California General Contractors May Prospectively Waive Lien Claims

Christopher Ng recently posted an interesting article concerning the waiver of a general contractor's priority for its mechanic's lien rights through a subordination agreement with the project lender under California law.

California General Contractors May Prospectively Waive Lien Claims

General contractors are often asked (or required) to subordinate their lien claims by owners and lenders before commencing work on a construction project. It may not come as a surprise to these contractors that such a subordination agreement may be enforceable in most states. In California, however, where the mechanics lien is a constitutional right under the California Constitution, the question of enforceability of such a subordination agreement against a general contractor was not as certain.

In Moorefield Construction, Inc. v. Intervest-Mortgage Investment Company (September 30, 2014), the California Court of Appeals held that, despite the constitutional protection and priority rights accorded to mechanics liens, a general contractor could waive its mechanics lien rights through a subordination agreement with a construction lender.

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New York Commercial Division Enacts New Rule to Promote More Efficient Privilege Logging

In document-intensive construction cases, a complete privilege log with enough information to allow the opposition to determine whether to challenge the assertion of the particular privilege is time-consuming and burdensome. This post, written by Joseph Imperiale and Kristopher Berr of Pepper Hamilton LLP summarizes a new rule in New York that attempts to rationalize the process of putting together a privilege log:

When responding to document requests or a subpoena duces tecum, litigants in New York traditionally have been faced with the onerous privilege log requirements set forth in Section 3122 of the New York Civil Practice Law and Rules.  Section 3122 requires a litigant who withholds any responsive documents to provide to the requesting party a privilege log containing a separate entry for each withheld document.  Each entry must disclose the legal grounds on which the document is withheld, in addition to certain identifying information including the type of document, the general subject matter of the document, and the date of the document.  N.Y. CPLR § 3122(b).  In complex construction disputes, there is often a large volume of privileged documents, and thus preparing a privilege log that meets the requirements of Section 3122 can be time consuming and expensive.

The “New York State Chief Judge’s Task Force on Commercial Litigation in the 21^st Century” recognized that the privilege log procedure of Section 3122 “has become a substantial expense in complex commercial litigation” with a “demonstrable need” for reform and issued a report in June 2012 recommending that the practice be reexamined.  In response, the Commercial Division Advisory Council drafted Commercial Division Rule 11-b, which represents a significant departure from the requirements of Rule 3122.  Rule 11-b requires that litigants work together to effectuate a newly expressed “preference in the Commercial Division…for the parties to use categorical designations” rather than line-by-line privilege logs.  22 N.Y.C.R.R. §202.70(g), Rule 11-b(b)(1).  Ultimately, Rule 11-b became effective on September 2, 2014.

The new rule requires the parties to “meet and confer at the outset of the case” to discuss the scope of the privilege review, the amount of information required to be set forth in the privilege log, the use of categories in the privilege log, including whether or not certain categories can be excluded from logging altogether, as well as any other pertinent issues.  22 N.Y.C.R.R. §202.70(g), Rule 11-b(a).  The stated goal of Rule 11-b is “to reduce the time and costs associated with preparing privilege logs”, and accordingly, “the parties are expected” under the rule to employ a categorical approach, rather than line-by-line logging.  22 N.Y.C.R.R. §202.70(g), Rule 11-b(b)(1).  Under this rule, the parties may use “any reasoned method of organizing the documents” into categories, which are to be provided to the requesting party in lieu of a document-by-document log.  22 N.Y.C.R.R. §202.70(g), Rule 11-b(b)(1). 

The rule recognizes that the categorical approach to privilege logging may not be appropriate or desirable in all cases and thus provides that the approach should be utilized only “where appropriate” and “where possible[.]”  22 N.Y.C.R.R. §202.70(g), Rule 11-b(b)(1).  But, where a party refuses to allow the categorical approach, the other party may seek an order shifting its costs, including attorney’s fees, to the party rejecting the categorical approach.  22 N.Y.C.R.R. §202.70(g), Rule 11-b(b)(2).  The courts are authorized to shift such costs “upon good cause shown.”  22 N.Y.C.R.R. §202.70(g), Rule 11-b(b)(2).

The parameters of “good cause” are not defined with any particularity in the text of Rule 11-b, and it is therefore unclear under what circumstances the rule’s cost-shifting provision takes effect.  For example, the rule does not indicate whether “good cause” to shift fees and costs is established merely where the court agrees that the categorical approach was preferable, if a showing of bad faith is necessary, or if “good cause” falls somewhere else along this spectrum.  The answer to this question will be borne out by the courts’ application of the new rule. 

No-Damages-For-Delay Provision Does Not Shield Owner from Liability for Deliberate Interference With a Contractor’s Work.

In a much-anticipated decision, the Texas Supreme Court has ruled in favor of a general contractor seeking to recover funds withheld by an owner for delays that the jury found were caused by the owner’s deliberate and wrongful interference. The Court addressed the effect of a no-damages-for-delay provision in the construction contract, as well as whether language in the waivers the contractor submitted for progress payments also waived the contractor’s claims for delay damages. Finally, the Court analyzed at length whether the applicable statutes waived the governmental immunity of the owner, a local port authority.

Background

Zachry Construction Corporation agreed to construct a wharf for the Port of Houston Authority for over $62 million. The construction contract gave Zachry control over the means and methods of the work. It also stated that Zachry could not recover any damages from delays in the work, even if the delays resulted from “the negligence, breach of contract or other fault of the Port Authority.” The parties agreed to a provision that permitted the Port to recover its attorneys’ fees from Zachry if Zachry brought an unsuccessful claim under the contract.

As part of the construction of the wharf, Zachry planned to utilize an innovative technique that involved creating a long U-shaped berm made of frozen earth that would extend into the water to surround the worksite. Water would then be removed from the worksite, allowing Zachry to work “in the dry” for much of the construction work. Zachry believed that this technique would make the work less expensive, complete it more quickly, and provide environmental benefits to the Port.

