The Deutsche Bank Building Demolition Dispute

The 9/11 terrorist attacks destroyed not only the World Trade Center but the adjacent 41-story Deutsche Bank building, slicing a 15-story gash in its side, shown at right,  making it uninhabitable due to resulting dust and release of asbestos from within its walls. Now it’s down to 12 stories after a 5-year decontamination and demolition project supervised by a stage agency charged with rebuilding the area, the Lower Manhattan Development Corporation, and managed by the global construction management company, Bovis Lend Lease.  But ongoing disputes between these parties about their bargain and its benefits threatens continued delay.

The latest round of fighting appears in an $80 million lawsuit Bovis filed last month saying their contract with LMDC entitles them not only to the fixed price of $81 million stated there, and $61 million in supplemental payments LMDC has made, but an additional $80 million. Bovis claims this amount because it did work beyond the contract’s requirements, due to unanticipated circumstances. As the tragic relic of 9/11 continues its slow deconstruction, it’s worth assessing this culminating dispute about this project, ripe material for a first-year contract law exam.

 Facts of the Saga

The contract, made in October 2005, called for a lump sum of $81 million for agreed work, along with a provision for additional compensation, at cost plus a profit, for “extra work” LMDC and Bovis might agree on. A fixed price in construction contracts means the contractor takes the risk of costs above that and gains the profit from costs below that; the owner takes no risk of variation in those factors and gets no upside from any savings.

The Bovis-LMDC contract defined extra work meticulously to mean things beyond the project’s initial scope or addressing hazardous materials not known to be in the building, with specific words excluding problems arising from Bovis’s errors or negligence, problems at the building that cannot be foreseen, or legal requirements. Bovis committed to a project schedule, final completion by March 15, 2007. In February 2006, Bovis subcontracted most work to John Galt Corp.

During 2006, Bovis asked LMDC for additional payment to cover what it saw as unforeseen costs of decontamination work not within the contract. LMDC refused, saying the proposed work was within its contract. Work slowdowns and manpower reductions followed. To break the impasse, Mayor Bloomberg and Governor Spitzer intervened, resulting in a supplemental agreement of February 5, 2007. LMDC paid Bovis a nonrefundable $10 million as an extra payment; advanced it a refundable $28 million depending on ultimate resolution of whether these contested claims were extra work or not; and agreed to share some cleaning costs.

Bovis and Galt resumed work , but the project hit trouble. On Saturday, August 18, 2007, at the end of the clean-up workers’ weekend shift, a seven-alarm fire engulfed the building, killing two firemen. The cause: Galt workers smoking on the 17th floor, though laws prohibited that. Damage was severe because Bovis site supervisors had dismantled the fire water supply months earlier. Ten days later, Bovis terminated its contract with Galt, citing a clause allowing it do so “for cause” without additional payments. The fire required extensive work to remediate the site to enable resuming decontamination work. It prompted local authorities to increase supervision and tighten enforcement of safety regulations.

Current Status and Dispute

Using a replacement subcontractor, LVI, and additional funds LMDC advanced, cleaning was completed in September 2009 and a new plan for tearing the building down agreed. LVI began demolition work in November 2009 and, by July 2010, the 41-story building was down to 12 stories and work continued, parties targeting late 2010 for its completion. By then, LDMC had paid Bovis $150 million, nearly twice the fixed price for a project four years late.  Still, Bovis wants $80 million more, while LMDC says Bovis owes it some $100 million, including the refundable $28 million advance, at least $10 million in costs it incurred due to the fire, and damages for project delay.

Bovis Claims: Extra Work; Unanticipated Circumstances.  Bovis claims it either didextra work within the contract ’s or additional work due to unanticipated circumstances. Work would be extra work if beyond the project’s initial scope or involving hazardous materials not initially delineated. The claim of unanticipated circumstances catalogues several categories: changed conditions, disruption, and unprecedented interference due to regulatory requirements; changes in code, site conditions and congestion; and changes in the state of the art for construction safety.

It says it performed, despite unprecedented, unanticipated, and unreasonable circumstances, all beyond its control. Bovis says the regulatory problems, made with LMDC’s complicity, should render invalid any contract provision that prohibits full and fair recovery for work performed. It wants cost of all that work plus overhead and profit on it. Bovis implies that LMDC’s assent to the February 2007 supplement shows it accepted the contested work as extra work.

LMDC Defense.  LMDC responds that the claimed work wan’t extra work and the contract allocated all related risks to Bovis, even unanticipated. Both the fixed price feature and dozens of different clauses support that risk allocation . Nothing in the February 2007 supplement changed that.  Any change of conditions, like consequences of the fire, were within Bovis’s control, may even have been Bovis’s fault, and it bears resulting risks. Any regulatory imposition was Bovis’s to bear, under contract provisions requiring it to comply with all laws and regulations.   Nor was there any substantive change in regulatory requirements but a determinationto enforce existing codes rigorously.

Issue One: Fault.  This main dispute thus presents two multifaceted issues. The first is whether the fire, or other surprising conditions and accidents, were Bovis’s fault or forces majeure. Relevant will be the grounds Bovis invoked to terminate the Galt contract for cause. LMDC thinks Bovis’s termination for cause of that contract implies an admission that Bovis breached its contract with LMDC. Bovis and Galt are fighting that issue in court now and it hasn’t been resolved, though that court said in preliminary rulings helpful to LMDC that Galt signed a fixed price contract with Bovis and wasn’t entitled to claim anything beyond what the contract provided. Still, there’s an issue about fault in causing the fire and other accidents and whether they should be legally recognized as unanticipated circumstances.

