Construction Law Blog
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On January 9, 2014, the Washington Utilities and Transpiration Commission ("UTC") announced that it has fined two utility companies, Pacific Power and Light Co. ("Pacific Power") and Frontier Communications Northwest, Inc. ("Frontier"), under Washington's new Underground Utility Damage Prevention Act (the "Act"). These are the first two penalties issued by the UTC since the Act took effect on January 1, 2013.
Recently, Division II of the Washington Court of Appeals held that a Pierce County contract with a son's proprietorship was illegal, void, and unenforceable when the project was competitively bid by the father's proprietorship and awarded to the father by the County. Bankston v. Pierce County, 174 Wn.App. 932, 301 P.3d 495 (Division II, May 21, 2013).
Small businesses are the economic engines of job creation and essential to strengthening our national economy. President Obama, Governor Inslee, and a whole gaggle of politicians are committed to helping America's small businesses grow and prosper. The US government has cut taxes for small businesses, and helps them get access to the capital they need to expand and create jobs that the US needs now and for decades to come.
In the first case of its Winter 2014 term, the Washington State Supreme Court is considering whether an employee benefits trust may use the Washington public works bond and retention statutes to pursue claims for unpaid worker benefits against a third party (i.e. one other than the worker's employer). Read more, here. Specifically, the court in W.G. Clark Construction Co. v. Carpenters Health & Security Trust of Western Washington, et al. is being asked to decide whether the federal law governing employee benefits, ERISA, preempts the state's bond and retention statutes, RCW 39.08 and 60.28, and therefore prevents a trust from collecting a subcontractor's delinquent employee benefit payments from a general contractor's bond or retention fund.
WSDOT Makes a Drastic Move by Publishing its Intent to Exclude Non-Minority Women-Owned Businesses from DBE Participation Goals for 2014
On the eve of the holiday season, the Washington State Department of Transportation (“WSDOT”) published its intent to submit a proposal to the United States Department of Transportation (“USDOT”) with two striking and drastic changes to the Disadvantaged Business Enterprise (“DBE”) Program in Washington. These changes will have a radical effect on non-minority women-owned DBEs. Women-Owned Businesses (“WBEs”) should take swift action to halt WSDOT’s proposed changes, which will have lasting detrimental impacts on small businesses in Washington and the construction industry as a whole.
In response to reports by the U.S. Government Accountability Office and Wartime Contracting Commission highlighting weaknesses in the suspension and debarment (S&D) offices of civil agencies, Congress has pushed for a significant overhaul of the suspension and debarment procedures applicable to federal contractors.
New National Defense Authorization Act of 2013 Removes Contract Thresholds for Women-Owned Small Businesses (WOSB).
Recent Unpublished Washington Court of Appeals Opinion Concludes that Absent Waiver Language, Failure to Comply with a Contractual Claim Procedure Will Not Result in Forfeiture
This blog has frequently addressed contractual notice and claim procedures and the Mike M Johnson[i] line of decisions (for example, see blog articles from January 2, 2008, February 15, 2011, July 10, 2012). A recent unpublished decision by the Division I Court of Appeals is noteworthy because it holds that if a contract has a mandatory procedure for resolving claims, but does not state that the failure to follow that procedure will operate as a waiver of such claim, then a forfeiture will not be found despite lack of compliance.
Shepler Construction, Inc. v. Leonard,[ii] involves a residential construction dispute over a project performed in 2000 with an incredibly long litigation history dating back to 2002. The decision that is the subject of this article is the Court of Appeals’ third decision in the matter!
In 2001, the Contractor (Shepler) sent the Owner (Leonard) a letter recommending that the Owner should initiate the contractual dispute resolution process with respect to the Owner's allegations of construction defects. The Owner admittedly failed to respond and did not initiate the contractual process. The Contractor then filed a lien and brought a foreclosure action. In 2008, the Contractor obtained a Summary Judgment Order precluding the Owner from asserting counterclaims for construction defects on the grounds that the Owner failed to initiate binding arbitration as required by the parties' contract in order to resolve allegations of construction defects. That order is the subject of the appellate decision that is the subject of this article.
