Construction Claims & Debt Collection

J. Norman Stark | July 17, 2017

Construction debt collection requires selection of the proper court with jurisdiction to hear such cases. Municipal courts have jurisdiction within a determined city or municipality, with limitations on the amount claimed by any party, which does not exceed $15,000.00. Limitations may vary by each jurisdiction.

Once a complaint is filed, and the debtor files a counterclaim in which the amount exceeds the monetary limit, the case must be transferred and certified over to the higher court, where there is no monetary limitation on claims. If a debtor fails or refuses to answer timely, after receiving a summons from the court, the court may grant default judgment in favor of the plaintiff.

Construction Claim Legal Procedure

Construction cases are routinely assigned to a Judge or a court-appointed Magistrate for hearings, which are open to the public. During such formal hearings in open court, each party is afforded an opportunity to present evidence and witness testimony to support their claim(s) for determination and judgment (ruling) for one of the parties. Frequently, witnesses may be called to support the claims of either party. The hearings are concluded by a written judgment, stating the nature, extent and amount awarded, or denied, together with the Court’s findings of fact and law.

Once a construction debt judgment has been rendered, the winning or prevailing party may file a Judgment Lien with the Clerk of Courts in the county where the judgment was rendered. A judgment lien acts as a charge against, or interest in, all real and personal property owned by the debtor in the county where the judgment lien is filed. Such liens may also be transferred to other jurisdictions where the Defendant resides. Judgment liens serve to secure payment of the judgment debt, by attaching to all of the assets of the debtor.

In the case of real property, once a judgment lien has attached, and payment is not forthcoming, the judgment creditor may initiate a foreclosure action. Such action demands the property be sold (liquidated) to secure payment of the judgment, together with all court costs, and interest at the legal rate from the date of the original judgment, and continuing until fully paid.

The assistance of an experienced construction attorney is important; it can make the collection of debts more of a certainty than a mere, remote probability. An experienced construction lawyer can help avoid costly mistakes; legal counsel doesn’t cost, it pays!

Limitations on Contract Damages: The ‘Betterment’ Argument

Benjamin M. Petre | Faegre Baker Daniels | July 12, 2017

A fundamental purpose of contract damages is to place a non-breaching party in the same position that it would have been in had its contract not been breached. Accordingly, remediation “enhancements” that give the non-breaching party more than was intended in the original scope of work must be credited to the damages claimed. These types of enhancements are known in the construction industry as “betterment.”

Betterment can exist throughout a construction project. It appears most frequently in the context of (1) repair of defective work, (2) correction of defective design and (3) substitution of materials. The analysis of whether betterment exists generally begins with the owner’s original project scope requirements and design intent — the theory is that the owner’s expectations are identified and described in the original design and construction contracts. Subsequent enhancements that give the owner a “better” project than that for which the owner originally bargained must be excluded from the owner’s contract damages. Such subsequent enhancements most frequently result from directed or constructive changes in design standards and improvements in materials and workmanship, which (1) permit a better or different use of the project than originally contemplated; (2) provide a more durable project than originally contemplated; or (3) otherwise enhance the value of the project beyond original design intent.

Indeed, betterment can exist in many forms. As a result, the typical analysis involves evaluating subcategories of betterment.

Usage Betterment

“Usage betterment” results from changes in design standards that permit a better or different use of the project than originally intended. For example, suppose a concrete deck on a commercial building is initially designed and constructed to merely facilitate the delivery of items that would be stored inside the building, and the owner subsequently decides to use the deck as an area to actually store items of a significant size and weight. If that deck later collapses and the owner brings an action, the owner will not be entitled the damages to replace the deck with the increased load-bearing capacity. The design professionals and contractor can argue that the change in usage is outside the original intended design requirements for the project, therefore such changes would constitute betterment. The proper measure of damages, therefore, should be the amount necessary to restore the deck to its original condition and intended use. The owner would be responsible for the costs incurred in increasing the load capacity of the deck.

