Technicalities and Tautologies: Interpreting Construction Statutes in Kansas

We’ve all heard it: “They got out on a technicality.” A recent case out of the Kansas Court of Appeals reminds us that what may look like a technicality is, in fact, a court properly applying the plain language of a statute, as enacted by the legislature.

In Drywall Systems, Inc. v. A. Arnold of Kansas City, LLC, Arnold entered into a commercial lease of a building in Olathe. Wanting to separate itself from other tenants in the building, Arnold then entered into a contract with Drywall Systems to build a partition wall. Drywall constructed the wall but was allegedly stiffed by Arnold.

The trial court found that Arnold had indeed breached the contract and entered judgment for Drywall for the contract amount only. The Court denied Drywall’s request for prejudgment interest and attorneys’ fees under the Kansas Fairness in Private Construction Contract Act. The Act’s goal is to promote prompt payment through the various construction tiers – from owners to subcontractors. The Act sets standards for promptness. In the case of an owner, the Act requires payment to a contractor within 30 days of submission of an undisputed amount. If the owner fails to pay within that time frame, it is required to pay 18 percent interest and attorneys’ fees.

Interpreting the Act, the trial court decided that Arnold, as a mere tenant, was technically not an owner and not subject to the rules; Drywall appealed. The appeals court found that the Act drafted and entered into law by the Kansas legislature specifically defined an “owner” as one “who holds an ownership interest” in the property – a tautology (the saying of the same thing twice in different words) and perhaps a technicality. But, because a tenant does not have an ownership interest in the property, the court reasoned that the legislature did not mean for the Act to apply to Arnold.

I wish I had a nickel (OK, maybe a dollar) for every contractor that has described its business as “TI” or tenant improvement work. If you fall in that category, how do you overcome this potential problem? Make sure there is a written contract with the tenant that provides payment of 18 percent interest and attorneys’ fees in the event of default or, better yet, contract directly with the “owner.”

Challenging Public Bid Awards in Missouri Just Got Easier, Depending on Your Perspective

As reported in this blog in October, 2015 in the post “The Making of a Supreme Court Case,” we predicted that the Missouri Supreme Court would take the case of Byrne and Jones Enterprises, Inc. v. Monroe City R-1 School District. That case involved a contractor, Byrne and Jones Enterprises (“B&J”), which was convinced that a school district had improperly rejected its bid to construct a new athletic stadium. The bid was awarded to the high bidder with whom the school district had worked very closely in the pre-construction phase. B&J asked the Supreme Court to overturn the decisions of the trial court and Missouri Court of Appeals for the Eastern District of Missouri which had ruled against it. Those courts found that contractors, as a rule, have no vested interest or private property right in a contract award and, therefore, possess no standing to challenge the award to a competing bidder. The courts reasoned that since the bidding statute was enacted for the sole benefit of the public, taxpayers were the only parties with a right to challenge a bid award.

As anticipated, the Supreme Court did, in fact, take the case and issued its opinion on July 26, 2016. Thanks to the zealous contractor, B&J, the Supreme Court overturned previous Missouri cases in deciding that unsuccessful bidders do have standing to challenge a bid award. In doing so, the Supreme Court made an important distinction. A spurned contractor does have the right to contest a bid award on the grounds that it was not afforded a fair and equal opportunity to compete in the bidding process but does not have the right to a court order compelling a school district to award the contract to it.

Although B&J won the battle, it ultimately lost the war. The court found that even though B&J was wrongfully deprived of the right to challenge the fairness of the bidding process by the trial court, the decision of the trial court dismissing B&J’s case must stand, because the case is now moot. According to the Supreme Court, even though B&J asked the trial court to enjoin the school district’s bid award to its competitor, it didn’t actually seek a temporary restraining order or a preliminary injunction hearing. While the case made its way through the court system and ultimately to the Supreme Court, construction on the stadium was completed. The Supreme Court also agreed with the trial court that the bid statute does not allow a contractor to obtain a judgment for its bid preparation costs or other damages. Therefore, B&J ended up with nothing in the end.

