Owners Can Get Cake and Icing Under New Tennessee Lien Law

Seems like last week I was just celebrating one kid’s birthday and I had to do it again last night!  Oh, that’s right, I have seven kids with two birthdays in September. So, it was not a dream?!?!?!  Although they both got to choose their own family dinner destination, we are going to have one huge cake this weekend…with tons of icing!

Owners in Tennessee are celebrating a new law recently passed because they may get their icing, too!  The new statute, signed into in May 2018, immediately created a cause of action providing for remedies for the successful challenge of the validity of a lien against a property.  Under the new law, Tennessee Code Section 66-21-108 provides a description of the “icing” that the owner may recover:

[A] real property owner who prevails in an action challenging the validity of a lien, including in a slander of title proceeding, shall recover:

(1) The owner’s reasonable attorney’s fees; 

(2) Reasonable costs incurred by the owner to challenge the validity of the lien;

(3) Liquidated damages in an amount equal to ten percent (10%) of the fair market value of the property not to exceed one hundred thousand dollars ($100,000); and 

(4) Any actual damages incurred by the owner.

The banking industry was able to get a carve-out because the above remedies do not apply “if the action was brought to challenge a lien that is based on a loan agreement for which the encumbered property was listed as collateral to secure the repayment of the loan.”

While there were other remedies available to owners under Tennessee’s mechanic’s lien statutes (such as right to bond off enforcement, right to demand enforcement, or exaggeration of lien claims), this new section provides additional remedies in the form of liquidated damages and actual damages.

Slow as a Turtle? “No Damages For Delay” Clause Inapplicable to Contractor’s Claim Against Architect

On Saturday, I took the kids to the zoo for a day-long adventure.  Faith’s favorite attraction was the turtle compound that was filled with about 20 slowpokes walking a circle.  Like watching paint dry, we sat on the sidelines as these mini-dinosaurs trekked the park at a whopping .25 mph.

When we think of delays on a construction project, the first inquiry is to identify the turtle—the one party holding up progress or causing the delay.  Many times, the parties’ contract will dictate whether the contractor can recover delay damages or will be limited to a time extension for delays beyond the contractor’s reasonable control.  In Perez-Gurri v. McLeod, 238 So.3d 347 (Fl. Ct. App. 2018), the court examined whether a “No Damages for Delay” clause extended to parties other than the owner.

The general contractor in McLeod filed a malpractice action against the architect on a public contract for the City of Miami.  The renovation project was located in the Caribbean Marketplace in an area known as Little Haiti.  When the construction project was delayed, the general contractor filed suit against the numerous designers, architects, engineers and subconsultants.

The architect filed a motion for summary judgment, arguing that the general contractor’s delay claim was contractually barred by a “No Damages for Delay” clause in the contract between the general contractor and the City of Miami.  The trial court granted summary judgment in favor of the architect.  The appellate court reversed, finding that the owner-contractor agreement did not insulate the architect from liability.

The appellate court agreed with the trial—and so should you for that matter—that the general contractor waived any rights to seek delay damages from the owner. But the question is whether that waiver of delay damages extended to other parties such as the architect. The clause read as follows:

No claim for damages or any claim, other than for an extension of time, shall be made or asserted against City by reason of any delays except as provided herein. Contractor shall not be entitled to an increase in the Contract price or payment or compensation of any kind from City for direct, indirect, consequential, impact or other costs, expenses or damages, including but not limited to costs of acceleration or inefficiency, arising because of delay, disruption, interference or hindrance from any cause whatsoever, whether such delay, disruption, interference or hindrance be reasonable or unreasonable, foreseeable or unforeseeable, or avoidable or unavoidable . . .

The appellate court reasoned that the above emphasis language expressly state that the City is protected from delay damage claims, and there was no language that extends that protection to other parties. The court concluded: “If M2G2 Architects were intended to be protected by the no delay damages provision, one would expect some reference to that idea in this provision which otherwise precludes any third party beneficiaries to the contract.”

The McLeod decision reiterates yet one more time that “words have meaning.” More importantly, it is always advisable to think about and negotiate key provisions at the start of the project, rather than litigating the meaning of the provision during a dispute after the project is complete.  Take a look at my Top 20 series where I blogged about key contract clauses and their meanings.

Words and Numbers: Contractor Forfeits Bid Bond When It Mistakenly Leaves Out “Thousand” Word

Contractors make mistakes with words.  Contractors make mistakes with numbers.  And sometimes, a mistake with words leads to a mistake with numbers.

In Clark Construction Co. v. Alabama Highway Department, a highway contractor tried to withdraw its bid on public contract and have its bid bond returned after it made a mistake on a its written proposal.  In its bid submission for a bridge construction project in Mobile County, the contractor had listed a total bid amount of $1,119,609.  On a particular line item for Steel Bridge Superstructure, the contractor listed the amount of “$368,000” in numerical value, but had the words “Three Hundred Sixty Eight” immediately before the word “Dollars.”  The contractor mistakenly left out the word “Thousand” from its written bid.

During the bid review, the Alabama Highway Department used the written words to calculate the total bid, as required by statute.  Alabama Code Section 39-2-7 provided: “In case of a discrepancy between prices shown in the figures and in words, the words will govern.”  The Department determined the contractor’s bid to be $816,977.60, as opposed to the $1,119,609 intended to be submitted by the contractor.

After learning about the error, the contractor asked permission to withdraw its bid on the basis of the mistake, but the Department refused to permit the bid to be withdrawn.  The contractor then refused to accept the job, and so the Department forfeited the contractor’s $10,000 bid bond.  The trial court ruled in favor of the Department.

The appellate court affirmed the decision, finding that the “words over numbers” statute was to be strictly construed.  In light of the potential damages the contractor could have lost due to its mistake, the forfeiture of the bond (which was also required by the statute) was not excessive and otherwise fair.

Clark Construction is a good reminder to public contractors to pay close attention to bid tabulations.  If there are errors in your written proposal, understand that the RFP or the applicable law will control how the error is to be resolved.

Say What? The Rise of Criminal Liability for Construction Accidents

Today’s guest post is by Chris Meyers and Cheri Gatlin, two of my fellow partners at Burr & Forman, LLP.  Chris is a partner and Cheri Gatlin is Chair of the firm’s Construction and Project Development Practice Group. The Group counsels clients throughout the U.S. on safety policies, OSHA and regulatory compliance, contracts, disputes, and all areas where law and construction intersect.

“To err is human; to forgive divine.” – Alexander Pope, “An Essay on Criticism.”

Last week marked the end of Construction Safety Week 2018, a combined effort by the Construction Industry Safety (CISI) group and the Incident and Injury Free (IIF) CEO Forum. Together these entities are comprised of 80 national and global construction firms, with a goal of promoting safety in the construction industry. Concern for safety is apparent on construction projects throughout the country and world, as evidenced by daily/weekly construction briefings and the familiar “___Days Since a Lost Work Accident” signs. People that work in the Construction Industry know firsthand the dangers and want to see their co-workers go home safely to their families after a long day. In addition, time is money in this business. Safe projects are more likely to be profitable projects due to lack of delays and prevention of claims for jobsite injuries. For employers, criminal liability for job site construction accidents is more and more a concern. Mainstream headlines highlight several cases where construction accidents = criminal charges.

From the well-publicized October 21, 2016 drowning of two construction workers in Boston after a trench in which they were working collapsed, to the March 18, 2018 pedestrian bridge collapse at Florida International University (FIU), which killed 6 and injured 9 more, construction accidents that result in loss of life are commonly viewed as more than “accidents.” There appears to be a trend toward construction incidents being investigated by various agencies for criminal liability. Inevitably, accidents happen in every area of life, from “fender bender” automobile accidents to high profile construction accidents, which result in extensive property damage and, unfortunately at times, loss of life. When, though, is an accident something more?

With regard to the Boston trench collapse, the Suffolk County District Attorney’s office presented evidence of manslaughter against the employer—both as a corporate entity and the company’s owner—related to the accident. There, the deceased were killed when underground materials supporting a hydrant in an allegedly unshored hole they were digging gave way and the hydrant burst, flooding the trench. Prosecutors claim the employer was pushing the men to work faster because the project was behind schedule. Motions to Dismiss manslaughter charges were considered and denied, leaving the employer and its owner subject to criminal prosecution. In an industry where liquidated damages and other pressures lead to acceleration, this is a headline of note.

In Florida, we await all the facts on the FIU bridge collapse, a decision by the Dade County State Attorney’s office on possible criminal action. However, a charge of “Culpable Negligence” could be in play. In Florida, the crime of Culpable Negligence is defined as a course of conduct “showing reckless disregard for human life, or for the safety of persons exposed to its dangerous effects, or . . . which shows wantonness or recklessness . . . [or] an indifference to the rights of others as is equivalent to an intentional violation of such rights.”

As Construction Safety Week concludes, Burr congratulates all our clients that participated in the activities. Focusing on safety is critical to the industry’s success and the life and livelihood of those who rely upon it.

How Important Is That Little Green Card? Pretty Darn Important Says One Court.

We live in a world of e-mails, IMs, texts, Snapchats, Instagrams and the occasional fax.  Although information is transmitted instantaneously in today’s environment, proof of receipt of that information (often called “Notice”) remains subject to some very strict rules imposed by contract, case law or statute.

Notice of Claims.  In a recent transportation case involving a personal injury, Department of Transportation v. Jones, the Court of Appeals of Georgia explained the importance of strict compliance with certain notice provisions.  The plaintiff was injured in a single-car accident on State Route 42 and he sued the Georgia Department of Transportation (“GDOT”). The plaintiff claimed that GDOT’s improper maintenance of the roadway led to an accumulation of water, which caused his truck to hydroplane into a tree, severely injuring him.  GDOT filed a motion to dismiss, arguing that the plaintiff failed to strictly comply with the notice provisions of the Georgia Tort Claims Act (“GTCA”).  The trial court denied that motion and the Court of Appeals reversed.

The Green Card.  The GTCA requires that notice of the claim be sent to “the Risk Management Division of the Department of Administrative Services.”  At the hearing, the plaintiff presented the following evidence: (a) the notice letter; (b) the green return receipt card sent to the Commissioner of GDOT; (c) a response letter from the Risk Management Division acknowledging receipt of the notice letter; and (d) a U.S. Postal Service tracking document showing that “something was sent by certified mail to the Department of Administrative Services.

The Holding. Despite this evidence, the Court held that the plaintiff failed to strictly comply with the statute because there was no proof by the plaintiff that the letter was sent by certified mail to the Risk Management Division.  The green card submitted showed proof of delivery to the Commissioner of GDOT.  The attorney for GDOT admitted in court that the notice letter received by the Commissioner of GDOT was then sent internally by the Commissioner’s office to the Risk Management Division, which then sent the acknowledgement letter.  Nevertheless, the plaintiff did not comply with the statute requiring that he sent notice of the claim to the Risk Management Division.

