1. Virtual Dispute Resolution: Social distancing and closure of the courthouses in many jurisdictions across the country caused numerous meetings, court appearances, depositions, mediations, hearings and arbitrations to be held virtually instead of in person. Once over the initial “discomfort” with using virtual platforms such as Zoom, Skype, BlueJeans, etc., the feedback from many in the industry is that this approach is incredibly efficient. Video conferences eliminate travel time and permit people to participate who would normally not be able to meet in person, due to distance or other commitments. We believe that the use of video conferencing has become entrenched into the daily routine. One additional outcome of this, that everyone needs to understand from the very beginning of a project, is the need to document everything — absolutely everything. Due to the difficulty of meeting in person, we have seen many more disputes initially handled on paper submissions. It is easier to be successful in your claim if it is well-documented. This was true before COVID-19, but now is even more critical.
2. Work Backlog: Early on in the pandemic, during the initial shutdowns and stay at home orders, private work projects came to a halt, while many public work projects were deemed essential. Not only did these projects proceed, but some public agencies took advantage of the lack of commuters and quiet streets to add work to existing contracts. Now we are seeing a distinct turn. While stay at home orders are being lifted and private construction is returning to pre-pandemic levels, the pandemic has devastated municipal capital budgets. We have seen contracts terminated or suspended, work deleted and future tenders put on hold. For public contractors, as the current backlog of work is burned off,  the scarcity of future work can significantly strain cash flow and possibly the viability of the company. It is imperative to remain disciplined in bidding, watch your margins, stay within the geographical footprint and industry sectors. This is not necessarily the best time to expand. Sometimes the best project is the one you did not win.
3. Employee Safety and Unions: Skilled craft persons working side-by-side on a project has always been the cornerstone of construction. Social distancing is not always possible, and people are worried about contracting COVID-19. This has heightened the health and safety protocols on projects. From additional PPE, social distancing and limiting the workforce on site, these protocols have possible negative effects on productivity and costs. Reduced efficiency and productivity directly translates into increased costs. These additional costs and productivity impacts have to be built into future bids. Additionally, these new necessary worker protections may inject new life into the power of unions. Will this be the rebirth of union strength in certain parts of the country?
4. Material Procurement: The pandemic has slowed and shut down factories throughout the world. This has caused a scarcity of raw materials and equipment, causing increasingly long lead times and higher costs. It is unclear when the supply chain will recover. These factors need to be accounted for when developing schedules and budgets. You should consider going beyond your regular suppliers, and engage new and multiple distribution chains and suppliers, and even enter into long-term supply contracts to protect yourself from price swings.
5. Legal Notices/Contractual Issues: The pandemic exposes (no pun intended) contractors to new and different claims and disputes related to COVID-19 You must thoroughly review your contract to assure you provide timely notices of all time and cost impacts, and comply with all claim documentation requirements. Additionally, as noted above, the pandemic has caused a significant increase in contract terminations and force majeure delays. You must understand what you can and cannot recover  under your contract, and make sure you document your claims well and make all timely submissions.
6. Health Insurance and Paid/Unpaid Medical or Family Leave: Local, state and federal responses to the pandemic have impacted the health care and leave benefits provided to workers. A flurry of new initiatives provide paid and unpaid medical leave related to COVID-19 exposures, mandatory quarantines and child and family care requirements. The conflicting requirements among overlapping local, state and federal mandates have created conflicts between employers, unions and benefit providers as to who is the responsible party to cover the additional costs of medical testing and leave. Having an understanding of all insurance policies, coverages, union agreements and your obligations as an employer is vital. It is critical that you take a team approach to assuring compliance with the myriad of benefits.

This is just a partial list of the impacts on our industry. If you need any assistance with these or any other construction related issues, Troutman Pepper’s Construction Practice Group are available to assist.

This chapter summarizes issues commonly raised during international construction arbitrations seated in the United States or governed by U.S. laws. This chapter should be a useful resource for those seeking to better understand the interplay between U.S. laws and international construction arbitration.

Danielle Volpe is a former associate of Troutman Pepper who recently became the General Counsel of Posillico Construction.

Change in Law

Under prior law, as recently determined by the Georgia Court of Appeals, lien waivers were effective for “all purposes” and were deemed to release lien rights and any other rights or remedies available to a claimant. ALA Constr. Servs., LLC v. Controlled Access, Inc., 351 Ga. App. 841, 843, 833 S.E.2d 570, 572 (2019), cert. denied (Apr. 20, 2020). In other words, if a claimant submitted a lien waiver and failed to timely file a claim of lien or an affidavit of nonpayment thereafter, all debts allegedly owed to the claimant were deemed paid-in-full and all claims related thereto, including breach of contract, were eliminated.

Under the current law, lien waivers and releases are limited to “waivers and releases of lien and labor or material bond rights and shall not be deemed to affect any other rights or remedies of the claimant.” O.C.G.A. § 44-14-366(a). In short, where a claimant submits a lien waiver and fails to timely file a claim of lien or an affidavit of nonpayment thereafter, the claimant retains all other rights it may have with respect to amounts it is allegedly owed, including the right to bring suit for breach of contract.

Less significantly, the new law also extends the time for a claimant to file an affidavit of nonpayment from 60 to 90 days, and the timely filing of an affidavit of nonpayment is now the only way for a claimant to nullify a waiver and release. O.C.G.A. § 44-14-366(f)(2)(C).

Impact on Owners and Developers

Owners and developers in Georgia can no longer rely on lien waivers to preclude all claims and rights of action with respect to debts allegedly owed. A lien waiver will do only that – waive liens against the subject property. Actions for breach of contract for failure of payment will survive.

In addition, in relation to the extension of the time for filing affidavits of nonpayment, owners and developers must now wait a full 90 days for lien waivers to become fully effective.

Owners and developers should contact their preferred counsel to discuss impacts of the new law specific to their respective operations. Troutman Pepper has a dedicated team of construction counsel and litigators capable of handling and advising on a wide array of construction related matters and topics. To receive advice on updating forms or to discuss the impact of the new lien waiver law, please contact any of the attorneys listed herein.

Sea World contracted with Level 10 in June 2019 to build what is believed to be the new Emperor Dive Coaster at the Sea World San Diego park. In its Complaint and a later Motion for Issuance of Writ of Attachment filed on June 25, 2020, Level 10 alleged that it completed all of its work necessary under the contract until Sea World asked Level 10 to stop its work on the project. Sea World also allegedly advised that it “would not process outstanding payments until the parks open.” Level 10 maintained that under its contract with Sea World, Level 10 would be paid for furnishing labor, materials, equipment, and services.  Further, Level 10 claimed that nothing in the contract conditioned payment to Level 10 upon “Sea World San Diego’s theme park being open for business to the public.”

Based on the Complaint, there does not appear to be a dispute that Level 10 performed the work, that Sea World has withheld payments from Level 10, or that Sea World will continue to do so until its parks reopen. Indeed, in an Orlando Sentinel article from April 8, 2020, Sea World was quoted saying that it would withhold payment during its temporary shutdown due to COVID-19: “We have communicated to [our vendors, suppliers, contractors and subcontractors] that during the temporary closures . . . payments may be delayed.” Thus, the issue may ultimately come down to whether Sea World can find relief by turning to its contractual force majeure clause if one exists in the contract. Under typical force majeure clauses, the party relying on the clause may be granted schedule relief from performing under the contract if certain events render its performance untenable or impossible.

The Court may have to wrestle with several questions like whether the COVID-19 pandemic qualifies as a force majeure event, and whether Sea World may rely on its contractual force majeure clause, if applicable, to delay payments to Level 10. Whether these issues come up in the litigation, and how the court ultimately decides these issues remains to be seen. However, there is little doubt that those in the construction industry will want to keep their eyes on these developments. How the court comes down on these potential issues described above could impact not only owners, but contractors and subcontractors alike.

The information above is for informational purposes only and is not intended to serve as providing legal advice. If you have further questions or seek advice based on your specific fact situation and contractual provisions, please reach out to any members of the Troutman Pepper Construction groups. In addition, Troutman Pepper maintains a COVID-19 Dedicated Resource Center to help guide clients through the challenges presented by COVID-19.

The United States Civilian Board of Contract Appeals (the “Board”) recently issued a decision that may be particularly pertinent in light of the COVID-19 pandemic. In Pernix Serka Joint Venture v. Department of State,¹ the Board rejected a contractor’s claim for additional costs related to demobilization and remobilization of the job site in Freetown, Sierra Leone, due to an Ebola virus outbreak. The Pernix decision should put government contractors on notice that, depending on applicable contract language, federal contractors may be entitled to schedule relief, but not costs, as contractors deal with COVID-19 related impacts.

