The Construction Contract Review

Got Conflicting Information in Bidding Documents? How to Avoid a Differing Site Condition Dispute.

A contractor was hired to remove DDT from contaminated soil at a Navy facility in California.  One of its subcontractors claimed that the soil encountered onsite had a higher than expected clay content resulting in extra costs incurred. The contractor sued to recover these unexpected costs on behalf of the subcontractor claiming the sub relied on one of two bidding documents relating to soil content in preparing its bid.  There was no specific differing site conditions clause in the contract, so the contractor’s theory was one of misrepresentation of the site conditions by incorrectly representing the amount of clay in the contaminated soil. 

 

In order to prevail on such a site conditions claim, a contractor must establish four elements.

1. The contractor must prove that a reasonable contractor reading the contract documents as a whole would interpret them as making a representation as to the site conditions - that the contract contained some identification of the conditions to be encountered at the site;
2. The contractor must prove that the actual site conditions were not reasonably foreseeable to the contractor, i.e., that the contractor "reasonably relied" on the representations given all information available to the contractor when bidding;
3. The contractor must prove that it in fact relied on the contractual representation; and
4. The contractor must prove that the conditions differed materially from those represented and that the contractor suffered damages as a result. 

The Court rejected the claim because it did not find the contractor proved that the specific contract documents actually represented site conditions, failing to satisfy the first requirement above.  But moreover, the contractor failed to prove the second requirement because the Court determined that the contractor’s reliance on the soil information was not reasonable.  Two bidding documents containing information on soil content were in “direct contradiction,” and the contractor could not claim a reasonable reliance on one but not the other. 

 

With 20/20 Hindsight….

 

This claim was lost at the time the bid was submitted.  Testimony emerged at the trial that the contractor itself questioned some of the data.  The classic “should have been a warning” was used by the Court in describing what conflicting reports represented to a “reasonable contractor.” 

 

Obviously, the contractor made a determination based on the data that turned out to be wrong.  However, given the importance of the soil characteristics to the success of the treatment methodology employed, the contractor could have negotiated better contractual protections in its contract.  The importance of the soil condition and the technical assumptions made should have been incorporated into the construction contract.  At a minimum, the contractor should have identified the contradiction and explained its reliance on one document over the other in its bid.  20/20 hindsight is pretty easy. 

 

The Construction Contract Clock:

Work Order to Court decision: 10 years

 

The case is known as Int'l Tech. Corp. v. Winter, 523 F.3d 1341 (Fed. Cir. 2008)

4 Things You Must Show If Claiming a Constructive Change

A constructive change occurs where a contractor performs work beyond the contract requirements without a formal order, either by an informal order or due to the fault of the Government.   Equitable adjustments are corrective measures that make a contractor whole when the government modifies a contract.  A contractor is entitled to an equitable adjustment for a constructive change when it is required to perform more or different work not called for under the terms of its contract.

 

Several categories of constructive change have been identified in existing case law:

• disputes over contract interpretation during performance;
• government interference or failure to cooperate;
• defective specifications;
• misrepresentation and nondisclosure of superior knowledge; and
• acceleration.

 

The doctrine of constructive change serves to

(1) remediate contractor claims for extra work, and (2) permit contractors to perform disputed work without having to risk abandonment of their contracts to preserve their claims. The theory underlying the constructive change concept is that where the government "should have" issued a change order authorizing the extra work in the first place, the court or board [of contract appeals] may direct the government to do what "should have been done" by directing the government to issue a formal change order. The doctrine in its modern guise is the embodiment of the ancient principle that "what should have been done will be done."

Philip L. Bruner & Patrick J. O'Connor, Jr., Bruner and O'Connor on Construction Law § 4.25 (2002) as quoted in Metric Constr. Co., Inc. v. United States, 80 Fed. Cl. 178 (2008). 

 

In order to recover for a constructive change, a contractor typically must show:

1. The work performed was not included in the original scope of work
2. All contractual or statutory notice requirements were satisfied
3. The owner required the change and was not volunteered by the Contractor
4. Contractor tracked its additional costs incurred due to the change

A constructive change situation can sneak up on a contractor or an owner.  All four of these elements are usually required to be shown in order for a contractor to recover.  Therefore, be sure to contact an attorney early in the project if you are working without a formal change order.

Or even better, send us your contract before you submit your bid and we can provide a comprehensive attorney review, highlighting the risks to you and suggest some negotiating strategies.  Click here for more details.

