June 2012

Oil and Gas Lawyer Steven Saunders in Scranton tipped me off to a new OSHA Bulletin entitled “Worker Exposure to Silica during Hydraulic Fracturing.”  A copy of the Bulletin is available HERE.  With this Bulletin, contractors working in the oil and gas industry can be assured that OSHA is going to be paying close attention to working conditions at sites where fracking is occurring.

Under federal law, contractors are responsible for providing safe and healthy working conditions for their workers.  According to the Bulletin, OSHA has jurisdiction over regulating work place conditions that expose workers to silica, including Air Contaminants (29 CFR 1910.1000); Hazard Communication (29 CFR 1910.1200); and Respiratory Protection (29 CFR 1910.134).  In addition to providing workers with proper respiratory protection, OSHA recommends contractors institute engineering controls, such as applying fresh water to roads around the well site to reduce dust, reducing the drop height on the sand transfer belt, enclosing points where dust is released, using enclosed cabs or booths for workers unloading silica, and replacing belt transfers with a screw auger transfer system. Moreover, OSHA recommends that contractors medically monitor workers for unhealthy exposure to silica dust.

OSHA also recommends educating workers on how to safely handle silica and to reduce the hazards related to silica exposure.  This recommendation is particularly important because if a contractor cited for an OSHA violation can show that it had an employee safety policy in effect; adequately informed employees of the safety policy; diligently tried to discover violations; and effectively enforced violations of safety rules, it may avoid liability under the “employee misconduct” defense.

Apparently, even low or moderate levels of exposure to crystalline silica can cause serious damage to a worker’s lungs, including chronic cough, shortness of breath, and in some cases respiratory failure.  The dangers associated with silica sound eerily similar to those of asbestos.  If the health hazards involving silica are founded, like with asbestos, you can be sure that plaintiffs attorneys are waiting to lay siege to an industry with deep pockets.  Therefore, if OSHA fines were not incentive enough to begin taking silica exposure seriously, the threat of lawsuits from the Plaintiffs’ Bar should add more than enough additional incentive.

So, contractors in the oil and gas industry who have workers exposed to silica dust should be proactive or they will likely find themselves facing an expensive OSHA fine or on the wrong end of a company threatening personal injury lawsuit.

You may have heard that there is a bit of natural gas drilling going on in Pennsylvania.  Thus far, the legal issues have dealt with environmental regulations, zoning, leasing, and rights of way.  The players involved in those matters have generally been landowners, government agencies, and the natural gas companies (the well operators).  The Courts have seen few – if any –  “intra-industry” disputes, that is disputes between drillers (and other trades) and operators or drillers and other trades.

Because litigation is like death and taxes, it is only a matter of time before a significant intra-industry dispute finds it way to a Pennsylvania court (as I will explain there is a reason the dispute will be resolved in Pennsylvania and not another jurisdiction).  According  to the International Association of Drilling Contractors, the IADC Daywork Drilling Contract is the most utilized contract form by operators  and drillers.  Because much of the case law interpreting the IADC contract’s terms comes from traditional oil and gas jurisdictions like Louisiana and Texas it is worth reviewing certain provision of a Standard IADC Daywork Drilling contract under Pennsylvania law.

1.  Payment Terms

Under paragraph 5.2 of the Daywork Contract,  the length of time an operator has to pay an invoice is left blank and, therefore, left to negotiation between the parties.  Here, we have the first instance where the Daywork Contract intersects with the Pennsylvania Contractor and Subcontractor Payment Act, 73 P.S. 501, et. seq. (the “Payment Act”), which broadly applies to any agreement to perform work on any real property within the Commonwealth.  Under Section 505 of the Payment Act, if the agreement is silent on when payment is due, payment must be made within twenty days of receiving an invoice.  Therefore, if no time frame is inserted into the Daywork Contract, under the Payment Act twenty days will be the default period for payment.  Drillers should consider this when negotiating their Daywork Contracts and be waryof agreeing to a payment period greater than statutorily prescribed.

Interestingly, the Daywork Contract contains a provision quite similar to Sections 506 and 511 of the Payment Act, whereby an Operator can withhold payment for a disputed item by giving the Driller notice of the disputed item within fifteen days of receiving the invoice, with timely payment of any undisputed portion of the invoice being made.  Under Section 511 of the Act, a contractor can likewise withhold payment to a subcontractor for disputed items, however, it must do so within seven, rather than 15, days.  Therefore, Drillers should consider changing the standard 15 day period to 7 to be consistent with Pennsylvania law.

