How Government Contractors Can Escape Lawsuits – Derivative Sovereign Immunity

The United States Government generally enjoys sovereign immunity from lawsuits unless that immunity is waived. Government contractors that perform “discretionary functions” under government contracts should be aware that they could be immune from suit under the doctrine of derivative sovereign immunity.

This type of immunity generally protects government contractors performing delegated discretionary governmental acts when they are sued for taking those protected acts. To qualify for derivative sovereign immunity, a government contractor must show that its actions involved an element of judgment or choice, and that its decisions were based on considerations of public policy. See Berkovitz v. United States, 486 U.S. 531, 536-37 (1998).

In an ongoing case before the Norfolk U.S. District Court, a group of government contractors are using the doctrine of derivative sovereign immunity to try to reduce their legal liability. The contractors are defendants in a military family’s lawsuit for mold contamination in their leased military home. The defendants are comprised of property management companies, the family’s landlord, and a construction company that performed demolition and repairs in the family’s home. See Federico, et al. v. Lincoln Military Housing LLC, et al., No. 2:12cv80 (E.D.Va. Norfolk, Aug. 31, 2015).

In Federico, the defendants developed a mold remediation plan with the Navy pursuant to a public private venture. The defendants argued in a recent Motion for Judgment that their acts taken in accordance with the plan are discretionary functions, and therefore they are protected from the military family’s suit based on derivative sovereign immunity.

The District Court agreed that acts taken in accordance with the plan are likely protected by derivative sovereign immunity, but the family alleges that the companies failed to follow the plan entirely, not that the plan was defective. As a result, the District Court denied the defendants Motion for Judgment on derivative sovereign immunity, but the litigation is ongoing, and the sovereign immunity will “add a gloss on each claim” according to the District Court. No. 2:12cv80, Dkt. No. 515 at 24.

Government contractors should always remain mindful of the interplay between their role as private contractors and companies performing delegated work for the United States Government. Distinctions in a contractor’s scope of work could mean the difference between extensive legal liability and derivative sovereign immunity protection.

Katie Lipp is a Senior Associate Attorney and head of the construction practice at Berenzweig Leonard LLP. She can be reached at klipp@berenzweiglaw.com.

Construction Arbitrators Get New Powers

On July 1, 2015, the American Arbitration Association (AAA) rolled out new rules for the construction industry. Construction arbitrators can now sanction parties and grant emergency relief, among other power expansions.

Sanctions

A construction arbitrator can order sanctions where a party fails to comply with AAA rules or an arbitrator’s order. The arbitrator can also order non-monetary sanctions, such as making an adverse determination against a party or limiting a party’s participation in the arbitration. A party must have an opportunity to respond before a sanction determination, through the submission of evidence and legal argument before a sanction award is made. The sanction award must be explained in writing, and default awards cannot be used under this sanction power.

Emergency Relief

A party can apply for emergency relief before an AAA panel is formed. One day after submitting an emergency relief application an emergency arbitrator is appointed. Not later than two days after this appointment, the arbitrator sets a schedule for consideration of the emergency relief application. If the emergency arbitrator finds that the applicant shows that “immediate and irreparable loss or damage” will occur absent emergency relief, the arbitrator can enter an order granting emergency relief.

Dispositive Motions

Arbitrators can consider written motions disposing of all or part of a claim, or narrowing case issues. This new explicit allowance of dispositive motions is akin to motions to dismiss or motions for summary judgment in traditional litigation.

Mediation

The revised rules provide for a mediation step for cases with claims over $100,000. In these cases, the dispute is automatically tracked for mediation. However, any party can opt-out of the mediation, unless the parties’ contract has a mandatory mediation provision. The mediation takes place concurrently with the arbitration and cannot be used to delay the underlying arbitration proceedings.

Conclusion

Other rule changes include the addition of time frames and filing requirements to the consolidation and joinder process, new preliminary hearing rules, and greater oversight and regulation over pre-hearing document exchange and production. These new expansive powers are welcome additions, because they will allow construction companies involved in arbitration swifter resolutions and more opportunities for interim monetary relief.

Katie Lipp is a Senior Associate Attorney and head of the construction practice at Berenzweig Leonard LLP. She can be reached at klipp@berenzweiglaw.com.  

Pick your Litigants Wisely When Filing Mechanic’s Lien Lawsuits

The Supreme Court of Virginia recently held that a subcontractor, Synchronized Construction Services, Inc. (“Synchronized”), could proceed with its mechanic’s lien lawsuit against the project owner and bank, despite the absence of the general contractor on the hotel construction project, finding that the general contractor was not a necessary party. In Synchronized Construction Services, Inc. v. Prav Lodging, LLC, et al., 764 S.E.2d 61 (Va. 2014), the subcontractor sought project amounts due with a breach of contract count against the general contractor (“GC”), and a mechanic’s lien count against the project owner and bank.

Synchronized failed to serve the GC in the litigation, and an appealable issue arose because the GC was not involved in the litigation of the mechanic’s lien claim. The circuit court held that because the GC was a necessary party, Synchronized’s mechanic’s lien claim could not proceed.

On appeal, the Supreme Court of Virginia focused its necessary party inquiry on the subject matter or the so-called “res” of the mechanic’s lien action.  Notably, the GC failed to perfect a mechanic’s lien on the project real estate. During the litigation, the owner and bank chose to go through a “bonding-off process” where they posted a bond, which had a practical effect of substituting the bond for the underlying project real estate – meaning that the res became the bond itself and not the real estate. The Court found that because the GC was not involved with its own lien and therefore had no rights to the underlying project real estate, and its rights were not tied up in any way with the posted bond, it had no specifically defined interest in the subject matter of the lawsuit, and was not a necessary party.

In light of this case, subs and other companies should ensure that they choose their parties wisely before proceeding with construction litigation. Failing to do so could derail an attempt to get a fair shake in court. The legal landscape is complicated and one slip can endanger a company’s entire payment claim.

Katie Lipp is an attorney with the Washington, DC regional business law firm Berenzweig Leonard, LLP, and the head of its construction law team. Katie can be reached at klipp@berenzweiglaw.com.