Spring 2017

www.eckertseamans.com l [email protected]

Construction

In This Issue…

Page 1 A short history of defective building delivery Incorporation by reference clauses in bonds: A sometimes problematic interaction

Page 3 The importance of indemnification language

Page 4 A short history of defective building delivery damages How long am I liable? The earliest known law arose in Babylonia around 1600 BCE. King Hammurabi legislated the following: Page 6 holds the door open 229. If a builder build a house for a man and do not make its construction for bad faith claims against firm, and the house which he has built collapse and cause the death of the owner of the house, that builder shall be put to death. Page 7 230. If it cause the death of a son of the owner of the house, they shall put FERC requirements affecting electricity generation David M. McGlone to death a son of that builder. projects This did not seem to do much for the plaintiff to put them back in the place they were before the Page 8 damages occurred. Rather, Hammurabi’s code specified an eye for an eye. Thus, there were purely Waiver of consequential punitive damages for a defective structure. Hammurabi was silent on whether the plaintiff would damages clauses: Are be entitled to damages after he had his revenge. Nonetheless, I am sure there wasn’t too much your damages direct or defective construction in Babylonia after this code was emplaced. consequential? continued on page 2 Page 9 Quiet Room® Guide advises on standards to calculate and recognize noise levels Incorporation by reference clauses in surety bonds: A sometimes for hotels problematic interaction

Page 10 The recent Maryland Court of Special Appeals opinion in the case of Advice for federal Schneider Electric v. Western Surety Company underscores the sometimes contractors during the new problematic interaction of incorporation by reference clauses in surety bonds. administration Schneider was engaged to perform work as a subcontractor for a medical Page 11 facility located in Maryland. The project was administered by the U.S. Army D.C. Court of Appeals Corps of . Schneider, in turn, entered into a sub-subcontract with liberally construes notice National Control Services (NCS) in accordance with a Master Subcontract requirements for delay claims Scott D. Cessar Agreement (MSA) between Schneider and NCS. Importantly for present purposes, the MSA included a mandatory clause. The MSA Page 12 also required NCS to provide a performance bond naming Schneider as obligee for 100% of the Construction Law Group sub-subcontract value, $2,050,000. The performance bond was issued by Western Surety and News incorporated by reference both the MSA and the sub-subcontract. continued on page 5

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Eckert_ConstructionLaw_Spring2017.indd 1 4/10/17 8:03 AM The Roman’s tortious standard contained the rudiments of our present law, which governs the measure of damages for a defective structure that killed somebody, or merely one that was delivered in a defective state. In most modern , the measure of damages for a wrongful death would include medical expenses, conscious pain and suffering, out-of-pocket funeral expenses, and lost wages. The Plaintiffs in this case would be the deceased’s spouse and minor children (loss of Consortium).

With respect to modern residential construction, in 1964, the Supreme Court of Colorado was the first court in the country to abandon the doctrine of caveat emptor (buyer beware) and hold that a builder-vendor of a completed residential home impliedly warrants that it complies with applicable requirements, is built in a workmanlike manner, and is suitable for habitation [Carpenter v. Donohoe, 154 Colo. 78, 83-84 (1964)]. This is generally referred to as the Implied Warranty of Habitability. This warranty applies when there are latent defects in A short history of defective building delivery damages the home that create substantial questions (continued) of safety and/or habitability. Many jurisdictions have adopted this .

Shortly after Moses parted the Red Sea, be eligible to flee to one of three sanctuary Depending on the (and ruling he found that construction was different cities in Israel, hopefully one with pitched out statutory, punitive and consequential on the other side. The Israelites were roofs. damages) the measure of damages for unfamiliar with flat roofs. He made breach of a construction is the that: “When you build a new house, then Even before Nero’s new building code cost of repairing or remedying the building. you shall make a battlement for your roof, (understandably preoccupied with fire However, if this is not possible, alternative that you bring not blood on your house, prevention), the Romans generally would damages could be the difference between if any man fall from there.” Deuteronomy inquire as to whether the builder actually the fair market value of the 22:8. intended to allow the building to fall down without the defect and the fair market before imposing the death penalty upon value of the property with the defect. Otherwise known as the “parapet him. The Romans, while traditionally requirement,” this qualifies to be the “First remembered as a bit cold, ironically If Hammurabi were alive today, I would Commandment of Construction Law.” required a finding of malice aforethought guess that he would be a proponent of before they put you to death. statutory, punitive and consequential Its import was that if somebody fell damages to enforce his code. These would from your roof that lacked a parapet, The Romans also created causes of action substantially add to a money there was a presumption that you were that, in the case of a defective building, amount. While I would never equate these a murderer. Moses’ remedy is vaguer could be tortious or contract based. As remedies to the death penalty, it does than Hammurabi’s, but there is a clear they litigated in the forum, the seem that societies need to flirt with the implication in the word “murderer” that could order money damages based on draconian to enforce their building codes. this is a capital and you would be a finding of liability on the causes of executed. Note, if you could negotiate the action. These concepts eventually were David M. McGlone may be reached at crime down to manslaughter, you would incorporated into our . [email protected]

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Eckert_ConstructionLaw_Spring2017.indd 2 4/10/17 8:03 AM CONSTRUCTION

