AIA B101-2007 Supports Architect’s Copyright Infringement Claim against Contractor, Subcontractors

AIA B101-2007 Supports Architect’s Copyright Infringement Claim against Contractor, Subcontractors

In a case of first impression, in April 2016 the Northern District of Ohio held in Eberhard Architects, LLC v. Bogart Architecture, Inc., 314 F.R.D. 567 (N.D. Ohio 2016), that a contractor and its subcontractors may have committed copyright infringement by continuing work after the architect terminated the nonexclusive license to use the architect’s instruments of service (“IOS”).

Eberhard Architects, LLC (“Eberhard”) agreed to provide architectural services to Lifecare Hospice (“Lifecare”) in accordance with AIA B101-2007 (the “Agreement”). Based on the standard language of AIA B101-2007, Eberhard granted Lifecare a nonexclusive license to use the IOS created by Eberhard in connection with the construction of a 12-bed hospice inpatient facility:

Upon execution of this Agreement, the Architect grants to the Owner a nonexclusive license to use the Architect’s Instruments of Service solely and exclusively for purposes of constructing, using, maintaining, altering and adding to the Project, provided that the Owner substantially performs its obligations, including prompt payment of all sums due, under this Agreement. The Architect shall obtain similar nonexclusive licenses from the Architect’s consultants consistent with this Agreement. The license granted under this section permits the Owner to authorize the Contractor, Subcontractors, Sub-subcontractors, and material and equipment suppliers, as well as the Owner’s consultants and separate contractors, to reproduce applicable portions of the Instruments of Service solely and exclusively for use in performing services or construction for the Project. If the Architect rightfully terminates this Agreement for cause as provided in Section 9.4, the license granted in this Section 7.3 shall terminate.

Eberhard obtained a copyright in connection with the IOS for the project. Lifecare later breached the Agreement by failing to make required payments and Eberhard terminated the Agreement. Eberhard brought suit against Lifecare for breach of contract, and also asserted claims for copyright infringement against Lifecare and the contractor and subcontractors (the “Contractor Defendants”) alleging that the Contractor Defendants continued to use Eberhard’s copyrighted IOS after Eberhard terminated the nonexclusive license.

Relying on the language of AIA B101-2007, the Court noted that the parties expressly agreed that Eberhard’s termination of the Agreement would also terminate the nonexclusive license. The Court therefore denied the Contractor Defendants’ motion to dismiss and allowed Eberhard to proceed with its copyright infringement claims against the Contractor Defendants.

The Eberhard decision demonstrates the full scope of the power an architect wields via its ability to grant and revoke a nonexclusive license. If the architect terminates its design agreement with the owner, it may be able to effectively halt work on the entire project until the dispute is resolved or the parties reach an agreement as to the continued use of the architect’s IOS. In light of this possibility, contractors desiring additional protection should consider including language in their contracts permitting them to suspend work (or even terminate the contract) if the architect terminates the design agreement and questions arise as to the validity of the license protecting the architect’s IOS.

Eastern District of PA Declines to Broaden Bilt–Rite Exception to Economic Loss Doctrine

Eastern District of PA Declines to Broaden Bilt–Rite Exception to Economic Loss Doctrine

In an unreported decision handed down this summer, the United States District Court for the Eastern District of Pennsylvania in Elliott-Lewis Corp. v. Skanska USA Bldg., Inc., 2015 WL 4545362 (E.D. Pa. July 28, 2015), declined to extend the Bilt–Rite exception to Pennsylvania’s economic loss doctrine – which established that architects and design professionals can be liable in tort to contractors for purely economic harm resulting from the inclusion of erroneous information in design documents – to a contractor that supplied information to design professionals during remedial construction.

The Franklin Institute (“Franklin”) contracted with Saylor Gregg Architects (“Saylor Gregg”) to design significant renovations to the Franklin Institute in Philadelphia.  Saylor Gregg entered into an agreement with Urban Engineers (“Urban”) and Marvin Waxman Consulting Engineers, Inc. (“Marvin Waxman”) to provide engineering services for the project.  Franklin contracted separately with Skanska USA Building, Inc. (“Skanska”) to construct the project.

Skanska subcontracted with Elliott-Lewis Corporation (“ELCo”) to install the project’s HVAC piping and controls.  Skanska and ELCo had discretion to choose the exact make and model of the HVAC system’s cooling tower so long as Marvin Waxman’s design specifications were met, and ultimately elected to use a four-cell cooling tower which required different piping and controls than the two-cell tower specified in the original plans.

The HVAC system was not completed in accordance with project deadlines and the cooling tower overflowed when the system was first tested, damaging the building itself.  In troubleshooting the issues with the HVAC system, Marvin Waxman utilized information provided by the supplier of the HVAC’s pump system, Patterson Pump Company (“Patterson”), and Patterson’s representative, Clapp Associations, Inc. (“Clapp”).  After several weeks of unsuccessful repair efforts, Patterson eventually admitted that there were problems “intrinsic to the pumps supplied.”

Despite performing extra work on the HVAC system and providing Franklin with a temporary cooling system, ELCo was never paid for this extra work by Skanska.  ELCo sued Skanska for breach of contract and Skanska filed a third-party complaint against Saylor Gregg, Urban, and Marvin Waxman (the “Design Defendants”), claiming that ELCo’s extra work was necessitated by errors in the design drawings and specifications.  The Design Defendants filed a fourth-party complaint against Patterson and Clapp, alleging that they reasonably relied on inaccurate information regarding the HVAC system supplied by Patterson and Clapp when drafting the design documents.

Patterson and Clapp claimed that the Design Defendants’ suit was barred by Pennsylvania’s economic loss doctrine, which prohibits a plaintiff from recovering in tort if the loss suffered is purely economic and not accompanied by an injury to either person or property.  However, the Design Defendants argued that their claims were valid under the Bilt–Rite exception to the economic loss doctrine, which permits recovery in tort for purely economic injuries when information is negligently supplied by one in the business of supplying information (such as an architect or design professional) and where it is foreseeable that the information will be used and relied upon by third parties.  See Bilt–Rite Contractors, Inc. v. The Architectural Studio, 866 A.2d 270 (Pa.2005).

