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.

2016: A Busy Year for the Supreme Court of Virginia, Including 2 Significant Decisions for the Construction Industry

Joseph R. Pope and Robert K. Cox | Williams Mullen | July 5, 2017

If you are a design professional providing services in Virginia, or a general contractor on a public works project for the Commonwealth of Virginia, you need to know of two Virginia Supreme Court decisions in 2016. You ask why? The answer is because your current practices and protocols may expose you to the same risks and liabilities that the design professional and general contractor experienced respectively on the projects the Virginia Supreme Court addressed in its two decisions. Now is the time to learn of these decisions and to review and, if appropriate, modify your practices to avoid the same risks and liabilities.

The first decision is William H. Gordon Associates, Inc. v. Heritage Fellowship Church, 291 Va. 122, 784 SE2d 265 (2016), which involved an array of construction issues, including the duty of care that design professionals owe when preparing construction plans and specifications. The second decision is Hensel Phelps Construction Company v. Thompson Masonry Contractors, Inc., 791 SE2d 734 ( Va. 2016), in which the Court limited the effect of the general contractor’s flow-down clause in its subcontracts and rejected the general contractor’s indemnity claim against its subcontractor.

William H. Gordon Associates, Inc. v. Heritage Fellowship Church, and A Design Professional’s Duty of Care

In this case, Heritage, a church located in Reston, Virginia, contracted with the Gordon firm to provide engineering services for the site on which the Church’s new sanctuary would be built. The services included designing a storm water management system for the site. The Gordon engineer assigned to the project selected a rain tank system that was relatively new to the industry. Unfortunately, the engineer had no experience with the system and “cut and pasted” the plans and specifications for the rain tank system that the rain tank vendor had provided into the design documents for the project. The engineer admitted at trial that he did not fully understand many aspects of the rain tank specifications and plans he “cut and pasted” into the design documents.

While installing the rain tank system, the building contractor became concerned that the system was ill-suited for the site and requested additional information. Relying on information that the rain tank vendor provided, the Gordon engineer dismissed the contractor’s concerns. The contractor proceeded to install the rain tank system and then paved over the installation as part of the construction of a new parking lot. Shortly after that installation and paving, the rain tank and parking lot above it collapsed. The Church sued the general contractor and engineer for the damages caused by the collapse, including the cost to install a new storm water management system.

Following an eight-day bench trial with over 20 witnesses, the trial court ruled that the engineer Gordon breached the duty of care because its engineer merely “cut and pasted” the rain tank’s product specifications into the design without “understand[ing] the specifications.” Despite evidence showing that the contractor did not strictly or fully comply with Gordon’s plans, the trial court concluded that Gordon’s breach of the standard of care was the proximate cause of
the collapse.

Gordon appealed the ruling on the narrow ground that the evidence was insufficient to establish that any breach of the professional standard of care proximately caused the rain tank to collapse.

The Supreme Court affirmed the trial court’s ruling on the issue, concluding that there was sufficient evidence to establish that the engineer violated the standard of care and the breach was the proximate cause of the rain tank collapse and the resulting damage. The Court noted that Heritage offered expert testimony that Gordon breached the standard of care by (1) incorporating the manufacturer’s unverified literature into the design, (2) failing to fully understand the design, (3) failing to consider the unusually high water table, (4) failing to provide quality oversight during construction to ensure that the elements of the plan were being verified and executed, and (5) failing to reexamine the original plan when the contractor requested information from the engineer. The Court also found the evidence sufficient to support the trial court’s finding that the breach of the standard of care was the proximate cause of the rain tank collapse.

Design professionals and project owners should note that the Supreme Court’s ruling was closely tied to the particular facts of the case, and, because the appeal was from a bench trial, the trial court’s ruling could not be disturbed so long as there was some evidence in the record to support the judgment. Based on these circumstances, the Court had no difficulty concluding that there was an evidentiary basis for the trial court’s ruling, especially given that the engineer admitted that he did not understand the specifications for the rain tank system, yet he nonetheless “cut and pasted” those specifications into the design documents.

