The Critical Path: Tools for Resolving Construction Disputes : California Construction Lawyer & Attorney for Dispute Resolution in Los Angeles, San Diego & the S.F. Bay Area

Bidding on public works projects often leads to conflicts and claims. In a future post I will discuss claims for extra compensation arising from bids below the engineer's estimate-characterized by some (usually public owners) as opportunistic bidder claims. Disputes also arise from disappointed bidders whose bids were not the low bid or from low bidders who lose contracts after a bid protest by a competitor with a higher bid price. 

Most states require public works contracts to be awarded to the lowest bidder. It is believed this inures to the benefit of the public fisc by driving competitive bids to the lowest reasonable price. But how do you reconcile the public's desire for the lowest price with the public's need for safety, quality, and  reliability? In California, these competing interests are addressed by requiring public works contracts to be awarded to the lowest responsive and responsible bidder. In other words, the award goes to the contractor with the lowest bid that fulfills the bidding requirements who can also demonstrate that it is a responsible contractor with the requisite bona fides such as licensure, experience, bonding capacity, etc.

There is an inherent problem with this system: while the lowest bid price is an objective standard, the requirements of responsiveness and reliability are subjective standards that can be manipulated. Yesterday, in a case called Great West Contractors v. Irvine Unified School District, the California Court of Appeal addressed problems that arose when subjective criteria were used to reject the low bids on two school district projects and awarding them to two other contractors at an additional cost to the taxpayers or, as the court put it, "the Irvine School District appears to have paid $800,000 more than was necessary to remodel two elementary schools." To read the opinion click here.

Summarizing the case is relatively simple: Great West submitted the low bids on two school remodel projects. Contractors with higher bids protested claiming Great West was not a responsive bidder due to a question in the bid documents about the existence of additional contractor licenses. The school district rejected Great West's bids and awarded the projects to two other contractors. The Court described the importance of the case as follows:

This case is important for two reasons. First, it presents a challenging problem in public contracting law: How to distinguish a "nonresponsive" bid from a de facto determination that the bidder is not a "responsible" bidder. The difference is significant not only to the bidder, but to the taxpaying constituency of the public entity: A truly nonresponsive bid may be summarily denied by a public entity even if the bid is otherwise monetarily the best for the entity. On the other hand, a determination of nonresponsibility entitles the bidder to a hearing where certain minimal elements of due process must be afforded before the contract can be awarded to the next-best bidder. 

More particularly, this case illustrates the necessity of following the rule enunciated in 2007 by our Fifth District colleagues in D.H. Williams, supra, 146 Cal.App.4th 757 (D.H. Williams). Under the D.H. Williams rule, a public agency cannot reject the bid of the lowest bidder on a public works project on the theory that the bid is "nonresponsive" to the agency's request for bids when, in substance, the real reason for the rejection is that the agency thinks the lowest bidder is "not responsible" -- at least not without giving the lowest bidder the chance for a hearing on whether the lowest bidder really is "not responsible." On the record before us, because D.H. Williams was not followed, the Irvine Unified School District appears to have paid $800,000 more than necessary to remodel two elementary schools.  

The second major reason this case is important is that it presents an object lesson in how evidence that, at least on its face, tends to show favoritism -- indeed, on this record, favoritism most foul -- never got squarely presented to, or considered by, the trial court. The reason? An unfortunate combination of trial court calendaring beyond a petitioner‟s control, and a public entity‟s delay in complying with a request for information. (Readers can judge for themselves, when we recount the facts in detail in part II below, whether "stonewalling" might not be a better word than "delay.")

The Court went on to describe what it considered to be suspicious circumstances leading to the rejection of the low bids on the remodel projects:

Here, one competitor in a bid for a school remodeling contract, for some reason never adequately explained by the public entity, had access to the lowest bidder‟s bid information within 24 hours of the opening of all the bids. Thus, this competitor was able to present a bid challenge almost immediately to the contracting school district based on the allegation that the lowest bidder had omitted to disclose some licenses with which it or its principals had been associated. And that competitor went on to be awarded one of two contracts up for award. after the critical first court hearing in the case.

