Lawyers, Guns, and Money – But Mostly Guns

The Justice Department’s decision to drop its False Claim Act case against Kellogg, Brown, and Root (“KBR”) over armed private security contractors (“PSC”) in Iraq says as much about the touchy subject over America’s increasing reliance on a private army as it does about the need to fully understand ALL of the terms of your contract.

In United States of America v. Kellogg Brown & Root, U.S. District Court for the District of Columbia, No. 1:10-cv-00530, the Justice Department alleged, among other things, that KBR had violated the False Claims Act when it requested payment for services provided by PSC’s to KBR, KBR executives in theater (i.e, Iraq), and KBR subcontractors also operating in theater.  The government claimed that KBR failed to obtain proper authorization from US Central Command (“CENTCOM”) before employing armed PSC’s to provide security to it and its subcontractors.  The government claimed that KBR’s contract prohibited KBR from employing armed PSC’s.  The basis for the government’s claim is one all too familiar to contractors – the incorporation by reference and compliance with laws clauses in KBR’s contract.

KBR entered into a logistical support contract with the government in 2001, before the War in Iraq began, that had nothing to do with private security.  The contract contained a typical incorporation by reference and compliance clauses found in most contracts.  The clause stated:

[KBR] shall ensure that all personnel hired by or for [KBR] will comply with all guidance, instructions, and general orders applicable to U.S. Armed Forces and DoD civilians as issued by the Theater Commander or his/her representative.  This will include any and all guidance and instructions issued based upon the need to ensure mission accomplishment, force protection, and safety, unless directed otherwise in the task order SOW [Statement of Work]

. . .

The contractor shall comply, and shall ensure that all deployed employees, subcontractors, subcontractors employees, invitees, and agents, comply with pertinent Service and Department of Defense directives, policies, procedures, as well as federal statutes, judicial interpretations and international agreements (e.g. Status of Forces Agreements, Host Nation Support Agreements, ect.) applicable to the U.S. Armed Forces or U.S. citizens in the area of operations.

After several high profile incidents involving PSC’s, CENTCOM and the Coalition Provisional Authority issued order essentially banning PSC from owning privately owned firearms without obtaining permission from CENTCOM first.  The government alleged that these orders became part of KBR’s contract via the incorporation and compliance clauses in the contract and KBR, therefore, violated its contract when it employed PSC who carried privately owned firearms without first obtaining permission of CENTCOM.

The parties litigated the case for two years until the government voluntarily dismissed the case without prejudice.  It is doubtful that KBR is celebrating victory, however. First, because the government withdrew the case “without prejudice” that means it can re-file the case against KBR at a later date provided the statute of limitations has not then run.  Second, KBR probably spent close to – if not in excess – of $1,000,000 in legal fees defending a case brought on by one small clause in its contract.

Like most contractors, before this case, I doubt KBR ever gave much thought to the ramifications of the incorporation and compliance with laws provisions in its contracts.  But, I am sure it will now.  As my old mentor used to tell me, if it was not important, it wouldn’t be in the contract.  Therefore, contractors need to the impact of each clause in its contract.  And, in the case of incorporation, compliance with laws, or flow down provisions, they must consider what other terms will apply to the contract other than those in the written agreement before them.

Another Guilty Plea in a DBE Case

If you have not gotten the point by now that you should take DBE regulations serious, you should.  The DOT Inspector General posted these two item on its web page today:

“On September 11, 2012, Michael Paletta, president of Crossboro Construction Contracting, pled guilty in United States District Court, New York, New York, to a mail fraud conspiracy. Between approximately 1994 and March 2011, Mr. Paletta, on behalf of Crossboro (a non-DBE), conspired with MS Construction (a DBE) to perform construction work on various federally-funded bridge projects in Manhattan and other boroughs where MS Construction was the purported DBE subcontractor. MS Construction was paid approximately 5% as its “fee” and relied upon Crossboro for performance of the actual work.”

“On September 5, 2012, Dennis Degrazia, pled guilty in U.S. District Court, Boston, Massachusetts, for his role in a scheme to impede, impair, and obstruct the U.S. Department of Transportation’s Disadvantaged Business Enterprise (DBE) program. In May 2011, David Hebert, Robert Dickerson, and Mr. Degrazia were indicted in conjunction with this scheme.”

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Construction Defect CLE

For Pennsylvania attorneys interested in the fast growing construction defect area of litigation or those just  looking for last minute CLE credits, I am moderating and presenting a CLE for the Philadelphia Bar Association entitled “Construction Defect Litigation: Claims and Coverage.”  It will take place August 21, 2012 from 12:00-4:15 pm live in Philadelphia and simultaneously via online web cast and via video feed in Mechanicsburg, Norristown, and Pittsburgh.  A copy of PBI flyer containing sign up information and more is available here:  PBI CLE Flyer.

A Look at Drilling Contracts Under Pennsylvania Law

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.

DOL to Hold Prevailing Wage Seminar

The Department of Labor is holding a seminar on the Davis Bacon Act and related federal prevailing wage laws in Philadelphia on July 10-12, 2012.

To sign up for a training session, email name, title, organization, email address and training location to whdpwc@dol.com.

For more information, visit http://www.dol.gov/whd/govcontracts.

The Problem With Low Bid

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.

Should Arbitration Be Avoided At All Costs?

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.

The Statutue of Repose Has Its Moment and Why You Should Care

Most of the attention given to our country’s aging infrastructure has concerned what we should do to fix it.  Most of the attention contractors have given it has concerned how they can fix it. However, contractors should also be giving attention to their current liabilities on aging – and long ago completed – infrastructure projects.  Think you don’t have to worry about the overpass you completed twenty years ago, based upon the U.S. Supreme Court’s decision not to reviewJacobs Engineering, Inc. v. State of Minnesota,  which concerned a decision of the Minnesota Supreme Court regarding the statute of repose,  think again.

The issue before the Supreme Court was whether the State of Minnesota could resurrect through legislation liabilities the  statute of repose had extinguished.  Understanding why this issue is so important to the design and construction industry requires a basic understanding of the statute of limitations and statute of repose.   Generally, a statute of limitations bars claims brought a certain period of time after the injury giving rise to the claim occurs (or a claimant first learns of the injury).  Whereas, a statute of repose bars all claims occurring after a certain period of time no matter when the injury occurs (or a claimant first learns of the injury).

For example, in Pennsylvania there is a two year statute of limitations on negligence claims.  If I am injured because of contractor’s faulty workmanship today (and I know about my injury) I have two years from today to bring a lawsuit against the negligent contractor.  Otherwise, the statute of limitations bars my claim.

On the other hand, the Pennsylvania statute of repose is 12 years.  Therefore, if I am injured today because of a contractor’s faulty workmanship, which the contractor completed more than 12 years ago, my claim is barred no matter how soon I bring it after learning of my injury.

Seems straightforward and basic until you consider what happened in Minnesota following the infamous (and tragic) I-35 bridge collapse.  In 2008, after the bridge collapse, the Minnesota Legislature enacted a statute called the “compensation statute” that allowed the State of Minnesota to recover from contractors any payments it made to victims of the bridge collapse to the extent that the contractor caused or contributed to the bridge collapse.  The problem was that the I-35 bridge was completed in 1962 and the Minnesota 15-year statute of repose had long ago run.

Jacobs Engineering, who did not actually work on the bridge project in the 60’s but had acquired a firm that did, challenged the Minnesota Legislature’s ability to retroactively change the statute and revive extinguished claims on constitutional due process grounds.  The Minnesota Supreme Court upheld the retroactive nature of the compensation statute effectively vitiated the state’s statute of repose.  Jacobs Engineering then sought review of the Minnesota Court’s decision by the U.S. Supreme Court.  While several construction trade groups filed amicus (“friend of the court”) briefs in support of Jacob’s appeal, the Supreme Court ultimately declined to review the case.  Therefore, effectively letting the Minnesota Court’s decision to stand.

AGC was one of the trade groups that filed a brief urging the Supreme Court to review the Minnesota Court’s decision.  The AGC’s brief  underlined the obvious vital role that statutes of repose play for the design and construction industry and also why contractors should care about the Minnesota Court’s decision even if you do not perform work there.

