Contractor Loses Effort to Bind Remote Home Purchaser to Arbitration ClauseOn December 8, 2020, in Taylor Morrison of Texas, Inc. v. Kohlmeyer, a Texas Court of Appeals rejected a contractor’s appeal of a trial court order denying the contractor’s motion to compel arbitration in a home construction defect dispute. The appellate court concluded that the theories of direct benefits estoppel and implied assumptions did not permit the contractor to bind a subsequent purchaser to mandatory arbitration required under the original purchase agreement.

In 2013, the contractor, Taylor Morrison, executed a purchase agreement with a homeowner for the construction of a new home in League City, Texas. The purchase agreement included a mandatory arbitration provision and provided that it may not be assigned without the prior written consent of Taylor Morrison. In March 2016, the homeowner sold the house, and, later that year, the property was sold again to the Kohlmeyers. In 2018, the Kohlmeyers sued Taylor Morrison “asserting that the house had a substantial amount of mold growth throughout resulting from numerous water and moisture sources caused by construction defects.” Taylor Morrison moved to compel arbitration under the doctrines of equitable or direct benefits estoppel and implied assumption, but the trial court denied the motion. Taylor Morrison then appealed.

The appellate court confirmed the trial court’s decision. The appellate court acknowledged that an arbitration agreement may bind a non-signatory such as the Kohlmeyers but only when one of the following six theories — none of which were applicable here — applies: “(1) incorporation by reference, (2) assumption, (3) agency, (4) alter ego, (5) equitable estoppel, and (6) third-party beneficiary.” Taylor Morrison only argued assumption and equitable estoppel applied in the instant action.

With respect to estoppel, Taylor Morrison contended that the Kohlmeyers’ claim sought a direct benefit of the original purchase agreement relating to the quality of workmanship and construction. According to the court, for Taylor Morrison’s direct benefits estoppel theory to apply, Taylor Morrison must show that the Kohlmeyers’ claims depended on and were unable to stand independently of the purchase agreement. Mere relation of the claims to the purchase agreement was insufficient to apply the estoppel theory to bind the Kohlmeyers to arbitration. The appellate court concluded that the Kohlmeyers’ claims did not arise solely from the purchase agreement because the Kohlmeyers did not allege breach of the purchase agreement, the economic loss doctrine could not be applied to bind the Kohlmeyers on a contract they never signed, and the Kohlmeyers’ claims for breach of implied warranties did not arise solely from the purchase agreement.

The appellate court also rejected Taylor Morrison’s argument for binding the Kohlmeyers to the arbitration clause under the theory of implied assumption because the purchase agreement had not been assigned to the Kohlmeyers. According to the court, an implied assumption of contract obligations arises when a contract is assigned to an assignee (here, the Kohlmeyers) and the benefit received by the assignee is so entwined with the burden imposed by the assignor’s contract that the assignee is estopped from denying assumption and the assignee would otherwise be unjustly enriched. Taylor Morrison argued the implied warranties in the purchase agreement had been automatically assigned to the Kohlmeyers when they bought the house and that the benefits of the implied warranties under the purchase agreement were entwined with the arbitration provision.

The court disagreed. Per the court, the alleged automatic assignment of the implied warranties was inapposite because there was no dispute that the purchase agreement (i.e., the contract) had not been assigned to the Kohlmeyers. Indeed, the appellate court noted that assignment of the purchase agreement was contingent on Taylor Morrison’s written consent, which the record showed had not been provided. Therefore, the court rejected the implied assumption theory and held that the Kohlmeyers could not be compelled to arbitrate.

Lessons from Taylor Morrison

Since arbitration is typically an animal of contract, it is important for contractors to understand how their arbitration clauses will be interpreted by a court. While attempts to compel arbitration of non-signatories to an agreement may invite some creative application of the applicable theories described above, a belt-and-suspenders approach in drafting a dispute resolution clause may provide more options to the party attempting to compel arbitration. Here, the appellate court appeared wary of applying a purchase agreement’s arbitration provision to a homeowner who was two-times removed from the original purchase agreement transaction. However, the court noted that three of the potential theories to enforce the arbitration clause were inapplicable based on how the agreement was structured.

