I’ve blogged about arbitration in construction disputes on numerous occasions.  Just like any other construction contract dispute, the resolution in arbitration often comes down to the language used in the parties’ agreement.  This is especially true when the gateway question is: Who decides whether the dispute is arbitrable—the court or the arbitrator?

In Massachusetts Highway Dept. v. Perini Corporation, 83 Mass. App. Ct. 96 (2013), the court addressed this age old question of “arbitrability” or “who decides whether the dispute is subject ot arbitration."  The appellate court vacated a $56 million arbitration award in favor of Perini-Kiewit-Cashman Joint Venture (“PKC”), one of the general contractors for portions of the “Big Dig” Central Artery/Tunnel Project. The court concluded that the Dispute Review Board (“DRB”) incorrectly determined the threshold issue of whether the parties agreed to arbitrate arbitrability (i.e., whether a panel of arbitrators should determine what disputes are subject to arbitration).

The Original Agreement.   The contract between PKC and the Owner provided that disputes were to be presented to a three-member DRB, which would issue findings and nonbinding recommendations to the project director. In turn, the project director could accept, revise, or reject the DRB’s recommendations. The parties could then appeal the project director’s decision to the appropriate state agency or court.

The Second Agreement.  As the work on the Project progressed, hundreds of disputes arose involving additional costs incurred by PKC for delays and problems with construction. In 1999, the parties entered into a subsequent agreement requiring that existing claims arising before January 1, 1999 would be subject to binding arbitration with the DRB. Those claims were identified in Exhibit 1 to the agreement. As of result of this agreement, the DRB functioned in a hybrid manner, adjudicating final claims for Exhibit 1 disputes and making nonbinding recommendations for other disputes.

The Disputes.  When the dispute resolution process commenced, PKC and the Owner disagreed as to which claims were subject to binding arbitration and which were not. The DRB issued a decision on arbitrability and proceeded to award PKC $56 million, of which $44 million was designated as binding under the terms of both the 1995 contract and the 1999 agreement. The Owner appealed, arguing it never agreed to binding arbitration on the issue of arbitrability.

The Holding.  The law requires “clear and unambiguous” evidence in resolving whether the parties agreed on who should decide arbitrability. Unlike deciding whether a particular merits-based dispute is arbitrable, a party’s silence or ambiguity does not create a presumption in favor of arbitration. The court concluded that the 1999 agreement did not contain any language indicating that the DRB should act as a binding arbitrator on disputes over arbitrability. Therefore, the court held that the DRB was authorized only to make nonbinding recommendations as to arbitrability to the project director who could then, at his discretion, accept, revise, or reject the recommendation.

Lessons Learned. Parties should be "clear and unambiguous" in drafting their dispute provisions, particularly where you are deciding that some disputes should be subject to arbitration and others should be be litigated.  Equally important is making sure that the decision-maker for arbitrability is clearly identified, whether it is to be the arbitrator or the court.

Image: o K o

About a year ago, my wife turned vegetarian on me. I don’t have any significant objection to eating more healthy and I like the fact that she has eliminated sugar and processed foods from our pantry. However, I constantly complain about the increased costs of eating right. Not that I treat every marital conversation like a construction claim, but I do find myself grilling my wife about these increased costs and whether they are justified.

 

Contractors should be concerned about the same level of grilling (or review) when submitting a claim. There are a variety of increased material costs that may be included in a request for additional compensation or a claim. Those costs include additional materials to perform extra work, material escalation costs when materials are purchased at a later period of time than anticipated, additional transportation costs, additional material handling and storage costs, and additional costs for material deterioration.

In reviewing claims for additional material costs, consider the following questions: 

  1. For claims including additional materials, have you substantiated that the additional materials were made necessary as a result of the claimed event?
  2. If the claim includes additional material quantities, is the estimated material quantity substantiated by your estimate and is the actual material quantity substantiated by your cost records?
  3. If the claim includes material escalation costs, is there a contract clause covering such; and if so, is the amount requested in the claim consistent with the clause?
  4. If the claim includes material escalation costs, have you established that you timely ordered materials based on the facts known at the time?
  5. Has the amount of material costs been adjusted for trade discounts, refunds, rebates, allowances, and cash discounts?

