Tuesday, August 30, 2011

You either talk to each other, or you talk to the lawyers.

The US Court of Federal Claims has decided an interesting case involving liquidated damages, delays and changes in a design-build contract.  See K-Con Building Systems, Inc., v. US, ____ Fed. Cl. ___, 2011 WL 3634164 (Fed. Cl. August 19, 2011).    As noted in my previous blog entry, the dispute all boils down to a lack of communications between the parties.  K-Con was the design-builder of prefabricated structures and outdoor smoking shelters for the Coast Guard.  The contract was awarded by the US General Services Administration and administered by the Coast Guard.  The Owner’s Program contained numerous performance requirements for the building, including the approximate square footage, the minimum clear height for the building’s shop bays as well as code compliant systems.   K-Con submitted a proposal that altered some of the requirements of the Owner’s Program, and the Coast Guard appeared to accept these alterations.
The Facts:  K-Con was required to submit drawings at 50%, 90% and 100% and was authorized to commence construction at the approval of the 50% drawings.  The Coast Guard initially asked if several of the performance requirements could be changed but eventually decided not to move forward with the requested changes.  During the design process, the Coast Guard made comments on K-Con’s proposed design.  However, K-Con never gave notice pursuant to the contract that either the proposed changes or the comments increased the time for performance of the work.  Further, although the parties negotiated several changes to the final cost, the contractual substantial completion date was never altered.   Although it is difficult to piece together the actual communications, it appears that there were little, if any.  The Coast Guard didn’t do a very good job of deciding what it really wanted, and K-Con didn’t do a very good job of managing expectations with respect to owner requested changes.  K-Con also didn’t understand the difference between “suggested” changes and “required” changes and treated all comments by the Coast Guard as requirements.
K-Con did not finish the work by the contractual substantial completion date, and the Coast Guard assessed liquidated damages.  The daily amount of the liquidated damages was $590, and the total assessment was $107,787.  You can do the math -- K-Con was extremely late.  K-Con disputed the assessment of liquidated damages on several fronts.  First, K-Con argued that the original calculation of the LD amount was not justified and constituted a penalty.  Second, K-Con argued that all of the Coast Guard’s comments were actually changes to the work, and K-Con should be entitled to an extension of the contract time.
Holding #1:  Quit whining about the substance of a contract you signed.  The court ruled that the time for determining the appropriate liquidated amount was at the beginning of the contract and would not entertain K-Con’s nit picking after the fact.  The government was entitled to include both overhead and administrative costs in its calculation.  The contracting officer doesn’t have to be perfect in his or her estimate of potential damages that the government will incur.  As long as the overall amount was reasonable, the court will not examine the details as to how it is calculated.
Holding #2:  Don’t play games with notice.  Although K-Con never provided specific notice under the contract that the Coast Guard’s comments on the proposed designs were “changes”, the court held that there was an issue of fact as to whether the Coast Guard had actual notice of the changes and whether the Coast Guard was prejudiced by any failure to provide notice.  If there was no prejudice, the design-builder would be entitled to an extension of time, despite the lack of notice.  The court noted the following standard for trial:
 Thus, “[i]f the contracting officials have knowledge of the facts or problems that form the basis of a claim and are able to perform necessary fact-finding and decisionmaking, the Government is not prejudiced by the contractor's failure to submit a precise claim at the time a constructive change occurs.” Calfon Constr., Inc., 18 Cl.Ct. at 438–39. Conversely, “[w]here contractor silence would foreclose less costly alternative solutions or the ability of the Government to avoid contractor claims, timely notice is required.” Id. at 439.
Holding #3:  Communicate, communicate, communicate.  The court then addressed whether the comments by the Coast Guard actually constituted actual changes by classifying the comments into two different types:  1) “recommendations” made by the Coast Guard to insure compliance by the design-builder to the original requirements of the contract; and 2) changes to the original contract requirements.  If the comment was merely a reminder to the design-builder of the contractual requirement and a suggestion that the design proposed would not meet those requirements, the court determined that the comment was not a change.  For example, a reminder that the contract required adequate ventilation for the telecommunications room and a suggestion that the design-builder’s design may not accomplish that goal was simply a “recommendation.”   However, if the comment mentioned requirements that were either additions to or contrary to the original program, the comment was a “change.”  For the comments in the second category, the court ordered a trial to determine whether the comment actually constituted a change.  Therefore, a comment that requested hose bibs be installed on two sides of the facility would be evaluated as to whether the hose bibs were necessary under good practice or a referenced code. 
The case is instructive as to the analysis of each comment and whether the court felt that a trial was necessary.  However, the better practice for K-Con would have been to tell the Coast Guard, “Sure, we are happy to include the hose bibs; however, that change will be a change and an increased cost to the contract.” 
What we learned today:  The lawyers are the only ones who win.  The real lesson from this case is not one of the enforceability of liquidated damages or notice of claims provisions.  As I said earlier, it all goes back to the parties’ lack of communication.  If the design-builder had established an open communications process with the owner and documented changes during the design process, and if the owner had clearly identified its objectives and requirements, then the dispute would not have occurred.  However, neither party did a particularly good job of working with the other to avoid later disputes.  Owners should feel free to discuss potential changes with design-builders; however, owners need to make final decisions within a reasonable time.  Design-builders need to provide owners with clear expectations with respect to potential changes and inform owners of the effects of changes as well as any claim that an owner’s actions will eventually result in a change.   Although the owner seems to have gotten a win out of this case, remember that the case is not over.  They still have to battle over what should have been discussed in the first place.  The only people who win when a case goes through this much litigation are the lawyers. 

