K&L Gates Construction Law Blog

K&L Gates' Arbitration World, March 2012

K&L Gates — Fri, 11 May 2012 08:58:43 -0800

Emerging Markets Special Edition

Welcome to the 18th edition of Arbitration World, a publication from K&L Gates’ Arbitration Group. This special edition focuses on issues and recent developments in emerging markets. We also include our usual round-up of news items in international commercial arbitration and investment treaty arbitration.

We hope you find this edition of Arbitration World of interest, and we welcome any
feedback (email ian.meredith@klgates.com or peter.morton@klgates.com).

In this issue:

News from around the World
World Investment Treaty Arbitration Update
Developments in Indian Arbitration
Harmonizing Arbitration in China with International Best Practice
Arbitration in Ukraine – Moving Forward
Recent Developments on Arbitrability in Russia
The Arbitration Landscape in Latin America

View the entire March 2012 edition here.

Green Building: Design and Construction Contract Issues

K&L Gates — Wed, 09 May 2012 11:00:15 -0800

By Gregory R. Andre, K&L Gates, Chicago

“Green Buildings” feature energy efficient and environmentally friendly elements. Governmental regulation, cost savings and public relations are driving the trend. While architects, engineers, contractors and facilities managers focus on Green Building design, construction, equipment and operation issues, lawyers may wish to consider Green Building issues in the contracts entered into between the owner and the design and construction professionals. This article addresses the special contract issues that may arise in connection with the design and construction of Green Buildings.

To read the full article, click here.

Idaho Supreme Court Upholds Damages Award For Architectural Services Rendered Without A Written Contract

K&L Gates — Wed, 04 Apr 2012 12:52:32 -0800

Farrell v. Whiteman, 152 Idaho 190, 268 P.3d 458 (2012)

Damien Farrell, an architect originally licensed only in Michigan, brought suit against developer, Kent Whiteman, for uncompensated architectural services rendered for Whiteman’s condominium project. Whiteman counterclaimed, arguing that Farrell was not entitled to compensation because some of the services rendered were rendered before Farrell obtained his architectural license in the State of Idaho and because some of the services rendered were provided without a written contract.

The District Court found that an implied in fact contract existed between the parties and awarded Farrell damages on the theory of quantum meruit for services rendered after obtaining his Idaho license, and unjust enrichment damages for services rendered before obtaining his license. Whiteman appealed.

Upon review, the Supreme Court of Idaho upheld the district court’s decision, including consideration of the speed and quality of Farrell’s work, in determining the amount of damages to award under the quantum meruit theory. The Court also awarded Farrell his attorney fees.

Court Imposes Strict Liability Under NYC Excavation Ordinance

K&L Gates — Wed, 28 Mar 2012 12:09:07 -0800

Yenem Corp. v. 281 Broadway Holdings, 18 N.Y.3d 481 (N.Y. 2012)

On February 14, 2012 the New York Court of Appeals held that former Administrative Code of the City of New York § 27-1031(b)(1), a municipal ordinance (“the Ordinance”), triggers strict liability for defendants who cause damage to adjoining property through excavation work.

In Yenem Corp., Defendants purchased a lot adjacent to a building located at 287 Broadway and began a construction project requiring an excavation eighteen feet below street level. As a result, 287 Broadway shifted out of plumb; eventually, the Department of Buildings deemed the building unsafe for occupancy. The plaintiffs, the owner and a tenant of 287 Broadway, sued for damages resulting from the excavation and moved for summary judgment under the Ordinance, which states that “when an excavation is carried to a depth of more than ten feet below the legally established curb level the person who causes such excavation shall at all times and at his or her own expense, preserve and protect from injury adjoining structures”.

The Court of Appeals noted that, as a general rule, violation of a state statute that imposes a specific duty constitutes negligence per se, while violation of a municipal ordinance is only evidence of negligence. The Court went on to hold, though, that Administrative Code § 27-1031(b)(1) is an exception to this general rule because it has its origin in state law. Specifically, the ordinance originated from an 1855 special law imposing absolute liability, and the policy considerations underpinning the 1855 special law remain the same. Accordingly, the Court held that violation of the Ordinance constitutes per se negligence.

It should also be noted that effective July 1, 2008, the Ordinance was amended. Its equivalent provision is now contained in New York Administrative Code, tit 28, ch 33, § 3309.4. The Court declined to interpret the new provision, as it was not before the Court.

Violation of Building Permit Requirement Not a Basis for Criminal Liability Under NY Executive Law

K&L Gates — Wed, 28 Mar 2012 12:02:45 -0800

People of the State of New York v. Grimditch, 936 N.Y.S.2d 527 (Sup. Ct. Essex Co. 2012).

In a case of first impression, the Court in People v. Grimditch held that a contractor cannot be held liable under New York Executive Law § 382(2) solely for building without a permit. The Defendant contractor had been constructing a boathouse on Lake Placid when the town building code enforcement officer issued a stop work order for failure to obtain a building permit under the state building code. When Defendant contractor disobeyed the order by continuing construction, he was indicted by the Essex County District Attorney’s Office for violating Executive Law § 382(2), which provides that failure to follow an “order to remedy any condition found to exist in, on, or about any building” or knowingly violating an order by a local government regarding the “standards for construction, maintenance, or fire protection” will result in fines or imprisonment. The Court held that the indictment was defective because building without a permit did not amount to a condition existing “in, on, or about” the building and therefore was not a violation of the express language of the statute. The Court also held that the requirement of a building permit was not a “standard of construction or maintenance.”

Objects Falling From Ground Level Can Trigger Liability Under NY Scaffold Law

K&L Gates — Wed, 28 Mar 2012 11:58:19 -0800

Wilinski v. 334 East 92ND Housing Dev. Fund Corp. et. al., 18 N.Y.3d 1, 935 N.Y.S.2d 551 (N.Y. 2011)

The New York Court of Appeals held that New York Labor Law § 240(1) could apply to injuries caused by a falling object whose base stands at the same level as the injured worker. The Plaintiff was a construction worker who, while in the process of demolishing walls in a vacant building, was injured when two ten-foot poles which rose out of the floor on which he was working fell on him. The Court clarified its prior holding in Misseritti v. Mark IV Constr. Co., 86 N.Y.2d 35, 657 N.E.2d 1318 (NY 1995), by stating that Labor Law § 240(1), a scaffold law, could be invoked even if the injury was caused by an object on ground level. In so doing, the Court explained that in order to state a claim under the statute, the plaintiff has to prove both that the injury was caused by the effect of gravity and that use of the protective equipment listed in the statute could have prevented the injury from occurring. In this case, though the Court determined that the injuries caused by the poles falling were caused by the effect of gravity, summary judgment in favor of the plaintiff worker was precluded because an issue of fact remained as to whether the equipment prescribed by the statute could have prevented the injury from occurring.

In addition, Plaintiff brought a claim under 12 NYCRR 23-6.3(b)(3), a regulation promulgated under New York Labor Law § 241(6), which provides that “walls, chimneys and other parts of any building or other structure shall not be left unguarded in such condition that such parts may fall, collapse or be weakened by wind pressure or vibration.” The Court found that Defendant could be liable despite the fact that neither wind pressure nor vibration contributed to the poles falling. The Court reasoned that the wind pressure and vibration clause only attached to the words “be weakened” and not to the clauses “fall” and “collapse.”

Court overturns City Rejection of Low Bidder based on alleged lack of Necessary Experience

K&L Gates — Thu, 09 Feb 2012 15:20:08 -0800

Hillside Landscape Constr. Inc. v. City of Lewiston 151 Idaho 749, 264 P.3d 388 (2011)

The City of Lewiston received multiple bids on a public works project. It rejected the low bidder’s offer on the ground that the low bidder lacked sufficient experience for the project. The low bidder brought an action against the City for declaratory relief, injunctive relief, and damages. The district court dismissed the complaint, and the low bidder appealed.

The Supreme Court of Idaho reversed, concluding that the City could not reject the bid on the ground of lack of experience because the City elected to follow Category A bid procedures. Under Category A, the City “may only consider the amount of the bid, bidder compliance with administrative requirements of the bidding process, and whether the bidder holds the requisite license.” Id. § 67-2805(3). The City “shall award the bid to the qualified bidder submitting the lowest responsive bid.” Id. Under Category B the city may consider other factors, such as sufficient work experience and other prequalification standards. Id. at 67-2805(3)(b)(i).

In this case, the contractor applied under Category A, and the city added further requirements, such as previous work experience and other prequalification standards from Category B. The Supreme Court held that “adding any further requirements, either before or after inviting the bids, required the city to proceed under Category B.” The Court concluded that because the City had followed the Category A procedures, it could not reject the low bidder on the ground of insufficient work experience. This case demonstrates that once a city elects to use one Category, it cannot evaluate a bid using procedures from the other Category. Under Category A, a “lowest responsible bidder” analysis must occur before, not after, the project is open for bidding.

Prevailing Parties Denied Attorney Fees for Lack of a Public Works License

K&L Gates — Wed, 08 Feb 2012 15:23:22 -0800

Harris, Inc. v. Foxhollow Constr. & Trucking Inc., 151 Idaho 761, 264 P.3d 400 (2011)

Following work on a public project, a general contractor brought suit against a paving subcontractor and an excavation subcontractor alleging breach of contract, fraud and other claims. The paving sub had a public works license for contracts up to $500,000, but the excavation sub had no license. In what the district court called an “illegal ruse,” the subs agreed to submit a joint bid, using the paving sub’s license. The total bid, including paving and excavation, exceeded $500,000. After a trial to the court, the district court entered judgment for defendants, including an award of attorney fees to the paving subcontractor. The general contractor appealed.

The Supreme Court of Idaho affirmed the judgment in favor of defendants, but reversed the award of attorney fees. Under Idaho law, reasonable attorney fees are allowed in “any action to recover on a contract for services or in any commercial transaction.” I.C. § 12-120(3). The Supreme Court found, however, that even if this was a commercial transaction, the contract was illegal because the licensed subcontractor engaged in a “flagrant disregard of the law” by teaming up with an unlicensed subcontractor. As a result, the paving subcontractor was not entitled to recover its attorney fees despite having prevailed in a commercial transaction.

The Federal Prompt Pay Act Does Not Create A Private Right Of Action

K&L Gates — Mon, 24 Oct 2011 08:44:13 -0800

United States of Am. ex rel. IES Commercial, Inc. v. The Continental Ins. Co., Inc., Civ. Action No. 11-0985 (ESH), 2011 WL 4526018 (D.D.C. Sept. 30, 2011)

In this case, the court ruled that the Federal Prompt Payment Act (31 U.S.C. §§3901 et seq.) (the “PPA”) does not provide a subcontractor with an independent cause of action or an implied right of action against a Prime Contractor (or presumably its surety).

A prime contractor was awarded a contract by the United States Architect of the Capitol to perform certain design/build work on utility tunnels connecting the U.S. Capitol Power Plant to the Capitol. Included was electrical work which was, in turn, subcontracted to the Plaintiff, IES Commercial, Inc. (“IES”) in the sum of $118,600.00. Following disputes relating to certain changes and delays between the Prime and IES, IES sued the Prime’s Miller Act (40. U.S.C. §§3131 et seq.) payment bond surety. Thereafter, the Prime intervened and IES sued the Prime for (a) breach of contract and (b) violation of the PPA.