Nine months into the project, the Port asked Zachry to add another section to the wharf, expanding the scope of the project by almost $13 million. To continue to meet the time deadlines in the project, Zachry proposed building a cutoff wall through the middle of the worksite, splitting the work area into two parts. Though the Port had reservations about this plan, it did not raise its concern before the parties executed the change order.

Two weeks later, the Port ordered Zachry to revise its plans to remove the cutoff wall. This forced Zachry to finish only a portion of the wharf “in the dry,” and then to remove the wall. The remainder of the project had to be finished “in the wet,” resulting in a delay of about two and a half years.

Zachry sued the Port several weeks after its refusal to allow construction of the cutoff wall. Zachry claimed about $30 million in delay damages. The Port argued that the contract precluded delay damages. The trial court disagreed, finding that the provision unenforceable if Zachry showed that the Port’s intentional misconduct caused the delay.

Zachry also sought to recover about $2.36 million in contract funds withheld by the Port as liquidated damages for delays. In response, the Port argued that Zachry had waived its claims by submitting applications for progress payments that included releases of certain claims. The trial court found the waiver language ambiguous and submitted the issue of its meaning to the jury.

In its defense, the Port contended that governmental immunity precluded Zachry’s claims. The Port also counterclaimed for close to $1 million in repair costs to remedy defective wharf fenders installed at the project, and for all of its attorneys’ fees under a contract provision that permitted the Port to recover all attorneys’ fees for any of Zachry’s claims that were not successful.

After a trial, a jury found that the Port breached the contract by rejecting the cutoff wall design, causing about $18.6 million in delay damages. According to the jury, the delay resulted from the Port’s “arbitrary and capricious conduct, active interference, bad faith and/or fraud.” The jury found that Zachry had not released its claim to the withheld funds, but also found in favor of the Port on the counterclaims for defective work.

On appeal, the court of appeals reversed the judgment in favor of Zachry. It found that the no-damages-for-delay provision barred any recovery of delay damages, regardless of whether the Port had intentionally or arbitrarily caused the delays. The court also held that the progress-payment releases were unambiguous and precluded any claims for the withheld funds. Finally, the court of appeals rendered judgment in favor of the Port on its claim for attorneys’ fees, awarding the Port almost $10.7 million.

Summary of the Texas Supreme Court’s holdings

The Texas Supreme Court reversed the court of appeals, holding that:

1. The no-damage-for-delays language did not apply, as a matter of public policy, to claims for delays caused by the owner’s intentional or arbitrary interference;
2. The actual waiver that the contractor signed for the progress payments was not ambiguous, and it did not waive the claims for the withheld claims;
3. Governmental immunity did not bar the contractor’s delay claims;
4. The Port was entitled to recover on its defective-work claims; and
5. The Port was not entitled to the award of attorneys’ fees.

Though the decision was 5-4, the dissent agreed with the majority on points 2 and 4, above. The dissent primarily concerned the governmental immunity issue (point 3), and thus did not reach the public-policy issue (point 1).

A contractor cannot waive claims for delays caused by the owner’s intentional or arbitrary interference

The Court found the no-damages-for-delay provision unenforceable against delay claims based on the owner’s intentional or reckless misconduct. While a contractor generally may agree to assume the risk of construction delays, exceptions to their enforcement apply where the delay resulted from the owner’s fraud, misrepresentation, or bad faith, or where the delay resulted from the owner’s active interference or other wrongful conduct, which includes arbitrary acts, willful misconduct, acting without due consideration, and acting in disregard of other parties’ rights. As the jury found that the Port caused the delays through “arbitrary and capricious conduct, active interference, bad faith and/or fraud,” the Court found that the Port could not enforce the provision against Zachry.

The Court noted that it was “doubtful” that the waiver of delay damages due to the Port’s “negligence, breach of contract or other fault” would even apply to deliberate, wrongful misconduct. It cited an amicus brief from the Associated General Contractors of Texas, which pointed out that contractors can (and often do) include in their estimates potential delaying events such as quality and completeness of plans and specifications, material shortages, weather issues, and soil conditions. These foreseeable issues can be taken into account using the contractors’ years of experience, education, and training. But no contractor can accurately assess potential delays “that may arise due to an owner’s direct interference, willful acts, negligence, bad faith fraudulent acts, and/or omissions.”

Under Texas law, contractual provisions seeking to exempt a party from tort liability for its own future intentional or reckless misconduct are void as against public policy. The Court applied the same rule to contract liability, to avoid “incentiviz[ing] wrongful conduct and damag[ing] contractual relations.” Even though Texas, unlike many other states, does not impose a duty of good faith and fair dealing in the performance of all contracts, the Court found such a duty unnecessary to prohibit provisions allowing a contracting party to evade liability for deliberate misconduct in the future.

A contractual requirement for the contractor to waive claims does not prevail over the actual language of the waivers signed

Next, the Court reversed the court of appeals’ ruling that Zachry had waived its claims for the $2.36 million that the Port withheld as liquidated damages. The Court disagreed with the trial court’s finding that the waiver language was ambiguous, instead holding that language unambiguously did not include Zachry’s claims. In particular, the progress-payment application released claims on “the portion of the Work completed and listed on” the invoice. The liquidated damages withheld by the Port, in contrast, were for delayed work that had not been completed, rather than work already finished.

Interestingly, the Court admitted that Zachry’s underlying construction contract could be read to require Zachry to waive such claims when it applied for progress payments. However, the language in the waiver Zachry actually submitted (whether it complied with the contract or not) did not encompass the claims for the withheld funds.

The Texas Supreme Court narrowly held that there was no governmental immunity for the contractor’s delay claims under these circumstances

Finally, a large portion of the majority, and the entire dissent, focused on whether the Texas legislature had waived the Port’s governmental immunity for Zachry’s delay claims. A more detailed examination of this issue is beyond the scope of this post, but the dispute concerned a statute waiving the governmental immunity of a local governmental entity for a contractor’s claims for its “balance due and owed . . . under the contract.” The majority and the dissent agreed that this issue was jurisdictional, but disagreed on whether delay damages were “owed under the contract” where, as here, the contract expressly prohibited delay damages. The majority found that such damages fell within the scope of the waiver.