So What? While this may seem like a hyper-technical application of the rule, that’s precisely what “strict construction” means according to one court in George.  Whether you are contractor, developer, specialty subcontractor, or professional service provider in the construction industry, the real lesson learned is to read the express terms of any applicable contract or statute when a dispute arises, and follow both “the letter and the spirit” of the law.

Do Not Pass “Go” You Out-of-State, Unlicensed Contractor

I forgot how much fun it was playing family board games as a child.  We recently dusted off some of the oldies like Sorry, Life and Monopoly to play with the kids.  I laughed uncontrollably the first time I got to say, “Go directly to jail. Do not pass GO. Do not collect $200!”

A contractor in North Dakota wasn’t laughing when it was not allowed to pass “Go” and could not immediately collect its $200,000  for work performed.  In Snider Construction v. Dickinson Elks Building, LLC, the court held a contractor was not entitled to recover for labor and materials during a time period when the contractor was unlicensed.  There, the out-of-state contractor entered into the construction contract on December 26, 2011, but did not get its contractor’s license until February 5, 2012.  The contractor later filed a lien for approximately $200,000.  The trial court awarded the contractor its claim for damages, and the owner appealed.

On appeal, the owner argued that North Dakota Code requires a contractor be licensed at the time of contract formation or commencement of work under the contract to maintain a claim or action related to the work performed under the contract. Because the contractor did not obtain a license until after it had entered into the contract with the owner and started working on the project, the owner claimed that the contractor barred from bringing any claim.

While the contractor was unable to pass “Go” to immediately collect its $200,000, its claims were not totally lost. The appellate court held that although the contractor could not recover for labor and materials during period that it had not received license (i.e., the lien claim), the contractor was entitled to recover in quantum meruit and unjust enrichment for labor and materials provided after it was granted a license.

Depending on your state, you may or may not be able to maintain an action as an unlicensed contractor.  For example, Arizona requires a valid license at entry into contract and when cause of action arose; Utah requires a valid license at time of contracting and “[c]ontinuously while performing the work for which compensation is sought”; and North Dakota bars all claims only during a period of time the contractor was not licensed.  If you work in another state, make sure you pass “GO” (…get licensed…) and collect your $200.

In Construction, There’s A Tattletale And There’s What is Right

Sometimes, we avoid doing bad things because of the risk of getting caught.  Other times, we avoid doing bad things because we simply choose to do right things.  Whatever the camp you fall into, a recent government contracts case tells a story that should be avoided when submitting payment applications to the government.

In U.S. ex rel. Jesse Sloan v. Waukegan Steel, LLC, an employee brought a False Claims Act (FCA) against his employer for false billing and certification on a goverment project.  The Attorney General has primary authority for enforcing FCA, but the law includes what is called a qui tam provision, which permits a private party to bring a civil action alleging fraud against the Government on its own behalf as well as on behalf of the United States. 31 U.S.C. § 3730(b).  If the private party prevails, he receives a percentage of the recovery. 31 U.S.C. § 3730(d).

Waukegan was responsible for fabricating and installing the structural steel of project. The design specifications require that the contractors adhere to various professional codes, including those of the American Institute of Steel Construction (AISC), the American Society for Testing and Materials (ASTM), and the American Welding Society (AWS).  The subcontractor was required to submit “fabrication quality control and weld inspection certificates” to the government before payment was issued. According to the employee, Waukegan did not have any of these certificates.

In Sloan, the president of the company allegedly asked the employee to fabricate the inspection certificates. When he refused, the president allegedly approached another employee who was not a qualified welding inspector.  That employee fabricated the requested welding inspection certificates.

While the court’s decision focused on the type of allegations necessary to prove fraud on the FCA, the opinion is instructive to avoid FCA claims.  To prove an FCA claim, a plaintiff must prove that (1) the defendant made a statement in order to receive money from the government, (2) the statement was false, (3) the defendant knew it was false, and (4) the statement was material to the decision to pay or approve the false claim.

Notably, the Court in Sloan rejected every defense raised by Waukegan and allowed the case to go forward. For example, the subcontractor argued that the funds were paid to the subcontractor by the prime contractor—as opposed to the Federal government—and thus there was no attempt to defraud the government.  The Court disagreed: “Importantly, Congress subsequently amended the False Claims Act to clarify that the defendant need not intend for the government itself to pay the subcontractor’s claim; it would be contrary to Congress’s original intent in passing the law if even when a subcontractor in a large Government contract knowingly submits a false claim to general contractor and gets paid with Government funds, there can be no liability unless the subcontractor intended to defraud the Federal Government, not just their general contractor.”

In the end, you can choose to follow the law because you are fearful that one of your employees may become a tattletale, like the decision in Sloan, or because it is the right thing to do.  Whichever the case, false and misleading statements submitted to the government will most likely be discovered and create problems for you.

Additional Insured Status: Playing the Speak-Out Game on a Construction Project

My Daughter Gets No Devastation Damages…And Neither Do You Government Contractor!

Our middle child of seven kids suffers from classic Middle Child Syndrome.  She has the largest heart in the family, and yet every other minute is a moment of devastation, wrought with feelings of neglect, resentfulness and sadness.  We love her and we have empathy, but—like government contractors who sometimes feel burned—there are no devastation damages available.

