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#153:  Upfront Payments in Residential Construction

1/24/2026

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This week’s sentencing of Stratham contractor Gerard Thibault to 10-30 years in state prison for taking over $2.4 million in down payments from customers without performing the work carries a message for residential customers and contractors.  Unscrupulous builders, though rare in New Hampshire, are out there.  How can their customers protect themselves?
 
While paying for labor and materials only as the work progresses may be ideal from the homeowner’s perspective, it is not always realistic.  Many contractors are relatively small operations without the capital to fund initial purchases from their own reserves, and need initial deposits to buy the materials.  The homeowner’s concern here is in ensuring that a deposit requested for his or her project is actually used solely for that purpose.  This requirement should be written into the parties’ contract, along with a provision that tools or equipment usable on future projects will not be purchased with the deposit.
 
Some homeowners think that by purchasing materials directly they can avoid the need for a large deposit and gain a measure of protection.  Many contractors resist this, believing that they will lose not only some of their expected profit, but control over the project as well.  And often they are correct.  From the homeowner’s perspective, buying their own materials entails the risk that if a directly purchased product fails, they will have no recourse against the contractor.  Disputes may arise over whether a product failure was or was not due to faulty installation, disputes that would be avoided if the contractor had furnished the product.
 
Contractors seek upfront deposits for more than just purchasing materials.  Deposits demonstrate owner commitment, securing the contractor’s time.  Moreover, payroll, fuel, and general overhead expenses don’t lend themselves to net-30 terms, and contractors need assurance that their customers won’t stiff them and leave them short when these expenses come due.  Financially speaking, the contractor wants to stay ahead of the customer – just as the customer wants to stay ahead of the contractor.  Striking the balance is a matter of negotiation.
 
If a construction lender is involved, it may disapprove of a significant upfront payment to the contractor.  As mortgagees, lenders want equity cushions for themselves, not for contractors.  Large deposits can negatively impact the homeowner/borrower’s financial strength if things go south and the loan falls into default.
 
A contract provision requiring the contractor to use a deposit solely for the depositor’s project is not prophylactic.  Preventing the contractor from using the deposit for other purposes entails segregating the deposit from the contractor’s general operating account in a separate escrow account, and requiring homeowner sign-off for disbursements.  I sometimes see this employed on major projects.  Particularly where the contractor has credit terms with a lumber yard or supply house (homeowners should be circumspect about hiring a contractor who doesn’t!), producing the seller’s invoice as a prerequisite to sign-off can work well. 
 
Even without homeowner sign-off, requiring a separate escrow account to hold the deposit until disbursed for the depositor’s project, if coupled with language creating a fiduciary duty on the part of the contractor to use the deposit only for project specific expenses, may offer some protection to the homeowner in the event of the contractor’s bankruptcy.  Trust funds are generally not deemed part of the bankruptcy estate under 11 U.S.C. § 541(d).  And an individual contractor’s use of the fund for other purposes in breach of fiduciary duties may be enough to avoid a discharge under 11 U.S.C. § 523(a)(4).
 
Some states impose caps on the amount of the deposit.  Massachusetts and Pennsylvania limit them to one-third of the total price (except for special-order materials like custom windows or cabinets).  Maine limits them to one-third of the total price absent a signed written waiver.  While New Hampshire law has no such cap, any request for more than a third upfront should be viewed with skepticism, especially on labor intensive projects.

The New Hampshire Department of Justice has published guidance recommending that "Consumers should always ask contractors to provide an itemized list of what their initial deposit will cover."  It's not a bad suggestion.
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#152:  Retainage and Performance Bonds

12/31/2025

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In commercial and governmental construction contracts, it is common for owners to retain from general contractors, and for general contractors to retain from subcontractors, some percentage of progress payments earned until substantial completion (or, less frequently, final completion) of the contract has been achieved.  Its purpose is to protect the holder from the financial impact of a breach of contract by downstream parties.  Any portion of the retainage not used to correct a breach must be returned.  Parem Contracting Corp. v. Welch Construction Co., Inc., 128 N.H. 254, 257 (1986) (“A party owed a retainage does not forfeit the amount owed if it breaks the contract.  If it sues to recover the retainage, however, its recovery is subject to the defendant’s counterclaim in recoupment for the actual damages caused by the breach.”).
 
There are many ways to structure a retainage provision.  The percentage of retention – most often 10% – may be reduced or eliminated at some agreed point (say, the 50% completion stage).  It may be reduced at substantial completion to an amount tied to the estimated cost of completing punch list items, to be released upon punch list completion.  Sometimes a portion of it may be held for the duration of warranty obligations.  In New Hampshire, these are all negotiable matters – with one regulatory exception for certain state-funded water pollution control projects.  
 
A performance bond likewise provides protection against the financial impact of a contractor default.  If the performance bond surety cures a default, retainage is no longer needed for that purpose.  But that doesn’t mean the retainage is then turned over to the contractor.  Many performance bonds expressly provide that any retainage must be paid over to the surety as a condition of the surety’s obligations.  Even without this express provision, the surety’s right to retainage is implied by most courts under equitable subrogation principles – which have been recognized by New Hampshire in similar contexts.  Chase v. Ameriquest Mortgage Co., 155 N.H. 19, 27 (2007), is an example (equitable subrogation “applies where one who has discharged the debt of another may, under certain circumstances, succeed to the rights and position of the satisfied creditor.”). 
 
If the owner chooses to apply retainage to cure a contractor’s default instead of resorting to the performance bond, but the retainage ends up being insufficient to fully cure the default, how does this affect the surety’s obligation to finish any remaining scope of work?  In this scenario the owner has impacted the surety’s right to complete the project as it sees fit, and deprived it of money to fund the effort.  This is akin to an owner picking its own completion contractor before giving the surety the opportunity to do so – a circumstance which has been held to absolve the surety of liability under its bond.  Sleeper Village, LLC v. NGM Insurance Co., 2010 WL 3860373 (D.N.H. Oct. 1, 2010).  I expect a similar result would follow the owner’s application of retainage to cure a contractor default.
 
Because invading retainage while a performance bond is still potentially in play is risky business, most owners won’t risk using retainage to complete a project unless the retainage is clearly sufficient to do so – and even then, they are likely to seek the surety’s permission.  The popular AIA-A201 (2017) General Conditions provides for consent of surety to release of retainage to the general contractor at the completion of the project.  It is silent on surety consent to use of retainage to cure a breach, but the implications are the same.
 
There is a wrinkle here.  In New Hampshire, when “a bond refers to and is conditioned on the performance of a specific agreement the latter’s terms become a part of the bond,” Paisner v. Renaud, 102 N.H. 27, 29 (1959). Thus, a usage of retainage expressly allowed in the bonded contract could theoretically moot the need to seek surety consent.  If, say, a bonded general contract expressly permitted the use of retainage to clear subcontractor liens, an owner who uses retainage held back from the general contractor to pay off a subcontractor’s lien has a decent argument against a performance bond surety’s objection.

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#151:  Promissory Estoppel: An Alternative to Contract Enforcement

11/28/2025

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Construction law is largely contract law.  Most of us know a contract when we see one.  Courts enforce agreements rather than mere promises, and require an offer, its acceptance, and an exchange of something of value (what lawyers call “consideration”).  One party promises to pay the other for a specified performance; the other promises to perform in exchange for the payment; and the mutual promises serve as consideration for each other.  If one party makes a gratuitous promise to the other (i.e., for no consideration), there is no enforceable contract. 
 
But there may still be a basis for recovering damages under a legal doctrine called “promissory estoppel.”   Courts recognize that if someone reasonably relies on a promise, and suffers some detriment as a result – or even does something that benefits the promisor – it is fundamentally unfair to leave him without any legal remedy.  Promissory estoppel fills this gap, holding that “a promise reasonably understood as intended to induce action is enforceable by one who relies on it to his detriment or to the benefit of the promisor.”  Panto v. Moore Business Forms, Inc., 130 N.H. 730, 738 (1988).  
 
Promissory estoppel is used “to enforce promises underlying otherwise defective contracts,” Great Lakes Aircraft Co., Inc. v. City of Claremont, 135 N.H. 270, 290 (1992).  But the doctrine is only available as a back up theory; “in all instances, application of promissory estoppel is appropriate only in the absence of an express agreement.”  Id. at 290.  If there is consideration for the promise, there is a contract, and promissory estoppel won’t apply.  New Hampshire Speedway, Inc. v. Motor Racing Network, Inc., 2013 N.H. LEXIS 153, at *10 (N.H. Sup. Sept. 25, 2013) (“Because we have already determined, as a matter of law, that there is consideration for the Agreement, Network may not rely upon promissory estoppel to enforce the promises contained therein.”).
 
In the construction world, promissory estoppel often applies in bid scenarios.  Granite State Glass, low bidder on a municipal contract who nevertheless wasn’t awarded the contract, used this theory in Marbucco Corp. v. City of Manchester, 137 N.H. 629, 633 (1993).  The Court held that “Granite State’s reasonable reliance on the city’s promise, if it awarded the contract at all, to award it to the lowest responsible bidder submitting all essential information prior to the bidding deadline, could entitle Granite State to damages under the theory of promissory estoppel.”
 
In the other direction, promissory estoppel can hold a subcontractor to its bid until the general contractor has had a reasonable time to accept the bid after receiving the prime contract.  Our Supreme Court has yet to rule on the issue, but the leading case nationwide is Justice Traynor’s opinion in Drennan v. Star Paving Co., 51 Cal. 2d 409, 415 (1958) (“Clearly defendant had a stake in plaintiff's reliance on its bid.  Given this interest and the fact that plaintiff is bound by his own bid, it is only fair that plaintiff should have at least an opportunity to accept defendant's bid after the general contract has been awarded to him.”).
 
