The Construction Contract Review

Just Get the Construction Bond

I’ve done a lot of legal work for environmental remediation companies and others doing underground construction so I am always interested in court decisions that arise from those sorts of disputes.  A recent case in Massachusetts (but applying Louisiana law) provided a painful lesson for a subcontractor. 

 

Project Dispute

A Property Owner hired a General to perform environmental remediation, including the excavation and removal of contaminated soil, on real property in Massachusetts. General entered a written subcontract with Sub, wherein Sub agreed to supply a bond, labor, equipment, and materials to General for the environmental remediation over the course of about 90 days.  In return, General agreed to pay Sub $2,136,194.

 

About nine months after the originally scheduled completion date, General issued a cure notice and subsequently terminated Sub. 

 

Cross Claims

In letters written back and forth around the time of termination and, ultimately, in the ensuing litigation, General asserted that Sub breached “its subcontract in that it has failed to prosecute the work with diligence so as to ensure completion of the project in accordance with the Schedule." Additional alleged breaches included Sub's failures to: comply with the performance requirements of the Subcontract, meet the Subcontract deadline, submit a revised schedule that included a new completion date, and provide the bonds.

 

As with most cases like this, Sub presented an alternative point of view.  Sub disagreed with the termination and claimed that “site conditions, defective specifications, and schedule impacts/business interruptions, not [Sub], have delayed the project schedule."

 

Each party filed Summary Judgment motions against the other (in other words, “even assuming the other side’s version of events is correct, or based on facts that we agree on, I should still win because…”). 

 

What the Court Did

There were numerous parties involved in this litigation – in addition to the General and Sub, parties included the property owners, replacement contractors, sub-subcontractors, and equipment suppliers.  The main dispute, however, is simply between the General and the Sub. 

 

There were lots of intricate details as to why the project was unsuccessful.  There were sufficient disputes between Sub and General about what occurred (defective plans or ineffective implementation of plans?) such that the court said it couldn’t rule without more information.  The Court simply skipped the messy “he said/she said.” 

 

However, what was not in dispute was that the Sub never provided the contractually required performance bond.  The Court held that in construction contracts, the "failure to furnish and maintain payment and performance bonds or insurance specified by the contract documents is deemed invariably to constitute a material breach of the contract."  A material breach is one that "goes to the heart of the contract" and this breach was material because "[b]onds and insurance constitute significant instruments of risk allocation that, if not procured or maintained in force, materially shift to the owner the risk of nonperformance."  Due to this material breach by the Sub, General was justified in terminating the contract. 

 

Essentially, Sub never got the chance to prove it’s version of events because Sub never got the bond it was supposed to.  Ouch for Sub. 

 

The Construction Contract Court Clock

Contract to Decision: 3 years 2 months

Protect Your Green by Protecting the Green

Two stories hit my desk on the same day that I found interesting for construction companies.  First, California adopted stricter pollution discharge rules that will require more aggressive monitoring of construction projects.  The California State Water Resources Control Board’s new General Permit for Storm Water Discharges from Construction imposes a significantly different permitting framework from the Current General Permit that has been in place for the last 10 years.  As reported by Morrison Foerster back in May, when still in draft form, the “new framework includes mandatory BMPs, two forms of numeric discharge limitations, and onerous monitoring requirements that could be costly for developers in California and raise a significantly higher risk of encountering enforcement actions and citizens’ lawsuits in the future.”

 

Highlighting the risk of enforcement actions is the second story I encountered.  The Florida Department of Environmental Protection fined a construction contractor $1,700,000 for alleged violations of its Stormwater Pollution Prevention Plan.  During construction of the Panama City-Bay County International Airport in Florida, there were heavy rains this spring.  Temporary soil stabilization methods (covering the soil with a synthetic covering or hydroseeding, in this case) should have been employed per the SWPPP, but were not, according to DEP and reported by The News Herald.  The DEP estimated that the contractor saved about $950,000 by not installing the erosion matting – the contractor is disputing the violations.  The contractor claims that drainage problems elsewhere on the site are contributing to the failure of the designed runoff prevention system. 

