Where Pragmatism and Law Collide

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Christopher G. Hill | Construction Law Musings

If there is one “theme” to Construction Law Musings, those that read regularly hopefully see that I take my role as counselor to construction companies seriously.  Aside from the fact that litigation and arbitration are both expensive and not a great way for any business, particularly a construction business, to make money, I have found construction professionals to be a pragmatic group of people that would rather solve a problem than go to court.

I have also discussed the need for a good foundation for the project in the form of a well drafted and properly negotiated contract.  This contract sets out the rights of the parties and essentially makes the “law” for your construction project.  Virginia courts will not renegotiate the terms for you and while this can lead to problems where parties either don’t understand the terms or don’t work to level the terms, it does mean that the parties know what the expectations are where the expectations are properly set, preferably with the help of your friendly neighborhood construction attorney and counselor at law.  Practical considerations such as your feel for the other party and which terms are worth forgoing the work for should drive your considerations almost as much as the legal implications.

With a good contractual foundation, hopefully you won’t ever have to call your attorney to deal with a dispute (at least in a “public” sense).  While I highly recommend getting advice early and often when you see a problem coming down the pike (and there will be problems), be practical about whether you want to use any of the “hammers” in the contract (which can range from termination to stopping work to arbitration).  The first and likely best option is to try and work through the problem and figure out a solution.  The least expensive and fastest way to get through to the end of a project that has problems almost never to terminate a subcontractor or walk off a job.  While these are proper in the right circumstances from a legal standpoint, they lead to additional issues, non-payment, mechanic’s liens, and in the end litigation or arbitration.

While I come from a litigation background, and litigate more often than I’m sure my clients would like, most often the practical approach, with a healthy dose of understanding the contract and the law, will get a construction project to the end and resolve issues in a less expensive and more satisfactory manner.

Construction Lien Waiver Provisions Contractors Should Be Using

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Jason Lambert | Construction Executive

It is common in construction for a subcontractor or material supplier of any tier to be required to provide a lien waiver when receiving payment. But not all lien waivers are created equal. While at a minimum, a lien waiver, by definition, needs to include a release of liens, it can also include many other terms that can tie up loose ends or resolve potential problems before they begin. 

ADDITIONAL RELEASES

A typical lien release is going to release any liens and right to claim liens on the subject property. But a lien waiver can also include releases of any claims against surety bonds, other statutory rights or claims, and at its broadest, claims against the paying party. One example of a provision that could help accomplish this is a release of “any right arising from a payment bond that complies with a state or federal statute, any common law payment bond right, any claim for payment, and any rights under any similar ordinance, rule, or statute related to claim or payment rights.” Broad release language can also be used to effectively preclude any claims arising prior to the date of the release. 

PAYMENT REPRESENTATIONS AND WARRANTIES

A typical lien release has no representations or warranties about payment to subcontractors or material suppliers of a lower tier. But contractors can include language requiring the company receiving payment to represent and warrant that all subcontractors of a lower tier have been paid or will be paid within a certain timeframe using the funds provided and that these are material representations and inducements into providing payment. On a related note, if the contract requires subcontractors to provide lien releases from lower tier subcontractors in addition to their own release when seeking payment, contractors can require the sub-subcontractor releases to include representations that they have been paid by the subcontractor to try and tie up payment loose ends all around. 

PAYMENT AFFIDAVIT

Piggybacking on the prior suggestion, contractors can also turn a lien waiver into a miniature payment affidavit and require the party receiving payment to swear that subcontractors have been paid or will be paid. They can also require that a list of unpaid subcontractors or material suppliers be listed on the affidavit to give them the ability to track a continuing lack of payments or to confirm that previously unpaid subcontractors have been paid as the project continues. 

INDEMNIFICATION

To the extent the contract does not already include indemnification language, a contractor can include an indemnification provision requiring the party receiving payment to indemnify them (and maybe even the property owner) from payment claims made by lower tier subcontractors or material suppliers. This can provide another incentive to a payee to use the funds to pay downstream subcontractors if they know that failing to do so will subject them to additional liability. 