B&J’s dedication to its cause has opened the door for contractors to dispute bid awards in Missouri. Contractors and their attorneys must operate expeditiously. Any contractor challenging a contract award must do so promptly and must seek an injunction preventing the construction process from moving forward or risk the case becoming moot. The most that a successful challenge will accomplish is a court order requiring the school district to alter its bid process to assure that all contractors, not just the complaining contractor, have a fair and equal opportunity to compete. The complaining contractor will not be entitled to a money judgment for its bid preparation costs or attorneys’ fees.

Article Published on Controlled Insurance Programs or “Wrap Ups.”

Large construction projects can benefit from a Controlled Insurance Program (CIP), also known as a “Wrap Up.” In this arrangement, a single party, either the owner (OCIP) or the general contractor (CCIP), acquires consolidated insurance for all participants working on-site during the construction period.

The overall goal of a CIP is to decrease the cost of insurance premiums ultimately pad by the Owner on a project. A CIP seeks to eliminate the cost of overlapping coverages and delays caused by disputes between the participants and, at the same time, protect all contracting parties by bringing the risk of loss from the project within the insurance coverage. Economies of scale attained by merging insurance are meant to reduce the overhead cost generated by multiple and separate policies. Despite this objective, CIPs can be difficult to administer or simply poorly administered and can leave lower tier contractors and suppliers in the dark regarding claims affecting their interests.

I recently published an article about this topic entitled “Scratching the Surface of Controlled Insurance Programs” which will be helpful as a refresher or to the uninformed in the official magazine of USLAW NETWORK, an exclusive national network of law firms of which Dysart Taylor is a member. To read the article, click here.

Attorneys’ Fees – Having Your Cake and Eating it Too

Clients frequently ask about getting attorneys’ fees from their adversaries in a construction dispute. I certainly understand the economics behind the question. Resolving construction disputes in any forum – mediation, arbitration, or court – can be an expensive proposition and require an investment in attorneys’ fees and costs. But, the right to recover fees and expenses is hardly automatic.

In Great Britain, the English Rule allows attorneys’ fees to the prevailing party in most civil disputes. The American Rule does not. It limits the right to recover fees in civil cases where parties have included the right in their contract or the right is granted by statute. There are unique situations where fees can be awarded even though no contract or statute provides the right. For instance, courts will award fees under the “collateral litigation exception” to the American Rule. That exception applies where the natural result of a wrong or breach of duty by one party results in an innocent party getting sued. In that case, the fees incurred in defense of the suit is a proper item of damage.

In Missouri and Kansas, prompt payment statutes provide the right to recover attorneys’ fees in certain instances but often give the trial court discretion whether to award fees. As a result, after a hard fought case, courts sometimes treat fees as a sacrificial lamb in order to help even the score or, as attorneys put it, to “split the baby.” An award of attorneys’ fees for the prevailing party is often left for cases in which the losing party’s behavior was especially bad, fraudulent, or unethical. Some prompt pay statutes require the court to find “bad faith” before awarding attorneys’ fees to the winner.

A recent case indicates that courts may be more willing to extend the right to recover attorneys’ fees even if the underlying contract does not expressly provide fees to the winner. The Court of Appeals for the Eastern District of Missouri recently decided a case which should cause parties regularly adopting contracts with AAA arbitration dispute provisions to take notice.

In City of Chesterfield v. Frederich Construction, Inc., https://www.courts.mo.gov/file.jsp?id=85643, the City contracted with Frederich Construction (“FCI”) on a construction project. The contract did not contain a provision allowing fees to the prevailing party. Normally, neither party would be entitled to attorneys’ fees in that case. However, the contract did contain a dispute resolution clause designating arbitration under the Construction Industry Arbitration Rules of the AAA (“Rules”). After a dispute arose between the City and FCI, an arbitration was held. The arbitrators ruled in favor of FCI and granted FCI attorneys’ fees in the amount of $279,000 in addition to the principal amount owed under the contract. The City argued in the state circuit court that the arbitrators had no power to award fees under the contract. The court disagreed and confirmed the award. On appeal, the Court of Appeals referenced the Rules and, specifically, Rule R-45 allowing an arbitrator to award attorneys’ fees “if all parties have requested such an award.” Both the City and FCI requested such an award in their pleadings. The Court of Appeals determined that the contract did, in fact, provide for attorneys’ fees because the contract adopted the Rules and the Rules allowed a fee award if both parties requested it.