Issue Two: Regulatory Change.  The second issue cluster is the relation between the contract language and regulatory action. The contract says Bovis must comply, at its own risk and cost, with all existing regulations, including new interpretations or applications, but relieves it of that burden if changes in laws are made. It’s contestable whether local authorities merely changed interpretations or applications of existing regulations or adopted new or more stringent ones. In the court’s preliminary ruling in the Galt-Bovis suit, it suggested that Galt’s contractual obligations to comply with law weren’t excused by any regulatory changes made—at least up to the fire, though that decision didn’t address regulatory intensity arising afterwards. But the local construction safety authority has considerable leeway in directing site conditions and it’s not clear anything it required at the Deutsche Bank building exceeded its preexisting authority. Advantage: LMDC.

Bovis Claims More Than Fixed Price Contract.  More boldly than quarreling over extra work and unanticipated circumstances, Bovis portrays the contract not as a fixed price one based on a profit identified in a schedule attached  If true, that would be a compelling case. But the contract’s language doesn’t support this . It repeatedly refers to the fixed price as the total consideration and repeatedly requires Bovis to perform all work, other than defined extra work, without additional compensation. Even if Bovis were right that these documents signal intention to use some cost plus profit formula, they don’t say how it would be calculated. That indefiniteness would prevent using them to measure compensation.

Bovis Claims Extension Denials Consitute Acceleration.   Though Bovis was not entitled to recover any costs it incurred due to project delay, the contract did entitle it to payments based on additional cost plus profit if LMDC accelerated the project schedule. The contract required final completion by March 2007, but let Bovis get extensions if delays were due to forces outside its control. Bovis says it requested extensions from LMDC but LMDC never granted any. It treats that alleged refusal as “constructive acceleration” of the schedule, entitling it to payment for extra work at cost plus profit. But the assertion that LMDC refused extension requests is refuted by supplements extending the completion date and by the fact that the project is incomplete four years later. Also, if LMDC repeatedly urged Bovis to adhere to the schedule or to make up lost time, it’s hard to see how that is a constructive acceleration.

Bovis Claims Quasi Contract .  Ultimately, Bovis seeks to set aside its contract and recover amounts beyond what it contemplates, to compensate it for its labors. But it’s common for a fixed price contract to undercompensate the performing party. That’s one of its purposes, to put risks of cost and profit on that party not the other. By saying this contract’s fixed price should not define its compensation, Bovis asks to be paid instead according to general principles of equity. This approach, called quasi-contract, measures the recovery a performing party gets by the reasonable value of services it rendered (quantum meruit) or the benefit it conferred on the other (unjust enrichment). Instead of a contractual $81 million (or $120 million considering the additional amounts LMDC paid), that would add $80 million.

The problem with this argument is a longstanding limitation on such restitution remedies that makes an actual contract between the parties, if one exists, controlling. The fighting issue here is whether that contract indeed limits Bovis to the fixed price stated or permits it to get additional compensation due to unanticipated circumstances. That’s another matter the court addressed in its preliminary ruling in the Bovis-Galt fight, limiting Galt to its contract price, scoring a point for LMDC. An additional advantage for LMDC is this contract language: Bovis “shall have no cause of action under any theory of quasi-contract or quantum meruit, by reason of any delay of any kind or duration whatsoever.”

Bovis Wants Indemnity.  Bovis’s most tenuous claim says that if Bovis owes anything to Galt (which it denies), that automatically means LMDC owes the same to Bovis. This is deficient in two ways. First, it views Bovis as a mere middleman and the pairs of duties and rights identical. It’s as if Bovis were invisible. But that’s not the deal. LMDC contracted with Bovis and Bovis owes LMDC the performance. Bovis made a separate deal with Galt and that has no legal effect on LMDC. It’s possible that the same facts supporting saying Bovis owes Galt could support saying LMDC owes Bovis but that doesn’t mean anything in their contracts or in law dictates that mirror treatment. Second, Bovis wants LMDC to indemnify it for liabilities incurred to Galt but the contract’s indemnity deal works the other way: it says Bovis must indemnify LMDC for liabilities it incurs.

Upshot

Despite many weak claims—portraying the bargain as varying with values not a fixed price, conceiving of extension request denials as acceleration demands, and seeing itself as mere middleman—Bovis isn’t obviously wrong. True, it signed a fixed price contract and accepted enormous risks of the project. It has to accept that. But the contract contemplated room for extra work and there’s a credible case that at least some of what it seeks compensation for counted as extra work.

There’s also the contract law principle that recognizes unanticipated circumstances and makes accommodation to allow compensation for additional work made in the face of them. If Bovis wasn’t responsible for the fire, it has a reasonable case for additional compensation for follow-on remediation and regulatory costs. It’s not necessary to resort to equitable claims of quantum meruit or unjust enrichment to get there. The contract illuminates the benefit—and burden—of this bargain.

Photograph Credit: Michael Rieger, US FEMA, Sept. 11, 2001 (via Wikipedia)

Facts and Allegations in this Post are culled from litigation documents, available here (after punching in an anti-spam protocol).

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