Construction Law Insights

United States ex rel. Branscome Inc. v. Hanover Insurance Company, No. 2:15-cv-127, 2015 U.S. Dist. LEXIS 173841, 2015 WL 9665679 (E.D. Va. Dec. 8, 2015)

The U.S. Government contracted with Douglas P. Fleming, LLC (“Fleming”) for projects in two locations. Pursuant to the Miller Act, Hanover Insurance Company (“Hanover”) acted as surety, furnishing the U.S. Government with a bond. Fleming subcontracted with Branscome Eastern Shore’s (“Branscome”) for labor and materials. Branscome fully performed under the subcontract, but was not paid.

At a hearing the parties represented to the court that a settlement had been reached. After the hearing the attorneys for Branscome and Fleming emailed back and forth regarding the terms of the settlement and cc’ed Hanover’s attorney on the emails. However, the parties were unable to agree on the terms of a written agreement. Branscome filed a motion to enforce the settlement.

Branscome could show that Fleming expressly agreed to the settlement, but had no proof that Hanover accepted the settlement. In cases where there are three parties, all with obligations in the settlement contract – such as with sureties or guarantors – the surety must accept the agreement as well unless there is explicit authorization whereby the surety tenders settlement authority to another, which did not happen in this case. The surety’s silence during the email negotiation and exchange of draft agreements was insufficient to bind the surety to the terms of the agreement reached between Branscome and Fleming.

William H. Gordon Assoc., Inc. v. Heritage Fellowship, 784 S.E.2d 265 (Va. Feb. 12, 2016)

The Heritage Fellowship Church (“Heritage”) contracted with William H. Gordon Associates, Inc. (“Gordon”) to design the “Final Site Plans” for a rain tank system (the “Engineering Contract”). Gordon’s rain tank design plan was approved by the county on August 5, 2009. Heritage then contracted with Whitener & Jackson, Inc. (“W&J”) to construct its sanctuary and parking lot, including the rain tank (the “Construction Contract”).

The parking lot above the rain tank collapsed. Heritage refused to pay W&J for installing a new storm water system and kept the retainer owed to W&J under the Construction Contract. W&J sued Heritage and Heritage counterclaimed against W&J. On August 9, 2013, Heritage filed a third-party claim against Gordon for any repair and replacement costs it owed W&J. The two cases were consolidated.

The Supreme Court of Virginia held that Heritage’s action against Gordon was not barred by the statute of limitations because an owner’s cause of action for negligent design against the engineer accrues when the county approves the final site plan.Because a cause of action for negligent design is an action for breach of contract, Heritage’s suit against Gordon was filed within five years of accrual.

The Supreme Court of Virginia also held that the Engineering Contract did not shift responsibility of the collapse to W&J because Gordon’s plan was a “prescriptive specification” that left no design work to W&J. Because the Construction Contract did not shift liability to W&J and there was evidence that W&J adhered to Gordon’s rain tank plan, the circuit court did not err in finding that W&J was entitled to be paid for installing a replacement system. Because there was evidence that Gordon’s plan caused the rain tank failure, the circuit court did not err in passing the liability for paying W&J on to Gordon.

Finally the Virginia Supreme Court also held: (1) A release under Virginia Code § 8.01-35.1 does not fully release the architect, but it entitles him to an offset in the amount of the payment; and (2) Construction financing costs may be a direct damage for delay, but they are not damages where the loan is set to mature after the delay ended.

VAP Union Square v. Cardinal Point, Inc., No. CL12-170, 2015 Va. Cir. LEXIS 120 (Va. Cir. Ct. City of Charlottesville Sept. 7, 2015)

Vapiana Franchisee contracted with Cardinal Point, Inc. (“CPI”) to design an HVAC unit to be used in a restaurant operated by a Vapiana Franchisee. VAP sued CPI, alleging faulty design of the unit and asserting causes of action for breach of express and implied contracts and professional negligence. Defendants demurred.

The Court denied the demurrer to the express and implied contract claims because the allegations in the Complaint stated a proper claim. VAP asserted an alternative claim for breach of implied contract against Andrew Ritchie, who acted as an employee and agent for CPI. With respect to this claim, the court found that VAP did not provide information sufficient to allege an implied contract existed between Ritchie and VAP and sustained the demurrer. Finally, regarding VAP’s assertion that CPI committed professional negligence, the court suggested that although VAP could bring the count for professional negligence if New York law applied, VAP did not plead any facts demonstrating that New York law applied.

