"Pay-When-Paid": Is there a "Reasonable Time" for Subcontractors to Wait for Payment Once Contractor-Owner Litigation Ensues?

Obviously, subcontractors prefer to be paid within a reasonable time, but the issue of what constitutes a “reasonable time” has been a conundrum many states have tackled over the years. From “pay-if-paid” to “pay-when-paid” provisions, states have either adopted one, both, or neither of these commonly controversial, heavily negotiated provisions. Recently, the California Court of Appeals has ruled on a “pay-when-paid” provision that might set the groundwork for subcontractors in other states arguing that “paid-when-paid” provisions should be against public policy.

Distinguishing Between Provisions

Both “pay-if-paid” to “pay-when-paid” provisions ultimately determine who will bear the financial risk of a construction contract. A “pay-if-paid” provision makes “payment by the owner to the general contractor a condition precedent to the general contractor’s obligation to pay the subcontractor for the work the subcontractor has performed.”¹ Under a “pay-if-paid” provision, the risk of non-payment falls on the subcontractor if the owner refuses to pay the general contractor. Many states, including California, have concluded that “pay-if-paid” provisions are unenforceable because they indirectly waive or forfeit the subcontractor’s mechanic’s lien rights in the event of nonpayment by the owner.²

Under a “pay-when-paid” provision, the general contractor agrees to pay the subcontractor within a period of time after the general contractor is paid by the owner.³ Thus, under a “pay-when-paid” provision, the risk of non-payment falls on the general contractor. While a “pay-when-paid” provision is not a condition precedent, there is an implied understanding that the subcontractor has an unconditional right to payment within a reasonable time. While many states depart as to whether “pay-when-paid” provisions are enforceable, the underlining issue for a “pay-when-paid” provision is what constitutes a “reasonable time.”

Crosno Construction, Inc. v. Travelers Casualty & Surety Co. of America

On April 17, 2020, the California Fourth Appellate District Court of Appeals ruled against enforcing a “pay-when-paid” provision that would postpone the plaintiff’s right to recover under a payment bond for an indefinite time period. The underlining issue was whether a surety may defend a public works payment bond action by invoking an expansive “pay-when-paid” provision in a construction subcontract that defers payment for an indefinite period of time.⁴

North Edwards Water District (District) selected Clark Bros., Inc. (Clark) as its general contractor on a public works project to build an arsenic removal water treatment plant. Clark hired subcontractor Crosno Construction (Crosno) to build and coat two steel reservoir tanks.⁵ The subcontract contained a “pay-when-paid” provision that stated:

“If Owner or other responsible party delays in making any payment to Contractor from which payment to Subcontractor is to be made, Contractor and its sureties shall have a reasonable time to make payment to Subcontractor. ‘Reasonable time’ shall be determined according to the relevant circumstances, but in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment, including (but not limited to) mechanics’ lien remedies.”⁶

A dispute arose between Clark and District halting the project. Crosno sought to recover payment owned under the public works payment bond that Clark had obtained for the project.

The Court focused on whether postponing Crosno’s right to recover under the payment bond until Clark’s litigation against the District concluded would result in an unreasonable impairment of Crosno’s statutory payment bond remedy. Crosno never executed a waiver and release required to validly “waive, affect, or impair” its payment bond rights. Applying precedent, the court reiterated that postponing payments:

“. . . earned by a subcontractor, itself without fault, until a dispute between the contractor and the owner is resolved, perhaps months or even years later … gives no reasonable assurance that such a dispute would ever be resolved. If the contractor lost the dispute, the contractor would be required to pay his subcontractor creditor from other funds. If the contractor won the dispute, the contractor would be required to apply all or a substantial part of the money he receives toward his subcontract obligations. . . the contractor’s interest would seem more likely to benefit from avoidance of any settlement with the owner.”⁷

A “reasonable time,” in this case, would include an indefinite timeframe. In fact, the litigation between Clark and District had already reached the two-year mark prior to this ruling. For many subcontractors, managing business in the wake of the COVID-19 crisis is difficult enough. If subcontractors were to be forced to wait until contractor-owner litigation were resolved prior to receiving payment, most subcontractors would fail to survive.

Conclusion

Crosno reminds lawyers representing subcontractors that the purpose behind a public works payment bond is to provide subcontractors a sufficient means of payment. This distinct remedy to public works subcontractors is in addition to the protection payment bonds provide in the event of a defaulting contractor. Moreover, Crosno provides a subtle reminder of the importance of drafting specific waiver and releases. Generally, a waiver and release of payment bond rights can be enforceable to the detriment of the subcontractor. While many states differ on their enforcement of “pay-if-paid” and “pay-when-paid” provisions, arguing the element of reasonableness to protect otherwise disadvantaged subcontractors caught in-between contractor-owner litigation might be your best option.

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1 Wm. R. Clarke Corp. v. Safeco Ins. Co., 15 Cal. 4th 882, 885 (1997).^↩
2 Id. at 886.^↩
3 Chapman Excavating Co. v. Fortney & Weygandt, Inc., 2004-Ohio-3867, ¶ 22 (Ct. App.).^↩
4 Crosno Constr., Inc. v. Travelers Cas. & Sur. Co. of Am., Nos. D075561, D075562, 2020 Cal. App.at *8-9 (Ct. App. Apr. 17, 2020).^↩
5 Id. at 1-2.^↩
6 Id. at 4-5.^↩
7 Id. at 17-18 (citing Yamanishi v. Bleily & Collishaw, Inc., 29 Cal. App. 3d 457, 463 (1972).^↩

Author Christopher M. Wise is an attorney and the Managing Member of Wise Law, LLC in Louisville, Kentucky. He focuses on contractor-subcontractor litigation and property law.

What the 1918 Flu Can Teach Us About COVID-19

The COVID-19 pandemic shows no signs of sparing the construction industry. Nearly every jurisdiction has implemented some level of restriction on business activity, i.e. “essential” versus “non-essential,” and as a whole construction has been caught in the grey zone. Some jurisdictions have found that construction is “essential,” thereby allowing work to proceed. Others, including New York, Pennsylvania, New Jersey, and Vermont, have halted nearly all construction projects not serving an emergency or essential purpose.

State Restrictions on Construction Activity Vary

Some states have enacted significant limitations on construction projects. One of the most stringent is Pennsylvania, which on March 19, 2020, issued an executive order forcing the closure of any business not deemed “life-sustaining,” including a state-wide prohibition on construction activity. Days later, the executive order was amended to deem the construction of medical facilities and emergency repairs as “life sustaining.” On March 27, 2020, except for the construction of medical facilities and emergency repair, nearly all construction work state-wide was closed. On a case-by-case basis, the Pennsylvania Department of Community and Economic Development has granted some waivers/exemptions.

While Pennsylvania closed nearly all construction projects, both New York and New Jersey initially considered construction an “essential” business. However, as the fight against COVID-19 intensified, these states restricted their definitions of essential to be project-specific, e.g. medical facilities, infrastructure, and affordable housing. Now, New York is threatening fines of up to $10,000 against teams found working on non-essential or non-emergency construction projects. While New York has a robust and responsive waiver process, New Jersey has not instituted a formal waiver process. In some jurisdictions, municipalities responding to the COVID-19 with their own rules. Presently, there are several major metropolitan areas with significant restrictions on construction activities, including Boston and San Francisco.

