As we enter the holiday season, some people have strict guidelines about when the Christmas tree or other holiday decorations are allowed to takeover our daily lives, offices, and homes.  The red and white ribbons and the colored lights of Christmas cannot be hung until after the orange pumpkins, brown leaves and turkey carcasses are thrown away.  In other words, it is premature to celebrate one holiday before the other holiday has occurred.  In the world of construction claims, according to one court, these same rules apply—it is premature to award damages before the claim has been considered and either approved or rejected.

In VVM Builders, LLC v. Atkins Construction Group, LLC, No. CV195021541S (Oct. 31, 2019), the Superior Court of Connecticut squarely addressed this precise issue in a case involving a change order dispute between a contractor and subcontractor.  The subcontractor filed a demand for arbitration against the contractor, seeking both its contract balance and approximately $40,000 in extra and/or change order work.  The parties’ contract provided that “the subcontractor shall have no claims for additional work or changes in the work without written authorization.”  The subcontractor submitted invoices for the extra work, but, according to the testimony at the hearing, the contractor had neither approved nor rejected the subcontractor’s claim.

Nonetheless, the arbitrator essentially awarded prospective damages based upon “not yet approved” changes or extra work, stating the following:

The [subcontractor] has submitted invoices for this extra work. The [contractor] testified that [it] has not yet approved any of those extra work/change order items and, therefore, the [subcontractor’s] claim cannot be awarded at this time. I find that should the contractor approve said work then the [subcontractor] shall recover same.

The contractor paid the contract balance to the subcontractor, but the subcontractor filed a motion to confirm the award on the change order work.  The court summarily denied the subcontractor’s motion, finding that the contractor’s interpretation of the arbitration award was correct.  While not explicitly stated in the one-page opinion, the court concluded that the arbitrator could not base its award on a change order claim that had not yet been approved (or even considered) by the contractor.

The short opinion makes sense—an arbitrator cannot rule on a claim that has not gone through the process required by the contract.  So what? A more difficult scenario arises when the claim has been submitted and either the contractor or the owner have refused to respond to the claim.  It is not clear from the VVM Builders case how long the subcontractor’s invoices for extra work had been pending, but I suspect it was not an excessive or unreasonable amount of time.  If it had been, the subcontractor could make an argument that the refusal to provide a response to the claim was a “deemed” denial and, therefore, gave the subcontractor the right to proceed with arbitration. Better yet, parties should draft a time limitation period within their contract for review and response to a submitted claim (i.e., “In the event Owner fails to respond to Contractor’s written claim for additional work within ten (10) days, the claim shall be deemed approved.”).

On a more personal note, to you and your family, Happy Thanksgiving!

I just blogged about asking for what you want and the importance of complying with notice provisions in pursuing a construction claim.  A court in Oklahoma just reminded me that not all claims require notice.  Here’s what I mean.

In WinCo Foods, LLC v.  Crossland Construction Co., No. CIV-18-175-HE (Nov. 21, 2019) (PDF), the U.S District Court for the Western District of Oklahoma recognized the distinction between “notice” for purposes of asserting a delay claim by the contractor and “notice” for purposes of assessing liquidated damages by the Owner.  The contractor failed to attain substantial completion of the construction of a new grocery store by the contractually required deadline.  The contractor argued that the owner failed to comply with the notice provision when making its claim for liquidated damages.

The court held that the “notice of claims” provision in the parties’ contract was a separate provision from the liquidated damages provision and, thus, inapplicable to the claim for liquidated damages.  The court reasoned:

As set forth above, the terms of the liquidated damages provision govern the issue of liquidated damages “notwithstanding anything to the contrary in the Contract Documents”. Thus, any additional requirements set forth in the notice of claims provision, that are not included in the liquidated damages provision, would not apply. Because the liquidated damages provision does not require [the owner] to provide notice of any claim for liquidated damages and makes the entitlement to liquidated damages automatic where the circumstances warrant, [the owner] was not required to comply with that notice procedure.

It is important to note that the court’s decision was made at the summary judgment stage—first, finding that the liquidated damages provision was enforceable; and, second, finding that the owner was not bound by any notice provision in assessing liquidated damages.  However, since there were disputed issues of material facts as to the delays on the project and the architect’s bias conduct against the contract, summary judgment was not proper on either the contractor’s claim for additional time or the amount of the owner’s claim for liquidated damages.  Those issues would proceed to trial.

So what?  The primary lesson that comes to mind from WinCo is one of mutuality, or making sure that the contract provisions that apply to one party apply equally to the other party. This is especially true when one party is attempting unfairly to shift risk of attorney fees, indemnification or otherwise to the other party.  In this instance, the contractor could have made sure that notice of any type of claim by any party shall be made within the time proscribed.

You may have met my 22 year old Princess when she was 11. A few years ago, I was teaching her about grace … undeserved merit or favor.

Well, my daughter was stalling and delaying on eating her meal … by almost an hour. So, naturally, I saw this as a teachable moment.

“Honey, do you remember when we were talking about grace this week? Although you should eat all your food, I am going to show you some grace tonight. Even though you don’t deserve it, I am going to eat the rest of your chili for you.” (How nice of me. I proceeded to spoon the rest of her chili into my bowl. Happy tummy!)

Without skipping a beat, my inquisitive daughter asked, Dad . . . You got any grace for my broccoli?  (Nice.)

Every now and then, we joke about the broccoli incident. But I am often reminded that too many times we fail to get something we want because we fail to “ask” for it. And when we ask for it, we sometimes fail to ask for it properly. Having litigated construction disputes for almost 20 years, the issue of entitlement often turns on whether the contractor properly submitted its claims in accordance with the terms of the parties’ contract. Whether the dispute involves a change order, delay damages, or time extension, I have litigated too many claims for additional compensation or time where: (a) the request was never made; (b) the request was not timely made; or (c) the request was not properly made.

As an attorney, I try to teach all my clients that proper documentation primarily serves as a claim preservation method—whether to provide notice of the claim or to document the claim impact. No matter the size of the project, proper documentation will eliminate a number of disputes. For example, consider the following claim provision:

“Any claim for additional time must be given within seven days of the event given rise to the delay.”

Best Practices would teach you to outline and highlight these types of provisions in your contract documents before you start contract performance. Make a spreadsheet with key provisions. And when one of those “events” arise, you should immediately send your letter “asking” for additional time or, at a minimum, “preserving” your right to later seek additional time and money. Don’t wait until the lawsuit or demand for arbitration before giving notice of your claim.

In other words, if you want someone else to eat your broccoli … you have to ask for it!

As you may be aware, one of the greatest risks on a construction project involves the payment process. Just like my kids expect to be paid for the lemonade they sell, contractors and subcontractors expect to be paid on a timely basis once the work has been performed.

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Contractors have a means of shifting the risk of non-payment by the owner to its subcontractor by including a certain payment provisions in the subcontract agreement.  The enforceability of these types of clauses may be limited by your particular state or jurisdiction.

In Universal Concrete Products Corp. v. Turner Construction Company, the U.S. Court of Appeals for the 4th Circuit concluded that a “pay if paid” clause in a subcontract was not ambiguous and, therefore, enforceable against the subcontractor.  The work involved the construction of the Granby Tower Project in Norfolk, Virginia. The subcontract between the general contractor and the concrete subcontractor contained the following clause:

“The obligation of contractor to make payment under this agreement, whether a progress or final payment, or for extra or change orders or delays to the work, is subject to the express condition precedent of payment from the owner.

The owner ultimately lost its construction financing on the project and abandoned the development. Since the contractor had not been paid for its work, it refused to pay the subcontractor’s work.  In a payment dispute between the subcontractor and contractor, the contractor argued that the “pay if paid” clause provided an absolute defense to payment. (Again, it should be noted that some states limit the enforceability of these clauses by either statute or case law. However, in Virginia, these types of clauses are enforceable so long as they are clear and unambiguous.)

The subcontractor argued that the prime contract between the owner and the contractor defined the cost of work to include “payments made” to subcontractors. Accordingly, the subcontractor argued that the contractor would, under the normal scenario, be paying its subcontractors and submitting the invoice to the owner as a “payment made” by the contractor. Both the trial court and the Court of Appeals disagreed, finding that payment from the owner was a condition precedent to payment from the contractor to the subcontractor.

Courts across the country vary in their treatment of these issues. For example, in the Universal Concrete Products case, the 4th Circuit reasoned that Virginia courts favor the freedom to contract and that parties are freely able to negotiate and draft these types of provisions. However, in Thomas J. Dyer v. Bishop International Engineering, the 6th Circuit refused to enforce a “pay when paid” clause because the court determined that the clause was sufficiently ambiguous. In that case, the contract stated that “no part of payment shall be due until 5 days after the owner shall have paid the contractor.”  Other jurisdictions, such as California, New York, Nevada and North Carolina, have expressly ruled that the “pay if paid” clauses are unenforceable as a violation of state public policy.

So, what should your contracts provide?  What should you do to determine the enforceability of a “pay if paid” clause in your state?

  • Contact an attorney to determine whether there are any limitations of the enforcement of these type of clauses.  Since each state differs dramatically, it is in your best interest to determine the applicable standard in your state or the applicable law where the project is located or the governing law of the contract to determine this information.
  • Determine as between the parties who should bear the risk of non-payment. If you are a general contractor, you should make sure that your subcontracts include clear and unambiguous language placing the risk of loss for non-payment on the subcontractor. In addition to putting a timing mechanism on payment of funds to the subcontractor following a certain number of days after payment by the owner, it is also advisable to include a clause that “payment by the owner to the contractor is a condition precedent to payment by the contractor to the subcontractor”. In addition, you can make your subcontracts explicitly clear by stating that “the subcontractor assumes the risk of non-payment by the owner due to insolvency or other inability to pay”.

For the contractors out there, Universal Concrete Products is a good reminder of the importance of drafting clear and unambiguous contact terms between the parties.  It is worth the effort to seek legal advice from an attorney in your jurisdiction about these issues prior to drafting and executing contracts with other parties.

Each and every kid in my house is held to the same standard—a very tough one I might add.  You see, I recognize they are different ages, difference sexes, and have different strengths and weaknesses, but that does not change how I choose to parent as a single dad.  In the same way, a court recently held that the type of contract delivery method did not change the applicability of the differing site conditions clause.

Appeal of John C. Grimberg Co., Inc., ASBCA No. 58791 (Oct. 25, 2018) involved the construction of a biolab facility at Fort Detrick, Maryland. The contract was a design-build contract.  As is typical of a design-build contract, no unit prices for rock excavation were set for because the contractor’s foundation solution is not established at the time of award. Interestingly, this contractor had performed other contracts at Fort Detrick involving deep foundations that happened to be design-bid-build contracts containing unit prices for excavation.

During construction, the presence of incompetent rock forced the contractor to use more drilling rigs than anticipated.  This crowded the site and prevented scheduled commencement of grade beams and rough-in of underslab MEP work. By the time the contractor completed drilling piers, it had excavated nearly four times the amount it had anticipated in its proposal.  The contractor submitted a Request for Equitable Adjustment, alleging that it had encountered a Type I differing site condition—i.e, where the site differed materially from those represented by the government. The contracting officer denied the claim, and the contractor appealed.

To establish such a claim, a contractor must prove: (1) the conditions indicated in the contract differed materially from those actually encountered during performance; (2) the actual conditions were reasonably unforeseeable to the contractor at the time of bidding; (3) contractor reliance; and (4) damages.  In this case, the board rejected the government’s argument that the differing site conditions clause is applied more restrictively to a design-build contractor than in the design-bid-build context. The board reasoned:

The identical DSC clause is required to be included in fixed-price construction projects, whether the design-bid-build or design-build method of contracting is utilized. There is no justification for interpreting the clause differently in the design-build context. As appellant concedes, design risk is transferred to contractors in the design-bid context, but not the risk of DSCs. A design-builder does not forfeit its rights under the DSC clause to rely on solicitation representations of subsurface site conditions.

The board concluded the contractor had established Type I differing site conditions claim that the “quantities of rock encountered greatly exceeded the quantity reasonably foreseeable based on a fair reading of contractual indications, albeit the Project was constructed in highly-variable karst topography at the site.”

Ultimately the decision is a good lesson for contractors to document “all of the facts, circumstances and contractual indications of subsurface conditions,” which is what the board relied upon in making its decision.  Another lesson learned is the importance of “reasonableness” when drafting or submitting claims.  Although the board found that two of the borings used by the contractor were unreasonable, it was “more reasonable” than the government’s analysis.  In the end, reasonableness matters.

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

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

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

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

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

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

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

A few years ago, I did a post on whether a digital signature in a construction contract was valid. Given the regularity by which parties now communicate by email, it is certainly a subject worth revisiting.

In United States ex rel. Cummins-Wagner Co., Inc. v. Fidelity and Deposit Co. of Maryland, the United States District Court of Maryland address whether a Miller Act claimant can give valid notice of a claim via email.  The payment bond claimant was a sub-subcontractor who filed a claim because the subcontractor failed to make timely payment.

The Email as Notice of Claim.  Under the Miller Act, second-tier claimants must give notice of any claim to the prime contractor within 90 days of last providing labor or materials.  In this case, the prime contractor contacted the sub-subcontractor to ask how much it was owed on the project.  Within that 90-day period, the sub-subcontractor sent an email response identifying the total amount owed, as well a copies of the outstanding invoices.  In a lawsuit on the payment bond, the surety argued that the email sent by the sub-subcontractor was not sufficient notice of the claim.

The Court Decision. The court concluded that the sub-subcontractor’s email notifying the prime contractor about the claim was legally sufficient notice. Although the Miller Act specifies methods for giving notice, the court focused on whether the prime contractor had received actual notice.  Since the contractor did not dispute that it had received the email on the amount owed, the court found that notice was sufficient.

So What?  The decision in Cummins-Wagner demonstrates one of many different ways in which a court can treat notice issues.  Since contractors do not always comply with the method of notice of a claim outlined in the Miller Act, actual notice may provide a safety net to those contractors who do not strictly comply with statutory or contractual requirements. Send those emails. Follow-up. Timely respond.  Do what you have to do to preserve your claims.

Construction disputes often involve voluminous amounts of discovery, including documents in the hand of third parties.   And if the case is subject to arbitration, it is likely that there will be a dispute about whether the arbitrator has the authority to compel production of third-party documents or witnesses for deposition.

On September 18, 2019, in Managed Care Advisory Group, LLC v. Cigna Healthcare, Inc.the Court of Appeals for the Eleventh Circuit concluded that Section 7 of the Federal Arbitration Act (“FAA”) precludes all pre-hearing discovery from non-parties.  Specifically, the court considered the enforcement of summonses sent to non-parties to appear by video conference and to produce documents.  According to the court, any non-party discovery must take place in person at the arbitration hearing.  Even if the arbitrator’s request is limited to document production, the non-party must appear at the hearing in person with the documents in hand.  This appears to now be the rule in the Second, Third, Fourth, Ninth and Eleventh Circuits.  The Eighth Circuit has held otherwise, suggesting that pre-hearing discovery is available under the FAA.

So what? As a practical matter, the majority of the circuits now hold that if a non-party receives an arbitral summons for pre-hearing discovery, this is outside the scope of the arbitrator’s power.  However, an arbitral summons may require discovery at the hearing so long as the non-party physically appears.

 

There is objective evidence.  There is subjective evidence.  And sometimes, it is a combination of both  A case cannot go much worse when a court’s opinion starts with the following: “This case concerns a contract in which a number of disputes, poor practices, and conflicting personalities created a climate of dishonesty, distrust, and lack of effective communication. This resulted in a default termination, and performance concluded more than a year late on a time-critical project.”

In Alutiiq Manf. Contractors, LLC v. United States, the contractor who had been awarded a fixed price, time sensitive contractor to repair pavement at an Air Force base filed suit against the Department of Defense (“Agency”), alleging it had been wrongfully terminated for default.  The Agency, through its contracting officer, determined that the contractor could not timely complete the project and, thus, terminated the contractor for default.  On appeal, the Court of Federal Claims held that the contracting office lacked a reasonable belief as to the completion of the project.  Accordingly, the termination for default was converted to a termination for convenience.

