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What part of the contract do you not understand?

Surely this must have been a question for the court in Casey Indus., Inc. v. Seaboard Surety Co., 2006 WL 2850652 (E.D. Va. Oct. 2, 2006) -- but in the review of the opinion it looks as if it may have been overlooked. It certainly was not answered. Here was a case where a concrete subcontractor filed an action upon a payment bond issued in favor of the general contractor. The surety raised as a defense the "pay when paid" clause in the concrete subcontract. It was found that the Surety could not rely on the "pay when paid" clause as a defense to the payment bond claim. It is one thing to require that the contract, to include its pre-requisites for payment, be clearly incorporated in the bond to set forth the conditions for payment under a payment bond, but should one have to expressly, separately and distinctly incorporate the "pay when paid" clause into the bond agreement or, for that matter, any other specific conditions precedent, or otherwise, for payment to be entitled to utilize them as a defense to payment under the bond? While one would think this generally not necessary, under this opinion unless the "pay when paid" provision is expressly incorporated into the bond agreement, the surety may not assert the "pay when paid" language in the subcontract as a defense to a claim against the bond. The defense was unavailable as a matter of law. Thus, until this matter is further reviewed, revisited and revised, utmost specificity should be considered.

See also this case's treatment at the Construction Channel. (This entry was published by John Springer of Womble Carlyle's construction and real estate development practice group.)

Argument That Party Enforcing Liquidated Damages Clause Must Present Evidence Of Actual Damages Is All Wet

It is well established in North Carolina that liquidated damages clauses that are not a penalty and are reasonable in amount are enforceable. This is so even if no actual damages are suffered. What was not established in North Carolina is which party has the burden to prove such a clause is enforceable.

In a case of first impression, Seven Seventeen HB Charlotte Corporation v. Shrine Bowl of the Carolinas, Inc. (North Carolina Lawyers Weekly No. 07-07-0325) answers this question. In Seven Seventeen, hosts of an annual high school all-star football game entered into a contract with a Charlotte hotel to use the hotel five times between 2001-2005. The contract included a liquidated damages clause. The all star football game hosts cancelled the contract, moved the event to South Carolina, and got sued. In trial, neither party presented evidence of actual damages. The all star football game hosts got hosed in trial court, having to pay the Charlotte hotel over $118,000 in liquidated damages.

Defendant's brief, mislabeled as "Plaintiff-Appellant's Brief", set the stage for a soggy argument that just didn't float. The Court sided with the national majority of jurisdictions which hold that the party seeking to invalidate the stipulated damages provision has the burden since that party initially agreed to it. Said the Court: "'[P]lacing the burden on the party seeking to avoid a stipulated damages provision to prove that no damages were suffered or that there was no reasonable relationship between the actual or probable compensatory damages and those agreed upon', makes sense from a policy perspective."

Although not a construction case, Seven Seventeen means the obvious - an owner will not have to present evidence of its actual damages in order to prove the enforceability of the liquidated damages clause – which, after all, was drafted so that the owner wouldn’t have to present evidence of its actual damages. About the only thing surprising to this writer about the Seven Seventeen case is that the question was even asked – like whether the law of gravity applies in North Carolina Courts.

Right Now is Your Tomorrow

I recently attended ACI's Conference on Developing and Investing in Green Buildings in New York City. The program addressed green building incentives, valuation of green buildings, LEED, and contracting for LEED. I came away with a couple of impressions.

First, green building is here. At least eighteen states and the District of Columbia now have some form of green building requirement for public buildings, as do some progressive cities. Some states (ex: MD, NY, OR) and cities (ex: Arlington, VA) also provide incentives for private development. These incentives include fast track permitting, density bonuses, and tax deductions/credits. We are also seeing a number of private companies build green in jurisdictions that without green requirements or incentives (ex: Bank of America in Charlotte).

Second, there is a premium to building green, but you should see long term savings. Developers at the conference are seeing a 2-7% increase ($3 to $5 per sq. ft.) in building costs, but that is tempered by yearly cost savings of roughly $1 per sq. ft., and projections of a 10 fold cost savings over the life cycle of the building due to reduced maintenance and operating costs (ex: roughly a 36% decrease in energy consumption). One developer also noted that choosing not to build green may result in a building that is obsolete (and thus demands lower rents) when green becomes the standard.

Third, anecdotal evidence suggests that, short term, developers in our footprint are not seeing a return through increased rents. Although a green building is a good marketing tool, there is not yet enough evidence to convince tenants that they will see a reduction in operating expenses or an increase in productivity. However, one developer that attended said it hoped to see a rent premium as leases come up for renewal because tenants will have experienced costs savings by that time.

Finally, developers should pay special attention to contract provisions when building green. LEED objectives and goals should be clearly expressed in the contract, responsibility for goals and objectives should be assigned to the proper parties, and consequences for failure to meet the objectives and goals should be expressed (including the possibly of penalties). Parties should also keep in mind that LEED certification comes after final completion of the project, after a contractor has typically been paid in full.

Bills before the Georgia General Assembly - Part Deux

As promised last week, below is a summary of bills before the Georgia General Assembly addressing licensing and public works projects that may potentially impact the design and construction industry.

Protecting bidders on projects for local government. Under SB 146, for projects awarded by local government using competitive sealed bids, plans must be available on the first day of advertising for bids; and those plans must expressly indicate whether the contract will be awarded taking into consideration only the "base bid" – or the "base bid plus alternates." Local governments must disclose: (a) whether all state, federal, and local permits needed for the project have been obtained (or, if not, when permits are anticipated); and (b) whether all anticipated rights of way and easements required for the work have been obtained (and, if not, what is their status). Under SB 146, once a bidder is pre-qualified, that bidder cannot be later disqualified by the local government "without cause." Currently, local government can reject "any and all bids or proposals." Under SB 146, local governments will no longer be able to reject some – but not all – responsive bids.

Debarment of non-performing contractors. HB 202 allows the Georgia Department of Transportation ("GDOT") to disqualify contractors from bidding on either state public works construction contracts or construction or maintenance contracts for GDOT if that contractor is "25 percent behind in the performance of two or more of [those types of contracts]" – and is the cause of that delayed performance. Under the bill, GDOT is authorized to make that determination.

Contractor licensing law. SB 115, if passed into law, will postpone the date on which contractor licenses become mandatory in Georgia from January 1, 2008 to July 1, 2008. SB 115 changes the contractor licensing statute in other ways; for example: (a) it allows specialty contractors to perform work that is incidental to work in their specialty; (b) it clarifies that qualifying agents are responsible for oversight over their business’s contracting activities within the State of Georgia; (c) it extends the statute’s scope to cover installation of industrialized buildings – but carves out installation of manufactured homes; and (d) it provides for subcategories of general contractor licensing. A conflicting bill, SB 171, would entirely repeal the contractor licensing statute. If SB 171 should pass, it would be over a tidal wave of objection from the industry, which strongly supports licensing.

Reciprocal architectural licensing – education requirements. SB 237 requires foreign-state candidates for reciprocal architectural registration to show, in addition to an NCARB certificate in good standing: (a) a bachelor's degree in architecture, architectural engineering technology, or other bachelor's degree with a substantial concentration in architecture; and (b) at least four years of practical experience.

(This entry was published by David Roberts of Womble Carlyle's construction and real estate development practice group.)

Bills before the Georgia General Assembly

This entry is the first in a two-part series summarzing current bills before the Georgia General Assembly that could potentially affect the design and construction industry. Next week I will address licensing and public works legislation.

Anti-indemnity statute. By Georgia statute, construction contracts that purport to indemnify a person from liability for damages due to bodily injury or property damage caused by that person's sole negligence are invalid and unenforceable. Currently, that statute allows an exception when the liability is covered by a policy of insurance or an insurance agreement. HB 136 eliminates those exceptions – except for liability covered by workers compensation insurance.

Owners’ right to withhold payment for lack of insurance. A bill stalled that would have eliminated that right. HB 138, if passed, would require that construction owners (before work on-site could begin) review and accept (or reject) certificates or policies of insurance submitted to them by contractors and their subcontractors (of all tiers). An owner's failure to reject a policy in writing, under HB 138, deprives the owner of the right to withhold payment for lack of insurance coverage. Observers indicate that support for the bill appears to have waned after legislators learned, from industry sources, of several practical problems with enforcement.

Mechanics' and materialmen's liens.

• Single-family residential real estate. If enacted, SB 63 would eliminate mechanics' and materialmen's liens on "single-family residential real estate" – which is defined as all "owner occupied structure[s] for use as a dwelling for one family, including but not limited to houses, condominium units, or any combination of manufactured homes and lots." Another bill, SB 65, requires that a contractor (upon entering a contract) provide the property owner with a statutory notice of "certain parties’ lien rights[.]" SB 65 further requires that, before paying a contractor, the owner must obtain a sworn, written affidavit from the contractor stating that all of its subcontractors and materialmen have been paid. The bills states that "[f]ailure to meet [either requirement] shall invalidate any lien filed… against residential real estate" – inviting several obvious questions.
• Dissolution of liens by admission of erroneous filing. SB 64 allows a claimant to dissolve a claim of lien by filing a sworn affidavit with the clerk of the superior court in the county where the real estate is located, stating that the lien was "filed in error."

(This entry published by David Roberts of Womble Carlyle's construction and real estate development practice group.)

What has happened to equitable subrogation?

When one considers the recent case of RLI Ins. Co. v. John H. Hampshire, Inc., 461 F. Supp. 2d 364 (D. Md. 2006), one must ask has anyone even thought about the doctrine of equitable subrogation, which has long been established to assist the surety who is called upon to the benefit of its obligee, in this case the Owner. (See the Construction Channel's treatment here.) In this case, after a contractor abandoned its work, the owner determined that a significant number of exterior panels installed by the contractor had been installed improperly. The contractor’s surety agreed to remove and replace the improperly installed panels. The surety eventually sued the project architect, claiming the architect had a duty to inspect and supervise the work of the contractor and failed to do so. The Court said the architect was not liable to the surety because the architect owed no duty to the surety. But what about the architect's duty to the Owner, into who's shoes the surety is entitled to step under the doctrine of equitable subrogation.

By this case's treatment in the referenced site, it is suggested that in Maryland, when only economic loss is involved, there must be an “intimate nexus” between the parties. Where there is no contract between the parties, the “intimate nexus” requirement can be satisfied by showing an equivalent to contractual privity exists. Here, there was no “intimate nexus” between the surety and architect. The court declined to hold that the inspection and supervision requirements imposed upon the architect were as much for the protection of the surety as for the owner. Again, one must ask what has happened to equitable subrogation, which would arguably have yielded a different and more equitable result. (This entry published by John Springer of Womble Carlyle's construction and real estate development group.)