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#145:  Using AI in Construction: Considerations and Pitfalls

4/30/2025

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



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

3/22/2025

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

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

1/31/2025

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

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

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

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

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

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

[Update: The tariffs have now been delayed by 30 days.]
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#142:  Are Lessees "Owners" Under the Mechanic's Lien Statute?

12/27/2024

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New Hampshire’s mechanic’s lien statute, RSA 447:2, gives a lien to those “erecting or repairing a house or other building or appurtenances . . . by virtue of a contract with the owner thereof.”  The lien is on “any material so furnished and on said structure, and on any right of the owner to the lot of land on which it stands.”  Nothing in the statute mentions lessees/tenants, even though they often contract for improvements to their leased premises.
 
While our Supreme Court has never ruled on whether a lessee hiring a contractor to improve the leased premises is an “owner” under this statute, our trial courts have assumed that a leasehold interest qualifies as “any” right to the land, and therefore can be liened.  An example is Dandreo Brothers General Contractors & Masonry, LLC v. CMAB Associates II, LLC, No. 218-2018-CV-00653 (January 10, 2019) (“In this case, the Tenant is the contracting ‘owner’ within the meaning of RSA 447:2 because (a) it contracted with the Contractor for improvements to the real estate and (b) it held a long-term lease.”).   But a recent case may call this into question.
 
In Appeal of Port City Air Leasing, Inc., 177 N.H. ___, 327 A.3d 598 (2024), the New Hampshire Supreme Court held that a lessee did not qualify as a “landowner” under RSA 482-A:9, a statute which specifies that an “abutting landowner” is entitled to notice of wetlands permit applications.  While noting that “‘landowner’ means one that has the legal or rightful title to land whether the possessor of that land or not,” the Court reasoned that because “Port City may use the leased premises only for the limited purposes enumerated in the lease” and was required “to obtain lessor approval before making any improvements or alterations to the leased premises,” its interests in the leased land were not tantamount to ownership.  The same thing can be said of most commercial tenants.
 
The Court further found that “Port City holds title to only the buildings and improvements on the leased premises. And it holds that title only for the duration of the lease, which has a five-year term with options to extend for additional five-year terms up to a maximum of thirty years. Nor are Port City’s interests in the property freely transferable: its ability to assign or sublease any part of the premises is, with limited exception, subject to the lessor’s approval.”  These features are likewise true of many commercial leases.  Indeed, unlike Port City, many commercial tenants don’t hold title to the occupied buildings or improvements even during the leasehold term.
 
Port City’s focus on “landowner” rather than “owner” could make a difference in interpretation of the two statutes.  The lien statute’s phrase “and on any right of the owner to the lot of land on which [a building] stands,” rather than on the right of the owner, indicates legislative recognition that the building owner need not be the landowner – a scenario commonly referred to as a ground lease.  But as noted above, few commercial lessees own the buildings they occupy.  Given the applicability of Port City’s rationale to lessees in general, the “landowner” distinction seems inconsequential.
 
If having a leasehold interest does not qualify the lessee as an “owner” under the mechanic’s lien statute, the only way to bring the lessee’s contracted improvements within the reach of the statute will be as an agent of the owner under RSA 447:5 – which, as the Dandreo case points out, can be an uphill battle.  Unless that agency is established, the contractor will have a lien against neither landlord nor tenant.
 
Pragmatically speaking, not much contractor protection is lost if leasehold interests aren’t lienable.  While attached interests can theoretically be auctioned off at a sheriff’s sale to satisfy contractors’ unpaid judgments, nobody is likely to bid at a sheriff’s sale for a leasehold interest.  As I have said elsewhere (Blog #18), transfer of a tenancy, whether voluntary or involuntary, without the landlord’s consent is virtually certain to be a breach of the lease, giving the landlord the right to kick the new tenant out!
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#141:  Insurance Coverage for Defective Work:  The Products-Completed Operations Hazard

11/30/2024

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Once again I am moved to blog (see #31, #37, #91) on Commercial General Liability (“CGL”) insurance coverage for defective workmanship.  I’ve previously said that at best, only consequential damage to other property, not for repairing or replacing the defective work itself, would be covered.  A recent case counsels an update.
 
