Building a Case: Document Management for Construction Litigation

Robert A. Gallagher, Jane Fox Lehman and Michael I. Frankel | Pepper Hamilton | October 2, 2019

Success in construction litigation often turns less on counsel’s ability to craft legal arguments and more on counsel’s ability to gather, master and present the often complex set of facts underlying the case. In construction matters, most of the key facts are found in documents: contract documents, drawings, plans and specifications, schedules, submittals, progress reports, daily logs, change orders, invoices and payment records. Nowadays, these documents will almost certainly be created, exchanged and stored electronically; many will never exist in hard copy. As such, timely collection, organization and analysis of electronically stored information (ESI) is crucially important in construction litigation.

The construction industry has always involved a large quantity of records. Today, the majority of those records exist only as ESI: Design professionals use computer-aided design (CAD) software to create construction plans. Construction managers use Primavera or similar software to create schedules and workflows. Estimators use job cost control programs. Innovative firms capture digital photos of the project, from mobilization through the punch process.

Because ESI is created and exchanged at a higher rate than hard-copy documents, ESI has facilitated a dramatic increase in the volume of records associated with construction projects. Further compounding the increase is the proliferation of mobile devices. With a smartphone in every pocket, ESI creation has moved out of the home office and the site trailer and onto the site itself. As the volume of ESI expands, so too does the time and expense associated with storing, processing, reviewing and producing these records. This article will cover strategies for balancing time and expense with the requirements of the rules and the needs of the case.

Preserving Documents

The first and most important consideration in a thorough document collection is document preservation. In general, the duty to preserve documents arises when a party knows litigation is pending or likely. Construction practitioners should carefully consider when this occurs: The duty may arise as early as the time of the first differing site condition or change order, or as late as the service of the complaint. As soon as possible after the duty arises, counsel should devise and send a “litigation hold” to project personnel, instructing them not to delete ESI or discard hard-copy documents that may be relevant to the case. In a construction case, the litigation hold may need to cover personnel who are no longer actively working on the project, as projects often span multiple phases and several years.

The hold also may need to cover mobile devices, as project personnel, particularly those on site, commonly communicate via text messaging and voicemail. Preserving mobile device data can be tricky. Personnel may use their personal device — or devices — for work; they may lose, update or upgrade those devices; and they may store their data in the cloud. Preserving mobile device data is also expensive, as imaging a single device can cost a few hundred dollars. But these devices may hold facts critical to your story, such as photos that depict progress at a critical juncture, text messages that demonstrate constructive notice, or voicemails that evidence another party’s admission. Further, the failure to properly preserve, collect and produce discoverable mobile device data can subject a party to sanctions, up to and including dismissal of the case.

Collecting Documents

Today, it is standard for parties on large construction projects to use a dedicated server or share a cloud-based electronic document management (EDM) storage system to store, review, annotate and exchange project documents, including submittals, construction drawings and correspondence. These databases, which are typically hosted by the general contractor, can be a rich source of key documents for litigation. As such, the party hosting the databases should be aware that the database contents will almost certainly be the subject of discovery requests directed to them. Nonhosting parties may not have access to certain database contents unrelated to their scopes of work, or their access may have been severed after a contentious termination. For this reason, it likely will be the hosting party’s responsibility to export the contents for production. The hosting party should take care to preserve the database contents to avoid any charges of spoliation of evidence.

In addition to shared online document repository databases, parties on construction projects typically keep individual project files, which are internal repositories of all project documents. These too will almost certainly be the subject of discovery requests. As parties often have legal counsel (both in-house counsel and outside counsel, sometimes from multiple law firms) advising them at various stages of the project and on a variety of issues (including regulatory, permitting, land use, procurement, contract and litigation issues), parties should take care to segregate attorney communications, work product and similar documents from their files during the course of the project.

Parties should also conduct thorough screens of their project files for attorney communications, work product and similar documents before producing them to any other party. As parties often use third-party, nonlegal professionals, such as engineers, to assist attorneys in drafting contracts, permit applications and other documents, thorough screens require an understanding of the relationship between the attorneys and the nonlegal professionals to determine whether the presence of a third-party, nonlegal professional on an attorney communication destroys its privileged status.