During project performance, the Agency issued a termination for default on the following three grounds: (1) the contractor’s alleged failure to “prosecute the construction project with the diligence that will ensure its completion within the time specified in the contract”; (2) the contractor’s alleged failure to “provide adequate assurances that it would complete the construction within the time specified in the contract”; and (3) the contractor’s alleged failure to adhere to contractual provisions such as providing “adequate supervision on a recurring basis” and compliance with requirements concerning the qualifications of key personnel.  The Agency’s construction manager outlined fives “acts or omissions” in justifying his decision to terminate for default:

  • the contractor’s inability to secure an asphalt subcontractor;
  • personnel gaps in contractor’s management team;
  • the contractor’s failure to submit project records and as-built drawings;
  • the contractor’s failure to submit routine documents and photos; and
  • “a belief of the onsite government personnel that the project is now at least 10% behind schedule”

The court concluded that the Agency could not justify its default termination by merely showing that the contractor was behind schedule.  The contracting officer’s decision, according to the court, must be based upon “tangible, direct evidence reflecting the impairment of timely completion.”  The court wrote: “It is an objective inquiry that does not turn on the CO’s subjective beliefs.”

In the end, the court said the Agency’s decision was clouded by a bad relationship.  The opinion is a good reminder for all those contracting with the government to document all delays, whether with revised schedules, letter’s and emails explaining the schedule circumstances, or photos and videos of the completed work.

Given the amount of leftover Halloween candy in our house, you bet that I can make some deals with my kiddos: “If you do this, I will give you some candy” … or … “If you don’t stop doing this … I won’t give you any candy.”  You see, there are conditions attached to the reward or consequence.

The Supreme Court of Vermont recently held that the conditions attached to a contractor’s payment of retainage to a subcontractor violated the state’s Prompt Pay Act.  In J&K Tile Company v. Wright & Morrisey, Inc., the dispute involved the parties’ separate agreement wherein the contractor committed to pay the subcontractor for delay damages that were beyond the subcontractor’s reasonable control. When the subcontractor was delayed, it submitted claim for $42,00 for the 21 days of delay damages.  By letter to the subcontractor, the contractor refused to pay the additional monies.

In the same letter as its refusal, the contractor said it would release the retainage payment “which was pending receipt of a Waiver of Lien. This payment represents payment in full of your current [contract] amount ….” The following week, the contractor sent the subcontractor the retainage check, even though the subcontractor had not signed the waiver of lien.  Here’s what happened next:

  • The subcontractor not cash the retainage check. Instead, the subcontractor sent contractor a letter, stating that they were “reluctant to … cash the check before there is acknowledgement by [contractor] that the act of cashing the check is not considered … to be a waiver or an accord and satisfaction of the dispute” regarding unpaid funds.”
  • The contractor did not reply. Two months later, the subcontractor sent another letter to the contractor, stating that the “refusal to allow the check to be cashed [was] a wrongful withholding” under the Vermont Prompt Pay Act.
  • The contractor responded to that letter: “Execution of the Waiver and subsequent cashing of the check will not affect your ability to initiate and prosecute your claim against [us.”
  • The subcontractor then cashed the retainage check.

The court held that the general contractor violated the Prompt Pay Act when it insisted that cashing the check would constitute an accord and satisfaction.  That violation was later cured by the general contractor when it confirmed that negotiation of the check would not affect the subcontractor’s rights. Thus, the court held that the contractor had violated the law for a period of about four months and awarded interest to the subcontractor.

The lesson from J&K Tile is one we have discussed before: the “paid in full” principle is not just an old wives’ tale.  Depending on your state’s law, if you negotiate a check that is marked “paid in full” or even “final payment” then you are risking the fact that you may be settling any claims you have.  And now we know the opposite to be true: if you insist on adding conditions to final payment, you may have a violation of your state’s prompt pay act on your hands.