Monday, March 31, 2014

Promissory Estoppel . . . Wait . . . What??

Promissory estoppel is not just one of those fancy phrases that lawyers use to make themselves feel smart.  It is a complex legal concept that can really screw with a company’s expectations with respect to whether a contract exists.  Personally, I became traumatized by the concept my first year in law school when I got into a shouting match with my Civil Procedure professor over the issue of what “estoppel” meant.  I believe that was also the day I gained my nickname “the Mouth from the South” and became a “free space” on the daily law school bingo game, but I digress.

Promissory estoppel comes into play when one party (we’ll call them the “defendant”) makes promises to another party (yes, that would be the “plaintiff”) on which the plaintiff relies to its detriment.  In these circumstances, we are obviously discussing litigation because it is not typical for anyone to voluntarily admit to the presence of promissory estoppel.  The theory behind promissory estoppel is that the plaintiff would not have taken the action it did unless the defendant made said promise, and it is unfair to the plaintiff for the defendant not to keep the promise.  If you are thinking that this concept sounds a bit dubious when it comes to evidence and damages, you are correct.  There is no actual contract, or the parties would have looked to the contract to determine whether the plaintiff is entitled to relief.  Instead, the plaintiff asks twelve people who couldn’t otherwise get out of jury duty to determine whether it is fair for the plaintiff to have suffered damages based on its reliance on the defendant’s promise and to determine the extent of those damages.  If that doesn’t scare the pants off a rational person, I don’t know what will.

A new case from the Fifth Circuit Court of Appeals illustrates this concept and the perils that can accompany chasing a project.  In MetroplexCore, LLC v. Parsons Transportation, Inc., 2014 WL 80237 (5th Cir. February 28, 2014), the parties initially entered into an agreement in which MetroplexCore would participate in a joint venture with Parsons for Phase I of a transportation project with the Harris County Texas Metropolitan Transit Authority (“Metro”).  The team did not initially win the project, and another company started work on the project.  Several years later, after the initial agreement between Parsons and MetroplexCore expired by its terms, the initial design-builder could not continue with the project, and Parsons was awarded the remainder of the project, which was then dubbed “Phase II”.  Metro based its award from the original solicitation, but the scope of the project had changed, and Parsons did not maintain its original team.  Significantly, although there were apparently some discussions between the parties with respect to Phase II, the end result was that MetroplexCore was not a member of the subsequent team, and MetroplexCore sued. 

MetroplexCore’s initial argument was that it and Parsons had a joint venture relationship, and MetroplexCore was entitled to a share of the profits on the project.  The Court of Appeals rejected this argument because the relationship did not meet the standards in the Texas Business Code for a partnership.  MetroplexCore then argued that it was entitled to relief under the legal theory of promissory estoppel because (according to MetroplexCores’ allegations, which must be taken as fact for the purposes of a summary judgment):  1) Parsons promised that MetroplexCore would continue to be a member of the team performing the work on the project; 2) MetroplexCore relied on that promise; and 3) that reliance is evidenced by the following assertions from MetroplexCore:  a) it retained personnel for longer than it normally would have so that it could maintain its capacity to work on the Project, and b) it divested its investment in a related company that performed work for the initial design-builder to avoid a conflict of interest that might disqualify the team from performing the work.  MetroplexCore’s asserted damages are in the range of $3 to 4 million. 

Because the case has been remanded back to the trial court for a hearing, and MetroplexCore now has the burden of convincing a jury that it is entitled to these damages, we may never know the eventual outcome of the case, but the potential damages to MetroplexCore are instructive and provide a cautionary tale for anyone chasing work.  At a minimum, Parsons is looking at either settlement or the costs of a new trial, all because of MetroplexCore’s allegation that one of its Vice Presidents kept it interested in performing the work and didn’t memorialize the relationship with a contract.  So, to those folks who tell me that they don’t “have time” to enter into a Teaming Agreement before they sign a subcontract (you know who you are), I ask them whether they have the time to sit in a trial court to explain the relationship to a jury.  My guess is that it takes far less time to put it in writing and quit whining.