Prime thereafter moved to dismiss this second, PPA-related, count arguing that (1) there is no private right of action under the PPA; (2) the fact that there was a payment-related dispute between the parties rendered the PPA inapplicable; and (3) because the Government had not yet paid the prime, the monies sought by IES were not yet due, thereby rendering any claim for monies premature.

In finding in favor of the Prime and dismissing the PPA count, the Court found that while the question of a private right of action under the PPA had not been determined in the District of Columbia, other jurisdictions had found that no right existed. Moreover, while finding that Congress did envision “the PPA’s protections to be enforced in the same manner as other contractual disputes” (decision at 2, citations omitted), the court concluded that “neither the text of the PPA nor the legislative history reveal an intent to create a private right of action.” While not expressly discussed, the implication is that as part of a breach of contract action, a PPA violation could be included, but not as an independent claim.

In a footnote, the Court also recognized that because the PPA was only applicable to payments earned based upon “satisfactory performance,” and given that there were disputes as to IES’s performance, the payments were disputed. As payments were disputed, they were not subject to the PPA and its rights to interest payments.

It bears noting that the PPA (and related Federal Acquisition Regulations) are clear that if there is a dispute as relates to payments due and owing subcontracts, the Prime must notify the Sub (and if the subject monies were paid by the Government, then the Contracting Officer) of the dispute and the basis therefor. The PPA and regulations provide certain obligations with regard to return of proceeds in hand to the Government while the Prime/Sub dispute is resolved, among other obligations. Failure to follow those procedures, at least on federal projects, may subject the Prime to interest penalties owed to the Government (in addition to and separate from, the Sub).

Building Information Modeling (BIM): Special Contract Issues

K&L Gates — Wed, 05 Oct 2011 13:39:07 -0800

By Gregory R. Andre, K&L Gates, Chicago

Building Information Modeling (“BIM”) is the use of a digital database to integrate the work of all of the design and construction project team members and generate two-dimensional and three-dimensional models, plans and reports. Cost and scheduling can be added to create fourth and fifth dimensions. It is a tool that facilitates design collaboration and is intended to avoid conflicts and errors in the plans. Simply stated, BIM makes design a group effort, and it raises special contract issues as discussed below. BIM can be used under all of the delivery methods, and is especially encouraged under Integrated Project Delivery (“IPD”).

Instead of each design professional (architect, steel fabricator, HVAC subcontractor, etc.) producing multiple separate and independent plans for one building, BIM allows a team of architects and engineers to all contribute their respective plan and specifications data to one computer model for one building. BIM provides the technology to not only coordinate various building component designs, but also to understand how design changes will impact the cost and timing of the project. The design of one building component, say the HVAC ductwork, can be changed, and BIM will automatically change the other building components to accommodate it and present the overall economic effect and schedule impact due to the change.

To read the full article, click here.

Standards Applicable to Construction Site Safety, Conditions and Injuries

K&L Gates — Sat, 01 Oct 2011 10:44:53 -0800

Cain v. Bovis Lend Lease, Inc., No. 03:09-cv-723-HU, 2011 WL 4074104 (D. Or. July 14, 2011)

A subcontractor employee fell from a ladder at a hospital renovation site and suffered injuries. The injured worker sued the hospital, the renovation general contractor, the ladder fabricator (a subcontractor) and the architect. The worker’s direct employer was statutorily immune from liability. The case is the review of summary judgment motions by all parties resulting in a recommended series of decisions by a federal magistrate.

The opinion is lengthy and should be carefully reviewed in detail but the salient highlights for construction project participants may be summarized.

Claims were brought under the Oregon Safe Employment Act (OSEA); Oregon Employer Liability Act (ELA); common law negligence and premises liability.

The Court in granting and denying the various summary judgment motions made the following, inter alia, procedural and substantive rulings:

• A non-moving party for summary judgment, when the burden has shifted to demonstrate existence of genuine facts for trial, “must come forth with evidence from which a jury could reasonably render a verdict in the non-moving party’s favor…all justifiable inferences are to be drawn in its [non-moving] favor.”

