In most states across the country, kids are headed back to school this week and next.  Some are even going to law school.  If you are considering a career in construction law, you will want check out my interview with Marc Luber of JD Careers Out There.

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Now Hiring.  Speaking of construction law careers, our Lexington, Kentucky office is seeking to fill an associate position in its Construction Service Group. Preferred experience level: 3 to 5 years with some civil litigation. Employment law background helpful but not essential. Strong academic background and writing sample illustrating strong analytical skills required. Contact Carrie Marshall: (859) 226-2349, cmarshall@stites.com.

Got questions about career planning in the construction industry?  Feel free to contact me.

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.

Recovery for unreasonable delays caused by others can be based upon a breach of an implied obligation not to hinder or delay the other party’s performance. Wow, that’s a mouthful! Let’s look at an example.

In Foster & Creighton Company v. Wilson Contracting, the Tennessee Court of Appeals reviewed a case involving a project at Key Field in Mississippi. The improvements included resurfacing certain existing runways and grading and paving new runways.

The Facts.  The prime contractor, Wilson, subcontracted the paving work (including the resurfacing of existing runways and paving of new runways) to Foster.  Accordingly, the resurfacing part of Foster’s work did not depend on the work of any other subcontractor.

Despite delays in the work of the grading subcontractor, Foster proceeded to assemble its mixing machinery and began to resurface existing runways ahead schedule. However, Foster notified Wilson that it would not be able to proceed with new paving until some of the grading work had been completed. Thereafter, Foster ceased operations because all of the resurfacing had been completed and none of the grading had been completed for new paving.

Months later, Foster returned its equipment and crew to the job site, but no grading was complete for paving at that time. Foster informed Wilson that the delays to the paving work would result in extra expense of $6,000 per week. Ultimately, after a few mobilizations and additional delays due to the winter months, Foster completed the paving.

The Rule of Law.  Foster filed suit against Wilson for damages on the theory of breach of express and implied contractual obligations. The court held that when a general contractor engages a subcontractor to perform a part of the general contract, “there is an implied understanding that the subcontractor will be given a reasonable opportunity to perform.” The court also recognized that a general contractor may, in a proper case, be liable to a subcontractor for wrongfully interfering with the performance by the subcontractor.

The Lesson.  Although the court ruled against Foster on its claims, it did so because the subcontractor failed to prove its case.  Rather than relying on the implied obligation not interfere with one’s performance, Foster instead claimed that it began work as a result of the threat of Wilson to find another subcontractor.  In fact, the court held that such a threat would not be enforceable, and that Foster could have refused to begin work until the grading was almost complete on the grounds that: (1) the prime contractor may not wrongfully interfere with performance by the subcontractor; and (2) must provide the subcontractor a reasonable opportunity to perform.

Image: US Army Corp of Engineers

Owners typically retain a geotechnical consultant, either directly, or indirectly though the designer. Either way, the number of borings the geotechnical consultant will take is often dependent on the funding available. It should be noted that the fewer the number of soil borings taken, the less likely that those taken will indicate properly the site conditions.

Deficient Site Investigation.

One common example of deficient site investigation is the failure to discover a conflicting underground utility in planning the location of new utilities. In some instances, the designer has not been given accurate utility locations by the owner. When utility conflicts are discovered during construction, they result in extra costs—either for redesigning the proposed utility or relocating the existing utility—depending on which option seems more feasible at the time of discovery.

Another example of deficient site investigation is the excessive moisture content of the excavated soil. Soil that contains excessive moisture will require additional compaction effort and drying time. Those efforts and the time associated with them are usually not considered in the contract time limits. Absent an extensive subsurface investigation, such soil conditions may not be known until the contractor starts its excavation work. A designer could have forewarned the contractor about the problems or could have incorporated lime or some other soil treatment in the design to facilitate the drying process.

In some roadway rehabilitation projects, the designer bases his or her design on original as-built drawings. Several renovations and piecemeal changes may have occurred since the completion of the previous project, and the as-built drawings may not reflect those changes. Lacking the funds to verify the accuracy of the as-built drawings, the designer designs the project from out-of-date drawings only to discover the deviations when construction begins.

An inadequate subsurface investigation may fail to identify hazardous materials which require special handling for removal and disposal. A contractor may discover materials unknown to it at the designated excavation area and determine they are hazardous. Because it had no prior knowledge of the presence of contaminated material, it will not have contemplated acquiring a special permit for its disposal, or the special handling necessary. Consequently, the contractor’s work may be delayed while it obtains approval of a disposal site and the disposal method.

Image: US Army Corps of Engineers

Construction is one of the riskiest businesses in the United States. It requires the coordination of many entities, which is one reason alone there are many disputes.  What do you think causes construction claims and disputes?

