Contractors: Be Aware When Contracting with Virginia Public Agencies

Imagine a severe thunderstorm damages a local public school such that classes cannot be held.  Total repairs will cost almost $1.5 million and they must be completed soon so classes can resume.

What if you’re the contractor working diligently to repair the school building so students can resume classes?  You promptly finish all the work, the school district pays for 2/3 of your work, but refuses to pay the balance, so you file a lawsuit against the school district.

But, the school district successfully argues your contract was void an unenforceable.  Without a valid contract, the school district has no duty to pay for any of your work.  Unfortunately, under the Virginia Public Procurement Act, the school district wins the lawsuit; so, it doesn’t have to pay you for the work that you timely and properly completed and it could sue you for return of the partial payments.

This recently happened to a public contractor in Virginia.  Under the Virginia Public Procurement Act, there are provisions to expedite the creation of some contracts, but the public entity must properly justify and document the process.

Contractors, protect your rights by:

  • Knowing the law governing your project and
  • Verifying the public entity has complied with that law before it’s too late.

In this case, the Contractor performed its work well, but didn’t verify the public entity was properly performing its obligations until it was too late.

H.S. Martin Construction Corporation v. Lee County School Board, Case No. 2:16 CV 00010 (U.S.D.C., W.D., Va. December 21, 2016).

Constructive Acceleration

Contractors know that time is money.  So, the point is clear when expressly told to “Speed Up!  Go Faster!”

But, what do you do when the Owner says, “You must still meet the deadline and I’m not giving you any more time.”  Preserve and pursue a claim against the Owner for constructive acceleration.

Constructive acceleration occurs when the owner or government demands compliance with an original contract deadline, despite a delay.  In such cases, the contractor may be entitled to reimbursement for expenses actually and reasonably incurred in complying with an (implied) acceleration order.

But, the Contractor must prove:

  • Excusable Delay: a delay that is neither the fault of the owner or contractor;
  • Request: The Contractor timely and sufficiently requested more time;
  • Denial: Owner denied or failed to timely respond to Contractor’s request for more time;
  • Demand: Owner demanded Contractor meet deadline;
  • Timely Notice: Contractor timely notified Owner that Contractor understood the Owner’s demand as constructive acceleration; and
  • Damages: Contractor incurred damages due to Owner’s unreasonable demand(s).

Appeal of IAP Worldwide Services, Inc., Armed Services Board of Contract Appeals Nos. 59397, 59398, 59399 (May 17, 2017).

Construction Contracts & Whodunit

Imagine reading a crime novel and just when you think you figured out whodunit, a plot twist suggests a different culprit.  Previously, I’ve written about making sure the answer you think is right is, in fact, the right answer.  In construction contracting, finding the right answer can be a difficult task when there are several separate contract provisions, specifications, and other documents incorporated into the parties’ agreement by reference.

Recently, a Contractor provided construction management services for NAVFAC at U.S. Naval Base Kitsap in Washington State.  At bid time, the Contractor understood all the many parts of the solicitation allowed the roles of Superintendent and Safety Officer to be fulfilled by the same person.  Post-award, NAVFAC demanded the two positions be fulfilled by two different people.

The U.S. Court of Federal Claims agreed with the Contractor.  The Court interpreted together all the various references to Superintendent and Safety Officer in the parties’ agreement – a tedious task.  Even the well-written Court’s opinion (like a good crime novel) seemed to suggest an answer until a new fact was introduced from a separate part of the parties’ agreement (like a plot twist).  You don’t know whodunit until the end.

Idaho Stage, LLC v. U.S., 131 Fed. Cl. 727 (2017).

Trick or Treat in Government Contract Claims

How often do you get (or give) Halloween treats without the magic words, “Trick or Treat!”?

Many Government Contractors are aware of and careful to include a proper certification of their contract claims to the Federal Government, as required by the Contract Disputes Act.  But, they should also expressly request a Contracting Officer’s Final Decision on the claim.  Without an express, or at least implied, request the various Boards of Contract Appeals may have no choice but to dismiss a Contractor’s later appeal.

Without a request for a contracting officer’s final decision, claimants may seek treats, but get tricked instead.

Appeal of Andrews Contracting Services, LLC, ASBCA No. 60808 (May 22, 2017).