• The OSEA claim against the architect is granted because it was neither the direct employer nor owner of the facility. A common law negligence claim remains.

• A private action for damages can, under certain facts, be brought under the OSEA if a four part test is met: 1) defendant violated the statute; 2) plaintiff was injured as a result of the violation; 3) plaintiff was a member of class protected by the statute; and 4) plaintiff suffered type of injury against which the statute protected.

• OSEA provisions apply to employer, but under some provisions also to owners or lessees of real property that constitutes a “place of employment”.

• Under the ELA, the general contractor in this case was not an indirect employer and therefore not liable under OSEA, which does not cover indirect employers.

• The hospital may be liable under OSEA where the worker qualifies as an employee and the hospital was the owner of the place of employment.

• The ladder fabricator is not liable under OSEA because it lacks any employment relationship with the worker.

• The hospital and general contractor may be liable for premises liability, but there are numerous issues for jury determination on this subject. The court gives extended discussion to invitee and licensee legal standards.

• The general contractor may be liable under the ELA. The determination must be made under a three part test for indirect employer liability: 1) the common enterprise test; 2) the retained control test; or 3) the actual control test. General contractor arguments that it was not responsible for architect’s code compliance and design work were left unanswered.

• On the subject of negligence, the Court reviewed the “but for” and “substantial factor’ standards in the context of causation. It determined that most likely the “substantial factor” standard applies where liability may rest with multiple defendants.

• In the end the Court dismissed the negligence claims as being redundant of the premises liability claims.

• The discovery rule applies to statute of limitations claims.

• A new unpled claim cannot be interjected in the form of a summary judgment motion response.

• An indemnity claim for defense costs only, may be asserted even though the indemnitee is not found to be negligent.

LESSON:

Oregon statutes and common law will provide causes of actions and defenses for multiple participants in construction projects where injuries are sustained by a worker. The availability of these options will rest on specific facts, statutory language and existing appellate case law.

Appellate Court Upholds Contract Requirement For Arbitration of Disputes

K&L Gates — Sun, 25 Sep 2011 11:36:59 -0800

Gemstone Builders, Inc. v. Stutz, 261 P.3d 64 (Or. Ct. App. 2011)

Contractor sued homeowners, who had hired contractor to build a home for them. Contractor sued for breach of contract, unjust enrichment and fraud. The parties disagreed regarding the interpretation of their contract as it pertained to arbitration. The contractor argued that the terms were irreconcilably contradictory, making the arbitration provisions unenforceable. The homeowner sought to compel arbitration. Addressing the issue, the trial court denied defendants’ petition to compel arbitration and defendants appealed.

The appellate court's parsing of the contract language is instructive in terms of the care that needs to be taken when drafting dispute resolution clauses. Following discussion of the contract, the appellate court observed that the contract was “surely not a model of clarity” and that there was ambiguity regarding whether arbitration was binding. However, the court concluded that such ambiguity did not render the contract unenforceable and, in the absence of extrinsic evidence of the parties intent, turned to “appropriate maxims of construction” to ascertain the reasonable intention of the parties. Noting that “we are guided by policies that favor arbitration” and recognizing that “arbitration is intended to be an alternative to litigation,” the appellate court determined the trial court had erred in denying defendants’ petition to compel arbitration and reversed and remanded the case.

Recent Third Circuit Decision Provides Insight into Pennsylvania's Approach to CGL Coverage for Faulty Construction Claims

K&L Gates — Fri, 23 Sep 2011 08:51:12 -0800

By: Richard F. Paciaroni & Amy Ream, K&L Gates, Pittsburgh

Despite substantial uniformity in language among commercial general liability (“CGL”) policies, the extent of coverage can vary depending upon which state’s law applies. One contested issue among the states is whether CGL policies should extend coverage for property damage caused by faulty construction, and what the extent of any such coverage should be. This article discusses a recent opinion reflecting the current status of Pennsylvania law with respect to CGL coverage for faulty construction claims, and briefly touches on the policy behind Pennsylvania’s existing approach.

