Washington Court of Appeals Dismisses Oregon Contractor’s Collection Action for Failure to Strictly Comply With Registration Requirements

Rachel B. Greenlee | Lane Powell | April 3, 2018

In an unpublished opinion filed April 3, 2018, in HNS, Inc. v. Eagle Rock Quarry, et al., Cause No. 34695-1-III, Division Three of the Washington Court of Appeals dismissed a contractor collection action finding that the contractor failed to substantially comply with the requirements of Washington’s contractor registration act, RCW 18.27, which is a prerequisite to filing suit.

Eagle Rock Quarry, Inc., located in Mesa, Washington, entered into an oral agreement with HNS Inc., an Oregon company, for HNS to blast and stockpile gravel at its Washington location. Eagle Rock made a number of payments to HNS under the agreement, but suddenly stopped paying HNS’s monthly invoices in September 2015. Four months later, HNS sued Eagle Rock for its failure to pay.

Despite expressing sympathy for HNS having performed work without payment, the trial court granted Eagle Rock’s motion to dismiss the Complaint on the basis that HNS was not duly registered as required under RCW 18.27, which is a prerequisite to filing suit.

RCW 18.27 requires every contractor engaging or offering to engage in services in Washington to register with the Department of Labor and Industries (L&I). In any action to collect compensation for work or to enforce a contract, a contractor must prove that it was duly registered at the time it entered into the contract or performed the work. The statute states that a court may not find a contractor in substantial compliance with the registration requirements unless:

  1. L&I  has on file the registration information prescribed in RCW 18.27.030,
  2. The contractor had at all times in force a current bond or surety as required by RCW 18.27.040, and
  3. The contractor had at all times in force a current insurance as required by RCW 18.27.050.

HNS had formerly been licensed in Washington, but failed to renew its license in 2010. The Court of Appeals reasoned that by virtue of its previous registration, L&I likely had on file much but not all of the information required by RCW 18.27.030. However, the Court found that HNS’s $75,000 surety bond did not qualify as a bond required by RCW 18.27.040 because it named the State of Oregon as obligee. RCW 18.27.040 requires the contractor’s bond to name the State of Washington as obligee. To this point, the Court of Appeals quoted the trial court’s comments at oral argument that “the purpose of the statute is to protect against damage claims … [for] people that work here. People that have accidents that occur here.” (Emphasis added).

Further, HNS could not demonstrate that it possessed the required insurance because it provided only premium notices, rather than a copy of the policy, or other evidence that the insurance in place covered its operations with Eagle Rock in Washington.

Accordingly, while similarly sympathetic to HNS’s situation, the Court found that HNS did not substantially comply with RCW 18.27.080 in the manner required to enjoy access to Washington courts, and affirmed the trial court’s dismissal of the action. This case emphasizes the importance of strict compliance with the Washington contractor registration act, especially for out-of-state contractors.

Settling With Some, But Not All, Of The Defendants In A Construction Defect Case

David Adelstein | Florida Construction Legal Updates | March 25, 2018

Construction defect lawsuits can be complex multi-party disputes, especially when the plaintiff is doing what is necessary to maximize recovery.  This means the plaintiff may sue multiple defendants associated with the defects and damage.  For example, the owner (e.g., plaintiff) may sue the contractor, subcontractors, design professionals, etc. due to the magnitude of the damages.  In many instances, the plaintiff is suing multiple defendants for overlapping damages.  The law prohibits a plaintiff from double-recovering for the same damages prohibiting the windfall of a plaintiff recovering twice for the same damages.  Perhaps this sentiment is straight common sense, but this sentiment is a very important consideration when it comes to settling with one or more of the defendants, while potentially trying the construction defect case as to remaining defendants.  Analysis and strategy is involved when settling with some but not all of the defendants in a construction defect case (and, really, for any type of case).  Time must be devoted to crafting specific language in the settlement agreements to deal with this issue. Otherwise, the settlement(s) could be set-off from the damage awarded against the remaining defendants.

The recent decision in Addison Construction Corp. v. Vecellio, 43 Fla.L.Weekly D625(a) (Fla. 4th DCA 2018) details the analysis and strategy required when settling with some but not all of the defendants in a construction defect case, and the concern associated with a trial court setting-off the settlement amount from the damage awarded against the remaining defendants.

This dispute involved the sale of a high-end residential home where the buyer of the home sued numerous parties due to construction defects—the sellers, the developer, the general contractor, and subcontractors.   Before trial, the buyer settled the dispute with certain subcontractors for a sum total of $2,725,000.  The buyer then proceeded to trial with remaining defendants.  Prior to trial, the buyer filed a motion in limine to exclude the remaining defendants from mentioning these subcontractor settlements.  The trial court granted the motion.  After trial, the plaintiff was awarded approximately $3.5 Million in damages associated with the construction defects.  However, smartly, remaining defendants moved the trial court to set-off the sum total of the subcontractor settlements from the approximate $3.5 Million to reduce the overall principal judgment amount.  The trial court granted the motion in most respects reducing the judgment amount finding that that the settlements covered the same damage.  Remember, a party cannot recover double damages for the same issue.

An appellate issue dealt with this set-off of the subcontractor settlements from the total judgment awarded against the remaining defendants.  This is a critical strategic  legal issue, not to be taken loosely, when settling with defendants in a multi-party construction defect dispute, particularly when you may try the case against non-settling defendants.

The purpose of the setoff statutes is to prevent a windfall to a plaintiff by way of double recovery. Thus, any “settlement recovery sought to be set off must be ‘in partial satisfaction for the damages sued for.’ ” Accordingly, “[i]f the settlement funds are applicable to a claim asserted only against the settling co-defendant, the non-settling co-defendants are not eligible for a set-off in the amount of the settlement.”  In the same vein, “[w]hen a settlement recovery is allocated between claims with different and distinctive damage elements, set-off should only be allowed to co-defendants jointly and severally liable for the same claims.” 

***

Although the same-damages-sued-for prerequisite seems simple enough in theory, because settlement agreements are often so broadly worded, in practice it is not always easy to determine whether damages paid as part of a settlement overlap with damages awarded against a remaining co-defendant. To that end, the law provides that if settlement proceeds are “not apportioned between (a) claims for which co-defendants are jointly and severally liable with the settling co-defendant, and (b) claims which were only asserted against the settling co-defendant, the entire amount of the undifferentiated recovery is allowable as a set-off.”  This is the case even where some of the settlement amount may have been for different damages and the settlement amount exceeded the damages it setoff. 

Addison Construction Corp., supra, (internal citations omitted).

Clearly, while this law seems simple, it is not.  And it certainly is not in a multi-party construction defect case which is why—again—settling with some but not all defendants in a construction defect case requires analysis and strategy. Otherwise, what could happen is a trial court setting-off the total sum of the settlements from the principal damages awarded at trial.  Probably not what the plaintiff had in mind! This is what the trial court did in this case based on otherwise broad language in the respective settlement agreements.  Guess what?  The appellate court agreed:

In sum, because the subcontractor settlement agreements failed to differentiate the damages settled for, it is simply “impossible to know whether [Buyers] would be receiving a duplicate payment” for their breach of contract based claims. If Buyers wanted to prevent this problem, they should have allocated the damages encompassed in each subcontractor settlement. Buyers made a strategic and understandable decision not to do so, and this is the end result. We acknowledge that this may seem harsh, but it is the only pragmatic result. If courts were required to delve into the scope of undifferentiated settlement agreements for the purposes of making a setoff determination, then post-judgment proceedings would turn into a second trial. Principles of judicial economy prohibit this result.

Addison Construction Corp., supra, (internal citations omitted).

In a Win for Property Owners California Court Expands and Clarifies Privette Doctrine

Garret Murai | California Construction Law Blog | March 21, 2018

We’ve written before about the Privette doctrine, which generally holds that a higher-tiered party is not liable for injuries sustained by employees of a lower-tiered party under the peculiar risk doctrine, herehere,  here and here. We’ve also talked about some of the exceptions to the Privette doctrine, including the non-delegable duty doctrine and the negligent exercise of retained control doctrine, which provide that a hirer cannot rely on the Privette doctrine if it owed a non-delegable duty to an employee of an independent contractor or if it retained control over the work of an employee of an independent contractor and negligently exercised that control in a manner that affirmatively contributes to injuries to that employee.

In the next case, Delgadillo v. Television Center, Inc., Second District Court of Appeals, Case No. B270985 (February 2, 2018), the Court examined whether a property owner could be held liable under the non-delegable duty doctrine and negligent exercise of retained control doctrine for failing to provide structural anchor bolts on its buildings which led to the death of an employee of window washing company.

Delgadillo v. Television Center, Inc.

In Delgadillo, property owner Television Center, Inc. contracted with  Chamberlin Building Services, a licensed contractor, to wash the windows a of three-story building owned by Television Center in Hollywood, California. While washing the building’s windows, Salvador Franco, an employee of Chamberlin fell to his death when his descent apparatus failed. Franco’s wife and children sued Television Center on the ground that Television Center failed to equip the building with structural roof anchors to which the descent apparatus could be attached as required by law.

Television Center filed a motion for summary judgment arguing that the lawsuit was barred under Privette v. Superior Court (1993) 5 Cal.4th 689 and its progeny because Television Center did not control the manner in which the work would be performed. In opposition, decedent’s family, citing McKown v. Wal-Mart Stores, Inc.(2002) 27 Cal.4th 219, argued that because the building did not have structural roof anchors, Television Center was liable for providing defective tools or equipment to an employee of Chamberlin. The trial court granted Television Center’s motion finding that Television Center did not retain control over the Chamberlin’s washing of the windows and the structural roof anchors (or the lack thereof) were not “equipment” under the McKown case.

The plaintiffs appealed.

The Appeal

On appeal, the Second District Court of Appeals explained that under common law “a person who hired an independent contractor to perform a task generally was not liable to third parties for injuries caused by the independent contractor’s negligence.” However, the Court noted one exception to the common rule, known as the peculiar risk doctrine, wherein “a person who hires an independent contractor to perform work that is inherently dangerous can be held liable for tort damages when the contractor’s negligent performance of the work causes injuries to others.”

In 1993, the California Supreme Court decided Privette,supra, which held that while employees of independent contractor’s are “third parties,” the peculiar risk doctrine does not apply to injured employees of independent contractors. Since then, several exceptions to the Privette doctrine have been created, two of which, are the non-delegable duty doctrine and the negligent exercise of retained control doctrine.

Under the non-delegable duty doctrine, a party that owes a duty to another party cannot delegate that duty to an independent contractor and later claim that it is not liable for injuries to an employee of that independent contractor because it delegated its duty to that independent contractor. Under the negligent exercise of retained control doctrine a party that retains control over the conditions of the work and negligently exercises that control such that it affirmatively contributes to injuries to an employee of an independent contractor cannot later claim that it is not liable for those injuries.

On appeal, the plaintiffs argued that notwithstanding the Privette doctrine, Television Centers was liable because it had a non-delegable duty to ensure that its building had structural roof anchors and had failed to do so and, further, that by failing to ensure that its building had structural roof anchors Television Centers negligently exercised retained control over the work. The Court of Appeals disagreed.

As to the plaintiff’s non-delegable duty argument, the Court of Appeals explained that under Seabright Ins. Co. v. US Airways, Inc. (2011) 52 Cal.4th 590, the Supreme Court held that while safety regulations under Cal-OSHA create a duty by a hirer to protect its own employees, it does not prevent a hirer from delegating such duties to an independent contractor with respect to the independent contractor’s employees. Relying on Seabright, the Court of Appeals held that:

  1. Safety statutes and regulations, whether under Cal-OSHA or otherwise, can be implicitly delegated by a hirer to an independent contractor with respect to that independent contractor’s employees; and
  2. Delegation of that duty properly includes delegation of the duty by an independent contractor to “identify the absence of safety guards” and to “take reasonable steps to address that hazard.”

Thus, held the Court of Appeals, under Seabright “[Television Centers] implicitly delegated to [Chamberlin] its duties under Cal-OSHA and non Cal-OSHA sources to provide a safe workplace for decedent.” (emphasis added).

As to Plaintiff’s negligent exercise of retained control argument, the Court of Appeals explained that under McKownsupra, while a hirer is not liable for injuries to an employee of an independent contractor merely because the hirer retained control over safety conditions, a hirer is liable insofar as the hirer’s exercise of retained control affirmatively contributes to the injuries of an employee of an independent contractor. The Court of Appeals, however, held that McKown was inapplicable because:

  1. “[W]hile [Television Centers] arguably ‘provided’ the inadequate anchor points to [Chamberlin], it did not suggest or request that [Chamberlin] use the anchor points to wash the building’s windows. To the contrary, the undisputed evidence before the trial court was that ‘[Chamberlin] and its employees made all decisions as to how the job was to be done.’”; and
  2. “Although it is undeniable that [Television Center’s] failure to equip its building with roof anchors contributed to decedent’s death, McKown does not support plaintiff’s suggestion that a passive omission of this type is actionable.”

