Washington Court Holds Statute of Limitations Doesn't Apply to Arbitration
Contributor: Stephen P. Kelly
In Broom v. Morgan Stanley DW, Inc., the Washington State Supreme Court held that state statute of limitations did not apply to a contractual arbitration. The arbitrators of an investment-related dispute had dismissed certain claims because plaintiffs failed to bring them before the applicable statutes of limitations lapsed. Analyzing the Washington statute of limitations and arbitration statutes, the court found that the legislature didn’t intend the term “action” in the statute of limitations – to include arbitration. Because of this, the court reasoned, the arbitrators weren’t authorized to apply the state statute of limitations to plaintiffs’ claims. The court made clear, though, that people can agree, by contract, to apply a state statute of limitations to arbitration provisions.
Construction and design contracts as well as many other types of contracts commonly specify arbitration as the exclusive forum for disputes, and commonly select what laws apply to the contract. This decision could affect a variety of construction-related disputes including construction defect and payment claims and the full impact of the decision remains to be seen. In the meantime, for a construction contract in Washington where arbitration is the forum for disputes, parties that want the Washington statutes of limitations to apply to the arbitration should make this clear.
One to Watch: BIAW Sues to Stop New Washington Residential Energy Efficiency Standards
In November 2009 the Washington State Building Code Council (“WSBCC”) approved amendments to the Washington State Residential Energy Code imposing additional energy efficiency requirements for newly permitted homes. The controversial changes, found in Chapter 9 of the new Code, are scheduled to take effect on July 1, 2010.
The new regulation at issue requires that “Dwelling units permitted under this Code shall comply with all provisions of Chapter 5 of this Code [building component performance requirements] and develop 1 credit from Table 9-1.” The requirements thus apply to both new residential units and additions to existing units. Table 9-1 contains a list of 13 options for achieving energy efficiency in newly permitted homes each of which qualify for between .5 and 2 credits and some of which must be combined with other listed options to qualify. Most of the options involve increasing the efficiency of HVAC systems, while others address things such as building envelope efficiency, water efficiency and on-site generation of renewable (solar or wind-generated) energy.
Various members of the Washington building industry have strenuously objected to the new regulation on the grounds that it will add to the cost of new homes built in Washington, therefore making them more difficult to sell in a down real estate market and ultimately harming the state’s building industry.
On May 25, 2010, the Building Industry Association of Washington and various building industry participants consisting mainly of residential builders and HVAC consultants and equipment suppliers, sued the WSBCC in the U.S. District Court for the Western District of Washington (Case No. 3:10-cv-05373-RJB). The complaint requests a temporary injunction prohibiting the State from implementing the new regulation and a declaration that the regulation is unconstitutional.
The Plaintiffs contend that the new energy efficiency regulation violates both the Supremacy Clause (Article VI) and the Interstate Commerce Clause (Article I, Section 8, cl. 3) of the U.S. Constitution. The primary argument set forth in the complaint is that the new regulation has the effect of imposing more stringent energy efficiency standards than those imposed under federal law, and is therefore in contravention of the Supremacy Clause in that such regulations are preempted by the federal Energy Policy Conservation Act of 1975 (EPCA) and similar acts.
Table 9-1 does not directly impose standards higher than those imposed under federal law, but the plaintiffs argue that many of the options listed are impractical and effectively force home builders and buyers to select expensive HVAC, water heating and plumbing equipment that exceeds federal standards, thus contravening the EPCA and adding between $4,000 and $15,000 to the cost of a new home.
The EPCA prohibits states from imposing higher energy efficiency standards than those imposed under the Act but also includes exceptions, including one allowing states to enact performance-based building codes that provide multiple options for compliance.
In response to the complaint, WSBCC may argue that Chapter 9 meets the performance-based building code exceptions of the EPCA and other relevant federal laws, that Table 9-1 provides a number of different ways to achieve one credit of additional energy efficiency, that the options are not impractical or unduly burdensome and/or that the plaintiffs’ allegations regarding the impact on the industry and the cost of new homes in Washington are exaggerated.
The plaintiffs’ complaint spends little time on the Commerce Clause argument, which is that the new regulation will disadvantage the residential building industry in Washington as compared to competitors doing business in other states that have less stringent regulations.
The plaintiffs’ Supremacy Clause argument should garner the most attention from the court and it will be interesting to see how the case is decided. The decision may come down to a factual analysis of the various options set forth in Table 9-1. Although the complaint addresses several of the allowed options, it provides little detail as to why the options are impractical. For instance, the complaint states, without further discussion, that the renewable energy options “are simply not viable for many homes/home sites.” Such factual issues should provide a fertile battleground for the litigants.
As of the date of this Blog, the court has not yet ruled on the request for temporary injunction pending the outcome of the proceedings; however, this may become a moot issue, as it appears that Governor Gregoire has requested that implementation of the new standards be delayed by nine months.
