ABA Forum Focuses on Trends and Developments in the Construction Industry
By Aileen Leipprandt
Californy Is The Place You Ought To Be…
Well, it wasn’t Beverly Hills, but the annual meeting of the ABA Forum on the Construction Industry held in Dana Point, California certainly was the place to be for those interested in legal issues affecting the future of the construction industry.
The Forum is comprised of lawyers from around the world who focus their practice in construction law. The theme for this year’s three-day program, “Surfing the Wave,” focused upon trends and developments in the construction industry with programs addressing the impact of technology and globalization.
I attended a session addressing the legal issues arising from advances in construction techniques such as robotic and modular construction. Of particular interest was the issue of managing supply chain integrity so that contractors could be certain that materials, goods, and their components supplied from foreign vendors were correctly manufactured, met quality standards, and were in fact genuine, not counterfeit materials.
I also attended a program covering reverse online auctions and location based scheduling. These electronic methods of bidding and project management have grown dramatically and their use is predicted to expand rapidly.
One of the most interesting presentations was a mock negotiation of dispute resolution clauses in a construction contract where the project was located in the U.S., the contractor was owned by a foreign corporation, and the sizeable steel package was coming from China. The session explored the impact of globalization and the ability to enforce a judgment against a foreign entity through vehicles such as the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This convention is widely considered the primary instrument for international arbitration.
Finally, a fascinating lunch program outlined the $492 million Long Beach, California courthouse project. This P3 [public private partnership] may be the largest social infrastructure project in the U.S. and required the private developer to finance, design, build, operate and maintain the courthouse over a 35-year period in exchange for payments from the state of California totaling $2.3 billion. Key players included Clark Construction and Johnson Controls. The project took more than two years to bid and finance. The state of California looked to methods used in Canada for assessing proposals and negotiating the lease. California is known as a trendsetter, and the prediction is that we will continue to see creative public private partnerships in all kinds of projects, not just the mega projects.
Stay tuned as we blog and lecture throughout 2013 on emerging construction law issues. “Y’all come back now, y’hear?”
Sworn Statements and Substantial Compliance with the Michigan Construction Lien Act
By: Mark A. Rysberg
The Michigan Court of Appeals recently addressed the issue of whether a subcontractor substantially complied with the Michigan Construction Lien Act by providing an owner with a sworn statement after litigation commenced. In general, the Michigan Construction Lien Act requires a contractor to provide an owner with a sworn statement when the contractor requests payment. However, the act does not identify whether a failure to do so can be remedied after litigation commences.
In Apache Carpet & Floor Covering, a contractor filed suit to enforce its construction lien. The contractor, however, failed to provide the owner with a sworn statement before doing so. The owner’s lender argued that the contractor’s lien was invalid and that the lien foreclosure action must be dismissed. In response, the contractor argued that it substantially complied with the Michigan Construction Lien Act by providing the owner with a sworn statement after the lawsuit commenced. The trial court disagreed with the contractor and dismissed the lien claim. The Michigan Court of Appeals agreed with that result and noted that the contractor failed to substantially comply with the Michigan Construction Lien Act.
The substantial compliance application of the Michigan Construction Lien Act is a potential pitfall for unwary contractors and lawyers. The requirements of the act can at times be confusing and there are areas of the law that are not well developed. The prudent approach to preserving and perfecting lien claims is to engage effective counsel as early as possible when faced with non-payment. Doing so may avoid the costly pursuit of foreclosing a construction lien when the possibility of recovery is marginal.
Title Company Not Liable For Construction Liens Recorded Against Property
By Aileen Leipprandt
In a recent Court of Appeals case, Hosey v Fifth Third, et al (February 2013), the Court found a title company not liable for liens recorded against an owner’s property, even though the title company failed to obtain sworn statements and lien waivers as it had agreed to do. In this case, Mr. & Mrs. Hosey entered into a typical construction financing arrangement whereby they secured a construction loan from Fifth Third Bank to build a home. Fifth Third, in turn, secured title insurance from a title company who agreed to obtain sworn statements and lien waivers before making the construction loan disbursements. The Hoseys signed a document which indemnified the title company from all losses resulting from construction liens.
Unfortunately for the Hoseys, their contractor failed to pay its subs and suppliers, even after receiving money from the Hoseys’ construction loan. The subs and suppliers then recorded liens against the Hoseys’ property. The Hoseys fired their contractor and sued the title company claiming that the Hoseys were beneficiaries of the agreement between the bank and the title company and that the title company breached that agreement when the title company failed to obtain waivers and sworn statements. The trial court disagreed with the Hoseys and dismissed the title company finding that the title company’s agreement with the bank was an agency agreement and created no rights in favor of the Hoseys. The trial court also rejected the Hoseys’ argument that the title company owed the Hoseys a separate duty to protect them from liens. The trial court ruled that the title company’s duty was to the Bank, not the Hoseys. And, even if the Hoseys could state a claim against the title company for some common law duty separate from the title company’s agreement with the bank, that claim was barred by the Hoseys’ agreement releasing the title company from liability. The Court of Appeals affirmed the trial court’s ruling.
Contract Provision Attempting to Reduce Statute of Limitations Backfires
Reproduced with permission of the publisher, International Risk Management Institute, Inc., Dallas, Texas, from free e-zine Construction Risk Manager, copyright International Risk Management Institute, Inc. Further reproduction prohibited. For subscription information, phone 800-827-4242 or visit www.IRMI.com for reliable and practical risk and insurance information.
Attempt To Avoid Discovery Rule Backfires
In a January 2013 decision, the Supreme Court of Washington upheld a ruling that a contractual provision establishing when a cause of action accrues effectively eliminated the ability to argue that a construction defect claim was barred by the statute of repose. In Washington State Major League Baseball Stadium Pub. Facilities Dist. v. Huber, Hunt & Nichols-Kiewit Constr. Co., 2013 Wash. LEXIS 75 (Jan. 31, 2013), the owner of Safeco Field (the Public Facilities District, or PFD) brought a multimillion-dollar breach of contract claim against the general contractor (Hunt-Kiewit) alleging defective fireproofing work and/or materials. Construction on the project was completed on July 1, 1999. Despite a 6-year statute of repose, PFD brought a claim against the general contractor in August of 2006 for costs associated with repairing the defective fireproofing. Hunt-Kiewit filed a motion for summary judgment on the grounds that the action is barred by the statute of repose, which expired in 2005. The court denied the motion, allowing PFD’s claim to proceed.
The construction contract included a provision that specified that claims arising from acts or omissions that occur prior to substantial completion will be “deemed” to have accrued “in any and all events not later than such date of Substantial Completion.” The purpose of this provision was to prevent a discovery rule from being applied with regard to the statute of limitations and thus protect the contractor from an extended period of liability that exists under that rule of law. The court found that while the provision accomplished its intended purpose by establishing a specific date on which the statute of limitations begins to run, it also effectively negated the statute of repose.
The statute of repose stipulated that any cause of action that has not accrued “within six years after such substantial completion of construction, or within six years after such termination of services, whichever is later, shall be barred.” Read in conjunction with the contract, the court held that a cause of action that accrues no later than substantial completion will always accrue earlier than 6 years after substantial completion. And once the cause of action has accrued under the statute it cannot later be barred by the same statute. Because the court had previously ruled that the claim was not barred by the statute of limitations due to an exception to the statute regarding actions brought “for the benefit of the state,” the contractor had no statutory protection from the owner’s claim. (See Washington State Major League Baseball Stadium Pub. Facilities Dist. v. Huber, Hunt & Nichols-Kiewit Constr. Co., 165 Wash. 2d 679, 202 P.3d 924 (2009).)
This case brings to light a potential unanticipated consequence of contract language that purports to stipulate when the statute of limitations begins to run. Contractors operating in Washington or elsewhere should have qualified legal counsel examine any such contract provisions for potential conflicts with applicable statutes of repose.
Court Declares Contractor Has Right to Pursue Construction Lien Claim
By Aileen Leipprandt
In the recent case of Karaus v Bank of New York Melon, (December, 2012), the contractor entered into an oral agreement with defendant owners to improve residential property. Unpaid for its work, the contractor filed a lawsuit asserting foreclosure of a construction lien of $325,000, breach of contract and unjust enrichment. As to the unjust enrichment claim, the contractor claimed that the owners and the owners’ lender were unjustly enriched because they received the improvements to the property without paying for the work.
The owners’ bank filed a motion to dismiss the lien claim arguing that because the contractor did not have a written contract, he was not entitled to a lien. Citing the plain language of the Michigan Construction Lien Act (CLA), the bank correctly pointed out that for residential construction, a contractor is not entitled to a lien unless the work is done pursuant to a written contract conforming to the requirements of the Act. The contractor argued that the property should be treated as commercial property for purposes of the CLA because the owner’s limited liability company bought the property for investment purposes, fixed it up, and rented it to third parties. That is, the owners of the property never intended to live in the home. The trial court rejected the contractor’s argument and dismissed the lien. The Court of Appeals, however, reversed the trial court and ruled that the contractor presented enough evidence to raise a material question of fact about whether the owners intended to live in the home. Therefore, the trial court should not have dismissed the claim and the contractor should be given the opportunity to prove his claim at trial.
The Contractor, however, did not fare so well on its unjust enrichment claim against the owners’ bank. The bank moved to dismiss the claim arguing that it never unjustly received a benefit. The trial court agreed and dismissed the claim. The appellate court affirmed the trial court’s ruling noting that there was no evidence that the bank was aware of the work being performed, requested any of the work be performed, or misled the contractor to believe that the bank would pay for the contractor’s work.
Lesson learned: ALWAYS have a written contract when providing improvements to real estate and make sure that the written contract conforms to the requirements of the Michigan Construction Lien Act.
General Contractor Liable for Violation of False Claims Act
By Aileen Leipprandt
In U.S. v Circle C Construction, LLC (Oct. 2012), the U.S. Court of Appeals for the Sixth Circuit affirmed the liability of a general contractor under the False Claims Act (“FCA”) for the contractor’s false statements and reckless handling of prevailing wage certifications involving subcontracted work.
The FCA impose liability when a person “knowingly makes, uses or causes to be made, or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government.” Violators of the FCA are subject to a civil penalty of between $5,000 and $10,000 plus three times the government’s actual damages. Actual damages are the difference between what the government paid and what it should have paid for the goods.
In Circle C, the general contractor, Circle C Construction, contracted with the U.S. Army to construct buildings at Fort Campbell. Given its nearly 20-year history of federal work, Circle C was very familiar with prevailing wage requirements. Nevertheless, Circle C neglected to inform or require its electrical subcontractor, Phase Tech, of the need to provide certified payroll. When Phase Tech eventually supplied certified payroll, Circle C failed to verify Phase Tech’s certifications for completeness or accuracy before submitting them to Fort Campbell officials and requesting payment. Later, one of Phase Tech’s employees, Mr. Wall, filed an action on behalf of the U.S. against Circle C and Phase Tech claiming the contractors violated the FCA. The U.S. then intervened in the matter.
The Federal District Court ruled in favor of plaintiffs and awarded treble (triple) damages to Mr. Wall and the U.S totaling $1,661,423. The Court concluded that the totality of the circumstances showed that Circle C, an experienced federal contractor, made false statements, acted in reckless disregard of the trust or falsity of the information in the payroll certifications and that the false statements were “material” to the government’s decision to pay Circle C. The Sixth Circuit affirmed the ruling as to liability of Circle C, but remanded the case to the District Court to re-calculate the damages.
Lesson learned – a general contractor cannot blindly accept or rely upon it subcontractors’ certified payroll, particularly where the general contractor’s records indicate more (or less) workers are on the jobsite than shown in the subcontractors’ certified payroll and where the subcontractor has clearly misclassified workers.
Has Anyone Seen My Dozer?A Michigan Court Case with a Lesson for the Rest of Us
By Benjamin H. Hammond
In the September 2012 case of Merlo Construction Co., Inc. v Citizens Ins. Co. of America, et. al. a contractor obtained an insurance policy that covered specified equipment listed on the policy’s equipment schedule. On that schedule was a 2000 Caterpillar 950g wheel loader. The contractor traded in for a newer model, the 2002 Caterpillar 950g wheel loader, but did not update or modify the equipment schedule to signify this change at the next renewal period.
Shortly thereafter, the 2002 Caterpillar 950g wheel loader was stolen and the insurance company denied the contractor’s claim on the basis that the 2002 loader was not listed on the policy. In particular, the serial number of the loader had not been updated on the schedule.
The contractor sued for insurance coverage arguing that there was a mutual mistake, that both parties had understood the loader to be covered and that the technical error of not updating the serial number should be overlooked. The contractor asked the court to reform the contract under equitable principles as if the proper serial number had been listed and find coverage for the loss.
While the trial court agreed with the contractor, the Court of Appeals did not. The Court of Appeals held that there was not a mutual mistake, but rather a unilateral mistake because there was no reason for the insurance company to know that the wrong loader was listed on the policy. As such, the claim was denied and the contractor will have to bear the loss of this loader.
An insurance agency was also named as a party, but this decision did not address any claims that may have been brought against the agency.
The lesson here for both contractors and insurance agents who work with contractors is to carefully review all equipment at every policy renewal and to be sure to add the new equipment to any policy equipment schedule when required. Diligence in this area will help to ensure coverage in the event of an unfortunate or unanticipated loss of construction equipment. i.e. when someone decides to take your dozer for a joyride and not bring it back.
Article originally published in the January newsletter for the American Subcontractors Association of Michigan (ASA).
