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Smith, Currie & Hancock LLP

COMMON SENSE CONTRACTING

Vol. 16, No. 2

Inside This Issue

• 422: Site Access Representations
• 423: Ohio – Eichleay Formula Accepted
• 424: Unilateral Right To Demand Arbitration
• 425: Commercial Bid Bond Causes Bid Rejection
• 426: Using E-mail in Public Bidding
• 427: Florida: Separation Does Not Preclude Arbitration
• 428: Termination – How Not To

Site Access Representations

422  In Oman-Fischbach Intl. v. Secretary of the Navy, 276 F.3d 1380 (Fed. Cir. 2002), the Court of Appeals for the Federal Circuit emphasized the contractor’s duty to be fully informed of the nature, location, and accessibility of work sites. The court affirmed the ASBCA’s denial of Oman-Fischbach’s claim to recover its increased costs caused by the lack of access to a road going through a military base to the waste disposal site. The lack of access meant that the contractor had to drive a substantial distance around the base in order to dispose of construction debris, thereby incurring substantial additional costs.

Background Facts

The Navy awarded Oman-Fischbach (“Oman”) a fixed-price contract to construct fuel tank facilities at Lajes Air Base, Terceira Island, Azores. This base was under the jurisdictional control of the Portuguese government. An Oman representative attended the pre-bid site visit, which included a bus tour of the construction site but did not include travel to all of the waste disposal sites designated in the contract.

For the first year of work, Oman was able to travel through the base directly to a disposal site. However, during the second year, after one disposal site reached capacity, Oman was required to use another disposal site. Access to this second site was provided only via a route around the base. While there was a road directly through the base to that disposal site, the Portuguese Armed Forces, who controlled the base, locked the gate that otherwise allowed access to that road.

Court’s Decision

The ASBCA had denied Oman’s request for an equitable adjustment in the amount of $531,907.00 for additional waste transportation costs. At the Federal Circuit, Oman argued that because its contract was silent as to the haul routes for access to the waste disposal sites, and because the government made oral representations during the pre-bid site visit, there existed an implied warranty of access through the base. Oman argued that this implied warranty superceded the contracting officer’s discretion as to which of the three waste disposal sites Oman should use. Oman’s argument was that this discretion was qualified by the requirement that the waste disposal site chosen must be accessible via roads through the base.

Oman relied upon the decision in D&L Constr. Co. v. United States, 185 Ct. Cl. 736, 402 F.2d 990 (Ct. Cl. 1968), where the Court of Claims held that the contracting officer had warranted that there would be suitable access to the project during the construction period. The Federal Circuit, in distinguishing D&L Constr. explained that the contracting officer had sent D&L Construction an assurance letter explicitly stating that the government would make existing streets available. In the court’s view, that assurance letter carried with it the implied promise to pay if the assurances were not met. The government gave Oman no such assurance letter. The Federal Circuit refused to recognize an implied obligation arising out of any verbal statements. Without explicit contractual language to justify its position, Oman’s claim was rejected.

Importance of Standard Clauses

In rejecting Oman’s claim, the court upheld the Navy’s reliance upon the “Site Investigation and Conditions Affecting the Work,” and “Conditions Affecting the Work” clauses. These standard clauses expressly place the burden upon the contractor to “ascertain the nature and location of the work.”

The court noted that the contract identified three potential waste disposal sites to be used and gave the contracting officer the authority to designate which site to use. Moreover, the contract did not identify the routes to be taken to reach the disposal sites, nor did it contain any written assurances regarding the accessibility of the disposal sites. Even the drawing of the site, attached to the contract, did not identify a particular route to be used to reach any of the disposal sites.

Oman argued that an implied warranty was created because the Navy used a route through the base during the pre-bid site visit and “made general comments about keeping roads clean and obeying traffic regulations.” The court rejected this argument, citing the “Site Investigation and Conditions Affecting the Work” clause, which provides that the contractor acknowledges that it has taken steps to determine costs, including conditions bearing upon transportation and disposal of materials.

The court also relied heavily upon paragraph (b) of the “Site Investigation and Conditions Affecting the Work” clause, which states as follows: . . . “Nor does the Government assume responsibility for any understanding reached or representation made concerning conditions which can affect the work by any of its officers or agents before the execution of this contract, unless that understanding or representation is expressly stated in this contract.”

The court concluded that, “Unless the parties in unmistakable terms agreed to shift the risk of increased costs due to acts by the Portuguese military, no liability on the part of the Navy attaches from such acts.” Thus, Oman was stuck with the additional transportation costs incurred because of the lack of accessibility of the waste disposal sites.

Comment

Practically, this case puts the burden on contractors to obtain written assurance from the contracting officer outlining the routes and their accessibility on the project. Contractors should anticipate any conceivable issues that might increase costs, and attempt to have the government assume that burden in writing. This case also highlights the significance of the “Site Investigation and Conditions Affecting the Work” clause. That clause makes it clear that the government will be held responsible only for representations “expressly stated in the contract”. Unfortunately, the court’s holding means that contractors must exercise either clairvoyance in order to shift unanticipated costs back to the government or obtain explicit, written commitments prior to submitting a bid or proposal. Absent clear written commitments from the contracting officer, anticipating the worst case scenario may be the more prudent course of action.