Maropakis Carpentry, Inc. v. U.S., 609 F.3d 1323 (Fed. Cir. 2010).

Owner Nonpayment is No Defense to Miller Act Claim

As if you needed confirmation that the Federal Miller Act is a powerful tool for unpaid subcontractors, this is it.  Even when a Prime ordered and accepted the Sub’s work, but didn’t have to pay under the Subcontract, the Subcontractor still got paid by the Prime’s Surety.

On a project for the U.S. Army Corps of Engineers in Qatar, a Subcontractor agreed to provide labor and materials for telecommunication systems.  The Prime ordered and accepted a portion of the work and the Sub performed.  The Corps then terminated the Prime for default, so the Prime refused to pay the Sub.

The Prime breached the Subcontract but because of its termination by the Corps and terms of the Subcontract, the Prime was not on the hook for any damages to the Sub.  Notably, the Court stated that, if “the Court were to base its decision on whether a party had acted unprofessionally towards another party, had mislead another party (whether intentionally or not), or had wrongly accused another party of failing to perform under a contract, then the court would find the [Prime should pay the Sub].”  But, the Court’s jurisdiction is limited to interpreting and applying only the applicable law, including the parties’ agreement.

However, under the Federal Miller Act, the Prime’s Surety was liable for the full amount of damages.  The Surety’s liability is independent of its Principal’s liability and required only a showing that the Sub had performed the work and had not been paid.

Pragmatically, the Surety will pay the Sub and then demand reimbursement from its Principal, the Prime.

U.S. f/u/b/o VT Milcom, Inc. v. PAT USA, Inc., Case No. 5:16-cv-00007, (W.D. Va., July 14, 2017).

Trust, but Verify

Rely at your own risk upon a Contracting Officer’s statements when statutes or contract provisions may conflict.

U.S. President Reagan used the phrase, “Trust, but Verify” from about 1984-1987 in the context of nuclear disarmament.  See a short clip here of President Reagan using that phrase with Mikhail Gorbachev by his side.

Reagan & Gorbachev

That same phrase also applies to communication between Owner and Contractor, Government and Contractor, and/or Contractor and Subcontractor.  I’m not suggesting rampant lying or fraud by anyone.  Nor am I suggesting disbelieving everything heard – doing that could cripple our world.  Rather, to preserve your interests, simply be mindful of words, either spoken or written, and actions done.  Balance your trust with a dash of constructive skepticism.

For example, the Armed Services Board of Contract Appeals has denied appeals when Contractors relied upon statements made by Contracting Officers, but the Contractors didn’t verify the accuracy of the statements by reviewing applicable laws or Contract Documents.  The Contractors trusted, but failed to verify.  Use the few minutes it may take to verify or risk forfeiting recovery.

Appeal of Anaconda Construction Co., ASBCA No. 60905 (June 26, 2017).

Payment for Verbal Changes When a Writing was “Required”

Here’s the situation – You’ve done the extra work because you were verbally asked and you strive to do a good job.  But now, the Owner or Prime won’t pay because your Contract or Subcontract precludes payment without a written change order.

Even if your agreement can only be modified by a writing, you may still have a good argument to be paid for extra work.

Consider your prior dealings with the Owner or Prime on the current project and on prior projects.  Have you ever been paid for extra work without a written change order?  If yes, then you could still get paid even though the contract requires a written change order or other written agreement.  The more frequently this happens between you and the other party, the better your chances of payment.

The Virginia Supreme Court has held a subcontract clause requiring a written agreement for changes did not pertain to work outside the scope of the original subcontract.  Instead, the Subcontractor’s invoices were sufficient written documentation to show subsequent, separate agreements for the extra work.  The Subcontractor’s daily reports supported that the Subcontractor actually performed the extra work.  Also important is that the subcontract did not include a provision that excluded all other negotiations from the Subcontract (i.e., a merger or integration clause).

Medlin & Son Construction Co. v. The Matthews Group, Inc., No. 160050 (Va. Nov. 23, 2016)

Pirates and Arbitration

How does a pirate solve a dispute (besides walking the plank)?  Answer: Arrrrbitration!

The pros and cons of arbitration are discussed in a separate post.  This post concerns the waiver of arbitration by progressing too far with litigation.  How far is too far?  Generally, it’s too far when the party refusing to arbitrate has been harmed (e.g., too much cost incurred) by the litigation.

If you’re sued by someone else, can you demand arbitration?  If you’re suing someone else, can you later demand arbitration?  The answers depend on:

  1. Does your construction contract have an arbitration provision?
  2. How far has the litigation gone before someone demands arbitration?

Even when a defendant waited 22 months after being sued to demand arbitration, the Court found the defendant had not waived its right to arbitration, in part because it had not (for nearly two years) actively involved the plaintiff or the court and so avoided causing too much harm to the other party.

But, don’t wait too long!  You’ll save time and money by deciding and acting sooner rather than later whether to arbitrate.

Pirate Mini-figure

Legoland Discovery Centre (Dallas), LLC v. Superior Builders, LLC, Texas Ct. App., No. 02-16-00425-CV (April 27, 2017)

Bases Covered?

Contractors, will your current insurance policy cover “your work” as a joint venture partner?

The typical answer is NO.  This is simply because your policy as a sole contractor is based upon a predicted scope of risk.  A JV’s risk is usually larger than a sole contractor’s risk.  Even a minority partner’s risk as a JV member is usually greater than as a sole contractor because each JV partner is liable for the entire risk of the JV, despite the JV agreement that may allocate that liability – that’s only applicable within the JV, not to outside parties.

Insurance coverage for a Joint Venture is typically either by:

  1. A specific policy for the JV or
  2. Separate policies for each JV member.

For Example:JV Coverage Graphic

On a student housing project in Raleigh, NC, a new building under construction by a JV started to lean, damaging other portions of the building.  The JV and subcontractors repaired the work and out of the total repair costs of about $14.4 million, JV was responsible for about $4 million.

One of the two JV partners sought reimbursement from its own CGL insurer (not the JV’s insurer).  The JV partner’s Insurer argued that the JV partner’s separate policy excluded coverage for the partner’s liabilities while working as a JV partner.

Thankfully, the JV partner had previously purchased a separate JV Endorsement to cover its potential liability to third-parties as a JV partner.  The Court did not rule on whether there was coverage  for liability between the two JV partners (i.e., liability within the JV, not between the JV and third-parties).

Westchester Surplus Lines Ins. Co. v. Clancy & Theys Constr. Co., U.S. Ct. App. Fourth Circuit, Nos. 15-2299 and 15-2373 (April 4, 2017).

Two Paths at the Same Time to the Same Place

“Two roads diverged in a wood, and . . .” the Prime Contractor had to take both roads at the same time to the same place.

Problem Example

Subcontractor on project for the U.S. Army Corps of Engineers at Ft. Lee, Virginia, sued Prime Contractor and Surety for nonpayment under the Federal Miller Act.  Prime and Surety wanted to pause (stay) the litigation while pursuing arbitration.  The Court granted a stay of the litigation for the Prime.  The Court denied the stay of the litigation for the Surety because:

  1. The Surety was not obligated under any written agreement to arbitrate and
  2. The Surety’s liability under the Miller Act is independent of the Prime’s liability (these two facts are true in most instances).

In other words, even if the Prime owes nothing to the Subcontractor, the Surety could still owe payment to the Subcontractor if the lawsuit was timely filed, the work was done, and the Subcontractor was not already paid.  In this case, the Prime had to pay for the Surety’s defense (a typical obligation) in the litigation while simultaneously paying for its own arbitration defense.

United States f/u/b/o Duncan Telecom, Inc. v. Pond Constructors, Inc. and Berkley Regional Insurance Co., U.S. Dist. Ct., E.D. Virginia No. 1:16-CV-01086 (October 11, 2016)

Potential Solution(s)

To avoid/reduce this dual-track approach/cost, prime contractors can:

  1. Seek the surety’s prior written agreement to arbitrate;
  2. Apply the American Arbitration Association’s Fast Track Procedures if the disputed amount is less than $100,000; or
  3. Require Alternative Dispute Resolution before any litigation (this will work in the Federal First Circuit (ME, NH, MA, and RI), but may not work in all Federal Courts). (Caution: Requiring arbitration of a Miller Act dispute will not pause the one-year statute of limitations to file a Miller Act lawsuit.)

Read more about meeting deadlines under The Miller Act.

Rules, Which Rules?

When playing a game of cards, how do you handle the “house” rules?  You know, those unique ways of playing the game that may differ from those to which you are accustomed.  Do you handle those nuances as they come up or before starting the game?

