WSDOT defeats $177 million construction project bid protest

Groff Murphy successfully defeated a bid protest on a $177 million construction project for Washington State Department of Transportation on behalf of its general contractor client. The disgruntled bidder sought to enjoin the award of the contract to the low bidder based upon the low bidder’s use of the term “mechanical” in its subcontractor listing. The Thurston County Superior Court denied the requested injunction and allowed the contract to be awarded to our client.

King County Superior Court order enforces a subcontract “pay if paid” clause

Groff Murphy obtained an order enforcing a subcontract “pay if paid” clause in King County Superior Court. The subcontractor sued our general contractor client for payment. Groff Murphy argued that the subcontractor was not entitled to payment because the general contractor had not been paid by the project Owner and the subcontract included a “pay if paid” provision. The Superior Court agreed, enforced the “pay if paid provision,” and dismissed the claims against our client.

New precedent set in Washington for bad faith claims handling

Groff Murphy established new precedent expanding the scope of an insurer’s liability for bad faith claims handling in Washington. In denying the insurers’ motion to dismiss, the Western District of Washington held that an insurance claims representative may be held individually liable for bad faith claims handling. In addition, the Court granted our client’s motion for summary judgment on its bad faith claims based on the insurer’s failure to honor the “made whole” rule during settlement negotiations

Best Lawyers, the oldest and most respected peer-review publication in the legal profession, has named David C. Groff as the inaugural “Seattle Best Lawyers Construction Law Lawyer of the Year” for 2012.

After more than a quarter of a century in publication, Best Lawyers is, for the first time, designating “Lawyers of the Year” in high-profile legal specialties in large legal communities. Only a single lawyer in each specialty in each community is being honored as the “Lawyer of the Year.”

Best Lawyers compiles its lists of outstanding attorneys by conducting exhaustive peer-review surveys in which thousands of leading lawyers confidentially evaluate their professional peers. The current, 18th edition of The Best Lawyers in America (2012) is based on more than 3.9 million detailed evaluations of lawyers by other lawyers.

The lawyers being honored as “Lawyers of the Year” have received particularly high ratings in our surveys by earning a high level of respect among their peers for their abilities, professionalism, and integrity.

Steven Naifeh, President of Best Lawyers, says, “We continue to believe – as we have believed for more than 25 years – that recognition by one’s peers is the most meaningful form of praise in the legal profession. We would like to congratulate David C. Groff on being selected as the ‘Seattle Best Lawyers Construction Law Lawyer of the Year’ for 2012.”

If you have any questions regarding this article, please call Marisa Bavand at 206-628-9500.

Good news for mechanic's lien claimants - on September 15, 2011, the Washington State Supreme Court unanimously overturned the Court of Appeals decision in Williams v. Athletic Field, Inc. In Williams, Division II of the Court of Appeals had invalidated a lien filed by a lien service on behalf of the contractor. The contractor's lien service had used the exact sample lien form set forth in the statute, which the law says shall be sufficient to state a valid claim of lien. But the Court of Appeals held that the lien was not properly "acknowledged," and was therefore invalid. In doing so, the Court of Appeals failed to "liberally construe" the lien statute to protect the claimant, as it is specifically required to do by the statute.

The Court of Appeals decision in Williams posed a significant trap for lien claimants. Numerous pending liens, representing untold millions of dollars in work were at risk of being declared invalid. Moreover, future lien claimants also ran the risk of having their liens declared invalid even though they relied in good faith on the sample lien form.

Because of our experience with this issue and the importance of this case to our clients and the industry, Groff Murphy was an active participant in the effort to have Williams overturned. Mike Grace and Dan Carmalt filed an amicus curiae brief in the case on behalf of the AGC of Washington, and Mike Grace argued the AGC's position to the Supreme Court.

In a 9-0 decision, the Supreme Court agreed with lien claimants and the AGC, holding that a properly filed lien based on the sample form is indeed sufficient to state a valid lien. Moreover, the Court also said that the mechanics lien statute is to be "liberally construed" by the courts in order to provide payment security for claimants.

From our perspective, although the Williams decision is important because it confirms that lien claimants can rely on the sample form in the statute, perhaps the broader significance of the decision is the Court's clarification of the liberal construction standard in RCW 60.04.900. There are a variety of issues and defenses raised in lien disputes to which the liberal construction standard will apply, to the benefit favor of lien claimants.

If you have any questions regarding the Williams decision or any other aspect of lien law, please call Mike Grace or Marisa Bavand at 206-628-9500.

It is a common scenario on construction projects - the contractor seeks additional money or time for work that it believes constitutes a change, but the owner disagrees, and refuses to issue a formal change or pay for the work. Indeed, often the fact of the change is undisputed, but the cost is. When this occurs on a private project, is the contractor allowed to record a lien that includes the cost of the disputed change? The answer has historically and reliably been "yes."

To the surprise of many in the construction industry, this is now an open question because of a case pending in the Washington State Court of Appeals, Keenan Hopkins Suder & Stowell v. J.E. Dunn Northwest, Inc. This case involves construction of a condominium project in the Belltown neighborhood of Seattle. The contractor filed a $6.7 million lien that included amounts for disputed changes. The owner took the position that because the lien included amounts in dispute, the amount of the lien was excessive and filed a motion for summary judgment to reduce the lien to eliminate the amounts for disputed changes.

The owner contended that the contractor's right to lien is limited to the "contract price," which is the "amount agreed upon" by the parties to the contract, and that "for amounts in excess of the contract price the contractor is afforded no security interest in the property, and must file suit for breach of contract - like any other unsecured plaintiff in Washington pursuing its breach of contract claims."

King County Superior Court Judge Gregory Canova agreed with the owner and ordered the lien reduced to eliminate the amount of the disputed changes. The court's ruling was based upon language in the Lien Statute:

"Any person furnishing labor, professional services, materials, or equipment for the improvement of real property shall have a lien upon the improvement for the contract price of labor, professional services, materials, or equipment furnished at the instance of the owner, or the agent or construction agent of the owner.

"Contract price" means the amount agreed upon by the contracting parties, or if no amount is agreed upon, then the customary and reasonable charge therefore. RCW 60.04.011(2)

Based upon a narrow reading of this language, the court reasoned that because the disputed change order work was not "agreed upon," it was not, by definition, included in the "contract price." The court completely ignored the fact that the contract contemplates the potential for disputes that will ultimately be resolved and the lien can then be amended to reflect the final agreed contract price. That is exactly what standard practice in the State of Washington has been, and fairly provides the contractor with security for the final contract price.

We did not handle this case, but in our opinion, the trial court's decision is wrong and should be reversed by the Court of Appeals. We believe the judge failed to appreciate that the change and dispute processes are integral and necessary to construction projects, and must be given effect in interpreting the lien statute. Indeed, all standard form contracts contemplate changes and potential disputes and provide mechanisms for resolving disputes to arrive at a final contract price. The breach of contract action and the lien foreclosure action often proceed in one suit with the final contract price and lien amount being determined in tandem.

In addition to ignoring standard practice and the intent of the lien statute, the judge only relied on part of the definition of "contract price" in the lien statute, and ignored the language "... or if no amount is agreed upon, then the customary and reasonable charge therefore." Only by giving effect to that language is the intent of the lien statute carried out - namely to give the contractor a security interest in the property in order to protect its right to be paid for the amount it is entitled to under the contract, whether called for by the original contract or by change.

Groff Murphy plans to file an amicus (friend of the Court) brief at the Court of Appeals to support the effort to overturn this decision. Stay tuned to see how the Court of Appeals rules on this important case for the industry.

Another case that we take a look at in this issue of the newsletter concerns the notice required to be given to sureties when a contractor or subcontractor defaults, and its implications on Washington law. In a case from the "other" Washington, Hunt v. National Wrecking, 587 F.3d 1119 (D.C.C. 2009), the court found that the AIA 311 performance bond requires notice of a subcontractor's default as a condition of a surety's liability. In that case, the general contractor on a hotel project sued its excavation subcontractor, as well as the subcontractor's performance bond sureties. The general contractor alleged that the subcontractor had defaulted by failing to timely complete its work.

