Best Practices Construction Law : Construction Lawyer & Attorney : Matthew DeVries : Stites & Harbison Law Firm : Green Building & LEED Litigation

Last week, I saw a Tweet about the United States Supreme Court granting certiorari in a construction dispute ... and I thought it had to be an April Fools' Day joke because they never take construction cases on appeal.  So, being quite the jokester, I naturally sent out the following Tweet:

Well, the joke is on me.  Last week, the Supreme Court did announce that it will review the decision of the Fifth Circuit in In re Atl. Marine Const. Co., Inc., 701 F.3d 736 (5th Cir. 2012) cert. granted, 12-929, 2013 WL 1285318 (Apr. 1, 2013).  

Forum selection clause.  The dispute relates to a subcontract agreement on a construction project located on Fort Hood in Texas. When the general contractor did not pay the subcontractor for its work, the subcontractor filed a lawsuit in federal court in Texas based upon diversity jurisdiction (...that means a dispute in excess of $75k between parties of different states...).  The general contractor tried to get out of the lawsuit by filing a motion to dismiss or, in the alternative, tried to get the case transferred to Virginia based upon a forum selection clause in the subcontract agreement.

Trial court.  The trial judge did not dismiss the case, nor did he agree to transfer the case to Virginia.  The court held that the project, and most of the project documentation, was located in Texas.  In addition, almost all of the witnesses lived in Texas and would not be able to testify if the case were transferred to Virginia.

The appeals court.  The general contractor filed an appeal to the United States Court of Appeals for the Fifth Circuit in the form of what was called a Petition for Writ of Mandamus in an attempt to reverse the trial court's ruling. The Fifth Circuit denied the write petition.  All three panel members agreed that the standard for obtaining a writ of mandamus was not met in this case.  One of the panel members agreed with the result, but wrote a concurring opinion.  In its decision, the majority of the panel concluded that the parties’ contractual choice of forum was not the only factor which should be weighed in a motion to transfer venue.  Stated differently, the majority reasoned that the federal venue statutes, not the parties' contractual forum selection clause, should govern whether Texas, as opposed to Virginia, was a proper forum for the case to be heard.

The Supreme Court. SCOTUSblog has all of the key documents and dates leading up the to grant of certiorari by the Supreme Court.  The issues on appeal are: (1) Whether the Court’s decision in Stewart Organization, Inc. v. Ricoh Corp. changed the standard for enforcement of clauses that designate an alternative federal forum, limiting review of such clauses to a discretionary, balancing-of-conveniences analysis under 28 U.S.C. § 1404(a); and (2) whether district courts should allocate the burdens of proof among parties seeking to enforce or to avoid a forum-selection clause.  

Practical implications.  While the issues on appeal are not construction-specific, such as whether pay if paid clause is enforceable, the ultimate decision may affect the contracting process for parties to a construction project.  Until there is clear guidance from the Supreme Court on these issues, some things to think about include:

• Forum selection clauses are not always enforced as written. As demonstrated in the Atlantic Marine Construction case, a court may focus instead on whether the plaintiff's chosen venue is proper under the statutes. The court may not place the same emphasis on where the parties agreed to litigate.
• When drafting a forum selection clause, you should think about all the where questions: (a) where the parties are located; (b) where the witnesses reside; (c) where the contract negotiations took place; and (d) where the project is located.
• By requiring in your forum selection clause that disputes be resolved in state court, you can eliminate these issues from the dispute.  For example, the majority panel in Atlantic Marine Construction noted dismissal would have been proper had the parties' forum selection clause required the case to be heard only in state court since federal courts may only transfer cases to other federal court.  

When the Supreme Court issues its decision on the American Marine Construction case, there may be some additional practical implications.

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Yes, there are limits to what parties can include in a construction contract.  For example, many states like Tennessee have choice of law and venue statutes that make it unlawful to include a provision in a contract requiring the substantive laws of another state or the venue of litigation/arbitration in another state for real estate improvement projects that are located in Tennessee.  Other states like Maryland prohibit lien waivers in executory construction contracts.

Recently, the Supreme Court of Nevada held that a general indemnification agreement was void and unenforceable based upon the purposes and intended effects of the Americans with Disabilities Act.  In Rolf Jensen & Associates v. Eighth Judicial District Court of Nevada, the design contract included an indemnification provision where the design professionals agreed to indemnify the project owner for "any damages arising from any act, omission, or willful misconduct." 

The Facts.  The owner of the Mandalay Bay Resort contracted with Rolf Jensen on the expansion project to provide certain consulting services involving ADA compliance.  Following completion of the project, the Department of Justice investigated certain violations related to lack of handicap accessibility at the property.  The owner estimated that it would take approximately $20 million to bring the resort into compliance.  The owner sued Rolf Jensen under the indemnification provisions to recover the costs of the repair work.

The Holding.  The procedural aspects of the court's decision are tricky, but in the end the decision was clear: "We conclude that Mandalay's state law claims for indemnification pose an obstacle to the objectives of the ADA and therefore are preempted."  Ultimately, the court concluded that allowing the indemnification claims would weaken an owner’s incentive to prevent violations of the ADA, which would conflict with the purpose and intended effects of the statute.. “Simply put, such claims would allow owners to contractually maneuver themselves into a position where, in essence, they can ignore their nondelegable responsibilities under the ADA.”

An Observation.  While the Rolf Jensen decision appears to undermine parties' freedom to contract, there have always been limitations on those freedoms.  Perhaps the question in this case stems from the lack of a clear prohibition against waiver of the ADA in contracts.  Perhaps this was simply an example where public policy trumps freedom to contract.  I think one of the real lessons is to make sure to review your construction contracts to make sure the agreement complies with the applicable state and federal law.

Question: Have you read the decision?  What are your thoughts?

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While I generally limit my guest posts to my fellow law partners, I simply could not resist sharing with you today's post from my friend and construction attorney, Scott Wolfe, Jr.  He is the founder of Zlien.com, a national mechanics lien filing and compliance management service. Scott writes the Construction Lien Blog, which analyzes construction lien laws and regulations across the nation.

Now the disclaimer part: I have not used or test-driven any of the services offered by Zlien.com and this post here is not an endorsement of the product.  I can say, however, that Scott is one bright guy and has a lot of good information about lien filings throughout the states.  I hope you enjoy.

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Through the years of consulting with folks in the construction industry about mechanics lien and bond claims, I’ve unearthed a set of principles to help navigate the very complicated world of liens. These principles form a set of “best practices” for the company interested in preserving its lien rights on every construction, and ultimately therefore, avoiding bad debt.
 

Understand What Type of “Lien” Is Available.  The term “mechanics lien” is overused in the construction industry, with companies presuming they can file a mechanics lien on any type of project. That’s part true, and part untrue.

The truth in this statement is that there is a lien-like remedy available on every construction project. The untrue part of the statement is that it’s not always a “mechanics lien” per se, it could be, for example, a state bond claim or a miller act claim.

This can get confusing to the contractor or supplier who considers them all one in the same. The other day, for example, I had an equipment rental company ask me whether they could file a mechanics lien on a state project in Florida. I referred them to some Florida attorneys who answered the question, but those attorneys got hung up on the terminology and not the goal of the client.

Rather than answering the equipment rental company by saying “yes, you can encumber the project” by filing a bond claim, they emphatically told the company that they couldn’t file a mechanics lien claim. They barely even mentioned that they could file a bond claim, and that this is commonly even referred to as a lien.

The long and short of this discussion is that the industry uses the term “lien” pretty loosely. But, if you’re on a state project, you’re likely filing a bond claim; on a federal project you’re filing a miller act claim; and on a private project you’re filing a traditional mechanics lien. They work differently, there are different rules, but they are all fundamentally the same.

The first best practice is to understand what lien remedy is available to you, because it will help you get that type of lien document filed when the time comes.

Know All Relevant Project Information.  If you’re furnishing labor or materials to a construction project, you should know all the critical data about that project. This includes:

● The address where your furnishing
● The name of the property owner
● The name of the general contractor
● The name of the bonding company (if any)
● The name of the lender (if any)

You’d be surprised how often I’m approached to help someone file a lien claim without this basic project information. This information is critical to not only filing an accurate mechanics lien claim, but also to sending out the required preliminary notices. If you don’t have this information, figure out a way to get it.

Most of the time you can politely request the data, and get it without much effort. Other times, you may need to send in a formal request. On state and federal projects, the identity of the bonding company and the general contractor is public information, and you can typically request this directly from the contracting department.

If you’re in Tennessee, a great place to start is with Matthew DeVries’ checklist, originally published on this Best Practices Construction Law Blog: Information Needed To Prepare A Lien.

The second best practice is to have good information about your construction projects.

Understand Preliminary Notice Requirements and Lien Deadlines.  In most states, filing a mechanics lien or bond claim is a discipline, and not something you can do impulsively. That’s because many states require you take actions right at the beginning of furnishing to preserve your right to file a mechanics lien or bond claim. It’s very important that you understand these requirements.

If you furnish in one state only, it should be fairly simple for you to get educated about that state’s notice requirements. Take the time to learn this information and follow it diligently. If you furnish to multiple states, organizing and understanding the information may be a bit more complex, and you may need to consult with a mechanics lien service or attorney to help you comply with the varying notice requirements. Remember, these mechanics lien laws and nuances will vary not only between states, but also between projects.

The third best practice, therefore, is to understand the requirements applicable to your project to preserve your lien claim rights, and then to follow those requirements.

Conclusion.  While most companies don’t want to file lien claims lightly, it is a very effective way to get paid on a construction project, and therefore, a remedy you always want available. If your customer doesn’t pay its debt, if money gets misappropriated on a job, or if your customer files for bankruptcy, you’re going to wish that you had preserved and enforced your lien or bond claim rights.

It’s very difficult to comply with lien and bond claim requirements on every project, because there are so many layers of complexity. However, these best practices will help your company wade through those requirements and set itself up to successfully protect its lien rights...and, hopefully, always get paid.

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We all have preconceptions about the language you might find on the construction project.  However, it is not every day that you read a court opinion and you find the following language: "...nor is it the business of the federal courts generally to clean up the language and conduct of construction sites."  This came from a recent ruling from a federal appeals court in Louisiana.

In EEOC v. Boh Brothers Construction Co. (pdf), the United States Court of Appeals reviewed a Title VII case brought by the Equal Employment Opportunity Commission against Boh Brothers Construction Company on behalf of the claimant, a male construction worker who alleged that his superintendent engaged in same-sex harassment.  According to the opinion, there was "plenty of evidence that [the employer's superintendent] is a world-class trash talker and the master of vulgarity in an environment where these characteristics abound." 

At the trial court, the jury was "very sympathetic" and awarded both actual and punitive damages to the claimant.  Although the appeals court agreed that the superintendent's language and abuse were offensive, it did not establish a claim of unlawful same-sex discrimination.  Ultimately, the appeals court concluded that there was insufficient evidence that the superintendent "acted on the basis of gender" in his treatment of the claimant.

Although the court's opinion is a good read for HR staff and employment lawyers for understanding same-sex discrimination standards, it also provides a few good lessons for all involved in the construction industry:

• Words make a difference.  The Boh Brothers case is a good reminder that words can have serious consequences, whether you are talking about the formation of a contract, the verbal admissions made during project performance, or the legal liability created by your management and employees. 
• Employers beware of employee conduct.  Although the question was not raised in Boh Brothers, employers need to understand that the company may be responsible for the conduct of its employees performed within the course of their employment. 
• Professionalism is important. If you were to read only the Boh Brothers' opinion, you would think that the contractor-employer simply defended the lawsuit.  Of course they did....there was a lot of money at stake.  But the company disciplined the superintendent and implemented a training program for this behavior.  According to an ENR article on the case (sub. req.), company representatives confirmed that Boh Brothers was embarrassed by the conduct and that "such treatment [of employees] will not be tolerated."  Even though the employer won in court, it was also important for the company to publicly admonish the offensive conduct.

Have you read the Boh Brothers' decision?  What other lessons exist?

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You can imagine that with seven young children in our house, there are a substantial number of arguments on any given day.  When both my wife and I are at home, the question becomes, Who decides disputes: Mom or Dad?  In the construction arena, the same types of questions arise.

Recently, in Bechtel Do Brasil Construcoes Ltda v. UEG Araucaria, Ltda., 638 F.3d 150 (2d Cir. 2011), this same issue arose in the context of whether the owner's claims were barred by the applicable statute of limitations.  Almost six years after completion of the power plant, the steam-turbine failed.  The owner filed a demand for arbitration against the contractor. 

The contractor filed a motion in court to permanently stay the arbitration because it argued that the claims were beyond the statute of limitations.  The owner filed a response, arguing that the arbitrator (and not the court) should decide the issue of the limitations period.

Who decides arbitrability?  Whether the court or the arbitrator decides the statute of limitations issues depends on the parties' contractual agreement.  In this case, the disputes clause stated that: "Any dispute, controversy, or claim arising out of or relating to the Contract, or the breach, termination or validity thereof ... shall be finally settled by arbitration..."  However, another provision in the contract stated that "the validity, effect and interpretation of this agreement to arbitrate shall be governed by the laws of the State of New York" and that "the law governing the procedure and administration of any arbitration instituted ... is the law of the State of New York."  Can you see the dilemma now?   In the end, the appeals court concluded that the arbitrator (and not the court) was required to decide the statute of limitations question. 

The takeaways.  The real lesson here is to understand that the parties' agreement will determine who decides arbitrability of disputes.  When you use phrases like "any and all disputes" in your contract, then it is likely that the arbitration or dispute provision is elastic enough to encompass every imaginable dispute, including statute of limitation defenses.  This exercise is more than academic because there may be strategical reasons for you wanting a court, as opposed to an arbitrator, deciding gateway issues and defenses.  So choose your words wisely in your contracts.

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I was working in our Virginia office this past week and was amazed at the amount of highway construction at and around Tyson's Corner.  What also caught my attention was the progress of the 495 Express Lanes project, which includes the construction of high occupancy toll (HOT) lanes that will operate on the I-495/Capital Beltway.

As the U.S. moves toward the construction of "smart" highways as an integral part of our transportation system, state DOTs and localities will be called upon to broaden the horizons of their normal procurement and contracting systems. Undoubtedly, many legal issues will arise as high-tech companies compete for contracts that offer the likelihood of substantial follow-on business in order to maintain compatibility.

"Improvement" versus "Construction". Presently, a few cities, states, toll road and turnpike authorities are in the process of procuring electronic toll-collection (ETC) systems. Many are procuring those systems under state statutes that call for competitive bidding of all construction contracts. The question has come up, however, whether those government entities are required to award contracts after public bidding. That question was considered in the 1995 decision called In the Matter of AT/Comm, Inc. v. Peter Tufo, 652 N.E.2d 915 (N.Y. 1995), where the New York Court of Appeals made an interesting distinction.

In 1991, the New York State Thruway Authority, together with similar agencies in New Jersey and Pennsylvania, formed an interagency committee (IAG) to evaluate electronic toll-collection systems that would be compatible among the three states. The IAG issued a request for proposals for both "read only" (which scan information from a windshield tag) and "read/write" (which are needed when tolls are determined by entry and exit points) systems. AT/Comm and Amtech Systems, both ETC-system manufacturers, submitted proposals for the contract to install the ETCs at designated sites along the New York State Thruway.

In 1993, without public bidding, the authority entered into a $1.7 million contract with Amtech for the manufacture and installation of an interim read-only ETC-system. This system would be used pending the IAG's selection of a fully integrated read/write system that would eventually replace it. Upon contract award, AT/Comm filed a petition seeking to stop the contract between Amtech and the authority. It also sought an order stopping the authority from entering any contract for the ETC-system without first conducting competitive bidding in accordance with the appropriate New York statutes.

In the litigation, AT/Comm argued that the ETC-system was an "improvement" of the thruway within the meaning of the New York competitive-bidding statute, which required a public bidding. Amtech and the authority disagreed, arguing that the contract for the installation of the ETC-system was not a contract for "construction, reconstruction or improvement" of the thruway and, as a result, was not subject to the competitive-bidding requirement. The Court of Appeals agreed with Amtech and the authority.

The Court of Appeals noted that the New York statute requires public bidding where the work undertaken is for the construction, reconstruction or improvement of the actual road or passageway used for traffic. The aim of the E-Z Pass system, however, was not to improve the roadway but to improve the flow of the traffic on it.

Lesson Learned. Competitive-bidding statutes were enacted by state legislatures to protect the public against fraud, favoritism, corruption, extravagance and improvidence in the award of public contracts. The idea behind such statutes is to require contract-award decisions to be based on objective criteria. Electronic toll-collection contracts are generally awarded after proposals are technically evaluated by consultants.

Public entities need to make sure they are not drafting specifications aimed at favoring one competitor over another. They should also establish criteria on how proposals will be evaluated and make evaluations of competing proposals fairly. Finally, they should ensure that their consultants are not biased. Given the subjectivity involved in this process, the cost of preparing proposals and the potential economic gain of being considered by several governmental entities who seek to make their systems compatible, there is great likelihood for disputes and litigation in the future.

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One of the largest groups for construction lawyers is the American Bar Association's Forum on the Construction Industry.  In the weeks leading up to to the Forum's 2012 annual meeting in Las Vegas, Nevada last month, a number of construction attorneys and I were feverishly reviewing submissions for Division 10's annual Construction Law Update.  The document is a compilation of cases and legislation affecting the construction industry.  The updates are provided throughout the year by attorneys all over the country.  This year, Division 10 released its 6th Annual Update. 

The following are examples of the types of information that you will find in the Construction Law Update: Cases and Legislation Affecting the Construction Industry (2011-12):

• Senate Bill Number 59, Alabama 2011 Regular Session. The bill amends §§ 6-5-221, 6-5-222, 6-5-225 and 6-5-227, Code of Alabama, 1975, reducing the statute of repose for actions against an architect, engineer or builder from 13 years to 7 years from the substantial completion of the construction of an improvement on or to real property. This Bill will become effective upon signature and approval by Governor Robert Bentley.
• In William Smith v. Krishna Pinnamaneni et al., 2011 Ariz.App. LEXIS 59, 607 Ariz.Adv.Rep. 35, (2011), the Arizona Court of Appeals held that the defense of lack of licensure could be waived if not timely and appropriately raised in an arbitration proceeding. Accordingly, the Court rejected defendants’ claims that the plaintiff contractor was not appropriately licensed and therefore was precluded by statute from pursuing its affirmative claim when defendants first raised the defense after plaintiff moved to confirm the arbitration award. The Court noted that contracts executed by unlicensed contractors are voidable, not void, and that unlicensed contracting constituted an affirmative defense that could be waived like any other affirmative defense.
• In Midwest Asphalt Coating Inc. v. Chelsea Plaza Homes Inc, 45 Kan.App.2d 119, 243 P.3d 1106 (Kan.App. 2010), the Court reaffirmed that claims for breach of contract and quantum meruit are mutually exclusive and a quantum meruit claim is permitted only if the contract is unenforceable. Additinally, pursuant to Kansas Fairness in Construction Act (K.S.A. §§ 16-1805 and 16-1806) attorney fees and costs are recoverable only if “undisputed” sums are not timely paid. Here there was a dispute if the work was completed and thus the amount owed was disputed. The Court also reasoned that even if it was a quantum meruit claim the amount was not liquidated or still in dispute until an award was made and thus fees are not recoverable.
• In Voigt Consultants, LLC v. Plymouth Crossroads Station, LLC, 2011 WL 1119697 (Minn. Ct. App. March 29, 2011), the court held that, in order for a mechanic’s lien to have priority, a mortgage holder must have actual notice that the lien claimant had not been paid. Moreover, the mortgage holder has no affirmative duty to inquire about whether the mechanic’s lien claimant has been paid in full.

There are updates from all over the country.  In addition, we have included references to recent federal legislation that affects the construction industry. If you would like a copy of the Construction Law Update, all you have to do is the following:

1. First, go to the ABA Forum's main website
2. Then,  look to the left column and connect with the Forum via Facebook LinkedIn, or Twitter
3. Finally, send me an email saying which you did.

If you would like copies of the past year's updates, please see my Resources, Articles, Presentations page.

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Today's guest post is written by Joe Hardesty, who handles complex litigation in construction and business disputes. He has defended and prosecuted claims for clients arising from major construction projects throughout the country, surety disputes, commercial real estate disputes and a variety of disputes arising from business transactions. He also advises clients on matters related to government contracting and compliance.

Does a construction manager have a duty of care to employees of contractors and subcontractors to provide a safe project site? This was the question that the Indiana Supreme Court addressed in its opinion issued on March 22, 2012, in the case of Hunt Construction Group, Inc. v. Garrett.

The Facts.  Hunt was the construction manager agent for the construction of the Lucas Oil Stadium in Indianapolis and had contracted with the owner, the Indiana Stadium and Convention Building Authority. Baker Concrete Construction, Inc. had also entered a contract with the Stadium Authority to perform concrete work on the stadium. Shannon Garrett, an employee of Baker, was injured while removing forming material from concrete. Garrett pursued a workers compensation claim against her employer, Baker, but also sued Hunt, the construction manager, for negligence in not providing a safe job site.

The Opinion. The Indiana Supreme Court addressed the issue of whether a construction manager has a legal duty of care for job site safety to employees of contractors and subcontractors. The Court held that a construction manager has a legal duty of care to workers on the job site for job safety in only two circumstances: (1) when such a duty is imposed on the construction manager by a contract to which it is a party; or (2) when the construction manager assumes such a duty, even gratuitously or voluntarily.

In this case, the Court found that there were no provisions in the construction manager’s contract under which Hunt contractually accepted the duty to maintain safety on the project. The Court noted that the contract provided that the contractors, not the construction manager, have the responsibility for project safety and the safety of their employees. The Court found no safety provisions in Hunt’s contract that imposed any specific legal duty to or responsibility for the safety of all employees on the construction site. Therefore, the Court held that Hunt’s contract did not create a duty to employees for job site safety and that Hunt’s only responsibilities for safety were owed to the Stadium Authority.

The Court next considered whether Hunt had assumed a legal duty for job site safety through its conduct beyond that required by its contract. The Court stated that a construction manager could be responsible for job site safety to individual employees where it specifically agrees to take on specific safety responsibilities beyond those set forth in its contract. Examples of such conduct are appointing a safety director, initiating weekly safety meetings, directing that certain safety precautions be taken and inspecting the job site for safety. Garrett argued that the fact that Hunt’s safety representative conducted safety committee meetings every Monday and inspected the site daily for violations of the project safety program demonstrated that Hunt had assumed responsibility for job site safety and owed a duty to workers for job site safety. The Court found that these activities were activities required by Hunt’s contract with the owner and, therefore, these were not additional duties voluntarily assumed by Hunt to job site workers. Hence, the Court found that Hunt did not assume specific supervisory responsibilities for job site safety beyond those set forth in its contract and, therefore, there was no duty owed by Hunt to Garrett or other workers for job site safety.

Lessons Learned.  This case focused only on the issue of whether a construction manager owes a duty to workers for job site safety such that individual workers would have a claim against the construction manager. It found that a construction manager’s duty for job site safety is normally only owed to the owner rather than to individual employees of contractors and subcontractors. Construction Managers should note, however, this case did not address what liabilities a construction manager might incur to OSHA for job site injuries. Construction managers must assess not only its duties to owners and workers for job site safety but also its legal obligations under OSHA.