Contractors can often address similar issues before problems arise by deciding which rules will apply with a choice of law clause in their contracts.

Suppose you’re a contractor installing 55 miles of pipeline across three different states (PA, WV, & VA).  If (when) a dispute arises, you’d like to resolve it with some consistency and predictability.  So, before beginning work, you and the owner agree that no matter the state or the section of pipeline where the problem(s) occurred, the dispute(s) will be resolved according to the laws of only one state.

Good Idea: Include a choice of law clause in your contract to promote consistency and predictability (while reducing potential costs and risk).

But, what if Pennsylvania law prohibits a choice of law other than Pennsylvania, which says that if the construction project is located in Pennsylvania then no other state’s law can apply regardless of the parties’ agreement.  Sometimes, the law seemingly frustrates the parties’ agreement.  Unless, the “house” decides its own rules apply because the parties agreed by their contract.

Better Idea: When including a choice of law clause in your contract, consider if existing laws may void your choice.

In this example, the owner and contractor agreed that Virginia law would apply to the entire pipeline project spanning across portions of Pennsylvania, West Virginia, and Virginia.  Although a Pennsylvania Law prohibited the parties’ choice of Virginia law, a Federal Court located in Virginia decided the parties’ agreement governed.  Perhaps the house preferred its own rules?

Precision Pipeline, LLC v. Dominion Transmission, Inc., U.S. Dist. Ct., E.D. Va. No. 3:16-CV-00180 (March 23, 2017).

Government Liability for Third-Party Delays

Has your work on a government contract ever been delayed by another contractor?  Did you (the prime contractor) have no control over the other contractor or entity?  Did the Government promise you the other contractor would not inhibit your work?  If yes to all three, consider the following success story of a Contractor’s recovery for delays against the Government caused by a third-party:

The successful Contractor under an IDIQ contract to perform canal excavation and sediment removal for the Department of Agriculture in St. Bernard Parish, Louisiana.  Contractor encountered delays due to the continued presence of another contractor under a separate government contract at the same project site.

Key to the recovery was that during pre-bid site visit, the Contractor asked if the third-party’s work would be complete prior to the Contractor starting work.  The Government replied, “Yes!”  Fortunately for the Contractor, the pre-bid Q&A’s were made a part of the Contract by the Government’s own express direction.

Generally, the Government is not responsible for delays caused by third parties, even other contractors at its own project site, unless the Government affirmatively indicates the site will be ready and available.

The Civilian Board of Contract Appeals found the pre-bid Q&A’s were sufficient to establish a warranty by the Government that the site would be available.  The Contractor recovered from the Government for the delays caused by the third-party contractor.

Regency Construction, Inc. v. Department of Agriculture, Civilian Board of Contract Appeals Nos. 3246 and 4356 (August 17, 2016).

Keep a Pass-Thru Claim Burning, Don’t Extinguish Liability

Prime contractors, have you ever submitted a subcontractor’s claim to a public owner? Subcontractors, have you ever wanted to submit a claim against the government, but you had no contract with the government?

Generally, if the prime has or could have at least some liability (even potentially), then the prime can “pass-thru” the sub’s claim against the government.

A pass-thru claim will fail if the prime has severed or extinguished all liability for the claim between itself and its sub.  This can be done by language that may already be in the subcontract or by a later agreement of release or settlement.

But, the same subcontract with the right language or a later agreement between the prime and sub (e.g., liquidation agreement) can preserve liability to keep a pass-thru claim alive.

A short success story:

A prime contractor on a project in Slick Rock, Colorado for the U.S. Dept. of Energy agreed to remediate uranium mill tailings.  The prime submitted a pass-thru claim by one of its subcontractors against the Government (the Sub’s claim “passed-thru” the Prime to the Government).

The Government’s efforts to dismiss the claim failed because the prime had to pay whatever recovery it got from the Government to the sub.  Only when the recovered amount (no matter how small) was paid, by the Government to the prime and then from the prime to the sub, was the prime’s liability extinguished.  Until that point, the fire of the claim kept burning.

