Misrepresentation or Good Negotiation: KBR Hit With Multi-Million Dollar Verdict

Prime contractors often negotiate claims, including subcontractor pass-through claims, with owners. This can put the prime contractor at odds with its subcontractors, depending upon what the owner is willing to negotiate, for how much, for what, etc. A recent Fourth Circuit decision involving the negotiation of Kellogg Brown & Root with one of its subcontractors resulted in a multi-million dollar verdict in favor of the subcontractor against KBR for $12.5m, plus $2.5m in interest and another $4m in punitive damages as the Fourth Circuit upheld the lower court's decision that KBR misled the subcontractor into taking less for its pass-through claim, including by telling the subcontractor that KBR did not have any discretion to raise or lower the amount offered to the subcontractor when in fact it did. Prime contractors are often forced to take lesser amounts from owners and then "negotiate" similar reductions from various subcontractors, and almost always have discretion regarding what they negotiate, with whom, for what amount, etc. This case is an eye opening lesson in the need to be clear and forthright in doing so.

Internet Name Protection: Avoiding branding with the next XXX website

Ever think you're company's name would get branded with a XXX website? Take a look at this article by my collegues Marshall Martin and Jane Tucker to see why this is something you need to deal with now:

http://www.vanblk.com/Protect.asp

Contractor and Surety have to pay twice? Not so fast says Judge Hilton

One of the generally accepted differences between a payment bond claim and a mechanic's lien claim is that lien claims can be extinguished by payment up the chain, whereas a payment bond principal (usually the prime contractor) or surety cannot rely upon payment as a defense and so can end up having to pay twice for the same debt. They typically occurs when the prime has paid a subcontractor, but the subcontractor did not use the monies to pay someone of lower tier. Virginia law typically cuts off the lower tier's lien rights, but it has been generally accepted that if there was a payment bond the lower tier could still recover under that.

In his recent "slip" opinion in U.S. ex rel. Capital Building Supply, Inc. v. Clark Realty, LLC, Civil Action No. 1:10-CV06 (E.D.Va., Alexandria Division), 2010 WL 3767853 (Sept. 15, 2010), Judge Hilton concluded differently; finding that neither the payment bond in that case nor equity principles permitted a result of a prime contractor having to pay twice for the same debt. In that case, the prime had paid for materials and obtained lien waivers and releases from its subcontractor in exchange for payent, but the subcontractor never paid its lower tier supplier who then sought recovery under the prime contractor's payment bond. Judge Hilton reasoned that since the supplier could not have obtained a mechanic's lien, and the purpose of the payment bond was to substitute for a mechanic's lien on a public job, the supplier correspondingly had not right to claim under the payment bond.

Whether Judge Hilton's decision will be followed by other judges/courts remains to be seen, but it's a real winner for payment bond principals and surety, and a real scare for bond claimants.

Virginia Little Miller Act Payment Bond Claim Notice Reduced to 90 days

Effective July 1, 2011, the time for a lower tier payment bond claimant to provide claim notice under Virginia's Little Miller Act, Virginia Code Section 2.2-4341, was reduced from 180 days to 90 days. This clearly applies to bonds written after July 1, 2011, but leaves the question of application to bonds written prior to July 1, 2011. Left unanswered in the statute is whether the 90 day rule will be applied to pre-July 1, 2011 bonds but for which the 90 days has not yet expired. It seems unlikely the courts will apply the statute so as to de-vest a claimant who was within the 90 to 180 day period as of July 1, 2011 since the general rule in Virginia is to not construe statutes so as to alter vested rights. The question is harder for claimants who knew (or are presumed to know) of the statutory reduction before their rights expired, and how the courts will treat them, so expect to see ongoing litigation, and likely differing circuit court decisions, on this until either the Supreme Court decides the question, or the code is further amended.

New Set Aside Rule for Multiple Award TO/DOs for Small Businesses

A new rule now authorized federal agencies to set aside task and delivery orders placed against multiple award contracts.  The new rule also allows agencies to reserve for small businesses one or more multiple award contracts, as well as parts of those orders.  The new rule further directs contracting officers to modify multiple award contracts that have been in effect for at least six months and that haven not had substantial amounts of work done or orders remaining to allow for the set asides. The rule was issued on an interim basis to meet the one year deadline in the Small Business Jobs Act, Section 1331, which was signed last year. The SBA is currently drafting a proposed rule with additional details on implementation.  Here's a link to the interim rule:

http://www.ofr.gov/OFRUpload/OFRData/2011-27786_PI.pdf

Acquisitions Savings Reform Act: Coming down the pipe

Recent legislation was introduced by two republican (Brown and Collins) and one independent (Lieberman) to "reform" acquisitions to "save" time and money. Among other things, the proposed legislation forces contractors to submit for final payment within 60 days of completion for firm fixed priced contracts, and allows contracting officer to unilaterally closeout contracts without final invoices. The proposed legislation also mandates use of online reverse auctions for commercial item procurement above the simplified acquisition threshold when it could save money. While well intended, if passed in the proposed form, there are various traps and/or problems for contractors, including impacts upon dispute resolution that do not seem to have been thought through by the proposed legislation's proponents. The proposed legislation is at the following link: http://thomas.loc.gov/cgi-bin/query/z?c112:S.1736:

Statutory Employer Defense Found for Subcontractor Notwithstanding Lack of Workers' Compensation Insurance

Last month the Virginia Supreme Court ruled in David White Crane Service v. Howell, 282 Va. ___ 1000981, ___ S.E.2d ___ (2011) that a subcontractor's lack of workers' compensation insurance did not affect the subcontractor's ability to rely upon Virginia's statutory employer defense as a bar to the claim of an employee of the general contractor who claimed he was injured by the subcontractor's employee. The lower court had held that the subcontractor's failure to obtain workers' compensation insurance precluded the subcontractor from relying upon the statutory employer defense, but the Supreme Court disagreed for a number of reasons as explained in the decision, holding that the subcontractor nevertheless came under the broad canopy of Virginia's statutory employer act. While a "good news" decision for subcontractors and their insurance carriers, subcontractors should not use it as a means of avoiding their statutory insurance obligations or the practical reasons of obtaining workers' compensation insurance; all of which has separate adverse consequences.

