A New Statute of Limitations on Construction Claims by VA State Agencies?

Christopher G. Hill | Construction Law Musings | January 21, 2019

I have discussed the Hensel Phelps case and the potential issues caused by both poorly drafted indemnity clauses and the lack of a statute of limitations applicable to the Commonwealth of Virginia and its agencies in 2017. New legislation (supported by various contractor groups including my friends at the AGC of Virginia) has been proposed for the 2019 General Assembly session that seeks to address at least part of this issue. While the indemnity provisions of your construction contracts can be addressed by careful drafting with the help of an experienced construction attorney, the proposed legislation (found in HB1667) seeks to address the statute of limitations issue.

The proposed legislation is described as follows:

Provides that no action may be brought by a public body on any construction contract, including construction management and design-build contracts, unless such action is brought within five years after substantial completion of the work on the project and that no action may be brought by a public body on a warranty or guarantee in such construction contract more than one year from the breach of that warranty, but in no event more than one year after the expiration of such warranty or guarantee. The bill also limits the time frame during which a public body, other than the Department of Transportation, may bring an action against a surety on a performance bond to within one year after substantial completion of the work on the project.

In short, it gives a contractor performing work for a Virginia agency the peace of mind that it will not have unlimited responsibility for its work by limiting its contractual liability period to five years and its warranty obligations to no longer than a year after the expiration of any warranty. The bill would further limit the liability of a surety under a performance bond, thus allowing sureties and their principals to move on to other projects without the corresponding hit to the principals overall bonding capacity after a period of time.

In my opinion this would be a good addition to the Virginia Public Procurement Act and allow better business for all involved.

I will keep an eye on the progress of this bill,among others that will be of interest to construction professionals in Virginia, once the General Assembly session begins.

With VA Mechanic’s Liens Sometimes “Substantial Compliance” is Enough (But Don’t Count on it)

Christopher G. Hill | Construction Law Musings | September 3, 2018

Virginia mechanic’s liens are a powerful and tricky beast that in most cases require absolute precision in their preparation. However, an interesting opinion recently came out of the Virginia Supreme Court that may provide a bit of a “safe harbor” from the total form over function nature of a mechanic’s lien.

In Desai, Executrix v. A.R. Design Group Inc., the Court considered a lien memorandum that had what could be described as technical flaws in the preparation of the mechanic’s lien by A. R. Design Group. The basic facts are that A. R. Design Group used the form of lien found in Va. Code Sec. 43-5 (also found as Form CC-1512 at the Virginia Judiciary website) when it recorded two lien memoranda for two pieces of property owned by a trust. Relating to one of the two properties, the memorandum failed to identify the “Owner” as the trustee of the trust. On the memoranda relating to both properties the affidavit verifying the amounts claimed did not identify the signatory as agent for A. R. Design Group, instead listing the agent as the claimant and further failed to state a date from which interest is claimed or a date on which the debt was due.

Needless to say, the owner argued that each of these technical defects invalidated the memoranda and therefore they should have been released. Somewhat surprisingly the Fairfax, Virginia Circuit Court disagreed and held the liens to be valid. On appeal, the Virginia Supreme Court affirmed the lower court. The held that the failure to add the word “Trustee” after Ulka Desai’s name did not invalidate the lien because the trustee had all of the rights of ownership and furthermore that naming Desai in the memorandum served the purpose of putting third parties on notice of the lien.

As to the naming of a vice president of A. R. Design Group as claimant, the Court held that this was not a “substantial” defect that would cause prejudice to a party or thwart the purpose of the statute. Because the claimant was properly identified in the lien memorandum itself and it was clear that the person executing the affidavit was an agent of the company, the Court held that this defect was not substantial and held that it fell within the safe harbor of Va. Code Sec. 43-15.

Finally, and more interestingly, the Court found that failure to state a date from which interest could be claimed or a date when the amounts due are or would become payable in this case were not fatal. As to the interest, the Court stated that in the case before them no interest was being claimed so no date was necessary. As to the failure to state a date when the amounts claimed are due, the Court looked at the requirements of Va. Code Sec. 43-4 and Va. Code Sec. 43-5 and concluded that because A. R. Design Group used the form found in Section 43-5:

[t]he memoranda were substantially compliant because they closely tracked the form required by Code § 43-5, they provided sufficient notice that the owner was claiming amounts due and any defect in the memoranda would not thwart an underlying purpose of the statute, such as providing notice to third parties. Therefore, A.R. Design is entitled to the safe harbor provided by Code § 43-5.

In short, the Virginia Supreme Court looked at a lien memorandum that had a technical flaw or two and concluded that its substantial compliance with the mechanic’s lien statute and its purpose did not require its invalidation.

Does this case mean that you shouldn’t worry about title searches, proper certification of mailing, and other technical requirements of the lien statutes? Of course not. Does this mean that the assistance of a Virginia construction lawyer that is experienced with mechanic’s lien matters is now unnecessary? Nope. The Court in this case was looking at a particular set of facts and circumstances. Frankly, the lien claimant was a bit lucky in my opinion because of the particular confluence of circumstances. I would still be very careful with mechanic’s liens and would not read this one case as a thawing of the strict requirements of these powerful collection tools.

As always, I recommend that you read the case yourself and draw your own conclusions. If they are different from mine, I’d love to hear them.

In Contracts, One Word Makes All the Difference

Christopher G. Hill | Construction Law Musings | July 4, 2018

Here at Musings, I sometimes feel as if I am beating the “contract is king” drum to death. However, each time I start to get this feeling, a new case out of either the Virginia state courts or the Fourth Circuit Court of Appeals here in Richmond reminds me that we all, lawyers and contractors alike, need to be reminded of this fact on a regular basis. The terms written into a construction contract (or any other contract for that matter) will control the outcome of any dispute in just about every case.

A recent 4th Circuit case takes this to the extreme in pointing out the the choice which of two tiny words can change the entire set of procedural rules and even the courthouse in which your dispute will be decided. In FindWhere Holdings Inc. v. Systems Env. Optimization LLC, the Fourth Circuit looked at a forum selection clause found in a contract between the parties. In this case, the clause stated that any dispute would be litigated in the courts “of the State of Virginia.” When the defendants tried to remove the case from Virginia state court to the Eastern District of Virginia federal courts, the federal court remanded the case, sending it back to the Circuit Court of Loudoun County, Virginia.

On appeal of this ruling, the 4th Circuit agreed with the remand and contrasted the language found in the contract (i. e. “of the State of Virginia) with other standard language stating “in the State of Virginia.” In upholding the district court, the 4th Circuit stated that the language containing the word of expressed sovereignty as opposed to the mere location expressed in the language using the word in. In the first case, the 4th Circuit stated, the federal courts have no jurisdiction while in the second they do. As such, the case could not continue in federal court.

While this case does not involve construction, it is informative for all of us in the construction world who deal with written contracts on a daily basis. The Findwhere case is a great reminder to read your construction documents carefully, and draft them with even more care. The lesson of this case is that a change in just one two-letter word can completely change the whole direction of a construction contract dispute. For this reason, the advice, early in the contracting process, of a qualified construction attorney knowledgeable in the way these little words make a difference is key.

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.

A Primer on Design Professionals’ Liability in Virginia

Stephen G. Test | Williams Mullen | July 27, 2017

When building a construction project in Virginia, it is essential that you understand the obligations and supporting legal principles for each of the parties involved in the Project.  You cannot make an informed judgment of the risk involved unless you know the scope of liability for each party.  The Owner must provide timely information and payment.  The general and the subcontractors must provide sufficient manpower and skilled workmanship.  The supplier must deliver equipment that meets the design criteria.

What about the architect or engineer?  The design professionals must provide design information and administration that allow the project to be constructed on time and on budget, and that meet the owner’s criteria for beneficial use when finished.  The legal principles underlying the liability of a design professional in Virginia, whether architect or engineer, are unique and differ markedly from those of an owner or contractor.  That is because of the principle of “professional liability.”

Architects and engineers in Virginia are deemed to be “professionals,” licensed and regulated by the Virginia Board for Architects, Professional Engineers, Land Surveyors, Certified Interior Designers and Landscape Architects.  Because they are professionals, their performance is judged by a “standard of care” not applicable to others involved in the project.  In Virginia, that standard has been determined by the Supreme Court of Virginia to be a duty to “exercise the care of those ordinarily skilled in the business.”  The designer must meet this professional standard in both the design and the administration of the project’s construction.  Nelson v. Commonwealth, 238 Va. 228 (1988).  This standard is determined by the expert opinion of a licensed design professional accounting for the type, size and complexity of project and its location, describing any deviation from that standard.  The design professional is not held to a standard of perfection, nor does she act as a guarantor of the design.

Contractual Liability

When an issue of design professional liability arises on a project, you must know the legal theory to use to establish that there has been a breach of the professional standard of care.  This begins with a determination of contract liability or tort liability.  Assuming there is an enforceable contract, either written or oral, the professional standard of care is implied in the contract for design services. See Nelson.  Should the contract provide for a higher standard of care, keep in mind that professional liability policies will exclude coverage for such additional contractual liability.  The contract may also provide that the design professional has agreed to provide a warranty or guarantee of its design services.  A warranty is an enforceable statement regarding the design professional’s own work, such as a certification that the design meets local building codes.  A guarantee is made with respect to the services of another, such as a designer’s sub-consultant.

Tort Liability

A tort is a civil wrong.  The most common tort is negligence.  If a person or business does not exercise a reasonable degree of care, it is negligent.  Applied here, the design professional must adhere to that professional standard of care, working as carefully as other design professionals under the same or similar circumstances.  In Virginia, a failure to adhere to the professional standard of care constitutes negligence.  There are essential elements that must be proved to prevail on a negligence theory: (i) existence of a duty; (ii) a breach of that duty; (iii) the breach was the proximate cause of the injury; and (iv) the breach resulted in damages.  The law provides that the design professional owes the duty to its contractual partner that it will adhere to the professional standard of care.  To establish a negligence claim, you will need expert testimony as to the professional standard of care and its breach, just as in a contract claim.

Defenses for Design Professionals

There are recognized defenses that design professionals will commonly rely on to defend a claim that their design work or administration breached the professional standard of care.  These include:

  • Statutes of limitations and statutes of repose:  Prohibit filing a claim after a defined period.  In Virginia, a claim for breach of written contract is five (5) years; for an oral contract, it is three (3) years. These time limits begin to run from the date the plans are delivered to the owner or the design-builder.  If administrative obligations are in the scope of the design professionals work, the time limit begins to run from the date of the breach of the administrative duty. The statute of repose in Virginia bars ANY filing for injury to property, real or personal, or for personal injury or wrongful death arising out of THE defective or unsafe condition of an improvement to real property more than five (5) years after completion of the performance of the services and construction.  This has been interpreted to apply only to claims in tort, not under contract.
  • Privity and Economic Loss:  A design professional cannot be sued for a claim of purely economic loss unless there is contractual privity.
  • Contributory Negligence:  If sued in tort, the design professional may allege that the party bringing the claim was also negligent, which negligence contributed to the damages.  If proved, the defense will bar the claim.
  • Betterment:  The party injured by the breach of the professional standard of care cannot recover damages that would make it better off than it would have been had the breach not occurred.  A design error discovered prior to construction that would not require corrective work will not obligate the designer to pay for the new work, only for the possible delay or increase in the costs of materials.
  • Limitation on Liability:  the written contract with the design professional may contain a provision that limits the liability of the professional to an amount certain.  It can be limited to the fee earned or some other defined amount.

All parties enter contracts with the prayer that it will go smoothly and be successful.  The more you know about the obligations, risks and legalities at the start, the more likely that prayer will be answered.