M.K. Ferguson Co., et al. v. U.S., Ct. Fed. Claims, No. 12-57C (April 14, 2016)

When You Can’t Recover from a Third-Party (The Economic Loss Doctrine)

Suppose that you (the Contractor) had extra costs and want payment for those extra costs from the designer.  But,

  • No property was damaged,
  • Nobody got hurt (thankfully), and
  • There is no contract between you and the designer.

Likely Result: You cannot recover from the designer because of the economic loss doctrine, which usually applies when the facts listed above are true.

Possible Solutions:

  1. Carefully negotiate your scope of risk under the contract;
  2. Trust but verify (consider using an independent design reviewer pre- or post-bid and pre-construction);
  3. Manage, coordinate, and communicate; and/or
  4. Apply an exception to the rule (depending on which State you’re in and the unique facts of the scenario).

 

Here’s a recent example from the highest court of Maryland where the contractor (unfortunately) lost:

Under a contract with the City of Baltimore, the Contractor agreed to construct improvements to a wastewater treatment plant including construction of giant concrete tubs to hold untreated wastewater.  The Contractor constructed the tubs per the third-party engineer’s design, but the tubs leaked.  The Contractor sued the engineer for money damages, no persons were injured and no property was damaged from the leaking tubs.

The highest court in the State of Maryland denied the Contractor’s recovery from the engineer.  The court denied the contractor’s request for two main reasons.  First, the City, Contractor, and engineer had carefully limited their risk by the complex construction contracts, so there was no need for the court after-the-fact to adjust the limits of that risk.  Second, adjusting the limits of the agreed-upon risk could result in higher costs for future public construction projects and, since public projects are often funded with taxpayers’ dollars, then taxpayers would be funding the potentially higher costs.  [Editorial note: I generally agree with the court’s first reason, but find the second reason flimsy.]

Balfour Beatty Infrastructure, Inc. v. Rummel Klepper & Kahl, LLP, 451 Md. 600 (2017)

Barbecue and Construction Contracts

Either Independence Day or the Fourth of July, it’s often celebrated with fireworks, friends, and barbecue.  While you’re enjoying this weekend, you may find yourself discussing what makes the best barbecue: gas, charcoal, or wood; smoking or grilling; sauce and/or dry rub; sweet or spicy; and the like.  (Are you hungry yet?)

Most people have their own idea of what’s necessary for the best barbecue.  Combining ideas of what’s best is the recipe for a mouth-watering result or successful project.  Differing ideas of what’s best often leads to a dispute.  Resolving that dispute depends on what the recipe (the agreement or contract) required.

While barbecue recipes can be short and simple, contracts can be long and complicated.  Fundamentally, though, recipes are very much like contracts: what’s required, how much of each part/ingredient, in what order should they be assembled/added, when, and for how long?

Recipe for a Successful Construction Project

  • Purpose (end-user, goal, and/or need);
  • One each: owner, designer, and contractor (pre-mix (design-build) or mix later (design-bid-build));
  • Adequate Funding;
  • Dash of Legal Advice; and
  • A Fair Amount of Reasonableness.

Show Your Work

A mentor of mine once said that process and procedures can be more important than substance and results.  Like solving a math problem, how you solve it is often more important than the answer itself.  The same is true in resolving construction contract disputes with public owners.

Under a contract with the City of Baltimore, the Contractor agreed to complete an administrative dispute resolution process before suing the City.  But, without first completing the administrative process, the Contractor sued the City.  The Contractor tried to justify its lawsuit by arguing that the City had also agreed to follow an administrative process before it could assess liquidated damages and that the City was the first to breach the contract by not following that administrative process.  (Being the first to breach the contract may excuse another party’s later breach of the same contract.)

The Court did not have to decide if the City first breached the contract because the Court decided the Contractor didn’t properly follow the administrative process before suing the City.

The Contractor has not lost the war, but it lost this battle, time, and money.  Follow the process even if it appears unnecessary.  As a math teacher might say, “show your work.”

Balfour Beatty Infrastructure, Inc. v. Mayor and City Council of Baltimore, Appeal No. 16-1322 (4th Cir., Apr. 25, 2017)

Substandard is Not Defective

Recently, I posted about the Spearin Doctrine, which says that if a contractor follows the owner’s plans and specifications and something doesn’t work, the contractor is generally not at fault.  But, this only works if the contractor first follows the owner’s design.  It doesn’t work when the owner’s design will work as is, but you think it could be better.

