American Bar Association Tort Trial & Insurance Practice Section Fidelity and Surety Law Committee

Transcription

1 American Bar Association Tort Trial & Insurance Practice Section Fidelity and Surety Law Committee Calculating the Performing Surety s Additional Time to Complete Tammy N. Giroux, Esq. Shumaker, Loop & Kendrick, LLP Tampa, Florida Doug Dearie Manager-Construction Services Liberty Mutual Surety Seattle, Washington Presented at the 2011 Midwinter Meeting Surety Program January 20-21, 2011 New York, New York The Critical Construction Issues Facing the Performing Surety James Carpenter, Matthew Horowitz and Cindy Rodgers-Waire, Program Chairs

2 I. INTRODUCTION 1 A surety s obligations under the performance bond are generally triggered once an obligee declares the principal in default under the contract. After receiving notice of the default, the surety is entitled to a reasonable period of time to investigate the facts and circumstances surrounding the default. The surety must promptly decide upon a course of action under the performance bond. The surety may deny liability and not perform, or the surety may perform under a reservation of rights. The AIA-A312 bond, for example, expressly lists the options available to the surety. Other bonds, however, do not expressly identify the surety s performance options, and simply commit the surety to perform the obligations undertaken by the principal in its contract with the obligee. As discussed in more detail by other authors presenting papers for this conference, a performance bond is a three-party agreement whereby a surety guarantees the principal s performance of an underlying contract between the principal and the obligee. Once the surety has elected to perform under a reservation of rights, the surety must promptly commence work on the project. The completing surety should analyze its entitlement to any pending claims for time extensions by its principal. In addition, the surety should evaluate its own entitlement to additional contract time for current delays, as well as anticipated future delays. Finally, as the work progresses, the surety must evaluate and timely submit its completing contractor s requests for time extensions. In connection with advancing requests for 1 The authors acknowledge Duane A. Daiker, a partner with Shumaker, Loop & Kendrick, LLP, and Timothy C. Garding, an associate with Shumaker, Loop & Kendrick, LLP, for their assistance with this paper. 1

3 additional time, the surety should simultaneously assess whether the time extensions are compensable or non-compensable, and proceed accordingly. II. THE SURETY S ENTITLEMENT TO TIME EXTENSIONS FROM THE OBLIGEE A surety has the right to select among several courses of action once an obligee has either declared the principal in default or terminated the principal. 2 The surety has the right to mitigate damages that may result from a default or termination, 3 and to limit its liability when satisfying its obligation to make the obligee whole. 4 Whether the surety elects to complete the work itself, support the defaulted principal while the principal completes the work, or enter into a takeover agreement with the obligee and a completion agreement with a replacement contractor, the surety has certain rights. 5 The surety is entitled to investigate the status of the project as of the date of 2 For a more detailed discussion of a surety s performance options, see BRUNER & O CONNOR, JR., BRUNER & O CONNOR ON CONSTRUCTION LAW 12:15-12:22, 12:36, 12:77-12:83 (2009). 3 See, e.g., St. Paul Fire & Marine Ins. v. City of Green River, 93 F.Supp.2d 1170, 1178 (D. Wy. 2000) (holding an obligee s action that deprived a surety of its ability to protect itself pursuant to performance options under a performance bond constituted a material breach that rendered the bond null and void); Dragon Constr., Inc. v. Parkway Bank & Trust, 678 N.E.2d 55, (Ill. App. Ct. 1997) (holding the surety was discharged from any obligation under the performance bond due to the obligee s actions in replacing the contractor without providing notice to the surety); Gen. Accident Ins. Co. of Am. v. Merritt-Meridian Constr. Corp, 975 F.Supp. 511, 516 (S.D.N.Y.1997) ( Sureties enjoy such discretion to settle claims because of the important function they serve in the construction industry, and because the economic incentives motivating them are a sufficient safeguard against payment of invalid claims. ). 4 See, e.g., Seaboard Sur. Co. v. Town of Greenfield, 266 F.Supp.2d 189, (D. Mass. 2003) (acknowledging the tripartite nature of surety contracts and the necessity of granting the surety a commercially reasonable period of time to investigate the circumstances of the default prior to requiring the surety to select one of the various available performance options under the bond); Morrison Assurance Co., Inc. v. United States, 3 Cl.Ct. 626, 632 (1983) (holding a performance bond protects the government obligee by making sure the obligee is not left with a partially completed project); Mass. Bonding and Ins. Co. v. State of New York, 259 F.2d 33, 37 (2d Cir. 1958) ( [I]t is settled law that a surety which undertakes to complete a construction contract after its principal has defaulted and pays laborers and materialmen becomes entitled to payments due the principal from the owner, here the United States, independent of any formal assignment. ). 5 When the contractor (the principal) defaults and the surety pays the claim or completes the contract, the surety steps into three sets of shoes: 2

