Delays Caused When Government (Owner) Pushes Contractor’s Work into Rainy/Adverse Weather Season

David Adelstein | Florida Construction Legal Updates

There are a number of horizontal construction projects where a contractor’s sequence of work and schedule is predicated on avoiding the rainy season (or certain force majeure events).  The reason is that the rainy season will result in delays due to the inability to work (and work efficiently) during the adverse weather (including flooding caused by the weather).  

There are a number of horizontal construction projects where a contractor’s sequence of work and schedule is predicated on avoiding the rainy season (or certain force majeure events).  The reason is that the rainy season will result in delays due to the inability to work (and work efficiently) during the adverse weather (including flooding caused by the weather).   If the work is pushed into the rainy season, is such delay compensable if the government (or owner) delayed the project that pushed work out into the rainy season?  It very well can be.

For example, in Meridian Engineering Co. v. U.S., 2019 WL 4594233 (Fed. Cl. 2019), a contractor was hired by the Army Corps of Engineers to construct a flood control project for a channel in Arizona. Due to delays, including those caused by the government, the project was pushed into the monsoon season, which caused additional delays largely due to flooding caused by the heavy rain.  One issue was whether such delays were compensable to the contractor – the government raised the argument that the contractor assumed the risk of potential flooding from the rainy season.  The Court found this argument unconvincing:

[The contractor’s] initial construction schedule planned for a completion of the channel invert work, a necessary step in protecting the site from flooding, to be completed by late June 2008…[M]any issues arose in the project’s early stages that led to cumulative substantial delay, including those caused by the government’s failure….The government cannot now claim that [the contractor] assumed the risk of flooding from monsoon season when the government was largely responsible for [the contractor’s] inability to complete the project prior to the beginning of the monsoon season.  Simply put, the government cannot escape liability for flood damages when the government is responsible for causing the contractor to be working during the flood-prone season.

Meridian Engineering, 2019 WL at *7 (internal citations omitted)

In other words, but for delays caused by the government, the contractor’s work would not have been pushed into the monsoon season.  The Court’s outcome, perhaps, would have been different if the contractor was the sole cause of delays that pushed the project into the monsoon season or the contractor’s original schedule was unrealistic to begin with.

It very well can be.

For example, in Meridian Engineering Co. v. U.S., 2019 WL 4594233 (Fed. Cl. 2019), a contractor was hired by the Army Corps of Engineers to construct a flood control project for a channel in Arizona. Due to delays, including those caused by the government, the project was pushed into the monsoon season, which caused additional delays largely due to flooding caused by the heavy rain.  One issue was whether such delays were compensable to the contractor – the government raised the argument that the contractor assumed the risk of potential flooding from the rainy season.  The Court found this argument unconvincing:

[The contractor’s] initial construction schedule planned for a completion of the channel invert work, a necessary step in protecting the site from flooding, to be completed by late June 2008…[M]any issues arose in the project’s early stages that led to cumulative substantial delay, including those caused by the government’s failure….The government cannot now claim that [the contractor] assumed the risk of flooding from monsoon season when the government was largely responsible for [the contractor’s] inability to complete the project prior to the beginning of the monsoon season.  Simply put, the government cannot escape liability for flood damages when the government is responsible for causing the contractor to be working during the flood-prone season.

Meridian Engineering, 2019 WL at *7 (internal citations omitted)

In other words, but for delays caused by the government, the contractor’s work would not have been pushed into the monsoon season.  The Court’s outcome, perhaps, would have been different if the contractor was the sole cause of delays that pushed the project into the monsoon season or the contractor’s original schedule was unrealistic to begin with.

Significant 2019 Tennessee Construction Decisions

Allison Wiseman, Brian Dobbs and Ryan Lee | Bass, Berry & Sims

This Construction Law Alert highlights some of the significant Tennessee state and federal decisions affecting the construction industry from the past year.

Holdback Payments Are Not Retainage

Tennessee’s Prompt Pay Act (PPA) requires all retainage withheld on construction projects to be deposited into a separate interest-bearing escrow account with a third party, and there are potentially harsh civil and criminal penalties for failing to do so. In Vic Davis Construction v. Lauren Engineers & Constructors, Inc., No. E2017-00844-COA-R3-CV, 2019 WL 1300935 (Tenn. Ct. App. March 20, 2019), a subcontractor alleged the contractor failed to comply with this requirement under a subcontract that called for a final payment of 5% for “Turn-over, As-Builts, Final Clean Up, Demobilize.” In arguing that this “holdback” payment constituted retainage that should have been escrowed, the subcontractor relied, in part, on the fact that Tennessee law limits retainage on construction projects to 5% of the contract amount. The court disagreed, finding that the contractor paid the subcontractor’s first 12 payment applications in full, and the contract explicitly stated that “invoices are not subject to retention.” Although the amount of the final payment likely exceeded the value of the as-builts, final clean up, and other items, the court held that the holdback did not constitute retainage.

Not Paying Retainage above Setoffs Constitutes Bad Faith

In the fallout from the late completion of the Nashville Centennial Sportsplex Indoor Fitness Expansion, the Tennessee Court of Appeals was again called on to consider the PPA. In E Sols. for Buildings, LLC v. Knestrick Contractor, Inc., No. M201802028COAR3CV, 2019 WL 5607473 (Tenn. Ct. App. Oct. 30, 2019), the project’s HVAC material supplier brought suit for nonpayment against the project’s HVAC subcontractor, general contractor, and owner.  Both the HVAC subcontractor and general contractor asserted multiple counterclaims and cross-claims. On appeal, the court found that the general contractor had violated the PPA by withholding more in liquidated damages from the HVAC subcontractor’s retainage than its claim to setoff and that such action constituted bad faith subjecting contractor to attorneys’ fees under the PPA.

Construction Changes on Publicly Funded Projects Could Give Rise to False Claims Liability

In Munson Hardisty, LLC v. Legacy Pointe Apartments, LLC, 359 F. Supp. 3d 546 (E.D. Tenn. 2019), the developer of an apartment complex in Knoxville obtained financing through HUD. During construction, disagreements arose between the developer and the project’s general contractor about payments including the developer’s attempts to refinance its HUD loans. As part of the dispute, the general contractor asserted claims under the federal False Claims Act (FCA) on the basis that the developer made changes to the project’s drawings and specification but did not obtain HUD’s approval as required under HUD’s loan agreements. The developer moved to dismiss the FCA claims, but the court denied the motion finding that the general contractor sufficiently alleged that the developer took actions to retaliate against it when the general contractor refused to cooperate or consent to the project’s refinancing due to the developer’s alleged false statements to HUD.

Whether Multiple Phase Project Has a Single Date Of Substantial Completion Is a Question of Fact

In Palazzo v. Harvey, 380 F. Supp. 3d 723 (M.D. Tenn. 2019), which involved the construction of an indoor horse arena and stable, the project’s designer and general contractor moved for summary judgment on the owner’s breach of contract and negligence claims asserting that the statute of limitations had expired. The designer and general contractor argued that despite there only being a single contract for their work, the arena and stable were two different projects with two different dates of substantial completion for the purposes of the statute of limitations. The court denied the motion finding that genuine issues of material fact existed about whether the parties understood that the work constituted one or more distinct projects. The court noted that Tenn. Code Ann. § 28-3-201 defines substantial completion but “does so in the context of being ‘in accordance with the contract documents,’” so the statutory language alone could not conclusively determine the substantial completion date.

Other Tennessee Construction Decisions of Note:

Maddox v. Olshan Foundation Repair & Waterproofing Co. of Nashville, L.P. (Tenn. Ct. App. Sept. 18, 2019) – A homeowner’s claims against a foundation repair company were not barred by the four-year statute of repose because the foundation repairs did not constitute an “improvement” to real property. The court upheld judgment for the homeowner.

Miolen v. Saffles, No. E2018-00849-COA-R3-CV, 2019 WL 1581494 (Tenn. Ct. App. April 12, 2019) – Trial court’s award of treble damages under the Tennessee Consumer Protection Act, Tenn. Code Ann. § 47-18-101, was not an abuse of discretion where the trial court found that defendant “misrepresent[ed] that [] walls had been engineered by a professional engineer, and by charging plaintiffs $10,000 in ‘engineering’ expenses that were not incurred by an engineer.”

