Delegation of Arbitrability to the Arbitrator – May Not Be Enforceable

Some arbitration clauses include a “delegation provision” where the parties grant to the arbitrator – instead of a court – the authority to determine validity and enforceability of the arbitration clause itself. A recent decision by the West Virginia Supreme Court of Appeals held a delegation provision that did not “clearly and unmistakably reflect an intention by the parties to assign to the arbitrator all questions about the enforceability of the arbitration clause” to be an improper delegation. As such, the court and not the arbitrator would determine enforceability of the arbitration clause. The clause in question included the following: “The arbitrator(s) shall determine all issues regarding the arbitrability of the dispute.”

This was a homeowner-contractor dispute. Unhappy with defects in their new house, the homeowners filed suit. The contractor moved to stay pending arbitration, and the homeowners responded that the arbitration clause was unconscionable and unenforceable. The contractor argued that it was for the arbitrator to decide those defenses, due to the delegation provision, and the court should defer. But the delegation argument was made only orally, as an apparent last-minute thought. The trial court refused to stay the case pending arbitration, adopting the homeowners’ position that the clause was procedurally and substantively unconscionable, and did not address the delegation issue. The case is Schumacher Homes of Circleville, Inc. v. Spencer, 2015 W.Va. LEXIS 562 (April 24, 2015).

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Liquidated Damages Liability After Convenience Termination

A contractor and public authority struggled through much of a pump station replacement project. During the work, the town agreed to extend the completion date by five months. Many change orders were presented and agreed to. The extended completion date came and went, and the town considered terminating the contract for cause but did not do so. More than two years after the extended completion date, the town terminated the contract for convenience. It later sought to impose liquidated damages, to offset against the contractor’s claim for payment made after termination. The contractor’s defense: the town cannot impose liquidated damages after a termination for convenience. But the Connecticut Supreme Court has held that the town can impose liquidated damages in that situation.

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Calculating Lost Labor Productivity: Is There a Better Way?

The calculation of lost labor productivity, also termed labor inefficiencies, is one of the most significant elements of damages in a construction dispute and one of the most controversial. If these damages are proven, the monetary value claim can be a considerable amount. This is far from surprising seeing as labor costs can make up to 30 to 50% of overall project costs and if these projects lose money, the unanticipated labor costs result from lesser unexpected productivity. Lost labor productivity has become controversial since owners and general contractors are skeptical of the methods in curating these calculations can be considered questionable, speculative, and illusory. The article will further define how lost labor productivity claims developed; the interplay of Daubert in the pursuit of, and defense against, such claims; and recent federal and state  case law addressing loss productivity.

The full article, written by Duane Morris partner Daniel E. Toomey and Duane Morris associate Joshua S. Marks, along with Dr. Tong Zhao, P.E. and J. Mark Dungan of Delta Consulting Group, Inc., is available on the Duane Morris LLP website, courtesy of The Construction Lawyer.

 

Non-Signatory Compels Arbitration by Signatory Party

Occasionally there are cases where one party to an arbitration agreement attempts to compel arbitration with a non-signatory party. The Massachusetts Supreme Judicial Court issued a decision on April 13, 2015, however, supporting the action of a non-signatory party to compel arbitration with parties who had signed the agreement, based on the theory of equitable estoppel.

The plaintiffs were System4 franchisees. They had entered into franchise agreements with NECCS, Inc., d/b/a System4 of Boston. Unhappy with the manner in which business had developed – or, more accurately, had allegedly not developed – they sued NECCS and System4 LLC, described as “regional ‘sub-franchisor’” and “master franchisor,” respectively. The plaintiffs claimed that NECCS misclassified them as independent contractors, when they were in reality employees. And that System4 participated in this misclassification. (There were other claims, but the misclassification claim was central to the argument about the scope of arbitration.) When System4, which had not signed any of the franchise agreements, attempted to compel arbitration, the plaintiffs argued that System4 was not signatory to the arbitration agreements and could not force that process. They also argued that statutory wage act claims were not subject to arbitration, based on a prior SJC decision holding that a release did not bar statutory wage claims unless the release specifically referenced such claims and/or the wage act.

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Duane Morris’ Construction Group Nominated for 2015 Chambers USA Award for Excellence

Duane Morris is pleased to announce that the firm’s Construction Group has once again been nominated for one of the prestigious Chambers USA Awards for Excellence. This is the fifth overall nomination for the group, which has been recognized among the top national practices by Chambers for the past several years. Duane Morris is one of only six firms to be finalists in the construction category this year.

The Awards for Excellence honor outstanding firms based on research conducted for Chambers USA 2015. These awards reflect a law firm’s preeminence in key practice areas, as well as notable achievements over a 12-month period, including outstanding work; impressive strategic growth; and excellence in client service.

The Chambers USA Awards for Excellence winners will be announced on Tuesday, May 19, 2015, at Cipriani 42nd Street in New York City.

AGC of America Calls for Transfer of VA Construction Management

AGC of America has issued a white paper calling for transfer of construction management duties currently exercised by the Office of Construction and Facilities Management at the U.S. Dept. of Veterans Affairs. In the paper, AGC notes that it has never before “called for the removal of a federal construction agency from managing its own construction program.” The paper references more than 20 GAO reports since 1981 citing major cost overruns on large VA projects. AGC offers to form a working group “to further articulate a thoughtful transition of the VA’s major construction program to the best qualified federal construction agency.” AGC’s own News & Views states that “not every AGC member agrees with this position.” Although not mentioned in the paper, the U.S. Army Corps of Engineers is the likely target recipient of this responsibility.

Subcontractors May Have Limited Relief Against Town When Prime Contractor’s Surety Fails

Subcontractors on a public project for the town of Darien, Connecticut found themselves on the short end of the stick when the prime contractor failed to pay (apparently went out of business) and its surety turned out to be bogus. Subcontractor claims against the town were initially dismissed, but the Superior Court has just reinstated certain claims, at least allowing the subs to seek unpaid amounts the town may still be holding against the prime.

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Tort-Based Indemnity/Contribution Remedies Not Available to Shift Contract Damages

The economic loss rule is alive and well in California. In State Ready Mix, Inc. v. Moffatt & Nichol (2015) 232 Cal.App.4th 1227, the Court of Appeal ruled that a concrete supplier (State Ready Mix, Inc., or “Supplier”) could not seek equitable indemnity or contribution from an engineer for the cost to remove and replace Supplier’s concrete that was non-compliant with Supplier’s own contract.  Although the Court minced no words when it described the factual basis for its ruling (“If [Supplier] wants to see who is at fault, it should look in the mirror.”), the most notable aspect of the opinion was its analysis and rejection of the legal theories of potential liability. Continue reading Tort-Based Indemnity/Contribution Remedies Not Available to Shift Contract Damages

Subcontractor Charged For Having Its Own Lien Bonded Off

Based on subcontract language, a Minnesota appeals court has held that the prime contractor could charge its lien bond premium against the sub who filed the lien. Arising from a power generation station project, the prime and a sub pursued breach of contract claims against each other. The sub also filed a lien, which was bonded off by the prime. The underlying case was decided largely in favor of the prime, including the cost of the lien bond. The sub appealed that issue, among others.

Subcontract language included the following: “Should there be any … lien asserted before or after final payment is made that arises from [the sub’s] Services, [the sub] shall reimburse [the prime] for any costs and expenses, including attorneys’ fees, costs and expenses, incurred by [the prime] in satisfying, discharging or defending against any such … lien … provided [the prime] is making payments or has made payments to [the sub] in accordance with the terms of this Agreement.” In conjunction with its decision that the prime owed no more money to the sub, the court also found that payments had been made per the subcontract. Thus, the sub owed the prime for the cost to bond off the sub’s own lien. This decision might not hold up under the laws of many other states, but the Minnesota court enforced the subcontract terms on this point. The case is Corval Constructors, Inc. v. FPD Power Development, LLC, 2015 Minn. App. Unpub. LEXIS 259 (Mar. 23, 2015).

Interplay of General Liability and Pollution Liability Coverage

An explosion caused by release of natural gas from a damaged pipe caused personal injury and property damage. Resulting lawsuits against the contractor whose crew damaged the pipe were defended by the contractor’s general liability (GL) carrier, which sought contribution for both defense and indemnity from the contractor’s pollution liability (PL) carrier. The PL carrier agreed to pay half of the defense, but claimed there was no coverage and thus no obligation to share in the indemnity costs. The trial court ruled against the PL carrier, but the intermediate appeals court reversed. On further appeal the Wisconsin Supreme Court held that an explosion caused by release of natural gas came within the bounds of the PL policy, and the PL carrier is liable for its share of the indemnity.

Two points of dispute were (a) whether escape of natural gas was a pollution condition, and (b) if so, whether the personal injury and property damage were “caused” by that pollution condition. The first point focused on whether escaping gas was an “irritant” or “contaminant.” The Wisconsin high court, using a dictionary definition, found that escaping natural gas is a contaminant, as it “renders the surrounding ground and air space impure or unclean because natural gas is extremely flammable and explosive.” The gas also occurred in concentrations above those “naturally found in the environment” (a term within the PL definition) at the point of escape from the damaged pipe.

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