On the other hand, many states including Texas and Florida have relied on federal guidance from the U.S Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA). CISA deems nearly all construction projects as essential, e.g. residential construction is essential “to combat the nation’s existing housing supply shortage.” California has also permitted most construction projects to continue.

In either case, COVID-19 has likely impacted the workforce and supply of readily available labor to work on any given construction project.

Lessons from the 1918 Flu

As clients continue to struggle with the full implications of the ongoing emergency, some experts suggest analyzing a similar pandemic from 100 years ago. As soldiers returned home from the battlefields of World War One, a global pandemic of influenza cast a pale over victory celebrations. The so-called “Spanish Flu” took over 50 million lives, about twice as many as the Great War itself. In the United States, it is estimated a staggering 29 million people contracted the 1918 Flu. Approximately 675,000 Americans lost their lives.

The 1918 Flu pandemic shares some parallels with COVID-19, but there are also a few important differences. Whereas COVID-19 seems particularly dangerous for older demographics, the 1918 Flu seems to have attacked younger people between the ages of 20 and 40.¹ As a result, historians believe a greater proportion of construction workers likely fell ill. In fact, one study from Toronto indicated construction workers had one of the highest mortality rates.²

The government response to the 1918 Flu was also less consistent. While some state and local governments acted aggressively to help fight the spread of the virus, there seems to have been less of a response at the federal level. Many of the local government responses were similar to today, such as mandating the use of masks in public, banning public gatherings, and encouraging social distancing. Many local businesses were ordered to close. On the other hand, mandatory shelter in place orders were uncommon 1918. Although some of the data is anecdotal, there is general agreement the 1918 pandemic caused a sharp, but short economic contraction.³ Labor shortages caused delays, shortages, and rising wages.⁴ Unlike the COVID-19 pandemic, which to date has included significant and ongoing economic stimulus, the 1918 pandemic did not result in any significant government stimulus. Thus, even before accounting for “work from home” or “remote work” capabilities, a direct economic comparison may prove difficult.

Available case law indicates courts reached inconsistent conclusions regarding delays and interruptions arising from the 1918 Flu. Courts seem to have generally upheld the power of local governments to enact quarantines. Soap Co. v. Peet Bros. Mfg. Co., 50 Cal. App. 246, 194 P. 715 (Cal. Ct. App. 1920). Additionally, the “contingency or delay in performance” provision in a contract was triggered by an enforcement of a local quarantine order and excused the supplier’s delayed performance. Id.

Other courts facing contract issues arising from the 1918 Flu pandemic reached the opposite conclusion. Napier v. Trace Fork Mining Co., 193 Ky. 291, 235 S.W. 766 (1921). The plaintiff entered into an agreement to complete grading as part of a railroad sidetrack construction project. Due to the 1918 Flu pandemic, the plaintiff was unable to find enough labor needed to qualify for an early completion bonus. The court refused to apply an unforeseen circumstances analysis because, “defendant accepted the work as soon as it was completed and offered to pay plaintiff therefor in exact accordance with the plain and unambiguous terms of the contract.” Id. at 767. The court found plaintiff merely showed timely completion was more difficult and expensive, not that it was impossible.

The lesson from history is that these cases are fact-sensitive even during times of pandemic. In that regard, best practices include well-tailored requests for time or additional money, supporting documents and materials to demonstrate entitlement at the claim level, and prompt notice. Much like the contractor in Napier, parties cannot risk overplaying or overstating the impact of COVID-19 on contractual performance. It appears the divergence of judicial analysis resulting from the 1918 Flu may be on the verge of repetition 100 years later.

Conclusion

The current patchwork of government restrictions on construction activity has generated a plethora of legal issues. Some of these include force majeure clauses, excusable delay, change orders, cash flow problems, employment and supply chain issues, and business interruption coverage. Although the 1918 Flu may be an imperfect comparison, it suggests COVID-19 will likely have a significant, although hopefully transitory, economic impact on the construction industry.

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1 “1918 Pandemic (H1N1 Virus),” Centers for Disease Control and Prevention, https://www.cdc.gov/flu/pandemic-resources/1918-pandemic-h1n1.html (last visited April 22, 2020).^↩
2 Peter Kenter, ‘”Unsung Heroes”: Toronto Construction Workers and The Spanish Flu Epidemic,” Daily Commercial News, https://canada.constructconnect.com/dcn/news/labour/2020/03/unsung-heroes-toronto-construction-workers-and-the-spanish-flu-epidemic (last visited April 22, 2020).^↩
3 Thomas A. Garrett, “Economic Effects of the 1918 Influenza Pandemic: Implications for a Modern-day Pandemic,” at 9, (Federal Reserve Band of St. Louis) https://www.stlouisfed.org/~/media/files/pdfs/community-development/research-reports/pandemic_flu_report.pdf (last visited April 22, 2020).^↩
4 Id. at 21.^↩

Co-authors Gaetano Piccirilli, partner and Patrick McKnight, associate, are members of the Litigation Department at Klehr Harrison Harvey Branzburg LLP in Philadelphia, Pennsylvania and serve on the Klehr Harrison Coronavirus Task Force.

INSIGHT: Best Practices for Conducting Remote Arbitration Hearings

Two King & Spalding attorneys were one week into a two-week arbitration hearing when New York City shut down due to the coronavirus pandemic. They learned valuable lessons from continuing the hearing via video and share their experience and some tips.

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Most businesses must now connect virtually, due to the coronavirus pandemic, and arbitration hearings are no exception. We were one week into a two-week arbitration hearing when New York City shut down, forcing the hearing to conclude via video. Video hearings may be the future of arbitration—at least in the short term.

Attorneys need to think about important considerations and best practices for conducting a hearing via video. This article also addresses applicable arbitral institution rules (or lack thereof) and discusses why this area is ripe for consideration by these institutions.

Technology Considerations

• Zoom vs. Alternatives: Zoom, a highly-popular video conference platform, is an inexpensive and effective means of conducting virtual hearings. It allows many individuals to participate, and the arbitral tribunal and speakers are visible to all participants. Screen sharing can be used to display exhibits, demonstratives, and PowerPoint presentations. Note, however, that the party initiating the meeting must have an upgraded Zoom account to utilize many features, included organizing extended meetings and virtual break-out rooms. Moreover, there have been security and privacy concerns about Zoom that are currently being investigated. Many court reporting services offer alternative platforms that provide similar features, but are generally more expensive than Zoom subscriptions.

• Transcription Services: Most court reporting services can provide transcription services via an online platform, including access to live transcription during the hearing for a daily fee.

• Translation Issues: One potentially complicating factor when conducting remote hearings is the need for translation. While many translators can provide services remotely, such translation would likely need to be sequential rather than simultaneous and would require speakers to be particularly careful not to speak over each other.

• Test the Technology: To ensure a smooth first day of the hearing, the parties, witnesses, tribunal, and court reporter should test the technology in advance. Witnesses will need to ensure they have cameras on their computers. Most importantly, everyone will need strong and reliable internet connections—particularly the tribunal, witnesses, court reporter, attorneys, and client representatives directly involved in the proceedings.

Agreed-Upon Protocol

• Implement a Written Protocol: Parties can minimize potential disputes by reaching an agreement on a detailed written protocol, including details about the schedule, exchange of exhibits, pre- and post-hearing deadlines, and other logistical matters.

• Exchange of Exhibits: The parties should outline how and when they will exchange documents and demonstratives in the written protocol, including the means for providing exhibits to be used during cross-examination to witnesses, opposing counsel, the tribunal, and the court reporter. It may be easier to exchange documents electronically, particularly during the coronavirus pandemic when many firms and document vendors have reduced onsite staffing.

• Reliability of Testimony: Possible safeguards to ensure the reliability of testimony include requiring witnesses to be alone when they testify and to affirm that they will not look at email or smartphones during the examination. If hard copy documents are sent to witnesses before they testify, the documents can be sealed in a box wrapped in colored tape that the witness must open on camera in the presence of opposing counsel and the tribunal immediately before testifying. Additional safeguards can be put in place by not providing cross examination bundles to opposing counsel until about 30 minutes before an examination is set to begin.

Presentation Considerations

• Displaying Documents: It is important to make sure the online platform chosen to host the video hearing includes a mechanism to display documents on the screen so all participants can see them. Most online video platforms, including Zoom, have this feature. It is helpful to pinpoint specific pages or sections of documents so that the process is as seamless as possible.

• Effective Cross Exam: The obvious difference when conducting a cross-examination via video is the loss of in-person, face-to-face contact with the witness, the tribunal, and opposing counsel. The witness should be positioned close enough to the camera to gauge facial expressions and other silent cues.

Arbitral Institution Rules

Most of the various arbitral institutions do not have rules in place specifically addressing videoconference hearings, or more generally, addressing what to do in times of local, national, or global crises.

For example, both the American Arbitration Association’s construction and commercial rules provide that an arbitrator may “allow for the presentation of evidence by alternative means including video conferencing.”

Similarly, pursuant to the JAMS arbitration rules, “[t]he Hearing, or any portion thereof, may be conducted telephonically or videographically with the agreement of the Parties or at the discretion of the Arbitrator.”

The International Institute for Conflict Prevention & Resolution is silent about videoconference hearings, providing only that unless the parties agree on the place for the arbitration, the tribunal shall decide “based upon the contentions of the parties and the circumstances of the arbitration.”

Rules promulgated by the International Chamber of Commerce , the London Court of International Arbitration, and the Singapore International Arbitration Centre provide for videoconferencing for emergency procedures. But none of these institutions appear to contemplate full merits hearings by video, much less provide specific rules for how such video hearings should proceed.

Although arbitral rules are aimed at providing individual arbitrators and parties significant control over hearing procedures, it would be helpful to have specific, consistent guidance from these institutions on how virtual hearings should be conducted.

More generally, parties would benefit from institutional guidance about how matters should proceed in the face of natural disasters or catastrophes. The Covid-19 pandemic hit the U.S. hard and fast. With many hearings already in progress, arbitrators, lawyers, and clients alike were faced with difficult decisions about whether to continue in-progress hearings in person or whether to adjourn hearings without any idea about when a live hearing could resume and no existing rules or protocols in place for continuing by video.

Although arbitrators generally have discretion to conduct a merits hearing as they see fit, explicit guidance about adjourning hearings during a global health crisis, national disaster, or other widespread catastrophe would be valuable for parties and arbitrators alike.

*This article previously appeared in Bloomberg Law.

Author Information

Jessica Sabbath is a senior attorney in King & Spalding LLP’s Trial and Global Disputes practice in Atlanta. She focuses on construction-related disputes, particularly those arising from large energy projects. She also has extensive commercial litigation experience in state and federal courts at the trial and appellate levels, as well as domestic and international arbitration experience.

Brianna E. Kostecka is a senior associate in King & Spalding’s International Arbitration practice in New York. She focuses on domestic and international litigation and arbitration of construction disputes involving large-scale projects primarily in the energy, oil and gas, and manufacturing industries. She has also represented clients in complex matters involving commercial agreements.

Recent Decisions Clarify Statute of Repose

A statute of repose bars claims against a defendant for a given period of time after completion of project. These statutes are stronger than statutes of limitation because tolling is not permitted. Clients including architects, engineers, builders, and contractors should understand their state’s statute of repose to effectively manage and mitigate risk.  Courts continue to interpret many of the most important aspects of their state’s statute of repose. Some of the most litigated issues remain:

1. What constitutes substantial completion sufficient to trigger the statute?
2. To which claims does the statute apply?

 Multi-Phase Construction in Massachusetts
Large projects often involve multiple phases. In D’Allesandro v. Lennar Hingham Holdings, LLC, 2019 WL 5550629, at *3 (D. Mass. 2019), a 150-unit condominium project in Massachusetts was completed over 24 phases. Several owners brought a suit for construction deficiencies and code violations involving the common areas of their buildings. The suit was filed two and half years after completion of the project.

The United States District Court for the District of Massachusetts agreed with plaintiff’s argument that the statute did not run from the time the architect signed off on substantial completion. Instead, it held Massachusetts’s six-year statute of repose was triggered only after the entire project was completed.

The court determined that while plaintiff’s claims for negligence and breach of implied warranty were subject to the statute, it did not apply to claims for intentional misrepresentation, negligent misrepresentation, violation of Massachusetts’ unfair business practices statute, and breach of fiduciary duty.

Ambiguity in Georgia

A recent decision by the Georgia Court of Appeals has left the local construction industry with more questions than answers. In Southern States Chemical, Inc. v. Tampa Tank & Welding, Inc., 836 S.E.2d 617 (Ga. App. 2019),  the enforceability of long-term warranties appears to have been significantly impaired. The court applied the statute of repose against a warranty-contract claim. The court surprised many by holding Georgia’s eight-year statute applied to claims arising from a contractor’s forty-year warranty against defective work.

The improvement in question was a chemical tank and the purported warranty was drafted after it began to leak. To further complicate matters, the court also determined the warranty only covered one year.

This case may be on its way to the Georgia Supreme Court for clarification. All parties to existing warranty agreements are watching closely to determine whether their contracts remain enforceable.

Building owners are concerned because the long-term warranties they bargained for suddenly appear in jeopardy. Contractors are apprehensive because they may no longer have the ability to incentivize construction of high-quality long-term improvements.

Contracts Covered in Ohio
The Supreme Court of Ohio confirmed the Buckeye State’s 10-year statute of repose applies to both tort and contract claims. In New Riegel Local School District Board of Education vs. Buehrer Group Architecture and Engineering, Inc.,157 Ohio St.3d 164 (Ohio 2019), the court clarified any lingering questions about the scope of the law.

In New Riegel, the Supreme Court of Ohio found the statute applies to “all causes of action,” that seek “to recover damages for bodily injury, an injury to real or personal property, or wrongful death, that arises out of a defective and unsafe condition of an improvement to real property *** against a person who performed services for the improvement to real property or a person who furnished the design, planning, supervision of construction, or construction of the improvement to real property.”

