Cases of the Month
Significant Cases and Decisions Affecting the Construction Industry
By: Joseph H. Bucci, Esquire
Rothman Gordon, P.C.
1. Where a road construction contractor seeks to recover an equitable adjustment for additional costs incurred due to defective specifications and/or differing site conditions, it is important that the contractor have good records of its additional costs and be able to demonstrate impacts to items of work on the critical path of the project schedule. Rustler Construction, Inc. vs. District of Columbia, 211 A.3d 187 (2019).
* What the Court Considered: The District of Columbia Court of Appeals reviewed the decision of the District of Columbia Contract Appeals Board in evaluating a claim by the contractor for an equitable adjustment where the records and cost data maintained by the contractor were not well maintained, giving deference to the factual findings of the Contract Appeals Board because legal interpretations by tribunals having expertise are helpful even if not compelling to the Court of Appeals.
* What the Court Said: The Appeals Court looked at the decision below, as well as the reasoning from the Contract Appeals Board and affirmed the award of damages to the contractor for additional tasks and out-of-sequence work as being supported by the evidence of record and therefore not being arbitrary or capricious. The Appeals Court also found that while it is the contractor’s burden to establish the critical path for completion of the project and to prove the delayed items of work were on the critical path, the contractor is not required to prove its damages with absolute certainty or mathematical exactitude. The contractor however must prove its costs using the best evidence available under the circumstances. Where actual cost data is not available, a contractor may use estimates of the costs incurred.
* What the Opinion Means: If you are a contractor or subcontractor intent on pursuing damages for delay or differing site conditions, it is incumbent upon you to maintain an accurate project schedule that is updated periodically so that a critical path may be identified. It is also incumbent on the contractor or subcontractor submitting a claim to maintain accurate and contemporaneous job cost records that can later be used to confirm the quantum of damages once entitlement is established.
2. Where a subcontractor files suit against the contractor and the contractor’s surety for payments due under a written subcontract agreement, a contractor who intends to respond to the subcontractor’s claim with offsets (i.e., “back charges”) that are not liquidated in a sum certain bears the burden of proof to support its offset and runs the risk of having its offset dismissed by the Court. Leigh of All Trades, LLC vs. Non-Flood Protection Assets Management Authority, 274 So.3d 64 (May 29, 2019).
* What the Court Considered: The Court of Appeals reviewed the record below upon a challenge to a decision rendered in favor of the subcontractor. The Appeals Court found that the contractor’s offset claim was in an uncertain and unliquidated amount that could not be used to reduce or offset the subcontractor’s claim.
* What the Court Said: The Appeals Court stated that to utilize a legal offset requires that where two persons owe each other sums of money, the sums alleged to be owed must be liquidated and presently due. Where this occurs, compensation extinguishes both obligations to the extent of the lesser amount. However, a disputed debt is not liquid and cannot be admitted as susceptible of compensation unless the one who asserts compensation has in hand the proof of the existence of the disputed debt and is thus in a position to prove it promptly.
* What the Opinion Means: If you are asserting a back charge to reduce, offset or overcome a claim arising under a construction contract, the debt that you seek to assert must be certain, ascertainable, quantifiable and supported by the project records. Your claim also must fall within the category of damages allowed under the written agreement and applicable law. The party asserting the offset bears the burden of proof before its claim will be accepted by the Court.
3. In order to utilize arbitration as a means of dispute resolution, especially where the parties are already engaged in litigation, the party attempting to stay the litigation and transfer the dispute to arbitration bears the burden of demonstrating that a written, binding agreement to arbitrate between the litigating parties exists and was not otherwise waived. Advanced Foundation Repair, L.P. and Structural Repair, LLC vs. José and Nicole Mendez, 2019 WL 3432096 (July 31, 2019); Court of Appeals of Texas, San Antonio.
* What the Court Considered: The Appeals Court reviewed the record from the trial court and the contractual documents submitted by the party seeking to compel arbitration of a matter that had been in litigation for nearly two years. The Court also looked at the state arbitration act and sections of the Federal Arbitration Act cited by the party seeking to compel arbitration.
* What the Court Said: A party seeking to compel arbitration must establish the existence of a valid arbitration agreement. Because arbitration is a creature of contract and must be consensual, a court must first decide whether a written agreement was reached, and will do so by applying state law principles of contract interpretation. The Court must find mutual assent because without mutual assent, there is no binding written contract. Here, the document tendered to the Court called for the signature by both parties but those signatures were never obtained and the Court was unwilling to imply acceptance by conduct or a waiver of the condition precedent.