Whatever the outcome, this case is certain to have widespread implications for the Washington residential building industry and could set an important precedent for other states wishing to impose new residential energy efficiency standards.
Adding an "O" and "F" to the DB process
The design-build (DB) process is no longer a novelty. In the past ten years, contractors and engineers have fine-tuned the DB project delivery approach, utilizing it to build bigger and better structures at reduced costs.
As the demand for public infrastructure continues to increase and the funds to pay for public infrastructure continues to decrease, a “new” process is gaining momentum in the construction industry in the states (it’s been around for awhile outside of the US). We are starting to see more projects that add an “O” and “F” to the DB acronym.
The DBOF process involves a public-private partnership whereby the private entity designs, builds, operates, and finances a facility. In return, the public entity pays fees throughout the life of the project, often extending 30 years.
When done correctly, the DBOF process can be a win-win for all parties. However, public and private entities should be aware of the issues that can arise with these agreements. Among other things, these issues include the following:
1. Legal challenges related to the public entities ability to pursue such a project delivery approach under the law.
2. Potential opposition from unions.
3. Lack of competition in the bidding arena because only a few entities perform such work.
4. Risks related to the financial demise of the private company.
5. High transaction costs related to the complex nature of these arrangements.
Bond. Performance Bond.
Performance bonds—insurance-like arrangements in which a surety (the bonding company) contractually agrees to pay for the performance of a principal (the contractor) to an obligee (the owner) in case the principal fails to perform the obligations of its contract—should be used more often in construction agreements to provide owners with a source of funds to cover defective work in a project.
Currently, owners typically require contractors to obtain insurance policies with the hope that such policies cover defects in the work they perform for the owner. Though owners are willing to spend a lot of money, time, and effort in obtaining these policies, insurers continue to make revisions to their policies to limit, and sometimes prevent, coverage for these defects.
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Performance bonds may provide better protection to an owner. Typically, the bond provides funds to pay for repair of defective work that may not be covered by insurance as part of the bond’s guarantee of the faithful performance of the contract by the contractor.
Unlike insurance policies, performance bonds provide coverage only for the owner’s project—if an owner discovers a defect in the contractor’s work, the owner will not have to worry whether another owner’s claim against the contractor for another defective project will reduce the coverage available under the contractor’s bond. The performance bond’s recovery pool belongs to the owner for the specific project it is drafted to cover.
A Rose by any Other Name.... But Are You Really Insured?
Do you think you have adequate insurance protection for your project under an “additional insured endorsement” to another entity’s policy? Or through a “wrap” policy, known as either an Owner’s Controlled Insurance Policy (OCIP) or Contractor’s Controlled Insurance Policy (CCIP), because you are listed as “an insured”? Perhaps not under more recent policies. Check the latest policy language carefully, and you may not like what you find. Many recent insurance policies now include limiting language that restricts the self-insured retention (SIR) provision to payments made only by “The Named Insured,” e.g., “Payments by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention. Satisfaction of the self-insured retention as a condition precedent to our liability applies regardless of insolvency or bankruptcy by you.” This past year we have noted a few published decisions that have supported such limiting policy language, allowing an insurer to restrict and ultimately refuse to accept SIR payments from any other insured but “the Named Insured.” What is the result of that interpretation if “The Named Insured” is M.I.A.? The policy is never triggered, thereby precluding coverage and the benefits of the policy to all other insureds. The potential effect on risk management and business protection for your project make those policies worthy of a second look.
CPSC Recommends Removal and Replacement of Chinese Drywall
Today the Consumer Product Safety Commission recommended removal of all sulfur-containing drywall from homes built with the problem drywall. The CPSC’s recommendation is contained in its Interim Remediation Guidance for Homes with Corrosion from Problem Drywall. In addition to the problem drywall, the CPSC recommends removal and replacement of all fire safety alarm systems, electrical components and wiring, gas service piping and fire suppression sprinkler systems, all of which the CPSC states have a direct connection to safety. The CPSC recommendation also noted that, while its scientific investigations are ongoing, information revealed to date justified issuing the interim recommendation.
Amendment to AAA Arbitrator Disclosure Rule Imposes Duties on both Arbitrator and Parties
With an increase in the use of arbitration as the preferred method for resolving construction industry disputes has come an increase in concerns with assuring fairness in the process. To this end, one of the recent changes the American Arbitration Association made to the Construction Industry Dispute Resolution Procedures (Including Mediation and Arbitration Rules), was to modify the disclosure requirements in the arbitrator selection process.
Prior Rule 17 of the AAA Rules imposed on proposed arbitrators an obligation to make certain disclosures. That rule has now been replaced with Rule 19(a), which imposes the disclosure obligation, not only on the proposed arbitrators, but also on the parties themselves. Specifically, Rule 19(a) provides as follows:
“Any person appointed or to be appointed as an arbitrator as well as the parties and their representatives shall disclose to the AAA, as promptly as practicable, any circumstance likely to give rise to justifiable doubt as to the arbitrator’s impartiality or independence, including nay bias or any financial or personal interest in the result of the arbitration or any past or present relationship with the parties or their representatives. Such obligation shall remain in effect throughout the arbitration.”
