Insurer Must Cover Portions of Arbitration Award

Tred R. Eyerly | Insurance Law Hawaii | August 19, 2019

    The court determined that there was coverage in a construction defect case for portions of an arbitration award. Liberty Surplus Ins. Corp. v. Century Sur. Co., 2019 U.S. DIst. LEXIS 116093 (S.D. Texas July 12, 2019). 

    Descon Construction contracted with the City of Edinburg, Texas, to build a library. Descon subcontracted with McAllen Steel Erectors to install the library metal roof. The roof began to leak within two months of occupancy. The leaks continued for seven years. 

    Edinburg sued Descon. The matter was arbitrated. The arbitration panel found that the library roof was defective, the exterior stucco system was defectively installed and certain work, including fire-caulking, had not been performed. The panel concluded that Descon was liable for breach of contract and breach of warranty. The panel determined that Edinburg was entitled to replacement of the existing roof. Further, McAllen was found to have breached its subcontract with Descon by defectively installing the roof, entitling Descon to recover $762,537 from McAllen. 

    Descon asked Liberty to cover the award, but Liberty refused. Liberty sued the City and McAllen’s insurer, Century, seeking declaratory relief that its policy did not cover the award. Liberty moved for summary judgment. Liberty contended that if it was liable for the award, Century had to pay under its policy with McAllen, which named Descon as an additional insured. The City cross-moved for summary judgment arguing that some of the award damages were covered and no exclusion applied. Century also cross-moved for summary judgment that its policy did not apply.

    The parties agreed that defective roof and exterior stucco installations were “occurrences” under the policies. The question was whether Liberty’s policy covered only: (1) “property damage” caused by the defective roof and stucco, as Liberty and Century argued; or whether the policy covered both (1) “property damage” caused by the defective roof and stucco and (2) the costs of repairing the roof and stucco, as the City argued. 

   Liberty and Century argued that defective work in and of itself was not “property  damage” under Texas law. Because the City sought coverage for the cost of fixing defective work, Liberty’s policy did not cover any arbitration award damages. The City responded that the cost of repairing faulty workmanship was covered if the faulty workmanship resulted in “physical injury” to “tangible property.” The City argued that the defective roof caused interior water damage and Liberty had to cover the award damages for the roof and stucco repair costs. The City also pointed out that the library would continue to sustain water damage until the roof was replaced. Therefore, Texas law required Liberty to pay for the roof replacement costs.         

    The arbitrators found that the library roof and stucco were themselves defective, not that they were damaged or unusable because of other defective work. The court ruled that Liberty’s policies covered the cost of repairing the ceiling tiles, as Liberty conceded, and not the costs associated with repairing or replacing the stucco or the roof. 

    Liberty’s motion was granted to the extent that Liberty was not liable for the stucco or roof replacement costs. The motion was denied, without prejudice, as to Liberty’s liability for ceiling tile damages. The City’s motion was denied on coverage because the policy covered only the ceiling tile damages. Century’s motion was denied as moot. 

Where Pragmatism and Law Collide

Christopher G. Hill | Construction Law Musings | October 25, 2019

If there is one “theme” to Construction Law Musings, those that read regularly hopefully see that I take my role as counselor to construction companies seriously.  Aside from the fact that litigation and arbitration are both expensive and not a great way for any business, particularly a construction business, to make money, I have found construction professionals to be a pragmatic group of people that would rather solve a problem than go to court.

I have also discussed the need for a good foundation for the project in the form of a well drafted and properly negotiated contract.  This contract sets out the rights of the parties and essentially makes the “law” for your construction project.  Virginia courts will not renegotiate the terms for you and while this can lead to problems where parties either don’t understand the terms or don’t work to level the terms, it does mean that the parties know what the expectations are where the expectations are properly set, preferably with the help of your friendly neighborhood construction attorney and counselor at law.  Practical considerations such as your feel for the other party and which terms are worth forgoing the work for should drive your considerations almost as much as the legal implications.

With a good contractual foundation, hopefully you won’t ever have to call your attorney to deal with a dispute (at least in a “public” sense).  While I highly recommend getting advice early and often when you see a problem coming down the pike (and there will be problems), be practical about whether you want to use any of the “hammers” in the contract (which can range from termination to stopping work to arbitration).  The first and likely best option is to try and work through the problem and figure out a solution.  The least expensive and fastest way to get through to the end of a project that has problems almost never to terminate a subcontractor or walk off a job.  While these are proper in the right circumstances from a legal standpoint, they lead to additional issues, non-payment, mechanic’s liens, and in the end litigation or arbitration.

While I come from a litigation background, and litigate more often than I’m sure my clients would like, most often the practical approach, with a healthy dose of understanding the contract and the law, will get a construction project to the end and resolve issues in a less expensive and more satisfactory manner.

When do Hard-Nosed Negotiations Become Coercion? Or, When Should you Feel Unlucky?

Stan Millan | Jones Walker | October 2, 2019

Conflict in a negotiation is to be expected and is arguably healthy for the process. Owners and contractors are constantly engaged in negotiations; whether it be negotiating changes to the work, changes to the schedule, or changes to the contractual terms.   But at what point does taking a strong position in a negotiation cross the line and become coercion or bad faith?

A recent decision from the Armed Services Board of Contract Appeals touched on this very issue.  While this is a government contract case, the issues discussed in this case (namely negotiating a change) are routinely encountered in just about every construction project. This decision is instructive because it adds to a trending line of cases that limit an owner’s and contractor’s negotiation tactics.

On August 5, 2019, the board issued an opinion in the appeal of Sand Point Services, LLC vs. NASA, ASBCA Nos. 6189.  In Sand Point Services, the contractor was hired by the owner to repair the Wallops Flight Facility’s aircraft parking apron. During its work, the contractor hit a differing site condition, namely unsuitable soils.  The contractor sought additional time and money for this differing site condition. The owner ultimately responded with a show cause letter to the contractor claiming, among other breaches, that the contractor was significantly behind schedule. This was generally viewed by all parties as the start of default proceedings against the contractor.

The contractor responded to the owner stating that it was behind schedule due to the owner’s impacts. The contractor principally argued that it was late due to the differing site soil conditions it encountered, which was the owner’s responsibility under the contract’s Differing Site Conditions Clause. Most construction contracts have similar risk shifting clauses placing unknown differing site soil conditions, for example, onto the owner and not the contractor. Such a differing site condition usually entitles the contractor to either additional time, money, or both.

In response to the contractor’s letter, the owner responded with a proposed change order. In that change order, the owner provided additional time, but no money. Importantly, the change order also required the contractor to execute a release and waiver with respect to this differing site condition claim. The contractor did not agree with the proposed change order and requested to be compensated for this impact, which it was entitled to receive under the contract if it had a legitimate basis for the additional costs.

The owner responded with a letter stating that if the contractor did not sign the proposed change order the contractor would “leave the Government no choice but to continue with termination for default proceedings.” The contractor believed the owner did not have grounds for default. Again, the main ground for default was the fact that the contractor was behind schedule. Yet, the owner tacitly, if not expressly, recognized the contractor was due additional time to its schedule as a result of the differing site soil conditions, a risk assumed by the owner. Faced with the possibility of a default termination—a death sentence to almost any construction contractor—the contractor signed the proposed change order.

The contractor later filed a suit against the owner seeking to essentially reopen the executed change order for the true cost of the differing site soils condition.  The owner moved for summary judgement (dismissal of the contractor’s lawsuit) based on the executed change order which only granted the contractor time, and no money.  The owner sought to also enforce the change order’s accompanying release and waiver signed by the contractor. The contractor argued it signed the contract modification under duress and because of the unfair negotiation that led to it executing the change order for only time, and no money.

In its decision, the board held that there were genuine issues of material fact as to whether or not the contractor signed the modification under duress.  Therefore, the board denied the owner’s motion for summary judgment.  In reaching its decision, the ASBCA cited to a line of cases holding that an owner cannot force a contractor to take an action (in this case sign a differing site condition modification for no money) under an improper threat of termination.  As the board noted, “the Government must have a good faith belief that it is entitled to take the threatened action.”  Sand Point Services, p. 8. While the board in this decision did not reach an ultimate conclusion on whether the owner’s actions rose to the level of duress or coercion, this case demonstrates that courts and boards do take such allegations seriously.

This recent decision in Sand Point Services adds to an already developed line of cases on this point. For example, courts and boards have previously determined that a wrongful threat of termination can constitute coercion. See Appeals of B & H Constr. Co., 1980 board LEXIS 239, *21, 80-2 B.C.A. (CCH) P14,568 (A.S.B.C.A. June 25, 1980) (noting a threat of termination constitutes coercion if the threat is not justified or otherwise legally permissible); Beatty v. United States, 144 Ct. Cl. 203, 206 (1958) (“[I]t is only the threat of a wrongful or unlawful act that may constitute duress.”). Therefore, the key to determining whether a threat of termination constitutes coercion is contingent upon the legitimacy, or lack thereof, of the threat. Appeals of B & H Constr. Co., 1980 board LEXIS 239, *21-22, 80-2 B.C.A. (CCH) P14,568 (A.S.B.C.A. June 25, 1980) (“[T]he propriety of the Government’s threats to terminate for default hinges upon whether the delays arose from unforeseeable causes beyond the control and without the fault and negligence of appellant and its subcontractors and suppliers at any tier.”).

So, while negotiations can be contentious at times, owners and contractors must be aware of their limits. Owners cannot threaten a contractor with default if there is no legitimate basis to support it. Likewise, contractors cannot threaten to walk off the project without there being a legitimate basis (for example, an owner’s material breach of the contract). These types of threats are highly charged and must not be made lightly; they require significant and substantial support. Equally important, these threats must have a legitimate basis. If such threats are made without a legitimate basis, the owner or contractor may be prevented from relying on any “deal” made during that negotiation. But the owner or contractor may be exposed to far greater liability: claims of coercion and bad faith. Keep in mind that this general principle is equally applicable down the chain of privity and in relations between general contractors and subcontractors.

It is important to recognize your limits during negotiations. It is also important to know when your counterparty crosses the line so you can protect your rights.

Insurer Must Pay Portions of Arbitration Award Related to Faulty Workmanship

Tred R. Eyerly | Insurance Law Hawaii | August 21, 2019

    The court determined that portions of an arbitration award against the insured contractor based upon faulty workmanship were covered by the policy. Wallace v. Nautilus Ins. Co., 2019 U.S. Dist. LEXIS 122219 (D. N. H. July 23, 2010). 

    Plaintiffs, owners of adjoining homes, hired McPhail Roofing, LLC to replace the roofs of their houses. After installation, the plaintiffs found several problems with their roofs and withheld roughly a third of the agreed-upon contract price from final payments due to McPhail. A roofing consultant found evidence of water leaking through both roofs during rainstorms. Improper installation of the shakes on the roofs allowed rain to seep through to the roof decks (the plywood underneath the roofs) and eventually into the houses. The only way to cure the installation defects was to remove and replace the roofs entirely. 

    Plaintiffs and McPhail went to arbitration. Plaintiffs sought compensation for the damage caused by the leaking and for the replacement costs of the roofs. McPhail sought the remaining payment under the contracts. Nautilus defended McPhail under this CGL policy. 

    The arbitrator issued awards against McPhail, $140,053.50 to one owner and $160,065.62 to the other owner. Pursuant to the parties’ stipulation, the arbitrator also awarded plaintiffs $176,898.95 for attorneys’ fees, expert witness fees and other expenses, including pre- and post- judgment interest.

