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#123: Bonding Around a Mechanic's Lien

3/26/2023

When a general contractor or lower tier subcontractor or supplier records a mechanic’s lien attachment on property, security for the lienor’s hoped-for judgment is achieved – but often something more, and perhaps unintended, is achieved. The resulting cloud on the owner’s title prevents a sale or refinancing of the property, and ties it up in a way that usually impacts the flow of funds needed for project completion. Draws on a construction loan may halt. Sales of units in multi-unit projects needed to raise funds for completion may cease.

This impact on the project can give the lienor leverage to coerce a favorable settlement if, as is often the case, the mechanic’s lien attachment survives an initial challenge and thus will remain in place for the duration of the litigation. The problem is not solved by prime contract provisions requiring a general contractor to promptly clear any lower tier mechanic’s liens or face having payments withheld. If an initial court challenge to the lien fails, the general contractor may well be coerced into an unfavorable settlement of the lienor’s claim.

Because such leverage is widely viewed as an unwarranted extension of the lien’s purpose to provide security for payment, many states have statutes authorizing lien release bonds, allowing an owner or general contractor to discharge the lien by substituting a bond. Massachusetts, for example, has statutes providing for two types of lien release bonds – a “blanket” lien bond pursuant to G. L. c. 254, § 12 which prevents any mechanic’s liens from attaching to the property, and a “target” lien bond pursuant to G. L. c. 254, § 14 which dissolves a particular lien that has already attached to a property.

A New Hampshire statute, RSA 511:48, authorizes petitioning the court to allow substitution of a bond for an attachment, but the statute is not specific to mechanic’s liens – and a number of Superior Court cases have declined to allow substitution of a bond for a mechanic’s lien. Consolidated Electrical Distributors Inc. v. SES Concord Company; Adam Windows & Doors, Inc. v. Eclipse Construction, Inc.; HPB Construction, LLC v. Berkshire-Amherst, LLC; Metro Walls, Inc. v. The MacMillin Company, LLC. There are a few Superior Court cases going the other way. Moynihan Lumber of Plaistow, LLC v. DeStefano & Assoc., Inc.; B & B Drywall, Inc. v Calamar Construction Management, Inc. Until our Supreme Court weighs in, the law on this question will remain uncertain.

If a lienor cannot be forced to give up his lien in exchange for a bond, how about in exchange for an escrow of cash? Few courts will ever grapple with this question, because few lienors will hesitate to jump at the offer (a cash escrow is a far easier path to payment than a sheriff’s sale of the liened property after judgment) – but the issue has been litigated in Superior Court a few times by plaintiffs who preferred leverage to eventual ease of collection. McCusker v. In-Home Restored, Refound + Reinvented Furniture + Accessories, LLC and S & J Enterprises, Inc. v. Delle Chiaie both required the cash escrow substitution, while A & E Flooring, Inc. v. SAMCO Holdings, LLC declined to do so.

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

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#122: Construction Loan Disbursement Pitfalls

2/25/2023

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A common feature of residential construction loans is the requirement for periodic inspections of the progress of work, usually by an independent inspection company hired by the bank, before disbursements are made. The idea is that the loan disbursements should pay only for properly completed work (or suitably stored materials on site), and the inspector is better able than the homeowner/borrower to gauge this. Banks insist on this as a way to ensure that the mortgages securing their construction loans are supported by enough value on the ground to collateralize repayment. Owner/borrowers like it as well; preventing the contractor from getting ahead of them in payments incentivizes proper contract performance, and a set of professional eyes to determine whether the contractor’s draw requests are justified is a welcome feature.

While owner/borrowers may well be relying on proper inspections when signing off on bank disbursements, they are wrong to assume that the bank requires inspections in support of loan disbursements in order to protect them from overpayments. Seymour v. New Hampshire Savings Bank, 131 N.H. 753, 759 (1989), held that “no duty is imposed upon a lender of a construction loan to exercise reasonable care in its inspection of the borrower’s premises, even where the borrower pays the lender’s inspection fee, unless the lender voluntarily undertakes to perform such inspection on behalf of and for the benefit of the borrower.” And such a voluntary undertaking is exceedingly rare.

Suppose the bank’s inspector overestimates the amount of work properly completed by the contractor, resulting in a larger disbursement than justified, and the contractor thereafter abandons the project or refuses to correct shoddy work. That puts the owner/borrower in a pickle. If the Seymour case shuts out a claim against the bank, do owner/borrowers have a legal claim against the inspector, with whom they have no contract? Don’t count on it. In Coachman Estates of Barrington, LLC v. REI Service Corporation, No. 2009-0848 (September 29, 2011), our Supreme Court held that “the role of the construction inspector was to ensure that the bank’s security interest was adequately protected, not to provide technical assistance to the plaintiff in determining the quality of work,” and on that basis rejected the claim that the borrower was a “third-party beneficiary” (see Blog #84) of the inspector’s contract with the bank. Nor does a negligence claim against the inspector appear promising. The economic loss rule, which generally precludes recovery in a negligence lawsuit absent personal injury or property damage and absent a special relationship between the parties (see Blog #29), will be an obstacle here.

Negligently performed inspections can work both ways; inspectors occasionally approve lower disbursements than objectively justified by the contractor’s performance. Usually the owner’s contract with the contractor will require payments as particular performance milestones are achieved regardless of whether the construction lender makes a disbursement – and the owner will be in breach unless personal funds are used to cover the gap. But the owner may not have sufficient personal funds to tap, or may be reluctant to tap them because of faith in the bank inspector’s accuracy. Except in the rare case where the contractor has agreed to abide by the bank inspector’s assessment of amounts earned, this puts the owner at risk of having the contractor suspend or even abandon work if the amount of the underpayment is substantial. Worse, the contractor or one of its unpaid subcontractors could place a mechanic’s lien on the property – which is sure to result in a breach of the owner/borrower’s loan agreement!

There are possible ways to contract around all of these pitfalls, including loan agreements that undertake additional duties to borrowers and contractor agreements to continue the work and waive lien rights despite disagreement with the amount of bank-approved disbursements. All such contractual solutions depend on the leverage possessed by and the negotiation savvy of the parties to these arrangements. Residential owners are usually on the short end here. If you’re wondering how often an owner has hired me to review the documents in advance, I can tell you, it’s a round number. Very round.

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#121: Owners' Duties to Withhold Money for Subcontractors

1/18/2023

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In New Hampshire, an owner generally owes no duty to subcontractors to see that they get paid. A few years back I blogged (#19) that RSA 447:8 might be an exception to this general rule, imposing a trust in favor of subcontractors on money that an owner owes to a general contractor if the proper notices are given by the subcontractors. And this month, a court has finally agreed.

The case is In re The Prospect-Woodward Home, 2023 BNH 001, 2023 WL 124859 (Jan. 6, 2023), decided by New Hampshire’s bankruptcy court. A Chapter 11 proceeding was commenced by a continuing care retirement facility in Keene whose real estate was subject to a construction mortgage and several mechanic’s liens. The Debtor’s real estate was ultimately sold, and the respective interests of the construction mortgagee and of the construction manager and its subcontractors holding mechanic’s liens attached to the $33 million sales proceeds. Because the total amount of the parties’ claims exceeded $33 million, the court was called upon to decide which of these interests had priority.

The court began by analyzing New Hampshire’s “race-notice” rule of priority, under which the first to record its interest at the registry of deeds is first in line unless it had notice of another’s unrecorded prior interest. Although the construction mortgage was recorded first, the mortgagee was aware at the time of that recording that MacMillin, the construction manager, had already commenced work, giving it an inchoate lien on the facility from the time its work commenced. Accordingly, MacMillin’s later-recorded lien was held to have priority over the mortgage.

Unlike MacMillin’s work, however, the subcontractors’ work did not commence until after the mortgage was recorded, so they were not race-notice winners. The subs argued that RSA 447:8’s directive that owners “retain a sufficient sum of money to pay” subcontractor claims before paying a general contractor meant that they should share in MacMillin’s victory anyway. The court agreed:

“The Subcontractors argue that because they have given notice of their lien claims to the Debtor
as required by RSA 447:5 (which apparently no one disputes), the Debtor is in essence a trustee
for the benefit of the unpaid subcontractors. The Court agrees that RSA 447:8 will dictate how money the Debtor owes to MacMillin must be handled if MacMillin succeeds on its race-notice
claim. Pursuant to this statute, the Debtor will be required to pay the Subcontractors, from the
net sale proceeds, the amounts owed on account of their own mechanics’ liens, as finally
determined by the Court.”

Given this ruling, the court found it unnecessary to rule on the subcontractors’ alternative argument that RSA 447:12-a nevertheless afforded priority to their later-recorded liens (see Blog #44): “Because the Court has determined that MacMillin’s mechanic’s lien is entitled to priority under the race-notice doctrine, and the Subcontractors will share in MacMillin’s race-notice victory, the Court need not determine whether the Subcontractors’ mechanics’ lien attachments also have priority based on the application of RSA 447:12-a.”