Reviewing Documents

Construction practitioners now rely on advanced discovery technologies to limit the number of documents they collect and produce and the attendant costs to process, host and review those documents. Technology-assisted review (TAR) can reduce — or at least prioritize — large document volumes through deduplication, email threading, topic analysis and predictive coding. But practitioners should keep in mind that current TAR techniques rely on the text content of documents to reduce document volumes. As such, certain records common in the construction industry are poor candidates for TAR, including records that have no text, such as photographs and diagrams; records that have minimal text, such as schedules and drawings; and records that have text not in narrative form, such as spreadsheets and charts. These documents should be identified using available metadata (e.g., file extension or document name) and sequestered for human review.

Construction practitioners also frequently negotiate ESI protocols as a way to make discovery more efficient. Such a protocol might limit document collection from a particular custodian to the tenure of his or her time on the project. Or it might limit collection to those documents that hit on specific keywords, such as the project name, contract numbers, project acronyms, project locations and the names of other parties involved on the project. Using keywords to limit document collection can cut down on costs, but it does carry the risk of excluding relevant documents, as dedicated project personnel may not identify the project by name in their communications, especially informal communications.

Using keywords carries the risk of over-inclusivity, too. Construction personnel, especially at the management level, often have responsibilities across multiple projects, and so a keyword search for a particular project name may capture a substantial number of documents that cover more projects than the one at issue. Depending on the sensitivity of this “other project” material, care may need to be taken to identify the material and either redact it or withhold it. Counsel may also consider stipulating to a procedure for designating and protecting such documents as part of an ESI protocol.

Conclusion

Even as ESI has improved the quality and availability of documents associated with a construction project, it has dramatically increased the quantity of these documents. This increase in quantity has made collection, organization and analysis of documents more challenging, more time-consuming and more expensive. Fortunately, there are strategies available to ensure a proper, thorough and efficient process that will set the construction practitioner up for successful litigation.

The (Usually) Not-So-Difficult Question: Should a Policyholder Ask To Recuse a Federal Judge?

Ian Dankelman | Property Insurance Coverage Law Blog | October 12, 2019

To avoid the appearance of impropriety, the federal judiciary ensures that every case is assigned to impartial judicial officers. Absent a unique circumstance,1 all cases are assigned to a judge based on a random-draw system. Thus, there is usually no way for litigants to know which judge will preside over the action. Most districts also require the parties to file corporate disclosure forms and certify that the parties are aware of no judicial conflicts. Judges often proactively screen themselves from certain cases where parties are represented by former colleagues or law clerks.

Despite these steps, recusal issues regularly arise. Rather than serving as point of contention, federal judges want litigants to inform them of any potential conflict that they may have over presiding over the case—especially early in the litigation. Like their state counterparts, federal judges jealously guard their institution’s reputation and screen themselves from cases when their integrity might be reasonably questioned.

Indeed, there are five circumstances that statute requires a federal judge to recuse automatically:2

(1) Where he has a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding;

(2) Where in private practice he served as lawyer in the matter in controversy, or a lawyer with whom he previously practiced law served during such association as a lawyer concerning the matter, or the judge or such lawyer has been a material witness concerning it;

(3) Where he has served in governmental employment and in such capacity participated as counsel, adviser or material witness concerning the proceeding or expressed an opinion concerning the merits of the particular case in controversy;

(4) He knows that he, individually or as a fiduciary, or his spouse or minor child residing in his household, has a financial interest in the subject matter in controversy or in a party to the proceeding, or any other interest that could be substantially affected by the outcome of the proceeding;

(5) He or his spouse, or a person within the third degree of relationship to either of them, or the spouse of such a person:

(i) Is a party to the proceeding, or an officer, director, or trustee of a party;
(ii) Is acting as a lawyer in the proceeding;
(iii) Is known by the judge to have an interest that could be substantially affected by the outcome of the proceeding;
(iv) Is to the judge’s knowledge likely to be a material witness in the proceeding.

Indeed, for these circumstances, the parties cannot waive their right for the judge’s recusal. The judge and parties have no choice: the presiding judge must recuse.

When a federal judge issues a tough ruling, it is important for policyholders to recognize that the ruling itself is not a basis to seek a new judge to preside over the case. Instead, absent a circumstance requiring mandatory recusal, seeking recusal is only appropriate in cases in which the judge’s “impartiality might reasonably be questioned.”3 The test is whether an “objective, disinterested, lay observer fully informed of the facts underlying the grounds on which recusal was sought would entertain a significant doubt about the judge’s impartiality.”4 A judge has a duty to preside over the assigned case, and should not recuse based on “unsupported, irrational, or tenuous allegations.”5 Quite simply, a difficult or even unfair ruling is not enough to ask a judge to recuse. Only when the public might reasonably question the judge’s ability to proceed impartially can a policyholder even consider the option to seek recusal.

