A Behind-the-Scenes Look at Substitution Hearings Under California’s Listing Law

Garret Murai | California Construction Law Blog | February 11, 2019

The next case, JMS Air Conditioning and Appliance Service, Inc. v. Santa Monica Community College District, 2nd District Court of Appeal, Case No. B284068 (December 17, 2018), provides an interesting behind-the-scenes look at substitution hearings under the Subletting and Subcontracting Fair Practices Act.

The Subletting and Subcontracting Fair Practices Act

The Subletting and Subcontracting Fair Practices Act (Public Contract Code Section 4100 et seq.), also commonly referred to as the “Listing Law,” requires that prime contractors on state and local public works projects “list” the following subcontractors in their bids:

  1. Subcontractors who are anticipated to perform work with a value in excess of 0.5% of the prime contractor’s total bid; and
  2. Subcontractors, on street, highway and bridge projects, who are anticipated to perform work with a value in excess of the greater of: (a) 0.5% of the prime contractor’s total bid; or (b) in excess of $10,000.

“Listing” a subcontractor requires that the prime contractor identify the name, business address, contractor’s license number, and public works registration number of the subcontractor.

The purpose of the Listing Law is to prevent “bid shopping” and “bid  peddling.” Bid shopping is where a prime contractor uses a low bid received from a subcontractor to pressure other subcontractors to submit even lower bids. Bid peddling is where a subcontractor uses a low bid received by a prime contractor from a subcontractor to submit an even lower bid. In enacting the Listing Law, the California State Legislature found that bid shopping and bid peddling result in “poor quality of material and workmanship to the detriment of the public, deprive the public of the full benefits of fair competition among prime contractors and subcontractors, and lead to insolvencies, loss of wages to employees, and other evils.”

To prevent these “evils,” the Listing Law prohibits prime contractors from substituting another subcontractor with a “listed” subcontractor unless consent is given by the public agency overseeing the public works project. Consent by a public agency is limited to nine circumstances:

  1. Failure to Execute Subcontract: When the listed subcontractor fails or refuses to execute a written subcontract at the price stated in the subcontractor’s bid;
  2. Insolvency or Bankruptcy: When the listed subcontractor becomes insolvent or files for bankruptcy;
  3. Failure to Perform: When the listed subcontractor fails or refuses to perform under its subcontract;
  4. Failure to Furnish Bonds When Required: When the listed subcontractor fails or refuses to furnish a payment and/or performance bond under its subcontract;
  5. Inadvertent Clerical Error: When the prime contractor demonstrates that the listed subcontractor was listed as a result of an inadvertent clerical error;
  6. Not Properly Licensed: When the listed subcontractor is not properly licensed under the Contractors’ Licensing Law;
  7. Unsatisfactory Performance: When the public agency determines that the work performed by the listed subcontractor is substantially unsatisfactory and not in substantial accordance with the plans or specifications or that the listed subcontractor is substantially delaying or disrupting the project;
  8. Labor Violations: When the listed subcontractor is ineligible to perform work as a result of labor violations under Labor Code Sections 1777.1 or 1777.7;
  9. Non Responsible: When the public agency determines that the listed subcontractor is not a responsible contractor.

A prime contractor seeking to substitute a listed subcontractor with another subcontractor is required to provide notice of the prime contractor’s intent to substitute with the public agency. The public agency is then required to give notice by certified or registered mail to the listed subcontractor of the prime contractor’s request for substitution and the basis for the prime contractor’s request. The listed subcontractor then has five (5) working days to submit written objections to the public agency. If the listed subcontractor submits written objections, the public agency then has five (5) working days to give notice to the listed subcontractor of a hearing by the awarding agency.

JMS Air Conditioning and Appliance Service, Inc. v. Santa Monica Community College District

In JMS Air Conditioning, subcontractor JMS Air Conditioning and Appliance Service, Inc. (JMS) performed work in excess of 0.5% of the bid of prime contractor Bernards Bros, Inc. (Bernards) on a project owned by the Santa Monica Community College District (District).  JMS’ work consisted of the installation of the heating, ventilation and air conditioning at the project and JMS held a C-20 warm-air heating, ventilating and air-condition license.

In March 2016, Bernards submitted a request to the District to substitute JMS. The reasons stated by Bernards for its request was because JMS had “failed or refused to perform its subcontract obligations and may not be properly licensed for portions of its work pursuant to the Contractors’ License Law. Within five (5) working days of receiving notice from the District of Bernard’s substitution request, JMS filed an objection.

On May 6, 2016, the District held a hearing to consider Bernard’s substitution request and JMS’ objection and appointed its facility manager Greg Brown as the “hearing officer.” Prior to the hearing, Brown informed the parties that: (1) the hearing would be limited to two hours; (2) that the technical rules of evidence would not apply; (3) that neither party would have a right to cross-examine witnesses; and (4) that should the parties wish they could submit written statements and that there was no page limitation on such statements.

Both Bernards and JMS submitted written statements. In its written statement, JMS assumed that Bernards’ “lack of proper licensure” claim related to hydronic plumbing work listed in the specifications, and argued that its C-20 HVAC license covered such plumbing work as “incidental and supplemental” or “essential” to its work under Business and Professions Code Section 7059, which permits specialty subcontractors to perform work that is “incidental and supplemental to the performance of the work in the craft for which the specialty contractor is licensed,” and under the Section 831 of the of the California Code of Regulations which defines “incidental and supplemental” as “essential to accomplish the work in which the contractor is classified.”

Bernards’ written statement argued that JMS was not properly licensed because its C-20 HVAC license did not permit it to perform the “hydronic boiler” work and “hydronic plumbing” work listed in the specifications. Bernard’s written statement also included a 250-page “Exhibit Book” that identified twenty-one “[p]erformance [d]efficienc[ies]” of JMS and included a written statement by Robert B. Berrigan, a lawyer and former licensing deputy of the Contractors State License Board, in which he opined that JMS’ C-20 license did not permit it to perform hydroponic boiler work but which also stated that he “ha[d] not formed an opinion” as to whether JMS required a C-36 plumbing license to perform the hydronic plumbing work.

At the hearing, Brown allowed each side 40 minutes to present its case, a 10 minute right to reply and brief closing arguments. Bernards presented two of its employees as witnesses, Michael Toepfer, a senior project manager, and Dave Inman, a superintendent, who testified concerning the quality and timeliness of JMS’ work. JMS presented its president, Joe Messica, as its sole witness. Messica testified that his company had completed other similar projects and that the hydronic boiler and hydronic plumbing work performed by JMS on the project was “essential to the HVAC system . . . installed by JMS.” None of the witnesses testified under oath.

On May 10, 2016, Brown sent a letter to the parties informing them of the District’s approval of Bernards’ substitution request finding that JMS had “failed to perform” its subcontractor “in the most sound, workmanlike and substantial manner” required by the subcontract, and finding that JMS was not properly licensed to perform the work, holding that JMS had performed over $3 million worth of boiler and piping work” and that such a substantial amount of work could not be “incidental and supplemental.”

In response, JMS filed a petition for writ of administrative mandamus which was rejected by the superior court. JMS appealed.

The Court of Appeal Decision

On appeal, JMS raised several arguments, all of which, were rejected by the Court of Appeal. The rationale of the court is less important than its holding, so I’ll be brief:

  • JMS’ Argument That Only the District, Not a “Hearing Officer” (i.e., Brown), Could Conduct the Substitution Hearing Under the Listing Law

JMS’ first argument was that, under the Listing Law, Brown lacked jurisdiction to conduct the substitution hearing, because under the Listing Law only the “awarding agency” may conduct a substitution hearing not a “hearing officer” designated by the awarding agency.

The Court of Appeal disagreed, explaining that the Listing Law was intended to prevent bid shopping and bid peddling, and nothing in the “[legislative] record, nor the [Listing Law’s] history, nor its overall structure suggests that preventing an awarding authority’s agent from conducting a substitution hearing might help combat bid shopping or bid peddling.”

  • JMS’ Argument That it Was Denied Due Process Because the Hearing Was Too Short, it Did Not Have the Right to Cross-Examine Witnesses, and Did Not Receive Sufficient Notice of Bernards’ Basis for its Substitution Request

JMS’ second argument was that it was denied due process under the Listing Law because: (1) the hearing was too short given the complexity of the issues involved; (2) it was not afforded the right to cross-examine witnesses; and (3) it did not receive sufficient notice prior to the hearing of the basis for the substitution request.

Again, the Court of Appeal disagreed, explaining that nothing in the Listing Law “requires a hearing of a particular length or the opportunity to cross-examine witnesses.” Furthermore, explained the court, so long as parties have “a reasonable opportunity to be heard, taking into account the ‘specific factual context,’” the conduct of proceedings will be upheld. And, here, explained the court, although Bernard’s substitution request stated that JMS might not be properly licensed to perform “some portions” of the work, JMS correctly concluded that Bernards’ request was premised in part on its contention that JMS needed a C-36 plumbing license to install the hydronic plumbing, and while JMS was not aware that Bernards’ request was also promised on its claim that JMS could install the hydronic boiler, “JMS failed to request a continuance to prepare additional evidence and argument to defend against Bernards’ boiler licensure argument.”

  • JMS’ Argument That There was Insufficient Evidence for the District to Grant Bernards’ Substitution Request

Finally, JMS argued that, while Brown testified that JMS’ C-20 HVAC license was not sufficient for it to install the hydronic boiler, because its president Messica testified that the boiler work was “incidental and supplemental” or “essential” to JMS’ HVAC work, that there was insufficient evidence for the District to grant Bernards’ substitution request.

The Court of Appeal disagreed, holding that the substantial evidence standard of review applies, rather than the broader independent judgment standard of review, and that under the substantial evidence standard of review, court’s “resolv[e] all conflicts in the evidence and draw[ ] all inferences in support of [the administrative findings].” And, here, explained the court, the credibility of witnesses and weight given to conflicting testimony is left to the discretion of the public agency unless “a reasonable person could not reach the conclusion reached by the agency.”

As to the hydronic boiler installation, the Court of Appeal held that it would not “second-guess[ ] Brown’s decision to believe Berrigan’s testimony over Messica’s. However, as to the hydronic plumbing installation, the Court of Appeal held that, because Berrigan expressly disclaimed offering an opinion on whether  JMS was properly licensed to perform the hydronic plumbing installation, substantial evidence did not support the District’s finding that JMS was not properly licensed to perform the hydronic plumbing installation.

Conclusion

JMS Air Conditioning provides an interesting behind-the-scenes look at substitution hearings under the Listing Laws, the primary take-aways being that: (1) the governing body of a public agency does not need to conduct substitution hearings itself, and can designate a hearing officer instead; (2) public agencies have broad discretion in how such hearings are conducted so long as the parties have a reasonable opportunity to be heard given the “specific factual context;” and (3) that substitution hearings are reviewed on appeal under a substantial evidence standard of review, whereby, appellate courts will resolve conflicts in the evidence and draw all inferences in support of the administrative findings.

Subcontracting In The Construction Industry And Who Is Responsible For The Injured Employee?

Ryan M. Hathcock | Drew Eckl & Farnham, LLP | December 5, 2018

The current trend in the construction industry involves the acquisition of specialized laborers and contractors to perform the various tasks required to complete each aspect of a given project. General contractors obtain the services of subcontractors as a common business practice to help construction projects become completed more efficiently. Often, these subcontractors are more capable of performing the specialized work, and in many ways, the construction industry is a subcontractor-driven industry.

The addition of subcontractors to a construction project brings additional workers hired by each subcontractor. In the event a subcontractor’s employee is injured in the performance of the work at the construction site, a question arises of who may be held responsible for payment of workers’ compensation benefits for those injuries.

Statutory Employment

A “statutory employer” is an entity that may be held liable for workers’ compensation benefits for injuries to a subcontractor’s employees. O.C.G.A. § 34-9-8(a) specifically lists the entities that may be considered statutory employers under the Workers’ Compensation Act and may liable for workers’ compensation benefits to an injured employee. That list includes principle contractors, intermediate contractors, and subcontractors. After identification of the appropriate immediate and statutory employers that may be held liable, the next question is determining which party is responsible for payment of any workers’ compensation benefits.

Under O.C.G.A. § 34-9-8(c), the immediate employer remains primarily liable for compensation, and the statutory employer is secondarily liable. In order to obtain workers’ compensation benefits from the statutory employer, a claim for benefits must first be brought against the immediate employer. If the immediate employer is uninsured or insolvent, the injured employee may then seek benefits from the statutory employer. In those situations where the statutory employer is held liable, the Georgia Workers’ Compensation Act allows the liable statutory employer to recoup their losses “from any person who, independently of this Code section, would have been liable to pay compensation to the injured employee or from any intermediate contractor.” O.C.G.A. § 34-9-8(b). Although there is an avenue for recovery for the statutory employer to recoup its losses, it may be impossible to recoup any losses from an insolvent immediate employer.

Employer/Employee Relationship Requirement

The Workers’ Compensation Act requires most employers with three or more employees to carry valid workers’ compensation insurance. Too often, one or more subcontractor fails to obtain and carry workers’ compensation insurance. Even if a subcontractor does not have three or more employees and does not obtain workers’ compensation insurance, the general contractor can be held liable for workers’ compensation benefits as a statutory employer. In those circumstances, the general contractor assumes liability for workers’ compensation coverage for the subcontractor’s employees injured on a general contractor’s project.

The polarity of that is O.C.G.A § 34-9-8 will only apply if the injured individual is an employee of his actual employer. While it has been determined that O.C.G.A. § 34-9-8(c) allows an employee to recover workers’ compensation benefits from the statutory employer if he is unable to recover those benefits from his direct employer, the injured individual cannot recover those benefits if he is not an actual employee. Thus, an injured individual will be unable to recover benefits from the statutory employer if he was working for his direct employer as an independent contractor.

Statutory Employer Tort Immunity

The Georgia Workers’ Compensation Act allows for medical treatment and lost wages to an injured employee without the need to prove fault of the employer (who may not be at fault at all). As a result, the injured employee gives up the right to sue his immediate employer and all other statutory employers for the injuries sustained on the job.

The obligation to pay workers’ compensation benefits provides immunity from tort claims arising from the same accident to all entities upward in the contractual chain between the principal contractor and the immediate employer. With that said, immunity does not extend to employees of the principal contractor. Immunity protection to a statutory employer is prompted by the statutory employer’s potential liability for workers’ compensation benefits even if the statutory employer (i.e. principal contractor) does not ultimately have to pay any benefits in connection with the workers’ compensation claim.

Third-Party Property Owner Liability

A property owner is not ordinarily a “statutory employer” under the Workers’ Compensation Act. However, an owner or an entity in control of the premises where an employee is injured may be subject to workers’ compensation liability as a statutory employer, “in the isolated situation where the party also serves as a contractor for yet another entity and hires another contractor to perform the work on the premises.” Creeden v. Fuentes, 296 Ga.App. 98(1), 673 S.E.2d 611 (2009) (citation and punctuation omitted). In other words, an owner or entity in control of property may be subject to statutory employer liability if that entity also functions as a contractor for another entity and hires a subcontractor to perform work on the premises. The corollary of this is that where the owner is potentially liable as a statutory employer, the owner is also entitled to tort immunity due to the exclusive remedy doctrine.

Practical Considerations for General Contractors

The Georgia Workers’ Compensation Act provisions regarding contractor-subcontractor relationships are designed to create a safety net for any injured worker to assure benefits will be paid by someone. General contractors are responsible for providing workers’ compensation coverage to their own employees, but they may also have additional exposure in instances where their subcontractors have not obtained coverage for the subcontractor’s employees. For a general contractor (i.e. statutory employer) to avoid being held financially responsible for another entity’s employees, it is essential that the general contractor protect itself by requiring every lower tier contractor to carry workers’ compensation coverage. In addition to statutory requirements, workers’ compensation coverage can also be contractually required. This verification process often fails through the life of a construction project as numerous subcontractors come and go. However, the cost to upstream contractors in the event of a workplace injury can be substantial.