The importance of indemnification language

In a recent case incorporated provisions from the prime contractor sought to sidestep this issue, arising out of the contract into the subcontracts. Based though, by recasting other language in the construction of a on this language, the general contractor subcontracts as indemnification provisions. public project, the maintained that the subcontractors had Again, the Supreme Court of Virginia was Supreme Court of agreed that they were obligated to the unpersuaded. In the eyes of the Court, Virginia underscored same extent, and for the same indefinite these provisions related to the work as the attention that period of time, that the general contractor it was being performed, and imposed should be paid to was obligated to Virginia Tech under the responsibility on the subcontractors for Michael A. Montgomery indemnification prime contract. Therefore, according the cost of remedying work that had language at the to the general contractor, any right to not been performed or not performed front end of a project before the contract assert a five-year of limitations correctly. The provisions did not impose is signed. Otherwise, many years later a had been waived. The Supreme Court of an obligation to indemnify the general general contractor could be left footing the Virginia, however, was not persuaded. contractor for all liability arising out of any entire bill for the correction of defective According to the Court, general “flow failure to perform after the work had been work, and have no recourse against the down” language alone is not sufficient to completed. If the general contractor had responsible subcontractor. demonstrate the subcontractors’ intent desired to achieve that result, it could have to waive a right to a specific limitations included specific indemnification language In Hensel Phelps Construction Company period, or even to demonstrate that the in the subcontracts that was enforceable v. Thompson Masonry Contractors, a knowledge of such a right exists. Some under applicable Virginia law. dispute arose out of the construction of additional, specific language sprinkled a student health and fitness center at throughout the subcontracts did nothing There are several takeaways from this Virginia Tech. All work on the project had to change the Court’s mind. Moreover, decision. First, review your , been completed by June 2000, including even if all of the language of the prime and consider consulting with an attorney warranty work. Many years later, Virginia contract had been incorporated into the before you sign the contract. Each word in Tech discovered and then corrected subcontracts, the result would have been the contract matters, and ultimately can a number of issues with the original the same. As the Court noted, in its prime result in the recovery (or loss) of millions construction. In April 2012, Virginia Tech contract, the general contractor had not of dollars long after the project has been filed suit against the general contractor, agreed to waive any applicable statute completed. Second, make certain the Hensel Phelps, for breach of written of limitations. Rather, Virginia Tech could indemnification language in the contract contract. Although a five-year statute of pursue its claims because a particular is enforceable. If properly drafted to limitations typically would serve to statute in the Virginia Code provides that comport with applicable law, the such a claim, the statute of limitations the five-year limitations period does not clause should allow claims to be pursued does not apply to state agencies such apply to a state agency. Nowhere in any against the subcontractors, even when as Virginia Tech. Therefore, the general of the subcontracts is this statutory waiver dealing with contracts related to public contractor found itself defending a incorporated, and therefore binding on projects. Finally, “flow down” language for allegedly defective work that had been the subcontractors. Accordingly, the claim is commonly used in subcontracts and completed more than 12 years earlier. against the subcontractor was time-barred. is generally effective in binding the subcontractor by referencing the prime After paying a considerable sum to resolve In making its second, alternative argument contract or by expressly incorporating the litigation with Virginia Tech, the to overturn the court’s decision, the it into the subcontract. Therefore, as general contractor then filed suit against general contractor attempted to couch to the subcontractor, it should review the subcontractors and their sureties. its claim as one for indemnification. If the prime contract before signing the The defendants responded with various allowed to pursue such a claim, any subcontract, and make certain it is not defensive pleadings, including a “special statute of limitations would not have unwittingly agreeing to terms such as an plea” that sought to dismiss the breach started to run until the general contractor indefinite time limitations period. As to the of contract claim based on the very same had paid money in 2012 to settle the general contractor, it should make certain five-year statute of limitations upon which claims. The general contractor, however, that the general “flow down” language the general contractor had not been able had not expressly asserted a claim for accomplishes the intended purpose. If not, to rely. And the defendants won. indemnification, and for good reason. or if there is any doubt, then the general The indemnification language in the contractor should consider inserting On appeal of the trial court’s decision, the prime contract contained language that additional language in the subcontracts general contractor first maintained that purportedly would indemnify the general where appropriate. the subcontractors had waived the five- contractor for its own . The year statute of limitations. In making this Supreme Court of Virginia had previously Michael A. Montgomery can be reached at argument, the general contractor relied held that such language violates public [email protected] on typical “flow down” language that policy, and accordingly is void. The general

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Eckert_ConstructionLaw_Spring2017.indd 3 4/10/17 8:03 AM How long am I liable?

You are a ‘Can I still be liable for a project I finished long ago?’ The construction answer is going to depend on an analysis of the circumstances contractor with a number of successful ‘‘ of your case, the Statute of Limitations, the Discovery Rule projects under and the Statute of Repose for the project’s locale. your belt, when you find out that you are being sued ’’ over a project you knows, or should have known, that he has Repose. Accordingly, after discovering its Edgar Alden Dunham, IV completed years a claim. claim, the plaintiff should have filed its ago. Your reaction is “Can I still be liable lawsuit against you within the 10-year cap. A determination that a plaintiff has filed its for a project I finished that long ago?” The Because it did not, the case against you claim within the Statute of Limitations, as answer is going to depend on an analysis of should be dismissed. extended by the Discovery Rule, still does the circumstances of your case, the Statute not complete the analysis, however. Most Something else that needs to be taken into of Limitations, the Discovery Rule and the states have a Statute of Repose in addition account is repairs. While a plaintiff may be Statute of Repose for the project’s locale. to a Statute of Limitations. A Statute of out of time to bring a claim on the project All states have of Limitations. Repose generally places a cap on any itself, it may be within time to bring a The Statutes of Limitations provide a extension to the Statute of Limitations, claim on the repair itself, if the claim is deadline for filing a lawsuit. Typically the beyond which the plaintiff is barred from only that the repair was not properly done. Statute of Limitations is longer for breach bringing a claim, regardless of whether it To give you an idea of the difference the of contract claims than it is for tort claims. knew or should have known of its claim. locale of your project may have on the A “tort” claim is generally a claim that Like the Statute of Limitations, it typically various statutes, the chart below compares someone wrongfully caused someone else (but not always) runs from Substantial the Statutes of Limitations and Statutes damage under circumstances that were not Completion. of Repose for New Jersey, Pennsylvania, governed by a contract. A An example would be as follows: Let’s say New York and West Virginia for contract claim is a prime example. Depending you substantially completed project “Y” claims (the most popular claims against on the state, other types of claims may 11 years ago. Let’s further say that the contractors). be subject to other specific Statutes of Statute of Limitations for a contract claim Limitations. In other words, the deadline in the locale where project “Y” is located is Finally, the parties to a construction for a plaintiff to file claims against you is 6 years, and the Statute of Repose is 10 contract generally can agree in the going to be different depending on the years. You are sued for . contract to shorten the applicable Statute locale and the claims being asserted. The claim is brought more than 6 years of Limitations. They can also generally agree, pursuant to a forbearance Determining that a plaintiff filed a lawsuit after you achieved Substantial Completion, agreement, to toll a Statute of Limitations, against you after the Statute of Limitations so it was filed beyond the deadline set by which has the effect of extending the deadline has passed, however, is not the the Statute of Limitations, but the plaintiff deadlines in which a party can sue. end of the analysis. Statute of Limitations argues that the Statute of Limitations has been extended by 7 years because it deadlines can be extended by what is Knowing the Statutes of Limitations and known as the Discovery Rule. In most could not reasonably discover the problem until 7 years after Substantial Completion. Statutes of Repose for the areas in which cases, the time period set by the Statute you are working can help you manage risk of Limitations on your construction projects While the reasonable discovery of the claim 7 years after substantial completion and have an intelligent discussion with begins when you achieve Substantial your attorney if you are sued. Completion of your contract. Under the might very well extend the Statute of Discovery Rule, the Statute of Limitations Limitations, it does not extend it past the Edgar Alden Dunham, IV, can be reached at does not begin to run until the plaintiff 10-year cap imposed by the Statute of [email protected]

State Statute of Limitations Statute of Repose *New Jersey’s Statute of Repose has an NJ 6 years - N.J.S.A. 2A:14-1 10 years - N.J.S.A. 2A:14-1.1* extra condition. In addition to arising out of a construction project, the claim PA 4 years - 42 Pa. C.S.A. 5525(2) 12 years (14 years for certain personal injury must allege an unsafe condition. and (3) or wrongful death claims) - 42 Pa. C.S.A. 5536 **New York is one of the few states in the country that does not have a Statute of Repose. NY 6 years - NY C.P.L.R. § 213 No statute of repose** WV 10 years - W.V. Code 55-2-6 10 years - W.V. Code 55-2-6a*** ***The West Virginia Statute of Repose is atypical and more along the lines of a Statute of Limitations for construction claims. It may be extended by a court pursuant to the Discovery Rule.

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Eckert_ConstructionLaw_Spring2017.indd 4 4/10/17 8:03 AM CONSTRUCTION LAW REPORT

Incorporation by reference clauses in surety bonds: A sometimes problematic interaction (continued)