Clients are right to ask about recovery of fees but shouldn’t have an expectation that fees will be awarded in every case, even if they win. It depends on a lot of factors over which the client and its lawyer often have no control. The one thing that is in the client’s control is to make sure the right to recover fees is contained in the contracts they sign.

The Making of a Supreme Court Case

It’s not easy to get an audience with a state’s Supreme Court. By the time a case gets to a state’s highest court, the parties have spent significant resources and are on a collision course with destiny. They will either live or die at the hands of those who live mostly behind closed doors.

The fact is that a very small percentage of cases are actually accepted for review by a state’s Supreme Court. However, diametrically opposite opinions issued by different Courts of Appeal in the same state will almost always justify the Supreme Court stepping from behind the curtain and resolving a dispute once and for all. Here’s an example of a case that has the chance to make it onto the docket of the Missouri Supreme Court:

On November 12, 2014, the Missouri Court of Appeals for the Eastern District addressed the right of an unsuccessful bidder on a state public-works project to challenge a contract award. In Byrne and Jones Enterprises, Inc. v. Monroe City R-1 School District, the School District accepted bids for the design and construction of a new athletic stadium at a high school. Design-build firms Byrne and Jones (“B & J”) and ATG Sports, Inc. (“ATG”) submitted bids for the project, and the contract was awarded to ATG. B & J promptly filed suit alleging the bid procedures used by the School District were unfair and did not allow bidders to compete on equal terms with ATG. B & J also contended the School District acted in bad faith and colluded with ATG in violation of the competitive bid process established by law.

The court analyzed Missouri’s public bidding statute and held the statute gave the School District’s board an absolute right to reject any and all bids. It also held that the unsuccessful bidder had no vested interest or private property rights in the award of a contract and, therefore, possessed no standing to challenge the award to a competing bidder. In so doing, the court determined that the bidding statute was enacted for the sole benefit of the public, not those bidding under it.

Therefore, the court reasoned that although a rejected contractor has no private right to seek damages against a state agency for its bid preparation expenses or lost profit, taxpayers do have a right to challenge the award of contracts, and officials do have a duty to the public to exercise discretion responsibly and in good faith and cannot reject bids “fraudulently, corruptly, capriciously or without reason.”

The decision limits standing to seek review of a contract award to a contractor by a state public body to taxpayers. But, what taxpayer wants to use his or her hard-earned dollars to fight a contract award? Most taxpayers don’t have the time or expertise to debate a contract award and are only interested in seeing the end result of the construction. The contractors are the ones with an interest in the award and who can keep governmental officials on the straight and narrow. After all, they have spent countless hours and resources putting together a bid only to see the contract get awarded to some other Tom, Dick, or Harry.

This is an important issue of public interest. But, what will likely land this case in front of the Missouri Supreme Court isn’t necessarily the public interest at stake, but the fact that the Eastern District Court of Appeals rejected a 2013 holding by the Western District Court of Appeals in Public Communication Services v. Simmons that an unsuccessful bidder has standing to challenge the fairness and lawfulness of an award. This means that there are different opinions among Missouri’s Courts of Appeals on how to interpret the law in matters such as those that arise in our example.

So, stay tuned! B & J has already asked for a transfer to the Missouri Supreme Court. We’ll have more information about this case as it develops.