Quality Betterment

In any dispute over repairs, one betterment question is whether the demanded repairs, although not altering usage, will nevertheless result in work that exceeds the owner’s original expectations regarding the agreed scope of and requirements for the completed project. Reasonable repairs that merely effectuate the owner’s original intent do not constitute betterment. But repairs that enhance original design standards and thereby increase the project’s value or extend the project’s original product warranties can constitute betterment. For example, if an owner contracts for the construction of a single-ply roofing system to be installed on a building, and subsequent efforts to replace the allegedly defective roof involve the installation of a four-ply roof, the roofer could argue that the owner is not entitled to their full replacement cost. The improvement in the quality of the roofing materials would constitute betterment, for which the owner could not recover.

Durability Betterment

Even when a replacement product is of the same quality as originally specified, betterment may be found where the replacement product extends the useful life of the work beyond that originally contemplated. The roofing example can also be used to illustrate this point. If the roofing contract specified that the roofing system would be watertight for 10 years, and the system does not begin leaking until the fifth year, the owner may not be able to recover its full replacement cost. The contractor could argue that the owner already had five years use out of the old roof and should not be able to reap the full benefits of a new 10-year roof, because that would effectively extend the expected roof’s life five years beyond the original warranty.
In the end, betterment is a key concept to keep in mind in evaluating potential contract damages in construction disputes. If the damages include an amount for enhancements that give the non-breaching party more than what was originally bargained for or more than what was intended, that amount will likely need to be credited to the damages claimed.

Cracks Caused by Construction Operations May Be Covered

Chip Merlin | Property Insurance Coverage Law Blog | July 14, 2017

Judges often make erroneous decisions based on the information presented and argued to them by the attorneys selected by the parties. I was thinking about this while writing my post, Experts Regarding Causation Can Be More Important Than Witnesses — or, Don’t Believe Your Lying Eyes When Your Insurance Company Hires an Expert.

The policyholder in King v. American Family Insurance1 was represented by a legal aid society—not attorneys specializing in property insurance law. Had the policyholder’s attorneys done some simple research and subscribed to the FC&S reference materials, they could have cited this bulletin:

EARTH MOVEMENT EXCLUSION AND PILE DRIVING

 

Pile driving nearby causes damage to insured’s building. Insurer denies coverage due to earth movement exclusion. Is this a covered loss?

 

July 24, 2008

Q
The insured’s building is situated close to a highway on which some heavy reconstruction work is in process. The pile driving that is going on is sending tremors through the earth and the insured worries that his building may be damaged as a result. Will coverage for any damage be adversely affected by the earth movement exclusion contained in the form?

Illinois Subscriber

 A
No, it will not. The earth movement exclusion relates to earth tremors caused by natural forces. The earth movement that might be brought on by an explosion as well as by the action of the pile drivers is a horse of a different color. The examples of “earth movement” listed in the exclusion (earthquake, landslide, mine subsidence, or earth sinking, rising, or shifting and volcanic eruption or explosion) provide all the support that is necessary for the notion that natural causes are the subject of the exclusion.

(Emphasis added)

Larry Bache wrote on this topic in, Are Damages Caused by Blasting or Other Man-Made Earth Movement Covered Under Your Insurance Policy? Indeed, I previously wrote How Adjuster Reference Materials Can Help Change the Law. There, I noted that the Insurance Service Office published a pamphlet instructing first party property insurers how to subrogate against construction companies after those insurers pay for the cracking caused by such construction activities

There is even a website, http://vibrationdamage.com/index.htm, devoted to the issue and instructs people how to make an insurance claim. The website correctly indicates that some insurance companies sell cheap insurance and changed the standard language to include exclusions for man-made earth movement. Don’t buy insurance based on price!
___________
1 King v. Am. Family Ins., 2017-Ohio-5514, 2017 WL 2735614 (Ohio App. June 26, 2017).

Experts Regarding Causation Can Be More Important Than Witnesses — or, Don’t Believe Your Lying Eyes When Your Insurance Company Hires an Expert

Chip Merlin | Property Insurance Coverage Law Blog | July 12, 2017

Insurance companies hire all kinds of experts to help them for all kinds of reasons. The problem is that some experts are not honest and never try to find the truth. The other problem is some policyholders or their under-financed attorneys do not hire experts or very good experts.

We have written a number of blogs on these topics which I suggest you read:

I asked you to review the prior posts because Ohio judges found that eyewitness testimony which directly contradicted an insurance company’s expert was to be disregarded.1 Seems bizarre to me, but here is the relevant part of the opinion:

American Family presented the report and affidavit of a structural engineering firm which specializes in evaluating damage and structural issues to buildings, that provided detailed descriptions of the likely cause of each item of damage. For example, it explained that typical evidence of damage due to vibrations, such as chatter, was not present, while evidence of other causes, such as patching, discoloring, and warping showing long-term, progressive damages due to normal weather conditions and aging, was present. Testimony that some cracks appeared during the time of the vibration/construction does not refute these conclusions. Under the facts of this case, the expert report supports a conclusion that the terms of the policy exclude coverage, especially given that expert testimony clarifies the often complex causes of structural damage. . . .

King argues that the affidavits of her lay witnesses show that the foregoing exclusions do not apply because the damages appeared after the vibrations began. Again, these affidavits do not ultimately refute the expert’s conclusion that the damages were of the type that fall under the exclusions. Further, Dixon v. Miami Univ., 10th Dist. Franklin No. 04AP–1132, 2005–Ohio–6499, cited by King for the proposition that, when there is little passage of time between the incident causing damage and discovery of the damage itself and the matter is not speculative, such lay testimony creates an issue of fact, is distinguishable. In Dixon, there was little cause for speculation, since the appellee broke his arm while working (which the appellant did not dispute was caused by its negligence) and a later infection resulted in the area of the fracture. Here, the unrefuted expert report served to show the many complex causes of damages that fall under the exclusions and the neighbor’s affidavits do not serve to refute the explicit language of the insurance policy.

Really! Suppose an insurance company fire expert concluding that excluded arson occurred and said the fire started in a corner of a building while 1023 witnesses said they saw it start somewhere else? I guess in Ohio, judges will tell you to believe the insurance company’s expert and not your lying eyes!

What Does Your Defense And Indemnity Construction Contract Mean In 2017?

Ryan W. Young | Lewis Brisbois | July 12, 2017

California’s longstanding restrictions on defense and indemnity construction contracts have undergone several changes over the years with significant differences based upon the contract execution date. More specifically, the California Legislature enacted Civil Code § 2782 in 1967, and has amended its provisions several times since 2005. Consequently, parties in a construction dispute often ask, “what version of section 2782 applies, and what does it mean to my case?” We’re here to help. This historical roadmap of Section 2782 will lead you to the answer.

Construction Contracts Executed From 1967 to December 31, 2005

In 1967, the California Legislature enacted Civil Code § 2782 to prohibit any construction contract that requires the promisor (the party accepting the indemnity obligation) to indemnify the promisee (the party benefiting from the indemnity obligation) for property damage, death or bodily injury caused by the sole negligence or willful misconduct of the promisee.

As of 2005, Section 2782 prohibited contracts that purport to indemnify the promisee against liability for damages arising from the sole negligence or willful misconduct of the promisee or the promisee’s agents, servants or independent contractors who are directly responsible to the promisee, or for defects in designs furnished by such persons.1 A typical Type I indemnity clause, however, could require the subcontractor to assume liability for the builder/developer/general contractor’s negligence and misconduct beyond the normal tort law principles of proportionate fault. Thus, under Type I indemnity agreements, the only loss not indemnified was for the sole negligence or willful misconduct of the builder/developer/general contractor. Indeed, the subcontractor was required to indemnify a builder/developer/general contractor for the entire loss, even if the developer performed the majority of the negligent work.