Again, these questions are for managers reviewing a claim before final submission. They are designed to ensure that you can demonstrate both entitlement and quantification in your request or claim.

Image: Beverly Cromer

I previously blogged about the importance of using daily reports to prove construction claims. 

In addition to daily reports, the following records should be prepared and maintained in the normal course of business to help prove claims and effectively manage the project:

  • Correspondence file containing all correspondence relating to a specific claim, including letters and/or memoranda to and from the DOT and subcontractors.
  • Meeting minutes and internal memoranda concerning the claim should be maintained in order to document attempts to resolve matters with the DOT and its representatives.
  • Plans and specifications, including all amendments, details, clarifications, and options of the owner concerning the plans and specifications.
  • Change/work order file showing all changes or work orders requested with regard to the particular aspect of the work that is the subject of the claim.
  • Schedules, including the as-planned and updates.
  • Job photographs and videotapes, for both status of work in place and possibly evidence of the conditions leading up to the change.
  • Subcontractor and/or supplier files documenting all dealings between the contractor and the subcontractor concerning the area of the claim.
  • Miscellaneous evidence file containing all other evidence that could help support the claim, such as inspection reports, completion schedules, projections, flow charts, work progress, accident reports, photographs, etc.
  • Job cost records, which will be critical to showing the additional costs incurred.

If a contractor expects to seek additional compensation for an encountered condition, it should create an additional job cost category describing the extra work. Once the new cost category is created, the supervisor responsible for completing the daily report should assign all additional labor and equipment hours to the newly created cost code. Where an unforeseen condition creates additional work not included in the original contract, recording labor and equipment hours is quite easy. On the other hand, when unforeseen conditions create no new work, but rather, take the form of impeding a crew’s progress, the recording task becomes more difficult.

Image: Tanzer18

It has been some time in the making, but on May 13, 2013, Governor Haslam signed into law HB-0183, which authorizes a pilot program for the use of a construction manager / general contractor (CM/GC) project deliver method in the development and construction of transportation projects.

Generally, the CM/GC project delivery method allows an owner to engage a construction manager during the design process to provide constructability input. (A design consultant can also be engaged by the owner, through a RFP process). The Construction Manager is generally selected on the basis of qualifications, past experience or a best-value basis through a subjective RFP process. During the design phase, the construction manager provides input regarding scheduling, pricing, phasing and other input that helps the owner design a more constructible project. At approximately an average of 60% to 90% design completion, the owner and the construction manager negotiate a sole source "guaranteed maximum price" contract for the construction of the project based on the defined scope and schedule. If this price is acceptable to both parties, they execute a contract for construction services, and the construction manager becomes the general contractor. The general contractor would self-perform a certain percentage of the work.

A proposed amendment to the original bill was prepared and the Tennessee Road Builders Association had extensive discussion with TDOT about the amendment. Under the amendment, the CM/GC method would be a pilot program of three projects. The first project could not exceed $70 million and the other two projects would have a maximum of $100 million, but the aggregate total of the three projects could not exceed $200 million. A selection committee of five TDOT persons and three people from the private sector with a construction and/or finance background would review and score the RFP proposals. Prior CM/GC, or any other project delivery method, experience could not be considered or be a factor to be weighed as part of the RFP. The law is set to take effect on July 1, 2014 and terminate on July 1, 2019.

There are certainly those in favor of and against the new law.  Where do you stand?
 

When I moved to Nashville in 2006, I was sworn into the Tennessee bar by a local judge.  My partner happened to be in trial on a significant prevailing wage dispute, and the court a break during the trial to admit me to the practice of law in Tennessee.  Five minutes later, the parties returned to their week-long trial on the wage determination claims.

Fast forward seven years and a new bill is being sent to Governor Bill Haslam’s desk that essentially repeals Tennessee’s Prevailing Wage Act. Generally, present law requires that the prevailing wage rate, as determined by the prevailing wage commission, be paid to workers on all state construction projects, which are projects that are: (1) over $50,000 for any type of building and construction work for which state funds may be appropriated or expended; or (2) for construction work on any streets, highways or bridges.