Tuesday, August 23, 2011

Posting from Desolation Sound

Posting from Cortez Island in Desolation Sound.  It's between Vancouver Island and mainland British Columbia.  As I spend the next week on a boat with my family (husband, twin 10 year olds and a 9 year old), I am reminded about the benefits of communication and teamwork.   In every single construction dispute I have witnessed, the genesis of every problem was the lack of communication.  The problem with the design-bid-build system and the legitimate fear that Owners have of falling in the Spearin liability gap is that is stifles rather than promotes good communication.   Even though problems that are solved early are solved easily, design-bid-build prohibits the designer and the constructor to work problems and issues out during design, when they are less costly.  Owners further the problem by creating contracts that restrict innovation and promote conflict. 

Back to cruising the Sound. 

Thursday, August 18, 2011

New Intellectual Property Case

The Seventh Circuit has decided a very interesting case involving the intellectual property rights in a design-build case.  Nova Design Build, Inc., v. Grace Hotels, LLC, ___ F.3d. ___, 2011 WL 3084929  (CA7 July 26, 2011).  Grace Hotels hired Nova Design Build, Inc., to perform architectural services in the design of a Holiday Inn Express in Waukegan, Illinois.  The designs were to be based on the Holiday Inn Express prototype.  The parties also contemplated that Nova would perform the construction work; however, the contract provided that Grace would have the right to use Nova’s design even if Nova did not perform the construction, provided that Nova was paid in full, including an additional $15,000 fee.   The parties’ relationship became strained. Grace terminated Nova hired another company to construct the hotel. 
Nova registered a copyright for the designs and then sued Grace for copyright infringement, arguing that it was not paid the fee required for Grace to utilize the drawings without Nova performing the construction work.  (The parties disputed this issue, but it became irrelevant given the court’s order.)  The court found that Grace had the right to use the drawings because they were not protectable under copyright law.  The court noted that to be protectable, the drawings had to be original.  “The protectable elements are those that possess originality.  Originality requires that the elements be independently created and possess at last some minimal degree of creativity.”  Id at p. 4.  Because the designs were based on the Holiday Inn Express prototype, Nova did not identify “anything in these particular designs that was original and thus protectable.”  Id.  Nova argued that the drawings had added features such as an extra floor, larger meeting area, different closet and door placements and a different pool, laundry and exercise area.  The court didn’t buy the argument.  “Though Nova’s designs do possess added features (and these additional are the only elements that may be protectable), they are devoid of originality.  Merely adding an extra floor, identical to the floor layout of the prototype is not original.”  The other features, noted the court, were specifically requested by Grace.  Therefore, the plans were insufficiently original to qualify for copyright protection.
What is the take away for design-builders?  There remained a contract claim on Nova’s right to the $15,000 payment.  What Nova lost was the hammer present in copyright infringement cases, the ability to stop the project through an injunction.   Parties may still contract for these types of payments; however, a party attempting to enforce copyright claims should objectively review the designs to see if there are any elements that can, in fact, be copyrighted. 

Tuesday, August 16, 2011

Blogging

The goal of this blog to further discussion regarding construction delivery methods.  I focus on design-build construction, but I am always interested in any delivery method or technique that has been successful.   As a lawyer, I do not subscribe to the delusion that I perform a useful function in society.  Let’s face it.  If stuck on a desert island, the ability to draft a legal pleading is not the “go to” skill.  Therefore, I like to think I contribute by helping others build buildings. 
Twenty years ago, when I first started practicing construction law, I was stunned to discover that the prevailing attitude between owners, architects and contractors was distrust.  The first task after the signing the construction contract was hiring the claims consultant.  After representing owners, contractors and designers, I have learned all of these wonderful people are simply trying to accomplish the same task:  create a successful project that 1) accomplishes owner’s goals; 2) comes in on time and on or under budget; and 3) is an asset to the community.  
Studies from the world of construction and manufacturing show that the best way to create a fabulous project is for all of the parties to communicate, cooperate and collaborate.  Involving the constructor early in the process and solving problems at the earliest possible time   However, the prevailing design-bid-build delivery method and price only procurement does not foster an environment where the parties can work together.   Rather, design-bid-build and price only procurement encourages the “claim first, talk later” attitude that was prevalent when I first started practicing.  My inclination was that there has to be a better way.  I became fascinated with design-build because it represents that better way.  It is the only delivery method that places the risk in the hands of the party best able to manage the risk.  Design-build, when implemented correctly, fosters a collaborative environment where the parties can communicate, innovate and create amazing results.