In Michael Johnson Logging v. USDA, CBCA 5089 (Dec. 22, 2017), a government contractor sought damages, including “business devastation” losses, under a timber sales contract with the United States Forest Department.   During performance of the contract, the contracting officer suspended the contractor’s operations three times for a combined total of 27 days. Two times were imposed for cutting the wrong trees and one time was for failure to control run-off and prevent erosion.  Notably, the Contractor did not challenge the suspensions at the time they were imposed, but instead took all required steps to remedy the alleged breaches.

In its certified claim to the Government, the Contractor alleged numerous components of damages:

• $741,837 for lost productivity (due to the need to use crooked skid trails and small landings);
• $22,000 for damage to equipment;
• $54,000 for inadequate skid trails;
• $52,600 for unreasonable suspensions of work;
• $91,980 lost profit on unharvested timber; and
• $150,000 business devastation damages.

The Board rejected the Contractor’s claims for business devastation damages, noting that these type of damages are “similar to a consequential damages claim where a contractor asserts that the Government’s actions caused the destruction of its business.”  The court concluded:

While contractors may recover damages resulting from “the natural and probable consequences of the breach complained of … damages remotely or consequently resulting from the breach are not allowed.” Ramsey v. United States, 101 F. Supp. 353, 357 (Ct. Cl. 1951).  Although not categorically disallowed, contractor claims for consequential damages premised on the destruction of the entire business or lost business opportunities have been denied where they failed to show a nexus between the damages claimed and the breach alleged.

Ultimately, the Board found the profits that the Contractor might have earned independent of the contract were not directly related to the supply contract and, consequently, were merely speculative.  The Board concluded that that business devastation claim was be too remote.
This case is helpful in understanding the type of damages a government contractor can seek and the type of proof required to proceed on a hearing against the Government.  Lost profits from collateral projects or lost net worth are generally too remote to be classified as a natural result of the Government’s breach. While devastating, these damages generally are not recoverable.

Disney Dad Reports About New Limitations Period for Construction Claims in Florida

As a father of seven children, my wife has often accused me of being Disney Dad−something to do with the allegation that I am the “fun” parent who takes the children to movies all the time, serves ice cream for breakfast, and lets them sleep in their clothes at bedtime.  Never have…never did.

While having nothing to do with Disney nor being a dad, there is a new law in Florida that went into effect on July 1, 2017 that governs the limitations period for actions other than to recover real property.  This includes construction claims and clarifies when the limitations period begins to run. In its simplest terms, a statute of limitation is a time limit for bringing a lawsuit (i.e., you may have six years to file suit on a breach of contract dispute), and a regularly disputed issue is determining when the time period begins to run. (I posted more about that here.)

Under the old law in Florida, this exact issue existed—there was confusion about when the limitations period began.  The old law provided that actions based upon the design, planning or construction of an improvement to real property shall be commenced within four years, and that the the period begins on one of the following:

• the date of actual possession of the owner
• the date of issuance of the certificate of occupancy
• the date of abandonment if not completed
•  the date of completion or termination of the contract between the engineer, architect, contractor and his employer

If the action involves a latent (or hidden) defect, then the time runs from the time the defect is discovered or should have been discovered with the exercise of due diligence.

The new law clarified the “completion of contract” language above, stating: “Completion of the contract means the later of the date of final performance of all the contracted services or the date that final payment for such services becomes due without regard to the date final payment is made.”

So what?  Well, as with most business owners and professionals like you, this Disney Dad likes clarity in order to avoid disputes, whether you are talking about fixing a construction defect, pursing a construction claim, or mitigating losses.  If a defect was never discovered, and an owner had never made final payment, arguably the statute of limitations for such claims could be extended forever.  The Florida legislature closed that loop.

“Paid in Full” Wives’ Tale True? When Endorsing A Check, Yes Ma’am!

Long before I was an attorney, I heard this tale that if you endorsed a check that had the words “PAID IN FULL” written on the check, then you were accepting the check as full payment of what was owed.  But I had never really thought about that legal principle because, “People don’t really do that, do they?”

In Triangle Construction Co. v. Fouches and Assoc., the Court of Appeals of Mississippi recently held that the PAID IN FULL principle—or what lawyers know as accord and satisfaction—barred a contractor’s claim for additional payment.  The contractor won a bid to construct a water system in two local counties.  Following completion of the project, the contractor filed a claim against the owner and engineer for damages allegedly resulting from the negligence of the owner and engineer.

Upon completion of the project, the owner sent contractor a check marked “Final Payment,” but the check did not compensate the contractor for its increased construction costs as a result of the delays or for the extracontractual project expansion. The contractor conceded that it cashed the check, but argued that it repeatedly asserted to the owner—including in a letter sent to then engineer—that it did not consider the “final payment” to be final and that it would continue seeking the remainder of what it was owed.

The court disagreed.  Under Mississippi law,  despite what the parties may argue was their intent, cashing a check marked “final payment” constitutes an accord-and-satisfaction agreement, which precludes that party from bringing future claims for additional payment. In Triangle Construction, the court held that the contractor’s claims against the engineer were barred by the doctrine of accord and satisfaction.

So, the “paid in full” principle is not just an old wives’ tale.  Depending on your state’s law, if you negotiate a check that is marked “paid in full” or even “final payment” then you are risking the fact that you may be settling any claims you have.  If you are a contractor that seeks to reserve those claims, then don’t cash the check if it is marked with special language on it.

Project Documentation: The Bad Little Email That Got Produced

Believe it or not, there are always a wealth of emails and other documents produced in litigation that help “make the case” for the other side. Take, for the example, the e-mail I found in the files of one superintendent entitled “PROJECT DELAYS” … the words could not have been clearer … “I think we need to begin to tell management that we are late.  We also need to consult the claims team to determine how late we really are.”

On another case, I found this nugget: “Although we should give them notice of this claim, let’s wait until our equipment has left the port on their vessel before telling them.”

Best Practices advises that you should have a written document management policy in place.  This policy should define and describe the role of the following:

• Critical project documentation, such as correspondence, meeting minutes, daily reports and logs, calendars and diaries, accounting records, submittals, schedules, photographs, etc.
• Non-critical documentation, such as personal emails, instant messages, text logs, blog trails, website traffic logs, etc.

The advent of project management software and web based platforms (i.e., Procore, Microsoft Dynamics, buildertrend, planswift, PlanGrid, e-Builder ) have enhanced document control by allowing the user to track revisions, store master files, and streamline the review process.  However, the human element is still involved.  Any policy must set appropriate boundaries and guidelines for the following:

• Personal use of email (…a good place to find “mismanagement” emails…)
• Use of profanity (…I always search for the juicy four-letter words…good emails…)
• Risks of informal communications (…see emails above…)
• And, of course, a document retention policy (…don’t shred right after lawsuit is filed…)

Failure to formulate a policy that addresses these simple areas almost guarantees that the bad little email will get created and produced.

Construction Contracts And Arbitration Provisions: Is The Word “May” Mandatory? Maybe!

You don’t always say what you mean. And you don’t always mean what you say.  In construction contracts, parties attempt to use plain and ordinary words to describe their respective obligations.

As an example, when the parties use the word “shall” in their agreement, they generally understand that the obligation specified is mandatory. Or when parties use the word “may” in their contract, performance is permissive or optional given the plain meaning of the word. Consider the following construction contract provisions:

“If the Owner fails to make payment for a period of 30 days, the Contractor may, after seven days written notice, terminate the Contract and recover from the Owner payment for Work performed.”

“The Work may be suspended by the Owner as provided in Article 14 of the General Conditions.”

“Payments may be withheld on account of (1) defective Work not remedied, (2) claims filed by third parties, or (3) failure to carry out the Work in accordance with the Contract Documents.”

In all of theses examples, it seems clear that the parties agreed to allow—but not require—the specified performance. The word “may” was permissive in nature.

According to some courts, however, this traditional line of reasoning is no longer the trend in the context of arbitration provision in construction contracts. For example, in TM Delmarva Power v. NCP of Virginia, the Supreme Court of Virginia held that the parties’ use of the word “may” in the dispute resolution provisions of their construction contract required mandatory participation in arbitration at the election of one of the parties. The arbitration agreement provided:

“If any material dispute, disagreement or controversy concerning this Agreement is not settled in accordance with the procedures set for in [previous section] . . . then either Party may commence arbitration hereunder by delivering to the other Party a notice of arbitration.”

The court held that the above provision was mandatory at the election of one of the parties: “The word ‘may’ . . . means that either party may invoke the dispute resolution procedures, but neither party is compelled to invoke the procedures. . . . [But] once a party invokes the arbitration provision, the other party is bound to arbitrate.”  The Delmarva court reasoned that the disputes provision would be “rendered meaningless” if the word “may” was interpreted as permissive because parties to a commercial contract can always choose to submit their disputes to arbitration.  The Fourth Circuit reached the same decision in United States v. Bankers Ins. Co.

Given the trend that the courts have interpreted the term “may” as “shall” in the context of arbitration agreements, parties to a construction contract must be careful in understanding both the plain, ordinary meaning and the legal meaning of the particular words used. In the above examples, if the parties wanted arbitration of disputes to be permissive and non-mandatory, they could have clarified their contract by including more explicit language (i.e., “any and all disputes,upon mutual agreement, may be arbitrated” or “with the consent of the other party, either party may commence arbitration”).  It is important in contract drafting that you say what you mean and you mean what you say.

Spearin Doctrine: A Construction Case Described in A Tweet!

I read in my Twitter feed this morning about a recent case where the Missouri Court of Appeals formally adopted the Spearin Doctrine.

I immediately wondered if I could explain the Spearin Doctrine in less than 140 characters.  Here you go:

US v. Spearin: Owner designs. Contractor builds. Owner accepts. Work sucks. Owner sues. Contractor absolved. Owner loses.

If you live in the government contracting world, don’t start sending me emails about how wrong I have described the Spearin Doctrine above.  Let me expand my statement beyond 140 characters and give you some more information about the 1918 decision in United States v. Spearin:

• The Facts.  The case involved a contractor who agreed to build a dry-dock in the Brooklyn Navy Yard.  In order to build the dry-dock in the site selected for it, the contractor was required to relocate a portion of a sewer that ran through the specified site. The owner (the United States) provided the plans and specifications for the sewer that was to be relocated.  The contractor completed the work according to the plans and specifications.  The owner approved and accepted the work.  But wait … about a year after the relocation of the sewer, a dam in a connecting sewer caused flooding in the area excavated for the dry-dock. This dam was not shown on the owner’s plans and specifications.  That’s the background and here is my tweet:
• The Rule. The Spearin Doctrine is legal principle that holds that when a contractor follows the plans and specifications furnished by the owner, and those plans and specifications turn out to be defective or insufficient, the contractor is not liable to the owner for any loss or damage resulting from the defective plans and specifications.
• Exceptions to the Rule.  In 2007, the Ohio Supreme Court rocked the construction law world by significantly limiting the application of the Spearin Doctrine.  In Dugan & Meyers Construction Co. v. Ohio Dept. of Administrative Services, the trial court applied the Spearin rule in favor of the contractor based upon alleged damages from the impact of an excessive amount of design changes.  On appeal, the Ohio Supreme Court reversed, holding that the Spearin Doctrine did not apply to cases involving delays due to design changes. Rather, the court focused its decision on the “no damages for delay” and “written requests for time extension” clauses in the contract.  Specifically, the court concluded: “We observed that the Spearin Doctrine does not invalidate an express contractual provision.”

What’s the lesson for contractors?  First, make sure you know and understand the “governing law” for your particular dispute, whether it is federal law or state law. Second, make sure you read your contract to understand the notice provisions and changes clause.  Finally, make sure you are documenting any impacts of delays caused by defective specifications or plans.

When Is the Contractor’s Termination for Default Proper? When It Does Bad Things.

Sometimes you “do” bad things.  Sometimes you “look like” you do bad things.  Just look at the difference between Bad-boy Jack and my youngest daughter, Haven, who just “looks like” she’s up to no good.  In the world of construction contracting, both can get in you in trouble, including a termination for default of performance.

Appeals of  Industrial Consultants, Inc. d/b/a W. Fortune & Company, ASBCA No. 59622 (2017) involved a construction contract to upgrade an HVAC system at a facility in New Hampshire. The Board held that the contractor was properly terminated for default where: (1) it repeatedly insisted on changing the design of the project; (2) it furnished the submittals consistently late and at times did not submit them; (3) it did not respond to certain communications regarding design changes and rejections; and (4) it never submitted a safety plan.

The Facts.  Following award of the contract to the successful bidder, immediate concerns arose regarding the design. The contractor’s presiden believe there was a defect in the design and he began to offer suggestions on redesign. The contractor submitted numerous RFI’s, to which the government responded. During the process, the contractor delayed in providing submittals and often times never provided submittals. The contracting officer sent a notice to the contractor demanding the contractor to cure its deficiencies.  Numerous communications are back and forth between the parties, all of which demonstrated that the contractor was accusatory and combative.  In the end, the contracting officer has sent three cure notices and ultimately issued a termination for default.

The Decision. The Board found that the contractor failed to proceed with the work in violation of FAR 52.233-1 (Disputes) (June 2008), which requires that the “contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract, and comply with any decision of the contracting officer.” As to the merits, the Board found:

The government bears the burden of demonstrating that [the contractor] did not perform in a timely manner and that it failed to gain approval of its submittals. Failure to proceed with the work during a dispute is a ground for termination for default. In this appeal, it is undisputed that [the contractor] failed to complete the work on time, failed to proceed with the work after the Corps rejected its proposed changes to the project, and failed to furnish some submittals and failed to gain approval of other submittals. The government has made a prima facie case for default termination; [the contractor]must, therefore, prove that its nonperformance was excusable.

The Board then found that the contractor’s default was not excusable—as it had a basic misunderstanding as to its role as a contractor on the project.

Lesson Learned.  Utlimately, the Board concluded that “government contractors must perform the contracts they execute and cannot require the government to rewrite the contract so that they can build some other project they like better.”  In this case, the contractor questioned the design of the HVAC system and notified the government of those concerns.  But in the end, the government  chose to proceed with the design. At that point, the contractor had one choice: continue to build the project as it had contracted to do.  It did not have the option to act bad by “dragging its feet” and refuse to perform, which ultimately led to the termination for default.

What Is Inefficient Risk Transfer? The Use of Indemnification in Construction Contracts

As a father of seven children, I am always being asked to determine the “responsible party” when something breaks, gets lost, or is simply missing.  In parenting, there is no written contract between the adult and to child to transfer the responsibility for the loss or damage.  In construction, there should be a written contract to transfer the risk when you are stuck between a rock and a hard place.

Understand that an indemnity clause in a construction contract is merely a written agreement to transfer some type of risk on the project to one or more of the parties, which may looks something like this:

Contractor agrees to hold harmless and indemnify the Owner, the Architect, the Lender and each of their agents and representatives for any losses, claims or other damages involving personal injury or property damage, other than to the Work itself, caused directly or indirectly by Contractor’s or its Subcontractors’ acts or omissions.

In a recent article in the Journal of the Canadian College of Construction Lawyers (2017 J. Can. C. Construction Law 1), Andrew Wallace and Victoria Merritt give a contractor’s perspective to contractual indemnity provisions in construction contracts.  While the authors recognize that indemnification provisions are standard for many construction contracts, certain indemnification provisions “raise serious concerns for parties involved in the construction project in so far as they reflect inefficient risk transfer between contracting partners.”

Since indemnification can be created by statute or by common law (or case law), the authors suggest that indemnity provisions should be included in construction contracts for two simple reasons: (1) to explain the legal principle that already exists by statute or common law; and (2) to expand one party’s exposure beyond what already exists by statute or common law.

