HawaiiConstructionLaw.com

Construction Debtor's Money Transfer to a Surety within 90 Days of Bankruptcy Deemed Subject to "New Value" Exemption

While in Hawaii it seems most insolvent subcontractors or small general contractors seem to simply disappear rather than declare bankruptcy, construction related bankruptcy cases are still helpful, since (1) insolvent parties in construction projects still do crop up; and (2) the procedural machinations of bankruptcy are unfamiliar to many construction lawyers.

Case in point:  bankruptcy laws treat asset transfers that occur within 90 days of the initiation of bankruptcy proceedings as "preferential transfers" and the trustee in bankruptcy can pull back the sums transferred into the debtor's estate.  For obvious reasons, if this law were not in effect, debtors would otherwise dump all of their assets, selectively paying off debts, before declaring bankruptcy.  There are exceptions to the rule where payments are made for preexisting debts, where the monies have been "earmarked" to pay previous debts, and/or, as in this new case, where the debtor's expenditure results in new value exceeding the value of the asset transfer.

In Campbell v. Hanover Ins. Co. (In re ESA Envtl. Specialists), 709 F.3d 388 (4th Cir.  2013), the debtor, ESA, was an environmental and industrial engineering firm that sought and performed construction projects with the federal government.  ESA had an outstanding loan with a bank that, in the waning days before ESA's Chapter 11 declaration, it added to with a 1.3 million dollar loan that ESA used to collateralize bonding on a federal Miller Act project.  The 1.3 million dollars was transferred to ESA's bond company which allowed ESA to go forward with the job.

ESA's subsequent Chapter 11 declaration became a Chapter 7 liquidation, and in those proceedings the trustee of the estate sought to recover the 1.3 deposit.  The trustee argued in bankruptcy that the deposit was a preferential transfer to the bond company.  Bond company responded the deposit was an exception to the preferential transfer rule because (1) the monies borrowed were "earmarked" to be paid over to the bond company; (2) the transfer allowed recovery of new monies (the federal job's profits) that exceeded the value of the debt; and (3) since the bond company actually had to step in and use the 1.3 million to finish the project, pay subcontractors and suppliers, equity demanded it be entitled to keep the money.

The bankruptcy court found for the bond company on the earmark exception.  On appeal, the 4th Circuit Court of Appeals disagreed with the finding, but ultimately upheld the decision, because of the "new value" exception -- since the federal project raised the prospect of profits in excess of the amount of the debt, transfer to the surety was deemed proper under the "new value" exception to the preferential transfer statute.

One other item of note:  the 4th Circuit dismissed outright the suggestion that equity could exempt a creditor from the preferential transfer rule -- the only recognized exceptions are the statutory exceptions. 

 

UH Poised To Lose Authority to Procure its Own Construction Projects

Coming on the heels of allegations over University of Hawaii procurement processes, the State Senate appears poised to pass a bill taking all construction and construction consultant services out of the hands of UH, and into the jurisdiction of the Department of Accounting and General Services (DAGS).

I was tracking this bill as it made its way through the legeislature, but lost some interest when the bill was altered to only cover consulting services, but not construction.  Well, the latest iteration of hte bill has re-inserted the language about construction contracts and so the bill could have very far reaching effect on a big player in state procurement. 

UHERO Construction Forecast: Construction Picking Up

UHERO's construction industry forecast is decidedly rosy, finally getting past the "green shoots" analysis we have seen for the last few years and showing real growth.  Some highlights from UHERO's public summary:

1.  Residential construction is expected to pick up this year and next

2.  Photovoltaic construction continues lead the surge in non-residential permitting, but private commercial construction is also expected to grow.

3.  publicly financed construction will provide only "middling" contributions to growth, but this does not include rail. 

3.  Real commitments to build are expected to rise by 23.5% this year and more than 20% in 2014. 

In UHERO's words, "construction and the general Hawaii economy are gathering a head of ssteam and should overcome the merdate inertia coing from public sector retrenchment." 

Good news for the industry. 

