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#46:  Destruction of Work Prior to Completion

7/30/2016

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A contractor builds 90% of a building; it is destroyed by fire before he can finish. A subcontractor constructs 90% of a road; it gets washed out by a 100-year storm before the owner accepts it. Nobody has insurance. No contractual provision allocates the risk of loss. Who will bear that risk? Does the contractor have to start over on his own dime, or does the owner have to pay for the work performed? The answer may surprise you.

In Anderson v. Shattuck, 76 N.H. 240, 242 (1911), the plaintiff contractors “had already performed a substantial part of the work they contracted to do, when the fire destroyed the buildings.” Even though they weren't entitled to be paid under their contract (because they hadn't performed it), the Court found that “the labor and materials actually furnished by the plaintiffs were attached to the defendant's real estate as the work progressed and constituted a benefit to the defendant for which the plaintiffs are entitled to recover.” That was true even though “[t]here has been no breach of the express contract by the defendant, and neither party is in fault for the fire which put an end to the contract and caused the situation now existing between the parties. But justice does not require that they should remain in that situation, or that the contractors should be remediless, merely because they cannot maintain an action against the defendant upon the contract.” Invoking a legal doctrine called quantum meruit (literally “the amount deserved”), the Court awarded “an apportionment of so much of the agreed compensation to the contractor as he has earned in what he has done; he recovers such part of the entire amount as is equal to the part he has performed of the whole contract.” Id. at 243.

The owner in Anderson had obtained fire insurance, and the question arose as to whether the contractors were entitled to be paid from the insurance proceeds. The Court ruled that they were entitled. What if there had been no insurance? For all that appears in the case, the principle of quantum meruit still applies. This suggests that it is the owner, not the contractor, who bears the risk of loss to partially completed work where “neither party is at fault” for the loss.

Some courts distinguish contracts for improvements to an existing structure, whose destruction made completion of the contract for improvements impossible, and construction of a building from the ground up. A New Jersey case, Matthews Construction Company v. Brady, 140 A. 433, 434 (N.J. 1928), is typical:

"(b) Where under a contract for alterations and additions to an existing building performance depends on the continued existence of the structure, a condition is implied that impossibility of complete performance arising from its destruction without fault of the parties will absolve them from further liability, with the exception that the owner remains liable and the builder may recover for the value of the work done and materials delivered and accepted prior to such destruction. [citations omitted]
"(c) There is a distinction as to continuing liability under a building contract involving the erection of a new structure on land of the owner and that which relates to the making of additions and alterations to an existing building [the continuance of which is necessary to complete the contract] in the event of destruction without fault before completion. In the former case the builder remains liable for failure to complete, while in the latter both parties are relieved and the contract is at an end in that respect. [citations omitted]"

Thus far, New Hampshire has not adopted this distinction. Until it does, the rule seems to be that in the absence of a contract providing for a different rule, the risk of loss from unpreventable acts of God is on the owner, who must pay for construction he won't get to enjoy.
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#45:  OSHA: A Primer

7/1/2016

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For the first time since 1990, the Occupational Health and Safety Administration (“OSHA”) has just increased its maximum penalties for rule violations. This is a good time to review the basics of OSHA enforcement.

OSHA rules on workplace safety include universal rules governing all industries, and industry-specific rules like those for the construction industry, codified at 29 CFR Part 1926.

Nationwide OSHA conducts about 35,000 inspections annually. Some are routine visits, some follow up on employee complaints or tips from whistleblowers, and others occur after mandatory reporting of a fatality (which must be reported within eight hours) or other serious accident such as loss of an eye or a limb (which must be reported within twenty-four hours). Legally, either the employer’s or owner’s permission, or a warrant, is required before an OHSA inspector may inspect a private facility or non-public work site. Given how easy it is to establish probable cause for a warrant in the non-criminal administrative setting, refusing a warrantless request to inspect may be unwise. OSHA inspectors have long memories, and refusals can end up painting a target on your back.

When OSHA inspectors show up, they will typically announce themselves to management and request permission or display a warrant to inspect all or part of a facility or work site; do a walk-around (which someone from management should always accompany); interview employees (sometimes privately, i.e., out of the presence of management); request documents (the OSH Act requires employers to keep records of employee injuries and illnesses, which must be made available on request without a subpoena); and confer with management (the “closing conference”) about any violations they spot. If violations can be abated immediately, it’s a good idea to do so before the inspector leaves.

OSHA has six months after the inspection to issue citations for any violations found. Citations will list the rule violated, the classification of the offense (e.g., “serious,” “repeat,” “willful”), the date by which the condition must be abated, and the proposed penalty – which effective August 1, 2016, can be up to $12,471 per “serious” violation and $124,709 per “repeat” or “willful” violation. Citations proposing the maximum penalty, however, are relatively rare. The OSH Act requires that in assessing penalties, “due consideration” must be given to four criteria: the size of the employer’s business, the gravity of the violation, the employer’s good faith, and any prior history of violations. 29 U.S.C. § 666(j).

Within fifteen work days of receiving a citation, an employer may request an informal conference with the OSHA Area Director, either in an effort to settle (the Area Director has authority to downgrade classifications and negotiate penalties) or simply to gather information. Within those same fifteen work days, an employer must give OSHA written notice that a citation is being contested.

If a citation is contested, a trial will be scheduled before an administrative law judge, whose decision is then reviewable by the Occupational Safety and Health Review Commission, whose decision is, in turn, appealable to the United States Court of Appeals. At the trial, the burden is on OSHA to prove by a preponderance of the evidence “(1) that the cited standard applies; (2) that there was a failure to comply with the standard; (3) that employees had access to the violative condition; and (4) that the employer had actual or constructive knowledge of the violation.” P. Gioioso & Sons, Inc. v. Occupational Safety and Health Review Commission, 675 F.3d 66, 72 (1st Cir. 2012). The knowledge element is often challenged, but rarely successfully. In particular, “an employer can be charged with constructive knowledge of a safety violation that supervisory employees know or should reasonably know about.” P. Gioioso, id. at 73.

Lastly, a word of warning to GCs: keep an eye on your subs! OSHA “may issue citations to general contractors at construction sites who have the ability to prevent or abate hazardous conditions created by subcontractors through the reasonable exercise of supervisory authority regardless of whether the general contractor created the hazard...or whether the general contractor’s own employees were exposed to the hazard.” Solis v. Summit Contractors, Inc., 558 F.3d 815, 818 (8th Cir. 2009).
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    Frank Spinella

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