ConstructLaw - January 2014

by Pepper Hamilton LLP

U.S. Supreme Court Holds Forum-Selection Clauses Are Presumptively Enforceable

Atl. Marine Constr. Co. v. United States Dist. Court
2013 U.S. LEXIS 8775 (U.S. 2013)

This action arose out of a forum-selection clause in a contract for a federal construction project. The U.S. Corps of Engineers contracted with Atlantic Marine Construction Company (“Atlantic”), a Virginia Corporation, to build a child development center at Fort Hood, a military base located in the western district of Texas. Atlantic then entered into a Subcontract Agreement (the “Subcontract”) with J-Crew Management, Inc. (“J-Crew”), a Texas corporation, to provide labor and materials. The Subcontract included a forum-selection clause, providing that disputes “shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division.” Following a dispute over payment, however, J-Crew sued Atlantic in the Western District of Texas.

Atlantic moved to dismiss the action under 28 U.S.C. § 1406(a) and Federal Rule of Civil Procedure 12(b)(3) for “wrong” or “improper” venue. In the alternative, Atlantic moved to transfer the action to Virginia pursuant to 28 U.S.C. § 1404(a) which provides that a district court may transfer a civil action for “the convenience of parties and witnesses” and to otherwise promote “the interest of justice.” The District Court denied Atlantic’s motion. It first held that section 1404(a) was the exclusive mechanism for enforcing a forum-selection clause if the forum the parties chose is federal. Second, the District Court held that Atlantic, as movant, bore the burden of establishing that a transfer would be appropriate under section 1404(a). After considering a “nonexhaustive and nonexclusive list of public and private interest factors,” the District Court found that Atlantic had not satisfied its burden. The District Court emphasized the convenience of the parties and witnesses—in particular the fact that most of the witnesses were in Texas and it would be inconvenient and expensive to secure witness testimony in Virginia—while finding that the parties’ forum-selection clause was only one factor that was not entitled to dispositive weight. The Fifth Circuit Court of Appeals denied Atlantic’s petition for a writ of mandamus, finding that the District Court had not abused its discretion in refusing to transfer the case. Atlantic sought review in the U.S. Supreme Court.

The Supreme Court granted certiorari to resolve a circuit court split between (1) a majority of circuits, including the Second, Seventh, Eighth, Ninth, and Eleventh, that have held that lawsuits brought in a federal district court different than that specified in a forum-selection clause are “improper” and should be dismissed; and (2) a minority of circuits, including the Third, Fifth (in this case), and Sixth, that have held that lawsuits brought in a federal district court different than that specified in a forum-selection clause are not “improper,” but rather, that the forum-selection clause is one of several factors that should be considered by the district court when deciding whether a case should be transferred to the selected forum.

In a unanimous decision, the Supreme Court sided with the minority of circuit courts but held that forum-selection clauses should be enforced unless “extraordinary circumstances unrelated to the convenience of the parties clearly disfavors a transfer.” In so holding, the Supreme Court set forth three standards to be applied by district courts.

First, a party that violates a contractual forum-selection clause bears the burden of proof. The Supreme Court reasoned that “when a plaintiff agrees by contract to bring suit only in a specified forum…the plaintiff has effectively exercised its ‘venue privilege’ before a dispute arises. Only that initial choice deserves deference, and the plaintiff must bear the burden of showing why the court should not transfer the case to the forum to which the parties agreed.” Second, the inconvenience to the party in violation of a contractual forum-selection clause bears no weight in the convenience analysis. Ordinarily, when a party seeks to transfer a case the court weighs a variety of private and public interests. The Supreme Court concluded that only public interest factors are to be considered because, by agreeing to a forum-selection clause, the parties contracted away their right to argue that the selected forum is inconvenient.

Third, the law of the parties’ agreed upon forum applies when determining whether to transfer a case. Usually, when determining whether to transfer a case, the court will apply the law of the jurisdiction in which the case was originally filed. However, in cases involving forum-selection clauses, the Supreme Court concluded that to do so would be “inequitable” and “encourage gamesmanship,” and thus the Supreme Court “rejcted[ed] the rule that the law of the court in which the plaintiff inappropriately filed suit should follow the case to a the forum contractually selected by the parties.”

Based on these three standards, the Supreme Court reversed the Fifth Circuit’s judgment and remanded for further consideration. While the Supreme Court agreed that section 1404(a) is the exclusive means for enforcing the forum-selection clause, it held that the lower court had applied the wrong standards when weighing the section 1404(a) factors. The Supreme Court reaffirmed that federal courts must enforce valid forum-selection clauses “in all but the most exceptional of cases.”

Finally, the Supreme Court also addressed the situation where the forum-selection clause chooses a state or foreign forum rather than a federal district court. Under these circumstances, section 1404(a) does not apply because it only permits transfer from one federal district to another. However, the Supreme Court found that in such cases, the common law doctrine of forum non convenience should be applied to dismiss the complaint in favor of the designated forum in the same way as the Supreme Court determined that section 1404(a) should be applied where there is a valid federal forum-selection clause.

Jeffery R. Mullen

Arizona Court of Appeals Rules Prompt Payment Act Does Not Apply To Design Professionals When Performing Normal Architectural and Engineering Services

RSP Architects, Ltd. v. Five Star Dev. Resort Communities, LLC
306 P.3d 93 (Ariz. Ct. App. 2013)

This action arose from a payment dispute on a construction project where an architectural firm, RSP Architects, Ltd. (“RSP”), contracted with a developer, Five Star Development Resort Communities, LLC (“Five Star”), to provide architectural services for a development known as the Palmeraie (the “Project”). Pursuant to the architectural services contract (the “Architectural Agreement”), RSP was tasked with several different duties, including “construction administration,” “overall coordination,” and “conceptual design” related to the Project. For its services, RSP was to receive approximately $3,000,000. Prior to completion, however, RSP ceased work on the Project and sued Five Star, alleging, among other claims, a violation of Arizona’s Prompt Payment Act, A.R.S. § 32-1129 et seq. (the “PPA”).