OTHER REPRESENTATIONS AND WARRANTIES

The lien waiver can also include representations that the work for which payment is being made is free from defects, that no defective work was covered by their work and that local code requirements were followed by the subcontractor. While the “sky’s the limit” in terms of what could be included, it’s important to consider that many of these types of provisions should be included in the main contract and any reference to them in a lien waiver should be a short “belt and suspenders” type provision. One exception to this could be a reaffirmation that there are no additional agreements between the parties other than those in writing and that compliance with those documents has not been waived. 

There are two additional points to be made with regarding to using a more comprehensive lien waiver form. First, these lien waiver forms can be used by anyone in the chain of work. Subcontractors can use a more substantial lien waiver form, even if the general contractor is not requiring one. 

Second, not every state allows the use of more substantial lien waiver forms. California, Nevada, Utah, Arizona, Colorado, Texas, Missouri, Michigan, Massachusetts, Mississippi, Georgia and Florida all have statutory lien waiver forms that must be used for some or all construction projects. These statutory forms vary in complexity and comprehensiveness. For example, Florida’s statutory final lien waiver form is just 73 words long. 

That being said, some states will allow use of a more comprehensive lien waiver form so long as the parties agree to use that form in their contract. Contractors should consult with an attorney if in one of the aforementioned states to see if they can contractually alter the statutory requirement or if they must use the statutory form. 

Performance Bond Surety Takeover – Using Terminated Contractor to Complete Work

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David Adelstein | Florida Construction Legal Updates

When a contractor is defaulted under a performance bond, can its surety hire the same defaulted contractor to complete the work?  Stated differently, can the performance bond surety engage its defaulted bond-principal in taking over and completing the same work the contractor was defaulted under?   The answer is “yes” if you are dealing with a standard form AIA A312 performance bond (and other bond forms that contain analogous language), as demonstrated by the recent decision in Seawatch at Marathon Condominium Association, Inc. v. The Guarantee Company of North America, 2019 WL 4850194 (Fla. 3d DCA 2019).

In this case, a condominium association hired a contractor in a multi-million dollar contract to renovate condominium buildings.  The contractor provided the association, as the obligee, a performance bond written on an AIA A312 performance bond form.  During construction, the association declared the contractor in default and terminated the contractor. In doing so, the association demanded that the performance bond surety make an election under paragraph 4 of the AIA A312 bond form that gave the surety the following options:

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

4.3 Obtain bids or negotiated proposals from qualified contractors acceptable to the OWNER for a contract for performance and completion of the Contract, arrange for a contract to be prepared for execution by the OWNER and the contractor selected with the OWNER’S concurrence, to be secured with performance and payment bonds executed by a qualified surety equivalent to the Bonds Issued on the Contract, and pay to the OWNER the amount of damages as described in paragraph 6 in excess of the Balance of the Contract Price incurred by the OWNER resulting from the CONTRACTOR Default; or

4.4 Waive its right to perform and complete, arrange for completion, or obtain a new contractor and with reasonable promptness under the circumstances;

4.4.1 After investigation, determine the amount for which it may be liable to the OWNER and, as soon as practicable after the amount is determined, tender payment therefore to the OWNER; or

4.4.2 Deny liability in whole or in part and notify the OWNER citing reasons therefore.

Seawatch at Marathon Condo. Ass’n, 2019 WL at *1-2.

The surety elected the option under section 4.2, underlined and bolded above.  The surety wanted to complete the construction contract and provided the association with a surety takeover agreement, i.e., an agreement where the surety takes over the completion of the defaulted / terminated contractor’s contract.   The takeover agreement was predicated on the terminated contractor continuing to serve as the contractor to finish the contract.

The association rejected the takeover agreement largely because it was adamant that the terminated contractor cannot serve as the completion contractor under the takeover agreement.  The association also argued that the surety could not properly elect section 4.2 because it was not a licensed contractor and needed to be a licensed contractor in order to undertake the completion of the defaulted contract.  Because an agreement could not be reached, the association filed a lawsuit for declaratory relief on these issues seeking judicial intervention as to its rights under the performance bond.

A. The Performance Bond Surety Can Use the Defaulted Contractor to Complete the Work

The trial court, as affirmed on appeal, held that the surety was well within its rights under section 4.2 of the bond to complete the contract with the defaulted contractor (bond-principal).  Section 4.2 places NO restrictions on the surety in using the defaulted contractor or any other contractor, for that matter.   As noted by the appellate court:

Finally, “[i]t is common practice for a surety undertaking to complete the project itself to hire the original contractor, as [Guarantee] elected to do here.”  “By completing the project itself, the surety obtains greater control than it would have had if it elected to require the obligee to complete, because the surety can select the completing contractor or consultants to finish the project as well as control the costs of completion.”

