Leonard A. Windish, P.C.
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CONSTRUCTION NEWS
Subcontractor’s Delay Damages Denied Due to Releases/Waivers
On January 2, a PA federal court denied a subcontractor’s claims for delay damages on the SCI Phoenix prison project in Montgomery County, Pennsylvania. The claims were denied because the masonry subcontractor had signed partial waivers and change orders containing waiver language. The facts that employees of the general contractor told the subcontractor that the waiver was for the amount of the payment only and that the general contractor would “try to make [the subcontractor] whole” did not change the fact that these claims were waived.
The Court reiterated Pennsylvania law that release and change orders are contracts. Contractors must carefully review and negotiate proposed partial/lien waivers/releases before signing a contract. Contractors must also carefully review change orders before signing them.
In Connelly Construction v. Travelers Casualty & Surety Co. of America, Connelly was the masonry subcontractor to Walsh Heary Joint Venture, which was the general contractor for the project. Connelly was delayed 9 months in starting its work. It suffered other delays on the project and was unable to complete its scope of work until 18 months later. It sent only one letter advising of the delays with no cost information included. It then sued the general contractor and its surety for in excess of $600,000 in delay damages.
The Court found that Connelly had waived all of its delay claim by signing partial waivers/releases in exchange for periodic payments. Connelly had also signed change orders which included "release of all claims" language. The Court applied Pennsylvania law which holds that such releases are enforceable. The Court also found that the GC had not waived the releases based on employee statements that the waiver was for the amount of the payment only and that the general contractor would “try to make [the subcontractor] whole”. These statements did not "shock the moral sensibilities" and were not "egregious misconduct" enough to render the releases unenforceable.
I regularly counsel clients to try to negotiate out of agreeing to such releases at the time of contracting or to at least exclude accruing delay damages from partial releases. Please contact me with any questions.
General Contractor’s Case Thrown Out Where It Failed to Follow Contract
Last month, the Appellate Division of the Superior Court of New Jersey upheld the dismissal of a general contractor’s case against a roofing subcontractor in Gloucester County. The Court agreed with the trial judge that the GC failed to give the sub a formal notice to proceed, failed to cooperate with the sub on a new schedule as required by the subcontract and failed to provide a notice of default to the subcontractor before hiring a replacement subcontractor.
In Ray Angelini v. Capitol Indemnity, Ray Angelini was brought in to replace the original contractor for the construction of a career center in Bridgewater, NJ by the original contractor's bonding company, Capitol. The original contractor's roofing subcontract was assigned first to Capitol and to Angelini. The roofer, Strober-Wright Roofing, provided some submittals and attended a pre-construction meeting. However, the project was delayed. Strober filled its summer schedule with other work and offered to complete its work before June and after September. Angelini responded by finding another roofer and suing Strober for the difference in price. The trial judge dismissed Angelini's claims, finding that Angelini failed to follow its subcontract with Strober in several ways.
On appeal, the Appellate Division agreed. Angelini never gave Strober the required Notice to Proceed - submittals and attendance at the precon meeting was not "commencing" the work and there was no notice to proceed. The appeals court agreed with the trial judge that Angelini breached the contract originally by changing the schedule without cooperating with Strober as required by the contract. Angelini also breached the contract by hiring a replacement roffer before it terminated Strober.
You must follow the terms of your contracts. Wise contractors mitigate risk on the front end by negotiating favorable or, at the very least, fair terms before entering contracts.
Mechanics’ Lien on Leased Land Valid Even Without Writing From Owner
Last week, the Superior Court of Pennsylvania decided that a contractor’s mechanics’ lien claim could go forward even though its contract was with a tenant of leased land and the contractor had failed to get the owner’s consent in writing as required by PA’s Lien Law. The Court reversed the Allegheny County judge who had sustained the owners’ objections to the lien based on the consent requirement in the Lien Law. The Superior Court decided that there was evidence that the owners may have acted in bad faith by knowing the tenant was representing himself as the owner.
In Kress Brothers Builders v. Williams, Kress Brothers Builders filed a mechanics' lien against property owned by the Williams sisters where Kress was not paid for renovations and remodeling at the property after water pipes at the property burst. The Williams sisters had leased the property to George Sadler who contracted with Kress to do the work, but failed to pay Kress. The trial court dismissed Kress' lawsuit to collect on the lien because Kress had failed to obtain "written notice" from the property owners consenting to the improvements as required by the Lien Law.
On appeal, the Superior Court ruled that the Lien Law's requirement of an owner's written consent is not an absolute bar to a mechanics' lien claim. Such a claim may be valid if the owners had knowledge that their tenant intended to enter into a contract with Kress while portraying himself as the owner. The Court returned the case back to Allegheny County for an evidentiary hearing.
First, be aware that PA requires an owner’s written consent to improvements made at a tenant’s request. Second, owners must have no knowledge of a tenant portraying itself as the owner to avoid liens for unpaid work.
Jury Verdict Overturned — Cannot Find Contract and Award Extras Under Another Theory
Last month, the Appellate Division of the Superior Court of New Jersey overturned a Bergen County jury’s verdict in favor of a contractor against an owner. The jury was improperly instructed that it could find there was a written contract between the owner and the contractor and still award damages under a theory of unjust enrichment for unapproved change orders. The Court ruled that a jury may not award damages under these inconsistent theories.
In New York-Connecticut Development Corporation v. Blinds-To-Go, Blinds-To-Go hired New-York Development Corporation ("NYDC") to build Blinds-To-Go's corporate headquarters. The parties negotiated the project's change orders in August of 2011 as the building was to be delivered in September 2011. Blinds-To-Go advised NYDC that the scope was not finalized. However, building was not certified for occupancy until March of 2012, at which time NYDC submitted another seventeen change orders for more than $1 million and refused to complete the remaining punchlist. NYDC sued for retainage and the unresolved change orders.
At trial, over the objections of Blinds-To-Go, the judge instructed the jury that it could find that the parties had entered into a written binding contract and also find that NYDC could recover for the disputed change orders under an unjust enrichment theory and award NYDC what this additional work was worth. The jury did just that, awarding NYDC nearly $800,000.
On appeal, the Court chastised the trial judge, citing the long-standing law that the existence of an express contract excludes the awarding of relief regarding the same subject matter based on quantum meruit [unjust enrichment]. The Court said it was error for the judge to tell the jury that if someone doesn't perform its obligation under a contract, it may still recover under the alternate theory of "what's the value of my services worth" [unjust enrichment]. The Court sent the case back to Bergen County for a new trial.
The bottom-line—if there is a procedure for payment for extra work in a written contract, it must be followed. In fact, it is good practice to follow all contractual requirements that are in writing.
Fed Appeals Court: NJ Subs Cannot File Lien Claims Once GC Goes Bankrupt
On March 30, the US Court of Appeals for the Third Circuit ruled that subcontractors in New Jersey may not file construction lien claims once a general contractor declares bankruptcy. New Jersey’s Lien Fund laws, which limit an owners’ liability, converts construction liens into liens on the general contractor’s receivables. Therefore, a lien on a bankruptcy debtor’s receivables violates the automatic stay provisions of the Bankruptcy Code and would prejudice the general contractor’s other creditors.
This is yet another reason to file construction liens promptly. A Construction Lien Claim must be filed in NJ within 3 months of last providing labor or materials in the improvement of real estate.
In In re Linear Electric Co., Cooper Electrical Supply and Samson Electrical Supply sold electrical supplies to Linear Electric which Linear Electric incorporated into several construction projects. On July 1, 2015, Linear Electric had not been paid in full for its work and owed cooper and Samson $1.2 million and $140,000 respectively. That day, Linear Electric filed for bankruptcy. Two weeks later, Cooper and Samson filed construction liens on the projects that Linear was working on. In Linear Electric's bankruptcy, it filed a motion to strike the liens as violating the automatic stay of the bankruptcy court. The court granted the motions and Cooper and Samson appealed.
New Jersey's Lien Law limits an owner's liability to the amount unpaid to the party it contracted with. An owner may pay this amount into a lien fund to be divided among lien claimants. The remainder would go to the general contractor. Therefore, if the liens were allowed, they would constitute liens against Linear Electric's receivables which are the property of Linear Electric's bankruptcy estate. This estate consists of all of Linear Electric's assets and is to be for the benefit of all of Linear Electric's creditors. Therefore, the liens filed would be unfair to the other creditors of Linear Electric and must be stricken.
Please do not wait to file construction liens in New Jersey.
PA Engineer’s Payment Bond Claim Dismissed — Must Direct and Oversee Work
Earlier this month, the Pennsylvania Commonwealth Court ruled that an engineer had no claim against a contractor’s payment bond because the services provided were not “labor” as defined in PA’s Mechanics’ Lien Law, for which PA’s Public Works Contractors Bond Law is a substitute on public projects.
The Court stated that, as under PA’s Lien Law, an engineer or architect has no rights under PA’s Bond Law unless he directs or oversees work. The engineer’s work was part of the total amount of the bond; yet, the Court found this unpersuasive in light of the fact that the engineer provided design services only.
In Widmer Engineering v. Five-R Excavating, Five-R was awarded a design-build contract by PennDOT for the replacement of bridges and culverts in Westmoreland County. Five-R hired Widmer to do the design work for the project and obtained a payment bond which included the amount of Widmer's contract. During the course of the project, Wedmer provided design services, but Five-R failed to pay Widmer and Widmer quit. Widmer filed suit against Five-R and its bonding company,
The bonding company asked the court to dismiss Widmer's claim s against it because engineering design services did not constitute "labor" as defined in PA's Bond Law. The trial court agreed and dismissed the bonding company.
On appeal, Widmer argued that the trial court erred in looking to PA's Lien Law for the definition of "labor." The Commonwealth Court disagreed, stating that the Bond Law was a substitute for the Lien Law on public projects and that payment bond laws, when enacted, were to have the same scope as lien laws. Therefore, because PA's Lien Law and cases decided under it only allowed engineers and architects to have lien rights where they supervise construction, the same standard should apply to bond claims. The Court decided that the bonding company was property dismissed from the lawsuit by trial court.
Builders Claims of Fraud Against Material Supplier Dismissed
Late last month, a federal court in Pennsylvania dismissed a builder’s counterclaim for fraud in a collection lawsuit brought by the builder’s material supplier, 84 Lumber Co. The builder had claimed fraudulent billing, fraud concerning the installers provided by 84 Lumber, and fraud in the correction of defective work.
The court dismissed all of these claims, finding that 1) the builder reviewed the supplier’s invoices and corrected any mis-billings; 2) the builder maintained general supervision and oversaw the supplier’s installers; and 3) the builder observed and was notified of defects and worked with the supplier to correct them.
In 84 Lumber Co. v. Gregory Mortimer Builders, 84 Lumber provided materials and installation services to the builder for two residential developments in Maryland. When the builder didn't pay 84 Lumber, 84 Lumber filed suit in federal court. The builder countersued, alleging a variety of tort claims sounding in fraud. After discovery, the judge decided that all of the builder's counterclaims had no merit and were "last minute theories." She dismissed them, stating "no matter how vigorously or inventively Defendants may rub the brass lamp of their residential-development relationship with Plaintiff, tort liability is not a genie which can be summoned by incanting even egregious breaches of contract." It is very hard to prove fraud where there is a contract between the parties.
Construction Manager Must Pay for Wrongful Termination of Contractor
On January 12, the PA Commonwealth Court upheld a jury verdict in favor of a contractor against the borough of East Brady where the borough wrongfully terminated the contractor based on advice from the borough’s engineering/construction management firm. The jury awarded the contractor the amount it billed for, $254,873.14, plus Prompt Pay Act interest of $175,216.26, Prompt Pay Act penalties of $208,168.67 and attorneys’ fees of $206,918.44. The borough’s consultant had recommended not paying the contractor and terminating the contractor. Due to the contract between the borough and the consultant, the consultant was responsible to indemnify the borough for liability and fees.
The jury found the Borough/consultant acted in bad faith. The Commonwealth Court remanded the case to the trial judge to limit the borough’s attorneys’ to those spent defending the contractor’s claim.
In MB&R Piping Contractors v. Borough of East Brady, the borough of East Brady, PA contracted with Gibson-Thomas Engineering Co. to provide engineering services for the construction of a new waste water treatment plant. The services included design, management, contract administration and inspection. The borough then contracted with MB&R to construct the project. MB&R began construction but one year later, on Gibson's recommendation, the borough terminated MB&R. MB&R sued for wrongful termination and the borough joined Gibson to the suit. The jury found in favor of MB&R , that the borough had acted in bad faith and awarded $845,176.51 as detailed above. The trial judge determined that Gibson was liable to the borough for amount of Prompt Payment Act interest, penalties, and attorney's fees due to the indemnity provisions in the contract between these two parties.
On appeal, the Court decided that the agreement was clear enough that if Gibson's management caused the borough to breach its contract with MB&R, Gibson would be responsible. The court did remand the case for the trial judge to reduce the amount of the borough's attorney's fees award by the amount the borough spent in litigating the indemnity by Gibson.
Two points on this case. First, even though the contractor was only owed $254,873, it was able to get a verdict in the amount of $845,176 due to its lawyer's successful showing of bad faith by the borough. Second, be wary of indemnity clauses. In this case, some bad advice led to liability of more than $600,000. Please contact me with any questions.
Outlook for Construction in 2017: It’s All Positive
Experts are predicting steady growth in the construction industry in 2017, forecasting an increase in construction spending in the 13% range. Construction starts should rise to over $700 billion as increases to interest rates won’t affect the construction industry until 2018/19, according to the 2017 Dodge Construction Outlook.
These forecasts follow recent increases in contractor backlog and in non-residential construction spending. This all points to a very positive 2017 for almost everyone in the construction industry.
Dodge forecasts:
Commercial building +6%
Institutional building +10%
Single family housing +12%
Multifamily housing 0%/flat
Public works +8%
Electric utilities -29%
Manufacturing +6%.
Associated Builders and Contractors is predicting nonresidential construction spending will increase by 3.5%. Also, expect material prices to rise in 2017.
The construction industry lost 3,000 jobs in December according to the Bureau of Labor Statistics. Nonresidential building construction employment stayed flat for the year, residential up 4.4%, nonresidential specialty trade employment up 0.9%, residential trade employment up 3.9% and heavy construction/civil engineering is down 2.2%.
Some construction prices fell in December and some rose. Prices were down for some: asphalt (-0.1%), concrete (-.02%); and up for others: natural gas (+23.1%), petroleum (+18.9%), plumbing fixtures (+0.2%), energy (+14.6%), wire/cable (+2.6%), lumber (+2.3%), fabricated metal (+0.6%), iron/steel (+3.4%), .
Good luck in 2017!
Mechanics’ Lien Against Husband Proper Where Husband and Wife Contracted for Work
Last week, the Superior Court of Pennsylvania decided that a mechanics’ lien was properly filed against a husband as the sole owner of a residential property despite the fact that that the contractor had contracted with both the husband and his wife. PA’s Mechanics’ Lien Law requires the owner of a property to be named. The Court decided that the wife was not an indispensable party to the mechanics’ lien action. However, if the contractor had sued for breach of contract, both the husband and wife would have had to have been named.
Contractors that desire to file mechanics’ lien must, in addition to the other numerous requirements of the Lien Law, properly identify the owner of the property improved. At the very least, an effective search of title should be conducted.
In Schell v. Murphy, Schell was contracted by the Murphys for work to install underground drainage and sewer lines, to construct a retaining wall and to regrade a driveway. 3 months after starting work, Murphy directed Schell to leave the property. Shcell was not paid, so he filed a mechanics' lien against the property and named Mr. Mruphy as the owner. Murphy objected, arguing that the contract was with the Murphys, husband and wife, and that the lien had to include the wife in order to be proper.
The trial court agreed, but the Superior Court disagreed, stating that the trial court was in error. A mechanics' lien is not intended to settle the contractual obligations of the parties and is distinct from a breach of contract action. The Lien Law only requires the property owner to be named. Therefore the wife was not an indispensable party.
Please contact me with any questions.
No Mechanics’ Lien for Drilling and Operation of Oil Wells
Also last week, a federal judge in Pennsylvania dismissed a complaint on a mechanics’ lien in the amount of $1,651,250. The complaint failed to make the necessary allegations that the labor and materials provided by the contractor were connected with the construction of a building or other permanent structure. Rather, it was merely alleged that the labor and material were provided in connection with drilling and/or operation of the wells.
In PA, mechanics’ liens are only available for work which is connected with and an integral part of the erection, construction, alteration or repair of a building or other permanent structure. A well for the production of gas, oil or other volatile or mineral substance only falls within the Lien Law’s definition of a structure or other improvement where the labor and materials supplied relates to the erection construction, alteration or repair of a building or other permanent structure. This applies to all labor and materials provided for which contractors desire to file mechanics’ liens.
In Stingray Pressure Pumping v. EQT Products, the parties had entered into a Master Services Agreement and Stingray performed drilling and the operation for 3 wells for EQT. When EQT didn't pay, Stingray filed a mechanics' lien for $1,651.250 against EQT's property. Stingray's lien said that it provided labor and materials in connection with drilling and/or operation of the wells and attached invoices and field tickets. EQT asked the court to dismiss the lien because it was deficient.
The Court agreed, stating that PA courts have consistently limited the availability of lien to work which was connected with and an integral part of the erection, construction, alteration or repair of a building other other permanent structure. Stingray's lien did not indicate that any of the labor and materials provided fit within this requirement. The lien was dismissed.
Note that this would not prevent Stingray from suing for breach of contract. Please contact me with any questions.
NJ Court Says Contractors Can Be Sued for 10 Years After Substantial Completion
Can a contractor be sued for allegedly defective construction for up to 10 years after substantial completion? New Jersey says YES. Statutes of limitation for negligence and breach of contract can be waived by a change in ownership and the new owners’ subsequent “discovery” of construction defects.
In a case decided on February 1, the Appellate Division allowed a condominium association’s claims for defective construction to proceed when they were filed 8 to 9 years after substantial completion. The court decided that the unit owners had no obligation to file suit until they had control of the board of directors and were advised of construction defects by an engineer. In Palisades at Fort Lee Condo. Ass'n v. 100 Old Palisade, the owner of a Hudson River-front condo hired contractors and subcontractors in 1998 to construct a residential tower and additional stories on a parking garage. Construction was completed in 2002. In 2004, the owner sold the condominium property and the new owner began to convert the rental property to condominiums. In 2006, enough of the units were purchased so that the owners took control of the association's board of directors. The board then retained an engineer due to various complaints from the unit owners. The expert produced a report in 2007 which identified various construction defects. The homeowner association filed a suit against the contractors in 2009. Some contractors settled with the association. The trial judge threw out the rest of the claims as being too late, saying that there was no way that the contractors could not have anticipated that the property would be sold and that an association of unit owners would be formed - this would subject the contractors to being "forever liable" for alleged construction defects. The statute of limitation for breach of contract is 6 years; for negligence, it is 2 years, usually measured from substantial completion.
On appeal, the appellate court disagreed. The court decided that the association did not have a claim until the unit owners took control of the association's board of directors and until the board had sufficient facts upon which to assert claims of defective construction. The unit owners did not have control of the association until they had control of the board of directors. The unit owners did not "discover" their claim until they got the expert's report. Both of these decisions by the court allowed the suit to continue despite it being filed 7 years after substantial completion. The court did say that New Jersey's "statute of repose" of 10 years would bar any suits filed more than 10 years after substantial completion.
Running Power Line to Adjacent Property’s Pumping Station Not an “Improvement”
Late last month, the Pennsylvania Superior Court upheld a trial court’s determination that a contractor could not lien property adjacent to a pumping station it built where the contractor ran power lines for the pumping station through an existing building on the parcel of land in question.
The Court decided that this was not an “improvement” under PA’s Mechanics’ Lien Law as it did not provide any “benefit” to the parcel. The court upheld the trial court’s judgment on the liens the contractor had filed on the 3 parcels of land on which it actually built the pumping station. The pumping station was built by the Linde Corporation to draw water from the Lycoming Creek to be used by fracking companies.In Linde Corp. v. Black Bear Properties, Linde built a pumping station for the owner of 4 parcels of land near the Lycoming Creek. The owner wanted the station to draw water from the creek to be sold to energy companies for use in fracking. Linde completed the pumping station, which sat on 3 of the parcels of land, with power coming from a building on the fourth parcel. The owner failed to pay Linde over $216,000 and Linde filed liens against all 4 properties. At trial, the court entered judgment for Linde, but only against the 3 properties on which Linde built the pumping station. The trial court found that running power lines through an existing junction box did not equate to construction in the ordinary sense.
On appeal, Linde claimed that it had improved all 4 pieces of property. The appellate court disagreed. It held that the work performed on the 4th parcel did not effect a material change to the building on that property because running the wires was merely incidental and did not improve the property in any way as required by the PA Mechanics' Lien Law. There was no benefit conferred on that specific property
Care must be used in allocating the amount due a contractor where the contractor improves more than one property, such as in a residential or mixed-use development. Please contact me if you have any questions.
Bad Faith by School District Puts Contractor’s Attorney’s Fees in Dispute
On January 6, the PA Commonwealth Court upheld a jury verdict in favor of a sheet metal subcontractor against a school district where the school district terminated the HVAC prime contractor and entered into an oral contract with the prime’s sheet metal subcontractor to complete its scope of work. The subcontractor did so, but the school district refused to pay. The trial court originally granted judgment to the subcontractor and awarded attorney’s fees of $41,000 under the Prompt Pay Act. The Commonwealth Court reversed and ordered a jury trial. The jury also found in favor of the subcontractor and this time judge awarded $110,000 in attorney’s fees for the school district’s bad faith.
The Commonwealth Court remanded the case again because the attorney’s fees award was made under the bad faith statute and not the Prompt Pay Act. One judge wrote “Litigation is the new sport of kings.”In F. Zacherl, Inc. v. Flaherty Mechanical Contractors, Flaherty was selected by West Allegheny School District as the HVAC prime contractor for alterations to West Allegheny High School. Flaherty subcontracted the sheet metal work to Zacherl. Flaherty developed cash flow problems and stopped paying its subcontractors which caused the school district to terminate Flaherty. Flaherty's bonding company took over. To mitigate further delay, the school district Zacherl to return to the project and complete its work. Zacherl sent a letter advised the school district of its amount billed to date, amount paid to date amount due, and amount remaining to bill. By way of verbal agreement, Zacherl agreed to complete its scope of work if the school paid it half of the amount currently due. - $147,000. The school district paid this amount and Zacherl returned and completed its scope of work. However, the school district made no further payments.
Zacherl sued and was granted judgment before trial against the school district for all of its work - $229,000, plus $41,103.31 in attorney's fees and costs under the PA Procurement Code/Prompt Pay Act.
The school district appealed and the Commonwealth Court remanded the case for trial. At trial, the jury found in favor of Zacherl and awarded $111,000. The judge added $130,000 fro interest, attorney's fees and costs.
The school district appealed again. It argued that (1) the oral contract was not valid because it was not approved by the school board, (2) there was insufficient evidence to find a contract and (3) the court erred in concluding that the school district acted in bad faith.
Section 508 of the Public School Code requires that all contracts for more $100 must be approved by the school board. However, the Court had previously decided in another case that this would not bar a contractor's claim for payment for additional work where that work was part of an already-approved contract. In this case, separate approval was not required because the oral contract was for work already approved by the school board.
The Court found plenty of evidence to support the jury's finding that Zacherl agreed to perform the same work specified in the prime contract for the same amount agreed in the subcontract with Flaherty. The school district never questioned why Zacherl was submitting invoices to it and no one informed Flaherty that the work was unauthorized or not-contracted-for. It was also highly unlikely that Zacherl agreed to perform the additional work for free. The jury verdict was upheld.
The trial court had ruled that the school district had acted in bad faith by enticing him to come back to work and not paying him. However, the trial judge cited PA's bad faith statute, which applies to bad faith during litigation, and not the Prompt Pay Act, which applies to public works. So the Court struck the $110,000 attorney's fees award and sent the case back to the judge to determine if Zacherl is entitled to attorney's fees for bad faith during the litigation.
Years of litigation pursued by a school district who employed a subcontractor and paid it nothing - ridiculous. A concurring judge wrote a noteworthy and too true opinion, including:
"Litigation is the new sport of kings. The damages awarded to Zacherl will not make Zacherl whole because the monies will be used to pay attorney fees and costs. The Prompt Pay Act was designed to address this unfortunate result."
RESOURCES
The Wall Street Journal
CNN Legal News
National Legal News
Philadelphia Legal News
World Legal News
Industry Links:
American Arbitration Association
American Institute of Architects
Construction Journal
Suburban Contractors Association of Pennsylvania
Associated Builders and Contractors
Pennsylvania's Home Improvement Consumer Protection Act - Contractor Registration
LEGAL LINKS
Pennsylvania Contractor and Subcontractor Payment Act
Pennsylvania Mechanics' Lien Law
Pennsylvania's Home Improvement Consumer Protection Act - Contractor Registration
OLDER CONSTRUCTION NEWS
YOU MUST CALL BEFORE YOU DIG
Pennsylvania’s One Call Law, which was recently changed, requires excavators to call Pennsylvania’s One Call System (POCS) before digging to ensure the safety of the excavator and underground facilities. SCA Members may call POCS for free.
Excavators have the following responsibilities under the One Call Law:
- Request location of facility lines through POCS between 3 and 10 days before beginning excavation
- Provide schedule date of excavation
- Provide PennDOT contract or permit number when working on state highway
- Identify the excavation site by address or by marking it with white
- On complex projects, schedule and conduct preconstruction meetings with facility owners
- Notify project owner in writing if unable to locate line due to information provided or to locate unclaimed or abandoned lines
- Protect and preserve marking (or call POCS for remarking)
- Hand dig within 18 inches of marking to ascertain precise location of facility
- Advise POCS if vacate worksite for more than 2 business days
- Facility owners have responsibilities too:
- Mark location of facilities no later than the day before scheduled date of excavation
- Participate in preconstruction meetings on complex projects
- Be a member of POCS to recovery for damage to facilities
The new version of the law imposes duties on the project owner as well:
- Use Subsurface Utility Engineering when designing projects > $400,000
- Install color-coded markers to indicate type and location of laterals installed by owner for new construction
- If a facility is struck during excavation:
- Call 911 if damage to facility results in release of flammable, toxic or corrosive gas or corrosive liquid
- File incident report within 10 days with Pennsylvania Department of Labor and Industry
If an excavator complied with the One Call Law, it is not liable for damage to facilities misidentified, mislocated or unmarked.
Some additional changes in the new One Call Law:
- The term “facility” now includes unexposed storm drainage and traffic loops
- The duty to call POCS can be delegated to the project owner if working for facility owner, municipality or municipal authority
- POCS may set up an alternative dispute resolution procedure to resolve disputes
CALL 1-800-242-1776 or 811 BEFORE YOU DIG
NEWSFLASH
PENNSYLVANIA REVISES MECHANIC’S LIEN LAW
On June 28, 2006, Governor Rendell signed a bill into law which revises Pennsylvania's mechanic's lien law. The new law makes significant changes to the current law. The revisions are meant to "modernize" Pennsylvania's antiquated law and to bring Pennsylvania's law in line with those in the majority of states. These changes were effective January 1, 2007. A summary of the most important changes follows.
Lien Rights for Sub-subcontractors
The definition of subcontractor will be expanded to include second tier subcontractors. Thus, any second tier subcontractor or supplier which contracts with a subcontractor will have lien rights, provided the first tier subcontractor is in direct privity with a "contractor", i.e., one who contracts with an owner of real property. Currently only contractors and subcontractors have lien rights – now sub-subcontractors will have them as well.
No More Preliminary Notice Before You Leave The Project
Currently, subcontractors engaged in "alteration and repair" have to provide the owner with preliminary notice of their intent to lien the property prior to leaving the project. Under the new law, this requirement of preliminary notice is eliminated. There will no longer be a distinction between new construction and alteration/repair for purposes of mechanic’s lien rights.
Time for Filing Expanded
Currently, contractors and subcontractors must file mechanic’s liens within 120 days after completing work on a project. Under the new law, mechanic's lien claims must be filed with the county prothonotary within six months after the completion of the work. This adds an extra two months onto the existing law. Subcontractors still must provide formal notice of their intent to file mechanic's liens at least thirty days before filing a mechanic’s lien.
No More Waivers of Liens on Commercial Projects
The waiver of mechanic's liens will also change. Most importantly, with respect to contractors, lien waivers will not be valid unless the project is a residential project of less than $1 million. Lien waivers will be valid as to subcontractors and sub-subcontractors, provided the project is covered by a payment bond.
What do the changes mean to you
This new law expands the class of entities which have lien rights, eases the strict filing requirements for lien claimants and is very pro-contractor. Accordingly, contractors can expect owners to require contractors to provide labor and material payment bonds and to obtain lien waivers from sub- and sub-subcontractors. Contractors should anticipate owners protecting themselves in this manner and should incorporate this into their financial planning and strategy. If you have any questions about the new law, please contact Len Windish at 215-979-7605.
CHANGES IN THE 2007 AIA A201
GENERAL CONDITIONS OF THE CONTRACT FOR CONSTRUCTION
1. PROJECT ADMINISTRATION
a. Architect or Initial Decision Maker
i. The person to render initial decisions on Claims and certify termination of the agreement.
2. THIRD PARTY CLAIMS AND PROGRESS PAYMENTS
a. Owner may withhold payments if third party files claim
i. Example: mechanic’s lien
3. OWNER’S FINANCIAL INFORMATION
a. Restrictions on requests – certain situations
4. PROOF OF PAYMENT TO SUBCONTRACTORS
a. Owners can request proof of payment
5. CONSEQUENTIAL DAMAGES
a. Mutual waiver remains in place, but express which are included
6. TIME LIMITS ON CLAIMS
a. Claims must now be made within applicable statutes of limitation rather than contractual deadlines, i.e., substantial completion
7. ALTERNATIVE DISPUTE RESOLUTION
a. Check the box – Arbitration or L
1. PROJECT ADMINISTRATION
a. Architect or Initial Decision Maker
i. The person to render initial decisions on Claims and certify termination of the agreement.
2. THIRD PARTY CLAIMS AND PROGRESS PAYMENTS
a. Owner may withhold payments if third party files claim
i. Example: mechanic’s lien
3. OWNER’S FINANCIAL INFORMATION
a. Restrictions on requests – certain situations
4. PROOF OF PAYMENT TO SUBCONTRACTORS
a. Owners can request proof of payment
5. CONSEQUENTIAL DAMAGES
a. Mutual waiver remains in place, but express which are included
6. TIME LIMITS ON CLAIMS
a. Claims must now be made litigated
b. Advantages and Disadvantages
8. INSURANCE
a. Contractor now required to add Owner as “additional insured”
i. But not for Owner’s negligence
PA SUPERIOR COURT UPHOLD MECHANIC'S LIEN PRIORITY
In a recent decision, the Pennsylvania Superior Court upheld a trial court’s determination that a mechanic’s lien had priority over a mortgage where the bank recorded a mortgage on the property after the contractor had begun work on the project.
In Commerce Bank v. Kessler, the Court considered whether a mechanic’s lien filed after a mortgage used to pay for construction was recorded had priority where the work began before the the mortgage was recorded. The Superior Court found that the amended version of the Mechanic's Lien Law, Section 1508 regarding a mechanic lien's priority, effective January 1, 2007. applied despite the fact that the contractor had begun work prior to January, 2007. Section 1508 awards prior over mechanic's liens to mortgages which are used to pay the cost of completing construction.
The bank argued that under the clear language of Section 1508, proceeds of the mortgage could be used to pay other expenses and the mortgage's priority over a mechanic's lien would be preserved. The contractor argued that allowing the owner to pay other expenses from the proceeds of the mortgage, would, in essence, eviscerate a contractor's lien rights as an owner could use most, if not nearly all of the proceeds of the mortgage on other expenses while maintaining priority over mechanic's liens. The Court agreed with the contractor, finding that the term "the proceeds" in Section 1508 means "all of the proceeds". The Court upheld the mechanic's lien's priority over the mortgage holding that the exception in Section 1508 did not apply since the owner used part of the proceeds of the mortgage to pay other expenses.
Contractors should take from this decision that it is the best practice to assert mechanic's lien rights in a prompt fashion.
The Court also considered the bank's attempt at invalidating the mechanic's lien because the mechanic's lien itself, while referring to the project's specification to describe the labor and materials the contractor provided, did not attach the specifications to the lien. The Court held that because the mechanic's lien referenced and attached the contract, the lien provided the bank and others "a general statement of the kind and character of the labor and material furnished" as required by the lien law. The Superior Court therefore upheld the priority of the mechanic's lien over the mortgage.
This is important precedent as owner cannot negate mechanic's liens by obtaining a mortgage after a contractor has begun work on the project unless they use all of the proceeds of the mortgage to pay for construction.
WHAT DO CONSTRUCTION ECONOMIC NUMBERS MEAN?
We have all seen the recent economic numbers. Construction jobs are up, but so is construction unemployment. Non-residential spending increased slightly in December, but materials prices increased in January. A construction backlog indicator remained unchanged in the fourth quarter of 2012 and will likely remain so for 2013.
Nonresidential construction spending increased 0.3 percent in December, 2012 according to the U.S. Census Bureau. The increase was driven by increased spending in the private, nonresidential sector. This increase indicates that the national economy is staying in recovery mode. However, increases in privately funded construction is being offset by declines in the publicly-funded segment.
The U.S. construction industry added 28,000 jobs in January; however, at the same time, construction unemployment shot up to 16.1 percent according the the U.S. Department of Labor. The increase in the number of jobs is likely due to the ongoing Hurricane Sandy reconstruction. The rise in unemployment is not surprising due to the seasonal nature of the construction industry.
The Associated Builders and Contractors' Construction Backlog Indicator, a survey of industrial and commercial contractors' work to be performed in the next few months, remained flat at approximately eight months of work from the third quarter through the fourth quarter of 2012. The ABC believes that fiscal cliff fears, limited public capital improvement budgets and lackluster growth are to blame for this stagnation. Risks limiting the release of additional money and projects include the looming sequestration and the pullback in publicly-funded construction projects.
National construction material prices increased 0.7 percent in January 2013 according to the Producer Price Index. This increase appears to be driven by an increased demand for softwood lumber, both for residential construction and for export to China. Look for material prices to continue to fluctuate in 2013.
All of this indicates that construction is still in a holding pattern. There are some indications that the private sector is increasing slightly, while public work is being postponed or shelved. Hurricane Sandy has produced a spike in regional jobs. However, overall, the construction industry remains flat. This is due to economic uncertainty, the fiscal cliff and sequestration. In addition, construction lenders will likely continue to avoid any risk pending a more secure environment.
BUILDER'S WARRANTY EXTENDED TO SUBSEQUENT PURCHASER
In a recent decision, the Pennsylvania Superior Court held that a homebuilder may have liability to the home’s second owner that bought the home from the parties that the homebuilder contracted with for a breach of the implied warranty of habitability.
In Conway v. The Cutler Group, the Court considered whether a homebuilder’s implied warranty of habitability extended to a subsequent purchaser who discovered latent defects that caused water infiltration. The Court held that it did.
Cutler constructed a home for the original buyers in Jamison, PA in 2003. The Conways bought the home from the original buyers in 2006. The Conways discovered water infiltration around the windows in the master bedroom in 2008. They hired an engineering and architecture firm to assess the infiltration problem. The firm prepared a report concluding tha the house suffered from several construction defects and recommended a complete stripping off of the entire house.
The Conways sued Cutler in 2011, alleging a breach of the implied warranty of habitability. The trial court dismissed the case, reasoning that the Conways, as subsequent purchasers, did not contract with Cutler and could not rely on the implied warranty.
The Pennsylvania Superior Court took the appeal and noted the the issue of whether the implied warranty of habitability extended to subsequent purchasers was one of first impression for Pennsylvania appellate courts. The implied warranty of habitability, a warranty that the house will be a suitable living unit, is a creation of public policy, shifting the risk of certain latent construction defects from the home buyer to the home builder. It is not dependent on a contract between the parties.
The Court noted that local courts of common pleas had addressed this issue and were deeply divided on the issue. The Court distinguished a warranty of workmanship or of workmanlike performance from the warranty of habitability as workmanship warranties are dependent on a written contract. The Court found that the policy behind the warranty of habitability is that a purchaser of a new home relies on the skill of the builder to provide a suitable living unit. Homebuyers and subsequent purchasers do not have the expertise to evaluate whether the house was constructed properly. The Court reasoned that it would be inequitable to shift the risk of a latent defect back from the homebuilder to a second or subsequent purchasers and allowed the subsequent purchasers' lawsuit to continue.
This decision, while surprising, is limited to homebuilders. In addition, as the Court noted, the subsequent purchasers still have to proved that the alleged defect is latent, that it is due to the builder's design or construction and that it affects habitability.
ALERT - ALL EMPLOYERS MUST POST REVISED PA AND FEDERAL LABOR LAW NOTICES
All employers in Pennsylvania must ensure compliance with the revised labor law posting requirements and replace outdate notices. Recent federal revisions include five new or revised notices. In addition, there is a recent change to the PA Minimum Wage notice.
Notices regarding numerous federal and PA laws must be posted for employees to see. I can provide the updated poster.
All employers must post, in an area where employees can view, company information, Pennsylvania Notices, including
PA Unemployment Insurance Notice
PA Workers' Compensation Notice
PA Abstract of Equal Pay Law
PA Human Rights/Discrimination
PA Minimum Wage Law & Fact Sheet
PA Abstract of Child Labor Law
PA Hours of Work for Minors.
In addition, all employers must post federal notices, including
Employee Polygraph Protection Notice
OSHA 3165 It's the Law Notice
Equal Employment Opportunity is the Law Notice
IRS Notice 797
IRS Notice of Withholding Earned Income Credit
Federal Minimum Wage
USERRA Rights and Benefits Notice
Family and Medical Leave Act - for employers of 50 or more employees
NLRA Employee Rights Notice (PENDING)
USCIS Discrimination Notice
Employee "Right to Know" Notice
Emergency Numbers
Payday Notice
Please contact me for more information on getting the all-in-one PA and federal labor law poster.
QUESTION - May a Contractor Count a Material Supplier Toward WBE/MBE Goals?
Clients often ask whether a material supplier may be counted toward MBE/WBE/DBE goals. The answer, as to most legal questions, is it depends. Generally, public agencies will allow contractors to designate minority/woman/disadvantaged-owned material suppliers toward goals if the supplier owns or operates a store or warehouse in which materials of the type specified under the contract are bought, kept in stock and regularly sold to the public. In addition, the supplier must, in most case, have the specified item in stock.
Under PennDOT regulations, contractors can count 60% of materials purchased from a supplier if the supplier is a "regular dealer". A regular dealer owns or operates a store, warehouse or other establishment in which the materials, supplies, articles or equipment of the general character described in the specifications and required under the contract are bought, kept in stock and regularly sold or leased to the public in the usual course of business. Generally, a supplier is not a regular dealer if it has to order the specified supplies. Also, "drop shipments", , may not be counted toward DBE goals.
In Philadelphia, the City will generally not allow contractors to count WBE/MBE suppliers toward goals where the supplier does not stock the specified item. This is especially true where the specified item is a custom item or item that must be fabricated to order.
Please contact me with any questions you have regarding WBE/MBE/DBE suppliers.
Proposed Change to Mechanic's Lien Law Would Require Subcontractors to Provide Notice to Owners within 20 Days of Starting Work
A bill currently pending in the PA General Assembly proposes requiring subcontractors to provide notice to project owners of their provision of labor and materials to the project within 20 days of starting work or face losing their rights to file mechanic’s liens.
House Bill 473 would require the creation of a State Construction Notice Directory where project owners would register their projects online. Subcontractors would then have a duty to register also. The bill, sponsored by Rep. Thomas Killion of Delaware and Chester Counties, would require the PA Department of Labor and Industry to establish and administer the proposed State Construction Notices Directory (the "Directory") by July 1, 2015. The Directory would serve as a means for contractors and subcontractors locate notices of commencement.