The PPA provides that a licensed contractor, subcontractor or material supplier that has performed according to a “construction contract” is entitled to prompt payment from the party with which it contracted. If applicable, the owner or upstream contractor has fourteen (14) days to issue a written objection to the invoice or else it is deemed certified and approved. Once certified and approved, the PPA requires payment to be made within seven (7) days. Accordingly, RSP argued that because Five Star did not timely disapprove the invoices RSP sent between December 2008 and May 2009, they were deemed certified and approved and Five Star violated the PPA by failing to transmit payment.

On cross-motions for summary judgment, the superior court held the PPA does not apply to a contract between an owner and an architect and entered summary judgment in Five Star’s favor on that claim. RSP appealed the superior court’s decision and argued to the Arizona Court of Appeals that the Architectural Agreement fell within the PPA because it “relat[es] to the development or improvement of land, within the definition of “construction contract.” Thus, the issue before the Court of Appeals was whether the Architectural Agreement was a “construction contract” within the meaning of the PPA. The PPA defines “construction contract” as “a written or oral agreement relating to the construction, alteration, repair, maintenance, moving or demolition of any building, structure or improvement or relating to the excavation of or other development or improvement to land.”

The Court applied what it called “common sense” and stated that there must be some bounds to the breadth of the PPA. To read the PPA as argued by RSP, the Court reasoned, the PPA would apply to any agreement touching construction, such as a contract with a food vendor to bring a lunch truck to the construction site every day or the retainer agreement between a contractor and his zoning attorney. The Court was unwilling to extend the PPA to include everyone who is involved in any way in construction.

Because the scope of the PPA was unclear to the Court from its plain language, it applied methods of statutory interpretation and looked to the legislative history of the PPA and elsewhere in Arizona law for clarity. First, the Court noted that the PPA is located in Chapter 10 of Title 32 of Arizona Revised Statutes (governing contractors), while Chapter 1 of Title 32 separately regulates architects. Indeed, the Court found that A.R.S. § 32-1121(a)(7) specifically states that Chapter 10 “shall not be construed to apply to” an agreement for architectural services. Second, the Court pointed out that Arizona’s anti-indemnity statute, A.R.S. § 32-1159, passed seven years prior to the PPA, uses a virtually identical definition of “construction contract.” However, the anti-indemnity statute also contains a definition for an “architect-engineer professional service contract.” Accordingly, the Court found that the “legislature at that time plainly intended to bring design professionals within the protection of the anti-indemnity act. It chose to do so not by relying on a single broad definition of ‘construction contract’ that might encompass architects, but by crafting a specific definition of ‘architect-engineer professional service contract’ to which the anti-indemnity act would apply.” Therefore, the Court reasoned that adopting RSP’s contention that the PPA’s definition of “construction contract” includes architectural services contracts would render A.R.S. § 32-1559 meaningless, because every architectural service contract would already qualify as a “construction contract.”

In further support of its position, RSP also argued that the Architectural Agreement fell within the definition of “construction contract” because it required RSP to do more than simply create drawings. The Architectural Agreement indicated that RSP “will provide conceptual design, schematic design, design documents, construction documents and construction administration services.” However, the Court held that nothing within the Architectural Agreement imposed “construction management” duties sufficient to potentially fall within the PPA. The Court reasoned that the construction administration services RSP contracted to perform were not beyond those normally performed by architects. Therefore, the court upheld the lower court’s ruling that the Architectural Agreement was not a “construction contract” to which the PPA applied.

Jeffery R. Mullen

Oregon Court of Appeals Holds General Contractor Cannot Offset Costs of Repairing Subcontractor’s Defective Work After Subcontractor Is Terminated “For Convenience” Without an Opportunity to Cure

Shelter Prods. v. Steelwood Constr., Inc.
307 P.3d 449 (Or. Ct. App. 2013)

This action arose from a payment dispute between a general contractor, Catamount Constructors, Inc. (“Catamount”), and one of its subcontractors, Steelwood Construction, Inc. (“Steelwood”). Catamount contracted with Steelwood (the “Subcontract”) to provide materials and perform work for the construction of a Home Depot distribution center in Salem, Oregon (the “Project”). Included in the Subcontract was a provision that allowed Catamount to terminate the Subcontract for convenience and “without cause.” In the event the Subcontract was terminated for convenience, Steelwood would be entitled to the cost of all work performed on the Project as of the date of termination.

After Steelwood delivered all materials required for the Project and commenced performance under the Subcontract, Catamount sent Steelwood a letter outlining concerns it had about the progress and quality of Steelwood’s work. The letter concluded that “[o]n Monday morning we will evaluate where you are and how to best assist you in meeting your contractual obligations.” However, before that meeting occurred, Catamount elected to terminate the Subcontract for convenience, and Steelwood vacated the site.

After it terminated Steelwood for convenience, Catamount refused to pay Steelwood for materials delivered or work performed prior to termination. Thereafter, Steelwood recorded a construction lien on the Project. Catamount, for its part, cleaned up debris left by Steelwood on the Project and engaged another subcontractor to complete Steelwood’s work under the Subcontract. In addition to completing the work that would have been performed by Steelwood, Catamount contended that it incurred $75,440 in conjunction with the cleanup and the repair of Steelwood’s defective work. However, after terminating the Subcontract, Catamount did not provide Steelwood with notice that its work was defective, nor did it give Steelwood an opportunity to enter the work site with respect to any defects in the work it performed.

Steelwood sued Catamount to recover amounts owed and alleged claims for breach of contract and construction lien foreclosure. Catamount counterclaimed for the costs incurred correcting allegedly deficient work. In the ensuing litigation, Steelwood argued that Catamount’s claim for costs incurred correcting allegedly deficient work could not be set off from amounts otherwise due and owing because Catamount terminated the Subcontract for convenience not default, and Steelwood was never given any notice or opportunity to correct the work. The trial court agreed and, on summary judgment, entered a limited judgment in Steelwood’s favor. The trial court reasoned that when the contract was terminated “for convenience,” Steelwood should have been given the opportunity to cure the defect and it was not given such an opportunity. Catamount appealed.

On appeal, Catamount argued that even though it terminated the Subcontract for convenience, it continues to have a “right in breach of contract against Steelwood for its breach of the Subcontract by performing its work in a deficient manner.” Thus, Catamount contended, in part, that it was entitled to offset amounts owed to Steelwood with costs it incurred to repair Steelwood’s defective work. Steelwood, on the other hand, maintained that a party cannot assert an offset after it has terminated for convenience.

In a matter of first impression in Oregon, the Court of Appeals agreed with the trial court and Steelwood and held that “in the absence of an opportunity to correct allegedly defective work… where a party has terminated a contract for convenience, that party may not then counterclaim for the cost of curing any alleged default.” The Court of Appeals looked to the Subcontract and found that, “the text of the termination for convenience clause does not, under the circumstances of this case, permit the prime to both terminate the subcontractor without cause and subsequently proceed against the subcontractor as if it had terminated the agreement for cause.” The Court reasoned that Steelwood would have been given an opportunity to cure had the contract been terminated for cause and, therefore, Catamount could not use an offset to reduce the damages where the Subcontract was terminated for convenience. Accordingly, the Court of Appeals reaffirmed the trial court’s decision to deny Catamount its defective-work damages and upheld the limited judgment in Steelwood’s favor.

Jeffery R. Mullen

Pennsylvania Commonwealth Court Interprets Payment Bond Language to Waive Bond Law “Safe Harbor” Against Double Payment

Berks Products Corp. v. Arch Ins. Co.
72 A.3d 315 (Pa. Commw. Ct. 2013)

Note: A petition for allowance of appeal from this decision has been filed with the Pennsylvania Supreme Court, but has not been acted upon as of January14, 2014.

This action arose from a payment bond secured by a general contractor for work performed on a public school building. Skepton Construction, Inc. (“Skepton”) entered into an agreement with the Wilson Area School District (the “District”) to be the general contractor for the construction of a new intermediate school (the “Project”). Under its agreement with the District, Skepton was required to secure a payment bond in order to guarantee its payment obligations. Skepton secured its payment bond through Arch Insurance Company (“Arch”). The payment bond (the “Bond”), in relevant part, stated: “[I]f the Principal and any subcontractor of the Principal to whom any portion of the work under the Agreement shall be subcontracted,…promptly shall pay or cause to be paid, in full, all money which may be due any claimant supplying labor or materials…, then this Bond shall be void; otherwise this Bond shall be and shall remain in force and effect.”

Skepton thereafter entered into a subcontract with R.A. Tauber, Inc. (“Tauber”) for the concrete work on the Project. Tauber subsequently contracted with Berks Products Corporation (“Berks”) to provide materials for its subcontract work. Tauber, however, failed to pay for $52,679.26 worth of materials. Skepton later terminated its subcontract with Tauber, and Tauber subsequently filed for bankruptcy. As a result, Berks filed suit against Arch seeking to recoup the money owed under the Bond for materials supplied and incorporated into the Project. In defense, Arch asserted that its principal, Skepton, had made full payment to Tauber for the materials, which acts as a complete bar to liability under section 3939(b) of the Commonwealth Procurement Code (the “Code”). Section 3939(b) of the Code, also known as the “safe harbor” provision, provides that “[o]nce a contractor has made payment to the subcontractor according to the provisions of this subchapter, future claims for payment against the contractor or the contractor’s surety by parties owed payment from the subcontractor which has been paid shall be barred.” Berks moved for summary judgment with the trial court and argued that Arch waived the “safe harbor” provision based on the language of the Bond. The trial court agreed and entered summary judgment in favor of Berks. Arch appealed to the Pennsylvania Commonwealth Court.

On appeal, Arch argued that the safe harbor provision should apply and that the trial court’s ruling violated Pennsylvania’s Public Works Bond Law (the “Bond Law”). Arch contended that the terminology of the Bond is standard for all payment bonds posted for public works construction projects and essentially mirrors provisions found in the Bond Law. While the Court agreed that the safe harbor provision is applicable, it held that the specific language of the Bond provides greater protection than that called for in the Bond Law. The Court stated that “[w]hile the terminology utilized by Arch does serve the purpose of…the Bond Law, i.e., to protect claimants supplying labor or materials for a project, this terminology goes further to ensure that the payment bond will remain ‘in force and effect’ until such time as both the principal and any of its subcontractors makes full payment for any labor or materials supplied for the school project.” Accordingly, the Court found that based on the language of the Bond, the safe harbor provision of the Code could be waived and such waiver is not inconsistent with the Bond Law. Arch next argued that the trial court erred in concluding that the language of the Bond effectively waived the safe harbor provision of the Code. The Court noted that while the safe harbor provision would typically protect a surety against such claims, the specific language of the Bond, which required Skepton to assure that all material men such as Berks were paid, served as a waiver of the safe harbor provision, thereby exposing Arch to liability under the Bond for any such unpaid amounts. The Court concluded that the critical language in the Bond imposed an obligation upon Skepton and its subcontractors to ensure that any claimant supplying labor or materials was paid in full. Therefore, the Court held that the trial court committed no error in finding that the language of the Bond waived the protections of the safe harbor provision. Accordingly, the Court affirmed summary judgment in favor of Berks, finding Arch liable under the Bond.