Conclusion
Regardless of how broadly these rulings are interpreted, clients contemplating claims involving improvements to real property should avoid unnecessary delay in bringing those claims. Although the broad contours of the statute of repose may seem consistent, essential details continue to be clarified in state courts.
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Patrick McKnight is a January 2020 graduate of Rutgers University earning both his JD and MBA.  Mr. McKnight can be contacted at patrick.joseph.mcknight@gmail.com

But What About My Machines Just Sitting There? Fed Court Rules Only Some Idle Equipment Costs are Allowable in a Payment Bond Claim

In 2010, the United States Army Corps of Engineers (USACE) entered into an agreement with Hirani Engineering & Land Surveying, PC (Hirani) for the construction of a levee wall on the National Mall to prevent the Potomac River from flooding into Downtown Washington. Hirani in turn then subcontracted out most of the work to a single firm, American Civil Construction (ACC).  For the next two plus years, the project was plagued with delays, changes, and disputes and consequently USACE terminated Hirani in April of 2013.  ACC then vacated the work site in the days following the termination.  USACE made a claim on Hirani’s Performance Bond and its surety Colonial Surety Company (Colonial) hired a contractor team to complete the project.

ACC filed suit against Hirani and Colonial in April of 2014 in the United States District Court for the District of Columbia for $2,172,285.23 in damages, prejudgment interest, attorney's fees, and costs.  In turn, Colonial counter-sued in the amount of $723,049.14 for work ACC had failed to complete. The bulk of ACC’s requested damages fell under at Miller Act-Payment Bond claim against Colonial for work ACC claimed was performed but not paid for by Hirani.

In its bond suit, ACC claimed quantum meruit damages which contained $138,135.34 for costs related to idle equipment.  ACC identified the idle equipment costs as, "the standby costs of having its owned equipment idling at the site as part of the reasonable value of ACC's owned equipment furnished in connection with the Project."  ACC asserted the figure did not represent rental values or other profit opportunities the equipment could have been used for.

The Court began its analysis by stating the Miller Act allows a contractor who "furnish[es] labor or material in carrying out work provided for in a contract" to make payment bond claim.  The court then goes on to state that idle equipment costs “cannot be viewed as an indivisible whole.” The Court presented two scenarios to exemplify this.  The first is when a contractor brings machines to a site and uses them over the course of weeks, but not every day.  The second scenario is one in which a contractor brings equipment to a job sixty days before it is ultimately used in the execution of contract work.   

The Court differentiated the two scenarios by stating in the first, a contractor cannot be expected to remove equipment from a work site every time it is not used so long as there are other activities that require its use, but in the second, a contractor cannot claim equipment is “furnished” for “carrying out work” if the equipment is not used absent a reasonable explanation.  The Court drew examples from the claim pointing to a skid steer that was brought to the job site early and used throughout the course of the project, but not every day, and compared it to an excavator brought in December of 2011, used a few times in January of 2012, and then used only one more time while sitting onsite for the duration of the project.

In its decision, the Court examined a submitted schedule of equipment utilized and determined ACC was entitled to $38,897.62 for standby expenses for idle equipment.

United States ex rel. Am. Civ. Constr., LLC v. Hirani Eng'g & Land Surveying, P.C.

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The author, Brendan Carter, Esq., is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA. He is a monthly contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.

Midwinter Meeting Lunch Presentation: Los Angeles Rams Stadium

Fantastic panel discussion about the Los Angeles Rams Stadium Project, currently under construction, including the unique and challenging aspects of the multi-billion dollar project.  Imagine placing two airplanes on 9 columns with only 1/8" tolerance!

 

Thank you to our speakers John D. Hanover, Partner, Alston & Bird; Richard C. Bach, Senior Vice President, Turner Construction Company; and Reed McMains, Vice President, Turner Construction Company. 

Economic Loss Doctrine - New from Rhode Island

The Rhode Island Supreme Court recently weighed in on the application of the economic loss doctrine to a construction dispute between two commercial entities. In Hexagon Holdings, Inc. v. Carlisle Syntec Inc. et al, --A.3d-- (Jan. 17, 2019 R.I.), the Court's majority framed the question as whether "the owner of a commercial building may circumvent [its] contractual privity with a general contractor by suing the subcontractor to evade application of the economic loss doctrine." The Court "answer[ed] this question in the negative." Accordingly, the Court affirmed that "summary judgment was appropriate as to [the owner]’s claim for negligence against [the subcontractor].")

The underlying issue in this case was a leaking roof.  Hexagon Holdings, Inc. ("Owner") had contracted with A/Z Corporation ("General Contractor") to build a facility at a business park in Rhode Island. The General Contractor in turn subcontracted with McKenna Roofing & Construction, Inc. ("Subcontractor") to install a specified roofing system manufactured by Carlisle Syntec Inc. The roofing began leaking immediately. Owner later sued the Subcontractor in contract and tort alleging that the roof was not properly installed and therefore sought to recover the cost of replacing the roof.  Owner opted not sue the General Contractor noting as its reasons: "judicial efficiency and not choosing to damage a relationship with somebody that [it] had a positive relationship with." The Subcontractor moved for summary judgment relying on the lack of privity (and that the Owner was not a third-party beneficiary of the roofing subcontract) to dismiss the claims sounding in contract and warranty and relying on the economic loss doctrine to dismiss the negligence claim. The Superior Court granted the Subcontractor's motion. The Owner appealed.

With respect to the contract and warranty claims, the Supreme Court agreed with the Superior Court - there was not sufficient evidence in the record creating a question of fact that the Owner was an intended as opposed to incidental beneficiary of the Subcontract.  Accordingly, the Court held that the contract claims were properly dismissed.  Note that there was a dissent that the Owner's third-party beneficiary status actually was a "triable issue of fact" based upon the information in the record.

As for the negligence claim, the Owner had pointed out that there was no privity between the Subcontractor and Owner, therefore the economic loss doctrine could not apply to bar the claim. The Subcontractor disagreed claiming that the economic loss doctrine did apply because Owner’s claim concerned "pure economic loss" and because the parties were engaged in a commercial transaction. The Court sided with the Subcontractor citing the New Jersey case, Spring Motors Distributors, Inc. v. Ford Motor Co., 489 A.2d 660 (N.J. 1985), which held that "[g]enerally speaking, tort principles, such as negligence, are better suited for resolving claims involving unanticipated physical injury, particularly those arising out of an accident. Contract principles, on the other hand, are generally more appropriate for determining claims for consequential damage that the parties have, or could have, addressed in their agreement." The Court noted that under the economic loss doctrine this Owner "clearly" did not have viable claim against General Contractor for negligence.  As such, the Court concluded that, here, where the Owner had "deliberately avoided suing the General Contractor, [the Owner was also] barred from asserting a lack of privity with [Subcontractor] to avoid application of the economic loss doctrine." Accordingly, the Court held that the negligence claim against the Subcontractor were properly dismissed. 

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

Register Now: the 2019 Midwinter Advocacy Practicum

Please remember to sign up for 2019 Midwinter Advocacy Practicum, which will take place on January 30, 2019 at 1:00 to 5:00 PST at the Millennium Biltmore Hotel.  Description and registration link below.   

https://www.americanbar.org/events-cle/mtg/inperson/346598580/

Advocacy Practicum–Advocacy in Writing the Perfect Brief: Tips From Expert Writers

 

Advanced Registration Only! Separate Registration Fee Required: Practicum Only - $325

 

If registering for the meeting - $200

The Forum is thrilled to be able to present an advocacy practicum dedicated to the elusive but laudatory goal of every construction lawyer—effective and crisp legal writing.

Bryan A. Garner’s extensive writing on the language of the law led The Green Bag to call him a "leading authority on good legal writing." A chorus of other publications—including The New York Times, Trial Magazine, and Harvard Law Review—have echoed that sentiment.

 

Garner is editor in chief of Black’s Law Dictionary and the author of many leading works on legal style, including Garner’s Dictionary of Legal Usage, The Elements of Legal Style, The Redbook: A Manual on Legal Style, The Winning Brief, Legal Writing in Plain English, and The Winning Oral Argument. He is co-author of two books with Justice Antonin Scalia, Reading Law: The Interpretation of Legal Texts and Making Your Case: The Art of Persuading Judges. He is also the author of Better Business Writing, a work focused on the art of communicating in the business world, published by the Harvard Business Review. His latest books are The Chicago Guide to Grammar, Usage, and Punctuation and The Law of Judicial Precedent, written with 12 judicial coauthors, including Justice Neil M. Gorsuch of the United States Supreme Court.

The second half of the Practicum shall be a panel discussion of leading legal writers who will discuss best practices for lawyers on how to present the most persuasive arguments and evidence to a court or arbitration panel. Anticipated panelists include the country's preeminent legal writing instructor, a federal judge and a leading construction lawyer. Since this program is a special event with limited seating, attendees must register for it separately.

Federal Circuit, Citing the Christian Doctrine, Holds That Performance and Payment Bonds Are Required for All Construction Contracts, Even When the Bonding Requirement Is Not Expressly Stated in the Contract

K-Con, Inc. v. Sec’y of the Army, 2018 U.S. App. LEXIS 31196 (Fed. Cir., November 5, 2018)

In September 2013 K-Con, Inc. (“K-Con”) entered into two contracts with the government to supply and construct pre-engineered metal buildings for a laundry facility and a communications equipment shelter.  The government issued both contracts using Standard Form 1449, entitled Solicitation/Contract/Order for Commercial Items.  The contracts’ terms did not contain any requirement to provide a performance or payment  bond.  Nor did they include FAR 52.228-15, which requires performance and payment bonds on construction contracts.

In October 2013 the government directed K-Con to supply performance and payment bonds before a notice to proceed could be issued.  K-Con initially refused but ultimately provided the bonds two years later.  The contracts were then adjusted to add the cost of the bonds.

K-Con submitted a claim under each contract for increases in costs for the two year delay, for a total value of $116,336.56.  The Contracting Officer denied the claim on the basis that the agreements were construction contracts, for which performance and payment bonds were mandatory pursuant to FAR 52.228-15, and that that provision was incorporated into the contracts pursuant to the Christian doctrine under which a court may insert a clause into a government contract by operation of law if that clause is required under applicable federal regulations.  G.L. Christian & Associates v. Unites States, 312 F.2d 418 (Ct. Cl. 1963).  K-Con appealed to the Armed Services Board, which affirmed the denial of the claims.  K-Con then appealed to the United States Court of Appeals for the Federal Circuit.

K-Con argued that the contracts were not construction contracts, but were commercial agreements which do not include mandatory bonding requirements.  The Court found the contracts ambiguous, because although commercial forms were used, the contracts included numerous references to construction activities.  These clear inconsistencies would have placed a reasonable contractor on notice that the contracts were patently ambiguous.  Thus, because K-Con failed to seek a clarification before the bid, it could not argue that its interpretation was proper.

K-Con also argued against application of the Christian doctrine.  The Court held that to incorporate a clause under the Christian doctrine, it must find both that the clause is mandatory, and that it expresses a significant or deeply ingrained strand of public procurement policy.

The Court noted that the Miller Act states that the contractor “must” secure bonds before a construction contract of a certain value is issued and that FAR 28.102-3(a) specifies that FAR 52.228-15 “should be inserted in the solicitations and contracts for construction.”  Thus, the Court found that bonding requirements were mandatory.

As to policy, the Court noted that the Miller Act was enacted to protect subcontractors and suppliers on government construction projects, and to ensure the government receives full performance at the agreed-upon cost.  Because government property cannot be subject to subcontractor and supplier liens, the bonds provide an alternative remedy to protect those who provide labor or materials on a federal project.  On that basis, the Court found that performance and payment bonds are “deeply ingrained” in government procurement policy.

Accordingly, the Court held that the bond requirements were incorporated by operation of law into the contracts despite the fact that these requirements were not stated in the agreements.

The author, John Conrad, is an associate in the Los Angeles office of the Pepper Hamilton Construction Practice Group.

Contractor Submits $4.5M Claim for Differing Site Conditions, Fed Court Rejects and then Imposes Liquidated Damages for $400K

The U.S. Court of Federal Claims shows contractors once again the dangers that can exist when pricing a performance specification and the importance of giving owner’s proper notice for change orders in CKYInc. v. Unites States of America. 

In 2012, the Government awarded CKY, Inc. a $6.4M contract to widen and rehabilitate the Urban Presidio Levee located in Presidio, TX.  The work required CKY to excavate existing materials in a series of benches and then infill the benches with new materials.  The contract contained a material testing specification which required the new fill material meet certain requirements.  The existing “benched” materials was further required to meet a performance specification as to moisture content and compaction rates.

During the bid process, the Government released Amendment 003 which contained questions and answers from bidders to the Government.  Within that document, the Government stated:

•       “Due to contamination in situ and the Contractor’s excavation processes, [the Government] cannot state that excavated material will meet…requirements. The Contractor is required to meet the embankment specification regardless of the source of the embankment material.”
•     “Question: Will removal and disposal of any unsatisfactory material from the existing levee embankment be paid as a separate item, as it is unknown how much material will be unsuitable for use in the new embankment? Government Response: No.”

Furthermore, the bid documents contained a geotechnical report for the existing ground conditions, but the report included the following disclaimer:  

“The data and report are not intended as a representation or warranty of continuity of conditions between soil borings nor groundwater levels at dates and times other than the date and time when measured. The [Commission] will not be responsible for interpretations or conclusions drawn there by the Contractor.”

During construction, CKY had difficulty achieving the subgrade requirements for moisture and density which resulted in schedule delays. CKY alleged at this time it was directed by the Government to place new suitable materials over the “unacceptable, non-constructible subgrade.”

In August of 2016, CKY filed a complaint in the U.S. Court of Federal Claims claiming costs for: (1) differing site conditions; (2) defective specifications; (3) constructive change; and (4) breach of an oral and implied-in-fact contract.

The Government moved for summary judgement contending CKY’s interpretation of the contract and specification were improper and CKY had not provided adequate notice of differing site conditions. It then filed a counter claim for liquidated damages.

The Court began its analysis by stating the primary issue in the dispute is the suitability of the subgrade material and CKY’s entire claim is based upon its contract interpretation that the subgrade was to be “acceptable and constructible.” 