W. Stephen Hart
(404)582-8046
wshart@smithcurrie.com

Ohio – Eichleay Formula Accepted

Overview

423 A repetitive issue in construction delay claims involves a contractor’s entitlement to recover compensation for those general and administrative costs and home office expenses that continue to accrue during the delay. Those costs and expenses are often termed as “overhead” or “G&A costs” as they are incurred for the general benefit of all operations. Since these expenses are often incurred in the home office, they are not usually susceptible to immediate reduction during a period of delay to a particular project. The label typically applied to these expenses during a delay period is “extended overhead.”

In order to recover extended overhead, the claimant must demonstrate both entitlement to delay damages and an acceptable basis for calculating these damages. One widely advanced approach for the computation of such damages is the Eichleay formula as articulated in the 1960 decision of the Armed Services Board of Contract Appeals in Eichleay Corp., ASBCA No. 5183, 60-2 BCA ¶ 2688. Since the mathematical steps in computing extended overhead using the Eichleay formula were set forth in Article 421 of the last issue of this newsletter, these will not be repeated here. While the Eichleay formula is clearly accepted in federal government construction contracts, its application outside of federal contracts is less certain. However, the recent decision by the Ohio Supreme Court in Complete Gen. Constr. v. Ohio Dept. of Transportation, 760 N.E. 2d 364 (Ohio, 2002) establishes that the Eichleay formula is an acceptable basis for computing extended overhead delay damages under Ohio law if the pre-conditions for its use are satisfied.

The Project Delay and Claim

Complete General Constr. (“CGC”) was the prime contractor for the construction of a section of I-670 in Ohio. The contractor’s work was delayed due to Ohio Department of Transportation (“ODOT”) design problems relating to the bridges. While the actual resolution of the design problems delayed work for seven months, the effect on CGC’s work was increased as the initial delay pushed the work into a winter weather period. The overall effect on the project was a twelve month delay.

CGC utilized the Eichleay formula to calculate its claim for home office overhead. In challenging the use of the Eichleay formula before the Ohio Supreme Court, ODOT argued that the formula was inconsistent with basic principles of contract law because it did not require the claimant to prove causation as an element of its claim for damages. The court rejected that assertion. However, Ohio Supreme Court clearly distinguished the mathematical steps for computing the claimed damages from the pre-conditions to be satisfied before the formula could be used to quantify the damages.

The Court’s Analysis

The decision by the Ohio Supreme Court in Complete General essentially reflects the analysis by the United States Court of Appeals for the Federal Circuit (“Federal Circuit”)in a series of decisions dating from the mid-1990s. The Ohio Supreme Court accepted the basic concept that a contractor’s costs included both direct costs attributed to a specific project and indirect costs. The latter was described as “the expenses involved in generally running a business, not attributable to any one project.” Home office overhead was recognized as the “most significant indirect cost”. Recognizing that each project derives benefit from home office support and that each project “contributes” to paying for home office overhead, the Ohio Supreme Court accepted the proposition that a project delay may adversely affect a project’s proportionate contribution to paying the cost for home office overhead support. In that context, a contractor is damaged.

Recognizing that it can be difficult to assign a value to the effect of a project delay on home office overhead, the court in Complete General followed the concept, enunciated in federal government contract decisions, that the Eichleay formula “seeks to equitably determine” the allocation of home office overhead to allow “fair compensation” for government caused delay.

Again, mirroring the principles set forth by the Federal Circuit, the court in Complete General held that a contractor must demonstrate two important elements to establish a prima facie case for the award of damages based on the Eichleay formula. These two elements were:

1. The contractor must show it was on “standby”; and
2. The contractor must show that the uncertainty of the delay’s duration made it impracticable to take on replacement work.

While not stated as a separate element, the Ohio Supreme Court also held that the delay must affect the project’s completion date before the contractor can claim overhead damages. In that court’s view “the fact that a delay that creates an uncertain extension period causes damages for a contractor is axiomatic”.

In the court’s view the Eichleay formula did no violence to contract law. To the extent that ODOT asserted that differences between federal and Ohio public contracting law allowed the contractor to recover certain types of “inappropriate” costs under Ohio law, the court agreed. In that context, the Ohio Supreme Court suggested that Ohio agencies would do well to consider the adoption of the cost principles set forth in the Federal Acquisition Regulations. Recognizing that Ohio public contract law did not have similar cost principles, the Ohio Supreme Court ruled that it was modifying the Eichleay formula to permit an owner to dispute particular items of cost.

With that qualification, the Ohio Supreme Court accepted the use of the Eichleay formula as “one way of determining unabsorbed home office damages in public construction delay cases.” However, unlike the rule in federal government contracts, the Ohio court did not make the Eichleay formula the exclusive formula for calculating home office delay damages. Rather, the court stated that a trial court could utilize the “direct cost formula”. See Royal Elec. Constr. Co. v. Ohio State Univ. (Dec. 21, 1993) unreported, 1993 WL 532013, reversed on other grounds, 652 N.E. 2d 687 (1995).

Thomas J. Kelleher, Jr.
404/582-8016
tjkelleher@smithcurrie.com

Unilateral Right To Demand Arbitration

424 Typically, the contract negotiated between the parties should dictate the manner of dispute resolution between parties. Furthermore, federal policy favors alternative dispute resolution, such as arbitration, and any doubts concerning the scope of arbitable issues should be resolved in favor of arbitration. See, Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985). However, while written agreements giving either party the right to demand arbitration are relatively common, some contracts appear to reserve the election to arbitrate to one party. Are these enforceable agreements?

Background

The preference for alternative dispute resolution was the premise behind the Federal Arbitration Act, 9 U.S.C. § 4, (hereinafter “FAA”) which allows the federal district courts to issue orders directing that arbitration hearings proceed in the manner provided in such contracts. The FAA was designed to overrule the common law’s long-standing hostility to arbitration agreements, which involve interstate commerce. However, the FAA does not compel arbitration in every case, it merely permits enforcement of the contractual right to arbitration as provided in the parties’ privately negotiated contractual agreements. Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 486 (1989).

Specifically, section 4 of the FAA provides that “[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court. . . for an order directing that such arbitration proceed in the manner provided in the agreement.” 9 U.S.C. § 4 (emphasis added). Long established case law has mandated that “arbitration is a matter of contract and a party cannot be required to submit to arbitration of any dispute which he has not agreed so to submit.” Peoples Sec. Life Ins. Co. v. Monumental Life Ins. Co., 867 F.2d 809, 812 (4^th Cir. 1989). Therefore, the first step is to ensure that a written arbitration clause is contained within the contractual agreement between the parties.

As confirmed in a recent decision of the United States Court of Appeals for the Fourth Circuit, TechnoSteel, LLC v. Beers Construction Co., 271 F.3d 151 (4^th Cir. 2001), the right to proceed to arbitration is dictated by the express terms of the parties’ written agreement.

Analysis

In TechnoSteel, the Fourth Circuit examined the express terms of the parties’ contractual agreement to determine who could demand that disputes proceed to arbitration. That court examined both deleted provisions of the agreement and the final version of the contract and determined that the express terms of the contract control.

The TechnoSteel case arose from an alleged breach of contract, quasi contract and quantum meruit action between TechnoSteel, LLC (“TechnoSteel”) and Beers Construction Company (“BCC”) resulting from the construction of a hospital project in Hartsville, South Carolina. BCC served as general contractor and had a direct contract with the owner, Health Management Associates d/b/a Hartsville HMA (“Owner”).

The General Conditions to the contract between the Owner and BCC provided that “[a]ny controversy or Claim arising out of or related to the Contract, or the breach thereof, shall be settled by arbitration.” The prime contract also included a clause which required each of BCC’s subcontractors to “assume toward [BCC] all the obligations and responsibilities which [BCC]. . . assumes toward the Owner” and “each subcontract agreement. . . shall allow to the Subcontractor, unless specifically provided otherwise in the subcontract agreement, the benefit of all rights, remedies and redress against [BCC] that [BCC], by the Contract Documents, has against the Owner.” (emphasis added) The subcontract agreement between TechnoSteel and BCC incorporated “the Agreement between the Owner and Contractor [BCC]”.

Since BCC had the right to demand arbitration against the Owner, TechnoSteel argued that, via incorporation of this obligation within its subcontract, it had the right to demand arbitration as against BCC. On this basis TechnoSteel petitioned the court to compel BCC to engage in arbitration to resolve the parties’ disputes.

Relying on the terms of the subcontract, BCC opposed the petition for arbitration. The subcontract agreement between TechnoSteel and BCC contained a provision that also addressed arbitration. Specifically, the clause read:

To the extent Contractor does not elect to arbitrate a claim or dispute hereunder, Contractor and Subcontractor each hereby agree that the claim or dispute shall be submitted for resolution to the United States District Court for the Northern District of Georgia, . . .
(emphasis added)

TechnoSteel argued that this clause allowed BCC an unfair unilateral right to demand arbitration, in direct conflict with the General Conditions of the prime contract between the Owner and BCC. Furthermore, TechnoSteel argued that it and BCC had agreed to delete a clause in their subcontract which called for litigation of their disputes unless BCC, at its sole discretion, chose to proceed to arbitration. By agreeing to delete this provision, TechnoSteel asserted, the parties intended to remove litigation as an accepted method of dispute resolution and impliedly chose to have their disputes resolved via arbitration (as incorporated from the prime contract).

The Fourth Circuit Court of Appeals rejected TechnoSteel’s position and ruled that under the plain “provided otherwise” language of the subcontract agreement between TechnoSteel and BCC, the subcontract gave the prime contractor the right not to arbitrate. The court refused to recognize that TechnoSteel had a right to demand arbitration. It further opined that BCC’s unilateral right to demand arbitration “quite clearly remained” within the express terms of the subcontract agreement. However, in its last footnote, the Fourth Circuit appears to limit the breadth of its opinion when it clarifies that it was not necessary to define whether BCC possessed a unilateral right to demand arbitration since it was not BCC who attempted to compel resolution in that forum.

Comment

The TechnoSteel decision only serves to reinforce the importance of specific contractual language found within the four corners of the document and the effect prime contacts and subcontracts have on one another. From TechnoSteel’s actions, it is clear it believed it had a viable arbitration clause. However, in reality, the power to select the method of dispute resolution may have been held solely by the general contractor, BCC, allowing it to proceed with a process that best suited its interests alone. Perhaps later opinions will address the unanswered question of whether unilateral arbitration clauses will be upheld.

As a result, when negotiating the terms of a contract, especially arbitration clauses, it is important to carefully evaluate the effect language choice may have and pay special attention to those clauses that may affect resolution of disputes.

Michael Knapp
704/334-3459
mwknapp@smithcurrie.com

Commercial Bid Bond Causes Bid Rejection

425 Most public construction contracts require that a bid guarantee or bond be submitted with the bid as assurance that the bidder will execute the contract and provide any required performance or payment bonds. Many public owners have their own forms and/or regulations which set forth the bid guarantee requirements. The failure to meet the bid bond requirements regarding time of submission, amount, and the form of submission will frequently result in the bid being declared non-responsive. A recent federal construction contract case demonstrates how the failure of a bid bond form to comply with the government’s requirements can cause bid rejection. Paradise Construction Co., B-289144, 2001 CPD ¶ 192.