HB-0850, which was signed by the House and Senate on April 15, 2013 and sent to the Governor for approval on April 16, 2013, revises the current law as follows:

  • Eliminates the state mandate of specified wages on state building projects;
  • Eliminates the mandatory certified payrolls and other paperwork submitted to the State of Tennessee on those projects;
  • For projects other than highway construction, "no such contract may require the private employer to pay wages that exceed the Tennessee Occupational Wages Report" 

The bill, as amended, does not impact highway (TDOT) projects. This is due to the Federal mandate of requiring a specified wage rate on road work. If a state does not have a mandated state Prevailing Wage, then the Davis-Bacon rate would be adopted for the wages for workers on the highway project.

This bill comes on the heels of HB-0501, which became law on April 16, 2013, that prohibits local governments from mandating health insurance benefits, leave policies, hourly wage standards or prevailing wage standards that deviate from state statutorily imposed standards on private employers as either a condition of operating a business within the jurisdictional boundaries of the local government or when the local government contracts with a private employer.

Image: USDAgov

Today’s guest post is from my good friend and law partner, M. Clark Spoden, who focuses on business litigation, labor and employment, environmental and construction law. The full article was published by Construction Executive. You can contact Clark at clark.spoden@stites.com.

Last April, the U.S. Equal Employment Opportunity Commission (EEOC) issued its long-awaited Enforcement Guidance regarding employers’ use of arrest and conviction records in employment decisions.

The guidance highlights the EEOC’s approach to using criminal records in background checks. Because claims can be made against employers by people who are injured by negligently hired or retained employees, firms need to know the risks involved in hiring decisions. Construction companies must walk the tightrope between potential claims of race discrimination by their employees or the EEOC, and claims by victims of those employees’ actions.

Essentially, employers must take due care to avoid presenting unreasonable risks of injury to their employees (and others), while limiting the use of arrest or conviction records in their hiring decisions.

Negligent Hiring. Negligent hiring and retention is a civil action (called a tort) recognized across the United States. According to the 2002 case Morris v. JTM Materials, Inc., an employer may be liable for negligent hiring if it knowingly (or should have known by the exercise of reasonable care) hires an incompetent, unfit or dangerous employee—thereby creating a foreseeable unreasonable risk of harm to others. In other words, a victim of a tort may recover against an employer for negligent hiring, supervision or retention of an employee if the victim establishes the elements of a negligence claim. The victim must prove the employer knew the employee was unfit for the job and verify the victim’s injury was foreseeable (see Phipps v. Walker).

It’s difficult for an employer to dismiss a negligent hiring claim without a trial. Given the importance of foreseeability, records showing a person has been arrested or convicted of a similar offense in the past could be used by the victim as evidence that similar conduct was foreseeable and could have been prevented by the employer by not hiring (or retaining) the employee.

The EEOC’s View of Arrest and Conviction Records.  Title VII of the Civil Rights Act of 1964 prohibits employment discrimination based on race, color, religion, sex or national origin. According to the EEOC, approximately 6.6 percent of all persons born in the United States in 2001 will serve time in state or federal prison during their lifetimes. Assuming current rates continue, approximately one in 17 Caucasian men will serve time in prison compared to approximately one in six Hispanic men and approximately one in three African-American men. In light of the relatively high conviction rates for African-American and Hispanic men, the EEOC issued its guidance in April 2012 as an update to prior policy statements about Title VII and using criminal records in employment decisions.

The EEOC found the reliability of criminal arrest and conviction records was suspect, stating “[A] significant number of state and federal criminal record databases included incomplete criminal records…[and] reports of documented criminal records may be inaccurate.” Additionally, the EEOC concluded third-party proprietary databases vary significantly in the types of information compiled and may be “missing certain types of disposition information, such as updated convictions, sealing or expungement orders or orders for entry into a diversion program.” In essence, “whether a covered employer’s reliance on a criminal record to deny employment violates Title VII depends on whether it is part of a claim of employment discrimination based on race, religion, sex or national origin.”