While this case was pending the appeal process, design professionals had expressed concern that the Court might accept the argument of the project owner, Heritage, that Virginia licensed design professionals breach the standard of care if they adopt into their sealed design documents the general plans and specifications for a product prepared by a non-engineer manufacturer. The Virginia Supreme Court neither accepted nor rejected that contention.

Hensel Phelps Construction Company v. Thompson Masonry Contractors, Inc.; No Limitations Protection Against Lawsuits By The Commonwealth

The second decision, issued in November 2016, arose from a project the general contractor, Hensel Phelps, had completed some 16 years earlier at Virginia Tech. Virginia Tech is a public, state owned university, and, as such, the University, like other agencies of the Commonwealth, is not subject to any statutory limitations period on claims by the Commonwealth.

The construction at issue in the case, a student health and fitness center, began in 1997 and was substantially complete in 1998, and all work was complete by June 2000. Years after completion, defects were discovered, and Virginia Tech repaired or replaced the defective work at a cost that Virginia Tech claimed to be in excess of $7.0 million. In April 2012, Virginia Tech claimed recovery of its repair and replacement costs against Hensel Phelps. Virginia Tech and Hensel Phelps eventually settled, with Hensel Phelps paying Virginia Tech some $3.0 million. Hensel Phelps then filed a lawsuit against its subcontractors who had performed the defective work, asserting breach of contract and indemnification.

The subcontractors defended on the basis that Hensel Phelps’ lawsuit was long outside Virginia’s five year statute of limitations on contract actions. The trial court agreed with the subcontractors and dismissed Hensel Phelps’ lawsuit.

On appeal to the Supreme Court, Hensel Phelps argued that the “flow-down” clause in its subcontracts flowed-down to the subcontractors the obligations that Hensel Phelps owed to Virginia Tech under the prime contract, including the obligation to respond to a Virginia Tech claim at any time. The particular subcontract clauses that Hensel Phelps relied upon were (1) the subcontractor’s incorporation by reference clause, found in most subcontracts, incorporating the prime contract into the subcontract, and (2) the subcontract language: “The subcontractor is bound to the contractor by the same terms and conditions by which contractor is bound to Virginia Tech.”

The Supreme Court rejected Hensel Phelps’ flow-down argument. The Court reasoned that, under Virginia law (like many other states), a waiver of rights must be shown by proving the party giving up its rights (here the subcontractor) has knowledge of the rights to be waived and intends to give up those rights. Hensel Phelps’ incorporation by reference subcontract clause and generally worded flow-down clause were not sufficient; there being no express statement by the subcontractor waiving its right to rely on the statute of limitations.

As a fall back argument, Hensel Phelps argued that it was entitled to indemnification by the subcontractors. The Court found Hensel Phelps’ express indemnification clause in its subcontracts, however, to be void under Virginia law. The clause included indemnification of Hensel Phelps for any act, error, omission or negligence of Hensel Phelps resulting in damages or losses to Hensel Phelps; thus calling for indemnification for Hensel Phelps’ own negligence, a fatal flaw under Virginia law. When Hensel Phelps turned to other subcontract clauses requiring the subcontractor to indemnify Hensel Phelps, the Court determined those clauses to be ineffective, particularly when it was clear that the parties had expressly otherwise agreed to an indemnification clause, although a clause void under Virginia law.

The take away for general contractors from this second decision is the wisdom of reviewing their “standard” subcontracts before using those “forms” on their next project. Are the terms drafted to obligate the subcontractor(s) to the same extent and for the same time that the general contractor obligated itself to the project owner, is the indemnification clause enforceable under the law applicable to the subcontract, and does the indemnification clause survive termination or close-out of the prime contract?

3. Conclusion

General contractors’ practices and procedures may have been sufficient in the past; but that should not dissuade them from periodically reviewing those practices and procedures and modifying them, if appropriate, to better protect their interests now and in the future.