Seawatch at Marathon Condo. Ass’n, 2019 WL at *4 (internal quotations omitted).

B. The Performance Bond Surety Does Not Need to be a Licensed Contractor to Enter into Takeover Agreement

The appellate court summarily rejected the argument by the association that the surety needed to be a licensed contractor to enter into a takeover agreement and undertake the completion of the defaulted contract.  Since the surety is not actually performing the completion, the court rejected this outright which would prohibit the surety from ever exercising rights under section 4.2 unless it was a licensed contractor.

One thing to consider after reading the outcome of the case is that there is nothing to prevent the obligee of a bond from modifying a standard form bond form, or my preference, creating its own manuscript performance bond form.  Creating your own performance bond form gives you more flexibility regarding rights to trigger a surety’s obligations under the bond and the recourse under the bond.

Insurer Awarded Summary Judgment on Collapse Claim

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Tred R. Eyerly | Insurance Law Hawaii

   The Eleventh Circuit agreed with the insurer that there was no coverage for a collapse under the policy. S.O. Beach Corp. v. Great Am. Ins. Co.,2019 U.S. App. LEXIS 32569 (11th Cir. Oct. 31, 2019).

    S.O. Beach Corporation and Larios on the Beach, Inc (“Larios”) owned a building in Miami Beach. Sometime between march 4, 2012 and April 10, 2013, Larios discovered that parts of the first three floors of its building had caved in to varying degrees. The primary cause of the collapse was a wooden support beam that had severely rotted. Larios found a broken pipe that was gushing water onto the beam, causing deterioration. Larios was forced to evacuate the building until the damage was repaired. 

    Larios submitted a claim under its all-risk policy with Great American. The policy required that a collapse an “abrupt falling down or caving in of a building or any part of a building” to be covered. Before a coverage decision was made, Larios sued for breach of contract. The parties filed cross-motions for summary judgment. The district court granted Great American’s motion and denied Larios’ motion. 

    On appeal, the court noted that Larios carried its initial burden under the all-risk policy of showing that a loss – the purported collapse – happened while the policy was in effect. The burden shifted to Great American to prove that the cause of the purported collapse was excluded under the terms of the policy. Great American produced documentary evidence along with testimony from expert witnesses and fact witnesses showing that the purported collapse was gradual, not abrupt. 

    Therefore, the burden shifted back to Larios to prove that an exception to the exclusion applied. Larios argued the policy was ambiguous. But the court found there was no conflict between explicitly covering collapses that resulted from a gradual cause like decay and limiting coverage to collapses that were abrupt. Decay was just one of over a dozen covered causes listed in the policy’s collapse coverage provisions. Some of the causes were abrupt, like “lightning” or an “explosion.” Others were more gradual, like “decay” or “water damage.” But regardless of whether the cause of a collapse was gradual or abrupt, the collapse itself was covered only if it was abrupt. Larios’ contention that the collapse provisions were ambiguous was rejected and the district court was affirmed. 

Find Your Footing: Don’t Stumble When it Comes to Slip-and-Fall Claims

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Carie Hall | Rumberger Kirk

Some regard slip-and-fall claims as nuisance litigation and often make billboard plaintiffs’ lawyers the butt of jokes. But, occasionally, these claims represent catastrophic injuries with verdicts to match, and even garden variety slip-and-fall claims expose companies to expense and aggravation.

Slip-and-fall accidents are by far the most prevalent accidents for both guests and employees in the hospitality industry. It is surprising how many restaurants, hotels, resorts, and other businesses have high foot traffic but have not exercised vigilance in protecting themselves from this common claim.

When it comes to slip-and-fall claims, prevention is the first step. Make sure your flooring meets industry standards when dry or wet. This starts with looking at the coefficient of friction, a mathematical expression of the ratio between the force necessary to move an object horizontally over another surface and the pressure between the two surfaces. Results can range from near zero (think of ice skates on ice) to greater than one (rubber on rubber).

