There are always development in the laws that affect owners and construction projects, and each development merits a detailed discussion of the significance of the impact locally and on a broader stage. What worked on one project in a given year may no longer be feasible or even possible in the following year or in a different location. Even before a dispute arises, the participants to a construction project should always be aware of the legal environment in which the work is being done. It is too late to correct an erroneous assumption as to the law after a dispute has arisen.  COAA is a great resource for staying current on industry practices and identifying the correct questions to ask to avoid assuming that a past practice remains correct. That is also the value that the construction lawyer may bring to the project whether allocating risk or assessing claims.

American Arbitration Association Issues Updated Rules For Construction Industry Arbitrations

The new Rules that became effective on July 1, 2015, introduce several concepts that could enhance the speed and efficiency of arbitration as well as create more distinct processes for disputes involving different amounts, issues and complexity. Some construction industry representatives became concerned in 2013 when AAA issued their “Optional Appellate Arbitration Rules” that the line between litigation and arbitration was being further blurred. The new Rules may address those concerns by empowering the arbitrator to encourage greater preparation by the parties and by stating more aggressive time frames than had previously been proposed.

The new Rules provide the mediation is mandatory for any dispute where the claim or counterclaim exceed $100,000. The mediation will take place concurrent with the preparation for the arbitration hearing, but should not extend the arbitration or affect the scheduling of the hearing. Interestingly, the Rules specifically provide that the mediator shall not also act as the arbitrator, unless all of the parties and the mediator agree. Some Alternative Dispute Resolution practitioners have been developing a hybrid Mediation-Arbitration or Arbitration-Mediation procedure in an effort to encourage the parties to take advantage of a “last opportunity” to resolve the dispute voluntarily. However, the hybrid procedures present serious issues of ethics and confidentiality, and competent construction counsel should be consulted before deciding to use a hybrid procedure.

From an arbitrator’s perspective, the new rules expand the description of the Preliminary Hearing Conference and allow the arbitrator to assert more control over the proceedings as may be appropriate with the goal of enhancing the speed and efficiency of the process. The Rules incorporate a section describing the elements and issues to be considered at the preliminary conference and warn against “importing procedures from court systems” in order to provide a simpler, less expensive and more expeditious process form of alternative dispute resolution. The preliminary hearing also addresses the exchange of information, including the format of the exchange of electronic information. The Rules avoid using the term “discovery”—except to prohibit discovery in “Fast Track” arbitrations (under $100,000) and allow the arbitrator to control the extent and character of discovery in Large, Complex Construction arbitrations (in excess of $1,000,000).

Some people have historically avoided arbitration because the arbitrators’ hesitation about making legal rulings that could deny either party a full opportunity to present facts or arguments on a given issue. However, the legal environment may provide clear guidance on the viability of a claim or defense, and allowing the arbitrator to make interim decisions could enhance the efficiency of the proceeding by narrowing the issues to be decided through the arbitration. The new Rules more explicitly recognize the arbitrator’s ability to permit dispositive motions. Likewise, the new Rules include a process to obtain emergency relief with an arbitrator appointed within 24 hours of a request; the Rule is generally patterned after the rule in the Commercial and International Rules that has been successfully implemented. These two additions do blur the distinction between litigation and arbitration, but they also allow the parties to obtain relief while maintaining the confidentiality of the proceeding rather than pursuing the relief in the public litigation forum.

“Some people have historically avoided arbitration because the arbitrators’ hesitation about making legal rulings that could deny either party a full opportunity to present facts or arguments on a given issue.”

One of the other significant shortfalls of the prior rules was the absence of explicit authority in the arbitrator to enforce the rules and orders issued through the procedure. The new Rules authorize the arbitrator to take enforcement actions to achieve a fair, efficient and economical resolution of the case. Among the specific powers, the arbitrator can allocate costs of producing information, recognize and protect confidentiality and impose sanctions including adverse inferences and exclusion of evidence if warranted. However, the arbitrator is still precluded from the draconian measure of entering a default against any party.

