You May Be Able to Dodge a Bullet, But Not a Gatling Gun

Garret Murai | California Construction Law Blog

In the days before cable, and long before Netflix, I watched my fair share of spaghetti westerns on lazy weekend afternoons. Bullets zinging past cowboys, knocking off hats, and ricocheting off rocks. But while you might get lucky and dodge a bullet, not so with a Gatling gun.*

In the next case, C. W. Johnson & Sons, Inc. v. Carpenter, Case No. B300187 (August 7, 2020), a contractor who was unlicensed during a portion of a project dodged a bullet. However, I’m not so sure that he’s going to be able to dodge the hail of bullets that are coming after.

The C. W. Johnson & Sons Case

As cases go, the C. W. Johnson & Sons case is pretty straightforward. In March 2016, Contractor C. W. Johnson & Sons, a family owned flooring company, was contracted to install flooring at Randall Carpenter’s house for a total contract price of $68,343. Work was performed between March and September 2016 including some warranty, repair and corrective work after September 2016.

On September 21, 2016, Charles Wilmer Johnson, the responsible managing officer and license holder of the family business, passed away. His son, Charles William Johnson, who took over the family business, did know that his father was the license holder of the family business, and later applied through the Contractors State License Board to replace his father as the license holder. His application was approved in October 2018.

By then, however, the inevitable had happened. In September 2018, Carpenter sued C. W. Johnson for fraud, breach of contract, unfair business practices and disgorgement under dreaded Business and Professions Code section 7031. C. W. Johnson in turn filed its own cross-complaint against Carpenter for breach of contract and quantum meruit.

Carpenter, however, demurred, on the ground that C. W. Johnson had failed to allege that it was a licensed contractor as required under Business and Professions Code section 7031. C. W. Johnson, in its opposition to the demurrer, contended that it was licensed during the period in which it was seeking compensation and, nevertheless, that it had substantially complied with the Contractor Licensing Law.

The trial court granted Carpenter’s demurrer without leave to amend and C.W. Johnson appealed.

The Appeal

On Appeal, the 2nd District Court of Appeal noted that Business and Professions Code section 7031 requires contractors seeking compensation for work to perform to allege that “he or she was a duly licensed contractor at all times during the performance of that act or contract regardless of the merits of the cause of action brought by the person.”

While noting that C. W. Johnson performed work under a single contract and therefore “cannot divide a single contract into segments and claim compensation for work performed during the segment for which it was licensed,” the Court of Appeal also noted that subdivision (e) to Business and Professions Code section 7031 provides an exception to the licensing requirement if a contractor can show that it substantially complied with the licensing requirements of the Contractor Licensing Law. Specifically, Section 7031(e) provides:

[T]he court may determine that there has been substantial compliance with licensure requirements under this section if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a contractor (1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, (2) acted reasonably and in good faith to maintain proper licensure, and (3) acted promptly and in good faith to remedy the failure to comply with the licensure requirements upon learning of the failure.

And here, explained the Court of Appeal, C. W. Johnson had alleged, apparently in its opposition to Carpenter’s demurrer, that: (1) it was a duly licensed contractor prior to and during part of the performance of the contract; (2) Charles (the sun) reasonably did not know or have reason to know that he was not the license holder for the company at the time of his father’s death; (3) as soon as he learned he was not the license holder for the company, he applied to be so designated; and (4) the CSLB granted the application shortly thereafter.

And that, further explained the Court of Appeal, was a sufficient allegation of ultimate facts to serve as a basis for C. W. Johnson’s contention that it had substantially complied with the Contractors License Law., and C. W. Johnson was entitled to an evidentiary hearing under Business and Professions Code section 7031(e) to prove (as opposed to simply allege) that it had substantially complied with the Contractors License Law.

Conclusion

The C. W. Johnson case is interesting from a procedural perspective in that it provides that an unlicensed contractor can survive a demurrer if it alleges facts supporting a contention that it had substantially complied with the Contractors License Law because a demurrer is not as implied by the 2nd District Court of Appeal an evidentiary hearing under Business and Professions Code section 7031.

While C. W. Johnson may have survived the demurrer, however, knowing how restricted courts have applied the “substantial compliance” under Business and Professions Code section 7031, I question whether C. W. Johnson will survive the evidentiary hearing.

*The Gatling gun was invented by Richard Jordan Gatling, an inventor from North Carolina, who patented a number of inventions including inventions to improve toilets, bicycles, steam-cleaning, pneumatic power, and other fields. Interestingly, while the Gatling gun was devastating in its destruction, Gatling wrote that he created the Gatling gun “to reduce the size of armies and so reduce the number of deaths by combat and disease, and to show how futile war is.”

Best Practices for ESI Collection in Construction Litigation

Kelley J. Halliburton | Construction Executive

The construction business has always been heavy on records and data but now more than ever much of that information is stored electronically. Gone are the days of just a trailer full of drawings and paper documents.

Construction projects now have huge amounts of electronically stored information (ESI) including contract documents; drawings in both CAD, PDF and other formats; schedule files such as Primavera; spreadsheets; photos; job cost control software files; formal correspondence; and an ever-expanding amount of email communications. Successful collection of this ESI can be critical to the success of litigation in construction cases, where often very complex facts will need to be gathered to support a claim or defense.

The best first step to a successful ESI collection is to build a solid foundation before trouble arises with prepared policies and procedures in place. Implementing and enforcing a document management plan on a project basis will make sure documents are kept in an organized fashion so that materials can be accessed quickly and easily. Document management is important for types of ESI that are not handled well by word-searches, including Primavera schedules, photos and videos.

Preparing document retention procedures outlining such things as where data is stored, how long to keep it and who has access to it will help when it comes time to implement a litigation hold and prepare for document collection. Policies and procedures for data from departing employees is especially important to have in place, as there may not be another chance to capture data once the employee has moved on. This is critical if collection of mobile devices is necessary. With the proliferation of smart devices and text messaging, collection of data from mobile devices is more and more likely to be required. Documented and enforced policies regarding the use of work-issued mobile devices such as phones, tablets or laptops and Bring Your Own Device policies for employees authorized to use personal devices for work will help with identifying, retaining and collecting data later.

Once potential litigation arises, a litigation hold must be put in place. Automated deletion of data that is part of a document retention policy must be stopped once the litigation hold is in place. Because the duty to preserve data begins once litigation is reasonably anticipated, that duty could arise as early in a project as the first change order request, an on-site accident or a differing site condition but would certainly arise once served with a complaint.

At this time, analyzing the project data can help confirm whether the litigation hold has reached all the necessary people. Does the project use a cloud-based document management system to store project documents and disseminate correspondence between participants? If so, is the document management system hosted by the organization or by someone else, such as the project engineer? A litigation hold may need to be communicated to the host of the document management system to make sure data is preserved at the completion of the construction project.

Understanding what types of communications may have been used in the field beyond formal correspondence (submittals and letters) and emails is also important. Was a communications platform such as FieldChat or Slack in use? These platforms have data separate from email systems that will also need to be collected in coordination with the IT department or the organization that hosted the platform if they were outside of the company. Was text messaging used? Mobile collection will likely be necessary in that case.

Once a litigation hold is in place and confirmed, analysis of both the ESI and the people with the data must continue. Are project files such as submittals, correspondence, schedules, etc., stored and organized on a shared company server? Who are the employees who have relevant information? Develop a comprehensive list of everyone who may have information relevant to the project, and then work with counsel to try to prioritize the list. 

The employees with relevant information, known as data custodians, should then be interviewed with counsel to determine their personal data management practices and help decide where and how to collect their data. These interviews should cover the use of any shared network servers or EDM systems, work devices, personal devices and removable media, and can assist in limiting redundant or unnecessary data collection while capturing as much relevant information as possible. 

