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.