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I had an admiralty professor at law school who would often refer to the Justices of the Supreme Court of the United States as ... get this ... the Supremes!  In honor of Professor Jones, today's post is about the Supremes' decision in PPL Montana, LLC v. Montana (pdf),  where the court declined to expand the definition of "navigable" under federal law.

What is "navigability"? In the case, the Montana Supreme Court held that the state of Montana owns and may charge for use of riverbeds where privately owned hydro-electric dams were located.  It was undisputed that the state owned all riverbeds that were navigable at the time of statehood, but that title remained with the federal government for those beds of river that were not navigable. Thus, the ultimate question turned on whether the waterway at issue was "navigable" and which test applied. In a 26-page unanimous decision, the Supremes held that navigability must be determined segment by segment, and that river segments which are sufficiently obstructed that travelers must portage are not navigable.

Why is the decision important to the construction industry?  The decision is hailed as a victory by the American Road & Transportation Builders Association, which was the only transportation construction association involved in the case and who filed a brief with eight other industry associations.  According to a press release by ARTBA, the ruling removed a "road block" that unnecessarily had the potential of delaying transportation projects:

For purposes of transportation development, once something is considered “navigable” it is under federal control, and subject to the permitting authority of the U.S. Environmental Protection Agency (EPA) and the Army Corps of Engineers (Corps). An expanded definition of “navigability” could have resulted in a scenario where the EPA and Corps would have the option of exerting jurisdiction over roadside ditches, potentially adding years to already expansive review and approval process for transportation infrastructure projects that are needed for increased mobility and improved safety.

If the state decision had been upheld, any water body ... including water features that are common on highway and other transportation projects ... could have been deemed to be navigable simply because someone could use it for a “recreational purpose."

Image: Orin Zebest

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Words matter. Yesterday, the Supreme Court of Tennessee released its decision in a construction dispute between Ray Bell Construction Company and the Tennessee Department of Transportation.  Where the contractor won the first two rounds at the trial court and intermediate appellate court levels, TDOT prevailed in the final appeal.

The Dispute.  The primary issue in dispute was whether the completion date in the parties' contract could be amended or moved to account for the impact of increased quantities and other delays.  TDOT argued that the completion date could be modified for purposes of the disincentive payment and liquidated damages, but under no circumstance could the date be modified for purposes of the incentive payment.  The contractor argued that the date could be modified for all purposes, including the incentive payment.  Ultimately, the claims commissioner awarded the contractor the $2.5 million early completion bonus, finding that the incentive date provision could be amended consistent with prior instances.

The Court of Appeals affirmed the claims commissioner's finding that “a definite latent ambiguity exist[ed] for which parol evidence not only is admissible, but frankly, absolutely necessary in both understanding and deciding the issues in this case."  

In a short opinion [pdf], the Supreme Court reversed that finding and concluded that the contract language was plain and ambiguous.  When the contract language is unambiguous it is the duty of the courts to interpret the contract according to its plain terms. According to the Court,"TDOT's refusal to extend the incentive date beyond December 15, 2006, was therefore consistent with the contract."

Lessons Learned.  The RBCC case is worthy for a number of reasons:

1. The appellate court decisions provide a good overview of the public contracting claims process. Like many other jurisdictions, the Claims Commission in Tennessee resolves claims involving tax recovery, state employee workers' compensation, negligence by state officials or agencies, and contract claims involving the State. The RBCC dispute went to trial before a claims commissioner and was appealed to the Court of Appeals and Supreme Court.
2. The case summarizes the two sides to a contract interpretation question.  Like almost every construction dispute, the contract will determine the rights and obligations of the parties.  In this case, a $2.5 million early incentive payment was at stake and the decision turned on whether there was an ambiguity in the parties' contact and what evidence could be used to resolve that ambiguity.  The Court of Appeals described in detail the ambiguity in the contract, where the Supreme Court found the contract unambiguous.
3. The case involved a truly "interesting" factual story.  The dispute involved a multi-million dollar claim ... design delays ... easement delays ... unexecuted change orders ... quantity overruns ...  contract ambiguities ... a compelling letter by the state agency ... a compelling letter by the federal agency ... and much more.

It appears to be the end of the road for this claim.  Noticeably absent from the Supreme Court's decision is any discussion of the circumstances leading up to this particular contract, which arguably formed the basis of the trial court's initial decision and the intermediate appellate court's decision.  The evidence included prior projects where the incentive date was allowed to be modified, as well as letters between TDOT and the Federal Highway allowing for a change to the incentive payment date.  The Supreme Court's opinion was silent on these issues most likely because it found the contract to be without ambiguity.

[Note: I was involved in this case along with lead counsel Greg Cashion at the trial court and court of appeals, but I moved law firms to Stites & Harbison before the appeal had been taken to the Supreme Court.]

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Happy Halloween!  Today's post is not about ghosts, ghouls and goblins, though.  It's much scarier ... it's about contractors, subcontractors and insurance companies! (....shriek....)

In a noteworthy decision issued last week, the Tennessee Supreme Court held that all construction contracts have an implied duty on part of the contractor to perform in a "careful, skillful, diligent, and workmanlike manner." In Federal Insurance Co. v. Winters (pdf), the court adopted the "majority rule" that has been applied in most states.  According to the court's decision, a contractor may not escape liability for performing in a workmanlike manner by "delegating" or subcontracting the work to a subcontractor.

In Winters, the defendant contractor entered into a contract to replace a roof. When the newly installed roof developed leaks, the defendant hired an independent contractor to make the necessary repairs. While performing the work, the independent contractor caused a fire, resulting in an $871,069.73 insurance claim by the homeowners.

The plaintiff insurance company sued the defendant contractor in both tort and in contract based upon theories of subrogation (i.e., stepping in the shoes of the homeowner to assert their rights for claims arising out of the fire). The defendant contractor filed a motion for summary judgment, asserting that because he had subcontracted the work to another contractors, he could not be liable. The trial court granted the motion on both the negligence and breach of contract claims.

The Court of Appeals reversed, holding that the defendant had a non-delegable contractual duty to perform the roofing services in a careful, skillful, and workmanlike manner.  The Supreme Court granted the defendant's application for permission to appeal. Because the defendant had an implied non-delegable duty to install the roof in a careful, skillful, diligent, and workmanlike manner, the Supreme Court affirmed the decision.

I told you it was scarier than ghosts, ghouls and goblins!  Is there a lesson to be learned?  Yes. Even the Supreme Court acknowledged that this rule was not a prohibition against delegation of construction contracts.  Rather, the lesson learned is that the delegation must be accompanied by a release from the other party.

Image: Pedro Ferreira

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Where is the best place to start when you have been away from work for a family emergency? Naturally, you go back to the basics.  In my next few posts, I review some of the "basic building block" or "essential" construction cases every contractor should know.  The first two are Spearin and Luria Bros.

U.S. v. Spearin, 248 U.S. 132 (1918) is perhaps the most important construction case to understand.  Spearin established the well-known rule that the government/owner impliedly warrants the adequacy of its design. The United States Supreme Court held that detailed specifications describing the work "imported a warranty that if the specifications were followed, the sewer would be adequate. This implied warranty is not overcome by general disclaimer clauses requiring the contractor to examine the site, check the plans and specifications and assume responsibility for the work until completed." The rule, which has come to be known as the Spearin Doctrine, has, for years, allowed contractors to recover the costs incurred as a result of defective design specifications provided by the government. The Spearin Doctrine has been adopted by most states.

In Luria Bros. v. U.S., 369 F.2d 701 (Ct. Cl. 1966), the Court of Claims further expanded upon the Spearin Doctrine to make clear that the government must timely correct its defective design. The court found that the original specifications were defective.  When defective specifications delay the work, the court reasoned, the contractor is entitled to recover damages. In Luria Bros., the government was dilatory in recognizing the need for and in revising defective specifications, which constituted a breach of the implied obligation not to do anything that would hinder or delay the contractor’s performance.

Both Spearin and Luria Bros. provide a legal assurance to contractors that additional costs may be recovered for defects in the design by the owner.

Next post features what is an equitable adjustment.

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Last week, the Supreme Court of Tennessee heard oral arguments on a contract interpretation issue in a construction dispute between Ray Bell Construction and Tennessee Department of Transportation.  You can get the details here, but the real lesson is one about how to interpret contracts, whether you are talking about the scope of work, changes, compensation or delays.

The TDOT Dispute.  The disagreement in the the TDOT case involved a question whether the contractor was entitled to an early incentive payment given the delays on the project beyond the contractor's control.  There was a disagreement as to whether the completion date could be moved, altered or amended. The trial court held that there was an "egregious ambiguity" in the parties' contract and allowed extrinsic evidence, including evidence of other contracts, to clarify the issue. The Court of Appeals affirmed [pdf].  The final decision from the Tennessee "Supremes" is expected.

Another Example.  In construing a written contract, the controlling consideration is the intention of the parties as derived from all the terms of the contract. Legally, a written contract to which both parties have assented as a complete and accurate expression of their agreement, may not be varied or contradicted by understandings and negotiations, which occurred prior to signing the contract. Thus, as a general rule, a proposal by a contractor cannot be used to vary or contradict the signed contract.

If the contract is so ambiguous that its meaning is unclear, the court can allow parol or extrinsic evidence to be admitted. A contract is considered ambiguous "when it is reasonably susceptible to more than one meaning." As a result, if the contractor can show that the scope of work specified in the contract is ambiguous, then the contractor's proposal may be used as extrinsic evidence to explain the meaning of the contract.

Owners (such as TDOT in the case currently on appeal) often argue the language in the scope of work specified in the contract is readily apparent and, therefore, the contractor should not be permitted to introduce its proposal as evidence on the issue of ambiguity. However, a court may conditionally consider extrinsic evidence, including the proposal, for the purpose of determining whether a contract is ambiguous. If the signed contract is reasonably susceptible of two or more meanings, the courts would likely consider the public owner's interpretation of the scope of work and the contractor's proposal.

Who Can Help Interpret a Construction Contract?  Using the above two examples, the rules are pretty clear that the court must look only to the four corners of the contract to interpret its provisions. Only where there is an ambiguity can the court look to extrinsic or parol evidence, including other writings, conduct of the parties, and industry practice.

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Last week I wrote a post about what is considered timely acceptance of a subcontractor's quote. My friend and former colleague, Brian Waagner, submitted a comment to that post, focusing on the importance of a written contract.  Brian also blogs at The Contractor's Perspective.  Brian's comments are on-point, so I have included them here as a guest post:

This case strikes me as an example of what happens when parties are not clear as to the terms of their contracts. While a written contract is not always necessary, the absence of a written contract when the circumstances indicate the parties expect to sign one is often a problem. 

Two other decisions make this point. In Jack Baker, Inc. v. Office Space Dev't Corp., 664 A.2d 1236 (D.C. 1995), for example, a developer advised an excavation subcontractor that it had been selected, but no formal subcontract had been signed. The subcontractor sued when he saw another contractor performing excavation work at the site, but his claim was dismissed on summary judgment because there was no written contract. In the court's view, the size of the project, the formality of the procurement process, and the ongoing negotiations as to the terms of the contract would make it impossible for a reasonable person to conclude that the parties had reached a complete agreement on all terms and conditions of the contract.