Monday, March 24, 2014

New Procurement Cases Shed Light on Owner's Discretion

Two new procurement cases shed light on the extent of a public agency’s discretion during an alternative procurement process.  In an unreported decision out of New Jersey, Patock Const. Co. v. New Jersey Sch. Dev. Auth., A-1305-13T3, 2014 WL 85300 (N.J. Super. Ct. App. Div. Jan. 10, 2014), one of the design-builders proposing on a project protested its disqualification based on a conflict of interest.  The lead architect identified by the design-builder had previously worked for the school district, and the school district made a determination that the architect’s involvement in the project was substantive such that the architect had information that gave the design-build team an unfair advantage.  Indeed, in the design-builder’s proposal to the school district highlighted the proposed architect’s role in developing the bridging documents as an advantage in selecting the design-build team.  Unfortunately for the proposer, when the school district determined that the design-builder was correct in stating that its architect’s involvement gave the design-builder an advantage, the school district then determined that the advantage was unfair to the other proposers and disqualified the entire team.  The court upheld the school district’s determination, consistent with other alternative procurement cases across the country that acknowledge the vast amount of discretion given to public agencies to determine conflicts of interest and disqualify teams based on the conflicts, stating, “Although not bound by an agency's determination on a question of law, our courts give ‘great deference’ to an agency's ‘interpretation of statutes within its scope of authority and its adoption of rules implementing’ the laws for which it is responsible.”
In Cmty. Mar. Park Associates, Inc. v. Mar. Park Dev. Partners, LLC, 2014 WL 415955 (N.D. Fla. Feb. 4, 2014), the highest scored proposers for a design-build project decided to play fast and loose with the business entity that entered into the eventual contract with the public agency.  The project consisted of the development of a public maritime park, and the authorizing legislation required that the public agency enter into a contract with the highest scored proposer from the procurement.  Unfortunately, the lead company in the joint venture that achieved the highest score had financially collapsed between the RFQ and the RFP.  The representatives of the joint venture did not disclose the financial collapse to the public agency, and instead, created a single purpose shell entity to enter into the contract.  The court held that the public agency did not have the authority to negotiate and/or enter into any contract with any other entity than the entity that submitted pursuant to the RFQ.  Absent such authority, the lower court declared the contract to be void and required the developer/design-builder to disgorge (a rather graphic term meaning pay back) the money paid to it by the public agency, and the appellate court affirmed this ruling.
“In its prior orders granting summary judgment, the Court concluded that the Development Agreement had been awarded to a shell entity, i.e., MPDP, and not the firm selected as the most highly qualified through the CCNA competitive qualifications procedure, which was Land Capital. The Court found that this irregularity constituted a material noncompliance with the CCNA. Although in Florida a public body has “wide discretion” to implement competitive award procedures for public improvements and courts will not interfere when the procedures are “based on an honest exercise of this discretion,” Liberty Cnty. v. Baxter's Asphalt & Concrete, Inc., 421 So.2d 505, 507 (Fla.1982)."  The Court in this case concluded that CMPA had no discretion under the statute to award the professional services portion of the Development Agreement to an entity that was not affiliated with the firm deemed “most highly qualified” within the meaning of the CCNA and which did not compete at all in the qualifications portion of the award process. Also, because no other competitive award procedures were used, the Court concluded that the entire Development Agreement was void and that disgorgement of money paid under the void public contract was required. Additionally, the Court entered a preliminary injunction, requiring MPDP to deposit with the Court any money it received as profit from the design-build contract, up to the sum of $460,786, in order to preserve the status quo until the amount of disgorgement could be determined.
The court acknowledged that Florida law recognizes an exception to the requirement to pay back money paid if the void contract was not the result of bad faith on the part of the parties; however, the court found the exception to be inapplicable because the representatives of the developer affirmatively misrepresented the financial stability of the entity proposing and failed to provide updated information regarding the entities financial capacity during the procurement.  The court also chastised the representatives for stating to the public entity that the proposing entity was a “joint venture”, when the eventual proposing entity was actually a shell LLC.  The proposers defended their actions explaining that they were not using the term as a legal one; however, court recognized that the term “joint venture” has a specific legal meaning and indicates that each party to the joint venture has joint and several liability toward the owner.  In contrast, the actual contracting entity was a shell LLC, thus limiting the participants’ liability to their contribution to the LLC, the exact opposite of a joint venture.
The lessons behind these two cases?  Although a public agency has a great deal of discretion to manage its procurement process, if it violates the rules of the procurement or its own rules pertaining to selection, its conduct may be the subject of a protest.  Another valuable lesson for proposers is not to misrepresent qualifications or structure to the owner.  Even if the public agency in the CMPA case wanted to continue to work with the developer, it would have been prevented from doing so because the contract was void against public policy.  Finally, don’t banter around legal terms like “joint venture” unless you know what you are talking about.   Legal terms have meaning, and by using them you may be making a representation that you do not intend. 