In this tight economy, the competitive bidding system forces contractors to price their work in a way that will give them the best opportunity to be the low bidder. Sometimes, too much attention is placed on getting the work and not enough attention is given to how the work can be done profitably.

In addition, the construction process typically involves parties from different disciplines temporarily joining together to deliver a construction project. Each party’s responsibility within the construction process is intertwined with others, either as a prerequisite for another party’s work or as an integral part of such work. When one of the parties in the construction process fails, the others are adversely affected. When a problem faced by one party in the construction process is ignored or recognized late, the problem may escalate into disputes and claims. Disputes and claims are detrimental to all parties.

A prerequisite to recognizing and remedying problems on the construction project is understanding their causes. The National Cooperative Highway Research Program has identifed practices and characteristics of contractors and owners that are associated with the high incidence of claims, including the following:

Contractor Practices

  • Inadequate investigation before bidding.
  • Unbalanced bidding.
  • Bidding below costs and over-optimism.
  • Poor planning and use of wrong equipment.
  • Failure to follow authorized procedures.

Owner Practices

  • Changes in plans and specifications during construction.
  • Inadequate bid information.
  • Inadequate time for bid preparation.
  • Excessively narrow interpretation of plans and specifications.
  • Restrictive specifications.
  • Contract requirements for socioeconomic objectives.

Causes Associated with the Contract Documents

  • Exculpatory clauses.
  • Mandatory advance notice of claims.
  • Finality of field engineer’s decisions.
  • Changed Conditions clauses.
  • Lack of periodic review of documents.

Causes Associated with Contract Awards

  • Diversity of state contract award rules.
  • Treatment of bid mistakes.

Causes Associated with Contract Administration

  • Coordination of owner responsibilities.
  • Interpretation of owner policy and practices.
  • Attitude and style of contract administrators.
  • Documentation of contract performance in field records.
  • Owner program factors.

Causes Associated with Claim Settlement Procedures and Practices

  • Encouragement of project-level settlements.
  • Delegation of settlement authority to field supervisors.
  • Effectiveness of field/headquarters consultation.

Review this list and think again.  What other causes of disputes can you identify?

Image: Ed Schipul

I realize that these regulations and rules may be three years old, but in 2010 the EPA imposed continuing requirements on persons and entities working with lead-based paint. Recently, there have been reports of regional EPA offices seeking to investigate and audit various renovation contractors for whom the regulations would apply.

In 2008, the United States Environmental Protection Agence ("EPA") passed the Lead-Based Paint Renovation, Repair and Painting Program Rule, which became effective on April 22, 2010. The Rule requires that contractors performing renovation, repair, and painting projects that disturb more than six square feet of paint in homes, child care facilities, and schools built before 1978 must be certified and trained to follow specific work practices to prevent lead contamination. Requirements cover training, certification, and work practice.

More helpful, however, is the EPA’s guide on "Small Entity Compliance Guide to Renovate Right: EPA’s Lead-Based PaintRenovation, Repair, and Painting Program," which includes several helpful flowcharts and decision trees regarding renovator certification, for example. The guide was published in July 2010, presumably to answer questions about the rule and its requirements.

If you are contacted by the EPA requesting information and other supporting documentation that evidences your compliance with the rules, then make sure you are prepared to cooperate and respond properly.  Even if you are not in compliance, you may not be fined if you provide the requested information and cooperate fully with the EPA.  You may also want to contact an attorney to assist with your compliance efforts.

Image: agaumont

While I know this was not coordinated to start on my birthday (…hint…hint…send gifts to my law firm address…), but for the July 12, 2013 letting and going forward, TDOT will require the apparent low bidder to submit a “Bidders List” identifying all subcontractors that provided a quote on that particular project/contract.

This measure is necessary for TDOT to comply with the Federal Regulation 49 CFR 26.45, which outlines how public owners set overall DBE goals. According to the TDOT Instruction to Bidders, the following guidelines address the new rule:

“The apparent low bidder for each project must provide a list of all subcontractors who provided a quote to perform work. The list shall be provided electronically on the TDOT form “Certification Regarding Subcontractor Bid Quotes” (Bidders List). The apparent low bidder shall submit this form before the close of business (4:30 PM, Central Time) five (5) calendar days after the date on which bids are required to be submitted (e.g., if bids are required to be submitted on a Friday, then the completed form is due by 4:30 PM on the following Wednesday). Emergency contracts will not require a bidders list. Failure to complete and submit this form within the time period required may result in the rejection of the bid.”

The new form can be downloaded here (.xls format), and will be posted on the TDOT website.  Within 5 calendar days of the date bids were due, the electronic form must be submitted to the following email address: TDOT.DBE.BiddersList@tn.gov.