Jeffery R. Mullen

U.S. District Court in Maryland Holds One-Year Statute of Limitations Under Miller Act Did Not Commence Until After Required Testing Performed by Subcontractor

United States of America ex rel D&M General Contracting, Inc v. Arch Ins. Co.
2013 U.S. Dist. LEXIS 111260 (D. Md. Aug. 5, 2013)

This action arose out of subcontractor’s claim for increased costs allegedly incurred as a result of delays on a federal government project. NTVI Enterprises, LLC (“NTVI”), as general contractor, entered into an agreement with the government to upgrade the chiller plant for a National Security Agency facility (the “Project”). NTVI posted a labor and material payment bond for the Project (the “Bond”) issued by Arch Insurance Company (“Arch”). NTVI then subcontracted with D&M General Contracting, Inc. (“D&M”) to perform electrical work on the Project. Midway through the Project, D&M alleged that the sequence of its work was altered by the government resulting in an additional $206,674.07 in costs to D&M. Pursuant to the Miller Act, D&M filed suit against Arch, as surety, to recover under the Bond its increased costs allegedly incurred.

Arch moved for summary judgment and argued that the Miller Act claim was barred by the statute of limitations. Under the Miller Act, subcontractors have a federal cause of action to collect on a surety bond, but such an action “must be brought no later than one year after the day on which the last of the labor was performed or material was supplied by the person bringing the action.” D&M filed its claim on January 8, 2013.

Arch first argued that D&M’s claim was untimely because it had not performed “significant” work or work that was “crucial to the operation of the Project” within one year of bringing suit. The Court, however, held that this was not the applicable standard. The Court stated that “[t]he standard in this ‘and the majority of circuits’…is only whether ‘the work was performed and the material supplied as part of the original contract or for the purposes of correcting defects or making repairs following inspection of the Project.’”

Arch insisted that October 27, 2011, over fourteen months prior to the January 8, 2013 filing of D&M’s claim, was the last date on which D&M performed “labor under the contract.” In defense of its claim, D&M adduced evidence showing that in January and March, within one year of bringing suit, it conducted (1) “black start testing and commissioning” which it contended “was an inspection and testing requirement of the base contract”; (2) a lighting inspection “required by the base contract”; (3) the installation of a surge protector during the inspection required by the original contract; (4) the removal of a previously installed function on certain breakers at the request of the government; and (5) a modification to the fire alarm system and final testing of the system as directed by the government. Nonetheless, Arch insisted that these items were remedial or corrective and merely ancillary to the original subcontract and, thus, they could not be used in calculating the statute of limitations period.

The Court agreed with Arch that the last two items may well be remedial or corrective given that they appeared to be secondary projects that were completed after inspection at the government’s request, and not during D&M’s initial completion of its contractual obligations. However, the Court found that the first three items “may have been work ‘performed…as a part of the original contract,’ even though the work appear[ed] to have been primarily in the nature of inspections and testing.” The Court reasoned that while the work was not necessarily principal labor under the subcontract, it was still part of D&M’s original contractual charge and did not occur “following inspection” for the purpose of remediation or repair. The Court surveyed other district Court decisions addressing the issue and determined that testing conducted by a contractor that is part of the initial completion of a subcontract is not “remedial” and can be counted in calculating the statute of limitations. Therefore, the Court found that a genuine issue of material fact remained as to whether D&M’s work was “part of the original contract” such that the one-year statute of limitations did not begin until the work was completed. If so, the Court concluded, D&M’s Miller Act claim would be timely. Accordingly, the Court denied Arch’s motion for summary judgment.

Jeffery R. Mullen

Court of Federal Claims Holds Contract Term Prescribing Adjustment for Variances Does Not Bar Claim for Breach of Contract Based on Negligent Estimates

Ravens Group, Inc. v. United States
2013 U.S. Claims LEXIS 979 (Fed. Cl. 2013)

This action arose out of a contractor’s claim for additional compensation for unanticipated work. The U.S. Army (the “Government”) solicited private contractors to provide the maintenance and repair services for General and Flag Officers Quarters (“GFOQ”) at Fort Myers, Virginia and Fort McNair, Washington D.C. GFOQ is military housing specifically designated for senior officers of the military and their families. Traditionally, the Government used “in-house” personnel to respond to the majority of the maintenance and repair service calls at GFOQ housing. The solicitation from private contractors marked a new initiative in which the service calls at these two bases would be handled exclusively by a private contractor.

Because it was a new initiative, the Government sought the assistance of The Ravens Group, Inc. (“TRG”) to help draft the performance work statement (the “PWS”). TRG was one of the private contractors that filled in when the in-house government personnel were unavailable or unable to perform the required services. In developing the PWS, TRG asked the Government for access to military service call records for GFOQ housing at both bases. TRG wanted historical services data to prepare the PWS as well as its own bid proposal for the work. In recognition of the need for some number to use in preparing the PWS, and without locating historical records, the Government decided that they “would come up with a number as far as service calls to be performed.” Accordingly, during pre-contract discussions, the Government orally informed TRG that it could expect fifty (50) monthly service calls and one (1) or two (2) emergency calls per year.

TRG relied on this estimate in preparing its bid of $15,000 per month for service calls under the fixed price portion of the contract and was subsequently awarded the contract. Shortly after the contract was awarded, however, TRG began responding to over ninety (90) service calls and ten (10) emergency calls per month. Because of the severe underestimation of the workload, TRG proposed an increase in the fixed price for service calls from $15,000 to $102,675 per month. After the parties failed to reach an agreement TRG submitted a claim and request for a contracting officer’s (“CO’s”) final decision. The CO, however, only agreed to pay approximately $55,000 to TRG. TRG filed suit in the Federal Court of Claims alleging, among other claims, that because the government provided it misleading estimates and breached the implied duty of good faith and fair dealing, TRG was entitled to damages.

The Government moved for summary judgment and argued, in part, that TRG was barred from recovering any damages for breach of contract because the contract contained a variance and equitable adjustment provision, which provided a formula which TRG specified the adjustments to compensation to be made for hours expended beyond the coverage of the monthly $15,000 fixed price for service calls. The Court disagreed, and found “that the contract’s variance and equitable adjustment clause served only to protect the [G]overnment from unforeseen circumstances at the time of contract formation. It did not, however, excuse the [G]overnment if it provided a negligent or misleading estimate to [TRG].” The Court reasoned that the Government could not provide inaccurate estimates and then be allowed to bar an equitable recovery by arguing that the resulting damages fall within the contract’s variance and equitable adjustment provision. The court held that there was a genuine issue as to whether the estimates supplied pre-contract were negligently made. Moreover, the Court found that “[t]he Federal Circuit has made plain…that such provisions for equitable adjustments do not necessarily bar other measures of damages in cases where the court finds a breach.” Therefore, the Court held that the Government could not successfully use the contract’s variance and equitable adjustment provision to preclude TRG from the opportunity to present the merits of its negligent estimate - breach of contract case. Accordingly, the Court concluded that summary judgment on this ground was not proper.

Jeffery R. Mullen

U.S. District Court in Maryland Holds Work Performed After Termination Does Not Delay Commencement of One-Year Miller Act Statute of Limitations

United States ex rel. Tymatt Indus. v. Allen & Shariff Constr. Servs.
2013 U.S. Dist. LEXIS 114015 (D. Md. Aug. 13, 2013)

This action arose out of a subcontractor’s Miller Act claim for unpaid contract balances on a federal construction project. Allen & Shariff Construction Services, LLC (“Allen & Shariff”) was the prime contractor on a federal contract for the construction of a dam in Bethesda, Maryland, and related remediation (the “Project”). United States Security Company (“USSC”) was the surety on the Miller Act payment bond for the Project. Allen & Shariff subcontracted with Tymatt Industries, Inc. (“Tymatt”) to perform work on the Project (the “Subcontract”). The Subcontract contained a default provision stating that “should Tymatt fail to perform, after giving three days written notice Allen & Shariff had the option to terminate the [S]ubcontract for default if the defective performance was not cured.” Allen & Shariff issued three such notices to Tymatt, the last of which was issued on November 11, 2011. When Tymatt failed to cure, USSC sent Tymatt a termination notice on November 18, 2011 stating that the “[S]ubcontract…has been terminated due to lack of performance effective immediately.” Additionally, Allen & Shariff notified Tymatt that its “base access privilege [would] be terminated on November 23, 2011,” and requested that its equipment be removed prior to that date. Tymatt subsequently alleged that Allen & Shariff failed to pay $107,665.26 in amounts owed for work performed under the Subcontract. On Monday, November 26, 2012, Tymatt filed a Miller Act claim against USSC, as surety, to recover the monies allegedly due and owing.

The Miller Act authorizes any “person that has furnished labor or material in carrying out work” under a federal contract and who “has not been paid in full within 90 days after the day on which the person did or performed the last of the labor or furnished or supplied the materials” to bring “a civil action on the payment bond.” The Miller Act contains a limitations provision, which states: “An action brought under this subsection must be brought no later than one year after the day on which the last of the labor was performed or material was supplied by the person bringing the action.” In its complaint, Tymatt claimed that the “date on which the last labor was performed and equipment supplied to [Allen & Shariff] by [Tymatt] was November 25, 2011.”

USSC contended that Tymatt’s action was time-barred and moved for summary judgment. USSC disputed Tymatt’s allegation that its last day of work on the Project was November 25, 2011. Instead, they asserted that “Tymatt’s last day of work was either November 17, 2011, the last day of productive work by Tymatt on the site, or November 22, 1011, the day that Tymatt began to remove [its] equipment from the site.” However, USSC argued that even assuming the truth of Tymatt’s allegation that its last day of work was November 25, 2011, Tymatt’s claim nevertheless is time-barred on its face under the Miller Act’s one-year statute of limitations, because Tymatt filed suit on November 26, 2011—one year and one day after its alleged last day of work. Tymatt countered that Rule 6(a) of the Federal Rules of Civil Procedure applied and extended the one-year period in this circumstance because November 25, 2012 (the one-year anniversary of November 25, 2011) fell on a Sunday. Rule 6(a) provides that, “if the last day [of a given time period] is a Saturday, Sunday, or legal holiday, the period continues to run until the end of the next day that is not a Saturday, Sunday, or legal holiday.” The Court agreed with Tymatt and rejected USSC’s proposition that Rule 6(a) does not apply to the Miller Act’s limitations period. The Court held that consistent with Fourth Circuit precedent, Rule 6(a), applied by its terms, inter alia, “in computing any time specified…in any statute that does not specify a method of computing time.” Therefore, because Tymatt alleged that the day on which the last of the labor was performed or material supplied was on a Sunday, and because the Miller Act does not specify a method of computing time, the Court concluded that “the period continue[d] to run until the next day that is not a Saturday, Sunday or legal holiday,” which was Monday, November 26, 2012, the day Tymatt filed its claim.

In the alternative, USSC argued that Tymatt’s claim was still untimely because Tymatt’s last day of work on the Project was actually earlier than November 25, 2011. USSC contended that while Tymatt’s personnel were present at the Project site as late as November 25, 2011, a subcontractors mere presence on the work site is insufficient to constitute the “perform[ance]” of “labor” or the “suppl[y]” of “materials,” within the meaning of the Miller Act’s statute of limitations provision. The Court agreed. The Court began its analysis by stating the Fourth Circuits “well established rule” that, to determine the time at which the Miller Act’s limitation period begins, the court must consider “whether the work was performed and material supplied as a ‘part of the original contract’ or for the ‘purpose of correcting defects or making repairs following inspection of the Project.’” The Court clarified that the Fourth Circuit’s interpretation of the Miller Act’s “last of the labor” language turns on a distinction between “performance of the contract, on the one hand, and correction or repair, on the other…[C]ontract work sets the starting-point for the limitations period, whereas corrections and repairs do not.”

Applying that standard to the facts, the Court held that, “within the meaning of the Miller Act, it is impossible for a subcontractor to undertake labor in ‘performance of a contract’ when the subcontractor’s contract has been terminated by the prime contractor.” The Court reasoned that the only evidence provided as to what was done by Tymatt on or after November 25, 2011, with reference to the Miller Act limitations period, indicates that the Subcontract was terminated as of November 18, 2011. The Court determined the fact “[t]hat Tymatt was authorized to remove materials from the site through November 23, 2011, does not equate to providing work or materials. When a subcontractor has been terminated, the provision of a brief period of time for removal of its equipment from the job site” does not equate to labor performed or material supplied that was “part of the original contract.” Therefore, the Court concluded that as a matter of law, there was no genuine dispute of material fact that Tymatt’s last day of work on the Project occurred prior to November 25, 2011. Accordingly, the Court granted summary judgment in favor of USSC.

Jeffery R. Mullen

U.S. District Court in Puerto Rico, Applying Connecticut Law, Considers Application of Notice Requirements to Termination of Joint Subcontractors

Fed. Ins. Co. v. Empresas Sabaer, Inc.
2013 U.S. Dist. LEXIS 112930 (D.P.R. Aug. 9, 2013)

This action arose out of a surety’s claim for expenses incurred for correcting a subcontractor’s defective work. DTC Engineering and Constructors, LLC (“DTC”) and the U.S. Army Corps of Engineers (the “Corps”) entered into a contract for the design and construction of the Armed Forces Reserve Center at Fort Buchanan, located in Guaynabo, Puerto Rico. Federal Insurance Company (“Federal”) and DTC subscribed to a payment and performance bond as surety and principal, respectively, naming the government as obligee. DTC subsequently entered into a subcontract (the “Subcontract”) with Empresas Sabaer, Inc. (“Sabaer”) and BBS Developers, S.E. (“BBS”) (collectively the “Subcontractors”). The Subcontract provided that Sabaer was required to complete the work under Subcontract, while BBS was responsible for providing technical and economic support. United Surety and Indemnity Co. (“USIC”) and the Subcontractors, as surety and principal, respectively, subscribed to a payment and performance bond and named DTC as obligee. DTC assigned to Federal all of its rights emerging from the Subcontract and USIC’s bond.

Federal exercised its right to complete the Project and executed a takeover agreement with the Corps and DTC. On October 18, 2011, Federal notified Sabaer, USIC, and BBS of “deficiencies in the form of an incorrectly installed silt fence and concrete pads that were rejected by quality control.” On the same day, Federal informed Sabaer, USIC, and BBS that it “was considering declaring them in default of the Subcontract” and requested a conference with them to discuss completion of their contractual obligations. However, Federal sent the letter to Sabaer and BBS to their addresses listed on their performance bond, and not their addresses listed on the Subcontract.

On October 26, 2011, Federal sent Sabaer another letter expressing its desire to meet with representatives from Sabaer and USIC to discuss the allegedly uncured deficiencies. On November 10, 2011, Federal sent letters to USIC and Sabaer at their contractual addresses of record stating that Federal intended to formally terminate Sabaer for default pursuant to the Subcontract. On November 15, 2011, Federal formally declared Sabaer in default by letter addressed to USIC, providing Sabaer and BBS with carbon copies by mail. Federal then filed suit against the Subcontractors to recover $286,233.62 in expenses incurred to correct Sabaer’s deficient work. In defense, Sabaer contended that Federal never provided BBS with the contractually required notice prior to the termination for default because the correspondence was neither addressed to BBS nor sent to the address listed in the Subcontract. Both Federal and the Subcontractors moved for summary judgment.

To resolve whether Sabaer and BBS were properly notified, the Court first looked to the terms of the Subcontract. Under the “Subcontractor’s Failure to Perform” section, Federal could terminate for default the Subcontractors upon three days written notice of the Subcontractors’ failure to perform, unless the condition specified in such notice was eliminated within the three day period. Under the “Notice” section, the Subcontract stated that “[a]ll notices shall be addressed to the Parties at the addresses set out herein, and shall be considered as delivered when postmarked, if dispatched by registered mail, or when received in all other cases, including facsimiles.” “Parties” was a defined term in the Subcontract and included DTC, BBS and Sabaer. The address set out in the Subcontract for both BBS and Sabaer was 65 Infanteria Station, San Juan, Puerto Rico.

The Court then looked to the letters sent by Federal to determine whether they provided sufficient notice. The Court concluded that Sabaer received letters at the Infanteria Station address listed under the Subcontract, and thus had actual notice of Federal’s intent to terminate due to default. The Court, however, determined that no such notice was provided to BBS. The October 18th and November 15th letters were sent to BBS at the address of Calle Lepanto URB, El Alamein, San Juan, Puerto Rico. While this address was listed as BBS’s address on the performance bond, the Subcontract required that notice be sent to the Infanteria Station address.

Nonetheless, applying Connecticut law as was called for by the Subcontract’s choice of law provision, the Court held that Federal adequately notified BBS. The Court specified: “The contract plainly states that notice shall be provided to both BBS and Sabaer in writing at the Infanteria Station address on the Subcontract. Plaintiffs did not do this. Thus, the inquiry should cease, but Connecticut law holds otherwise.” The Court traced the history of Connecticut and Second Circuit jurisprudence on the matter, dating back to a 1914 Connecticut Supreme Court case holding that notice to one joint contractor sufficed as notice to a second joint contractor. The Court found that “BBS’s agreements with Sabaer and its actions during the life of the Subcontract reveal that it was inextricably intertwined with and reliant upon Sabaer” and that “Sabaer ostensibly performed all of the duties under the Subcontract.” Thus, consistent with Connecticut precedent, the Court held that notice to Sabaer conveyed notice to BBS with respect to matters affecting their joint obligation, irrespective of whether BBS actually received notice.