A project owner would be allowed to file a notice of commencement with the Directory prior to the commencement of work on a project. Subcontractors, as a condition of retaining the right to file mechanic's liens, would have a duty to monitor the Directory and to file notice with the project owner within 20 days after first providing materials in connection with the project. The bill proposes a form Notice of Furnishing that subcontractors would have to fill out and file with the owner via certified mail, personal delivery or filing on the Directory. The bill would make it unlawful for contractors to contractually require subcontractors not to file the notice of furnishing.
The passage of this bill will obviously create another hurdle for subcontractors to gain their right to lien property for labor and materials provided for the benefit of project owners. The existing mechanic's lien law already requires subcontractors to give a project owner 30 days' written notice of the intent to file a mechanic's lien. The proposed law would add an "up-front" notice requirement. This additional notice will likely result in the loss of many subcontractors lien right and in increased administrative costs to subcontractors. Representative Killion's telephone number is 610-325-1541 and his email is tkillion@pahousegop.com
PA Supreme Court Rules that Claims Arising from State Contracts Must be Filed in the Board of Claims
In a March, 2013 decision, the Pennsylvania Supreme Court ruled that all claims arising out of contracts with the Commonwealth must be filed in the Board of Claims and not in state court.
In Scientific Games Int’l v. Dep't of Revenue, the Court considered the Commonwealth Court’s decision that it had jurisdiction over a dispute between a company and the Department of Revenue over a contract awarded, but not executed, that was subsequently cancelled.
Scientific Games ("SG") was awarded a contract for the design and implementation of a computer system to monitor slot machines at casinos in Pennsylvania. Before the contract was signed by both sides, the Department of Revenue cancelled the RFP. SG sued for performance and sought an injunction in Commonwealth Court, relying on that court's original jurisdiction over actions against the Commonwealth. The Commonwealth overruled the Department's objections to jurisdiction.
The PA Supreme Court reversed, finding that sovereign immunity prevented an action seeking force the Commonwealth to enter a contract:
The Procurement Coe establishes administrative processes to address disputes arising in the procurement setting. On account of the doctrine of sovereign immunity, however, contractors, bidders, and offerors have limited recourse and remedies. Relative to controversies in matters arising from procurement contracts with Commonweath agencies, the Board of Claims retains exclusive jurisdiction (subject ot all jurisdictional prerequisites) which is not to be supplanted by a court of law through an exercise of original jurisdiction.
The take away for contractors is when doing business with the Commonweath, your venue for contract claims is the PA Board of Claims.
Be Aware that Partial Releases of Claims are Enforceable, but May be Waived
Owners and general contractors now routinely require that partial release of all claims be given with monthly payment applications. These releases are enforceable, but may be waived.
In a recent federal decision, the Court held that such partial releases are generally enforceable and could bar delay claims. However, the releases may be waived by conduct including representations that outstanding claims would be “taken care of”, by settlement discussions and by statements made by counsel.
In Lydon Millwright Services v. Ernest Bock & Sons, Lydon had subcontracted with Bock to install a baggage handling system at the Philadelphia Airport. Lydon experienced numerous delays in performing its work and sued Bock for nearly $2 million in delay costs. Bock sought to have the case dismissed on summary judgment, arguing that Lydon had submitted 54 partial releases of claims with its payment applications. The partial releases included "any claims arising from delay" and allowed Lydon to "reserve and except out of this release" any claims detailed on the reverse side of the releases.
The Court found that because the plain language of the releases was not ambiguous or contain a "contractual hook", they would be enforceable to bar Lydon from pursing its delay claim in the absence of a waiver. Lydon contended that Bock had waived the releases numerous times, by
Telling Lydon that it could team up with Bock to pursue the delay claims jointly against the owner;
Telling Lydon that Bock would "take care" of Lydon with respect to the delay damages;
Bock's counsel proposing that Lydon release the delay claim by entering into a liquidating agreement with Bock by which both companies would pursue delay damages;
Attempting to settle Lydon's claim.
The Court denied Bock's motion for summary judgment, finding that the question of waiver was one for the jury to determine. Basically, it was for the jury to decide whether Bock's actions constituted a waiver of the partial releases signed by Lydon.
Contractors and subcontractors must understand that executing monthly releases of claims is not merely a clerical function and can have serious implications. It is best to reserve or except any outstanding claims out of the release. Similarly, owners and general contractors need to take care in how they acknowledge and react to (and how their attorneys react to) subsequent claims.
QUESTION - Can I be Forced by Contract to Litigate/Arbitrate a Long Way from Home?
Recently, a client asked me to review a contract that contained a clause requiring all disputes to be resolved in a state two time zones away from the project site. Are such clauses enforceable? Well, currently it depends on where you are. However, the US Supreme Court will consider this issue later this year.
Federal courts across the country are divided on the issue of the enforceability of forum selection clauses. Most will enforce them. Some hold this is only one factor in deciding where the parties must litigate or arbitrate their disputes.
The majority of federal circuits will enforce forum selection clauses unless there is fraud or the chosen forum is unreasonable. The minority view, reflected in the case from the Fifth Circuit case, In re: Atlantic Marine Construction Co., is that other factors, including the location of the project and witnesses are located, are just as important in determining where the parties must resolve their disputes. The US Supreme Court accepted review of the Atlantic Marine Construction Co. case, presumably to resolve the differing federal opinions, and a decision may come this year.
In our federal courts, the Third Circuit, forum selection clauses are interpreted according to the applicable state law.
Under Pennsylvania law, forum selection clauses are presumed to be valid. The law permits enforcement when the parties have freely agreed that litigation shall be conducted in another forum and where such agreement is not unreasonable at the time of litigation.
Under New Jersey law, forum selection clauses are enforceable if the contract has been mutually agreed upon by the parties, is supported by valid consideration, and does not violate codified standards or offend public policy. For mutual assent to exist, there must have been a meeting of the minds of the parties. This signifies that each party to the contract must have been fairly informed of the contract's terms before entering into the agreement.
Please contact me if you run across a forum selection clause requiring you to arbitrate or litigate disputes in a state far away from the project.
PA Superior Court Allows Site Subcontractor to File Mechanic's Lien When Planned Building Not Built
In a decision filed in May of 2013, the sharply-divided Superior Court overruled the trial court’s striking of a Lancaster-area site work contractor’s mechanic’s lien despite precedent that a mechanic’s lien must be connected to the construction of a building.
In B.N. Excavating v. PBC Hollow-A, the Court ruled that where excavation is performed as an integral part of a construction plan, that activity falls within the Mechanic’s Lien Law regardless of whether a structure is ever built.
BN Excavating performed excavation work, including a silt fence, temporary riser, emergency spillway, topsoil stripping, cut and fill, concrete pipe, sub-grading for building pad, storm water bed and other site work at the Providence Business Park in Phoenixville. BN was not paid and filed a mechanic's lien for $118,670.71. The proposed buildings were never built and the owners sought to have the lien dismissed. The trial court in Montgomery County dismissed the lien, citing prior case law that no lien can attach to property for work unconnected to the construction of a building.
The Superior Court framed the issue as whether land is lienable for site work performed as an integral part of a planned construction process even if construction never occurred. The Court analyzed the language of the Mechanic's Lien Law which provides that property is lienable for excavation performed incidental to the erection or construction of an improvement. Nothing in the Lien Law requires that a structure actually be erected. After distinguishing BN's case from cases where excavation work is performed independent of a construction plan, the Court ruled that where excavation is performed as an integral part of a construction plan, the activity falls within the Mechanic's Lien Law regardless of whether a structure is ever erected. Because BN performed work integral to the construction of the buildings (excavation, sub-grading of building pads, underground storm water system) and because BN alleged in its mechanic's lien that it performed the site work as part of a planned two-building construction project, the Superior found that the mechanic's lien was valid.
The law was and remains clear that site work unconnected to any plans for the construction of a structure may not be the subject of a lien. However, it now clear that site work performed incidental to plans for the construction of a structure may be the subject of a mechanic's lien. Contractors and subcontractors should consider including such an allegation in their mechanic's liens.
New Law Would Invest $2.5 Billion in Pennsylvania Highways, Bridges and Other Infrastructure
The Bridge to Pennsylvania’s Future is currently being finalized in the PA Senate’s Transportation Committee. The new law proposes to raise money to modernize Pennsylvania highways, bridges, transit agencies, railways, airports, ports, and bicycle and pedestrian programs within 5 years.
It is estimated that 50,000 jobs will be created, that the threat of a crumbling infrastructure will be diminished and that a more hospitable environment for business development will be created.
Pennsylvania leads the country in structurally deficient bridges. 4,400 (18%) of Pennsylvania's 25,000 state-owned bridges are rated as structurally deficient. Of the 44,000 miles of state-owned roads in Pennsylvania, 9,000 (23%) are in poor condition.
By the fifth year of the Bridge to Pennsylvania's Future, it is estimated that the following investments will be made:
$1.9 billion for Pennsylvania's state and local highways and bridges
$510 million for Pennsylvania's urban and rural transit agencies
$115 million for Pennsylvania's railways, airports, ports and bicycle and pedestrian programs
PennDOT and municipalities will collaborate to upgrade, modernize and manage 14,000 traffic signals owned and maintained by local governments.
The following changes are proposed to Pennsylvania DMV:
Annual vehicle registration will now be a two year registration
Four year driver's license will now be a six year license
Vehicle registration stickers will be eliminated.
The funding will be raised, at least in part, in the following ways:
The wholesale price cap on fuel will be phased out
The fuel tax will be reduced by 17% over a two year period
Vehicle licensing, registration and permitting fees will be raised
Drivers who violate traffic laws will pay a $100 surcharge
Drivers who fail to obey traffic control devices will be fined $300 instead of $25 to $100.
The Bridge to Pennsylvania's Future will provide needed infrastructure improvements, create jobs and raise funds for highway and other construction
Check Indemnity Contract Language to Avoid Responsibility for Another’s Negligence
Contractors and subcontractors routinely accept contractual language regarding indemnity without a second look. However, this language could make you responsible for another contractor’s negligence, even where your own employee is injured.
In a ruling in Philadelphia last month, the Court held that “clear and unequivocal language” of an indemnity provision required a subcontractor whose employee was injured due to a GC ’s negligence to reimburse the GC’s settlement payment and attorneys’ fees.
In Ferraro v. Turner Construction Co., the case involved an injury that occurred during the construction of a new Intermediate High School for the Reading School District. Turner was the construction manager, Perrotto Builders was the GC and Riegel Engineering was the structural steel subcontractor. The plaintiff, an employee of Riegel, was injured when standing on a scissor lift installing steel stairway as he lost his balance and fell 30 feet. The plaintiff sued Turner, Perrotto and Lift, Inc. Perrottoa joined Riegel to the lawsuit based on an indemnity provision in Riegel's subcontract. Perrotto settled with the plaintiff, paying $1 million.
Perrotto proceeded to trial against Riegel and the indemnity provision, which provided:
Subcontractor shall indemnity and hold harmless the Owner, the Architect and the Contractor . . . from and against all claims, damages, losses and expenses, including but not limited to attorney's fees . . . regardless of whether it is caused in party by a party indemnified hereunder . . . The Subcontractor's obligations under this section shall not be limited in any way , . . under Workers' Compensation acts.
The jury found in favor of Perrotto on this language. The judge upheld the jury verdict and found that the language met the "Perry-Ruzzi" rule which requires clear, specific and express language in the terms of the agreement to support indemnification by an indemnitee which is itself negligent. The court entered judgment against the subcontractor-employer for $1,000,000.00 and $177,272.07 in attorney's fees and costs.
You can be liable for another party's negligence that results in injury, even if the injury is to one of your employees. Please review indemnity provisions carefully or engage counsel to do so before signing any contract.
Bonding Companies Can Waive “Safe Harbor” and be Made to Pay Downstream Claims
Generally, when a contractor pays a subcontractor, the Pennsylvania Procurement Code (the “Code”) provides that future claims against the contractor or its bonding company are barred. However, this law can be waived by the language in a payment bond.
In a July 2013 Commonwealth Court decision, the Commonwealth Court upheld summary judgment against a GC’s bonding company where the GC paid its subcontractor which later declared bankruptcy and in favor of the subcontractor’s unpaid supplier where the payment bond’s language effectively waived the Code.
In Berks Products Corp. v. Arch Insurance Co., Skepton Construction contracted with Wilson Area School District to build a new intermediate school. Skepton gave Wilson a payment bond. Skepton also engages R.A.Tauber as its concrete subcontractor Tauber bought material from Berks Products but failed to pay Berks Products in full, owing $52,679.26. Skepton terminated Tauber and claimed that Tauber was paid in full, Tauber declared bankruptcy and Berks Products brought a claim under Skepton's bond.
Skepton's bonding company defended the claim, claiming that Skepton had paid Tauber in full, thereby barring Berks Products claim pursuant to the Code which provides:
once a contractor has made payment to the subcontractor . . . future claims for payment against the contractor or the contractor's surety by parties owed payment from the subcontractor which has been paid is barred.
Berks Products had moved for summary judgment at the trial court level, arguing that the language of the payment bond:
if the Principal and any subcontractor . . . promptly shall pay or cause to be paid, in full, all money which may be due any claimaint supplying labor or materials . . ., then this Bond shall be void; otherwise this Bond shall be and shall remain in force and effect.
had waived the "safe harbor" provision of the Code. The trial judge agreed and entered judgment in favor of Berks Products against the bonding company.
The bonding company appealed, arguing the the Code should apply and that the ruling violated PA's Public Works Contracting Bond Law (the "Bond Law"). The Commonwealth Court upheld the ruling of the trial court, finding the bonding company liable for the claim by Berks Products. The Court found that the Code did apply but that the bonding company had waived it by the language in the bond. The Court also held that the Bond Law was not violated as one of the main purposes of the Bond Law is to ensure a remedy for subcontractors who supply labor and materials for a project.
The takeaway is to obtain and review payment bond language carefully. Careless drafting by a surety may expose it to liability even if the principal pays it subcontractors in full.
You Have Six Months from Last Day of Work to File a Mechanic’s Lien— NOT INCLUDING PUNCHLIST WORK
In a recent decision, the Pennsylvania Superior Court ruled that a contractor’s return to the project to complete deficiency items does not constitute a day of work for purposes of Pennsylvania’s Mechanic’s Lien Law (the “Lien Law”).
In Neelu Enterprises v. Agarwal, the Court ruled that where a contractor returned to complete defective items after his contract had been terminated, this did not constitute the extension of the “completion of his work” under the Lien Law.
The contractor had entered into a contract to build a house in November of 2008. The owner became dissatisfied and fired the contractor on December 8, 2010, at which time the contractor made the owner sign and acknowledgement of the termination. In January of 2011, the contractor returned to the house with his subcontractors to "observe and correct certain deficiencies." The contractor filed his mechanic's lien for unpaid contract balance and lost profits on June 23, 2011.
The owner filed objections, arguing that the contractor had not complied with the Lien Law which requires that all mechanic's liens be filed "within six (6) months after the completion of his work." The trial court agreed with owner and dismissed the contractor's lien.
On appeal, the Superior Court considered the issue of whether the return to the project to correct deficiencies extended the time to file a mechanic's lien. Citing a case from 1890, the Court found that it did not. Work done to correct a defect will not preserve the lien as the contract is unchanged and the work is done without charge to the owner. The Superior Court upheld the dismissal of the lien.
Contractors must be vigilant in asserting their lien rights in a timely fashion. Going back to correct defective work may not extend the time for filing a lien.
New Jersey Low Bidder Properly Thrown Out Where Contractor Failed to Include Pre-Qualification Certificates
New Jersey bidders — beware. In a decision issued last month, the New Jersey Superior Court, Appellate Division, upheld New Jersey’s strict bidding requirements and threw out a low bidder.
In A&A Industrial Piping v. County of Passaic, the Court upheld a county’s rejection of a low bid because the bidder had failed to include pre-qualification certificates for its subcontractors. The public entity has broad discretion which is not easily overturned unless it is arbitrary, capricious or unreasonable.
The bidder had failed to include pre-qualification certificates (for New Jersey's Department of Property Management and Construction) for its plumbing and steel subcontractors in its bid for the upgrade of the county jail's HVAC and fire protection systems. The Court found this requirement "substantial" and that the county could not waive non-compliance because it"could affect a bidder's overall bid price" and because it provides "a guarantee the work will be performed by pre-qualified prime and subcontractors."
Contractors in New Jersey must strictly comply with bidding requirements. Rejected bidders face a heavy burden to challenge the decision of a local government to reject their bids as non-conforming. In such circumstances, the contractor should consult its construction attorney as soon as possible.
New Jersey Contractors Can Sue Architects for Delays and Verbal Change Orders
In a recent federal case, a judge decided that, under New Jersey law, a contractor’s claim for delay damages against the project architect were not barred by the economic loss doctrine.
In SRC Construction Corp. of Monroe v. Atlantic City Housing Authority, the contractor had brought claims for delay damages and unapproved change orders against the architect. The architect defended, arguing that the contractor’s claim was barred because its contract was with the owner. The Court disagreed.
The contractor alleged that the architect was negligent and caused it damage by failing to provide permits, submitting non-compliant shop drawings to the owner, failing to respond to RFIs in a timely manner and verbally approving change orders that were later denied by the owner.
The architect argued that the "economic loss doctrine" barred the contractors claims. The economic loss doctrine precludes a negligence action, in addition to a contract claim, unless the plaintiff can establish an independent duty of care. Judge Irenas decided that the economic loss doctrine only applies to bar negligence claims between parties to a contract. This is to prevent plaintiffs from resorting to negligence actions to seek the benefit of the bargain they made in the contract.
The architect argued that because the contractor's contract was with the owner, the doctrine should bar claims against the architect because the contractor was seeking the benefit of its contract with the owner from the architect. The Court refused to stretch the law that far. It held that where there was no contractual relation between the contractor and the architect, there can be no contract claim and therefore, a negligence claim cannot be barred.
The law is similar in Pennsylvania. If a contractor is damaged by the negligence of the architect, the damages may be recoverable.
Philadelphia School District Sues Its Architects on Capital Improvement Program
Last month, the School District of Philadelphia filed 26 lawsuits against more than 2 dozen design professionals that worked on the School District’s Capital Improvement Program.
According to a statement by the School District, the lawsuits seek $2 million for deficiencies in the drawings and specifications that allegedly caused cost overruns on the Program.
The School District faces an uphill battle as there are defenses. Architects are professionals and under Pennsylvania law, a certificate of merit, signed by another architect certifying that the defendant was negligent, must be filed with the court. The School District will be hard pressed to identify an architect willing to certify that 26 of his colleague firms were negligent, let alone be able to prove these allegations.
In addition, the School District's claims seem illogical. How could all of the projects' cost overruns be the result of architectural errors? And, if the average cost overrun was less than $85,000 per project, is this indicative of widespread design issues?
And, in the larger picture, Is this related to School District's budget shortfall?
PA Courts Continue to Enforce Partial and Final Waivers of Liens and Claims
As we’ve advised in the past, contractors must be careful in signing partial and final waivers. Recently, the PA Commonwealth Court refused to allow a supplier to claim an amount due after it had signed a final release, even against a bonding company.
In Conestoga Ceramic Tile Distributors v. Travelers, the Court ruled that the fact that Conestoga signed a final release barred all subsequent claims on the project, including those against the subcontractor, the GC, the GC’s surety and the owner.
Conestoga supplied tile to ProFast Commercial Flooring, a subcontractor to IMC Construction which had a contract with Penn College. IMC had a payment bond on the project. In December of 2009, Conestoga signed "Lower Tier Vendor Final Waiver and Release". In October, 2010, Conestoga sent a claim for $169,000 to Profast and to IMC's bonding company. Conestoga received some payments, $101,000 of the $169,000, via a joint check agreement with IMC and Profast, but a balance remained of $68,000. Profast went out of business and Conestoga sued IMC's bonding company, IMC, Penn College and Profast.
The Commonwealth Court upheld the dismissal of Conestoga's lawsuit by the Lycoming County Court of Common Pleas based on the final waiver. The waiver stated that is was "an express warrant and representation from Conestoga that there are no other costs, expenses, fees charges . . .relating to Conestoga's Work performed on the project." The Court held that this language in the waiver barred any further claims against Penn College, IMC and Profast: "This language is clear. Conestoga waived 'all claims, demands and causes of action' against Contractor, Subcontractor and Penn College."
The court also held that the final waiver barred claims against the GC's bonding company: "If the principal has no liability, neither does the surety . . . Under the Final Waiver and Release, Contractor has no liability to Conestoga. It necessarily follows that Travelers, as surety for Contractor, has no liability to Conestoga.
As we have advised in the past, everyone must be extremely cautious in signing both partial and final waivers and releases of liens and claims. They should be rigorously reviewed before you sign away important rights.
Federal Courts Strike Tort Claims v. Bonding Companies
Claims for bad faith and other non-contract claim have been bounced by federal judges in the last two months.
In Upper Pottsgrove Township v. International Fidelity Ins. Co., the Township’s claims for bad faith against IFIC were thrown out because PA’s bad faith insurance law does not cover sureties. IFIC had provided the Township with subdivision bonds on behalf of TH Properties for the Coddington View subdivision in the Township. TH Properties went bankrupt in April, 2009 and all work stopped. Two years later, the Township demanded the full amount of the bond as the development deteriorated. When IFIC refused to pay, the Township sued IFIC and included claims for bad faith. This claim would have allowed the Township to seek punitive damages and its attorney's fees.
The Court dismissed the bad faith claim. Pennsylvania's Bad Faith Statute applies in an action "arising under an insurance policy." Because surety bonds are not insurance contracts, the court found that the Bad Faith Statute did not apply and dismissed that part of the Township's lawsuit..
In Reginella Construction Co. v. Travelers, claims not arising out of contract, for example, interference with contract and bad faith, were stricken with no permission to amend the claim. Reginella had contracts with the Moon Area School District ("MASD") and with the Ohio Turnpike Commission ("OTC"). Travelers provided bonding for both of these projects. During these project, Reginella stopped using Travelers as its surety for future projects. Reginella claims that Travelers then refused to bond off a lien filed on the OTC project, causing OTC to terminate Reginella. Then Travelers demanded that MASD turn over the contract balance due Reginella to Travelers. Travelers allegedly met with Reginella's subs to advise them that Reginella would be terminated. Reginella went out of business and sued for breach of fiduciary duty, tortious interference with contract and bad faith.
The court dismissed the claim in full, finding that the underlying indemnity agreements between Reginella and Travelers were contracts and that the duties allegedly breached were contractual in nature. The gist of the action doctrine provides that when a case "is really about" a contractual relationship, other claims or torts should be precluded. This is because torts are violations of a general duty of care imposed by law on society, while contracts are agreements concerning the obligations between the parties to a contract. Reginella failed to file a claim for breach of contract. in its complaint.
Reginella then sought the court's permission to file an amended complaint and allege a breach of its contracts with Travelers. Courts are usually pretty liberal in granting such a request. However, this court refused to do so, saying it would be futile and would cause undue delay. Reginella had countersued Travelers in a separate case in state court and the federal court refused to continue a parallel action.
You should realize that all dispute you have with a surety will be based on the indemnity agreement and bonds. You will not have recourse to tort claims, including bad faith.
PA Superior Court Answers Questions About Mechanic’s Lien Law
Several questions about PA’s mechanic’s lien law were recently answered by the PA Superior Court in Hogg Construction v. Yorktowne Medical Center.
1– Does the 6-month time limit to lien, effective January 1, 2007, apply if the lien was filed in 2007, but the work was completed in 2006 when the time limit was 4 months?
Yes.
2—Is the issue of whether work performed after substantial completion extends the “last day of work” for the time to file a lien a question of fact for the jury?
Yes.
3—Does a lien claimant have to file a new lawsuit under a new docket number to foreclose on a mechanic’s lien?
No.
In this case, Hogg contracted with YTMC Fit-Out to renovate a condo connected to the Yorktowne Medical Center. Hogg claims that it is due almost $90,000. Hogg completed its work on September 17, 2006 and a certificate of substantial completion was issued the next day. In November, Hogg returned after the sale of the condo to install an electrical receptacle and to replace a smoke detector. Hogg filed its lien on April 30, 2006, more than 7 months after substantial completion and more than 5 months after Hogg's return to the project. Hogg later filed a complaint to foreclose on the lien.
The new owners of the condo moved to have the lien stricken and the complaint dismissed, arguing 1- the lien was untimely as it was filed more than 4 months after the last day of Hoggs work; 2 - Hogg's return in November did not extend the last day of Hogg's work from September to November; and 3 - Hogg's complaint was unlawfully filed under the same docket number as the lien. The trial court agreed and dismissed the lien and the complaint. Hogg appealed.
The Mechanic's Lien Law was amended, effective January 1, 2007, to increase the time claimants have to file a lien from their last day of work, from 4 months to 6 months. Because the work performed by Hogg occurred in 2006, but the claim was filed in 2007, the court had to determine which version of the law applied. The court held that the new version allowing 6 months to file a lien applied, reasoning that the new version, by its own terms, applies to liens filed after January 1, 2007, and that three sections of the new version, but not the section specifying the 6-month time limit, specifically state that they apply to contract entered into after January 1, 2007. By not making such a statement concerning the 6-month limit, the court determined the lawmakers wanted the 6-month limit to apply to all liens filed after January 1, 2007. Therefore, the court held that the 6 month limit applied to the lien as it was filed after January 1, 2007.
The law provides that the completion of a lien claimant's work means "performance of the last of the labor or delivery of the last of the materials required by the terms of the claimant's contract or agreement, whichever last occurs." Hogg claimed that the trial court wrongfully dismissed the lien as the return of Hogg's electrical subcontractor to install the receptacle and replace the smoke detector extended the completion of Hogg's work. The court agreed, finding that when the receptacle and smoker detector were installed and whether or not these installations were the last of the labor required under the contract were to be decided by the facts of the case. These issues would have to be decided by the judge or jury at trial.
Pennsylvania's rules of civil procedure provide that a lien and an action to foreclose on a lien are separate and distinct. However, the court found that the rules do not say that a complaint to foreclose a mechanic's lien must be filed at a different docket number than the lien. More importantly to the court, the rules do not state that the filing of a complaint to foreclose a mechanic's lien under the same docket number as the lien is fatal to the complaint and lien. According the court upheld the lien and referred it back to the trial court for trial.
These questions routinely come up in the context of collecting on mechanic's liens and this case provides us with a couple signposts.
PA Transportation Funding Law Has Hundreds of Millions of Dollars for Construction
Pennsylvania’s Transportation Funding Law, passed by the PA General Assembly on November 21 and signed into law by Governor Corbett on November 25, includes hundreds of millions of dollars for improvements to PA roads, bridges and mass transit systems which will been a boon for public contractors.
The funds will be raised through increases in the gasoline tax and various fees for vehicle registration, driver licensing and moving violations. PennDOT will decide where to use the money.
The $2.3 billion funding bill includes hundreds of millions of dollars allocated to the Philadelphia area. One of the larger projects is the replacement of the seven bridges crossing the Vine Street expressway in Center City. In addition, the bridge at the congested intersection of Route 23 and Route 422 and the Route 422 bridge that crosses the Schuykill River in will be replaced. PennDOT has not yet set a schedule for these projects.
Commonwealth Court Hold that County Must Comply with Local Road Construction Rules
This month, the Commonwealth Court decided that Carbon County had to comply with local road ordinances in constructing access roads to the proposed Packerton Business Park in Mahoning.
In In Re: Petition of Commissioners of Carbon County to Lay Out and Open County Road, Carbon County asked the Court to review the trial court’s decision denying the County’s petition to take ownership of a township road. The Commonwealth upheld the trial court's finding that the township’s ordinance was not preempted.
Carbon County wanted to develop a 70 acre parcel of land into a new industrial park to be known as Packerton Business Park. The County's plans included moving a Mahoning Township road to allow access to the park. The Township rejected the County's plans because they did not satisfy Township requirements for a 20 foot carpath width and a 6 foot shoulder. The County then filed a petition with the Carbon County Court of Common Pleas to condemn and take possession of the road in dispute. The trial court rejected the County's argument that the County Road Law, which was less stringent than the Township's ordinances, trumped the Township's law.
On appeal to the Commonwealth Court, the County argued that the Township's road ordinance was irrelevant because the County's activity in laying out roads is not land development, that the County law by its own language preempts or trumps the Township law, and that any other interpretation would effectively allow townships to spend County money through regulation.
The Court reviewed both laws. The County Road Law did not specifically state that the County may open roads accessing a subdivision without complying with local township laws. The Township law was equally silent on conflicts with county laws. Therefore, the Court had to examine the consequences of each law prevailing where neither one specifically preempted the other. In the end, the Court determined that the County could comply with its own law and the Township law and that the County's compliance with local laws would not frustrate the County's actions, only regulate them.
A lesson from this case is that developers, their design team and their counsel should review county and local laws before submitting plans for approval.
US Supreme Court Decides Forum Selection Clauses are Enforceable Absent Greater Public Interest
Earlier this month, the US Supreme Court decided that contract clauses requiring that disputes be litigated in a state other than where the construction project is located are enforceable unless public interest factors weigh in favor of litigating in the state where the project is located.
This decision, however, does not invalidate specific state laws, such as Pennsylvania’s, which state that such clauses are unenforceable in construction contracts.
In Atlantic Marine Construction Co. v. US District Court, a general contractor and a subcontractor on a child-development center project in Texas had a payment dispute. The contract required that all lawsuits would have to be brought in the general contractor's home state of Virginia. The subcontractor argued that this unenforceable as the project was in Texas and it would be burdensome to litigate 2000 miles away.
Justice Alito upheld the forum selection clause, stating that the bargained-for forum selection clause is given controlling weight in all but the most exceptional cases. The party seeking to litigate elsewhere has the burden of showing why the case should not be litigated where the parties agreed to litigate. The court stated that the parties' private interests should not be considered and only "public interest factors" should be considered. Public interest factors may include court congestion, local interest in the dispute and the local law.
The decision allows consideration of state laws that invalidate forum selection clauses in construction contracts. 24 states, including Pennsylvania, have laws that hold that such forum selection clauses are unenforceable.
Contractors must carefully review and negotiate all terms of a contract before signing them. It is recommended that you contact counsel before signing any contract.
Simple Steps to Obtain Payment and Performance Bonds
The state of the construction industry is driving private owners to require payment and performance bonds on more and more projects. In turn, more general contractors are requiring more subcontractors to provide bonding. It is important to start the process of obtaining
bonding well in advance of contracting so you don’t miss the opportunity to bid on a bonded job.
This article will provide the basics of obtaining bonding, including what information you will need to provide and whom to contact in order to get the bonds you need.
By issuing your company payment and performance bonds, a bonding company is promising that if your company cannot complete its contract work or if your company does not pay its subcontractors and suppliers, the bonding company will protect the obligee of the bond (the party you contract with) by completing or paying for the completion of your work and paying your subcontractors and suppliers. The bonding company will therefore be interested in your company and its finances and management.
First, you should gather the information a bonding company will want to see before writing bonds for you. Bonding companies will want a complete understanding of your overall business operation, details regarding your accounting and estimating operations, financial reporting and information on completed projects. You should be prepared to provide:
business and personal financial statements
a list of references from owners, GCs, subs and suppliers
a formal business plan for your company
a formal contingency plan in case you or other key managers cannot complete the project
your expectations of bonding needs and capacity
Next, you should build relationships and talk to people who can get you what you need. These include:
insurance/ surety agents who can find you the right fit for your bonding needs
your accountant who can assemble the necessary financial package for the bonding company
peers to get leads and information about surety relationship
your attorney who can guide you through the process and review the agreements required by the bonding company
.
You should treat your bonding company as a valued business partner. A good relationship with your bonding company can lead to the financial success of your company.
Develop an Effective Distracted Driving Policy to Reduce Liability
Everyone’s aware of the dangers of talking and texting while driving. States and local governments are enacting more laws prohibiting handheld communications while driving. Violations of these laws by your employees could result in additional liability for your company.
Employees often use cell phone for work or personal business while driving. However, a lax company policy could result in a greater liability should an accident occur while an employee is talking or texting while driving. A plaintiff’s attorney may sue your company and seek payment based on a lack of direction from your company to employees on this issue. A company policy on distracted driving may help to reduce that risk.
An effective policy should not be limited to hands-free communication while driving, but all aspects of distracted driving as defined by state and local laws.
In addition, the policy should offer alternatives to using the cell phone while driving, such as pulling over for phone calls or waiting until employees return to the project, trailer or office. The policy should state that the employer does not expect the employee to engage in work while driving.
Next, you should decide on the disciplinary consequences of violating the policy and enforce it. Progressive discipline is recommend. Immediate termination is impractical. A lack of enforcement may come back to bite you in the case of an accident.
A sensible and enforceable policy that works for your company and its drivers can reduce your exposure. You should contact an experienced attorney to help you prepare such a policy or to review your existing policy.
PennDOT Hoe Pac Ban Lifted
PennDOT recently lifted its ban on the use of vibratory plate compactors for backfilling trenches after laying pipe on PennDOT projects. This ban was fought by numerous contractor organizations. However, PennDOT is only permitting compaction of 8 inch layers.
With the ban removed, PennDOT issued new regulations including the requirement of an authorized inspector being present during compaction and of the completion of a “Pipe Installation Inspection Form”.
The change institutes a trench installation inspection requirement for pipe installations, including subsurface utilities, located under a roadway, sidewalk or shoulder. An authorized inspector will have to be present for all trench backfill work. In addition, the inspection and a representative of the contractor will have to fill out and file a Pipe Installation Inspection Form that requirement field measurements of trench and bedding checks every 50 feet and field measurement of backfill including compaction method, soil/aggregate type and lift thickness.
PennDOT has stated that it is partnering with the industry to research whether the 8 inch layer restriction can be increased in the future.
If you have any questions or would like the new regulation, please contact me.
New Requirements for Contractors Working in Philadelphia
Effective January 1, 2014, all contractors applying for a permit in Philadelphia must submit a Tax Clearance form from the Department of Revenue and a current and valid Certificate of Insurance.
The Department of Licenses and Inspections is stepping up requirements and enforcement due to the mishaps in 2013. L&I will be out enforcing all requirements this year, including all of those included in the Philadelphia Code.
The Tax Clearance form can be obtained from the Philadelphia Department of Revenue's website at www.phila.gov/Revenue. The Certificate of Insurance must include a contact name and phone number of the contractor's insurance agent. PERMIT APPLICATIONS WILL NOT BE ACCEPTED WITHOUT THESE DOCUMENTS.
In addition, the Philadelphia Code was recently changed and all licensed Contractors, Register Master Plumbers, Electrical Contractors, Warm Air Installers and Fire Suppression System Contractors must meet the following conditions:
Contractors must display their license number on advertisements, stationery, proposals, contracts, job sites, main place of business and business vehicles displaying the Contractor's b business name;
License numbers on vehicles must be at least 2 inches high;
No contractor can sell or otherwise allow another person or business to use a license or permit issued to the contractor;
The primary contractor on a permitted job site must set up a display showing the address of the construction site; the prime contractor's business name, address and contractor license number; a list of all subcontractors and their license numbers; all required licenses; name of the property owner; copies of all permits; and a copy of the contractors insurance certificate.
Pass-Through MBE Subject GC to Liability, but Not Liquidated Damages
In a recent Philadelphia case, the judge granted summary judgment in favor of the City of Philadelphia and against a general contractor for breaching the 12% MBE requirement in its contract with the City when the general contractor’s MBE subcontractors merely took a 3% fee and passed the actual work along to non-MBE subcontractors.
The contract contained a clause that allowed the City to collect liquidated damages for the general contractor’s breach of the MBE requirement in the amount of 1% of the contract amount for each 1% of the 12% MBE requirement not met. The Court considered the City’s demand for $5 million in liquidated damages and held that the actual damage would be determined at trial.
In Ernest Bock & Sons v. City of Philadelphia, Bock signed a contract for renovations at Philadelphia International Airport in which it committed to engaging MBE's to perform 12% of the $39.8 million contract plus $450,000. This equated to $5.2 million. During discovery, it was determined that Bock's original MBE and its replacement MBE merely took a 3% fee and passed the work along to non-MBE subcontractors. Bock argued that it could not find an MBE to actually perform the work. The Court found that this was insufficient to satisfy Bock's duty under the contract and held that Bock breached the contract.
The contract provided that if Bock failed to fulfill the MBE requirement, then the City could recover, as liquidated damages, 1% of the total amount of the contract for each 1% of the commitment shortfall. The Court refused to enforce this provision, finding that it was not a reasonable forecast of just compensation for Bock's breach. The court held that this was an excessive penalty and allowed that the reasonable and appropriate damages for Bock's breach of the MBE participation requirement would be determined by the finder of fact at trial.
GC's must make every effort to ensure that any MBE commitments are fulfilled and that the MBE's employed are actually performing the work subcontracted to them and no merely taking a fee and passing the work along to non-MBE subcontractors.
New Economic Numbers for 2014 Inspire Hope
The recent economic numbers are encouraging. Both construction jobs and material prices increased in January after both were flat for most of 2013. Non-residential construction jobs increased by 8,300 jobs in January according to the U.S. Department of Labor, an increase of 3.3% over last year. However, construction unemployment rose to 12.2 percent. This contradiction may be a result of seasonal factors and the end of the government's long-term unemployment compensation plan which may have encouraged worker to look for jobs in construction. Material prices were boosted by natural gas prices which surged by 14.5 percent in January and are now 27.7 % higher than one year ago. Iron, steel and wire/cable prices also increased in January.
A construction backlog indicator showed a backlog of almost 8½ months which is a 4% increase from one year ago and a post-2008 high. A growing backlog indicates an expanding demand for construction services. The average backlog increased in the northeastern, southern and western parts of the US and decreased in the middle states. Expansion is being seen in the energy production, industrial production, social media, robotics, international trade and online retail segments of construction. GDP is still expected to expand by about 2.5% this year.
Non-residential construction spending did decrease slightly last month, but this was likely the result of the unseasonably cold weather.
All of this indicates that the construction industry may finally be rebounding. Although the increases are sporadic, they are trending in the right direction.
How to Mitigate Legal Costs in Defect Litigation
Anyone that has ever been involved in multi-party construction defect litigation knows that it can be extremely expensive and time-consuming. As contractors work with smaller margins than in the past, there is less money for repairs. Therefore, the probability of more lawsuits for defects increases as parties look to blame others for the defect and the cost to correct. There are strategies to keep your legal costs reasonable.
The best way to avoid high legal costs is to avoid litigation entirely. This can be aided by exercising intelligence and diligence on the job. If your work or work in place does not look like it will serve its intended purpose, you must give notice to the appropriate party, such as the GC, owner, and/or architect. Also, any field directives that modify work in the plans and specifications must be confirmed in writing. These may help you avoid being joined into a lawsuit if a defect and damage occurs.
If you do become involved in construction defect litigation involving multiple parties, you can still act to mitigate your legal costs. This can be done by giving the required notices before doing anything when a defect arises, by working closely with your attorney, and by getting involving in a solution to the defect.
Once you encounter a defect or damage on a project, you must immediately notify the appropriate parties in writing. You should notify your insurance company even if only as a precaution and allow your insurer to investigate. You should also notify any of your subcontractors or suppliers if you believe there is any chance at all that they may be responsible for part or all of the defects. In addition, your contract probably contains indemnity language requiring you and/or others to defend the owner and/or other in the event of property damage. If you are to be indemnified, you must send a tender of defense letter to the party who owes you indemnity.
Once you are involved in a lawsuit, you must work closely with your lawyer. If you can, you should tell your insurance company to hire an attorney familiar with construction. Most insurance defense lawyers specialize in insurance work as opposed to construction disputes. You will then have to help your lawyer get up to speed on the technical issues to provide a more effective defense. Also, if you believe other parties may be responsible for the defect or damage, you must tell your lawyer so these potentially responsible parties can be joined to the lawsuit.
Lastly, you should be involved in coming up with a solution to repair the project or to mitigate the damage caused. If the lawsuit can be short-stopped, you can avoid legal expense and potential liability. Working toward solving the problem will change the attitude of other parties, owners in particular. This may help to resolve the dispute before the case gets too far down the road. If your liability can be separated from the liability of other parties, for instance, if a portion of the defect or damage is entirely your fault, you should push your lawyer to make a quick settlement, either with corrective work, payment of some money or both.
