Inside this Issue

A1 - Contractor’s Duty to Seek Clarification of Ambiguity in Specifications; Architect’s Decision on Dispute is Final
A2 - Implied Warranty of Habitability Extends only to Original Purchaser of Home, says Pennsylvania Supreme Court
A3 - Civilian BCA Accepts Jurisdiction over Contract Interpretation Issue and Grants Declaratory Relief Entitling Contractor to Suspend

Article 1

Contractor’s Duty to Seek Clarification of Ambiguity in Specifications; Architect’s Decision on Dispute is Final

In a dispute involving whether a subcontractor satisfied the contract plans and specifications when it installed escalators for an airport expansion project, the appeals court held that because the subcontractor (Otis Elevator) was aware of an ambiguity concerning the escalator width, Otis had a duty to clarify the ambiguity prior to bidding. Failing to do so meant that Otis bore the risk that the project owner and architect would adopt a different interpretation of the requirements. The subcontract provided that “the appropriate design professional” was vested with binding authority to resolve ambiguities. Although the district court had set aside the design professional’s interpretation and ruled for Otis, the appeals court reversed the decision. Otis Elevator Company v. WG Yates & Sons Construction Company, 2014 WL 5304867 (U.S. 11th Circuit Court of Appeals).

Ambiguity in Specifications

Otis’ subcontract included a mechanism for resolving disputes about the subcontract’s terms, which stated: “If there is … a difference in interpretation, the matter shall be referred to the appropriate design professional whose decision the Subcontractor shall implement at no additional cost.” The Prime contractor asserted that the “appropriate design professional” referred to the architect that designed the airport expansion project. In support of that assertion, the Prime pointed to the provision of the subcontract that stated “the Subcontractor shall be bound … by all terms and conditions of the Prime Contract.” Next, it pointed to the terms of the Prime Contract which provided that the architect “shall decide all questions that may arise as to the interpretation and/or clarifications of the specifications or plans relating to the work.”

Drawing A180 of the plans laid out a detailed blueprint of the escalators and used “tick marks” to indicate the escalator width. The dispute arose out of a misunderstanding over whether the tick marks indicated that the width of steps themselves (the “nominal width”) was to be 39.5 inches or whether the distance from handrail to handrail (the “rated width”) was to be 39.5 inches. The architect and the prime contractor thought Drawing A180 called for 39.5 inch nominal width, whereas Otis thought it called for a 39.5 rated width and thus supplied escalators with a 32-inch step width.

Only after the four escalators called for by the plans were installed did the Prime and the architect realize that the escalators had 32 inch wide steps. There was a tent surrounding the escalators during construction, and this prevented the problem from being discovered sooner.

Shop Drawing Review Process.

The Prime Contract required the Prime contractor and the architect to review and approve all “shop drawings … and similar submittals” before work began, to ensure that they complied with the Prime Contract’s requirements. Otis’ shop drawings indicating that it would install escalators with a 32-inch step width were approved by both the Prime and the architect. Although Otis appears to have a good argument that approval of the narrower elevators excused it from installing the wider width that the owner desired, the court indicated that this was not so. As explained by the court,

“Otis did not include any disclaimer or other notice to Yates [the Prime contractor] that called attention to the fact that the shop drawings used 32–inch steps. As is customary in the industry, Chapman Sisson [the architect] did not conduct a “line item” review of the over 400 submittals it received from Yates' subcontractors. Similarly, in keeping with industry custom and the terms of the Prime Contract, it did not check the shop drawings to ensure that their dimensions matched the Prime Contract's specifications. When Chapman Sisson approved Otis' revised shop drawings, it used a stamp that specifically qualified its approval by stating: “This review is only for general conformance with the design concept of the project and general compliance with the information given in the Contract Documents.” Yates also reviewed and approved the revised shop drawings. The stamp it placed on the shop drawings specified that Yates' review had been “for general compliance” and that the ‘[f]inal dimensions and quantities required for the project remain the responsibility of the subcontractor.’”