Parties to construction contracts could use the public-policy exception to avoid damage waivers

This decision could significantly narrow the enforcement of contract provisions limiting recovery of damages in Texas. With some exceptions, Texas has prohibited contractual provisions that require a contractor to indemnify another person for property damage resulting in whole or in part from the fault of the other person, its agent, or its employee. Tex. Ins. Code § 151.102. The Zachry decision adds a public-policy exception invalidating waivers of damages caused by intentional or reckless misconduct. Contractors could argue that this exception applies to more than delay claims. For example, a waiver of consequential damages could be invalidated if a general contractor showed that the owner’s intentional or reckless misconduct caused the damages. Moreover, the Court’s reasoning might apply to conduct that is less culpable than recklessness, such as acting “without due consideration,” arbitrarily, or “in disregard of other parties’ rights.”

Zachry Constr. Corp. v. Port of Houston Auth., ---S.W. 3d ----, No. 12-0772 (Tex. Aug. 29, 2014) (Hecht, C.J.), (Boyd,J., dissenting).

The Fall Meeting in Chicago

Thank you to everyone who attended the Fall Meeting in Chicago last week. We on the steering committee are very excited about the annual planning session that we held on the Wednesday afternoon before the seminars began. Many potential initiatives were discussed, and all of them will need involvement, support, and participation from our Division 1 membership. 

As is the case with nearly all of our national meetings, Division 1 held a lunch meeting. During the Chicago Meeting, Division 1 teamed up with Division 6 for lunch and learning about Guided Choice Dispute Resolution. National expert Paul M. Lurie of Schiff Hardin, LLP in Chicago joined Tony Lehman of DLA Piper to discuss what Guided Choice is, why it matters, and how construction practitioners can use its principles both to resolve cases promptly and, potentially, to gain new clients.

Here's a photo from that presentation (apologies for the blurriness).

If you were unable to attend or if you did attend and want more information regarding Guided Choice, Mr. Lurie graciously put together a PowerPoint presentation that you can view simply by clicking on this link.

After the first day's seminars wrapped up, Division 1 got together in the laid back atmosphere at Bar Louie for a casual dinner. Thankfully, those of us who were at Bar Louie had the decency not to take the "your mouth is full at dinner" photos!  

From Bar Louie, most of the group headed over to Buddy Guy's Legends to see blues singer Nellie "Tiger" Travis in action. Buddy Guy's is surprisingly well-lit for being a blues club, so our photos of "Tiger" turned out reasonably well.

 

Once there, Division 1 was joined by a number of other folks from other divisions who realized the errors of their ways in not having as much of a fun itinerary as we did. Here are Division 1's Rob Ruesch and former Young Lawyers Division Chair Angela Stephens, who put the rest of us to shame by dancing their way through the show!

Division 1 Chair Nick Holmes was entranced by Tiger's show -- so much so that he bought the CD:

And yes, it's autographed!

A great time was had by all who attended. 

So, don't get left out of the fun! Be sure to attend either the Midwinter Meeting in Scottsdale, Arizona, the Annual Meeting in Boca Raton, Florida, or both. 

New Name, New Logo . . . Same Great Forum. The Forum on Construction Law. Building The Best Construction Lawyers

Plan ahead for the Forum's 2015 Midwinter Meeting on January 29-30, 2015 in Scottsdale, Arizona. 

This Week: Forum's Fall Meeting in Chicago

If you are attending the Fall Meeting in Chicago, you should have received an email last week with a link to the written materials. If you missed it, click here http://shop.americanbar.org/ebus/ABAEventsCalendar/EventDetails.aspx?productId=130853994

The Construction Law Practicum for New Construction Lawyers is occuring tomorrow at 3:30PM, October 14, 2014, at ABA headquarters.

For information on events while you are in Chicago, visit:

http://www.timeout.com/chicago/things-to-do

http://www.events12.com/chicago/october/

http://www.choosechicago.com/articles/view/CHICAGO-EVENTS-FESTIVALS-2014-CALENDAR-HIGHLIGHTS/1243/

United States Supreme Court To Review Two Qui Tam Issues: Application of “First-to-File” Under the Federal False Claims Act and Tolling Provisions of the Wartime Suspension of Limitations Act

The United States Supreme Court granted certiorari on July 1, 2014 to review the United States Fourth Circuit’s March 18, 2013, decision that reversed the district court’s dismissal of a qui tam petitioner’s False Claims Act (“FCA”) complaint, with prejudice. See United States v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013).

In his complaint, the petitioner alleged that Halliburton Company, KBR, Inc., Kellogg Brown & Root Services, Inc. and Service Employees International (collectively “KBR”) fraudulently billed the United States for services provided to the military forces serving in Iraq. The district court dismissed the petitioner’s complaint on two bases: (1) because the district court lacked subject matter jurisdiction over the petitioner’s claims under the “first-to-file” bar of the False Claims Act, 31 U.S.C. § 3730(b)(5) and (2) because the petitioner’s complaint was filed beyond the six-year statute of limitations and had not been tolled by the Wartime Suspension of Limitations Act (“WSLA”), 18 U.S.C. § 3287. The district court ruled that the WSLA did not apply to non-intervened qui tam cases. The Fourth Circuit, however, reversed and held that the district court did have jurisdiction and that the WSLA did apply to the qui tam action.

While there were previously filed qui tam actions against KBR urging false billing practices, the petitioner urged that those cases did not bar his qui tam action because they alleged false billing practices in different work scopes and by different employees in different company divisions than those alleged in his complaint. The Fourth Circuit, however, applied the “material elements test” that had been adopted by the Third, Fifth, Sixth, Ninth, Tenth, and D.C. Circuits, instead of a test requiring “identical” actions, and held that all of the actions essentially involved submission of false time sheets in order to falsely claim payment.

The petitioner further argued that, although the other cases were active when his case was filed, they had since been dismissed, so they were no longer a “pending” case giving rise to the “first-to-file” bar of the statute. On this point, the Fourth Circuit agreed and held that the district court’s dismissal with prejudice was incorrect.

