When you are involved in construction litigation, you have battles on several fronts, including those against subcontractors, owners, insurers and the court. Shoring up your defenses on each of these fronts is imperative, or you may lose the battle or, worse yet, the war.
An opinion out of the Eleventh Circuit Court of Appeals (overseeing federal courts in Alabama, Florida and Georgia) Carithers v. Mid-Continent Casualty Company, illustrates the various battle fronts involved in a construction case. In this case, the Carithers (Home Owners) sued their homebuilder, Cronk Duch Miller & Associates (Contractor) in state court after discovering multiple defects with their home.
Battle Front #1—Claim Against Contractor
The Contractor and Home Owner entered into a consent judgment for approximately $90,000.00 and the Contractor assigned its claim against its insurer to the Home Owner. It is unlikely that the Contractor paid the $90,000.00 judgment. The Home Owner likely agreed not to collect on the $90,000.00 in exchange for the chance to pursue the Contractor’s claim against its insurer.
Scorecard: Home Owner wins hollow victory against Contractor, but gets a chance to pursue the Contractor’s Insurer.
Battle Front #2—Where Are You Litigating?
The Home Owner files suit against the Contractor’s insurer, Mid-Continent Casualty Company (Insurance Company), in state court. The Insurance Company removes the case to federal court. This is not a big deal, but you are no longer in front of your local district judge, but the federal judge. If you were litigating near your home office, say in North Platte, you would now be litigating in Lincoln or Omaha.
Scorecard: No winner here, just litigating in a different court.
Battle Front # 3—Claim Against Insurance Company, Part I
The Home Owner filed suit over 4 years after the home was completed. The Home Owner claimed that there was dry rot in the framing, electrical problems, and improperly installed brick and tile. The Home Owner claimed that he did not discover the defective construction until 2010.
The Insurance Company insured the Contractor from 2005 through 2008. The Insurance Company claimed that it had no duty to defend the Contactor because the property damage “occurred” after the policy period ended. In essence, the Insurance Company claimed that the defective construction did not occur until it was discovered, and because it was discovered after the insurance ended, there was no duty to defend the Contractor.
The Court disagreed and required the Insurance Company to defend.
Scorecard: Home Owner wins, and insurer must defend claim against Contractor. Importantly, this does not put money in the Home Owner’s pocket.
Battle Front #4—Claim Against Insurance Company, Part II
The Insurance Company also argued that it did not have to pay the Home Owner because the claim “occurred” after the Contractor’s insurance coverage ended. The Court again disagreed, finding that the Insurance Company must pay claim against the Contractor arising out of defective construction.
Scorecard: Win for Home Owner, but still no dollars in Home Owner’s pocket.
Battle Front #5—Damages
The Home Owner wants to be paid for the damage to his home. The Insurance Company argues that the “Your Work” exclusion limits its obligation to pay for damage to the house. In essence, the insurance company argues that the defective work performed by the subcontractors, which did not damage anything else in the house, is not covered. There is only coverage, and an obligation to pay, when the subcontractor’s work caused damage to parts of the house beyond the subcontractor’s work. For example, the brick on the house was improperly installed and a sealant was improperly applied, requiring the brick to be replaced. The court ruled in favor of the Insurance Company because the brick subcontractor’s work did not damage any other part of the house.
Scorecard: The Home Owner won some portions of its claim, but not all.
Take Away: There are challenges to a construction claim at every turn. You not only have to marshal the resources to fight the battle, but you need sound counsel in pursuing each of the claims. Having experienced construction counsel on your side is crucial to victory.
Employers in the construction industry have long known the value of apprentice programs, such as those offered by Associated Builders and Contractors. But, did you know that having or participating in a qualified apprentice program may become a requirement to bid on government projects? If organized labor gets it way through the so-called Responsible Contractor Reforms, it could happen.
Supplemental Conditions, a construction blog worth reading, recently posted an article on this topic pointing out that states on the east coast, such as New Jersey and Pennsylvania, have passed or are considering statutes that would require contractors to have a Department of Labor approved apprentice program before they can bid on a government projects. While merit-shop contractors have effective training programs, the programs may not be approved by the DOL. If that is the case, the number of contractor able to bid on government projects would be greatly diminished.
