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#97:  DOL's New Independent Contractor Regulation

1/23/2021

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In an effort to avoid the costs and risks associated with the employment relation, contractors and construction managers often prefer to hire workers as “independent contractors” rather than employees.  And occasionally, they misclassify workers as independent contractors when legally they are not – often with nasty consequences.  (Imagine a contractor who has long treated its workers as independent being ordered to pay them for hundreds of hours of overtime!)
 
It’s pretty easy to screw this up.  The tests for distinguishing one from the other are not uniform among the various state and federal statutes governing employment – the Fair Labor Standards Act (FLSA), which prescribes minimum wage and overtime rules for employees, uses one set of factors; IRS uses another; state workers compensation and unemployment insurance statutes use still different tests (including from each other!); and the common law, focused on traditional agency concepts, yet another.  Some of these tests are quite restrictive, making it difficult to classify a worker as an independent contractor.
 
On January 6, 2021, the U.S. Department of Labor announced a new rule for classifying workers as independent contractors rather than employees for purposes of the FSLA, thus replacing a patchwork of court and administrative opinions on the issue with a comprehensive – and minimally restrictive – test for independent contractor status.  Its overarching premise is that “an individual is an employee if he or she is dependent on an employer for work and is an independent contractor if he or she is, as a matter of economic reality, in business for him- or herself.”  The “economic reality” test announced by the new regulation
 
  identifies and explains two core dependency factors: the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative and/or investment; and
  identifies three other guideposts in the analysis: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production.

The first core factor, the nature and degree of control over the work, weighs in favor of independent contractor status “to the extent the individual, as opposed to the potential employer, exercises substantial control over key aspects of the performance of the work, such as by setting his or her own schedule, by selecting his or her projects, and/or through the ability to work for others, which might include the potential employer's competitors.”

The second core factor, opportunity for profit or loss, weighs in favor of independent contractor status “to the extent the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work.”

This final rule expressly rejects the restrictive “ABC” test adopted by several states – including in New Hampshire for unemployment insurance purposes, as I have previously blogged (#3) – under which a worker must be (A) free from employer control, (B) perform work outside the employer’s business, and (C) be in business for himself/herself in order to be deemed an independent contractor.  Because only the Department of Labor’s interpretation of the FLSA is governed by the new rule, state laws are unaffected by it.  There is accordingly no universal standard; employers/hirers may face liabilities under one law and not under another.

The new rule has an effective date of March 8, 2021, which gives the Biden administration some time to decide whether to keep it or scrap it.  Business interests like it.  Unions hate it.  Biden’s nominee for Labor Secretary, Boston mayor Marty Walsh, is a former union official and former leader of Boston’s Building and Construction Trades Council – so it is easy to predict where his sympathies lie.  The rule is also vulnerable under the Congressional Review Act which allows simple majorities in both the House and Senate to repeal a new regulation within 60 days of its submission or publication.  We will know soon enough.
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#96:  Payment Bond Sureties and "Pay-if-Paid" Subcontracts

12/19/2020

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It is often said that a payment bond surety may assert all of the contractual defenses to payment enjoyed by its principal.  If the principal is a general contractor with a “pay-if-paid” clause in its subcontracts, must a subcontractor wait for the general contractor to be paid before it can collect on a payment bond?  I promised elaboration on this question in an earlier blog (#8).

For public works contracts where payment bonds are required by statute (RSA 447:16 et seq. for state and municipal projects, the Miller Act for federal projects), the answer appears to be “No.”  These statutes set the passage of time that the subcontractor is unpaid as the only precondition to payment under the bond, and courts reason that any other precondition would be inconsistent with the statutory scheme.  United States ex rel. Walton Technology v. Westar Engineering, 290 F.3d 1199, 1206 (9th Cir. 2002) (“Thus, the liability of a surety and its principal on a Miller Act payment bond is coextensive with the contractual liability of the principal only to the extent that it consistent with the rights and obligations created under the Miller Act.”).  No New Hampshire case has yet considered whether the same result obtains under state law, but the same logic applies.

What about payment bonds on private construction projects?  Outside of New Hampshire there is a split of authority on the question.  OBS Co. v. Pace Construction Corp., 558 So. 2d 404 (1990), construing Florida law, held that general contractor’s “pay-if-paid” defense was not available to a surety.  Wellington Power Corp. v. CNA Surety Corp., 217 W.Va. 33, 614 S.E.2d 680 (2005), construing West Virginia law, held that it was.  Several precedents can be found on both sides of the argument.

While New Hampshire’s Supreme Court has yet to take either side, it has held that when “a bond refers to and is conditioned on the performance of a specific agreement the latter’s terms become a part of the bond and the instruments should be read together as a whole. [citations omitted]  By its terms the bond insured the faithful performance of the contract . . . Thus the liability of the company as surety is coextensive with that of the principal . . .”  Paisner v. Renaud, 102 N.H. 27, 29 (1959).  This means one must examine the language of the bond in order to ascertain which “specific agreement” is incorporated into the bond, and thus which contract’s provisions are the measure of the surety’s exposure.

Many payment bonds in vogue today (the popular AIA A312 is an example) contain both indemnity obligations to the project owner and direct payment obligations to subcontractors and suppliers, but incorporate by reference only the prime contract between owner and general contractor.  That prime contract, of course, won’t contain “pay-if-paid” language, which is only found in subcontracts – and nothing in the bond’s description of payment obligations to subcontractors purports to incorporate their agreements.  Some courts have ruled against the surety on this basis.  See Paige International, Inc. v. XL Speciality Ins. Co., 267 F.Supp.3d 205, 215-16 (D.D.C. 2017), holding that the surety enjoys only the contractual defenses in its principal’s contract with the indemnitee, not those found in lower-tier subcontracts.

Incorporation of the terms of the prime contract may, depending on those terms, end up playing a decisive role.  Such was the situation in Maine Bonding & Casualty Company v. Foundation Constructors, Inc., 105 N.H. 470, 473 (1964), affirming a surety’s liability to pay subcontractor claims where the bond incorporated by reference a prime contract providing that “unless otherwise stipulated, the contractor shall provide and pay for all materials, labor, water, tools, equipment, light, heat and power necessary for the execution of the work.”  If the prime contract contains an unqualified directive that the contractor pay its subs and suppliers, that directive is likely to impose liability on the surety in an action under the bond, even if the claimant would strike out in an action under a "pay-if-paid" subcontract.
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#95:  Are Miller Act Claims Arbitrable?

11/30/2020

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The Miller Act, the federal statute providing for payment bonds on federal construction projects to protect unpaid subcontractors and suppliers, provides that suits on the payment bond “must be brought . . . in the United States District Court for any district in which the contract was to be performed and executed.”  40 U.S.C. § 3133(b)(3)(B).  The word “must” in the statute has been characterized by F.D. Rich Co. v. United States ex rel. Industrial Lumber Co., 417 U.S. 116, 125 (1974) as “merely a venue requirement” – a right to insist on where the lawsuit must be brought.  Because venue provisions can be waived, courts allow Miller Act claims to be litigated in a different court selected by the parties’ contract.  United States on behalf of Pittsburgh Tank & Tower, Inc. v. G. & C. Enterprises, Inc., 62 F.3d 35, 36 (1st Cir. 1995).

At the same time, courts have refused to enforce forum selection clauses that pick a state court rather than a federal court for resolving Miller Act claims, given the statute’s admonishment that the suit “must be brought . . . in the United States District Court . . .”  U.S. ex rel. B & D Mechanical Contractors, Inc. v. St. Paul Mercury Ins. Co., 70 F.3d 1115, 1117 (10th Cir. 1995) (“The parties’ selection of a state court forum is fatal to the clause’s enforceability. . . The Miller Act grants federal courts exclusive jurisdiction.”).

What if the parties’ contract calls for arbitration?  The Federal Arbitration Act instructs federal courts to enforce arbitration agreements according to their terms.  If a general contractor and subcontractor on a federal construction project have agreed to arbitrate any disputes, must the subcontractor’s payment bond claim under the Miller Act be arbitrated?

Twenty-one years ago, the answer was a rather clear Yes.   But in 1999, Congress amended the Miller Act to provide that  “A waiver of the right to bring a civil action on a payment bond required under this subchapter is void unless the waiver is (1) in writing; (2) signed by the person whose right is waived; and (3) executed after the person whose right is waived has furnished labor or material for use in the performance of the contract.” 40 U.S.C. § 3133(c).  An arbitration agreement is the quintessential “waiver of the right to bring a civil action,” and when contained in a signed subcontract it will necessarily be executed before labor or materials are furnished.

The legislative history of the amendment, H.R. Rep. No. 106-277 at *5 (1999), tells us: “This bill does not void subcontract provisions requiring arbitration or other alternative methods of resolving disputes. Such provisions would remain enforceable with a claimant’s Miller Act rights preserved by a timely suit that can be stayed pending the outcome of the subcontract dispute resolution procedure. The bill respects the freedom of the parties to the subcontract to specify means to resolve their disputes and the exclusive jurisdiction of the district court to decide issues arising under the Miller Act.”  This language can certainly be read as evidence of congressional intent that Miller Act claims not be arbitrable.

Keeping the Miller Act claim in court, but staying it pending arbitration of the breach of contract claim between the subcontractor and the general contractor, works well if the surety is bound by the outcome of the arbitration.  United States f/b/o Maverick Construction Management Services, Inc. v. Consigli Construction Co., Inc., 873 F.Supp.2d 409 (D.Me. 2012), a Miller Act and breach of contract case by a subcontractor on a project at the Portsmouth Naval Shipyard, is an example.  The surety, Federal Insurance Company, acknowledged “that its liability is coextensive with Consigli’s.  Maverick will not need to relitigate its claims against FIC following arbitration with Consigli.  It would be duplicative and risk inconsistent adjudications to allow Maverick to pursue its Miller Act claim against FIC in this Court simultaneously with its claims against Consigli in arbitration.”  Id. at 417-418.

If the surety has not agreed to be bound by the arbitration award, or if no claim is made against the general contractor at all, things get dicier.  I’ll address this scenario in a future blog.


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#94:  Trump, Biden and the Construction Industry

10/26/2020

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With Election Day just around the corner, here’s a quick review of how the candidates stack up on construction-related matters:

Infrastructure spending:  Trump has long promised significant infrastructure spending, but thus far his Administration has not produced a comprehensive infrastructure spending law, and no such program is formalized in any Plan he has released via campaign documents.  Although he has tweeted about a “big and bold” $2.0 trillion spending plan, his FY 2021 budget allocates only $75 billion for increasing surface transportation spending through a highway bill reauthorization, $190 billion for other infrastructure investments such as bridges and freight, and $9 billion for a capital fund for infrastructure investments.  The Biden Plan proposes a $2 trillion package for roads and bridges, public transit, the power sector, the automobile industry (including charging stations for electric vehicles),  and upgrading 4 million buildings and weatherizing 2 million homes over 4 years – all with a focus on energy efficiency and sustainability, with net-zero greenhouse gas emissions as the long term goal.

Minimum Wage:  During the October 22 Presidential debate, Biden supported raising the federal minimum wage to $15/hour.  Trump responded “I think it should be a state option. Alabama is different than New York.  New York is different from Vermont.  Every state is different.”  When pressed on the subject by the moderator, Trump said he would consider raising the federal minimum wage if given a second term, but gave no specifics.

Independent Contractor vs. Employee:  The U.S. Department of Labor is proposing a new rule that would make it easier to classify workers as independent contractors rather than employees for purposes of the Fair Labor Standards Act, which prescribes minimum wage and overtime rules for employees.  The rule would test whether a worker is in business for himself or herself (independent contractor) or is economically dependent on a putative employer for work (employee), by focusing on the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss based on initiative and/or investment.  Biden pledges to stop the misclassification of workers as independent contractors, and favors implementing California’s “ABC” test  on a national level. 

Paid Leave: as part of his Build Back Better program,  Biden supports 12 weeks of paid leave if a worker or a family member has a serious health condition.  Trump has signed legislation giving federal workers paid leave as well as emergency legislation for paid leave for COVID-related absences (the latter will expire at the end of 2020), but he has advanced no current proposal for paid leave generally.

Funding Social Security: Biden proposes that the 12.4 percent payroll tax which funds Social Security – half of which is paid by employers and half paid by employees – be levied on the first $400,000 of income (currently the taxable maximum is $137,700, increasing annually at the rate of wage growth).  In an August 12 news conference Trump announced his intention to replace the Social Security payroll tax with revenues drawn from the general tax fund, almost all of which is furnished by income taxes.

Foreign Trade:  Trump’s tariffs on Chinese and other foreign imports have made not only consumer goods more expensive, but inputs as well, particularly steel and aluminum.  He has said that he will maintain tariffs in a second term.  Biden has hinted that his administration would eliminate them – but as they benefit organized labor, a key base for him, Biden will find it hard to scrap tariffs on steel and aluminum. Trump’s and Biden’s positions on Buy American are also similar.

Right to Work:  So-called “Right to Work” laws forbidding labor unions from charging dues or “agency fees” to non-members are in place in 27 states (not including New Hampshire). In February Trump promised to veto the “PRO Act” which would have preempted these laws – a promise that was instrumental in Trump’s endorsement by Associated Builders and Contractors. Meanwhile, Biden pledges  to “repeal the Taft-Hartley provisions that allow states to impose right to work laws.”

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#93:  Spoliation During Construction

9/5/2020

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Parties to a lawsuit, or who reasonably should anticipate future litigation, have a duty not to destroy evidence crucial to their opponents’ claims or defenses.  Intentionally destroying material evidence to the prejudice of an opponent – called “spoliation” – can result in imposition of sanctions by the court, ranging from adverse inferences to preclusion of expert testimony to outright dismissal of a case.  The duty to preserve material evidence extends not just to documents and records, but also to physical items (for instance, in a products liability case the defective product itself).
 
But what about a building under construction?  Must an owner whose contractor abandons or is terminated from a project await a lawsuit before implementing the repairs that will destroy the evidence of defective work?  Compared to suspending routine document destruction programs or storing an offending product, putting construction on hold to avoid altering or destroying deficient work (or dismantling temporary accessories like scaffolding, shoring or cribbing) may place an unreasonable financial burden on the owner.  Courts understand this, and make allowances for it.  Miller v. Lankow, 801 N.W.2d 120, 128 (Minn. 2011) (“A rule that too broadly forbids a custodial party from making repairs or remediating damage when such repair or remediation is necessary may be both unfair and impractical . . . [W]e conclude that the duty to preserve evidence must be tempered by allowing custodial parties to dispose of or remediate evidence when the situation reasonably requires it.”).
 
Fortunately, the duty to preserve relevant evidence may be satisfied by affording the adverse party an adequate opportunity to inspect it prior to destruction.  American Family Mutual Insurance Co. v. Golke, 768 N.W.2d 729, 737 (Wis. 2009) (“a party or potential litigant may discharge its duty by giving the other side notice of a potential claim and a full and fair opportunity to inspect relevant evidence”).  Indeed, upon being notified of a claimed defect that could lead to litigation, the party alleged to be responsible may have some duty to affirmatively seek an inspection.  Miller v. Lankow, 801 N.W.2d at 130-31 (“[W]hen a party has sufficient knowledge to protect its interests and nevertheless does nothing, it is inappropriate to sanction the custodial party.”);  Aktas v. JMC Development Co., Inc., 877 F.Supp.2d 1, 13 (N.D.N.Y. 2012) (“When a party fails to request an inspection of the evidence after being notified of its existence, spoliation sanctions are not appropriate.”).  In the residential setting, New Hampshire’s opportunity to repair statute, RSA 359-G:4, comes into play here.  If a homeowner gives the contemplated statutory notice of a claimed defect to the contractor, who then declines to exercise his statutory right to request inspection, a later spoliation defense premised on lack of opportunity to inspect will be a tough sell.
 
While some states impose sanctions even for negligent spoliation, in New Hampshire “the general rule [is] that an adverse inference — that the missing evidence would have been unfavorable — can be drawn only when the evidence was destroyed deliberately with a fraudulent intent.”  Murray v. Developmental Services of Sullivan County, 149 N.H. 264, 271 (2003).   Inferring a subjective purpose of the spoliator to deprive an opponent of evidence can be challenging in construction settings.  In a Massachusetts Superior Court case, 333 Massachusetts Avenue Limited Partnership v. The Architectural Team, Inc., No. 06-4630-BLS2 (December 7, 2010), the defendants sought sanctions for plaintiffs’ spoliation of allegedly leaking facades of a building, claiming that “both before and during the course of this litigation, remediated, repaired and altered the very components of the building facade and the Defendants’ work allegedly involved in the claimed leaks, without notifying the Defendants or preserving evidence as they are duty-bound to do.”  The Court denied the request, concluding that “plaintiffs’ intent was not spoliation of evidence, but rather addressing failing facade components as circumstances required.”
 
Even if an invited inspection is declined by the contractor, the wise owner will thoroughly photograph or video any potentially defective workmanship before it is altered – and if a lawsuit results, share that evidence with her opponent.  Chances are it will be useful, perhaps even necessary, in order to prove the owner’s case in court anyway.
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#92:  Lost Profits and Waivers of Consequential Damages

8/13/2020

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In the law of contracts, damages suffered by the nonbreaching party may be either “direct” (loss of the benefit of the bargain, measured by the cost of remedying the deficient performance) or “consequential” (other reasonably foreseeable harm caused by the breach).  Normally both types of damages, if adequately proven, are recoverable in a lawsuit by the nonbreaching party.  But many commercial construction contracts provide for mutual waivers of consequential damages in the event of a breach.  Typical is the AIA’s A201 General Conditions (2017) § 15.1.7:
 
The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes:
.1 damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and
.2 damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit, except anticipated profit arising directly from the Work.
 
The concluding phrase “except anticipated profit arising directly from the Work” enshrines a distinction that courts have often made between lost profits as direct damages and lost profits as consequential damages.  In Mentis Sciences, Inc. v. Pittsburgh Networks, LLC, 2020 WL 5637697 (N.H. Supreme Ct. Sept. 22, 2020), a lawsuit against an IT service provider, the parties’ contract excluded liability for “any indirect, special, incidental, punitive or consequential damages, including but not limited to loss of data, business interruption, or loss of profits, arising out of the work performed or equipment supplied by the Service Provider . . .”  The New Hampshire Supreme Court concluded that the quoted language barred the plaintiff's claim for lost profits, noting that while "[l]ost profit damages may be direct or consequential depending on the circumstances . . . the claimed lost profit damages are not direct because the profits lost were not inherent in the contract, that is, the plaintiff did not stand to earn these profits as a direct result of its contract with the defendant."

The litmus test for distinguishing lost profits as direct damages from lost profits as consequential damages is “whether the lost profits flowed directly from the contract itself or were, instead, the result of a separate agreement with a nonparty,” Biotronik A.G. v Conor Medsystems Ireland, Ltd.,  22 N.Y.3d 799, 808, 11 N.E.3d 676 (2014).  A commercial owner's lost profits will always be of the latter type.  A contractor's might or might not be; its lost profits on the contract breached will qualify as direct damages, but lost profits on concurrent or future projects will not. 

Should you agree to a mutual waiver of consequential damages in your contract?  As between owner and contractor, the mutual waiver generally favors the contractor; an owner is more likely to suffer consequential damages from the contractor’s breach than vice versa.  While a waiver of consequential damages will preclude recovery for a contractor’s lost opportunity to perform other profitable work, that scenario normally arises only when its work is delayed by the owner – and if a “no damage for delay” clause is also in the contract, that ship will have already sailed.

A recent case suggests that consequential damages waivers can be undermined by provisions for capping damages – a common feature of engineering and architectural services contracts.  In Teatotaller, LLC v. Facebook, Inc., 2020 WL 4248507 (N.H. Supreme Ct. July 24, 2020), a lawsuit for wrongful deletion of an Instagram account causing the plaintiff to “lose business and customers,” the defendant’s contract stated that “we won’t be responsible . . . for any lost profits, revenues, information, or data, or consequential, special, indirect, exemplary, punitive, or incidental damages arising out of or related to [the Terms of Use], even if we know they are possible.  This includes when we delete your content, information, or account.”  The Supreme Court focused on the contract’s next sentence: “Our aggregate liability arising out of or relating to these Terms will not exceed the greater of $100 or the amount you have paid us in the past twelve months.”  The Court deemed damages “arising out of or relating to” the contract to be consequential, and concluded that the cap trumped the waiver.
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#91:  Liability Insurance for a Subcontractor's Defective Work

7/26/2020

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“May unintentionally faulty subcontractor work that damages an insured’s work product constitute an ‘accident’ under a commercial general liability insurance policy?”  With that opening sentence, the Michigan Supreme Court last month became the latest high court to give a “yes” answer, in Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., 2020 WL 3527909 (June 29, 2020).
 
Skanska, the construction manager of a hospital renovation project, hired a heating and cooling subcontractor whose liability insurance policy named Skanska and the owner as insureds.  When the subcontractor installed the expansion joints in the steam boiler and related piping backwards, the heating system got damaged.  Skanska made a claim against the policy which, in typical fashion, indemnified the insured for liability on account of property damage “only if: (1) The . . . ‘property damage’ is caused by an ‘occurrence’ . . .”  The insurer responded predictably, pointing to the definition of “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” and denying that the faulty installation of the expansion joints qualified as an “accident” because it wasn’t fortuitous.  The Michigan Supreme Court disagreed, interpreting “accident” as broader than “fortuity.”
 