The sureties claimed that the general contractor delayed in notifying the sureties while incurring additional expenses for expediting the work. The sureties argued that this failure to give timely notice deprived them of their right to remedy the subcontractor's alleged default under the bond. The court agreed and granted the sureties' motion for summary judgment.

The court held that the AIA 311 bond form required timely notice of default to the surety, relying in part on the language in the bond which gives the surety the right to remedy the default. The court found that this right to remedy would not make sense without an understanding that the bond also required notice of default to the surety. The court also stated when notice is a condition of liability under the bond, proof of prejudice is not required.

The Hunt Court's decision is of interest because it is at odds with a relatively recent - and somewhat controversial - Washington Supreme Court holding that the AIA 311 bond did not require notice as a condition of recovery. In Colorado Structures, Inc. v. Insurance Co. of the West, 167 P.3d 1125 (Wn. 2007), the Washington Supreme Court relied on paragraph B of the AIA 311 bond, finding that it placed "one - and only one - express condition" on the surety's liability: the subcontractor's failure to fully and faithfully perform the contract. The Court interpreted paragraph C to apply only when the general contractor formally declares a default. Under this interpretation, notice of default was an option that led to additional remedies, such as the surety's right to remedy, and not a condition precedent to recovery against the surety.

So what is the lesson learned? If your subcontractor is bonded, carefully review the requirements in the bond to make sure you timely and properly comply with notice requirements. Although the Colorado Structures decision seems to indicate that Washington courts will give some latitude to claimants, this is a dangerous assumption to make. Courts from other jurisdictions seem to treat the Colorado Structures decision as somewhat of an aberration. Bond claimants are therefore wise not to rely upon the latitude in giving notice accorded to the claimant in Colorado Structures. Rather, the more prudent course of action when making a surety claim is to give notice early and often, and to strictly comply with the notice requirements in the bond form. Even though Colorado Structures is the law in Washington State, the safer approach for claimants is to follow the strict notice rules set forth in the Hunt v. National Wrecking case.

We would be glad to discuss any of these issues with you in further detail. Please feel free to contact Dave Groff, Mike Grace or Marisa Bavand at (206) 628-9500.

In this and future issues, we look to keep our clients and colleagues updated on news and events that are of current interest to the construction industry. In this first issue, we address a topic that has become increasingly relevant in these challenging economic times - false claims. The Federal Government recently passed legislation expanding the reach of the Federal False Claims Act. The Washington State Legislature considered, but did not pass, legislation that would have enacted a Washington False Claims Act.

The Federal False Claims Act ("FCA") dates back to the Civil War. It imposes both civil and criminal liability for "knowingly presenting or causing to be presented to an officer or employee of the United States Government a false or fraudulent claim for payment or approval." Case law has expanded the scope of the FCA to also include the use of information in a claim on federally funded projects with "deliberate ignorance" or "reckless disregard" of the truth or falsity of information.

On May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act ("FERA"), which further expands the reach of the FCA and provides the Federal Government with more tools and resources to investigate and prosecute financial frauds. Pursuant to FERA, a contractor will face liability under the FCA if it submits false information that is "material," i.e., capable of influencing the government in making a payment. The Government is no longer required to establish a contractor's intent to submit a false claim.

FERA also clarifies a split among the Federal Circuit Courts related to the "presentment" requirement of the FCA. It is no longer a requirement that the contractor present false information to the Federal Government to be liable under the FCA, but must only submit false information on a project that is at least partially funded by Federal dollars. In addition, FERA increases FCA enforcement and oversight by establishing the Government's authority to make Civil Investigative Demands ("CIDs") during the course of an investigation. CIDs provide the Government with significant investigative tools to obtain access to documents, witnesses and other resources in the course of conducting an FCA investigation. Coupling this with the over $200 million in stimulus money earmarked for the hiring of Inspector Generals to oversee the spending of Federal funds and prosecute financial frauds, we expect to see a significant increase in FCA investigations.

This spring, the Washington State Legislature concluded the 2009 legislative session. The session was unusually productive with respect to construction related legislation. There was a wide variety of legislation related to the construction industry, from bills that authorized funding for significant public works projects, to bills that affect contract rights on public projects.

