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 Eighth 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.

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.

Contractor’s Common Law Indemnity Claim Against Architect and Engineer Fails

Posted by: Hilger Hammond On: 16th October 2014 | no responses.

wood constructionBy Aileen Leipprandt

A general contractor’s common law indemnification claim against the project architect and structural engineer was dismissed where the general contractor could not establish that it was liable for the wrongdoings of either the architect or structural engineer. Sachse Construction & Development Co, LLC v AZD Associates, et al (Mich Ct. Appeals 2014). 

In this case, Sachse Construction & Development was the general contractor for a condominium project located in Royal Oak. The condominium association sued Sachse claiming numerous construction defects. Sachse, in turn, sued the project architect and the structural engineer asserting a variety of theories including (1) common-law indemnification; (2) third-party beneficiary; (3) unjust enrichment; and (4) negligence.

As to its common law indemnity claim, Sachse argued that the damages sought by the condo association were the result of the malpractice of the architect and engineer, not Sachse. The trial court disagreed with Sachse, ruling that the evidence presented did not establish any claim by the condominium association for damages caused by the architect or engineer. Instead, the association had sued Sachse for construction defects solely related to Sachse’s work. The trial court dismissed Sachse’s indemnity claim and Sachse appealed.

The Court of Appeals upheld the trial court’s ruling, affirming the longstanding principle that in order to prevail on a claim for common law indemnification, the party seeking indemnity must show: (1) that it has been held liable for the acts of another, and (2) that it is “free from fault in the underlying wrongful act that gave rise to the liability at issue.”

Hilger and Hammond to Speak at CFMA 2014 Midwest Regional Conference

Posted by: Hilger Hammond On: 23rd September 2014 | no responses.

0307Stephen Hilger and Benjamin Hammond will participate as speakers at the CFMA 2014 Midwest Regional Conference, Tuesday, September 23, 2014 in Oak Brook, Illinois. CFMA is dedicated to bringing together construction financial professionals and those partners serving their unique needs. CFMA serves more than 6500 members via 89 chapters located throughout the US and Canada.

Stephen Hilger was invited to present “Top 20 Contract Clauses. Hilger is engaged in complex commercial litigation with an emphasis on construction law, has tried many cases in multiple state courts, and has appeared in several state courts of appeal, the Michigan Supreme Court, United States District Courts, United States District Courts of Appeal, the United States Supreme Court on cert, and multiple arbitration tribunals across the country.

Benjamin Hammond will be discussing “Construction Defects”. A significant portion of Hammond’s practice concerns construction law, where he is routinely engaged in complex litigation. Hammond’s clients are representative of all parties involved in construction, including owners, design professionals, general contractors, subcontractors, and suppliers.

New Michigan Law Allows Architects and Engineers to Use Electronic Seals and Signatures

Posted by: Hilger Hammond On: 15th January 2014 | no responses.

1191990_61729697By: Benjamin H. Hammond

For several years architects and engineers have had the technical ability to affix an electronic seal or signature to drawings, but were prevented from doing so under the law when submitting those plans to governmental authorities for approval. That has now changed and the law in Michigan has finally caught up with technology.

Effective February 25, 2014, architects and engineers will be able to submit a plan, plat, drawing, map, title sheet of specifications, addendum, bulletin or report to most governmental agencies for approval with an electronic seal and signature.

House Bill 4585 provides that a “seal” now includes an electronic seal, and a “signature” now includes an electronic signature. “Electronic seal” means a seal created by electronic or optical means and affixed electronically to a document or electronic document. “Electronic signature” means a signature created by electronic or optical means and affixed electronically to a document or electronic document with intent to sign the document.

However, the bill does not require plans and reports be submitted electronically and allows for individual local units of government that do not have the capability to accept and store documents electronically to still require paper copies to be submitted. One should double check with the local authority prior to the submission of any plans to ensure they will accept electronic seals and signatures.

These subtle yet important changes should improve the efficiencies and time involved in submitting plans for approval and receiving the green light on projects across the state.