As a result of a payment dispute, NCS Based on settled Maryland contract law, The Court of Special Appeals opinion in refused to perform work required by the Court stated that its task was to the Schneider opinion presents several the sub-subcontract with Schneider, determine “from the language of the helpful practice pointers. First, if a party notwithstanding a clause in the sub- agreement [the performance bond] what wants claims under a surety bond to be subcontract which required NCS to a in the position of the arbitrated consistent with the underlying “diligently perform the Work…despite the parties would have meant at the time the contract, it should provide that all of the pendency of any dispute….” Schneider agreement was effectuated.” The Court terms and conditions of the underlying proceeded to hire other contractors to then proceeded to review the terms of the contract are incorporated into the bond complete what it contended was work that performance bond to determine what a and not just provisions that relate to the was the responsibility of NCS. reasonable person would have meant at performance of the work. the time the surety bond was entered. As a result, and pursuant to the MSA, Second, in the event that the underlying Schneider filed a demand for arbitration First, the Court noted that the performance contract does not provide that all of the against NCS. Schneider’s demand for bond referenced that Western Surety was terms are incorporated, a party should arbitration also named Western Surety as bound to NCS’ performance of both the review the surety bond that is supplied a respondent. Schneider claimed damages sub-subcontract and the MSA. The Court and, if there is any issue as to whether of $1,473,100, plus attorney fees and then considered the particular language of arbitration is compelled, require the surety interest. the performance bond by which Western to agree to a rider to the surety bond Surety bound itself “jointly and severally” incorporating the clause Western Surety filed suit to enjoin its to “the performance of the Construction of the underlying contract. participation in the arbitration, contending Contract [the sub-subcontract].” The that, based on the terms of the Court then also noted that the purpose of Finally, if the surety objects to arbitration performance bond, Western Surety was the MSA was to “ensure that NCS would and there is any question as to whether not subject to the mandatory arbitration ‘perform work’ described in the [sub- the bond provides for arbitration of provision contained in the MSA. The lower subcontract].” disputes, a party should file a protective court agreed with Western Surety that civil action in the appropriate court against Western Surety had not agreed to arbitrate In focusing on the terms “performance” the surety and then move to stay the claims under the performance bond. and “perform work” in the operative civil action pending the outcome of the Schneider appealed. agreements, the Court found that Western arbitration. At the same time, the party Surety had obligated itself only to the should invite the surety in writing to While the appeal was pending, the “performance of the work it agreed to observe and participate in the arbitration. arbitration proceeded against only NCS complete and not to every contractual The purpose of this approach is twofold: with an award entered by the arbitrator provision in the incorporation by reference (a) the filing of the action avoids any risk in favor of Schneider and against NCS in chain” of the performance bond, sub- that any contractual or statutory time the amount of $1,653,924.21 in damages, subcontract and MSA. period for filing against the bond (usually attorney fees, arbitrator fees and interest. one year or two years) will expire and Second, the Court addressed paragraph allow the surety to escape its obligations The issue on appeal was whether Western 9 of the bond, which provides that “any on a technicality; and (b) the invitation Surety was bound to the arbitration proceeding…under this Bond may be letter strengthens the contractor’s claim provision in the MSA based on the instituted in any court of competent that the surety is bound by the underlying incorporation by reference language jurisdiction in the location in which the liability finding from the arbitration contained in the performance bond, work or part of the work is located and pursuant to the doctrine of collateral even though Western Surety was not a shall be instituted within two years estoppel. signatory to the MSA. after Contractor default….” The Court found that, to hold that arbitration of Scott D. Cessar may be reached at As a threshold issue, the Court noted that claims under the performance bond was [email protected] the underlying project implicated interstate compelled would be to improperly read this commerce and considered whether, based provision out of the bond. on the Federal Arbitration Act, federal common law or state law governed the Based on its review of the language of underlying issue of contract interpretation. the performance bond, MSA and sub- In view of a 2009 United States Supreme subcontract, the Court of Special Appeals Court case and several subsequent United upheld the decision of the lower court States Court of Appeals’ opinions, the and found that Western Surety was not Court of Special Appeals concluded that compelled to arbitrate with Schneider its state law governed, not federal law. obligations under the performance bond in the event of default by NCS.

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Eckert_ConstructionLaw_Spring2017.indd 5 4/10/17 8:03 AM an insurer bad faith standard to a surety relationship. Nonetheless, the Court proceeded to examine the facts applying that lesser standard, ultimately ruling against Bailey in rejecting the notion that GAIC had engaged in bad faith.

First, the Court found that Bailey had presented no about GAIC’s state of mind, nor any reason why GAIC’s interest in settling the case differed from Bailey’s; rather, both “share[d] an interest in securing the highest settlement Court holds the door open for bad faith claims against sureties possible from the State.” Further, emails demonstrated negotiations between GAIC and the State were “genuinely adversarial,” indicating GAIC’s good faith, and indeed, As both sureties from the State. In the second suit, some GAIC had secured a significantly higher and contractors of Bailey’s subcontractors sued Bailey and settlement from the State ($358,000) than are well aware, the GAIC for payments owed on the project. the $220,000 recommended by a mediator question of whether GAIC demanded that Bailey post collateral in prior negotiations (a recommendation the surety-principal consistent with the surety agreement, and rejected by the State). The Court also relationship can—or Bailey refused. Ultimately, GAIC settled the rejected Bailey’s assertion that GAIC should—be held to second suit as well. had concealed negotiations in bad faith, the same standards because it appeared that GAIC had only Audrey K. Kwak as the insurer- After settling these suits, GAIC filed suit engaged in negotiations with the State insured relationship against Bailey, seeking (1) indemnification for a week before telling Bailey of the is far from settled. While some have for failure to provide collateral for likely settlement. The Court did, however, declared outright that “suretyship is not the subcontractors’ claims, and (2) a note that a “surety’s concealment of insurance,” barring allegations of bad faith declaration that GAIC had the right to its settlement negotiations does raise by contractors against their sureties, the settle Bailey’s claims with the State. concerns.” argument in favor of allowing bad faith claims against sureties does have some Bailey’s defense to the declaratory Ultimately, Bailey’s significance may lie facial appeal. Indeed, sureties often act judgment claim was that GAIC had acted in its failure to resolve the debate as in a manner similar to insurers, including in bad faith in settling with the State, to whether sureties owe principals the settling claims on behalf of their principals because the amount was too low, because duties insurers owe their insureds. It (usually contractors) without consent. GAIC failed to advise Bailey that GAIC has preserved, for now, the ability of was engaged in direct negotiations with contractors to argue that sureties are not Late last year, in Great American Ins. the State, and because GAIC supposedly immune to claims of bad faith conduct in Co. [GAIC] v. E.L. Bailey & Co., the Sixth failed to adequately research Michigan law the settlement of affirmative claims. Circuit Court of Appeals was confronted on liquidated damages. Bailey argued that with a variant of this question—specifically, the lesser bad faith standard applicable Although a surety’s legitimate business the proper standard for “bad faith” in the to insurers in Michigan—“more than concerns often make swift and early settlement of claims by a surety on behalf negligence but less than ”—should settlement important to the surety, if of its principal—and declined to answer it apply to GAIC as surety. Under this this concern does not equally serve the definitively either way. standard, “good faith denials, offers of interests of its principal, Bailey implies that compromise or other honest errors” would a surety may have the duty to advocate The facts of Bailey not constitute bad faith, but because bad for a larger payout—even if it means In Bailey, the surety GAIC settled two faith “is a state of mind, there can be bad prolonging negotiations and/or litigation. underlying pieces of litigation on behalf of faith without actual dishonesty or fraud” Regardless, sureties would be wise to its principal, Bailey, arising from a contract including, for example, “if the insurer is keep principals fully advised of any and all between Bailey (as general contractor) and motivated by selfish purpose or by a desire settlement negotiations, especially if doing the State of Michigan for the construction to protect its own interests at the expense business within the Sixth Circuit’s reach. of a prison kitchen. In one suit, Bailey of its insured’s interest.” Contractors would be equally wise to remind their sureties of these obligations. and the State sued each other for breach The Sixth Circuit’s decision of contract for delays on the project. GAIC ultimately settled the matter—in After considering Bailey’s arguments, the Audrey K. Kwak can be reached at negotiations that excluded Bailey—with the Court refused to take a definitive position [email protected] State, receiving a payment of $358,000 as to whether Michigan law would apply

