In handling public contract construction disputes, lawyers must pay attention to detail, have patience, and often use a two-front dispute resolution process.
It also entails a thorough knowledge of the context’s expansive regulatory framework, especially since several factors are likely implicated, including the:
increased risk of inconsistent terms in subcontracts;
public owner’s different incentives and practices;
impact on insurance coverage triggers;
unique role of design; and
timing and sovereign immunity aspects.
Contractors who perform construction work for public entities (particularly the Wisconsin Department of Transportation (WisDOT)) need to be aware of the regulatory framework that those contracts necessarily contain, and its impact on several key aspects of a typical construction dispute.
Because the WisDOT contracts for more construction work in Wisconsin than any other public entity, these factors are discussed here in the context of a dispute involving WisDot.
Issue 1: Using Inconsistent Terms in Contracts
The standard specification published by WisDot on its website (and updated regularly) govern a successful bidder’s contract on a WisDot project.
The specifications are very lengthy. Moreover, contractors and their lawyers should know that, due to the Christian doctrine, mandatory statutes or regulations that express a significant or deeply ingrained strand of public procurement policy shall be read into federal contracts by operation of law, even if the clause is not in the contract.1
This doctrine has not yet been applied in state public contracting, but it is a concept for contractors and their lawyers know about.
It is important for public contractors to update their contracts to reflect WisDot’s annual specification changes. This alleviates the potential for differences in the general contractor-WisDOT agreements and subcontracts in the key areas of:
change order timing and entitlement;
liquidated damages and related provisions; and
the length of the dispute resolution process.
While it is very difficult for general contractors to create unique terms with each of their subcontractors and material suppliers on a job, in order to minimize the key contractual differences, the effort is worthwhile.
When problems occur on a construction site, the "devil is often in the details," and there are likely to be differences of opinion on what (or who) caused the problem. Because the general contractor most likely did not perform the work at issue and seldom produced the products incorporated into the project, the general contractor is often simply a go-between for the parties, whose product or work is at issue, and the unhappy public owner.
The public owner will without question insist that the general contractor stand behind the work or product at issue (i.e., make them whole), while subcontractors or suppliers will defend the integrity of their work or product (i.e., refuse to acknowledge fault).
While use of AIA, AGC, or other similar forms will increase the likelihood of consistent terms and conditions, including dispute resolution mechanisms, that consistent use happens less frequently on public contracts. This will lessen the possibility of a general contractor needing to take seemingly inconsistent positions before a tribunal and preserve its opportunity to preserve the subcontractor’s defense that it performed appropriately while at the same time reserving the right to, if and when necessary, pursue a claim against the subcontractor for performing negligently.
Issue 2: Public Owner Practices and Incentives
In pursuing dispute resolution, contractors and their counsel must remember that government owners are motivated by different incentives than private owners.
On private projects, the concept that "time is money" applies to all parties. While the good people serving as public servants for public owners will accurately contend that they take their duties to guard taxpayer funds very seriously (and they do), experience shows that government actors do not face the same time-cost pressure. Public representatives are more likely to explain delay in negotiating, litigating, or arbitrating a dispute as an unavoidable function of government understaffing.
Issue 3: Impact on Insurance Coverage Triggers
Government owners have far greater leverage than public owners in insisting upon repair or rework.
Many public contractors get the vast majority of their work from these same government owners, who have the power to suspend or debar those contractors. This pressure sometimes alleviates the government owners' need to bring suit against their contractors for defective work.
Because insurance coverage under most commercial general liability policies is triggered by a "suit" (usually claiming """property damage" caused by an “occurrence”), contractors who are not careful can end up being compelled to perform remediation work without any insurance coverage. In a private setting, the owner would threaten and, if not resolved, bring suit. Both actions trigger insurer obligations, which aids in both resolving the dispute and, where necessary, funding the remediation.
Many times, with no suit by the government owner, a contractor’s insurer can escape liability, leaving a contractor to fund both remediation and actions to pursue potentially responsible subcontractors, suppliers, or others.
Issue 4: Design Professional Status
Government owners often work with the same contractors and design professionals on several different projects. While this familiarity fosters a certain professional collegiality, there are clear distinctions among the relationships, especially when it comes to imposing.
The contractors are often considered resource-heavy adversaries, while the design professionals are more often considered trusted allies helping the government owner keep an eye on the contractors. This, as well as the Spearin doctrine and governmental immunity, can cause government owners to be less inclined to impose responsibility for errors on the design professionals, particularly when an alternative theory placing blame on the contractors is available.
Moreover, the back charge remedy against the contractor is in the short term more likely to yield sufficient resources to fund remediation, than pursuing contributions from the design professionals through suit.
In the vast majority of construction problems where responsibility lies on several fronts, the designer and contractor will allege liability against each other, and sometimes are both proven correct.
Issue 5: Dispute Resolution Process Differences and Sovereign Immunity
The WisDOT Standard Specifications require a contractor seeking a change order to go through a fairly complex process.
First, it must complete a 3-step process governed by Wis. Stat. section 104.3, involving an initial oral notification (made promptly), a five-day contractor written notification, a five -day Region response and a Region Final Decision.
If the contractor disagrees with Region's decision, it may file a Notice of Claim under Wis. Stat. section 105.13 Standard Specification within 14 calendar days. Failing to timely do so could waive the claim. The contractor must submit the claim itself "as promptly as possible," but in any case before the deadline for submitting the "semi-final estimate" as part of the project close-out.
Often, waiting until project closeout is necessary in order for the costs of the claim to be known. This is important because the claim must be certified by the contractor who faces false claims act exposure should the claim be submitted inappropriately.
Under the 2022 version of the specifications, the department has 28 days to investigate the claim, and then 21 days to issue a decision on the claim. In terms of timing, this is a marked improvement over a 3-step process contained within prior specifications that took almost a year to complete. The specifications now say that
If the contractor disagrees with the department's final decision, the contractor may initiate a legal action pursuant to state statutes.
However, the state statute requires the contractor to go through the Wisconsin Claims Board, and then have their claim passed on by the legislature before pursuing a claim against the department in circuit court. The contractor must get a member of the legislature to introduce a bill asking the legislature to either grant or deny its claim. Once the legislature acts (or closes its session without acting), the claim is deemed "passed upon" by the legislature, and the contractor may join the state as a defendant in a civil lawsuit.
What constitutes a "claim" is important. Not all breach of contract actions are considered "claims." The relevant inquiry is whether the breach of contract claim is an action of debt, which means is a specific sum of money that is due or owing from one to another.2
In a situation in which the general contractor believes that any responsibility it owes to the government owner is due to the negligence or defective materials of others, the general contractor can (and in fact oftentimes may need to) bring suit against those parties prior to being able to join the government owner in that circuit court suit.
Thus, an important strategic consideration is the speed with which the general contractor can get all potentially responsible parties before the same tribunal. This oftentimes involves slowing down the circuit court process, while expediting the WisDOT/Claims Board process.
Conclusion: Many Moving Parts
Public projects entail moving parts and considerations not encountered on private projects, including those referenced above.
It is essential that lawyers who represent any parties involved in dispute resolution – whether owner, general contractor, subcontractor, or supplier – have a working knowledge of these factors and their potential impact.
This article was originally published on the State Bar of Wisconsin’s Construction and Public Contract Law Section Blog. Visit the State Bar sections or the Construction and Public Contract Law Section web pages to learn more about the benefits of section membership.
1 G. L. Christian & Associates v. United States, 312 F.2d 418 (Ct. Cl. 1963).
2 Koshick v. State, 2005 WI App 232, 287 Wis. 2d 608, 706 N.W.2d 174.