Cases of the Month
Significant Cases and Decisions Affecting the Construction Industry
By: Joseph H. Bucci, Esquire
Saul Ewing LLP
1. As a matter of first impression, the Court of Appeal from the Sixth District, California, held that the Eichleay Formula was a legally permissible method of calculating a contractor’s extended home office overhead damages based on a delay. JMR Construction Corp. v. Environmental Assessment and Remediation Management, Inc., 243 Cal.App.4th 571, 198 Cal.Rptr. 3d 47 (January 28, 2016, certified for partial publication.)
* What the Court Considered: The Appeal Court considered a decision by the trial court finding in favor of a contractor against its subcontractors for damages incurred by the general contractor where the subcontractor failed to perform.
* What the Court Said: In using the Eichleay Formula, there are three steps to calculate extended overhead for which a government contractor would be reimbursed for the period of delay: (1) find the allocable contract overhead by multiplying total overhead costs incurred during contract period by ratio of billings from delayed contract to total billings of the firm during the contract period; (2) get daily contract overhead rate by dividing allocable contract overhead by days of contract performance; and (3) get amount recoverable by multiplying daily contract overhead rate by days of government caused delay. The Court also said that to use Eichleay, the contractor must establish: (1) government-caused delay; (2) that the contractor was on standby; and (3) the contractor was unable to take on other work. The Appeals Court also held that it was proper for the trial court to use the modified total cost method of calculating the contractor’s disruption and delay damages.
* What the Opinion Means: The Appeals Court upheld the application of the Eichleay Formula in construction cases where delay and disruption can be proven. The Appeals Court also commented that use of the modified total cost method of calculating a contractor’s disruption and delay damages is an acceptable means of determining delay damages.
2. As interpreted by the courts of the State of Ohio, a claimant seeking to recover home office overhead attributable to owner-caused delay is not required to use the Eichleay Formula as the exclusive way of calculating its damages. Use of Eichleay is discretionary in Ohio as the contractor may also elect to use the procedure adopted by the Ohio Department of Transportation known as the HOOP Formula. Wood Electric, Inc. v. Ohio Facilities Construction Commission, 2017 WL 2241535 (Court of Appeals of Ohio, Tenth District, Franklin County).
* What the Court Considered: This was an appeal from the Court of Claims of Ohio in favor of the contractor against the owner of an award in the amount of $254,027.00 on a delay claim arising out of the construction of a pre-kindergarten through eighth grade school building.
* What the Court Said: Focusing on the contractor’s element of damages submitted under the category of home office overhead, the Court of Appeals concluded that, in Ohio, a claimant, unless otherwise stated, has discretion regarding the particular formula or means of calculating home office overhead damages. One such method is the Eichleay Formula; the other method is one recognized by the Ohio Department of Transportation known as HOOP Formula.
* What the Opinion Means: In Ohio, a contractor who sustains delay damages as a result of an owner caused event for which the contractor did not contribute, may recover unabsorbed home office overhead damages provided the contractor can show: (1) that it was on standby, meaning the work on the project was suspended for a period of uncertain duration and the contractor can at any time be required to return to work immediately; and (2) the contractor must prove that it was unable to take on other work while on standby, meaning that the contractor must show that the uncertainty of the duration of delay made it unable to commit to replacement work on another project. Here, impracticability, rather than impossibility, of other work is the standard.
3. In a May 18, 2017 decision from the United States Court of Federal Claims, it was held that under the Administrative Dispute Resolution Act (ADRA), a bid protestor has a direct economic interest and therefore standing to sue such that if, after a successful bid protest, the government would be obligated to re-bid the contract and the protestor could compete for the contract once again. Vintage Auto Works, Inc. v. United States, 2017 WL 2180579 (May 18, 2017).
* What the Court Considered: Consideration was given to the Contracting Officer’s evaluation of the bid submissions of several offerors and the determination that the claimant, Vintage Auto Works, was not the lowest responsible bidder who offered the “best overall value” to the government. As such, even though Vintage’s proposal was at a slightly lower price than that of the awardee, Vintage was not the recipient of the government’s contract award.