The new scale of the applicable rules provides that disputes under $25,000 should be decided by submission of documents only, unless any party requests a hearing. Cases under $100,000 should be administered under the Fast Track Procedures that require the Preliminary Conference within 10 days of appointing the arbitrator, and the hearing should be closed within 45 days of the Preliminary Conference followed by issuance of the award within 14 days. Under Fast Track Rule 12, the time frames may only be extended “in extraordinary cases when the demands of justice require it” and all of the parties agree in writing. Other cases under $1,000,000 would be administered under the Regular Track. The Large, Complex Construction Cases over $1,000,000 would be subject to the enhanced authority of the arbitrator to control the proceedings, allocate costs and impose sanctions.

Many states have passed various arbitration statutes that may go further than the Federal Arbitration Act, 9 USC 1 et seq., in describing the relationship between the courts and arbitration proceedings, regardless of whether the arbitration takes place pursuant to the AAA rules. Each party to a contract should consult with experienced counsel when considering the dispute resolution options that are available and the best approach to avoiding and resolving disagreements.

Surety May Be Liable For Consequential Damages Even When Contract Waives Those Damages

Generally, a surety’s liability is the same as that of the contractor who is to perform the contract. As a result, if the underlying contract waives consequential damages, the surety would have not greater liability. The Bankruptcy Court for the Eastern District of North Carolina in New Bern Riverfront Development, LLC (“New Bern”) v. Travelers Casualty and Surety Company of America (“Travelers”) recognized the general rule as it applies to the surety’s derivative liability to answer for the default by the contractor. However, the Court also observed that the surety has obligations that arise out of the bond itself that create separate contractual obligations to the Owner.

New Bern executed an AIA A111-1997 Agreement incorporating AIA A201-1997 General Conditions with Weaver Cooke Construction to perform construction work. Travelers was the Performance Bond Surety based on the AIA A312 bond form. At some point, New Bern declared Weaver Cooke to be in default and called upon Travelers to honor the performance bond. New Bern ultimately filed for Bankruptcy protection, and the litigation became an adversary proceeding in Bankruptcy Court. Travelers field a motion to dismiss the claim against it for consequential damages. Initially, on December 5, 2014, the Bankruptcy Court denied Travelers’ motion finding that the recovery of consequential damages for the breach of a direct obligation of a surety under the bond is appropriate unless the bond expressly or impliedly limits such recovery.

The Court examined the obligations of the surety under the A312 [which is similar in these respects to the ConsensusDOCS 260 Performance Bond] to remedy the default, arrange for completion of the work, tender a completion contractor or pay the owner the amount of damages up to the bond amount. The Court noted that the underlying contract contained a waiver of consequential damages, but the bond itself did not contain a similar waiver. The bond language obligated the surety to act and allowed for recovery of damages from the surety’s failure to act.

Not surprisingly, Travelers requested the Court reconsider its December denial of the motion to dismiss, and the Court did reconsider and reverse its decision on March 5, 2015, on the narrow ground that New Bern did not actually request consequential damages in its complaint against Travelers. Rather, the complaint only sought “compensatory” damages, so the pleadings did not satisfy the legal requirement of seeking non-derivative consequential damages from Travelers.

The lesson is to carefully examine the requests for relief to make sure that the owner is adequately alleging all appropriate measures of relief against the appropriate parties who may bear some responsibility. Failure to pay close attention may result in being legally precluded from seeking consequential damages from a party who breached contractual obligations.

Contractor Awarded “Delay” Damages Even Though The Project Was Completed Early

The Louisiana Department of Transportation (DOT) awarded the contract to widen a portion of Interstate 10 outside of Lake Charles, Louisiana, to Gilchrist Construction Company. The contract contained both liquidated damages and an early completion bonus. The project was completed ahead of schedule and Gilchrist was awarded a substantial early completion bonus. Shortly thereafter, Gilchrist sued DOT seeking an additional $4 million for delays encountered during the contract performance that were alleged to be due to errors in the plans and specifications provided by DOT. The trial court awarded the requested $4 million that was largely affirmed by the Louisiana Court of Appeals finding that the errors in fact caused delays that likewise increased the contractor’s costs for performing the contract.