The Nation Council on Compensation Insurance (NCCI) maintains an active list that allows for verification of workers’ compensation coverage for any company. General contractors are often not aware of the service provided by NCCI that could greatly limit their exposure in workers’ compensation matters. Aside from regularly checking the NCCI database, general contractors could ensure compliance by contractual language requiring for verification of coverage by providing valid certificates of insurance at each subcontractor pay request. Certificates of insurance should not be consider absolute verification of valid insurance, given that inaccurate or fraudulent certificates of insurance may be prepared. Checking directly with the insurance carrier to confirm proper insurance is held is always the best practice.

Work injuries in the construction industry are more common than in any other industry. Requiring all subcontractors down the contractual chain to obtain valid workers’ compensation insurance will prevent situations in which the general contract will be forced to accept responsibility for claims and reduce the number of instances in which they will tap their own insurance for coverage. In theory, a contractual requirement for subcontractors to present workers’ compensation coverage seems simple. In complex construction projects with numerous subcontractors and an ever approaching deadline, the need for skilled and efficient labor sometimes overrides a thorough examination of a subcontractor’s insurance coverage. Unfortunately, that mistake can become extremely costly as general contractors will assume liability for workers’ compensation benefits for injuries to an employee it did not directly hire.

Timing is Everything: Defending Subcontractors Against Breach of Construction Contract Claims

Andrew T. Marshall | Butler Weihmuller Katz Craig | October 31, 2018

Transfer of risk and liability are common occurrences in the field of construction. National builders often employ a single licensed general contractor to oversee the totality of its construction projects throughout the state of Florida. While this use of a “qualifier” technically complies with Florida law, it leaves unlicensed superintendents with the lion share of day-to-day responsibility for the quality of a project’s overall construction. In order to shift the responsibility of quality construction away from the builder, subcontract agreements are often drafted in such a manner that requires every subcontractor to agree to comply with all applicable plans, specifications, building codes, ASTM and industry standards. Additionally, to ensure risk transfer is accomplished, builders mandate, through its subcontract agreements, the placement of the builder as an additional insured on the subcontractors commercial general liability (“CGL”) policy.

Residents who begin to experience damage to their property as a result of construction defects  often file suit against the builder directly. The builder in turn initiates suit against its subcontractors to effectively transfer its potential liability exposure. While builders often assert a multitude of claims against each subcontractor, it is almost guaranteed that a breach of contract claim will be one of the claims asserted. Two of the more common breach of contract allegations proclaim that pursuant to the contract, the subcontractor was obligated but failed: 1) to construct the project in accordance with the plans and specifications, applicable building codes, and industry standards, and 2) to name the builder as an additional insured on the subcontractors CGL policy.

Because builders often assert these claims several years after original construction, it is important to consider and evaluate the statute of limitations for every such claim. Generally, the applicable statute of limitations period for a breach of contract action is five (5) years. 95.11(2). However, an action founded on the design, planning, or construction of an improvement to real property must be brought within (4) years.  95.11(3)(c).  When two statutes ostensibly conflict, the more specific statute controls, even when the more specific statute provides for a shorter limitation period. Therefore, a claim for breach of a construction contract has a four (4) year limitations period.[1]

As with any statute of limitations analysis, the date of accrual is the most important factor involved.  As such, practitioners would be wise to also remember that accrual of a breach of contract claim begins at the date of breach.[2] Any breach of the contract based upon the subcontractor’s failure to construct in accordance with the plans must begin to accrue no later than the date the subcontractor’s work on the project was completed. If the subcontractor completed its work on the project over four (4) years prior to the filing of the lawsuit by the general contractor, a motion for summary judgment based upon statute of limitations should be filed.

Likewise, a similar analysis should occur when defending a subcontractor from a breach of contract claim based upon the failure to add the builder as an additional insured. Unless specified within the contract, the accrual date for this type of claim is more fluid as it is subject to when the subcontractor was required to add the builder to its CGL policy. The accrual date should be confirmed through requests for admissions, interrogatories or deposition testimony provided by the builder’s corporate representative.[3] Armed with a confirmed accrual date, a practitioner can determine whether suit was filed within the four (4) year limitations period and possibly secure dismissal through the filing of a dispositive motion.

