May/June 2004 Newsletters

 

Katz & Stone, L.L.P. Construction Newsletter
May/June 2004

 

OWNER’S FAILURE TO APPORTION RESPONSIBILITY FOR DELAYED PROJECT COMPLETION DEFEATS ITS ASSESSMENT OF LIQUIDATED DAMAGES


In the context of a contract for construction work, the term “concurrent delay” refers to a situation where both parties to the contract have delayed the timely performance or completion of the work. An owner will often rely on the concept of concurrent delay as a defense to any claim by its contractor for delay damages. The basis for this defense is that the contractor has not apportioned responsibility between the owner and the contractor for the total delay, and therefore has not proven its damages with the specificity required by law. As illustrated by the case of City of Westminster v. Centric-Jones Constructors, 2003 Colo. App. Lexis 1432 (Colo. App. Ct. 2003), however, this defense cuts both ways.

In City of Westminster, a municipal corporation (“city”) entered into a contract with a contractor to expand the city’s water treatment plant. The project involved the design and construction of three structures, including a below ground concrete tank for holding treated water and a pumping station to move the treated water to the city’s distribution system. In 1995, the contractor began construction using the city’s designs and specifications. Disputes soon arose over water leakage from the concrete tanks and structural problems with the nearby pumping station. As a result, the project continued beyond the scheduled completion date.

In 1997, with most of the work done, the city terminated the contractor on the basis of alleged defective construction. The city hired new engineers, who recommended that the city demolish and rebuild the tank using a significantly different design, rebuild the masonry walls of the pumping station to new specifications, and change the pumping station’s foundation. These changes to the project added features to the tank and the pumping station, and corrected identified deficiencies in the original design of the project. The city adopted the recommendations of its engineers, at a substantial increase in the cost and time necessary to complete the project.

Ultimately, the city sued the contractor for breach of contract, claiming $1,994,500 in liquidated damages for approximately six years of delay at the contract rate of $1,000 per day. At trial, after the city presented its claim and rested its case, the court directed a verdict in favor of the contractor, concluding that the city had failed to present a reasonable basis upon which a jury could award the claimed damages.

On appeal, the Court of Appeals of Colorado affirmed the trial court. The appellate court found that the city’s claim for liquidated damages suffered from two problems. First, under applicable law, a liquidated damages clause in a construction contract is not enforceable when the delay is due in whole or in part to the fault of the party seeking to assess damages. In this case, the city’s evidence showed that the city’s redesign of the project incorporated structural features not part of the original design and corrected undisputed deficiencies in the original design for which the contractor was not responsible. Second, in light of these additional causes of project delay, the city was required to present evidence allowing the trier of fact to apportion responsibility for the delay. Because the city presented no evidence segregating the total delay among optional redesign, correction of original design errors, and correction of the contractor’s alleged defective construction, there was no basis for assessing liquidated damages.

City of Westminster reminds owners that, when a project is concurrently delayed by multiple parties, they too must apportion responsibility between those responsible for the total delay. Otherwise, they take the risk that a court will bar their claim for liquidated damages or other time-related damages.

FEDERAL COURT DENIES EICHLEAY CLAIM DUE TO CONTRACTOR’S FAILURE TO PROVE THAT IT WAS EVER ON “STANDBY”

Claims for damages due to delays on a construction project often include a claim for extended home office overhead based on the “Eichleay” formula. However, even as more states are recognizing the legitimacy of the Eichleay formula as a basis for calculating such damages, Charles G. Williams Construction, Inc. v. Secretary of the Army, 326 F.3d 1376 (Fed. Cir. 2003), demonstrates that Eichleay claims on federal government projects may fail if contractors do not first show that the delays placed them in a “standby” mode.

In Charles G. Williams Construction, a contractor was awarded a contract to improve and repair a government building. The work was to be done in two phases, covering the south and north portions of the building, and the government was to vacate each phase while that phase was under construction. However, there were substantial delays in the performance of the contract, for which both the government and the contractor were responsible. The government ultimately terminated for convenience the work on the second phase and the contractor completed the first phase 93 days after its extended completion date. The contractor made various claims, including an Eichleay claim for extended home office overhead, which were eventually heard by the Armed Services Board of Contract Appeals.