For the rest of the article, click here.

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, Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:”Table Normal”; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-parent:””; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:”Times New Roman”,”serif”;} 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.

You don’t need to go any further than this Washington Post article to read about a delayed construction project where the parties are passing blame back and forth.  The Silver Spring Transit Center is reported to be two years behind schedule and suffering from significant cost increases. No doubt the dispute will be resolved in litigation.

When contractors seek additional compensation for changes, design impacts, differing site conditions or other delays, they must convince the court or arbitrator of the amount they are entitled to be paid. Whenever these types of events occur on larger construction projects, there is usually a substantial loss of productivity. Yet, contractors are frequently unable to prove the appropriate amount.

The Measured Mile. One way to determine lost productivity on a project is by determining what is known as the measured mile—comparing the cost of “impacted” work with the cost incurred to perform the same or similar “unimpacted” work. Because the measured-mile calculation is based on comparing the impacted productivity and unimpacted productivity on the same project, it tends to be a more accepted approach.

Steps that Contractors Need to Take. Applying the measured-mile method is straightforward if the contractor has kept productivity records by location, type of work and crews.

  • Identify and define impacted work, including the unit of measurement for the work. For example, certain aggregates designated by the agency as suitable for use in the concrete may not be suitable if the soils contain large lumps of clay. Under this first step, you need to identify and define the impacted work.
  • Identify the impacted and unimpacted time periods and project locations for the analysis. Selecting the unimpacted (measured-mile) period and location for the project is crucial. Most common tasks on projects are constructed in different phases, at different times of the year and in different locations. In the above example, the contractor may be able to achieve a higher production after identifying and approving a different aggregate source.
  • Carefully evaluate the difference between the two periods and select a representative unimpacted period. Remember that a potential challenge to this approach is the argument that the unimpacted selection is not representative of the project. This is because the measured-mile method assumes all work on the project would have been performed at the same rate as the unimpacted segment.
  • Locate and assemble job-cost records, identifying man-hours, equipment and material used. Record keeping is critical to calculate and support any lost productivity claim. On highway construction projects, contractors must break the work down by location, activity and event. Review records for all unimpacted work periods. Field personnel need to maintain the records in generally the same manner for the impacted and unimpacted sections.
  • Determine whether you will base the analysis on hours or dollars. Then develop an unimpacted benchmark productivity measurement. An hourly approach is based on the total crew hours required to complete a work task, such as yards of concrete paved. A dollar approach is based on the total cost to complete a task, including labor costs, equipment rental, operating costs and consumables that vary with time. Once you have developed the productivity factors and crew costs, simply apply these to the impacted work quantities.

A measured mile analysis is generally acceptable if based on reasonably similar work to the impacted work. The impacted and unimpacted work activities should draw on labor from the same labor pool, and both activities should involve similar skill level and effort. Identify and evaluate possible other causes for the claimed impact. Be prepared to explain why these do not apply.

Image: thisisbossi

ConsensusDocs released the new ConsensusDocs 498 Design-Build Teaming Agreement today, which provides a standard contract for parties desiring to form a team for the purpose of submitting a bid on a design-build project.


According to the press release, this agreement has the flexibility for those team members to include design professionals, contractors and other parties. One team member serves the role as team leader for the purposes of compiling and submitting the proposal, as well as for negotiation of the owner agreement, if awarded. Critical issues such as confidentiality, withdrawal from the team, and document ownership are included. Post-award considerations are addressed and team members are required to enter good faith negotiations for a subsequent agreement covering the work (e.g., the ConsensusDocs 298 Joint Venture Agreement or the 299 Joint Venture LLC Operating Agreement).

My friend Kory George, was chair of the teaming working group, said the following: “With the industry’s increase in joint ventures and design-build construction, there is an increased need for a standard preliminary teaming agreement. The new document provides an excellent contractual foundation for all parties desiring to form a design-build teaming arrangement prior to forming a joint venture.”

The contract is specifically drafted to address the unique considerations of a design-build teaming arrangement. Similar to all ConsensusDocs standard contract documents, this agreement takes a project-first approach and promotes collaboration, communication and integration.