Louisiana Construction Law and News Update · 2017-01-09 · Construction Progress Scheduling,” which required Gilchrist to submit CPM schedules that, once ... submitted an updated

All contractors have been faced with accelerating a project to completion. However, one general contractor effectively parlayed the acceleration into additional compensation in a way to be followed. In Gilchrist Const. Co., L.L.C. v. Dept. of Transp. And Development, 2013-2101 (La. App. 1 Cir. 3/9/15), --- So. 3d ---, 2015 WL 1020860, Gilchrist Construction Company, L.L.C. (“Gilchrist”) submitted a cost-plus-time bid to the Louisiana Department of Transportation and Development (“DOTD”) for the widening of Interstate 10 east of Lake Charles, Louisiana (“the Project”).

The contract between Gilchrist and the DOTD contained two important provisions. The first was entitled “Critical Path Method (CPM) for Construction Progress Scheduling,” which required Gilchrist to submit CPM schedules that, once approved, were incorporated into the Contract’s documents. This provision also modified a standard DOTD provision titled “Determination and Extension of Contract Time.” When the contract required more work or time than originally specified, this later provision - - as modified - - mandated that the general contractor submit a proposed schedule that built off the latest approved CPM schedule and applied the increased time and its impact on the completion date as a prerequisite for DOTD approval. In complying with these requirements, Gilchrist submitted a CPM schedule at the outset of the Project (“the Original Schedule”).

Shortly after beginning its work on the Project, Gilchrist notified the DOTD in writing that there was a significant shortage in the amount of embankment material that the DOTD had estimated for the Project and requested acknowledgement from the DOTD so Gilchrist “may review the contract schedule and make any necessary adjustments as soon as possible.” The DOTD responded and outlined how Gilchrist should show the shortage in seeking a contract adjustment. Gilchrist did so, and eventually the DOTD issued

a change order for the additional embankment quantities. But by the time the DOTD executed the change order, the Project’s embankment work was nearing completion. Nevertheless, Gilchrist submitted an updated claim for additional time and compensation for the overlooked material. Attached to Gilchrist’s updated claim were CPM schedules Gilchrist produced by modifying the Original Schedule to add the additional time and materials (“the Proposed Schedules”).

Gilchrist completed the Project ahead of schedule and was paid the Contract’s full price, plus additional compensation for the embankment change order, and an early completion bonus, for a total payment of $76,558,550.55. Nonetheless, Gilchrist filed suit to recover additional “construction delay costs” which Gilchrist alleged were incurred due to the DOTD’s gross miscalculation of the Project’s embankment quantities. After a six-day bench trial, the trial court rendered judgment in favor of Gilchrist and against the DOTD for $4,195,127.00.

On appeal, the DOTD argued that the Original Schedule and the Proposed Schedules were insufficient to prove that Gilchrist sustained a delay in completing the Project because of the DOTD’s failure to account for all the Project’s embankment material. The Louisiana First Circuit Court of Appeal noted that the DOTD acknowledged the shortage but did not issue a change order until the embankment work was nearing completion. Thus, the Original Schedule could not have been updated - - nor the Proposed Schedules created - - until there was an identifiable quantity for which the DOTD would pay.

Further, the First Circuit rejected the DOTD’s attempt to use the Original Schedule and the as-built schedule as proof that a delay did not occur, finding that the as-built schedule contained production rates and completion dates that would not have been

SPRING 2015

Delay Damages Via Acceleration - - And You Thought the Two Were Incompatible

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In this issue:

• Construction Law Update

• Surety Decisions and Non-Louisiana Cases

• Upcoming Construction Law Seminars

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Andrew G. Vicknair

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Eric A. Mund

The lawyers ofShields | Mott L.L.P.

This newsletter covers recent case law and other developments of significance to the construction industry. However, the information contained in this newsletter should not be considered legal advice and does not create an attorney-client relationship with the reader. ADDITIONALLY, PURSUANT TO THE APPLICABLE RULES GOVERNING ATTORNEY CONDUCT, THIS NEWSLETTER MAY BE CONSIDERED LEGAL ADVERTISING. Readers should always seek the advice of competent legal counsel for any matters on which they need legal advice.

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available to Gilchrist or the DOTD at the time the discrepancy was discovered. Further, the First Circuit acknowledged that:

[T]he problem with simply relying on ‘the facts’ as shown in the [as-built schedule] is that it gives the DOTD the unbargained-for advantage of reaping the benefits of Gilchrist’s efforts to increase productivity to such a rate that the extra quantities did not, in fact, retard the progress of the embankment work.

Id. at *25. Instead, the Court recognized that the Original Schedule and the Proposed Schedules presented the most contemporaneous assessment of the impact the DOTD’s embankment oversight would have imposed upon Gilchrist, simply because the Proposed Schedules were generated the closest in time to the discovery of the discrepancy. Thus, the Court found that Gilchrist’s presentation of the Original Schedule and the Proposed Schedule was sufficient to prove that Gilchrist sustained a delay because of the identified embankment work.

After finding that Gilchrist’s proof was sufficient, the Court quickly highlighted deposition testimony from DOTD personnel that admitted that the embankment quantity take-offs were the DOTD’s responsibility. Further, the First Circuit upheld the trial court’s damages awards for job site overhead, actual material costs, idle equipment because of out-of-sequence work caused by the additional embankment placement, and material stockpiling. However, the First Circuit reduced the trial court’s award of damages to remove the amounts attributable to home office overhead under the Eichleay formula. Specifically, while it recognized Gilchrist proved an 180-day delay (where the Project would have been completed 180 days earlier than it was), the First Circuit highlighted Eichleay’s “strict prerequisite” of a complete work stoppage before the

formula could apply. Because there was no complete stoppage, the elements for Eichleay’s application were not met, and Gilchrist’s damages were reduced.

Overall, this thought-provoking decision outlines the proper method for proving not only delay impacts, but may also be the proper method for proving the impact costs which could be sustained because of acceleration, at least in the realm of contracts with Louisiana state entities. We will continue to monitor the application and interpretation of this decision and will update you on significant changes as they arise.

Responsibility by Proxy

In open account litigation in the construction industry, courts typically require there to be a contractual agreement to recover amounts owed and associated penalties for nonpayment. Yet in Care Services, Inc. v. DBR Associates, L.L.C., 14-757 (La. App. 5 Cir. 2/11/15), --- So. 3d ---, 2015 WL 629294, a general contractor was held liable to a subcontractor for amounts incurred by the subcontractor before a contract existed between the two of them.

In 2004, Summit Property Management (“Summit”) hired DBR Associates, L.L.C. (“DBR”) to construct an administrative office and community center building (“the Project”) at the Southwood Patio Apartments (“the Apartments”). The Apartments had a history of drainage problems. In the past, Summit used Care Services, Inc. (“Care”) to resolve the plumbing and drainage issues the Apartment experienced.

The Project required DBR to drive piles on the Apartment’s site where the Project would eventually be built. However, shortly after beginning pile driving operations, the site began experiencing flooding problems. Summit contacted Care to investigate the cause of the flooding, which Summit claimed were clogged storm drains. Both Care and the subcontractor it employed concluded that there was an obstruction in the drainage piping, which was ultimately found

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to be a pile driven by DBR. Later, DBR directly contacted Care for another similar investigation, which concluded that another piling was obstructing another storm drainage pipe. Finally, and to rectify the continued flooding problem, Care installed a pump and subsurface drainage system for DBR. Care sent an invoice totaling $10,580.30 to DBR (“the Invoice”). The Invoice included the charges for Care’s two initial visits and the pump installation, and contained a breakdown of hours for employee work for all of its activities.

The Invoice went unpaid. Eventually, Care filed suit against DBR for an open account, seeking full payment of the Invoice and attorney’s fees as a penalty for DBR’s nonpayment. At trial, the district court rendered judgment in favor of Care for $10,580.30, plus attorney’s fees in the amount of $8,000.00.

On appeal, DBR conceded that it did hire Care to perform some of the drainage work, but argued that the Invoice included work performed before DBR had a contract with Care. Further, DBR argued that the man-hours identified in the Invoice were overinflated, because the hours and hourly rates did not equate to the Invoice’s total amount. Because of these defects, DBR argued that the demand letter - - which Care used to justify the attorney’s fees penalties - - identified the incorrect amount owed.

Nevertheless, the Louisiana Fifth Circuit Court of Appeal upheld the ruling, recognizing that even if the Invoice contained charges occurring before DBR invoked Care’s services, the trial court’s findings based upon Care’s treatment of its investigation as one instance and DBR’s ultimate responsibility for the drainage problems justified the judgment. As far as the discrepancy in hours billed with the Invoice’s total amount, the Court recognized that “the trier of fact did not view these anomalies as being significant on the question of whether Care accurately billed for the work it performed.” Because these findings upheld the Invoice’s full amount, the demand letter was accurate, and the $8,000.00 in attorney’s fees was likewise upheld.

In short, this decision highlights that a general contractor may still be responsible for work performed by a subcontractor at the owner’s request - - even in the absence of an agreement between the general contractor

and subcontractor - - if clear direction about the scope of work is provided, or if the general contractor’s actions necessitate the subcontractor’s work.

Bye Bye Bad Faith

Generally, bad faith allegations are a surety’s bête noire, forcing it to tread carefully in any action to recover funds it has paid on behalf of its principal. However, in Gray Ins. Co. v. Terry, --- Fed. Appx. ---, 2015 WL 1223664 (5th Cir. 2015), the United States Court of Appeals for the Fifth Circuit, upheld the trial court’s gutting of a principal’s bad faith defense. In Terry, Gray Insurance Company (“Gray”) agreed to begin issuing payment bonds and performance bonds to Government Technical Services, L.L.C. (“GTS”). In conjunction with Gray’s issuance of those bonds, GTS and several individual indemnitors (“the Terrys”) executed an indemnity agreement (“the Indemnity Agreement”) in which GTS and the Terrys were all bound “indemnify and hold [Gray] harmless from all loss, liability, damages and expenses . . . because of having furnished any Bond[.]”

Eventually, several of GTS’s subcontractors on various government construction projects for which Gray had issued payment and performance bonds began asserting claims of nonpayment against GTS and Gray. Gray began its investigation and ultimately resolved all of the subcontractors’ claims. Collectively, Gray incurred $1,683,509.82 in costs and attorney’s fees in resolving the claims against GTS and itself.

In 2007, Gray initially brought suit against GTS and the Terrys, seeking reimbursement for its costs and attorney’s fees in connection with the investigation and resolution of claims against GTS. But at the time Gray initially filed, there were unsettled issues regarding whether the payments Gray made were proper. The district court stayed the litigation to resolve those issues. Once resolved, Gray reopened the stayed litigation and moved for summary judgment against all defendants under the Indemnity Agreement. Although the motion was stayed against the now-bankrupt GTS, the district court granted summary judgment against the Terrys.

On appeal, the Fifth Circuit recognized that the Indemnity Agreement was clear, and emphasized that “[t]he test set forth in the . . . [A]greement is one of causation,

whether Gray incurred losses because it furnished a payment and performance bond for GTS.” Id. at *2 (emphasis in original). Under this framework, the Court reasoned that the Terrys were responsible for all investigative and resolution costs Gray incurred - - whether or not it paid any claims - - because those costs were incurred because Gray furnished bonds to GTS.

Importantly, the Fifth Circuit also dismissed the argument by the Terrys that “there is a genuine issue of material fact regarding whether Gray acted in bad faith by making payments on certain claims despite GTS having valid defenses against those claims.” Here, the Court stated that the indemnity obligation was not conditioned upon the existence or non-existence of a valid defense to the claim, but was simply based upon whether Gray incurred costs “because of having furnished any Bond” to GTS. This reasoning, coupled with a lack of evidence presented by the Terrys, led the Court to affirm the trial court’s decision.

Other Noteworthy Decisions

Roy Allan Slurry Seal, Inc. v. American Asphalt South, Inc., 184 Cal. Rptr. 3d 279 (2d Div. 2015): finding that the second low bidder could maintain a claim for intentional interference with prospective economic advantage and Unfair Practices Act claim against the low bidder who obtained award because it used labor paid below the state prevailing wage.

Full House Resorts, Inc. v. Boggs & Poole Contracting Group, Inc., 1:14-cv-223, 2015 WL 1427284 (S. D. Miss. Mar. 27, 2015): denying summary judgment and allowing owner to proceed against general contractor for structural defects in multi-level parking garage after conclusion of arbitration between general contractor and prior owner of parking garage.

Professional Performance Development Group, Inc. v. United States, --- Fed. Cl. ---, 2015 WL 458168, (2015): finding that the Court of Federal Claims has jurisdiction to hear a claim for declaratory judgment brought by the general contractor under the Contract Disputes Act despite restrictions in prime contract with the Department of the Army limiting decision on the issue of equitable adjustment and time extensions to Army’s contracting officer.

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Construction SeminarsShields | Mott, L.L.P. is consistently engaged in construction law seminars throughout the state of Louisiana, and is pleased to announce the following upcoming seminars:

Bad Plans and Specifications: A Contractor’s Perspective

(Lorman Education Services Webinar)

http://www.lorman.com/training/?products=ondemand-webinars

July 28, 2015

Our seminars are designed to address the legal issues that the construction industry faces and to hone in on the options that provide the best legal advice. Understanding these issues are the best ways to avoid potential problems. Additional information about our seminars can be obtained by contacting Andrew G. Vicknair at Shields | Mott, L.L.P. at (504) 581-4445.

Green Building is growing. In the United States, an estimated 40-48% of 2015’s new non-residential construction will be green, equating to a $120-145 billion opportunity. 62% of firms building new single-family homes report that more than 15% of their projects are green. By 2018, it is expected that that percentage will increase to 84%. In the non-residential market, the increase in green projects is even more dramatic, as 41% of all non-residential building starts in 2012 were green, as compared to 2% of all non-residential building starts in 2005.

In Louisiana, green building is rapidly growing even though Louisiana ranks 35th in the nation with 260 commercial buildings that are LEED registered and certified. Notably, however, Louisiana ranks 11th in terms of registrations and certifications under the LEED for Schools rating system. And, individually, New Orleans ranks among the top 50 U.S. cities with the most LEED project activity.

As the “trend” of green building becomes law, it is becoming an integral issue of design and construction that all thoughtful construction lawyers should understand. Shields | Mott L.L.P. is at the forefront of this new emerging area of construction law. Led by Partner and LEED Green Associate, Adrian D’Arcy, Shields | Mott L.L.P. is positioning itself to provide its clients with the most up to date advice on all green construction issues.

In the coming months and in the coming newsletters, look for articles that will address the Uniform Green Building Code, LEED certification, contractual issues surrounding green building, insurance and bonding considerations, and issues arising in recent “green litigation.” In addition, look out for seminars in late 2015 and 2016 on the issue.

Going Green