Further the Court found that Federal’s failure to send notice to BBS at the Infanteria Station address is overcome not only by Connecticut’s notice-to-one, notice-to-both rule, but also by the Subcontracts requirement that the Subcontractors subscribe to a performance bond in which the Subcontractor’s included a second address to which Federal sent notice. The Court found that in Connecticut, “[w]here the question whether proper notice was given depends on the construction of a written instrument or the circumstance are such as to lead to only one reasonable conclusion, it will be one of law, but where the conclusion involves the effect of various circumstances capable of diverse interpretation, it is necessarily one of fact for the trier.” Because the Subcontract contemplated submission of a performance bond, BBS provided its address at the Calle Lepanto location on the bond, and the bond was signed subsequent to the Subcontract, the Court concluded that notice was properly sent to that address. The Court reasoned that “no reasonable fact finder could conclude that notice was improper and the court must adhere to Connecticut’s interpretation of what constitutes proper notice.” Therefore, the Court determined notice was properly given and granted summary judgment in favor of Federal.

Jeffery R. Mullen

Court of Federal Claims Holds Government Abused Discretion in Terminating Contract for Convenience; Also Finds Contractor Liable for Violations of the False Claims Act

Gulf Group Gen. Enters. Co. W.L.L. v. United States
2013 U.S. Claims LEXIS 899 (Fed. Cl. July 2, 2013)

This action arose from a contractor’s claim that the U.S. Army (the “Army” or the “Government”) abused its discretion in terminating contracts for its convenience. In September 2004, Gulf Group General Enterprises Co. W.L.L. (“Gulf Group”) entered into four contracts worth approximately $15.8 million with the Army to provide cleanup and sanitation services in Kuwait. Three of the contracts—the camp package master blanket purchase agreement for provisions (the “BPA contract”), the latrine contract, and the dumpster contract—were terminated by the Army for its convenience within a month after they were awarded. The fourth contract, for bottled water distribution (the “bottled water contract”), was not terminated and instead extended into 2005.

In December 2005, Gulf Group submitted a series of claims to the Government for losses it allegedly incurred because of the termination of the three contracts and for losses from delays in bottled water deliveries it alleged were caused by the Government’s requirement that military convoys escort its delivery trucks into Iraq. After its claims were denied, Gulf Group filed four separate complaints with the Federal Court of Claims in 2007 that were subsequently consolidated in 2008. Gulf Group’s complaints alleged abuse of discretion and arbitrary and capricious action by the Army concerning the terminations, and, therefore, breaches of the BPA contract, the latrine contract, and the dumpster contract. Gulf Group further asserted that the Government violated its duty of good faith and fair dealing by causing delays for the delivery of Gulf Group’s bottled water pursuant to the bottled water contract.

In response, the Government asserted fraud-related counterclaims and affirmative defenses under the False Claims Act alleging that Gulf Group knowingly submitted false or fraudulent claims to the Government under the four contracts. The Government contended that Gulf Group submitted claims under the four contracts for an amount significantly greater than what was owed, and that, under the antifraud provision of the Contract Disputes Act, Gulf Group had to pay the Government the money it claimed which is not supported, plus the Government’s costs in reviewing the claims.

The Court first considered whether Gulf Group had “knowledge,” as defined by the False Claims Act to include “reckless disregard,” that the claims Gulf Group submitted to the Government were false or fraudulent. All invoices submitted by Gulf Group were reviewed, signed and submitted by Gulf Group’s attorney. They had also been signed by Gulf Group’s owner. However, the submitted claims were inflated and contained gross inaccuracies. For example, despite being terminated less than a month into the Project, Gulf Group claimed amounts greater than the total sum it would have been entitled to under the dumpster contract had the contract been performed. In defense, Gulf Group, a foreign company, argued that it did not know how to compile and submit a government claim and that it relied on advisors in submitting the claim. The Court rejected these arguments. The Court held that “a failure to make a minimal examination of records can constitute deliberate ignorance or reckless disregard, for which a contractor may be found liable under the False Claims Act.” The Court determined that had Gulf Group conducted even a minimal inquiry into the accuracy of the claims submitted, they would have been aware of the inconsistencies and inaccuracies therein. “Although Gulf Group…relied on [its] advisors as to how to submit claims…those advisors [failed] to provide competent advice…” This reliance did not excuse Gulf Group from reviewing its settlement proposals and claim submissions, and evinced “a reckless disregard for accuracy” under the False Claims Act. The Court concluded that Gulf Group submitted conflicting, incorrect, and baseless claims regarding the BPA contract, the latrine contract, and the dumpster contract in 2005 and in 2007. Accordingly, the Court found Gulf Group liable for the maximum statutory penalty of $11,000 per claim, for a total amount of $66,000 for the six violations of the False Claims Act.

Despite the established liability under the False Claims Act, the Court found that the Government had not proven that the claims were made with intent to deceive the Government. The Court reasoned that because Gulf Group had relied upon “advisors” to prepare those claims, it did not intend to deceive the Government with their submission, which would have resulted in their forfeiture under the Special Plea in Fraud statute. Therefore, the Court went on to assess the merits of Gulf Group’s claims against the Government for wrongful termination.

With regard to the BPA contract, the Court found that Army officials offered a reasonable and good faith explanation for its termination. The officials supported Gulf Group’s assertion that the termination of the BPA contract was contingent on Gulf Group being awarded a BPA for a larger military base, Camp Virginia. Gulf Group ultimately was not awarded the Camp Virginia contract, but the Court found that the Government had no contractual obligation to make the award.

