Construction Law Blog | Barnes & Thornburg Employment Law Bloghttps://btlaw.com/en/The attorneys of Barnes & Thornburg's Construction Law Practice Group bring you analysis of laws and legal topics that impact the business of constructing, redeveloping, or servicing buildings and industrial facilities. en{293D0B97-AA8D-485F-8B17-57820D0FE72C}https://btlaw.com//en/insights/blogs/construction/2021/new-texas-legislation-would-reallocate-risk-for-design-defectsNew Texas Legislation Would Reallocate Risk for Design Defects<p>Since the Texas Supreme Court’s 2012 decision in <em><a rel="noopener noreferrer" href="https://scholar.google.com/scholar_case?case=5493896804038148820&q=El+Paso+Field+Services,+L.P.+v.+MasTec+North+America,+389+S.W.3d+802+&hl=en&as_sdt=800006" target="_blank">El Paso Field Services, L.P. v. MasTec North America</a></em>, contractors may be held liable for design defects even if the designs, plans, or specifications were provided by the owner or the owner’s design professional. Texas lawmakers are trying to change this outcome. </p> <p>Senator Bryan Hughes (R-Mineola) and Representative Jeff Leach (R-Plano) have introduced companion legislation for Texas’s 87th legislative session, intended to bring Texas back in line with the vast majority of jurisdictions on the issue of risk allocation for design defects. SB 219 and HB 1418 would apply prospectively to shift responsibility for defective plans, specifications, or other design documents to the design professional who prepared the documents as opposed to the contractor who relies upon their accuracy. </p> <p>Additionally, the bill clarifies that a contractor is not responsible for, and does not guarantee the accuracy, sufficiency, or suitability of design documents. However, the legislation does require a contractor to make known, in writing, the existence of any known defect discovered before or during the construction. If the contractor fails to do so, the liability shield may be lost. The bill also exempts from its protection contracts for the construction or repair of a critical infrastructure facility. Notably, similar legislation has failed to pass before, in both 2017 and 2019, due to resistance from owners, designers, and architects.</p> <p>In Texas currently, a contractor may be exposed to liability for construction defects arising from flaws in the plans, drawings or specifications. According to the Texas Supreme Court in <em>MasTec</em>, where parties to a construction contract agree to allocate the risk of construction defects to one party, the courts will not disturb that agreement and will allocate the risk according to the parties’ agreement. To do otherwise, the court explained, would vitiate the ability of sophisticated parties to contract as they see fit. As a result, a contractor may be liable for damages in Texas even where the work at issue was performed strictly in accordance with the provided plans or specifications.</p> <p>This approach runs contrary to the federal rule first enumerated in <em>United States v. Spearin</em> in 1918, which recognized that when a contractor is “bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications,” and therefore allocates the risk of defects based on faulty plans or specifications to the party who provided those plans. Almost every state has adopted the <em>Spearin </em>doctrine, whether through case law or by statute. However, Texas is not the only state that has not fully adopted the <em>Spearin </em>doctrine. The Ohio Supreme Court also limited the doctrine’s applicability in the 2007 case <em><a rel="noopener noreferrer" href="https://scholar.google.com/scholar_case?case=6313367292716378074&q=+Dugan+%26+Meyers+Construction+Co.+v.+Ohio+Dept.+of+Administrative+Services&hl=en&as_sdt=800006" target="_blank">Dugan & Meyers Construction Co. v. Ohio Dept. of Administrative Services</a></em>, holding that it would not apply to overwrite the parties’ contracted “no-damages-for-delay” clause and award damages to the contractor, even where the delays were wholly the fault of the contracting party. </p> <p>Should this legislation pass, Texas will fall in line with the vast majority of jurisdictions who have adopted the <em>Spearin </em>doctrine and shielded contractors from liability when they perform their work in strict conformity with the plans and specifications provided by the owner or its design professional. </p>Tue, 16 Mar 2021 00:00:00 -0400{F294C367-FE4E-4E07-A2ED-9E0BB03F5794}https://btlaw.com//en/insights/blogs/construction/2021/parent-company-providing-workers-compensation-cant-be-sued-by-subsidiarys-employeeParent Company Providing Workers Compensation Can’t Be Sued By Subsidiary’s Employee<p>With one child currently in college and two having graduated in recent years, I sympathize with parents who wonder what they get—other than eternal love—for the expense of raising and educating their children. A recent decision of the Illinois Appellate Court makes the rewards more tangible for Illinois contractors purchasing workers’ compensation insurance for their corporate families. </p> <p>In <em><a rel="noopener noreferrer" href="http://www.illinoiscourts.gov/Opinions/AppellateCourt/2021/1stDistrict/1200254.pdf" target="_blank">Munoz v. Bulley & Andrews, LLC</a></em>, the Illinois Appellate Court held that a parent company contractually obligated to maintain workers compensation insurance for its subsidiary is immune from civil litigation by the subsidiary’s employee for an injury suffered on the construction project managed by the parent. This decision could impact how many businesses structure their corporate families, insurance coverage programs, and third-party contracts.<br /> <br /> In this case, Bulley & Andrews, LLC (Bulley LLC) was hired as construction manager for a Chicago office project. The contract required Bulley LLC to carry workers compensation insurance for itself and all subcontractors. Bulley LLC purchased the required insurance, which also named its wholly owned subsidiary Bulley Concrete Restoration, LLC (Bulley Concrete) as an insured. Bulley LLC used employees of Bulley Concrete to do some work on the project but did not enter into a written subcontract for that work.</p> <p>Munoz, an employee of Bulley Concrete, was injured on the job and filed a workers compensation claim. Because the workers compensation policy had a $250,000 deductible, Bulley LLC paid Munoz’ medical bills.</p> <p>Munoz then filed a civil lawsuit against Bulley LLC and other companies involved in the construction project. Bulley LLC filed a motion to dismiss, arguing that the Illinois workers compensation statute immunizes Bulley LLC from liability beyond the workers compensation benefits it was already paying. Munoz responded that, as an employee of subsidiary Bulley Concrete rather than parent Bulley LLC, he was free to pursue a civil lawsuit against Bulley LLC. The trial court granted Bulley LLC’s motion to dismiss.</p> <p>The appellate court affirmed, holding that “[d]espite the fact that Bulley LLC was not the direct employer of plaintiff, as it bore the burden of furnishing workers’ compensation benefits for plaintiff, it was entitled to avail itself of the exclusive remedy provisions” of the workers compensation act. </p> <p>To support its reasoning, the court looked to two earlier Illinois Supreme Court cases. In one case, a general contractor was not immune from suit after having paid workers compensation benefits without a contractual obligation to do so. In the other, the Illinois Supreme Court held that an employee of a joint venture could not sue the joint venture, which was contractually required to reimburse the workers compensation insurance premiums paid by one of its constituent entities. The <em>Munoz </em>court also relied on a case by another Illinois Appellate Court district that allowed a parent company to invoke workers compensation immunity because it was required by agreement with its subsidiary to pay the benefits for the subsidiary’s injured workers.</p> <p>The <em>Munoz </em>opinion, including its analysis of earlier precedents, shows that the exclusive remedy provisions of the Illinois workers compensation statute can extend beyond an injured worker’s direct employer. The key is for the company claiming immunity to pay the workers compensation insurance premiums or benefits under a pre-existing contractual obligation. <em>Munoz </em>identifies a few different ways that have been successfully accomplished. While <em>Munoz </em>should not be viewed as a prescription that guarantees immunity, a corporate family that contractually uses a similar workers compensation structure can cite <em>Munoz </em>in an effort to insulate from civil litigation not only the direct employer but also a related entity that provides for workers compensation.</p> <p>Raising and paying for my children’s education may not give me such statutory benefits, but the intangible rewards are worth far more than the investment.</p> <p><em>Editor’s note: The Munoz decision remains subject to modification and correction until the time for filing a petition for rehearing has expired.</em></p>Wed, 03 Mar 2021 00:00:00 -0500{62555132-79A2-4264-B67C-F3E45DCD8A88}https://btlaw.com//en/insights/blogs/construction/2021/non-union-construction-companies-face-significant-threats-under-the-pro-actNon-Union Construction Companies Face Significant Threats Under the PRO Act<p>In February 2020, the House of Representatives passed the Protecting the Right to Organize Act of 2019 (H.R. 2474), known as the PRO Act. The PRO Act contains a number of anti-management, pro-union<a href="/en/insights/blogs/labor-and-employment/2021/what-is-the-pro-act-and-should-your-company-be-concerned" target="_blank"> changes to various labor laws</a>, many of which have existed in the United States for decades. President Biden has already promised to sign the PRO Act if it comes across his desk, and with a Democratic-controlled House and Senate, it likely will. Several of the proposed changes will be critical to our clients in the construction sector, but there is one in particular that we find especially concerning.</p> <p>Within the PRO Act’s relatively innocuous language is wording that would strip Section 8(b)(4) out of the National Labor Relations Act (NLRA). Section 8(b)(4) is the federal labor law that outlaws secondary picketing, boycotts and related activity.</p> <p>Secondary activity is when a union enmeshes a neutral company even though the union's dispute is with a different primary target (normally a non-union subcontractor). Typically in this situation, the neutral company and the target company happen to be working on a common job site with numerous other contractors. The danger to the job site is that once a picket line goes up, all the union employees for the union contractors will probably refuse to cross the picket line to go to work – even if they are not directly involved in the dispute.</p> <p>The remedy sanctioned by Section 8(b)(4) of the National Labor Relations Act, which prohibits secondary boycotts or secondary activity, is the creation of a two-gate system at the job site. Typically there would be a gate reserved for the picketing union and picketed company and a separate gate for employees of the non-picketed companies. Thereby, the problem of having to cross a picket line is eliminated and the job is back on schedule. </p> <p>Without the ability to set up either a second gate or a reserve schedule allowing the non-union company to work at different times from the union company, the non-union company will find itself in a very painful dilemma of either being kicked off the jobsite or having to sign a union contract. The PRO Act would eliminate the Section 8(b)(4) option to allow the jobsite to continue and as a result could force the non-union construction companies to either go out of business or sign union contracts. </p> <p>Since 1947, however, this has been held illegal. Under federal labor law, it is unlawful for a union to pressure a neutral company to punish a targeted company. The United States Supreme Court long ago allowed for the usage of reserve gates or reserve times to isolate a labor dispute on a common site project. Under a two-gate system, a union would have to confine its picketing to a gate reserved solely for the targeted company, and the job could proceed with every other non-targeted or union companies using a second gate. </p> <p>If in fact the PRO Act is signed by President Biden, removing the protection for neutral companies from other companies’ labor disputes, the increased leverage for labor organizations could significantly shrink the non-union construction industry in the United States. For instance, the Associated Builders and Contractors, a trade organization of over 25,000 non-union construction companies, is especially vulnerable if the Pro Act is signed into law.</p> <p>The Biden Administration also has plans to reinstate “card-check” union organizing. This would eliminate secret ballot union elections at the NLRB and force non-union companies to sign union agreements if 51 percent of their employees sign a petition.</p> <p>Then there is the $15 minimum wage drive, which would create upward pressure on base pay rates for unskilled labor in all work classifications. That will necessarily propel all wage rates upward, drastically increasing corporate costs and lowering corporate profits.</p> <p>The next 24 months could be rocky for the construction industry. We encourage all contractors, owners and general construction managers to join us in watching these developments closely.</p>Thu, 11 Feb 2021 00:00:00 -0500{A300B5B9-A298-4CE9-9BC2-449B3F36550C}https://btlaw.com//en/insights/blogs/construction/2020/georgia-contractors-and-owners-must-follow-new-lien-waiver-procedures-in-2021Georgia Contractors and Owners Must Follow New Lien Waiver Procedures in 2021<p><em>Updated Dec. 2, 2020, to include comment from bill sponsor Sen. Lindsey Tippins.</em></p> <p>Contractors and subcontractors in Georgia must pay careful attention to the payment process over the coming months in light of <a rel="noopener noreferrer" rel="noopener noreferrer" href="http://www.legis.ga.gov/Legislation/20192020/194229.pdf" target="_blank">Act 576</a> of the 155th General Assembly, which takes effect on January 1, 2021. Through the end of 2020, the act leaves in place the “duty to speak” under Georgia law if a contractor wants to preserve breach of contract claims for progress payments. Beginning the first of the year, project owners must require, and contractors must provide, new forms of interim and final lien waivers to ensure the waivers are enforceable.</p> <p>Georgia is one of several states that prescribes, by statute, the form of lien waiver that a contractor or subcontractor <strong><span style="color: #000000;">must</span> </strong>provide with each progress payment. Since at least 1991, that form has required contractors and subcontractors to execute a waiver form containing the warning that: </p> <p style="margin-left: 40px;">“When you execute and submit this document, <strong><span style="color: #000000;">you shall be conclusively deemed to have been paid the full amount stated above, even if you have not actually received such payment, 60 days after the date stated above unless you file either an affidavit of nonpayment or a claim of lien prior to the expiration of such 60 day period</span></strong>.”</p> <p>In the 2019 case of<em><a rel="noopener noreferrer" rel="noopener noreferrer" href="https://efast.gaappeals.us/download?filingId=6b482fdb-93d2-4df1-9ee5-271d86c1d7e4" target="_blank"> ALA Construction Services, LLC v. Controlled Access, Inc.</a></em>, the Court of Appeals of Georgia held that the quoted warning and associated statute “meant what it said and said what it meant” and, accordingly, all Georgia contractors have “a statutorily imposed responsibility to file either a claim of lien or affidavit of nonpayment if [they] wished to keep the debt alive beyond 60 days.” Thus, every contractor and subcontractor in the state currently has a “duty to speak” – and often to do so before ever contacting a collections attorney – if they wish to preserve any claim to be paid the progress payment.</p> <p>Georgia passed Act 576 in response to the ALA Construction decision. Bill sponsor Senator Lindsey Tippins told us that, in his view, the status quo following ALA Construction was contrary to equity. Senator Tippins stated that contracting parties should not be permitted “to take advantage of a loophole in existing law that precluded one party of a contract from receiving payment from the other party for materials and services performed in good faith per contract specifications.”</p> <p>The 2020 version of the statute states: “When a waiver and release provided for in the Code section is executed by the claimant, it shall be binding against the claimant for all purposes.” The act changes both the language of the required waivers and the statutes relating to the effect of those waivers to make clear that the lien waivers no longer impact other claims, such as claims for breach of contract. The act also extends the time period to file an affidavit of nonpayment from 60 to 90 days. Finally, the act removes filing of a claim of lien as a way to preserve lien rights and mandates that the contractor file an affidavit of nonpayment to preserve lien claims.</p> <p>Owners, contractors, and subcontractors in Georgia should consult with their lawyer regarding the recent changes to Georgia’s lien law. Owners that continue to receive the old waiver forms after December 31, 2020, face the risk that those waivers will be deemed unenforceable for not containing the revised statutory language. Contractors and subcontractors must also update their payment procedures and paperwork to ensure maximum protection under the mechanic’s lien law both under the current “duty to speak” and after Act 576 takes effect on January 1.</p>Fri, 23 Oct 2020 00:00:00 -0400{D2D793CA-DFAB-4E01-8145-ACAB2DA1DC3D}https://btlaw.com//en/insights/blogs/construction/2020/federal-court-applying-michigan-law-recognizes-implied-warranty-of-design-adequacyFederal Court Applying Michigan Law Recognizes Implied Warranty of Design Adequacy<p>The United States District Court for the Western District of Arkansas has come to the conclusion that implied warranty of design adequacy should apply to private parties to a construction contract. In <em><a href="/-/media/files/blog/midamerica-inc-plaintiff-v-bierlein-companies-inc-defendant.ashx">Midamerica, Inc. v. Bierlein Companies, Inc.</a></em>, the court analyzed prior decisions of the Michigan Supreme Court which recognized the existence of an implied warranty within a construction contract created by affirmative statements by the state government when soliciting bids from contractors. </p> <p>According to the Arkansas district court’s Oct. 9 opinion, the “core consideration that created the warranty was that of fair dealing and not one party’s status as a governmental entity. The reasoning of the controlling precedent articulates no exception for private contracts and the principles underlying the implied warranty are easily applicable to contract between private parties.”</p> <p><em>Midamerica </em>involves the decommissioning, demolition and decontamination of a retired power plant. The defendant was the general contractor and the plaintiff was the subcontractor tasked with remediating environmental contamination and providing waste disposal services. The subcontractor bid the project based on plans and specifications provided by the general contractor. According to the subcontractor, the plans and specifications expressly stated that the material it was removing was No. 2 fuel oil. </p> <p>During a preconstruction inspection, the subcontractor contends that an agent of the plant’s owner confirmed that the material to be removed from the plant’s piping and associated equipment was No. 2 fuel oil. Based on these representations, the subcontractor submitted a bid in the amount of $16,420 for the removal of No. 2 fuel oil. Unfortunately, when the subcontractor started removing the fuel oil, it determined that the material in the pipelines was No. 6 fuel oil as opposed to No. 2 fuel oil. No. 6 fuel oil was significantly more difficult and expensive to remove. As a consequence, the price jumped from a modest $16,420 to $453,159.88. When the general contractor rejected the subcontractor’s change order request, the subcontractor filed suit for breach of contract and unjust enrichment. </p> <p>The parties filed competing motions for summary judgment. While the subcontractor contended that the plans and specifications contained material misrepresentations, the general contractor argued that the work performed by the subcontractor was contemplated by the parties’ subcontract and that the subcontractor exhausted its remedies under the subcontract. </p> <p>The district court denied both motions. In regards to the subcontractor’s motion, the district court relied upon the site specifications which mention the presence of an empty No. 6 fuel oil storage tank on the premises. According to the district court, the presence of the tank alone should have put the subcontractor on notice that No. 6 fuel oil may be present on the site. </p> <p>The general contractor fared no better. In denying the general contractor’s motion, the district court reasoned that “Michigan’s implied warranty of design adequacy applies to contracts between private parties” and that the specifications identified No. 2 fuel oil as a material that may be encountered but omitted No. 6 fuel oil. Coupled with the fact that a representative of the project owner confirmed that only No. 2 fuel oil was present during a pre-bid site visit, the district court opined that a reasonable fact finder could determine that the affirmative statements could create an implied warranty of design adequacy. </p> <p>Finally, the district court rejected the general contractor’s argument that under the exclusive remedy provision of the subcontract, the subcontractor was limited to submitting a change order for differing site conditions. In rejecting this argument, the district court stated “[a] principle of contract law in Michigan is that each party to a contract must have some means of remedy for a breach by the other party . . . defendant’s interpretation of the subcontract creates the possibility that a legitimate breach of contract claim by plaintiff can fail simply because neither [the owner] nor defendant decide to respect plaintiff’s request for reimbursement.”</p> <p>The district court noted that there were prior lower court decisions in Michigan that “narrowly define the warranty to situations with government contracts.” Ultimately, however, the district court concluded that the Michigan Supreme Court would apply the implied warranty to private contracts, and that its decision was “buoyed” by the reasoning of one other federal court decision in Michigan applying the implied warranty to a private construction contract. The district court’s decision clarifies the scope and reasoning behind the implied warranty of design adequacy under Michigan law and further emphasizes the need to conduct a vigorous pre-bid site inspection. </p>Thu, 15 Oct 2020 00:00:00 -0400{61EB9156-43CC-4B26-A54C-0376089503EC}https://btlaw.com//en/insights/blogs/construction/2020/michigan-supreme-court-holds-a-contractors-defective-work-is-an-occurrenceMichigan Supreme Court Holds a Contractor’s Defective Work Is an ‘Occurrence’<p>In <em><a rel="noopener noreferrer" rel="noopener noreferrer" href="https://courts.michigan.gov/Courts/MichiganSupremeCourt/Clerks/Recent Opinions/19-20-Term-Opinions/159510.pdf" target="_blank">Skanska USA Building v M.A.P Mechanical Contractors, Inc.</a>,</em> Docket No. 159510, ____ Mich ____, 2020 WL 3527909, the Michigan Supreme Court found that a subcontractor’s inadvertent faulty work may constitute an “accident” under Michigan law, and therefore constitute an accidental “occurrence” under current standard form commercial general liability (CGL) policy. This landmark decision on July 29, 2020 changes the law in Michigan, and reverses many years of lower court rulings that denied coverage for Michigan contractors on the ground that inadvertent construction defects do not constitute an accidental occurrence under the CGL policy.</p> <p>Skanska served as a construction manager on a hospital renovation project involving the replacement of certain HVAC equipment. Skanska subcontracted the HVAC work to MAP Mechanical Contractors who procured a commercial general liability policy for the project. Sometime after the project was completed, the owner discovered that some of the expansion joints were installed backwards by the subcontractor, thereby causing significant damage to concrete, steel and the heating system. The cost to repair the subcontractor’s defective work exceeded $1.4 million. Skanska sued both the subcontractor and its insurer seeking payment for the cost of the repair and replacement work.  </p> <p>After the trial court found a genuine issue of material fact concerning whether coverage was triggered under the CGL policy, the court of appeals reasoned that there was no “occurrence” under the policy because the only damage was to the insured’s own work product. The court of appeals relied upon prior appellate court precedent from Michigan in reaching its decision and, according to the Michigan Supreme Court, ignored the express language of the CGL policy. In reversing the decision from the court of appeals, the court reasoned: </p> <p style="margin-left: 40px;">Nor is there any support for the Court of Appeals’ conclusion that “accident” cannot include damage limited to the insured’s own work product. Amerisure does little to defend that holding, and focuses mainly on its fortuity argument. Most significantly, the Court of Appeals accepted that an insured can seek coverage for its damage to a third party’s property. <em>Id</em>. at 9-10. But the policy does not limit the definition of “occurrence” by reference to the owner of the damaged for distinguishing between damage to the insured’s work . . . the Court of Appeals failed to recognize that an insured’s own defective workmanship is excluded from coverage via the explicit exclusions, <em>not in the initial grant of coverage</em>.</p> <p>The court went on to reject the carrier’s historical argument that including faulty subcontractor work essentially converts the policy into a performance bond. According to the court, “coverage may overlap with a performance bond is not a reason to deviate from the most reasonable reading of the policy language.” <em>Id</em>. at 4. The court summarized its holding as follows: </p> <p style="margin-left: 40px;">For these reasons, given the plain meaning of the word “accident,” we conclude that faulty subcontractor work that was unintended by the insured may constitute an “accident” (and thus an “occurrence”) under a CGL policy.</p> <p>Notably, the Michigan Supreme Court’s decision is limited to cases involving policy language revised by the 1986 ISO revisions to commercial general policies. Those revisions incorporated the “broad form” property endorsement as well as damage caused by faulty workmanship to other parts of work in progress including damage to, or caused by a subcontractor’s work after the insured’s operations are completed. </p> <p>This landmark decision tracks with the majority of states that recognize the changes to the standard language found in a CGL policy over the years and is a big win for policyholders in Michigan and elsewhere. For further information about this decision or coverage issues in other states, please refer to <a href="/en/insights/publications/2018/insurance-coverage-for-construction-defects-2018-50-state-survey" target="_blank">Barnes & Thornburg’s 50 state analysis</a> of coverage decisions throughout the United States.</p>Wed, 08 Jul 2020 00:00:00 -0400{42E0663A-F602-4B80-9A19-A833AE7B415B}https://btlaw.com//en/insights/blogs/construction/2020/illinois-supreme-court-affirms-school-district-must-pay-for-emergency-constructionIllinois Supreme Court Affirms School District Must Pay for Emergency Construction<p>Public construction projects in Illinois can be fraught with legal loopholes and “gotchas” that can take hard earned money out of the pockets of construction workers. Back in December, we wrote about the <a href="/en/insights/blogs/construction/2019/school-district-required-to-pay-for-construction-work-despite-void-contract" target="_blank">cautionary tale of Proviso East High School</a>. In that case, the school district attempted to avoid making any payments over and above insurance proceeds for $7.3 million of emergency construction work that was performed to repair a high school following a fire loss. </p> <p>The construction contracts at issue were signed by the school superintendent and the board received regular updates on the work. There were no objections to the price or the quality of the work when it was performed. But the school district then refused to pay on the ground that the contracts were void from the beginning because the school board did not follow the bidding-and-approval process required by the Illinois School Code. In the school district’s view, this was the construction company’s problem because the contractor had the responsibility in the first instance to make sure that the people it was dealing with had proper authorization before proceeding. </p> <p>The trial court agreed with the school district and dismissed the case on the ground that the construction contract was void. The trial court also held that the contractor could not recover based on a contract implied by law (quantum meruit).