Kingdomware Techs., Inc. v. United States, 136 S. Ct. 1969 (June 16, 2016)

Kingdomware Technologies, Inc. (“Kingdomware”) is a small business owned and controlled by a service-disabled veteran and has been certified as such by the Department of Veteran Affairs (“VA”). In 2012, Kingdomware bid on a project, but the VA awarded the contract to a non-veteran-owned business. Kingdomware filed a bid protest with the Government Accountability Office (“GAO”) and argued that the contract award was illegal under the “Rule of Two.” The “Rule of Two” provides that the VA shall award contracts to veteran-owned small business when there is a “reasonable expectation” that two or more such businesses will bid for the contract at “a fair and reasonable price that offers best value to the United States.” 

The GAO recommended that the VA cancel the contract and re-solicit the bids. The VA did not accept the GAO’s recommendation. Kingdomware brought suit. Relying on the phrase “for purposes of meeting the goals under subsection (a),” the district court determined that the Act was “goal setting in nature” rather than mandatory. The U.S. Court of Appeals for the Federal Circuit upheld the decision.

The Supreme Court reversed and remanded. The VA must award a contract to a veteran-owned small business when there is a reasonable expectation that two or more such businesses will offer reasonable bids for the contract, even when the VA will otherwise meet its minimum contracting goals for the year. The Supreme Court held that the plain language of the relevant text of the Veterans Act of 2006, which established guidelines for contracting with veteran-owned business, makes this rule for contracting mandatory.

Taja Invs. LLC v. Peerless Ins. Co., No. 1:15-cv-01647-GBL-TCB, 2016 U.S. Dist. LEXIS 95760, 2016 WL 3951406 (E.D. Va. July 21, 2016)

Taja Investments, LLC and Taja Construction & Rehab, Inc. (collectively, “Taja”) were conducting renovations on a property’s basement. According to the project’s structural plans, Taja was to excavate the basement in discrete stages, underpinning the structure at every step to prevent the risk of collapse. When the wall collapsed, however, no underpinning had been performed. Taja paid for the repairs and made an insurance claim. Peerless Insurance Company (“Peerless”) refused to cover Taja’s sustained losses on the grounds of the policy’s workmanship and earth movement exclusions entitled Peerless to withhold coverage.

The workmanship exclusion applied because Taja’s own acts, errors, and omissions related to the over-excavation of the basement, coupled with Taja’s failure to install the necessary underpinnings to secure the building’s foundation, caused the wall’s collapse. The ensuing loss exception failed to restore coverage because no independent or interceding act covered by the peril contributed to the collapse. The earth movement exclusion also applied to Taja’s activities because Taja’s activities occurred at the earth’s surface level and the policy did not require the activities to be below grade.

U.S. Home Corp. v. Nationwide Mut. Fire Ins. Co., No. 1:15-CV-1464-GBL-JFA, 2016 U.S. Dist. LEXIS 29895, 2016 WL 958348 (E.D. Va. Mar. 8, 2016)

U.S. Home Corporation a/k/a U.S. Home Corp. DC Division (“US Home”) and Lennar Corporation’s (“Lennar”) subcontracted with Rulex Plumbing, LLC a/k/a Rulex Plumbing, Inc. (“Rulex”) for plumbing work in the Colonial Heritage community in Williamsburg, Virginia. The subcontract obligated Rulex to name US Home and Lennar as additional insured under Rulex’s general liability insurance policy with Nationwide Mutual Fire Insurance Company (“Nationwide”). Due to Rulex’s allegedly defective work, homeowners brought claims against US Home and Lennar.

US Home and Lennar sought declaratory judgment against Nationwide for coverage under the policy as additional insureds. Nationwide removed the declaratory judgment claim to federal court. US Home and Lennar filed a motion to remand.

28 U.S.C. § 1332(c)(1) provides that in a direct action against an insured the insurer’s citizenship is deemed to include the insured’s state of citizenship. This was not a “direct action,” because it was not an action by an injured party against an insured to recover for damages caused not by the insurer but by its insured who was not joined in the action. Rather US Home and Lennar alleged that they are additional insureds under the insurance policy and that Nationwide had a duty to pay indemnity benefits to US Home and Lennar for amounts paid to certain homeowners to repair work performed by Rulex. Therefore, the court denied the motion to remand.