Federal Prompt Payment Act Doesn't Give Cause of Action to Subcontractors

In its recent decision in United States for the use and benefit of IES Commercial Inc. v. The Continental Insurance Co., D.D.C., No. 11-0985, 9/30/11, the U.S. District Court for the District of Columbia held that the Federal Prompt Payment Act (PPA) does not provide plaintiffs with a private right of action. It therefore dismissed a subcontractor's claim against a construction company made claiming this. This does not mean though that the PPA provides no remedy, in that it still entitles a claimant due money to interest, but it does mean that a PPA violation, of itself, does not give rise to an independent cause of action or damages. Virginia has a similar PPA scheme in the Virginia Public Procurement Act, which similar does not expressly provide for a private cause of action, and so one would anticipate the same result.  A holding like this is good news for prime contractors; but not so much for subcontractors.

If you do DOD work, post your posters

Under a new Final Rule, there are no longer poster exceptions for contractors with ethics or awareness programs.  Instead, now, anyone doing DOD work must post the DOD fraud prevention hotline.  Here's a link to the Final Rule, which was made effective immediately:

http://op.bna.com/dlrcases.nsf/r?Open=lchi-8lqm7y

Equitable Adjustments: Danville Division allows despite disclaimer, but limits recoverable costs

Haymes Bros., Inc. v. RTI International Metals, Inc., Case No. 4:10cv00005, USDC, EDVA, Danville Div. (Judge Kiser) offers a new analysis of differing conditions clauses and resulting adjustments. The issue in that case was whether the contractor encountered differing underground site conditions during its excavation. There was an express equitable adjustment clause, but it was limited to adjustments for "soils and rock of a type(s) different than those known to the CONTRACTOR are encountered." Judge Kiser concluded that the work "type" was ambiguous and subject to interpretation, and accepted the contractor's interpretation that it included the extent of anticipated rock. He rejected the claim that the furnished geotechnical information was sufficient to have put the contractor on notice, and also rejected application of the contract's disclaimer by reason of the contractor's failure to investigate pre-contract. From an adjustment standpoint, this case is also interesting in that Judge Kiser limited adjustment to the date of the contractor's equitable adjustment request and rejected any award of profit markup. It's an interesting case with interesting analysis applicable to many similar adjustment claims overall, and specifically on how to value any adjustments due.

Chinese Drywall Excluded from Insurance Coverage

If you have a possible Chinese Drywall claim against you insurance carrier, and you have a pollution exclusion provision in your policy, you don't want to litigation in the Norfolk Division of the United States District Court for the Eastern District of Virginia. In a recent decision, Judge Smith ruled in Dragas Management Corp. v. Hanover Insurance Co., No. 2:10cv547, Aug. 8, 2011, that Dragas' pollution exclusion was unambiguous and so barred coverage. Judge Smith found that the focus should be on the sulfur gases that came from the drywall and caused the damages, and that since they were pollutants, they therefore came within the exclusion. So she granted judgment for the insurance carriers. This probably isn't good news for anyone. Without insurance coverage, this leaves monetary responsibility with developers, contractors, and suppliers, who may not be able to sustain those losses. This in turn could leave injured parties without a remedy. We'll have to see how it continues to shake out.

Corporate Protection: Henrico Court pierces the veil of contractor

Corporations are often principally set up to shield individuals from liability. Court generally accept the corporate veil absent proof of "sham" corporations. As a result, the assets of individual officers, directors, shareholders or employees of corporations remains personally protected, absent proof of activity outside of the scope of their authority, intentional negligence, or other limited theories. But when corporations do not have sufficient assets to cover losses, such exceptions may get litigated to establish a recovery pot, and similar facts gave rise to the recently decided case in Henrico Circuit Court by Judge Hicks in Ace Electric Co., Inc. v. Advance Technologies, Inc., et al., Civil Case No. CL09-971, 14 Cir. CL09971 (2011) (April 29, 2011).

In the Spring of 2007, Trent Construction Company subcontracted with Ace Electric Company for boiler work on a project at the University of Richmond. Ace sub-subcontracted work to Advance Technologies, Inc. by written purchase order. Ace later terminated Advance, which had ceased operations. Ace brought suit against Advance and received a default judgment against Advance. After being unable to collect the judgment amount, Ace brought suit against Ace's sole shareholder, officer and director, Erik Butler, his wife, and ADVTEC, Inc., a later created company claimed to have been fraudulently created to avoid Advance's debts.

The Court noted that piercing a "corporate veil is an extraordinary remedy that is infrequently granted." But the court found the evidence sufficient in that case to do so against Mr. Butler because it found that he had failed to uphold corporate formalities, such as conducting annual meetings and maintaining corporate records, and because the company was "grossly undercapitalized" at the time it entered into the contract with Ace.  While the court found the facts relating to Mrs. Butler and ADVTEC suspicious, it held Ace had not met the required burden to get to them.

The key lesson learned from this case is the importance of maintaining corporate formalities. They may seem like impositions, but failing to maintain those formalities can have drastic implications, including this type of corporate piercing, and as a result the advantages of corporate protection are lost. It certainly was an important, and expensive, lesson learned to Mr. Butler in this case.

CAS Board is Eliminating Overseas Exemption

For those doing overseas work, the Office of Federal Procurement Policy's Cost Accounting Standards (CAS) Board has finalized a proposed rule that eliminates the CAS exemption for contracts executed and performed outside of the US.  The Board says it concluded that eliminating the exemption would not create any hardships and that the Board, among other things, did not believe the exemption had any accounting basis. The final rule takes effect Oct. 11 (76 Fed. Reg. 49,365, 8/10/11), and is available at: http://www.gpo.gov/fdsys/pkg/FR-2011-08-09/pdf/2011-20138.pdf.

Mediation vs. Arbitration: What's the difference anyway?

Many construction contracts have mandatory mediation and arbitration provisions. So what's the difference? The key difference is purpose. Mediation involved a third-party facilitator, who tries facilitate a resolution between the parties. Most mediators use one of two styles; facilitative or evaluative. With facilitative style the mediator does not express opinion on the merits of the dispute, but with evaluative style opinion is given. While parties often want an evaluation, often mediators are loath to do so because they feel it hinders compromise by "picking a side." So, typically mediators will resort to evaluation as a last resort when it's apparent the parties would otherwise impasse. But many mediators use variations on both styles, or combinations of them. For example, a mediator might be evaluative, but keep the evaluation confidential so that it does not taint the other side's views. In contrast, arbitration is intended to be a decision making process, whereby the arbitrator finds for one side or the other, without concern for possible settlement. I'll discuss these and other alternative dispute resolution processes in follow on blogs.

