Month: November 2010

Indemnity and Defense Obligations: Not Necessarily Absolute

Now that everyone’s had their fill of Thanksgiving food and good cheer, it’s time to get back to the old grindstone. One way to burn off those holiday calories is to exercise the old mind; hey, in my book, every calorie burned counts, not matter how you burn it!

The Virginia Supreme Court recently dabbled into the indemnity and hold harmless field in the case of Uniwest Construction, Inc. v. Amtech Elevator Services, Inc., 280 Va. 428, 699 S.E.2d 223 (2010), in which it considered whether a subcontractor had an absolute obligation to indemnify and hold a general contractor harmless. While the court held the subcontractor did have to indemnify and hold the contractor harmless, it held that obligation was not absolute, and only found the obligation after voiding another more specific obligation in the parties’ subcontract.

The subcontract had a very specific indemnity / hold harmless provision that required the subcontractor to indemnify the contractor even if the contractor was negligent. The court held that verbiage was too broad and conflicted with Virginia Code Sec. 11-4.1, which statutorily voids any provision contained in any contract relating to construction, alteration, repair or maintenance of a building, structure or appurtenance (including connected moving, demolition and excavation) if it contains language purporting to require one party to indemnify or hold harmless another party against liability for damage arising out of bodily injury or property damage caused by or resulting solely from the other party’s negligence.

So even though the facts didn’t give rise to a situation in that instance where the contractor was trying to hold the subcontractor liable for the contractor’s sole negligence, the court held the clause was nevertheless void in its entirety because it was contrary to the statue, and so there was no duty to defend or hold harmless under that provision. But the contractor wasn’t totally out of luck because it had been smart enough to include other flow-down language in the subcontract in the form of a general flow-down provision elsewhere in the subcontract, and the court held that flow-down provision established a more broad pass-through requirement to indemnify and hold harmless that nevertheless applied.

Major lessons learned: 1) overbroad indemnity / hold harmless clauses are void, regardless of whether the facts involve the sole negligence of the party seeking to enforce the provision, so avoid them; and 2) courts will construe contracts as the parties make them, so be careful what you include or accept in your contracts; and 3) the Virginia Code does have some provisions voiding otherwise agreed terms, but those public policy restrictions are not extensive and will not void other valid terms in the contract; and 4) those general flow down provisions can play important roles in the parties’ obligations owed to each other, so don’t ignore them or figure they’re just standard language without significant meaning.

Payment Bond: It’s not insurance

Many subcontractors presume that if there is a payment bond on a project they have insurance of payment from the surety, but that’s not true. A payment bond is not insurance. It only comes into play if the claim is covered by the payment bond and the claimant makes proper claim under the payment bond, or applicable statute.

Typically that includes a written notice requirement and then filing suit to enforce the bond claim within a specified period. There is no set periods or form for either for commercial construction projects, but for Virginia public projects (if bonds are required) the notice must be given within 180 days of last work or delivery and suit must be filed within one year of last work or delivery. The time period varies in NC for those that cross the border. A common norm is 90 days for notice and 1 year for suit, but again that will vary by specific bond or statute.

If claim is made, that does not, of itself, require the surety to pay the claim. The surety typically will investigate the claim first, and then decide if it believes payment is due; but even then it is not obligated to make payment unless the claimant provides notice when required and brings suit. Some states have “bad faith” statutes allowing pursuit of a surety that “drags its heels” in either investigation or payment, but Virginia is not one of them, so the surety does not always have incentive to move quickly if at all.

That all said, payment bonds remain a comfortable assurance of likely payment at some point, and projects with bonds are unquestionably better from a lower tier standpoint as a means of ensuring payment; but again perhaps not as prompt of payment as desired.

Holiday Cheer: WKRP Old School Sitcom Humor

The holiday season is always one of the best of the year. Getting ready for turkey day reminded me (showing a bit of my age here) of an old episode of WKRP in Cincinnati, in which the radio station tried a turkey giveaway promotion, but the station owner didn’t realize turkeys (at least big domestic ones intended for turkey dinner) didn’t fly.

Ordinary Building Materials versus Equipment or Machinery: The Difference is Time

Following up an earlier post, the Virginia Supreme Court In Jamerson v. Coleman-Adams Construction, Inc., 280 Va. 490, 699 S.E.2d (2010) recently discussed the distinction between ordinary building materials, which are subject to Virgina’s 5-year statute of repose, and equipment or machinery, which are exempt.