Change Order Do’s and Dont’s

Three things are certain in life: death, taxes, and change orders. There are very few projects that don’t have some measure of change or different site conditions which should result in adjusted compensation to a contractor and a change in scheduled date of completion. The change order process doesn’t begin when a potential change is encountered. In fact, the process starts before a bid is submitted and long before a contract is delivered for signature. When a contract if finally signed, it should precisely define the scope of work being undertaken in such a way that parties can determine whether work encountered after commencement is within or outside of that scope. The following Do’s and Don’ts take this reality into account and provides tips to follow to both avoid change orders and assert the right to a change order:

Bidding, Contracting, and Planning for Change Orders

• Do review and have a complete understanding of the work description, drawings, specifications, time limitations, and anticipated contract terms and look and account for errors in design when preparing a bid.
• Do bring design errors to the architect or engineer’s attention and prior to submitting a bid.
• Do provide a detailed description of the scope of work included in your bid and provide a complete list of work, materials, equipment, and services that are excluded in your bid and, ultimately, your contract.
• Do make bid prices contingent upon written assumptions about the time and conditions allowed for performance of your work and build in protections for seeking adjustments in contract price, time of completion, or right of termination in the event of delays or other conditions out of your control.
• Do identify the labor billing rates and mark-up on materials which you will use to price extra work encountered on a project.
• Do make certain that the scope of work defined in your contract is accurate and does not exceed the scope of work defined in your bid.
• Don’t sign a subcontract which does not accurately describe your scope of work and any exclusions to that scope of work and which does not match the scope of work defined in your bid.

How to Handle the Change Order Process When A Change is Encountered and Identified

• Do request a change order immediately and in writing when:
  • you come upon a site condition which is inconsistent with the plans and specfications and/or you are directed to do work which is outside of the scope of your work;
  • you need more time to complete your work…for any reason;
  • you have incurred costs due to the delays or performance of other subs, the GC, the design professional, or the owner.
• Do present a timely written claim for adjustment to the subcontract amount or time of completion before commencing any extra work, if the contract requires a claim to be made within a certain time frame.
• Do require a written change order to be signed by the other party before commencing extra work.
• Do proceed with extra work if no signed change order is in place if you are provided you with a Construction Change Directive or similar order to perform extra work, which:
  • is in writing
  • acknowledges that the work is extra work requiring additional compensation and/or additional time, and
  • is provided by an individual authorized by the party to authorize extra work.
• Don’t worry about “rocking the boat” by refusing to perform any extra work before receiving a change order signed by the GC or receiving a Construction Change Directive or an Order to proceed.
• Do proceed with extra work if the party with whom you have contracted refuses to sign a change order or a Construction Change Directive or similar order to perform extra work under extreme caution and only if:
  • you prepare and send a written Change Order Memorandum describing the extra work you have been asked to perform
  • confirming the party’s refusal to sign a change order or Change Order Directive;
  • stating that the extra work is being performed under protest and with full reservation of right to seek an increase in the contract price and additional time to complete that contract, upon completion of the extra work when all information regarding the consequences of the extra work in known.
• Do take photographs, prepare a report of the extra work in daily logs and other reports, and maintain detailed daily records of all labor, burden, material, equipment, and other costs incurred in performing extra work and, if possible, obtain the signature of the party with whom you have contracted and/or the owner’s representative on a daily basis.
• Don’t perform extra work based on verbal assurance that you’ll get paid.
• Don’t just wait for the GC to announce updates and changes to the project schedule without your input and active participation.

Termination for Convenience is Never Convenient

It can be a true horror story when you learn that your construction contract been terminated for convenience. All the planning, hard work, anticipation of a “job well done,” and profit are lost due to circumstances completely out of your control. Although impossible to predict or foresee, the risk of premature termination cannot be overlooked.

Termination for convenience clauses (“TFC”) were commonplace in federal acquisition contracts during wartime and can be traced back to the Civil War. TFCs were originally justified based on the unpredictable length of demand for supplies. TFCs are now found in a wide variety of civilian and military federal contracts and are almost universally found in private and state public works contracts.

The first rational response of the terminated is to argue that the work performed is free of defect. Unfortunately, a TFC allows termination even if the contractor has performed well. In other words, the terminator has the right despite the lack of a wrong. But, there are consequences. The terminator does have to pay the cost of the work incurred along with the overhead and profit on those costs. However, TFCs customarily limit the ability to recover profits the terminated party anticipated earning through completion. One notable exception is Article 14 of the AIA A201-2007 which allows the terminated party to also recover “profit on work not executed.” This phrase is often deleted from the A201 frequently leaving the TFC toothless when triggered.

Because of its origin, the main source of guidance regarding TFCs is federal court. Federal law has generally recognized the principle that “good faith and fair dealing” is implied in every contract. Therefore, a TFC is justified so long as the terminator is acting in good faith, i.e., there is a valid reason for terminating the contract and no fraud has been committed. In Edo Corp. v. Beech Aircraft Corp., the Tenth Circuit Court of Appeals applied Kansas law largely using federal cases in finding that Beech exercised good faith in terminating a design contract with Edo and bringing the design work in house.

Missouri courts are likely to follow the “good faith” standard. In Danella Southwest, Inc. v. Southwestern Bell Tel. Co., the federal district court for the Eastern District of Missouri found that S.W. Bell could lawfully terminate an excavator’s contract after three years despite the significant start-up costs expended by the excavator which had calculated its investment would not be recovered until six years of work. The excavator could not recover its front end costs nor could it recover lost profits.

To lessen the shock and consequences of a TFC, make sure you know whether your contract contains such a provision and attempt to delete or modify the TFC before you sign it. If deletion or modification is not an option, you can always step away from the project or have a contingency plan in place in the event of a TFC.

Missouri Reforms Retainage Laws on Public Works Contracts

Following the trend around the country regarding retainage practices, Missouri Governor Jay Nixon recently signed into law modifications to the Missouri Prompt Payment Act, §34.057 R.S.Mo. These revisions become effective August 28, 2014.

The revisions specifically address public works contracts and cap the amount of retainage that can be withheld at 5 percent. Public owners and their architect or engineer have been stripped of their previous statutory discretion to determine to withhold more than 5 percent “to ensure performance of the contract.” The sole instance in which public owners may withhold 10 percent is on contracts of $50,000 or less where surety bonds are not required.

The modifications extend prompt pay protections to professional engineers, architects, landscape architects and land surveyors. Like general contractors (GCs) and subs, the public owner must now pay engineers, architects and surveyors within 30 days following receipt of invoice. If payment is not made in a timely manner, interest of 1.5 percent per month accrues on the unpaid invoice.

The law requires the owner to pay out 98 percent of the retainage to the general contractor upon substantial completion. The GC must likewise pay such retainage to subs and suppliers in a timely manner after substantial completion. If the owner determines that the work is not substantially complete, the owner must give a written explanation to the GC within 14 days. The GC must give the explanation to the subcontractor responsible for the work. The law reduces the amount the owner may withhold on incomplete work from 200 percent of the value of each item remaining to 150 percent. All unpaid retainage must now be included with the final payment and paid no later than 30 days after the due date. To the extent any progress or final payment is withheld for rejected work or materials, the law requires the owner to provide a written explanation to the GC, and responsible subcontractor or supplier, effectively doing away with the practice of holding money without explanation or justification.

Missouri’s Private Construction Act, §436.300, R.S.Mo., is not affected by this revision and still allows 10 percent retainage to be withheld unless a higher amount is required “to protect the owner’s interest.” On other side of the state line, the Kansas Fairness in Public Construction and Fairness in Private Construction Acts require retainage of 5 percent, but still allow the owner to withhold up to 10 percent “if necessary to insure performance.” Stay tuned as retainage reform continues to make its way through state legislatures.

The Border War III: Mechanic’s Liens for Rental Equipment

Liens for unpaid rent for machinery and equipment vary from state to state. Kansas has no special rules governing liens by those who rent equipment for others to use. Such renters are essentially treated as suppliers under Kansas law and are required to follow the lien law, K.S.A. 60-1101, generally applicable to all unpaid suppliers and contractors. The procedure is different in Missouri.