The Court first examined the Government’s assertion CKY’s interpretation of the contract documents and specifications were incorrect.  The Court reviewed the items contained within Addendum 003 and the geotechnical report disclaimer and found that a reliable contractor could not have relied on the subgrade soil to meet the requirements of the specifications.  The Court elaborated that, “When all parts of the contract are assigned meaning and understood in their entirety, CKY’s reliance on its own interpretation of the constructability and suitability of the subgrade material was unreasonable.”

The Court next reviewed the differing site condition claim and CKY’s argument that “constructive notice” had been given to the Government.  The Court noted constructive notice is allowed only if “the Government is not prejudiced by a lack of written notice.”  The Court reasoned that since it took CKY over a year to submit a REA for the subgrade materials, the Government was prejudiced because it could have stopped construction to evaluate all options other than a $4.5M change order.

Finally, the Court found that as a result of finding CKY had no basis for a claim and the project being 225 days late, liquidated damages as identified in the contract were appropriate in the amount of $1,885 per day.

In conclusion, the Government was granted summary judgement and awarded $424,125 in liquidated damages.

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The author, Brendan Carter, Esq., is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA. He is a monthly contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.

Ohio Supreme Court: Subcontractor Defective Work Not an "Occurence"

The Ohio Supreme Court, in Ohio Northern University v. Charles Construction et al. Slip Op. No. 2018-Ohio-4057, recently issued a decision impacting insurers and contractors in that state.  This Ohio outcome could eventually be adopted by courts or legislatures in other states.  In Ohio Northern, the Court held that defective work by a subcontractor is not within the meaning of an “occurrence” entitling a contractor to coverage under its commercial general liability policy.   By so deciding, the Court’s analysis ultimately ended at the issue of coverage, and did not reach the question of whether the policy’s “your work” exclusion was avoided by an exception under the Products-Completed-Operations-Hazard (PCOH) endorsement.  

The underlying facts involved the construction of a hotel and conference center.  After the project was completed, water leaks caused millions of dollars of damage.  The cause of the water infiltration was believed to be from the subcontractor’s defective work.  The owner filed suit against the contractor.  In turn the contractor submitted the claim to its insurer.   The insurer intervened and filed for declaratory judgment claiming that it had no obligation to defend or indemnify the contractor.  The trial court agreed, the appeals court reversed, and then the Ohio Supreme Court sided with the insurer.

The crux of Ohio Northern expanded the holding of a 2012 case, Westfield v. Custom Agri Systems, 979 N.E. 2d 269 (Ohio 2012).  In that earlier decision, the Court observed that a CGL policy provides coverage for property damage and personal injury caused by an occurrence, but held that a contractor’s own defective work was not an “occurrence.”  Applying that same analysis here, the Court again focused on the plain language of the definition of “occurrence” under the policy: “An accident, including continuous or repeated exposure to substantially the same generally harmful conditions.”  The undefined word, “accident,” the Court said necessarily meant “fortuitous” and that a subcontractor’s defective work is not fortuitous. Rather the defective work is a known business risk that the contractor can control and manage.  In sum, although the water leaks caused property damage and the damage was discovered after the project was complete (which would trigger the PCOH), the prerequisite linchpin was an “occurrence” and that element was missing.

The Court acknowledged that other jurisdictions have gone the opposite direction from its conclusion about subcontractor defective work not being fortuitous.  It also noted that after a similar decision in Arkansas, that state legislature stepped in to pass a statute requiring any CGL policy sold in that state to include “faulty workmanship” within the definition of occurrence.  For Ohio contractors, beyond waiting for the Ohio general assembly to possibly consider new piece of legislation, they may wish to contact their brokers and explore options for defective work endorsements.  Contractors outside of Ohio may want to consider the same to stay ahead of any future decisions in their states.

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

When a CM Issued Owner-Disputed Subcontractor Progress Payments, It Did so at Its Own Risk and Cannot Recover Costs Ohio Appeals Court Rules

In early 2004, Manley Architectural Group (MAG) entered into an architectural services agreement with Dr. Steven Santanello (Santanello) for a $1.6 million, 5,800 s.f. home complete with stable and riding area, sitework, pond, tennis court, and outdoor pool.  During contract formation, MAG also presented Santanello a cost savings option of utilizing it as a construction manager (CM) during construction. This would be done lieu of Santanello hiring a general contractor with Santanello holding all of the subcontracts. MAG’s CM services would include, “work[ing] directly for [Santanello] bidding out to the subcontractors and suppliers on your behalf and managing the entire construction process...Added benefits are we have more involvement in the details from start to finish, you have access to all of the subcontractor bids and we can make sure the construction is performed properly.” Santanello elected for the CM option presented by MAG.

During the course of construction, the barn project suffered water infiltration problems at the roof as well as water level retention issues at the pond project.  At that time Santanello stopped paying progress invoices submitted by MAG.  A number of years after construction was finished, MAG filed suit against Santanello for breach of contract to which Santanello filed a counterclaim for breach of contract based upon improperly supervising the construction of the pond and barn. 

A bench trial was held and the trial court found the CM agreement did not make MAG a guarantor of the subcontractor’s work on the roof and pond. Furthermore, it found Santanello was in privity with the subcontractors and ultimately remained responsible for performance and deficiencies in the work.  But, it also reasoned MAG had a responsibility to monitor the work and inform Santanello of any non-conforming work.  

The trial court ultimately found MAG was owed compensation by Santanello for: 1) payments it made to subcontractors on MAG’s behalf, 2) unpaid design fees, and 3) unpaid CM fees with total interest in the amount of $224,270.  The court then found MAG was in breach as to monitoring of the roof installation at the barn awarding Santanello the cost of a replacement roof with inflation in the amount of $160,000.  Each party cross-appealed with Santanello asserting error in the award of payments to subcontractors and MAG claiming error in the award of the cost of the roof (among other errors).

The Tenth Appellate District Court first analyzed the payments MAG issued to subcontractors in the amount of $55,577.  The Court pointed to MAG's statements that it paid the subcontractors to keep them engaged and working so the project could be completed. It "made the decision on its own to start to pay some of these people just to get them back to finish the work."  The Court found that MAG did not have the authority to issue payments on the behalf of Santanello because in the CM arraignment MAG suggested, Santanello was to act as the de facto general contractor and hold all the subcontracts.  The Court further pointed to the fact that liens had been attached to the property by subcontractors and thus there was a remedy for disputes between them and Santanello.  Ultimately the Court reduced the damages award to just the design and CM fees in the amount of $27,179.

The Court next reviewed MAG’s cross-assignment of error that it was liable for the $160,000 cost for the barn roof.  The Court examined the trial court’s definition that MAG’s CM services do not require it to be the ultimate guarantor of the work, but then the trial court ultimately required MAG to guarantee the roof work by imposing all liability for leaks on it.  The Court again pointed to the record and MAG’s efforts to identify and correct the defective work going so far as hiring additional roofing companies and making structural changes to the work.  The Court found these remedial actions satisfied MAG's CM responsibilities and since it was not responsible for the ultimate installation, it should not be held responsible for a new roof system. Accordingly the Court vacated the $160,000 damages award to Santanello.

