The Top 10 (or so) Recent Developments in U.S. Construction Law of Which Every Contractor Working in the United States Should Be Aware

2011 Annual MeetingFrankfurt, Germany10 – 12 November 2011

European Society of Construction LawDeutsche Gesellschaft fur Baurecht e.V.

Presented byJohn B. Tieder, Esq.

Alex N. Lamme, Esq.

8405 Greensboro Drive, Suite 100McLean, VA 22102

703-749-1000 (p)jtieder@wthf.com

alamme@wthf.com

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Summary

I. Organization of U.S. Legal System

II. Public Contracts

III. U.S. Government Contracts – Focus on “Fraud & Abuse”

IV. Contractor Licensing

V. Public-Private Partnerships (P3)

VI. Freedom of Contract• Exceptions• Payment

VII. Performance Bonds

VIII. Demise of Arbitration

IX. Dispute Review Boards

X. Liquidated Damages

XI. Liability to Non-Contract Parties – The Economic Loss Doctrine

XII. Consequential Damages

XIII. Green Construction

XIV. 50-State Survey

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I. Organization of United States Legal System

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Federal Court System

1 Supreme Court (§ 1)Other Courts as Established by Congress (§ 1)Judges Have Lifetime TenureTrial by Jury (§ 2)

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U.S. Federal Court System

U.S. Supreme Court• Created by Constitution (Article III)

– 13 U.S. Circuit of Appeals– 12 Circuits– Court of Appeals for Federal Circuit

– 94 Federal District Courts

– Specialized Courts– U.S. Court of Federal Claims– U.S. Court of International Trade– Court of Military Appeals– U.S. Court of Custom & Patent Appeals

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Federal Jurisdiction

Federal Questions• Arising under Federal Law• Violations of Federal Constitution• Patents• Regulations under Federal Law • Admiralty or Maritime• Treaties• U.S. a Party

Diversity Actions• A dispute between citizens of any 2 different states in excess of

$75,000• Suit between a foreign citizen and a U.S. citizen applying state law

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Typical Case

Instituted in a U.S. District CourtRight of Appeal to Circuit Court of AppealsRight to Petition, but not be heard, by Supreme Court

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U.S. Court of Appeals and U.S. District Courts

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910

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51+ Legal Systems

1 Federal System50 State SystemsTerritories and Provinces

• Puerto Rico• Guam

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State Courts

50 State Courts - use New York as an exampleCourt of Appeals

• 4 Appellate Divisions• 12 Judicial Districts

– 57 County Courts

Appeals from last Court of Appeals in State can go to U.S. Supreme Court• Very seldom in a commercial case

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Jurisdiction of State Courts

All Civil and Criminal Matters Not Federal in Nature • Examples – Civil

– Personal Injury

– Family Law

– Commercial Disputes

– Ownership of Property

– Inheritance

• Examples – Criminal– Murder

– Assault

– Robbery

– Embezzlement

– Arson

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II. Public Contracts

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Types of Public Contracts

Direct U.S. Government Contracts U.S. Government Funded Contracts State Contracts Political Subdivisions within States

• Counties• Cities / Town• Special Purpose Entities

– Water Districts– Sewer Districts– School Districts– Transit Districts– ETC.

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Laws Applicable to Non-Federal Public Contracts

U.S. Laws of General Application• Social / Economic Clauses• Safety• Labor

U.S. Laws Applicable to Federally Funded Projects• False Claims Acts, 18 U.S.C § 287, 31 U.S.C. §§ 3929-3933• American Recovery & Reinvestment Act

– Report Effects on Employment– Report Compensation of 5 Most Highly Paid Employees– Buy American Compensation

State Laws• State Procurement Statutes• State False Claims Acts• Political Subdivisions within States

– Some are quite unusual– e.g. Cannot bid if do business with Myanmar or Iran

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III. U.S. Government Direct Contracts

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Applicable Laws and Regulations

Basic Statutes• Contract Disputes Act of 1978• Buy American Act• Others

Primary Regulations• Federal Acquisition Regulations

Procuring Agency Regulations• U.S. Army Corps of Engineers• U.S. Department of State• General Services Administration

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Improper (False) Claims – Federal Criminal and Civil Statutory Scheme

Criminal Liability• Making False Statements, 18 U.S.C. § 1001• False Claims Act, 18 U.S.C. § 287• Mail / Wire Fraud, 18 U.S.C.§§ 1341, 1343• Conspiracy to Defraud Govt., 18 U.S.C. § 286• Major Fraud Act, 18 U.S.C. § 1031• Federal Enforcement and Recovery Act of 2009

Civil Liability• False Claims Act, 31 U.S.C. § 3929-33• Anti-Kickback Act, 41 U.S.C. §§ 51 to 58• Forfeiture of Fraudulent Claims Act, 28 U.S.C. § 2514• Contract Disputes Act, 41 U.S.C. § 604

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Improper (False) Claims – What Is a Claim?

Any request or demand, whether under a contract or otherwise, for money or property which is made to a contractor, grantee, or other recipients if the United States provides and portion of the money or property which is requested or demanded or if the Government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded

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Improper (False) Claims – What Is a “False Claim?

Knowingly presents, or causes to be presented, to an officer or employee of the United States or a member of the Armed Forces as a false or fraudulent claim for payment or approval

Knowingly makes, uses or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government

Conspires to defraud the Government by getting a false or fraudulent claim allowed or paid

Has possession, custody or control of property or money used, or to be used, by the Government and, intending to defraud the Government or willfully to conceal the property, delivers, or causes to be delivered, less property than the amount for which the person received the certificate or receipt

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Improper (False) Claims – What Is a “False Claim?

