 |
The
following paper, in outline form and with links to related reading, accompanied
a panel discussion at the Global Construction Superconference on November 5 and
6, 2001, in London. The panelists were Stephen
V. O'Neal, Andrew
D. Ness and Jesse B. Grove III of Thelen LLP; Michael Feigin, executive vice president,
Bovis Lend Lease Americas, New York; and Alison Gough, head of legal, Lend Lease
Europe, London.
By James E. Acret
| I. |
Licensing
Laws for Architects, Engineers and Contractors |
| | | |
| | A. | Every
state has its own set of licensing requirements for contractors, architects, engineers,
and surveyors. | | | |
| | |
| 1. | Most
states classify contractors according to trade: general, electrical, roofing,
plumbing, etc. | | |
| 2. | It
is a violation for a trade contractor to operate outside its licensed specialty. |
| |
| 3. | In
most states, the definition of "contractor" includes construction management,
so construction managers must be licensed. An architect's, engineer's, or contractor's
license authorizes the licensee to act as a construction manager. |
| | | |
| | B. | The
doctrine of illegality. | | | |
| | |
| 1. | Under
the doctrine of illegality, courts will not enforce an illegal contract. |
| |
| 2. |
In
many states, the courts accord this treatment to unlicensed contractors: The unlicensed
party is turned away at the courthouse door when it seeks to enforce its contract,
which is treated as illegal for lack of a license. - The
first step taken by a construction lawyer in defending against a claim is to check
license status of the plaintiff.
|
|
| | C. | State
licensing requirements do not apply to projects of the U.S. government and its
agencies. | | | |
| | D. | Qualifying
for a license. | | | |
| | |
| 1. |
As
a general rule, a corporation, partnership or joint venture qualifies for a license
through the offices of the owner or a managing employee. - A
qualifying person must show experience and pass a test, and the firm must submit
evidence of reasonable financial responsibility.
|
| 2. |
Most
states also require a contractor's license bond to protect any consumer who suffers
damages because of a violation of the license law.
| | | | |
| | E. | Design-build
implications. | | | |
| | |
| 1. |
A
design-build contractor may need to be licensed as a contractor, an architect
and an engineer. - Work
can be subbed out to licensed subcontractors and to surveyors.
|
| 2. |
In
some states, the architectural and engineering work also can be subbed out. |
| |
| 3. | In
some states, a licensed architect or engineer can contract for a work of improvement
and sub out all the construction work. | | |
| 4. | Joint
ventures must be separately licensed. It often is feasible for a contractor to
joint venture a design-build project with an architect or an engineer in order
to attain proper licensing. | |
| | | |
MORE
READING ON THIS TOPIC:
| II. |
Design-Build |
| | | |
| | A. | Definition.
Design-build is a construction protocol in which the constructor undertakes, by
contract with the project owner, both to design and build a work of improvement. |
| | |
| | B. |
Advantages. The joint employment of the resources of the contractor and
the designer promotes buildability. If there are problems on the job, the designer
and the contractor work together to overcome them rather than trying to pin blame
on each other. Even if a blame game develops, the owner does not have to take
sides. The team will involve major subcontractors at the design stage. Project
may more easily go fast track. | | | | |
| | C. | Disadvantages.
The owner may not have the resources to properly evaluate a design-build proposal.
If competitive bidding is required, it is difficult to judge which is the lowest
responsible bidder. If competitive bidding is abandoned, the contract price may
escalate. Compliance with state licensing laws may be difficult or even impossible. |
| | | |
| | D. | Design-build
documents. It is amusing to compare the standard design-build contract documents
published by design professions with those published by contracting professions.
In those published by the design professions, the architect or the engineer becomes
a true master builder. In those published by the contracting professions, the
designer becomes something closer to a clerk of the works. |
| | | |
| | E. | Popularity.
Many owners conclude that design-build is the way to go despite its manifest drawbacks.
Owner's primary motivation is the hope of avoiding construction disputes. As more
public agencies are authorized by statute to pursue design-build projects, more
and more private owners are convinced of its virtues. |
MORE READING ON THIS TOPIC:
| III. |
Mechanic's
Liens and Stop Notices | | | | |
| | A. | Mechanic's
Liens | | | | |
| | |
| 1. | Mechanic's
lien law is purely statutory, and every state has a mechanic's lien statute. The
fundamental purpose is an equitable one: If a contractor improves an owner's property,
to prevent the unjust enrichment of the owner, the contractor should have a lien
on the property until paid. | | |
| 2. | Since
subcontractors and material suppliers also have lien rights, a problem arises.
