetts’s six-year statute of repose was triggered only after the entire project was completed.

The court determined that while plaintiff’s claims for negligence and breach of implied warranty were subject to the statute, it did not apply to claims for intentional misrepresentation, negligent misrepresentation, violation of Massachusetts’ unfair business practices statute, and breach of fiduciary duty.

Ambiguity in Georgia

A recent decision by the Georgia Court of Appeals has left the local construction industry with more questions than answers. In Southern States Chemical, Inc. v. Tampa Tank & Welding, Inc., 836 S.E.2d 617 (Ga. App. 2019),  the enforceability of long-term warranties appears to have been significantly impaired. The court applied the statute of repose against a warranty-contract claim. The court surprised many by holding Georgia’s eight-year statute applied to claims arising from a contractor’s forty-year warranty against defective work.

The improvement in question was a chemical tank and the purported warranty was drafted after it began to leak. To further complicate matters, the court also determined the warranty only covered one year.

This case may be on its way to the Georgia Supreme Court for clarification. All parties to existing warranty agreements are watching closely to determine whether their contracts remain enforceable.

Building owners are concerned because the long-term warranties they bargained for suddenly appear in jeopardy. Contractors are apprehensive because they may no longer have the ability to incentivize construction of high-quality long-term improvements.

Contracts Covered in Ohio
The Supreme Court of Ohio confirmed the Buckeye State’s 10-year statute of repose applies to both tort and contract claims. In New Riegel Local School District Board of Education vs. Buehrer Group Architecture and Engineering, Inc.,157 Ohio St.3d 164 (Ohio 2019), the court clarified any lingering questions about the scope of the law.

In New Riegel, the Supreme Court of Ohio found the statute applies to “all causes of action,” that seek “to recover damages for bodily injury, an injury to real or personal property, or wrongful death, that arises out of a defective and unsafe condition of an improvement to real property *** against a person who performed services for the improvement to real property or a person who furnished the design, planning, supervision of construction, or construction of the improvement to real property.”

Conclusion
Regardless of how broadly these rulings are interpreted, clients contemplating claims involving improvements to real property should avoid unnecessary delay in bringing those claims. Although the broad contours of the statute of repose may seem consistent, essential details continue to be clarified in state courts.
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Patrick McKnight is a January 2020 graduate of Rutgers University earning both his JD and MBA.  Mr. McKnight can be contacted at patrick.joseph.mcknight@gmail.com

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

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

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

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

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

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

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

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

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The author, Brendan Carter, Esq., is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA. He is a monthly contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.

Midwinter Meeting Lunch Presentation: Los Angeles Rams Stadium

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

 

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

Economic Loss Doctrine - New from Rhode Island

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

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

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

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

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Katharine Kohm, Esq. is a committee member for The Dispute Resolver. She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island.

Register Now: the 2019 Midwinter Advocacy Practicum

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

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

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

 

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

 

If registering for the meeting - $200

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

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

 

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

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

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

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

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

In October 2013 the government directed K-Con to supply performance and payment bonds before a notice to proceed could be issued.  K-Con initially refused but ultimately provided the bonds two years later.  The contracts were then adjusted to add the cost of the bonds.

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

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

K-Con also argued against application of the Christian doctrine.  The Court held that to incorporate a clause under the Christian doctrine, it must find both that the clause is mandatory, and that it expresses a significant or deeply ingrained strand of public procurement policy.

The Court noted that the Miller Act states that the contractor “must” secure bonds before a construction contract of a certain value is issued and that FAR 28.102-3(a) specifies that FAR 52.228-15 “should be inserted in the solicitations and contracts for construction.”  Thus, the Court found that bonding requirements were mandatory.

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

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

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

Contractor Submits $4.5M Claim for Differing Site Conditions, Fed Court Rejects and then Imposes Liquidated Damages for $400K

The U.S. Court of Federal Claims shows contractors once again the dangers that can exist when pricing a performance specification and the importance of giving owner’s proper notice for change orders in CKYInc. v. Unites States of America. 

In 2012, the Government awarded CKY, Inc. a $6.4M contract to widen and rehabilitate the Urban Presidio Levee located in Presidio, TX.  The work required CKY to excavate existing materials in a series of benches and then infill the benches with new materials.  The contract contained a material testing specification which required the new fill material meet certain requirements.  The existing “benched” materials was further required to meet a performance specification as to moisture content and compaction rates.

During the bid process, the Government released Amendment 003 which contained questions and answers from bidders to the Government.  Within that document, the Government stated:

•       “Due to contamination in situ and the Contractor’s excavation processes, [the Government] cannot state that excavated material will meet…requirements. The Contractor is required to meet the embankment specification regardless of the source of the embankment material.”
•     “Question: Will removal and disposal of any unsatisfactory material from the existing levee embankment be paid as a separate item, as it is unknown how much material will be unsuitable for use in the new embankment? Government Response: No.”