You just got sued in Virginia Circuit Court, so now what?

Virginia has two trial courts that someone in the construction industry is likely to encounter. The first is General District Court, and you may start seeing this court more often because effective this year the jurisdictional limit was increased to $25,000. I'll discuss those processes in a later blog. But if the amount in controversy is greater than $25,000, the action will likely be in Circuit Court. After service, you have 21 days to file a responsive pleading with the court. That means you want to get the complaint to your attorney sooner, rather than later, so they can consider responsive strategies, including whether they'll be filing an answer, a motion, or some other response. Also, in some instances there could be insurance coverage or at least insurance defense, and so you'll also want to consider advising your insurance agent for their input, and the giving of required notices to your insurer (your policy will specify how, when, to whom, etc.). Your attorney may also want to consider "third-partying" in another party to the lawsuit, such as for example your subcontractor if the suit alleges deficiencies with their work. All of this needs to be considered and decided within those 21 days of service, unless the time is extended by the court. So, a lawsuit is not something you want to sit upon and, like fruit, it doesn't grow better with age. I'll discuss other aspects of that decision making process from time to time in this blog.

Court of Federal Claims Equitable Powers: Yes the CoFC Can!

Disregard that last blog! Despite that CoFC decision, the Federal Circuit, which has appellate jurisdiction over the CoFC, discussed the CoFC's equitable powers in its recent decision in Turner Constr. Co., Inc. v. U.S., 10-CV-195, decided July 14, 2011. In it, the Federal Circuit confirmed the CoFC's decision to enjoin the procurement of a contract to a bidder and to order that another bidder's contract be reinstated (this was an appeal of a GAO decision recommending an agency re-procure without participation of the awardeed contractor). The Federal Circuit noted that the CoFC was awarded broad equitable powers under the Tucker Act by reason of the power to "award any relief" language in that act, and that thus the CoFC "has broad equitable powers to fashion an appropriate remedy." The decision also addresses in detail the standard to be applied by the CoFC in reviewing the CoFC's review of a GAO decision, and the GAO's review of the agency's decision. Interesting read if you need legal analysis regarding either.

Declaratory relief: Not in the CoFC

On July 6, 2011, the U.S. Court of Federal Claims held that while it had jurisdiction to hear a plaintiff's claim against the Department for Veterans Affairs for breach of a property contract to the extent of the plaintiff's money damages claim, it did not have jurisdiction or authority to award declaratory relief or "specific performance."  That case is Patricia Hoag v. United States, Fed. Cl., No. 11-4C, 7/6/11. This is an area with respect to which there have been contrary views, but - subject to reversal - would appear to resolve the question in the negative to contractors seeking declaratory or other non-monetary relief from the court. The court did allow the case to proceed on the money damage portion of the claim though. Pleaders should consider this case when drafting complaints for CoFC relief and expect it to be used by Justice Counsel for pending or future claims.

Alternative Dispute Resolution: Why it's great

Contract disputes are traditionally resolved by judges or juries. Besides the costs involved, this entails putting resolution of your dispute in the hands of a judge or jury who does not know the facts or circumstances anywhere near as well as you, and may not, because of legal rulings, even get the complete facts or circumstances to make their decision. Further, it is unlikely that your judge will be well-versed in the practical aspects of construction projects or standards, and more likely than not that anyone that could serve on a jury with such knowledge will get "struck" from the jury by one side or the other and so not be able to serve on the jury.

Alternative dispute resolution, and in particular mediation, provides a mechanism to avoid this, and have your dispute considered and resolved with construction subject matter experts, either as neutral facilitators or arbiters. Such methods can range from very detailed processes with extensive pre-resolution "discovery" to much more informal discussion sessions.  They can be just between project personnel to try and resolve change orders, or involve counsel for more complex or value related disputes. The beauty of ADR is that the parties get to shape its form and process.  They can mirror trials but with subject matter experts, or be conducted more summarily with rules of evidence or procedure tabled.

In the end, though, your dispute is resolved or facilitated by means of your own choosing, and generally more quickly and in a less costly fashion. So why isn't it used more often? That's a complicated question but the answer generally lies in either one side or the other's perception of leverage, or their counsel's unfamiliarity with such process, and preference for the "old ways" of resolution. To me, the more important question about ADR is not whether to do it (you should) but is rather when you should do it. This hinges primarily upon whether there is sufficient information already known or exchanged to make an ADR session effective. Typically, the sooner that is the better, because resolution is more likely since positions haven't yet been entrenched, and quicker resolution is usually less costly.

Business Decision Voided Insurance Coverage

Claims are made against you regarding concerns with your work, so you decide to "fix" the problem as a business decision to maintain good will and avoid further issues. Sounds like a good business decision, doesn't it? Well, not if you think the underlying issue could be subject to insurance coverage. In a recent decision of first impression construing Virginia insurance coverage law, Judge Smith of the U.S. District Court for the Eastern District of Virginia concluded recently in Builders Mutual Insur. Co. v. Dragas Management Corp., Civil Action No. 2:09cv185 that the mere threat of litigation is itself insufficient to support a "legal obligation" so as to trigger a carrier's obligation to pay money damages.

The context of that decision was the property developer's decision to replace "Chinese drywall" after receiving numerous complaints by homeowners. Judge Smith sided with what she concluded was the majority of courts who have concluded that in order for an insured to be "legally obligated" there must have been either a final judgment or a settlement as the result of a suit. She then concluded that the demands made upon the developer were legally insufficient to trigger such legal obligation because doing so would improperly expand the carrier's obligation beyond the contractual coverage. She therefore held that the developer "volunteered" the remediation and could not recover for it from its carrier, concluding that "Demands under the guise or potential of a legal right are not sufficient to create a legal obligation to pay by the insured, and the sums expended in response to such demands do not constitute 'damages' under the insurance policies at issue."

So what is a developer or contractor to do? This case at least concludes that if you decide to "do the right thing" or try and "get ahead of the curve" regarding mere threats of litigation, you clearly do so at your own risk with respect to coverage for what you spend doing that. This case dictates consultation with your carrier before you make that type of decision, or you likely will have been concluded to have waived coverage; at least if you case ends up before Judge Smith, until such time as the Virginia Supreme Court or a higher Federal Court addresses the issue differently. The downside of this decision is that it discourages pre-suit settlement, and the result may well be increased litigation. But if you think you may have coverage at that point, voluntary remediation should only be used when you in fact are willing to pay for the remediation at your own cost.

