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#131:  Applying Statutes of Limitations in Arbitration Proceedings

11/24/2023

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New Hampshire’s three-year statute of limitations for filing lawsuits, RSA 508:4, states “Except as otherwise provided by law, all personal actions, except actions for slander or libel, may be brought only within 3 years of the act or omission complained of . . .”  The phrase “personal actions” is not defined in the statute.  Does it encompass arbitration proceedings?
 
Neither the Federal Arbitration Act, 9 U.S.C. § 1 et seq., nor New Hampshire’s state arbitration act, RSA 542, mentions the statute of limitations.  The New Hampshire Supreme Court implicitly assumed applicability of the statute of limitations to arbitration proceedings in Metropolitan Property and Liability Insurance Co. v. Walker, 136 N.H. 594 (1993), but in that case “the defendant’s August 2, 1989 request for arbitration was commenced well within the three-year statute of limitations,” id. at 598, so there was no occasion for the Court to decide whether an arbitration not commenced within three years would be barred by RSA 508:4.
 
Because arbitrations are not court proceedings, statutes of limitations that apply to an “action,” “civil action,” “suit” or “action at law” have been held by a number of courts not to apply to arbitration proceedings.  Typical is Gannett Fleming, Inc. v. Corman Construction, Inc., 243 Md. App. 376, 397, 220 A.3d 411, 424 (2019) (holding that the term “action” means “the steps by which a party seeks to enforce any right in a court”).  Similar conclusions have been reached by courts in Connecticut, R.A. Civitello Co., v. New Haven, 6 Conn.App. 212, 226, 504 A.2d 542 (1986); Maine, Lewiston Firefighters Ass’n v. City of Lewiston, 354 A.2d 154, 167 (Me. 1976); Massachusetts, Carpenter v. Pomerantz, 36 Mass. App. Ct. 627, 631, 634 N.E.2d 587, 590 (1994); Minnesota, Vaubel Farms, Inc. v. Shelby Farmers Mutual, 679 N.W.2d 407, 412 (Minn. App. 2004); North Carolina, Cameron v. Griffith, 91 N.C. App. 164, 165, 370 S.E.2d 704 (1988); Ohio, NCR Corp. v. CBS Liquor Control, Inc., 874 F. Supp. 168, 172 (S.D. Ohio 1993), aff’d 43 F.3d 1076 (6th Cir. 1995); and Vermont, Clayton v. Unsworth, 188 Vt. 432, 8 A.3d 1066, 1073 (2010).  It is easy to see how the same reasoning might govern interpretation of the phrase “personal action” in our own statute of limitations.
 
Some courts leave it to the arbitrator to decide the applicability of the statute.  See Merchants Mutual Ins. Co. v. American Arbitration Ass’n, 433 Pa. 250, 252, 248 A.2d 842 (1969) (“the issue of the applicability of the statute of limitations comes within the arbitrator’s purview”).  New Hampshire courts may well take this approach.  Given the deferential standard of review for arbitral awards under New Hampshire’s arbitration act (see Blog #20), and without a definitive case on point from our Supreme Court, whatever the arbitrator decides here will likely be rubber-stamped by any New Hampshire court asked to confirm or vacate the decision.  Deference to an arbitrator’s decision is even greater under the Federal Arbitration Act, with some federal courts requiring the challenger to demonstrate “manifest disregard” of the law by the arbitrator – an insurmountable hurdle if the law is unsettled.  See Trustees of Lawrence Academy v. Merrill Lynch Pierce Fenner & Smith, Inc., 821 F.Supp. 59 (D.N.H. 1993) (holding that arbitrators’ refusal to apply the statute of limitations was not “manifest disregard” of the law).

Of course, the parties’ contracts can explicitly make statutes of limitations applicable to their arbitrations.  Section 15.4.1.1 of the AIA A201 General Conditions (2017), for example, provides that a demand for arbitration shall not be made “after the date when the institution of legal or equitable proceedings based on the Claim would be barred by the applicable statute of limitations.”  Similarly, section 12.5.1.1 of ConsensusDocs 200 provides: “Neither Party may commence arbitration if the claim or cause of action would be barred by the applicable statute of limitations had the claim or cause of action been filed in a state or federal court.”

Without some such contract language, parties are at risk that their arbitration might never be time-barred.  How scary would that be?
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#130:  Secured Lenders' Rights to Construction Contract Payments

10/22/2023

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It happens this way: A contractor or subcontractor borrows money from a lender, and as security for the loan it gives the lender an assignment of or lien on its receivables and contract rights.  The borrower defaults, and the lender notifies everyone who may owe the borrower money of the lender’s rights to its customer’s receivables, demanding that any further payments owed to the borrower be remitted directly to the lender.
 
If the construction project is not yet complete, this puts the recipient of the notice in a quandary: paying the lender instead of the general contractor or subcontractor will likely induce a cessation of the work.  Worse, a lawsuit against the general contractor or subcontractor for breach of contract after abandonment of the project will almost certainly be futile; the default on its loan usually signals that it won’t be able to pay a judgment and is probably headed for bankruptcy.
 
Can the recipient of the notice – in legal parlance, an “account debtor” – ignore the lender’s demand and continue to pay his contractor or subcontractor?  Not unless he is prepared to pay twice!  The Uniform Commercial Code, enacted in all fifty states, favors the lender here, but also provides that paying the lender discharges the account debtor’s payment obligation to the contractor or subcontractor (called the “assignor” in this context).  Section 9-406 states that the account debtor “may discharge its obligation by paying the assignor until, but not after, the account debtor receives a notification, signed by the assignor or the assignee, that the amount due or to become due has been assigned and that payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor.”

The account debtor can and should ask for proof of the assignment and keep his checkbook closed until it arrives, but on receiving that proof the check should be payable to the lender, not the contractor.  Payment should be in the full amount currently owed to the contractor, regardless of how much is still owed on the contractor’s loan.  Reading Cooperative Bank v. Suffolk Construction Co., 464 Mass. 543, 553, 984 N.E.2d 776 (2013), held that a general contractor receiving notice from a lender who nevertheless paid its subcontractor over $3 million was liable to the lender for “the total value of all payments wrongfully misdirected” even though the subcontractor’s loan balance was only a sixth of that amount.  Any subsequent square-up was between lender and borrower, and not the account debtor’s concern.
 
If the account debtor has a valid legal defense to paying the contractor, the lender/assignee is stuck with that defense under Section 9-404(a), as long as it “accrues before the account debtor receives a notification of the assignment signed by the assignor or the assignee.”  This accrual provision prevents the receipt of a lender’s notice from itself being the breach which authorizes the account debtor to stop paying the contractor.  Together with Section 9-406(d)(2), it stops construction contracts from thwarting the lender’s statutory rights.
 
In the commercial setting, sophisticated owners and even some general contractors often protect themselves from the risk of contractor abandonment by requiring a performance bond.  In the residential setting, this never happens.  No one thinks to ask whether the contractor has pledged its receivables to secure a loan or line of credit.  Worse, homeowners often let their payments get ahead of the work performed, putting them in the hole if their contractor abandons the project when its lender pulls the plug on its income stream.
 
Section 9-404(c) does have a place marker for a different result in the residential construction setting: “This section is subject to law other than this article which establishes a different rule for an account debtor who is an individual and who incurred the obligation primarily for personal, family, or household purposes.”  Thus far New Hampshire has enacted no such protective law for homeowners.  (A draft Bill is in my desk drawer, if anyone in the Legislature cares to call me.)
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#129:  New Davis-Bacon Rules

9/28/2023

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For the first time in 40 years, the regulations implementing the prevailing wage requirements of the Davis-Bacon Act have been updated, effective October 23, 2023.  Contractors on federal and federally-funded projects need to be aware of the changes.
 
Davis-Bacon has long mandated that construction workers on these projects must be paid at least the locally prevailing wage and fringe benefits applicable to each classification of workers.  Contractors are required to maintain accurate records of hours worked and wages paid, including fringe benefit contributions, and submit certified payrolls on a weekly basis to the funding agency or funding recipient attesting to compliance.  Prime contractors must also ensure that their subcontractors do the same.

The new rule will determine “prevailing wage” by a three-step process, and reinstates as the second step the so-called “30-percent rule” that was eliminated in 1982 in favor of a 50% rule.  A wage is “prevailing” in an area (typically the county where the project is located) if:
  • The wage rate is paid to a majority of workers in the classification;
  • If there is no majority rate, then the wage rate paid to at least 30% of workers in the classification; and
  • If no rate is paid to at least 30% of workers, then a weighted average rate in the classification will apply.
The new regulation changes several definitions in a way which expands the scope of the Act.  “Building or work” now includes so-called “green” equipment such as solar panels, wind turbines, broadband installation, and installation of electric car chargers, and embraces construction activities on only a portion of a building, as well as demolition and removal work.  “Construction, prosecution, completion, or repair” now includes several types of activities that qualify as “covered transportation.”

Up until now, a construction contract clause reciting that the project is governed by Davis-Bacon standards could be relied upon by contractors to determine if their contract was for a prevailing wage project.   The new rule adds an “operation-of-law” provision, applying the Act to federally funded projects even if the contract omits that clause, making contractors responsible for compliance whether or not prevailing wage duties were recited in their contract.

The Act has also been expanded to apply not only to work at the project site but to any “secondary construction site,” defined as any off-site location dedicated for a period of time to making components fabricated specifically for use at the project site (as contrasted with manufacture or construction of a product made available to the general public). 

While prime contractors have always faced liability for their subcontractors’ violations of prevailing wage requirements, the new rule provides that upper-tier subcontractors may also be liable for their lower-tier subcontractors’ violations, potentially requiring them to pay back wages on behalf of their lower-tier subcontractors.  And while prime contractors are responsible for back wages of subcontractors regardless of intent, upper-tier subcontractors must have some degree of culpability (such as knowledge or willful disregard of the violation) before they may be held liable for back wages of their lower-tier subcontractors.

Some new provisions foreshadow a planned uptick in enforcement efforts.  Contractors will now be required to keep not only payroll records, but workers’ last known phone numbers, email addresses and contact information – and retain those records for at least three years.  Another significant change is the addition of an anti-retaliation provision, to protect whistleblowers from termination or other adverse actions by employers.  The new rule also provides for “make-whole relief” for any employee suffering retaliation, including reinstatement, front-pay in lieu of reinstatement, and compensatory damages.

The U.S. Department of Labor has published a comparison of the old and new rule to highlight changes.

These new rules are completely independent of the U.S. Department of Labor's just-announced hike in the minimum wage for federal contractor employees from $16.20 to $17.20 an hour, effective January 1, 2024, applicable to all construction contracts covered by Davis-Bacon.
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#128:  Waivers of Subrogation

8/31/2023

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Subrogation – the right of an insurer, upon paying an injured party’s damages arising out of another's negligence, to chase the negligent party for reimbursement – is a staple of the law.  “The doctrine of subrogation presupposes the payment of a debt by a party secondarily liable therefore, who thereby acquires an equitable right to be reimbursed by the principal debtor and for the purpose of making this right effective is invested with all the rights which the creditor had against him (the principal debtor).”  Chase v. Ameriquest Mortgage Co., 155 N.H. 19, 26 (2007) (quotation omitted).  “[T]he purpose of subrogation is to place the responsibility where it ultimately should rest by compelling payment by the one who ‘in good conscience ought to pay it.’” Security Fence Co. v. Association, 101 N.H. 190, 192 (1957) (quotation omitted).

Upon making payment, the insurer (or “subrogee”) is said to “stand in the shoes” of the insured (or “subrogor”) for purposes of chasing the guilty party.  But an injured claimant with insurance coverage will occasionally waive his own right to sue the guilty party and agree to rely instead solely on his insurance – in which case the shoes are tossed away, leaving the insurer nothing to stand in and hence no ability to be reimbursed.  And the insurer will have no say in the matter.

In commercial construction contracts the rationale for such waivers is to avoid litigation that could disrupt the construction process.  Behr v. Hook, 787 A.2d 499, 503 (Vt. 2001) (“By shifting the risk of loss to the insurance company regardless of which party is at fault, these clauses seek to avoid ‘the prospect of extended litigation which would interfere with construction.’”) (citation omitted).  Here’s how it works in the AIA’s popular A201 General Conditions:

§ 11.3.1  The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents, and employees, each of the other; (2) the Architect and Architect’s consultants; and (3) Separate Contractors, if any, and any of their subcontractors, sub-subcontractors, agents, and employees, for damages caused by fire, or other causes of loss, to the extent those losses are covered by property insurance required by the Agreement or other property insurance applicable to the Project, except such rights as they have to proceeds of such insurance.

Notice that this clause expressly addresses only property insurance.  If a contractor’s negligence damages an Owner’s property and the Owner’s property insurer pays to repair it, this language precludes the insurer from chasing the contractor under subrogation principles.  The contractor’s liability insurance may theoretically cover the same loss, giving the Owner a choice between claiming under its own property insurance policy or claiming under the contractor’s liability insurance policy.  But the “waive all rights” language of this clause eliminates the latter choice.  The contractor and therefore the contractor’s liability insurer will be off the hook.

Because waivers of subrogation facilitate project completion, a purpose not furthered in the case of post-completion losses, some courts hesitate to construe waivers of subrogation as intended to cover post-completion losses – at least without some type of continuation clause expressly extending subrogation waivers beyond completion.  Under the AIA A201, losses occurring after the Project has been completed and paid for, and insured under an Owner’s separate property insurance policy, are embraced by a waiver of subrogation this way:

§ 11.3.2 If during the Project construction period the Owner insures properties, real or personal or both, at or adjacent to the site by property insurance under policies separate from those insuring the Project, or if after final payment property insurance is to be provided on the completed Project through a policy or policies other than those insuring the Project during the construction period, to the extent permissible by such policies, the Owner waives all rights in accordance with the terms of Section 11.3.1 for damages caused by fire or other causes of loss covered by this separate property insurance.

Under this approach, waiver of subrogation may be triggered either by “builder’s risk” insurance or by so-called “all-risk” insurance that covers both the entire existing property and the work performed.

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#127:  Subcontract "Flow Down" of Prime Contract Terms

7/22/2023

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Commercial construction subcontracts frequently incorporate by reference provisions of the prime contract between the owner and the general contractor, often with language requiring the subcontractor to assume toward the general contractor all duties owed by the general contractor to the owner.  (Article 2 of the popular AIA A401 (2017) is an example.)  Exactly what duties these “flow down” clauses embrace can be less clear than a casual reading might suggest.
 
Flow down clauses can limit a subcontractor’s remedies for breach by incorporating the prime contract’s restrictions.  In Costa v. Brait Builders Corp., 463 Mass. 65, 78, 972 N.E.2d 449 (2012), a subcontractor who agreed “to be bound to the Contractor by the terms of the [general contract] and to assume to the Contractor all the obligations and responsibilities that the Contractor by those documents assumes to the awarding authority” was stuck with a waiver of consequential damages clause found only in the prime contract.  In L & B Construction Co, v. Ragan Enterprise, Inc., 482 S.E.2d 279 (Ga. 1997), a no-damages-for-delay clause in a prime contract was held binding on a subcontractor through a similar flow-down clause. 
 
When the prime contract dictates a forum for resolving disputes, cases are split on the effect of flow down clauses.  Weatherguard Roofing Co. v. D. R. Ward Construction Co., Inc., 152 P.3d 1227 (Ariz. App. 2007), saddled a subcontractor with the prime contract’s arbitration clause. Remedial Construction Services, LP v. AECOM, Inc., 65 Cal. App. 5th 658 (2021), went the other way.   ESI Companies, Inc. v. Ray Bell Construction Co., 2008 WL 544563 (Tenn.  App., Feb. 29, 2008), bound a subcontractor to the prime contract’s forum-selection clause.  U.S. Steel Corp. v. Turner Construction Co., 560 F.Supp. 871 (S.D.N.Y.1983), went the other way. 
 
The precise language of the flow down clause matters greatly, and any ambiguity in its scope as well as any conflict with express provisions in the subcontract will likely limit flow-down incorporation to those prime contract provisions directly addressing scope and quality of work.  Such was the case in Flatiron-Lane v. Case Atlantic Co., 121 F.Supp.3d 315, 551 (M.D.N.C. 2015), refusing to flow down a prime contract’s notice-of-claim obligations onto a subcontractor because “the Subcontract has numerous procedural and notice provisions of its own that are dissimilar to those found in the [prime contract], make no reference to the [prime contract] at all, and are not entirely consistent with the [prime contract] procedures.”

Some courts go further, and restrict flow down clauses to items involving performance of work unless the clause explicitly states otherwise.  In Amerisure Insurance Co. v. Selective Insurance Group, Inc., 2023 WL 3311879 (2d Cir., May 9, 2023), the subcontractor agreed to “assume toward the Contractor all the obligations and responsibilities that the Contractor assumes toward the Owner.” The court ruled that this clause “does not require the subcontractor to assume all obligations of the general contractor, but only those relating to the nature or scope of the work undertaken by the subcontractor.”  Id. at *3.
 
Where does New Hampshire stand on all of this?  We have but one Supreme Court case to go on, and it suggests a narrow interpretation of flow down clauses.  Berke Moore Co. v. Phoenix Bridge Company, 98 N.H. 261 (1953), was a suit by a concrete subcontractor on a State bridge project who agreed to “be bound by and conform to the general specifications in all respects wherein they apply to the work embraced in this agreement” and agreed to accept payment “for the quantity of material approved by the State Highway Commission.”  The State paid the general contractor per square yard of finished concrete surface excluding curbs, but the Supreme Court held that this wasn’t binding with respect to the subcontractor’s claim against the general contractor, id. at 271:
 
“The provisions of the ‘general specifications’ which relate to ‘the work embraced in’ the subcontract contain no reference to the provisions of the N. H. specifications defining the authority of the State Engineer and Commissioner.  Accordingly these provisions upon which the defendant relies may not be considered incorporated by reference in the subcontract.”
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#126:  The Federal False Claims Act

6/26/2023

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When commercial contractors request a progress payment or final payment, they typically must sign payment requisitions under oath, representing that the amount sought has been earned – and, inferentially, that all contractual prerequisites to payment have been satisfied.  For government contractors, there can be serious repercussions if those representations are knowingly false.

The federal False Claims Act (FCA), 31 U.S.C. § 3729 et seq., imposes liability for knowingly making a false or fraudulent “claim,” or a false record or statement material to such a claim, in order to obtain funds from the federal government.  The statute applies to claims that are either “presented to an officer, employee, or agent of the United States,” or “made to a contractor, grantee, or other recipient” who has authority to distribute that money or property on the government’s behalf.  31 U.S.C. § 3729(b)(2).  Accordingly, federally funded state and municipal contracts are embraced by the FCA as well.  That includes several hundred million dollars expected to be spent on transportation projects in the Granite State over the next three years. 

Civil penalties under the FCA currently range between $13,508 and $27,018 per violation “plus 3 times the amount of damages which the Government sustains.”  31 U.S.C. § 3729(a).  Triple damages can really add up.  Recently Walsh Construction Company, a contractor working on the federally-funded Whittier Bridge/I-95 Improvement Project in Amesbury, MA paid $1,099,000 to settle claims under the FCA that it defrauded the Disadvantaged Business Enterprise (DBE) program by falsely claiming that its DBE subcontractor had performed certain tasks which, in fact, Walsh itself had performed.

The Walsh litigation was a “relator” case.  Both the Justice Department and private parties acting as whistleblowers (called “relators”) may bring FCA lawsuits in the name of the United States, with successful relators recovering their attorneys’ fees plus a bonus of between 15% and 30% of the damages awarded.  The financial incentive for these so-called “qui tam” lawsuits works like a charm.  In FY 2022, over $1.9 billion of the Justice Department’s $2.2 billion FCA suit recovery stemmed from qui tam suits, and relators were paid $488 million. 

While the FCA is a civil statute, a violation of the FCA can also trigger criminal penalties under 18 U.S.C. § 287, with fines up to $500,000 for businesses and $250,000 for individuals, and imprisonment for up to five years.

A defendant violates the FCA if he “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.”  A statement is made “knowingly” if it is made with actual knowledge of its falsity, deliberate ignorance of its truth or falsity, or reckless disregard of its truth or falsity.  Earlier this month the U.S. Supreme Court in United States ex rel. Schutte v. Supervalu Inc., 143 S.Ct. 1391 (2023), clarified that this is purely a subjective test: as long as the representer believed his representation was false, liability follows regardless of whether truth or falsity was objectively ambiguous.

A statement is “material” if it has “the tendency to influence, or be capable of influencing, the payment or receipt of money or property.” § 3729(b)(4).  One way to gauge the materiality of a contractor’s statement is to consider whether the government paid a claim despite knowing the representation was false.  In United States ex rel. Foreman v. AECOM, 19 F.4th 85 (2d Cir. 2021), cert. denied, 142 S.Ct. 2679 (2022), a defense contractor improperly billed the Army for work it never performed by inflating a statistic used to measure the time worked on the Army’s projects compared to their overall time on duty.  On appeal, the court affirmed dismissal of this claim for lack of materiality because “the government had actual knowledge of AECOM’s non-compliance,” yet continued to pay AECOM’s claims.  Id. at 118.

The wise government contractor assumes that all representations made in connection with a claim for payment are “material,” and takes care to verify that they are true to the best of his knowledge and belief after diligent inquiry into the facts.
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#125:  Enforcing Pay-if-Paid Clauses After Contractor Default

5/20/2023

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A couple of years ago I blogged (#101) on “pay-if-paid” clauses, which make a general contractor’s receipt of payment from the owner a prerequisite – a “condition precedent,” in legal terms – to its obligation to pay subcontractors.  The main purpose of such clauses is to shift the risk of owner nonpayment, whether due to owner insolvency or owner breach, from the contractor to the subcontractors.  But while pay-if-paid clauses can take various forms and include various qualifications, many such clauses are open-ended, not confined to any particular reason for the owner’s failure to pay.  When that is the case, can a general contractor avoid paying its subs if the reason for owner nonpayment is the general contractor’s own default?
 
JBC Merger Sub LLC v. Tricon Enterprises, Inc., 474 N.J. Super. 145, 286 A.3d 1186 (2022), didn’t think so.  In that case the unpaid subcontractor successfully argued that “a pay-if-paid provision can be enforced only when the project owner’s nonpayment to the general contractor was the result of default or insolvency and not when nonpayment is due to the fault of the general contractor.”  Id. at 1200.  The Court relied on the general rule of contract law that “Where a promisor ‘prevents or hinders’ fulfillment of a condition which otherwise would have been fulfilled, ‘performance of the condition is excused’ and the promisor’s liability is ‘fixed’ regardless of the condition’s non-fulfillment.”  Id. at 1201.  (New Hampshire employs the same general rule.)
 
Sometimes a nonpaying owner’s claim of breach by the general contractor as an excuse for withholding money is valid, sometimes it isn’t – but either way, the general contractor must decide whether to sue or settle with the owner.   Can its decision to give up money in a settlement agreement rather than litigate the owner’s claimed justification for nonpayment effectively bargain away the subcontractors’ right to payment under a pay-if-paid provision? 
 
Quinn Construction, Inc. v. Skanska USA Building, Inc., 730 F.Supp.2d 401, 421 (E.D. Pa. 2010), didn’t think so.  The pay-if-paid clause in that case was as broad as can be, providing that the subcontractor “expressly accepts the risk that it will not be paid for work performed by it in the event that Skanska, for whatever reason, is not paid by [the owner] for such Work” – yet the court concluded: “In general, courts are reluctant to enforce a conditional payment provision against an unpaid subcontractor that is not responsible for the condition giving rise to the payment defense. . .  [A] settlement between an owner and a general contractor prevents the general contractor from relying on a pay-if-paid clause to deny payment to its subcontractors.”
 
When the reason for the Owner’s nonpayment has nothing to do with the subcontractor’s performance and everything to do with the general contractor’s separate and unrelated nonperformance, there is a basic unfairness in enforcing a pay-if-paid provision.  But judicial reluctance to reach an unfair result is often in tension with judicial obligation to enforce bargains as written, and an unqualified pay-if-paid clause that recites no exceptions is hard to construe as permitting any.  Unless the legislature steps in to limit enforcement of pay-if-paid provisions where the subcontractor is not at fault – as Massachusetts has done for larger projects, M.G.L. c. 149, section 29E – resolving this tension in the subcontractor’s favor means construing the unfair condition as “so far beyond the contemplation of the parties at the time they entered the contract that its enforcement would work an unconscionable hardship,” MacFarlane v. Rich, 132 N.H. 608, 617 (1989).  And that is not something a subcontractor should count on.  “Conditions in contracts are construed in accordance with their ordinary meaning.”  In re Estate of Kelly, 130 N.H. 773, 781 (1988).
 
The wise subcontractor won’t leave this to chance, and will attempt to negotiate language which limits the pay-if-paid clause to situations where the owner’s failure to pay is (a) due to its insolvency; (b) in breach of its obligations under the prime contract; or (c) premised on some alleged default attributable to the subcontractor. 
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#124:  The Clarity of Pre-Bid Clarifications

4/3/2023

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As I write this on the centennial of the New Hampshire Supreme Court’s decision in Osgood Construction Co. v. Claremont, 81 N.H. 29 (1923), it remains one of the most interesting contract decisions I have yet encountered.  (Coincidentally the losing defendant, Town of Claremont, was represented by a prior iteration of my law firm – which of course has nothing to do with my musings today!)  Here’s what happened:
 
The case involved a water system improvement project that included constructing a concrete dam.  The concrete specifications provided that “Sand, broken stone or gravel will be at all times subject to the approval or rejection of the engineer.”  When the plaintiffs were preparing their bid, they asked the Town’s engineer “if they could base their bid upon the use of native stone, and he told them that they could.  Accordingly they did so, reducing their bid $1.25 a yard upon the understanding that they could use local or native stone in the concrete.”  Id. at 32.  When the engineer later tested it, he found that “the local stone was wholly unsuitable for use in the concrete,” id. at 31, and required the plaintiffs to import different stone from elsewhere.
 
The plaintiffs sued to recover the additional expense, and lost at trial based on the trial judge’s conclusion that the engineer’s statement “falls considerably short of Mr. Osgood’s claim that [the engineer] told them unconditionally that the local stone might be used, and is rather more consistent with the statement . . . that local stone might be used if it proved to be suitable.”  Id. at 32.  But the Supreme Court reversed the decision, reasoning:
 
“If the defendants accepted the plaintiffs’ bid upon the basis of the lower price for local stone, they obtained the advantage of the use of such stone if it proved suitable. Making the contract in this way to obtain this advantage in price, they took the risk of the suitability of the local stone. Having taken the risk, they must bear the loss or extra expense rendered necessary by the discovery that the local stone could not be used.”  Id. at 32.
 
Shifting the risk of nonconforming materials from contractor to owner normally requires proof that the contractor was misled about what materials could be used.  Peter Salvucci & Sons, Inc. v. State, 110 N.H. 136, 147 (1970) (awarding the cost of importing distant gravel to a contractor who “is misled by incorrect plans and specifications issued by the public authorities as the basis for bids and who, as a result, submits a bid which is lower than he would have otherwise made”). Osgood reached the same result by construing the engineer’s statement that local stone could be used for bidding purposes as a firm promise – or as the Court put it, “the plaintiffs had a right to understand that, if their bid was accepted, they could use the local stone.”  Id. at 33.
 
If the takeaway from Osgood were simply that owner approval of construction materials may be inferred from careless answers to pre-bid questions, it would hardly be surprising.  What is more interesting to me is the Court’s willingness to overturn a factual finding of the trial court as to what the parties really meant.  “When there is a question of fact concerning what was intended by certain terms within a contract, the dispute is to be resolved by the trier of fact, whose findings will be upheld if supported by the evidence.”  R. Zoppo Co. v. City of Dover, 124 N.H. 666, 671 (1984).   The trial judge found that engineer’s unspoken qualification “Yes, if it meets spec” should reasonably be implied under the circumstances.  But the Supreme Court saw no ambiguity, and therefore no issue of fact to be resolved; an unqualified "Yes" was, in its view, “the only reasonable interpretation that can be placed upon the language used,” id. at 33.
 
The lesson of Osgood a century later remains important: pre-bid statements on what bidders may furnish in compliance with contract requirements need to be precise, or they risk giving unintended leeway to the successful bidder.
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#123:  Bonding Off a Mechanic's Lien

3/26/2023

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When a general contractor or lower tier subcontractor or supplier records a mechanic’s lien attachment on property, security for the lienor’s hoped-for judgment is achieved – but often something more, and perhaps unintended, is achieved.   The resulting cloud on the owner’s title prevents a sale or refinancing of the property, and ties it up in a way that usually impacts the flow of funds needed for project completion.  Draws on a construction loan may halt.  Sales of units in multi-unit projects needed to raise funds for completion may cease.  
 
This impact on the project can give the lienor leverage to coerce a favorable settlement if, as is often the case, the mechanic’s lien attachment survives an initial challenge and thus will remain in place for the duration of the litigation.  The problem is not solved by prime contract provisions requiring a general contractor to promptly clear any lower tier mechanic’s liens or face having payments withheld.  If an initial court challenge to the lien fails, the general contractor may well be coerced into an unfavorable settlement of the lienor’s claim.
 
Because such leverage is widely viewed as an unwarranted extension of the lien’s purpose to provide security for payment, many states have statutes authorizing lien release bonds, allowing an owner or general contractor to discharge the lien by substituting a bond.  Massachusetts, for example, has statutes providing for two types of lien release bonds – a “blanket” lien bond pursuant to G. L. c. 254, § 12 which prevents any mechanic’s liens from attaching to the property, and a “target” lien bond pursuant to G. L. c. 254, § 14 which dissolves a particular lien that has already attached to a property.
 
A New Hampshire statute, RSA 511:48, provides for petitioning the court to allow substitution of a bond for an attachment, but the statute is not specific to mechanic’s liens – and a number of Superior Court cases have declined to allow substitution of a bond for a mechanic’s lien. Consolidated Electrical Distributors Inc. v. SES Concord Company; Adam Windows & Doors, Inc. v. Eclipse Construction, Inc.; HPB Construction, LLC v. Berkshire-Amherst, LLC; Metro Walls, Inc. v. The MacMillin Company, LLC.  There are a few Superior Court cases going the other way.  Moynihan Lumber of Plaistow, LLC v. DeStefano & Assoc., Inc.; B & B Drywall, Inc. v Calamar Construction Management, Inc.  Until our Supreme Court weighs in, the law on this question will remain uncertain.
 
If a lienor cannot be forced to give up his lien in exchange for a bond, how about in exchange for an escrow of cash?  Courts will rarely grapple with this question, because most lienors will jump at the offer (a cash escrow is a far easier path to payment than a sheriff’s sale of the liened property after judgment) – but the issue has been litigated in Superior Court a few times by plaintiffs who preferred leverage to eventual ease of collection.  Results are mixed.  McCusker v. In-Home Restored, Refound + Reinvented Furniture + Accessories, LLC and S & J Enterprises, Inc. v. Delle Chiaie both required the cash escrow substitution, while A & E Flooring, Inc. v. SAMCO Holdings, LLC declined to do so.

Bonds and cash may well be adequate payment substitutes for lien rights, but whether a plaintiff should be compelled to forego the leverage a lien provides is a different question.  Before giving an answer, it may be useful to consider what happens to lien rights when owners require general contractors to furnish a payment bond up front.  To my knowledge no New Hampshire court has ever held that the mere existence of the bond deprives subcontractors and suppliers of their statutory lien rights.  Were it otherwise, every payment bond would automatically convert every subcontract on the bonded project into a “no lien” subcontract.  Parties are free to bargain for “no lien” subcontracts, essentially waiving the right to a mechanic’s lien up front; see Duke/Fluor Daniel v. Hawkeye Funding, Ltd. Partnership, 150 N.H. 581 (2004).  If they didn’t bargain for that waiver, courts are loathe to allow a payment bond to force the same result.
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#122:  Construction Loan Disbursement Pitfalls

2/25/2023

2 Comments

 
A common feature of residential construction loans is the requirement for periodic inspections of the progress of work, usually by an independent inspection company hired by the bank, before disbursements are made.  The idea is that the loan disbursements should pay only for properly completed work (or suitably stored materials on site), and the inspector is better able than the homeowner/borrower to gauge this.  Banks insist on this as a way to ensure that the mortgages securing their construction loans are supported by enough value on the ground to collateralize repayment.  Owner/borrowers like it as well; preventing the contractor from getting ahead of them in payments incentivizes proper contract performance, and a set of professional eyes to determine whether the contractor’s draw requests are justified is a welcome feature.
 
