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ConstructionRisk.com Report
http://www.ConstructionRisk.com

Vol. 7, No. 8, December 05

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Inside This Issue: 

•  Book Review: Design-Build Lessons Learned (2004 Edition)

•  Ambiguity in Design-Build Contract Specs Interpreted in Favor of Contractor;

•  Contractual Jury Waivers Held Invalid by California Supreme Court;

•  Contract & Risk Management Guide;

•  Accord and Satisfaction Barred Contractor Claim for Additional Compensation

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Contract & Risk Management Guide – by J. Kent Holland 

If you have $39.95 remaining in your 2005 budget for books and education materials, here is a good place to spend it.  This approximately 300 page guide provides detailed examples of over 30 contract clauses. The discussions include risk management ideas and suggestions for negotiating contracts with reasonable allocation of risk between the contracting parties. Much attention is given to explaining how contract language may affect the availability of insurance coverage for claims against design professionals. This book is for (1) Attorneys and insurance brokers that advise design professionals on the insurability of contract language and the risks assumed by contract; (2) design professionals who desire to more information and reasoning to use during their contract negotiations with project owners; (3) project owners who desire to understand what and why design professionals are seeking  certain language in their contracts and rejecting language proposed by owners, and (4) anyone concerned with design professional contracts.  

http://www.constructionrisk.com/ContractGuideProNet/index.htm

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ARTICLE 1

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Book Review: Design-Build Lessons Learned (2004 Edition)

            Those of you who are interested in design-build have undoubtedly come across Design-Build Lessons Learned, an annual publication authored by Mike Loulakis, the president of the law firm of Wickwire Gavin and one of the country’s foremost authorities on design-build.  Mike first started publishing Design-Build Lessons Learned in 1995 as a newsletter designed to give his clients an opportunity to understand the nuances of this new area of law.  The first edition of the publication only covered ten cases, which represented the universe of 1995 court decisions addressing design-build disputes.  Ten years later, after unprecedented growth in both public and private sector use of the design-build process, Mike has now reported on a total of 304 cases, almost half of which have come during the 2002-2004 time period.  Design-Build Lessons Learned has also become much more substantial in appearance, as it moved from newsletter format to paperback book format in 2001.(240 pages, US$60.00).

            As an avid reader of this publication, I strongly believe that the industry needs caselaw to help explain design-build legal theories and precedent.  Over the past few years, Design-Build Lessons Learned has regularly highlighted 20-30 important design-build cases around the country.  While this gives design-build practitioners insight into the mistakes of others, it also affords them the opportunity to fashion best practices from these cases.

            The 2004 edition of Design-Build Lessons Learned is a 240-page paperback book that contains an array of significant design-build cases among its 58 reported decisions.  Although it is very difficult to identify the “best of the best,” special attention should be paid to the following seven cases:

§         Lockheed Martin Idaho Technologies Co. v. EG&G Idaho Inc., where an Idaho federal court rejected a turnkey contractor’s excuses for failing to meet the contract’s performance guarantees.  Particularly noteworthy was the court’s conclusion that millions of dollars of cost overruns were not sufficient to establish a “commercial impracticability” defense to performance.

§         Record Steel and Construction v. United States , where the United States Court of Federal Claims concluded that the design-builder was entitled to a change order when the government required it to use a “recommended” geotechnical approach instead of what the design-builder wanted to use.

§         PDC-El Paso Meriden, LLC v. Alstom Power, Inc., where a Massachusetts state court concluded that an owner and an EPC contractor needed much more than a Letter of Intent to create a binding commitment to construct a power plant.

§         Siemens Westinghouse Power Corp. v. Dick Corp., where a New York federal court refused to find that one member of a design-build consortium could claim that it was “duped” by its partner.

§         Metropolitan Steel Industries, Inc. v. Perini Corp., where a New York state court considered a series of claims arising from construction of a New York City Transit Authority bus terminal.  Particularly noteworthy about this case is the guidance it provides relative to the potential liability of a subconsultant engineer to the prime design-builder, reaching a different result than what we have seen from other cases around the country.

§         O’Brien & Gere Technical Services, Inc. v. Fru-Con Construction Corp./Fluor Daniel, Inc., where the 8th Circuit Court of Appeals concluded that a design-build contract was abandoned because of, among other things, poor change order management and a failure of the parties to ever reach agreement on a design baseline.

§         American Family Mutual Insurance Company v. American Girl, Inc., where the Wisconsin Supreme Court finally ended a multi-year piece of litigation by concluding that a design-builder’s CGL insurance policy covered the damages incurred when a building failed because of negligence by the design-builder’s geotechnical contractor.

For an extensive excerpt of one of the cases taken directly from the publication, see the next article in this issue of the ConstructionRisk.com Report.

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Ambiguity in Design-Build Contract Specs Interpreted in Favor of Contractor,  by Michael C. Loulakis

            Record Steel and Construction v. United States , 62 Fed. Cl. 508 (2004), provides an excellent example of the evolution of design-build caselaw.  The dispute in this case involved whether a design-build contract required foundations to be over-excavated.  The design-builder argued that the contract unambiguously made over-excavation a design recommendation – not a design requirement.  In the alternative, it argued that if the contract was ambiguous, then the ambiguity was latent and should be construed against the government.  The government argued that the contract expressly and unambiguously required the design-builder to over-excavate the foundation.  After carefully examining the relevant contract provisions, the United States Court of Federal Claims (“Court of Federal Claims”) found the contract to be latently ambiguous, and saddled the government with the financial responsibility of the over-excavation. [Editor’s Note:  This casenote discussion is excerpted from Design-Build Lessons Learned (2004) -  See book review above for more details].

            The Corps of Engineers (“Corps”) awarded Record Steel and Construction, Inc. (“Record Steel”) an $8.8 million design-build contract for a dormitory at Offutt Air Force Base in Bellevue , Nebraska .  Part of the RFP contained a foundation analysis report, with a section entitled “Subsurface Recommendations.”  Included in the recommendations was the following language:

Due to the anticipated column loads for a multi-story building, it is believed that improving the site is more viable than reducing the bearing pressure to a very low value …. The recommended improvement program is outlined below.

The recommended program contained statements that materials be undercut and “should be excavated” from below the bottom elevation of all building footings.

            In response to the RFP, Record Steel submitted a price proposal informing the Corps that it did not believe over-excavation for the foundations would be required but, if site conditions ultimately required over-excavation, Record Steel committed to perform this work at no additional cost.  The need for over-excavation was discussed during several design meetings both prior to and after contract award.  The parties agreed that Record Steel’s geotechnical firm was to conduct field investigations and tests and provide such information to both Record Steel and the Corps.  If the resulting data was satisfactory, then Record Steel could proceed with its design without conducting over-excavation.  

            The geotechnical firm concluded that the native soils were adequate to support the building’s footings without over-excavation.  However, the Corps apparently re-evaluated its position and refused to issue a notice to proceed for the footings unless Record Steel agreed to conform to “the requirements of the subsurface recommendations of the Foundation Analysis Report” and over-excavate the site.  Record Steel complied with this order and submitted a claim for approximately $188,000 for the costs associated with the over-excavation effort. 

            The Court first looked at the reasonableness of each party’s contract interpretations.  In finding that Record Steel’s interpretation was reasonable, it first noted that Record Steel, as the designer-of-record, was expected to exercise its professional judgment in designing the dormitory and had to defer only to specific requirements contained in the RFP, not to recommendations.  The Court then examined how the “requirements” in the RFP were expressed in terms of words like “shall,” “may,” and “should.”

            It found that the most critical aspects of the foundation report used the word “should” instead of “shall” – and that this expressed a desire for action, but not a binding requirement.  It looked to the fact that the foundation report stated that the Corps “believed” that over-excavation was “more viable” to improve the site, and couched its report in terms of a “recommendation” rather than as a requirement.  The Court also found Record Steel’s interpretation to be reasonable based on the fact that the Corps’ initial borings were not conducted within the actual footprint of the dormitory’s location.

            The Court ruled, however, that the Corps’ contract interpretation fell “within the zone of reasonableness.”  It looked to the fact that the RFP used the verb “shall” in connection with incorporating the foundation report’s recommendations into the contract, and that, by referring to the terms “over-excavation and compaction requirements,” there was an argument that the RFP expressly converted the foundation report’s recommendations into requirements.

            Faced with two reasonable contract interpretations, the Court then looked to the rule of contra proferentem for guidance on who should bear the risk of these ambiguities.  The four-part test associated with this rule places the risk of the ambiguities on the government when: (1) the contract specifications were drawn by the government; (2) the language used therein was susceptible of more than one interpretation; (3) the intention of the parties does not otherwise appear; and (4) the contractor actually and reasonably construed the specifications in accordance with one of the meanings of which the language was susceptible.  The Court found that all of these conditions were satisfied. 