Furthermore, the bid documents contained a geotechnical report for the existing ground conditions, but the report included the following disclaimer:  

“The data and report are not intended as a representation or warranty of continuity of conditions between soil borings nor groundwater levels at dates and times other than the date and time when measured. The [Commission] will not be responsible for interpretations or conclusions drawn there by the Contractor.”

During construction, CKY had difficulty achieving the subgrade requirements for moisture and density which resulted in schedule delays. CKY alleged at this time it was directed by the Government to place new suitable materials over the “unacceptable, non-constructible subgrade.”

In August of 2016, CKY filed a complaint in the U.S. Court of Federal Claims claiming costs for: (1) differing site conditions; (2) defective specifications; (3) constructive change; and (4) breach of an oral and implied-in-fact contract.

The Government moved for summary judgement contending CKY’s interpretation of the contract and specification were improper and CKY had not provided adequate notice of differing site conditions. It then filed a counter claim for liquidated damages.

The Court began its analysis by stating the primary issue in the dispute is the suitability of the subgrade material and CKY’s entire claim is based upon its contract interpretation that the subgrade was to be “acceptable and constructible.” 

The Court first examined the Government’s assertion CKY’s interpretation of the contract documents and specifications were incorrect.  The Court reviewed the items contained within Addendum 003 and the geotechnical report disclaimer and found that a reliable contractor could not have relied on the subgrade soil to meet the requirements of the specifications.  The Court elaborated that, “When all parts of the contract are assigned meaning and understood in their entirety, CKY’s reliance on its own interpretation of the constructability and suitability of the subgrade material was unreasonable.”

The Court next reviewed the differing site condition claim and CKY’s argument that “constructive notice” had been given to the Government.  The Court noted constructive notice is allowed only if “the Government is not prejudiced by a lack of written notice.”  The Court reasoned that since it took CKY over a year to submit a REA for the subgrade materials, the Government was prejudiced because it could have stopped construction to evaluate all options other than a $4.5M change order.

Finally, the Court found that as a result of finding CKY had no basis for a claim and the project being 225 days late, liquidated damages as identified in the contract were appropriate in the amount of $1,885 per day.

In conclusion, the Government was granted summary judgement and awarded $424,125 in liquidated damages.

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The author, Brendan Carter, Esq., is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA. He is a monthly contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.

Ohio Supreme Court: Subcontractor Defective Work Not an "Occurence"

The Ohio Supreme Court, in Ohio Northern University v. Charles Construction et al. Slip Op. No. 2018-Ohio-4057, recently issued a decision impacting insurers and contractors in that state.  This Ohio outcome could eventually be adopted by courts or legislatures in other states.  In Ohio Northern, the Court held that defective work by a subcontractor is not within the meaning of an “occurrence” entitling a contractor to coverage under its commercial general liability policy.   By so deciding, the Court’s analysis ultimately ended at the issue of coverage, and did not reach the question of whether the policy’s “your work” exclusion was avoided by an exception under the Products-Completed-Operations-Hazard (PCOH) endorsement.  

The underlying facts involved the construction of a hotel and conference center.  After the project was completed, water leaks caused millions of dollars of damage.  The cause of the water infiltration was believed to be from the subcontractor’s defective work.  The owner filed suit against the contractor.  In turn the contractor submitted the claim to its insurer.   The insurer intervened and filed for declaratory judgment claiming that it had no obligation to defend or indemnify the contractor.  The trial court agreed, the appeals court reversed, and then the Ohio Supreme Court sided with the insurer.

The crux of Ohio Northern expanded the holding of a 2012 case, Westfield v. Custom Agri Systems, 979 N.E. 2d 269 (Ohio 2012).  In that earlier decision, the Court observed that a CGL policy provides coverage for property damage and personal injury caused by an occurrence, but held that a contractor’s own defective work was not an “occurrence.”  Applying that same analysis here, the Court again focused on the plain language of the definition of “occurrence” under the policy: “An accident, including continuous or repeated exposure to substantially the same generally harmful conditions.”  The undefined word, “accident,” the Court said necessarily meant “fortuitous” and that a subcontractor’s defective work is not fortuitous. Rather the defective work is a known business risk that the contractor can control and manage.  In sum, although the water leaks caused property damage and the damage was discovered after the project was complete (which would trigger the PCOH), the prerequisite linchpin was an “occurrence” and that element was missing.

The Court acknowledged that other jurisdictions have gone the opposite direction from its conclusion about subcontractor defective work not being fortuitous.  It also noted that after a similar decision in Arkansas, that state legislature stepped in to pass a statute requiring any CGL policy sold in that state to include “faulty workmanship” within the definition of occurrence.  For Ohio contractors, beyond waiting for the Ohio general assembly to possibly consider new piece of legislation, they may wish to contact their brokers and explore options for defective work endorsements.  Contractors outside of Ohio may want to consider the same to stay ahead of any future decisions in their states.

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Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island.