Owner's Acceptance of Work Paves Way for Contractor's No Fault Decision

In the matter captioned Wilson v. Dura-Seal, --S.W.3d (March 21, 2017), the Missouri Court of Appeals considered "negligent construction claim against paving contractor" where the injured party claimed that "that she fell as a result of the height differential between the gutter area and the new asphalt poured by contractor."  Id. The trial court had granted summary judgment in favor of the contractor and the appellate court affirmed.

The defendant contractor had performed work, an asphalt overlay of a drive lane, at a school. The work was performed, invoiced, and paid by the school.  But apparently, the work was not up to par. It was undisputed that the contractor failed to pave up to the curb and instead left a “gutter area” where the "asphalt in the drive lane [was] taller than the gutter area in between the drive lane and the curb." The injured plaintiff claimed the height differential was "three to four inches." Id.

In order for the plaintiff to proceed against the contractor, the plaintiff needed to present evidence that the school had not yet "accepted the contractor's work" and that the contractor "was still in control of or had a right to control the area." Otherwise,“[a]fter [an] owner accepts a structure, the general rule [under the Acceptance Doctrine] is that a general contractor is not liable to persons with whom he did not contract." Id. The court was not persuaded that the plaintiff had raised a question of fact as to control, especially where the contractor had been off the site for 2 months and had been paid by the school.  Likewise the court was unpersuaded that the plaintiff has raised sufficient way around the Acceptance Doctrine -- for example that the drive lane was left in "an imminently dangerous condition," which would "operate[] to impose liability on a contractor, even after the owner has accepted the contractor's work." The court noted that "the road was in plain view and discoverable through inspection" and therefore not imminently dangerous.  Moreover, that the contractor had warranted its work to the school for a year did not change the analysis either -- the contractor had not expressly assumed any "greater liability to third parties than is commonly the case under the acceptance doctrine." Id.

Incidentally, the school had already settled with the injured party when the case against the contractor was commenced.  It was not evident from the decision whether the school ever attempted to recoup its settlement payments from the contractor.  Also worthy of note is that the Restatement (Second) of Torts § 385 takes a different approach to depart from the Acceptance Doctrine:  "One who on behalf of the possessor of land erects a structure or creates any other condition thereon is subject to liability to others upon or outside the land for physical harm caused to them by the dangerous character of the structure or condition after his work has been accepted by the possessor, under the same rules as those determining the liability of one who as manufacturer or independent contractor makes a chattel for the use of others."
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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: GC’s Non-Payment for a Scope Dispute with Subcontractor is a Willful Act, but not an Intentional One

The plaintiff in D.A. Sullivan & Sons, Inc.V. City of Springfield was a general contractor who contracted with the defendant for a public-school construction project in Springfield, MA. Subsequently, the plaintiff contracted with a subcontractor to perform certain finish work on the project.  During the execution of that work, a scope dispute arose with the finish subcontractor as to who owned certain lath and plaster work.  The subcontractor completed the work under protest then filed suit seeking compensation for the “extra work.” The subcontractor prevailed in that suit and was awarded damages related to the disputed work.  The plaintiff in the current matter then initiated an action against the defendant for: 1) breach of contract; 2) unjust enrichment; and 3) indemnification. The trial court granted the defendant’s motion for summary judgement holding that the indemnification clause of the general contract bars the plaintiff’s claims due to the plaintiff’s obligation to indemnify the defendant for losses arising from the intentional acts of the plaintiff and its subcontractors.

The Court began its summary judgment analysis by examining indemnity agreements in Massachusetts by stating that, “[i]ndemnity agreements "are to be fairly and reasonably construed in order to ascertain the intention of the parties and to effectuate the purpose sought to be accomplished."” Shea v. Bay State Gas Co., 383 Mass. 218, 222 (1981)

The Court next presented the prime contract’s indemnification agreement in dispute:

"The [c]ontractor hereby agrees to and shall at all times defend, indemnify and hold the [c]ity…wholly harmless from any and all losses, cost, expenses..,claims, demands, suits by any person or persons, injuries, damages or death, and other liabilities of whatever kind or nature, caused by, resulting from, incident to, connected with, or arising directly or indirectly out of the negligent or willful act or omission by the [c]ontractor, any [s]ubcontractor, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable whether or not caused in part by any act or neglect on the part of the [c]ity, its officers, employees, agents or servants, or others, including parties indemnified hereunder. This indemnity shall survive termination of the contract.”

The Court reviewed the lower court’s ruling on the above indemnity language where the lower court found there was “no ambiguity in this extremely broad indemnification clause” which it interpreted to mean that willful is intentional, but it does not necessarily imply a “malicious motive.”  Consequently, the lower court found an indemnity right existed because the plaintiff’s claims arose out of: 1) its direction to its subcontractor to perform the disputed scope; or 2) the subcontractor’s intentional act of actually performing the work.

The Court stated that such an interpretation of the indemnity clause might be correct if the defendant was seeking indemnity for a tort, personal injury, or property action resulting from the activities of the plaintiff or its subcontractor.  The Court further stated that the plain language of the provision would not limit such an interpretation as it does not “expressly tie the city’s indemnity right to damage of a person or property caused by the work to be performed” or limits damages to specific types of actions or omissions, or even further explicitly excludes payment terms.  The Court found the provision “unusually broad” and it specifically identified the phrase “arising directly or indirectly out of the negligent or willful act or omission” as ambiguous.

The Court also questioned whether the plaintiff’s actions of: 1) performing, or directing its subcontractor to perform the work was within its contractual obligation for the contemplated work; and 2) if performance of such an obligation would be considered “willful” within the context of the indemnity agreement, thus requiring the plaintiff to indemnify the defendant against the plaintiff’s own claims for payment.  The Court examined the meaning of the word “willful” and stated it could be synonymous with “intentional” or “deliberate” depending upon the circumstances, but “we question whether intentional or deliberate actions are necessarily willful in the instant context, where willfulness will arguably trigger an indemnity right as to payment claims arising from the very same acts alleged to be willful.” 

Accordingly, the Court overturned the motion for summary judgement stating that it disagreed with the legal determination that “willful” within the indemnification clause was unambiguous and synonymous with intentional.

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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

Alex Corey, Pepper Hamilton LLP

Fifth Circuit Holds That Spearin-like Provision of Louisiana Civil Code Bars Negligent Failure to Warn Claim

LaShip, LLC v. Hayward Baker, Inc., 2017 U.S. App. LEXIS 3694 (5th Cir. Mar. 1, 2017)

Beginning in 2007, LaShip, LLC (“LaShip”) undertook the construction of a large shipbuilding facility in Houma, Louisiana (the “Project”), situated on its own private land as well as land owned by the Terrebonne Port Commission (“TPC) – a subdivision of the Louisiana state government. In July 2008, LaShip accepted a bid from Hayward Baker, Inc. (“HBI”) to complete the soil mixing and drill shaft work on the Project.

The contract between LaShip and HBI (the “Contract”) provided for HBI to install subterranean soil-mix columns to form the foundation of the shipbuilding facility and prevent it from collapsing into the soft and compressible Louisiana soil. Pursuant to the Contract, HBI obtained soil samples to ascertain the columns’ strength.  Laboratory testing revealed that, in general, the soil possessed the requisite compressive strength provided for in the Contract.  Nevertheless, as the work progressed the columns exhibited spiraling, and HBI experienced several cave-ins during its installation of the drill shafts and unwanted settlement of the foundation columns.

On January 21, 2011, LaShip filed suit against HBI in the Louisiana Federal District Court alleging that HBI violated Louisiana law by not warning LaShip about alleged defects in the design of the columns. TPC joined the lawsuit on March 6, 2013, also claiming that HBI acted negligently in failing to warn of a dangerous condition.  The District Court ruled that LaShip failed to prove by a preponderance of the evidence its claims against HBI.  LaShip and TPC then appealed.

The Fifth Circuit reviewed the District Court’s ruling de novo and fully affirmed the decision.  In regards to LaShip’s arguments that HBI is liable for its failure to warn of the column defects, the Fifth Circuit found that HBI was “statutorily immune” from this claim under Louisiana Revised Statute 9:2771 (“LRS 9:2711”), which provides that:

No contractor . . . shall be liable for destruction or deterioration of or defects in any work constructed, or under construction, by him if he constructed, or is constructing, the work according to plans or specifications furnished to him which he did not make or cause to be made and if the destruction, deterioration, or defect was due to any fault or insufficiency of the plans or specifications.

Pursuant to LRS 9:2711, a contractor is shielded from liability for any defects that may arise as a result of the contractor’s adherence to plans and specifications that were provided to the contractor. This wording of the provision resembles the common law doctrine announced in Spearin.  See U.S. v. Spearin, 247 U.S. 128 (1918) (“if the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications”).  However, as the Fifth Circuit noted, a contractor will be liable “if he has a justifiable reason to believe that adherence to plans and specifications would create a hazardous condition.”

Applying LRS 9:2711, the Fifth Circuit reviewed the record and found that the problematic settlement of the structure in the Project stemmed from a design defect in the length of the columns. As such, HBI was afforded immunity based on its installations of the columns according to specifications in the Contract.

The Fifth Circuit rejected LaShip’s argument that based on HBI’s geotechnical expertise, its knew or should have known that the design was allegedly defective and thus had an affirmative duty to warn LaShip. The Fifth Circuit opined that such an argument would unduly broaden the affirmative tort duty of contractors under Louisiana law.  In affirming the District Court’s decision, the Fifth Circuit distinguished prior case law where a contractor was found to have breached a duty to warn the owner of a potential defect in the construction of a grain storage tank, noting that in that situation, the liable contractor “both designed and constructed” the storage tank.  HBI did not design the soil-mix column specifications.

The Court also affirmed the dismissal of LaShip’s breach of contract claim, finding that HBI fulfilled its contractual requirement in confirming that the soil tested met the minimum threshold for unconfined compressive strength. The dismissal of TPC’s claims was also affirmed on the basis that TPC failed to initiate the action within the one-year prescription period provided by Louisiana law for tort claims not governed by a contract.

 

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.