Residential Construction Contracts Executed From January 1, 2006 to December 31, 2007

In 2005, the California Legislature set out to address what were deemed unfair indemnity agreements commonly found in construction contracts which shifted liability from the general contractor to the subcontractor. This, in part, was due to the unfair bargaining power of general contractors and the perceived effect such agreements had on general liability insurance rates.

Consequently, the California Legislature amended Section 2782 to prospectively restrict Type I indemnity provisions in residential construction contracts between builders2 and subcontractors, effective January 1, 2006. More specifically, residential construction contracts entered into after January 1, 2006 could not require a subcontractor to indemnify, including the cost to defend, the builder of original construction individual dwellings3 for construction defect claims arising out of the negligence (or defects in design) of the builder, its agents or other subcontractors, or to the extent the claims did not arise out of the subcontractor’s scope of work.

Residential Construction Contracts Executed From January 1, 2008 to December 31, 2008

Effective January 1, 2008, Section 2782 was amended to clarify that the 2006 amendments regarding residential construction contracts would also apply to a general contractor or contractor “nonaffiliated” with a builder.

Residential Construction Contracts Executed From January 1, 2009 to December 31, 2012

In response to builders requiring subcontractors to pay for their defense costs unrelated to the subcontractor’s work, thereby circumventing the intent of the 2006 amendments and the state’s comparative fault principle, the California Legislature amended Section 2782. For residential construction contracts executed on or after January 1, 2009, a subcontractor has no defense or indemnity obligation to the builder or general contractor in a construction defect action unless and until the builder or general contractor provides a written tender of the claim to the subcontractor. Thereafter, the subcontractor is required to elect to either (1) provide a complete defense of all claims alleged to be caused by the subcontractor, or (2) pay the builder or general contractor the reasonable allocated share of the builder’s or general contractor’s defense fees and costs, on an ongoing basis with shares allocated to each subcontractor and/or the builder or contractor itself.

All Construction Contracts Executed On Or After January 1, 2013

The California Legislature placed further restrictions on construction contracts through its passage of Senate Bill No. 474 which applies to contracts executed on or after January 1, 2013.

Civil Code § 2782 now renders void and unenforceable any construction contract with a public entity or private property owner that purports to relieve a public entity or private property owner for its active negligence or to shift such liability to a contractor, subcontractor or supplier of goods or services. This prohibition only applies to owners that are not acting as a contractor or supplier of materials.

Non-Residential Construction Contracts Executed On Or After January 1, 2013

Non-residential contracts executed on or after January 1, 2013, that require a subcontractor to insure or indemnify, including the cost to defend, a general contractor, construction manager, or other subcontractor against liability for claims of property damage, death or bodily injury are now void and unenforceable where such claims arise out of the active negligence or willful misconduct (or defects in design) of that general contractor, construction manager, or other subcontractor (or their agents), or to the extent such claims do not arise out of the subcontractor’s scope of work under the construction contract. 4

We will continue to follow developments in Section 2782 and will report on changes to the law and relevant cases in future editions of this newsletter. Although you should always seek legal advice as to your particular case, we provide the following chart for ease of reference.

Footnotes

1 Section 2872 also prohibits construction contracts with a public agency which imposes on the contractor, or relieves the public agency from, liability for the active negligence of the public agency.

2 “Builder” means any entity or individual, including, but not limited to a builder, developer, general contractor, contractor, or original seller who, at the time of sale, was also in the business of selling residential units to the public for the property. “Builder” did not include any entity or individual whose involvement is limited to his or her capacity as general contractor or contractor and who is not a partner, member of, subsidiary of, or otherwise similarly affiliated with the builder. These nonaffiliated general contractors and nonaffiliated contractors were treated the same as subcontractors, material suppliers, individual product manufacturers, and design professionals. Cal Civ. Code § 911.

3 See, Civil Code § 896.

4 See Civil Code § 2782.05 for exclusions including, but not limited to, direct contracts with public agencies, owners of private property, design professionals, and any wrap-up insurance policy.