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RESULTS FIRSTSM | NEWSLETTER VOLUME XXVII | WINTER 2017

CO - EDITORS CHARLES F. KEN NY, PARTN ER AN D M ICHAEL S . Z ICH ERMAN , PARTN ER

THE 2017 AIA DOCUMENTS: WHAT’S NEW AND DIFFERENT?By Sean P. Ryan 2

CHANGES TO ENVIRONMENTAL RULES UNDER THE TRUMP ADMINISTRATION By David J. Scriven-Young 4

CONTRACTORS BEWARE: COMPLETING WORK DIRECTED ONLY BY A CONTRACTING OFFICER’S REP IS AT YOUR OWN RISKBy Alexandra Busch

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PECKAR & ABRAMSON CONTINUES GROWTH THROUGHOUT THEIR OFFICES 8

FEDERAL APPEALS COURT RULES THAT LIEN CLAIMS FILED AFTER A CONTRACTOR FILES FOR BANKRUPTCY VIOLATE AUTOMATIC STAY By Scott G. Kearns

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POTENTIAL RISKS OF TAKING EQUITY STAKES IN CONSTRUCTION PROJECTS By Stephen P. Katz and Abby R. Weiner 12

PECKAR & ABRAMSON SWEEPS 2017 CONSTRUCTION LAW AWARDS15

Sean P. Ryan

THE 2017 AIA DOCUMENTS: WHAT’S NEW AND DIFFERENT?A significant construction industry event occurred at the end of April 2017 with the release of thirteen updated construction project documents by the American Institute of Architects (“AIA”). The 2017 updates were made to the former 2007 editions of the following documents:

A SeriesA101 – Standard Form of Agreement Between Owner and Contractor where the basis of payment is a Stipulated Sum

A102 – Standard Form of Agreement Between Owner and Contractor where the basis of payment is the Cost of the Work Plus a Fee with a Guaranteed Maximum Price

A103 – Standard Form of Agreement Between Owner and Contractor where the basis of payment is the Cost of the Work Plus a Fee without a Guaranteed Maximum Price

A104 (formerly A107) – Standard Abbreviated Form of Agreement Between Owner and Contractor

A105 – Standard Short Form of Agreement Between Owner and Contractor

A201 – General Conditions of the Contract for Construction

A401 – Standard Form of Agreement Between Contractor and Subcontractor

B SeriesB101 – Standard Form of Agreement Between Owner and Architect

B102 – Standard Form of Agreement Between Owner and Architect without a Predefined Scope of Architect’s Services

B103 – Standard Form of Agreement Between Owner and Architect for a Complex Project

B104 – Standard Abbreviated Form of Agreement Between Owner and Architect

B105 – Standard Short Form of Agreement Between Owner and Architect

C SeriesC401 – Standard Form of Agreement Between Architect and Consultant

This article will provide an overview of noteworthy changes in the A-series documents, which are among the most widely used forms of agreements between Owners and Contractors for construction projects in the United States.

The Owner-Contractor AgreementsLiquidated Damages. Liquidated Damages are given a more prominent place in the A101, A102, A103, and A104 Agreements with specific provisions for assessment of liquidated damages, if any, If the Contractor fails to achieve Substantial Completion by the required date. The specific terms and conditions for liquidated damages are to be inserted by the Owner and Contractor. A new Section provides for provisions for bonus or other incentives to be inserted. The A105 Agreement omits liquidated damages.

There is no guidance on language generally used to create an enforceable liquidated damages clause. Moreover, there is no mention whether liquidated damages are capped or are the Owner’s exclusive remedy for lateness.

Date of Commencement and Substantial Completion. New “check the box” provisions are included for the parties to indicate the commencement and substantial completion dates. The default commencement date is the date of the Agreement, unless the parties check and complete one of three boxes. The three choices are (1) the date of the Agreement; (2) a date set forth in the Owner’s notice to proceed; and (3) a date established by inserting a specific date or a means for determining the date of commencement. The two choices for fixing the date of substantial completion are either inserting a number of days from commencement or a specific date.

Termination for Convenience. A new provision has been added for a termination fee in the event

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THE 2017 AIA DOCUMENTS: WHAT’S NEW AND DIFFERENT?Sean P. Ryan is a Partner in our New York Office.

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NEW P&A ASSOCIATES

of the Owner terminating for convenience. The parties are to insert, if any, the amount of or method for determining the fee payable to the Contractor following a termination for the Owner’s convenience. The contractor must negotiate the termination fee at the time of the Agreement or waive that fee, since A201-2017 § 14.4.3 refers only to the termination fee. There is no guidance as to what is to be included in the termination fee.

Pricing and Payments. Changes have been made to provisions dealing with unit prices, payments, and retainage. The complex method of calculating amount of Work completed for payment application purposes has been streamlined in the A101 Agreement. In the A102, but not the A103, the schedule of values is to include any contingency. Additional details are included regarding withholding and releasing retainage, including a provision for the parties to stipulate that retainage will not be withheld on certain costs, for example, general conditions, insurance, etc.

The New Insurance Exhibit. The A101, A102, and A103 Agreements now incorporate a seven-page Exhibit A, Insurance and Bonds, which is a menu of insurance products and coverage that the parties can select by checking boxes. This new exhibit results in a reduction of the insurance requirements specified in the A201. The Owner is the default provider of Builder’s Risk insurance, although this responsibility can be shifted to the Contractor by checking a box. Other types of insurance that the Owner can select to provide include loss of use, ordinance or law insurance, ingress/egress insurance, soft costs insurance, and cyber security insurance. The Contractor is required to carry commercial general liability insurance with eleven (11) types of claims that cannot be excluded, such as residential (if that type of project) roofing and exterior insulation finish systems (“EIFS”). Examples of other types of insurance the Contractor may be required to carry are auto, workers’ compensation, Jones Act, professional Liability insurance, pollution liability, maritime, and aircraft. Interestingly, bonds are a requirement, although the type and penal sums are to be specified.

