ABA Forum on the Construction Industry Division 3/Design Hot Topic

1. ABA Forum on the Construction Industry Division 3/DesignHot Topic May 7, 2013 Robynne Thaxton Parkinson Mike Kennedy

2. Metcalf Construction Co., Inc. v. United States A Few Background Facts Military Housing Project Demolition of Existing Neighborhood Design and Construction of 212 New Duplex Units in 106 Buildings, Including Recreation Lots, Roads and the Like Total contract price: $48.3 M. Actual cost: over $78 Million

3. Differing Site Conditions: Soils Investigation [Quotation from the lower court case.] During an April 27, 2001 pre-proposal question and answer opportunity, the following exchange took place: Q15: Page 2B–1, Para. 2B.1.C. Contractor Soil Investigation Report. This requires an independent investigation after award. The last two sentences state “submit in writing proposed or requested changes to the Government requirements with appropriate technical data. Changes are subject to approval by the Contracting Officer.” Should we infer from this that any unforeseen soil conditions or variances from the Government’s soils report will be dealt with by change order? Answer: Yes, if there’s a major disparity from the Government’s soil reconnaissance report. JX D1 at DEF0063555 (emphasis added).

4. Differing Site Conditions:Soils Conditions • Despite the lower court factual finding that the soils conditions were not as represented in the RFP, the lower court found that Metcalf could not recover because the contract contained an independent duty to perform a soils investigation. “The March 1, 2001 EMET Report, however, advised Metcalf of the need to conduct an independent assessment. JX A1 at DEF0498734, RFP Appendix B–EMET Report (discussing requirement for an independent soil investigation); see also JX A1 at DEF0498474; JX D1 at DEF0063555 (same). As such, Metcalf could not rely on the Contract and was on notice to seek more information.”

5. Differing Site Conditions:Soils Report • Despite the court’s interpretation of the RFP that the proposers could rely on the soils report for the purposes of bidding, the court ruled that because the contract required an independent duty to investigate the soils, the design-builder could not recover: “As to reliance, the third International Tech. element, Paragraph 2D.1 (a) of the RFP instructed bidders to review the Hirata Report for “site preparation, foundation support, footing, slab and reinforcement requirements.” JX A1 at DEF0498516. But, Paragraph 2B.1 (c) of the RFP required Metcalf to engage a Geotechnical Engineer to prepare an independent report of subsurface conditions and recommendations for the design of the project. JX A1 at DEF0498474. In other words, Metcalf could rely on the Hirata Report for bidding purposes, but the Navy advised all potential contractors that they could not rely on the Hirata Report in performing the 212 Project.”

6. Differing Site Conditions:Hazardous Material Removal [Quotation from the lower court case] In addition, in response to Notice No. 3, Question 34 also was asked and answered, as follows: Q34: Does the Navy have any requirements for removal of the Chlordane contaminated soil, shown on the environmental survey? For example, if homes are built over the contaminated area or will the Navy require removal of the Chlordane? Answer: No remediation action of the Chlordane contaminated soil is required, per Part 2, page 2A–4, paragraph 23. JX D1 at DEF0063539 (emphasis added).

7. Differing Site Conditions:Hazardous Materials • Despite the fact that a) the Chlordane levels were higher than what was indicated in the RFP and b) the Navy lowered the acceptable levels of Chlordane contamination after the contract, the lower court did not allow a change order based on these changed conditions. “The March 1, 2001 EMET Report, however, advised Metcalf of the need to conduct an independent assessment. JX A1 at DEF0498734, RFP Appendix B–EMET Report (discussing requirement for an independent soil investigation); see also JX A1 at DEF0498474; JX D1 at DEF0063555 (same). As such, Metcalf could not rely on the Contract and was on notice to seek more information.”

8. DBIA/AIA Amicus Brief • The information in the RFP and the contract documents form the assumptions and clarifications on which the price is based. • When a design-builder is entitled to rely on information from the owner for the purposes of bidding, the design-builder is entitled to a change order when that information is incorrect. • Design-builders always have an independent duty to investigate the information provided by the owner. • The independent duty to investigate does not relieve the owner of liability when the representations made by the owner are incorrect.

9. Good Faith and Fair Dealing Lower Court Findings Government “fail[ed] to promptly investigate the substantial differences regarding soil conditions on a prompt basis . . . .” Contracting Officer’s “lack of knowledge and experience significantly contributed to the lack of trust and poor communication that Plagued the [project] at the beginning . . . .”

10. Good Faith and Fair Dealing Lower Court Findings Government inspector “was a difficult and overzealous Navy employee.” [T[here was a retaliatory aspect to some of the noncompliance notices . . . .” Inspector “rejected a countertop that was 1/64 inch outside of specifications . . . .” Marine Corp official opined Navy inspector’s conduct amounted to “harassment.”

11. Good Faith and Fair Dealing Lower Court Quoting Precision Pine: “[A] breach of the duty of good faith and fair dealing claim . . . can only be established by a showing that [the government’s acts or omissions were] ‘specifically designed to reappropriate the benefits [that] the other party expected to obtain from the transaction . . . .’”

12. Good Faith and Fair Dealing Lower Court Quoting Precision Pine: “[I]ncompetence and/or the failure to cooperate or accommodate a contractor's request do not trigger the duty of good faith and fair dealing, unless the Government ‘specifically targeted’ action to obtain the ‘benefit of [the] contract’ or where Government actions were ‘undertaken for the purpose of delaying or hampering [performance of the] contract[.]’”

13. Good Faith and Fair Dealing Associated General Contractors of America Brief Amicus Curiae in support of neither party Interested in “the fair, dependable, and correct administration of government procurement law, and “not the ultimate outcome of this particular case.” Limited to implied covenant of good faith and fair dealing.

14. Good Faith and Fair Dealing Associated General Contractors of America “For nearly 150 years,” this covenant has required both parties to a federal procurement contact “to cooperate with [each other] and not hinder contract performance.” Past cases have held that government breached this duty where, for example, it “damaged the work site, . . . engaged in overzealous inspection, . . . or conducted inadequate surveying . . . .”

15. Good Faith and Fair Dealing Associated General Contractors of America Other cases have found a breach where the government “damaged the work site, . . . engaged in overzealous inspection, . . . or conducted inadequate surveying . . . .” Still other cases have held the government liable for its untimely delivery of models, unreasonable delay of acceptance, or failure to make a work site available, or to provide plans or drawings.

16. Good Faith and Fair Dealing Associated General Contractors of America Well-established test: “objective reasonableness.” Comment d to Restatement Section 205: “Subterfuges and evasions” are in breach of the duty “even though the actor believes his conduct to be justified.” “[P] laintiff need not prove bad faith . . . .”

17. Good Faith and Fair Dealing Associated General Contractors of America Wrong to read Precision Pine to abandon this body of law. Different context. Different question.

18. Good Faith and Fair Dealing Associated General Contractors of America The facts that Precision Pine presented: Fourteen Forest Service contracts to harvest timber. Fish and Wildlife Service determination that Mexican spotted own belongs on list of endangered species. Federal court order to suspect harvesting, pending consultations between two agencies

19. Good Faith and Fair Dealing Associated General Contractors of America How Precision Pine differed: Dealt with government action external to the contract. Far from typical procurement contract case, where “there is no occasion to determine whether the government conduct was ‘specifically targeted” at the private contractor.

20. Good Faith and Fair Dealing Associated General Contractors of America “Where, as in the present case, the questioned governmental acts are not those of others but rather the acts of the very officials administering the individual contract, the ‘specifically targeted’ standard is tautological and irrelevant. Every act of such officials is ‘specifically targeted’ at the contract they are administering.”

21. Good Faith and Fair Dealing Associated General Contractors of America “[M]isplaced inquiry into ‘specific targeting’ would also blur important distinctions between two very different legal standards: a breach of the duty of good faith and fair dealing, which requires proof only by a preponderance of the evidence, and bad faith, which requires proof by clear and convincing evidence.”

22. Good Faith and Fair Dealing Associated General Contractors of America “Any change — or even uncertainty — in the duty of good faith and fair dealing” would also “have major implications for contractors’ risk assessments and costs.” “This Court should [therefore] reaffirm” that the test in the typical procurement case is “the objective reasonableness of the challenged conduct.”

23. Robynne Parkinsonis a principal of Thaxton Parkinson PLLC, a Seattle area law firm that provides representation and counseling on a wide range of construction projects with a focus on alternative procurement.  She is on the Executive Committee of the Design-Build Institute of America National Board of Directors and is the Co-Chair of DBIA’s National Legal and Legislative Committee.  Robynne represented the DBIA and the AIA in the submission of their Amicus brief to the Court of Appeals for the Federal Circuit in the Metcalf Construction v. U.S. case .  She is a frequent speaker on risk allocation in Design-Build construction and the author of the blog www.designbuildlaw.blogspot.com. She can be reached at rparkinson@rtp-law.com

24. Michael Kennedy is the General Counsel of the Associated General Contractors of America (AGC), where he formalizes most of the association’s business arrangements and serves as its primary point of contact with the surety and insurance industries. He also supervises the association’s work on labor, employment and environmental matters, and its litigation program. Between 1986 and 1996, he spearheaded AGC’s successful effort to determine the outer legal boundaries of government programs for minority, women and disadvantaged business enterprises. In 2010, he persuaded California’s Air Resources Board to modify its emission standards for off-road diesel equipment.

25. Theresa Ringle, is President/CEO of the Ringle Law Group, LLC in Indianapolis, Indiana, a contracts, litigation and appeals firm focusing on the construction, design, energy, environmental and insurance industries. • Division 3/Design provides practical knowledge concerning the problems and needs, risks and rewards, and duties and liabilities of each of the parties involved in the design process, with particular emphasis on design delivery and implementation, construction project development, and project economics and financing in both the public and private sectors. • Join the ABA Forum on the Construction Industry and Division 3/Design by visiting www2.americanbar.org/Forums/Construction/CI103000/Pages/default.aspx