Here, the Eastern District declined to extend this exception to Patterson and Clapp because they are not in the business of supplying information.  Specifically, Patterson manufactured a product and Clapp facilitated the sale of that product.  The court noted that the “sale of a product is fundamentally different than the sale of information, even if the seller provides information about the product to consummate the sale,” and that a “manufacturer and a manufacturer’s representative are very different from the accountants, lawyers, and architects noted in Bilt–Rite.”  The court further reasoned that, if the Bilt–Rite exception were to apply to Patterson and Clapp in this situation, then many typical commercial transactions would be subject to this standard and the economic loss doctrine would be rendered meaningless.  Because the sale and purchase of a product often involves at least some conveyance of information by the seller, the court determined that broadening Bilt–Rite to include such run-of-the-mill transactions was inappropriate and dismissed the Design Defendants’ claims against Patterson and Clapp.

While the Bilt–Rite exception remains narrowly-tailored, the court also noted that the Design Defendants failed to demonstrate that they reasonably relied on any representations made by Patterson and Clapp when drafting the design documents.  Therefore, contractors should therefore be wary of making representations to design professionals on which the design professionals will rely when drafting design documents.

Awards of Attorneys’ Fees and Statutory Penalties are “Discretionary” even when the Government acts in Bad Faith

Awards of Attorneys’ Fees and Statutory Penalties are “Discretionary” even when the Government acts in Bad Faith

In A. Scott Enterprises Inc. v. City of Allentown, the Pennsylvania Supreme Court held that an award of statutory interest and attorneys’ fees under Section 3935 of the Procurement Code is not automatic even where a jury finds the public owner to have withheld payment in bad faith. Rather, the decision to issue such an award is within a judge’s discretion.

This case arose out of a contract awarded by the City of Allentown to A. Scott Enterprises (ASE) to build a public road in 2009. After the discovery of arsenic contamination on site threatened ASE with additional substantial costs to continue with the project, and attempts to negotiation a continuation of the project failed, ASE sued the city to recover its losses. At trial, ASE presented evidence Allentown was aware of possible contamination when it entered a contract with ASE, and failed to disclose this to ASE or incorporate terms regarding this possibility into the parties’ contract. At trial a jury found the city breached its contract and withheld payments in bad faith, awarding ASE $927,299. When ASE motioned the court for an award of statutory interest and attorneys’ fees, the trial court denied ASE’s request outright, without analysis, stating such an award was unwarranted because ASE’s evidence on damages was “conflicting.”

ASE then prevailed on appeal to the Pennsylvania Commonwealth Court, which had held in 2014 that a bad faith finding automatically entitled a contractor to recover its attorney’s fees and the 1% penalty, because, otherwise, “the finding of bad faith is a meaningless exercise with no consequence for the government agency found to have acted in bad faith.” But the Supreme Court ultimately disagreed.

In reversing the Commonwealth Court’s decision, the Supreme Court held “Section 3935 of the Procurement Code allows—but does not require—the court to order an award of a statutory penalty and attorney fees when payments have been withheld in bad faith. The court’s determinations in this regard are subject to review for an abuse of discretion.” The Court also noted “the instances where a finding of bad faith is deemed not to require a Section 3935 award at all presumably will be rare.”

Ultimately, in this case, the trial court’s reliance on the presence of “conflicting” evidence concerning the contractor’s damages alone was insufficient to support its denial of a Section 3935 award outright. For this reason, the case was remanded to the trial court for reconsideration of ASE’s original motion.

Therefore, although an award of attorneys’ fees and/or the 1% penalty under Section 3935 is not “automatic,” a court still must have a reasonable basis for denying such an award against an agency that withheld payment in bad faith. In A. Scott Enterprises, the Supreme Court declined to articulate a test for lower courts to apply in determining whether to enter an award under Section 3935; thus, trial courts are without guidance to determine whether attorneys’ fees and/or penalties must be assessed.

Commonwealth Court Addresses Engineer Licensure Requirements

Commonwealth Court Addresses Engineer Licensure Requirements

On May 24, 2016, the Commonwealth Court in Se. Reprographics, Inc. v. Bureau of Prof’l & Occupational Affairs, No. 2235 C.D. 2014, 2016 WL 2979844 (Pa. Commw. Ct. May 24, 2016) addressed an issue of first impression and held that the petitioner did not perform an “engineering land survey” in violation of the Engineer, Land Surveyor and Geologist Registration Law (Law), 63 P.S. §§ 148 – 158.2, when it used maps and mobile GPS/GIS equipment to locate and identify a customer’s physical assets for a non-engineering purpose.

Southeastern Reprographics, Inc., now known as The Davey Resource Group (“DRG”), was commissioned by Central Electric Cooperative, Inc. (“CEC”), a rural electric distribution cooperative, to locate every piece of electric equipment owned by CEC, including transmission poles, distribution poles, security and street light poles, mounted equipment, regulators, and meters. The purpose of this field inventory was to provide CEC with sufficient information to create a GIS database of its existing assets. Using GIS/GPS technology, DRG assessed over 100 square miles of land, located CEC’s assets to sub meter accuracy, took an inventory of all equipment at each location, and identified and tagged the equipment. DRG then transferred this data to CEC in the form of x-y coordinates to be electronically plotted on a base map.

Based on this information, the State Registration Board for Professional Engineers, Land Surveyors, and Geologists (the “Board”) concluded that DRG performed an “engineering land survey” as defined by the Law when it determined by measurement methods the position of fixed objects on the Earth’s surface through the use of GIS/GPS equipment. According to the Board, DRG violated the Law when it conducted this “engineering land survey” without the necessary license.

On review, the Commonwealth Court reversed the Board’s determination. Agreeing with DRG, the Court held that “‘engineering land surveys’ regulated or encompassed under the Law are those that are performed in connection with or related to building construction and land development.” And because DRG’s field inventory of CEC’s assets was performed purely so that CEC could create a GIS database of its electrical equipment, it was not an “engineering land survey” as defined by the Law.

