What Should Owners Look for in a Contractor Schedule (Hot Topic Presentation - 8/9/2017 at noon EST)

Please join us as we welcome our new Division Chair, Suzanne McSorley, and hold our monthly meeting with a great Hot Topic presentation:

What Should Owners Look for in a Contractor Schedule, presented by Jesus Schuldes of Spire Consulting Group LLC

 

What Should Owners Look for in a Contractor Schedule

Project Controls, particularly scheduling, set the foundation for project success. Our Hot Topic presenter for our next call is Jesus Schuldes, MS, PSP, Senior Consultant with Spire Consulting Group, a multi-disciplined construction engineering consulting firm. The program will address the cornerstones of construction scheduling and provide pointers on how to write an appropriate specification. The industry expert will offer insights into your contractor’s schedule, the applicable standard AIA contract clauses, and recommended clauses to help you identify, prevent, and mitigate potential project risks and costly delays.

 

About the Speaker

Jesus Schuldes, MS, PSP has many years of project controls experience for complex construction projects across the globe. He is an expert in Critical Path Method (CPM) scheduling, and is also well-versed in dispute resolution involving schedule delays. He specializes in performing time impact and windows delay analyses to apportion delays and validate construction claims. He is also a certified Planning and Scheduling Professional (PSP) by AACE International (AACE).

Here's how to join the call:

Dial-In:  866-646-6488; Passcode: 613 577 4053#

A Perspective on Building Enclosure Consulting and Peer Review Process (November Hot Topic Presentation)

On November 9, 2016 at 12 pm EST, Ken Lies, AIA, a Principal at Raths, Raths & Johnson, Inc., will present the following: 
 
A Perspective on Building Enclosure Consulting and Peer Review Process 
 
Engaging a qualified design professional to perform building enclosure consulting and peer review services for a construction project has become more and more common.  The demand for these professional services is often driven by building owners, architects and/or contractors that recognize the inherent risks of design and construction and the potential negative impacts (financial, scheduling, legal, etc.) that defects all too often have on a project.  The presentation is from the perspective of a licensed architect whose firm provides building enclosure peer reviews, consultation and quality assurance testing services.   

Learning Objectives

1.    Gain an appreciation of client motivations and objectives for engaging a building enclosure consultant.

2.    Understand various roles and objectives for a consultant and the potential impact of the peer review process on the project team members.

3.    Acquire knowledge of typical building enclosure consulting services.

4.    Understand the differences between building enclosure consulting vs. building enclosure commissioning (BECx).

5.    Recognize potential legal and liability issues associated with engaging a consultant.

6.    Understand the importance of firm and individual qualifications and possible professional licensing issues.

ABA Forum on Construction Law Members may call into the conference line at 866-646-6488, conf. ID 613-577-4053.

Customizing the Proper ADR Process for Your Project

Last month, Mike Marra and Rod Toben of the American Arbitration Association gave a Hot Topic presentation on Customizing the Proper ADR Process for Your Project – So little time now . . . so much effort later. In case you missed it, here are a few highlights from their presentation to remember when drafting your next ADR clause.

When drafting, adopting, or recommending a dispute resolution clause in a construction contract, parties or their attorneys do not always spend the time needed to make sure the dispute resolution clause works for their particular client or project.  A little time spent at the contracting stage can go a long way toward saving time and money should a dispute arise.

Construction Industry standard form documents have included ADR clauses for more than fifty years and most of them provide what is needed to get you into the process: agreement to arbitrate, administrator, a set of rules and judgment language.  But what should you think about when you want to draft an ADR clause that is unique to a particular client or project?  Below are some examples of items to consider when drafting your next ADR clause:

Rules:

First and foremost a good set of ADR rules will help move the process in an efficient manner because of their self-executing nature.  The AAA Construction and Commercial Rules provide parties a time tested roadmap for both arbitration and mediation. 

Step Clauses:

Mediation prior to arbitration is a condition precedent in most construction industry form contracts but in the interest of saving time consider whether both processes could move in conjunction with each other.  Think about including project meetings, project neutrals and other steps prior to mediation and arbitration.  While these steps can be effective, it is important to have a mechanism, such as time limitations, in place to keep the process moving to final disposition. 

The Simple Things in Life made complicated:

Keeping the clause simple should be a priority.  Locale, Time Limits and Arbitrator qualifications are examples of simple items that can be made complicated.  