Conclusion

Delgadillo both clarifies and expands the Privette doctrine by clarifying that a hirer’s “passive omissions” will not give rise to liability for injuries to an employee of an independent contractor, in addition to expanding the protections afforded under the Privette doctrine by holding that safety regulations, whether under Cal-OSHA or otherwise, may be impliedly delegated by a hirer to an independent contractor with respect to that independent contractor’s employees.

Pay-if-Paid Enforced Opening Door to Subcontractor Claim Against Owner

Katharine E. Kohm | The Dispute Resolver | February 24, 2018

In Superior Steel, Inc. v. Ascent at Roebling’s Bridge, LLC, No. 2015-SC-000204-DG, 2017 WL 6380218 (Ky. Dec. 14, 2017), a subcontractor and a sub-subcontractor sued the general contractor and owner for the failure to pay for extra work. The general contractor and owner cross-claimed against the other for, inter alia, indemnification.  At the jury trial, the subcontractors recovered under theories of implied contract and unjust enrichment.  All parties appealed, in particular, as to the pay-if-paid jury instruction. The Court of Appeals vacated the judgment and remanded.  In turn, all parties petitioned to the Supreme Court of Kentucky.
The key questions in the petition were whether the pay-if-paid provision was enforceable as between the general contractor and subcontractors and, if so, whether the subcontractors could pursue the owner directly for payment notwithstanding the lack of privity between owner and subcontractors.
The Supreme Court concluded that, as a result of the pay-if-paid clause, the general contractor had not breached subcontract for the failure to pay for the subcontractor’s extra work.  The relevant subcontract provisions stated:
  • “no compensation . . . for any claim arising out of the performance of this Subcontract, unless the Contractor has collected corresponding additional compensation from the owner, or other party involved”
  • And more directly – “payment [to] the Contractor from the Owner for the Subcontractor Work is a condition precedent to payment by the Contractor to Subcontractor. The Subcontractor hereby acknowledges that it relied on the credit of the Owner, not the Contractor for payment of the Subcontract Work.”
Reading these together, the Supreme Court agreed that the general contractor’s receipt of payment from owner was a condition precedent to its obligation to pay the subcontractors.  Because the general contractor did not receive payment from the owner, there could be no breach. The Court did note that “pay-if-paid clauses have fallen out of favor in some states, [but] the prohibition against their use has come from the legislature rather than the courts.” In Kentucky, no such statutory prohibition existed.
However, because the subcontractors were left with no useful contract remedy against general contractor, the Court held that the subcontractors were not barred from bringing unjust enrichment claims against the owner.  The Court acknowledged that typically “unjust enrichment is unavailable when the terms of an express contract control.”  But noted that, here, the “adequacy” of a “legal remedy” (or the “actual realization of that contractual remedy”) was absent due to the “contractual gridlock” caused by the owner.  Indeed, if the contract was the only avenue for the subcontractors to obtain relief, that result would allow the owner to take advantage of its own failure to pay after receiving “a substantial benefit” from the subcontractors’ work.

Construction Law Alert: Proposed Legislation Would Make Contractors Liable for Unpaid Wages of Subcontractors

Eric A. Grasberger and W. Cory Haller | Stoel Rives | February 13, 2018

A bill proposed in the Oregon House of Representatives threatens to fundamentally alter the relationships between owners, contractors, their subcontractors, and their subcontractors’ employees. Under the bill, a contractor (defined as a person who contracts with an owner to perform construction) on a private project would be directly liable for the unpaid wages of its subcontractors’ employees. This liability would extend to employees of subcontractors at all tiers, and it would include liability for any benefit payments or contributions made as part of the employee’s total compensation. The contractor’s liability could be enforced by the Bureau of Labor and Industries, any third party owed a benefit payment or contribution on behalf of the unpaid employee, or any joint labor and management committee established under a collective bargaining agreement.

The bill provides a few minor protections for contractors. It requires subcontractors to provide payroll records and information describing payment status. Although it allows a contractor to withhold payment to a subcontractor because of the subcontractor’s failure to comply with a contractor’s information request, it does not allow a contractor to avoid liability to the subcontractor’s employees for unpaid wages based on the subcontractor’s failure to comply with such a request.

For the full text of the proposed legislation, click here. This legislation is currently pending in the House Business and Labor Committee, and we urge you to contact your representative to share your comments regarding the impact this legislation could have on your business.

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