Labor Under the Federal Miller Act: The Known Unknown

Posted by: Hilger Hammond On: 25th April 2017 | no responses.

By Daniel Hatch

Here’s what we know. On federal projects, the Miller Act requires prime contractors to furnish a payment bond “for the protection of all persons supplying labor and material in carrying out the work provided for in the contract for the use of each person.” The Act authorizes “every person that furnished labor or material in carrying out work provided for in a contract” who has “a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the contractor furnishing the payment bond may bring a civil action on the payment bond.”

Further, we know that the Act is “highly remedial in nature” and “entitled to a liberal construction and application in order properly to effectuate the Congressional intent to protect those whose labor and materials go into public projects.” However, while liberally construed in favor of subcontractors, the Miller Act is not without limit.

Beyond notice, timeliness, and venue requirements, which are all necessary elements to state a prima facie claim for relief under the Miller Act, many forget to analyze the obvious: whether the subcontractor performed “labor” within the purview of the Miller Act. Despite the ostensibly inclusive language in the Miller Act requiring a bond for the protection of all persons supplying labor and materials in carrying out the work, several federal courts have imposed limits on the types of work constituting “labor” on construction projects.

To have a viable claim for unpaid work under the Miller Act, the subcontractor’s work must: (1) be performed “in the prosecution of work provided for in a contract for which a payment bond is furnished”; and (2) qualify as “labor” within the meaning of the Miller Act.

Work is performed in the prosecution of the contract when it is within the original scope of work for the project. Generally, the majority of federal courts, including the Sixth Circuit for us Michiganders, agree that neither warranty work nor corrective work satisfy this element.

Assuming the work is performed in the prosecution of the contract, the work must also qualify as “labor” which is not further defined in the Miller Act. The United States District Court for the South Division of Ohio first addressed the definition of labor under the Act in 1982 holding that, while case law interpreting the term is relatively sparse, labor must include physical toil.

Today, there is still no bright line test used to determine what constitutes labor under the Miller Act. The Eight Circuit was the first federal appellate court to address the issue holding that labor must include some physical work and not work solely involving “technical and professional skill and judgment.” Thereafter, the Fourth Circuit expanded on the Eighth Circuit’s decision holding that labor includes professional supervisory work to the extent it “involves superintending, supervision, or inspection at the job site.”

Albeit, labor may better be defined by way of what does not qualify rather than what does. Here are some examples of work that was not considered labor under the Miller Act:

Project Administration. “Living on the job site and performing routine office maintenance [e.g., cleaning of the office and bathrooms, negotiating new contracts, determining bid amounts and change orders, preparing bid proposals, negotiating and signing new subcontracts and purchase orders] is not enough to constitute labor that went towards completing the construction job.

Contract Administration. “Paying invoices, reviewing proposals, and supervising hiring are clerical or administrative tasks which, even if performed at the job site, do not involve the physical toil or manual work necessary to bring them within the scope of the Miller Act.”

Lesson Learned: Federal courts are adopting an increasingly narrow definition of “labor” under the Miller Act. Don’t forget to analyze whether the subcontractor performed work provided for in the contract that qualifies as labor when assessing a Miller Act claim.

Court Enforces Subcontractor’s Demand for Arbitration of General Contractor’s Claim

Posted by: Hilger Hammond On: 11th April 2017 | no responses.

By Aileen Leipprandt

The Court of Appeals recently enforced an arbitration agreement between a contractor and its subcontractor in a dispute involving indemnity and insurance coverage for a claim by subcontractor’s injured worker. (Spence Bros. v Kirby Steel, March 2017). In this case, the general contractor, Spence Brothers, was the project manager overseeing the University of Michigan’s expansion of the Crisler Arena. Spence subcontracted with Kirby Steel to provide structural and metal work. Spence’s letter accepting Kirby’s proposal directed Kirby to list Spence as an additional insured. The parties’ subcontract contained a standard indemnity clause requiring Kirby to defend and indemnify Spence against all losses. The subcontract also required that Kirby’s insurance policy name Spence as a named insured.