 

If you are trying to run a sustainable or green construction business, you probably already know that nonpoint source pollution is one of the leading causes of water quality problems and that these pollutants can have harmful effects on drinking water supplies, recreation, fisheries, and wildlife.  It is a good thing to protect the green around our jobsites but also rewarding to protect the green in your wallet by following your stormwater pollution prevention plans.

Follow the Change Order Path

An unpublished opinion from a federal court in Virginia this spring provides a nice lesson in the importance of contractual change order procedures in construction agreements.

 

It stated: The Virginia Supreme Court has held that "when one furnishes labor to another under a contract which, for reasons not prejudicial to the former, is void and of no effect, he may recover the value of his services on a quantum meruit." Marine Dev't Corp. v. Rodak, 225 Va. 137, 300 S.E.2d 763, 765 (Va. 1983) (quoting Hendrickson v. Meredith, 161 Va. 193, 170 S.E. 602, 604 (1933)). "It is a general rule of law that he who gains the labor of another must make reasonable compensation for the same." Id. (punctuation and citation omitted). However, the Virginia Supreme Court has also held that "where there is an express and enforceable contract in existence which governs the rights of the parties, the law will not imply a contract in contravention thereof." Royer v. Bd. of County Supervisors of Albemarle County, 176 Va. 268, 10 S.E.2d 876, 881 (Va. 1940).

 

There you go, thanks for stopping by today. 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ok.  I’ll try to provide a little insight.  An electrical contractor was doing a project for a public entity.  The contractor wanted some change orders for some extra work.  The construction agreement had specific procedures to follow for requesting and receiving change orders.  The contractor followed those procedures….for awhile.  At some point, the contractor stopped following those procedures for additional extra work it did and tried to get paid.  The owner refused to pay for the extra work and then the contractor sued to recover the value of that work as being outside of the construction contract.  But the court found that the contractor failed to follow the prescribed method outlined in the parties' contract to obtain approval and payment for extra work -- a method with which it was not only familiar, but which it had in fact utilized.

 

Do you always know and understand the terms and conditions and the procedures of your construction contract for getting change orders approved? If your construction agreement has a path to follow for change orders, follow it, particularly if you’ve already started down that path once before. 

 

Click here for a nice summary and copy of the decision.

 

The Construction Contract Court Clock

Contract to Decision: 5 years 9 months

 

Construction Site Safety: A Duty Unhinged

A premises owner and a contractor enter into a construction contract, and a third party is injured on the premises of the owner. The fundamental question at issue here is under what circumstances does a duty of care arise between the contractor and the third party?

 

A federal case was decided in Michigan this summer that probably made a lot of lawyers recall those halcyon days of law school, with references to Palsgraf and other classic Cardozo opinions.

 

A gas/service station was remodeling and moving its Subway location.  An employee of the service station sued a contractor for “injuries sustained when, during a remodeling of her employer's premises, a door, temporarily removed and stored outside of the construction zone, fell on her because it was stored upright and where, if placed there at all, it should have been laid on its side at an angle.”

 

The decision walks the reader through an interesting history of duty, contractual obligations, misfeasance and torts.  Good stuff, believe you me.

 

But the best way to explain the court’s thinking in this case was the story it told of an older case.  A contract for snow removal services made explicit that the snow removal contractor would "not be responsible for any damage or injury caused by slipping or falling on any pavement surface." But in the course of actually performing the contract the snow plow contractor placed snow "on a portion of the premises when it knew, or should have known or anticipated, that the snow would melt and freeze into ice on the abutting sidewalk, steps, and walkway, thus posing a dangerous and hazardous condition to individuals who traverse those areas."  While the snow removal contractor lacked a pre-existing duty to the person who slipped, in contract or otherwise, a duty arose anyway out of the contractor’s acts because it placed plowed snow from the parking lot on an otherwise clean sidewalk.  The snow removal contractor was responsible for creating an unsafe condition where one previously did not exist.   

 

In this Subway case, the contractor removed the door and placed it in an area that it knew was used by the store’s employees.  The contractor created the hazard when persons working for it leaned and left the door unsecured in an area outside the construction zone.  If one having assumed to act, does so negligently, then liability exists as to a third party for failure of the contractor to exercise care and skill in the performance itself.

 

Today’s shocking and profound legal insight: if you, as a construction contractor, do something, you have a duty to do it in a safe way.

 

The Construction Contract Court Clock

Contract to Decision: 4 years 11 months

Construction Contract Review for Week of October 16, 2009

Some of the construction news I have encountered or collected this week that I found interesting. 

 

• Tragic news out of Atlanta this week where a construction worker on a Habitat for Humanity project was killed in a sewer trench collapse.  According to the report, neither wooden planks nor steel plates were used to hold back the earth while digging trenches.  The AGC Bookstore, keyword “Excavation,” has available The Excavation & Trenching Training Manual & CD-ROM to work in combination with "In the Trenches: Excavation Safety for Workers" DVD and "Construction Standards for Excavation."  According to OSHA, excavating is recognized as one of the most hazardous construction operations.  Tragic reminder to review your practices today.

• From Construction Equipment magazine, Fleet Masters Awards recognize and honor those fleets that exhibit exceptional management in emissions compliance, return on capital investment, peak residual values, vendor relations, maintenance management, technology and human resources.  Presented in conjunction with The Association of Equipment Management Professionals, Construction Equipment has recognized the following winners:

2009   Private Fleet: Barriere Construction

Public Fleet: Manatee County Fleet Services Division

2008   Private Fleet: Kokosing Construction Co.
Public Fleet: Virginia Department of Transportation

2007   Private Fleet:  CJ Miller LLC

2006   Private Fleet: Traylor Brothers, Inc.
Public Fleet: City of Jacksonville, FL

2005   Private Fleet: Alyeska Pipeline Serice Company and ASRC
Public Fleets: City of Fort Worth, TX

2004   Private Fleet: Barriere Construction
Public Fleet: Virginia Department of Transportation

Simple Climate Change for Contractors: Fuel Switching

In honor of “Blog Action Day” 2009 and its efforts to address climate change, here are some steps green construction contractors can take to address climate change themselves. 

 

A significant proportion of the carbon footprint of earth moving contractors and other heavy equipment users comes from diesel fuel and associated emissions.  Switching to alternative fuels like ultra low sulfur diesel or biodiesel is an easy and effective way to address climate change.  Ultra Low Sulfur Diesel (“ULSD”) fuel is usually required to maximize the clean technology of modern diesel engines and vehicles.  Biodiesel is a clean burning alternative fuel, produced from domestic, renewable resources, which contains no petroleum, but can be blended at any level with petroleum diesel to create a biodiesel blend. It can be used in diesel engines with little or no modifications resulting in a fuel that is simple to use, biodegradable, nontoxic, and essentially free of sulfur and aromatics. 

 

Reduce emissions from construction equipment by substituting clean-burning fuels such as ultra-low sulfur diesel fuel and/or biodiesel or fuel additives verified by the U.S. Environmental Protection Agency (EPA) Voluntary Diesel Retrofit Program Verification Process, when possible and available. Use highway grade diesel fuel in all pieces of equipment where clean-burning fuels cannot be used.

 

Federal regulations mandate the use of ULSD fuel for both on-road (2007) and off-road (2010) vehicles, and in certain areas of the country already.  The ULSD must conform to the American Society of Testing and Materials (ASTM) D975 with the following additional specifications:

i.    ASTM D5453 15 ppm Sulfur maximum

ii.   ASTM D6078 Lubricity (SBOCLE) 3100g minimum

iii. ASTM D613 Cetane 45 minimum

 

Reduce emissions from construction equipment by using equipment that meets or exceeds applicable EPA emissions standards for on-road (e.g. 2004 model year) and non-road (e.g. Tier 2) equipment, when possible and available. Equipment should also be fitted with the best available pollution controls for particulate matter, when possible and available.

