Virginia Real Estate, Land Use & Construction Law : Virginia Construction Lawyers & Attorneys : Bean Kinney & Korman Law Firm : VA Real Estate, Land Use & Zoning

Here is a new sampling of cases in which the Virginia Supreme Court has recently granted appeals.

In April, the Court granted the petition for appeal in Studio Center Corporation v. WKW Construction, LLC, Record No. 092257, challenging the ruling of Judge Shockley from the Circuit Court of the City of Virginia Beach. Studio Center is contesting Judge Shockley’s holding that Virginia Code Section 54.1-1115(C) applied when the unlicensed contractor admitted it knew Virginia law required a license, but did not realize that it could not use someone else’s license. This case should give us some much needed guidance on Section 54.1-1115(C)’s requirement of “good faith” and “actual knowledge.”

What “Case Watch” would be complete without an appeal involving one of my favorite topics – BPOL tax! In March, the Court accepted the petition for appeal in Ford Motor Credit Company v. Chesterfield County, Record No. 092158. This case will delve into, among other issues, when a tax payer can take a deduction for out-of-state gross receipts under Virginia Code Section 58.1-3732(B)(2), and when it is appropriate to use the default apportionment method in Virginia Code Section 58.1-3703.1(A)(3)(b) to measure the tax payer's gross receipts.

In January, the Court also granted the petition for appeal in AMEC Civil, LLC v. Commonwealth of Virginia, et al., Record No. 091662. AMEC Civil designated no less than twenty-two assignments of error, with the Commonwealth designating seven assignments of cross-error. Much of the debate revolves around whether AMEC was required to give VDOT written notice of its claims at the “beginning of the work,” or whether AMEC could have given notice at the “time of the occurrence” under Virginia Code Section 33.1-386, whether that notice requirement could be satisfied by VDOT’s actual notice, and whether VDOT must show prejudice by any delay in providing notice. Some of the other issues involve whether sustained elevated lake levels constituted a differing site condition, and whether VDOT had a reciprocal duty to provide AMEC notice of that condition under the contract.

As always, stay posted!
 

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Earlier this year, the Virginia Supreme Court decided Martin Brothers Contractors, Inc. v. Virginia Military Institute, taking the opportunity to revisit its decision in Blake Construction.

The Virginia Military Institute (“VMI”) contracted with Martin Brothers to renovate VMI’s main dining facility. During the project, VMI requested changes resulting in a 270-day delay. VMI agreed that it alone was responsible for the delay. Martin Brothers sought $430,242.56 in delay damages plus the costs of recovery.

VMI paid only a portion of Martin Brothers’ delay claim, relying on terms found in the contract’s General Conditions. General Condition 43(b) stated that Martin Brothers could recover damages for owner-caused delay, provided the delay was “unreasonable” [sound familiar?!]. In such a case, Martin Brothers would be permitted to submit a change order adding additional days for completion of work. The General Condition governing change orders allowed some, but not all, site direct overhead expenses for delay, and disallowed all home office expenses. The same General Condition contained a subsection allowing a fifteen percent markup for overhead and profit. Martin Brothers’ claim included $225,937.40 in site delay damages and $204,305.16 in home office delay damages. Based on the language in the relevant General Conditions, VMI agreed to pay only $99.646.20 in site damages and refused to pay any home office damages.

At the trial court level, VMI successfully convinced the Circuit Court that the contract's terms, including its markup provisions, amounted to “liquidated damages,” one of the specifically enumerated exceptions in Virginia Code Section 2.2-4335 (B). The Virginia Supreme Court didn’t buy this argument, going right back to its decision in Blake Construction. The Court reiterated that Section 2.2-4335 “means what it says”:

Any provision…to waive, release, or extinguish the rights of a contractor to recover costs or damages for unreasonable delay in performing [a public construction contract]…shall be void.

The only exceptions to this broad language are those specifically enacted by statute, including Section 2.2-4335 (B):

1. provisions allowing a public body to recoup costs for delay caused by the contractor, subcontractors, and their agents and employees;
2. notice requirements;
3. liquidated damages; and
4. arbitration or other forms of alternative dispute resolution.

In analyzing whether the terms of the contract were in fact a liquidated damages clause, the Virginia Supreme Court asked whether Martin Brothers and VMI had actually entered into an agreement for the calculation of delay damages. VMI argued that the claimed home office expenses and all site expenses beyond $99,646.20 were included in the markup provisions, amounting to an agreed method of calculating the delay damages, and therefore a valid and enforceable liquidated damages clause.

The Court saw past this argument, pointing out that the markup provisions compensate Martin Brothers for added work required by VMI’s change order, but provide no compensation at all for extra expenses resulting purely from the delay. For instance, if VMI issued a change order requiring extra work, and Martin Brothers was able to complete the extra work on time, Martin Brothers would be entitled to its fifteen percent markup. However, if the extra work delayed the project by a year, Martin Brothers would still be entitled only to its fifteen percent markup, and nothing at all for the delay.

The Court concluded that the General Conditions with its markup provisions were not actually an agreed formula to calculate delay damages, and therefore not covered by Section 2.2-4335 (B)'s liquidated damages exception. Because the terms of the contract that VMI relied up acted as an absolute bar to most of the delay expenses incurred by Martin Brothers, the Court declared those terms void and unenforceable as against public policy.

In the wake of Martin Brothers, public bodies will likely become more and more creative in drafting supposed “liquidated damages” provisions. Take comfort in the Virginia Supreme Court’s and the General Assembly’s strong protection of a contractor’s right to delay damages in public contracts, and carefully scrutinize these provisions before you sign a contract.
 

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In the recent case of Martin Brothers Construction, Inc. v. Virginia Military Institute [pdf], the Virginia Supreme Court was confronted with whether Martin Brothers was able to claim delay costs, re-examining its 2003 opinion, Blake Construction Company, Inc./Poole & Kent v. Upper Occoquan Sewage Authority [pdf]. This post will review the Blake Construction opinion, and set the stage for the next blog post on Martin Brothers.

Blake Construction presented the Court with its first opportunity to examine a contract limiting delay damages in light of Virginia Code Section 2.2-4335 (A) [pdf], which states in part:

Any provision contained in any public construction contract that purports to waive, release, or extinguish the rights of a contractor to recover costs or damages for unreasonable delay in performing such contract, either on his behalf of on behalf of his subcontractor if and to the extent the delay is caused by acts or omissions of the public body, its agents or employees and due to causes within their control shall be void and unenforceable as against public policy.

The Court analyzed two contractual provisions, easily finding that the first was directly contrary to Section 2.2-4335 and therefore void as against public policy. That provision stated that an extension of time would provide the sole remedy for delay, and that the contractor agreed to make no claim for delay damages for “any sort of delay…for any reason, including but not limited to delay occasioned by any act or failure to act of the Owner.”

The rub in the case was the second provision, which tried to temper the blanket prohibition on delay damages. The second provision allowed the contractor to recover “additional compensation for the actual and direct costs” from unreasonable delay caused by the owner or engineer, provided that the contractor complied with notice and submission requirements. The provision also included a definition of “unreasonable delay” as amounting to bad faith, malice, gross negligence or abandonment.

As it should have, the Court began with the plain language of Section 2.2-4335, and the sweeping language by the General Assembly declaring any provision limiting delay damages as void. Viewed through that lens, the Court was not concerned about the language limiting delay damages to those within the owner’s control and requiring the contractor to give notice, because these were specific exceptions included in Section 2.2-4335 (A) and (B)(2). The Court was less forgiving about the bar for unreasonable delay damages except upon the owner’s bad faith, malice, gross negligence or abandonment, concluding that such a bar was void and unenforceable as against public policy under Section 2.2-4335.

The lesson to take from Blake Construction is to carefully compare any delay provisions in a public contract to Section 2.2-4335. A court is likely to find unenforceable and void delay provisions that go beyond Section 2.2-4335 (B), which specifically allows: (1) provisions allowing a public body to recoup costs for delay caused by the contractor, subcontractors, and their agents and employees; (2) notice requirements; (3) liquidated damages; and (4) arbitration or other forms of alternative dispute resolution.

Two more things to know about Section 2.2-4335: Under Subsection (C), a contractor making a delay claim is liable for a percentage of the public body’s costs to investigate, analyze, negotiate, litigate or arbitrate the claim. Under Subsection (D), a public body denying a delay claim is liable to the contractor for a percentage of the same kinds of costs, but only if determined in litigation or arbitration to have been in bad faith.

Stay tuned for the outcome of Martin Brothers in Part II of this post! I’ll give you a hint – we’ll look at Section 2.2-4335 (B)’s liquidated damages exception.
 

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Be aware that the procedural requirements of Virginia Code Section 15.2-1246 [pdf] apply to appeals denying claims arising under contracts covered by the Virginia Public Procurement Act, according to the recent case, Viking Enterprise, Inc. v. County of Chesterfield, Record No. 080215 (Jan. 16, 2009) [pdf].

In Viking Enterprise, Viking entered into a written contract with Chesterfield County to construct a fire station. The County insisted that Viking had to remove and replace part of a concrete floor. Although Viking believed the floor could be repaired without removing and re-pouring the concrete, it complied with the County’s request and submitted a claim for $86,531 for additional work. The County’s board of supervisors denied the claim on July 25, 2005, and the clerk of the County’s board of supervisors gave Viking written notice of that denial in a letter dated August 2, 2005.

Relying on Virginia Code Section 2.2-4363(E) [pdf] and 2.2-4364(E) [pdf], Viking believed that it merely needed to file suit in Circuit Court within six months of the board of supervisor’s final decision to perfect its appeal. It filed a complaint in Chesterfield County Circuit Court on January 27, 2006. It later non-suited its action and re-filed its complaint on February 13, 2007.

The County argued that Viking failed to comply with Section 15.2-1246, which would require Viking to appeal within thirty days from the date of the board of supervisors’ decision (if Viking had been present at the July 25, 2005 meeting) or within thirty days of service of the clerk’s letter (had Viking not been present at the meeting), and that Viking failed to serve written notice on the clerk and to execute a bond.

The Circuit Court and the Virginia Supreme Court agreed with the County. Because Viking conceded it had not appealed within thirty days of the decision or service of the clerk’s letter, had not served notice of the appeal on the clerk and had not executed a bond, Viking’s appeal was dismissed because it did not comply with Section 15.2-1246.

The Viking Enterprise opinion concludes with the following recap of requirements to perfect an appeal from a county’s disallowance of a claim arising out of a contract covered by the Virginia Public Procurement Act:

[T]he claimant must serve written notice of its appeal on the clerk of the county’s governing body and execute a bond to the county, both within 30 days from the date of either the decision or service of the written notice of the denial, in accordance with Code § 15.2-1246. The claimant must then institute legal action in the appropriate circuit court within six months of the date of the decision denying the claim, in accordance with Code Code §§ 2.2-4363(E) and -4364(E).

Notably, the Court recognized that Section 2.2-4363(E) also allows for an administrative appeal if available, and declined to rule on whether that subsection conflicts with section 15.2-1246. The Court also assumed without deciding that the Virginia Public Procurement Act applied, although Chesterfield County argued that it had enacted an ordinance opting out of the Act.
 

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