HawaiiConstructionLaw.com

New South Carolina Decision Declares Unconstitutional And Partially Invalidates Legislation Crafted to Correct South Carolina's Version of Hawaii's "Group Builders" Decision

We have previously discussed Hawaii's Group Builders decision; one that has had major implications in the construction industry because of its decreed limitations on the scope of coverage afforded by a standard commercial general liability insurance policy, and holding that construction defects are not "occurrences" under same and therefore not covered by insurance. 

This matter has been extensively covered by fellow blogger Tred Eyerly at his blog, insurancelawhawaii.com.  For those who follow this issue, they will know that in response to the Group Builders decision, Hawaii's legislature enacted Act 83, which stated that the terms of an insurance policy must be interpreted in accordance with the resonable expectations of the parties at the time the policy was enacted.  The act underwent many modifications before being finalized, but this was effectively the language finally chosen.  Since then, Act 83 has been interpreted differently by different courts but has not been directly challenged as "unconstitutional" by anyone in the insurance industry.

Not so in South Carolina.  In a decision released on November 21, 2012, the South Carolina Supreme Court considered and ultimately decided that legislation crafted by the South Carolina legislature to redress perceived wrongs enacted by South Carolina's version of Hawaii's Group Builders decision violated the contracts clause, but only to the extent it applied retroactively. 

The act was upheld on all other constitutional challenges.

Federal Funding of Portion of Rail Project Approved

KHON reports the feds have approved funding of 1.55 billion dollars of funding for the rail project, monies previously held up by pending litigation and an uncertain political election.  With the president, senate, and mayor seats all still held by rail proponents, Senator Inouye's office announced a major step along the way to funding of the job:

"This is an important step toward providing federal funding for the Honolulu Rail Transit project.  We have discussed and debated the merits of a rail line on the island of Oahu for the majority of my time in the Congress and I would like to thank Peter Rogoff and the Federal Transit Administration, President Obama, and Transportation Secretary Ray LaHood for partnering with the City and County of Honolulu to build a system that will alleviate traffic congestion, lessen our dependence on imported fossil fuels and provide our residents, in particular those living in West Oahu, with a much needed alternative to driving.  The Full Funding Grant agreement will provide$1.55 billion for the project and I will continue to work in a bipartisan fashion with my colleagues in the Congress to ensure we appropriate what is needed to complete this project in an efficient and timely manner.  The path to this agreement with the federal government has not been easy, but like the construction of the H-3 Freeway for Windward Oahu residents, and significant improvements to Kalanianaole Highway for East Honolulu, the rail transit project will bring welcome relief to West Oahu residents who spend too much time stuck in traffic." 

The Senator's full press release is available here.

Tennessee case on AIA Notice of Claim Provisions

Just read  a new case that addressed an AIA provisionn that is often litigated:  notice of claim provisions.  The case is Rcr Bldg. Corp. v. Pinnacle Hospitality, 2012 Tenn. App. LEXIS 787  and the text is available here https://www.lexis.com/research/retrieve?_m=ff96c8490a81e58211c2aa7eacda17bf&csvc=le&cform=byCitation&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLzVzk-zSkAb&_md5=09fecd23fe6d25ce38cd94a57ecc8cd3  (subscription required).

Standard AIA general conditions require that parties provide notice of claims (defined as, inter alia, disputes over money) within 21 days of the issue giving rise to the claim. 

In the RCR case, the contractor contracted with the owner to construct renovations to a hospital.  The project was delayed for reasons at least partly attributable to the owner's defective plans and specifications.  When the job was completed, the parties met and determined the contractor was owed approximately $600,000 as part of its final payment.

Instead of making that final payment, the owner withheld the entire sum, claiming it had (1) paid subcontractors directly; (2) was asserting a 230k offset for liquidated damages because the job was delayed; and (3) holding rhe rest for anticipated payments to other subcontractors or suppliers.

The contractor argued that the owner could not unilaterally determine and withhold liquidated damages from the contractor.  The contractor relied upon the AIA 201, section 4.3, notice of claim provisions.

Owner countered that the notice of claim provisions are not applicable to owner and not applicable to claims for liquidated damages, which arise automatically when a job is delayed.  Owner argued that the contractor failed to seek extensions of time during the job, so it was justified in claiming liquidated damages.

The trial court adopted the owner's arguments, awarding the owner attorneys' fees in the action.  The court of appeals reversed, holding that the plain language of the contract and definition of "claim" applies to liquidated damages, which are certainly claims for disputed sums of money.  Based upon the owner's failure to notify the contrractor of its intent to claim liquidated damages during the job, the court of appeals held the owner had waived such claims and reversed the award of attorneys' fees to the owner.

 

 

New Texas Case Enforces No Damages for Delay Clause and Reverses $23 Million Award to Contractor, Imposes $10.5 Million in Attorneys' fees Against Contractor.

The Port of Houston Authority of Harris County, Texas v. Zachry Construction Corp. 377 S.W.3d 841 (Tex. App. 2012), involved a no damages for delay cause that was particularly strict.  As a result of its contents, the Texas Court of Appeals reversed in its entirety a  judgment in the amount of $23 million dollars, and awarded $10.5 million dollars to the other side.

In 2003 the Port of Houston Authority of Harris, Texas (Port) issued a bid for the construction of a wharf at the Bayport Ship Channel.  Zachry Construction Corporation
(Zachry) proposed a construction plan designed for construction “in the dry”
through use of a “U shaped, frozen earthen wall to seal out water from
Galveston Bay from the construction site.”  Zachry planned to construct a “freeze wall” by sinking 100 foot pipes into the earthern wall and circulating chilled brine
through the pipes.  The “dry” construction method had environmental benefits due to fewer “NOx” emission credits being consumed during construction, and it was this feature that ultimately won Zachry the bid. 

 Construction was subject to a strict timeline, and was required to be complete by June 1, 2006. Zachry’s construction contract with the Port included a no damages for
delay clause that not only stated that the contractor’s sole remedy would be an
extension of time, but also stated that this was the case even if such delay or
hindrance resulted from the negligence, breach of contract, or “other fault” of
the Port authority.  The contract also contained a provision holding that any party that does not prevail with respect to a claim, is liable for the Port’s attorneys’ fees.

 Ultimately, Zachry’s plan to construct the wharf had to be altered.  The Port claimed this was because Zachry’s frozen wall plan was not working within the schedule
requirements, and Zachry claimed this was because the Port had interfered with
Zachry’s means and methods and prevented it from proceeding as planned.  Zachry completed construction “in the wet,” and filed suit against the Port while the project was still ongoing.  In May 2006, the Port began withholding liquidated damages from Zachry, and held $2.36 million in liquidated damages before voluntarily agreeing to stop the withholdings.

 Zachry and the Port went to trial, and after a three month jury trial, a verdict was returned in Zachry’s favor in the amount of$18,602.697.00 for the Port’s breach of contract.  The jury also found that the Port had reasonably incurred $10,500,000 for trial.  The trial court awarded Zachry an additional 2.36 million for the withheld liquidated damages, less an offset for defective work, plus pre and post judgment interest and costs.  Thetotal award was $23,443,719, in favor of Zachry.

 The Port appealed the decision, and Zachry cross appealedthe defective workmanship finding. 

 In a stunning reversal of fortune, the Texas Court of Appeals reversed the award in its entirety, not only reversing the award to   Zachry, but also awarding the Port $10,500,000 in attorneys’ fees for trial, plus additional fees and costs for the appeals. 

 The Court of Appeals’ decision was predicated upon three findings. 

 First, the court found that the no damages for delay clausein the parties’ contract precluded any delay damages award to Zachry.  The trial court and jury found active
interference on the part of the owner, which has traditionally been treated as
a common-law basis for evading a no damages for delay contract provision.  However, the Court of Appeals held otherwise, enforcing the language of the contract’s no damages for delay clause to the letter.  Since the clause precluded delay damages even for “other fault” on the part of the Port, the Court held there could be no award of damages, even for active interference.  Zachry argued such interpretation rendered
the contract unbreachable and illusory, but the Court disagreed, finding Zachry
proceeded with the work with full knowledge of the contract’s limitations, and
held that it could not rewrite the provisions of the contract. 

 Second, the court found that by executing lien releases containing language stating that the Port had paid “all sums owing” on the payment estimate at issue and that Zachry had “no further claims against the Port for the portion of the Work completed,” Zachry released the Port from having to reimburse Zachry for the liquidated damages it had withheld from Zachry totaling $2.36 million dollars, even though such damages had been found to have been wrongfully withheld.  Zachry argued that the lien release was never intended to release its additional claims against the Port, but the Court disagreed, holding Zachry to the language of the lien release which it deemed unambiguous and therefore not susceptible to alternative interpretation.

 Third, the court awarded the Port $10,500,000 in attorneys’ fees incurred defending against Zachry’s claims, even though this sum represented an amount several times the sums expended by Zachry.  The Port had hired four law firms to represent it against Zachry, and Court blamed Zachry in part for the escalation in fees, recounting how Zachry refused to produce its records to counsel, but instead required them to review the records on site, in a sweltering container “crammed full of boxes not organized in any manner.”

 In all, the Court’s decision effected a staggering $39,000,000 reversal of fortune for the contractor, who has since filed a petition for review of the appellate court’s decision.

 Note:  this case represents the dramatic impact of contract and accompanying contract document provisions parties sometimes treat as boilerplate.  Not all damages for delay clauses will be subject to common law exceptions, and the specific language of the clause is crucial to that point.  The same holds with lien releases executed during the course of the job and typically not carefully examined by parties signing them in haste and anticipation of payment.  As a practitioner who has spent many an hour reviewing documents inside of non-air conditioned containers, the attorneys’ fee provision and award in this case is also fascinating. Since this was a public project and the contract and forms were likely set at the time of bid, it is questionable what bargaining power, if any, Zachry would have had toalter the provisions and forms at issue. 

 

 

DBEDT Report Reflects Growth, Improvements in Hawaii's Construction Industry

DBET has issued its forecast adjusting upwards its calculations of growth in 2012 to 1.6%, with higher growth anticipated for 2013.  The construction industry, after losing jobs for the last 4 years, grew 1.4% in the last quarter. "State capital improvement spending increased 32.9 percent during the first three quarters, while the permitted value of private-sector construction rose 39.1 percent during the same period of time."  Full text of DBEDT's report can be found here. 

Fiscal Costs of Solar Construction in Hawaii Threaten Burgeoning Industry

Current law  allows homeowners and businesses in Hawaii to take 30% of the cost of solar installation off of their tax bill.  This is in addition to a 30% federal tax bill.  These incentives have led to fantastic growth in the solar industry here.  Construction related to solar panel installations now accounts for 15% of construction industry growth and has generated 2000 jobs in the islands.  Hawaii has become one of the top 10 solar producers nationwide.

However, this growth has come at a price:

"During the 2010 tax year, Hawaii residents claimed $42.8 million in renewable
energy credits, mostly for solar projects. In just six months of 2011, they
claimed $54.9 million in credits, according to data provided to
Stateline by the Hawaii Department of Taxation. This year, the price
will soar to $173.8 million, the state estimates. That’s out of an overall state
budget that hovers around $12 billion each year.

“Everybody is pretty much on board with this clean energy,” says Jack
Suyderhoud, a University of Hawaii economist and vice chair of the state’s
Council of Revenues. “But people are starting to ask, at what price?'"

Last week Friday, Hawaii's Department of Taxation issued new rules for renewable energy credits that will cut most tax credits on residential projects in half.  While styled as an attempt to "clarify" existing tax credit rules for installation of solar projects, the purpose behind the rule change was an attempt to control the fiscal cost of tax credits associated with solar installations.

Environmental groups including the Sierra Club, question the State's action and its effect on the growing solar industry.  However, with tax credit claims expanding from $35 million to $173 million this year, the State is looking for a means to control its revenue losses. 

The new rules, which can be found here, go into effect on January 1, 2013, and apply to systems unless they are "installed and in place" by the end of 2012.  "Installed and in place" according to the rules, means systems that have been completed, costs incurred, and building inspections ordered.  If the system does not pass inspection, it will be deemed installed in the year in which it passes final inspection. 

USDC Rail Decision Issued: No Injunction, Yet

The decision will be dissected shortly.  For now, the Court granted summary judgment to Plaintiff in part, and to Defendant on its Cross-Motions on all others.  The dispute is not over, however, because the Court invited briefing on injunctive relief.