Year: 2011

Misrepresentation or Good Negotiation: KBR Hit With Multi-Million Dollar Verdict

Prime contractors often negotiate claims, including subcontractor pass-through claims, with owners. This can put the prime contractor at odds with its subcontractors, depending upon what the owner is willing to negotiate, for how much, for what, etc. A recent Fourth Circuit decision involving the negotiation of Kellogg Brown & Root with one of its subcontractors resulted in a multi-million dollar verdict in favor of the subcontractor against KBR for $12.5m, plus $2.5m in interest and another $4m in punitive damages as the Fourth Circuit upheld the lower court’s decision that KBR misled the subcontractor into taking less for its pass-through claim, including by telling the subcontractor that KBR did not have any discretion to raise or lower the amount offered to the subcontractor when in fact it did. Prime contractors are often forced to take lesser amounts from owners and then “negotiate” similar reductions from various subcontractors, and almost always have discretion regarding what they negotiate, with whom, for what amount, etc. This case is an eye opening lesson in the need to be clear and forthright in doing so.

Surveillance Can Be Dangerous – and Not Just to Your Claim

As I sat down to draft my blog this week, the most obvious thing that came to mind was a Thanksgiving/Workers’ Comp connection. I suspect there are some really interesting “Thanksgiving” cases out there. I can imagine an amusing story about a back strain from lifiting a turkey, or even a claim for psychological trauma as a result of having to choose between nuts and brown sugar or marshmallows for the sweet potatoes. I once had a case where a kitchen worker cut her finger opening a can of green beans. But, what I came across is a story, more of a cautionary tale, about the dangers of assigning surveillance.
The story goes – William Wehnke, 51, was walking on his property, with a loaded shotgun, when, he said, he spotted a “turkey” in a nearby cornfield. He took aim and fired, hitting Matthew Brady in the side of his body, his back and legs. Brady, yes, you guessed it, was not a turkey at all. Rather, he was an investigator hired to investigate Wehnke for workers’ compensation fraud. The investigator was apparently wearing dark colored and camouflaged clothing and lying on the ground at the time of the shooting.
Wehnke was indicted for felony second-degree assault and unlawful manner of taking – a violation that claims he used an inappropriate type of ammunition for hunting turkey – no mention was made in the indictment about whether the ammunition was appropriate for hunting workers’ compensation investigators.
Typically the most dangerous aspect of assigning surveillance is the risk of incurring the expense without actually obtaining any helpful footage. But, as this story illustrates, bodily harm may ensue. I suspect also that the injured investigator not only has a viable workers’ compensation claim against his employer, but also a third party suit against the shooter, and potentially the insurance company that retained his services.
The workers’ compensation attorneys at Vandeventer Black wish you all a very happy Thanksgiving. Enjoy good food, friends and family – and football!

Contractor and Surety have to pay twice? Not so fast says Judge Hilton

One of the generally accepted differences between a payment bond claim and a mechanic’s lien claim is that lien claims can be extinguished by payment up the chain, whereas a payment bond principal (usually the prime contractor) or surety cannot rely upon payment as a defense and so can end up having to pay twice for the same debt. They typically occurs when the prime has paid a subcontractor, but the subcontractor did not use the monies to pay someone of lower tier. Virginia law typically cuts off the lower tier’s lien rights, but it has been generally accepted that if there was a payment bond the lower tier could still recover under that.

In his recent “slip” opinion in U.S. ex rel. Capital Building Supply, Inc. v. Clark Realty, LLC, Civil Action No. 1:10-CV06 (E.D.Va., Alexandria Division), 2010 WL 3767853 (Sept. 15, 2010), Judge Hilton concluded differently; finding that neither the payment bond in that case nor equity principles permitted a result of a prime contractor having to pay twice for the same debt. In that case, the prime had paid for materials and obtained lien waivers and releases from its subcontractor in exchange for payent, but the subcontractor never paid its lower tier supplier who then sought recovery under the prime contractor’s payment bond. Judge Hilton reasoned that since the supplier could not have obtained a mechanic’s lien, and the purpose of the payment bond was to substitute for a mechanic’s lien on a public job, the supplier correspondingly had not right to claim under the payment bond.

Whether Judge Hilton’s decision will be followed by other judges/courts remains to be seen, but it’s a real winner for payment bond principals and surety, and a real scare for bond claimants.

Fourth Circuit Confirms that Even ALJs are Bound by the U.S. Supreme Court

Workers’ compensation claims filed pursuant to the Longshore & Harbor Workers’ Compensation Act are formally adjudicated by the Office of Administrative Law Judges (ALJ) ALJs are not Article III judges under the judicial branch of the government; rather, they are considered to be part of the executive branch. While it is often true that many procedural rules and rules of evidence are relaxed, Article I judges, and in particular ALJs, do not have the ability or authority to circumvent precedent established by higher Article III courts, including federal circuit courts and the U.S. Supreme Court.

The ALJs got a gentle reminder of this in a recent opinion decided, and published, by the Fourth Circuit. The Fourth Circuit Court of Appeals reversed a decision of the ALJ by finding that BRB committed a clear error of law when it affirmed the ALJ’s decision and order. The Fourth Circuit admonished the ALJ for relying on its own precedent rather than the controlling law set forth by the Supreme Court. In particular, the Fourth Circuit determined that the claimant failed to meet his burden of proof; his claim for binaural hearing loss benefits was denied. Suffice it to say that the Fourth Circuit found the ALJ erred in relying on the decisions of other ALJs in contravention of a previous holding of the Supreme Court.

This case is important beyond any particular hearing loss case. Because of the rather informal nature of the adjudication of claims by Article I judges, from time to time, ALJs drift off course from the establishment of stare decisis, which is the backbone of the legal system. The U.S. Supreme Court is binding precedent on all courts, even Article I administrative law judges. Sometimes they just need a gentle reminder, which was provided quite effectively by the Fourth Circuit this time around.

Virginia Little Miller Act Payment Bond Claim Notice Reduced to 90 days

Effective July 1, 2011, the time for a lower tier payment bond claimant to provide claim notice under Virginia’s Little Miller Act, Virginia Code Section 2.2-4341, was reduced from 180 days to 90 days. This clearly applies to bonds written after July 1, 2011, but leaves the question of application to bonds written prior to July 1, 2011. Left unanswered in the statute is whether the 90 day rule will be applied to pre-July 1, 2011 bonds but for which the 90 days has not yet expired. It seems unlikely the courts will apply the statute so as to de-vest a claimant who was within the 90 to 180 day period as of July 1, 2011 since the general rule in Virginia is to not construe statutes so as to alter vested rights. The question is harder for claimants who knew (or are presumed to know) of the statutory reduction before their rights expired, and how the courts will treat them, so expect to see ongoing litigation, and likely differing circuit court decisions, on this until either the Supreme Court decides the question, or the code is further amended.

New Set Aside Rule for Multiple Award TO/DOs for Small Businesses

A new rule now authorized federal agencies to set aside task and delivery orders placed against multiple award contracts.

The new rule also allows agencies to reserve for small businesses one or more multiple award contracts, as well as parts of those orders. The new rule further directs contracting officers to modify multiple award contracts that have been in effect for at least six months and that haven not had substantial amounts of work done or orders remaining to allow for the set asides.

The rule was issued on an interim basis to meet the one year deadline in the Small Business Jobs Act, Section 1331, which was signed last year. The SBA is currently drafting a proposed rule with additional details on implementation.

Acquisitions Savings Reform Act: Coming down the pipe

Recent legislation was introduced by two republican (Brown and Collins) and one independent (Lieberman) to “reform” acquisitions to “save” time and money. Among other things, the proposed legislation forces contractors to submit for final payment within 60 days of completion for firm fixed priced contracts, and allows contracting officer to unilaterally closeout contracts without final invoices.

The proposed legislation also mandates use of online reverse auctions for commercial item procurement above the simplified acquisition threshold when it could save money. While well intended, if passed in the proposed form, there are various traps and/or problems for contractors, including impacts upon dispute resolution that do not seem to have been thought through by the proposed legislation’s proponents.

Click Here to view the proposed legislation.

Statutory Employer Defense Found for Subcontractor Notwithstanding Lack of Workers’ Compensation Insurance

Last month the Virginia Supreme Court ruled in David White Crane Service v. Howell, 282 Va. ___ 1000981, ___ S.E.2d ___ (2011) that a subcontractor’s lack of workers’ compensation insurance did not affect the subcontractor’s ability to rely upon Virginia’s statutory employer defense as a bar to the claim of an employee of the general contractor who claimed he was injured by the subcontractor’s employee.

The lower court had held that the subcontractor’s failure to obtain workers’ compensation insurance precluded the subcontractor from relying upon the statutory employer defense, but the Supreme Court disagreed for a number of reasons as explained in the decision, holding that the subcontractor nevertheless came under the broad canopy of Virginia’s statutory employer act.

While a “good news” decision for subcontractors and their insurance carriers, subcontractors should not use it as a means of avoiding their statutory insurance obligations or the practical reasons of obtaining workers’ compensation insurance; all of which has separate adverse consequences.

Federal Prompt Payment Act Doesn’t Give Cause of Action to Subcontractors

In its recent decision in United States for the use and benefit of IES Commercial Inc. v. The Continental Insurance Co., D.D.C., No. 11-0985, 9/30/11, the U.S. District Court for the District of Columbia held that the Federal Prompt Payment Act (PPA) does not provide plaintiffs with a private right of action.

It therefore dismissed a subcontractor’s claim against a construction company made claiming this. This does not mean though that the PPA provides no remedy, in that it still entitles a claimant due money to interest, but it does mean that a PPA violation, of itself, does not give rise to an independent cause of action or damages.

Virginia has a similar PPA scheme in the Virginia Public Procurement Act, which similar does not expressly provide for a private cause of action, and so one would anticipate the same result. A holding like this is good news for prime contractors; but not so much for subcontractors.

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