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Eckert_ConstructionLaw_Spring2017.indd 6 4/10/17 8:03 AM CONSTRUCTION LAW REPORT

FERC requirements affecting electricity generation projects

Electricity generation and cogeneration projects (which are faced with a FERC has the authority to regulate: (1) the wholesale sales variety of state and of electricity in interstate commerce; (2) the merger or local regulatory requirements) ‘‘ acquisition of a FERC jurisdictional asset; and (3) the rates sometimes must of a Qualified Facility generation asset, pursuant to the Richard A. Drom also comply with a host of federal Public Utility Regulatory Policies Act. requirements established by the Federal Energy Regulatory Commission (FERC). For example, FERC has the authority ’’ to regulate: (1) the wholesale sales of electricity in interstate commerce; (2) the merger or acquisition of a FERC consume electricity from the grid, and of a new class of generating facilities that jurisdictional asset; and (3) the rates to participate in wholesale energy and would receive special rate and regulatory of a Qualified Facility generation asset, capacity markets. treatment. Generating facilities in this pursuant to the Public Utility Regulatory group are known as QFs, and they fall Policies Act (PURPA). There are significant Section 203(a) of the Federal Power into two categories: qualifying small penalties associated with failure to comply Act (FPA) prohibits a public utility from power production facilities and qualifying with FERC’s requirements. selling, leasing or otherwise disposing cogeneration facilities. The owner of a of facilities subject to the jurisdiction of QF, however, must comply with FERC FERC does not have the authority to the FERC, or any part thereof of a value requirements, including, for example, approve or to regulate the physical in excess of $10 million (that is used for submitting a Self-Certification utilizing construction of electricity generation interstate wholesale sales over which FERC’s Form 556, prior to commencing facilities. FERC also has limited authority to FERC has jurisdiction for ratemaking operations. regulate generation facilities that are not purposes), unless the public utility first connected to the wholesale power grid; secures an order from FERC authorizing FERC also oversees compliance with the these are sometimes described as “behind- the disposition. Thus, the owners of approved mandatory reliability standards the-meter” generation facilities because jurisdictional facilities may be required by the users, owners and operators all electricity that is produced is used to obtain FERC’s consent prior to the of the bulk power system. This could, where the generation facility is located, transfer of such facilities through a merger for example, require that an electricity and the electricity is not metered into the or an acquisition, unless the owner can generation facility register with the nation’s wholesale electricity grid. demonstrate with substantial evidence Electric Reliability Organization (ERO) as a that the facility is used only for retail Generation Operator or Generator Owner. However, if a generation facility delivers sales. FERC is responsible for determining The ERO requires registration of: (1) power “in front of the meter” (e.g., whether a proposed merger is consistent individual generation units of 20 Megavolt provides power to third parties outside of with the public interest. In making its amperes (MVA) or greater that are directly the property limits of the facility), then determination, FERC examines a merger’s connected to the bulk electric system; (2) the generation facility may be subject effect on competition, rates and , generating plants with an aggregate rating to FERC’s jurisdiction because of the and the potential for cross-subsidization. of 75 MVA or greater; (3) any blackstart facility’s potential impact on the wholesale unit material to a restoration plan; or (4) power market, and on the reliability of An electricity generation facility that any generator, regardless of size, that is the electricity grid. In such an instance, also produces usable thermal energy material to the reliability of the bulk power the owner of the resource must register or is powered by renewable energy system. with the public utility that operates resources (e.g., solar, biomass, landfill the wholesale power grid, frequently a gas, etc.) may meet FERC requirements Richard A. Drom can be reached at Regional Transmission Organization (e.g., as a “Qualified Facility” or a “QF” under [email protected] PJM Interconnection, L.L.C.) or an electric the PURPA requirements. (QFs often use utility (e.g., Southern Company). These industrial or other waste heat to generate organizations have complex electricity electric energy, or use waste heat from tariffs that govern the ability of the electric-generating activities for other generation asset to deliver electricity, to beneficial purposes.) PURPA established

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Eckert_ConstructionLaw_Spring2017.indd 7 4/10/17 8:03 AM Waiver of consequential damages clauses: Are your damages direct or consequential?

In Jay Jala, LLC v. Rather, the touchstone must be what was were consequential damages because the DDG Construction, the contractually promised performance or contract obligated the general contractor Inc., the issue the benefit of the bargain. If the damages only to provide a storage container to facing the district represent the replacement of the promised store FF&E between delivery and eventual court was whether performance, then the damages are installation. The leasing of the actual FF&E certain damages direct; if the damages represent some was not something the owner expected to categories were secondary loss caused by the breach, get from the general contractor. waived by the owner then the damages are consequential. F. Timothy Grieco pursuant to a waiver Quoting the Third Circuit, the district court Conversely, the district court ruled that of consequential stated: “The difference between direct the owner’s damages relating to the damages provision in the parties’ contract. and consequential damages depends on project completion fee, extended utilities, Ruling that the owner had waived certain whether the damages represent (1) a loss and bank interest were not consequential damages and not others, the district in value of the other party’s performance, in nature and thus not barred by the court attempted to clarify the sometimes in which case the damages are direct, waiver clause. First, the district court uncertain distinction between direct and or (2) collateral losses following the interpreted the project completion fee as consequential damages. breach, in which case the damages are a reimbursement of overhead costs for consequential.” Based on this authority, the time period during which it served The owner, Jay Jala, had contracted the district court attempted its own as its own contractor after Defendant with DDG as general contractor for the articulation as follows: “So direct damages quit. According to the district court, the construction of a Motel 6. Various delays are the costs of a plaintiff getting what the owner was entitled to recover the cost occurred, and the owner terminated the defendant was supposed to give—the costs of substituted performance, and “if it general contractor for cause and finished of replacing the defendant’s performance. had hired a replacement contractor, the project utilizing its own forces. The Other costs that the plaintiff may not that company may well have charged hotel opened late several months after have incurred if the defendant had not an overhead fee just as Defendant did the termination of the general contractor breached, but that are not part of what (or it might be otherwise built into the and the contractual completion date. the plaintiff was supposed to get from the price).” Because the fee was part of the The owner sued the general contractor defendant, are consequential.” substituted performance, it was “direct” for various damages, including a project in nature. Second, because payment completion fee by owner; loss of income/ Applying this definition, the district court of utility costs during construction was profits; insurance; advertising expenses; ruled that the owner had waived any expressly part of the general contractor’s furniture, fixtures, and equipment (FF&E); damages for loss of income, insurance performance under the contract, the owner bank interest on the ; and costs, advertising expenses and FF&E was entitled to the “direct” damages of extended utilities. The parties’ contract rental expenses. First, the loss of income several months of additional utility bills included a mutual waiver of consequential to the owner from the motel opening incurred in carrying out the defendant’s damages, which provided that “the late came directly within the ambit of the scope of work. Finally, despite being a contractor and owner waive Claims against waiver clause and was actually withdrawn closer issue and contrary to some existing each other for consequential damages as an element of damages by the owner authority, the district court ruled that the arising out of or relating to this Contract… after the submission of the defendant’s owner’s claim for additional bank interest [and including] damages incurred by the summary judgment motion. Second, the on the construction loan represented direct Owner for rental expenses, for losses of owner’s claimed insurance costs—which damages and thus was not waived. “Here, use, income, profit, financing, business and related to insurance coverage for the Defendant agreed to build the motel using reputation, and for loss of management or operation of the motel during the period no more than a certain amount of time and employee productivity or of the services of of the delayed opening—were not tied to therefore, necessarily, a certain amount such persons.” any insurance the general contractor was of loan interest. Defendant used up all obligated to provide under the contract. the time and left the building unfinished, The contractor moved for summary Third, like the insurance costs, the so Plaintiff can recover as direct damages judgment, arguing that various of the advertising expenses —which were for a the costs of additional time necessary to owner’s damages were barred by the billboard and print media that the owner finish construction.” For the district court, provision waiving consequential damages. claimed were unnecessarily extended the taking out of the construction loan and In deciding the motion, the district or made wasteful by the missed grand paying additional interest on the loan was court first acknowledged that many opening date—“were not designed to deal an “integral cost of completing Defendant’s parties tend to focus on foreseeability with or make up for [the defendant’s] performance.” when evaluating the difference between breach or recover the lost value of direct and consequential damages. defendant’s performance.” Finally, the F. Timothy Grieco can be reached at But the district court emphasized that owner’s costs in renting FF&E for an [email protected] foreseeability should not be the focus. extra period of time due to the delay

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Quiet Room® Guide advises on standards to calculate and recognize noise levels for hotels

