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US Construction Law: Review of 2013

US Construction Law: Review of 2013

US Construction Law: Review of 2013

There have been a number of recent, important court decisions and rules associated with construction law. This article sets forth a brief summary of some of those cases and rules which may affect those involved in the construction sectors.
Contractor Challenges To Terminations For Convenience
TigerSwan, Inc. v. U.S., 110 Fed.Cl. 336 (2013) concerns the U.S. government’s termination for convenience of a contractor on certain non-commercial procurement contracts for security services in Iraq. TigerSwan, the awardee, was terminated for convenience and the government subsequently awarded the same work to a rival offeror under a sole-source contract. TigerSwan challenged the termination for convenience on the grounds that, among other things, the termination was in bad faith. The government moved for judgment on the pleadings and the Court of Federal Claims denied that motion. According to the Court of Federal Claims, TigerSwan had adequately pleaded a breach of contract cause of action because “bad faith” could potentially be found in the context of a termination of convenience even if the government did not intend to harm the contractor. In this case, the pleadings indicated that the government had terminated TigerSwan in order to improperly benefit the competitor, and the Court of Federal Claims consequently refused to dismiss the claim.

Although TigerSwan appears to make it easier for contractors to challenge terminations for convenience, it is important to note that the Court did not hold that the government had actually breached its contract. Instead, the Court merely held that TigerSwan had adequately pleaded a breach of contract cause of action based on the termination. In short, the Court simply allowed TigerSwan “the opportunity to present its case on the merits” (citations omitted). More importantly, a contractor hoping to challenge a termination for convenience must be cognizant of the broad categories of standards articulated in TigerSwan: (1) improper terminations for convenience that amount to a breach of contract; and (2) terminations for convenience that constitute breaches of the implied duty of good faith and fair dealing. Nevertheless, a number of factors make it likely that the TigerSwan decision will be relied upon in future challenges to terminations for convenience. First, the decision makes it clear that the government’s intent to harm the contractor need not be pleaded, and it also reaffirms that government self-dealing or improper steering of work to a particular contractor may give rise to a valid challenge to a termination for convenience. Second, due to the across-the-board federal spending cuts known commonly as the “sequester,” it is likely that agencies will more often resort to terminating contracts for convenience as agencies attempt to cope with reduced budgets. In turn, the reduced availability of federal contracting dollars will give government contractors who fall victim to the budget axe more incentive to challenge such terminations, and TigerSwan provides contractors a bit of ammunition for these fights.
The Reallocation Of Risk For Differing Site Conditions
The United States Court of Federal Claims’ ruling in Metcalf Construction Co. v. United States, 102 Fed.Cl. 334 (2011), is currently on appeal in the United States Court of Appeals for the Federal Circuit. Under debate in the case are multiple disputes between a design-builder and the federal government in connection with the construction of a housing project that went awry. Among the various issues in the case is a dispute over differing site conditions (“DSC”) and the design-builder’s claim arising out of the discovery of those conditions. In the view of many, the Court of Federal Claims deviated from precedent in its ruling, misapplied the prevailing test for DSC claims, and may have radically shifted risk in government contracts in the process.

At issue is the Court of Federal Claims’ handling of the design-build contractor’s DSC claim and the Navy’s duty of good faith and fair dealing. During construction, the contractor encountered expansive soils which required a substantial amount of additional excavation. The contractor sought an equitable adjustment for its additional costs and relied upon a soil report provided by the Navy as evidencing conditions materially different from those actually encountered. The court, however, found that the contractor failed to establish the DSC claim, because the contract required the contractor to perform post-award site design and engineering work, including the retention of a geotechnical engineering firm to conduct soil investigations to ensure that the contractor’s design addressed relevant geotechnical issues. As such, the court determined that the contractor could not reasonably rely on the soil report that was expressly labeled “information only.”

Certainly, it is commonplace for a design-build contract to require an independent investigation of the owner’s information. Metcalf, however, seems to reflect a dramatic reallocation of risk by turning the design-builder’s independent review into a warranty of conditions and by diminishing the reliability of reports and indications included in RFPs. The Metcalf distinction between bid documents (upon which it concluded a contractor cannot rely) and other contract documents (upon which a contractor may rely) certainly undercuts this longstanding policy of providing greater predictability to the procurement process. Arguably, the Court in Metcalf imposed a heavy a burden on the design-build contractor while allowing the owner to avoid liability for representations made in bid documents. The case, if affirmed and enforced, will likely promote more uncertainty in project pricing and greater risk for design-build contractors. For now, the precedential value of Metcalf and its reach and applicability remain unclear. The Court of Appeals for the Federal Circuit will likely have the last word on the matter.
The Question Of Acceleration
It is axiomatic that a recovery schedule seeks to recover time lost due to project delays or other impacts, and thus contemplates performance of work in a compressed time frame. Accordingly, contractors may need to accelerate their work operations in order to meet newly revised interim or substantial completion dates. Can an owner’s demand that a contractor perform pursuant to a recovery schedule be considered a demand for constructive acceleration?

SNC-Lavalin America, Inc. v. Alliant Techsystems, Inc., 858 F. Supp. 2d 620 (W.D. Va. 2012), involved a construction acceleration claim. The U.S. District Court for the Western District of Virginia ruled that where a contract did not expressly require a contractor to provide notice of acceleration, that contractor could still maintain its acceleration claim based on an owner’s demand for completion by a date certain. The Court held that, unlike contracts with the federal government that include the standard Federal Acquisition Regulations changes clause, the contract in question did not require that the prime contractor notify the owner that it believed an owner’s completion demand required acceleration. Accordingly, despite the contractor’s lack of notice, the court permitted the contractor to recover on its claim for damages resulting from constructive acceleration.

