September 2011

I planned a course for the Philadelphia Bar Association today called “Public Bidding and Bid Protest – A Primer on Pennsylvania Law.”  A special thanks to my friend Chris McCabe – who has been mentioned before on this blog – for a thorough and interesting presentation.  Chris is a “Dean” on public contracting law.  Here are few takeaways from the course.

1.  Pennsylvania law requires public contracts to be awarded to the lowest responsive, responsible bidder.

First, a bidder must ensure that it has complied with all material terms of the bid specifications and instructions.  Second, a bidder must be qualified to perform the work – i.e. having performed work on similar projects, be financial sound, and otherwise capable of handling the work contracted.

2.  A Local Contracting Authority Has the Right to Waiver Certain Non-Material Bid Defects.

Under Pennsylvania law, an authority may waive non-material defects.  Some examples of “material” defects include, missing signatures, missing bid bonds, or prices.  Some examples of “non-material” defects include missing forms or attaching bid bonds with the wrong ratings.

In Gaetna v. Ridley School District, 788 A.2d 363 (Pa.2002) the Pennsylvania Supreme Court articulated a test for determining whether a bid defect is material or non-material.  First, the Court must consider whether the defect deprived the government of assurance that the contract would be performed.  Second, the Court must consider whether the waiver will give one bidder a competitive advantage over another bidder.

On close calls, Courts are apt to side with the local authorities and give them the discretion to waive defects in bids.

3.  Challenges to Bids.

Taxpayers have standing to challenge the responsiveness of a bid or whether the winning bidder is a qualified bidder.  Disapointed bidders to not have standing to challenge bids unless they are also taxpayers.  A bid may be challenged by filing suit in Common Pleas Court asking the Court to issue an injunction preventing the contract from being awarded.  In the case of a contract award that has already occured, a taxpayer can ask that the Court to void the award.

 

 

A common misconception among contractors and owners is that their commercial general liability insurance policy covers property damage caused by faulty workmanship.  Pennsylvania breaks with many other states in holding that property damage caused by faulty workmanship is not an “occurrence” as defined in most CGL policies.

In Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co.,  908 A.2d 888 (2006), the Pennsylvania Supreme Court of Pennsylvania was asked to decide whether a claim of faulty workmanship could constitute an “occurrence” under commercial general liability policies. The policies at issue defined an “occurrence” as an “accident, including continuous or repeated exposure to substantially the same or general harmful conditions.”  Because there was no definition of accident in the policies, the Supreme Court used a dictionary definition, observing that “[t]he key term in the ordinary definition of ‘accident’ is ‘unexpected’ ” and that “[t]his implies a degree of fortuity that is not present in a claim for faulty workmanship.”  There the Court there held:

We hold that the definition of “accident” required to establish an “occurrence” under the policies cannot be satisfied by claims based upon faulty workmanship. Such claims simply do not present the degree of fortuity contemplated by the ordinary definition of “accident” or its common judicial construction in this context. To hold otherwise would be to convert a policy for insurance into a performance bond. We are unwilling to do so, especially since such protections are already readily available for the protection of contractors.

Becausae Kvaerner’s holding was limited to claims of damage to the work product itself. Id. at 900. It left open the question of whether damage to property other than the work product itself resulting from faulty workmanship might constitute property damage caused by an “occurrence” under a commercial general liability policy.

A year later in Millers Capital Insurance Co. v. Gambone Bros. Development Co., 941 A.2d 706, 713 (Pa.Super.Ct.2007), the Pennsylvania Superior Court addressed the question left open by Kvaerner.  There, the parties disputed whether an insurer had a duty to defend against claims for damages to property arising out of faulty workmanship. Specifically, the complaint alleged that faulty workmanship in constructing the exteriors of homes led the stucco exteriors to fail and resulted in “ancillary and accidental damage caused by the resulting water leaks to non-defective work inside the home interiors.”  The insureds conceded that, under Kvaerner, the damages to the exteriors of the homes was not caused by an “occurrence” but argued that the damage to the interior of the homes was nevertheless caused by an “occurrence” because the rainfall constituted an “occurrence.”

The Superior Court disagreed and based on Kvaerner,  held “that natural and foreseeable acts, such as rainfall, which tend to exacerbate the damage, effect, or consequences caused ab initio by faulty workmanship also cannot be considered sufficiently fortuitous to constitute an ‘occurrence’ or ‘accident’ for the purposes of an occurrence based [commercial general liability policy].”

Then, in Specialty Surfaces Int’l, Inc. v. Cont’l Cas. Co., 609 F.3d 223 (3d Cir. 2010) the Third Circuit was asked whether an carrier had a duty to defend based upon allegations in a complaint that the faulty workmanship caused damage to property other than the work itself.  Relying on Gambone the Third Circuit held “that natural and foreseeable acts, such as rainfall, which tend to exacerbate the damage, effect, or consequences caused ab initio by faulty workmanship also cannot be considered sufficiently fortuitous to constitute an ‘occurrence’ or ‘accident’. . . Thus, damages that are a reasonably foreseeable result of the faulty workmanship are also not covered under a commercial general liability policy.”

The take away?  Talk to your insurance agent to make sure you are getting coverage for damages caused by faulty workmanship.  Many carriers offer a “Kvaerner” rider which provides coverage for damage caused by faulty workmanship.

 

On his blog PhillyDeals, Joe Distefano reports that the non-profit Center City District has hired Gilbane to review bids for the taxpayer funded $50 million plan to renovate Dilworth Plaza from a concrete jungle to a place you actually want to go.  So far so good.  However, although taxpayer funds are being used to renovate public property Joe pointed out this tidbit:

“By using the nonprofit District to run the process, the project avoids public bid procedures.”

Jump back.  Sensing this did not pass the smell test I ran this by my friend and public contracts lawyer Chris McCabe.  Chris, a former City attorney, suggested I check out the City Charter on public bid procedures.

Section 8-200 clearly states that any construction contract for construction work rendered to the City be competitively bid.  Moreover, Section 17 of the City Charter sets forth various requirements that contractors working on City projects must abide by, such as, bonding requirements, minority participation requirements, conflicts and ethics requirements, and prevailing wage laws.

The Charter does not define the terms “public works” or “services to the City.”  However, one does not have to strain the statutory construction of the City Charter to conclude that the Charter’s public bid and public contractor requirements apply to a project being developed using taxpayer funds on City owned land.  Furthermore, if all the City had to do to avoid its public works contracting requirements is have a non-profit run the job, then what is the purpose of having public works contracting laws to being with?

Because the Dilworth Plaza is City owned property and the project will certainly be for a purely public purpose subcontractors working on the job will have no mechanics lien rights.  Moreover, if the public works contracting procedures do not apply, then neither does the requirement that the general contractor for the project post a labor and material payment bond, the purpose of which is to guaranty payment to subcontractors in the absence of mechanics lien rights.  Thus, subcontractors working on the Dilworth Plaza project will be left with no payment security although taxpayer funds are being used to pay for it.

Any contractor interested in working on this job should be wary of the bid process the City is employing.  Subcontractors in particular should be concerned with the potential lack of any payment security.  General contractors bidding to be the lead contractor on the project should consider a challenge to the bid procedures.   Heck, as an aggrieved City of Philadelphia taxpayer, who’s money will be used to pay for the project, maybe I will.

 

Yesterday, I talked about how the Carpenters’ Union has been sending letters to neutral employers threaten to picket a job site if a merit shop contractor were permitted to perform work on that site.  I received multiple inquiries asking what a contractor can do if they are the target of such a letter.  The most common approach is to file a claim with the NLRB against the union claiming that the union has engaged in an unfair labor practice.  However, this is probably a waste of time.  The better approach is to bring a claim directly against the union in federal court under Section 303 of the Labor Management Relations Act.

Under the NLRA, anyone who believes they have been harmed by a unfair labor practice can bring a charge with the NLRB.  After the charge is made, the NLRB has a duty to investigate the charge.  If the investigation finds that the charges have merit, the NLRB will issue a complaint against the party who allegedly violated the NLRA.  And, a hearing will be held in front of an Administrative Law Judge.  One way of looking at the NLRB is that it acts as a special Attorney General (or District Attorney) who deals will onlywith  alleged violations of the federal labor law.

In certain cases, bringing a claim with the NLRB can be effective.  First, its cheap.  The claimant does not have to pay for the NLRB investigation or prosecution of meritorious claims.  Second, it can be efficient.  NLRB investigations alone way lead to a settlement.  Or, if need be, the NLRB has the ability to drop the hammer and obtain injunctive relief when necessary.

However, bringing a claim with the NLRB has several drawbacks.  First, the NLRB has no ability to award an aggrieved contractor damages if it finds that it has been a victim of an unfair labor practice (the Board does have the ability to award back pay to an employee who is a victim of an unfair labor practice, however.)  Second, the NLRB is a political body and as we have often blogged about, the NLRB is apt to make decision based on politics rather than the law.  Finally, the person that hears the claims and appeals in NLRB unfair labor actions are usually experts on labor law.