When it comes to damages, promissory estoppel may not be as generous as a breach of contract award would be.  Breach of contract damages include lost expectation damages. i.e., the value of what was promised.  In contrast, damages under promissory estoppel are sometimes limited to “reliance” damages, i.e., the amount or value of what the plaintiff expended in money or effort.  (That’s what happened with Granite State Glass in the Marbucco case; it was awarded its bid preparation costs.)  But in general, “the value of the promise is the presumptive measure of damages for promissory estoppel, to be rejected only if awarding so much would be inequitable.”  Jackson v. Morse, 152 N.H. 48, 53 (2005).
 
[One open question in New Hampshire is whether promissory estoppel requires a plaintiff to prove that injustice can be avoided only through enforcement of the promise.  Our Supreme Court had the opportunity to tell us in Collision Communications, Inc. v. Nokia Solutions and Networks OY, No. 2025-0140, but decided to pass on the issue.  We'll find out eventually.]
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#150:  The Future of Federal Disadvantaged Business Set-Asides

10/13/2025

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Last year I blogged (#139) about the constitutionality of federal set-asides for disadvantaged contractors and the preliminary ruling in Mid-America Milling Co. v. U.S. Department of Transportation, 2024 WL 4267183 (E.D. Ky. Sept. 23, 2024).  The Biden-era case suggested that long-standing federal programs favoring the awarding of contracts to businesses classified as disadvantaged or minority-owned was likely unconstitutional because they presumed that women and minorities are “socially and economically disadvantaged individuals.” 
 
The Trump Administration’s war on Diversity, Equity and Inclusion has now seized on this case in leading its troops into battle.  First, the USDOT decided to stop contesting the case in court and instead proposed a consent order barring USDOT approval of federally-funded projects where any DBE’s eligibility was based on a race- or sex-based presumption.  When intervening disadvantaged business groups contested the entry of a consent order as collusive, the Administration decided not to wait for a ruling:
 
On October 3, 2025, the U.S Department of Transportation published an Interim Final Rule – purportedly in response to the Mid-America Milling case – announcing that henceforth its Disadvantaged Business Enterprise (DBE) programs for federally assisted contracts will operate in what it calls “a nondiscriminatory fashion,” by removing “race- and sex-based presumptions of social and economic disadvantage that violate the U.S. Constitution.”
 
The new rule was issued without first seeking public comment – an unusual move signaling the Administration’s haste to end DEI in the expenditure of federal funds.  While there is a 30-day public comment period ending on November 3, 2025, the rule is already in effect, and you can bet it won’t be changed as a result of public comments.  “Interim” is euphemistic.  The regulation expressly overrides Congressional policy at odds with the Administration’s agenda:
 
“Congress has mandated by statute that DOT treat certain individuals—women and members of certain racial and ethnic groups—as ‘‘presumed’’ to be disadvantaged. . . . On September 23, 2024, the U.S. District Court for the Eastern District of Kentucky determined that the DBE program’s statutory race- and sex-based presumptions likely do not comply with the Constitution’s promise of equal protection under the law. . . . DOT and DOJ, consistent with the ruling of the District Court, have determined that the race- and sex-based presumptions of DOT’s DBE programs are unconstitutional.”
 
The curious statement that DOT and DOJ “have determined that the race- and sex-based presumptions of DOT’s DBE programs are unconstitutional” raises some eyebrows.  Normally it is up to the courts, not administrative agencies, to determine the constitutionality of federal statutory programs.  Johnson v. Robison, 415 U.S. 361, 368 (1974) (“Adjudication of the constitutionality of congressional enactments has generally been thought beyond the jurisdiction of administrative agencies.”).  But the political world is different today.
 
A preliminary ruling by a Kentucky District Court is a rather slim reed on which to rest DOT’s constitutional law pronouncement. When courts rule on constitutionality they don’t do so in the context of a preliminary injunction, where the standard is mere likelihood of success in establishing unconstitutionality.  That was the setting for the ruling in Mid-America Milling, which has never issued a final ruling on the merits.  
 
Bottom line: Women, Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, and Subcontinent Asian Americans are no longer presumed to be socially and economically disadvantaged.  DBE applicants must now prove specific instances of individualized economic hardship, systemic barriers and denied opportunities that impeded the applicant’s progress or success in education, employment, or business, including obtaining financing on terms available to similarly situated, non-disadvantaged individuals.  As the Mid-America Milling opinion candidly acknowledged, this is “a high hurdle.”
 
New Hampshire’s DOT, which is in charge of the certification of DBE eligibility for federally funded projects in the Granite State, will need to retool its application forms.  If your business has been certified before – well, get working on your personal narrative!

[Update:  On December 1, 2025, DOT published some guidance.]
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#149:  Sparking Residential Development

8/27/2025

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It has long been perceived by many in New Hampshire that residential housing construction has been stymied by local zoning and building restrictions.  Cutting through red tape in getting permits hasn’t been the biggest problem; New Hampshire is actually rather efficient in that regard compared to the other New England states.   The bigger issue in the Granite State is what it has always been: the desire of taxpaying homeowners to preserve the character of their neighborhoods and property values by restricting construction that would increase density and/or decrease aesthetic appeal.  “Not in my back yard!” has been a rallying point at town meetings.
 
With the resulting shortage of available “back yards,” the Legislature has recently focused on limiting local discretion thought to be putting up roadblocks to new housing starts.  This summer Governor Ayotte signed several bills into law which affect residential construction in the State.  Here are the highlights:
 
  • HB 413 limits local jurisdiction of a ZBA or other municipal appeals authority to just appeals on local amendments to the state building code or state fire code, requiring all other appeals to be made directly to the State Building Code Review Board, which now has authority to review municipal decisions on local amendments as well.
  • HB 457, effective September 13, 2025, prohibits local legislative bodies from restricting the number of occupants of any dwelling unit to less than 2 occupants per bedroom, or basing occupancy restrictions on the familial or non-familial relationships or marital status, occupation, employment status, or the educational status among the occupants.
  • HB 428 amends the State Building Code, effective July 1, 2026, by prohibiting local legislative bodies from making changes to the state fire code.
  • HB 577 expands accessory dwelling units by establishing a right to construct one detached unit on a single-family residential lot, and increases the maximum square footage for a unit.
  • HB 631, effective July 1, 2026, permits multi-family residential buildings in commercial zoning districts, mandating an exemption to any requirements regarding setbacks, height, or frontage requirements for a building being converted to multi-family or mixed-use.
  • SB 26, effective September 30, 2025, allows the Consumer Protection Bureau of the Attorney General’s Office to authorize the use of escrow deposits on purchase and sales agreements on subdivided land for pre-closing payments to customize or upgrade the property, or for change orders and similar items.
  • SB 188 allows independent third-parties (engineers, architects, building code enforcers) hired by the property owner to inspect land, buildings, and structures to determine compliance with state and local building codes, and sets deadlines for issuance of certificate of occupancy after a municipality receives certification of code compliance form the independently hired party.
  • SB 281, effective July 1, 2026, prohibits municipalities from denying building or occupancy permits for property adjacent to class VI roads, provided that the applicant agrees to relieve the municipality of liability.
  • SB 283, effective September 30, 2025, requires municipalities to exclude below-grade areas from floor-area-ratio (FAR) calculations and to review and adjust height limitations as needed to maximize capacity and height potential for new construction.
  • SB 284, effective September 13, 2025, prohibits municipalities from requiring more than one parking space per new residential unit.
 
While these measures may spark some new residential development, they do little to address the other root cause of the housing shortage: affordability.  Smaller manufactured housing units are obviously the most affordable, but the Legislature left HB 685, which would have allowed manufactured housing on all residentially-zoned lots, on the cutting room floor – proof that the “Not in my back yard” sentiment echoes even in the State House.
 
In Washington, FreddieMac has just included single-wide manufactured housing to its CHOICEHome financing program, previously restricted to double-wides.  Borrowers can make down payments of as little as 3% and still qualify for the program.  A nice gesture, but finding the land which will allow the placement of these units is another matter.  A local one.
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#148:  Federal Bid Protests: The Hurdles Get Higher

7/30/2025

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Thinking of protesting an adverse decision on a federal contract award?  Well, a recent decision by the United States Court of Federal Claims illustrates just how rocky your path has become.  This one will leave you scratching your head:
 
The case is Gemini Tech Services, LLC v. United States, 177 Fed. Cl. 227 (July 24, 2025).  The government issued a Request for Proposals to perform certain support services for a military installation in Fort Knox, Kentucky, and announced that it would initiate a “strict compliance review” starting with the lowest priced proposal and continuing to higher priced proposals until at least five compliant proposals were received, while reserving the right to waive strict compliance review if the government deemed it to be in its best interest.  In selecting among the compliant bidders, it would then employ “a best value source selection process using three evaluation factors: technical, past performance, and cost/price.”
 
When three of the five proposals were found to be noncompliant, the government decided to waive strict compliance review in order to expand the candidate pool, and proceeded to the three evaluation factors.  The Plaintiff, Gemini Tech Services, got a satisfactory grade on the first two criteria and had the lowest price, but was nevertheless disqualified because its proposal was interpreted as containing a cap on certain indirect expense rates, in violation of the government’s newly announced rule prohibiting such caps (a rule intended to benefit smaller bidders).  The contract was eventually awarded to a competitor who, unlike Gemini, had failed the strict compliance review that the government later decided to waive.
 
