Failure to Follow Claims Procedure was an Irrevocable Waiver of the Claim

Stan Martin | Commonsense Construction Law LLC | February 3, 2016

Consider this sentence: “courts cannot decide cases of contract interpretation on the basis of what is just or equitable.” Contractors are reminded, via an Ohio Court of Appeals decision, that claim deadlines and waiver language will be applied when the contractor is late in submitting what may well be a legitimate claim. And when the contract terms state that late claims are deemed to be waived, courts will normally enforce those terms. The case is IPS Elec. Services, LLC v. Univ. of Toledo, 2016 Ohio 361 (Feb. 2, 2016) (subscription required).

IPS was performing electrical work for the University of Toledo. There were apparently problems that impacted the schedule, not of IPS’s doing. IPS sent letters to the University complaining about the impacts, and the resulting need to accelerate performance, in October and again in December 2012. The December letter could be read to state that IPS expected the University to reimburse IPS for the additional costs. In January 2013, IPS stated in writing that it had “previously provided . . . written notices of impacts and claims.” Then, in February, IPS sent a letter providing backup. Finally, in April 2013, IPS provided a certified claim to the University.

But the contract claim language worked against IPS. Notice was required “within 10 days after the occurrence of the event giving rise to the claim.” In this instance, that would have been sometime in October 2012. Further, the contract stated that the failure to give notice “shall constitute the Contractor’s irrevocable waiver of the claim.” Substantiation of the claim was due within 30 days of initiating the claim; the contract stated that failure to provide this substantiation would also constitute an “irrevocable waiver” of the claim. Finally, certification of the claim was also required within 30 days after initiating the claim. The failure to timely provide the certification, per the contract – the reader can see where this is headed – would constitute an “irrevocable waiver.”

IPS made all the arguments one might expect of a contractor with a meritorious claim that had not complied with contract deadlines: the contract terms were unfair, the University would get a windfall, the equities weighed against a strict enforcement of the claim language, and particularly that IPS had notified the University of the issues, even if it had not done so in the proper format or strictly per the contract deadlines. The appellate court was unmoved. As recited above…

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General Contractors Beware of Subordination Clauses

Amy M. Anker, Esq. | Construction Chaos | December 10, 2014

In California, a general contractor can usually rest assured that in the event of nonpayment, it can rely upon the remedy of a mechanics lien, which remedy is, in fact, even a constitutional right. The priority rights accorded to mechanics liens are strong. For example, although California is a race-notice statute (meaning that priority is determined by notice and date of recordation), a mechanics’ lien, even if it is recorded after another encumbrance, and even if the mechanics lien claimant had notice of that earlier recorded encumbrance, takes priority over such earlier encumbrance for work performed prior to recordation of the earlier encumbrance. This means a general contractor can feel comfortable that notwithstanding an encumbrance recorded after its work has started, any mechanics lien it records for nonpayment of such work, even if the mechanics lien is recorded after a later encumbrance (which didn’t exist at the time work commenced), relates back to when work started and takes priority over such later encumbrance. Or so was the case before Moorefield Construction, Inc. v. Intervest-Mortgage Investment Company (September 12, 2014, No. D065464), in which the Fourth Appellate District Court held that a general contractor could waive its priority rights of a mechanics lien.

In 2006, general contractor Moorefield Construction, Inc. (“Moorefield”) entered into a construction contract to build a medical office building and commenced work at the property. About a month after work started, the owner of the property obtained a construction loan from Intervest-Mortgage Investment Company (“Intervest”), which loan was secured by a deed of trust on the property.  In connection with the loan, Intervest required Moorefield to subordinate its mechanics lien rights to Intervest’s deed of trust.

By the end of construction, the owner defaulted under the construction loan and failed to pay Moorefield outstanding payments totaling approximately $2.2 million. Moorefield timely recorded a mechanics lien and sued to foreclose on the mechanics lien in accordance with the statutory scheme specifically designed for this type of circumstance. Intervest filed a cross-complaint claiming that its deed of trust was senior to Moorefield’s mechanics lien given the subordination clause Moorefield agreed to.

The trial court found in favor of Moorefield and ordered the foreclosure and sale of the property to satisfy the mechanics lien. In doing so, the trial court held that the subordination clause was null, void and unenforceable largely for two reasons: first, the clause is void as a public policy matter because it would deprive Moorefield “of its mechanic’s lien priority right that is a guarantee to them (as a contractor) under the California Constitution,” and second, the clause is unenforceable since it did not substantially follow the statutory forms set forth in former California Civil Code § 3262(d) (now § 8122).

Intervest appealed and the Fourth Appellate District Court reversed, holding that Section 3262(d) does not protect general contractors, explaining that the plain language of Section 3262(a) allows a general contractor to waive its own rights. Section 3262(a) read as follows: “[n]either the owner nor original contractor by any term of a contract, or otherwise, shall waive, affect, or impair the claims and liens of other persons whether with or without notice except by their written consent…” The Court stated: “The clear implication is that the contractor may waive or release his own claim, when doing so does not affect or impair the claims or liens of other laborers or subcontractors.”

The beneficiary under the deed of trust foreclosed on the loan and took title to the property. Moorefield’s mechanics lien, as a subordinate lien, was extinguished. Without a lien, Moorefield lost any chance of recouping more than $2 million for unpaid work.

In light of this case, California general contractors should be very mindful of any documents they may be asked to execute in connection with a construction loan, especially anything containing a subordination clause, and should always have such documents reviewed by an attorney knowledgeable in the area.

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