Therefore, bringing a claim with the NLRB is best where a contractor or neutral employer wants to obtain some sort of remedial action against a union such as an injunction against a picketing.  However, the Board is not the best place seek relief from nuiansed violations of labor law such as banner, “ratting,” or being sent a threat to picket letter which have caused a contractor monetary damages, like losing a contract.

The better approach to seek relief for the more nuiansed labor law violations is to bring a claim against a union pursuant to Section 303 of the Labor Management Relations Act.  Under the Act, anyone injured by an unfair labor practice can sue in federal court to recover damages.  Therefore, if you are a contractor that suffers actual legal damages as a result of a union’s unfair labor practices you can bring a lawsuit in federal court against that union to recover those damages.  The best reason to bring a private cause of action against a union rather than a simple NLRB claim is the right to a jury trial.  The second best is the ability to recover money damages, which the NLRB cannot award a contractor.

Juries are not experts on labor law.  Juries are also more likely to be swayed by the equities of a case.  Moreover, juries are less likily to render a decision for political reasons, such as ruling aggressive union bannering or using large inflatable rats are protected forms of speech.  In fact, as public opinion has moved against organized labor, juries may be the considered contractor friendly.  Jury awards to contractors who bring privte causes of action under Section 303 are common and the damages awards are often staggering.

Certainly, private rights of action under Section 303, have their drawbacks as well.  Like any litigation, there are inherent risks.  First, a contractor will likely have to pay for the cost of litigation until a jury renders an award.  Indeed, unlike an NLRB claim a contractor will have to hire an attorney to pursue the case.   Second, juries are sometimes unpredictable and could easily award a contractor zero damages.  Finally, cases with adverse precedent could be dismissed before they even reach a jury.

The Courts are split on whether union letters threaten a strike if a non-union contractor is allowed to work on a job are unfair labor practices.  However, dispute the risks private rights of action under Section 303 are something to consider.

In the past year, the NLRB has issued a series of opinions which give a rather “liberal” interpretation of Section 8(b)(4)(B)’s prohibition on threatening, coercing, or restraining a neutral employer from doing business with someone.  Bannering, “Ratting,” and even infiltrating worksites impersonating federal immigration agents have all passed muster with the Board.  Apparently, bouyed by these decisions the Carpenters Union has taken its coercive and threaten tactics to the next level.  Recently, the Carpenters Union has been sending certified letters directly to neutral employers, who are the owners of construction projects, threatening the owner with picketing because of a “labor dispute” with a merit shop contractor working on the job site.    The letters name the contractor with whom the Carpenters allegedly maintain a “labor dispute.”  Moreover, the letters are being sent to employers who have no direct contract with the contractor that is involved with the “labor dispute.”  Usually, the contractor that the Carpenters are targeting are a subcontractor to the owner’s general contractor. 

As I have blogged about before, Section 8(b)(4)(B) of the NLRA prohibits a union “to threaten, coerce, or restrain any person engaged in commerce or in an industry affecting commerce . . . to cease doing business with any other person.”  Until this year, case law held that picketing a neutral employer violated Section 8(b)(4)(B) with the term “picketing” being fairly well defined.  However, beginning with United Brotherhood of Carpenters and Joiners of America, Local 1506 (Eliason & Knuth of Arizona, Inc.), 355 NLRB No. 159 (Aug. 27, 2010), the Board began gradually eroding the definition of picketing when it held that large stationary banners announcing a “labor dispute” at a neutral employers site where not tantamount to picketing but rather were protected forms of free speech.  In a later decision, the Board blessed the use of the familiar large inflatable rats to protest a “labor dispute” at a neutral employers job site on the same free speech grounds. 

Case law is split on wheather the specific act of sending letters to employers threaten pickets is a violation of Section 8(b)(4)(B).  However, unlike with banner and inflatable rats, the Unions cannot cloak its otherwise coercive activities with First Amendment free speech protection.  Any free speech protection for the letters is diminished because it is a private communication being sent directly to the neutral employer rather than an announcement being made to the whole community.  Therefore, the Carpenter’s Unions letters appear to squarely violate Section 8(b)(4)(B). 

I am not aware of any targeted contractors taking action against the Carpenters for the letters.  However, because there is less of a free speech issue with the letters than there is with bannering and rats, it would be interesting to see how the Board would rule if a targeted contractor did bring an unfair labor practice claim against the Carpenters with the Board.  It will also be interesting to see if any of the employers cede to the Union’s demands causing the targeted contractor to lose out on the job.  And, if so, whether the targeted contractor brings an action against the union for damages.  If we learn of any such claims or Board decisions on this matter, I will be sure to blog about it. 