But when the lowest bidder tried to get a copy of that very same competitor‟s bid (as well as that of another company that was awarded the second contract), the school district did not turn over that information until several weeks later. More pointedly, the information was deliberately not made available until after the critical first court hearing in the case.

However, when, in the second hearing on the lowest bidder's main request for relief, the lowest bidder tried to proffer evidence that would show how it had been treated differently from the winning competitors, the school district vigorously objected on the ground that the evidence was submitted too late! It doesn't take Hamlet to figure out that something rotten happened in this case. In fact, it suspiciously fits George Washington Plunkitt's definition of honest graft -- the use of tips to gain an advantage over one's rivals in public contracting.

In the end, the Court of Appeal reversed the trial court's decision, holding in favor of Great West which meant Great West could amend its complaint to claim damages for payment of its bid costs. But the injunctive relief requested by Great West had been made moot with the passage of time. The case illustrates the difficulty and even futility of many bid protests in California. Due to the time it takes to file a petition with the trial court for an injunction to prevent the award of the contract to the other guy, and then if you lose, the time to file, and have heard, a writ of mandate with the Court of Appeal, more often than not, during the time necessary for the legal proceedings to roll out, the contract is awarded to the other contractor and the work is started, and sometimes completed, before the legal proceedings are concluded. If an injunction does not occur, the rejected low bidder is left with a claim for damages in the amount of the bid costs. This is not a satisfying solution when you lose profits from a job (and work for your employees) through no fault of your own.

Given the timing difficulties with bid protest, here are a couple of things you could do to speed up the process:

1. Have your lawyer prepare a "canned" public document request for the bid documents of your challenger(s) that you could immediately fill out and serve on the public entity in the event  your low bid is rejected.
2. If you choose to fight it, send a copy of your bid documents to your counsel as soon as possible so a petition for injunction can be filed as soon as possible. Make sure you have available all personnel who may be required to sign affidavits in support of the petition.
3. In the event the trial court can not or will not set the hearing at an early date, have your attorney file an ex parte hearing to shorten the time for the hearing on your petition.

Note: The Court of Appeal made it clear that Great West and its counsel reacted as promptly and as efficiently as possible under the circumstances. On the other hand, the Court went out of its way to suggest the reasons for the school district's motivation in (1) rejecting the low bid and (2) delaying the production of records in response to Great West's request for documents. While I have no idea of the school district's motives, it is noteworthy to point out the Court's strong language about what happened. I'll end this post with one such quote. 

The sweaty haste with which the District consummated the contracts with the third-from-lowest bidders, contrasted with the insouciance and delay with which it honored the lowest bidder's request for records, are all susceptible, of course, to at least an inference that the fix was in from the beginning not to award the contracts to Great West.

You don't read that kind of stuff everyday. At least not in the published opinions of the Court of Appeal.

• Email This
• Print
• Comments
• Trackbacks

Construction claims for non-disclosure on public works projects got a little easier to prosecute yesterday with the publication of the California Supreme Court’s decision in Los Angeles Unified School District v. Hayward Construction. (PDF) The importance of this case is reflected by the list of attorneys who represented the parties, a veritable Who's Who in the legal community.The contractor and surety were represented by veteran construction lawyers John Immordino of Wilson Elser and Joseph Miller of Montelone & McCrory. The school district was likewise well represented by its General Counsel, Roberta Fesler, Gregory Bergman of Bergman & Darcey and lawyers at Jones Day, including Ellwood Lui, a former associate justice of the California Court of Appeal, Second Appellate District, Division 3..

In the Hayward Construction case, and for the first time, the Court was asked to resolve a construction dispute brought solely on a theory of non-disclosure during the bidding phase of a project. The question was whether a contractor can recover extra costs of construction when the plans and specifications are correct, but the public entity failed to disclose information in its possession that materially affected the cost of performance.

The case is also important because it resolves conflicting opinions between four of the California Courts of Appeal. One Appellate Court, followed by the trial court in the Hayward Construction case, held that to recover for nondisclosure, the contractor must show the public entity affirmatively misrepresented or intentionally concealed material facts that rendered the furnished information misleading. Another Court of Appeal held a contractor need not prove an "affirmative fraudulent intent to conceal" when disclosure would have eliminated or materially qualified the misleading effect of facts disclosed. A third Appellate Court suggested that the careless failure to disclose information may allow recovery if the public entity possessed superior knowledge inaccessible to the contractor. And the Appellate Court in the Hayward Construction case broadly held that a contractor need show only that the public entity knew material facts concerning the project that would affect the contractor's bid or performance and failed to disclose those facts to the contractor.

SUMMARY OF THE FACTS

Hayward entered into a contract with a school district to complete the work of the original contractor who was in default. The scope of the work was based on a 108 page “pre-punch list” and required Haywood to correct the defective, missing and incomplete work on a time and material basis up to a guaranteed maximum price.

Shortly after beginning work, Hayward informed the district there were significant deficiencies in the existing work that had not been noted on the pre-punch list and could not have been detected by a visual inspection. As a result, Hayward made a claim for extra compensation to perform this additional work. The district then sued Hayward and its surety and Hayward filed a cross-complaint against the district, alleging misrepresentation and concealment. In support of these theories, Hayward alleged the district failed to disclose the extent of the defects in the existing construction, and failed to disclose information that would have put Hayward on notice that some of its assumptions about the scope of the required work were erroneous.

After losing a motion for judgment of the pleadings in the trial court, Hayward won at the Court of Appeal, and then the school district appealed to the California Supreme Court.

THE COURT'S DECISION

The California Supreme Court affirmed but narrowed the court of appeal’s opinion in Hayward Construction, holding that a contractor need not prove an affirmative fraudulent intent to conceal. Rather a public entity may be required to provide extra compensation if it knew, but failed to disclose, material facts that would affect the contractor's bid or performance.

In narrowing the Court of Appeal's opinion, the California Supreme Court stated:

[W]e conclude the Court of Appeal's rule was, in turn, overbroad in suggesting that recovery may be had for any failure to disclose material information. Rather, we hold that a contractor on a public works contract may be entitled to relief for a public entity's nondisclosure in the following limited circumstances: (1) the contractor submitted its bid or undertook to perform without material information that affected performance costs; (2) the public entity was in possession of the information and was aware the contractor had no knowledge of, nor any reason to obtain, such information; (3) any contract specifications or other information furnished by the public entity to the contractor misled the contractor or did not put it on notice to inquire; and (4) the public entity failed to provide the relevant information.

The Court noted the circumstances affecting recovery may include, but are not limited to, positive warranties or disclaimers made by either party, the information provided by the plans and specifications and related documents, the difficulty of detecting the condition in question, any time constraints the public entity imposed on proposed bidders, and any unwarranted assumptions made by the contractor. The public entity may not be held liable for failing to disclose information a reasonable contractor in like circumstances would or should have discovered on its own, but may be found liable when the totality of the circumstances is such that the public entity knows, or has reason to know, a responsible contractor acting diligently would be unlikely to discover the condition that materially increased the cost of performance.

The is an important case in the construction industry. The risks of the bidding process became a little less risky. The uphill battle for contractors claiming extra work for unknown conditions got a little easier. They will still have to overcome the Spearin rule stated by the U.S. Supreme Court nearly a hundred years ago, that a contractor can not avoid its contractual obligations or seek additional compensation for performing them merely because unanticipated circumstances are encountered. Contractors will still have to get past disclaimers and other contractual language that attempt to place the burden of unanticipated conditions on them. But the Hayward Construction case now gives them some relief when making a claim for non-disclosure: they do not have to prove an intent to defraud; only a failure to disclose material facts that would affect the contractor's bid or performance.When such a claim arises, the contractor should make a demand for all documents in the owner’s possession, custody or control relating to the conditions of the project.

As for the parties in the Hayward Construction case, they are back in the trial court preparing for trial.

NOTE: Nine amicus curiae (friends of the court) briefs were filed in the Supreme Court of California on behalf of various organizations. Such briefs are often filed in appeals concerning issues of broad public interest. Four amicus curiae briefs were filed on behalf of various construction industry organizations, including the Associated General Contractors Association of California and the American Subcontractors Association. Five amicus curiae briefs were filed on behalf of various governmental organizations, including the California School Boards Association and The League of California Cities. The filing of these briefs by outstanding lawyers and law firms is another indication of the importance of the Hayward Construction case to the respective interests of construction professionals and public entities in California.