The board denied the contractor’s Eichleay claim, finding that the contractor had not satisfied a prerequisite to entitlement on such a claim: that the contractor had been forced to be on “standby” for an uncertain duration. According to the board, the contractor had not shown that its performance of the work had been suspended or significantly interrupted. Rather, the board found that the contractor manned the project without significant interruption throughout the contract performance period, did not have any reduction in direct costs, and, thus, the contract continued to absorb its equitable share of overhead expenses.

The contractor appealed the board’s decision to the United States Court of Appeals for the Federal Circuit, which affirmed the board. The court held that the board had properly found that a prerequisite to the recovery of extended home office overhead under the Eichleay formula was that the contractor’s performance of work had been delayed or suspended for an uncertain duration, during which the contractor was required to remain ready to perform. In this case, there was no evidence that, on any particular day, the contractor was unable to do any work at all on the contract, while still being required to possibly resume work on short notice. The contractor argued that the government’s significant interference with the contractor’s efficient performance of the contract, although not actually suspending work, was sufficient to establish entitlement to Eichleay damages. The court held that as long as a contractor is able to continue performing a contract, although not in the same way or as efficiently or effectively as it had anticipated it could do so, it can still allocate a portion of its indirect costs to that contract and thus cannot recover on an Eichleay claim.

Charles G. Williams Construction reflects a recent trend among federal courts to place increased emphasis on the necessity of proving a standby situation in order to make out a claim for extended home office overhead. Such decisions indicate that federal courts may be “raising the bar” for Eichleay claims on federal construction projects. Under these decisions, the Eichleay formula is regarded as an extraordinary remedy that is generally not available to a contractor whose performance, while perhaps having been made less efficient, has not been fully suspended by project delays for an uncertain duration.

SUBCONTRACTOR SHIELDED FROM SUIT BY A FELLOW SUBCONTRACTOR’S EMPLOYEE UNDER VIRGINIA WORKER’S COMPENSATION ACT

The Virginia Workers’ Compensation Act (“Act”) establishes a system for providing compensation to employees injured in the scope of employment. The Act gives many advantages to employees, including the fact that employers are held strictly liable for injuries. Claims under the Act are also resolved more quickly than claims that would otherwise be litigated and, therefore, employees are more likely to receive an award when they need it the most. As a limitation, however, employees surrender their right to sue their employer in court for damages, and must accept a measure of damages fixed by the Act as their exclusive remedy, which is often less than what they could have received through a lawsuit.

Since the Act limits the amount an injured employee can recover, employees have often attempted to recover additional damages by suing third-parties to their employment relationship. In the context of construction projects, injured employees may attempt to assert a claim against the owner, general contractor or other subcontractors who they believe are responsible for their injuries. The case of Clean Sweep Professional Parking Lot Maintenance, Inc. v. Talley, 267 Va. 210 (2004), demonstrates the obstacles that a subcontractor’s employee faced when that employee sued another subcontractor for injuries sustained on a construction project.

In Clean Sweep, a general contractor was engaged in repaving a portion of Interstate 95 in Spotsylvania County. The contract required the general contractor to undertake all aspects of the repaving process, including milling the existing road surface, removing the milled asphalt, sweeping away loose debris, and repaving the roadway with fresh asphalt. The general contractor hired two subcontractors to assist with the work. One subcontractor, a trucking company, assisted with transporting asphalt from a plant to the jobsite, loading asphalt into the paving machines, and hauling the millings from the jobsite back to the plant. Another subcontractor, a sweeping contractor, cleared the roadway of asphalt after it was loosened by the milling machines. The injury at issue in Clean Sweep occurred when an employee for the trucking subcontractor was attempting to diagnose a disabled truck on the project site. The employee was underneath the truck when it was struck by one of the sweeping subcontractor’s vehicles, injuring the employee’s back.

The injured employee sued the sweeping subcontractor for his injuries. The sweeping subcontractor defended on the basis that the Act afforded the sole remedy available to the employee. The trial court disagreed and allowed the suit to go forward, finding that the Act allowed an employee to sue “other parties” not engaged in the trade, occupation or business in which the employee was engaged when he was injured. In the trial court’s opinion, the trucking subcontractor for whom the employee worked was engaged solely in the hauling and delivery of goods, and was therefore not working in the same trade (i.e., paving) as the general contractor and the sweeping subcontractor.

On appeal, the Virginia Supreme Court reversed. The higher court held that the trucking subcontractor’s work was not limited to simply delivering goods, and that its duty to haul millings to the plant and to then deliver the recycled asphalt back to the jobsite was an integral part of the paving process. As such, because the sweeping contractor and the trucking contractor were both engaged in the same business as the general contractor, the sweeping subcontractor could not be deemed an “other party” to the injured employee’s employment relationship and the injured employee was precluded from suing by the Act.

The court’s decision in Clean Sweep represents good news for subcontractors subject to the Virginia Worker’s Compensation Act. The decision illustrates that an injured employee of one subcontractor will not be able to sue another subcontractor responsible for the injury when the two subcontractors are engaged in the same trade, business or occupation. In such situations, the responsible subcontractor has the benefit of the Act’s exclusive, limited remedy for employee injuries.

 

VIRGINIA HIGH COURT HOLDS THAT REMEDIAL EXPENSES
ARE NOT A “LOSS” COVERED BY A BUILDERS RISK POLICY

A recent case decided by the Virginia Supreme Court serves as a reminder concerning the scope and limitations of builders risk insurance policies. In National Housing Building Corporation v. Acordia of Virginia Insurance Agency, Inc., 267 Va. 247 (2004), a contractor agreed to build an apartment complex in Harrisonburg, Virginia. An agent of the contractor negotiated an agreement with an insurance agency to procure a builders risk insurance policy covering the contractor and other entities for work on several construction projects, including the apartment complex project. The insurance agency obtained a policy, but failed to ask the insurer to list the contractor as a named insured, resulting in the contractor’s omission as a named insured under the policy.

Unaware of the insurance agency’s failure to effectively obtain coverage under the policy, the contractor commenced work on the project. The project was built on a steep slope requiring the construction of multiple retaining walls. The walls constrained the earth behind them, which in turn supported apartment buildings further up the slope.

After completion of the walls, it became apparent that there was a problem. One of the walls moved forward approximately eight feet, causing the contractor to hire a civil engineer to examine the walls. The engineer recommended that remedial measures be taken to ensure the stability of the foundations of the uphill apartment buildings. Although the apartment buildings had not yet suffered physical damage, the general contractor adopted the engineer’s suggested remedial measures to underpin the foundations of those structures so as to prevent any loss or damage.

The contractor notified the insurance agency of its claimed loss under the aforementioned insurance policy for the remedial measures. Upon learning that it was not, and never had been, a named insured under the policy, the contractor sued the agency for breach of contract and negligence. The contractor, while acknowledging that it defectively designed and built the retaining walls because its specifications did not properly consider the steep incline of the project, claimed that the remedial expenses it had incurred would have been covered by the policy at issue if the insurance agency had secured the contractor as a named insured thereunder.

The trial court determined that the contractor could not recover from the insurance agency because, even if the contractor had been named as an insured, its loss was not covered by the policy. The contractor appealed, arguing that its remedial expenses were covered under a provision in the policy that required it to take all reasonable steps to protect covered property from further damage in the event of a loss.

The Virginia Supreme Court affirmed the trial court. The Supreme Court first noted that the policy at issue only covered losses to “Covered Property” and that the policy excluded certain kinds of losses from coverage in its exclusions, including losses caused by or resulting from poor workmanship or a deficiency in the designs, plans or specifications. In this case, as the defective retaining walls had not yet damaged the foundations of the uphill apartment buildings, there was no loss to covered property. Addressing the contractor’s argument concerning its obligation to mitigate damages in the event of a loss to covered property, the court found that the incurrence of a loss to covered property was a predicate to the contractor’s obligation to mitigate its damages. Because this condition had not yet occurred at the time of the remedial work, no obligation to compensate the contractor arose under the policy.

While every insurance policy must be evaluated on its own terms, they are not often written by drafters or interpreted by courts to cover losses arising out of the insured’s own defective or unworkmanlike work. As National Housing illustrates, this principle may result in the denial of coverage not only for the defective work itself, but also for remedial efforts undertaken to prevent or minimize damages arising out of the defective work.