Earlier this week I posted about the GAO study which found serious flaws in the way the DOL formulates prevailing wage rates that must be paid to employees on federally funded construction projects. 

The Davis-Bacon Act applies only to federally funded construction projects.  However, most States have so called “little Davis-Bacon” Acts which require prevailing wages to be paid on State funded construction projects.  Pennsylvania is one of those States. 

I mentioned that one of the most troubling flaws in the way the DOL determines wage rates on federal projects was the concept of “union prevailing” wage rates.  As I noted, if DOL wage rate surveys reveal that the wage rate in an area is equal to the union rate then the wage rate become pegged to the union rate basically forever. 

Pennsylvania’s little Davis Bacon Act goes a step further than its Big Brother and requires that the prevailing wage rate on State funded construction projects is the union wage rate per se.  In fact, the Deparment of Labor & Industry uses data from collective bargaining agreements in determining the prevailing wage rate for State projects.  Well, it looks like Rep. Ron Miller, R-York, chairman of the House Labor and Industry Committee is fixing to do something about it.

As reported in on www.paindependent.com, the Independent reports that Rep. Miller wants to replace the “prevailing wage” with “occupation wage,” which would take into account all wages paid at the county level including non-union rates.  Rep. Miller estimates that the change in how Pennsylvania determines its wage rates on State funded projects would result in cash strapped local and state authorities saving between 25%-75% on labor costs. 

Understandably Big Labor has circled the wagons in response to Rep. Miller’s proposition.  Rep. Bill Keller, who’s district I can see from my front porch, said “[t]he prevailing wage does protect the taxpayers … by making sure that public works projects are done with the highest skill available.”  The Pennsylvania Building and Construction Trades Council has also spoken out against Rep. Miller’s proposal.

We will continue to monitor this legislation.  If it proceeds, Pennsylvania could become the latest front in the organized labor war.

K&L Gates published an interesting review of a GAO study that – shockingly – found flaws in Davis – Bacon Prevailing Wage Act Determinations. 

As readers probably already know, the Davis-Bacon Act requires contractors on federally funded construction projects to pay employees “prevailing wages” and benefits.  The Department of Labor’s Wage-Hour Division sets the “prevailing wage” rate that must be paid by a contractor.  The rate varies by jurisdiction.  The Department of Labor determines what the prevailing wage is in a specific area by conducting voluntary wage rate surveys of contractors on federal, state, and private construction projects.  Based upon responses to those surveys, the DOL extrapolates what a majority of workers are earning on similar construction projects in the area.      

While the GAO report highlighted several flaws with the DOL methodology for determine wage rates.  I thought the most interesting flaw related to the concept of “union prevailing” rates. 

 The GAO criticized the DOL policy of defaulting to “union prevailing” wage rates when wage rate surveys found that the wage rate is the same as the union rate for the area.  The main problem with the union prevailing rate is that as union adjusts their rates in response to new wage rates reflected in collective bargaining agreements, so does the DOL.  In other words, once the DOL has determined the wage rate for an area is “union prevailing” the wage rate will remain pegged to the union rate in the area, until a new survey is completed.  Unfortunately, completing an accurate new wage rate survey is no easy task because

“63 percent of Davis-Bacon wage determinations are based upon union prevailing wages, notwithstanding the fact that unions only represent 14 percent of construction workers nationwide.   This overrepresentation is a result of the fact that unions actively mobilize their members to complete and return DOL wage surveys.”

As K&L Gates points out the problem this creates is obvious:

“if a union is present, DOL has traditionally defaulted to the union’s hourly burdened wage to establish the local prevailing wage, even if non-union contractors are performing the same type of work. This has, in effect, forced non-union contractors to pay union wages to its employees on federal construction projects.”

In order to combat this problem the GAO suggest that merit shop contractors accurately complete wage rate surveys.  However, this is often a Catch – 22 scenario for merit based firms because they are often reluctant to disclose sensitive wage rate data based on a well founded fear that they will be making proprietary information public and also providing foder to Big Labor who often criticize merit shop contractors for paying substandard wages. 

The K&L Gates is thorough and this post only touches on the GAO finding regarding the “union prevailing” wage rate.  Therefore, the remainder of the report is worth the read. 

Perhaps the solutions lies with Congress who has the power to require the DOL to keep wage rate surveys private or at least anonymous.  What is certain is that until this disparity is fixed, taxpayers will continue to get overpay for labor on construction projects and a majority of non-union merit based firms will continue to get squeezed out of federal founded projects.