Note that the point of disqualification was that Gemini’s ultimate price might end up being lower, not higher, than competitors!  (That’s what caps on rates do.)  But this didn’t matter under the test that the Court applied in upholding the Contracting Officer’s decision:
 
“When called upon to review a federal agency’s procurement decision, this Court employs the Administrative Procedure Act (APA) standard, and must determine whether the challenged action was arbitrary, capricious, an abuse of discretion, or otherwise contrary to law.  ‘The arbitrary and capricious standard is highly deferential and requires this Court to sustain an agency action evincing rational reasoning and consideration of relevant factors.’  An agency’s procurement decision is arbitrary and capricious ‘if either: (1) the procurement official’s decision lacked a rational basis; or (2) the procurement procedure involved a violation of regulation or procedure.’  With respect to challenges brought under the first ground, the Court must ‘determine whether the contracting agency provided a coherent and reasonable explanation of its exercise of discretion, and the disappointed bidder bears a heavy burden of showing that the award decision had no rational basis.’  As for the second ground, ‘the disappointed bidder must show a clear and prejudicial violation of applicable statutes or regulations.’”  [citations removed]
 
If any explanation given by a Contracting Officer, no matter how questionable its underlying theory, can satisfy the “rational basis” test and prevent the action from being “arbitrary and capricious,” it is hard to imagine how any bid protest can ever overcome a Contracting Officer’s decision.  The upshot of this approach is that courts will not question the wisdom of a decision, and will examine little more than whether consideration was given to all relevant factors.  In other words, the courts only conduct a procedural review, not a substantive one.  As long as the Contracting Officer has checked all of the boxes for the relevant factors, whether those factors were weighed properly, or even rationally, will escape judicial review completely. 
 
And as the Gemini case demonstrates, this is true even if the relevant factors are internally inconsistent.  To say that adopting a constraint on bids that rewards the inefficient, higher cost bidder is within the awarding authority’s discretion is one thing.  To approve that discretion when it is contradicted by the RFP’s announced evaluation factors – particularly the cost/price factor – is quite another.
 
We’ve now hit the high water mark for agency discretion.
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#147:  Handling Supply Chain Disruptions

6/28/2025

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From natural disasters to cyberattacks to pandemics to bankruptcies to geopolitical turmoil, there are a host of reasons why the construction materials that contractors count on as being readily available might end up becoming scarce commodities.  We are so used to seeing stock items on the shelves of supply houses, and getting special order items produced by manufacturers on time, that the potential for supply chain disruptions are rarely top of mind.  But they are real risks.  And if they happen, a contractor’s financial viability can be jeopardized.
 
Product shortages spark price increases, and I previously blogged (# 100) on price escalation clauses for unanticipated increased costs.  But what about reducing the risk ahead of time?
 
Some contractors formerly loyal to one distributor now divide their purchases among two or three, hoping that diversifying their sources of supply will minimize the risk of shortages.  It’s not a bad strategy – akin to maintaining two or three accounts at different banks in case one bank account is compromised.  Others are buying key materials in bulk and warehousing them (or buying out a project’s needed materials on Day One and storing everything on site), a practice that took off when President Trump announced his mission to make imports more expensive.
 
From a legal perspective, contracting in a way that spreads the risk makes great sense.  So-called “force majeure” clauses in contracts with customers need to be specific when it comes to supply chain disruptions.  This may require tweaking form contracts dealing with delays in contract performance, such as the popular AIA A-201 (2017) General Conditions reference in Section 8.3.1 to “unusual delay in deliveries” as a basis for extensions of time (why not add “supply chain disruptions” too?).  It may require contract language giving the contractor flexibility in substitution of products – a mandatory “or equal” provision – where an owner or architect has designated or “sole-sourced” a specific brand.  A provision for additional compensation if the substitution proves more expensive may also be advisable.
 
On the supply side, “requirements contracts” can provide some protection to contractors who are willing to commit to buying all of their needs for particular products – or at least all of their needs up to a certain quantity – from a single supplier.  Both buyer and seller commit to the deal, essentially making the buyer a priority customer in the event of a shortage.  Suppliers have an incentive to enter into such contracts with customers whose volume of purchases is both large and somewhat predictable, because it effectively guarantees them a market for resale even if market-wide demand declines.  To satisfy the Uniform Commercial Code provision that sales contracts are unenforceable unless reflected in a writing that makes the quantity of goods to be sold ascertainable, such requirements contracts must be exclusive.  PMC Corp. v. Houston Wire & Cable Co., 147 N.H. 685, 692 (2002) (“Because a requirements contract depends on exclusivity to determine the quantity, there can be no valid requirements contract without it.”).  And this runs counter to the diversification strategy discussed above.
 
If contractual risk-spreading solutions are not in the cards, various forms of business interruption insurance and even specific supply chain insurance are available which can mitigate financial impacts of supply chain disruptions.  Some such policies are “all risk,” some are customizable, and they can cover lost profits, costs, expenses, even liquidated damages awards.
 
There is nothing a contractor can do to promote supply chain stability.  That effort has to be undertaken on a national scale, in the political arena.  And Congress knows it.  Earlier this week the Senate passed the bi-partisan Promoting Resilient Supply Chains Act of 2025, co-sponsored by New Hampshire Senator Jeanne Shaheen.  It charges the Department of Commerce to work with private sector and government partners to prevent future supply chain disruptions, creating a government-wide Supply Chain Resilience Working Group.  The bill now goes to the House for consideration.  We will see what comes of it.
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#146:  Design-Build Contracts and the Spearin Doctrine: an Update

5/24/2025

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Several years back I blogged (#36) on how design-build contracting – combining design and construction responsibilities in a single phased contract – might impact a contractor’s liability for design defects where there is joint participation by owner and contractor in the design.  I pointed out the approach taken in Coghlin Electrical Contractors, Inc. v. Gilbane Building Co., 472 Mass. 549 (2015), which held that because the owner has the ultimate decision on acceptance or rejection of the design, the design-build contractor is not a “guarantor against all design defects.”

Sometimes a design-build contractor is obliged to use an architect/engineer’s preliminary design as a template. (See Arco Ingenieros, S.A. v. CDM International, Inc., 368 F.Supp.3d 256, 259 (D.Mass. 2019), in which a design-builder was required to “use the preliminary designs to create final designs.”)  In such cases, the Spearin doctrine – the owner’s implied warranty of sufficiency of design specifications (see Blog #24) – may still be in the mix.  As described by AAB Joint Venture v. United States, 75 Fed. Cl. 414, 428-29 (2007), “the implied warranty is that the specifications will result in a satisfactory, acceptable, or adequate result; short of that, the specifications are defective and the contractor is entitled to an equitable adjustment.”

Because Spearin only applies to design specifications, a contractor’s Spearin claim turns on whether the specification in question is a true design spec – one that leaves no discretion to the contractor to deviate from it – or is, rather, a performance spec which leaves it to the contractor to figure out how to achieve a required performance level.

A recent Federal Circuit Court of Appeals decision, Balfour Beatty Construction, LLC v. Administrator of the General Services Administration, 2025 WL 798865 (Fed. Cir. March 13, 2025), sheds some light on the issue.  The project was to construct and expand phase two of the central utilities plant for the Department of Homeland Security headquarters in Washington D.C. The design-build contractor in that case was presented by GSA with preliminary design drawings about 30% complete – so-called “bridging” documents – and was obliged both to validate the design and to complete it.  GSA’s bid solicitation contained this caveat:

“The Bridging Documents are conceptual in nature and are intended to depict the overall intent of the project terms of general design concept, the major architectural elements, and describe the required performance of the other systems. As Bridging Documents they are preliminary in nature, are not fully coordinated and are not intended to indicate or describe the scope of work required for the full performance or completion of the project.”

The design-build contractor found errors in the bridging documents that required significant redesign – specifically, a drawing that directed the contractor to match an existing foundation thickness of 18 inches, belied by calculations from GSA consultants that called for a 24-inch foundation – and even that turned out to be inadequate.  The contractor ultimately installed a 43-inch slab and submitted a claim for increased costs, which the contracting officer rejected.  The Board of Contract Appeals upheld that rejection, concluding that the discrepancy “should have caused Balfour to raise the issue before contract award.”  But the Court of Appeals disagreed.  Finding that “the drawing is sufficiently definite to constitute a design specification,” the Court ruled that “there was an implied warranty with respect to the mat slab thickness.”  Accordingly, the contractor was entitled to extra compensation for putting in a thicker slab.

[The contractor did not fare so well on its second claim, for additional costs related to meeting ventilation requirements when compliant generators were too large to fit in the building space.  The Court upheld the Board’s rejection of this claim, noting that GSA had made clear to bidders that compliance with ventilation requirements must be assumed as the basis for bids.  The Court ruled that “The ventilation requirements were set out as a performance specification, and therefore, no implied warranty attached.”]

Despite the outcome, it would be a mistake to read this case as approving of a bidder’s silence in the face of an obvious discrepancy in the bid documents.  The safer course is to raise the issue with the owner before submitting a bid.
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#145:  Using AI in Construction: Considerations and Pitfalls

4/30/2025

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Artificial intelligence (AI) is increasingly being used in most industries, commercial construction among them.  While design professionals grabbed this bull by the horns years ago, and project estimators soon thereafter, project managers who know how to use AI tools to increase productivity and lessen risk are becoming increasingly common as well – and for good reason.  Those who ignore its benefits are at a significant disadvantage. 
 
One of the roles of a project manager is to extract and analyze large amounts of information and data that at times can feel like trying to drink from a fire hose.  AI is useful in synthesizing that data in a hurry.  It can spot patterns in even apparently random information in seconds and suggest decisions based on the extraction.  It can highlight data and identify clashes across multiple drawings and aggregate information from multiple document versions, flagging the need for an RFI or a change order request – including by cross-checking against historical data from other projects.  It can read through daily logs and subcontractor reports to track progress and pull out the common threads related to a given topic of concern, such as identifying scheduling problems, cost projections, and even safety hazards early enough to avert a crisis. 
 
