Contracting parties often agree to settle disputes in a preselected court or arbitration proceeding, in a preselected location. Such agreements are called “forum-selection clauses” in contracts. The United States Supreme Court recently addressed a challenge to forum-selection clauses, in Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, et al., --- S. Ct. ----, 2013 WL 6231157 (U.S. Dec. 3, 2013). The Supreme Court showed an inclination to enforce forum selection clauses as the parties agreed, but the Court’s decision also recognized that such clauses may be attacked and avoided under some circumstances. For reasons discussed below, this is likely to be an evolving issue over the next few years. Background Atlantic Marine Construction Company, Inc. INSIDE THIS ISSUE Noteworthy Items: • SCH’s 2014 Construction Industry Update Conference • OSHA’s Proposed Silica Rule: Potentially Very Costly • SCH’s New Deskbook on Federal Social and Economic Policies for Federal Construction Projects 755 – Forum Selection Clauses – Still Enforceable Forum selection clauses are common in many construction contracts and subcontracts. While many states have laws addressing the enforcement of such clauses, the recent U.S. Supreme Court decision may signal that the agreed terms of the contract or subcontract will be entitled to deference. 756 – Prevailing Wage Laws & Debarment Errors related to compliance with prevailing wage laws and the documentation provided to an owner can result in debarment. 757 – ASBCA Considers a Fraud Based Defense While boards of contract appeals do not have the authority to decide government claims based on a contractor’s alleged fraudulent conduct, the ASBCA has concluded that it can decide whether the underlying contract is void due to a contractor’s fraudulent conduct. 758 – Ignoring RFP Formatting Requirements is Risky Many public agency RFPs contain explicit formatting requirements for proposals. Ignoring these can be risky. 759 – Florida and the Economic Loss Rule The Florida Supreme Court does not limit the application of this rule to “products liability” cases. However, the question of whether a completed building is a “product” remains. 760 – Remission of Liquidated Damages on a Federal Government Contract While the Government is technically the claimant when it holds liquidated damages on a contractor, a contractor should file a Contract Disputes Act claim to preserve all of its rights. 761 – Satisfying Notice Requirements When is less than literal compliance with contractual notice requirements sufficient? It may depend on the applicable law and the factual circumstances. 755 SAVE THE DATE Smith, Currie & hanCoCk annual ConStruCtion induStry update Seminar Navigating Multiple Fronts – Working on Federal, State, Local and Private Projects Mark your calendars and plan on attending Smith, Currie & Hancock’s 2014 Update for the Construction Industry to be held on February 6-7, 2014 at the Hyatt Regency Hotel in Atlanta. Hold these dates for our Atlanta conference. If you wish to receive further information on this important program, please contact Sandi Ivey, (404) 582-8092 or sivey@smithcurrie. com. In the meantime if there are topics you would like to see us address in the program, please contact Eric Nelson, (404) 582-8061 or firstname.lastname@example.org or any of the firm’s attorneys. 2 SCH Deskbook on Federal Social and Economic Policies Federal government construction contracts contain numerous social and economic program requirements. The complex and varied small business preferences and the Buy American Act/domestic product preferences are two primary programs. In an effort to assist all contractors (large or small), the AGC of America requested Smith Currie to develop a detailed guide for construction contractors outlining the various socio-economic programs for federal construction projects and federally assisted projects such as FHWA funded projects. In November 2013, this 300+ page deskbook was released, Federal Socio Economic Policies, A Practical Guide for Construction Contractors. This publication is available in either print version or as an e-book from the AGC of America’s bookstore. In addition, the AGC has provided a 10% discount from its standard pricing (AGC members - $45.00) (non-member - $56.25) for recipients of this newsletter. The following are the links to order this publication: Hard copy: http://store.agc.org/New-Products/New-Products/5078 ePub: http://store.agc.org/ePubs/ePubs/5078EB To obtain the 10% discount, enter Discount Code: Socio-Economic If there are questions about this new publication, please feel free to contact either Tom Kelleher, e-mail: email@example.com, telephone: (404) 582-8016 or Eric Nelson, e-mail: elnelson@ smithcurrie.com, telephone: (404) 582-8061. OSHA’S Proposed Silica Rule: Potentially Very Costly On September 12, 2013 OSHA issued its draft of a new rule to limit silica exposure in the construction industry. (78 Fed. Reg. 56274- 56504). If adopted in its present form, this 230 page draft regulation may well have significant and costly compliance obligations for all construction contractors. Some of the key provisions in the draft regulation are: 1. A new proposed permissible exposure limit (PEL) – 50 ug/m3 (milligrams per cubic meter) per 8 hour day. This limit is 1/5 th of the current PEL for silica. 2. Monitoring requirements if PEL is at 25 ug/ m3 or more. 3. Required medical exams with chest x-rays every three years for workers exposed to the new PEL for 30 days or more per year. 4. 30-year record retention obligation is mandated. 5. Depending on construction activities, the proposed rule requires engineering controls and work practices for: • Wet operations • Respirators for all exposed workers • Silica dust clean-up with HEPA vacuums or wet methods OSHA has extended the comment period to January 27, 2014. Contractors should consider working with their trade associations to develop comprehensive and specific comments to this potentially costly rule. If there are questions regarding this new proposed rule, feel free to contact Tom Kelleher at firstname.lastname@example.org. (“Atlantic Marine”), a Virginia corporation, was awarded a contract by the United States Army Corps of Engineers to construct a child development center at Fort Hood in Killeen, Texas. Atlantic Marine subcontracted some of the work to J-Crew Management, Inc. (“J-Crew”), a Texas corporation. The subcontract included a forumselection clause, stating that all disputes would be litigated in Virginia. When a payment dispute arose, J-Crew filed a lawsuit in a federal district court in Texas. J-Crew’s originally filed complaint included a claim brought pursuant to the Miller Act, 40 U.S.C. §§ 3131-3134, which specifies venue for lawsuits. However, J-Crew