The takeaway here is that RSA 447:8 is a type of “trust fund” statute. Several states have enacted statutes that make the general contractor receiving payment a trustee for the benefit of its subcontractors. (Maryland is an example, Md. Code Ann. Real Property § 9-201(b)(1).) By contrast, RSA 447:8 declares that any money due from owner to contractor is held by the owner for the benefit of subcontractors who have given the owner timely notice of their intent to claim a lien and the amount thereof. Once those notices have been given, protection of the owner from threatened liens and protection of subcontractors from nonpayment by the general contractor trumps any contractual right of the general contractor to be paid those amounts (unless and until it pays the subcontractors what they are owed).

Whether the owner’s trusteeship expires if the subcontractors who gave proper notice don’t timely perfect their liens with court-ordered attachments pursuant to RSA 447:10 is an open question that In re The Prospect-Woodward Home had no need to consider.

The case is presently on appeal.

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#120: Addressing the Shortage of Construction Workers

12/29/2022

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

Theoretically the market is supposed to self-adjust, with higher wages offered by construction companies sparking an uptick in the labor supply. It hasn’t worked that way because the workers just aren’t there. The labor pool needs to be expanded, and that means looking to foreign-born workers, both those seeking to immigrate and those already here. There is no other realistic option.

Canada gets it. On November 1 it announced plans to bring in 1.45 million immigrant workers over the next three years to ease its labor shortage.

But in the U.S., near-term prospects for bringing in more foreign-born workers appear dim. President Biden’s proposed U.S. Citizenship Act of 2021, which would have provided pathways to citizenship for an estimated 11 million undocumented immigrants, has fizzled, and his efforts to keep DACA going have taken a beating in the courts. The House is now controlled by Republicans, many of whom ran on anti-immigration platforms capitalizing on the Trump-instilled xenophobia that painted illegal immigrants as violent criminals and drug dealers. This political rhetoric has also managed to erode popular sentiment for expanding legal immigration, which has always been concerned with whether immigrant workers will displace Americans from their jobs – a non-issue in today’s economic climate.

To be sure, there are many undocumented immigrants who would like to work, including in New Hampshire. But under both federal law and state law, they cannot legally be hired. Employers are required to verify employees’ right to work in the U.S. by completing an I-9 form for each hire and examining the documents (Green Card or EAD in the case of a non-citizen) provided by would-be employees in support of the verification. Guidance on the process can be found here. Penalties for noncompliance are stiff. Knowingly hiring illegal immigrants is a crime subjecting the employer to escalating fines of up to $16,000 per employee, potential jail time, and possible debarment from federal contracts. State law penalties are $2,500 per day of violation.

While independent contractors are not subject to the same restrictions as employees, hiring illegal immigrants as independent contractors is no panacea, even if they are true independent contractors and not misclassified employees (see Blog #3). Knowingly hiring illegal aliens as independent contractors is illegal. Independent contractors must furnish a Form W-9 to prospective employers, which in turn requires them to have a social security number or tax ID number. If a vendor furnishes no W-9, the employer must withhold federal taxes from any payments, which will eventually let IRS weed out the violators. And it is foolhardy to hire an independent contractor who lacks liability insurance and workers’ compensation insurance – likewise difficult to procure without proper tax identification.

As the calendar flips to 2023 there seems to be no solution on the horizon. The work force can only be supplemented by immigrant labor if the political will to facilitate it can be found in Washington. My wish for the construction industry in the new year is that comprehensive immigration reform overcomes partisan politics and becomes a reality. When we turn on the evening news and see the mass of migrants on our southern border, we should try to see opportunity – just not the kind seen by Republican lawmakers looking to reap political capital from the public perception that the Biden Administration is solely responsible for this chaos.

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#119: Quantum Meruit vs Unjust Enricment

11/25/2022

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It is common in construction litigation for contractors suing owners to assert a right to recover damages for more than just a breach of contract. Two of the most popular legal theories beyond breach of contract are “unjust enrichment” and “quantum meruit.” Although distinct, they share some elements, which often leads to confusion between them. As our federal court has noted, “New Hampshire cases do not clearly differentiate between theories of unjust enrichment and quantum meruit.” Eastern Electric Corp. v. FERD Construction Inc., 2005 WL 3447957 at *3 n.1 (D.N.H. Dec. 15, 2005) (citing cases). Let’s try to tease them apart.

“Unjust enrichment” is exactly what it sounds like – recognition by the courts that when one party has benefited from another party’s services, justice often demands that they be paid for. “In the absence of a contractual agreement, a trial court may require an individual to make restitution for unjust enrichment if he has received a benefit which would be unconscionable to retain.” Petrie-Clemons v. Butterfield, 122 N.H. 120, 127 (1982). Sometimes this theory applies even if the services in question were never expressly requested by the beneficiary.

This “absence of a contractual arrangement” prerequisite has historical roots. Unjust enrichment is what lawyers refer to as an “equitable” remedy, distinguished from a “legal” remedy (such as for breach of contract). Many years ago there were separate courts of law and courts of equity (or courts of “chancery,” to use the term then in vogue), and a disappointed suitor in the law courts could turn to the equity courts for another shot at recovery. With the merger of law and equity in modern times – at least in the Superior Court (Circuit Courts lack equity jurisdiction and cannot entertain unjust enrichment claims, Barlo Signs International, Inc. v. GCD, Inc., 2018 WL 3237974 (N.H. Sup. Ct., June 29, 2018)) – the principle that legal remedies are favored over equitable ones has survived. So, if the parties have a contract addressing their rights and obligations with respect to payment for the work in question, equitable remedies like unjust enrichment are unavailable.

Quantum meruit – Latin for “as much as is deserved” – is slightly different. It provides a basis for recovery when a valid contract exists but for some reason can’t be successfully invoked, such as where the unpaid party is himself in breach, or is unable to satisfy a contractual condition to payment, or (my favorite) where extra work beyond the contract scope is performed but a formal change order does not get signed.

Unjust enrichment and quantum meruit have different theoretical roots. The law distinguishes implied-in-fact contracts, i.e., true contracts in which an actual agreement of the parties is inferred from circumstantial evidence, and implied-in-law contracts, which are legal fictions designed to prevent injustice. Morgenroth & Associates, Inc. v. Town of Tilton, 121 N.H. 511, 514 (1981). Unjust enrichment fits snugly into the implied-in-law category. Id. But our federal court has said “Quantum meruit, also sometimes labelled ‘contract implied in fact,’ involves recovery for services or materials provided under an implied contract.” Universal Am-Can, Ltd. v. CSI-Concrete Systems, Inc., 2012 WL 579167 at *9 (D.N.H. Feb. 22, 2012) (citation omitted). This suggests that quantum meruit is not an equitable remedy at all, as some courts – although not our Supreme Court as yet – have recognized. See Dinan v. Alpha Networks, Inc., 60 A.3d 792 (Me. 2013) (“Quantum meruit is a legal, not an equitable, remedy and thus is distinct from the theory of unjust enrichment.”).

Quantum meruit and unjust enrichment have different measures of damages. “While ‘[d]amages in unjust enrichment are measured by the value of what was inequitably retained[,][i]n quantum meruit, by contrast, the damages ... are based on the value of the services provided by the plaintiff.’” General Insulation Co. v. Eckman Construction, 159 N.H. 601, 612 (2010) (citation omitted). Sometimes these two measures will yield identical results. R. Zoppo Co., Inc. v. City of Manchester, 122 N.H. 1109, 1113-14 (1982) (“evidence of the plaintiff's expenditures may be considered as circumstantial evidence of the value of the benefit conferred upon a defendant.”).

Still confused? Trust me, you’ve got lots of company!

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#118: Letters of Intent Forming Enforceable Contracts

10/30/2022

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

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

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

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

Sometimes the LOI will contain conditional language – for example, one sent to a subcontractor which is conditioned on an award of the prime contract to the general contractor. This type of LOI can become binding once the condition is fulfilled. Other times the LOI’s conditions may end up being deemed unessential formalities. In Blais v. Remillard, 138 N.H. 608, 612 (1994), “the defendants argue[d] that the buyer’s reservation of the right to have his attorney review the contracts was a condition precedent to the buyer’s acceptance of the terms of the contract and, thus, that there was no actual meeting of the minds. While a reasonable jury might have found in the defendants’ favor, it need not have done so and could have found the proposed review merely perfunctory.”

It is easy for the author to eliminate any risk that his LOI will be interpreted as a binding contract, simply by reciting that the LOI is not intended to be binding and/or expressly stating that until another document is signed there is no contract. If such a disclaimer is present, the recipient could not reasonably believe that a contract is already in place. But without such a disclaimer, the matter is less certain. As one court has put it, “The fact that parties contemplate that a formal agreement will eventually be executed does not necessarily render prior agreements mere negotiations, where it is clear that the ultimate contract will be substantially based upon the same terms as the previous document.” Chicago Investment Corp. v. Dolins, 107 Ill.2d 120, 126, 481 N.E.2d 712 (1985).

Lastly, if the LOI instructs the recipient to begin preparations for performance or take action that would constitute part performance, it is far more likely that the LOI will be construed as a binding contract.