While owner/borrowers may well be relying on proper inspections when signing off on bank disbursements, they are wrong to assume that the bank requires inspections in support of loan disbursements in order to protect them from overpayments.  Seymour v. New Hampshire Savings Bank, 131 N.H. 753, 759 (1989), held that “no duty is imposed upon a lender of a construction loan to exercise reasonable care in its inspection of the borrower’s premises, even where the borrower pays the lender’s inspection fee, unless the lender voluntarily undertakes to perform such inspection on behalf of and for the benefit of the borrower.”  And such a voluntary undertaking is exceedingly rare.
 
Suppose the bank’s inspector overestimates the amount of work properly completed by the contractor, resulting in a larger disbursement than justified, and the contractor thereafter abandons the project or refuses to correct shoddy work.  That puts the owner/borrower in a pickle.   If the Seymour case shuts out a claim against the bank, do owner/borrowers have a legal claim against the inspector, with whom they have no contract?  Don’t count on it.  In Coachman Estates of Barrington, LLC v. REI Service Corporation, No. 2009-0848 (September 29, 2011), our Supreme Court held that “the role of the construction inspector was to ensure that the bank’s security interest was adequately protected, not to provide technical assistance to the plaintiff in determining the quality of work,” and on that basis rejected the claim that the borrower was a “third-party beneficiary” (see Blog #84) of the inspector’s contract with the bank.  Nor does a negligence claim against the inspector appear promising.  The economic loss rule, which generally precludes recovery in a negligence lawsuit absent personal injury or property damage and absent a special relationship between the parties (see Blog #29), will be an obstacle here.
 
Negligently performed inspections can work both ways; inspectors occasionally approve lower disbursements than objectively justified by the contractor’s performance.  Usually the owner’s contract with the contractor will require payments as particular performance milestones are achieved regardless of whether the construction lender makes a disbursement – and the owner will be in breach unless personal funds are used to cover the gap.  But the owner may not have sufficient personal funds to tap, or may be reluctant to tap them because of faith in the bank inspector’s accuracy.  Except in the rare case where the contractor has agreed to abide by the bank inspector’s assessment of amounts earned, this puts the owner at risk of having the contractor suspend or even abandon work if the amount of the underpayment is substantial.  Worse, the contractor or one of its unpaid subcontractors could place a mechanic’s lien on the property – which is sure to result in a breach of the owner/borrower’s loan agreement!
 
There are ways to contract around all of these pitfalls, including loan agreements that undertake additional duties to borrowers and contractor agreements to continue the work and waive lien rights despite disagreement with the amount of bank-approved disbursements.  All such contractual solutions depend on the leverage possessed by and the negotiation savvy of the parties to these arrangements.  Residential owners are usually on the short end here.  If you’re wondering how often an owner has hired me to review the documents in advance, I can tell you, it’s a round number.  Very round.
2 Comments

#121:  Owners' Duties to Withhold Money for Subcontractors

1/18/2023

1 Comment

 
In New Hampshire, an owner generally owes no duty to subcontractors to see that they get paid.  A few years back I blogged (#19) that RSA 447:8 might be an exception to this general rule, imposing a trust in favor of subcontractors on money that an owner owes to a general contractor if the proper notices are given by the subcontractors.  And this month, a court has finally agreed.
 
The case is In re The Prospect-Woodward Home, 2023 BNH 001, 2023 WL 124859 (Jan. 6, 2023), decided by New Hampshire’s bankruptcy court.  A Chapter 11 proceeding was commenced by a continuing care retirement facility in Keene whose real estate was subject to a construction mortgage and several mechanic’s liens.  The Debtor’s real estate was ultimately sold, and the respective interests of the construction mortgagee and of the construction manager and its subcontractors holding mechanic’s liens attached to the $33 million sales proceeds.  Because the total amount of the parties’ claims exceeded $33 million, the court was called upon to decide which of these interests had priority. 
 
The court began by analyzing New Hampshire’s “race-notice” rule of priority, under which the first to record its interest at the registry of deeds is first in line unless it had notice of another’s unrecorded prior interest.  Although the construction mortgage was recorded first, the mortgagee was aware at the time of that recording that MacMillin, the construction manager, had already commenced work, giving it an inchoate lien on the facility from the time its work commenced. Accordingly, MacMillin’s later-recorded lien was held to have priority over the mortgage.
 
Unlike MacMillin’s work, however, the subcontractors’ work did not commence until after the mortgage was recorded, so they were not race-notice winners.  The subs argued that RSA 447:8’s directive that owners “retain a sufficient sum of money to pay” subcontractor claims before paying a general contractor meant that they should share in MacMillin’s victory anyway.  The court agreed:
 
“The Subcontractors argue that because they have given notice of their lien claims to the Debtor
as required by RSA 447:5 (which apparently no one disputes), the Debtor is in essence a trustee
for the benefit of the unpaid subcontractors.  The Court agrees that RSA 447:8 will dictate how money the Debtor owes to MacMillin must be handled if MacMillin succeeds on its race-notice
claim.  Pursuant to this statute, the Debtor will be required to pay the Subcontractors, from the
net sale proceeds, the amounts owed on account of their own mechanics’ liens, as finally
determined by the Court.”
 
Given this ruling, the court found it unnecessary to rule on the subcontractors’ alternative argument that RSA 447:12-a nevertheless afforded priority to their later-recorded liens (see Blog #44): “Because the Court has determined that MacMillin’s mechanic’s lien is entitled to priority under the race-notice doctrine, and the Subcontractors will share in MacMillin’s race-notice victory, the Court need not determine whether the Subcontractors’ mechanics’ lien attachments also have priority based on the application of RSA 447:12-a.”
 
The takeaway here is that RSA 447:8 is a type of “trust fund” statute.  Several states have enacted statutes that make the general contractor receiving payment a trustee for the benefit of its subcontractors.  (Maryland is an example, Md. Code Ann. Real Property § 9-201(b)(1).)  By contrast, RSA 447:8 declares that any money due from owner to contractor is held by the owner for the benefit of subcontractors who have given the owner timely notice of their intent to claim a lien and the amount thereof.  Once those notices have been given, protection of the owner from threatened liens and protection of subcontractors from nonpayment by the general contractor trumps any contractual right of the general contractor to be paid those amounts (unless and until it pays the subcontractors what they are owed). 
 
Whether the owner’s trusteeship expires if the subcontractors who gave proper notice don’t timely perfect their liens with court-ordered attachments pursuant to RSA 447:10 is an open question that In re The Prospect-Woodward Home had no need to consider.
 
The case is presently on appeal.
1 Comment

#120:  Addressing the Shortage of Construction Workers

12/29/2022

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Most contractor clients I speak with these days rank labor shortages as their chief concern, above supply chain issues and rising interest rates.  With unemployment hovering around 2.5% at last look, New Hampshire’s available work force has been unable to meet the demand for labor, resulting in a dearth of manpower for most industries – including construction.  The U.S. Chamber of Commerce reports that New Hampshire has only 44 unemployed workers for every 100 available positions – one of the lowest ratios in the country. To quote AGC’s chief economist Ken Simonson, “contractors report almost universally that they need more workers than they can find.”

Theoretically the market is supposed to self-adjust, with higher wages offered by construction companies sparking an uptick in the labor supply.  It hasn’t worked that way because the workers just aren’t there.  The labor pool needs to be expanded, and that means looking to foreign-born workers, both those seeking to immigrate and those already here.  There is no other realistic option. 
 
Canada gets it.  On November 1 it announced plans to bring in 1.45 million immigrant workers over the next three years to ease its labor shortage. 

But in the U.S., near-term prospects for bringing in more foreign-born workers appear dim.  President Biden’s proposed U.S. Citizenship Act of 2021, which would have provided pathways to citizenship for an estimated 11 million undocumented immigrants, has fizzled, and his efforts to keep DACA going have taken a beating in the courts.  The House is now controlled by Republicans, many of whom ran on anti-immigration platforms capitalizing on the Trump-instilled xenophobia that painted illegal immigrants as violent criminals and drug dealers.  This political rhetoric has also managed to erode popular sentiment for expanding legal immigration, which has always been concerned with whether immigrant workers will displace Americans from their jobs – a non-issue in today’s economic climate. 
 
To be sure, there are many undocumented immigrants who would like to work, including in New Hampshire.  But under both federal law and state law, they cannot legally be hired.  Employers are required to verify employees’ right to work in the U.S. by completing an I-9 form for each hire and examining the documents (Green Card or EAD in the case of a non-citizen) provided by would-be employees in support of the verification.  Guidance on the process can be found here.  Penalties for noncompliance are stiff.  Knowingly hiring illegal immigrants is a crime subjecting the employer to escalating fines of up to $16,000 per employee, potential jail time, and possible debarment from federal contracts.  State law penalties are $2,500 per day of violation.

While independent contractors are not subject to the same restrictions as employees, hiring illegal immigrants as independent contractors is no panacea, even if they are true independent contractors and not misclassified employees (see Blog #3).  Knowingly hiring illegal aliens as independent contractors is illegal.  Independent contractors must furnish a Form W-9 to prospective employers, which in turn requires them to have a social security number or tax ID number.   If a vendor furnishes no W-9, the employer must withhold federal taxes from any payments, which will eventually let IRS weed out the violators.   And it is foolhardy to hire an independent contractor who lacks liability insurance and workers’ compensation insurance – likewise difficult to procure without proper tax identification.
 
As the calendar flips to 2023 there seems to be no solution on the horizon.  The work force can only be supplemented by immigrant labor if the political will to facilitate it can be found in Washington.  My wish for the construction industry in the new year is that comprehensive immigration reform overcomes partisan politics and becomes a reality.  When we turn on the evening news and see the mass of migrants on our southern border, we should try to see opportunity – just not the kind seen by Republican lawmakers hoping to distill political capital from the public perception that the Biden Administration is solely responsible for this chaos.


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#119:  Quantum Meruit vs Unjust Enricment

11/25/2022

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It is common in construction litigation for contractors suing owners to assert a right to recover damages for more than just a breach of contract.  Two of the most popular legal theories beyond breach of contract are “unjust enrichment” and “quantum meruit.”  Although distinct, they share some elements, which often leads to confusion between them.  As our federal court has noted, “New Hampshire cases do not clearly differentiate between theories of unjust enrichment and quantum meruit.”  Eastern Electric Corp. v. FERD Construction Inc., 2005 WL 3447957 at *3 n.1 (D.N.H. Dec. 15, 2005) (citing cases).  Let’s try to tease them apart.
 
“Unjust enrichment” is exactly what it sounds like – recognition by the courts that when one party has benefited from another party’s services, justice often demands that they be paid for.  “In the absence of a contractual agreement, a trial court may require an individual to make restitution for unjust enrichment if he has received a benefit which would be unconscionable to retain.”   Petrie-Clemons v. Butterfield, 122 N.H. 120, 127 (1982).  Sometimes this theory applies even if the services in question were never expressly requested by the beneficiary.
 
This “absence of a contractual arrangement” prerequisite has historical roots.  Unjust enrichment is what lawyers refer to as an “equitable” remedy, distinguished from a “legal” remedy (such as for breach of contract).  Many years ago there were separate courts of law and courts of equity (or courts of “chancery,” to use the term then in vogue), and a disappointed suitor in the law courts could turn to the equity courts for another shot at recovery.  With the merger of law and equity in modern times – at least in the Superior Court (Circuit Courts lack equity jurisdiction and cannot entertain unjust enrichment claims, Barlo Signs International, Inc. v. GCD, Inc., 2018 WL 3237974 (N.H. Sup. Ct., June 29, 2018)) – the principle that legal remedies are favored over equitable ones has survived.  So, if the parties have a contract addressing their rights and obligations with respect to payment for the work in question, equitable remedies like unjust enrichment are unavailable.
 
Quantum meruit – Latin for “as much as is deserved” – is slightly different.  It provides a basis for recovery when a valid contract exists but for some reason can’t be successfully invoked, such as where the unpaid party is himself in breach, or is unable to satisfy a contractual condition to payment, or (my favorite) where extra work beyond the contract scope is performed but a formal change order does not get signed. 
 
Unjust enrichment and quantum meruit have different theoretical roots.  The law distinguishes implied-in-fact contracts, i.e., true contracts in which an actual agreement of the parties is inferred from circumstantial evidence, and implied-in-law contracts, which are legal fictions designed to prevent injustice.  Morgenroth & Associates, Inc. v. Town of Tilton, 121 N.H. 511, 514 (1981).  Unjust enrichment fits snugly into the implied-in-law category.  Id.  But our federal court has said “Quantum meruit, also sometimes labelled ‘contract implied in fact,’ involves recovery for services or materials provided under an implied contract.”  Universal Am-Can, Ltd. v. CSI-Concrete Systems, Inc., 2012 WL 579167 at *9 (D.N.H. Feb. 22, 2012) (citation omitted).  This suggests that quantum meruit is not an equitable remedy at all, as some courts – although not our Supreme Court as yet – have recognized.  See Dinan v. Alpha Networks, Inc., 60 A.3d 792 (Me. 2013) (“Quantum meruit is a legal, not an equitable, remedy and thus is distinct from the theory of unjust enrichment.”).
 
Quantum meruit and unjust enrichment have different measures of damages.  “While ‘[d]amages in unjust enrichment are measured by the value of what was inequitably retained[,][i]n quantum meruit, by contrast, the damages ... are based on the value of the services provided by the plaintiff.’”  General Insulation Co. v. Eckman Construction, 159 N.H. 601, 612 (2010) (citation omitted).  Sometimes these two measures will yield identical results.  R. Zoppo Co., Inc. v. City of Manchester, 122 N.H. 1109, 1113-14 (1982) (“evidence of the plaintiff's expenditures may be considered as circumstantial evidence of the value of the benefit conferred upon a defendant.”).
 
Still confused?  Trust me, you’ve got lots of company!
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#118:  Letters of Intent Forming Enforceable Contracts

10/30/2022

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It is not uncommon for owners/developers who solicit proposals from contractors, and contractors who solicit proposals from subcontractors, to send a Notice of Intent or Letter of Intent to the contractor or subcontractor before signing a formal contract, announcing that the proposal has been accepted.  Depending on the wording of the notice, a contract may well be formed between the parties even if the contemplated formal document is never sent or signed.

Although the word “intent” may suggest a mere expression of what the writer expects to happen, the LOI's wording will occasionally suggest something more.  For example, when the LOI states that the author will be sending a formal contract for signature, that promise may reasonably be deemed unequivocal, and not suggestive of negotiations still to come.

The usual legal requirements for a valid contract – offer, acceptance and consideration – can all be present in a LOI.  The sticking point is usually the requirement of “a meeting of the minds about the contract’s terms: ‘each party must have the same understanding as to the terms of the agreement.’”  International Business Machines Corp. v. Khoury, 170 N.H. 492, 500 (2017) (citation omitted).  But a meeting of the minds is judged under an objective standard, which “places a reasonable person in the position of the parties, and interprets [contractual terms] according to what a reasonable person would expect [them] to mean under the circumstances.”  Id. at 501 (citation omitted).  So the question becomes, would the recipient of a LOI reasonably understand that an agreement has been reached on the essential terms of a contract?

What counts as an “essential” term of a contract can be fuzzy.  Our Supreme Court has adopted the dictionary definition of the word, “constituting an indispensable ... condition of a thing,” “necessary,” “important in the highest degree,” and “unavoidably significant.”  Behrens v. S.P. Construction Company, Inc., 153 N.H. 498, 505 (2006).  In construction contracts the price, scope of work and time for performance are generally viewed as essential.  If the LOI references a proposal or other document that contains typical price, scope and schedule terms of a normal construction contract, it may be fair for the recipient to understand that those terms have been agreed to – and reasonably conclude that anything that may show up in a later, more formal contract document is window dressing.

Sometimes the LOI will contain conditional language – for example, one sent to a subcontractor which is conditioned on an award of the prime contract to the general contractor.  This type of LOI can become binding once the condition is fulfilled.  Other times the LOI’s conditions may end up being deemed unessential formalities.  In Blais v. Remillard, 138 N.H. 608, 612 (1994), “the defendants argue[d] that the buyer’s reservation of the right to have his attorney review the contracts was a condition precedent to the buyer’s acceptance of the terms of the contract and, thus, that there was no actual meeting of the minds. While a reasonable jury might have found in the defendants’ favor, it need not have done so and could have found the proposed review merely perfunctory.”
 
It is easy for the author to eliminate any risk that his LOI will be interpreted as a binding contract, simply by reciting that the LOI is not intended to be binding and/or expressly stating that until another document is signed there is no contract.  If such a disclaimer is present, the recipient could not reasonably believe that a contract is already in place.  But without such a disclaimer, the matter is less certain.  As one court has put it, “The fact that parties contemplate that a formal agreement will eventually be executed does not necessarily render prior agreements mere negotiations, where it is clear that the ultimate contract will be substantially based upon the same terms as the previous document.”  Chicago Investment Corp. v. Dolins, 107 Ill.2d 120, 126, 481 N.E.2d 712 (1985).
 
Lastly, if the LOI instructs the recipient to begin preparations for performance or take action that would constitute part performance, it is far more likely that the LOI will be construed as a binding contract.
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#117:  Building Information Modeling

9/30/2022

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Over the past decade, Building Information Modeling (“BIM”) – computerized 3D portrayal of integrated building elements that allows a project or project subset to be built virtually before being built in the field – has become prolific in commercial construction.  Visit any project trailer on a major construction site today, and you are as likely to see managers and superintendents poring over BIM images on their tablets and smartphones as over a set of traditional paper plans rolled out on a table.  With a keystroke or a touch pad swipe, any part of the model and any trade’s work can be isolated to display connections and dimensions or to identify potential clashes arising from any design change.  Put the model in motion over time to depict progress of the work, and the simulation becomes 4D rather than 3D – an obvious aid to coordination and scheduling.  This is not your father’s CAD system.
 
Whether a BIM model is considered a Contract Document required to be followed is a matter for agreement among the project participants.  Depending on how the parties agree on the protocols for and the extent of permissible reliance on shared BIM in constructing a project, BIM models can run the gamut from serving as a check on accuracy of traditional 2D plans to replacing those plans as the official project drawings, or anything in between.  The AIA’s newly released E201-2022, for use when at least some BIM version will become a Contract Document, and E202-2022, for use when that will not be the case, facilitate establishing these protocols.
 
Whether reliance on BIM models is proper ought not be left to interpretation, and the E201-2022 and E202-2022 strive to ensure that it is not, confining permissible reliance to designated uses, beyond which any reliance will be at the user’s own risk.  In the absence of agreement on the point, ordinary contract principles will determine whether a party’s reliance on a BIM model furnished by the other party is reasonable.  In general, reliance on information provided by one party to the other for use in his contract performance will, in the absence of a disclaimer, be deemed justified.  In such a case, errors in the BIM or undisclosed changes to the BIM can come back to haunt the provider. 
 
Sometimes actual field conditions differ from what was expected based on the BIM, and a clash not modeled is nevertheless encountered during installation.  Adjustments made in the field to accommodate those differences can spawn what look very much like Type I differing site condition claims.  And if the finished product does not perform as expected, those same field adjustments can take on all the trappings of a dispute over whether a design defect or a construction defect is present.  Ideally, any disparity between what was modeled and what was encountered should be promptly raised with the architect or owner’s rep for instruction and potential redesign, implementing the change order process if the BIM is a Contract Document.  But in the heat of battle, such command decisions are not always made at the highest levels; installers encountering something that, per the BIM, should not have been in their way often simply work around it and move on.  That can have ripple effects for the next trades working on the project.
 
While the BIM may demonstrate how the plumbing, HVAC, electrical and anything else can all fit in a given space without clashes, the tighter the space the more important each trade’s means and methods will become in order to make it all fit.  Coordination and sequencing of trades is key here; the last trade to perform, who must work around prior trades’ work, will need a different plan of attack than the first trade in.  If the work sequence is altered after a contractor’s or subcontractor’s reliance on a time-simulated 4D BIM showing no obstructions to its work, the financial consequences of dealing with unanticipated obstructions can be huge.  For a cautionary tale, North American Mechanical Inc. v. Walsh Construction Company II LLC, 132 F.Supp.3d 1064 (E.D.Wis. 2015), is worth a read.
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#116:  Termination as a Condition of Performance Bond Liability

8/21/2022

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Many performance bonds (the popular AIA A312 is an example) state that the surety’s obligation is not triggered unless the principal’s contract has been terminated.  This can put the obligee, whether an owner holding its general contractor’s performance bond or a general contractor holding its subcontractor’s performance bond, in a difficult spot.  Wrongful termination will not only be a breach of contract giving the principal a claim for damages against the obligee, but it will forfeit the protection of the bond.  Conversely, not terminating also forgoes the protection of the bond – if termination is an enforceable condition of the surety’s liability. 
 
In Arch Insurance Co. v. Graphic Builders LLC, 36 F.4th 12 (1st Cir. 2022), a general contractor sought to enforce its subcontractor’s performance bond after the subcontractor failed to correct leaking windows and failed to furnish the contractually-required manufacturer’s warranty for the windows.  But the contractor didn’t terminate the subcontractor – a condition of the surety’s liability under its standard A312 performance bond – because (a) substantial completion had already been achieved such that the subcontractor “thus could not be terminated,” id. at 15, and (b) no physical work was involved in providing the missing warranty.  Affirming summary judgment for the surety, the Court of Appeals rejected both excuses, holding that termination was nevertheless required in order to trigger the surety’s liability:
 
“We acknowledge the difficulty contractors may face in navigating between the risk of premature termination of a subcontractor and the risk of failing to comply with the requirements of section 3 of the A312 performance bond.  See 4A Bruner & O’Connor, supra, at § 12:38 (noting that “[a] wrong decision to terminate is a material breach of contract and results in the obligee’s completion of the contract without recourse against the contractor or surety” and that “[t]he wrong decision not to terminate may result in unsatisfactory completion ..., with recourse limited to the contractor and not the surety”.  Yet that is the framework under which Graphic agreed to operate pursuant to the performance bond, and it was obliged to adhere to the bond’s terms to invoke the bond’s coverage.”
 
Id. at 20.  It is significant that the court rejected the contractor’s argument that the subcontractor had substantially completed its work, noting the contractor’s earlier letters stating that the subcontractor had not done so – and particularly given the contractor’s valuation of the warranty obligation “at $2 million, a significant proportion of the subcontract’s total price tag of roughly $8.6 million,” id. at 18.  It is likewise significant that defective work was in play; the reason that the manufacturer declined to issue a warranty was over concern about improper installation by the subcontractor.  Id. at 19.
 
Was the contractor correct that it could not lawfully terminate a subcontractor whose work was substantially complete?   Arch did not reach this question given the Court’s conclusion that the subcontractor’s work was in fact not substantially complete.  But I think the answer to the question is yes.  4A Bruner & O’Connor on Construction Law § 12:45 (2021) (noting that an “obligee may not terminate for default a construction contract that has been substantially performed”).  And if termination of the principal is always a condition precedent to the surety’s liability, then in practical effect substantial completion by the principal will absolve the surety of liability under the bond.  Punch list completion and warranty obligations will not be bonded!
 
The one thing that gives me pause here is that bonds incorporate the terms of the bonded contract by reference, and often those bonded contracts will – as is true of the AIA A201 form – require consent of the surety for release of retainage after substantial completion (see § 9.8.5) and for final payment (see § 9.10.2).  Why would that consent be necessary if the surety is exonerated by substantial completion?  “In interpreting a multiple-document agreement, we seek to harmonize and give effect to the provisions of the various documents so that none will be rendered meaningless.”  Motion Motors, Inc. v. Berwick, 150 N.H. 771, 777 (2004).  And that principle of interpretation may well save the day for the obligee.
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#115:  Ushering In the New Building Codes

7/12/2022

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Every three years the International Code Council updates its building codes, which eventually become the basis for codes adopted by the states.  But the law takes a while to catch up.  From September of 2019 until now, the 2015 versions have been incorporated into New Hampshire’s state building code, RSA 155-A.  That has just changed.  On July 1, 2022, Governor Sununu signed into law legislation adopting the 2018 versions of the International Building Code, International Residential Code, International Plumbing Code, International Mechanical Code, International Energy Conservation Code and International Existing Building Code, along with the 2020 National Electrical Code. 
 
The key changes from the 2015 edition of the International Building Code may be found here. The key changes from the 2015 edition of the International Residential Code may be found here. 

When New Hampshire last updated its building codes in 2019 (from the 2009 versions to the 2015 versions) I blogged (#80) on the ambiguities in the transition rules for construction projects straddling the effective date, an issue that was left to the municipalities to deal with.  This time the new law has come up with a solution: the version in effect at the time of application for the building permit will remain in effect for the duration of the permitted work unless the applicant elects to be governed by the 2015 version – an election available for six months after the effective date of the new law.  
 
As I have earlier blogged (#25), building codes provide the standards of care for purposes of negligence lawsuits only if a common law duty to protect the injured party from the type of harm sought to be avoided by the codes already exists independently of the codes.  If such a duty exists, construction that violates the newer code but complies with the older code will present an interesting question: can a finding of negligence turn on the fortuity of which version the builder elected to follow?  It will be hard to argue that a builder’s failure to comply with the newer code he chose to follow was negligent if his construction would have met the prior code he could have chosen.  It will likewise be hard to argue that projects failing to comply with a change effected by the 2018 code are built negligently when identically-constructed projects that happened to be commenced earlier, and hence are still governed by the 2015 code, are not.  Still, a line has to be drawn somewhere, and if a failure to meet code is to establish negligence per se, drawing it elsewhere than at the six month deadline will enmesh the courts in climbing a slippery slope.
 
This problem would disappear if courts treated a failure to meet applicable building codes as merely evidence of negligence, not as negligence per se.  Fifty years ago Chief Justice Kenison wrote “There is no unalterable rule in this State on the admissibility of safety codes as evidence on a question of the applicable standard of care . . . unless they have been incorporated into statutes or ordinances by either State or local legislative bodies.”  Lemery v. O’Shea Dennis, Inc., 112 N.H. 199, 200 (1972).  Treating such codes as admissible on the issue, not as unalterable establishments of the standard of care, strikes me as the sounder approach.  I applaud the trial judge in Mailhot v. C & R Construction Co., 128 N.H. 323 (1986), who gave an “evidence of negligence” jury instruction rather than a negligence per se instruction in a case involving OSHA regulations.  (On appeal, the plaintiff’s challenge to this instruction was rejected for failure to preserve the argument.)
 
And just as failure to meet code should not automatically constitute negligence, neither should meeting code be a blanket absolution from negligence.  Schlis v. Target Corporation, No. 19-cv-1201-JD, 2021 DNH 068 (April 6, 2021) (“Target has not identified any legal authority holding that complying with building or safety codes applicable at the time of a building’s construction or initial opening per se satisfies its duty of care.”).

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#114:  No Damages for Delay -- Maybe, Maybe Not

6/30/2022

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Delays on construction projects are as common as shells on the shore.  They can arise from contractor fault, owner fault, or events beyond either party’s control – or any combination of these.  Contracting parties contemplate the possibility of delays, and often include contract language to address them – sometimes with clauses precluding a contractor from any monetary compensation for delays, even owner-caused delays.  Such “no-damages-for-delay” clauses can take various forms, but they typically limit a delayed contractor (or subcontractor) to extensions of time for performance in the event of delays beyond the contractor’s control.  While such time extensions may help avoid assessment of liquidated damages, they put no money into the contractor’s pocket for what can often be devastatingly expensive consequences of being on the job longer than anticipated.
 
Because freedom of contract is an overarching principle in the law, courts generally enforce no-damages-for-delay clauses.  Still, contracts excusing a party from liability for the harm he causes have never been favorites of the courts, which have been willing to entertain exceptions to the enforceability of such clauses.  While New Hampshire has yet to tackle this question, most jurisdictions refuse to enforce no-damages-for-delay provisions in certain circumstances, such as “if the delay: (1) was of a kind not contemplated by the parties, (2) amounted to an abandonment of the contract, (3) was caused by bad faith, or (4) was caused by active interference,” Peter Kiewit Sons’ Co. v. Iowa Southern Utilities Co., 355 F. Supp. 376, 397 (S.D. Iowa 1973).  Some states even have statutes disallowing such clauses.  Ohio’s statute, for example, voids any clause in a construction contract “that waives or precludes liability for delay...when the cause of the delay is a proximate result of the owner’s act or failure to act, or that waives any other remedy...when the cause of the delay is a proximate result of the owner’s act or failure to act,” R.C. 4113.62(C)(1).
 
The “active interference” exception to enforcement of no-damages-for-delay provisions dovetails nicely with New Hampshire's longstanding rule that "if it can be shown that the performance of the contract was prevented directly or indirectly by the act of the promisee, its non-performance will be excused,” Famous Players Film Co. v. Salomon, 79 N.H. 120, 122 (1918).  No bad faith need be shown.  And the modern trend elsewhere is that “a plaintiff contractor or subcontractor claiming active interference on the part of the defendant owner or contractee need only to show that the defendant committed an affirmative, willful act that unreasonably interfered with the plaintiff’s performance of the contract, regardless of whether that act was undertaken in bad faith.”  Tricon Kent Co. v. Lafarge North America, Inc., 186 P. 3d 155, 161 (Colo. App 2008).
 
One example of active interference is issuance of a notice to proceed before the jobsite is ready for the contractor’s work.  U.S. Steel Corp. v. Missouri Pacific Railroad, 668 F.2d 435, 439 (8th Cir. 1982).  Another is suspension of work by the owner after commencement beyond the time reasonably justifiable by the circumstances – sometimes regardless of other contract language affording the owner a right to suspend.  Sarasota County v. Southern Underground Industries, Inc., 333 So.3d 285, 288 (Fla. App. 2022).  Indeed, schedule and sequencing changes have been found to justify an award of delay damages even in the face of other contract provisions giving one party the right to dictate progress and sequence of the other party’s work.  J.J. Brown Company, Inc. v. J.L. Simmons Co., Inc., 2 Ill. App.2d 132, 140, 118 N.E.2d 781 (1954) (“The provision of the subcontract giving defendant the right to direct the sequence or general progress of work does not release it from liability for delay.  It implies an obligation on the part of the general contractor to keep the work in such a state of forwardness as to enable the subcontractor to perform within a limited time.”).
 
The common thread here is that owners must give their contractors (and contractors must give their subcontractors) a fighting chance at timely performance – and if they interfere with that chance, a no-damage-for-delay provision likely won’t save the day.
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#113:  Waiving the Right to Arbitrate

5/24/2022

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“When a party who has agreed to arbitrate a dispute instead brings a lawsuit, the Federal Arbitration Act (FAA) entitles the defendant to file an application to stay the litigation.  See 9 U.S.C. § 3.  But defendants do not always seek that relief right away.  Sometimes, they engage in months, or even years, of litigation—filing motions to dismiss, answering complaints, and discussing settlement—before deciding they would fare better in arbitration.  When that happens, the court faces a question: Has the defendant’s request to switch to arbitration come too late?”
 
With that opening paragraph, the U.S. Supreme Court in Morgan v. Sundance, Inc., 142 S.Ct. 1708 (2022), considered whether a waiver of a defendant’s right to insist on arbitration requires a showing of prejudice to the plaintiff resulting from delay in demanding arbitration.  Nine of the eleven circuit courts of appeal, including the First Circuit which embraces New Hampshire, had said yes.  A unanimous Supreme Court has now said no, and in the process has debunked the common assumption that arbitration agreements are specially favored in federal court – the so-called “presumption of arbitrability.”
 
Noting that “[o]utside the arbitration context, a federal court assessing waiver does not generally ask about prejudice,” 142 S.Ct. at 1713, Morgan ruled that “a court must hold a party to its arbitration contract just as the court would to any other kind.  But a court may not devise novel rules to favor arbitration over litigation. . . The federal policy is about treating arbitration contracts like all others, not about fostering arbitration.” Id. For that reason, the Court concluded that “prejudice is not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the FAA.”  Id. at 1714.
 
Although Morgan was decided under the Federal Arbitration Act, the relevant state law principles are not materially different.   Morgan’s definition of waiver – “the intentional relinquishment or abandonment of a known right,” id. at 1713 – is identical to New Hampshire’s.  Demers Nursing Home, Inc. v. R. C. Foss & Son, Inc., 122 N.H. 757, 761 (1982) (“Waiver requires a finding of an actual intention to forego a known right.”).  And the “presumption of arbitrability” is a feature of New Hampshire law as well.  Grand Summit Hotel Condominium Unit Owners’ Ass’n v. L.B.O. Holding, Inc., 171 N.H. 343, 346 (2018) (“Under both federal and state law, a presumption of arbitrability applies to arbitration clauses.”).  How Morgan influences New Hampshire state courts’ take on this remains to be seen, but it is worth noting that early New Hampshire case law on the “presumption of arbitrability,” first introduced in the collective bargaining setting, distilled the presumption entirely from federal law.  Appeal of Westmoreland School Board, 132 N.H. 103, 105-06 (1989).
 
Waiver of a contractual right to demand arbitration by participation in litigation is not restricted to acquiescing defendants; a plaintiff can also be held to have waived arbitration by pursuing litigation.  In tossing prejudice out of the equation and abandoning any preference favoring arbitration, Morgan is likely to have an effect here as well.  The bare act of filing suit may now be viewed as a decision to forego arbitration – including in state court, where there is already precedent for inferring a plaintiff’s waiver from the institution of litigation despite a valid arbitration clause.  Logic Associates, Inc. v. Time Share Corp., 124 N.H. 565, 571 (1984) (“We affirm the master’s recommendation that Logic’s right to arbitration, provided by the license and service agreement’s arbitration clause, was waived when Logic filed a common-law writ for damages in superior court against Time Share.”).
 
If, however, litigation is instituted in order to seek a prejudgment remedy that is unavailable in arbitration, the inference of waiver is weakened.  Thus, bringing a lawsuit as a vehicle for getting a mechanic’s lien attachment – although not the only vehicle that can accomplish this task, as I have mentioned before on this site (#83) – won’t preclude a later demand for arbitration.  Pine Gravel, Inc. v. Cianchette, 128 N.H. 460, 465 (1986).
 
But I wouldn’t include a demand for jury trial in the Complaint!
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#112:  Owners' Implied Warranty Rights Against Subcontractors

4/26/2022

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A few years back I blogged (#84) that owners generally lack “third party beneficiary” rights required in order to enforce subcontracts.  While some commercial subcontracts do extend the subcontractor’s express warranties to the owner, such provisions are rarely found in residential construction, where there is often no express warranty in the subcontract at all.  But what about the implied warranty of good workmanship (#4)?  Does it apply to subcontractors’ work as well?  Is it enforceable by the owner despite the lack of a contractual relationship between the two?
 
Until our Supreme Court weighs in, we can only make an educated guess here.  Lempke v. Dagenais, 130 N.H. 782, 789 (1988), held that in the residential context “the privity requirement should be abandoned in suits by subsequent purchasers against a builder or contractor for breach of an implied warranty of good workmanship for latent defects.”  Some of the Court’s expressed rationale for extending that warranty to remote purchasers – most notably, that implied warranties are not founded on contract but on public policy – would suggest that privity of contract is irrelevant to an owner’s implied warranty suit against a subcontractor.  But other factors mentioned in Lempke are specific to subsequent purchasers suing builder-vendors.
 
Some courts that allow subsequent purchaser suits for breach of implied warranty against the builder-vendor refuse to allow them against its subcontractors.  See Moglia v. McNeil Co., Inc., 270 Neb. 241, 700 N.W.2d 608 (2005); Yanni v. Tucker Plumbing, Inc., 233 Ariz. 364, 312 P.3d 1130 (2013); Sienna Court Condominium Ass’n v. Champion Aluminum Corp., 129 N.E.3d 1112, 1121 (Ill. 2018) (“The purchaser of a newly constructed home may not pursue a claim for breach of an implied warranty of habitability against a subcontractor where there is no contractual relationship.”).

Other courts have allowed direct homeowner suits against subcontractors only if there is no recourse against the general contractor.  Raymond v. Rahme, 78 S.W.3d 552, 563 (Tex. App. 2002) (holding that because a property owner has recourse against the general contractor with whom he contracted, “there is no compelling public policy reason to impose an implied warranty against a subcontractor”); Minton v. The Richards Group of Chicago, 116 Ill. App.3d 852, 856, 452 N.E.2d 835 (1983) (“where the innocent purchaser has no recourse to the builder-vendor and has sustained loss due to the faulty and latent defect in their new home caused by the subcontractor, the warranty of habitability applies to such subcontractor.”).

Still other courts allow homeowners to bring negligence claims against subcontractors regardless of recourse against the builder-vendor.  Juliano v. Gaston, 187 N.J. Super. 491, 498, 455 A.2d 523 (App. Div.1982), cert. denied, 93 N.J. 318, 460 A.2d 709 (1983) (“[I]f plaintiffs sustained any economic loss by reason of the negligence of the subcontractors, they are entitled to be made whole.”);  A.C. Excavating v. Yacht Club II Homeowners Association, Inc., 114 P.3d 862, 865 (Colo. 2005) (“subcontractors owe homeowners a duty of care, independent of any contractual obligations, to act without negligence in the construction of homes.”).  Even the economic loss rule, which ordinarily bars recovery in a negligence action of the costs or repair and replacement of defective work, “has no application to this case because the Association’s negligence claim is based on a recognized independent duty of care,” id.  (New Hampshire likewise recognizes the “independent duty” exception to the economic loss rule, but thus far only for parties in privity of contract.  Wyle v. Lees, 162 N.H. 406, 410 (2011).)
 
A clue as to which of the three approaches New Hampshire will favor may be found in Healy v. Telge, 139 N.H. 407 (1995), which dismissed a homeowner’s implied warranty claim against the seller who wasn’t also the builder, but allowed an implied warranty claim to proceed against the septic installer hired by that seller.  Strictly speaking, that installer wasn’t a “subcontractor.”  But Healy did permit a homeowner to sue the installer of just one component part of the house for breach of implied warranty, despite lack of privity.
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#111:  The "One Year" Warranty: Myth and Reality

3/26/2022

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A common misperception among commercial contractors, particularly those who use standard form contracts, is that their warranty obligations only last for a year.  While contracting parties are free to agree to limit warranties to a one-year duration by explicit language in their contracts, that is not the approach taken by most standard form contracts – except in one limited instance.
 
The AIA’s popular A201 (2017) General Conditions imposes several warranty obligations on the contractor.  The basic one is found in Section 3.5.1, warranting that “materials and equipment furnished under the Contract will be of good quality and new unless the Contract Documents require or permit otherwise,” and that “the Work will conform to the requirements of the Contract Documents and will be free from defects, except for those inherent in the quality of the Work the Contract Documents require or permit.”  Almost identical language is found in Section 3.8.1 of ConsensusDocs 200 – Standard Agreement and General Conditions Between Owner and Constructor.  These clauses include no time limits, so the general statute of limitations applies (in New Hampshire, three years from when the defect was or should have been discovered).
 
Then there is A201 Section 12.2.2.1, the so-called “call back” remedy (I hesitate to call it a “warranty” because it is a promise that the contractor will act, not that the construction will conform to some standard): “In addition to the Contractor’s obligations under Section 3.5, if, within one year after the date of Substantial Completion of the Work or designated portion thereof . . . any of the Work is found to be not in accordance with the requirements of the Contract Documents, the Contractor shall correct it promptly after receipt of notice from the Owner to do so. . . 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.”  Section 3.9.1 of ConsensusDocs 200 contains a like provision.
 
Most of the case law and commentary discussing the relationship between these two sections focuses on the duration of the general warranty, concluding that it is independent of and not circumscribed by the one-year period found in the call back provision.  But scant attention has been paid to the scope of the waiver attending an Owner’s failure to notify and provide the Contractor with an opportunity to address known deficiencies.  Under the A201, such failure waives not only the Owner’s call back rights after the one-year period expires, but also the Owner’s right “to make a claim for breach of warranty.”  The last sentence of Section 3.9.1 of ConsensusDocs 200 is similar, providing that the Owner's failure to give notice and opportunity to cure defects discovered within the first year "waives the Constructor’s obligation to correct that Defective Work as well as the Owner’s right to claim a breach of the warranty with respect to that Defective Work.”
 
The effect of these form contracts is to limit a contractor’s warranty obligations to one year after substantial completion only when the Owner has discovered defective work during that year and failed to afford the contractor an opportunity to fix it – resulting in its deemed acceptance by the Owner.  Since only intentional relinquishment of known rights can result in a waiver, and because the underlying goal of encouraging contracting parties to resolve performance issues among themselves is only achievable if they know about those issues, the trigger for this waiver is actual discovery of the defective work during the first year, not whether the owner reasonably should have discovered it.
 
Not all form contracts include this waiver (the EJCDC’s C-700 – Standard General Conditions of the Construction Contract, for example, has a one-year call back remedy but omits any associated waiver language), and those that do can of course be modified.  But in my view, this particular waiver – a back door into a one-year warranty – strikes a fair balance.
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#110:  Who Owns The Float?

2/26/2022

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In large commercial projects it is common for contractors to present owners with a schedule for the work to be performed using the so-called “critical path method,” or CPM.  A CPM schedule identifies in logical sequence the tasks which must be performed in order to complete the project, assigning an estimated duration for each one.  A task on the critical path is “critical” whenever a delay in its performance will delay the project’s ultimate completion.  Thus, if unforeseeable causes or an owner’s conduct delays the performance of a critical path item, an extension of time, if not damages for delay, may be in order.

But not all scheduled tasks are “critical” in this sense.  Many can be performed at any time within a given period without affecting completion of the entire project – i.e., the time slot calendared for performing the task is larger than the amount of time it will actually take to perform it.  CPM schedules quantify this leeway by assigning these tasks early start/late start dates or early finish/late finish dates (it doesn’t matter which, since the result is the same either way).  “The time difference between the early start and late start or the early finish and late finish of each activity is ‘float,’ that is, the time that the start of the activity can be delayed without affecting the critical path and timely completion of the project.”  5 Bruner & O’Connor Construction Law § 15:8.  In other words, the float “represents the amount of scheduling discretion or flexibility that may be available for that activity before its total project duration will be adversely affected.” Id.

Of course, if the project is to get finished on time every task has to be completed by the specified project completion date.  An activity with zero float is necessarily on the critical path, i.e., any delay to completion of that activity will delay completion of the project.  Once a non-critical activity’s float is gone, bingo – it has just become a critical path item!  And this raises an interesting question: how to handle contractor claims for time extensions or delay damages when, through no fault of the contractor, a non-critical path activity is delayed such that all of its float is destroyed.

The answer depends on whether the contractor or the owner “owns the float.”  If float is available to absorb the impact of an unavoidable or owner-caused delay to a non-critical path item, owners argue that the contractor does not need an extension of time and has not suffered delay damages, while contractors argue that the float was their cushion which could have been used to speed up ultimate completion, and the delay deprived them of that earlier completion opportunity.  Once all of the float associated with the task is consumed and it ends up on the critical path, further delay is certainly grounds for extension (and perhaps damages).  If the owner owns the float, time extension (or owner liability) is only for the length of delay in excess of the float days.  If the contractor owns the float, time extension (or owner liability) may be for the entire length of the delay.