The court found support for its conclusion by referring to the policy’s exclusion of coverage for an insured’s own work product, but with an exception for work performed by a subcontractor on the insured’s behalf:  “If faulty workmanship by a subcontractor could never constitute an ‘accident’ and therefore never be an ‘occurrence’ triggering coverage in the first place, the subcontractor exception would be nugatory.”  The court rejected the argument that an exception to an exclusion cannot create coverage where none exists, pointing out that it was obliged to read the contract as a whole and give effect to all of its provisions if possible.
 
This observation about the subcontractor exception to a coverage exclusion as indicative of initial coverage for faulty workmanship is nothing new.  U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871, 880 (Fla. 2007) (“the subcontractor’s exception to the general exclusion for a contractor’s defective work becomes important only if there is coverage under the initial insuring provision.”); Lamar Homes, Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1, 12 (Tex. 2007) (“By incorporating the subcontractor exception into the ‘your-work’ exclusion, the insurance industry specifically contemplated coverage for property damage caused by a subcontractor’s defective performance.”); National Surety Corp. v. Westlake Investments, LLC, 880 N.W.2d 724, 740 (Iowa 2016) (“It would be illogical for an insurance policy to contain an exclusion negating coverage its insuring agreement did not actually provide or an exception to an exclusion restoring it.”).  But what makes Skanska interesting is that the court took pains to distance itself from an earlier Michigan decision, Hawkeye-Security Ins. Co. v. Vector Construction Co., 185 Mich.App. 369 (1990), which had expressly relied on a New Hampshire case holding that “[t]he fortuity implied by reference to accident or exposure is not what is commonly meant by a failure of workmanship.”  McAllister v Peerless Ins. Co., 124 N.H. 676, 680 (1984).  The court of appeals in Hawkeye “agree[d] with both the reasoning and the conclusion as expressed by the McAllister court,” 185 Mich.App. at 378.  But the Michigan Supreme Court in Skanska decided that “because Hawkeye interpreted a 1973 policy that did not cover damage caused by a subcontractor’s faulty workmanship, Hawkeye is not persuasive.”
 
Will New Hampshire reach the same conclusion?  McAllister’s comment that “[t]he fortuity implied by reference to accident or exposure is not what is commonly meant by a failure of workmanship,” was repeated as recently as Concord General Mutual Ins. Co. v. Green & Company Building and Development Corp., 160 N.H. 690, 693 (2010).  But no subcontractor’s workmanship caused the damages in either McAllister or Concord General.  If our Supreme Court hears a case involving similar policy language, and abides by its longstanding rule that “[w]e will not presume language in a policy to be mere surplus,” International Surplus Lines Ins. Co. v. Manufacturers & Merchants Mutual Ins. Co., 140 N.H. 15, 19 (1995), it just might follow Michigan’s lead and hold that faulty workmanship can be a covered occurrence.
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#90:  Government Contractor Immunity

6/30/2020

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A few years back I blogged (#24) on the Spearin doctrine, which holds that adherence to government-imposed design specifications absolves the contractor from contract liability to the government when the finished product fails to perform as intended.  Spearin does not address tort liability to third parties injured by defective designs.  But its rationale – that the party at fault ought to bear the responsibility when things go awry – arguably applies there as well.
 
In the federal arena, Uncle Sam can be sued only with Congressional consent, and the Federal Tort Claims Act has not waived sovereign immunity for claims “based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government, whether or not the discretion involved be abused.”  28 U.S.C. § 2680(a).  Governmental adoption of design specs is almost always a discretionary function, so suing the Government for negligent design won’t work.  But what about suing the contractor who implemented the faulty design?
 
In Yearsley v. W.A. Ross Construction Co., 309 U.S. 18 (1940), a contractor who simply performed as the Government directed was held immune from suit.   The plaintiffs in Yearsley sued to recover damages for land that was washed away as the result of work done by a contractor in building dikes in the Missouri River under a contract with the United States Government.  The Supreme Court held that “if what was done was within the constitutional power of Congress, there is no liability on the part of the contractor for executing its will.”  Id. at 20-21.  The Court recently clarified that while government contractors do not “share the Government's unqualified immunity from liability and litigation,” under Yearsley they may sometimes “obtain certain immunity in connection with work which they do pursuant to their contractual undertakings with the United States.”  Campbell-Ewald Co. v. Gomez, 136 S.Ct. 663, 672 (2016) (quoting Brady v. Roosevelt S.S. Co., 317 U.S. 575, 583 (1943)).
 
Courts have dubbed this “derivative sovereign immunity.”  The “driving purpose of derivative sovereign immunity ‘is to prevent the contractor from being held liable when the government is actually at fault but is otherwise immune from liability.’”  In re U.S. Office of Personnel Mgmt. Data Security Breach Litigation, 928 F.3d 42, 70 (D.C. Cir. 2019) (quoting In re World Trade Center Disaster Site Litigation, 456 F.Supp.2d 520, 560 (S.D.N.Y. 2006).  Apparently it applies not just on federal projects, but to any project on which federally-imposed designs are followed.  Campbell-Ewald Co., 136 S.Ct. at 673 n.7 (“Critical in Yearsley was not the involvement of public works, but the contractor’s performance in compliance with all federal directions.”).
 
Overlapping the “derivative sovereign immunity” defense is the so-called “government contractor defense” to liability for procurement of negligently designed equipment, articulated in Boyle v. United Technologies Corp., 487 U.S. 500, 512 (1988), which immunizes a federal government contractor from liability for design defects when “(1) the United States approved reasonably precise specifications; (2) the equipment conformed to those specifications; and (3) the supplier warned the United States about the dangers in the use of the equipment that were known to the supplier but not to the United States.”  Boyle has been extended by several lower federal courts beyond equipment procurement to service contracts in general – and a subsequent Supreme Court case suggests that the logic of Boyle applies to service contacts too.  Correctional Services Corp. v. Malesko, 534 U.S. 61, 74 n.6 (2001) (citing Boyle and noting that “[w]here the government has directed a contractor to do the very thing that is the subject of the claim, we have recognized this as a special circumstance where the contractor may assert a defense”).
 
Whether Yearsley immunity and/or Boyle immunity will apply by analogy to designs implemented at the behest of state or municipal governments is presently an open question in New Hampshire.  A number of other states have adopted these defenses – and since RSA 541-B:19, I(c) furnishes the State of New Hampshire with the same discretionary function immunity enjoyed by the United States, don’t be surprised if our state falls in line.
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#89:  COVID-19 as a “Hazardous Substance” Justifying Delay or Suspension

5/24/2020

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For everyone’s protection, construction contracts often contain provisions for suspending work when a hazardous substance is encountered at a job site, with companion clauses governing extensions of time and extra compensation.  The AIA’s popular A201 General Conditions (2017), for example, contains these provisions:

§ 10.3.1  If the Contractor encounters a hazardous material or substance not addressed in the Contract Documents and if reasonable precautions will be inadequate to prevent foreseeable bodily injury or death to persons resulting from a material or substance, including but not limited to asbestos or polychlorinated biphenyl (PCB), encountered on the site by the Contractor, the Contractor shall, upon recognizing the condition, immediately stop Work in the affected area and notify the Owner and Architect of the condition.

§ 10.3.2  Upon receipt of the Contractor’s notice, the Owner shall obtain the services of a licensed laboratory to verify the presence or absence of the material or substance reported by the Contractor and, in the event such material or substance is found to be present, to cause it to be rendered harmless. . . . When the material or substance has been rendered harmless, Work in the affected area shall resume upon written agreement of the Owner and Contractor.  By Change Order, the Contract Time shall be extended appropriately and the Contract Sum shall be increased by the amount of the Contractor’s reasonable additional costs of shutdown, delay, and start-up.

§ 10.3.4 The Owner shall not be responsible under this Section 10.3 for hazardous materials or substances the Contractor brings to the site unless such materials or substances are required by the Contract Documents.

Is COVID-19 a “hazardous material or substance” within the meaning of this language?  You won’t find it on EPA’s comprehensive list of hazardous substances.  An infectious disease transmitted by human hosts is certainly not the type of “substance” one would normally think of as included, although scientists tell us that the virus can survive on hard surfaces such as metal or plastic for several days.  The contractual provision for testing is also a poor fit; as a practical matter nobody is going to test the site for the presence of COVID-19 when it is cheaper and easier simply to disinfect.

Even if COVID-19 counts as a hazardous substance, the next question is whether “reasonable precautions will be inadequate to prevent foreseeable bodily injury or death to persons.”  OSHA’s issuance of COVID-19 Guidance for the Construction Workforce tends to suggest that reasonable precautions will be adequate.

Then there is the difficulty of figuring out who introduced the virus into the site.  Under § 10.3.4, the Owner is not responsible if the Contractor’s workforce brought it to the project – and in cases of new construction where the Contractor had sole possession of the site, proving otherwise will be almost impossible.  Indeed, even raising the subject is risky business; if it turns out that the Contractor introduced the virus to the site, it would be liable under § 10.3.5 to “reimburse the Owner for the cost and expense the Owner incurs (1) for remediation of hazardous materials or substances the Contractor brings to the site.”

All things considered, premising a unilateral suspension of a project on the presence of the virus as a hazardous substance is a poor strategy.  The better course is to try for an extension of time under § 8.3.1:  “If the Contractor is delayed at any time in the commencement or progress of the Work . . . (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with Section 15.1.6.2, or other causes beyond the Contractor’s control; . . . or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.”  With many construction workers nervous about returning to work in close quarters – and particularly if a few have tested positive on their crews – manpower issues as excuses for delay will commend themselves to the sensibilities of all but the most jaded Architects.
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#88:   Battle of the Forms: When Is There an Enforceable Contract?

4/26/2020

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When contracts and subcontracts are negotiated, it is common for written drafts and redrafts to circulate between the parties, sometimes with a letter of intent to enter into a contract thrown into the mix, and sometimes with competing forms being used – a proposal or bid on one side, an expansive formal contract on the other.  Occasionally this back-and-forth will produce disagreement on whether a contract was actually entered into, i.e., whether an offer has been accepted.  The problem arises because acceptance doesn’t necessarily have to be in writing – and conversely, a signed writing doesn’t necessarily prove acceptance.
           
In Skyrise Construction Group, Inc. v. Annex Construction, LLC, 956 F.3d 950 (7th Cir. 2020), a federal appeals court affirmed summary judgment for a general contractor against a subcontractor in a case where each party had signed the other’s form.  The general contractor Annex requested bids to frame a multi-unit housing project in Wisconsin, and Skyrise submitted a bid to supply the rough framing carpentry labor.  Annex sent back a Letter of Intent expressing its intention to “enter into a contract with Skyrise” for the work, and informing Skyrise that Annex would “work on getting you contract documents in the near future.”  Skyrise immediately blocked off the project duration on its calendar and stopped pursuing other work for that period.

A few weeks later Annex sent Skyrise a six-page “Agreement Between Contractor and Subcontractor,” containing the general parameters of the agreement, along with a fourteen-page Exhibit A labeled “Subcontract General Conditions” detailing subjects such as timing, payment terms, insurance, modifications, and dispute resolution. Skyrise dragged its feet in responding, and ultimately requested that Annex sign Skyrise’s own proposal while Skyrise reviewed the contract documents.  Annex did so, writing on the face of the document “Contract exhibit A.”  Eventually Skyrise signed and returned the Proposed Contract, marked with some handwritten edits to the payment terms.  Annex never signed that revised version.
 
Ultimately Annex decided to go with a different sub.  Annex’s lawyer sent Skyrise a letter advising that Annex “will not be accepting and countersigning the Agreement as marked-up by Subcontractor and is therefore null and void.”  956 F.3d at 955. Skyrise sued, asserting that a contract was formed either when Annex signed Skyrise’s original framing proposal, or when Skyrise signed and returned Annex’s proposed contract.
 
The court rejected both assertions.  It first reviewed the applicable Wisconsin law of contract formation: that there must be a “meeting of the minds” on the same material terms expressed by objective manifestations rather than subjective beliefs.  (New Hampshire law is the same.)  As to signing Skyrise’s proposal, the court said that by adding the words “Contract exhibit A” to it, Annex indicated that it “intended for it to become part of the final agreement, not a contract in and of itself” – and that Skyrise indicated a similar understanding by saying it was still reviewing the proposed contract.  Thus, no contract was created “because neither party manifested an objective intent to do so at that time.”  Id. at 957.  As to Skyrise signing and returning a marked-up version of the proposed contract, the court said that by striking out its payment terms Skyrise was proposing “a material change to the contract” which Annex never accepted.  Id.  Hence, no contract was formed.

Skyrise demonstrates that getting a signature on a form in the hope of locking in a contract before all material terms have been agreed upon may be wasted ink.  If both parties are not on the same page on all of the essential terms of the deal, signing other pages won’t help.

Interestingly, the court also rejected Skyrise’s insistence that Annex had verbally agreed to the change in payment terms, by pointing to language in the proposed contract stating that it superseded “all prior negotiations, representations or agreements, whether written or verbal.”  Apparently Skyrise was tagged with having agreed to that provision by the act of signing without crossing it out.  The court may have botched that one; any assumption that the parties had reached an agreement on everything not crossed out would seem to be at odds with the ultimate conclusion that there was no enforceable contract at all.
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#87:  Coronavirus and Construction Delays

3/19/2020

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COVID-19 is interfering with the performance of contracts throughout the economy – and in the construction industry particularly.  All Boston construction projects were temporarily suspended effective March 17.  New Hampshire is not there yet, but projects in the Granite State are feeling the pinch.  Workers are staying home, manufacturers of components and products are slowing production, supply chains are being disrupted (particularly for foreign sources).  Even social distancing guidelines play a role in reducing efficiency (are you going to allow two or three people in your job trailer at the same time?).  All of this has created a coordination nightmare for project managers – and perhaps some angst over the OSHA requirement that places of employment must be “free from recognized hazards that are causing or are likely to cause death or serious physical harm to his employees.” 29 U.S.C. § 654(a)(1).  (Frequent hand washing on a job site?  Good luck with that!)

As project schedules inevitably suffer, the question will arise whether these are excusable delays justifying time extensions and the avoidance of delay damages, liquidated or otherwise.  This is where the legal doctrine of force majeure kicks in.  Force majeure (pardon my French) literally means “superior force” – what we might refer to colloquially as an “act of God” when natural disasters are in play, but also including an act of Government.  Mere economic hardship from unanticipated circumstances is not enough; there must be some exogenous obstacle to performance imposed by events beyond a contractor’s control, trouncing on his ability to perform the contract.

Unfortunately for contractors, force majeure has almost always been invoked as a reason to terminate a contract entirely as opposed to delay performance.  Federal contractors, though, have the benefit of the Federal Acquisition Regulations.  48 C.F.R. § 52.249-14 provides that “the Contractor shall not be in default because of any failure to perform this contract under its terms if the failure arises from causes beyond the control and without the fault or negligence of the Contractor.  Examples of these causes are . . .  (5) epidemics, (6) quarantine restrictions . . . Default includes failure to make progress in the work so as to endanger performance.”

Most private commercial construction contracts have clauses excusing delays occasioned by a variety of supervening events.  Section 8.3.1 of the AIA’s popular A201 – General Conditions of the Contract for Construction (2017), for example, authorizes extensions of time for “labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions ... or other causes beyond the Contractor’s control.”  Not all such clauses are so broad.  When the parties choose particular language to cover force majeure situations, courts usually enforce it literally.  See Richard A. Lord, 30 Williston on Contracts § 77:31 (4th ed.) (“What types of events constitute force majeure depend on the specific language included in the clause itself.”); United States v. Panhandle Eastern Corp., 693 F.Supp. 88, 96 (D.Del. 1988), aff’d, 868 F.2d 1363 (3rd Cir. 1989) (“Ordinarily, only when a force majeure clause specifically includes the event alleged to have prevented performance, will a party be excused from performance.”).  Few force majeure clauses specifically mention epidemic or outbreak of disease (watch how quickly that changes now!), and if parties are held to their enumeration of force majeure events and did not keep their language broad, this could spell trouble.

Even in contracts lacking any such clause, a variant of force majeure is sometimes applied by the courts under the rubric “impossibility of performance.”  But in New Hampshire, “to justify the termination of a contract on account of impossibility of performance, the impossibility must be complete and permanent.”  Perry v. Champlain Oil Co., Inc., 99 N.H. 451, 453 (1955).  Our Supreme Court has yet to weigh in on the doctrine’s interplay with extensions of time.

We will see how all of this plays out, but my advice to contractors faced with pandemic-related shortages of manpower or materials is to document schedule impacts carefully and seek a change order for schedule relief early on – regardless of what their contract language says, or even if it says nothing at all on point.  Prompt communication with owners is key.
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#86:  Mechanic's Lien Deadlines and Additional Work

2/29/2020

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The requirement in RSA 447:9 that a mechanic’s lien must be secured within 120 days of the lienor’s last furnishing of labor or materials has occasionally spawned disputes over what counts as that last day.  A would-be lienor who returned to the jobsite to do something which he hopes has reset the clock may find that he has waited too long.
 
The general nature of activities that will not extend the 120-day life of the lien has been the subject of few New Hampshire Supreme Court cases.  Tolles-Bickford Lumber Co. v. Tilton School, 98 N.H. 55, 58 (1953), held that “where a contract to furnish materials is to be regarded as completed, a subsequent gratuitous furnishing of material in the nature of a substitution or replacement to remedy a defect in the material originally delivered will not operate to extend the time within which to claim a mechanic’s lien.”  Bader Co. v. Concord Electric Co., 109 N.H. 487, 489 (1969), affirmed a ruling “that the work done in March by Bader on Concord Electric’s premises ‘was inconsequential and not done pursuant to the contract but done at the request of the owner to correct defects.’ Work of that nature could be found not to be such as to extend the duration of plaintiff’s lien.”
 
Such characterizations – “gratuitous,” “inconsequential,” “a substitution or replacement,” “to correct defects” – are helpful, but not always easy to identify.  “Warranty” work won’t count, but “punch list” work might.  Identifying when the lienor’s contract can fairly be said to have been “completed” may be useful.  But see Fraser Engineering Company, Inc. v. IPS-Integrated Project Services, LLC, 2018 WL 1525725 (D.N.H. March 27, 2018) (“this court is disinclined to hold as a matter of law that work done pursuant to a contract necessarily extends a mechanics lien”).
 
Some would-be lienors hurt their cause by sending a final invoice for the full balance due for all contract work more than 120 days prior to securing their lien.  See Tolles-Bickford, supra at 57 (“When the plaintiff submitted its final bill on January 31, 1951, there was included in the total debits and credits and enclosed therewith an invoice entitled ‘Materials delivered to complete contract.’”).  Sending a final invoice strongly suggests that full performance was achieved as of its date, justifying the inference that any return to the site thereafter was for performing touch-up work.  See Fabcon Precast, LLC v. Zirkelbach Constr. Inc., No. 218-2015-cv-1011 (Rockingham Super. Ct. Nov. 25, 2015) (Delker, J.) (“Because it represented that the work was 100% complete, the Court finds that the work performed on May 20, 2015—both the repair of the panels and the caulking—was remedial. The 120 days began to run on January 15, 2015. Accordingly, the failure to perfect the lien within that time is ‘fatal’ and the lien must be lifted.”)
 
If all of the work that the lienor is suing for was performed outside the 120-day window, courts might not even consider whether subsequent work extended the deadline.  Peabody v. Wentzell, 123 N.H. 416, 419 (1983) (“We need not determine whether the work performed by the plaintiff after September, 1979, was inconsequential, gratuitous or done merely to remedy defects, because there was sufficient evidence to support the master’s finding that the work at issue was not included in the parties’ contract.  Consequently, it was immaterial whether the work was inconsequential, gratuitous, or done merely to remedy defects.”)  In other words, a lienor may not reset the 120-day clock by performing work for which it is not seeking compensation.
 
The reference in Tolles-Bickford to sending a final bill has engendered some additional confusion.  In re McLaughlin, 2011 BNH 5, 2011 Bankr. Lexis 1656 (Bkrtcy. D.N.H. May 4, 2011), stated “The time starts to run not from the date the mechanic’s lien accrues but from when the final bill is sent or the last work is completed under the contract.”  If the phrase “whichever is later” had been added, the ruling would clearly be in tension with the statutory language; but if “whichever is earlier” were implied, the ruling would dovetail with the analysis discussed above.
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#85:  Who Decides Arbitrability?

1/12/2020

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Although arbitration clauses are common in many types of contracts and particularly in construction contracts, the contracting parties sometimes differ on their enforceability or their application to particular disputes.  “[W]hether the parties are bound by a given arbitration clause raises a question of arbitrability,”  Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002).  But is arbitrability itself a question for the court or for the arbitrator to decide?

The general rule is that questions of arbitrability are decided by the courts “unless the parties clearly and unmistakably provide otherwise.”  Appeal of Town of Durham, 149 N.H. 486, 488 (2003), quoting AT&T Technologies v. Communications Workers, 475 U.S. 643, 649 (1986).  What constitutes “clear and unmistakable” evidence that the power to determine arbitrability has been delegated to the arbitrator is often itself a contentious issue.  For example, an arbitration clause that incorporates the American Arbitration Association’s rules, which empower the arbitrator to decide issues of arbitrability, is usually deemed to be “clear and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator.”  Contec Corp. v. Remote Sol. Co., Ltd., 398 F.3d 205, 208 (2d Cir. 2005).  But in New Hampshire at least, if the parties’ contract allows one or both of them to elect either litigation or AAA arbitration for resolving contractual disputes, and one of the parties then insists on arbitration in accordance with AAA rules, that clarity and unmistakability are lost and the court will decide the arbitrability issue.  Hoyle, Tanner & Associates, Inc. v. 150 Realty, LLC, 172 N.H. 455 (2019).

A clear and unmistakable delegation clause is enforceable even where a party sues on a claim that is obviously not within the scope of what was agreed to be arbitrable; the opposing party can still invoke the delegation clause to insist that the arbitrator, not the court, decide its arbitrability.  Henry Schein, Inc. v. Archer and White Sales, Inc., 139 S.Ct. 524, 529 (2019), which likewise involved a contract incorporating the AAA rules, makes the point: “When the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract.  In those circumstances, a court possesses no power to decide the arbitrability issue. That is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.”  The Court brushed aside the argument that its ruling would invite “frivolous motions to compel arbitration,” noting that arbitrators “can efficiently dispose of frivolous cases by quickly ruling that a claim is not in fact arbitrable,” id. at 531.

Henry Schein has left courts with little wiggle room to deny a motion to dismiss founded on a valid delegation clause, but our own federal court has been among the first to start wiggling.  In Bossé v. New York Life Insurance Company, 2019 DNH 190, No. 19-cv-016-SM (Nov. 13, 2019), the defendant moved to dismiss a discrimination claim, relying on a delegation clause in a 2004 employment contract that had been terminated and did not form the basis of the plaintiff’s claim, but which recited that it would survive termination and govern “any dispute, claim or controversy arising between” the parties.  Judge McAuliffe denied the motion, ruling that he should decide arbitrability and deciding that the claim was not arbitrable.  Acknowledging that “there are no words used that explicitly limit the clause’s application to only those disputes bearing some relationship to or having some connection to the contract in which it is found,” he nevertheless held that at least a minimal relationship was required, finding that “[n]o reasonable person in either Bossé’s position or New York Life’s position would have understood the 2004 Partner’s Agreement arbitration provision (and survival provision) to require arbitration of any and all future claims of whatever nature or type, no matter how unrelated to the Partner’s Agreement, and no matter how distant in the future the claim arose.”

The case is now on appeal – itself a testament to how important this preliminary issue of who gets to decide the proper forum for adjudication often is to the contestants.
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#84:  Owners' Third Party Beneficiary Rights Against Subcontractors

12/22/2019

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In contract law the rule that only the parties to a contract can sue for its breach has a well recognized exception.  If you are a “third party beneficiary” of someone else’s contract, you can recover for its breach even though you are not a party to it – as long as the contracting parties so intended.

“A third-party beneficiary relationship exists if: (1) the contract calls for a performance by the promisor, which will satisfy some obligation owed by the promisee to the third party; or (2) the contract is so expressed as to give the promisor reason to know that a benefit to a third party is contemplated by the promisee as one of the motivating causes of his making the contract.”  Brooks v. Trustees of Dartmouth College, 161 N.H. 685, 697 (2011).  If we look no further than this language, the first of these two methods of establishing third party beneficiary status appears to be a perfect fit in the usual owner-contractor-subcontractor relationship: through his subcontract, the subcontractor (promisor) is rendering a performance that the general contractor (promisee) owes to the owner.  So does the second: subcontracts almost always tell the subcontractor (promisor) that a benefit to the owner is what the general contractor (promisee) has in mind in paying the subcontractor to perform.
 
But there is a gloss on this description of the test: the contract must also indicate “that the parties considered the third party’s legal status and intended to confer upon him a right to sue the promisor.”  Id.  An intent to benefit a third party and an intent to give that third party the right to sue for breach are very different things.  Because both are needed to give someone a right to sue for breach of another’s contract, property owners will generally not be considered third-party beneficiaries of contracts between their general contractor and its subcontractors.  They will merely be incidental beneficiaries, with no contract right of recovery against the subcontractors.
 
The main benefit to an owner in having a valid breach-of-contract claim against a subcontractor is avoidance of the "economic loss rule" precluding recovery for the subcontractor's negligent performance (see Blog # 29).  Without the right to an assignment of the subcontract in the event of default by the general contractor (see Blog # 39), there may be no mechanism for an owner to recover damages directly from the guilty party -- or at all, if the general goes under.

Ordinarily, intent can be either express or implied from surrounding circumstances.   In discerning an intent to allow an owner to sue for breach of a subcontract, however, courts around the country typically insist that it be express.  “The commentators and courts that have considered the question have concluded that unless the contract specifically so provides, the owner is an incidental beneficiary of the contract between the subcontractor and the contractor.”  Lazovitz, Inc. v. Saxon Construction, Inc., 911 F.2d 588, 591 (11th Cir. 1990).  No reported New Hampshire case has yet so declared, but it is a safe bet that a subcontract’s silence on the point will weigh heavily against finding third party beneficiary rights.

One way to dispel all doubt is to insert language in the subcontract disclaiming any intent to allow the owner a right to sue for its breach.  See Hrushka v. State Dept. of Public Works, 117 N.H. 1022, 1024 (1977) (“[I]f two contracting parties expressly provide that some third party who will be benefited by performance shall have no legally enforceable right, the courts should effectuate the expressed intent by denying the third party any direct remedy.”).  Interestingly, the popular AIA A401 (2017) subcontract form provides in section 1.5 that "The Subcontract documents shall not be construed to create a contractual relationship of any kind . . . (2) between the Owner and the Subcontractor, or (3) between any persons or entities other than the Contractor and Subcontractor." But it also provides in section 4.6.1 that the subcontractor's warranty extends "to the Owner, Architect and Contractor" -- which presumably gives the owner the right to sue the subcontractor for breach of warranty.  How this apparent inconsistency shakes loose remains to be seen.

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#83:  The Impact of Bankruptcy on Perfecting a Mechanic's Lien

11/23/2019

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As discussed in an earlier blog (#60), in order to “perfect” a mechanic’s lien in New Hampshire the lienor must institute court action for the purpose of getting an attachment order, Topjian Plumbing Heating, Inc. v. Bruce Topjian, Inc., 129 N.H. 481 (1987).  Suppose the owner files for bankruptcy protection before that step is taken.  Can the lienor still take it?
 
Upon the filing of a bankruptcy petition, the “automatic stay” found in Section 362 of the Bankruptcy Code prevents creditors from taking various acts including, per Section 362(a)(4), “any act to create, perfect, or enforce any lien against property of the estate” – but contains an exception in Section 362(b)(3) for any act to perfect an interest in property “to the extent that the trustee’s rights and powers are subject to such perfection under Section 546(b) of this title.”  Section 546(b), in turn, subjects the trustee’s powers to “any generally applicable law that permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of such perfection.”  Our question is whether New Hampshire’s mechanic’s lien statute is such a law.
 
It is tempting to conclude that such retroactive effect is accomplished by RSA 447:9, which states that mechanic’s liens “shall take precedence of all prior claims except liens on account of taxes.”  After all, this type of super-priority is akin to the Massachusetts environmental superlien statute at issue in In re 229 Main Street Limited Partnership, 262 F.3d 1 (1st Cir. 2001), which provided that “Any lien recorded, registered or filed pursuant to this section shall have priority over any encumbrance theretofore recorded, registered or filed with respect to any site . . . described in such statement of claim.”  The Court of Appeals held that “[s]uch perfection plainly is effective against entities which already had acquired rights in the property,” id. at 12, and accordingly ruled that postpetition perfection of such a lien “meets the combined requirements of section 362(b)(3) and 546(b)(1)(A) and therefore falls within the exception to the automatic stay carved out by those provisions,” id. at 13.
 
But one set of prior claims that RSA 447:9 does not give precedence over are claims of “bona fide purchasers of the property for value before the writ of attachment was recorded,” Chagnon Lumber Co. v. Stone Mill Const. Corp., 124 N.H. 820, 824 (1984).  A mechanic’s lien that the buyer knew nothing about, perfected by an attachment after her purchase, will not trump her interest – nor, presumably, that of the bankruptcy trustee under Section 546(b) of the Bankruptcy Code, to whom Section 545(2) grants the power to “avoid the fixing of a statutory lien on property of the debtor to the extent that such lien . . . is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists. . . .”
 
Until a bankruptcy case in New Hampshire directly addresses the post-petition perfection of a mechanic’s lien, we won’t know for sure whether the lien can still be perfected.  There is certainly reason for caution here.  But even if the exception in Section 362(b)(3) protects the lienor’s attachment effort from the ban of the automatic stay, that won’t condone the filing of a collection lawsuit against the debtor as the springboard for filing the motion to attach.   Fortunately, lienors are “not statutorily required to institute a suit for damages for breach of contract on the same writ that was used to perfect the materialman's lien . . . The attachment securing the lien serves a narrower purpose than the action for damages . . .”  Pine Gravel, Inc. v Cianchette, 128 N.H. 460, 465 (1986).  See Norcross v. Fahey, No. 2016-0304 (N.H. Sup. Ct., January 13, 2017) (“although RSA chapter 511-A allows a party to seek a pre-judgment attachment when filing an action on an underlying debt, nothing in the statute requires the party to file the underlying action before perfecting a mechanic’s lien pursuant to RSA 511-A:8.”).
 
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#82:  Extending the Deadline for Securing a Mechanic's Lien

10/9/2019

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RSA 447:9 and :10 provide that a mechanic’s lien must be secured through an attachment of the property improved within 120 days of the lienor’s last furnishing of labor or materials.   Over the years this statutory time frame has been lengthened by the legislature, from 60 days, to 90, and now to 120 – but actually recording a court-approved attachment within the allowable time has always been required.  As one early case noted, “The plaintiff’s lien depends for its existence and continuance upon a strict compliance with the provisions of the statutes.  Neglect to commence a suit and secure it by attachment upon the property within sixty days from the time the labor thereon was performed, or the materials therefor furnished, would operate to dissolve it.”  Marston v. Stickney, 55 N.H. 383, 385 (1875).

Suppose an unpaid contractor or supplier is trying to work things out with a customer as the 120-day deadline looms, and the parties want to extend the deadline.  Can they?

There are good reasons to think they can.  The time limit is designed to provide a fixed cutoff after which owners may rest easy.  In general, “statutory provisions enacted for the benefit of individuals may be so far waived by those for whose benefit they were enacted,” Mulhall v. Nashua Manufacturing Company, 80 N.H. 194, 205 (1921). This rule was applied to the notice rights of an owner in Janvrin v. Powers, 79 N.H. 44, 48 (1918) ("The statute prevents sub-contractors from acquiring liens upon the property of owners unless the statutory notices are given, and is for the protection of owners. The defendant's contention that he could not waive the statutory requirements of notice cannot be sustained. The statute being for his benefit there is no doubt that he could waive it.").

Then there is the statement in Tolles-Bickford Lumber Co., Inc. v. Tilton School, 98 N.H. 55, 58 (1953), that “The failure to perfect the lien within ninety days results in its expiration in the absence of a waiver which is not present in this case.”  (The statutory deadline was increased from 90 days to 120 days in 1991.)  Granted, this “absence of a waiver” language is what lawyers call dicta (statements not forming the basis for the decision), but the Court would have had little reason to mention a waiver exception if one didn’t exist.

I conclude that the 120-day deadline for an attachment to perfect a mechanic’s lien may be extended by agreement with the owner.  But what about time extensions without the owner’s agreement?  May the statutory deadline for the attachment be extended in any other way?

Recently a Superior Court judge ruled that just filing suit provides an automatic extension.  In considering several attachment petitions relating to the same project, he issued an order in one of the cases stating “This request is taken under advisement pending the issuance of a consolidated order on all other outstanding requests for mechanics’ liens and attachments related to this construction project.”  The plaintiff, a supplier whose 120-day window was about to close, immediately moved for interim approval of its attachment while the judge pondered his consolidated order.  The court denied the motion, ruling that “While RSA 447:10 suggests the mechanic’s lien may be secured by attachment made ‘while the lien continues,’ the Court finds the lien continues while the suit is pending, that the 120-days is tolled once the suit is filed. To hold otherwise would effectively and pragmatically deprive all would-be mechanic’s lien holders of the full 120 statutory lien period because they would realistically be required to file suit long before the 120-day period expires to ensure the granting of the attachment.”
 
This rationale falls apart if, as Justice Souter once wrote, “the court may grant an order of attachment ex parte ‘to perfect a labor and materials lien under RSA 447.’”  Chagnon Lumber Co. v. Stone Mill Const. Corp., 124 N.H. 820, 823 (1984).  And while the ruling appears favorable to lienors, it actually puts them at risk of losing out to “bona fide purchasers of the property for value before the writ of attachment was recorded,” id. at 824.
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#81:  Women-Owned Small Businesses

9/7/2019

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Since 2011, the Women-Owned Small Business (WOSB) program run by the SBA has afforded federal contracting opportunities to WOSBs by allowing contracting officers to set aside specific contracts exclusively for WOSBs in industries, like construction, where women-owned small businesses are underrepresented.  The enabling statute sets a goal of five percent of federal contracting dollars being awarded to WOSBs annually.  There are also limitations on how much work a WOSB can subcontract out to non-WOSB entities – for general construction contracts, it’s no more than 85% exclusive of the cost of materials.  13 C.F.R. § 125.6(a)(3).
 
The eligibility criteria for WOSBs are set forth in 13 C.F.R. § 127.201.  In general,
  1. The company must be “small” in its primary industry in accordance with SBA’s size standards for that industry.  (For construction trades, the maximum annual revenue of the company is currently $36.5 million for building contractors and heavy infrastructure contractors, $15 million for specialty trades.)
  2. The company must be at least fifty-one percent (51%) unconditionally and directly owned and controlled by one or more women who are U.S. citizens.
  3. Management and daily operation must be controlled by one or more of the women owners.
  4. The women owners must make long-term decisions for the business.
  5. For corporations, women must either: (1) comprise a majority of the Board of Directors (or have a majority of the Board votes through weighted voting); or (2) hold 51% of the voting power, sit on the Board and have enough voting power to overcome any supermajority requirements.
The diminished competition faced by WOSBs makes getting certified as a WOSB an attractive option.  Despite statutory changes in December of 2014 eliminating self-certification by WOSBs, thus far the SBA has continued to permit WOSBs to self-certify – but this is about to change under proposed regulations issued in May of this year.  Theoretically this change will lessen the number of sham or “paper” WOSBs that do not meet eligibility requirements – and particularly the requirement that the owners possess the managerial or technical experience and competency needed to control the business.

Illustrative of the problem is In the Matter of C & E Industrial Service, Inc., SBA No. WOSB-112, 2019 (S.B.A.), 2019 WL 1590652 (April 8, 2019).  C & E, a purported WOSB, was awarded a contract for rebuilding four parking lots at the White Sands Missile Range in New Mexico. An unsuccessful bidder protested the award, claiming that the owners of C & E, one of whom was its President, weren’t qualified to run a construction firm.  While they had significant managerial responsibilities at the firm, including overseeing administrative and field operations, their backgrounds were as school bus drivers.  Their husbands, on the other hand, had decades of experience in the construction field; one had 28 years of welding, commercial fabrication, construction, plumbing, heating and cooling experience along with 17 years in business ownership, management, and supervision, while the other had 25 years of industrial construction experience as a supervisor at a machinery and fabricating shop and in a construction company.
 
The SBA upheld the protest, finding that “the women owners lacked the adequate managerial experience and expertise to run the concern.  While Ms. Hernandez and Ms. Valles do perform administrative and financial tasks, they must also participate in the long-term decision making and day-to-day management to be found to be in control of the company.  A significant part of the day-to-day management, the field operations, are run by Mr. Hernandez and Mr. Valles. Moreover, the business license for Appellant lists Mr. Valles as the qualifying individual.  There is no indication that either Ms. Hernandez or Ms. Valles has supervisory control over the individual who holds the important business license, Mr. Valles, or over those with technical expertise, Mr. Hernandez and Mr. Valles.”
 
There are significant penalties for intentional misrepresentation of WOSB eligibility, including suspension, debarment and even civil or criminal penalties, but proving intent to dupe the Government is rarely a simple matter.  How much doing away with self-certification lessens the incidence of fraud remains to be seen.

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#80: Transitioning to the New Building Codes

8/11/2019

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Effective September 15, 2019, New Hampshire’s building codes – specifically the International Building Code, International Residential Code, International Plumbing Code, International Mechanical Code, International Existing Building Code and International Energy Conservation Code – will upgrade from their current 2009 versions to the 2015 versions published by the International Code Council.  The ICC updates its proposed codes every three years (there is already a 2018 version published), and New Hampshire is finally catching up to other New England states.

There are bound to be some fits and starts in implementing the transition – a subject the legislation adopting the 2015 codes did not address, and which is therefore left to the municipalities to deal with.  As of this writing, very few towns and cities have posted any guidance on how they will handle plans and applications already submitted to building code officials for approval under the 2009 versions.

It seems clear that approvals received prior to September 15, 2019 for plans and applications submitted under the old code will be honored without requiring revisions to implement new code changes, even for construction completed and building inspections conducted after that date – at least if the project is completed within a reasonable time thereafter.  Section 107.3.2 of the 2015 International Building Code and Section 106.3.2 of the 2015 International Residential Code both provide that “This code shall not require changes in the construction documents, construction or designated occupancy of a structure for which a lawful permit has been heretofore issued or otherwise lawfully authorized, and the construction of which has been pursued in good faith within 180 days after the effective date of this code and has not been abandoned.”  (The Town of Amherst has tweaked this by imposing a completion deadline of 180 days after September 15 for projects seeking to avail themselves of this safe harbor.)  
 
The thornier question is what to do about plans and applications in the pipeline that have not yet been approved by September 15 and are premised on the old code.  Don’t expect consistency here.  Some municipalities will take a hard line and insist on compliance with the 2015 codes.  (The Town of Chester, for example, has announced that “Any plans or applications submitted on or after September 1, 2019 must be designed to meet these codes.  Any project slated to begin after September 1, 2019 must also meet the new codes, regardless of application submittal date.”)  Others will continue to apply 2009 codes to pre-September 15 applications.  (The City of Nashua, for example, advises that projects “which have submitted an application for review prior to September 15, 2019 will be permitted to continue finalizing designs, receive permitting and have inspections performed to the applicable codes in effect at time of application, provided that final ‘For Construction’ building and building systems plans are submitted no later than December 15, 2019.”)
 
Pragmatically, a court challenge is more likely to be mounted against a strict approach (builders fully invested in a project designed to the 2009 codes may not be willing to eat significant redesign costs lying down) than against a lenient approach (someone injured due to a condition permitted by the 2009 code but forbidden by the 2015 code will likely see their lawsuit falter on a “discretionary function immunity” defense).  I suspect that many towns will favor the Nashua approach over the Chester approach for that reason. 
 
But don’t count on it.  If you will be applying for a building permit between now and September 15 in a town that has no published guidance on this issue, make a phone call and ask.  If you don’t get a straight answer – and maybe even if you do get a straight answer (local code enforcement officials’ off-the-cuff guesses, fueled by their desire for more time to study up on the changes, can get overruled later, spawning the kind of “municipal estoppel” lawsuits that make construction lawyers wince) – the wiser course may be to submit plans that comply with the updated code, even if it means having your architect troubleshoot and revise your design.
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#79:  Res Judicata and the Privity Element

7/21/2019

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How many bites at the apple is a litigant given to prove his claim?  Generally, only one.  This principle finds expression in a legal doctrine called res judicata, also known as claim preclusion, which “prevents parties from relitigating matters actually litigated and matters that could have been litigated in the first action.”  Merriam Farm, Inc. v. Town of Surry, 168 N.H. 197, 199 (2015). “[I]t applies if three elements are met: (1) the parties are the same or in privity with one another; (2) the same cause of action was before the court in both instances; and (3) the first action ended with a final judgment on the merits.”  Id. (quotation omitted).  The doctrine applies not only to court cases but to arbitrations.  Finn v. Ballentine Partners, LLC, 169 N.H. 128 (2016).
 
In this context “privity with one another” is shorthand for a substantive legal relationship between a party to the prior action and a non-party, one which makes it fair to conclude that “the interests of the non-party were in fact represented and protected in the prior litigation,” Cook v. Sullivan, 149 N.H. 774, 779 (2003), such as “when a person controls or substantially participates in controlling the presentation or if a non-party authorizes a party in litigation to represent his or her interests,” id.   Representation of interests is to be distinguished from commonality of interest.  As noted in New Hampshire Motor Transport Ass’n v. Town of Plaistow, 67 F.3d 326, 328 (1st Cir. 1995), “normally something more is required for privity between the prior and present litigants than merely a common interest in the outcome.”
 
Is the relationship between a general contractor and its subcontractors enough to establish the necessary privity?  If we analogize the contractor–subcontractor relationship to the employer–employee relationship, the answer would seem to be No.  In Daigle v. City of Portsmouth, 129 N.H. 561, 573 (1987), the Court “reject[ed] privity by employment for the basic reason that an employer representing himself does not necessarily defend the interest of the employee whose behavior has become the occasion for legal action. There is, rather, a potential for conflict between their respective interests, and this case illustrates it well: the employer’s option to defend by claiming that its employee acted outside the scope of his employment is an option to defend the employer by sacrificing the employee.”  The same is true when a GC defends against an owner’s tort claims on grounds that its subcontractor is an independent contractor for whose negligence the GC bears no responsibility.
 
It follows that a subcontractor is not automatically stuck with the outcome when the GC botches the claim – unless he had a duty to intervene in the case to assert his own rights, or authorized the GC to spearhead his claims (see Blog #55: Pass Through Claims).  But he may still stick the owner with the outcome if the GC won the prior case.  Say an owner litigates claims and counterclaims with his general contractor, and then sues the subcontractors for the same alleged sins.  The subs should be able to invoke res judicata even though they were not parties to the first lawsuit.  This result is suggested by Fiumara v. Fireman’s Fund Ins. Companies, 746 F.2d 87, 92 (1st Cir. 1984), where an insured litigated a case against his insurers in state court, and later sued the insurer’s investigators and testing laboratory in federal court:
 
“While these appellees were not parties to the state suit, the application of res judicata and collateral estoppel, both in the federal courts and in New Hampshire, is no longer grounded upon mechanical requirements of mutuality.  Instead, the significant question is whether a party has had a full and fair opportunity for judicial resolution of the same issue.  That opportunity was palpably present in the state court proceedings. And, given the allegations of the federal complaint that [appellees] were each and all acting as agents of the insurers when they committed the putative misdeeds for which they have now been sued, they clearly qualify as persons in privity with FFIC and DMFIC.  Thus, the res judicata defense is unmistakably available to them.”
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#78:  Substantial Completion: Whence It Came, Why It Matters

6/22/2019

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In the law of contracts, any failure to perform any promised duty is a breach.  Historically, whether a breach justified a complete refusal to pay the breaching party for goods or services furnished depended on whether the nonbreaching party received or refused the benefits of partial performance.  If he accepted them, he was obliged to pay for them; but if he opted to refuse them, he need not pay any of the agreed contract price.  This was dubbed the “perfect tender” rule: if a contract is made to do X for an agreed price, and X isn’t perfectly done, the nonbreaching party could refuse to pay any part of the price.

The first case to alter this rule was Britton v. Turner, 6 N.H. 481 (1834).  Britton had agreed to work for Turner for a full year, at the end of which Turner had agreed to pay him $120.  Britton quit after ten months and Turner refused to pay him a cent.  The court held that Turner must pay the fair value of Britton’s services (minus any damages from his failure to perform completely). Justice demanded that the divisible nature of the contract’s day-to-day performance precluded Turner’s rejection of their benefits, which were automatically deemed accepted.

Britton v. Turner limited its holding to “divisible” contracts (benefits accrue as performance is rendered) as opposed to “entire” contracts (benefits accrue only upon completion), and appeared to place construction contracts in the latter category: “[W]here the party has contracted to furnish materials, and do certain labor, as to build a house in a specified manner, if it is not done according to the contract, the party for whom it is built may refuse to receive it--elect to take no benefit from what has been performed.”  Eventually the courts abandoned this fallacy, and began treating construction contracts the same as labor contracts.  Danforth v. Freeman, 69 N.H. 466, 468 (1899) (“in special contracts for labor day by day, or for labor and materials in erecting a building upon the land of another, the person for whom the work is done necessarily receives the value of the work done as it is done, and if any advantage has accrued to him therefrom, is liable to pay for the benefit received,--the worth to him of the partial performance of the contract by the other party.”).

This has now morphed into the doctrine of “substantial performance,” which is “intended to protect the right to compensation of those who have performed in all material and substantive particulars, so that their right to compensation may not be forfeited by reason of mere technical, inadvertent, or unimportant omissions or defects.”  15 Samuel Williston, A Treatise on the Law of Contracts § 44:52, at 220-21 (4th ed. 2000).  The nonbreaching party is entitled to offset any costs of completion or correction – but he may not reject the performance and refuse to pay anything just because the finished product was not delivered 100% to his specifications.  Today the right of rejection due to lack of perfect tender is restricted to contracts for the sale of goods.

In the construction context “substantial performance” is equivalent to “substantial completion.”  Contracts will often define the phrase (the stage of construction at which the owner may use the work for its intended purposes being a particularly popular definition), and many contracts use it as a trigger for various things ranging from the initial release of retainage, to the cessation of liquidated damages, to the beginning of the warranty period.  It also starts the commencement of the eight-year statute of repose under RSA 508:4-b.  And most importantly, it renders the contractor’s breaches insufficiently material to justify terminating his contract.  As one leading commentator put it, “Substantial performance is performance without a material breach, and a material breach results in performance that is not substantial.”  E. Allen Farnsworth, Contracts § 8.12 (4th ed. 2004).  Upon achieving substantial completion, an unpaid contractor may sue for breach of contract and recover damages measured by the agreed contract price less any costs of completing or correcting the work (i.e., punch list items).
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#77:  Mechanic's Lien vs. Mortgage: A Quirk in the Priority Scheme

5/26/2019

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A few years back I blogged (#42) on priorities as between mechanic’s liens and earlier-filed construction mortgages (the mechanic’s lien wins, subject to a couple of exceptions), and as between mechanic’s liens and earlier-filed conventional mortgages (the conventional mortgage wins).  This priority scheme raises the possibility that the priorities may not be transitive: A could trump B, B could trump C and C could trump A if a construction mortgage is recorded first, a conventional mortgage is recorded second and a mechanic’s lien is recorded third.  In such a case, what will be the pecking order after a foreclosure?

Recently the New Hampshire Supreme Court rendered an opinion on a somewhat analogous fact pattern that may shed light on our question.  In Sabato v. Federal National Mortgage Association, 172 N.H. 128 (2019), the plaintiff’s wife gave two mortgages on her home to two different mortgagees, but the plaintiff waived his $120,000 homestead exemption – which trumps a mortgage if not waived, see RSA 480:5-a – only as to the second mortgage.  When the second mortgagee foreclosed and bought the property at auction for $64,872 subject to the first mortgage, the question arose whether the homestead exemption had been extinguished by the foreclosure even as to the first mortgage.  “The plaintiff contended that foreclosure of the second mortgage did not affect his homestead right because he had not waived that right in the first mortgage.  FNMA argued that, because the plaintiff waived his homestead interest in the second mortgage, he could not now assert any homestead right.”  Id. at 130.

Both positions were rejected.  Noting that “upon foreclosure, the plaintiff’s homestead right had priority over the first mortgage,” the Court ruled “the waiver gave [the] second mortgage priority over the first mortgage up to the value of the plaintiff’s homestead right ($120,000),” meaning that when it “foreclosed its second mortgage, it stepped into first position up to a maximum of $120,000 because it, unlike the first mortgagee, had access to the value of the homestead right, and that right, as previously noted, had priority over the first mortgage.”  Id. at 133.  Since the $64,872 bid at the foreclosure sale was the second mortgage balance, there was no surplus to deal with, but the Court nevertheless said this: “Had the property sold for more than the indebtedness under the second mortgage note, the surplus proceeds up to the remaining balance of the plaintiff’s homestead exemption would have been exempt from the first mortgage and payable to the plaintiff before FNMA, as holder of the first mortgage, received any proceeds.”  Id. at 134.

The Court then addressed the extent to which the homestead exemption had been extinguished by the foreclosure, ruling that “any portion of the exemption left after satisfying the second mortgage, which continues to exist in either the surplus [citation omitted] or, we now hold, in the property, is not subordinate to the mortgage and is not extinguished by the foreclosure. . . The waiver of the plaintiff’s homestead exemption in the second mortgage did not impute a waiver into the first mortgage; rather, the waiver in the second mortgage merely gave the second mortgagee the right to step into the plaintiff’s shoes with respect to his priority over the first mortgage up to the value of the homestead exemption . . . The plaintiff, having waived his homestead right in the second mortgage, has no grounds to complain that the second mortgagee has availed itself of the homestead to satisfy its mortgage and left him unable to assert his entire homestead exemption against the first mortgagee.”  Id. at 135.

The analogy between a homestead exemption and a mechanic’s lien is not perfect, but Sabato suggests that a mechanic’s lien with priority over a first mortgage but not over a foreclosing second mortgage will be extinguished by the second mortgagee’s foreclosure only to the extent necessary to satisfy the second mortgage balance.  A sales price at foreclosure above that amount will likely be deemed to create a fund on which the mechanic’s lienor has first dibs.  To be safe, the lienor may need to bid at auction a price sufficient to cover not only the second mortgage balance but the lien amount as well.
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#76:  Indemnity and the Statute of Repose

4/24/2019

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New Hampshire’s statute of repose for construction claims, RSA 508:4-b, puts a time limit of eight years from the date of substantial completion on the filing of most lawsuits challenging construction and design deficiencies in the creation of an improvement to real property, after which time no suit can be brought regardless of whether the claim was latent and not discoverable for most or all of that period.  In this respect it is unlike the statute of limitations, RSA 508:4, whose three-year clock does not start ticking until the claim “accrues” -- which may be more than three years after the breach of duty occurs if the breach and resulting injury were neither discovered nor reasonably discoverable until later.
 
The statute of limitations operates differently with respect to indemnity claims, which “do not accrue for the purposes of the statute of limitations until a judgment has been paid by the third-party plaintiff” because the “statute of limitations cannot possibly start to run on an indemnity claim until the party seeking indemnification suffers a loss.”  Jaswell Drilling Corp. v. General Motors Corp., 129 N.H. 341, 347 (1987).  Often a suit brought within that three year limitations period will result in a judgment beyond it, yet still allow the loser’s indemnification suit against the indemnitor to proceed even though filed well more than three years after the underlying claim accrued.  But what if the party seeking indemnification suffers that judgment, that “loss,” more than eight years after substantial completion of the improvement giving rise to the underlying claim?  Does the statute of repose shut out his right to indemnity?
 
A recent decision from New Hampshire’s federal district court says it does.  In Continental Western Insurance Co. v. Superior Fire Protection, Inc., Civil No. 18-cv-117-JL, 2019 WL 1318274 (D.N.H. March 22, 2019), the inspector/tester of a sprinkler system was sued by the subrogee of the hotel where the system had failed, and in turn sought indemnity or contribution from the installer of the system.  The installer, having substantially completed its work more than eight years prior to the lawsuit, sought refuge under the statute of repose.  The inspector/tester countered that its claim for indemnity did not accrue until it was sued by the subrogee.  But “accrual” is not the trigger under the statute of repose, said Judge LaPlante.  Rather, substantial completion is the trigger, barring indemnity and contribution claims “even if those claims would — as they would here — accrue after the repose period has run.”  The Court granted the installer’s motion for summary judgment.
 
