Inside this Issue

A1 - Failure to Give 10-Day Notice to Government Deprives Contractor of Right to Recovery
A2 - No Damage for Delay Clause Unenforceable Where Owner’s Intentional Misconduct Caused the Delay; And Lien Releases do not Release Claim Previously Submitted by Contractor
A3 - Communication with a Lawyer is not Automatically Protected from Discovery by Attorney-Client Privilege

Article 1

Failure to Give 10-Day Notice to Government Deprives Contractor of Right to Recovery

See similar articles: Cure Notice | Default Termination | Notice Provisions

Kent Holland, J.D.
ConstructionRisk, LLC

Where a design-build contractor under a federal government contract was terminated for default for failure to perform work consistent with the project schedule, it was default terminated. The contractor filed suit against the government for wrongful termination, arguing that the government breached its contract by, among other things, failing to timely provide design intent drawings. It also argued that it was delayed due to late issuance of permits and authorizations by the fire marshal and local authorities. The contract required the contractor to notify the government, in writing, of any excusable delays within ten (10) days after the contractor learned of the delay. Because the contractor in this case failed to provide the required ten-day notice to the government that it was encountering excusable delay, the court found that the contractor could not later argue that its delay was excusable. The termination for default was, therefore, found to be appropriate. The court explained that although notice provisions in government contracts are generally liberally construed, “The requirement is not meaningless, however, because giving notice within ten days allows an investigation contemporaneous with the events. In this case, the record does not reflect the government’s independent knowledge of the problems facing plaintiff or that notice was constructively provided by other means. In sum, defendant was within its rights to insist on timely notice, and notice was not provided. We hold that plaintiff cannot now assert delay as a defense to non-performance.” Lake Charles XXC, LLC . United States, 118 Fed.Cl. 717 (2014).

The contract listed six steps for the design and construction of the more specific interior elements for the office building that was to be designed, constructed, and then leased to the Government. These included: “(1) the government would generate initial design intent drawings; (2) the government would finalize the design intent drawings and provide them to the lessor (contractor); [and] (3) the lessor [contractor] would create final working/construction drawings of the interior improvements in conformance with the design intent drawings.”

The design intent drawings (“DIDs”) were to be “fully-dimensioned drawings of the leased space” and included information regarding finish elements such as furniture locations, telephone and data outlet locations, specifications for electrical and HVAC loads, and other “finish/color/signage selections.”

The contract stated that the parties would incorporate the final DIDs into the contract by a Supplemental Lease Agreement (“SLA”). Id. at 3 (paragraphs 13 and 14). This would begin a 180–day clock for completion of construction and delivery of the building to GSA/SSA. Id.

The government issued the DID documents, but for reasons not explained in the decision, those documents were not incorporated into the contract. Several months later, the government issued a notice to proceed to the contractor. When the contractor failed to demonstrate progress with the work, the government met with the contractor and suggested the possibility of a termination for convenience. The contractor declined that offer and instead proposed a new schedule for completion. The new schedule agreement also called for the contractor to obtain all necessary city construction permits.

During subsequent site visits the GSA project manager observed that work was not progressing and the GSA “warned plaintiff that it was in danger of violating the default delivery clause” and advised that GSA was considering terminating plaintiff for default. Plaintiff was instructed to “present, in writing, any facts bearing on the question to Nancy Lopez, Contracting Officer, ... within 10 days after receipt of this notice. Failure to present any excuses within this time may be considered as an admission that none exist.”

Despite reassurances from the contractor that it was obtaining permits and progressing with the work, the work did not, as observed by the GSA, progress consistent with the new agreed upon schedule. The GSA sent a second show cause notice to the contractor stating that GSA’s site inspection,

“revealed ‘no completed work’ at the site and that ‘no letter of delay or revised dates [had been] received from Lake Charles.’ Def.’s App. 293. The letter noted that Lake Charles had missed the delivery date and failed to respond to several inquiries made by the CO in January 2008 after plaintiff’s promise to send an updated schedule. The letter informed [contractor] that GSA was considering terminating the contract for default and instructed Lake Charles to submit in writing within 10 days any facts bearing on the question of whether the delays were plaintiff’s fault.”