Green Updates: Construction Contract Review For November 2009

A few updates or interesting items I encountered this month:

Green Mall Expansion

In November, I wrote about a troubled mall expansion in Syracuse intended to showcase green construction technologies.  The Wall Street Journal reported that the New York State Supreme Court Appellate Division, affirming a lower court decision, ruled that Citigroup must continue to fund a $155 million construction loan to Destiny USA Holdings.  The developer must post a $15 million bond before the bank must fund the remainder of the project.  Look out for changes in determination of default criteria in construction loan agreements. 

Clean Diesel

The Associated General Contractors of America and the Clean Air Task Force lobbied Congress to let states mandate the use of clean-diesel equipment for federally funded highway construction.  The New York Times reported that the two groups want new legislation to authorize states to require diesel emissions reductions at construction sites and to cover the cost of retrofitting or repowering equipment manufactured to meet earlier emissions standards.  Under the plan, states would first require contractors who successfully bid for a project to identify the off-road diesel equipment they plan to use during the construction process. States would then consider a U.S. EPA-approved measure for cutting emissions from the equipment and issue orders to the contractors requiring that they pursue the best of the emissions-reducing options.  Federal funds would be used to reimburse the contractors, according to the Times.  Anti-idling and alternative fuel policies are easy to implement and cost effective.  Are you ready now for these guidelines?  Why not?

Emission Footprint Tool

The Rocky Mountain Institute has developed an assessment tool for reducing carbon emissions from building construction projects called Green Footstep.  According to the website, the Green Footstep tool can be used on residential and commercial new and retrofit building construction projects, from pre-design through occupancy. The tool assesses design's total carbon footprint due to site development, construction, and operation; helps designers and other project stakeholders set carbon emissions goals and design targets; identifies ways to meet the Architecture 2030 Challenge, earn credits in green building rating systems, and achieve other goals; and compliments a financial model (based on life cycle cost analysis) to provide the most comprehensive support for building design decisions.  The tool is online and FREE.

Green Construction Not Enough

 

Construction of a three-story, 1.3-million-square-foot mall expansion, the largest building project in Syracuse in 19 years, came to a halt in June after Citigroup refused to loan any more money to the developer.  The project was designed to showcase "state-of-the-art" green technology, renewable energy resources, and sustainable design for both construction and operations. The project was to include an innovative design combining research, retail, entertainment, dining, hospitality and tourism. The project has created expectations to create tens of thousands of jobs, attract millions of visitors to an otherwise economically depressed region, and add millions of dollars annually into the local and state government economy.  Drawing in part on public funding, it had become known as the model "private - public partnership" for economic development, for green development and for sustainable development. 

 

The Post-Standard reported that Citigroup said the project was at least $15 million over budget and a year over schedule -- and had no tenants signed up despite the expenditure of millions of dollars on marketing. It demanded that the developer put up $15 million more of his own money, on top of $40 million he already has put into the construction.

 

The project was being financed by the developer’s own $40 million, $170 million from the sale of Syracuse Industrial Development Agency bonds and a $155 million loan from Citigroup. The $210 million in SIDA bond proceeds and the developer's own money have already been dispersed and are not at issue in the dispute.

 

When the bank stopped funding the construction, the developer sued the bank, saying Citigroup reneged on the loan agreement because of its own financial problems - problems that prompted the federal government to give the bank $45 billion to keep it afloat.  The bank countered that as a result of a loan "Deficiency", the bank had no further obligation to fund the construction loan agreement until the "Deficiency" was fully resolved and the developer was in default on interest payments.  Citigroup also attempted to argue that because there were allegedly no signed leases and because - in their opinion - the project was a "failure", that there should be no obligation to further fund the project.  According to the Court, the bank sought to rewrite the loan agreement because there was no requirement that there be any tenants whatsoever at this stage of the construction. There was no requirement that - at this stage - the project be a success or otherwise. The first net operating income test from the loan agreement did not come effect until some six months in the future. The court concluded that the bank’s arguments were “specious, without substance in law and fact, and irrelevant to the issues before this Court.”

 

The practice of the loan funding was to pay interest payments from the funding.  If the funding did not come in, the developer was unable to make the interest payment.  By stopping the funding, the bank created the deficiency itself. 

 

The Court ruled that the bank broke the loan agreement and ordered it to resume lending the remaining $68.4 million yet to be advanced on the loan, starting with an immediate payment of $29 million. Citigroup obtained a stay of the ruling while it appeals the order.

 

One can have a nice green construction project, but that doesn’t isolate the project from larger economic forces, bad management or stingy bankers.  I probably didn’t need to tell you that though, did I?

Are there “green” provisions in a proposed contract you are bidding on?  Have you identified the risks of those clauses and are you prepared to handle those new contractual risks?  Click here to send us your contract and we will provide a complimentary attorney 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

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

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