A recent Third Circuit decision applying Pennsylvania law, Specialty Surfaces International, Inc. v. Continental Casualty Co., addressed the scope of an insurer’s duty to defend and indemnify a contractor for faulty workmanship claims under a CGL policy. In Specialty Surfaces, the source of the defective construction allegations stemmed from a project to install synthetic turf fields and drainage systems for four schools in the Shasta Union High School District (“Shasta”). Empire and Associates, Inc. (“Empire”) was hired as a subcontractor to provide and install synthetic turf fields manufactured by Specialty Surfaces, Inc., (“Specialty Surfaces”) as well as to install drainage systems. Empire and Specialty Surfaces, working together as “Sprinturf,” provided an eight-year warranty for each of the fields.

To continue reading and to view footnotes, click here.

Integrated Project Delivery: A Teamwork Approach to Design and Construction

K&L Gates — Fri, 16 Sep 2011 09:19:28 -0800

By Gregory R. Andre, K&L Gates, Chicago

What is Integrated Project Delivery?

Integrated Project Delivery (“IPD”) is an evolving, bold innovation in construction delivery. It generally contemplates the owner, the architect or engineer and the contractor all entering into one contract and functioning as a cooperative and collaborative team to design and construct the project with shared risks and rewards in the ultimate cost, schedule and quality of the overall project.

In simple terms, IPD is like a joint venture approach to design and construction. IPD represents a radical departure from traditional delivery methods that isolate responsibilities, liabilities, communication, risks and rewards with contracts that often lack incentives to cooperate and work toward the common goal of a successful project overall for everyone. Parties to an IPD team have incentives to do what is best for the project, rather than what is best for themselves. To motivate the design and construction team and get the best performance out of them, IPD generally favors a “carrot” approach; whereas, traditional delivery methods generally use a “stick” approach.

To read the full article, click here.

Kuwait and see

K&L Gates — Thu, 15 Sep 2011 13:09:28 -0800

As investors target Saudi and Qatar, it is still possible that Kuwait may turn to a hybrid PPP
model involving outsourcing and privatisation, write Paul de Cordova and Patricia Tiller at
K&L Gates.

While western economies blow hot and cold over the merits of PPPs, many Middle East countries are embracing this alternative to conventional government procurement. Kuwait is prominent among the first movers in this emerging sector. Kuwait introduced its own PPP law in 2008, with guidelines administered by the Partnerships Technical Bureau (PTB) and developed in consultation with the World Bank. Kuwait is taking a professional approach to bringing projects to market. Unlike some of its neighbours who have announced PPP schemes with little advance planning, Kuwait is endeavoring to approach projects in a methodical manner. Every project must undergo a feasibility study stage and be approved by a ministerial higher committee under the chairmanship of the Ministry of Finance before entering the procurement stage. Furthermore, the PTB is required to engage professional advisers to ensure, as far as possible, that projects are structured to attract the international investment community.

To read the full article click here.

This article originally appeared in PPP Bulletin International on September 14, 2011.

GAO Report Finds Flaws in Davis-Bacon Act Prevailing Wage Determinations

K&L Gates — Fri, 02 Sep 2011 10:41:11 -0800

By: Lawrence M. Prosen & Andrew R. McFall, K&L Gates, Washington DC

Over the past several years, the current business conditions have had an impact on all areas and aspects of the economy. Recent reports indicate that no industry has been harder hit than that of construction, an industry possessing one of the highest national levels of unemployment. Unemployment in the construction industry has spiked from 7.1 percent in 2000 to around 20 percent in early 2011. Tied to this issue is the fact that the commercial and private construction and real estate markets substantially dried up as a result of the economy and underlying bank crises. This, in effect, resulted in government construction and real estate projects being the predominant area in which work was available; forcing contractors to enter the federal market, often for the first time, and ‘‘learn on the fly.’’