What is somewhat unusual about this case is the fact that the underlying action by the subrogee against the inspector/tester was not itself barred by the statute of repose (because the allegedly deficient inspection/testing of the sprinkler system was not a  “deficiency in the creation of an improvement to real property,” and in any event occurred years after that improvement was substantially complete).  In most construction settings the would-be indemnitee, if sued within eight years of substantial completion of the improvement at issue, will still be timely in seeking indemnity from an indemnitor -- as long as he doesn’t wait to suffer a judgment first.  And he doesn’t need to wait.  As Judge McNamara noted in Penta Corporation v. Town of Newport, No. 212-2015-CV-00011, 2015 WL 11182532 (Merrimack Super. Ct., Nov. 20, 2015), “While technically the right to indemnity arises when a judgment is rendered in favor of another, it has long been the practice to try indemnity claims, when properly pled, along with an underlying action.”  Indemnity claimants would be well served to file their cross-claims against potential indemnitors in the underlying action, before the eight-year repose clock winds down.
 
Quaere: Continental Western concerned a claim of derivative or equitable indemnity, not one of express contractual indemnity.  If there had been such a contractual right to indemnity, would a claim for breach of that contract still have been barred by the statute?
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#75:  Recovery for Defective Work After Termination for Convenience

3/13/2019

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Many contracts specify that an owner may terminate a contractor, and many subcontracts specify that a contractor may terminate a subcontractor, either for cause (i.e., for breach) or for “convenience” (i.e., without breach).  Generally there are different remedies associated with each type of termination, with convenience terminations providing for more favorable benefits to the terminated party.  And there could be one unintended benefit: protection against backcharges for defective work.
 
Shelter Products, Inc. v. Steelwood Construction, Inc., 257 Or.App. 382, 307 P.3d 449 (2013), explains the logic.  A general contractor (Catamount) terminated one of its subcontractors (Steelwood) under a clause in their subcontract that read “The Contractor may, upon seven (7) days written notice to the Subcontractor, without cause and without prejudice to any other right or remedy, terminate this Subcontract, in whole or in part, for its convenience . . . The obligations of the Subcontractor shall continue as to portions of the work already performed and as to bona fide obligations assumed by Subcontractor prior to the date of termination. Subcontractor shall be entitled to be paid the full cost of all work properly done by Subcontractor to the date of termination not previously paid for, less sums already received by Subcontractor on account of the portion of the work performed.”
 
When Catamount refused to pay Steelwood’s last materials invoice, Steelwood sued -- and Catamount counterclaimed for alleged defective work.  The trial court disallowed the setoff, and the appeals court agreed, ruling that “the text of the termination for convenience clause, in context, does not under the circumstances of this case permit Catamount to both terminate Steelwood without cause and subsequently proceed against Steelwood as if it had terminated the agreement for cause. . . [W]e are persuaded, at least in the absence of an opportunity to correct allegedly defective work, that, where a party has terminated a contract for convenience, that party may not then counterclaim for the cost of curing any alleged default.”
 
Depriving a terminated contractor of an opportunity to cure defects was likewise the basis for rejecting defective workmanship claims in TRG Construction, Inc. v. Water & Sewer Authority, 70 A.3d 1164, 1167-68 (D.C. 2013) (“Upon terminating a contract for convenience, the government loses whatever right it has to hold the contractor responsible for correcting deficiencies in the work included in the terminated portion of the contract”), and in Paragon Restoration Group, Inc. v. Cambridge Square Condominiums, 42 A.D.3d 905, 839 N.Y.S.2d 658 (2007)  (“[w]here [defendant] elects to terminate for convenience . . ., whether with or without cause, it cannot counterclaim for the cost of curing any alleged default’”) (quoting Tishman Constr. Corp. v City of New York, 228 A.D.2d 292, 293 (1996)).
 
This last comment may be overbroad, since defaults come in many forms aside from poor workmanship, some of which may not be curable by the terminated party.  Old Colony Construction, LLC v. Town of Southington, 316 Conn. 202, 113 A.3d 406 (2015), for example, held that liquidated damages could be recovered from a contractor who was terminated for convenience.  But if a contractor’s right to cure is vitiated by a termination for convenience, uncured defects in its work may well leave the owner with no recourse.
 
This is not to say that every termination for convenience clause is so worded as to leave the terminating party without a remedy for defective work.  Parties are free to craft language preserving that right.  How New Hampshire courts will rule on the matter will undoubtedly depend on the precise clause at issue.  But this much is reasonably certain: if the contract afforded the terminated party with an opportunity to correct deficiencies -- Section 12.2.1 of the popular AIA form A201 General Conditions is an example -- termination for convenience is far more likely to preclude recovery for uncured defects.  An owner who has cause to terminate a contract, but chooses instead to terminate for convenience, may end up regretting it.
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#74:  Disclaiming Implied Warranties: Public Policy Considerations

1/1/2019

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A necessary principle of contract law is that “[p]arties generally are bound by the terms of an agreement freely and openly entered into,” Mills v. Nashua Federal Sav. and Loan Ass’n, 121 N.H. 722, 726 (1981).  The word “generally” here is important, for courts “will not enforce a contract or contract term that contravenes public policy,” Harper v. Healthsource New Hampshire, 140 N.H. 770, 775 (1996). “An agreement is against public policy if it is injurious to the interests of the public, contravenes some established interest of society, violates some public statute, is against good morals, tends to interfere with the public welfare or safety, or, as it is sometimes put, if it is at war with the interests of society and is in conflict with the morals of the time.”  Id. (quotation omitted).

The implied warranty of habitability attending new construction, affording consumers a minimum level of protection against latent defects that are not readily identifiable from inspection of the premises, is itself a creature of public policy.  Nevertheless, a contractor or developer will occasionally try to disclaim it, usually by providing an express limited warranty in connection with new construction that limits a customer’s remedies to the strict terms of the limited warranty to the exclusion of any other warranties express or implied -- including implied warranties of workmanship and habitability.  This puts the public policy behind the implied warranty in tension with freedom of contract.

Nowhere is this tension more stark than in the case of building codes, which by their nature are public policy expressions of the minimum level of required protection for occupants of buildings. Any effort by a contractor or developer to disclaim the implied warranty of good workmanship or the implied warranty of habitability will, to the extent that code compliance is embraced by the warranty, be suspect.
 
While our Supreme Court has not had occasion to rule on the issue, Massachusetts courts have long held that disclaimers of implied warranties, which include but go beyond building code compliance, are invalid.  This was recently reaffirmed in Trustees of The Cambridge Point Condominium Trust v. Cambridge Point, LLC, 478 Mass. 697, 705 (2018):
 
“Massachusetts has a well-established public policy in favor of the safety and habitability of homes, as reflected in our implied warranty of habitability under common law and in the legislative enactment of building codes. . . . We have emphasized that ‘[the implied warranty] cannot be waived or disclaimed, because to permit the disclaimer of a warranty protecting a purchaser from the consequences of latent defects would defeat the very purpose of the warranty.’” (citation omitted).

In this regard it is worth noting the mandatory language of RSA 155-A:2,VII: “The contractor of a building, building component, or structure shall be responsible for meeting the minimum requirements of the state building code and state fire code.”  Allowing the contractor and its customer to waive this responsibility as between themselves would, of course, not preclude code enforcement officials from insisting on repairs, but as a practical matter once the building is occupied by the customer, it is the customer who will bear the wrath of code enforcement officials.  A disclaimer of an implied warranty embracing code compliance would deprive the customer of recourse against the contractor, and all but render the language of the statute a dead letter.

Declaring the implied warranty unwaivable on public policy grounds would avoid another thorny issue: if the first purchaser agrees to the builder’s disclaimer but a subsequent purchaser does not, will the subsequent purchaser -- to whom the implied warranty extends as well, see Lempke v. Dagenais, 130 N.H. 782 (1988) -- be stuck with his seller’s disclaimer?  
 
Until our Supreme Court speaks to these issues, lawyers can only guess at the outcome; but I advise my contractor clients that while they are free to try, they should not count on their disclaimers and waivers passing muster, at least where code violations are in play.
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#73:  Do Contractors Have a Right to Fix Their Own Defective Work?

11/7/2018

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Some months back I blogged (#59) on New Hampshire’s “Right to Repair” statute, RSA 359-G, and I noted its limitations and lack of teeth.  It applies only to residential construction, and it provides little more than a temporary delay in a homeowner’s ability to sue.  It does not address whether, once an owner sues, the contractor’s rejected offer to repair defective work will be a defense to claims for damages measured by the cost of having a third party do the repairs.
 
There are few safer bets than that the cost of third party repair will exceed what it would cost the defendant contractor to make things right.  Since plaintiffs have a duty to mitigate their damages where reasonably possible, you might think that refusing to afford the contractor a repair opportunity is risky business for the owner.  Well, not so much.  Our courts generally take a “once burned, twice shy” approach to the question, and usually support an owner’s lack of confidence that the original contractor will improve its performance if given a second bite at the apple.   Wrobleski v. Constellation Corp., 118 N.H. 532, 533 (1978), is the leading authority for this approach.  I’ll let the Supreme Court’s words speak for themselves here:
 
“[D]efendant asserts that it had offered to remedy the plaintiffs’ septic system problem for a cost of approximately $500 and that it was improper for plaintiffs to hire someone else to reconstruct the leach field at a cost of $1,200.  Plaintiffs were not compelled to solve their problem only by the use of employees of the defendant, and the master could conclude that based on the past performance of the defendant, plaintiffs need not further repose confidence in its ability to correctly solve the leach field problem.”
 
Wrobleski suggests that the conclusion that lack of trust is justified based on a contractor's past performance is not compelled; it is merely permissible.  The circumstances of the particular defect and the complexity of its repair will determine whether that conclusion is sound in any given case -- and that will almost always be a question for the jury.  Something more than merely leaving a job before applying the final coat of paint will need to be in play; the circumstances must suggest a lack of skill rather than a lack of attention to detail.
 
Most contractors facing a plausible claim for defective work will want to make the offer of repair right away, for two reasons.  First, not doing so may doom any mitigation of damages defense down the road.  See Berkshire Medical Center, Inc. v. U.W. Marx, Inc., 644 F.3d 71, 78 (1st Cir. 2011) (“As for giving Marx the option of doing the replacement job itself, Berkshire had little reason to think that Marx either could be trusted to do it or would have any interest in doing so”). Second, the offer, if rejected, cannot be used against the contractor in court as evidence that he admitted liability.  Rule of Evidence 408 provides that “evidence of (1) furnishing or offering or promising to furnish, or (2) accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount, is not admissible to prove liability for or invalidity of the claim or its amount.” 
 
The wiser course is for the parties’ contract to address the issue up front, by providing both a right to repair and a duty to repair defects discovered during the warranty period.  The popular AIA form A201 (2017), General Conditions of the Contract for Construction, takes this approach in Section 12.2.2.1 (“During the one-year period for correction of Work, if the Owner fails to notify the Contractor and give the Contractor an opportunity to make the correction, the Owner waives the rights to require correction by the Contractor and to make a claim for breach of warranty.").
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