The A201 General ConditionsNotices and Claims. A new section 1.6 is added that

defines notice as a written notice and distinguishes between “notice” and “Notice of Claims.” Methods of giving notice are specified for the first time. Electronic transmission is permitted if set forth in the Agreement, but only for “notices” and not for “Notice of Claims.” There are also new and modified notice provisions scattered throughout the 2017 A201, including at Section 3.7.4 where notice of differing site conditions has been reduced to 14 days from 21 days. The Claims Section 15 now stipulates that Notice of Claims must be submitted to the Initial Decision Maker (“IDM”), only if first discovered before the expiration of the correction period set forth in Section 12.2.2. Thereafter, no decision by the IDM is required. Other Claims excluded from IDM decision are those related to hazardous materials (§10.3), emergencies (§10.4), and insured loss (§11.5).

A noteworthy change is that the Owner is not required to file a Claim in order to impose liquidated damages in accordance with the Contract Documents. Coupled with other changes, this shifts the burden to the Contractor to make a Claim if the Contractor believes liquidated damages are improperly imposed. Also, notice of a cost claim must be given before proceeding to execute a portion of Work that is subject to the Claim.

Arbitration. If arbitration is selected in the agreement as the method of binding dispute resolution, it shall be conducted in the place where the Project is located unless otherwise mutually agreed. Consolidation and joinder are now subject to AAA rules or other applicable rules.

Digital Data and Building Information Modeling (“BIM”). Section 1.7 now provides that the parties will use AIA Document E203™–2013, Building Information Modeling and Digital Data Exhibit, to establish the protocols for the development, use, transmission, and exchange of digital data. Section 1.8 sets forth provisions as to reliance, liability, and risk of use of information in the BIM.

Owner’s Financial Arrangements. The Contractor is not obligated to commence work until it receives reasonable evidence of the Owner’s f inancial arrangements. The Contractor is entitled to an extension of time if commencement is delayed,

“As a new member of P&A’s construction law practice, I handle a variety of construction and commercial litigation matters. Our team identifies potential disputes throughout the

construction process, saving clients time, money, and unnecessary distraction.”

FREDDY MUNOZ | M IAMI

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David J. Scriven-Young

Changes to Environmental Rules under the Trump AdministrationAs expected, President Trump and Scott Pruitt, the Administrator of the U. S. Environmental Protection Agency, have begun the process of transforming the EPA and the way that the EPA interprets and enforces environmental statutes and regulations. This article reviews three specific changes that will affect businesses, including contractors, developers, and manufacturers: (1) President Trump’s Executive Order on environmental reviews of infrastructure projects, (2) proposed revision of the “Waters of the United States” rule, and (3) the reduction of federal environmental enforcement.

Executive Order on Environmental Reviews of Infrastructure ProjectsOn August 15, 2017, President Trump signed a Presidential Executive Order on Establishing Discipline and Accountability in the Environmental Review and Permitting Process for Infrastructure. The purpose of the Order was to “ensure that the Federal environmental review and permitting process for infrastructure projects is coordinated, predictable, and transparent.” This sweeping executive order eliminates and streamlines some permitting regulations and would expedite the construction of roads, bridges and pipelines. A key element of the new executive order rolls back standards set by former President Barack Obama that required the federal government to account for climate change and sea-level rise when building infrastructure.

The Executive Order also puts in place a “one federal decision policy” under which one lead federal agency works with others to complete environmental reviews and other permitting decisions for a given project. All decisions on federal permits will need to be made within 90 days, and agencies now have a two-year goal to process environmental reviews for major projects.

“Water of the United States” Rule RevisionOn July 27, 2017, the Environmental Protection Agency and the Department of the Army published in the Federal Register (82 Fed. Reg. 34899) a proposed rule to initiate the first step in a comprehensive, two-step process intended to review and revise the definition of “waters of the United States” (“WOTUS”). The definition of “waters of the United States” is critical as to how the EPA will enforce the water laws of the United States because this definition informs the regulated community which bodies of water (e. g., oceans, lakes, rivers, streams, creeks, and swamps) are subject to the requirements of the Clean Water Act. For example, the definition of WOTUS impacts how the EPA will enforce a number of Clean Water Act programs, such as oil spill notification; Spill Prevention, Control, and Countermeasure (“SPCC”) plans; National Pollutant Discharge Elimination System (“NPDES”) permits and stormwater discharges; the industrial effluent guidelines; and dredge and fill permitting.

In 2015, the Obama administration attempted to revise the definition of WOTUS to greatly expand the number of bodies of water that could potentially be impacted by Clean Water Act rules. This revision has stayed

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CHANGES TO ENVIRONMENTAL RULES UNDER THE TRUMP ADMINISTRATIONDavid J. Scriven-Young is Senior Counsel in our Chicago Office.

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NEW P&A ASSOCIATES

due to a decision by the U. S. Court of Appeals for the Sixth Circuit in the Ohio v. United States Army Corps of Engineers case.