4 default or termination, pursue all viable claims for time extensions that exist as of the date of default or termination, and pursue all claims for time extensions that arise during the completion of the project. 6 Delays on construction projects result from a variety of causes and circumstances, and critical delays are those that impact the construction schedule for the work. A critical delay is usually a condition precedent to obtaining a time extension. 7 Thus, the surety must evaluate whether the identified critical delays are excusable or non-excusable. 8 An excusable delay, one that was beyond the control of the contractor and unforeseeable, will justify an extension of time for contract completion. 9 In addition, once the determination is made that a particular critical delay is excusable, the surety should determine if it is entitled to compensation for the delay period. 10 An excusable delay will be considered compensable if the delay resulted from actions or inaction of another party, and the surety, as the delayed party, suffered damages as a result of [The Surety] stands in the shoes of the contractor insofar as there are receivables due it; in the shoes of laborers and material men who have been paid by the surety who may have had liens; and, not least, in the shoes of the [owner], for whom the job was completed. Transamerica Ins. Co. v. Barnett Bank, 540 So.2d 113, (Fla. 1989) (citing Nat l Shawmut Bank v. New Amsterdam Cas. Co., 411 F.2d 843, (1st Cir. 1960)). In addition, for a detailed discussion of a surety s rights of subrogation and assignment, see George J. Bachrach & John V. Burch, The Surety s Subrogation Rights, in THE LAW OF SURETYSHIP (Edward G. Gallagher ed., 2d ed. 2000). 6 For a detailed discussion of the process of developing and presenting a request for time extension, see 1 RICHARD K. ALLEN & STANLEY A. MARTIN, CONSTRUCTION LAW HANDBOOK (2d ed. 2009). 7 Id. at 23.03[B]. 8 Id. at 23.03[B] & [D]. 9 Id. 10 Id. at 23.03[C]. 3

5 the delay. 11 As discussed below, the surety must meet its burden of proof and clearly show that the otherwise excusable delay is not a concurrent delay, which renders it non-compensable. 12 A. The Surety May Pursue its Principal s Claims for Time Extensions for Prior Delays The surety may be entitled to pursue its principal s claims for time extensions, even if previously rejected. In situations where (i) the principal complied with the notice provisions of the contract for the submission of claims for time extensions, but the obligee denied the requested time extensions; (ii) the obligee failed to timely respond to the principal s claims for additional time; or (iii) the obligee wrongfully rejected the principal s claims for additional time; the surety, in mitigating its damages and limiting its liability, should re-evaluate every claim for additional time, and further pursue all viable claims that should have been granted by the obligee to the principal. The AIA Standard Form of Agreement 13 and AIA General Conditions 14 address delays, extensions of time, adjustments to the original completion date, and adjustments to the original contract sum. 15 As part of its investigation, the surety should review the previously submitted 11 Id. 12 Id. at 23.03[B], AIA Document A , Standard Form of Agreement between Owner and Contractor Where Basis of Payment Is a Stipulated Sum. 14 AIA Document A , General Conditions of the Contract for Construction. 15 The AIA General Conditions provide: A Change Order is a written instrument prepared by the Architect and signed by the Owner, Contractor and Architect stating their agreement upon all of the following:.1 The change in the Work;.2 The amount of the adjustment, if any, in the Contract Sum; and.3 The extent of the adjustment, if any, in the Contract Time If the Contractor is delayed at any time in the commencement or progress of the Work by an act or neglect of the Owner or Architect, or of an employee of 4

6 claims for time extensions, the supporting documentation for the claims, the obligee s responses to the claims (if any), and all project documentation related to the claims. The surety must confirm its principal complied with the contractual notice provisions. In addition, the surety must determine if any potential waiver arguments exist, arising out of the principal s failure to timely submit claims for time extensions, or arising out of the principal s submittal of a claim for additional compensation that was silent as to time extensions when it should have included an express reservation of rights to subsequently pursue a claim for time extensions. In situations where the obligee and surety are negotiating a written takeover agreement, the surety should include all unresolved issues in the takeover agreement. As an example, a either, or of a separate contractor employed by the Owner; or by changes ordered in the Work; or by labor disputes, fire, unusual delay in deliveries, unavoidable casualties or other causes beyond the Contractor s control; or by delay authorized by the Owner pending mediation and arbitration; or by other causes that the Architect determines may justify delay, then the Contract Time shall be extended by Change Order for such reasonable time as the Architect may determine Claims relating to time shall be made in accordance with applicable provisions of Article This section 8.3 does not preclude recovery of damages for delays by either party under other provisions of the Contract Documents Definition. A Claim is a demand or assertion by one of the parties seeking, as a matter of right, payment of money, or other relief with respect to the terms of the Contract. The term Claim also includes other disputes and matters in question between the Owner and Contractor arising out of or relating to the Contract. The responsibility to substantiate Claims shall rest with the party making the Claim If the Contractor wishes to make a Claim for an increase in the Contract Time, written notice as provided herein shall be given. The Contractor s Claim shall include an estimate of cost and of probably effect of delay on the progress of the Work. In the case of continuing delay, only one Claim is necessary. 5

7 surety can include provisions like those in the format below, regarding unresolved time extension issues: Surety. The Owner acknowledges that the Surety will subcontract the performance of the work under the Original Contract to a Completion Contractor. The Owner acknowledges that the Surety is acting in its capacity as a Completion Surety, by virtue of the Surety having issued the Performance Bond for the Original Contractor, in making arrangements for the performance and completion of the Contract, and not as a completing contractor, and that the Surety is not assuming any obligations or liabilities beyond those set forth in the Bond, the Original Contract, any amendments to the Original Contract, and this Agreement. The Surety is entitled to all rights, title and interest of the Original Contractor under the Contract in all respects as if the Surety were the original party to the Contract. No right, promise, benefit or privilege provided to the Owner or the Surety in or by the Contract or Performance Bond shall be waived, reduced, eliminated or released by this Agreement or its terms. All such rights, promises, benefits and privileges shall be and are hereby preserved to the Owner and the Surety. Project Issues. The Surety and the Owner acknowledge that certain issues remain outstanding regarding claims by the Original Contractor and Surety against the Owner and by the Owner against the Original Contractor and Surety, and the Surety and Owner retain any and all rights, with respect to these issues which are as follows: [insert specific issues]. The Surety and Owner agree that the above issues shall be referred to Alternative Dispute Resolution pursuant to this Agreement. Time for Completion. The Surety hereby agrees that it shall cause the remaining Work under the Contract to be complete within not more than calendar days following receipt of the Owner s Notice to Proceed with respect to its completion work ( New Completion Date ), subject only to any time extensions that may otherwise be granted or available to the Surety under the terms of the Contract or by this Agreement. The Owner shall provide the Surety with a punch list of all unfinished work that remains to be completed or corrected within fifteen (15) days of substantial completion. The Owner s failure to provide the foregoing punch list within the fifteen (15) day period will extend the New Completion Date accordingly. Additionally, Owner agrees with Surety that it will not assess against Surety or demand from Surety liquidated damages for the period of time from the date of termination of the project to the execution of this Agreement to the New Completion Date if the Surety or those acting on its behalf have completed all remaining work and obtained Final Completion by the New Completion Date; but if Surety fails to complete all remaining work and obtain final completion by the New Completion Date as provided herein, subject only to any time extensions that may otherwise be granted or available to the Surety under the terms of the 6

8 Contract or by this Agreement, then Owner shall be entitled to liquidated damages as provided under the Contract and Performance Bond for the period from the Completion Date to the date final completion is achieved. In addition, in the absence of a takeover agreement, the surety should submit its claims to the Architect under Section of the AIA General Conditions. The surety should not risk a contractual bar to its claims for time extensions or delay damages due to a failure to satisfy conditions precedent under the contract. Section of the AIA General Conditions provides as follows: The Architect will interpret and decide matters concerning performance under, and requirements of, the Contract Documents on written request of either the Owner or Contractor. The Architect s response to such requests will be made in writing within any time limits agreed upon or otherwise with reasonable promptness. Courts interpreting the above contract language, or modified versions of the above contract language, have barred claims for damages under a conditions precedent argument when a party failed to timely submit a claim, controversy or request for equitable adjustment to the Architect as the initial arbiter of disputes. 16 B. The Surety May Pursue its Own Time Extensions for Current and Anticipated Future Delays Once the surety has elected a course of action under the performance bond, the surety should also analyze and evaluate its own independent basis to seek time extensions and compensation for current delays, as well as known and anticipated future delays. The review of 16 See, e.g., Mayfair Const. Co. v. Waveland Assoc.s Phase I Ltd. P ship, 619 N.E.2d 144, 156, (Ill.App.Ct 1993) (holding the obligee materially breached the contract by failing to bring its claims for construction defects and delays first to the architect for a determination prior to suit, barring the obligee s counterclaims, where the contract expressly required the parties to submit disputes initially to the architect for decision); Commonwealth Const. Co. v. Cornerstone Fellowship Baptist Church, 2006 WL , *21, 23 (Del.Sup.Ct. 2006) (holding the obligee s claims for offsets and credits against the contractor s claims for payment were barred where the obligee failed to submit its claims to the architect as the initial decision maker on such issues). 7

9 the project documents, and the preparation of an after-the-fact schedule analysis, will assist the surety in identifying and pursuing additional claims for time extensions. The surety should focus on proving that delays resulted from the fault of the obligee and its representative. To assist in this analysis, as discussed in more detail below, the surety s professional consultant should conduct a schedule analysis in connection with the project s critical path. 17 The objective is to clearly delineate obligee delay versus contractor delay, and then immediately pursue all viable claims for time extensions. C. The Surety May Pursue the Completing Contractor s Claims for Time Extensions Finally, as the work progresses, the surety should evaluate and timely submit its completing contractor s claims for time extensions. The completing contractor must maintain an accurate schedule. The completing contractor is entitled to submit claims for time extensions upon the discovery of latent defects, the discovery of design errors, or the occurrence of additional obligee or architect delays. 18 In addition, the surety and completing contractor should review the written contract for all applicable provisions authorizing claims for additional time extensions. 19 Events of force majeure, such as hurricanes, floods and earthquakes, also warrant an award of time extensions. 20 Obtaining the time extensions can prove critical in mitigating and minimizing damages arising from the principal s default. 17 For a more detailed discussion of proving and defending time impact claims, see Jon M. Wickwire & Thomas D. Fertitta, Deciding To Litigate: Proving and Defending Time Impact Claims, in MANAGING AND LITIGATING THE COMPLEX SURETY CASE (Philip L. Bruner & Tracey L. Haley eds., 2d ed. 2007) and ALLEN & MARTIN, supra note 6, at , AIA General Conditions. 19 See Wickwire & Fertitta, supra note 17, at ; ALLEN & MARTIN, supra note 6, at See Wickwire & Fertitta, supra note 17, at ; ALLEN & MARTIN, supra note 6, at

10 III. CALCULATION OF TIME EXTENSIONS As discussed in detail by Jon Wickwire and Thomas Fertitta in Deciding To Litigate: Proving and Defending Time Impact Claims, the surety often must prepare an after-the-fact schedule analysis. 21 The surety, directly or through a consultant, should review relevant project documents including, but not limited to, daily reports and job diaries, progress charts, meeting minutes, correspondence, change order files, schedules, cost and budget records, photographs, and requests for information. 22 If supported by the project documents, the surety should resubmit the principal s claims for time extensions arising out of delays caused by the obligee and its representatives. The surety should undertake this analysis whether or not the obligee and surety have entered into a written takeover agreement. When possible, the after-the-fact schedule analysis will assist the surety in pursuing its principal s justifiable claims for time extensions, even if previously rejected. Obtaining approval of its principal s claims for time extensions may be critical to minimizing damages arising from the principal s default on the bonded project. A. The As-Planned or Baseline Schedule With every project, the surety must analyze the nature of the delay described in the claims for time extensions. The prime contract should include the as-planned (or baseline) schedule that establishes the original commencement date and the original substantial completion date. The surety should then identify the as-built critical path(s) by reviewing and analyzing the actual activities in connection with the relationships and events that controlled the progression of the project toward substantial completion. By comparing the as-built start and finish dates of 21 Wickwire & Fertitta, supra note 17, at Id. at ; see also ALLEN & MARTIN, supra note 6, at 23.05; BRUNER & O CONNOR, supra note 2, at

11 critical activities to the originally planned dates, the surety can identify and quantify occurrences of critical delay. In undertaking this analysis, the surety must investigate the causal factors for each of the critical delays and determine the responsible party or parties for each delay. Once that analysis is complete, the surety can then determine the excusable and compensable nature of each delay. The surety will bear the burden of proving the amount of days of contractually recognized time extensions. The surety must review the contract and determine if the contract includes schedule specification sections that set forth a specific methodology the contractor or surety must follow in proving its request for time extensions and related demands for monetary compensation. 23 The above is often referred to as the critical path method ( CPM ) schedule analysis or critical path network analysis. 24 CPM schedules illustrate the construction activities as well as the sequencing of those activities. 25 The critical path model has been defined as: 26 A CPM is a standard construction device used to plan the activities of a construction project in a logical, orderly sequencing manner citing durations for the different activities from the beginning of the job to the end. A CPM is created by dividing the entire project into discrete and quantifiable steps; in turn, each step is allotted an estimated time for completion. Ultimately, each step is arranged into a chronological sequence, thus revealing the anticipated length and structure of the entire construction schedule. In addition to serving as a road map for the contractors to determine when and where their work fits into the overall construction sequence, the CPM also assists contractors in assessing their hiring and material purchasing needs. 23 Wickwire & Fertitta, supra note 17, at For a discussion of using the critical path network analysis to measure critical delay, see ROBERT F. CUSHMAN ET AL., CONSTRUCTION DISPUTES: REPRESENTING THE CONTRACTOR (3d ed. 2001). 25 Id.; see also Wickwire & Fertitta, supra note 17, at ; ALLEN & MARTIN, supra note 6, at See, e.g., Roberts & Schaefer Co. v. Hardaway Co., 152 F.3d 1283, 1287 (11th Cir. 1998), reh'g and suggestion for reh'g en banc denied, 162 F.3d 1179 (11th Cir. 1998). 10

12 As discussed by Wickwire and Fertitta in Deciding To Litigate: Proving and Defending Time Impact Claims, the focus of the time impact analysis is to evaluate delays on a chronological and cumulative basis. 27 The chronological and cumulative approach allows the executor of the schedule to take into account that the schedule is dynamic and the critical path can change from month to month, and that time is a resource to the executor of the schedule as well as to the schedule stakeholders. 28 The surety must proceed carefully since courts have refused to accept some after-the-fact schedules due to a lack of reliability illustrated in the analysis. 29 B. Preparing the As-Built Critical Path Schedule As stated above, document sources for the as-built critical path schedule analysis include the entire contemporaneous project records, including but not limited to, daily reports and job diaries, meeting minutes, requests for information, progress charts, updates to schedules, change order files, photographs, and weather reports. The focus of the as-built schedule analysis is identifying how a change or delay extends the project s critical path and the project completion date. 30 As succinctly noted by Wickwire and Fertitta, a credible CPM schedule analysis considers the following: 31 the contemporaneous baseline schedule; the amount of float available, if any, of the impacted activities; 27 Wickwire & Fertitta, supra note 17, at Id. at Id. at (citing Chaney & James Construction Co., FAACAP No , 66-2 BCA 6066 (1967) and Mega Constr. Co. v. United States, 29 Fed. Cl. 396, , 434 (1993)). 30 Wickwire & Fertitta, supra note 17, at Id. at

13 a chronological and cumulative accounting of excusable delays for which time extensions may still be pending; the actual job conditions encountered; and the progress achieved up to the point in time when the present delay occurs. In addition, Wickwire and Fertitta provide a comprehensive step-by-step procedure for preparing and documenting delays in their Proof of Delay Procedure Checklist, set forth below: 32 A. Study the scope of the change (alleged or directed), or the extent of the delay encountered. B. Review all reference material, such as appropriate contract clauses, construction drawings, sketches, specifications, vendor data, regulatory and administrative codes, field directives, correspondence, and cost estimates. Prepare an accurate description of the changed condition or the delay encountered. C. Identify all contracting parties who are affected by the direct or indirect delay and request any participation or documentation assistance that may be necessary. D. Determine which activity or activities on the project schedule is or are potentially impacted by the added, delayed, or changed work. E. Review the schedule and determine the scheduled start and finish dates for all affected activities. F. Status the CPM schedule to determine the project s critical path at the inception of the delay. G. From the record-keeping systems and from contacts with key project staff, identify and document the facts associated with the change and/or delay issue. H. Prepare a fragnet analysis illustrating the sequence of delay and define its relationship to the current adjusted schedule. [A fragnet is defined as a sequence of new activities and/or activity revisions that are proposed to be added to the existing schedule to demonstrate (mathematically and graphically) the influence of delay and also the method for incorporating 32 Id. at

14 delay and any impacts into the schedule.] The fragnet should identify the first notice involved and the sequence of activities necessary to mobilize the required work, and it should clearly demonstrate the effect or lack of effect of the alleged delay on the existing schedule and the remaining activities required to be performed. I. Prepare a written narrative of the overall schedule analysis and derive a time impact position to be taken for each delay. Factual references to contract clauses, schedule information, drawings, specifications, sketches, industry standards, and any written or oral communications should be properly identified to support positions and ultimate conclusions. Weekends, holidays, and any recovery periods involved in the calculations should be noted. Also note any use or absorption of available float in the analysis. J. Make sure that any extensions of time for excusable delay is the direct result of the change or delay, and not for any nonexcusable cause. In order to obtain approval of a claim for time extension, the surety must clearly prove the delay was caused by the obligee or its representative. 33 In addition, the surety may obtain time extensions under the contract if the surety shows the delays were caused by labor disputes, fire, unusual delay in deliveries, unavoidable casualties or other causes beyond the surety or contractor s control. 34 The surety must anticipate all responses and defenses by the obligee and its representative, including arguments that the purported delay was caused solely by the contractor or constitutes a concurrent delay. Under every scenario, the surety must compute the delay 33 See, e.g., Blinderman Constr. Co. v. United States, 695 F.2d 552, 559 (Fed.Cir. 1982) (observing that [g]enerally, courts will deny recovery where the delays are concurrent or intertwined and the contractor has not met its burden of separating its delays from those chargeable to the Government.); Commerce Int l Co. v. United States, 338 F.2d 81 (Ct.Cl. 1964) (same); S.W. Marshall, Jr. v. United States, 164 F.Supp. 221, (Ct.Cl. 1958) (holding courts cannot grant monetary recovery where the contractor fails to apportion the degree of blame attributable to each party) , AIA General Conditions; see also ALLEN & MARTIN, supra note 6, at 23.03[B], 23.04[E]. 13

15 period and the proposed new completion date. In addition, the surety should simultaneously assess whether the time extensions are compensable, and proceed accordingly. C. Advantages of Using the As-Built Schedule Analysis The as-built schedule analysis, when prepared in a comprehensive and reliable manner, presents proof of not only the fact of a delay, but also the cause of that delay. 35 Pursuant to Section of the AIA Standard Form of Agreement, and Section of the AIA General Conditions, the obligee should grant the surety time extensions, and corresponding monetary compensation resulting from the project delays, if the delays are not contractor-caused or surety-caused. 36 In addition, the surety should pursue, and the obligee should approve, claims for time extensions for concurrent delays, even if the obligee denies claims for additional compensation arising out of the concurrent delays. 37 Thus, the as-built schedule analysis is an effective tool for the surety. IV. DISCUSSION OF POTENTIAL ISSUES WITH COMPENSATION FOR DELAYS The surety will bear the burden of proof associated with proving the existence of damages and then quantifying those damages. 38 As stated above, the surety has the right to pursue not only time extensions, but also the monetary compensation resulting from the project delays, if the delays are not contractor-caused or surety-caused. If the delay that forms the basis 35 Wickwire & Fertitta, supra note 17, at Blinderman Constr. Co., 695 F.2d at 559 (quoting Coath & Goss, Inc. v. United States, 101 Ct.Cl. 702, (1944) and Commerce Int l Co. v. United States, 167 Ct.Cl. 529, 338 F.2d 81, 90 (1964) ( Where both parties contribute to the delay neither can recover damage, unless there is in the proof a clear apportionment of the delay and expense attributable to each party. )). 37 See ALLEN & MARTIN, supra note 6, at 23.03[C] & [D]. 38 For a more detailed discussion of proving and defending construction contract damages, including damages associated with time impact claims, see Julian F. Hoffar, Deciding To Litigate: Proving and Defending Damages, in MANAGING AND LITIGATING THE COMPLEX SURETY CASE (Philip L. Bruner & Tracey L. Haley eds., 2d ed. 2007); see also ALLEN & MARTIN, supra note 6, at

16 of the requests for time extensions involves concurrent causes, or the amount of delay cannot be attributed specifically to the obligee or the obligee s representatives, then the surety may not recover damages. The term concurrent delay indicates a delay to a project s critical path caused by multiple events not exclusively within the control of either the obligee or the contractor. 39 In general, concurrent delay is described as a situation in which two or more delays occur at the same time during all or a portion of the delay periods being considered. 40 In circumstances where the obligee and contractor share responsibility for the delays affecting the critical path (e.g., delays that would affect the overall completion date), the obligee may agree to extend the contract completion date to reflect the period of concurrent delay but simultaneously deny a claim for monetary damages for that period. 41 The concept of concurrent delay has been applied in at least two circumstances: (i) where both parties to a contract are simultaneously at fault for a delay to one activity on the critical path; and (ii) where each party is causing a delay to a separate activity, both of which would affect the overall completion date. 42 As the party seeking recovery, the surety bears the burden of apportioning the delay. A. Concurrent Delay - Joint Fault by Contractor/Surety and Obligee Many courts have recognized the first example of concurrency, which is based upon the notion of joint fault. 43 Generally, courts do not grant delay damages where the contractor (or surety) and obligee both contributed to a delay on the same aspect of the project and the contractor (or surety) fails to meet its burden of segregating its delays from those chargeable to 39 See, e.g., BRUNER & O CONNOR, supra note 2, at 15: CUSHMAN ET AL., supra note 24, at 17.04; ALLEN & MARTIN, supra note 6, at 23.01[D]. 41 CUSHMAN ET AL., supra note 24, at 17.04; ALLEN & MARTIN, supra note 6, at 23.01[D]; JOHN CIBINIC, JR. & RALPH C. NASH, JR., ADMINISTRATION OF GOVERNMENT CONTRACTS 609 (3d ed. 1995). 42 CIBINIC & NASH, supra note 40, at Blinderman Constr. Co., 695 F.2d at

17 the obligee. 44 The concurrent delays are thus said to be intertwined. 45 In such circumstances, courts deny recovery of damages on the grounds that delays attributable to both parties are commingled and the court cannot ascertain the measure of the contractor s damages without speculating. 46 For example, in F.M. Hargrave v. United States, 47 the plaintiff contractor, Hargrave Construction Company ( Hargrave ), and the government each caused delays to compaction work during the performance of a contract for grading, paving, construction of drainage facilities and construction of an additional runway on a military airport. 48 Hargrave asserted the government s inspectors prevented proper compaction by requiring excessive wetting of the subgrade. 49 The court agreed, finding the government s inspectors required the use of an excessive amount of water and the government s inspectors provided improper instructions during the work. 50 However, the court also faulted Hargrave for its lack of sufficient equipment, inability to handle the drainage, and inability to prevent ponding on the project site. 51 In ruling, the court found that although Hargrave incurred extra costs as a result of the government s improper direction, the court could not determine the extent to which Hargrave s damages were the direct result of the actions of the government. 52 Citing the concurrency rule, which denies recovery where the parties are jointly at fault for the delay, the court denied Hargrave s claim 44 Id. 45 Id. 46 Id. 47 F.M. Hargrave v. United States, 130 F.Supp. 598 (Ct.Cl. 1955). 48 Id. at Id. 50 Id. 51 Id. 52 Id. at

