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.”

 

 

A Potential Pothole in the Paving – Proposed Changes to Paving Warranty Obligations

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

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By: Mark A. Rysberg

Over the last year, the state government and advocacy groups have attempted to find solutions for funding road construction and maintenance that had enough support to be enacted into law. Those efforts are continuing and the Legislature has approved various bills relating to funding improvements and maintenance to Michigan’s roads. Part of those discussions and legislature deserves some additional attention as it would implement changes to warranty requirements for public paving projects.

In that respect, House Bill 4613 would require MDOT, county road commissions, cities, and villages to obtain warranties from contractors for the full replacement or appropriate repair of paving projects that exceed $1.0 million. The scope of such warranties is not clear based on the language of the bill itself. As a result, warranty obligations may be defined by project specifications based on the estimated lifespan of the paving to be installed. While warranties are nothing new in the construction industry, this proposed legislation may impact the aggregate bonding capacity of contractors engaged in public transportation projects.

In public contracting, bonding capacity arises in the context of capacity per project and aggregate capacity. The bonding necessary for a specific project is largely dictated by the contract amount, which is a measure of the financial obligations owed by the bond principal to the owner or higher-tier contractor. To the extent warranty bonds are required, those obligations would compound existing payment and performance bond requirements increasing the amount of bonding necessary for a particular project. It would also decrease aggregate bonding capacity as warranty bonds would survive the completion of a project, which means that aggregate bonding capacity would be reduced by warranty bonds from projects completed years earlier.

Those issues could pose serious problems for contractors who are already at the upper limit of their bonding capacity. Although the future of House Bill 4613 is still uncertain, the issues of bonding and bonding capacity should be regularly evaluated. To that end, contractors performing bonded work should consider their bonding capacity and how impacts to bonding capacity can effect business operations. In that respect, bonding agents, accountants, and attorneys can provide insight to assist with maximizing and evaluating bonding capacity.

Michigan’s Prevailing Wage Act – Committee Report on Fiscal Impact

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

bank-check-scanning-2-1259527By: Mark A. Rysberg

Earlier this year, the Michigan Senate voted to approve bills repealing Michigan’s prevailing wage laws. Eventually, those bills were submitted for fiscal analysis by the Senate Committee on Michigan Competitiveness. That analysis was recently completed and a written summary issued. Therein, the Committee issued the following statement regarding the fiscal impact of the bills:

FISCAL IMPACT

The bills would have an indeterminate, but likely positive, fiscal impact on the State and local units of government. The bills would eliminate the requirement that workers on State-funded construction projects be paid wages and fringe benefits that meet or exceed levels established by the Wage and Hour Division within the Department of Licensing and Regulatory Affairs. Affected construction projects include State buildings, universities, roads, and public schools. Additionally, projects undertaken by economic development corporations, public school academies, and certain other types of schools are currently subject to these requirements as well. The bills would remove the prevailing wage requirements, and could produce potential savings on these types of projects. The amount of potential savings is indeterminate and dependent on the wages ultimately paid to workers who otherwise would have been paid at the prevailing wage rates. Lack of available data makes it difficult to estimate with any certainty how much would be saved if the bills were enacted. Factors that could affect the amount of actual savings include the degree of competition among contractors in bidding on projects and the strength of the labor market.

Missing from that statement is any quantifiable cost or benefit of prevailing wage. Instead, the message is clear that it is difficult to quantify the extent of the benefits or costs of prevailing wage.

Michigan Prevailing Wage Act – Where Things Stand

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

writing-1238365By: Mark A. Rysberg

When the Michigan Senate voted to approve bills repealing Michigan’s prevailing wage laws, the future of those bills became uncertain in the face of a likely veto by the governor. Advocates of repealing wage then turned to a provision of the Michigan Constitution which allows laws to be enacted without being subject to the governor’s veto power. Under that provision, a proposed law may be submitted to the Michigan Legislature by obtaining enough signatures on a petition which proposes enacting a specific law.

One such petition was recently submitted to repeal Michigan’s prevailing wage laws. That petition is currently being reviewed by the Michigan Secretary of State. If the Secretary of State verifies that the petition contains enough signatures, the proposed law will be submitted to the Michigan Legislature. The Legislature then has 40 session days to enact the law by simple majority. If the proposed law is not enacted, it will be placed on the ballot for decision in the next general election.

In sum, a proposal to repeal prevailing wage laws in Michigan will likely be submitted to the Legislature. There is no issue of potential veto. Rather, whether Michigan’s prevailing wage laws are repealed will likely depend on whether a simple majority of the Legislature votes to repeal them. While the ultimate resolution of this issue may not occur for some time, there will likely be further develop of this issue before the end of the year.

Prevailing Wage Repeal and Withdrawal Liability

Posted by: Hilger Hammond On: 2nd June 2015 | no responses.

brickBy: Mark A. Rysberg
There has been no shortage of discussion regarding the possible repeal of Michigan’s prevailing wage act. However, one topic that has not been part of the conversation is the possible interplay between repealing prevailing wage and complete or partial withdrawal liability that may result for employers participating in underfunded multi-employer defined benefit pension plans. In general, decreasing or discontinuing contributions to such plans can trigger employer withdrawal liability as set out in ERISA (the Employee Retirement Income Security Act).

Both sides of the prevailing wage debate appear to agree that if the act is repealed the benefits and rates of labor on public construction projects will decrease. Presumably, that would impact the contributions to union based multi-employer defined benefit pension plans, which would make it more difficult, if not impossible, for currently underfunded plans to improve their present financial situation. In turn, employers whom participate in currently underfunded plans could be responsible for large withdrawal liability that they did not anticipate or prepare for.

Managers of construction companies that participate in these plans should be discussing the extent and possibility of withdrawal liability in the ordinary course of management operations. However, the possibility that Michigan’s prevailing wage act will be repealed adds another layer of complexity which requires strategic planning. Proactive management directed at avoiding and monitoring such exposure is important. Employing professionals knowledgeable in how to navigate those management issues can be a significant resource for successfully avoiding and mitigating potential liability.