Federal Circuit Affirms Absence of Differing Site Condition But Remands for Delay Claim

Mary C. Oswell collection, Bonita Museum,
available at http://sunnycv.com/southbay/exhibits/water.html 

The case Meridian Eng'g Co. v. United States, No. 2017-1584, 2018 WL 1386147, at *10 (Fed. Cir. Mar. 20, 2018) concerned a dispute between the federal government and a contractor related to the construction of flood control structures and the relocation of a sewer line in Chula Vista near San Diego, California.  After starting work, the contractor encountered "subsurface organic/unsuitable material” and “a layer of dripping saturated dark clay material under which a clean layer of sand is producing water.”  As a result the parties modified the contract - selecting larger pipes, reinforced concrete, more soil investigation, but to no avail.  The project was terminated after further structural failures.  The contractor then sought extra costs for what it deemed a Type I differing site condition ("DSC") and for delay costs for inclement weather. The Court of Federal Claims denied the claims and the contractor appealed to the United States Court of Appeals for the Federal Circuit.  The Appeals Court reviewed for "clear error."

Under this federal contract, a Type I DSC claim arises when the subsurface or latent physical conditions at the site differ materially from those indicated in the contract documents.  The Appeals Court recounted that typically whether "a contract contained indications of a particular site condition is a matter of contract interpretation." Id.  As part of its burden of proof, the contractor needed to show it acted as "a reasonable contractor [when] reading the contract documents as a whole [and] interpret[ing] them as making a representation as to the site conditions.”  Besides reliance on the contract and proof of damages, the contractor also needed to prove that “the actual site conditions were not reasonably foreseeable to the contractor with the information available to the particular contractor outside the contract documents” as well. Id.  The Appeals Court agreed with trial court's conclusion that the saturated soil conditions were reasonably foreseeable from the contract documents.  In particular, the contract stated that the worksite was located on a floodplain and the descriptions of the incorporated boring logs expressly stated that "variations may exist in the subsurface between boring locations."  The court also emphasized that "actual conditions at the site indicated such [saturated] conditions" and the contractor was charged with knowing information that could be gleaned from a pre-bid site visit.  The court found important that there was no testimony from the contractor otherwise regarding the actual conditions.

For the contractor's part, it argued that the contract had identified the areas of the project as "hard unyielding material.”  But the Appeals Court was unpersuaded in the face of disclaimer contract provisions noting "unstable material" and boring logs that were determined to indicate otherwise. The contractor also balked that trial court found that an "independent soils investigation" was something a reasonable contractor would have performed.  Again the Appeals Court disagreed concluding that the underlying decision actually did "not impose an improper requirement for investigation." Lastly, the Appeals Court disposed of the contractor's argument that the agreed-to modifications to the contract served as admissions by the government that a Type I DSC existed because "a contractor is not entitled to the benefit of any presumption arising from the [CO]'s decision." Id.

Although the contractor did not prevail on the DSC claim, the Appeals Court did breathe new life into the delay claim for having to work in inclement weather.  The trial court had dismissed this claim as well on account of an "accord and satisfaction" as a result of contract modifications. However, the Appeals Court disagreed noting that the contract modification did not represent a meeting of the minds to dispose of these inclement weather delay claims especially in light of the government's actions post-modification - requests for estimates, draft modifications with these claims included, offer to review further documentation.  Accordingly this delay claim was remanded for further hearings.

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

  

 

Construction Vignette on Personal Jurisdiction

Recently the United States District Court for the District of Rhode Island offered a concise refresher on personal jurisdiction through the lens of construction contractors.  In Sugar Fox 218, LLC v. Greython Constr., LLC, No. CV 16-470S, 2017 WL 1906963 (D.R.I. Mar. 17, 2017), rep. & rec. adopted sub nom. 2017 WL 1900273 (D.R.I. May 9, 2017), the court walked through the several factors that established general jurisdiction in Rhode Island over a defendant contractor who had performed the disputed work for a project in neighboring Connecticut.  Recall that, "[u]nlike specific jurisdiction, which focuses on the cause of action, the defendant and the forum, general jurisdiction is dispute blind with the sole focus on whether the defendant is 'fairly regarded as at home' in the forum." Id. (quoting Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915 (2011)).  The Court's step-wise analysis serves as an important reminder that a contractor's business touches in a state can add up to "minimum contacts" and being haled to court in a state even though the dispute did not even stem from work in that state.  

To confer general jurisdiction, the Court recounted that "(1) the defendant must have sufficient contacts with the forum state; (2) those contacts must be purposeful; and (3) the exercise of jurisdiction must be reasonable under the circumstances." Id.  In Sugar Fox 218, the defendant's main location was in Connecticut, it was organized under Connecticut LLC law, its employees all resided in Connecticut, and it did do much work there.  However, Court determined that the following purposeful contacts all weighed in favor of exercising general jurisdiction over the contractor as though Rhode Island was its "home":

• website included locations in Providence and Watch Hill, Rhode Island (noting that "the website alone would not be sufficient to confer general personal jurisdiction in this case")
• routinely sent employees into Rhode Island
• completed at least seven projects in Rhode Island in the months prior to suit
• currently is completing projects in Rhode Island
• maintained a permanent “on call” status for one project in Rhode Island
• registered as a contractor to do business in Rhode Island
• its proximity to Rhode Island

As far as the fairness and reasonableness of exercising jurisdiction, the "gestalt" factors, the defendant contractor was not able to carry its burden that the Rhode Island jurisdiction was unfair. The Rhode Island courthouse was actually more convenient for the defendant in terms of distance, the plaintiff was from Rhode Island and selected Rhode Island as its forum, and there was no injustice for a Rhode Island federal court interpreting Connecticut law.  Note also that the defendant contractor  was unable to carry its burden to transfer the venue to Connecticut, which analysis was similarly based on convenience and fairness.