So, why should you care?  Because as our nation’s aging infrastructure continues to deteriorate it is reasonable to assume that a similar catastrophe (or even a less tragic accident like a water main break causing property damage), while unfortunate, will occur.  If and when an incident involving aged infrastructure does occur, Minnesota’s actions (and now the Court’s decision not to review the case) will encourage other state governments to pass legislation that retroactively revises extinguished claims against potentially liable contractors.  Indeed, prior to Minnesota, several other states had already done what Minnesota did with varying levels of success.  In essence, your state’s statute of repose is only good so long as your state feel like it is.  This uncertain affects not only the potential liable contractors but also their insurers who rely upon the statute of repose in determining risk.

What this all means is that if you live in a jurisdiction that does not pass ex post facto laws which seek to recover from contractors for unfortunate catastrophes for work completed beyond the statute of repose date, then the statute of repose in your jurisdiction should protect you from certain claims.  On the other hand, with elected officials beholden to constituents that demand that a wrong be righted and that someone be held accountable, it is certainly possible that other jurisdictions could take actions  similar to Minnesota, especially considering the U.S. Supreme Court’s decision not to review the case.

Add this to the list of concerns that infrastructure contractors have when considering whether state and federal governments will ever get around to addressing the aging of our nation’s infrastructure.

Pipe Dream

Are you a pipe fitting contractor or excavator looking for more work?  Are you a material supply house looking for a swift selling product?  Then you better get to know gas-line pipe.  ENR reports that the discovery of natural gas formations present a tremendous opportunity for pipe line builders.  Meeting the demands of the natural gas market:

“will require the annual construction of nearly 2,000 miles of pipeline in the lower 48 states and the Gulf of Mexico, roughly a 17% increase over current capacity. Additionally, an average of 1,300 miles of oil and natural-gas-liquid (NGL) pipeline will need to be constructed annually. The study predicts more than $250 billion of investment in the new lines.”

7 Essential Construction Contract Clauses: Change Claims (Part 7 of 7)

Even on modestly sized projects changes are inevitable and a project is rarely constructed exactly as originally designed. The reasons for changes in the work are as numerous as the stars in the sky. However, one certainty is that entitlement to additional compensation for changes is a frequent battle ground for construction disputes.

Several areas of the contract will address changes. Of particular importance is how a contractor perfects a claim for compensation for a change. Pity the contractor that has performed work clearly outside the scope of his contract only to see his claim be lost because he failed to perfect his claim under the contract. Your lawyer cannot argue a claim for compensation because of a change if the claim was not perfected. Therefore, it is imperative that a contractor know how a change claim is perfected.

A contract should state the “who, when, and how” of change claims:

•  Who is authorized to direct changes?

•  When is the deadline for submitting claims for changes?

•  How must those claims be submitted?

 Who is authorized to direct change orders?

The contract should state who is authorized to direct changes in the work. In First General Construction Corp., Inc. v. Kasco Construction Co., Inc., the Federal District Court for the Eastern District of Pennsylvania held that verbal directives to perform additional work from a person not authorized to approve extra work are insufficient to support a claim for additional compensation related to that work. In First General, the Court granted summary judgment in favor of the defendant on a subcontractor’s claim that it was entitled to compensation for additional work directed at the behest of defendant’s project superintendent. The Court held that the only person from defendant that was authorized to direct such work was the project manager and the directive in question came from the project superintendent.

Therefore, the contract should be clear as to which persons are authorized to direct the work. Contractors should follow directives only from those authorized persons and when the directive comes from a non-authorized person should confirm the directive from the person that is authorized.

When is the deadline for submitting claims?

Contracts will typically require written notification on claims for compensation to be submitted within a certain time period. The time period can range from between 7 to 21 days after a contractor is aware of an event giving rise to a claim. Failure to provide notice within the prescribed time period may result in a claim being barred. Therefore, contractors should be wary of any such notice provisions and deadlines for making claims for changes.

How must the claims be submitted?

Knowing how claims are submitted is just as important as knowing when they must be made. Typically, the contract will require claims to be made “in writing.” Contractors should take care to learn what the written notice must include in order to validate the claim. Moreover, to whom is the claim being made? Is it to the architect, the construction manager, the owner, or some combination of them?

Of course there are exceptions to these rules, but why make claims for entitlement more difficult to prove; especially, when the burden of proof in demonstrating the exception applies is on the party claiming the exception.