Sometimes a Reminder is in Order. . .

Christopher G. Hill | Construction Law Musings | November 18, 2019

Recently, I was talking with my friend Matt Hundley about a recent case he had in the Charlottesville, VA Circuit Court.  It was a relatively straightforward (or so he and I would have thought) breach of contract matter involving a fixed price contract between his (and an associate of his Laura Hooe) client James River Stucco and the Montecello Overlook Owners’ Association.  I believe that you will see the reason for the title of the post once you hear the facts and read the opinion.

In James River Stucco, Inc. v. Monticello Overlook Owners’ Ass’n, the Court considered Janes River Stucco’s Motion for Summary Judgment countering two arguments made by the Association.  The first Association argument was that the word “employ” in the contract meant that James River Stucco was required to use its own forces (as opposed to subcontractors) to perform the work.  The second argument was that James River overcharged for the work.  This second argument was made without any allegation of fraud or that the work was not 100% performed.

Needless to say, the Court rejected both arguments.  The Court rejected the first argument stating:

In its plain meaning, “employ” means to hire, use, utilize, or make arrangements for. A plain reading of the contractual provisions cited–“shall employ” and references to “employees”–and relied on by Defendant does not require that the persons performing the labor, arranged by Plaintiff, be actual employees of the company or on the company’s payroll. It did not matter how the plaintiff accomplished the work so long as it was done correctly. The purpose of those provisions was to allocate to Plaintiff responsibility for supplying a sufficient workforce to get the work done, not to impose HR duties or require the company to use only “in house” workers. So I find that use of contracted work does not constitute a breach of the contract or these contractual provisions.

The Court reminds us, and the defendant, that employ in these types of construction contracts does not require use of ones own forces, but simply to use enough resources to get the job done as required by the contract.  The Court also went on to say that because of the fixed price nature of the contract, the Association would have paid the same amount regardless of the method of completion used by James River Stucco so the Defendant could not show any damages from the alleged breach of contract through the use of subcontracted work.

The Court rejected the second out of hand stating that the Defendant had not plead any facts that could lead the Court to conclude that the work was not performed as billed.  The Court pointed out that any alleged poor performance or other issues were more properly defenses to James River’s case in chief and not properly part of a Counterclaim.

In sum, this case is an example of how some of the things that we construction attorneys would think are so obvious are not always as clear as we may think.  We all could use a reminder on occasion.

More Hensel Phelps Ripples in the Statute of Limitations Pond?

Christopher G. Hill | Construction Law Musings | November 11, 2019

As is always the case when I attend the Virginia State Bar’s annual construction law seminar, I come away from it with a few posts on recent cases and their implications.  The first of these is not a construction case, but has implications relating to the state project related statute of limitations and indemnification issues for construction contracts brought out in stark relief in the now infamous Hensel Phelps case.

In Radiance Capital Receivables Fourteen, LLC v. Foster the Court considered a waiver of the statute of limitations found in a loan contract.  The operative facts are that the waiver was found in a Continuing Guaranty contract and that the default happened more than 5 years prior to the date that Radiance filed suit to enforce its rights.  When the defendants filed a plea in bar stating that the statute of limitations had run and therefore the claim was barred, Radiance of course argued that the defendants had waived their right to bring such a defense.  The defendants responded that the waiver was invalid in that it violated the terms of Va. Code 8.01-232 that states among other things:

an unwritten promise not to plead the statute shall be void, and a written promise not to plead such statute shall be valid when (i) it is made to avoid or defer litigation pending settlement of any case, (ii) it is not made contemporaneously with any other contract, and (iii) it is made for an additional term not longer than the applicable limitations period.

The Circuit Court and ultimately the Supreme Court agreed with the defendants.  In doing so, the Virginia Supreme Court rejected arguments of estoppel and an argument that a “waiver” is not a “promise not to plead.”

The Court also rejected an argument that was made based upon the Hensel Phelps case.  When faced with the argument from Radiance that the Court had in fact endorsed just such a waiver in the Hensel Phelps case, the Court rejected that argument and in doing so stated:

This argument is misplaced. In Hensel Phelps, we examined the language of a subcontract between a prime contractor and a subcontractor and determined that no provision demonstrated that the subcontractor had waived its right to plead the statute of limitations. See Hensel Phelps, 292 Va. at 702-03. As the subcontractor failed to waive its right to plead the statute of limitations, we did not determine whether such a waiver was enforceable pursuant to Code § 8.01-232. Thus, the holding in Hensel Phelps did not reach the issue presented in this case.

The result was a holding by the Virginia Supreme Court that the waiver found in the Guaranty Agreement was invalid and the claim barred by the statute of limitations.