[1] Suntrust Bank of Florida, Inc. v. Don Wood, Inc., 693 So. 2d 99 (Fla. 5th DCA 1997)“General rule that more specific statute controls when two statutes ostensibly conflict applies to construction of statutes of limitations, even when more specific statute provides for shorter limitation period.”

[2] Hartford First Ins. Co., 995 So. 2d 576 “We hold that in the context of a subcontract, where a contractor accepted the work of the subcontractor and paid in full for that work, the action accrued when the subcontractor finished its work.” See also Access Ins. Planners, Inc. v. Gee, 175 So. 3d 921 (Fla. 4th DCA 2015)(“For purposes of the statute of limitations, a cause of action for breach of contract accrues at the time of the breach”); State Farm Mut. Auto. Ins. Co. v. Lee, 678 So.2d 818, 820 (Fla.1996); Med. Jet, S.A. v. Signature Flight Support–Palm Beach, Inc., 941 So.2d 576, 578 (Fla. 4th DCA 2006) (“Florida has followed this general rule that a cause of action for breach of contract accrues at the time of the breach, ‘not from the time when consequential damages result or become ascertained.’ ”) (quoting Fradley v. Cnty. of Dade, 187 So.2d 48, 49 (Fla. 3d DCA 1966)).

[3] Make certain that the corporate representative deposition is properly noticed and that you have identified the subcontract and the requirement of additional insured placement as a topic of inquiry within the Notice of Taking Deposition.

Does the Miller Act Trump Subcontract Dispute Provisions?

Christopher Horton | Smith Currie & Hancock | May 9, 2018

The Miller Act

All general contractors performing public building or public works contracts with the federal government must be familiar with the Miller Act. It is a requirement for doing business with the federal government. Pursuant to the Miller Act, a general contractor entering into a public building or public works contract with the federal government must furnish a payment bond in an amount equal to the contract price, unless the contracting officer determines that it is impractical to obtain a bond in that amount and specifies an alternative bond amount.

Miller Act payment bonds guarantee payment to certain subcontractors and suppliers supplying labor and materials to contractors or subcontractors engaged in the construction. As a result, subcontractors have an avenue of relief should they not get paid for work done on the project. Specifically, subcontractors have a right to bring an action against the surety within 90-days after the date on which the person did or performed the last labor or furnished or supplied the last of material for which the claim is made. Any such action must be brought no later than one year after the date on which the person did or performed the last labor or furnished or supplied the last of material. 40 United States Code § 3133.

Limiting Subcontractor Claims

General contractors handling federal work routinely include provisions in their subcontracts that require their subcontractors to exhaust certain dispute procedures prior to filing suit for non-payment or for additional compensation and damages based on alleged extra work, changed conditions, or other grounds. By employing these provisions, general contractors attempt to control the process by which their subcontractors seek recovery for additional compensation or damages. Generally, these provisions require subcontractors to submit their claims through the general contractor against the government, in accordance with the Contract Disputes Act, rather than bringing suit directly against the general contractor under the Miller Act.

For general contractors, these provisions offer a way to avoid costly litigation that may have only arisen because of the government’s denial of a change order or other government action affecting the cost of the project. For subcontractors, however, these provisions limit their rights to recovery and may increase costs associated with recovery. Most importantly, participation in a contract mandated dispute resolution procedure will not toll or extend the Miller Act’s one-year deadline for filing. The one-year deadline is, for the most part, absolute.

Are Miller Act Limitations Enforceable?

General contractors cannot avoid Miller Act lawsuits unless their subcontractors have executed waivers expressly releasing their rights under the Miller Act after the subcontractors have furnished labor or material for use in the performance of the contract. This provision of the Miller Act was added in 1999 to prevent general contractors from requiring that their subcontractors waive Miller Act rights as a precondition to obtaining work on federal projects. It is also directly relevant to the validity of contract provisions requiring exhaustion of dispute procedures prior to initiating Miller Act lawsuits. While some courts interpret these provisions as a de facto waiver of rights under the Miller Act, other courts differ on whether these provisions are enforceable.