Image: Jenniferschwalm

As a general proposition, if the owner delays the prime contractor by not performing its contractual obligations, the prime contractor is entitled to relief, including damages for delay or extensions of time. This is actually a rather common situation and most contracts contain clauses and provisions that govern such occasions. But what happens when the prime contractor delays the performance of its subcontractor?  

A Fine Line.  Obviously, subcontractors would prefer to recover damages for delay from the prime contractor in much the same way that the prime contractor can recover from the owner. Most courts that have considered this situation have held that, in the absence of provisions in the subcontract which govern such a situation, there is an implied duty on the prime contractor not to delay or hinder its subcontractor and to perform all of its obligations to enable the subcontractor to perform the obligations of the subcontract.

Three-Prong Test.  The courts have set forth a three-pronged test to determine when the subcontractor may recover delay damages or extensions of time:

  1. The subcontractor must show a breach of contract has occurred.  The breach may be an express or implied obligation.
  2. The subcontractor must prove that a substantial delay resulted from the breach of contract. Here, the subcontractor must establish that the delay was neither anticipated nor in the contemplation of the parties at the time that the contract was created.
  3. The subcontractor must prove that the prime contractor’s breach of contract damaged it.

The courts have generally concluded that contracts between prime contractors and subcontractors contain implied obligations on the part of the prime contractor to avoid hindering or delaying the subcontractor in any way.

The Take-Away.  When some thing is said to be "well established" in the legal world, that means that the majority of the case law supports the proposition stated.  I am confident in saying this much: it is a well established rule that a contractor is entitled to a reasonable opportunity to perform his contract without obstruction or interference and that neither party will do anything that will hinder or delay the other party in performance of the contract.  Thus, the take-away is to identify those areas in potential interference in your project and make sure the risk is properly allocated in your contract.

Over the next few posts, I will be look at some specific case examples of contractor delays to the work performed by its subcontractors.

Image: USACE

On May 21, 2013, the Office of Inspector General of the U.S. Department of Transportation provided an update to Congress on the Moving Ahead for Progress in the 21st Century Act (MAP-21), requiring the Acceleration of Project Delivery (Subtitle C).  MAP-21 is the first long-term surface transportation authorization since 2005 and provides for $105 billion for 2013-2014.

In the letter, Joseph Come, Assistant Inspector General for Highway and Transit Audits, comes to the following conclusion:

While most of the Department’s remaining Subtitle C actions are in progress, a lack of completion dates for some actions combined with delays in some rulemaking actions could impede the Department’s ability to complete Subtitle C provisions in a timely manner.

This was the first review of a series of audits to assess DOT’s progress in implementing MAP-21’s project delivery reforms.  The DOT developed a plan with 42 actions to meet Subtitle C requirements, and most of these actions involve environmental issues that occur during the planning and design phase of highway projects.  According to the audit, the DOT completed only five of the actions and 34 were underway.  Three planned actions had not started, including: (1) establishing a best practices clearing house related to accelerated project delivery; (2) developing guidance on integrating planning and environmental reviews; and (3) reporting on the types of and justification for additional categorical exclusions.  The DOT stated that it has not begun these three actions because other actions either have a higher priority or need to be completed before it can start these actions.

So what?  Although the report goes into detail about the planned actions and target milestones, and goes as far to conclude that the DOT will be "challenged to complete required rulemakings by the statutorily set dates," there is little insight on the impact of delays in the implementation of MAP-21.  For example, what is going to be the practical effect of delays to new projects?  When will we see benefits of streamlined processes?  We understand that "timely completion of planned actions would help States and others managing Federal projects to fully realize the benefits of MAP-21’s innovation and streamlining provisions," (as noted in the report), but where is the accountability?  Maybe that is to come from the next audit?

I just received an update from Kent Starwalt at the Tennessee Association of Road Builders and Brian Egan, Construction Division Director at TDOT, regarding new state requirements for payment and performance bonds in Tennessee. The requirements apply to "contractors entering into contracts with any city, county or state authority for public works within this state."

The General Assembly has passed, and the Governor has signed, legislation which sets standards for what constitutes a “good and solvent” surety bond, found at Public Chapter 195 (pdf).  The new law states that:

  1. the bond must be written by a surety company listed on the U.S. Treasury Department (USTD) financial management service list of approved surety companies;
  2. the bond shall not be written for an amount in excess of the amount indicated on the same U.S. Treasury list; and
  3. the surety must be licensed to do business as a surety or insurance company in the State of Tennessee.

You can find a list of approved USTD surety companies here.  Also, you can find a list of State of Tennessee licensed surety companies here.