SUBSTITUTING MATERIALS AND FAILURE TO COMPLY WITH CONTRACTUAL REQUIREMENTS

It is important to remember that if you are going to substitute materials from those specified, you need to make sure there is proper approval in doing so–make sure to comply with the contractual requirements to substitute materials.  Otherwise, you could be in a situation where you are contractually required to remove the installed substituted materials and replace with the correct specified materials.  This is not the situation you want to find yourself in because this is oftentimes a costly endeavor.  This was the situation in Appeal-of-Sauer, Inc., discussed below, on a federal project.  The best thing that you can do is comply with the contractual requirements if you want to substitute materials.   If you are in the situation where it is too late, i.e., you already installed incorrect materials, you want to demonstrate the substituted materials are functionally equivalent to the specified materials and/or come up with an engineering solution, as required, that could be less costly then ripping out the installed material and replacing with the correct material.  Even doing so, however, is not a “get out of jail free card” and does not necessarily mean there is not a strong basis to require you to install the correct specified material.

In Appeal of- Sauer, Inc., ASBCA 61847, 2021 WL 4888192 (ASBCA September 29, 2021), a federal project’s engineering requirements required cast iron piping for the above ground sanitary system.   However, the prime contractor installed PVC piping instead of cast iron piping.  The prime contractor believed it had the appropriate approval through its submittal.  The government, through its contracting officer, directed the prime contractor to remove installed PVC piping to replace with cast iron.  The government did not believe PVC piping was the functional equivalent of cast iron piping for the above ground sanitary system due to its concern with the noise level of waste materials flowing through the piping.  The prime contractor submitted a claim for its removal and replacement costs which was denied by the contracting officer.  On appeal with the Armed Services Board of Contract Appeals, the Board agreed with the contracting officer explaining: “While we agree that a design change could be approved by the designer of record and brought to the attention of the government before being incorporated into the design documents, the [prime contractor’s] task order required that such a design change meet the minimum requirements of the solicitation and accepted proposal.  The plumbing submittal [the prime contractor] issued here, showing the use of PVC instead of cast iron for the above ground waste piping, did not meet the minimum requirements of the solicitation.”  Appeal of-Sauer, Inc., supra.

The prime contractor argued the government approved the deviation and use of PVC by another government representative.  This argument failed because only the contracting officer had the authority to change a contract or task orderAppeal of-Sauer, Inc., supra (citing FAR clauses that reference that only the contracting officer has authority to modify or deviate from a contract).

Next, the prime contractor argued estoppel and waiver in that government personnel were present and observed the construction of the above ground sanitary piping with PVC and waited 16 weeks before directing the prime contractor that it could not use PVC piping.   The prime contractor argued this unreasonable delay should be deemed the government constructively accepting PVC and the government either waived the right to demand strict compliance with cast iron or should be estopped from demanding such compliance. This argument failed:

Here, only the contracting officer could vary the task order requirements.  Therefore, to establish waiver, [the prime contractor] must demonstrate that the contracting officer knowingly rescinded the government’s right to require compliance with a task order minimum requirement.  Even assuming government personnel on site may have observed the installation and use of PVC pipe, there is no evidence that the contracting officer knowingly waived the task order requirement.

The government is generally entitled to insist upon strict compliance with the contract specifications and to require correction of nonconforming work.  There are instances, however, where the government may waive strict compliance with contractual requirements and is estopped from later re-imposing those requirements upon the contractor.  These cases require knowing failure to exact performance – presumably by one with authority to waive contractual terms.

Appeal of-Sauer, Inc., supra (internal quotations mitted).

Lastly, the prime contractor argued under the economic waste doctrine—that removing the PVC and replacing it was cast iron constituted economic waste, particularly since PVC and cast iron piping are functionally equivalent.  “To establish economic waste, the work performed must substantially comply with the specifications; the work must be adequate for the intended purpose; and the cost of correction must be economically wasteful.  Economic waste does not ipso facto excuse non-performance but serves to limit excessive damages for repair of non-conforming work.”  Appeal of-Sauer, Inc., supra(internal quotation omitted).

The Board found that economic waste did not apply because the prime contractor did NOT substantially comply with the specification and PVC was not the functional equivalent to cast iron based on the intended application (which was to control the noise level and sound transmission of waste materials flowing through the piping).  Further, while the government was receptive to another remedial measure, none was offered to the government.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

WAIVING THE RIGHT TO ARBITRATE UNDER FEDERAL LAW

If there is an arbitration provision in your contract that you want to enforce, you do not want to take action inconsistent with those rights as this could give rise to a waiver argument, i.e., that you waived your rights to arbitrate, particularly if the other party has been prejudiced.

Under federal policy and law, establishing waiver requires the party arguing waiver to “bear a heavy burden of proof.  U.S. f/u/b/o John Wayne Construction, G.S.A. Division, LLC v. Federal Ins. Co., 2021 WL 4526727 (M.D.Fla. 2021) quoting Stone v. E.F. Hutton & Co., 898 F.2d 1542, 1543 (11th Cir. 1990).

“To determine whether the right to arbitrate has been waived, courts apply a two part test: i) whether, “‘under the totality of the circumstances,’ the party ‘has acted inconsistently with the arbitration right’”; and ii) “whether, by doing so, that party ‘has in some way prejudiced the other party.’”  Id. quoting Ivax Corp. V. B. Braun of Am., Inc., 286 F.3d 1309, 1315-16 (11th Cir. 2002).   Substantial participation in litigation prior to invoking the right to arbitrate supports a party acting inconsistent with the right to arbitrate.  Id.   And, “‘[p]rejudice has been found in situations where the party seeking arbitration allows the opposing party to undergo the types of litigation expenses that arbitration was designed to alleviate.’”  Id. quoting Morewitz v. W. of Eng. Ship Owners Mut. Prot. & Indem. Ass’n (Luxembourg), 62 F.3d 1356, 1366 (11th Cir. 1995).

Hence the heavy burden for a party to support to prove waiver– establishing both substantial participation in litigation that is inconsistent with the right to arbitrate AND prejudice.

An example of this heavy burden to support waiver can be found in the Federal Magistrate’s Report and Recommendation in U.S. f/u/b/o John Wayne Construction, G.S.A. Division, LLC.  Here, a prime contractor on a federal project in Louisiana hired a drywall subcontractor.  The subcontract contained a detailed provision to address disputes with the final process as follows:

[I]t may choose to pursue the matter in court, subject to the requirements on venue and alternative dispute resolution agreed to herein. Any claim by[subcontractor] filed in state or federal court against [prime contractor] and/or [prime contractor’s] surety shall only be filed and/or resolved in anycourt within the exclusive venue of Duval County, Florida. At [prime contractor’s] sole option, [prime contractor] may require Alternative DisputeResolution (ADR) methods to be used to resolve the dispute, including binding arbitration in accordance with the Construction Industry Rules ofthe American Arbitration Association, instead of litigation in a court of law. In the event [prime contractor] elects binding arbitration, any claimsthat [subcontractor] may have against any bonds provided by [prime contractor] shall be stayed, pending the result of such binding arbitration.

(As an aside, an arbitration provision is enforceable if it gives one party – perhaps the prime contractor—the sole option to select arbitration as the binding dispute resolution procedure, as was the situation in this arbitration provision.)

Due to a dispute between the drywall subcontractor and prime contractor, the prime contractor filed a lawsuit in state court in Louisiana.  The subcontractor, after a mediation between the parties reached an impasse, moved to dismiss the lawsuit and contemporaneously filed a lawsuit in Florida federal court against the prime contractor and Miller Act payment bond surety (based on venue provision in the subcontract).  The prime contractor did not dispute the dismissal contending it was formally invoking its right to arbitrate with the subcontractor. The prime contractor further moved to compel arbitration of the subcontractor’s Florida federal court lawsuit pursuant to its rights under the subcontract’s dispute resolution procedure.

The subcontractor argued that the prime contractor waived its right to compel arbitration by virtue of it initially filing a lawsuit against the subcontractor in Louisiana state court.  The prime contractor countered that the subcontractor cannot meet the required heavy burden to support waiver and, nonetheless, it did not act inconsistent with its rights to arbitrate.  The Federal Magistrate agreed with the prime contractor finding that waiver did not occur recommending the parties be compelled to binding arbitration.

First, the Magistrate found that the prime contractor filing the Louisiana lawsuit where there was limited litigation was insubstantial and did not result in the substantial participation in litigation to demonstrate it was acting inconsistent with its right to arbitrate. Further, once the subcontractor filed its lawsuit in the Florida federal court, the prime contractor filed its motion to compel the lawsuit to arbitration and did not substantially participate in litigation in the Florida federal court.  “Under the ‘totality of circumstances,’ it does not appear that the Louisiana Lawsuit or the current case [in Florida federal court”] before this Court amount to ‘substantial participation in litigation’ to a point that was inconsistent with the intent to arbitrate.” U.S. f/u/b/o John Wayne Construction, G.S.A. Division, LLC, supra.

Second, the Magistrate found that even if the prime contractor acted inconsistent with its right to arbitrate by initiating the Louisiana lawsuit, this would not matter because there was no prejudice to the subcontractor. The Magistrate noted that while the subcontractor incurred costs due to the Louisiana lawsuit, the subcontractor filed only one motion, a hearing was not held on the motion, and the dispute was dismissed without prejudice; thus, the expenses were not so prejudicial to the subcontractor.   Moreover, “looking at the totality of circumstances (along with the finding that the Louisiana Lawsuit amounted to insubstantial litigation), the undersigned [Magistrate] find that [the subcontractor] is not so prejudiced to satisfy its heavy burden.” U.S. f/u/b/o John Wayne Construction, G.S.A. Division, LLC, supra.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

QUICK NOTE: YES, YOU CAN WAIVE THE RIGHT TO ARBITRATE

A party can waive the contractual right to arbitrate.  Waiver is the “voluntary and intentional relinquishment of a known right or conduct which implies the voluntary and intentional relinquishment of a known right.”  Ship IV Harbour Island, LLC v. Boylan, 44 Fla. L. Weekly D831a (Fla. 5th DCA 2019) (citation and internal quotation omitted).  Thus, a party can waive its right to arbitrate a dispute by engaging in conduct inconsistent with the right to arbitrate.  One way a party can act inconsistently with the right to compel a dispute to arbitration is by engaging in discovery in litigation, particularly discovery as to the merits of the case.  See Ship IV Harbour Island, supra (after court ordered limited discovery regarding arbitration, party thereafter waived right to arbitration by engaging in discovery as to the merits of the dispute).    For this reason, if your desire is to preserve the integrity of a contractual arbitration provision, do not do anything inconsistent with this right such that you give the other party the argument that you waived the contractual right to arbitration.  

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

QUICK NOTE: DON’T NEGLECT CONDITIONS PRECEDENT TO PAYMENT IN YOUR CONTRACT

imagesThere is a good chance your contract contains conditions precedent to payment.  Such conditions precedent to payment include waivers and releases of lien (and, perhaps, claims) and contractually required warranties.  Make sure to comply with conditions precedent to payment!

 

In a case where a subcontractor sued a payment bond surety, the court held the subcontractor’s lawsuit was premature because the subcontractor did not comply with a condition precedent to payment, that being the submission of a release in satisfactory form.  Until such condition precedent was satisfied, payment was not due and owing the subcontractor.  

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.