July 28, 2011
By Dean B. Thomson
The effects of Minnesota’s government shutdown have been felt throughout the state, most notably on members of the construction and design industry. The forced work suspension has affected both pending projects and future ones. Because of delays and inefficiencies caused by the shutdown, contractors have suffered, and continue to suffer, increased costs for such things as home and field office overhead, additional mobilization, labor, and materials.
Contractors are now scrambling—or should be scrambling—to submit claims for additional compensation and time extensions because of the shutdown. The claims process includes some traps for the unwary. This briefing papers calls attention to contractual provisions—and a strange new law—that affect claims arising out of the shutdown.
The fight for construction funding during the shutdown
Before the shutdown began, the Attorney General’s Office filed a petition requesting a court order that the Executive Branch identify and fund the “core functions” of Minnesota’s state government. The Minnesota Associated General Contractors, joined by a consortium of construction and design industry groups—the Minnesota chapters of the AIA, ASA, ACEC, MCA, SEIA, the Midwest Chapter of the NAMC, and the AWC (together, the “Construction & Design Consortium)–intervened in the Attorney General’s petition.1 Dean Thomson and Ted Roberts, shareholders at the Minneapolis law firm, Fabyanske, Westra, Hart & Thomson, represented the MnAGC in their motion to intervene.
Judge Gearin ordered the funding of core functions shortly before the shutdown began. Thomson and Roberts persuaded the Court to grant the Consortium a hearing on why the Court should clarify or modify its order in order to better consider the shutdown’s specific impact on the State’s construction and design projects.
The court heard oral arguments on the Consortium’s request on July 13, 2011. Judge Gearin did not make a decision at the hearing. In fact, the Court never ruled on the merits of the Consortium’s arguments after the announcement of a budget deal made a court decision unnecessary.
Even though the budget deal effectively ended the case before Judge Gearin, we expect more lawsuits arising from the after-effects of the shutdown. Some of those lawsuits will be triggered by certain contract provisions; others may arise out of a new law enacted as part of the budget deal.
Most contracts place strict time limits on claims for additional compensation
Most, if not all, state construction projects were “suspended” during the shutdown. The Minnesota Department of Transportation (MnDOT), for example, invoked its right to suspend the work under § 1501.2 of MnDOT’s Specifications. Presumably, MnDOT based its suspension on “reasons deemed to be in the public interest.” One wonders, however, if a shutdown caused by an intra-governmental dispute could ever be “in the public interest.” Contractors looking to claim additional damages not usually allowed by contract—for example, lost profits—may consider challenging the legal basis for the contract suspension.
Assuming a valid suspension, most government contracts permit contractors little time in which to bring claims for additional money or extra time because of a changed condition or other circumstance. For projects governed by MnDOT’s 2005 Specifications, MnDOT may rely on §1402.2 as a basis for denying any shutdown claims.
Contractors should take careful note of two provisions in § 1402.2. First, the section requires the execution of a written “Supplemental Agreement … before performance of the work for which a Changed Condition is claimed.” This includes any suspensions of work, though it is difficult to predict whether or how MnDOT will apply this provision.
Second, § 1402.2B requires a contractor a written claim for adjustment in the contract price and time to the Engineer within 7 calendar days of receiving notice to resume work. The request must include the contractor’s “reasons and support” for the requested adjustment.
Contractors should make every effort to comply with any contractual notice or claim requirements, including any time requirements, or they risk having their claims denied. For example, § 1402.2B also states that MnDOT will not allow any adjustments for contractors who fail to comply with the section’s time requirements.
Importantly, MnDOT has provided some guidance on how it intends to apply the timing requirements in its Specifications to shutdown claims. According to a July 21, 2011 memo from State Aid Division Director Julie Skallman, MnDOT is applying the 7-day requirement under § 1402.2B to require contractors “submit a written request noting the items for which he plans to submit a claim for increased costs.” Skallman’s memo goes on to state that MnDOT is allowing the contractor 60 days to document its claims: “[Section] 1517 then allows them 60 days to provide the detailed cost data for your consideration.”
