Category Archives: Construction

Proposed Changes to The Retainage Law for Massachusetts Private Construction Projects

By on June 30, 2015

*with contributions from Christopher D. Strang

In November 2014, the Massachusetts Legislature passed Mass. Gen. Law c. 149, § 29F, entitled “Payment of Retainage in Private Construction Projects” (“The Retainage Law”).  The Retainage Law reduced the amount of retainage that can be withheld on many large private construction projects. It also provides deadlines for paying retainage amounts and methods for determining the date of substantial completion.  The Massachusetts Senate recently held hearings on proposed Bill Number 1006, which seeks to amend the statutory language of this law.

Under the changes proposed in Bill 1006, The Retainage Law would be limited in its application and would only control the amount of retainage withheld on certain private construction projects. Below is an explanation of the standards The Retainage Law currently sets forth, followed by an explanation of the changes Bill 1006 proposes.

Projects Covered by The Retainage Law

The Retainage Law applies to all private construction contracts entered into after November 6, 2014 valued over $3 million dollars, with the exception of residential projects for four or fewer units.

Limitations on Retainage

Retainage is specifically limited to 5% of each periodic payment. Contracts that either waive, limit or subvert the 5% retainage cap may be void and unenforceable under the statute.

Notices of Substantial Completion

Under The Retainage Law, general contractors must submit a “Notice of Substantial Completion” to the owner within 14 days of determining that it has achieved substantial completion. The statute defines “substantial completion” as the stage in the project where the project work is sufficiently complete as to permit the owner to occupy or utilize the premises for its intended use. Substantial completion may be applied to the project as a whole or to a phase of the entire project where the contract permits substantial completion for project phases.

The owner then has 14 days to notify the general contractor whether it accepts or rejects the Notice of Substantial Completion. To reject it, an owner must notify the contractor in writing and include “the factual and contractual basis for rejection,” along with a certification that the rejection was made in good faith. Rejection of the Notice of Substantial Completion permits the contractor to utilize the dispute resolution procedures provided for in the contract, which must begin within 7 days after the rejection (unless the contractor later resubmits a Notice of Substantial Completion). If the owner fails to deliver notice of its rejection within 14 days, or fails to comply with the requirements of Section 29F(d), the date indicated by the contractor in the Notice of Substantial Completion will be deemed accepted by the owner.

The owner has 14 days from the date the Notice of Substantial Completion is accepted to submit a written punchlist to the contractor. The punchlist must describe all incomplete or defective work items and deliverables required of the contractor, and include a certification that it is made in good faith. A “Deliverable” is defined by Section 29F(a) as “a project close-out document that shall be submitted by the [contractor] seeking payment of retainage under the [contractor’s contract] for construction; provided, however, that a lien waiver or release, which is a deliverable, shall comply with chapter 254; and provided further, that ‘deliverable’ shall not include any document affirming, certifying or confirming completion or correction of labor, materials or other items furnished or incomplete or defective work.” The contractor must then pass on a written punchlist to each subcontractor it is holding retainage against within an additional 7 days (or 21 days after the date the Notice of Substantial Completion is accepted), detailing all incomplete or defective work items and deliverables. The punchlist to the contractor’s subcontractors may include items beyond those on the owner’s punchlist and must also include a certification that it is made in good faith. Both the general contractor and subcontractors are permitted under The Retainage Law to dispute the items listed on punchlists.

Applications for Payment of Retainage

General contractors and subcontractors must submit a written application for payment of retainage within 60 days after the date of substantial completion for a final and binding resolution regarding a disputed date. This application must include a written list of all punchlist items that were completed, repaired, and delivered, and must be certified by the submitting party that it was made in good faith.

The owner then has 30 days to provide payment of retainage to the contractor. When providing payment of retainage, owners are permitted to withhold portions of the retainage to cover incomplete or defective work, limited by the following:

  • for incomplete, incorrect or missing deliverables, either (a) the value of the deliverable, as mutually agreed upon in writing between the owner and contractor or (b) if no value has been agreed upon, the reasonable value of the deliverables, not to exceed 2.5% of the total adjusted contract price;
  • 150% of the reasonable cost to complete or correct incomplete or defective work items; and
  • the reasonable value of claims and any costs, expenses and attorney’s fees incurred if the claim is allowed under the contract.

Portions of retainage may only be withheld where the contractor seeking payment received a detailed punchlist from the owner prior to the date payment is due. The time period for payment under an application for payment is extended by a period of 7 days for the contractor at each tier of contract below the general subcontractor. Contractors may submit further applications for payment of retainage as work is completed on the project. The Retainage Law specifically prevents owners from withholding retainage payments otherwise due to subcontractors where the general contractor is not in default. General contractors have 7 days to forward retainage payments to subcontractors.

At a minimum, The Retainage Law requires applications for payment of retainage to be submitted at least once a month. Rejection of an application is also subject to dispute resolution procedures, which may be initiated 30 days after the rejection of an application for payment of retainage.

