2006-05-04 / Editorial

Arbitration of the wastewater upgrade contract

By Bruce Keiser

A major milestone in the fiveyear long $7.5 million sewer project was reached last month when an arbitration panel reached a decision in the contract dispute between the town and Siegmund & Associates, consulting engineers. In this dispute, Siegmund had sought $50,000 compensation for unpaid work and loss of profit following the early termination of the engineering contract by the town in January 2004. The town counterclaimed that deficiencies in the engineering firm's work and performance has resulted in more than $1.1 million in additional project costs.

In its ruling, the arbitration panel awarded Siegmund $4,050 to reimburse the firm for expenditures previously made to subcontractors. In addition, $30,000 in attorneys' fees and $12,043 for arbitration panel expenses were granted to Siegmund's insurance company. Siegmund & Associates did not receive any compensation for its substantive claim for $50,000. Likewise, the panel denied the town's $1.1 million counterclaim.

Because the arbitrators' did not issue a written decision explaining the reasoning for the award, we do not know how the panel arrived at its findings. However, based on testimony and written arguments, it appears that the contract was terminated by mutual agreement between the town and Siegmund weighed heavily in the outcome. Essentially, the arbitrators' appear to have concluded that since both sides voluntarily agreed to walk away from the contract, then neither the town nor Siegmund had the ability to demand compensation for any costs associated with their respective contract responsibilities.

Why were attorneys' fees awarded to Siegmund's insurance company and not to the town? Following the contract termination, Siegmund initiated the arbitration in an attempt to recover $50,000 for project expenses and lost profits. The town responded to these demands by entering a counterclaim for unbudgeted expenses directly attributable to project delays and defective and incomplete work that required the hiring of new consultants for reengineering and re-design.

The arbitrators' have recognized the appropriateness of each party's attorneys' and hearing fees related to Siegmund's claim. Unfortunately, the panel did not view the town's counterclaim as legitimate, given the mutual termination of the contract. Therefore, the panel has directed the town to cover Siegmund's insurance company's legal expenses incurred to defend against the town's demand. The town believes this component of the award is not merited and has directed its legal counsel to pursue negotiations to eliminate the provision for attorney's fees.

If the town anticipated a claim to recover costs under the contract, why was the contract termination by mutual agreement? First, in January 2004, attorney Parks' correspondence with Siegmund's attorney explicitly stated that the town could have terminated the contract for cause even though the town was agreeing to a mutual severing of the agreement. Secondly, the town needed to move on with the project as expeditiously as possible, and this recourse was the only viable method to get a new engineering consultant on board.

What costs has the town incurred as a consequence of the failed contract with Siegmund? In the arbitration claim, the town itemized over $1.1 million in excess project costs. This projection included $400,000 in added costs due to the loss of a zero percent financing for a $2 million loan through the RI Clean Water Finance Agency. Additional costs are related to remediating a flawed Infiltration and Inflow study, $338,113, estimated construction cost escalation due to extended delays, $164,430, and ancillary expenses including sliplining, archeological monitoring, manhole and drain repairs, and unnecessary technology, $89,405.

Fortunately, the Clean Water Finance Agency subsequently arranged that the town would retain a zero percent interest rate, and the town has opted to conduct the I & I study in-house, reducing the amount of the deficit in this project component. However, expenditures to arbitrate the dispute have included legal services, $44,695, arbitration panel fees, $35,577, and retention of qualified engineers to advise the town and serve as expert witnesses, $82,100. In concert with the arbitration, engineering consultants have performed a necessary critique and evaluation of the adequacy and completeness of the studies, plans, and design work prepared by Siegmund.

To date, the town has expended $4.8 million to perform system assessment, design upgrades to the pump stations and treatment plant, and repair, replacement, and sliplining of 29,000 linear feet of pipe. lf of the sewer infrastructure. We are currently soliciting bids to complete the treatment plant improvements. Remaining funds of $2.6 million are approximately $200,000 below the original allocation for the plant upgrade. When bids are opened on May 16, we will know what modifications, if any, may be required to keep spending within the available project budget.

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