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Cover Story:You Agreed to Arbitrate...WHERE?
Recent PA Court Case Weighs in on Arbitration
- by Jennifer M. Horn, Esq.
The Answer May Surprise You! Before signing a contract, do you review your contract for the dispute resolution clause? Dispute resolution clauses are those provisions buried deep in the contract that dictate where and how a dispute will be resolved. Unfortunately, many contractors overlook these provisions until it is too late. Parties may unknowingly forfeit their right to litigate construction disputes in court and may unwittingly bind themselves to arbitrating the dispute in another state, halfway across the country.
In Pennsylvania, the Contractor and Subcontractor Payment Act (“CASPA”) and the Commonwealth Procurement Code (“PA Procurement Code”) offered protection in the past for the unwary because they made provisions that required a party to resolve its dispute in another state or subject to the laws of another state unenforceable. Even if a contractor failed to read the fine print, Pennsylvania laws prevented the contractor from being forced to travel many states away simply to get paid. In January 2007, however, a federal court decision changed all that, as it applies to arbitration clauses.
In S&G Electric v. Normant Security Group, Inc., S&G, a Pennsylvania corporation, agreed to perform electrical work for Normant, a Delaware corporation headquartered in Alabama, on a project located in Philadelphia, Pennsylvania. The subcontract between S&G and Normant contained a typical arbitration clause which provided that “any controversy or claim between the Contractor and the Subcontractor arising out of or related to this Subcontract . . . shall be settled by arbitration.” The subcontract also provided that arbitration was at the discretion of Normant, and if Normant decided to proceed with arbitration, “it will be conducted in Montgomery, AL or at the nearest AAA Office as decided by [Normant].” As the project progressed, problems occurred and the parties inevitably asserted claims against each other. S&G filed suit in the Eastern District of Pennsylvania seeking to recover its claims. Normant moved to compel arbitration of the dispute in Montgomery, Alabama.
S&G argued that, as a Pennsylvania subcontractor working on a project in Pennsylvania, it should not be forced to travel to Montgomery, Alabama to resolve the construction dispute because 1) the Federal Arbitration Act (“FAA”) does not apply to the subcontract and 2) even if the FAA did apply to the subcontract, CASPA and the PA Procurement Act would govern this dispute.
The FAA is a federal act that mandates the enforcement of arbitration agreements where the agreement involves a transaction involving interstate commerce. The FAA ensures that private agreements to arbitrate are enforced according to their own terms. In the Normant case, the court held that the FAA applied to the S&G/Normant subcontract because that subcontract involved interstate commerce as Normant employees corresponded and engaged in telephone calls with their colleagues in Alabama regarding S&G’s work. In addition, the court found that the FAA controls over CASPA and the PA Procurement Code. The court determined that applying Pennsylvania laws would undermine the FAA’s purpose of enforcing arbitration agreements according to their own terms. Thus, the Court held S&G and Normant to the terms of their agreement and required them to arbitrate the dispute in Montgomery, Alabama.
The S&G case serves as a wake up call to all contractors and subcontractors to be vigilant of the arbitration provisions found in the contracts they execute. Careful review of these terms before you sign the contract could save you much time and anguish down the road. The foregoing steps are a fundamental part of good business practice and are relatively easy to implement. If you ever find yourself litigating a construction claim, the effort taken to follow these documentation strategies will pay dividends in the courtroom.
Labor & Employment Law:
TUNING UP YOUR EMPLOYEE HANDBOOK
ADOPTING A GOOD HANDBOOK MINIMIZES THE LIKELIHOOD OF LEGAL PROBLEMS
-- by Jonathan Landesman, Esq.
If the title of this article makes you nervous, chances are your company has an old handbook which hasn’t been revised in years. Or perhaps your company views a formal handbook as going overboard and has not adopted one. In either event, your company is taking an unnecessary risk. In the past 15 years, there has been a virtual explosion of new employment laws and employment-related litigation. Many of the new laws apply to even the smallest employers. As such, all employers should adopt a handbook to minimize the likelihood of being caught in the jaws of a nasty lawsuit, government audit, or discrimination charge.
A good employee handbook does not need to be hundreds of pages long. On the contrary, anywhere from thirty to seventy pages should get the job done for most companies. At a minimum, every handbook should cover the following basic areas:
Employment At-Will Disclaimer - Employment “at-will” means that either the employer or employee may terminate the employment relationship at anytime and for any reason (or no reason at all), as long as it is not based on an unlawful reason. Without a carefully crafted disclaimer, your handbook may be deemed an “employment contract” and you could lose the ability to change your policies, procedures, benefits, etc.
Equal Employment Opportunity and Anti-Harassment - Your handbook should prohibit all forms of discrimination and harassment (not just sexual harassment). If you have adopted a comprehensive harassment policy and discipline the harasser, if appropriate, you may be able to avoid liability altogether even if harassment has occurred.
