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 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.

Do you think that there is a difference between “furnishing” labor and “performing” labor? (Is there a difference between Godiva chocolate and Palmer’s?)  Well, the Court of Civil Appeals of Oklahoma recently held that “furnishing labor is not the same as performing labor” for purposes of filing a mechanic’s lien.

In Advanced Resource Solutions, LLC v. Stava Building Corp., a temporary staffing company filed petition against client which was a construction subcontractor asserting that it had provided client with laborers for a commercial construction project on an open account, that it had invoiced client for the labor, and that client had failed to pay for the services. The temporary staffing company then executed and filed a materialmen’s lien.  The general contractor ultimately posted a bond to discharge the lien and filed an action for accounting against the staffing company.

The Court of Civil Appeals held that temporary staffing company was not a “subcontractor” in commercial construction project and, thus, was not a proper lien claimant under statutes on mechanic and materialmen’s liens. The court noted that there was a distinction between a contractor and a subcontractor under the relevant statutes since the legislature did not include in the subcontractor statute those persons who “furnish labor.”  The court reasoned:
[T]he record provides that [the staffing company] entered into a contract with [the subcontractor] to provide it with temporary laborers, i.e., licensed apprentice and journeymen electricians, for use on its various commercial construction projects. The contract does not refer to a particular project. Rather, [the staffing company] is supplying [subcontractor] with laborers on an open account. Thus, [the staffing company] has not entered into a contract to perform any act with regard to the Walmart Project.
This case demonstrates once again that: words matter.  For this appellate court, the single phrase “furnish labor” was missing from the relevant subcontractor statute where those same to words appeared in the contractor statute.  Since words matters, the court invalidated the lien of a temporary staffing company who furnished labor.

In a world of texts, email and Siri, you should be careful about the impact of the words you write.  Remember that case where a court found that a string of text messages can form a binding contract? (FYI…it is one of my top five blog posts ever!)  Another court took a similar approach last week, finding that a casually written email by an attorney can constitute a settlement agreement.

Although it was a summary order with no precedential effect, the Second Circuit held in In re: Lehman Brothers Holdings, Inc. that an exchange of emails with a mediator can constitute a binding settlement, even if the parties nevre signed a written agreement.  While the case is certainly interesting and the holding appears to be novel, it appears consistent with traditional contract law principles.

In Lehman Brothers, there was a mediation between Lehman and an individual defendan.  The mediator sent Lehman and the defendant an email confirming that they had accepted his proposal and agreed on the amount of a payment in settlement of Lehman’s claim against that defendant. Lehman then sent the defendant the draft of a written settlement agreement. According to the defendant, the agreement contained additional terms that had never been discussed, much less agreed upon in mediation, such as the timing and manner of payment, the identity of the parties to the settlement, the scope of releases, and other terms.  Subsequently, the defendant requested changes in the agreement to which Lehman agreed.  Finally, the record contained evidence that defendant’s counsel sent Lehman an email saying its client would sign the written agreement as revised.

The question before the court was “whether the parties intended to be bound [to a settlement] in the absence of a document executed by both sides” by considering:

(1) whether there has been an express reservation of the right not to be bound in the absence of a writing; (2) whether there has been partial performance of the contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract usually committed to writing.

Altough two factors weighed in favor of an agreement and two factors weighed against and agreement, the Second Circuit ultimately held that the “balance tips in favor of finding an intention to be bound.” It is not clear whether the appeals court would have found a binding agreement had the defendant not later said it would sign the settlement. However, the appeals court focused on the original email exchange when the mediator notified the parties that they had agreed on the settlement amount.

Lesson learned: Words matter, but written words matter more!

 

Seems like last week I was just celebrating one kid’s birthday and I had to do it again last night!  Oh, that’s right, I have seven kids with two birthdays in September. So, it was not a dream?!?!?!  Although they both got to choose their own family dinner destination, we are going to have one huge cake this weekend…with tons of icing!

Owners in Tennessee are celebrating a new law recently passed because they may get their icing, too!  The new statute, signed into in May 2018, immediately created a cause of action providing for remedies for the successful challenge of the validity of a lien against a property.  Under the new law, Tennessee Code Section 66-21-108 provides a description of the “icing” that the owner may recover:

[A] real property owner who prevails in an action challenging the validity of a lien, including in a slander of title proceeding, shall recover:

(1) The owner’s reasonable attorney’s fees; 

(2) Reasonable costs incurred by the owner to challenge the validity of the lien;

(3) Liquidated damages in an amount equal to ten percent (10%) of the fair market value of the property not to exceed one hundred thousand dollars ($100,000); and 

(4) Any actual damages incurred by the owner.

The banking industry was able to get a carve-out because the above remedies do not apply “if the action was brought to challenge a lien that is based on a loan agreement for which the encumbered property was listed as collateral to secure the repayment of the loan.”

While there were other remedies available to owners under Tennessee’s mechanic’s lien statutes (such as right to bond off enforcement, right to demand enforcement, or exaggeration of lien claims), this new section provides additional remedies in the form of liquidated damages and actual damages.

On Saturday, I took the kids to the zoo for a day-long adventure.  Faith’s favorite attraction was the turtle compound that was filled with about 20 slowpokes walking a circle.  Like watching paint dry, we sat on the sidelines as these mini-dinosaurs trekked the park at a whopping .25 mph.