            The court also refused to apply the exception to the general rule of contra proferentem (i.e., the patent ambiguity doctrine), which resolves ambiguities against the contractor where the ambiguities are “‘so ‘patent and glaring’ that it is unreasonable for a contractor not to discover and inquire about them.’”  The court did not find this ambiguity obvious, particularly since the Corps had not indicated its view of the mandatory nature of these so-called “requirements” until many predesign meetings between the parties had taken place.

            There are several “take-aways” from the Record Steel case.  Owners who use competitive procurement processes, like the Corps of Engineers and other public agencies, must remember that proposers get the benefit of the doubt if there is something wrong with or unclear about the owner-furnished RFP documents.  The fact that the over-excavation concept was expressed in terms of a “recommended” process started the potential for ambiguity, and the “should,” “may,” and “shall” verbs contained in the foundation report sealed the deal for the conclusion that there was an ambiguity.  If the Corps wanted to mandate over-excavation, it should have said so explicitly. 

            Equally important, however, is that Record Steel did the right thing by advising the Corps during the proposal phase that it did not intend to undercut unless soil conditions required it to do so.  These actions demonstrated that Record Steel actually relied upon its interpretation of the ambiguity, which is one of the predicates to recovery under the contra proferentem rule.  The result of this case might have been different if Record Steel recognized the ambiguity but never informed the Corps of its interpretation during the proposal process.

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Contractual Jury Waivers Held Invalid by California Supreme Court

 By Daven G. Lowhurst
Thelen Reid & Priest LLP

October 3, 2005  

The Issue

The California Supreme Court has single-handedly altered the contractual expectations of parties to thousands of contracts governed by California law. For many years, parties to a wide variety of contracts – such as leases and construction contracts – have knowingly agreed to give up their right to have their disputes resolved by jury trial. Indeed, these contracting parties likely continue to assume that any dispute that arises in the future will be subject to the jury waiver clause in their contracts. Confidence in the enforceability of contractual jury waivers could only have been increased beginning in 1991 when a California appellate court expressly validated such jury waivers.

That confidence was been shattered by the California Supreme Court recently in Grafton Partners L.P. v. Superior Court, 36 Cal.4th 944 (2005). The court ruled that contractual pre-dispute waivers of the right to trial by jury are unenforceable. Further, the Court elected to treat its ruling as retroactive, meaning that jury waivers are invalidated in existing contracts.

A brief trek through the Court’s analysis is helpful to understanding how the Court reached its decision and what alternatives remain available to parties who wish to avoid the expense and uncertainty of entrusting their contractual disputes to juries.

The Decision

In Grafton, a partnership hired PriceWaterhouseCoopers (PWC) to audit accounts. Under the retention agreement, the parties agreed not to demand a trial by jury in any action arising out of PWC’s services. The partnership sued PWC for negligence and misrepresentation arising out of the audit and demanded a jury trial. PWC, after unsuccessfully asking the trial court to strike the jury demand, obtained relief from the Court of Appeal. The Supreme Court reversed.

The court ruled that under California law, jury trials can be waived only when one of the six situations set out in Code of Civil Procedure §631 had occurred. Section 631 allows jury waivers when, for example, a party consents to waive jury in open court, fails to timely demand a jury trial or fails to pay jury fees. A contractual pre-dispute jury waiver is not one of those situations. Thus, the court found that such waivers violate the California Constitution’s right to trial by jury.

In so ruling, the Court disapproved of the Court of Appeal decision in Trizec Properties, Inc. v. Superior Court, 229 Cal.App.3d 1616 (1991), which had validated pre-dispute contractual jury waivers by analogizing them to arbitration clauses. Trizec reasoned that if parties can contractually do away with trials altogether, they certainly can do away with trials by jury.

The Supreme Court found that analogy unpersuasive. First, the court explained that unlike jury waivers, arbitration clauses are expressly authorized by statute and advance a strong public policy in favor of arbitration. Second, arbitrations conserve judicial resources to a much greater extent than court trials by avoiding the judicial forum altogether. By contrast, court trials unquestionably tax the court system, even if to a lesser degree than jury trials.