Regarding application of the WSLA to toll the six-year statute of limitations for an action under the FCA, the statute originally tolled the statute of limitations regarding offenses involving defrauding or attempting to defraud the United States that were “indictable under any existing statutes,” but that requirement was deleted from the statute in 1944. KBR argued that the use of the term “offense” in the statute maintained the statute’s original intent to toll only criminal actions; therefore, the petitioner’s civil qui tam action was barred by the statute of limitations, which had not been tolled due to the Iraq conflict. The Fourth Circuit, though, held that, if Congress had intended that result, it could have done so by not deleting the “indictable” requirement in 1944, so the statute of limitations on the petitioner’s action had been tolled by the WSLA.

On July 1, 2014, the U.S. Supreme Court granted certiorari to decide:

1. Whether the Wartime Suspension of Limitations Act--a criminal code provision that tolls the statute of limitations for "any offense" involving fraud against the government "[w] hen the United States is at war," 18 U.S.C. § 3287, and which this Court has instructed must be "narrowly construed" in favor of repose--applies to claims of civil fraud brought by private relators, and is triggered without a formal declaration of war, in a manner that leads to indefinite tolling.

2. Whether, contrary to the conclusion of numerous courts, the False Claims Act's so called "first-to-file" bar, 31 U.S.C. § 3730(b)(5)--which creates a race to the courthouse to reward relators who promptly disclose fraud against the government, while prohibiting repetitive, parasitic claims--functions as a "one-case-at-a-time" rule allowing an infinite series of duplicative claims so long as no prior claim is pending at the time of filing.

We will keep an eye out for a decision, but in the meantime, for your reference, the U.S. Supreme Court docket information is linked here, and the Fourth Circuit’s March 18, 2013, decision is linked here.

Sixth Circuit Allows Lawsuit Against Indirect Parties Following Consolidated Arbitration

Jones Day recently posted an interesting article about a case allowing a subcontractor to proceed with a lawsuit against design professionals, even though the subcontractor, the design professionals, and others had previously participated in a consolidated arbitration.

Arbitration for One is Not Arbitration for All: Sixth Circuit Allows Lawsuit Against Indirect Parties Following Consolidated Arbitration

Recently, the U.S. Court of Appeals for the Sixth Circuit allowed a subcontractor's lawsuit against design professionals to proceed even though all parties had previously participated in a consolidated arbitration proceeding over the same issues. W.J. O'Neil Co. v. Shepley, Bulfinch, Richardson & Abbott, Inc., No. 12-2320, 2014 U.S. App. LEXIS 16607 (6thCir. Aug. 28, 2014). The design professionals were brought into the arbitration via indemnification claims by the owner, and there was no arbitration agreement between the subcontractor and the design professionals. Given this, the court found that the subcontractor's claims against the designers were not a part of the arbitration and not barred byres judicata. The court applied a technical approach to res judicata based on the principle that a party cannot be forced to arbitrate a claim against another party with whom it has not agreed to arbitrate.

The O'Neil decision is potentially significant for any consolidated construction arbitrations involving additional parties added through indemnification claims. Whether a contractor, project manager, or design professional, O'Neil holds that arbitration is binding and final only as to the parties who agreed to arbitrate the claims that are subject to arbitration. The result highlights the fact that the same claims may have to be relitigated in their entirety in a second proceeding—depriving everyone of a sense of finality. The risk of multiple proceedings and increased costs should be considered in determining how to proceed in a consolidated arbitration proceeding and how to draft arbitration clauses to minimize the risk of repeatedly litigating the same claims.

[...]

Here are links to the article's authors:

Scott W. Cowan

Kent W. Lindsay

Andrew D. Ness

Stephen V. O'Neal

E-Discovery Is Complicated, But It Is Still Discovery.

Reasonable cooperation between opposing counsel during discovery can save clients significant costs and delays in litigation. The current proposed changes to the Federal Rules of Civil Procedure to require more efficiency and proportionality in e-discovery certainly support those efforts. But some would argue that many discovery disputes could be avoided - even in the complicated world of e-discovery - if attorneys adhere to their fundamental obligations in discovery After all, e-discovery is still discovery, as we were reminded in Branhaven, LLC v. Beeftek, Inc., 288 F.R.D. 386 (D. Md. 2013).

In Branhaven, the defendant served discovery requests on the plaintiff on January 31, 2012. On March 21, 2012, the plaintiff’s counsel signed written discovery responses indicating that responsive documents would be available for inspection and copying at a mutually convenient time. The court noted, however, that counsel had done little, or nothing, in terms of a reasonable inquiry and had no knowledge of the number and identity of responsive documents when the written responses were provided. In fact, the record reflected that the plaintiff’s counsel had not taken any action until the middle of June when the plaintiff’s counsel finally produced some documents that were in counsel’s possession. Then, only a few business days before depositions were to start, the plaintiff produced 112,106 pages, apparently from certain e-mail servers and laptops that had been previously overlooked. In response to the defendant’s motion for exclusion and sanctions, the plaintiff argued that the production was mostly delayed because the plaintiff lacked access to passwords for the servers, which were purchased as part of an asset sale of another entity in 2011.

The court was not convinced. Instead, the court stated that, while a one-month delay before seeking vendor or IT assistance might be reasonable, a five-month delay was not.  Coupling that with the fact that plaintiff’s counsel’s signed responses had been made prior to any investigation by counsel, the court found the plaintiff’s actions punishable through the award of attorneys’ fees to the defendant for both the time spent drafting and prosecuting the motion for sanctions, and for the time spent converting the plaintiffs’ produced documents to a reviewable format (which was a separate complaint by the defendant). The court did not, however, exclude the documents.

E-discovery is time consuming, complicated, and costly, but as Branhaven reminds us, it is still discovery. Attorneys should not use meaningless and arguably misleading written responses to buy time and technically comply with Federal Rule 34. Accordingly, attorneys and their clients should be prepared to make a meaningful production before providing written responses that promise production at a mutually agreeable time and place.

For your reference, a copy of the Branhaven decision is linked here: http://www.mdd.uscourts.gov/Opinions/Opinions/branhaven1302013.pdf.