The level of noise KGI has developed a new Quiet Room® the preparation and selection of rooms in a hotel room is Guide to help , developers and for testing, the protocols for every a high source of construction professionals understand the measurement to ensure accuracy and complaints; thus, essential elements of acoustic insulation consistency, the calculation method used ensuring quiet is of of hotel rooms and the certification for the limiting values of the QR label (to great concern for requirements of the Quiet Room® label. account for service equipment noise levels the hotel industry The Guide explains how hotel rooms and size of the room), and suggested in the construction must be evaluated to determine their improvement measures to increase Shani R. Else and design of its existing noise level, necessary steps they sound insulation and reduce noise levels, rooms. The industry must take to improve their noise level, if as necessary. Hotels can retain KGI to must balance the and quiet of its necessary, and overall sound limitations conduct the tests as set forth in the Guide, clients with the ability to offer quality required to receive a QR label. or the architects and construction teams entertainment and to generate revenue. for the hotel can perform their own tests Hotels have developed various strategies In order to qualify for the QR label, a hotel and provide the results to KGI in order to to reduce noise, including increased room must meet certain standards in four qualify for a QR label or to simply ascertain soundproofing, sound masking, and areas: (1) the airborne sound insulation how the hotel stands in terms of noise grouping rooms together in designated between rooms, (2) the airborne sound levels. “quiet zones.” The Knowledge Center insulation between rooms and traffic areas, Sound Insulation (KGI) is a consortium of (3) the service equipment sound level, For more information, please visit acoustic and sound insulation specialists and (4) the reverberant sound period. https://www.quiethotelroom.org/en/ who have taken the next step—creating Each of these must be evaluated in order If you wish to receive a copy of the Quiet ® a Quiet Room® label to objectively qualify to evaluate a hotel room’s existing sound Room Guide, you may request it under and standardize noise level in individual level and determine if the room meets the the tab “Info for Professionals—Architects/ hotel rooms for its clients. QR label requirements. Developers.”

As reducing noise can be done most cost- The Guide sets forth the equipment needed Shani R. Else can be reached at effectively in the construction stages, to take the appropriate measurements, [email protected]

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Eckert_ConstructionLaw_Spring2017.indd 9 4/10/17 8:03 AM Advice for federal contractors during the new administration

The adage “may you companies, and has already taken steps, Trump may also face challenges from live in interesting such as withdrawing from the Trans-Pacific budget hawks within his party who may times” is thought Partnership, to effectuate that priority. see an opportunity to shrink the federal by some to be a That priority is likely to continue in the apparatus, and so may be reluctant to blessing and others coming months and may mean the Buy fund certain projects. Under applicable a curse. While American Act and similar will receive , contractors who accept long- every Presidential greater emphasis. term projects may be in a bind if a later transition brings decision is made to cease allocating funds Matthew J. Whipple change, the move Additionally, President Trump has to a project. Prudent contractors should from the Obama emphasized public-private partnerships, pay attention to planning and funding administration to the Trump administration with a likely increase in outsourcing to the details and to weigh any risks before adds an extra dose of intrigue. For federal private sector, as evidenced by the federal jumping into a project. contractors, the new administration brings hiring freeze issued just days after Trump’s both gainful opportunities and unique inauguration. The bottom line is that Be prepared for volatility challenges. It is impossible to know there will be opportunities for construction It is well known that Trump’s rise to the precisely what the next four years will contractors seeking to do business with the presidency did not follow a traditional path, bring, but this article attempts to offer federal government. and the volatility that marked his campaign some guidance for those seeking to not may translate into procurement policy. The challenge for any President is moving only to live but also to thrive in these new It seems reasonable to conclude that from promises to practice, and that is “interesting times.” the orders that have marked where contractors must be mindful. Trump the first weeks of his administration will may be a career developer, but he is not a There will be opportunities, continue. Additionally, those familiar with career politician, and the demands of the but be mindful of the details the @POTUS Twitter account know that he federal government are not the same as While on the campaign trail, President is willing to criticize not only SNL, but also those placed on the president of a closely Trump touted himself as a builder and contractors involved in projects he deems held family company, no matter how large. made clear that his administration will wasteful. One unfavorable tweet can thrust President Trump is likely used to making prioritize infrastructure improvements. a reluctant contractor into the spotlight. decisions on his terms, with tasks being Indeed, one of the first things he completed on his timetable. He has little mentioned in his election night victory President Trump has further shown he is experience with the slower, consensus- speech was a commitment to rebuild willing to roll back Obama-era policies, building, majority-rules system that roads, bridges, airports and schools. which can increase volatility for contractors underlies the federal government. As can Increasing IT infrastructure and security seeking to make long-term plans to be seen in some early executive orders, has also been a consistent theme. The maximize their competitiveness. Many the White House may be willing to act President has strongly emphasized the federal contractors were focused in 2015 quickly, but can be ahead of precise plans need for growing domestic businesses, and 2016 on compliance with Obama to implement its desires. even at the expense of multinational executive orders, including the Fair Pay