But distilling information into useful data subsets ultimately requires a human decision on what is and is not useful.  As with any technology, AI requires a trained hand at the switch.  The more sophisticated its algorithms and platforms become, the greater the temptation to rely on AI for what I will call “ultimate” decisions.  The mindset that the machine prioritizes better than the human is in effect a relinquishment of control to the machine.  And when something goes wrong, from a legal perspective the buck needs to stop at the human’s feet, not on his laptop.  If a construction manager gets sued over an AI-generated decision gone wrong, his liability is not likely to be averted by blaming the AI even if the failure was in the algorithm rather than in his programming.  Reliance on that AI, even if facially reasonable, won't eliminate negligence.
 
Utah has just become the first state to enact legislation eliminating the defense of reliance on AI in consumer protection act claims, providing “It is not a defense to the violation of any statute administered and enforced by the division under Section 13-2-1 that generative artificial intelligence: (1) made the violative statement; (2) undertook the violative act; or (3) was used in furtherance of the violation.”  A bill currently in the Connecticut Legislature would provide that it is not a defense to any civil or administrative claim or action, whether in tort, contract or under the consumer protection act, that an AI system committed or was used in furthering the act or omission that the claim or action is based on.  This is undoubtedly the wave of the future.
 
Even without legislation, court cases will eventually be called upon to elucidate the general standard of care when relying on AI.  That doesn’t mean contracting parties can’t agree to their own standards of care governing AI-related liability as between themselves right now.  After all, AI platform sellers all have disclaimers in their fine print to protect themselves from potential indemnity claims by contractors who are sued for AI-generated snafus.  Why shouldn’t contractors try to do the same?  Particularly where AI usage is encouraged or even required by owners, this is a fruitful area to explore.
 
From a contractor’s perspective, the more important question is whether insurance will be available to cover AI-related liabilities.  A typical CGL policy may cover liability for personal injury or property damage occasioned by negligent usage of AI, but not likely for economic losses arising from the same negligence.  A typical E & O (professional liability) policy has a better chance of covering such economic losses. But traditional insurance policies may not fully address specific risks associated with AI, resulting in coverage gaps. 
 
In the coming years I expect the insurance industry to tailor policies and riders to offer, or exclude, coverage for various AI-related liabilities.  But don’t wait to call your insurance agent.



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#144:  What Is a “Material” Breach Justifying Terminating a Contractor?

3/22/2025

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When an owner hires a contractor to perform work, there is an expectation that the contractor will adhere to the express and implied contract terms, the ultimate goal being to build what the contract calls for in a proper, safe and timely manner, free of claims from injured third parties or unpaid suppliers and subcontractors.  These are essential considerations in every construction contract.  But sometimes the parties’ contract will include other requirements that would be considered comparatively minor in nature, such as using only designated lay down areas, placing a sign on the premises, keeping a log book, cleaning up at the end of each work day, or dozens of other things having far less importance to accomplishing the ultimate goal. 
 
While the failure to adhere to such requirements is in breach of contract, whether a contractor may be fired if these less crucial requirements are not met isn’t always addressed in the contract language itself – and when it isn’t, the owner may face a difficult choice.  Firing a contractor who is performing properly obviously would be a breach of contract by the owner.  Riblet Tramway Co. v. Stickney, 129 N.H. 140, 146-47 (1987) (“If Riblet were to meet all contractual requirements, its performance would be acceptable, and the State could not terminate the contract without breaching it.”).  The risk to the owner of terminating without adequate cause is substantial; wrongful termination gives the contractor a right to recover its lost profit, typically measured by the unpaid contract price less any savings from not having to perform the balance of the contract.  Kearsarge Computer, Inc. v. Acme Staple Co., 116 N.H. 705, 708 (1976) (“If the defendant’s breach saves expense to the plaintiff, the plaintiff will recover the contract price minus the savings”).
 
In determining whether a contractor’s performance is “bad enough” to justify terminating its contract, the courts use the concept of “material” breach.  “Only a breach that is sufficiently material and important to justify ending the whole transaction is a total breach that discharges the injured party’s duties.”  Fitz v. Coutinho, 136 N.H. 721, 725 (1993).  That’s not much guidance!  “‘Whether conduct is a material breach is a question for the trier of fact to determine from the facts and circumstances of the case.’”  South Willow Properties, LLC v. Burlington Coat Factory of New Hampshire, LLC, 159 N.H. 494, 503 (2009) (citation omitted).  That won’t give owners a warm and fuzzy feeling either.
 
The best guidance given by our Supreme Court to date is found in Gaucher v. Waterhouse, 175 N.H. 291, 296 (2022): “A breach is material if: (1) a party fails to perform a substantial part of the contract or one or more of its essential terms or conditions; (2) the breach substantially defeats the contract’s purpose; or (3) the breach is such that upon a reasonable interpretation of the contract, the parties considered the breach as vital to the existence of the contract.”  But even this leaves much to interpretation.
 
Owners who are sued for wrongful termination over a minor breach always argue how important that minor breach was to them.  But satisfactory performance, and therefore “material” breach, is gauged by an objective standard.  In McNeal v. Lebel, 157 N.H. 458, 465 (2008), the Court held that “the plaintiffs’ subjective satisfaction, or lack thereof, with Lebel’s work is legally irrelevant so long as any flaws in Lebel’s performance did not amount to a material breach; absent material breach by Lebel, the plaintiffs were contractually obligated to allow him to finish the job.”

My advice to owners who ask whether they can safely terminate their contractor for breach of contract is simple: err on the side of caution.  If slow performance is the culprit, offer the contractor an opportunity to pick up the pace and get back on schedule.  If poor workmanship appears, offer the contractor an opportunity to cure.  If a sub or supplier sends a notice of intent to lien, consider issuance of two-party checks.  But if the breach does not impact safety, quality, timeliness or liens, the better course will usually be simply to ride out the storm.
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#143:  Canadian Tariffs and New Hampshire Construction

1/31/2025

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The Trump Administration has announced that effective February 4, 2025, a 25% tariff will be levied on virtually all goods imported from Canada.  Much of the lumber used for construction in New Hampshire – indeed, nationwide – comes from Canada.  The same is true of steel.  If these tariffs are maintained, our construction industry will feel the pinch.

Tariffs are essentially taxes on imported goods, charged as a percentage of the purchase price and paid at the port of entry by the importer (typically an American company) to the U.S. Customs and Border Protection Service.  A tariff on construction materials means the importer must pay more, a cost which importers will pass along to their contractor consumers whenever possible.  Substitute domestic products, if available, will experience an increase in demand, meaning they will cost more too.
 
Can builders pass the increased costs on to consumers?  That depends on their contracts.  Most construction contracts require all taxes to be paid by the contractor – and if a tariff is deemed a tax, contractors operating under fixed price contracts will rarely be entitled to an adjustment in the contract sum to cover the increased cost absent a price escalation clause (see Blog #100).

Section 3.6 of the AIA A201-2017 General Conditions has a bit of a twist on this: “The Contractor shall pay sales, consumer, use and similar taxes for the Work provided by the Contractor that are legally enacted when bids are received or negotiations concluded, whether or not yet effective or merely scheduled to go into effect.”  ConsensusDocs® 200 Section 3.21.1 is similar: “The Contract Price or Contract Time shall be equitably adjusted by Change Order for additional costs resulting from any changes in Laws, which were not reasonably anticipated and then enacted after the date of this Agreement.”  Likewise the EJCDC form C-700 provides in Section 7.10.C: “Owner or Contractor may give notice to the other party of any changes after the submission of Contractor’s Bid (or after the date when Contractor became bound under a negotiated contract) in Laws or Regulations having an effect on the cost or time of performance of the Work, including but not limited to changes in Laws or Regulations having an effect on procuring permits and on sales, use, value-added, consumption, and other similar taxes.”  Use of one of these form contracts may provide some wiggle room for price adjustments if the bid was prior to Trump’s announcement of the new tariffs. 

Form contracts aside, contracting parties are free to provide for such an adjustment, and it is predictable that going forward some contractors will negotiate for precisely that.  Those who are unsuccessful in negotiating such price protections will instead attempt to protect themselves by padding their bids against uncertainty in price fluctuations and/or holding their bid prices for shorter periods (say, five days instead of thirty). 

On public federal projects, an equitable adjustment to the contract price is available under FAR 52-229.3 for new taxes that arise during a project. If a tariff constitutes a new tax under this regulation, relief is available.  But a 2022 Armed Services Board of Contract Appeals decision casts doubt on this.  Pangea, Inc., ASBCA Nos. 62561, 62640, 22-1 BCA ¶ 38,026 (Jan. 4, 2022) (“Pangea does not persuade us that an increase in the price of domestic steel resulting from a tariff on foreign steel is a “Federal tax” within the meaning of FAR 52.229-3.”). 

A 25% tariff on Canadian imports is unlikely to last long once its harmful effects on U.S. businesses and consumers are realized.  Canada will retaliate with its own measures.  The Canadian dollar will fall in value, lessening demand for U.S. exports generally.  And inflation will see an uptick.  The political pressure on Trump to reverse course will be intense.  And he can easily spin the reversal to save face, simply by declaring that his goal of pressuring Canada to crack down on the flow of undocumented migrants and fentanyl was met.

[Update: A federal appeals court has ruled that the President lacks statutory authority to impose these tariffs.  The Supreme Court will weigh in soon.]
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#142:  Are Lessees "Owners" Under the Mechanic's Lien Statute?

