Courts Generally Will Enforce North Carolina’s Anti-Indemnity Statute, But How Far?

Back in March, I wrote about the role of North Carolina’s anti-indemnity statute in the construction industry.  The statute, codified at N.C. Gen Stat. § 22B-1, appears below (you can click the image for a larger version):

Anti-Indemnity Statute

As my previous blog post indicated, the statute prevents “one party from shifting the entire risk of its own negligence to another.”  A recent case from the U.S. Bankruptcy Court for the Eastern District of North Carolina demonstrates how courts utilize the so-called “blue pencil” doctrine to accomplish that goal.

In In re New Bern Riverfront Development, LLC, the subcontract between GC and sub contained a clause purporting to require the sub to “indemnify and hold harmless” the GC “from and against claims … resulting from Subcontractor’s work … provided that such claim … is attributable to bodily injury … or to injury to or destruction of tangible property … if caused in whole or in part by the negligent acts or omissions of Subcontractor…”  (Emphasis supplied).  The sub argued the anti-indemnity statute precluded enforcement of the clause; the GC argued the clause was enforceable.  The court split the difference, using the “blue pencil” doctrine to essentially strike from the clause the phrase “or in part,” leaving the sub potentially responsible to the GC only for the sub’s negligence “in whole.”  On the facts of the case, however, there was no evidence that the damages in question were caused “in whole” by the negligence of the sub, and so the court dismissed the GC’s indemnity claim upon the sub’s motion for summary judgment.

That’s a great result for the sub.

Wednesday WisdomStill, a word of caution is in order.  The anti-indemnity statute, per its own terms, only extends to third-party claims for personal injury and property damage.  That leaves a whole host of claims for which a lower-tier contractor could be responsible to a higher-tier, regardless of which party in the contractual chain might be at fault.  Suppose, for example, you’ve signed a subcontract containing a clause purporting to require you to defend, indemnify and hold harmless the GC “from any and all claims whatsoever arising from the Subcontractor’s performance.”  Let’s further assume that a project delay arising from an architect’s wrongful stop work order related to your work caused the GC to incur extended general conditions.  The architect is now out of business, and the GC is looking to you to make it whole.  Might you escape liability to the GC under the anti-indemnity statute? Unfortunately, there’s no express language in the statute prohibiting enforcement of such a clause, and under existing law, it’s unclear to what extent, if any, the courts might offer you protection under the “spirit” of the statute.

The upshot?  Courts typically will employ the blue pencil doctrine to enforce specific protections passed into law by the state Legislature.  But in the absence of such statutory protections, you may be on your own.  At the contracting stage, be on the lookout for overbroad indemnification provisions, and negotiate your construction contracts wisely.  Better still, have an experienced construction attorney review the next construction contract you’re asked to sign to ensure it contains a fair risk allocation between the parties.

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Filed under Federal case law, Indemnity Claims, State law, policy & news, Subcontractors

A Few Simple Words That Make a World of Difference for Lower-Tier Miller Act Claimants

If you’re a lower-tier subcontractor or supplier on a public construction project, it might be tempting to calendar your notice-of-claim deadline 90 days (in the case of federal Miller Act projects) or 120 days (in the case of North Carolina “Little Miller Act” projects) from your last furnishing of labor and materials, regardless the nature of that last furnishing.

Resist that temptation.

It overlooks a few simple but critical words recited in the federal Miller Act, as well as similar language contained in North Carolina’s Little Miller Act.

Check out the highlighted words in this excerpt from the federal Miller Act (40 U.S.C. § 3133(b)(2)) (you can click the image for a larger view):

MillerActNoticeExcerpt3

And now take a gander at this excerpt from North Carolina’s “Little Miller Act” (N.C.G.S. § 44A-27(b)) (you can click the image for a larger view):

LittleMillerActNoticeExcerpt2

Both statutes say essentially the same thing: not only must notice of claim under the payment bond be given from 90 days (federal projects) or 120 days (North Carolina public projects) from last furnishing of labor and/or materials; it must be given from the last furnishing of labor and/or materials for which payment is sought.

That distinction can make a world of difference.  Here’s an example of how:

Monday MemoImagine you’re a second-tier provider & installer of security cameras on a wildlife refuge visitor center project owned by the U.S. Fish & Wildlife Service.  Your sub-subcontract is with the project’s first-tier security subcontractor, placing you firmly on the second tier, and within the federal Miller Act’s notice-of-claim requirements.  You last performed installation work on April 30, 2014, and later that day you submitted your final invoice, seeking payment in-full.  As of July 31, 2014, however, you hadn’t been paid the balance of your sub-subcontract; nor had you furnished notice of claim under the prime contractor’s payment bond.  You then spent a week in August training employees on the system’s operation (part of your base scope) and switching out a few cables (arguably extra work, but you neither provided notice of claim nor sought a change order timely, as required by your sub-subcontract).

It’s now September 29, 2014.  You still haven’t been paid.  Worse still, the first-tier subcontractor filed for bankruptcy protection last Friday.  You decide it’s time to put the prime contractor and its surety on notice of your payment bond claim, citing your last day on-site in August (which was obviously less than 90 days ago) as your last furnishing date.

That might not do the trick.  Why?  Because you didn’t bill for your August work.  In fact, your documentation shows that you billed for the entire remaining balance of your subcontract at the end of April.  Sure, the training work you performed in August was pursuant to your contractual obligations, so you have that going for you.  But would a trial court judge conclude that was work for which payment was sought, when final payment was sought back in April?  Your final invoice could be a major obstacle.

The good news is courts tend to afford public payment bond statutes a liberal construction.  The bad news is that they also tend to construe statutory notice and suit deadlines strictly.  As an example, check out how Judge Boyle trimmed the second-tier subcontractor’s Miller Act claim in AMEC Environment & Infrastructure, Inc. v. Structural Associates upon finding that the claim was asserted well after the claimant’s base scope of work had been completed.

The takeaway?  When you’re a remote sub or supplier on a government project, and therefore subject to the notice-of-claim requirements of the Miller Act or Little Miller Act, be mindful in establishing your date of last furnishing.  Don’t assume commissioning, training, punch list work, providing replacement parts or similar activities represent last performance, particularly if you have already submitted a “final” bill prior to such performance.  Once you submit an invoice for final payment, it may be difficult to prove that any subsequent activity represents performance “for which payment is sought.”

Generally speaking, the most conservative approach is to set your claim notice deadline based on the date you last performed labor and/or supplied material for which you actually sought payment, and avoid reliance on subsequent commissioning, training or similar activities (unless, of course, you’re planning to hold off on your “final” billing until these activities are actually completed).  Better still, consult with an experienced construction attorney to map out an appropriate strategy for ensuring your payment rights are secured timely.

 

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Filed under Federal case law, Payment Bonds

Have a Lien Claim Arising from an Improvement to Leased Property? Aim for the Right Target.

In most cases, the “owner” of a tenant improvement project is NOT the record owner of the real property, but rather the tenant who entered into the contract for the improvement.

That distinction can be critical when perfecting and enforcing mechanics liens in North Carolina.

Take, for example, the fireproofing contractor who asserted a mechanics’ lien enforcement action against both the landlord and the tenant of a leased premises in yesterday’s unpublished Court of Appeals decision in Century Fire Protection, LLC v. Heirs.

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Subcontract Negotiation Is a Question of Leverage. Leverage Is a Function Of . . .

Two tweets touching upon subcontract negotiation dynamics jumped out at me this week.  The first was from zlien founder Scott Wolfe, Jr., who linked to his recent blog post about general contractors who demand that their subcontractors sign away their lien rights:

Money quote from the post:

General contractors scream that relationships are important, but really, it’s relationships on their terms.  …  In reality, however, the subcontractor is likely feeling a bit abused.  They accommodate because of the general contractor’s influence and contracting power.

The second tweet was from good friend and Virginia construction attorney Chris Hill, who linked to fellow Virginia attorney Juanita F. Ferguson’s piece discussing (among other things) forum selection clauses in subcontracts between out-of-state prime contractors and local subs:

Money quote from the post: “local contractors must be savvy in negotiating contracts with out-of-state companies.”

Which, in turn, begs the Friday Forum money question:

What factors impact the relative bargaining power of primes and subs when it’s time to make a deal?

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Filed under Construction Risk Management, Contract Review & Negotiation, Forum Selection Clauses, Subcontractors

N.C. Construction Industry First Fractures, Then Coalesces, Around Prequalification Legislation

By a whopping 116-0 margin, the N.C. House of Representatives yesterday passed House Bill 1043 (“HB 1043″), aimed at bringing objectivity and uniformity to the prequalification of contractors on public construction projects in the Tar Heel State.

Don’t let yesterday’s vote tally deceive you, however; the legislation was not without its share of controversy.

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Filed under Construction Management, Project Delivery Systems, State law, policy & news, Subcontractors

Bound, But Determined: How Subs Might Evade Terms Binding Them to Decisions of Architects

It’s typical for subcontracts to include a clause binding the subcontractor to the decisions of the project architect.  Such terms help general contractors and construction managers at-risk avoid obligations to subs below that can’t be passed through to owners above.  That’s a sensible and enforceable risk allocation most of the time.

But not all of the time.

Sometimes, the architect doesn’t play fairly.  Sometimes, the prime contractor fights hard for itself, but not hard enough for its subs.  And sometimes, a statute might provide a remedy when the subcontract does not.

On such occasions, as discussed below, subcontractors might avail themselves of an escape hatch:

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Filed under Change Orders, Delay Claims, NC case law, Subcontractors

Why Yesterday’s 4th Circuit Lien Law Decision Is a Mammoth Victory for Contractors & Suppliers

Image by Shirley v. Pixabay.com

Image by Shirley via Pixabay.com

I was out-scooped yesterday by good friend and fellow Raleigh construction lawyer Brian Schoolman, who announced via Twitter that the Fourth Circuit Court of Appeals has approved the filing of North Carolina mechanics’ liens even after a party higher up in the contractual chain seeks bankruptcy protection:

I highly recommend clicking the link and reading Brian’s blog post.  It does a terrific job summarizing the Court’s rationale and discussing how CSSI puts the last nails in the coffins of the 2009 Shearin, Mammoth Grading and Harrelson Utilities decisions of a lower court that had reached the opposite result, before subsequently reversing itself a few years later in CSSI, which the 4th Circuit has now affirmed.  (For additional legal context, check out my previous blog post on the Mammoth Grading and Harrelson Utilities cases.).

I write today to emphasize how important the 4th Circuit’s CSSI decision is to your construction business.  Specifically, I write to answer this question: Why does having the right to file a mechanics’ lien, after the party immediately above you in the contractual chain seeks bankruptcy protection, matter?

Here’s why:

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Filed under Federal case law, Federal law, policy & news, Lien Law, State law, policy & news, Subcontractors

4th Circuit: Construction Company Can Be Liable for Harassment by Another Company’s Agent

Construction is a relationships-driven business.  The most successful companies understand that rising to the top requires developing and nurturing solid relationships up and down the contractual chain, both before the contract is signed and throughout the period of performance.  It’s the ticket to generating repeat business, increasing bonding capacity, maximizing profit and thriving over the long haul.

Of course, a relationship between two corporate entities represents the sum of the interpersonal interactions between and among the owners and employees of the respective companies to the relationship.  Unfortunately, those interactions might not always be pleasant.  They might even become downright abusive.  And when one company’s agent harasses another company’s employee, the employer of the aggrieved employee could face hostile workplace liability.

Monday MemoThat’s the unmistakable message driven home by the April 28, 2014 Fourth Circuit Court of Appeals’ published decision in Freeman v. Dal-Tile Corporation.

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Filed under Employment Law Issues, Federal case law

When Resolving Construction Disputes, Three Is Company, Too

You’re a general contractor on a large commercial construction project impacted by significant delays.  You place most of the blame for the delays on the project architect, who you contend issued a wrongful stop work order arising from the performance of one of your subcontractors and performed other construction administration services negligently.  Both you and the sub have incurred significant extended general conditions as a result of the work suspension, and you invite the sub to make a delay claim you intend to pass through as a component of your own claim to the owner, who, under the contract documents, is legally responsible for the acts of its architect.

The sub wants to participate in a pre-litigation mediation you’ve scheduled with the owner, but you’re hesitant to oblige.  The owner, after all, will spend mediation blaming your sub for the issues giving rise to the stop work order, and you worry your sub’s presence could actually hamper, rather than facilitate, the settlement negotiations.

Wednesday WisdomAre you better off refusing the sub’s request to participate in the mediation, trying to settle with the owner first, and then circling back to resolve open issues with your sub once things are squared away up-the-chain?

That would be a risky play, as a 2011 North Carolina Court of Appeals decision demonstrates.

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Filed under Construction Risk Management, Damages, Delay Claims, NC case law

4th Circuit: Substantial Completion Occurs When Your Contract Says It Occurs

There is no milestone more significant to a commercial construction project than substantial completion.  For an owner, it’s the long-awaited moment it can make beneficial use of its investment.  For prime contractors, it’s the moment the owner’s rights to terminate and/or assess liquidated damages is cut off.  For subcontractors, it’s the moment contractual warranties typically begin to run.  The list goes on and on.

Monday MemoIn light of how many legal rights and defenses are tied to the moment of substantial completion, you would think that contracting parties would take extra care to (1) define what constitutes “substantial completion” and (2) ensure that “substantial completion” is achieved in accordance with that carefully crafted contractual definition.

That’s not always the case, as a 2013 decision from the U.S. Court of Appeals for the Fourth Circuit (which includes North Carolina) reveals.

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Filed under Construction Risk Management, Contract Review & Negotiation, Damages, Delay Claims, Federal law, policy & news