The main point is that you must take an active role in your projects and in the process if a defect or damage occurs.
PennDOT Picks Teams to Bid on Rapid Bridge Replacement Project
PennDOT has selected four teams of design/financing/construction companies engaged in joint ventures to bid on its Rapid Bridge Replacement Project which will replace 500 bridges throughout Pennsylvania for a number of years under one contract. The final specs are expected to be released this summer. PennDOT would like to select a winning team this fall and for construction to begin in the Summer of 2015.
The teams/joint ventures selected are: (1) Plenary Walsh Keystone Partners; (2) Keystone Bridge Partners; (3) Commonwealth Bridge Partners; and (4) Pennsylvania Crossings.
The teams are made up as follows:
Plenary Walsh Keystone Partners:
Plenary Group (Los Angeles, CA)
The Walsh Group (Chicago, IL)
Granite Construction Co. (Watsonville, CA)
HDR Engineering (Philadelphia, PA)
HNTB Corp. (Philadelphia, PA)
Infrastructure Corp. of America (Brentwood, TN)
Keystone Bridge Partners:
InfraRed Capital Partners (London/New York)
Kiewit (Omaha, NE)
Parsons (Pasadena, CA)
The Allan A. Myers family of companies (Worcester, PA)
DBi (Washington, DC)
American Infrastructure (Worcester, PA)
Commonweath Bridge Partners:
John Laing Investments (London)
Fluor (Irving, TX)
American Bridge Co. (Coraopolis, PA)
Traylor Bros, Inc. (Evansville, IN)
Joseph B. Fay Co. (Tarentum, PA)
STV Inc. (Philadelphia, PA)
Infrastructure and Industrial Contractors (Pittsburgh, PA)
Pennsylvania Crossings:
Meridiam (Paris)
Lane Construction (Cheshire, CT)
AECOM (Philadelphia, PA)
Trumbull (Pittsburgh, PA)
Wagman Companies (York, PA)
Cofiroute (France).
The bridges are spread throughout Pennsylvania with 10 bridges scheduled for repair or replacement in the counties surrounding Philadelphia. More information is available at www.P3forPA.pa.gov.
PA Supreme Court Clarifies "Statutory Employer"
Pennsylvania’s Workers Compensation Law provides a defense to general contractors when an employee of a subcontractor is injured on the job. The defense, called the “statutory employer defense”, gives the general contractor immunity from suit by the subcontractor’s employee because the general contractor is responsible, under the law, to provide workers compensation if the subcontractor cannot. There is a lot of litigation involving the definition of “statutory employer.”.
Last week, the Pennsylvania Supreme Court ruled that a trial court wrongfully asked a jury to determine whether a subcontractor’s employee was an independent contractor or and employee of the general contractor in the context of the statutory employer defense and provided clarification of the distinction between a subcontractor and an independent contractor.
In Patton v. Worthington Associates, Worthington was the GC for an addition to a church in Levittown. Worthington subcontracted with Patton Construction, Inc. for carpentry at the project. Earl Patton, the owner and employee of Patton Construction, fell and hurt his back at the project. He sued Worthington saying that Worthington failed to maintain safe working conditions at the jobsite. Worthington moved for summary judgment and argued that it was immune from suit because it was Mr. Patton's "statutory employer." The court disagreed, denied the motion and sent the case to the jury to determine whether Mr. Patton was an independent contractor (no defense available) or an employee of Worthington (defense).
The Supreme Court disagreed with this tact. Independent contractors, in the context of the statutory employer defense, are those other contractors who have a distinct and independent contract with the owner. Conventional subcontractors are dependent contractors and not independent contractors. Employees of subcontractors may not bring suit against general contractors for their injuries. There is no exception for owners/principals of subcontractors. The Supreme Court said the case against Worthington should have been dismissed.
It is important to engage competent counsel when dealing with construction site injuries. Sometimes judges have to be educated about the law before they make a serious and costly erroneous ruling.
Ambiguity in Bid Specs Can Force Re-Bid
Requirements set forth in bidding specifications on public projects are mandatory and must be strictly adhered to for a bid to be valid. When a public entity issues bid specs that are subject to more than one reasonable interpretation, there is no fair and just competition among bidders as required by the law. The only remedy is to enjoin an award of the contract and conduct a re-bid with revised specs.
In a recent case before the Pennsylvania Commonwealth Court, an ambiguity in bid specifications, mandating that the winner’s recycling facility be located within 15 miles of the public entity, created a defect in the bid process that required that the contract award be rescinded and the project re-bid.
In Greenstar Pittsburgh v. Allegheny County, Allegheny County and the City of Pittsburgh (collectively the "Public Authorities") put out an invitation to bid on the processing of recyclable materials. Included in the specifications as a qualification that the "Contractor's facility shall be located within fifteen (15) mile radius from the City's Department of Public Works." However, throughout the specifications, both the Contractors' "processing facility" and "other receiving site" are referred to as two different and distinct types of facilities. The specifications could thus be reasonably read to require either that the Contractor's processing facility be located within 15 miles or that the Contractor's processing facility or other receiving site/facility be located within 15 miles. This ambiguity created a defect in the bid process and the court ordered that the project be re-bid.
It is interesting that a one-word omission in one section of specifications can create an ambiguity and require a re-bid. Contractors should always check for ambiguity in the contract documents when losing out on a public project. If one potentially exists, you should contact your legal counsel.
Property Damage Recovery Pitfalls
Recovering from the responsible party and/or its insurance company for property damage is fraught with pitfalls. Parties that cause property damage often have no assets or disappear. Insurance companies draft their policies to reduce their exposure. Courts require expert testimony to prove causation. So what are you to do? A recent case from Philadelphia gives some guidance.
In Valentino v. Harleysville Insurance Co., the plaintiff owner hired contractors and oversee and perform roof repairs and the installation of a new rubber roof. Portions of the roof were removed and not replaced in time to avoid rain which entered the property and damaged the interior and exterior of the building. The owner sued the contractors for breach of contract and negligence.
The contractors' insurance company moved for judgment in its favor because the insurance policy stated that it did not cover damage from rain unless the building first suffered a covered cause of loss to the roof. The Court agreed and let the insurance company out of the case because the replacement of the roof was not a covered cause of loss to the roof.
The contractors also moved for judgment in their favor because the owner had not retained an expert to prove that the contractors' actions caused the rain to enter the building and that this event caused the owner's damages. The Court agreed and dismissed all claims against the contractors because the owner could not prove its case without an expert.
To recover for property damage, it is recommended that you explore all avenues for recovery, including all avenues where an insurance policy may provide coverage. There are many exclusions and insurance companies will use all of them to avoid paying. In addition, you must retain an expert, usually an engineer or architect, to provide an opinion on causation. You should consult your attorney who can assist you in these endeavors.
PA Supreme Court Rules Unions May Not File Mechanic’s Liens
On April 17, the Pennsylvania Supreme Court overturned the 2012 decision of the Superior Court and ruled that union workers are not subcontractors as defined in Pennsylvania’s Mechanic’s Lien Law and that union benefit funds may not file mechanic’s liens on their behalf. This decision renders all mechanic’s liens filed by union benefit funds, unions, and employees of contractors invalid.
The Pennsylvania Superior Court had ruled in 2012 that the Lien Law should be liberally construed, that employees of a contractor are “subcontractors” entitled to file mechanic’s liens and that the contracts between unions and contractors made the contractors’ employees “subcontractors” entitled to file liens on project where they (or their benefits) were not paid.
In Bricklayers of Western Pennsylvania Combined Funds v. Scott's Development Company, William Pustelak, Inc., had entered into collective bargaining agreements ("CBAs") with two unions, the Bricklayers and the Laborers. While the CBAs were in effect, Scott's Development Company (the "Developer") entered into a contract with William Pustelak, Inc. (the "Contractor") to complete a construction project in Erie County. The Contractor completed the work, but failed to pay benefits funds to the unions' trust funds. The union trust funds filed mechanic's liens against the Developer for the unpaid benefits in the amount of about $42,000. The trial court dismissed the liens, holding that the union trust funds were not "subcontractors" under the Lien Law. The Superior Court disagreed in 2012, and this appeal followed.
The Pennsylvania Supreme Court framed the issues as (1) whether the Superior Court erred in concluding that the Lien Law should be liberally construed, (2) whether a liberal construction of the Lien Law would allow an employee of a contractor to assert a claim as a subcontractor, and (3) whether the Superior Court erred in finding on its own that implied contracts control the parties' rights under Lien Law.
First, the Supreme Court held that, in interpreting a statute such as the Lien Law, a court's job is to determine the will of the General Assembly using the language of the statute as its primary guide. A court's primary goal is to give effect to the legislative intent without regard to a liberal or conservative construction.
Second, the Court found it extremely relevant that the legislature chose to use the word "subcontractor" instead of "employee" when granting lien rights. A "subcontractor" is generally understood to be a person or business who performs or takes a specific portion of a prime contractor's work from the prime contractor's contract with an owner. The Court also cited to established precedent from the 1840's and 1850's holding that laborers are not subcontractors. In addition, the legislature's official comments stated that prior decisional law that laborers are not subcontractors remained unchanged. Lastly, the Court cited a portion of the Lien Law that disallows liens by persons who are not contractors or subcontractors. Therefore, the Court found that the legislature did not intend a contractor's employees to be subcontractors for purposes of filing a mechanic's lien.
Third, the Court found that it was improper for the Superior Court to overrule a trial court's decision on its own legal theories that had nothing to do with the allegations set forth by the parties. The Superior Court had stretched the law to find an implied contract between the Contractor and the unions for the specific work on the Developer's project. The Supreme Court found this stretch to be too attenuated, especially since the CBA's preceded the contract between the Developer and the Contractor.
In summary, employees of a contractor are not "subcontractors' for the purpose of filing a mechanic's lien. Neither are unions or union trust funds.
Any mechanic's liens that were filed on behalf of union benefit funds, unions or employees of contractors are now invalid.
Why Delay/Disruption Claims Are Hard to Win
On almost all project, contractors run into delays. These delays result in increased costs. Another problem is disruption, where inefficiency is caused by an interruption to your normal working methods. There are many roadblocks to recovering these costs. However, with proper guidance, these obstacles may be overcome.
The first and most common roadblock is your contract. Owners routinely build provisions into their contracts to protect themselves. These include no damages for delay clauses, claim notice requirements, scheduling provisions, claim waivers and limitations of liability. While these clauses may, in certain cases, be unenforceable, a better strategy is to negotiate them before you sign the contract.
A second roadblock is putting a value on delay and disruption claims. Although difficult, this is not impossible. These claims result from trade-stacking, congestion, and decrease in productivity. There are several methods used to put a value on these claims, including the measured mile, industry standards, the total cost method and a modified total cost method. In larger claims, a construction expert can be employed to put a dollar value to your delay and disruption claim. Your lawyer has access to several such experts and can help you select an expert to help prosecute such a claim.
Short of litigation, there are preventative measures you can take to protect yourself against these cost overruns. One way is to negotiate a higher overhead rate for change order work. You should consult a competent construction lawyer to assist you during contract negotiation, when you encounter delays and disruptions on a project and when you are attempting to recoup cost overruns caused by delays and disruptions.
Cutting Lawn not “Landscaping” under New Jersey Prompt Payment Act
The U.S. District Court for the District of New Jersey recently ruled that a contractor that was not paid under a contract for lawn mowing services could not assert a claim under New Jersey’s Prompt Payment Act because lawn mowing did not meet the definition of “landscaping” as used in the Act to describe the improvement of real property.
The Act applies to all contracts to improve real property. The definition of “to improve” in the Act includes to “landscape” any real property. The Court found that lawn mowing was not landscaping as landscaping involves transforming property, rather than just maintaining it.
In TBI Unlimited v. Clearcut Lawn Decisions, Clearcut contracted with a party who had contracted to provide property preservation services to mortgage servicing companies. Clearcut claimed that it was not paid in full and filed a lawsuit that included a claim for interest and attorney's fees under New Jersey's Payment Act. The defendant sought to dismiss this claim, arguing that a contract to provide lawn mowing services is not a contract to "improve real property" as that term is defined under the statute.
The Court examined the definition of "to improve" which is defined under the act to mean, among other things, "to excavate, clear, grade, fill or landscape any real property." The issue was whether the act of landscaping includes lawn mowing. The Court looked to the dictionaries to determine the plan meaning of landscaping. The term is defined s improving by landscape architecture or gardening. The Court found that this definition involving enduring transformative acts to improve real property rather than those that involve simple routine maintenance. Therefore, the Court found that the term landscape in the act is limited to activities that serve to permanently alter the character of real property. Because lawn mowing is mere maintenance and upkeep, it is not landscaping and therefore, contracts for lawn mowing do not fall under the act. The Court dismissed this claim.
Fed Court Not Bound by PA Law Restricting Forum Selection Clause
In a recent decision, the U.S. District Court for the Middle District of Pennsylvania upheld a forum selection clause in a contract for work at the Mohegan Sun Hotel that required disputes to be litigated in Missouri.
The subcontractor had filed suit in Pennsylvania and argued that Pennsylvania’s Contractor and Subcontractor Act rendered the forum selection clause unenforceable. The Court disagreed and ordered the case transferred to federal court in Missouri based on federal procedural law.
NLRB Re-Issues New Union Election Regulations
The National Labor Relations Board recently re-issued a regulation reducing the time between when a union files a representation petition and when an election takes place from the current average of 38 days to 10 days. A similar regulation was overturned by the courts in 2013. This is in addition to a recent regulation proposed by the Department of Labor which would require reporting of third party advice that employers used to educate their employees about collective bargaining agreements.
No Contract Where County Made Award, but Did Not Sign Contract
The Pennsylvania Commonwealth Court ruled late last month that there was no contract formed where Montgomery County awarded a contract for a roadway project, but rescinded the award before signing the contract. The Court based its ruling on the fact that the Second Class County Code requires that all county contracts be signed.
The Court did allow that the contractor awarded the contract may seek its costs for surety bonds it procured and provided to the County on the basis on the award.
In Allan A. Myers v. Montgomery County, Montgomery County issued an RFP for a roadway project in the county. The County accepted Myers bid after the lowest bidder's proposal was withdrawn due to an unintentional omission, and the second lowest bidder's bid was rejected for non-compliance with the bid specifications. The second lowest bidder, Highway Materials, contested the rejection of its bid. In response, the County rescinded the award to Myers and awarded the contract to Highway Materials. Myers sued for breach of contract and violation of the Commonwealth Procurement Code.
The trial court dismissed Myers' complaint, finding that the awarding of a contract creates no binding obligation on the part of the party to enter into and execute a contract. Myers appealed, arguing that an enforceable contract was formed with the county awarded the contract.
The Commonwealth Court reviewed the law governing contracts made by counties like Montgomery County in Pennsylvania, the Second Class County Code. That code specifically says "Where any official document, instrument or official paper is to b executed by the county commissioners, it shall be done by at least two of the commissioners. . ." The Code also required that all contracts in excess of $18,500 be in writing and that all contract be filed with the County controller or chief clerk after their execution. The Court based its ruling on this language, finding that it manifested an intention of the General Assembly that all written contracts must be formally executed by a county's commissioners. In addition, the Procurement Code requires that contracts be executed by governmental agencies within 60 day of an award.
The Court did reinstate Myers' claim for its bond costs finding that it may be able to prove a claim for damages for the costs related to procuring the required bonds after the award under a non-contractual theory of recovery.
Bidders should understand that an award of a contract is not always a guarantee that a contract will be signed. Contractors should also be aware of what law governs the entity that the contractor hopes to work for. Lastly, you should contact your attorney to be advised of your rights in contracting.
Philly Unions Cut Rates 20% for Housing Authority Work
This month, Philadelphia’s building-trades unions agreed to cut their wages and benefits by 20 percent when working on residential construction for the Philadelphia Housing Authority. The PHA has stated that this should reduce the cost of building a house by $50,000. The US Department of Housing and Urban Development, which provides most of PHA’s funding, must still approve the agreement.
The Building and Construction Trades Council of Philadelphia negotiated the agreement on behalf of 14 member unions. Philadelphia City Council is pressing to add 2,000 PHA housing
units in the City.
Pat Eiding of the Building and Trades Council of Philadelphia said "This is a very, very good negotiated agreement." City Council President Darrell Clarke said "To be able to get such a significant changes in rates could be dramatic in terms of the number of affordable units they can build."
In the next 5 years, PHA expects to spend in excess of $280 million on new construction. This includes a new headquarters for PHA, reconstruction of the Queen Lane development in Germantown and redevelopment around the Blumberg housing project in North Philadelphia.
With the agreement, PHA pledged to contract only with contractors who hire union laborers, carpenters, painters and other union workers. In addition, contractors will have to have 20% of their subcontractors be Disadvantaged Business Enterprises.
Changes to PA Lien Law Affect Lenders and Residential Subcontractors
On July 9, Governor Corbett signed changes to Pennsylvania’s Mechanic’s Lien Law. The changes provide that construction loans secured by mortgages will have priority over all mechanic’s liens if at least 60% of the loan is used for “costs of construction” as this term in now defined.
In addition, subcontractors will no longer have the right to file a mechanic’s lien against a residential property if the owner has paid the general contractor in full. These changes go into effect September 7.
The change to the lien priority for construction loans comes in response to 2012 case which established that mechanic's liens had priority over open-ended mortgages where the visible commencement of work on a construction project predated the recording of the construction loan mortgage and any of the loan was used for other than "hard construction costs." This decision had wrecked havoc on the title insurance industry as mechanic's liens took priority over construction loans secured by a mortgage that was recorded after work was begun. The new law requires that only 60% of the loan be used for "construction costs" which has been revised to include taxes, insurance, bonding, testing, architect fees, commissions, existing liens, mortgage fees and closing costs. Open-end mortgages for construction loans regain their "super priority" over mechanic's liens. This change is good for owners and construction lenders, but limits the lien rights of contractors and subcontractors.
The change to the right of subcontractors to file liens against residential property is in response to numerous complaints from property damage victims and their insurers who paid unscrupulous general contractors for repairs and still had to defend and pay subcontractor who did the work but were not paid by the general contractors. The victims were mostly individual homeowners who were forced to pay twice for the subcontractors' work. Subcontractors on residential projects retain their right to file liens where the owner has not paid the general contractor. Otherwise, subcontractors will have to pursue the general contractors only for breach of contract, unjust enrichment and violation of Pennsylvania's Contractor and Subcontractor Payment Act.
PA Superior Court Upholds Award of Attorney’s Fees, No Penalty
Pennsylvania’s Contractor and Subcontractor Payment Act provides for an award of reasonable attorney’s fees to the “substantially prevailing party” in an action for failure to pay in accordance with the Act and for an award of a one-percent per month penalty on funds “wrongfully” withheld”, with an exception for amounts withheld “in good faith.”
In an opinion filed on June 30, the Pennsylvania Superior Court reinforced that distinction. In a case concerning two unpaid change orders on a fifteen-unit apartment building partially funded by HUD, the Court upheld an award of attorney’s fees to the contractor, but refused to impose the penalty because the owner had a good faith basis to withhold payment.
In Waller Corporation v. Warren Plaza, Warren Plaza, a non-profit, hired Waller to construct the building for low income and partially disabled individuals. The two change orders in dispute concerned a change to the floors of the building and the relocation of unit water heaters. Warren Plaza never signed the change orders and refused to pay. At trial, Waller won and was awarded $69,904 for the change orders and $78,071 in attorney's fees. The large award of attorney's fees was due to Warren Plaza's failure to resolve the claim in a timely manner. the trial court did not award the Act's penalty because it decided that Warren had a "good faith basis, although mistaken, to withhold payment."
On appeal, Warren Plaza disputed the attorney's fees award on the basis that Waller did not "substantially prevail" because the court found that Warren Plaza had a good faith basis not to pay. The Superior Court cited to the Act which provides that the substantially prevailing party shall be awarded a reasonable attorney fee. Whether a party "substantially prevails" is left to the discretion of the judge or jury. The Superior Court found that the Act's provisions for awards of attorney's fees and the penalty are to be determined separately, i.e., a party can have a good faith basis for withholding payment but still be charged with the other party's attorney's fees. There is no exception to an award for attorney's fees for good faith claims.
Please contact me if you have questions on this issue or anything to do with the Act.
Homebuilder’s Warranty Does Not Extend to Subsequent Purchasers
The implied warranty of habitability was created by courts which ruled that a homebuilder impliedly warrants that the home he as built and is selling is constructed in a reasonably workmanlike manner and that it is fit for its intended purpose—habitation.
On August 18, the Supreme Court of Pennsylvania ruled that the implied warranty of habitability of a new house does not extend to subsequent purchasers. It is only available to the original buyer.
The Court found that the warranty was created by courts based on the privity of contract between a homebuilder and the original homeowners. The matter of whether and under what circumstances the warranty is to be extended to subsequent purchasers is a matter of public policy properly left to the PA General Assembly.
In Conway v. The Cutler Group, Cutler sold a new house to the original owner. After living there for 3 years, the owners sold the house to the Conways. Five years later, the Conways discovered water infiltration around some of the windows, allegedly caused by construction defects. The Conways sued Cutler alleged a breach of the implied warranty of habitability. Cutler objected based on the lack of a contract between it and the Conways. The trial court in Bucks County agreed and dismissed the Conways' suit. On appeal, the Pennsylvania Superior Court reversed and found that the implied warranty of habitability extended to a subsequent or second purchaser of a house due to public policy considerations. Cutler appealed.
The Pennsylvania Supreme Court reversed. The Court recognized the creation of the implied warranty of habitability as a rejection of the anachronistic doctrine of caveat emptor in light of the unequal footing of skilled developers and unsophisticated homebuyers. It also did a survey of other states that confronted this issue: Iowa and Rhode Island have extended the warranty of habitability to subsequent purchasers; Vermont and Connecticut have refused to do so. In the end, it rejected the proposition of extending the warranty because this is a matter of public policy. Showing judicial restraint, the Court recognized that its authority to declare public policy is limited and refused to extend the implied warranty of habitability beyond its firm grounding in contract law. This case is good news for homebuilders.
Strict Requirements of PA Home Improvement Act Do Not Bar All Claims
Pennsylvania’s Home Improvement Consumer Protection Act provides a set of 13 requirements for a home improvement contract to be valid or enforceable against a homeowner. The requirements include the contractor’s registration number, the approximate starting and completion dates, the amount of the down payment, the names and addresses of all subcontractors, the current amount of insurance, the toll-free number of the Bureau of Consumer Protection and a notice of the right of rescission.
In an opinion filed on July 21, the Pennsylvania Supreme Court ruled that these strict requirements do not bar a quasi-contract/quantum meruit claim by a contractor because the Act’s language does not bar a quasi-contract remedy. To read the Act as doing so would allow homeowners to refuse payment for the perfect construction of a house base on a defect in the contract.
In Shafer Electric & Construction v. Mantia, the Mantias contracted with Shafer to build a 2-car garage addition to their house. However, the written contract did not contain the approximate start and completion dates or the toll-free number. The Mantias did the excavation for the addition, but did it improperly. Shafer re-excavated the foundation area and offered design changes based on the excavation problems. The Mantias refused the changes. Shafer sent an invoice for the work done, including materials, labor and architect fees. The Mantias refused to pay and Shafer filed a lien. Shafer then sued the Mantias for breach of contract and quantum meruit (unjust enrichment). The Mantias sought to dismiss the lawsuit because Shafer had not complied with the Act.
The trial court agreed, dismissed the lawsuit and struck the lien. It reasoned that the breach of contract claim failed because the contract did not comply with the Act. It also struck the quantum meruit claim because it was clear that the Act did not permit such a claim.
The Superior Court reversed. The Act provides that "Nothing in this section shall preclude a contractor who has complied with subsection (a) from recovery of payment for work performed based on the reasonable value of services which were requested by the owner if a court determines that it would be inequitable to deny such recovery." The Superior Court held that the obvious purpose of this section was to allow equitable actions such as quantum meruit where there was no valid and enforceable contract.
The Supreme Court agreed. It found that the plain and unambiguous language above does not prohibit a cause of action in quantum meruit. Again showing judicial restrain, the Supreme Court decided that if the General Assembly had seen fit to modify the right of non-compliant contractors to recover in contract, quasi-contract or common law, it could have done so.
You should always include a claim for quantum meruit/unjust enrichment when seeking to collect for labor and materials supplied.
Oral Contracts for Curbing Enforceable and Subject to PA's CASPA
On September 10, the Superior Court of Pennsylvania issued a decision holding that a curbing subcontractor could pursue a general contractor where oral contracts were established by the parties’ prior course of dealing and where curbs were an “improvement” as defined by PA’s Contractor and Subcontractor Payment Act.
The parties had a ten year relationship where the GC would request a bid for curbing, the subcontractor would fax a proposal for the work, the GC would send a purchase order, and the subcontractor would complete the work and bill the GC. The GC’s lack of payment was subject to the Act’s penalties and attorney’s fees because a curb is a “structure” and an “improvement” to real property.
In Prieto Corp. v. Gambone Construction, Prieto, in the business of construction concrete curbs and Belgian block curbs, had the ten-year relationship with Gambone for curbing on Gambone's residential and commercial projects. This ended when Gambone refused to pay four (4) of Prieto's invoices. Prieto sued Gambone in Montgomery County for breach of contract, unjust enrichment and violation of the Act. At trial, Prieto won. Gambone appealed, arguing that curbing is not an "improvement" covered by the Act and that there was no "contract" between the parties.
The Superior looked at the following definitions: (1) real property - "improved lands"; (2) improvement - includes "a structure or an alteration of real property"; (3) structure - "piece of work artificially built up"; and (4) curb - "a raised edging serving as a roadway border that is the responsibility of the abutting property owner." The Court held that a "curb" is both a structure and an alteration of real property. Therefore, the Court upheld the trial court's application of the Act to an oral contract to construct a curb on real property.
The Court also upheld the trial court's determination that there were four oral contracts between the parties. There was evidence that Gambone would contact Prieto with a purchase order specifying a project and that Prieto would perform the work and invoice Gambone. The parties had done business this way for almost a decade which established a course of dealing and, therefore, contracted in this manner.
This is an important decision not only for curbing contractors, but for all parties that contract based on oral promises or documents authorizing work for a specific amount.
Subcontractor's Suit in NJ Dismissed and Not Reinstated Since Registration had Lapsed
On September 11, the Appellate Division of the Superior Court of New Jersey upheld the dismissal of a subcontractor’s payment claim where the Delaware subcontractor’s NJ registration had lapsed. Also, the Court held that the subcontractor was not a third party beneficiary of the contract between the owner of the project and the general contractor.
The Court found that the statute the requires that corporations be registered to do business in NJ before filing a lawsuit and cannot continue any such lawsuit even upon reinstatement. Also, the sub could not sue the owner because contract between the general contractor and the owner, for renovation of a Camden house, did not show any intention to benefit the subcontractor.
In Seven Caesars v. Dooley House, the City of Camden contracted with Dooley House for the rehabilitation of the Hogan House, an AIDS rehabilitation center, to be financed with HUD funds. Dooley House subcontracted the rehabilitation to Seven Caesars which completed phase one (demolition) and phase two of the project and was paid. When Seven Caesars completed and billed for phase three of the project, Dooley House, pursuant to HUD regulations, requested receipts for materials used in phases one and two and withheld payment for phase three. There was some correspondence between the parties, but ultimately, the City refused to disburse the phase three payment. Seven Caesars sued Dooley House and the City of Camden. The trial judge found in favor of Seven Caesars and ordered the City to pay for phase three.
On appeal, the City contended that Seven Caesars lacked corporate standing to sue it lacked corporate standing to bring the lawsuit and that Seven Caesars was not an intended third party beneficiary of the contract between the City and Dooley House. Seven Caesars had lost its corporate status in its home state of Delaware prior to filing the lawsuit because it had failed to pay the corporate franchise tax. As a result, the New Jersey Department of State had expunged Seven Caesars' corporate status in New Jersey as of the time Seven Caesars filed the lawsuit. Although Seven Caesars subsequently paid the franchise tax and had its corporate status reinstated in Delaware retroactively pursuant to the Delaware Code, the New Jersey statute requiring that a corporation be registered in New Jersey to be able to file a lawsuit did not allow retroactive reinstatement. Therefore, the Appellate Division ruled that the lawsuit was invalid and should have been dismissed.
In the event that Seven Caesars filed a new lawsuit, the Appellate Division decided to rule on the third party beneficiary claim. Under New Jersey law, the test to be considered the third party beneficiary of a contract, the test is whether the contracting parties intended that a third party should receive a benefit which might be enforced in court; the fact that such a benefit exists or that a third party is named, is merely evidence of this intention. The contract between the City and Dooley House contained a provision specifically stating that the contract documents shall not be construed to create a contractual relationship of any kind between the City and Seven Caesars. The Court found that this language and the course of the parties' performance showed that Seven Caesars was only an incidental beneficiary of the contract and had no claim against the City.
Contracting parties must make sure to review or have your attorney review all contracts to determine your rights. In addition, all corporations should maintain registration not only in their home states, but in whatever states they do business.
Attracting, Working With and Retaining Millennial Workers
There has quite a bit of data and commentary lately about the “Millennial” Generation or “Generation X” as they continue to enter the workplace. Employers, especially in the construction industry, need to be aware of generational differences, how to engage and retain Millennials and how to attract Millennial construction workers. To do this, you must know and understand the answers to these questions:
What is a Millennial? What are their characteristics? What motivates them? What do they think of construction and other blue-collar jobs? How does my company attract qualified Millenials? How do I train Millenials? How do I reward and retain Millenials?
What is a Millennial?
The term Millennial is used to refer to the generation that did and is growing up around the year 2000. Although this generation has been defined as larger, generally anyone 14-32 years old.
What are their characteristics?
Millennials are driven by emotion and experience. They believe nothing too bad will happen to them. They believe that if things get tough, they can always move back in with their parents. They grew up with intensely protective parents. These individuals were not raised like baby boomers ("Go out and ride your bike!") or Generation X (latchkey kids).
Millennials believe that they are all unique individuals. From a young age, baby boomer and Generation X parents doted on them and helicoptered over them. Managers who refuse to treat them as "special" will be rejected by young people. Due to their upbringing, Millennials can be talented, intelligent and adaptable workers.
Millennials have a large amount of student loan debt. They also face a high unemployment rate. Millennials would prefer living in rented apartment in an area with alot to do than owing a single home in suburban and rural areas.
What motivates Millennials?
When faced with a new job, Millennials will question why the job is important and why it has to be done a certain way. They worry about their financial and emotional health as well as their physicial health.
What do they think of construction and other blue collar jobs?
The median age of construction workers in 2000 was 37.9. In 2010, it had jumped to 40.4 years old. Baby boomer and Generation X have navigated blue collar jobs to higher paying positions. However, Millennials view blue collar work as an aging, dying field. They belive that if they take a blue collar job, they will be laborers forever with no room for advancement. They'd rather stay out of work and try for a more "prestigous" job.
How does my company attract qualified Millenials?
Make safety a priority - promote and publish your stellar safety record and hire a safety manager. Establish a skills progression program and promote and publish success stories about young workers movig up. Emphasize that your company does not tolerate discrimination or bullying in any form. Recruit on high school and college campuses via one on one interviews where you can make potential candidates feel special.
How do I train Millenials?
When you do hire a Millennail, make it a big deal. Treat it as if it's an honor that this person is coming to work for you. Make them feel special, wanted and important. Make it easy for them to find and connect with "coaches" and "mentors", not just bosses. Remind them on a regular basis how well they are doing.
How do I reward and retain Millenials?
Encourage and recognize their uniqueness and ingenuity. Give them the opportunity to show how creatvie and important they are. Be receptive to their ideas. Show them a bright career path and how that leads to a great lifestyle.
PennDOT Awards $899 Million Contract for PA Bridge Replacements
On October 24, PennDOT awarded the Rapid Bridge Replacement Project to the Plenary Walsh Keystone Partners consortium. The project calls for the replacement of 558 bridges across Pennsylvania within 3 years as well as the maintenance of these bridges for 25 years.
Plenary Walsh Keystone Partners consist of the Plenary Group of Vancouver, The Walsh Group of Chicago, Granite Construction of California and HDR Engineering of Mechanicsburg, PA. PennDOT chose Plenary Walsh based on its commitment to replace the bridges 8 months sooner than was specified, its pricing and its traffic management and quality control plans. The team also includes 11 Pennsylvania subcontractors.
This is the largest contract that PennDOT has ever awarded. The winning group's plan is to subcontract with companies from the local communities where the bridges are to be replaced. The named Pennsylvania subcontractors include A.D. Marble &Co, M.A. Beech Corp., Carmen Paliotta Contracting, Clearwater Construction, Francis J. Palo, Glenn O. Hawbaker, Eckman, J.F. Shea Construction, Larson Design Group, Swank Construction and TRC Engineers. They plan to begin by replacing 58 bridges in 2015. Most of these are in the northeastern and southwestern parts of Pennsylvania.
The specifications provide that single span bridges can be closed no more than 60 days and multi-span bridges no more than 110 days. In addition, certain bridges cannot be detoured during the school year. The group is to be paid only when a bridge replacement is completed.
PennDOT Secretary Barry Schoch said "The goal for this project is not only finding cost savings, but also to minimize impact to the traveling public. This team has thoroughly detailed their traffic control plans and expects to finish construction eight months earlier than required."
Plenary's chief operating officer, Matt Girard stated "This project is an important milestone for U.S. and civil businesses, and represent our third [public private partnership] selection in the past year. We have successfully built a seasoned civil infrastructure team that is valued by our clients and partners, and that will help us ensure the success of our projects in the years to come."
Read, Analyze and Negotiate Indemnity Terms in Contract . . . Or Else
When you receive a new contract or are considering bidding on public work, you should seek out, analyze and, if possible, negotiate indemnity terms. You may be agreeing to be responsible for the negligence of everyone else on a project. This type of clause is not uncommon and is being enforced by the courts.
In a recent federal decision, a contractor was required to indemnify his subcontractor for a serious injury to an employee of another subcontractor where the indemnity provision in the contract was clear and unambiguous.
In Williams v. Braden Drilling, the plaintiff was injured while installing a piece of heavy equipment on a drilling rig. He was employed by Tesco, a subcontractor of East Resources, the general contractor. An employee of another subcontractor of East Resources, Braden Drilling, was operating a crane when the piece of heavy equipment came down on Williams' foot. Williams sued Braden Drilling and East Resources. Braden Drilling filed a motion for summary judgment on its cross claim against East Resources based on a clause in the subcontract that required East Resources to defend and indemnify Braden Drilling for all claims for bodily injury.
The Court cited Pennsylvania law that permits indemnification for the indemnitee's own negligence as long as the indemnity agreement is "clear and unequivocal." The clause must not contravene public policy, it must relate solely to the private affairs of the parties, each party must be a free bargaining agent and it must be clear that the indemnitee is being relieved of liability for its own negligence.
In this case, the Court found no ambiguity in the indemnity language. The indemnity was stated "with the greatest particularity." The Court found that the contract showed that the parties agreed with specificity that East Resources would indemnify Braden Drilling for all claims. East Resources was required to defend and pay for the negligence of Braden Drilling's crane operator.
You should consult an attorney when considering or negotiating a contract that contains an indemnity provision. Otherwise, you may be held liable for someone else's negligence.
Your Insurance Will Not Cover Claims for Defective Work or Damage Caused by Defective Work
A lot of contractors believe that their insurance will cover claims for negligence, including claims for property damage to their work or caused by their work. However, insurance companies do not cover such claims where the damage is possibly caused by defective work, especially where the insured contracts to perform to a certain level.
In a federal decision filed October 14, the court decided that there was no coverage for a plasterer/stucco subcontractor despite claims of negligence where the underlying subcontract provided that the subcontractor would perform in an workmanlike manner, that the stucco would be uniform and strong for 5 years and that flashing installed would be in good condition. Failing to meet the contract and to live up to contractual obligations is not an “occurrence” or an “accident”; therefore, there is no insurance coverage.
In State Farm v. Patrick McDermott Plastering, McDermott was a subcontractor to the Pulte Group for a 299-home community in Washington Crossing. Water intrusion was an issue in most of the homes and Pulte sued McDermott in Bucks County alleging that McDermott failed to install a drip cap under patio doors, improperly attached decks to the houses, failed to properly install felt paper and failed to flash under window flanges causing water damage to the homes. Pulte was the subject of numerous homeowner lawsuits. McDermott sought coverage for these allegations from its general liability carrier, State Farm. State Farm sued McDermott in federal court, seeking a judgment that it did not have to defend or pay for these allegations against McDermott.
The Court cited to Pennsylvania law that courts have an obligation to determine coverage based on the allegations of the complaint against a potential insured. McDermott's policy with State Farm provided coverage for property damage caused by an "occurrence", defined as an "accident.". "Accident" is defined s an unexpected and undesired event or something that occurs unexpectedly or unintentionally, implying a degree of "fortuity.".
The Court found that faulty workmanship, as alleged in Pulte's complaint against McDermott, does not constitute an "accident." This is also true of any damage resulting from faulty workmanship. McDermott's contract with Pulte required McDermott to perform its work in a "workmanlike manner" in accordance with Pulte's specifications and quality requirements. McDermott contracted to be solely responsible that all flashing was in good condition. The Court found that McDermott's potential liability stemmed from his alleged failure to meet the expectations which he was contractually obligated to meet. His alleged failure to live up to these contractual obligations could not be seen as an accident or some unforeseeable event. The Court therefore granted judgment to State Farm - there was no insurance coverage for the claims made against McDermott.
You should be aware that there is no coverage for damage caused by defective construction. You should also contact an attorney to review the obligations you are agreeing to before signing a contract.
No Liability for Individual Who Promised Company Would Pay for Extras
Last week, the Pennsylvania Superior Court ruled that there was no liability under PA’s Contractor and Subcontractor Payment Act for an individual who owned 50% of a company that owned a project and who authorized additional work by a contractor that went unpaid. CASPA’s payment obligations only apply to the contracting parties, not agents, officers, etc.
Generally, individuals are not liable for the debts or actions of the corporation they work for. However, CASPA defines “owner” to include agents of the owner acting within their authority. Therefore, there is ambiguity concerning the case where an owner’s agent promises payment.
In Scungio Borst & Associates v. 410 Shurs Lane Developers, 410 Shurs Lane Developers ("410 SLD") contracted with Scungio Borst & Associates ("SBA") for the general construction of a condominium project in Manayunk. SBA performed and billed for $2.6 million in addition work at the direction of 410 SLD's president and 50% shareholder, Robert DeBolt. SBA was not paid in full and sued 410 SLD and Mr. DeBolt under CASPA. The trial court granted Mr. DeBolt's motion for summary judgment and SBA appealed.
The issue for the Superior Court was whether Mr. DeBolt, as an authorized agent of 410 SLD, was an owner under CASPA that could be subject to liability for non-payment. The Court looked to another provision of CASPA that provides that when a contractor performs, he is entitled to payment from the party with whom the contractor has contracted. Because SBA contracted with 410 SLD, Mr. DeBolt had no liability to SBA. The Court rejected arguments that CASPA should be construed the same as its model, the Wage Payment Collection law, that the legislature intended to extend liability beyond the contracting parties and that Mr. DeBolt's promises constituted a new contract (there were no allegations of such.)
Contractors must be sure to get approval for extra work in writing from the party they contract with. Direction to perform extra work and promises to pay, even if made by the owner of the company with whom you contract, is not enough. Please get it in writing.
County Must Pay Attorney's Fees for Violating NJ Prompt Pay Act
Late last month, the New Jersey Appellate Division upheld an award of attorney’s fees under NJ’s Prompt Payment Act where a county failed to follow the Act and advise a contractor of the reason for withholding payment within 20 days of receipt of the contractors’ invoice.
New Jersey’s Prompt Payment Act requires public entities to make payment to contractors within 30 days of receipt of the contractor’s invoice, unless the public entity advises the contractor, in writing, of the amount and reason for withholding payment within 20 days of receipt of the contractor’s invoice. The Act provides for interest and attorney’s fees for parties that violate the Act.
In Aire Enterprises v. Warren County, Warren County contracted with Aire Enterprises for renovation of a county building. After the work was complete, Warren County refused to make final payment to Aire, holding the final payment for certain carpet tiles that allegedly did not adhere properly. At trial, the judge found that Aire had breached the contract, but that the County was only due $150 for gluing down the tiles. The County had held $12,400 for the tiles and the judge ruled that the County had to pay the balance, $12,250 plus interest to Aire. The judge also ruled that the County had to pay Aire's reasonable attorney's fees in the amount of $44,000. Warren County appealed.
The Appellate Division concentrated the on attorney fee shifting provision of the Prompt Pay Act which requires the payment of contractor invoices within 30 days of billing unless the owner provides notice of withholding and the reason therefor within 20 days of a contractor's billing. In this case, Warren County had not provided the required notice and had therefore breached the Prompt Pay Act. The Court found the popping of carpet tiles to not be a significant breach of the contract that may have obviated the County's notice obligation. This breach entitled Aire to reasonable attorney's fees. The Court approved the trial judge's award of $44,000 in attorney's fees which was reduced from the amount Aire actually accumulated, $180,896.
There are two points to take away from this case. First, owners must give notice of any withholding within 20 days of a contractor's invoice. Second, legal fees add up quickly during litigation and are not always fully recovered. Do not spend $180,000 in a dispute over $12,000.
New OSHA Reporting Requirements Start January 1
Beginning on January 1, 2015, there will be a change to the way employers are required to report to the Occupational Safety and Health Administration. Employers will now be required to report all work-related fatalities within 8 hours and all in-patient hospitalizations within 24 hours of finding out about an accident.
Previously, employers were required to report all workplace fatalities and hospitalization of 3 or more employees.
The updated reporting requirements are not simply to make more paperwork but have a life-saving intent: it is hoped they will enable employers and workers to prevent future injuries by identifying and eliminating the most serious workplace hazards.
Employers have 3 options for reporting these severe incidents: (1) call the nearest OSHA office; (2) call the 24 hour OSHA hotline at 1-800-321-6742; or (3) report online at www.osha.gov/report_online.
For more information, including a YouTube video, visit OSHA's website for the updated reporting requirement: https://www.osha.gov/recordkeeping2014/index.html
Breach of Contract & CASPA Claims Dismissed - UCC Governed Contract
Last week, the U.S. District Court for the Western District of Pennsylvania dismissed claims of breach of contract and violation of Pennsylvania’s Contractor and Subcontractor Payment Act (“CASPA”) where the contract provided that PA’s Uniform Commercial Code ("UCC") would govern and control the parties and the contract was for the construction of a continuous barge unloader for use in Louisiana.
Generally, common law will govern contracts unless the parties specify otherwise. Also, CASPA applies only to work on real property in Pennsylvania.
In Heyl & Patterson v. T.E. Ibberson, Ibberson contracted with H&P for the design and manufacture of a continuous barge unloader for a terminal renovation project at Port Allen, Louisiana for $7.5 million. H&P allegedly caused delays in the testing of the unloader and failed to pay Ibberson in full. Ibberson filed a complaint, alleging a breach of contract, breach of contract under PA's UCC and violation of CASPA.
The Court dismissed the breach of contract claim because the UCC displaced the parallel common law breach of contract claim. The Court found that the UCC was comprehensive enough to govern all of the party's dealings as well as remedies for breach of contract. The fact that the parties agreed that the UCC would govern and the fact that allowing a separate breach of contract claim to go forward would thwart the purpose of the UCC and the parties' intent.
The Court dismissed the CASPA claim because the construction and delivery of a barge unloader to Louisiana is clearly not work on Pennsylvania real estate.
The takeaway from this case is that you should pay particular attention to your contracts when negotiating them so you and your lawyer know what law applies.
Do’s and Don'ts for Change Orders
Change orders—they are as inevitable as the sun going down every day. However, you do not have to dread them. Being proactive, rather than reactive, can smooth the process and lead to good results.
Preparation for change orders should begin at the bid preparation and contract negotiation stages of contracting. These steps set the stage for how easy or how rough the change order process will be. There are do’s and don'ts for easing the process.
Do's - Before You Start Work:
Do provide a detailed scope of work in your estimate and contract (I may recommend incorporating your proposal into the contract)
Do include exclusions in the scope of work
Do provide unit prices, billing rates and material markup in your estimate and contract
Do review and know your contracts, all drawings, specifications and time limits
Do bring any design errors to the attention of the architect or engineer.
Do's - How to Handle a Change When it is Encountered:
Do request a change order immediately and in writing when you encounter a different condition, when you need more time, when you have incurred additional costs due to the actions of others
Do provide a timely written claim for adjustment in the contract price and time for completion BEFORE commencing any extra work
Do proceed with the change order work when you have a signed change order.
Do take photos, report the extra work in daily logs and other documentation.
Do call your lawyer if you have any questions.
Don'ts - How to Handle a Change When it is Encountered.
Don't perform additional work based on verbal promises that you will get paid!
Don't worry about "rocking the boat" by insisting on a written change order and complying with the contract language.
Don't wait for someone else to dictate your schedule without your input.
Don't hesitate to contact your lawyer if there is a problem.
How is a Liquidating Agreement Different from a Settlement Agreement?
Another lawyer recently proposed a liquidating agreement in a dispute involving the partial liability of a third party. Most everyone is familiar with a settlement agreement, which resolves claims between two parties. However, in most liquidating agreements, one party agrees to accept a recovery from a third party in full settlement of any claims it has against the other party. Which of the two parties pursues the third party is open to negotiation.
The differences have consequences. Most if not all settlement agreements are confidential as against outside parties. However, earlier this month, a federal court ruled that a liquidating agreement could be presented into evidence at the trial of a construction dispute in order to show bias of the parties involved in the liquidating agreement.
In E. Allen Reeves v. Michael Graves & Associates, Reeves had contracted with the Princeton Arts Council for the renovation of Paul Robeson Center, a multi-purpose center. The Arts Council also contracted with Michael Graves to be the architect on the project. Reeves was delayed on the project and incurred increased costs. Reeves settled its claim against the Arts Council by entering into a liquidating agreement in which it was agreed that Reeves would pursue recovery for delay costs against Michael Graves on behalf of Reeves and the Arts Council. Reeves sued Michael Graves for negligent misrepresentation in the designs of the project. Reeves joined the Arts Council to the suit, but settled these claims by entering into a settlement agreement with the Arts Council.
Before trial, Reeves moved to bar the introduction of the liquidating agreement at trial. However, the court denied this and allowed the liquidating agreement to be introduced at trial to demonstrate bias on behalf of the Arts Council witnesses. The liquidating agreement contained a clause requiring the Arts Council to cooperate and assist Reeves in obtaining the maximum recovery in the litigation. The judge found this to be relevant to the potential bias of the Arts Council witnesses.
In contrast, the settlement agreement between Michael Graves and the Arts Council was not admissible at trial. The rules of evidence generally bar the introduction of evidence of compromise or settlement. The judge found that the settlement agreement, in contrast to the liquidating agreement, did not contain any litigation strategy obligations.
You should have your lawyer review any settlement or liquidating agreements before you sign them. You should especially have your lawyer explain the obligations and consequences of any liquidating agreement. Make your lawyer explain it so that and until you thoroughly understand what it means.
Why do Subcontractors Fail and How Do I Handle It?
We have represented both subcontractors who simply could not complete their scope due to financial reasons and general contractors who have had subcontractors just “fade away” and stop working. What causes these failures and how do we deal with them when they occur?.
The number one reason subcontractors stop working is cash flow. Most often, subcontracts call for subcontractors to float the cost of their work for a month which, in practice can be several months, until a payment makes its way to the subcontractor from the owner. A subcontractor can protect its investment in a project by exercising its lien rights General contractors can deal with cash flow issues by prequalifying subcontractors with a particular view toward a subcontractor’s financial condition. A general contractor can also seek to limit subcontractors’ lien rights.
Another main reason for subcontractor failure is the nature of the work. Subcontracting is a lot more complex than selling hammers. Subcontracting involves coordinated numerous layers of the different elements required to do a particular job. Subcontractors must also meet the subjective approval of general contractors, architects, engineers and owners. With a lot of moving parts and a subjective standard for success, a lot can (and does) go wrong for subcontractors.
What can a subcontractor do? Lien the project for unpaid work. This is the subcontractor's number one remedy when it can no longer work due to non-payment.
What can a general contractor do? It's best if general contractors prepare for subcontractor failure at the contracting stage. As stated above, it is worthwhile to investigate or prequalify subcontractors prior to contracting. General contractors can protect themselves by requiring a performance bond from subcontractors and by requiring lien waivers if possible.
In any event, if a subcontractor is having trouble completing its work, it may be time to contact your lawyer.
Outlook for Construction in 2015: Balanced Growth?
Experts are predicting a more balanced growth in the construction industry in 2015, forecasting an increase in construction spending in the 7% to 9% range. Construction starts could rise to over $600 billion as financing for construction projects is becoming more available according to the 2015 Dodge Construction Outlook.
These forecasts follow recent increases in contractor backlog, in nonresidential construction hiring and in construction material prices. This all points to a better 2015 for everyone in the construction industry (hopefully).
Dodge forecasts:
Commercial building +15%
Industrial building +9%
Single family housing +15%
Multifamily housing +9%
Public works +5%
Electric utilities -9%
Manufacturing -16%.
Associated Builders and Contractors is predicting nonresidential construction spending will increase by 7.5%. Also, not surprisingly, expect compensation costs per worker to increase at a great rate. In addition, material prices will rise by about 3%.
Embarking on capital improvement programs has helped to grow construction employment rapidly in the Northeast USA, especially in Pennsylvania, Maryland and Virginia. The construction backlog rose to over 10 months in the third quarter of 2014, nearly two months more work than a year ago.
The construction industry added over 48,000 jobs in December according to the Bureau of Labor Statistics. Nonresidential building construction employment is up 3.4% for the year, residential up 7%, nonresidential specialty trade employment up 3.7%, residential trial employment up 5.6% and heavy construction/civil engineering is up 6.6%.
Construction prices were also up for some in December: natural gas (19%), concrete (0.7%), fabricated metal (0.3%) plumbing fixtures (0.1%); and down for others: petroleum (19%), energy (4.7%), wire/cable (1.6%), lumber (1.3%), iron/steel (1%), asphalt (1%).
Good luck in 2015.
New Jersey Contractors Must Include ALL Successful Bids in DPMC Bidding Rating
In a recent decision in Hudson County, New Jersey, the Superior Court awarded a contract for the construction of the Applied Science Academy at the Hudson County Schools of Technology to the third-lowest bidder. The lowest and second-lowest bidders used an electrical subcontractor that failed to disclose that it had been the successful bidder on another project 5 days earlier. The other project, combined with the Applied Science Academy project, would have exceeded the electrical subcontractor’s bidding rating.
New Jersey public works contractors must be prequalified by the NJ Division of Property Management and Construction. Each bidder’s aggregate rating is calculated on a statutory forumula that considers a bidder’s working capital, bonding capacity and performance. The DPMC issues the bidder a maximum amount of public work on which it is qualified to bid. Bidders must disclose their current inventory of contracted for, unbilled work in bidding on new public contracts.
In Dobco v. Brockwell & Carrington Contractors, the 2 low bidders identified Sal Electric Co. as their electrical subcontractors. The 3rd lowest, Dobco, used a different electrical sub.
$1+ Million AAA Arbitration Award Upheld Despite Strenuous Appeals - No Attorney's Fees Awarded
The New Jersey Appellate Division recently affirmed the trial court’s approval of a private American Arbitration Association arbitration between the general contractor and the site subcontractor for the new courthouse in Staten Island, New York. The general contractor made many arguments as to why the subcontractor was not entitled to the arbitrator’s award of $1 million. The Court agreed with none of them.
Despite the expense of 21 days of arbitration hearings, an appeal to the Superior Court and another appeal to the Appellate Division, no attorney’s fees were awarded. An award of attorney’s fees under NJ’s Prompt Pay Act is discretionary with the arbitrator who did not award attorney’s fees. Also, both courts on appeal found the appeals to not be ‘frivolous” and therefore neither awarded attorney’s fees.
In ERG Renovation & Construction v. Delric Construction, a scope of work issue arose during construction. Delric, the general contractor terminated ERG and demanded arbitration for the costs to complete. ERG counterclaimed for the work it did and for wrongful termination.
School District Must Pay for Extra Work It Directed Despite No Written Change
Order
In a recent decision, the Pennsylvania Commonwealth Court upheld a trial court’s verdict of $356,000 for a paving contractor against the North Allegheny School District where the School District directed and was aware of extra work despite the lack of written change orders required by the contract.
In addition, the Court decided that the Contractor and Subcontractor Payment Act does not apply to public works. Rather, the higher standard for an award of attorney’s fees contained in Pennsylvania’s Procurement Code applies. The Court remanded the issue to the trial court to determine if there was bad faith by the School District.
In East Coast Paving & Sealcoating v. North Allegheny School District, East Coast Paving was the low bidder for paving at two schools. The contract did not include the alternate of soft spot repair work on a unit price basis. During the second day of paving, the School District's inspector identified soft spots and advised the architect who directed East Coast Paving to repair the soft spots. A discrepancy arose in billing when more soft spots were later discovered and repaired. The School District withheld payment and East Coast Paving sued. At trial, the judge found that that the School District had breached the contract by not paying East Coast Paving in full and awarded the contract balance, $220,000, attorney's fees, $20,000, and damages under PA's Contractor and Subcontractor Payment Act, $116,000.
On appeal, the School District argued that the contract required all extra work to be pre-approved in writing. The Court dismissed this argument, finding that both parties demonstrated buy their conduct that they understood the contract not to require an executed change order in advance of the work.
The School District also argued that the award of CASPA damages was improper because the School District is a government agency which is governed by the PA "Prompt Pay Act" which covers public works. The Court agreed, finding that if both CASPA and the Prompt Pay Act applied on public projects, contractors would always invoke CASPA which has a lower threshold for the imposition of penalties and attorney's fees ("wrongfully withheld" versus "acted in bad faith". The Court reversed the order for attorney's fees and CASPA damages and remanded the case for the trial judge to determine if the School District acted in bad faith.
Verdicts Upheld Against Construction Lender that Took Assignment of Contract
In a decision from earlier this month, the New Jersey Appellate Division upheld a trial judge’s verdicts in excess of $5 million against a construction lender that took an assignment of a contract between its borrower, which had leased land that needed improvement, and a contractor. The lender raised numerous arguments on appeal—the Court agreed with none of them.
After the assignment, the lender failed to exercise control over the leased public land or to assert the defenses of its borrower/lessee. The Court also found that the lender violated NJ’s Prompt Payment Act, failed to prove alleged damages due to the borrower’s side agreement with the contractor and failed in its argument that the contractor’s lien was barred as against public lands.
In EnviroFinance Group v. Environmental Barrier Co., EnviroFinance provided construction funding to Earthmark NJ Kane Mitigation for an environmental mitigation project on lands leased by Earthmark and owned by the Meadowlands Conservation Trust. Earthmark hired Environmental Barrier Co., which does business as Geo-Con, to build the project.
1 - EnviroFinance/Kane did not have standing to challenge Geo-Con's default judgment against Earthmark on its counterclaim because EnviroFinance/Kane, as a secured creditor, did not exercise its rights under the assignment to defend the counterclaim. Without doing so, a secured creditor did not hold a stake in any dispute between Earthmark and Geo-Con.
2 - The trial judge thoughtfully and correctly applied NJ's Prompt Payment Act in awarding Geo-Con attorney's fees, costs and pre-judgment interest in excess of $1.7million.
3 - EnviroFinance admitted that it sustained no damages due to the undisclosed side agreement to pay for the extras as it identified the invoices for the extra work as acceptable because they were certified by the project engineer.
4 - Geo-Con's liens against the leasehold were proper because the public/private venture between the owner of the property, MCT (a public entity) and Earthmark was not a public entity under NJ's Construction Lien Law. The contract between Earthmark and Geo-Con was not "contracted for and awarded by a public entity."
Contractors should note that courts will award attorney's fees for non-payment as long as they can prove damages and remain tenacious during litigation. Lenders are cautioned to fulfill all responsibilities when they take over for a borrower.
PA Supreme Court: CASPA Does Not Apply to Public Construction Projects
On June 15, the Pennsylvania Supreme Court, as expected, ruled that Pennsylvania’s Contractor and Subcontractor Payment Act (“CASPA”) does not apply to construction projects where the owner is a governmental entity. This ends confusion among Pennsylvania’s courts of common pleas and U.S. District Courts in Pennsylvania over the application of CASPA. Public construction projects are subject to PA’s less stringent Procurement Code.
The Court based this decision on the very vague language of CASPA and decided that the definitions of “owner”, “association” and “person” did not include a governmental entity. Their decision was based partially on the rule of interpreting statutory language in favor of the government. Even if a governmental entity is not involved in a payment dispute, CASPA still does not apply because of the definitions of “owner” and “contractor”
In Clipper Pipe & Serv. v. Ohio Casualty Ins. Co., the U.S. Navy entered into a contract with Contracting Systems, Inc. ("CSI") for the construction of an addition to and renovations to the Naval Operational Support Center in Allentown. CSI subbed the mechanical work to Clipper. CSI did not pay Clipper in full and Clipper filed suit in federal court against CSI and its bonding company, seeking $150,000 and damages under CASPA. The federal trial judge ruled that CASPA did apply and upheld a jury verdict in favor of Clipper. CSI's bonding company appealed to the U.S. Court of Appeal for the Third Circuit which asked Pennsylvania's Supreme Court to decide the issue of whether CASPA applies to a project where the owner is a governmental entity.
CSI's bonding company made several argument to the PA Supreme Court:
1 - Public owners could not be "owners" because the word "government" does not appear in CASPA
2 - Public owners could not be "associations" because at the time CASPA was enacted, "associations" referred to unincorporated enterprises.
3 - It would not be right for both CASPA and PA's Procurement Code to apply simultaneously apply to a construction project
4 - Enforcing CASPA against the federal government would violate the principle of federal supremacy.
Clipper made several arguments as well:
1 - The federal government is a "person" or "other association" as defined by CASPA because the federal government is an association of its citizens
2 - The public policy of protecting contractors and subcontractors should not be confined to private projects
3 - CASPA could be applied to federal projects' contractors and subcontractors without raising supremacy concerns because the federal Prompt Pay Act would preempt CASPA
4 - Only recent changes to the Associations Code exclude governmental entities - at the time CASPA was enacted governmental entities could be considered associations.
The PA Supreme Court did not address all of these arguments. Rather, the Court found that governmental units did not fit into CASPA's definitions. This was based on the preference for interpreting statutes in favor of the government. In addition. the Court decided that even if a public owner is not involved in litigation, CASPA cannot be used by contractors or subcontractors on public projects because, "[w]here there is no "owner" for purposes of CASPA, . . . there also can be no "contractor" under the statute".
Do’s and Don’ts When OSHA Comes for a Visit
What do you do when OSHA shows up at the job site? What don’t you do? As with most things, proper preparation can avoid poor performance. With OSHA, preparation and planning can avoid discomfort, disharmony and costly citations and shut downs.
There is a wealth of information available in print and online – some worthwhile, some not. We have selected themes from reputable authorities who have worked with and for OSHA and condensed them to a short list of do’s and don’ts that can get you thinking about safety and to get on to the right track.
Preparation:
Do's
Designate a representative to meet with and accompany OSHA inspector.
Have all required OSHA documentation ready for the inspector.
Review your policies and procedure
Don'ts
Falsify reports or OSHA 300 logs.
Don't fire employees for absence for work-related injuries.
During the inspection:
Do's
Check the inspector's credentials.
Ask the purpose of the inspection and what will be inspected.
Be professional and courteous.
Have someone accompany the inspector, photo or video what the inspector photos or videos and measure what the inspector measures.
Provide the documents that must be kept under OSHA regulations.
Don'ts
Make the inspector wait.
Don't lie or refuse to answer questions.
Don't volunteer information.
After the inspection
Do's
Post any citations.
Appeal any citations within 15 days that your lawyer thinks should be appealed.
Consider an early settlement or voluntary compliance.
Don'ts
Fail to correct violations.
Extra Credit
Review the OSHA Field Operations Manual for inspectors.
Prepare an OSHA Inspection Kit, including a camera, tape measure, note pad, pens, flashlight, tape recorder and calculator.
Please contact me if you have any questions or concerns.
Challenges in the Payment Process and How to Deal with Them
Everyone’s favorite topic is getting paid for the labor and materials provided on construction projects. We offer a list of challenges, most of which you are aware of and some that you may want to think about in future contracts & projects.
Incorporation of the Prime Contract in Subcontracts
Risks — Pay if Paid, Lien Waivers and Claim Waivers
Directed Work with No Agreement on Price
Time Limits on Claims
Accurate Billing and Payment Applications
Many subcontracts incorporate the prime contract between the general contractor and the project owner. Before signing a subcontract with such a term, you should absolutely obtain a copy of the prime contract. Usually the subcontract has a clause that states that in the event of a conflict, the prime contract governs. Why would you agree to an important term of a contract without seeing it?
Pay if paid payment terms limit your remedies for non-payment. You will only get paid if and only if the contractor receives payment from the owner or general contractor. Complete lien waivers are only valid on residential construction in PA and are not enforceable in New Jersey. Partial waivers, submitted with payment applications, may include claim waivers for all unresolved claims through the date of the payment application. All of these terms should be negotiated out of a contract before you sign it.
Some contracts allow owners and general contractors to direct the completion of extra work before a price is agreed to for the extra work. This allows these parties to maintain leverage to have the work completed and offer a low price after the work is completed. These should be negotiated out of the contract before you sign it.
A lot of contract specify that claims for extra costs must be submitted in writing within a certain time of the event causing the extra costs. You may be barred from seeking additional costs if such a provision is in your contract and you fail to submit the claim in writing in a timely fashion.
Inaccurate payment applications and invoices can delay payment or even bar you from collecting for all work completed. Payment applications and invoices should be double-checked before submitting them.
As you can see, the review and negotiation of construction contract is very important for what happens later.
I would be happy to help with any of these issues any way I can.
PA Commonwealth Court Upholds Verdict Against School District for Delay Damages
On July 24, the PA Commonwealth Court upheld a trial court’s verdict in favor of a contractor against school district for the contract balance due, damages for delay and attorney’s fees with no liquidated damages 1)where there was active interference by the owner and its representatives (delays in decision-making) that invalidated a “no damages for delay” clause, 2) where the school district had actual notice of the delay costs despite the lack of formal notice under the contract and 3) where the architect had unilaterally granted “no cost” time extensions .
This case shows that sometimes a party’s actions can negate contract provisions that are in their favor and would seem to provide a defense. In other words, actions speak louder than words.
The contractor sued and won at trial. On appeal, the School District argued that 1) the no damages for delay clause barred the contractor's extra costs, 2) the contractor had not provided timely notice of the delay claims and 3) the contractor was not entitled to its attorney's fees because it had not prevailed on its entire claim.
Lastly, the Court that the trial court had indeed found that the contractor prevailed on its entire claim for non-payment, thus entitling the contractor to an award of attorney's fees.
This is a victory for all contractors who get delayed by actions of owners and their representative who try to deny claims based on no damages for delay clauses and notice requirements.
Mechanic’s Liens Were Properly Dismissed Even After They Were Bonded Off
On July 8, the Superior Court of PA upheld the dismissal of mechanic's liens where 1) the property owner had bonded off the liens after filing objections to the liens, 2) where formal notice was not served on the owner despite the appearance of the owner’s attorney, and 3) where the site contractor failed to apportion the amount due among the lots he worked on.
Courts continue to construe mechanic’s lien and construction lien laws strictly. You must follow the complex lien laws despite other recent cases allowing “substantial compliance.”
In Oakdale Equipment v. Meadows Landing Associates, a developer contracted with a site contractor for earthwork and water and sewer. The developer terminated the contractor and refused to make payment. The site contractor and the rental company that supplied equipment filed mechanic's liens against the property
The owner filed objections to the mechanic's liens based on the fact that the rental company had failed to comply with the Lien Law's notice requirement and that the contractor had not apportioned his lien among the numerous lots he worked on. The owner also bonded off the liens. The trial court sustained the preliminary objections and struck the liens.
On appeal, the rental company argued that the bonding off of the lien foreclosed the owner's right to file objections to the lien. The Superior Court disagreed.
Be Wary of Indemnification Clauses in Construction Contracts
Indemnification clauses in construction contracts can be tricky. Such clauses may require you to pay for the defense and the liability of other parties in personal injury, property damage and even contract cases. Contract language can even waive your company’s workers compensation defense and put your insurance company on the hook for paying for pain and suffering damages to your own employee. They must be negotiated with care.
In a New Jersey federal case from earlier this month, a third party’s claim for indemnity for personal injury against the injured person’s employer was dismissed where the complaint did not allege a “special relationship” between the third party and the employer in the absence of contract language providing for indemnity.
In Carpenter v. World Kitchen, Dana and Ann Carpenter sued World Kitchen for injuries Dana suffered while operating a tractor trailer in the employ of New England Motor Freight. Mr. Carpenter was injured when the contents of the trailer, in route from New World Kitchen to Macys, became unstable and the vehicle overturned. New World Kitchen joined Carpenter's employer, NEMF. NEMF sought to be dismissed based on the workers compensation statute which bars third party claims against an injured party's employer.
The District Judge set forth the exceptions to the workers compensation defense - where "an employer has expressly agreed to indemnify the third party or where there is an implied indemnification" which requires the showing of a "special relationship" between the employer and the third party. Therefore, an employer can be at risk of indemnifying a third party when contracting if it expressly agrees to do so. A contract, in and of itself, does not constitute a "special relationship."
In this case, the Court found that World Kitchen had not alleged that the goods in the trailer were its property; rather, it appeared that that goods had already been sold to Macys. But the take away from this case is to be aware that you can negotiate away your defenses when signing a new contract.
Claims by Contractors Against Design Professional Move Ahead
In 2005, the Pennsylvania Supreme Court ruled that contractors could sue design professionals for negligent misrepresentations contained in plans and specifications. However, until last month, it was unknown whether this required an express representation by the design professional or if defective plans or specs were enough.
Last month, the Superior Court decided that a design professional need not make an explicit negligent misrepresentation of a specific fact for a third party to recover economic damage.
In Gongloff Contracting v. L. Robert Kimball & Associates, California University of Pennsylvania hired Kimball to design a new convocation center. When construction began, Gongloff was hired as the steel erection subcontractor. Feaseability concerns about whether the roof trusses would support the trussed roof system were expressed by both the steel supplier and the structural engineers. As the design team attempted to adjust the design during construction, Gongloff has a large amount of extra work resulting in 81 change orders. Gongloff was not paid and stopped working, eventually suing Kimball.
The lower court dismissed Gongloff's claims. On appeal, the Superior Court allowed them to go forward, finding that a contractor may sue a design professional for negligent misrepresentation for errors of design that cause economic damage even if the design professional does not make an explicit negligent misrepresentation.
You may contact me for more information on the state of this and other laws in PA and NJ.
CAUTION: Subcontractor That Waited to Sue on Payment Bond Out $237,214.00
On September 9, the Superior Court of Pennsylvania upheld the dismissal of a subcontractor’s claim against an out-of business general contractor’s payment bond where the subcontractor failed to sue the surety within 1 year and 90 days after completing work. The general contractor’s promises to pay did not stop the statute of limitations of the Pennsylvania Public Works Contracting Bond Law. The subcontractor billed $237,214.00 and was paid nothing.
Subcontractors must sue on a payment bond on a public project within 1 year and 90 days after completing your work or lose all claims against the contractor’s payment bond.
In Tecton v. Liberty Mutual Ins.Co., Tecton Corp. was a subcontractor to J.S. Cornell & Son for renovations to the City of Philadelphia's Police Tactical Headquarters. Cornell awarded 2 subcontracts to Tecton for masonry and carpentry work in July of 2011. Cornell asked for Tecton's billing while Tecton was performing it work in January, 2012; however, Tecton billed for all of its in September, 2012 and completed its work prior to or in early November, 2012. Over one year later, Tecton's owner sent an email to Cornell requesting payment. Cornell responding that it was going out of business. Tecton responded by filing a Demand for Arbitration against Cornell and its surety, Liberty Mutual in December, 2013. Liberty Mutual was not bound by the arbitration clause in the contract between Cornell and Tecton. Tecton finally sued Liberty Mutual in February 2014. The trial court dismissed the case in light of the Bond Law's 1 year-90 days statute of limitation.
On appeal, Tecton argued that the statute of limitations should have stopped or been tolled because Cornell's representatives promised to pay Tecton while knowing that it could not and because Tecton relied on these promises in not suing Liberty Mutual earlier. The Superior Court rejected Tecton's argument on the basis that Tecton knew it was not being paid and could have sued Liberty Mutual on its bond before the statute of limitations.
Two points to take from this case: 1 - On public works, subcontractors must sue on a payment bond within one year and 90 days of completing their work (subcontractors must give the surety 90 days' notice of non-payment before suit); 2 - Bonding companies are not bound by alternative dispute resolution provisions, such as mediation and arbitration, in their principals' contracts.
CAUTION: Builder Made Misrepresentations on Plans, Permit—Must Pay $761,527.00
In late August, the Appellate Division of the Superior Court of New Jersey affirmed a judgment in favor of homeowners against a builder for $165,956 in damages, tripled under New Jersey’s Consumer Fraud Act to $497,868, a refund of the contract amount of $62,000, and $201,659 for costs and attorney’s fees. The Court found that the builder misrepresented the nature of the addition as a great room when the homeowners were really using the space as a preschool. The local code officials found this out shut down the preschool.
Be aware that any misrepresentation, written or spoken, can subject you to fraud, and, if the situation escalates, can subject you to triple damages and attorney’s fees. This applies to New Jersey’s Consumer Fraud Act and as well as Pennsylvania’s Unfair Trade Practices and Consumer Protection Law.
In Coluccio v. Sevas Builders, the Coluccios operated a private preschool in their home. They contracted with Sevas to construct additions to their home and make other renovations for use in their preschool business. At trial, the Coluccios testified that they told Sevas that the additions and renovations were to better serve their students. Sevas testified that although the Coluccios referred to one of the additions as the "school room", he saw no fire extinguishers, exits signs or anything else that indicated non-residential use. Sevas applied for a permit and submitted drawings, designating the addition as a "great room". Sevas completed the work. However, the local construction code official required that the addition conform to the code's requirements for a preschool and include exits, fire alarms and and increased load capacity for the floor, which was on a slab. The Coluccios sued Sevas for the cost of demolishing all of Sevas' work and rebuilding to code. The trial court found that Sevas has committed fraud by submitting the permit and plans for what he knew to be a preschool as a simple residential addition/renovation. The trial court found Sevas individually and corporately liable for fraud and awarded the Coluccios the original contact amount, $62,000, the cost of demolishing his work and rebuilding to code, $165,956, tripled this under the Consumer Fraud Act to $497,868, and awarded the Coluccios attorney's fees and costs in the amount of $201,659.
On appeal, Sevas raised three issues. First, Sevas argued that the Coluccios failed to disclose that they were using their home for a preschool. The Court held that Sevas was unquestionably aware that Sevas had designed the addition as a "school room" and had intentionally misrepresented his permit and plans as for a "great room". This was fraud, entitling the Collucios to all of the damages.
Second, Sevas argued that his work did not have to be demolished to conform to the applicable code. The Court found that there was sufficient expert testimony concerning the need to start from scratch to support the trial judge's finding that demolition was necessary.
Third, Sevas argued that the award of over $200,000 in legal fees and costs was excessive. The Court disagreed, citing to the fact that Sevas' counsel did not dispute the amount of time the Collucios' attorney spent on the case or his hourly rate. In addition, the Court agreed with the trial court that the Collucio's attorney was required to spend the amount of time he spent on the case as Sevas opposed the Collucios' every attempt to collect.
The award was huge and shows that fraud can lead to a major economic penalty.
GC Cannot Hide Behind Contract—Must Pay Subcontractor for Extra Work
Earlier this month, the Pennsylvania Superior Court upheld a trial court’s verdict in favor of a subcontractor for site work extras where 1) the contractor waived a contract requirement that all changes be in writing, 2) the subcontractor submitted its claim for the extra work at the end of the project despite a clause in the general contractor’s contract with the owner that required that all changes be submitted within 21 days, and 3) the trial court did not award attorney’s fees to the general contractor per the contract because the subcontractor did not breach the contract.
You should always attempt to follow the contract language regarding changes to your work. However, where this is not practical, you must be diligent in notifying the parties involved and submitting the claim for extra work in a timely manner.
In C.E. Pontz Sons v. Purcell Construction, Purcell subcontracted Pontz to perform landscaping work at the Twin Valley High School in Elverson, PA. The subcontract required all change orders to be in writing. Pontz did perform extra work at the school, but did not submit the claims for the extra work on a payment application for over two years after Purcell made final payment. Pontz sued Purcell for the extra work. At trial, the judge found that Pontz had performed extra work, that Purcell had observed the extra work and awarded Pontz $11,247.10 for the extra work.
On appeal, Purcell raised three issues. First, Purcell argued that the subcontract required that all change orders be approved in writing and that, because a pubic contract was involved, the court should strictly enforce the subcontract. The Superior Court disagreed, finding that the evidence at trial showed that Purcell and Pontz had waived this requirement by oral agreement and that the stricter standard for public contracts did not apply because Purcell and Pontz were private parties.
Second, Purcell argued that its contract with the school district required that all claims for extra work be submitted within 21 days. However, there was evidence that Pontz had submitted an invoice for the extra work shortly after completing its work. Pontz's failure to include this invoice in its final application for payment did not preclude Pontz's right to seek compensation for the work on the timely-submitted invoice.
Third, Purcell argued that Pontz breached the subcontract by not including the extra work with its final application for payment and that this entitled Purcell to its attorney's fees pursuant to the contract. Again, the Court disagreed, finding that the trial court was justified in finding that Pontz had not breached the contract or the duty of good faith.
You should always follow the contract's provisions concerning extra work. But you should be aware that these provisions may be waived, by oral agreement or by action. Please contact me if you have any questions or concerns.
Forum Selection Clause Upheld Despite Contractor’s Claims of Racial Discrimination
On October 15, the US District Court for the Middle District of Pennsylvania dismissed a case filed by a contractor against the Minersville School District for breach of contract and racial discrimination in failing to pay. The federal court dismissed the case based on a forum selection clause in the contract that required all disputes to be resolved in Schuylkill County. The Court found that it had no jurisdiction over the discrimination claims since they arose from the contract.
Everyone should be aware that courts will presume that forum selection clauses are valid unless certain public interest factors weigh against enforcement. They should be negotiated at the time of contracting.
In ARK Builders v. Minersville Area School District, ARK was awarded a contract to complete roofing at Minersville Elementary and Minersville High School. When ARK did not complete its work on time, the School District terminated the contract and engaged another contractor to complete the roof work the following year.
ARK sued in federal court seeking $250,000 for unpaid work plus punitive damages. ARK alleged that because it was a Pakistani-American-owned company, the School District harassed ARK and improperly terminated the contract. ARK also sued the members of the School Board. The contract contained a forum selection clause which required that the local court of common pleas would have jurisdiction over any disputes arising in connection with the contract.
The defendants asked the judge to dismiss the federal case. ARK argued that its racial discrimination claims fell outside the terms of the contract. The federal court disagreed, stating that ARK's racial discrimination claim is a claim on the contract, that federal law rather than PA law governed whether the clause should be enforced, that ARK failed to show that public interest factors favored disregarding the forum selection clause and that PA law also favored enforcement of the clause.
This was a public contract so there was no negotiation of terms. On such public projects, you should be aware of any forum selection clauses. On private projects, you should negotiate the forum for dispute resolution. The last thing you want to do is to spend a lot of money fighting over where a dispute will be resolved.
PA Supremes: Collect Mechanics Liens Under Same Docket as Lien
Late last month, the Supreme Court of Pennsylvania overturned orders dismissing 17 complaints to enforce 17 mechanics’ liens filed in Chester County. The trial court had dismissed the complaints because the complaints were filed under the same docket number as the liens. The Supreme Court disagreed, finding that the Lien Law does not specifically require that such complaints be filed under separate docket numbers..
This decision mostly affects lawyers who should be aware the complaints to collect on mechanics’ liens should be filed on the mechanics’ lien docket.
In Terra Technical Services v. River Station Land, River Station contracted with Terra for the demolition and debris removal of various structures on a 76 acre parcel of land. When Terra finished its work and was not paid, it filed 17 mechanics' liens on the parcels that made up the 76 acres. Terra then sought to collect on the mechanics' liens and filed 17 complaints to obtain judgments on the mechanics' liens using the same docket numbers as the liens. The trial court struck down the complaints to collect on the liens, relying on the Rules of Civil Procedure and a 1991 Superior Court decision which required separate dockets for mechanics' liens and complaints to enforce mechanics' liens. Terra appealed and the Superior Court agreed with the trial court.
On appeal, the Supreme Court disagreed. Both the Rules of Civil Procedure and the Lien Law govern actions to collect on mechanics' liens. They must be read in concert with each other. Neither specifically requires separate docket numbers. The Supreme Court also quoted a 2013 Superior Court decision that stated that neither set of rules specifically required that a separate action be initiated to collect on a mechanics' lien. Therefore the Supreme Court overruled the Superior Court and the trial court and reinstated Terra's complaints to collect on the mechanics' liens.
NJ Court Upholds Verdict Against Supplier—Should Have Filed Construction Lien!
On November 20, the NJ Appellate Division upheld a trial court’s verdict against a plumbing supply company where the supplier failed to prove that it expected payment from other parties on the Princeton Medical Arts Pavilion project when the subcontractor it sold supplies to went under. The Court noted that the supplier “took no action to protect its interests under the Construction Lien Law.”
I always counsel clients to take action and protect their rights under the applicable lien laws. In New Jersey, you only have 90 days to file a construction lien on commercial projects and only 60 days on residential construction. Do not be like this supplier and fail to use all of your avenues of collection.
In Flemington Supply Co. v. Nelson Enterprises, Flemington Supply gave a price to The Frank McBride Company to supply fixtures for the Princeton Medical Arts Pavilion. McBride accepted the proposal but advised Flemington to bill for the fixtures through a recently-created WBE, Nelson Enterprises. Flemington did so, but Nelson stopped paying Flemington when McBride stopped paying Nelson. Flemington sued Nelson and added McBride as a defendant before the trial when Nelson declared bankruptcy. At trial, the trial court dismissed Flemington's unjust enrichment claims against McBride.
On appeal, Flemington argued that the trial court erred in holding that it could not collect from McBride on the theories of unjust enrichment, quantum meruit and quasi-contract. The appellate court stated that unjust enrichment requires that the plaintiff show that it expected payment from the defendant at the time it performed or conferred a benefit on the defendant. Because Flemington only billed Nelson and because initially only sued Nelson, it could not establish that it expected payment from McBride. The Court also admonished Flemington for failing to take advantage of its right to lien the property to insure payment.
I cannot stress enough that contractors exercise their lien rights when they are not paid in timely manner. Once you miss your deadlines, you may be left without recourse when parties in the construction payment chain go out of business or declare bankruptcy.
No Claim Under CPL Where Homeowners Cannot Prove Justifiable Reliance
On November 10, the PA Superior Court ruled that the Bucks County Court of Common Pleas had erred in awarding damages under PA’s Unfair Trade Practices and Consumer Protection Law (the “CPL”) where the homeowners failed to prove justifiable reliance on the homebuilder’s misrepresentations or wrongful conduct under the CPL. The Jamison house’s stucco façade failed, causing the OSB to become “extremely wet” and damaged.
The court decided that the homeowner had to prove reliance on misrepresentations made AFTER the sale of the home and that misrepresentations in the original sale are not actionable under the CPL.