But here's the rub:  Even if the float is owned by the contractor, any loss of float that does not affect the critical path could entitle it to extra time or money only “if the contractor establishes that it could realistically complete the project early,” Weaver-Bailey Contractors, Inc. v. United States, 24 Cl. Ct. 576, 578 (1991).  Without that proof, loss of contractor-owned float that does not impact the critical path is legally irrelevant.  That should give some comfort to owners.  Nevertheless, I am seeing with increasing frequency contract provisions dictating that the owner owns the float, or that the float is consumable by whichever party first needs it – colloquially, that the project owns the float.

Since it is the owner who usually drafts commercial construction contracts, such clauses are driven by the perception (which I happen to share, although I can point to no court case explicitly so holding) that if the contract is silent, the contractor owns the float.
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#109:  Liability Insurers' Duty to Defend

1/30/2022

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When a contractor or subcontractor is sued for defective workmanship, one of his first thoughts is likely to be whether the damages are covered by his liability insurance.  As I have noted elsewhere (Blog # 37), the cost of repairing defective work itself (as opposed to the cost of addressing any resulting damage to other property) is rarely covered by the defendant’s insurance policy.  But if the plaintiff’s complaint also alleges some resulting property damage, however minor, the insurer is obliged to defend the lawsuit.

An insurer’s duty to defend is triggered by comparing the allegations of the plaintiff’s complaint with the policy’s coverages to see if there is any overlap.  Todd v. Vermont Mutual Insurance Co., 168 N.H. 754, 759 (2016) (“An insurer’s obligation to defend its insured is determined by whether ‘the cause of action against the insured alleges sufficient facts in the pleadings to bring it within the express terms of the policy.’”)(quotation omitted).  If there is overlap, the insurer must defend the lawsuit in its entirety, even though repair of the defective work itself is not a covered loss.  Titan Holdings Syndicate, Inc. v. City of Keene, 898 F.2d 265, 269 (1st Cir. 1990) (applying New Hampshire law) (“If some of the claims against the insured fall within the terms of coverage, and some without, the insured must still defend the entire claim (at least until it is apparent that no recovery under the covered theory can be had) . . .”)  Parsing of claims and theories, and furnishing a defense to only the covered ones, is not allowed.

But settling them is.  As long as the policy language reserves settlement authority to the insurer – which is typically the case – the insurer can settle with the plaintiff on just the covered claims.  At that point, is its duty to defend at an end, leaving the defendant to hire his own attorney to defend the non-covered claims going forward?

No New Hampshire court has yet tackled this question, but the Restatement of the Law of Liability Insurance (2018) § 18 takes a stand on it: “An insurer’s duty to defend a legal action terminates only upon the occurrence of one or more of the following events: . . . (3) Final adjudication or dismissal of parts of the action that eliminates any basis for coverage of any remaining parts of the action . . . (5) Partial settlement of the action, entered into with the consent of the insured, that eliminates any basis for coverage of any remaining parts of the action . . .”  Either one of these subsections might apply to our question, although subsection (5) is the more specific, addressing settlement directly.  At least one court, however, has interpreted subsection (3), which is silent on consent of the insured, to embrace dismissals by settlement.  Burka v. Garrison Property and Casualty Ins. Co., 521 F. Supp. 3d 97, 108 (D. Me. 2021) (“a duty to defend terminates upon final adjudication or settlement of the insurable part of the underlying lawsuit or settlement”).

The argument that the insured’s consent to a partial settlement should be required is in tension with the principle that the parties’ contract should determine their rights.  Some policies do contain “consent to settle” clauses, giving the insured a voice in the settlement decision but providing that such consent shall not be unreasonably withheld.  (Many professional liability policies have them.  Few commercial general liability policies do.)  But if the policy is silent on consent to settlement, implying such a right is problematic – particularly if the insured were to have unfettered discretion to withhold it, regardless of reasonableness.  Withholding consent to a partial settlement solely to keep the insurer on the hook for defense costs might well be deemed unreasonable.  And if the policy provides for reimbursement of an insurer’s defense costs incurred where there was no duty to defend, the contractor may end up paying anyway.

In the end, an insurer-provided defense for uncovered claims in a mixed covered-and-uncovered claim case is likely to survive to the end of the case only if the damages to other property are substantial as a percentage of the total.
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#108:  Replacement Contractor Issues

12/19/2021

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When a contractor abandons or is terminated from a construction project before substantial completion, one of the first tasks for the owner/developer (or for the contractor’s performance bond surety if such a bond exists) is to locate and hire a replacement contractor.  If the original contract went south due to defective workmanship issues, the newcomer will be tasked not only with finishing up uncompleted scope, but with correcting existing mistakes.  It is certainly possible, even wise, for the new contractor to disclaim any liability for his predecessor’s work, but at the end of the project teasing apart the respective responsibilities for any issues with the finished product can be challenging.

One of the certainties in life, right up there with death and taxes, is that the price tag for completion will exceed the original contractor’s unpaid contract balance.  Fearful of their own warranty liability, the time-honored approach of completion contractors has been to err on the side of correcting any work that may even marginally impact satisfactory completion of remaining work.  At the bid stage, even with the original plans and specs and any change orders or updated drawings in hand, the completion contractor won’t be able to spot every potential error in the existing work, and so will pad his bid – or insist on a cost-plus arrangement – to protect himself against unseen issues. Cha-ching!

Faced with this, the owner/developer must anticipate that litigation with the original contractor may ensue, and will want to preserve the evidence of how the project was left at the point of abandonment or termination.  Photographing and videotaping the stage of construction before the completion/correction process begins is always smart, but that snapshot-in-time sufferers from the same challenges that the completion contractor faces at bid time; all possible construction defects won’t be observable on Day 1.  It’s a good idea to keep the camera handy to document things when what was once latent becomes patent – and to insist that the completion contractor call out newly observed defects before proceeding with a fix.

If the original subcontractors can be wooed back to the job (or better yet, have already agreed to the assignment of their subcontracts to the owner in the event of the contractor’s termination), there may be a basis for correction of at least their deficient work without additional cost.  This assumes that the completion contractor is required to employ them – a provision that the owner (or performance bond surety) may wish to insist on, but that the completion contractor may resist (why break the huddle with a sub who dropped the ball when the prior QB threw it a pass?).

When the owner sues the original contractor for the difference between the cost of finishing the work and the unpaid contract balance – the usual measure of damages in such cases, see McMullin v. Downing, 135 N.H. 675, 677-78 (1992) – the contractor will of course insist that the completion costs were excessive or unnecessary.  Who has the burden of proof on this issue?  Parem Contracting Corp. v. Welch Construction Co., Inc., 128 N.H. 254, 259 (1986), gives an answer in the analogous context of a terminated subcontractor [Parem] defending a counterclaim by a general contractor [Welch] for costs incurred to complete the sub’s work:

“Welch had the burden in the first instance of proving the extent and amount of its damages. [citation omitted]  It was required to show that the claimed expenditures were incurred solely in completing work that Parem had agreed to perform and obtaining materials that Parem had agreed to supply.  However, once the trial court found that the costs actually were incurred as alleged, it was not permitted to conclude that they ‘could have been avoided’ in the total absence of evidence to that effect.  Parem, not Welch, had the burden of going forward with evidence that all or part of the costs could have been avoided without undue risk or burden” [citations omitted].

This burden-shifting framework should apply equally to owners’ claims against terminated contractors.  Nevertheless, owners would do well to support their costs of completion/correction by documenting deficiencies in workmanship as best they can.
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#107:  "Prevailing Party" Attorneys' Fees Provisions

11/26/2021

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In 279 B.C. the Greek king Pyrrhus defeated the Romans at the Battle of Asculum but lost much of his army in the process.  He reportedly said “If we are victorious in one more battle with the Romans, we shall be utterly ruined!”  Thus was coined the phrase “Pyrrhic victory” – a win that inflicts such a cost on the victor that it amounts to defeat.  And any trial lawyer you ask can point to cases in which the cost of litigation resulted in a Pyrrhic victory for the client.
 
Contracting parties can and often do agree that in the event of litigation between them, the “prevailing party” will be paid his attorneys’ fees incurred in the fight.  On the assumption that any monetary judgment in the plaintiff’s favor, no matter how small, renders him the “prevailing party,” this type of fee-shifting provision is thought by some litigants to be a balm against the sting of Pyrrhus.  And sometimes it is.  A recent case from Tennessee affirmed an award of $201,255.50 in attorneys’ fees to a homeowner who sued for $12,400 and won a $6,800 jury verdict on a breach of contract claim.  G.T. Issa Construction, LLC v. Blalock, 2021 WL 5496593 (Tenn. App. Nov. 23, 2021).
 
The fly in the ointment, however, is the court’s power to tweak the amount of attorneys’ fees to be awarded.  A “win” that is grossly disproportionate to the attorneys’ fees incurred in achieving it can lead to an award of less than all of those fees.  In New Hampshire, attorneys’ fee awards take into account “the amount involved, the nature, novelty, and difficulty of the litigation, the attorney’s standing and the skill employed, the time devoted, the customary fees in the area, the extent to which the attorney prevailed, and the benefit thereby bestowed on his clients.”  Funtown USA, Inc. v. Town of Conway, 129 N.H. 352, 356 (1987).  The requirement to consider both the amount sought and the degree of success falls short of an explicit directive to compare the outcome of trial with the bill, but in practice that is often what happens.  I have seen several New Hampshire courts cut down an award of fees where outcome and bill are wildly disparate.  Pyrrhus lives!
 
Judicial reluctance to approve fee applications that dwarf the amount of a judgment or verdict is at its peak when the fee-shifting provision is contractual rather than statutory.  In the statutory setting, fee awards are designed “to encourage suits that are not likely to pay for themselves, but are nevertheless desirable because they vindicate important rights.”  Diaz v. Jiten Hotel Management, Inc., 741 F.3d 170, 178 (1st Cir. 2013) (affirming an attorneys’ fee award of $104,626.34 on a $7,650 verdict under a Massachusetts anti-discrimination statute).  But a suit for breach of a contract with a prevailing party fee-shifting provision implicates no public policy to encourage suits that would otherwise not be cost-effective.
 
One way that courts reduce attorneys’ fee awards below the amounts incurred is by disallowing fees spent pursuing claims or legal theories on which the plaintiff did not prevail.  LaMontagne Builders, Inc. v. Brooks, 154 N.H. 252, 261 (2006) (“Where a party prevails upon some claims and not others, and the successful and unsuccessful claims are analytically severable, any fee award should be reduced to exclude time spent on unsuccessful claims.”).  In the construction setting, however, that type of severability is rare; it will almost always turn out that “the evidence necessary to prove liability under one theory was also relevant to proving liability under the other theory,” id.  The prevalence of multiple claims in mine run construction disputes – breach of contract, unjust enrichment, negligence, Consumer Protection Act, etc. – will thus exacerbate the Pyrrhic problem. 
 
Because parties are masters of their own contracts, they can craft fee-shifting provisions as they see fit.  For example, a prevailing party fee-shifting clause might cap the plaintiff’s recoverable attorneys’ fees at the amount of the verdict or judgment, thereby maintaining a disincentive to sue over small disputes, while capping the defendant’s fee recovery at the amount of the claim, thereby incentivizing reasonable settlement offers.
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