November 2006 Issue
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A Brief Primer on Acceleration Claims
Selling Company Stock under Securities Law Exemptions
Recent Case Notes
A Brief Primer on Acceleration Claims
By Daniel M. Drewry
Dan concentrates his practice in Construction Law and Litigation, Public Contract Law, Surety Law, and Commercial and Business Litigation.
When faced with an excusable and compensable delay claim, a contractor is entitled to recover not only the increased costs incurred as a result of that delay, but also is entitled to an extension of time in which to perform its work under the contract. Oftentimes, however, an owner may not fully recognize the delay due to a lack of expertise or experience in project scheduling or may dispute whether the delay was in fact excusable. The result is the contractor’s request for an extension of time is denied and the contractor is then forced to accelerate its performance of the work in order to meet the original, but now delayed, contract completion date. This article provides a brief overview of the elements of and circumstances under which constructive acceleration claims can arise, in the hope that owners and contractors alike will be able to recognize and proactively resolve an acceleration claim.
Elements of an Acceleration Claim
A constructive acceleration occurs when an owner denies a legitimate claim to a time extension to a contractor and, instead, forces the contractor to incur additional expenses by requiring it to bring the project in by the original completion date. All acceleration claims share the following elements: (a) the occurrence of an excusable delay; (b) timely notice of the delay to the owner and request for a time extension; (c) the time extension is denied and the owner requires the contractor to complete the project by the original project completion date; (d) notice from the contractor to the owner that the directive is considered to be a constructive change; and (e) the contractor incurs additional costs in order to meet the now accelerated schedule. The contractor bears the burden of proof to establish these elements.
Potential Pitfalls
First and foremost, in order for the acceleration claim to succeed, the contractor must first establish that the delay allegedly giving rise to the owner’s acceleration was in fact excusable. See Fraser Construction v. United States, 384 F.3d 1354 (C.A.Fed. 2004). In Fraser Construction v. United States, the contractor brought an acceleration claim against the government claiming that it had been constructively accelerated by the government’s refusal to grant time extensions under the “unforeseeable causes” delay provisions of the contract when the contractor’s work had been delayed by flooding conditions. Instead, the government insisted on compliance with the original project completion date. The Court held that the government could not have constructively accelerated the contractor. First, the contract contained a valid no damages for delay clause, which stated that in the event of delays, the contractor’s sole relief was a time extension. Second, the government had previously granted the contractor a 29-day extension to the schedule. Consequently, the contractor was unable to prove the elements of a valid acceleration claim.
Additionally, the situation often arises in which contractors notify the owner of the occurrence of a delay but neglect to formally request a time extension under the contract. The failure to comply with the time extension provisions of the contract can provide a defense to an acceleration claim. See Stelko Electric, Inc. v. Taylor Community School Building Corp., 826 N.E.2d 152 (Ind.App. 2005); Murdock & Sons Construction, Inc. v. Goheen General Construction Inc., 2002 WL 243576 (S.D. Ind. 2002).
In Stelko Electric, Inc. v. Taylor Community School Building Corp., a prime contractor brought a number of claims, including an acceleration claim, against the project owner, architect and construction manager for cost overruns associated with the early completion of its work four months before the contractual completion date. The prime contractor claimed it incurred significant cost overruns when forced to accelerate the completion date by four months due to unforeseen obstacles, including interference from other primes and a tornado. However, the prime contractor never sought or requested an extension of time. The court determined that the contractor’s acceleration claim was barred by the “no damages for delay” clause contained in the parties’ contract, which stated that in the event of delays, the only remedy available was an extension of time and no contractor would have a claim against the owner for damages or an increase in the contract price resulting from delays or interruptions.
The Murdock & Sons Construction, Inc. v. Goheen General Construction Inc. case involved a subcontractor’s acceleration claim against its general contractor. The prime contract stated that if a request for an extension of time was not made to the architect in writing within twenty days of the commencement of the delay, then that time request was waived. The subcontractor was aware of the delay and causes for that delay many months prior to making the extension request. Consequently, the court enforced the plain terms of the prime contract and precluded the subcontractor’s acceleration claim.
Types of Recoverable Damages
If the contractor establishes a valid acceleration claim, it is entitled to recover the costs incurred in meeting the owner’s accelerated schedule. These costs may include increased mobilization and demobilization costs due to the need to commit additional resources in terms of labor, equipment and supervision at the project than originally contemplated by the original schedule; specifically, direct labor costs include such items as increased wage costs for additional workers, overtime pay and rental costs for additional equipment.
Further, the contractor may incur additional costs for inefficiencies in labor and material costs, due to inherent difficulties in purchasing both on a “hurry” basis. These inefficiencies may include trade stacking, congestion or fatigue from extensive overtime work. Labor inefficiencies are a hidden but very expensive cost of an acceleration.
All of these types of damages may be recoverable in an acceleration claim. Nevertheless, while labor inefficiencies are a very real part of an acceleration claim, they are extremely difficult to quantify. One of the better ways measure the loss of efficiency is to compare the labor efficiency realized during a period of the job in which the contractor’s performance was not impacted by the delay, versus the contractor’s performance during the impacted period. This type of comparison can provide convincing proof of what the contractor’s efficiency in performance would have been absent the delay. It also requires accurate and complete documentation of labor and material costs and an updated and accurate project schedule.
Conclusion
Construction projects are becoming increasingly complex, involving and requiring more interaction amongst trades and with the owner. With this growing complexity and interaction come the increased likelihood of delays and a resulting acceleration claim. By understanding the elements and recoverable damages of an acceleration claim, as well as the potential defenses to such a claim, both owners and contractors can better recognize, and move to quickly resolve, these disputes to avoid protracted and expensive claims procedures.
