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.
Hammond Presents at the 32nd IRMI Construction Risk Conference
By Benjamin H. Hammond
In mid-November of 2012, I attended the 32nd annual IRMI Construction Risk Conference held in Orlando, Florida. At this conference, I was both a speaker and an attendee of multiple sessions. My presentations concerned navigating construction defect claims, and specifically, the insurance coverage issues that arise for general contractors and subcontractors when faced with these types of claims.
The conference was well attended with well over 1,000 insurance, legal, and construction professionals from across the country in attendance. Approximately 300 people attended my presentation, and I was very pleased with the interest level and questions raised throughout and after the presentation. Whether a construction defect constitutes an “occurrence” under the CGL policy remains a hotbed of litigation across the country. Courts across the country are split as to whether there should be coverage for a construction defect, and my presentation highlighted the differences among the states with regard to this matter.
In addition, I talked at great length about the “subcontractor exception” found in most CGL policies and how there could be insurance coverage for a general contractor whose subcontractor performed defective work based on the proper application of the “subcontractor exception.” If you would like more details on this particular subject, please give me a call.
Other topics of discussion and presentations concerned contractors professional liability insurance, design build projects on public projects, what is working and not working with wrap-ups, managing subcontractor default risks, trends in subcontractor default insurance, trends in additional insured coverage, and other updates on construction and insurance law.
The handouts for the presentations are available at IRMI.com. If you have any specific questions, I would be happy to speak with you on any of these topics.
Michigan Arbitration Act: Arbitration Agreement Between Architects Enforced
In the recent case, Rouleau v Orchard, Hiltz,& McCliment, Inc. (“OHM”)(October 2012), the Michigan Court of Appeals enforced an arbitration agreement, even though that agreement did not conform to the exact requirements of the Michigan Arbitration Act.
In Rouleau, two architectural firms (OHM and Hitch, Inc.) entered into an agreement in 2005 to form a third company, called Hitch LLC. Hitch Inc. transferred all of its assets and liabilities to the new entity, Hitch LLC. The parties’ 2005 agreement included provisions for arbitration and indemnity. Later, White Cloud Public Schools sued Hitch Inc. for negligently performed construction work. OHM, the sole shareholder of Hitch Inc., then sued a former shareholder seeking indemnity for the costs OHM incurred in defending the White Cloud lawsuit. OHM sought to arbitrate the dispute with its former shareholder pursuant to the parties’ 2005 agreement.
The question before the court in Rouleau dealt with the interpretation of the arbitration provision. Michigan law distinguishes between statutory arbitration and common law arbitration. Statutory arbitration is governed by Michigan’s Arbitration Act (MAA). To be enforceable under the MAA, the agreement must be in writing and must provide that “a judgment of any circuit court may be rendered upon the award.” If the agreement complies with the MAA, neither party can revoke it. If the agreement does not comply with the MAA, then it is treated as a common law arbitration agreement and either party can revoke it at any time before the arbitrator renders an award.
The arbitration clause in Rouleau did not contain the language required by the MAA; therefore, the trial court refused to compel arbitration. The appellate court, however, reversed finding that the arbitration provision satisfied the MAA because it incorporated the commercial arbitration rules of the American Arbitration Association (AAA). Because the AAA rules contained the language required by the MAA, neither party could revoke their agreement to arbitrate.
Incorporating AAA arbitration rules is a common practice in business transactions and construction contracts. What do YOUR contracts provide regarding arbitration and do your contracts need updating to comply with the MAA?
Increase in Funding for Michigan Road Construction
By: Mark A. Rysberg
This year, Michigan amended the General Sales Tax Act to earmark a portion of the General Fund for matching federal aid highway funds and fund improvements to local and county roads. The amendment accomplishes that by allocating sales taxes collected for the sale of gasoline and diesel fuel to the State Trunkline Fund and local municipalities. The Senate Finance Committee estimated this will generate approximately $135.1 million dollars for improving Michigan’s roads and highways, which is in addition to federal funds received for federal highway maintenance.
Michigan Construction Lien Law Update: Lumber Supplier’s Lien Found Invalid
By Ben Hammond
In July 2012 case of Ben’s Supercenter, Inc. v All About Contracting & Excavating, LLC, et. al. Earl and Roberta Crank hired a contractor to build them a barn on their property. The Cranks paid in full for the barn, but before it was complete, the contractor abandoned the job and failed to pay the lumber supplier. The lumber supplier recorded a lien on the property and sued to foreclose on its lien. The supplier also sued the owner for unjust enrichment on the theory that the owner received the benefits of the lumber unjustly.
The Michigan Construction Lien Act states that a lien does not attach to a “residential structure” to the extent payments have been made for those improvements by the owner. This meant that if the barn was a “residential structure” as defined by the act, the lien would not be valid since the owner had already paid once for the lumber. Otherwise, the owner would be forced to pay twice for the same material.