Guided Choice: A New Approach to Mediation

As you may have seen posted here at the Dispute Resolver late last week, our Division Lunch in Chicago will be discussing Guided Choice. Speaker Paul M. Lurie from Schiff Hardin LLP in Chicago and I will be discussing this approach to mediation that has attracted major users of litigation services, AGC and AAA. This post is intended to give a brief introduction to the concepts underpinning Guided Choice dispute resolution, and it will also raise some questions to consider for the presentation.

The information below has been distilled from articles and additional resources located at the Guided Choice Dispute Resolution blog, located at this link.

The Context: The Current Lay of the Land

As most of us know, construction trials in any forum – whether in an arbitration, in a bench trial, or before a jury – are becoming rarer and rarer. More than 10 years ago, the American Bar Association Section of Litigation featured a story by the then-chair of the Section Patricia Lee Refo discussing what she called “The Vanishing Trial.” As the statistics from Professor Marc Galanter cited in the article mentioned, nearly every type of civil case has seen a marked decline in the number of cases that go to trial.

What happened to these cases? There are a few possibilities. First, with the changes in law related to being successful at the summary-judgment stage, perhaps there are more factually lacking cases that are filtered out before they reach a trial. Second, judges and court systems encourage – some would say pressure – parties to explore settlement options and mediation more frequently and earlier in the process. Third, the ever-increasing costs for trying cases has pushed parties to settle cases. Finally, there often is a business reason to settle a case before trial – risks of outcome,  business distraction and use of resources, relationship preservation and business ethics.

As construction litigators, we encounter pressures from our clients to settle cases to avoid the potential downside at trial. Yet, even when we file a lawsuit in which two parties appear to hate each other more than any two business entities should, we end up settling the case anyway. At that point, we hear complaints from our clients and the other side about how much money they spent getting to what was always the most likely resolution.

This is where Guided Choice comes into the discussion.

What Is Guided Choice?

Since a settlement is almost always the most likely scenario, Guided Choice encourages a faster, earlier resolution of a dispute that also reduces expense Because it is based on standard mediation clauses the Guided Choice  procedures for resolution are incorporated into most  construction contracts without additional language.

The main purpose of Guided Choice is to have a more active, involved mediator who is working to confidentially diagnose the basis for the dispute and suggest  an effective  settlement process before any negotiations begin. Parties should not be required to negotiate until they believe they are ready. Guided Choice helps get them ready.  The mediator is brought into the process very early in the dispute, and he or she is engaged to review the existing problems and identify ways to resolve the case before discovery rumbles onward for years.

For example, the mediator begins talking in confidence to the parties and the attorneys early in the process. This helps the mediator to identify potential areas for impasse before the parties have spent thousands of dollars on mediation statements, experts, depositions, document exchanges, and the like. By identifying these problems early, the mediator can help the parties to engage in limited information exchanges. The amount of information that enables parties to make the business decision to settle is less than the amount needed for a lawyer to prepare for trial. Guided Choice helps the parties recognize the distinction.

Even if an impasse occurs, the mediator may be involved to assist the parties to craft a limited or modified  process for the parties focusing on the impasse issues where positions need to re-evaluated. This may involve the use of experts, Dispute Review Boards and binding or non-binding opinions from arbitrators or judges.. This assistance allows the parties – again, confidentially through the mediator – to design a dispute-resolution process that is appropriate for the size, importance, and complexity of the dispute.

What Are the Questions About this Approach?

As we will discuss in Chicago, this approach raises a number of questions in the minds of litigators. Since much of our presentation in Chicago will focus on these questions, I am only going to raise them here for folks to consider before the presentation.

1.         It sounds like the mediator being involved more in the process is just another layer of expense for our clients. Why would we pay a mediator in this way in addition to all of the other costs in litigating a case?

2.         With the mediator being so involved in the process and the process including deeper investigation than most mediations, it sounds like Guided Choice will delay the process of getting a case to arbitration/trial. Is this true?

3.         Look, all this touchy-feely stuff sounds great, but I know that the other side in this dispute is entirely irrational and unreasonable. Why would I waste my time and the client’s money engaging in a mediation that we know won’t work?

4.         My clients understand mediation is important. That is why we have written step-negotiation clauses into their contracts. Isn't that enough? Shouldn't those executives meet to work things out before we get a mediator involved?

5.         This does not sound like anything new to me. Isn't this the same process we have already in mediation?

6.         Why would I keep a mediator involved after an impasse is reached? That sounds like a waste of time and money and it sounds like it could cause me to have to disclosure trial strategies.

7.         Hold on a second – this sounds interesting and all, but it feels like that my clients and I are ceding control over the negotiations to the mediator. Why should I do that?

8.         Okay, you have me convinced that this is a great idea and will save my clients money, time, and effort. But, hey, I am a businessman too and this sounds like you are taking money out of my pocket. I mean, I want the best for my clients and all, but isn’t this set up going to cost my law firm and me money?

The Forum's Searchable Knowledgebase

Information, Please!

Everyone who has attended a Forum meeting knows that the Forum and its speakers produce high quality presentations and written materials. Not everyone knows that they can access all of these presentations and papers dating back to 2002 simply by accessing the Forum’s Searchable Knowledgebase.

The Knowledgebase is more targeted than a Google search and provides well over a decade of information written by experts in the field. Whether it is research on the economic loss rule, a primer on waivers of subrogation, or an explanation of an AIA or ConsensusDocs provision, it is all in the Knowledgebase and waiting for you to use it.

Take a test run by clicking here or by going to the Forum homepage and clicking on the link there. It will change the way you research tough issues in construction law!

Division 1 Activities at the Forum Meeting in Chicago

The Fall Meeting of the Forum is only a little over two weeks away now. As always, Division 1 is ready to provide our members with both a top-notch lunch presentation and a fun night out on Thursday evening.  Here's a little information about both of those events. 

Division Lunch: Guided Choice Dispute Resolution
Despite the advent of ADR, clients continue to complain about the high cost of resolving disputes -- especially since most construction disputes eventually settle before trial or arbitration. While mediation has increased in popularity, too often it is deferred until late in the adversarial process and after the parties have incurred the expense of legal and expert fees, discovery, and other pretrial activity. 