Conversely, the Court found that the Government had improperly terminated the latrine and dumpster contracts because it failed to “establish[] a legitimate basis for doing so,” which amounted to an abuse of discretion. The Court noted that various Army officials presented a number of different and often conflicting reasons for terminating Gulf Group’s dumpster and latrine contracts, none of which were reasonable or consistent with the Government’s obligation to act in good faith. An alleged security incident was chief among those reasons. In the incident, a Gulf Group employee asked about the layout of the military base Camp Arifjan and made drawings of buildings around the base, purportedly to determine placement locations for dumpsters. The Court determined, however, that the Army’s termination of these contracts “based on security reasons, without finding a need to even open a case or begin a formal investigation…is not reasonable or best practices, and is arbitrary and capricious.” In fact, the Court found that Government personnel “were simply motivated… ‘to get Gulf Group off the bases.’” As a result, the Court ruled that “[a]lthough a termination for convenience generally does not entitle a contractor to anticipatory profits, a termination for convenience ‘tainted by bad faith or an abuse of contracting discretion,’ which amounts to a breach of contract, may entitle a plaintiff to expectancy damages.” Accordingly, the Court found that Gulf Group was entitled to both lost profits and contract preparation costs under the latrine and dumpster contracts.

Finally, with regard to the bottled water contract, the Court determined that Gulf Group could not recover any money for losses it allegedly suffered from delays in bottled water deliveries because the Government’s requirement that Gulf Group make its deliveries into Iraq with a military convoy was a sovereign act and not part of a contractual agreement.

Therefore, the Court ordered the Government to pay Gulf Group approximately $560,000 for losses it suffered from the Army’s termination of the latrine and dumpster contracts. The Court also directed Gulf Group to pay the Government $66,000 for the six False Claims Act violations resulting from Gulf Group’s submission of inflated claims in 2005 and 2007.

Jeffery R. Mullen

Sixth Circuit Court of Appeals, Applying Kentucky Law, Holds Subcontractor’s Allegedly Faulty Construction of a Building Pad and the Resulting Damages Is Not an “Occurrence” Under a Commercial General Liability Policy

Liberty Mut. Fire Ins. Co. v. Kay & Kay Contr.
2013 U.S. App. LEXIS 23587 (6th Cir. Nov. 19, 2013)

This action arose out of a commercial general liability (“CGL”) policy issued by Liberty Mutual Fire Insurance Co. (“Liberty Mutual”) to MW Builders, Inc. (“MW Builders”) and Kay and Kay Contracting, LLC (“Kay & Kay”) for the construction of a Wal-Mart store in Morehead, Kentucky. Wal-Mart Stores, Inc. (“Wal-Mart”) contracted with MW Builders as general contractor for the construction of the building. MW Builders then entered into a subcontract with Kay & Kay to perform site preparation work and construct the building pad beneath the structure. Liberty Mutual issued the CGL policy to Kay & Kay, with MW Builders as an additional insured (the “Policy”). The Policy was the standard ISO (Insurance Services Office, Inc.) policy containing the standard coverage language. Specifically, the Policy provided: “This insurance applies to ‘bodily injury’ and ‘property damage’ only if… [t]he ‘bodily injury’ or ‘property damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage territory’…” The Policy defined “occurrence” to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The term “accident” was not defined in the Policy.

After Kay & Kay had completed the building pad and the building had been erected, Wal-Mart notified MW Builders that there were cracks in the building’s walls. Wal-Mart alleged that the fill area underneath a corner of the building had experienced settling due to problems with the foundation, and that this had caused structural problems and resultant damage to the building. MW Builders demanded that Kay & Kay remedy these issues and indemnify it. Kay & Kay denied liability and turned to Liberty Mutual with defense and indemnity claims under the Policy. Liberty Mutual subsequently filed a complaint seeking declaratory relief against MW Builders and Kay & Kay (jointly the “Contractors”) alleging that the Contractors’ claims for a defense and indemnity were not covered under the Policy. Liberty Mutual and the Contractors filed cross-motions for summary judgment on the limited threshold issue of “whether there was an ‘occurrence’ as defined in the underlying policy.” The district court agreed with the Contractors and found that the damage to the building qualified as an “occurrence” and was therefore covered under the Policy. Liberty Mutual appealed.

A three-judge panel of the Sixth Circuit Court of Appeals reversed and held that the facts of the case did not present an “accident” that would trigger coverage as an “occurrence” under the Policy. Applying Kentucky law, the Court first noted that although faulty workmanship generally is not an “accident” within the meaning of a CGL policy, the Supreme Court of Kentucky has not “definitively decided whether allegedly faulty workmanship that causes damage to other property constitutes an ‘accident’ under a CGL policy.” The Contractors argued that the damage was not to the insured’s (Kay & Kay’s) allegedly defective work product itself (the building pad), but was rather “collateral damage” to other property (the building), the work of third-party subcontractors. The Contractors contended that under these circumstances, the Supreme Court of Kentucky would conclude there was indeed an “occurrence.”

The Court disagreed. The Court recognized that in order for there to have been an “occurrence”, there had to have been an “accident.” Because the term “accident” was undefined in the Policy, the Court looked to Kentucky case law and concluded that the plain meaning of the term “accident” implicated the doctrine of fortuity. Applying this doctrine, the court focused its analysis on the level of control Kay & Kay had over the construction of the building pad. The Court distinguished the case before it, where Kay and Kay had exclusive control over the construction of the building pad for a new structure, from a situation where a contractor comes to an existing property to work on only a certain aspect of that property, and the contractor’s defective workmanship causes unintentional damage to other aspects of the property beyond its control. Under the latter scenario, the Court stated that it is “certainly plausible” that the damage “qualifies as ‘fortuitous’ and therefore an ‘accident.’” However, where the damage to the building was within the control of the contractor, the Court held that it could not be considered an “accident” that would give rise to coverage under a CGL policy. The Court found that “Kay & Kay was hired precisely to prevent the settling and resultant structural damage that occurred… [i]n other words, the possibility of the type of damage in this case was exactly what Kay & Kay was hired to control.” Therefore, the Court concluded that Kay & Kay’s construction of the allegedly faulty building pad could not qualify as an “accident” that would trigger coverage as an “occurrence” under the Policy. Accordingly, the district court’s decision in favor of the Contractors was reversed and the Court ordered that summary judgment be entered in favor of Liberty Mutual.

Jeffery R. Mullen


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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