Salary Basis Policy - Wage and hour litigation, including class action overtime cases, are the “hot” cases today. All companies should immediately adopt a salary basis policy satisfying the Department of Labor’s regulations if they haven’t already done so. A model policy is available online at: http://www.dol.gov/esa/regs/compliance/whd/fairpay/modelPolicy_PF.htm
Benefits and Leave - Many of your employees don’t understand the value of fringe benefits and leave. A handbook acts as a “commercial” for the company. Also, a good handbook answers all of the basic questions about sick and vacation pay; for example, does you company pay unused vacation time at year end and/or upon termination?
Attendance - Communicating expectations about regular attendance and procedures for calling out of work is essential.
Discipline - Ideally, your company should have in place a progressive discipline policy which includes several disciplinary steps. For minor infractions, the first step may be an oral warning, the second step a written warning, the third step suspension, and the fourth step termination. Generally, docking pay for disciplinary problems is unlawful.
If you haven’t had your handbook revised in years, or if your company doesn’t have a handbook at all, now is the time to tune-up yours.
Q&A: With The Business Practice Group
A Look at Identity Theft and the New Pension Protection Act
-- by Wayne C. Buckwalter, Esq.
What can I do to protect myself from identity theft?
A new Pennsylvania law gives consumers an important tool in the battle against identity theft. It used to be that anyone could pose as a “potential lender” and obtain a copy of your credit report from a credit reporting bureau. This report would provide an identity thief with your social security number, all of your account numbers, and your entire credit history. Beginning January 1, 2007, Pennsylvania residents can place a “freeze” on their files maintained by the national credit reporting bureaus. This freeze prevents access to the files without your permission. Under the new statute, known as the “Credit Reporting Agency Law,” consumers can freeze their credit file with a credit bureau by sending a written request to the bureau by certified mail. Each credit bureau must have a toll-free telephone number with information on where to write. Credit bureaus are also permitted, but not required, to establish secure Internet sites through which consumers may request a freeze. Freezes must be placed on a consumer’s file no later than 5 business days after the request is received. Security freezes remain in place for 7 years, or until the credit bureau receives a request from the consumer to remove the security freeze. You can get credit freeze requests at: Equifax Security Freeze, www.equifax.com; Experian, www.experian.com; and Transunion, Fraud Victim Assistance Department, www.transunion.com.
What do I need to know about the New Pension Protection Act?
The New Act provides opportunities to obtain immediate income tax savings for gifts to charities from retirement plans and tools to further defer income tax liability for withdrawals from retirement plans. Children and other non-spouse beneficiaries may now roll inherited 401(k) assets into IRA accounts. The accounts still maintain tax–deferred status, however, taxable Required Minimum Distributions may be stretched over the beneficiary’s life expectancy instead of mandatory taxable payouts of 5 years or less.
In addition, you may gift money from your IRA directly to a charitable organization if you are 701⁄2 or older. This is beneficial because the money in these accounts is eventually taxable. An additional benefit is that the IRA gift satisfies the Required Minimum Distribution rules. This is an especially effective strategy for individuals who face donation limits based on their income. Generally, you cannot donate an amount that exceeds 50 percent of your adjusted gross income. But when the money goes directly to the charity from an IRA, it does not count against that limit because it is not included in gross income.
Beginning in 2008, employers must automatically enroll employees in the 401(k) plan unless the employee affirmatively opts out. Many companies are already implementing this procedure. Upon a change of employment or at retirement, a 401(k) may be directly rolled into a Roth IRA streamlining the requirement that a 401(k) must be first rolled into a traditional IRA prior to a Roth conversion.
Question for our Business Practice Group?
Submit it to Janet L. Treiman, our editor, and you might just see it appear in this column.
You Can Count On Me...But Can You?
When Can a Contractor Count on a Sub’s Bid?
-- by Janet L. Treiman, Esq.
We all know the drill – it’s 1:55, bids are due at 2:00, and the subcontractors and vendors are calling in with their numbers. The contractor needs to use these numbers to complete its bid, but can it really rely upon them? Can the subcontractor back out if it decides it does not want to be part of the project? If so, does the contractor have any remedies if the replacement subcontractor is more expensive? Both the contractor and the subcontractor should be asking these questions when submitting their bids.
In many states, including New Jersey, a contractor may rely upon the subcontractor’s bid because of a doctrine known as promissory estoppel. Promissory estoppel provides that a bid is enforceable if it is made with the expectation that the contractor will rely upon it and the contractor does in fact rely upon it.
In Pennsylvania, however, it remains unclear whether promissory estoppel applies when a contractor relies on a subcontractor’s bid. Therefore, a contractor must take special precautions to protect its right to recover against a subcontractor that backs out of its bid. A contractor working in any other state is also well advised to take some of the following precautions.
