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#72:  Determining the Amount of a Mechanic's Lien

10/7/2018

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A contractor is thrown off a job midstream for alleged shoddy work and/or slow performance.  He sues the owner for his unpaid contract balance.  His contract provides for interest and attorneys’ fees if payment is not timely made, so he adds both to his complaint.  The owner then counterclaims for the cost of correcting items of poor workmanship and for the cost of completing the unfinished work (which the owner claims will exceed the unpaid contract balance), and perhaps for delay damages as well.

Suppose the contractor applied for and got a mechanic’s lien attachment on an ex parte basis in the full amount of his claims (unpaid balance, interest and anticipated attorneys’ fees).  If the owner then files an objection to the lien and asks for a hearing, what will be grounds for the judge to reduce or eliminate the lien?

The starting point is the basic mechanic’s lien rule in RSA 447:2 that anyone who furnishes labor or materials to improve another’s property “shall have a lien 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.”  The word “shall” here means what it says.  The lien is a matter of right so long as it is timely and properly perfected.  Timeliness is governed by RSA 447:9, providing that the lien “shall continue for 120 days after the services are performed, or the materials, supplies or other things are furnished.” Perfection is governed by RSA 447:10, providing that a mechanic’s lien is secured “by attachment of the property upon which it exists at any time while the lien continues.”  

Because an attachment is a court order, it is tempting to assume that all of the provisions of New Hampshire’s pre-judgment attachment statute, RSA 511-A, will apply to that effort -- including RSA 511-A:3, which requires “the plaintiff to show that there is a reasonable likelihood that the plaintiff will recover judgment including interest and costs on any amount equal to or greater than the amount of the attachment.”  This statute focuses on the ultimate judgment, where counterclaims will matter; any judgment will necessarily be reduced by a successful counterclaim.  But a number of Superior Court decisions, including Consolidated Elec. Distrib., Inc. v. SES Concord Co., No. 89-C-571/579 (Merrimack County Superior Ct., Nov. 21, 1989), and West Side Dev. Group, LLC v. D’Amour, No. 04-C-018, (Carroll County Superior Ct., March 24, 2004), have held that the provisions of RSA 511-A:3 do not apply to mechanic’s lien attachments, thus relieving the contractor of the burden of proving a reasonable likelihood of getting a judgment at least equal to the lien amount.  Our federal court has followed suit.  H.E. Contracting v. Franklin Pierce College, 360 F.Supp.2d 289 (D.N.H. 2005).

Freed of the burden of showing a likelihood that he will recover a judgment “equal to or greater than than the amount of the attachment,” the contractor will be allowed to lien for the amount of his claim regardless of whether the owner may have a setoff against that amount at trial.  The amount of the lien will be the unpaid contract sum, i.e., the contractually agreed value of the labor and materials furnished.  The owner may be able to argue that defective goods and deficient work must be taken into account in valuing the contractor’s performance, but not all courts will lend an ear to that argument at the attachment hearing, preferring to leave that claim for trial and not gut the lien at the pretrial stage.

Note that the inapplicability of RSA 511-A:3 cuts both ways; a mechanic’s lien attachment will not include “interest and costs” (which for this purpose will include attorneys’ fees).  If those amounts were included in the lien amount ex parte, subtracting them may be the owner’s lone victory at the attachment hearing.

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#71:  Product Warranties of Future Performance

9/30/2018

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Consider this scenario:  Owner needs a new roof, and sees Manufacturer’s advertisement for “30-year shingles.”  He picks up a catalog, which trumpets “30 year protection.”  The limited warranty at the end states that if the shingles fail in the first 30 years due to manufacturing defects, Manufacturer will pay to replace them according to a prorated formula (the longer into the 30 years, the lesser the Manufacturer’s liability) but excluding the costs of tear down, disposal and new installation.  Owner buys them, believing that they will last for 30 years.  
 
In 15 years, the shingles fail and Owner sues Manufacturer for the cost of a new roof -- including the tear down, disposal and new installation costs.  Owner says that he has no recollection of reading the limited warranty, but relied on Manufacturer’s marketing catalog, which gave the impression of an express warranty that the shingles would last 30 years.  He points to Kelleher v. Marvin Lumber & Cedar Co., 152 N.H. 813 (2005), which held that a statement in window marketing materials asserting that the window would be “permanently” protected against rot was an affirmation or promise creating a warranty of future performance.
 
Under the Uniform Commercial Code governing the sale of goods, an express warranty is created by “[a]ny affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain,” or “[a]ny description of the goods which is made part of the basis of the bargain.”  RSA 382-A:2-313(1).  The seller can fashion the terms of its warranty and limit it in various ways -- for example, by excluding liability for costs beyond repair and replacement.  Unless a shorter duration is agreed to, a four year statute of limitations governs lawsuits for breach of warranty commencing on date of delivery, RSA 382-A:2-725(1) -- but if the warranty “explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance,” then the clock starts ticking “when the breach is or should have been discovered.”  RSA 382-A:2-725(2).
 
The alleged catalog promise in our hypothetical expressly extends to future performance, so Owner’s lawsuit is timely.  Assuming that the limited warranty did not exclude all other warranties -- a common provision in limited warranties -- the remaining question is, how do we reconcile the two warranties?  The New Hampshire Supreme Court’s decision in Faro v. IKO Industries, Inc., No. 2017-0325 (Jan. 26, 2018), sheds some light on this.
 
In Faro a homeowner relied on a shingle manufacturer’s marketing materials which “contained language, such as ‘30-year’ shingles, that would lead a consumer to believe that the shingles would last for the duration of the warranty.”  The trial judge held that “the only representations in these marketing materials pertaining to duration are that the . . . shingle is backed by a ‘limited’ 30 or 35 year warranty” and therefore were not “guarantees that the . . . shingles will last for a particular number of years, but rather an affirmation that the shingles come with a 30 or 35 year limited warranty.”  The Supreme Court agreed, finding no “representation of the defendant that the shingles, without limitation, would last for thirty or thirty-five years.”
 
The Faro case should be considered in connection with RSA 382-A:2-317’s admonition that “Warranties whether express or implied shall be construed as consistent with each other and as cumulative, but if such construction is unreasonable the intention of the parties shall determine which warranty is dominant.”  The reasonableness of construing a catalog warranty as independent of a limited warranty contained in the same document has gotten a little dicier after Faro.  If there is no reasonable way to divorce them, the buyer will be stuck with his remedies under the limited warranty, terms which are typically more favorable to the seller.

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#70:  Owner and GC Tort Duties to Subcontractor Employees

8/11/2018

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It is commonplace for subcontractors to promise to provide for the safety of their employees, and for general contractors to promise the owner that they will maintain site safety as well.  Who is liable for injuries to the sub’s employees in such cases?  The recent case of Grady v. Jones Lang Lasalle Construction Co., 171 N.H. 203 (2018), provides some guidance.
 
Steven Grady was an employee of A&M, a roofing subcontractor to Jones Lang on a project in Dover owned by Liberty Mutual.  A&M’s subcontract required it to assume full responsibility for implementing safety programs on the project, to maintain all work areas in a safe manner, and to furnish all safety equipment.  But on one cold and windy February day, A&M did not furnish rubber gloves and fire-proof leather gloves to Grady when he was using a cleaning solvent and a torch to melt ice on the roof -- and Grady ended up burning his hand.  He couldn’t sue A&M due to the Workers’ Compensation Law’s exclusivity provision, but he could and did sue the GC and the owner, claiming that they owed him a duty to maintain a safe working environment.
 
The New Hampshire Supreme Court disagreed.  Noting that “A&M, not Jones Lang, supervised him and provided him with the equipment that he used,” the Court decided that Jones Lang’s general duty to monitor the site for dangerous conditions was not implicated.  Nor could Grady rely on Jones Lang’s promise in its general contract with the owner to “be responsible for initiating, maintaining and supervising all safety precautions and programs,” and to be “fully responsible” for “the acts, errors, omissions, defaults and conduct of all Subcontractors.”  The Court found this promise to be solely for the owner’s benefit.
 
The Court also mentioned that the general contract “required Jones Lang to require any subcontractor to assume the same responsibilities for the subcontracted work, and A&M in fact assumed those responsibilities in the subcontract,” and that A&M was “the party in the best position to know about the particular dangers involved in its specialty work and to provide appropriate equipment and supervision to safely perform that work.”  Had Jones Lang itself undertaken to provide any services necessary for the protection of Grady, or had Jones Lang altered the conditions of the roofing work or the equipment needed to perform it, the Court indicated that the outcome might have been different.  The lesson for general contractors is clear: make sure your subcontract shifts safety responsibility downstream, and then let your sub handle its own safety program; don’t mess with its implementation.
 
Grady also sued Liberty Mutual on the theory that owners are liable for injuries resulting from “inherently dangerous activity” on their premises.  The Court ruled that winter roofing work itself is not inherently dangerous; rather, the employee created a new and unanticipated danger when he used a torch and solvent without proper gloves.  It also rejected Grady’s claim that a business owner is vicariously liability to invitees at its premises for the negligence of independent contractors.  The Court noted that A&M had agreed to indemnify the owner from any claims arising out of A&M’s negligence -- which meant that A&M would ultimately have to foot the bill, a result contrary to the exclusivity provisions of the Workers’ Compensation Law.
 
Because the Grady case held that neither the GC nor the owner owed any duty to the subcontractor’s employees to keep them safe from the type of risk involved there, the question of their negligence -- i.e., whether a duty was breached -- never got addressed.  We’ll never know whether their failing to prevent Grady’s use of a torch and cleaning solvent on a windy day without proper gloves was negligent.  Frankly, I can’t imagine any jury finding that it would have been; Grady’s accident was not reasonably foreseeable to the owner or the GC.

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#69:  Measures of Adequacy in Contract Performance

7/4/2018

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In their first year of law school, budding lawyers learn in Contracts class about the “perfect tender” rule and the “substantial performance” rule.  These alternative measures of adequate performance raise precisely the issue that their words suggest: must a contracting “promisor” give the “promisee” (please forgive the legalese) exactly what was promised, or is a “close enough” standard applicable?
 