The current economic problems have also resulted in Congress increasing or maintaining spending levels for a number of years on construction and related projects to try and bolster the economy. These expenditures and stimulus efforts have led to an increased curiosity and concern for how government monies are being spent. Coupled with the inauguration of President Obama in 2009, there has been a significant uptick in the amount of government regulation and oversight regarding government contracting and the construction industry. As part of that effort, the United States Government Accountability Office and other governmental organizations have conducted investigations and released reports dealing with government expenditures and budgeting. This article discusses one such report.

On March 22, 2011, GAO released a report (the ‘‘Report’’) raising several issues and concerns with the U.S. Department of Labor’s (‘‘DOL’’) methodology for making Davis-Bacon Act wage determinations. The Report is noteworthy, in that the Davis-Bacon Act plays a significant role in federal and federally funded construction projects throughout the United States. This article provides a brief background on the Davis-Bacon Act, a description of the Report and its recommendations, a discussion of the potential implications of the Report on the Service Contract Act, and a list of practical tips that construction contractors should consider in light of the Report.

To read more and to view footnotes, click here.

K&L Gates' Partners Found Illinois Chapter of Construction Owners Association of America

K&L Gates — Tue, 26 Jul 2011 11:48:48 -0800

Chicago partners Greg Andre and Dan Rosenberg have co-founded an Illinois chapter for the Construction Owners Association of America ("COAA"). An inaugural program is scheduled for October 6th at which Greg will lead a panel presenting on Integrated Project Delivery. Greg chairs the chapter's Executive Committee and Dan chairs its Program Committee. Officers must be owner members and consist of representatives of the University of Chicago, University of Illinois, Exelon Corporation and Northwestern Memorial Hospital. COAA is national organization dedicated to providing education, information and networking for real estate owners with ongoing construction work. Its members consist primarily of educational and health care organizations, both of which are active in construction today.

For more information, please visit the COAA website, here, or contact any of the following people:

Greg Andre (COAA IL Executive Committee Chair)
K&L Gates
70 Madison St., Suite 3100
Chicago, IL 60602
(312) 827-8000
Greg.andre@klgates.com

Daniel Rosenberg (COAA IL Program Committee Chair)
K&L Gates
70 Madison St., Suite 3100
Chicago, IL 60602
(312) 827-8000
Daniel.rosenberg@klgates.com

Chris Rogan, LEED AP – BD+C (COAA IL President Elect)
Manager, Capital Programs
University of Illinois
University Office of Capital Programs and Real Estate Services
807 South Wright Street, Suite 340
Champaign, IL 61820
crogan@uillinois.edu
www.uocpres.uillinois.edu
(217) 333-5688

Rana Lee, CCIM, LEED AP (COAA IL Membership Chair)
Director of Business Development
SmithGroup
25 E. Wacker Drive, Suite 2200
Chicago, IL 60601
Rana.lee@smithgroup.com
(312) 641.0770

Preparing for Flying Blind: The Possible Effects of a Government Default on Government Contracts

K&L Gates — Fri, 08 Jul 2011 13:11:01 -0800

By: Lawrence M. Prosen, Joel S. Rubinstein, Tim L. Peckinpaugh, James T. Walsh, Andrew R. McFall & Christopher M. Smith, K&L Gates, Washington DC

Government shutdowns, while very uncommon, are no longer a completely unknown beast to government contractors (or at least the threats of them are not). Much has been written about their causes, effects, and the ways contractors can prepare for them. The current discussions about raising the debt ceiling, however, present a completely different, and unknown, challenge to government contractors. There is a very real fear that the gridlock in Congress may prevent a raising of the debt ceiling, forcing the government into default on its financial obligations. This would be a novel occurrence, a first for the U.S. government, with unknown consequences. The best-prepared contractors, however, will be the ones to weather the storm successfully and come out the other side better positioned in the marketplace, and in all possibility with significantly fewer competitors.