In order to protect a contractor’s right to recovery, any of the following precautions may be taken before a contractor submits a bid to the owner: 1) secure an actual signed contract with a subcontractor conditioned upon the owner’s award of the contract; 2) attach a copy of the contractor’s standard subcontract agreement in the request for bids that is sent to potential subcontractors; 3) condition a subcontractor’s right to submit a bid on its agreement not to withdraw the bid until after the expiration of a certain fixed period following the owner’s award of the contract; or 4) sign the subcontractor’s proposal as is if it states that it is given “in accordance with the contract documents and specifications.”
Although not foolproof, these precautions will help to support a contractor’s recovery against a subcontractor based upon breach of contract. Additional care must be taken by a contractor who receives an unsolicited bid at the last moment and who has insufficient time to take any of the above precautions as there is a real risk that a Pennsylvania court may not permit the contractor to recover against a subcontractor who revokes its bid. A contractor must also beware of the impact that the above precautions will have on their ability to bid shop after they are awarded the contract.
In addition to these precautions, both contractors and subcontractors in any state can take additional steps to protect their interests. Despite the time pressures associated with submitting a bid for a project, a contractor should carefully review any bids that it receives from potential subcontractors for exclusionary language. A contractor should clarify any exclusionary language with a subcontractor before the contractor submits a bid to the owner. For example, if a bid includes language stating that it is merely a quote upon which a contractor should not rely, a contractor should request another written bid from the subcontractor without this language, or seek a written confirmation from the subcontractor that it is the subcontractor’s intention that the contractor rely on its bid. Despite the time pressures and industry custom, some courts have held that it is not reasonable for a contractor to rely on a bid with such exclusionary language.
Similarly, before submitting a bid, a subcontractor should decide if exclusionary language should be included in the bid. For example, if a subcontractor is bidding for work which includes materials whose price varies substantially with the passage of time, a subcontractor is well advised to include a time-limit for acceptance in its bid to protect itself from the risk that a drastic price increase in the materials occurs at the time its bid is accepted.
One final consideration which can affect both contractors and subcontractors is whether a bid is qualified or responsive. For example, if the project specifications call for a certain brand of material to be used, the contractor should carefully review the subcontractor’s bid to make sure that it complies with the specifications. Similarly, if a subcontractor decides to bid and substitute a similar but “equal” brand of material for that called for in the specifications, the subcontractor should be aware that it may be required to supply the material called for in the specifications, despite its bid.
Contractors should remember that they can avoid most problems in this area by taking one of the precautions mentioned above and carefully reviewing any bids that they receive before submitting a bid to the owner. Subcontractors should carefully consider these ramifications and how they can protect themselves when
submitting a bid. At the end of the day, paying attention to these issues could save some headaches and a lot of money.
What's New At The Firm?
-- by Edward T. DeLisle, Esq.
Cohen Seglias is pleased to announce the addition of two new partners. Steven M. Williams, formerly a shareholder in the Harrisburg firm, Wix, Wenger & Weidner, joins us as the resident partner in the firm’s Harrisburg office. Steve is a 1991 graduate of The Dickinson School of Law (now Penn State) and concentrates his practice in the areas of commercial and civil Litigation, real estate, landlord and tenant law, employment law, business and corporate law, construction law, and election law.
Steven D. Usdin also joined the firm as a partner in the Philadelphia office. Steve is a graduate of the Brooklyn Law School. He concentrates his practice in the areas of commercial and personal bankruptcy, general corporate and transactional matters and commercial litigation. Prior to joining Cohen, Seglias, Steve was a managing shareholder in the bankruptcy firm of Adelman, Lavine, Gold & Levin in Philadelphia. Earlier, he was an Assistant District Attorney in New York City and a Special Assistant Attorney General for New York State. He also served as a Law Clerk to the Chief Judge of the United States Bankruptcy Court for the Eastern District of Pennsylvania.
Since our last edition, the attorneys of Cohen, Seglias have spoken to a number of organizations on construction and labor related issues. In January, George Pallas and Shawn Farrell spoke at the 2007 Executive Seminar for the Utility and Transportation Contractors Association in St. John, U.S.V.I. about strategies for avoiding litigation and maximizing profit. Marc Furman was a presenter for the March Round Table at the Delaware Valley Industrial Resource Center. Also, in March, Jason Copley spoke to the Architectural Glass & Metal Association about changes in the Pennsylvania lien law and other developments in the law and Ed Seglias spoke to the Pennsylvania Utility Contractors Association about proposed amendments to the payment provisions of the Procurement Code.
Words From Our Editor:
-- by Janet L. Treiman, Esq.
Welcome to the Spring 2007 Edition of Construction in Brief. Now that Spring is here, it is a good time to clean out those business closets and review some of your practices that may inadvertently be costing you time and money. In an effort to help with your Spring cleaning, this edition includes such topics as tuning up your employee handbook, reviewing the arbitration provisions in your contracts, and cleaning up your bidding practices.
As always, we welcome you to submit suggestions for future articles that may be of interest to you, either by regular mail or e-mail at: JTreiman@cohenseglias.com
Remember, if you have a specific legal concern, we recommend that you consult with counsel so that you may receive the best advice. See you next issue!