Perhaps “inefficient risk transfer” (alluded to by the authors) comes when parties try to transfer risk opposite or beyond what the law addresses. Perhaps it comes when parties transfer risk to the party who ultimately cannot control they circumstances given rise to the loss. In the end, a court or arbitrator will be asked to determine the validity of the indemnification clause and whether the law will allow such a transfer of risk given the particular situation.

 

Did the FAR Lose Its Mojo in the Government Contracts World? Depends.

It’s not everyday that you read about one of your longtime heroes, the Federal Acquisition Regulations (“FAR”), losing some of its mojo.  The Nash & Cibinic Report read as follows: “The FAR: Does It Have Contractual Force and Effect?”

According to the article, there remains some confusion about the application of the FAR based upon the recent decision in Lockheed Martin Integrated Systems, Inc., ASBCA 59508 (Dec. 16, 2016).  In Lockheed, the Army awarded two separate indefinite-delivery, indefinite-quantity, time-and-materials (“T&M”) contracts to Lockheed for various support services.  Following various audits, the Government filed a complaint against Lockheed seeking more than $115 million in reimbursement based upon a claim of breach of contract.  Lockheed filed a motion to dismiss, arguing that the Government’s legal theory failed because the FAR did not provide a contractual duty or obligation for Lockheed to manage its subcontractors.

What did the FAR say?  Both contracts expressly incorporated FAR provisions, including 52.232-7 addressing T&M and labor-hour contracts.  Based upon an audit of certain subcontractor costs, the Government determined that Lockheed violated FAR 42.202, which provides that “the prime contractor is responsible for managing its subcontractors.” Accordingly, the Government argued, the costs submitted by Lockheed without adequate record-keeping or back-up documentation were questionable.

What did the Board say?  The contracting officer concluded that Lockheed was responsible for repayment of approximately $102 million because the contractor breached its duty of performance.  The Board disagreed:

Notably, nowhere in either complaint or COFD does the government cite to a contract term giving rise to a contractual obligation or duty. As the government conceded in its briefs, FAR 42.202 is not a term of the contract.

Our inquiry does not end there, however. The government asserts for the first time in its briefs that there exists an implied contractual duty for a prime contractor to manage its subcontracts . . . [T]he government summarizes the essence of its claim, which is that [Lockheed]’s breach of a contractual duty to manage its subcontractors led it to breach the contract by submitting claims for subcontract costs that were unallowable because [Lockheed] breached its contractual duty to manage its subcontractors. Thus, ipso facto, if [Lockeheed] did not breach a duty to manage its subcontractors, it did not submit unallowable costs for payment, and if it did not submit unallowable costs for payment, it did not breach the contract.

Ultimately, the Board concluded that the Government incorrectly went “forward with a claim for over $100,000,000 that is based on nothing more than a plainly invalid legal theory.”

When does the FAR apply?  A common misunderstanding about the FAR is its binding nature or application to government contracts.  Nothing in the FAR indicates that it is contractually binding or incorporated into government contracts as a whole.  According to Nash & Cibinic, “[I]n the course of our teaching we have been startled by the number of acquisition personnel in both Government and industry, including personnel with long experience, who believe that the FAR is contractually binding.”  Therefore, when the Government wants to contractually bind a contractor to comply with a particular FAR provision, it must include the appropriate FAR clause within the contract.

Did the FAR lose its mojo? Nah. The real lesson from Lockheed is one about mistaken mojo—too many people think the FAR generally applies in full force to all government contracts.  But according to Nash & Cibinic, the rule is simple: “In order for a contractor to be obligated to act or refrain from acting in a specified way pursuant to FAR, the contract must plainly say so. It must include a term to that effect, such as a specification or a contract clause.”

How Construction May Be Affected by President Trump’s Executive Orders on Immigration

With all the talk about billions of dollars of investment in infrastructure and sweeping reversal of prior executive orders affecting construction labor and federal contracts, it should come as no surprise that President Trump’s recent executive orders on immigration may have an affect on the construction industry.

What Happened?  Beginning on January 25, 2017, the Trump Administration began leaking a series of Executive Orders aimed at changing immigration policies that have developed over the last decade.  Three of those have been signed as of January 28, 2017, and more orders likely will be signed in the coming weeks.

The order that received the most attention over the weekend affects citizens from the following countries: Iraq, Iran, Libya, Somalia, Sudan, Syria, and Yemen.  This includes individuals who may have dual citizenship with other countries.  The order instructs U.S. Customs not to allow citizens of these countries to enter the U.S. for the next 90 days.

What’s the “Real” Effect?  Many of the cases of detained individuals that made the news involved Legal Permanent Residents of the U.S. (“green card holders”).  However, DHS Secretary Kelley has stated that LPRs will be admitted as of this morning.  The order also suspends the Refugee Admissions Program for 120 days, which means that refugees from any country who have been processed for entry outside the U.S. will not be admitted unless DHS makes an exception based on “national interest.”

Department of State, which processes visas at U.S. Consulates abroad, also sent emergency notifications Sunday that visa cases for citizens of these countries will be put on hold indefinitely.  The court-ordered stays entered Saturday and Sunday only prevent DHS from detaining and deporting individuals based solely on the executive order.  Travel bans, suspension of visa processing, and suspension of the Refugee Admission Program appear to be intact.  DHS has not been clear on how it intends to comply with the court orders, likely because the court orders themselves are not altogether clear.