In September 2013, the Department of State (“DOS”) contracted with Pernix Serka Joint Venture (“PSJV”) in a firm, fixed-price contract to construct a rainwater capture and storage system in Freetown, Sierra Leone.² The contract included all necessary labor, materials, equipment, and services.³ Additionally, the contract permitted the contractor to recover time, but not money, for excusable delays as defined in Federal Acquisition Regulation (“FAR”) 52.249-10.⁴ The excusable delays provision expressly referenced government acts, epidemics, and quarantine restrictions.⁵⁵ The DOS issued PSJV a notice to proceed in December 2013. In July 2014, about four months before the project completion date, Sierra Leone suffered an Ebola virus outbreak.⁶

In light of the outbreak, PSJV sought guidance from the DOS on how the project should proceed.⁷ Specifically, PSJV queried about a potential project shutdown and temporary demobilization to protect its employees during the outbreak.⁸ In response to PSJV’s requests, the DOS advised that its operations post in Sierra Leone was operating as usual, that the DOS would not order an evacuation of the job site, and that PSJV must make its own business choices about the need to demobilize.⁹ After the World Health Organization declared the Ebola outbreak an international public health emergency on August 8, 2014, the PSJV notified the DOS that it planned to shut down construction and demobilize the site.¹⁰ In response, the DOS acknowledged the concern about the Ebola outbreak, but advised that it recognized PSJV’s site demobilization as a unilateral decision and, therefore, would not grant an equitable adjustment for costs associated with the temporary shutdown.¹¹

In mid-March 2015, PSJV remobilized to the site.¹² Upon remobilization, PSJV incurred additional costs as it expanded the on-site medical facility and provided a standby licensed paramedic.¹³ Due to the associated demobilization and remobilization costs, and the expanded medical capabilities, PSJV submitted a request for equitable adjustment to the DOS seeking both an extension of time and additional costs.¹⁴ The DOS granted PSJV the requested time extension, but rejected PSJV’s claim for additional costs associated with the temporary shutdown and expanded medical capabilities.¹⁵ Following PSJV’s resubmission of the REA as a certified claim, and the contracting officer’s denial of that claim, PSJV appealed to the Board.

The DOS successfully moved for summary judgment based on the above facts. To support its grant of summary judgment in favor of the DOS, the Board first explained that the Parties entered into a firm, fixed-price contract. The Board emphasized the well-established principle that “a contractor with a fixed price contract assumes the risk of unexpected costs not attributable to the Government.”¹⁶ The Board emphasized that PSJV and DOS entered into a firm, fixed-price contract that expressly provided for how certain excusable delays not attributable to the Government would be treated: PSJV would be granted time, but not money. So, where the costs increased due to the unforeseen Ebola outbreak, PSJV bore the risk.

The Board next addressed PSJV’s argument that it was entitled to recover costs because of either a cardinal or constructive change to the contract. “A cardinal change is a breach that occurs when the Government effects a change in the work so drastic that it effectively requires the contractor to perform duties materially different from those in the original bargain.”¹⁷ Indeed, a cardinal change may rise to an actual breach of contract.¹⁸ To recover for a constructive change, the contractor must show “(1) that it performed work beyond the contract requirements, and (2) that the additional work was ordered, expressly or impliedly, by the government.”¹⁹

The Board found both of these arguments unavailing. First, the Board found that no cardinal change occurred because the addition of life safety measures did not so alter the very thing that PSJV contracted for. The Board further found that no constructive change occurred because the DOS never ordered PSJV to evacuate the work site. At all times, PSJV was required to construct the rainwater capture and storage system, and was entitled to additional time, but not money, to complete the project in the event of an excusable delay.²⁰

There is no question that global supply chains and labor forces have been heavily disrupted due to COVID-19. Contractors are suffering delays and increased costs due to COVID-19-related impacts, and ensuing litigation is inevitable. The Pernix decision, however, offers some sobering insight into how the Board might interpret certain government contract provisions in light of COVID-19. It appears that time extensions will be granted without much contest, but the Board will not readily award additional costs – at least in the face of a clear contract provision such as that in the PSJV-DOS agreement. In a COVID-19 world, understanding your contractual entitlement and planning early will be critical to monitoring costs and keeping your project alive.