An owner who has already paid the contractor can catch a lien from a subcontractor
or supplier. This is the "double payment" problem. |
| | |
| 3. | The
ultimate end result of the foreclosure of a mechanic's lien is for the sheriff
to sell the owner's property at public auction and use the proceeds of the sale
to pay off the lien. | | |
| 4. |
The
best protection for the owner is a qualified, experienced and financially sound
contractor. It is the prime contractor who protects the job against liens. |
| | |
| |
| a. | Payment
bond also protects owner. | | |
| b. | Owner
also may protect the job by carefully processing progress payments so that no
payment is made to the prime contractor until potential lien claimants have been
identified and paid. To process progress payments in such a way requires highly
trained personnel. | | |
| | 5. | Most
lien statutes include notice provisions, relatively short deadlines, statutes
of limitations and documents that can be recorded by owners to cut down the period
for recording liens. Owner may tender the defense of a mechanic's lien foreclosure
suit to the prime contractor for defense, but care is required. The owner may
find the contractor's interests are more aligned with those of the claimant than
with those of the owner. | | | |
| | | B. | Stop
notices. A stop notice is ancillary to the mechanic's lien remedy. It enables
claimants, usually subcontractors and suppliers, to attach construction funds
in the hands of project owner or construction lender. The owner or lender must
withhold the funds from the prime contractor pending resolution of the claim in
court. | | | |
| | |
| 1. |
In most states mechanic's liens are not allowed on public property, and, therefore,
the stop notice substitutes for the mechanic's lien remedy on public jobs. |
| |
| 2. |
On
private jobs, the stop notice and the mechanic's lien remedies may be asserted
at the same time. Stop notice usually is considered to be more effective and in
most situations, it is. Well-advised claimants pursue both remedies at the same
time.
| | | |
| | | C. | Payment
bonds. The payment bond remedy also protects claimants who have mechanic's
lien and stop notice rights. Payment bonds usually are in place on all public
jobs and large private projects. They usually are not provided on smaller projects.
Payment bond surety undertakes that all parties who have mechanic's lien and stop
notice rights will be paid in full. | | | |
| | D. | Self
help. Owners, contractors and potential claimants need to understand lien,
stop notice and payment bond laws in states where they operate. The mechanic's
lien statutes for all states are available in a single book. See Bibliography. |
MORE READING ON THIS TOPIC:
| IV. |
Construction
Contract Bonding | | | | |
| | A. | Performance
bond. The surety undertakes that the principal (usually a contractor or a
subcontractor) will perform the contract. (Performance bonds are usually held
to cover contractual warranties and may apply to construction defects discovered
many years after completion of the project.) |
| | | |
| | |
| 1. | Claims
against the bond. There is no specific format for making claims against a
performance bond. The best policy is to promptly inform the surety in writing,
with adequate backup. | | |
| 2. | Position
of surety. The surety will refer a claim to the principal (the contractor).
If the contractor disputes the claim, the surety is caught in the middle. |
| | |
| |
| a. | For
obvious reasons, the surety is likely to favor the contractor's version. This
is because if it pays a claim over the contractor's objection, it will have to
sue the contractor for reimbursement. | | |
| b. | When
the surety denies a claim, the owner will find itself fighting both the contractor
and the surety. | | |
| | | | B. | Indemnity
agreements. Surety will have required the principal or its officers and directors
to sign agreements to indemnify the surety against loss and expense. The surety,
therefore, will look to the principal or its officers and directors to reimburse
any loss. The surety, thus, is motivated to cultivate a good relationship with
them. So, the surety's natural desire to curry favor with the indemnitors creates
conflicts of interest with the owner. | | | | |
| | C. | Bonding
requirements. Performance and payment bonds are required on all public jobs
and on most major private projects. For smaller projects, they are seldom required.
Smaller contractors do not have the bonding capacity, and many owners resist incurring
the expense of paying the bond premium. | | | | |
| | D. | Taking
over the job. If contractor defaults, there are three basic alternatives for
the surety. | | | | |
| | |
| 1. | Surety
finances the contractor to finish the job. |
| |
| 2. |
Surety
employs a new contractor to finish the job. |
| | |
| 3. | Owner
employs a new contractor to finish the job and claims reimbursement from the surety. |
| | | |
| | E. | Strategic
considerations from the standpoint of the surety: |
| | | |
| | |
| 1. | If
the owner finishes the job using a replacement contractor, maximum liability is
the penalty amount of the bond; if we take over the job or finance the contractor,
we "blow the bond penalty." | | |
| 2. |
If
we finance the job or if we take over the job and use the same contractor to finish
it, we save the expense of orienting a new contractor to the job. |
| | |
| 3. |
If we let the owner finish the job, we lose control of costs. |
| | | |
| | F. | Strategic
considerations from the owner's point of view: |
| | | |
| | |
| 1. | We
don't want the same contractor: he is a proven incompetent. |
| |
| 2. |
If
we finish the job ourselves, we'll probably have to sue the surety for a settlement. |
| | |
| 3. |
If the surety employs a fresh contractor, it may turn out to be a stooge for the
defaulted contractor. Any fresh contractor will take time to mobilize and may
try to cheapen the job. | |
| | | |
| | G. | Bad
faith. In some states, sureties may be liable for punitive damages for bad
faith in processing claims. | | | | |
| | H. | Provisions
of the bond. As a general rule, owner should carefully scrutinize bond provisions
because most of them will be loopholes for the bonding company. Owner should not
accept such provisions. | | | | |
| | I. | Reports
to surety. Performance bond sureties usually have a form letter by which they
request monthly reports from owner. Owner should have a policy not to respond.
If owner criticizes contractor, contractor may claim defamation; if owner fails
to criticize contractor, surety may claim waiver. Owner should be diligent in
reporting actual problems to the surety but not necessarily as a response to a
form letter inquiry. | | | | |
| | J. | Surrendering
the bond. A year or two after completion of job, the contractor may request
that the owner surrender (or release) the bond, pleading that the contractor's
bonding capacity is reduced as long as the bond remains open. Owner should never
release the bond. | | | | |
| | K. | Payment
bonds. The purpose of a payment bond is to protect an owner against mechanic's
lien and stop notice claims. | | | | |
| | |
| 1. | The
surety agrees to see to it that subcontractors, material suppliers and others
who could assert mechanic's lien or stop notice claims on the project will be
paid. | | |
| 2. |
Here,
the obligee is not only the owner. Potential mechanic's lien and stop notice claimants
also are obligees. They make their claims directly against the bonding company. |
|
MORE READING ON THIS TOPIC:
| V. |
Indemnity |
| | | |
| | A. | Assume
a contractor is required to indemnify the owner against losses arising out of
a construction project. Such indemnity clauses are classified as follows: |
| | | |
| | |
| 1. | Claims
and losses. Indemnity against losses becomes effective when a loss is sustained.
Indemnity against claims takes effect when a claim is made, and the indemnitor
must defend the indemnitee against the claim. |
| |
| 2. | Liability
vs. loss. An indemnity against liability takes effect when liability is established
by a final judgment; indemnity against loss takes effect when the loss has actually
been paid. | | | |
| 3. | Fault
or no fault. The obligation to indemnify may be triggered only when the indemnitor
or its subcontractor is at fault or when the indemnitor is faultless. Some clauses
provide indemnity even if the indemnitee wholly at fault. (A liability insurance
policy is an example of an indemnity contract that provides coverage when the
indemnitee is wholly at fault.) | | | |
| |
| a. | A
clause will be interpreted to provide indemnity against the indemnitee's own negligence
only if the language is unmistakably clear. |
| |
| b. |
In some states, statutes prohibit indemnity in a construction contract against
the indemnitee's own sole negligence. |
|
| 4. | Mechanic's
liens. Prime contractors usually are required by contract to indemnify the
owner against mechanic's lien claims. | | |
| | | | B. | Tender.
Indemnitee should promptly demand a defense. Costs of defense before the demand
are waived. The demand should be carefully considered. |
| | | |
| | |
| 1. | Indemnitor
may not provide an adequate defense. | | |
| 2. |
Indemnitor
may not be able to pay an adverse judgment. |
| | |
| 3. | Indemnitor
may in fact have a conflict of interest, e.g., prime and subcontractors who are
lien claimants may be cooperating against the owner. |
| | |
| 4. | Indemnitee
should reserve the right to select, or approve the selection of, defense counsel. |
| | | | |
| | C. | Liability
assumed by contract is a form of liability insurance coverage in which the
obligation to indemnify is passed on to an insurance carrier. This could be described
as an insured indemnity clause. | | | | |
| | D. | Indemnity
against loss does not protect an owner against construction defects. The word
"indemnity" implies not merely a loss but also a third party claimant. |
| | | |
| | E. | Equitable
indemnity, sometimes called implied indemnity, arises in the absence of a
contract of indemnity. The doctrine implements an equitable principle allocating
blame among defendants and cross-defendants. Example: Claim is made against a
prime contractor for a leaky roof installed by a subcontractor. Contractor may
cross-complain against roofer to seek equitable indemnity even absent an indemnity
clause in the subcontract document. | | | | |
| | F. | Limitations.
A cause of action accrues on an indemnity against loss and the statute of limitations
begins to run when indemnitee has paid the loss. This makes for an extremely long
limitations period. |
MORE READING ON THIS TOPIC:
| VI. |
Total
Cost Claims | | | | |
| | A. | Application
of the total cost rule is a boon to claimants and a despised perversion of the
law to defenders. It is a special instance of the principle that a plaintiff should
not be deprived of a remedy just because the damages it suffered are difficult
to prove with specificity. | | | | |
| | B. | The
seven steps to prove total cost damages: | | | | |
| | |
| 1. |
Introduce the estimate and prove it was reasonable. If there are any busts in
the estimate, establish the amounts of the busts. |
| |
| 2. | Show
how the actions of the owner or the general contractor are (a) unlawful and (b)
caused damage. Unlawfulness may be breach of contract, breach of warranty, failure
to follow trade practice, misrepresentation or negligence. (If misrepresentation
or negligence, the claim may be defeated by the economic loss rule, discussed
below.) | | | |
| 3. | Show
that the damages cannot be proved precisely because records do not exist. Example:
There is a bust in plans, crews repeatedly had to demobilize, move, remobilize,
reorient and resume work at a different location. It was not feasible to assign
a timekeeper to document these events. | | | |
| 4. |
Have
your expert estimate the loss of productivity caused by the improper acts of the
defendant, e.g., "We only got 80 percent of the productivity we figured in
the estimate." | | | |
| 5. | Compute
the losses caused by the claimant's own mistakes. |
| |
| 6. | Determine
the total cost of the project. | | |
| 7. | The
damages are the total cost of the project minus busts in the estimate minus the
mistakes and minus payments. | | |
| | | C. | Some
courts use the label "modified total cost" because the total cost is
modified by the bid busts and the mistakes. |
| | | |
| | D. | Note
the estimate of lost productivity will, quite naturally, approximate the claim
figured by the modified total cost method. | .
MORE READING ON THIS TOPIC:
| VII. |
Economic
Loss Rule | | | | |
| | The
economic loss rule is the most frequently overlooked defense and the most devastating
to the claimant. | | | | |
| | A. | Under
the rule, economic losses unaccompanied by physical injury cannot be recovered
in any cause of action that sounds in tort. |
| | | |
| | B. | Privity.
The economic loss defense is similar to what is labeled the "privity"
defense. This was and is a defense often asserted, for example, by architects
and engineers to deflect claims of liability by parties with whom they have no
privity of contract, e.g., patrons, workers, subcontractors, remote owners. |
| | | |
| | C. | Justification
for the rule. The economic loss rule rests on a plausible theory: Persons
should be required by tort law to avoid causing bodily injury or physical property
damage to strangers, but they should not be responsible for economic expectations
of making a profit or avoiding an expense. |
| | | |
| | D. |
Economic
loss examples: Value of building is diminished because shear walls are absent;
roofs wear out prematurely; cost of heating and cooling a building is increased
because of negligent design of air handling units; power plant cannot produce
power at a profit because of negligent design and improper economic analysis;
subcontractor loses money on job because of busts in plans. - In
all the foregoing cases, plaintiff might recover in contract or for breach of
warranty, but if the economic loss rule applies, plaintiff could not recover in
tort.
| | | E. | Whether
bodily injury or physical property damage has occurred may become a sophisticated
question. Emotional distress may be accompanied by physical manifestations. Deflection
is a physical manifestation, but nothing is broken. In its most extreme form,
recently adopted by the Nevada Supreme Court, the economic loss rule was a successful
defense to a claim against a subcontractor because the physical damage (caused
by defective framing) was to the product itself (townhomes) and not to other property. |
| | | |
| | F. | Information-for-the-use-of-others
exception. Many states hold architects and engineers responsible for economic
loss sustained by contractors on the ground that they prepared information to
be used by contractors even though their identities may have been unknown. |
| | | |
| | G. | Services
exception. In some states, the economic loss rule protects builders, manufacturers
and material suppliers but not service providers, such as architects and engineers. |
| | | |
| | H. | Defenders
blew it. In legions of cases, the courts have awarded economic loss damages
in tort without ever considering the economic loss rule: it was not raised by
the defense. | | | | |
| | I. | Motions
in limine. The economic loss defense may be asserted by a motion in limine
to exclude all evidence of damages not caused by physical injury. |
MORE READING ON THIS TOPIC:
MORE READING ON THIS TOPIC:
| IX. |
Bibliography |
| | | |
| | A. | On
This Site | | | |
| | | |
| | B. | From Publishers | | | | |
| | |
| | James
Acret, Construction Industry Formbook (West Group 2d ed.) |
| |
| | James
Acret, National Mechanic's Lien Handbook (BNI 2000). |
| |
| | James
Acret, Construction Litigation Handbook (West Group 2d ed.). |
| |
| | | |