The primary advocates of Responsible Contractor Reforms are labor unions. The law firm of O’Donoghue & O’Donoghue, a large pro-labor law firm in Washington, D.C., has published a summary of these reforms explaining that the reforms are being pursued to ensure that
public works projects are awarded to reputable, responsible firms that have the qualifications, resources and personnel required to successfully perform contract work.
Not surprisingly, the qualification standards are tailor made for union contractors.
It is important that merit shops be on the lookout for Responsible Contractor Reforms in their operating areas. The qualification standards must be broad enough to allow for an even playing field so that all qualified contractors, including merit shops, can bid on public projects.
A recent article in ENR described the setbacks associated with a public rail project. There are problems with the schedule, concrete quality, including precast girders , panels and rail ties, and allegations of fraud. In a nutshell–a mess. But, I wonder if there are contract provisions that address these problems. Below are some problems on the project and my thoughts on contract provisions.
Schedule. The article mentions that the general contractor will be facing liquidated damages of $100,000 per day and the project will likely be several months late.
Does the contract allow the general contractor to assess a portion of the liquidated damages to subcontractors?
Does the contract allow the general contractor to withhold subcontractor payments to cover liquidated damages?
Does the contract have indemnity provisions that allow the general contractor to demand payment from the subcontractor and maybe its insurer?
Quality Control. The concrete appears to have been a problem throughout this project.
Who decides which “fix” is acceptable?
Do the parties have to “agree” on a fix or can the owner simply decide and demand the work be done?
Can the general contractor demand additional work of the subcontractor to fix the problem?
Can the subcontractor demand payment for the additional work?
Fraud. A subcontractor’s employee admitted to falsifying quality reports.
How will allegations of fraud impact a subcontractor’s insurance coverage?
How will fraud allegations impact an indemnity provision?
Will the subcontractor have the financial ability to correct its work?
Can the general contractor withhold funds from other projects to cover the subcontractor’s problems on this project?
Take Away. These are just a few of the questions that this single ENR article raised. And, if you are a general contractor or owner, you should be considering these issues when you draft your construction contract. You’ll likely never cover every issue, but the failures on this project point out the importance of giving serious thought to catastrophic problems when drafting your construction contracts. It also points to the importance of having an experienced construction lawyer helping you with your construction contracts.
– A lien for the owner or operator of any threshing machine or combine against the grain or seed harvested or processed. Neb. Rev. Stat. Sec. 52-501.
A combine with a plugged feeder house is extremely frustrating and basically useless until the plug is removed. Similarly, liens that are plugged with filing or notice problems are frustrating and potentially unenforceable. Even a straightforward thresher’s lien can contain issues which plug up the lien and render it useless.
For starters, the lien must contain (1) the name, address and social security or tax identification number of the owner or operator who performed the work; (2) the name, address and social security or tax identification number, if known, of the person for whom the harvesting was performed; (3) the amount due for the harvesting: (4) the amount of grain, seed or corn harvested; (5) the place where the grain, seed or corn is located; and (6) the date upon which the grain, seed or corn was harvested. In addition, the lien statement must be filed within 30 days after harvesting with a copy sent to the customer.
The customer can sell or transfer the grain, seed or corn after harvest even if a lien is filed. However, the customer must notify the purchaser or consignee that the harvester has not been paid. The lien will shift to the purchaser or consignee once notice is provided. The harvester is responsible for notifying the purchaser or consignee in writing if the harvester knows the grain, seed or corn is being transferred or sold within 30 days of harvest. The lien will not pass to the purchaser or consignee if the harvester fails to notify the purchaser or consignee of the lien.
In addition, a thresher’s lien will not apply to a landlord’s or lessor’s share of the harvested grain, seed or corn. Simply put, an operator may only lien against the percentage of the grain, seed or corn owned by the customer.
Finally, the statute specifically relates to grain, seed or corn. Therefore, a thresher’s lien may not effectively secure payment for the harvesting of alfalfa or grass.
An operator has to ensure that his/her thresher equipment is kept clean and clear of materials that can clog the machine. Similarly, the harvester needs to ensure a thresher’s lien is clean and clear of any issues. It is imperative the lien clearly identifies the proper information, includes the right notices and is filed appropriately, and the harvester knows who owns the grain, where it is located, and who has possession.
