Best Practices Construction Law

Best Practices Construction Law

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Matt has written articles and given presentations on all aspects of construction law. Find a resource here.

Top Posts

Best Practices top posts include claims preparation, contract drafting, and litigation pitfalls. You don’t want to miss these ones.

Matthew DeVries

Matt is a construction & litigation attorney at Burr & Forman LLP and father of seven young kids.

Proceed Wisely, Ninja Contractor, Because Suing Your DOT May Have Limitations

Posted in Case Law, Claims, Claims and Disputes, Federal Construction, Legal Trends, Transportation

No self-respecting Ninja goes into battle without a plan, right? You need to know your environment, your opponent and the rules of the battle.  For you Ninja contractors, it’s a good thing to fully understand your potential recovery before you spend countless months and thousands of dollars pursuing a claim against your state DOT for breach of contract, misrepresentation or other cause of action.

wiseninja

Recently, in Victor Virgin Construction Co. v. N.H. Department of Transportation, 75 A.3d 1136 (N.H. 2013) (pdf), the New Hampshire Supreme Court held that a contractor’s claim for negligent misrepresentation against the DOT was statutorily capped at $475,000. The Contractor filed a breach of contract claim, as well as a negligent misrepresentation claim, against the DOT for its alleged failure to adjust the contract price after changes by the DOT increased the scope of work and caused almost a year of construction delays.  (Remember my earlier post about “no damages for delay” clauses?)

In Victor Virgin, a jury awarded the Contractor approximately $1.5 million on its negligent misrepresentation claim.  Following the verdict, the trial court held that no reasonable jury could have awarded more than $779,078, concluding that any more than that amount was purely speculative. Inexplicably, the trial court did not enter a finding on the breach of contract claim. Both parties appealed.

On appeal, the New Hampshire Supreme Court concluded that the damages against the DOT were statutorily capped.  Section 541-B:14, I (Supp. 2012) of the New Hampshire Code provides as follows:

All claims arising out of any single incident against any agency for damages in tort actions shall be limited to an award not to exceed $475,000 per claimant and $3,750,000 per any single incident.

Applying the statute, the appellate court held that the Contractor’s damages were limited to $475,000, despite the jury award of $1.5 million. The Supreme Court sent the case back to the trial court on the breach of contract claim—so the Contractor will get another chance.

So, when you have a claim, what does it mean to Be Wise Ninja Contractor?  I have previously talked about 10 things to do when pursuing a claim, but I think its important to go back to the basics.  These include:

  • Read, read, read your contract.  This sets the basis for the types of claims that are available, how disputes will be handled, and whether you will be limited in your recovery of damages.
  • Understand the law in your jurisdiction.  Each state is different and what may be recoverable in one state may be barred in another state. What one state says about economic losses or indemnification provisions, may be dramatically different in another state.
  • Don’t go it alone.  Depending on the size of the claim, you are wise to get professional assistance, whether talking about a claims consultant for preparing damage calculations, a scheduling expert for proving entitlement to delays, or a construction lawyer for advising you through the initial evaluation and advocating for you through the claims process.

Many times, inexperienced Ninja contractors race straight into battle without having a plan or strategy. But you should not…you should be wise.

Can Active Interference by Owner Invalidate A No Damages for Delay Clause? Sometimes.

Posted in Best Practices, Case Law, Legal Trends

Some will say that a “no damages for delay” clause is harsh.  Well, it depends on which hat you wear. If you are a contractor, you have a reasonable expectation that you will be paid for the extra work to overcome a delay beyond your control, especially if the owner causes or contributes to the delay. If you are an owner, you may have an expectation that the contractor is not going to get extra compensation when there are delays to the project. Who’s right?

Workers

In C and H Electric, Inc. v. Town of Bethel, 312 Conn. 843 (2014), the Connecticut Supreme Court held that a Contractor’s claims against a Town for delay damages could not overcome the “no damages for delay” clause because the Town’s conduct did not constitute “active interference” within the meaning of the contract.  The Contractor was hired by the Town to perform electrical work on a high school renovation project. The project also involved asbestos abatement work performed by another contractor, whose work was supposed to have been complete prior to the start of all other renovation work. While only 70% of the asbestos work had been completed, the Town instructed the Contractor to commence its work, which was interrupted numerous times by the ongoing asbestos abatement work. The Contractor incurred additional costs for relocating and re-sequencing its work.  The Town rejected the Contractor’s request for additional compensation.

At trial, the Contractor argued that the contractual “active interference” exception to the “no damages for delay” clause provided relief. Since the Town knew the asbestos work had not been complete, the Contractor argued that the Town should not have ordered it to begin the work.  The trial court agreed with the Town’s argument that the notice to proceed was not in bad faith or malicious and, therefore, was not an active interference.

On appeal, the Connecticut Supreme Court agreed with the Contractor’s proposed interpretation that an “active interference” required a showing of an affirmative willful act that unreasonably interferes with the contractor’s work. However, the Court affirmed the trial court’s conclusion that the Town’s conduct was not willful or unreasonable because there was no showing that the Town actually knew the asbestos work would cause interference.

So what? Based upon the laws of other states, the Court in C and H Electric determined that there could not be an “active interference” without proof that the Town directed the Contractor to commence its work despite actually knowing that the Contractor’s
work would be delayed. There are a few lessons from this case:

  1. As a contractor, you need to first review your contracts for a “no damages for delay” clause. If one is present, then you will want to negotiate an “active interference” clause that defines what constitutes an active interference.
  2. An “active interference” could mean that the owner knows about the delay and still proceeds; or it could mean that the owner conceals or actively interferes by affirmative conduct.
  3. During performance, you should document the impact of the owner’s actions, including whether the owner failed in coordinating other trade contractors for which it alone is responsible.
  4. Even if your contract does not have an “active interference” exception, there may be a common law remedy of bad faith or negligence on the owner’s part, which causes the delays.  That would depend on your particular state.

In the end, the dispute will be decided on the express contract language and the offending conduct giving rise to the additional damages and delays.

Opening Up the Doors (Roads) for Design-Build Contracts on Highway Projects

Posted in Best Practices, Contract Docs, Federal Construction, Transportation

The Department of Transportation in my home state of New Mexico is the latest to allow the design-build delivery method for highway projects. Although design-build had been approved in New Mexico on limited public projects, road and highway construction had been previously excluded.  That changed on March 9, 2016, when Governor Susana Martinez signed into law the bill authorizing use of design-build on certain, large critical highway projects of more than $50 million.

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What’s the big deal?  This is more than an academic exercise for lawyers—there’s a very practical reason to track the legislation opening the roads to design-build contracts. Under the traditional approach, a state Department of Transportation has a design created, it then bids out that design, and the contractor builds the project (…thus, design-bid-build…).  Projects can now be accelerated through the alternative approach of design-build, where the team selected for the construction project has both design and construction responsibilities. The design-build method can lead to significant cost and time savings. The Federal Highway Administration has a good fact sheet on the process.

What does your state say?  To see whether your particular state authorizes the design-build delivery method for highway projects, the Design-Build Institute of America has issued its 2015 State Statute Report (“Report”) that outlines the various states’ laws that provide owners, lawmakers, and industry professionals with the statutory information to guide them on their project delivery processes. The Report summarizes the statutes, laws, and limitations for design-build industry and is not limited to highway projects. You need to check your particular state to determine whether the state legislature has authorized such a method.

What next?  If you are a contractor that works in the highway construction industry, then you will want to know and understand whether design-build presents an opportunity for you and your company. First, you need to determine whether there are any limitations on the project size or amount. Second, you will want to begin exploring potential teaming relationships with design firm who has significant highway experience. Finally, after you have selected your design partner and proceed on the road toward submitting a proposal or bid to the state DOT, you will want to enter a formal joint venture or other teaming agreement for the work. ConsensusDocs has a catalog of teaming and joint venture agreements, including No. 498—Teaming Agreement for Design-Build Projects.

Image: Tim Kuzdrowski

Contractors: Do You Have a Cell Phone Policy? Is It Time for an Upgrade?

Posted in Best Practices, Project Management

Smart phones and tablets are now commonplace on the construction job site.  Are your cell phone policies as outdated as the original the flip phones that you issued to your employees? Do you even have a cell phone policy?

tablet

Given the legal risks involved with your superintendents, project managers and other employees, you should should be adequately prepared. If you haven’t revisited your cell phone and computer use policies recently—or don’t have any—below are some major issues to consider:

  1. Claims, claims, claims.  No longer are construction disputes limited to the written documents between the parties.  More and more litigation (or arbitration) involves discovery of texts, emails and photographs for proving or disproving your claims.  Any written policy should address use of cell phones and tablets with an eye for document preservation.  Are change orders being discussed by text?  What photos of an accident?  And did you think about use of personal email accounts by your project members?  All of these issues need to be addressed.
  2. Let’s Talk about Sex(ting). Cell phones cameras, video and audio recorder capabilities, and text functions can be an employer’s worst nightmare when it comes to harassment and discrimination claims. They can be used discretely, anywhere, anytime, and leave an undisputable record. Thus, revise your harassment policies if they do not address electronic devices and activities outside of work, including those on social media.
  3. Keep Your Secrets Secret. Cell phones are often used by departing or disgruntled employees to transfer your company’s confidential information. Moreover, lost cell phones can expose your company’s business, customer and employee information to third parties. Make sure you have protocols identifying and protecting confidential information, require the return of an employee’s equipment at the end of his or her employment, and implement internal procedures for locking the employee out of your computer network.
  4. The Always Connected Employees. Time spent responding to emails, texting, and handling phone calls outside of normal work hours can be compensable for non-exempt employees. Review your practices and policies to address these issues and, just as importantly, train your employees and supervisors on the best practices.
  5. Don’t Text and Drive. Employers can be liable for employee accidents that occur while they are distracted by texting or on the phone. Employees must be prohibited—and disciplined as appropriate—from texting while operating vehicles or using heavy machinery, or engaging in other behavior that would distract their attention. Thus, evaluate your employees’ job responsibilities and address risk areas.
  6. Don’t Forget about the NLRB. Did you think the National Labor Relations Board would not have an opinion on cell phones at work? The NLRB seemingly contends that, under many circumstances, non-supervisor employees have a right to use their cell phones at work to record video and take pictures. The NLRB has not drawn clear lines on what is and is not permitted, but review your policies and consult with legal counsel for the best practices.

Ignoring the realities of cell phones in the workplace is no longer an option. All employers must draft policies addressing the varied legal risks and monitor this ever changing legal environment. While this post addresses key issues with cell phones on the project site, employers should consult with legal counsel to determine what practices best fit your workplace and where legal lines can be drawn.

[Thanks to fellow labor and employment attorney, Matthew Scully, for contributing to this post!]

Image: Scott Lewis

If You Settle Your Construction Dispute, Have You Really Settled It?

Posted in Best Practices, Case Law, Legal Trends

Just this weekend, after breaking up a Minecraft dispute among four my young children, I sent them back to the world of digital building. Within minutes, they were fighting again. Makes you wonder about whether you have really settled the dispute after you have settled the dispute?

The Court of Appeals of Tennessee recently addressed this issue in McNeese v. Williams, No. 2014-CV-30, which involved two adjoining landowners who had a dispute over an easement.  Right before trial, the parties reached an agreement and notified the court that the trial was unnecessary. The attorney for the Williams drafted a short letter agreement and sent it to opposing counsel.  An agreed order of dismissal was also submitted to the attorney for McNeese. When Williams was “unable to obtain” a signature on the agreed order from opposing counsel, they filed a motion to enforce the settlement agreement.

construction hand

Following the hearing, the trial court found that the parties, through their attorneys, had entered into an agreement to resolve all matters of controversy between the parties. The trial court found that the agreement was fair and equitable, and that it would be enforced, despite the fact that Mr. McNeese no longer consented to the agreement.

On appeal, the Court of Appeals found that the trial judge lacked the power to enter the agreed order when he knew that Mr. McNeese had withdrawn his consent to the oral settlement agreement reached by the parties’ attorneys.   In other words, Mr. McNeese may have “had” a settlement agreement with the other party, but he repudiated that agreement prior to the hearing on the motion to enforce the settlement agreement.  Accordingly, the appellate court ruled that the trial judge should have granted the motion to set aside the agreed order.