30 Anchor Bolts Holding New Bay Bridge Construction Together Have Snapped

S.F. Chronicle image

The S.F. Chronicle reports that at least 30 of the giant bolts that hold together the new,
$6.4 billion eastern span of the Bay Bridge have snapped.  The Chronicle reports Caltrans is considering replacing all 288 bolts holding the new construction together.  These bolts were manufactured in the U.S. and some of them span as much as 15 feet.  Caltrans insists the new span is safe and to date, plans to open the bridge the day after Labor Day are still on track.   So far, Caltrans is placiing blame for the failure on the products themselves -- Caltrans engineers do not believe the bolt issue is due to construction or design of the bridge, but rather due to the chemical makeup of the bolts themselves, which appear to be brittle. 

 

Related articles

Giant Bolts Snap On New Bay Bridge Eastern Span

Owner-Builder License Exemption Part of the Legislation for 2013 Session

Several important bills are currently working their way through the 2013 legislative session.  Here are a few:

SB 1077, HB 846:  Limiting the Haw. Rev. Stat. 444-2.5 Owner Building Exemption

Under current licensing laws, building owners are exempt from having to have a valid contractors' license if they are performing construction on their own property.  The type of property currently allowed under the owner builder exemption includes residential, farm, industrial and commercial.  Contractors have historically had a problem with the owner builder exemption, not only because of the loss of business associated with the exemption but also because of the kinds of problems associated with unlicensed work:  hurt workers without workers compensation insurance to cover them, shoddy work that may even violate codes, and general avoidance of the protections inherent in contractor licensure.  On the other hand, the exemption allows owners to perform work on their own property at a much reduced cost since they are not paying any markup to a contractor for its services. 

The two bills currently moving through the 2013 legislature attempt to address these issues and also severely limit the scope of the owner building exemption.  Under both the House and Senate bills, the exemption is limited to only residential and agricultural structures, eliminating the exemption for commercial and industrial buildings.  Also, the exemption requires owners to comply with certain quasi-licensure requirements, such as mandatory workers compensation insurance for construction workers directly employed by the owner, compliance with the building code, and record-keeping requirements for work completed.   The statute also requires contractors contracting with owner builders to comply with the contractor disclosure requirements of the licensing statute, and to do so at the time of contracting. 

 

 

 

Oral Argument on Licensing Case

On Thursday we watched oral argument at the Supreme Court on the licensing issue being pursued by petitioner District Council 50.  Michael Lilly argued on behalf of petitioners, and deputy attorney general Rodney Tam argued on behalf of the State. 

At issue was whether the Contractors License Board, Administrative Hearings Officer, Circuit Court, and ICA were correct in determining that a C-5 specialty contractor licensed to perform carpentry and renovation work, is suitably licensed to perform jalousie window replacement work that these tribunals determined was incidental and supplemental to the renovation project itself. 

Hawaii's licensing laws allow a contractor to perform work outside its license scope if the out of scope work is incidental and supplemental to the work the contractor is performing.  More importantly, the C-5 renovation license allows the contractor to perform work "incidental and supplemental to" the work covered by the C-5 license. 

The Contractors License Board promulgated a rule defining the term "incidental and supplemental" as work that is directly related to and necessary for the completion of the project.  At oral argument Petitioner argued  that the Board's rule defining “incidental and supplemental” is plainly erroneous, because, Petitioner argued, that definition is not what the legislature intended.   Petitioner argued that any logical interpretation of “incidental and supplemental” work MUST conclude that the work is “minor” and therefore any definition that does not include a requirement that the work is "minor" must be wrong and subject to reversal.

Petitioner argued that without the Court's intervention that the "incidental and supplemental" definition applied by the board is too vague, too standardless, and could give rise to exceptions that would destroy the intended public protection afforded by the license laws. 

Sitting justice Glenn Kim (who dissented from the grant of the cert. review) noted that from his reading, “incidental to” could mean attendant with, without any implication of cost or amount.  He noted that the definition applied by the Board went through the
normal rule making process, public hearings, etc., and that the Board is the entity charged with interpreting laws subject to interpretation.

Sitting justice Judge To’o To’o asked Petitioner,  isn’t the board comprised of five specialty contractors, five general contractors, etc, so if there is some concern about the scope of work a specialty contractor can do, wouldn’t the board be best suited to address it? 