In examining the significance of the shop drawing review process and whether this could excuse Otis, the court considered the terms and conditions of Otis’ subcontract. The subcontract expressly incorporated the terms and conditions of the Prime Contract as well as “all drawings specifications, details and standards.” As stated by the court, the subcontract required Otis to:

… complete the escalator installation “in strict accordance with this Subcontract and with the Prime Contract.” Second, the Subcontract gave “the appropriate design professional” binding authority to resolve “any conflict, ambiguity, ... or ... difference in interpretation” of the Subcontract. Third, the Subcontract established that Yates' and Chapman Sisson's review and approval of shop drawings did not excuse Otis from performing its work in “strict accordance” with the project's plans and specifications. The Subcontract went on to emphasize that Yates had “no duty to discover any mistake, error, or deviation in any submittals from the Prime Contract requirements,” and that Yates' and Chapman Sisson's approval of the submittals “shall not relieve [Otis] from responsibility or liability for any mistakes, error, or deviation, or of [Otis'] obligation to perform its work in strict accordance with the Prime Contract.” Finally, the Subcontract had a merger clause that limited the terms of the agreement to those written in the Subcontract itself and the documents incorporated by reference in the Subcontract.”

When the airport discovered the escalators were narrower than called for by the specifications, they initially demanded that all four escalators be replaced. Eventually, a compromise was reached between the Prime contractor and airport whereby the four escalators would remain, but a fifth, wider elevator would be added between two of the narrow ones. Otis and the Prime contractor then worked out a change order, with Otis agreeing to complete the installation, and both parties reserving their respective rights against the other party. After completion, Otis filed suit against the Prime to recover its additional costs plus amounts the Prime had withheld. The Prime responded with a counterclaim for its costs due to the extra elevator work. In a bench trial, the District Court ruled for Otis on its breach of contract claim and awarded Otis the damages it claimed.

The trial court decision was reversed on appeal for the reasons explained above. The appeals court found that Otis had a duty to seek clarification of the specifications before bidding. The appeals court agreed with the Prime contractor that the airport architect was “the appropriate design professional” with authority to resolve ambiguities in subcontracts and that the design professional’s decision interpreting the specifications against Otis was binding. The court’s reasoning with respect to the design professional’s decision was follows:

“We also disagree with the district court's conclusion that Chapman Sisson's interpretation was not binding. Under Alabama law, the third-party expert's decision “can be impeached only for fraud, or such gross mistakes as would imply bad faith or a failure to exercise an honest judgment.” Finish Line, 90 So.3d at 759 (quotation marks omitted). That is a high bar, and justifiably so. If the bar were lower, third-party-expert interpretations would lack the finality they are meant to provide. See id. Here, Chapman Sisson's interpretation did not amount to fraud or such a gross mistake as to imply bad faith or a failure to exercise honest judgment. As the district court's decision and Otis' brief acknowledge, Drawing A180 is ambiguous as to whether it calls for 32–inch or 40–inch escalator steps—which means that it can be reasonably interpreted as calling for 40–inch escalator steps. See Mann v. GTE Mobilnet of Birmingham Inc., 730 So.2d 150, 155 (Ala.1999) (explaining that a contract term is ambiguous where it “is susceptible to more than one reasonable interpretation”). Because a reasonable interpretation is not a fraud or gross mistake, the district court should not have set aside the third-party expert's binding interpretation.”

Comment

There are several lessons in this decision: (1) Subcontractors must pay attention to the terms of a prime contract that will be incorporated into their subcontract, and when negotiating the subcontract should take exception to those prime contract terms they finds unacceptable; (2) Granting the decision professional final decision-making authority may have greater impact than sometimes realized; and (3) Patent ambiguities in plans and specifications require a subcontractor to seek clarification before bidding.

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 17, No. 3 (March 2015).

Article 2

Implied Warranty of Habitability Extends only to Original Purchaser of Home, says Pennsylvania Supreme Court

Where the second purchasers of a home sued the builder asserting a breach of implied warranty of habitability, a 2012 Pennsylvania Superior Court decision held that despite the lack of privity of contract between the parties, public policy dictated that the subsequent purchaser should be able to maintain suit against the builder. This was reversed by the Pennsylvania Supreme Court in Conway v. Cutler Group, Inc., 99 A.3d 767 (August 2014), which held that the action for breach of the implied warranty must be dismissed because the action requires a contractual relationship between the parties. The court analyzed decisions by courts in other states that have allowed such suits in the absence of contractual privity. The court concluded that it was improper for Pennsylvania courts to allow such suits because while many of the arguments in support were cogent and compelling, the arguments were “predominantly grounded in policy considerations that necessitate judgments reserved to the legislature after fact-finding and weighing of the ramifications of any decision.”

The court, quoting early cases precedent, explained that its authority to declare public policy is limited: “In our judicial system, the power of courts to formulate pronouncements of public policy is sharply restricted; otherwise they would become judicial legislatures rather than instrumentalities for the interpretation of law. General speaking, the Legislature is the body to declare the public policy of a state and to ordain changes therein…. If in the domain of economic and social controversies, a court were, under the guise of the application of the doctrine of public policy, in effect to enact provisions which it might consider expedient and desirable, such action would be nothing short of judicial legislation, and each such court would be creating positive laws according to the particular views, and idiosyncrasies of its members. Only in the clearest cases, therefore, may a court make an alleged public policy the basis of judicial decision.”

The problems alleged with the house concerned water infiltration around the windows that was allegedly due to construction defects. The earlier decision in this case by the Superior Court of Pennsylvania was reported in this ConstructionRisk.com Report in 2012 and can be found in the website search engine. The Superior Court had unanimously held that no privity of contract was needed in order for a homeowner to sue a builder for implied warranty.

The Superior court had noted that the implied warranty of habitability is based on public policy considerations and is designed to equalize the disparate positions of the builder-vendor and the home purchaser, and that it exists independently of any representation of the builder, and even in the absence of an express contract between the builder and the purchaser. With its holding, the Superior Court rejected the builder’s argument that extending the warranty to those not in privity of contract would lead to unlimited liability for home builders.

After reviewing cases from other states that have found a duty in the absence of contract (e.g., Iowa and Rhode Island) and states that have found there can be no implied warranty to anyone not in contract with the builder-vendor (e.g., Vermont and Connecticut), the court stated:

“After careful review of the arguments of the parties, the comments of amici, and the reasoned decisions of our sister states on this issue, we conclude that the question of whether and/or under what circumstances to extend an implied warranty of habitability to subsequent purchasers of a newly constructed residence is a matter of public policy properly left to the General Assembly. We do not minimize the potential concerns, nor do we disregard the rationales set forth by the parties and amici; to the contrary, many of the arguments are cogent and compelling. However, the arguments are predominantly grounded in policy considerations that necessitate judgments reserved to the legislature after fact-finding and weighing of the ramifications of any decision.”

The court concluded: “[W]e decline to extend the implied warranty of habitability beyond its firm grounding in contract law. Under the facts of this case, where the builder-vendor sold a new home to a purchaser-user, we hold that an action for breach of the implied warranty requires contractual privity between the parties.”

Comment: It is refreshing to read a decision that so succinctly distinguishes between the proper Constitutional responsibilities of courts and legislatures. If it is to be determined that second-, third- and even fourth-tier purchasers of homes should have a cause of action against a builder with whom they had no contract, it seems only right that such broad protection for homeowners, and such draconian potential liability for builders, should be determined as a matter of public policy by state legislatures and not by the courts.

Article 3

Civilian BCA Accepts Jurisdiction over Contract Interpretation Issue and Grants Declaratory Relief Entitling Contractor to Suspend

See similar articles: Board Jurisdiction | CBCA | Contract Interpretation | Declaratory Relief | Suspension of Work

By Gail S. Kelley, P.E., JD
ConstructionRisk, LLC

The U.S. Civilian Board of Contract Appeals concluded that declaratory relief in situations involving a “fundamental question of contract interpretation or a special need for early resolution of a legal issue” is appropriate. Even though a contractor on a government project has a contractual obligation to perform in accordance with the contracting officer's decision until it receives a different ruling on the contract scope, the contractor does not have to wait to seek such a ruling from the Board of Contract Appeals until it has performed in full and requests compensation for the additional work that the contract did not require. This was the holding by the Civilian Board of Contract Appeals in Kiewit-Turner v. Department of Veterans Affairs, 14-1 BCA P 35705, 2014 WL 4267429, where the Board denied the government’s motion to dismiss Kiewit-Turner’s request for a declaratory judgment.

On August 31, 2010, the Department of Veterans Affairs (VA), awarded a contract to the joint venture Kiewit-Turner (KT) for pre-construction services to build a medical center in Colorado, with an option for construction services. The contract was an integrated design and construct (IDc) contract, which is defined as the Government’s procurement of both pre-construction and optional construction services for a specific project under one contract.

The VA entered into a separate contract with an architect/engineer (A/E) who was responsible for the project's design and quality. KT was to work with the VA and the A/E as they developed a design for the project, and to notify the VA of any design problems or issues it found as it reviewed the A/E’s work.

About a year after the contract was awarded, KT submitted a firm target price (FTP) proposal of $604,087,179 for the construction. The VA subsequently exercised the construction option of the contract, but the agreement between the parties required that they get the project price at or below the $604 million target price, and included the statement:

[T]he VA shall ensure the A/E ... will produce a design that meets their Estimated Construction Cost at Award (ECCA) of $582,840,000.”

Once construction started, KT realized that its costs would be considerably greater than the ECCA amount. KT subsequently requested a final decision from the contracting officer (CO) on whether the VA had breached its obligation to provide a design that could be built for $582,840,000, and, therefore, whether KT had the right to stop work. When the CO denied KT's requests and directed KT to continue working, KT filed a notice of appeal with the Civilian Board of Contract Appeals (CBCA). KT requested that the Board declare that (1) the VA had a material contractual obligation to provide a design that could be constructed for the ECCA of $582,840,000; (2) the VA breached this obligation; and (3) KT was entitled to suspend performance until the VA provided a design that could be built for the ECCA.

The VA requested the appeal be dismissed, stating that KT was not entitled to declaratory relief. The VA did not challenge the CBCA’s jurisdiction to issue declaratory judgments, but suggested that this was not an appropriate case for rendering such relief.

The parties agreed that the essential case when determining whether declaratory relief is appropriate is Alliant Techsystems, Inc. v. United States,178 F.3d 1260 (Fed. Cir. 1999). In Alliant, the court concluded that boards of contract appeals and the Court of Federal Claims have broad discretion to issue declaratory relief during contract performance, including adjustment or interpretation of contract terms, or other relief arising under or relating to the contract. Thus, declaratory relief in situations involving a “fundamental question of contract interpretation or a special need for early resolution of a legal issue” is appropriate.

Alliant set three criteria for a court or board to consider when evaluating whether declaratory relief is appropriate:

(1) whether the claim involves a live dispute between the parties, (2) whether a declaration will resolve that dispute, and (3) whether the legal remedies available to the parties would be adequate to protect the parties' interests.

The parties agreed there was a live dispute, but disagreed as to the other two points. The Board found for KT on both of the other criteria and thus denied the VA’s motion to dismiss. With respect to the second point, whether issuance of a declaratory judgment would resolve the dispute, the Board stated:

Respondent [VA] suggests that the request goes beyond the contract by urging that the Board determine whether the respondent was obligated to provide a design that could be constructed for the ECCA of $582,840,000; whether that obligation was material, and whether the respondent had in fact breached that obligation.

… respondent argues that the Board would need to consider evidence of cost evaluations and additional activities not likely to be provided at a hearing seeking declaratory relief, making the issue too involved for resolution via interpretation of the contract. ….

For its part, KT argued that the case presented a fundamental question of interpretation and an urgent need for early resolution of the issue. The Board agreed with KT, concluding:

If appellant [KT] must continue work when it believes it is not obligated to do so, a fundamental issue is implicated in the contract, and in the face of potential cost overruns of hundreds of millions of dollars, it has a special need for early resolution of this issue.

With respect to the third point - whether there was an adequate legal remedy to protect KT’s interests - the VA argued that declaratory judgment was inappropriate because the real issue was money and that per Alliant, a board or court should not issue declaratory judgments on contract interpretation matters when the issue is whether a contractor will later be entitled to additional compensation. In contrast, KT argued that it was critical to resolve these contractual interpretation issues so that KT and its numerous subcontractors knew whether they were required to continue to perform.

The Board found that the facts alleged suggested that KT's remedies short of a declaratory judgment were not adequate to protect its interests. While the VA stated that KT could rely on the contract's changes clause to recoup the funds it expended, the Alliant court found that to file a claim under the changes clause for compensation when the work is completed can be an inadequate remedy.

Comment: This is a very nice analysis of the factors a board or court must consider in determining whether a declaratory judgment is appropriate.

This article is published in ConstructionRisk.com Report, Vol. 17, No. 3 (March 2015).

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ConstructionRisk.com Report (March 2015)