At the same time, the interview can help counsel gain information regarding time periods and project background from the custodians that can assist with further tailoring the data collection. Assisting counsel with access to this information prior to the development and negotiation of ESI protocols in the litigation will help in tailoring the protocols to the data.

Once these steps are taken, a document collection plan can be created and implemented. A data map of the different sources of relevant data should be created and procedures developed and documented step by step to collect the data. Determine if forensic collection is necessary – unless there have already been claims of data spoliation where a forensic collection may be necessary, a logical copy will suffice. Self-collection by the actual data custodians by simply copying their files is highly disfavored due to issues such as unintentional alteration of document dates and inadequate searching. Generally, the data collection should be done with the supervision of counsel using either in-house IT resources (if available and sufficiently robust) or with assistance from an outside vendor. Outside vendors may even be able to accomplish most of the data collection by remote means.

Email and data stored on in-house shared servers and workstations is relatively straightforward to collect. Data stored with cloud providers may have different policies and protocols for collection, but most e-discovery technology solutions and vendors can integrate with these providers to collect data. Mobile device collection may also require specialized expertise from an outside vendor unless the company has already prepared its IT department in advance to do this type of collection regularly (for example, when an employee separates from the company). Backup tapes or disaster recovery systems are difficult and expensive to collect and generally counsel will negotiate the ESI protocol so that use of these systems will only be as a last resort.

By putting document management and retention procedures in place in advance, understanding the ESI involved in a construction project, developing a data map and collection plan, and utilizing and documenting defensible collection methods, construction companies can make sure that the information necessary for supporting legal claims or defenses is available to counsel and increase the chance of a successful result in the litigation. At the same time, these steps will help hold costs down by cutting down on collection of irrelevant or duplicative data.

Don’t Assume a Civil Zoom Trial Creates Reversible Error

Dr. Ken Broda-Bahm | Holland & Hart

Here is a scenario that might be playing out in various forms around the country: A judge looks at her increasingly crowded docket during the coronavirus pandemic and thinks, “Well, I’m doing professional meetings on Zoom every day. Why couldn’t I move some of these trials by putting all or part of them online?” So the judge scans the list, looking for cases where both parties might be motivated enough to give it a try. But what if one side doesn’t agree? What if, as is often the case, one side actually benefits from the state of limbo in having no clear trial date on the horizon? Let’s say that in that situation, the judge goes ahead anyway, sets a date, and requires even the reluctant parties to logon and proceed to trial. Has our judge just created reversible error? That is bound to be tested at some point, but at present, there are good reasons to think that the answer is “No.”

In a recent article available on the Social Science Research Network (SSRN), two former judicial clerks and current Research Fellows at New York University’s Civil Jury Project (Shammas & Pressman, 2020), make the argument that, while it may be reversible error to force a criminal defendant into a virtual trial (because the Federal Rules of Criminal Procedure appear to require a defendant’s physical presence to satisfy the Confrontation Clause), it is probably not error to require video-conferenced communication in a civil trial. In this post, I will take a look at some of their reasons why, and consider the ways that inform the situation that courts and litigants are currently facing.

The Situation: Still No Clear Light at the End of the Tunnel.

As many commentators have recently noted, even as more and more of us are feeling done with the virus and its restrictions, the virus is not done with us. Infection rates are still alarmingly high in the United States, and currently average more than 40,000 new cases and 850 deaths per day. While the situation might (or might not) change dramatically with the emergence of a vaccine, many experts are saying that we should prepare for the long haul, stressing the unwelcome likelihood that we could be experiencing many of the same limitations on in-person contact well into 2021.

That sobering reality raises the question, how long can our court systems afford to remain at or near shut-down, or at a significantly diminished capacity? Many courts are pressing ahead with temperature checks, distancing, hand sanitizers, and masks, but are also generally restricting themselves to a few cases held in the largest courtrooms. I haven’t seen a strong argument that courts with these limits could address the volume of cases now stacking up on the dockets.

So that leaves courts with the tools that businesses and schools have been using relatively effectively for the last half-year: online meetings. There are limitations with all systems, and still a lot of work to be done in learning the best practices for adapting online tools to the unique and essential requirements of the courtroom. But it would be truly odd if the trial court was one of the very few professional spaces where distanced communication is not a big part of the solution during the pandemic.

The Solution: Reasons Why a Civil Zoom Trial is Not Reversible Error

The authors of the SSRN paper looked at the case law in contexts where the permissibility of videoconferencing has come up. Here are some of the reasons they believe that moving the civil trial to an online space is not reversible error, even when parties don’t voluntarily agree with an online trial:

  • Even as there is no specific authority explicitly permitting online civil trials, there is also nothing in the Federal Constitution or state Constitutions prohibiting or limiting them.
  • Courts would apply a balancing test in assessing the validity of any procedural limits caused by online communication, and the current public health crisis would weigh heavily in favor of allowing that accommodation.
  • The Confrontation Clause, that has at times been interpreted as requiring a criminal defendant’s physical presence, does not apply in a civil trial context.
  • Online trials can meet the “public trial” requirement more easily than in-person trials that would use the entire gallery for social distancing, and thus not permit public attendance.
  • Without online trials, courts will face a tremendous backlog, and potentially a breakdown in the system.
  • Online platforms can facilitate credibility determination by giving jurors a full view of an unmasked witness.

Reasonable people can differ on the merits of Zoom and other web-conferencing tools. The technology can be inconsistent, the resulting communication is not as high-definition as reality, and it can be frightening to think about what is off camera. But there are also problems with the limits placed on in-person trials. There are still many factors to be worked out. Based on the author’s analysis, though, concern over error should not be a strong reason for avoiding an online civil trial.

No Longer in the Dark: A Primer on the Distinction between Delay and Disruption Damages in a Construction Dispute

Matthew DeVries | Best Practices Construction Law

If you are left in the dark about something, you don’t have the information you should have to make an informed decision.  Delay claims on a construction can be confusing, especially when you think about the delay to the work being performed and the disruption to other activities.  A few years ago, I found a case that shed some light on the delay v. disruption distinction.

In County of Galveston v. Triple B Services, LLP, decided on May 26, 2016, the Court of Appeals of Texas reviewed a contractor’s claim for damages on a road expansion project.  While the legal issue focused on the County’s right rely on the defense of sovereign immunity, the Contractor’s (and it expert’s) characterization of the damages was critical to the outcome of the case.  Since the applicable statute waives a county’s sovereign immunity for breach-of-contract damages that are “a direct result of owner-caused delays,” the Court had to decide whether disruption damages—as opposed to delay damages—were recoverable.

The Contract.  The County entered into an agreement with the Contractor to expand a three-mile stretch of road. Under the contract, the County was responsible for moving gas, water, and fiber-optic utilities.  According to the Contractor’s expert, the contract established a “baseline schedule … created by the County’s engineer,” which showed a starting date with unhindered access along the area of the road where the utilities were located. The contract allowed for “delay damages” if the Contractor’s request for those damages “is determined to be compensable.”

Owner-Related Delays.  Although the Contractor’s plans for the construction project anticipated that the County would move the utilities by a particular date, those utilities were moved almost one year later.  Nevertheless, the Contractor completed its work within the contract time.  According to the Contractor, it incurred additional costs to hand-form manholes, set and reset barricades, extended field office overhead, as well as additional labor, equipment, street cleaning, flagging, and traffic control—all of which resulted from the County’s delays in moving the utilities.

Sovereign Immunity Argument.  The County argued that Section 262.007 of the Local Government Code waives a county’s sovereign immunity for construction contracts involving claims for delay damages.  Here, the County relied heavily on the testimony of the Contractor’s expert witness who testified about the Contractor’s damages resulting from the County’s delays. Since the County did not timely move the utilities as anticipated in the original construction plan, that schedule of work was “disrupted.”  By seeking disruption damages, the County argued, the Contractor sought damages that were excluded from recovery under the statute.

