Monthly Archives: January 2020

The Registrar of Contractors and the Residential Contractors’ Recovery Fund: One Size Does Not Fit All

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Creighton Dixon | Snell & Wilmer

The Arizona Court of Appeals recently published a decision examining the Registrar of Contractor’s (“ROC”) handling of a homeowner’s claim involving the Residential Contractors’ Recovery Fund (the “Fund”). The decision, Gordon v. Arizona Registrar of Contractors, 247 Ariz. 146 (App. 2019), is a helpful reminder that while the ROC and the Fund can be useful to resolve certain disputes, they are not the right solution for every problem.

Though the Homeowner and ROC were the named parties, the dispute with the ROC was rooted in the Homeowner’s relationship with InHouse Home Warranty (“InHouse”). InHouse sold home warranty policies, and it was licensed by the ROC, as well as Arizona’s Department of Insurance. InHouse’s contractor’s license specifically covered air system repair, and InHouse would otherwise coordinate with independent contractors to fix other work.

The Homeowner bought a home warranty policy from InHouse. Under the policy, InHouse was obligated to cover repairs on a variety of household systems. Eventually, InHouse stopped answering the Homeowner’s calls for service, and the Homeowner in turn filed a complaint with the ROC. The Homeowner’s complaint alleged that InHouse worked outside the scope of its contractor’s license, aided and abetted an unlicensed contractor, operated as an insurance company without a license, and failed to respond to new requests for service. Notably, the Homeowner did not include any complaints about the actual workmanship. After InHouse failed to respond, the ROC issued a default decision and order revoking InHouse’s contractor’s license.

This is when the dispute began between the Homeowner and the ROC. After succeeding against InHouse, Homeowner sought to recover from the Fund. For those unfamiliar with the Fund, the Fund is described by the ROC’s website as “a form of financial protection provided by licensed Arizona residential contractors to residential homeowners.” Essentially, it provides money that can be used to complete or repair work, provided the residential homeowner meets the legislative requirements.

However, in this case, the ROC found that the Homeowner could not recover from the Fund because the “home warranty policy” was not a construction contract. The Homeowner appealed the decision first to the Superior Court, and then to the Arizona Court of Appeals. Both courts affirmed the ROC’s decision. The Court of Appeals determined there were three independent reasons to deny the request to recover from the Fund: (1) as the ROC had noted, the “home warranty policy” was not a construction contract; (2) the Homeowner was not a “person injured” as required by the relevant statute because the issues in his complaint (e.g. unnecessary labor and high cost) were not related to the type of damage the Fund is meant to address (e.g. incomplete work); and, (3) the Homeowner did not “suffer damage compensable by the Fund.”

This case is a helpful reminder that the Fund cannot solve every problem parties may face against a contractor. Here, there were at least two reasons the square problems of the Homeowner did not fit into the round solutions the Fund was intended to address. First, the “home warranty policy” was essentially insurance, not a construction contract. Parties should consider this distinction (and the specific contours of their own disputes), as not every “contract” meets the statutory requirements to recover from the Fund. Second, the problems the Homeowner had with InHouse did not meet the requirements to recover from the Fund. In Gordon, there were no workmanship issues to address. Other bars to consider include the statutory prohibition preventing commercial property owners from recovering from the Fund. See A.R.S. § 32-1132.01(A) (“An award from the residential contractors’ recovery fund is limited to residential real properties. The Fund may not issue an award covering damages to commercial property.”). Overall, Gordon is a timely reminder that the ends you are looking for (e.g. money, directive to complete the work), do have an important role in determining your means. Take the time to consider if the Fund can award the remedy you want.

Not All Damages Are Created Equal – the Proper Application of the Economic Loss Doctrine

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Rahul Gogineni | The Subrogation Strategist

In William Lansing v. Doe, 2019 Ore. App. LEXIS 1564, the Court of Appeals of Oregon considered whether the Economic Loss Doctrine (ELD) applied to the plaintiff’s claims based on purportedly faulty construction work in a home. In determining that damage to persons or property is not a purely economic loss in the context of the ELD, the court concluded that the plaintiff could proceed with a negligence claim against a contractor that performed work on the home.

In William Lansing, a credit union that owned a foreclosed home hired CR Services, Inc. (CR) to repair and replace water-damaged drywall in the home. After the plaintiff purchased the home and discovered water-damaged drywall, the plaintiff filed suit against CR for failing to identify the original water leak and repair it prior to installing drywall over the piping. CR filed a motion to dismiss the claim, asserting that the plaintiff’s negligence claim was barred by the ELD. The trial court agreed that the ELD applied and dismissed the action. The plaintiff appealed the decision to the Court of Appeals of Oregon.

The ELD is a legal principle that precludes a party from bringing negligence claims for purely economic losses. The principle is most commonly used in the area of products liability. Specifically, if a failed product only causes damage to itself, most jurisdictions will limit a plaintiff to contractual remedies. Some jurisdictions have expanded the ELD to interpret a home as a product, and as such, apply the ELD where damage is solely to the home and not to other property or persons.

In William Lansing, Oregon’s Court of Appeals rejected the idea that the ELD can apply to the construction of a home. Specifically, it found that the ELD only applies to financial losses, which are purely economic losses. It further confirmed that, while injuries to persons or property may have a financial component, they are not purely economic losses. As the court determined that damage to property is not a purely economic loss, it concluded that the ELD did not apply and, therefore, reversed the trial court’s dismissal of the action.

This case serves as a good reminder that when dealing with a construction loss, a subrogation professional should understand the application of the ELD within the loss location’s jurisdiction. Absent that understanding, a subrogation professional may file the wrong type of claim, which can lead to dismissal of the action.

Killer Subcontract Provisions

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Patrick McNamara | Porter Law Group

We are frequently requested by subcontractor clients to review the subcontract that has been prepared by the prime contractor, before our client signs it. While no two agreements are identical, there are a number of problematic contract provisions that appear in many agreements. Here is a list of ten such provisions (and their variations) that are potential “deal breakers”:

