Under Construction - September 2017

by Snell & Wilmer

Snell & Wilmer

Letter from the Editor

Welcome to the fall 2017 edition of our Under Construction newsletter. We hope your summer has left you relaxed and refreshed to make the final push to successfully finish out the remainder of the year.

In this issue, we highlight several topics affecting the construction industry, such as the new standard for schedule delay analysis that the American Society of Civil Engineers recently published. The standard includes 35 guidelines generally reflecting engineering principles associated with schedule delay analysis and the standards of practice in the construction industry nationally. This new standard is addressed in the first article.

“Pacing delays” are non-critical delays that occur when one party makes a conscious decision to decelerate or slow down the pace of non-critical activities to keep pace with the critical delays of another party. Our second article discusses this “why hurry up and wait?” pacing concept, how it has been analyzed by the courts, and the complications that may arise when claiming or defending against a pacing delay.

Additional topics in this edition include what you should be paying attention to when dealing with change orders, an arbitrator’s ability to exercise authority over non-signatories to a contract containing an arbitration clause in Nevada, a recent case out of California that demonstrates that an arbitration provision in a contract may properly provide parties with the ability to appeal an arbitrator’s decision and a discussion of a recent ruling by the Arizona Supreme Court that contract privity is not required for a successful party to recover attorneys’ fees on a breach of implied warranty claim.

We hope you will find these articles informative and enlightening. Please let us know if you want us to address a specific construction issue in a future newsletter. We hope you have a profitable, busy and safe fall season!

Jim Sienicki

American Society of Civil Engineers Publishes New Standard for Schedule Delay Analysis

By Jason Ebe

Recently, the American Society of Civil Engineers (ASCE) published its Standard 67-17 relating to Schedule Delay Analysis. The standard includes 35 guidelines generally reflecting engineering principles associated with schedule delay analysis and the standard of practice in construction nationally. Topics covered by the guidelines include critical path, float, early completion, chronology of delay, concurrent delay, responsibility for delay, changing schedules after the fact, and acceleration. In some instances, the standard cites legal cases, but for informational purposes only, such that their relevance or application to a specific project or jurisdiction will necessarily require legal consultation.

ASCE prefaces its Standard with much cautionary language, including: “The form of this Standard reflects the goals of the Schedule Delay Analysis Standards Committee of the Construction Institute of ASCE. The provisions of this document are written in permissive language and, as such, offer to the user a series of options or instructions but do not prescribe a specific course of action.” To be clear, as stated in its publication, “ASCE does not intend, nor should anyone interpret, ASCE’s standards to replace the sound judgment of a competent professional, having knowledge and experience in the appropriate field(s) of practice, nor to substitute for the standard of care required of such professionals in interpreting and applying the contents of this standard.”

What, then, is the benefit of this new standard? Schedulers, scheduling experts, and construction attorneys negotiating contracts and handling disputes relating to scheduling, delays, acceleration and other time-related impacts can all benefit from, and ought to become familiar with, this concise recitation of industry practices in scheduling and forensic analysis. This is not to say that all practitioners, experts and attorneys will necessarily agree with, or follow, all of these guidelines, and departure from the guidelines may very well be warranted by the applicable law, contract language, and/or facts of the project. Compliance with this standard does not in and of itself assure that a schedule, forensic analysis, or delay or other impact claim will necessarily be accepted by the parties or an adjudicator of a dispute. Conversely, failure to follow the standard does not in and of itself discredit the schedule, analysis or claim. Rather, this standard simply provides another tool in the tool box of construction professionals to prepare, maintain and revise schedules, analyze claims, and evaluate the performance of schedulers and forensic experts.

Pacing Claims in Scheduling Disputes – Hard to Prove and Hard to Defend

by Daniel Frost and Luke Mecklenburg

“Pacing delays” are delays that occur when one party makes a conscious decision to decelerate or slow down the pace of non-critical activities to keep pace with the critical delays of another party. A more formal definition would be “deceleration of the work of the project, by one of the parties to a contract, due to a delay caused by the other party, so as to maintain steady progress with the revised overall project schedule.” Zack, Pacing Delays — The Practical Effect, Construction Specifier 47, 48 (Jan. 2000). A party to the construction process may decide to slow down its performance of noncritical activities to keep pace with the delayed progress. For example, contractors may adjust the pace of their work in light of delays in owner-furnished equipment, delays by other multiple prime contractors, delays in permits, limited access, or differing site conditions. Owners may slow down their response time to requests for information or submittals, or postpone the delivery of owner-furnished equipment, or the processing of change orders. Id. at 48. In other words, why “hurry up and wait?”

These concepts have been considered and accepted by courts, which generally hold that the party not causing the delay has the right to slow down work when faced with delays caused by another party. For example, Boards of Contract Appeals have explicitly stated that “the contractor is not necessarily required to conduct all of his other activities exactly according to his predelay schedule,” John Driggs Co., ENG B.C.A. No. 4926, 87-2 B.C.A. (CCH) ¶ 19,833 (1987). Also, “where the government causes delays to the critical path, it is permissible for the contractor to relax its performance of its work to the extent that it does not impact the project completion date.” Utley-James, Inc., GSBCA No. 5370, 85-1 B.C.A. (CCH) ¶ 17,816 (1985), aff’d, Utley-James, Inc. v. United States, 14 Cl. Ct. 804 (1988); Appeal of MCI Constructors, Inc., D.C.C.A.B. No. D-924, 1996 WL 331212 (D.C. C.A.B. 1996) (“We agree with MCI that the delays attributed to MCI by the District were not critical path delays and generally come within the category of ‘why hurry up and wait.’”).

The argument by the party who delayed commencement of the succeeding activity is that creation of additional float to the scheduled duration of succeeding activities by delays to preceding critical activities justified its delay. In Williams Enterprises, Inc. v. Strait Mfg. & Welding, Inc., 728 F. Supp. 12, 17 (D.D.C. 1990), aff’d in part, remanded in part on other grounds, 938 F.2d 230 (D.C. Cir. 1991), reh'g denied, (Oct. 8, 1991), a court discussed the issue of pacing in the creation of additional float in non-critical activities as a result of preceding critical activity delay. The court ruled that owner delay in approval of shop drawings for precast panels to be hung on the erected structural steel was not proven to have mattered:

It is clear that any problems with the drawings at this point were of little consequence since production proceeded and no evidence was produced that any panel fabricated was later rejected. On the contrary, the evidence indicates that some 360 panels were produced … with no evidence of special pressure on the fabricator to rush. These facts created a strong inference that [the fabricator] could have begun … to fabricate precast panels at a rate sufficient to maintain project momentum.

The dispute becomes a “chicken or the egg” argument. For example, a steel erector may delay without liability the delivery of its erection crane to the site if correct in its assessment that steel erection will be delayed because the owner's untimely shop drawing review has delayed the fabrication of the structural steel to be erected. The erector argues that its delayed mobilization has no impact on the critical path (and thus was a noncritical pacing delay) because there would be no succeeding critical work activity for the erector to perform. If, on the other hand, sufficient steel had been fabricated and delivered to the site to permit erection to begin, the erector's delay would be critical. Thus, “pacing” by any party responsible for performance of work represents a gamble that scheduling analysis, in hindsight, will show “pacing” to have been justified because the “paced” work activity had additional float for completion of such work.

The practical effect of a pacing argument on presentation of or defense of claims is that the schedule analysis may become more complex than it might be otherwise. Claimed delays may take on more significance and may need to be carefully analyzed and apportioned. On a big project, this is complicated, expensive and sometimes uncertain. Not surprisingly, vague or ill-defined pacing claims are often looked at critically by the courts, arbitrators, or boards in these circumstances. An analysis of float and which party is entitled to it also may become an important and complicating factor in the analysis. Also not unsurprisingly, these types of cases often turn on the terms of the contract, the efforts of the parties to overcome the delays as shown in the project record, attempts to mitigate and timely notices.

When Dealing with Change Orders, Know the Underlying Contract and Change Order Language

by Parker A. Allred

Circumstances often arise during construction projects requiring change orders to be executed that potentially have huge consequences on the original contract’s scope or schedule. This is particularly true when there are unforeseen circumstances that arise that impact a project’s timely completion or result in significant additional costs because of the change order. When this happens, it is important for those executing the change order to know what they are and what they are not agreeing to in the change order. Rarely does any construction project go as planned and uninterrupted; thus, contracting parties should consider planning for the unplannable in every project. The best way to do this is to know what, how, and when certain requirements for change orders can, or even must, be negotiated and executed.

First and foremost, the parties must know the original contract. Particularly, they must be familiar with its requirements related to the process and procedure for executing change orders. Not knowing the precise change order process is an unfortunate, but all too common, mistake that parties do not think about until after it is too late—once litigation is threatened or has ensued. In fact, many times the parties fail to follow the requirements outlined in the contract because often times they are in a time crunch or under other related pressures to ensure the project is timely completed with minimal disruptions. Thus, oversights to the change order process are common, and many times, are without consequence. However, when disputes arise, these oversights can be very costly both in terms of getting paid for the change order work and its effects on the original contract work, and in terms of incurring attorneys’ fees to receive such payment. Many disputes are a result of a contractor claiming additional compensation or a time extension, often based on purported verbal representations made that the contractor would be “taken care of” at a later date. However, depending on what the contract says about the process and change orders, the contract will usually govern each change order and precisely what can and will be included in the change order and/or raised as a defense to payment for the work that a court will ultimately determine only after expensive litigation.

Understanding the change order process under the contract is also necessary because most have detailed provisions requiring several notices and multiple steps to obtain additional compensation and time for additional work covered in each change order. Often, the contract language can be convoluted, but it is vital to understand it as failing to serve notices, take appropriate steps, or otherwise abide by certain terms may preclude the contractor from recovering anything later, and instead may be evidence that the contractor waived his right to any remedies. It may also cause the contractor to spend attorneys’ fees to evaluate and raise creative arguments to circumvent the contract language. Thus, to avoid those costs or the risk of non-recovery, contracting parties may want to consider the following: know and follow precisely the change order process; know and follow the procedural requirements; start the dispute resolution mechanisms; timely initiate the claims process if necessary; and follow the contract. Otherwise, it could result in making your claim more difficult to prove or a waiver of your claim.

Importantly, many contracts or the change orders themselves generally contain clauses affecting change orders and may effectively act like a waiver for any and all claims not specifically reserved in each change order itself covering a particular subject matter. Thus, if a contractor has claims or is unsure of any rights to compensation or additional time that he may want to assert at a later date, it is best that he reserve such rights in each executed change order. Not doing so may risk waiving the claims under the contract.

There are simply too many unknowns in construction projects. Designs may need to be changed. Unforeseen weather or soil conditions arise. Therefore, it may be important for parties to know, understand, and be prepared to follow the contract, particularly as it relates to the process and procedure for negotiating and executing change orders. Ensuring these things are understood at the outset of any project and then applied throughout the project may greatly reduce the likelihood of costly litigation, and increase the likelihood of being paid for your claims.

When an Arbitrator Exercises Authority Over Non-Signatories to a Contract Under Nevada Law, Does the Court Later Have Automatic Jurisdiction to Confirm or Must it Conduct its Own Jurisdictional Analysis?

by Justin L. Carley and V.R. Bohman

Although not in the construction context, a recent Supreme Court of Nevada opinion, Half Dental Franchise, LLC, et al., v. Robert Houchin, et al., No. 69577 (Nev. July 27, 2017), may impact some Nevada construction cases. The opinion addresses an arbitrator’s ability to exercise authority over non-signatories to a contract containing an arbitration clause, the type of review that should follow in state court confirmation proceedings, and a jurisdictional question regarding those confirmation proceedings

Under a series of franchise agreements, Half Dental commenced an arbitration against multiple parties, including Robert Houchin and Precision Dental. Neither Houchin nor Precision Dental were signatories to the franchise agreements that contained the arbitration clauses. Houchin was represented by counsel at the arbitration “for sole purposes of objection to jurisdiction of arbitration tribunal.” Precision Dental did not participate in the arbitration at all.

Early on, the arbitration panel found that both Houchin and Precision Dental were bound to the contractual arbitration provisions under Nevada common law that allows non-signatories to be bound to arbitration provisions in certain circumstances, in this case, by the doctrine of estoppel. After Half Dental prevailed at the arbitration, it moved a Nevada district court to confirm the arbitration award. However, Houchin moved the court to vacate the award as exceeding the arbitrator’s authority over him, while Precision Dental filed a motion to dismiss arguing that the district court lacked personal jurisdiction over it regarding the confirmation proceedings. Both motions were granted by the district court, and Half Dental appealed.

The Supreme Court of Nevada found that the district court erred in two respects in determining that the arbitrator lacked authority over Houchin. First, while the arbitrability of a claim is a question for the courts absent a “clear and unmistakabl[e]” agreement that arbitrability will be decided some other way, here, the arbitration clause provided that “[t]he arbitrator, and not a court, will decide any questions relating in any way to the parties’ agreement or claimed agreement to arbitrate.” Second, arbitration awards should be confirmed so long as the arbitrator provided “colorable justification” for his or her findings. Here, email evidence made it clear that Houchin was aware of and benefitted from the signed franchise agreements, and on that basis the arbitrator rightfully bound Houchin to the arbitration clauses found in the franchise agreements. Thus, the Supreme Court of Nevada held that the district court erred when it reviewed the arbitration decision de novo and overturned the arbitrator’s ruling.

Equally interesting, the Supreme Court of Nevada found that the district court erred in conducting a minimum contacts analysis to determine personal jurisdiction over Precision Dental. The arbitrator determined that Precision Dental was bound to the Nevada arbitration provision based on the doctrine of estoppel. The district court held that was not enough to confer it jurisdiction to confirm the subsequent award and conducted its own minimum contacts analysis at the confirmation stage. But, the Supreme Court of Nevada concluded that was inappropriate because “when the arbitrator found that Precision Dental was bound to arbitration based on estoppel, Precision Dental was subject to jurisdiction in Nevada as a matter of law and no minimum contacts analysis was necessary” given the Nevada statute, NRS 38.244(2), which reads “[a]n agreement to arbitrate providing for arbitration in this state confers exclusive jurisdiction on the court to enter judgment on an award under NRS 38.206 to 38.248, inclusive.”

Many construction contracts have dispute resolution clauses requiring arbitration, but often they do not account for this issue: what happens when an arbitrator exercises authority over non-signatories? The Nevada Supreme Court has just held that if the contract allows the arbitrator the power to decide his own authority, and then the arbitrator exercises that authority to include non-signatories under Nevada’s common law, then the non-signatories are subject to the Nevada confirmation proceedings just as if they signed the agreements requiring arbitration themselves.

Keeping an Arbitrator on Track: A New California Case Demonstrates that Contractual Arbitration Provisions Can Be Drafted to Provide for Appellate Review of Errors or Fact of Law

by Mark D. Johnson

Arbitration provisions are common in a large number of construction contracts. One of the major concerns that parties have about resolving construction disputes through arbitration is that, generally, an arbitrator’s decision may not be challenged or appealed for errors of fact or law. As a result, in most cases a party will have no ability to challenge an arbitrator’s erroneous decision. However, a recent California case demonstrates that an arbitration provision in a contract may properly provide the parties with the ability to appeal an arbitrator’s decision based on errors in the application of the facts or law. Harshad & Nasir Corporation v. Global Sign Systems (8/15/2017) 2017 WL 3484761.