Jeb Stuart Auction Services, LLC v. West American Co., No. 4:14-cv-00047, 2015 U.S. Dist. LEXIS 133568, 2015 WL 5793345 (W.D. Va. Oct. 1, 2015)

Jeb Stuart Auction Services, LLC (“Jeb Stuart”) purchased several interconnected brick buildings. Fire destroyed the building. Jeb Stuart made a claim under its fire insurance policy with West American Insurance Company (“West American”). Under the policy, Jeb Stuart was entitled to the full policy limits of $4,050,000 if Jeb Stuart contracted to repair or replace the building within 180 days of the loss. Otherwise, Jeb Stuart was entitled to only the market value of the buildings, which was $255,000. Jeb Stuart failed to timely contract for repair or replacement of the building.

Jeb Stuart asked for summary judgment that it was entitled to the full policy limits because: (1) Jeb Stuart could not afford to contract for repair or replacement without proceeds from West American; (2) West American wrongfully rescinded the policy, which prevented Jeb Stuart from contracting to repair or replace the building; and (3) West American did not participate in the adjustment process because it failed to share with Jeb Stuart repair estimates that West American developed when analyzing the claim.

The district court denied Jeb Stuart’s motion for summary judgment and granted West American’s cross motion for summary judgment. The district court rejected each of Jeb Stuart’s reasons for failing to timely contract for repair or replacement of the building. The district court found no provision in the policy that required West American to tender proceeds under the policy prior to the building’s replacement or to provide information to Jeb Stuart regarding the estimated repair costs. Jeb Stuart could have contracted for the repair or replacement regardless of West American’s actions, but did not.

IES Commercial, Inc. v. The Hanover Ins. Co., No. CL16-108 (Cir. Ct. Roanoke City May 3, 2016)

Center Manager, LLC (“Center Manager”) owns the Center, which is located in the Square facility in the City of Roanoke (the, “Project”). Center Manager contracted with Thor Construction, Inc. (“Thor”) to perform construction work on the Project. Thor subcontracted with IES Commercial, Inc. (“IES”) for certain work on the Project (the “Subcontract”). Thor entered into a bond agreement with The Hanover Insurance Company (“Hanover”) that named Thor as “Principal” and “Contractor,” Hanover as “Surety,” and Center Manager as “Owner” (the “Bond”).

The Subcontract contained a “pay-if-paid” clause that stated “Receipt of payment from owner for this subcontract work and/or material supplied is a condition precedent to payment by Thor, Inc. to this subcontract and/or material supplier. IES fully performed its work under the Subcontract and submitted appropriate claims. Thor made timely demands for payment from Center Manager for the sums sought by IES. Center Manager refused to pay IES’ claims. IES then made an appropriate claim under the Bond.

The court held that a surety for a general contractor can rely on a “pay-if-paid” clause in the subcontract to defend against an action by the subcontractor on the bond between the surety, the general, and the landowner. The court could not find any provision in Virginia’s statutory or case law which revealed a public policy that would condemn or restrict a surety’s reliance on a pay-if-paid clause negotiated by its principal. Furthermore, a “pay-if-paid” clause in a subcontract does not need to be expressly stated in both the subcontract and bond to be used by the surety.

Because the Subcontract in this case did not create any liability between Thor and IES due to the “pay-if-paid” clause, IES could only recover against Hanover if the language in the Bond created obligations for Hanover as a surety that were independent of those imposed on Thor in the Subcontract. The court, however, could not find any freestanding obligations in the Bonds' language. Thus, neither Thor, the Center Manager, nor Hanover paid IES’ claims and the court dismissed the case.

Weinberg v. JPMorgan Chase & Co., No. 1:16-cv-110 (LMB/TCB), 2016 U.S. Dist. LEXIS 37484, 2016 WL 1070817 (E.D. Va. Mar. 15, 2016)

A Pro Se plaintiff filed a complaint to enforce a mechanic’s lien against a property. Plaintiff alleged that from 2007 through 2015 he performed work worth $195,000 on the property. The property eventually went into foreclosure and was purchased by JPMorgan Chase Bank, N.A. (“Chase”). Plaintiff claimed that the defendants failed to provide him with proper notice of the foreclosure, sought to recover $195,000 based on the mechanic’s lien, and claimed that the defendants violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”).

There was several meritorious grounds for dismissal, including lack of personal jurisdiction, insufficient process, and failure to state a claim upon which relief could be granted.

The defendants were under no obligation to notify Plaintiff about the foreclosure sale and the defendants had no liability for the $195,000 because Plaintiff’s mechanic’s lien was invalid. Plaintiff had failed to allege or provide any evidence showing that he was a licensed contractor entitled to the mechanic’s lien or that no license was required for the type of work performed.

Plaintiff also had an obligation to disclose all his assets in his Chapter 7 bankruptcy petition filed nearly five months after he filed his mechanic’s lien. Because Plaintiff did not disclose the mechanic’s lien in his bankruptcy, the court held that allowing Plaintiff to now recover would give Plaintiff an unfair advantage by misleading the bankruptcy court. Plaintiff’s RICO claims also failed because they were premised on his deficient mechanic’s lien or were vague claims regarding the other alleged wrongs committed by defendants in other states and against other parties.

United States ex rel. Duncan Telcom v. Pond Constructors, Inc., No. 1:14-cv-1217, 2016 U.S. Dist. LEXIS 141419, 2016 WL 137163 (E.D. Va. 2016)

The United States Corps of Engineers (“Corps”) contracted with Pond Constructors, Inc. (“Pond”) to provide labor and material to make fueling system improvements at Fort Lee (the “Prime Contract”). Berkley Regional Insurance Company (“Berkley”) supplied the bond required by the Prime Contract. Pond subcontracted with Duncan Telcom, Inc. (“Duncan”) for a 4,500 gallon temporary storage tank (the “Subcontract”). After the project was complete, Pond did not pay Duncan for the work.

Duncan filed suit against Pond and Berkley on the bond. Pond and Berkley filed a motion to stay and compel arbitration. The court granted Pond’s motion, but denied Berkley’s motion.

The Pond-Duncan Subcontract provided for arbitration. Pond argued that it had never agreed to arbitrate its claims against Berkley and that the case against Berkley involved independent claims and different potential defenses under the Miller Act. The court found that the claims against Berkley were not clearly referable to arbitration, and, therefore, the court had the discretion to stay the case pending arbitration. The court also found that Berkley had not demonstrated a “pressing need” for a stay that outweighed any possible harm to the nonmovant and ruled that the case against Berkley would go forward as scheduled.

United States v. Unisys Corporation, No. 1:14-cv-1217, 2016 U.S. Dist. LEXIS 46319, 2016 WL 137163 (E.D. Va. Apr. 5, 2016)

Plaintiff alleged that Unisys Corporation (“Unisys”) defrauded the United States by presenting claims for payment and supporting documentation for services to the federal government that were of no value resulting in overcharges. Unisys moved to dismiss for lack of jurisdiction and for failure to state a claim, arguing Plaintiff failed to state a claim for relief and that the overcharge claim is precluded by the False Claims Act’s (“FCA”) first-to-file jurisdictional bar and barred by res judicata.

The court held that it is not enough to offer evidence that a defendant provided services that are worth some amount less than what was paid. Services that are “worth less” are not “worthless,” and an allegation that services were performed at a level below the value paid is insufficient to state a claim for relief under the FCA.

The first-to-file jurisdictional bar also precluded the claim for overcharges. A later suit is barred if it is based upon the same material elements of fraud as an earlier suit even though the later suit may not involve identical facts and details, and where the allegations of fraud in the earlier suit provide the government with enough knowledge of essential facts of the scheme to discover related fraud. Allegations in another matter were pending at the time and involving a time-card scheme for the same contract, task order, locations, timeframe, and managers were sufficiently broad enough to inform the government of possible fraud and provided enough information to the government to discovery the alleged fraud in this matter.

Federico v. Lincoln Military Housing, LLC, et al., 127 F. Supp. 3d 623 (E.D. Va. Aug. 31, 2015)

Plaintiffs leased military housing affected by mold. Plaintiffs brought claims based on violation of the Virginia Residential Landlord and Tenant Act (“VRLTA”), breach of lease, negligence, and negligence per se against Defendants: (1) Lincoln Property Company (“LPC”); (2) Lincoln Military Housing, LLC (“LMH”); (3) Mid-Atlantic Military Families, LLC (“Mid-Atlantic”); (4) LPC Property Management, Inc. (“LPCPM”); and (5) TWF Construction (“TWF”).

Under the Department of Defense’s Military Housing Privatization Initiative, LMH and its subsidiaries manage and operate military housing under a 50 year lease. Mid-Atlantic manages the performance of all maintenance activities for the military housing occupied by Plaintiffs. TWF is an independent contractor who performed demolition and repairs in Plaintiffs’ home. Defendants moved for summary judgment on the ground of derivative sovereign immunity.

The court denied the Defendants’ Motion for Summary Judgment. The court held that for Defendants to prevail on their defense that the Government and its contractors did not waive sovereign immunity under the Federal Tort Claims Act, they must establish that: (1) The conduct involved an element of judgment or choice; and (2) The decisions were based on consideration of public policy.

Defendants argued that they met both prongs by developing a plan with the Navy to evaluate, remediate, and monitor mold conditions in the military housing and that such plan considered public policy factors such as budgetary constraints and military morale readiness. The court rejected this argument because the Plaintiffs had not alleged the plan was defective, but, instead, alleged that Defendants did not comply with their own plan. Therefore, the court ruled that derivative sovereign immunity potentially applied to conduct in line with the plan, but did not bar the suit as a whole.

Code of Virginia §§ 54.1-4400 and 54.1-4412.1 – Amended by 2016 HB 907

The General Assembly has enacted legislation that provides an exemption from monetary caps on architectural and engineering services for transportation district commissions.

Code of Virginia §§ 54.1-4400 and 54.1-4412.1 – Amended by 2016 HB 907

The General Assembly has enacted legislation that provides an exemption from monetary caps on architectural and engineering services for transportation district commissions.

Code of Virginia § 2.2-4303 – Amended by 2016 HB 1166/SB 362

The General Assembly has enacted legislation that lets a public body establish small purchase procedures that do not require competitive sealed bids or competitive negotiation for single or term contracts for transportation-related construction if the aggregate or sum of all phases is not expected to exceed $25,000.

Virginia Code § 2.2-4302.2 – Amended by HB 578/SB 169

The General Assembly has enacted legislation stating that offerors in the selection process for architectural or engineering services are not required to list any exceptions to proposed contractual terms and conditions until after the qualified offerors are ranked.

Virginia Code §§ 2.2-4302.1 and 2.2-4302.2 – Amended by 2016 HB 1108 

The General Assembly has enacted legislation that prohibits the use of any experience modification factor as a condition of any bidder’s or offeror’s eligibility to participate in a solicitation for construction. The Code defines “experience modification factor” as “a value assigned to an employer as determined by a rate service organization in accordance with its uniform experience rating plan required to be filed pursuant to subsection D of §38.2-1913.”  The legislation includes the same prohibition for any contract or offer to contract not covered by the VPPA. The legislation applies to any offer to contract, Invitation to Bid, or Request for Proposal for construction services issued on or after July 1, 2016.

Virginia Code § 8.01-229 – Amended by 2016 HB 441/SB170 

In response to a decision we discussed last year – Allstate Prop. & Cas. Ins. Co. v. Ploutis – which held that a nonsuit only tolled the statute of limitations and not a contractual limitations period contained in the applicable insurance policy, the General Assembly enacted changes to the nonsuit statute. The changes to § 8.01-229 make it clear that the limitations period is tolled by a nonsuit, regardless of whether the limitations period is by statute or contractual.

Virginia Code § § 8.01-557, 8.01-581.014, 8.01-581.016, 16.1-77 – Amended by 2016 HB 641

In response to a decision we discussed last year – Allstate Prop. & Cas. Ins. Co. v. Ploutis – which held that a nonsuit only tolled the statute of limitations and not a contractual limitations period contained in the applicable insurance policy, the General Assembly enacted changes to the nonsuit statute. The changes to § 8.01-229 make it clear that the limitations period is tolled by a nonsuit, regardless of whether the limitations period is by statute or contractual.

PLDR Law Scott Kowalski 1 PLDR Law Mark Burgin 1

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