H Group Construction, LLC v. City of Lafollette, No. E201800478COAR9CV, 2019 WL 354973 (Tenn. Ct. App. Jan. 28, 2019) – An unsuccessful bidder for municipal construction projects alleged that the City had engaged in unlawful restraint of trade and violated its competitive bidding ordinances. The court held that municipalities enjoy sovereign immunity against claims for restraint of trade and that the City’s bidding ordinances did not provide a private right of action for monetary damages. A writ of certiorari is the only method for asserting a violation of such ordinances.

SPE GO Holdings, Inc. v. W & O Constr., Inc., No. 18-5404, 2018 WL 6181645 (6th Cir. Nov. 27, 2018) – Affirming district court’s denial of defendant’s request for judgment as a matter of law (which would have nullified the jury verdict) and explaining that determination of whether someone was a third-party beneficiary to a contract was a fact question properly submitted to the jury; owner gave sufficient notice of breach and opportunity to cure under Tennessee law; and evidence was sufficient to support damages award under Tennessee law.

TWB Architects, Inc. v. Braxton, LLC, No. M2017-00423-SC-R11-CV, 2019 WL 3491467 (Tenn. July 22, 2019) – When a condominium developer failed to pay for his services, the project’s architect accepted a condominium unit in lieu of payment.  When the developer’s lender foreclosed on the architect’s condominium unit, a question of fact existed whether the architect’s claims against developer under the original architectural services agreement were eliminated.

Crouch Ry. Consulting, LLC v. LS Energy Fabrication, LLC, No. M201702540COAR3CV, 2019 WL 1949631 (Tenn. Ct. App. Apr. 30, 2019), appeal granted (Oct. 14, 2019) – A Texas company engaging a Tennessee engineering company to provide customized services, which were performed primarily in Tennessee, subjected the Texas company to jurisdiction in Tennessee.

If you have any questions about how these decisions will impact your company, please contact one of the authors or any member of the firm’s Construction Contracts & Litigation Practice Group.

Another Reminder to ALWAYS Show up for Court

Christopher G. Hill | Construction Law Musings

I have discussed the need to always respond to a lawsuit on multiple occasions here at Construction Law Musings.  However, I keep reading cases where the defendant fails to appear either by pleading or in person.  Such action is never a good idea as demonstrated once again in the case of Balfour Beatty Infrastructure, Inc. v. Precision Constr. & Mgmt. Group, LLC, a case out of the Eastern District of Virginia.

The basic facts are not a surprise and are taken from the magistrates report that was adopted by the District Court.  Balfour Beatty and Precision entered into a subcontract for some electrical work at a project located in Loudoun County.  The subcontract included an attorney fees provision and provided for liquidated damages for late performance and the typical damages for default.  The project began in July of 2016 with substantial completion July 5, 2018.  Precision failed to supply sufficient manpower and sent a letter to Precision stating the same.  After an agreement between the parties regarding supplementation by Balfour Beatty and to the accompanying back charge, Balfour Beatty informed Precision by letter that it would be liable for any liquidated damages.  The Owner began assessing liquidated damages and Balfour Beatty subsequently terminated the subcontract and discovered defective work by Precision.

Balfour Beatty sued and after the expiration of the response deadline moved for default judgment.  The magistrate judge found, without any defense from Precision, that Precision materially breached the contract for numerous reasons, converted any equipment that Precision retrieved from the job site post default, and awarded attorney fees.  The total damages exceeded a million dollars.  The District Court adopted these findings in whole.

Were all of these findings accurate?  Did Precision possibly have defenses?  Would there have been an opportunity for settlement or mediation?  We’ll never find out because Precision didn’t take the time to respond.  By failing to respond, Precision removed all flexibility and waived any defenses it may have had, thus precluding any possibility to mitigate the outcome.

As always, I reccommend that you read the case (linked above) for yourself.  I also reccomend that should you be served with a lawsuit relating to your construction project that you always respond and do so with the assistance of an experienced construction attorney.

When is a General Contractor’s License Required for Emergency Remediation Services?

Evan m. Musselwhite | Ward and Smith

North Carolina has seen an increase in the need for building repair services following the damage caused by recent hurricanes, including Florence in 2018 and Dorian in 2019.

Frequently, these services must be performed on an emergency basis. These services are referred to by many different names but are typically referred to as remediation, restoration, or mitigation. The services typically involve removing wet and damaged materials and building components, drying the structure, and, sometimes, repair or reconstruction work. The lines between remediation, demolition, and repair are often blurred. Many emergency remediation companies, particularly those from out-of-state, may not realize that they are wading into territory that requires a general contractor’s license in North Carolina. North Carolina has a fairly broad definition of what constitutes general contracting for which a license is required. This article will provide some general guidance about when a license is required.

Having the proper license to perform work on a building is vitally important in North Carolina for at least three reasons. First, performing work without a license when one is required is illegal and criminally punishable as a misdemeanor. Second, doing so also may precipitate administrative action by the North Carolina General Contractor’s Licensing Board, and this may present an obstacle to subsequently obtaining a license. And finally, it has long been the rule in North Carolina that if a license was required for the work, an unlicensed contractor cannot enforce the subject contract or agreement. In other words, if an unlicensed contractor is not paid, the unlicensed contractor cannot use a lawsuit to recover the amount owed for the work performed, even if the owner is unjustly enriched by the work. The practical result is that the unlicensed contractor performs the work for free.

To avoid this result, every remediation contractor performing work in North Carolina should carefully evaluate whether their scope of work falls within North Carolina’s definition of general contracting for which a license is required and, if so, comply with the requirements for licensure before entering into the contract and undertaking the work.

Whether a general contractor’s license is required depends upon two factors: (1) the cost of the work; and (2) the nature of the work. The threshold dollar amount is $30,000.00. A general contractor’s license is not required if the total cost of the work is less than $30,000.00. Whether a license is required for work that exceeds $30,000.00 depends upon the nature of the work.

The North Carolina General Statutes define general contracting as follows:

[A]ny person or firm or corporation who for a fixed price, commission, fee, or wage, undertakes to bid upon or to construct or who undertakes to superintend or manage, on his own behalf or for any person, firm, or corporation that is not licensed as a general contractor pursuant to this Article, the construction of any building, highway, public utilities, grading or any improvement or structure where the cost of the undertaking is thirty thousand dollars ($30,000) or more, or undertakes to erect a North Carolina labeled manufactured modular building meeting the North Carolina State Building Code, shall be deemed to be a “general contractor” engaged in the business of general contracting in the State of North Carolina.

If the work falls within this definition, a general contractor’s license generally is required. For purposes of remediation, the pivotal factor here appears to be whether the work involves the construction of any “improvement” where the cost of the work is $30,000.00 or more.

Performing remediation work to arrest further damage, such as removing wet carpet and drying the structure with fans or dehumidifiers, is clearly not construction and should not require a license. This would include work that does not involve construction. Work that can be categorized as repairs, however, may constitute the construction of an improvement for which a license is required.

North Carolina courts have recognized that the term “improvement” does not have a definite and fixed meaning but does connote the performance of construction work. Few cases have squarely addressed what type of work constitutes an improvement under the statute. However, courts have found that the following constituted the construction of an improvement requiring a license: repairs to a home that had been damaged by fire; adding a roof over an existing structure; and the renovation of apartments that included correction of dry rot, installation of new storm doors and windows, new paint, new wallpaper, and new carpet.

Additionally, the contractor license classifications used by North Carolina tend to support the notion that even demolition constitutes an improvement. For instance, the classifications for Building Contractor and Residential Contractor both specifically cover “all building construction and demolition activity[.]”

These cases and classifications suggest that the term improvement has a broad meaning in North Carolina that includes all types of “construction work.” This makes sense. If construction exceeding $30,000 in cost is being undertaken, this almost certainly would constitute an “improvement” and require a license.

A fairly recent unpublished opinion for a case decided by the North Carolina Court of Appeals, however, suggests that not all repair work may fall within the definition of general contracting and require a license. By issuing an unpublished opinion, the Court has made it clear that the opinion has no precedential value and is not controlling for future cases. Nonetheless, the opinion is instructive as to how careful North Carolina courts will look at the word “improvement.” In the 2018 case, an unlicensed contractor filed a lawsuit against the owner of a shopping center that was damaged during Hurricane Matthew. The unlicensed contractor alleged that it was owed $212,776.15 for “mitigation work” and $139,854.58 for “reconstruction work.” The owner responded by asserting that the contractor was not entitled to recover because it was unlicensed and the cost of the work exceeded $30,000. The trial court agreed with the owner and dismissed the unlicensed contractor’s lawsuit. The unlicensed contractor appealed to the Court of Appeals.

On appeal, the Court recognized that North Carolina’s law is not clear as to what types of repair work are covered under the definition of improvement. The Court noted that while the construction of new walls, floors, etc. would certainly require a license, “the cases do not provide black letter rules for determining whether the mere repair of an existing wall or other improvement is considered ‘the construction of an improvement’ covered under [the general contracting statute].” The Court determined that because there are no black letter rules, determining whether certain work constitutes an improvement for purposes of licensure depends on the totality of the factual circumstances in each case. The case involved an early dispositive motion, which meant the Court didn’t have evidence of the specific services provided and could not delve into the issue further. Unable to resolve the issue without more development of the actual facts, the Court reversed the dismissal and sent the case back to the trial court to determine whether the nature of the specific work performed by the subcontractor required a license. The unlicensed contractor incurred the cost of the dismissal and the appeal.

Although the opinion, in this case, gives limited guidance as to what types of repair work may not be covered under the definition of improvement, it does suggest that simply repairing or patching building components, like a wall, may not require a license in all circumstances. The case, however, cannot be understood to mean that simply calling work “repairs” means that no license is required. Whether a license is required for repairs depends on the factual circumstances of each individual case.

This case and the others touching on the issue make one thing clear: except for work that constitutes an obvious “improvement” and requires a license if the cost is more than $30,000, there are no bright-line rules or tests to determine whether certain work constitutes an improvement. Rather, that determination is a factual one that must be made in each individual case. Because of this uncertainty, it is imperative for remediation contractors to carefully review and analyze the nature and scope of the work involved to determine whether a license is required and, if so, to comply with the requirements for licensure before committing labor, materials, and services to remediation work. This is not an issue that contractors can afford to get wrong or they may find themselves unable to collect what is owed to them for the work they performed.

Insured’s Leaky “Abrupt” Interpretation of All-Risk Insurance Collapses Under Eleventh Circuit Scrutiny

D. Barret Broussard | Property Casualty Focus

In S.O. Beach Corp. v. Great American Insurance Company of New York, No. 18-1967 (11th Cir. Oct. 31, 2019), the Eleventh Circuit affirmed the district court’s grant of summary judgment in full to the insurer, finding there was no ambiguity in the all-risk policy’s definition of a “collapse” as “an abrupt falling down or caving in of a building or any part of a building with the result that the building or part of the building cannot be occupied for its intended purpose” (emphasis added).

The case involved the caving in of several floors of the insured’s building, which the insured claimed was caused by water damage from a leaking pipe that deteriorated the floors’ sill plates, causing a “collapse.”

Under the all-risk policy, all fortuitous loss or damage would be covered unless there is fraud, willful misconduct, or a delineated exception. One such exception was for a “collapse,” which, as set forth in the policy, would only be covered when caused by a specified cause of loss, including hidden decay.

The district court granted summary judgment in full to the insurer on the basis that the insurer produced evidence that the collapse of the three floors was gradual, rather than abrupt, and therefore the loss was excluded under the policy. On appeal, the insured argued that the collapse provisions were ambiguous and should be construed against the insurer — specifically, the policy allegedly defined a collapse as abrupt while also providing that gradual decay may qualify as a collapse.

The Eleventh Circuit disagreed with the insured, finding that “collapse” was not ambiguous because causation and occurrence are not the same. While a collapse’s causation may be something gradual or abrupt, the question is whether the collapse (i.e., the event of occurrence) itself is abrupt. Therefore, because the insured failed to produce any evidence that the collapse was abrupt, the Eleventh Circuit affirmed the district court’s decision, effectively ending this campaign to carve out extra-contractual caving coverage.