If you have any questions about compelling arbitration of non-signatories, please do not hesitate to contact Jon Paul Hoelscher or Aman Kahlon.

Enhanced Debriefing End Date Still Unresolved: DOJ Seeks to Overturn NIKA Technologies A few months ago, we wrote about how the U.S. Court of Federal Claims (COFC) had defined when the protest clock starts running for a stay of contract performance pending a bid protest if the Department of  Defense’s (DOD) enhanced post-award debriefing procedures are used. The case was NIKA Technologies, Inc. v. United States, and the issue involved when NIKA’s debriefing ended. The COFC ruled for NIKA, but the United States has now appealed to the U.S. Court of Appeals for the Federal Circuit. NIKA is not participating in the appeal, leaving the Department of Justice (DOJ) to go it alone. On December 9, 2020, the Federal Circuit heard an oral argument.

Background

A disappointed offeror protesting to the Government Accountability Office (GAO) can obtain a stay of contract performance pending a protest as long it files the protest by the later of “10 days after the date of the contract award,” or “the date that is 5 days after the debriefing date offered to an unsuccessful offeror for any debriefing that is requested and, when requested, is required” (31 U.S.C. § 3553).

In 2018, Congress made changes to the debriefing rules in Section 818 of the FY-2018 National Defense Authorization Act (NDAA). Section 818 created an exception to the deadline to file a protest after a required debriefing by allowing “a disappointed offeror to submit, within two business days…, additional questions related to the debriefing,” which a military agency must answer within five business days (10 U.S.C. § 2305). Thus, for DOD procurements now, the five-day post-debriefing period for filing a protest and obtaining a stay of performance runs from the date the government responds to a disappointed offeror’s questions.

In February 2020, NIKA was not selected for a U.S. Army Corps of Engineers (USACE) multiple-award IDIQ contract. NIKA requested a debriefing, which it received in writing on a Wednesday. The debriefing told NIKA that it had two business days to submit follow-up questions and that the debriefing would be considered “closed if additional questions are not received within (2) business days,” i.e., on Friday. On Saturday, NIKA told the USACE that it had no more questions.

NIKA filed a GAO bid protest on the following Tuesday, six days after receiving the written debriefing but four days after it could have submitted follow-up questions but chose not to. The USACE did not stay contract performance, stating that NIKA filed the protest outside the five-day window. NIKA took the contract stay dispute to the COFC while the GAO protest continued separately.

At the COFC, the government argued that, because NIKA submitted no follow-up questions, the debriefing closed on Wednesday when the USACE gave the written debriefing. Thus, any protest had to be filed within five days of that date, i.e., the following Monday. The COFC disagreed, holding that the debriefing date was “the last day of NIKA’s debriefing process,” the Friday NIKA could have submitted follow-up questions, not the Wednesday that NIKA received the written debriefing. The COFC stated that the statute plainly included two business days to submit additional questions, and the USACE’s own interpretation, according to its written debriefing, was that the debriefing had not closed the day the debriefing was written. The COFC enjoined the USACE from issuing any task orders pending the resolution of the GAO protest.

On June 5, 2020, the GAO denied NIKA’s protest. On June 25, 2020, DOJ filed a notice of appeal of the COFC decision on the contract stay issue. NIKA is not participating in the appeal.

What has happened so far in the appeal?

On December 9, Chief Circuit Judge Prost, Judge Lourie, and Judge Hughes heard the government’s oral argument. DOJ frames the question as one of statutory interpretation, which it contends the COFC got wrong by extending the debriefing by two days to accommodate follow-up questions that never came. DOJ argues that, because NIKA asked no follow-up debriefing questions, the DOD’s enhanced debriefing procedures, which track the amended statutory language, did not apply, so the debriefing date was not extended beyond the date NIKA received the written debriefing. Thus, to get a stay of performance, NIKA should have been required to file its GAO protest within five days of the date of the written debriefing, not within five days of the date by which it could have asked questions but did not. All three judges on the panel asked about the USACE’s statement in the written debriefing that apparently kept the debriefing open for at least two days to allow follow-up questions, with Chief Judge Prost asking whether it was not at least ambiguous. DOJ responded that the argument about the contents of the letter was raised and abandoned at the COFC and that the statute governed in the event of any confusion.