12/27/2024

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New Hampshire’s mechanic’s lien statute, RSA 447:2, gives a lien to those “erecting or repairing a house or other building or appurtenances . . . by virtue of a contract with the owner thereof.”  The lien is on “any material so furnished and on said structure, and on any right of the owner to the lot of land on which it stands.”  Nothing in the statute mentions lessees/tenants, even though they often contract for improvements to their leased premises.
 
While our Supreme Court has never ruled on whether a lessee hiring a contractor to improve the leased premises is an “owner” under this statute, our trial courts have assumed that a leasehold interest qualifies as “any” right to the land, and therefore can be liened.  An example is Dandreo Brothers General Contractors & Masonry, LLC v. CMAB Associates II, LLC, No. 218-2018-CV-00653 (January 10, 2019) (“In this case, the Tenant is the contracting ‘owner’ within the meaning of RSA 447:2 because (a) it contracted with the Contractor for improvements to the real estate and (b) it held a long-term lease.”).   But a recent case may call this into question.
 
In Appeal of Port City Air Leasing, Inc., 177 N.H. 149 (2024), the New Hampshire Supreme Court held that a lessee did not qualify as a “landowner” under RSA 482-A:9, a statute which specifies that an “abutting landowner” is entitled to notice of wetlands permit applications.  While noting that “‘landowner’ means one that has the legal or rightful title to land whether the possessor of that land or not,” the Court reasoned that because “Port City may use the leased premises only for the limited purposes enumerated in the lease” and was required “to obtain lessor approval before making any improvements or alterations to the leased premises,” its interests in the leased land were not tantamount to ownership.  The same thing can be said of most commercial tenants.
 
The Court further found that “Port City holds title to only the buildings and improvements on the leased premises. And it holds that title only for the duration of the lease, which has a five-year term with options to extend for additional five-year terms up to a maximum of thirty years. Nor are Port City’s interests in the property freely transferable: its ability to assign or sublease any part of the premises is, with limited exception, subject to the lessor’s approval.”  These features are likewise true of many commercial leases.  Indeed, unlike Port City, many commercial tenants don’t hold title to the occupied buildings or improvements even during the leasehold term.
 
Port City’s focus on “landowner” rather than “owner” could make a difference in interpretation of the two statutes.  The lien statute’s phrase “and on any right of the owner to the lot of land on which [a building] stands,” rather than on the right of the owner, indicates legislative recognition that the building owner need not be the landowner – a scenario commonly referred to as a ground lease.  But as noted above, few commercial lessees own the buildings they occupy.  Given the applicability of Port City’s rationale to lessees in general, the “landowner” distinction seems inconsequential.
 
If having a leasehold interest does not qualify the lessee as an “owner” under the mechanic’s lien statute, the only way to bring the lessee’s contracted improvements within the reach of the statute will be as an agent of the owner under RSA 447:5 – which, as the Dandreo case points out, can be an uphill battle.  Unless that agency is established, the contractor will have a lien against neither landlord nor tenant.
 
Pragmatically speaking, not much contractor protection is lost if leasehold interests aren’t lienable.  While attached interests can theoretically be auctioned off at a sheriff’s sale to satisfy contractors’ unpaid judgments, nobody is likely to bid at a sheriff’s sale for a leasehold interest.  As I have said elsewhere (Blog #18), transfer of a tenancy, whether voluntary or involuntary, without the landlord’s consent is virtually certain to be a breach of the lease, giving the landlord the right to kick the new tenant out!
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#141:  Insurance Coverage for Defective Work:  The Products-Completed Operations Hazard

11/30/2024

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Once again I am moved to blog (see #31, #37, #91) on Commercial General Liability (“CGL”) insurance coverage for defective workmanship.  I’ve previously said that at best, only consequential damage to other property, not for repairing or replacing the defective work itself, would be covered.  A recent case counsels an update.
 
In general, CGL insurance coverage calls for a three-step inquiry.  First, do the damages qualify as “property damage” caused by an “occurrence”?   Second, if so, do any exclusions apply?  Third, are there any exceptions to those exclusions?
 
One of the exclusions from coverage found in the standard ISO form CGL policy, the so-called (j)(6) exclusion, eliminates coverage for “That particular part of any property that must be restored, repaired or replaced because ‘Your work’ was incorrectly performed on it.”  (“Your work” is defined as “Work or operations performed by you or on your behalf” – so it includes work done by your subcontractors.)  Does such a “particular part” include non-defective work damaged by the consequences of defective work – such as perfectly good drywall ruined by a leaky roof? New Hampshire’s Supreme Court has said that it does not, Cogswell Farm Condo. Ass’n v. Tower Group, Inc., 167 N.H. 245, 252 (2015).  Hence, in New Hampshire at least, non- defective work damaged by defective work may be covered.
 
But even if non-defective work damaged by defective work were not otherwise covered, (j)(6) is subject to an exception which restores coverage for “property damage included in the ‘products-completed operations hazard’” – a phrase that embraces property damage “arising out of ‘your product’ or ‘your work’ except . . . Work that has not yet been completed or abandoned.”  In other words, the (j)(6) coverage exclusion only applies to work in progress, not to work that has been completed or abandoned.  How does this figure into the mix?
 
Earlier this month a First Circuit case decided under Massachusetts law weighed in.  Admiral Insurance Company v. Tocci Building Corporation, 120 F.4th 933 (1st Cir. 2024), was a suit over “defective work by Tocci’s subcontractors resulting in various instances of property damage to non-defective work.”  The parties arm-wrestled over whether these damages were covered, with Tocci trumpeting the New Hampshire approach and Admiral arguing against it.  The court sidestepped the issue, concluding that even if non-defective work damaged by defective work were covered as Tocci claimed, the (j)(6) exclusion still won the day for Admiral because the products-completed operations hazard exception didn’t apply.  The court framed the question as “whether the project was ‘completed or abandoned’ prior to the damage, such that it would fall under the ‘products-completed operations hazard’ and thus be covered.”  Because Tocci’s contract was terminated before it finished its work, the court answered in the negative.

To understand what would have happened if Tocci had completed its contract before the damage occurred, a separate exclusion must be considered.  Exclusion (l) eliminates coverage for damage to completed work, but has an exception “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” Thus, if the work that causes the damage or the work that is damaged was performed by the insured’s subcontractor, coverage exists.

Back to the Admiral case.  Focusing on this subcontractor exception, the court considered the argument that if the definition of “property damage” and “occurrence” already excluded coverage for the damage, it “would make this exclusion/exception pair meaningless surplusage.”  Admiral naturally had a different view: that “this language was added as a backstop for use in jurisdictions that had found there was coverage for this type of claim.”  The court said “our reading of the (j)(6) exclusion does not make that exclusion/exception pair a nullity because of the (j)(6) exclusion’s exception for completed work.”

The upshot of this view is that subcontractor work causing damage may be covered as long as it arises after the construction project is completed.  To quote Acuity v. M/I Homes of Chicago, LLC, 234 N.E.3d 97, 108 (Ill. 2023), “a subcontractor’s defective work that results in property damage to the completed project may be covered."
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#140:  Including Overhead and Profit In Mechanic's Lien Amounts

10/28/2024

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New Hampshire’s mechanic’s lien statute, RSA 447:2, gives a lien to those who “perform labor, provide professional design services, or furnish materials” to improve someone’s real estate.  The lien “provides security against the property owner for the value of the labor or materials rendered.”  Pine Gravel, Inc. v. Cianchette, 128 N.H. 460, 464 (1986).  The statute is silent on how that “value” is measured, but the common practice has been to base the lien amount on the agreed price for the labor and materials provided – which naturally includes a markup for profit and overhead.  This approach is supported by a reference in Anderson v. Shattuck, 76 N.H. 240, 247 (1911), to “the contract price, which is the measure of the protection afforded by the lien.” 
 
Using the agreed contract price as the measure of lien value has some appeal because it indicates the owner’s own view on what the labor and materials are worth.  But that logic fails when the owner and lienor did not contract directly.  Anderson concerned a general contractor’s lien rather than a subcontractor’s lien – a distinction that Maine’s Supreme Court found significant in Bangor Roofing & Sheet Metal Co. v. Robbins Plumbing Co., 151 Me. 145, 148, 116 A.2d 664, 666 (1955):  “When by express contract the parties fix the compensation to be paid for full and complete performance of the contract, they have themselves established the debt to be secured by lien. In a sense they have by binding agreement determined the extent to which the owner’s property will be enhanced by the labor and materials to be incorporated in the realty, and to that extent the contractor is protected by lien. When, as here, the owner is not party to the contract, the determination must be as to what is the fair and reasonable value of the labor and materials in place.” 
 
Calculating the fair and reasonable value of labor and materials is no easy task.  Some states presume that the subcontract price establishes reasonable value for lien purposes, and put the owner to the burden of proving otherwise.  Typical is Diener v. Cubbage, 259 Md. 555, 561, 270 A.2d 471, 474 (1970) (“while the contract is not binding on the owner, the contract price is nonetheless prima facie proof of the reasonable value, and the owner has the burden of introducing evidence to show unreasonableness”).
 
Court decisions under New Hampshire’s public works payment bond statute, RSA 447:16, which likewise provides security for labor and materials without mention of overhead or profit, do not appear to have questioned the propriety of a bond claim based on the subcontract price.  Cases under the federal Miller Act – the analogue to RSA 447:16 for federal projects – expressly support including overhead and profit.  Arthur N. Olive Co. v. U.S. for Use & Benefit of Marino, 297 F.2d 70, 73 (1st Cir.1961) (“Out-of-pocket expense is not the limit of the fair value of labor and materials.”)  This would seem to overturn United States ex rel. Henie v. Great American Indemnity Co., 30 F.Supp. 613 (D.N.H. 1939), which held that a subcontractor could recover under a payment bond only its actual cost of labor and materials, and not any profit thereon.
 