To the cynical, this case reflects the adage that "no good deed goes unpunished." To me, its further shows the importance of involving everyone available from your business teams before making this type of major business decision, including your insurance agent and your attorney, when it comes to questions of building defects, potential coverage and the pros and cons of your various available courses of action.

NLRB Proposes Change to Voting

On June 22, 2011, the National Labor Relations Board published a Notice of Proposed Rulemaking in the Federal Register to propose amendments to its existing rules and regulations governing certain procedures. Among other things, the proposed rule would, if adopted, according to the NRLB:

• Allow for electronic filing of election petitions and other documents.
• Ensure that employees, employers and unions receive and exchange timely information they need to understand and participate in the representation case process.
• Standardize timeframes for parties to resolve or litigate issues before and after elections.
• Require parties to identify issues and describe evidence soon after an election petition is filed to facilitate resolution and eliminate unnecessary litigation.
• Defer litigation of most voter eligibility issues until after the election.
• Require employers to provide a final voter list in electronic form soon after the scheduling of an election, including voters’ telephone numbers and email addresses when available.
• Consolidate all election-related appeals to the Board into a single post-election appeals process and thereby eliminate delay in holding elections currently attributable to the possibility of pre-election appeals.
• Make Board review of post-election decisions discretionary rather than mandatory.

According to the NLRB majority, the proposed rule changes are intended to "reduce unnecessary litigation, streamline pre- and post-election procedures, and facilitate the use of electronic communications and document filing." Board member Brian Hayes dissented to the proposed rule, noting among other concerns what he believed was its heavy tilt against employers' rights. Of note, he is the only Republican appointee to the Board; but, indeed, if one were to evaluate initial impact, it certainly appears the rule changes are intended to benefit union organizers and to hinder employer response time and ability.

Regardless of your union views, this is a proposed rule that should be of interest to you.

Below is a link to the NRLB's webpage announcement about this proposed rule change, with more details about it:
http://www.nlrb.gov/news/board-proposes-rules-reform-pre-and-post-election-representation-case-procedures

Below is a link to the e-gov site to comment upon the proposed rule, if you are so inclined:

http://www.regulations.gov/#%21submitComment;D=NLRB-2011-0002-0001

A public hearing is currently schedule for July 18 / 19.  Comments are due to the proposed rule within 60 days of their publication in the Federal Register, so time is important if you want to comment upon them.

GAO Bid Protests: How long do I have to file again?

In the current construction client, bid protests seem on the rise. For Federal projects, the most common protest venue is the General Accountability Office (GAO). But how long do you have to protest?

If the protest relates to something within the solicitation itself, the bid protest must be filed before bid opening, or such alleged defect is waived. If the protest relates to something post-opening, the basic rule is 10 calendar days from when the basis of protest is known or should have been known; which is generally from date of award or notice of intent to award. If you request a debrief, though, the protest can be filed 10 calendar days from the debrief.

But those dates do not account for the automatic stay provisions, if you intend to request a stay of the award pending your protest. If so, that requires the GAO to provide notice to the agency of the award at least 10 calendar days after contract award or 5 calendar days after a debriefing. This in turn means that GAO has to have the protest at least 1 calendar day prior to that so that the GAO can provide that notice to the agency.

Where it further gets tricky is the calendar days themselves since while the GAO can receive protests by email even on weekends that does not allow time for GAO to notify the agency. So, depending upon the calendar days in question your time to protest and obtain the stay can be shorter (much shorter) than the general rule of 10 days.

So, the takeaway: if you intend to file a GAO protest, pull out your calendar and count the days you need, while accounting for the notice requirement is you want to request the automatic stay.

Government Contractor? - Your sophistication may be presumed

Most everyone would like to be considered "sophisticated," but those performing federal contracts might feel otherwise. The GAOCAB recently noted in Grunley Constr. Co., Inc. v. Architect of the Capital, GAOCAB No. 2009-1, 2010 WL 2561431 (June 16, 2010) that "[u]like private contractors, government contractors who perform large contracts for the government are 'neither unsophisticated nor careless' . . . ." As a result, the Board concluded the contractor in that case should have anticipated possible project delays and charged a higher price for the work because of that. In that case, the included "no damages for delay" clause was at issue, and whether it should be enforced so as to prohibit delay claims by the contractor.  The GAOCAB concluded yes, those claims were precluded because it was a reasonable limitation on the contractor's recovery. The GAOCAB also rejected the contractor's argument that the Sovereign Acts Doctrine prohibited enforcement of the no damages for delay clause. The sophistication presumption could be applied in any number of similar instance to other contract issues, so government contractors beware!

Federal Project PLAs: House's Military Construction Bill Doesn't Preclude

Project Labor Agreements are becoming increasingly used for state and local project throughout the Country, and there's been an increasing usage for Federal projects too; particularly with the current administration. One's view of PLAs depends upon one's view of a right to work vs. union approach to business. There was a move in Congress to outlaw PLAs for federal projects as part of Congress' funding for those projects, but that effort failed and on June 13 the House passed the Military Construction and Veterans Affairs and Related Agencies Appropriations Act of 2012 (H.R. 2055) without such prohibitory language. The Associated Builders and Contractors has particularly been following this, and recently posted the article at the below link discussing this, and PLAs in general:
http://www.abc.org/Newsroom2/News_Letters/2011/Issue_24/House_Passes_Military_Construction_Bill_Without_Language_Banning_PLAs.aspx

Inducing statements: fraud or mere opinion?

In his February 22, 2011 letter opinion in Environmental Staffing Acquisition Corp. v. Beamon Enterprises, Inc., CL09-2688, 3 Cir. CL092688, Judge Melvin of Portsmouth Circuit Court concluded that a subcontractor's statement during the proposal process that the subcontractor "had exactly what you are looking for" was a matter of opinion, and not a fraudulent statement giving rise to a claim of fraud in the inducement. This case includes a detailed analysis of Virginia law on fraud, and also deals with the foundation question of the prima facie elements of fraud in the inducement, including the present intention to not act as one is representing, as opposed to just not later following through in breach of one's contract. Drafters seeking to establish a fraud in the inducement count, or defeat one, should find the opinion of interest.