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#117: Building Information Modeling

9/30/2022

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Over the past decade, Building Information Modeling (“BIM”) – computerized 3D portrayal of integrated building elements that allows a project or project subset to be built virtually before being built in the field – has become prolific in commercial construction. Visit any project trailer on a major construction site today, and you are as likely to see managers and superintendents poring over BIM images on their tablets and smartphones as over a set of traditional paper plans rolled out on a table. With a keystroke or a touch pad swipe, any part of the model and any trade’s work can be isolated to display connections and dimensions or to identify potential clashes arising from any design change. Put the model in motion over time to depict progress of the work, and the simulation becomes 4D rather than 3D – an obvious aid to coordination and scheduling. This is not your father’s CAD system.

Whether a BIM model is considered a Contract Document required to be followed is a matter for agreement among the project participants. Depending on how the parties agree on the protocols for and the extent of permissible reliance on shared BIM in constructing a project, BIM models can run the gamut from serving as a check on accuracy of traditional 2D plans to replacing those plans as the official project drawings, or anything in between. The AIA’s newly released E201-2022, for use when at least some BIM version will become a Contract Document, and E202-2022, for use when that will not be the case, facilitate establishing these protocols.

Whether reliance on BIM models is proper ought not be left to interpretation, and the E201-2022 and E202-2022 strive to ensure that it is not, confining permissible reliance to designated uses, beyond which any reliance will be at the user’s own risk. In the absence of agreement on the point, ordinary contract principles will determine whether a party’s reliance on a BIM model furnished by the other party is reasonable. In general, reliance on information provided by one party to the other for use in his contract performance will, in the absence of a disclaimer, be deemed justified. In such a case, errors in the BIM or undisclosed changes to the BIM can come back to haunt the provider.

Sometimes actual field conditions differ from what was expected based on the BIM, and a clash not modeled is nevertheless encountered during installation. Adjustments made in the field to accommodate those differences can spawn what look very much like Type I differing site condition claims. And if the finished product does not perform as expected, those same field adjustments can take on all the trappings of a dispute over whether a design defect or a construction defect is present. Ideally, any disparity between what was modeled and what was encountered should be promptly raised with the architect or owner’s rep for instruction and potential redesign, implementing the change order process if the BIM is a Contract Document. But in the heat of battle, such command decisions are not always made at the highest levels; installers encountering something that, per the BIM, should not have been in their way often simply work around it and move on. That can have ripple effects for the next trades working on the project.

While the BIM may demonstrate how the plumbing, HVAC, electrical and anything else can all fit in a given space without clashes, the tighter the space the more important each trade’s means and methods will become in order to make it all fit. Coordination and sequencing of trades is key here; the last trade to perform, who must work around prior trades’ work, will need a different plan of attack than the first trade in. If the work sequence is altered after a contractor’s or subcontractor’s reliance on a time-simulated 4D BIM showing no obstructions to its work, the financial consequences of dealing with unanticipated obstructions can be huge. For a cautionary tale, North American Mechanical Inc. v. Walsh Construction Company II LLC, 132 F.Supp.3d 1064 (E.D.Wis. 2015), is worth a read.

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#116: Termination as a Condition of Performance Bond Liability

8/21/2022

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Many performance bonds (the popular AIA A312 is an example) state that the surety’s obligation is not triggered unless the principal’s contract has been terminated. This can put the obligee, whether an owner holding its general contractor’s performance bond or a general contractor holding its subcontractor’s performance bond, in a difficult spot. Wrongful termination will not only be a breach of contract giving the principal a claim for damages against the obligee, but it will forfeit the protection of the bond. Conversely, not terminating also forgoes the protection of the bond – if termination is an enforceable condition of the surety’s liability.

In Arch Insurance Co. v. Graphic Builders LLC, 36 F.4th 12 (1st Cir. 2022), a general contractor sought to enforce its subcontractor’s performance bond after the subcontractor failed to correct leaking windows and failed to furnish the contractually-required manufacturer’s warranty for the windows. But the contractor didn’t terminate the subcontractor – a condition of the surety’s liability under its standard A312 performance bond – because (a) substantial completion had already been achieved such that the subcontractor “thus could not be terminated,” id. at 15, and (b) no physical work was involved in providing the missing warranty. Affirming summary judgment for the surety, the Court of Appeals rejected both excuses, holding that termination was nevertheless required in order to trigger the surety’s liability:

“We acknowledge the difficulty contractors may face in navigating between the risk of premature termination of a subcontractor and the risk of failing to comply with the requirements of section 3 of the A312 performance bond. See 4A Bruner & O’Connor, supra, at § 12:38 (noting that “[a] wrong decision to terminate is a material breach of contract and results in the obligee’s completion of the contract without recourse against the contractor or surety” and that “[t]he wrong decision not to terminate may result in unsatisfactory completion ..., with recourse limited to the contractor and not the surety”. Yet that is the framework under which Graphic agreed to operate pursuant to the performance bond, and it was obliged to adhere to the bond’s terms to invoke the bond’s coverage.”

Id. at 20. It is significant that the court rejected the contractor’s argument that the subcontractor had substantially completed its work, noting the contractor’s earlier letters stating that the subcontractor had not done so – and particularly given the contractor’s valuation of the warranty obligation “at $2 million, a significant proportion of the subcontract’s total price tag of roughly $8.6 million,” id. at 18. It is likewise significant that defective work was in play; the reason that the manufacturer declined to issue a warranty was over concern about improper installation by the subcontractor. Id. at 19.

Was the contractor correct that it could not lawfully terminate a subcontractor whose work was substantially complete? Arch did not reach this question given the Court’s conclusion that the subcontractor’s work was in fact not substantially complete. But I think the answer to the question is yes. 4A Bruner & O’Connor on Construction Law § 12:45 (2021) (noting that an “obligee may not terminate for default a construction contract that has been substantially performed”). And if termination of the principal is always a condition precedent to the surety’s liability, then in practical effect substantial completion by the principal will absolve the surety of liability under the bond. Punch list completion and warranty obligations will not be bonded!

The one thing that gives me pause here is that bonds incorporate the terms of the bonded contract by reference, and often those bonded contracts will – as is true of the AIA A201 form – require consent of the surety for release of retainage after substantial completion (see § 9.8.5) and for final payment (see § 9.10.2). Why would that consent be necessary if the surety is exonerated by substantial completion? “In interpreting a multiple-document agreement, we seek to harmonize and give effect to the provisions of the various documents so that none will be rendered meaningless.” Motion Motors, Inc. v. Berwick, 150 N.H. 771, 777 (2004). And that principle of interpretation may well save the day for the obligee.

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#115: Ushering In the New Building Codes

7/12/2022

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

The key changes from the 2015 edition of the International Building Code may be found here. The key changes from the 2015 edition of the International Residential Code may be found here.

When New Hampshire last updated its building codes in 2019 (from the 2009 versions to the 2015 versions) I blogged (#80) on the ambiguities in the transition rules for construction projects straddling the effective date, an issue that was left to the municipalities to deal with. This time the new law has come up with a solution: the version in effect at the time of application for the building permit will remain in effect for the duration of the permitted work unless the applicant elects to be governed by the 2015 version – an election available for six months after the effective date of the new law.

As I have earlier blogged (#25), building codes can provide the standards of care for purposes of negligence lawsuits only if a common law duty to protect the injured party from the type of harm sought to be avoided by the code already exists independently of the code. If such a duty exists, construction that violates the newer code but complies with the older code will present an interesting question: can a finding of negligence turn on the fortuity of which version the builder elected to follow? It will be hard to argue that a builder’s failure to comply with the newer code he chose to follow was negligent if his construction would have met the prior code he could have chosen. It will likewise be hard to argue that projects failing to comply with a change effected by the 2018 code are built negligently when identically-constructed projects that happened to be commenced earlier, and hence are still governed by the 2015 code, are not. Still, a line has to be drawn somewhere, and if a failure to meet code is to establish negligence per se, drawing it elsewhere than at the six month deadline will enmesh the courts in climbing a slippery slope.

This problem would disappear if courts treated a failure to meet applicable building codes as merely evidence of negligence, not as negligence per se. Fifty years ago Chief Justice Kenison wrote “There is no unalterable rule in this State on the admissibility of safety codes as evidence on a question of the applicable standard of care . . . unless they have been incorporated into statutes or ordinances by either State or local legislative bodies.” Lemery v. O’Shea Dennis, Inc., 112 N.H. 199, 200 (1972). Treating such codes as admissible on the issue, not as unalterable establishments of the standard of care, strikes me as the sounder approach. I applaud the trial judge in Mailhot v. C & R Construction Co., 128 N.H. 323 (1986), who gave an “evidence of negligence” jury instruction rather than a negligence per se instruction in a case involving OSHA regulations. (On appeal, the plaintiff’s challenge was rejected for failure to preserve the argument.)

And just as failure to meet code should not automatically constitute negligence, neither should meeting code be a blanket absolution from negligence. Schlis v. Target Corporation, No. 19-cv-1201-JD, 2021 DNH 068 (April 6, 2021) (“Target has not identified any legal authority holding that complying with building or safety codes applicable at the time of a building’s construction or initial opening per se satisfies its duty of care.”).