This Legal Insight is intended to make you aware of some of the unique aspects of a U.S. government default and its effects.

To continue reading, click here.

Are Prevailing Wages "Prevailing"? - GAO Report Finds Fault with Davis-Bacon Act Wage Determinations

K&L Gates — Fri, 01 Jul 2011 10:52:11 -0800

By: Lawrence M. Prosen, Samson Y. Chen, K&L Gates, Washington DC

On March 22, 2011, the United States Government Accountability Office (“GAO”) released a report (the “Report”) raising several issues with how the U.S. Department of Labor (“DOL”) has been making Davis-Bacon Act wage determinations. This is a significant report, in that the Davis-Bacon Act plays a substantial role in federal and federally funded construction projects throughout the United States. The Davis-Bacon Act, located at 40 U.S.C. 3141 et seq., requires contractors on federally funded construction projects in excess of $100,000.00 to pay locally “prevailing wages” to their hourly paid field employees performing work on the project site. In other words, in order to bid on federal construction projects, construction contractors and subcontractors alike must pay their field employees at least as much as other construction workers in the area earn as determined by the DOL’s Wage-Hour Division. The Davis-Bacon Act’s stated purpose is to preserve local wage standards and promote local employment. This alert briefly highlights DOL’s problems in determining wage rates and summarizes GAO’s recommendations for improvement.

To continue reading, click here.

Prompt Payment Penalties: CA Court of Appeal Relaxes Standard, "Good Faith Dispute" To Be Proven By Objective Evidence

K&L Gates — Wed, 29 Jun 2011 09:46:11 -0800

FEI Enters., Inc. v. Kee Man Yoon, 194 Cal. App. 4th 790 (2011)

To encourage general contractors to make timely payments to subcontractors, California Business and Professions Code section 7108.5 requires a general contractor to pay its subcontractors within 10 days of receiving a corresponding progress payment from the project’s owner, unless the parties agree otherwise in writing. If the general contractor fails to do so, the subcontractor may recover a payment penalty. That penalty is fixed at 2% of the amount due per month for every month the payment is not made.

The general contractor, however, may withhold progress payments and avoid the payment penalty if there is a “good faith dispute” over the amount owed. The question is what constitutes a “good faith dispute.” In the recent case of FEI Enters., Inc. v. Kee Man Yoon, 194 Cal. App. 4th 790 (2011), the California Court of Appeal held that a “good faith dispute” exists “where the arguments asserted or positions taken have objective legal tenability.” In other words, the subcontractor does not need to show what a general contractor believed in his or her own mind. The subcontractor only needs to show objective evidence that the general contractor’s actions were unreasonable.

In FEI Enterprises, the general contractor and low voltage subcontractor disagreed as to completion, sequencing, and testing of the subcontractor’s rough-in work. The general contractor ultimately terminated the subcontractor and hired another to finish the work. The terminated subcontractor brought an action seeking payment and penalties pursuant to section 7108.5. The court held that the general contractor’s actions demonstrated a reasonable basis for denying the subcontractor’s progress payment, and thus, the general contractor avoided any prompt payment penalties.

The court noted two sources of objective evidence showing a “good faith dispute.” First, the court found that the contract terms were ambiguous and subject to more than one reasonable interpretation. The fact that the parties litigated over their divergent understandings of the terms further supported this conclusion. Secondly, during the course of construction, the general contractor consistently maintained its position that the work was incomplete under the contract terms, going so far as to hire a replacement subcontractor to finish the job. This added further objective evidence that a “good faith dispute” existed, which was sufficient to allow the general contractor to avoid prompt payment penalties.

In light of FEI Enterprises, general contractors should make sure that there is a reasonable basis based on objective evidence to support withholding progress payments from subcontractors since their own subjective view of the matter may not be sufficient to avoid prompt payment penalties.