<a rel="noopener noreferrer" href="https://courts.illinois.gov/Opinions/AppellateCourt/2019/1stDistrict/1181580.pdf" target="_blank"> The appellate court reversed</a>, finding that the affected contractors could sue based on a contract implied by law for the value of the work. </p> <p><a rel="noopener noreferrer" href="https://courts.illinois.gov/Opinions/SupremeCourt/2020/125133.pdf" target="_blank">The Illinois Supreme Court’s decision</a> affirms the appellate court’s decision. The Supreme Court first held that the school board did not act beyond its statutory authority when it entered into the contracts. The decision observed that a Financial Oversight Panel (FOP) was managing the school district’s finances at the time the construction contracts were entered into, and the FOP had the authority to regulate the procedure for entering into contracts – not the school board. In addition, the school code provides that its “enumeration of powers is not exclusive,” and also specifically exempts the expenditure of funds for emergencies from the normal bidding process where the expenditure is approved by three-quarters of the board. </p> <p>The Supreme Court then concluded:</p> <p>“While the actions taken by the Board in handling the emergency repair and restoration work at Proviso East may not have comported with the procedures set forth in the School Code, hiring a contractor to do such work, as the Board did here, is unquestionably among the types of action Illinois school boards are authorized to undertake. The contractor, Restore, performed its obligations in good faith, and the Board willingly accepted the benefits of Restore’s efforts without question or complaint.”</p> <p>The decision also holds that the contractor was entitled under the circumstances to recover the value of its work based on a contract implied by law. According to the Court:</p> <p>“Illinois courts have similarly recognized that the failure of a governmental unit to comply with the required methods for awarding contracts is not fatal to a plaintiff’s right to recover based on principles of quasi-contract or contract implied in law. The essence of a cause of action based upon a contract implied in law is the defendant’s failure to make equitable payment for a benefit that it voluntarily accepted from the plaintiff. Even where a governmental unit has not complied with its policies and procedures for awarding contracts, recovery may be had against it if the plaintiff can show that it furnished valuable goods or services, which the defendant received under circumstances that would make it unjust to retain without paying a reasonable sum in compensation.”</p> <p>Finally, the Supreme Court concluded that any problem with the formation of the contracts was caused by the school board’s own “misconduct,” and that fundamental principles of Illinois law will not permit a party to seek to take advantage of its own wrongdoing: </p> <p>“A fundamental precept of Illinois law is that no one shall be permitted to take advantage of his own wrong. Allowing the Board to escape responsibility for paying what it owes based on its own misconduct would directly contravene this core principle and reward school districts for failing to adhere to the law. That is not a precedent we should set, particularly where, as here, the school board has had such difficulty managing its own financial affairs that it has been forced to operate with State oversight for more than a decade.”</p> <p>Although the Illinois Supreme Court has made it clear it will not allow a public entity to hide behind contracting technicalities to escape payment for work performed under an improperly formed agreement, contractors should still act with caution. Contractors that are contemplating contracting with a public entity should consult an attorney to navigate the complex bidding requirements for such work. </p>Fri, 05 Jun 2020 00:00:00 -0400{77399AE0-7224-4640-B9EF-6B50A3CAE5E5}https://btlaw.com//en/insights/blogs/construction/2020/california-appellate-court-finds-open-ended-pay-when-paid-clause-unenforceableCalifornia Appellate Court Finds Open-Ended Pay-When-Paid Clause Unenforceable<p>On April 17, 2020, the Fourth District California Court of Appeals in <em><a rel="noopener noreferrer" href="https://www.courts.ca.gov/opinions/archive/D075561.DOCX" target="_blank">Crosno Construction, Inc. v. Travelers Casualty</a></em>, found unenforceable a pay-when-paid clause in a subcontract between a general contractor and subcontractor. The appellate court held that the pay-when-paid clause violated California public policy and did not provide for payment within a reasonable time.</p> <p>In <em>Crosno Construction</em>, a general contractor was engaged by the North Edwards Water District to serve as the general contractor to build an arsenic removal water treatment plant. The general contractor engaged Crosno Construction as its subcontractor to build and coat two steel reservoir tanks. Crosno Construction’s subcontract contained a pay-when-paid clause, which stated that the general contractor and its sureties would pay Crosno Construction for its work within “a reasonable time … but in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment, including (but not limited to) mechanics’ lien remedies.”</p> <p>After Crosno Construction performed and invoiced $562,435 worth of work, the North Edwards Water District terminated the general contractor’s contract, prompting a lawsuit by the general contractor. Crosno Construction subsequently made a claim on the project’s payment bond seeking full payment of amounts invoiced to the general contractor. Travelers Casualty, the surety on the payment bond, invoked the pay-when-paid clause in the subcontract and rejected the claim, stating that Crosno Construction had to wait for resolution of the general contractor’s then-pending lawsuit against the North Edwards Water District for payment. Crosno Construction sued.</p> <p>The California lower court found that the subcontractor’s pay-when-paid clause was unenforceable because it impermissibly impaired Crosno Construction’s payment rights under California’s anti-waiver statute, Cal. Civ. Code § 8122. That statute governs payment rights on public works projects in California and renders void any provision of a contract that impairs a contractor’s payment rights. </p> <p>Previously, California courts had found that pay-<em>if</em>-paid clauses—which make payment by the owner to the contractor a condition precedent to the contractor’s obligation to pay a subcontractor for its work—were unenforceable and violated the anti-waiver statute. Conversely, pay-when-paid clauses, which instead establish a time period for payment to the contractor, may not violate California’s anti-waiver statute if the time period is reasonable. </p> <p>However in this case, the trial court found that the pay-when-paid clause was open-ended and unreasonable, and therefore unenforceable. The California appellate court agreed. </p> <p>The appellate court noted that the purpose behind a public works payment bond is to “provide subcontractors … a quick, reliable and sufficient means of payment.” The pay-when-paid clause was essentially open-ended, in that it provided for payment to Crosno Construction “until some unspecified and undefined point in time when [the general contractor’s] litigation with the district concluded.” This, the appellate court found, unreasonably impaired Crosno Construction’s payment bond rights. And while California’s anti-waiver statute allows a subcontractor to waive the protections of the statute, Crosno Construction had never executed such a release.</p> <p>The appellate court was careful to tailor its holding to the specific language of the pay-when-paid clause at issue. The court noted that it did “not suggest that all pay-when-paid provisions are unenforceable against a payment bond claim—just that this one is.” In fact, even though Crosno Construction was eventually repaid the full balance, it took over three years after it first made a claim on the payment bond. In the eyes of the appellate court, this “protracted delay” conflicted with the remedial purpose behind California’s public works statute.</p> <p>The court’s decision in <em>Crosno Construction </em>is important in that it expressly defines an unreasonable, and unenforceable, time period in a pay-when-paid clause in California. Notably, the court did not find that pay-when-paid clauses are always unenforceable. But a provision that delays payment to a public works contractor until some undefined, unspecified point in time when litigation concludes will not pass muster.</p>Fri, 01 May 2020 00:00:00 -0400{6D098A6B-2007-43DB-AA50-42693BAF2967}https://btlaw.com//en/insights/blogs/construction/2020/force-majeure-construction-industry-faces-impacts-from-covid-19Force Majeure: Construction Industry Faces Impacts from COVID-19The coronavirus has upended the economy of nearly every country in the world. The construction industry has felt the impacts nationwide as supply chains have tightened and work has been suspended. The term force majeure is typically found in every construction agreement but rarely invoked. The term itself translates to “superior force”. In other words, when superior external forces such as a hurricane or a natural disaster impact a contractor’s ability to successfully complete a construction project in a timely manner. An “epidemic” is often listed as a force majeure event. Read more about how the <a href="/en/insights/alerts/2020/force-majeure-navigating-coronavirus-supply-chain-disruptions">coronavirus may trigger provisions</a> within your construction agreement. Fri, 13 Mar 2020 00:00:00 -0400{05D20600-8123-49B3-B01F-07619C907E96}https://btlaw.com//en/insights/blogs/construction/2020/inadvertent-construction-defects-are-an-occurrence-under-the-cgl-insurance-policyInadvertent Construction Defects Are an ‘Occurrence’ Under the CGL Insurance Policy<p>Whether property damage caused by defective construction work constitutes an accidental “occurrence” under the standard form Commercial General Liability (CGL) insurance policy is now highly dependent on which state’s law applies. Determining which state’s law applies to a particular construction defect claim is therefore critical and often outcome determinative. </p> <p>The current status of each’s state’s law can be found in the Barnes & Thornburg Construction Law Practice Group’s <a href="/en/insights/publications/2018/insurance-coverage-for-construction-defects-2018-50-state-survey" target="_blank">50 state survey of the “occurrence” issue.</a></p> <p>This article discusses some of the correct and the incorrect ways that courts are currently addressing this issue. In particular, it focuses on the failed state of the law in Illinois, a state that continues to use an incorrect and outdated analysis to determine whether construction defects constitute an “occurrence” under the CGL insurance policy. </p> <p>A majority of jurisdictions find that defective or faulty workmanship can constitute an “occurrence” under the modern day CGL insurance policy. Generally, these jurisdictions find that defective construction work that occurs unintentionally is a fortuitous “accident,” and therefore an “occurrence” within the meaning of the coverage grant in the CGL policy. Other jurisdictions find that unintentional defective work can constitute an accidental “occurrence” if the defective work causes property damage to something other than the defective work itself. In all of these jurisdictions, a policyholder can potentially trigger coverage for a construction defect claim, assuming other terms and exclusions in the policy do not apply to bar coverage.</p> <p>A minority of jurisdictions still hold that construction defect claims do not, and cannot, give rise to an accidental “occurrence” within the meaning of the CGL insurance policy, and therefore refuse to provide any coverage at all for construction defect claims. This is the situation in Illinois, and frankly the law in Illinois needs to be corrected. </p> <h2>Understanding ‘Occurrence’ Under the CGL Policy</h2> <p>The modern day CGL insurance policy contains two key parts: the coverage grant and the policy exclusions. The coverage grant broadly provides insurance coverage up to the policy limits for amounts the policyholder becomes legally obligated to pay because of “property damage” caused by an accidental “occurrence.” The CGL policy then narrows and defines the actual scope of insurance coverage for a particular claim through the many policy exclusions.</p> <p>The correct legal analysis recognizes that there is an accidental “occurrence” under the CGL policy coverage grant when a claim alleges that a general contractor or subcontractor caused property damage by accidentally (not intentionally) performing faulty construction work. Whether or not coverage exists for the claim is then determined by examining the various construction-specific policy exclusions that may apply to the particular situation. </p> <p>The correct legal analysis then examines the kind of property damage at issue only as required by the analysis of the policy exclusions, and not to determine in the first instance if the claim involves an accidental “occurrence.” This is a very important difference. A threshold finding of no “occurrence” is an absolute bar to coverage, which means there is no possibility of coverage and therefore no duty to defend the policyholder against the claim. </p> <p>On the other hand, a finding that the claim involves an accidental “occurrence” then requires analysis of the claim under the policy exclusions. This often leads to a finding that there is at least potential coverage for part of the claim, and the insurance company is therefore required to provide its policyholder with a defense at the carrier’s cost. As a result, the applicable law regarding the “occurrence” issue can, and often does, dramatically affect the policyholder’s financial posture for a construction defect claim.</p> <h2>The Important ‘Your Work’ Exclusion</h2> <p>A policyholder is more likely to have coverage in jurisdictions that recognize construction defects can be an “occurrence” and properly examine the applicable policy exclusions. For example, in the completed operations context, the “your work” exclusion generally applies to bar coverage for the cost to repair or replace property damage caused by the work of the policyholder, but it also has a specific “subcontractor exception” that does <em>not</em> bar coverage for property damage arising out of the work of the policyholder’s subcontractors. Thus, in a jurisdiction that recognizes that construction defects can be an accidental “occurrence,” a general contractor generally will have coverage for property damage caused by the work of its subcontractors. </p> <p>While a subcontractor does not have the benefit of the subcontractor exception in the “your work” exclusion, a subcontractor can still have coverage under the correct analysis of the CGL policy if its work causes property damage to other work (i.e., property damage outside of the subcontractor’s own scope of work). The reason for this is not that the claim alleges an accidental “occurrence” because there is damage to other work. Rather, the correct conclusion is based on the “your work” exclusion, which generally excludes coverage for the cost to repair or replace the policyholder’s own defective work, but does not exclude the cost to repair or replace damage to other work.