In Haughton Elevator Co. v. Donata Corp., 271 F. Supp. 958 (E.D. Va. 1966), Haughton submitted a bid for the installation of elevators. Donata directed Haughton to proceed while the parties discussed "final details" that would be necessary for the preparation of a "formal purchase order," but no purchase order was ever signed. The court rejected both Haughton's claim for lost profits and Donata's counterclaim for additional costs incurred to install the elevators. Both parties were "very experienced in the construction field" and their discussions made it clear that they did not intend to be bound until a formal contract was executed.

Excellent points Brian!  These are real-life examples of disputes about parties' expectations that were not fully nor clearly reduced to writing.

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If a subcontractor's quote does not contain a deadline by which it must be accepted, how late can the contractor accept the quote to be valid?  And when there is a dispute, who has the burden of proving that the contractor accepted the quote in a timely manner?

The court addressed these issues in Piland Corporation v. Rea Construction Co., 672 F.Supp. 244 (E.D. Va. 1987), a Virginia case involving a contractor's bid to perform work at a government facility.  The contractor solicited a quote from a subcontractor to perform certain paving work on the project. The subcontractor phoned in its quote to the contractor, and it also gave the same quote to other bidders. When the subcontractor learned that the contractor was the low bidder and had been awarded the contract, it phoned the contractor to see if it had been awarded the subcontract.

The subcontractor called a second time after waiting a week to pass without hearing from the contractor.  Four more weeks ... no response from the contractor.  Understandably, the subcontractor assumed that it did not receive the award for the paving work and closed its files.  Several months later, the contractor sent an agreement to the subcontractor to sign. When the subcontractor refused to sign the agreement to perform the work at the earlier quoted price, the contractor filed a lawsuit for breach of contract.

At trial, the court focused on whether the contractor had notified the subcontractor in a timely manner about the subcontract award. The court looked to local industry practices, which dictated that it was customary for prime contractors to notify selected subcontractors within 30 days after notice of acceptance of its bid.  The court also determined that telephone notification was an acceptable industry standard. 

Ultimately, the court concluded that the contractor was unable to show by a preponderance of evidence that it timely notified the subcontractor of its acceptance of the quote.  Much of the decision was based upon credibility findings, where the court found the contractor's evidence to be weak and unconvincing.  The contractor's estimator could not remember details of the all and had one minor notation about notice to the subcontractor that read: "Called 2-2-84, bid okay."

On the other hand, the subcontractor's estimator was so positive in his testimony that he received absolutely no notice of acceptance and he closed out the file.  The court concluded that there was no acceptance of the bid and, therefore, there could be no breach of contract without a binding contract in place.

This case outlines the problems contractors may encounter when they fail to document all their actions. The contractor should have given written confirmation of notice of the award and acceptance of the subcontractor's bid.  Even if notice is given by telephone, it should be properly documented as well.  Finally, as to what constitutes a "reasonable time" to accept a bid, the parties should include the time for acceptance in the written offer to avoid a determination by industry practice.

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Owners, contractors, and subcontractors in Kentucky should carefully review their legal claims given a recent Kentucky Supreme Court decision.  On June 16, 2011, the Court joined the majority of other states and adopted what is commonly know as the economic loss doctrine.  Now, claims against  suppliers for product defects are legally limited to the parties’ contract and warranties. 

In Giddings & Lewis, Inc. v. Industrial Risk Insurers [pdf], the Court held that “a manufacturer in a commercial relationship has no duty under a negligence or strict products liability theory to prevent a product from injuring itself.”  Ending years of speculation regarding the applicability of this doctrine in Kentucky, the Court wrote: "We believe the parties’ allocation of risk by contract should control without disturbance by the courts via product liability theories.” 

In Giddings & Lewis, the manufacturer sold a sophisticated machining center to an industrial company.  After seven years of continuous operation, and after the contract’s express warranty expired, the machining center malfunctioned, throwing huge chunks of steel across the factory floor.  The costs of repair and other business damages were almost $3 million.  After reimbursing the machine’s owner for its losses, a consortium of insurance companies asserted a subrogation claim against the machining center’s manufacturer.   With the warranty expired, the insurance companies sued in negligence, strict liability, negligent misrepresentation, and fraudulent misrepresentation. 

Applying the economic loss doctrine, the Kentucky Supreme Court held that the purchaser could not recover from the manufacturer under any tort theory.  The consortium was limited to contractual remedies, all of which expired years earlier.  The Court side-stepped the claim for fraudulent misrepresentation, leaving it for another day, by holding that the insurance companies’ were actually claiming “fraud by omission,” which they could not prove as a matter of law. 

Caveat emptor is alive and well in Kentucky.  Construction project participants should review contracts carefully and negotiate warranties.  Recovery will be limited to contract terms and statutory remedies.

Hat tip to Cassidy Rosenthal and John Tate for the original write-up.

Image: Scott Beale

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Yesterday, highway and bridge contractors in Tennessee received an alert from from TDOT officials about the affect of heavy rain in the area: "I'm sure most are aware of the anticipated rise in the Mississippi River, but could you please share with all that are working in the Mississippi River area and the backwater areas of the Mississippi that they may want to consider moving to higher ground in the next weeks. Thanks." 

The warning came with more details from the Army Corps of Engineers about excavation activities near a floodwall and the rising waters:

. . . [W]e have analyzed the construction excavation immediately adjacent to the floodwall and have determined that when the Memphis Gage reaches a reading of 38, with predicted additional rise, the excavation adjacent to the floodwall must be filled in. The Mississippi River will reach 38 sometime next week with significant additional rise forecasted. . . .

Based on the predicted stages, significant uplift pressures are possible for some distance from the wall. These excavations may also need to be filled in order to ensure the integrity of the flood risk reduction system. . . .

The river stages currently being predicted are historic in nature and will test our flood risk reduction systems at a new level.

What should a contractor do with such historic conditions and unusually severe weather affecting construction activities?  In Daewoo Eng’g & Constr. Co. v. U.S., 557 F.3d 1332 (Fed. Cir. 2009), the contractor involved in building a 53-mile road around the island of Babeldaob submitted to the Corps a claim for delays and additional costs incurred because of high humidity, rainy weather and moist soils encountered on the project. The contractor sought $13 million in additional costs incurred and more than $50 million for future costs not yet incurred. The government filed a counter-claim alleging fraud and other violations.

Although the appellate decision focuses on the government's claims, the lessons learned about delays stem from the trial court 's opinion.  The trial court criticized the contractor’s witnesses for lacking credibility.  The court concluded that the $50 million portion of the contractor’s claim addressing future costs was no more than “a claim to gain leverage against the United States [and] violates the principles on which Congress enacted the Contract Disputes Act.”  Apparently, the contractor was seeking a substantial modification of compaction requirements for embankment that would have greatly reduced problems for the contractor. In the court’s view, the $50 million in future costs was an inflated figure inserted into the claim as a ploy to expedite the Corps’ decision on whether to modify the compaction requirements.

The most notable lesson from Daewoo is that contractors should seek the guidance of experts to assist in calculating damages and to perform a schedule analysis for their claims.  You've read my tips on proving weather delays before, but they are worth repeating:

•  The contractor is usually entitled to additional contract time, but not additional compensation for weather delays. Here, the contract terms and specifications are key to understanding what relief is available. 
• Delays must be attributable to "unusually severe" weather or weather "not reasonably anticipated."  Of course, by its very nature, such a claim will be factually driven. The contractor should be prepared to establish this by reasonable documentation, such as weather data from the National Oceanic and Atmospheric Administration.
• Weather analysis should be geographically limited.  What may be characterized as "unusually severe weather" on a Memphis transportation project may be different than a site in another part of the country.
• The delays must actually impact the schedule.  While you may think that down-time due to weather should automatically entitle the contractor to a time extension, it will depend largely on the contract provision addressing weather delays. You will have to determine whether the inclement weather affected material delivery, access to the site, safety measures, etc.

Finally, get guidance from your experts as soon as possible.  What most likely doomed the Daewoo contractor was the difference in methodologies in assessing the claim.  Although the claim was originally prepared using in-house personnel, the outside experts hired for trial abandoned altogether the methodologies the contractor utilized in the claim. The trial court concluded that “the experts’ method resulted in an entirely different claim to the Government . . . [and] . . . the claim that was certified by the plaintiff’s project manager became an orphan during trial, supported by no one and barely acknowledged by plaintiff’s attorneys.”

Even on the smallest claims involving the calculation of damages, contractors should—at a minimum—seek the guidance of an expert on the most desirable methodology and should permit the expert to review the results prior to inclusion of them in the claim submitted to the public entity.

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In the weeks leading up to the ABA Forum on the Construction Industry's annual meeting in Scottsdale, Arizona, a number of construction attorneys and I were feverishly reviewing submissions for this year's Construction Law Update.  The document is a compilation of cases and legislation affecting the construction industry.  The updates are provided throughout the year by attorneys all over the country.  

The following are examples of the types of information that you will find in the Construction Law Update: Cases and Legislation Affecting the Construction Industry (2010-2011):

• ARKANSAS: In Crumpacker v. Gary Reed Constr. Inc., 2010 Ark. App. 179, __ S.W.3d __ (Ark. App. 2010), the Crumpackers filed suit against Gary Reed Construction alleging that it had breached the implied warranty of habitability. Although this case does not represent a drastic change in Arkansas construction law, it provides a clear understanding of the facts required of a plaintiff in order to pursue a breach of implied warranty of habitability claim.
• CALIFORNIA: Assembly Bill modifying California Civil Code Sections 3084 and 3146. Assembly Bill 457 modifies California’s mechanic’s lien statutes with new notice requirements. The new law requires that a mechanic’s lien and Notice of Mechanic’s Lien now be served on the owner of the property, or on the construction lender or original contractor if those parties cannot be served. A proof of service affidavit must be completed and signed by the person serving the Notice of Mechanic’s Lien and would be included as part of the mechanic’s lien. The lien is unenforceable if it is not properly served according to the new statute. [NOTE: The legislation was scheduled to go into effect on January 1, 2011.]
• GEORGIA:  The Georgia Constitution was amended in 2010 to implement the Georgia Restrictive Covenants Act, O.C.G.A. § 13-8-50, et. seq., which dramatically changed the law regarding restrictive employment covenants in Georgia. In addition to providing express guidance to employers as to which types of covenants are enforceable (previous guidance had come only through caselaw), the Act allows courts to “blue pencil”, or edit, otherwise unenforceable restrictive covenants to make them enforceable. The new statute is effective January 1, 2011.
• TENNESSEE: In Ray Bell Construction Co., Inc. v. State, No. E2009-01803-COA-R3-CV, 2010 Tenn. App. LEXIS 737 (Tenn. Ct. App. Nov. 24, 2010), the Tennessee Court of Appeals affirmed the claims commissioner’s award of $2.5 million to the plaintiff. The case concerned an alleged breach of contract involving the incentive clause of a Tennessee Department of Transportation ("TDOT") road construction contract. Before the Claims Commission, TDOTargued that the contract language was clear in prohibiting an extension, alteration, or amendment of the incentive clause. The Claims Commission disagreed and found that the plaintiff was entitled to a modification of the incentive provision based on admissible parol evidence. Agreeing with the Claims Commission, the Court of Appeals held that “a definite latent ambiguity exist[ed] for which parol evidence not only [was] admissible, but frankly,absolutely necessary in both understanding and deciding the issues in this case.”

There are updates from all over the country.  In addition, we have included references to recent federal regulations and administrative rulings that affect the construction industry. If you would like a copy of the Construction Law Update, please send me an email.

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Initially filed as a class action suit in October 2010 against the USGBC, Henry Gifford's lawsuit took a turn this week when he filed an amended complaint.  The original lawsuit alleged violations of the Sherman and Lanham Acts for “deceiving users” of the LEED rating system.  The lawsuit questioned whether "LEED buildings use less energy than conventionally-built buildings.”

Gifford's amended complaint ([pdf) focuses on claims of false advertising under the Lanham Act and state law, as well as a claim for deceptive trade practices under state law.  Again, it is no longer a class action, but instead alleges certain damage to Gifford and a few others as professionals in the industry.  The amended complaint states:

USGBC's false advertisements divert customers from Plaintiffs to professionals accredited by USGBC and/or its affiliates who provide advice about how to obtain LEED certification. Plaintiffs are losing customers because USGBC's false advertisements mislead the consumer into believing that obtaining LEED certification incorporates construction techniques that achieve energy-efficiency.

Should Owners and Contractors Worry about Gifford's Suit Against USGBC? At this point, the answer is a simple ...  No ...  While it is interesting to follow the legal commentary about the lawsuit, the claims are in their infancy stage.  The USGBC will be afforded an opportunity to challenge Gifford and his co-plaintiffs' standing to bring the law suit.  "Standing" is one of those Law School 101 principles that says a party must demonstrate to the court sufficient connection to and harm from the action challenged.  In other words, they must have a dog in the fight.

Whether you are an owner-developer or contractor working with a green project, the real lesson from the Gifford show is to address LEED certification and energy performance in your contracts.  As an owner, you may want the LEED certification from the USGBC and you may want your building to achieve a certain energy performance.  As a contractor, you cannot guarantee certification, but you may be obligated to construct the building with certain performance guarantees. 

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Today's guest post is by fellow Stites attorney Bob Goodrich, Jr., who has been designated by the American Bankruptcy Board of Certification and the State of Tennessee as a specialist in business bankruptcy. For more then 25 years, Bob has represented creditors, creditors' committees, landlords, and other interested parties in bankruptcy and insolvency related matters in state and federal courts. If you have questions, you can contact Bob by email or phone at (615) 782-2231.

Bankruptcy lawyers are often asked to “bankruptcy proof” a transaction, and they often explain that an agreement not to file bankruptcy or under which property is forfeited or a contract terminated by a bankruptcy filing is likely unenforceable. There are, however, bankruptcy proofing tactics which have some degree of success, as illustrated by In re DB Capital Holdings, LLC, BAP No. CO-10-046, Bankr. No. 10-23242 (10th Cir. BAP December 6, 2010).
 
In this case the Debtor was a Colorado LLC that owned a condominium project, encumbered by a mortgage loan in favor of WestLB AG (“WestLB”). The Debtor’s manager attempted to put it into bankruptcy. The Debtor’s operating agreement originally did not expressly empower the manager to file bankruptcy for the LLC and stated that the manager must cease operating as manager “upon dissolution or bankruptcy,” necessitating a change in management if a bankruptcy were filed. The LLC agreement also prohibited the manager from doing any act that would make it impossible to carry on the ordinary business of the LLC. Citing previous authority, the bankruptcy court and the appellate court agreed that filing a bankruptcy prevented the LLC from carrying on the ordinary course of business. Both courts found that the manager was not authorized to place the LLC in bankruptcy. Additionally, an amendment to the LLC agreement, inserted after some negotiations with WestLB, expressly prohibited the filing of a bankruptcy. The court found no evidence of coercion but found it did not need to opine on that issue because it concluded the LLC was not eligible for bankruptcy under the original LLC agreement.
 
The case is a reminder that an entity’s ability to act, including its power to file bankruptcy, is based on state law and the authorizing documents that empower the entity to act. To the extent that such authorization is not present, the entity cannot file bankruptcy, but it can be placed into bankruptcy involuntarily by its creditors. Also, so long as the members vote to change the LLC agreement, it can be amended to empower the filing of a bankruptcy.  If, however, the requisite voting is not there, no amendment can be made. Lenders sometimes control a vote or votes so that the requisite votes cannot be obtained to empower the entity to file bankruptcy, but these arrangements sometimes raise breach of fiduciary duty issues with respect to the holder of the vote who is acting at the direction of the lender.

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If you are a contractor, you love hearing about these types of boxing tales: Contractor works his butt off. Owner benefits from the accelerated work. Contractor seeks early completion bonus. Owner rejects the claim based upon technicality. Contractor fights in court ... fights on appeal ... and wins! 

That is exactly what happened in Ray Bell Construction Co. v. TDOT (pdf), a 2-1 "split decision" released by the Court of Appeals of Tennessee on November 29, 2010.  In RBCC, the claims commissioner awarded Ray Bell Construction Company a $2.5 million early completion bonus.  The primary issue in dispute was whether the completion date in the parties' contract could be amended or moved to account for the impact of increased quantities and other delays.  TDOT argued that the completion date could be modified for purposes of the disincentive payment and liquidated damages, but under no circumstance could the date be modified for purposes of the incentive payment.  The contractor argued that the date could be modified for all purposes, including the incentive payment.

The primary issue in the litigation was whether the contractor could rely on evidence of other projects where TDOT had granted an extension to the incentive date.  During the dispute, the contractor learned from TDOT officials that there was a list of "existing" projects where TDOT and its financial participant, the Federal Highway Administration, had agreed in a set of letters between them that the incentive date could be moved, despite a change in FHWA policy.  Although the RBCC project was existing at the time of the TDOT-FHWA letters, it was not included on the list of "existing" projects. 

In the majority opinion, the court of appeals affirmed the claims commissioner's finding that “a definite latent ambiguity exist[ed] for which parol evidence not only is admissible, but frankly, absolutely necessary in both understanding and deciding the issues in this case."   In his dissenting opinion, Judge Swiney believed that the parties' contract was "crystal clear" in not allowing a modification to the incentive payment date.   The RBCC decision is a worthy read for a number of reasons:

1. The decision provides a good overview of the public contracting claims process. Like many other jurisdictions, the Claims Commission in Tennessee resolves claims involving tax recovery, state employee workers' compensation, negligence by state officials or agencies, and contract claims involving the State. The RBCC dispute went to trial before a claims commissioner and was appealed to the court of appeals.
2. The decision summarizes the two sides to a contract interpretation question.  Like almost every construction dispute, the contract will determine the rights and obligations of the parties.  In this case, a $2.5 million early incentive payment was at stake and the decision turned on whether there was an ambiguity in the parties' contact and what evidence could be used to resolve that ambiguity.  The majority and the dissent describe both sides to the issue.
3. The decision involves a truly "interesting" factual story.  As noted above, the dispute involved a multi-million dollar claim ... design delays ... easement delays ... unexecuted change orders ... quantity overruns ...  contract ambiguities ... a compelling letter by the state agency ... a compelling letter by the federal agency ... and much more.

Will there be a Round 3?  Don't know.  TDOT can file an application for permission to appeal to the  Tennessee Supreme Court, which must be filed within 60 days of entry of judgment by the Court of Appeals.  According to the appellate rules, the application shall be granted if two members of the Supreme Court are satisfied that the application should be granted.  In determining whether to grant the application, the Court looks to: (1) the need to secure uniformity of the decision; (2) the need to secure settlement of an important question of law; (3) the need to secure settlement of questions of public interest; and (4) the need for the exercise of the Supreme Court's supervisory authority.  At this point, it is a waiting game on whether there will be Round 3.

[Note: I was one of the boxers in the ring, along with lead counsel Greg Cashion of Smith Cashion & Orr PLC, at the trial court and court of appeals, but I moved law firms before oral arguments in the appeal. Special thanks to Greg for allowing me to write about this victory.]

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I have often wondered whether there is such a thing as too small a dispute.  Well, the parties in Earl Faulkner v. Tom Emmett Construction Company (pdf) determined to take their $3,000 construction dispute to the Tennessee Court of Appeals.  In the end, the Court gave some good instructions on the "first material breach" rule, which applies in many states.

 The Owners hired the Contractor to build a new driveway at their home.  The total contract price was $18,000 and the Owners refused to pay the balance of $8,000 because they were dissatisfied with the workmanship of the driveway.  The Owner sued the Contractor, seeking the cost to remove and replace the allegedly defective driveway. The Contractor claimed that the driveway was properly constructed and filed a counterclaim for the remaining $8,000 balance owed on the oral contract.

The trial court concluded that any problems with the driveway were not sufficient to require that it be removed and replaced.  Because there was a problem with how the concrete on one portion of the driveway had been poured, the trial court ordered the Owners to pay only $5,000 of the remaining
$8,000 owed on the contract.

The appellate court affirmed the findings of the trial court, but modified the judgment.  The court held that the Contractor committed the first material breach of the contract when it failed to construct the driveway in accordance with the plans.  Accordingly, the Owner was relieved of any obligation to pay:

A party who has materially breached a contract is not entitled to damages stemming from the other party’s later material breach of the same contract. Thus, in cases where both parties have not fully performed, it is necessary for the courts to determine which party is chargeable with the first uncured material breach.

. . . We conclude that [Contractor's] admitted failure to use a gravel base prior to pouring the driveway extension constitutes a material breach of the contract, thereby prohibiting [Contractor] from challenging [Owner's] later material breach of failing to pay the balance of the contract price.

Based upon the above reasoning, the appellate court concluded that the Owner was not required to pay the remaining $3,000 breach of contract damages awarded by the trial court. 

While the amount in controversy in Faulkner does not seem significant, the decision provides a good illustration of the first material breach rule.

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Some court decisions provide little instruction for future disputes.  Other court decisions give you a great road map for analyzing your claims.  Every now and then you find a decision where the court is split and you wonder which side is right, such as the opinion in Davis v. McGuigan (pdf), issued by the Supreme Court Tennessee on October 26, 2010.

A husband and wife alleged that the appraiser, who was hired by the bank financing the husband and wife’s home construction, recklessly overestimated the value of their proposed construction and that they reasonably relied on the appraisal value to their detriment. The intermediary appellate court affirmed the trial court’s ruling, holding that an appraisal is an "opinion" that cannot form the basis for a fraudulent misrepresentation claim. 

In the (3-2) opinion by the Supreme Court of Tennessee, the majority held that an "opinion" can form the basis of a fraudulent misrepresentation claim. The majority also concluded that genuine issues of material fact precluded summary judgment as to the husband and wife’s claims against the appraiser.  The dissent reached a different conclusion as to the facts of the case: "Even though an opinion can provide the basis for a fraudulent misrepresentation claim, the undisputed facts in this record, and the inferences reasonably drawn from these facts, support only the following conclusions."

The opinion in Davis is 32 pages with both the majority and dissent opinions.  The majority opinion provides a good road map for what elements are required to prove an intentional misrepresentation claim, including an analysis of each element and the applicable factual allegations.  The dissent opinion provides a good road map of proof required to establish summary judgment and to shift the burden of production to the non-moving party.

If you are a legal practitioner, the Davis decision is worthy of a read (although it may take you some time to fully digest the two opinions).  If you are an owner, developer, seller or appraiser, be warned that opinions may be used to establish an intentional misrepresentation claim.

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In Kampert v. Valley Farmer Cooperative (pdf), an opinion issued on October 19, 2010, the Tennessee Court of Appeals validated a forum selection clause in a construction contract that specified venue in a county other than where the property was located. 

The primary issue in dispute was whether the proper venue in a case involving the breach of construction contract lawsuit should be the county named in the forum selection clause of the contract, or in the county where the construction project and land was located. 

In Kampert, the owner entered into an agreement with the contractor to construct an operational dairy facility on the Kamperts’ farm, including barns, sheds, and milking facilities. The contract contained a forum selection clause requiring that "venue for any litigation shall lie in the Circuit or Chancery Court for McMinn County, Tennessee.”

Following disputes between the parties, the owner filed a lawsuit in Giles County (where the property was located) for breach of contract, negligence, civil fraud, intentional infliction of emotional distress, and violation of the Tennessee Consumer Protection Act. The trial court denied the motion to dismiss for improper venue, holding that the property was located in Giles County and, thus, venue was proper.  Although this may seem to be a straight-forward analysis, the opinion contained some noteworthy points.