Monday, March 10, 2014

What Exactly Do You Mean by "Fiduciary"?

Because it is not uncommon for design-build teams to be either single purpose LLCs or joint ventures, issues arise with respect to the enhanced duties implied under the law for these entities.  When design-build teams create these relationships, the obligations are different than those of parties to the garden variety or “arm’s length” contract.  When parties are members of an LLC or joint venture, they have a higher duty toward the other joint venturers or LLC members, known as a “fiduciary” duty.  When discussing this issue in the DBIA Contracts and Risk course, my usual line is that fulfilling a fiduciary obligation includes a requirement to put the interest of their partners over their own interests.  However, when asked for specific fact situations, I am often hard pressed to describe the type of obligations included in the fiduciary duty.  In a new case, the Federal District Court in Seattle provides some insight into how fiduciaries in an LLC created for a design-build project can get into trouble. 

In Kumar v. Entezar, 2014 WL 352960 (W. D. WA 2014), the parties created a single purpose LLC to acquire property and design and construct single family homes.  Entezar owned one of the LLC members and was appointed as the manager of the single purpose entity.  Kumar owned the other member of the single purpose entity.  Kumar brought a claim of breach of fiduciary duty against Entezar.  Although the procedural posture of the case had not sufficiently progressed to allow the court to make a holding with respect to the facts in the case, the court did note some potential actions that may give rise to a breach of fiduciary duty claim.  These actions include a conflict of interest through contracting with a related company and obtaining an unauthorized profit through the related company, hiring a manager for the LLC without obtaining the consent of the other LLC member and finalizing a design-build contract without obtaining the consent of the other LLC member.  The court noted that the parties’ fiduciary obligations to each other did not prohibit contracting with related entities; however, any contract with a related entity had to meet a commercially reasonable standard and the potential conflict of interest and profit pursuant to that contract would have to be disclosed to the other LLC member.  If, by contrast, the parties had entered into an arm’s length contract (such as a prime/subcontractor or subconsultant agreement), rather than an LLC with the additional fiduciary obligations, there would be no obligation to make such disclosures. 
The bottom line is that parties with fiduciary obligations need to be cautious about any actions taken during the course of the management of the project because their duties go beyond what is specifically defined in the LLC documents or the joint venture agreement.  One party cannot profit at the expense of the LLC without the other party knowing about the additional compensation and consenting to the transaction.  In these cases, over disclosure is the best course of action.

The DBIA has two upcoming conferences:  The Water/Wastewater Conference is scheduled for March 17-19, and the Transportation Conference is scheduled for March 19-21, both at the San Jose, CA Convention Center.  These conferences are always well produced and are specifically tailored to individuals in these market sectors.  More information can be found at: