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When Donald Trump was a Client

Categories: Construction Claims, Consulting
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This is not a political post, but surely we get enough of that elsewhere. Rather, this is a story about a construction claim I became involved in back in the early 1990s. I worked for a New Jersey construction consulting firm at the time. My firm was hired by Donald Trump to defend against a lawsuit filed by an electrical contractor on the Trump Plaza Garage in Atlantic City. The garage was located next to the Trump Plaza Hotel & Casino.

It is admittedly a misnomer to say that Donald Trump was my client. Each building that Donald Trump owned was a separate Limited Liability Corporation. The parking garage itself was a LLC and therefore shielded from any litigation that might affect the adjacent Trump Plaza Hotel & Casino, or any other Trump property for that matter. My client was really the garage. As clients go I have certainly had worse and I didn’t have to buy it dinner.

The first interesting part about this project was the contract. The attorneys spent so much time hammering out the details that the contract was not executed until a couple of months before the project ended. Regardless of the reasons, I thought it was very risky for a contractor to start work without a signed agreement. The electrical contractor was not my client of course, but he was the one spending all the money and hoping to get paid.

The second interesting part was the electrical contractor’s contradictory behavior. Early on, the electrical contractor apparently realized he had the basis of a claim. But he then signed each month’s pay application, which contained an unconditional waiver of any known disputes. And he did this on the advice of his attorney, who just happened to be his daughter. It was not until the final pay application was awaiting signature that the electrical contractor revealed his claim.

Trump’s attorneys filed a counterclaim based on these unconditional waivers. After all, the electrical contractor had stated on several occasions that he did not have any claims. The contract (a standard American Institute of Architects agreement) also had a notice provision that required the contractor to make claims in a timely manner. Waiting until the end of the project to pounce with a claim was prejudicial to the owner who expected there was an agreement on the project’s cost.

Notice provisions in a contract serve a very important purpose. As explained by attorney Justin Sweet in his excellent book, Sweet on Construction Law:

“The notice informs the owner of what is going on and it gives him the opportunity of trying to repair whatever problem is developing – a sort of early warning system. If warned, steps can be taken to minimize the harm caused.”

Notice can be given in many ways. Mr. Sweet even suggests that a telephone call would be sufficient as long as it is followed up with written confirmation. When this book was first published in 1997 email correspondence was pretty rare, but certainly it is much easier to send written confirmation these days. And presumably, not signing a waiver would be a way of giving notice that something was amiss.

Meanwhile, my firm had to evaluate the electrical contractor’s claim in case the judge allowed the claim to proceed. I even went to Atlantic City to meet with Trump’s representatives to discuss my preliminary findings. The meeting was rather uneventful and Mr. Trump was not in attendance; the stakes were not particularly high, only a few hundred thousand dollars.

Most construction disputes are not black and white, and the electrical contractor potentially had some valid claims for additional compensation – ignoring the waivers and proper notice. During a preliminary hearing with the judge the electrical contractor was asked to explain his actions. His response? He had heard from a contractor on another Trump project that if he did not sign the waivers then his progress payments would be withheld.

Now, it is understandable that no one likes the idea of not getting paid because they have the audacity to ask for more. The disputed amount might be very minor compared to what is otherwise owned. A waiver can be a pretty effective way of making a contractor forget about petty claims. On the other hand, the owner deserves to be protected from false or fraudulent claims that are submitted after the fact.

The judge ultimately rejected the electrical contractor’s claim because he could not prove that signing the waivers would have held up progress payments. Whether it might have happened to someone else was irrelevant. Giving timely notice of a claim was probably not as important as denying that a claim even existed.

Mr. Sweet has an interesting perspective regarding notice provisions on smaller projects, arguing that:

“They are still essential administrative provisions; but if we couple them with the wealth of notice provisions, we can see that administering ‘by the book’ is a wonderful but very costly way of operating. I have often advised contractors on smaller projects – say, under $500,000 – that they should ignore the notice system, such as created by the AIA, at least to the extent of giving every required notice in the required way.”