In a dissenting opinion, Judge McCullough cautioned the Court against overturning legal determinations based on the Board’s extensive “technical expertise.” Judge McCollough also noted that the Law’s licensure requirements are in place to “to safeguard life, health or property and to promote the general welfare.” And because CEC shared DRG’s maps with PA One Call and EMS services for six or seven different counties, Judge McCollough believed that the risk of not properly identifying and locating electrical infrastructure was so great that it should only be entrusted to a licensed professional. The dissent also expressed dissatisfaction with the majority’s limiting the definition of “engineering land survey” to surveying activities performed in connection with building construction or land development.

Overall, the Court’s opinion demonstrates that licensure under the Law is not required to simply determine the location of objects on the Earth’s surface. However, design professionals should be aware that they must be licensed under the Law before performing any surveying activities in conjunction with building construction or land development.

Eastern District of Pennsylvania Grants General Contractor’s Summary Judgment Claims Based on Releases

Eastern District of Pennsylvania Grants General Contractor’s Summary Judgment Claims Based on Releases

On March 23, 2016, the United States District Court for the Eastern District of Pennsylvania granted a general contractor’s summary judgment motion as to a subcontractor’s claim against it as well as its own claim against the subcontractor. In doing so, the Court addressed the importance of construction lien waivers and releases and the practical importance of raising performance and interference issues in a timely fashion.

In Bricklayers & Allied Craftworker Local 1 of PA/DE, et. al. v. ARB Construction, Inc. et. al,  the School District of Philadelphia (“Owner”) hired Ernest Bock & Sons, Inc. (“EBS”) as the general contractor for a construction project at the General Phillip Kearney School (the “Project”). Subsequently, EBS hired Arb Construction, Inc. (“AC”) to supply all labor and materials to complete the masonry portion of the Project at a cost of $777,500.00.

The subcontract terms at issue involved termination and payment. EBS had the right to terminate AC and/or subsidize AC’s work following 48 hours of written notice if EBS determined AC (1) delayed the project; (2) provided faulty workmanship; (3) failed to provide acceptable supervision, or (4) failed to pay its subcontractors or suppliers. The payment terms of the subcontract required AC to certify payrolls and release claims and liens with payment applications, among other things.  Important to this action, AC was required to supply a release of liens from “subcontractors/ suppliers and any labor/union organizations before payment is made.”

Along with each payment application, AC submitted the release of liens and certified payrolls, signed and notarized by AC’s owners. These releases certified that AC had paid “all taxes, welfare and pension fund payments, and fringe benefits.”

AC hired members of the Bricklayers & Allied Craft Workers, Local 1 (“Bricklayers”) to fulfill its labor obligations under the contract. Despite certifying it complied with the union fund obligations on the payment applications, AC was delinquent on its payments to the Bricklayers. Additionally, AC failed to provide a sufficient number of masons to complete the work in accordance with the Project schedule. EBS received multiple complaints from the Owner about AC’s work and the delay it was causing. AC claimed the delay was the fault of EBS, who AC alleged had failed to properly prepare the Project for the masonry phase. AC also claimed it was forced to expend its own resources to correct errors made by other subcontractors.

EBS notified AC it had 48 hours to increase its manpower, which it did by hiring another subcontractor. Subsequently, the Bricklayers stopped supplying masons to the Project because AC was still delinquent in its payment obligations to the benefit funds. EBS declared AC in breach of the contract and terminated the agreement. AC claims the termination was wrongful, as it was delayed because of EBS’ failure to properly manage the Project.

The Bricklayers filed suit against AC for its failure to pay contributions in violation of the collective bargaining agreement (“CBA”). AC in turn filed a third-party complaint against EBS, claiming it breached the subcontract by failing to pay money it owed to AC. EBS in turn counterclaimed against AC for breach of the subcontract. After discovery, EBS moved for summary judgment on AC’s breach of contract claim against it as well as its own breach of contract claim against EBS.

First, EBS argued it was entitled to summary judgment on AC’s breach of contract claim because AC released all of its claims against EBS. In the alternative, AC failed to provide releases from its own subcontractors to EBS, which was a condition precedent to payment.

The Court agreed, holding that EBS was entitled to summary judgment on AC’s breach of contract claim because AC released all claims it could have asserted through the signed releases. The releases were clear and unequivocal, and released all claims prior to the signing without preservation or exception. AC argued that the releases were unenforceable because EBS failed to provide it with a construction work schedule or a proper work area layout and failed to supervise other subcontractors who interfered with its work. Finally, AC argued that the releases were unenforceable because EBS failed to make full payment on the payment applications.

The Court rejected AC’s defenses. If AC had an issue with accounting issues or interference with performance, it had “clear options.” AC could have accepted payment and noted its objection on the application, or refused payment and refused to sign the accompanying release. Because AC did neither, it released its claims. Further, the fact that the notarization of the Releases did not adhere to Pennsylvania law did not render the Releases unenforceable.

Second, EBS moved for summary judgment on its counterclaim, asserting that AC breached the contract by 1) failing to supply adequate manpower and materials; 2) falsely certifying payment; 3) failing to timely complete its work; and 4) submitting non-compliant payment applications. Because the undisputed evidence demonstrated AC’s failure to comply with these terms, EBS was granted summary judgment on its own claims. The Court held that there was a genuine issue of fact however, with respect to calculating the damage amounts.

The takeaway point in Bricklayers is the importance of construction lien waivers and releases. The Court will interpret these as a “contract within a contract,” and they are regularly enforced in accordance with their terms. You should not assume that a waiver is limited to Mechanic’s Lien rights; depending on the language in the waiver, signing a waiver may constitute a release of all rights you may have for payment or performance issues during that particular phase of the work. As the Court noted, if you have an issue with performance and/or payment, you have options. This Court concluded that AC could have accepted payment and noted its objection on the application or refuse the payment and refuse to sign the release. When you sign the waiver and/or release, you will typically be held to those terms.

Governor Wolf’s Executive Orders Protect Employees of Government Contractors from Sexual Orientation, Gender Identity Discrimination

Governor Wolf’s Executive Orders Protect Employees of Government Contractors from Sexual Orientation, Gender Identity Discrimination

The employees of government contractors now have much greater protection from discrimination on the basis of sexual orientation and gender identity. In response to the General Assembly’s delay in passing the Pennsylvania Fairness Act (a bill intended to broaden protections available to all Pennsylvania workers that has seen no progress since it was referred to the State House on September 8, 2015), Governor Tom Wolf took action on April 7, 2016, signing two executive orders that protect not only state employees, but also employees of contractors doing business within Pennsylvania.

The first executive order, Order 2016-04, prohibits discrimination against “any employee or applicant for employment on the basis of race, color, religious creed, ancestry, union membership, age, gender, sexual orientation, gender expression or identity, national origin, AIDS or HIV status, or disability.” Order 2016-04 is premised on the belief “that the employment practices of the Commonwealth of Pennsylvania must be nondiscriminatory in intent and effect to promote public confidence in the fairness and integrity of government.” In addition to prohibiting discrimination, Order 2016-04 bans sexual harassment based on the above-referenced bases and empowers the Secretary of the Administration to “supervise the development, implementation, and enforcement of the Commonwealth’s equal employment opportunity programs through the Bureau of Workforce Planning, Development, and Equal Opportunity.” Order 2016-04 rescinds and replaces Executive Order 2003-10.

The second executive order, Order 2016-05, guarantees that “discrimination by reason of race, gender, creed, color, sexual orientation, or gender identity or expression does not exist with respect to the award, selection, or performance of any contracts or grants issued by Commonwealth agencies.” Order 2016-05 is premised on Pennsylvania’s continued commitment “to promoting the prosperity and economic growth of all businesses and citizens of the Commonwealth of Pennsylvania, regardless of race, gender, creed, color, sexual orientation, or gender identity or expression,” and designates “the Department of General Services as the central agency to develop and manage Commonwealth agency programs to ensure that discrimination . . . does not exist with respect to the award, selection, or performance of any contracts or grants issued by Commonwealth agencies.” Order 2016-05 rescinds and replaces Executive Order 2006-02.

Governor’s Wolf’s actions are intended to demonstrate Pennsylvania’s direct opposition to the recent North Carolina Bill requiring transgender individuals to use public restrooms corresponding to the biological sex on their birth certificate, as well as a Mississippi Bill allowing businesses to deny service to homosexual customers based on religious grounds. According to Governor Wolf, the passage of the North Carolina Bill, coupled with the stagnation of the Pennsylvania Fairness Act, is “a call to pass non-discrimination legislation in Pennsylvania now.” The passage of both executive orders garnered widespread support from a variety of anti-discrimination organizations, including the ACLU, the Anti-Defamation League, Equality Pennsylvania, the Human Rights Campaign, the National Gay & Lesbian Chamber of Commerce, as well as Philadelphia Mayor Jim Kenney and Philadelphia’s City Council.

Proposals Submitted to PennDOT for CNG Fueling Station P3 Project

Proposals Submitted to PennDOT for CNG Fueling Station P3 Project

On January 4, 2016 the three shortlisted proposers competing to enter into a public-private partnership (a “P3”) with the Pennsylvania Department of Transportation (“PennDOT”) submitted their proposals.  The award of the P3 contract, which calls for constructing 27 compressed natural gas (“CNG” fueling stations) along the Commonwealth’s public highways as well as making modifications to transit agencies’ vehicle maintenance and storage facilities, is expected to come sometime in February or March of 2016.

The goals and objectives of the Project include

  • Providing cost-effective CNG fuel availability to enable transit fleets to switch from diesel and gasoline to CNG;
  • Achieving operational cost savings for transit agencies;
  • Reducing greenhouse gas emissions;
  • Providing retail CNG fueling to the public (where feasible); and
  • Establishing consistency between transit agencies for the deployment of CNG fueling infrastructure.

To accomplish those goals and objectives PennDOT is seeking a private partner that will make the necessary utility upgrades, compress gas and make it available for fueling for transit agencies and third parties, and operate and maintain fueling stations.  The private entity will be compensated for its capital and operational costs but will be subject to PennDOT for liquidated damages in the event it fails to perform and will pay royalty payments to PennDOT based on third party sales of CNG.

As of October 2015, twenty three regional transit agencies opted into the CNG program and were divided into three tiers (Tier 1 includes five transportation agencies, Tier 2 includes seven transportation agencies, and Tier 3 includes eleven transportation agencies).  CNG facilities for Tier 1 agencies have completion deadlines between fall 2016 and spring 2017, CNG facilities for Tier 2 agencies have completion deadlines between spring and summer 2017, and CNG facilities for Tier 3 agencies have completion deadlines between fall 2017 and spring 2021.

More information about the CNG Fueling Station P3 Project, including a list of the shortlisted proposers and their partners, can be found by visiting PennDOT’s CNG Fueling Station website.

Commonwealth Court Affirms Award of Delay Damages to Government Contractor despite Contract’s “No Damages for Delay” Clause

Commonwealth Court Affirms Award of Delay Damages to Government Contractor despite Contract’s “No Damages for Delay” Clause

The Commonwealth Court recently concluded that a contractor in a Pennsylvania public project can be entitled to delay damages, even if there is a “no damages for delay” clause in its contract, as long as the delay was caused by the government’s “active interference.” John Spearly Construction, Inc. v. Penns Valley School District, No. 2050 C.D. 2014, 2015 WL 4497726 (Pa. Commw. Ct. July 24, 2015).  The Commonwealth Court further concluded that the contractor’s failure to comply with the contract’s formal notice procedure was not fatal to its delay claim.  In Spearly, a school district entered into a contract with several contractors for the design and construction of a biomass boiler system. John Spearly Construction, Inc. was the contractor retained to construct the building that would house the boiler plant.  Spearly’s contract stated that an extension of the contract time shall be the sole remedy against the District or Architect for delays, “unless a delay is caused by the acts of [the District] constituting active interference, as defined under applicable law and subject to the limitations stated herein …”  It also defined “active interference” to exclude the following type of conduct: “[The District’s] exercise or failure to exercise any rights or remedies under the Contract Documents (including without limitation, order changes in the work, or directing suspension, rescheduling or correction of the work), regardless of the extent or frequency thereof, shall not be constructed as active interference with [Contractor’s] performance of the work.”