Guided Choice is intended to help the parties use mediation and other dispute resolution tools more intelligently to achieve earlier settlements at less expense and with greater client satisfaction in the outcome. A brief introduction will be posted here on the blog early next week.

Our main speaker for our lunch is Paul M. Lurie. Mr. Lurie has served as business and legal counsel for major owners, developers, design firms, and contractors for over 40 years. He has written several articles regarding mediation and arbitration generally and about Guided Choice in particular. Several introductory articles are available at a Wordpress blog called Guided Choice Dispute Resolution System.

Division 1 Social Event: Buddy Guy's Legends Blues Club

Join Division 1 for a fun night out in Chicago! We'll meet at 7:30 PM for beverages, conversation, and casual dining at Bar Louie at 47 W. Polk Street in the Printers Row neighborhood in the landmark Dearborn Station Building.

Dearborn Station

From there, we'll head around the corner to Buddy Guy's Legends at 700 South Wabash, one of Chicago's renowned blues venues, for the 9:30 PM show featuring blues diva Nellie "Tiger" Travis. Tickets for the Blues show are $10.

To RSVP, please e-mail Rob Ruesch by October 10 to ensure a seat. Tickets for the show may also be purchased at the door subject to availability. Both spots are a short walk from the Chicago Hilton. 

Don't miss out, or you will be the one singing the blues! 

California Allows Condo Association to Sue Architects for Design Defects Required by Developer

In a decision which was issued in July, the California Supreme Court in Beacon Residential Community Assn. v. Skidmore, Owings & Merrill LLP (July 3, 2014, Case No. S208173) upheld a decision by the California Court of Appeal to allow the subsequent condominium owners to sue the design professionals for their condominium for a construction defect caused specifically by a materials choice approved by the developer for the project.  How did the Court reach its decision?

Factual Background

Skidmore and HKS, Inc. served as the architects of record for The Beacon residential condominiums, a property located in San Francisco. The Beacon was designed for eventual sale as condominiums, though the entire community started as rental units for two years prior to the sale. As the opinion points out, the condo association was formed and all the covenants, conditions, and restrictions were recorded before construction on the project ever began. 

Once the condominiums were sold, residents began to complain about "solar heat gain" when the sun was on their particular side of the building. The association alleged in its complaint that Skidmore and HKS approved the use of less expansive, substandard windows that failed to meet local and state building codes. These windows led to the solar heat gain. The Association also alleged that Skidmore and HKS designed a building that lacked adequate ventilation, had excessive water infiltration, inadequate fire separation, structural cracks, and other safety problems.

Procedural Background

The trial court was not impressed with the allegations against the architects and, after the plaintiff's four attempts to plead causes of action with sufficient factual and legal support, the trial court dismissed the complaint. In so doing, the trial court agreed with the architects on two key points. First, the architects argued that they did not owe a duty of care to the Association or its members under the facts as alleged. Second, the trial court placed the onus for the problems on the fact that the architect looked to and relied on the building developer's approvals for the materials used.

The Association appealed this decision to the Court of Appeal, which reversed. The Court of Appeal held that, at the motion to dismiss/demurrer stage and as a matter of law, the architects have a duty of care toward the Association even without privity. The Architects appealed.

The Supreme Court Decision

The California Supreme Court affirmed the Court of Appeal opinion. While citing to a number of products-liability and contractor-negligence cases, the Supreme Court relied heavily on the same case on which the Court of Appeal relied -- Biakanja v. Irving, 49 Cal. 2d 647 (1958). Biakanja was a notary case relating to the witnessing of a will and whether that notary had any duties to third parties in the performance of that duty. The California Supreme Court held that the answer to that question was "yes" and set forth a number of factors to determine whether a professional has a duty to third parties.

That holding in Biakanja served as the main underpinning for this case. The Supreme Court applied the factors from Biakanja as follows:

1. The architects' work was intended to benefit homeowners living in the building that the architect designed;
2. It was foreseeable that the homeowners would be part of a limited class of persons harmed by a negligent design;
3. The Association's members have been damaged because their homes are unsafe and, at times, uninhabitable;
4. Because Skidmore and HKS were the sole architects, there is a close connection between their conduct and the injury suffered;
5. Because the architects played a unique and "well-compensated role" on the project (having been paid over $5 million for their work) and because the architects knew that future homeowners would rely on their specialized expertise, "significant moral blame attaches" to the architects' conduct; and, 
6. Preventing future harm to homeowners reliant on architects' specialized skills is a sufficient policy to recognize a duty of care.

Application

This decision rests in large part on the fact that this case was at the pleading stage and not at summary judgment. However, it provides a roadmap to those seeking to impose a duty of care on an architect for a subsequent purchaser of a property. 

The California Supreme Court refused to allow the architects to avoid potential liability on the basis that the developer of the property had been advised fully regarding decisions to be made during design. Put another way, the court is saying that the architect of record on a project cannot avoid responsibility for design defects by pointing to owner choices. The architect always must design the project properly.  

Texas Supreme Court Reinforces that Subcontractors May be Liable to Property Owners

by Kat Statman and Eddy De Los Santos

On August 22, 2014, the Texas Supreme Court ruled that both the trial court and the court of appeals improperly dismissed a property owner's claim for negligence against a subcontractor for improper plumbing installation in Chapman Custom Homes, Inc. v. Dallas Plumbing Company. The Court reiterated that a subcontractor has an implied duty to perform with both care and skill and that breach of this duty may result in liability to property owners. The Court's ruling in this case makes it clear that a subcontractor may be directly liable to a property owner even when the property owner and subcontractor do not have a contractual relationship.

In Chapman, Chapman Custom Homes was hired as a general contractor to build a home in Frisco, Texas. Chapman hired Dallas Plumbing Company to install the plumbing in the new house. The plumbing was allegedly installed improperly, and leaks from the plumbing significantly damaged the structure. The property owner sued Dallas Plumbing alleging breach of contract, breach of warranty, and negligence.