During the project, an employee of Kirby suffered injuries when he fell from a ladder. The employee sued Spence Brothers. Spence demanded that Kirby defend and indemnify Spence, but Kirby’s insurer refused such coverage because Spence was only an additional insured under its policy. Spence then sued Kirby for breach of the subcontract for failing to name Spence as a named insured and for failing to defend Spence. Kirby asked the trial court to dismiss Spence’s claim because the subcontract required arbitration. The trial court refused Kirby’s request and instead granted summary disposition in favor of Spence, ruling that Kirby breached its insurance coverage and indemnification obligations under the subcontract.

Kirby appealed arguing that the trial court made a mistake by ignoring the plain terms of the arbitration provision. The Court of Appeals agreed with Kirby, reversed the lower court’s ruling, and ordered the matter to arbitration. The appellate court observed that the subcontract unambiguously required arbitration of all claims and disputes related to the subcontract. This broad language clearly reflected the parties’ shared intention to submit any matters related to the subcontract to arbitration.

Captive Insurance Changes for 2017

Posted by: Hilger Hammond On: 4th April 2017 | no responses.

By: Mark A. Rysberg

On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) was signed into law. Proponents and sponsors of captive insurance structures often refer to the tax benefits of I.R.C. Section 831(b), which allows eligible insurance companies to make an election to be taxed only the company’s taxable investment income. In effect, the 831(b) election allows such insurance companies to collect a set amount of insurance premium without having to pay tax on said premiums. Effective January 1, 2017, insurance companies electing taxation under 831(b) can collect up to $2.2 million in insurance premiums while being taxed only on the taxable income generated from the collection and retention of such premiums. This increase expands the benefits and opportunities available for companies that can implement a captive insurance aspect into their risk management strategies by, among other things, increasing the amount of otherwise potentially taxable income and leverage that money into expanding into coverage lines that may otherwise not be available.
Mark A. Rysberg is a construction lawyer who maintains a local and national practice representing owners, contractors, subcontractors, and suppliers on a variety of issues affecting all aspects of the construction industry.

Captive Insurance Structures Designed for Different Needs, Goals and Funding Abilities

Posted by: Hilger Hammond On: 29th March 2017 | no responses.

By: Mark A. Rysberg

Captive insurance entities can be structured in a variety of ways depending on the participant’s needs, goals, and funding abilities. The following are some of the more common structures that can be used.

Pure Captive
In this model, a captive insurance company is typically a wholly-owned subsidiary of a parent company. These captives are usually closely controlled by the parent company and are generally used by companies that have insurance and risk management needs that are significant enough to justify the financial costs of being solely responsible for the captive’s operational costs. Companies that consider forming a pure captive generally do so to improve risk management and to maximize the benefits of I.R.C. 831(b) election thereby sheltering up to $2.2 million in taxes.

Group or Association Captive
These captives are formed to provide captive insurance solutions to several members composed of trade association members or companies engaged in the same industry. This model can allow groups of smaller companies that have similar risk profiles to pool their insurance needs and resources to improve their risk management efforts at lower possible costs than traditional risk transfer vehicles.

Rent-a-Captive
This form of captive is typically selected by users that may not have the capital resources to participate in a traditional captive insurance program. To that end, insurance companies provide access to captive facilities by requiring users to provide collateral to mitigate risk to the rent-a-captive.

Mark A. Rysberg is a construction lawyer who maintains a local and national practice representing owners, contractors, subcontractors, and suppliers on a variety of issues affecting all aspects of the construction industry.

Captive Insurance and Risk Retention

Posted by: Hilger Hammond On: 24th February 2017 | no responses.

By: Mark A. Rysberg

The concept behind captive insurance companies is based on the principle that rewards are derived from the assumption and retention of risk. Traditional insurance vehicles purchased through third-party agents is directed at shifting definable risks onto insurance companies that assume such risks based on weighing the statistical probability that, when viewed in the aggregate, the costs to the insurance company for paying claims will be less than the premiums the insurance company charges for assuming those risks. In that sense, insurance companies operate on the business model that they generate revenue, and ultimately profit, by assuming risk. A captive insurance company operates on a similar principle with the main difference being that rewards are the result of retaining risks by the parent company rather than shifting those risks to traditional insurance companies. In short, captive insurance companies are formed as part of a risk management strategy to take advantage of the economic benefits derived from risk retention. One of the more notable benefits of captive insurance models relates to the tax benefits provided to so-called micro captives. Under I.R.C. Section 831(b), micro captives can elect to only be taxed on investment income and avoid tax on income derived from the collection of up to $2.2 million in insurance premiums. As a result, incorporating captive insurance concepts as part of a risk management strategy can provide opportunities to go beyond simply planning for catastrophic and non-catastrophic losses.

To offset the retention of risk, captive insurance companies are formed.

Mark A. Rysberg is a construction lawyer who maintains a local and national practice representing owners, contractors, subcontractors, and suppliers on a variety of issues affecting all aspects of the construction industry.

Michigan Prevailing Wage Update

Posted by: Hilger Hammond On: 15th February 2017 | no responses.

By: Mark A. Rysberg

Michigan’s prevailing wage law faces potential repeal in 2017. The first three bills proposed by the Michigan Senate are directed at repealing the laws that require labor on Michigan public construction projects be paid at prevailing wage rates akin to union-level wages. This is not the first time this issue has surfaced in Michigan and in other states across the country.

Proponents of repealing prevailing wage contend that requiring higher labor costs is passed through to the taxpayers whereas the opposition claims that prevailing wage results in higher-quality public improvements and a fair wage for the people of Michigan that perform the improvements. The debate over these issues is expected to be heated and continue throughout the year. Check back for additional updates about this issue and the future of Michigan’s prevailing wage legislation on public construction projects.

Mark A. Rysberg is a construction lawyer who maintains a local and national practice representing owners, contractors, subcontractors, and suppliers on a variety of issues affecting all aspects of the construction industry.

Court Enforces Subcontractor’s Obligation to Indemnify Contractor

Posted by: Hilger Hammond On: 3rd February 2017 | no responses.

By Aileen Leipprandt

The Michigan Court of Appeals recently affirmed a contractor’s right to defense and indemnity from its subcontractor under the plain language of the parties’ subcontract. Provenzino v Macomb County Department of Roads, et al (January 2017).

In this case, Mr. Provenzino alleged that he was injured when he fell from his motorcycle after encountering a disparity in height between adjacent milled and unmilled lanes of traffic in a construction zone. Provenzino sued multiple parties including Florence Cement Company, the general contractor, and Lois Kay Contracting Company (LKCC), the subcontractor who milled the roadway surfaces. Florence filed a cross claim against LKCC seeking indemnity based upon the indemnification provision in the parties’ subcontract. That provision stated:

Subcontractor agrees, and shall bind all sub-subcontractors to agree to indemnify Contractor, Owner and all other parties the Contractor is obligated to indemnify pursuant to the Prime Contract (hereinafter “Indemnitees”), and to defend and hold Indemnitees forever harmless from and against all suits, actions, legal and administrative proceedings, claims, demands, damages, interest, attorney fees, costs and expenses of whatsoever kind or nature whether arising before or after completion of Subcontractor’s work and in any manner directly or indirectly caused or claimed to be caused by any action or negligence of Subcontractor or Sub-subcontractor, and regardless whether directly or indirectly caused or claimed to be caused in part by a party indemnified hereunder or by anyone acting under their direction, control or on their behalf, until such time as a judgement [sic] is entered against Contractor by a court of law. …[emphasis added].

The trial court dismissed Florence’s claim for indemnity ruling that LKCC’s work did not cause the plaintiff’s injuries and that there was no evidence to suggest LKCC was negligent. The Court of Appeals reversed, ruling that the plain language of the indemnity provision required LKCC to defend and indemnify Florence. The appellate court explained that in determining whether a duty to indemnify exists, the issue is not whether LKCC was actually negligent; rather, the issue is whether Mr. Provenzino’s allegations arose in “any way” from LKCC’s work. Since Mr. Provenzino broadly alleged that LKCC and Florence’s actions created an unreasonably dangerous condition, under the plain language of the subcontract, the indemnification clause was triggered.

Lesson Learned :  Each party to a construction contract (whether giving or receiving indemnity) should carefully assess (and negotiate) the indemnity provision to properly manage risk transfer.

Improperly Licensed Architect Firm Not Liable On Licensing & Malpractice Claims

Posted by: Hilger Hammond On: 2nd February 2017 | no responses.

By Aileen Leipprandt

In Center Street Lofts Condominium Association v AZD Associates, Inc., et al (Mich. Ct. App. Dec. 2016), a condominium association sued an architectural firm, AZD Associates, claiming that AZD’s deficient design of the condominium project caused multiple units to leak. The Association also claimed that AZD was not properly licensed because less than 2/3 of AZD’s principals were licensed architects, contrary to the requirements of the Michigan Occupational Code (MOC).

The trial court dismissed the Association’s claims as to improper licensure, ruling that the Michigan Occupational Code does not give a private person the right to sue an architect to enforce the licensing requirements of the MOC. Instead, the MOC gave enforcement authority only to prosecutors and the Attorney General. The only exception given to private persons is the right to seek an injunction (an order to stop) against an unlicensed practice. The Court of Appeals agreed with the trial court and affirmed dismissal of the claim.

The trial court also dismissed the Association’s claims for professional negligence, ruling that the claims were filed too late. Again, the appellate court agreed, ruling that the Association did not file its claim within the six-year period of limitations which began to run when the Association occupied, used or accepted the improvement. Furthermore, even though the Association might have been permitted to file its claim within one year of discovering the defect, the evidence established that the Association likewise did not file its lawsuit within that one-year time frame.

Finally, the appellate court observed that even if the Association’s argument was correct – that AZT was not properly licensed – the Association’s claim would be controlled by the three-year statute of limitations for negligence claims. The period of limitations for such a claim begins to run “at the time the wrong upon which the claim is based was done regardless of the time when the damage results.” Here, the alleged “wrong” was the negligent design of the project. The Association argued that the damage did not occur until it first noticed the leaking. The appellate court disagreed, ruling that the “‘damage’ actually occurred when the portions of the project that were negligently designed were actually built, i.e., when the problem could no longer be corrected without the need for plaintiff to spend money on redesign and reconstruction. It was at that point that all elements of negligence were in existence, though plaintiff at the time did not know that its legal rights had been impacted upon.”

Lesson Learned – While the Condominium Association’s claim for improper licensure was dismissed, design professionals should nonetheless take care to assure they are properly licensed in accordance with the Michigan Occupational Code, otherwise they may face an administrative enforcement proceeding. And, building owners who encounter design or construction deficiencies cannot sit on their claims, otherwise, they risk dismissal for untimeliness.

Contractor Loses Bad Faith Argument Against Surety

Posted by: Hilger Hammond On: 18th January 2017 | no responses.

By Aileen Leipprandt

The Sixth Circuit Court of Appeals recently affirmed that a surety did not act in bad faith when it settled the claim of its principal contractor against the State of Michigan related to disputes on a prison construction project. Great American Ins. Co. v E.L. Bailey & Co., et. al. (November 2016).

In this case, the State hired E.L. Bailey & Company to construct a kitchen in a prison in Ypsilanti. Great American Insurance Company (GAIC) provided performance and payment bonds ensuring Bailey’s performance and payment to subcontractors. In turn, Bailey agreed to indemnify GAIC for payments or expenses GAIC incurred under the bonds and to post sufficient collateral to protect GAIC from claims. The indemnity agreement between Bailey and GAIC also gave GAIC the right to settle on Bailey’s behalf any claim concerning the prison contract.

Disputes arose on the project and Bailey never finished the work. The State and GAIC agreed to have another contractor complete the project. The State withheld payment to Bailey asserting liquidated damages (“LDs”) for Bailey’s failure to timely perform. Bailey disputed the LDs, blaming delays on the State and its architect. The parties sued each other in the Michigan Court of Claims (Lawsuit #1). On the eve of facilitation, GAIC informed Bailey that it had settled Bailey’s claims against the State, with the State agreeing to pay GAIC $358,000 as final payment under the construction contract.

At about the same time, some of Bailey’s subcontractors sued Bailey and GAIC in state court under the payment bonds for amounts due for work (Lawsuit #2). GAIC demanded that Bailey provide collateral for those claims, but Bailey refused. GAIC ultimately settled the subcontractor claims for $645,287.

In another separate proceeding (Lawsuit #3), GAIC sued Bailey in federal court seeking indemnity for Bailey’s failure to provide collateral for the subcontractor claims and requesting a declaratory judgment that GAIC had the right to settle Bailey’s claims against the State. Bailey raised a “bad faith” defense, arguing that GAIC’s settlement with the State was in bad faith because GAIC concealed its negotiations with the State until the eve of facilitation.

While the federal court generally agreed that GAIC’s undisclosed settlement negotiations raised concerns because it might deprive Bailey of the opportunity to consider its options appropriately, that fact alone did not establish bad faith. Rather, Bailey had to prove that GAIC was motivated by a selfish purpose or a desire to protect its own interest at the expense of Bailey. Bailey offered no evidence as to GAIC’s state of mind. The Court sided with the surety concluding that GAIC had a right to settle Bailey’s claims under the parties’ indemnity agreement and that GAIC had not acted in bad faith in doing so, particularly where communications between GAIC and the State established that GAIC pushed the State for a higher settlement amount.

Lesson learned – a surety’s rights under the general indemnity agreement with its principal contractor are expansive. A contractor should carefully evaluate its course of action on project disputes in the face of its broad reaching indemnity obligations.

An ADC Construction Classic – The Timeless Gingerbread House

Posted by: Hilger Hammond On: 9th January 2017 | one response.

You never know what might spark a student’s interest in construction. Such was the case on December 21, 2016, when 10th grade students in the Academy of Design and Construction (ADC) at Grand Rapids Public Schools’ Innovation Central High School enthusiastically embraced their studies in the classic holiday short course favorite – gingerbread house construction. Aileen Leipprandt, an ADC mentor, offers the following account of the students’ successful project.

After spending approximately two minutes in a design charrette guided by Ashley Dunneback (Tower Pinkster), the team broke ground. The first order of business was assembly and installation of the pre-fabricated wall panels (graham crackers). Field fabrication of the panels (snapping the crackers into proper dimensions) proceeded without incident largely due to the pre-scored panels. Attempts to customize panel size by sawing with hand tools (plastic knives) was only marginally successful due to breakage and quickly abandoned. Consistency of the principal fastener (icing) played a crucial role in affixing the panels to the structure (ok, we admit that a shoe box provided well-needed structural support).

Next came the roof. Very tricky. Installation of the gables and roof decking was skillfully accomplished through use of gable wall studs and lateral bracing (pretzel sticks), precisely measured and cut with central incisors (front teeth). The ridge vent (colorful gumdrops) was a key aesthetic component. Because of the short construction duration (<50 minutes), to maintain the critical path of the project a portion of the crew worked concurrently on the curtain wall system. Using trowels (more plastic knives), the laborers quickly screeded the mortar (yes, more icing) on the exterior in anticipation of installation of the salty and sweet architectural components (pretzel stick muntins, Cheez-It® siding and M&M® headers).

With Substantial Completion achieved two minutes before the bell ringing, the ADC students and their mentors delivered the project ahead of schedule with only minimal loss in materials consumed by the labor force during the construction process, with M&Ms experiencing a more significant loss ratio than other components. Legal counsel for the contractor (Aileen, Hilger Hammond) confirms that aside from excessive icing coating the fingers and the clothing of the laborers, there were no OSHA recordable injuries on the project site.

Well done ADC students!

Students in the Academy of Design & Construction at GRPS Innovation Central represent the future construction labor force in West Michigan. Perhaps you will consider donating your time or resources as a benefactor or mentor to the ADC program and students? The rewards are priceless…