The Construction Advantage – Issue 8

In our eighth issue of The Construction Advantage, we provide you with three new cases, with two of them coming from the ME courts. We hope that this newsletter has been helpful and informative to you so far in 2014. Please feel free to let any of us know if there are specific issues that you want us to cover in the future.

Stop Being So Unreasonable!

By Mike Bosse

In a recent case decided in the United States Court of Appeals for the Federal Circuit, the Federal Court considered when costs are reasonable and when they are not. Kellogg Brown and Root Services Inc. (“KBR”) entered into a contract with the Army back in 2001 to provide logistical support services during Operation Iraqi Freedom. The court case involved KBR’s construction of dining facility services near Mosul, Iraq under a cost-plus fee arrangement. Under this contractual arrangement, all allowable costs were reimbursed by the government plus the contractor was paid an additional fee. Though the dining facility was supposed to serve 2,500 people and was to be a prefabricated metal building, once construction started, the Army ordered KBR to stop and begin construction of a new dining facility made of reinforced concrete that would service almost 3 times as many persons. KBR received a revised estimate from its major subcontractor, and the Army essentially accepted the estimate after conducting a rudimentary analysis of the possible increased costs. After construction was finished, a defense contract auditing agency suspended some of the payments to KBR and instead of the $12.5 million it expected to receive, KBR was paid only $6.7 million. After trial, the court concluded KBR did not meet its burden to show the costs it incurred were reasonable under the circumstances.

The Federal Appeals Court started by remarking that the reasonableness of costs are always questions of fact under the particular circumstances in which the costs were incurred. The court looked at factors such as whether the type of costs were recognized as ordinary and necessary for the project, whether there was arm’s-length bargaining regarding the costs and sound business practices, the contractor’s responsibilities to the government and the public at large, and any significant deviations from the contract’s established practices. Here, the court concluded that the governmental employee overseeing the review of the increased costs had overestimated the costs in a fairly obvious mistake when reviewing KBR and its subcontractor’s new pricing. The court also highlighted testimony that KBR knew that there was a serious lack of detail in the costs. The increase estimates from KBR’s perspective were based on the need for more equipment and increases in labor costs due to violence around the war but it provided no further details regarding underlying cost data or whether they were in a reasonable range. Thus, the Appeals Court upheld the trial court’s finding that the increased costs were unreasonable.

This case stands as a reminder that courts are only going to award costs that are considered reasonable under the circumstances. Therefore, contractors should consider the reasonableness of costs at the time that the costs are being estimated and when incurred. Otherwise, contractors may find that even though those costs are actually incurred, an owner might not agree or even have the obligation to reimburse them.

Mechanics Liens: Better Than Money Judgments

By Asha Echeverria

In a recent ME mechanics lien case, Cote Corporation v. Kelley Earthworks, the ME Supreme Judicial Court upheld Cote Corporation’s mechanics lien judgment. In this case, Cote filed a mechanics lien against property owned by Kelley for the construction of an asphalt plant on Kelley’s land that was being leased to another entity. Kelley failed to timely respond to the complaint, the court defaulted Kelley, and Cote eventually got a mechanics lien judgment for $30,000 plus interest and attorney’s fees, and an order for the property to be sold. When Kelley subsequently moved to set aside the default, the trial court denied to do so, but the trial order modified its order so that the property need not be sold and instead granted Cote a money judgment in the same amount.

The ME Supreme Judicial Court upheld the trial court’s ruling on both the default and on the award of damages. There was no dispute that Cote built the asphalt plant on land owned by Kelley and that there was sufficient evidence in the record that the work was done with Kelley’s knowledge and consent as the owner. The ME Supreme Court concluded, however, that the trial court could not substitute a money judgment for the order to have the property sold to get the $30,000 in proceeds.

This case is important for two reasons. First, although it was by default, this lienor was able to recover attorney fees as part of the value of the lien, an issue that has not been firmly decided in ME. Second, this opinion reinforces that the remedy in a mechanics lien case is to have the property be sold, not to have a money judgment issued that the lienor then needs to go and try to collect. This confirms the strength of a mechanics lien that, like in a foreclosure, you are specifically asking that the land be sold and the proceeds applied to the underlying judgment. This case is yet another reminder that it is easier to get paid when you assert a mechanics lien than when you don’t.

Buying “As Is” Precludes Future Claims

By Meredith Eilers

In a decision issued on August 20, 2014 by the First Circuit Court of Appeals in Boston, the court both enforced an “as is” provision in a purchase and sale agreement and concluded that the sale of a multimillion dollar oceanfront property in Bar Harbor was not accompanied by ME’s implied warranty of habitability.

The plaintiff/buyer, Michael Thompson, purchased the property in Bar Harbor, named Seascape, from defendants/sellers, Nancy Cloud and Michael Miles, for $2.9 million. The sellers had lived in the house after it was constructed during the summer seasons between 2002 and 2004, and then listed it on the market for $3.5 million. Around September 2007, they signed a sellers’ property disclosure form saying that there were “no known material defects” in the property. A subsequent disclosure form indicated that there had been issues with leaking around the fireplace, the copper canopy, and stonework, but those issues had been resolved. Prior to closing on the property, the buyer had a building inspector inspect the property, which identified more potential issues. As a result, the buyer negotiated a reduction in the purchase price in exchange for a provision in the purchase and sale agreement indicating that the property was being sold “as is.” After the purchase, however, the buyer had to spend in excess of $1.5 million in repairs to the property, including repairing damage to the foundation and water damage in other areas of the house. The buyer sought to recover the money he spent on repairs from the seller. When the sellers refused to meet his demands, the buyer sued the sellers alleging, among other claims, breach of contract, fraud, and negligent misrepresentation. The trial court granted summary judgment in favor of the sellers and against the buyer on the breach of contract, fraud and negligent misrepresentation claims.

On appeal, the First Circuit Court of Appeals agreed with the trial court’s decision and affirmed the judgment for the sellers. First, regarding the breach of contract claim, the court rejected the buyer’s argument that ME law implied a warranty of habitability on the sellers. ME law implies a warranty of habitability on a builder-vendor in the sale of a new home, but here, the court concluded, although the seller was a “builder,” he was not a “builder-vendor.” Because the sellers had built the house for their own residential use, and not merely for the purpose of sale, they were not “builder-vendors” under ME law. Additionally, the home had been built over six year before being sold to the buyer, and was therefore not a “new” home. For these reasons, ME’s implied warranty of habitability did not apply to these sellers.

Second, and perhaps most importantly, regarding the fraud and negligent misrepresentation claims, the first circuit concluded that the bargained-for “as is” provision that was incorporated into the purchase and sale agreement—in exchange for a reduction in the purchase price—essentially waived any claims from the buyer regarding misrepresentations by the sellers. The “as is” language was clear and put the burden on the buyer to conduct his own inspections. The buyer provided no evidence that he should not be held to the unambiguous terms of the agreement.

This case is important because both the trial court and the appeals court enforced an “as is” provision, leaving the buyer to incur the repair costs without the ability to recover those costs from the seller. It demonstrates that agreeing to such a clause when closing a real estate deal has real risks. Potential buyers should understand that they will take on the risk of all additional repair costs that they may have to make after closing.

We hope that you have found these tips and pointers in the eighth issue of The Construction Advantage helpful to you in your daily business. Each of the attorneys in our Construction Law Practice is available to answer the day to day questions of your business as you work on projects over the summer months.