In recently denying an HVAC Contractor’s appeal, the Armed Services Board of Contract Appeals stated, “the government may require performance [either] in excess of, or below, the standard normally accepted in a trade.”  In other words, the government need not follow the industry standard.  It can do less or more.

Under a firm, fixed-price contract managed by the Army Corps of Engineers, the Contractor agreed to upgrade the HVAC equipment at a Child Development Center at a facility in Hanover, NH.  The project was “limited by budget constraints,” but included work intended to remedy the “thermal discomfort” of the facility’s occupants.

The Contractor advised the Corps that certain design improvements would help the end-user.  The Corps considered the advice, but rejected the Contractor’s suggestion.  Thereafter, the Contractor “delayed the project because it disagreed with the government’s design choices.”  Ultimately, the Corps terminated the Contractor for default.

Appeals of Industrial Consultants, Inc., d/b/a W. Fortune & Co., ASBCA Nos. 59622, 60491 (March 10, 2017).

Hide, Seek, & Seek

Have you ever played hide and seek?  If you are the seeker, do you win the game when you find the hidden person?  Yes, of course!

Unless, you’re a government contractor seeking “hidden” requirements that seem to pop-up around every corner.  Just when it seems you’ve found the answer, requirement, specification, or drawing detail, the government replies that you missed something and should have kept seeking.

Do not fear, you may yet win this round.  Give notice, track your costs, and organize the documents supporting your position.  Later you may submit a claim.

Under a recent design-build project for the U.S. Navy, the contractor submitted claims for extra work on the construction of a dormitory at Aviano Air Base in Italy.  Although the ASBCA denied the appeal because the contractor didn’t consider the many requirements that were incorporated into the contract by reference (not verbatim), the case provides a good lesson for contractor’s –

When it seems you’ve found the answer, keep looking to ensure the answer doesn’t change.

Appeals of A.T.I. Tacose S.C.a R.L., ASBCA Nos. 59157 and 59200 (Jan. 4, 2017).

Contractor Schooled School

Have you ever done exactly what you were supposed to do, but it didn’t work and you were blamed anyway?  Nevertheless, if contractors follow the owner’s plans and it still doesn’t work, the contractor may be without fault – this is as it should be.

This happened when a public school district near Cape Girardeau, Missouri provided electrical plans to a contractor for an addition to a local high school.  The contractor followed the plans and when problems arose, the school district blamed the contractor.  Ultimately, however, the contractor can rely on the accuracy of the plans provided by the school district and the contractor may be blameless.

Contractors, be aware!  Your express warranty can overwrite the owner’s implied Spearin warranty.  If the contract includes language like “contractor has verified [or guarantees] the accuracy of the plans and specifications,” the contractor may be assuming responsibility for the owner’s design or plans.

Always understand what you’re signing or saying beforehand.

Penzel Construction Co. v. Jackson R-2 School District, No. ED 103878 (Mo Ct. of Appeals, Feb. 14, 2017)

Walk It Off, Keep Going

During a recent soccer game, my seven-year-old son took the ball squarely in the face.  But, he walked it off and continued playing.  Contractors must do the same with changes.

In 2006, under a contract with NAVFAC for repairs to a wastewater treatment system at Naval Station Guantanamo Bay Cuba, the Contractor encountered differing site conditions.  NAVFAC did not issue a suspension or stop work order, but the Contractor stopped working awaiting responses to RFIs.  NAVFAC did not respond to all the RFIs.  So, the Contractor submitted a certified claim, but the Contractor never resumed work.  The Contractor should have continued working.

Under the Federal Acquisition Regulations, the Contractor is obligated to “prosecute the work diligently” and continue performance pending the outcome of a claim. (FAR 52.211-10 and 52.233-1(i)).  Doing so not only mitigates potential delays and damages, but it ensures that when a claim is submitted, a “sum certain” (i.e., showing of damage) is possible.

In this case, the Contractor’s claim submission was premature and the Contractor’s refusal to perform directed or constructive changes pending the promise of payment precluded the ASBCA from having any power to resolve the dispute.  The ASBCA dismissed the Contractor’s appeal because the Contractor sought future damages for work it had not yet performed.  At worst, NAVFAC could have terminated the Contractor for default.

Appeal of Islands Mechanical Contractor, Inc., ASBCA No. 59655 (April 13, 2017)