 The arguments went back and forth but it is clear from the questioning that the Court’s main concern is whether the incidental and supplemental exception is too vague/general and allows too big a loophole for specialty work being performed by unqualified contractors.   In that vein in my opinion the attorney general did a very good job of addressing the court's concern.  Deputy AG Rodney Tam pointed out that the legislature had the opportunity to speak if the Board or its rules were out of accord with its intent.  It has not.  There is nothing in the statute that says incidental and supplemental must mean “minor” or that suggests that the question of what is incidental and supplemental is in any way dependent upon quantity.  As such, the board, which is statutorily charged with creating rules to enforce the laws, should be afforded deference in crafting its definition, especially as it has been very consistent in its interpretation as was pointed out to the Hearings Officer and Circuit Court below.

Justice McKenna asked Petitioner close questions about the scope of the exception afforded by the Board's interpretation of "incidental and supplemental," asking whether it would entitle a general contractor to perform "anything" including an entirely new condominium, because everything is "incidental and supplemental" to the job of building a new building.  No, answered Tam, it would not, because new construction is limited by the Okada Trucking decision.  Even for renovation work, a contractor cannot perform plumbing, electrical, or elevator work because those licenses are covered by separate statutes and require special permitting from the counties.  So there are limits.  He also wisely explained the process the board goes through in determining what is "incidental and supplemental," focusing on the purpose of the construction rather than the "amount," and refused to concede that any percentage could be set in advance to determine what is incidental to a job. 

Judge McKenna also asked well if the Board believes that certain specialty work, here C-22 glazing work, can be performed by renovation contractors if it is incidental and supplemental to their work, then why didn't the Board define the C-5 renovation license to specifically identify which specialty licenses are among the types of work the C-5 contractor can do?  Tam responded because it would be impossible to identify every possible specialty that could be included, or when.  That is why the Board is charged with the responsibility of answering scope questions and what it does at every meeting.  Judge McKennas asked if a scope question was raised by the contractor at issue in this case, and it was.  In fact, Tam noted, the Board did not get to the question of quantity or amount of specialty work because that is not its focus, and it is not even really necessarily part of the procurement process -- not all bids require bidders to list the amount of their subcontractor's bids -- just the names of the subcontractors.  Therefore, it is not even possible to have a clear delineation of specialty quantities for all bids.

This seemed to get to the crux of the problem with Petitioner's argument:  it wants the Court to impose a definition not included in the operatie statute or rule, i.e. that incidental and supplemental work must by definition be "minor" in quantity, on the basis that a failure to do so makes the definition too vague and subjective.  However, at hearing and in its moving papers Petitioner refused to acknowledge what numerical percentage would qualify as "minor" because, Petitioner argued, what is "minor" can change depending upon the size of a job.   This would seem to be replacing one allegedly subjective definition for another, just one that Petitioner prefers.  That seems an insufficient  reason for the Court to intervene in the rulemaking authority of the agency charged with enforcing the laws, especially since, as Judge To'o To'o noted, that Board has special expertise to make such scope calls, given that it is comprised of both specialty and general contractors. 

We were gratified to hear the court ask about the cost concerns cited in our amicus brief, and whether construction costs would be affected if renovation contractors were required to hire specialty subcontractors for every specialty that came up in the course of a renovation project.  Petitioner responded that costs would likely go up as a result of a general having to hire subcontractors for every bit of specialty work in a renovation project, but that could not be grounds for refusing to act.  This cost concern is a very real issue.  I earlier discussed the Sipco case I worked on 20 years ago, which was a pre-Okada case on the scope of a "B" license.  At that time, on that project, the difference between hiring a subcontractor for every possible trade versus self-performing the job, was $1,000,000 on about a $7,000,000 job.  A significant difference, which explains industry concern over the impact of this case.

 We will await the decision on this case with great interest.  In the meantime, here is a link to the taped oral argument. 

http://state.hi.us/jud/oa/13/SCOA_011713_28762.mp3

 

Upcoming Oral Argument on Licensing Question at the Supreme Court

On Thursday, January 17, 2013 starting at 11:00 a.m., the Hawaii Supreme Court will hear oral arguments in District Council 50, of the International Union of Painters and Allied Trades v. Lopez, No. SCWC-28762.

In that case, the court is presented with the question of whether the Okada Trucking Co. v. Bd. of Water Supply, 97 Haw. 450, 40 P.3d 73 (2002) dictates that in renovation, a contractor must hire specialty contractors for all work that is covered by a specialty license, or whether the contractor can perform any work necessary to complete the renovation (aside from work requiring a special permit, of course). The specific issue is whether the holder of a specialty renovation license is entitled to do certain specialty renovation work as "incidental and supplemental" to that license. The Hawaii Intermediate Court of Appeals ruled in favor of the licensee, and dismissed a challenge by another specialty contractor, and held that the Contractors' License Board was within its discretion when it adopted administrative rules defining the term "incidental and supplemental."

We filed an amicus brief in the case on behalf of the General Contractors Association, the  Building Industry Association of Hawaii, Hawaii Island Contractors Association, Contractors Assocition of Kauai, Gordon L. Scruton, Jas. Glover, Ltd., Kaikor Construction Co., Ltd., and Ralph S. Inouye Co. The brief urges the Supreme Court to affirm the ICA, and argues that the case implicates much more than the scope of contractors’ licenses, and whether a contractor with a C-5 specialty renovation license entitling it in a renovation project to perform "any other work" that will not change the structure, must employ a C-22 subcontractor to replace windows. Rather, this case asks whether the Board’s definition of "incidental and supplemental" work deserves deference because it is consistent with the plain meaning of those words, and whether the Board—comprised of five general contractors, five specialty contractors, and three members of the public who have been charged with the responsibility of carrying out the mandate of the contractor licensing statutes—"possesses expertise and experience in [its] particular field."

Three Supreme Court justices -- Chief Justice Recktenwald, and Justices Acoba and Pollack -- have recused themselves, and three circuit judges have been assigned in their places.

Here are the issues in the case, as framed by the Judiciary's web site:

Petitioners/Plaintiffs-Appellants, District Council 50 of the International Union of Painters and Allied Trades and Aloha Glass Sales & Service, Inc., filed an application for writ of certiorari to review the August 22, 2012 Judgment on Appeal of the Intermediate Court of Appeals (“ICA”), entered pursuant to its July 26, 2012 Memorandum Opinion. The ICA’s judgment affirmed the Circuit Court of the First Circuit’s (circuit court) judgment in favor of Respondent/Defendant-Appellee Kealiʻi S. Lopez, in her capacity as director of the Department of Commerce & Consumer Affairs. The circuit court affirmed the Department of Commerce and Consumer Affairs Contractors License Board’s (“Board”) finding that a B general building contractor may complete work falling within the C-22 specialty glazing and tinting license under the incidental and supplemental provisions of its automatic C-5 specialty remodeling and repairing license. This case arose from the State of Hawaii’s renovation project at Lanakila Elementary School, which included, in part, the installation of aluminum jalousie windows.

In their application, Petitioners argue that the ICA gravely erred in affirming the Board’s decision because: (1) the Board’s decision was inconsistent with this court’s opinion in Okada Trucking Co. v. Bd. of Water Supply, 97 Hawai`i 450, 40 P.3d 73 (2002); and (2) the Board’s interpretation of the terms “incidental and supplemental” was clearly erroneous, contrary to law, arbitrary and capricious, and inconsistent with the legislature’s underlying purpose.

I'll bring you a report after the arguments.

Honolulu High Rise Boom on the Horizon -- Construction Defect Litigation Ahead

Civil Beat has a new article out this morning about the multiple high rise condominiums planned for the Kakaako area, and what that means not only for the construction industry but for lawyers working in construction defect litigation as well. 

Last year we completed a chapter in a book called Construction Defects (2012, ABA).  My chapter dealt with the rights and liabilities of parties in construction defect litigation, and identified every potential participant in a claim for construction defects, and what potential claims could be made both for and against them.  The list is daunting:  everyone from owners, subsequent purchasers, associations, developers, design professionals, sub-design prorfessionals, contractors, subcontractors, lenders, construction managers, suppliers, and insurers and sureties have been drawn into defect litigation, and with the Group Builders decision still outstanding, it is an interesting time to be embarking upon large residential construction projects.  For owners and contractors, subcontractors, and others, one major caveat would be to craft insurance coverage provisions of such contracts very carefully, and to ensure before the project has started that the coverage purchased will cover expected claims. 