First, the venue issue must have been important to Tennessee jurisprudence because the Court of Appeals granted an "extraordinary appeal" under Rule 10.  The trial court concluded that the claim involved injury to land, which required that suit be brought in the county where the project was located.  The contractor filed a request for an interlocutory appeal, which the trial court denied. The appellate court granted the motion for extraordinary appeal, perhaps because the case addressed an ambiguous area of law or involved important legal issues.

Second, breach of construction contracts do not necessarily invoke a "local action involving land."  The appellate court noted the distinction between causes of action that are transitory versus local.  A transitory action is based on a cause of action of a type that can arise anywhere, whereas a local action can only arise in the particular county because the injury is tied to that locality.  Here, a breach of construction contract would be transitory, but an injury to property claim would be local.

Third, venue provisions and forum selection clauses are valid and enforceable.  Notably, the appellate court made a distinction between injury to existing buildings and injury to new buildings: 

In contrast, the alleged negligence in the present case involved faulty construction of new buildings on the plaintiffs’ land.  If we were to hold this to be a local action, it would effectively make all actions on construction contracts local, and it would render void any forum selection clause in a construction contract that designates venue in a county other than the one where the construction takes place.

The court found statutory support for its conclusion that contractual venue provisions are valid under Tennessee Code Section 66-11-208.

It is suggested that the dispute is resolved "for now" because it may be appealed to the Tennessee Supreme Court.  An interesting legal issue is the Court of Appeals' reliance on the statutory provisions of section 66-11-208, which address venue in cases involving real property. 

Subsection 208(a) provides that a contract requiring application of the laws of another state or requiring resolution of disputes in another state involving improvement of property in this state is void and unenforceable.  Subsection 208(b) provides that for projects partially located in Tennessee and partially located in another state, venue can be in any state in which part of the property is located. 

Although the provision expressly applies to multiple state disputes, the appellate court in Kampert concluded (perhaps correctly, perhaps incorrectly) that the provision applied to venue challenges involving two counties in Tennessee.  The "Supremes" may be asked to weigh in on the subject.  For now, contractual provisions calling for venue in one county involving construction projects in another county are valid.

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The Tennessee Court of Appeals released another opinion in a construction dispute earlier this week.  In East Tennessee Grading v. Bank of America (.pdf), the court grappled with competing ownership claims and made its decision primarily on grounds of timing.

In this case, the owner of a residential development did not pay the excavation contractor.  The contractor filed suit to enforce its $2 million lien for excavation and road work.  An agreed judgment was entered as to the contractor's claims against the owner, awarding judgment for materials and labor performed on the property.  It was discovered that one parcel of the total 150 acres of property was owned by someone other than the developer.  That small parcel was subject to a deed of trust in favor of Bank of America.

The trial court held that Bank of America had priority over the contractor as to 1.9 acres because the contractors had not filed its "Notice of Lien" in a timely matter to maintain priority over the subsequent owners pursuant to Tenn. Code Ann. § 66-11-112.  However, the trial court also held that the contractor had priority over Bank of America as to the remaining 4.46 acres because the contractor's Notice of Lien was filed before the Amended Deed of Trust in favor of Bank of America was filed.  The appellate court affirmed the trial court's decision

The decision provides some key practice points for lien claimants:

• You must know, understand and follow your deadlines.  The case was brought under the pre-2007 amendments and the court in East Tennessee Grading had to carefully walk through the timeliness of notice requirements.  Also, since the contractor abandoned the work based upon the owner's non-payment, there was an additional timeliness question for "completion or abandonment" of the work.  You need to make sure you understand all the notice requirements and filing deadlines.
• A lien may be enforced even against subsequent purchasers.  In limited circumstances, if a sworn statement is not recorded within the applicable statutory time period, the lien's priority as to subsequent purchasers or encumbrancers is determined as of the date of the recording.  In other words, you may lose priority over a subsequent purchaser even if the work was performed prior to the sale.
• Tennessee is now a "substantial compliance" state.  This is a new standard within the past few years. Tennessee lien law once required “strict construction,” as was stated in the East Tennessee Grading opinion.  However, the General Assembly changed the law in 2007 to require only “substantial compliance.”  The new statute is to be “construed and applied liberally.” T.C.A. § 66-11-148(a). This was a significant change in the law.

Image: Catherine on Flickr

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Just because you may win on appeal in one claim does not mean that you have properly preserved your other claims.  This was a hard lesson to learn for one developer in the case of B&B Enterprises v. City of Lebanon (pdf), a decision recently issued by the Supreme Court of Tennessee on August 31, 2010.

In B&B Enterprises, the developer of a residential subdivision filed suit against the City, alleging that the planning commission had denied it all economically beneficial use of its property by wrongfully refusing to approve the final plans for two phases of its subdivision. 

Although there is more history to this dispute, the real rub occurred after the developer appealed to the trial court the planning commission's refusal to approve the final plan.  Both the trial court and the appellate court held that the planning commission had acted arbitrarily and capriciously when it declined to approve the plans for Phases Two and Three.  Thereafter, the developer filed a complaint seeking monetary damages based upon claims of regulatory takings and violation of civil rights.

In those proceedings the City argued that the applicable one year statute of limitations barred the developer's claims.  Ultimately, the Supreme Court of Tennessee concluded that the claims were untimely because the developer "knew" that the City's conduct occurred when the planning commission denied the final plans.  The Court rejected the developer's claim that the City's actions were not "permanent" or "complete" because it sought (and won) judicial review of the planning commission's denial.  The Court reasoned:

The Planning Commission’s action on February 26, 2002, put B & B Enterprises on notice that its reasonable investment-backed expectations for the use of its property had been frustrated. Regardless of the eventual outcome of the judicial proceedings, the Planning Commission began interfering with B&B Enterprises’s economically beneficial use of its property by no later than February 26, 2002.

Do you see the fine line here?  The Court focused on the planning commission's actions and not the subsequent actions of the courts.  Again, it is the final decision of the agency that triggers the claim and not whether subsequent review of that decision provides relief.  Since I am a visual-learner, it may be easier to understand the time line this way:

UNTIMELY LAWSUIT = Planning commission's denial→ judicial and appellate review of denial → appellate reversal of denial → suit to seek damages relating to denial.

TIMELY LAWSUIT = Planning commissions denial → review of denial and suit to seek damages relating to denial → judicial and appellate review if necessary.

While you make not agree with the reasoning of the court's decision in B&B Enterprises, the lesson learned is one about preservation of rights at the earliest stage possible.  Know and understand your deadlines.

Image: husfse on Flickr

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I previously blogged about the historic flooding in Nashville in May, including insurance flood claims,  building permits for repairs, and statute of limitations on mold claims. I also recently blogged about the leadership lessons from the flood recovery by Colin Reed, the CEO for Gaylord Entertainment. 

It seems that there is a trend of newsworthy items involving the flood damage at Opryland, including recent news that Opry Mills just sued its insurers for more than $150 million in flood coverage.  As reported in the Nashville Post, the owner of Opry Mills Mall filed a lawsuit against its property insurers yesterday afternoon, alleging that the insurance companies wrongfully refused to honor a majority of the $200 million in flood insurance policies.  The complaint, available here, alleges that the insurance coverage denial could delay work to repair damage from the historic flooding.

The complaint filed by Greg Cashion provides an outline of the types of causes of action involved in a major property loss such as the flooding at Opry Mills. These include:

• Breach of contract.  This claim is for the insurance companies' failure to provide coverage within the terms of the insurance policies.  At dispute will be the applicability and meaning of the insurance policy terms, exclusions, and exceptions.  Notably, this lawsuit will involve the issue of whether the mall is part of a "high hazard flood zone" for which a certain $50 million limitation applies. The lawsuit alleges that the mall is not listed in such a zone.
• Estoppel.  This claim alleges that the insurance companies issued certificates of insurance to Opry Mills for full coverage and with "no mention" of any limitation of liability.  Under these circumstances, the complaint alleges, the insurance companies are estopped from relying on any limitation of liability clause.
• Declaratory Judgment.  This claim seeks a determination from the court that the policy coverage is valid and that there is no limitation of liability of $50 million.  The importance of declaratory relief, particularly in this instance, is to get a judicial determination as soon as possible so that funds will be available to complete the construction repairs.  
• Negligence.  There is a claim based upon the alleged negligent actions of the broker and agent of the insurers.  According to the complaint: (1) the broker/agent had a duty to Opry Mills to perform its services in a professional manner; (2) the broker/agent had a duty to correctly represent the coverages; and (3) the broker/agent breached that duty, which has caused in whole or in part the losses alleged. 
• Consumer Projection Act.  Finally, the complaint contains a statutory claim for violation of Tennessee's Consumer Protection Act for deceptive practices or practices declared unlawful for insurers.  If proven, this claim provides recovery for additional damages and attorney's fees.

As noted in the Nashville Post article, the lawsuit may drive the construction efforts.  According to Opry Mills president Gregg Goodman, "work will cease, delaying the mall’s reopening pending its success in this suit."

 Image: Ritab38315 on Flickr

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It can be a daunting task to mine through the federal and state laws, regulations and court decisions to determine what rights and remedies you may have as a disappointed bidder on a public project.   In a case involving a state university construction project, the Ohio Supreme Court recently provided a good road map of what do in such situations.

In Meccon, Inc. v. University of Akron (pdf), a contractor sought a temporary restraining order and other relief resulting from the university's failure to award it the HVAC contract.  The facts of Meccon are intricate because the project involved multiple scopes of work that could be submitted by offerors as stand-alone bids or combined bids.  Ultimately, the contractor alleged that the university wrongfully awarded three of the stand-alone bids to the awardee—after the awardee had withdrawn its combined bid—which was in violation of the university's own "Instructions to Bidders" documents and public bidding statutes.  The contractor sought injunctive relief, as well as damages for its bid-preparation costs.

On appeal, the Supreme Court of Ohio concluded that when a rejected bidder establishes that a public authority violated state competitive-bidding laws in awarding a public-improvement contract, that bidder may recover reasonable bid-preparation costs as damages if: (1) the bidder promptly sought, but was denied, an injunction to suspend work on the project pending resolution of the bid dispute; and (2) it is later determined that the bidder was wrongfully rejected and injunctive relief is no longer available.  [Note: You can view the oral arguments before the Ohio Supreme Court by clicking here.]

Wow.  That's a mouthful!  What does that practically mean? The decision provides a useful road map for what the court called "mitigation of damages" in a public contract.  For instance, if a rejected bidder alleges that the public authority violated its competitive-bidding laws, the bidder should immediately seek injunctive relief from the court or agency to stop the award of the contract to the successful bidder.

If the request is granted, then the wrongfully rejected bidder will have avoided the damages that would otherwise flow from the wrongful conduct by the public authority.  If the request is denied, then that means the allegation of "wrongful conduct" by the public authority will not be determined until a later date after a full hearing on the merits.  Absent the temporary restraining order or preliminary injunction, the rejected bidder will never be able to perform because work will have commenced or will be completed.  Under the Meccon decision, the rejected bidder is entitled to recover reasonable bid-preparation costs where it seeks, but is denied, injunctive relief and it is later determined that the bid was wrongfully rejected.

Hat tip to fellow colleague Mark Leach for sending the case!

Image: Michael Meiser

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For years, I have paid my homeowner's association dues.  Recently, my neighbors selected me to serve on the board (... I was unopposed and I had to promise to name my next child after the development ... ).  I have even been involved as counsel in a number of HOA disputes over the past few months.  In Tennessee, the only thing you need to know is that the courts will enforce those HOA covenants.

Last week, the Court of Appeals issued its opinion in Hershey v. Cathey (pdf), a dispute involving the HOA's Architectural Control Committee.  When the defendants began construction of a fence on both of their lots, the HOA filed a lawsuit to stop the construction.  The HOA claimed that the defendants had not obtained approval to erect a fence and that the fence was not in compliance with the applicable restrictive covenants. The defendants asserted that they obtained the required approval and that strict compliance with the restrictions had been waived.

The trial court held the following: (1) that plans and specifications were required to be submitted to the Architectural Control Committee for its approval; (2) that no plans or specifications were ever submitted; and (3) that the defendants had not obtained the requisite approval to construct the fence at issue.  Accordingly, the trial court entered an order requiring the defendants to remove the fence and to comply with the Architectural Control Committee restrictions.  The appellate court affirmed that ruling.  Here are two lessons from the case: 

First, the courts will enforce HOA covenants.  Whether you are a new homeowner or you are one of the leaders in a homeowner association, you must read your restrictive covenants.  The architectural guidelines may be strict or broad, depending on how they are written.  The court is going to look to the express language of the covenant to resolve any disputes. 

Second, you must prove your case at the trial court.  The decision by the appellate court in Hershey was based largely upon the factual findings of the trial court.  Indeed, the appellate court wrote: "The trial court made a specific finding of fact that Defendants did not obtain approval to build the fence."  The appellate court presumes factual findings are correct unless the preponderance of the evidence is otherwise. 

Image: glen edelson

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As my four children were running through the house this weekend, I inevitably yelled at them, "No running in the house!"  My five-year-old responded, "Just passing through..."  Imagine the smile I had this morning when I read about a recent Tennessee appellate court decision about pass-through claims against the State.

In Kay and Kay Contracting, LLC v. Tennessee Dep't of Transportation (pdf), the contractor entered into a $10.2 million contract with TDOT for the construction of a new bridge on Interstate 75.  The contractor then entered into a $3.1million subcontract with the grading and excavation subcontractor. 

Problems occurred during performance and both the contractor and subcontractor filed claims against TDOT for additional compensation.  TDOT rejected the subcontractor's claim because it did not have a contract with the subcontractor and, thus, it argued that sovereign immunity barred any claim by the subcontractor.  Although the Claims Commission agreed that the subcontractor was not a proper party to the lawsuit, it allowed the contractor to pursue the claim against TDOT as  "pass-through" claim on behalf of the subcontractor.

The Court of Appeals of Tennessee reversed, holding that the pass-through claim was prohibited by the doctrine of sovereign immunity.  Under that principle, the state is immune from lawsuit unless that immunity is expressly waived by statute or otherwise.  The Tennessee legislature has expressly determined that a written contract with the State is a waiver of the immunity for any lawsuit on the breach of that contract.  See Tennessee Code 9-8-307(a)(1)(L).

In Kay and Kay, the appellate court concluded that the contractor was not entitled to pursue the pass-through claim on behalf of the subcontractor, who did not have a contract with the state.  The court reasoned:

We acknowledge that we must give Tenn. Code Ann. § 9-8-307(a)(1)(L) a liberal construction. However, in so doing we cannot amend, alter, or extend the statute beyond its obvious meaning. Stewart, 33 S.W.3d at 791. The obvious and ordinary meaning of requiring a “written contract between claimant and the state...” is not susceptible of more than one meaning. A contract is either written or it is not. If we allow pass-through claims, then we are allowing a party to sue the State and prosecute the claim of a different entity that has no contractual relationship with the State. This is contrary to the clear and unambiguous language of the statute requiring a written contract between the claimant and the State before the State can be sued for breach of contract. We again note that if the General Assembly believes that allowing pass-through claims is in the State’s best interest and public policy favors allowing such claims, we invite the General Assembly to amend the relevant statutory provisions to expressly allow such claims.

The appellate court expressly held that its decision applied "only to pass-through claims wherein subject matter jurisdiction is predicated on the removal of the State’s immunity pursuant to Tenn. Code Ann. § 9-8-307(a)(1)(L)." 

The court expressed no opinion on whether pass-through claims otherwise are permitted in Tennessee in other contexts.  That decision was left for another day ... another dispute. 

Image: Roger Smith

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Fellow blogger Matt Handal did a post today about his Livescribe Pulse Smart Pen.  I love technology and I absolutely love this gadget!  However, Matt's post raised a red flag to me about the discoverability of taped or recorded conversations in litigation.

For years, lawyers have been requesting "electronic discovery" from the opposing side.  Traditionally, the debate has been about emails and native electronic files.  How are we to collect the information?  How are we to process the information?  How are we to produce the information? But the debate mainly focused on computer servers, desktops and laptops.

Then came mobile devices, such as Blackberries and iPhones.  Is the information on these devises subject to discovery?  Instant messages and other data stored on mobile devices are generally discoverable under the applicable rules in your jurisdiction covering e-discovery.   In one reported case, the court found it suspicious that all data had been wiped from two Blackberries and ordered sanctions for spoliation of evidence.

So what about the data from a Livescribe Smart Pen? I would treat this data as any other form of data ... whether in hard-copy or electronic format.  If a construction schedule is discoverable, then the native Primavera files are most likely subject to production.  If a particular written statement is discoverable, then the recorded version is most likely subject to production.  If hand-written notes are discoverable, then the electronic notes transcribed by the smart pen are most likely subject to production. 

In the end, I am extremely leery of recording any attorney-client conferences, as well as any meetings with consultants and testifying experts.  The Livescribe Smart Pen would be great for hearings and other public meetings.  But understand that the digital recording may be otherwise discoverable depending on your jurisdiction.

Matt Handal agrees: "For privacy reasons I restrict my use of the smart pen to proposal and strategy related meetings."

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You’ve heard about Nashville’s historic flood almost six weeks ago and all the damage that it has caused to thousands of homes throughout Middle Tennessee. Just this morning, Nashville Metro government sent 305 buyout letters to homeowners whose homes were damaged within the floodway, the area where water flows most swiftly during a flood. Today’s post is about a decision released yesterday by the Court of Appeals of Tennessee regarding what may occur when a restoration contractor fails to remediate toxic mold following significant water damage. 

In Victoria Dutton v. Farmers Group, the Plaintiffs’ home was flooded and incurred severe water and mold damage when the hot water tank burst. The Plaintiffs began to experience various illnesses after moving back into the home. Despite assurances from ServePro (the remediation contractor) and the Plaintiffs’ insurance carrier that the home was safe, the Plaintiffs discovered that their home was contaminated with toxic mold almost three years after moving back into the home. The Plaintiffs filed suit against various defendants alleging distinct causes of action.

The trial court held that the Plaintiffs’ claims were barred by the applicable statute of limitations. The Court of Appeals reversed, holding that the discovery rule tolled the applicable statute of limitations.  In Tennessee, the discovery rule provides that a cause of action accrues and the statute of limitation begins to run when the plaintiff knows or should have known that an injury has been sustained as a result of some wrongful or tortuous conduct by the defendant. 

In this case, the Plaintiffs did not connect their illnesses to the toxic mold exposure in the home until close to three years after they moved back in the home. The Court found that the defendants attempted to remediate the mold issues in 2002 and the Plaintiffs had a good faith belief that the problem was resolved. The Plaintiffs did not discover until 2005 that the flooring throughout the home was not removed as originally advised in the 2002 cleanup of the home. After testing, it was found that the linoleum flooring was severely contaminated with toxic mold spores. The Court reasoned:

Without the obvious signs of mold contamination in the home, Plaintiffs had no indicators that mold contamination caused their health problems. . . . Eventually, [the insurer] retested the home, which confirmed that Plaintiffs’ home was contaminated with toxic mold. Until a doctor mentioned a possible allergic reaction as to the cause of [Plaintiffs] injuries, Plaintiffs did not have sufficient facts to investigate their potential claims. Under these circumstances the discovery rule tolled the statute of limitations.

The Victoria Dutton case is a good example of how the courts will apply the discovery rule to personal and property damages cases involving residential construction.  Factually, the case also highlights the severity and seriousness of toxic mold exposure following a significant flooding event. Finally, the case demonstrates that there may be certain substantive defenses in your state that preclude you from recovering on a claim including, but not limited to, a statute of limitations, the discovery rule, and the tolling of the statute of limitations.

Image: Eric Hamiter

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Is it too late to discuss a case from 2009?  Nah.  Especially if the court released the opinion within the past two months.  And according to the decision in Shelby County v. Crews (pdf), there are times when it may be too late to withdraw a condemnation petition. That line in the sand appears to be the date after the public entity takes legal possession.

In Shelby County, the Court of Appeals of Tennessee recently held that the County was precluded from backing out of condemnation proceedings too late in the game. The County had possession of a small strip of land owned by the Crews. The County used the land as a parking area for a nearby penal farm and had gone as far as to pave the property. In the summer of 2004, the County filed a Petition for Condemnation of the strip of land pursuant to the condemnation statutes. The County offered approximately $40,000 as to the amount of compensation for the family land owners. The family did not contest the County’s right to acquire the property, but disputed the amount of compensation it should receive for the land. Thereafter, the trial court entered a Consent Order that granted “all property rights and ownership in fee simple” in the property to the County. The trial court scheduled a trial on the issue of compensation for a later date.

One week prior to the scheduled trial date, the County filed a Notice of Non-Suit, which is a document that gives notice of a voluntary dismissal of the condemnation proceedings.  The Crews filed an objection to the non-suit order, arguing that the County was not entitled to dismiss the case because it took possession of the property. The issue before the court was whether the County was entitled to voluntarily dismiss the condemnation after it took possession of the property.

In a short five-page opinion, the court held that the County was precluded from voluntarily dismissing the condemnation proceedings after it had acquired ownership and legal right to possession, leaving only the issue of compensation to be decided.

While this issue may seem like a no-brainer to you, the case is important because it establishes a limitation on a public entity's power to condemn property.  The public entity can no longer take possession of the property and later "back out" of the deal if compensation looks to fall in favor of the private owner.

Photo: Flickr | ToniVC

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Every construction litigator in the residential arena knows that a state's consumer protection laws are good grounds for disputes.  Will my client get treble damages?  Will they recover attorney fees for deceptive trade practices?  Does my client have any defenses to these types of claims?

In Fayne v. Vincent (pdf), the Supreme Court of Tennessee held that the Consumer Protection Act applied to real estate professionals engaged in the sale of their personal residence. The case involved problems with a septic tank that were discovered after sale of the residence to the purchasers.  Mr. Vincent was a builder and developer and his wife was a realtor. Mr. Vincent was the developer of the neighborshood and he constructed the home in question, moving into the house after it was completed. Mrs. Vincent signed the Tennessee Residential Property Condition Disclosure Statement in her dual capacity as owner of the property and as realtor for the property.

After the purchasers moved into the home, they began to notice odorous fluid seeping from around the septic tank. After investigation, the purchasers filed suit against the builder and the realtor for various claims including negligent misrepresentation, fraud, deceit, and violation of the Tennessee Consumer Protection Act.

Following a two-day jury trial in the trial court, an appeal to the Court of Appeals, a remand back to the trial court, and a subsequent appeal, the Supreme Court held that the sale of the home was covered by the Tennessee Consumer Protection Act (TCPA). Specifically, the Court recognized that the TCPA does not apply to sellers who are “not in the business of selling property as owners or brokers” and therefore that “persons making an isolated sale of their home [is] not covered.” The Court reasoned:

We adhere to the holding ... that homeowners participating in the casual and isolated sale of their personal residence and not in the conduct of trade or commerce cannot be sued for damages under the TCPA. This principle applies to developers, contractors and realtors who are selling their personal residence in a casual or isolated sale and who are not performing or providing professional services to facilitate or finalize the sale. However, we have also concluded that developers, contractors, and realtors cannot insulate themselves from liability under the TCPA simply by owning and briefly residing in a house before they offer it for sale as their personal residence.

Accordingly, the Supreme Court held that the TCPA applied to the facts of this case.

The Fayne case is a good reminder to developers, contractors, and realtors, as well as to purchasers of residential property, to know and understand the full breadth of your state’s consumer protection laws.  Imagine the case of where verbal abuse by the builder against a purchasing couple gives rise to a claim for intentional infliction of emotional distress and consumer protection act violations.  It happens.

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As reported by the Tennessee Bar Association, the 2010 Tennessee State High School Mock Trial Competition got underway yesterday with the release and publication of the mock problem. The case involves a dispute over the design and construction of a 400,000 square foot distribution center featuring a concrete slab-on-grade floor. The primary issue in dispute is whether the work performed by the contractor constituted a breach of contract or professional negligence. A copy of the problem may be downloaded on the TBA’s website.

The case materials for this year's problem were developed in large part by the Tennessee Association of Construction Counsel, which is an association of about 100 attorneys from across the state with practices serving contractors, building material and equipment suppliers, architects, engineers, and building owners and developers.

Marisa Lee Combs, the Chair of the Tennessee State Mock Trial Committee and a construction attorney at Lewis King in Nashville, is a product of the mock trial competition. In response to an inquiry, Marisa said, " If not for that experience, I am not sure I would have chosen a career in the law. Other classmates of mine were interested in drama, so they loved playing witness roles. To me, it is a great way to show the students how complicated and fun the law can be."  

To me, it is exciting to see a future generation of thinkers, problem solvers and litigators at such an early age in their education. I am also excited to see that this year’s problem focuses on a construction dispute that will provide for some very interesting trial arguments. (Since I am a construction lawyer who regularly litigates these types of disputes, I will refrain from providing any more commentary on this issue.)

Kudos to the Tennessee Bar Association and the Tennessee State High School Mock Competition for their extraordinary efforts in creating and supporting this great program. And a hearty good luck to all the young participants!

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I love seeing a case zig zag through the appellate process ... and I especially enjoy reading one where intermediate appellate court reverses the trial court and the highest court then reverses that intermediate appellate court.  I know, I'm sick.

In a decision released yesterday, Goff v. Elmo Greer & Sons Construction Company, the Supreme Court of Tennessee reversed the Court of Appeals and reinstated the trial court's decision approving an award of punitive damages in a construction case.  The owners of the property filed suit against the general contractor on a highway widening project.  The owners contracted with the general contractor to use their adjacent land as a lay down area in exchange for compensation.  When the contractor failed to pay the full contracted amount, the owners sued.

Following a trial, the jury found in favor of the land owner and awarded: (a) about $5,300 for the unpaid contract balance; (b) about $9,500 for damages resulting from blasting activities; and (c) about $3,300 for burying debris on the property.  The jury also returned a verdict of $2 million in punitive damages, which the trial court reduced to $1 million.

The Court of Appeals affirmed the trial court's judgment as to liability, but reversed the award of punitive damages based upon a finding that the trial court improperly considered Tennessee's environmental laws in approving the award.  The Supreme Court of Tennessee reversed, holding that the trial court properly considered Tennessee's environmental statutes in approving the award.

The Goff decision has a number of construction nuggets to analyze.  One of the more significant aspects of the opinion is the jury's award of punitive damages based upon various environmental laws without any finding of a violation of those laws.   The intermediate appellate court determined that because the jury found that the contractor had not committed an environmental tort, the trial court should not have relied on the environmental statutes and policies in affirming the award of punitive damages.  The Supreme Court disagreed:

The evidence supporting the nuisance claim was the proof regarding buried whole waste tires.  In order to determine the reprehensibility of burying whole waste tires, the trial court considered the State's policy regarding such action. To this end, the trial court correctly noted that the State has enacted legislation against burying whole waste tires, recited the public policy behind that legislation, acknowledged that [the contractor] was aware of the State’s policy against burying waste tires, and
observed that high civil penalties are permissible for burying waste tires. In our  view, the fact that the legislature has determined it necessary to prevent the improper burial of tires “to protect the public health, safety and welfare” is important in the discussion of the reprehensibility of [the contractor's] actions.

Interestingly, the Supreme Court did not decide whether a private right of action existed for a claimed violation of the state's environmental statutes because the jury did not find the existence of any "environmental tort" and neither of the parties raised the issue on appeal.

For the contractors out there, Goff is a good reminder of the total exposure (including significant punitive damages) for violation of state waste disposal and environmental laws.  For the legal practitioner, Goff instructs that a statute may be used to define the public policy for proving punitive damages even when there is no violation of the actual statute.

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What is the scope of coverage under a commercial general liability (CGL) insurance policy on a construction project?  As most attorneys will tell you, "It depends."  It truly depends on the express terms or language of the policy, the cause of the damage, and notably the jurisdiction of the dispute.

The Mississippi Supreme Court heard oral arguments on October 5, 2009 in the case of Architex Association Inc. v. Scottsdale Insurance Co. to determine what exactly is covered under the terms of a CGL policy.  The general contractor (Architex) filed suit against its insurance carrier after the owner the project sought damages from the general contractor for alleged defective work.  The insurer claimed that the defective work was performed by a subcontractor, which was not covered by the CGL policy.  The general contractor contended that any negligent work of the subcontractor should be covered under the "your work" provisions of the policy.  

The trial court held that damages were not caused by an occurrence or accident since the work being performed by the subcontractor was an "intentional act."  The oral arguments on appeal can be found at the Mississippi Appellate Court Video Archive. (The appellate court has some great questions between 1:50pm-1:55pm and 2:01pm). 

In a prepared statement published in the Mobile Bay Business Journal, Architex's counsel, Dorsey Carson, indicated that a finding for the insurance carrier would render a contractor's CGL policy practically useless:

"It would exclude coverage for any damages if the act that caused the damage is in any way related to the act of construction. It is a matter of whether the insurer is going to cover its insured for acts that it received premiums for, and for a policy that it marketed to contractors expressly for this type of damage.”

A decision from the Mississippi Supreme Court is expected by the end of the year.  Many in the construction industry are watching this case as it will have a significant impact on insurance coverage disputes:

• “The insurance industry made a very conscious decision to provide this coverage and charge these premiums. We are asking the insurance industry to stand behind the language of the policy it has today.” Mike Kennedy, general counsel for Associated General Contractors of America.
• "The premise has always been that if the work of your subcontractors is negligently performed and causes damage, it's covered." Chris Solop, Mississippi Associated General Contractors.

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Released in 1968, the lyrics from Steppenwolf's psychedelic rock song blare out: "I like to dream, right between my sound machine..."  Yep, you remember ... the Magic Carpet Ride!

The Maryland Court of Appeals recently decided a construction case based upon a set of pre-contract discussions that Judge Harrell described as a "complicated series of events from which this appellate 'magic carpet ride' springs..."  In Questar Builders v. CB Flooring, the court upheld the duty to act in good faith and deal fairly in construction contracts. The appellate court reversed and remanded the trial court's decision for a determination of whether the contractor (Questar) acted in bad faith when it terminated for convenience the flooring subcontractor (CB Flooring).

Questar received bids from three subcontractors to install the "magic carpet" in the luxury midrise apartment and townhome complex.  CB Flooring submitted a bid for $1.12 million and CTI submitted a bid for $1.24 million.  Interestingly, the third subcontractor's bid was so low that it left Questar with the impression that the subcontractor misunderstood the scope of the project.    (...I wonder if all the low estimates being submitted on public contracts these days fall into this category? Certainly not! ... Sarcasm ... )

Ultimately, disputes arose between Questar and CB Flooring about design changes in the selection of the carpet and the resulting increases in the cost of work.  Questar reportedly used CB Flooring's original bid to obtain CTI's agreement to perform the same work for $1,000 less than the original winning bid.  Meanwhile, Questar terminated CB Flooring, alleging breach of contract, as well as a contractual right to terminate for convenience.

The trial court held that CB Flooring did not breach the subcontract agreement with Questar.  The court also rejected Questar's claim that it had a right to terminate for any reason.  Based upon the evidence presented, the judge found that the subcontract was improperly terminated.

On appeal, the appellate court held that the termination for convenience clause "may" be enforceable, but that the trial court failed to determine whether the termination was made in good faith and in accordance with fair dealing.  Therefore, the case was remanded to the trial court for a determination of that issue.

The opinion is a long read (...50 pages...), but sheds some light on the limitations inherent in a contractual right to terminate:

"Questar's contention that it was entitled to terminate the Subcontract for any reason whatsoever goes too far and is inconsistent with the terms of the Subcontract. To be sure, a right to terminate in the absence of the other party's breach does not equate necessarily with the right to terminate based on a whim. We shall not read into the Subcontract such unfettered power."

This point was highlighed by the American Subcontractors Association, which filed an amicus brief in the appellate proceedings.  In its brief, ASA argued that an exception to the scope of the good faith and fair dealing covenant would "not only poison business relationships and eliminate business certainty, but also does great damage to the ability of subcontractors to rely on their signed contracts as a reliable indicator of future work and expected revenues" and would otherwise make subcontracts "illusory and meaningless."

This case provides a good warning to contractors: Beware of subcontractor shopping after you have already entered an agreement with another party.  While you may have the contractural right to terminate for cause, do not make a decision in haste without adequate basis for the termination.  These magic carpet ride cases often involve hotly disputed facts leading up to the termination and you may find yourself defending a lawsuit.

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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. For 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 dcision 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.

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As I was driving to work, a super-hero-like voice interrupted my morning news program on the radio: "Green Power Switch is coming to a neighborhood near you!  Green Power Switch will allow you, the consumer, to choose to purchase “green” energy from the companies that sell the power that TVA generates."

That’s right! The Tennessee Valley Authority and local power companies are banding together to offer their customers various alternatives of renewable energy (i.e., solar, bio fuels and wind).

Self, I ask, what’s the big deal with that? The big deal is that the speeches and PowerPoint presentations we’ve heard on renewable energy legislation and its effects on the construction industry are becoming a reality.  

Just a few weeks ago, the Green Ribbon Committee on Environmental Sustainability issued its recommendations to Nashville Mayor Karl Dean, including the following: 

• "Implement program at NES to switch from petroleum oil to a soybean-based oil for transformers used city wide."
• "Develop a Metro Green Fleet program to expand the use of electric vehicles, hybrids and bio-diesel to help diversify energy supplies, decrease emissions and support regional economic activity."
• Adopt an Advanced Metering Infrastructure (AMI) system for NES residential customers that would enable them to manage their energy consumption and conservation efforts.

From government initiative ... to legislative enactment  ... to industry standard ... to consumer incentive ... renewable energy will have a dramatic effect on the construction industry as a whole. Already, we are seeing green-related ordinances that affect the day-to-day business operations of your hard-hat construction contractors, laborers and suppliers.  Take, for example, the green cement ordinance in Dallas, Texas that requires use of cement from "dry kilns" versus "wet kilns."  That's good news if you operate a dry kiln ... not so good news if you operate a wet kiln.  In other instances, the issue is finding its way into the court system like City of Albuquerque v. AHRI, which blocked enforcement of various state energy conservation codes in New Mexico on preemption grounds. The plaintiffs were a group of HVAC and water heating equipment trade organizations, contractors and distributors.  (Steve Del Percio discusses the City of Albuquerque v. AHRI case on www.greenbuildingsNYC.com.)  

These are just a few examples of the 411 (... information ...) that you can find here at Best Practices Construction Law.  Check back soon for an overview of other green-related legislation affecting the construction industry.

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