Stacy L. Morris of Lamson Dugan & Murray, chair of the Omaha Bar Association Memorial Committee, gives the call to order at the OBA’s annual Memorial Day Program in the legislative chamber of the Omaha-Douglas Civic Center on May 10, 2019. (Photo by Scott Stewart)
As this year’s construction projects are in full swing, it’s a good time to review your rights to payment. Since 2014, the Prompt Pay Act has been a tremendous resource for contractors to recover retainage and interest from upstream contractors and owners for failing to timely pay on a project. Here are a few highlights from the Prompt Pay Act.
Limit on Retainage. Retainage may not exceed 10%. And, when the work is 50% complete, no more than 5% of future progress payments may be held as retainage. Nebraska Revised Statute 45-1204
Release of Retainage. Upstream contractors are now required to release retainage within 45 days after the project is substantially complete. Upstream contractors must pay subcontractors within 10 days of receiving retainage payment from the owner. Nebraska Revised Statute 45-1203(3)
Interest. Contractors can demand interest on late payments at the rate of 1% per month. Interest begins to accrue on the date the payment is due. But, interest is only recoverable if the entity charged interest, ie the owner or upstream contractor, has been notified of the provisions of the Prompt Pay Act. Nebraska Revised Statute 45-1205
Attorney’s Fees May be Recovered. Contractors can now recover attorneys’ fees if they pursue a claim under the Act. This is not reciprocal in that the defendant may not recover fees. Nebraska Revised Statute 45-1211
If you or your construction company have ever been sued, you know it can be a stressful time. You have deadlines, you have subcontractors clamoring to get paid or defended, and it’s a generally awful situation. But, keep your mind on the prize–to make sure you have insurance coverage that will provide a defense to these claims. The most important step to ensure you have coverage is to tender your defense. But, how you tender the claim to the insurer will impact the outcome, ranging from acceptance of the claim to denial. Here are some tips to help tendering your defense.
Who Do I Send the Tender To?
Generally speaking, you will want to tender the defense of the claim to all your insurers, most importantly the Commercial General Liability carrier. If you are an Additional Insured under your subcontractors’ insurance policies, you will also want to tender to those carriers. But, you will need to assess whether each particular subcontractor was involved in the underlying claim.
What Should the Tender Say?
Remember, your goal is to find as much coverage as possible, so cast the net widely. You will want to draft, or get help drafting, the tender letter to make it appear with certainty that the claim is covered. The adjuster who reviews the tender will have two choices: (1) accept the tender; or (2) send the tender to counsel for an opinion as to whether insurance coverage is available. The better the tender letter, the more likely the adjuster is to accept the tender.
When Should I Tender?
As soon as possible. Every penny that you pay for an attorney to defend your claim is a penny you’ve lost. The insurer will most likely not pay for legal fees incurred done before the tender.
Helpful Hints on the Tender Letter
If you are writing to several insurers, make sure you are tailoring the letter to that insurer’s coverage. Don’t send the same tender letter to all insurers.
Keep the tender as simple as possible and attach the claim.
Make sure you ask only that the insurer accept defense of the claim. Don’t ask the insurer whether the claim is covered. Assume that there is coverage and that you are simply passing it on for handling.
Take Away: Getting sued on a construction project can be a stressful situation. Don’t add to the stress by failing to tender your defense to your insurer.
Construction material costs are rising, at least that’s what AGC, ABC, ACEC, ENR and the government are saying. So, let’s assume that its true—construction material costs are rising. What can you, as a general contractor or subcontractor do about it? Not surprisingly, it all comes down to your contract and whether you included a cost escalation clause.
What is a Cost Escalation Clause?
These clauses are pretty self-explanatory in that they require an adjustment of the contract price to account for fluctuations in the costs of materials and labor. The goal is to shift the risk of cost increases from the contractor to the client.
What does an Escalation Clause look like?
Escalation clause must be carefully drafted because they will face serious scrutiny if you have to enforce it. Typical clauses may provide:
In the event of significant delay or price increases of materials, through no fault of the Contractor, the contract sum, time of performance, and contract requirements shall be equitably adjusted by change order in accordance with the procedures of the contract documents. A change in price of an item of material shall be considered significant when the price of an item increases ____ percent between the date of this contract and the date of installation.