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and Safe Workplaces Order (also known as Contractor performance evaluations are Stick to the fundamentals the “Blacklisting” Order), as well as orders now, more than ever, a crucial aspect Finally, resist the urge to change just pertaining to LGBT protections and sick of government contracting, as the because the occupant of the Oval Office leave. Even before Trump took office, the evaluation process has received increased has. It can be tempting to have a short- “Blacklisting” Order was faced with legal standardization, and evaluations are term outlook, but businesses are not built challenges, and it may be that some or all routinely shared across agencies. A poor in two- and four-year cycles. Know what of the Obama-era orders will be rescinded performance review by one agency may changes may be required to comply with or modified. And this is to say nothing negatively impact a contractor’s bid with the contract or to submit a competitive of Obama-era accomplishments such as a second agency. That review will not be bid, but do not overhaul your business the Affordable Care Act, which impacts written by a new cabinet appointee; it model just because of a new President. businesses other than federal contractors, will be written by the same contracting but which requires contractors to “bake officer you have dealt with for months. Additionally, if you are faced with volatility, in” overhead costs in their bids. If the Maintaining good working relationships control what you can control. Cross ACA is repealed or significantly altered, with those who are the “boots on the T’s and dot I’s. Communicate clearly. contractors may be required to respond ground” remains essential. Be responsive to requests from the accordingly to keep bids competitive. contracting officer. Contemporaneously Further, even though executive orders may document contract negotiations, Those at the top may have grab headlines, most orders cannot, on modifications and problems. Create a changed, but your contracting their own, meaningfully alter procurement record of following the rules. Adhere officer likely has not practice. Implementing regulations, to notice procedures. When there is a which may take months or years to be Contractors should also remember that problem, seek help from sooner finalized, are necessary to truly alter even though there may be turnover at the rather than later. Follow the fundamentals the procurement landscape. And most highest levels of government, the majority of good business practice, and you will of that landscape—voluminous statutes, of federal employees have not changed. thrive regardless of who lives at 1600 the Federal Acquisition Regulations, Most are career workers who held positions Pennsylvania Ave. before the Trump Administration and will accompanying agency supplements—is after. This is likely true of your contracting unchanged, regardless of who sits at the Matthew J. Whipple can be reached at officer. top. Intimate knowledge of the policies and [email protected] procedures that affect your business is still the best way to ensure success for federal contractors.

D.C. Court of Appeals liberally construes notice requirements for delay claims

The District of The contractor sought payment for the necessary fact-finding and decision- Columbia Court of indirect costs incurred during the delay. making[.]” The Court of Appeals further Appeals, which is The owner of this project, the District of found that in these instances, the the equivalent of Columbia, argued that such claims were contractor should not be barred from a state supreme barred because the contractor did not making a claim because it relies on actual court for the district, submit its claim within 30 days of the costs rather than prospective cost data. recently adopted the written change order, or submit certified rule that the 30-day cost or pricing data. Both the Appeals The clear message is that delay claims Timothy D. Berkebile notice requirements Court and the Contract Appeals Board on construction projects in the District of for delay claims disagreed, instead adopting a flexible Columbia will generally not be decided should be liberally construed. In that case, stance on notice requirements for delay on technical readings of these notice a contractor was engaged to complete claims, except in cases where the public provisions, and the courts will acknowledge alterations and repairs to a solid waste owner is unaware of the circumstances the actual knowledge of the parties. transfer facility. The public owner directed surrounding the claim, causing prejudicing Timothy D. Berkebile can be reached at additional work due to unanticipated to the government. [email protected] problems. The additional work resulted in unexpected and unbudgeted changes that The Appeals Court explained that the caused a nine-month project delay, and government is not prejudiced by a late significantly increased the cost of the work. claim where the government has the necessary knowledge to “to perform

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Eckert_ConstructionLaw_Spring2017.indd 11 4/10/17 8:03 AM compiles its lists of outstanding attorneys Scott and Matthew also successfully Construction by conducting exhaustive peer-review fended off a bid protest before the U.S. surveys in which thousands of leading Government Accountability Office (GAO) confidentially evaluate their to an award of an $18 million contract professional peers. Inclusion in The Best to a firm client in the underground Law Group Lawyers in America 2017 is determined construction industry. The contract is for by more than 5.5 million detailed the construction of cutoff walls at a United evaluations of lawyers by other lawyers. States Army Corps of Engineers project. NEWS Scott Cessar and Matthew Whipple Audrey Kwak authored “Owner’s recently achieved a favorable result termination for convenience will not Scott D. Cessar and Christopher for a longtime firm client in the water preclude entitlement to liquidated R. Opalinski were selected by 2017 technology industry. The client was damages,” for the Winter 2017 issue of Pennsylvania Super Lawyers® as two of awarded $1.889 million, and claims by Dimensions Magazine, published by the the “Top 50 Attorneys in Pittsburgh.” a contractor of nearly $6 million were New Jersey Builders Association; and denied. The award brought to close five “Precise Contract Language Is the Key Scott Cessar, Neil O’Brien and Chris years of litigation, which arose from the to Avoiding Liquidated Damages,” in the Opalinski were selected for inclusion construction of a $150 million storm water March issue of News Record. in the 2017 edition of The Best Lawyers containment facility. This matter led to the in America® for their legal work in establishment of new in Michigan construction. Also, Scott was named on the use of the Eichleay formula to Litigation – Construction “ of calculate home office overhead. the Year” in Pittsburgh. Best Lawyers

Boston, MA Buffalo, NY Charleston, WV Harrisburg, PA Hartford, CT 617.342.6800 716.835.0240 304.720.5533 717.237.6000 860.249.7148 Newark, NJ Philadelphia, PA Pittsburgh, PA Princeton, NJ Providence, RI 973.855.4700 215.851.8400 412.566.6000 609.392.2100 401.272.1108 Richmond, VA Troy, MI Washington, DC White Plains, NY Wilmington, DE eckertseamans.com 804.788.7740 248.526.0571 202.659.6600 914.949.2909 302.574.7400

The information in this publication is for the purpose of informing and educating our clients about various aspects of the law and is not intended to be used as legal advice. If you have questions concerning any of the topics, please contact your Eckert Seamans attorney. Eckert Seamans Cherin & Mellott, LLC. All rights reserved © 2017.

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