The contract required Critical Path Method scheduling as described in the AGC Construction Planning and Scheduling publication. Using the impacted as-planned schedule analysis method, the contractor argues that accommodating the errors in the quantity estimates required greater effort and more time to be expended. While the DOT critiqued the methodology and argued that interim change orders resolved some of the claims, the DOT did not perform an alternate calculation. Gilchrist acknowledged that the baseline schedule did include some errors relative to the assumed rate of productivity, but the court concluded that the baseline schedule was an accurate and valid work plan that was accepted by DOT. The increased production rate achieved by the contractor overcame the errors in the quantity estimates from DOT. Applying the production rate actually achieved to the original estimated quantities reveals that the project would have been completed even earlier.

While the trial court awarded the full damages requested by Gilchrist (including compensation for idle equipment and material stockpiling), the Court of Appeals deducted the award of Eichleay damages for home office overhead since there was no actual work stoppage. The Court of Appeals affirmed the award of $3.7 million in delay damages on a project that was completed early.

While completing on schedule is an important measure of a project success, that is not the only consideration when evaluating exposure for delay damages. Either based on early completion incentives or the contractor’s general ability to complete early, delays that do not extend the completion date could still expose the owner to delay damages. This topic may be addressed in the contract and with appropriate documentation during the course of the project. As demonstrated by this case, early completion opportunity is another potential issue for the unwary.

Cyber Liability Is An Issue For Any Business With A Public Presence

The risk of data breach is not limited to health care entities and retailers. Any business that uses computer technology, especially if it stores personal information relating to its employees, customers or others, is susceptible to an attack or inadvertent breach of data security. The now-infamous Target data breach was traced to credentials stolen from an HVAC contractor who had access to the Target network possibly to monitor energy usage in various store locations. Once the hackers were able to enter the Target system, they were able to introduce malicious software that provided access to substantial financial data on the company and customers.

The increasing use of Building Information Modeling and the transfer of the BIM model and data to operations, which also allow entities to access real time data and possibly access other parts of an owner’s network, creates a greater risk for data breach even if you believe that there may be no connection between the building operations and other information stored on the network. The more points of entry to any network, the greater the risk of intrusion.

There are federal laws, agencies and rules that have been developed to require various industries to enhance cyber security, and many states have likewise gotten involved in “encouraging” businesses to avoid data breaches in order to avoid substantial fines and penalties. While most lawsuits resulting from data breaches have been dismissed because the allegations largely asserted “fear of identity theft,” some courts are getting more sympathetic to the increasing numbers of people who have been the subject of a malicious or inadvertent data breach.

The Federal Trade Commission has issued Ten Lessons to Reduce Vulnerabilities that provide some structure to the preventive actions that can be taken:

1. Start with security
2. Control access to data sensibly
3. Require secure passwords and authentication
4. Store sensitive personal information securely and protect it during transmission
5. Segment your work and monitor who is trying to get in and out
6. Secure remote access to your network
7. Apply sound security practices when developing new products
8. Make sure your service providers implement reasonable security measures
9. Put procedures in place to keep your security current and address vulnerabilities that may arise
10. Secure paper, physical media, and devices

According to the Ponemon Institute, ninety-one percent of health care organizations have had at least one data breach. Likewise, the incidence of cybercrime is growing at a rapid pace. Despite the best efforts of industry and government, there is an increasing likelihood that every business will suffer some form of breach. With that in mind, the Department of Justice issued “Best Practices for Victim Response and Reporting Cyber Incidents” to provide some guidance for businesses who may experience a breach of security.

a. Have a plan in place before a breach occurs
b. Make initial assessment
c. Implement measures to minimize damage
d. Record and collect information
e. Notify law enforcement/victims
f. Do not use compromised system to communicate
g. Remain vigilant

While most people do not consider themselves to be likely target of cyber criminals, the methods employed by those criminals does not discriminate based on the value of the target. It is becoming a crime of opportunity using automated programs searching the Internet for vulnerabilities that can be exploited. Alternatively, the human factor remains the greatest security vulnerability, whether by losing laptops or storage media, succumbing to phishing attacks, using weak passwords or malicious intent. The best plan involves the elements of a good security program as well as a good cyber insurance policy from a reputable carrier—in addition to your lawyer, of course.

John Sier, with the firm of Kitch Drutchas Wagner Valitutti & Sherborook in Detroit, Michigan, is Associate Counsel to COAA.