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

6/30/2022

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Delays on construction projects are as common as shells on the shore. They can arise from contractor fault, owner fault, or events beyond either party’s control – or any combination of these. Contracting parties contemplate the possibility of delays, and often include contract language to address them – sometimes with clauses precluding a contractor from any monetary compensation for delays, even owner-caused delays. Such “no-damages-for-delay” clauses can take various forms, but they typically limit a delayed contractor (or subcontractor) to extensions of time for performance in the event of delays beyond the contractor’s control. While such time extensions may help avoid assessment of liquidated damages, they put no money into the contractor’s pocket for what can often be devastatingly expensive consequences of being on the job longer than anticipated.

Because freedom of contract is an overarching principle in the law, courts generally enforce no-damages-for-delay clauses. Still, contracts excusing a party from liability for the harm he causes have never been favorites of the courts, which have been willing to entertain exceptions to the enforceability of such clauses. While New Hampshire has yet to tackle this question, most jurisdictions refuse to enforce no-damages-for-delay provisions in certain circumstances, such as “if the delay: (1) was of a kind not contemplated by the parties, (2) amounted to an abandonment of the contract, (3) was caused by bad faith, or (4) was caused by active interference,” Peter Kiewit Sons’ Co. v. Iowa Southern Utilities Co., 355 F. Supp. 376, 397 (S.D. Iowa 1973). Several states even have statutes disallowing such clauses. Ohio’s statute, for example, declares that any clause in a construction contract “that waives or precludes liability for delay...when the cause of the delay is a proximate result of the owner’s act or failure to act, or that waives any other remedy...when the cause of the delay is a proximate result of the owner’s act or failure to act, is void and unenforceable as against public policy.” R.C. 4113.62(C)(1).

The “active interference” exception to enforcement of no-damages-for-delay provisions dovetails nicely with New Hampshire's longstanding rule that "if it can be shown that the performance of the contract was prevented directly or indirectly by the act of the promisee, its non-performance will be excused,” Famous Players Film Co. v. Salomon, 79 N.H. 120, 122 (1918). No bad faith need be shown. And the modern trend elsewhere is that “a plaintiff contractor or subcontractor claiming active interference on the part of the defendant owner or contractee need only to show that the defendant committed an affirmative, willful act that unreasonably interfered with the plaintiff’s performance of the contract, regardless of whether that act was undertaken in bad faith.” Tricon Kent Co. v. Lafarge North America, Inc., 186 P. 3d 155, 161 (Colo. App 2008).

One example of active interference is issuance of a notice to proceed before the jobsite is ready for the contractor’s work. U.S. Steel Corp. v. Missouri Pacific Railroad, 668 F.2d 435, 439 (8th Cir. 1982). After commencement, suspension of work by the owner beyond the time reasonably justifiable can likewise overcome a no-damages-for-delay clause – regardless of other contract language affording the owner a right to suspend. Sarasota County v. Southern Underground Industries, Inc., 333 So.3d 285, 288 (Fla. App. 2022). Indeed, schedule and sequencing changes have been found to justify an award of delay damages even in the face of other contract provisions giving one party the right to dictate progress and sequence of the other party’s work. J.J. Brown Company, Inc. v. J.L. Simmons Co., Inc., 2 Ill. App.2d 132, 140, 118 N.E.2d 781 (1954) (“The provision of the subcontract giving defendant the right to direct the sequence or general progress of work does not release it from liability for delay. It implies an obligation on the part of the general contractor to keep the work in such a state of forwardness as to enable the subcontractor to perform within a limited time.”).

The common thread here is that owners must give their contractors (and contractors must give their subcontractors) a fighting chance at timely performance – and if they interfere with that chance, a no-damage-for-delay provision likely won’t save the day.

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#113: Waiving the Right to Arbitrate

5/24/2022

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“When a party who has agreed to arbitrate a dispute instead brings a lawsuit, the Federal Arbitration Act (FAA) entitles the defendant to file an application to stay the litigation. See 9 U.S.C. § 3. But defendants do not always seek that relief right away. Sometimes, they engage in months, or even years, of litigation—filing motions to dismiss, answering complaints, and discussing settlement—before deciding they would fare better in arbitration. When that happens, the court faces a question: Has the defendant’s request to switch to arbitration come too late?”

With that opening paragraph, the U.S. Supreme Court in Morgan v. Sundance, Inc., 142 S.Ct. 1708 (2022), considered whether a waiver of a defendant’s right to insist on arbitration requires a showing of prejudice to the plaintiff resulting from delay in demanding arbitration. Nine of the eleven circuit courts of appeal, including the First Circuit which embraces New Hampshire, had said yes. A unanimous Supreme Court has now said no, and in the process has debunked the common assumption that arbitration agreements are specially favored in federal court – the so-called “presumption of arbitrability.”

Noting that “[o]utside the arbitration context, a federal court assessing waiver does not generally ask about prejudice,” 142 S.Ct. at 1713, Morgan ruled that “a court must hold a party to its arbitration contract just as the court would to any other kind. But a court may not devise novel rules to favor arbitration over litigation. . . The federal policy is about treating arbitration contracts like all others, not about fostering arbitration.” Id. For that reason, the Court concluded that “prejudice is not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the FAA.” Id. at 1714.

Although Morgan was decided under the Federal Arbitration Act, the relevant state law principles are not materially different. Morgan’s definition of waiver – “the intentional relinquishment or abandonment of a known right,” id. at 1713 – is identical to New Hampshire’s. Demers Nursing Home, Inc. v. R. C. Foss & Son, Inc., 122 N.H. 757, 761 (1982) (“Waiver requires a finding of an actual intention to forego a known right.”). And the “presumption of arbitrability” is a feature of New Hampshire law as well. Grand Summit Hotel Condominium Unit Owners’ Ass’n v. L.B.O. Holding, Inc., 171 N.H. 343, 346 (2018) (“Under both federal and state law, a presumption of arbitrability applies to arbitration clauses.”). How Morgan influences New Hampshire state courts’ take on this remains to be seen, but it is worth noting that early New Hampshire case law on the “presumption of arbitrability,” first introduced in the collective bargaining setting, distilled the presumption entirely from federal law. Appeal of Westmoreland School Board, 132 N.H. 103, 105-06 (1989).

Waiver of a contractual right to demand arbitration by participation in litigation is not restricted to acquiescing defendants; a plaintiff can also be held to have waived arbitration by pursuing litigation. In tossing prejudice out of the equation and abandoning any preference favoring arbitration, Morgan is likely to have an effect here as well. The bare act of filing suit may now be viewed as a decision to forego arbitration – including in state court, where there is already precedent for inferring a plaintiff’s waiver from the institution of litigation despite a valid arbitration clause. Logic Associates, Inc. v. Time Share Corp., 124 N.H. 565, 571 (1984) (“We affirm the master’s recommendation that Logic’s right to arbitration, provided by the license and service agreement’s arbitration clause, was waived when Logic filed a common-law writ for damages in superior court against Time Share.”).

If, however, litigation is instituted in order to seek a prejudgment remedy that is unavailable in arbitration, the inference of waiver is weakened. Thus, bringing a lawsuit as a vehicle for getting a mechanic’s lien attachment – although not the only vehicle that can accomplish this task, as I have mentioned before on this site (#83) – won’t preclude a later demand for arbitration. Pine Gravel, Inc. v. Cianchette, 128 N.H. 460, 465 (1986).

But I wouldn’t include a demand for jury trial in the Complaint!

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#112: Owners' Implied Warranty Rights Against Subcontractors

4/26/2022

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A few years back I blogged (#84) that owners generally lack “third party beneficiary” rights required in order to enforce subcontracts. While some commercial subcontracts do extend the subcontractor’s express warranties to the owner, such provisions are rarely found in residential construction, where there is often no express warranty in the subcontract at all. But what about the implied warranty of good workmanship (#4)? Does it apply to subcontractors’ work as well? Is it enforceable by the owner despite the lack of a contractual relationship between the two?

Until our Supreme Court weighs in, we can only make an educated guess here. Lempke v. Dagenais, 130 N.H. 782, 789 (1988), held that in the residential context “the privity requirement should be abandoned in suits by subsequent purchasers against a builder or contractor for breach of an implied warranty of good workmanship for latent defects.” Some of the Court’s expressed rationale for extending that warranty to remote purchasers – most notably, that implied warranties are not founded on contract but on public policy – would suggest that privity of contract is irrelevant to an owner’s implied warranty suit against a subcontractor. But other factors mentioned in Lempke are specific to subsequent purchasers suing builder-vendors.

Some courts that allow subsequent purchaser suits for breach of implied warranty against the builder-vendor refuse to allow them against subcontractors. See Moglia v. McNeil Co., Inc., 270 Neb. 241, 700 N.W.2d 608 (2005); Yanni v. Tucker Plumbing, Inc., 312 P.3d 1130 (Ariz.App. 2013). Lempke itself relied heavily on an Illinois decision, Redarowicz v. Ohlendorf, which allowed a subsequent purchaser to sue the original builder for breach of implied warranty of habitability, finding that “[p]rivity of contract is not required,” id. at 183. But Illinois has declined to abandon the privity requirement when it comes to suits against subcontractors. Sienna Court Condominium Ass’n v. Champion Aluminum Corp., 129 N.E.3d 1112, 1121 (Ill. 2018) (“The purchaser of a newly constructed home may not pursue a claim for breach of an implied warranty of habitability against a subcontractor where there is no contractual relationship.”).

