Contractor Submits $4.5M Claim for Differing Site Conditions, Fed Court Rejects and then Imposes Liquidated Damages for $400K

Brendan Carter | The Dispute Resolver | November 21, 2018

The U.S. Court of Federal Claims shows contractors once again the dangers that can exist when pricing a performance specification and the importance of giving owner’s proper notice for change orders in CKYInc. v. Unites States of America.

In 2012, the Government awarded CKY, Inc. a $6.4M contract to widen and rehabilitate the Urban Presidio Levee located in Presidio, TX.  The work required CKY to excavate existing materials in a series of benches and then infill the benches with new materials.  The contract contained a material testing specification which required the new fill material meet certain requirements.  The existing “benched” materials was further required to meet a performance specification as to moisture content and compaction rates.

During the bid process, the Government released Amendment 003 which contained questions and answers from bidders to the Government.  Within that document, the Government stated:

  •       “Due to contamination in situ and the Contractor’s excavation processes, [the Government] cannot state that excavated material will meet…requirements. The Contractor is required to meet the embankment specification regardless of the source of the embankment material.”
  •     “Question: Will removal and disposal of any unsatisfactory material from the existing levee embankment be paid as a separate item, as it is unknown how much material will be unsuitable for use in the new embankment? Government Response: No.”

Furthermore, the bid documents contained a geotechnical report for the existing ground conditions, but the report included the following disclaimer:  

“The data and report are not intended as a representation or warranty of continuity of conditions between soil borings nor groundwater levels at dates and times other than the date and time when measured. The [Commission] will not be responsible for interpretations or conclusions drawn there by the Contractor.”

During construction, CKY had difficulty achieving the subgrade requirements for moisture and density which resulted in schedule delays. CKY alleged at this time it was directed by the Government to place new suitable materials over the “unacceptable, non-constructible subgrade.”

In August of 2016, CKY filed a complaint in the U.S. Court of Federal Claims claiming costs for: (1) differing site conditions; (2) defective specifications; (3) constructive change; and (4) breach of an oral and implied-in-fact contract.

The Government moved for summary judgement contending CKY’s interpretation of the contract and specification were improper and CKY had not provided adequate notice of differing site conditions. It then filed a counter claim for liquidated damages.

The Court began its analysis by stating the primary issue in the dispute is the suitability of the subgrade material and CKY’s entire claim is based upon its contract interpretation that the subgrade was to be “acceptable and constructible.”

The Court first examined the Government’s assertion CKY’s interpretation of the contract documents and specifications were incorrect.  The Court reviewed the items contained within Addendum 003 and the geotechnical report disclaimer and found that a reliable contractor could not have relied on the subgrade soil to meet the requirements of the specifications.  The Court elaborated that, “When all parts of the contract are assigned meaning and understood in their entirety, CKY’s reliance on its own interpretation of the constructability and suitability of the subgrade material was unreasonable.”

The Court next reviewed the differing site condition claim and CKY’s argument that “constructive notice” had been given to the Government.  The Court noted constructive notice is allowed only if “the Government is not prejudiced by a lack of written notice.” The Court reasoned that since it took CKY over a year to submit a REA for the subgrade materials, the Government was prejudiced because it could have stopped construction to evaluate all options other than a $4.5M change order.

Finally, the Court found that as a result of finding CKY had no basis for a claim and the project being 225 days late, liquidated damages as identified in the contract were appropriate in the amount of $1,885 per day.

In conclusion, the Government was granted summary judgement and awarded $424,125 in liquidated damages.

Concurrent Delay: Surety—Standing in the Shoes of Subcontractor—Is Barred From Asserting Defense of Concurrent Delay Because Subcontractor Failed to Seek a Time Extension as Required by the Subcontracts

Michelle Beth Rosenberg | Pepper Hamilton LLP | November 20, 2018

Fid. & Deposit Co. of Md. v. Travelers Cas. & Sur. Co. of Am., 2018 U.S. Dist. LEXIS 162265 (D. Nev., September 21, 2018)

Clark County School District (“CCSD”) hired Big Town Mechanical (“Big Town”) as general contractor to perform HVAC upgrades at five schools. Big Town in turn hired F.A.S.T. Systems (“FAST”) to complete low-voltage work at the schools. Big Town obtained performance bonds from Travelers Casualty and Surety Company of America (“Travelers”) and FAST obtained performance bonds from Fidelity & Deposit Company of Maryland (“F&D”).