Public owners frequently describe the required bid guarantee protection in their procurement regulations. Sometimes a bid form is included in the solicitation but is not required to be used. The Paradise case illustrates a risk of using a commercial corporate surety’s form instead of the form furnished by the public owner. This federal construction contract was governed by the Federal Acquisition Regulations (FAR) which describe bid guarantees at §52.228-1 and state that:

(a) Failure to furnish a bid guarantee in the proper form and amount, by the time set for opening of bids, may be cause for rejection of the bid.

* * *
(e) In the event the contract is terminated for default, the bidder is liable for any cost of acquiring the work that exceeds the amount of its bid, and the bid guarantee is available to offset the difference.
(emphasis added)

Paradise submitted the low bid for a contract to seal four maintenance hanger roofs. Paradise’s bid bond was submitted on a commercial form which stated in part as follows:

If the principal shall pay to the obligee the difference not to exceed the penalty thereof between the amount specified in said bid and such larger amount for which the obligee may in good faith contract with another party to perform the work covered by said bid, then this obligation shall be null and void, and otherwise to remain in full force and effect.

The Air Force rejected the bid as non-responsive. The Air Force asserted that the above-quoted language made the commercial bid bond form deficient because it limited the surety’s obligation to only the difference between the bid amount and the amount of any new contract. The bid bond did not expressly cover “any cost” that the Air Force might expend in securing a new contract. As a result, the Air Force concluded that the bond form was contrary to the requirement of FAR § 52.228-1 which states that if the contract is terminated for default, then the bidder is liable for any cost of acquiring the work that exceeds the amount of its bid. That is, the defaulting contractor is liable not only for the reprocurement cost but also any other related costs. Paradise protested the rejection of its bid to the U.S. General Accounting Office (GAO).

In its decision, the GAO stated that the guarantee secures the surety’s liability to the government which includes the cost of reprocurement and any related costs. Since the bid bond form did not hold the surety liable for any related costs that the government might incur, the GAO held the bid bond was defective. The coverage in the form was a significant departure from the bidder and surety’s obligations required by the FAR. The FAR requires that the bid guarantee cover the administrative costs which the government incurs in a reprocurement, and the above quoted language in Paradise’s commercial bond limited the surety’s liability to only the difference between the Paradise bid and any contract to complete the work. Since the bond did not cover any administrative or related reprocurement costs, this was less than the defaulting bidder and its surety’s FAR obligation to pay all reprocurement costs up to the penal sum of the bond. Therefore, the GAO held that the bid bond was deficient and that the bid was properly rejected as nonresponsive.

Points To Remember

The Paradise case illustrates the importance of carefully reviewing the language of a commercial bid bond. If the public owner has its own form and/or regulations describing the bid guarantee requirements, then the bidder is well-advised to use the owner-furnished bid guarantee form. Alternatively, the bidder should compare the owner’s bid bond form and/or bid guarantee regulations to determine the coverage requirements so as to avoid its bid being rejected by submitting a commercial bid bond form that does not provide the required coverage.

Other defects in the form of the bid bond may cause bid rejection. For example, the U.S. Court of Federal Claims recently upheld a bid rejection when the joint venture name on the bid was different from the name of the principal on the bid bond which contained the name of only one joint venture partner. Davis/HRGM Joint Venture v. U.S., 50 Fed. Cl. 339 (2001). Another GAO decision on the form of the bid bond involved the surety’s power of attorney. Kemper Const. Co., B-283286.2, 99-2 CPD ¶ 98. In the Kemper case, the power of attorney which was submitted with the bid bond was a copy, not the original. The GAO held that the bid bond was not sufficient because there was no way to determine whether the surety was bound other than by referring to the original power of attorney after bid opening to show that the documents had not been altered. As a result, the bid rejection was upheld. Other defects in the form of the bid bond involve situations where the principal designated was the bidder’s attorney-in-fact (not the bidder) and where the principal was an affiliate of the bidding firm, rather than the bidder itself.

Thomas E. Abernathy IV
404/582-8013
teabernathy@smithcurrie.com

Using E-mail in Public Bidding

426 E-mail (Electronic mail) is a hot issue in the law today. Whether it is the use of e-mail to transmit information among parties on a project or just to communicate with friends, how e-mail is used has changed the way that many companies and people do business with one another. Yet, as is evidenced by decisions of many courts, e-mail is not the panacea of simplification of communication that many trumpet it to be. One such decision came through a bid protest on the award of a government contract in Diamond Aircraft Indus., Inc., Comp. Gen. Dec., B-289309, 2002 CPD ¶ 26 (February 4, 2002). In this decision, the protestor, Diamond Aircraft Industries (“Diamond”), learned a valuable lesson about relying upon the statements of a government representative sent via e-mail.

Factual Background

The solicitation (“RFP”) for certain motorglider aircraft and related equipment was issued by the Department of the Air Force (the “government”). Two bidders, Diamond and Xiamango U.S., Inc. (“Xiamango”) provided proposals to supply the equipment requested. Diamond’s proposal, however, was rejected by the government because it failed to meet five of fourteen specified minimum requirements.

