Construction Contract Clauses Part 2 – Flow-Through Provisions

Posted by: Hilger Hammond On: 15th November 2016 | no responses.

2016-11-08_13-13-14By: Mark A. Rysberg
Construction contracts are intended to define and memorialize the parties’ expectations regarding how they will perform during the course of a construction project. This series will examine clauses that are routinely found in construction contracts and provide a brief explanation of what they are and why they are important.

Flow-through provisions are common in construction contract documents. In essence, when a general contractor enters into a construction contract with an owner, the general contractor obligates itself to perform certain functions and services for the owner. The general contractor then subcontracts some of those functions to sub-contractors. A flow-through provision is language in a contract that makes one party obligated to fulfill the obligations of another party. In essence, by way of example, if properly drafted, it could prevent a subcontractor from arguing that the obligations it owed a general contractor were different from the obligations the general contractor owed the owner. However, the language of these provisions needs to be carefully read and construed to determine precisely the specific obligations of the parties.

Further, flow-through provisions can work two ways: A subcontractor can owe a responsibility to the owner, and likewise, a general contractor can owe a subcontractor the same obligations that an owner owes the general contractor. The form and extent of flow-through provisions depends specifically upon the language of each contract document. Consider the following example:

The Subcontractor shall be bound to the Contractor by the terms of this Agreement and, to the extent that provisions of the Contract Documents between the Owner and Contractor apply to the Work of the Subcontractor as defined in this Agreement, the Subcontractor shall assume toward the Contractor all the obligations and responsibilities which the Contractor, by those Documents assumes toward the Owner and the Architect/Engineer, and shall have the benefits of all rights, remedies and redress against the Contractor which the Contractor, by Those Documents, has against the Owner, insofar as applicable to this Subcontract, provided that where any provision of the Contract Documents between the Owner and Contractor is inconsistent with any provision of this Agreement, this Agreement shall govern.

These clauses are important for several reasons. However, at its core these provisions are intended to transfer risk from one party to another. Risk transfer is important in construction contracting because it is important to put the risk on the party that is in the best position to prevent the risk or insure around it. In that sense, flow through provisions can be thought of as serving the purpose of aligning the parties’ performance obligations with regard to insurance and risk transfer.

Construction contracts have many different clauses that are intended to work together to accomplish risk transfer and to define performance obligations. When the parties to a contract have a different understanding about what terms are in a contract, problems can result. Therefore, it is important to understand and include thoughtfully planned and precise contract clauses in your construction contracts.

Attorneys who practice in construction law can be a valuable resource for contract review and in-house training that is intended to avoid costly mistakes later.

Construction Contract Clauses Part 1: Inegration Clause

Posted by: Hilger Hammond On: 8th November 2016 | no responses.

2016-11-08_13-01-55By: Mark A. Rysberg

Construction contracts are intended to define and memorialize the parties’ expectations regarding how they will perform during the course of a construction project. This series will examine clauses that are routinely found in construction contracts and provide a brief explanation of what they are and why they are important.

The first clause to be considered is the integration clause. An integration clause is language in a contract that prohibits telling a court or an arbitration panel that prior oral arguments, or even prior written agreements, are part of the contract documents. For example, suppose an owner and a general contractor enter into an agreement. The agreement has ten elements, and the parties were discussing orally the eleventh element. If this oral eleventh element is not reduced to writing and included in the written document, chances are that that oral provision will not be enforced due to the fact that the contract is “fully integrated” because it contains an integration clause. A “fully integrated” contract means that all of the prior dealings between the parties have culminated into the written contract and a court or arbitration panel will not look beyond the written contract to determine the obligations of the parties. The following is a common example of an integration clause.

The Contract Documents enumerated in this Agreement form the contract for construction, represent the entire and integrated agreement between the parties hereto and supersede all prior negotiations, representations or agreements, either oral or written.

Notice that the language above makes it clear that the only contract terms are those embodied in the contract documents that are specifically identified in the contract. In other words, prior oral and written agreements are not part of the contract if an integration clause is included. Now, consider why this is important.

First, a written contract is intended to specify all of the terms of the agreement. If an integration clause is not included, there can be significant questions about the terms of the agreement.

Second, enforcing oral or piecemeal contracts is costly and difficult. Imagine having to piece together a contract at the end of a project based on notes, emails, and memory. That can be a difficult, if not impossible, task.

Third, basing decisions on a contract that is not fully integrated can be risky. As you may imagine, decisions to default or terminate are usually made based on the language of the contract. The precursor to those decisions is usually performance requirements set out in other sections of the contract, such as payment timing and scheduling. If one party’s expectations are based on the belief that one of those terms was agreed upon orally before the contract was signed and the other believes those terms are defined by the signed contract, there can be a serious problem because the parties will likely operate on different understandings of their respective obligations. As a result, the party issuing a default may actually be the party in default.

Construction contracts have many different clauses that are intended to work together to accomplish risk transfer and to define performance obligations. When the parties to a contract have a different understanding about what terms are in a contract, problems can result. Therefore, it is important to understand and include planned and precise contract clauses in your construction contracts.

Attorneys who practice in construction law can be a valuable resource for contract review and in-house training that is intended to avoid costly mistakes later.

New Overtime Rule – Legal Implications for Employers

Posted by: Hilger Hammond On: 11th October 2016 | no responses.

time-1196952-640x480By Elizabeth Welch Lykins
Welch Law

In May 2016, the Department of Labor (DOL) released its long-anticipated new overtime rule for Executive, Administrative, and Professional employees. These employees are generally your managers and white-collar professionals. If these employees perform certain “duties” (as defined by DOL regulations) and are paid a salary, then you do not need to pay them overtime. They are referred to as “salaried exempt” (ie, exempt from overtime laws).

As of December 1 of this year, these Executive/Administrative/Professional employees will need to be making at least $47,476 annually (or $913 per week) in order to qualify as “exempt” from overtime. Right now, the required salary threshold is only $23,660 (or $455 per week). Under the new rule, up to 10 percent of the salary can include nondiscretionary bonuses, incentive payments, and commissions.

Thus, if you have a current employee classified under one of the Executive/Administrative/Professional exemptions, that employee MUST BE PAID the new salary minimum. If he/she does not make the minimum, then the employee must be converted to an hourly employee and be paid overtime for hours worked in excess of 40 in a week. Alternatively, the employee can receive a salary to cover a set number of hours (but the employee still must be paid overtime for hours worked over 40 in a work week).

There is a grace period until December 1 to update the status/salaries of your employees. Employees who do not meet the new salary minimum will now have to keep time records. These employees will need to record start/stop times, breaks, lunch, and time worked in the evening. This is vital as the employer has the burden of proving “hours worked.” Even if an employer decides to just limit “hours worked” to only 40 in a work week, hours still must be tracked to show that is in fact the case. Furthermore, these employees will now be subject to all your hourly employee policies regarding sick time, vacation/PTO etc. It will be a huge adjustment for them since their pay will be tied to hours worked—they will no longer just make the same amount each week regardless of hours worked.

The legal implications of this change are large. If an employer fails to make the salary change (or convert employees to non-exempt/overtime eligible), the employer could be sued for past-due overtime for any hours worked in excess of 40 (and face the possibility of treble damages with a 3-year lookback as well as payment of the employee’s attorney’s fees). It is critical that you examine every salaried position in your company and make sure you are compliant with this new rule.

The new minimum for “highly compensated employees” (another exemption some employers utilize) is now $134,004 (raised from$100,000).

The new rule raises the salary minimum every three years. Thus, the DOL estimates that as of January 1, 2020, the estimated minimum will rise to $51,168. The “highly compensated employee” exemption will likewise be adjusted every three years.

One final note: MANY employers have employees mis-classified as “exempt” from overtime just because they pay a salary to an employee. Salaried status alone is not enough. The employee must also meet one of the approved exemption categories. Each category has its own duties checklist. This new rule presents an opportunity to make sure everyone in your work place is in fact properly classified. My fellow management-side employment law attorneys and I have been very busy the last few years handling wage/hour matters resulting largely from mis-classifications (ie, treating an employee as salaried-exempt when in fact they are not and should have been receiving overtime).

Once salary/hourly wage adjustments are made, you will need to examine your policies for this new group of potentially non-exempt employees. Your handbook policies and benefits packages will need to be examined with an eye towards the impact on this group who previously was not subject to the “hourly” policies.

Elizabeth Welch Lykins practices exclusively in the area of labor and employment law. Her work includes assisting management with issues related to hiring and firing, wage and hour compliance, union negotiations, as well as all aspects of employment law on the local, state and federal levels. She has extensive experience practicing in front of the National Labor Relations Board, the Equal Employment Opportunity Commission, the Michigan Department of Civil Rights, and the state/federal Departments of Labor. Elizabeth is also a trained mediator.

 

The Good, The Bad, and The Ugly – The Michigan Builders’ Trust Fund Act

Posted by: Hilger Hammond On: 3rd October 2016 | no responses.

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This article was originally posted in Michigan Infrastructure and Transportation Assocation (MITA) publication, Cross-Section, Summer 2016 edition.

By Mark Rysberg

Contractors performing work on State and Federal construction projects are likely familiar with prompt payment acts. These laws generally require contractors and subcontractors to pay their downstream subcontractors shortly after receiving payment for such work. As the economy has improved, many contractors are finding opportunities in the private sector. The work may be similar, but the rules that apply are vastly different. These differences present pitfalls for the unwary contractor that may result in criminal and civil penalties. One such hazard exists under the Michigan Builders’ Trust Fund Act, which exposes contracting entities and its officers, directors, and employees to individual liability. The consequences for violating the Michigan Builders’ Trust Fund Act could result in substantial financial penalties and prison.i

The purpose of the Michigan Builders’ Trust Fund Act is to prevent fraud in the construction industry, and to ensure that the subcontractors, suppliers, and materialmen that did the work received the payments their work generated.ii

However, courts have recognized that:

[T]he date of its passage, 1931, identifies the act as one of a genre of Depression-era measures intended to afford relief to subcontractors and materialmen in the construction industry.

During the boom period of the 1920’s, speculative builders often undertook to construct projects too large for their available capital to finance, and they frequently paid suppliers and materialmen on older projects with funds received as payment on more current operations. With the advent of the crash of 1929 and the consequent widespread insolvency of many building contractors, these pyramided empires also collapsed and many subcontractors and suppliers were never paid. Subcontractors and materialmen on private projects were left only with mechanics’ liens as remedies, and these were often ineffective.

[S]tatutes like the Michigan Act of 1931 were enacted to afford a “supplement to the Mechanics’ Lien Law,” providing a more effective remedy for private project suppliers against their principal contractors than they had previously.iii

Despite its shrouded history, the Michigan Builders’ Trust Fund Act is a tool for those engaged in the construction industries to collect funds, protect funds from third-parties, and to prevent projects from becoming entangled with problems arising from misuse of project funds.

The Good—It Is Your Money

The backbone of the Michigan Builders’ Trust Fund Act is the imposition of trust status over payments received on private construction projects.iv In its simplest sense, when money is held in trust it creates a property right in favor of the trust beneficiaries. This means that funds impressed with trust status under the Michigan Builders’ Trust Fund Act do not belong to the contractor or subcontractor that receives them.v Rather, the funds belong to the subcontractors, suppliers, and laborers who were engaged by the upstream contractor or subcontractor. As a result, funds subject to the Michigan Builders’ Trust Fund Act are not subject to liquidation in bankruptcy or setoff by lenders.vi Should bankruptcy or default occur, a beneficiary can follow any diverted funds and recover them from third-parties.vii The property rights created by the Michigan Builders’ Trust Fund Act are both a sword and shield intended to guarantee that the funds reach the intended.

The Bad—Officer and Employee Liability

At its core, the Michigan Builders’ Trust Fund Act is a criminal statute that provides civil remedies.viii Accordingly, the use of funds received on a construction project for any purpose other than to pay those who performed the work exposes the individuals and corporate entities that participated in using those funds to criminal and civil liability. In that sense, it is the people involved in causing a violation of the Michigan Builders’ Trust Fund Act who pay the price.

Importantly, the existence of a corporate or quasi-corporate entity does not provide the defense it might otherwise in a breach of contract situation.ix The individuals involved in the processing and decision making regarding the use of project payments are at high risk of personal liability.

The Ugly – Prison, Punitive Damages, and Attorneys Fees

The Michigan Builders’ Trust Fund Act carries significant exposure to criminal and civil liability. On the criminal side, the statute is a felony punishable by up to 12 months in jail and 60 months of probation—per violation.x

Several violations of the Michigan Builders’ Trust Fund Act were punished with lengthy incarceration relative to the amount of money involved.xi

For example, an individual builder was sentenced to 12 months in jail and 60 months of probation for withdrawing $2,000.00 from her account as profit on the project while the project subcontractors were owed at least $1,000.00 resulting in an overdrawn account.xii Other cases reveal criminal sentences ranging from three months to three years.xiii Importantly, these situations involved small construction projects with the amounts received and amounts owed as compared to larger commercial projects.

On the civil side, liability can arise for a violation of the Michigan Builders’ Trust Fund Act or related remedies for statutory conversion. Statutory conversion provides the possibility to recover three times actual damages plus attorney fees, costs, and interest.xiv It is easy to understand the magnitude of exposure when one considers the monthly payables owed to subcontractors, suppliers, and laborers and then multiplies that figure by a factor of three.

Although the risks created by the Michigan Builders’ Trust Fund Act are significant, they may be avoided by prudent business strategies. The key to managing these risks is to understand that they originate in all aspects of construction process. Contract drafting, contract administration, billing, paying vendors, managing cash-flow, financing, and dispute resolution all present opportunities to mitigate these perils. As a result, sensible contractors will make sure that employees involved in those aspects of the construction process understand the Michigan Builders’ Trust Fund Act so they may identify trouble areas and seek resources to assist in avoiding potential problems. Along those lines, engaging professionals can provide insight when developing best practices. Accountants, insurance agents, and attorneys that are familiar with the Michigan Builders’ Trust Fund Act can help prevent and mitigate problems. In short, the Michigan Builders’ Trust Fund Act is an important consideration for successful management of a construction company when entering or expanding work in the private sector.

iM.C.L. § 570.151 et seq.
ii General Ins. Co. v. Lamar Corp., 482 F.2d 856, 860 (CA6 1973) (internal cites omitted); see, National Bank of Detroit v. Eames and Brown, 396 Mich. 611, 619-620, 242 N.W.2d 412 (1976).
iii General Ins. Co. v. Lamar Corp., 482 F.2d 856, 860 (CA6 1973) (internal cites omitted); see, National Bank of Detroit v. Eames and Brown, 396 Mich. 611, 619-620, 242 N.W.2d 412 (1976).
iv M.C.L. § 570.151
v Selby v. Ford Motor Co., 590 F.2d 642 (CA6 1990).
vi Selby v. Ford Motor Co., 590 F.2d 642 (CA6 1990); Blair v. Trafco Products, Inc., 142 Mich. App. 349; 369 N.W.2d 900 (2005).
vii Blair v. Trafco Products, Inc., 142 Mich. App. 349; 369 N.W.2d 900 (2005).
viii M.C.L. § 570.151 et seq.
ix People v. Brown, 239 Mich. App. 735; 610 N.W.2d 234 (2000).
x M.C.L. § 570.152
xi See, People v. Brown, 239 Mich. App. 735; 610 N.W.2d 234 (2000); and People v. Miller, 78 Mich. App. 336, 259 N.W.2d 877 (1977).
xii People v. Brown, 239 Mich. App. 735; 610 N.W.2d 234 (2000).
xiii See, People v. Wedel, No. 290324 (Mich. Ct. App., Feb. 23, 2010); People v. Looze, No. 234195 (Mich. Ct. App., Oct. 25, 2002); People v. Currier, No. 269564 (Mich. Ct. App., Sept. 13, 2007); People v. Bazeley, No. 191440 (Mich. Ct. App., July 11, 1997); People v. Hall, No. 3118830 (Mich. Ct. App., Sep. 29, 2009); People v. Miller, 78 Mich. App. 336, 259 N.W.2d 877 (1977).
xiv M.C.L. § 600.2919a.

Court’s Tough Stance on Contract Terms Means Big Loss for Wisconsin Subcontractor

Posted by: Hilger Hammond On: 12th September 2016 | no responses.

By Suzanne Sutherland

Following and understanding contract terms can have a major impact if a project goes south. A Wisconsin subcontractor learned this lesson the hard way after losing its claim against the general contractor for damages from unpaid change orders and scheduling problems. North American Mechanical, Inc. v. Walsh Constr. Co. General contractor Walsh hired North American Mechanical, Inc. (“NAMI”) to install HVAC systems for a hospital renovation and expansion.

The perfect storm of project delays, tough contract clauses, and inadequate record-keeping combined to defeat all but $8,000 of the subcontractor’s $2 million claim. Three key lessons from the court’s decision could both mitigate a subcontractor’s losses and improve likelihood of recovery.

NAMI’s first roadblock was its breach of the subcontract by failing to use the proper lien waiver forms. The court found that lien waivers with different release language and reservations of rights from the contractually required forms were entirely void. NAMI’s use of improper lien waiver language caused NAMI to forfeit this claim.

The second obstacle involved NAMI’s inability to prove change order costs. NAMI maintained that its required use of building information modeling (BIM) revealed numerous architectural problems with the plans. The court rejected NAMI’s argument that changes due to BIM-revealed conditions were beyond the scope of NAMI’s original bid. Because NAMI had insufficient documentation to back up its position that the additional costs incurred were valid change orders, the court denied the majority of this claim.

Finally, NAMI’s claim was thwarted by a no damage for delay clause in the subcontract. NAMI blamed Walsh’s mismanagement and poor scheduling for over $1.7 million in additional labor costs. The court enforced the no damage for delay clause and barred NAMI’s recovery for labor inefficiencies.

Three lessons can be learned from NAMI’s big loss. First, understand the contract requirements and follow them. Second, maintain good records for changes and know what the contract requires for payment of changed work. Third, courts can and do enforce no damage for delay clauses. Be aware of the potential risks that this clause presents and that a court may deny delay-related damages.

If you enjoyed this article, you might also like “Crossing a Finish Line Can Be Tough”.

Supplier Who Does Everything Right Wins Big on Payment Bond Claim

Posted by: Hilger Hammond On: 13th May 2016 | no responses.

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By Aileen Leipprandt

On May 3, 2016, in the case of Wyandotte Electric Supply Company v Electrical Technology Systems, Inc., the Michigan Supreme Court issued an important opinion regarding “notice” requirements under the Michigan Public Works Act (PWA). The case involved renovation of the Detroit Public Library. KEO & Associates was the general contractor and Westfield Insurance Company supplied KEO with a $1.3 million payment bond as required under PWA. KEO subcontracted with Electrical Technology Systems (ETS) who in turn subcontracted with Wyandotte Electrical Supply for material and supplies.

ETS and Wyandotte had agreed to an open account arrangement, pursuant to which ETS would be liable for attorney fees and time-price differential charges of 1.5% on past due amounts. A time-price differential charge is “the difference between the current cash price of an item and the cost of purchasing the item with credit. A payment made with cash is immediate; a payment made with credit is not. Thus, when a payment is made with credit, the seller [such as Wyandotte] is burdened by a cash-flow interruption. A time-price differential compensates for the increased cost to a seller for credit. It reflects the difference between the credit price and the cash price.”

When Wyandotte began working, Wyandotte sent letters to KEO and Westfield asking for a copy of the payment bond for the project. In accordance with the Public Works Act, Wyandotte then sent a timely 30-day “Notice of Furnishing” via certified mail to KEO, Westfield, ETS and the Library. All but KEO received the notice. The United Postal Service tracking indicated KEO’s certified letter was at the post office, however, the notice never reached its destination. Again, in accordance with the PWA, Wyandotte sent a timely 90-day furnishing after it completed its work.

ETS failed to pay Wyandotte so Wyandotte eventually sued KEO, Westfield and ETS. Apparently, by this time, ETS had gone out of business and the president of ETS had declared personal bankruptcy. KEO challenged Wyandotte’s bond claim, arguing that the claim was invalid because KEO did not receive the 30-day notice of furnishing. In essence, defendants asked the court to read an actual notice requirement into the Public Works Act. The trial court refused, and ruled the bond claim was valid. KEO also argued that Wyandotte could not recover the time-price differential charges and attorney fees. The trial court disagreed and awarded Wyandotte the balance claimed, plus time price differential charges, plus attorney fees, plus post judgment interest. The Court of Appeals affirmed.

KEO and Westfield appealed to the Supreme Court. The Supreme Court affirmed the lower courts’ rulings in nearly all respects. Importantly, the Supreme Court held that the Public Works Act did not contain an “actual” notice requirement. Instead, the Act only required that the claimant serve a copy of its bond claim in the manner required by the Act. In this case, there was no dispute that Wyandotte sent notice via certified mail, thus Wyandotte complied with the PWA, regardless of whether KEO actually received the notice. Furthermore, because Wyandotte’s contract with ETS allowed Wyandotte to recover attorney fees and time-price differential charges, those charges were “justly due” under the Public Works Act and recoverable against the Payment Bond.

Lessons learned – Timely and properly filing and serving bond claims is crucial to recovering under a Public Works payment bond. Equally important, fees incurred to enforce payment on past due accounts will be enforceable against the payment bond, provided the underlying contract contains such provisions.

Changes Make Michigan Garnishment Law More Forgiving to Employers

Posted by: Hilger Hammond On: 4th January 2016 | no responses.

checkBy Suzanne Sutherland

Technical rules governing garnishments were a bit tricky and often tripped up companies that received garnishment demands. Recent changes that took effect in September, 2015 are more forgiving. Note that garnishments come in two varieties: non-periodic and periodic. Non-periodic garnishments are most commonly sent to banks—and grab whatever funds are in the account for the creditor. A debtor’s paycheck is a common example of a periodic garnishment. The changes in the law only affected periodic garnishments. What do the changes mean for an employer who might receive a garnishment of their employee’s wages?

Certain procedures of the garnishment process changed. The new law requires a more formal process for sending garnishment demands, reducing the likelihood that garnishments are misplaced or mishandled. A garnishment continues until the judgment amount is paid in full. The creditor will send both the employer and the debtor a statement every six months showing the remaining balance. When the judgment is paid in full, the creditor must send a release of the garnishment to the employer.

Most importantly, the employer is less likely to become liable for the employee’s debt. Under the prior law, an employer could become fully liable for the debt if it failed to respond to a garnishment within just two weeks. The new timeline for responding is more flexible.

Before an employer can be liable for the debt, the law requires more notice to the employer. A creditor can still request a default judgment if the employer is unresponsive. At any time before entry of the default judgment against the employer, the employer can avoid liability by submitting a disclosure or by withholding the wages. Even if a creditor succeeds in obtaining a judgment against an employer, the employer has the opportunity to set aside the default judgment due to a good faith mistake or other reason that prevented the employer from responding.

As a last resort, the employer can recover against the employee’s future wages for any debt it paid on the employee’s behalf. However, the employer must comply with rules that require proper notice to the employee. Employers should not ignore garnishments believing that they will collect from the employee later.

Even though the new law provides more time and notice before an employer can be liable for an employee’s debt, it is still possible. Employers are wise to implement a plan to handle garnishments before they receive one.

The Michigan Builders’ Trust Fund Act – Officer and Employee Liability

Posted by: Hilger Hammond On: 30th November 2015 | no responses.

2015-11-30_11-29-17By: Mark A. Rysberg

The Michigan Builders’ Trust Fund Act (“MBTFA”) creates liability for officers and employees of contracting companies; however, some confusion remains about what triggers that liability. The Michigan Court of Appeals recently clarified that individual liability is controlled by participation in the decision to act in a manner that violates the MBTFA. What that means for employees and officers is simple. If you participate in the retention, use, or distribution of project payments, you are at risk that a claim may be made against you personally in the course of a construction payment dispute. While you may not be able to control whether a claim is made, you can take simple steps to minimize your exposure and the cost of defending such a claim.

First, understand the MBTFA.

The MBTFA is a Michigan statute that prohibits using construction project payments for any purpose unless and until all of the subcontractors and suppliers you engaged for that project have been paid. In other words, the MBTFA prohibits, among other things, using progress payments, or parts thereof, to finance overhead, operating expenses, and unrelated project costs. What that means in a practical sense is that MBTFA liability can be triggered by something as simple as approving what bills are paid or signing a check. Understanding that you may be exposed to a MBTFA claim for doing your job is an important step.

Second, comply with the MBTFA.

The best way to prevent exposure to liability under the MBTFA is to comply with the MBTFA. But, MBTFA violations can happen inadvertently from poor business planning regarding operational finances and company capitalization. Complying with the MBTFA can be complicated and may seem impractical given the nature of the construction industry; however, accountants and attorneys with construction industry expertise can evaluate existing practices and help limit potential exposure.

Third, be prepared for potential MBTFA claims.

Obtain appropriate insurance coverage. One of the biggest dangers of an MBTFA claim is the defense cost. MBTFA claims are complex and typically require expert analysis to show that the MBTFA was not violated. As a result, such claims can get expensive quickly. Fortunately, defense costs may be insurable through a director’s and officer’s policy. Consulting with an insurance professional who understands the MBTFA is an important step toward being prepared for an unforeseen MBTFA claim.

Dealing with a MBTFA claim can be expensive and time consuming. Many construction industry professionals are not aware that they may be exposed to individual liability arising from their job. Professionals with expertise in the construction industry can assist with understanding, complying, and preparing for MBTFA claims. Being proactive about the MBTFA is simply good business.

If you found this article useful, you may also wish to read “The Michigan Builders’ Trust Fund Act – Understanding the Obligation.”

Unlicensed Builder Beware

Posted by: Hilger Hammond On: 17th November 2015 | no responses.

Michigan Supreme Court Gives Homeowners Exclusive Power of Avoidance When Contractor Lacks License 

By Suzanne Sutherland

The Michigan Supreme Court recently issued a decision that determined if an unlicensed builder is entitled to payment when he makes a contract with a homeowner. Epps v. 4 Quarters Restoration & Emergency Insurance Service (September 2015). The Supreme Court decided that an unlicensed builder could be compensated, and that contracts between a homeowner and unlicensed builder are enforceable, but only at the homeowner’s option.

In July 2006, Danny and Joyce Epps’ Detroit home was flooded. The Eppses contacted their insurance company, Auto Owners, and were referred to Troy Willis of 4 Quarters Restoration and Emergency Insurance Services. Willis showed the Eppses a book of prior work that included a copy of his residential builder’s license. But Willis didn’t tell the Eppses that his license was revoked six months earlier. The Eppses hired Willis, authorizing him to sign insurance checks on their behalf and collect the claim proceeds directly from Auto Owners.

Willis received $128,000 in insurance payments for restoration work on the Epps’ home. The Eppses then disputed whether the restoration was satisfactory and complete. The Eppses claimed that Willis was never entitled to payment because it is against Michigan law for an unlicensed builder to perform restoration work on a residential property. The Eppses sued Willis for conversion, arguing that Willis had no right to cash the insurance checks and had essentially stolen from them.

The Supreme Court determined that the prohibition on residential work by unlicensed builders was intended to protect homeowners. If the contract was void, neither the homeowner nor the unlicensed builder could enforce it. That might limit a homeowner’s recovery in some circumstances. Even though an unlicensed builder can be paid for work on a contract with a homeowner, only the homeowner can sue if problems arise. The Supreme Court concluded that the homeowner can decide unilaterally whether to enforce the contract.

The Supreme Court showed little sympathy to unlicensed builders that violate Michigan law, and adopted an approach that best protects the interests of homeowners.

Crossing a Finish Line Can Be Tough

Posted by: Hilger Hammond On: 16th September 2015 | no responses.

The following article was originally published in Builder’s Exchange Quarterly. Summer 2015 edition.

track-finish-1442273By Aileen Leipprandt

It was reported that elite runner, Hyvon Ngetich, literally crawled the last two tenths of a mile to cross the finish line in the Austin Marathon on February 15, 2015. After leading most of the race, her body simply gave out. Instead of calling it quits, she crawled on her hands and knees to the end, taking third place with a time of 3:04:02.

Closing out a construction project is not that dramatic, nor should it be. As legal advisors to the construction industry, however, we often see relationships disintegrate at the final stages of the Project. What can you do to finish strong?

First, start well to finish well. Even before groundbreaking, prepare for close out by clearly defining responsibilities and deliverables in your contract. It’s easier to negotiate terms at the beginning of a project when relations are cordial, rather than the end when parties get sidetracked by unresolved claims. Clearly define Substantial and Final Completion and the relationship of those dates to warranty obligations, insurance requirements, liquidated damages and the statute of limitations. Specify when the Owner’s obligation for operation, maintenance, security, insurance and utilities begins to avoid gaps in insurance coverage. Evaluate whether warranty and as-built requirements are commercially reasonable. Confirm the punch list procedure has sufficient controls so that the process does not get bogged down by endless additions. And, to minimize subcontractor claims, negotiate a reduction in
retention as milestones are met.

Second, timely address claims to the extent you can. Deferred claims merely fester, derail close out and ultimately spawn calls to the legal team. Strive to neutralize claim language to avoid igniting emotion during the project.

Third, establish clear and efficient financial controls. You don’t want to chase missing lien waivers nor do you want to absorb trailing invoices that are too stale to present to upstream parties.

Fourth, don’t overlook the importance of comprehensive owner training on capital equipment. Proper handover of sophisticated systems can reduce callback and prevent damage to systems, thereby reducing warranty claims or contractor/design professional blame for operational challenges.

Fifth, carefully document all policies of insurance that apply to the project while the policy numbers, carriers, coverage limits and additional insureds are easily identifiable.

Finally, think creatively about solutions to end a difficult project on a high note. Diminish arm wrestling over whether work is truly defective by providing a warranty bond or extending the warranty. Do not overlook the reputational value gained through a smooth close out process. It’s not just first impressions that matter. Especially on construction projects, last impressions have a bigger and lingering impact. Just as Hyvon Ngetich’s heroic effort to cross the finish line in Austin, Texas left a lasting image of courage and perseverance, much can be gained when construction stakeholders focus not only on “when” a project should be completed, but also on “how.”