Prior to 2015, the EPA enforced a narrower interpretation of “navigable” waters with respect to the WOTUS definition. This interpretation came from the U. S. Supreme Court’s opinion in Rapanos v. United States. Although the Court failed to garner a majority of justices who voted in favor of one interpretation of WOTUS, two views emerged. First, Justice Scalia’s plurality opinion would protect wetlands “with a continuous surface connection” to navigable water. ” Second, Justice Kennedy’s concurring opinion called for a broader definition of WOTUS, in that there would need to be a “significant nexus” between wetlands and navigable waters, in which the wetlands “significantly affect the chemical, physical, and biological integrity of other covered waters. ”

The 2017 proposal from the Trump administration would, as a first step, rescind the 2015 WOTUS rule. This means that the EPA would interpret WOTUS in line with the Rapanos decision, although it is widely believed that the EPA’s interpretation of WOTUS will follow Justice Scalia’s narrow interpretation, rather than Justice Kennedy’s broader interpretation. In a second step, the administration will pursue notice-and-comment rulemaking through which a substantive re-evaluation of the definition of WOTUS will be conducted.

Reduction of Federal Environmental EnforcementA recent report from the Environmental Integrity Project showed that the President Trump’s EPA has reduced federal environmental enforcement.

Specifically, during the first six months of the Trump presidency, the federal government has collected 60% less in civil penalties from the regulated community as compared to previous administrations. During those six months, the Justice Department collected $12 million in civil penalties as part of 26 civil lawsuits. That compares to $36 million in 34 cases during the Obama administration; $30 million in 31 cases under the George W. Bush administration; and $25 million in 45 cases during the Clinton administration’s first six months.

The report also found that the value of injunctive relief (i. e., the amount of money spent on remediation and installation of pollution control devices) was also lower than prior administrations. Under President Trump, injunctive relief in 10 cases totaled $197 million, compared to $710 million in 16 cases under President Bush and $1.2 billion in 22 cases under President Obama.

ConclusionThe changes addressed in this article are likely only a small sample of the moves the Trump Administration will attempt to transform the EPA. It is hard to tell at the present time how much of this transformation will be successful. In addition, while federal environmental enforcement may be down, it is likely that environmental advocacy groups and environmental agencies in some states will pick up the slack and increase state enforcement actions, as well as citizens’ lawsuits. Therefore, businesses should remain cautious, comply with environmental laws and regulations, and closely follow developments from the Trump administration and the response from the courts, states, and environmental citizens groups. n

“ P&A has rightfully earned its reputation as the nation’s leader in construction law. I look to forward to serving as a vital member of the firm,

providing practical counsel to a range of construction industry clients.”

JAMIE OBERG | DALL AS

“ The attorneys at P&A pride themselves on helping clients retain profits and dedicate time and energy to expanding their business interests. As a new

addition to the firm, I look forward to continuing this effort and helping clients successfully navigate the maze of complex construction issues.”

NATHALIE VERGOULIAS – M IAMI

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but adjustment of the Contract Sum is omitted. After commencement, the Contractor may request the Owner to furnish such reasonable evidence only if the (1) Owner fails to make payments; (2) the Contractor identifies a reasonable concern; or (3) a change materially changes the Contract Sum. The terms reasonable evidence, reasonable concern, and materially changes can lead to disputes if not better defined during negotiations. There is a new 14 day post-commencement right of the Contractor to stop work, with entitlement to time and money, if the Owner fails to furnish reasonable evidence, provided that if the evidence is requested because of a change that materially changes the Contract Sum, then only the portion of the work affected by the change may be stopped. The Owner cannot materially vary financial arrangements without prior notice to the Contractor. Finally, there are new confidentiality provisions pertaining to the Owner’s financial information.

Review of Contract Documents and Field Conditions. The revised Section 3.2.4 now provides that the Contractor’s liability for failing to perform its obligations under Sections 3.2.2 or 3.2.3 is subject to mutual waiver of consequential damages (the waiver is now Section 15.1.7).

Supervision & Construction Procedures (Revised §3.3.1). The Contractor is now obligated to propose alternative means, methods, techniques, sequences, or procedures if it determines that those specified may not be safe. Unless the Architect objects, the Contractor shall perform using its alternatives. Left unsaid is what happens if the Contractor’s alternatives do not comply with the Contract Documents.

Warranty (New §3.5.2). A new warranty provides that all material, equipment, or other special warranties required by the Contract Documents shall be issued in the name of the Owner or shall be transferrable to the Owner and shall commence in accordance with §9.8.4 [Substantial Completion].

Shop Drawings, Product Data, and Samples (Revised §3.12.10.1). There are new requirements regarding design services required of the Contractor. The former language that the Contractor is not responsible for adequacy of the performance and design criteria in Contract Documents has been deleted. The requirements now provide that the Contractor is entitled to rely upon the adequacy and accuracy of performance and design criteria provided in the Contract Documents. The former Owner and Architect’s reliance on “completeness” of services, certifications, and approvals of the Contractor’s design professionals were deleted, although the Owner and Architect may still rely on the adequacy and completeness. There is a new certification requirement by the Contractor’s design professional (New §3.12.10.2).

Royalties, Patents, and Copyrights (Revised §3.17). The old “reason to believe” language has been replaced by language holding the Contractor responsible for loss due to an infringement of a copyright or patent discovered by or made known to the Contractor.

Subcontracts & Separate Contractors (Revised §§5.2.1, 6.1.1 & 6.2.2). Separate Contractors is now a defined term. The Contractor is not responsible for discrepancies and defects in the construction or operations of the Owner or a Separate Contractor that are not apparent (as opposed to the prior language “not then reasonably discoverable”).

Construction Change Directives (Revised §7.3). The Architect determines adjustment of the Contract Sum and has approval rights of employees’ costs, but new Section 7.3.5 only speaks of the Contractor making a claim for time.

Delays and Extensions of Time (Revised §8.3.1). A cross-reference has been added to the adverse weather conditions mentioned in Section 15.1.6.2.

Indemnification Changes. There is a new lien indemnity at Section 9.6.8, which is conditioned on the Owner having paid. The former indemnifications obligations in hazardous materials Sections 10.3.5 and 10.3.6 have been replaced by obligations to “reimburse” costs. This may be a nod to anti-indemnification statutes around the nation.

Uncovering and Correction of Work (Revised §12.1.2). Adjustment of time has been added if uncovered work conforms to the Contract Documents. The former Owner responsibility for costs of uncovering and correcting non-conforming work if the condition was caused by the Owner or a Separate Contractor has been deleted.

Termination (Revised §§ 14.1, 14.2 & 14.3). Entitlement is added to Section 14.1.3 for overhead and profit on Work not executed if the Contractor terminates for any of the specified grounds. Also, a termination fee is mentioned in the termination for convenience clause to align it with the provision in the updated agreements. Sub-subcontractors or other entities added to §14.1.4 as parties whose act or fault caused work to stop will deprive the Contractor of the right to terminate. Failure to make payment to suppliers can now trigger termination for cause. Certification of sufficient cause for termination is now by the Architect instead of the Initial Decision Maker.

This survey of noteworthy changes in the A-series Owner-Contractor documents should be supplemented with an in-depth review of the updated documents. Advice of counsel is recommended to understand how the changes affect you and what modifications will better position you to manage the risks. n

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Alexandra Busch

Can an agent with apparent but not actual authority bind its principal? The answer depends on whether the transaction is between private parties or involves the federal government. Practitioners who represent parties in private construction disputes are likely aware of the rule that apparent authority can generally bind the principal in a private transaction. But, a unique aspect of federal procurement law is that the federal government may typically only be bound by representatives with actual authority – whether that authority is express or implied.

When contracting with the federal government, contractors must act with the understanding that the government does not recognize apparent authority. This awareness will help contractors to avoid completing work for which they may not ultimately be compensated. The general rule when the federal government is the project owner is that only the contracting officer (“CO”) has the authority to bind the federal government. This means that contractors risk nonpayment when they perform work that has not been directed by the CO or an individual who has actual authority to bind the government. An understanding of the different types of authority is critical to avoiding disputes about work that may be outside the scope of the contract.

I. Brief Overview: Authority of Agents to Bind the GovernmentAn agent of the federal government must have

express actual authority or implied actual authority to bind the government. Apparent authority is not sufficient. COs have express actual authority to bind the government in a transaction and are appointed by the principals of government agencies, as required by statute. This binding authority is often referred to as the CO’s “warrant. ” The limits of the CO’s warrant are memorialized on a Standard Form 1402, Certificate of Appointment, which can be made available to the contractor. The CO may also delegate his/her authority to a contracting officer’s representative (“COR”). It is the contractor’s responsibility to determine the limits of the CO’s authority, and a contractor who completes work at the direction of an agent without confirming that agent’s authority does so at the contractor’s own risk.

A government agent may bind the federal government under the theory of implied actual authority, as well. “Actual authority is implied when such authority is an integral part of the duties assigned to the particular government agent. ” Implied authority is grounded in the federal government’s actions and intent, so a government agent may have implied authority when the agent’s actions and statements are appropriate and/or essential to the performance of his/her duties. For example, the Court of Federal Claims has held that a government agent has implied authority to contract as is “appropriate and/or essential to the performance of the agents [sic] duties” where an agent who possessed delegated discretionary authority to manage, allocate, and distribute funds guaranteed reimbursement by

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CONTRACTORS BEWARE: COMPLETING WORK DIRECTED ONLY BY A CONTRACTING OFFICER’S REP IS AT YOUR OWN RISKAlexandra Busch is an Associate in the Washington, DC Office.

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Matt Moore is a Partner in P&A’s Houston Office in the Construction and Surety practice groups, where he focuses primarily on the transactional litigation and dispute resolution aspects of construction law. Moore represents general contractors, sureties, owners, developers, subcontractors, and suppliers in all phases of construction and on a wide variety of construction-related issues, including breach of contract, breach of warranty, mechanic’s liens, contractual and statutory indemnity, payment and performance bonds, collections, fraud, extra work, construction defects, contract termination, differing site conditions, bid protests, bid mistakes, and delay and disruption claims, in both the public and private sectors. He is also frequently involved in drafting and reviewing contract documents. Moore has been selected each year since 2012 as a Texas Super Lawyer and Rising Star in the area of construction litigation.

Matthew S.C. Moore

Karla Pascarella is a Partner in Peckar & Abramson’s Austin office, where she represents a range of international and domestic corporate clients and construction professionals. Her practice is primarily concentrated on construction law, corporate compliance and governance, and commercial litigation/complex dispute resolution. Fluent in both Spanish and English, she regularly handles multi-cultural transactions and disputes, and assists corporate clients with strategic legal decisions and global business matters. An adept litigator and negotiator, Pascarella has successfully handled a diverse range of contract disputes at state and federal court levels, and frequently negotiates complex contracts for publicly and privately financed infrastructure projects.

Karla Pascarella

Jeff Hage is a Partner in Peckar & Abramson’s Dallas office. A highly adept litigator, Hage has over 35 years of experience representing clients in complex, high-stakes construction and commercial litigation matters. Over the course of his career, he has handled matters in numerous jurisdictions across Texas, as well as throughout the U.S. and internationally. Hage represents clients in the construction, real estate, energy, and banking/finance industries, and focuses his practice on a range of legal matters, including construction, fiduciary/trust, environmental, real estate, and partnership disputes. Hage has successfully tried numerous cases in a variety of forums including state, federal, bankruptcy and appellate courts, and arbitration. His clients include general contractors, public and private companies, and individuals. Widely known for his depth of leadership skills, Hage brings a unique balance of expertise and efficiency to each case. He has earned a reputation for vigorous representation and offers his clients a wealth of insight and strategic guidance on legal matters.