Last year, Chief Justice John Roberts wrote that our nation had “an extraordinary group of dedicated judges doing their level best to do equal right to those appearing before them.” How true. Policyholders—and their attorneys— are extremely fortunate to have a dedicated, fair, and impartial judiciary presiding over their complex cases.
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1 For instance, (1) the division’s administrative judge or the district’s chief judge might order the clerk to transfer several factually similar cases to one judge for judicial efficiency interests; and, (2) the multidistrict litigation panel might order consolidation of certain cases for a single judge to enter all pretrial orders before sending the cases to the original judge for trial.
2 28 U.S.C. § 455.
3 28 U.S.C. § 455(a).
4 Parker v. Connors Steel Co., 855 F.2d 1510, 1524 (11th Cir. 1988).
5 Giles v. Garwood, 853 F.2d 876, 878 (11th Cir. 1988) (per curiam).

Practical Tips on Working with Former Employees Who Are Key Witnesses

R. Thomas Dunn | Pierce Atwood | September 28, 2019

Suppose you are in-house counsel for a construction company. Your Guaranteed Maximum Price (“GMP”) is blown and the Owner has refused to execute any change orders during the Project. You know you are heading towards a claim. Within one week of substantial completion being achieved, the project manager that has managed the entire job gives his notice explaining he is leaving to work for a competitor. What do you do next? What could you have done to plan for this? In this post, I outline practical measures you can take when faced with this challenging, complex, and yet very common scenario.

Planning Measures

The best time to deal with the issue of former employees is before the employee is hired. Important provisions to be considered in employment policies and agreements include:

  • Confidentiality and Protection of Company Trade Secrets. An employer, particularly in the competitive market of the construction industry, has a strong and vested interest in protecting its trade secrets and confidential business practices. Having a clearly articulated confidentiality policy in place at the commencement of employment will ensure that a corporation has a solid argument to prevent or delay its adversary from receiving information possessed by its former employee. The more specific the description of confidential material is and the greater care utilized to safeguard the information, the more likely the information may be protected.
  • Cooperation and Duty to Preserve Corporate Privilege. A cooperation clause states that an employee has a duty to cooperate in the employer’s claims, investigations, and communications with corporate counsel. The clause may be drafted to extend beyond the period of employment regarding the information known and acquired during the term of employment.
  • Restrictive Covenants. Restrictive covenants include non-competition, non-solicitation, and non-disparagement clauses. In appropriate circumstances, especially where an employee is known to be a “key employee,” these clauses can provide an employer with additional layers of protection with its former employees.

Litigation Consulting Agreements with Former Employees

Even with the best planning measures in place, a former employee still knows what she knows – good or bad. Consulting agreements which seek to establish confidential and privileged communications are often used to mitigate these risks. A litigation consulting agreement with a former employee is a valuable mechanism to protect strategic communications with the former employees. The following are important clauses for such an agreement:

  • Identify the Litigation. The litigation, whether anticipated or filed, should be identified with particularity.
  • Clearly articulate the consultant’s responsibilities and scope of work.
  • Insert an unambiguous statement that the former employee’s consultation work is confidential and may not be disclosed to any third party.
  • Preservation obligation. The litigation consulting agreement should include an obligation to gather and provide any information relevant to the litigation to corporate counsel and not to destroy information.
  • Privilege. In addition to confidentiality, the agreement should state that the communication is protected by the attorney client privilege, work product doctrine, and (if applicable) common interest doctrine.
  • Reasonable Compensation. Compensation for the consulting services must be identified. In most instances, the services will be paid based upon the consultant’s normal hourly rate. Because of the prohibition on paying for or improperly influencing testimony, careful attention must be made to ensure that the former employee is not being compensated for fact testimony.

“Upjohn Warnings” in Interviews with Former Employees

Because former employees are not typically clients, think carefully about the extent to which informal interviews can be protected by the attorney-client privilege or the work-product doctrine. In Upjohn v. United States, the United States Supreme Court resolved a circuit split by holding that attorney-client privilege applies beyond a relatively small “control group” of executive employees. 449 U.S. 383 (1981). Instead, the Court held that communications between an attorney and corporate employees would be privileged if they: (1) were made to the corporation’s counsel, acting in counsel’s legal capacity; (2) were made at the direction of management for the purpose of obtaining legal advice for the corporation; (3) concerned matters within the scope of employment; and (4) were made with the employees’ understanding that they were being questioned for the purpose of obtaining legal advice for the corporation. Notably, the Court in Upjohn expressly declined to decide whether the protection extended to a corporation’s former employees. Id. at 394-95. Before beginning any interview, consider giving the former employee an “Upjohn warning”. A suggested Upjohn warning, as recommended by the White Collar Crime Committee of the American Bar Association’s Criminal Justice Section is:

I am a lawyer for or from Corporation A. I represent only Corporation A, and I do not represent you personally.