If you have any questions regarding this article or related matters,
please contact Daniel M. Drewry at (317)580-4848 or ddrewry@drewrysimmons.com.
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Selling Company Stock under Securities Law Exemptions
By Sean M. Mayberry
Sean concentrates his practice in Business and Securities Law
There comes a point in the life cycle of almost every business, no matter what size the business is and no matter what products or services the business sells, when the business must raise funds. One way to obtain necessary capital is to sell a portion of the business’s equity to investors. This article summarizes a few of the basic elements of federal and Indiana securities law that business owners should be aware of before they consider an equity offering.
The Registration Requirement
An ownership interest in a business that is purchased for investment purposes, whether it is the stock of a corporation or the membership units of a limited liability company, will be considered a “security” under both federal and Indiana law. Classifying these equity interests as a security is significant because the federal Securities Act of 1933 and Indiana law both prohibit, as a basic principal, the offer or sale of unregistered securities. Unfortunately, while it is designed to protect investors, the registration process for securities under both federal and Indiana law can be a costly, time-consuming process requiring the company to provide large amounts of information to regulatory authorities. Therefore, businesses may take some solace from the fact that there are numerous exemptions from the registration requirements provided under both federal and Indiana law and that the majority of equity sales by small businesses will fall under one of these exemptions if structured correctly. The decision to attempt to sell securities under a registration exemption should be thoughtfully considered and executed because the failure to qualify for an exemption can lead to legal penalties and can allow investors to rescind their purchases and demand the return of their investment funds from the company.
Exemptions from Registration
Due to the large number of registration exemptions available and due to the technical complexity of these exemptions, this article can only provide a brief overview of several points that may help a company to qualify for a registration exemption under both Indiana and federal law. It should be noted that in most cases a company issuing stock will have to qualify for an exemption from federal registration requirements and will also have to qualify for a separate exemption under Indiana law.
By placing the following limitations on its equity offering, a company can increase its chances of qualifying for a registration exemption and may potentially avoid certain requirements to provide large amounts of detailed information to both regulatory officials and investors. First, the total amount received for the securities sold should be less than $500,000; second, there can be no more than twenty investors who purchase the securities; third, each investor should be a resident of Indiana or company based in Indiana; fourth, each investor must be provided with all of the information about the company and the securities being sold that a reasonable investor would want to know prior to making an investment decision; fifth, the sale of the securities must not be marketed through broad advertising such as a general mailing or a seminar that is open to everyone; and sixth, no securities sold in the offering may be re-sold by the investors unless those securities are either registered for sale or they are held by the investors for at least one year and in some cases two years.
The above limitations may be too restrictive for companies that require a significant amount of capital from their equity offering or that need to make the offering available to a larger number of investors. In such circumstances, a company can increase the variety of registration exemptions that are available to it by targeting its offer and sales to “accredited investors,” such as banks or financially sophisticated individuals who have a high net worth (over $1 million) or high annual income (over $200,000 in each of the prior two years). A company may also increase the variety of available exemptions by drafting and providing a private placement memorandum to potential investors and applicable regulatory authorities. Private placement memorandums contain detailed financial information about a company, detailed information about the company’s business and information disclosing the potential risks that an investor may face if he or she purchases equity in the company.
America’s system of securities laws is extremely complex and a company is always best served by seeking competent legal counsel prior to making any offering or sale of its securities to investors. However, by paying close attention to how it will market its securities, to whom it will sell its securities and how many securities it will sell, a company will already be starting down the right path.
If you have any questions regarding this article or related matters, please contact Sean M. Mayberry at (317)580-4848 or smayberry@drewrysimmons.com.
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Recent Case Notes
By Robert J. Orelup and Nathan A. Leach
Construction Law
R.T.B.H., Inc. v. Simon Property Group,
849 N.E.2d 764 (Ind. Ct. App. 2006)
(June 27, 2006)
The Indiana Court of Appeals recently reaffirmed that under Indiana law an owner of property must actively consent to improvements on its property before a lien may attach to the real estate and that an owner’s lease to an entity which calls for improvements on the owner’s property does not meet the requisite level of active consent. In so holding, the court placed significant reliance on the fact that the property owner did not receive a direct benefit from the lessee’s improvements and the property owner made no payments for any construction to either the general contractor or the subcontractor.
Thomas v. Lewis Engineering, Inc.,
848 N.E.2d 758 (Ind. Ct. App. 2006)
(June 7, 2006)
The Indiana Court of Appeals held that an engineering professional that performed a retracement survey did not owe a duty to the adjacent landowner that it had not contracted with unless the professional had actual knowledge that the third party would rely on the professional’s services. To hold otherwise would open the floodgates of litigation and unjustifiably increase the cost of professional services for all consumers.
Employment Law
Burlington Northern & Santa Fe
Railroad Co. v. White,
126 S.Ct. 2405 (U.S. 2006)
(June 22, 2006)
The U.S. Supreme Court expanded the scope of potential retaliation claims that may be brought by employees. The Court held that employees may state a claim for retaliation if they can prove that they suffered “materially adverse” harm, which means that their employer’s alleged retaliatory act or practice must be conduct that could dissuade a reasonable worker from making or supporting a charge of discrimination. The Burlington Northern decision also found that Title VII’s anti-retaliation provision is not limited to actions or harms that are “related to employment or occur at the workplace.”
If you have any questions regarding these cases or related matters, please contact Robert J. Orelup (rorelup@drewrysimmons.com) or Nathan A. Leach (nleach@drewrysimmons.com) at (317) 580-4848 .