 .

• Email This
• Print
• Comments
• Trackbacks

The very first sentence of a recent opinion of the California Court of Appeal (PDF) frames the essence of a prime contractor’s multi-million dollar claim on a public works project known as the Hyperion Wastewater Treatment Plant: 

The City of Los Angeles (City) obtained millions of dollars worth of construction work that it does not want to pay for.

And the third footnote in the opinion reads like a consumer products warning label for construction lawyers:

The pretrial proceedings and trial presented the trial court with difficult legal and logistical issues that were made even more difficult by the inability of trial counsel to adequately define the case and state the law. Given this context, the trial court‘s effort to resolve these issues was admirable.

This preamble to the Dillingham-Ray Wilson v. City of Los Angeles opinion leads THE CRITICAL PATH to state the obvious (something I have a keen eye for): construction claims are complex, judges are usually not experts in construction law matters, and lawyers may find it difficult to reduce complex concepts in ways that are meaningful to the judge or the jury. For these reasons and more, the risks and uncertainties of trial are enormous, even for the most sophisticated parties and experienced construction lawyers. as illustrated by this case.There are, however, some dispute resolution tools that can be forged from the pages of the opinion:

• Proving Damages. When evaluating a construction case, you must carefully consider the question of how you will prove damages. Oftentimes an inordinate amount of time and money is spent discovering facts to support liability but the issue of damages is not fully vetted until it is time to prepare for expert depositions and trial. You have to begin your case evaluation with the end-damages-in mind. When it comes to obtaining a verdict, proof of liability without proof of damages is no proof at all.
• Method of Proving Damages. There are various methods for proving damages in construction claims: the actual cost method, the jury verdict method, the total cost method, and the modified total cost method. The acceptance of these methods of proof varies from state to state and between some state and federal courts. However, the Dillingham-Ray Wilson case recognizes the viability of the modified total cost method in California." In the published portion of this opinion, we conclude that the trial court erred because section 7107 and Amelco impact the measure of damages, not the method of proving them, and also because a modified total cost theory is permissible."
• Motions in Limine. When evaluating the likelihood of success, you have to anticipate motions in limine that can gut your case. In the Dillingham-Ray Wilson case, for example, the trial court granted an in limine motion and excluded from evidence $25 million of the contractor’s claim on the theory that it could not document its actual costs as required by contract. Of course, this ruling was reversed on appeal but that only means the contractor will have a second  trial with no guarantee that the new jury will award any damages.

These points should be among those you consider when evaluating the likelihood of success at trial. It is not enough to say, “My chances are 50/50 or 70/30.” Your risk analysis should break down each key element and evaluate the likelihood of success for each one. Your risk analysis should include a hard look at your damages and how you will prove them up. You should consider your chances of getting all of your evidence into trial by anticipating potential motions in limine. You should be sure you know the law and each element that you must prove and fashion your discovery plan around those elements.

What does all of this have to do with dispute resolution? Everything. Mediation is at one end of the ADR spectrum and trial is at the other end. Both processes resolve disputes; litigants retain control in mediation, but they lose control at trial. The Dillingham-Ray Wilson case is a good illustration of this fact. Once the trial begins, you lose control of the evidence. The judge decides what will be admitted into evidence. Once your closing argument is over, you lose control of the outcome of the case. The jury will decide the winner and the loser. Preparing your case with the end in mind will increase your ability to establish the realistic value of your case. Litigants who do this usually find a way to resolve their dispute before trial

• Email This
• Print
• Comments (2)
• Trackbacks

Veteran Utah trial lawyer Harold G. Christensen recently published Samurai Lawyer, a pithy book that provides excellent counsel to trial lawyers based upon “The Samurai Way” of living (and dying, I might add). However, given the fact that more than ninety percent of civil cases settle before trial, it is negotiation skills, not trial skills, that are most often called upon by litigators, and yet relatively little attention is given to them 

 In Japan, samurai were warrior servants who embodied the law of bushido, a Japanese word formed from two other words: bukyo, meaning “The Warrior’s Creed,” and shido which means, “The Way of Gentlemen”. Litigators who adopt these principles to enhance their negotiating skills will resolve their clients’ disputes more effectively and will become more than courtroom warriors; they will be valued as wise and trusted counselors at law.