Jeff Hage

PECKAR & ABRAMSON CONTINUES GROWTH THROUGHOUT THEIR OFFICES

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Olivier Larzul

Olivier Larzul is Special Infrastructure Counsel at Peckar & Abramson’s New York office, where he represents a wide range of construction, engineering, and energy industry professionals in both the public and private sectors. With over twenty years of experience handling international engineering and construction and project financing transactions, Mr. Larzul offers his clients a wealth of industry insight. He frequently advises clients involved in major infrastructure projects around the world, and oversees high-profile engineering bids, contract negotiations, acquisitions, as well as litigation and corporate compliance matters.Formerly based in Paris, Mr. Larzul has represented an impressive range of international clients in both the public and private sectors. Prior to joining Peckar & Abramson, he served as lead counsel for Systra, a mass transit engineering company, Air Liquide, an industrial gas group, Bouygues Civil Works, an infrastructure contractor, and Suez Environment, a water and waste management group,, where he directly handled numerous engineering bids, acquisitions, and project financing transactions for transportation infrastructure and energy sectors worldwide. Olivier also offers considerable public-private partnership (P3) experience, having successfully overseen multiple P3 bids and projects in Europe, Africa, Asia and Australia, including tunnels, ports, LNG terminals, and uranium processing and power plants. Mr. Larzul is admitted to practice in the State of New York. He received his law degree in public business affairs from Paris Sud University School of Law & Paris-Dauphine University, and his M. A. in U. S. Legal Studies from the University of Connecticut School of Law. He is fluent in both French and English, and has working knowledge of German.

Barry J. Brooks is a Partner in Peckar & Abramson’s Dallas office, where he concentrates his practice on construction law, employment law, and general commercial litigation matters. He represents a broad range of commercial and construction clients, including contractors, owners, healthcare providers, and corporate executives, as well as U. S. and international corporations. Mr. Brooks thrives in high-stakes litigation and has maintained a strong reputation for protecting and advancing his clients’ sensitive business interests. A highly skilled litigator and defense attorney, Mr. Brooks vigorously represents his clients’ interests throughout the litigation process and understands the importance of efficient and decisive action. He has successfully represented numerous entities in multi-million dollar disputes, including breach of contract, fraud, and defective construction lawsuits, as well as high-profile Department of Labor (DoL) investigations, theft of trade secrets, and breach of fiduciary duty claims. He also works closely with businesses before problems arise to find creative solutions to protect their most vital resources and assist them in avoiding costly disputes. Barry earned his B. S. in Civil Engineering from Texas A&M University, where he served as a member and later as a company commander in the Texas A&M Corps of Cadets. He later earned his J. D. from the University of Denver Sturm College of Law, where he graduated in top three percent of his class, served as Editor-in-Chief of the Denver University Law Review, and received numerous awards for academic achievement and student leadership. Barry spent his first year of practice as a law clerk to Justice Nathan B. Coats of the Colorado Supreme Court.

Barry J. Brooks

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the government. In contrast, implied actual authority will not be present when the government agent’s action is contrary to the explicit terms of the contract, such as when the contract contains a provision that exclusively reserves contracting authority to the CO.

Notwithstanding that implied actual authority can bind the federal government, the mere appearance that an agent has authority is not enough to show that an agent has contracting authority. This is a unique distinction from private transactions in which a principal may be bound by the apparent authority of its agent. Contrary to implied authority, which arises from the government’s actions and intent, apparent authority is grounded in contractor reliance regardless of the government’s intent. Accordingly, a contractor must be confident it is taking direction from an agent with actual authority (express or implied) to avoid nonpayment of completed work.

II. Baistar Mechanical, Inc. v. U. S., 128 Fed. Cl. 504 (2016)The Court of Federal Claims recently reiterated the unique rule about authority to contract in the context of federal procurement law. In 2011, Baistar Mechanical, Inc. (“Baistar”) executed a contract with the federal government to provide maintenance and snow removal services to a retirement community. The contract expressly provided that only a CO was authorized to bind the government to a change in the specifications, terms, or conditions of the contract. Baistar alleged, inter alia, that the government failed to compensate Baistar for services it performed outside of the scope of the contract. When the CO denied Baistar’s requests for equitable adjustments to the contract, many of which were directed by the contracting officer’s representatives (“CORs”), Baistar filed suit to recover on its requests for equitable adjustment.

In Counts I, III, and IV of its complaint, Baistar asserted that it performed maintenance services outside the scope of the contract at the direction of the CORs, and Baistar claimed that it should have been compensated for such work under theories of implied-in-fact contract, constructive change, and breach of contract theories. The Court of Federal Claims rejected Baistar’s positions and granted the government’s motion to dismiss Counts I, III, and IV of Baistar’s complaint regarding the services performed outside of the scope of the contract. The Court reasoned that the CORs did not have the necessary authority to bind the government because the language of the contract reserved such authority for the CO.