I am conducting this interview to gather facts in order to provide legal advice for Corporation A. This interview is part of an investigation to determine the facts and circumstances of X in order to advise Corporation A how best to proceed.

Your communications with me are protected by the attorney-client privilege. But the attorney-client privilege belongs solely to Corporation A, not you. That means that Corporation A alone may elect to waive the attorney-client privilege and reveal our discussions to third parties. Corporation A alone may decide to waive the privilege and disclose this discussion to such third parties as federal or state agencies, at its sole discretion, and without notifying you.

In order for this discussion to be subject to the privilege, it must be kept in confidence. In other words, with the exception of your own attorney, you may not disclose the substance of this interview to any third party, including other employees or anyone outside the company. You may discuss the facts of what happened but you may not discuss this discussion.

Do you have any questions?

Are you willing to proceed?

See generally Upjohn Warnings: Recommended Best Practices when Corporate Counsel Interacts with Corporate Employees, A.B.A. WCCC Working Group, July 17, 2009. The recommended practice is for an attorney giving the Upjohn warning to provide the warning from a prepared script prior to beginning the interview and to make a record noting that the warning was given consisting of handwritten notes (at a minimum) or a contemporaneous memorandum of the interview. Whether the attorney uses the ABA’s suggested warning or not, it should include the following elements:

  • an unambiguous statement that the investigating attorney represents to corporation — not the former employee;
  • a clear statement that the purpose of the interview is to provide legal advice to the corporation — not the former employee;
  • a statement that the corporation regards the interview as confidential, privileged, and that the former employee should not disclose the substance of the interview;
  • a notice that the privilege belongs to the corporation alone, and that the corporation may choose to waive privilege at any time and without notice to the former employee.

Conclusion

Well thought out employment agreements, litigation consulting agreements, and Upjohn warnings are a few tips that can mitigate the stress associated with key witnesses who are former employees. While there are many more strategies, particularly when former employees are contacted by your adversary or deposed, these tools will lay a solid foundation to preserve necessary confidentiality and privilege of your corporate client.

New Illinois Law Impacts Retainage For Contractors

Matthew Horn | SmithAmundsen | September 13, 2019

The Illinois legislature recently passed a law modifying the Contractor Prompt Payment Act, impacting retainage on all private projects (except residential projects involving twelve units or less). The law sets the ceiling for retainage at 10%, and requires that retainage be reduced to no more than 5% once the project is 50% complete.

The new law is generally favorable for contractors and subcontractors from a cash flow perspective. However, it raises concern among developers and owners, who have been able to defeat the bill in earlier sessions.  In light of the new law, all applicable construction contracts need to be reviewed and modified to ensure compliance.

Failing to comply with the new law can be costly—if a party fails to adhere to the new retainage requirements, the other party is entitled to suspend performance on the contract and collect 10% interest per annum on all outstanding amounts.

Illinois’ New Retainage Law

James Rohlfing | Saul Ewing Arnstein & Lehr | September 3, 2019

Effective August 20, 2019, Illinois law provides that a maximum of 10 percent retainage may be withheld from payments under private construction contracts and, after the contract is one-half complete, retainage must be reduced to 5 percent and kept at 5 percent for the remainder of the contract.  With this new law, Illinois joins the vast majority of states that have enacted laws pertaining to retainage on construction contracts.  Like almost every other state, Illinois’ retainage restrictions are unique to Illinois and, therefore, parties to Illinois construction contracts should understand how the new law will impact their projects.  This article will explain the law, discuss how to comply with it and give an example of its application.

When Governor J.B. Pritzker approved SB 1636 it become effective immediately as Public Act 101-0432.  It is an amendment to a law known as the Contractors Prompt Payment Act, 815 ILCS 603/1 (“CPPA”), which governs the timing of payments to contractors on private projects in Illinois.  The new law applies to contracts entered into after August 20, 2019, but not to contracts made before that date.  Public Act 101-0432 provides:   

No construction contract may permit the withholding of retainage from any payment in excess of the amounts permitted in this Section. A construction contract may provide for the withholding of retainage of up to 10 percent of any payment made prior to the completion of 50 percent of the contract. When a contract is 50 percent complete, retainage withheld shall be reduced so that no more than 5 percent is held. After the contract is 50 percent complete, no more than 5 percent of the amount of any subsequent payments made under the contract may be held as retainage.

The above provision can only be understood within the context of the CPPA.  Moreover, the CPPA incorporates definitions from the Illinois Mechanics Lien Act (770 ILCS 60/0.01) (the “MLA”) and, should be applied consistently with the MLA.  The CPPA, including the new retainage section, applies to construction contracts with general contractors as well as those with subcontractors.  It does not apply to contracts for the construction or improvement of residential properties of twelve or fewer units.  Also excluded from its reach are contracts that require the expenditure of public funds, which, consistent with Section 23 of the MLA, should be understood as public improvements for either the State of Illinois or a local government.  The CPPA provides that if full payment is not timely made, including retainage, ten percent interest is due on unpaid amounts, and the contractor is entitled to stop work until proper payment is received.  Importantly, the CPPA raises a presumption that invoices are valid if not objected to in writing within 25 days of receipt.  The provisions of the CPPA are incorporated by law in all Illinois construction contracts to which it applies, even if its terms are not be expressly included in the written contract.    

The CPPA, which governs the timing of payments under construction contracts, apparently takes the view that 50 percent completion of a contract occurs when half of the price of the contract has been earned.  The requirement under Section 5 of the MLA, as well as the common practice in Illinois, is that contractors must furnish sworn statements to owners before receiving payments.  Among other things, the statements set forth the contract price, the amount paid to date, the amount being requested as part of the current payment application, and the amount that remains due to complete work under the contract.  The same information must also be furnished for subcontracts.  Sworn statements will be useful in determining when a contract is fifty percent complete, thereby requiring a reduction of retainage to five percent under the CPPA.  Other evidence will be required for non-fixed price contracts or in situations when substantial and unpredictable change orders greatly increase the difficulty of measuring the 50 percent threshold.  Careful contract drafting should lessen potential conflicts over inevitable  unusual situations. 

Consider the following hypothetical to illustrate how the law should work in practice:

1) an owner contracts with a general contractor to construct a commercial building for a fixed price of $900,000, with payment applications to be submitted on the tenth day of every month until completion;

2) to date, the general contractor has submitted payment applications totaling $400,000 and the owner has approved those applications;

3) retainage of $40,000 (10 percent) has been held from approved payments, so the owner has made net payments totaling $360,000 to the contractor; and

4) now, the general contractor is submitting a payment application with a sworn statement requesting an additional interim payment in the amount of $100,000, less retainage.

Under this hypothetical, the general contractor’s contract with the owner is now more than 50 percent complete ($500,000 of work completed on a total contract price of $900,000), so retainage must be reduced to 5 percent or a total of $25,000, and a maximum of 5 percent retainage may be withheld from all future payments. 

Therefore, the owner may withhold up to $5,000 from the newly submitted payment application and credit the contractor $20,000 for previously held retainage which is in excess of 5 percent.  Thus, the owner would pay the contractor $115,000 ($100,000 minus $5,000, plus a credit of $20,000).  The owner would then be holding retainage of $25,000 (5 percent of $500,000).

Each subcontract is considered separately for purposes of triggering 5 percent maximum retainage upon fifty percent completion.  Thus, a general contractor typically will be restricted to withholding a maximum 5 percent retainage from payments to its demolition and excavation subcontractors before the general contractor reaches 50 percent completion under its own contract with the owner.  In addition, the CPPA requires a contractor to remit to a subcontractor monies received from an owner for that subcontractor’s work (including retainage), within fifteen days of receiving payment from the owner.  Thus, a contractor might request a provision in the general contract that the owner will not withhold retainage from the contractor money the contractor is by law required to pay to its subcontractors.  If an owner is satisfied with a contractor or is otherwise secure that the contract work will be satisfactorily completed, reducing overall retainage to five percent would simplify the project accounting.

In practice, many Illinois commercial construction projects already have reduced retainage to less than 10 percent, and some large public projects in Illinois hold no retainage or a straight 5 percent retainage.  In many other states, retainage is restricted on public and private contracts to amounts less than the maximum permitted by Illinois’ new law.  Some contractors and subcontractors believe the new retainage law does not go far enough, while some owners believe it does not allow them the security they require to guarantee job completion.  Owners, lenders, title companies, contractors, subcontractors, sureties, and other participants in the industry all will need to grapple with the new law, and reach accommodations in the process.