Following FAST’s default on its subcontracts, F&D opted to complete FAST’s work and hired a substitute subcontractor, Perini. In May 2012, Perini notified Big Town that it had “substantially completed” all of FAST’s work. After Big Town refused payment, F&D filed suit against Big Town and Travelers in early 2013. In May of 2013, CCSD rejected Big Town’s final payment application, stating that the project was incomplete and claiming there were significant defects in the work. CCSD then sued Travelers seeking specific performance and liquidated damages for delay. Travelers eventually settled CCSD’s suit but through its counterclaim sought reimbursement from F&D for its settlement plus costs expended to complete the project.

F&D moved for partial summary judgment, asserting that because Big Town contributed to the delays in completing the HVAC work, Travelers—standing in Big Town’s shoes—could not establish that FAST caused the liquidated damages to accrue. F&D argued that any delays attributed to FAST ran concurrent to delays caused by Big Town and therefore FAST was not the “but for” cause of the liquidated damages.

Relying on California Court of Appeal’s decision in Greg Opinksi Construction, Inc. v. City of Okadale, 132 Cal. Rptr. 3d 170 (Cal. Ct. App. 2011), Travelers argued in response that where a subcontractor fails to comply with mandatory subcontract procedures pertaining to requesting an extension of the subcontract time, the subcontractor is responsible for all delay damages and loses the right to assert that others caused the delay. The District Court agreed, finding that FAST’s exclusive remedy for delay was to request an extension pursuant to the subcontracts and that failure to request an extension would act as a waiver of a claim for delay damages. The Court reasoned that this provision was intended to allocate the risk of delay costs. Accordingly, the Court held that FAST’s failure to request an extension of time as specified in the subcontracts precluded F&D from asserting the concurrent-delay defense.

F&D argued that it was not bound by the time-extension provision in the subcontracts because those provisions were in the Big Town-FAST subcontracts, to which F&D was not a party. The Court rejected this argument on the grounds that F&D took over performance once FAST defaulted and therefore stood in FAST’s shoes. F&D then argued that it could not comply with the time-extension provisions because once CCSD declared Big Town in default, the subcontracts were terminated. The Court also rejected this argument because Big Town’s default occurred a year-and-a-half after FAST’s default and a year after F&D’s team declared the work complete.

Construction Law Practice Tip: Certificate of Merit Requirements in Federal Court

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Pierre Grosdidier and Ryan Gardner | Haynes and Boone LLP | November 12, 2018

Under Texas law, a plaintiff must file a certificate of merit in any action for damages arising out of the provision of professional services. A certificate of merit is an affidavit from a third-party professional who is knowledgeable about the defendant’s practice area that essentially gives credence to the plaintiff’s claims. A failure to file a certificate with the first-filed petition will result in the action’s dismissal in Texas state courts. But, federal courts are currently divided on whether plaintiffs must also file a certificate of merit when bringing these claims in diversity. No federal Circuit Court has addressed the Texas certificate of merit statute yet, but several federal district courts have considered the issue both for the Texas statute and other comparable state laws and reached conflicting conclusions. Two Texas district court cases discussed below illustrate this conflict well.

Faced with these conflicting results, construction law practitioners bringing claims against professionals in federal court should consult the case law to determine whether the forum court has decided the issue and how. Even if a district judge has previously held that plaintiffs in diversity can dispense with certificates of merit, it is conceivable that another judge might hold otherwise. Moreover, a district judge’s decision that no certificate of merit is required might be reversed by the Fifth Circuit Court of Appeals. Considering the time required to appeal, a negligence claim against a professional might be well past its limitations by the time the appellate court remands the case and the district court dismisses it without prejudice. Therefore, the best practice might be to always include a certificate of merit with an initial complaint.

In Estate of C.A. v. Grier, the Southern District of Texas held the certificate of merit requirement did not apply to federal diversity cases. The Supreme Court’s seminal opinion in Erie Railroad Co. v. Tompkins along with its more recent opinion in Shady Grove Orthopedic Associates v. Allstate Insurance Co. guided the court’s analysis. Erie held that courts adjudicating diversity-jurisdiction claims must apply state substantive law but federal procedural law to the proceedings. To determine if Section 150.002 was a substantive or procedural rule, the court applied the two-step test set forth in Shady Grove: (1) it determined whether the state law—Section 150.002—conflicted with federal law and, (2) if such a conflict did exist, the court asked if applying the federal rule was valid under the federal Rules Enabling Act, which forbids federal procedural rules from abridging, enlarging, or modifying any substantive rights.

Applying the first step, the court found Section 150.002 conflicted with various Federal Rules of Civil Procedure. The court first found a conflict with federal law because Section 150.002 imposed more stringent pleading requirements than Rules 8 and 9. Specifically, the court found Section 150.002’s requirement that the certificate of merit contain the specific factual allegations, including the action, error, or omission by the professional that formed the basis of the suit, created additional pleading requirements beyond Rule 8’s requirement that a pleading provide a short and plain statement of the plaintiff’s claim. Section 150.002 was, therefore, inconsistent with federal law. The court also found Section 150.002 conflicted with the discretion given to courts by Rule 11 to sanction attorneys for filing meritless claims. The court held the mandatory dismissal requirement took away the court’s Rule 11 discretion except as to whether the case should be dismissed with prejudice. Moreover, it concluded the certificate of merit requirement was inconsistent with Rule 26’s expert disclosure and report requirements by accelerating the federal procedures regarding experts.

Turning to the second step, the court held that applying Rules 8, 9, 11, and 26 in light of Section 150.002 did not affect any substantive rights (and, therefore, did not violate the Enabling Act) because Section 150.002’s “most obvious purposes are procedural.” Specifically, Section 150.002 was a procedural rule designed to inform the defendant of the specific conduct the plaintiff is challenging and to assure the court that the claims have merit.

The court found federal law provided other procedural means to accomplish these objectives, namely those offered by Rules 8 and 26(a). Thus, it held that Section 150.002 did not apply to federal diversity cases and denied the defendant’s motion to dismiss.

In State Automobile Mutual Insurance Co. v. Dunhill Partners, Inc., the Northern District of Texas reached the opposite conclusion when faced with identical arguments. The court found Section 150.002 did not conflict with Rules 8 or 9 because the statute was not about pleadings, facts, or notice but rather about “rooting out professional negligence claims that lack expert testimony.” As to Rule 11, the court found no inconsistency because the Federal rules implicitly mandated dismissal for a procedural deficiency, such as under a Rule 12(b) motion, and because Rule 11 focuses on attorneys, not the claims. The court also found no conflict with Rule 26 because Section 150.002’s concurrent filing requirement did not alter the federal schedule for disclosures or discovery. Additionally, the court found the certificate of merit requirement to be substantive because its dismissal requirement had a direct effect on the ultimate result of the litigation. The Court, therefore, held Section 150.002 should apply to federal diversity cases, dismissed all claims without prejudice, and ordered the plaintiff to file an amended petition within 30 days to avoid dismissal with prejudice.

Why You Should Think Twice Before Withholding Payment From Your Subcontractor

Katlyn L. Gregg | Procopio Cory Hargreaves & Savitch LLP | October 18, 2018

As anyone involved in even the most straightforward construction project is aware, payment disputes frequently arise between contractors. If you are in the middle of the payment dispute, it may seem practical to withhold all payment to the subcontractor until the dispute is resolved. However, a recent holding by the California Supreme Court demonstrates the danger in failing to timely pay a subcontractor for all amounts that are undisputed, regardless of ongoing issues between you.

California has enacted a number of statutes over the years that are focused on ensuring that downstream contractors receive progress payments and retention payments in a timely manner. As most contractors know, however, these statutes also allow for the direct contractor to withhold amounts from a subcontractor that are the subject of a good faith dispute.

On May 14, 2018, the California Supreme Court sought to clarify the scope of that provision. In United Riggers & Erectors, Inc. v. Coast Iron & Steel Co., No. S231549, slip. op. (Cal. Sup. Ct. May 14, 2018), the Court determined that payment may be withheld from a subcontractor pursuant to the “good faith dispute” exception only when a good faith dispute exists over a statutory or contractual precondition to that payment, such as the adequacy of the construction work for which the payment is consideration. In other words, controversies concerning unrelated work, or additional payments above and beyond the amount both parties agree is owed, will not excuse a contractor’s delay in paying undisputed amounts.