A contractor’s performance pursuant to a recovery schedule may be the basis for an acceleration claim, but the specific terms of the contractor’s contract will govern the circumstances under which such a claim may be asserted. In the spirit of caution, contractors are advised to notify their contract partners at the time of submission of a recovery schedule that: (1) delays previously encountered are understood to be excusable; and (2) performance to a submitted recovery schedule is understood to be accelerated work at the owner’s request. For owners, to the extent that accelerated performance is sought, express direction relative to the recovery schedule should be provided to the contractor. Owners should explain the rationale for determination of unexcused delay or why performance to the compressed schedule may not actually result in acceleration damages.
Contractors’ Past Performance Ratings Process Standardized
A negative past performance rating can have significant consequences on a contractor’s ability to obtain future contracts with the federal government. In view of the growing emphasis on past performance, the government’s evaluation system has come under ever-increasing scrutiny. With these concerns in mind, the recent rule amending FAR sub-part 42.1500 seeks to provide greater clarity and consistency in the evaluation process.

On August 1, 2013, the Department of Defense, General Services Administration and NASA jointly issued the new rule which seeks to standardize the evaluation process. With regard to the frequency of performance evaluations, the rule provides that these evaluations must be performed at least annually and also upon completion of any contract or purchase order with a total contract value over $150,000. There are four main features of the new rule: (1) agencies must assign responsibility and management accountability of past performance submissions; (2) agencies must include certain standardized evaluation factors (i.e., technical, cost control, schedule/timeliness, management of business relations, small business subcontracting, and other factors); (3) agencies must use a standardized rating scale to describe the contractor’s performance in each of the evaluation factors; and (4) the agency must enter the information into the Department of Defense Contractor Performance Reporting System. In addition, a contractor can seek appellate review for a negative performance evaluation through the Contract Disputes Act.
When The Surety’s Penal Sum Fails To Protect
Deluxe Building Systems, Inc. v. Constructamax, Inc., Case No. 2:06-cv-2996, 2013 WL 4781017, at *1 (D.N.J. Sept. 5. 2013) involves a surety’s motion for summary judgment seeking to limit its liability for costs to complete a rental housing project to the penal sum of its performance bond. After the general contractor abandoned the project, the surety entered into a Takeover Agreement with the owner and stepped in to complete the project. The surety breached the Takeover Agreement, however, by failing to timely complete the project.

The United States District Court denied the surety’s motion, holding that the surety was not protected by the bond’s penal sum limitation once it stepped into the shoes of its principal, the general contractor. At that point, the completing surety assumed the duties of the contractor under the Construction Agreement. In that regard, the Court noted that the surety was liable for damages, not just as a surety, but as an ordinary contracting party. Therefore, the District Court held that the amount of the bond did not limit the damages that could be assessed against the surety for breach of contract as a result of having entered into the Takeover Agreement.

The Takeover Agreement contained a provision entitled “Preservation of Penal Sum Limitation on Surety’s Liability.” With regard to the effect of that provision, however, the court held that the clause as drafted did not, as a matter of law, limit the surety’s liability to the performance bond’s penal sum. Among other reasons, the court noted that the provision could be read to apply only to the surety’s liability under the bond, i.e., liability as surety, and not to the surety’s liability to perform under the Takeover Agreement, i.e., liability as contractor.

The Deluxe case highlights the surety’s increased risk and potentially increased liability attendant to completing a project upon the principal’s default. Sureties must weigh the pros and cons of stepping into the shoes of the contractor. In connection with that assessment, sureties should appreciate that some courts have enforced a default rule that the penal sum protection is lost when the surety steps in to complete a Project. Accordingly, it would be prudent for a surety contemplating completing a bonded project after a default to seek legal counsel to ensure that appropriate protections are set out in the Takeover Agreement.
Department Of Justice And Securities And Exchange Commission Provide Long-Awaited Guidance On Foreign Corrupt Practices Act Compliance
Greater domestic competition for fewer engineering and construction projects has led many US contractors to expand operations to the international arena. Such interactions, however, may come at a steep cost to contractors if done in violation of the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1, et seq.(“FCPA”). Improper payments to foreign officials, among other activities, can result in severe civil and criminal penalties, which include suspension and debarment from contracting with the U.S. federal government. Given the consequences for violating the FCPA, contractors who want to take advantage of new global opportunities must be aware of the scope and effect of the Act.

On November 14, 2012, the Department of Justice (“DOJ”), together with the Securities and Exchange Commission (“SEC”) published a highly anticipated resource guide (“the Guide” can be found here). Although non-binding and not an exhaustive reference, the Guide provides helpful information on the FCPA’s requirements, the approach of agency enforcement, as well as several hypothetical examples aimed to aid U.S. companies in developing effective compliance programs. The Guide did not render any changes to the statutory language of the FCPA, but it does offer detailed interpretations of the FCPA from the agencies responsible for its enforcement. Key Guide highlights include: a definition of a foreign official, gifts and expenses, affirmative defenses, corporate liability, and identification of the “Hallmarks of Effective Compliance Programs.” Contractors engaging in foreign projects must be mindful of the reach and repercussions of the FCPA. Violations of the FCPA can sever the U.S. Government contracting lifeblood of many contractors. Contractors that wish to expand their global exposure must institute and follow clear and effective compliance controls and procedures.

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