Top 3 Construction Law Developments of 2015
Kegler Brown Construction Newsletter December 8, 2015
There were a number of significant legal developments impacting the construction industry over the past year. You can find my top three for Ohio in 2015 below:
1. Ohio Court of Claims Referee finds State failed to act in good faith.
After three (3) weeks of a trial where our firm represented the contractor, Referee Wampler of the Court of Claims, in a 140-page decision has ruled:
- The State has a duty to provide full and accurate plans sufficient for construction.
- The Architect and the Construction Manager were authorized agents of the State with respect to planning, design and construction.
- “The design was in such a state of confusion and disarray that the architect itself was never able to issue a set of comprehensible set of construction drawings” … “so they could be issued to the contractors.”
- The construction manager “manipulated the schedule by accelerating some activities which resulted in stacking of trades which in turn led to inefficiencies.”
The Court found that the contractor “had become a scapegoat” for “mismanagement” and “poor design.” As a result, the Court ruled that the State, through its agents, “did not act in good faith in the performance of its obligations,” and breached the contract.
This dispute arose from the efforts of the Ohio School Facilities Commission (OSFC) to build dorms for the Ohio School for the Blind (OSSB) and the Ohio School for the Deaf (OSD) when our client TransAmerica (TA) was hired as the general trades contractor.
As the Court summarized: “At the end of the day, it is clear the OSFC tried to build a project that OSD and OSSB could not afford within the funding provided through the Capital Bill, and it forced its contractors to achieve this task, at least with respect to the Dorm Project, without approved or adequate construction documents.”
“OSD and OSSB ended up with a compromised design and reduced capacity for their new facilities and they were delayed in putting them into service for their students. This was not the fault of TA. It was the fault of OSFC in its efforts to build facilities that OSD and OSSB could not afford, and in trusting its agents to carry out the task, agents who often acted in their own interest and not in the interest of the OSFC, or fairly and honestly in their dealings with TA.”
The Court also found that the “Article 8 process was a road to nowhere” as it was ignored or disregarded by the OSFC. And that the OSFC and its agents prevented the contractor from strictly “complying with the conditions precedent under Article 8 of the General Conditions.”
Contractors who are unfairly blamed for additional costs or delays caused by incomplete plans or flawed schedules will find helpful language in the Decision. Further objections and appeals from the State are expected.
2. The Ohio Supreme Court tackled the Liquidated Damages issue.
The Ohio Supreme Court has decided to revisit liquidated damages in the context of a construction case handled by our firm.
On June 9, 2015, the Supreme Court of Ohio heard oral argument in the case of Boone Coleman Construction Co., Inc. v. Village of Piketon, Ohio, 2014-0978. The issue was whether a liquidated damages provision in a public construction contract is valid, or an unenforceable penalty, and whether that determination should be made prospectively or after the fact.
The Village of Piketon bid the installation of a traffic signal and related roadway improvements at an intersection of U.S. Route 23. The contract contained a $700 per diem liquidated damages clause to compensate Piketon for damages caused by unexcused delays in the project. The per diem was set based on a schedule established by the Ohio Department of Transportation (ODOT).
The project was awarded to the lowest bidder, and Boone Coleman, which bid at $683,300, agreed to complete the project in 120 days. The project was completed 397 days late.
Boone Coleman filed a complaint to recover its contract balance, plus additional compensation for extra work performed. Piketon denied that any additional compensation was owed, and counterclaimed for $277,900 in liquidated damages for the delays in completing the project.
The trial court granted Piketon’s motion for summary judgment, finding that the liquidated damages clause was valid and enforceable, that Boone Coleman was responsible for the delays in completion of the project, and that Boone Coleman did not provide the required written notice for extensions of time or additional compensation as required under the contract.
The Fourth District Court of Appeals affirmed the trial court’s granting of summary judgment in favor of Piketon on Boone Coleman’s claims for additional compensation, agreeing with the trial court that Boone Coleman failed to follow the notice provisions of the contract, and was responsible for the 397 day delay.
The court of appeals reversed, however, on the counterclaim for liquidated damages, finding it to be an unenforceable penalty. In doing so, the court of appeals looked at the contract as a whole, in its application, (meaning it looked at the situation retroactively) finding that the liquidated damages equaled nearly a third of the contract price. The court of appeals found the total amount of liquidated damages to be “so manifestly unreasonable and disproportionate [to the consideration given to Boone Coleman] that [the contract] is plainly unrealistic and inequitable.”
While no decision has been received yet, some legal commentators have stated that this case looks like a victory for the owner. This comment from the Chief Justice at oral argument summarized the Court’s skepticism of the contractor’s argument:
“I see a much bigger application here which pretty much upends a pretty stable area of contracts with public funded projects which is the stick, the penalty, if the construction company does not get the work done for the benefit of the public. Using public dollars, you are going to be penalized, and I don’t know that it would be a wise foray for this court to upend that.”
This was generally considered a well settled area of the law until the Fourth District decision, and the contractor didn’t provide much of a convincing reason to change it. While the liquidated damages assessed were large, most of the damage was self-inflicted by the contractor.
3. Bond protection strengthened on Ohio P3s – Public-Private Partnerships.
The funding of construction projects for public use through public-private partnerships (known as P3s) is increasing at all levels, including on federal and federally-funded projects. Typically, the public entity will provide the land and authorize the private entity to design, build and frequently operate the resulting public work. In trying to maximize the incentives for the participation of private investment in P3 projects, federal agencies, as well as state and local governments using federal funds to help finance construction, try to minimize government “red tape.” The zeal to reduce “red tape” and minimize costs has damaging consequences, however, when it eliminates traditional requirements related to public procurement, such as the statutory payment protections for work performed, provided by the federal Miller Act and state and local so-called “little Miller Acts,” enacted by all the states, including Ohio.
The Ohio General Assembly has authorized ODOT to enter into P3s with private entities after soliciting proposals. Fortunately, ODOT is statutorily obligated to require that the public-private agreement include a (1) contract performance bond and (2) payment bond pursuant to R.C. §5501.73(B). In 2015 that statute was clarified to require bonding of the entire “construction services” portion of any such P3 job.
Those providing labor or material to other P3 projects should not necessarily conclude that the work is protected by a payment bond in the usual public fashion. Further investigation is recommended on such projects if ODOT is not involved.