In Harding v. Cutler Group, the Hardings purchased a house form Cutler. Almost immediately, the Hardings experienced water infiltration and mold damage. Cutler initially responded pursuant to the home warranty and recaulked and replaced a window. The Hardings hired an expert who determined that the leaks had saturated the OSB wall sheathing and took moisture readings that showed the the OSB was excessively wet. The Hardings also hired an expert who determined that the stucco siding was improperly installed, causing the leaks. The Hardings sued Cutler for breach of contract, breach of warranty and violations of the CPL. After trial, the judge awarded $78,000 in damages and $80,000 in attorneys' fees under the CPL.
On appeal, Cutler argued that the Hardings had not established all of the elements of common law fraud and therefore could not collect attorneys' fees under the CPL. The Superior Court took up the issue of whether a plaintiff under the CPL must establish all of the elements of common law fraud. Reviewing prior case law, the Court found that plaintiffs must only establish one element of common law fraud, namely justifiable reliance on a misrepresentation or wrongful conduct. However, plaintiffs must also demonstrate that they suffered damage as a result of the reliance. The Court held that a CPL plaintiff is not required to demonstrate the a guarantee or warranty justifiably induced him to purchase goods or services, but rather that he relied on a misrepresentation and that he was damaged due to reliance on the misrepresentation. Because the Hardings did not prove reliance on some misrepresentation or wrongful conduct after the sale, the Superior Court struck down the damages under the CPL.
This case makes it harder for homeowner plaintiffs to sue and collect damages, including treble damages and attorneys' fees under the CPL
In New Jersey, Subcontractors’ Complaint Against Owner Dismissed— Sub Can Only Lien
Last week, the U.S Bankruptcy Court for the District of New Jersey dismissed an adversarial action brought by creditors of a bankrupt general contractor for payment on the construction of a Retro Fitness. The subcontractors sought to collect their unpaid balances from the owner of a Retro Fitness through the bankruptcy court, arguing that the owners of a Retro Fitness had “engaged” the subcontractors through the bankrupt GC.
The Court dismissed the adversarial action against the owner because the subcontractors showed no privity, or direct contractual relationship, with the owner. It was clear from the documents attached to the subcontractors’ complaint that the owner did not directly hire the subcontractors. The subcontractors also argued for a quasi-contractual or unjust enrichment remedy. The Court dismissed this as well. In New Jersey, a subcontractor may only sue the party with which it contracted—it cannot sue those “further up the chain.” The Court stated that the only remedy available to a subcontractors against an owner is to file a construction lien within 90 days of completing its work.
In Mtinick v. Schwartz (In re Schwartz), subcontractors were creditors in a GC's bankruptcy. As the debtor had limited assets, the subcontractors filed an adversarial action in the bankruptcy against the owner of a Retro Fitness where the subcontractors had worked for the bankrupt GC. The subcontractors pleaded that they were "engaged" by the owner to work on the construction of the Retro Fitness. The owner filed a motion to dismiss the case against it.
The Court, after a hearing, decided that the subcontractors offered no evidence that the owner had directly contracted with the subcontractors. This was dispositive of the case as, under New Jersey law, a claim for payment by a subcontractor can only be made against the party with which it contracted - it cannot sue those "further up the chain." Unjust enrichment claims against the owner also failed because NJ courts have ruled that allowing such claims would be unfair as both owner and lenders would find it impossible to monitor payment on a project. In dismissing the case, the Court commented that NJ's Construction Lien Law exists to provide a remedy in situations like this. To allow a subcontractor to circumvent the Lien Law by filing an unjust enrichment claim "would create havoc in the construction industry."
I cannot stress enough that contractors and subcontractors must be aware of their lien rights and the time limits they have to enforce them. In NJ, you have 90 days. If you fail to use your rights, not only do you lose them, you may have no other avenue for recovery. Please contact me if you have questions about construction liens and mechanics' liens.
Federal Court Finds in Favor of GC on Claims of Subcontractor at Tobyhanna Depot
On December 1, the US District Court for the Middle District of Pennsylvania issued its ruling after a trial on case by a subcontractor who sued the general contractor for non-payment on a renovation project at the Tobyhanna Army Depot in the Poconos. The subcontractor stopped working near the completion of its work when the GC began underpaying its payment applications. The subcontractor sought payment for its work, including partially paid and unpaid change orders.
After trial, the Court held that the subcontract contained a “pay if paid” provision and that payment to the subcontractor was conditioned on approval of the subcontractor’s applications for payment by the GC and the owner. The GC did not authorize some of the extra work performed by the subcontractor and paid the subcontractor reduced amounts on the GC-approved change orders because the owner made reduced payments. The Court also found that the subcontractor breached the contract by walking off the job. It was not justified in doing so because the underpayment, by a few hundred dollars, was not a breach so substantial as to justify the subcontractor’s abandonment of its work. The Court awarded the GC all of the costs to complete the subcontractor’s work.
In Butch-Kavitz v. Mar-Paul, Butch-Kavitz, an electrical subcontractor, sued Mar-Paul, the GC it contracted with, for non-payment on a renovation project for the US Army Corps of Engineer at the Tobyhanna Army Depot. Butch-Kavitz sought payment for additional electrical demolition it had to perform, unpaid change orders and its contract balance. Mar-Paul countersued for the costs it incurred to complete Butch-Kavitz's work after it walked off the job due to non-payment.
At trial, the evidence showed that that subcontract contained a pay-if-paid clause, that Mar-Paul overpaid Butch-Kavitz on some pay applications, underpaid on others and that the subcontract stated that a failure to prosecute the work of the subcontract constituted a default. The evidence also showed that the USACE approved reduced amounts on the change orders for Butch-Kavitz's extra work.
The Court found that Butch-Kavitz was not entitled to payment for additional demolition because it failed to provide that Mar-Paul directed it to perform this work. Also, Butch-Kavitz was only entitled to the amounts approved by the USACE for its other change order work. In addition, the Court decided that "negligible" underpayments on payment applications did not justify Butch-Kavitz abandonment of the project. Rather, this abandonment was a breach of contract by the subcontractor. The Court awarded Mar-Paul all of its costs to complete Butch-Kavtiz's work.
There are a couple of take-aways from this case. First, be sure you know what the contract documents say about payment and default. Second, you must carefully consider walking off of a job for non-payment. If you have any questions, please do not hesitate to contact me.
Bad Faith by School District Puts Contractor’s Attorney’s Fees in Dispute
On January 6, the PA Commonwealth Court upheld a jury verdict in favor of a sheet metal subcontractor against a school district where the school district terminated the HVAC prime contractor and entered into an oral contract with the prime’s sheet metal subcontractor to complete its scope of work. The subcontractor did so, but the school district refused to pay. The trial court originally granted judgment to the subcontractor and awarded attorney’s fees of $41,000 under the Prompt Pay Act. The Commonwealth Court reversed and ordered a jury trial. The jury also found in favor of the subcontractor and this time judge awarded $110,000 in attorney’s fees for the school district’s bad faith.
The Commonwealth Court remanded the case again because the attorney’s fees award was made under the bad faith statute and not the Prompt Pay Act. One judge wrote “Litigation is the new sport of kings.”
In F. Zacherl, Inc. v. Flaherty Mechanical Contractors, Flaherty was selected by West Allegheny School District as the HVAC prime contractor for alterations to West Allegheny High School. Flaherty subcontracted the sheet metal work to Zacherl. Flaherty developed cash flow problems and stopped paying its subcontractors which caused the school district to terminate Flaherty. Flaherty's bonding company took over. To mitigate further delay, the school district Zacherl to return to the project and complete its work. Zacherl sent a letter advised the school district of its amount billed to date, amount paid to date amount due, and amount remaining to bill. By way of verbal agreement, Zacherl agreed to complete its scope of work if the school paid it half of the amount currently due. - $147,000. The school district paid this amount and Zacherl returned and completed its scope of work. However, the school district made no further payments.
Zacherl sued and was granted judgment before trial against the school district for all of its work - $229,000, plus $41,103.31 in attorney's fees and costs under the PA Procurement Code/Prompt Pay Act.
The school district appealed and the Commonwealth Court remanded the case for trial. At trial, the jury found in favor of Zacherl and awarded $111,000. The judge added $130,000 fro interest, attorney's fees and costs.
The school district appealed again. It argued that (1) the oral contract was not valid because it was not approved by the school board, (2) there was insufficient evidence to find a contract and (3) the court erred in concluding that the school district acted in bad faith.
Section 508 of the Public School Code requires that all contracts for more $100 must be approved by the school board. However, the Court had previously decided in another case that this would not bar a contractor's claim for payment for additional work where that work was part of an already-approved contract. In this case, separate approval was not required because the oral contract was for work already approved by the school board.
The Court found plenty of evidence to support the jury's finding that Zacherl agreed to perform the same work specified in the prime contract for the same amount agreed in the subcontract with Flaherty. The school district never questioned why Zacherl was submitting invoices to it and no one informed Flaherty that the work was unauthorized or not-contracted-for. It was also highly unlikely that Zacherl agreed to perform the additional work for free. The jury verdict was upheld.
The trial court had ruled that the school district had acted in bad faith by enticing him to come back to work and not paying him. However, the trial judge cited PA's bad faith statute, which applies to bad faith during litigation, and not the Prompt Pay Act, which applies to public works. So the Court struck the $110,000 attorney's fees award and sent the case back to the judge to determine if Zacherl is entitled to attorney's fees for bad faith during the litigation.
Years of litigation pursued by a school district who employed a subcontractor and paid it nothing - ridiculous. A concurring judge wrote a noteworthy and too true opinion, including:
"Litigation is the new sport of kings. The damages awarded to Zacherl will not make Zacherl whole because the monies will be used to pay attorney fees and costs. The Prompt Pay Act was designed to address this unfortunate result."
Outlook for Construction in 2016: Slower Growth?
Experts are predicting slower growth in the construction industry in 2016 compared to last year, forecasting an increase in construction spending in the 6% range. Construction starts could rise to over $700 billion as the increases to long-term interest rates should stay gradual according to the 2016 Dodge Construction Outlook
These forecasts follow recent increases in contractor backlog and in construction employment. This all points to a better 2016 for everyone in the construction industry (fingers crossed).
Dodge forecasts:
Commercial building +11%
Institutional building +9%
Single family housing +20%
Multifamily housing +7%
Public works 0%/flat
Electric utilities -43%
Manufacturing +1%.
Associated Builders and Contractors is predicting nonresidential construction spending will increase by 7.4%. Also, expect construction employment to increase about 3%. In addition, material prices will rise by about 3%.
The construction industry added over 45,000 jobs in December according to the Bureau of Labor Statistics. Nonresidential building construction employment is up 1.4% for the year, residential up 4.8%, nonresidential specialty trade employment up 4.3%, residential trade employment up 6.1% and heavy construction/civil engineering is up 2.2%.
Some construction prices fell in December and some rose. Prices were up for some: asphalt (+1%), concrete (+3%), fabricated metal (+0.1%); and down for others: natural gas (-46.5%), petroleum (-16%), plumbing fixtures (-0.5%), energy (4.7%), wire/cable (-2.7%), lumber (-2.9%), iron/steel (-2.2%), .
Good luck in 2016!
NJ Court Says Contractors Can Be Sued for 10 Years After Substantial Completion
Can a contractor be sued for allegedly defective construction for up to 10 years after substantial completion? New Jersey says YES. Statutes of limitation for negligence and breach of contract can be waived by a change in ownership and the new owners’ subsequent “discovery” of construction defects.
In a case decided on February 1, the Appellate Division allowed a condominium association’s claims for defective construction to proceed when they were filed 8 to 9 years after substantial completion. The court decided that the unit owners had no obligation to file suit until they had control of the board of directors and were advised of construction defects by an engineer.
In Palisades at Fort Lee Condo. Ass'n v. 100 Old Palisade, the owner of a Hudson River-front condo hired contractors and subcontractors in 1998 to construct a residential tower and additional stories on a parking garage. Construction was completed in 2002. In 2004, the owner sold the condominium property and the new owner began to convert the rental property to condominiums. In 2006, enough of the units were purchased so that the owners took control of the association's board of directors. The board then retained an engineer due to various complaints from the unit owners. The expert produced a report in 2007 which identified various construction defects. The homeowner association filed a suit against the contractors in 2009. Some contractors settled with the association. The trial judge threw out the rest of the claims as being too late, saying that there was no way that the contractors could not have anticipated that the property would be sold and that an association of unit owners would be formed - this would subject the contractors to being "forever liable" for alleged construction defects. The statute of limitation for breach of contract is 6 years; for negligence, it is 2 years, usually measured from substantial completion.
On appeal, the appellate court disagreed. The court decided that the association did not have a claim until the unit owners took control of the association's board of directors and until the board had sufficient facts upon which to assert claims of defective construction. The unit owners did not have control of the association until they had control of the board of directors. The unit owners did not "discover" their claim until they got the expert's report. Both of these decisions by the court allowed the suit to continue despite it being filed 7 years after substantial completion. The court did say that New Jersey's "statute of repose" of 10 years would bar any suits filed more than 10 years after substantial completion.
Running Power Line to Adjacent Property’s Pumping Station Not an “Improvement”
Late last month, the Pennsylvania Superior Court upheld a trial court’s determination that a contractor could not lien property adjacent to a pumping station it built where the contractor ran power lines for the pumping station through an existing building on the parcel of land in question.
The Court decided that this was not an “improvement” under PA’s Mechanics’ Lien Law as it did not provide any “benefit” to the parcel. The court upheld the trial court’s judgment on the liens the contractor had filed on the 3 parcels of land on which it actually built the pumping station. The pumping station was built by the Linde Corporation to draw water from the Lycoming Creek to be used by fracking companies.
In Linde Corp. v. Black Bear Properties, Linde built a pumping station for the owner of 4 parcels of land near the Lycoming Creek. The owner wanted the station to draw water from the creek to be sold to energy companies for use in fracking. Linde completed the pumping station, which sat on 3 of the parcels of land, with power coming from a building on the fourth parcel. The owner failed to pay Linde over $216,000 and Linde filed liens against all 4 properties. At trial, the court entered judgment for Linde, but only against the 3 properties on which Linde built the pumping station. The trial court found that running power lines through an existing junction box did not equate to construction in the ordinary sense.
On appeal, Linde claimed that it had improved all 4 pieces of property. The appellate court disagreed. It held that the work performed on the 4th parcel did not effect a material change to the building on that property because running the wires was merely incidental and did not improve the property in any way as required by the PA Mechanics' Lien Law. There was no benefit conferred on that specific property
Care must be used in allocating the amount due a contractor where the contractor improves more than one property, such as in a residential or mixed-use development. Please contact me if you have any questions.
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DROP ZONE
CHANGES IN THE 2007 AIA A201
GENERAL CONDITIONS OF THE CONTRACT FOR CONSTRUCTION
1. PROJECT ADMINISTRATION
a. Architect or Initial Decision Maker
i. The person to render initial decisions on Claims and certify termination of the agreement.
2. THIRD PARTY CLAIMS AND PROGRESS PAYMENTS
a. Owner may withhold payments if third party files claim
i. Example: mechanic’s lien
3. OWNER’S FINANCIAL INFORMATION
a. Restrictions on requests – certain situations
4. PROOF OF PAYMENT TO SUBCONTRACTORS
a. Owners can request proof of payment
5. CONSEQUENTIAL DAMAGES
a. Mutual waiver remains in place, but express which are included
6. TIME LIMITS ON CLAIMS
a. Claims must now be made within applicable statutes of limitation rather than contractual deadlines, i.e., substantial completion
7. ALTERNATIVE DISPUTE RESOLUTION
a. Check the box – Arbitration or L
1. PROJECT ADMINISTRATION
a. Architect or Initial Decision Maker
i. The person to render initial decisions on Claims and certify termination of the agreement.
2. THIRD PARTY CLAIMS AND PROGRESS PAYMENTS
a. Owner may withhold payments if third party files claim
i. Example: mechanic’s lien
3. OWNER’S FINANCIAL INFORMATION
a. Restrictions on requests – certain situations
4. PROOF OF PAYMENT TO SUBCONTRACTORS
a. Owners can request proof of payment
5. CONSEQUENTIAL DAMAGES
a. Mutual waiver remains in place, but express which are included
6. TIME LIMITS ON CLAIMS
a. Claims must now be made litigated
b. Advantages and Disadvantages
8. INSURANCE
a. Contractor now required to add Owner as “additional insured”
i. But not for Owner’s negligence
PA SUPERIOR COURT UPHOLD MECHANIC'S LIEN PRIORITY
In a recent decision, the Pennsylvania Superior Court upheld a trial court’s determination that a mechanic’s lien had priority over a mortgage where the bank recorded a mortgage on the property after the contractor had begun work on the project.
In Commerce Bank v. Kessler, the Court considered whether a mechanic’s lien filed after a mortgage used to pay for construction was recorded had priority where the work began before the the mortgage was recorded. The Superior Court found that the amended version of the Mechanic's Lien Law, Section 1508 regarding a mechanic lien's priority, effective January 1, 2007. applied despite the fact that the contractor had begun work prior to January, 2007. Section 1508 awards prior over mechanic's liens to mortgages which are used to pay the cost of completing construction.
The bank argued that under the clear language of Section 1508, proceeds of the mortgage could be used to pay other expenses and the mortgage's priority over a mechanic's lien would be preserved. The contractor argued that allowing the owner to pay other expenses from the proceeds of the mortgage, would, in essence, eviscerate a contractor's lien rights as an owner could use most, if not nearly all of the proceeds of the mortgage on other expenses while maintaining priority over mechanic's liens. The Court agreed with the contractor, finding that the term "the proceeds" in Section 1508 means "all of the proceeds". The Court upheld the mechanic's lien's priority over the mortgage holding that the exception in Section 1508 did not apply since the owner used part of the proceeds of the mortgage to pay other expenses.
Contractors should take from this decision that it is the best practice to assert mechanic's lien rights in a prompt fashion.
The Court also considered the bank's attempt at invalidating the mechanic's lien because the mechanic's lien itself, while referring to the project's specification to describe the labor and materials the contractor provided, did not attach the specifications to the lien. The Court held that because the mechanic's lien referenced and attached the contract, the lien provided the bank and others "a general statement of the kind and character of the labor and material furnished" as required by the lien law. The Superior Court therefore upheld the priority of the mechanic's lien over the mortgage.
This is important precedent as owner cannot negate mechanic's liens by obtaining a mortgage after a contractor has begun work on the project unless they use all of the proceeds of the mortgage to pay for construction.
WHAT DO CONSTRUCTION ECONOMIC NUMBERS MEAN?
We have all seen the recent economic numbers. Construction jobs are up, but so is construction unemployment. Non-residential spending increased slightly in December, but materials prices increased in January. A construction backlog indicator remained unchanged in the fourth quarter of 2012 and will likely remain so for 2013.
Nonresidential construction spending increased 0.3 percent in December, 2012 according to the U.S. Census Bureau. The increase was driven by increased spending in the private, nonresidential sector. This increase indicates that the national economy is staying in recovery mode. However, increases in privately funded construction is being offset by declines in the publicly-funded segment.
The U.S. construction industry added 28,000 jobs in January; however, at the same time, construction unemployment shot up to 16.1 percent according the the U.S. Department of Labor. The increase in the number of jobs is likely due to the ongoing Hurricane Sandy reconstruction. The rise in unemployment is not surprising due to the seasonal nature of the construction industry.
The Associated Builders and Contractors' Construction Backlog Indicator, a survey of industrial and commercial contractors' work to be performed in the next few months, remained flat at approximately eight months of work from the third quarter through the fourth quarter of 2012. The ABC believes that fiscal cliff fears, limited public capital improvement budgets and lackluster growth are to blame for this stagnation. Risks limiting the release of additional money and projects include the looming sequestration and the pullback in publicly-funded construction projects.
National construction material prices increased 0.7 percent in January 2013 according to the Producer Price Index. This increase appears to be driven by an increased demand for softwood lumber, both for residential construction and for export to China. Look for material prices to continue to fluctuate in 2013.
All of this indicates that construction is still in a holding pattern. There are some indications that the private sector is increasing slightly, while public work is being postponed or shelved. Hurricane Sandy has produced a spike in regional jobs. However, overall, the construction industry remains flat. This is due to economic uncertainty, the fiscal cliff and sequestration. In addition, construction lenders will likely continue to avoid any risk pending a more secure environment.
BUILDER'S WARRANTY EXTENDED TO SUBSEQUENT PURCHASER
In a recent decision, the Pennsylvania Superior Court held that a homebuilder may have liability to the home’s second owner that bought the home from the parties that the homebuilder contracted with for a breach of the implied warranty of habitability.
In Conway v. The Cutler Group, the Court considered whether a homebuilder’s implied warranty of habitability extended to a subsequent purchaser who discovered latent defects that caused water infiltration. The Court held that it did.
Cutler constructed a home for the original buyers in Jamison, PA in 2003. The Conways bought the home from the original buyers in 2006. The Conways discovered water infiltration around the windows in the master bedroom in 2008. They hired an engineering and architecture firm to assess the infiltration problem. The firm prepared a report concluding tha the house suffered from several construction defects and recommended a complete stripping off of the entire house.
The Conways sued Cutler in 2011, alleging a breach of the implied warranty of habitability. The trial court dismissed the case, reasoning that the Conways, as subsequent purchasers, did not contract with Cutler and could not rely on the implied warranty.
The Pennsylvania Superior Court took the appeal and noted the the issue of whether the implied warranty of habitability extended to subsequent purchasers was one of first impression for Pennsylvania appellate courts. The implied warranty of habitability, a warranty that the house will be a suitable living unit, is a creation of public policy, shifting the risk of certain latent construction defects from the home buyer to the home builder. It is not dependent on a contract between the parties.
The Court noted that local courts of common pleas had addressed this issue and were deeply divided on the issue. The Court distinguished a warranty of workmanship or of workmanlike performance from the warranty of habitability as workmanship warranties are dependent on a written contract. The Court found that the policy behind the warranty of habitability is that a purchaser of a new home relies on the skill of the builder to provide a suitable living unit. Homebuyers and subsequent purchasers do not have the expertise to evaluate whether the house was constructed properly. The Court reasoned that it would be inequitable to shift the risk of a latent defect back from the homebuilder to a second or subsequent purchasers and allowed the subsequent purchasers' lawsuit to continue.
This decision, while surprising, is limited to homebuilders. In addition, as the Court noted, the subsequent purchasers still have to proved that the alleged defect is latent, that it is due to the builder's design or construction and that it affects habitability.
ALERT - ALL EMPLOYERS MUST POST REVISED PA AND FEDERAL LABOR LAW NOTICES
All employers in Pennsylvania must ensure compliance with the revised labor law posting requirements and replace outdate notices. Recent federal revisions include five new or revised notices. In addition, there is a recent change to the PA Minimum Wage notice.
Notices regarding numerous federal and PA laws must be posted for employees to see. I can provide the updated poster.
All employers must post, in an area where employees can view, company information, Pennsylvania Notices, including
PA Unemployment Insurance Notice
PA Workers' Compensation Notice
PA Abstract of Equal Pay Law
PA Human Rights/Discrimination
PA Minimum Wage Law & Fact Sheet
PA Abstract of Child Labor Law
PA Hours of Work for Minors.
In addition, all employers must post federal notices, including
Employee Polygraph Protection Notice
OSHA 3165 It's the Law Notice
Equal Employment Opportunity is the Law Notice
IRS Notice 797
IRS Notice of Withholding Earned Income Credit
Federal Minimum Wage
USERRA Rights and Benefits Notice
Family and Medical Leave Act - for employers of 50 or more employees
NLRA Employee Rights Notice (PENDING)
USCIS Discrimination Notice
Employee "Right to Know" Notice
Emergency Numbers
Payday Notice
Please contact me for more information on getting the all-in-one PA and federal labor law poster.
QUESTION - May a Contractor Count a Material Supplier Toward WBE/MBE Goals?
Clients often ask whether a material supplier may be counted toward MBE/WBE/DBE goals. The answer, as to most legal questions, is it depends. Generally, public agencies will allow contractors to designate minority/woman/disadvantaged-owned material suppliers toward goals if the supplier owns or operates a store or warehouse in which materials of the type specified under the contract are bought, kept in stock and regularly sold to the public. In addition, the supplier must, in most case, have the specified item in stock.
Under PennDOT regulations, contractors can count 60% of materials purchased from a supplier if the supplier is a "regular dealer". A regular dealer owns or operates a store, warehouse or other establishment in which the materials, supplies, articles or equipment of the general character described in the specifications and required under the contract are bought, kept in stock and regularly sold or leased to the public in the usual course of business. Generally, a supplier is not a regular dealer if it has to order the specified supplies. Also, "drop shipments", , may not be counted toward DBE goals.
In Philadelphia, the City will generally not allow contractors to count WBE/MBE suppliers toward goals where the supplier does not stock the specified item. This is especially true where the specified item is a custom item or item that must be fabricated to order.
Please contact me with any questions you have regarding WBE/MBE/DBE suppliers.
Proposed Change to Mechanic's Lien Law Would Require Subcontractors to Provide Notice to Owners within 20 Days of Starting Work
A bill currently pending in the PA General Assembly proposes requiring subcontractors to provide notice to project owners of their provision of labor and materials to the project within 20 days of starting work or face losing their rights to file mechanic’s liens.
House Bill 473 would require the creation of a State Construction Notice Directory where project owners would register their projects online. Subcontractors would then have a duty to register also. The bill, sponsored by Rep. Thomas Killion of Delaware and Chester Counties, would require the PA Department of Labor and Industry to establish and administer the proposed State Construction Notices Directory (the "Directory") by July 1, 2015. The Directory would serve as a means for contractors and subcontractors locate notices of commencement.
A project owner would be allowed to file a notice of commencement with the Directory prior to the commencement of work on a project. Subcontractors, as a condition of retaining the right to file mechanic's liens, would have a duty to monitor the Directory and to file notice with the project owner within 20 days after first providing materials in connection with the project. The bill proposes a form Notice of Furnishing that subcontractors would have to fill out and file with the owner via certified mail, personal delivery or filing on the Directory. The bill would make it unlawful for contractors to contractually require subcontractors not to file the notice of furnishing.
The passage of this bill will obviously create another hurdle for subcontractors to gain their right to lien property for labor and materials provided for the benefit of project owners. The existing mechanic's lien law already requires subcontractors to give a project owner 30 days' written notice of the intent to file a mechanic's lien. The proposed law would add an "up-front" notice requirement. This additional notice will likely result in the loss of many subcontractors lien right and in increased administrative costs to subcontractors. Representative Killion's telephone number is 610-325-1541 and his email is tkillion@pahousegop.com
PA Supreme Court Rules that Claims Arising from State Contracts Must be Filed in the Board of Claims
In a March, 2013 decision, the Pennsylvania Supreme Court ruled that all claims arising out of contracts with the Commonwealth must be filed in the Board of Claims and not in state court.
In Scientific Games Int’l v. Dep't of Revenue, the Court considered the Commonwealth Court’s decision that it had jurisdiction over a dispute between a company and the Department of Revenue over a contract awarded, but not executed, that was subsequently cancelled.
Scientific Games ("SG") was awarded a contract for the design and implementation of a computer system to monitor slot machines at casinos in Pennsylvania. Before the contract was signed by both sides, the Department of Revenue cancelled the RFP. SG sued for performance and sought an injunction in Commonwealth Court, relying on that court's original jurisdiction over actions against the Commonwealth. The Commonwealth overruled the Department's objections to jurisdiction.
The PA Supreme Court reversed, finding that sovereign immunity prevented an action seeking force the Commonwealth to enter a contract:
The Procurement Coe establishes administrative processes to address disputes arising in the procurement setting. On account of the doctrine of sovereign immunity, however, contractors, bidders, and offerors have limited recourse and remedies. Relative to controversies in matters arising from procurement contracts with Commonweath agencies, the Board of Claims retains exclusive jurisdiction (subject ot all jurisdictional prerequisites) which is not to be supplanted by a court of law through an exercise of original jurisdiction.
The take away for contractors is when doing business with the Commonweath, your venue for contract claims is the PA Board of Claims.
Be Aware that Partial Releases of Claims are Enforceable, but May be Waived
Owners and general contractors now routinely require that partial release of all claims be given with monthly payment applications. These releases are enforceable, but may be waived.
In a recent federal decision, the Court held that such partial releases are generally enforceable and could bar delay claims. However, the releases may be waived by conduct including representations that outstanding claims would be “taken care of”, by settlement discussions and by statements made by counsel.
In Lydon Millwright Services v. Ernest Bock & Sons, Lydon had subcontracted with Bock to install a baggage handling system at the Philadelphia Airport. Lydon experienced numerous delays in performing its work and sued Bock for nearly $2 million in delay costs. Bock sought to have the case dismissed on summary judgment, arguing that Lydon had submitted 54 partial releases of claims with its payment applications. The partial releases included "any claims arising from delay" and allowed Lydon to "reserve and except out of this release" any claims detailed on the reverse side of the releases.
The Court found that because the plain language of the releases was not ambiguous or contain a "contractual hook", they would be enforceable to bar Lydon from pursing its delay claim in the absence of a waiver. Lydon contended that Bock had waived the releases numerous times, by
Telling Lydon that it could team up with Bock to pursue the delay claims jointly against the owner;
Telling Lydon that Bock would "take care" of Lydon with respect to the delay damages;
Bock's counsel proposing that Lydon release the delay claim by entering into a liquidating agreement with Bock by which both companies would pursue delay damages;
Attempting to settle Lydon's claim.
The Court denied Bock's motion for summary judgment, finding that the question of waiver was one for the jury to determine. Basically, it was for the jury to decide whether Bock's actions constituted a waiver of the partial releases signed by Lydon.
Contractors and subcontractors must understand that executing monthly releases of claims is not merely a clerical function and can have serious implications. It is best to reserve or except any outstanding claims out of the release. Similarly, owners and general contractors need to take care in how they acknowledge and react to (and how their attorneys react to) subsequent claims.
QUESTION - Can I be Forced by Contract to Litigate/Arbitrate a Long Way from Home?
Recently, a client asked me to review a contract that contained a clause requiring all disputes to be resolved in a state two time zones away from the project site. Are such clauses enforceable? Well, currently it depends on where you are. However, the US Supreme Court will consider this issue later this year.
Federal courts across the country are divided on the issue of the enforceability of forum selection clauses. Most will enforce them. Some hold this is only one factor in deciding where the parties must litigate or arbitrate their disputes.
The majority of federal circuits will enforce forum selection clauses unless there is fraud or the chosen forum is unreasonable. The minority view, reflected in the case from the Fifth Circuit case, In re: Atlantic Marine Construction Co., is that other factors, including the location of the project and witnesses are located, are just as important in determining where the parties must resolve their disputes. The US Supreme Court accepted review of the Atlantic Marine Construction Co. case, presumably to resolve the differing federal opinions, and a decision may come this year.
In our federal courts, the Third Circuit, forum selection clauses are interpreted according to the applicable state law.
Under Pennsylvania law, forum selection clauses are presumed to be valid. The law permits enforcement when the parties have freely agreed that litigation shall be conducted in another forum and where such agreement is not unreasonable at the time of litigation.
Under New Jersey law, forum selection clauses are enforceable if the contract has been mutually agreed upon by the parties, is supported by valid consideration, and does not violate codified standards or offend public policy. For mutual assent to exist, there must have been a meeting of the minds of the parties. This signifies that each party to the contract must have been fairly informed of the contract's terms before entering into the agreement.
Please contact me if you run across a forum selection clause requiring you to arbitrate or litigate disputes in a state far away from the project.
PA Superior Court Allows Site Subcontractor to File Mechanic's Lien When Planned Building Not Built
In a decision filed in May of 2013, the sharply-divided Superior Court overruled the trial court’s striking of a Lancaster-area site work contractor’s mechanic’s lien despite precedent that a mechanic’s lien must be connected to the construction of a building.
In B.N. Excavating v. PBC Hollow-A, the Court ruled that where excavation is performed as an integral part of a construction plan, that activity falls within the Mechanic’s Lien Law regardless of whether a structure is ever built.
BN Excavating performed excavation work, including a silt fence, temporary riser, emergency spillway, topsoil stripping, cut and fill, concrete pipe, sub-grading for building pad, storm water bed and other site work at the Providence Business Park in Phoenixville. BN was not paid and filed a mechanic's lien for $118,670.71. The proposed buildings were never built and the owners sought to have the lien dismissed. The trial court in Montgomery County dismissed the lien, citing prior case law that no lien can attach to property for work unconnected to the construction of a building.
The Superior Court framed the issue as whether land is lienable for site work performed as an integral part of a planned construction process even if construction never occurred. The Court analyzed the language of the Mechanic's Lien Law which provides that property is lienable for excavation performed incidental to the erection or construction of an improvement. Nothing in the Lien Law requires that a structure actually be erected. After distinguishing BN's case from cases where excavation work is performed independent of a construction plan, the Court ruled that where excavation is performed as an integral part of a construction plan, the activity falls within the Mechanic's Lien Law regardless of whether a structure is ever erected. Because BN performed work integral to the construction of the buildings (excavation, sub-grading of building pads, underground storm water system) and because BN alleged in its mechanic's lien that it performed the site work as part of a planned two-building construction project, the Superior found that the mechanic's lien was valid.
The law was and remains clear that site work unconnected to any plans for the construction of a structure may not be the subject of a lien. However, it now clear that site work performed incidental to plans for the construction of a structure may be the subject of a mechanic's lien. Contractors and subcontractors should consider including such an allegation in their mechanic's liens.
New Law Would Invest $2.5 Billion in Pennsylvania Highways, Bridges and Other Infrastructure
The Bridge to Pennsylvania’s Future is currently being finalized in the PA Senate’s Transportation Committee. The new law proposes to raise money to modernize Pennsylvania highways, bridges, transit agencies, railways, airports, ports, and bicycle and pedestrian programs within 5 years.
It is estimated that 50,000 jobs will be created, that the threat of a crumbling infrastructure will be diminished and that a more hospitable environment for business development will be created.
Pennsylvania leads the country in structurally deficient bridges. 4,400 (18%) of Pennsylvania's 25,000 state-owned bridges are rated as structurally deficient. Of the 44,000 miles of state-owned roads in Pennsylvania, 9,000 (23%) are in poor condition.
By the fifth year of the Bridge to Pennsylvania's Future, it is estimated that the following investments will be made:
$1.9 billion for Pennsylvania's state and local highways and bridges
$510 million for Pennsylvania's urban and rural transit agencies
$115 million for Pennsylvania's railways, airports, ports and bicycle and pedestrian programs
PennDOT and municipalities will collaborate to upgrade, modernize and manage 14,000 traffic signals owned and maintained by local governments.
The following changes are proposed to Pennsylvania DMV:
Annual vehicle registration will now be a two year registration
Four year driver's license will now be a six year license
Vehicle registration stickers will be eliminated.
The funding will be raised, at least in part, in the following ways:
The wholesale price cap on fuel will be phased out
The fuel tax will be reduced by 17% over a two year period
Vehicle licensing, registration and permitting fees will be raised
Drivers who violate traffic laws will pay a $100 surcharge
Drivers who fail to obey traffic control devices will be fined $300 instead of $25 to $100.
The Bridge to Pennsylvania's Future will provide needed infrastructure improvements, create jobs and raise funds for highway and other construction
Check Indemnity Contract Language to Avoid Responsibility for Another’s Negligence
Contractors and subcontractors routinely accept contractual language regarding indemnity without a second look. However, this language could make you responsible for another contractor’s negligence, even where your own employee is injured.
In a ruling in Philadelphia last month, the Court held that “clear and unequivocal language” of an indemnity provision required a subcontractor whose employee was injured due to a GC ’s negligence to reimburse the GC’s settlement payment and attorneys’ fees.
In Ferraro v. Turner Construction Co., the case involved an injury that occurred during the construction of a new Intermediate High School for the Reading School District. Turner was the construction manager, Perrotto Builders was the GC and Riegel Engineering was the structural steel subcontractor. The plaintiff, an employee of Riegel, was injured when standing on a scissor lift installing steel stairway as he lost his balance and fell 30 feet. The plaintiff sued Turner, Perrotto and Lift, Inc. Perrottoa joined Riegel to the lawsuit based on an indemnity provision in Riegel's subcontract. Perrotto settled with the plaintiff, paying $1 million.
Perrotto proceeded to trial against Riegel and the indemnity provision, which provided:
Subcontractor shall indemnity and hold harmless the Owner, the Architect and the Contractor . . . from and against all claims, damages, losses and expenses, including but not limited to attorney's fees . . . regardless of whether it is caused in party by a party indemnified hereunder . . . The Subcontractor's obligations under this section shall not be limited in any way , . . under Workers' Compensation acts.
The jury found in favor of Perrotto on this language. The judge upheld the jury verdict and found that the language met the "Perry-Ruzzi" rule which requires clear, specific and express language in the terms of the agreement to support indemnification by an indemnitee which is itself negligent. The court entered judgment against the subcontractor-employer for $1,000,000.00 and $177,272.07 in attorney's fees and costs.
You can be liable for another party's negligence that results in injury, even if the injury is to one of your employees. Please review indemnity provisions carefully or engage counsel to do so before signing any contract.
Bonding Companies Can Waive “Safe Harbor” and be Made to Pay Downstream Claims
Generally, when a contractor pays a subcontractor, the Pennsylvania Procurement Code (the “Code”) provides that future claims against the contractor or its bonding company are barred. However, this law can be waived by the language in a payment bond.
In a July 2013 Commonwealth Court decision, the Commonwealth Court upheld summary judgment against a GC’s bonding company where the GC paid its subcontractor which later declared bankruptcy and in favor of the subcontractor’s unpaid supplier where the payment bond’s language effectively waived the Code.
In Berks Products Corp. v. Arch Insurance Co., Skepton Construction contracted with Wilson Area School District to build a new intermediate school. Skepton gave Wilson a payment bond. Skepton also engages R.A.Tauber as its concrete subcontractor Tauber bought material from Berks Products but failed to pay Berks Products in full, owing $52,679.26. Skepton terminated Tauber and claimed that Tauber was paid in full, Tauber declared bankruptcy and Berks Products brought a claim under Skepton's bond.
Skepton's bonding company defended the claim, claiming that Skepton had paid Tauber in full, thereby barring Berks Products claim pursuant to the Code which provides:
once a contractor has made payment to the subcontractor . . . future claims for payment against the contractor or the contractor's surety by parties owed payment from the subcontractor which has been paid is barred.
Berks Products had moved for summary judgment at the trial court level, arguing that the language of the payment bond:
if the Principal and any subcontractor . . . promptly shall pay or cause to be paid, in full, all money which may be due any claimaint supplying labor or materials . . ., then this Bond shall be void; otherwise this Bond shall be and shall remain in force and effect.
had waived the "safe harbor" provision of the Code. The trial judge agreed and entered judgment in favor of Berks Products against the bonding company.
The bonding company appealed, arguing the the Code should apply and that the ruling violated PA's Public Works Contracting Bond Law (the "Bond Law"). The Commonwealth Court upheld the ruling of the trial court, finding the bonding company liable for the claim by Berks Products. The Court found that the Code did apply but that the bonding company had waived it by the language in the bond. The Court also held that the Bond Law was not violated as one of the main purposes of the Bond Law is to ensure a remedy for subcontractors who supply labor and materials for a project.
The takeaway is to obtain and review payment bond language carefully. Careless drafting by a surety may expose it to liability even if the principal pays it subcontractors in full.
You Have Six Months from Last Day of Work to File a Mechanic’s Lien— NOT INCLUDING PUNCHLIST WORK
In a recent decision, the Pennsylvania Superior Court ruled that a contractor’s return to the project to complete deficiency items does not constitute a day of work for purposes of Pennsylvania’s Mechanic’s Lien Law (the “Lien Law”).
In Neelu Enterprises v. Agarwal, the Court ruled that where a contractor returned to complete defective items after his contract had been terminated, this did not constitute the extension of the “completion of his work” under the Lien Law.
The contractor had entered into a contract to build a house in November of 2008. The owner became dissatisfied and fired the contractor on December 8, 2010, at which time the contractor made the owner sign and acknowledgement of the termination. In January of 2011, the contractor returned to the house with his subcontractors to "observe and correct certain deficiencies." The contractor filed his mechanic's lien for unpaid contract balance and lost profits on June 23, 2011.
The owner filed objections, arguing that the contractor had not complied with the Lien Law which requires that all mechanic's liens be filed "within six (6) months after the completion of his work." The trial court agreed with owner and dismissed the contractor's lien.
On appeal, the Superior Court considered the issue of whether the return to the project to correct deficiencies extended the time to file a mechanic's lien. Citing a case from 1890, the Court found that it did not. Work done to correct a defect will not preserve the lien as the contract is unchanged and the work is done without charge to the owner. The Superior Court upheld the dismissal of the lien.
Contractors must be vigilant in asserting their lien rights in a timely fashion. Going back to correct defective work may not extend the time for filing a lien.
New Jersey Low Bidder Properly Thrown Out Where Contractor Failed to Include Pre-Qualification Certificates
New Jersey bidders — beware. In a decision issued last month, the New Jersey Superior Court, Appellate Division, upheld New Jersey’s strict bidding requirements and threw out a low bidder.
In A&A Industrial Piping v. County of Passaic, the Court upheld a county’s rejection of a low bid because the bidder had failed to include pre-qualification certificates for its subcontractors. The public entity has broad discretion which is not easily overturned unless it is arbitrary, capricious or unreasonable.
The bidder had failed to include pre-qualification certificates (for New Jersey's Department of Property Management and Construction) for its plumbing and steel subcontractors in its bid for the upgrade of the county jail's HVAC and fire protection systems. The Court found this requirement "substantial" and that the county could not waive non-compliance because it"could affect a bidder's overall bid price" and because it provides "a guarantee the work will be performed by pre-qualified prime and subcontractors."
Contractors in New Jersey must strictly comply with bidding requirements. Rejected bidders face a heavy burden to challenge the decision of a local government to reject their bids as non-conforming. In such circumstances, the contractor should consult its construction attorney as soon as possible.
New Jersey Contractors Can Sue Architects for Delays and Verbal Change Orders
In a recent federal case, a judge decided that, under New Jersey law, a contractor’s claim for delay damages against the project architect were not barred by the economic loss doctrine.
In SRC Construction Corp. of Monroe v. Atlantic City Housing Authority, the contractor had brought claims for delay damages and unapproved change orders against the architect. The architect defended, arguing that the contractor’s claim was barred because its contract was with the owner. The Court disagreed.
The contractor alleged that the architect was negligent and caused it damage by failing to provide permits, submitting non-compliant shop drawings to the owner, failing to respond to RFIs in a timely manner and verbally approving change orders that were later denied by the owner.
The architect argued that the "economic loss doctrine" barred the contractors claims. The economic loss doctrine precludes a negligence action, in addition to a contract claim, unless the plaintiff can establish an independent duty of care. Judge Irenas decided that the economic loss doctrine only applies to bar negligence claims between parties to a contract. This is to prevent plaintiffs from resorting to negligence actions to seek the benefit of the bargain they made in the contract.
The architect argued that because the contractor's contract was with the owner, the doctrine should bar claims against the architect because the contractor was seeking the benefit of its contract with the owner from the architect. The Court refused to stretch the law that far. It held that where there was no contractual relation between the contractor and the architect, there can be no contract claim and therefore, a negligence claim cannot be barred.
The law is similar in Pennsylvania. If a contractor is damaged by the negligence of the architect, the damages may be recoverable.
Philadelphia School District Sues Its Architects on Capital Improvement Program
Last month, the School District of Philadelphia filed 26 lawsuits against more than 2 dozen design professionals that worked on the School District’s Capital Improvement Program.
According to a statement by the School District, the lawsuits seek $2 million for deficiencies in the drawings and specifications that allegedly caused cost overruns on the Program.
The School District faces an uphill battle as there are defenses. Architects are professionals and under Pennsylvania law, a certificate of merit, signed by another architect certifying that the defendant was negligent, must be filed with the court. The School District will be hard pressed to identify an architect willing to certify that 26 of his colleague firms were negligent, let alone be able to prove these allegations.
In addition, the School District's claims seem illogical. How could all of the projects' cost overruns be the result of architectural errors? And, if the average cost overrun was less than $85,000 per project, is this indicative of widespread design issues?
And, in the larger picture, Is this related to School District's budget shortfall?
PA Courts Continue to Enforce Partial and Final Waivers of Liens and Claims
As we’ve advised in the past, contractors must be careful in signing partial and final waivers. Recently, the PA Commonwealth Court refused to allow a supplier to claim an amount due after it had signed a final release, even against a bonding company.
In Conestoga Ceramic Tile Distributors v. Travelers, the Court ruled that the fact that Conestoga signed a final release barred all subsequent claims on the project, including those against the subcontractor, the GC, the GC’s surety and the owner.
Conestoga supplied tile to ProFast Commercial Flooring, a subcontractor to IMC Construction which had a contract with Penn College. IMC had a payment bond on the project. In December of 2009, Conestoga signed "Lower Tier Vendor Final Waiver and Release". In October, 2010, Conestoga sent a claim for $169,000 to Profast and to IMC's bonding company. Conestoga received some payments, $101,000 of the $169,000, via a joint check agreement with IMC and Profast, but a balance remained of $68,000. Profast went out of business and Conestoga sued IMC's bonding company, IMC, Penn College and Profast.
The Commonwealth Court upheld the dismissal of Conestoga's lawsuit by the Lycoming County Court of Common Pleas based on the final waiver. The waiver stated that is was "an express warrant and representation from Conestoga that there are no other costs, expenses, fees charges . . .relating to Conestoga's Work performed on the project." The Court held that this language in the waiver barred any further claims against Penn College, IMC and Profast: "This language is clear. Conestoga waived 'all claims, demands and causes of action' against Contractor, Subcontractor and Penn College."
The court also held that the final waiver barred claims against the GC's bonding company: "If the principal has no liability, neither does the surety . . . Under the Final Waiver and Release, Contractor has no liability to Conestoga. It necessarily follows that Travelers, as surety for Contractor, has no liability to Conestoga.
As we have advised in the past, everyone must be extremely cautious in signing both partial and final waivers and releases of liens and claims. They should be rigorously reviewed before you sign away important rights.
Federal Courts Strike Tort Claims v. Bonding Companies
Claims for bad faith and other non-contract claim have been bounced by federal judges in the last two months.
In Upper Pottsgrove Township v. International Fidelity Ins. Co., the Township’s claims for bad faith against IFIC were thrown out because PA’s bad faith insurance law does not cover sureties. IFIC had provided the Township with subdivision bonds on behalf of TH Properties for the Coddington View subdivision in the Township. TH Properties went bankrupt in April, 2009 and all work stopped. Two years later, the Township demanded the full amount of the bond as the development deteriorated. When IFIC refused to pay, the Township sued IFIC and included claims for bad faith. This claim would have allowed the Township to seek punitive damages and its attorney's fees.
The Court dismissed the bad faith claim. Pennsylvania's Bad Faith Statute applies in an action "arising under an insurance policy." Because surety bonds are not insurance contracts, the court found that the Bad Faith Statute did not apply and dismissed that part of the Township's lawsuit..
In Reginella Construction Co. v. Travelers, claims not arising out of contract, for example, interference with contract and bad faith, were stricken with no permission to amend the claim. Reginella had contracts with the Moon Area School District ("MASD") and with the Ohio Turnpike Commission ("OTC"). Travelers provided bonding for both of these projects. During these project, Reginella stopped using Travelers as its surety for future projects. Reginella claims that Travelers then refused to bond off a lien filed on the OTC project, causing OTC to terminate Reginella. Then Travelers demanded that MASD turn over the contract balance due Reginella to Travelers. Travelers allegedly met with Reginella's subs to advise them that Reginella would be terminated. Reginella went out of business and sued for breach of fiduciary duty, tortious interference with contract and bad faith.
The court dismissed the claim in full, finding that the underlying indemnity agreements between Reginella and Travelers were contracts and that the duties allegedly breached were contractual in nature. The gist of the action doctrine provides that when a case "is really about" a contractual relationship, other claims or torts should be precluded. This is because torts are violations of a general duty of care imposed by law on society, while contracts are agreements concerning the obligations between the parties to a contract. Reginella failed to file a claim for breach of contract. in its complaint.
Reginella then sought the court's permission to file an amended complaint and allege a breach of its contracts with Travelers. Courts are usually pretty liberal in granting such a request. However, this court refused to do so, saying it would be futile and would cause undue delay. Reginella had countersued Travelers in a separate case in state court and the federal court refused to continue a parallel action.
You should realize that all dispute you have with a surety will be based on the indemnity agreement and bonds. You will not have recourse to tort claims, including bad faith.
PA Superior Court Answers Questions About Mechanic’s Lien Law
Several questions about PA’s mechanic’s lien law were recently answered by the PA Superior Court in Hogg Construction v. Yorktowne Medical Center.
1– Does the 6-month time limit to lien, effective January 1, 2007, apply if the lien was filed in 2007, but the work was completed in 2006 when the time limit was 4 months?
Yes.
2—Is the issue of whether work performed after substantial completion extends the “last day of work” for the time to file a lien a question of fact for the jury?
Yes.
3—Does a lien claimant have to file a new lawsuit under a new docket number to foreclose on a mechanic’s lien?
No.
In this case, Hogg contracted with YTMC Fit-Out to renovate a condo connected to the Yorktowne Medical Center. Hogg claims that it is due almost $90,000. Hogg completed its work on September 17, 2006 and a certificate of substantial completion was issued the next day. In November, Hogg returned after the sale of the condo to install an electrical receptacle and to replace a smoke detector. Hogg filed its lien on April 30, 2006, more than 7 months after substantial completion and more than 5 months after Hogg's return to the project. Hogg later filed a complaint to foreclose on the lien.
The new owners of the condo moved to have the lien stricken and the complaint dismissed, arguing 1- the lien was untimely as it was filed more than 4 months after the last day of Hoggs work; 2 - Hogg's return in November did not extend the last day of Hogg's work from September to November; and 3 - Hogg's complaint was unlawfully filed under the same docket number as the lien. The trial court agreed and dismissed the lien and the complaint. Hogg appealed.
The Mechanic's Lien Law was amended, effective January 1, 2007, to increase the time claimants have to file a lien from their last day of work, from 4 months to 6 months. Because the work performed by Hogg occurred in 2006, but the claim was filed in 2007, the court had to determine which version of the law applied. The court held that the new version allowing 6 months to file a lien applied, reasoning that the new version, by its own terms, applies to liens filed after January 1, 2007, and that three sections of the new version, but not the section specifying the 6-month time limit, specifically state that they apply to contract entered into after January 1, 2007. By not making such a statement concerning the 6-month limit, the court determined the lawmakers wanted the 6-month limit to apply to all liens filed after January 1, 2007. Therefore, the court held that the 6 month limit applied to the lien as it was filed after January 1, 2007.
The law provides that the completion of a lien claimant's work means "performance of the last of the labor or delivery of the last of the materials required by the terms of the claimant's contract or agreement, whichever last occurs." Hogg claimed that the trial court wrongfully dismissed the lien as the return of Hogg's electrical subcontractor to install the receptacle and replace the smoke detector extended the completion of Hogg's work. The court agreed, finding that when the receptacle and smoker detector were installed and whether or not these installations were the last of the labor required under the contract were to be decided by the facts of the case. These issues would have to be decided by the judge or jury at trial.
Pennsylvania's rules of civil procedure provide that a lien and an action to foreclose on a lien are separate and distinct. However, the court found that the rules do not say that a complaint to foreclose a mechanic's lien must be filed at a different docket number than the lien. More importantly to the court, the rules do not state that the filing of a complaint to foreclose a mechanic's lien under the same docket number as the lien is fatal to the complaint and lien. According the court upheld the lien and referred it back to the trial court for trial.
These questions routinely come up in the context of collecting on mechanic's liens and this case provides us with a couple signposts.
PA Transportation Funding Law Has Hundreds of Millions of Dollars for Construction
Pennsylvania’s Transportation Funding Law, passed by the PA General Assembly on November 21 and signed into law by Governor Corbett on November 25, includes hundreds of millions of dollars for improvements to PA roads, bridges and mass transit systems which will been a boon for public contractors.
The funds will be raised through increases in the gasoline tax and various fees for vehicle registration, driver licensing and moving violations. PennDOT will decide where to use the money.
The $2.3 billion funding bill includes hundreds of millions of dollars allocated to the Philadelphia area. One of the larger projects is the replacement of the seven bridges crossing the Vine Street expressway in Center City. In addition, the bridge at the congested intersection of Route 23 and Route 422 and the Route 422 bridge that crosses the Schuykill River in will be replaced. PennDOT has not yet set a schedule for these projects.
Commonwealth Court Hold that County Must Comply with Local Road Construction Rules
This month, the Commonwealth Court decided that Carbon County had to comply with local road ordinances in constructing access roads to the proposed Packerton Business Park in Mahoning.
In In Re: Petition of Commissioners of Carbon County to Lay Out and Open County Road, Carbon County asked the Court to review the trial court’s decision denying the County’s petition to take ownership of a township road. The Commonwealth upheld the trial court's finding that the township’s ordinance was not preempted.
Carbon County wanted to develop a 70 acre parcel of land into a new industrial park to be known as Packerton Business Park. The County's plans included moving a Mahoning Township road to allow access to the park. The Township rejected the County's plans because they did not satisfy Township requirements for a 20 foot carpath width and a 6 foot shoulder. The County then filed a petition with the Carbon County Court of Common Pleas to condemn and take possession of the road in dispute. The trial court rejected the County's argument that the County Road Law, which was less stringent than the Township's ordinances, trumped the Township's law.
On appeal to the Commonwealth Court, the County argued that the Township's road ordinance was irrelevant because the County's activity in laying out roads is not land development, that the County law by its own language preempts or trumps the Township law, and that any other interpretation would effectively allow townships to spend County money through regulation.
The Court reviewed both laws. The County Road Law did not specifically state that the County may open roads accessing a subdivision without complying with local township laws. The Township law was equally silent on conflicts with county laws. Therefore, the Court had to examine the consequences of each law prevailing where neither one specifically preempted the other. In the end, the Court determined that the County could comply with its own law and the Township law and that the County's compliance with local laws would not frustrate the County's actions, only regulate them.
A lesson from this case is that developers, their design team and their counsel should review county and local laws before submitting plans for approval.
US Supreme Court Decides Forum Selection Clauses are Enforceable Absent Greater Public Interest
Earlier this month, the US Supreme Court decided that contract clauses requiring that disputes be litigated in a state other than where the construction project is located are enforceable unless public interest factors weigh in favor of litigating in the state where the project is located.
This decision, however, does not invalidate specific state laws, such as Pennsylvania’s, which state that such clauses are unenforceable in construction contracts.
In Atlantic Marine Construction Co. v. US District Court, a general contractor and a subcontractor on a child-development center project in Texas had a payment dispute. The contract required that all lawsuits would have to be brought in the general contractor's home state of Virginia. The subcontractor argued that this unenforceable as the project was in Texas and it would be burdensome to litigate 2000 miles away.
Justice Alito upheld the forum selection clause, stating that the bargained-for forum selection clause is given controlling weight in all but the most exceptional cases. The party seeking to litigate elsewhere has the burden of showing why the case should not be litigated where the parties agreed to litigate. The court stated that the parties' private interests should not be considered and only "public interest factors" should be considered. Public interest factors may include court congestion, local interest in the dispute and the local law.
The decision allows consideration of state laws that invalidate forum selection clauses in construction contracts. 24 states, including Pennsylvania, have laws that hold that such forum selection clauses are unenforceable.
Contractors must carefully review and negotiate all terms of a contract before signing them. It is recommended that you contact counsel before signing any contract.
Simple Steps to Obtain Payment and Performance Bonds
The state of the construction industry is driving private owners to require payment and performance bonds on more and more projects. In turn, more general contractors are requiring more subcontractors to provide bonding. It is important to start the process of obtaining
bonding well in advance of contracting so you don’t miss the opportunity to bid on a bonded job.
This article will provide the basics of obtaining bonding, including what information you will need to provide and whom to contact in order to get the bonds you need.
By issuing your company payment and performance bonds, a bonding company is promising that if your company cannot complete its contract work or if your company does not pay its subcontractors and suppliers, the bonding company will protect the obligee of the bond (the party you contract with) by completing or paying for the completion of your work and paying your subcontractors and suppliers. The bonding company will therefore be interested in your company and its finances and management.
First, you should gather the information a bonding company will want to see before writing bonds for you. Bonding companies will want a complete understanding of your overall business operation, details regarding your accounting and estimating operations, financial reporting and information on completed projects. You should be prepared to provide:
business and personal financial statements
a list of references from owners, GCs, subs and suppliers
a formal business plan for your company
a formal contingency plan in case you or other key managers cannot complete the project
your expectations of bonding needs and capacity
Next, you should build relationships and talk to people who can get you what you need. These include:
insurance/ surety agents who can find you the right fit for your bonding needs
your accountant who can assemble the necessary financial package for the bonding company
peers to get leads and information about surety relationship
your attorney who can guide you through the process and review the agreements required by the bonding company
.
You should treat your bonding company as a valued business partner. A good relationship with your bonding company can lead to the financial success of your company.
Develop an Effective Distracted Driving Policy to Reduce Liability
Everyone’s aware of the dangers of talking and texting while driving. States and local governments are enacting more laws prohibiting handheld communications while driving. Violations of these laws by your employees could result in additional liability for your company.
Employees often use cell phone for work or personal business while driving. However, a lax company policy could result in a greater liability should an accident occur while an employee is talking or texting while driving. A plaintiff’s attorney may sue your company and seek payment based on a lack of direction from your company to employees on this issue. A company policy on distracted driving may help to reduce that risk.
An effective policy should not be limited to hands-free communication while driving, but all aspects of distracted driving as defined by state and local laws.
In addition, the policy should offer alternatives to using the cell phone while driving, such as pulling over for phone calls or waiting until employees return to the project, trailer or office. The policy should state that the employer does not expect the employee to engage in work while driving.
Next, you should decide on the disciplinary consequences of violating the policy and enforce it. Progressive discipline is recommend. Immediate termination is impractical. A lack of enforcement may come back to bite you in the case of an accident.
A sensible and enforceable policy that works for your company and its drivers can reduce your exposure. You should contact an experienced attorney to help you prepare such a policy or to review your existing policy.
PennDOT Hoe Pac Ban Lifted
PennDOT recently lifted its ban on the use of vibratory plate compactors for backfilling trenches after laying pipe on PennDOT projects. This ban was fought by numerous contractor organizations. However, PennDOT is only permitting compaction of 8 inch layers.
With the ban removed, PennDOT issued new regulations including the requirement of an authorized inspector being present during compaction and of the completion of a “Pipe Installation Inspection Form”.
The change institutes a trench installation inspection requirement for pipe installations, including subsurface utilities, located under a roadway, sidewalk or shoulder. An authorized inspector will have to be present for all trench backfill work. In addition, the inspection and a representative of the contractor will have to fill out and file a Pipe Installation Inspection Form that requirement field measurements of trench and bedding checks every 50 feet and field measurement of backfill including compaction method, soil/aggregate type and lift thickness.
PennDOT has stated that it is partnering with the industry to research whether the 8 inch layer restriction can be increased in the future.
If you have any questions or would like the new regulation, please contact me.
New Requirements for Contractors Working in Philadelphia
Effective January 1, 2014, all contractors applying for a permit in Philadelphia must submit a Tax Clearance form from the Department of Revenue and a current and valid Certificate of Insurance.
The Department of Licenses and Inspections is stepping up requirements and enforcement due to the mishaps in 2013. L&I will be out enforcing all requirements this year, including all of those included in the Philadelphia Code.
The Tax Clearance form can be obtained from the Philadelphia Department of Revenue's website at www.phila.gov/Revenue. The Certificate of Insurance must include a contact name and phone number of the contractor's insurance agent. PERMIT APPLICATIONS WILL NOT BE ACCEPTED WITHOUT THESE DOCUMENTS.
In addition, the Philadelphia Code was recently changed and all licensed Contractors, Register Master Plumbers, Electrical Contractors, Warm Air Installers and Fire Suppression System Contractors must meet the following conditions:
Contractors must display their license number on advertisements, stationery, proposals, contracts, job sites, main place of business and business vehicles displaying the Contractor's b business name;
License numbers on vehicles must be at least 2 inches high;
No contractor can sell or otherwise allow another person or business to use a license or permit issued to the contractor;
The primary contractor on a permitted job site must set up a display showing the address of the construction site; the prime contractor's business name, address and contractor license number; a list of all subcontractors and their license numbers; all required licenses; name of the property owner; copies of all permits; and a copy of the contractors insurance certificate.
Pass-Through MBE Subject GC to Liability, but Not Liquidated Damages
In a recent Philadelphia case, the judge granted summary judgment in favor of the City of Philadelphia and against a general contractor for breaching the 12% MBE requirement in its contract with the City when the general contractor’s MBE subcontractors merely took a 3% fee and passed the actual work along to non-MBE subcontractors.
The contract contained a clause that allowed the City to collect liquidated damages for the general contractor’s breach of the MBE requirement in the amount of 1% of the contract amount for each 1% of the 12% MBE requirement not met. The Court considered the City’s demand for $5 million in liquidated damages and held that the actual damage would be determined at trial.
In Ernest Bock & Sons v. City of Philadelphia, Bock signed a contract for renovations at Philadelphia International Airport in which it committed to engaging MBE's to perform 12% of the $39.8 million contract plus $450,000. This equated to $5.2 million. During discovery, it was determined that Bock's original MBE and its replacement MBE merely took a 3% fee and passed the work along to non-MBE subcontractors. Bock argued that it could not find an MBE to actually perform the work. The Court found that this was insufficient to satisfy Bock's duty under the contract and held that Bock breached the contract.
The contract provided that if Bock failed to fulfill the MBE requirement, then the City could recover, as liquidated damages, 1% of the total amount of the contract for each 1% of the commitment shortfall. The Court refused to enforce this provision, finding that it was not a reasonable forecast of just compensation for Bock's breach. The court held that this was an excessive penalty and allowed that the reasonable and appropriate damages for Bock's breach of the MBE participation requirement would be determined by the finder of fact at trial.
GC's must make every effort to ensure that any MBE commitments are fulfilled and that the MBE's employed are actually performing the work subcontracted to them and no merely taking a fee and passing the work along to non-MBE subcontractors.
New Economic Numbers for 2014 Inspire Hope
The recent economic numbers are encouraging. Both construction jobs and material prices increased in January after both were flat for most of 2013. Non-residential construction jobs increased by 8,300 jobs in January according to the U.S. Department of Labor, an increase of 3.3% over last year. However, construction unemployment rose to 12.2 percent. This contradiction may be a result of seasonal factors and the end of the government's long-term unemployment compensation plan which may have encouraged worker to look for jobs in construction. Material prices were boosted by natural gas prices which surged by 14.5 percent in January and are now 27.7 % higher than one year ago. Iron, steel and wire/cable prices also increased in January.
A construction backlog indicator showed a backlog of almost 8½ months which is a 4% increase from one year ago and a post-2008 high. A growing backlog indicates an expanding demand for construction services. The average backlog increased in the northeastern, southern and western parts of the US and decreased in the middle states. Expansion is being seen in the energy production, industrial production, social media, robotics, international trade and online retail segments of construction. GDP is still expected to expand by about 2.5% this year.
Non-residential construction spending did decrease slightly last month, but this was likely the result of the unseasonably cold weather.
All of this indicates that the construction industry may finally be rebounding. Although the increases are sporadic, they are trending in the right direction.
How to Mitigate Legal Costs in Defect Litigation
Anyone that has ever been involved in multi-party construction defect litigation knows that it can be extremely expensive and time-consuming. As contractors work with smaller margins than in the past, there is less money for repairs. Therefore, the probability of more lawsuits for defects increases as parties look to blame others for the defect and the cost to correct. There are strategies to keep your legal costs reasonable.
The best way to avoid high legal costs is to avoid litigation entirely. This can be aided by exercising intelligence and diligence on the job. If your work or work in place does not look like it will serve its intended purpose, you must give notice to the appropriate party, such as the GC, owner, and/or architect. Also, any field directives that modify work in the plans and specifications must be confirmed in writing. These may help you avoid being joined into a lawsuit if a defect and damage occurs.
If you do become involved in construction defect litigation involving multiple parties, you can still act to mitigate your legal costs. This can be done by giving the required notices before doing anything when a defect arises, by working closely with your attorney, and by getting involving in a solution to the defect.
Once you encounter a defect or damage on a project, you must immediately notify the appropriate parties in writing. You should notify your insurance company even if only as a precaution and allow your insurer to investigate. You should also notify any of your subcontractors or suppliers if you believe there is any chance at all that they may be responsible for part or all of the defects. In addition, your contract probably contains indemnity language requiring you and/or others to defend the owner and/or other in the event of property damage. If you are to be indemnified, you must send a tender of defense letter to the party who owes you indemnity.
Once you are involved in a lawsuit, you must work closely with your lawyer. If you can, you should tell your insurance company to hire an attorney familiar with construction. Most insurance defense lawyers specialize in insurance work as opposed to construction disputes. You will then have to help your lawyer get up to speed on the technical issues to provide a more effective defense. Also, if you believe other parties may be responsible for the defect or damage, you must tell your lawyer so these potentially responsible parties can be joined to the lawsuit.
Lastly, you should be involved in coming up with a solution to repair the project or to mitigate the damage caused. If the lawsuit can be short-stopped, you can avoid legal expense and potential liability. Working toward solving the problem will change the attitude of other parties, owners in particular. This may help to resolve the dispute before the case gets too far down the road. If your liability can be separated from the liability of other parties, for instance, if a portion of the defect or damage is entirely your fault, you should push your lawyer to make a quick settlement, either with corrective work, payment of some money or both.
The main point is that you must take an active role in your projects and in the process if a defect or damage occurs.
PennDOT Picks Teams to Bid on Rapid Bridge Replacement Project
PennDOT has selected four teams of design/financing/construction companies engaged in joint ventures to bid on its Rapid Bridge Replacement Project which will replace 500 bridges throughout Pennsylvania for a number of years under one contract. The final specs are expected to be released this summer. PennDOT would like to select a winning team this fall and for construction to begin in the Summer of 2015.
The teams/joint ventures selected are: (1) Plenary Walsh Keystone Partners; (2) Keystone Bridge Partners; (3) Commonwealth Bridge Partners; and (4) Pennsylvania Crossings.
The teams are made up as follows:
Plenary Walsh Keystone Partners:
Plenary Group (Los Angeles, CA)
The Walsh Group (Chicago, IL)
Granite Construction Co. (Watsonville, CA)
HDR Engineering (Philadelphia, PA)
HNTB Corp. (Philadelphia, PA)
Infrastructure Corp. of America (Brentwood, TN)
Keystone Bridge Partners:
InfraRed Capital Partners (London/New York)
Kiewit (Omaha, NE)
Parsons (Pasadena, CA)
The Allan A. Myers family of companies (Worcester, PA)
DBi (Washington, DC)
American Infrastructure (Worcester, PA)
Commonweath Bridge Partners:
John Laing Investments (London)
Fluor (Irving, TX)
American Bridge Co. (Coraopolis, PA)
Traylor Bros, Inc. (Evansville, IN)
Joseph B. Fay Co. (Tarentum, PA)
STV Inc. (Philadelphia, PA)
Infrastructure and Industrial Contractors (Pittsburgh, PA)
Pennsylvania Crossings:
Meridiam (Paris)
Lane Construction (Cheshire, CT)
AECOM (Philadelphia, PA)
Trumbull (Pittsburgh, PA)
Wagman Companies (York, PA)
Cofiroute (France).
The bridges are spread throughout Pennsylvania with 10 bridges scheduled for repair or replacement in the counties surrounding Philadelphia. More information is available at www.P3forPA.pa.gov.
PA Supreme Court Clarifies "Statutory Employer"
Pennsylvania’s Workers Compensation Law provides a defense to general contractors when an employee of a subcontractor is injured on the job. The defense, called the “statutory employer defense”, gives the general contractor immunity from suit by the subcontractor’s employee because the general contractor is responsible, under the law, to provide workers compensation if the subcontractor cannot. There is a lot of litigation involving the definition of “statutory employer.”.
Last week, the Pennsylvania Supreme Court ruled that a trial court wrongfully asked a jury to determine whether a subcontractor’s employee was an independent contractor or and employee of the general contractor in the context of the statutory employer defense and provided clarification of the distinction between a subcontractor and an independent contractor.
In Patton v. Worthington Associates, Worthington was the GC for an addition to a church in Levittown. Worthington subcontracted with Patton Construction, Inc. for carpentry at the project. Earl Patton, the owner and employee of Patton Construction, fell and hurt his back at the project. He sued Worthington saying that Worthington failed to maintain safe working conditions at the jobsite. Worthington moved for summary judgment and argued that it was immune from suit because it was Mr. Patton's "statutory employer." The court disagreed, denied the motion and sent the case to the jury to determine whether Mr. Patton was an independent contractor (no defense available) or an employee of Worthington (defense).
The Supreme Court disagreed with this tact. Independent contractors, in the context of the statutory employer defense, are those other contractors who have a distinct and independent contract with the owner. Conventional subcontractors are dependent contractors and not independent contractors. Employees of subcontractors may not bring suit against general contractors for their injuries. There is no exception for owners/principals of subcontractors. The Supreme Court said the case against Worthington should have been dismissed.
It is important to engage competent counsel when dealing with construction site injuries. Sometimes judges have to be educated about the law before they make a serious and costly erroneous ruling.
Ambiguity in Bid Specs Can Force Re-Bid
Requirements set forth in bidding specifications on public projects are mandatory and must be strictly adhered to for a bid to be valid. When a public entity issues bid specs that are subject to more than one reasonable interpretation, there is no fair and just competition among bidders as required by the law. The only remedy is to enjoin an award of the contract and conduct a re-bid with revised specs.
In a recent case before the Pennsylvania Commonwealth Court, an ambiguity in bid specifications, mandating that the winner’s recycling facility be located within 15 miles of the public entity, created a defect in the bid process that required that the contract award be rescinded and the project re-bid.
In Greenstar Pittsburgh v. Allegheny County, Allegheny County and the City of Pittsburgh (collectively the "Public Authorities") put out an invitation to bid on the processing of recyclable materials. Included in the specifications as a qualification that the "Contractor's facility shall be located within fifteen (15) mile radius from the City's Department of Public Works." However, throughout the specifications, both the Contractors' "processing facility" and "other receiving site" are referred to as two different and distinct types of facilities. The specifications could thus be reasonably read to require either that the Contractor's processing facility be located within 15 miles or that the Contractor's processing facility or other receiving site/facility be located within 15 miles. This ambiguity created a defect in the bid process and the court ordered that the project be re-bid.
It is interesting that a one-word omission in one section of specifications can create an ambiguity and require a re-bid. Contractors should always check for ambiguity in the contract documents when losing out on a public project. If one potentially exists, you should contact your legal counsel.
Property Damage Recovery Pitfalls
Recovering from the responsible party and/or its insurance company for property damage is fraught with pitfalls. Parties that cause property damage often have no assets or disappear. Insurance companies draft their policies to reduce their exposure. Courts require expert testimony to prove causation. So what are you to do? A recent case from Philadelphia gives some guidance.
In Valentino v. Harleysville Insurance Co., the plaintiff owner hired contractors and oversee and perform roof repairs and the installation of a new rubber roof. Portions of the roof were removed and not replaced in time to avoid rain which entered the property and damaged the interior and exterior of the building. The owner sued the contractors for breach of contract and negligence.
The contractors' insurance company moved for judgment in its favor because the insurance policy stated that it did not cover damage from rain unless the building first suffered a covered cause of loss to the roof. The Court agreed and let the insurance company out of the case because the replacement of the roof was not a covered cause of loss to the roof.
The contractors also moved for judgment in their favor because the owner had not retained an expert to prove that the contractors' actions caused the rain to enter the building and that this event caused the owner's damages. The Court agreed and dismissed all claims against the contractors because the owner could not prove its case without an expert.
To recover for property damage, it is recommended that you explore all avenues for recovery, including all avenues where an insurance policy may provide coverage. There are many exclusions and insurance companies will use all of them to avoid paying. In addition, you must retain an expert, usually an engineer or architect, to provide an opinion on causation. You should consult your attorney who can assist you in these endeavors.
PA Supreme Court Rules Unions May Not File Mechanic’s Liens
On April 17, the Pennsylvania Supreme Court overturned the 2012 decision of the Superior Court and ruled that union workers are not subcontractors as defined in Pennsylvania’s Mechanic’s Lien Law and that union benefit funds may not file mechanic’s liens on their behalf. This decision renders all mechanic’s liens filed by union benefit funds, unions, and employees of contractors invalid.
The Pennsylvania Superior Court had ruled in 2012 that the Lien Law should be liberally construed, that employees of a contractor are “subcontractors” entitled to file mechanic’s liens and that the contracts between unions and contractors made the contractors’ employees “subcontractors” entitled to file liens on project where they (or their benefits) were not paid.
In Bricklayers of Western Pennsylvania Combined Funds v. Scott's Development Company, William Pustelak, Inc., had entered into collective bargaining agreements ("CBAs") with two unions, the Bricklayers and the Laborers. While the CBAs were in effect, Scott's Development Company (the "Developer") entered into a contract with William Pustelak, Inc. (the "Contractor") to complete a construction project in Erie County. The Contractor completed the work, but failed to pay benefits funds to the unions' trust funds. The union trust funds filed mechanic's liens against the Developer for the unpaid benefits in the amount of about $42,000. The trial court dismissed the liens, holding that the union trust funds were not "subcontractors" under the Lien Law. The Superior Court disagreed in 2012, and this appeal followed.
The Pennsylvania Supreme Court framed the issues as (1) whether the Superior Court erred in concluding that the Lien Law should be liberally construed, (2) whether a liberal construction of the Lien Law would allow an employee of a contractor to assert a claim as a subcontractor, and (3) whether the Superior Court erred in finding on its own that implied contracts control the parties' rights under Lien Law.
First, the Supreme Court held that, in interpreting a statute such as the Lien Law, a court's job is to determine the will of the General Assembly using the language of the statute as its primary guide. A court's primary goal is to give effect to the legislative intent without regard to a liberal or conservative construction.
Second, the Court found it extremely relevant that the legislature chose to use the word "subcontractor" instead of "employee" when granting lien rights. A "subcontractor" is generally understood to be a person or business who performs or takes a specific portion of a prime contractor's work from the prime contractor's contract with an owner. The Court also cited to established precedent from the 1840's and 1850's holding that laborers are not subcontractors. In addition, the legislature's official comments stated that prior decisional law that laborers are not subcontractors remained unchanged. Lastly, the Court cited a portion of the Lien Law that disallows liens by persons who are not contractors or subcontractors. Therefore, the Court found that the legislature did not intend a contractor's employees to be subcontractors for purposes of filing a mechanic's lien.
Third, the Court found that it was improper for the Superior Court to overrule a trial court's decision on its own legal theories that had nothing to do with the allegations set forth by the parties. The Superior Court had stretched the law to find an implied contract between the Contractor and the unions for the specific work on the Developer's project. The Supreme Court found this stretch to be too attenuated, especially since the CBA's preceded the contract between the Developer and the Contractor.
In summary, employees of a contractor are not "subcontractors' for the purpose of filing a mechanic's lien. Neither are unions or union trust funds.
Any mechanic's liens that were filed on behalf of union benefit funds, unions or employees of contractors are now invalid.
Why Delay/Disruption Claims Are Hard to Win
On almost all project, contractors run into delays. These delays result in increased costs. Another problem is disruption, where inefficiency is caused by an interruption to your normal working methods. There are many roadblocks to recovering these costs. However, with proper guidance, these obstacles may be overcome.
The first and most common roadblock is your contract. Owners routinely build provisions into their contracts to protect themselves. These include no damages for delay clauses, claim notice requirements, scheduling provisions, claim waivers and limitations of liability. While these clauses may, in certain cases, be unenforceable, a better strategy is to negotiate them before you sign the contract.
A second roadblock is putting a value on delay and disruption claims. Although difficult, this is not impossible. These claims result from trade-stacking, congestion, and decrease in productivity. There are several methods used to put a value on these claims, including the measured mile, industry standards, the total cost method and a modified total cost method. In larger claims, a construction expert can be employed to put a dollar value to your delay and disruption claim. Your lawyer has access to several such experts and can help you select an expert to help prosecute such a claim.
Short of litigation, there are preventative measures you can take to protect yourself against these cost overruns. One way is to negotiate a higher overhead rate for change order work. You should consult a competent construction lawyer to assist you during contract negotiation, when you encounter delays and disruptions on a project and when you are attempting to recoup cost overruns caused by delays and disruptions.
Cutting Lawn not “Landscaping” under New Jersey Prompt Payment Act
The U.S. District Court for the District of New Jersey recently ruled that a contractor that was not paid under a contract for lawn mowing services could not assert a claim under New Jersey’s Prompt Payment Act because lawn mowing did not meet the definition of “landscaping” as used in the Act to describe the improvement of real property.
The Act applies to all contracts to improve real property. The definition of “to improve” in the Act includes to “landscape” any real property. The Court found that lawn mowing was not landscaping as landscaping involves transforming property, rather than just maintaining it.
In TBI Unlimited v. Clearcut Lawn Decisions, Clearcut contracted with a party who had contracted to provide property preservation services to mortgage servicing companies. Clearcut claimed that it was not paid in full and filed a lawsuit that included a claim for interest and attorney's fees under New Jersey's Payment Act. The defendant sought to dismiss this claim, arguing that a contract to provide lawn mowing services is not a contract to "improve real property" as that term is defined under the statute.
The Court examined the definition of "to improve" which is defined under the act to mean, among other things, "to excavate, clear, grade, fill or landscape any real property." The issue was whether the act of landscaping includes lawn mowing. The Court looked to the dictionaries to determine the plan meaning of landscaping. The term is defined s improving by landscape architecture or gardening. The Court found that this definition involving enduring transformative acts to improve real property rather than those that involve simple routine maintenance. Therefore, the Court found that the term landscape in the act is limited to activities that serve to permanently alter the character of real property. Because lawn mowing is mere maintenance and upkeep, it is not landscaping and therefore, contracts for lawn mowing do not fall under the act. The Court dismissed this claim.
Fed Court Not Bound by PA Law Restricting Forum Selection Clause
In a recent decision, the U.S. District Court for the Middle District of Pennsylvania upheld a forum selection clause in a contract for work at the Mohegan Sun Hotel that required disputes to be litigated in Missouri.
The subcontractor had filed suit in Pennsylvania and argued that Pennsylvania’s Contractor and Subcontractor Act rendered the forum selection clause unenforceable. The Court disagreed and ordered the case transferred to federal court in Missouri based on federal procedural law.
NLRB Re-Issues New Union Election Regulations
The National Labor Relations Board recently re-issued a regulation reducing the time between when a union files a representation petition and when an election takes place from the current average of 38 days to 10 days. A similar regulation was overturned by the courts in 2013. This is in addition to a recent regulation proposed by the Department of Labor which would require reporting of third party advice that employers used to educate their employees about collective bargaining agreements.
No Contract Where County Made Award, but Did Not Sign Contract
The Pennsylvania Commonwealth Court ruled late last month that there was no contract formed where Montgomery County awarded a contract for a roadway project, but rescinded the award before signing the contract. The Court based its ruling on the fact that the Second Class County Code requires that all county contracts be signed.
The Court did allow that the contractor awarded the contract may seek its costs for surety bonds it procured and provided to the County on the basis on the award.
In Allan A. Myers v. Montgomery County, Montgomery County issued an RFP for a roadway project in the county. The County accepted Myers bid after the lowest bidder's proposal was withdrawn due to an unintentional omission, and the second lowest bidder's bid was rejected for non-compliance with the bid specifications. The second lowest bidder, Highway Materials, contested the rejection of its bid. In response, the County rescinded the award to Myers and awarded the contract to Highway Materials. Myers sued for breach of contract and violation of the Commonwealth Procurement Code.
The trial court dismissed Myers' complaint, finding that the awarding of a contract creates no binding obligation on the part of the party to enter into and execute a contract. Myers appealed, arguing that an enforceable contract was formed with the county awarded the contract.
The Commonwealth Court reviewed the law governing contracts made by counties like Montgomery County in Pennsylvania, the Second Class County Code. That code specifically says "Where any official document, instrument or official paper is to b executed by the county commissioners, it shall be done by at least two of the commissioners. . ." The Code also required that all contracts in excess of $18,500 be in writing and that all contract be filed with the County controller or chief clerk after their execution. The Court based its ruling on this language, finding that it manifested an intention of the General Assembly that all written contracts must be formally executed by a county's commissioners. In addition, the Procurement Code requires that contracts be executed by governmental agencies within 60 day of an award.
The Court did reinstate Myers' claim for its bond costs finding that it may be able to prove a claim for damages for the costs related to procuring the required bonds after the award under a non-contractual theory of recovery.
Bidders should understand that an award of a contract is not always a guarantee that a contract will be signed. Contractors should also be aware of what law governs the entity that the contractor hopes to work for. Lastly, you should contact your attorney to be advised of your rights in contracting.
Philly Unions Cut Rates 20% for Housing Authority Work
This month, Philadelphia’s building-trades unions agreed to cut their wages and benefits by 20 percent when working on residential construction for the Philadelphia Housing Authority. The PHA has stated that this should reduce the cost of building a house by $50,000. The US Department of Housing and Urban Development, which provides most of PHA’s funding, must still approve the agreement.
The Building and Construction Trades Council of Philadelphia negotiated the agreement on behalf of 14 member unions. Philadelphia City Council is pressing to add 2,000 PHA housing
units in the City.
Pat Eiding of the Building and Trades Council of Philadelphia said "This is a very, very good negotiated agreement." City Council President Darrell Clarke said "To be able to get such a significant changes in rates could be dramatic in terms of the number of affordable units they can build."
In the next 5 years, PHA expects to spend in excess of $280 million on new construction. This includes a new headquarters for PHA, reconstruction of the Queen Lane development in Germantown and redevelopment around the Blumberg housing project in North Philadelphia.
With the agreement, PHA pledged to contract only with contractors who hire union laborers, carpenters, painters and other union workers. In addition, contractors will have to have 20% of their subcontractors be Disadvantaged Business Enterprises.
Changes to PA Lien Law Affect Lenders and Residential Subcontractors
On July 9, Governor Corbett signed changes to Pennsylvania’s Mechanic’s Lien Law. The changes provide that construction loans secured by mortgages will have priority over all mechanic’s liens if at least 60% of the loan is used for “costs of construction” as this term in now defined.
In addition, subcontractors will no longer have the right to file a mechanic’s lien against a residential property if the owner has paid the general contractor in full. These changes go into effect September 7.
The change to the lien priority for construction loans comes in response to 2012 case which established that mechanic's liens had priority over open-ended mortgages where the visible commencement of work on a construction project predated the recording of the construction loan mortgage and any of the loan was used for other than "hard construction costs." This decision had wrecked havoc on the title insurance industry as mechanic's liens took priority over construction loans secured by a mortgage that was recorded after work was begun. The new law requires that only 60% of the loan be used for "construction costs" which has been revised to include taxes, insurance, bonding, testing, architect fees, commissions, existing liens, mortgage fees and closing costs. Open-end mortgages for construction loans regain their "super priority" over mechanic's liens. This change is good for owners and construction lenders, but limits the lien rights of contractors and subcontractors.
The change to the right of subcontractors to file liens against residential property is in response to numerous complaints from property damage victims and their insurers who paid unscrupulous general contractors for repairs and still had to defend and pay subcontractor who did the work but were not paid by the general contractors. The victims were mostly individual homeowners who were forced to pay twice for the subcontractors' work. Subcontractors on residential projects retain their right to file liens where the owner has not paid the general contractor. Otherwise, subcontractors will have to pursue the general contractors only for breach of contract, unjust enrichment and violation of Pennsylvania's Contractor and Subcontractor Payment Act.
PA Superior Court Upholds Award of Attorney’s Fees, No Penalty
Pennsylvania’s Contractor and Subcontractor Payment Act provides for an award of reasonable attorney’s fees to the “substantially prevailing party” in an action for failure to pay in accordance with the Act and for an award of a one-percent per month penalty on funds “wrongfully” withheld”, with an exception for amounts withheld “in good faith.”
In an opinion filed on June 30, the Pennsylvania Superior Court reinforced that distinction. In a case concerning two unpaid change orders on a fifteen-unit apartment building partially funded by HUD, the Court upheld an award of attorney’s fees to the contractor, but refused to impose the penalty because the owner had a good faith basis to withhold payment.
In Waller Corporation v. Warren Plaza, Warren Plaza, a non-profit, hired Waller to construct the building for low income and partially disabled individuals. The two change orders in dispute concerned a change to the floors of the building and the relocation of unit water heaters. Warren Plaza never signed the change orders and refused to pay. At trial, Waller won and was awarded $69,904 for the change orders and $78,071 in attorney's fees. The large award of attorney's fees was due to Warren Plaza's failure to resolve the claim in a timely manner. the trial court did not award the Act's penalty because it decided that Warren had a "good faith basis, although mistaken, to withhold payment."
On appeal, Warren Plaza disputed the attorney's fees award on the basis that Waller did not "substantially prevail" because the court found that Warren Plaza had a good faith basis not to pay. The Superior Court cited to the Act which provides that the substantially prevailing party shall be awarded a reasonable attorney fee. Whether a party "substantially prevails" is left to the discretion of the judge or jury. The Superior Court found that the Act's provisions for awards of attorney's fees and the penalty are to be determined separately, i.e., a party can have a good faith basis for withholding payment but still be charged with the other party's attorney's fees. There is no exception to an award for attorney's fees for good faith claims.
Please contact me if you have questions on this issue or anything to do with the Act.
Homebuilder’s Warranty Does Not Extend to Subsequent Purchasers
The implied warranty of habitability was created by courts which ruled that a homebuilder impliedly warrants that the home he as built and is selling is constructed in a reasonably workmanlike manner and that it is fit for its intended purpose—habitation.
On August 18, the Supreme Court of Pennsylvania ruled that the implied warranty of habitability of a new house does not extend to subsequent purchasers. It is only available to the original buyer.
The Court found that the warranty was created by courts based on the privity of contract between a homebuilder and the original homeowners. The matter of whether and under what circumstances the warranty is to be extended to subsequent purchasers is a matter of public policy properly left to the PA General Assembly.
In Conway v. The Cutler Group, Cutler sold a new house to the original owner. After living there for 3 years, the owners sold the house to the Conways. Five years later, the Conways discovered water infiltration around some of the windows, allegedly caused by construction defects. The Conways sued Cutler alleged a breach of the implied warranty of habitability. Cutler objected based on the lack of a contract between it and the Conways. The trial court in Bucks County agreed and dismissed the Conways' suit. On appeal, the Pennsylvania Superior Court reversed and found that the implied warranty of habitability extended to a subsequent or second purchaser of a house due to public policy considerations. Cutler appealed.
The Pennsylvania Supreme Court reversed. The Court recognized the creation of the implied warranty of habitability as a rejection of the anachronistic doctrine of caveat emptor in light of the unequal footing of skilled developers and unsophisticated homebuyers. It also did a survey of other states that confronted this issue: Iowa and Rhode Island have extended the warranty of habitability to subsequent purchasers; Vermont and Connecticut have refused to do so. In the end, it rejected the proposition of extending the warranty because this is a matter of public policy. Showing judicial restraint, the Court recognized that its authority to declare public policy is limited and refused to extend the implied warranty of habitability beyond its firm grounding in contract law. This case is good news for homebuilders.
Strict Requirements of PA Home Improvement Act Do Not Bar All Claims
Pennsylvania’s Home Improvement Consumer Protection Act provides a set of 13 requirements for a home improvement contract to be valid or enforceable against a homeowner. The requirements include the contractor’s registration number, the approximate starting and completion dates, the amount of the down payment, the names and addresses of all subcontractors, the current amount of insurance, the toll-free number of the Bureau of Consumer Protection and a notice of the right of rescission.
In an opinion filed on July 21, the Pennsylvania Supreme Court ruled that these strict requirements do not bar a quasi-contract/quantum meruit claim by a contractor because the Act’s language does not bar a quasi-contract remedy. To read the Act as doing so would allow homeowners to refuse payment for the perfect construction of a house base on a defect in the contract.
In Shafer Electric & Construction v. Mantia, the Mantias contracted with Shafer to build a 2-car garage addition to their house. However, the written contract did not contain the approximate start and completion dates or the toll-free number. The Mantias did the excavation for the addition, but did it improperly. Shafer re-excavated the foundation area and offered design changes based on the excavation problems. The Mantias refused the changes. Shafer sent an invoice for the work done, including materials, labor and architect fees. The Mantias refused to pay and Shafer filed a lien. Shafer then sued the Mantias for breach of contract and quantum meruit (unjust enrichment). The Mantias sought to dismiss the lawsuit because Shafer had not complied with the Act.
The trial court agreed, dismissed the lawsuit and struck the lien. It reasoned that the breach of contract claim failed because the contract did not comply with the Act. It also struck the quantum meruit claim because it was clear that the Act did not permit such a claim.
The Superior Court reversed. The Act provides that "Nothing in this section shall preclude a contractor who has complied with subsection (a) from recovery of payment for work performed based on the reasonable value of services which were requested by the owner if a court determines that it would be inequitable to deny such recovery." The Superior Court held that the obvious purpose of this section was to allow equitable actions such as quantum meruit where there was no valid and enforceable contract.
The Supreme Court agreed. It found that the plain and unambiguous language above does not prohibit a cause of action in quantum meruit. Again showing judicial restrain, the Supreme Court decided that if the General Assembly had seen fit to modify the right of non-compliant contractors to recover in contract, quasi-contract or common law, it could have done so.
You should always include a claim for quantum meruit/unjust enrichment when seeking to collect for labor and materials supplied.
Oral Contracts for Curbing Enforceable and Subject to PA's CASPA
On September 10, the Superior Court of Pennsylvania issued a decision holding that a curbing subcontractor could pursue a general contractor where oral contracts were established by the parties’ prior course of dealing and where curbs were an “improvement” as defined by PA’s Contractor and Subcontractor Payment Act.
The parties had a ten year relationship where the GC would request a bid for curbing, the subcontractor would fax a proposal for the work, the GC would send a purchase order, and the subcontractor would complete the work and bill the GC. The GC’s lack of payment was subject to the Act’s penalties and attorney’s fees because a curb is a “structure” and an “improvement” to real property.
In Prieto Corp. v. Gambone Construction, Prieto, in the business of construction concrete curbs and Belgian block curbs, had the ten-year relationship with Gambone for curbing on Gambone's residential and commercial projects. This ended when Gambone refused to pay four (4) of Prieto's invoices. Prieto sued Gambone in Montgomery County for breach of contract, unjust enrichment and violation of the Act. At trial, Prieto won. Gambone appealed, arguing that curbing is not an "improvement" covered by the Act and that there was no "contract" between the parties.
The Superior looked at the following definitions: (1) real property - "improved lands"; (2) improvement - includes "a structure or an alteration of real property"; (3) structure - "piece of work artificially built up"; and (4) curb - "a raised edging serving as a roadway border that is the responsibility of the abutting property owner." The Court held that a "curb" is both a structure and an alteration of real property. Therefore, the Court upheld the trial court's application of the Act to an oral contract to construct a curb on real property.
The Court also upheld the trial court's determination that there were four oral contracts between the parties. There was evidence that Gambone would contact Prieto with a purchase order specifying a project and that Prieto would perform the work and invoice Gambone. The parties had done business this way for almost a decade which established a course of dealing and, therefore, contracted in this manner.
This is an important decision not only for curbing contractors, but for all parties that contract based on oral promises or documents authorizing work for a specific amount.
Subcontractor's Suit in NJ Dismissed and Not Reinstated Since Registration had Lapsed
On September 11, the Appellate Division of the Superior Court of New Jersey upheld the dismissal of a subcontractor’s payment claim where the Delaware subcontractor’s NJ registration had lapsed. Also, the Court held that the subcontractor was not a third party beneficiary of the contract between the owner of the project and the general contractor.
The Court found that the statute the requires that corporations be registered to do business in NJ before filing a lawsuit and cannot continue any such lawsuit even upon reinstatement. Also, the sub could not sue the owner because contract between the general contractor and the owner, for renovation of a Camden house, did not show any intention to benefit the subcontractor.
In Seven Caesars v. Dooley House, the City of Camden contracted with Dooley House for the rehabilitation of the Hogan House, an AIDS rehabilitation center, to be financed with HUD funds. Dooley House subcontracted the rehabilitation to Seven Caesars which completed phase one (demolition) and phase two of the project and was paid. When Seven Caesars completed and billed for phase three of the project, Dooley House, pursuant to HUD regulations, requested receipts for materials used in phases one and two and withheld payment for phase three. There was some correspondence between the parties, but ultimately, the City refused to disburse the phase three payment. Seven Caesars sued Dooley House and the City of Camden. The trial judge found in favor of Seven Caesars and ordered the City to pay for phase three.
On appeal, the City contended that Seven Caesars lacked corporate standing to sue it lacked corporate standing to bring the lawsuit and that Seven Caesars was not an intended third party beneficiary of the contract between the City and Dooley House. Seven Caesars had lost its corporate status in its home state of Delaware prior to filing the lawsuit because it had failed to pay the corporate franchise tax. As a result, the New Jersey Department of State had expunged Seven Caesars' corporate status in New Jersey as of the time Seven Caesars filed the lawsuit. Although Seven Caesars subsequently paid the franchise tax and had its corporate status reinstated in Delaware retroactively pursuant to the Delaware Code, the New Jersey statute requiring that a corporation be registered in New Jersey to be able to file a lawsuit did not allow retroactive reinstatement. Therefore, the Appellate Division ruled that the lawsuit was invalid and should have been dismissed.
In the event that Seven Caesars filed a new lawsuit, the Appellate Division decided to rule on the third party beneficiary claim. Under New Jersey law, the test to be considered the third party beneficiary of a contract, the test is whether the contracting parties intended that a third party should receive a benefit which might be enforced in court; the fact that such a benefit exists or that a third party is named, is merely evidence of this intention. The contract between the City and Dooley House contained a provision specifically stating that the contract documents shall not be construed to create a contractual relationship of any kind between the City and Seven Caesars. The Court found that this language and the course of the parties' performance showed that Seven Caesars was only an incidental beneficiary of the contract and had no claim against the City.
Contracting parties must make sure to review or have your attorney review all contracts to determine your rights. In addition, all corporations should maintain registration not only in their home states, but in whatever states they do business.
Attracting, Working With and Retaining Millennial Workers
There has quite a bit of data and commentary lately about the “Millennial” Generation or “Generation X” as they continue to enter the workplace. Employers, especially in the construction industry, need to be aware of generational differences, how to engage and retain Millennials and how to attract Millennial construction workers. To do this, you must know and understand the answers to these questions:
What is a Millennial? What are their characteristics? What motivates them? What do they think of construction and other blue-collar jobs? How does my company attract qualified Millenials? How do I train Millenials? How do I reward and retain Millenials?
What is a Millennial?
The term Millennial is used to refer to the generation that did and is growing up around the year 2000. Although this generation has been defined as larger, generally anyone 14-32 years old.
What are their characteristics?
Millennials are driven by emotion and experience. They believe nothing too bad will happen to them. They believe that if things get tough, they can always move back in with their parents. They grew up with intensely protective parents. These individuals were not raised like baby boomers ("Go out and ride your bike!") or Generation X (latchkey kids).
Millennials believe that they are all unique individuals. From a young age, baby boomer and Generation X parents doted on them and helicoptered over them. Managers who refuse to treat them as "special" will be rejected by young people. Due to their upbringing, Millennials can be talented, intelligent and adaptable workers.
Millennials have a large amount of student loan debt. They also face a high unemployment rate. Millennials would prefer living in rented apartment in an area with alot to do than owing a single home in suburban and rural areas.
What motivates Millennials?
When faced with a new job, Millennials will question why the job is important and why it has to be done a certain way. They worry about their financial and emotional health as well as their physicial health.
What do they think of construction and other blue collar jobs?
The median age of construction workers in 2000 was 37.9. In 2010, it had jumped to 40.4 years old. Baby boomer and Generation X have navigated blue collar jobs to higher paying positions. However, Millennials view blue collar work as an aging, dying field. They belive that if they take a blue collar job, they will be laborers forever with no room for advancement. They'd rather stay out of work and try for a more "prestigous" job.
How does my company attract qualified Millenials?
Make safety a priority - promote and publish your stellar safety record and hire a safety manager. Establish a skills progression program and promote and publish success stories about young workers movig up. Emphasize that your company does not tolerate discrimination or bullying in any form. Recruit on high school and college campuses via one on one interviews where you can make potential candidates feel special.
How do I train Millenials?
When you do hire a Millennail, make it a big deal. Treat it as if it's an honor that this person is coming to work for you. Make them feel special, wanted and important. Make it easy for them to find and connect with "coaches" and "mentors", not just bosses. Remind them on a regular basis how well they are doing.
How do I reward and retain Millenials?
Encourage and recognize their uniqueness and ingenuity. Give them the opportunity to show how creatvie and important they are. Be receptive to their ideas. Show them a bright career path and how that leads to a great lifestyle.
PennDOT Awards $899 Million Contract for PA Bridge Replacements
On October 24, PennDOT awarded the Rapid Bridge Replacement Project to the Plenary Walsh Keystone Partners consortium. The project calls for the replacement of 558 bridges across Pennsylvania within 3 years as well as the maintenance of these bridges for 25 years.
Plenary Walsh Keystone Partners consist of the Plenary Group of Vancouver, The Walsh Group of Chicago, Granite Construction of California and HDR Engineering of Mechanicsburg, PA. PennDOT chose Plenary Walsh based on its commitment to replace the bridges 8 months sooner than was specified, its pricing and its traffic management and quality control plans. The team also includes 11 Pennsylvania subcontractors.
This is the largest contract that PennDOT has ever awarded. The winning group's plan is to subcontract with companies from the local communities where the bridges are to be replaced. The named Pennsylvania subcontractors include A.D. Marble &Co, M.A. Beech Corp., Carmen Paliotta Contracting, Clearwater Construction, Francis J. Palo, Glenn O. Hawbaker, Eckman, J.F. Shea Construction, Larson Design Group, Swank Construction and TRC Engineers. They plan to begin by replacing 58 bridges in 2015. Most of these are in the northeastern and southwestern parts of Pennsylvania.
The specifications provide that single span bridges can be closed no more than 60 days and multi-span bridges no more than 110 days. In addition, certain bridges cannot be detoured during the school year. The group is to be paid only when a bridge replacement is completed.
PennDOT Secretary Barry Schoch said "The goal for this project is not only finding cost savings, but also to minimize impact to the traveling public. This team has thoroughly detailed their traffic control plans and expects to finish construction eight months earlier than required."
Plenary's chief operating officer, Matt Girard stated "This project is an important milestone for U.S. and civil businesses, and represent our third [public private partnership] selection in the past year. We have successfully built a seasoned civil infrastructure team that is valued by our clients and partners, and that will help us ensure the success of our projects in the years to come."
Read, Analyze and Negotiate Indemnity Terms in Contract . . . Or Else
When you receive a new contract or are considering bidding on public work, you should seek out, analyze and, if possible, negotiate indemnity terms. You may be agreeing to be responsible for the negligence of everyone else on a project. This type of clause is not uncommon and is being enforced by the courts.
In a recent federal decision, a contractor was required to indemnify his subcontractor for a serious injury to an employee of another subcontractor where the indemnity provision in the contract was clear and unambiguous.
In Williams v. Braden Drilling, the plaintiff was injured while installing a piece of heavy equipment on a drilling rig. He was employed by Tesco, a subcontractor of East Resources, the general contractor. An employee of another subcontractor of East Resources, Braden Drilling, was operating a crane when the piece of heavy equipment came down on Williams' foot. Williams sued Braden Drilling and East Resources. Braden Drilling filed a motion for summary judgment on its cross claim against East Resources based on a clause in the subcontract that required East Resources to defend and indemnify Braden Drilling for all claims for bodily injury.
The Court cited Pennsylvania law that permits indemnification for the indemnitee's own negligence as long as the indemnity agreement is "clear and unequivocal." The clause must not contravene public policy, it must relate solely to the private affairs of the parties, each party must be a free bargaining agent and it must be clear that the indemnitee is being relieved of liability for its own negligence.
In this case, the Court found no ambiguity in the indemnity language. The indemnity was stated "with the greatest particularity." The Court found that the contract showed that the parties agreed with specificity that East Resources would indemnify Braden Drilling for all claims. East Resources was required to defend and pay for the negligence of Braden Drilling's crane operator.
You should consult an attorney when considering or negotiating a contract that contains an indemnity provision. Otherwise, you may be held liable for someone else's negligence.
Your Insurance Will Not Cover Claims for Defective Work or Damage Caused by Defective Work
A lot of contractors believe that their insurance will cover claims for negligence, including claims for property damage to their work or caused by their work. However, insurance companies do not cover such claims where the damage is possibly caused by defective work, especially where the insured contracts to perform to a certain level.
In a federal decision filed October 14, the court decided that there was no coverage for a plasterer/stucco subcontractor despite claims of negligence where the underlying subcontract provided that the subcontractor would perform in an workmanlike manner, that the stucco would be uniform and strong for 5 years and that flashing installed would be in good condition. Failing to meet the contract and to live up to contractual obligations is not an “occurrence” or an “accident”; therefore, there is no insurance coverage.
In State Farm v. Patrick McDermott Plastering, McDermott was a subcontractor to the Pulte Group for a 299-home community in Washington Crossing. Water intrusion was an issue in most of the homes and Pulte sued McDermott in Bucks County alleging that McDermott failed to install a drip cap under patio doors, improperly attached decks to the houses, failed to properly install felt paper and failed to flash under window flanges causing water damage to the homes. Pulte was the subject of numerous homeowner lawsuits. McDermott sought coverage for these allegations from its general liability carrier, State Farm. State Farm sued McDermott in federal court, seeking a judgment that it did not have to defend or pay for these allegations against McDermott.
The Court cited to Pennsylvania law that courts have an obligation to determine coverage based on the allegations of the complaint against a potential insured. McDermott's policy with State Farm provided coverage for property damage caused by an "occurrence", defined as an "accident.". "Accident" is defined s an unexpected and undesired event or something that occurs unexpectedly or unintentionally, implying a degree of "fortuity.".
The Court found that faulty workmanship, as alleged in Pulte's complaint against McDermott, does not constitute an "accident." This is also true of any damage resulting from faulty workmanship. McDermott's contract with Pulte required McDermott to perform its work in a "workmanlike manner" in accordance with Pulte's specifications and quality requirements. McDermott contracted to be solely responsible that all flashing was in good condition. The Court found that McDermott's potential liability stemmed from his alleged failure to meet the expectations which he was contractually obligated to meet. His alleged failure to live up to these contractual obligations could not be seen as an accident or some unforeseeable event. The Court therefore granted judgment to State Farm - there was no insurance coverage for the claims made against McDermott.
You should be aware that there is no coverage for damage caused by defective construction. You should also contact an attorney to review the obligations you are agreeing to before signing a contract.
No Liability for Individual Who Promised Company Would Pay for Extras
Last week, the Pennsylvania Superior Court ruled that there was no liability under PA’s Contractor and Subcontractor Payment Act for an individual who owned 50% of a company that owned a project and who authorized additional work by a contractor that went unpaid. CASPA’s payment obligations only apply to the contracting parties, not agents, officers, etc.
Generally, individuals are not liable for the debts or actions of the corporation they work for. However, CASPA defines “owner” to include agents of the owner acting within their authority. Therefore, there is ambiguity concerning the case where an owner’s agent promises payment.
In Scungio Borst & Associates v. 410 Shurs Lane Developers, 410 Shurs Lane Developers ("410 SLD") contracted with Scungio Borst & Associates ("SBA") for the general construction of a condominium project in Manayunk. SBA performed and billed for $2.6 million in addition work at the direction of 410 SLD's president and 50% shareholder, Robert DeBolt. SBA was not paid in full and sued 410 SLD and Mr. DeBolt under CASPA. The trial court granted Mr. DeBolt's motion for summary judgment and SBA appealed.
The issue for the Superior Court was whether Mr. DeBolt, as an authorized agent of 410 SLD, was an owner under CASPA that could be subject to liability for non-payment. The Court looked to another provision of CASPA that provides that when a contractor performs, he is entitled to payment from the party with whom the contractor has contracted. Because SBA contracted with 410 SLD, Mr. DeBolt had no liability to SBA. The Court rejected arguments that CASPA should be construed the same as its model, the Wage Payment Collection law, that the legislature intended to extend liability beyond the contracting parties and that Mr. DeBolt's promises constituted a new contract (there were no allegations of such.)
Contractors must be sure to get approval for extra work in writing from the party they contract with. Direction to perform extra work and promises to pay, even if made by the owner of the company with whom you contract, is not enough. Please get it in writing.
County Must Pay Attorney's Fees for Violating NJ Prompt Pay Act
Late last month, the New Jersey Appellate Division upheld an award of attorney’s fees under NJ’s Prompt Payment Act where a county failed to follow the Act and advise a contractor of the reason for withholding payment within 20 days of receipt of the contractors’ invoice.
New Jersey’s Prompt Payment Act requires public entities to make payment to contractors within 30 days of receipt of the contractor’s invoice, unless the public entity advises the contractor, in writing, of the amount and reason for withholding payment within 20 days of receipt of the contractor’s invoice. The Act provides for interest and attorney’s fees for parties that violate the Act.
In Aire Enterprises v. Warren County, Warren County contracted with Aire Enterprises for renovation of a county building. After the work was complete, Warren County refused to make final payment to Aire, holding the final payment for certain carpet tiles that allegedly did not adhere properly. At trial, the judge found that Aire had breached the contract, but that the County was only due $150 for gluing down the tiles. The County had held $12,400 for the tiles and the judge ruled that the County had to pay the balance, $12,250 plus interest to Aire. The judge also ruled that the County had to pay Aire's reasonable attorney's fees in the amount of $44,000. Warren County appealed.
The Appellate Division concentrated the on attorney fee shifting provision of the Prompt Pay Act which requires the payment of contractor invoices within 30 days of billing unless the owner provides notice of withholding and the reason therefor within 20 days of a contractor's billing. In this case, Warren County had not provided the required notice and had therefore breached the Prompt Pay Act. The Court found the popping of carpet tiles to not be a significant breach of the contract that may have obviated the County's notice obligation. This breach entitled Aire to reasonable attorney's fees. The Court approved the trial judge's award of $44,000 in attorney's fees which was reduced from the amount Aire actually accumulated, $180,896.
There are two points to take away from this case. First, owners must give notice of any withholding within 20 days of a contractor's invoice. Second, legal fees add up quickly during litigation and are not always fully recovered. Do not spend $180,000 in a dispute over $12,000.
New OSHA Reporting Requirements Start January 1
Beginning on January 1, 2015, there will be a change to the way employers are required to report to the Occupational Safety and Health Administration. Employers will now be required to report all work-related fatalities within 8 hours and all in-patient hospitalizations within 24 hours of finding out about an accident.
Previously, employers were required to report all workplace fatalities and hospitalization of 3 or more employees.
The updated reporting requirements are not simply to make more paperwork but have a life-saving intent: it is hoped they will enable employers and workers to prevent future injuries by identifying and eliminating the most serious workplace hazards.
Employers have 3 options for reporting these severe incidents: (1) call the nearest OSHA office; (2) call the 24 hour OSHA hotline at 1-800-321-6742; or (3) report online at www.osha.gov/report_online.
For more information, including a YouTube video, visit OSHA's website for the updated reporting requirement: https://www.osha.gov/recordkeeping2014/index.html
Breach of Contract & CASPA Claims Dismissed - UCC Governed Contract
Last week, the U.S. District Court for the Western District of Pennsylvania dismissed claims of breach of contract and violation of Pennsylvania’s Contractor and Subcontractor Payment Act (“CASPA”) where the contract provided that PA’s Uniform Commercial Code ("UCC") would govern and control the parties and the contract was for the construction of a continuous barge unloader for use in Louisiana.
Generally, common law will govern contracts unless the parties specify otherwise. Also, CASPA applies only to work on real property in Pennsylvania.
In Heyl & Patterson v. T.E. Ibberson, Ibberson contracted with H&P for the design and manufacture of a continuous barge unloader for a terminal renovation project at Port Allen, Louisiana for $7.5 million. H&P allegedly caused delays in the testing of the unloader and failed to pay Ibberson in full. Ibberson filed a complaint, alleging a breach of contract, breach of contract under PA's UCC and violation of CASPA.
The Court dismissed the breach of contract claim because the UCC displaced the parallel common law breach of contract claim. The Court found that the UCC was comprehensive enough to govern all of the party's dealings as well as remedies for breach of contract. The fact that the parties agreed that the UCC would govern and the fact that allowing a separate breach of contract claim to go forward would thwart the purpose of the UCC and the parties' intent.
The Court dismissed the CASPA claim because the construction and delivery of a barge unloader to Louisiana is clearly not work on Pennsylvania real estate.
The takeaway from this case is that you should pay particular attention to your contracts when negotiating them so you and your lawyer know what law applies.
Do’s and Don'ts for Change Orders
Change orders—they are as inevitable as the sun going down every day. However, you do not have to dread them. Being proactive, rather than reactive, can smooth the process and lead to good results.
Preparation for change orders should begin at the bid preparation and contract negotiation stages of contracting. These steps set the stage for how easy or how rough the change order process will be. There are do’s and don'ts for easing the process.
Do's - Before You Start Work:
Do provide a detailed scope of work in your estimate and contract (I may recommend incorporating your proposal into the contract)
Do include exclusions in the scope of work
Do provide unit prices, billing rates and material markup in your estimate and contract
Do review and know your contracts, all drawings, specifications and time limits
Do bring any design errors to the attention of the architect or engineer.
Do's - How to Handle a Change When it is Encountered:
Do request a change order immediately and in writing when you encounter a different condition, when you need more time, when you have incurred additional costs due to the actions of others
Do provide a timely written claim for adjustment in the contract price and time for completion BEFORE commencing any extra work
Do proceed with the change order work when you have a signed change order.
Do take photos, report the extra work in daily logs and other documentation.
Do call your lawyer if you have any questions.
Don'ts - How to Handle a Change When it is Encountered.
Don't perform additional work based on verbal promises that you will get paid!
Don't worry about "rocking the boat" by insisting on a written change order and complying with the contract language.
Don't wait for someone else to dictate your schedule without your input.
Don't hesitate to contact your lawyer if there is a problem.
How is a Liquidating Agreement Different from a Settlement Agreement?
Another lawyer recently proposed a liquidating agreement in a dispute involving the partial liability of a third party. Most everyone is familiar with a settlement agreement, which resolves claims between two parties. However, in most liquidating agreements, one party agrees to accept a recovery from a third party in full settlement of any claims it has against the other party. Which of the two parties pursues the third party is open to negotiation.
The differences have consequences. Most if not all settlement agreements are confidential as against outside parties. However, earlier this month, a federal court ruled that a liquidating agreement could be presented into evidence at the trial of a construction dispute in order to show bias of the parties involved in the liquidating agreement.
In E. Allen Reeves v. Michael Graves & Associates, Reeves had contracted with the Princeton Arts Council for the renovation of Paul Robeson Center, a multi-purpose center. The Arts Council also contracted with Michael Graves to be the architect on the project. Reeves was delayed on the project and incurred increased costs. Reeves settled its claim against the Arts Council by entering into a liquidating agreement in which it was agreed that Reeves would pursue recovery for delay costs against Michael Graves on behalf of Reeves and the Arts Council. Reeves sued Michael Graves for negligent misrepresentation in the designs of the project. Reeves joined the Arts Council to the suit, but settled these claims by entering into a settlement agreement with the Arts Council.
Before trial, Reeves moved to bar the introduction of the liquidating agreement at trial. However, the court denied this and allowed the liquidating agreement to be introduced at trial to demonstrate bias on behalf of the Arts Council witnesses. The liquidating agreement contained a clause requiring the Arts Council to cooperate and assist Reeves in obtaining the maximum recovery in the litigation. The judge found this to be relevant to the potential bias of the Arts Council witnesses.
In contrast, the settlement agreement between Michael Graves and the Arts Council was not admissible at trial. The rules of evidence generally bar the introduction of evidence of compromise or settlement. The judge found that the settlement agreement, in contrast to the liquidating agreement, did not contain any litigation strategy obligations.
You should have your lawyer review any settlement or liquidating agreements before you sign them. You should especially have your lawyer explain the obligations and consequences of any liquidating agreement. Make your lawyer explain it so that and until you thoroughly understand what it means.
Why do Subcontractors Fail and How Do I Handle It?
We have represented both subcontractors who simply could not complete their scope due to financial reasons and general contractors who have had subcontractors just “fade away” and stop working. What causes these failures and how do we deal with them when they occur?.
The number one reason subcontractors stop working is cash flow. Most often, subcontracts call for subcontractors to float the cost of their work for a month which, in practice can be several months, until a payment makes its way to the subcontractor from the owner. A subcontractor can protect its investment in a project by exercising its lien rights General contractors can deal with cash flow issues by prequalifying subcontractors with a particular view toward a subcontractor’s financial condition. A general contractor can also seek to limit subcontractors’ lien rights.
Another main reason for subcontractor failure is the nature of the work. Subcontracting is a lot more complex than selling hammers. Subcontracting involves coordinated numerous layers of the different elements required to do a particular job. Subcontractors must also meet the subjective approval of general contractors, architects, engineers and owners. With a lot of moving parts and a subjective standard for success, a lot can (and does) go wrong for subcontractors.
What can a subcontractor do? Lien the project for unpaid work. This is the subcontractor's number one remedy when it can no longer work due to non-payment.
What can a general contractor do? It's best if general contractors prepare for subcontractor failure at the contracting stage. As stated above, it is worthwhile to investigate or prequalify subcontractors prior to contracting. General contractors can protect themselves by requiring a performance bond from subcontractors and by requiring lien waivers if possible.
In any event, if a subcontractor is having trouble completing its work, it may be time to contact your lawyer.
Outlook for Construction in 2015: Balanced Growth?
Experts are predicting a more balanced growth in the construction industry in 2015, forecasting an increase in construction spending in the 7% to 9% range. Construction starts could rise to over $600 billion as financing for construction projects is becoming more available according to the 2015 Dodge Construction Outlook.
These forecasts follow recent increases in contractor backlog, in nonresidential construction hiring and in construction material prices. This all points to a better 2015 for everyone in the construction industry (hopefully).
Dodge forecasts:
Commercial building +15%
Industrial building +9%
Single family housing +15%
Multifamily housing +9%
Public works +5%
Electric utilities -9%
Manufacturing -16%.
Associated Builders and Contractors is predicting nonresidential construction spending will increase by 7.5%. Also, not surprisingly, expect compensation costs per worker to increase at a great rate. In addition, material prices will rise by about 3%.
Embarking on capital improvement programs has helped to grow construction employment rapidly in the Northeast USA, especially in Pennsylvania, Maryland and Virginia. The construction backlog rose to over 10 months in the third quarter of 2014, nearly two months more work than a year ago.
The construction industry added over 48,000 jobs in December according to the Bureau of Labor Statistics. Nonresidential building construction employment is up 3.4% for the year, residential up 7%, nonresidential specialty trade employment up 3.7%, residential trial employment up 5.6% and heavy construction/civil engineering is up 6.6%.
Construction prices were also up for some in December: natural gas (19%), concrete (0.7%), fabricated metal (0.3%) plumbing fixtures (0.1%); and down for others: petroleum (19%), energy (4.7%), wire/cable (1.6%), lumber (1.3%), iron/steel (1%), asphalt (1%).
Good luck in 2015.
New Jersey Contractors Must Include ALL Successful Bids in DPMC Bidding Rating
In a recent decision in Hudson County, New Jersey, the Superior Court awarded a contract for the construction of the Applied Science Academy at the Hudson County Schools of Technology to the third-lowest bidder. The lowest and second-lowest bidders used an electrical subcontractor that failed to disclose that it had been the successful bidder on another project 5 days earlier. The other project, combined with the Applied Science Academy project, would have exceeded the electrical subcontractor’s bidding rating.
New Jersey public works contractors must be prequalified by the NJ Division of Property Management and Construction. Each bidder’s aggregate rating is calculated on a statutory forumula that considers a bidder’s working capital, bonding capacity and performance. The DPMC issues the bidder a maximum amount of public work on which it is qualified to bid. Bidders must disclose their current inventory of contracted for, unbilled work in bidding on new public contracts.
In Dobco v. Brockwell & Carrington Contractors, the 2 low bidders identified Sal Electric Co. as their electrical subcontractors. The 3rd lowest, Dobco, used a different electrical sub.
$1+ Million AAA Arbitration Award Upheld Despite Strenuous Appeals - No Attorney's Fees Awarded
The New Jersey Appellate Division recently affirmed the trial court’s approval of a private American Arbitration Association arbitration between the general contractor and the site subcontractor for the new courthouse in Staten Island, New York. The general contractor made many arguments as to why the subcontractor was not entitled to the arbitrator’s award of $1 million. The Court agreed with none of them.
Despite the expense of 21 days of arbitration hearings, an appeal to the Superior Court and another appeal to the Appellate Division, no attorney’s fees were awarded. An award of attorney’s fees under NJ’s Prompt Pay Act is discretionary with the arbitrator who did not award attorney’s fees. Also, both courts on appeal found the appeals to not be ‘frivolous” and therefore neither awarded attorney’s fees.
In ERG Renovation & Construction v. Delric Construction, a scope of work issue arose during construction. Delric, the general contractor terminated ERG and demanded arbitration for the costs to complete. ERG counterclaimed for the work it did and for wrongful termination.
School District Must Pay for Extra Work It Directed Despite No Written Change
Order
In a recent decision, the Pennsylvania Commonwealth Court upheld a trial court’s verdict of $356,000 for a paving contractor against the North Allegheny School District where the School District directed and was aware of extra work despite the lack of written change orders required by the contract.
In addition, the Court decided that the Contractor and Subcontractor Payment Act does not apply to public works. Rather, the higher standard for an award of attorney’s fees contained in Pennsylvania’s Procurement Code applies. The Court remanded the issue to the trial court to determine if there was bad faith by the School District.
In East Coast Paving & Sealcoating v. North Allegheny School District, East Coast Paving was the low bidder for paving at two schools. The contract did not include the alternate of soft spot repair work on a unit price basis. During the second day of paving, the School District's inspector identified soft spots and advised the architect who directed East Coast Paving to repair the soft spots. A discrepancy arose in billing when more soft spots were later discovered and repaired. The School District withheld payment and East Coast Paving sued. At trial, the judge found that that the School District had breached the contract by not paying East Coast Paving in full and awarded the contract balance, $220,000, attorney's fees, $20,000, and damages under PA's Contractor and Subcontractor Payment Act, $116,000.
On appeal, the School District argued that the contract required all extra work to be pre-approved in writing. The Court dismissed this argument, finding that both parties demonstrated buy their conduct that they understood the contract not to require an executed change order in advance of the work.
The School District also argued that the award of CASPA damages was improper because the School District is a government agency which is governed by the PA "Prompt Pay Act" which covers public works. The Court agreed, finding that if both CASPA and the Prompt Pay Act applied on public projects, contractors would always invoke CASPA which has a lower threshold for the imposition of penalties and attorney's fees ("wrongfully withheld" versus "acted in bad faith". The Court reversed the order for attorney's fees and CASPA damages and remanded the case for the trial judge to determine if the School District acted in bad faith.
Verdicts Upheld Against Construction Lender that Took Assignment of Contract
In a decision from earlier this month, the New Jersey Appellate Division upheld a trial judge’s verdicts in excess of $5 million against a construction lender that took an assignment of a contract between its borrower, which had leased land that needed improvement, and a contractor. The lender raised numerous arguments on appeal—the Court agreed with none of them.