In dismissing the Owner's claims for construction defects, the trial court was persuaded that the Owner's breach of the agreement by failing to seek arbitration required dismissal of all of the Owner's claims for construction defects that should have been arbitrated. The Contract clause at issue provided:
If a dispute arises between owner and contractor as to the performance of contractor's obligations under this agreement, such disputes shall be resolved as follows:
Each party shall employ a contractor of his or her choice to evaluate the work completed. The contractors then will select a third contractor to act as an impartial arbiter. This contractor shall, likewise, inspect the construction to determine if the work has been performed in accordance with this agreement, applicable building codes and in a good workmanlike manner as provided hereinabove. If two of the three contractors determine that the work is not in conformity with the provisions of this agreement, then they shall state in writing the work in need of repair or replacement and contractor shall undertake to perform same as soon as reasonably practical. Contractor shall be responsible for owner's fees and costs associated with this arbitration as well as the impartial contractor's fees and costs. If no remedial work is recommended by the contractors, then the owner shall pay for the costs of the arbitration. The owner shall forthwith pay the amounts due to the contractor as established by a majority of the arbiters.
The Contractor argued to the Court of Appeals that under Absher Const. Co. v. Kent School District,[iii] and Mike M. Johnson v. County of Spokane, that the Owner's admitted failure to arbitrate its construction defect claims operated as a waiver of those claims. Division One, however, disagreed, on the grounds that unlike the contract language at issue in Absher and Mike M. Johnson, the contract between the Contractor and Owner did not explicitly provide that the failure to follow dispute resolution procedures constituted a waiver of claims. Division One ruled:
Shepler relies on Absher and Mike M. Johnson, Inc. v. Spokane County. This reliance is misplaced. Absher and Mike M. Johnson are distinguishable from the contract at issue here, because the contracts in those cases explicitly provided that failure to follow dispute resolution procedures constituted a waiver of those claims.
In addition, Division One held that waiver of the right to arbitrate does not mean the underlying claims are waived:
...Washington courts have long held that the contractual right to arbitration may be waived through a party's conduct if the right is not timely invoked. The right to arbitrate is waived by conduct inconsistent with any other intention but to forego a known right. Simply put, a party waives a right to arbitrate if it elects to litigate instead of arbitrate. The [Owners] filed their counterclaims in 2002. [The Contractor] did not assert arbitration as a defense or move to dismiss the [Owner’s] arbitrable claims on that basis until 2008. Both parties waived the dispute resolution clause by conduct.
Comment: This unpublished case provides guidance that the failure to comply with a contractual claim procedure may not give rise to forfeiture of the underlying claim if the contract clause at issue does not include language stating that the failure to comply will operate as a waiver of the claim. In addition, the decision reinforces that a mandatory contract provision can be waived by the party it benefits, which is another basis to defeat an argument that the failure to comply results in forfeiture.
[i] 150 Wn.2d 375, 78 P.3d 161 (2003).
[ii] Shepler Construction, Inc., v. Leonard, 68227-0-I (unpublished 2013).
[iii] 79 Wn. App. 841, 917 P.2d 1086 (1996).
Michigan State Law Prohibiting Project Labor Agreements on Public Construction Projects Declared Unenforceable
In the Pacific Northwest, most public works construction is performed by union contractors. Often times the contract will include a Project Labor Agreement ("PLA") mandating that all workers on the site are subject to the terms of the union agreement. Labor relations in the U.S. are generally subject to federal regulation, particularly if the project is federally funded. Most large public works projects have some amount of federal money in them, and therefore, are subject to federal law. The National Labor Relations Act ("NLRA") is a federal law which protects an employee's right to engage in "concerted activities for mutual aid and protection." The most common of these "concerted activities" is collective bargaining.
PLAs are pre-hire agreements establishing terms and conditions of employment for the project, which are negotiated between an owner and unions, and are common form of collective bargaining agreement in the construction industry. A PLA requires all contractors, whether they are unionized or not, to subject themselves and their employees to the terms of the collective bargaining agreement (the union contract) as a condition of performing work on a construction project. Union wages, no-strike clauses, grievance procedures, and mandatory arbitration of disputes are among the terms often included in PLAs.
On July 19, 2011, Michigan enacted the Michigan Fair and Open Competition in Governmental Construction Act (the "Act") aimed at limiting the use of PLAs in Michigan public construction contracts. Section 5 of the Act states:
A governmental unit shall not enter into or expend funds under a contract for the construction, repair, remodeling, or demolition of a facility if the contract or subcontract under the contract contains any of the following:
(a) A term that requires, prohibits, encourages, or discourages bidders, contractors, or subcontractors from entering into or adhering to agreements with a collective bargaining organization relating to the construction project or other related construction projects.
