If you’re a prime contractor on a private, commercial construction project, your contract with the owner likely includes a provision requiring you to bond off or otherwise dispose of real property liens filed by your subs & suppliers. And if you’re a prime contractor on a bonded public project, the agreement of indemnity between you and your bonding company makes you ultimately responsible for any bond claim the surety might pay.
Either way, you’re exposed to financial loss arising from the lien & bond claims of second-tier and more remote subs & suppliers, even if you faithfully pay your first-tier subs each and every time payment is due.
So what can you do about the risk of double payment in North Carolina?
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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):
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.
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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.
That’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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The Monday Memo in recent weeks has focused on North Carolina laws and policies bearing on the Tar Heel State’s construction industry. Today I turn my gaze to our nation’s capitol, where public hearings are underway on OSHA’s proposed rule to lower the permissible exposure limit (“PEL”) for airborne crystalline silica, a by-product of such common construction operations as concrete and stone cutting.
The hearings began on Tuesday, March 18 and continue through Friday, April 4, with a variety of construction industry and safety voices scheduled to be heard.
Here are five key points to bear in mind as the process moves forward:
If I were to tell you that unforeseen subsurface conditions — for example, wetter-than-expected soils requiring a change to a building’s foundation — resulted in a substantial cost-overrun on a publicly bid project, you’d probably say, “that’s lousy news.” In the context of that one project, I’d have to agree with you; unexpected cost increases can create uncomfortable financial, PR and political pressures for a public project’s participants, not to mention unwelcome additional costs for John Q. & Jane Q. Taxpayer.
But what if I told you that the contractor’s entitlement to increased compensation on that one project would ultimately save the government much more money on future projects? “Sounds great,” you might respond, “but I don’t believe in fairy tales.”
You don’t have to. You just have to believe in the differing site conditions (“DSC”) clause.
To limit the risk of litigating in multiple jurisdictions, regional and national prime contractors usually seek to centralize dispute resolution by including a forum selection clause in their subcontracts. But some states, North Carolina included, have statutes on the books declaring such clauses unenforceable as against public policy. See N.C. Gen. Stat. §§ 22B-2, 3. The legislatures in states like North Carolina apparently have concluded that subs should be able to litigate in the state in which the project is being built. While that public policy is no doubt embraced by local subs, it might irk primes who perform work across state lines.
Which begs this question: can prime contractors circumvent such anti-forum selection statutes and ensure home field advantage when litigating against first-tier subcontractors?
Representative Sarah Stevens
I had the pleasure yesterday of attending the first of four meetings of the “House Committee on Mechanics’ Liens and Leasehold Improvements,” a non-standing legislative research committee of the North Carolina House of Representatives co-chaired by Representatives Sarah Stevens (R-Mt. Airy) and Dean Arp (R-Monroe). The Committee’s work is focused primarily on whether the state’s mechanics’ lien statutes should be tweaked to strengthen the lien rights of contractors performing work for project owners who lease, rather than own, the property being improved.
Represenative Dean Arp
Current statutory law allows contractors to place a lien on so-called “leasehold estates” (see N.C. Gen. Stat. § 44A-7(7)), but as Raleigh construction attorney Henry Jones, counsel to the Carolinas Electrical Contractors Association and N.C. Association of Plumbing & Mechanical Contractors, explained, such liens, in practice, are “illusory,” for two reasons: (1) when the lease is terminated, so are any lien rights asserted against the tenant’s leasehold interest; and (2) a successful levy against a leasehold generally means accepting not only the lease’s benefits, but also its burdens, including the obligation to make rent payments.
The 2011 Pete Wall Plumbing decision of the N.C. Court of Appeals, which Research Division staff member Shelly DeAdder did a terrific job of summarizing, is a vivid example of how a contractor can be left holding the bag when a leasehold interest is terminated. As Representative Stevens put it, “Poor Pete Wall did the work, but didn’t get paid,” and the expiration of its lien rights when the leases at issue were terminated by the record owner represented an “unfair result.” Judge Steelman’s concurring opinion in Pete Wall Plumbing, while acknowledging the majority opinion “reaches the correct legal conclusion under the present state of our statutory and case law,” called upon our state legislature to “consider revising the provisions of Chapter 44A to prevent this unjust result.”
The big question for the Committee to consider over the coming weeks is this: under what circumstances might it be appropriate to permit a contractor performing a tenant improvement to place a mechanics’ lien on the record owner’s “fee simple” interest?
Did your contract just get axed? Read on. (Picture by Hans Braxmeier / pixabay.com)
Most private owners negotiate for a contract clause permitting them to terminate a construction agreement without regard to the quality of the contractor’s performance. These so-called “termination for convenience” clauses come in handy when, for example, an owner’s financing runs dry and a project must be halted. A termination for convenience clause allows an owner to cancel a project without materially breaching the contract and avoid paying the contractor its anticipated lost profit on unperformed work.
Photo by CGehlen via Flickr *
Talk about being stuck between a rock and a hard place.
You’re an electrical sub who notices during your performance that installing certain light fixtures per plans would run afoul of the manufacturer’s instructions and violate the building code. You bring the issue to the attention of your general contractor, who submits an RFI. The architect’s response directs you to proceed per plans. The system later malfunctions, and you incur significant cost researching the problem, ultimately concluding that the installation method directed by the architect is the culprit. The architect refuses to pay your costs for researching the issue.
Might you have a claim for negligence against the architect?
One of the oft-cited advantages of arbitration is that it is simpler, cheaper and faster than litigation. Recent figures from the American Arbitration Association (“AAA”) suggest that while a commercial case may take up to two years to run its course through the judicial system, commercial cases can be resolved via arbitration between six months and a year.
Still not fast enough for you? Then perhaps you might be interested in the following fast-track alternative dispute resolution procedure: