When Does the Statute of Repose Begin to Run in Phased Development Projects?

Christopher Sweeney | Conn Kavanaugh

The Massachusetts Statute of Repose requires litigants to assert within six years all tort claims arising out of the design, construction, or administration of improvements to real property. The Statute begins to run upon the earlier of: (1) the opening of the improvement to use; and (2) substantial completion and the owner’s taking of possession. It acts as an absolute bar to tort claims filed more than six years after the earlier of these two milestones. These principles are well-accepted.

But what happens when a project involves phased development – where, for example, a developer constructs condominium buildings over a series of years? Does the Statute of Repose begin to run only upon substantial completion of the entire project? Or is each phase considered a distinct improvement for purposes of triggering the Statute?

Last month, a Massachusetts federal judge asked the Supreme Judicial Court for guidance on this issue. In that case, the trustees of a 28-unit condo association brought suit against the condo’s developer for negligent construction of the condo’s common areas. The developer moved for partial summary judgment, arguing that it substantially completed six of the condo units more than six years before the trustees brought suit, and that the Statute of Repose therefore barred claims as to those units. The court rejected that argument, and held that the condo project constituted a single improvement – as opposed to a series of distinct improvements – under the Statute of Repose. But, noting a total lack of appellate authority on the issue, the Court granted the developer’s motion to certify the question to the SJC.

The SJC’s ruling on this issue will have significant implications for landowners and construction-industry professionals. If the court adopts the developer’s view of the Statute of Repose, condo owners will need to move more quickly to preserve their rights. On the other hand, if the condo trustees prevail, developers and other construction professionals will need to be prepared to defend latent claims that could be a decade or more old by the time they are filed.

The SJC is soliciting amicus briefs on this issue. A decision is expected sometime this summer.

Obscure But Important Surety and Guarantee Rules

Joe Virene | Gray Reed & McGraw

Texas surety law contains obscure procedural rules that can have outsized consequences. Chapter 43 of the Civil Practice and Remedies Code is an important example.

Applicability

This chapter applies to everything that is a “surety” as defined by the statute. The statute’s definition includes “an endorser, a guarantor, and a drawer of a draft that has been accepted; and …every other form of suretyship…” This means sureties on payment and performance bonds and even personal guarantees.

Notice and Discharge

A surety on a contract may send a written notice requiring the obligee to bring a suit on the contract. If the obligee fails to do so within the “first term of court” or fails to do so within the “second term of court if good cause is shown for delay” then the surety is discharged of liability. “Term of court’ is antiquated. However, that has since been construed to mean a “reasonable time.”

The Priority of the Execution

If a judgment is entered against a principal and a surety, then Chapter 43 requires the sheriff to first levy the principal’s property until the judgment is satisfied. If the principal does not have enough property in the county to satisfy the judgment, then the surety’s property may be levied.

Subrogation

The surety may also subrogate to the judgment creditor’s rights to extent the surety makes or is complelled to make payment(s) to satisfy the judgment.

Waiver

These rights may be waived by agreement. For this reason, these rights are often, directly or indirectly, waived.

Forethought Is Key to Overcoming Construction Calamities

Mitch Cohen | Construction Executive

Without warning, an under-construction structure in the southern United States suffered a catastrophic collapse. The tragedy resulted in the death of several people. As a result, engineering and construction post-collapse forensics experts engaged in an 18-month investigation.

Those involved in the design and build project included the general contractor hired by the owner, a prime engineer, a consulting peer-review engineer and a prime structural design firm supported by a sub-consulting structural engineer. Although significant cracking was noticed several weeks before the failure, no one sounded the alarm or deemed the cracking worthy of corrective action.

In their findings, forensic experts found the collapse resulted from the combined failure of the general contractor, engineers and even the owner, who all failed to shut down the work once the cracking reached unacceptable levels and/or take the appropriate actions needed to secure the public safety and mitigate the risk. This was even after the general contractor requested that the engineer-of-record and design manager assess the structure’s extreme cracking. Consequently, the choice to not seriously investigate the crack or seek an independent peer review to design a rectification plan contributed directly to the tragedy. This is typically referred to within the industry as a “negligent professional design error.”