Finally, paragraph 5.3 of the Daywork Contract states that invoices not paid by the prescribed due date shall bear a certain rate of interest.  Here, the parties to a Daywork Contract should be aware of the stringent penalties of the Payment Act.  Under the Payment Act, unpaid invoices shall bear interest at 1% per month.  Moreover, if litigation is commenced to recover payment, a Court may assess an additional 1% penalty per month on outstanding amounts.  Finally, if litigation is commenced to recover payment, there is a mandatory award of attorneys fees to the substantially prevailing part.

2. Liens

The Contract states that the Driller will not allow liens from “third parties” to be filed against the “lease, well, or other property” of the Operator.  Following the 2007 Amendments to Pennsylvania’s Mechanics Lien Law, lien waivers – except those given in exchange for payment – were declared void as a matter of public policy.  To the extent this clause is intended to act as an indemnification clause for lien claims, then it would pass muster.  However, to the extent it is intended to act as a waiver of any lien rights of third parties, it would not.  Finally, it is interesting that the clause relates only to third party claims, thus allowing a Driller itself to file a lien, notwithstanding any prohibition under Pennsylvania Law.

3.  Venue

The Contract contains a choice of law clause which permits the parties to stipulate to enforcement of the contract under a the law of a certain jurisdiction.  Under the Payment Act, “[m]aking a contract subject to the laws of another state requiring that any litigation, arbitration or other dispute resolution process on the contract occur in another state, shall be unenforceable.”   As will be discussed below, this impacts the indemnification provision of the Contract the most.

4.    Indemnification

Last but certainly not least are the Contract’s indemnification provisions.  The Contract’s indemnification provisions are more comprehensive than a typical construction contract.  State law dictates whether an indemnification provision of a contract is enforceable and because Pennsylvania law will apply because of the Act, it is important to know how Pennsylvania law views the various indemnification provisions of the Contract.

Generally, the Contract contains a  “broad form” indemnification provisions that state that each party agrees to indemnify the other for all claims, demands, and causes of action arising from the actions of the others employees, subcontractors, or agents.  The right to indemnification is “without regard to  . . . the negligence of any party or parties.”  Presumably, this is a lawyer’s way of saying “including the indemintee’s own negligence.”

Additionally, the Contract contains indemnification provisions related to pollution or contamination.  Under those indemnification provisions, the Driller indemnifies the Operator for any claims arising from pollution or contamination that originates above the surface.  Conversely, the Operator agrees to indemnify the Driller for any claims arising from pollution or contamination originating elsewhere.  However, the environmental indemnification provision is silent on whether the indemnity is triggered even if the pollution is caused by the other party’s negligence.

Pennsylvania Courts hold that an indemnification provision will not be construed to require indemnification for an indemnitee’s own negligence unless this intention is stated explicitly in clear, precise, and unequivocal terms and distinguish between indemnity clauses that specifically refer to liability arising from a party’s own negligence and those that call for indemnity for “all liability” or “all loss.”  If an indemnity clause does not expressly mention liability arising from the indemnitee’s own negligence, the clause will not cover that situation despite broad, all inclusive language that might suggest otherwise.

While the language of the Contract’s general indemnity provision may be sufficient under Pennsylvania law to trigger indemnification of the other party even when the other party is negligent, the parties should not risk it.  The parties would be better off amending the Contract’s general indemnification language to simply say “including the indemnitee’s own negligence.”  Otherwise, the parties are inviting litigation over the interpretation of contractual language novel to Pennsylvania courts.  Furthermore,  the parties should decide whether the environmental indemnification provisions will include indemnification for the other party’s negligence and, if so, include it in the Contract.  Otherwise, the unsuspecting indemnitee may be left without indemnification.

It is only a matter of time to we see our first Pennsylvania case litigating these issues.  Hopefully, you are prepared.

Time and time again I see the old adage “if it is too good to be true it probably is” applying to a project gone array.  This was apparently the case with the Palo Alto, CA Library project where the low bidder came in $8 million below the next low bid.  Whatever dreams the local authority in Palo Alto had of saving money with the low bid have turned into a nightmare as the project has become riddled with delays, saddled with $1.7 million in change orders, and threatened with a messy lawsuit.

Typical of a project dispute, the contractor is blaming incomplete design drawings and owner directed changes.  Meanwhile, the owner is demanding answers and trying to hold angry taxpayers at bay.  Also typical, I am sure there is enough blame to be spread around.  First, while I fully understand the public policy behind lowest responsive responsible bid laws, the unintended consequence of low bid laws is often a situation where an owner accepts a bid that is indeed too good – in this case $8 million too good – to be true.  What was the owner thinking here?  Did it really think that the winning contractor possessed a magical bid process that allowed it to submit a bid $8 million less than the next low bid?  $8 million is significant to say the least and it should have been a huge red flag to this owner.

Meanwhile, on the contractor’s part, its bid was either erroneous or willfully low.  There really is no way else to explain how it came in $8 million less than the next low bidder.  If – or rather when – the parties get around to litigating this dispute, attacking the contractors bid is the first place, that lawyers representing the owner will go.

Because lowest is not always best for a public entity, this case is another example of why public bid laws need to be relaxed to allow for alternative bidding methods, like the DB/CM bidding.  Otherwise, as is often the case, the owner ends up with much more than they bargained for.

 

Forbes Energy Blog has a guest post from Navigant on why exporting liquefied natural gas (LNG) is a good idea for America.  Exporting LNG is also a must for Pennsylvania in maximizing the economic benefits of the Marcellus beyond just the drilling regions.

Southeastern Pennsylvania already has the rough infrastructure to make it a LNG export hub with the existing crude oil refineries along the Delaware River.  Moreover, the Delaware is naturally capable of handling the tankers necessary to transport the LNG.

The good news for the construction industry is if a concerted effort to convert petroleum refineries to LNG refineries were to become a reality billions would need to be invested.  That is also the bad news because with natural gas prices currently very low the investment currently does not make economic sense.  However, as the article points out there are signs that may change and the benefits of exporting LNG may soon be too big to ignore.

The conversion of the petroleum refineries along the Delaware to LNG refineries is something that political leaders in Southeastern Pennsylvania have raised from time to time.  Now is the time they should get serious about it.

ENR has an interesting blog post about a panel discussion on claims held at the Structural Congress of the American Society of Civil Engineers in March where the topic of arbitration was discussed.

I know there remains a small but vocal anti-arbitration bias among  attorneys but I found the advice of the attorney on the panel particularly surprising and perhaps reckless.   According to the post, the attorney on the panel believed  that arbitration should be avoided at all costs and that “[t]welve unemployed postal workers” could reach a better decision “than the engineer and two lawyers on the arbitration panel.”   According to the post, the reason for the panel’s anti-arbitration fervor is:

When you sign a contract with a clause mandating binding arbitration, you also sign away your right to appeal the decision, excluding some extraordinary finding of misconduct on the part of the arbitrators. That’s also very bad.

Under arbitration, the arbitrators do not have to follow the law. That’s astounding and very bad!”

Are these reasons really so “so very bad” as to make a jury trial a more appealing (pun intended) route?  First, while it is true that under the Federal Arbitration Act – and most state arbitration statutes – your basis for overturning an arbitration award on appeal is limited to gross misconduct on part of the arbitration panel (fraud, corruption, evident partiality) or that the award rendered is unconscionable in some way, under the Seventh Amendment, a jury’s award is even more sacrosanct.

Second, the conclusion that arbitrators do not have to follow the law is misleading.  Arbitration panels “do not have to follow the law” any more than Judges do.  Presumably, the law that the panelists felt the arbitrators failed to follow was the law that their side wanted the panel to adopt.  Hardly, does a prevailing party leave an arbitration victorious but also wondering if the arbitrators reached their decision based on the law the prevailing party advocated or if they simple flipped a coin and decided.

I find that most of the anti-arbitration bias exists not because of the lack of appeal rights and arbitrators not following the law, but rather because defense attorneys cannot avail themselves of various procedural devices as part of a grind it out litigation strategy.  That same strategy includes appealing decisions on any and every procedural ground in order to craft a settlement more favorable than the verdict.  I also find that the bias exists because an attorney was embarrassed jilted by an arbitration panel in a case in which they were sure they would prevail.

In my opinion arbitration is still the preferred route in design and construction claims.  I like to think that my opinion is shared by a majority of construction attorneys.  My experience has been there is no indication that arbitration panels reach wrong decisions any more frequent than juries.  Moreover, while the costs has increased, an arbitration generally less expensive overall than a jury trial.  Finally, stripped of the potential for discovery disputes, it also breads a certain level of collegiality among opposing counsel.  For the most part, I have always had a better relationship with opposing counsel in an arbitration setting.