(b) A term that discriminates against bidders, contractors, or subcontractors based on the status as a party or nonparty to, or the willingness or refusal to enter into, an agreement with a collective bargaining organization relating to the construction project or other related construction projects.
M.C.L. § 408.875. Additionally, Section 9 of the Act prohibits the government or any construction entity acting on behalf of the government from placing any terms described in Section 5 in bid specifications, project agreements, or other contract documents. M.C.L. § 408.879.
In Michigan Bldg. and Const. Trades Council, AFL-CIO v. Snyder,[i] several trade associations and organized labor groups (the "Unions") filed suit claiming that Michigan's Act was preempted by the NLRA. The Unions filed a motion for summary judgment, arguing the NLRA preempted the Act because it effectively banned PLAs on all government contracts, which is a form of concerted activity protected by the NLRA. Michigan argued that the Act was not regulatory, and thus not subject to NLRA preemption. The District Court agreed with the Unions and granted summary judgment holding the Act to be unenforceable because it was preempted by the NLRA, and that the "market participant" exception to NLRA preemption did not apply.
The NLRA Preempts Michigan's Act
Although the NLRA does not expressly preempt state law, the Supreme Court of the United States has articulated two distinct NLRA preemption principles - state and local governments are prohibited from regulating: (1) activities that are protected by Section 7 (which protects an employee's right to negotiate and secure a PLA) or constitute an unfair labor practice under the NLRA,[ii] and (2) areas that Congress intended to be left unregulated.[iii]
In this case, the District Court found that the Act violated both preemption principles. First, the Act regulated employees' ability to negotiate and secure a PLA - activities protected by Section 7 of the NLRA. Specifically, Section 5 of the Act prevented governmental entities from entering into PLAs, and Section 9 prohibited the state from "expending funds" if a contract or subcontract contained a PLA. Based on these facts, the District Court held that the Act created an impermissible obstacle to employees' right to bargain on government construction projects, and therefore, the Act was preempted by the NLRA because the two laws could not "move freely within the orbits of their respective purposes without impinging upon one another."[iv]
Similarly, under the second preemption principle, the District Court found that the Act regulated areas that Congress intended to be left unregulated by the states because Congress had specifically authorized certain behaviors in the construction industry under Sections 8(e) and (f) of the NLRA. The District Court held that Congress intended to balance the power for bargaining in the construction industry when it enacted Section 8(e), which exempts the construction industry from the general prohibition of "hot cargo" agreements (agreements between a union and employer which require the employer to boycott goods or services of another person), and Section 8(f), which authorizes pre-hire agreements that set terms and conditions of employment. The District Court found that Congress, in enacting Section 8(e) and (f) of the NLRA, intended PLAs to be permissible in the construction industry. Thus, the NLRA preempted the Act because it impermissibly prohibited PLAs on all government construction projects, which Congress had expressly allowed.
The Market Participant Exception Does Not Apply
Michigan argued that even if the NLRA preempted the Act, the Act was exempt because the state was acting as a "market participant" (i.e., acting in a proprietary/private function, rather than a regulatory/governmental function). The NLRA does not preempt state laws when a state acts as a "market participant" furthering its proprietary interests, as opposed to its regulatory interests. For example, when a state owns and manages property, it must interact with private entities (i.e., the state is a "market participant") and is not subject to preemption by the NLRA because it is acting in a proprietary function, as a private business would act.
In this case, however, the District Court rejected Michigan's argument that the Act was proprietary because it was not narrowly tailored to a specific project, but was an across the board ban on PLAs on all public works projects, and because the Act impermissibly affected private conduct unrelated to efficient procurement of goods or services (as in a private business relationship). The District Court found that the Act's "rigid, unbending policy smacks of regulation" and, therefore, was preempted by the NLRA, and that the state was not a "market participant."
Comment: Employers in the construction industry should proceed cautiously when dealing with PLAs. The NLRA forbids employers from interfering with, restraining, or coercing employees in the exercise of rights relating to organizing, or from working together to improve terms and conditions of employment. Employers may not threaten their employees with loss of jobs or benefits if they join or vote for a union advocating for PLAs, promise benefits to employees to discourage their union support, or otherwise punish employees because they participated in an investigation conducted by National Labor Relations Board.
[i] 846 F. Supp. 2d 766 (E.D. Mich. 2012).
[ii] See San Diego Bldg. Trades Council, Millmen’s Union, Local 2020 v. Garmon, 359 U.S. 236, 79 S.Ct. 773 (1959).
[iii]See Lodge 76, Int’l Ass’n of Machinists and Aerospace Workers, AFL-CIO v. Wisconsin Empl. Relations Comm’n, 427 U.S. 132, 96 S.Ct. 2548 (1976).
[iv] 846 F. Supp. 2d at 783.
Court Review Of Arbitration Decision Limited: Port Employee Only Receives 20-Day Unpaid Suspension For Hanging Noose In Workplace
The Washington State Supreme Court recently issued an opinion regarding courts' scope of review of arbitration decisions. This case shows how difficult it is to overturn an arbitration decision.[i]
A Port of Seattle ("Port") supervisor noticed a rope hanging from a ladder and asked an employee to take it down. Instead, as a joke aimed at the supervisor, the employee thought it would be funny to tie the rope into a hangman's noose and hang it from the ladder. Not surprisingly, the noose was not viewed as humorous by at least one of his minority co-workers. That co-worker made a complaint and the Port fired the amateur knot-maker for violating the Port's zero-tolerance anti-harassment policy. The employee was a member of the International Union of Operating Engineers, Local 268 ("Union"). The Union challenged the employee's termination. The case proceeded to arbitration, per a collective bargaining agreement.
The arbitrator found that the knot-maker violated the Port's anti-harassment policy, but that he should not have been terminated because he was "more clueless than racist," and the employee's noose-on-a-ladder prank was "not racial" in nature. The arbitrator considered the employee's twelve year history as a Port employee with no performance problems, and his history in the Navy - where he often played with rope and tied nooses to pass time - and decided that the employee should be suspended for 20-days without pay, rather than be fired.
The Port appealed the arbitrator's decision and a King County Superior Court judge concluded that the arbitrator's decision was too lenient and violated the public policy against workplace harassment. The King County judge then imposed a six-month unpaid suspension, and ordered the employee to make a sincere written apology, to attend diversity and anti-harassment training, and to be subject to four years of probation with a second harassment violation resulting in termination.
The Union appealed and the Court of Appeals affirmed the King County judge's ruling to vacate the arbitrator's decision, but held that the reviewing trial court could not create its own judgment. The Union then appealed again and the Washington State Supreme Court accepted review. The Supreme Court noted that its review was limited to whether the arbitrator exceeded his or her authority because further review "would weaken the value of bargained for, binding arbitration and could damage the freedom of contract," but that arbitration awards can be vacated if they violate "explicit, well defined, and dominant public policy." [ii] The Court found that the policy against workplace harassment and discrimination was explicit, well defined, and dominant so it had authority to review and vacate the arbitrator's decision if the punishment was too lenient to not deter future discrimination.
The Court reiterated that its review was limited, and that it was bound by the arbitrator's findings of fact, which included the employee's non-racial understanding of the symbolism of the noose (he believed it related to "cowboys and Indians"), and the effect of the noose on other employees in the workplace. Based on this limited scope of review and despite the employee's unacceptable and ignorant actions, the Court held that a 20-day unpaid suspension could "provide sufficient discipline to cause this or other employees to understand the serious nature of a noose in the workplace and thus prevent a similar incident in the future."[iii] Thus, the Court held, the arbitrator's decision was not so lenient that it violated the public policy against workplace harassment and discrimination.
Lastly, the Court reiterated that a trial court reviewing an arbitration award has the authority to vacate the award, but that it does not have the authority to fashion its own remedy. Instead, trial courts should remand to the arbitrator for further proceedings.
Comment: Construction contracts often employ arbitration as the dispute resolution mechanism. Although this case does not involve construction contractors, it does provide some insight into Washington courts' scope of review of arbitration awards and how difficult it is to vacate an award. Even with these bizarre facts regarding the noose and the employee's questionable understanding of what the noose suggested, the Supreme Court did not find that the arbitrator's decision to suspend the employee for 20-days was so lenient that it violated the public policy against workplace harassment and discrimination. This case demonstrates the finality of an arbitrator's decision such that parties subject to arbitration proceed knowing that it is extremely difficult to vacate an arbitrator's decision.
[i] Int’l Union of Operating Engineers, Local 286 v. Port of Seattle, 296 P.3d 736, 117 Fair Empl. Prac. Cas. (BNA) 834 (2013).
[ii] Id. at 740 (quoting Kitsap County Deputy Sheriff’s Guild, 167 Wn.2d 428, 435, 219 P.3d 675 (2009)).
[iii] Id. at 742.