The facts of United Riggers illustrate the implications of this holding. In 2010, Universal City Studios selected defendant Coast Iron & Steel Co. to serve as the direct contractor to design, furnish, and install metal work at its theme park. Universal agreed to pay Coast Iron on a monthly basis for amounts billed, minus a 10 percent withholding as protection against nonperformance and potential liens. Upon receipt, Coast Iron was contractually responsible for making corresponding payments to its subcontractors. One such subcontractor was plaintiff United Riggers & Erectors, Inc., which was responsible for installing the metal work Coast Iron fabricated and supplied. The contract between Coast Iron and United Riggers called for United Riggers to receive $722,742 for its work. Because of change orders submitted by United Riggers and approved by Universal, the amount Coast Iron owed United Riggers eventually rose to just under $1.5 million. None of these amounts were disputed.

However, once all work on the project was finished, United Riggers demanded an additional $274,158.40 for increased expenses attributed to Coast Iron’s mismanagement, and $78,384 based on outstanding change order requests. Coast Iron disputed these amounts, and thus refused to make any payment.

Following completion of the project, Universal paid out the 10 percent withheld as a retention to Coast Iron; of that amount, $149,602.52 was owed to United Riggers. Coast Iron did not dispute that the $149,602.52 paid by Universal was owed to United Riggers, but again declined to make any payment to United Riggers in light of the disputed claims related to mismanagement and outstanding change order requests.

United Riggers sued in January, 2013. Its complaint alleged various common law claims and one statutory claim for failure to make prompt payment of the retention monies Coast Iron had received from Universal and in turn owed United Riggers. (Civ. Code, §§ 8814, 8818.) In February, 2013, Coast Iron made a partial payment of the retention, and in December, 2013, it paid the remainder. However, these payments did not moot United Riggers’ statutory claim because the statutory scheme imposes a penalty for delay and awards attorney fees and costs to the prevailing party in any action over late payment of a retention. (Id., § 8818, subds. (a), (b).)

Consequently, although Coast Iron ultimately paid United Riggers all undisputed amounts owed, it was still liable for prompt payment penalties and United Riggers’ attorneys’ fees. The court explained that direct contractors cannot use the parties’ disputes over project mismanagement to justify withholding a subcontractor’s portion of the retention.

The key takeaway from this opinion is that direct contractors need to be cautious when withholding retention payments from subcontractors and ensure that they are withholding payment only when there is a dispute directly relevant to the specific payment that would otherwise be due. Without that caution, the contractor could find itself on the hook for additional penalties and costs.

A Word to the Wise: The AIA Revised Contract Documents Could Lead to New and Unanticipated Risks – Part II

George Talarico | Construction Executive | September 18, 2018

Part I addressed general conditions, revised insurance terms, revisions that affect owner’s required insurance and revisions that affect contractor’s required insurance.

REVISIONS THAT AFFECT DISPUTE RESOLUTION

A seemingly minor but noteworthy change is to the definition of “Claim.” Under Section 15.1 a “Claim” is defined to:

  • include a request for a modification of contract time; and
  • exclude any requirement that an owner must file a claim to impose liquidated damages.

Notably, any request relating to contract time must be brought within the specified time period for Notice of Claim1 and in the prescribed manner2. There are at least two traps for the unwary. First, even though email is regularly used for communications among the parties, the revised contract documents do not recognize email as an acceptable form of delivery of a Notice of Claim. Second, an unwary contractor may wrongly assume that an owner’s failure to assert a claim for LDs means that LDs will not be imposed. This may lull the contractor into failing to timely assert its own claim for a time extension and thereby waiving its ability to do so.

There have not been any major revisions to the arbitration provisions of Section 15.4. Other changes, however, will influence dispute resolution. As before, a condition precedent to commencing Mediation and thereafter a possible arbitration or litigation, Claims must first be submitted to the Initial Decision Maker3. The IDM is normally the architect as the architect is designated as the default IDM4. The 2017 revisions, however, now include strong exculpatory language protecting the IDM from liability “for results of interpretations or decisions rendered in good faith5.” This broad protection from liability could place the architect (acting as IDM) in an uncomfortable and possible conflicted position if, for example, the Claim infers liability on the part of the architect (such as improper or defective design). Moreover, it raises possible struggles to ascertain the meaning of ‘good faith’ in the context of the architect’s actions6.