The Court of Federal Claims did, however, acknowledge a possible exception to this general rule regarding

Baistar’s claim for out-of-scope snow removal services because the snow and ice potentially created an emergency situation. In Count V, Baistar alleged that the CORs directed Baistar to provide snow removal services outside the scope of the contract. Baistar asserted that the COs authorized the out-of-scope snow removal work because the COs were copied on the e-mail orders from the CORs and took no steps to prevent Baistar from performing the alleged out-of-scope work. Although Baistar did not contend that any government agent with actual authority ordered the snow removal services, the Court of Federal Claims denied the government’s motion to dismiss Baistar’s claim for payment on the out-of-scope snow removal work. The Court’s rationale was that although this work was also directed by CORs without authority to bind the government, the presence of snow and ice posed a potential threat to the residents and the order may therefore fall within an exception to the requirement that a government agent possess actual authority in order to authorize out-of-scope work. Notably, the Court acknowledged that “[t]he emergency exception to the actual authority requirement is limited and has been construed narrowly. ”

III. Best Practices for Clients to Manage RiskAppearance is not everything when contracting with the federal government. A major concern when performing work that falls outside the scope of the contract is whether the contractor will be compensated for such work. When doing business with the federal government, the contractor may take some steps to manage expectations and the risk of nonpayment because it is incumbent on the contractor to determine which agents have the authority to bind the federal government. When the contractor receives direction from a government agent, it should determine whether the directive is within that agent’s authority. One way to check an agent’s authority is for the contractor to request to review the CO’s warrant or the COR’s written delegation. Without this inquiry, the contractor risks nonpayment and increases the likelihood of the inception of a dispute.

To further manage risk, contractors should avoid relying on the narrow exceptions to actual authority, such as the emergency exception. Likewise, contractors should not rely on casual dealings and prior governmental course of conduct, especially in a situation in which the government has warned the contractor to wait until the execution of a formal agreement. Contractors who do not employ risk management strategies complete out-of-scope work at their own risk. n

Initially published in the American Bar Association Forum's Under Construction.

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Scott G. Kearns

The Third Circuit Court of Appeals, in In re Linear Electric Company, Inc., examined the relationship between New Jersey’s Construction Lien Law and the United States Bankruptcy Code (“Code”), specifically as it relates to a contractor’s filing of a construction lien claim after the party against whom the lien is filed has initiated bankruptcy. The issue before the court was whether a materials supplier of electrical equipment can file a construction lien claim, pursuant to New Jersey law, after the electrical subcontractor to which it supplied materials files a voluntary Petition in Bankruptcy Court. The Third Circuit Court of Appeals held that the post-Petition liens violated the automatic stay, pursuant to Section 362 of the Code.

Suppliers Cooper Electric Supply Co. (“Cooper”) and Samson Electrical Supply Co., Inc. (“Samson”) furnished electrical materials to contractor Linear Electric Company, Inc. (“Linear”) that were incorporated into certain construction projects. Linear owed Cooper and Samson $1,234,100.48 and $142,980.17, respectively.

On July 1, 2015, Linear filed a voluntary Petition under Chapter 11 of the Code. Two weeks later, on July 15, Cooper and Samson filed Construction Lien Claims (the “Liens”) against the developments into which Linear incorporated the supplied electrical materials.

Linear immediately filed a motion in the Bankruptcy Court seeking to dismiss Cooper and Samson’s post-Petition Liens on the grounds that they violated the automatic stay in Bankruptcy (Code § 362). The Bankruptcy Court granted Linear’s motion and declared the Liens void ab initio. On appeal, the District Court affirmed the Bankruptcy Court’s decision. On further appeal, the Third Circuit reviewed de novo the legal conclusions of the Bankruptcy Court and District Court.

Cooper and Samson argued on appeal that their Liens did not violate the automatic stay because construction lien claims attach to the owners’ interest in the improved real property and not to any property interest of the contractor.

In rejecting this argument, the Third Circuit held that Cooper and Samson’s Liens did not merely attach to the owners’ real property interests. They were also asserted against the accounts receivables owed to Linear by the owners. Accounts receivables are estate property pursuant to 11 U. S.C. § 541. Accordingly, any claim against Linear’s accounts receivables is a claim against property of the Bankruptcy estate.

The Court further reasoned that, if lien claimants are permitted to pursue liens against estate property while other creditors are subject to the automatic stay, the rights of the latter would be prejudiced and the purpose of the automatic stay rule (preservation of estate property pending a plan of reorganization) would be compromised. Accordingly, the Court held that Cooper and Samson’s Liens were filed in violation of the automatic stay.

The Third Circuit notably distinguished its holding in Linear from its prior holding in the analogous case, In re Yobe Electric, Inc.

In Yobe, the court held that a supplier’s lien did not violate the automatic stay, despite having been filed after Bankruptcy proceedings were commenced. There, the Third Circuit applied Pennsylvania law, which provides that the filing date of a lien relates back to the date of “visible commencement” of work. Thus, although the lien was filed after the debtor’s petition, it was treated as though it had been filed prior to the petition when the lienor visibly commenced work. In contrast, Cooper and Samson’s Liens were filed under New Jersey law, which provides that liens are effective as of the date of filing and/or service. Accordingly, their liens do not relate back to a pre-Petition date and, unlike those in Yobe, violated the automatic stay.

Thus, the Linear decision is instructive in terms of the interplay between federal bankruptcy law and state construction lien law(s). Contractors should consult their attorneys to become familiar with the lien laws of the jurisdictions that they are working in, since every state has a different statutory scheme pertaining to relation back provisions. n

FEDERAL APPEALS COURT RULES THAT LIEN CLAIMS FILED AFTER A CONTRACTOR FILES FOR BANKRUPTCY VIOLATE AUTOMATIC STAYScott G. Kearns is a Partner in our New Jersey Office.

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Stephen P. Katz

In our practice, we are increasingly seeing contractors take equity stakes in projects to be developed. The equity is usually in the form of membership interests in a limited liability company (a “Company”) which owns, or will own, the real property on which the project will be built and the improvements on the property. Owning equity in a project can certainly have a financial upside, but it can also come with risks. The following issues should be considered before taking any equity stake in a (?) project:

• Management. Who will be operating the day to day affairs of the Company? Will this person or persons have authority to make all decisions on behalf of the Company? Are they qualified to manage a project of this scope? Will major decisions such as sale of assets, entering into a mortgage and/or construction loan and/or dissolution require the consent of members, and if so, what percentage of members? Will management fees be paid to a manager and if so, are those fees market-rate fees? Is the manager also a member of the Company, and if so, does the manager have the right to pay himself/itself and/or their affiliates other fees and/or reimbursements? Not having a voice in at least

major decisions, and understanding how a manager and/or its affiliates are paid, could lead to a manager depleting the Company of cash (and having to call on members for additional capital or loans) or entering into transactions which put the Company, its assets and a contractor’s investment at risk.