In fact, even though the lead forensics investigator stated that there was a definite problem….no one responded with the required urgency. The simple truth is that when the cracks reached unacceptable levels, oversight protocols should have been enacted to suspend work and close nearby roads. This was the construction manager’s responsibility regardless of whether he or she was hired by the owner or a member of the general contractor team.

From the details presented, it appears that both negligent wrongful design acts and errors as well as negligent wrongful construction management errors played a significant role in the collapse. Assuming the parties alleged to have caused the collapse had professional liability policies, here is how the exposures and resulting tragedy could have been addressed after the collapse occurred.

Under such conditions, the engineering professionals should have immediately notified their brokers and carriers of the potential claims. This includes citing the alleged negligent professional wrongful acts involved in the collapse in relation to the design, its oversight and the failure to adhere to established professional standards of care. 

Another important element is the definition of professional services in the engineer’s policy. Ideally, this language would carefully detail and define the extent of the engineering, land surveying, construction management, program management and technical consulting services (in the case of the collapse, the negligence in not addressing the reported design flaws); design and construction consulting (as in the failed peer reviewing of original plans and specifications); and the use of technology services (any structural analysis software). 

Other considerations involve the possible containment of crisis management coverage, which would have paid the expenses of media consultants and their dealings with the press and public, as well as punitive damage terms and conditions as allowed by local insurance laws. However, given the catastrophic failure of the structure, it is highly unlikely that the policies held by the engineers engaged would have possessed policies containing the limits of coverage needed to pay the damages and losses assessed. 

Optimally, the project’s general contractor and subcontractors should have had contractor’s professional and pollution liability coverage. As with engineers, the contractors should have had a broad definition of covered professional services, especially construction management. While it does appear that the general contractor did report the cracking weeks before the collapse, little if anything was done to either further investigate or alleviate the problem. Subsequently, the work was not stopped and the structure collapsed. By all accounts, it appears the construction manager should have shut down the project and forced an evaluation before the job continued. In terms of professional liability insurance exposure, not doing so could have been seen as a negligent wrongful professional act when it comes to overseeing and ensuring the work’s structural integrity work. 

Unlike engineering policy forms, contractor’s professional liability policies cover the rectification of structural problems caused by professional and/or design errors. Under these conditions, if the general contractor had notified the carriers of the construction failures when first noticed, they might have been able to work together, identify and institute the proper corrections before the problem became catastrophic. In addition, if the contractor policy had protective indemnity coverage and if the contractor hired engineers to do shop-drawing changes to plans and specs, then the protective indemnity coverage could have been applied as an excess coverage that literally pays in excess of the engineer’s available policy limits and enables. The benefits are that the contractor could have received substantial financial relief as a result of the damages that likely exceeded the limits available through the engineer’s professional liability insurance.

While insurance may not provide all the answers, the proper policies when in place can provide the risk management assistance needed to overcome challenges before they become catastrophic in addition to deferring the costs associated with costly third-party claims, delays and the correction of structural deficiencies. There is no substitute for due diligence and the forethought to recognize the problems, both big and small, that plague nearly every jobsite. The trick is to thoroughly anticipate the potential risks and then plan accordingly with the appropriate, proven strategies well before the project even begins. 

I am not Being Paid – Can I Suspend my Works?

Suzannah Fairbairn and Alastair Young | Dentons

Why is this question so common?

For the construction industry, the uncertain economic climate can mean a lack of cash and liquidity across the supply chain. Employers are increasingly seeking to rely on their contractual rights and remedies to avoid having to pay, or to delay payment. As a result, one of the biggest issues we see contractors facing in the current market is the lack of cash-flow due to non-payment, late payment or underpayment.

In these circumstances, the contractor often feels it has limited options to ensure it gets paid, and sees suspending works as its only viable option. If there is a clear contractual entitlement to suspend works, then this can be a very powerful tool for the contractor. However, if there is not a clear entitlement and/or the contractor wrongfully suspends its works, then this can lead to serious repercussions.

I have an unamended FIDIC contract – can I suspend? 

  • You have a right to suspend in certain circumstances (Sub-Clause 16.1, 1999 Edition), including:
    • if the engineer fails to issue a payment certificate; and/or
    • if the employer fails to pay any amounts due.
  • You can rely on this only if:
    • there has been a failure to pay an amount that has been certified, or a failure to issue a payment certificate at all. It does not apply if the engineer certifies “nil”, no matter how good your grounds for disputing this “nil” certification;
    • you have given at least 21 days’ notice after the payment or certificate became due; or
    • you have otherwise performed the contract, and you are exercising this right, in a manner consistent with the requirements of good faith (Article 246(1) Civil Code).
  • If this applies, then:
    • you are entitled to an EOT, cost and profit arising from the suspension, as long as you have fulfilled the necessary notice requirements for contractor’s claims (Sub-Clause 20.1); and
    • this right is in addition to any entitlement to financing charges and to termination.
  • However, the right to suspend works is often deleted from contracts in the region (or at least heavily amended), so check your contract carefully before attempting to rely on an assumed contractual entitlement.

My contract does not contain a right to suspend – is there any other way?

  • Article 247 of the Civil Code provides a possible right to suspend works. This states: “In bilateral contracts, where the reciprocal obligations are due, each of the contracting parties shall have the right to abstain from executing his obligation in case the other party does not honour his obligation.”

However, this does not necessarily give you an entitlement to suspend the works if you have not been paid. An attempt to rely on this article is risky.

  • There is no right to suspend mentioned in the part of the Civil Code dealing with construction contracts (Muquwala).
  • The requirement for reciprocal obligations is problematic because the payment relates to work already completed, rather than work that you are hoping to suspend.
  • You would need to be able to demonstrate, at a minimum, that: (i) you were not in breach of the contract first; (ii) you were willing and able to perform your obligations; (iii) the suspension is proportionate; and (iv) you are acting in good faith.

Is it worth a try?

  • You should only suspend the works if you are confident that you are entitled to do so and have fully complied with the notice provisions and any other requirements.
  • If you suspend without entitlement, this would be a breach of contract and the employer might be able to terminate the contract and/or claim (often very substantial) damages.

Key messages 

  • A clear contractual right to suspend can be very effective (however, commercially this can be very difficult to obtain).
  • Even an unamended FIDIC does not assist where the issue is routine under-certification.
  • Make sure you have fully complied with all the contractual requirements – failure to do so could be fatal to your right to suspend and open you up to significant claims.
  • It is very risky to suspend without a clear contractual right to do so (although it may be worth considering in exceptional circumstances).
  • Do not simply slow or stop work without notice.
  • The result of suspending works without entitlement can be severe.
  • If you are suffering cash-flow problems, take legal advice early.

A Few More 2020 Bills “Crossing Over” in the General Assembly

Christopher G. Hill | Construction Law Musings

Last week I posted about a few bills that should be noted by the construction community here in Virginia.  Now that the “crossover” (passed Senate bills headed to House and vice versa), here are a couple of other bills that the AGC of Virginia has highlighted that were not included in the post and updates last week.  I will just highlight two here but for a more complete list, check out this crossover update from the AGC of Virginia.

SB208 Mechanics’ liens; right to withhold payment. Specifies that the use of funds paid to a general contractor or subcontractor and used by such contractor or subcontractor before paying all amounts due for labor performed or material furnished gives rise to a civil cause of action for a party who is owed such funds. The bill further specifies that such cause of action does not affect a contractor’s or subcontractor’s right to withhold payment for failure to properly perform labor or furnish materials and that any contractual provision that allows a party to withhold funds due on one contract for alleged claims or damages due on another contract is void as against public policy.

HB1300 Virginia Public Procurement Act; statute of limitations on performance bonds; statute of limitations on construction contracts and architectural and engineering contracts. Provides that an action against the surety on a performance bond shall be brought within five years after the completion of the contract. The bill further provides that the statute of limitations on construction contracts and architectural and engineering contracts is 15 years after completion of the contract.

Both of these bills have passed their respective chambers and are being considered in the other chamber of the General Assembly.  The first deals with offset by general contractors and the other should be good news for all who deal in public construction because it at least would give some certainty and mitigate so called “Hensel Phelps” problem.

As always, I recommend that you read the entire bill yourself and consult a Virginia construction attorney with any questions about how this will affect your construction business.