How does an Escalation Clause impact a subcontractor?
If a general contractor is successful in negotiating an escalation clause in the prime contract, there are likely flow down provisions that will benefit a subcontractor. But, it is advisable to include a similar clause in a subcontract. These clauses typically state:
To the extent Contractor receives reimbursement or additional time from the Owner under the prime agreement, the Subcontract Amount or Progress Schedule shall be equitably adjusted.
Take Away: It is important to consider the impact of material and labor cost fluctuation when negotiating construction contracts before the construction contract is finalized, otherwise you may find yourself having to pay for those increases out of your pocket.
While this is not typically a topic of discussion on this construction blog, two recent construction related lawsuits filed in Nebraska highlight the importance of making sure your key employees do not walk away with your projects and employees.
We all know the situation. A long-term, faithful employee gets the itch to head out on his own or take another job for a few more dollars. Maybe you wish the employee well or maybe you don’t, but do you have everything in place to prevent this employee from taking your client list or asking your other employees to join him at the new employer? This is where confidentiality and non-solicitation agreements come into play.
As the name indicates, confidentiality agreements require an ex-employee to keep your confidential information private and not share it with his new employer. This may include your customers, suppliers, pricing, order tracking system, and even a list of work performed in the last few years. This is your information and you are entitled to keep an ex-employee from using it for the benefit of his new employer.
To keep an ex-employee from using this information, you need to enter into an agreement with the employee, before he leaves, ideally before he’s even thinking about leaving. This agreement may be a provision in your handbook or a standalone agreement that defines confidential information and provides:
In the event of the termination of my employment, whether voluntary or involuntary, I agree not to use this information or disseminate the Company’s confidential information to any other individual or entity.
Non-Solicitation Agreements prevent ex-employees from working with those clients he worked with while employed by you. Importantly, this only applies to those customers with whom the now ex-employee worked with. So, you cannot prevent your ex-employee from contacting any clients, but only those with whom he worked. A non-solicitation clause can also be used to prevent an ex-employee from enticing your employees to work for his new employer.
Again, you need to enter into this agreement before the employee leaves, and ideally when he or she starts working for you. A non-solicitation provision can be contained in your employee handbook or a standalone agreement and generally provides:
In the event of the termination of my employment, whether voluntary or involuntary, I agree not to directly or indirectly sell, solicit, direct, manage or otherwise have any involvement whatsoever in the sale, marketing or solicitation of any Employer customers with whom I actually did business and had personal contact while employed by Employer. I further agree that I will not, either directly or indirectly, call on, solicit, or induce any other employee to terminate his or her employment.
Take Away: You have every right to protect your confidential information, clients and employees. But, you need agreements in place well before an employee is thinking about leaving. Ideally, these agreements are contained in your employee handbook or are stand alone agreements signed when the employee starts to work for you.
Back in 2014, I posted a blog about the problems contractors were having digging the tunnel for Route 99 in Seattle. Bertha, the boring machine, hit a pipe and some rocks and got stuck, causing two years of delay.
Well, that problematic situation, now a $624 million lawsuit, has wound its way through the courts and the Seattle Tunnel Partners (“STP”) is blaming the slow down on the pipe they hit. Unfortunately, STP has lost the pipe. Yep, they can’t find the pipe that stopped their boring machine for 2 years. Not only did they lose the pipe, but they lost a pallet of 2 granite boulders and the deputy project managers journal for the months before and after the work stoppage.
Of course, the other parties to the lawsuit are pretty upset that the pipe, rock and journal can’t be found and they asked the court to sanction STP for losing the pipe. After making 190 Findings of Fact, the court found that STP purposefully lost or destroyed the pipe, rocks and journal in violation of its duty to preserve. The court also ruled that the parties that wanted to examine the pipes, rocks and journal are entitled to a presumption that this evidence would have been bad for STP. The court has set a special hearing to determine the actual sanctions to be given.
Believe it or not, this sad story has some application to contractors in Nebraska and Iowa. If you have a project that hits a snag, you are well served to keep all the evidence of the problem, or at least invite the other parties to your contract see the problem before you fix it. Otherwise, a party may claim that you destroyed important evidence that would have been bad for you.