Authorizes or delivers a document certifying receipt of property used, or to be used, by the Government and, intending to defraud the Government, makes or delivers the receipt without completely knowing that the information on the receipt is true

Knowingly buys, or receives as a pledge of an obligation or debt, public property from an officer or employee of the Government, or a member of the Armed Forces, who lawfully may not sell the pledged property

Knowingly makes, uses or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government

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Improper (False) Claims – Examples of False Claims

False CertificationReverse False ClaimsSubcontractor’s Pass-Through ClaimsOverstating DamagesDouble BillingDeliberate Misbranding or Substitution of MaterialsLabor IssuesEquipment / Material Issues

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Improper (False) Claims – Damages for False Claims Act Violations

Civil Penalty of $5,000 to $10,000 per violationTreble DamagesDebarmentCriminal LiabilityBenefit to Qui Tam Relator

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Improper (False) Claims – Reporting Violations to the Government

Amended FAR § 52.203-14(b)(3) – December 2008• Contractors must “timely” notify Government of:

1) Violations of Civil False Claims Act (FCA)2) Violations criminal statutes upon “credible evidence” of

such violations3) Receipt of “significant overpayments” from the

Government• “Knowing failure” to timely disclose violation can lead to

suspension or debarment; Amended FAR § 52.203-14(b)(3) – December 2008

• “FULL COOPERATION” in investigations; and• Mandate that certain previously excepted Contractors

establish a compliance program and internal control system

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IV. Contractor Licensing

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IV. Contractor Licensing

Licensing is a State-by-State Issue Types of License

• Professional, i.e., Architect or Engineer• General (Main) Contractor• Specialty Subcontract• Construction Manager

Failure to Have Proper License at Time of Contracting• Bid Not Accepted on Public Contracts• No Problem if License Obtained During Contract• No Entitlement to Payment• Criminal Proceedings

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V. Public-Private Partnerships

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Public-Private Partnerships

New to United StatesOnly some states authorize, e.g., Florida, GeorgiaProjects with Revenue Potential

• Toll Roads• Bridges• Water & Sewage Treatment Facilities

Re-Coup Costs of Construction and Make Profit

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VI. Freedom of Contract

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VI. Freedom of Contract

In Private Contracts, Few Limitations Nothing Comparable to German VOB In Public Contracts, More Requirements Some Exceptions

• Prompt payment of subcontractors and suppliers• Indemnification against sole negligence

– By Statute– By Case Law

• Non-Enforcement of “No Damages for Delay” Clauses– By Statute– By Case Law

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VII. Performance & Payment Bonds

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Performance & Payment Bonds

Performance Bond – Outside (Insurance) Guarantee of 100% of Contract Value• Owner has direct recourse

Payment Bond – Outside (Insurance) Guarantee for Payment of Subcontractor and Suppliers• Set at various levels• Subcontractor and Suppliers have direct recourse

Required for All Public ContractsUsual Practice on Private ContractsCost is .75% - 2+% of Contract Value

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VIII. Demise of Arbitration

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Demise of Arbitration

More Common in Private than Public Contracts Less Sophisticated than ICC or Other International Arbitrations No Right of Appeal Trend is to Non-Jury (i.e. judge only) Trials with Right of Appeal Should Be Contract-by-Contract Determination Depending on

Many Factors• Location of Project• Likely Nature of Dispute• Ability to Appeal Arbitration• Amount of Discovery

Many Problems Can Be Overcome by Drafting of Arbitration Clause

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IX. Disputes Review Boards

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Disputes Review Boards

Panel of Experts who Make Initial Determination of Claims

Non-Legal ProceedingNot BindingCan Be Introduced Into Evidence in a Court or Arbitration Proceeding

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X. Liquidated Damages

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Liquidated Damages

Liquidated Damages are a good-faith pre-determined amount of loss applicable to a specified event, e.g., a day of delay

Liquidated Damages are not a penalty as that concept is applied in Civil Law Jurisdictions

Cannot be adjusted by Court or Arbitrator 3 Approaches Depending on State

1) Always applied unless shown to be a penalty

2) Applied if a good faith calculation of amount is shown regardless of actual loss

3) “Look Back”, i.e., specified amount bears some reasonable relationship to actual loss

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XI. Economic Loss Doctrine

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Economic Loss Doctrine

Are Engineers and Contractors Liable to Parties with Whom They Have No Contractual Relationship for Purely Economic Losses?

Purely Economic Losses = Increased Cost of Performing Work, Additional Overhead, Lost Profits Not Related to Personal Injury or Damage to Property

3 variations Depending on State• Never Liable• Always Liable• Liable only When the relationship is so close it is equal to a

Contractual Relationship

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XII. Waiver of Consequential Damages

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Waiver of Consequential Damages

Consequential Damages = Those Not Reasonably Foreseeable at Time of Contracting, e.g., lost profits to Owner if contract not completed in time

Generally Waivable in All States, But Must Be Explicit

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XIII. Green Construction

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Green Construction

Green Construction – Design and Construct with Minimal Negative Impact on Environment, e.g., production of carbon dioxide

Standards are Still Evolving; No National or Even State Codes

Standards Set by ContractOwners Pay PremiumLiability for Failure to meet Specified Standards

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XIV. 50 State Survey

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Questions?