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

Amount in Controversy Not a Barrier to Federal Court Review of Arbitration Award

In Pershing, LLC v. Kiebach, 2016 WL 1375874 (5th Cir. April 6, 2016), the 5th Circuit considered an interlocutory appeal whether the district court properly exercised jurisdiction over a case that involved an arbitration award of only $10,000.  The 5th Circuit "adopting the better reasoned approach" concluded yes.

The underlying matter concerned an alleged Ponzi scheme.  Investors (Kiebach and others) claimed that a clearing broker agent of Pershing failed to disclose adverse financial information causing them $80 million in damages.  After a two week hearing, a Financial Industry Regulatory Authority ("FINRA") panel found against the investors' claims, but awarded them $10,000 in compensation for "certain arbitration-related expenses." Pershing filed a motion to confirm the arbitration award in federal court pursuant to the Federal Arbitration Act ("FAA").  The investors moved to dismiss because, although the parties were diverse, the amount in controversy was only $10,000, not the threshold amount of greater than $75,000.

Noting that federal courts diverge, the 5th Circuit observed that the "courts that have confronted this issue generally follow one of two approaches—the award approach or the demand approach."  As the name would suggest, the "award approach" determines the amount in controversy based on the "underlying arbitration award regardless of the amount sought."  In contrast, the "demand approach" ties the amount in controversy to "amount sought in the underlying arbitration." Based on the Investors' arbitration demand of $80 million, the district court had decided that the $75,000 amount in controversy was met.  The 5th Circuit agreed.

The 5th Circuit's rationale relied three points.  "First, the demand approach recognizes the true scope of the controversy between the parties."  The Court observed that the Investors were likely opposing the confirmation of the award because they were not satisfied with $10,000 on their original $80 million claim.  Second, "the demand approach avoids the application of two conflicting jurisdictional tests for the same controversy." Essentially using the award approach would result in two different jurisdictional outcomes at the beginning of the arbitration and at the end.  In other words, a motion to compel arbitration, based on the amount claimed (if more than $75,000), could be heard by the court.  But then, for the exact same case, the motion to confirm the later arbitration award (if ultimately less than $75,000) could not be heard by the court.  This dichotomy is irrational and would possibly promote "gamesmanship" of filing motions for arbitration at the start of the case in order to "to preserve their right to a federal forum for review of the eventual award."  The third rationale for using demand approach was that the jurisdictional outcome would be the same had the case been arbitrated or litigated. 

The concurring opinion pointed out that while the demand approach was appropriate in this case, it was not "necessary or advisable to adopt any such general approach" for all cases going forward.  Rather the concurring judge believed the better approach was to take each matter on a case-by-case basis on its facts.

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

U.S. Supreme Court Enforces Forum-Selection Clause in Construction Subcontract

On the Best Practices Construction Law blog, Matt DeVries posted an interesting summary of the U.S. Supreme Court's recent opinion concerning enforcement of forum-selection clauses in construction contracts in Atl. Marine Const. Co., Inc. v. U.S. Dist. Ct. for the W. Dist. of Tex., 2013 U.S. LEXIS 8775, 2013 WL 6231157 (Dec. 3, 2013), reversing 701 F. 3d 736 (5th Cir. 2012). Matt's article analyzes the Court's reasoning and some of the practical implications of the ruling.

In the case, the Supreme Court held that forum-selection clauses requiring litigation in federal courts in other districts should be enforced by motions to transfer under 28 U.S.C. § 1404(a), which governs transfers "[f]or the convenience of the parties and witnesses," rather than through motions to dismiss under 28 U.S.C. § 1406(a) or Federal Rule of Civil Procedure 12(b)(3) for improper venue. (Forum-selection clauses requiring litigation in state courts can be enforced through the common-law "residual doctrine of forum non conveniens," as the statute permits only transfers and not dismissals.)

The case involved a Texas subcontractor that filed suit for nonpayment on a construction project located at Fort Hood in Texas. The general contractor was located in Virginia, and the parties' subcontract included a forum-selection clause requiring the parties to litigate their disputes in state or federal court in Virginia. The subcontractor filed suit in the U.S. District Court for the Western District of Texas, which denied the general contractor's motions to dismiss or transfer venue based on the forum-selection clause. The U.S. Supreme Court reversed, pointing out that forum-selection provisions should be granted deference absent "extraordinary circumstances" not present in the case.

Early reactions to the opinion have been mixed. Tom Ichniowski at Engineering News-Record interviewed Atlantic Marine’s attorney Michael Sterling (Vandeventer Black, LLP), who believes the ruling supports the enforceability of forum-selection provisions in construction contracts. The article presents an opposing view from attorney Eric Travers (Kegler Brown Hill + Ritter), who filed an amicus brief on behalf of the American Subcontractors Association. He pointed out that the Supreme Court remanded the case for consideration of public-policy interests, and that 24 states have found similar forum-selection clauses invalid.

As a Texas-based construction attorney, I'll add a public-policy wrinkle: Texas has a statute which gives a subcontractor performing construction or repair work on a project in Texas the option to void any contractual provision making disputes "subject to another state's law, [or] litigation in the courts of another state." Tex. Bus. & Comm. Code § 272.001. On remand, the subcontractor might raise this statute (if it hasn't already) as support for its argument that the case should not be transferred to federal court in Virginia.