For both general contractors and subcontractors, lost profit on work not performed is never included in the lien, which “increase[es] in amount according to the progress of the work until performance is completed,” Boulia–Gorrell Lumber Co. v. East Coast Realty Co., 84 N.H. 174, 177 (1929).  This makes sense.  When mechanic’s liens transfer value added by improvements from the owner to the unpaid lienor, the owner’s net wealth is unaffected.  Similarly, RSA 447:9 gives mechanic’s liens priority over other pre-existing liens because the increased value floats all boats, leaving them with no less draw under their hulls.  But this rationale applies only when the amount of the lien matches the increase in value.  Unperformed work doesn’t increase value.
 
The same is true of delay damages.  Nevertheless, H.E. Contracting v. Franklin Pierce College, 360 F.Supp.2d 289, 295 (D.N.H. 2005), added delay damages to a general contractor’s lien amount.  I couldn’t tell you why!
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#139:  Constitutionality of Federal Set-Asides for Disadvantaged Contractors

9/26/2024

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In 1983, Congress authorized the Disadvantaged Business Enterprise (“DBE”) program, requiring the U.S. Department of Transportation to ensure that at least 10% of funding for federally-assisted highway and transit projects is set aside for businesses at least 51%-owned and controlled by “socially and economically disadvantaged” individuals.  Federal construction contracts worth billions of dollars have gone to such businesses through programs administered by the states.  New Hampshire’s administration of the program is described here.  There are hundreds of DBE-certified businesses in New Hampshire, including some out of state businesses. 

The DBE program defines “socially and economically disadvantaged” as anyone “who has been subjected to racial or ethnic prejudice or cultural bias within American society because of his or her identity as a member of a group.”   Women, and members of five specific racial groups (African Americans, Hispanics, Native Americans, Asian-Pacific and Subcontinent Asian Americans), are automatically presumed by the implementing regulations to be socially and economically disadvantaged.  
 
Is this type of favoritism, intended to rectify past discrimination, constitutional?  This month, one court gave its answer: No.  A federal judge in Kentucky ruled that the set-aside’s presumption that these specific groups are disadvantaged was a violation of equal protection of the laws, and issued a preliminary injunction against DOT’s implementing such preferences.
 
The case is Mid-America Milling Company, LLC v. U.S. Department of Transportation, 2024 WL 4267183 (E.D. Ky. Sept. 23, 2024). The Plaintiffs, a construction contractor and a trucking firm, are two frequent bidders on DOT-funded contracts in Kentucky and Indiana that lost out to DBE businesses under the program, despite having lower bids.  Their lawsuit challenges DOT’s race-based and gender-based classifications for awarding such contracts as a denial of equal protection, claiming that the presumption of disadvantage for certain enumerated groups discriminated against them as white-owned, male-owned businesses. 
 
The court agreed, noting that while anyone may seek to qualify as socially and economically disadvantaged regardless of race or gender, the presumption of disadvantage enjoyed by those designated groups eliminates the need for them to prove their disadvantaged status – while all others had to prove it, tilting the playing field against them. 
 
Relying on Sixth Circuit precedent, the court identified three hurdles that the Government must clear in order to show a compelling interest justifying the program under current Equal Protection jurisprudence: (1) the policy must target a specific episode of past discrimination, (2) that discrimination must have been intentional; (3) the government must have had a hand in it.  The court held that the Government’s evidence wasn’t specific enough to clear these hurdles, colorfully writing “If it wants to grant preferences to certain groups, it must specifically show how the Department of Transportation has previously discriminated against those groups.  It cannot group all minority owned businesses into one gumbo pot but then try to scoop out only the sausage and not the okra.”
 
Next, the court ruled that regardless of any compelling interest in redressing past discrimination, the program was not “narrowly tailored” to remedy the problem.  Particularly on the race-based side, the door was opened to this conclusion by the U.S. Supreme Court’s decision last year in Students for Fair Admissions, Inc. v. President & Fellows of Harvard College, 600 U.S. 181 (2023), striking down race-based affirmative action programs for college admissions.  The Mid-America court cited to that case half a dozen times.

Thus far the injunction is applicable just in states where the plaintiffs do business.  But nothing prevents any non-DBE contractor who bids on federally-funded projects from bringing suit in New Hampshire on the exact same grounds.

[Update: On January 21, 2025, President Trump signed an Executive Order banning federal agencies from considering race or gender in the award of federal contracts.]
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#138:  2024 Legislative Update

8/30/2024

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This summer has seen a number of state legislative measures that affect the construction industry, both to update codes and to attempt to spark additional housing.
 
It was just a couple of years ago that New Hampshire updated its State Building Code to the 2018 versions of the International Building Code, International Residential Code and other related ICC codes governing construction. (Blog #115)  On August 2, 2024, Governor Sununu signed into law an amendment of RSA 155-A that adopts the 2021 version of these codes.  A summary of significant changes can be found here.

Effective on August 13, 2024, New Hampshire has also amended RSA 153 to transition from the 2018 to the 2021 National Fire Codes, NFPA 1 and NFPA 101.  These codes apply to anyone “constructing, reconstructing, modifying, maintaining or operating any structure and all owners or occupants of existing structures or premises,” and to anyone “installing, modifying, operating or maintaining equipment or processes that are regulated under the provisions of NFPA 1.”  There are a few exceptions to the 2021 updates continuing in effect the exceptions to earlier versions, primarily involving rooftop photovoltaic systems.  A summary of significant changes can be found here.

Also new is a change to the ability of municipalities to modify the codes.  Prior to the recent amendment municipalities could enact “additional regulations provided that such regulations are not less stringent than the requirements of the state building code and the state fire code.”  Now, any such local amendments must be submitted to the building code review board or the state fire marshal for review, and be “not inconsistent with or less stringent than, nor intended to replace, the requirements of the most recent edition of the state building code adopted under RSA 155-A, or the state fire code adopted under RSA 153.”
 
Other recent legislation is aimed at increasing housing stock and limiting local challenges to housing expansion.  In May the Governor signed a bill which forbids municipalities from banning manufactured housing.  In July the Governor signed a bill limiting the class of persons entitled to appeal to a Zoning Board of Adjustment, replacing “any person aggrieved” in RSA 676:5,I with “the applicant” and “an abutter.”  Another change, signed into law by the Governor on August 23, 2024, prevents municipalities from requiring more than 1.5 spaces per unit for studio and one-bedroom apartments under 1,000 square feet, and for multifamily structures of 10 or more units.  This could be a boon to space-challenged developers.
 
What’s coming?  Polls indicate that affordable housing is the top issue on the minds of New Hampshire voters, and the gubernatorial candidates are acknowledging it, but without much in the way of concrete proposals.  Most of them have mentioned that local planning and zoning regulations are often obstacles to residential development, so legislation to eliminate some of those obstacles can be anticipated. 

One program already in place is the Housing Opportunity Planning (HOP) Grant Program, which has $2.9 million still available for municipalities to hire consultants to recommend pro-housing changes.  Applications are due September 30, 2024.  Federally, HUD’s “PRO” Housing Program has appropriated $100 million for competitive grant funding for the identification and removal of local regulatory barriers to affordable housing development.  HUD’s application deadline is October 15, 2024. 

A bill that didn’t make it into law, HB 1291, would have permitted up to two accessory dwelling units, one of which may be detached, to be constructed on privately owned lots zoned for single family use, regardless of local dimensional, setback or lot coverage ordinances.  Massachusetts just enacted such a law as part of the Commonwealth’s comprehensive Affordable Homes Act. 
It wouldn’t surprise me if New Hampshire followed suit in the upcoming session.

All of this legislation, however, will have a lesser effect on housing starts than market forces.  If the price of lumber goes up – as it has started to do recently – the affordability of housing will diminish accordingly.  Ditto for construction worker wage rates, which are also creeping up.


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#137:  Liability for Negligent Selection of Subcontractors

7/21/2024

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It is well established that general contractors are vicariously liable for damages resulting from the negligence of their employees, and not of their independent contractors (except in the case of “inherently dangerous” activities, Arthur v. Holy Rosary Credit Union, 139 N.H. 463 (1995)).  But a general contractor can be liable for its own negligence in hiring an incompetent subcontractor.
 
“As a general rule, the employer has a duty to use reasonable care to choose a contractor who is properly qualified to perform the work. . .  ‘[A]n employer of an independent contractor may be liable to one injured as a result of the contractor’s fault where it is shown that the employer was negligent in selecting a careless or incompetent person with whom to contract.’” Arthur v. Holy Rosary Credit Union, 139 N.H. 463, 468 (1995) (citations omitted).  Thus far, in New Hampshire at least, this rule has been applied only to personal injury, not to property damage.  Guitarini v. Macallen Company, 98 N.H. 118, 119 (1953) (finding that the law “requires one who employs an independent contractor to do work which involves risk of bodily harm to others unless skillfully and carefully done to exercise reasonable care in selecting a competent contractor”).
 
It stands to reason that “an employer who has had previous successful experience with an independent contractor in the performance of his work cannot be held liable on the theory of the negligent selection of the contractor.”  Western Arkansas Tel. Co. v. Cotton, 259 Ark. 216, 219, 532 S.W.2d 424, 426 (1976).  But if this is your first time working with a sub – and there is a first time for everyone – how much due diligence in the selection process is required?
 