voluntarily dismissed the Miller Act claim, leaving this as an ordinary breach-of-contract case in federal court. Atlantic Marine argued that venue in Texas was “wrong” and “improper”, because the subcontract’s forum-selection clause required the suit to be brought in Virginia. Atlantic Marine sought to have the Texas suit dismissed or transferred to Virginia. The Texas federal district court denied both motions and left the suit pending in Texas, based in large part on the convenience and availability of witnesses in Texas. The court held that Atlantic Marine had not demonstrated that a transfer of this case to Virginia would be in the interest of justice or increase the convenience to the parties and their witnesses, despite the fact that this is what the parties had agreed. The United States Court of Appeals for the Fifth Circuit (which covers Texas) affirmed. The court of appeals held that, although a contracted-for choice of forum is a significant factor, it is not controlling, and “institutional concerns” such as availability of witnesses cannot be contracted away by private parties. Circuit Judge Haynes 3 wrote a separate, concurring opinion, noting that he was compelled to agree with the court’s judgment to affirm the district court’s decision, due to “the very high standards for mandamus review coupled with the majority opinion’s approach,” but he concluded that the district court had erred because “[a] forum-selection clause that was negotiated and agreed to by sophisticated parties and is not challenged on fraud, unreasonableness, or anything similar should be given effect.” Atlantic Marine—the party seeking to enforce the forum-selection clause—sought to have the United States Supreme Court hear the case, and the Court agreed to do so. The Supreme Court’s Decision The United States Supreme Court found that, while “plaintiffs are ordinarily allowed to select whatever forum they consider most advantageous . . . when a plaintiff agrees by contract to bring suit only in a specified forum—presumably in exchange for other binding promises by the defendant—the plaintiff has effectively exercised its ‘venue privilege’ before a dispute arises.” The Court held that the district court should not consider the parties’ private-interests (e.g., availability of witnesses) in determining whether to enforce a forum-selection clause. “When parties agree to a forum-selection clause, they waive the right to challenge the preselected forum as inconvenient or less convenient for themselves or their witnesses, or for their pursuit of the litigation.” Two aspects of the Court’s decision are significant. First, recall that the trial court denied the request to dismiss or transfer the case because the party seeking to enforce the forum-selection clause had not demonstrated that there were valid reasons to enforce the clause. The Supreme Court reversed the analysis, holding that the party seeking to avoid enforcement of the forumselection clause—often the plaintiff, who has selected a different forum—has the burden of showing “institutional concerns” sufficient to ignore the parties’ agreement. This decision emphasizes the deference federal courts will give to the parties’ contractual freedom. A party seeking to challenge a valid forum-selection clause for which it has bargained must show a compelling reason why the agreement should not be enforced. Second, the Supreme Court did not outright say that a forum-selection clause will always be enforced as written. Rather, the Court remanded the case to allow the lower courts to decide whether there are any public-interest factors that would warrant non-enforcement of the forumselection clause, thereby leaving it to the lower courts to decide just what public interests may successfully defeat the forum-selection clause. This is significant because the Court did not establish any objective or “bright line” test to the enforceability of forum-selection clauses. Sending the case back to the lower courts to develop the important factors almost assures us that further appellate litigation on this topic is coming, as trial courts struggle to articulate the factors and courts of appeal weigh in to agree or reject what the lower courts have done. It should be noted that the Supreme Court’s decision addresses the enforceability of forum-selection clauses as a matter of contract in general. Some of the amicus curiae (“friend of the court”) briefs filed with the Court, however, sought to distinguish construction contracts from other contracts in general. In discussing public-interest factors that may be relevant in construction disputes, these briefs point to the many states (including both Texas and Virginia) with laws that either void or make voidable forum-selection clauses that require construction disputes to be litigated in a state other than the state where the construction project is located. But the Supreme Court did not address this or any other potential public-interest factor, leaving that analysis to the lower courts. It will be up to the lower courts to decide what weight, if any, to give to legislative policy concerns underlying these state laws. The Supreme Court also did not address whether a Miller Act claim would change the court’s analysis when ruling on a motion to transfer. Recall that J-Crew’s complaint initially included a Miller Act claim, which J-Crew voluntarily dismissed. The only discussion regarding the Miller Act came from Circuit Judge Haynes’ concurring opinion, which noted that the United States Court of Appeals for the Fifth Circuit “has found that forum-selection clauses may trump even seemingly mandatory venue statutes.” Judge Haynes noted that while “Congress provided that any action under the Miller Act, 40 U.S.C. §§ 3131-3134 ‘must be brought . . . in the United States District Court for any district in which the contract was performed and executed,’” the Fifth Circuit’s decision in In re Fireman’s Fund Ins. Cos., 588 F.2d 93 (5th Cir.1979), held that this provision in the Miller Act “‘is not jurisdictional but only a venue provision . . . [which] may be varied by contract unless under the circumstances the agreement is unreasonable.’” While not binding legal precedent, Judge Haynes’s concurring opinion suggests that, even when analyzing a Miller Act claim, some lower federal courts may be inclined to defer to the contractual forumselection clause. The Supreme Court’s decision makes it clear that the plaintiff carries a heavy burden of showing that public-interest factors “overwhelmingly disfavor a transfer” as the Court noted “those factors will rarely defeat a transfer motion.” Given what appears to be a high standard set by the Supreme Court for parties challenging a contractual forum-selection clause, the decision limits uncertainty by preventing parties from ignoring a clause to which they agreed. Thus, the law now is that, while forum-selection clauses will not always be enforced as written, they will be given great weight when a contracting party sues in another forum. On the other hand, the decision establishes that there may be circumstances in which deference to private agreements will give way to other circumstances. Stand by for further developments on this issue. James K. Bidgood, Jr. (404)582-8031 email@example.com Member of the State Bar of Georgia Vianney Lopez (404)582-8132 firstname.lastname@example.org Member of the State Bar of New York Prevailing Wage Laws & Debarment Background One of the greatest risks contractors working on public works projects face is that of debarment. If a contractor is either permanently or even temporarily debarred from contracting with local, state or federal governmental agencies, it can very seriously impact if not completely cripple that contractor’s business depending on how much government contracting the contractor typically does. That is why it is imperative public works contractors work diligently to eliminate the risk of debarment. One way to mitigate the risk of debarment is to strictly comply with any and all applicable prevailing wage laws. For most public works contractors, prevailing wage laws apply to their projects because the federal government and 32 states currently have prevailing wage laws such as the Davis-Bacon Act, which is applicable to federal government construction projects and federally assisted projects. Those laws typically require that contractors pay their laborers and mechanics at least the specified wage per hour as set forth in the contract as “the prevailing wage rates” and then certify to the relevant owner governmental agency that they and their subcontractors have paid the required wages. Recently, the California courts issued a decision that further defined what type of prevailing wage law violation will result in debarment. See Ogundare v. Dep’t of Ind. Rel’s, Div. of Labor Stds. Enforcement, 214 Cal. App. 4 th Supp. 822 (2013) 4 756 Allegations of Intent to Defraud – Payroll Discrepancies The issue in Ogundare was whether or not the contractor intended to defraud the state of California when it submitted certified payroll records certifying hours paid to various employees that were different than what the employees testified to at the debarment proceeding. The state Division of Labor Standards Enforcement (“DSLE”) had debarred the contractor but the trial court reversed the decision. The DSLE appealed the trial court’s reversal and won the appeal because the appellate court concluded that there was substantial evidence to support the administrative finding of intent to defraud. Simply put, the evidence cited by the appellate court was as follows. The contractor had submitted certified payroll records showing that it had paid one employee the prevailing wage of $36.10 per hour for 25 hours of work in one week. The records also showed that two other employees were not eligible to receive overtime wages. The contractor’s certified payroll records were not signed but instead the owner’s name was type written on the signature line. One employee testified at the debarment proceeding that he had actually worked 61 hours that week and had been paid $15.00 per hour. The employee’s paycheck stub indicated that he was paid $915.00 for 61 hours that same week which equates to $15.00 per hour. The other two employees testified that they had worked sufficient weekly hours to be paid overtime prevailing wages but had not been paid such wages and that their total number of hours had been split between them on the certified payroll records. In order for the DSLE’s debarment decision to stand, the DSLE had to produce “substantial evidence” that the contractor had intended to defraud the state. The legal test used to determine whether the record contained “substantial evidence” has two prongs: (1) “evidence of ‘ponderable legal significance . . . reasonable in nature, credible, and of solid value’”; and (2) “relevant evidence that a reasonable mind might accept as adequate to support a conclusion.” The contractor argued the DSLE had not produced substantial evidence to support the debarment because the one employee had not kept a record of the hours he worked in any particular week, the discrepancy between the records and the testimony did not amount to a showing of an intent to defraud, the contracting owner had not actually signed the payroll record, and that any errors were the result of clerical mistakes caused by inexperienced payroll employees. In response, the DSLE argued that the dis- 5 757 crepancy between the payroll records and the one employee’s testimony did in fact evidence an intent to defraud even if he had not kept track of his hours because the paycheck itself corroborated his testimony. The court agreed stating that “[n]o satisfactory explanation was ever provided by [the contractor] for [the] glaring discrepancy between [the] actual paycheck reflecting $15 per hour and the contrary representation by [the contractor] to the DSLE.” The court came to this conclusion because the original debarment decision “rejected [the contractor’s] explanation as inherently implausible in light of [the contractor’s] extensive experience in public contracts and knowledge of recordkeeping that is required.” The appellate court then issued an order directing the trial court to reinstate the DSLE’s one-year debarment. Even though the debarment was only for one year, it may well have much longer lasting effects on the contractor’s ability to obtain any future government contracts because most agencies’ requests for proposals require that a bidder disclose whether they have ever been disbarred, as well as why it occurred. Points to Consider This case illustrates that a compliance failure with a prevailing wage law may have adverse consequences that are far more serious than merely making economic restitution of back wages. Public agencies now seem more willing than ever to exercise the debarment sanction. There are a number of lessons to be learned from this decision that, if heeded, will reduce if not eliminate the risk for this type of compliance problem and the risk of debarment. It is imperative that each member of a contractor’s staff who works in payroll is oriented to the requirements of relevant prevailing wage laws that apply to the contractor’s various public works projects. That training should be updated at least once a year so that any changes in those wage laws can be highlighted for the relevant staff members. The contractor should also implement accounting procedures and protocols that will ensure strict compliance with prevailing wage laws during the accounting and payroll processes. Lastly, a contractor should diligently self-audit its accounting and payroll activities to ensure that the proper procedures and protocols are being followed and implemented. If these steps are taken, the contractor can more readily demonstrate that it is complying with the applicable prevailing wage laws. Jay R. Houghton 415-249-0869 email@example.com Member of the State Bar of California ASBCA Considers Fraud Based Defense Under the Contract Disputes Act of 1978, 41 U.S.C. § 7101, et seq., the ASBCA’s jurisdiction is limited to deciding appeals from a contracting officer’s decision “relative to a contract made by [the relevant] department or agency.” Traditionally, the boards of contract appeals have not addressed affirmative monetary claims by the government based upon allegations that the contractor has committed fraud. But in International Oil Trading Company, ASBCA Nos. 57491, et al., 13-1 BCA ¶ 35,393, the ASBCA asserted its jurisdiction over the government’s affirmative defense that the underlying contract was void ab initio because the contract was tainted by a contractor’s fraudulent or illegal conduct. If a contract is deemed void ab initio, the government’s position is that it has no obligation to pay the contractor even if the scope of work was fully performed. If sustained, this works as a total forfeiture. Factual Background In May 2007, the government awarded International Oil Trading Company (“IOTC”) a contract for the indefinite delivery of fuel to four military installations in Iraq on an as-ordered basis. The fuel was loaded in Aqaba, Jordan, where IOTC prepared a “Fuel Delivery and Acceptance Form” for each tank truck load of fuel, including information such as the weight of the fuel delivery. Shortly after the start of deliveries, the government personnel at the discharge sites in Iraq reported that the gallons of fuel received were less than the loaded gallons that had been indicated on the Fuel Delivery and Acceptance Form. The contracting officer instructed IOTC to adjust its invoice based on the reports of fuel received. Subsequently, in December 2007, IOTC requested payment for the difference between the invoiced quantities of fuel and the reported quantities received. When the government did not make the interim payment, IOTC filed a claim with the contracting officer. The contracting officer denied payment to IOTC and IOTC appealed to the ASBCA. Once at the ASBCA, IOTC moved for partial summary judgment, which the ASBCA granted in part and denied in part. Following the ASBCA’s decision on IOTC’s summary judgment motion, the government filed an amended answer, alleging IOTC’s fraud and bribery in connection with obtaining the two contracts at issue provided an affirmative defense against IOTC’s payment claim. Specifically, the government alleged that IOTC principals bribed the head of the General Intelligence Directorate of Jordan with $9 million to ensure that IOTC would have no competition for the contracts. The 6 government of Jordan controlled transit permits, which were needed to move the fuel through Jordan to Iraq. The government argued that IOTC could not recover from it on the contracts because the contracts were void ab initio (from the beginning). IOTC moved to strike the defense. The ASBCA’s Decision IOTC argued that the ASBCA lacked jurisdiction to consider the government’s defense because it would require a determination that IOTC violated the Foreign Corrupt Practices Act (“FCPA”), 15 U.S.C.A. § 78dd-1, and exercise of such jurisdiction by the ASBCA would be precluded due to the language in sections 7103(a) (5) and 7103(c)(1) of the CDA. The ASBCA held that those sections of the CDA did not apply to the government’s affirmative defense. Section 7103(a)(5) of the CDA provides that “[t]he authority of this subsection . . . does not extend to a claim or dispute for penalties or forfeitures prescribed by statute or regulation that another Federal agency is specifically authorized to administer, settle, or determine.” The ASBCA rejected IOTC’s argument, focusing on contracting officer’s denial of IOTC’s claims for additional compensation allegedly due under the contract. Thus, the ASBCA held that neither the contracting officer’s final decision nor the government’s defense “claims any penalty or forfeiture prescribed by statute or regulation that another Federal agency is specifically authorized to administer, settle, or determine. There is no penalty or forfeiture imposed by a finding that a contract never came into existence.” The ASBCA also rejected IOTC’s argument that Section 7103(c)(l) of the CDA deprived it of jurisdiction over the government’s defense, holding that neither the contracting officer’s final decision nor the government’s defense “compromise, pay, or otherwise adjust any IOTC claim involving fraud. They deny the IOTC claims entirely.” Second, the ASBCA asserted that it “is not an ‘agency head,’ as defined by the CDA.” Third, the ASBCA held that Section 7103(c)(l) was inapplicable because the ASBCA’s “authority to decide appeals is statutory and not derived by a delegation of authority from an agency head.” IOTC also argued that the only basis for the government’s defense for taint of bribery and fraud in the formation of the contracts was a violation of the FCPA and that the U.S. Department of Justice had exclusive statutory authority over FCPA claims. The ASBCA disagreed, finding that “[a] government contract is void ab initio under the common law for taint of fraud, bribery or other misconduct compromising the integrity of the Federal contracting process, without a criminal conviction.” In exercising jurisdiction over the government’s fraud defense in the case at hand, the ASBCA discussed Environmental Safety Consultants, Inc., ASBCA No. 53485, 02-2 BCA ¶ 31,904, in which the ASBCA held that it had jurisdiction over the government’s affirmative defense of fraud in the contractor’s claim for additional costs of performance because the allegation of fraud was “not a Government claim asserted as the Government’s own right, but a response which raises a defense to [the contractor’s] claim for a quantum recovery” and that this defense was relevant to the merits of the contractor’s claim as it placed in issue the amount of out-of-pocket expenses and legal obligations that could constitute recoverable costs. Moreover, the ASBCA distinguished the case at hand from its decision in Environmental Systems, Inc., ASBCA No. 53283, 03-1 BCA ¶ 32, 167, in which the ASBCA held that it lacked jurisdiction over allegations that closely tracked the provisions of the False Claims Act, 31 U.S.C. 3729. The ASBCA noted, however, that in that same case it exercised jurisdiction over the government’s allegation that the contractor’s submission of false progress payment requests was a material breach of the contract thereby justifying default termination. With this precedent in mind, the ASBCA concluded that it could exercise jurisdiction over the government’s affirmative defense because the defense did not track the provisions of the FCPA or any other criminal statute, nor did it claim any damages, forfeiture or penalties from IOTC. Rather, that the government’s defense alleged only that the contracts under which IOTC was claiming money damages from the government were void ab initio for taint of fraud and bribery by IOTC in obtaining and retaining the contracts. Analyzing the record evidence, the ASBCA found a causal link between the alleged bribery and the formation of the contract such that the contract was tainted from the beginning and therefore was void. Because the underlying claims were IOTC’s claims to compensation under those contracts, the validity of the contracts was relevant to the merits of IOTC’s claims. Earlier 2013 Decision and Implications In an earlier 2013 decision, Servicious y Obras Isetan S.L., ASBCA No. 57584, 13-1 BCA ¶ 35,279, the board also denied the contractor’s claim after concluding that the contractor’s clear misrepresentation of fact in its proposal regarding its qualifications rendered the contract void ab initio. Application of this affirmative defense to a contractor’s representations in its proposal warrants that every contractor consider the significance of these decisions by the ASBCA. It is unlikely that government agency lawyers will miss their significance when defending against a contractor’s claim. As a consequence, agency lawyers are not likely to carefully examine the complete record of performance and initial proposals to find a basis to assert this defense even if it is well after the initial complaint and answer have been filed. The government’s fraud defense in this case was just that—a defense to the contractor’s underlying payment claim. In order to rule on the underlying claim, the ASBCA must determine the validity of the contract, considering whether it was tainted by illegal conduct. Thus, while this case may appear to expand the ASBCA’s statutory jurisdiction, the case emphasizes the ASBCA’s role as fact finder and suggests that fraud based defenses such as proposal misrepresentations, etc., will be addressed in the context of the ASBCA’s resolution of the underlying contract claims before it. Vianney Lopez 404-582-8132 firstname.lastname@example.org Member of the State Bar of New York Ignoring RFP Formatting Requirements Is Risky Specific RFP Requirement Disregarded With the advance of technology and the importance of delivering information to the government by electronic means using that technology, a contractor must stay aware of the specific requirements set forth in Requests for Proposals (“RFPs”) for the submission of proposals and ensure that its submissions to the government comply with those requirements. If the requirements in the RFP appear unnecessary, it can be very risky to simply elect to make a submission in an alternative format. In a recent bid protest decision, Herman Construction Group, Inc., B-408018.2, 2013 CPD ¶ 139, a contractor learned that lesson the hard way. Herman Construction submitted a proposal in response to an RFP for infrastructure maintenance and repair services. The RFP required submission of a detailed price proposal. The price proposal was to be submitted in an electronic format using the XLS format for spreadsheet files at minimum using the version of XLS formatting utilized by Microsoft Excel 2003. As explained by the Department of Homeland Security, the requirement for submission in XLS format was to “ensure submission of information essential to the understanding and comprehensive evaluation of the offerors’ proposals.” The spreadsheet files were encoded by the agency with formulas allowing for fast computation of work category and total price for each offeror. Herman Construction failed to submit its price proposal using the XLS format specified in the 7 758 RFP. Instead, it submitted its price proposal as a portable document format file (“PDF”) and in paper form. Although Herman Construction included formulas with its submission of its price proposal, the agency rejected the proposal on the basis that it failed to comply with the formatting requirements included in the RFP. The Government Accountability Office (“GAO”) denied Herman Construction’s protest of the rejection of its proposal by the agency. The basis for the denial was clear: GAO determined that Herman Construction failed to show that it had submitted its proposal in the format required by the solicitation. Specifically, it ruled that the agency is not required to adapt its evaluation to make up for deficiencies in a submission. Furthermore, the agency is under no obligation to reformat a proposal that is not compliant with the RFP. Comment For contractors pursuing federal contracts, the moral of Herman Construction is clear: Read and take all steps necessary to comply with the formatting requirements for proposals, and all other requirements of an RFP, before submitting it to the government. If an RFP does not give options for the format of a proposal, a contractor should not be making independent decisions on the best way to present the information requested. This is an area where the government may not have any obligation to be flexible, if the agency provides any justification for its decision. Creativity on the part of a contractor, despite it being a good idea, may be the reason that a contractor is excluded from the competition for a contract. If the contractor believes that the submission requirements of the RFP are overly restrictive or that there is an alternative (better) method for submitting its proposal, the contractor should take the following actions: • Contact the agency prior to submitting the proposal and explain how it wishes to submit the proposal; • Provide a rationale or justification for the request; and • Request a specific response by a date certain. If the agency fails to reply to a request for an alternative submission format, it is very risky to conclude that this silence constitutes agreement. If the agency rejects the proposed alternative submission format, that may be grounds for a protest. However, any such protest must be submitted prior to the due date for submission of proposals. Stephen J. Kelleher (202) 452-2140 email@example.com Member of the State Bars of Georgia, Virginia, and the District of Columbia Bar 8 759 Florida and the Economic Loss Rule The economic loss rule is a judicially created rule which prohibits certain tort actions when they are based solely on economic losses. Traditionally, this rule operates as a shield to a defendant who provides a defective product. The rule requires a plaintiff to plead something in addition to a purely economic loss for their claim to stand. The Florida Supreme Court‘s recent decision in Tiara Condominium Association v. Marsh & McLennan Companies, 110 So. 3d 399 (Fla. 2013) may significantly affect the future application of the economic loss rule in Florida. An economic loss occurs when there is no personal injury or damage to products or property other than the defective product. A claim alleging damages based entirely on the repair and replacement costs of the product constitutes purely economic damages. Assume that a construction worker was hammering a nail. Upon striking the nail the hammer breaks. The construction worker cannot bring a tort action against the hammer manufacturer for the replacement cost of the hammer. Now assume that the hammer broke and shattered a glass table. The economic loss rule still bars recovery of the cost of the hammer but does not apply to the damaged glass table because that injury is not purely economic. History of the Economic Loss Rule The exact origin of the economic loss rule is unknown. The rule first appeared in cases involving products liability but was subsequently expanded. Florida law first expanded the concept into actions based on services contracts. AFM Corp. v. Southern Bell Telephone and Telegraph, 515 So. 2d 180 (Fla. 1987) held that a service provider can rely on the economic loss rule where the claim does not allege any personal injury or property damage. This case also extended the products liability shield to tort cases between parties who already have a contract. A contractual breach without an independent tort is barred by the economic loss rule if only economic losses exist. The Florida Supreme Court in Casa Clara Condominium Ass’n v. Charley Toppino and Sons, 620 So. 2d 1244 (Fla. 1993) blurred the line between the application of the economic loss rule in contract law and products liability law. Casa Clara held that a material supplier is not liable to a homeowner in tort where only economic losses are alleged. The court viewed the “product” supplied by the contractor to the home owner as the home itself. Defective concrete which caused no other injury was deemed solely an economic loss that is not recoverable in tort. The court also stated that contract principles were a more adequate remedy than tort principles. This ambiguity blurred the line between the economic loss rule in products liability cases and in contract cases. The economic loss rules application to breach of contract cases was solidified by the Florida Supreme Court in Indemnity Insurance Co. of North America v. American Aviation, 891 So. 2d 532 (Fla. 2004). This case held that a plaintiff cannot sue a defendant in tort where there is a contract and it suffered only economic losses. Yet some cases have limited the application of the economic loss rule. The court limited the economic loss shield in Moransais v. Heathman, 744 So. 2d 973 (Fla. 1999). That decision rejected application of the economic loss rule in cases of professional negligence. Moransias holds that a professional can be sued for professional negligence even when the only damages alleged are economic. The Great Tiara The Florida Supreme Court changed the economic loss rule landscape in the Tiara decision. Tiara involves a condominium association who purchased insurance through an insurance broker. The condominium association experienced significant damages during two separate hurricanes and filed a claim with the insurance policy secured by the broker. When selling the policy, the insurance broker assured the association that the policy limits were per occurrence and they were entitled to $100 million. The association relied on this information to conduct repairs only later to discover that the coverage was not per occurrence. The association brought a negligence claim against the broker for the cost of repairs over their $50 million aggregate policy limit. The trial court ruled that the economic loss rule barred the negligence claims and the association appealed. The court in Tiara expressly stated that the economic loss rule only applies to products liability cases. The Tiara court began by reviewing the origins and development of the economic loss rule in Florida. The court then proceeded to highlight the general unintended expansion of the rule into the arena of contracts. The opinion repeatedly expresses the court’s desire to limit the economic loss rule in Florida cases to its origins in products liability cases. Tiara - From Here to Eternity The effect that Tiara will have on the economic loss rule for construction cases in Florida is uncertain. It appears that Tiara might not change as much of the existing precedent as one would imagine. An example is the effect of Tiara on a professional negligence action. Moransais ex-9 760 emplifies the interaction of professional liability and the economic loss rule. Moransais held that professionals owe a duty to a client independent of their contractual relationship. It is that independent duty that removes a professional’s liability from the scope of the economic loss rule. The holdings of Tiara and Moransais appear to be congruent in that neither applies the economic loss rule in purely a contractual context. The court in Tiara faced with the specific question as to whether the economic loss rule applies to bar a tort claim based solely on the fact that the parties have a contract with one another and no personal injury occurred. The Tiara decision unquestionably holds that the mere existence of a contract can no longer solely trigger the economic loss rule. The court went further to state that the economic loss rule only applies in products liability cases. The exact effect of the broad language in Tiara narrowing the economic loss rule to product liability cases is unknown as it relates to construction cases. How courts will interpret Tiara remains to be seen because the holding of Casa Clara appears untouched. The court in Casa Clara relied on the assumption that the “product” purchased by a homeowner is the home itself and not its individual components. This assumption renders Casa Clara a standard product liability case – at least when the homeowner is the plaintiff bringing suit against a contractor. Tiara appears to solidify the holding in Casa Clara as an application of the economic loss rule in construction cases as a “product liability” case. The more practical issue of what constitutes a “product” under the economic loss rule remains uncertain. Nicholas Ceavers 954-769-5326 firstname.lastname@example.org Member of the Florida Bar Remission of Liquidated Damages on a Federal Government Contract In K-Con Building Systems, Inc. v. United States, 107 Fed. Cl. 571 (Fed. Cl. 2012), the Court of Federal Claims required compliance with the Contract Disputes Act (CDA) requirements for a valid claim where a contractor sought remission of liquidated damages. However, the court relaxed the notice requirements for a CDA claim by finding that the contractor’s previously submitted formal requests for time extensions provided adequate notice of the contractor’s basis for its claim. Specifically, the court noted it would consider contract correspondence, taken together, as long as it clearly requested relief for time and/or money. Background of the Case K-Con Building Systems, Inc. (“K-Con”) entered into a contract with the U.S. Coast Guard (“Coast Guard”) for the design and construction of a prefabricated supply warehouse in Florida. The contract included a liquidated damages clause setting a rate of $564 per day after the contract completion date. Right from the beginning, the project ran into significant delays, many of which were apparently attributable to the Coast Guard or were otherwise excusable. To make matters worse, the project was hit by three hurricanes during the summer of 2004 causing additional delays. Throughout its performance, K-Con submitted requests for extensions of time and additional compensation for the non-weather related delays. The Coast Guard denied all but one request related to these delays, but eventually extended the contract completion date to account for the hurricane-caused delays. When it finally accepted the building, the Coast Guard assessed 90 days of liquidated damages, and accordingly reduced the contract price by $50,760. K-Con submitted a claim letter, alleging that the government had wrongfully withheld the money as liquidated damages and sought remission of those damages. The claim stated that liquidated damages should not have been withheld because K-Con “was not the sole cause of any alleged delays,” that “any alleged delays by [it were] concurrent with delays caused by the government,” and that “the government failed to issue extensions to the completion date as a result of changes to the contract by the government….” K-Con, however, did not specify which “alleged delays” the government was responsible for, or what the “changes” were for which the Coast Guard had failed to compensate the contractor with extra time. In response, the contracting officer denied the claim on the ground that K-Con failed to establish that it was not responsible for the delays. K-Con filed a complaint with the U.S. Court of Federal Claims shortly after. The Court’s Analysis In considering a claim for remission of liquidated damages, the court held that the first question that must be answered is whether the contractor actually asserted a claim. If so, then that claim must comply with the requirements for a valid claim under the CDA. Addressing the first question, the court noted that when the Coast Guard assessed liquidated damages on K-Con’s contract, it made a government claim against the contractor, which K-Con could have directly appealed to the Court of Federal Claims. However, since K-Con submitted the requests to form a basis for that claim. On the other hand, the court refused to “read together” other contract correspondence and documentation that merely mentioned delays to find a basis for parts of the claim. Only correspondence in which a contractor clearly “asserted entitlement to relief” would be considered together to give notice of the basis for a claim. For example, the court noted that earlier contract documentation that noted delays in K-Con’s performance along with the alleged causes, were not adequate to give the contracting officer notice of the basis of the claim. The contractor had the burden to give an adequate basis of the claim and the court refused to require the contracting officer to “examine every piece of paper generated by the contractor” during performance to discern the basis of the claim. Practical Takeaway Beyond outlining the process for submitting a claim for remission of liquidated damages, the court’s decision in K-Con Building Systems illustrates two important lessons. First, government contractors need to be aware that in order to request the remission of liquidated damages based on partial government responsibility, that request must comply with the requirements for a valid claim under the CDA. Failure to submit a valid CDA claim for remission of liquidated damages will preclude any recovery of CDA interest on the amount of the remitted liquidated damages eventually paid by the government. Second, contractors must ensure that they are preserving their claims both during performance and when drafting their claims. Not only should a contractor notify the government of delays and additional costs, but also request specific relief from the government for the additional time and/or money. When submitting a claim to the government, contractors should include as much detailed support as possible to fully inform the contracting officer of the basis for that claim. Jonathan R. Mayo (404) 582-8129 email@example.com Member of the State Bar of Georgia Satisfying Notice Requirements Any contractor considering submitting a bid for a lump sum contract to rebuild a military-grade runway in the tropics during the rainy season with unproven aggregate sources and inadequate preliminary engineering is advised to read this case first: Nippo Corp./International Bridge Corp. v. AMEC Earth & Environmental, Inc., 2012 U.S. Dist. Lexis 47232 (E.D. Pa. April 1, 2013). The subcontractor suffered $25 million in cost overruns on a $30 million contract. 10 761 claim letter to the contracting officer requesting a final decision, the court found that K-Con had asserted a claim against the Coast Guard. According to the court, when a contractor seeks remission of liquidated damages from the contracting officer, and alleges that the government is partially responsible for delays, this constitutes a “contractor claim” that must satisfy the requirements for a valid claim under the CDA. This distinction is significant as a contractor cannot recover any interest on the money withheld by the government as liquidated damages until the contractor has submitted a valid CDA claim. Next, the court considered whether the claim K-Con asserted was valid under the CDA. In order to submit a valid claim under the CDA and its regulations, the claim must be (1) in writing, (2) submitted to the contracting officer within six years of its accrual, and (3) include a request for monetary or other relief as a matter of right. Additionally, the court noted that the wording of the claim also must contain “a clear and unequivocal statement that gives the contracting officer adequate notice of the basis and amount of the claim.” (Emphasis added.) (If the monetary claim (remission of liquidated damages) by the contractor in this case had been in excess of $100,000, the contractor would have been required to certify the claim in accordance with the CDA before the submission would be considered as a “claim”. While acknowledging that K-Con met the other applicable CDA requirements, the government argued that K-Con’s claim failed to give the contracting officer adequate notice of the basis of KCon’s claim because it did not provide any support for its assertion. These assertions included that K-Con was not the only cause of the delays, that the delays were concurrent, and that the delays were due to changes in the contract by the government. The court explained that in order to satisfy the “adequate notice” requirement, the question is whether the contractor’s claim letter was “sufficiently detailed” to provide adequate notice to the contracting officer of the basis of the claim. Applying this analysis to K-Con’s claim, the court concluded that the claim letter did provide the contracting officer with adequate notice of “at least some of the basis of its claim.” While K-Con failed to specify the “alleged delays” for which the Coast Guard bore responsibility, and the “changes” that the Coast Guard failed to compensate with time extensions, it had submitted several formal requests for extensions of time to the contracting officer throughout contract performance. Additionally, the court considered the fact that the contracting officer’s reply to the demand letter indicated that she was “sufficiently cognizant” of the formal 11 However, the court’s analysis of contractual notice requirements will be valuable to all contractors, subcontractors and owners. The subcontract in this case had a fairly typical notice provision providing that the subcontractor would waive its claims unless it gave formal notice within 7 days of discovery of conditions giving rise to the claim. This is sometimes viewed as a forfeiture clause. The notice of claim(s) also had to specify the precise dollar value of the claim. The subcontractor in this litigation rarely satisfied these requirements but, as this court explained, did not necessarily forfeit its damages. Constructive Notice Sufficient The subcontract contained a choice of law provision, which provided that the subcontract would be interpreted pursuant to Nevada law. The subcontract also incorporated the substantive provisions under the Federal Acquisition Regulation, in particular the Changes clause. Consequently, the court reviewed both Nevada case law and federal common law interpreting notice requirements. In the court’s view, both bodies of law favored substantive compliance with notice clauses rather than literal adherence to the provisions of the subcontract terms. Concluding that the federal approach was consistent with Nevada’s approach, the court also looked to the federal common law for guidance. (Note: the law in other states varies and some states strictly uphold notice requirements.) This court explained that notice provisions are liberally construed under federal common law, with compliance determined by whether the notice given satisfies the purpose of the provision. The purpose is to provide notice of the conditions underlying the claim and an opportunity to investigate. Consequently, a court interpreting notice provisions under federal common law may allow otherwise untimely claims when the late notice has not prejudiced the other party. In addition, the court declined to enforce the requirement of stating the dollar value of the claim as that required “prognostication.” Despite the liberal interpretation, one example of inadequate notice pertained to the quality of the base course material under the existing runway. The material was not fast draining, which the subcontractor alleged led to rainwater ponding and paving delays. Although the poor quality of material was immediately apparent to the subcontractor upon handling it, the subcontractor did not give notice within seven days or contemporaneously with the work; it waited until months after the affected work was complete to mention these concerns in any context. This notice was provided too late for the owner to investigate or mitigate so the claim was denied. Notice is also inadequate when the owner is made aware of difficulties but is not held responsible for damages. The subcontractor believed that the prime contractor and owner’s concerns about paving during hard rains were unreasonable but became ambivalent about paving in rain out of fear that the work would be unreasonably rejected. The court characterized such delays as “voluntary” and, although the subcontractor had corresponded about the delays, it did not blame the prime contractor or declare it would seek delay damages. Again the purpose of the claim provision was not satisfied so the court did not find constructive notice was provided. In contrast, the court found constructive notice with respect to delays caused by the prime contractor’s failure to notify the subcontractor which paving work required remediation. The subcontractor, although not within 7 days of the prime contractor’s failure, clearly notified the prime contractor of its breach in letters expressing frustration with the prime contractor’s delays. Combined with the court’s findings that the prime contractor’s delays were in bad faith, this constituted sufficient constructive notice. The court also found constructive notice where the prime contractor had specifically directed extra work that was undisputedly outside of the subcontract scope of work. Constructive notice exists when clearly out-of-scope work is directed and the directing officer “knows the likely outcome.” Conclusion The subcontractor prevailed over significant weather and supply-chain challenges and completed construction, but did little to comply with notice requirements so it failed to preserve potentially valid claims worth millions. Understanding notice requirements and how they are enforced is necessary to be compensated for all of the work that is performed. Although the subcontractor may have been disappointed with this outcome, the owner or prime contractor is entitled to be informed of potential claims that they may have to pay. On the other side, the prime contractor may have been surprised that it did not win across the board. Under the law in many forums, an owner or prime contractor is not immunized from claims by a contractor’s or subcontractor’s failure to strictly comply with a stringent notice requirement. Therefore it is important for owners to act in good faith to fulfill their duties to contractors and to meaningfully investigate and mitigate possible claims, despite less than literal compliance with notice requirements.