In general, CGL insurance coverage calls for a three-step inquiry.  First, do the damages qualify as “property damage” caused by an “occurrence”?   Second, if so, do any exclusions apply?  Third, are there any exceptions to those exclusions?
 
One of the exclusions from coverage found in the standard ISO form CGL policy, the so-called (j)(6) exclusion, eliminates coverage for “That particular part of any property that must be restored, repaired or replaced because ‘Your work’ was incorrectly performed on it.”  (“Your work” is defined as “Work or operations performed by you or on your behalf” – so it includes work done by your subcontractors.)  Does such a “particular part” include non-defective work damaged by the consequences of defective work – such as perfectly good drywall ruined by a leaky roof? New Hampshire’s Supreme Court has said that it does not, Cogswell Farm Condo. Ass’n v. Tower Group, Inc., 167 N.H. 245, 252 (2015).  Hence, in New Hampshire at least, non- defective work damaged by defective work may be covered.
 
But even if non-defective work damaged by defective work were not otherwise covered, (j)(6) is subject to an exception which restores coverage for “property damage included in the ‘products-completed operations hazard’” – a phrase that embraces property damage “arising out of ‘your product’ or ‘your work’ except . . . Work that has not yet been completed or abandoned.”  In other words, the (j)(6) coverage exclusion only applies to work in progress, not to work that has been completed or abandoned.  How does this figure into the mix?
 
Earlier this month a First Circuit case decided under Massachusetts law weighed in.  Admiral Insurance Company v. Tocci Building Corporation , 120 F.4th 933 (1st Cir. 2014), was a suit over “defective work by Tocci’s subcontractors resulting in various instances of property damage to non-defective work.”  The parties arm-wrestled over whether these damages were covered, with Tocci trumpeting the New Hampshire approach and Admiral arguing against it.  The court sidestepped the issue, concluding that even if non-defective work damaged by defective work were covered as Tocci claimed, the (j)(6) exclusion still won the day for Admiral because the products-completed operations hazard exception didn’t apply.  The court framed the question as “whether the project was ‘completed or abandoned’ prior to the damage, such that it would fall under the ‘products-completed operations hazard’ and thus be covered.”  Because Tocci’s contract was terminated before it finished its work, the court answered in the negative.

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

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

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

10/28/2024

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

9/26/2024

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

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

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

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

8/30/2024

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

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

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

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

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

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


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#137:  Liability for Negligent Selection of Subcontractors

7/21/2024

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

6/23/2024

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

4/26/2024

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“An agreement to arbitrate may be unenforceable if pursuing a claim in arbitration is so cost prohibitive that it prevents a party from vindicating its rights.”  With that opening sentence, the Texas Supreme Court in Lennar Homes of Texas, Inc. v. Rafiei, 687 S.W.3d 726 (Tex. 2024), recently rendered an opinion worth noting by all residential contractors, including in New Hampshire, who insert arbitration clauses with fee-splitting provisions in their contracts as a strategy for discouraging claims.
 
In Lennar a homeowner sued his builder for personal injuries that he blamed on a construction defect, seeking in excess of $1,000,000 in damages.  The parties’ contract had an arbitration clause, one which expressly delegated “issues of formation, validity or enforceability” of the contract to the arbitrator rather than the courts to decide.  The builder asked the court to compel arbitration, and the homeowner responded that the twin provisions for arbitration and for delegation of enforceability issues to the arbitrator “are unconscionable because arbitration was prohibitively costly and would prevent him from pursuing his claims.”  He pointed to the AAA’s Administrative Fee Schedules, under which it would cost him over $8,000 to present his case to the arbitrator.
 