Rule 12 of the AAA Construction Rules give parties guidance on where the hearings will take place, but is that enough?  What if there are multiple locations in a single contract?  Specifying the locale in the contract can undoubtedly save time and money should a dispute arise. 

Time limits, if they are drafted into contracts, should also be thought through.  While parties may want a quick resolution, having unrealistic timeframes may have the reverse effect and not allow each party to effectively present its case. 

Arbitrator expertise is something that can certainly be drafted into the clause, but how specific should you be?  If parties to a complex project are looking for specific expertise, an engineer, architect or contractor for example, how detailed should they be?  Thought should be given to specifying only the broad category of expertise, whenever possible, as getting too specific may limit the number of qualified arbitrators and become yet another argument in the dispute.

Another important issue to think about when drafting an ADR provision is joinder of parties and consolidation of cases, which can greatly delay the process.  If you are the lead drafter you should think about how the issue of joinder and consolidation are dealt with by all project participants.  When one set of contracts has a joinder provision and others do not, it creates great delay and expense because of the argument that ensues.  Making sure all downstream contracts are in line with the main project document will save all involved the pain of resolving yet another conflict in an arbitration. 

These are just some examples of the things to consider when drafting your dispute resolution clause.  Even the most experienced lawyer can surely benefit from following a basic checklist of items to consider at the contracting stage.  For additional information and sample language, feel free to build your ADR clause online at www.clausebuilder.org.

Avoid Disputes Over Your ADR Process (September Hot Topic Presentation for Division 12)

On September 14, 2016, at 12 p.m. EST, Mike Marra and Rod Toben, Vice Presidents in the AAA Construction Division will present the following:

Avoid Disputes Over Your ADR Process

The purpose of an alternative dispute resolution (ADR) clause is to resolve disputes, not to create them, but a poorly drafted ADR clause can cause delay and expense if parties disagree about the meaning of the clause. Planning early for possible disputes, and taking the time to draft and negotiate an ADR clause that addresses the particular needs of the parties, will save time later and allow for the most time-and cost-effective dispute resolution process.

This Hot Topic will highlight the essential issues that parties to a construction contract should carefully consider before the contract is executed.

ABA Forum on Construction Law members may call into the conference line at 866-646-6488/613-577-4053.

Mike Marra

Rod Toben

The Owner’s Project Audit: Critical Considerations for Success

Patrick A. McGeehin and Mark J. Malengo of FTI Consulting, Inc. recently gave an interesting presentation concerning project audits from the Owner's perspective, pointing out ways an Owner can reduce costs and improve the audit's effectiveness:

There are several important factors that an Owner should consider for its project-audit needs.  With proper planning and strategy, an Owner can reduce costs and improve the effectiveness of an audit.

First and foremost, an audit should be viewed as a key component that can contribute to the overall success of a project and the Owner.  In addition to identifying potential savings on a cost reimbursable contract, use of an auditor can improve the cost/pricing language of the Owner’s contracts and develop process procedures that can be used to benefit future projects.

An audit can also measure the success of the project compared to various metrics, identify non-compliance with Owner contract provisions, and determine amounts of asset purchases and any related salvage value.  This is true whether an audit is required to meet the Owner’s compliance requirements, to meet its fiduciary duty to other partners/investors, to determine a savings amount, or to improve selected processes. 

Selecting an auditor with the appropriate experience can assist the Owner in defining and achieving the agreed-upon audit objectives efficiently and effectively.  The “right” auditor should perform a focused-objective review.

Further, there are several actions that an Owner can take to improve the productivity of the audit with the help of the auditor. They include performing up-front procedures, such as developing contract definitions, establishing pre-determined Contractor rates, improving contract-review processes, and requiring the production of essential records.  In addition to improving the productivity of future audits, this pre-contract involvement can minimize misunderstandings between the Owner and Contractor.

In summary, an audit should be much more than a “ticking and tying” exercise, if the Owner engages an auditor with the appropriate expertise and develops a focused review plan.  This approach can lead to better project results, savings, and other process improvements.

Massachusetts Decision Limits Spearin Doctrine in CM-at-Risk Contracts on Public Projects

On September 2, 2015, the Massachusetts Supreme Judicial Court issued a long-awaited opinion in Coghlin Electrical Contractors, Inc. v. Gilbane Building Company et al., SJC Docket No. SJC-11778.  Among other issues decided in the case, the Court held that the scope of a public-awarding authority's implied warranty of adequacy and sufficiency of the plans and specifications is more limited in the context of a construction-management-at-risk contract than a traditional design-bid-build contract.  

This case represents the first time that the highest court in Massachusetts has looked at the Spearin Doctrine in the context of the CM-at-Risk delivery method under the state's relatively new CM-at-Risk statute (M.G.L. c. 149A, Sections 1-13).  Under this law, public awarding authorities are permitted to retain construction managers early during the project's design phase in order to involve them in project planning and design development.  

In Coughlin, the Court recognized the the relationship between the awarding authority and a construction manager at risk is different from the traditional relationship in the design-bid-build context, insomuch as a construction manager may be engaged to participate extensively in the design phase and, therefore, has an opportunity to influence the final plans and specifications. However, despite several noted differences between CM-at-Risk and design-bid-build delivery, the Court was not persuaded that the implied warranty should not apply. In construing the relevant statutory language, the Court determined that "the legislative intent in providing the construction management at risk alternative [to design-bid-build] was to permit the [construction manager at risk] a greater consultative role regarding the project's design, not to eliminate the owner's responsibility for design defects."  The Court concluded that the proper scope of the implied warranty in the CM-at-Risk context should be limited to instances where the construction manager acts in good faith and acts reasonably in light of its design responsibilities.  Therefore, on projects where the construction manager's design responsibilities are greater, the construction manager will have a higher burden to show that its reliance on the defective design was reasonable.

Links to more information regarding this case, including the text of the opinion, all appellate and amicus briefs, as well as video of the oral argument, are below.

Full Text Opinion

Oral Argument Webcast

Link to Docket and Appellate Briefs

The Basics of Litigating the Typical "Multifamily" Construction-Defect Case

Sanjay Kurian contributed the following post concerning the basics of litigating a typical "multifamily" construction-defect case on behalf of a property owner:

In this blog post, I wanted to touch on some basics of the typical “multifamily” construction defect case. Whether the project is a condominium, apartment, assisted-living facility or hotel, disputes concerning multifamily properties share many of the same issues.  There are six primary considerations in bringing these claims but each of those has many subparts which depend on specific facts of the project.

The first consideration is to identify the true owner and determine whether that entity is able to recover for the defective construction.  Is there a condominium association or building owner? Maybe it is the hotel or facility operator that is the aggrieved party or is the developer of the building?  Knowing who has the rights to make the defect claims is a critical first step.

The second consideration is to determine against whom any claims may be asserted.  Is there a claim against the developer of real property who designed, built, and sold the units or buildings in question? Or maybe there are claims against the general contractor and subcontractors who coordinated and performed the work?  What about the design professionals who designed the building improvements?  The reality is that all of these entities could be responsible for defects in the improvements.  How much each of them is responsible for is dependent upon the warranties, contracts and legal theories at play where the property is located as well as any contracts that may exist between the parties.

The third consideration is what types of claims available, which depends greatly on the jurisdiction you are in.  There may be contractual express warranties that arise out of the contracts negotiated between the parties. There could be implied warranties pursuant to the common law at play.  In some jurisdictions and depending on the type of property, Florida condominiums for example, statutory implied warranties may exist that protect the owner.  Most states still allow claims for negligence in the construction or design of the structures.  An important note is that not every claim can be made against every party. Careful consideration is needed as to what claims should be asserted against whom.

The fourth consideration is the type of recovery available.  Generally the cost of repairing the defective condition is the damage that can be recovered.  In the event that such repair would be economically wasteful, courts may consider diminution of value to be a valid damage.  In addition, depending on the type of property there may also be claims for lost rents other lost profits for the time that the property was not able to be used for its intended purpose in whole or in part.  Attorney's fees are often not recoverable in defect claims in most jurisdictions. The exception to the "American Rule" is where the fees are awarded to the prevailing party through contract or statute, or what is called a "proposal for settlement" or "Offer of Judgment."  The question of recovery is maybe the most important one for owners because no one wants to spend money on experts and lawyers where the damages do not warrant such claims.

The fifth consideration is the defenses available.  I have never handled a defect claim where there was no claimed defense by one of the parties identified above.  The typical defenses are that the owner failed to maintain the condition, that the damages were not mitigated, lack of notice of the condition, failure to comply with a statutory notice procedure, the proposed repair is a betterment, the repaired items consist of first costs that the owner would have incurred anyways.  The determination as to the validity of a given defect claim or defense rests with the trier of fact, whether that be a judge, jury, or arbitrator.  The applicability of a defense is based upon the specific facts of each case.

