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

By Matthew DeVries on March 20, 2018 Posted in Case Law, Legal Trends

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

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

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

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

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

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

By Matthew DeVries on March 5, 2018 Posted in Best Practices, Claims, Federal Construction

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

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

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

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

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

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

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

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

By Matthew DeVries on February 21, 2018 Posted in Best Practices, Case Law, Legal Trends

Last weekend we played Speak-Out: Kids versus Parents, a game where you use a plastic thingy to obstruct your speech capabilities. The winning team is the one that guesses the most phrases. Reading and understanding an insurance policy on a construction project can be a lot like understanding my kids playing Speak Out.

Proper insurance coverage is an important risk management tool for contractors, subcontractors, project owners/developers and design professionals. Whether you are required by contract or law, purchase and maintaining the appropriate coverage can help you avoid catastrophe on your project. Since there are so many types available, it is important to understand what is being covered…and what is not.

This was a hard lesson learned by a contractor recently in Vivify Construction v. Nautilus Insurance Co., a recent decision issued by the Appellate Court of Illinois. In that case, the contractor and subcontractor (and their insurance carriers) were pointing the finger at each other for injuries sustained by an employee of the subcontractor.

The subcontract agreement required the subcontractor to indemnify and hold harmless the contractor against claims of bodily injury resulting from the subcontractor’s work. The subcontract also required the subcontractor to include the contractor as an “Additional Insured” on its policy.

The insurance policy provided “Additional Insured” coverage for the contractor. But it also contained an endorsement that included an “employee exclusion,” which stated that the policy did not apply to bodily injury to the subcontractor’s own employees.

The Court was required to parse through the applicable contract and insurance provisions. In the end, the Court found that—despite the “Additional Insured” status of the contractor—the subcontractor’s insurance policy contained the broadened employee exclusion provisions. This ultimately negated coverage.

Vivify Construction addresses such a small portion of insurance coverage disputes on construction projects, but the lesson is far more impactful. Despite the difficulty in reading and understanding insurance coverages on a project, you are advised to specify in your contracts what types, amounts, and limitations are acceptable for a project. While cumbersome, don’t just rely on a certificate of insurance provided by a party, but ask them to get you a copy of the actual policy to review. Don’t try to figure out what was said after the dispute arises.

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

By Matthew DeVries on February 1, 2018 Posted in Case Law, Legal Trends

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

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

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

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

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

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

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

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

By Matthew DeVries on January 25, 2018 Posted in Best Practices, Case Law, Legal Trends, Legislation

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

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

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

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

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

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

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

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

By Matthew DeVries on January 22, 2018 Posted in Best Practices, Case Law, Claims and Disputes, Legal Trends

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

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

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

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

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

Project Documentation: The Bad Little Email That Got Produced

By Matthew DeVries on August 11, 2017 Posted in Best Practices, Legal Trends

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

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

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

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

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

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

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

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

By Matthew DeVries on August 10, 2017 Posted in Arbitration, Case Law, Legal Trends

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

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

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

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

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

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

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

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

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

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

Spearin Doctrine: A Construction Case Described in A Tweet!

By Matthew DeVries on July 6, 2017 Posted in Case Law, Claims, Federal Construction, Legal Trends

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

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

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

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

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

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

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

By Matthew DeVries on May 5, 2017 Posted in Uncategorized

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.

nogood

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

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

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

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

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

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

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