The lower court agreed with him, as did a divided panel of the Texas Court of Appeals – even though he hadn’t presented evidence that he couldn’t afford the cost.  That missing element persuaded the Texas Supreme Court to send the matter back to the lower court for a ruling on ability to pay – but it also announced the test for a finding of unconscionability:
 
“To determine unconscionability, a court must first consider ‘a comparison of the total costs of the two forums’ and decide ‘whether that cost differential is so substantial as to deter the bringing of claims.’ . . . A proper unconscionability analysis further requires a comparison of the relevant costs between litigating in court and in arbitration and of the claimant’s ability to pay an arbitration provision as unconscionable due to the difference in such costs.” 
 
Because arbitrators charge for their time and administering bodies like the AAA charge for their services, arbitration can be expensive, and often much of the expense must be paid up front.  The dilemma faced by an indigent party trying to avoid arbitration arises when the unconscionability issue is delegated to the arbitrator to decide; a filing fee (typically amounting to several thousand dollars) and perhaps a deposit to cover the arbitrator’s anticipated time must be paid just to have the arbitrator resolve this threshold issue!  Recognizing this Catch-22, most courts, like our own federal court, hold that when a plaintiff “argues that the delegation clause is unconscionable . . . it is for the court, not the arbitrator, to resolve her challenges to the delegation clause.”  Rosen v. Genesis Healthcare, LLC, 2021 WL 411540 (D.N.H. Feb. 5, 2021).
 
No New Hampshire case has yet found such a delegation provision unconscionable due to financial hardship.  But the unconscionability tests applied by our courts generally align with those in Texas and elsewhere.  The First Circuit Court of Appeals has noted that “if the terms for getting an arbitrator to decide the issue are impossibly burdensome, that outcome would indeed raise public policy concerns.  If arbitration prevents plaintiffs from vindicating their rights, it is no longer a ‘valid alternative to traditional litigation.’”  Awuah v. Coverall North America, Inc., 554 F.3d 7, 12 (1st Cir. 2009).  It’s fair to predict that our courts will be of the same view.
 
A final word of caution: Contractors should not assume that if a homeowner ever seeks to avoid arbitration by pleading poverty, they can just offer to pay all of the arbitration expenses and keep the claim out of court.  That didn’t work in Lim v. TForce Logistics LLC, 8 F.4th 992, 1004 (9th Cir. 2021) (“TForce states that it has already filed the arbitration demand in Los Angeles and agreed to pay all arbitration fees.  But, as the district court correctly recognized, waiving unconscionable elements of the delegation clause does not change the analysis of whether the delegation clause, as drafted, is unconscionable.”).
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#134:  30-Day Accountings for Subcontractor/Supplier Mechanic’s Liens

3/28/2024

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

2/29/2024

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

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

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

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

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

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

12/30/2023

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

11/24/2023

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New Hampshire’s three-year statute of limitations for filing lawsuits, RSA 508:4, states “Except as otherwise provided by law, all personal actions, except actions for slander or libel, may be brought only within 3 years of the act or omission complained of . . .”  The phrase “personal actions” is not defined in the statute.  Does it encompass arbitration proceedings?
 
Neither the Federal Arbitration Act, 9 U.S.C. § 1 et seq., nor New Hampshire’s state arbitration act, RSA 542, mentions the statute of limitations.  The New Hampshire Supreme Court implicitly assumed applicability of the statute of limitations to arbitration proceedings in Metropolitan Property and Liability Insurance Co. v. Walker, 136 N.H. 594 (1993), but in that case “the defendant’s August 2, 1989 request for arbitration was commenced well within the three-year statute of limitations,” id. at 598, so there was no occasion for the Court to decide whether an arbitration not commenced within three years would be barred by RSA 508:4.
 
Because arbitrations are not court proceedings, statutes of limitations that apply to an “action,” “civil action,” “suit” or “action at law” have been held by a number of courts not to apply to arbitration proceedings.  Typical is Gannett Fleming, Inc. v. Corman Construction, Inc., 243 Md. App. 376, 397, 220 A.3d 411, 424 (2019) (holding that the term “action” means “the steps by which a party seeks to enforce any right in a court”).  Similar conclusions have been reached by courts in Connecticut, R.A. Civitello Co., v. New Haven, 6 Conn.App. 212, 226, 504 A.2d 542 (1986); Maine, Lewiston Firefighters Ass’n v. City of Lewiston, 354 A.2d 154, 167 (Me. 1976); Massachusetts, Carpenter v. Pomerantz, 36 Mass. App. Ct. 627, 631, 634 N.E.2d 587, 590 (1994); Minnesota, Vaubel Farms, Inc. v. Shelby Farmers Mutual, 679 N.W.2d 407, 412 (Minn. App. 2004); North Carolina, Cameron v. Griffith, 91 N.C. App. 164, 165, 370 S.E.2d 704 (1988); Ohio, NCR Corp. v. CBS Liquor Control, Inc., 874 F. Supp. 168, 172 (S.D. Ohio 1993), aff’d 43 F.3d 1076 (6th Cir. 1995); and Vermont, Clayton v. Unsworth, 188 Vt. 432, 8 A.3d 1066, 1073 (2010).  It is easy to see how the same reasoning might govern interpretation of the phrase “personal action” in our own statute of limitations.
 
Some courts leave it to the arbitrator to decide the applicability of the statute.  See Merchants Mutual Ins. Co. v. American Arbitration Ass’n, 433 Pa. 250, 252, 248 A.2d 842 (1969) (“the issue of the applicability of the statute of limitations comes within the arbitrator’s purview”).  New Hampshire courts may well take this approach.  Given the deferential standard of review for arbitral awards under New Hampshire’s arbitration act (see Blog #20), and without a definitive case on point from our Supreme Court, whatever the arbitrator decides here will likely be rubber-stamped by any New Hampshire court asked to confirm or vacate the decision.  Deference to an arbitrator’s decision is even greater under the Federal Arbitration Act, with some federal courts requiring the challenger to demonstrate “manifest disregard” of the law by the arbitrator – an insurmountable hurdle if the law is unsettled.  See Trustees of Lawrence Academy v. Merrill Lynch Pierce Fenner & Smith, Inc., 821 F.Supp. 59, 63 (D.N.H. 1993) (holding that arbitrators’ refusal to apply the statute of limitations was not “manifest disregard” of the law).

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

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

10/22/2023

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

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

9/28/2023

1 Comment

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

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

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

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

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

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

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

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

8/31/2023

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

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

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

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

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

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

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

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

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

7/22/2023

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

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

6/26/2023

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

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

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

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

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

A defendant violates the FCA if he “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.”  A statement is made “knowingly” if it is made with actual knowledge of its falsity, deliberate ignorance of its truth or falsity, or reckless disregard of its truth or falsity.  Earlier this month the U.S. Supreme Court in United States ex rel. Schutte v. Supervalu Inc., 598 U.S. 739 (2023), clarified that this is purely a subjective test: as long as the representer believed his representation was false, liability follows regardless of whether truth or falsity was objectively ambiguous.

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

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

5/20/2023

7 Comments

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

#124:  The Clarity of Pre-Bid Clarifications

4/3/2023

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

3/26/2023

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

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

2/25/2023

4 Comments

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

#121:  Owners' Duties to Withhold Money for Subcontractors

1/18/2023

2 Comments

 
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). 
 
[Update:  Affirming in all other respects, the District Court remanded for consideration of whether subcontractors giving notice under RSA 447:6 should likewise be within the trust provisions of 447:8 -- a matter not expressly mentioned by the Bankruptcy Court.  See 654 B.R. 824 (D.N.H. 2023).  The case subsequently was settled.]
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