As with most torts involving negligence, “reasonableness” is the key to establishing the contours of the duty.  Relying on reputation is fine, but vetting subs is important whenever the sub does not already have a good reputation.  Subcontracting to someone with scant experience but who “talks a good game” likely won’t cut it.  Simply asking a sub about his safety record on other jobs and taking him at his word with no effort to verify the answer likely won’t suffice.  (Checking online for OSHA complaints and violations takes all of 60 seconds.)
 
The fact that a specialty trade is licensed (plumbers, electricians, etc.) is often thought to make any selection safe from attack, on the theory that the licensee has already been vetted by the State.  Don’t count on it.  Records of disciplinary actions against licensees are retained for seven years and checkable online from the N.H. Office of Professional Licensure and Certification. 
 
The diligence required in selecting an independent contractor is not one-size-fits-all, but some general guidelines are available.   Section 411 of the Restatement (Second) of Torts, comment c,  advises: “Certain factors are important: (1) the danger to which others will be exposed if the contractor’s work is not properly done; (2) the character of the work to be done-whether the work lies within the competence of the average man or is work which can be properly done only by persons possessing special skill and training; and (3) the existence of a relation between the parties which imposes upon the one a peculiar duty of protecting the other.”
 
Accidents will occasionally happen even on a competent subcontractor’s watch.  In such a case, failing to vet the subcontractor won’t matter.  Riley v. A.K. Logistics, Inc., 2017 WL 2501138 at *2 (E.D. Mo. June 9, 2017) (“[A]n employer is not liable for the negligence of its independent contractor, notwithstanding any lack of care it took in selecting the contractor, if the contractor hired was in fact competent.”).  But that’s no reason to press your luck.
 
Naturally any GC will insist that its subs carry liability insurance to cover any damages resulting from their negligence, and will have its own insurance as well.  But insurance doesn’t prevent a successful lawsuit; it simply pays any damages awarded (above the deductible).  And usually a hike in premiums results.  Better to prevail in the lawsuit than to suffer a black mark!
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#136:  Fixed Price vs. “Cost Plus” Contracts: Some Considerations

6/23/2024

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When contracting parties agree to a fixed price or lump sum amount for a defined scope of work, the contractor is generally obligated to build that scope of work for that price regardless of what it costs him to do so or what unmentioned obstacles he may face.  His price will typically be set to cover overhead costs and a reasonable profit.  And time is money; all other things being equal, the sooner the contractor completes the work, the more profit he will make.  Framing a building in a week rather than two, or drywalling a room in a day rather than two, saves money and acts as an incentive to move fast.
 
Some think that this incentive spawns corner-cutting and less attention to detail, particularly when an owner lacks the resources or (as in most residential construction) the expertise to catch poor workmanship, which is often covered up before any opportunity for observation.  A measure of trust is accordingly essential in fixed price contracts.
 
If quality is an owner’s priority, some think that “cost-plus-a-fee” contracts – reimbursement for labor and materials expenses, plus either a percentage or a fixed amount for overhead and profit – are the way to go.  This eliminates incentives to cut corners or rush a project through, as the time spent on “getting it right” will be compensated.  But that time may include many man-hours spent reworking areas of the construction that, if the worker were more skilled, should have been built properly the first time.  The productivity of the contractor’s workforce is not easy for the inexperienced owner to gauge.  A measure of trust is accordingly essential in cost plus contracts.
 
In the commercial setting, various form contracts are designed to lessen the risks for both fixed price and cost plus contracts by changing “trust” to “trust but verify.”  Plans and specifications are more detailed; architects or owner reps observe the work and approve payment; differing site conditions clauses are included; scheduling is monitored; subcontractors are often approved in advance; and in cost-plus contracts a “not to exceed” or “guaranteed maximum” price is often agreed upon, reimbursables are defined with care, and the back-up for reimbursable expenses is scrutinized.  Residential contracts rarely include such provisions.
 
So which type of contract is better?  There is no one-size-fits-all answer, but here are some considerations:
 
1.  Is the scope of work uncertain, such that many changes are likely to occur during the project?  Cost plus contracts may offer more flexibility and transparency for both parties, and change orders (which is where many fixed price contractors earn their highest return) are less dominant.
 
2.  Are quantities uncertain?  “Unit prices” (fixed amounts per linear or cubic yard of work performed or per ton of materials used) can lessen the impact of quantitative uncertainties, and reduce the risk of fixed price contracts for contractors and thus the cost for owners.
 
3.  Is the completion date of paramount importance?  A cost plus contract is likely to be lower on a busy contractor’s priority list than his fixed price arrangements, and take longer to complete.  And the tracking of expenses by the contractor is project management time devoted to paperwork rather than production.
 
4.  Is saving as much money as possible paramount?  In a tight construction market with limited availability of builders, fixed price contracts tend to be padded to deal with uncertainties, contingencies, mistakes, etc.
 
5.  Is the budget set in stone?  A fixed price contract gives greater certainty.
 
6.  Are “allowance” items a large part of the price?  These make fixed price contracts a hybrid contract, as allowance items are cost-plus elements of an otherwise fixed price arrangement.
 
Clarity on which type of contract is in place is a must.  In the residential setting I occasionally see agreement to what is styled as an “estimate,” followed by disagreement over whether that estimate was really intended as a fixed price when, almost inevitably, the job comes in over budget.   The parties should tighten this up at the beginning, at a minimum by limiting the contractor to staying within some agreed percentage of his estimate.
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#135:  Unconscionable Arbitration Agreements

4/26/2024

1 Comment

 
“An agreement to arbitrate may be unenforceable if pursuing a claim in arbitration is so cost prohibitive that it prevents a party from vindicating its rights.”  With that opening sentence, the Texas Supreme Court in Lennar Homes of Texas, Inc. v. Rafiei, 687 S.W.3d 726 (Tex. 2024), recently rendered an opinion worth noting by all residential contractors, including in New Hampshire, who insert arbitration clauses with fee-splitting provisions in their contracts as a strategy for discouraging claims.
 
In Lennar a homeowner sued his builder for personal injuries that he blamed on a construction defect, seeking in excess of $1,000,000 in damages.  The parties’ contract had an arbitration clause, one which expressly delegated “issues of formation, validity or enforceability” of the contract to the arbitrator rather than the courts to decide.  The builder asked the court to compel arbitration, and the homeowner responded that the twin provisions for arbitration and for delegation of enforceability issues to the arbitrator “are unconscionable because arbitration was prohibitively costly and would prevent him from pursuing his claims.”  He pointed to the AAA’s Administrative Fee Schedules, under which it would cost him over $8,000 to present his case to the arbitrator.
 
The lower court agreed with him, as did a divided panel of the Texas Court of Appeals – even though he hadn’t presented evidence that he couldn’t afford the cost.  That missing element persuaded the Texas Supreme Court to send the matter back to the lower court for a ruling on ability to pay – but it also announced the test for a finding of unconscionability:
 
“To determine unconscionability, a court must first consider ‘a comparison of the total costs of the two forums’ and decide ‘whether that cost differential is so substantial as to deter the bringing of claims.’ . . . A proper unconscionability analysis further requires a comparison of the relevant costs between litigating in court and in arbitration and of the claimant’s ability to pay an arbitration provision as unconscionable due to the difference in such costs.” 
 
Because arbitrators charge for their time and administering bodies like the AAA charge for their services, arbitration can be expensive, and often much of the expense must be paid up front.  The dilemma faced by an indigent party trying to avoid arbitration arises when the unconscionability issue is delegated to the arbitrator to decide; a filing fee (typically amounting to several thousand dollars) and perhaps a deposit to cover the arbitrator’s anticipated time must be paid just to have the arbitrator resolve this threshold issue!  Recognizing this Catch-22, most courts, like our own federal court, hold that when a plaintiff “argues that the delegation clause is unconscionable . . . it is for the court, not the arbitrator, to resolve her challenges to the delegation clause.”  Rosen v. Genesis Healthcare, LLC, 2021 WL 411540 (D.N.H. Feb. 5, 2021).
 
No New Hampshire case has yet found such a delegation provision unconscionable due to financial hardship.  But the unconscionability tests applied by our courts generally align with those in Texas and elsewhere.  The First Circuit Court of Appeals has noted that “if the terms for getting an arbitrator to decide the issue are impossibly burdensome, that outcome would indeed raise public policy concerns.  If arbitration prevents plaintiffs from vindicating their rights, it is no longer a ‘valid alternative to traditional litigation.’”  Awuah v. Coverall North America, Inc., 554 F.3d 7, 12 (1st Cir. 2009).  It’s fair to predict that our courts will be of the same view.
 
A final word of caution: Contractors should not assume that if a homeowner ever seeks to avoid arbitration by pleading poverty, they can just offer to pay all of the arbitration expenses and keep the claim out of court.  That didn’t work in Lim v. TForce Logistics LLC, 8 F.4th 992, 1004 (9th Cir. 2021) (“TForce states that it has already filed the arbitration demand in Los Angeles and agreed to pay all arbitration fees.  But, as the district court correctly recognized, waiving unconscionable elements of the delegation clause does not change the analysis of whether the delegation clause, as drafted, is unconscionable.”).
1 Comment

#134:  30-Day Accountings for Subcontractor/Supplier Mechanic’s Liens

3/28/2024

4 Comments

 
It is generally recognized by New Hampshire courts that “[f]ailure to comply with the specific statutory provisions of perfecting a mechanics lien is usually fatal,” Alex Builders & Sons, Inc. v. Danley, 161 N.H. 19, 23 (2010).  Yet one of those statutory provisions, RSA 447:8, is in my experience regularly ignored by subcontractors and suppliers to whom it applies.  It states: 
 
“Any person giving notice as provided in RSA 447:5-7 shall, as often as once in 30 days, furnish to the owner, or person having charge of the property on which the lien is claimed, an account in writing of the labor performed, professional design services provided, or materials furnished during the 30 days; and the owner or person in charge shall retain a sufficient sum of money to pay such claim, and shall not be liable to the agent, contractor or subcontractor therefor, unless the agent, contractor or subcontractor shall first pay it.”
 
The notices triggering this accounting requirement can be given to the owner before the first labor or materials get furnished (RSA 447:5 and RSA 447:7) or after (RSA 447:6) – but in either event, written monthly updates of the amount owed are required.  The reason is not hard to fathom: under the statute “the owner is to hold back from the principal contractor the amount due the sub-contractor” to pay such claims, Cudworth v. Bostwick, 69 N.H. 536, 537 (1898), and owners need to know the amount of those claims in order to do so intelligently.
 
When the notice of intent to lien is a RSA 447:6 notice first given after work has commenced or materials are furnished, that notice typically states the amount then due.  But rarely are such amounts updated in 30-day intervals.  If the amount owed hasn’t changed since that first notice, an update would be “an empty formality,” and failure to provide the accounting will be excused.  McGranahan v. Standard Construction Co., 101 N.H. 46, 47 (1957).  But if it has changed – or if the advance notice has been given under RSA 447:5, such that the owner has never been told the amount claimed – the lack of an update frustrates the purpose of the statute.
 
In the absence of an accounting within the 30-day period, the owner who has received a notice of intent to lien "is entitled to understand that within that period nothing has been done for which a lien is claimed and to act accordingly.” Lawson v. Kimball, 68 N.H. 549, 550 (1896).  Failure to furnish the required accounting will therefore limit the lienor’s claim to the last amount he disclosed as being owed – which will often be zero in the case of the RSA 447:5 notice given prior to commencement and never updated with any accounting.
 
Suppose, however, that a sub’s or supplier’s accounting is received late, beyond the 30-day statutory period – but the owner has not yet paid the general contractor’s monthly requisition.  Must the owner still retain the amount of the claim and not pay it to the general?  I know of no case that has ruled on the issue, but my educated guess is yes.  The statutory scheme is designed to ensure that subs and suppliers are paid before general contractors by treating amounts due to the GC as a trust fund for the benefit of unpaid subs and suppliers (see Blog #121), and protecting owners from liability to GCs when owners honor that trust.  This goal is served as long as the owner has not yet paid the GC, even if the 30-day period has elapsed.
 
The last phrase of RSA 447:8 – “unless the agent, contractor or subcontractor shall first pay it” – requires the owner to stop withholding the GC’s money once the GC has paid the sub or supplier.  With the prevalence of “pay-when-paid” and “pay-if-paid” clauses in commercial subcontracts today, advance payment by GCs is uncommon.  A requirement for lien waivers from notifying subs, on forms that not only waive lien rights but recite that payment has been received, will assure the owner that its trust duties for the month are at an end.
4 Comments

#133:  DOL's Latest Independent Contractor Rule

2/29/2024

0 Comments

 
On January 10, 2024, the U.S. Department of Labor issued its new rules on how to properly classify workers as either employees or independent contractors under the Fair Labor Standards Act.   The new rules are slated to go into effect on March 11, 2024, and reinstate the so-called “economic realities” test for determining whether a worker is in fact in business for himself.  According to DOL, the new rules “will help to ensure that workers who are employees are paid the minimum wage and overtime due to them, and that responsible employers that comply with the law are not placed at a competitive disadvantage when competing against employers that misclassify employees.”

The new rules replace what is widely viewed as a more employer-friendly test adopted by the Trump Administration’s DOL in its waning days in January 2021.  The Biden Administration suspended and then withdrew the Trump DOL’s test in the Spring of 2021 (see Blog # 97), but a federal lawsuit challenging that action ultimately succeeded in vacating the suspension and withdrawal.  Coalition for Workforce Innovation v. Walsh, 2022 WL 1073346 (E.D. Tex. Mar. 14, 2022).  A recent detour to the Fifth Circuit Court of Appeals vacated that decision in light of the new rule, but also remanded the case to determine whether the 2024 rule itself complies with the requirements of the Administrative Procedure Act (as the plaintiffs now claim).  There are several other lawsuits challenging the new rule in other courts.  As of this writing no court has issued an injunction postponing the March 11 effective date.

Under the “economic realities” analysis, six factors are considered:
(1) the worker’s opportunity for profit or loss depending on managerial skill.  (Does the worker earn profits or suffer losses through his own independent effort and decision making?)
(2) investments by the worker and the potential employer.  (Has the worker made investments that are capital or entrepreneurial in nature?)
(3) the degree of permanence of the work relationship.  (What is the nature and length of the work relationship?)
(4) the nature and degree of control.  (How much control does the potential employer have over the performance of the work and the economic aspects of the working relationship?)
(5) the extent to which the work performed is an integral part of the potential employer’s business.  (Is the work critical, necessary, or central to the potential employer’s principal business?)
(6) the worker’s required skill and initiative.  (Does the worker use specialized skills together with business planning and effort to perform the work and support or grow a business?)

The DOL has admonished that “no one factor or subset of factors is necessarily dispositive, and the weight to give each factor may depend on the facts and circumstances of the particular relationship.  Moreover, these six factors are not exhaustive.”  Under the 2021 rule, the first and fourth factors, opportunity for profit or loss and the nature and degree of control over the worker, predominated as “core” factors, and if they pointed toward independent contractor status other factors would be unlikely to overcome that determination.

It is easy to see why the construction industry prefers the 2021 approach.  The fifth factor – the extent to which the work performed is an integral part of the potential employer’s business – may make it difficult for general contractors to treat roofers, drywallers and other non-licensed trades as anything but employees.  The third factor – the degree of permanence of the work relationship – adds to that difficulty whenever, as is commonly the case, a general contractor uses the same “subs” over and over again for multiple projects.

If it survives litigation challenges, the new rule will determine a worker’s status for purposes of the Fair Labor Standards Act, but not for any other federal or state law.  There continues to be a patchwork of tests to determine employment status for purposes of different laws, and under the common law of liability for another’s negligence.

[Update: On May 1, 2025, DOL's Wage and Hour Division issued guidance indicating that it would not enforce the 2024 rule pending further review.]
0 Comments

#132:  Written Change Order Requirements

12/30/2023

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Many construction contracts and subcontracts, both residential and commercial, provide that any addition or deletion from the scope of work described in the contract must be documented by a written change order.   The purpose of these written change order requirements is obvious: to avoid disputes down the road over the existence of, extent of, or price and time effects of changes to the work.
 
In the press to get a project completed, contractors and their customers sometimes ignore such contract language, agreeing on a change but failing to get a written change order signed.  Does that failure doom additional compensation (or credit) for an agreed upon change to the work?
 
A few years back I blogged (#65) on the difficulty of unjust enrichment recovery for verbal change orders in the face of contractual requirements for written change orders.  But there are other approaches that can save the day.
 
The most common scenario for getting around a contract provision for written change orders arises from an implied waiver of the requirement.  An example is D.M. Holden, Inc. v. Contractor’s Crane Service, Inc., 121 N.H. 831, 835 (1981), which affirmed an award of damages for extra work despite a contract provisions that “no payment for ‘extras’ would be made unless the work was approved in advance and in writing,” finding that the provision had been disregarded by the parties and impliedly waived.  Where I see this most often is in time crunch settings, with the need for quick action forgiving a lapse in the paperwork.  See Worcester Air Conditioning Co., Inc. v. Commercial Union Ins. Co., 439 N.E.2d 845, 848 (Mass.App. 1982) (“The judge’s finding that it was the practice of the subcontractor and plaintiff to proceed without a written change order where something had to be done quickly justifies the conclusion that they impliedly waived the requirement of a written change order.”).
 
When a contractor’s or subcontractor’s extra work is specifically approved by the owner or contractor, courts tend to allow recovery despite written change order requirements.   Ekco Enterprises, Inc. v. Remi Fortin Construction, Inc., 118 N.H. 37, 41 (1978), is an example: “Although the contract did specify that extra work was to be requested and agreed to in writing, the master correctly ruled that this requirement did not bar recovery for extras, improvements and substitutions made with Ekco’s full knowledge and approval.”
 
The issue of waiver arises only when a party is suing under the contract.  But there are other theories of recovery that can be resorted to, such as quantum meruit.  (See Blog #119)  R. J. Berke & Co., Inc. v. J. P. Griffin, Inc., 116 N.H. 760, 765 (1976), is apt here: “Whatever its merits, the issue of waiver is irrelevant insofar as Berke’s recovery is not on the contract but in quantum meruit.  In the absence of some explicit understanding between the parties that quantum meruit for extras would be barred . . . they were properly included in the calculation of the gross benefit conferred.”
 
As these cases make clear, written change order requirements in construction contracts will not always bar recovery in the absence of the writing.  1 Philip L. Bruner and Patrick J. O’Connor, Jr., Bruner and O’Connor on Construction Law § 4:39 (2010) notes: “The principle of strict enforcement of ‘written order’ requirements is now a pale shadow of its former existence. Since the mid-20th century, the judiciary has recognized the fundamental distinction between authorized changes and written changes, and between the authorization itself and evidence of authorization, and generally has enforced authorized orders in whatever form given.”
 
That being said, the original purpose behind written change orders still holds.  Proving a waiver of the requirement, proving the express direction to perform concededly extra work, and proving a basis for quantum meruit recovery are far more difficult tasks than simply pointing to a signature on a written change order.  If your contract requires such a writing, it is foolish to ignore it and take the risk of being able to prove a basis for forgiving the lapse.
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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 arbitration 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, 63 (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

4 Comments

 
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.)
4 Comments

#129:  New Davis-Bacon Rules

9/28/2023

2 Comments

 
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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