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A recent California case, Ahdout v. Hekmatjah (2013) 213 Cal.App.4th 21, held that an arbitrator’s refusal to apply California’s disgorgement remedy against an unlicensed contractor was subject to judicial review even if the underlying agreement was not entirely void.

Two adjacent landowners formed a limited liability company to develop condominiums on the combined property. The LLC’s operating agreement provided that the LLC would hire a contractor owned by the managing member to construct the project. The contractor was not to receive any direct payment for its work. Instead, the agreement provided that the managing member would receive a greater credit to his capital account based on the construction price, and a correspondingly greater share of the profits.

Unhappy with delays and cost overruns, the non-managing member initiated arbitration proceedings. The non-managing member asserted that the managing member’s contractor was not properly licensed, and thus under California Business and Professions Code section 7031 the non-managing member was entitled to (a) equalization of the profit-sharing mechanism, and (b) a 50% share of the construction cost, all of which should be disgorged to the LLC.

The arbitratror denied disgorgement, on the basis that neither the managing member nor the contractor acted as a general contractor.

The non-managing member sought to vacate the arbitrator’s award, but the trial court determined it did not have the power to review the arbitrator’s decision.

On appeal, the court reviewed Loving & Evans v. Blick (1949) 33 Cal.2d 603, which held that a construction contract with an unlicensed contractor was void, and an arbitrator’s award in favor of the unlicensed contractor under that void agreement was unenforceable. The court determined that Loving was not directly applicable, because the provision in the LLC’s operating agreement mandating hire of the unlicensed contractor was only a portion of the agreement, and did not void the entire agreement. Under Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, when only part of an agreement containing an arbitration provision is illegal (and the illegal part is not the arbitration provision), disputes under the agreement remain arbitrable.

However, the court found refuge for the non-managing member in a portion of the Moncharsh decision identifying a public policy exception to its broad rule in favor of arbitration. The court found that California’s strong public policy against unlicensed contractors was sufficient to merit “judicial review of arbitration awards that allegedly fail to enforce section 7031.” Id. at 39. The court remanded the case to the trial court to conduct a de novo review of the evidence to determine whether disgorgement was required.

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Since we last checked in on California’s planned high speed rail system nearly a year ago, it has continued to take baby steps toward construction.

Mike Rosenberg of the San Jose Mercury News notes here that on June 6 the California High Speed Rail Authority’s (CHSRA) board authorized its CEO to negotiate final terms of a contract for the first phase of construction with a Tutor Perini-led group after its $985 million bid beat its nearest competitor by about $100 million and the initial estimate by over $200 million.

The project also avoided a potential roadblock with the June 13, 2013 decision of the federal Surface Transportation Board (STB) to grant the CHSRA an exemption allowing it to proceed with construction without subjecting itself to the STB’s approval requirements in addition to the hurdles already cleared. The STB’s decision, effective June 28 according to its text, is available here.

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Eager to get its share of the billions of dollars looking for infrastructure investments in the United States, Florida is set to be the next state to enact new public-private partnership legislation. Florida House bill 85 authorizes expanded opportunities for public-private partnerships to develop projects that have traditionally been public-sector only.

After clearing the Florida House by a wide margin, HB 85 received unanimous approval from the Florida Senate. This leaves the matter to Governor Scott, who has already voiced his support for the measure. Unless Scott vetoes the bill, it will become effective on July 1, 2013.

HB 85 promotes the private construction, financing, and/or operation of green or brown field projects that satisfy traditionally public sector obligations. The bill establishes procedures for those developments by the state and authorizes counties to use public-private partnerships to develop county assets. This latter aspect is a force-multiplier for the State, by vastly expanding the number and nature of viable projects that can be undertaken.

Those familiar with Florida’s key infrastructure needs believe that HB 85 could be a boost for those interested in the further development of the I-4 corridor (linking Tampa, Orlando, and Daytona Beach) and even offer a break-through in the discussions about a the renovation to Sun Life Stadium.

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There are quite a few major development projects taking place in the Bay Area. Here are some highlights that are catching the attention of both the Bay Area development community and the public at large:

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  • Demolition of “The Coop,” a 113-year-old building on Michigan State University’s campus, was delayed after a fire broke out on the building’s roof this week.

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Last month New York’s Supreme Court, Appellate Division 1st Department affirmed the Supreme Court, New York County’s decision granting partial summary judgment in favor of an insured freezer manufacturer, I.J White Corp., which sought defense and indemnity under a CGL policy for claims against it brought by Hill Country Bakery for breach of contract, breach of warranties, and fraudulent inducement. See I.J. White v. Columbia Casualty Co., 2013 N.Y. Slip Op 02500 (NY A.D., 1st Dept., April 16, 2013). The court held that Hill Country’s underlying complaint against I.J. White seeking damages because of a defect in its freezer system alleged both an “occurrence “and “property damage” within the meaning of the policy, triggering the insurer’s duty to defend.

Hill Country, a maker and distributor of baked goods, bought a spiral freezer system from I.J. White which was to freeze freshly baked goods within 150 minutes to a temperature necessary for proper handling and packaging. Once installed, however, the freezer failed to freeze the cakes as required, which became evident when workers cut into the cakes as part of the packaging process.

Hill Country sued the freezer manufacture for damages, including for the eight months its $21 million facility (specifically constructed to house the freezer equipment) was out of use and for the additional $1.9 million it spent fixing the defective equipment.
I.J. White tendered the claim to its CGL insurer, Columbia Casualty Co., which took the position that the alleged defects in the freezer did not qualify as an “occurrence” and that there was no “property damage” within the meaning of the policy and denied coverage.

The Supreme Court and the 1st Department on appeal disagreed. As the appellate court explained, while CGL policies like the one at issue do not insure against faulty workmanship in the work product itself, they do insure against property damage caused by faulty workmanship to something other than the work product. And here, that something other was Hill Country’s cakes. Distinguishing George A. Fuller v. United States Fid. & Guar. Co., 200 A.D. 255 (NY AD 1st Dept 1994), in which the court said the insured contractor sought coverage for damage to its own work, the court said here the insured seeks coverage for damage to the cakes, not to its freezer. This damage, according to the court, “is precisely the kind that [the insurer’s] CGL policy contemplated, and therefore, the complaint properly alleges an ‘occurrence’ within the meaning of the policy.” Additionally, the damages for loss of use of the facility specifically built to house the freeze fall squarely within the policy’s definition of property damage, which includes “[l]oss of use of tangible property that is not physically injured.” The court rejected the insurer’s argument that it was the act of cutting into the unfrozen cakes that ruined the product rather than the defective freezer itself as a distinction without a difference: “the fact remains that Hill Country’s product was rendered unusable as a direct result of the alleged defect in plaintiff’s freezer.”

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THE QUESTION: (A question pondered as far back as October 1981.) What do you do when the only way for 16,000 cars to get from point A to point B each weekday is to go through congested streets of downtown Miami?

THE ANSWER: The Port of Miami Tunnel (POMT) – a $1 billion tunnel connecting I-395 to the Port of Miami.

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THE DILEMMA: How exactly does one build a tunnel (twin tunnels actually) approximately 4,2000 feet long, almost 40 feet in diameter, and 120 feet below the surface of the water?

Enter “Harriet” – the $45 million German-built Tunnel Boring Machine (TBM) that has spent the past 18 months digging through the earth near Miami, leaving twin tunnels in her wake. The massive TBM that would build this underground network was aptly named, by the Miami-Dade County Girl Scouts, after Harriet Tubman.

Harriet was built and tested by Herrenknecht in Germany, then disassembled and packed for her transatlantic voyage to the U.S. in the Summer of 2011. Harriet is the largest diameter soft ground tunnel boring machine in the United States. In an assembled state, she is 428.5 feet long and her cutter head has an outside diameter of 42.3 feet. That’s longer than a football field and as high as a 4 story building.

The process for excavating and building the twin tunnels is not an easy one – even for Harriet. The “Tunneling Process” is described as follows:

The cutter head rotates as a cutting wheel boring out the underground area, while the trailing gear contains the electrical, mechanical, guidance systems and additional support equipment. Excavated material is carried back through the trailing gear on an enclosed conveyor belt and deposited outside the tunnel entrance, or portal. It is moved off‐site to be used as fill material and is disposed in a manner consistent with applicable environmental rules and regulations. As the TBM moves forward it erects precast concrete liners (known as segments) that become the finished wall of the tunnel. Once the liners are in place, grout is pumped into the space between it and the excavated area to fill any voids or gaps.

And about those “segments” that become the finished wall of the tunnel – it takes 8 segments to construct each ring and Harriet can construct 3-6 rings per day. According to the POMT website, “Harriet launched from her home in the Watson Island pit on November 11, 2011, boring the first tunnel towards Dodge Island. Harriet emerged on Dodge Island on July 31, 2012 where she was disassembled, turned and reassembled.” EarthCam captured Harriet’s breakthrough on Dodge Island on video.

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Yesterday, May 6, 2013, Harriet reached the end of her journey. After working 24 hours a day (with 4 hours being for daily maintenance) with up to 30 people inside and on the machine’s surface – Harriet has finally reached the light at the end of the tunnel. To quote Chris Hodgkins, V.P. of Miami Access Tunnel: “She’s dirty, she’s worn, she’s missing a lot of her teeth. She wants to breathe some fresh air. She served us well, and she’s ready to call it a day.”

The Port of Miami Tunnel is expected to open to traffic in May 2014. For more information, visit the Port of Miami Tunnel website.

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A few weeks ago I posted about an Eighth Circuit case that once again illustrated how, despite the drafter’s precision carrying the day most of the time, sometimes a litigator’s creativity can trump it. Well, it’s happened again. And again the issue is whether a dispute between and insured and a carrier is subject to arbitration. And again, the carrier wanted to arbitrate but the court kept the case. This time it’s the Second District California Court of Appeal, in Diamond Blue Enterprises v. Gemini Insurance Company. Before I say more, let me caution all the lawyers preparing to cite the case that it’s unpublished.

(I chuckle to myself as I write that given the difference between “published” and “unpublished”. Sure, the case won’t end up in a bound reporter on a library shelf collecting dust, but other than that and the fact that the judges who wrote it not wanting it to be precedent, what’s the difference between a published and unpublished case?) But enough of my editorializing; on to the case.

The insureds were sued by a third party and tendered the case to the carrier, who initially declined to defend. The insureds then incurred nearly $400,000 in defense costs but the carrier then picked up the defense. The insureds sued the carrier for reimbursement of the defense costs and the carrier moved to compel arbitration based on this clause in the policy: “If we and the insured do not agree whether coverage is provided under this Coverage Part for a claim made against the insured, then either party may make a written demand for arbitration.”

The word “coverage” was not defined in the policy, so the Court of Appeal looked at the duty to defend and the duty to indemnify and explained: “The duty to defend is triggered if a third party sues the insured seeking damages for a covered risk, but is not triggered if the lawsuit seeks damages for a risk ‘to which this insurance does not apply.’ Under the terms of the policy, coverage defines the risks and the duty to defend is triggered by the scope of coverage. Thus, the duty to defend and coverage are related by not synonymous.” The difference between the duty to defend and the duty to indemnify means that “there may ultimately be no coverage for a claim even though the insurer has an obligation to defend the claim.”

As a result, “[t]he arbitration clause is ambiguous as to whether it was meant to apply to a dispute over the duty to defend, and ambiguities in an arbitration agreement, like any other contract, are resolved against the party that drafted the agreement.”

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  • New York is back and better than ever. Construction crews hoist a 408-foot spire atop One World Trade Center that once fully installed will stand a symbolic 1,776 feet high.