So what?  While the issue in this case generally is one for attorneys, it also provides guidance to businesses about how to treat their settlement discussions via email.  Whether you are talking about a change order, outstanding payment application, or claim for delay damages, your agreement on a dispute may be binding depending on the circumstances. First, your written contract may have a provision that requires all changes and modifications to be in writing. Therefore, an oral agreement to resolve the dispute may not be sufficient. Second, even if you agree to resolve the dispute in writing, the outcome may be dependent on whether you have timely repudiated the agreement.

In the McNeese case, it was a matter of whether the attorney for McNeese had the authority to approve the settlement agreement and whether he had provided the final agreement by his client. Mr. McNeese ultimately repudiated the agreement, which the court found important in its decision. In this situation, the best way to confirm an agreement on a dispute is to make sure you add appropriate language at the end of your communication such as, “This agreement is final and binding until a formal change order (or settlement) is signed by the parties.”  That way, the other side will have an opportunity to object. If they do not object, you will have evidence of their agreement.

Do Your Employees and Construction Laborers Belong to You? Depends.

Posted in Best Practices, Federal Construction, Legislation

When walking through the mall or the grocery store with my children, I inevitably get asked, “Are they all yours?”  Depending on my mood, I may or may not claim them all.  As a general contractor, you will want to know the law on whether laborers hired through a staffing company will be considered “yours” for purposes of the Fair Labor Standards Act (“FLSA”).

workers

It is very common in the construction industry that general contractors and trade contractors will hire workers through third party management companies, independent contractors, staffing agencies and labor providers.  Consequently, traditional employment relationship lines are blurred in determining who is the real employer?

What is a joint employer? On January 20, 2016, the U.S. Department of Labor released its Administrator’s Interpretation (“AI”) No. 2016-1 (PDF), which addresses these type of situations involving joint employment determinations.  Whether an employee has more than one employer is important in determining employees’ rights and employers’ obligations under the FLSA.  When two or more employers jointly employ an employee, the employee’s hours worked for all of the joint employers during the workweek are aggregated and considered as one employment, including for purposes of calculating whether overtime pay is due. Additionally, when joint employment exists, all of the joint employers are jointly and severally liable for compliance with the FLSA.  However, not every subcontractor or labor provider relationship results in joint employment.

What test applies?  The AI discusses two different scenarios—horizontal joint employment and vertical joint employment.  Horizontal joint employment exists where the employee has employment relationships with two or more employers and the employers are sufficiently associated or related with respect to the employee such that they jointly employ the employee. The analysis focuses on the relationship of the employers to each other.  Vertical joint employment exists where the employee has an employment relationship with one employer (typically a staffing agency, subcontractor, labor provider, or other intermediary employer) and the economic realities show that he or she is economically dependent on, and thus employed by, another entity involved in the work.

What about the construction industry?  While the AI address all workplace scenarios, it specifically outlines the following example with the hiring of construction laborers through a staffing agency:

A laborer is employed by ABC Drywall Company, which is an independent subcontractor on a construction project. ABC Drywall was engaged by the General Contractor to provide drywall labor for the project. ABC Drywall hired and pays the laborer. The General Contractor provides all of the training for the project. The General Contractor also provides the necessary equipment and materials, provides workers’ compensation insurance, and is responsible for the health and safety of the laborer (and all of the workers on the project). The General Contractor reserves the right to remove the laborer from the project, controls the laborer’s schedule, and provides assignments on site, and both ABC Drywall and the General Contractor supervise the laborer. The laborer has been continuously working on the General Contractor’s construction projects, whether through ABC Drywall or another intermediary.

According to the AI, “[t]hese facts are indicative of joint employment of the laborer by the General Contractor.

So what? As a result of changes throughout the various workplace industries, it is possible that a worker is jointly employed by two or more employers. In determining whether an employee has joint employers, the following two factors should be considered: (1)  whether the employee works for two employers who are associated or related in some way with respect to the employee; or (2) whether the employee’s employer is an intermediary or otherwise provides labor to another employer.   In the end, general contractors may be responsible for FSLA compliance over laborers who are the employees of staffing companies.

