Wednesday, November 21, 2018

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.
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.

Saturday, November 10, 2018

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.

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