* What the Opinion Means: If you desire to have your contractual disputes resolved by an alternate form of dispute resolution, such as arbitration, then there must be a written, valid, binding agreement between the parties to arbitrate that is undisputed. Such an agreement can be entered after the original contract is executed provided there is consideration and both parties are in agreement to do so. You can also agree to arbitration after litigation has been underway.
4. Under a federal government construction contract calling for the repair of pavement at an Air Force base, in order for the contracting officer to validly terminate a contract for default, the government must be able to demonstrate, objectively, more than simply that the contractor was behind schedule. A court reviewing federal agency decision to terminate for default will focus on the events, actions and communications leading to the default decision to ascertain whether the contracting officer had a reasonable belief that there was no reasonable likelihood of timely completion. The subjective beliefs of the contracting officer will not warrant a decision to default terminate. Alutiiq Manufacturing Contractors, LLC vs. The United States, 143 Fed. Cl. 689 (U.S. Court of Federal Claims; June 27, 2019).
* What the Court Considered: In analyzing whether the contracting officer possessed a reasonable belief that there was no likelihood of timely completion, as would support termination for default, the reviewing court asks, in part, whether the agency conformed to the Federal Acquisition Regulations (FAR) in making the determination. However, if the Federal Agency terminated the contract prior to analyzing the contractor’s performance and recovery schedule, rather than following the guidelines set out in the FAR, then the Agency’s decision would be deemed unreasonable and could be overturned.
* What the Opinion Means: A termination for default is a serious event that requires close scrutiny by the court to determine whether objective criteria exists to support the drastic measure of a default termination. Such a decision cannot be made subjectively by the contracting officer and requires a consideration of the following factors: (1) a comparison of the percentage of work completed and the amount of time remaining under the contract; (2) the contractor’s failure to meet progress milestones; (3) problems with subcontractors and suppliers; (4) the contractor’s financial situation; (5) the contractor’s performance history; and (6) other pertinent circumstances surrounding the contracting officer’s decision. Where a termination for default is wrongful, it will likely be converted to a termination for convenience of the government.
5. In a contractual dispute between a Surety providing payment and performance bonds, and its principal, where the Surety is seeking indemnification and collateral for having to undertake completion of a construction project where its principal was declared to be in default, a Federal Court in reviewing a motion to dismiss a counterclaim asserted by the principal under Rule 12(b)(6) will limit its review to the facts as asserted within the four corners of the complaint, any documents attached to the complaint as exhibits, and any documents incorporated by reference to determine if enough facts have been pled to state a claim to relief wherein the Court is allowed to draw reasonable inferences that the Surety is liable for the misconduct alleged. Arch Insurance Company vs. Centerplan Construction Company, LLC, et al., 2019 WL 3080920 (U.S. District Court, D.Connecticut; July 15, 2019).
* What the Court Considered: In ruling on a motion to dismiss, the Court looks to the four corners of the pleadings at issue as well as any exhibits to the pleadings and/or documents incorporated by reference. A reviewing court may also consider matters of which judicial notice may be taken, as well as documents either in the plaintiffs’ possession or of which the plaintiffs had knowledge and relied on in bringing the litigation.
* What the Court Said: For a principal to allege that its surety committed a breach, the principal must show an existing obligation under the party’s contract that was breached. The Court did not find any obligations under the payment or performance bonds running to the principal that could have been breached by the Surety. Additionally, the Court looked at the party’s General Indemnity Agreement to likewise conclude that the principal was unable to establish a duty or a breach thereof by the Surety.
* What the Opinion Means:
In the absence of unique factual situations or a clearly expressed duty running from the Surety to the principal, the breach of a performance or payment bond by a principal does not create liability against the Surety by which the principal may profit when the Surety seeks reimbursement.
Joseph H. Bucci is a Partner in the Construction Litigation Group at Rothman Gordon, P.C., and resides in the Pittsburgh office. Joseph represents contractors, subcontractors, owners, real estate developers, wind farm developers, public utilities, architects, engineers, construction managers, design builders, sureties and government agencies related to construction and/or real estate development projects. Mr. Bucci is also available to serve as an Arbitrator, or as a Mediator.