The Construction Advantage
This edition of The Construction Advantage marks the start of the 4th year of the newsletter from Bernstein Shur’s Construction Practice Group. This month, Mike Hodgins discusses the doctrine of promissory estoppel in a bid snafu, Asha Echeverria reports on the “Your Work” exclusion in the insurance world, and Mike Bosse offers up some thoughts about the construction industry under President Trump’s administration. Here’s to a happy and healthy 2017 to all of our faithful readers!
The Trump Administration and Construction: Something New or Groundhog Day?
By: Mike Bosse
Regardless of your politics, we have a newly elected President. And yes, Groundhog Day is just around the corner. Although no one can predict for sure, the first week of the new presidency is signaling positive vibes for the future of the construction industry. Here are just a few examples from the past week.
First, just this past Tuesday, President Trump signed an Executive Order to advance the construction of the Keystone XL and Dakota Access pipelines, two projects that had been blocked by the Obama administration because of environmental concerns. The pipeline, intended to run from Canada to Nebraska, will connect to already existing lines that run to U.S. refineries on the Gulf Coast. Because the pipeline crosses over from Canada, it needs approval from the Executive Branch and that has now occurred.
President Trump has also signaled a plan to invest $1 trillion in the infrastructure of the United States, although the financing for the infrastructure rebuild is not yet clear. President Trump has clearly made the modernization of our infrastructure a priority, something that many of us discussed throughout the last presidential administration. One thing that Trump has hinted at is that he wants to link up private investors and perhaps put private companies in charge of some of the transportation projects instead of the federal government. This could potentially open up a multitude of new public-private partnerships in the coming years, including in New England where they have been scarce. There is a document circulating in the industry with a priority list of 50 projects around the country including the MBTA Green Line Extension in Boston listed as the 28th project, the I-93 rebuild in New Hampshire listed as the 30th, and another 48 projects around the country.
Finally, many in the industry are predicting that the direction at OSHA will change from a focus on enforcement to a higher volume of compliance assistance and cooperative programs. I have previously written about the Silica Rule, and my colleagues have written about the Injury and Illness Recordkeeping Rule, both of which are regulations that could be rolled back under the Trump administration. President Trump has been vocal about rolling back regulations, and OSHA would be a likely candidate in the construction industry.
Aside from how anyone voted, the election is over, and it is clear that construction and infrastructure development has taken a center stage in the first days of the Trump administration. Will any of it actually happen? Only time will tell. It might end up being Groundhog Day again. But new administrations tend to benefit some industries over others, and we will continue to monitor developments as they occur and report about the positive and negative impacts on the construction industry.
Promises Made and Broken- Enforcement of Subcontractor Bids
After attempts to enforce subcontractor bids by contractors that argued reliance upon them, two recent cases provide contrasting results.
In Nebraska, a general contractor that relied upon a sub’s bid, which was incorporated into the general contractor’s bid to the owner, recovered nearly $300,000 after trial, after the sub refused to perform the work. Weitz Company, LLC v. Hands, Inc. 294 Neb. 215, 882 N.W.2d 659 (2016). The HVAC subcontractor submitted a bid approximately 15 minutes before the deadline for bids to the owner. The bid of $2,400,000 was incorporated into the contractor’s bid to the owner of $9,200,000. Within days of being informed that its bid had been accepted, for reasons that were more personal than business, the owner of subcontractor directed his employees to withdraw the bid, and refused to perform. After a month of haggling, the general contractor told the sub that it would use other subcontractors, and completed the job at a cost just shy of $300,000 more than the original bid by the subcontractor.
Although the subcontractor argued there were several errors in its bid, these proved to be unpersuasive. While no contract existed between the general contractor and sub, the Court awarded the full difference between the bid amount and actual subcontract amount, based upon promissory estoppel. In short:
- the subcontractor made a promise and reasonably expected the general contractor to act on it
- the general contractor did act in reliance
- injustice would result if the Court did not enforce the promise.
A much different result was reached by a Federal Court applying Wisconsin law in C.G. Schmidt, Inc. v. Permasteelisa North America, 2016 U.S. App. Lexis 10920 (7th Cir. June 16, 2016). The Courts in Wisconsin have previously applied the doctrine of promissory estoppel against subcontractors to enforce a bid amount similar to the result in Weitz Company. However, the distinction here was that the general contractor did not immediately accept the bid, but continued to renegotiate the potential subcontract for a year before suing the potential subcontractor, seeking damages.
As the Court noted in C.G. Schmidt, because the general contractor expected further negotiations following bidding, the subcontractor’s promise was conditional, and it was not reasonable for the contractor to rely on the subcontractor’s bid while simultaneously trying to negotiate it. Had the Court enforced the bid against the subcontractor after a year of negotiation, the general contractor would have had an option contract that it could accept at any time, without downside risk.
The important lesson from these two cases: To seek equitable enforcement of a subcontractor bid, the general contractor must affirmatively accept it within a reasonable time, without renegotiation, in order to show actual reliance upon the bid amount.
“Your Work” means “Your Work” – What’s So Hard About That?
By: Asha Echeverria
In Double AA Builders, Inc. v. Preferred Contractors Insurance Co., LLC, the Arizona Court of Appeals ruled in a matter of first impression that the “Your Work” exclusion in a commercial general liability (CGL) insurance policy does not permit an Additional Insured to recover when the only claimed damage is to the Named Insured’s work. In CGL policies, the purpose of the “Your Work” exclusion is to ensure that the insurance policy compensates for accidental property damage; the policy is not meant to serve as a warranty for the quality of the Named Insured’s work. This exclusion is often coupled with the “Subcontractor Exception” which states that the exclusion does not apply to damage caused by “work performed on Your behalf by a subcontractor”.
In Double AA, the general contractor was an Additional Insured on the Named Insured subcontractor’s CGL policy. When the roof installed by the subcontractor started to leak, the general contractor sought recovery for the cost to replace the roof from the subcontractor’s CGL policy as an Additional Insured. The general contractor argued that as an Additional Insured the “Your Work” referred to its own work and therefore the subcontractor’s defective work was covered through the “Subcontractor Exception”. The Arizona Court disagreed, holding that under the policy “Your” was defined as the Named Insured subcontractor and so the subcontractor’s work on the roof was excluded from coverage. The Subcontractor Exception would only apply to work by sub-subcontractors. The Court holding confirmed that coverage available to the Additional Insured could be no greater than was available to the Named Insured. To find otherwise would increase coverage under the policy without a corresponding premium increase. Note: Interestingly the general contractor, as Additional Insured, never sought coverage for the water damage to other property in the building. Such consequential damage would not be excluded under the “Your Work” exclusion as such property was the work of other contractors, not the Named Insured subcontractor of the subject policy.
This case highlights the difficulties and complexity of having the status of an additional insured, and construction insurance generally. Here, being an additional insured provided the general contractor no benefit for the leaky roof. If you have construction insurance issues and have questions, please feel free to call.