Language in Performance Bond Critical in Determining Surety’s Rights to Complete

Jared Gillman | Saul Ewing Arnstein & Lehr | October 11, 2019

If an owner terminates a contractor due to a contractor default on a bonded project, can the surety hire the same contractor to complete the work under the bond?  Depending on the language of the bond, it may be permissible in Florida.

Recently, in Seawatch at Marathon Condominium Association, Inc. v. The Guarantee Company of North America, No. 3D18-1337, 2019 WL 4850194 (Fla. 3d DCA Oct. 2, 2019), a Florida appellate court ruled that the unambiguous terms of an AIA A312 Performance Bond permitted a surety to propose a previously-terminated contractor as the “replacement contractor” under a Takeover Agreement.

The AIA A312 Performance Bond provided that the surety was required to exercise one of the following series of options upon a contractor’s default:

“4.1 Arrange for the contractor, with consent of the owner, to perform and complete the Contract; or 

4.2 Undertake to perform and complete the Contract itself, through its agents or through independent contractors; or…”

The surety elected to complete the contract itself pursuant to Section 4.2 of the Bond, and presented a Takeover Agreement to the owner.  The Takeover Agreement provided that the defaulted contractor would complete the project for the surety.  The owner refused the Takeover Agreement because it would not consent to the terminated contractor completing the work on the project.

The appellate court held that the terms of Section 4.2 were unambiguous, and lacked the consent requirement of Section 4.1.  Therefore, the court would not read into Section 4.2  a consent requirement, and held that the surety’s refusal to provide another replacement contractor was not a breach under the terms of the bond.

The owner also argued that the surety could not complete the project itself under Section 4.2 because it was not a licensed contractor.  However, the appellate court rejected this argument, holding that the surety did not need to be a licensed contractor to enter into the Takeover Agreement.

Like any construction contract, it is important to understand the terms contained within a performance bond.  Had the owner successfully modified the terms of the bond to require its consent to a replacement contractor, the dispute (and the resulting legal fees) could have been avoided.

Quick Tips on Effective Construction Quality Control

Alexander G. Thrasher | Bradley Arant Boult Cummings | October 3, 2019

Quality control (QC) programs and reporting are not new to the construction industry. Engineers’ and owner’s specifications, and even manufacturers’ product data sheets, make clear what procedures must be followed and what records must be prepared to ensure that specified quality requirements are met or are within acceptable limits. Contractors are used to filling out QC reports to document environmental conditions, equipment operating parameters, and the work activities performed on site each day. The advancement of QC software and other technologies make it easier than ever to continuously monitor and record environmental, material, and other relevant conditions. Both contractors and owners should embrace the benefits associated with a top-notch QC program and diligent completion of QC reports, but they should be equally aware of the pitfalls that can arise when this aspect of a project is mismanaged and a legal dispute arises.

To resolve a dispute, lawyers must evaluate facts related to a project in terms of claims made by each side and the potential defenses and counter-arguments to those claims. If or when disputes arise on a project, the existence or absence of a QC program and QC reports (along with what is written or not written on them) can be compelling evidence that either helps or hurts your position. Although it is never the goal to end up in litigation or another dispute resolution proceeding because of your work on a project, it is helpful to consider whether your QC program would aid or damage your case in such a proceeding. Here are three points to always remember:

  • Your program on paper is only as good as your program in the field. A QC program that looks great on paper might do wonders to help you win a project. But that same program, if poorly implemented, can cost you thousands, or more, if it is not executed as intended. Put thought into your QC program. It is easy to establish a practice on paper because it is an owner requirement or necessary to obtain an industry certification. But if you are not able and willing to implement the requirement, what seemed like a gold star in your favor at bid time can damage your credibility and can be used to draw inferences against you in court. It is often worse to create a program or plan that says you will do something and not do it, than to never have said anything at all. Take time to review your QC program, and make sure you and your employees are executing your work in accordance with your program.
  • Train your employees well, train them often, and verify training effectiveness. Your program must be more than a commitment by the owners or upper management of the company. In fact, more than anything, it must be a daily commitment by your employees in the field. Train employees on the program, and set expectations for what it looks like to implement the program in the field. Think about the information that needs to be included on daily QC reports or in superintendent log books. Think about times when it makes just as much sense to record activities that did not happen on a given day as those activities that did and why. Be consistent with when and how you record this information. Remember, the absence of a record can be just as compelling as the existence of one in certain situations. Make sure your project managers review these documents regularly. If there is a problem in the reporting, you need to correct it as soon as possible. Make sure records are stored so they are easy to locate and review and protected from loss or damage. Finally, make sure you have a document retention policy in place (and that you follow it, as well).
  • Do not be afraid to call on legal counsel. Do not shy away from seeking guidance on the legal risks associated with your business or a project. I know, I know — no one ever wants to get lawyers involved, and you certainly do not want lawyers dictating how to run your businesses. But as the saying goes, an ounce of prevention is worth a pound of cure. The right lawyer can add value to your business and make you more profitable. Rational contractors do not want to litigate disputes. They would much rather do the job they contracted to do, get paid, and move on to the next project. Proactive clients who contact their legal counsel about issues that might arise in the future often come out ahead of clients who wait to call until there is a real mess and a lot of damage has already been done. Whether it is a QC program, a contract, or a safety issue, lean on the legal resources at your disposal. Engage your attorney to conduct a review of your programs or to present needs-based training to your team for legal perspective on discrete topics that affect your business.

Ohio Supreme Court Crushes “Fannie Lewis Law” in Cleveland – Reverses Court of Appeals in Hot Debate

Tara Rose and John Swansinger | Buckingham, Doolittle & Burrooughs | September 27, 2019

Ohio local hiring laws affecting contractors are destroyed, for now.

Municipalities will no longer be able to force local hiring upon contractors for various jobs. This especially impacts large cities and their citizens with the ambition to work in construction. The winners are contractors who want to bid on all public work throughout the state on a level playing field and not be forced to hire certain workers or pay fines.

Click here to read opinion

THE RULING: On September 24, 2019, the Supreme Court of Ohio ruled that the State of Ohio legislature prevails over Cleveland’s Fannie Lewis law. In the majority opinion, Justice Kennedy leaned on Article II, Section 34 of the Ohio Constitution which grants the Ohio General Assembly broad authority to legislate the welfare of the working people of Ohio. Justice Kennedy asserted that the Ohio legislature “…exercised that authority in enacting R.C. 9.75, which protects all employees engaged in the construction trades from public-improvement contracts that impose conditions on employment favoring a public authority’s own residents to the detriment of other construction workers in the state. Because every resident of a political subdivision is affected by the residency restrictions imposed by another political subdivision, the statute (R.C. 9.75) provides for the comfort and general welfare of all Ohio construction employees and therefore supersedes conflicting local ordinances.”

THE BACKGROUND: In 2003, the City of Cleveland passed the “Fannie Lewis Law.” The Fannie Lewis Law is an ordinance requiring that 20% of all hours worked by employees from the state of Ohio on a $100,000+ public construction project in the City must be completed by residents of the City of Cleveland. If a contractor fails to meet this quota, they are charged a fine. The City passed this law because, after much study and review, it believed its residents were not receiving adequate opportunities on local construction projects. Other cities throughout the state have passed similar requirements, with some requiring residency quotas as high as 50%. Here is the rub: Ohio Revised Code Section 9.75, which was passed in May of 2016, bars public authorities from requiring workers on public projects to reside in the geographic area of the project. Thus, the City of Cleveland sued the State of Ohio over this Revised Code Section one week before its effective date.

CITY OF CLEVELAND. The City of Cleveland argued that its authority to make public improvements is included within the powers of local self-government guaranteed by the constitution and R.C. 9.75 directly infringes on that right. The City also argued that construction employees already have the choice to live where they please, so no fundamental right is being infringed by enforcing the residency quotas. Instead, the City argued that the law provides much needed jobs to City residents who are trained and willing to work, but who are otherwise not being offered employment on these types of projects. The City has also provided data that purports to show that the ordinance has had a positive impact on the City’s work force. The City took the stance that R.C. 9.75 is not a general law of the State and, as such, it infringes on the City’s home-rule power. Lastly, the City argued that the Supreme Court should affirm the lower courts because R.C. 9.75 does not arise pursuant to the State’s employee-welfare powers and does not provide for the comfort, health, safety and general welfare of all employees engaged in construction work. Obviously, the court by a 4-3 margin disagreed.

IMPACT: Local hiring laws in Ohio are destroyed, for now. Municipalities will no longer be able to force local hiring upon contractors for various jobs. This especially impacts large cities and their citizens with the ambition to work in construction. The winners are contractors who want to bid on all public work throughout the state on a level playing field and not be forced to hire certain workers or pay fines.

The question remaining, is R.C. 9.75 being used as a tool for discrimination? We expect new local laws and additional state and federal constitutional challenges.

RHS Amends Rules for Single Close Construction to Permanent Loans

Weiner Brodsky Kider | September 11, 2019

The USDA’s Rural Housing Service (RHS) recently issued a final rule, pushing back from August 21, 2019, to October 1, 2019, the effective date of a prior rulemaking that seeks to facilitate and encourage single close combination construction to permanent loans (single close loans) under the Single-Family Housing Guaranteed Loan Program (SFHGLP).

According to RHS’s prior rulemaking, warehouse lenders currently have difficulty making affordable single close loans under the SFHGLP because of the inability to cover construction costs and make payments to secondary market investors during the construction period.  As a result, the rulemaking amends the SFHGLP regulation to ease the financial costs of interim construction financing for such lenders by: (i) allowing a temporary interest rate higher than the permanent note rate for interim construction financing; (ii) removing the requirement for loan modification or re-amortization once construction is complete (thereby allowing loans to remain in mortgage backed securities without interruption); and (iii) allowing for the reserve of regularly scheduled principal, interest, taxes and insurance payments for up to 12 months during the construction period.

In addition, the final rule allows single close loans for the rehabilitation of existing dwellings upon their purchase, eliminates maximum interest rate cap requirements for all SFHGLP loans, and updates lender mortgage record retention requirements to include single close construction documentation.

Why Do I Teach? To Learn Something of Course!

Christopher G. Hill | Construction Law Musings | September 9, 2019

A week ago on Thursday and Friday August 29 and 30, 2019, I had the pleasure of co-teaching a two day module on Contract Administration for the Project Manager Development Program created by the Associated General Contractors of America. This was my favorite kind of class, a class for mostly young construction professionals looking to learn something practical about how contracts affect “on the ground” project management.  While I presented the “legalese” and a construction lawyer’s perspective on the legalities of construction contracting, mechanic’s liens, agency and the like, my co-presenter, Paul Stiles of The Bell Company, told war stories and gave them the benefit of his construction experience to bring this to the practical level for them.

The class covered everything from notice requirements, “killer clauses,” and preparation of claims, to a primer on arbitration/litigation, privity and payment issues.  As always seems to occur, the attendees asked questions that neither Paul or I anticipated.  Their relatively new eyes on the construction management world gave them a perspective that at least I, as a relatively cynical (yes I admit it, the Murphy’s Law governed world of construction has created a bit of cynicism) construction attorney, do not have.  As I always do, I learned from teaching.  Answering these fresh eyed questions taught me as much as imparting the information taught them.

Not only did I have to brush up on how to best explain concepts that I have internalized and know to the point I don’t have to think too much about what they mean (for instance privity) but I also had to think outside the box to answer the questions and respond to the scenarios that these folks have faced in the past or may face in the future.  Further, these teaching opportunities force me to apply the legal concepts (many of which are discussed here at Construction Law Musings) to every day situations that construction pros deal with on a daily basis.  All of the above makes me a better lawyer and counselor.

In short, I truly enjoy teaching classes, whether to young attorneys or in particular for those that I represent on a day to day basis.  I have fun on “Hawaiian Shirt Friday” as shown in the photo accompanying this post (that’s me in the back with the red floral one), but I always come away from the experience having learned something new.  Thanks to my friends at the AGC of Virginia for the opportunity.