• Capital Calls and Loans. What is the budget for development of the project? Does the Company have sufficient capital to satisfy the equity requirements of a construction lender? If not, how will the Company raise cash to fund the development budget and equity requirements? If additional cash is needed, will capital calls be mandatory or voluntary? Will additional cash from members be mandatory or voluntary? How is additional cash from members treated? As contributions to capital or as member loans to the Company? If member loans, will interest be paid on the loans and if so, what is the rate? Will such loans be paid off, with interest, before any distributions to members are made? What if one or more members do not make the loan or capital contribution? Will their equity interests be diluted? Will they be deemed to owe the funds to the Company anyway, with interest?

Abby R. Weiner

continued on page 13

POTENTIAL RISKS OF TAKING EQUITY STAKES IN CONSTRUCTION PROJECTSStephen P. Katz is a Partner in our New Jersey Office.Abby R. Weiner is Senior Counsel in our New Jersey Office.

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• Distributions. When will distributions of available cash to members be made? Do any members have a priority return of capital, or other priorities in distributions? If so, how does that priority affect distributions to the contractor? Are member loans paid before distributions and if so, how might this affect a member who does not make a loan? Upon completion of the project, will the Company sell the project and if so, will there be enough funds to at pay off member loans and return capital to the members? If not sold, will the project generate sufficient cash flow to meet debt service obligations to the construction lender?

• Transfers. What if the contractor wishes to sells its assets, merge with another entity, or transfer its equity interest to an affiliate or third party? Are transfers of membership interests restricted in any way? If so, how does this affect the contractor’s exit strategy?

The foregoing issues should be addressed in the operating agreement of the Company, which should be carefully reviewed and negotiated by any contractor taking equity in a project.

If the project is to be developed, it will likely require construction financing. Construction financing can also

pose risks to a contractor taking equity in a project:

• Guarantees. Will the lender require a personal guaranty from the contractor and/or other members? If so, what is the scope of the guaranty? Will it be unlimited and unconditional for all amounts due to the lender under the construction loan? Will it be limited to damages and amounts due under the loan as a result of “bad boy acts” of the Company (i. e.-fraud, waste, misappropriation of funds)? Will the lender also require the contractor and/or other members to provide a completion guaranty pursuant to which they guarantee completion of the project?

• Pledges. Will the lender require the contractor and other members to pledge their membership interests in the company as collateral for the loan? If so, the contractor must be aware that in the event of default under the loan, the contractor can lose its entire equity interest in the project.

These are just a few of the issues and risks a contractor should consider prior to taking equity in any project. The corporate and real estate group can assist our contractor clients with navigating these important issues and minimizing risk. n

NEW P&A ASSOCIATES

“As an attorney with a strong background in litigation matters, I am thrilled to join Peckar & Abramson’s team of highly experienced litigators and

look forward to representing the interests of our clients throughout the dispute process.”

ISABELL A DEMOUGEOT | DC

“Practicing law within the construction industry requires a highly focused understanding of the needs of each client. P&A consistently provides just that and I look forward to working with our team of attorneys to solve our clients’

most complex legal needs.”

NICHOL AS DESENA | NE W JERSE Y

“Joining Peckar & Abramson’s robust Labor Relations and Employment Practices Group is an incredible opportunity. I look forward to drawing from both my own expertise and the firm’s vast legal resources to help employers enact the best

possible employment and compliance practices.”

SHANNON A ZZ ARO | NE W JERSE Y

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NEW P&A ASSOCIATES

“P&A provides its clients with expert advice on a range of Corporate and Real Estate Law matters. My practice will focus on advising clients proactively

on commercial real estate investment and development, as well as handling complex transactions.”

IAN SCHL ANGER | NE W JERSE Y

“Given the ever-expanding complexities in the present construction environment, I am very pleased to join the P&A team and continue to help

clients stay ahead of industry trends.”

DORTHY KONCUR | NE W JERSE Y

“I am proud to join a firm with unparalleled trial, mediation, arbitration, and appellate experience, and look forward to expanding the firm’s dispute

resolution capabilities even more.”

NAVID ANSARI | NE W YORK

“As a new member of Peckar & Abramson’s Commercial Litigation and Construction Law Groups, I intend to strengthen the firm’s already robust

complex litigation capabilities and navigate clients to the most efficient and cost-effective path to success.”

MELISSA SALSANO | NE W YORK

“I am very pleased to contribute to the firm’s Construction Law and Commercial Litigation Groups, both of which are uniquely poised to provide effective and

successful management of construction disputes.”

ANDRE W R ADESPIEL | NE W JERSE Y

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PECKAR & ABRAMSON SWEEPS 2017 CONSTRUCTION LAW AWARDS FROM SUPER LAWYERS®, BEST LAWYERS IN AMERICA® AND CHAMBERS USA®

Peckar & Abramson, P.C. (P&A) is pleased to announce that the nation’s foremost legal rating services, including Super Lawyers®, Best Lawyers in America®, and Chambers USA®, have named the firm among their respective top-tier rankings and have singled out several P&A attorneys as the industry’s leading construction law attorneys.