After the assignment, the lender failed to exercise control over the leased public land or to assert the defenses of its borrower/lessee. The Court also found that the lender violated NJ’s Prompt Payment Act, failed to prove alleged damages due to the borrower’s side agreement with the contractor and failed in its argument that the contractor’s lien was barred as against public lands.
In EnviroFinance Group v. Environmental Barrier Co., EnviroFinance provided construction funding to Earthmark NJ Kane Mitigation for an environmental mitigation project on lands leased by Earthmark and owned by the Meadowlands Conservation Trust. Earthmark hired Environmental Barrier Co., which does business as Geo-Con, to build the project.
1 - EnviroFinance/Kane did not have standing to challenge Geo-Con's default judgment against Earthmark on its counterclaim because EnviroFinance/Kane, as a secured creditor, did not exercise its rights under the assignment to defend the counterclaim. Without doing so, a secured creditor did not hold a stake in any dispute between Earthmark and Geo-Con.
2 - The trial judge thoughtfully and correctly applied NJ's Prompt Payment Act in awarding Geo-Con attorney's fees, costs and pre-judgment interest in excess of $1.7million.
3 - EnviroFinance admitted that it sustained no damages due to the undisclosed side agreement to pay for the extras as it identified the invoices for the extra work as acceptable because they were certified by the project engineer.
4 - Geo-Con's liens against the leasehold were proper because the public/private venture between the owner of the property, MCT (a public entity) and Earthmark was not a public entity under NJ's Construction Lien Law. The contract between Earthmark and Geo-Con was not "contracted for and awarded by a public entity."
Contractors should note that courts will award attorney's fees for non-payment as long as they can prove damages and remain tenacious during litigation. Lenders are cautioned to fulfill all responsibilities when they take over for a borrower.
PA Supreme Court: CASPA Does Not Apply to Public Construction Projects
On June 15, the Pennsylvania Supreme Court, as expected, ruled that Pennsylvania’s Contractor and Subcontractor Payment Act (“CASPA”) does not apply to construction projects where the owner is a governmental entity. This ends confusion among Pennsylvania’s courts of common pleas and U.S. District Courts in Pennsylvania over the application of CASPA. Public construction projects are subject to PA’s less stringent Procurement Code.
The Court based this decision on the very vague language of CASPA and decided that the definitions of “owner”, “association” and “person” did not include a governmental entity. Their decision was based partially on the rule of interpreting statutory language in favor of the government. Even if a governmental entity is not involved in a payment dispute, CASPA still does not apply because of the definitions of “owner” and “contractor”
In Clipper Pipe & Serv. v. Ohio Casualty Ins. Co., the U.S. Navy entered into a contract with Contracting Systems, Inc. ("CSI") for the construction of an addition to and renovations to the Naval Operational Support Center in Allentown. CSI subbed the mechanical work to Clipper. CSI did not pay Clipper in full and Clipper filed suit in federal court against CSI and its bonding company, seeking $150,000 and damages under CASPA. The federal trial judge ruled that CASPA did apply and upheld a jury verdict in favor of Clipper. CSI's bonding company appealed to the U.S. Court of Appeal for the Third Circuit which asked Pennsylvania's Supreme Court to decide the issue of whether CASPA applies to a project where the owner is a governmental entity.
CSI's bonding company made several argument to the PA Supreme Court:
1 - Public owners could not be "owners" because the word "government" does not appear in CASPA
2 - Public owners could not be "associations" because at the time CASPA was enacted, "associations" referred to unincorporated enterprises.
3 - It would not be right for both CASPA and PA's Procurement Code to apply simultaneously apply to a construction project
4 - Enforcing CASPA against the federal government would violate the principle of federal supremacy.
Clipper made several arguments as well:
1 - The federal government is a "person" or "other association" as defined by CASPA because the federal government is an association of its citizens
2 - The public policy of protecting contractors and subcontractors should not be confined to private projects
3 - CASPA could be applied to federal projects' contractors and subcontractors without raising supremacy concerns because the federal Prompt Pay Act would preempt CASPA
4 - Only recent changes to the Associations Code exclude governmental entities - at the time CASPA was enacted governmental entities could be considered associations.
The PA Supreme Court did not address all of these arguments. Rather, the Court found that governmental units did not fit into CASPA's definitions. This was based on the preference for interpreting statutes in favor of the government. In addition. the Court decided that even if a public owner is not involved in litigation, CASPA cannot be used by contractors or subcontractors on public projects because, "[w]here there is no "owner" for purposes of CASPA, . . . there also can be no "contractor" under the statute".
Do’s and Don’ts When OSHA Comes for a Visit
What do you do when OSHA shows up at the job site? What don’t you do? As with most things, proper preparation can avoid poor performance. With OSHA, preparation and planning can avoid discomfort, disharmony and costly citations and shut downs.
There is a wealth of information available in print and online – some worthwhile, some not. We have selected themes from reputable authorities who have worked with and for OSHA and condensed them to a short list of do’s and don’ts that can get you thinking about safety and to get on to the right track.
Preparation:
Do's
Designate a representative to meet with and accompany OSHA inspector.
Have all required OSHA documentation ready for the inspector.
Review your policies and procedure
Don'ts
Falsify reports or OSHA 300 logs.
Don't fire employees for absence for work-related injuries.
During the inspection:
Do's
Check the inspector's credentials.
Ask the purpose of the inspection and what will be inspected.
Be professional and courteous.
Have someone accompany the inspector, photo or video what the inspector photos or videos and measure what the inspector measures.
Provide the documents that must be kept under OSHA regulations.
Don'ts
Make the inspector wait.
Don't lie or refuse to answer questions.
Don't volunteer information.
After the inspection
Do's
Post any citations.
Appeal any citations within 15 days that your lawyer thinks should be appealed.
Consider an early settlement or voluntary compliance.
Don'ts
Fail to correct violations.
Extra Credit
Review the OSHA Field Operations Manual for inspectors.
Prepare an OSHA Inspection Kit, including a camera, tape measure, note pad, pens, flashlight, tape recorder and calculator.
Please contact me if you have any questions or concerns.
Challenges in the Payment Process and How to Deal with Them
Everyone’s favorite topic is getting paid for the labor and materials provided on construction projects. We offer a list of challenges, most of which you are aware of and some that you may want to think about in future contracts & projects.
Incorporation of the Prime Contract in Subcontracts
Risks — Pay if Paid, Lien Waivers and Claim Waivers
Directed Work with No Agreement on Price
Time Limits on Claims
Accurate Billing and Payment Applications
Many subcontracts incorporate the prime contract between the general contractor and the project owner. Before signing a subcontract with such a term, you should absolutely obtain a copy of the prime contract. Usually the subcontract has a clause that states that in the event of a conflict, the prime contract governs. Why would you agree to an important term of a contract without seeing it?
Pay if paid payment terms limit your remedies for non-payment. You will only get paid if and only if the contractor receives payment from the owner or general contractor. Complete lien waivers are only valid on residential construction in PA and are not enforceable in New Jersey. Partial waivers, submitted with payment applications, may include claim waivers for all unresolved claims through the date of the payment application. All of these terms should be negotiated out of a contract before you sign it.
Some contracts allow owners and general contractors to direct the completion of extra work before a price is agreed to for the extra work. This allows these parties to maintain leverage to have the work completed and offer a low price after the work is completed. These should be negotiated out of the contract before you sign it.
A lot of contract specify that claims for extra costs must be submitted in writing within a certain time of the event causing the extra costs. You may be barred from seeking additional costs if such a provision is in your contract and you fail to submit the claim in writing in a timely fashion.
Inaccurate payment applications and invoices can delay payment or even bar you from collecting for all work completed. Payment applications and invoices should be double-checked before submitting them.
As you can see, the review and negotiation of construction contract is very important for what happens later.
I would be happy to help with any of these issues any way I can.
PA Commonwealth Court Upholds Verdict Against School District for Delay Damages
On July 24, the PA Commonwealth Court upheld a trial court’s verdict in favor of a contractor against school district for the contract balance due, damages for delay and attorney’s fees with no liquidated damages 1)where there was active interference by the owner and its representatives (delays in decision-making) that invalidated a “no damages for delay” clause, 2) where the school district had actual notice of the delay costs despite the lack of formal notice under the contract and 3) where the architect had unilaterally granted “no cost” time extensions .
This case shows that sometimes a party’s actions can negate contract provisions that are in their favor and would seem to provide a defense. In other words, actions speak louder than words.
The contractor sued and won at trial. On appeal, the School District argued that 1) the no damages for delay clause barred the contractor's extra costs, 2) the contractor had not provided timely notice of the delay claims and 3) the contractor was not entitled to its attorney's fees because it had not prevailed on its entire claim.
Lastly, the Court that the trial court had indeed found that the contractor prevailed on its entire claim for non-payment, thus entitling the contractor to an award of attorney's fees.
This is a victory for all contractors who get delayed by actions of owners and their representative who try to deny claims based on no damages for delay clauses and notice requirements.
Mechanic’s Liens Were Properly Dismissed Even After They Were Bonded Off
On July 8, the Superior Court of PA upheld the dismissal of mechanic's liens where 1) the property owner had bonded off the liens after filing objections to the liens, 2) where formal notice was not served on the owner despite the appearance of the owner’s attorney, and 3) where the site contractor failed to apportion the amount due among the lots he worked on.
Courts continue to construe mechanic’s lien and construction lien laws strictly. You must follow the complex lien laws despite other recent cases allowing “substantial compliance.”
In Oakdale Equipment v. Meadows Landing Associates, a developer contracted with a site contractor for earthwork and water and sewer. The developer terminated the contractor and refused to make payment. The site contractor and the rental company that supplied equipment filed mechanic's liens against the property
The owner filed objections to the mechanic's liens based on the fact that the rental company had failed to comply with the Lien Law's notice requirement and that the contractor had not apportioned his lien among the numerous lots he worked on. The owner also bonded off the liens. The trial court sustained the preliminary objections and struck the liens.
On appeal, the rental company argued that the bonding off of the lien foreclosed the owner's right to file objections to the lien. The Superior Court disagreed.
Be Wary of Indemnification Clauses in Construction Contracts
Indemnification clauses in construction contracts can be tricky. Such clauses may require you to pay for the defense and the liability of other parties in personal injury, property damage and even contract cases. Contract language can even waive your company’s workers compensation defense and put your insurance company on the hook for paying for pain and suffering damages to your own employee. They must be negotiated with care.
In a New Jersey federal case from earlier this month, a third party’s claim for indemnity for personal injury against the injured person’s employer was dismissed where the complaint did not allege a “special relationship” between the third party and the employer in the absence of contract language providing for indemnity.
In Carpenter v. World Kitchen, Dana and Ann Carpenter sued World Kitchen for injuries Dana suffered while operating a tractor trailer in the employ of New England Motor Freight. Mr. Carpenter was injured when the contents of the trailer, in route from New World Kitchen to Macys, became unstable and the vehicle overturned. New World Kitchen joined Carpenter's employer, NEMF. NEMF sought to be dismissed based on the workers compensation statute which bars third party claims against an injured party's employer.
The District Judge set forth the exceptions to the workers compensation defense - where "an employer has expressly agreed to indemnify the third party or where there is an implied indemnification" which requires the showing of a "special relationship" between the employer and the third party. Therefore, an employer can be at risk of indemnifying a third party when contracting if it expressly agrees to do so. A contract, in and of itself, does not constitute a "special relationship."
In this case, the Court found that World Kitchen had not alleged that the goods in the trailer were its property; rather, it appeared that that goods had already been sold to Macys. But the take away from this case is to be aware that you can negotiate away your defenses when signing a new contract.
Claims by Contractors Against Design Professional Move Ahead
In 2005, the Pennsylvania Supreme Court ruled that contractors could sue design professionals for negligent misrepresentations contained in plans and specifications. However, until last month, it was unknown whether this required an express representation by the design professional or if defective plans or specs were enough.
Last month, the Superior Court decided that a design professional need not make an explicit negligent misrepresentation of a specific fact for a third party to recover economic damage.
In Gongloff Contracting v. L. Robert Kimball & Associates, California University of Pennsylvania hired Kimball to design a new convocation center. When construction began, Gongloff was hired as the steel erection subcontractor. Feaseability concerns about whether the roof trusses would support the trussed roof system were expressed by both the steel supplier and the structural engineers. As the design team attempted to adjust the design during construction, Gongloff has a large amount of extra work resulting in 81 change orders. Gongloff was not paid and stopped working, eventually suing Kimball.
The lower court dismissed Gongloff's claims. On appeal, the Superior Court allowed them to go forward, finding that a contractor may sue a design professional for negligent misrepresentation for errors of design that cause economic damage even if the design professional does not make an explicit negligent misrepresentation.
You may contact me for more information on the state of this and other laws in PA and NJ.
CAUTION: Subcontractor That Waited to Sue on Payment Bond Out $237,214.00
On September 9, the Superior Court of Pennsylvania upheld the dismissal of a subcontractor’s claim against an out-of business general contractor’s payment bond where the subcontractor failed to sue the surety within 1 year and 90 days after completing work. The general contractor’s promises to pay did not stop the statute of limitations of the Pennsylvania Public Works Contracting Bond Law. The subcontractor billed $237,214.00 and was paid nothing.
Subcontractors must sue on a payment bond on a public project within 1 year and 90 days after completing your work or lose all claims against the contractor’s payment bond.
In Tecton v. Liberty Mutual Ins.Co., Tecton Corp. was a subcontractor to J.S. Cornell & Son for renovations to the City of Philadelphia's Police Tactical Headquarters. Cornell awarded 2 subcontracts to Tecton for masonry and carpentry work in July of 2011. Cornell asked for Tecton's billing while Tecton was performing it work in January, 2012; however, Tecton billed for all of its in September, 2012 and completed its work prior to or in early November, 2012. Over one year later, Tecton's owner sent an email to Cornell requesting payment. Cornell responding that it was going out of business. Tecton responded by filing a Demand for Arbitration against Cornell and its surety, Liberty Mutual in December, 2013. Liberty Mutual was not bound by the arbitration clause in the contract between Cornell and Tecton. Tecton finally sued Liberty Mutual in February 2014. The trial court dismissed the case in light of the Bond Law's 1 year-90 days statute of limitation.
On appeal, Tecton argued that the statute of limitations should have stopped or been tolled because Cornell's representatives promised to pay Tecton while knowing that it could not and because Tecton relied on these promises in not suing Liberty Mutual earlier. The Superior Court rejected Tecton's argument on the basis that Tecton knew it was not being paid and could have sued Liberty Mutual on its bond before the statute of limitations.
Two points to take from this case: 1 - On public works, subcontractors must sue on a payment bond within one year and 90 days of completing their work (subcontractors must give the surety 90 days' notice of non-payment before suit); 2 - Bonding companies are not bound by alternative dispute resolution provisions, such as mediation and arbitration, in their principals' contracts.
CAUTION: Builder Made Misrepresentations on Plans, Permit—Must Pay $761,527.00
In late August, the Appellate Division of the Superior Court of New Jersey affirmed a judgment in favor of homeowners against a builder for $165,956 in damages, tripled under New Jersey’s Consumer Fraud Act to $497,868, a refund of the contract amount of $62,000, and $201,659 for costs and attorney’s fees. The Court found that the builder misrepresented the nature of the addition as a great room when the homeowners were really using the space as a preschool. The local code officials found this out shut down the preschool.
Be aware that any misrepresentation, written or spoken, can subject you to fraud, and, if the situation escalates, can subject you to triple damages and attorney’s fees. This applies to New Jersey’s Consumer Fraud Act and as well as Pennsylvania’s Unfair Trade Practices and Consumer Protection Law.
In Coluccio v. Sevas Builders, the Coluccios operated a private preschool in their home. They contracted with Sevas to construct additions to their home and make other renovations for use in their preschool business. At trial, the Coluccios testified that they told Sevas that the additions and renovations were to better serve their students. Sevas testified that although the Coluccios referred to one of the additions as the "school room", he saw no fire extinguishers, exits signs or anything else that indicated non-residential use. Sevas applied for a permit and submitted drawings, designating the addition as a "great room". Sevas completed the work. However, the local construction code official required that the addition conform to the code's requirements for a preschool and include exits, fire alarms and and increased load capacity for the floor, which was on a slab. The Coluccios sued Sevas for the cost of demolishing all of Sevas' work and rebuilding to code. The trial court found that Sevas has committed fraud by submitting the permit and plans for what he knew to be a preschool as a simple residential addition/renovation. The trial court found Sevas individually and corporately liable for fraud and awarded the Coluccios the original contact amount, $62,000, the cost of demolishing his work and rebuilding to code, $165,956, tripled this under the Consumer Fraud Act to $497,868, and awarded the Coluccios attorney's fees and costs in the amount of $201,659.
On appeal, Sevas raised three issues. First, Sevas argued that the Coluccios failed to disclose that they were using their home for a preschool. The Court held that Sevas was unquestionably aware that Sevas had designed the addition as a "school room" and had intentionally misrepresented his permit and plans as for a "great room". This was fraud, entitling the Collucios to all of the damages.
Second, Sevas argued that his work did not have to be demolished to conform to the applicable code. The Court found that there was sufficient expert testimony concerning the need to start from scratch to support the trial judge's finding that demolition was necessary.
Third, Sevas argued that the award of over $200,000 in legal fees and costs was excessive. The Court disagreed, citing to the fact that Sevas' counsel did not dispute the amount of time the Collucios' attorney spent on the case or his hourly rate. In addition, the Court agreed with the trial court that the Collucio's attorney was required to spend the amount of time he spent on the case as Sevas opposed the Collucios' every attempt to collect.
The award was huge and shows that fraud can lead to a major economic penalty.
GC Cannot Hide Behind Contract—Must Pay Subcontractor for Extra Work
Earlier this month, the Pennsylvania Superior Court upheld a trial court’s verdict in favor of a subcontractor for site work extras where 1) the contractor waived a contract requirement that all changes be in writing, 2) the subcontractor submitted its claim for the extra work at the end of the project despite a clause in the general contractor’s contract with the owner that required that all changes be submitted within 21 days, and 3) the trial court did not award attorney’s fees to the general contractor per the contract because the subcontractor did not breach the contract.
You should always attempt to follow the contract language regarding changes to your work. However, where this is not practical, you must be diligent in notifying the parties involved and submitting the claim for extra work in a timely manner.
In C.E. Pontz Sons v. Purcell Construction, Purcell subcontracted Pontz to perform landscaping work at the Twin Valley High School in Elverson, PA. The subcontract required all change orders to be in writing. Pontz did perform extra work at the school, but did not submit the claims for the extra work on a payment application for over two years after Purcell made final payment. Pontz sued Purcell for the extra work. At trial, the judge found that Pontz had performed extra work, that Purcell had observed the extra work and awarded Pontz $11,247.10 for the extra work.
On appeal, Purcell raised three issues. First, Purcell argued that the subcontract required that all change orders be approved in writing and that, because a pubic contract was involved, the court should strictly enforce the subcontract. The Superior Court disagreed, finding that the evidence at trial showed that Purcell and Pontz had waived this requirement by oral agreement and that the stricter standard for public contracts did not apply because Purcell and Pontz were private parties.
Second, Purcell argued that its contract with the school district required that all claims for extra work be submitted within 21 days. However, there was evidence that Pontz had submitted an invoice for the extra work shortly after completing its work. Pontz's failure to include this invoice in its final application for payment did not preclude Pontz's right to seek compensation for the work on the timely-submitted invoice.
Third, Purcell argued that Pontz breached the subcontract by not including the extra work with its final application for payment and that this entitled Purcell to its attorney's fees pursuant to the contract. Again, the Court disagreed, finding that the trial court was justified in finding that Pontz had not breached the contract or the duty of good faith.
You should always follow the contract's provisions concerning extra work. But you should be aware that these provisions may be waived, by oral agreement or by action. Please contact me if you have any questions or concerns.
Forum Selection Clause Upheld Despite Contractor’s Claims of Racial Discrimination
On October 15, the US District Court for the Middle District of Pennsylvania dismissed a case filed by a contractor against the Minersville School District for breach of contract and racial discrimination in failing to pay. The federal court dismissed the case based on a forum selection clause in the contract that required all disputes to be resolved in Schuylkill County. The Court found that it had no jurisdiction over the discrimination claims since they arose from the contract.
Everyone should be aware that courts will presume that forum selection clauses are valid unless certain public interest factors weigh against enforcement. They should be negotiated at the time of contracting.
In ARK Builders v. Minersville Area School District, ARK was awarded a contract to complete roofing at Minersville Elementary and Minersville High School. When ARK did not complete its work on time, the School District terminated the contract and engaged another contractor to complete the roof work the following year.
ARK sued in federal court seeking $250,000 for unpaid work plus punitive damages. ARK alleged that because it was a Pakistani-American-owned company, the School District harassed ARK and improperly terminated the contract. ARK also sued the members of the School Board. The contract contained a forum selection clause which required that the local court of common pleas would have jurisdiction over any disputes arising in connection with the contract.
The defendants asked the judge to dismiss the federal case. ARK argued that its racial discrimination claims fell outside the terms of the contract. The federal court disagreed, stating that ARK's racial discrimination claim is a claim on the contract, that federal law rather than PA law governed whether the clause should be enforced, that ARK failed to show that public interest factors favored disregarding the forum selection clause and that PA law also favored enforcement of the clause.
This was a public contract so there was no negotiation of terms. On such public projects, you should be aware of any forum selection clauses. On private projects, you should negotiate the forum for dispute resolution. The last thing you want to do is to spend a lot of money fighting over where a dispute will be resolved.
PA Supremes: Collect Mechanics Liens Under Same Docket as Lien
Late last month, the Supreme Court of Pennsylvania overturned orders dismissing 17 complaints to enforce 17 mechanics’ liens filed in Chester County. The trial court had dismissed the complaints because the complaints were filed under the same docket number as the liens. The Supreme Court disagreed, finding that the Lien Law does not specifically require that such complaints be filed under separate docket numbers..
This decision mostly affects lawyers who should be aware the complaints to collect on mechanics’ liens should be filed on the mechanics’ lien docket.
In Terra Technical Services v. River Station Land, River Station contracted with Terra for the demolition and debris removal of various structures on a 76 acre parcel of land. When Terra finished its work and was not paid, it filed 17 mechanics' liens on the parcels that made up the 76 acres. Terra then sought to collect on the mechanics' liens and filed 17 complaints to obtain judgments on the mechanics' liens using the same docket numbers as the liens. The trial court struck down the complaints to collect on the liens, relying on the Rules of Civil Procedure and a 1991 Superior Court decision which required separate dockets for mechanics' liens and complaints to enforce mechanics' liens. Terra appealed and the Superior Court agreed with the trial court.
On appeal, the Supreme Court disagreed. Both the Rules of Civil Procedure and the Lien Law govern actions to collect on mechanics' liens. They must be read in concert with each other. Neither specifically requires separate docket numbers. The Supreme Court also quoted a 2013 Superior Court decision that stated that neither set of rules specifically required that a separate action be initiated to collect on a mechanics' lien. Therefore the Supreme Court overruled the Superior Court and the trial court and reinstated Terra's complaints to collect on the mechanics' liens.
NJ Court Upholds Verdict Against Supplier—Should Have Filed Construction Lien!
On November 20, the NJ Appellate Division upheld a trial court’s verdict against a plumbing supply company where the supplier failed to prove that it expected payment from other parties on the Princeton Medical Arts Pavilion project when the subcontractor it sold supplies to went under. The Court noted that the supplier “took no action to protect its interests under the Construction Lien Law.”
I always counsel clients to take action and protect their rights under the applicable lien laws. In New Jersey, you only have 90 days to file a construction lien on commercial projects and only 60 days on residential construction. Do not be like this supplier and fail to use all of your avenues of collection.
In Flemington Supply Co. v. Nelson Enterprises, Flemington Supply gave a price to The Frank McBride Company to supply fixtures for the Princeton Medical Arts Pavilion. McBride accepted the proposal but advised Flemington to bill for the fixtures through a recently-created WBE, Nelson Enterprises. Flemington did so, but Nelson stopped paying Flemington when McBride stopped paying Nelson. Flemington sued Nelson and added McBride as a defendant before the trial when Nelson declared bankruptcy. At trial, the trial court dismissed Flemington's unjust enrichment claims against McBride.
On appeal, Flemington argued that the trial court erred in holding that it could not collect from McBride on the theories of unjust enrichment, quantum meruit and quasi-contract. The appellate court stated that unjust enrichment requires that the plaintiff show that it expected payment from the defendant at the time it performed or conferred a benefit on the defendant. Because Flemington only billed Nelson and because initially only sued Nelson, it could not establish that it expected payment from McBride. The Court also admonished Flemington for failing to take advantage of its right to lien the property to insure payment.
I cannot stress enough that contractors exercise their lien rights when they are not paid in timely manner. Once you miss your deadlines, you may be left without recourse when parties in the construction payment chain go out of business or declare bankruptcy.
No Claim Under CPL Where Homeowners Cannot Prove Justifiable Reliance
On November 10, the PA Superior Court ruled that the Bucks County Court of Common Pleas had erred in awarding damages under PA’s Unfair Trade Practices and Consumer Protection Law (the “CPL”) where the homeowners failed to prove justifiable reliance on the homebuilder’s misrepresentations or wrongful conduct under the CPL. The Jamison house’s stucco façade failed, causing the OSB to become “extremely wet” and damaged.
The court decided that the homeowner had to prove reliance on misrepresentations made AFTER the sale of the home and that misrepresentations in the original sale are not actionable under the CPL.
In Harding v. Cutler Group, the Hardings purchased a house form Cutler. Almost immediately, the Hardings experienced water infiltration and mold damage. Cutler initially responded pursuant to the home warranty and recaulked and replaced a window. The Hardings hired an expert who determined that the leaks had saturated the OSB wall sheathing and took moisture readings that showed the the OSB was excessively wet. The Hardings also hired an expert who determined that the stucco siding was improperly installed, causing the leaks. The Hardings sued Cutler for breach of contract, breach of warranty and violations of the CPL. After trial, the judge awarded $78,000 in damages and $80,000 in attorneys' fees under the CPL.
On appeal, Cutler argued that the Hardings had not established all of the elements of common law fraud and therefore could not collect attorneys' fees under the CPL. The Superior Court took up the issue of whether a plaintiff under the CPL must establish all of the elements of common law fraud. Reviewing prior case law, the Court found that plaintiffs must only establish one element of common law fraud, namely justifiable reliance on a misrepresentation or wrongful conduct. However, plaintiffs must also demonstrate that they suffered damage as a result of the reliance. The Court held that a CPL plaintiff is not required to demonstrate the a guarantee or warranty justifiably induced him to purchase goods or services, but rather that he relied on a misrepresentation and that he was damaged due to reliance on the misrepresentation. Because the Hardings did not prove reliance on some misrepresentation or wrongful conduct after the sale, the Superior Court struck down the damages under the CPL.
This case makes it harder for homeowner plaintiffs to sue and collect damages, including treble damages and attorneys' fees under the CPL
In New Jersey, Subcontractors’ Complaint Against Owner Dismissed— Sub Can Only Lien
Last week, the U.S Bankruptcy Court for the District of New Jersey dismissed an adversarial action brought by creditors of a bankrupt general contractor for payment on the construction of a Retro Fitness. The subcontractors sought to collect their unpaid balances from the owner of a Retro Fitness through the bankruptcy court, arguing that the owners of a Retro Fitness had “engaged” the subcontractors through the bankrupt GC.
The Court dismissed the adversarial action against the owner because the subcontractors showed no privity, or direct contractual relationship, with the owner. It was clear from the documents attached to the subcontractors’ complaint that the owner did not directly hire the subcontractors. The subcontractors also argued for a quasi-contractual or unjust enrichment remedy. The Court dismissed this as well. In New Jersey, a subcontractor may only sue the party with which it contracted—it cannot sue those “further up the chain.” The Court stated that the only remedy available to a subcontractors against an owner is to file a construction lien within 90 days of completing its work.
In Mtinick v. Schwartz (In re Schwartz), subcontractors were creditors in a GC's bankruptcy. As the debtor had limited assets, the subcontractors filed an adversarial action in the bankruptcy against the owner of a Retro Fitness where the subcontractors had worked for the bankrupt GC. The subcontractors pleaded that they were "engaged" by the owner to work on the construction of the Retro Fitness. The owner filed a motion to dismiss the case against it.
The Court, after a hearing, decided that the subcontractors offered no evidence that the owner had directly contracted with the subcontractors. This was dispositive of the case as, under New Jersey law, a claim for payment by a subcontractor can only be made against the party with which it contracted - it cannot sue those "further up the chain." Unjust enrichment claims against the owner also failed because NJ courts have ruled that allowing such claims would be unfair as both owner and lenders would find it impossible to monitor payment on a project. In dismissing the case, the Court commented that NJ's Construction Lien Law exists to provide a remedy in situations like this. To allow a subcontractor to circumvent the Lien Law by filing an unjust enrichment claim "would create havoc in the construction industry."
I cannot stress enough that contractors and subcontractors must be aware of their lien rights and the time limits they have to enforce them. In NJ, you have 90 days. If you fail to use your rights, not only do you lose them, you may have no other avenue for recovery. Please contact me if you have questions about construction liens and mechanics' liens.
Federal Court Finds in Favor of GC on Claims of Subcontractor at Tobyhanna Depot
On December 1, the US District Court for the Middle District of Pennsylvania issued its ruling after a trial on case by a subcontractor who sued the general contractor for non-payment on a renovation project at the Tobyhanna Army Depot in the Poconos. The subcontractor stopped working near the completion of its work when the GC began underpaying its payment applications. The subcontractor sought payment for its work, including partially paid and unpaid change orders.
After trial, the Court held that the subcontract contained a “pay if paid” provision and that payment to the subcontractor was conditioned on approval of the subcontractor’s applications for payment by the GC and the owner. The GC did not authorize some of the extra work performed by the subcontractor and paid the subcontractor reduced amounts on the GC-approved change orders because the owner made reduced payments. The Court also found that the subcontractor breached the contract by walking off the job. It was not justified in doing so because the underpayment, by a few hundred dollars, was not a breach so substantial as to justify the subcontractor’s abandonment of its work. The Court awarded the GC all of the costs to complete the subcontractor’s work.
In Butch-Kavitz v. Mar-Paul, Butch-Kavitz, an electrical subcontractor, sued Mar-Paul, the GC it contracted with, for non-payment on a renovation project for the US Army Corps of Engineer at the Tobyhanna Army Depot. Butch-Kavitz sought payment for additional electrical demolition it had to perform, unpaid change orders and its contract balance. Mar-Paul countersued for the costs it incurred to complete Butch-Kavitz's work after it walked off the job due to non-payment.
At trial, the evidence showed that that subcontract contained a pay-if-paid clause, that Mar-Paul overpaid Butch-Kavitz on some pay applications, underpaid on others and that the subcontract stated that a failure to prosecute the work of the subcontract constituted a default. The evidence also showed that the USACE approved reduced amounts on the change orders for Butch-Kavitz's extra work.
The Court found that Butch-Kavitz was not entitled to payment for additional demolition because it failed to provide that Mar-Paul directed it to perform this work. Also, Butch-Kavitz was only entitled to the amounts approved by the USACE for its other change order work. In addition, the Court decided that "negligible" underpayments on payment applications did not justify Butch-Kavitz abandonment of the project. Rather, this abandonment was a breach of contract by the subcontractor. The Court awarded Mar-Paul all of its costs to complete Butch-Kavtiz's work.
There are a couple of take-aways from this case. First, be sure you know what the contract documents say about payment and default. Second, you must carefully consider walking off of a job for non-payment. If you have any questions, please do not hesitate to contact me.
Bad Faith by School District Puts Contractor’s Attorney’s Fees in Dispute
On January 6, the PA Commonwealth Court upheld a jury verdict in favor of a sheet metal subcontractor against a school district where the school district terminated the HVAC prime contractor and entered into an oral contract with the prime’s sheet metal subcontractor to complete its scope of work. The subcontractor did so, but the school district refused to pay. The trial court originally granted judgment to the subcontractor and awarded attorney’s fees of $41,000 under the Prompt Pay Act. The Commonwealth Court reversed and ordered a jury trial. The jury also found in favor of the subcontractor and this time judge awarded $110,000 in attorney’s fees for the school district’s bad faith.
The Commonwealth Court remanded the case again because the attorney’s fees award was made under the bad faith statute and not the Prompt Pay Act. One judge wrote “Litigation is the new sport of kings.”
In F. Zacherl, Inc. v. Flaherty Mechanical Contractors, Flaherty was selected by West Allegheny School District as the HVAC prime contractor for alterations to West Allegheny High School. Flaherty subcontracted the sheet metal work to Zacherl. Flaherty developed cash flow problems and stopped paying its subcontractors which caused the school district to terminate Flaherty. Flaherty's bonding company took over. To mitigate further delay, the school district Zacherl to return to the project and complete its work. Zacherl sent a letter advised the school district of its amount billed to date, amount paid to date amount due, and amount remaining to bill. By way of verbal agreement, Zacherl agreed to complete its scope of work if the school paid it half of the amount currently due. - $147,000. The school district paid this amount and Zacherl returned and completed its scope of work. However, the school district made no further payments.
Zacherl sued and was granted judgment before trial against the school district for all of its work - $229,000, plus $41,103.31 in attorney's fees and costs under the PA Procurement Code/Prompt Pay Act.
The school district appealed and the Commonwealth Court remanded the case for trial. At trial, the jury found in favor of Zacherl and awarded $111,000. The judge added $130,000 fro interest, attorney's fees and costs.
The school district appealed again. It argued that (1) the oral contract was not valid because it was not approved by the school board, (2) there was insufficient evidence to find a contract and (3) the court erred in concluding that the school district acted in bad faith.
Section 508 of the Public School Code requires that all contracts for more $100 must be approved by the school board. However, the Court had previously decided in another case that this would not bar a contractor's claim for payment for additional work where that work was part of an already-approved contract. In this case, separate approval was not required because the oral contract was for work already approved by the school board.
The Court found plenty of evidence to support the jury's finding that Zacherl agreed to perform the same work specified in the prime contract for the same amount agreed in the subcontract with Flaherty. The school district never questioned why Zacherl was submitting invoices to it and no one informed Flaherty that the work was unauthorized or not-contracted-for. It was also highly unlikely that Zacherl agreed to perform the additional work for free. The jury verdict was upheld.
The trial court had ruled that the school district had acted in bad faith by enticing him to come back to work and not paying him. However, the trial judge cited PA's bad faith statute, which applies to bad faith during litigation, and not the Prompt Pay Act, which applies to public works. So the Court struck the $110,000 attorney's fees award and sent the case back to the judge to determine if Zacherl is entitled to attorney's fees for bad faith during the litigation.
Years of litigation pursued by a school district who employed a subcontractor and paid it nothing - ridiculous. A concurring judge wrote a noteworthy and too true opinion, including:
"Litigation is the new sport of kings. The damages awarded to Zacherl will not make Zacherl whole because the monies will be used to pay attorney fees and costs. The Prompt Pay Act was designed to address this unfortunate result."
Outlook for Construction in 2016: Slower Growth?
Experts are predicting slower growth in the construction industry in 2016 compared to last year, forecasting an increase in construction spending in the 6% range. Construction starts could rise to over $700 billion as the increases to long-term interest rates should stay gradual according to the 2016 Dodge Construction Outlook
These forecasts follow recent increases in contractor backlog and in construction employment. This all points to a better 2016 for everyone in the construction industry (fingers crossed).
Dodge forecasts:
Commercial building +11%
Institutional building +9%
Single family housing +20%
Multifamily housing +7%
Public works 0%/flat
Electric utilities -43%
Manufacturing +1%.
Associated Builders and Contractors is predicting nonresidential construction spending will increase by 7.4%. Also, expect construction employment to increase about 3%. In addition, material prices will rise by about 3%.
The construction industry added over 45,000 jobs in December according to the Bureau of Labor Statistics. Nonresidential building construction employment is up 1.4% for the year, residential up 4.8%, nonresidential specialty trade employment up 4.3%, residential trade employment up 6.1% and heavy construction/civil engineering is up 2.2%.
Some construction prices fell in December and some rose. Prices were up for some: asphalt (+1%), concrete (+3%), fabricated metal (+0.1%); and down for others: natural gas (-46.5%), petroleum (-16%), plumbing fixtures (-0.5%), energy (4.7%), wire/cable (-2.7%), lumber (-2.9%), iron/steel (-2.2%), .
Good luck in 2016!
NJ Court Says Contractors Can Be Sued for 10 Years After Substantial Completion
Can a contractor be sued for allegedly defective construction for up to 10 years after substantial completion? New Jersey says YES. Statutes of limitation for negligence and breach of contract can be waived by a change in ownership and the new owners’ subsequent “discovery” of construction defects.
In a case decided on February 1, the Appellate Division allowed a condominium association’s claims for defective construction to proceed when they were filed 8 to 9 years after substantial completion. The court decided that the unit owners had no obligation to file suit until they had control of the board of directors and were advised of construction defects by an engineer.
In Palisades at Fort Lee Condo. Ass'n v. 100 Old Palisade, the owner of a Hudson River-front condo hired contractors and subcontractors in 1998 to construct a residential tower and additional stories on a parking garage. Construction was completed in 2002. In 2004, the owner sold the condominium property and the new owner began to convert the rental property to condominiums. In 2006, enough of the units were purchased so that the owners took control of the association's board of directors. The board then retained an engineer due to various complaints from the unit owners. The expert produced a report in 2007 which identified various construction defects. The homeowner association filed a suit against the contractors in 2009. Some contractors settled with the association. The trial judge threw out the rest of the claims as being too late, saying that there was no way that the contractors could not have anticipated that the property would be sold and that an association of unit owners would be formed - this would subject the contractors to being "forever liable" for alleged construction defects. The statute of limitation for breach of contract is 6 years; for negligence, it is 2 years, usually measured from substantial completion.
On appeal, the appellate court disagreed. The court decided that the association did not have a claim until the unit owners took control of the association's board of directors and until the board had sufficient facts upon which to assert claims of defective construction. The unit owners did not have control of the association until they had control of the board of directors. The unit owners did not "discover" their claim until they got the expert's report. Both of these decisions by the court allowed the suit to continue despite it being filed 7 years after substantial completion. The court did say that New Jersey's "statute of repose" of 10 years would bar any suits filed more than 10 years after substantial completion.
Running Power Line to Adjacent Property’s Pumping Station Not an “Improvement”
Late last month, the Pennsylvania Superior Court upheld a trial court’s determination that a contractor could not lien property adjacent to a pumping station it built where the contractor ran power lines for the pumping station through an existing building on the parcel of land in question.
The Court decided that this was not an “improvement” under PA’s Mechanics’ Lien Law as it did not provide any “benefit” to the parcel. The court upheld the trial court’s judgment on the liens the contractor had filed on the 3 parcels of land on which it actually built the pumping station. The pumping station was built by the Linde Corporation to draw water from the Lycoming Creek to be used by fracking companies.
In Linde Corp. v. Black Bear Properties, Linde built a pumping station for the owner of 4 parcels of land near the Lycoming Creek. The owner wanted the station to draw water from the creek to be sold to energy companies for use in fracking. Linde completed the pumping station, which sat on 3 of the parcels of land, with power coming from a building on the fourth parcel. The owner failed to pay Linde over $216,000 and Linde filed liens against all 4 properties. At trial, the court entered judgment for Linde, but only against the 3 properties on which Linde built the pumping station. The trial court found that running power lines through an existing junction box did not equate to construction in the ordinary sense.
On appeal, Linde claimed that it had improved all 4 pieces of property. The appellate court disagreed. It held that the work performed on the 4th parcel did not effect a material change to the building on that property because running the wires was merely incidental and did not improve the property in any way as required by the PA Mechanics' Lien Law. There was no benefit conferred on that specific property
Care must be used in allocating the amount due a contractor where the contractor improves more than one property, such as in a residential or mixed-use development. Please contact me if you have any questions.
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