This article was originally published in Government Construction (Volume 5, Issue 2 – Summer 2020), an ABA Division 13 Quarterly Newsletter. It is republished here with permission.

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

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

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

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

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

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

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

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

Endnotes

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

Published in Dispute Resolution Journal (June 2020, Vol. 74, No. 3), the flagship publication of the American Arbitration Association. © 2020, American Arbitration Association. It is reprinted here with permission.

EXCERPT:

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

Introduction

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

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

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

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

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

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

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

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

A PDF of the full article is available here.

United States Army Corps of Engineers v. John C. Grimberg Co., Inc., No. 2019-1608, 2020 BL 215269 (Fed. Cir. June 9, 2020)

The Court of Appeals for the Federal Circuit reversed a decision by the Armed Services Board of Contract Appeals (“Board”), which had found in favor of a contractor on a Type I differing site condition claim. The Board had held that, even though the contractor’s interpretation of the contract documents was unreasonable, it was more reasonable than the government’s. The Federal Circuit reversed, holding, as a matter of law, that the contractor’s unreasonable interpretation of the contract documents barred its claim. Continue Reading Federal Court Holds the Reasonableness of the Government’s Interpretation of Geotechnical Data is Irrelevant to Differing Site Condition Claim

P.A.L. Environmental Safety Corp. v. North American Dismantling Corp. Et Al., No. 19-11630, 2020 BL 198779 (E.D. Mich. May 28, 2020)

A Michigan federal court partially granted Consumers Energy Company’s (“CEC”) motion to dismiss P.A.L. Environmental Safety Corporation’s (“PAL”) complaint alleging numerous causes of action in connection with its suit against CEC and contractor North American Dismantling Corporation (“NADC”) for outstanding payment stemming from asbestos abatement work at a CEC-owned power plant in Essexville, Michigan (the “Power Plant”).

According to the decision, CEC, as owner, and NADC, as prime contractor, entered into a written contract whereby NADC agreed to abate, dismantle, and demolish the Power Plant.  In turn, NADC subcontracted with PAL to perform abatement of all asbestos containing material at the Power Plant.  While the subcontract price was $7,996,331, PAL alleged entitlement to an adjusted price of $23,841,833 in unpaid labor and materials for its asbestos abatement work.  Specifically, PAL alleges that it performed additional work not accounted for in the subcontract including fly ash and coal dust removal, refractory brick abatement, and extra asbestos removal.

While PAL’s complaint included numerous counts against Defendants NADC, CEC, and labor and material payment bond surety North American Specialty Insurance Company (“NASIC”), the opinion is most notable for its treatment of CEC’s motion to dismiss several counts against it including: (i) quasi-contractual claims; (ii) a third-party breach of contract claim; and (iii) a negligent misrepresentation claim. Continue Reading Michigan Federal Court Permits Subcontractor’s Quasi-Contractual Claims to Proceed Despite Existence of Express Contract Covering the Same Subject Matter

Gables Construction, Inc. v. Red Coats, Inc., No. 23, 2020 BL 193791, 2020 MD LEXIS 264 (Md. May 26, 2020)

Upper Rock II, LLC (“Upper Rock”) contracted Gables Construction, Inc. (“GCI”) to construct a multi-building apartment complex in Rockville, Maryland (the “Project”) per the terms of the American Institute of Architects (“AIA”) A102TM-2007, Standard Form Agreement Between Owner and Contractor and AIA A201TM – 2007, General Conditions of the Contract for Construction.  The General Conditions required Upper Rock to purchase and maintain a property insurance policy.  It also contained a waiver of subrogation provision under which Upper Rock waived all rights against GCI and other Project participants for damages caused by fire to the extent covered by insurance. Continue Reading Maryland Court Holds No Right of Contribution Where a Waiver of Subrogation Precludes Common Legal Responsibility

The U.S. Supreme Court issued a unanimous decision on June 1 in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, holding that, in some circumstances, even nonsignatories to an agreement may invoke international arbitration. The Court ruled that the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) did not prohibit the application of the U.S. doctrine of equitable estoppel to permit the enforcement of arbitration agreements by nonsignatories. In doing so, the Court clarified that the doctrine of equitable estoppel recognized under Chapter 1 of the Federal Arbitration Act (FAA) for U.S. domestic arbitrations could also be applied to international arbitration proceedings governed by Chapter 2 of the FAA.