The sixth consideration is the cost in moving forward with such claims and the prospects of recovery. Given the complicated nature of these cases they often settle.  Driving settlement is the cost of moving forward in the litigation as well as likelihood of recovery from the named defendants or their sureties or insurance carriers. Not evaluating these items at each step of a case is a trap for the unwary client or counsel.

I have represented numerous owners, condominium associations, contractors and developers in these types of cases and I can guarantee that none of them wanted to be in this type of litigation.  However, sometimes construction projects go wrong and everyone bears some of that eventual cost.

Division 12 Has Changed Its Name

We are Division 12 - Owners and Project Finance.  No longer "Owners and Lenders," our name change reflects our broad purpose and fundamental initiative in service to our Owner clients.  Our division leads the way to educate our Forum members regarding issues impacting the construction owner in the design, construction, and financing processes.  

As Owners are building again, they are seeking responsible and appropriate financing options to support the construction, maintenance, and operations of their capital projects.   We are pleased to benefit our Forum members and the construction industry as we present monthly topical presentations and discussions on how Owners can proper and avoid costly claims on their projects.

Texas Bars Contractors’ Premises-Liability Claims Against Owners Even Where the Owners Were Partially At Fault

The Texas Supreme Court recently applied a statutory bar to contractors’ claims for premises liability against property owners. The statute invalidates the injured contractor’s claims even if the injuries were caused by the negligence of the owner or another contractor, as long as the injured contractor was working on construction, renovations, or repairs to the property at the time of the injury. Abutahoun v. The Dow Chem. Co., No 13-0175 (Tex. May 8, 2015) (interpreting Tex. Civ. Prac. & Rem. Code ch. 95).

Chapter 95 of the Texas Civil Practice and Remedies Code sets forth circumstances in which an owner is not liable for negligence claims brought by independent contractors or their employees. The relevant portion of Chapter 95 states that an owner is not liable for injury or property-damage claims by a contractor that constructs, repairs, renovates, or modifies an improvement to the property, unless the owner exercises or retains control over the manner in which the work is performed, has actual knowledge of the danger or condition, and fails to adequately warn the contractor. Tex. Civ. Prac. & Rem. Code § 95.003.

In Abutahoun, the plaintiff was the estate of a construction worker who contracted and died from mesothelioma as a result of asbestos exposure. The decedent was an employee of an independent contractor that installed asbestos insulation around pipes on the owner’s property. The owner’s own employees were also performing similar tasks. The actions of the employee, independent contractor, and owner’s employees all contributed to the decedent’s death. In the trial court, there was a jury verdict in favor of the plaintiff in excess of $2.5 million. The trial court justified its decisions by distinguishing the negligent acts of the independent contractor and the negligent acts of the property owner, and holding the owner liable for its comparative negligence.

The owner appealed, arguing that Chapter 95 does not make such a distinction and that all of the plaintiff’s claims should be barred. Interpreting the statute, the Court agreed with the owner that as long as the injured party was performing construction, renovation, or repair, it could not sue the owner in negligence for that injury even if the owner’s negligence caused the injury.

The Court did not express an opinion on the exceptions to Chapter 95, which would allow an injured contractor to sue the property owner for negligence if the property owner had control over the independent contractor’s work, knew of the dangerous condition, and failed to warn the contractor. This exception was not at issue in the case - the plaintiff argued only that Chapter 95 did not apply at all.

Abutahoun v. The Dow Chem. Co., No 13-0175 (Tex. May 8, 2015).

Thanks to Nick Brooks at Griffith Davison & Shurtleff, P.C. for his help with preparing this post.

Accrual of Prompt-Payment Act Interest During Disputes Over Latent Defects

Claramargaret H. Groover has asked for our thoughts and experience regarding the following issue arising under a construction contract:

An owner that has not yet paid a contractor discovers a latent defect with the contractor's work. The contractor has not remedied the defect. Would a Prompt-Payment Act impose statutory interest on the owner if it withholds the funds needed to remedy the defect?

Analyses under any jurisdiction's law are welcome, particularly with any statutory or judicial authority in support.