                                                           I. VISION

A successful negotiator has outstanding vision; he sees both the strengths and weaknesses of his case. He has the capacity to look beyond the narrow focus of advocacy and peer into the broad spectrum of possible outcomes through the eyes of the judge or the jury. He meticulously evaluates the law and facts advocated by his opponent, knowing, as did the samurai, that “You must understand the conditions on the opposite shore to comprehend your side of the river.” This perspective minimizes negotiating mistakes, which, studies have shown, occur more frequently with plaintiffs, but that when defendants do make them, they are really big mistakes resulting in awards much higher than plaintiff’s last pre-trial settlement offer.

                                                           II. PREPARATION

Samurai negotiators know “When you’re thirsty it’s too late to start thinking about digging a well,” so they prepare for the negotiations in every detail. Foundational questions include:

• What do I want to accomplish through the negotiation?
•  What outcomes would not be acceptable?
• Why would these outcomes not be acceptable?
• What are the terms that I must have vs. terms I would like to have?

In their seminal work, Getting to Yes,” Fisher and Ury suggested that negotiators prepare by determining their BATNA, their best alternative to a negotiated agreement. In other words, the client would rather  go to trial than accept an amount lower than the bottom number in her settlement range, if she is the plaintiff, or if she is the defendant, she would prefer going to trial rather than pay more than the highest number in her settlement range. In order to establish their BATNA, successful negotiators determine in advance the point at which the risks of trial outweigh the concessions their client must make to settle the case.

Trial risks can be effectively evaluated through decision tree analysis, in which the key events of the litigation through trial are projected, and an estimate of the probability for success or failure of these events is assigned. A decision tree visually depicts this process in as much detail as may be desired. A more complex decision tree may include the chances of success of potentially dispositive motions, such as summary judgment, or the impact of rulings on certain key evidence. If, on the other hand, the evaluation is limited to liability and damages, the basic question is what are the chances of prevailing on the issue of liability? If liability can be established, what is the range of damages likely to be awarded? The outcome will provide a range for settlement purposes.

                                                            III. Benevolence

“A wise man hears one and hears ten,” so goes the Japanese proverb. Litigators are not known for their benevolence in the courtroom; however, it is an important characteristic for negotiators, who must look beyond economics to see if there are additional motivating factors on the other side of the table. Successful negotiators consider the following:

• What are the conditions and circumstances of the other side?
• What is the financial condition of the other side?
• What business or personal pressures is the other side facing?
• What would my interests be if I were on the other side?

In addition, such things as the titles and responsibilities of the other side’s negotiating team, and their respective ages, length of employment, and relevant experience should be considered. But it does not stop there; successful negotiators also take into consideration the age, health, and financial condition of their clients, including the impact of the litigation on work and family, for successful negotiators understand that, win or lose, trials exact a price beyond money from all of its participants.

                                                             IV. WISDOM

Often, litigants negotiating a dispute will fall into the “You go first” trap. They want the other side to make the first offer and this often leads to frustration, mistrust, and, ultimately, an unsuccessful negotiation. Wise negotiators understand, “Knowledge without wisdom is a load of books on the back of an ass.” They recognize the psychological affects of anchoring and framing, concepts that inure to the benefit of the party who is willing to make the initial move during negotiations. Anchoring occurs when one of the parties makes the first reasonable settlement offer, one that suggests that the target figure is within reasonable range of the likely outcome if the case were to proceed to trial. Studies have shown that the party making the first reasonable offer will likely succeed in the negotiation as the other side must respond to the range that has been set.