In addition, in its appellate brief, DOJ had identified a potential mootness issue because the COFC injunction is no longer in effect and the GAO protest is over but contended that because the legal issue is capable of repetition and likely to evade review, it was not moot.

What is the takeaway?

It is possible that the Federal Circuit determines that the case is moot. The Federal Circuit could also conclude that the language in the USACE’s debriefing letter, rather than the statute, was dispositive about the date of the closing of the debriefing and that any holding on the appeal is limited to the facts of this case. Absent of those scenarios, the case is likely to provide some certainty one way or the other regarding when a DOD enhanced debriefing closes if the disappointed offer does not ask any follow-up questions after a required debriefing. Of course, because DOJ argued on its own, no one posed the obvious hypothetical. If the Federal Circuit agrees with the government’s position, isn’t the way out of the problem for a prospective protester who wants more time to simply ask a question — any question — within the two-day follow-up period just to force the agency to answer it and, thus, run the clock some more?

Bradley will continue to monitor this case and provide further updates as appropriate. If you have any questions about this article, please feel free to contact Patrick Quigley or Aron Beezley.

Non-compliance with Change Order Requirements Dooms Differing Site Conditions ClaimOn November 6, 2020, the Kentucky Court of Appeals affirmed a trial court’s decision dismissing a contractor’s differing site conditions claim on a sewer replacement project. In TSI Construction, Inc. v. Louisville and Jefferson County Metropolitan Sewer District, the appellate court concluded that the contractor’s failure to comply with contractual provisions necessary to preserve its claim were fatal to its lawsuit.

The case involved a sewer replacement project that required excavation and removal of a large amount of rock. The geotechnical report provided by the owner did not warn of any unusual conditions with underlying bedrock at the site that would affect construction. The contract required the contractor to provide notice to the owner of a differing site condition within 10 days of identifying the condition necessitating a change in the work with a formal written claim to follow within 30 days. The contract required the formal written claim to provide specific information regarding the nature of the claim, the facts giving rise to the claim, the date of discovery of the claim, and detailed pricing for the claim, as well as other supporting documentation.

When it began work in 2016, the contractor discovered that the layer of bedrock beneath the site was at a shallower depth than shown in the geotechnical report and other owner-provided site information. The contractor claimed it provided notice of this issue during weekly meetings with the owner, but the contractor did not send written notice to the owner until February 2018, after the project had achieved substantial completion. The contractor did not follow up with a formal written claim, as required under the contract, until nine months later in November 2018. After the owner denied the claim, the contractor filed suit. The owner sought summary judgment arguing that the contractor’s formal written claim was untimely under the parties’ contract. The trial court agreed, and the contractor appealed.

The appellate court upheld the trial court’s decision finding it was undisputed that the contractor failed to make any formal written claim within 30 days of providing notice of such claim, as required under the contract. The court was not persuaded by the contractor’s argument that the 30-day time limit for submission of a formal written claim was unreasonable, especially where the contractor admitted knowledge of the claim as early as 2016 but did not submit a formal written claim until two years later. Per the court, the contractor’s failure to comply with the contractual requirement constituted a waiver of its claims.

Takeaway from TSI Construction

Contractual notice requirements in change order clauses can be important to preserving claims, and, in certain jurisdictions, failure to comply with the notice requirements may result in waiver of an otherwise valid claim. Often, when a change occurs, the impacts are ongoing or not easily quantifiable, so compliance with certain notice requirements may be difficult. However, such difficulties may not relieve a contractor from fulfilling the notice obligation. In such circumstances, utilizing best efforts at compliance, which may require consultation with counsel, may be beneficial.

If you have any questions regarding negotiating or complying with change order clauses or construction disputes generally, please do not hesitate to contact Bryan Thomas or Aman Kahlon.