Ninth Circuit Vacates Order Disqualifying Arbitrator in Dispute Over Condominiums

On his Business Conflict Blog, arbitrator and mediator Peter Phillips recently posted an interesting summary of a Ninth Circuit case addressing a dispute between sellers and purchasers of condominiums:

Ninth Circuit Reminds Us When Courts Intervene - and When They Don't - In Arbitration

The Ninth Circuit Court of Appeals recently issued a writ of mandamus directing a district court to vacate an order disqualifying an arbitrator, while the arbitration was pending.  Its succinct opinion in In re Sussex (No. 14-70158, January 27, 2015) serves as a clear lesson in the limitations of judicial intervention in arbitration.

[Read more]

A hat tip to Suzanne McSorley for suggesting this article.

Claims against a general partner for partnership debts do not accrue until after the judgment against the partnership

The Texas Supreme Court recently held that Texas partnership law does not require a plaintiff, seeking to enforce a partner’s liability for partnership debt, to bring a claim against the partner within the limitations period on the underlying claim against the partnership. Am. Star Energy and Minerals Corp., v. Stowers, --- S.W. 3d ----, 2015 Tex. LEXIS 151 (Tex. Feb. 27, 2015). 

The four respondents (collectively the “Partners”) formed a general partnership (the “Partnership”) in Texas. In 1980, American Star Energy and Minerals Corporation (the “Creditor”) entered into an agreement with the Partnership to manage certain oil and gas properties. In the early 1990’s, the Creditor sued the Partnership for breach of that agreement and eventually prevailed on its claims. After various appeals, the Creditor’s judgment against the Partnership became final in 2009. 

In June 2010, the Creditor brought an action against the individual Partners to satisfy the debts the Partnership owed to the Creditor. In response, the Partners asserted that the action was barred by the four-year statute of limitations that applies to the underlying breach-of-contract claim. The trial court agreed and granted summary judgment in favor of the Partners.

The Texas Supreme Court analyzed whether the statute of limitations barred the Creditor’s cause of action against the Partners, which depended on when the action against the individual Partners accrued. General partnerships are entities distinct from the partners, but partners are jointly and severally liable for the partnership’s obligations. TEX. BUS. ORGS. CODE §§ 152.056, 152.101. A creditor seeking to hold a partner liable may either join the partner in the suit against the partnership or file a separate lawsuit against the partner. However, the creditor cannot obtain a judgment against the partner assets until at least 90 days after the judgment has been rendered against the partnership. Id. at §152.305.

The Supreme Court was left to establish a rule of accrual for partner liability suits. Generally, a cause of action accrues “when facts come into existence [that] authorize a claimant to seek a judicial remedy.” Exxon Corp. v. Emerald Oil & Gas Co., 348 S.W. 3d 194,202 (Tex. 2011). When the Legislature employs the term “accrues” without an accompanying definition, the courts must determine what cause of action accrues and thus when the statutes of limitations commences to run. Moreno v. Sterling Drug, Inc., 787 S.W.2d 348, 351-52, 354 (Tex. 1990). Here, a creditor cannot obtain a judgment against a partner until 90 days after the judgment is issued against the partnership. Thus, the Court found that the Creditor’s claims did not accrue until the 90-day period after the judgment against the Partnership had expired. Summary judgment in favor of the Partners was reversed and remanded.

This case has benefits and drawbacks for partners in general partnerships. On the one hand, it extends the period in which creditors of the partnership may seek to enforce the judgment against the partners. Given that civil lawsuits can take years to reach judgment, this de facto extension of the limitations period could be significant. On the other hand, this ruling removes some incentive for the creditor to join the partners to the original lawsuit with the general partnership. The creditor may obtain its judgment against the partnership before deciding whether to incur the additional time and expense of seeking judgments against individual partners. 

Texas Supreme Court Allows General Contractor to Compel Arbitration Against Developer Despite Asserting Counterclaims and Participating in Discovery

In a recent decision involving a dispute over a construction project, the Texas Supreme Court held that the developer had to arbitrate its claims against the general contractor, even though the general contractor filed counterclaims and responded to discovery requests. G.T. Leach, LLC v. Sapphire V.P., LP, 2015 Tex. LEXIS 273 (Tex. 2015).

