John S. Higgins – November 28, 2011
Ohio legislators have contemplated retainage reform for years. New legislation is being drafted to attempt reform retainage on private construction projects (LSC 129 1897).
Ohio legislators have contemplated retainage reform for years. New legislation is being drafted to attempt reform retainage on private construction projects (LSC 129 1897). The proposed legislation includes the following provisions:
No owner, contractor, subcontractor, material supplier, or lower tier subcontractor or lower tier material supplier shall withhold retainage greater than 2% on any construction contract for a private improvement.
Any provision of a construction contract, agreement or understanding, or specification, or other documentation that is made a part of a construction contract, agreement or understanding that purports to authorize additional retainage is void and unenforceable as against public policy. This provision would be added to R.C. 4113.62 “Construction Contract Provisions Against Public Policy.”
Chapter 13111 of the Ohio Revised code would provide the definitions for private owner, contractor, improvement, etc. on private project.
A contractor cannot withhold retainage from a sub or supplier in a percentage greater than the retainage being withheld from it. For example, if an Owner is withholding 2% retainage from a general contractor, the GC may not withhold more than 2% retainage from its subs or suppliers.
Violations and failure to make prompt payments may result in an award of attorneys’ fees and 18% interest.
While the legislation has not yet been formally introduced, if introduced and passed it could have a large impact on the industry. Although previous attempts to pass such retainage reform have been unsuccessful the progress of this proposed legislation should be watched as “interested party” meetings have been held.
Alex Merritt and Michael B. Wilmar – November 21, 2011
This month the Second District Court of Appeal concluded that the developer of a condominium complex lacked standing to enforce the declaration of covenants, conditions, and restrictions (CC&R’s) after it had sold all the units in the complex.
Western Pacific Housing and Playa Capital Company (the “Developers”) constructed and sold a 90-unit condominium complex in Playa Vista, California. The homeowners association (“HOA”) for the complex later filed suit against the Developers, alleging construction defects. The Developers sought to enforce a binding arbitration provision in the CC&R’s.
The Second District Court of Appeal upheld the trial court’s rejection of a motion to compel arbitration. It reasoned that the Developers could have enforced an arbitration provision in a contract. However, CC&R’s are not contracts, but rather equitable servitudes, which may only be enforced by a property owner or an HOA.
The court relied on California Civil Code section 1354, which states that CC&R’s “shall be enforceable equitable servitudes” and may be enforced “by any owner of a separate interest or by the association, or by both.” Relying on the plain meaning of section 1354, the court decided that “the Developers cannot enforce the CC&R’s once they have completed the project and sold all the units” because “they no longer have any ownership interest in the property.”
The court also decided that the Federal Arbitration Act, which makes a written arbitration provision in acontract valid and enforceable, did not apply because CC&R’s are not contracts.
The court distinguished B.C.E. Development, Inc. v. Smith, 215 Cal.App.3d 1142 (1989), which allowed a developer to enforce CC&R’s where it had continuing authority to do so through an architectural review committee. In contrast, the Playa Vista Developers had not retained any authority or control to enforce CC&R’s . Moreover, given the plain language of section 1354, the court suggested that B.C.E. Development was wrongly decided.
The California Supreme Court is set to consider this same issue in Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC, 187 Cal.App.4th 24 (2010), review granted November 10, 2010, S186149. If it agrees with the Second District Court of Appeal, developers may begin retaining an interest in the properties they develop to preserve their right to enforce CC&R’s.
Jerome H. Sturhahn – November 17, 2011
The last couple of years have seen Colorado courts disagree over the question whether faulty workmanship is an “occurrence” covered under a commercial general liability policy. In previous client advisories we have tracked the evolution of this issue in Colorado. Last year, the Colorado General Assembly, responding to a number of decisions in state and federal courts concluding faulty workmanship is not an occurrence, passed legislation making clear that defective construction is presumed to be an “accident,” rendering it an “occurrence” eligible for coverage under a CGL policy.
There is now additional, good news to report for insured construction professionals. The Tenth Circuit U.S. Court of Appeals, which covers Colorado, recently issued a decision that further reinforces what the Colorado General Assembly made plain – property damage caused by faulty workmanship is an occurrence where the insured did not intend to cause the property damage. Thus, the faulty workmanship itself is an accident for purposes of coverage under a commercial general liability policy. The decision, Greystone Construction Company, Inc. v. National Fire & Marine Insurance Co., interpreted the term “occurrence” to encompass unanticipated damage to nondefective property resulting from poor workmanship, and “nondefective property is property that has been damaged as a result of poor workmanship.” The court concluded that a deliberate act, performed negligently, is not intended by the policyholder to cause damage to a third party. The Greystone decision should provide insureds with additional comfort that a Colorado court is unlikely to deny coverage of faulty workmanship claims solely on the basis of the “occurrence” argument.
Despite the Greystone decision, and the earlier statutory amendments, CGL claims for faulty workmanship are always difficult and dynamic, with the insurer’s ultimate coverage decision based on a fact-specific inquiry. We recommend that anyone either pursuing or defending a faulty workmanship claim carefully consider how that claim is articulated and consult with your lawyer. Never assume the insurer’s decision about coverage is final and without challenge.