When we think of delays on a construction project, the first inquiry is to identify the turtle—the one party holding up progress or causing the delay.  Many times, the parties’ contract will dictate whether the contractor can recover delay damages or will be limited to a time extension for delays beyond the contractor’s reasonable control.  In Perez-Gurri v. McLeod, 238 So.3d 347 (Fl. Ct. App. 2018), the court examined whether a “No Damages for Delay” clause extended to parties other than the owner.

The general contractor in McLeod filed a malpractice action against the architect on a public contract for the City of Miami.  The renovation project was located in the Caribbean Marketplace in an area known as Little Haiti.  When the construction project was delayed, the general contractor filed suit against the numerous designers, architects, engineers and subconsultants.

The architect filed a motion for summary judgment, arguing that the general contractor’s delay claim was contractually barred by a “No Damages for Delay” clause in the contract between the general contractor and the City of Miami.  The trial court granted summary judgment in favor of the architect.  The appellate court reversed, finding that the owner-contractor agreement did not insulate the architect from liability.

The appellate court agreed with the trial—and so should you for that matter—that the general contractor waived any rights to seek delay damages from the owner. But the question is whether that waiver of delay damages extended to other parties such as the architect. The clause read as follows:

No claim for damages or any claim, other than for an extension of time, shall be made or asserted against City by reason of any delays except as provided herein. Contractor shall not be entitled to an increase in the Contract price or payment or compensation of any kind from City for direct, indirect, consequential, impact or other costs, expenses or damages, including but not limited to costs of acceleration or inefficiency, arising because of delay, disruption, interference or hindrance from any cause whatsoever, whether such delay, disruption, interference or hindrance be reasonable or unreasonable, foreseeable or unforeseeable, or avoidable or unavoidable . . .

The appellate court reasoned that the above emphasis language expressly state that the City is protected from delay damage claims, and there was no language that extends that protection to other parties. The court concluded: “If M2G2 Architects were intended to be protected by the no delay damages provision, one would expect some reference to that idea in this provision which otherwise precludes any third party beneficiaries to the contract.”

The McLeod decision reiterates yet one more time that “words have meaning.” More importantly, it is always advisable to think about and negotiate key provisions at the start of the project, rather than litigating the meaning of the provision during a dispute after the project is complete.  Take a look at my Top 20 series where I blogged about key contract clauses and their meanings.

After a great extended weekend on the beaches of Florida, we embarked upon the drive back to Nashville with six kids.  Despite the clearly defined travel rules, the antagonizing kid was putting his feet on the emotional kid. The creative kid was writing on the seat with markers, while the perfect kid screamed foul.  The lazy teenagers slept. Mom and dad were triggered for eight hours.

Many Tennessee contractor’s have felt the same way with the changes in the licensing laws over the past few years. The rule relating to the effect of a contractor who exceeds its licensing limit is now clear based upon the decision in Clayton Pickens v. John R. Underwood (Tenn. Ct. App. June 12, 2018).  In that case, the dispute was whether the “old law” or the “new law” applied.  Here’s how it went down:

  • On June 2, 2008, contractor entered into an agreement with owner to construct house for $572,000, but at the time the contract was signed the contractor’s license limit was $350,000.
  • Under the prior version of Tennessee Code Section 62-6-103, an “unlicensed contractor” was limited to recover only the actual documented expenses that could be shown by clear and convincing evidence.
  • The question that often came up was whether a contractor who exceeds its monetary limit was “unlicensed” for purposes of this rule on damages.
  • The Legislature amended Tennessee Code Section 62-6-103(b) effective June 23, 2009, which clarified that: “[a]ny contractor required to be licensed under this part who is in violation of this part or the rules and regulations promulgated by the board shall not be permitted to recover any damages in any court other than actual documented expenses that can be shown by clear and convincing proof.”
  • In Anchor Pipe Company, Inc. v. Sweeney-Bronze Development, LLC (Tenn. Ct. App. Aug. 2, 2012), the court held that a licensed contractor who contracts above his or her monetary limit still is considered “licensed” for application of the rule on damages above.  The Anchor Pipe court was interpreting and applying the prior version of Section 103.

In Clayton Pickens, the evidence showed that the parties signed the contract in 2008, which was one year before the statute changed, but filed the lawsuit one month after the statute was amended.  The court held the old law applied:

We believe the date of the contract to be more significant here than the date of the filing of the complaint. By the time Pickens filed his complaint, all the operative, underlying events of this case had transpired. The amendment to Tenn. Code Ann. § 62-6-103 was substantive in nature. The effect of the amendment was to expand the limitation of actual documented expenses to any contractor required to be licensed under the statute and rules, whereas before this limitation applied only to unlicensed contractors. When Pickens signed the contract and performed the work for the Underwoods, he was not subject to that limitation as he was not unlicensed.  Pickens is not limited retroactively by the provisions of the amended statute.
It appears that all of the loops have been closed.  Currently, the law states that if you exceed your licensing limit or otherwise violate some provision of the licensing laws, you cannot file a lien and your damages will be limited to actual documented expenses proven by clear and convincing evidence.