    Nautilus paid a portion of the award for attic cleaning and re-insulation, repainting, expert witness fees and expenses. Nautilus determined the rest of the award, including replacing the roofs and award of attorneys’ fees, was not covered under the policy. McPhail declared bankruptcy and plaintiffs obtained an assignment of McPhail’s claims against Nautilus, eventually bringing suit against Nautilus. 

    Agreeing that defective workmanship alone was not an occurrence under New Hampshire law, plaintiffs argued that the occurrence here was not the defective workmanship itself, but rather the leaking caused by the defective roofs, which resulted in property damage. The court agreed.

    The damage for the cost of replacing the roofs was not covered, however. The arbitrator found that plaintiffs were entitled to the replacement cost of the roofs because: (1) the roofs were installed defectively; and (2) plaintiffs’ consultant advised them that the only way to cure the installation defects was to remove and replace the roofs. No New Hampshire case held that a CGL policy covered the cost of replacing defective work any time property damage resulted from it. 

    Next, the court turned to whether the policy covered the award of attorneys’ fees. The Supplementary Payments provision included Nautilus’ obligation to pay “costs taxed against the insured.” Plaintiffs argued the phrase was ambiguous and should be construed in their favor. The court noted that several jurisdictions had interpreted the phrase to include an award of attorneys’ fees, but noted that a Hawaii federal district court case held that the phrase excluded attorneys’ fees. CIM Ins. Corp. v. Masamitsu, 74 F. Supp. 2d 975 (D. Haw. 1999). The court went the the majority position, finding that “costs taxed against the insured” in the Supplementary Payments provision included attorneys fees. 

Why Builders Should Reconsider Arbitration Clauses in Construction Contracts

David M. McLain | Colorado Construction Litigation | September 23, 2019

My advice to home builders has long been to arbitrate construction defect claims instead of litigating them in front of juries.  Based on my experience and watching others litigate claims, I have learned that home builders usually fare better in arbitration than in jury trials, both in terms of what they have to pay the homeowners or HOAs and also in what they recover from subcontractors and design professionals.  Because of these dynamics, conventional wisdom has been that builders should arbitrate construction defect claims.  For several reasons, I am now questioning whether the time is right to consider a third option.

First, plaintiffs’ attorneys dislike arbitration and will continue their attempts to do away with arbitration for construction defect claims.  In 2018, the Colorado Legislature considered HB 18-1261 and HB 18-1262.  While both bills were ultimately killed, they showed the plaintiffs’ attorneys disdain for arbitration, and serve as a warning that attempts to prevent arbitration legislatively will continue.  If the legislature does away with the ability to arbitrate construction defect claims, and that is the only means of dispute resolution contained in a builder’s contracts, that builder may find itself in front of a jury.

Second, in rare instances, builders may disagree with an arbitration order to the extent that they want to appeal the decision.  Under the American Arbitration Association rules, once an arbitrator issues an award on the merits, it can only correct clerical, typographical, technical, or computational errors and has no ability to reconsider the merits.  Pursuant to Colorado’s Uniform Arbitration Act, a dissatisfied builder can only challenge an arbitration award in extreme circumstances, for example, if it was procured by corruption, fraud, or other undue means or because of evident partiality, corruption, or misconduct on the part of the arbitrator.  For better or worse, binding arbitration is just that – it is binding, and builders may regret that they have no appellate rights if they find themselves holding the short end of the stick. 

For these reasons, I believe that builders should start looking beyond arbitration clauses in their purchase and sale and subcontract agreements.  At the very least, builders should add language to protect against the legislature making arbitration clauses void as against public policy or otherwise impeding arbitration rights.  This language would say something to the effect that should the arbitration clause be unenforceable, the parties agree to waive a jury trial and to have their case decided by a judge after a bench trial.  A builder could also simply remove references to arbitration and require a bench trial from the outset.

Regardless of the language used, builders should ensure that the language in the purchase and sale agreement and the subcontracts call for the same dispute resolution forum, either arbitration or a bench trial.  In no case do you want to litigate the same issue twice, in two different forums.