Holding the Bag
According to a quick Google search the term “holding the bag” comes from the mid eighteenth century and means be left with the onus of what was originally another’s responsibility. Nobody wants to be left holding the bag. But that is the situation our client (subcontractor) found themselves in when upon completion of a public project the general contractor went out of business before paying the remaining amount due and owing to our client.
Under Nebraska law, liens are not allowed against public projects. Instead the subcontractor is to make a claim on the payment and performance bond secured by the general contractor at the start of the project. In our case, the general contractor never secured a bond on which to make a claim; consequently leaving our client holding the bag.
Fortunately, we were able to hand the bag back to the State and obtain full payment for the services and materials provided.
In Nebraska, when the State undertakes a construction project, the State is required to take from the contractor “a payment bond or bonds in a sum not less than the contract price with a corporate surety company and agent selected by the contractor…” Neb. Rev. Stat. Sec.52-118(1). Furthermore, “no contract referred to in this section shall be entered into by the Sate of Nebraska …until the bond or bonds referred to ….has been made, filed and approved.” Neb. Rev. Stat. Sec.52-118(3).
So what happens if the State fails to abide by the statute? The Nebraska Supreme Court has held that the state and any public entity has a duty ensure a bond is in place for the the benefit of the materialmen before entering into a construction contract. Westinghouse Elec. Supply Co. v. Brookley.
Applying the statute and the Supreme Court’s decisions the District Court found the State violated its duty imposed by statute and sustained our action against the State for the full amount left due and owing. In the end, the State was left holding the bag. Good for our client, and possibly good for you if you find yourself in the same situation.
Please contact us if you would like a copy of the Court’s order.
Landowners and developers bogged in an EPA wetland determination were recently thrown a life line when the United States Supreme Court determined The Army Corps of Engineer’s (Corps) “jurisdictional determinations” (JD) regarding wetland designations are reviewable by the court. United States Army Corps of Engineers v. Hawkes Co. Inc.
Under the Clean Water Act (CWA) landowners and developers who do not have the proper permits can face severe criminal and civil penalties for releasing any pollutant into “the waters of the United States.” Anybody stuck wading through the permitting process will tell you it is difficult, time consuming, expensive, and may eventually prohibit the intended use of the property. Furthermore, there is yet to be a consensus on the definition or scope of the term “waters of the US”. Consequently, a landowners or developers may never be certain whether a permit is necessary before conducting any activity that may discharge a pollutant into a “water of the United States”.
To solve this dilemma, the Corps will graciously provide a “jurisdictional determination” (“JD”) designating whether a property (1) contains waters of the US; (2) does not contain waters of the US; or (3) “may” contain waters of the US. Any JD stating the property contains or does not contain waters of the US is binding on the Corps and landowner or developer for 5 years. The JD is also appealable to the EPA but not to the District Court.
Because the landowner was not allowed to appeal the determination beyond the EPA, the landowner was stuck with the decision unless the landowner decided to discharge the pollutant and argue in a government enforcement action that a permit was not necessary. The landowner or developer could also complete the permit process and have the determination judicially reviewed after the permit is issued or denied.
The Supreme Court determined that neither was a viable option for the landowner or developer. Federal law states that any agency decision that (1) concludes the agency’s decision making process and (2) legally affects the rights or obligations of another are appealable to the federal district court. The Supreme Court found that a Corps’ JD met both obligations.
First, the JD was issued after a fact-finding investigation and was described as a “final agency action” by the Corps.
Second, the JD had a legal binding effect for a period of 5 years which directly affected the legal rights and remedies of the landowner or developer.
Obviously any feelings of joy or celebration have to be tempered by the fact that any court to which the JD is appealed can determine the JD is correct. However, the life line gives the landowner or developer an opportunity to pull the decision from the very agency which made the original decision.
You can find the entire decision at:United States Army Corps of Engineers v. Hawkes Co.
Ouch. That’s what a court called a contract to remediate petroleum contamination at a number of gas stations in New York. Sometimes, it’s hard to believe the contracts that get signed.
Environmental Risk hired Science Applications to remediate petroleum contamination at 47 gas stations. Environmental Risk had previously entered into a Professional Services Master Agreement with Science Applications, but also required Science Applications to sign three separate, but basically identical, subcontracts called the Project Specific Scopes of Work. So, right from the start, there were four contracts that could apply to Science Applications’ work.
Sometime after work started, Environmental Risk terminated the contracts with Science Applications under a termination for convenience clause. Science Applications pulled off the job and submitted its final pay application. When Environmental Risk failed to pay, Science Applications filed mechanics liens and filed a breach of contract lawsuit. Environmental Risk then claimed that Science Applications breached various provisions of the contracts. After a five week bench trial, the court awarded Science Applications $800,000.
