VALUABLE RESEARCH TOOL -- Forum's Construction Industry Knowledgebase

We all know the quality the Forum's written materials for its programs are excellent.  Through the oversight of the GC, the Program Co-Chairs and GC Liaison, to Program Coordinators (aka Cat Herders), the written materials are routinely law review quality. 

The written materials for the Forum's programs going back to 2002 are available online!  The Forum calls it the Construction Industry Knowledgebase. 

There are numerous ways to search for content and, unlike the current online member directory, it is fast!

So, for your next research project, remember to visit the Knowledgebase for a head start. 

In case the links don't work, the website is: http://www.americanbar.org/directories/construction_industry_knowledge_base.html

Effective Risk Management Planning - Step 1 - Identify Your Team

Our Division's name is the Dispute Avoidance and Resolution Division of the Forum on the Construction Industry.  A lot of our posts relate to "resolution" component of our name through mediation, arbitration, and litigation. 

In this series of posts, we focus on dispute "avoidance" strategies our clients can implement during the project.  We asked Andrew Englehart of Construction Process Solutions to provide us his views on effective risk management and claims avoidance. 

Mr. Englehart's first step about picking the risk management team is below.   

* * * 

Effective Risk Management and Claims Avoidance via a Project-Specific Plan

by Andrew T. Englehart, Principal, Construction Process Solutions, Ltd, www.cpsconsult.com

Step 1: Picking your Risk Management Team 

“Claims Avoidance” does not mean “document the #!$$%%##@& out of the project.” (That is another topic . . . how to minimize losses due to claims once you do find yourself embroiled in one. Another blog, another day.)  If that is your strategy to maximize project return, you are already acknowledging you are going to have some defeats in some battles, but hopefully not lose the war. (Though having a “standing army” of the right documentation (again, a different blog for a different day) is necessary to being a sovereign construction company (or project owner) in today’s world.)

Effective claims avoidance requires a plan that must be developed at the outset of the project during the “nuts & bolts” planning of the project. The first material step in developing the Risk Management Plan is to identify possible impediments to the success of the project. This is a large elephant and needs to be eaten 1 bite at a time. BUT, before even getting to that process, you must pick the right team members that will identify those (possible) risks, and who will then work through developing the Risk Management Plan. The team should have depth and breadth. Examples: Depth . . . team members should range from executive level personnel down to the key labor foremen on the project. Those tradesmen with boots on the ground are a construction company’s front line risk assessors and they have seen it all. The breadth should have a similar wide range, including the estimator who estimated the key parts of the project, and all the way to the safety coordinator, and perhaps even the shop manager. Perhaps the lead engineer or draftsperson?  Without these diverse perspectives and the information that can be provided, the resultant planning process will likely end in a myopic and distorted plan, ultimately being unsuccessful in its goal in maximizing project return via minimizing project risk.

It’s refreshing that this “team approach” to identifying risks and developing Risk Management plans is increasingly being used across a project, incorporating multiple organizations (owners, designers, contractors, etc.) in a collaborative fashion. Sadly, many of these planning processes, and the resultant plans, are defective because the teams are generally focused on the upper level management and executive level, and miss where the risk battles start, on the project front lines on a day to day basis among those with boots on the ground.  

 

Texas Court Clarifies What Is Required to Order a Party to Turn Over Hard Drives During Discovery

As with most complex commercial litigation, lawsuits over construction often involve investigations into electronically stored information (“ESI”). In Texas, a recent case has clarified the requirements necessary to order a party to turn over hard drives during disputes over production of ESI.

In 2013, a Texas Court of Appeals in Houston granted a writ of mandamus and vacated an order to compel production of computer and network hard drives.

In the lawsuit, several former co-owners of businesses had a falling out and sued one another alleging various claims. Central to the case was whether one of the parties had misrepresented his educational background to the other.

After several disputes regarding whether responsive ESI had been produced, the trial court issued an order requiring production of forensic images of the defendants’ computer hard drives and the drives of their network servers. Forensic images are digital duplicates of hard drives prepared used to prevent any changes being made to the original source of the ESI.

The defendants sought mandamus relief from the court of appeals, arguing the trial court had abused its discretion. They argued that the order was overly broad, giving the plaintiff “carte blanche to rummage through” their hard drives without any reasonable limits to address privilege, confidentiality, or privacy.

The court of appeals granted the writ of mandamus and vacated the order. It examined the Order in light of the applicable Texas Rules of Civil Procedure, as well as a seminal Texas Supreme Court case on electronic discovery, In re Weekley Homes, 295 S.W. 3d 309 (Tex. 2009). In Texas, courts have held that providing direct access to electronic information systems is particularly intrusive and should be discouraged. An order requiring electronic data storage systems to be turned over is not appropriate unless and until the moving party has shown that existing discovery responses were inadequate and the proposed searches of the storage systems could recover the relevant missing information.

In this case, the court found that a conclusory statement that “emails must exist” was insufficient to overcome the threshold question of whether there was an inadequate production. The moving party had to present actual evidence that the production was somehow deficient. Moreover, even with such a showing, the moving party had not shown that there was deleted relevant information which could feasibly be recovered by taking a forensic image of the hardware. To do so, the requesting party should have provided information from his forensic imaging expert as to why his methods would have produced relevant deleted information.

The court also examined the requests for production at issue, and found them insufficiently specific to justify the trial court’s order. The moving party made a blanket request for servers, tablets, and laptops, which was insufficient because it did not inform the opposing parties of the exact nature of the information sought.  Specific discovery requests must be aligned with the request for the production of hardware.

The widespread use of ESI to conduct business continues to require attorneys and courts to evaluate how far parties may go to uncover documents through discovery. This case suggests that a party seeking to search its opponents’ hard drives must prepare a detailed and thorough justification of the request before a trial court can permit the searches to proceed.

In Re Pinnacle Engineering, 405 S.W.3d 835 (Tex. App.—Houston [1st Dist] 2013, no pet.).

West Virginia Recognizes that Property Damage Caused by Defective Construction Is an “Occurrence” Under a CGL Policy

In July 2013, the Supreme Court of Appeals of West Virginia joined with a majority of states and ruled that defective workmanship resulting in property damage constitutes an “occurrence” under a standard Commercial General Liability (“CGL”) insurance policy. The case was styled Cherrington v. Erie Insurance Property and Casualty, Co.

The underlying case involved defects to a family’s home. There were three insurance policies in place: CGL, homeowners, and personal catastrophe. The lower court ruled that none of the three policies covered various defects in the home including an uneven concrete floor, water infiltration through the roof and chimney joints, and cracks in the drywall. The court found that these problems were economic losses and not property damage because the defects were caused by faulty workmanship, which was not an “occurrence” triggering coverage under a CGL policy.

The Supreme Court of Appeals reversed the decision, holding that property damage resulting from faulty workmanship is an “occurrence” under the CGL policy. In prior cases, the Court had held that faulty workmanship was not an occurrence under a CGL policy unless coverage is specifically included in the policy. It also had stated that CGL policies are not designed to cover poor workmanship. In this case, the Supreme Court of Appeals recognized that a majority of other jurisdictions had either legislatively or judicially found that poor workmanship was an occurrence under a CGL policy. The Court decided to join the majority.

The Court relied on two lines of reasoning. First, it examined the property damage in light of the policy’s definition of “occurrence,” which included an “accident.” The court found that faulty workmanship must be accidental because no contractor would hire subcontractors that would intentionally perform defective work. Thus, the property damage defective resulting workmanship was an “accident,” and therefore an “occurrence.” Second, the Court explained that excluding subcontractors’ defective work from coverage would violate the intent of the CGL policy, which is to provide coverage for subcontractors’ acts.

This case shows a continuing national shift towards expanding the scope of CGL policies and helps to resolve uncertainty about the scope of CGL policies in West Virginia.

Cherrington v. Erie Ins. Prop. & Cas. Co., 745 S.W.2d 508 (W. Va. 2013).

Admitting Animations into Evidence

Last week, before the Atlanta snowstorms so rudely interrupted my work week, I posted an article written by Ed Josiah from Nautilus Consulting regarding whether and how a construction lawyer can get what otherwise might appear to be a demonstrative exhibit admitted successfully into evidence.

Today, thanks to Paul McCullough at S-E-A -- another Forum sponsor -- we will walk through the  issues that Mr. Josiah raised using S-E-A's capabilities shown in the video above as our example.  I would like to thank Paul for giving Division 1 the right to use this video as a practical example to make the abstract more concrete.

S-E-A created this video from a point cloud.  Wikipedia defines a point cloud simply as "a set of data points in some coordinate system."  S-E-A uses a 3D scanner to create the point cloud you see in the video.  In essence and as Paul McCullough stated to me in an e-mail, "What you are looking at is not a 3D 'model' and it is not an animation.  [Instead] it is millions and millions of data points all with a relative x, y, and z location and a color.  The sum total of these millions of data points [is] the point cloud."  In other words, we have a three-dimensional survey of actual conditions at the project site -- not a modeled hypothesis of what someone believes exists at the project.

In identifying how to admit this point cloud into evidence and as Mr. Josiah's article stated, there are four factors to address to get this video admitted into evidence as an exhibit.  These factors are:

• Witness Competence to testify about the exhibit
• Relevance of the exhibit to an issue or issues in the case
• Proper Identification of the exhibit
• Trustworthiness/Authentication of the exhibit

Let's discuss each briefly after the jump.  For our discussions, we will assume that we have allegations of excessive slab deflection for a poured-in-place concrete floor.

Demonstrative Evidence: Evidentiary Issues & Laying a Proper Foundation

In this post, we are reprinting an article (with the author's permission) that Ed Josiah, the Forum's tech guru from Nautilus Consulting, wrote regarding how attorneys can lay a proper foundation to turn what otherwise would be considered as demonstrative evidence into substantive evidence that a jury or fact finder can rely on in reaching its decision. Later this week, we will be using an example of this type of presentation to walk through the issues that Mr. Josiah raises in a practical manner.  At any rate, after the jump is Mr. Josiah's excellent discussion of these issues.

Information regarding the Division I Program in the Bahamas

The Division 1 program for the Mid-Winter meeting, entitled "How to Catch Flies – With Honey or a Fly Swatter?  Negotiation Tactics and Strategies," will consist of a panel discussion of various negotiation strategies and tactics designed to assist in the favorable resolution of disputes.  Panelists will include Frank Adams, Interface Consulting International Inc., Houston, TX;  Devon Coughlan, Conflict Solutions, Raymond, ME;  and George Meyer, Carlton Fields PA, Tampa, FL.  Scott Griffith of Griffith Davison & Shurtleff PC in Dallas, TX will moderate.

The decision of how one should approach and handle a dispute, especially when engaging the opposing party, can mean the difference between success and failure from a settlement perspective.  As with first impressions, the approach you take can have lasting consequences and will certainly impact the probability of a successful resolution.  Whether you have been negotiating disputes for years, or are still learning the ropes, we welcome you to join Division 1 in what will undoubtedly be a lively, informal discussion lead by an esteemed panel of experts in the field of negotiation strategies and techniques.

See you at Paradise Island! 

In Texas, Contractual-Liability Exclusions Do Not Exclude Coverage for Property-Damage Claims Based on Failure to Perform Work in a Good and Workmanlike Manner.

The Texas Supreme Court recently held that insurance coverage for property damage resulting from violations of a general contractor's contractual duty to perform work in a good and workmanlike manner are not excluded by the standard exclusion for "contractual liability" in a commercial general liability policy. Ewing Const. Co., Inc. v. Amerisure Ins. Co. --- S.W.3d ----, 2014 WL 185035 (Tex. Jan. 17, 2014).

 In Ewing, a general contractor had constructed some tennis courts for a school district. After construction was completed, the tennis courts began cracking and became unsuitable for use. The school district sued the general contractor for repairs, claiming the work had not been performed in a good and workmanlike manner.  

The general contractor sought defense and indemnity from its liability insurer, but the insurer denied coverage. In the ensuing coverage lawsuit in federal court, the insurer relied on the contractual-liability exclusion in the policy to deny it had any obligation to defend or indemnify the general contractor. 

Contractual-liability exclusions are common in commercial general liability policies in Texas.  The provision at issue in Ewing excluded coverage for property damage "for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.” The construction contract with the school district required the general contractor to perform its work in a good and workmanlike manner. As the school district claimed the problems with the tennis courts resulted from the general contractor's failure to meet this standard, the insurer argued the contractual-liability exclusion applied. 

The district court granted summary judgment in favor of the insurer based on the contractual-liability exclusion. The Fifth Circuit initially agreed with the district court, but then vacated its opinion and certified the question of whether the exclusion applied to the Texas Supreme Court. The Texas Supreme Court held that the exclusion does not apply.

Central to the Court’s decision was an opinion issued several years ago that interpreted the contractual-liability exclusion. In Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, a contractual-liability exclusion excluded coverage for claims based on liability outside of what the general contractor would have had absent the contract. 327 S.W.3d 118 (Tex. 2010). Specifically, the contractor in Gilbert had agreed to assume liability for damage caused to adjacent landowners' property. 

The Ewing Court distinguished its holding in Gilbert by pointing out that Gilbert addressed whether a CGL policy’s contractual liability exclusion applied to exclude indemnity coverage for a third party’s property-damage claim where the only basis underlying the claim was the insured’s contractual agreement to be responsible for the damage. The contractual agreement at issue in Gilbert specifically obligated Gilbert to repair or pay for damage “resulting from a failure to comply with the requirements of th[e] contract,” thus extending Gilbert’s obligations beyond what would exist under general principles of law.

            In Ewing, the general contractor's agreement to construct the work in a good and workmanlike manner did not enlarge its obligations beyond any general common-law duty it might otherwise have. In Texas, contractors are obligated to perform their work with skill and care even absent an express contractual provision requiring them to do so. The Court reasoned that the exclusion “means what it says,” and excludes liability for damages the insured assumes by contract, such that “assumption of liability” means liability for damages that exceeds the liability an insured would have under general law.  Thus, the Court concluded that a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract and does not “assume liability” for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion. 

            This decision is generally positive for contractors insured under CGL policies in Texas, as it reduces the substantial uncertainty about coverage of property-damage claims based on construction defects that arose after the Gilbert decision was issued in 2010. However, as the Court acknowledged in Ewing, CGL policies are not performance bonds. Claims based on faulty workmanship are often excluded from coverage by other exclusions specific to the construction industry. For example, CGL policies often exclude claims for property damage to the insured's own work under the "your work" exclusion.

Forum Webinar: Choosing Between Judge, Jury and Arbitrator: What’s the Real Difference?

Choosing Between Judge, Jury and Arbitrator: What’s the Real Difference?

Live Webinar:
Thursday February 6 - 1 pm ET
Click HERE to register

Join trial communication and strategy experts along with a construction trial attorney experienced in persuading judges, juries, and arbitrators to answer the following questions:
• Which fact finder is more likely to favor equities over the dictates of the law?
• Which fact finder is better suited to handle highly technical cases?
• Which fact finder is more likely to award reasonable damages?
• Which fact finder is more likely to have anti-corporate bias?


Register for the latest CLE specialty program from the American Bar Association here: http://apps.americanbar.org/cle/programs/t14cbj1.html?sc_cid=CET4CBJ-C

Great Div 1 Lunch Program on Negotiation Tactics and Strategies

Seventh Circuit (Posner, J.) Allows Limited Discovery To Proceed In US District Court Action Despite Parallel International Arbitration

In GEA Group AG v. Flex-N-Gate Corporation, Shahid Khan (decided 1/10/2014), the Seventh Circuit allowed limited discovery to proceed in an action brought in U.S. District Court despite the fact that an international arbitration was pending between the same parties on the same issues in Germany before the Arbitral Tribunal of the German Institution of Arbitration. 

The U.S. District Court action was different in that GEA named "Flex-N-Gate's CEO, board chairman, and controlling shareholder, the American billionaire Shahid Khan" as a defendant on various grounds from piercing the corporate veil to fraudulent inducement into the contract. The Seventh Circuit permitted the limited discovery because Shahid Khan was not a party to the arbitration or signatory as an individual to the arbitration agreement.  Judge Posner wrote for the Court:

Since fraud is a tort, GEA is entitled to make it the subject of a lawsuit.  But it is a serious charge and Khan is entitled to defend himself against it, which he can't do, it appears, without being able to conduct discovery.  Discovery may yield evidence germane to the arbitration as well, but if so - and, more to the point, if it yields evidence favorable to Flex-N-Gate - that is a consequence that GEA will have brought upon itself by its decision to sue Khan.  You cannot sue someone and prevent him from defending himself.

This case is an interesting read.  Judge Posner's opinion goes over the procedural history of the dispute commenting throughout in a direct manner about the strategic maneuvering and inter-relationship between international arbitration and US proceedings.

Relying upon Section 3 of the FAA, GEA had a sought a stay in the federal court proceeding mainly because it asserted that it would be prejudiced if Flex-N-Gate could use the discovery in the German arbitration (where such discovery would not be permitted).  A repeated theme and tone of the opinion was that GEA's federal court action may have been premature.  In addressing GEA's argument concerning the use of discovery, the Court wrote:

The ground is that Khan will convey the fruits of his discovery to Flex-N-Gate for use against GEA in the do-over arbitration proceeding.  But that is not a proper concern of the district court, or of this court.  It is the concern of the foreign arbitrators and the foreign courts.  Should Flex-N-Gate try to inject evidence into the arbitration from discovery conducted by Khan in the district court suit, GEA can object and the arbitrators will decide.  What business is it of an American court?  It was GEA that invoked German arbitration.  By doing so, it subjected its claim of breach of contract to the German arbitrators and judiciary.  If the arbitrators allow the fruits of Khan's discovery into the arbitration, and in doing that they are violating German law, there is always the High Regional Court in Frankfurt, and, if necessary, the Federal Court of Justice, for GEA to appeal to.

Read the opinion and let us know what you think. 

Join Us For The Division 1 Dinner - Bahamian Club Restaurant (1/30/2014, 8:30PM)

For those who are attending the Forum's Mid-Winter Meeting later this month in the Bahamas, email Tony Lehman (Anthony.Lehman@dlapiper.com) to sign-up for Division 1's Dinner on Thursday night (January 30, 8:30 PM).  Guests are welcome. 

Our dinner will be at the Bahamian Club at Atlantis.  It will be a price fix menu ($89 per person plus 15% gratuity). 

The three-course dinner menu is below:

Appetizers

Club House Salad or Bahamian Conch Chowder

Entrees

Sirloin Steak (14 oz) or Grilled Double Chicken Breast or Grilled Swordfish

Desserts

Coconut Creme Brulee or Chocolate Passion Fruit Tart

Email Tony now to reserve your spot.  See you in the Bahamas.