How does this non-construction case make its way into Construction Law Musings?  Not only does it mention Hensel Phelps, it has implications for construction contract drafting.  First of all, it essentially invalidates any provisions of construction contracts purporting to provide a waiver of the statute of limitations by any subcontractors, thus removing one of the possible work-arounds to the lack of a statute of limitations applicable to the Commonwealth of Virginia for construction projects.  Any purported waiver can at best now double any statute of limitations for claims.  Second of all, it puts an even higher premium on the proper drafting of indemnificaiton provisions in these contracts.  Remember, one of the issues for Hensel Phelps was that its indemnification provision purported to have its subcontractors indemnify it for its own negligence and was thus invalid.

Finally, what this case coupled with the Hensel Phelps case tells us is that you should draft or review your contractual indemnification clauses with the assistance of an experienced Virginia construction attorney and that if you are a general contractor in Virginia you should work toward a fair statute of limitations applicable to the Commonwealth for construction projects.

In This Case, The “Crux Of The Biscuit” Was The Missing Apostrophe

Keith Bishop | Allen Matkins | November 8, 2019

Consider the following provision of in a contract between a general contractor and a subcontractor:

“Ten percent (10%) of Subcontractor’s contract amount shall be withheld and will be released 35 days after completion of subcontractors work.”

After the subcontractor abandons the job, the general contractor refused to pay the 10% retention even after the job is completed by another subcontractor.  The subcontractor argued that the reference to “subcontractors” (no apostrophe) must mean any subcontractor, not just itself.  Thus, it was entitled to payment of the retention when the replacement subcontractor finished the job.  The general contractor took the position that “subcontractors” refers to the first sub-contractor and since it did not finish the job, it is owed nothing more.  Who won?

The trial court found for the general contractor and the Court of Appeal affirmed based on a literal interpretation. Regency Midland Constr. v. Legendary Structures, 2019 Cal. App. LEXIS 1110.  The Court of Appeal supported its holding by referring to the purpose of the retention clause – to ensure proper performance.

“He said: “IT DOESN’T, ‘n YOU CAN’T!”

Why we use an apostrophe to denote possession is somewhat mysterious.  The word is derived from two Greek words, ἀπό (meaning away from) and στρέφειν (meaning to turn away).  Thus, an apostrophe is used to denote an elision.  In can’t, for example, the apostrophe denotes the elision of no.  But what does elision have to do with possession.  In Old English, singular possessives were often formed by adding es to a word.  For example, the singular possessive of the Old English word for ship, sċip, is sċipes.  The theory is that the apostrophe was used to denote the elision of the e.

What Should Be in Every Construction Agreement

Patrick Barthet | Construction Executive | October 6, 2019

A detailed and coherent construction agreement in place on every job minimizes confusion, makes clear everyone’s respective responsibilities and reduces disputes. There are six things that should be addressed in every construction agreement. 

DEFINE THE SCOPE

Define what the scope of work is that will be provided. Will it be only materials; will it be materials and labor; or will it be just labor? Be very clear and specific in how the scope of work is spelled out. Many contracts state that the contractor is responsible for all work that’s shown on the plans and specifications, as well as that which is reasonably inferable. While subjective—even if not actually on the plans or specifications, someone may believe that something should be part of the contractor’s work. This could expand what has to be done beyond what was understood or priced. 

LIST ALL THE EXCLUSIONS

Do the parties each have the same understanding as to what is covered in the contract? How often are contractors faced with customers thinking something was included as part of the work? The contractor may have believed that task, or that material, or that specially fabricated item was excluded. But was it? Did the contractor articulate what was and was not in the scope and price? Specifically listing what is excluded can obviate this problem. Articulate what is not in the price or scope and reduce the chance of one party believing that something is to be done when it isn’t. 

EXPLAIN THE CHANGE ORDER PROCESS  

When extra work is performed under a contract, obtain a written agreement on every change order. Make sure it’s fully memorialized—signed with change in scope, change in price and change in time, and approved before the work is done. Often contractors are given a revised page in the plans. But before doing the work, generate the change order, submit it and have it accepted. Alternatively, contractors can request a change directive, directing them to do this change work. This creates the necessary paper trail. 

VERIFY THE SCHEDULE

As important as the price in a contract is the schedule—how quickly is the work to be done? Importantly, check to see whether or not the agreement has any penalty associated with the failure to timely perform. Review the schedule and make sure that it is doable.

Are there any liquidated damage provisions that exist in the contract and if so, are they reasonable? Know that not having a liquidated damage provision doesn’t mean there are no damages for delay. A contractor may be liable for actual delay damages. A drywall subcontractor on a hotel project failed to timely perform certain aspects of its work and the hotel’s completion was delayed. Even if there were no liquidated damages in the contract, the owner may still be able to assess damages from staffing costs or loss of income from the inability to rent rooms.

All of these actual damages may become the contractor’s responsibility even without liquidated damage provisions. Review that schedule to be sure it is achievable. 

REFINE THE DISPUTE RESOLUTION PROCEDURE

Require that the executives of each party have a meeting within a week or two of any disagreement to try to resolve any dispute. If that doesn’t work, then the parties should go to mediation. Mediation is a process in which both parties meet and split the cost of a neutral mediator who tries to facilitate a resolution between the parties. The mediator may be able to bring the parties together and have them settle their dispute. If an impasse is reached at mediation, then the parties can proceed to either arbitration or litigation, but only after they mediate. Fifty percent or more of disputes actually settle at mediation.  

MAKE SURE THE WINNER GETS LEGAL FEES

A lot of contractors incorrectly believe that winning their case automatically means they will also recover their legal fees and costs. That’s incorrect. In most states there are only two ways to recover the legal costs incurred in any dispute—by statute or by contract. Not all construction laws automatically call for an award of legal fees to the winner, and these days determining the winner on the substantial issues in any given legal case has become a bit complicated.

The better approach is to always have a clear contractual provision which allows a contractor to recover reasonably incurred fees if its win, and which goes one step further by defining what makes one the prevailing party in any dispute. Dealing with legal issues can be very expensive, so make sure that if the company has to litigate, it will be able to recover fees if it prevails.

Remember, a short document is better than no document, and a more thorough document is better than one that is too general. Sometimes people wonder whether a handwritten (versus a typed) agreement is valid. Yes, it is. And what about something electronic? Yes—an email authorizing the terms and conditions of the agreement will be accepted as a contract. What if the contractor does not  have an original? The contractor does not have to have the original for there to be a valid contract. A recent case even determined that an exchange via text message was enough to create a valid contract between two parties.

Keep hard earned income on those challenging projects by addressing these six provisions. Verbal acknowledgements won’t work here—get them all in writing. 

Illinois Appellate Court Requires School Board to Pay for Services Rendered Under an Invalid Construction Contract

Brianne Dunn, Respicio Vazquez and Jackie Wernz | Franczek | November 5, 2019

A recent Illinois Appellate Court case appears to have closed a loophole through which some school districts and other public entities have avoided liability for work performed by construction companies under invalid contracts. Although the Illinois Supreme Court has agreed to review the decision, school districts and other public entities should be aware of the potential effects of this case if the decision is upheld.

Restore Construction Company v. Board of Education of Proviso Township High Schools District 209 involved a dispute between a high school district and a construction company for work resulting in approximately $7 million in emergency repairs the company made for the high school after a fire. The repairs were never authorized by the Board of Education or and the contract was not submitted to a competitive bidding process. Rather, the Superintendent first signed a contract with the company. Later, the Board President amended an earlier, Board-approved contract with the company to address the new work; the amendment, however, was not approved by the Board.  Accordingly, neither contract or amendment was competitively bid out or Board approved. 

After paying approximately $5 million to the company for the fire cleanup, the Board refused to pay the remainder due. Relying on earlier court decisions in Illinois holding that a contract cannot be implied “in fact” where the contract was entered into in violation of law, the Board argued that the contracts were void ab initio, or at the start, because they were not entered into in compliance with law, and that no contract could be implied “in fact” without compliance with contractual requirements of the law. 

Here, however, the company sought payment for what it was owed based on equitable principles, not the existence of a valid contract. The Appellate Court held that even though there was no valid contract in place, it would be unjust to allow the school district to retain the company’s services without paying the reasonable value for them. Thus, a contract implied in law could be enforced against the school district.

Prior to this decision through this unusual loophole, public entities could, in some instances, avoid payment for services already provided by third parties. For instance, one case the Appellate Court distinguished in Restore Construction Co. stemmed from work a company performed in excess to the terms of an express contract. In both cases, the company did work that the school district benefitted from, but only in Restore was the school district required to pay for those services. The only distinction appears to be the legal basis under which the company sought relief; in Restore the relief was sought in equity, whereas in the earlier case the company argued that the contract was actually valid.

The Supreme Court has agreed to review the case, so it remains to be seen if the decision will stand. If it does, however, school districts and other public entities should expect this “loophole” to be closed as companies seeking payment for previously completed work should be expected to proceed under theories of equity instead of contract so that they can rely on the precedent in this case.