Diamond protested to the Comptroller General. In its protest, Diamond claimed that the government misled Diamond into believing that its proposal would be technically acceptable through advice given via e-mail. Diamond’s proposal stated that it would supply the government with an HK36T aircraft that included a 100-horsepower engine. At the time of the RFP’s issuance, Diamond produced an HK36T with an 81-horsepower engine that met all of the requirements of the solicitation. However, Diamond was in the process of upgrading the HK36T to the 100-horsepower engine during the time of the bid solicitation, and expected that the new version would be certified by the Federal Aviation Administration (FAA). This certification was one of the requirements of the RFP.

Prior to submitting a proposal, Diamond sent an e-mail to the government asking several questions. These questions were based upon the RFP’s statement that all offers must have the demonstrated capability to meet all minimum requirements stated in the solicitation. Diamond therefore claims that it asked whether the 100-horsepower version would be rejected by the government. This rendition of the question, however, was disputed by the government. Diamond also asked whether it should submit two separate offers—one for the 100-horsepower plane and one for the 81-horsepower plane. Diamond argued that the government replied by saying that the 100-horsepower plane would be acceptable and that Diamond should submit only one offer. Then, when the offers were evaluated, the offer for the 100-horsepower plane was rejected as nonconforming.

In its protest, Diamond argued that the e-mail from the government misled it to its detriment, in that Diamond would have provided a proposal for the 81-horsepower plane if it had known that the government would reject the offer of 100-horsepower aircraft. Diamond believed that the rejection of the 100-horsepower aircraft was inconsistent with the e-mail sent by the government. The protest asked that Diamond have the opportunity to provide an offer with the 81-horsepower motorglider as a result of the government’s actions conflicting with its pre-award statements.

Rejection of the Protest

The Comptroller General rejected the protest. This rejection is based upon the principal that oral advice conflicting with the solicitation is not binding on the government. Thus, the offeror relies upon an oral explanation of the solicitation by the government at its own risk. The Comptroller General saw no difference between an oral statement made by the government and a statement sent via e-mail. Because the RFP provided the specific factors against which an offer would be evaluated, any informal advice, whether oral or otherwise, provided by the government could not serve to amend the RFP’s specific requirements. Diamond was taken to task for its failure to request that the government provide an amendment to the solicitation so that all offerors would be competing on the same basis. In short, the alleged advice did not provide grounds for questioning the government’s rejection of the offer.

In addition, without setting forth the text of the government’s response to Diamond’s e-mail, the Comptroller General further stated that Diamond’s interpretation of the advice did not support its protest. Nothing in Diamond’s e-mail, according to the Comptroller General, referenced the technical acceptability of the 100-horsepower motorglider. Further, nothing in the government’s response related to technical acceptability either—it only referenced whether the 100-horsepower version would qualify as a “commercial item” as defined in the Defense Federal Acquisition Regulations. When the government stated that one offer would be fine in its reply e-mail, the Comptroller General interpreted this as stating that a second offer would not be required to meet the “commercial item” requirement. It did not mean that the 100-horsepower aircraft was technically acceptable. Thus, the protest on this matter was denied.

Practical Implications

One of the key problems with e-mail is that people view it as being more informal than a “normal” letter on paper. Thus, the language used is often less precise. Because e-mail is viewed as conversational rather than formal, people may assume that the “listener/recipient” understands what the intent of the statements made in the e-mail is. In situations such as the one covered in Diamond, it may be understandable that Diamond’s personnel misread the reply that it received from the Air Force. After all, Diamond’s personnel understood what they were asking—even though the e-mail they sent to the government may not have asked the specific question that they really “meant” to ask.

Case law in courts on all levels is rife with instances of people saying things in e-mail that are highly detrimental, even though those statements are not what the author believed or intended to say. In Diamond, the imprecision of e-mail potentially cost the company a lucrative government contract with the Air Force. In cases where e-mail communication is used to supply valuable project information, people need to treat e-mail as if it were the same as any other letter. In other words, people need to review the e-mail prior to sending it—even to the point of printing it before it is sent to revise and edit it so that the intent of the writer comes through in the words and phrases that are used.

E-mail can be a valuable tool for companies if used properly. An e-mail usage policy is an appropriate way to address these concerns. Such a policy, properly enforced, can avoid issues such as the one in Diamond—by making sure that e-mail is not viewed only as “oral communication.” It is just as important to have “formality” in e-mail communications as it is in letters. Otherwise, your company too could find itself with a rejected bid, a rejected claim, or even losses on a project that could easily have been avoided.

Florida:
Separation Does Not Preclude Arbitration

427 Congress’ passage of the Federal Arbitration Act in 1925 was intended to facilitate the use of arbitration as a means of dispute resolution, and to “overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985). Following this lead, many states, including Florida, passed versions of the Uniform Arbitration Act, designed closely after the federal act. Since then, what courts were once reluctant to enforce has now become a favored means of dispute resolution for specialized industries, particularly construction. Today, the form contracts of many construction industry groups include arbitration provisions. The American Arbitration Association receives in excess of 4000 requests annually for the arbitration of construction disputes totaling millions of dollars. Following the growing acceptance of arbitration, many courts are now more willing than ever to interpret contractual arbitration provisions to require broader participation in arbitration.

Florida’s Public Policy

For many years Florida courts have espoused a strong public policy in support of arbitration, “a favored means of dispute resolution.” Roe v. Amica Mut. Ins. Co., 533 So. 2d 279 (Fla. 1988). Arbitration clauses are to be given “the broadest possible interpretation in order to accomplish the purpose of resolving controversies outside of the courts.” Ocwen Fin. Corp. v. Holman, 769 So.2d 481, 483 (Fla. 4th DCA 2000). Courts “are required to indulge every reasonable presumption in favor of arbitration.” K.P. Meiring Const., Inc. v. Northbay I & E, Inc., 761 So. 2d 1221 (Fla. 2d DCA 2000). In Florida, construction disputes in particular are deemed to be especially amenable to arbitration. Lake Plumbing, Inc. v. Seabreeze Constr. Corp., 493 So.2d 1100, 1102 (Fla. 2d DCA 1986) (arbitration is especially appropriate for “issues that are unique to certain industries and which require specialized knowledge for their resolution,” particularly, the construction industry). This strong public policy has played an important role in Florida decisions regarding the applicability of an arbitration clause to particular parties.

For example, Florida courts have held that a party that did not enter into a written agreement to arbitrate, a non-signatory, can still enforce an arbitration provision in certain circumstances. Where a subcontract incorporates a prime contract and the prime contract contains an arbitration provision, the contractor is bound to arbitrate its disputes with its subcontractor in the same manner that the contractor would be bound to arbitrate its disputes with the owner. See Frank J. Rooney, Inc. v. Charles W. Ackerman of Florida, Inc., 219 So. 2d 110 (Fla. 3d DCA 1969). Likewise, employees or agents of a corporation can enforce an arbitration provision from a contract with a third party despite only the corporation being a party to the contract with the third party. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Melamed, 453 So. 2d 858 (Fla. 4th DCA 1984). In addition, if a third party receives the benefits of a contract, that party is deemed to also receive the benefits of an arbitration provision in the contract and can compel arbitration. See Passerrello v. Robert L. Lipton, Inc., 690 So. 2d 610 (Fla. 4th DCA 1997). However, these cases typically involve a non-signatory who wishes to receive the benefits of an arbitration provision.

Compelling a Non-Signatory to Arbitrate

A recent case, Cuningham Hamilton Quiter, P.A. v. B.L. of Miami, Inc., 776 So. 2d 940 (Fla. 3d DCA 2000), rehearing denied January 21, 2001, expands this logic and requires a non-signatory to a contract to arbitrate. In Cuningham, the Third District Court of Appeal held that an arbitration provision in a design-build contract between an owner and a contractor required the owner to arbitrate its professional malpractice, negligent misrepresentation, and fraud claims against an architect with whom the owner did not have a contract. In Cuningham, B.L. of Miami, Inc. (“B.L.”), as owner, entered into a design-build contract with Cuningham Group Construction Services, LLC (“CGCS”) for the construction of B.L.’s entertainment complex. The design-build contract provided for arbitration of “[a]ny controversy or claim arising out of or relating to this Agreement or its breach;” that all necessary parties were to be included in such an arbitration proceeding; and that arbitration clauses were to be included in other contracts “relating to the Work.” CGCS thereafter entered into a separate subcontract with Cuningham, Hamilton, Quiter, P.A. (“Cuningham”) to provide architectural and engineering services for B.L.’s project. The subcontract also provided for arbitration.

Following a dispute, B.L. instituted arbitration proceedings against CGCS. In addition, B.L. filed a lawsuit against the architect, Cuningham, alleging professional malpractice, negligent misrepresentation, and fraud. Cuningham, relying on the arbitration clause in the design-build contract between B.L. and CGCS, moved the trial court to compel arbitration. The trial court denied Cuningham’s motion, and Cuningham appealed.

On appeal, B.L. argued that it could not be compelled to arbitrate its claims against Cuningham because it did not have a contract with Cuningham, much less an written agreement to arbitrate. The Third District disagreed, holding that the arbitration clause in the design-build contract applied to disputes between B.L. and Cuningham on two interrelated grounds. First, the court relied on the design-build contract’s provision for the inclusion of all “necessary parties” in any arbitration under that agreement. The court concluded that because B.L.’s claims against Cuningham were “intertwined” with the design-build contract, Cuningham was a necessary party to the B.L. and CGCS arbitration. Second, the court determined that B.L. “intended” to settle disputes through arbitration rather than through the courts. The court noted that the design-build contract specifically named Cuningham as the architect/engineer to be retained by CGCS, and that under the design-build agreement, such a subcontract was required to have an arbitration provision. Considering these two factors, the court concluded that B.L. had intended to arbitrate disputes with subcontractors, specifically with Cuningham, pursuant to the design-build agreement.

The court also relied on the principle of equitable estoppel. Under this principle, a party may not adopt a new position that contradicts its previous position when allowing the new position would unfairly harm another person who has relied on the previous position. In essence, the court held that B.L.’s act of requiring CGCS to place an arbitration clause in its subcontact with Cuningham was an affirmative act by B.L. indicating its intention to Cuningham that all project claims, regardless of origination, would be arbitrated. Therefore, B.L. was precluded from changing its position to say that it did not have an agreement to arbitrate with Cuningham.

The Cuningham ruling is arguably an expansion of prior law beyond that expressly supported by Florida’s Arbitration Code nor by the Florida Supreme Court. Florida’s Arbitration Code provides that two or more parties may “include in a written contract a provision for the settlement by arbitration of any controversy thereafter arising between them relating to such contract or the failure or refusal to perform the whole or any part thereof.” § 682.02, Fla. Stat. (2001) (emphasis added). By its terms, section 682.02 appears to authorize only “the parties” to a written contract settling claims arising between “them.” Although not directly addressing this issue, the Florida Supreme Court has held that while the intent of the parties is important in determining whether an arbitration provision applies, “no party may be forced to submit a dispute to arbitration that the party did not intend and agree to arbitrate.” Siefert v. U.S. Home Corp., 750 So. 2d 633, 636 (Fla. 1999). Nevertheless, the Third District’s view in Cuningham may reflect a further expansion of the obligations of non-signatories to arbitration agreements.

