Federal Circuit Affirms Absence of Differing Site Condition But Remands for Delay Claim

Katherine E. Kohm | The Dispute Resolver | March 23, 2018

The case Meridian Eng’g Co. v. United States, No. 2017-1584, 2018 WL 1386147, at *10 (Fed. Cir. Mar. 20, 2018) concerned a dispute between the federal government and a contractor related to the construction of flood control structures and the relocation of a sewer line in Chula Vista near San Diego, California.  After starting work, the contractor encountered “subsurface organic/unsuitable material” and “a layer of dripping saturated dark clay material under which a clean layer of sand is producing water.”  As a result the parties modified the contract – selecting larger pipes, reinforced concrete, more soil investigation, but to no avail.  The project was terminated after further structural failures.  The contractor then sought extra costs for what it deemed a Type I differing site condition (“DSC”) and for delay costs for inclement weather. The Court of Federal Claims denied the claims and the contractor appealed to the United States Court of Appeals for the Federal Circuit.  The Appeals Court reviewed for “clear error.”

Under this federal contract, a Type I DSC claim arises when the subsurface or latent physical conditions at the site differ materially from those indicated in the contract documents.  The Appeals Court recounted that typically whether “a contract contained indications of a particular site condition is a matter of contract interpretation.” Id.  As part of its burden of proof, the contractor needed to show it acted as “a reasonable contractor [when] reading the contract documents as a whole [and] interpret[ing] them as making a representation as to the site conditions.”  Besides reliance on the contract and proof of damages, the contractor also needed to prove that “the actual site conditions were not reasonably foreseeable to the contractor with the information available to the particular contractor outside the contract documents” as well. Id.  The Appeals Court agreed with trial court’s conclusion that the saturated soil conditions were reasonably foreseeable from the contract documents.  In particular, the contract stated that the worksite was located on a floodplain and the descriptions of the incorporated boring logs expressly stated that “variations may exist in the subsurface between boring locations.”  The court also emphasized that “actual conditions at the site indicated such [saturated] conditions” and the contractor was charged with knowing information that could be gleaned from a pre-bid site visit.  The court found important that there was no testimony from the contractor otherwise regarding the actual conditions.

For the contractor’s part, it argued that the contract had identified the areas of the project as “hard unyielding material.”  But the Appeals Court was unpersuaded in the face of disclaimer contract provisions noting “unstable material” and boring logs that were determined to indicate otherwise. The contractor also balked that trial court found that an “independent soils investigation” was something a reasonable contractor would have performed.  Again the Appeals Court disagreed concluding that the underlying decision actually did “not impose an improper requirement for investigation.” Lastly, the Appeals Court disposed of the contractor’s argument that the agreed-to modifications to the contract served as admissions by the government that a Type I DSC existed because “a contractor is not entitled to the benefit of any presumption arising from the [CO]’s decision.” Id.

Although the contractor did not prevail on the DSC claim, the Appeals Court did breathe new life into the delay claim for having to work in inclement weather.  The trial court had dismissed this claim as well on account of an “accord and satisfaction” as a result of contract modifications. However, the Appeals Court disagreed noting that the contract modification did not represent a meeting of the minds to dispose of these inclement weather delay claims especially in light of the government’s actions post-modification – requests for estimates, draft modifications with these claims included, offer to review further documentation.  Accordingly this delay claim was remanded for further hearings.

Turning Off the Spigot of Damages in Construction Cases: The Doctrine of “Avoidable Consequences”

Jeff Wertman | Berger Singerman LLP | February 15, 2018

“Damage control” is often associated with measures taken to offset or minimize damage to reputation, credibility, or public image caused by a controversial act, remark, or revelation. However, the concept of damage control has been and continues to be prevalent in construction cases.

The doctrine of “avoidable consequences”, also sometimes referred to as the “duty to mitigate” damages, is an affirmative defense in construction cases and prevents a party from recovering those damages inflicted by a wrongdoer that the injured party could have reasonably avoided. Under the doctrine of avoidable consequences, a party must make reasonable efforts and exercise reasonable care to reduce the resulting damages as much as is practicable under the circumstances of the particular case or that party cannot recover damages flowing from consequence which reasonably could have avoided. However, a party need not make extraordinary efforts, including those which would require undue effort or expense.

A recent Florida case, Penton Business Media Holdings, LLC v. Orange County, Florida, Case No. 5D16–3935, 2018 WL 559684 (Fla. 5th DCA Jan. 26, 2018), illustrates why it is critical for a plaintiff seeking damages in a construction case to reasonably avoid the consequences of the damages caused by a wrongdoer.

The lawsuit in Penton arose out of an incident at the Orange County Convention Center (the “Convention Center”), which is owned by the plaintiff, Orange County. The defendant, Penton, leased several exhibit spaces from Orange County for a trade show at the Convention Center. Penton, in turn, leased one of the exhibit spaces to co-defendant, Ultratec. Penton advised exhibitors, including Ultratec, prior to the show that demonstration rooms (rooms for exhibitors to demonstrate or test their products) were also available for the show. Penton and Ultratec discussed the use of a demonstration room for a flame test display Ultratec wanted to conduct at the show. Thereafter, Ultratec hired co-defendant, Art F/X, to obtain a permit from Orange County, for the flame test. The permit was approved by Orange County and stated the flame test would involve the use of different theatrical flame effects.

Ultratec conducted its flame test and the display was monitored and supervised by the Orange County Fire Department. The sprinkler system became activated during Ultratec’s flame test. Although Orange County was in control of the demonstration room and owned the Convention Center, it did not initially know how to turn off its sprinkler system. As a result, the sprinkler system ran for approximately 30 minutes causing substantial water damage. Orange County subsequently sued based on theories related to strict liability and negligence against the lessee, Penton; the entity that obtained the permit, Art F/X; and the exhibitor, Ultratec.

Penton alleged in one of its affirmative defenses, the doctrine of avoidable consequences – the County’s damages to its property were created or enhanced by its failure to shut down or disengage the sprinkler system when reasonably possible. According to Penton, had the Convention Center shut off the sprinkler system when reasonably possible, its damages would be significantly less.

In its written opinion, the appellate court reversed part of the final summary judgment, which awarded damages to the County, concluding the County had not conclusively refuted Penton’s affirmative defense that the County failed to exercise ordinary and reasonable care in disconnecting the sprinkler system and had it done so, the water damage could have been avoided.

The doctrine of avoidable consequences is sometimes confused with the doctrine of comparative negligence. Both doctrines are affirmative defenses in construction cases which must be alleged and proven by a defendant, however, the avoidable consequences doctrine pertains to a plaintiff’s duty to prevent further injury and applies after a legal wrong has occurred. In contrast, the doctrine of comparative fault, which allows partial liability to be assigned to multiple parties, involves a party’s duty not to contribute to causing the initial injury.

The doctrine of avoidable consequences can have a substantial impact limiting damages in construction cases. Construction participants, including owners, developers, contractors, and sureties, should be familiar with this important principle.

“Good Faith” May Not Be Good Enough: California Supreme Court to Decide When General Contractors Can Withhold Retention

Erinn Contreras and Joy O. Siu | Construction & Infrastructure Law Blog | March 7, 2018

It is industry standard in California for owners of a construction project to make monthly payments to a contractor for work it has completed, less a certain percentage that is withheld as a guarantee of future satisfactory performance. This withholding is called a retention. Contractors generally pass these withholdings on to their subcontractors via a retention clause in the subcontract. Under such clause, if a subcontractor fails to complete its work or correct deficiencies in its work, the owner and the general contractor may use the retention to bring the subcontractor’s work into conformance with the requirements of the contract.

When and how retention payments must be released are governed by, among other statutes, Civil Code section 8800 et seq. Specifically, Civil Code section 8814, subdivision (a), states that a direct contractor must pay each subcontractor its share of a retention payment within ten days after the general contractor receives all or part of a retention payment. Failure to make payments in accordance with Section 8814 can subject an owner or a contractor to a (1) two percent penalty per a month on the amount wrongfully withheld, and (2) claim for attorney’s fees for any litigation required to collect the wrongfully withheld retention payments. (Civ. Code, § 8818.)

However, there exists an important exception to the ten-day deadline: whenever a “good faith dispute exists between the direct contractor and a subcontractor,” a direct contractor may withhold from the subcontractor’s retention an amount not in excess of 150 percent of the estimated value of the disputed amount. (See Cal. Civ. Code, § 8814, subd. (c) (Section 8814(c)).) There is very little in the statute or case law, however, defining what constitutes a “good faith dispute” sufficient to justify withholding funds from the retention.

The California Supreme Court has decided to fill this void, and granted a petition for review in United Riggers & Erectors v. Coast Iron & Steel, Case No. S231549 (United Riggers). The California Supreme Court certified the issue of whether “a contractor [may] withhold retention payments when there is a good faith dispute of any kind between the contractor and a subcontractor, or only when the dispute relates to the retention itself in the case of.”