At issue was a specially fabricated steel platform that failed after construction and injured a firefighter while he was standing on it before sliding down the fire pole. The fireman filed suit more than 5 years after the contract was completed, because of which the trial court dismissed the case as beyond the 5-year repose period (Va. Code Sec. 8.01-250).

Below are the firefighter’s arguments, and the Virginia Supreme Court’s response:

– The pole and platform were equipment because there were warranted. No because the court distinguished independent manufacturer warranties and a basic policy to stand behind one’s product.

– The pole and platform were equipment because their erection was subject to close quality control. No because associated inspections were just reviews of the work and not quality control processes.

– The pole and platform were equipment because fabricator provided plans and installation instructions with them. No because the drawings were shop drawings prepared based on adaptation of the underlying contract requirements and the installation instructions were suggested guidelines.

– The pole and platform were not equipment because they were specially fabricated. No because uniqueness does not preclude characterization as ordinary building materials.

Confused? Obviously the distinction is very grey. One justice’s ordinary building material can very easily be another justice’s equipment or machinery. But it is important to keep abreast of such questions as it can have significant long term liability implications.

No License? – No Pay (Maybe)

Most states, including Virginia, have licensing requirements for contractors. Virginia’s requirements apply regardless of trade and regardless of whether the contractor is a prime contractor or one of the prime’s lower tier subcontractors.

Unlike some other states, Virginia has a 3-level “class” system for contractors, based – in general – on contract value: $10,000 or less = Class C; $10,000 or more up to $120,000 = Class B; and more than $120,000 = Class A (similar to an “unlimited” license in some other jurisdictions). Not only are there civil penalties for being unlicensed, but it is also a crime. There are certain exceptions, but rarely would they apply to a commercial project.

Besides being a crime, from a practical standpoint, non-licensure can also affect entitlement to payment. Non-licensure was previously judicially held as a total bar to payment in Virginia (and still is in North Carolina), but a key statute was revised to allow non-licensure as a defense to payment (but not the rest of the code requirements) if, even if not licensed, the contractor: 1) substantially performed with the contract terms; 2) in good faith; and 3) without actual knowledge of the licensure requirements.

It is always important to determine whether your contractor is licensed. There are sound practical reason for licensure, and while a license alone does not insure good workmanship, it is at least an indicator that the contractor has had requisite training and is not “fly by night.”

Conversely, if you are a contractor, it is important be be licensed. Not only is there the practical issue of entitlement to payment for your work, but non-licensure also establishes the basis for civil penalty, and criminal prosecution.

More information about Virginia’s licensure requirements is available at the Virginia Board for Contractor website.

License holders can be looked up on line at the Virginia Department of Professional and Occupational Regulation.

Delays: Time can, but doesn’t alway, equal money

Time is almost always “of the essence” for construction projects. But that doesn’t necessarily mean that every delay results in monetary loss. Absent “liquidated” damage agreements (i.e., each day of day = $x.xx), damages resulting from delays have be proven.

The most undisputed aspect is extended field or general conditions (i.e., the costs of running the project for each delay day). The most disputed aspect is unallocated or underabsorbed home office overhead, typically calculated using the so-called “Eichleay” formula. But either way, the party claiming money damages because of delay must substantiate that they were delayed, that the delay was along the critical path of the work, that there were not other concurrent delays, and that the party claiming delay did not cause the delay or fail to mitigate its affects or its damages.

Typically this will require some sort of Critical Path Method analysis. CPM analysis is the “standard” in federal procurement case law and is increasingly becoming so in other tribunals too; however, some courts, like Virginia’s Supreme Court, recognize that delay damages are recoverable by any proven methodology involving admissible testimony, and so that may or may not involve true CPM analysis.

As with most claim issues, the key is documentation, so if you are claiming delay you can substantiate your claim or if conversely you are rejecting a delay claim you can refute it.

Pay if Paid II – Mechanic’s lien affect

Some states prohibit mechanic’s lien waivers. But not Virginia. By statute, mechanic’s lien rights can be waived in Virginia. Construction attorneys have generally (I think I correctly speak for most) presumed that meant a clear and express waiver of lien rights.

However, a recent Circuit Court opinion agreed with the theory of bank counsel trying to void various mechanic’s liens on a project by arguing that: 1) because subcontractor subcontracts had enforceable pay if paid provisions; and 2) because the owner went bankrupt and was not going to ever be able to pay the prime contractor; that, therefore, the pay if paid clause had the effect of a mechanic’s lien waiver, and voided filed mechanic’s liens.

I respectfully disagree with the court’s analysis, and think this a totally wrong result; but this is another example of risk allocation that must be considered by any subcontractor before accepting a pay if paid provision in its subcontract, and another reason for prime contractors to consider adding such provision in their subcontracts, or of owners mandating such provisions to be flowed down in their prime contracts.

Whether that decision is appealed remains to be seen, but it is clearly another warning shot over the bow of subcontractor rights.

Controversial Contract Provisions – No Damages to Delay

Another controversial contract provision is a no damages for delay clause. Essentially, it provides that the sole remedy in a delay situation is a time extension, but no money for the delay impacts.

Depending upon how the clause is written, it could go further to all time related impacts, including acceleration or disruption too. Again, the question is risk allocation. The Virginia Public Procurement Act voids no damages for delay provisions for covered public projects, but the statute does not apply generally to all construction projects, nor is there a general voiding statute like in some other states.

So for commercial projects, the money impacts of delay are something the courts will leave to the contracting parties. That risk allocation can make or break projects and parties, as the costs of delays can be tremendous. So like with every contract clause, much thought should be given to whether this type of clause is appropriate to your needs and your risk tolerance.

Controversial Contract Provisions – Pay if paid

Following up an earlier theme about contracts, it occurred to me that there are various controversial contract provisions regularly used that warranted discussion. I will not say they are good or bad because, like opinions about art, such opinions are in the eye of the beholder; or in this case the party with control over what terms go into a contract.

As I’ve noted before, contracting is about allocating risk. One common way the risk of non-payment is allocated is a “pay if paid” clause. While variously worded, the key concept from the verbiage is that one party acknowledges pre-payment to the other as a condition precedent to payment to that other party. The most common example is in a subcontract, wherein the general contractor includes a provision that payment to a subcontractor is not due unless and until the general contractor is paid by the owner.

Some states, like North Carolina, have legislatively voided such provisions as being against state public policy; however, Virginia has not, and the Virginia Supreme Court, who has considered that question, has expressly upheld such provisions as being valid and enforceable if clearly and unambiguously written. There are certainly justifiable reasons for arguing both sides of enforcability and voidability.

For example, general contractors will argue they are not banks and so if they have not been paid upstream they should not have to pay downstream, whereas conversely subcontractors will argue they are not banks and in the business of doing work for free and as between they and the general contractor the general contractor has better means of controlling payment. The most common way this comes to a head is, as is more frequently occurring of late, an owner becomes insolvent or bankrupt and has no ability to pay for work in place.

Pay if paid clauses push that risk down to the lower level; a result welcome to the general contractor but untenable to its subcontractors. Again, fair or unfair depends upon your point of view, but prudence regardless dictates that if you are involved in the contract process you consider the pay if paid application; one way or the other.

Industry Forms: Is consensus really an advantage?

Many projects utilize industry forms such as the AIA or ConsensusDocs family of documents. The AIA family has, particularly, been an accepted “standard” in the industry for many years, and the Consensus have developed more recently as another series of alternative documents.

The clear advantages of these documents are their consensus; however, that conversely is their detriment. Contracting is all about risk allocation. Consensus tends to equate that risk, but not always equally; rather, the more prominent player in the consensus effort tends to maintain greatest advantage (much like in politics). For example, in the AIA (American Institute of Architects) series, the most protected party is – don’t be surprised here – the architects.

Each job and each contract have their own individual characteristics, important issues, needs, lack of needs, etc.; therefore, to rely upon any form as one-size-fits all should be looked at very, very carefully, and strong consideration given to individualized contracts to fit one’s specific needs and interests. There’s an old proverb I think equally applicable to industry forms that goes something like this: A camel is a horse designed by committee.

But, of course, camels too serve their purposes, so the question is do you need a camel for your purposes or do you really need a horse? The answer governs whether such industry forms are suitable for your particular need.

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