Living Forward: A Book That Will Change You, Your Business and the Construction Industry

Posted in Leadership

 

In seven years of blogging, I have never marketed another company’s or individual’s services or products.  Today, I decided to make an exception for one special reason: I believe that Michael Hyatt and Daniel Harkavy’s new book, Living Forward will actually change your and my life.  Here’s why:
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A Virtual Mentor. I met Michael Hyatt during a transition point in my life.  Well, I didn’t actually meet him, but I found him on the Internet. I had just moved to Nashville, Tennessee, after relocating my construction law practice here, to be closer to family. At the time, Michael was CEO of Thomas Nelson Publishing located in Nashville. I happened to come across Michael’s blog, which he had just started. Over the next 10 years, I’ve seen Michael transition from a corporate leader to a Virtual Mentor, helping hundreds of thousands of people with the struggles in their daily life—from Fortune 500 CEO to small business owner to blogging mommies to this construction lawyer in Nashville.  Since we live in the same area, I’ve had the opportunity to meet Michael and his wife Gail on numerous occasions.

A Practical Problem Solver.  If you think that Michael is one of those out-of-reach, unapproachable public figures, with simply a handful of lofty ideas, you could not be more wrong. Just take a surf of his website on any given topic from how to treat employees, how to fight fair in marriage, and even the best ways to get out of a funk. All practical solutions to everyday problems. His advice helped me to answer common problems for my followers. One of my favorite lessons learned was captured in a blog post I wrote about what to do when your computer presentation crashes right before your big speech. Michael even tweeted this blog post one day and my stats went out the roof. Needless to say, Michael is the real deal.

A Forward Thinker.  With my leadership-crush on Michael, imagine my surprise when I was selected to be part of the launch team for Michael and Daniel’s new book Living Forward, which at the time, I felt was just a way to get the book a month before its release. But when I received the first chapter, as well as started to meet a number of the of the launch team members, I couldn’t be more excited to be part of the team. This book is about experiencing the life you want, while navigating all the distractions, difficulties, and demands that pile up day-by-day, year-by-year.  It leads you through a simple step-by-step life-planning process so every day adds up to the life you want now and creates the legacy you want to leave behind.

Sounds Too Thoughty, Right?  Wrong.  As a busy construction lawyer and husband and father of seven children, my time is limited.  I  find myself in “emergency mode” every single day. I tackle the problems that land in my lap at the moment or the ones that I see coming.  This is not to say that I do not plan for my caseload or family challenges, but I often seem to be living too close to the present without enough reliance on planning for the future. That’s where “Living Forward” has helped me identify a plan to get back on track: professionally, personally and spiritually. Even after reading the first chapter, there was a spark in my belly that started to inflame my desire to change. Here’s just one little nugget that I learned within the first few pages:

You may feel that you’ve drifted too far of course to get back on track, like the shore is just too far away. Perhaps you have given up hope and don’t believe things can ever be different. This is simply not true. It’s never too late. Be encouraged. You can’t change the past, but all of us have the power to change the future. The right choices today will radically alter the shape of tomorrow.

I don’t want to leave you with just a teaser of what you may find in this book and it how it can help you professionally and personally in your business and life. As part of the launch team I’m excited to share a few golden nuggets if you preorder Michael and Daniel’s book. (Again, I’ve never marketed on this blog, but I believe so much in changing my circumstances that I want to share with you that passion.)  If you order by February 29, you’ll receive:

  • A free copy of the audiobook (worth $22)
  • Admission to live online launch event (worth $197)
  • Detailed action plan guide (worth $47)
  • Living Forward quickstart audio training (worth $47)
  • Complete library of Life Planning templates (worth $47)

You can find out more about these pre-order bonuses—including our Leadership Package—by clicking here.  And while I am on the launch team, I do not receive any money or compensation if you decide to join me on this journey.

A Final Word.  I really feel weird opening my soul to you (…I said “leadership-crush” earlier…), but I think it is important for us to be truly honest with each other. My construction practice has experienced losses and successes. Your construction or development company has not reached its financial goals. Both of our families have been wrought with tears, giggles, fear, joy and frustration on all levels.  We both have experienced times in our life or we felt like we were just drifting and not living a purposeful life with achievable goals. That changes today!