Court Decisions Concerning Dispute Remedy Exhaustion Provisions

A number of federal courts have determined that subcontract terms conflicting with the provisions of the Miller Act are unenforceable. Based on this determination, courts have considered whether subcontract provisions requiring exhaustion of dispute procedures prior to initiating a Miller Act suit conflicts with the waiver provisions of the Miller Act. Only a few federal courts have addressed this issue. The majority of courts that have (D.C., Maryland, Nebraska, New Jersey, Pennsylvania, Virginia), have found that such provisions are unenforceable and do not require dismissal or stay of a Miller Action lawsuit. These courts have focused on the language of the provisions at issue. In these cases, the provisions set forth in the subcontract have conditioned the subcontractor’s right to recovery under the payment bond on the completion of the dispute procedures. By requiring that a subcontractor exhaust other procedures first, the courts have determined that the provision conflicts with the waiver requirements set forth in the Miller Act. The provisions at issue in these decisions also fail to expressly cite to the Miller Act.

A minority of courts (Louisiana, California, and Hawaii) have upheld dispute exhaustion provisions and entered dismissals or stays of Miller Act. Contrary to the decisions referenced above, the courts rendering these decisions based their rulings upon the fact that the provisions at issue included express language that required a stay for Miller Act claims pending exhaustion of the dispute procedures. The courts also found that the provisions were not so extreme as to constitute a waiver. The subcontractor’s Miller Act remedies remained intact pending exhaustion of the contractual dispute procedures.

“Best Practices” for General Contractors and Subcontractors

As is discussed above, only a few states have considered whether dispute provisions requiring exhaustion of remedies are enforceable. The majority of states that have considered the issue have refused to enforce the stays or dismissals required by such provisions. But it is fair to say that the law is still evolving on this issue. General contractors and their counsel should consider the following when drafting these types of provisions: (1) whether the Miller Act is expressly referenced; (2) whether the provision includes a disclaimer that the provision does not serve as a waiver of any Miller Act rights; and (3) whether enforcement of the provision is in furtherance of ongoing dispute procedures contemplated by the provision. The last item is great import because it will always be difficult to convince a court to dismiss or stay a claim if the parties are not in the process of moving forward with the dispute procedures referenced within the applicable provision.

On the other hand, subcontractors should consider whether such provisions should be stricken from their subcontracts when negotiating the terms. If not, subcontractors and their counsel should fully consider whether it is better to proceed with the dispute procedures prior to filing a Miller Act lawsuit or whether filing and later challenging the provision in court is a better option. If the one-year deadline is approaching, subcontractors must either file a Miller Act suit or lose their Miller Act rights.

The General Assembly Seems Ready to Provide Some Consistency in Mechanic’s Lien Waiver

Christopher G. Hill | Construction Law Musings | March 5, 2018

Back in 2015, the Virginia General Assembly amended the mechanic’s lien statute (Va. Code 43-3) here in Virginia to preclude any contractual provision that diminishes a subcontractor or supplier’s “lien rights in a contract in advance of furnishing any labor, services, or materials.” However, this amendment was only applicable to subcontractors and suppliers. For political and other reasons, general contractors in Virginia were left out of this change. This omission by the legislature put Virginia general contractors in the position of potentially being forced by project owners to waive their mechanic’s lien rights without the ability to run that risk down stream to their subcontractors and suppliers.

A recent bill enrolled during this legislative session, HB823, provides some remedy to this inconsistency. This bill (a .pdf of which can be obtained here) amends Virginia Code 43-3 and Virginia Code 43-21 to effectively preclude full contractual waiver of lien rights by general contractors with one caveat. That caveat is that with the amendment to 43-21 relating to priority of liens the general assembly has specifically authorized pre or post provision of labor or materials subordination of general contractor mechanic’s liens to any deed of trust on the property in question. In short, general contractors got at least partial relief from the contractual bind that the previous legislation put them in.

Of course this begs the question of whether subcontractors and suppliers can be forced to subordinate their lien rights given the above-quoted language. Would doing so constitute diminishing those rights through the loss of priority? In the past few years, I haven’t seen a case that answers this question. As always, I recommend that you review the statutes yourself, preferably with the advice of an experienced Virginia construction attorney.