Concurrent Delays Dissected

(c) 2013. Navigant Consulting

In its most recent newsletter, "Insight from Hindsight," Navigant Consulting's Tom Peters provided a fascinating article entitled "Dissecting the Doctrine of Concurrent Delay."  I have linked the article here so that we can discuss it and so that you can read it more closely.  

In the article, Mr. Peters first points out that lawyers and schedulers differ on what effect concurrent delays might have both on the excusability and the compensability of various concurrent delays.  As the table makes clear, nothing is clear when it comes to answering a number of the key questions.  For example, is a delay that is excusable actually excused if the delay occurs concurrently with a non-excusable delay? Some commentators say it is, while others say it is not. 

Mr. Peters then looks at various boards of contract appeal decisions and -- no surprise -- finds similarly conflicting points of view.  As a practice issue, if major articles and treatises cannot agree and if the cases are all over the place, how does an attorney advise his or her client correctly?

This also raises another issue for discussion: with the increase of technology usage in our daily lives, will construction companies be able to harness this technology to improve their as-built and as-happening schedules?  For example, with smart phone cameras now being nearly ubiquitous, will workers be required to take photos every hour to show progress on their work?  Should contractors or owners expect that kind of documentation when faced with delay claims?

Let's hear from you in the comments.

Are Witnesses Overrated In Construction Cases?

Check out Witnesses Are Overrated - a piece written by Attorney Ned Nicholas, of Vandeventer Black LLP (Bill Franczek's firm).  In the article, Mr. Nicholas discusses the key role documentary evidence has over witness testimony in construction litigation. 

While the finder of fact (whether Judge, Jury, or Arbitrator) still must see, hear, and believe as reasonable the party's story from at least one witness (preferably a likeable one), our construction cases often swing based upon the contemporaneously prepared project documents. 

On some issues, for example, loss of productivity claims, oral testimony often pushes the fact finder to its decision.  During one bench trial, I (Tom Dunn) recall walking back upstairs into court during a break following the testimony of my client's foreman wherein he described the working conditions during the winter months.  With opposing counsel at my side, I couldn't help but smile (and opposing counsel couldn't help but to shrug) when I heard the courtroom clerk and security officer talking about how horrible it must have been to work that job.  I figured if they got "it" enough to talk about it, then the Judge probably did as well.  I don't think photos or contemporaneous documents (other than maybe video) could have done what that witness did with his personality. 

Significant Amendments to the Rule Governing Subpoenas in Federal Court

On December 1, 2013, significant amendments to Federal Rule of Civil Procedure 45 took effect. Tony Lathrop of the Litigation Blog has posted a detailed summary of the revisions. They include, among other things:

• Changing the issuing court for subpoenas to the court where the action is pending (previously, the issuing court had varied depending on the purpose of the subpoena);
• Clarifying that the limit on compelling a person to travel more than 100 miles to attend trial applies to parties and party officers;
• Explicitly authorizing the enforcement court (where the witness is located) to transfer subpoena-related motions to the issuing court (where the action is pending).

A redlined version of the amendments is available in Appendix C to the September 2012 Summary of the Report of the Judicial Conference Committee on Rules of Practice and Procedure (starting at page 119 of the Adobe file).

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.

Default Terminations: A Death Penalty?

In this linked article distributed by Advise & Consult, Inc., Smith, Currie & Hancock's Gene Heady discusses default-termination clauses in subcontracts and their impact on the parties.  

In particular, the article provides some ideas as to what should constitute an "event of default" for the subcontractor, including failing to pursue its work diligently, failing to prosecute the work in a workmanlike and skillful manner, failing to pay sub-subcontractors and suppliers, or failing to correct defective work, among others. One very important point that may be ignored by some general contractors is the requirement to follow the contractual provisions allowing subcontractors to cure their defaults.

The article is a good summary of what types of clauses should be incorporated into subcontracts to protect both the subcontractor and the contractor.  More saliently for us as a dispute-resolution group, it helps to remind us of possible defenses to a termination for default claim.

