Tuesday, October 28, 2014

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.


Thursday, October 23, 2014

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 21st 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. 

Monday, October 20, 2014

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.


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.”

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. 

Monday, October 13, 2014

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:




Friday, October 10, 2014

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.

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:

Friday, October 3, 2014

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.