For parties who regularly engage in multi-tiered international commercial arrangements like the kind seen in GE Energy, the ruling expands the reach of international arbitration agreements and gives those parties greater clarity into their own ability to utilize international arbitration to resolve complex disputes. Continue Reading Supreme Court Interprets New York Convention to Allow Arbitration Agreement Nonsignatories to Invoke International Arbitration

D.A. Nolt, Inc. v. The Philadelphia Municipal Authority, 2020 BL 199761 (E.D. Pa. May 28, 2020)

The Philadelphia Municipal Authority (the “Authority”) contracted D.A. Nolt, Inc. (Nolt) to renovate a building that would serve as the City’s new police headquarters. After Nolt had performed a portion of the renovation work, the Authority cancelled the project. Nolt sued the Authority, alleging that the Authority owed it $2.5 million for work performed before the project was cancelled. The Authority denied that payment was due, claiming that Nolt had delayed the project by 255 days and that a $10,000 per day liquidated damages provision in the contract thus offset Nolt’s claim.

Nolt moved for summary judgment on the Authority’s liquidated damages counterclaim. It argued that the provision was unenforceable because the $10,000 per day amount was not a reasonable forecast or approximation of the loss the Authority expected to suffer in the event of delay. Nolt cited testimony from the Project Director for the City’s Department of Public Property, who was responsible for finalizing the Authority’s contract with Nolt. The Director testified that he did not estimate the anticipated harm that might occur in the event of a delay in Nolt’s work. Rather, he determined that $10,000 per day was reasonable because prior City projects of a similar scope and magnitude included $10,000 per day liquidated damages provisions. The Director was not personally involved in the analysis which the City had undertaken on the referenced prior projects, and he did not personally analyze any of the calculations or estimates that the City completed for those prior projects. Continue Reading Federal Court in PA Finds Liquidated Damages Provision Unenforceable Where the Per Day Liquidated Damage Amount Was Copied from Contracts for Prior Unrelated Projects Rather than a Project-Specific Forecast of Likely Damages

N. Plains Res. Council v. United States Army Corps of Eng’rs, No. 4:19-cv-00044-BMM, 2020 BL 35412 (9th Cir. May 14, 2020)

Oil and gas pipeline construction may no longer proceed under Nationwide Water Permit 12 (NWP 12). The Ninth Circuit, by way of a two-judge panel, denied challenges to a district court decision vacating NWP 12 and enjoining the United States Army Corps (Army Corps) from authorizing oil and gas pipeline construction projects pursuant to NWP 12. The Order, which was issued without an opinion, has national effect and set a briefing schedule for reconsideration of a motion for an administrative stay. N. Plains Res. Council v. United States Army Corps of Eng’rs, No. 4:19-cv-00044-BMM. Continue Reading Ninth Circuit Orders Enjoinment of Oil and Gas Line Construction Proceeding Under Nationwide Water Permit 12

On April 17, the California Court of Appeal decided Crosno Construction, Inc. v. Travelers Casualty & Surety Company of America,1 effectively narrowing the scope of enforceable “pay-when-paid” provisions in construction subcontracts to the extent the subcontractor seeks recovery against a general contractor’s payment bond surety. Although the Crosno case involved a public works project, the rationale and holding should apply with equal force to private works projects. Basing the bulk of its decision on the Wm. R. Clarke Corp. v. Safeco Insurance Co.2 case, the court found that an open-ended “pay-when-paid” provision in a subcontract is not enforceable against a subcontractor that seeks to recover on a public works payment bond claim. This article discusses the Crosno decision and the implications for contractors on both sides of the contract moving forward. Continue Reading California Appeals Court Provides Guidance on ‘Pay-When-Paid’ Provisions in Construction Subcontracts

Days after the World Health Organization declared the COVID-19 outbreak a global pandemic, governments from around the world scrambled to enact measures aimed at mitigating the spread of the virus. In the United States, cities and states have enacted travel restrictions, issued shelter-in-place orders, and directed nonessential businesses to shutter. While all aimed at mitigating the spread of the virus, these measures will have an immense disruptive impact on businesses and industries around the world — the construction sector included.

As notices concerning force majeure, changes in law, and change orders swirl, parties should prepare themselves for how these disputes will be managed and resolved. The COVID-19 outbreak will rapidly reshape how the construction sector does business. This article offers our insight into just once facet of the construction industry: alternative dispute resolution and how the COVID-19 outbreak has and will affect construction disputes going forward. Continue Reading ADR for Construction Disputes During COVID-19: How to Manage Dispute Resolution Before and After the Dust Settles