We see it all the time. Boilerplate language in a contract that becomes a major issue down the line. A recent case revealed the problems a contractor had with permits when the contractor’s estimate contemplated an easy permitting process and compliance, but in actuality it was much, much more difficult.
The case Bell/Heery v. United States, involved Bell/Heery’s request for additional compensation under a federal contract. Bell/Heery submitted a bid for a prison project. As explained in the bid, Bell/Heery anticipated that the New Hampshire Department of Environmental Services (NHDES) would issue a permit allowing Bell/Heery to “cut-to-fill” the site, which involved excavating materials from one area and moving it to another area to level the entire site. NHDES did not agree with Bell/Heery’s proposed construction method and refused to issue the permit. Instead, NHDES required a multi-step construction process through which only 40 acres of land were disturbed at a time. Complying with NHDES permitting requirement was a much more expensive and time consuming process than Bell/Heery had anticipated, to the tune of $7,000,000.00.
Due to the increased cost created by NHDES, Bell/Heery asked for more money from the government contracting officer. The contracting officer rejected the request, finding that Bell/Heery had assumed the risk of the permitting process and it was liable for any costs associated with the permitting process and construction methods required by the permitting process. Bell/Heery appealed to the Court of Claims, which found:
The Permits and Responsibilities clause clearly and unambiguously placed the burden of obtaining and complying with state and local permits for the construction project solely on BH without additional expense to the government.
So, Bell/Heery was stuck absorbing the $7 million costs to comply with the NHDES permits.
Take Away: What do your contracts say about permits? Do you just assume that permits are going to be easy? Should you incorporate some language that will allow you to charge the owner any additional costs associated with obtaining or complying with permits?
As you gear up for the spring, maybe it’s time to look at your employment policies and practices to make sure you are covering all your bases. Below is checklist to help ensure you are in compliance.
- Workplace Posters. How long has it been since you updated your workplace posters? Any number of federal laws require posters. Here’s a link to the Department of Labor’s posting requirements.
- OFCCP Obligations. Are you incorporating the proper language into contracts and subcontracts? Have you updated your affirmative action plan and hiring practices to comply? Here’s a link to an earlier blog on OFCCP Audits to get you started .
- Policy Review. Aside from the OFCCP obligations, how long has it been since you reviewed your employee handbook? Do you have a sound anti-harassment or anti-retaliation policy?
- Training. Have you scheduled your training for 2014? It’s always a good idea to train your employees on all policies, and the OFFCP requires it.
- Record-Keeping. How are you doing with your I-9 documentation? Have you conducted an internal audit to see if they are being completed correctly and have all the necessary copies? Here’s a link to an earlier blog on I-9’s to get you started.
- Review Classifications. Are you exempt and non-exempt employees properly designated? Can you support the designation with job descriptions? Are you relying too heavily on independent contractor status? These are all issues to consider.
- Review Benefits. How will your company’s benefit system be impacted by the Affordable Care Act? Even though implementation has been delayed to 2015, it’s never too early to take a look.
These are just a few steps you can take to minimize your exposure to employment related claims in 2014.
On February 12, 2014, President Obama signed an Executive Order that raises the minimum wage on federal construction projects to $10.10 per hour. The raise will not be effective until January 1, 2015, and every year afterwards, the minimum wage will be increased and is tied to the Consumer Price Index. Depending on the trade, this could require an increase in wages on projects, including those covered by Davis Bacon.
The Executive Order requires federal agencies to include language in their contracts requiring a minimum wage. Contractors and subcontractors must also incorporate the same language into their contracts and subcontracts. The Executive Order also encourages government agencies to take all reasonable steps to ensure that all new government contracts, including those that go into effect before January 1, 2015, include a provision specifying that the minimum wage for employees of government contractors is at least $10.10 per hour.
There are still a number of questions relating to the scope and impact of the Executive Order. For example, are all employees of the contractor entitled to the new minimum wage or only those working on the project? Questions relating to this Executive Order should be made clear through the implementing regulations that the Department of Labor will issue later this year.
We will review the Department of Labor’s implementing regulations to see how broad the Executive Order is intended to be. In the meantime, closely review government contracts to see if they require the increased minimum wage.
Avoid litigation at all costs was the mantra several years ago. Supporters of arbitration claimed that it was less expensive, quicker and avoided run-away juries. But, are these claims still true? Is arbitration still better? Well, it depends. Some claims may benefit from arbitration, but the benefit is not always clear.
AIA Contracts Don’t Push Arbitration
For those of you using AIA contracts, you have probably seen that arbitration is still an option under section 6.2 of the A101. In that section, the parties check a box to agree to arbitration, litigation or other resolution.
Filing Fees and the Cost of the Arbitrator Can be Expensive
If you have a relatively small contract, resolving your claim may prove very expensive. Filing fees for arbitration exceed $700.00. And, you will have to pay to have the arbitrator hear and decide your case. That’s in addition to your own attorney’s fees. You could well spend over $5,000 just to have the arbitrator decide your case – again, not to mention your own attorneys fees.