Those who miss their contract’s deadline, however, should still submit their claims in writing—many courts refuse to enforce similar notice provisions and timing requirements if the late notice did not result in any harm to the government.
The State passes a new law to retroactively immunize itself from liability for contractor shutdown claims
Claims for delays and changed conditions are nothing new. New and unprecedented laws, on the other hand, present challenges to even the most experienced among us. Contractors who document and timely submit their shutdown claims may still run into a wall created by a new law that appears to withhold any funding for shutdown claims. The statute provides in pertinent part:
PAYMENT FOR 2011 GOVERNMENT SHUTDOWN CAUSES OF ACTION
No appropriation under this or any other law, regardless of when enacted, may be used to pay or settle judgments for damages by contractors or third parties arising out of, or related to, the government shutdown of July 2011.
This language is extremely troubling as it appears to outlaw the payment of any claims related to the shutdown. The language is also unclear and thus subject to a variety of interpretations. MnDOT, for example, appears to interpret the law to permit out-of-court settlements. If a dispute goes to court and a judgment results, however, MnDOT claims that state money is unavailable to satisfy this judgment.
This interpretation is evident in Julie Skallman’s July 21, 2011 memo to all County Engineers, City Engineers, and Federal Aid Holders:
[The law] says that the budget appropriations cannot be used to pay judgments. This means that any claims that are settled through the courts must be paid by local dollars. Any claims that are settled through the normal construction processes up to and including mediation may be paid with State aid funds.
The implied threat is obvious: contractors had better settle (discount) their claims “through the normal construction processes,” or they risk not being paid at all if they take their dispute to court.
The law also contains an exception that is both important and confusing:
This limitation [on payments for contractor shutdown claims] does not apply if the contract expressly provides for the payment by the state or an agency of the state for measures or activities undertaken by the contractor or third party arising from or caused by the government shutdown.
This “exception” is couched in such murky language that it may end up creating more problems than it solves. The problem for contractors is that a State agency or court could interpret this exception as applying only to those contracts that “expressly” address payment to the contractor during a government shutdown. If that interpretation is adopted, almost no contracts entered into before the shutdown would fall under the exception.
MnDOT has since stated its belief that “there is nothing in [the appropriations law] that prevents MnDOT from honoring all provisions of its construction contracts.” This statement, however, falls well short of a firm commitment to fund and pay for shutdown claims. Moreover, MnDOT’s interpretation appears to be at odds with others, including that of the Research Department of the Minnesota House of Representatives, who summarized the law as providing “that no appropriation may be used to pay or settle claims for damages by contractors or other third parties related to the July 2011 government shutdown.”
This gives rise to the question of what contractors should do if a government owner invokes the new law to deny a claim (or to threaten a contractor with nonpayment).
Unfortunately, this law (and any future laws inspired by it) may continue to plague contractors until challenged in court. We believe a law that retroactively prohibits appropriations to pay for damages that have already occurred is unconstitutional on at least several grounds. First, the law deprives contractors of their property rights—their claims—without due process. Second, the law may violate the equal protection amendment because it irrationally targets contractors as the only group of people who may not recover shutdown damages. Finally, the law likely violates the constitutional prohibition against the impairment of contracts (in other words, the State cannot pass laws that retroactively alter contractors’ rights under pre-existing contracts).
There will certainly be more news about shutdown claims along with the legislature’s attempt to outlaw the payment of any claims and we will certainly keep you updated on what we learn. If you have any comments or questions—or any stories to share—please contact Dean Thomson or Ted Roberts at (612) 359-7600 or by email email@example.com and firstname.lastname@example.org.
 This consortium consisted of the Minnesota chapters of the following national organizations: American Institute of Architects; Association of Women Contractors; American Subcontractors Association; American Council of Engineering Companies, Mechanical Contractors Association; the Solar Energy Industries Association; and the Midwest Chapter of the National Association of Minority Contractors.
This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T