The number of P&A attorneys selected for these honors reflects the firm’s extraordinary talent and depth of experience in handling the most challenging disputes and transactions, as well as the unique ability to provide a full range of legal services that earn high praise across the United States and internationally.

Super LawyersThis year, forty-eight (48) attorneys from the firm’s Miami, New York & New Jersey, Washington, D.C., California, Texas, and Illinois offices were named to the elite list of 2017 Super Lawyers and Rising Stars. These highly experienced attorneys continually achieve national recognition for their successes in representing the nation’s leading contractors and professional members of the construction industry.

The firm’s 2017 Super Lawyers® include:

MIAMI NEW YORK & NEW JERSEY WASHINGTON, D.CMelinda S. GentileAdam P. HandfingerStephen H. ReismanNeal I. Sklar,Gary M. Stein

RISING STARS:

K. Stefan ChinWarren E. Friedman

Richard L. AbramsonSteven M. Charney Gregory H. ChertoffThomas J. CurranJeffrey M. DaitzRobert A. DruckerPatrick J. GreeneCharles F. KennyChristopher B. Kinzel

Craig A. LandyPaul MonteBruce MellerKevin J. O’ConnorGerard J. OnorataRobert S. PeckarCharles E. Williams, IIIMichael Zicherman

RISING STARS:

Levi W. BarrettDenis SerkinDoris D. ShortRashmee SinhaJustin Van HoutenJoseph Vento

Adrian L. Bastianelli, IIIMichael A. BrancaStephen M. SeegerMichael C. Zisa

RISING STARS:

Susan ElliottJesse S. KeeneBenjamin Williams

CALIFORNIA ILLINOIS TEX ASAlex R. Baghdassarian David Scriven-Young George C. Baldwin

James DeemPaulo J. FloresJeffrey A. Ford

Curtis W. MartinTimothy D. MathenyMatthew S.C. Moore

RISING STARS:

Angela ConnorJustin ‘JD’ Holzheause

The Super Lawyers list is issued by Thomson Reuters. A description of the selection methodology can be found at https://www.superlawyers.com/about/selection_process.html. No aspect of this advertisement has been approved by the Supreme Court of New Jersey.

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Steven M. CharneyGregory H. ChertoffBruce MellerPaul MonteRobert S. PeckarHoward M. Rosen

Construction | Washington, D.C.

Adrian L. Bastianelli, IIIMichael A. BrancaStephen M. Seeger

Construction | Texas

George BaldwinJeffrey Ford

Construction | New York

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The information provided in this Newsletter does not, nor is it intended to, constitute legal advice. Readers should not take or refrain from taking any action based on any information contained in this Newsletter without first seeking legal advice.

• Richard L. AbramsonLitigation – Construction

• Alex R. BaghdassarianConstruction Law

• George C. BaldwinConstruction Law

• Adrian L. Bastianelli IIIArbitration, Litigation – Construction, Mediation

• Jerry P. BrodskyLitigation – Construction

• Steven M. CharneyConstruction Law, Litigation - Construction

• Gregory H. ChertoffConstruction Law, Litigation - Construction

• James L. DeemConstruction Law

• Robert A. DruckerLitigation - Construction

• Jeffrey A. FordArbitration, Construction Law, Insurance Law, Mediation

• Melinda S. GentileLitigation – Construction

• Patrick J. Greene, Jr.Construction Law, Litigation - Construction

• Charles F. KennyConstruction Law, Litigation - Construction

• Roger S. MarkowitzLitigation - Construction

• Curtis W. MartinConstruction Law

• Timothy D. MathenyConstruction Law

• Bruce D. MellerConstruction Law, Litigation – Construction

• Paul G. MonteConstruction Law, Litigation – Construction

• Gerard J. OnorataLitigation – Construction

• Robert S. PeckarConstruction Law, Litigation – Construction

• Stephen H. ReismanConstruction Law, Litigation – Construction

• Howard M. RosenConstruction Law, Litigation – Construction

• Donald S. RosenbergConstruction Law, Litigation - Real

The Best Lawyers in America list is issued by Best Lawyers. A description of the selection methodology can be found at https://www.bestlawyers.com/Methodology. No aspect of this advertisement has been approved by the Supreme Court of New Jersey.

Best LawyersBest Lawyers in America® named twenty-eight (28) P&A attorneys on its “Best Lawyers List”—an annual ranking that, for over three decades, has earned respect across the legal profession, in the media and with the public as a reliable, unbiased source of legal referrals. The P&A attorneys included in The Best Lawyers in America® 2017 are:

Chambers Peckar & Abramson has been recognized by Chambers & Partners USA in the category of Construction Law at the coveted Band 1 level, both Nationwide and in New York, as it has been for the past for 14 consecutive years. In 2017, P&A was honored for the first time as the singular firm to occupy that level, both Nationwide and in New York.

Chambers & Partners USA named fifteen (15) P&A attorneys as some of the leading construction lawyers in the USA.

Estate, Real Estate Law

• Stephen M. SeegerArbitration, Construction Law

• Neal I. SklarConstruction Law, Litigation – Construction

• Gary M. SteinCommercial Litigation, Construction Law, Litigation – Construction

• William W. Thompson, Jr.Construction Law

• Michael S. ZichermanCommercial Litigation, Construction Law

Construction | Florida

Jerry P. BrodskyMelinda GentileStephen H. ReismanGary M. Stein

C O U N S E L T O T H E C O N S T R U C T I O N I N D U S T R Y

NEW YORK, NY • RIVER EDGE, NJ • MIAMI,FL • WASHINGTON, D.C. • LOS ANGELES, CA. • OAKLAND, CA CHICAGO, IL • AUSTIN, TX • DALLAS, TX • HOUSTON, TX • DEVON, PA WWW.PECKLAW.COM

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