Increased Workforce Is Not "Delay" - Massachusetts Appeals Court affirms subcontractor award despite no-damage-for-delay clause

In Central Ceilings, Inc. v. Suffolk Construction Company, Inc., et al., - N.E.3d - 91 Mass.App.Ct. 231 (Mar. 29, 2017), the Massachusetts Appellate Court affirmed a $321,315 damages award against a general contractor in favor of a subcontractor.  The subcontractor claimed that as a result of the general contractor's mismanagement of the dormitory construction project (at Westfield State University) it was less productive and therefore incurred costs. 

Indeed the subcontractor, who installed exterior and interior wall systems, illustrated that properly sequencing its work "floor by floor, exterior to interior, building by building" was key to meeting its cost and time bid. The evidence presented showed that general contractor "struggled" coordinate the other trades who needed to complete their work before the subcontractor could begin, failed to timely survey the locations for the subcontractor to line up its panels, delayed making the building weather tight, among other delays.  The delays caused the subcontractor to perform costly extra work mobilizing and demobilizing and to incur project administration costs.  In addition, the subcontractor was not given extra time to do this work due to the looming liquidated damages that the general contractor would owe if the project was not completed on time (though the general contractor later attempted to dispute that the subcontractor had ever asked for extra time).  Instead the subcontractor was "compressed" and forced to assign, and pay for, extra personnel on the project. To support its claim, the subcontractor introduced an expert who opined, using the total cost method, that the loss was "best quantified through the impact it had on [the subcontractor's] manpower." After confirming the subcontractor's bid was "reasonable," he examined what the subcontractor actually spent to complete the project, what change orders were already paid, and concluded that the difference, $321,315, was the subcontractor's lost productivity.

In response, the general contractor pointed to the contract's no-damages-for-delay clause and asserted that the demanded recovery was wholly precluded. In pertinent part, the clause stated:

The Subcontractor agrees that it shall have no claim for money damages or additional compensation for delay no matter how caused, but for any delay or increase in the time required for performance of this Subcontract not due to the fault of the Subcontractor, the Subcontractor shall be entitled only to an extension of time for performance of its Work. Written notice of all claims for any extension of time shall be submitted to Contractor within ten (10) days of the date when Subcontractor knows (or should know) of the event which causes such delay, or such claim shall be considered waived by Subcontractor

The trial judge held, and the appellate court affirmed, that the unambiguous provision was inapplicable to the subcontractor's claim for two reasons.

First, the only remedy under the no-damages-for-delay clause was the extension of time but, here, no extensions were allowed in contravention to the agreement. The general contractor protested on appeal that no extension requests from the subcontractor were ever received, but the general contractor did not raise that issue at the trial court and the record belied that position anyway.  

Second, the trial court held and the appellate court affirmed that in strictly construing the draconian language of the clause, the subcontractor's damages claimed, lost productivity, were not "for delay" (precluded by the clause) but rather "it had been forced to increase its workforce due to the compression of the schedule occasioned by [the general contractor's] breaches" (not precluded by the clause). The trial court observed that the general contractor's "breaches did not affect [the subcontractor's] ability to complete its work on time . . . but, rather, with its ability to complete its work on budget."

Accordingly the award, and the total cost method for calculating the award, were affirmed.

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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.

KY Appeals Court Allows General Contractor’s Negligent Misrepresentation Claim for Defective Plans and Specifications Against Architect to Proceed

The case of D.W. Wilburn, Inc. v. K. Norman Berry Assocs. involves a dispute stemming from a project for the renovation of the North Oldham High School in Goshen, Kentucky. The defendant was the project’s architect who was contracted by the Oldham County Board of Education to provide design and construction administration services for the project.  The plaintiff was a general contractor who contracted with the Board for the four phases of construction with a completion date of May 31, 2009.  The general contract contained four fairly common payment provisions: 1) executed change orders must be signed by the architect; 2) claims for extra costs must be submitted within 21 days of the event giving rise to the claim; 3) executed changes resolved all claims related to that change; and 4) acceptance of final payment by the contract constituted a waiver of all claims not previously submitted to the owner at the time of acceptance.

During construction operations, the project completion date was adjusted through the issuance of twenty change orders which were all signed by the Board, defendant, and plaintiff as required by the general contract.  One of these, a comprehensive change order issued on February 2, 2010, addressed all issues related to claims for the final schedule and new completion date.  A final change order that incorporated punch list and closeout items was executed in February 2012 with submission of the final application for payment shortly thereafter. In May of 2012, the plaintiff forwarded an extended general condition cost request from its electrical subcontractor that was dated March 2009.  At the completion of the project, the electrical subcontractor filed suit against the plaintiff claiming, among other items, damages related to schedule delay. The plaintiff then filed a third-party complaint against the Board seeking indemnity and contribution for delays caused by the Board.  The plaintiff also filed a third-party complaint against the defendant alleging that it caused a project delay by failing to properly prepare plans and specifications which would allow for a timely issuance of a building permit.  The Board and defendant were both granted summary judgement by the trial court, with the plaintiff conceding it should be granted the Board due to the project record, and the trial court finding the lack of privity of contract between the Plaintiff and Defendant as a bar to recovery. The plaintiff appealed summary judgement granted to the defendant.

The Court of Appeals began its analysis of the case by reviewing the tort of negligent misrepresentation within the context of construction projects in Kentucky.  The Court found that the Kentucky Supreme Court had already found that Restatement of Torts § 552 negligent misrepresentation was available to third parties to a contract because, “duty, rather than privity, is a fundamental element under modern tort law” and a plaintiff could recover from a defendant for an “independent duty.”

The Court then looked other jurisdictions for an architect’s duties under § 552.  The Court quoted Davidson& Jones, Inc. v. New Hanover Cty.,41 N.C. App. 661, 666, 255 S.E.2d 580, 583-84 (1979) when it reviewed an architect’s duty under § 552.  The Davidson court stated:

“An architect, in the performance of his contract with his employer, is required to exercise the ability, skill, and care customarily used by architects upon such projects…Where breach of such contract results in foreseeable injury, economic or otherwise, to persons so situated by their economic relations, and community of interests as to impose a duty of due care, we know of no reason why an architect cannot be held liable for such injury. Liability arises from the negligent breach of a common-law duty of care flowing from the parties' working relationship.”

Accordingly, the Court concluded that the trial court errored when it found that the defendant did not owe a duty outside of the purely contractual ones owed to the Board.  Since the plaintiff claimed it reasonably and foreseeably relied upon the plans prepared by the defendant, and those plans were negligently prepared resulting in rejection by the approving authority, which in turn caused project delays, the Court was not in a position to say that the Plaintiff could not prove the elements of negligent misrepresentation.

The Court next examined the defendant’s argument that even if the plaintiff had stated a claim for negligent misrepresentation, it cannot recover damages because of the economic loss rule. The Court examined the evolution of the economic loss rule in Kentucky and ultimately concluded that since the economic loss rule is a function of contract, and there is no privity between the parties, it would not apply to a claim under § 552. The Court stated:

“It is the very purpose of the tort to compensate purely economic losses when there is no contractual remedy available but there is a breach of the duty described in [§ 552]. To apply the rule would essentially eviscerate the tort. We agree with the Court in Bilt-Rite, 581 Pa. at 484, 866 A.2d at 288, that the result would simply be "nonsensical." "[I]t would allow a party to pursue an action only to hold that, once the elements of the cause of action are shown, the party is unable to recover for its losses."”

Finally, the Court examined the defendant’s claim that even if the plaintiff could proceed based on negligent representation, the claim would be barred due to all claims for delay damages were closed with the issuance of the February 2012 change order and the acceptance of the application for final payment.  The Court did not find this argument persuasive because the defendant was not party to the contract between the Board and plaintiff where the waiver of claims language was located. The Court also found that the requirement that the defendant sign all change orders “did not constitute a contract between [the plaintiff] and the [the defendant].”

The Court reversed the granting of summary judgment for the defendant and remanded the case for further proceedings.  

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based in Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com

Reallocation Actions and Settlement Agreements: What Did We Settle?

By Stacy L. La Scala, Esq.

The purpose of a settlement and release agreement is to fully and finally dispose of a disputed matter. However, more and more often, a dispute cannot be fully resolved where non-parties to the dispute have contributed defense and indemnity amounts on behalf of one or more of the parties and have reserved the right to seek recovery of those amounts in subsequent litigation. In particular, insurance carriers are typically not part of the action and are not signatories to the settlement agreement.

Who owns the right to pursue the claim?

An essential step in any settlement negotiation, and one that is often missed, is the determination of who owns the right to the claims being asserted. The question becomes complicated where the parties to a dispute have an underlying contractual relationship that includes a defense and indemnity obligation and an insurance carrier has agreed to defend. So if a party is being defended by an insurance carrier, does that party own the right to assert and recover those fees, or does the carrier that actually paid the fees own the right?

In many jurisdictions, in order for a party to pursue contractual damages in the form of defense fees, that party has to actually incur the fees. This concept pairs with the common law notion of subrogation, wherein a carrier is subrogated to the rights of its insured to the extent of its payments. A general liability insurer that has paid a claim to a third party on behalf of its insured may have an equitable right of subrogation against other parties who are legally liable to the insured for the harm suffered by the third party, including defense and indemnification agreements. These rights are derived from the contract of insurance and include its insured’s rights against tortfeasors principally responsible for the loss and contractual indemnitors.

So how can you limit potential reallocation actions?

In recognition of a non-party carrier’s putative rights, parties to the underlying litigation have responded with a number of strategies to expand the scope of the release agreement. For instance, the parties can:

1. Include any carriers as part of the negotiations and add them as releasing entities to the settlement agreement;
2. Include a requirement that the claimant defend and indemnify the settling parties as part of any settlement;
3. Require a pre-settlement assignment of claims to the claimant and have the claimant release those claims as part of a settlement; and/ or
4. Have the carrier intervene in the action or force the carrier into the action by way of a cross-complaint and include it in a global settlement.

Is counsel well-versed in these types of settlement agreements?

The pitfalls for the novice in negotiating the scope of a settlement agreement and release are plentiful. Counsel has to be conversant with not only the claims against her client, but also who owns the rights to those claims. Should there be known third-party claims, they have to be discussed, bargained for, and, if possible, included in the settlement agreement and release. Where the third-party claims are not part of the settlement, counsel needs to understand the potential for a subsequent action, advise her client on the risk, and negotiate release language to put the client in the best-possible position should subsequent litigation be filed. Of course, finding a neutral that understands non-party rights and the limitations in settlement negotiations can significantly contribute toward the successful resolution of the matter and substantially reduce the likelihood of future litigation.

Are unknown claims going to be released as part of the settlement?

Seeking a full and final resolution of the matter, which would eliminate any future litigation arising from the subject matter of the dispute, is a lofty goal. Typically, the parties must first acknowledge that a general release does not release all known and unknown claims (pursuant to public policy, common law, or statute). As such, the parties to the negotiation must negotiate and specifically waive any limitations for unknown claims. For instance, in California and many other jurisdictions, to obtain the broadest form of release, the parties must set forth the limitations contained in California Civil Code Section 1542 and specifically waive those provisions. While including and waiving this provision in a settlement agreement is a good step toward obtaining a full and final settlement among the signatories to the agreement, it does not necessarily resolve claims of non-parties to the action. In particular, a carrier’s potential rights against its insureds and its derivative rights against third parties can provide the basis upon which a subsequent action can be maintained against the settling parties. As such, the parties to the release, the scope of the release, and third-party rights need serious consideration by counsel when negotiating a settlement and drafting the terms of the settlement and release agreement.

Stacy L. La Scala, Esq. is a mediator and arbitrator with JAMS based in Orange, Calif. His practice focuses on a wide array of disputes, including construction, insurance, business/commercial and professional liability matters.  He can be reached at slascala@jamsadr.com. 

Second Circuit Recognizes Manifest Disregard, But Denies Appeal

In Tully Construction Company, Inc.v. Canam Steel Corporation the Second Circuit confirmed that "manifest disregard" is a viable basis for vacating an arbitration award under the Federal Arbitration Act (FAA).  Ultimately, however, the Court held that the arbitrator’s award not was rendered with manifest disregard of the law or the terms the relevant agreements.

The project involved replacing a span of a bridge in New York. The general contractor, Tully Construction Company (Tully), hired a steel fabricator to provide steel to the project.  After the project had gotten underway and some issues with performance arose with the initial steel fabricator, Canam Steel Corporation (Canam) became steel fabricator on the project.  This came about after Canam had taken on the initial fabricator's assets and liabilities under an "Asset Purchase Agreement" and state court declaratory judgment.  Disputes over performance continued with Canam.  Tully and Canam arbitrated.  An award was issued with Tully awarded almost $7 million.  Tully moved to confirm and Canam moved to vacate.  The district court confirmed the award.

 At the Second Circuit, the Court clearly acknowledged that "The Second Circuit recognizes two additional bases for vacatur [beyond those listed in Section 10 of the FAA]: if the award 'was rendered in manifest disregard of the law [ ] or 'the terms of the [parties’ relevant] agreement[s].'" Id.[citations omitted]  The Court observed, however, that "only 'a barely colorable justification for the outcome reached' by the arbitrator is necessary to confirm the award."Id.  Indeed, "party moving to vacate an arbitration award has a 'very high' burden of proof to avoid confirmation." Id.

At the district court and on appeal, Canam argued that the arbitrator had manifestly disregarded the declaratory judgment and Asset Purchase Agreement because, accordingly to Canam, it did not assume liability for the initial steel fabricator's breaches of contract before a certain date.  Canam also argued that the arbitrator ignored a contractual modification that extended the delivery time for the project.  For each of these allegations of error, the Court was not persuaded they rose to the level of manifest disregard.  It held that "manifest disregard clearly means more than error or misunderstanding with respect to the law" and that "manifest disregard of the evidence [is not a] proper ground for vacating an arbitrator’s award." Id.  The Second Circuit therefore affirmed the district court's decision.
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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.

Before You Litigate Your Construction Case, Test It!

Construction litigation is expensive. Why? Because construction cases usually involve complextechnical issues with lots of documents. Knowing that, it only makes sense for a party facing litigation or arbitration to try to settle the case by negotiation and mediation. If that is not possible, that party should thoroughly and candidly evaluate the prospects of achieving a good result at trial or in arbitration.

Even the most competent and experienced construction lawyers have great difficulty putting their biases aside when trying to determine how an independent and impartial decision-maker would decide the case. So, assuming that settlement is not likely, how does a party go about trying to assess the prospects of winning or losing—before going to trial?

Neutral Analysis

Neutral Analysis refers to a group of ADR techniques, including pre-file evaluations, brief-based case evaluations, second opinions and mock exercises, which help counsel assess their likelihood of success or failure before walking into a courtroom or arbitral tribunal.

Attorneys and their clients may have many questions pre-filing: which of your claims are likely to be successful and which are not? How will the trier of fact likely react to your fact witnesses and experts? Would a dispositive motion likely be successful? What are the chances that the construction contract limitation of liability or notice provisions will be strictly enforced?

Pre-File/Brief-based Case Evaluations

Putting these questions to an independent party who has similar expertise and experience as the trier of fact can be immensely useful to a party contemplating suit. The evaluator can be engaged on a number of levels:  she may review the complaint pre-filing and act as a sounding board to help develop counsel’s theory of the case; she might also help reassess settlement options, or manage client expectations about the likelihood of success.

Mock Arbitration

Similarly, a mock arbitration involves presenting a summary of a party’s case to one or more independent persons who have similar expertise and experience as do the actual arbitrators. The key difference is that this can be done before going to the actual hearing. The mock arbitrator(s) will hear the case presentation, which includes a summary of the opposing party’s positions as well, and offer their candid views on a confidential basis of how your case strategy would appear to an experienced, neutral third party.

If the case relies on documents, which documents are likely to be critical to the outcome? Having critical and honest feedback on issues like these—from persons who have no stake in the outcome— will allow you to adjust your case presentation strategy and tactics before it’s too late. Or, perhaps, after the mock arbitration, you may decide to settle on less favorable terms or even to abandon the case.