He still advocates giving “early warning” of a potential claim by some means. However, the distinction Mr. Sweet makes is that “if it is clear that the owner was not prejudiced by a failure to give the required notice in the required way at the required time to the required person, the contractor should still be able to press the claim.”

Here is final, compelling, thought by Mr. Sweet:

“A notice can show that a claim is a genuine one, not an afterthought claim. An often dispiriting ‘end of the job’ phenomenon is the assertion of many claims for time and money. This is part of construction legends.”

 

 

 

 

 

 

 

 

Consulting Firm Faces Possible Fraud Charges

Categories: California High Speed Rail, Consulting, Fraud, Navigant Consulting
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The New York Times reported on June 22nd that Navigant Consulting may face criminal charges for “highly questionable” billing practices and “exorbitant” expenses on services provided to the Long Island Power Authority. A panel appointed by Governor Andrew M. Cuomo (known as the Moreland Commission) plans to issue its findings to federal prosecutors in Brooklyn to determine if criminal charges are warranted against officials of LIPA or Navigant. A link to the New York Times articles appears below:

www.nytimes.com/2013/06/23/nyregion/possible-fraud-is-seen-at-long-island-power-authority.html

Among the abuses found by the Moreland Commission:

  • The chief executive of the LIPA, who approved Navigant’s contracts and billings, now works for Navigant
  • A “disturbing revolving door” between LIPA and Navigant existed, with employees leaving one firm to work at the other
  • More than 50 Navigant employees charged time to the LIPA at rates between $300 and $500 per hour
  • One Navigant employee billed more than 3,500 hours in one year, or roughly 70 hours per week
  • Another Navigant employee was reimbursed by LIPA for a seaplane ride from San Juan to a resort island

Cozy relationships between consulting firms and clients is certainly nothing new. I was aware of this practice by some firms in the early 1990s. But it is rather hard to believe that a public agency would allow this to happen. The chief executive of the LIPA surely could not act unilaterally without some oversight by the Board of Trustees. Many individuals who were spending the taxpayers’ money turned a blind eye to questionable practices.

A few days later, the Port Authority of New York and New Jersey announced that it would audit Navigant’s billings for possible fraud. Navigant has been paid $5M in fees for several consulting assignments, including an audit of the Port Authority, which seems rather ironic. In addition, New York City’s Comptroller announced that it would investigate Navigant’s practices during the time it was investigating fraud in the city’s CityTime payroll project. These investigations were also reported by the New York Times:

http://www.nytimes.com/2013/06/25/nyregion/port-authority-orders-audit-of-consulting-firm.html

Frankly, a consulting firm that can charge $300 to $500 an hour to a public agency has a fool for a client. Here in California the High Speed Rail Authority has been criticized for relying heavily on consultants rather than hiring more staff. The argument that specialized knowledge is difficult to obtain for “temporary” positions is rather ludicrous on a rail system expected to take 10 years or more to build. NFL coaches enjoy far less job security. Consultants are the perfect solution for targeted short-time assignments that demand a certain expertise; using them as essentially fulltime employees becomes very expensive.

In too many instances privatizing public services becomes an excuse to gouge the taxpayers. Having been in the consulting industry for 30 years I can say without hesitation that high hourly rates have little correlation to skills and qualifications. Rather, it comes down to marketing. High hourly rates stoke the egos of the people who hire them. The irony of the LIPA debacle is that 90% of its customers lost power when Hurricane Sandy hit. LIPA spends millions of dollars on consulting fees and never asks for an emergency preparedness plan?

My wife and I belong to a wine club that holds “blind” tastings several times a year. Everyone brings the same varietal and we taste the wines without any knowledge of price or the winery’s reputation. And very rarely does the most expensive wine manage to land among the top three selections. Imagine if owners selected their consultants based solely on qualifications?