Qui Tam Plaintiff Awarded $2.2M in Attorneys' Fees

After winning a $7.6M jury award, the realtor plaintiff in a Qui Tam action (U.S. ex rel. Maxwell v. Kerr-McGee Oil & Gas Corp. D. Colo., No. 04-cv-01224, 6/2/11) against the company he alleged falsely reported royalties with the government, the judge trebled the damages, and after adding statutory penalties the total award was $22.9M. The realtor plaintiff was then awarded $2.2M is attorneys' fees, plus expenses, under the False Claims Act, rejecting the defendant's arguments that the fees were disproportionate to the amount he would recover or unfairly compensated him. Of note, the court did not reduce the fee because of the reduced risk associated with the partial contingency aspect of the plaintiff's fee agreement, nor was the court troubled by the awarded fees being almost 29% of the original award (but only 9.5% of the total award as noted by the court). Lawyers will enjoy the fee calculation discussions; however, those in the industry should note the verdict amount, as well as the fee awarded, as further evidence of the teeth available through the False Claims Act.

Government Not Required to Certify Claims under CDA

In trying to avoid the government's claim against it, a contractor recently tried to argue to the Civilian Board of Contract Appeals in Navigant SatoTravel v. General Services Administration, CBCA, No. 449, 5/26/11, that the Board lacked jurisdiction because the government did not certify its claim against Navigant. The Board rejected the argument, holding that the Contract Disputes Act does not require such certification by the government.While not a surprising result, one has to like the attempted creativity to avoid obligation by the contractor. The decision has some other interesting aspects regarding burden of proof for those finding that of interest.

Proactive management: staying ahead of the curve

Most projects sail smoothly. Generally, that is the result of good business practices, cost controls, staff management, etc. Typically though the focus is on the nuts and bolts of construction, and making things go together smoothly from technological standpoints. Often overlooked is contract administration: making sure contracts are signed, insurance certificates received, and other "i"s dotted and "t"s crossed. But those little things can make or break projects. Proactive management on those little things can help avoid later contract disputes, or identify them before they fester. Like other aspects of construction, regular "lunch box" programs, check sheets, and the like are great first steps, to be followed by regular compliance and compliance checks. As they say, an ounce of prevention is worth a pound of cure.

Prejudgment interest against a surety: recoverable but from when?

Neither the Miller Act nor the Little Miller Act have specific provisions for the recovery of prejudgment interest if a claimant prevails on a bond claim. Absent contractual language in a commercial bond, it's the same result. However, case law generally holds that in such actions state law on prejudgment interest applies. Virginia statute allows for prejudment interest in the discretion of the fact finder. Considering that, the recent opinion of Judge Trenga in Attard Industr., Inc. v. United States Fire Insur. Co., No. 1:10cv121 (EDVA, Alex. Div. Nov. 9, 2010) concluded that prejudgment interest may only run against a surety from the date of demand made against the surety by the claimant. Judge Trenga concluded that date sufficiently compensates the claimant without unfairly penalizing the surety. As a result, if you are a claimant, the lesson learned is to promptly make demand upon the surety to start the prejudgment interest clock.

Memorial Day: Enjoy but also remember

As Memorial Day approaches, I encourage all to enjoy the holiday weekend, but while doing so to try and remember those that gave life and limb so that we can enjoy ourselves. Thank you to all who have served and continue to serve.

Setoff by Payment Bond Surety Rejected by EDVA

Many subcontracts contain setoff provisions, even respecting other projects.  Those allow a contractor to setoff obligations it is owed on other projects by the same subcontractor on unrelated projects. The Eastern District of Virginia, Alexandria Division, in U.S. ex rel. Acoustical Concepts, Inc. v. Travelers Cas. & Sur. Co. of Amer., 635 F.Supp.2d 434 (2009), recently looked at the question of whether the payment bond surety of a contractor who had included that kind of setoff clause in its subcontract could avail itself of the setoff right and not make payment for labor or materials that would otherwise be due under a project's payment bond, and concluded the surety could not avail itself of such setoff right. The court recognized that the subcontractor had agreed to the setoff right, but held that since the Miller Act does not reference such a setoff right, nor does the payment bond, then the surety was regardless liable for the full amount because that was the value of the labor and materials furnished for the bonded project. This makes for an interesting result by which the surety's liability is greater than that of its principal, the contractor. Fairness regarding that result depends upon the eyes of the beholder, but the result is consistent with similar analysis regarding the affect of a subcontract's pay if paid clause, so at least there's consistency. However, because the result seems to undermine the well established surety principle that a surety stands in its principal's shoes, the implications on other cases, including state Little Miller Act cases, remains to be seen. 

Fridge benefit challenges

I attended an interesting lunch meeting today put on by the Tidewater AGC involving strategies for dealing with Davis-Bacon act fringe benefits. The presenter was Lind Sawyer with Capital Strategies. She put forth several really interesting strategies to move away from cash fringes, as opposed to employer directed programs. It was interesting to hear what some contractors were doing with fringes within the regulatory constricts to keep their businesses competitive, and how companies like Capital Strategies can help. The presentation reminded me how increasingly important wage compliance is becoming with the expansion of the D-B act to much more that the traditional federal construction projects, particularly with the use and requirements associated with Recovery Act funds. For more information about fringe strategies, contact Lind Sawyer at (757) 421-0411.

Pay When Paid Clauses: A different twist on use in defense

Judge Trenga of the Eastern District of Virginia recently decided a new twist on the pay when paid defense in Virginia in U.S. ex rel. Aarow Equipment & Services v. Travelers Cas. & Sur. Co. of Amer., Civil Action No. 1:09-cv-00861 (March 16, 2010). The subcontractor in that case was making a Miller Act claim, and asserted that the surety could not defend on the basis of the subcontract's pay when paid clause. The prime contractor withheld payments from Aarow that had been withheld by the government. Aarow quit work because of that withholding, and the prime contractor terminated Aarow. Aarow then sued the surety under the Miller Act for the unpaid amounts, arguing that the surety was liable regardless of the government's withholdings because the surety could not avail itself of the pay when paid clause. Judge Trenga disagreed, noting that the issue for that case was not one of timing, but of amount; which must be resolved from looking at the subcontract. Because the prime contractor was not liable for the amount claimed (Aarow could not justify its work stoppage because the prime contractor was not liable at the time for the monies Aarow was claiming due), nor was the surety. Stated otherwise in that case, the pay when paid clause of itself did not preclude Aarow's payment bond claim against the surety, but the pay when paid clause was properly considered in determining whether Aarow was properly default terminated, and thus not owed anything. This case shows pay when paid clauses still may have relevance to federally bonded projects, and subcontractors assume significant risk if they presume otherwise.

SBJA 2010 Changes: False Claims Act implications

The Small Business Act has always had an enforcement trigger for violations, but with the 2010 act changes the hammer has gotten bigger. Section 1341 of the Small Business Jobs Act of 2010 (SBJA), referred to as the "Presumed Loss Rule," has new incentives to both federal and whistleblower enforcement. Essentially, the act's language now presumes the government suffers loss based on the total amount the government expends on a contract where the small business status has been misrepresented, with no offset or credit for the value or benefit actually received by the government. That is, even if the work was fully conforming, the entire contract value is presumed as a value loss to the government because of size status misrepresentation. Furthermore, under the False Claims Act, damages can be trebled (tripled) based on that presumed loss value; a significant risk for anyone making such a size misrepresentation. The Committee Report that established the bill noted its intention that the presumption be irrebuttable, even though the statute only speaks of the loss being presumed; leaving interpretation up to the courts. The SBJA does direct the SBA though to promulgate regulations to establish defenses for innocent mistakes, but the SBA has not yet done so. But expect those defenses to be very limited, and likely very hard to establish. Bottom line, status misrepresentation has always been subject to penalty; however, the SBJA now makes those penalties much more severe, and much easier to enforce.

Bid Withdrawal Changes Coming This July

This year's General Assembly session resulted in changes to the bid withdrawal provisions of Code Section 2.2-4330 of the Virginia Public Procurement Act. The major change lies in the procedures. There are still two procedures. The first stays the same; allowing the bidder to give notice in writing of a bid mistake claim within 2 business days after the conclusion of the bid opening procedure. The second, however, changes for cases when the public body opens bids one day following the fixed submission time; shortening the notice period from 1 day to 2 hours. The statute's change also now allows bidders to request that its working papers, which it is required to submit, be considered trade secretes or proprietary information. The statute also now includes a maximum timeframe of 5 days for the public body to notify the bidder of its withdrawal decision, and now requires the public body to return the bidder's work papers and any copies thereof with the decision notice.

Recent Changes to Bond and Claim Notice Requirements on Virginia Public Construction Projects

Credit for this article goes to my law partner, John Lockard, who prepared it as part of his recap of the 2011 General Assembly session. This summarizes two significant changes to Virginia's Little Miller Act.

During the 2011 Session the Virginia General Assembly passed two important changes to bond and claim requirements on Virginia Public Construction Projects. HB 1951, effective 7/1/11, raised the minimum amount required for bid, performance and payment bonds. The new minimum contract amount increased from $100,000 to $500,000 for non-transportation construction projects. If the bond requirement is waived on projects between $100,000 and $500,000 the prospective contractors must be prequalified. This means that subcontractors and vendors on non-transportation construction projects under $500,000 should not assume that a bond is in place and should investigate that issue before agreeing to payment and credit terms. SB 1424, effective 7/1/11, reduced the time within which lower tier subcontractors and vendors must provide notice to the contractor from 180 days to 90 days. Therefore, any claimant that has a contract relationship with a subcontractor or vendor, but no contract relationship with the contractor may only pursue a payment bond claim if it first gives written notice to the contractor within 90 days from the day on which the claimant performed the last of the labor or furnished the last of the materials for which it claims payment.

- nsl

Careful of that deal, you may be waiving your payment bond claim

Payment bonds are intended to protect those who have supplied labor or materials for either public projects where mechanic's liens are not available, or for some commercial projects where the owner seeks to encourage bond claims rather than lien claims. They offer generally good protection for those who have supplied labor or material, but not yet been paid. However, because they seek to hold the payment bond surety liable even though they have not contracted with the subcontractor or supplier, they - generally - are strictly construed so as to protect the surety from conditions to which the surety was not a party. One of those principles results in discharge of the surety if the subcontractor or supplier changes the nature of its "deal" with the contractor principal to the bond. This may occur, for example, if the supplier is owed money and enters into a settlement agreement with the contractor rather than seeking recovery under the bond. If the surety is not a party of the settlement, the settlement has the effect of discharging the surety, leaving the supplier only with the remedy of enforcing the settlement against the contractor breaching the settlement agreement, but not against the surety. Thoughts to consider if you're contemplating a compromise of your claim regarding a bonded project.

VDOT Subcontractor Pass-Through Claims: APAC-VA revisited

Subcontractor "pass-through" claims for VDOT projects were rejected by the Virginia Court of Appeals in the APAC-Virginia case based on the premise that the statute only allowed a contractor to assert claims respecting which it was the "real" party in interest. Because the subcontractor did not have a contract with VDOT there was no "privity" between them and the court dismissed the pass-through claims as not statutorily allowed.

The same court's later decision in the Tyger Constr. case suggested the law was not so clear and allowed that contractor to "plead around" the APAC-Virginia result by pleading that the contract was in fact the aggrieved party. There things sat for over 10 years.

Then in a 2005 decision the Virginia Supreme Court cited to APAC-Virginia with approval of its holding as an appropriate statement of the law in a footnote to that case, XL Specialty. This footnote is "dicta" to the ultimately decision, but appears to approve of the earlier decision rejecting subcontractor pass-through claims because of lack of privity and the subcontractor being the real party in interest.

This analysis avoids the practical realities of construction projects. But it also clearly points out the pitfalls of relying upon a "pass-through" as a means of obtaining relief from an owner. By statute, such pass-through claims are now authorized (Virginia Code Sec. 33.1-192.1 was expanded to expressly reference subcontractor claims), but there is no similar provision for other types of construction projects.

Were this ultimately leads remains to be seen.

Contract or Tort Claim: The difference goes from clarity to gray

In 1998 the Virginia Supreme Court clarified in the McDevitt case that the rights and obligations between contracting parties was limited to that contract, and could not give rise to additional tort claims. This month the same court in Kaltman v. All American Pest Control seems, to me, to have significantly clouded the issue by allowing a contracting party to bring a tort claim against the party with whom it contracted relating to the services for which the contract was entered. Disregarding prior case law that held there were no implied duties in a written contract, the Kaltman court held that a pest control company could be sued in tort for not meeting common law and statutory duties applicable to its work. The latter is more understandable, but not the former. The Kaltman's explanation distinguishing McDevitt is murky, and will likely lead to regular attempts in pleadings to establish tort claims relating to contractual relationships. Practitioners, take you marks, get set, and start arguing tort vs. contract law.