Somewhat surprisingly the Court held that the barn was in fact a “residence” under the Act because it was an improvement to a residential structure. Since the owner paid once for the lumber, the Court was not inclined to force them to pay twice in this case.
In addition, the Court found that there was no unjust enrichment because the owners did nothing to contribute to the supplier’s loss or lead the supplier to believe that its interests would be protected by the owners.
Suppliers need to continue to take caution when supplying materials to construction projects and protect themselves with risk minimizing strategies such as joint check agreements and personal guarantees in addition to construction liens and other measures.
Unjust Enrichment Claim in Construction Lien Foreclosure Lawsuit Fails
By Aileen Leipprandt
In the recent case of Arlington Transit Mix v Countrywide Home Loans, (June 2012), Countrywide Home Loans provided financing for the construction of a home, secured by a future advance mortgage. The homeowner defaulted on the loan and Countrywide foreclosed its mortgage on the property. Several subcontractors and suppliers who supplied improvements to the home foreclosed on their construction liens. One of these suppliers, West Friendship, also sued Countrywide on a theory of unjust enrichment, claiming that when Countrywide took title to the property, Countrywide received a benefit from the material and services West provided and for which West never received payment.
The trial court dismissed West’s unjust enrichment claim and the court of appeals affirmed that ruling. The appellate court noted there was no evidence that Countrywide was part of the decision making process as to contractors on the project or that Countrywide encouraged the general contractor not to pay the subs and suppliers. There was no proof that Countrywide actively participated in the decision to use West’s materials and Countrywide had no control of or responsibility for completing the project. There was no evidence that Countrywide requested a benefit from the general contractor or West, or that Countrywide misled the contractors to receive such a benefit. Furthermore, there was no claim that Countrywide gave assurance that it would pay West for the materials.
Though one cannot tell from the legal opinion, Countrywide’s mortgage interest probably had priority over the supplier’s lien. Faced with a “second” position on its lien, the supplier tired to tag Countrywide on the equitable theory of unjust enrichment, hoping it could convince the trial court that it was unfair for the lender to get the value of improvements without paying for them. The lesson learned from this case – absent strong evidence that the lender encouraged or requested the improvements and provided assurances of payment, subcontractors and suppliers may have little recourse against lenders.
Proposed Expansion of the Michigan Construction Anti-Indemnification Statute
By: Mark A. Rysberg
Since 1966, construction related indemnity provisions for personal injury or property damage resulting from the sole negligence of the indemnified party are invalid. MCL 691.991. The Michigan House of Representatives proposed extending the application of that statute to design professionals and to further limit indemnification on public projects to the percentage of the indemnitor’s fault. 2011 HB 5466. The Bill has been referred to the Senate Committee on Judiciary.
Construction Law News: Minnesota Court Decision on Bridge Collapse Concerns AEC Sector
Originally published by MPRNews
A decision related to the 2007 Interstate 35-W bridge collapse by the Minnesota Supreme Court could have repercussions for the architecture, engineering and construction industry, according to industry officials. The court rulings could increase insurance rates for contractors and allow “[o]ther states [to] follow suit and if there’s a mass disaster, the legislature could come in and sweep away the protection that they had relied on,” said Bob Huber, Minneapolis construction attorney. “The cost of doing business in design and construction is now going to go up,” said Tom Smith, American Society of Civil Engineers’ deputy executive director.
See more details published by MPRNews.
Michigan Construction Law: Sometimes Juries Get It Wrong
Design Professional Not Liable For Alleged Defective Pavement
By Aileen Leipprandt
In a recent Michigan Court of Appeals case, the court threw out a verdict by the jury against a design professional, holding that the engineer could not be held liable where there was no expert testimony that the engineer breached the professional standard of care. In the absence of this expert testimony, the appellate court concluded that the jury improperly was left to speculate whether the engineer’s conduct fell below the standard of care.
The case, City of Huntington Woods v Orchard Hiltz McCliment, Inc (“OHM”) (May 2012), involved reconstruction of Coolidge Highway in Oakland County. The plans and specifications prepared by OHM required that a certain type of binder be used with the asphalt and further provided for seasonal suspension of paving between November 14 and April 16. In spite of these specs and without issuing a change order, OHM allowed the use of a different binder and allowed paving to occur on November 18. Apparently there were problems with the paving and the City of Huntington sued OHM claiming OHM breached its contract by providing negligent design or negligent inspection or supervision of the contractor. The trial court treated the claim as one of professional negligence against OHM. The jury returned a verdict in favor of the City.
OHM appealed arguing that although it did not strictly comply with the plans and specs, there was no expert testimony that the standard of care required written change
orders for those changes or that the change in use of specified binder and paving on November 18 breached the standard of care. The court of appeals agreed, finding that the
absence of expert testimony on these points was fatal to the City’s claim. The trial court should have ruled in favor of the engineer and the matter should never have been submitted to the jury.
While the engineer ultimately prevailed, it suffered the privilege of doing so through a trial and appellate process. Next time around, the engineer may give closer consideration to the contract requirements, including the change order process.