  1. PAY IF/WHEN PAID (e.g. “Contractor shall have the right to exhaust all legal remedies, including appeals, prior to having an obligation to pay Subcontractor.”) “Pay-if-paid” provisions (“Receipt of payment from Owner shall be a condition precedent to Contractor’s duty to pay Subcontractor”) are illegal in California. However, the only legal limit on “Pay-When-Paid” provisions is that payment must be made “within a reasonable time.” The example above, as written, essentially affords the prime contractor a period of several years following completion of the project before that contractor has an independent duty to pay its subcontractors – not a “reasonable” amount of time, to those waiting to be paid. A compromise is to provide a time limit, such as 6 months or one year following substantial completion of the project.
  2. CROSS-PROJECT SET-OFF (e.g. “In the event of disputes or default by Subcontractor, Contractor shall have the right to withhold sums due Subcontractor on this Project and on any other project on which Subcontractor is performing work for Contractor.”) Such provisions are problematic and likely unenforceable, as they potentially bar subcontractors’ lien rights. Such provisions should be deleted.
  3. CONTRACTOR/SUBCONTRACTOR RESPONSIBILITY FOR DESIGN QUALITY (e.g. “Subcontractor warrants that the Work shall comply with all applicable laws, codes, statutes, standards, and ordinances.”) Unless a subcontractor’s scope of work expressly includes design work, this provision should either be deleted or modified, with the addition of the following phrase: “Subcontractor shall not be responsible for conformance of the design of its work to applicable laws, codes, statutes, standards, and ordinances.”
  4. SUBCONTRACTOR CLAIM DEPENDENT ON OWNER PAYMENT OF CLAIM TO GENERAL CONTRACTOR (e.g. “Subcontractor’s sole and exclusive remedy for delays or disputed extra work shall be an extension of time, unless Contractor recovers additional compensation related to such delay or extra work from Owner.”) Such provisions should be deleted, as they ignore the fact that some subcontractor claims for extra work or delay are caused by the prime contractor or one of its other subcontractors.
  5. “LIEN-FREE” REQUIREMENT, REGARDLESS OF PAYMENT STATUS (e.g. “Subcontractor shall keep the Project and its property free from all liens, stop payment notices, or other encumbrances or claims, from any source. In the event a subcontractor or material supplier of any tier files a lien, stop payment notice, or claim, Subcontractor shall promptly have such lien or claim removed at its own expense.”) Such provisions need to be modified to include the following qualifier at the beginning of the sentence: “Provided Contractor makes full and timely payments to Subcontractor,”
  6. FULL CONTRACTOR OVERHEAD AND PROFIT ON DEDUCTIVE CHANGES (e.g. “In the event of deductive changes to the Work, the Contract Sum shall be reduced by a sum that includes costs associated with such deleted or reduced work, as well as Subcontractor overhead and profit equal to ____%.”) These provisions often originate with the prime contract, where the owner seeks a full credit for deleted work. The percentage should be either minimized or deleted, altogether, as deductive change orders are often as burdensome to administer as additive ones.
  7. NO DAMAGE FOR DELAY (e.g. “In the event of a delay to the Contract Time, Subcontractor’s sole remedy, regardless of the source or extent of such delay, shall be an extension to the Contract Time. In no event shall Subcontractor have any claim against Owner or Contractor for additional costs, extended overhead, or other delay-related damages.”) Public Contract Code §7102 limits these provisions on public works to delays that are reasonable and within the contemplation of the contracting parties. The same restriction should be applied to private works subcontracts.
  8. APPLICABLE LAW OTHER THAN CALIFORNIA (e.g. “Disputes arising from this Agreement shall be governed by Nevada Law.”) California projects, private or public, generally should be governed by California law.
  9. VENUE OTHER THAN CALIFORNIA (e.g. “The sole venue for resolution of disputes arising from this Agreement or the Work shall be Maricopa County in Arizona.”) Such provisions should be revised to designate a California venue. Parties to a construction project located in California cannot be required to litigate their disputes in another state.
  10. (LACK OF) MUTUAL WAIVER OF CONSEQUENTIAL (SPECIAL) DAMAGES. (e.g. “In the event of Subcontractor’s unexcused delay to Substantial Completion, Contractor shall be entitled to recover from Subcontractor Contractor’s costs and damages associated with such delay, including consequential damages.”) Any reference to “consequential damages” or “special damages” should be stricken. Liquidated damages, if included in the contract agreement, should be the sole remedy available to an owner and/or a general contractor for a subcontractor’s unexcused delays to a project.

Of course, having subcontract provisions revised requires agreement on the prime contractor’s part. Such agreement is particularly difficult if the provision in question also appears in the prime contract. If a general contractor (or, in turn, an owner) is unwilling to show any flexibility in these important terms, perhaps the subcontractor should reconsider whether signing the agreement is worth the additional risk.

Construction Change Order: Friend or Foe

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George Nicholos | Vandeventer Black

The dreaded Change Order or CO is almost unavoidable on most projects. COs commonly result because of things such as inaccurate specifications, ambiguous or inaccurate drawings, unforeseen conditions at a job site, issues with construction materials, faulty budgets or schedules, or additional requests or changes by an owner. CO logistics vary by contract, and it is important for all contract parties to understand, and follow, the change order requirements.

Either party may initiate a CO. Unfortunately, when the contractor has initiated the CO, skepticism may commonly arise from the owner’s team. One way to avoid this is to maintain a positive project relationship among the parties, including not letting issues linger. After-the-fact COs are particularly frustrating, and typically such delays waive entitlement to otherwise valid change claims.

Regardless, although initiating a CO may induce animosity between the parties, COs serve important purposes and are better viewed as a positive first step to avoid later disputes and disputes resolution processes.