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

Still other courts allow homeowners to bring negligence claims against subcontractors regardless of recourse against the builder-vendor. See A.C. Excavating v. Yacht Club II Homeowners Association, Inc., 114 P.3d 862, 865 (Colo. 2005) (“subcontractors owe homeowners a duty of care, independent of any contractual obligations, to act without negligence in the construction of homes.”). Even the economic loss rule, which ordinarily bars recovery in a negligence action of the costs or repair and replacement of defective work, “has no application to this case because the Association’s negligence claim is based on a recognized independent duty of care,” id. (New Hampshire likewise recognizes the “independent duty” exception to the economic loss rule, but thus far only for parties in privity of contract. Wyle v. Lees, 162 N.H. 406, 410 (2011).)

A clue as to which of the three approaches New Hampshire will favor may be found in Healy v. Telge, 139 N.H. 407 (1995), which dismissed a homeowner’s implied warranty claim against the seller who wasn’t also the builder, but allowed an implied warranty claim to proceed against the septic installer hired by that seller. Strictly speaking, that installer wasn’t a “subcontractor.” But Healy did permit a homeowner to sue the installer of just one component part of the house for breach of implied warranty, despite lack of privity.

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#111: The "One Year" Warranty: Myth and Reality

3/26/2022

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A common misperception among commercial contractors, particularly those who use standard form contracts, is that their warranty obligations only last for a year. While contracting parties are free to agree to limit warranties to a one-year duration by explicit language in their contracts, that is not the approach taken by most standard form contracts – except in one limited instance.

The AIA’s popular A201 (2017) General Conditions imposes several warranty obligations on the contractor. The basic one is found in Section 3.5.1, warranting that “materials and equipment furnished under the Contract will be of good quality and new unless the Contract Documents require or permit otherwise,” and that “the Work will conform to the requirements of the Contract Documents and will be free from defects, except for those inherent in the quality of the Work the Contract Documents require or permit.” Almost identical language is found in Section 3.8.1 of ConsensusDocs 200 – Standard Agreement and General Conditions Between Owner and Constructor. These clauses include no time limits, so the general statute of limitations applies (in New Hampshire, three years from when the defect was or should have been discovered).

Then there is A201 Section 12.2.2.1, the so-called “call back” remedy (I hesitate to call it a “warranty” because it is a promise that the contractor will act, not that the construction will conform to some standard): “In addition to the Contractor’s obligations under Section 3.5, if, within one year after the date of Substantial Completion of the Work or designated portion thereof . . . any of the Work is found to be not in accordance with the requirements of the Contract Documents, the Contractor shall correct it promptly after receipt of notice from the Owner to do so. . . During the one-year period for correction of Work, if the Owner fails to notify the Contractor and give the Contractor an opportunity to make the correction, the Owner waives the rights to require correction by the Contractor and to make a claim for breach of warranty.” Section 3.9.1 of ConsensusDocs 200 contains a like provision.

Most of the case law and commentary discussing the relationship between these two sections focuses on the duration of the general warranty, concluding that it is independent of and not circumscribed by the one-year period found in the call back provision. But scant attention has been paid to the scope of the waiver attending an Owner’s failure to notify and provide the Contractor with an opportunity to address known deficiencies. Under the A201, such failure waives not only the Owner’s call back rights after the one-year period expires, but also the Owner’s right “to make a claim for breach of warranty.” The last sentence of Section 3.9.1 of ConsensusDocs 200 is similar, providing that the Owner's failure to give notice and opportunity to cure defects discovered within the first year "waives the Constructor’s obligation to correct that Defective Work as well as the Owner’s right to claim a breach of the warranty with respect to that Defective Work.”

The effect of these form contracts is to limit a contractor’s warranty obligations to one year after substantial completion only when the Owner has discovered defective work during that year and failed to afford the contractor an opportunity to fix it – resulting in its deemed acceptance by the Owner. Since only intentional relinquishment of known rights can result in a waiver, and because the underlying goal of encouraging contracting parties to resolve performance issues among themselves is only achievable if they know about those issues, the trigger for this waiver is actual discovery of the defective work during the first year, not whether the owner reasonably should have discovered it.

Not all form contracts include this waiver (the EJCDC’s C-700 – Standard General Conditions of the Construction Contract, for example, has a one-year call back remedy but omits any associated waiver language), and those that do can of course be modified. But in my view, this particular waiver – a back door into a one-year warranty – strikes a fair balance.

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#110: Who Owns The Float?

2/26/2022

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

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

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

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

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

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

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#109: Liability Insurers' Duty to Defend

1/30/2022

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

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

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

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

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

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

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#108: Replacement Contractor Issues

12/19/2021

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

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

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

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

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

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

This burden-shifting framework should apply equally to owners’ claims against terminated contractors. Nevertheless, owners would do well to support their costs of completion/correction by documenting deficiencies in workmanship as best they can.

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#107: "Prevailing Party" Attorneys' Fees Provisions

11/26/2021

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In 279 B.C. the Greek king Pyrrhus defeated the Romans at the Battle of Asculum but lost much of his army in the process. He reportedly said “If we are victorious in one more battle with the Romans, we shall be utterly ruined!” Thus was coined the phrase “Pyrrhic victory” – a win that inflicts such a cost on the victor that it amounts to defeat. And any trial lawyer you ask can point to cases in which the cost of litigation resulted in a Pyrrhic victory for the client.

Contracting parties can and often do agree that in the event of litigation between them, the “prevailing party” will be paid his attorneys’ fees incurred in the fight. On the assumption that any monetary judgment in the plaintiff’s favor, no matter how small, renders him the “prevailing party,” this type of fee-shifting provision is thought by some litigants to be a balm against the sting of Pyrrhus. And sometimes it is. A recent case from Tennessee affirmed an award of $201,255.50 in attorneys’ fees to a homeowner who sued for $12,400 and won a $6,800 jury verdict on a breach of contract claim. G.T. Issa Construction, LLC v. Blalock, No. E2020-00853-COA-R3-CV (Tenn. App. Nov. 23, 2021).

The fly in the ointment, however, is the court’s power to tweak the amount of attorneys’ fees to be awarded. A “win” that is grossly disproportionate to the attorneys’ fees incurred in achieving it can lead to an award of less than all of those fees. In New Hampshire, attorneys’ fee awards take into account “the amount involved, the nature, novelty, and difficulty of the litigation, the attorney’s standing and the skill employed, the time devoted, the customary fees in the area, the extent to which the attorney prevailed, and the benefit thereby bestowed on his clients.” Funtown USA, Inc. v. Town of Conway, 129 N.H. 352, 356 (1987). The requirement to consider both the amount sought and the degree of success falls short of an explicit directive to compare the outcome of trial with the bill, but in practice that is often what happens. I have seen several New Hampshire courts cut down an award of fees where outcome and bill are wildly disparate. Pyrrhus lives!

Judicial reluctance to approve fee applications that dwarf the amount of a judgment or verdict is at its peak when the fee-shifting provision is contractual rather than statutory. In the statutory setting, fee awards are designed “to encourage suits that are not likely to pay for themselves, but are nevertheless desirable because they vindicate important rights.” Diaz v. Jiten Hotel Management, Inc., 741 F.3d 170, 178 (1st Cir. 2013) (affirming an attorneys’ fee award of $104,626.34 on a $7,650 verdict under a Massachusetts anti-discrimination statute). But a suit for breach of a contract with a prevailing party fee-shifting provision implicates no public policy to encourage suits that would otherwise not be cost-effective.

One way that courts reduce attorneys’ fee awards below the amounts incurred is by disallowing fees spent pursuing claims or legal theories on which the plaintiff did not prevail. LaMontagne Builders, Inc. v. Brooks, 154 N.H. 252, 261 (2006) (“Where a party prevails upon some claims and not others, and the successful and unsuccessful claims are analytically severable, any fee award should be reduced to exclude time spent on unsuccessful claims.”). In the construction setting, however, that type of severability is rare; it will almost always turn out that “the evidence necessary to prove liability under one theory was also relevant to proving liability under the other theory,” id. The prevalence of multiple claims in mine run construction disputes – breach of contract, unjust enrichment, negligence, Consumer Protection Act, etc. – will thus exacerbate the Pyrrhic problem.

Because parties are masters of their own contracts, they can craft fee-shifting provisions as they see fit. For example, a prevailing party fee-shifting clause might cap the plaintiff’s recoverable attorneys’ fees at the amount of the verdict or judgment, thereby maintaining a disincentive to sue over small disputes, while capping the defendant’s fee recovery at the amount of the claim, thereby incentivizing reasonable settlement offers.

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#106: Construction Mortgage Priority and Direct Payments to Subs/Suppliers

10/30/2021

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A few years back I blogged (#44) on the relative priorities of construction mortgages and mechanic’s liens under RSA 447:12-a. Regardless of who recorded first at the registry of deeds, that statute affords priority to mechanic’s liens except in two scenarios. The one which concerns us here grants the mortgagee priority “to the extent that the mortgagee shall show that the proceeds of the mortgage loan were disbursed . . . toward payment of invoices from or claims due subcontractors and suppliers of materials or labor for the work on the mortgaged premises.”

The statute does not explicitly state that such disbursements must go directly to subs and suppliers. Is it enough that the payments went to a general contractor who then used the money to pay subs and suppliers?

Lewis v. Shawmut Bank, 139 N.H. 50 (1994), answers in the negative. The Court interpreted the statute to require the mortgagee to “show that the disbursements . . . were made directly to subcontractors as payment . . . While the evidence in this case may well support a finding that more than $565,001 of disbursements is in some sense traceable to the payment of subcontractors, priority is afforded only to those disbursements traceable by either of the two methods described in the statute, i.e., disbursement checks payable to subcontractors, or disbursement checks payable to the mortgagor coupled with prior affidavits of payment. The record in this case contains no evidence that disbursements to G.M. were in response to affidavits attesting to payments made by G.M.; accordingly, the defendant has priority only for those disbursements made directly to subcontractors. The record, however, does not support a finding that any disbursements were made directly to subcontractors. We conclude that the plaintiff’s mechanic’s lien has priority.” Id. at 54 (emphasis in original).

This result was perhaps foreshadowed by L.M. Sullivan Co. v. Essex Broadway Savings Bank, 117 N.H. 985, 990 (1977) (“[B]ecause defendant failed to prove that any other disbursements of its mortgage loan were made to those individuals specified in RSA 447:12-a . . . the remainder of defendant’s mortgage was subordinate to Sullivan’s mechanic’s lien.”) (emphasis added).

Further evidence of legislative intent to require direct payments is suggested by RSA 447:12-b, which obliges construction lenders to post their identity conspicuously at the job site and requires would-be lienors to “provide written notice to the institution providing the construction funds that such person is furnishing services, materials, supplies or other things.” This statute is designed to give lenders a ready means to identify subs and suppliers, so that they can protect their mortgages from lien priority by either gathering lien waivers as a condition of disbursement, or making direct payments (by joint check or otherwise) to those not signing such lien waivers.

In the normal course of progress payments on a construction project, lenders do not pay subs and suppliers directly. For reasons of efficiency – and to avoid injecting themselves into potential disputes between general contractors and subcontractors/suppliers – it is almost always left to the general contractor to make those latter payments. Lewis has done nothing to change this routine practice. Lenders typically take on the more cumbersome procedure of disbursing payments directly to subs and suppliers only when alerted to claims of nonpayment.

Why should it matter whether subs and suppliers were paid by the mortgagee directly rather than through disbursements to the owner or general contractor which then made their way to those subs and suppliers? It is not easy to spot the policy rationale – until we consider that payment to subs and suppliers from any source already protects lenders by reducing their exposure to liens. Subs and suppliers perfect mechanic’s liens only for what remains unpaid. Whether the paid portion of their labor or materials resulted from a GC’s check or an owner’s check is immaterial; the lender benefits either way. But protection against liens for any unpaid portion – the only portion that matters – requires ensuring the subs’ or suppliers’ receipt of funds, and there is no way to ensure this other than by making disbursements directly.

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#105: Nonmutual Arbitration Agreements

9/28/2021

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Many construction contracts and subcontracts provide for arbitration of disputes. Some of them give just one of the parties an option to require arbitration. Such unilateral arbitration clauses are viewed by some courts with disfavor. See DiMercurio v. Sphere Drake Insurance, PLC, 202 F.3d 71, 81 (1st Cir. 2000) (“We adhere to our view that one-sided agreements to arbitrate are not favored.”). Are they nevertheless enforceable in New Hampshire?

To be enforceable, contracts require “consideration,” a bargained-for exchange of value or promises of value on both sides. A legal doctrine called “mutuality of obligation” – or in lay terms, if both sides are not bound, neither side is – comes into play here. It is clear that “the equal obligation . . . to arbitrate disputes . . . is enough to ensure mutuality of obligation and thus constitute consideration,” Rosen v. Genesis Healthcare, LLC, No. 20-cv-1059-PB, 2021 WL 411540 (D.N.H. Feb. 5, 2021). But when an equal obligation to arbitrate is absent, matters are less certain.

If the mutuality requirement is applied separately to the arbitration provision within a larger contract, chances are that a unilateral arbitration clause will not be enforced. Such was the case in United States ex rel. Birckhead Electric, Inc. v. James W. Ancel, Inc., 2014 WL 2574529 (D. Md. June 5, 2014), a payment dispute between a subcontractor and contractor on a federal project. The contractor sought to compel arbitration based on the following clause in the subcontract: “All disputes between the Contractor and Subcontractor, not involving the Owner’s act, omissions or responsibilities shall, at the Contractor’s sole option, be resolved by arbitration in accordance with the rules of the American Arbitration Association.” The court sustained the subcontractor’s objection that unilateral arbitration clauses should not be enforced: “Because the arbitration provision in this case binds only one party, it is unenforceable.”

If, however, mutuality is gauged with respect to the contract as a whole rather than with respect to the arbitration clause viewed in isolation, the outcome will be different. An example is United States ex rel. Harbor Construction Co. v. T.H.R. Enterprises, Inc., 311 F.Supp.3d 797 (E.D.Va. 2018), which construed the following subcontract clause: “At CONTRACTOR’s sole election, any and all disputes arising in any way or related in any way or manner to this Agreement may be decided by mediation, arbitration or other alternative dispute resolution proceedings as chosen by CONTRACTOR.” The court ordered arbitration over the subcontractor’s objection: “[A]s long as the contract as a whole is supported by adequate consideration, an arbitration provision need not impose a mutual obligation to arbitrate in order to be valid.” Id. at 803.

Neither case mentioned Rent-a-Center, West, Inc. v. Jackson, 561 U.S. 63, 70 (2010), which distinguished challenges to “the validity of an agreement to arbitrate” from challenges to “the contract as a whole” – and held that “only the first type of challenge is relevant to the court’s determination whether the arbitration agreement at issue is enforceable.” This might suggest a focus for the mutuality inquiry solely on the arbitration provision. But at least one court has concluded that Rent-a-Center “does not require that an arbitration clause be isolated and subjected to a mutuality test,” United States ex. rel. Maverick Construction Management Services, Inc. v. Consigli Construction Co., Inc., 873 F.Supp.2d 409, 415 (D.Me. 2012).

While the New Hampshire Supreme Court has not announced which approach it favors, it has held in other contexts that mutuality of remedy is not a requirement of a valid contract. Gulf Oil Corp. v. Rybicki, 102 N.H. 51, 54 (1959) (“If want of mutuality of obligation is the gist of their argument, it is no more acceptable. The lease is not invalid merely because the right to terminate it is conferred upon one party alone.”). Because arbitration agreements do not specify the remedy for a breach of contract but only the forum in which the remedy will be determined, this precedent may not be conclusive. But it does suggest that in New Hampshire mutuality of obligation is to be searched for in the contract as a whole, rather than in individual clauses.

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#104: Proving Lost Productivity Claims

8/27/2021

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In construction, as in most businesses, efficiency is the key to profitability; the bigger the bang for a given buck, the greater the profit margin. Bucks spent on labor will produce a big bang or a small one depending on working conditions. At the bid stage contractors estimate the manhours needed to complete their contracts by anticipating what those conditions will be. Many variables play into a labor productivity prediction: in what weather conditions will the work be performed? how much access is there to staging areas? what equipment must be used? is the sequence of construction logically dictated? how crowded will the job site be? and so on. Adjusting for these factors is not simple. [I’m reminded of Ambrose Bierce’s tongue-in-cheek syllogism: “Sixty men can do a piece of work sixty times as quickly as one man; one man can dig a post-hole in sixty seconds; therefore, sixty men can dig a post-hole in one second.”]

Few jobs ever go perfectly, and a contractor’s productivity can be adversely impacted when predicted conditions turn south. If the adverse impact is due to another party’s breach of contract in imposing unanticipated conditions on a contractor, damages resulting from lost productivity may be recoverable. How are such damages proved in court or in arbitration?

The preferred approach for isolating the impact of adverse conditions is called the “measured mile” method – a before-and-after analysis that establishes an unimpacted baseline against which to compare diminished actual performance. A productivity rate (say, feet of pipe laid per day or volume of concrete poured per day) is measured on a project during an unimpacted period, and then compared to the productivity rate over a like period after the breach in an effort to isolate the effect of the breach. If project conditions during the two periods are comparable except for the disruptive condition to be isolated, this type of analysis can be very convincing.

Because it requires a comparison of impacted and unimpacted periods of work, “measured mile” methodology on a single project won’t be available if the entire work was impacted from Day One. In such cases baseline productivity rates may be gauged by reference to the contractor’s historical performance on other similar jobs, or even by published studies showing industry-wide productivity averages. Since conditions can vary job by job, such baselines are not as persuasive as the contractor’s actual performance on the project in question, but resorting to them may be the only option for creating a baseline if the entire project was impacted – or if the contractor failed to document productivity on the job prior to the onset of the adverse conditions for which damages are sought. (Is it time for the paperwork lecture again?)