I am curious to hear what others think about the advice to avoid arbitration at all costs.

Check out this trailer for the PBS documentary “Liquid Assets.” Sums up nicely the need to repair our crumbling infrastructure. It also indirectly makes the case for PPP’s especially in the area of water and sewer systems where private companies (like Philly’s own Aqua American) can upgrade, repair, and manage these systems far more effectively and much cheaper than the public entities they currently belong to.

ENR has an interesting article about a legal challenge to Florida’s (the State not the rapper pictured right) new law that bars the awarding of public contracts to firms that have business interests in Cuba or Syria.   In the case mega-construction firm Oderbrecht seeks to invalidate the Florida law on several constitutional grounds.  First, Oderbrecht claims the law violates the supremacy clause.  Second, Oderbrecht claims the law unconstitutionally violates the foreign affairs power of the federal government.  Third, Oderbrecht claims the law violates Congress’ power to regulate commerce with foreign nations.  A copy of the complaint can be found here.  Odebrecht v. Prasad

Now, Cuba and Syria are near the top of my least favored nations list.  However, government policies that punish businesses for political reasons – even for things I agree with –  is worrisome.  I am not sure many conservatives would be too happy with Philadelphia passing a law barring the awarding public contracts to companies that do business with Smith & Wesson or some other firearms manufacturer.

From a legal perspective, it will be interesting to see how this case plays out.  It appears as if Oderbrecht may have an uphill battle.    At first blush, it appears that Florida is simply acting as a “market participant” rather than a regulating foreign affairs.  Indeed, the laws sanctions are directed at contractors not the sovereign nations of Cuba or Syria.   Then again, I am not an expert on the “foreign commerce clause” so it will be interesting to watch this case play out.  I certainly would not rule out some sort of compromise.

Would be great to hear the thoughts of the sage Chris McCabe over at papubliccontracts.com on this issue.

Underground Construction has an article on the results of a study concerning the current state our water systems.  The results are bad news for those that live in areas that are prone to water main breaks (like Philadelphia) and potential good news to the contractors that will be required to perform the work to fix, maintain, and upgrade these system.  Here are some statistics that I found interesting:

“The average age of the failing water mains is 47 years old and 22 percent of all water mains are over 50 years old. The study also found that 8 percent of all installed water mains are beyond their useful life and the use of trenchless technologies will continue to increase with directional drilling as the most widely accepted technology with a higher satisfaction rating and 74 percent of utilities are considering it in the near future.”

These statistics one again prove that infrastructure will be a growth area for contractors for the considerable future.

Is the controversial Goldtex project the beginning of the end for the last union-town in America?  Ryan Briggs over at HiddenPhilly.org has an interesting piece that explores this question.  

I have been an outspoken proponent of what the developers of the Goldtex project are doing.  I applaud them not because they are trying to bust up unions, rather because they are standing up to a long history of Big Labor extortion of developers in the City of Philadelphia.

I am not anti-union.  In fact, I think union apprentice and trade schools do a great job of teaching individuals a real world pliable trade.    I think it takes a remarkable person to to voluntary go hundreds of feet into the air to weld steel.  And, I am certainly not against anyone that puts in a hard days work everyday working with their hands.

However, what I am against are the mob like tactics used by Big Labor to extort developers into giving work to labor unions.  We would not stand for the deplorable, embarrassing, and childish behavior in any other industry.  Imagine if I went to a potential client and destroyed their property because they hired another law firm!  Imagine if Microsoft destroyed an Apple Store because they were angry with people buying iPads!  Union behavior of the kind being exhibited on the Goldtex project is nonsensical.   Who is advising the Unions?  Do they really think that they are endearing themselves to the public by engaging in such tactics?

Moreover, the folks that are vandalizing protesting the Goldtex project are professional grade thugs protesters.  They are not the rank and file members of the trade that just want to go to work and earn a living.  If Big Labor truly believes that better quality work justifies the higher cost of Union labor then why don’t they demonstrate that to developers?  In other words send your business agents to sales school, not thug school.  Furthermore, if union members are truly concerned about their future they should immediately fire their leadership.  Obviously, they are doing a horrible job for you as you ranks and influence shirk everyday.

So, what the Goldtex developers are really doing is standing up to bullies.  And until Big Labor changes the way it sells itself to consumers, that is something we can all agree with.