Conclusion

In light of the willingness of courts to enforce and even expand arbitration provisions, it is critical that parties make informed decisions on whether or not to agree to arbitrate. A party must recognize the advantages and disadvantages of arbitration. Arbitration of construction industry claims can provide a prompt and economical resolution of disputes by typically well-trained arbitrators with particularized experience. Arbitration may also provide greater certainty of result due to the limited judicial review available, and the lack of exposure to untrained and potentially capricious jurors. On the other hand, arbitration has the effect of undercutting important rights under the Florida Constitution: the right of access to the courts, the right to a trial by jury, and the right of appellate review. Parties that agree to arbitration necessarily waive the right to have a judge decide legal disputes and to have a jury resolve factual disputes, in favor of the discretion of arbitrators. Judicial review of an arbitration award is typically limited to difficult to establish allegations of arbitrator misconduct.

Given the high stakes involved, the decision on whether or not to agree to arbitration in a construction contract should be considered fully at the front end of a contract. In light of the Cuningham case, such consideration must now include a review of other contractual relationships on a particular project. Parties should not inadvertently waive their right to choose or to choose not to arbitrate by being unaware of the arbitration provisions in other contracts for a particular project. In addition, if an arbitration clause is to be included in a contract, it should specifically describe the types of claims to be arbitrated and the parties that must be included in such arbitration. Such a recitation in the contract may avoid a court misinterpreting the parties’ actual intent at a later date.

S. Elysha Luken
850/878-3700
seluken@smithcurrie.com

Termination – How Not To

428 Termination for default in construction contracts is relatively rare. The drastic nature of the action and the adverse practical and legal consequences for the defaulted contractor generally cause very careful scrutiny of that action. The decision of the Department of Interior Board of Contract Appeals (“IBCA”) in Marshall Associated Contractors, Inc. and Columbia Excavating, Inc., IBCA Nos. 1901 et al, 01-1 BCA ¶ 31,248 illustrates the careful scrutiny applied to a default action. To some extent it reads as if it is a manual on how not to default terminate a contractor.

This matter arose out of the Bureau of Reclamation’s (“BOR”) construction of the Upper Stillwater Dam and Stillwater Tunnel for the Central Utah Project (“Project”). At that time, the Project was the largest construction project ever administered by the BOR. The Upper Stillwater Dam is a roller compacted concrete structure which regulates the flow of Rock Creek and its South Fork tributary for its release to the Strawberry Aqueduct.

Marshall and Columbia formed a joint venture to bid, and were ultimately awarded, the sand and aggregate supply contract for the Project’s concrete requirements.  The contractor was to produce 1,194,400 cubic yards of sand and coarse aggregate over a two year period from a borrow pit identified and designated by the government. Essentially, the contractor had to excavate the aggregate and sand from the borrow pit, set up a plant to crush the aggregate, crush the aggregate to meet the specification requirements, and place the aggregate in stockpiles. The Project’s specifications provided that the “predominant” amount of sand required for the Project existed in its natural state in the borrow pit, however, a certain percentage of crushed rock could be processed and blended with the natural sand to qualify as acceptable ASTM C33 sand.

The Specifications

The bid documents did not allow bidders to obtain samples from the borrow pit for testing or analysis. In fact, a provision requiring such sampling and testing was stricken from the specifications because at the time of bid, the government had yet to acquire a portion of the borrow pit property. Rather, the government inserted the following language in lieu of the contractor’s testing requirements:

The material specialist of this office will conduct tests of the available aggregate of the borrow area and will direct the aggregate processing contractor’s operating procedure from these investigations….Bidders may visit the borrow site for bidding purposes, but are to bid on the documented log of existing test pits for evaluation of materials.

This section of the specification became central to the IBCA’s decision on the validity of the default action.

The specifications did not identify any geological reports pertaining to the borrow pit that could be reviewed by the bidders, nor did the BOR make available any rock samples that it had previously obtained. However, the specifications did state, “Tests performed on samples of sand and coarse aggregate obtained from the contractor’s work area indicate that these sources contained, when sampled, materials meeting the quality requirements of the specifications for sand and coarse aggregate.” The specifications contained test reports and sample logs that indicated that borrow pit material was appropriate for use in concrete.   These tests also indicated that the rock to be encountered was sandstone which could easily be crushed to meet the Project specifications.

Project Performance

Shortly after award, the contractor’s exploration of the borrow pit indicated that the borrow site material was much too fine to satisfy the specification requirements and contained far too much silt and waste. After award, the government dug 39 test pits purportedly for the government and the contractor’s use. The government’s analysis of these sand samples indicated that none of the samples would satisfy the specification requirements without extensive processing. These test results were never shared with the contractor, but were obtained during discovery.

After a month of sand production, the contractor had only produced 25% of its required milestone production. The contractor addressed the BOR’s concerns by updating its schedule to reflect obtaining the future milestone production dates through additional work hours but also signaled the possibility of a differing site conditions claim. The contractor continued to be plagued by equipment breakdowns and extensive aggregate testing. After four months of sand production, the contractor had only produced 20% of the required amounts. Given the contractor’s failure to improve production, the government began to consider default termination.

When the contracting officer mentioned the possibility of default termination, the contractor immediately consulted with an aggregate production expert and initiated extensive testing of the borrow pit material. The contractor also substantially enlarged its crushing plant to enhance production capacity. Yet, the contractor continued to fall behind.