Sapphire V.P., LP (“Developer”) contracted with G.T. Leach, LLC (“General Contractor”) for the development of luxury condominiums (the “Project”) on South Padre Island. In July 2008, Hurricane Dolly tore through the island causing significant damage to the Project. Developer filed suit against its insurance brokers, alleging claims for negligence and breach of contract. Developer alleged that, eight days before the hurricane hit, the brokers allowed a builder’s risk insurance policy to expire and be replaced by a permanent insurance policy, even though construction of the Project had not yet been completed. More than two years later, the brokers designated several other responsible third parties. These parties included the project general contractor, General Contractor, two subcontractors, and an engineering contractor. Developer amended its petition to name these parties and defendants, also alleging their negligence and contractual breaches resulted in construction defects that caused the Project to sustain water damage that resulting in uncovered losses.

After pursuing pretrial motions and participating in discovery, General Contractor moved to compel arbitration and stay the litigation. General Contractor relied on an arbitration agreement in its general contract with Developer. The brokers, subcontractors, and engineer (collectively, the “Other Defendants”) also moved to compel arbitration, relying on the general contract (even though they never signed that contract) and their own subcontracts with General Contractor.

The trial court denied all of the motions. The defendants pursued an interlocutory appeal, the court of appeals affirmed, and defendants subsequently petitioned the Supreme Court for review.

The Texas Supreme Court took up several issues. First, the Court analyzed whether General Contractor could compel arbitration. Specifically, the Court examined whether General Contractor had waived its right to compel arbitration by participating in pretrial proceedings and discovery. In Texas, a party may waive its right to enforce an arbitration agreement implicitly, though conduct inconsistent with an intent to enforce the right. See Perry Homes v. Cull, 258 S.W.3d 580, 590-91, 594 (Tex. 2008); Moayedi v. Interstate 35/Chisam Rd., LP, 438 S.W. 3d 1, 6 (Tex. 2014). A party asserting implied waiver as a defense to arbitration has the burden to prove that the other party “substantially invoke the judicial process,” which is conduct inconsistent with a claimed right to compel arbitration, and the inconsistent conduct caused the non movant detriment or prejudice. Perry Homes, 258 S.W. 3d at 593-94. Whether a party has “substantially invoked the judicial process depends on the totality of the circumstances.” Id. at 589-90. Relevant factors include: (1) how long the party waited to move to compel arbitration; (2) how much discovery it conducted before moving to compel arbitration; and (3) whether the party asserted affirmative claims for relief in court. Id. at 590-91. “Merely taking part in litigation” was not enough to rise to the level of substantially invoking the judicial process.

Here, General Contractor’s counterclaims were compulsory and purely defensive in nature–that is, “use it or lose it” type claims. Moreover, General Contractor never sought judgments on the merits of the case. General Contractor sought to transfer venue, but venue challenges do not relate to the merits of the case. See Richmont Holdings v. Superior Recharge Sys., LLC, 2014 Tex. LEXIS 1211 (Tex. 2014). In addition, General Contractor filed motions for continuance, to quash depositions, and to designate responsible third parties (a procedure available to tort defendants in Texas that does not involve adding any parties). The Court found these actions were defensive rather than offensive in nature. A party’s litigation conduct aimed at defending itself and minimizing its litigation expenses, rather than taking advantage of the judicial form, does not amount to substantial invocation of the judicial process. Finally, Developer complained of an excessive delay in seeking arbitration. However, General Contractor moved to compel arbitration three months after it had been joined. The Court found that three months, while lengthy, was not an unreasonable delay amounting to waiver.

The Court then examined whether Developer proved it suffered unfair prejudice as a result of General Contractor’s litigation conduct. In this context, detriment or prejudice referred to an “inherent unfairness caused by a party’s attempt to have it both ways by switching between litigation and arbitration to its own advantage.” In re Citigroup Global Mkts., Inc., 258 S.W.3d 623, 635 (Tex. 2008). Here, General Contractor did not serve a single request for production, interrogatory, or deposition notice, therefore not giving it any more of an advantage that it otherwise would have obtained by switching back and forth. In summary, the Court held that General Contractor did not implicitly waive its right to compel arbitration.

The Court analyzed several other interesting issues in the case, including whether the issue of whether the General Contractor’s claims were timely under the language of the arbitration provision had to be resolved by arbitration (it did), and whether subcontractors and other parties who had not signed the arbitration agreement could compel arbitration (a complex issue, but they could not in this case).

Thanks to Ian Fullington at Griffith Davison & Shurtleff, P.C. for his assistance with preparing this post.