Other methodologies include the “total cost” and “modified total cost” methods. The “total cost” method simply compares a contractor’s estimated costs and actual costs; strives to defend the reasonableness of the estimate (sometimes by comparison to other bids); and attributes all of the delta to the breach. The “modified total cost” method takes this approach another step, and seeks to subtract out any identifiable cost overruns that are likely independent of the breach. While the latter is preferable to the former, neither method matches the “measured mile” in persuasiveness. One New Hampshire court has said that “[t]he total cost method is a ‘theory of last resort for use in those extraordinary circumstances where no other way to compute damages was feasible.” Axenics, Inc. v. Turner Construction Co., 2011 N.H. Super. LEXIS 6, at *39 (March 1, 2011). (Yup, time for the paperwork lecture!)

Kudos go out to the American Society of Civil Engineers’ recently published Standard 71-21 – Identifying, Quantifying, and Proving Loss of Productivity, which gives a nice roadmap for how to collect productivity data and apply standard practices. If you are seeking a primer on identifying, presenting or defending against lost productivity claims, you could do worse than this 48-page guide. It also contains an extensive bibliography of relevant literature, but my guess is that the book itself is destined to be cited by courts and boards as authoritative on the subject.

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#103: Contracting Online

7/31/2021

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The time-honored method for parties to signify their agreement to a contract – a signature on a piece of paper – has had to adapt to the digital age, and the law has adapted with it. Electronic signatures were declared valid in New Hampshire in 2001 with the enactment of the Uniform Electronic Transactions Act, RSA 294-E. In the fast paced world of e-commerce, however, parties often enter into contracts online with a single click of a mouse or tap on a smartphone screen. This development has led courts to scrutinize the process in an effort to ensure that such actions truly manifest a party’s intent to be bound to contractual terms where the “fine print” is on a different webpage.

New Hampshire’s first foray into this quagmire seems to be Ford v. Netgear, Inc., Hillsborough-North No. 216-2019-CV-00704 (March 9, 2020). The issue was whether an online purchaser of a WiFi system had agreed to arbitrate any disputes with the seller. The Court concluded that he had, by clicking a box on the registration page directly below text which recited that doing so signified agreement to the seller’s terms and conditions (which happened to include an arbitration clause). The terms and conditions were found on a separate page that the plaintiff insisted he never visited, although a prominent hyperlink to those terms would have taken him there had he bothered to click on it. That was enough for the Court. Could the seller’s website have declined registrations until the hyperlink was clicked? Sure. Was the seller required to set up its website that way in order to prove the purchaser’s assent? No.

Some recent decisions from other states have taken a less accommodating view. In Kauders v. Uber Technologies, Inc., 486 Mass. 557, 159 N.E.3d 1033 (2021), the Court declined to enforce an arbitration clause in Uber’s online terms and conditions. Its website alerted consumers that “By creating an Uber account, you agree to the Terms & Conditions and Privacy Policy,” which were viewable by clicking a hyperlink. Finding the Uber registration “qualitatively different from a large business deal where sophisticated parties hire legal counsel to review the fine print,” id. at 575, the Court noted that “the interface did not require the user to scroll through the conditions or even select them. The user could fully register for the service and click ‘done’ without ever clicking the link to the terms and conditions.” Id. at 576. Moreover, “‘DONE’ is also different from, and less clear than, other affirmative language such as ‘I agree.’” Id. at 580.

Similarly, Wollen v. Gulf Stream Restoration and Cleaning, LLC, 468 N.J. Super. 483, 259 A.3d 867 (2021), declined to enforce a contractor referral service’s arbitration provision in its terms and conditions reachable by a hyperlink from its search page. According to the Court, the positioning of the hyperlink on the webpage “did not provide reasonable notice of HomeAdvisor’s terms and conditions to the reasonably prudent internet user.” Id. at 878. As was true of Kauders, “HomeAdvisor did not require plaintiff to open, scroll through, or acknowledge the terms and conditions by ‘clicking to accept’ or checking a box that she viewed them before clicking the View Matching Pros submit button.” Id. at 879.

If you are “old school” and think that paperless contracting doesn’t happen in the construction industry, think again. In recent years I have noticed more and more general contractors and supply houses whose subcontracts and credit applications are not only electronically signed, but incorporate by reference terms and general conditions that are accessible only on their websites. Those websites should be designed so as to minimize claims of surprise and lack of assent. While courts may well be more solicitous of online consumers’ potential confusion as compared to commercial users, it is safe to say that any online user is more likely to be bound to terms and conditions found on a different webpage than the one he clicks if those terms are accessible by a hyperlink which is (a) conspicuous, and (b) positioned on the webpage where viewers are likely to see it before they click to signify assent.

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#102: The State of Residential Construction

6/30/2021

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Anyone buying or selling a home in New Hampshire recently can attest that the supply of available existing homes has never been tighter relative to demand, with the result that prices are at all-time highs. A report by the New Hampshire Housing Finance Authority indicates that MLS listings in May 2021 were down 23% from a year earlier, while the New Hampshire Association of Realtors reports that the median price of single family home in May 2021 hit a record high of $402,000 (25.7% higher than May 2020).

One would expect the shortage of inventory and high prices of existing homes to spark a boom in new residential construction. There has certainly been a decent amount of such activity; the U.S. Census Bureau reports that in the first five months of 2021 a total of 1,933 new building permits were issued in New Hampshire, 80% of them for single family homes. But skyrocketing lumber and material prices, coupled with a labor shortage in the construction field, have tempered the boom.

These drags won’t last, as market forces work out the blips. An easing of tariffs on Canadian lumber would certainly help (over 80% of U.S. lumber imports come from Canada), but lumber prices are already on the way down. The labor shortage created by COVID-19 should ease with the decline of the pandemic, nudged a bit by New Hampshire’s recent opt out of federal unemployment benefits, and by the use of Paycheck Protection Program (PPP) loan money, which is forgivable tax free to recipients who use at least 60% of it on payroll. Wages may go up, but so will employment.

In the long term, I also see some positive incentives to residential construction as a result of tax and monetary policies:

On June 21 Governor Sununu signed into law HB-154, which enables municipalities to offer community revitalization tax incentives for the construction of low-income housing. Until now the tax incentives were limited to construction/rehabilitation projects in downtown or town center areas. Effective in 2022, the new law allows the tax break for developers of affordable housing in designated “housing opportunity zones” anywhere in the municipality’s borders. Tax assessment relief is now available to developers for ten years rather than the present five.

HB-2, the new biennial budget signed into law by Governor Sununu on June 25, gradually reduces the interest and dividends tax rate and eliminates the tax entirely by 2027. The current rate under RSA 77:1 is 5%, levied on all interest and dividend income above $2,400 in any year. For 2023 that rate will be 4%, declining to 3%, 2% and 1% in each of the next three years, and eliminated entirely for 2027 and beyond. This will make New Hampshire a truly “no income tax” state (did you think it already was?), and a more attractive place for the wealthy to live and retire – a shot in the arm for high end residential construction.

On the federal level, the $10,000 cap on deductions for state and local taxes (SALT) – which in New Hampshire is virtually entirely property taxes – is set to expire in 2025. But it could happen sooner, as bipartisan support for repealing or at least increasing the cap is waxing. That would inject a shot in the other arm for high end residential construction.

Perhaps the most important spur to residential construction is interest rates. Inflation fears in recent months have led to predictions that the Fed would begin to raise interest rates this year. The Fed Chairman’s testimony before Congress last week has now eased concerns that inflation alone might motivate a rate hike. None of the prognosticators as of this writing are predicting much of a spike in rates. As long as those rates stay low, housing affordability stays in the positive zone.

These are promising times for New Hampshire home builders. But let the buyer beware. Unscrupulous contractors who abscond with deposits are out there. The Consumer Protection Bureau of the Attorney General’s Office reports on several who have been indicted on Class A felonies in recent months for doing exactly that.

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#101: Analyzing "Pay-when-Paid" and "Pay-if-Paid" Clauses

5/31/2021

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When a contractor and subcontractor agree that payments to the subcontractor will be conditioned on the contractor’s receipt of payment from the owner, enforcement of that condition requires unmistakable clarity of purpose to shift the risk of the owner’s nonpayment to the subcontractor. Any ambiguity on the point will be resolved against the contractor. Such was the ruling of the Cheshire County Superior Court in Denron Plumbing & HVAC, LLC v. MacMillin Company, LLC, No. 213-2019-CV-00221 (April 26, 2021), a case of first impression in New Hampshire.

MacMillin was the general contractor on an assisted living facility project in Keene for Prospect Woodward Home, and subcontracted the plumbing and mechanical portion of the project to Denron. When the owner failed to pay MacMillin for reasons unrelated to Denron’s work, Denron sued MacMillin for its money after completing its subcontract work. The parties’ subcontract contained this provision on progress payments: “Contractor shall pay Subcontractor 7 days after it receives from Owner a corresponding payment for Subcontractor’s Work . . . A condition precedent to its payment obligations is Contractor’s actual receipt of the corresponding payment from Owner.” As to final payment, the subcontract stated: “Contractor shall make final payment to Subcontractor within 7 days, or as otherwise required by the applicable law in the State of work after it receives final payment from Owner.”

The Court first distinguished two types of such provisions, labeled “pay-when-paid” and “pay-if-paid.” A “pay-when-paid” clause is a timing mechanism, providing a set number of days after receipt of payment from the owner after which payment to the subcontractor falls due – but if the owner’s payment is delayed or never arrives, the obligation to pay the subcontractor is not extinguished; it is merely suspended for a reasonable length of time. A “pay-if-paid” clause makes receipt of the owner payment a strict “condition precedent” to the subcontractor’s right to get paid – and if the owner never pays the contractor, the contractor has no obligation to pay the subcontractor.

The Denron court noted that other states deal with pay-if-paid clauses “in a variety of ways. Some void them; others require explicit language for their use; and still others enforce them strictly like any other contract provision.” In deciding to adopt the middle approach, the Denron court relied heavily on New Hampshire precedent holding that “Conditions precedent are not favored in the law, and we will not construe contracts to include them unless required by the plain language of the agreement in question.” It also noted that “subcontractors are often at the mercy of the general contractor during negotiations. With that in mind, the burden should be on the general contractor to display a clear intent.”

The court then examined the two subcontract clauses referenced above to determine whether they “clearly and unambiguously expressed an intent for Prospect-Woodward’s payment to MacMillin to serve as a condition precedent to Denron’s pay from MacMillin.” It held that the first, governing progress payments, was a pay-if-paid provision while the second, governing final payment, was a pay-when-paid provision – thereby creating an ambiguity as to which one should trump the other. It also noted that the prime contract, which conditioned the owner’s payment to MacMillin on submission of “an affidavit that payrolls, bills for materials and equipment, and other indebtedness connected with the Work for which the Owner or the Owner's property might be responsible or encumbered (less amounts withheld by Owner) have been paid or otherwise satisfied,” created a further ambiguity. Juxtaposed with the subcontract’s pay-if-paid clause, a circularity issue arises: no payment is due from the owner to MacMillin until subcontractors are paid, and no payment is due from MacMillin to its subcontractors until the owner pays.

Based on these ambiguities, the Denron court deemed the parties' subcontract to be a pay-when-paid subcontract, and struck MacMillin’s pay-if-paid defense – leaving to another day whether a reasonable time had elapsed so as to make MacMillin’s payment to Denron presently due. But the message is clear. The risk of owner nonpayment falls on the general contractor unless the subcontract clearly and unambiguously requires the subcontractor to share it.

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#100: Dealing With Rising Costs

4/29/2021

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It’s no secret to anyone involved in the construction industry that materials prices have been increasing by leaps and bounds recently. Steel, copper, PVC, drywall, and particularly lumber prices are dramatically higher compared to a year ago. And the trend continues to be up.

In the traditional “fixed price” or “lump sum” mode of contracting, a construction project must be delivered by the contractor for the agreed price, subject to whatever contract provisions may justify a price increase – and if increased materials costs are not one of them, the contractor bears all of the risk of those increases. In the “cost-plus-a-fee” or “time and materials” mode of contracting, materials price increases are generally passed on to the owner – but even here, guaranteed maximum price (GMP) provisions often cap the contractor’s ability to pass on price increases to the owner.

As a hedge against price increases on projects expected to last many months, some contractors buy the bulk of their materials as early in the project as possible, a strategy that works if storage is available at relatively low cost, and the purchases are immediately reimbursable (the AIA’s popular A201-2017 General Conditions, for example, allow for payment for materials store off-site “[i]f approved in advance by the Owner”). Another approach is to negotiate with subcontractors or suppliers to lock in prices for an extended period of time, thereby kicking the price increase risk downstream – but in the present volatile market, subs and suppliers are increasingly reluctant to hold their prices for long, typically not more than 60 or 90 days. Any delay in the start of construction puts the contractor in a tough position here.

One way to share the risk is through a price escalation clause in the parties’ contract, allowing some or all of a cost increase to be shifted from contractor to owner (or from subcontractor to contractor). Generally these clauses will have one of two triggers, either a delay or other event beyond the contractor’s control occurring during the project that pushes off the anticipated date of materials purchases, or a stated percentage increase in actual costs compared to some agreed benchmark. Often the benchmark is indexed costs, for example the producer price index or “PPI” published by the Bureau of Labor Statistics. Sometimes the benchmark is budgeted costs, i.e., the contractor’s actual buyout costs at bid time (or those of their subs if the subcontract prices are similarly allowed to fluctuate). That choice is more common in cost-plus contracts as a mechanism to increase the GMP than it is in fixed-price contracts, where the contractor is often reluctant to share its budgeted costs with the owner, thereby revealing its margins.

Owners go along with price escalation clauses for the same reason they go along with differing site conditions clauses; they want to disincentivize contractors from padding their bids to cover themselves for unknown contingencies. Uncle Sam was among the first to catch on, and for decades has authorized price adjustment clauses for fixed price contracts in the Federal Acquisition Regulations, 48 CFR § 16.203-1, as long as they are “based on increases or decreases in labor or material cost standards or indexes that are specifically identified in the contract.”

Whatever the chosen trigger, price escalation clauses are products of negotiation that can cabin the contractor’s ability to pass on price increases in various ways. I have seen clauses with floors (e.g., price increases below 5% will be absorbed by the contractor) and/or ceilings (e.g., price increases up to a limit of 15% can be passed on to the owner). I have seen clauses that adjust the contract price in both directions, affording the owner a price reduction if input costs decrease (probably a waste of ink in the present economic climate). And almost always the change order process must be invoked, with its timing limitations and waiver possibilities.

While price escalation causes are more common in commercial than in residential construction contracts, the National Association of Home Builders has put out a sample addendum for residential contracts. Worth a look.

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#99: General Contractors' OSHA Liability for Subcontractors' Violations

3/28/2021

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For many years the Occupational Safety and Health Administration (OSHA) has implemented a Multi-Employer Citation Policy, under which more than one employer at a worksite – for example, a general contractor and a subcontractor – can be cited by OSHA for the same hazardous condition. If an employer “has general supervisory authority over the worksite, including the power to correct safety and health violations,” it will be deemed a “controlling employer” who, depending on the circumstances, can be cited along with the employer that actually created the hazardous condition. The requisite “[c]ontrol can be established by contract or, in the absence of explicit contractual provisions, by the exercise of control in practice.”

Almost every general contractor will meet this test. In StormForce of Jacksonville, LLC, No. 19-0593, 2021 WL 2582530 (OSHRC March 8, 2021), a general contractor on a residential roofing contract entered into a subcontract that allocated safety responsibility to the installing sub and specified that the GC “cannot reasonably be expected to prevent, detect or abate violative conditions by reason of its limited role on the project.” But in light of the GC’s dictation of the sub’s work hours, signage, communications with the owner and the like, and particularly because its site foreman’s duties included monitoring safety issues and contacting the sub’s management if any safety concerns are observed, the Occupational Safety and Health Review Commission – the administrative arm of the Department of Labor charged with hearing appeals of OSHA citations – concluded that “controlling employer” status was present.

The low bar for finding “controlling employer” status presents something of a dilemma for general contractors. While “a controlling employer’s duty to exercise reasonable care ‘is less than what is required of an employer with respect to protecting its own employees,’” Suncor Energy (U.S.A.) Inc., No. 13-0900, 2019 WL 654129, at *4 (OSHRC Feb. 1, 2019), it must at least take “reasonable measures to ‘prevent or detect and abate the violations due to its supervisory authority and control over the worksite.’” Id. The very act of implementing such measures makes its “controlling employer” status virtually assured. And if a GC eschews them completely in an ostrich-like effort to avoid becoming a “controlling employer,” but is nevertheless found to be one, its do-nothing approach will virtually guarantee its liability for subcontractor safety violations.

If a “controlling employer” knows of a safety violation and does nothing about it, liability will follow. In StormForce, the OSHRC absolved the general contractor in part because there was no evidence that its foreman had witnessed the same lack of fall protection measures that led the OSHA inspector to cite the sub. The more interesting aspect of the decision, however, concerned whether the GC should have known, i.e., the reasonableness of its measures to detect safety issues. The OSHRC concluded that constant observation by the GC was not required, and that the occasional review of its sub’s performance would not necessarily have revealed the sub’s violations.

StormForce reinforces that it is the Secretary of Labor’s burden to prove controlling employers’ knowledge of violations and/or lack or reasonable safety review measures to catch them. And the same is true of the “controlling employer” inquiry itself. Earlier OSHRC precedent adopting a rebuttable presumption that a general contractor on a construction project is a “controlling employer” had passed muster in the courts, see R.P. Carbone Constr. Co. v. OSHRC, 166 F.3d 815, 818 (6th Cir.1998) (citing the OSHRC’s 1979 Haugan case for proposition that “[t]here is a presumption that a general contractor has sufficient control over its subcontractors to require them to comply with safety standards”) – but StormForce announced that this presumption would no longer be used: “We thus overrule Haugan to the extent that its formulation of a ‘rebuttable presumption’ is inconsistent with established precedent.”

Whether StormForce signals a pro-contractor shift at the OSHRC is debatable. For now, general contractors and construction managers would be well served not to hand off all safety-related duties to subcontractors in the hope of avoiding “controlling employer” status. The safer course from a liability perspective is also the safer course from an accident perspective: no matter what your subcontracts say, make some effort to monitor hazardous job conditions created by others.

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