Bill No. 1006 – Proposed Changes to The Retainage Law

Bill 1006, if passed, will dramatically change the scope and effect of The Retainage Law. It would add exemptions for construction projects which are financed or supported, in whole or in part, by state or federal mortgage assistance, special taxing arrangements, tax credits, grants, issuance of bonds, loans, loan guarantees, debt, or equity assistance.

It also proposes removing the sections relating to notices of substantial completion and applications for payment of retainage entirely. Bill 1006 would reduce The Retainage Law to the following content: (1) retainage is limited to 5% of the contract price and (2) contracts which require or permit retainage in excess of 5% of the contract price will be void and unenforceable insofar as any such excess is concerned.

Impact of The Retainage Law and Bill No. 1006

Citing practical issues with meeting the deadlines set forth in The Retainage Law, some project developers and owners have articulated a desire to remove large portions of it. In particular, they cite the 14-day limitation to accept or reject the date of substantial completion as impractical and unachievable. Some general contractors criticize the additional 7 days for paying subcontractors, and for completing and forwarding punchlists. Some also claim the law does not adequately consider the complexity of communication between multiple parties on large projects.

Bill 1006 alters the language that retainage may not exceed 5% of “any progress payment” to state that retainage may not exceed 5% “of the contract price.” While the amount would equal out at the end of the project, the proposed changes would arguably allow an owner or higher tiered contractor to withhold more than 5% from any single payment, so long as the amount equals 5% of the total contract price. Such a change could negate the benefit contractors receive through larger progress payments throughout a project, but would have no impact on the amount of retainage outstanding at the end of the project.

Whether Bill 1006 will be enacted and what additional changes, if any, are to be made to the Retainage Law will be determined over the next several months. It is clear that there is significant interest in creating consistency in retainage guidelines for the construction industry.

The foregoing information is a general summary regarding proposed changes to retainage in private construction projects in Massachusetts. If you are uncertain about anything regarding the amount of retainage withheld on a project or the process of obtaining payment for retainage amounts, contact your construction attorney to ensure the necessary steps are taken to achieve the best possible outcome.

 

Avoiding Fatal Errors When Submitting Bids on Public Construction Projects

By on June 18, 2015

Those who perform public work in Massachusetts know the phrase “lowest, responsible and eligible” bidder well, as it applies to the standard for awarding subcontracts on public construction projects subject to the bid statutes.  However, as many subcontractors have experienced, some of the bid requirements to be considered an “eligible” bidder are in fact waivable by the awarding authority.

 The nuances of public bidding are that some bid requirements, even those that are statutory, are waivable by the awarding authority.   For instance, the bidding statute requires that a sub-bidder must include its certificate of eligibility and update statement with its bid to establish prequalification.  However, the Attorney General (“AG”) has held that a bidder can actually submit its certificate of eligibility after the opening of the bids.  Yet, failure to submit the update statement at the time of bid opening necessitates automatic rejection of the bid.  Why this discrepancy?  In evaluating whether an awarding authority has the discretion to accept a bid that fails to include a certificate of eligibility at the time of bid opening, the AG reasoned that awarding authority can verify contemporaneously whether a bidder is DCAM certified.  Therefore, there is no harm in allowing a bidder to submit its certificate a few hours later.  Conversely, allowing a bidder to furnish its update statement after bid opening would result in an unfair advantage because the update statement, unlike DCAM certification, cannot be independently and instantaneously verified.  Allowing a bidder to submit a document that is entirely within the bidder’s control, like the update statement, could result in “two bites of the apple,” as the saying goes, because the bidder could decide after bid opening whether to submit the document based on whether the bidder still wants the job. 

So how does one determine which deviations from the bid requirements would be minor enough to warrant an awarding authority to use its discretion to accept an otherwise non-complying bid?  It all comes down to whether or not a bidder would have an unfair advantage which would undermine the purpose of the competitive bidding statute to obtain the lowest price for work that competition among responsible bidders can secure.  For instance, as explained above a certificate of eligibility submitted late is not unfair as there is no upper hand gained by a certificate-less bidder.  Conversely, a bidder is not allowed to submit bid security a few hours late.  The AG explained allowing a bid bond to be submitted even a few hours late could upset the balance of fair bidding as some bidders could abuse such leniency by submitting a low bid without a bid bond and then have second thoughts after the opening and nullify their bid by never filing a bond.  Below is a brief summary of bid requirements that the AG has determined require rejection by the awarding authority, and those for which the awarding authority may use its discretion in determining whether to reject.  It’s important to recognize that an awarding authority is not compelled to overlook “waivable” bid requirements.

Bid Requirements which the AG has held may be waived by the awarding authority, in its discretion: 

1.  Minor clerical errors.

–Such clerical errors much be minor enough that they are obvious and deceive no one.

2.  Failure to submit non-statutory items where bid documents do not make submission mandatory.

–These include items which do not go to the scope of work or price of the work.

3.  Noncompliance with discretionary minority requirement.                                                         

4.  Failure to acknowledge addenda which do not go to price and scope.

–Such addenda must be small or insignificant as to be a minor deviation.