The trial court granted summary judgment for Dallas Plumbing because the property owner did not have a contract with Dallas Plumbing. Additionally, the trial court found the property owner did not allege a violation of a duty owed to it by Dallas Plumbing, independent of the contract.

 

Looking to a case from 1947, the Texas Supreme Court reversed the decision of the court of appeals. The Court found that, even though Dallas Plumbing and the property owner did not have a contractual relationship, Dallas Plumbing still had a duty to perform the contract with both care and skill. Therefore, the property owner's suit alleging that Dallas Plumbing had performed work negligently was sufficient to raise an implied duty by Dallas Plumbing to perform its work with care and skill.

The Court further rejected Dallas Plumbing's argument that the property owner was barred from recovery under the economic loss rule. The economic loss rule states that a party may not recover damages for failure to perform under a contract when the only damages are losing what the party expected to receive under the terms of the contract. The Court specifically noted that, when the tort duty is independent of the contract itself, the economic loss rule will not preclude recovery. In this case, the Court found that Dallas Plumbing had an independent duty to perform with care and skill. Because this duty was independent of the contract between Dallas Plumbing and Chapman Custom Homes, the economic loss rule did not preclude recovery.

There are a number of cases that state a subcontractor cannot be sued by a property owner for defective work because the property owner does not have a contract with the subcontractor, only with the general contractor. This case makes it clear that, while a property owner may not have a contract suit against a subcontractor with whom they do not have a contract, they may have a negligence claim. Importantly, this potential liability is independent of any contract with the subcontractor.

This case also reinforces an independent legal duty that subcontractors have to property owners when they are conducting work. At all times, they must perform the work with both care and skill. Failing to perform a contract with both care and skill may result in liability to the property owner in addition to potential contract liability to the general contractor.

Finally, because this duty and potential liability is independent of the contract between the subcontractor and general contractor, a subcontractor will not be able to escape liability under the economic loss rule. If a subcontractor breaches its duty to perform with care and skill, it will be liable for all damages caused by the breach. 

For your reference, the opinion is linked here.

A Contractor’s Remedies Under the Miller Act May Not Be Conditioned on State-Licensing Requirements.

In a matter of first impression, the United States Court of Appeals for the Ninth Circuit ruled that even though a contractor violated a state law requiring it to have a contractor’s license, the contractor was still eligible to make a claim under the Miller Act on a federal construction project. This decision brings the Ninth Circuit into a general agreement with other federal appellate courts that state law cannot abridge or condition a contractor’s rights and remedies under the Miller Act.

Plaintiff Technica was a subcontractor on a federal project in California. Technica provided almost $900,000 worth of labor and materials, but received less than $300,000 in payments. As a result, Technica filed suit under the Miller Act against the general contractor and its payment-bond surety.

Section 7031(a) of California’s Business and Professions Code precludes a contractor from maintaining an action to collect compensation for its services unless the contractor was licensed during the performance of the contract. Technica did not hold a California contractor’s license. The district court granted summary judgment in favor of the general contractor and the surety, holding that the state-licensing statute barred Technica from pursuing claims for nonpayment under the Miller Act.

In considering the appeal, the Ninth Circuit examined the Miller Act’s strong policy in favor of protecting subcontractors on public projects. Sovereign immunity prevents liens from being placed on public land, so Miller Act bonds are used to provide contractors an alternative means of securing payment on federal construction projects. Moreover, the Miller Act is considered highly remedial in nature and is liberally construed to protect entities that labor and/or provide material to public projects. The remedy provided by the Miller Act was federal in nature and the law that would prevent the unlicensed contractor from recovering was a state law. In addition, the court felt that enforcement of state-licensing requirements against Miller Act claims would “wreak havoc” on the uniform application of federal law, particularly in federal projects spanning multiple states.

The Ninth Circuit focused on the distinction between federal and state law as well as federal preemption in reversing the decision of the district court. It found that the state law could not abridge an entity’s right to pursue a Miller Act claim. The court conceded that while state contract law was sometimes used in evaluating a Miller Act claim, state contract law was not used to affect the rights established by the Miller Act.

This decision was one of first impression. It likely has broad applicability beyond the Ninth Circuit, as many states have contractor-licensing requirements.

Technica LLC ex. rel. v. Carolina Cas. Ins. Co., No. 12-56539, 2014 WL 1674108 (9th Cir. Apr. 29, 2014).

4TH CIRCUIT: DAVIS BACON ACT DOES NOT GIVE RISE TO PRIVATE RIGHT OF ACTION

The 4th Circuit Court of Appeals recently addressed whether the Davis Bacon Act, 40 U.S.C.A. §§ 3141 et seq., bestows a private right of action. In Quezada, et al. v. Clark Construction Group, LLC, et al., a Maryland federal district court granted a defendant contractor's motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), finding the Davis Bacon Act does not give rise to a private right of action. The 4th Circuit affirmed, citing cases from various other jurisdictions, including the 2nd and 5th Circuits, which have concluded that neither the language, history nor structure of the Act support the implication of a private right of action. It remains to be seen whether this issue will make its way to the U.S. Supreme Court. However, the reasoning of the various Courts of Appeal appears sound.

Predictive coding and litigating force majeure clauses in construction contracts

By Drew Lewis, Esq., ediscovery counsel at Recommind

Construction lawyers understand the importance of a comprehensive force majeure clause.  But in an increasingly tumultuous world where extraordinary events are difficult to predict, where can litigators find the evidence to support (or refute) claims of impossibility or impracticability?  Increasingly, the answer is in their client’s own data.  And with data volumes increasing on a daily basis lawyers are turning more frequently to predictive coding as their tool of choice.

Predictive coding, at the most basic level, is a machine learning system where exemplar documents are provided and the system retrieves other documents that are conceptually similar to the exemplar(s).  The system is language agnostic so it is not simply returning other documents that use the same words; rather it is returning documents regardless of how dissimilar they might appear based on key word analysis alone.  The use of predictive coding was first approved by a court in Da Silva Moore v. Publicas Groupe SA, 2012 WL 607412 (S.D.N.Y. Feb. 24, 2012); since that time it has become the subject of comment (and controversy) in the eDiscovery community. 