So, are these delay damages or disruption damages?

On appeal, the Contractor agreed that its “disruption damages” do not meet the definition of “delay damages” as traditionally understood in the construction law arena. However, it argued that the statutory waiver of sovereign immunity for damages that are “a direct result of owner-caused delays or acceleration” includes more than “delay damages” as defined under construction law: “Disruption and lost productivity costs are … recoverable damages under the clear meaning of the words of the statute.”

The Court turned to the construction law bible written by Phillip Bruner and Patrick O’Connor to address the inquiry, noting that delay damages have a technical definition distinct from disruption damages:

 Delay damages refer to damages “arising out of delayed completion, suspension, acceleration or disrupted performance”; these damages compensate the contracting party that is injured when a project takes longer than the construction contract specified. . . .

Disruption damages, on the other hand, are for a project that may be timely completed but nevertheless includes disruption to the contractor and compensates it for “a reduction in the expected productivity of labor and equipment—a loss of efficiency measured in reduced production of units of work within a given period of time.” . . . Disruption damages can also be caused by an “event [that] both disrupts and delays a critical path activity….” A project that finishes on time but at greater expense because of disruptive events or scheduling errors presents a claim for disruption damages.

The Court’s Decision.  Based upon a plain reading of the statute, the Court concluded that Section 262.007 allows a claim for disruption damages against a county “if the disruption damages directly result from the county’s delay in performance of its contractual obligations….” Significantly, the statute did not distinguish between “delay damages” and “disruption damages” that are directly caused by the breaching party’s delay.

Lesson Learned.   According to the expert in this case, the Contractor incurred significant increased costs to finish the work on time. The Court’s opinion provides an excellent roadmap of the type of expert proof required to establish the damages sought by the Contractor, including the following:

  • The expert examined the “daily summaries” of work and “the manner [the project] was intended to be executed … [and] the manner by which the project was actually executed and some of the specific things that caused that deviation.”
  • Using this information, the expert testified that the Contractor had to adjust its approach to accommodate the County’s delay by “segmenting the work into smaller segments of the roadway, waiting on the utilities … just a various sundry of impacts that caused them to not be as productive from a direct labor standpoint.”
  • The “waiting on the utilities” caused the Contractor to waste “man-hours trying to deal with working around utilities and bouncing around back and forth and dealing with not being able to set barricades and … progress the roadway [in the way] that they thought they would be able to in an unhindered manner.”
  • The expert also testified that the Contractor had to add “a number of crews because they were working in so many different areas to try and progress the work….”
  • Finally, the expert opined that the Contractor’s clean-up crew also had to perform additional work because “whenever you slow down that progression and create situations where you’re excavating and you’re staging materials in one location[,] … you wind up with … more debris than if you were just moving in a steady progressive manner.”

Although the project in this case was finished on time and the Contractor never completely “stopped” its work, the Court readily found that the Contractor was “hindered” because of the County’s actions.  Since the type of recoverable damages include those that are “a direct result of owner-caused delays,” the Contractor could recover its disruption damages.

Court of Appeals Confirms One-Year Statute of Limitations for Disgorgement Claims that is not Subject to the Discovery Rule

Timothy L. Pierce, Hector H. Espinosa and Samira F. Torshizi | K&L Gates

In a recently published case dealing with issues of first impression, the California Court of Appeal Second Appellate District in Los Angeles held that the disgorgement penalty under Business and Profession Code § 7031(b) must be made within one year of completion or cessation of the performance of the project, and that time is not extended by the discovery rule.  Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc., 2020 WL 5035826 (Cal. Ct. App., Aug. 26, 2020).  BPC § 7031(b) permits a party who uses the services of an unlicensed contractor to recover any and all money paid to the contractor for its work—regardless of the quality of the work (indeed, even if the construction was flawless).  The purpose of this harsh forfeiture provision is to deter unlicensed contractors from performing construction.