It can be more complex to assess the real-world slip potential of a floor. Most experts will testify that flooring testing at .5 or better is reasonably safe. Do not depend on your own judgment or that of a floor-material salesperson, or even a product specification sheet. Get an expert opinion when selecting new flooring. Additional consideration is needed if a finish is added to the flooring material after installation. Is it worth having a glossy finish for aesthetic reasons if it reduces the coefficient of friction and increases the potential for accidents?

Another recent trend involves claims that involve a transition between surface materials (e.g., from carpet to tile). Plaintiffs’ attorneys may argue that going from the sure-footed grip of an office carpet to the smooth lobby marble creates a hazard. Aesthetic considerations come into play here, but consider whether the change is too abrupt for the particular use of the area. There may be engineering fixes for such transitions, or perhaps a contrasting color or intermediate surface that prepares people for the change. In some cases, signage may be appropriate.

Prevention protocols should also include how to maintain and monitor a floor that is expected to get wet, such as a lobby when it rains outside. Wet floor signs have become ubiquitous, but many businesses go a step further and have mats available to roll out and absorb water tracked in by guests. Of course, these mats will need to be in good condition to prevent trip hazards or slippage of the mats themselves.

Many slips in restaurants and hotels result from spills, so the first step in prevention is to pay attention and promptly clean them up. Having a timely inspection regimen and documentation that proves it was followed will bolster a defense.

This gets to the legal principle of “knew or should have known,” which closely correlates with the legal determination of what is reasonable. If someone slips on beer that was spilled an hour ago, then that scenario would likely fall into the “should have known” category. However, most courts and jurors would not expect you to detect a spilled beer within seconds or even a few minutes. The reasonableness standard is also affected by the venue. The dining room in a senior center will have a different standard of reasonableness compared to that of a restroom adjacent to a pool or splash park.

After the Fall

The welfare of customers or employees should be your first concern. Once an appropriate party has attended to their needs and, if necessary, called for aid, your staff must do its best to document everything. Take photos from every angle, both close up and broad views for context. Document anything the person said after the incident. (“I wasn’t paying attention,” will not be something a claimant remembers saying by the time you start taking depositions.) Because people scatter quickly, an important, often overlooked step is taking statements from witnesses. The guest who was skipping across the lobby with a beer in each hand or who created the spill that caused her own fall will not remember it that way, making witness statements vital. Document their statements and remember to get contact information for the witnesses.

Documentation should always include the type of shoes the person wore and details about what they were doing at the time. If a claimant was wearing high heels or $1 flip flops from a discount store, talking on a cell phone, and carrying six packages, then it is important information. Most falls are affected by both human behavior and floor conditions, and many states allow for comparative-negligence verdicts in which damages are apportioned accordingly. For example, a careless plaintiff may have been 50 percent at fault for an accident, which means a jury award is reduced by 50 percent. Another guest who carelessly dropped a drink on the floor, even if the person cannot be identified, may be assigned part of the fault, again reducing the amount of potential damages.

Preserve any video evidence. Most public venues have cameras, but many record on a loop that erases everything on a 24-hour or 48-hour cycle. In some states, the evidence you gather during an investigation, such as witness statements and photographs, may be privileged as work product, but that is not the case everywhere. An attorney or insurance carrier can advise on how a state’s law will affect a specific response to accidents. Surveillance video capturing the accident is not likely privileged, but it is better to preserve the video than risk an allegation of spoliation of evidence, which could result in sanctions including an instruction to the jury that they can assume the evidence was not favorable to the party that lost or destroyed it.

If the accident results in a claim, bring in an expert right away to assess the floor surface. Given that litigation may take years to develop, it is imperative that you analyze and document the condition of the surface. Also, be aware that replacing flooring, even for reasons unrelated to the accident, can be detrimental to the claim without proper analysis. Never make any changes to the floor after a claim is made without the advice of your attorney. If a claimant is not offered an opportunity to inspect the floor, that may also give rise to a claim of spoliation of evidence.

Finally, designate someone on staff as the internal slip-and-fall expert. This person should constantly be on the lookout for hazards, keep up with new technology in floor surfaces, execute inspections, and train others in both prevention and response to hazards. With vigilance, you can reduce your exposure to slip-and-fall claims and ensure the safety of guests and employees.