During litigation, Environmental Risk argued that Science Applications failed to meet the stringent clean-up standard contained in the Project Specific Scopes of Work. Unfortunately for Environmental Risk, the court noted that another section allowed for a completely different clean-up standard, thus allowing for multiple interpretations of the contract.
To make matters worse, the Professional Services Master Agreement contained internally inconsistent clean-up standard provisions. One clause required Science Applications to achieve a “clean-up standard” and then obtain approval from the New York Department of Environmental Conservation. But the very next provision only required approval from the Department of Environmental Conservation.
Projects can get complicated. But, the contract should not make them more complicated. As this case shows, cobbling together a number of contracts may create a hodgepodge of conflicting proposals that will greatly hamper your effort to win your case.
Sean Minahan, one of my partners, and I were discussing a construction dispute the other
day and we commented again and again about the significant organization required to get a construction project to completion. From the contracts, to the schedule, to the funding—everything has to be in lock step or there will be problems that could bring the project to a halt, or worse yet litigation.
The same is true of construction claims. To present a claim effectively, it has to be simple. But, to make it simple will require substantial documentation and organization of all aspects of a claim.
This point was driven home this week when I received Long International’s Construction Claims Analysis Checklist Long International. The Checklist is 11 pages long and identifies various aspects of a claim, from the simple to the complicated. A few of these items include:
- Identify the law which governs the contract.
- Prepare a chronological history of events related to each claim and problem.
- Perform an assessment of the project and construction management performance of the owner and contractor.
- Determine if the as-built start and finish dates for the scheduled activities are accurate.
- Prepare narratives with supporting documentation that describe the information utilized, the problems encountered, the analyses performed, and the results of the damages calculations.
Determine if the as-built start and finish dates for the scheduled activities are accurate.
Prepare narratives with supporting documentation that describe the information utilized, the problems encountered, the analyses performed, and the results of the damages calculations.
If you want a little light reading as you’re sitting around the fire this holiday season, I suggest Long International’s Checklist. It may not bring in the holiday spirit, but it may provide some insight to avoid a visit from the ghosts of projects past.
A contractor learned a $12M lesson when it tried to change course on a Corps of Engineer river dredging project. The case also illustrates the importance of documenting problems on a project and providing notice of those problems to the owner.
In Weston/Bean Joint Venture v U.S., Weston/Bean was awarded a Corps of Engineers project to provide maintenance dredging on the Miami River to a depth of 15 feet. The contract noted that the contractor may experience sediment, debris and rock, including soft to moderately hard limestone.
The contractor encountered rocks early on in the project, but consistently submitted reports to the Corps of Engineers that nothing was experienced on the project that would lead to a change order or claim. And, for the first year of operations, the contractor made no claim for differing site conditions. Instead, the contractor terminated the subcontractor for not being able to process the rock uncovered during the dredging process.
Once the project was completed Weston/Bean submitted a claim for $12 million alleging that the Corps of Engineers directed it to perform work above and beyond the contract. The Court of Claims closely reviewed the contract, finding various clauses precluded the contractor’s claim. Importantly, the contract stated that “massive, monolithic in situ rock” would not have to be removed. This necessarily meant that large rocks, but not massive ones, would have to be removed.
The court also found it significant that Weston/Bean never submitted a change order or claimed differing site conditions until well after a year on the project. In essence, the contractor’s failure to submit a claim immediately upon finding rocks larger than expected precluded its claim.
Take Away: It is very difficult to change course midstream. The contractor’s failure to notify the Corps of the rock problems early on greatly diminished its ability to claim unforeseen conditions later on.
I recently had a discussion with an insurer about whether defense costs were included within the policy limits of a client’s coverage or in addition to policy limits. This was an important discussion because if costs of defense were included in the policy limits, my client was going to exceed those policy limits in a hurry. How would this situation play out with your insurance?
Fortunately, the majority of insurance policies, such as Commercial General Liability (CGL) policies, provide that defense costs are “in addition” to the policy limits. But some policies, often times referred to as “burning limits” policies, provide that cost of defense is included in the policy limits. This means that if you have $1,000,000.00 policy limits, your costs of defense will reduce that limit throughout the course of litigation.
When the claim is substantially less than your policy limits, this will probably not be a problem. But, if the claim is near your policy limits, you may find that the company is on the hook for any excess claim over the remaining limits.
So, why would you buy a burning limits policy? Because they are cheaper, often times a lot cheaper. And, you may still get a certificate of coverage that indicates that you have policy limits of $1,000,000.