The ultimate benefit of predictive coding, and other advanced machine learning techniques, is not simply the decrease in labor hours (and subsequent cost to your client).  Instead, the ultimate benefit is to extrapolate the lawyer’s knowledge and insight to data volumes once thought unimaginable.  This extrapolation results in the ability to rapidly find what actually matters in the case, and leverage that information in a strategic manner.

In the construction context it can be vitally important for a party trying to prove (and even disprove) a claim of impossibility of performance by providing deep insight into the digital conversations of key players in the case.  In several instances, the party claiming unforeseen circumstances made performance impossible has produced documents – without the aid of this technology – only to have those documents examined using advanced technologies such as predictive coding, and having their entire theory undone by the data.  Predictive coding can isolate the key documents that showed what the performing party knew at the time of contract formation, and more importantly what they did to explore alternative performance.  The data often stands in stark contrast to the claims made in the pleadings, and it becomes clear what the performing party really knew (and when they knew it). 

Predictive coding, as part of a system of search techniques provides deep insight into what actually happened once performance became impracticable, but does so in a fraction of the time generally associated with the review process.  Parties on either side of the line in construction cases are well advised to discuss the use of this technology with their clients.

Delving Into Mock Trials and Jury Psychology

By: Galina Davidoff Director of Jury Consulting at Magna Legal Services

 Published On: Thursday, July 17, 2014 at www.enewsletters.constructionexec.com

There is hardly an experienced trial attorney who hasn’t lost what seemed like a very strong case. In fact, 68 percent of attorneys’ predictions of legal outcomes are wrong, according to a study.

It is hard to predict legal outcomes because of the great multiplicity of factors involved, especially in jury trials. While everybody knows that jurors’ pre-existing opinions matter, taking them all into account in a particular case is a challenging task. Consider the following two cases and the reactions of surrogate jurors who participated in the mock trials.

 

  

 

1.      In an upper-middle class, conservative venue, jurors discuss alleged violations of federal regulations by an owner of a construction project. The allegations are part of the defense put forward by the construction company, which in turn is accused of poor workmanship. Initially, all seems well for the construction company, but as the discussion progresses, the jurors are increasingly putting themselves in the shoes of the owner, finding more excuses for why he evaded, ignored and broke government regulations. The end result: Regulations are found to be broken, but the violations are deemed irrelevant and the construction company is viewed as responsible for all the alleged defects.

2.      A government agency claims it has no obligation to follow its contract because it is not the contract it intended to sign. The contract involves insurance coverage for multiple construction projects. The insurance company argues that the contract was negotiated by experienced insurance brokers on both sides and clearly says what it says. The case is in a multicultural liberal, mixed-income venue. In deliberations, jurors show disdain for the government agency and its wasteful ways, and eventually find against the insurance company, which they see as being sneaky and exploitative of government inefficiency.

If the venues were switched, the results likely would have been very different. The strategies were good; they just did not match the interests and the mood of the prospective jurors. As deliberations in these mock trials demonstrated, real estate is not only always local–it is also political. Jurors try to stay away from political arguments per se, but their conservative or liberal attitudes are clearly identifiable. This by itself may not be news, but these days peoples’ attitudes can shift and become more polarized quicker than expected.

Litigants and attorneys’ perceptions of the political climate and their own political orientations also play a role in their assessment of the strength of their case. Lawyers and business leaders are as human as jurors and as such cannot fully isolate their personal views. At this time of political polarization, even experienced trial attorneys often look across the divide with a sense of incomprehension, wondering how people can believe what they believe and where do they get their facts. Evaluating cases in such climate is even more challenging.

Because construction cases touch on many issues and opinions, trial lawyers have space to be creative and find juror predispositions that help their case. Neither of the aforementioned cases was hopeless. Different trial strategies produce different results. For example, in the first case, surrogate jurors taught the attorneys that stressing violations of government regulations was not a winning strategy. But they did learn how to focus jurors’ attention on the owner’s complete control over the project and the bad choices for which he now must accept responsibility. Now, when the case goes to trial, the construction company need not lose credibility by talking about government regulations. The insurance company learned that jurors were willing to let an ignorant government agency off the hook. Based on the jurors’ feedback, the company determined how to demonstrate the government agency’s full knowledge of the contract terms and thus its full responsibility.

It is not surprising that attorneys were able to learn so much from the small groups of non-experts. Studies show that groups and even crowds consistently beat experts in evaluating complex problems, such as predicting trial outcomes (see Predicting Civil Jury Verdicts. How Attorneys Use (and Misuse) of Second Opinion). According to the studies, the more experienced an attorney is, the less likely he or she is to take into account opinions of other equally experienced attorneys. The reason groups do better than experts is that people’s mistakes tend to cancel each other out, while experts tend to be entrenched and dismissive of contrary views. Thus, if the only people who evaluate a case are all well-educated and personally invested professionals, it limits the accuracy of the evaluation. For more information on the subject, read James Surowiecki’s The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations.

Time and again, jury research shows that outcomes can be changed with the right strategy and made much worse with the wrong one. Both academic and applied research finds that the best evaluations of complex problems such as civil jury trials are based on a variety of perspectives that come from groups and individuals with varied life experiences. Groups of disinterested observers appear to offer greater wisdom than experts alone in evaluating risks associated with complex events. Perhaps that is the reason jury trials have such an important place in the justice system in the first place.

Galina Davidoff, Ph.D., Director of Jury Consulting at Magna Legal Services, is one of the leading experts in development of winning trial strategies for complex commercial and criminal matters. Dr. Davidoff has consulted on a number of high profile cases and hundreds of cases across the nation. As a litigation and trial consultant, she has assisted her clients in the development of winning trial strategies, jury selection and voir dire, implementation of shadow juries, witness communication training, ordering evidence, opening/closing statements, the development of themes and arguments, demonstrative evidence preparation, and teaching persuasion techniques.

She can be reached at 866.624.6221 or GDavidoff@MagnaLS.com.

Reprinted with permission from Construction Executive, July 2014, a publication of Associated Builders and Contractors Services Corp. Copyright 2014. All rights reserved.