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?
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.
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.
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.
In 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.
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?
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?
1. Scott Wolfe of Zlien.com tweeted about the pros and cons of filing a claim of lien on real property in advance of a construction mediation. The linked blog post notes that while a claim of lien might enhance the claimant’s negotiation leverage, it might simultaneously generate adversarial tension up the chain, which in turn could make a mediated resolution more difficult to achieve.
It’s an interesting strategic question, particularly now that N.C. Gen. Stat. § 44A-23(d) expressly gives subs and suppliers the option to file their lien claims within 120 days of the prime contractor’s date of last furnishing, as opposed to their own date of last furnishing. More than ever, timing is everything. Continue reading
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: