Monthly Archives: April 2021

Utah Owners Cannot Simply Rely on Construction Lien Registry Search Results to Find Valid Preliminary Notices

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Mark Morris and Tyson Prisbrey | Snell & Wilmer

In December 2020, the Utah Court of Appeals found that, because a contractor’s preliminary notice contained the statutorily required information, although in unconventional order, the notice was valid.

In Zion Village Resort, Pro Landscape U.S.A. performed work on a condominium development and filed preliminary notices with the Utah State Construction Registry pursuant to the state construction lien laws. Pursuant to Utah Code Ann. § 38-1a-501(1)(h)(i), a preliminary notice must include certain information, including the “name, address, telephone number, and email address of the person providing the construction work.” In Pro Landscape’s preliminary notices under the line “Person Furnishing Labor, Service, Equipment, or Material,” the Pro Landscape listed “Chad Hansen,” and provided an address, email address and telephone number. Under the line provided for “comments,” the notices stated that the “services [were] provided by Pro Curb USA LLC DBA Pro Landscape USA.” Pro Landscape later filed construction liens on various parts of the development.

Zion Village filed a petition to nullify the construction liens, arguing that the they were invalid because Pro Landscape failed to file valid preliminary notices as required by statute. The trial court concluded that the notices were filed by Chad Hansen, not Pro Landscape, and therefore the notices “neglected to include such basic information as the identity of the actual lien claimant.”

On appeal, Pro Landscape argued that the preliminary notices contained all the statutorily required information, including the name, address, telephone number and email address of the person providing the construction work. Zion Village argued that because Chad Hansen rather than Pro Landscape is listed on the line asking for identification of the “Person Furnishing Labor, Service, Equipment or Material,” the notices were deficient.

The court found that Pro Landscape, by identifying itself in the comments section of the preliminary notice, had substantially complied with the statute. “While Pro Landscape may have set forth the required information in an unconventional sequence, the preliminary notices it filed contained all statutorily required information.”

Zion Village argued that the court’s holding frustrated the practical functioning and purpose of the registry, which serves as a database that allows interested persons to search for preliminary notices on a property. When Zion Village searched the registry’s database for preliminary notices filed by Pro Landscape, none turned up in the result because “Chad Hansen” and not Pro Landscape was listed on its notices as the “Person Furnishing Labor, Service, Equipment or Material.” Zion Village asserted that interested persons should be able to rely on the search results without having to searching through all preliminary notices individually. The court was not persuaded, noting that the construction lien statute mandates the application of a “substantial compliance” standard, rather than a strict compliance standard.

The court’s holding in Zion Village stands as a warning to property owners that one cannot rely on the search results to determine whether a party has a preliminary notice on file. Given the “substantial compliance” standard, as long as a preliminary notice has the statutorily required information in the notices somewhere, it is valid.

Attorneys’ Fee Clauses are Engraved Invitations to Sue

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Dave McLain | Colorado Construction Litigation

As we start another trip around the sun, hopefully you are in the process of updating your form contracts, including purchase and sale agreements and express written warranties. Because the law and litigation landscape continually changes, it is a good practice to periodically update the forms you use in order to give yourself a fighting chance if and when the plaintiffs’ attorneys come knocking on your door. As you engage in this process, I hope that you will take a critical look at whether your contracts include a prevailing party attorneys’ fees clause and, if so, whether you should leave it in there. 

In Colorado, parties are entitled to recover attorneys’ fees only if provided for by statute or by contract. Historically, plaintiffs’ attorneys relied on two statutes, the Colorado Consumer Protection Act and Colorado’s Statutory Interest statute, to recover attorneys’ fees in construction defect cases. In 2003, the Colorado legislature capped treble damages and attorneys’ fees under the Colorado Consumer Protection Act at $250,000, effectively restricting plaintiffs’ attorneys from relying on the CCPA to recoup their attorneys’ fees, especially in large cases. In 2008, the Colorado Supreme Court issued its decision in Goodyear v. Holmes, stating that plaintiffs can only claim prejudgment interest under Colorado’s Statutory Interest statute, in cases where they have already spent money on repairs, not when they are suing for an estimate of what repairs will cost in the future. Without either the CCPA or the prejudgment interest statute to recover attorneys’ fees, plaintiffs’ attorneys most often now rely on the prevailing party attorney fee clause in contracts between the owner and builder, or in the declaration of covenants, conditions and restrictions in situations where a claim is prosecuted by an HOA.

In speaking with clients in the past, it seems that the conventional wisdom has been that homeowners or HOAs would be less likely to pursue legal action if there was a threat that they may have to pay the builder’s attorneys’ fees if they lose. While I cannot speak to any specific situation in which this clause has been used to successfully fend off a construction defect case, I can speak to the innumerable times that we have had to fight with plaintiffs’ attorneys about the fees they claimed because our own clients’ documents provided for prevailing party attorney fees.

Just for a moment, put yourself in the shoes of a homeowner or an HOA board member. Would you be more or less willing to pursue a construction defect action, or to push questionable claims, if you knew that at the end, you would have to pay your own attorneys’ fees out of the cost of repair ultimately awarded? Ifyour contracts provide for prevailing party attorneys’ fees, this is not a question that your buyers or HOAs will ever have to answer. With the clause in the contracts or CCRs, plaintiffs’ attorneys are able to say, truthfully, that they only get paid if they recover a cost of repair for you, by virtue of the contingent fee agreement used. Better yet, because of the prevailing party clause in the contract or CCRs, they will be able to get the builder to pay the attorneys’ fees, such that it will not even come out of the cost of repair awarded. Viewed in this light, the prevailing party attorneys’ fees clause is nothing more than an engraved invitation for your owners to sue.

As you start another year, consider whether the time is right to remove the prevailing party attorneys’ fees clause from your purchase and sale agreements and CCRs. It remains appropriate to seek attorneys’ fees from subcontractors actually performing the work, as part of their duties to defend and indemnify you, but I believe it is time to reconsider whether you want to provide that incentive to your homeowners or HOAs.

Key Legal Considerations for Modular Construction Contracts

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Fred Hedberg | Construction Law Zone

Modular construction is literally on the rise. It is rapidly displacing traditional stick-built construction for new commercial, industrial and residential buildings. Over the past decade, an increasing number of health care, education facilities and apartment buildings have been built using modular construction. As the need for housing, and especially affordable housing, has grown as a result of the COVID-19 pandemic, modular construction is becoming increasingly popular. 

Recently, the Canadian government, through the Canadian Mortgage Housing Corporation, launched a “Rapid Housing Initiative,” a $1 billion program utilizing only modular construction to rapidly construct affordable housing for its citizens. Similarly, the city of Toronto (which last year approved a plan to build 250 modular homes in response to homelessness) plans to build 1,000 modular homes by 2030. The pandemic also has resulted in an urgent demand for modules for medical facilities and schools. Modular construction allows contractors to build “leaner” and “greener” buildings while increasing quality control and improving site safety and potentially saving valuable time and money.

The modular process involves unique commercial and legal challenges not present in traditional contracting. In order to successfully navigate these challenges and to properly allocate risk, a well-drafted contract is important. Key legal considerations in drafting such contracts include: 

  • different governing laws if the fabrication site is located in a jurisdiction other than the project or worksite; 
  • the applicable law – common law or the Uniform Commercial Code (UCC); 
  • insurance and bonds; 
  • risk of loss at various points of transfer during the project; and 
  • proper quality assurance and control. 

Recognizing the rise in modular construction and its unique legal issues, ConsensusDocs published last October the first-ever industry standard contract – ConsensusDocs 753, Standard Agreement Between Constructor and Prefabricator, for a common type of modular construction, an off-site prefabrication of a component delivered and installed at a worksite. This contract is a useful resource for drafting modular construction contracts. 

GOVERNING LAW

A key legal consideration for modular projects is the governing law, especially if the fabrication site is located in a different jurisdiction than the project site. The governing law determines applicable building codes, licensing, permitting and safety requirements, labor relations, and the applicable statutes of limitation and repose. While most states apply the International Building Code, as amended, in the absence of a uniform modular construction building code, some states have amended their building codes to account for modular construction. ConsensusDocs 753 contains several key defined terms, including:

  • Components ̶ the prefabricated elements constructed at the Fabrication Site prior to installation at the Worksite; 
  • Fabrication Site ̶ the physical location(s) of the facility or facilities where the Components are constructed; 
  • Worksite ̶ the geographical area of the project location; and 
  • Carrier ̶ an independent, commercial shipping/transport contractor contracted by the Prefabricator to deliver the Components to the Worksite. 

ConsensusDocs 753 provides that the law in effect at the location of the project controls, except that parties can agree (where permitted by law) that the law governing the Components’ construction, transport and installation shall be either common law or the UCC to the extent either is in conflict with the law in effect at the project location. Consequently, it is crucial to identify the locations of the Fabrication Site and Worksite in any modular construction contract. 

Modular projects must comply with licensing and permitting requirements outlined in state and local building codes. ConsensusDocs 753 provides that the work shall comply with the state and local licensing requirements of the state where it is performed; to the extent allowed by law, the state and locale in which the Fabrication Site is located shall govern all licensing requirements relating to the construction of the Components. Safety concerns and Occupational Safety and Health Administration regulations should be considered in developing a prefabrication process for the Components, transporting them to the Worksite and using cranes and other equipment to lift them into place.

Prefabricators may need to comply with OSHA regulations regarding permitting and training if building the Components constitutes a confined space as defined by OSHA. Labor-related issues also should be considered for modular projects. ConsensusDocs 753 provides that labor and/or collective bargaining agreements shall apply to the work performed at the Worksite, but not to work performed at the Fabrication Site. Parties also should closely analyze statutes of limitations and repose for potential claims since they are based on the applicable governing law and whether the claim arises from a written contract, a sale of goods under the UCC, or a product deficiency.

COMMON LAW OR THE UCC 

Another key legal consideration is whether common law or the UCC governs the construction, transport and installation of the Components, since modular construction is often viewed as a hybrid transaction combining both goods and services. The UCC applies only to transactions in goods, not to contracts purely for services. If the contract is silent, courts typically apply a “predominant factor” test to determine whether the provision of goods or of services is more important to the overall transaction. If the transaction primarily involves the sale of goods, the UCC applies; if the sale of goods is ancillary to services, common law governs the transaction. While a few courts have applied the UCC to contract provisions dealing with goods, most courts have found modular construction contracts to be primarily for services. 

ConsensusDocs 753 is consistent with the majority of courts, stating that the work to be performed includes labor, materials, equipment, Components and services provided within its scope of work and performed at the Fabrication Site and Worksite (the “Subcontract Work”). To avoid application of products liability law and the UCC as well as rules generally not appropriate for construction projects, prefabricators should consider contracting as subcontractors, not suppliers. Accordingly, prefabricators might enter into agreements such as ConsensusDocs 753, rather than purchase orders, clearly stating that they are building modules to plans and specifications, rather than designing a product.

INSURANCE AND BONDS

Insurance- and bond-related issues should be carefully considered for modular projects. Prefabricators should ensure that insurers issuing policies are licensed in the jurisdiction(s) of the Fabrication Site and the Worksite. ConsensusDocs 753 requires the owner or constructor to purchase and maintain builder’s risk insurance to protect insureds from damage and loss to Subcontract Work occurring during storage or installation of that work at the Worksite. 

Thus, since Components are part of the Subcontract Work under ConsensusDocs, they are typically covered by builder’s risk insurance while being stored or installed at the Worksite. However, if Components are stored offsite after leaving the Fabrication Site, prefabricators should research whether a rider to the builder’s risk policy is necessary. Furthermore, because most of the work in modular construction is performed off-site at the Fabrication Site, Owner- or Contractor-Controlled Insurance Programs (OCIP/CCIP) may not be feasible since the labor performed at the Worksite often does not meet minimum requirements to qualify for such programs.

Fabricators also may be required to furnish performance and payment bonds. ConsensusDocs 753 provides that such bonds must be issued by a surety admitted in the state in which the Fabrication Site and the Worksite are located, and that they shall apply to and cover performance and payment for all Subcontract Work, whether such work occurs at the Fabrication Site or Worksite.

RISK OF LOSS

Risk of loss should be carefully considered in drafting modular construction contracts. If the Fabricator is a supplier of goods, the UCC should govern the transaction and risk of loss passes to the Constructor upon receipt of the Components. However, if the Fabricator is a subcontractor performing services, the risk of loss might pass on tender of delivery under the common law. 

ConsensusDocs 753 provides that risk of loss shall be upon the Prefabricator until the Components are physically delivered to the Constructor at the Worksite or other authorized location, unless otherwise agreed to or covered by builder’s risk insurance. It also defines responsibilities for the protection of the Subcontract Work during prefabrication, damage occurring during transportation and delivery, and damage occurring post-delivery, where such work is, is to be, or is not to be installed by the Prefabricator. 

The Prefabricator shall promptly remedy property damaged while in its care, custody and control or during transportation. It also shall take necessary precautions to properly protect the Subcontract Work from the time of delivery to the completed installation if it is to install that work; otherwise, the Constructor shall do so upon delivery to the Worksite.

Quality assurance and quality control also are key considerations when drafting modular construction contracts to protect against risk of loss and damage. ConsensusDocs 753 requires the Prefabricator not to release any Components to a Carrier, unless and until the Constructor confirms to the Prefabricator that each such Component conforms with the Subcontract Documents and has satisfied any and all quality assurance/quality control protocols established for the inspections of Components at the Fabrication Site.

ConsensusDocs 753 also obligates the Prefabricator to schedule all required tests, approvals, and inspections of all Subcontract Work performed at the Fabrication Site and the Worksite. It also gives the Constructor the right to enter the Fabrication Site to inspect the Subcontract Work, including stored materials, completed Components and partially completed Components.

CONCLUSION

A well-drafted contract is often the key to the success of any construction project. This is especially true for modular construction projects, which involve complex commercial and legal issues that should be carefully considered when drafting contracts for these unique projects. 

ConsensusDocs 753 is an industry standard form agreement that addresses key issues pertaining to these hybrid transactions. It is imperative that parties understand the law governing all aspects of these transactions, from off-site fabrication to transport and delivery to storage to installation, in order to satisfy all applicable building codes, including licensing and permitting requirements, safety and OSHA regulations, labor agreements and insurance and bonding requirements for these projects. Therefore, parties are encouraged to seek competent counsel to review and advise on particular legal considerations unique to anticipated transactions involving modular construction.

Owner Liability To Construction Subcontractors In Contract Or Quasi-Contract

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Bradley Polina | Cole Schotz

The typical arrangement on most construction projects is that the property owner or developer engages the services of a general contractor or construction manager, which in turn subcontracts the work out to the various trades pursuant to a number of subcontracts.  Under this standard arrangement, subcontractors seeking payment for their work are generally limited to recovering funds from the general contractor or construction manager, as that is the party they contracted with.  Generally, under such an arrangement, there is no basis for an unpaid subcontractor to sue the property owner or developer for nonpayment because there is no contract between them.  (The obvious exception is a mechanic’s lien foreclosure action, where unpaid subcontractors, among others, can directly pursue a claim against the real property at issue, even where they do not have a contract with the owner.)

Can an unpaid subcontractor nevertheless sue an owner or developer on a “quasi-contract” theory of unjust enrichment or quantum meruit, to recover funds due on a construction project?  The answer is also generally “no,” as reaffirmed by a recent decision of Justice Melissa Crane of the New York County Supreme Court in the case of G&Y Maintenance Corp. v. 540 W. 48th St. Corp., 2021 NY Slip Op 31206(U).  New York law in this area holds that a property owner who contracts with a general contractor does not become liable to a subcontractor on a “quasi-contract” theory unless it expressly consents to pay for the subcontractor’s work.  Further, an owner’s acceptance of the subcontractor’s work also does not create a payment obligation.

In G&Y Maintenance Corp., an HVAC subcontractor entered into an oral subcontract with a general contractor, and alleged that it was owed funds due under the contract and on a change order.  The subcontractor filed suit against the owner asserting claims of unjust enrichment and quantum meruit.  Justice Crane dismissed the subcontractor’s claims against the owner, because the subcontractor had not entered into a contract with the owner, and also because the owner had not “assumed an obligation” to pay for the subcontractor’s work.

The subcontractor also argued that, because its contract with the general contractor was only oral, and not written, it should be permitted to pursue payment directly from the owner.  Justice Crane also rejected this argument, concluding that the owner could not be held liable to the subcontractor that had contracted only with the general contractor, simply because the subcontractor did not have an “express” contract with the general contractor.

The decision in G&Y Maintenance Corp. confirms the basic principle that an owner is generally not liable to a subcontractor with which it has not entered into a contract (except in cases seeking foreclosure of a mechanic’s lien).  By the same token, however, the decision is a reminder that an owner may potentially be held responsible for payments to subcontractors if the owner undertakes conduct reflecting an assumption of such payment obligations – such as directing subcontractors and making payments directly to them so that that the subcontractor is “working for” the owner itself, or terminating the general contractor and assuming direct owner oversight of subcontractors.

It’s My Construction Contract, I Can Arbitrate Where I Want

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Patrick Lindmark | Taft Law

“[W]hen parties agree to arbitrate all questions arising under a contract, the [Federal Arbitration Act] supersedes state laws lodging primary jurisdiction in another forum, whether judicial or administrative.”[1]

Subcontractors know all too well that out-of-state prime contractors and owners often include clauses in construction contracts that require all disputes be resolved in, and subject to the laws of, a state different from where the project is located. These “choice of law” and “forum selection” clauses are often relegated to the ends of contracts and most subcontractors lack the bargaining power necessary to negotiate these terms. This ability to force a smaller subcontractor to fight a lawsuit in another state provides a “home court advantage” and oftentimes presents a hardship to the subcontractor, which ultimately may deprive that party of its “day in court.”

Not only do these provisions make it costlier and more difficult to pursue or defend a lawsuit, but they can also complicate the subcontractor’s work during construction. Issues such as indemnity, prompt payment, mechanic’s liens, limitations of liability, cost shifting, and statutes of limitations vary by state and can materially affect a subcontractor’s rights and remedies. A subcontractor that does not understand the nuances of a different state’s laws and the effect of those laws on its work will be in for a rude awakening should a problem arise during construction. For instance, a construction contract subject to the laws of the state of Texas will allow for an aggrieved party to recover attorneys’ fees if it prevails on a breach of contract claim regardless of what the contract says about fee shifting.[2] A subcontractor unaware of this statute might mistakenly believe that each party would have to bear its own attorneys’ fees in a legal dispute regardless of which party ultimately prevailed. 

In an effort to equalize the playing field, and protect in-state contractors from having to fight a lawsuit in a distant jurisdiction, approximately 28 states have enacted some type of home-court statute. These “anti-forum” statutes typically provide that regardless of what contractual choice of law and venue the parties selected, a contract that is principally for the construction or repair of an improvement to real property is subject to the laws of that state and any dispute regarding the project must be venued in that state. Provisions in the contract to the contrary are void as against public policy. 

Despite the best efforts of these state legislatures, contractors do have at least one potential avenue available to make certain the forum selection provision — and possibly choice of law — in the contract is enforced regardless of the project state’s statutory scheme — arbitration.

Several courts have held that the Federal Arbitration Act (FAA) preempts an otherwise applicable state anti-forum statute. Those courts hold that the forum selection provision in the contract forms part of a binding agreement to arbitrate, even if different from the jurisdiction in which the project is located.[3] Section 2 of the FAA provides that:

A written provision in any…contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.[4]

According to the Supreme Court, this “primary substantive provision” of the FAA “is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” Moses H. Cone Mem’l Hosp. v. Mercury Construction Corp., 460 U.S. 1, 24 (1983). In addition, the Supreme Court has also held that the parties’ contractual choice of forum should be enforced except in the most unusual cases, and that the party resisting the forum-selection clause (i.e., the plaintiff who filed in a different court) has the burden of establishing that public interests disfavoring transfer outweigh the parties’ choice. Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas 571 U.S. 49 (Dec. 3, 2013).

A number of lower court decisions have also found that a properly drafted agreement to arbitrate preempts a state’s anti-forum statute under the FAA. See, e.g., Bell Prod., Inc. v. Hosp. Bldg. & Equip. Co., 2017 WL 282740 (N.D. Cal. Jan. 23, 2017);  R.A. Bright Construction, Inc. v. Weis Builders, Inc., 930 N.E.2d 565 (Ill. App. Ct. 3d Dist. 2010); LaSalle Group, Inc. v. Electromation of Del. County, Inc., 880 N.E.2d 330 (Ind. Ct. App. 2008); M.A. Mortenson/The Meyne Co. v. Edward E. Gillen Co., 2003 WL 23024511 (D. Minn. Dec. 17, 2003);and Cleveland Construction, Inc. v. Levco Construction, Inc., 359 S.W.3d 843 (Tex. App. Houston 1st Dist. 2012). In addition, the American Arbitration Association rules also provide that, when the agreement selects a locale for the arbitration, “the locale shall be that specified in the agreement.” R-12, AAA Constr. Indus. Rules.

Arbitration has long been a favored forum for dispute resolution in construction projects because of its speed, potential for reduced costs, ability to have an expert in the industry decide the case, and the private nature of any decision. As the popularity of anti-forum statutes continues to rise, the enforcement of forum selection provisions — and possibly choice of law — can now be added to that list of benefits. Although it remains to be seen whether every state will enforce venue selection in arbitration agreements despite the existence of an anti-forum statute, a well-drafted arbitration agreement clause that triggers the FAA preemption will go a long way towards ensuring the terms of the contract remain enforceable.

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[1] Preston v. Ferrer, 552 U.S. 346, 359 (2008).

[2] Tex. Civ. Prac. & Rem. Code § 38.001.

[3] Although not addressed by the cases cited in this article, it is also possible that the FAA might preempt any state statute dictating that the contract is subject to the laws of a state different from what the parties selected in the contract.

[4] 9 U.S.C. § 2.