Under Pennsylvania law, a “no damages for delay” provision like this one is considered an exculpatory clause; subject to stringent standards in order to be enforceable. See Keystone Aeronautics Corp. v. R.J. Enstrom Corp., 499 F.2d 146 (3d Cir. 1974).  Thus, the party asserting it must prove, among other things, that the contract: (1) does not contravene public policy; and (2) relates solely to the private affairs of the contracting parties. See Valhal Corp. v. Sullivan Assocs., Inc., 44 F.3d 195 (3d Cir. 1995).  In Spearly, the Court refused to find that the District’s contract was only related to the “private affairs” of the contracting parties.  See also State Pub. Sch. Bldg. Auth. v. Goodea Constr. Co., 24 Pa. D. & C. 3d 648 (Pa. Com. Pl. 1981) (proper construction of public school buildings is a matter of interest to the public or state).  Therefore, the Court construed the contract against the District (i.e., the party seeking immunity) and held that delay damages were available to the contractor since the District delayed the issuance of several change orders.  The Commonwealth Court also held the District was properly attributed responsibility for the actions of “third-parties” where the District had control over the hiring and management of those third parties.  Specifically, a third-party contractor, whose work disturbed Spearly’s access to the work site, and the Architect’s lack of oversight was ultimately attributable to the District.  Finally, the Court concluded that Spearly was not barred from bringing its delay claims by its failure to adhere to the notice procedures for such claims required by the contract. The Commonwealth Court followed the United States Court of Federal Claims’ rationale that a narrow application of notice provisions is not appropriate where the government was aware of the delay.  See Hoel-Steffen Construction Co. v. United States, 456 F.2d 760 (Ct. Cl. 1972).  In light of this decision, contractors should look closely at the cause of any delay on the public construction project before concluding that a delay claim is barred by a “no damages for delay” clause.

West Virginia Amends Public Project Change Order Process then Adopts Emergency Rule Restoring Previous Process

West Virginia Amends Public Project Change Order Process then Adopts Emergency Rule Restoring Previous Process

On July 1, 2015, amendments to West Virginia’s laws governing public construction took effect.  Among the changes ushered in by those amendments was a new requirement that all change orders for public construction be approved by the Purchasing Division of the West Virginia State Government before the contractor could begin the change order work.  Unfortunately, because of the bureaucracy and related delays necessary to obtain approval of a change order by the Purchasing Division, the amended legislation effectively required lengthy stoppages of work on active construction sites and had the potential to result in costly and unfeasible delays at the expense of taxpayers.  Accordingly, less than a month the amendments took effect, on July 31, 2015, West Virginia Secretary of State Natalie Tennant signed Decision 8-15 approving an emergency rule clarifying that change orders related to government construction contracts do not require prior approval from the Purchasing Division.

Accordingly, after the issuance of the emergency rule, the procedure for change orders on public projects has returned to the status quo – public agencies are colored with the authority to approve change orders on behalf of the State but are required to file construction change orders with the Purchasing Division “in a timely fashion.”

A copy of the emergency rule, which includes a revised version of Title 148, Series 1 (i.e. the “Legislative Rule” governing public procurement in West Virginia) may be found here.

American Arbitration Association Revises Rules for Construction Arbitration

American Arbitration Association Revises Rules for Construction Arbitration

On July 1, 2015 the American Arbitration Association (“AAA”) issued revisions to its Construction Arbitration Rules and Mediation Procedures intended to address preferences of users for a more streamlined, cost-effective, and tightly managed arbitration process.  The AAA’s press release announcing the rule amendments, which became effectively immediately, states that the changes “reflect what the [AAA] learned from focus groups conducted across the country” structured to “ensure that all industry sectors had the opportunity to provide input.”

Perhaps the most significant change to the rules is the new “mediation step”, which provides subject to any party opting out, all cases with claims that exceed $100,000 must proceed to mediation at some point during the arbitration.  The new mediation step rule requires mediation in accordance with the AAA’s Construction Mediation Procedures and provides that unless specifically agreed to by all parties, the mediator may not be appointed as an arbitrator in the case.  According to the AAA, the mediation step is a “novel approach” to dispute resolution “intended to further assist the parties with the quick and economical resolution of their disputes.”

The amendments also include a new rule regarding a “Preliminary Management Hearing” that generally should take place very soon after the arbitrator is appointed.  The purpose of the hearing is to allow the parties and the arbitrator to “discuss and establish a procedure for the conduct of the arbitration that is appropriate to achieve a fair, efficient, and economical resolution of the dispute.”  The parties and the arbitrator have the option of conducting the preliminary management hearing in person or telephonically.

Other changes brought about by the amendments give the arbitrator a greater degree of control over the discovery process, the power to impose sanctions upon parties that fail to comply with the mandates of the arbitrator and the ability to allow parties to file dispositive motions.  Finally, the amendments contain a new mechanism that will allow the AAA to appoint an emergency arbitrator within one day to rule upon requests for emergency relief (but only for claims arising from contracts entered into on or after July 1, 2015) and contain time limits and filing requirements intended to streamline the consolidation and joinder processes.

More information about the AAA’s changes to its Construction Arbitration and Mediation Processes is available on the AAA’s website.

 

A subcontract term that conflicts with the Miller Act is ineffective in a suit against the surety on the payment bond. But, that right may be waived.

A subcontract term that conflicts with the Miller Act is ineffective in a suit against the surety on the payment bond. But, that right may be waived.

In United States ex rel. Marenalley Constr., LLC v. Zurich American Ins. Co., et al, Civil Action No. 14-4581 (E.D. Pa. March 13, 2015), a subcontractor filed suit under the Miller Act to recover against the prime contractor’s payment bond for additional work performed at the VA Medical Center in Philadelphia, PA. The Miller Act provides a subcontractor the right to bring suit against the surety that issued the prime contractor’s payment bond if the subcontractor is not paid within ninety days of the completion of its work.

Prior to the commencement of the action, the prime contractor sought additional compensation from the VA in an administrative proceeding, which included the additional compensation sought by the Subcontractor. The VA had not approved payment for the additional work at the time the subcontractor filed suit. The prime contractor and its surety moved to dismiss, or in the alternative, to stay the action pending the outcome of the prime contractor’s claim against the VA.

The court denied the motion to dismiss, and held that the administrative procedure between the prime contractor and VA provides no direct remedy to a subcontractor for any claim it has against the prime contractor. The Court explained, “When a subcontractor and prime contractor have a dispute about the amount due the subcontractor, that dispute is not resolved in the [administrative] proceeding.”

Finally, the Court refused to grant a stay. Citing to non-Miller Act cases, the prime contractor and surety argued that the surety’s liability is “derivative” of the prime contractors and the prime contractor’s liability is being determined in the administrative proceeding.  The Court disagreed, and explained that the surety’s “liability on a Miller Act bond must be at least coextensive with the obligations imposed by the Miller Act if the bond is to have its intended effect.” As such, “a subcontract term that conflicts with the Miller Act is ineffective in a suit against the surety on the payment bond.” The practical takeaway from this case is the reminder the Miller Act permits a subcontractor to seek payment against the payment bond once the requisite ninety-day period has elapsed regardless of other administrative procedures that may be contractually required. Those Miller Act rights, however, may be waived, if: (1) the waiver is in writing; (2) signed by the person whose right is waived; and (3) executed after the person whose rights are waived has furnished labor or materials for use in the performance of the contract.

Pennsylvania Department of Transportation Announces New P3 Project to Construct 37 CNG Fueling Stations

Pennsylvania Department of Transportation Announces New P3 Project to Construct 37 CNG Fueling Stations

On September 29, 2014, the Pennsylvania Department of Transportation (“PennDOT”) issued a press release announcing that the Pennsylvania Public-Private Partnership (“P3″) Board approved a project seeking a private partner to design, build, finance, operate and maintain compressed natural gas (“CNG”) filling stations at as many as 37 transit facilities throughout the state.  According to PennDOT, the CNG filling stations must be designed to provide CNG for public transportation vehicles as well as for private parties with CNG vehicles.  Once the fueling stations are build and operating, PennDOT will retain an unspecified portion of the fuel sales revenue for use in future capital projects.  The rest of the fuel sales revenue will presumably go directly to the private partner.

The press release indicates that PennDOT will soon issue a Request for Qualifications to solicit interested parties and that PennDOT expects to invite qualified teams to submit proposals as early as next year, with a project team selection coming as early as summer 2015.  Additional information regarding the P3 CNG Fueling Station Project is available at Pennsylvania’s P3 website.

PennDOT Shortlists Four Teams for its Rapid Bridge Replacement P3 Project

PennDOT Shortlists Four Teams for its Rapid Bridge Replacement P3 Project

The Pennsylvania Department of Transportation (“PennDOT”) has announced that based upon responses to PennDOT’s request for qualifications for its Rapid Bridge Replacement Project, a public-private partnership involving the construction of more than 500 bridges, it will invite four teams to submit proposals for the project.  Those four teams are:

  1.  Plenary Walsh Keystone Partners: Plenary Group, The Walsh Group, Granite Construction Company, HDR Engineering, HNTB Corporation and Infrastructure Corporation of America
  2. Keystone Bridge Partners: InfraRed Capital Partners, Kiewit, Parsons, The Allan A. Myers family of companies, DBi and American Infrastructure;
  3. Commonwealth Bridge Partners: John Laing Investments, Fluor, American Bridge Company, Traylor Bros. Inc., Joseph B. Fay Co., STV Incorporated and Infrastructure and Industrial Constructors;
  4. Pennsylvania Crossings: Meridiam, Lane Construction, AECOM, Trumbull, Wagman Companies and Cofiroute.

PennDOT expects to release the final project details and requirements to the four teams this summer and select a preferred proposal this fall.  Construction is anticipated to begin in the summer of 2015.

According to PennDOT, the selected team will manage the design, construction and maintenance for at least 500 bridges throughout the Commonwealth for yet-to-be determined number of years under one contract.  The team will be responsible for financing the effort and PennDOT will make payments based on the team’s adherence to the terms of the contract.

To learn more about the Rapid Bridge Replacement Project, you can visit PennDOT’s public-private partnership website.

 

 

AIA General Conditions Mediation Clause Covered Contractor’s Mechanics’ Lien Claim

AIA General Conditions Mediation Clause Covered Contractor’s Mechanics’ Lien Claim

The United States District Court for the District of Maryland recently interpreted the mediation clause in the AIA A201 -2007 “General Conditions of the Contract for Construction” to require mediation before proceeding with a mechanics’ lien claim.  Kane Builders S&D, Inc. v. Maryland Pharmacy, LLC, 2013 U.S. LEXIS 83432 (D. Md. June 13, 2013).  In Kane, the subcontractor and contractor used a form AIA contract as their agreement for the subcontractor to furnish labor and materials in the construction of a retail pharmacy.  The parties incorporated as part of the contract the AIA Document A201 – 2007 General Conditions.

The standard conditions in the AIA A201 include Section 15.2.8, which provides, “If a Claim relates to or is the subject of a mechanic’s lien, the party asserting such Claim may proceed in accordance with applicable law to comply with the lien notice or filing deadlines.”  Section 15.3.1, however, states, “Claims, disputes, or other matters in controversy arising out of or related to the Contract . . . shall be subject to mediation as a condition precedent to binding dispute resolution.”  Another relevant clause is Section 15.3.2, which provides that a request for mediation “may be made concurrently with the filing of binding dispute resolution proceedings but, in such event, mediation shall proceed in advance of binding dispute resolution proceedings, which shall be stayed pending mediation for a period of 60 days from the date of filing.”

The subcontractor filed a mechanics’ lien in state court for nonpayment, and the owner contended that mediation was a condition precedent to the subcontractor prosecuting its lien claim.  Distrct Court Judge Deborah K. Chasanow held that Section 15.3.1 is sufficiently broad to include mechanics’ lien claims.  The court also rejected the subcontractor’s argument that litigation does not constitute “binding dispute resolution” as that term is used in Section 15.3.1.  Therefore, the court concluded that mediation was a condition precedent to the subcontractor’s right to prosecute its mechanics’ lien claim.