The Supreme Court then ruled that its decision applies retroactively, i.e., to pre-existing contracts. PWC argued that pre-dispute jury waivers are commonplace and that retroactive application of the court’s decision would upset long-established contractual expectations. The court was not persuaded that an exception to the normal rule of retroactive application should be found because Trizec did not constitute a uniform body of law that could reasonably have been relied on in forming expectations.

A concurring opinion pleaded for the California Legislature to authorize pre-dispute jury waivers because they offer an “attractive middle ground” between jury trials and arbitration. Specifically, court trials calm contracting parties’ fears of runaway jury awards while providing greater procedural and evidentiary safeguards than arbitration. Court trials also provide the additional safeguard of a full right to appeal rather than the very limited right to seek to vacate arbitration awards. Finally, court trials reduce the expense and delay associated with jury trials.


The Impact

Grafton broadly invalidates pre-dispute contractual jury waivers. What’s more, it invalidates jury-waiver clauses in existing contracts, thereby shattering the contractual expectations of thousands of parties who have entered into contracts governed by California law.

Unless and until the California Legislature authorizes pre-dispute jury waivers, contracting parties seeking to avoid the expense and risk associated with jury trials may be limited to having their disputes resolved by arbitrators or by referees (usually retired trial court judges). The pros and cons of arbitration versus reference versus jury trial should be examined with legal counsel. Likewise, given that Grafton is retroactive, parties to existing contracts with jury waivers should consult legal counsel to determine whether to attempt to modify the contract to provide for arbitration or reference or whether to leave the invalid jury waiver as it is.

Whether in an existing contract or in a contract to be negotiated, if arbitration is preferred to having the dispute resolved by a referee, care must be taken to ensure that the arbitration clause satisfies California law, as different rules of arbitral enforceability govern different types of contracts. Further, when arbitration or reference is sought to resolve contractual disputes, care must be taken to ensure that the clause is not later invalidated as unconscionable. A pro-active approach to reviewing existing contracts with an eye toward dispute resolution will help ensure that any dispute is resolved in a manner consistent with the parties’ expectations.

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RED VECTOR.COM --- ON-LINE COURSES by KENT HOLLAND

Do you need year end continuing education courses?  Currently available on-line risk management courses written by Kent Holland for RedVector, (http://www.redvector.com/instructors/view_related_courses.asp?id=195) include the following:; Contract Guide for the Design Professional, Design Build Professional Liability Risk Management and Insurance; Site Safety Risk and Liability; Risk Management for the Design Professional; Managing Communication, Documentation and Reports; Insurance for Design-Build and Complex Projects; Construction Contract Law; Contract Claims against Design Professionals; Insurance Coverage Disputes; and Environmental Claims.  This is an efficient, easy and cost-effective to get your continuing education credits. 

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Accord and Satisfaction Barred Contractor Claim for Additional Compensation -- By J. Kent Holland

Where a contractor timely completed a construction contract for the U.S. Army Corps of Engineers and accepted payment which included changes required by the Corps, the contractor was barred from later filing a claim for additional compensation.  The claim was barred by accord and satisfaction because when signing change orders the contractor did not reserve its rights to assert any additional delay or impact.  Moreover, the contractor had signed releases in certain bilateral modifications that barred its claims.

The contractor was paid the lump sum contract price plus over $600,000 in additional compensation for changes to the work that were agreed upon and authorized by bilateral modifications.  After completing the work and being paid, the contractor, Jackson Construction Company (Jackson), sought to recover additional compensation under two separate claims.  One claim was for early completion delay.  The other was an impact claim to recover additional overhead and general administrative costs.  Jackson asserted that the project was delayed by the Corps of Engineers at the start of the project causing the contractor to have to overcome a 120 day delay.  This was allegedly due to the having to redesign and relocate a waterline that ran through the footprint of the building.  Jackson argued the applicability of what is known as the Eichleay formula for calculating additional home office overhead.  The other claim was for additional damages allegedly incurred due to cumulative impact of numerous changes required by the Corps during performance. 

The U.S. Claims Court found in favor of the Corps and denied the claims due to (1) accord and satisfaction and (2) on the merits, the contractor failed to prove its case.  As explained by the court, “The doctrine of accord and satisfaction is an absolute defense that terminates any previous right that a party may have had to assert a claim of the same subject matter.”    Further explaining this, the court stated: “An ‘accord’ is a contract under which both parties agree that one party will render additional or alternative performance in order to settle an existing claim made by the other party, and ‘satisfaction’ is the actual performance of the accord.  A party asserting an accord and satisfaction defense must establish four elements: (1) proper subject matter; (2) competent parties; (3) a meeting of the minds; and (4) consideration.”

The issue concerning the delay was that the contractor asserted that although it completed the contract exactly on time, it could have completed its work much earlier if it had not been for delays due to the waterline location that were allegedly caused by the Corps.  In reviewing these issues, the court pointed out that Jackson chose to move the waterline and that the Corps approved Jackson ’s plan with the work to “be performed at no additional cost to the Government.”  Eventually, the Corps paid Jackson on a claim for the waterline relocation in the amount of $15,212 on a total claim of $18,212.   The modification, along with all the other bilateral modifications executed by the parties included the following stipulation regarding schedule delays and impact changes:  “The contract period of performance remains the same.  It is further understood and agreed that this adjustment constitutes compensation in full on behalf of the contractor and his subcontractors and suppliers for all costs and markup directly or indirectly, including extended overhead, attributable to the change order, for all delays related thereto, and for performance of the change within the time frame stated.”

The Corps agued that Jackson was barred by this release language from obtaining any further damages.   The court agreed that Jackson did not make a timely reservation of rights to assert additional damages for the problems associated with the work, either in its original claim or at any time prior to the execution of the bilateral modification.  It was not until after the contract was completed that Jackson first attempted to make an additional delay claim.  The same was true of Jackson ’s cumulative impact for the changes required by the Corps.  The court found that “ Jackson never attempted to reserve its rights to assert a cumulative impact claim at any time during the work.” 

Jackson argued that there had been no accord and satisfaction because the release language was in effective for the following reasons: (1) Jackson says it made a written reservation of rights to assert an impact claim at a later date; (2) the modifications were ambiguous; (3) the modifications were the result of misrepresentations by the Corps; and (4) the modifications were executed under duress.  The court found none of these arguments were supported by the evidence presented at trial.  The court found Jackson did not explicitly reserve its rights to assert a delay or impact claim at a later date.   Even if Jackson did attempt to reserve its rights, however, the court found it did not do so in a timely manner.   In fact, the court stated that the delay and impact claim appeared to be an after thought.  According to the court, “It does not appear that Jackson had even considered submitting a delay claim at that time.  Jackson did not request any delay damages when it submitted its [original] claim for the waterline location….”

Much later, when executing two contract modification completely unrelated to the claims at issue in this particular matter, Jackson attempted to make two after-the-fact reservations of rights pertaining to the earlier matters.   “The Court views Jackson ’s actions as an invalid attempt to revive claims that had already been extinguished by its execution of bilateral modifications.”  Moreover, said the court, “ Jackson did not reserve its rights to assert future claims arising from any of the other specific performance problems that it presented at trial.”

In reviewing the language of the release, the court found that it was neither ambiguous nor obtained by misrepresentation.  And, finally, the court found that Jackson had been under no duress when it agreed to the release language.   For these reasons, the court found in favor of the Government and against the contractor. 

Jackson Construction Co., Inc v. The United States , 62 Fed.Cl. 84.

Comment:  This case points out how important it is for contractors to exercise extreme caution when executing change orders—if they intend to reserve any potential claims for delay and impact.  It is sometimes difficult when agreeing to a change order to know the full impact of the change in the event that the project owner issues multiple additional changes impacting the project and the contractor’s work.  If there is a chance that additional damages may arise out of a change, the contractor should strive to include some language explicitly reserving its rights.  Otherwise, it may find itself in the situation described in this case. 

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ABOUT THIS NEWSLETTER & A DISCLAIMER

          This newsletter Report is published and edited by J. Kent Holland, Jr., J.D., a construction lawyer and risk management consultant for Environmental and Design Professional Liability.  The Report is independent of any insurance company, law firm, or other entity, and is distributed with the understanding that ConstructionRisk.com, LLC, and the editor and writers, are not hereby engaged in rendering legal services or the practice of law.  Further, the content and comments in this newsletter are provided for educational purposes and for general distribution only, and cannot apply to any single set of specific circumstances. If you have a legal issue to which you believe this newsletter relates, we urge you to consult your own legal counsel. ConstructionRisk.com, LLC, and its writers and editors, expressly disclaim any responsibility for damages arising from the use, application, or reliance upon the information contained herein.

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Copyright 2005, ConstructionRisk.com, LLC

Publisher & Editor: J. Kent Holland, Jr., Esq.

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