Will you please join me, Michael and Daniel on this amazing endeavor?

No Lump on the Head for One Contractor’s Failure to Follow Public Bid Instructions

Posted in Best Practices, Bid Protest, Federal Construction

In our house of chaos, rules are especially important.  And when you don’t follow the rules—like no jumping on the furniture—you could end up with a lump on your head.  Just ask Jackson.

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In the world of government contracts, you know that rules, instructions, and directions should be followed precisely.  In the case of Silver Bow Construction v. State of Alaska, the Alaska Supreme Court reviewed whether the State could find that a bidder whose bid exceeded the 10-page limit for bids could nonetheless be awarded the contract in question.

The Facts. In November 2010, the State issued a request for proposals to perform exterior renovations to the Governor’s House in Juneau. The request imposed specific submission requirements and guidelines. Paragraph 8 of the request included the instructions relevant to this appeal, which provided in part:

The maximum number of attached pages (each printed side equals one page) for criteria Responses shall not exceed: 10 pages.

Paragraph 8 warned that “Criteria Responses which exceed the maximum page limit or otherwise do not meet requirements stated herein, may result in disqualification.”

One contractor submitted a 7-page proposal; Silver Bow submitted a 10-page proposal; another contractor submitted an 11-page proposal; and Alaska Commercial Contractors (the awardee) submitted a 15-page proposal.

The Protest.  Silver Bow protested the bid and argued that the over-length bid by Alaska Commercial was non-responsive and that the successful bidder should have been disqualified. The State countered that the page count was a matter of form and did not confer an advantage on the winning bidder.

The Opinion.  On appeal, the Alaska Supreme Court concluded that the State reasonably found that the over-length bid did not confer an unfair advantage on the winning bidder. It then upheld the State’s bid award as being within its discretion, particularly where (by use of the permissive word “may” in Paragraph 8 of the instructions) the State had the discretion to decide whether a failure to comply with this requirement could be a basis for disqualification.

So What?  The decision in Silver Bow highlights the distinction of substantive and non-substantive issues in a request for proposal.  In the government contracts arena, where a bid received two minutes past a deadline is likely rejected, the decision may not make sense. However, you should make every effort to follow the instructions to bidders so as not to leave a lump on your head.

Top 10 Compliance Laws for Federal Highway Contractors

Posted in Best Practices, Federal Construction

Following up on my post about the Yates Memo, I started to think more about the areas of compliance that federal highway contractors must face.  Contractors certify many things and interact with a wide variety of governmental agencies. Similar to what occurred after the bid-rigging scandals, governmental scrutiny has increased because of a loss of trust.

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So, my question to contractors is: Do you have a corporate compliance program designed to avoid purposeful or inadvertent violations of law by your employees?

In 1991, after defense contractor scandals, the U.S. Sentencing Commission issued sentencing guidelines for corporations. For a corporate compliance program to be effective, the guidelines provide it must, as a minimum, include the following elements:

  • Reasonable compliance standards;
  • Effective oversight of program;
  • Due care in delegating authority;
  • Communication to employees;
  • Enforcement of program;
  • Consistent enforcement; and
  • Periodic review of program.

The Top Ten

What are the potential issues facing highway contractors? Here are my top ten

  1. False claims;
  2. Antitrust;
  3. EEO;
  4. OSHA/safety and health;
  5. DOT (commercial driver’s licenses);
  6. DBE;
  7. Environmental;
  8. Procurement and government contracting;
  9. Finance and tax; and
  10. Labor/employment.

Each of these areas is guided by specific statutory law or by guidelines published by the pertinent regulatory agencies. It is important to understand the law and the regulations in each of  the areas of the compliance program and to develop a code of conduct for each area.

Keeping current is obviously a concern. For example, a couple of years ago the U.S. DOT revised the DBE regulations. The U.S. DOT issued new rules with respect to commercial driver’s licenses that may have broad applicability to trucking.

The structure or organization is a key component of whether a company is truly abiding by its compliance program. The highest level of management must propose the standards for them to have legitimacy within the corporation. Next, a high-level person or persons must be responsible for overseeing compliance.

High-level security

Many different examples of the structure have been used, and no strict rules determine how the program must be set up. Some firms have compliance committees, others a compliance officer who both has the respect of the employees and the clout to deal with those who may create a problem. The individual should answer directly to the CEO of the company or a committee of the board. This individual may be called an ombudsman or an ethics officer. Either way, this individual is an absolute necessity in the compliance program.

Any compliance officers or committees should be formally designated as such by the highest level of management. Formal acknowledgement affirms the company’s commitment and lends credibility to the structure. To carry out their duties, these individuals must have and understand a manual outlining how to carry out the program.

If a problem ever arises, the government agency is likely to look at the relationship of the contractor’s efforts to comply and how the problem occurred. In this context paper compliance programs may be worse than not having a compliance program. If employees at the appropriate level do not know of or understand the compliance program, then the contractor has not taken compliance seriously. As a result, contractors must ensure their employees are well trained. That may be no small effort.

Finally, there must be accountability. Obviously, contractors hope they will have no problems. Using the program in their decision making is one way to anticipate and avoid problems. Reviewing and auditing activities in each of the risk areas is essential. Additionally, violations of law or ethics must be identified, investigated and addressed.

Over the next several months and years, corporations will be placed under a higher degree of scrutiny than before. With a strong compliance program, contractors can take steps to avoid willful or inadvertent violations of law or regulations by their employees.

What Federal Contractors Should Know About the “Yates Memo”

Posted in Best Practices, Federal Construction

On September 9, 2015, United States Deputy Attorney General Sally Q. Yates issued a memorandum directing increased focus on individual culpability in matters of corporate wrongdoing. In addition to fines and sanctions against the corporation, the memo highlights six policy directives targeting individuals involved in corporate wrongdoing. If you are a federal contractor, watch out!

corporate

According to Yates, “[o]ne of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing.” The Yates Memo sets out six policy directives:

  1. Identifying Individuals Threshold for Cooperation Credit. In the past, DOJ has given partial cooperation credit to corporations based on disclosure of wrongdoing, even without complete details about the individuals involved. That’s over. The new policy requires complete disclosure of individuals as a “threshold requirement” for any cooperation credit. And it applies to “all individuals involved in or responsible for the misconduct at issue, regardless of their position, status or seniority.” As corollaries to that directive, DOJ is instructing its attorneys to investigate and build cases against individuals from the start and to include a “company’s continued cooperation with respect to individuals” as a term of any plea or settlement agreement.
  2. Investigations Focus on Individuals from Inception. DOJ will focus on individual culpability from the start of any investigation. The Yates Memo cites advantages, among them: getting at the “full extent” of the misconduct and increasing the likelihood of individual prosecutions. Mostly importantly, it increases the likelihood of involved individuals giving up targets “higher up the corporate hierarchy.”   “Flipping” witnesses to walk-up a conspiracy is an established prosecutorial tactic.
  3. Criminal / Civil Staff Collusion. DOJ will increase communication and cooperation between staff in the criminal and civil divisions. The move is expected to lead to better coordination, allocation of consequences to the most appropriate “venue”, and more parallel proceedings.
  4. No Protection by Settlement. “Absent extraordinary circumstances,” corporate resolutions cannot provide protection to individuals ‒ whether dismissal, immunity, or release – without 4. high-level written approval.
  5. No Corporate Resolution without Prosecutorial Plan for Individuals. If individual prosecutions have not been brought or otherwise resolved by the time of entity resolution, any corporate settlement (or similar) memo must include a detailed prosecution plan for the individuals involved in the wrongdoing. While tolling agreements remain an exception, they now must account for individuals as well.
  6. Civil Enforcement Beyond Individual’s Ability to Pay. An individual defendant’s ability to pay fines or restitution no longer will be a principal determinant in civil enforcement charging decisions, having been demoted in the relative hierarchy of considerations.

If you are a government contractor, you should review the Yates Memo and understand its implications on your company, directors, executive and employees. Understand that individuals now have “skin in the game” and could be held criminally and civilly accountable for misconduct.