Endnotes

1 CBCA 5683, 2020 WL 1970843 (C.B.C.A. Apr. 22, 2020)
2 Id. at 2.
3 Id.
4 Id.
5 Id. (“The Contractor will be allowed time, not money, for excusable delays as defined in FAR 52.249-10[.] . . . Examples of such cases include . . . (2) acts of the United States Government in either its sovereign or contractual capacity; (3) acts of the government of the host country in its sovereign capacity; . . . (7) epidemics; (8) quarantine restrictions[.]”
6 Id.
7 Id.
8 Id. at 3.
9 Id. at 3, 9.
10 Id. at 3-4.
11 Id. at 4.
12 Id. at 6.
13 Id.
14 Id.
15 Id. at 7.
16 Id. at 7-8 (quoting Matrix Business Solutions, Inc. v. Department of Homeland Security, CBCA 3438, 15-1 B.C.A. (CCH) ¶ 35,844, 2014 WL 8106179 (C.B.C.A. Dec. 19, 2014)).
17 Bell/Heery v. United States, 106 Fed. Cl. 300, 314 (2012) (quoting Krygoski Constr. Co. v. United States, 94 F.3d 1537, 1543 (Fed. Cir. 1996)).
18 Id. at 313.
19 Id.
20 Pernix, CBCA 5683 at 9-11.

EXCERPT:

“There is a deceptive simplicity about the way in which arbitral proceedings are conducted… In fact, the appearance conceals the reality.”

Introduction

Arbitration is simple. Parties select a person or persons — the arbitrator(s) — whose expertise or judgment they trust to resolve their differences in a privatized forum. After each party puts on their case, the arbitrator(s) consider the arguments and evidence and renders a binding decision.

Given the simplicity, informality, and efficiency offered by arbitration — as compared to courts of law — it is easy to understand why arbitration has been a readily accepted approach to dispute resolution around the world. This appeal has been especially true for the construction industry, where arbitration has become the predominant form of dispute resolution because it offers a method that is better able to manage the complex, multi-faceted, and highly technical features of construction disputes than the U.S. federal or state courts.

But as the quote above indicates, notwithstanding arbitration’s conceptual simplicity, in practice, arbitration proceedings vary widely depending on the legal traditions of the parties, counsel, and arbitrators. In other words, although arbitration is widely accepted in jurisdictions around the world, the practical reality is that not all arbitrations look the same. Accordingly, given that arbitration is part of a much broader global phenomenon, what can we learn about the practice outside the United States to help improve the U.S. approach to arbitration?

In that vein, this article questions some of the current norms associated with the management of U.S. domestic construction arbitrations and submits that international arbitration procedures may improve efficiencies and outcomes in many construction cases. This is particularly true for megaproject disputes, where it is increasingly paramount for parties to carefully present and organize their case in front of the arbitrator(s) given the significant complexities and facets associated with those arbitrations.

In the United States, there is no shortage of guidelines, protocols, or model rules, that aim to improve efficiencies associated with construction arbitration as compared to U.S. courtroom litigation. However, parties, counsel, and arbitrators in the U.S. domestic arbitrations commonly utilize procedures that, more often than not, mimic the practices seen in the U.S. courts. Certainly, it is understandable that U.S. attorneys naturally gravitate toward U.S. federal and state court practices as a model for domestic arbitrations. But why is it necessary for U.S. litigation practice and procedure, in general, to so heavily influence U.S. domestic arbitrations?

As arbitration has become widely adopted in jurisdictions around the world, it has largely become a lingua franca for the resolution of transnational disputes. As a result, over the course of the last several decades, the modern practice of “international arbitration” has developed. International arbitration — generally arbitration involving parties from different countries, counsel from different legal traditions, and/or a dispute located outside the United States — blends common and civil law legal traditions into a single dispute resolution process. Thus, despite falling under the broad umbrella of “arbitration,” international arbitration retains characteristics that are noticeably distinct from practices utilized by most U.S. domestic arbitrations.

This article introduces five distinct international arbitration procedures and explains how those practices might be utilized in U.S. domestic arbitration proceedings. In doing so, the authors hope to spark a broader debate about whether domestic arbitration practices in the United States should begin to shift away from typical U.S.-styled litigation practices in favor of a different model.