Manley Architecture Group, L.L.C. v. Santanello

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The author, Brendan Carter, Esq., is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA. He is a monthly contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  

Divided Massachusetts Supreme Judicial Court Holds Statute of Repose Bars Alleged Unfair and Deceptive Acts Claims Against Contractor

The Supreme Judicial Court of Massachusetts in Bridgwood v. A.J. Wood Construction, Inc., 2018 WL 4100644 (Mass. 2018) held that statute of repose barred the homeowner's claims that the defendant contractor and subcontractor had committed unfair or deceptive acts (per Mass. Gen. Law c. 93A, s. 2) by failing to perform electrical work in compliance with statutory building and home improvement standards.

 

In 2001, the Newburyport, MA homeowner contracted for a renovation including the replacement of several ceiling light fixtures.  The defendants failed to obtain the proper permits to do so nor arranged for an inspection of the electrical wiring.  This electrical work was not performed to code, but the homeowner was unaware of the non-compliance until the concealed wiring caused a substantial fire in and damage in 2012.  The homeowner filed suit in 2016.

 

In Massachusetts, home improvement contractors are governed, in part, by Mass. Gen. Law c. 142A, s. 1 et seq.  Mass. Gen. Law c. 142A, s. 17 lists a number of prohibited acts including: "violation of the building laws of the commonwealth or of any political subdivision thereof."  Id. c. 142A, s. 17(10).  This law has some teeth because "[v]iolations of any of the provisions of this chapter shall constitute an unfair or deceptive act under the provisions of [Mass. Gen. Law c. 93A]," which carries penalties in addition to direct damages, including the potential for double and treble damages along with attorneys fees.  Here, the Bridgwood homeowner "claim[ed] that the defendants failed to perform the electrical work in compliance with those standards and, therefore, committed unfair or deceptive acts." Bridgwood, 2018 WL 4100644, at *2.

 

For their part defendants argued the homeowner's claim was barred by Massachusetts's 6-year statute of repose of tort claims set forth in Mass.  Gen. Law. c. 260, s. 2B.  The statute of repose is not tolled until the cause of action accrues.  Rather, in Massachusetts, the statutory trigger is substantial completion of the project or when the work is "open[] for use." Id.

 

The homeowner disputed the application of the statute of repose, instead arguing that only the 4-year statute of limitation under c. 93A, triggered "when the cause of action accrued," is the controlling timeline.  The homeowner emphasized that "because the relief available under G. L. c. 93A is 'sui generis,' neither wholly tortious nor wholly contractual in nature, the [tort-based] statute of repose does not apply." Bridgwood, 2018 WL 4100644, at *4. 

The Court disagreed explaining first that a "plaintiff to avoid the statute of repose by relabeling what is essentially a tort claim as a claim under [ ] c. 93A" and instead courts must look at the "gist of the action" to determine whether tort or contract based.  Bridgwood, 2018 WL 4100644, at *4.  Here because the homeowner's "claim is essentially that the defendants failed to perform the electrical work in compliance with the standards set forth in [a state statute and building code], [i]t is indistinguishable from a claim of negligence. Therefore, it sounds in tort and, having been commenced well beyond the six-year deadline, is barred by [the statute of repose]." Id.

The Chief Justice filed a dissent  joined by two other justices that rejected the majority's analyses of c. 93A caselaw and disputed that the legislature intended (or even contemplated) that the prior-enacted statute of repose would control the later-enacted consumer protection statutes.

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


 

But There’s a Catch—California’s Wage-Credit Restrictions on IAFs Still Stand

*Thanks to Rebecca D. Takacs, a construction litigator, with Oles Morrison Rinker &Baker LLP in Oakland, California.  Rebecca is a member of the Division 1 Publication Committee.  Her contact information is below.  Enjoy the post!   


The California Legislature passed Senate Bill 954 in 2016 (http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201520160SB954) for the express purpose of prohibiting payments to industry advancement funds as wage credits on public works projects where such credits were not expressly required by collective bargaining agreements. Plaintiff-Appellants Interpipe Contracting, Inc. and Associated Builders and Contractors of California Cooperation Committee, Inc. (“ABC-CCC”) challenged the amendment to the labor code’s wage-credit limitation in Interpipe Contracting, Inc. v. Becerra (9th Cir., July 30, 2018, No. 17-55248) 2018 WL 3613378 (https://www.ca9.uscourts.gov/media/view_video.php?pk_vid=0000012920).

Interpipe Contracting, Inc., is a pro-open shop contractor that prior to SB 954 went in effect took wage credits for contributions to ABC-CCC. ABC-CCC is an industry advancement fund that opposes project labor agreements on public works projects in favor of open shop arrangements. The plaintiff-appellants challenged SB 954 after Interpipe stopped making payments to ABC-CCC due to the new restrictions on wage-credits.  

SB 954 was intended to have a large effect on the construction industry in California. The Bureau of Labor Statistics estimates that just under 15% of construction industry labor nationally is union labor or union represented. (https://www.bls.gov/news.release/union2.t03.htm) SB 954 was intended to prevent employers from funding industry advancement funds that might support efforts contrary to workers interests. At the time of SB 954’s passage, industry opponents considered the SB 954 to be an outright ban on contributions to industry advance funds that might advocate for open shop policies.  

The lower court action challenged the constitutionality of SB 954 and sought a preliminary injunction. The district court denied the request for injunctive relief and dismissed the case on the basis that SB 954 was not preempted by federal labor laws and did not violate ABC-CCC’s free speech or equal protection rights.  

The United States Court of Appeals for the Ninth Circuit was presented with two issues: (1) whether the National Labor Relations Act (“NLRA”) preempted SB 954, and (2) whether SB 954 violated the First Amendment and the Fourteenth Amendment’s Equal Protection Clause by limiting industry advancement funds’ speech in the form of fundraising. The Ninth Circuit affirmed the lower court. 

The Ninth Circuit outlined the current state of prevailing wage requirements in California. Prevailing wages are either all cash wages or a combination of cash wages and benefits including: (1) health and welfare, (2) pension, (3) vacation, (4) travel, (5) subsistence, (6) apprenticeship or other training, (7) worker protection and assistance programs or committees, (8) industry advancement and administrative fees, provided they are required within the locality, and (9) other similar purposes to the above categories.  Cal. Lab. Code § 1773.1(a). In 2004, credits expanded from the first six categories to include industry advancement fees. The restrictions on industry advancement fees arose in 2016 with the passage of SB 954. The thrust of plaintiff-appellants challenge relied on Machinists v. Wisconsin Employment Rel. Comm'n, 427 U.S. 132 (1976). The Machinists doctrine bars states from interfering with the collective bargaining process and regulating non-coercive labor speech by an employer, employee, or an employee’s union. State minimum labor standards are generally saved from preemption by the NLRA. The Ninth Circuit held SB 954 was a legitimate minimum labor standard that does not regulate labor speech. The distinction hinged on the fact that a restriction on funding an employer’s speech was not an unlawful regulation of the speech itself.  

ABC-CCC argued it had a First Amendment right to receive monetary contributions from wage-credits. The Ninth Circuit rejected ABC-CCC’s theory holding that the First Amendment does not establish a right to receive funds necessary for speech. The Ninth Circuit evaluated whether SB 954 was viewpoint discriminatory toward open shop advocates. Relying on the recent Supreme Court case of Janus v. American Federation of State, County, and Municipal Employees, Council 31, et al., 138 S.Ct. 2448 (2018) (https://www.supremecourt.gov/opinions/17pdf/16-1466_2b3j.pdf), the Ninth Circuit found SB 954 to be facially neutral and rejected ABC-CCC’s discrimination arguments. 

Finally, the Ninth Circuit rejected the equal protection claim by ABC-CCC because SB 954 did not regulate industry advancement funds and it was not an employer.  

Rebecca D. Takacs is a contributing writer to The Dispute Resolver. She practices construction litigation at Oles Morrison Rinker & Baker LLP in Oakland, California. She may be contacted at takacs@oles.com.

Consequences for Exceeding the Limit…Maybe…

By: I’Ashea Myles-Dihigo
Leitner, Williams, Dooley & Napolitan

Sometimes I speed…okay, most times I speed.  Not anything dangerous, but I do keep up with the flow of traffic on the interstate.  Don’t judge.  With a daily commute into the office that is always over an hour, any bit of time savings is justified in my opinion.  

While I may be able to justify exceeding the speed limit as I travel down the interstate, the Tennessee Court of Appeals has recently clarified the effects of exceeding the monetary limits of your general contractor’s license in its holding in Pickens v.  Underwood.  In that case, timing was everything.  
General contractor, Pickens, entered into a contract to construct a house for the Underwoods. Pickens v. Underwood, No. E2017-02120-COA-R3-CV, 2018 Tenn. App. LEXIS 322, at *2-3 (Ct. App. June 12, 2018).  The parties entered into their contract on June 2, 2008. Id.   The dispute over final payment arose on May 9, 2009.  Id. at *3.  At the time the parties entered into the contract, Pickens’ limit on his contractor’s license was $350,000, yet at the time the project was complete, the final bill was over $670,000.  Id.  When the Underwoods failed to pay for the work, Pickens filed suit for breach of contract, unjust enrichment, promissory fraud and mechanics’ and materialmen’s lien. Id.  

The Underwoods counter sued for fraud, cost overruns, violations of the Tennessee Consumer Protection Act and for entering into a contract in excess of the contractor’s license limit. Id. The complaint in this matter was filed on July 21, 2009. Id. at *32.  Counsel for Pickens agreed to stipulate that he was an unlicensed contractor and thereby agreed to limit his damages to actual documented expenses.  Id. at *3.  The trial court disagreed with the stipulation and confirmed that Pickens, though over the monetary limit of his contractor’s license, was licensed for purposes of Tennessee Code Annotated §§ 62-6-101, et seq. Id. at *4.  The Underwoods appealed. 

The Court of Appeals affirmed. They reasoned that just prior to the filing of the parties’ complaint, the Legislature made a substantive change to Tennessee Code Annotated § 62-6-103 which governed the monetary limits on contractors’ licenses. Id. at *32.  The effect of the amendment expanded the limitation of actual documented expenses to any contractor required to be licensed under the statute and rules whereas before the limitation only applied to unlicensed contractors. Id.  

The Court held that the date the parties entered into the contract was controlling regarding which statute should apply in the case. Id. When Pickens entered into the contract and performed the work, he was not subject to the limitation because he was properly licensed under the old Tenn. Code. Ann. § 62-6-103.  The Court declined to apply the new code changes retroactively to the pre-existing contract.  Therefore, his recovery would not be limited to actual documented expenses as reflected in the new schematic. Id. at *33. 

While it is never a good idea to exceed the monetary limits of your contractor’s license, if you happen to find yourself in that position, you may still be able to recover the full contractual price as damages.  Based on the holding in Pickens, the Court will look to the law in effect at the time of the contract to determine whether or not your recovery is limited.

Federal Government Escapes Liability in Class Action Seeking Recovery of Damages Caused by Hurricane Katrina

This post comes from Mike Lane, a new contributor to the Dispute Resolver.  Mike practices construction law at Riess LeMieux, LLC in New Orleans, Louisiana.  Thanks, Mike!  Enjoy everyone.

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In St. Bernard Parish Government, et al. v. United States, No. 2016-2301, 2018 WL 1882913 (Fed. Cir. April 20, 2018), the Parish of St. Bernard and property owners in the City of New Orleans filed a class action suit against the federal government under the Tucker Act, 28 U.S.C. § 1491, for an alleged taking of property following Hurricane Katrina.  The plaintiffs claimed the federal government failed to maintain or modify the Mississippi River-Gulf Outlet channel (MRGO), which led to an increased storm surge that resulted in significant damage to their property.  The Court of Federal Claims ruled in favor of the plaintiffs and awarded a total of $5.46 million.  The United States Court of Appeals for the Federal Circuit reversed, holding the plaintiffs failed to show a causal link between the operation and maintenance of the MRGO navigation channel and the damages allegedly sustained. 

The Army Corps of Engineers (Corps) built the MRGO navigation channel in 1968 to increase commerce by providing a direct connection between the port of New Orleans and the Gulf of Mexico.  In addition to operating and maintaining the navigation channel over several decades, the Corps built several flood mitigation projects adjacent to the MRGO, including a vast levee system.  The plaintiffs contended that the levees would not have been breached, or would have held out longer and caused less damage to their property, if the Corps had properly maintained or modified the MRGO channel.  After a trial in December 2011, the Court of Federal Claims found a government taking occurred under the theory of inverse condemnation.  Specifically, the court ruled that the “continued operation of, and failure to maintain and modify MRGO caused erosion, increased salinity, wetlands loss, and a funnel effect, which in turn caused increased storm surge.”  After a separate trial on damages in November 2013, the Court of Federal Claims awarded the plaintiffs $5.46 million.  The federal government appealed both judgments.

The United States Court of Appeals for the Federal Circuit reversed the trial court decision, concluding that the plaintiffs failed to demonstrate that the Corps’ operation and maintenance of the MRGO navigation channel caused their alleged damages.  In so holding, the court focused on two errors by the lower court.  First, the trial court erred in finding that the failure to maintain or modify the MRGO served as a proper basis for a takings action.  The government cannot be liable for inaction in a takings claim; it may only be liable for affirmative acts.  Although the government’s failure to act may give rise to a tort claim, it “cannot be the basis of takings liability.”

The court next turned to whether any affirmative acts of the federal government proximately caused the damages of which the plaintiffs complained.   The plaintiffs argued that the construction and operation of the MRGO should be the only activity considered, not the separate flood mitigation projects constructed by the Corps in the same time period.  The court rejected this approach and held that the government’s separate flood mitigation projects must also be taken into account in the takings analysis.  On this point, the plaintiffs “failed to present evidence comparing the flood damage that actually occurred to the flood damage that would have occurred if there had been no government action at all.”  In other words, the “causation analysis must consider the impact of the entirety of government actions that address the relevant risk [i.e., flooding].” 

The appeals court ultimately held that the separate flood mitigation projects constructed by the federal government, composed primarily of the levee system, may have placed the plaintiffs in a better position than if the government had done nothing at all.  After noting the absence of supporting evidence and expert testimony, the court reversed the trial court judgments and ruled that the plaintiffs failed to prove their property damage was greater than the damage that would have occurred had the government not built the MRGO or the levee system in the first place. 

This decision clarifies that a claimant’s burden of proving causation in a takings cause of action against the federal government may only rely on affirmative acts of the government and must take into consideration all government acts related to the pertinent risk of harm.