Arbitration Does Not Avoid Discovery
Parties to arbitration will conduct some discovery. Arbitration does not eliminate the need for document exchanges and depositions.
Arbitration May Provide a Specialized Decision Maker
Probably the biggest benefit to arbitration is that the decision maker may have specialized experience in the area. Large construction disputes oftentimes include very specialized issues and having a decision maker familiar with those issues may assist resolution of the matter.
Mediation is Available in Arbitration and Litigation
Mediation is always an option, regardless of which way you pursue your claim.
At the end of the day, arbitration as an alternative dispute resolution process is still viable, but it does not appear to be the beat all/end all process for all construction disputes. The size and complexity of project will likely dictate whether litigation or arbitration is the appropriate path.
How often do subcontractors continue to work on a project, waiting to get paid? The subcontractor has submitted pay applications, no one is complaining about its work, yet payment is slow. What are the subcontractor’s options? Can the subcontractor terminate the contract? Maybe, but, as always, it depend on the contract language.
A recent case out of Indiana sheds some light on this very issue. In Ellerman Construction v. Ohio Farmers Insurance Company, Ellerman sued the general contractor and its bonding company to recover $250,000 due under the contract. The general contractor refused to pay, claiming that Ellerman had walked off the job and the general contractor was forced to hire a replacement contractor, at a much greater cost. Ellerman responded, arguing that it walked off the job because it had not been paid for more than 60 days and the contract allowed Ellerman to terminate the contract for nonpayment.
The court agreed with Ellerman’s position and ruled that the subcontractor was entitled to $250,000. In so ruling, the court rejected the general contractor claim that Ellerman walked off the job, forcing the general contractor to complete the job with a more expensive subcontractor. The court found that the contract language authorized Ellerman to walk off the job if it had not been paid for 60 days. Because it had not been paid for more than 60 days, Ellerman was entitled to walk off the job.
This is yet another example where knowing the language in your contract is very important. The court’s opinion does not delve into which party insisted on the 60 day language, but it certainly helped the subcontractor in getting its judgment against the general contractor and its bonding company.
The National Labor Relations Board reissued its ambush election rules that will shorten the timetable for union representation elections. This is the same rule that became effective in April, 2012, but was struck down in May, 2012 because the NLRB did not have enough members to approve the final rule. This rule reduces the time available for employers to organize an effective campaign against unionization in their workplace.
The proposed rule changes the following:
- Employers must give unions employees phone numbers and e-mail addresses prior to election. The prior rule only required names and addresses.
- The new rules requires that a hearing must be held within 7 days of the union’s representation petition.
- The rule that elections may not take pace sooner than 25 days after a Direction of Election would be eliminated, meaning that elections will take place more quickly.
- Pre-election appeals will be severely limited.
The new rule raises significant concerns for employers in responding to union organization. Under the old rule, elections take place around 38 days after the union files a petition for election. The new rule will allow for elections in 10 to 21 days from the filing of the petition. This “quickie” election likely means that unions will win more elections. And, given that unions win more than 60% of elections under the old rule, there is reason for concern for merit shops.
The NLRB has again requested comments on the rule. 65,000 comments were submitted in response to the last ambush election rule and I expect that there will be a lot of comments this time around. Comments may be submitted until April 14, 2014 though regulations.gov or by mailing them to the NLRB’s Washington D.C. headquarters.
What does it mean when the architect has the “final” say on disputes? Does that prevent you from filing a lawsuit to get paid? Not necessarily.
As we discussed in the last blog post, Otis Elevator installed four escalators. Otis’ shop drawings were approved before work was nearly completed, but the owner refused to accept the work. The escalators had to be changed and Otis wanted to be paid for the change ordered work. The general refused and Otis had to file suit against the general to get paid for its work.
During the litigation, the general contractor claimed that the contract prevented Otis from bringing the lawsuit. Specifically, the general contractor cited to the contract language that stated:
If there is any conflict, ambiguity, or inconsistency within or between [the contract documents] or a difference in interpretation, the matter shall be referred to the appropriate design professional whose decision the subcontractor shall implement at no additional cost.
The general contractor claimed that the above language bound Otis to the architect’s decision that the plans called wider step width than those originally proposed by Otis.
The court disagreed and ruled that the architect’s decision was reviewable where there is evidence of fraud or such gross mistakes as would imply bad faith or a failure to exercise honest judgment. The court found that the architect did not exercise honest judgment by:
- Having an intern draft the escalator drawings;
- Approving the shop drawings and stamping them with “Concept conforms with Design Concept”; and
- Failing to identify any problem with Otis’ construction during the architect’s on-site inspections.
Here the court found that the architect’s final say was reviewable because the architect demonstrated dishonest judgment or bad faith. But, if the architect had performed his work well, Otis could have been stuck with the decision to implement the change, and at no additional cost.
