An Alternative to Bid Protests – California Court Allows Second Low Bidder to Sue Low Bidder Directly

In Roy Allan Slurry Seal, et al. v American Asphalt South, Inc. (2/20/2015), the court held that if a low bidder is only able to secure the bid by paying its workers less than the required prevailing wage, then second low bidder is entitled to bring a direct law suit against the low bidder.

The broader facts are as follows.  From 2009 to 2012, American Asphalt outbid Roy Allan Slurry Seal and Doug Martin Contractor on 23 public works projects valued at more than $14.6 million.  The disappointed contractors, Allan and Martin, later jointly sued American Asphalt, contending that they would have been the low bidders on those projects if American Asphalt’s bid had included labor costs based on the statutorily required prevailing wage.  American moved to dismiss the claims, arguing that that Allan and Martin did not have the required existing relationship and reasonable probability of being awarded the contracts to show intentional interference with prospective economic advantage.  After various conflicting lower court rulings on the issue, the matter was eventually presented to the California Court of Appeals, which denied the motions, stating:

The second-place bidder on a public works contract [may] state a cause of action for intentional interference with prospective economic advantage against the winning bidder if the winner was only able to obtain lowest bidder status by illegally paying its workers less than the prevailing wage... if the plaintiff alleges it was the second lowest bidder and therefore would have otherwise been awarded the contract, because that fact gives rise to a relationship with the public agency that made plaintiff’s award of the contract reasonably probable. 

 

The usual course of action in a case such as this would be for the second low bidder to file a bid-protest with the awarding authority, or to challenge any subsequent bid based upon such conduct.  However, this carries strong implications as the same principle could allow a second low bidder to sue the low bidder directly any time that it can show that that a low bidder knowingly used cut corners to secure the bid.  For example, contractors who commit wage-hour violations may be subject to challenge from the second low bidder, contending that they carried a lower labor number than appropriate in their bid.  If the second low bidder can show that the difference allowed the winning contractor to secure the bid, the contractor may be subject to significant liabilities.

Arbitration Waiver Violates Chapter 93A

A Massachusetts Superior Court Judge has held that a contractor’s failure to register with the Commonwealth under Mass. Gen. Laws. Chapter 142A constitutes an injury under Mass. Gen. Laws c. 93A (the Massachusetts Consumer Protection Statute). See Groleau v. Russo-Gariele, Norfolk Superior Court, Civil Action No. 2012-01818.  Chapter 142A regulates the home improvement contracting industry and allows a homeowner to submit disputes under the Home Improvement Contractor Arbitration Program (“HICARB”).

The homeowner hired the contractor to perform work on her home.  The contractor told the homeowner she needed to sign an “Affidavit/Home Improvement Contractor Law Supplement to Permit Application” in order to get a building permit.  The affidavit identified the contractor as a “Home Improvement Contractor” and contained language at the bottom indicating that homeowners dealing with unregistered contractors did not have access to HICARB.  At the time, the contractor was not registered with the Commonwealth.  He did not inform the homeowner of this.

Prior to completion of the project, the contractor stopped working on the property and sued the homeowner for unpaid amounts.  The homeowner counterclaimed alleging breach of contract, as well as violations of Chapters 142A and 93A.  At the conclusion of the jury-waived trial, the judge found that the homeowner owed the contractor $1,988.  However, he also found that the contractor violated Chapter 142A by operating without a certificate of registration.  The judge found that the homeowner could show actual damage stemming from the contractor’s failure to register because she lost the ability to arbitrate the dispute, which may have resulted in significant additional attorneys’ fees.

In finding that the homeowner sustained “injury,” the judge found that the contractor abandoned the project without justification, given that he was not owed substantial funds, and had accepted payment for work he had not performed.  The judge held that the abandonment caused additional costs attributable to the completion of work within the scope of the contract and deprivation of occupancy of the property that the homeowner otherwise would have enjoyed.  The judge dismissed the contractor’s argument that signing the affidavit waived the plaintiff’s right to arbitrate, noting that Chapter 142A makes it unlawful for any agreement for residential contracting services to contain a provision that would waive any rights conveyed to the owner under that chapter.  Additionally, the judge held that the affidavit did not actually waive the owner’s statutory rights by its terms.  The affidavit also does not waive Chapter 142A rights in a clear and conspicuous way as would be expected in a consumer transaction in which a business owner claims a consumer has waived consumer protection rights.  The judge noted that the information in the affidavit referencing unregistered contractors was merely a “notice” and is not suggestive of a waiver of statutory rights is signed by the homeowner.

The judge entered judgment for the homeowner on her Chapter 93A claim, which allows her to submit a motion for the contractor to pay her legal fees and costs.  This case shows how the courts will work to invalidate written agreements that require a consumer to give up a statutorily protected consumer right and will also invalidate agreements that include waivers which are not “clear and conspicuous.”

Recent Supreme Court Decisions Strengthen NH Statute of Repose

The New Hampshire Supreme Court has issued two decisions in the past two weeks that bolster the strength of New Hampshire’s 8 year statute of repose.

Statute of Repose not Tolled During Period Where Contractor also Owned Property
In Ingram v. Drouin (February 12, 2015), the Plaintiffs argued that New Hampshire’s 8-year statute of repose did not bar their claims because the defendants not only built the home, but also once owned and possessed it.  Therefore, the Plaintiffs argued, the defendants are not entitled to the protection of the statute of repose.  The New Hampshire Supreme Court disagreed, stating, “We agree with the majority of courts addressing the issue that, when a builder-owner is sued for his construction-related activities, the statute of repose applies. To interpret the statute of repose otherwise would be contrary to the legislature's intent in enacting it— which was to protect the building industry.”

High Court Affirms Constitutionality of Statute of Repose
In Jillian Lennartz v. Oak Point Associates, P.A. & a. (February 20, 2015), the Plaintiff missed the statute of repose deadline by 3 months.  The Plaintiff then argued that New Hampshire’s 8 year statute of repose was unconstitutional.  The Plaintiff raised a variety of arguments, which the New Hampshire Supreme Court soundly rejected.  Ultimately, the Court disagreed, noted that it had previously rejected nearly identical arguments in Winnisquam Reg. Sch. Dist. v. Levine, 152 N.H. 537 (2005).  The Court went on to state, “The plaintiff concedes that the purpose of RSA 508:4-b, I, in preventing potentially infinite liability in the building industry is an important government objective, and we see no reason to modify our prior conclusion...”

New Hampshire Supreme Court Interprets "Your Work" Exclusion in CGL Policy

The NH Supreme Court issued an important ruling yesterday, clarifying the “Your Work” exclusion under a standard Commercial General Liability (CGL) Policy. See Cogswell Farm Condominium Association v. Tower Group, Inc.

Executive Summary

Under the Court's ruling, the “Your Work” exclusion in the standard CGL policy only bars coverage for property damage to the defectively constructed portions of a contractor’s work. It will not preclude claims for damage to the non-defective parts of the work. In other words, if a contractor’s defective work causes damage to other non-defectively built portions of the project, the contractor cannot recover its costs for repairing the defectively performed work, but can claim coverage for the damage to the non-defective work.

Discussion

In Cogswell, a contractor’s defective work (a leaky water barrier) caused water damage to several condo units that the contractor had properly constructed. The property owner sued the contractor and sought to recover under the contractor’s CGL policy. The contractor’s insurance carrier, however, denied coverage based upon the policy's “Your Work” exclusion in policy. This exclusion precludes coverage for property damage for “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” The carrier argued that this clause precluded any claim for damage to the contractor’s own work.

The trial court found in favor of the insurer, but the New Hampshire Supreme Court overturned the decision, holding that while the insurer’s interpretation was reasonable, the policy could also be read in a more limited fashion, only barring claims for the cost of repairing the defective work. The court held that since either interpretation was reasonable, the policy was ambiguous, and the ambiguity must be resolved in favor of the insured. Accordingly, the court concluded by stating that:

[The “Your Work” exclusion] bars coverage for property damage to the defectively constructed portions of the condominium units...however, [the exclusion] does not bar coverage for damage to those portions of the units that were not defectively constructed by [the Contractor] but were damaged as a result of the defective work.

Important Note

Courts nationwide have disagreed sharply on this issue. Accordingly, while Cogswell is good law in New Hampshire, courts in other jurisdictions may not follow the same rationale, and contractors should check the law in their specific jurisdiction when dealing with this issue.

Who is Entitled to Receive a “Refund” in NH of Impact Fees May Surprise You

We usually think that the word “refund,” refers to money being returned to the person who paid it.   The NH Supreme Court, in the recent case of K.L.N. Construction Company, Inc. v. Town of Pelham, 2013-0374, turned this notion on its head in concluding that a “refund” of impact fees could be paid to current property owners that never paid the impact fee in the first place.

The Town of Pelham adopted an impact fee ordinance in 1999 (pursuant to RSA 674:16 and RSA 674:21, V) assessing fees on new development in order to pay for capital improvements.  The ordinance provided that, if the Town had not spent or otherwise encumbered the impact fees within six years, “[t]he current owners of property on which impact fees have been paid may apply for a full or partial refund of such fees, together with any accrued interest.” (emphasis added).    Subsequent to the enactment of the  ordinance, the Town required certain residential real estate developers to pay impact fees to the Town.  After paying the fees, the developers sold the properties to individual homeowners.

Certain of these residential developers sought the refund of impact fees that they had paid more than six years earlier.  The Town argued that because these developers no longer owned the properties which had been developed, they lacked standing to seek a refund of the impact fees.  The trial court agreed with the Town finding that the statute did not prevent municipalities from choosing to direct refunds to the current property owners.  The developers then appealed and the NH Supreme Court affirmed.

The NH Supreme Court reached its conclusion primarily by considering how the term “refund” was used in connection with unused exactions in another statute (RSA 674:21, V(j)). Exactions are fees charged to a developer for off-site improvements needed for the occupancy of a development.  When an exaction is predicated upon a municipality paying a portion of the improvement’s cost, and the municipality fails to appropriate its share of the cost within six years, the statute provides that “a refund of any collected exaction shall be made to the payor or payor’s successor in interest.”  The residential developers argued a similar interpretation should apply to impact fees.  The Court concluded, however, that the absence of the “payor or payor’s successor in interest” language in the impact fee statute, which was enacted a decade before the exaction statute, indicated that the legislature did not intend the two sections to have identical meanings.  The Court then concluded that the Legislature must have intended the potential recipients of impact fee refunds to be broader than the residential developers who paid them or their successor’s in interest.  Thus, the Town properly interpreted the impact fee statute in making its decision to refund such fees to current property owners rather than the residential developers who paid them.

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.