In construction cases, “close enough” is not enough to prevent a breach of contract from occurring, but when a failure to deliver a perfect tender of the design and construction elements of the contract causes the other party no damages, “close enough” will yield the same financial result as no breach at all.
 
The leading case is Justice Cardozo’s opinion in Jacob & Youngs, Inc. v. Kent, 230 N.Y. 239 (1921).  The contract in that case specified Reading pipe, but different pipe identical to Reading pipe in every material way was inadvertently installed, a mistake first discovered after construction was complete.  The court refused to allow the owner to withhold from final payment the cost of tearing out and replacing the off-spec pipe, ruling that while “[t]here is no general license to install whatever, in the builder’s judgment, may be regarded as ‘just as good,’” nevertheless the court “must weigh the purpose to be served, the desire to be gratified, the excuse for deviation from the letter, the cruelty of enforced adherence.  Then only can we tell whether literal fulfilment is to be implied by law as a condition . . . In the circumstances of this case, we think the measure of the allowance is not the cost of replacement, which would be great, but the difference in value, which would be either nominal or nothing.”

Whether “substantial performance” has been met in a given case goes far beyond the functional equivalency of brand name components.  Quality is in the eye of the beholder, and contractors’ views of what is “good enough” may not match owners’ views.  Building codes address only a fraction of the myriad ways that quality of construction can come into play, and even those codes are subject to interpretation.  See Streit v. Callahan, 122 N.H. 244 (1982) (affirming a verdict that stairs constructed with a nine-inch tread but at an angle of less than ninety degrees between tread and riser were defective, based on an expert’s interpretation of the code).
 

One way to head off disagreements on quality, particularly for dimensional and positional aspects of the construction, is to agree in advance on tolerances -- the allowable deviation from “perfect” -- when considering how tight, how smooth, or how plumb/level/square the construction must be in order to count as “good enough.”  In the residential setting, the National Association of Home Builders publishes “Residential Construction Performance Guidelines,” now in its fifth edition, which sets out minimum performance criteria that can be incorporated into the parties’ contract.  Other trade associations publish similar guidelines for specific industries (the National Frame Building Association, American Concrete Institute, and American Institute of Steel Constructors come to mind).  If agreed upon up front, these published standards will govern.
 
Sometimes a dispute over whether the contractor’s implied warranty of workmanlike quality has been met will spark the argument that such industry trade group standards define the standard of good workmanship even without their express incorporation into the parties’ contract.  Our Supreme Court has yet to adopt that view.  While those standards are admissible evidence on the question, expert testimony is the time-honored way of establishing the mark, and while most experts do rely on such standards, in the end the jury decides both the measure of adequate performance and whether it has been met.
 

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#68:  Energy Code Compliance

6/24/2018

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On June 12, 2018, Governor Sununu signed into law House Bill 1472, repealing the state code for energy conservation in new construction (RSA 155-D) effective August 7, 2018.  RSA 155-D, first enacted in 1979 before the international building codes came into prominence, has largely been redundant since New Hampshire’s adoption of the International Energy Conservation Code as part of its state building code (RSA 155-A) in 2002.  HB 1472 was intended to clean up that redundancy.  But repeal of the old law may have an unintended consequence.
 
As with RSA 155-D, the 2009 IECC -- the version currently in effect in New Hampshire -- has different rules for residential and commercial buildings.  (Residential buildings more than three stories above grade are considered commercial for code compliance purposes; commercial buildings three stories or less above grade may show compliance with residential requirements instead.)  Under RSA 155-D:4, plans for both types of construction bearing the certification of a licensed architect or engineer that the design met code had to be submitted to the public utilities commission for review and approval (with the default rule that unless the commission notified the applicant of noncompliance “within 15 working days of receipt, they shall be considered automatically approved”).  The commission historically issued a permit only for residential construction (based on submission of application form EC-1), and relied on the design professional's certification without issuing a permit for commercial construction.
 
Section 103.1 of the 2009 IECC provides that “[t]he construction documents shall be prepared by a registered design professional where required by the statutes of the jurisdiction in which the project is to be constructed.”  Upon repeal of RSA 155-D, New Hampshire has no such statute. The new law partially plugs the gap on the residential side, requiring the Building Code Review Board to develop “a simplified residential energy code compliance form based upon the energy provisions in the International Residential Code and the International Energy Conservation Code” which, on proper completion, will be accepted by all New Hampshire code enforcement authorities as evidence of compliance with energy code requirements.  But neither an application form nor a design professional’s certification of compliance with energy code requirements is now part of our law for commercial buildings.  The new law explicitly charges the public utility commission with a duty of “verification that the applicable project meets the code requirements” for residential construction, but there is no similar requirement for commercial construction.

As with all building codes, enforcement in New Hampshire is at the local level where the municipality has adopted an enforcement mechanism pursuant to RSA 674:51, and at the state level where there is no local enforcement.  In the latter case, RSA 155-A:7
shifts enforcement authority over the entire building code (of which the IECC is a part) to the state fire marshal or his designee, but only “upon written request of the municipality.”  Thus far no legislation is in the works to bring the public utilities commission into the enforcement mix for commercial buildings, with the result that its rules promulgated under the authority of RSA 155-D are likely to lapse as applied to commercial construction.
 
Perhaps this gap will eventually be plugged in connection with adopting the 2012 or 2015 IECC, both of which significantly increase required R-values, U-values and energy ratings generally, as well as efficiency of mechanical systems and lighting, over the 2009 version currently in force.  New Hampshire is lagging somewhat behind other Northeastern states in keeping up with the triennial revisions to the IECC (Massachusetts, New York and Vermont use the 2015 version, Connecticut and Rhode Island the 2012 version).  The last legislative push to update New Hampshire’s building codes, including the IECC, was defeated in 2016 when the Building Code Review Board's recommendation to adopt the 2015 version of all of the international building codes as a group met with industry lobbying resistance.  Nothing prevents the Board from adopting rules directly amending the code pursuant to RSA 155-A:10, which authorizes such amendments subject to later ratification by the Legislature.

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#67:  Paying Your Subcontractor's Employees

5/28/2018

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Like many states, New Hampshire law requires that if a subcontractor doesn’t pay wages to its employees, the general contractor must pay them.  RSA 275:46.  Similarly, New Hampshire law provides that if a subcontractor doesn’t pay amounts owed to its employees under workers’ compensation laws, the general contractor must cover those as well.  RSA 281-A:18.  If the general contractor must write a check under either of these statutes, the subcontractor will owe reimbursement to the general contractor -- but it’s a safe bet that any subcontractor who can’t meet payroll or pay workers’ comp premiums won’t be able to meet any reimbursement obligation either.  How does a GC protect itself?
 
Before subcontracting any significant portion of a long term job to someone who isn’t known to be financially solvent, the wise general will ask for proof that the sub can carry the strain of weekly payroll through a monthly requisition procedure, with retainage.  If a sub won’t share its current financials, chances are they aren’t pretty.  While some solvent subs would rather protect their financial privacy than land a particular job, it can’t hurt to ask.
 
An insurance certificate showing that the sub has workers comp coverage should always be a prerequisite to allowing the sub to proceed.  While it doesn’t guarantee that the premiums will be paid through the duration of a project expected to last many months, the written subcontract can also provide for direct pre-cancellation notice from the insurer to the general contractor if policy premiums are late.
 
Second, written subcontracts can provide that all payments made to the subcontractor are to be held “in trust” for the benefit of the subcontractor’s employees working on the project, including wages and all associated employee-related expenses.  The main advantage of such “trust fund” provisions is in bankruptcy; trust funds are not considered assets of the subcontractor/debtor that can be distributed to general creditors.
 
On federally funded projects the Davis Bacon Act requires the submission of certified payrolls in order to ensure compliance with the prevailing wage requirements.  (Davis Bacon requirements are yet another instance in which “[t]he prime contractor shall be responsible for the compliance by any subcontractor,” 29 C.F.R. § 5.5(a)(6).)  But even on private projects written subcontracts can reserve the right to inspect subcontractor payroll records.  At the first hint of trouble the GC should demand to see them -- and if they aren’t in order, it can withhold payment to the sub. The threat of that withholding may be enough to entice the sub to prioritize scarce dollars toward employee-related debts before feeding any other wolf at the door.
 
Some subcontracts provide that unpaid employees may be paid directly and/or issued joint checks.  I generally do not recommend this except as a last resort.  While it may be the only way to keep them on the job, it also entails the risk that the GC will be deemed a “joint employer” of the sub’s employees -- in which case the GC may have more than just wages to worry about, ranging from fringe benefit claims under collective bargaining agreements with the sub, to Fair Labor Standard Act claims, to Title VII discrimination issues, and more.
 
Finally, the general should insist -- even if the owner doesn’t -- on sworn lien waivers with each progress payment to the sub, verifying that the sub has paid for all labor and materials on the project with the last progress payment and will do so out of the present progress payment.  If the sub falsely swears (it happens!), any principal of the sub signing the lien waiver may also be liable to the general.

 
Bottom line: There is no foolproof protection short of a payment bond, which adds a layer of expense that could narrow the field of available subcontractors.  But hey, who ever said that general contracting was risk-free?

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#66:  Labor Inefficiency Costs: Who Pays? How Much?

4/26/2018

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Among the possible reasons a project might cost more to build than anticipated is diminished labor productivity occasioned by unforeseen space or time constraints.  If the available space for construction gets compressed, workers who are confined by a tighter site or other physical obstacles they didn’t count on, or whose anticipated lay-down or staging areas are shifted to a more distant off-site location, will become less productive.  If the available time for construction gets compressed, work could be pushed into winter conditions when labor is notoriously less efficient, or acceleration could be required with its attendant overtime expenses and consequent fatigue factors making a man-hour less productive.

Sometimes this unanticipated time/space compression is the owner’s fault, in which case the general contractor/construction manager and its subcontractors will likely be entitled to increased compensation by change order or otherwise -- and to a mechanic’s lien if that increase is not paid.  Sometimes unanticipated compression is the result of acts of God or of third parties, in which case it is crucial to examine the contract or subcontract to see who has agreed to bear this risk. (Contractual silence on the point usually spells bad news for the party providing the labor. See Town of Bedford v. Brooks, 121 N.H. 262, 266 (1981) (“One who by contract or agreement binds himself to an obligation possible to perform must perform it, and he will not be excused from performance because of unforeseen difficulties.”)).

What if the unanticipated compression is due to poor planning or coordination by the general contractor or construction manager, affecting not only its own bottom line but its subcontractors’ as well?  It is difficult to see why the owner should pay extra in such a case or suffer a lien from a subcontractor even if that sub is legitimately owed extra compensation from the GC or CM who caused the inefficiencies.  But a recent case suggests that such a lien may be granted if the owner has a cost-plus or “time and materials” arrangement.

In Fraser Engineering Company, Inc. v. IPS-Integrated Project Services, LLC, 2018 WL 1525725 (D.N.H. March 27, 2018), a subcontractor on a project at the Pease International Tradeport obtained a mechanic’s lien for almost $5 million, two-thirds of which was for labor inefficiencies after being ordered by the construction manager to accelerate and work overtime.  The owner argued that it didn’t owe nearly that much to its construction manager and therefore was entitled to invoke the cap on mechanic’s liens described in RSA 447:6, limiting subcontractor liens to “the amount then due or that may become due to the contractor . . .”  Because the owner’s cost-plus contract obliged it to pay its CM for “the cost of trade labor including the indirect costs, overhead and profit for all [s]ubcontractors and equipment necessary for construction,” the Court concluded that the owner could well end up owing its CM the entire amount of the subcontractor’s labor inefficiency claim, and let stand the lien amount which included that sum.

But how is that sum calculated?  In Fraser, the subcontractor’s arrangement with the CM was fixed price rather than cost-plus except as to change orders and extras.  Its $3,324,083.30 “labor inefficiency” number included not only its direct overtime wage expense, but also an uptick for the inefficiency of those manhours due to the fatigue, loss of morale, absenteeism and similar effects of a workforce that was working ten hours a day, seven days a week.  The subcontractor relied on studies estimating such productivity losses -- “Overtime and Productivity in Electrical Construction” published by the National Electrical Contractors Association being a chief one -- but even that study acknowledged that “Obviously, these overtime cost calculations are unnecessary for labor-plus-material type contract situations.”  Why simply paying agreed-upon overtime rates for each overtime hour would not fully compensate the subcontractor for all labor inefficiencies is unclear.  (And because the case is now in arbitration, it will likely stay that way.)

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#65:  Unjust Enrichment Recovery for Verbal Change Orders

3/24/2018

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Given the importance of nailing down any changes to an original scope of work along with their price and schedule effects, many construction contracts require change orders to be in writing, and even define change orders as written instruments.  Section 7.2.1 of the A201 (2017) is typical: “A Change Order is a written instrument prepared by the Architect and signed by the Owner, Contractor and Architect.”  Some contracts are even more limiting, expressly stating that if extra work is done without a signed change order, no additional compensation can be claimed.
 
What if an owner orders a change but never prepares the written change order?  What if the contractor prepares a change order himself but the owner ignores it?  Should he suspend work, and risk being in breach?  There may be another option.  If he proceeds with the work on the reasonable expectation of getting a change order signed later and doesn’t get it, he still has a shot at “unjust enrichment” recovery -- a remedy allowed by courts when an individual receives “a benefit which would be unconscionable for him to retain,” Clapp v. Goffstown Sch. Dist., 159 N.H. 206, 210 (2009).  
 
Unjust enrichment recovery “may be available to contracting parties if the benefit received is outside the scope of the contract,” Axenics, Inc. v. Turner Construction Co., 164 N.H. 659, 670 (2013), but not if the parties’ contract addresses the subject matter of the claim.  In Axenics a subcontractor’s claim against a general contractor for “failure to properly coordinate construction” was rejected because the GC’s coordination responsibility and the sub’s entitlement to payment for any resulting extra work or extra costs “was addressed in the subcontract itself.”  The Court explained that “the terms of the subcontract expressly addressed the possibility of delays and hindrances as well as the process by which Axenics would receive payment for any extra work that it performed because of change orders.  The subcontract also established a mechanism for proceeding when Axenics believed the ‘work to be beyond the scope of’ the subcontract, and delineated Turner’s responsibilities for coordinating changes to the work.  Since the subcontract governed the subject of Axenics’ unjust enrichment claim, and the subcontract was not abandoned by the parties, the trial court erred in allowing Axenics to recover against Turner under a theory of unjust enrichment.”
 
Notice that Axenics did not seek compensation for an added scope of work, but for making an existing scope more expensive to perform.  Added scope sounds like a candidate for unjust enrichment on grounds that “the benefit received was outside the scope of the contract,” id.  But I hesitate to equate a contractual scope of work with “scope of the contract.”  Contractors speak that way.  Judges don’t.  For them, “scope of the contract” is broader, encompassing not only the work to be done but all of the terms and conditions impacting the performance of that work.  
 
Still, any contractual provision can be modified by the parties -- including a provision requiring that change orders be in writing.  “Parties to a contract can not, even by an express provision in that contract, deprive themselves of the power to alter or vary or discharge it by subsequent agreement.  An express provision in a written contract that no rescission or variation shall be valid unless it too is in writing is ineffective to invalidate a subsequent oral agreement to the contrary.”  Prime Financial Group, Inc. v. Masters, 141 N.H. 33, 37 (1996).  Ordering extra work that both parties should reasonably anticipate will entail extra costs, particularly when accompanied by insistence that it be done promptly before a change order is prepared and signed, is evidence from which a court might infer an agreement to modify the requirement that change orders must be signed before extras can get paid.

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#64:  Recovering Attorneys' Fees as Damages

2/25/2018

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Win, lose or draw, the usual rule in litigation is that “absent statutorily or judicially created exceptions, parties pay their own attorney’s fees.”  Shelton v. Tamposi, 164 N.H. 490, 501 (2013).  Judicial exceptions include “bad faith” litigation, for which “an award of attorney’s fees is appropriate where one party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons, where the litigant’s conduct can be characterized as unreasonably obdurate or obstinate, and where it should have been unnecessary for the successful party to have brought the action.”  Bedard v. Town of Alexandria, 159 N.H. 740, 744 (2010) (quotations omitted).
 
In such two-party scenarios, attorneys’ fees are awarded not as damages caused by the defendant’s conduct, but “to do justice and vindicate rights, as well as to discourage frivolous lawsuits.”  Jesurum v. WBTSCC Ltd. Partnership, 169 N.H. 469, 483 (2016) (quotation omitted). But matters are different in three-party scenarios, where A is forced to litigate with B due to the acts or omissions of C.  Legal fees incurred by A in the skirmish with B may be recovered from C as damages, i.e., as the natural and foreseeable consequence of C’s wrongful conduct.
 
Suppose a design professional administering a construction contract advises the owner that a problem with the project is due to a construction defect when, in fact, it is the result of the professional’s own design error.  If the owner sues the contractor for breach of contract and the contractor prevails, the contractor’s defense costs should be recoverable as damages in an action by the contractor against the design professional.  This is sometimes known as the “tort of another” doctrine, after its formulation in RESTATEMENT (SECOND) OF TORTS § 914(2): “One who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover . . . attorney fees . . . thereby suffered or incurred in the earlier action.”

Our Supreme Court recently had this “tort of another” doctrine on its plate in Halifax-American Energy Co., LLC v. Provider Power, LLC, 170 N.H. 569 (2018), but decided not to dig in.  A Rockingham County Superior Court jury was instructed that it could award damages on this basis, and it did so; but when the defendant appealed on grounds that this was not the law in New Hampshire, the Supreme Court ruled that “the defendants did not argue before the trial court that the court's proposed jury instruction was inconsistent with New Hampshire law. Thus, we decline to consider that argument on appeal.”  The Supreme Court left the jury’s award intact.

The lower court’s jury instructions certainly had some legs; there is precedent in New Hampshire for an award of attorneys’ fees incurred in litigating with a third party.  Hubbard v. Gould, 74 N.H. 25, 28 (1906) (“If it is established that the defendants and not the plaintiff are responsible for the injury to Rogers’ horse, the expenses reasonably incurred in good faith by Hubbard in litigating the questions raised by Rogers’ claim are a part of his damages”); Hildreth v. Bergeron, 110 N.H 197, 199 (1970) ("
If the alleged contract was breached he is entitled to all expenses resulting from the breach including attorney's fees both in defending the Gilbert action and prosecuting the suit over against the suppliers.").  This result has been characterized by several implied, non-contractual indemnity cases as a proper item for indemnification.  Morse v. Ford, 118 N.H. 280, 281 (1978) (“Our cases have held that attorney’s fees are proper when an indemnitor is primarily responsible for the injury to the third party”); General Contracting & Trading Co., LLC v. Interpole, Inc., 899 F.2d 109, 113 (1st Cir. 1990) (applying New Hampshire law) (“the indemnitee’s damages may include reasonable counsel fees and costs necessarily expended in defending against the principal claim”).
 
Whether analyzed under implied indemnity principles or labeled the “tort of another” doctrine, recovery of attorneys’ fees as damages does seem to be available in New Hampshire in three-party scenarios.

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#63:  Subcontractor or Supplier: A Potentially Crucial Distinction

12/27/2017

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On most building contracts the contractor is called upon to provide labor, materials and equipment.  He will often hire subcontractors to furnish various portions of the labor and materials, and either he or they will purchase equipment (such as a boiler or a well pump) for installation at the job site.  On high end commercial projects the required equipment can be quite large and specialized (say, a gas turbine for a utility power plant).  Is the seller of that equipment considered a subcontractor, or a mere manufacturer/supplier?
 
The distinction can be important on many levels.  For one thing, the Uniform Commercial Code rather than general contract law governs the sale of goods, and employs different legal rules, including special warranty provisions and a longer statute of limitations.  For another, payment bond rights and mechanic’s lien rights were held unavailable for suppliers to suppliers (as opposed to suppliers to subcontractors) in Lyle Signs, Inc. v. Evroks Corp., 132 N.H. 156 (1989). Third, general contractors will often be expressly liable under their contracts for the mistakes of their subcontractors. If they are obliged to install particular equipment (and even directed as to which manufacturers they may buy that equipment from), characterizing the equipment supplier as a subcontractor can be the owner’s only shot at holding the contractor responsible when the equipment whose characteristics the owner itself has specified proves deficient!
 
The Lyle Signs case offers some rough guidance on when an entity is considered a subcontractor, admonishing that “courts should look, in part, to the following factors: (1) Whether the entity constructs a definite and substantial part of the work or improvement called for in the original contract; (2) whether the work is performed in accordance with plans and specifications of the original contract; and (3) whether the plans and specifications call for a unique product and not a product readily available on the open market. Lastly, we note that the work need not be done at the job site for one to be considered a subcontractor. The above list, however, is not intended to be a comprehensive list of the factors which may be considered by courts. Furthermore, in applying these factors to their determinations, courts should consider the totality of the circumstances surrounding the contractual relationship of the parties.” 
 
The following year In re Trailer & Plumbing Supplies, 133 N.H. 432, 436 (1990), considered two tests for whether a mixed sales and services contract was governed by the UCC.  The first is the “predominant factor” test, which inquires “whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, with goods incidentally involved (e.g., contract with artist for painting) or is a transaction of sale, with labor incidentally involved (e.g., installation of a water heater in a bathroom).”  The second is the “gravamen of the action” test, which “simply asks whether the underlying action is brought because of alleged defective goods or because of the quality of the service rendered. If the gravamen of the action focuses on goods, then the UCC governs. If the focus is on the quality of the services rendered, then common law applies.”  Ultimately the Court in that case applied the “predominant factor” test – as has virtually every court case since then.
 
Can a manufacturer/supplier who is subject to the UCC under the “predominant factor” test also be a subcontractor under the Lyle Signs factors?  Theoretically, yes; the two tests are not wholly inconsistent.  A 2015 New Hampshire Superior Court case, Hooksett Sewer Commission v. Penta Corporation, ruled a general contractor to be subject to the UCC under the “predominant factor” test when it purchased and installed specified equipment and related items that together comprised two thirds of the cost of the entire contract.  There was no mention of the Lyle Signs factors, nor reason to consider them, but the GC in Hooksett Sewer would have satisfied all three of them.

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#62:  The Implied Covenant of Good Faith and Fair Dealing

11/28/2017

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“In every agreement, there is an implied covenant that the parties will act in good faith and fairly with one another.”  So states Birch Broadcasting, Inc. v. Capitol Broadcasting Corp., Inc., 161 N.H. 192, 198 (2010), and many other New Hampshire court cases.  But what does this really mean?  And how does it shake out in construction contracts?
 
As the Birch Broadcasting case notes, “implied good-faith obligations fall into three general categories: (1) contract formation; (2) termination of at-will employment agreements; and (3) limitation of discretion in contractual performance.”  The third category is the one most relevant to construction contracts.  It prohibits an exercise of contractual discretion “inconsistent with the parties’ agreed-upon common purpose and justified expectations as well as ‘with common standards of decency, fairness and reasonableness.’”  Id.

The first thing to notice is that the implied covenant comes into play only when one party has the discretion to act in a way that could deprive the other party of the expected benefits of its bargain.  Discretion exists where “a legal directive or contract term is indeterminate because it fails to identify a single specific action that is legally permitted, prohibited, or required under the circumstances.”  Milford-Bennington R. Co. v. Pan Am Railways, Inc., No. 10-cv-00264-PB,
2011 WL 6300923 at *5 (D.N.H. Dec. 16, 2011), aff’d, 695 F.3d 175 (1st Cir. 2012).  In other words, not everything is nailed down; the contract presents an opportunity for one party to move the goal posts on the other party after the contract has been entered into.  Conversely, if the claimant has an express contractual right to the benefit it seeks, the other party’s refusal to tender that benefit is simply a breach of an express rather than an implied contract term.  No true discretion exists.

The second thing to notice is the tension between “two apparently inconsistent principles: that the covenant of good faith and fair dealing should be implied to limit the exercise of a discretionary power, and that express terms of a contract cannot be varied by an implied covenant.”  Hobin v. Coldwell Banker Residential Affiliates, Inc., 144 N.H. 626, 630 (2000).  The apparent dilemma is resolved by examining the degree of specificity with which the contract allows the challenged conduct.  If the exercise of discretion yields an outcome that is specifically mentioned as authorized by the contract, courts will not impose reasonableness limits on the exercise of that discretion.  Rouleau v. U.S. Bank, N.A., 2015 WL 1757104, at *5 (D.N.H. Apr. 17, 2015) (“a party does not breach the duty of good faith and fair dealing simply by invoking a specific, limited right that is expressly granted by an enforceable contract”).  In such a case the exercise of discretion would necessarily be consistent with, not inconsistent with, the parties’ “agreed-upon common purpose and justified expectations.”
 
In construction settings, claims of breach of the implied covenant will almost always be “upstream” claims, by a subcontractor against a general contractor or by a general contractor against an owner.  Where I see the implied covenant of good faith and fair dealing implicated most often is in the rescheduling of work.  An instance is New Design Constr. Co., Inc. v. Hamon Contractors, Inc., 215 P.3d 1172 (Colo.App.Div. 2 2008).  As is commonly the case, Hamon, the general contractor, had the contractual right to modify the project schedule.  When it did so to the detriment of its paving sub, it crossed the line.  The Court noted that “Hamon was responsible for developing and maintaining a schedule, NDCC was responsible for completing its work when directed by Hamon to do so, and Hamon was required not to abuse its discretion when directing NDCC to complete its work.”  Id. at 1182.
 
The wise contract drafter attempts to identify areas of discretion, and tries to limit them.  Nothing prevents contracting parties from flagging potential instances of application of the implied covenant -- for example, with language making one party’s action subject to the other’s consent but providing that such consent shall not be unreasonably withheld
.
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#61:  Excusing Delays in Completion

10/30/2017

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Under the rule that parties to a contract have a duty not to hinder or delay each other’s performance, an owner cannot recover damages for a delay in completion of the contractor’s work if the owner or his agents slowed down the contractor’s performance.  But sometimes a third party, or the government, or a casualty or other circumstances will delay final completion of the project of which the contractor’s work is only a part, without hindering the contractor’s own work.  In such a case, is the contractor excused from meeting his contractual deadline on the theory that the need for strict compliance with his deadline has become moot?
 
An example will illustrate the issue.  Suppose an owner contracts separately with two prime contractors -- let’s call them “Eastbound” and “Westbound” -- each of whom is to build 500 feet of a one-thousand foot tunnel, each at the same unit price per foot, each in 100 days starting on the same day and ending at the same designated point smack in the middle of the mountain.  If the tunnel is not completed on time and no extensions have been granted, consider how damages (whether actual or liquidated) should be assessed if:

A. 
Eastbound reaches the midpoint 10 days late, and Westbound reaches the midpoint 50 days late; or
 
B.  With Westbound well behind schedule, Eastbound -- who is tunneling at the rate of five feet per day and is thus on pace to complete on time -- takes seven weeks off to do a different job and reaches the midpoint 49 days late, while Westbound reaches the midpoint 50 days late.
 
Under both scenarios Eastbound will argue that it is off the hook because its failure to meet its target completion date did not delay opening the tunnel given Westbound’s greater delay.  The only difference is that under scenario B, Eastbound could have finished on time but chose instead to take advantage of an opportunity to moonlight when some unanticipated “float” fell into its lap.
 
Contract law recognizes the doctrine of “frustration of purpose,” which “assumes the possibility of literal performance but excuses performance because supervening events have essentially destroyed the purpose for which the contract was made.”  Perry v. Champlain Oil Company, 101 N.H. 97, 98 (1957).  Normally the doctrine excuses a party’s performance when the value of the contract to the party seeking to be excused has been destroyed by an unanticipated and fortuitous event.  But here, timely performance has turned out to be of no value to the owner, who is not the one seeking to be excused from the contractual deadline.  Moreover, performance of the entire contract has not lost its value to the owner; only the completion deadline has lost its value, and only for a relatively short time.  The commercial frustration defense is a poor fit.
 
“No harm,” then, does not necessarily mean “no foul.”  But it may mean “no remedy.”  An owner who must prove actual damages (because there is no enforceable liquidated damages clause), but cannot pin loss of use of the project as a whole on Eastbound, is unlikely to be awarded any damages for the breach.  If, however, liquidated damages are sought, the result could be different, since proof of actual damages is not necessary for enforcement of a liquidated damages provision.
 
Scenario B presents an additional issue.  If Eastbound was on pace to finish on time and Westbound was lagging, the owner could have issued change orders adding 100 feet to Eastbound’s scope and deducting 100 feet from Westbound’s scope, resulting in faster completion of the tunnel (120 days rather than 150) at no additional cost.   By not
keeping Eastbound on site, the owner signaled that prompt completion was not important to the purpose of the contract, and may have waived his right to complain about late completion.

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#60:  Getting a Mechanic's Lien Attachment Without Giving Advance Notice

9/3/2017

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Unlike most states, New Hampshire requires an “attachment” – a court order that property shall be held as security – before a mechanic’s lien may be filed.  RSA 447:9 provides that the lien “shall continue for 120 days after the services are performed, or the materials, supplies or other things are furnished” while RSA 447:10 specifies that “Any such lien may be secured by attachment of the property upon which it exists at any time while the lien continues.”  But a different statute, RSA 511-A, governs the procedure for getting the attachment approved and recorded.
 
The basic rule is found in RSA 511-A:1, which provides that “a defendant shall be given notice and an opportunity for a preliminary hearing before any pre-judgment attachment, including attachments of property held by a trustee, shall be made.”  An exception exists when there is a need for speed and all will be lost if the claimant must await notice and a hearing.  But mechanic’s lien attachments are routinely granted without advance notice to the defendant even if there is no such emergency.
 
The statutory authority for dispensing with advance notice is RSA 511-A:8: “Upon application to the court, in exceptional circumstances, an attachment may be ordered in advance of notice to the defendant if the plaintiff establishes probable cause to the satisfaction of the court of his basic right to recovery and the amount thereof and in addition thereto the existence of any of the following: . . .”  Five scenarios follow, including  “III. In equity cases for specific performance of an agreement to transfer land or a unique chattel, there is imminent danger of transfer to a bona fide third party.  In such land cases, as well as those to perfect a labor and materials lien under RSA 447, a writ of attachment may be filed at a registry of deeds without prior application and notice, provided said writ is in the form of a lis pendens and specifically restricts its application to the particular real estate described in the writ and the return of attachment.”
 
Let’s break this down.  First, the would-be lienor must show “probable cause to the satisfaction of the court of his basic right to recovery and the amount thereof.”  Second, “a writ of attachment may be filed at a registry of deeds without prior application” – that is, without prior application to the court (don’t ask me how one can both make “application to the court” yet not apply to the court at all!) – as long as it is in the form of a lis pendens.  A lis pendens (Latin for “pending suit”) puts third parties on notice of a lawsuit (presumably one filed by the would-be lienor in which the attachment is being sought).  The "application to the court" and "without prior application" tension was resolved in Topjian Plumbing and Heating, Inc. v. Bruce Topjian, Inc., 129 N.H. 481, 484 (1987), ruling that “recording a lis pendens gives notice but does not create an attachment or perfect a lien.”
 
It seems clear that the Legislature intended this lis pendens option solely as a means of avoiding the problem that would otherwise arise under RSA 511-A:5 (“Such attachments shall not be effective against bona fide purchasers for value until attachments of real estate have been recorded in the registry of deeds”).   After all, the whole point of recording a lis pendens is to eliminate third party purchasers’ bona fides, thus keeping a mechanic’s lien (or a specific performance lawsuit) from becoming worthless in instances where a bona fide purchaser is about to close on the real estate before an attachment hearing with notice can be held.

Until the Topjian case is overturned or the statute is amended, recording a lis pendens won't perfect a mechanic's lien attachment; court approval will still be required in every case.  But RSA 511-A:8,III provides scant authority for getting it without notice, at least in the absence of "imminent danger of transfer to a bona fide third party" -- a qualification which is explicit in the first sentence of the subsection, and implicit in the second.  It is high time the courts stopped reading the second sentence as a blanket approval of ex parte mechanic's lien attachments.

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#59:  New Hampshire's "Right to Repair" Law

8/1/2017

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Like many states, New Hampshire has a so-called “right to repair” statute for residential construction defect cases. Found in RSA 359-G, it is intended to provide a period of time before a homeowner commences a lawsuit for the parties to attempt an out-of-court resolution, by giving the contractor a crack at making things right. But our statute has far less teeth than many other states' statutes. Here's how it works:

First, with the purchase and sales agreement or written contract for construction the contractor is supposed to give a written notice advising the homeowner of the statutory requirement for opportunity to repair defects. The penalty for failure to provide this notice? NONE. (In some states, the contractor loses his statutory opportunity to repair.)

Next, if the homeowner believes there has been defective work, before suing he or she is supposed to detail the problems in writing to the contractor. The penalty for failure to provide this notice prior to suit? Up to a 60-day “stay” of the lawsuit at the request of the contractor. (In some states the penalty is outright dismissal of the lawsuit.)

Next, within 30 days of receiving the homeowner notice of defects, the contractor may either (a) offer to settle the claim by monetary payment, the making of repairs, or a combination of both, without inspection; (b) propose to inspect the residence first; or (c) completely reject the claim (in which case the homeowner can sue immediately). If the contractor chooses (b) and gives notice that he wishes to inspect the premises before committing to anything, must the homeowner allow the inspection? Interestingly, the statute says that “homeowners are encouraged, but not required, to provide access for an inspection.” The penalty for not allowing one? NONE. (In some states, refusing the inspection bars a later suit entirely.)

If the contractor offers to make repairs (either initially or after an allowed inspection) and the homeowner accepts the offer, either the contractor will perform within the time frame agreed upon, or he won't. If he does perform, problem solved; no need for a lawsuit. If he doesn't, the homeowner can sue either for the original defects or for breach of the settlement agreement.

Unlike some states which give the contractor an absolute right to repair, in New Hampshire a homeowner can simply reject the contractor's settlement offer and file a lawsuit. At that point the statute threatens a mild penalty: if the homeowner doesn't win a judgment for more than the value of the repair offer, he must pay the contractor's “costs” (which do not include attorneys' fees) incurred in the lawsuit. If the homeowner wins nothing, obviously any repair offer was more valuable (but in that case, the contractor would be awarded his costs anyway as the prevailing party). But if the homeowner wins a judgment – presumably based on the cost of particular repairs – how does the contractor prove that the value of his repair offer exceeded the amount of that judgment? Surely he won't have testified that the homeowner's claimed damages were too low! And if the judgment is for the exact same repairs that the contractor offered to make, using the judgment to establish their value automatically means both figures will be exactly equal, and the contractor won't get his costs. This diminishes the sting of the “penalty.”

Perhaps the best feature of the statute is its list of things that a residential contractor will not be liable for: (a) normal shrinkage from drying or settlement; (b) reliance on information from the government or on building codes then in effect; (d) defects disclosed to the homeowner prior to purchase or that the homeowner should have discovered when buying the residence from a prior owner; (e) warranty items that the contractor tried to but wasn't allowed to address; (f) normal wear and tear; (g) items on which the homeowner did not perform normal and reasonable maintenance; (h) items that were altered by the homeowner. It is useful to have such a concise statement of contractor defenses, for both sides' benefit.

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#58:  Gathering Evidence for Proving or Defending a Contract Claim

7/1/2017

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If you are in the construction game long enough, sooner or later you are bound to get into a dispute over money allegedly owed under your contract, whether to you or by you. The issue could be as simple as whether proper performance of an agreed scope of work has occurred, or as complicated as whether a differing site condition has been encountered. Whatever the dispute, both the party seeking payment and the party defending against it should anticipate that it may ultimately land in the lap of an arbitrator, a judge or a jury. And before you lawyer up, you need to paper up.

Document management may be a pain, but the simple truth is that documents – paper or electronic – win cases. Contemporaneous records are the best evidence of what happened months or even years before the matter reaches trial. Documents are viewed as more trustworthy than witness testimony (even when the witness is also the author!) if for no other reason than the fact that the strongest memory is weaker than the palest ink.

Projects of any appreciable size naturally generate written records of various types, whether required by the contract or not, simply to effectively manage the project. A typical project file will include daily reports, correspondence (often by email these days), meeting minutes, internal memoranda, RFIs and responses thereto, change order requests, shop drawings and submittals, revisions to plans/specs/schedules, job photos or videos, and of course requisitions for payment with appropriate back-up.  Keeping them properly will improve your chances of prevailing on or against a claim.

The first and most obvious task is getting the right details documented. This goes far beyond collecting a signature from the owner's rep or the contractor's superintendent before embarking on a new task (which your contract may well require as a prerequisite to any price or time adjustment). A daily report that only recites the personnel and equipment on site, the portion of the job being worked on and the weather is less useful than one which notes any problems encountered or discussions surrounding them. A change order request which does no more than mention the aspect of the work that required additional effort is less useful than one which quotes chapter and verse from the plans and specs, includes a sketch or a photo, and compares in narrative form the initial plan of attack with the means and methods employed after the changed condition.


Timely documentation is the next most important consideration, as a writing cannot qualify as a “business record” admissible in court unless it was made “at or near the time” of the event it describes. If a verbal discussion includes a directive or a clarification that might involve extra time or money, it should be followed up with prompt confirming correspondence or with an accurate meeting minute. If a schedule is impacted by an added or deleted task or by a loss of productivity on an existing task, the schedule needs to be adjusted quickly. With men, materials and machinery moving around all the time, a job site photo taken tomorrow may not show precisely the same conditions as one taken today. No matter how pressed for time you are in the heat of battle, try not to let the sun set on an undocumented occurrence that may have financial consequences down the road. The longer you wait, the more of an afterthought it will look like, making your documentation appear far less indicative of a serious concern. No one is likely to be impressed with a “Well, I was too busy” excuse at trial, even if it is true.

Lastly, for any issue that may spawn a money fight down the road, prepare a separate “claims file” right away, into which copies of all of the foregoing documentation can be placed on a regular basis. This is far more efficient than trying to comb through thousands of pages for relevant information at the point of “going legal.” Why incur dozens of extra hours to separate the wheat from the chaff for your lawyer – or, God forbid, by your lawyer – down the road?
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#57:  The New AIA A201 (2017): Not Much Is Different

6/10/2017

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Every ten years, the American Institute of Architects revises and updates its standard form Owner-Contractor A-series documents, including the popular A201 General Conditions. The latest version released in April 2017 has some updates, rearranges some sections and tweaks some language – but by and large, the changes are rather minor.  A comparison of the 2017 and 2007 versions may be found here.

Some of the salient changes:

Revised Section 1.1.8 makes express what was formerly implied: that the Initial Decision Maker (typically the Architect) must be impartial to both the owner and the contractor, and shall not be liable for decisions made in good faith.

Revised Section 2.2 obliges the owner to provide “reasonable evidence” that it can fulfill its financial obligations under the contract. If that evidence is not provided, the contractor need not start work. If there is a change in the work “materially altering” the contract sum, upon written request the owner must provide updated financial information, failing which the contractor may refuse to perform the portion of the work affected by the change.

New Section 3.5.2 requires that all “material, equipment, or other special warranties required by the Contract documents” be issued in the owner’s name.

Revised Section 3.12.10.1 formally adopts the Spearin doctrine, entitling the contractor “to rely upon the adequacy and accuracy of the performance and design criteria provided in the Contract Documents,” while deleting the prior language that “the Contractor shall not be responsible for the adequacy of the performance and design criteria specified in the Contract Documents.”

Revised Section 7.4 allows the contractor to object to a “minor change” proposed by the architect if the contractor disagrees the the change will have no effect on Contract Price or Contract Time, and refuse to perform it until the effect is determined. Failure to object and proceeding with the change, however, waives a later claim for adjustment.

Article 11's Insurance and Bond provisions have been scaled back in favor of moving many of the 2007 form provisions to a new Insurance and Bond Exhibit that allows the parties to negotiate check-the-box insurance coverage requirements. Remaining provisions include a few changes: Section 11.1.1 requires the owner, architect and architect’s consultants to be named as additional insureds under the contractor’s CGL policy; Section 11.1.3 requires the contractor to provide a copy of any bonds to potential beneficiaries (e.g., subcontractors and suppliers looking for payment bonds) upon request; Section 11.1.4 and 11.2.3 require each party to notify the other of any lapse of insurance coverage that the party was required to carry within three business days; and Section 11.2.2 waives claims by the owner for any loss that would have been covered by insurance that the owner was required to procure but didn't.

New Section 15.1 adds what amounts to a statute of repose, providing that all claims must be asserted within 10 years after substantial completion. (New Hampshire's statute already limits claims to 8 years after substantial completion.)

Revised Section 15.2.6.1 now states that if a demand for mediation is made within 30 days after receipt of a decision from the Initial Decision Maker (rather than the former 60 days) and the other party fails to participate within 30 days of receipt, both mediation and the ability to challenge the Initial Decision are waived.

As always, using the AIA form simply sets default rules; the parties are free to modify them as they see fit. (Here's a bold prediction: the most deleted provision of the new 2017 A201 will be Section 1.7, which calls for the use of AIA Document E203 – 2013, Building Information Modeling (BIM) and Digital Data Exhibit. Going digital is a great idea – but for smaller projects, we're just not there yet.)

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#56:  Mechanic's Liens on Condominium Common Area

6/6/2017

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Condominium ownership has been on the rise since the 1970s, and there are now over 800 condominium developments in New Hampshire ranging in size from two units to several hundred units. Condo owners own not only their units, but a proportionate share of the grounds, facilities and the like – so-called “common area.” Decisions on common area maintenance and improvements are typically made by a homeowners' association; see RSA 356-B:41,I (“Except to the extent otherwise provided by the condominium instruments, all powers and responsibilities with regard to maintenance, repair, renovation, restoration, and replacement of the condominium shall belong (a) to the unit owners' association in the case of the common areas . . .”). If an association contracts for common area improvements but doesn't pay for them, how does the contractor go about getting a mechanic's lien? The answer may surprise you.

RSA 356-B:8,II provides: “Labor performed or materials furnished for the common areas, if duly authorized by the association of unit owners or board of directors in accordance with this chapter, the declaration or bylaws, shall be deemed to be performed or furnished with the express consent of each unit owner and shall be the basis for the filing of a lien pursuant to the lien law against each of the units . . .” The apparent effect of this statute is to require an attachment of each of the unit owners' proportionate interests in the common area. Whether or not suing the condo association that hired you (rather than suing each unit owner separately) is an allowable way to seek a money judgment, liening the association's interest in common area will not work – for the simple reason that the condo association has no such interest. Only the unit owners do.

When there are numerous unit owners in the condominium, this can get cumbersome. A contractor, subcontractor or supplier who wishes to perfect a mechanic's lien will often be obliged to name and serve dozens of parties. A subcontractor or supplier who wishes to give notice of intent to lien will often be obliged to send dozens of notices. Writs of attachments must be recorded against dozens of names. And so on. As one court has noted, “the cost and delay inherent in identifying, pleading against, and serving a multitude of owners (and then substituting a new owner for a predecessor during the pendancy of the case as units are sold or otherwise transferred) would be substantial.” Trintec Const., Inc. v. Countryside Village Condominium Association, Inc., 992 So.2d 277, 280 (Fla. App. 2008).

Fortunately for contractors, condo associations are required by statute to raise the money to pay for common area improvements; see RSA 356-B:45,III (mandating that all common expenses “shall be assessed against the condominium units”). Unfortunately, “such assessments shall be made by the unit owners' association annually, or more often if the condominium instruments so provide” – and they rarely do so provide, so a contractor expense not budgeted for at the previous annual meeting may have to wait to be paid. Fortunately, such unbudgeted contractor expenses almost always result from casualties or accidents that are required to be insured against “to the full replacement value of the structures within the condominium, or of such structures that in whole or in part comprise portions of the common areas,” RSA 356-B:43,I(a). Unfortunately, “structures” likely do not embrace sitework (e.g., washouts or tree damage from severe storms), which is therefore not required to be insured against.

If a mechanic's lien is recorded, unit owners may “remove their unit and the percentage of undivided interest in the common areas appurtenant to such unit from the lien by payment of the fractional or proportional amounts attributable to each of the units affected,” RSA 356-B:8,II. But don't get too excited, contractors; this will typically happen only when there is a sale or a refinance afoot. Frankly, that scenario is the only way a mechanic's lien will ever provide leverage to a lienor – at least until someone figures out how to attract a buyer for an undivided proportionate common area interest at a sheriff's sale!

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#55:  Pass Through Claims

4/26/2017

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In the law of contracts there is a concept known as “privity,” the direct relationship between parties to the same contract. Thus, an owner and a GC are “in privity,” a GC and a subcontractor are “in privity,” but an owner and a subcontractor are not. In general, to sue someone for breach of contract you must be in “privity of contract” with that person. It follows that a subcontractor cannot sue an owner for breach of contract – or, what amounts to the same thing, for extra compensation under an equitable adjustment provision of the prime contract.

Often an owner's failure to pay for extra work will affect a subcontractor far more than it will affect the GC. A good example is a differing site condition that obliges an owner to pay extra for dealing with ledge, or groundwater, or some unforeseen subsurface problem which will cost the sitework sub a ton of extra money but “cost” the GC only his markup on the sitework sub's extra work. If the owner refuses to pay the extra costs incurred by the sub, the sub cannot sue the owner because of the lack of privity.

In an effort to fix this problem the GC and sub could agree in their subcontract (or later) that the GC will pursue the claim for the sub and then turn over any recovery to the sub. Often the subcontract will also have a “pay if paid” clause providing that the GC doesn't owe any money to the sub except to the extent it collects from the owner. These two agreements seem perfectly consistent – and from the perspective of the subcontracting parties, they are. But from the perspective of the owner, who is not a party to the subcontract, the “pay if paid” clause may mean that the GC has not suffered any damages because the GC literally doesn't owe the sub any money it hasn't collected from the owner – a good defense to the GC's lawsuit!

Before discussing the fix to this dilemma, a bit of history is in order, and specifically the case of Severin v. United States, 99 Ct. Cl. 435 (1943), which held that a GC could not recover damages from the owner on a sub's behalf unless the GC “has reimbursed the subcontractor or is liable to make such reimbursement.” The so-called Severin Doctrine named for this case has been chipped away at over the years “out of reluctance to leave subs with valid claims out in the cold,” Morrison Knudsen Corp. v. Fireman's Fund Ins. Co., 175 F.3d 1221, 1251 (10th Cir. 1999). Nevertheless, the doctrine sill retains some punch. Unless the GC is at least conditionally liable to its sub, the GC has no damages, and thus no pass-through claim to pursue.

The solution comes in the form of a “liquidating agreement,” whereby (1) the GC concedes liability to the sub for the sub's extra costs, (2) the sub agrees that the amount of that liability is equal to the GC's recovery, if any, from the owner, and (3) the GC agrees to pass through that recovery to the sub. Liquidating agreements are "a valid mechanism for bridging the privity gap between owners and subcontractors,” North Moore St. Developers, LLC v. Meltzer/Mandl Architects, P.C., 23 App.Div. 27, 30, 799. N.Y.S.2d 485 (1st Dept 2005). Where they sometimes get tripped up is on the GC's admission of liability to the sub – something that most GC's strive mightily to avoid in the initial subcontract language. For example, a no-damage-for-delay clause in a subcontract, if it releases the GC from liability completely, can bar a pass-through delay claim despite the parties' effort to undo the release after the fact through a liquidating agreement.  Harper/Nielsen-Dillingham Builders, Inc. v. United States, 81 Fed. Cl. 667 (2008).

Thus far the New Hampshire Supreme Court has not been called upon to decide whether a liquidating agreement can provide the basis for a pass through claim, but virtually every state to consider the matter has concluded that it does. I expect New Hampshire will follow suit.

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#54:  Liening the Flow of Funds on Public Works Projects

3/25/2017

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Most subcontractors and suppliers who perform work or furnish materials for state and municipal projects know that the GC is required to provide a payment bond for their benefit – a substitute for the mechanic’s lien that, for public policy reasons, is not allowed on state or municipal property.  What they may not know, however, is about an alternative to a payment bond claim, one that may actually be of greater value to them: the right to lien the money coming from the owner to the GC.  The rarely-invoked statute is RSA 447:15:
 
“The liens given by RSA 447:5-14, inclusive, shall attach to any money due or to become due from the state or from any political subdivision thereof by virtue of any contract for any public work or construction, alteration, or repair, in the performance of which contract the lienor participated by performing labor, providing professional design services, or furnishing materials or supplies. Such liens shall not attach, however, unless filed within 90 days after the completion and acceptance of the project by the contracting party, whether such contracting party is the state or any political subdivision of the state.”
 
The lien works like a “trustee process,” requiring the public agency to act as a “trustee” of the funds and hold back the amount of the lien from any payments due or to become due to the GC until the lienor’s underlying claim against the GC is resolved.  Unlike a bond claim which may take months to be investigated by the surety and will cost the GC only eventual reimbursement of the surety’s expenses, the effect of this lien on the GC is immediate.  This affords a bit of leverage to the lienor that a bond claim does not.  And the lien is superior to the bond claim in another way: once the underlying claim is proven, payment by the public agency is immediate as well.  A surety’s check may take longer to arrive.
 
While the intent of the statute is clear enough, its procedural aspects are not a model of clarity.  Given the statute’s opening six words, it is safest to assume that the prerequisites to mechanic’s lien actions found in RSA 447:5 through :14 must be complied with – including the deadline of 120-days after the last of the labor or materials was furnished in which to get the attachment.  That the lien must also be “filed” within 90 days of completion and acceptance of the project by the public authority – the same deadline that applies to bond claims – appears to be an additional time constraint rather than a potential enlargement of RSA 447:9’s 120-day duration after the lienor’s labor and/or materials were last furnished.
 
Because the lien is on money rather than on real estate, the “attachment of the property” required by RSA 447:10 is not achieved by recording a writ of attachment at the registry of deeds.  But the statute does not say how that attachment is to be made.  The only thing that is literally “filed” is the attachment petition itself – in court.  Service of a writ of attachment on the public entity must still be made, and perhaps that service is the “filing” that the legislature had in mind in requiring the lien to be “filed” within 90 days following project completion and acceptance.  No court cases have shed any light in this regard.
 
Obviously RSA 447:15 will be useless if, due to the owner’s setoffs for faulty or incomplete work, no money will fall due to the GC.  In that event, the bond claim will be the only remedy worth pursuing.  But nothing prevents a sub or supplier from pursuing both the lien remedy and a bond claim simultaneously.  General Insulation Co. v. Eckman Construction, 159 N.H. 601, 608 (2010) (characterizing the lien remedy as being “[i]n addition to the remedy of seeking payment on the bond”).  Since a sub or supplier cannot be sure that there will ultimately be any money falling due to the GC, it makes sense to pursue both claims as an initial matter, and drop the bond claim if the lien pays off.  More often than not, it will.

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#53:  Project Work Agreements

2/27/2017

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New Hampshire’s recent renewed attempt to enact “right to work” legislation, prohibiting labor unions from charging fees to open shop employees who benefit from union-negotiated collective bargaining agreements, has been much in the news. Not as well publicized, but running on a parallel track, was House Bill 446.

Intended to outlaw project-specific labor agreements in state construction contract procurement, the bill proclaimed that “fair and open competition in state construction contracts is necessary to provide for more economical, nondiscriminatory, neutral, and efficient procurement of construction related goods and services by this state and political subdivisions of this state as market participants.” It defined “project labor agreement” as “any pre-hire collective bargaining agreement with one or more labor organizations that establishes the terms and conditions of employment for a specific construction project,” and forbade state contracting officers from either requiring or prohibiting them as a condition of bidding on a state contract.

PLAs have been around since the 1930s. They are negotiated by labor organizations, and require all contractors and subcontractors who bid on a construction project – whether they are unionized or open shop – to sign on to the PLA as a condition of working on the project. PLAs typically offer a guarantee to the owner that no work stoppage will occur during the life of the project, in exchange for granting the labor organization the ability to set wages, benefits and employment terms for the job. This results in favoring unionized contractors and requiring nonunionized contractors to hire union workers for the project and pay in to union benefit plans. In practical effect, PLAs require a project to be built solely with union labor, regardless of whether the successful bidder and its subs are otherwise open shop employers. Unions obviously love them. Contractor associations generally hate them.

Thus far about twenty states have forbidden their public procurement officials from utilizing PLAs. But New Hampshire will not be among them, at least not this year. On February 15 House Bill 446 was killed in Committee, where the “inexpedient to legislate” vote was 17-2 and the explanation was “This bill is an unnecessary and burdensome new government regulation, which seeks to tie the hands of our state contracting agencies, making it more difficult for the state to get the best deal for our taxpayer dollars. What’s more, this bill is a solution in search of a problem. The bill’s sponsor admitted in testimony that the practice this bill seeks to ban, so-called project labor agreements, have literally never been utilized in New Hampshire and are not planned to be.”

It is difficult to argue with an “if it ain’t broke, don’t fix it” rationale (although the notion that PLAs might result in “the best deal for our taxpayer dollars” could spark a chuckle). Unions have not taken root in the Granite State to the same extent that they have in many “blue” states. The focus now shifts to federal contracts, where President Obama’s 2009 Executive Order encouraging the use of PLAs on construction contracts in excess of $25 million will undoubtedly be reviewed by the Trump administration.

In a state like ours, where only about 10 percent of the construction work force is unionized, one wonders whether PLAs will scare off bids by local contractors and result in decreased competition. The debate over whether PLAs are likely to yield higher bids will continue to rage, but we do have one basis for comparison right here in New Hampshire. In 2011 the Department of Labor’s Job Corps Center project in Manchester went out to bid with a PLA, and the low bid was $37.87 million. All of the bidders were out-of-state contractors. After a bid protest was filed, the General Accounting Office advised the Department to withdraw the solicitation and re-bid the project without a PLA – which it did. In 2013 the re-bid project drew three times as many bidders, and was awarded to Eckman Construction for $31.63 million – a savings of $6.2 million.

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#52:  The Rights of an "Additional Insured"

1/30/2017

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In the construction setting, it is common for owners to require contractors to purchase insurance that names the owner as an “additional insured” under the contractor's Commercial General Liability policy. It is likewise common for contractors to require their subcontractors to do the same thing. In either case, an endorsement to the insurance policy naming the party as an “additional insured” will dictate the type of loss for which the “additional insured” is covered, typically limited to claims arising out of ongoing work (but not completed work) performed for the additional insured by the primary insured.

The advantage of being an “additional insured” under someone else's CGL policy is twofold. First, it can avoid the need for the additional insured party to purchase its own CGL policy for protection against the covered losses – because an additional insured is, in the eyes of the law, a party to the insurance policy entitled to the same defense and indemnity as the primary insured (unless an endorsement limits its scope). Second, even if it has its own CGL policy, a covered loss will not be on the additional insured's “loss history” so as to increase its premiums on its own CGL policy in the future – unless the additional insured coverage is expressly designated as “excess” or secondary to the additional insured's own CGL policy coverage.

The express terms of the “additional insured” endorsements matter greatly, yet I am constantly amazed at how infrequently the entity named as an additional insured bothers to inquire about them, contenting itself with a Certificate of Insurance listing the entity as an additional insured. Does the endorsement provide additional insured coverage only as “excess” coverage over the additional insured's own CGL coverage? Is it limited to claims arising out of ongoing work, or does it embrace “completed operations” as well? Is it limited to instances where there is a direct written contract between named insured and additional insured?

This last question comes into play when a general contractor requires subcontractors to carry CGL policies naming not only the GC but the owner as additional insureds. Two common endorsement forms, the 2013 versions of forms CG 20 33 and the CG 20 38, differ in their treatment of the issue. The CG 20 33 provides additional insured status for “any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy,” whereas the CG 20 38 also extends coverage to “any other person or organization you are required to add as an additional insured under the contract or agreement.” Whether the CG 20 33 requires that “you and such person or organization have agreed in writing” with each other is an open question on which courts do not all agree. Compare Pro Con, Inc. v. Interstate Fire & Cas. Co., 794 F.Supp.2d 242 (D.Me. 2011) (direct contract not required) with Westfield Ins. Co. v. FCL Builders, Inc., 407 Ill.App.3d 730, 948 N.E.2d 115 (Ill.App. 2011) (direct contract required). Our Supreme Court has yet to rule on the question.

Insurers often argue that additional insureds are entitled to coverage only for claims of vicarious or derivative liability on the part of the additional insured, and not for negligence by the additional insured. Where there is no express mention of vicarious liability in the endorsement, these arguments have not fared well in the courts. See, e.g., Capital City Real Estate, LLC v. Certain Underwriters at Lloyd's London, 788 F.3d 375, 380-81 (4th Cir. 2015). Once again, our Supreme Court has yet to rule on the issue.

Such open questions are potential traps for the unwary. If you intend to be an additional insured on another's policy, most of the land mines can be sidestepped by taking some time to examine the endorsement in the named insured's policy to ascertain the coverage it affords you. The wisest course is to prescribe what it must say, requiring the named insured to pick the broadest form available.
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#51:  Damages for Defective Work

12/29/2016

1 Comment

 
In every lawsuit for breach of contract, both liability (establishing the breach) and resulting damages (the amount of money required to fairly compensate the non-breaching party) must be proven by a preponderance of the evidence. With regard to damages, the law seeks to make the non-breaching party “whole,” i.e., to put him in the financial position he would have enjoyed if the contract had been fully performed. If the contractor is the breaching party by virtue of defects in the work, the measure of damages required to accomplish that goal for the owner is not always obvious. Is cost of correction/completion the right measure? Or is diminished value of the structure the right measure?

The answer is, it depends. “The ordinary measure of damages is the cost of remedying the defective work, but that amount may be withheld if 'physical reconstruction and completion in accordance with the contract (would) involve unreasonable economic waste by destruction of usable property or otherwise.' . . . In that case, the injured party may be awarded the difference between the value the building would have had if constructed as promised and its value as actually constructed.” M. W. Goodell Const. Co., Inc. v. Monadnock Skating Club, Inc., 121 N.H. 320, 322 (1981).

Suppose a house is constructed almost perfectly, except that the required compressive strength of the concrete foundation walls was not met, or the correct rebar was not placed. Sure, the walls are somewhat more likely to crack. But do we really want to make the contractor pay to tear the whole house down and start over? “The defect may be of such a kind as to diminish the value of the house but little, while to make the work conform literally to the contract would involve reconstruction at unreasonable and disproportionate expense.” Danforth v. Freeman, 69 N.H. 466, 469 (1899). An award of damages equal to the cost of correction in such a case would in all likelihood simply be pocketed by the owner, arguably constituting a windfall instead of making him whole.

The determination of whether reconstruction would constitute “unreasonable economic waste” is for the jury to decide. While our Supreme Court has yet to rule on which party has the burden of proof on this issue, other courts suggest that the builder must prove unreasonable economic waste if he wants to avoid the usual repair/replacement measure of damages. Willie's Construction Co., Inc. v. Baker, 596 N.E.2d 958, 962 (Ind.App. 5 Dist. 1992) (“The breaching contractor has the burden of proving that curing defects would cause economic waste and any reasonable doubt will be resolved against him.”); Pennington v. Rhodes, 55 Ark.App. 42, 55, 929 S.W.2d 169, 176 (Ark.App. 1996) (“The seller-builder of the defective new dwelling has the burden of proving that the cost-of-repairs standard is improper.”). If that burden is met, the plaintiff's lawyer had better be prepared to prove diminished value as an alternative measure of damages to the cost of correction. Two experts – one to opine on cost of correction and another to opine on values – may need to be retained.

One rough way to gauge “unreasonable economic waste” is by comparing the cost of repairs/replacement to the original contract price. If such costs are a small fraction of the contract price, chances are that they will be allowed as a proper measure of damages. That was true in the M.W. Goodell case referenced above (“In this case, the cost of doing that work is less than five percent of the total contract price. We agree with the master that the repairs are not economically wasteful and that such an award is proper.”). Conversely, if reconstruction costs would approximate or even exceed the original contract price, closer scrutiny of the net benefit of reconstruction should be expected.

The bottom line is that making an injured party whole requires a common sense approach, fact-specific rather than one-size-fits-all. If the rationale for a rule doesn't fit the facts, the rule will be discarded in favor of one that does.
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#50:  Change Order Disputes

11/25/2016

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Owner and contractor sign a contract for performance of a defined scope of work. The owner changes the scope in a way that will increase the contractor's costs. The contractor pulls out the contract, looks at the “change order” clause, and follows the stated procedures for getting extra compensation. Sounds simple, doesn't it?

In practice, it rarely is that simple. There can be disputes over whether the initial scope of work has really changed. There can be disputes over who is responsible when the contractor is obliged to alter his planned means and methods of construction in order to accommodate unanticipated circumstances. There can be disputes over pricing.

To speak of a change “order” smacks of owner discretion and control, but from a legal perspective the focus is usually on the contractor's rights. “A change order is a charge for work not included in a contract's scope of work.” H.E. Contracting v. Franklin Pierce College, 360 F.Supp.2d 289, 292 n.3 (D.N.H. 2005). The “change” part arises from an alteration of either the work initially designated or the means of performing it. The “order” part arises from an actual or implied directive to perform the altered task, but in the latter case “order” is a bit of a misnomer – the common terminology of change orders being “issued” by an owner or architect doesn't quite fit. An owner or architect will not issue a change “order” he doesn't agree with, yet the courts often indulge in the fiction that he has done exactly that.

Many owners attempt to protect themselves from this result with contract language specifying that no change orders are allowable unless agreed on by the owner in writing. In the H.E. Contracting case, the contract stated “No claim for extra work or cost shall be allowed unless the same was done in pursuance of the written order of the Engineer, approved by the owner.” The Court ruled that such provisions are enforceable “unless the owner has actual knowledge of the additional work and is not prejudiced by the contractor's failure to comply with the writing requirement.” Id. at 294. This suggests that if the work truly is “additional,” and the owner is paying reasonable attention to what is happening on site and does not step in to stop it, the additional work will generally be compensable even if the owner never picks up a pen. The legal principle here is familiar. Like all contract modifications, change orders must be agreed to either expressly (typically demonstrated by signing a piece of paper) or impliedly (typically shown by a direction to the contractor to perform the change under circumstances that yield a reasonable expectation of extra compensation). Resolution of change order disputes almost always boils down to a search for those circumstances, and hence for that implied consent.

This does not mean that owners are at contractors' mercy whenever there are scope changes. From the owner's perspective, if a change is to have a price tag associated with it, the owner wants to know what that price will be before blessing the change. It is common to find contract provisions for submission of a claim before the additional work is started, with an itemized breakdown of additional costs. Such provisions are enforceable. So are provisions for how change orders will be priced in the event of disagreement on the amount (e.g., unit prices stipulated in advance, or documented time and materials charges with a markup stipulated in advance). Owners are not expected to issue blank checks for extra work.

Conversely, change orders can embrace more than the raw cost of constructing the new or altered work. Suppose that an owner's indecision or change of mind causes delays to the job, leaving the contractor with extended general conditions and additional time on the job for which he seeks compensation through the change order process. More often than not, the courts will award compensation for these as well, unless specific contractual language excludes them.

The common thread here is that contractual provisions matter – but so does fairness to both sides.
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#49:  The Performance Bond Surety and Indemnity for Expenses

10/29/2016

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When a contractor buys a performance bond at the behest of an owner, he is typically required to sign an agreement to indemnify the surety for any costs and expenses that the surety may incur under its bond. If the bond is ever called by the owner, those expenses can get quite high quite fast – including not only sums paid to complete the contract, but the fees of attorneys and experts hired by the surety in connection with any litigation brought by or against the owner. From the contractor's perspective, suspending or abandoning work prior to completion of a bonded job thus entails the risk not only of a lawsuit by the owner but of indemnity claims by the surety who is called upon to complete the work – and the latter can end up being more costly than the former. Generally the indemnity agreement will not only establish the surety's right to reimbursement of its expenses, but provide for security or collateral to ensure that those expenses will be collectable.

To be sure, there is some risk on the surety as well. The surety has good faith obligations to both the contractor and the owner, and when a declaration of default by the owner is challenged by the contractor, those twin obligations require a bit of a balancing act. Often the contractor's challenge will arise from its suspension or abandonment due to nonpayment for work that the contractor considers a change and the owner considers within the original scope of work. The surety must investigate and decide which party's position is more plausible. Most indemnity agreements will prescribe the standard that the surety will apply when judging between the two positions (“reasonableness” being the usual touchstone), but judging wrongly can have consequences – particularly given the legal principle that the performance bond surety has all of the rights and defenses that the contractor has. Refusing to invoke those defenses when they are likely winners may end up depriving a surety of reimbursement.

So can going overboard on the amount spent in defending against an owner's claim. In Gulf Ins. Co. v. AMSCO, Inc., 153 N.H. 28, 41 (2005), our Supreme Court noted that “an indemnity agreement is not a blank check; it does not entitle the surety company to reimbursement for legal expenses which are unreasonable or unnecessary. To hold otherwise would allow [a surety] to retain counsel and to charge attorney's fees against the indemnitor even when the surety company does not require a separate legal defense to protect its interests.” The Court affirmed a lower court decision that a surety was not entitled to be indemnified by the contractor for the costs of hiring separate counsel where it could have tendered the defense of the owner's claims to the contractor.

Every case is different, but in general the factors considered by the courts when ruling on a surety's right to be reimbursed for attorneys' fees include “the amount of risk to which the surety was exposed; whether the principal was solvent; whether the surety has called on the principal to deposit with it funds to cover the potential liability; whether the principal on demand by the surety to deposit with it the amount of the claim has refused to do so; whether the principal was notified of the action and given opportunity to defend for itself and the surety; whether the principal hired the attorney for both himself and the surety; whether the principal notified the surety of the hiring of the attorney; the competency of the attorney hired by the principal; the diligence displayed by the principal and his attorney in the defense; whether there is a conflict of interest between the parties; the attitude and cooperativeness of the surety; and the amount charged and diligence of the attorney hired by the surety.” Id. at 37-38.

Tendering the defense of an owner's claims to the contractor does not mean that the surety will incur no indemnifiable expenses. The surety will still monitor the litigation, and could step in if the defense is going poorly. It may even end up assisting in financing the defense if the contractor's resources wane. But in my experience, tendering the defense usually makes sense – for both contractor and surety.

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#48:  The Use and Abuse of Liquidated Damages

9/29/2016

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Getting a project completed on time is often crucial to a commercial owner, who must forego the efficiencies or even the business opportunities which motivated him to build the longer the project is incomplete. Making delayed completion a breach of contract is all well and good, but proving the damages that will flow from such a breach can be difficult; the legal standard for recovery of damages requires proof by a preponderance of the evidence that profits would have been realized or increased but for the delay, as well as reasonable certainty as to their probable amount.

It is precisely for such situations that liquidated damages clauses are used in many construction contracts. Damages are agreed to, or “liquidated,” in advance, usually in a particular amount per day of delay, thereby relieving the owner of the burden of proving actual damages. But because the law aims to make the non-breaching party whole and not give him a windfall, courts impose restrictions on the ability to recover liquidated damages – as a check against the possibility that the amount fixed by agreement may be wildly divergent from actual damages, thereby constituting a penalty. A liquidated damages clause will be enforceable if “(1) the damages anticipated as a result of the breach are uncertain in amount or difficult to prove; (2) the parties intended to liquidate damages in advance; and (3) the amount agreed upon is reasonable and not greatly disproportionate to the presumable loss or injury.” Holloway Automotive Group v. Lucic, 163 N.H. 6, 9-10 (2011).

The first two of these elements are rarely problematic in a construction contract. Almost always, the fight will be over the third element: was the liquidated amount reasonable? Our courts “employ a two-part test to determine whether a liquidated sum is reasonable. First, we assess whether the amount 'was a reasonable estimate of difficult-to-ascertain damages at the time the parties agreed to it.' Next, we ask whether actual damages are 'easily ascertainable' after a breach. '[I]f the actual damages turn out to be easily ascertainable, we must then consider whether the stipulated sum is unreasonable and grossly disproportionate to the actual damages from a breach.' If the stipulated sum is grossly disproportionate to easily ascertainable, actual damages, the provision is an unenforceable penalty, and the aggrieved party will be awarded no more than the actual damages.” Holloway, 163 N.H. at 10.

Let's break this down. The first inquiry is prospective as judged at the time of contracting: was the amount chosen a reasonable estimate of what appeared at the time to be hard to prove with precision? The second inquiry is retrospective: have subsequent events shown that actual damages are easy to prove – and if so, was the original estimate in the ballpark? Thus, the reasonableness of the estimate is judged both prospectively and retrospectively.

Most liquidated damages clauses are premised on delays in substantial completion rather than final completion. The reason is not hard to see: substantial completion is the stage of progress at which the project can be used by the owner for its intended purposes, and once the owner can use it, damages for delay no longer accrue. Nevertheless, I have seen contracts purporting to impose liquidated damages for late final completion, and even for late completion of interim milestones. Whether such provisions are enforceable in court is another matter. My guess is that these are likely to be deemed unenforceable penalties.

If a liquidated damages clause is unenforceable, the non-breaching party can still recover any proveable actual damages. General Linen Services, Inc. v. Franconia Investment Associates, L.P., 150 N.H. 595, 600 (2004). The more interesting question is whether a nonbreaching party can choose to sue for actual damages in the face of a valid liquidated damages clause. As long as the contract expressly gives an option to pursue either, the answer appears to be Yes – although “where an election is permitted, the election of one remedy bars pursuit of the other,” because “the right to recover liquidated damages and the right to recover actual damages are mutually exclusive remedies,” Orr v. Goodwin, 157 N.H. 511, 517 (2008). 
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