Noncompetes: Death by breadth

Noncompete agreements are common in the construction industry for key employees. There are valid reasons for this, such as the expense of train-up, knowledge growth, and client access employees would never otherwise get or have. But courts simply do not like noncompete agreements, primarily because they are loath to prohibit someone from working in the trade for which they have trained. Therefore, it is critical to specifically tailor and limit a noncompete agreement, if you chose to use one for key employees. First, consider if the person upon whom you are trying to impose a noncomplete really needs one; that is can he or she truly harm you if they go to a competing company? Second, consider reasonable time and distance limitations; that is where do you really do business and for how long could the information the ex-employee has really hurt you? There are no definitative positions, distances or times, and each noncomplete will be scrutinized individually by the judge reviewing it. A recent example of overbreadth struck by the court involved a noncompete that prohibited an ex-employee from performing similar serves of the same type, "directly, or indirectly, for [herself] or as an agent, officer, director, member, partner, shareholder, independent contractor, owner or employee . . . ." The court looked at the breadth of this prohibition and noted, for example, it would prohibit the employee from even owning stock in a publicly traded company if some part of that company provided the same types of services, and struck it as against public policy and unenforceable. The lesson: if you are going to use noncompetes, be very careful how they are written and in particular why, what and how they prohibit the conduct. Even then, it's a bit of a crap shoot as judges are often more inclined to find reasons to strike them then enforce them.

Good contract documents: they make all the difference

I've just finished reviewing a construction contract as precursor to helping with resolving major disputes between the parties. The parties used a "standard" industry form, but not in its current version. It incorporates, in part, a proposal that has arguably contrary terms. Which governs? Eventually the parties will resolve this between themselves or the issues will be resolved by arbitration or litigation, but it reminds me that good drafting can avoid many of these types of problems. While hindsight is 20/20, dealing with important contractual issues at the front end, prospectively, can help avoid most disputes, or at least establish how they will be resolved. Don't leave your concerns to "standard" forms. Consider what you want and expect, and clearly put it in your contract. Consult with your counsel and let him or her help you. This isn't self-serving advise or marketing; just a good idea. Yes, we lawyers often focus too much on what could go wrong, but that's part of our job so our clients can then make business decisions about how to deal with those concerns.  And if any of those concerns later do come up then you'll be happy you spent the time to consider and address them beforehand (if you did, and if you didn't we lawyers will try and avoid saying I told you so).

E-verify Updated

In an earlier post I discussed potential legislation adopted the federal e-verify requirements for public projects.  This is now closer to happening.  Both the state senate and house passed identical e-verify bills that are now going to the governor for consideration.  Summarized, if you do business with the state and have over 50 employees and contracts worth more than $50,000, you need to use e-verify to confirm employee residency. No word yet from the governor's office about what he'll do. I'll update again as I hear further on it.

Notice: Actual probably isn't enough

Most construction projects have notice requirements requiring notice to be given to the other side, in writing, at specific times, to specific persons, and including specific information. The reality, though, is that construction projects move quickly and lend themselves to focusing upon construction and not administration. Unfortunately, though, this can lead to problems down the road when disputes need resolution.

Virginia courts generally incorporate contracts as they are written. As a result, courts will not typically rewrite terms or allow parties to avoid conditions to which they agreed in their contracts. As a result, failure to comply with notice requirements can void otherwise valid claims.

Because this can create harsh results, courts have sometimes tempered this result by finding that when another party has actual notice, however obtained, that actual notice is legally sufficient even if not totally compliant with the contract requirements. Virginia courts have done the same, but have not expanded this to public projects because of the doctrine of sovereign immunity.

That is the legal principle that precludes suit against the state or its public bodies unless there is a statute specifically allowing suit.  Public bodies partially waive sovereign immunity under statutes allowing them to sue and be sued; however, recent ruling by the Virginia Supreme Court holds that this partial waiver does not extend to the waiver of contractual notice requirements.

To the contrary, the court dismissed a contractor's claims because the contractor failed to comply with the contract's notice requirements, even though the public body had actual notice of the claims. Unfortunately, this result disregards the reality of construction projects, where the focus is on getting the job done and not the paperwork.

The takeaway point is that you always disregard specific contractual provisions at your own risk. While courts sometime can and do use their equity (fairness) power to help avoid unfair results, that is not always the case, and recent case law confirms is not available to avoid contractual notice requirements imposed by a public body.

Supervision: Grounds for claim of negligence?

Construction is fraught with possible lawsuits. Even besides the possibilities of defective work or materials, accidents can occur. But what if an accident arises because of the failure to supervise someone at the jobsite? For example, a superintendent's failure to supervise a worker or train them properly? The law is not definitive on this, but generally superintendents can sleep relatively easily. In Chesapeake and Potomac Telephone v. Dowdy, the Virginia Supreme Court dismissed a claim for negligent supervision; however, its application has been various interpreted by the lower courts, with some concluding the court did not preclude any supervision claims under any facts, including "negligence per se" or negligence as a matter of law because of non-compliance with a statutory obligation. While there are various statutory obligations associated with construction projects, generally courts appear reluctant to allow this type of claim against a supervisor. But it is something to consider depending upon your point of view or whether you were injured or are claimed as the cause of the injury. A good summary of the law on Dowdy's application was written by Judge Dorsey of Roanoke in In re Gilbertson, 78 Va. Cir. 295 (2009).

Sprinkler heads: equipment or building materials? And what's the difference anyway?

Last month the Virginia Supreme Court resolved the question of whether sprinkler heads were equipment or building materials in Royal Indemnity Co. v. Tyco Fire Products, 281 Va. ___ 091993, ___ S.E.2d ___ (2011). Why does it matter you might ask? The short answer is it affects whether defect claims are barred under Virginia's "statute of repose," which limits construction / construction material defect claims to 5 years from cause of action accrual. The court reached that conclusion because it held that sprinklers were not an essential structural component and serve a purpose unrelated to the construction of the building itself. Further, the court held that characteristics of the product lend themselves to close quality control when manufactured, and thus are more akin to manufactured equipment exempt from the statute of repose then construction materials, which are covered by the statute of repose. Whether you agree with the court's conclusion or not, it shows the legal significance of the characterization of construction related products on legal liability.

Possible bond threshold increase legislation: another consideration

I was at a trade association meeting today and the possible bond threshold increase legislation discussed in my earlier blog came up. Another aspect to increasing the threshold we discussed was that in addition to the payment bond implications I discussed in the earlier blog that there is also a performance bond aspect. That is that if the thresholds increase then it will open procurements to bidders or offerors that otherwise would not have the financial means to perform the work. While on the one hand this can open doors that might not otherwise exist to participate in public procurements, on the other hand those persons might not be capable of doing or financing the work, and if they cannot then it would leave the awardee governmental entities at significant risk. More thought for consideration on this pending legislation.

E-verify: coming to Virginia?

HB 1727 has been filed mandate the Federal "E-Verify" program to Virginia public procurements, and broadly expands the program to anyone seeking a publicly issued permit or license and having over 15 employees. Link to the proposed legislation follows:
http://leg1.state.va.us/cgi-bin/legp504.exe?111+ful+HB1727

This should be of interest to everyone involved or intending to become involved in public contracting in particular, but also to anyone involved in a business requiring licensure or permitting, and is legislation to which you should consider making your opinion known to your legislator and considering long term planning and cost implications moving forward.

Possible increasing public bond thresholds coming to Virginia

Two new bills have been filed in the current session of the Virginia General Assembly dealing with public project bonds; House Bill 1951 and Senate Bill 1126. HB 1951 proposes to raise the threshold for non-transportation related project bonds from $100,000 to $1 Million. SB 1126 proposes to raise the threshold on transportation-related projects from $250,000 to $500,000. In either instance, this will create a significant gap from the current thresholds in which many claims may fall. The losers in this could be the subcontractors and suppliers who would otherwise look to the protection of project payment bonds for payment in the even of non-payment as they cannot lien the public properties. It is unclear if this legislation will ultimately pass, but both are certainly important possible changes to keep eyes upon.

WOSB Regulations on the February Horizon

In October of 2010 the SBA issued amended regulations that may finally put into place the Women-Owned Small Business (WOSB) program established under Section 8(m) of the Small Business Reauthorization Act of 2000. Absent change, the Final Rule for this program will be effective February 4, 2011, and the SBA is in the process of working with the Federal Acquisition Regulatory Council to implement this program in the Federal Acquisition Regulations.

The assistance program is called the Women-Owned Small Business Federal Contract Assistance Procedure, or WOSBFAP, and is in 13 CFR Part 127. The program is self-certifying; however, there will also be an opportunity to certify through some third-party approved entities, including some Federal agencies. The program will provide contracting opportunities for Women-Owned Small Businesses, or WOSBs, and Ecumenically Disadvantaged Women-Owned Small Businesses, or EDWPSBs, under certain circumstances and in certain industries.

The NAICS codes have been extended and now include 84 industries as provided in Fed. Reg./Vol. 75 No. 194 (October 7, 2010). Also, the requirement that each Federal agency certify that it had engaged in discrimination against WOSBs in order for the program to apply to that agency has been removed, and thus expands the ability to use the program. Eligible concerns must be not less than 51 percent owned by one or more economically disadvantaged women, although the SBA may waive economic disadvantage for industries that are substantially underrepresented by WOSBs. In either instance, the women owner must actually control the WOSB (ownership does not always equal control, similar control questions applicable to other small business programs).

Contracting officers must have reasonable expectations that, in industries in which WOSBs are underrepresented, two or more EDWOSBs will submit offers for the contract or, in industries where WOSBs are substantially underrepresented, two or more WOSBs will submit offers for the contract. The anticipated award price of the contract must not exceed $5 million in the case of manufacturing contracts and $3 million in the case of all other contracts. Award prices must be estimated as being fair and reasonable before usage.

Competing concerns must be duly certified by a Federal agency, a State government, or a national certifying entity approved by SBA as an EDWOSB or WOSB, or must certify to the contracting officer and provide adequate documentation that it is an EDWOSB or WOSB. As with other similar programs, the statute imposes penalties status misrepresentation. In a statutorily mandated study, SBA determined the industries that have been identified as being industries in which EDWOSBs are underrepresented or substantially underrepresented or WOSBs are substantially underrepresented with respect to Federal procurement contracting.

Time will tell how this program progresses and is used, but for now it clearly looms on the very near horizon for next month.

Bond Claims: When the last day worked isn't always the last day for payment bond claims

Both federal and Virginia bond claim limitations periods to file suit for a bond claim that tie to the last day work or materials were furnished (both statutes have a one year limit). But the actual last day work or materials were furnished is not necessarily the last day for purposes of that one year limit, as confirmed in a recent Federal Court decision out of the Alexandria Division of the Eastern District of Virginia last month.

That case involved a subcontractor who sought to recover for alleged payments due from its general contractor, and the general contractor's surety, under the project's "Miller Act" payment bond. The subcontractor's last payment application was dated July 28, 2009, although its last certified payroll record date indicated work through August 26, 2009. The subcontractor did not file suit until over a year later, on September 24, 2010.

The subcontractor sought to avoid the limitations period by claiming that it returned to the site in June 2010 to replace a sidewalk. It claimed that work was part of the original subcontract work instead of warranty work, and that its last date for limitations period should accordingly run from June 2010. The judge disagreed and dismissed the subcontractor's payment bond claim.

In doing so the judge noted that the last certified payroll record was the August 2009 date, and that moreover it was not probable that the subcontractor would have redone the sidewalk at its own expense (it hadn't charged for the June work) unless it was warranty work. But the judge went on to note whether the work was characterized as warranty work or not wasn't dispositive; rather the keys in that case were that 1) the last pay application was July 2009, which showed 100% billing, and that 2) the June 2010 sidewalk work was done without protest or other suggestion that it was change work or otherwise somehow original subcontract work.

The overall result is not surprising because the basic principal has been that corrective or repair work does not extend the one year limit for Federal bond claims since 1983, but what was surprising is that the court dismissed the case at the initial pleading stage based on the information in the complaint itself, which the judge concluded confirmed that as a matter of law the last day of work did not include the claimed sidewalk work.

Lesson learned: In considering your payment bond rights, keep the one year limit in mind and only include original contract work; correction of defective work or repairs following inspection of the work do not count to extend the period in which you must act to preserve your claim. In that regard, payment applications and certified payroll records, and the information in them, can be used to establish the last day.