Significant Changes to Michigan Indemnity Law
By Stephen A. Hilger
On December 27, 2012, the Michigan Legislature passed Public Act 468 which significantly changes indemnity law in the construction arena. The Act is titled “An Act to Invalidate Certain Requirements for Indemnity in the Construction Industry.” In essence, it modifies the prior law which was MCL 691.991. In the original law, §691.991 provided:
Sec. 1. A covenant, promise, agreement or understanding in, or in connection with or collateral to, a contract or agreement relative to the construction, alteration, repair or maintenance of a building, structure, appurtenance and appliance, including moving, demolition and excavating connected therewith, purporting to indemnify the promisee against liability for damages arising out of bodily injury to persons or damage to property caused by or resulting from the sole negligence of the promisee or indemnitee, his agents or employees, is against public policy and is void and unenforceable.
The modifications to the law added Section 2, which provides:
(2) When entering into a contract with a Michigan-licensed architect, professional engineer, landscape architect, or professional surveyor for the design of a building, a structure, an appurtenance, an appliance, a highway, road, bridge, water line, sewer line, or other infrastructure, or any other improvement to real property, or a contract with a contractor for the construction, alteration, repair, or maintenance of any such improvement, including moving, demolition, and excavating connected therewith, a public entity shall not require the Michigan-licensed architect, professional engineer, landscape architect, or professional surveyor or the contractor to defend the public entity or any other party from claims, or to assume any liability or indemnify the public entity or any other party for any amount greater than the degree of fault of the Michigan-licensed architect, professional engineer, landscape architect, or professional surveyor, or the contractor and that of his or her respective subconsultants or subcontractors. A contract provision executed in violation of this section is against public policy and is void and unenforceable.
This represents a large change from modified broad form indemnity to comparative fault indemnity in the construction industry. This applies when entering into a contract with an architect, engineer, surveyor, or a contractor for just about any aspect of public construction. The provision deals with public construction as Section 2 indicates “a public entity” shall not require the architect, engineer, or contractor to assume or indemnify that public entity for any amount greater than comparative fault. This is a fairly significant breakthrough. The penalty for the attempts by the public entity to broaden the scope of the indemnity is simply rendering the contract provision void and unenforceable. This represents a shift in thinking and a move toward fairness in overall construction contracting. The Act takes effect on March 1, 2013. If you would like a copy of the Act, it can be found at http://www.legislature.mi.gov/documents/2011-2012/publicact/pdf/2012-PA-0468.pdf, or you can simply give us a call.
The Legislature Jump-Starts Housing Development
By Stephen A. Hilger
In the last few days of December 2012, the 96th Legislature of the State of Michigan, as approved by the Governor, passed House Bill 4134 which deals with taxes and assessments on real property. In short, the legislature created a three-year tax exemption on development property. Development property, as defined by House Bill 4134, includes real property on which a residential dwelling, condominium unit, or other residential structure is located, which residential dwelling, condominium unit, or other residential structure meets all of the following conditions: (1) It is not occupied and never has been occupied; (2) It is available for sale; (3) It is not leased; and (4) It is not used for any business or commercial purpose. In short, this means residential development built by real estate developers who want to market and sell residential real property. For all the units in their inventory, there is now a moratorium on the assessment of certain taxes for a three-year period. The exemption ends as soon as the property is no longer “development property,” in other words, if it sells, leases, or ceases complying with any one of the four criteria.
To claim the exemption, the real estate developer needs to prepare and file with the local taxing authority an affidavit claiming the exemption. The exemption can be granted, denied, or granted and later denied, and there is also an appeal process. In short, this House Bill 4134 should encourage real estate developers to invest in new projects as a three-year moratorium will give them a fair period of time within which to sell the units. If you would like a copy of House Bill 4134, please let us know
The Michigan Builders’ Trust Fund Applies to Construction Projects in Other States
By Mark Rysberg
Performing work in states other than Michigan requires understanding the laws of the state in which the project is located. However, Michigan contractors are required to comply with the Michigan Builders’ Trust Fund Act (“MBTFA”) despite a project being located in a different state. That is because the MBTFA relates to construction funds and whether the misuse of those funds occurred in Michigan rather than the location of a specific project.
That means a Michigan contractor working on an out-of-state project must comply with the MBTFA and any similar construction trust fund act in the state where the project is located. That also means out-of-state owners, suppliers, laborers, and subcontractors could apply the MBTFA to ensure payment from Michigan contractors. Michigan contractors, and those working with Michigan contractors, should be aware of the obligations and liabilities imposed by the MBTFA regardless of where a construction project is located.