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.

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It is one thing to assert construction claims; it is another thing to prove your case with admissible evidence. Therefore, those who intend to litigate construction claims must keep Steven Covey's advice in mind: Begin with the end in mind. This mindfulness must begin prior to the commencement of the project. Systems must be put in place to manage, sort, and preserve potential evidence. If you wait until a lawsuit is filed to get your ducks in order, it may be too late. At that point, the more appropriate aphorism has something to do with cats, not ducks, because organizing admissible evidence at that juncture is like herding cats. With enough time and money, you may get most of what you want organized and ready for trial, but something is bound to get away from you-or taken away from you by the court.

The reality of being precluded from using evidence at the trial of a construction defect case was aptly demonstrated in a recent decision of the New Jersey Supreme Court in the Tri-Form Construction case (August 2010). To read the entire opinion click here. This case is a useful primer on a number of levels. First, it deals with the issue of spoliation, meaning, the destruction of evidence. What happens when evidence is destroyed in the remediation process so that the defendant no longer has the evidence to defend itself in court? The New Jersey Supreme Court also does a good job summarizing the competing interests and corresponding difficulties of parties involved in construction litigation.

How Courts Perceive Construction Claims

Commercial construction projects often present unique challenges to the courts, in part because when an argument erupts over a claimed construction defect, it is inevitably complicated by the conflicting interests of the parties. The project owner wants the building to be free of defects, while other parties to the project, including the general contractor, its subcontractors and suppliers, the construction manager, if any, the architect and other design professionals, each may dispute the existence of, the extent of, and the responsibility for, any claimed defects. Moreover, each of them may seek to shift the blame for any conceded defect to others and each will likely assert that it has the right to investigate the claim and to attempt to cure any defects that are identified.

Further compounding those competing interests, time itself may create overriding considerations for the building's owner. Particularly if the claimed defect threatens the building's integrity or the owner's ability to conduct its business, the owner will view the time within which to remedy a defect in a building's construction as being constrained. The building's owner, fearing that existing, identified defects, if not cured promptly, will worsen or adversely affect other parts of the structure, may have limited patience with a contractor who does not resolve a problem quickly. The owner may lose confidence in the contractor's ability to remedy a defect if that contractor's response is slow or if proposed resolutions are inadequate. In either situation, the building owner may hasten to seek solutions from experts, consultants, or contractors in an effort to prevent a relatively minor problem from turning into a major failure of one of the building's systems.

Nor is the building's owner the only party whose interests complicate the dispute. A contractor who is being blamed for a problem may conclude that there is no defect to be cured and, if the complaints persist, may come to regard the owner as unreasonable or as seeking perfection when the work was performed in an adequate, acceptable, and workmanlike manner. Alternatively, the contractor may recognize that there is a defect and try to resolve it, or it may decide that the problem was caused by a supplier, laborer, or another contractor outside of its control, or has resulted from faulty plans or specifications.

Other parties to a large construction project will also have their own unique perspectives on the owner's claim that there is a problem to be addressed. General contractors, construction managers, architects, and engineers each have a role to play in the project and interests to protect in the event that a claimed defect is identified. Questions about whether the defect arose because of faulty plans and specifications, improper design, poor workmanship, defective materials, insufficiently skilled subcontractors, or inadequate supervision may divide the participants and confound the ability to reach a workable solution.

As complicated as the relationships inherently are, they are compounded when they play out in the shadow of threatened or actual litigation. The reality of how project owners, contractors, and related professionals behave, each with distinct and often inconsistent goals and motivations, frequently leads one or more of them to act in ways that impact on the eventual conduct of that litigation.

The building owner who only wants to solve a problem and prevent it from getting worse may undertake testing and repairs without waiting for a resolution by the contractor whose work the owner believes is the cause. The contractor called back to the building for a repair may make suggestions or corrections without undertaking a thorough investigation or fully documenting the alleged defect or identifying other potential causes. Even if the parties act with the purest motives, evidence of the extent or the cause of any claimed defect may be compromised or destroyed as testing and investigations are undertaken and as repair, retrofitting, or replacement of affected building systems or components is completed.

It is preferable, of course, to have an orderly procedure for identifying a defect, alerting the allegedly culpable party, conducting an investigation and testing that is observed and documented by representatives for all potentially responsible parties, identifying a cause, and achieving a solution. In the real world of construction projects, however, the parties do not always behave that way and may proceed to develop a solution without preserving all of the evidence that is needed to determine liability or prove damages.

Owner's Catch 22: Remediation vs. Spoliation

Catch 22 has come to be known as a situation in which a desired outcome is impossible to achieve because of a set of illogical rules or conditions. As will be shown, the owner in the Tri-Com Construction case was in a Catch 22 situation. The curtain wall system in the owner's large new commercial building leaked, and the subcontractor that installed it eventually stopped responding to the owner's request for help. What is an owner to do? On the one hand, he must take action to protect his building and the health and safety of those who work there. On the other hand, if litigation is contemplated, remediation could destroy evidence that may be necessary to prosecute or defend the claims.

In this case, after the owner fixed the problems with the window system, the company sued its construction manager, its consultant Tri-Form Construction, and the installation subcontractor, Academy Glass. The defendants filed motions to exclude all evidence regarding the curtain wall system on the grounds of spoliation of evidence. The New Jersey Supreme Court summarized the proceedings as follows:

On March 21 and 22, 2006, the trial court separately granted defendants' motions to exclude evidence relating to the window system installation. In reaching that conclusion, the court found that plaintiff had never given notice to defendants about the proposed remediation prior to the commencement of the work; had failed to respond to defendants' initial requests to conduct an inspection; had first notified defendants of the remediation work on January 24, 2003, when there was insufficient time to permit them to perform an independent investigation; and had completed the repairs when there was no real emergency.

The trial court concluded that plaintiff had engaged in spoliation of the evidence and that there was clear prejudice to defendants because their expert had not been given an opportunity to fully investigate the leaks and their cause. The court also concluded that the expert's photographs and his records about his visual observations were not sufficient^[ to permit defendants to secure an expert opinion contrary to that offered on plaintiff's behalf.

Shortly thereafter, the trial court granted summary judgment to one defendant and partial summary judgment to another on the grounds plaintiff owner could not no longer prove its claims following the order excluding evidence. The plaintiff owner appealed and the appellate division reversed the order of dismissal, holding that the preclusion of evidence was unreasonably harsh under the circumstances. The defendants then appealed to the New Jersey Supreme Court, and that court held:

In this dispute, plaintiff has already lost claims as a result of the spoliation and its claim relating to the strip-window system has been limited significantly. There remains, however, one further step in our analysis, because defendants are not similarly situated. As to defendant Academy Glass, we agree with the Appellate Division that there is a sufficient basis on which to permit plaintiff to proceed, limiting its claims to the conditions that were observable prior to remediation and its experts to a review of only those conditions.

However, we reach a different result as to defendants Tri-Form and Karabinchak. In spite of the fact that the wealth of evidence ordinarily generated during construction projects lends itself to leveling the playing field, in this case the opportunity to inspect the leaking windows before remediation was critical. Because plaintiff deprived defendants Tri-Form and Karabinchak of that opportunity, and because we therefore perceive them to have no independent source of evidence or testimony sufficient to permit them to mount a defense, the claims as to those defendants cannot proceed at all. As to defendants Tri-Form and Karabinchak, the only fair remedy for plaintiff's spoliation is to impose the sanction of dismissal.

The Tri-Form Construction case shows the rationale of courts trying to fashion a just remedy when evidence has been destroyed. Each state will have different factors to consider. In New Jersey, the courts consider the following factors:

In summary, courts confronted with spoliation in the context of commercial construction litigation should recognize that a variety of factors bear on the appropriate remedy. In particular, courts should consider all of the following: the identity of the spoliator; the manner in which the spoliation occurred, including the reason for and timing of its occurrence; the prejudice to the non-spoliating party, including whether the non-spoliating party bears any responsibility for the loss of the spoliated evidence; and the alternate sources of information that are, or are likely to be, available to the non-spoliator from its own records and personnel, from contemporaneous documentation or recordings made by or on behalf of the spoliator, and from others as a result of the usual and customary business practices in the construction industry. Courts should then balance all of those considerations in crafting the appropriate remedy with an appreciation for the ways in which the construction industry itself provides them with unique tools with which to "level the playing field" and achieve an appropriate remedy for spoliation.

Suggestions

Owners are faced with this kind of Catch 22 situation ail of the time. Here are a few suggestions to prepare for the next time it happens:

1. Draft contract language that addresses this issue. State the address where notices can be sent to advise the other side of defective conditions. Include reasonable time frames within which  inspections and repairs are to be performed.
2. Before taking corrective measures, advise the other side in writing of the date, time and place of the remediation efforts, giving the other side ample time and warning about the remediation efforts that are to take place, and invite them to be there to observe, take pictures, take notes, etc.
3. Make sure to establish an unassailable record of your efforts to get the contractors to (1) take corrective action, (2) the contractors refusal to do so, and (3) that the contractors had actual notice of the time and place of your remediation efforts.
4. During the remediation process take pictures and video of the work; handle with care any portion of the work that is removed; take special efforts to preserve the materials; keep a log of the chain of custody in case someone alleges that the materials have been tampered with.

As was mentioned at the beginning of this article, the success of the prosecution or defense of construction claims begins before the project begins: contract language, systems and controls to preserve evidence, diligence in ensuring the other side is on notice of plans for remediation, and so much more, all have a role in being prepared for potential litigation. The Tri Form Construction case is a perfect example of the uncertainty of litigation, that evidence matters, that courts have tremendous power and influence over what the jury will ultimately hear and see during trial

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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.

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