In United Riggers, 243 Cal.App.4th 151 (2015), the General Contractor, Coast Iron & Steel Co. (Coast), entered into a direct contract with an owner and a subcontract with United Riggers & Erectors (United). After the work was completed, and after Coast received its retention from the owner, Coast continued to withhold United’s retention on the ground that United had submitted various change order requests and damage claims that Coast disputed, citing Section 8814(c)’s good faith provision.

The Court of Appeal disagreed with Coast and held that this was not permissible under Section 8814(c), holding “a contractor is entitled to withhold a retention payment only when there is a good faith dispute regarding whether the subcontractor is entitled to the full amount of the retention payment.” (Emphasis added.) The Court of Appeal then remanded for an assessment of interest and attorney’s fees due to United for the delayed retention payment claim. In reaching this conclusion, the Court of Appeal reasoned that “[t]o excuse Coast in this case from paying United the retention payments would unduly increase the leverage of owners and primary contractors over smaller contractors and subcontractors by discouraging subcontractors from making legitimate claims for fear of delaying the retention payment.” Such a consequence was not to be borne, the Court of Appeal explained, in light of the “broader remedial purpose of the prompt payment statutes” to “encourage general contractors to pay timely their subcontractors and to provide the subcontractor with a remedy in the event that the contractor violates the statute.”

This policy concern was the primary focus of the California Supreme Court at the oral argument in United Riggers, which took place on March 6, 2018. Coast’s counsel began with a “plain meaning” analysis of Section 8814(c), juxtaposing its language with Civil Code section 8812—which expressly states that retention payments may only be held when “there is a good faith dispute between the owner and direct contractor as to the retention payment due.” (Emphasis added.) This predicated Coast’s argument that if the Legislature intended to limit the scope of disputes between direct contractors and subcontractors to those relating to the retention itself in Section 8814, the Legislature would have done so as it did in Section 8812 related to owners and direct contractors. The Court pushed back against this construction of the statute, positing whether under such interpretation, a general contractor would be able to withhold retention payments for a dispute related to any issue, even one outside the scope of the contract, such as a property border dispute. If this were the case, Justice Kruger cautioned, such interpretation would allow contractors to leverage the disbursement of retention payments to resolve separate disputes on unrelated projects.

The case has been submitted, and an opinion is expected to be issued in approximately 90 days. The opinion will certainly have wide-reaching effects in the construction industry. Namely, in the common event of contractor and subcontractor disputes, contractors will have to be cautious in assessing offsets against the retention, particularly in situations where the dispute involves mixed claims of changed and delayed work and subcontractor deficiencies, lest they be liable for prompt payment penalties and attorneys’ fees.

Washington Legislature to Consider Reforms to Statute Governing Residential Construction Disputes

Grant S. Degginger | Lane Powell PC | January 31, 2018

Efforts are now underway in both houses of the Washington legislature to improve the legal landscape for residential construction defect litigation by adding a mediation option similar to what has been common in commercial and public works contracts.

The House Judiciary Committee is considering House Bill 2475, a bill introduced by Representative Cindy Ryu (D-Shoreline). Meanwhile, Senator Mark Mulle (D-Issaquah) has filed a similar proposal, Senate Bill 6523. Both bills propose several changes to RCW 64.50, the statutes governing the prerequisites for filing a residential construction defect lawsuit. As currently written, the statute requires a homeowner or a condominium association to serve a written notice on any construction professional (defined to include any contractor, subcontractor, developer, declarant, architect, engineer and/or inspector) detailing the defect at issue 45 days before filing suit. The construction professional then has 21 days to serve a written response to the notice proposing one of three options:

  • Propose to inspect the residence within a specified period of time and based upon the inspection offer to remedy the defect, compromise by making a cash payment or dispute the claim;
  • Offer to compromise and settle the claim with a monetary payment without inspection. The offer may include a proposal to purchase the residence that is subject of the claim and pay the claimant’s reasonable relocation costs; or
  • State that the construction professional disputes the claim and will not remedy the construction defect or offer to compromise and settle the claim.

The bills would revise the notice and opportunity to cure process and they would add mediation as a fourth option. Thus, a construction professional could respond to a notice of construction defect by offering to mediate, which would give the claimant 30 days to serve an acceptance or rejection of the offer to mediate. If the claimant rejects the mediation offer, then the notice and opportunity to cure process is terminated. If the mediation is accepted, then the parties have 30 days to do the following:

  • Select a mediator;
  • Agree on a mediation date;
  • Agree on what materials will be submitted at mediation;
  • Complete their respective investigation of the alleged defects;
  • Disclose each party’s proposed repair plan and the estimated costs of repair; and
  • Any other deadlines mutually agreed to by the parties.

The parties can mutually agree to modify the deadlines and the selected mediator is permitted to unilaterally extend deadlines by no more than 90 days.

The bills currently have a provision that allows either party to terminate the mediation process without cause and without costs. Given the time and expense that the parties may have incurred preparing for a construction defect mediation, including the mediator’s time, investigation and expert costs, it only would be fair to require that the party who terminates the mediation should pay at least the cost of any lost deposits for the mediator’s services. Although not currently in the proposed legislation, such an amendment would be reasonable.

The bills also extend the applicable statutes of limitations and repose following service of a claim under RCW 64.50.020 from 60 days after the period of time which the filing of an action is barred until 105 days after termination of the notice and opportunity to cure process; however, the new tolling period applies to claims by one construction professional against another construction professional only if the construction professional serves the claimant’s notice of claim upon the other construction professional within 60 days of receipt of the notice of claim or the amended notice of claim.

Many construction contracts for commercial or public works projects attempt to encourage early claim resolution by requiring the parties to engage in mediation before they can commence litigation. This bill seeks to extend this practice to the field of residential construction. The objective is that the mediation option will encourage early case assessments and timely resolution of disputes.

Florida Supreme Court Confirms 558 is Not a Civil Proceeding, Allowing Contractors and Design Professionals to Resolve Defect Disputes as Intended by the Legislature

Brian A. Wolf and Joseph R. Young | Smith Currie & Hancock | December 14, 2017

Contractors and design professionals are entitled to notice of alleged defects in their work and the opportunity to fix them without intervention by insurance companies and needless litigation. Today, Florida’s Supreme Court in Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Co., No. SC15-1420 (Dec. 14, 2017), held that the Florida Statute Chapter 558 dispute resolution process is not a civil proceeding. This means that contractors and subcontractors who receive a 558 demand are free to participate in the notice and right to cure process without notifying their insurers of non-covered claims for construction defects unless otherwise specified in their insurance policy.

Chapter 558, Florida Statutes, was enacted almost 15 years ago with the express purpose of resolving construction defect claims without expensive and time-consuming litigation. Chapter 558 was originally known as the notice and right to cure statute. Unfortunately, the statute is now more commonly referred to as the “construction defect statute.” The trend has been for owners, contractors and design professionals to engage in expensive and protracted processes often lead by condo-lawyers and their engineering consultants, and on the other side, insurance companies, their lawyers and adjusters.

In Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Co., the contractor’s reaction to an extensive 558 notice was an attempt to force its insurer to pay for the 558 process. Altman Contractors argued that its commercial general liability policy contractually obligated its insurance company to defend against the 558 process because it was no different than a lawsuit. Altman attempted to convince the Supreme Court that the 558 notice and right to cure process was a “civil proceeding” as defined by language of their insurance policy.

The Supreme Court expressly held that the chapter 558 presuit process is a mechanism for resolving disputed construction defect claims but it is not a civil proceeding. The Court reasoned that chapter 558 is a notice and repair process which is not equivalent to a lawsuit because participation is voluntary and does not involve a third-party acting like a judge. The Court noted that the 558 process does not take place in a court setting and the parties are free to resolve or not resolve the defect claims as they choose.

It is critical to note that the Supreme Court determined that that the 558 process would fit the insurance policy’s definition of a “suit” if the insured submitted to the 558 process with the insurer’s consent. The Court reasoned that the 558 process is an alternative dispute resolution proceeding as defined by the insurance policy that Crum & Forster Specialty Insurance Co. sold to Altman Contractors, Inc. The Supreme Court relied on the language of the insurance policy which included a specific definition of a “suit” in the context of the insurer’s duty to defend.

The Court’s holding is important because it allows contractors to request and obtain consent of their commercial general insurance company for the insurance company to pay for and participate in the 558 process. The Court’s holding provides contractors with guidance for triggering their insurance company’s duty to pay for the defense of a 558 proceeding. If the contractor elects to trigger defense coverage, then it is incumbent on the contractor to notify its insurer of the 558 claims and specifically request the insurer’s consent to the process before participating in the 558 process.

Contractors and design professionals who receive a 558 notice and demand to cure should take care to consult with their construction attorney to review their insurance coverage and determine whether and how to involve insurance in the 558 process. The determination will depend on whether any of the defects alleged in the 558 notice are covered by insurance and the specific triggering language of all applicable insurance policies.