</p> <h2>Illinois Courts Get It Wrong</h2> <p>The legal framework used by the Illinois courts is fundamentally flawed. In fact, it fails to apply the terms of the CGL insurance policy as intended by the insurance companies themselves. </p> <p>Illinois decisions currently hold (incorrectly) that inadvertent construction defects cannot be an “occurrence” unless the defective work causes property damage to something other than the “project,” “building” or “structure.” Most, but not all, of these decisions address the coverage question in situations where the policy holder was a general contractor. The cases find that there can never be an “occurrence” – and that there is therefore no insurance coverage at all for the claim – if the alleged property damage was to any property within the general contractor’s scope of work. Because the general contractor’s scope of work usually includes construction of the entire building or project, this analysis finds that a CGL insurance policy provides no coverage at all to a general contractor for any claim that involves property damage to the building or project. This virtually eliminates insurance coverage for construction defect claims for general contractors. Under this analysis, there can only be insurance coverage if the claim includes property damage to something other than the project or building being constructed.</p> <p>Among other things, this analysis fails to apply the “your work” exclusion as intended by the insurance contract. The correct legal analysis recognizes that there would be no reason to have an exclusion for property damage caused by the “work” of the policyholder if the “occurrence” requirement in the coverage grant did not allow any possible coverage for property damage caused by inadvertent construction defects in the first place. And there would certainly be no reason for the same exclusion to have an exception that specifically restores coverage for property damage caused by the policyholder’s subcontractors if there never could have been an accidental “occurrence” within the meaning of the policy’s coverage grant in the first place. In short, the Illinois analysis makes the “your work” exclusion essentially meaningless.</p> <p>Unfortunately, the incorrect analysis is now very established in Illinois. For more than twenty years, Illinois appellate courts have repeatedly applied the incorrect analysis to deny insurance coverage for construction industry policyholders facing construction defect claims, and the Illinois Supreme Court has never decided the issue. Illinois appellate court cases continue to hold that there can never be an “occurrence” if the policyholder is a general contractor and the alleged damage was to any part of the project or building itself. As a result, Illinois decisions continue incorrectly to collapse what should be a second and separate analysis of coverage under the applicable policy exclusions (including the “your work” exclusion) into the initial threshold coverage determination of whether the claim involves an accidental “occurrence.” </p> <p>Illinois decisions also continue to disregard or fail to apply the well accepted requirement that an insurance policy must be read and interpreted as a whole. Instead of applying the “your work” exclusion as intended, Illinois decisions often simply state that the legal analysis does not need to even consider the “your work” exclusion. The decisions find that construction defect claims for property damage within the policyholder’s scope of work are simply not sufficiently “fortuitous” or “accidental” to constitute an “occurrence.” This reasoning is based on an outdated judicial gloss that is not found in the insurance policy itself. It is based on old reasoning used by certain courts and commentators before the CGL policy terms were materially changed, including in 1986. Those changes to the policy modified the exclusions (including the “your work” exclusion) to clarify that the CGL policy provides coverage for certain kinds of property damage caused by inadvertent faulty workmanship, and that the scope of that coverage is found in the policy exclusions. </p> <h2>Illinois Coverage for Subcontractors: Correct Result, Wrong Analysis</h2> <p>Until recently, there was uncertainty whether the same incorrect “scope of work” analysis for the “occurrence” issue would be applied in Illinois to claims against subcontractors. Some federal decisions held that there could be an “occurrence” if the subcontractor’s defective work caused property damage to some other part of the project or building outside of its scope of work. But other decisions held that the subcontractor, like the general contractor, could not show the existence of any accidental “occurrence” if the claim involved property damage to any part of the entire project or building.</p> <p>On March 29, 2019 the First District of the Illinois Appellate Court issued an opinion in <em><a href="/-/media/files/blog/acuity-insurance-co-v-950-w-huron-condominium-assoc.ashx" target="_blank">Acuity Insurance Co. v. 950 W. Huron Condominium Association</a></em> that directly answers the “occurrence” question for insured subcontractors. The decision finds that a subcontractor can have insurance coverage for an inadvertent construction defect claim under a CGL policy in Illinois if the claim involves property damage to a part of the project that is outside of the subcontractor’s scope of work. A 2017 Seventh Circuit decision in <em><a href="/en/insights/publications/2017/seventh-circuit-finds-duty-to-defend-triggered-in-illinois-when-subcontractors-defective-work" target="_blank">Westfield Ins. Co. v. National Decorating Service</a></em> also finds that a general contractor can have coverage under its subcontractor’s insurance policy as an additional insured where the general contractor is being sued for defective work performed by its subcontractor that caused damage to property outside of the subcontractor’s scope of work.</p> <p>Applying Illinois’ flawed analysis, <em>Acuity</em> and <em>Westfield</em> essentially arrive at the correct outcome for claims that involve resulting property damage caused by subcontractors – but for an absolutely wrong reason. Worse, the decisions do nothing to remedy current Illinois law that continues to deny coverage for general contractors even when the claim involves property damage that arises out of the work of subcontractors. Under that law, the general contractor who worked on the same project at issue in <em>Acuity</em> would not be able to obtain any insurance coverage for the loss under its own CGL policy even if the claim involved the exact same property damage caused by the same subcontractor. This is absurd, as the subcontractor exception in the “your work” exclusion should apply in this circumstance to allow coverage for the general contractor under these circumstances.</p> <p>Similarly, while the insured subcontractor in the <em>Acuity</em> case should have insurance coverage for part of the cost to repair the property damage, it is not because the existence of property damage outside of the subcontractor’s scope of work somehow created an “occurrence.” Instead, the “occurrence” requirement in the policy was satisfied by the accidental and inadvertent nature of subcontractor’s defective work, and the scope of coverage for the claim should have been determined by the applicable policy exclusions. Here, the subcontractor’s defective work itself should be excluded from coverage under the “your work” exclusion in the subcontractor’s CGL policy. But that exclusion does not apply to the resulting property damage to the other non-defective parts of the work, including the damage that the subcontractor caused to other parts of the project. It is for this reason, and not because the claim somehow fails to allege an accidental “occurrence,” that the subcontractor has coverage for the resulting damage it caused to other parts of the project.</p> <h2>Will Illinois Law Ever Be Corrected? </h2> <p>The <em>Acuity</em> case presented a rare opportunity for the Illinois Supreme Court to reconsider and correct Illinois law, but unfortunately the court recently refused to accept the opportunity to decide the case on appeal. Illinois therefore continues to have an incorrect analysis in its case law for determining whether construction defect claims are covered by the CGL insurance policy. The Illinois Supreme Court needs to consider this issue and publish a decision that finally addresses and corrects the law in Illinois, or the Illinois legislature needs to take up and pass corrective legislation. </p>Tue, 25 Feb 2020 00:00:00 -0500{4D0494D7-3C9C-4C6F-B31A-6037C62EED24}https://btlaw.com//en/insights/blogs/construction/2019/windy-city-ranks-as-the-greenest-city-in-the-united-statesWindy City Ranks as the Greenest City in the United States<p>For the third year in a row, Chicago has been named the greenest city to work in the United States by the <a rel="noopener noreferrer" href="https://www.cbre.com/insights/reports/us-green-building-adoption-index-for-office-buildings--2019" target="_blank">2019 Green Building Adoption Index</a>. According to the index, nearly 71 percent of Chicago’s office space is green certified – up from 66 percent the previous year. Chicago is followed by San Francisco at 67.5 percent, Atlanta at 59.3 percent and Minneapolis at 57.1 percent. </p> <p>Chicago’s ranking is particularly impressive when compared with the index’s finding that only 42.2 percent of office space across the 30 largest U.S. office markets are either Energy Star or LEED certified.</p> <p>Chicago also ranks in the top 5 on the <a rel="noopener noreferrer" href="https://www.cbre.com/insights/reports/us-green-building-adoption-index-for-multifamily-buildings-2019" target="_blank">2019 Multifamily Green Building Adoption Index</a>, with 19,645 units of 331,687 units are either Energy Star or LEED certified. This accounts for 5.9 percent of Chicago’s multifamily units. Denver tops that list with 7 percent of its units certified green.</p> <p>CBRE and a consortium of Maastricht University and the University of Guelph began publishing the Green Building Adoption Index in 2014. This year marked the first year of the Multifamily Green Building Adoption Index’s publication, which was completed in collaboration with Yardi Matrix and supported by the Multifamily Housing Council.</p>Mon, 23 Dec 2019 00:00:00 -0500{8F0531CD-3987-4DB7-85AB-45336DDFFE0E}https://btlaw.com//en/insights/blogs/construction/2019/constructing-additional-insured-coverage-from-a-certificate-of-insuranceConstructing Additional Insured Coverage From A Certificate Of Insurance<p>If your company receives a certificate of insurance that says your company is an additional insured on someone else’s policy, can you rely on it? A recent decision from the Supreme Court of Washington suggests you can, at least if the certificate was prepared by the insurance company’s agent.</p> <p>T-Mobile Northeast wanted to build a cell phone tower in New York City. It hired a contractor and entered into an agreement that, among other things, required the contractor to obtain general liability insurance, provide a certificate of insurance, and name T-Mobile Northeast as an additional insured. This is all very common practice with any construction project.</p> <p>The contractor’s general liability policy provided that anyone would be an additional insured if so required by a written contract with the contractor. Therefore, T-Mobile Northeast was an additional insured. Again, very common.</p> <p>The certificate was prepared on a standard insurance industry form. Preprinted portions near the top stated:</p> <p style="margin-left: 40px;">THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AFFIRMATIVELY OR NEGATIVELY AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW. THIS CERTIFICATE OF INSURANCE DOES NOT CONSTITUTE A CONTRACT BETWEEN THE ISSUING INSURER(S), AUTHORIZED REPRESENTATIVE OR PRODUCER, AND THE CERTIFICATE HOLDER.</p> <p style="margin-left: 40px;">IMPORTANT: If the certificate holder is an ADDITIONAL INSURED, the policy(ies) must be endorsed... </p> <p>Once again, this form and the language quoted here are very common.</p> <p>Other key facts are only slightly less common. The owner of the rooftop on which the cell tower was constructed sued the contractor and T-Mobile USA (T-Mobile Northeast’s parent) for damage allegedly caused by the construction work. T-Mobile USA, which was not a party to the construction contract, tendered the claim to the contractor’s insurer because the certificate of insurance stated that “T-Mobile USA Inc., its Subsidiaries and Affiliates” were additional insureds. The certificate was issued by an insurance agency that was authorized to issue certificates of insurance under the terms of its agency agreement with the insurance company. Citing the disclaimer language in the certificate, the insurance company denied coverage to T-Mobile USA because it was not a party to the contract that required T-Mobile Northeast to be an additional insured. T-Mobile USA sued the insurance company.</p> <p>Ultimately, the <a rel="noopener noreferrer" href="https://scholar.google.com/scholar_case?case=15481984988953510229&q=t+mobile+northeast+llc&hl=en&as_sdt=4,248" target="_blank">Supreme Court of Washington held</a> that an insurer is bound by the representation of its agent despite the certificate’s disclaimers. The court acknowledged its prior precedent that the purpose of a certificate of insurance is to provide information, and that it is not the equivalent of an insurance policy. Nevertheless, the court relied on the rule of textual interpretation that the specific prevails over the general. It viewed the preprinted disclaimers as general and the additional insured statements entered by the agent as specific and controlling.</p> <p>Parties involved in construction can take at least four valuable points from this case. First and foremost, certificates of insurance typically contain disclaimer language that may be surprising, but there can be ways to defeat those disclaimers. </p> <p>Second, when the contract requires one party to provide a certificate of insurance to the other, it can be worthwhile for both sides to review the certificate carefully to make sure it reflects all the coverage required by the contract. </p> <p>Third, one or both parties may want to look beyond the certificate and review the policy to see if it actually provides the required coverage. Interestingly, nothing in the T-Mobile case suggests that any party to the contract failed to take these steps. </p> <p>Fourth, when a claim arises, each defendant can benefit from taking another look at all the contract and insurance documents, as T-Mobile USA apparently did in this case to find coverage even though it was not a party to the construction contract.</p>Thu, 19 Dec 2019 00:00:00 -0500{9F07450D-5594-40B0-AB99-B4EBF63ADD8B}https://btlaw.com//en/insights/blogs/construction/2019/illinois-determines-prevailing-wage-benefits-no-longer-preempted-by-erisaIllinois Determines Prevailing Wage Benefits No Longer Preempted by ERISA<p>In <em><a rel="noopener noreferrer" href="https://courts.illinois.gov/Opinions/AppellateCourt/2019/3rdDistrict/3180080.pdf" target="_blank">People ex rel. Department of Labor v. Lion Construction, LLC</a></em>, the Illinois Appellate Court reversed Illinois’ prior rule that the state’s Prevailing Wage Act (PWA) is preempted by the federal Employment Retirement Income Security Act (ERISA) when a state action results from benefits-related issues. After an audit, the Illinois Department of Labor concluded that Lion Construction violated the state’s prevailing wage law even though it had nominally paid its employees the required base wage. The state alleged that Lion nevertheless violated the PWA by failing to pay required fringe benefits and brought an action in state court to enforce the state law. </p> <p>Lion made deductions from the employees’ wages that it paid to a union fund, which is subject to ERISA. Noting that, since 1992, the rule in Illinois was that ERISA preempted the PWA in these circumstances, the trial court dismissed the state’s complaint. The Appellate Court disagreed, finding that the U.S. Supreme Court modified the framework for determining ERISA preemption after that 1992 decision. The employer may still seek further review by the Illinois Supreme Court, and unless permission is granted to appeal it seems that this decision is likely to be cited in other states where state prevailing wages and other statutes potentially cross paths with ERISA. </p> <p>ERISA preemption and prevailing wages are each complicated topics in and of themselves, and the combination of the two is a particularly tricky area facing construction employers. Union contractors and contractors working on public projects of any kind are well advised to seek the assistance of counsel.</p>Tue, 17 Dec 2019 00:00:00 -0500{1C174F69-FA0A-4377-8135-5F207F9A07DA}https://btlaw.com//en/insights/blogs/construction/2019/school-district-required-to-pay-for-construction-work-despite-void-contractSchool District Required To Pay for Construction Work Despite Void Contract<p>The Illinois Appellate Court has ruled that two contractors can recover against a school district for construction work despite the fact that their contracts were not properly created, and were therefore void, under state law.</p> <p>In <em><a rel="noopener noreferrer" rel="noopener noreferrer" href="https://courts.illinois.gov/Opinions/AppellateCourt/2019/1stDistrict/1181580.pdf" target="_blank">Restore Construction Co. v. Board of Education of Proviso Township High Schools District 209</a></em>, two contractors brought suit against the Proviso school district in the Circuit Court of Cook County when the district refused to pay the plaintiffs for services rendered. Both parties initially believed they had entered into valid contracts for restoration and construction work after one of the schools in the district was damaged by fire. However, the school district failed to follow the procedural rules laid out in the Illinois School Code, which required a bidding process and a board vote – even in emergencies – to effectuate a valid contract. Accordingly, the circuit court found that the parties’ contracts were void from the beginning (ab initio) because the school district did not follow the rules that were required to create an enforceable contract. </p> <p>The plaintiffs appealed the decision, arguing that even though the contracts were void, they could still recover in equity under a theory of quantum meruit. This theory allows a contractor to be paid for the reasonable value of work performed based on the contractor’s reliance on a contract implied in law. However, the school district argued because the contracts were declared void ab initio, the plaintiffs’ quantum meruit claims were also barred. </p> <p>The Illinois Appellate Court ruled in favor of the contractors, stating: “Illinois courts have held governmental units, like a school district, liable on contracts implied in law even where proper contractual forms were not followed.” Under a contract implied in law, “no actual agreement exists between the parties, but a duty to pay a reasonable value is imposed on the recipient of services or goods to prevent an unjust enrichment.” The appellate court remanded the case back to the Circuit Court of Cook County for further proceedings consistent with its opinion. </p> <p>Although this case appears to close a loophole that could have potentially allowed a government entity, like a school district, to avoid paying for work performed under improperly formed contracts, we now have to wait and see if the decision will remain good law – the Illinois Supreme Court has agreed to hear the school district’s appeal.</p> <p>Regardless of the outcome, this case serves as a cautionary tale. When contracting with a government entity, contractors should take care to ensure that all of the procedural requirements are satisfied to create an enforceable contract. </p>Mon, 09 Dec 2019 00:00:00 -0500{94EE7B57-CFD9-4354-8390-40DE681AFE10}https://btlaw.com//en/insights/blogs/construction/2019/does-your-cgl-policy-cover-consequential-damagesDoes Your CGL Policy Cover Consequential Damages?<p>An update of the article “<a href="/en/insights/blogs/policyholder-protection/2019/recovering-consequential-damages-under-general-liability-policies" target="_blank">Recovering Consequential Damages Under General Liability Policies</a>” was published in the newsletter for Division 7 of the ABA Forum on Construction Law. The newsletter, which primarily focuses on topics pertaining to insurance, suretyship and liens, was handed out at the forum’s annual meeting. View the updated article and the full newsletter for Division 7 of the ABA Forum on Construction Law<a href="/-/media/files/articles/aba-forum-on-construction-newsletter.ashx" target="_blank"> here</a>.</p> <p>This article discusses an often-overlooked feature of commercial general liability (CGL) insurance policies. In particular, we discuss how CGL policies provide coverage for damages “because of” bodily injury or property damage. This “because of” language has been interpreted broadly by courts to permit recovery of consequential damages and other damages that, while not themselves property damage or bodily injury, are traceable to covered property damage or bodily injury. </p> <p>The original article was featured in the <a href="/en/insights/publications/2019/corporate-policyholder-magazine-jan-2019" target="_blank">January 2019 edition</a> of Barnes & Thornburg’s Corporate Policyholder Magazine, publication of the firm’s Insurance Recovery and Counseling practice group. The most recent edition of <a href="/en/insights/publications/2019/corporate-policyholder-magazine-fall-2019" target="_blank">Corporate Policyholder Magazine</a> is available now.</p>Mon, 11 Nov 2019 00:00:00 -0500{9886FEA0-5C3A-4205-845C-ED35F96572CD}https://btlaw.com//en/insights/blogs/construction/2019/to-claim-damages-for-repair-costs-or-not-beware-the-economic-waste-doctrineTo Claim Damages For Repair Costs Or Not? Beware The Economic Waste Doctrine<p>When claiming damages for construction defects, the doctrine of economic waste is often forgotten or ignored, even among sophisticated parties and counsel, potentially at great cost. Unwary parties to a dispute typically jump to – and focus significant time, money and energy on – seeking damages equal to the cost to repair or replace, without considering what the applicable state law says about economic waste.</p> <p>In most states, the measure of damages for a construction defect claim center on the cost to repair or replace the defective work, unless the repair cost is clearly disproportionate to the subject property’s probable loss in value because of the construction defect. Put differently, using the repair cost as a measure of damages is “unfair” when such costs are imprudent and unreasonable in light of the property’s probable change in market value if the repair is made. </p> <p>That’s where the economic waste doctrine comes into play. In such cases, the measure of damages becomes the difference between the fair market value of the property with the defect and without the defect, and the complaining party is not permitted to recover the cost to repair. </p> <p>Rooted in equity and justice, the economic waste doctrine centers on the idea that, although damages measured by the reduction in property value may not be sufficient to place the injured party in the same position they would have been in if the contract had been properly performed, their financial outcome will be substantially similar. </p> <p>Take for example a situation where a contractor installed several hundred square feet of expensive ceramic tile in a commercial building, just the wrong color. Or, they installed the wrong brand of windows throughout the building, but with similar performance specifications. Or, they installed a roof with defective discoloration on the backside of a house. It is likely that repairs in any one of these circumstances could result in unreasonable economic waste. Contractors that overlook the economic waste doctrine could find themselves paying substantially more in repair or replacement damages than they may have been required to pay under the law. And, if the complaining party is not prepared to present evidence of the required alternative measure of damages in this situation, it may not be entitled to recover damages at trial.</p> <p>Jurisdictions differ in how they apply the economic loss doctrine, but here are some considerations that may tip the scale:</p> <ul style="margin-left: 40px;"> <li>What would be the probable change in market value of the property if the repair is made? And, to what extent would the cost to repair or replace exceed any decrease in value caused by the defect?</li> <li>Does the claimed defect provide similar general quality and appearance to that which the owner contracted for?</li> <li>Would making the repair require substantial destruction, significant dismantling, or unreasonable expense?</li> <li>To what extent does the defect relate to an aesthetic aspect of the property? Is the defect related to a personal customization? Is it offensive to aesthetic sensibilities?</li> <li>What is the property used for and what is the effect of the defect on such use? Is the property a home, a commercial place of business with customer traffic, or a secluded warehouse or storage facility? </li> <li>Would the damages awarded equitably place the claimant in the position it would have been in had the contract been performed properly?</li> <li>What was the overall condition and age of the property prior to the repairs?</li> <li>Was the contractor’s breach intentional or willful?</li> <li>Is a safety or a health concern involved?</li> </ul> <p>While this list not all-inclusive, it demonstrates that not all damages cases are the same. In most instances, the cost to replace or repair will carry the day, but in some cases the economic waste doctrine may apply. For the alert contractor, invoking the doctrine can substantially impact the ultimate resolution. </p> <br />Tue, 22 Oct 2019 00:00:00 -0400{2EF14BB8-6B27-413B-ADD9-FE7FB3D5A8F2}https://btlaw.com//en/insights/blogs/construction/2019/ohio-supreme-court-finds-statute-of-repose-applies-to-all-claims-but-it-might-not-matterOhio Supreme Court Finds Statute of Repose Applies To All Claims – But It Might Not Matter<p>In <em><a rel="noopener noreferrer" href="https://www.supremecourt.ohio.gov/rod/docs/pdf/0/2019/2019-Ohio-2851.pdf" target="_blank">New Riegel Local School District Board of Education v. Buehrer Group Architecture & Engineering, Inc.</a></em>, the Supreme Court of Ohio reversed long-standing law to hold that the 10-year Ohio construction statute of repose applies to breach of contract claims as well as claims based in tort.</p> <p>However, the opinion does not decide how the statute of repose will apply to construction contract claims going forward, which leaves Ohio law uncertain on this critical question. </p> <p>The <em>New Riegel</em> decision rejects the court’s prior analysis in <em><a rel="noopener noreferrer" href="https://scholar.google.com/scholar_case?case=17302039376374653556&q=Kocisko+v.+Charles+Shutrump+%26+Sons.+Co&hl=en&as_sdt=800006" target="_blank">Kocisko v. Charles Shutrump & Sons. Co.</a></em> In that case, the court held that a prior version of the construction statute of repose applied only to tort claims. However, the statute was repealed and reenacted after <em>Kocisko</em>, and it was expanded from one paragraph to nine with added exceptions in certain situations. Under the circumstance in <em>New Riegel</em>, the court concluded that the current statute was “sufficiently different” to avoid the court having to apply the holding in <em>Kocisko </em>to the current statute under the principle of <em>stare decisis</em>.</p> <p>The court then concluded that “Ohio’s construction statute of repose is not limited to tort actions but also applies to contract actions that meet the requirements of the statute.” According to the court, its prior decision in <em>Kocisko </em>was “shortsighted,” in part because Ohio courts have more recently recognized that a plaintiff can seek damage for injury to property in an action for breach of contract. The court also found that the current statute “expressly refers to contract-law concepts” and “explicitly tie[s] the commencement of the repose period to contractual performance.”</p> <p>However, the court did not decide whether the statute of repose can ever apply to bar a breach of contract claim. Under a quirk in the Ohio law, the statute of repose does not bar commencement of an action after a specified time, but instead provides that an action cannot first <em>accrue </em>more than 10 years after substantial completion. The plaintiff therefore argued that the Ohio construction statute of repose does not apply <em>at all</em> to breach of contract claims because breach of contract claims necessarily accrue at the time the breach of contract occurs. According to the plaintiff, this means that the only potential time bar on a construction breach of contract claim is the separate Ohio statute of limitations for breach of contract claims.  </p> <p>Because the court of appeals did <em>not </em>consider these questions in its prior ruling, the Supreme Court of Ohio remanded the case for further consideration. As a result, it is now unclear under Ohio law whether the construction statute of repose can ever actually apply to bar a construction claim based on breach of contract. </p> <p>The <a rel="noopener noreferrer" href="https://www.supremecourt.ohio.gov/rod/docs/pdf/0/2019/2019-Ohio-2851.pdf" target="_blank">slip opinion in <em>New Riegel</em></a> is subject to modification until released for publication.</p> <div> </div>Fri, 18 Oct 2019 00:00:00 -0400{0099F097-7E38-4AE0-A5B7-364A4D3E4AD0}https://btlaw.com//en/insights/blogs/construction/2019/michigan-court-of-appeals-construction-lien-cant-exceed-contract-valueMichigan Court of Appeals: Construction Lien Can’t Exceed Contract Value<p>The Michigan Court of Appeals held that an arbitrator’s decision to award a contractor consequential damages on a construction lien claim warranted reversal even under the extremely narrow standard of review for arbitration awards. In reaching its decision, the court made the definitive ruling that a contractor may not assert a construction lien for consequential damages beyond the monetary value of the parties’ contract. </p> <p>In <em><a rel="noopener noreferrer" href="https://scholar.google.com/scholar_case?case=17975143101506762316&q=TSP+Services,+Inc.+v.+National-Standard,+LLC&hl=en&as_sdt=800006&as_vis=1" target="_blank">TSP Services, Inc. v. National-Standard, LLC</a></em>, the contractor’s scope of work included asbestos abatement, demolition of steel structures and disposal of scrap steel as well as other site restoration work for an abandoned industrial facility. The parties’ contract required payment in installments with an aggregate contract price of $414,950, due upon completion of the asbestos abatement. Notably, the contract did not mention the sale of scrap steel or TSP’s potential profits therefrom as compensation under the contract. This fact was significant in the eyes of the appeals court because the arbitration proceeding focused on the profits from the sale of scrap steel as a major component of the contractor’s scope of work. </p> <p>Because the project experienced significant delays in permitting, the contractor was unable to begin the steel reclamation work. During the delay, the market price for steel declined dramatically and as a result, the value of the contract was diminished significantly. In response to the declining steel prices, the contractor requested an equitable adjustment to the parties’ contract. At the time the contractor requested the equitable adjustment, only 9 percent of the available steel had been removed from the project site. When the parties could not reach an agreement to adjust the contract price, the owner terminated the contractor for cause. </p> <p>However, the arbitrator ultimately concluded that the owner improperly terminated the parties’ contract and committed the first material breach of the parties’ contract. The arbitrator awarded the contractor a construction lien for $782,496.05 and broke that amount out as follows: </p> <ul style="margin-left: 40px;"> <li>$141,083 on the unpaid invoices under the contract</li> <li>$46,557.39 for interest and unpaid invoices</li> <li>$391,809 for lost profits on steel inventory</li> <li>$33,793 for interest on those profits</li> <li>$169,226 in attorneys’ fees</li> </ul> <p>The arbitrator determined that the contractor’s construction lien was valid, and was enforceable against the entire award, including the award for consequential damages for lost profits on steel inventory. Notably, the arbitrator awarded the contractor the full value of all the steel even though the contractor never actually removed the steel from the project site.</p> <p>Despite the extremely narrow standard of review for arbitration awards under Michigan law, the Michigan Court of Appeals reversed the arbitrator’s award of consequential damages in connection with the lien claim because the value of the lien was nearly double the value of the parties’ contract. In reaching this decision, the appeals court emphasized that under the Michigan Construction Lien Act, the amount of any construction lien cannot exceed the remaining unpaid balance under the contract. <em>See </em>MCL 570.1103(4). </p> <p>Because the arbitrator approved a construction lien well in excess of the contract value, the award violated the Construction Lien Act. Specifically, the arbitrator approved a lien for $782,469, which is $641,386 greater than the unpaid balance under the contract. According to the appeals court, the arbitrator’s award constituted a clear legal error that would reduce the value of the lien by over $500,000. </p> <p>In reversing the arbitration award, the appeals court relied upon the Michigan Supreme Court’s decision in <em><a rel="noopener noreferrer" href="https://scholar.google.com/scholar_case?case=10628829533006513174&q=Detroit+Auto+Inter-Insurance+Exch+v+Gavin&hl=en&as_sdt=800006&as_vis=1" target="_blank">Detroit Auto Inter-Insurance Exch v Gavin</a></em>, which held that judicial interference with an arbitration award is appropriate where the arbitration award contains a clear error of law that if corrected would substantially change the award. The Michigan Court of Appeals granted interlocutory relief because further proceedings on the lien claim would have only further complicated the issues and lead to multifarious litigation. </p> <p>In summary, the decision in <em>TSP Services, Inc v National-Standard</em> makes it clear that consequential damages are not available under the Michigan Construction Lien Act when they exceed the balance of the parties’ contract. </p>Fri, 27 Sep 2019 00:00:00 -0400{B53FFB1B-E12D-4D34-B412-04E718942647}https://btlaw.com//en/insights/blogs/construction/2019/illinois-imposes-retainage-limits-in-construction-contractsIllinois Imposes Retainage Limits in Construction Contracts<p>The rules for drafting construction contracts changed overnight in Illinois. On August 20, 2019, Governor Pritzker signed <a rel="noopener noreferrer" href="http://www.ilga.gov/legislation/publicacts/101/PDF/101-0432.pdf" target="_blank">Public Act 101–0432</a>, amending the Contractor Prompt Payment Act to limit the amount of permissible retainage that can be held on construction projects. The new limitations apply to all privately funded projects in Illinois except for residential construction of 12 or fewer units in a single building. </p> <p>P.A. 101–0432, which went into effect immediately upon becoming law, requires that construction contracts limit retainage to no more than the following:</p> <ol style="margin-left: 40px;"> <li>For any payment made prior to the completion of 50 percent of the contract, retainage may not exceed 10 percent of payments made</li> <li>Upon achieving 50 percent completion, the withheld retainage must be reduced to no more than 5 percent</li> <li>Following 50 percent completion, no more than 5 percent of subsequent payments may be held as retainage</li> </ol> <p>Retainage limits have been introduced in one form or another in every session of the Illinois General Assembly dating back to at least 2005. In August 2018, Governor Rauner vetoed the latest iteration of these acts, <a rel="noopener noreferrer" href="http://ilga.gov/legislation/fulltext.asp?DocName=&SessionId=91&GA=100&DocTypeId=SB&DocNum=3052&GAID=14&LegID=110582&SpecSess=&Session=" target="_blank">S.B. 3052</a>, <a rel="noopener noreferrer" href="http://ilga.gov/legislation/fulltext.asp?DocName=10000SB3052gms&GA=100&SessionId=91&DocTypeId=SB&LegID=110582&DocNum=3052&GAID=14&Session=" target="_blank">raising concerns</a> that enacting this law “could potentially discourage economic growth, harm existing businesses, increase financing costs, and leave owners with no recourse to address performance issues on construction projects.” The law enacted last week was identical to S.B. 3052.</p> <p>Owners and general contractors must now take immediate steps to evaluate their business practices in light of P.A. 101–0432. As the Amendment to the Contractor Prompt Payment Act is now in full force and effect, construction contracts must be reviewed immediately to confirm compliance with the new restrictions on payment withholding. Owners and general contractors should review prequalification procedures and reassess bonding requirements to reduce risks that would traditionally have been mitigated by retainage. </p> <p>Project participants will also need to negotiate who is liable to finance retention payments to subcontractors in the inevitable scenario where subcontractors performing early work reach 50 percent completion on their subcontracts, but the general contractor is still subject to 10 percent retainage. </p> <p>The new retainage limits also reinforce the importance of filing claims in a timely manner and ensuring that payment procedures strictly comply with the Illinois Mechanics’ Lien Act. Under the new payment procedures, it is less likely that there will be sufficient retention to cover end-of-job issues.</p>Wed, 28 Aug 2019 00:00:00 -0400{AE377898-3E66-4026-9223-06BF6194D468}https://btlaw.com//en/insights/blogs/construction/2019/no-zebra-or-leopard-prints-insurance-company-must-repair-buildings-to-matchNo Zebra or Leopard Prints: Insurance Company Must Repair Buildings to Match<p>If you own any commercial, industrial or residential property, you may encounter a situation where part of your building gets damaged and the repair won’t match the undamaged portions. Will you endure the mismatch, or will you replace everything so it all matches? Insurance coverage may be a factor. </p> <p>The United States Court of Appeals for the Seventh Circuit recently addressed this situation under Illinois law in the case <em><a rel="noopener noreferrer" href="http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2019/D08-07/C:18-2103:J:Hamilton:aut:T:fnOp:N:2381073:S:0" target="_blank">Windridge of Naperville Condominium Assoc. v. Phila. Indem. Ins. Co.</a></em> A hail and wind storm damaged the aluminum siding on the south and west sides of several buildings in one condominium complex. The condo association found that replacement siding that would match the undamaged north and east sides was no longer available. Its insurance company paid $2.1 million to replace the siding on the damaged south and west sides, but the condo association sought additional payment to replace the undamaged north and east sides so the buildings would entirely match.</p> <p>The “loss payment” section of the policy stated, in part, that in the event of loss to “covered property,” the insurance company would repair the property with other property of like material and quality. The condo association argued that this provision refers to the buildings as a whole, while the insurance company contended that it is limited to the portions that were damaged by the storm. </p> <p>The court found both interpretations reasonable, which means the policy was ambiguous and had to be construed in favor of the policyholder. Focusing as well on the fact that it was a replacement cost policy, which is intended to make the policyholder whole, the court explained that the condo association would not be made whole by having mismatched siding. To illustrate, the court offered hypotheticals where, for example, the storm damaged every other piece of siding or only the middle three feet of every piece of siding. Under the insurance company’s interpretation of the policy, the unavoidable mismatch would result in a striped or spotted appearance. The court found that unreasonable and ruled in favor of the condo association.</p> <p>Businesses and individuals frequently face similar problems, particularly with older structures. When some but not all of the originally identical components are damaged, replacements may not be available to match the originals. In that circumstance, the property owner may have a viable basis for insisting that its insurance company pay to replace even undamaged components so they all match.</p>Mon, 26 Aug 2019 00:00:00 -0400{077DDC3C-EE1D-455A-9898-28A5F3AD8F90}https://btlaw.com//en/insights/blogs/construction/2019/beware-of-the-barter-a-cautionary-taleBeware of the Barter: A Cautionary Tale<p>A recent ruling by Tennessee’s top court sends a strong message: be leery of waiving traditional forms of payment in favor of accepting goods or services. In <em><a rel="noopener noreferrer" href="https://www.tncourts.gov/courts/supreme-court/opinions/2019/07/22/twb-architects-inc-v-braxton-llc-et-al" target="_blank">TWB Architects, Inc. v. The Braxton, LLC</a></em>, et al., an architecture firm and a cash-strapped developer executed an agreement for the architect to receive a penthouse condominium instead of his design fee. When the developer could not deliver a deed for the condominium, the architecture firm sued the developer for its fees. </p> <p>So far, the ensuing litigation has lasted over 10 years and, most recently, resulted in an opinion by the Supreme Court of Tennessee that reversed summary judgment in favor of the architect and remanded the matter back to the trial court for still more proceedings. </p> <p>The parties originally entered in a standard Architect Agreement, whereby the plaintiff, TWB Architects, was to be paid for its design services based on two percent of the construction costs for the project. After failing to obtain sufficient financing for the project, the defendant, The Braxton, informed TWB that it could not pay the design fees and suggested TWB accept a condominium in the project as payment instead. TWB agreed, and the parties executed the Condominium Agreement. </p> <p>Thereafter, TWB’s owner acted as though he owned the condominium contemplated in the deal, which just so happened to be a penthouse. He invested nearly $40,000 in upgrades and repeatedly referred to the penthouse as “his penthouse.” In December 2008, he moved into the penthouse and represented himself as its owner. </p> <p>However, shortly thereafter, issues arose with Braxton’s ability to deed the condominium to TWB’s owner. At that point, TWB decided to change course. It claimed that it was still entitled to the original design fee under the Architect Agreement and filed a mechanic’s lien for the unpaid fees. Braxton claimed the Condominium Agreement had acted as a novation, nullifying the Architect Agreement and, accordingly, TWB’s ability to collect its fee thereunder.</p> <p>The trial court granted summary judgment in favor of TWB, holding it could still recover its design fees because there was insufficient evidence that the parties intended a novation by substituting the Architect Agreement for the Condominium Agreement. The court of appeals affirmed, but the Tennessee Supreme Court reversed. The Supreme Court found that summary judgment was improperly granted because disputed questions of material fact existed about whether TWB and Braxton intended a novation when they executed the condominium agreement. </p> <p>Unless the parties can settle the matter, the case will now require a trial to determine whether TWB can recover its fees. It’s unknown whether TWB’s owner is still living in the penthouse.</p> <p>This case is a great example of how a tempting barter – like accepting a penthouse from a cash-strapped developer – may sound like a nice solution at the time, but can lead to further headaches and protracted litigation. </p>Thu, 22 Aug 2019 00:00:00 -0400{5C02D043-0D97-4AD7-B691-4498F464AD28}https://btlaw.com//en/insights/blogs/construction/2019/contractor-found-in-material-breach-solely-for-building-code-violationsContractor Found in Material Breach Solely For Building Code Violations<p>In a recent case out of Indianapolis, the Indiana Court of Appeals held that building code violations constituted a material breach by the general contractor of its contract with the property owner. As a result, the court determined that the general contractor could not enforce provisions of the contract against the homeowner or assert lien rights, because the general contractor committed the first material breach of the contract. </p> <p>The ruling in <em><a rel="noopener noreferrer" href="https://scholar.google.com/scholar_case?case=2500663145839915893&q=Ahouse+Mechanics+Inc.+v.+Massey,&hl=en&as_sdt=4,15" target="_blank">A House Mechanics Inc. v. Massey</a></em>, 124 NE3d 1257 (2019), has several potential implications. Most importantly, the court’s determination that a building code violation constitutes a material breach of contract could expose general contractors to significant liability where a building code violation may be <em>de minimis</em>. </p> <p>According to the <em>Massey </em>court, the parties’ contract required the general contractor to “comply with all applicable building codes.” This provision is very typical and included in almost every construction agreement. Whether a minor building code violation gives rise to material breach is not specifically discussed by the court in <em>Massey</em>, and its holding could have significant ramifications for general contractors in the state of Indiana. </p> <p>The <em>Massey </em>court analyzed the purpose and intent behind this requirement, noting that “the term of the contract requiring that the work comply with applicable building codes can only have meant that it must always be in compliance.” Despite using the word “always,” the court said that there was no breach where code noncompliance was based on the mere fact that work was in progress but not yet finished. However, where many parts of the construction work were simply wrong, defective or noncompliant from the outset, such violations constitute a material breach of the contract. </p> <p>The court’s opinion in this case may have significant ramifications for general contractors who could forfeit contractual rights because of prior building code violations. Parties to construction contracts would be wise to carefully consider provisions such as the one in <em>Massey</em>, because they may substantially shift the parties’ rights and burdens in the event of a dispute.</p>Tue, 06 Aug 2019 00:00:00 -0400{E93C801A-06EC-446D-A61F-678B3F10F901}https://btlaw.com//en/insights/blogs/construction/2019/chicagos-willis-tower---no-longer-the-highest-roof-in-the-western-hemisphereChicago’s Willis Tower – No Longer the Highest Roof in the Western Hemisphere<p>Well, it had to happen someday. Chicago’s Willis Tower hasn’t been the world’s tallest building since 1998 or on the world’s 10 tallest buildings list since 2016, but fans of the skyscraper had still been able to say it had the tallest roof height in the Western Hemisphere. Until now. As reported in <em><a rel="noopener noreferrer" rel="noopener noreferrer" href="https://chicago.curbed.com/2019/7/30/20747403/willis-tower-tallest-roof-height-western-hemisphere-central-park" target="_blank">Curbed Chicago</a></em> on July 29, New York’s Central Park Tower overtook the 1,453-foot-tall Chicago icon as it builds toward a final roof height of 1,550 feet.</p> <p>Chicago architecture enthusiasts may recall the emphasis on roof height when, in 2013, Willis was officially bumped to the second tallest building in the U.S. behind New York’s One World Trade Center under what some called “contentious circumstances.” One World Trade Center’s roof is at 1,368 feet, but its 1,776-foot-tall decorative spire allowed it to claim the top spot. Willis Tower’s famous twin antennas were reportedly not allowed to be counted, by Council on Tall Buildings and Urban Habitat rules, as part of its official building height.</p>Fri, 02 Aug 2019 00:00:00 -0400{D8DE101A-FD28-4119-BDAC-5916587A68E8}https://btlaw.com//en/insights/blogs/construction/2019/michigan-court-appoints-receiver-to-complete-construction-projectMichigan Court Appoints Receiver to Complete Construction Project<p>Michigan courts have appointed receivers in a variety of circumstances to preserve and protect mortgaged property that is otherwise subject to waste. However, it is rare for a court to appoint a receiver to oversee a construction project on the rocks. In <em>CAN IV Packard Square LLC v Packard Square LLC, unpublished per curiam</em>, Docket No. 335512 (Mich. Court of Appeals Jan. 23, 2018), the Michigan Court of Appeals did just that and appointed a receiver to complete the construction of a commercial development located in Ann Arbor, Michigan, after the developer missed several key deadlines.</p> <p>In reaching its opinion, the Michigan Court of Appeals affirmed the lower court’s decision to appoint a receiver because the project was behind schedule, several extensions had been granted but not complied with, and the developer admitted that the project was only 60% complete. Although the trial court improperly relied upon Michigan Compiled Laws (MCL) 600.2927 as a basis to appoint the receiver, the Court of Appeals determined that the trial court reached the right decision albeit, in part, for the wrong reason.</p> <p>The pertinent facts are as follows. On or about Oct. 1, 2014, the plaintiff loaned the defendant $53,783,184 for a mixed use commercial development. Included within the parties’ contract documents were mortgage and loan agreements and construction agreements, which set forth certain events of default, including the defendant’s failure to complete the construction milestones by specified milestone dates.</p> <p>Under the loan documents, if the defendant failed to meet the construction milestones, the plaintiff could accelerate the debt, cease any further disbursements, and demand immediate payment of the full indebtedness. Pursuant to the loan documents, the defendant had to substantially complete the project by Oct. 25, 2016. To substantially complete the project, the defendant had to deliver all permits and approvals, obtain a temporary certificate of occupancy and substantially complete the project in accordance with the plans and specifications.</p> <p>After several milestones were missed, the plaintiff moved for the appointment of a receiver, arguing that the defendant failed to complete numerous items on the project, including the roof and its drains, mechanical openings, the parking lot, side concrete installation, windows, and utility and mechanical systems, and resolve structural issues prevalent throughout the project. Further, the plaintiff argued that the defendant left open exposed areas that were subject to the elements and allowed the recording of two construction liens in contravention of the loan agreement. </p> <h2>Satisfactory Condition</h2> <p>The defendant opposed the motion by arguing that it had not defaulted and that the project stood in satisfactory condition and could be winterized in two to four weeks and completed within four to five months. The defendant excused its failure to meet the construction milestones by asserting two force majeure events (unforeseeable circumstances) caused by an electrician strike and labor shortage. The defendant also blamed its former construction manager’s negligence for deficiencies and delays but assured the trial court that its new construction manager would get the project completed timely. </p> <p>In addition, the defendant argued that the plaintiff lacked entitlement to the equitable appointment of a receiver because the plaintiff caused the two subcontractor’s liens by failing to pay them after approving their work. The trial court ultimately rejected the defendant’s arguments after criticizing the defendant’s effort to complete the construction project. It was apparent from the record that the defendant made promise after promise, but failed to satisfy them and conceded several times that the project was only about 60% completed. The court noted that in fact, at least five extensions were granted after milestones were missed and because winter was approaching, an eminent risk of harm existing to the building because it was not substantially complete and not fully enclosed.</p> <p>The trial court ultimately determined that the project could not go forward without appointing a receiver, and there was no evidence submitted to suggest that the receiver lacked the requisite qualifications or ability to act as a receiver.</p> <p>The trial court relied upon MCL 600.2926 to appoint the receiver which, in pertinent part, states: </p> <p style="margin-left: 40px;">Circuit court judges in the exercise of their equitable powers, may appoint receivers in all cases pending where appointment is allowed by law. This authority may be exercised in vacation, in chambers, and during sessions of the court. In all cases in which receiver is appointed the court shall provide for bond and shall define the receiver’s power and duties where they are not otherwise spelled out by law. Subject to limitations in the law or imposed by the court, the receiver shall be charged with all of the estate, real and personal debts of the debtor as trustee for the benefit of the debtor, creditors and others interested. The court may terminate any receivership and return the property held by the receiver to the debtor whenever it appears to be to the best interest of the debtor, the creditors and others interested. </p> <h2>An Extraordinary and Extreme Case</h2> <p>Although the trial court recognized that the appointment of a receiver is a harsh remedy that should ordinarily be resorted to only in extreme cases, it determined that this case was extraordinary and extreme. Despite the fact that the court did not hold an evidentiary hearing, the Court of Appeals upheld the trial court’s decision based upon the affidavit and evidentiary evidence submitted by the parties.</p> <p>Let’s dig a little deeper into the evidence. During the appeal, the defendant had argued that the doctrine of substantial performance applied because they made a good faith attempt to perform all the essential requirements of the contract. The trial court recognized that the doctrine of substantial performance applies in Michigan and provides that if a good faith attempt to perform does not precisely meet the terms of an agreement or statutory requirements, the performance will still be considered complete if the essential purpose is accomplished. However, in this case because only 60% of the project was completed, the court found that the essential purpose of the parties’ contract was not met and therefore the substantial performance doctrine did not apply. </p> <p>Next, the court rejected the defendant’s argument that the plaintiff’s failure to release funds to subcontractors for work that the plaintiff approved violated the good faith in fair dealing requirement of the loan commitments. The court found that because the defendant failed to provide unconditional lien waivers, there was no requirement under the loan agreement to disburse funds to the subcontractors despite the fact that work was performed on the project. </p> <p>Finally, the Court of Appeals rejected the defendant’s argument that the trial court improperly appointed a receiver under MCL 600.2927 because that statute only applies in instances where a defendant failed to either pay taxes or property insurance, neither of which applied in this case. While the Court of Appeals agreed that the trial court committed error, such error did not warrant reversal. The Court of Appeals relied upon MCL 600.2926 to appoint a receiver and determined that the plaintiff met all the requisite conditions for appointment of a receiver under that statute. In addition, the court said the plaintiff also met requirements of MCL 570.1122, which grants trial courts the authority to appoint receivers in cases brought by construction lienholders. </p> <p>In light of the court’s decision in <em>CAN IV Packard Square LLC</em>, contractors and owners should be aware of the possibility of appointing a receiver when there is a chronic failure to perform on a construction project. While this is an extreme remedy that usually only occurs in bank foreclosure cases, the court’s decision in <em>CAN IV Packard Square LLC</em> appears to relax the standard for appointing receivers.</p>Wed, 17 Jul 2019 00:00:00 -0400{E1617E67-FB6B-4932-B8FF-91A6F406E466}https://btlaw.com//en/insights/blogs/construction/2019/indiana-federal-court-bars-citys-negligence-claim-against-subcontractorIndiana Federal Court Bars City’s Negligence Claim Against Subcontractor, Allows Breach of Contract Claim Despite Lack of Privity<p>An Indiana federal court applied the Indiana economic loss rule to bar the city of Whiting from recovering most of the negligence damages it claimed against a marine engineering subcontractor that allegedly performed defective design work in connection with a lakefront park project. However, the decision then allowed the city to pursue its breach of contract damages directly against the subcontractor despite lack of privity as a third-party beneficiary.</p> <p>With respect to the negligence damages in <em><a rel="noopener noreferrer" href="https://law.justia.com/cases/federal/district-courts/indiana/inndce/2:2014cv00440/80811/80/" target="_blank">City of Whiting v. Whitney, Bailey, Cox & Magnani, LLC,</a></em> 2018 U.S. Dist. LEXIS 44943 (N.D. Indiana, March 20, 2018), the court refused to allow the city to recover most of its claimed damages related to the project on the grounds that they did not constitute damage to “other property” under the recognized exception to the economic loss rule. Citing Indiana Supreme Court precedent, the court determined that “[w]hat matters is what the City purchased” which, in this case, was an entire lakefront park. Even though the project was divided into sub-projects by the prime agreement, the court held that the allegedly defective revetment was part of the overall park project, and therefore did not qualify as “other property.” Other damages (including damage to trees and an existing structure) were held to qualify for recovery as “other property” because the city had acquired that property separately from the park project. </p> <p>With respect to the city’s contract claim, the court found that the city could sue the subcontractor directly for breach of contract as a third-party beneficiary. The decision holds that the subcontract conferred third-party beneficiary rights on the city, in part, because the subcontract referred to the city as the party for whom the marine engineering design services were to be performed.</p> <p>The court also held that the subcontract created a duty to the city that could establish third-party beneficiary rights because the subcontract incorporated the city’s prime agreement by reference, thereby including provisions regarding the city’s ownership of the subcontractor’s instruments of service. Finally, the court found that performance of the subcontract provided a direct benefit to the city. Accordingly, the court held that the city could pursue its breach of contract damages directly against the subcontractor as a third-party beneficiary.</p>Wed, 10 Jul 2019 00:00:00 -0400{E73466BD-26C5-4F14-B1C7-F3EA6E9B8732}https://btlaw.com//en/insights/blogs/construction/2019/bucking-modern-trend-ohio-supreme-court-refuses-to-reconsider-whether-defective-construction-workBucking Modern Trend, Ohio Supreme Court Refuses to Reconsider Whether Defective Construction Work Can Be a Fortuitous ‘Occurrence’<p>The Ohio Supreme Court ruled on Oct. 9, 2018, that property damage caused by a subcontractor’s faulty workmanship can never be an accidental “occurrence” within the meaning of the commercial general liability (CGL) insurance policy, and is therefore not covered. In reaching this conclusion in <em>Ohio Northern University v. Charles Construction Services Inc.,</em> Case No. 2017-0514 (2018), Ohio’s highest court followed its own precedent instead of applying the reasoning used by the vast majority of courts that have reached the opposite conclusion in recent years.</p> <p>Ohio Northern University hired Charles Construction Services to oversee construction of an $8 million University Inn and Conference Center. Charles Construction obtained a general liability policy from Cincinnati Insurance Company. After the project was completed, the university discovered extensive water infiltration and other damage to the building. The university sued Charles Construction for breach of contract, and Charles Services filed third-party claims against several subcontractors.</p> <p>Cincinnati initially agreed to defend Charles Construction in the litigation under a reservation of its rights, but then later sought and obtained a trial court ruling finding that it had no duty to defend. The appellate court reversed, and the Ohio Supreme Court agreed to review the appellate court’s decision at Cincinnati’s request.</p> <p>The Ohio Supreme Court reversed, finding that Cincinnati owed no duty to defend or to indemnify Charles Construction. The analysis in the decision is based entirely on the court’s 2012 decision in <em>Westfield Ins. Co. v. Custom Agri Sys., Inc.,</em> 133 Ohio St.3d 476, 979 N.E.2d 269 (2012). In that case, the court held that “property damage caused by a contractor’s own faulty work” is not “fortuitous” and therefore is not an accidental “occurrence.”</p> <p>The court viewed the issue in <em>Charles Construction</em> to be “nearly identical,” and therefore applied its reasoning in <em>Custom Agri</em>. Using that analysis, the court held that, “Property damage caused by a subcontractor’s faulty work is not an ‘occurrence’ under a CGL policy because it cannot be deemed fortuitous. Hence, the insurer is not required to defend the CGL policy holder against suit by the property owner or indemnify the insured against any damage caused by the insured’s subcontractor.” </p> <p>The Ohio Supreme Court acknowledged that its decision is contrary to several recent decisions. Those include:</p> <ul style="margin-left: 40px;"> <li>The U.S. Court of Appeals for the Tenth Circuit’s decision in <em>Black & Veatch Corp. v. Aspen Insurance (UK) Ltd.,</em> 882 F.3d 952 (10th Cir. 2018) (predicting that the highest New York court would hold that resulting damage from faulty subcontractor work constitutes an “occurrence”)</li> <li>The New Jersey Supreme Court decision that changed New Jersey law in <em>Cypress Point v. Adria Towers,</em> 2016 WL 4131662 (2016) (holding that the term “accident” in the CGL policy encompasses unintended and unexpected harm caused by negligent conduct, and that consequential harm caused by negligent work is an accidental “occurrence”)</li> <li>The Iowa Supreme Court decision that changed Iowa law in <em>National Surety Corp. v. Westlake Investments,</em> 880 N.W.2d 724 (Iowa 2016) (discussing in detail the history and evolution of the CGL policy to change and clarify Iowa law by holding that “defective workmanship by an insured's subcontractor may constitute an occurrence under the modern standard-form CGL policy containing a subcontractor exception to the ‘your work’ exclusion.”)</li> </ul> <p>The decision issued by Ohio’s highest court does not reconsider the court’s reasoning in <em>Custom Agri</em> or address the legal analysis that is now used by most other courts that have carefully considered (and, in several cases, reconsidered) this issue in recent years. Instead, the Ohio Supreme Court applied its prior decision in <em>Custom Agri</em> without discussion of the important changes to the policy terms that most courts have concluded require a different conclusion. According to the court, “Regardless of any trend in the law, we must look to the plain and ordinary meaning of the language used in the CGL policy before us.” The court added, “When the language of a written contract is clear, we may look no further than the writing itself to find the intent of the parties.”</p> <p>Contrary to the court’s explanation, its analysis in <em>Custom Agri</em>, and now <em>Charles Construction, </em>actually fails to apply the terms of the modern day CGL insurance policy. Instead, these decisions apply an outdated judicial gloss <em>not </em>found in the insurance policy itself to conclude that inadvertent faulty workmanship can never be “fortuitous” or “accidental.” This reasoning is rooted in analysis that was used by courts and commentators before the CGL policy terms were materially changed, some dating back to 1986. Those changes modified the exclusions to clarify that the CGL policy <em>provides </em>coverage for certain kinds of property damage caused by inadvertent faulty workmanship.</p> <p>In other words, the coverage grant in the modern day CGL policy specifically anticipates that coverage <em>can </em>exist for property damage caused by the accidental “occurrence” of faulty workmanship. The CGL policy exclusions then define and narrow the scope of the insurance coverage that is actually provided when property damage is caused by faulty workmanship. In particular, due to the “subcontractor exception” in the “your work” exclusion, the modern day CGL policy specifically anticipates and provides insurance coverage for a general contractor when property damage is caused by the faulty work of its subcontractors. This is especially true when (as in <em>Charles Construction</em>) the property damage arises after operations are complete and the damage is to something other than the subcontractor’s defective work itself.</p> <p>The Ohio Supreme Court’s decision is contrary to the clear trend in the law on this issue, a trend that is based on more careful analysis of the current CGL policy terms. It is most unfortunate that the Ohio Supreme Court elected not to use the <em>Charles Construction </em>case as an opportunity to reconsider and to correct the faulty reasoning and analysis in the court’s 2012 <em>Custom Agri</em> decision.</p> <p>For more analysis of this important occurrence issue, please see the <a rel="noopener noreferrer" href="https://www.btlaw.com/en/insights/publications/insurance-coverage-for-construction-defects-2018-50-state-survey" target="_blank">50 state survey of case law</a> prepared by the Barnes & Thornburg Construction Law Practice Group. </p>Wed, 03 Jul 2019 00:00:00 -0400{DF4D9506-93DE-40E7-BE5B-B7FC7C2B2982}https://btlaw.com//en/insights/blogs/construction/2019/appeals-court-decision-shines-light-on-risks-of-land-deconstruction-if-indian-allotment-ownersAppeals Court Decision Shines Light on Risks of Land Deconstruction if Indian Allotment Owners’ and Indian Tribes’ Rights Are Not Respected<p>In a recent decision, the U.S. Court of Appeals for the Tenth Circuit upheld a judgment of trespass against an oil and gas company based on the continued presence of a pipeline on tribal allotment lands in Oklahoma subsequent to the expiration of the easement upon which the pipeline sat. However, the Tenth Circuit reversed the district court’s order requiring the oil and gas company, Enable Intrastate Transmission LLC, to remove the pipeline.</p> <p>This decision underscores the need for uniform legal standards for easements and rights of way over land held in trust by the U.S. State law does not apply to land held in trust and there has been a split among federal circuit courts on how rights of way and easements on tribal land must be handled. </p> <p>The U.S. has a long history with right of way on tribal lands. In the 1940s, Congress enacted a series of right of way statutes in order to support the construction of the infrastructure necessary for continued western settlement and development. Under the statutes, the secretary of the interior has the power to approve easements over lands “held in trust by the United States for individual Indians or Indian tribes.” 25 U.S.C. 323. However to do so, the secretary needs “the consent of the proper tribal officials” if the land in trust is held for an Indian tribe, or the consent of owners of “a majority of the interests” if the land in trust is held for individual Indians. 25 U.S.C. § 324. In <em>Davilla v. Enable Midstream Partners, L.P.,</em> 913 F.3d 959 (10th Cir. 2019), the secretary, in 1980 and with the consent of the majority owner of interest in the land, allowed the conveyance of a 25-foot pipeline easement over 160 acres of land held in trust for an individual Indian, known as an allotment. The easement allowed the oil and gas company to “install … and thereafter, use, operate, inspect, repair, maintain, … and remove a single buried natural gas pipeline” for a period of 20 years.</p> <p>After the expiration of the easement in 2000, the oil and gas company did not remove the pipeline, nor did it immediately seek a new easement. Two years later, the oil and gas company applied for a new easement, but was unable to obtain the consent of a majority of the holders of equitable title in the allotment which then totaled close to 40 individual Indians. As a result, the secretary cancelled the oil and gas company’s application for an easement. The oil and gas company continued to operate the pipeline, despite lacking any easement that would allow it to do so over the individual Indian allotments.</p> <h2>Unlawful Operation of the Pipeline</h2> <p>In 2015, the individual Indian allotment owners sued the oil and gas company for trespass, saying that the company had unlawfully operated the pipeline for more than 15 years. In 2017, the district court granted summary judgment in favor of the individual Indian allotment owners on their trespass claims. Additionally, the district court permanently enjoined the oil and gas company from operating the pipeline and ordered the company to immediately remove the pipeline. The company appealed.</p> <p>On appeal, the oil and gas company attempted to argue that the individual Indian allotment owners were equivalent to tenancies in common. As a result, because the oil and gas company received consent from five of the nearly 40 allotment owners, it could assert the complete defense of consent to the trespass claims. The Tenth Circuit reasoned that “[a]dopting [the oil and gas company]’s view would therefore frustrate federal Indian land policy, effectively robbing Indian allottees and the government of meaningful control over alienation.” Therefore, the Tenth Circuit upheld judgment on the trespass claim. </p> <p>With regard to the injunctive relief, however, the Tenth Circuit found error in the issuance of the district court’s permanent injunction which, among other things, requiring the oil and gas company to remove the pipeline. In granting injunctive relief, the district court relied on Oklahoma law that equitable relief should be granted to restrain a continuing trespass. In doing so, the district court failed to consider federal rules of equity.</p> <h2>Need for Uniform Standard</h2> <p>In reversing the district court, the Tenth Circuit analyzed that while federal courts will generally adopt state law to avoid the creation of federal common law, the questions raised by <em>Davilla</em> demonstrate a distinct need for nationwide legal standards. Specifically, the Tenth Circuit stated: </p> <p style="margin-left: 80px;">Congress provided a way for the Secretary of the Interior to approve easements over and across any lands held in trust by the United States for individual Indians or Indian tribes. This right-of-way statute was to help ensure that necessities such as telegraph lines and roads could continue without encumbrance. While this does not rise to the level of creating a federal interest that federal common law should manage, the nationwide application of this right-of-way statute suggests a need for a uniform federal standard.</p> <p>As such, the Tenth Circuit found that the district court should have applied the federal standard for permanently enjoining a continuing trespass over allotted Indian lands; i.e., whether an injunction is required to prevent the allotment holders from suffering irreparable harm, whether the threatened injury outweighs the harm that could be caused by an injunction, and the injunctions effect on the public interest. Based on the information before it, the Tenth Circuit remanded the case for the district court to weigh such factors as it appeared that the equities would not weigh in favor of the allotment owners.</p> <p>Regardless of which way the district court rules, it is likely this case will go through multiple rounds of appeal, as the consequences for both Indian country and utilities on and around Indian land are significant. This case illustrates the need for knowledge of the implications surrounding construction of both pipelines and other structures on and around tribal lands. A misunderstanding of the rights of individual Indians and Indian tribes on Indian land could result in years of prolonged litigation and unnecessary construction or deconstruction costs.</p>Wed, 26 Jun 2019 00:00:00 -0400