Michigan Contractors May Face New Law — The Michigan False Claims Act

Posted by: Hilger Hammond On: 18th October 2013 | no responses.

law books 2
By: Mark A. Rysberg

Earlier this year, a bill was introduced in the Michigan House of Representatives to enact a False Claims Act (“MFCA”).  H.B. 4020, 2013.  If enacted, the MFCA would establish civil remedies and penalties for presenting false or fraudulent claims to the State of Michigan and local governmental entities.  Those remedies and penalties may include the possibility of exemplary damages, attorneys’ fees, and costs.  Similar laws in the context of federal contracting are intended to, among other things, prevent government contractors from receiving compensation for work that was not performed, and provide an incentive for whistleblowers in the form of receiving 15-20% of the government’s recovery.

First, contractors working on public projects in Michigan should evaluate their payment application practices.  The payment application process typically involves two forms—a payment application and sworn statement.  Those forms may provide the basis for a MFCA action if a contractor makes a construction claim, change order request, or demand for payment that is inconsistent with the sworn representations in prior sworn statements or applications.  Contractors should consider the substance and representations contained in that documentation.

Second, applications and sworn statements generally require a notarized signature, which is sworn testimony regarding the accuracy of those documents.  A sworn statement typically identifies: the names of the persons performing the work, providing materials, or providing any labor for the project; the contract amount for each person; the amount paid to each person; and the amount currently owed to each person, as of the date of the sworn statement.  Payment applications similarly certify that the work represented in the application has been completed, that the applicant has paid for all work represented on prior applications, and that the amount currently requested is due.

These forms create a snapshot of the project based exclusively on the sworn testimony of the applicant.  When these documents are prepared monthly they provide a history of payment and performance over the entire project.  When prepared correctly, these documents should consistently track the critical aspects of the project.  Difficulties arise when claims for additional payment are not accounted for in payment request documentation.

Contractors should keep the False Claims Act in mind when preparing payment requests and construction claims on public projects.  Under the MFCA, as currently proposed, claims are generally defined as “a request or demand, whether under a contract or otherwise, for money or property that is” presented to the government or others acting on its behalf.  That means that payment applications, sworn statements, change order requests, construction claims, and pre-litigation payment demands are claims under the False Claims Act.

Contractors should take care to only submit requests for payment, of any kind, that have been substantiated with documentation and analysis.  Inflating claims for purposes of negotiation, or making claims that, at the time they are made, are not supported could lead to a violation, or perceived violation, of the MFCA.  To avoid possible problems, contractors should develop claim preservation and submission practices so that the contractor can quickly respond to the submission requirements included in most construction contracts, while at the same time being able to support such claims.  In turn, timely claim and change order requests can be incorporated into payment application documentation to prevent inconsistencies with prior sworn representations.

The introduction of the MFCA sends a clear message.  Contractors performing work on public projects should be proactive.  Policies and procedures intended to avoid a possible violation of the False Claims Act should be implemented in advance of the legislation being enacted.  In addition to avoiding a violation, such measures are simply good business.

Michigan Court Enforces Pay If Paid & Forum Selection Provision

Posted by: Hilger Hammond On: 16th September 2013 | no responses.

constructionworkersBy Aileen Leipprandt

Much to the disappointment of a subcontractor, in the recent Michigan Court of Appeals decision, Walbridge Aldinger Co. v Moorehead Electric Co. et al (Mich. Ct. App. July 2013), the Court affirmed the enforceability of pay-if-paid and forum selection provisions in construction subcontracts.

While the underlying facts in the case are not explained in the decision, it appears that a construction project in Indiana went south and the project owner did not pay Walbridge, the construction manager.  Presumably faced with numerous claims from subcontractors, Walbridge filed suit in Michigan seeking a ruling that the pay-if-paid (PIP) provision in its subcontracts was enforceable.  One subcontractor, Moorehead Electric, claimed the PIP provision was unenforceable because Walbridge fraudulently induced Moorehead to agree to the term by misrepresenting facts about the owner.  Moorehead further implied that Walbridge’s mismanagement created an exception to the PIP provision.