Whether the CO is friend or foe depends on one’s perspective. From the perspective of a friend, properly administered CO processes provide a means for documenting scope changes, addressing pricing changes, and memorializing other changes or modifications to the base contract. They can prevent “scope creep” and, when properly memorialized, may confirm the agreement of the parties about the subject of the CO.

When properly prepared and administered, the CO clearly and effectively memorializes the “why, how, who, and what” of the change by providing a clear roadmap for why certain changes were made, who directed the changes, etc.  This helps prevent many problems that typically arise later after memories may have faded or intentions been forgotten. Accordingly, CO’s should include more, rather than less, detailed information, including approved sketches of the changed work as appropriate.

The parties do not want to be “penny foolish” about CO preparation. Even a small undocumented change in construction can result in significant negative impacts on the overall project, promote animosity and distrust among the parties, preclude otherwise allowable adjustments to the contract’s time, performance period, or both, and even result in unexpected liabilities.  Contractors and owners alike should seek the assistance of legal counsel to assist with the memorialization of key construction records for that day when your project encounters problems or changes and memories suddenly go hazy amid the finger-pointing.

Serving Notice of Nonpayment Under Miller Act

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David Adelstein | Florida Construction Legal Updates

Under the federal Miller Act, if a claimant is NOT in privity with the prime contractor, it needs to serve a “notice of nonpayment” within 90 days of its final furnishing.   In this manner, 40 U.S.C. 3133 (b)(2) states:

A person having a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the contractor furnishing the payment bond may bring a civil action on the payment bond on giving written notice to the contractor within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made. The action must state with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done or performed. The notice shall be served–

(A) by any means that provides written, third-party verification of delivery to the contractor at any place the contractor maintains an office or conducts business or at the contractor’s residence; or

(B) in any manner in which the United States marshal of the district in which the public improvement is situated by law may serve summons.

Although the bolded language states that, “The action must state with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done…,” courts have found that this requirement also applies to the notice of nonpayment.  See Prince Payne Enterprises, Inc. f/u/b/o Prince Payne Enterprises, Inc. v. Tigua Enterprises, Inc., 2019 WL 5394197, *4 (D. South Carolina 2019).

However, there is a certain liberality regarding the format of the notice as long as it states with substantial accuracy the amount claimed and the name of the party to whom the work was done.

For instance, in Prince Payne Enterprises, a sub-subcontractor—not in privity with the prime contractor—filed a Miller Act payment bond lawsuit.  To support that it provided a notice of nonpayment to the prime contractor, the sub-subcontractor attached a hodgepodge of documentation, none of which was applicable, to its complaint, as well as alleged that it demanded payment from the prime contractor within 90 days of its final furnishing date on the project.  The prime contractor moved to dismiss the Miller Act payment bond claim based on the inapplicability of the hodgepodge of documentation which included letters that came after the 90 days expired.  But, based on the allegation that the sub-subcontractor demanded payment on the prime contractor, the Court held:

While the dates and contents of the attached exhibits may not meet the notice requirements of the Miller Act, the court must accept the allegation that Prince Payne [sub-subcontractor] demanded payment from Tigua [prime contractor] within ninety days of last performing work as true. Discovery may reveal that this is not true or that none of the communications satisfy the Miller Act’s notice requirements; however, at this early stage of litigation, the court finds that Prince Payne’s proposed amended complaint sufficiently alleges a viable cause of action for a violation of the Miller Act.

Prince Payne Enterprises, supra, at *4.

This sub-subcontractor is likely in trouble supporting that it served a notice of nonpayment within 90 days of its final furnishing date.  However, it lived to see another day by surviving a motion to dismiss.  Summary judgment will be different.  This could have been avoided had the sub-subcontractor appreciated that to preserve a Miller Act payment bond claim, it MUST serve a notice of nonpayment within 90 days of its final furnishing.  Rights preservation is everything!