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.