Perhaps the most notable piece of legislation was a bill introduced by Senator Kline that didn't pass. SB 5144 was entitled the "Washington False Claims Act," and would have introduced a significant new dynamic into the owner-contractor relationship on public projects.

In a general respect, the bill was modeled after the Federal False Claims Act. As originally introduced, the bill defined a false claim as "any claim that contains or is based upon a materially incorrect fact, statement, representation, or record." However, the term "claim" was defined more broadly than the term is used in construction contracts, to include any "request or demand, whether under a contract or otherwise, for money or property which is made to a government employee or official, contractor, grantee, or other recipient if a governmental entity provides any portion of the money or property which is requested or demanded[.]" As is evident from the proposed language, a false claim could have been a request for a change order, as well as a contract claim or request for equitable adjustment.

A person that violated the act by would be liable for a civil penalty ranging from $5,000 - $10,000. In a subsequently proposed amended version of the bill, a person that violated the act could have been liable for uncapped treble damages, plus attorney's fees and costs.

The bill was supported by the Washington State Trial Lawyers Association. As one might surmise from WSTLA's support, the bill also provided Qui Tam provisions and incentives for third party enforcement (i.e., whistleblowers). Depending on how the false claim was prosecuted - in particular, whether the government chose to take control of an action after initiation by the whistleblower - the whistleblower could stand to recover between 15-30% of the amount recovered for the false claim.

Ultimately, the bill didn't pass. However, our take is that the Washington False Claims Act - whether in this form or modified - will be back. False claims are a hot topic these days, given the economic climate and the numerous high profile examples of fraud and corruption in the news over the past year.

So how can a False Claims Act be a bad thing? As drafted, the language in the bill was quite broad. There was no requirement of intent to defraud or to make a false claim. Liability could have been imposed for mistaken information that was included in a "request for money." If the Act were passed as drafted, the breadth of its language, combined with the tight timelines imposed by Mike M. Johnson, would have provided another tool for owners to defeat and discourage legitimate contractor claims. A contractor would not only face the waiver penalty imposed by Mike M. Johnson, but also potential monetary penalties as well. In our opinion, this simply shifts the balance too far in favor of owners.

Despite the failure of the False Claims Act, the State Legislature did pass numerous other bills related to construction and public works, including the following:

HB 1195 - Payment of Undisputed Claims on Public Projects: This new law is a first short step towards addressing some of the inequity that results when public owners refuse to issue change orders for changed work. The law requires the State or municipality to issue a change order for the full dollar amount of any undisputed portion of additional work within 30 days of satisfactory completion of the additional work. If the owner fails to issue the change order within 30 days, the owner is liable for 12% annual interest on the amount due for the undisputed work. The law goes into effect on July 26, 2009.

SSB 5613 - Stop Work Orders for Failure to Secure Industrial Insurance: This new law authorizes the Director of Labor & Industries to issue a stop-work order against a general or specialty contractor or a general or specialty electrical contractor that has failed to secure payment of industrial insurance. The stop-work order may be served on a worksite by posting a copy in a conspicuous location, and is effective as to the employer's operations on that worksite. Upon issuance, business operations of the employer must cease immediately upon service. An employer who violates a stop-work order is subject to a $1,000 penalty for each day not in compliance. The law goes into effect on July 26, 2009.

Transportation Bills - The legislature passed multiple bills that authorized or provided funding for public transportation projects, including the following:

• Economic Stimulus Transportation Funding - This new law authorizes the WSDOT to spend up to $341.4 million in Federal Funding, and updated the State transportation budget to account for these funds.
• SR 520 Corridor - This bill authorizes tolls on the 520 floating bridge, replacement of the bridge, and other related projects on the SR 520 corridor.
• Alaskan Way Viaduct Replacement Project - This bill requires the Alaskan Way Viaduct Tunnel to be located under 1st Avenue in Seattle. The bill also caps the amount of State funding for the tunnel at $2.4 billion, requires $400 million in toll revenues, and expedites the environmental review and design process.