Join Us for a Breakfast Presentation on Updates to the Model Jury Instructions for Construction Litigation at the Forum's Annual Meeting

Please join Divisions 10 and 12 and the Construction Litigation Committee of the ABA Section of Litigation for a breakfast presentation on "Updates to the Model Jury Instructions for Construction Litigation: Charging to a Successful Verdict" at the Forum on Construction Law's Annual Meeting on Saturday, April 18, 2015, at 8:00 a.m. 

Join us to hear from Melissa Beutler, Vice President and General Counsel of Big-D Construction, Forum Division 10 Steering Committee Green Building Chair and ABA Section of Litigation Construction Litigation Committee Member. She is the lead editor of the soon-to-be-published Second Edition of the ABA Section of Litigation Construction Litigation Committee's book on model jury instructions for construction litigation. The First Edition quickly became a go-to resource for many construction litigators when it was originally released. Melissa will discuss key updates to the model instructions, and explain the book's use as a resource on jury instructions as well as a way to gain quick insight on the elements of key legal issues faced in the construction industry.

Join Divisions 1, 10, and 12 for cocktails at the Annual Meeting

Please remember to register for the 2015 Annual Meeting of the ABA Forum on Construction Law from April 16-18 in Boca Raton, Florida.

If you're planning to attend, Divisions 1, 10, and 12 are having cocktails on Thursday night at The Blue at the Boca Raton Resort. 

Please contact Emily Anderson to RSVP for this event. Space is limited. If you'd like to make reservations for a sit-down meal, you can do so online here.

Misuse of Construction Trust Funds May Prevent a Contractor From Discharging Its Liability in Bankruptcy

In a recent bankruptcy case in Texas, the court rejected a contractor’s attempt to discharge its liability for violation of a construction trust-fund statute. Tag Invs., Ltd. v. Monaco (In re Monaco), 514 B.R. 477, 2014 Bankr. LEXIS 3276 (Bankr. W.D. Tex. 2014). The trust-fund violation established that the contractor had breached its fiduciary duties to the trust beneficiaries with either actual knowledge of wrongdoing or reckless disregard to the risk that the conduct would violate the contractor’s duties. This was sufficient to reject a discharge under § 523(a)(4) of the Bankruptcy Code.

In many states, funds paid by an owner to a contractor to pay for subcontractors’ work are considered statutory “trust funds.” See, e.g., Tex. Prop. Code §§ 162.001, et seq. The contractor is deemed to be a “trustee” with certain fiduciary duties to the “beneficiaries” of the trust funds, including the subcontractors. Violation of the statute occurs when the contractor intentionally or knowingly does not apply the funds in the manner required under the statute. This can lead to civil liability and, depending on the statute, potential criminal prosecution. Such liability applies not only to the contractor, but to any officers, directors, or agents who control or direct the trust funds.

If such violations occur, the contractor may attempt to discharge its liability to the owner for the misapplied payments through bankruptcy proceedings. If the subcontractors have perfected liens against the owner’s property, the owner faces the risk of paying twice for the subcontractors’ work without any possibility of collecting reimbursement from the contractor.  

To reduce this risk, the owner has the option to challenge the discharge of the debtor’s liability. Section 523 of the Bankruptcy Code prohibits discharge of a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. 523(a)(4). If successful, the owner may then seek to recover the misapplied funds from the debtor (which could be the contractor, its officers, its directors, and/or its agents).

In the Monaco case, a contractor and several individual officers sought to discharge debts in bankruptcy that included claims asserted by an owner based on the debtors’ misapplication of trust funds. The contractor failed to pay several subcontractors despite receiving the funds to do so from the owner. The bankruptcy court found that the debts were not dischargeable, as the owner had shown that the debtors misapplied funds with sufficient knowledge to meet the requirements of § 523(a)(4) of the Bankruptcy Code. In particular, this finding was based on evidence that one of the officers submitted written certifications that all subcontractors and suppliers had been paid, when he knew they had not. These false certifications were intended to obtain payment from the owner and conceal the misapplication of the trust funds. Thus, the discharge was denied as to the officer who had signed the certifications. Another officer evidently was permitted a discharge because, though she likely knew the subcontractors had not been paid, she did not sign false certifications or engage in other conduct suggesting intentional violation of the trust-fund statute.

Bankruptcy proceedings can impose significant obstacles to the successful pursuit of claims against the debtors. Statutory fiduciary duties can serve as an important tool to owners seeking to overcome these obstacles.

An Invitation from Steve Lesser to Attend the 2015 Annual Meeting of the ABA Forum on Construction Law

boca 03 beach cuts from Becker & Poliakoff on Vimeo.

New Retainage Law Takes Effect in Massachusetts

The Commonwealth of Massachusetts has a new retainage law applicable to most private construction projects, which took effect on November 6, 2014.  The Retainage Law limits the ability of owners and contractors to negotiate retainage, punchlist, and substantial-completion provisions of certain private construction contracts.  It applies to any construction contract with an original contract price of not less than $3,000,000, and to which the Massachusetts mechanic’s lien law, M.G.L. Ch. 254, §§ 2 and 4, applies (i.e., contracts with prime contractors, all first- and second-tier subcontractors, and all first- and second-tier suppliers). Residential construction projects consisting of four or fewer units are exempt regardless of the contract value.  All construction contracts executed after the effective date are subject to the new law.

The Retainage Law limits the amount of retainage withheld from each progress payment to no more than five percent (5%) of the payment.  The law also specifically defines “substantial completion” as the stage of the project (or phase thereof, if applicable) at which work “is sufficiently complete . . . so that the project owner may occupy or utilize the work for its intended use.”  Any contract terms which conflict with this new statutory definition are void and unenforceable. 

The Retainage Law also prescribes a timeline and procedure for the release of retainage.  In general, retainage cannot be withheld for more than 90 days after substantial completion and seven additional days for each contract tier below the prime contractor.  The Retainage Law imposes a new statutory form of notice of substantial completion, which the prime contractor must submit to the owner within 14 days after achieving “substantial completion.”  The owner must accept or reject the substantial completion notice within 14 days of receipt and must send the general contractor a punchlist of deficient or incomplete items within 14 days after the owner’s acceptance. 

An owner may continue to withhold retainage, in limited amounts specified by the Retainage Law, for incomplete or incorrect work or deliverables and for certain outstanding claims.  In such event, the owner must, before the date payment is due, provide the party seeking payment with written notice describing the deficient or missing work items and deliverables, the basis of the outstanding claims, and the value attributable to each. 

The PowerPoint presentation in the link below provides more detail on the timeline and process for releasing retainage and on other aspects of the Retainage Law.  

New Massachusetts Retainage Law Powerpoint

The text of the New Retainage Law can be found here. 

Proposed legislation to change Florida's construction-defect notice statute

Sanjay Kurian recently posted an interesting article concerning proposed changes to Florida’s statute governing notice of construction defects. 

Proposed legislation to change Chapter 558

The Legislature will be considering legislation this year to change Chapter 558, Florida Statutes.  Chapter 558 is  required process for any party seeking to pursue claims for construction defects.  The original goal of Chapter 558 was to provide an opportunity to settle defect claims without litigation or arbitration, and not to create another source of dispute or litigation.  This bill is contrary to that original intent. The proposed bill would create new rights and defeats any realistic hope to amicably resolve claims as more fully explained below.  These changes, if enacted, will negatively impact all owners of construction improvements including hospitals, doctor’s offices, school buildings, condominiums, single family homes and commercial buildings.  The proposed legislation can be found here and the specific problems are noted below.

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Lunch Presentation on Advances in Construction Procurement and Performance for Owners and Contractors at the Forum's Midwinter Meeting

Please join Divisions 5, 11, and 12 for a lunch presentation on "Advances in Construction Procurement and Performance for Owners and Contractors" at the Forum on Construction Law's Midwinter Meeting on Thursday, January 29, 2015, from 11:30 a.m. to 1:00 p.m. 

The topic will be presented by Dr. Kenneth Sullivan, an Associate Professor at Arizona State University. Dr. Sullivan specializes in performance measurement, risk management, best value contracting, organizational transformation, and accountability systems. His processes have been implemented in design, engineering, construction, and facility services projects valued at $3B+. He holds a B.S. and M.S. in Civil and Environmental Engineering; MBA in Real Estate and Urban Economics; and PhD in Civil and Environmental Engineering from University of Wisconsin - Madison. Author of 120+ peer reviewed publications, he won the 2012 ASCE Journal of Leadership and Management in Engineering Best Article. Dr. Sullivan has created a Masters Degree program in Facility Asset and Project Management. He won the Ira A. Fulton School of Engineering 2008, 2009 and 2012 Teaching Awards and 2013 IFMA Educator of the Year.