What You Need to Know?  While it may seem obvious, here are a few things to be mindful.  As related to international construction projects, point number 2 below will likely affect international business travel on foreign construction projects.

1. Stay Put!  Citizens of these countries, dual citizens of these countries, and possibly non-U.S. citizens who have visited these countries in the last few years should refrain from travelling if at all possible.  Affected individuals who are outside the U.S. should make arrangements to remain outside the U.S. for the duration, and those who are in transit to the U.S. should be prepared for delays and detention at a U.S. airports or other ports of entry.  You should not sign any waivers or other documents relinquishing approved visas despite pressure from airline authorities and Customs officials to do so.
2. Reciprocal Action is Likely.  Government officials from several countries on this list have stated intentions to subject U.S. travelers to similar scrutiny and travel bans under the diplomatic principal of reciprocity. Construction projects in these target areas must be ready for the challenges of reciprocal action.
3. Visa Processing is going to Change.  Citizens of all countries should be prepared for visa processing times to increase, background checks to intensify, and denial rates on visa cases to rise.  The executive order eliminates several “work-arounds” that U.S. Consulates have developed over the years to make visa processing more efficient.  Some countries, such as India, China, Mexico, and the Philippines, may see visa processing times increase from weeks to months this year.

Special thanks to my colleague Anna Scully for contributing to this post!

Texas Court Gobble-Gobbles New Federal Overtime Rules

On this Thanksgiving Eve, contractors and other employers can take a breathe and gobble down some extra turkey and pumpkin pie without worrying about the new increases in overtime rules.

On Tuesday, November 22, 2016, a Texas federal court entered a nationwide injunction blocking the U.S. Department of Labor’s (“DOL”) new federal overtime rules from taking effect on December 1, 2016.  The DOL’s new overtime regulations, which were finalized in May 2016, would nearly double the minimum salary threshold requirements for the common white collar exemptions from $23,660 ($455/week) to $47,476 ($913/week).  The DOL estimates that 4.2 million workers who are currently classified as exempt under the white collar exemptions would be affected by the new rules.

In September 2016, 21 states and dozens of business groups filed lawsuits seeking an immediate injunction to block the new rules from taking effect on December 1, 2016.  U.S. District Judge Amos Mazzant ruled Tuesday that the states were able to show a likelihood of success on the merits of their challenge and irreparable harm if the new rules went into effect and that the DOL exceeded its authority by raising the minimum salary threshold.  Judge Mazzant’s ruling recognized that the DOL enjoys “significant leeway” to establish the types of job duties required for exemptions, but nothing in the FLSA permits the DOL to classify employees by salary levels.  “Congress defined the [white collar] exemption with regard to duties, which does not include a minimum salary level,” Judge Mazzant said. “With the final rule, the Department exceeds its delegated authority and ignores Congress’s intent by raising the minimum salary level such that it supplants the duties test.”

The legal battle over the federal overtime rules is far from over. There is little doubt this decision will be appealed to the United States Court of Appeals for the Fifth Circuit.  At least for now, however, the new overtime rules will not go into effect. Employers are no longer required to meet the December 1, 2016 deadline.  It is unlikely the nationwide injunction would be lifted before the Trump Administration takes office in January 2017, and it is unclear whether the new Administration will push for the new overtime rules to take effect or repeal them altogether.

(Special thanks to Carlton Hilson for contributing to this post!)

What A Trump Card Means In The Game of Construction and Development

Like many of you, I stayed up late on Tuesday night / Wednesday morning to watch the 2016 election returns.  I dragged myself into the office after only a few hours of sleep and my phone was immediately ringing. Some clients. Some association contacts. Some reporters.  They all wanted to talk about the same thing: What would Donald Trump do as President when it comes to construction and development?

If you listened to President Elect Trump’s victory speech, you learned a few things that will impact individuals and business owners in the construction world:

1. A President Trump will likely move on illegal immigration.  As I commented to the Nashville Business Journal’s  inquiry on this subject, this will unlikely affect unskilled labor shortages hurting many states:
   

   “How does that affect various states with labor shortages? If we pull those back, it’s only affecting a small subsection,” DeVries said. He noted that both government agencies and many large private contractors have policies prohibiting the use of illegal immigrants on construction projects.

   “I don’t think him being elected as the new president is going to have a direct effect, negatively or positively, on this particular issue of a lack of skilled labor,” DeVries said.

2. A President Trump will push for major stimulus package for investment on infrastructure improvements.  Indeed, by pledging to double Clinton’s $275 billion proposal, Trump indirectly pledged to spend more than $500 billion repairing America’s roads, bridges, highways, airports, waterways and other infrastructure. ENR reports that the proposal could be as much as a $1 trillion, 10-year plan. The real question is whether he will find enough allies in Congress to get a growth package in place and passed in order to stimulate the road-building industry.
3. A President Trump will likely move to repeal or otherwise limit a number of the policies put in place by Executive Orders by President Obama.  Many Republicans in the House and Senate oppose the various regulatory rules and Executive Orders that touch the construction industry, and they want Trump to move quickly. These include regulations on wages and overtime for Federal contractors, OSHA and other safety issues (like silica dust) and environmental hurdles.
4. A President Trump is expected to overhaul or repeal the Affordable Care Act, which affects many small- to medium-sized business owners in the construction industry.   While affordable healthcare is an ancillary issue to construction executives, it remains a significant business issue that a new administration will tackle in 2017.