The trial court disagreed with Moorehead and granted Walbridge summary disposition.  The appellate court affirmed, ruling that the PIP provision clearly shifted the risk of owner non-payment to Moorehead.  Further, because the subcontract specifically provided that Moorehead could obtain access to all information in Walbridge’s possession as to the Owner’s solvency, Moorehead had the means to establish the true identity of the Owner and its ability to pay; therefore, Moorehead could not establish a claim for fraudulent inducement.  Finally, Moorehead apparently conceded that Walbridge had undertaken all steps necessary to secure payment on behalf of Moorehead, dispelling Moorehead’s claims of mismanagement.

Also of note, the subcontract contained a forum selection clause that required that all claims between the parties be heard in Oakland County, Michigan.  Moorehead challenged the enforceability of the provision claiming that Oakland County was not a convenient place to hear the dispute since the Project and some of the parties were located in Indiana.  Moorehead also claimed that under Indiana law, the forum selection clause was invalid, as Indiana Code declared void any provision that made the “contract subject to the laws of another state” or otherwise required litigation on the contract to occur in another state.  Again the trial court and appellate court rejected Moorhead’s arguments finding that Michigan was just as convenient a forum as Indiana and nothing prevented a Michigan court from exercising jurisdiction as provided under Michigan law.

The bottom line – Pay If Paid provisions are enforceable, so subcontractors must perform their due diligence on the Owner’s creditworthiness.  Similarly, with courts inclined to enforce forum selection provisions, parties should check their contracts to determine where they might end up if a dispute arises.

Detroit Bankruptcy – Effect on Construction Contractors

Posted by: Hilger Hammond On: 31st July 2013 | no responses.

Bankrupt_Detroit_0By: Mark A. Rysberg

The first thing every construction contractor working on a project for the City of Detroit needs to ask is: what do I do now?  The answer is to immediately seek professional advice.  The City of Detroit’s bankruptcy filing will have profound implications for everyone involved in the construction projects for the City of Detroit’s various departments.  Those effects start at the prime contractor level because the bankruptcy filing affects the City of Detroit’s payment obligations to prime contractors.  From there, the effects felt by the prime contractor will likely pass downstream to the project subcontractors and suppliers.  That can occur in various ways, including, among others, the application of pay-if-paid clauses, pay-when-paid clauses, and prime contractor insolvency.  Therefore, it is important to understand how this bankruptcy filing will affect payment to the prime contractor.

There are generally three categories that prime contractors will fall into in the context of this bankruptcy filing.   First, are those contractors that completed their construction contracts and received final payment pre- petition.  Those may be the lucky ones.  Second, are contractors that have completed their construction projects and are awaiting final payment.  This group will generally fall into the category of general creditors.  The manner, amount and timing of resolving these claims is likely to be a long and complicated process.  The third are those whose construction contracts with the City of Detroit are uncompleted at the time the bankruptcy petition was filed.  If you find yourself in this situation, you are in a precarious position.  The City of Detroit can reject or assume your contract.  If the City of Detroit rejects an uncompleted contract, the contractor becomes a general creditor of the City of Detroit.  If, on the other hand, the contract is assumed, the City of Detroit’s obligations on the contract survive bankruptcy.

Contractors involved in projects for the City of Detroit should take immediate action.  Project payment information should be reviewed to determine the possible internal economic impact of non-payment.  Contract documents should be analyzed to determine what, if any, effect this bankruptcy filing has on your obligations to pay third parties.  Written communication should be sent to the City of Detroit regarding project status and the City’s intentions regarding continued performance and payment.  While taking those precautions does not guarantee payment, it hedges the risk of continuing to perform a construction contract with the City of Detroit after the bankruptcy petition was filed.

ABA Forum Focuses on Trends and Developments in the Construction Industry

Posted by: Hilger Hammond On: 21st May 2013 | no responses.

palm treesBy 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?”

Significant Changes to Michigan Indemnity Law

Posted by: Hilger Hammond On: 4th February 2013 | no responses.

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.