* What the Court Said: In a bid protest, the plaintiff must first establish standing by demonstrating that it is an “interested party” under the ADRA. Additionally, the plaintiff in a bid protest must also allege facts sufficient to show that the plaintiff is prejudiced by the award to another bidder. Pursuant to the standards set forth in the Administrative Procedure Act, the reviewing court shall hold unlawful and set aside agency action, findings, and conclusions found to be arbitrary, capricious and an abuse of discretion, or otherwise not in accordance with the law. Finding that the Contracting Officer has, as a matter of law, wide discretion in making responsibility determination and in determining the amount of information that is required to render a responsibility determination, this Court found that the actions of the Contracting Officer’s determination of the responsibility of the bidder to whom the award was issued was entitled to be upheld, thereby resulting in a denial of the bid protest and the issuance of judgment on behalf of the Government.
* What the Opinion Means: Embarking on a bid protest is an endeavor that requires timely action and critical analysis of whether or not the challenged award complied with the bidding specifications as published. A bid protestor must also understand that a Contracting Officer’s initial determination will be entitled to considerable discretion and that the standard of arbitrariness, capriciousness and abuse of discretion is not easily achieved.
4. In a memorandum opinion from the U.S. District Court of Maryland, it was held that a contractor’s obligations under the General Indemnity Agreement with its payment bond surety to provide collateral security in the event of a loss on a payment bond claim from a subcontractor for unpaid wages, will be strictly upheld by the court in favor of the payment bond surety. Travelers Casualty & Surety Company of America v. C.R. Calderone Construction, Inc., et al., 2017 WL 2256600 (filed May 22, 2017).
* What the Court Considered: In construing the surety’s motion for a preliminary injunction and specific performance of a collateral security provision of the indemnity agreement, the court strictly construed the terms and conditions of the underlying indemnity agreement in accordance with the laws of contract interpretation.
* What the Court Said: Because a preliminary injunction is an extraordinary remedy, it may only be awarded upon a clear showing that the plaintiff is entitled to such relief. To obtain a preliminary injunction, the moving party must establish that: (1) they are likely to succeed on the merits; (2) they are likely to suffer irreparable harm in the absence of preliminary relief; (3) the balance of equities tip in their favor; and (4) an injunction is in the public interest.
* What the Opinion Means: If you are a contractor who enters into an indemnity agreement with your bonding company, upon judicial challenge, the terms and conditions of the general indemnity agreement will likely be upheld as written. Recognizing the vital role of sureties in the construction industry, courts find an acute public interest in having the parties to written indemnity agreements comply with their contractual obligations.
5. Where the parties to a construction dispute resolve their claims through arbitration subject to the Federal Arbitration Act, upon the rendering of an award by the arbitrator, courts are inclined to confirm the arbitrator’s award unless the court finds reason to vacate, modify or correct the award which, absent fraud or a lack of due process, is unlikely to be found. National Water Services, LLC v. ACC Construction Co., Inc., 2017 WL 2239973 (U.S. District Court, W.D. Kentucky; May 22, 2017).
* What the Court Considered: The District Court was presented with a motion to confirm the arbitration award by the prevailing party and reviewed the underlying documents as well as the award issued by the arbitrator, which the court found to be supported by a reasoned opinion explaining the factual and legal basis of the arbitrator’s decision.
* What the Court Said: Under the Federal Arbitration Act, the court is required to confirm the award of the arbitrator unless the court finds reason to vacate, modify or correct the award pursuant to 9 U.S.C. §9. Under the Federal Arbitration Act, it is presumed that arbitration awards will be confirmed. Here, this court found no reason to vacate, modify or correct the award in any manner.
* What the Opinion Means:
Courts give considerable deference to the awards rendered through the arbitration process and are not inclined to overturn those awards unless it is clearly evident that the arbitrator’s award was not supported by a reasoned opinion or that fraud or a lack of due process is shown by clear and convincing evidence. Arbitration is meant to be final and binding and to free the courts of unnecessary backlogs of cases that can more expediently be resolved through the arbitration process.
Joseph H. Bucci is a Partner in the Construction Litigation Group at Saul Ewing LLP, and resides in the Pittsburgh office. Joseph represents contractors, subcontractors, owners, real estate developers, wind farm developers, public utilities, architects, engineers, energy and pipe liners, construction managers, design builders, sureties and government agencies related to construction and/or real estate development projects.