The case arises from the construction of a 108-unit assisted living facility in Reseda, California.  In 2007, Eisenberg Village of the Los Angeles Jewish Home for the Aging (“Eisenberg”) engaged Suffolk Construction Company, Inc. (“Suffolk”) as the contractor to build the project, which was completed in 2010.  Eisenberg initially filed a complaint alleging defects at the project.  In 2015, Eisenberg amended its complaint to assert an entirely new cause of action under BPC § 7031(b) against Suffolk for disgorgement of every penny of the more than $49 million it was paid to construct the project.  The trial court granted summary adjudication of the disgorgement claim and that ruling was the subject of the appeal.

The factual circumstances of the case are interesting in that Suffolk held a valid California contractor’s license at all relevant times.  Eisenberg nonetheless pursued its disgorgement claim by seeking to retroactively strip Suffolk of its contractor’s license.  Eisenberg alleged that the full-time employee whom Suffolk had designated as the “responsible managing employee” or “RME” did not adequately perform his oversight duties under BPC § 7068.1 simply because he had relocated to Suffolk’s Boston office during the term of the project.  Eisenberg also argued that it could not have known the RME allegedly fell short of its BPC § 7068.1 duties during construction and that it first discovered potential issues regarding the status of Suffolk’s RME in 2015.  The court of appeal affirmed the trial court’s holding that Eisenberg’s claims were time-barred and did not address whether a BPC § 7031(b) claim provides an automatic suspension of a contractor’s license for a violation of section 7068.1.

The appellate court held the applicable limitation statute to be one-year under CCP § 340(a) given that the disgorgement remedy provided by BPC § 7031(b) represents a “penalty” and a “forfeiture.”  The court reasoned that BPC § 7031(b) “provides a windfall to the plaintiff, at the expense of the unlicensed contractor, since the plaintiff also retains the work completed by the contractor.”  The court held:

When viewed in this context, it is clear that the disgorgement provided in section 7031(b) is a penalty. It deprives the contractor of any compensation for labor and materials used in the construction while allowing the plaintiff to retain the benefits of that construction. And, because the plaintiff may bring a section 7031(b) disgorgement action regardless of any fault in the construction by the unlicensed contractor, it falls within the Supreme Court’s definition of a penalty: ‘a recovery without reference to the actual damage sustained.’

Having determined the one-year statute of limitations applied, the appellate court next addressed the accrual date.  In light of the equitable basis for the discovery rule, the appellate court held the discovery rule does not apply because “the disgorgement mandated by section 7031(b) is not designed to compensate the plaintiff for any harm, but instead is intended to punish the unlicensed contractor.”  The court did observe that “[t]o the extent a plaintiff does suffer any injury caused by an unlicensed contractor that is not easily or immediately discoverable, the discovery rule would continue to apply to other claims seeking recovery for any damages the plaintiff suffered.”

The court also highlighted the rather absurd possible application of a discovery rule to a disgorgement claim that can arise ten years after completion, with no other basis for a claim against the contractor.  That is, a plaintiff, who after ten years randomly “discovers” that the license had lapsed, could bring a section 7031(b) claim and get back all the compensation paid for the construction of a building the plaintiff has used without any problems for ten years. “An absurd result, to be sure, but there would be no principled way to avoid it under the discovery rule[.]” As such, the appellate court held “[t]o avoid such absurd results, and because there is no reason in equity to apply it, we hold that the discovery rule of accrual does not apply to section 7031(b) claims.”  The cause of action is complete when an unlicensed contractor completes or ceases performance of the act or contract at issue.

The published opinion is instructive regarding at least two matters of first impression in California.  It is now clear that the time limitation for a BPC § 7031(b) disgorgement claim is one year from completion of the project or cessation of the performance.