Notwithstanding this point, the court declined to dismiss the action.  Judge Chasanow noted that Section 15.3.2 expressly contemplated that the subcontractor had the right file the lien claim while concurrently requesting mediation, and have the litigation stayed pending mediation.  The court reasoned that staying the litigation, rather than dismissing it, was appropriate.

The practical takeaway from this case is the reminder that if parties do not wish to subject a mechanics’ lien claim (or other specific types of claims) to mediation or another form of alternative dispute resolution provided for in the contract, the parties should expressly exclude lien claims from the mediation or ADR provisions.  Otherwise, the parties are at the mercy of the court to determine whether the claim falls within or outside of the ADR requirement, and awaiting the decision of the court on this matter will only serve to delay the ultimate resolution of the underlying dispute.

Allegheny County Could have as Many as 60 Bridges Constructed as Public-Private Partnership Projects

Allegheny County Could have as Many as 60 Bridges Constructed as Public-Private Partnership Projects

The Pittsburgh Post-Gazette recently published an article about how Pennsylvania’s Department of Transportation (“PennDOT”) plans to replace at least 500 decaying bridges across Pennsylvania via public-private partnerships (“P3”).  According to the article, nearly 60 of those bridges are located within Allegheny County, with another 23 in neighboring Westmoreland County and another 13 in Butler County.  The Post-Gazette reports that PennDOT hopes to get construction underway on 50 to 100 bridges in 2015 and that the party or parties with whom PennDOT contracts for the construction of the bridges will also maintain the new bridges for a period that may be as long as 40 years.

The entire Post-Gazette article is available here.

United States Supreme Court Delcares Choice of Forum Clauses Enforceable

United States Supreme Court Delcares Choice of Forum Clauses Enforceable

In June of 2013 we reported that the United States Supreme Court agreed to decide In re Atlantic Marine Construction Co. to resolve a split between the United States Courts of Appeals regarding whether a federal court must honor a forum selection clause in a construction contract by transferring the case to the forum so designated in the contract.

On October 9, 2013, the Supreme Court heard oral argument in the Atlantic Marine case.  Less than two months later, on December 3, 2013, the nation’s highest court issued an opinion declaring that upon motion of one of the parties, a federal district court should transfer a case to the forum selected in the contract “unless extraordinary circumstances unrelated to the convenience of the parties clearly disfavor the transfer.”

The Supreme Court’s Atlantic Marine opinion reaffirms the enforceability of choice of forum clauses and suggests that courts may only disregard the contractually designated forum for litigating disputes under exceptionally rare circumstances.  Accordingly, owner, contractors and subcontractors should pay particular attention to the choice of forum clauses in their contracts and subcontracts because federal courts now have a clear mandate that they must be enforced.

Federal Government Shutdown Having Limited Affect on Federal Highway Administration Construction, but Affecting Federal Contract Solicitation and Awards

Federal Government Shutdown Having Limited Affect on Federal Highway Administration Construction, but Affecting Federal Contract Solicitation and Awards

As the shutdown of the federal government enters its second week, its impact on federally funded construction projects has been somewhat muted because of the way that certain federal agencies receive their funding.  For example, because the Federal Highway Administration is funded by the Highway Trust Fund, which still has funding through the end of the 2014 fiscal year, the shutdown has virtually no impact on any Federal Highway Administration construction projects.  The Airport Improvement Program is also funded by a trust, and thus, the federal government shutdown will have much less of an impact on Airport Improvement Program construction projects.  Other agencies, including the Federal Transit Administration and the Federal Aviation Administration are not funded by a trust fund, and therefore, the government shutdown will have a much more significant impact on those agencies’ construction projects.

Overall, however, because funding has already been appropriated for most ongoing and already awarded direct federal construction projects, the federal government shutdown will have virtually no impact on ongoing and already awarded contracts.  Rather, the furloughs of non-essential government employees has suspended pending solicitations and awards, including task orders for existing multiple award contracts, until the shutdown comes to an end.

More information on the impact of the shutdown on federal construction contracts is available at the Association of General Contractors’ website.  The source of the information in this post is available here.

Association of General Contractors’ Website Has Resource Center for Contractors Affected by Government Shutdown

Association of General Contractors’ Website Has Resource Center for Contractors Affected by Government Shutdown

The Association of General Contractors has created a Resource Center to provide information to government contractors about the current federal government shutdown.  The Resource Center, which is available here, contains links to contingency plans drafted many different federal agencies detailing how the agency will likely proceed and operate in the event of a government shutdown.  While each agency’s contingency plan is intended to be informative rather than authoritative, the documents should provide some guidance for government contractors about the process for dealing with federal government agency construction project owners during the federal government shutdown.

 

New Law Removes Cap on Set-Asides for Contracts with Women-Owned Small Business

New Law Removes Cap on Set-Asides for Contracts with Women-Owned Small Business

In October 2010, the Small Business Administration implemented the Women-Owned Small Business Program, which authorized contracting officers for federal agencies to set aside certain federal contracts for eligible and qualified Women-Owned Small Businesses and Economically Disadvantaged Women-Owned Businesses. Under the program, however, those set-asides were capped at $6.5 million for manufacturing contracts and $4 million for all other contracts.

However, the 2013 National Defense Authorization Act, which President Obama signed into law earlier this year, removed the statutory limits for set-asides for Women-Owned Small Businesses and Economically Disadvantaged Women-Owned Businesses. Recently, the Small Business Administration issued an Interim Final Rule officially removing dollar value limits on set-asides for Women-Owned Small Businesses and Economically Disadvantaged Women-Owned Businesses. A copy of the new Interim Final Rule, which details the new parameters under which set-asides may be made, can be found by following this link.

 

Pennsylvania Federal Court Finds that Principal Has No Right to Assert Breach of FiduciaryDuty and Bad Faith Claims Against Surety

Pennsylvania Federal Court Finds that Principal Has No Right to Assert Breach of FiduciaryDuty and Bad Faith Claims Against Surety

The United States District Court for the Western District of Pennsylvania recently issued an opinion in a diversity action dismissing with prejudice a principal’s claims for tortious interference with a contractual relationship, breach of fiduciary duty and bad faith against its surety.

In Reginella Construction Company, Ltd. v. Travelers Casualty and Surety Company of America, Civ. A. No. 12-1047, 2013 WL 2404140 (W.D. Pa. May 31, 2013), Reginella Construction Company, Ltd (“Reginella”) sued its surety, Travelers Casualty and Surety Company of America (“Travelers”) for breach of fiduciary duty, tortious interference with a contractual relationship and bad faith. The court, however, granted Travelers Motion to Dismiss all claims against Travelers with prejudice.

Regarding Reginella’s breach of fiduciary duty claim, the court looked to Pennsylvania case law regarding sureties, insurers, and commercial guarantees, and concluded that (1) surety bond agreements are standard commercial contracts; (2) imposing a fiduciary duty relationship between parties to a contract is the exception rather than the rule; and (3) a surety is not an insurer.  Based upon these conclusions, the court predicted that the Pennsylvania Supreme Court would not find a fiduciary relationship between a surety and its principal.  Therefore, the court concluded that Travelers owed no fiduciary duty to Reginella.

The court then turned to Reginella’s tort claims (i.e. its bad faith and tortious interference with a contractual relationship claims) and held that Pennsylvania’s gist of the action doctrine barred Reginella’s ability to assert either claim. Specifically, Pennsylvania’s gist of the action doctrine bars tort claims (1) that arise solely from a contract between the parties; (2) where the duties allegedly breached were created and grounded in the contract itself; (3) where the liability stems from a contract; or (4) where the tort claim essentially duplicates a breach of contract claim or the success of which is wholly dependent on the terms of a contract. The court found that the relationship between Reginella and Travelers was purely contractual in nature, and therefore, the gist of the action contract barred Reginella’s tort claims.

Although the Pennsylvania Supreme Court has not yet ruled upon the issue, Reginella suggests and supports the notion that a principal’s only cause of action against its surety under Pennsylvania law is one for breach of contract. Therefore, pursuant to Reginella, the terms of the contract between a principal and its surety will strictly govern the relationship and obligations between the parties.

 

United States Supreme Court to Hear Case Regarding Enforceability of Forum Selection Clauses

United States Supreme Court to Hear Case Regarding Enforceability of Forum Selection Clauses

Construction subcontracts often contain “forum selection” clauses requiring that the parties to the contract settle all of their disputes in arbitration or litigation in some state that seems entirely unrelated to the construction project but happens to be the state where the general contractor maintains its home office.  These clauses provide economic and strategic benefits to the general contractor by eliminating or mitigating the travel expenses for key personnel and by requiring litigation in a court familiar to the contractor’s legal counsel.

This ability to contract for a “home field advantage” has been eroded by provisions included in some states’ recently enacted prompt payment laws (which require that all disputes by resolved by courts in the jurisdiction of the project location), and it was more recently rejected by the Court of Appeals for the Fifth Circuit in In re Atlantic Marine Construction Company, Inc.  In that case, the Fifth Circuit held that a subcontractor could file suit against a general contractor in Texas (where the project was located), despite a clause in the subcontract agreement requiring that all disputes arising from the contract be resolved in a specific federal court in Virginia.

The Fifth Circuit’s decision directly contradicts the majority of federal circuit courts, including the Second, Seventh, Eighth, Ninth, and Eleventh Circuits, all of which have held that a forum selection clause in a contract negotiated at arms’ length should be enforced by the federal courts. On April 1, 2013, United States Supreme Court agreed to review the split between the Circuit Courts on the choice of forum issue by granting certiorari for the Atlantic Marine case.  This nation’s highest Court will hold argument in case and decide it next term, which begins in October of this year.  We will post the Supreme Court’s ruling on this important case as soon as it is issued.

Pennsylvania Superior Court Decision Regarding Prejudgment Interest

Pennsylvania Superior Court Decision Regarding Prejudgment Interest

In the recent decision of Cresci v. Martin, the Pennsylvania Superior Court issued an opinion qualifying the rule regarding prejudgement interest for breach of a construction contract. In October of 2004, Cresci Construction Services, Inc. (“Cresci”) and James H. Martin (“Martin”) entered into a construction contract (the “Contract”) wherein Cresci agreed to build a home for Martin in exchange for $184,730. The Contract did NOT contain a liquidated damages provision in the event that Cresci caused delays in completing construction, nor did it contain a “no damages for delay” clause, meaning that Martin could sue for his actual damages in the event that Cresci was late in constructing the hom.

Construction of the Martin’s home did not go smoothly, and Martin sued to recover his alleged damages.  After a trial on the merits, the jury found that Cresci breached the Contract and entered a verdict awarding Martin $66,000.00. The jury’s verdict sheet did not subcategorize the amount of damages. After the verdict was entered, Martin filed post-trial motions seeking attorneys’ fees and prejudgment interest on the breach of contract damages. The trial court denied Martin’s motion, and Martin appealed to the Superior Court.

On appeal, the Superior Court affirmed. Regarding Martin’s claim for the prejudgment interest, the Superior Court explained that under Pennsylvania law, prejudgment interest is awarded automatically only when the damage resulting from the breach is liquidated at the time of breach. In all other circumstances, the decision whether to award prejudgment interest is left to the discretion of the trial court. The Superior Court concluded that because Martin’s damages were unliquidated, consequential damages (including items such as mortgage interest and the costs of maintaining two properties), an award of prejudgment interest on those damages was purely discretionary. The Superior Court found no abuse of discretion, and therefore affirmed the denial of prejudgment interest. The Cresci decision reinforces the significance of including liquidated damages provisions in construction contracts.

ConsensusDocs Releases New Design-Build Teaming Agreement

ConsensusDocs Releases New Design-Build Teaming Agreement

ConsensusDocs recently released its newest version of the 498 Design-Build Teaming Agreement.  The 498 Design-Build Teaming Agreement provides a standard contract for parties desiring to form a design-build team for the purposes of submitting a proposal to construct a design-build project.  According to ConsensusDocs, the New 498 Design-Build Teaming Agreement has the flexibility for design-build team members to include design professionals, constructors, and other contractors.  The new 498 Teaming Agreement is available for purchase on ConsensusDocs’ website.