Framing is a concept that gives the wise negotiator additional advantages by providing persuasive context to the negotiations. It can cause the other party to focus on features within a desired construct while disregarding other aspects arising from the disputed event. For example, in the realm of politics, we see national leaders framing the debate over health care. While one side has attempted to frame the debate by focusing on the importance of extending health care for everyone, the other side seems to have taken control of the debate by framing the issue as the nationalizing of health care for the benefit of a small group of uninsured people at great cost to the majority of Americans who are content with the status quo. As a result, the party in power has been put on the defensive and has been forced to react within the framework established by the “loyal opposition.” For the litigated case, framing is most effective during the initial phase of negotiations, either during pre-settlement correspondence, in mediation or settlement briefs or during a joint mediation session prior to caucusing. Thoughtfully done, framing can influence the subsequent behavior of both sides: for the “framer” it provides a pattern for organizing and shaping persuasive arguments, while placing on the other side the onus of responding within the desired framework.

                                                            V. HONESTY

Litigators may enlist many strategies during settlement negotiations: anchoring, framing, indifference, aggression, to name a few; but the samurai negotiator understands that honesty and integrity are perhaps the two most powerful tools available to him. He recognizes the truth of the Japanese proverb, which states, “Darkness reigns at the foot of the lighthouse.” Honesty can provide the light that engenders trust; trust will beget understanding; and understanding most often results in the resolution of a dispute, not because either side concedes it is wrong, but because of enlightened self-interest. Honesty also protects the negotiator who may be tempted to blur the line between “puffing” and deceit during negotiations. “ Indeed, cases from twenty-eight states hold that '[a]n attorney can be liable to a non client, even an adversary in litigation, for fraud or deceit.' " Shafer v. Berger Kahn, et.al. (2003) 107 Cal. App. 4^th 54. 

                                                            VI. LOYALTY

Hojo Shigetoki was a samurai warrior of the Kamakura period of the 13^th Century. His writings influenced generations of samurai who followed him. He said this about loyalty: “When one is serving officially or in the master's court, he should not think of a hundred or a thousand people, but should consider only the importance of the master.” Of course attorneys have the highest ethical obligations to their clients. Occasionally, however, clients may call into question the motivation of their attorneys during negotiations. In a recent case that cast into question the breadth of the mediation privilege in California, a client sued his lawyer for malpractice on the basis that the attorney forced him to settle the case. Cassell v. Superior Court, Cal App 4^th 2009/B215215. The samurai negotiator always places the interests of his client ahead of all other considerations.

                                                            VII. COURAGE

Some trial lawyers feel that settlement negotiations are for the faint of heart. Samurai negotiators understand this mentality. In fact they know there are certain cases that must go to trial, and they prepare for that possibility. But they also know that most of the time, lawsuits are resolved through negotiations, so they prepare themselves and their clients accordingly. This takes professional courage. Clients focused on justice do not always appreciate being told that a judge or jury may not agree with them. At the risk of offending or even losing their clients, samurai negotiators fully inform their clients of the realities of the case: that the costs of litigation may outweigh the upside potential of the damage award, that the judge may limit critical evidence, that the jury may not believe the expert witnesses, or any number of things that make ceding control of a case to a tribunal of strangers a very risky proposition. This leads samurai negotiators to engage in settlement negotiations prior to trial as forcefully and effectively as they would prosecute a trial, for they know, as the samurai knew, that “A good sword is the one left in its scabbard.”

• Email This
• Print
• Comments (4)
• Trackbacks

LEED standards for the greening of construction projects may leave people red-faced. Before the dust settles on these new standards.. Clay Olson at South Carolina Construction Defect Law has written a thought-provoking post regarding the uncertainty of LEED standards and the potential for adding to the risks associated with construction. Clay writes:

"There are no universally accepted standards for this type of construction. To qualify that statement, let me state that  there is  no universally accepted standard for what qualifies as green or, sustainable building.  While some municipalities in states such as California have enacted standards recently, I will guarantee you that those standards fail to scratch the surface in comparison to what is actually intended by code regulations.  While there is not much doubt that many green projects will fail to deliver the promised environmental savings, there is an almost greater certainty that the mixing of technology with tradition will yield problems that we have yet to recognize."

I share Clay's concern about the unintended consequences of LEED applications on the construction industry. Contractors must be astute risk takers given the high costs of construction, and profit margins that are relatively low. The ambiguity of LEED standards injects unknowns in the bid preparation process that will likely create a greenhouse effect on litigation.

• Email This
• Print
• Comments
• Trackbacks