In 2005, the Missouri legislature rewrote its mechanic’s lien law, 429.010, R.S. Mo., to limit the ability of companies renting machinery or equipment for use by others to file liens. In order to file a valid lien for unpaid rent, the 2005 revision required the following elements to be met:  (1) the property must be a commercial property; (2) the amount of the claim must exceed $5,000; and (3) notice must be given to the owner within 5 days of the commencement of the use of the machinery or equipment that such items are being used on its property. The notice must include the name of the entity renting the equipment, the equipment or machinery being rented, and the rental rate. If any of these prerequisites is not met, the lien is invalid.

The 2005 revision caused confusion among contractors which rented machinery or equipment for their use on projects and included the cost of the rental in their subsequent mechanic’s liens. In 2007, the statute was revised to state that the prerequisities noted above for filing a lien for rental equipment do not apply to those persons who rent machinery or equipment in performing their work or labor. This statute is popularly read as allowing those who rent machinery or equipment, i.e., lessees, to include the rental charges in their liens without having to give the notice of commencement to the owner or meeting the other prerequisites. However, the statute could also be interpreted by those seeking to invalidate liens as excluding lessees from claiming a lien for the cost of rental equipment. Unfortunately, there are no cases which have specifically addressed this conundrum. The only case to address the issue, Mo. Land Development Specialities, LLC v. Concord Excavating Co., noted the differences in interpretation and side-stepped ruling on the issue.

There has been additional confusion centering on the amount which can be liened for rental charges. Under the statute, the lien for rental of machinery or equipment is “for the reasonable value…during the period of actual use and any periods of nonuse taken into account in the rental contract…while the equipment is on the property…” In the Concord Excavating Co. case, the Missouri Court of Appeals held that while rental machinery or equipment is idle on the project, such “downtime” charges are simply not lienable regardless of what the rental contract says about charges for “downtime.” Therefore, under this case, rental machinery or equipment is not lienable just because it’s on the property; it has to be in use improving the property in question.

The Border War II: Where Can I Litigate a Dispute?

The contract is signed, the work begins, and the relationship sours. The parties “lawyer up,” and the contracts are read. Many contracts contain forum selection clauses which state the place where disagreements are to be litigated. Depending on where you reside, you can either litigate in your backyard or some inconvenient, unfamiliar, distant location.

In the U.S. Supreme Court case of Atlantic Marine Construction Co., Inc. v. U.S. District Court for the Western District of Texas, a dispute arose on a Texas construction project between a Texas subcontractor, J-Crew Management, Inc. and a Virginia-based general contractor, Atlantic Marine Construction Co. J-Crew filed suit in Texas federal court since the project and witnesses were located there. Atlantic moved to dismiss the case because the subcontract contained a provision that Virginia would be the exclusive forum for litigating disputes. The U.S. Supreme Court held that unless “exceptional circumstances” exist, the forum selection clause will be enforced. In this case, no such circumstances existed, and the subcontractor was forced to litigate the dispute in the GC’s own backyard.

In a recent Missouri case, Raydiant Technology, LLC v. Fly-N-Hog Media Group, Inc., a forum selection clause again ruled the day. The Arkansas-based company Fly-N-Hog, licensed software and equipment to Raydiant, a Missouri company. After experiencing problems with the products, Raydiant filed suit in Missouri. Fly-N-Hog moved to dismiss based on the forum selection clause which set exclusive jurisdiction for litigation in Sebastian County, Arkansas. The Missouri Court of Appeals found that there was nothing unfair or unreasonable about the agreement to litigate in Arkansas and affirmed the dismissal of the Missouri case. The court held that the forum selection clause also overcame the argument that the forum selection clause shouldn’t apply because Fly-N-Hog fraudulently induced Raydiant to enter into the contract.

So the next time you read a contract, find out if it contains a provision requiring litigation in the other parties’ domain. If it does, ask yourself whether you are comfortable crossing one or more state lines to litigate an action. Could the provision create an advantage for your opponent? Did Fly-N-Hog have an advantage litigating in Sebastian County, Arkansas? Let me hear your best, “suey pig!”