With the possibility of default termination looming, the contractor requested a meeting with the government personnel to discuss its performance problems. The contractor alleged a differing site condition due to a significant underrun in suitable borrow pit material and excessive hardness of the existing borrow pit material. The contractor’s testing indicated that the borrow pit material was not “sandstone” as represented in the specifications but rather contained significant amounts of hard quartzite. The hardness of the material required processing and re-processing and caused extraordinary wear on the contractor’s machinery resulting in excessive downtime for repairs.

After numerous expert analyses, the contractor filed a certified claim for $8,832,603.93 to recover excess costs incurred due to the borrow pit differing site condition. The contractor also requested a time extension. Further, the contractor expressed a willingness to complete the project, but would require a forward looking unit price adjustment.

The government’s stated that the contractor’s claim had “no merit” because the borrow pit material was satisfactory and that the contractor’s delays were caused by its insufficient plant size and capacity. Relying on the government’s experts, the contracting officer initiated default termination proceedings.

The Default Termination Decision

Contracting officers are afforded latitude when exercising their business judgment. Typically, courts and boards are reluctant to disturb discretionary decisions of contracting officers. However, the fact that the government has the right to terminate is only one factor to be considered in making the business decision to terminate. Pursuant to FAR 49.402-3(f), contracting officers are to consider:

• The terms of the contract and applicable laws and regulations.
• The specific failure of the contractor and excuses for the failure.
• The availability of the supplies or services from other sources.
• The urgency of the need for the supplies or services and the period of time required to obtain them from other sources, as compared with the time delivery could be obtained from then delinquent contractor.
• The degree of essentiality of the contractor in the Government acquisition program and the effect of a termination for default upon the contractor’s capability as a supplier under other contracts.
• The effect of a termination for default on the ability of the contractor to liquidate guaranteed loans, progress payments, or advance payments.
• Any other pertinent facts and circumstances.

A contracting officer’s decision must reflect an “active and reasoned consideration” of these factors and the totality of the circumstances. Jamco Constructors, Inc., VABCA No. 3271 et al, 94-1 BCA ¶ 26,405 recons. denied 94-2 BCA ¶ 26,792. Yet failure to consider one or more of these factors does not automatically render the default improper. Darwin Construction Co. v. United States, 811 F.2d 539 (Fed. Cir. 1987).

The ICBA’s Rejection of the Termination for Default

When reviewing a default termination, courts and boards initially look to the government to prove the propriety of the default. In this instance, the ICBA acknowledged that the contractor’s failure to meet the project’s delivery schedule established a prima facie case of default. If the government justifies the default, the burden shifts to the contractor to show that the failure was beyond its control and without its fault or negligence, or that the contracting officer’s decision was arbitrary and capricious. KARPAK Data and Design, IBCA No. 2944 et al, 93-1 BCA ¶ 25,360.   In finding that the contracting officer’s decision was an abuse of discretion and therefore arbitrary and capricious, the ICBA addressed several of the FAR 49.402-3(f) factors as embodied in the predecessor regulation. The ICBA found that the contracting officer’s default termination was an abuse of the discretion for the following reasons:

• The contracting officer did not fully consider the contractor’s claims and in fact had not even reviewed the contractor’s expert analyses.
• The BOR had several studies indicating information contrary to the specifications, yet failed to share those with the contractor.
• The contracting officer did not even see the analyses of his own technical personnel.
• The contracting officer did not seek any independent evaluation of the borrow pit conditions.
• The contracting officer relied entirely upon the advice his technical personnel, but the analysis they performed was inadequate under the circumstances.
• The BOR had information prior to defaulting the contractor that it had more than ample C33 sand to meet pending dam construction requirements.
• The contractor had expressed a willingness to proceed and had obtained and evidenced the financial resources to do so.
• The contractor received substantially disparate (better) treatment, such as:
  • The reprocurement contract substantially relaxed the specification requirements;
  • The reprocurement contract provided substantially more information to the bidders and more time to produce less sand than was required of the contractor; and
  • The reprocurement contractor encountered difficulty producing sand and fell seriously behind schedule but was not assessed liquidated damages.

Ultimately, the IBCA concluded that the termination for default must be converted to a termination for convenience.

Lessons Learned

Both federal government contractors and contracting officers should recognize the principles discussed in this decision. Contractors faced with a possible termination for default should utilize FAR 49.402-3(f) as a framework for describing the likely impact of the termination for default on this project and any others. Any possible performance excuses should be advanced and well-supported with project documentation and expert analyses if necessary. The contractor’s past and current performance record should be addressed and the likely impact on future government acquisitions. The contractor should be proactive to investigate the potential causes of its failures and communicate an action plan designed to remedy past problems.

Contracting officers must appreciate that when faced with the decision to terminate, or not terminate, that courts and boards recognize that a default termination is a drastic sanction which should only be imposed for good grounds and on solid evidence. These “good grounds” and “solid evidence” should be set forth in a memorandum required by FAR 49.402-5. This memorandum should carefully describe the contracting officer’s consideration of the FAR 49.402-3(f) factors, as well as the totality of the circumstances justifying default. The contracting officer must also realize that total reliance on technical advisors might be viewed as abdication of the contracting officer’s role as decision maker which can amount to an abuse of discretion. Further, a failure to read, review, and consider a contractor’s excuses for failure to perform might result in a reversal of a termination decision.

Steven L. Smith
704/334-3459
slsmith@smithcurrie.com

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