Friend of the Court Brief For the GCA

Today we filed an amicus curiae or friend of the court brief on behalf of the General Contractors Association, in another Okada Trucking related case.  At issue in the case is whether a C-5 renovation license allows a contractor to remove and replace jalousie windows in a school renovation project.  The bigger issue is whether the Okada Trucking decision of 2002 can be used to claim a monopoly of all specialty license work to specialty license holders.

This case is of special interest to me and therefore I am so glad we were able to help the GCA with this matter, because it brings full circle a case I worked on three months after starting at Damon Key -- involving one of the phases of the Stadium refurbishing projects.  The issue (back in 1993) was whether a general contractor had to have a specialty license to do painting and waterproofing work on a construction project, or whether the general's license allowed it to do specialty license work.  The case generated an inquiry with the Contractors License Board of what exactly the scope  of a general contractor's license may be, and the board answered that for the construction of a building, as long as the work involved more than two specialty trades or crafts, the general could do the whole job with its general contracting license, except for work that required a separate permit, including plumbing, electrical, and elevator work.  The Board's interpretation was memorialized in meeting minutes which were in turn used by us in a number of different bid protests through the years.

This was the law until the Okada Trucking decision came along in 2002.  In that case, the Supreme Court reviewed the licensing laws and the Board's administrative rules, and noted that the Board automatically awarded a number of specialty licenses to general engineering and building contractors upon licensure.  The Court decided that this must be the only work the Board believed the general engineering and building contractor capable of performing itself, and so ruled. 

In fact, as the 1993 meeting minutes demonstrated, the reason the Board issued separate licenses was in order to increase, not decrease, the work a general contractor could perform, by allowing a general contractor to still work on a project even if there was no building involved, and even if the project involved less than three specialty trades or crafts.

However, presumably because the meeting minutes were never before the court until reconsideration, it denied the rquest, and Okada became the law, disrupting contracts and making construction more expensive. 

The present case deals with renovation.  The C-5 renovation license is written very broadly and in fact has been interpreted somewhat broadly by the Board.  The question is whether the Okada decision dictates that in renovation, a contractor must hire specialty contractors for all work that is covered by a specialty license, or whether the contractor can perform any work necessary to complete the renovation (aside from work requiring a special permit, of course).  A ruling on this issue against contractors will have a potentially reverberating effect, just as Okada did when it wsas first published.

We feel strongly that we are correct on this issue, but invite others to read the case and make their own judgments.

General Contractors Association of Hawaii's Amicus Curiae Brief in Support of Respondent/Defendant-Appellee...

 

 

 

 

Supreme Court Accepts Cert. Petition re: Scope of C-5 Renovation License

The Supreme Court has accepted a petition for a writ of certiorari filed by the District Council of 50 Intern Union of Painters and Allied Trades, asking that the Supreme Court overturn a decision issued by the Intermediate Court of Appeals upholding an agency finding that a general contractor who is automatically granted a specialty C-5 renovation license upon obtaining licensure, is qualified to perform the removal and replacement of windows on renovation projects, even though the general contractor lacks a C-22 glazier license. 

The union argues the Supreme Court has previously ruled that in order to perform work covered by a specialty license a general contractor must possess the specialty license at issue.  The union argues that the Intermediate Court of Appeals' decision, which found that the removal of windows is incidental and supplemental to a renovation project, would have the effect of gutting the overall rule were it to be enforced by the court.

Oral arguments on this issue are scheduled to take place on Janury 17.  This petition could have very far reachig effect upon upcoming and ongoing renovation projects.  If contractors are forced to hire a subcontractor for every piece of renovation work they perform that is not specifically enumerated as part of the c-5 license, jobs will be more expensive, there may be less work, and contractors currently performing renovation jobs may find themselves ruled "unlicensed" in the middle of their performance of their work. 

Our firm has filed a motion requesting that the Supreme Court allow us to file an amicus brief in support of the State's position. 

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. 

ABA Forum on the Construction Industry: Fall Meeting in Boston

Am attending the Fall meeting for the ABA Forum on the Construction Industry -- beautiful fall foliage in full bloom: