Arbitration Clause Enforceable Despite Inconvenient Forum Argument

The United States District Court for the Western District of Kentucky, in Weddle Enters. V. Treviicos-Soletanche, J.V., 2014 U.S. Dist. LEXIS 146812 (WD. Ky. Oct. 15, 2014), recently held that an arbitration clause in a contract between a Massachusetts-based general contractor, and a Kentucky-based subcontractor, which called for all disputes to be arbitrated in Boston was enforceable, despite the subcontractor’s argument that the clause requiring arbitration in Boston was unfair, unreasonable and unenforceable.

The Court held that “while a court may recognize that enforcement of a forum-selection clause… in an arbitration agreement may be inconvenient and burdensome to the parties in some instances, the Court does not have the authority to invalidate a term of an arbitration agreement simply on the forum non conveniens argument that it is unfair, unreasonable, or inconvenient to one of the parties.” While the Court can review the “making of the agreement to arbitrate,” the only grounds upon which a court may refuse to enforce an arbitration agreement under the Federal Arbitration Act (“FAA”) are those that exist for the revocation of a contract – fraud, duress, or unconscionability. The Court noted that a determination of the location or venue of the arbitration is a procedural matter for the arbitrator.

The Court also dismissed the subcontractor’s claim that the arbitration agreement was not governed by the FAA because it does not evidence a transaction involving interstate commerce. The Court noted that the subcontract was between parties with principal places of business in Massachusetts and Kentucky, respectively; the subcontractor procured some equipment and material through interstate channels; the U.S. Government funded the project through the Army Corps of Engineers; and all payments to the general contractor by the Army Corps of Engineers were wired to the general contractor’s bank in New York. The Court found that all of these factors indicated the arbitration agreement was a transaction affecting interstate commerce.

This case shows the importance of paying close attention to dispute resolution clauses at the time a contract is entered into. Even though you may not want to envision any issues arising at the time you are first entering into an agreement, as evidenced by this case, courts show great deference to how and where parties agree to resolve disputes in a written contract they have entered into.

Court Limits Application of No-Damages-For-Delay Clause

In a widely watched decision, the Texas Supreme Court recently ruled in Zachry Construction Corporation v. Port of Houston Authority that a local government entity could not rely on a no-damages-for-delay provision to shield itself from liability for deliberately and wrongfully interfering with a contractor’s ability to perform construction of a wharf. The contractor had originally proposed an innovative means of completing the work by using soil it dredged from the canal to enable it to build the wharf “in the dry.” After the contractor commenced its work, the Port determined that the wharf needed to be longer than originally anticipated to accommodate the expected ships. The Port issued a change order for this additional work despite its reservations about the contractor using its innovative method of working “in the dry” for this the new section. Two weeks after issuing the change order, the Port ordered the contractor to revise and re-submit its plans and ultimately refused to allow the contractor to use its chosen means and method of performing the work for this new section of the wharf. The contractor then sued for $30 million in delay damages.

Although a jury found that the contractor’s delay damages resulted from the Port's “arbitrary and capricious conduct, active interference, bad faith and/or fraud,” the lower appellate court reversed the jury’s verdict holding that the no-delay-damages provision of the contract barred the contractor’s recovery of delay damages In reversing the appellate court, the Texas Supreme Court found that “[a]s 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.” It concluded, however, that enforcing the no-delay-damages provision in the parties’ contract would “allow one party to intentionally injure another with impunity” and therefore would violate law and public policy. The court also rejected the argument that the contractor was a large, sophisticated company that could have protected itself by not including such a provision finding that “the law's protection against intentional injury is not limited to the helpless.”

This decision should give some comfort to contractors that are forced to include similar no-damages-for-delay provisions in their contracts that the intent and purpose of such provisions is to cover ordinary delay that may be experienced on a contract and can reasonably be anticipated by a contractor. Such provisions, at least as determined by the Texas Supreme Court, are not intended to protect an owner from damages it may cause by intentionally interfering or obstructing with a contractor’s work.

Massachusetts Enacts New Retainage Act

Massachusetts has enacted a new Retainage Act intended to accelarate the closeout of private projects involving $3 million or more. The Retainage Act limits the amount of retainage that can be withheld on applicable projects and provides procedures to speed up the payment of retainage. For a more complete summary of the key features of the Act, see our recent Construction Law Update.

President Signs Executive Order Requiring Federal Contractors to Disclose Labor Violations and Eliminate Pre-Dispute Arbitration Agreements with Employees

On July 31, 2014, the President signed an Executive Order that will require will require prospective federal contractors to disclose labor law violations from the past three years before they can get a contract with the federal government. Contractors will also be expected to collect similar information from many of their subcontractors. The new disclosure requirements will apply to new federal procurement contracts valued at more than $500,000; however, according to the Fact Sheet put out by the White House it will be “implemented on new contracts in stages, on a prioritized basis, during 2016.” The Executive Order anticipates the creation of a website by the General Services Administration that will serve as the one location where contractors can report this information to avoid having to provide it with each new contract.

In addition to the new disclosure requirements, the Executive Order also includes a provision directing companies with federal contracts of $1 million or more not to require their employees to enter into predispute arbitration agreements for certain employment-related claims such as statutory claims under Title VII and tort claims related to sexual assault or harassment. This provision is not intended to affect employment agreements currently in place that include such arbitration provisions.

Economic Loss Doctrine Does Not Apply to Condo Associations Says the Massachusetts Supreme Judicial Court

The Massachusetts Supreme Judicial Court recently held that the economic loss doctrine does not apply to condo associations. In Wyman, et al. v. Ayer Properties, LLC. 469 Mass. 64, (July 10, 2014), the Plaintiffs, as trustees of a condo trust, sought damages stemming from the negligent construction of elements of a condominium building constructed by Ayer. The Plaintiffs alleged that Ayer, which had purchased and converted the building in question into condominiums, negligently constructed the window frames, the exterior brick masonry, and the roof of the building. The negligent construction allegedly led to damage to both the common areas of the building and individual residential units.

The SJC reviewed the history of the economic loss rule, noting that the rule was developed in part to prevent the progression of tort concepts from undermining contract expectations. The rationale for excluding tort recovery for economic loss is that, “when a product injures only itself,” a party should be left to its contractual remedies. The commercial user can protect himself by seeking express contractual assurances concerning the product (and thereby perhaps paying more for the product) or by obtaining insurance against losses. The rationale underlying the economic loss doctrine is that damage to a product itself means simply that the product has not met the customer's expectations, or, in other words, that the customer has received “insufficient product value.” The maintenance of product value and quality is precisely the purpose of express and implied warranties"). As a result, “when a product injures only itself the reasons for imposing a tort duty are weak and those for leaving the party to its contractual remedies are strong.”

The SJC pointed out that the nature of condo ownership supports their conclusion that claims such as those presented here do not fit into the rubric of claims intended to be covered by the rule, as condo ownership gives both exclusive possession and ownership of the unit, and an undivided interest in the common areas. The court noted that as part of the statutory structure of condo ownership, “condominium owners cede the management and control of the common areas to the organization of unit owners, which is the only party that may bring litigation relating to the common areas of the condominium development on their behalf.”

In applying the rationale of the economic loss doctrine to the underlying case, the SJC noted a problem arises where the party exclusively responsible for bringing litigation on behalf of the unit owners for the negligent construction of common areas (here, the trustees) has no contract with the builder under which it can recover its costs of repair and replacement. Phrased differently, they cannot recover economic losses caused by defective construction. The SJC noted that the fundamental purpose of the economic loss doctrine is to confine the indeterminacy of damages, not to nullify a right and remedy for a demonstrated wrong and its harm. The court wrote that the rationale for applying the rule in this instance is made even weaker where the trustees seek damages which are finite and foreseeable, as the rule is intended to preclude recovery for intangible and unknown damages for lost contract or economic opportunity. The court reasoned that here, there was no such danger, as a lengthy trial established Ayer’s fault, the harm suffered by the trustees (as representatives of the unit owners’ rights in the common areas), and the exact amount of the damages. There were no allegations of consequential damages, but simply a reliably proven amount needed to repair or replace the negligently constructed window frames, masonry and roof. The purposes of the economic loss rule have little applicability in this circumstance.

Massachusetts Superior Court Holds Construction Manager At-Risk Responsible for Design Errors / Holds that Spearin Doctrine Does Not Apply to CM At-Risk

The Worcester Superior Court recently issued a potentially landmark decision clarifying the risk that construction managers assume when entering into CM-At Risk contracts. A copy of the Court’s decision is attached here.

In Coghlin Electrical Contractors, Inc. v. Gilbane Building Company, a subcontractor filed suit against the construction manager for additional costs resulting from the purported mismanagement of the project. The construction manager, in turn, sued the owner, asserting that the owner was legally responsible for damages caused by design changes and design errors that caused the additional subcontractor costs. The Court dismissed the construction manager’s claim against the owner, holding that the construction manager could not pass along the additional costs.

In making this ruling, the Court focused on the construction manager’s “extensive ‘Design Review’ responsibilities,” as well as the construction manager’s “broad obligation to ‘indemnify, defend and hold harmless’ [the owner]....” The Court held that this language served to “trump the long-standing Massachusetts common law principles to the effect that “where one party furnishes plans and specifications for a contractor to follow in a construction job...the party furnishing such plans impliedly warrants their sufficiency for the purpose intended’ [also known as the Spearin Doctrine].” Thus the relationship between the Owner and the Construction Manager under a CMR contract is not the same as the relationship between Owner and General Contractor under a traditional design-bid-build arrangement... Given the material changes in the roles and responsibilities voluntarily undertaken by the parties in a modern CMR contracts, the protections that Massachusetts courts historically have extended to construction contractors in the traditional design-bid-build context...simply are inapplicable to such contracts.

This decision is almost certain to be appealed and will be closely watched by industry groups.

U.S. Department of Labor Fighting for Right to Force Federal Contractors to Post Notices Informing Employees of Their Right to Unionize

An interesting battle is developing in a federal court in Washington, D.C.  The National Association of Manufacturers (NAM) is seeking summary judgment in an action it brought (along with the Virginia Manufacturer’s Association) in December 2013. They asserted that the poster informing employees of their right to unionize (required of federal contractors by the DOL's Office of Federal Contract Compliance Programs in accordance with a rule issued in 2010 by the Office of Labor-Management Standards) violates contractors' First Amendment rights. In its motion for summary judgment, NAM relies upon a prior decision in which the D.C. Circuit struck down the NLRB’s post-noticing requirement on the grounds that it compelled speech and thus violated the National Labor Rights Act.

In its opposition to NAM’s motion for summary judgment, the DOL argues that its poster requirement authority is properly derived from the Procurement Act, and that notifying federal contractor employees of their labor rights ensures efficiency in procurement of contracts by protecting against any labor unrest. The DOL asserts that the requirement does not interfere with contractors’ First Amendment free speech rights because the notices are “government” speech and not “private” speech, and does not interfere with federal contractors’ ability to disseminate their own speech regarding unionization. Finally, the DOL contends that the government is permitted to set certain conditions on the receipt of federal funds and contractors have a choice whether or not to enter into a contract with the government knowing that it will require such notices to be posted.