The amended rule will help to improve the process, since it will help to avoid, not just the potential partiality of arbitrators, but also the appearance of partiality. Parties who have been accustomed to the disclosure requirement being solely the duty of the proposed arbitrators, need to be aware that the duties have been expanded.
Below is a link to the amended AAA Rule.
www.adr.org/sp.asp
Default on Skyscraper Punctuates Dreary Outlook for Commercial Construction in Seattle
It is no secret that the commercial real estate market has been one of the biggest losers of the great recession. Seattle is no exception and as if to belabor the point, it has been reported this week that Beacon Capital Partners, the owner of Seattle’s icon skyscraper, the Columbia Center, missed its $1.65 million loan payment this month.
At 285 meters high the 76-story building formerly known as Bank of America Tower and Columbia-Seafirst Center (but long referred to by locals as Columbia Tower) not only looms large over the Seattle skyline but also carries the distinction of being the tallest building West of the Mississippi River by number of floors. However, bigger is not always better, as the Seattle Times reports that the tower is nearly forty percent vacant and Puget Sound Business Journal points out that the situation will only get worse as Amazon recently announced that it is taking its sizable ball (230,000 Square feet of leased office space in the tower) and going home, that is, to its new digs in South Lake Union courtesy of landlord Paul Allan. This comes on the heels of Columbia Center’s loss of one of its largest and oldest tenants a couple of years back, mega-firm K&L Gates (formerly Preston Gates and Ellis).
Although speculation is that the loan servicer will likely try to restructure Beacon’s loan, there appears to be little hope on the horizon in the near term for Seattle’s commercial real estate market, which of course means no new commercial construction is in the cards for the immediate future. (A brief look out this author’s window at the Seattle skyline confirms this assessment, revealing but one lonely crane on the horizon).
On the other hand, at least one brave developer is looking on the bright side, as Ed Hewson of HB Capital was quoted today in the Seattle Times saying: "Right now I can get great people to work on all the aspects of the project" in response to a report that HB Capital has filed a preliminary application for city approval of a 200 unit 17-story apartment building at Third Avenue and Cedar in Belltown. (Given the location of the proposed building, the developers should be further encouraged by the Seattle Police Department’s announcement last week that it will be increasing foot patrols in the area).
Be careful what you ask for Idaho
In the last two decades, the Idaho State Legislature has authorized design-build contracting for many different types of public projects. It appears that the Legislature will continue this trend for highway projects. In February, a House committee voted to print a bill that would allow the Idaho Transportation Department (IDT) to award design-build contracts for highway projects. A similar measure nearly became law last year.
For the most part, the Legislature’s acceptance of the design-build process is good thing. Several years ago, I worked for a commercial contractor. In 2001, I visited our largest project at that time -- a $500 M design-build facility in California. When I asked the project lead whether he liked design-build projects, he was quick to praise the process. He believed that design-build projects equated to fast results, decreased change orders, and less litigation. To him, it was a no-brainer. Many of my colleagues agree.
Since then, I have been involved with several design-build and design-bid-build projects. Although some design-build projects have been successful, that’s not always the case. The moment an owner enters into a design-build contract, it loses something that can be very important to a successful construction project: control. This lack of control – which is caused in large part by undefined design requirements – can lead to significant cost overruns and delays.
To avoid such results, owners should focus on two important actions: careful planning and diligent execution. On the topic of planning, design-build owners should spend significant time defining the project requirements. The design-build contract documents must include, among other things, detailed project design criteria, program requirements, performance specifications, and deliverables. Absent such defined requirements, design-builders are free to run wild.
Professional execution of the plan is equally important. Owners must prudently monitor the design-builder’s work. Too often, owners in design-build projects overlook this task, believing that such role is limited in design-build projects. In fact, the opposite is true. Because the design-builder has more flexibility in design-build projects, owners must arduously monitor the budget and schedule.
Design-build projects present many benefits. IDT, however, should know that it will not be less work for them. The key is for IDT to clearly define the project programs and performance requirements before the contracts are signed, and to monitor the design-builder’s compliance with these requirements throughout the project.
Government Involvement Has Consequences (Part 2)
Here is list of laws that may apply to projects in which the federal government is involved.
These reflections about government involvement are prompted by recent changes to the Federal Acquisition Regulations that give federal contractors an affirmative duty to disclose any “credible evidence” that comes to their attention of (a) the violation of certain criminal laws (e.g., those involving fraud or bribery), (b) violations of the civil False Claims Act, and even (c) “substantial overpayments” from the government. Contractors are also required to train their employees to ensure that misconduct will be detected and reported. This regulation reminds us that working with the government can trigger serious legal issues. As public-private partnerships and other forms of government involvement become more common, it is important to find out whether the government is involved in your project and, if it is, what consequences that has for your company.