This article is structured as follows. First the authors provide a generalized introduction into international arbitration and highlight some of the conceptual features that make the dispute resolution process distinct from U.S. domestic arbitrations. Second, the authors outline five distinct procedures utilized in international arbitrations — (A) Statements of Claim Memorials; (B) Witness Statements; (C) Document Disclosure; (D) Order of Evidence; and (E) Joint Expert Procedures — that parties, practitioners, and arbitrators should consider applying to U.S. domestic arbitrations when attempting to determine how best to manage the proceedings.

A PDF of the full article is available here.

The Court of Appeals for the Federal Circuit reversed a decision by the Armed Services Board of Contract Appeals (“Board”), which had found in favor of a contractor on a Type I differing site condition claim. The Board had held that, even though the contractor’s interpretation of the contract documents was unreasonable, it was more reasonable than the government’s. The Federal Circuit reversed, holding, as a matter of law, that the contractor’s unreasonable interpretation of the contract documents barred its claim.

The case arises from an Army Corps of Engineers project for the design and construction of the Navy Medical Biological Defense Research Laboratory (“Biolab”) in Fort Detrick, MD.  The request for proposals (“RFP”) issued by the Army Corps included a geotechnical report that stated that the Biolab should be supported by a deep foundation system of drilled piers socketed into five feet of competent rock (referred to as “rock sockets”). The geotechnical report also included data from 46 test borings, which indicated the subsurface conditions in the area.  However, of those 46 borings, just two were taken from the planned footprint of the Biolab project. Those two borings, referred to as DH-11 and DH-12, indicated high quality rock with no intervening voids or incompetent rock.  Other borings taken between 300 and 500 feet away from the Biolab’s footprint showed that up to 20 feet of incompetent rock could be expected.

John C. Grimberg Co., Inc. (“Grimberg”) submitted a bid and was ultimately selected for award.  In preparing its bid, Grimberg had relied solely upon borings DH-11 and DH-12 to estimate the volume of rock through which it would be required to drill.  Grimberg therefore assumed it would not encounter any voids or incompetent rock, estimating that each of its 48 planned rock sockets would require drilling into exactly five feet of rock, for a total of 240 feet.

The rock Grimberg actually encountered was far different than indicated by DH-11 and DH-12. Grimberg discovered voids and a significant amount of incompetent rock, which ultimately required Grimberg to drill through an additional 13.5 feet of rock per pier on average, for a total of 923 feet.

Grimberg sought an equitable adjustment from the Army Corps, arguing that the rock it had encountered constituted a Type 1 differing site condition because it differed materially from what was indicated in borings DH-11 and DH-12. The Army Corps denied Grimberg’s claim, asserting that Grimberg should have relied on the data from more distant bores.

On appeal, the Board held that Grimberg was entitled to an equitable adjustment because the rock Grimberg encountered was not reasonably foreseeable.  Initially, the Board determined that Grimberg’s interpretation of the contract documents was unreasonable because it had “‘cherry pick[ed]’ a subset of 2 of 46 borings” and relied upon those borings exclusively in preparing its estimate.  But the Board nonetheless found that Grimberg was entitled to relief on its claim because “[t]he quantities of rock encountered greatly exceeded the quantity reasonably foreseeable based on a fair reading of contractual indications.”  The Board explained that, while Grimberg’s reliance on DH-11 and DH-12 was unreasonable, it was more reasonable than the Army Corps’ argument that Grimberg should have relied upon borings taken 500 feet from the Biolab footprint.

On appeal, the Federal Circuit reversed. The Court explained that, to prevail on Type 1 differing site condition claim, a contractor must prove, among other things, that it had reasonably relied upon its interpretation of the contract documents. Because the Board determined that Grimberg’s reliance solely on DH-11 and DH-12 was unreasonable, the Board should have held, as a matter of law, that Grimberg’s claim failed.

Further, while the Board had reasoned that the Army Corps’ interpretation of the geotechnical report was less reasonable than Grimberg’s, the Federal Circuit concluded that the parties’ comparative reasonableness was immaterial because the “case law does not permit us to balance the Corps’ reasonableness against that of the contractor.”  Rather, “the focus of our inquiry must be on the reasonableness of the contractor.  This focus serves the purpose of incentivizing contractors to carefully and reasonably interpret contract documents.” The Court therefore reversed the Board and held that Grimberg was not entitled to an equitable adjustment.