Take Away: Review your insurance policies and determine whether costs of defense are included within your policy limits before any claims are made. Otherwise, you might be having this conversation during litigation and finding out you have a burning limits policy.
I hope you and your family are enjoying some well earned time off this Thanksgiving.
Today’s post provides me an opportunity to thank everyone who gave me ideas for the blog and I thank you for reading it.
I’d also like to thank all of my construction clients from whom this blog is written. I appreciate the opportunity to assist you in your construction projects.
Finally, we will be smoking, NOT deep frying our turkey this year. So, there is very little chance that we will burn the house down.
Wouldn’t it be nice to know ahead of time what an OSHA inspector will be looking for
when he comes to your work site? Well, I know the secret. And, it’s not really a secret. Just look at OSHA’s top ten citation standards and it becomes quite clear.
In 2015, OSHA’s top ten most frequently cited violations are:
- Fall protection (C)
- Hazard communication
- Scaffolding (C)
- Respiratory protection
- Powered industrial trucks
- Ladders (C)
- Electrical: wiring
- Machine guarding
- Electrical: systems design
Those marked with a (C) are construction standards.
So, when OSHA comes knocking, you know the top ten areas they are investigating. And, if you are on a construction site, you know they are going to look hard at fall protection, scaffolding and ladders.
I had the pleasure of speaking at the National Association of the Remodeling Industry (NARI) Education Day earlier this month. During my presentation, “The Myth of the One Year Warranty”, we discussed the impact of arbitration clauses in construction contracts and who should act as arbitrator.
While the American Arbitration Association is certainly a popular forum, there are others. For example, the New York Times recently wrote about a hardwood supplier, Higuera Hardwoods, in Washington State that requires arbitration before the Institute for Christian Conciliation, a division of Peacemaker Ministries. This organization has adopted Conciliation Rules of Procedure, the purpose of which is to
glorify God by helping people to resolve disputes in a conciliatory rather than an adversarial manner
The rules further provide that it will consider the state, federal and local laws brought to its attention, but
the Holy Scriptures (the Bible) shall be the supreme authority governing every aspect of the conciliation process.
I don’t honestly know how a dispute about the hardwood product would be resolved relying on biblical principles. But, if you purchase hardwood from this company, you will be obligated to find out.
Take Away: Arbitration clauses will impact how your dispute will be resolved. Make sure you review the arbitration clause so that you know how your dispute will be resolved before you sign the contract.
A recent case out of New Mexico highlights the importance for subcontractors to review their contract with the general and the contract between the general and the owner. In Centex/Worthgroup, LLC v. Worthgroup Architects, L.P, the architect claimed that the limitation of liability clause in the prime contract trumped the provisions of the subcontract. The court disagreed and ruled that the specific provision in the subcontract controlled.
In the case, a general contractor was hired to expand and renovate a resort. The general contractor subcontracted with an architect to design a mechanically stabilized earth wall. The prime contract contained a limitation of liability clause that states:
general contractor shall require its design professional Subcontractor(s) to obtain insurance in an amount not less than $3,000,000. Owner agrees that it will limit general contractor’s liability to Owner for any errors or omissions in the design of the Project to whatever sums Owner is able to collect from the above described professional errors and omissions insurance carrier.
The subcontract with the architect included two important provisions, an order of precedence clause and a flow down clause.
The order of precedence of the documents, … shall be: (1) the most current approved edition of the construction documents; (2) modifications to the subcontract; (3) the subcontract, unless the prime contract imposes a higher standard or greater requirement on the parties, in which case the prime contract; (4) the prime contract, unless the provisions of (3) apply.
In respect of the design work, Architect shall . . . have all rights toward general contractor which general contractor has under the prime contract towards the Owner and Architect shall, to the extent permitted by applicable laws and except as provided herein, assume all obligations, risks and responsibilities toward general contractor which general contractor has assumed towards the Owner in the prime contract with respect to the design work.
The wall the architect designed failed causing $6 million in damages. The architect’s insurer paid its $3 million policy limits. The general contractor then sued the architect to recover the remaining $3 million in damages. In an interesting twist, the architect claimed that the limitation of liability clause contained in the prime contract limited the architect’s liability to $3 million.
The court reviewed both contracts and found that the subcontract controlled the extent of the architect’s liability. The court reached this conclusion by applying the contractual interpretation rule:
if the specific provisions of the subcontract conflicts with the prime contract, the terms of the subcontract prevail.
Here the subcontract required the architect to shoulder specific liability for redesign work and damages, while the prime contract generally limited the architect’s liability to the limits of insurance. So, the subcontract with specific language controlled, not the prime contract.
Take Away: Contractors are well advised to review both the subcontract and prime contract to determine whether conflicts exist and the extent of potential liability.