It’s never fun getting sued, especially when you didn’t do anything wrong. That was the situation for Otis Elevator in a recent case. In this post we’ll look at the problem created by poorly drafted plans and specifications. In the next post we’ll review the impact of contract language that says the architect is the final decision maker on all issues.
A small airport was expanding and needed to add four escalators. All bidders were asked to bid according the architect’s plans and specifications. The plans did not make clear the width of the steps and Otis Escalator, along with another bidder, submitted a bid based on a 32 inch step width. Otis was selected as the lowest bidder, but before the contract was finalized, Otis’ shop drawings were reviewed and approved by the general contractor and the architect. The shop drawings made clear that Otis was installing a 32 inch step. At no point during submittal and review did the architect or general contractor object to the proposed step width.
Otis ordered the escalators and the general contractor constructed the areas around the escalators to accommodate the 32 inch stair width. When the work was nearly complete, the owner objected to the stair width, claiming that the escalators’ steps were supposed to be the same width as the existing escalators, 40 inches. A meeting was held and the general contractor wrote the owner afterwards concluding that the escalators complied with the contract documents.
The owner disagreed and threatened the general contractor with liquidated damages. The general contractor then changed its position and told Otis that the escalators did not conform to the contract. A change order was issued and Otis agreed to do the work, but did so under a reservation of rights. The general contractor refused to pay Otis for the additional work and Otis sued.
How did the court decide?
The court decided that the contract documents were ambiguous because they did not specify the width of the escalators. The general contractor argued that certain tick marks and dots on the drawing, in addition to the scale, showed that the escalator should have been 40 inches wide. The court disagreed, finding that the scale was off 3 to 3 ½ inches.
The court concluded that the plans were ambiguous and Otis was well justified in submitting a bid for a 32 inch step. The court also found it significant that both the contractor and the architect approved Otis’ plans that clearly showed a 32 inch stair width. Based on these conclusions, the court found that Otis did not breach the contract and was entitled to be paid for the work performed in installing the 40 inch escalator.
Make sure your bid complies with the plans and specifications. And, keep any approvals of your shop drawings to defend again challenges that your work is incorrect. But, also know that you may still get sued for doing the work that was approved.
Late last year, the United States Supreme Court ruled that forum selection clauses in a construction contract are enforceable and, in some states, may require a construction dispute to be litigated outside of the state in which the project is located.
The case, Atlantic Marine Construction Co. Inc., involved a construction project in Texas. Atlantic Marine was awarded a project at Fort Hood and subcontracted with J-Crew Management, a Texas company. The contact contained a forum selection clause requiring any litigation to be brought in Virginia state or federal court, Atlantic Marine’s home state.
J-Crew was owed about $160,000 on the project and sued Atlantic in Texas. Atlantic asked the court to move the case to Virginia as required by the forum selection clause. J-Crew argued that the case should stay in Texas and the court should apply Texas law that provides that a forum selection clause that requires a claim to be litigated in another state may be voidable. The Supreme Court ultimately held that the trial court should have moved the case to Virginia.
This is an important case for contractors that work in states that do not prohibit forum selection statute, like Texas. Nebraska statute, section 45-1209, on the other hand, provides that forum selection clauses that seek to require the parties to litigate the case outside of Nebraska are void and will not be enforced.
Take Away—Review your contract for forum selection clauses. If the work is performed in Nebraska, any dispute should be litigated in Nebraska. If you are doing work in other states, make sure you know that state’s law on where litigation may take place.
The Texas Supreme Court recently ruled that a general contractor has coverage for construction defects under its Commercial General Liability (CGL) insurance where the contract required the work to be performed in a good and workmanlike manner. While this may sound like no big deal, this was the most anticipated opinion of the year.
As is often the case in litigation over insurance policies, the debate over coverage delves deeply into the language of the policy. Here, the parties agreed that the CGL provided coverage on the project and that the poor workmanship was an occurrence triggering coverage. The question for the court was whether the exclusion to coverage applied.
The exclusion provided that the insurance does not apply to property damage for which the insured is obligated to pay by reason of the assumption of liability in a contract. But, the exclusion does not apply if the insured would have had liability in the absence of the contract.
So, the court looked at whether the general contractor would have had liability even if there was no contract. Not too surprisingly, the court found that a general contractor has a common law duty to perform in a good and workmanlike manner and even though the underlying contract obligated the general contractor to do the same thing. In essence, the contract did not expand the contractor’s underlying duty. Because the general contractor’s duty to do good work existed independently of the contract language, the exclusion to coverage did not apply and the insurer had to cover the loss.
This case is a big deal for contractors in Texas and around the country. If the court had ruled against the general contractor, virtually no contractors would have had coverage for construction defects.
Take Away—Review your contracts to see whether you are taking on additional liabilities that may not be covered by your CGL policy.