REVISIONS THAT AFFECT SUPERVISION AND CONSTRUCTION PROCEDURE

In circumstances where the specifications do not prescribe construction means and methods, these remain the responsibility of the contractor. It appears, however, that the contractor is now being burdened with some of the architect’s design responsibilities, in circumstances where the specifications and/or drawings “give specific instructions concerning construction means, methods, techniques, sequences or procedures7.” Previously, if the contractor determined that the specified means, methods, techniques, sequences or procedures were unsafe, the contractor was required to provide the architect with timely notice and then stop the work it deemed to be unsafe, while awaiting further written instructions8. Now the contractor does not have the right to stop work and it is incumbent upon the contractor and not the architect to propose alternate means, methods, techniques, sequences or procedures9. The architect’s role has been diminished and is only required to review the contractor’s proposal, solely for “conformance with the design intent for the completed construction10.”

REVISIONS THAT AFFECT SHOP DRAWINGS

Another change which could shift some design responsibility from the architect to the contractor is contained in the section on Shop Drawings. On one hand this section adds an assurance that in preparing Shop Drawings the contractor is “entitled to rely upon the adequacy” of the architect’s design criteria, yet on the other hand it removes the language stating that “[t]he contractor shall not be responsible for the adequacy of the” design criteria contained in the Contract Documents11. This modification could be interpreted to mean that through submittal of Shop Drawings, the contractor is taking on responsibility for design criteria.

REVISIONS THAT AFFECT CONTRACT TERMINATION

Another deletion that could prove troubling for the contractor involves contract termination by the contractor. Both the prior and current versions are consistent in that each allows the contractor to terminate the contract if work is stopped for 30 consecutive days, for certain specified reasons, i.e. court order. The difference is that the prior version limited this option only to circumstance where the delay was not caused by the contractor, a subcontractor or “entities performing portions of the Work under direct or indirect contract with the contractor12.”The latest version deletes the underlined words and therefore implies that the contractor has no right to terminate if the delay is caused by any party performing work on the project regardless of whether or not the contractor has any control over that party.

In instances where the owner terminates ‘for convenience’ the contractor will no longer be permitted to receive payment for overhead and profit on work that the contractor performed as a result of the termination unless the contract otherwise provides. Since the contractor is entitled to a termination fee included the contract13, it is important that a contractor negotiate for inclusion of overhead and profit in its calculation for a termination fee.

While many of the 2017 revisions to A201 appear to be stylistic in nature, there are some changes which could affect the liability of the architect, owner and the contractor (including its subcontractors). In order to prevent unpleasant surprises, the parties need to recognize those revisions that:

  • effect the claims process;
  • increase and/or limit costs;
  • shift liability; and
  • change deadlines.

This will allow them to negotiate around the revisions, i.e. included overhead and profit in termination fee) and/or perform the contract in a manner that anticipates the impact of the revisions, i.e. filing a claim for contract time extension without awaiting the owners claim for LDs.

1 “Claims by either party under Section 15.1.3.1 shall be initiated within 21 days after occurrence of the event giving rise to the Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later.” A201-2017 § 15.1.3.1.

2 Pursuant to A201-2017 § 1.6.2 Notice of Claims must be delivered by registered or certified mail or by courier.

3 Note that there is no requirement that Claims submitted after the correction of work period be submitted to the IDM. A201-2017 § 15.1.3.2.

4 A201-2017 § 1.1.8.

5 Id.

See, e.g., MECO Systems, Inc. v Dancing Bear Entertainment, Inc., et al., 948 SW2d 185, 1997 Mo. App. LEXIS 1191 (the architect’s “actions raise genuine issues of fact regarding the architect’s partiality and good faith.” where the architect failed to demonstrate its compliance with contract provisions on timeliness and the contractor raised claims that construction delays were caused by the architect).

7  A201-2017 § 3.3.1.

8  Id.

9  Id.

10 Id.

11  A201-2017 § 3.12.10.1.

12  A201-2007 § 14.1.1 (emphasis added).

13 A201-2017 § 14.4.3.