In Harshad, Global Sign Systems, Inc. (Global) sued Friendly Franchisees Corporation (FFC) to recover $114,823.72 allegedly owed on unpaid invoices for repair/remodel work performed at certain Carl’s Jr. restaurants. A few weeks before trial, the parties agreed to submit the dispute to arbitration. Nearly five years later, the arbitrator awarded Global $1,154,793.72 in damages, $702,093.86 in prejudgment interest, and $1,142,596.20 in costs and attorney fees. The arbitrator also added four affiliates of FFC (the Affiliates) as joint and several obligors under the award. FFC provides management services to the Affiliates, who own certain Carl’s Jr. restaurants. However, the Affiliates were not parties to the FFC/Global arbitration agreement.

Beginning in April 2007, FFC and Global discussed a potential business relationship between FFC and Global. These discussions covered possible work related to the replacement of signs, signs for a possible new Carl’s Jr. store, sign repair and maintenance work, and a project to remodel—or “reimage”—Carl’s Jr. stores. Ultimately, FFC selected Global as FFC’s “go to sign maintenance company.”

After performing some sign repair work for FFC, Global filed a lawsuit against FFC for unpaid invoices and FFC filed a counter-suit. However, before trial, FFC and Global entered into an arbitration agreement. The agreement stated that “[t]he dispute involves the amount of money FFC owes to Global for services performed.” The parties agreed to “submit all disputes relating to this [a]greement to binding arbitration.” The Affiliates were not parties to the agreement.

The arbitration agreement provided that the “[a]rbitrator shall apply California law as though he were obligated by applicable statutes and precedents and case law, including the admissibility of evidence and shall endeavor to decide the controversy as though he were a judge in a California court of law.” It further provided: Any party may object to the confirmation of the decision and award on the basis that the statement of facts and the conclusions of law do not support the decision and award, and/or that the law was incorrectly determined or applied. The arbitrator shall apply the substantive law of the State of California and the United States, if such law would apply if the matter were decided in court, in deciding the issues submitted to arbitration. The parties agree that the decision of the [a]rbitrator and the findings of fact and conclusions of law shall be reviewed on appeal to the trial court and thereafter to the appellate courts upon the same grounds and standards of review as if said decision and supporting findings of fact and conclusions of law were entered by a court with subject matter and present jurisdiction.”

During the arbitration, Global took the position that it had a contract with FFC to perform reimaging work on 66 Carl’s Jr. stores managed by FFC, that FFC wrongfully cancelled that contract, and that Global was entitled to the profits it would have received in the absence of the breach of contract by FFC. During the arbitration hearing, Global made an oral motion to have the Affiliates added as parties to the arbitration, and the arbitrator granted the motion. Shortly thereafter, the arbitrator set aside that ruling pursuant to a stipulation among counsel. According to the stipulation, Global preserved its “right to seek an order from a court . . . to add one or more of the Affiliates as [r]espondents in the arbitration and/or as defendants in the underlying lawsuit.”

The arbitrator issued a final award in favor of Global. The total of damages, attorney fees, costs, and interest (as of the date of the award) was $2,985,628.28. The arbitrator also ruled that the Affiliates were joint and several obligors under the award.

Global filed a petition in court to confirm the award, and FFC and the Affiliates filed petitions to vacate the award. The trial court confirmed the award as to FFC and vacated the award as to the Affiliates, and entered judgment accordingly. FFC and Global appealed.

In the appeal, the Harshad court found that in the arbitration agreement, the parties agreed that the “[a]rbitrator shall apply California law as though he were obligated by applicable statutes and precedents and case law” and “apply the substantive law of the State of California and the United States, if such law would apply if the matter were decided in court, in deciding the issues submitted to arbitration.” The Harshad court found that this language unambiguously required the arbitrator to act in conformity with rules of law—specifically, in accordance with applicable California and federal substantive law.

The Harshad court also found that the parties also plainly expressed that “the decision of the [a]rbitrator . . . shall be reviewed on appeal to the trial court and thereafter to the appellate courts upon the same grounds and standards of review as if said decision and supporting findings of fact and conclusions of law were entered by a court with subject matter and present jurisdiction.” Applying this standard, the Harshad court found that there is no substantial evidence in the record that FFC ever agreed to have Global perform the reimaging work for any store other than the Baldwin Park store. Nor was there any evidence of any writings that satisfied the statute of frauds.

The Harshad court further found that the arbitrator exceeded his authority in awarding lost profits to Global. The court found that the arbitration agreement defined the “dispute” as the amount of money owed to Global for “services performed.” The court found that Global’s lost profit claim was for the lost profits that Global would have received for work it would have performed in the future. Therefore, the lost profit claim was not subject to the arbitration agreement. Finally, the Harshad court improperly added the Affiliates as parties to the arbitration because the parties had stipulated that the question of whether the Affiliates would be joined was to be decided by a court. As a result, the arbitrator exceeded his authority by adding them to the arbitration award.

Harshad makes it clear that parties can validly draft an arbitration provision in a construction contract that requires the arbitration to be conducted in accordance with the substantive law of a state or the Federal government and further provides for a full appeal of the arbitration ruling on the same standards. A provision like that would allow an arbitrator’s decision to be reviewed for errors in law or fact. However, such a provision would also take away or greatly limit the finality of the arbitration decision and would also likely make the arbitration process more lengthy and costly. These issues should be carefully considered in drafting an arbitration provision particularly with respect to the laws that govern the conduct of the arbitration and the level of review permitted of an arbitrator’s decision.

Arizona Supreme Court Rules Contract Privity Is Not Required for Successful Party to Recover Attorneys’ Fees on Breach of Implied Warranty Claim

by Jason Ebe

The Arizona Supreme Court recently ruled that the successful party on a breach of implied warranty claim could recover its reasonable attorneys’ fees in prosecuting or defending the claim even without contractual privity between the parties. In the case of Sirrah Enterprises, LLC v. Wunderlich, the Wunderlichs contracted with Sirrah to build a basement. A dispute arose, Sirrah sued for payment, and the Wunderlichs counterclaimed for breach of implied warranty and other claims. The jury found in favor of Sirrah on its payment claim and on the Wunderlichs’ claims for breach of contract and breach of the covenant of good faith and fair dealing, and in favor of the Wunderlichs on their breach of implied warranty claim. The trial court determined the Wunderlichs were the prevailing parties and awarded them attorneys’ fees pursuant to a contractual fee provision and A.R.S. § 12-341.01(A), the statute that provides for attorneys’ fees for the prevailing party in contested contract disputes.

The Arizona Supreme Court determined that the implied warranty is a contract term, and that even though the implied warranty is imposed by law, breach of the warranty can give rise to a contract-based fee award. In doing so, the Court also determined that A.R.S. § 12-341.01(A) does not have a privity requirement for claims “arising out of contract.” Therefore, while not applicable to the facts of Sirrah, the Court determined that the implied warranty enforced by a subsequent purchaser without privity with the builder can nonetheless recover attorney fees on a successful claim because the warranty arose out of a contract, albeit an earlier contract between the builder and original homeowner. The Court stated: “The Implied Warranty arises out of the construction contract; that characteristic does not change simply because the law effectively assigns the Warranty to subsequent homeowners. Just as a claim asserted by an original homeowner in privity with a builder can arise from contract, so too can a claim asserted by a subsequent homeowner.”

Previously, cases such as Sullivan v. Pulte Home Corp. (Ariz. Ct. App. 2012) and North Peak Construction, LLC v. Architecture Plus, Ltd. (Ariz. Ct. App. 2011) rejected attorneys’ fees awards on breach of implied warranty claims. The Arizona Supreme Court expressly disapproved these cases to the extent they conflict with Sirrah.

What are the takeaways here? First, a reminder that implied warranty claims may extend beyond the original parties to a construction contract. Second, a change in law, such that the successful homeowner on a breach of implied warranty claim may be entitled to recover attorneys’ fees, with or without privity with the contractor. Third, based on the facts and trial court ruling in Sirrah, a contractor can prevail on the breach of contract claim, but lose on the implied warranty claim, and ultimately have to pay attorneys’ fees.

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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