18 since Hargrave failed to meet its burden of proving to the court that its additional costs and expenses were directly caused by the actions of the government. 53 B. Concurrent Delay - Separate and Distinct Activities on the Scheduling Critical Path (Offsetting Delays) The second type of concurrency occurs when delay is simultaneously caused by the contractor (or surety) and the obligee, but arises from two separate and distinct activities identified on the scheduled critical path. Courts and governing boards have recognized that concurrent delay also exists where a project would have been delayed by one cause, notwithstanding another delay caused by either party. 54 Generally, courts do not grant delay damages where the contractor and obligee are simultaneously causing delay relating to two separate activities. 55 Stated differently, courts are denying claims for delay damages where the contractor or surety cannot show that Party A delayed the project s completion date by a delay to Activity X when the completion date would also have been extended by a separate delay to Activity Y caused by Party B. 53 Id. at William F. Klingensmith, Inc. v. United States, 731 F.2d 805 (Fed. Cir. 1984) (holding that although the contractor caused some delay in the installation of extra caissons, the contractor could recover damages if it showed the obligee caused concurrent delays arising out of the separate issue of the smoke tunnel, and if the contractor proved how much of that concurrent delay was caused by the obligee); Chas. I. Cunningham Co., IBCA No. 60, 57-2 BCA 1541, at 5483 (1957) (holding contractor should not be held responsible for delays in the completion of the project caused by the issuance of government purchase orders that necessitated deferment of the completion until certain items could be procured and installed); Young Enterprises of Ga., Inc. v. Gen. Serv. Admin., GSBCA No , 00-2 BCA 31, 148 (2000) (considering the concurrent delays of the contractor and the government, the board rejected the contractor s claims for recovery for delay damages on the grounds the contractor failed to carry its burden of proof and failed to show the delays were caused solely by the government where the delays purportedly caused by the government were too intertwined with the delays attributable to the contractor). 55 Id. 17

19 For example, in The Tuller Constr. Co. v. United States, 56 the court denied delay damages upon a finding that independent delays to separate activities resulted in concurrent delay. In Tuller, the government delayed more than two months before supplying shop drawings for the equipment the government was furnishing, and the contractor was also delayed while waiting for approvals from the War Production Board. 57 In addition, during construction, the contractor s method for building an intake pipe in a river bed proved to be impracticable, and the work was delayed while the contractor employed an alternative method. 58 Despite finding the government and contractor-caused delays were separable, the court denied the contractor s claim for recovery of delay damages because, the evidence show[ed] that there would have been substantially the same delay in the completion of the job, if the government had been prompt in supplying the materials and drawings. 59 Even in light of the above case law, the surety should pursue all viable claims for time extensions, even if the surety will not receive additional monetary compensation resulting from the delays. As stated above, the surety is best positioned to mitigate and minimize damages if all time extensions are sought and granted. C. Brief Comparison of the Concurrent Delay Analysis to Changing Trends in the Case Law on Liquidated Damages The concurrent delay analysis discussed above has some similarities to the changing trends in the case law on liquidated damages. 60 Historically, contractors argued the rule against 56 The Tuller Constr. Co. v. United States, 118 Ct. Cl. 509 (1951). 57 Id. at Id. at Id. at For a more detailed discussion, see BRUNER & O CONNOR, supra note 2, at 15:70. 18

20 apportionment to defeat government claims for liquidated damages. 61 When employed by courts, the rule against apportionment prohibited the government from recovering under a contract s liquidated damages clause if the government was responsible for any delay to the project. 62 More recently, however, courts have criticized the rule against apportionment as harsh and outdated. 63 Courts are now moving toward the clear apportionment rule, an approach that permits the award of liquidated damages to obligees where the party seeking recovery can clearly apportion responsibility for delays to the critical path. 64 V. EVIDENTIARY ISSUES WITH A TERMINATED PRINCIPAL By the time the obligee declares a default, the principal is often out of business. The principal s office may be closed. The principal may have released its employees. The project documents may not be readily available for review. The surety is often faced with a situation where it does not have access to key project documentation or key personnel of the principal. Sometimes the principal s business is still a going concern, but the key employees of the principal are uncooperative. The surety will experience difficulty proving its principal s claims for time extensions, pursuing monetary damages for delays or damages arising during the 61 See, e.g., Acme Process Equip. v. United States, 347 F.2d 509 (Ct.Cl. 1965), rev d on other grounds, 385 U.S. 138 (1966) (holding that foregoing enforcement of the liquidated damages provision does not deprive the government of damages for the contractor s delay, rather, the government merely loses its right to insist on an artificial measure of damages when it is also responsible for the delay); Schmoll v. United States, 91 Ct.Cl. 1, 16 (1940) (annulling a liquidated damages provision because delays were attributable to both parties). 62 Id. 63 See, e.g., PCL Constr. Servs., Inc. v. United States, 53 Fed. Cl. 479, 485 (2002). 64 Id.; see also Cumberland Cas. & Sur. Co. v. United States, 82 Fed.Cl. 500 (2008) (citing Sauer, Inc. v. Danzig, 224 F.3d 1340 (Fed. Cir. 2000) and Essex Electro Eng rs v. Danzig, 224 F.3d 1283 (Fed. Cir. 2000) (holding that liquidated damages for delay should be parsed by responsibility between the parties)). 19

21 principal s tenure on the project, or pursuing the surety s and completing contractor s claims for time extensions and damages. If the surety anticipates litigation on any issue related to the default and termination, the surety will have to overcome multiple evidentiary obstacles. If not addressed upon the surety s election of its performance option under the bond, the surety may not position itself to prevail in subsequent litigation. The surety should seek the cooperation of the principal, and record the testimony of key personnel through recorded statements. If a key witness later proves to be unavailable for trial, or testifies but is unable to recall critical facts, the surety may be able to offer the prior recorded testimony as evidence. 65 Ultimately, the court is tasked with determining the competency, relevancy and admissibility of proffered evidence. 66 Since courts have exclusive power to determine the technical competency of evidence 67 and the personal knowledge of the witness, 68 courts have broad discretion to deny a motion to admit speculative evidence, unauthenticated evidence, or incomplete evidence. Authentication or identification of evidence is required as a condition precedent to its admissibility. 69 In situations where the surety has no cooperation from the principal, the surety will have to find alternate ways to authenticate and introduce the principal s business records to support the 65 FED. R. EVID. 613, 804(b)(1); see also, Walker v. Pepsi-Cola Bottling Co., 2000 WL at *5 (D.Del. August 10, 2000) (holding previously recorded testimony given as a witness at another hearing or in a deposition is admissible if the party or its predecessor in interest against whom the evidence is being offered was present). 66 See, e.g., FED. R. EVID , , FED. R. EVID. 601; see also, Bourjaily v. United States, 483 U.S. 171, 172 (1987) (holding that while the Rules of Evidence require the court to determine preliminary questions on the admissibility of evidence, the Rules of Evidence do not define the standard of proof). 68 FED. R. EVID FED. R. EVID. 901; see also, JOHN W. STRONG, MCCORMICK ON EVIDENCE 222 (5th ed. 1999) ( [P]roof of any circumstances which will support a finding that the writing is genuine will suffice to authenticate the writing. ). 20

22 surety s claims. The surety may have to authenticate the principal s business records through the adverse party. Alternatively, the surety may try to introduce key documentation through experts who have independently confirmed and authenticated the contents of the business records. 70 Generally, the surety can overcome these evidentiary hurdles; however, the surety must anticipate the time and costs to do so. VI. CONCLUSION A surety s entitlement to time extensions, and additional monetary compensation arising from those time extensions, are important for the surety to investigate and pursue. Upon takeover, the surety should conduct a thorough review and analysis of the project documentation, initial scope of work, scheduling analysis, approved change orders, pending change orders and remaining contract balances. By pursuing pending or wrongfully rejected claims for time extensions, the surety may be able to lessen financial loss arising from the principal s termination. In addition, by pursuing claims for time extensions discovered by the completing contractor, the surety can continue to mitigate the potential loss. Furthermore, the surety should always evaluate whether the identified claims for time extensions are compensable. 70 FED. R. EVID , 705; see also, Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 597 (1993) (holding expert testimony must rest[] on a reliable foundation and [be] relevant to the task at hand. ); United States v. Firishchak, 468 F.3d 1015, 1022 (7th Cir. 2006) (holding trial court did not abuse its discretion in permitting an Ukrainian Auxiliary Police historian to testify as to the authenticity of UAP documents). 21

23 About the Authors Tammy N. Giroux is a partner in the Surety & Fidelity Practice Group at Shumaker, Loop & Kendrick, LLP in Tampa, Florida. Ms. Giroux obtained her B.S. in Finance (cum laude) from Florida State University, and her J.D. (cum laude) from Stetson University College of Law. Ms. Giroux practices extensively in the area of surety and fidelity claims and commercial litigation. Doug Dearie is the Manager-Construction Services for Liberty Mutual Surety in Seattle, Washington. Mr. Dearie obtained his B.S. in Civil Engineering from Newark College of Engineering (NJIT), and has lectured widely in the area of surety bond litigation. 22