Perhaps the most important aspect of any mock is that the opposing party’s positions and arguments are presented credibly and persuasively, and this is typically done by having another lawyer in the appointing party’s law firm make that presentation. The standard practice is that each side’s position will be presented in the form of a general background statement—much like an opening statement in a trial—perhaps followed by presentations by expert witnesses, and with the use of PowerPoint demonstrations of documentary evidence. The typical case presentation will take one day or less, but in some complex cases, mock arbitration presentations can last several days.

Confidentiality

Of course, it is critical that the neutral evaluation process be kept strictly confidential. Therefore, an agreement should be made with the neutral that any and all confidential documents and other information that they receive, or any comments or advice given during the course of the evaluation, will be maintained in strict confidence with the appointing party.

Summary

Certainly, a mock exercise will add to the case preparation costs, but the expense of a mock is usually a small fraction of the total cost of preparing for and putting on the actual case. What is more sobering is the prospect of expending the considerable time and cost of going through the actual matter with a weak or less-than-persuasive case presentation. Because the cost of mocks and other neutral evaluations can be managed to fit the party’s needs, using them will usually be cost-effective. It is almost always the case that a party will make productive adjustments in its case based on feedback from the evaluation and will agree that the overall benefit of the exercise was worth the additional cost.

John W. Hinchey, Esq. is a panelist with JAMS based in Washington, D.C. He is recognized in the United States and internationally as a leader in resolving significant engineering, infrastructure and energy-related disputes as an arbitrator and mediator. He can be reached at jhinchey@jamsadr.com.

 

R.I. Supreme Court Overturns Arbitration Award - Manifest Disregard Lives On

It is a rare event for a court to vacate an arbitration award, but the Rhode Island Supreme Court in the recently decided opinion Nappa Construction Management, LLC v. Flynn, No. 2015-211-Appeal, --- A.3d--- (R.I. Jan. 23, 2017) held that vacatur was warranted. In reaching this outcome, the Court was divided 3 justices to 2 with a filed dissent.

The underlying case concerned the construction of automobile repair shop that did not proceed smoothly.  The focal issue was the cement floor and foundation. The owner was displeased with the installation and ordered the contractor to stop work.  Nonetheless, the contractor submitted a pay application for the floor work, which went unpaid by the owner.  The contractor, claiming material breach for non-payment, terminated for cause. The owner sued the contractor for wrongful termination. The case ultimately ended up in arbitration with the contractor claiming it was owed for work performed.  There, the arbitrator held that both parties were at fault and therefore the contractor could not terminate for cause. Instead, the arbitrator held that the contractor terminated for convenience by the contractor. As such, the arbitrator awarded the contractor its fair and reasonable value of the work performed.

The parties next applied to superior court with the owner moving to vacate the award while the general contractor moved to confirm.  The superior court confirmed and the owner appealed arguing that the arbitrator "manifestly disregarded a contractual provision by holding that the contract was terminated for convenience" by the contractor.

The majority of the Court agreed with the owner.  The three justices acknowledged that "judicial review of arbitration awards is extremely limited," but held that the case met the threshold for vacatur under the R.I. General Laws.  The Court explained that where "the arbitration award fails to ‘draw its essence from the agreement, if it was not based upon a passably plausible interpretation thereof, if it manifestly disregarded a contractual provision, or if it reached an irrational result" the Court must vacate the award.  Here, the majority concluded that the arbitrator exceeded his authority by "manifestly disregard[ing] a contractual term or ignor[ing] 'clear-cut contractual language.'” In sum, because the AIA contract's termination for convenience clause could only be exercised the owner completely in the owner's discretion, the arbitrator had ignored and manifestly disregarded that distinction by applying the clause in favor of the contractor.  Accordingly, the Court ordered the award vacated.

As for the dissent, the two justices focused on the great deference the Court affords to an arbitrator's decision and that "review of the contract as a whole reveal[ed] that the arbitrator's award did not exceed the language of the agreement." In essence, because the clause was present in the contract and the arbitrator did not create the contractual basis out of whole cloth, the dissent was satisfied that arbitrator could interpret and apply the contract as such.  And at the least, the dissent concluded, this Court was not empowered to second guess that interpretation.

Putting aside that this case was decided under state law, it is important to note that in the federal sphere, under the Federal Arbitration Act 9 U.S.C. §§ 10 & 11, the "manifest disregard" rationale for vacating an arbitration award has more limited applicability and not all Circuits recognize the standard.
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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.

Massachusetts Appeals Court Awards Attorneys’ Fees for Public Works Bond Claim and then Vacates Fees for Unfair and Deceptive Business Practice Claim

The Plaintiff in Aggregate Industries – Northeast Region, Inc. v. Hugo Key & Sons, Inc., 90 Mass.App.Ct. 146 (2016) contracted with the Defendant to supply and install asphalt for a public works project in Salem, Massachusetts.  The project’s Defendant general contractor furnished a payment bond as required by state statute (Bond Statute).  In January of 2011, the Plaintiff submitted a bid for the asphalt scope of work that contained two qualifications: 1) costs for additional grader services at $400/HR, and 2) the cost of asphalt material would escalate accordingly with the price of liquid asphalt.

The Plaintiff submitted two revised bids in May 2011, neither of which were accepted by the Defendant because of the asphalt escalation clause.  With no agreement in place, the Defendant sent a purchase order to the Plaintiff in mid-May 2011 for the revised bid price but did not include the grader costs or escalation clause.  The Plaintiff returned the purchase order marked up to include the grader unit costs and escalation clause which the Defendant immediately rejected.  The Defendant then issued another purchase order which identified the unit cost of asphalt in order to expressly exclude the escalation clause. Plaintiff signed this purchase order and executed the work.  During the course of the project, the Defendant required the Plaintiff to perform grading activities which the Plaintiff completed and subsequently submitted pricing with the $400/HR unit cost.  The Plaintiff submitted its final invoice on July 6, 2011 in the amount of $89,989.90, $11,400 of which was for the grader rental and asphalt escalation costs.  With not payment received as of October 31, 2011, the Plaintiff filed a complaint in Superior Court.

The Plaintiff’s complaint alleged breach of contract and quantum meruit claims under the state’s Bond Statute.  The complaint also contained claims for violations of the state’s unfair and deceptive business practice statute (Business Statute) for withholding payments due at the completion of the project.  Following the filing of the complaint, the Defendant issued a check to the Plaintiff for $68,525.40 and offered to negotiate for reasonable grader costs.  The Plaintiff refused the payment and the Defendant then counterclaimed violations of the Business Statute.

The trial court found that the contract entered into by the parties did not contain the asphalt escalation clause nor the $400/HR grader unit cost, but under the quantum claim, the Plaintiff was entitled to reasonable grader cost in the amount of $7,125. The trial court further found that “fairness would be the victim” if recovery under the Bond Statute and its attorneys’ fees were allowed.  The trial court reasoned that the Defendant was “ready, willing, and able to resolve at [a] fair and reasonable” cost the disputed work. The trial court also ruled for the Defendant on the cross-Business Statute claim calling the Plaintiff’s claims under the Bond Statute “extortion.” Instead of awarding damages under the Business Statute, the court withheld pre and post-judgement interest on the quantum claim and then awarded attorneys’ fees to the Defendant in the amount of $67,319.  The Plaintiff appealed.

The Massachusetts Appeals Court examined the case and found the trial court’s finding of fact accurate that a valid contract did exist which excluded the asphalt escalation clause and grader unit costs of $400/HR.  Accordingly, no breach of contract occurred based upon the Defendant's issuance of payment for the base contract scope of work.  The Court next reviewed the Bond Statute claim and the Plaintiff’s claims for attorneys’ fees under that statute.  The Plaintiff argued that the once the trial court found damages in quantum for the grader rental, the Bond Statute provision of attorneys’ fees must apply because the elements of the statute were satisfied.  The Court agreed.

The Court reviewed the Bond Statute’s elements along with its attorneys’ fees provision which requires a judgement in favor of a claimant “shall include reasonable legal fees.” The Court found the Plaintiff plainly met the requirements by 1) filing an action with the Superior Court, 2) within the one-year period from completion of the work, 3) which alleged nonpayment within sixty-five days of the last invoice, and 4) prosecuted the claim "to final adjudication and execution for the sums justly due the claimant as provided in this section."  Accordingly, the Court found the compulsory usage of “shall” required the award of attorneys’ fees to the Plaintiff.

The Court next reviewed the Plaintiff’s argument that its refusal to negotiate with the Defendant over the asphalt escalation and grader unit costs “did not constitute unfair or deceptive acts or practices in the course of trade or commerce” as required by the language of the Business Statute.  The Court once again agreed with the Plaintiff finding that “ordinary contract disputes, or the failure to negotiate a settlement in lieu of litigation, however, typically fall outside the reach of the statute.” The Court further mused that even if the Plaintiff’s claims were weak, it was within its rights to file suit and litigate them.

The Court remanded the Bond Statute claim back to the trial court to award of pre and post-judgement interest plus reasonable attorneys’ fees and then vacated the award of attorneys’ fees for the Defendant’s Business Statute claim.

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based in Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com

Fees to the Prevailing Party: Tennesse and the American Rule

I’Ashea Myles-Dihigo
Hagan Law Group, PLLC

Tennessee generally follows the American Rule regarding the payment of attorneys’ fees, which permits the recovery of fees in very limited situations. Many clients are disappointed when they win their case but still have to pay their attorney’s fee.

 

Contractual provisions, which provide for attorneys’ fees, have become a regular practice in contract drafting to hedge against the outcome of American Rule for the prevailing party.  These provisions are a very important consideration for construction industry clients and were the discussion of a recent Tennessee Court of Appeals case.

 

In Barrett v. Ocoee Land Holdings, LLC the Court strictly construed the terms of the parties’ construction contracts regarding a claim for an award of attorneys’ fees.  In that case, the homeowners sued the homebuilder, real estate developer, and other individuals involved in those entities related to the purchase of, and planned construction of a house on a lot in a subdivision.  The homeowners sued under various theories including breach of contract, civil conspiracy to commit wrongdoing, the Consumer Protection Act, and the Fraudulent Conveyance Act.  The case was tried before a jury, and the homeowners lost their claims.  There was a provision in the contract between the homeowners and defendants, which provided an award for attorneys’ fees for the prevailing party.  The jury never heard any proof about the attorneys’ fees, and there was no space on the jury verdict form for an award of fees.  The trial court reserved the issue of fees and ultimately denied defendants’ claim for an award of attorneys’ fees and expenses.

 

The defendants appealed the decision of the trial court, and the Court of Appeals reversed.  The Court of Appeals held that, “Tennessee allows an exception to the American Rule where the contract specifically or expressly provides for the recovery of attorneys fees.” The Court went on to explain that the litigation between the parties fit the exact situation contemplated by the fee provision, as the parties contract stated that they “agree to an award of reasonable attorney’s fees and expenses to the prevailing party in litigation ‘arising out of [the] Contract.”  Based on the terms of the contract, the defendants were ‘each entitled to the enforcement of their contractual right to recover reasonable attorney’s fees and expenses’ under the ‘plain terms of the attorney’s fee provision.’”

 

So, at least in Tennessee, those prevailing party fee provisions in construction law contracts are very important to the outcomes in litigation as an exception to the American Rule.

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The author, I'Ashea Myles-Dihigo, is a contributor to The Dispute Resolver and Of Counsel Attorney with Hagan Law Group, PLLC based in Murfreesboro, TN.  She may be contacted at 615.546.4066 or iashea@hanganlg.com.

Part of Contractor's Settlement Payment Covered by Insurer under the Duty to Defend

The California Court of Appeals in Navigators Specialty Insurance Co. v. Moorefield Construction, Inc. concluded that a general contractor's general liability (CGL) insurer must pay the general contractor for at least part of its settlement obligation notwithstanding there was no coverage.

The general contractor entered into a contract with the owner to construct a Best Buy store.  Years after the project was completed, the owner of the building sued the general contractor (and others) for breach of contract and negligence based on "claims the flooring had failed." The insurer accepted tender of defense from the general contractor with a  reservation of rights.

During the litigation it was revealed that the "flooring tiles had been installed on top of a concrete slab that emitted moisture vapor in excess of specifications." Worse, evidence came out that the general contractor knew about the excessive moisture vapors, but had directed its subcontractor to install the flooring anyway. The cost to repair the floor was $377,404.  The general contractor settled for $1,310,000. The insurer contributed the policy limits of $1 million and then filed suit that it had no duty under the policies to defend or indemnify the general contractor.

After a non-jury trial, the court agreed with the insurer and ordered the general contractor to reimburse the insurer for the entire $1 million that the insurer paid. The general contractor appealed and the Court of Appeals reversed in part.

The Court was faced with two questions - was the floor failure an "occurrence" giving rise to coverage? And did the supplementary payments provision of the policies require the insurer to still pay a part of the settlement?


For the first question, the Court answered "no" because "occurrence" under the policies was defined as an "accident." There could be no accident from the general contractor's deliberate act. As such: the insurer had no duty to indemnify the general contractor for damages and "was entitled to recoup that portion of the $1 million paid toward settlement that was attributable to damages."

As for the second question, however, the Court held that the standard CGL provision--"with respect to any claim . . . or any `suit' against an insured we defend," the insurer will pay "all costs taxed against the insured"--did require the insurer to pay for settlement "costs" and that those costs includes attorneys' fees when there, as here, was a "prevailing party attorney fees under a contract."  The Court concluded that the insurer's "duty [to defend] was not extinguished by the determination that [the insurer] had no duty to indemnify" for the damages the insured caused. The case was remanded "for a new trial limited to the issue of the amount of the $1 million paid by [the insured] that is attributable to damages, not attorney fees and costs of suit under the supplementary payments provision."
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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.

Florida Court’s Decision Should be a Caution to General Contractors to Precisely Follow a Performance Bond’s Procedural Requirements

In Arch Insurance Company v. John Moriarty & Associates of Florida, Inc., 2016 U.S. Dist. LEXIS 172173, the U.S. District Court for the Southern District of Florida granted Summary Judgment to a surety after finding that a general contractor did not satisfy the procedural requirements of a performance bond before it submitted a bond claim.  The Defendant was a general contractor who subcontracted the bond’s principal to furnish labor and materials on a project.  The subcontract required the provision of a performance bond which the subcontractor acquired through the Plaintiff.  At some point during the course of the project, the Defendant notified the Plaintiff that it was considering to declare the subcontractor in default. Later at the completion of the contract, the Defendant demanded a $995,239.83 payment from the Plaintiff on the bond due to the performance of the subcontractor.

The terms of the performance bond addressed specific procedures that must have been followed in the event of the subcontractor’s termination for default.  The bond required that: 1) Notice be provided to the subcontractor and Plaintiff that Defendant is, “considering declaring a Contractor Default”; 2) "Declares a Contractor Default, terminates the Construction Contract and notifies [Plaintiff]"; and 3) "Agree[s] to pay the Balance of the Contract Price…to [Plaintiff] or to a contractor selected to perform the Construction Contract." Once those three condition precedents had been met, the bond required that the Plaintiff be given the opportunity to mitigate its damages through arranging for the completion of the defaulted work.  Finally, seven days’ notice must be provided before Defendant can make a demand on the bond. 

The Court found the first requirement was met by Defendant when it alerted the Plaintiff that it was considering declaring a default.  The Court then went on to find that none of the other bond’s default or termination requirements were met.  The Defendant never declared the subcontractor to be in default, never terminated the subcontractor, nor paid the contract balance to the Plaintiff to complete the work.  In fact, the Defendant admits in its response that it, "did not declare [subcontractor] in default, did not terminate the Subcontract, and continued to administer the Subcontract substantially as it had before the Pre Default meeting, with a few additions." The Court stated that, “There can thus be no dispute that [Defendant] never allowed [Plaintiff] to mitigate its damages by arranging for the completion of the subcontract itself. By depriving [Plaintiff] of its completion options, [Defendant] materially breached the bond.”

In its ruling, the Court found that the Defendant failed to comply with the terms of the bond and as a result the Plaintiff was not liable for the nearly $1 million demand.  

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based in Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com

The AAA Permitted to Pull Rank to Disqualify a Named Arbitrator

In the recently decided case, LD Miller Construction, Inc. V. Kirschenbaum, - P.3d - (N.M. App. Dec. 1, 2016) the Court of Appeals of New Mexico affirmed the hearing justice's order that the American Arbitration Association ("AAA") indeed could disqualify an arbitrator from arbitrating a dispute between a contractor and homeowners for the failure of the arbitrator to follow the AAA Rules.

The Homeowners hired the Contractor to do concrete and framing work on their property in Santa Fe, New Mexico.  Contractor completed the work, but the Homeowners disagreed that is was done properly.  They hired someone else to correct the work.  A short time later, the Contractor submitted an invoice for the concrete and framing work to the Homeowners.  The Homeowners only paid half of what was claimed owed by the Contractor.  Apparently in recognition that a dispute had arisen, about two weeks later, the Homeowners and Contractor entered into an arbitration agreement:

Contractor and Owner agree to binding arbitration under AAA (American Arbitration Association) for any dispute (claim, work, material, etc.) between Contractor and Owner . . . . Contractor and Owner agree that the designated arbitrator shall be Roger Lengyel.

Fast forward two years later, the Contractor filed a complaint in court for the unpaid amount.  The Homeowners answered with an affirmative defense that the action must be dismissed in light of the arbitration agreement. The Court agreed and issued an order that stated in pertinent part:

the parties are compelled to arbitrate this matter pursuant to the terms of the arbitration agreement, requiring binding arbitration under the [AAA] with . . . Roger Lengyel as the designated arbitrator.

The parties attempted arbitration but it quickly devolved with the Contractor sending a letter to the AAA requesting disqualification of the arbitrator for non-neutrality.  According the Contractor, the arbitrator was having ex parte communications with the Homeowners and setting rules that only served to delay the arbitration (which benefited the Homeowners). The Homeowners insisted that the Court's order had designated the named arbitrator and usurped AAA's power to disqualify him.  The AAA sought clarification from the court.  The hearing justice concluded based on the language of the order that the AAA could disqualify. AAA did just that.  The Homeowners appealed.

On appeal, the court applied New Mexico contract law for the interpretation and construction of the agreement. Because neither party argued that the agreement was ambiguous, the court simply was to determine "what do the words of the agreement mean and what is their legal effect"? The Homeowners argued for an "integral-ancillary" bifurcation of the agreement under the Rivera v. Am. Gen. Fin. Servs., Inc., 259 P.3d 803 (N.M. 2011).  They claimed that because the designation of the arbitrator was introduced with the precatory "shall be Roger Lengyel," this provision is integral and must be abided, whereas the "under the AAA" was merely ancillary. The Court explained that Rivera was limited to its facts, where the parties had "clearly intended to use a designated institutional arbitration provider" but that provider no longer existed. As a result, the Rivera court held that the arbitration provision would have to stricken in its entirety because arbitrating with the chosen provider was integral to the agreement and the section could not be rewritten by the court.  The Court continued that the instant dispute was much different. To treat the two cases as the same "would unreasonably treat as equivalent an unavailable arbitration provider and a disqualifiable arbitrator" with an available provider. Plus the Court noted that Rivera did not even get to the issue presented by the Homeowners -- weighing the relative value of two, separate provisions.

In the Court's de novo review of the agreement's language, the Court held that "most reasonable construction of this language is that 'under AAA' incorporates all of the AAA rules normally applicable to proceedings held under AAA's auspices." There was nothing in the agreement that limited the AAA's powers or made certain rules inapplicable.  The Court acknowledged that the use of "shall" to designate the arbitrator is strong evidence that the parties agreed to use him. However there was nothing in agreement that this arbitrator could be non-neutral, which is contrary to the AAA rules. If this arbitrator could be non-neutral in violation of the AAA Rules, then it would "potentially cause [the Rules] to have no meaning." In sum, the Court held that "The most natural construction of the Arbitration Agreement is that the parties intended to arbitrate disputes between them concerning [the Contractor's] construction work under all of the AAA rules, with Lengyel serving as a neutral arbitrator. To interpret the Arbitration Agreement designating Lengyel to trump the AAA rule permitting replacement of a neutral arbitrator in certain circumstances would risk rendering the AAA Rules meaningless." Accordingly, the hearing justice's order and the AAA's disqualification were affirmed.

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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.

Certified, Schmertified: Federal District Court Rules Against Subcontractor’s Breach and Quantum Claims Due to its Fraudulent Davis-Bacon Payrolls

The Plaintiff in METRIC ELECTRIC, INC., v. CCB, INC. and THE HANOVER INSURANCE COMPANY was an electrical subcontractor who was contracted by the Defendant to provided electrical services for a GSA project at the John F. Kennedy Federal Building in Boston. The subcontract was executed on December 2, 2013 for a value of $1,380,301 with the project to be completed over four phases.  The project fell under the Davis-Bacon Act which required that working tradesmen be paid the geographically designated Department of Labor prevailing wage rate.  The Davis-Bacon Act, along with the subcontract, required that subcontractors submit weekly payroll reports that certify under signed oath the tradesmen on the project were paid for all hours worked for the appropriate prevailing wage. In accordance with the Davis-Bacon Act and the specific language in the subcontract, the Plaintiff submitted signed certified payrolls during the course of the project from December 21, 2013 until April 26, 2014.

In March of 2014, six employees of the Plaintiff filed a lawsuit for unpaid wages in Massachusetts District Court and summary judgement was issued on April 6, 2014 in favor of the employees.  When the Defendant learned of this judgement, it advanced funds to the Plaintiff to pay the back wages, but ultimately the Plaintiff’s employees quit the project on April 23, 2014. The Defendant later found that the funds it provided were not paid to the employees until three months later in July 2014.  On May 16, 2014, the Defendant put the Plaintiff on notice of breach for failure to maintain schedule, and then formally terminated the Plaintiff on June 10, 2014, citing the failure to pay wages and to timely perform the contract schedule.  At the time of termination, Plaintiff had only completed 75% of the Phase I work and was 44% complete on the entire job.

In May of 2015, the Plaintiff filed suit against the Defendant in federal district court for: 1) breach of contract; 2) quantum meruit; 3) violation of the Miller Act; and 4) violation of the Massachusetts unfair business practices act. Defendant counterclaimed for breach of contract and violation of the unfair business practices act, plus a cross-complaint against the Plaintiff’s owner for fraud.

The Court began its analysis of the Plaintiff’s claim by simply stating that the Plaintiff’s failure to pay its employees in a timely fashion, as required both by the Davis-Bacon Act and the subcontract, was a material breach.  That material breach in turn relieved the Defendant of any duty to make payments on the contract to the Plaintiff.  The Court then rejected the Plaintiff’s argument that the act of the Defendant paying the employee’s back wages constituted waiver of that breach.  The Court discounted this argument by stating there was no “clear, decisive, and unequivocal conduct” indicating waiver by the Defendant.

The Court next reviewed the Plaintiff’s claim in quantum meruit for $158,823.14 in work it claimed to have performed before its termination.  To start this analysis, the Court pointed to the maxim of Equity that, “a party coming before the court seeking equitable relief must do so with clean hands.”  The Court declared that the Plaintiff in this instance not only failed to follow Federal law, it also failed to adhere the terms of the subcontract by paying its tradesmen in a timely fashion, and it finally then filed perjured certified payrolls, compounding the issues.  As such, a claim in equity for “quantum meruit…is a nonstarter.”

Based upon its ruling on the first two counts of the complaint, the Court rejected the Miller Act and unfair business practices claims outright and granted Summary Judgment in favor of the Defendant.

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based in Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com

No Flow-Down of a Waiver of the Statute of Limitations to Subcontractor

In the matter Hensel Phelps Construction Company v. Thompson Masonry Contractor, Inc. et al. the Supreme Court of Virginia considered whether a subcontract waived the applicable statute of limitations--meaning there was no time restriction to filing a lawsuit--by incorporating by reference the prime contract between the general contractor and the Commonwealth. The Court held that there was no waiver and therefore the general contractor's lawsuit against the subcontractors was time barred by the applicable statute of limitation.

The underlying project was for the construction of a health and fitness center at the Virginia Tech campus in Blacksburg, Virginia. The general contractor entered into the $15 million contract with Virginia Tech, a Commonwealth agency. By law, no statute of limitations period can run against Virginia Tech. Va. Code section 8.01-231. By contract, the prime contract stated that: Except

as otherwise specified, all work shall be guaranteed by the [general contractor] against defects resulting from the use of inferior materials, equipment or workmanship for one (1) year from the date of final acceptance of the entire project by [Virginia Tech] in writing[.]

Nothing in this section shall be construed to establish a period of limitation with respect to any other obligation which the [general contractor] might have under the Contract Documents, including liability for defective work under [the Warranty provisions].

In sum, besides the 1-year warranty, there was no statute of limitations applicable to claims or disputes under the prime contract.
The project undisputedly was finished in 2000. Twelve years later in April 2012, Virginia Tech found variety of construction defects, repaired them, and then brought a claim against the general contractor to recover over $7 million. The general contractor looked to its subcontractors for these repair costs. When they refused, the general contractor settled with Virginia Tech for $3 million, and then sued all its implicated subcontractors. The subcontractors invoked the statute of limitations, which in Virginia, is five years for an action on a written contract. Va. Code § 8.01-246(2).

In turn, the general contractor pointed to its subcontracts' flow-down provision, which stated that "[t]he subcontractor is bound to the [general contractor] by the same terms and conditions by which [the general contractor] is bound to [Virginia Tech] under the [prime] contract," and that the subcontractor's warranty period covers any time "prior to [the general contractor's] release from responsibility to [Virginia Tech] therefor as required by the Contract Documents." The general contractor argued that because the general contractor was obligated to Virginia Tech on its claims brought 12 years after the project concluded, the subcontractors too were subject to claims from the general contractor.

Virginia's highest court sided with the subcontractors holding that any waiver of a known right must be "express" in that it reflects both knowledge of the right and the clear intent to relinquish the right. It need not be in writing. Here, the Court continued, the subcontract incorporation by reference neither acknowledged the 5-year statute of limitation nor the clear intent to waive the benefit of the statute. Moreover, just because the prime contract was silent on the statute of limitations, the subcontract could not be held to incorporate a statute that existed outside the prime contract. As a result, the Court held that the statutory waiver of the statute of limitations was not incorporated into the subcontracts, the 5-year period had run, and therefore the general contractor had no claim against the subcontractors.

As an alternate argument, the general contractor focused on the accrual date for the claim. It argued that its claims against the subcontractors, which sounded in indemnification, did not accrue until it settled with Virginia Tech. But because Va. Code § 8.01-246(2) states that the accrual is "when the breach of contract occurs in actions ex contractu and not when the resulting damage is discovered," this too was a dead end for the general contractor. Another statute Va. Code § 8.01-249(5) for "actions for contribution or indemnification," established accrual when "the contributee or the indemnitee has paid or discharged the obligation." But, here, the indemnification provision in the subcontract was rendered void because it could be read as requiring indemnification for the general contractor's own negligence. The Court disagreed that other parts of the subcontract, cobbled together, could give rise to independent cause of action for indemnification. So again, the general contractor could not proceed with its lawsuit.

The lesson learned is that explicitness in a follow-down provision is necessary if a waiver of rights is involved.
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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.