Court’s Reasoning in Finding in Favor of Government

Because the contractor executed a contract change agreeing to perform the work with a later completion date, it was bound by that date. The fact that the government issued the notice to proceed before incorporating the DID documents into the contract was of no consequence, and provided no excuse to the contractor, since the contractor had subsequent to that agreed to the contract modification.

The government challenged the contractor’s delay claims as unfounded because the contractor failed to notify the CO within 10 days of when they commenced and because plaintiff had not alleged how the delays, even assuming they were not contractor's fault, affected the critical path of construction, meaning that they were not the cause of plaintiff’s failure to complete the project in time. The adoption of the contract change was, according to the court, “in effect, a new notice to proceed, and one which ignored defendant’s asserted failure to incorporate the DIDs into a SLA and approve plaintiff’s construction drawings. Any conditions precedent contemplated under the original schedule were superseded by SLA No. 2, were no longer in force, and cannot constitute an excuse for plaintiff’s failure to give notice of the alleged delay.”

Regardless of what excuses the contractor thinks it may have had for completing consistent with the agreed upon schedule, the contractor failed to provide the required 10-day notice. As stated by the court,

“Plaintiff does not assert that it provided written notice within 10 days after the beginning of the delay. Instead, it argues that, because GSA did not issue a notice to proceed after incorporation of DIDs by SLA, it had no duty to perform, and thus any delay is the government’s fault.”

The court further explained:

“In order for delay to be excused, the contract’s delay clause requires that ‘the Lessor within 10 days from the beginning of any such delay (unless extended in writing by the Contracting Officer) provide[ ] notice to the Contracting Officer of the causes of delay.’ This means that, if the contractor experiences delay not of its own making, it must provide notice to the CO within 10 days of experiencing the delay or the contractor risks being held responsible for that delay.” ….

“We recognize that the general rule in applying contract notice provisions is that they should be applied liberally. See generally Hoel–Steffen Constr. Co. v. United States, 197 Ct.Cl. 561, 573, 456 F.2d 760 (1972) (holding that the notice provision of a contract-adjustment clause not be applied “too technically and illiberally where the Government is quite aware of the operative facts”) (citing Copco Steel & Eng’g Co. v. United States, 169 Ct.Cl. 601, 616, 341 F.2d 590 (1965)). The requirement is not meaningless, however, because giving notice within ten days allows an investigation contemporaneous with the events. This comports with the Court of Claim’s instruction in Hoel–Steffen, where the court declined to construe the contract-adjustment clauses’ notice provision strictly against the contractor when the agency was aware of the circumstances due to a request from the contractor for a time-extension under a different contract provision. Id.; see also R.P. Wallace, 63 Fed.Cl. at 417–18 (rejecting the *727 government’s late notice argument because the contractor did not reasonably know of the cause of the delay until seven days before it provided the Navy with notice). In this case, the record does not reflect the government’s independent knowledge of the problems facing plaintiff or that notice was constructively provided by other means.

In sum, defendant was within its rights to insist on timely notice, and notice was not provided. We hold that plaintiff cannot now assert delay as a defense to non-performance.”

Comment: This case demonstrates the importance of adhering to contract notice requirements. Contractors should exercise caution to provide notice to the government of changes within the time period required buy the contract. As explained by the court, although there may be exceptions to strict enforcement of notice requirements, these requirements are important and courts can and will enforce them.

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 17, No. 4 (June/July 2015).

Article 2

No Damage for Delay Clause Unenforceable Where Owner’s Intentional Misconduct Caused the Delay; And Lien Releases do not Release Claim Previously Submitted by Contractor

Kent Holland, J.D.
ConstructionRisk, LLC

Although parties are free to negotiate away a contractor’s right to recover for delay damages, the Supreme Court of Texas held that a “no-damages-for-delay” provision in a contract cannot shield a project owner from liability for deliberately and wrongfully interfering with the contractor’s work. This is true even when the owner is a local governmental entity and there is an issue of sovereign immunity. But what if the contractor signed lien releases throughout the project after the date it had asserted a claim for its damages? The court held that such a lien release does not release a claim unless it specifically states the intent to do so on the form. In this case, the contractor’s claim for delay damages was preserved despite having executed subsequent waivers and releases through the lien release forms. Zachry Construction Corporation v. Port of Houston Authority of Harris County, 449 S.W.3d 98 (Tex. Supreme Court, 2014).

Zachry contracted to construct a wharf. The contract made Zachry an independent contractor, “in sole charge of choosing the manner in which the work would be conducted.” But the Port nevertheless had authority to review Zachry’s plans and oversee construction.

Zachry devised an innovative plan that it believed would make the work less expensive and allow it to be completed more quickly. It planned to use soil dredged from the channel to construct an 8-foot-wide earthen berm extending out toward the center of the channel and then running parallel to the shore to form a long wall around the construction area. By doing this, Zachry would be able to work “in the dry.”

Nine months into the project, the Port realized that it needed two 1,000-foot berths to accommodate ships it ultimately expected to service. It began discussions with Zachry on a change order. To complete the two sections and continue to work “in the dry”, Zachry proposed to build a freeze wall, in addition to the one it had already planned. This would serve as a cutoff wall through the middle of the project to spilt the project into two parts.

The Port issued a change order accepting Zachry’s approach, but two weeks later, the Port changed its mind and ordered Zachry to revise and resubmit its plans without the cutoff wall. Zachry protested that the Port had no authority under the contract to determine the method and manner of the work. But as the Court stated, “The Port would not budge.” Zachry’s only option, therefore, was to work “in the wet” which would delay completion of the project and increase its cost.

Several weeks after the Port refused to allow construction of the cutoff wall, Zachry sued, eventually claiming $30 million in damages from delays caused by the Port. The Port countered, arguing that the following clause precluded recovery by Zachry:

“[Zachry] shall receive no financial compensation for delay or hindrance to the Work. In no event shall the Port Authority be liable to [Zachry] or any Subcontractor or Supplier, any other person or any surety for or any employee or agent of any of them, for any damages arising out of or associated with any delay or hindrance to the Work, regardless of the source of the delay or hindrance, including events of Force Majeure, AND EVEN IF SUCH DELAY OR HINDRANCE RESULTS FROM, ARISES OUT OF OR IS DUE, IN WHOLE OR IN PART, TO THE NEGLIGENCE, BREACH OF CONTRACT OR OTHER FAULT OF THE PORT AUTHORITY. [Zachry's] sole remedy in any such case shall be an extension of time.”

Zachry argued that such a no-damage-for-delay provision is unenforceable if the Port’s intentional conduct caused the delay. It also sought recovery of $2.36 million in delay damages (liquidated damages) that had been withheld by the Port.

In response, the Port argued that Zachry’s claim to the liquidated damages was precluded by the releases it executed to obtain the periodic payments from which liquidated damages were withheld. The releases contained the following language:

“[Zachry] hereby acknowledges and certifies that [the Port] has made partial payment to [Zachry] on all sums owing on Payment Estimate Number [–––] and that it has no further claims against [the Port] for the portion of the Work completed and listed on the Schedule of Costs in Payment Estimate Number [–––]. The trial court concluded that this language did not unambiguously release Zachry's claim to the liquidated damages withheld and asked the jury to decide what effect it had.”

The jury at the trial found that the Port breached the contract by rejecting Zachry’s cutoff wall design, causing Zachry to incur delay damages. It also found that the delay “was the result of the Port's … arbitrary and capricious conduct, active interference, bad faith and/or fraud.” The jury concluded that the waivers and releases signed by Zachry with each paid invoice did not release Zachry’s claim to the liquidated damages.

The Port appealed the trial court judgment to the state court of appeals, which reversed the judgment and held that the no-damages-for-delay clause served as an absolute bar to recovery for the delay claims, and it also held that the releases unambiguously released Zachry’s claims to the liquidated damages that had been withheld. This holding was reversed by the Texas Supreme Court in the current decision.

Port Could not claim sovereign immunity

First, the Supreme Court ruled on whether the Port could successfully assert that it had immunity from suit pursuant to the state code. The answer was a resounding – No. This is because, says the court, “the code waives immunity for a contract claim for delay damages not expressly provided for in the contract.”

No-Damages-for-Delay clause is unenforceable

Next, the Court dealt with the question of whether the time-honored “freedom of contract” has limits. Texas is one of the states that gives great deference to the rights of parties to contract as they will, and the courts will typically enforce terms and conditions of contracts even if they result in unfortunate consequences to one of the parties. But, here, the Court states there are indeed limits to how much deference will be given. The court stated:

“We have indicated that pre-injury waivers of future liability for gross negligence are void as against public policy. Generally, a contractual provision 'exempting a party from tort liability for harm caused intentionally or recklessly is unenforceable on grounds of public policy.' We think the same may be said of contract liability. To conclude otherwise would incentivize wrongful conduct and damage contractual relations. This conclusion is supported by lower court decisions in Texas and court decisions in at least 28 American jurisdictions. We join this overwhelming consensus. The Port argues that the cases from other jurisdictions are inapposite because those jurisdictions all recognize a party's duty of good faith in performing a contract, and Texas does not. But the law need not impose a duty of good faith on a party to prohibit him from attempting to escape liability for his future, deliberate, wrongful conduct. The Port argues that withholding enforcement of a no-damages-for-delay provision is in derogation of freedom of contract. But that freedom has limits. 'As a rule, parties have the right to contract as they see fit as long as their agreement does not violate the law or public policy.' Enforcing such a provision to allow one party to intentionally injure another with impunity violates the law for the reasons we have explained. The Port also argues that Zachry is a sophisticated party, a very large construction company that can protect itself. But the law's protection against intentional injury is not limited to the helpless. Finally, the Port argues that the conduct found by the jury does not qualify for the exception. But the jury charge tracked the language of the second and fifth exceptions. The charge correctly described the misconduct that cannot be covered by a no-damages-for-delay provision. Accordingly, we conclude that the no-damages-for-delay provision, Section 5.07 of the parties' contract, was unenforceable.”

“Affidavit and Partial Release of Lien” did not release Zachry claims

The release language in question provided as follows:

“[Zachry] hereby acknowledges and certifies that [the Port Authority] has made partial payment to [Zachry] on all sums owing on Payment Estimate Number [–––] and that it has no further claims against [the Port Authority] for the portion of the Work completed and listed on the Schedule of Costs in Payment Estimate Number [–––].”

Zachry argued that the releases covered only liens. The Port argued in contrast that the releases covered all claims for payment. The lower appellate court found that the language of the releases was unambiguous and that it unambiguously covered and barred Zachry’s claim for recoupment of the liquidated damages withheld by the Port. The Supreme Court looked at the language of the release and also found it to be unambiguous – but completely in the opposite way – the releases did not cover Zachry’s claim. As explained by the court,

“The release forms were captioned “Affidavit and Partial Release of Lien”. In the form language, Zachry acknowledged “partial payment ... on all sums owing” on a specified invoice and stated that it had “no further claims against [the Port] for the portion of the Work completed and listed on” the invoice. The release plainly refers only to claims for work completed, not for liquidated damages withheld for delays—work not completed. Furthermore, Zachry actively disputed the Port's right to withhold liquidated damages from the first time the Port did so, and that dispute was never resolved. The purpose of progress payment releases is to ensure that the contractor will not accept payment for work performed and then insist on additional payment for that work. Zachry's releases can no more be interpreted to extend to its claim for liquidated damages the Port withheld than to its claim for delay damages. The jury failed to find that the releases in fact covered Zachry's claim. We agree, as a matter of law.”

Comment: This is an important case for setting some much needed important limits on the enforcement of a no-damages-for-delay clause.

Article 3

Communication with a Lawyer is not Automatically Protected from Discovery by Attorney-Client Privilege

See similar articles: Attorney-Client privilege | Protective Order | Risk Management

By: Gail S. Kelley, P.E., J.D
ConstructionRisk, LLC

When a lawyer working as a risk manager brought a sex discrimination and Equal Pay Act claim against her former employer, the former employer filed a motion for a protective order, claiming that the woman was an attorney, and thus the internal communication she sought to obtain in discovery was protected by attorney-client privilege. The court denied the motion, holding that an individual is not providing legal advice simply because they have a law degree and their work involves reviewing insurance policies and managing insurance claims.

Carolyn Casey, the plaintiff in Casey v. Unitek Global Services, Inc., (U.S. District Court, E.D. Pennsylvania, 2015), had a law degree from Widener University but before becoming employed by Unitek Global Services (“Unitek”), she had worked exclusively in insurance claims management. Unitek hired Ms. Casey as its Director of Risk Management in 2011 and subsequently promoted her to Vice President of Safety and Risk. During the course of her employment at Unitek, Ms. Casey complained both that she was being paid less than her male co-workers and that she was being sexually harassed. In January 2013, Ms. Casey emailed a written complaint regarding repeated sexual harassment by one particular individual, and states that, within minutes, she was terminated.

Ms. Casey filed a complaint under Title VII of the Civil Rights Act and the Equal Pay Act, and sought to have Unitek produce certain emails during discovery. Unitek moved for a protective order, asserting that because Ms. Casey was an attorney, all of Ms. Casey’s emails while employed at Unitek were protected by attorney-client privilege.

The court acknowledged that:

A motion for a protective order is a proper method for challenging inappropriate discovery requests… upon a motion by a party from whom discovery is sought and for good cause shown, the court may enter a protective order preventing discovery on certain matters. …A party may demonstrate good cause for the issuance of a protective order by establishing that the sought after discovery is protected by attorney-client privilege.

However the court found that attorney-client privilege did not support the issuance of a protective order in this case, because Ms. Casey, while she was an attorney, was not Unitek’s attorney. Attorney-client privilege only applies to communication between a client and its attorney or the attorney’s agent, when the communication is made to obtain or provide legal assistance for the client.

The court noted that Unitek did not hire Ms. Casey to be its attorney. Rather, Unitek hired Ms. Casey to work in risk management. The risk management and safety departments were separate from the legal department and did not report to Unitek’s General Counsel. Ms. Casey’s work involved reviewing Unitek’s insurance policies, analyzing risk, reducing loss, and managing litigation arising from insurable claims. This work did not require Ms. Casey to have any legal knowledge.

The court specifically noted that Ms. Casey’s management of litigation arising from insured claims did not establish an attorney-client relationship. The claims were not assigned to her office because she was an attorney but because she negotiated and oversaw the insurance policies. As a result, she was in the best position to communicate with insurers regarding the litigation and to discuss settlement. After consulting with the insurers and Unitek executives, Ms. Casey communicated the company’s position to outside counsel. Thus Ms. Casey was not acting as Unitek’s attorney, but as a client to outside counsel.

Comment: This case highlights that certain positions, especially those involving insurance policies and insurance claims, may appear quasi-legal. However, unless an individual is actually providing legal advice, their communications are not protected by attorney-client privilege.

About the Author: As a professional engineer, Gail Kelley has performed structural design and analysis of post-tensioned structures, has performed constructability reviews, due diligence inspections, and condition assessments, and has provided litigation support for construction defect and delay claims in both state and federal court. She received her B.S. in Civil Engineering from Cornell University, and Master of Science in Structure and Materials from Massachusetts Institute of Technology (MIT), and she received her Juris Doctorate from American University, Washington College of Law. She provides risk management services for ConstructionRisk, LLC. This article is published in ConstructionRisk.com Report, Vol. 17, No. 4 (June/July 2015).

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ConstructionRisk.com Report (June-July 2015)