 

Many green construction contracts are starting to mandate the use of alternative fuels in heavy construction.  Why not get in front of regulations and adopt these practices now?  You may be surprised at the mileage you get from your customers by practicing simple green construction practices.

 Photo credit: http://www.flickr.com/photos/robseattle/34083190/

Losing a Public Bid Due to Online Reputation

If you are trying to show someone that you are not litigious, waving around one of your recently filed lawsuits its probably not the best strategy.  But that is just what a contractor did in Texas in a case decided this summer in a federal court. 

 

Responsible Bidder

The contractor tried to make some constitutional retaliation arguments that may be interesting to lawyers.  So read the case if you care about those issues.  What interested me, however, was the criteria used by the public entity to choose a responsible bidder. 

 

A City’s project involved the installation of approximately ten miles of pipe at depths of up to forty-five feet, improving the city's storm water drainage. The city council considered it a high profile project, requiring attention to safety as well as adroit coordination of construction activities with environmental and regulatory authorities, affected landowners, and the public. Under applicable Texas law, the city council was obliged to select a winning bid from the "lowest responsible bidder or . . . the bidder who provides goods or services at the best value for the municipality," basing the assessment on factors including price, reputation, and quality.

 

Bid Protest

The aggrieved contractor bid $23.5 million, beating the next highest bidder by about $2.2 million.  After receiving bids, the City surveyed the contractor’s references.  Raving reviews received by the City about the contractor included: "[Contractor was v]ery lawsuit happy--Sued water district for $ 4 mill on a $ 6 mill project" and "Has both positives and negatives about them. Owner has been threatened with lawsuits several times during job when things did not go their way."  Remember, these were the bidders own references.  Additionally, the City reviewed other information submitted by the Contractor as well as publicly available information and referenced in a memo "serious safety and environmental concerns and public relations concerns," resulting from OSHA and TCEQ run-ins. 

 

The City awarded the construction agreement to the next highest bidder in part about litigation concerns – those concerns mostly being related to the cost of an unrelated lawsuit the City was involved in.  After the award and during its efforts to convince the City it should be awarded the contract, Contractor appeared before the council and “[i]ts effort did not take a form likely to persuade that it was not litigious.  Rather the opposite, as [Contractor] made it a point to lift up the El Paso suit in a thinly disguised effort to infect the award decision.”  So....to show it was NOT litigious, the contractor waved around his other lawsuit.  Shockingly, the contractor eventually filed various lawsuits on various theories, all of which have been unsuccessful to date. 

 

May be strange coming from a construction litigator, but what is your litigation reputation?  Do you have an on-line presence?  Is your company on twitter, Youtube, Linkedin, Facebook or some other social networking site my kid can tell me about?  What is on the first result page when you Google your own company?  When assessment factors include reputation, you should care about that.  If nothing else, know what your own references will say about you. 

 

The Construction Contract Court Clock

Contract to Decision: 3 years 7 months

Construction Contract Review for Week of October 9, 2009

Some of the news I have encountered or collected this week that I found interesting.  Apparently, I was interested in mechanics liens this week:

• OK, I’m a lawyer and I find stuff like this interesting.  Do you know the difference between an oath and an affidavit?  Nice review of a recent Illinois case discussing this in the context of a mechanics lien, here. 
• I think Texas has one of the more unique mechanic lien procedures, at least as compared to other states.  A good reminder of what to send when, here.
• Good advice regarding when to send Preliminary Notices.  If a supplier sends a preliminary notice prior to shipping materials and then shipment is delayed, is the preliminary notice still timely?  Probably safest approach is to simply send a second, or amended, notice close to the actual shipment date. 

HighLife:

We have a chance of snow this weekend in Chicago, so this seems appropriate:

Hot Toddy

1 shot whiskey

1 teaspoon sugar (preferably superfine)

Boiling water

Grated nutmeg

Cinnamon stick

Dissolve sugar in whiskey, add water to fill cup or glass. Garnish with dash of nutmeg and stir with cinnamon stick.

Submit a construction contract here and receive a free, comprehensive attorney review.  

Delays Not “Party Time, Excellent” for Subcontractor

A subcontractor (SUB) entered into a construction agreement with Schwing America, Inc. to make and install five silos to store and treat sludge at a wastewater treatment plant owned by a sanitary district between Chicago and Milwaukee[1].  Initially SUB’s piece of the process was to take about eight months.  A short three months after the construction contract was executed but after SUB had been paid about 89% of the contract value, the sanitary district suspended the project. 

 

Project Delayed

The project was apparently dormant for about 2 ½ years.  When Schwing contacted SUB to restart the project at a different location[2], the SUB apparently asked for a pretty large change order.  Negotiations ensued, but eventually a change order was executed by both SUB and Schwing that contained the following language:

No other changes to this order apply at this time. Access…or the use of… equipment or requirements for the hiring of [Schwing client] labor personnel has not yet been established by Schwing America Project Manager and must be established. Additional charges may apply if accessibility is delayed or limited, and charges from the [Schwing Client] or unforeseen issues arise.

 

Schwing expected the five silos to be installed.  SUB tried to argue that the conditions at the new location were such that additional funds would be required to deal with the conditions and that the language of the above change order did not include installation costs at the new facility.  It appears, however, that SUB had some larger problems - there were numerous allegations of deficient work by SUB.  That certainly didn’t help SUB’s case that the additional costs were solely from changed location and not from underbidding the work in the first place or poorly executing the work it did.  The work dragged on and impeded the larger project schedule.  Some two months after installation was to be completed and with a fair amount of work to be completed and/or re-done, Schwing terminated SUB for cause.  Schwing hired other contractors to complete installation/re-do to the tune of some $467,000.  SUB sued alleging improper cause for contract termination and its damages; Schwing countersued for its costs to complete. 

 

Contract Performance

Under Wisconsin law, a material breach of a contract[3] releases the non-breaching party from performance of the contract. A breach is material if it destroys the essential object of the agreement or deprives the non-breaching party of a benefit that the party reasonably expected.  In a breach of contract action, the fundamental idea is to put the injured party in as satisfactory a position as the party would have been in had the contract been performed.  Under that general concept, the injured party is entitled to damages that flow directly and necessarily from the breach of contract, and that were reasonably foreseeable to or contemplated by the parties at the time the contract was made. A party is not entitled, however, to be placed in a better position than it would have been if the construction contract had been performed.

 

Reasonable Time for Completion

The Court held that the original purchase order from 3 years earlier included installation.  Nothing in the subsequent change order removed installation, only that it was at a different location and issues such as access may require additional charges.  SUB’s inability to complete the installation in a “reasonable time” was a breach of the contract.  In determining materiality of breach and the parties' reasonable expectations, the court looked not only at the construction schedule, but also considered the circumstances as a whole, bearing in mind normal delays of construction, whether Schwing or other contractors or subcontractors bore responsibility for the delays, and the benefit Schwing  reasonably expected.  The original purchase order required delivery less than five months from the date the order was signed and then anticipated approximate installation within the next three months.  Even with the two year delay and vague hard deadlines, total work time of eight months was not an unreasonable expectation of Schwing and SUB’s failure to install in the timeframe was a material breach.  The SUB was ordered to pay the $467,000 or so and that was upheld on appeal. 

 

Change Orders

There is no reason to fear change orders in a situation like this.  Change orders do not need to be fancy, but they do need to adequately convey what exactly each party intends.  It never hurts to run the specific language of change orders by your lawyer[4] and to have the right questions asked.  It would not have won many friends[5], but if it could show that the conditions at the new site were SO different than the original, SUB probably should have credited Schwing for installation costs at the old location, insisted that the language of the change order clearly state that installation costs at the new location were not yet included, and fixed its own work timely.  “Wow, what a totally excellent discovery — NOT!”[6]

 

The appeal was in the Seventh Circuit (incidentally, not far from Aurora, Illinois) and known as International Production Specialists, Inc. v. Schwing America, Inc., No. 07-3632 decided September 2, 2009.  Would you like to have your construction contract reviewed for free? Send us your contract here.

 

The Construction Contract Court Clock

Contract to Decision: 8 years 1 month

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[1] Wayne Campbell: So, do you... come to Milwaukee often?

Alice Cooper: Well, I'm a regular visitor here, but Milwaukee has certainly had its share of visitors. The French missionaries and explorers began visiting here in the late 16th century.

Pete: Hey, isn't "Milwaukee" an Indian name?

Alice Cooper: Yes, Pete, it is. In fact, it's pronounced "mill-e-wah-que" which is Algonquin for "the good land."

Wayne Campbell: I was not aware of that.

 

[2] Benjamin Kane: So, Garth, what do you think of the new set?

Garth Algar: It's kinda like a new pair of underwear. At first it's constrictive, but after a while it becomes a part of you.

 

[3] Garth Algar: “Did you ever see that 'Twilight Zone' where the guy signed a contract and they cut out his tongue and put it in a jar and it wouldn't die, it just grew and pulsated and gave birth to baby tongues? Pretty cool, huh?”

 

[4] Benjamin Kane: Do you have a lawyer?

Wayne Campbell: Yes. Ahm... no. We're between lawyers right now. You see, our first lawyer screwed our affairs so bad.

Garth Algar: That's right. I walked right to that office — that's what I did — and I reached across that desk and I grabbed him by his fat head and I said "Listen, man. I'm not going to jail for YOU or for anybody!

 

[5] Garth: Do you ever get the feeling Benjamin's not one of us?

Wayne: Good call. It's like he wants us to be liked by everyone. I mean, Led Zeppelin didn't write tunes everybody liked. They left that to the Bee Gees.

 

[6] All footnotes and quotes, thanks to http://en.wikiquote.org/wiki/Wayne%27s_World

 

The Construction Contract Court Clock

Sure I could explain myself about the all new “The Construction Contract Court Clock” that will be included in any case summary on this blog, but what better way to introduce this feature than a message from a trusted Nigerian friend:

 

Can i trust you?

From: Daniel Arinze -

Attention My Good Friend,

 

Greetings to you!

 

Please do accept my apologies if my mail does not meet your personal ethics, I want to introduce myself and this business opportunity to you. My name is Rev. Daniel Arinze, a bank accountant. I wish to know if we can work together. I would like you to stand as the next of kin to my deceased client who made some deposits to my bank. He died without any registered next of kin and as such the funds now have an open beneficiary mandate. Fortunately, both of you have the same last name so it will be very easy to make you become his official next of kin.

If you are interested you do let me know so that I can give you Comprehensive details on what we are to do. I urgently hope to get your response as soon as possible.

 

Fortunately also upon receipt of all of your bank particulars the goodness of The Construction Contract Court Clock to be revealed.  I am manager in this company, i will play a role to make sure that the 10.5 Million Dollars is released to you. As soon as i receive your first reply, i will also give you a draft application which you will fill and forward to our company. 

Also with every case analysis CCR will note the start date of the project and the date of the decisions.  Note surely the length of time litigation takes.

 

Best regards

Rev. Daniel Arinze.

 

Well, I’m deeply flattered by this endorsement for a simple notation I will include in any case discussed here.  For simply noting the start date of a project and the end of litigation, not only will you get a sense of how long construction disputes can last, it looks like the good Rev. will wire 10.5 million dollars. 

Or, maybe just contact a construction attorney early in your bidding stage for a comprehensive review of your construction agreement and early in a potential dispute to avoid wasting time.  Let the attorneys at Mayfield | Broderick suggest negotiation strategies and highlight the risks in your construction contract.  Send us a contract today, and the first attorney review is on us.  Click here for more details.

 
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