Scope of Federal Arbitration Act Allows Contractor to Compel Arbitration

In August, the Supreme Court of South Carolina addressed the reach of the interstate-commerce requirement of the Federal Arbitration Act (FAA). Cape Romain Contractors v. Wando E., LLC, 747 S.E. 2d 461 (S.C. 2013).  It also addressed whether an Owner could compel arbitration of a lien-foreclosure action filed by a subcontractor.

Wando E. owns property along the Wando River. It hired Sean Barnes as its general contractor to build a marina along the river.  Barnes then subcontracted with Cape Romain Contractors to install pilings and a prefabricated, manufactured dock. 

A dispute arose between Barnes and Cape Romain after the project engineer refused to certify further payments due to problems with Cape Romain's work, including angled pilings and misaligned dock sections. Cape Romain insisted its work was correct and argued that the manufacturer was at fault.  The dispute could not be resolved, so Cape Romain filed a $158,413.14 lien on Wando E.'s property.

Cape Romain filed a lawsuit against Barnes and Wando E., alleging breach of contract and seeking to foreclose on the lien.The subcontract between Barnes and Cape Romain was an AIA form contract that required arbitration of disputes.  Thus, Barnes sought to compel arbitration and dismissal of the court case.  For its part, Wando E. wanted to tag along with Barnes to arbitration.  

The trial court, however, refused to compel arbitration. That court found that the contract between Barnes and Cape Romain did not impact interstate commerce sufficiently to "justify or trigger" application of the FAA.  The court also found that Wando E. could not compel arbitration with Cape Romain because they had not agreed to arbitrate and did not have a "special relationship" that justified applying the arbitration provision in the subcontract with Barnes.

The Supreme Court of South Carolina reversed on both issues.  To determine whether the FAA applied, the Court looked to decisions defining the extent of the Commerce Clause under the U.S. Constitution.  For commerce to be "interstate," the commerce either must use the "channels" of interstate commerce, use the "instrumentalities" of interstate commerce, or have a "substantial relation" to interstate commerce.  In this case, the Court held that all three prongs were satisfied -- the marina included raw materials originating in Ohio, Cape Romain used barges to bring materials up the Wando River through the Charleston Harbor (see the map, above), and the project was constructed in navigable waterways of the United States under a permit issued by the U.S. Army Corps of Engineers.  

As to Wando E.'s attempt to compel arbitration, the court declined to reach the question as to whether the attempt was valid on its own.  Instead, the court pointed to Section 21.6 of the Barnes/Cape Romain contract, which allows for, "joinder [of] persons or entities substantially involved in a common question of law or fact whose presence is required if complete relief is to be accorded in an arbitration" so long as that other party consents to joinder.  Since Wando E. consented to joinder, the South Carolina Supreme Court held that Cape Romain could not preclude  Wando E. from joining.  The case was then remanded with a stay imposed in the litigation below. 

November 2013 Under Construction

Under Construction is the newsletter of the ABA Forum on the Construction Industry.

The November 2013 edition can be accessed here. 

It contains seven informative articles on subject matters ranging from DRBs, insurance coverage disputes, affirmative action, the Foreign Corrupt Practices Act, and forensic information modeling.

Most importantly, it contains an article by our own Tony Lehman: Construction Basics: Betterment, Premium Costs, and First Costs.

It also contains the most recent news and announcements of the Forum on the Construction Industry.

Forum Midwinter Meeting in the Bahamas (Jan. 30-31, 2014)

D1 Members - Register for the Midwinter Meeting NOW!

As part of my Membership Committee responsibilities (I am the Division 1 liaison), I just did a post on the Forum's LinkedIn page regarding the midwinter meeting. The room rates are excellent and I am sure that it will book up quickly. We want to make sure D1 has a big turnout for this program.

Visit the Forum's page to view the brochure or register.