5.  Update statement with an omission.

 –Massachusetts Courts have held that even if a contractor makes an intentional misrepresentation on the update statement, the awarding authority still has the discretion to terminate, but is not required to terminate the contract.

6.  Submitting certificate of eligibility after bid opening.

There are certain deviations from the bid requirements that mandate bid rejection by the awarding authority:

1.  No bid bond.                                                                                                                                            

2.  No signature on bid.                                                                                                                                  

3.  Failure to submit update statement.    

4.  Failure to timely submit bid.                                                                                                                

5.  Bids that are incomplete, obscure, or contain conditions.

–For example, failure to bid on materials specified in bid documents; failure to acknowledge addenda which affect price and scope of work; or not bidding on the amount of material specified.  Another pitfall would be a bidder who put conditions on the bid price or does not comply with specifications but tries to change them.

Of course, the statute also provides modes of protesting the award of a contract.  A bidder can chose to go to either Superior Court, or to the Attorney General’s office to protest a bid award. Because these issues are often very fact specific, bidders that may have been aggrieved by the awarding authority or other parties in the bid process should consult their construction attorney to determine whether there are grounds for a bid protest, and to provide the bidder with guidance on the bid protest process.

Payment Bonds on Federal Construction Projects – Last Date of Work

By on June 3, 2015

When did you last work, for the purposes of filing a timely payment bond claim on a federal public construction project?

The Miller Act, which governs federal construction project payment bond claims, provides that suit be brought within one-year from the day on “which the last of the labor was performed or material was supplied by the person bringing the action.” 40 U.S.C. § 3133(b)(4). The same date is used to determine the 90-day notice requirement for sub-subcontractors and material suppliers. What constitutes labor or material supplied in the context of contract work is often not clear; work performed prior to a subcontractor’s substantial completion clearly counts. Warranty work that involves coming back to repair defects in the subcontractor’s own work generally does not. However, “punch list” items may sometimes include both incomplete contract work (which generally counts) and defective work performed that requires correction (which generally does not count). Sometimes the distinction is not entirely clear, and courts struggle to find a bright line rule on this point.

Massachusetts Federal Court Standard for “Last Date of Work” on a Miller Act Claim

The Massachusetts’ standard is that the one-year statute of limitations will begin to run on the last date on which materials or labor were supplied on the project for the purpose of completing subcontract work. U.S. for Use & Benefit of Lab. Furniture Co. v. Reliance Ins. Co., 274 F.Supp. 377, 379-80 (D.Mass. 1967) (emphasis added). Corrective work, which is performed for the purpose of making repairs following the inspection of the project, will not extend the statutory deadlines. D.D.S. Industries v. C.T.S., Inc., 2012 WL 2178962, *1 (Mass.Super. June 13, 2012) (making clear that the date of substantial completion is not the relevant date).

For material suppliers, the “date of last work” is the day of last supplying material on the project. The First Circuit, which encompasses Massachusetts federal courts, ruled that where a supplier provides material on a single, federally-owned project, all material supplied will be covered by that project bond.  This is true regardless of whether the material supplier and general contractor treat each delivery of project material as part of one contract or under distinct and separate contracts. G.E. Supply v. C & G Enterprises, Inc., 212 F.3d 14, 18 (1st Cir. 2000).

Massachusetts considers punch list work provided as a requirement for completion of the project to be contract work; whereas punch list work provided as a correction, repair, or as clean up, is not contract work and will not prevent the statutory deadlines from running. U.S. for Use & Benefit of Lab. Furniture Co. citing U.S. for Use and Benefit of Austin v. Western Elec. Co., 337 F.2d 568, 572-75 (9th Cir. 1964). The value of materials supplied is not relevant in determining whether work was provided to complete the contract or as corrective work. Labor and materials supplied which are ultimately not used in the project still count as “work,” for statute of limitation purposes, so long as it is toward completion of the contract work. In U.S. for Use & Benefit of Lab. Furniture Co., the court considered replacement of plastic identification buttons on faucets and nozzles in a physics laboratory “corrective” punch-list work and could not extend statutory deadlines. The court weighed the following key factors in reaching this conclusion: (1) the buttons were supplied as replacements for buttons previously provided during the original performance of the subcontract; (2)  seven months passed between when the subcontractor substantially completed work and the installation of replacement buttons; (3) four months elapsed after termination of the subcontractors’ contract until the button replacement; and (4) a demand letter sent to the subcontractor’s surety initiated the replacement work. 

An Alternative Standard for Determining the “Last Date of Work” on a Miller Act Claim

The Fifth Circuit Court of Appeals created a test, which is not the law in Massachusetts at this time, to determine whether labor and material will be considered “contract work” or “corrective work.” The test involves weighing the following factors: (1) the value of the materials, (2) the original contract specifications, (3) the unexpected nature of the work, and (4) the importance of the materials to the operation of the system in which they are used. U.S. for Use of Georgia Elec. Supply Co., Inc. v. U.S. Fidelity & Guaranty Co., 656 F.2d 993, 996 (5th Cir. 1981).[1]

This standard was adopted by the Eleventh Circuit Court of Appeals in Southern Steel Co, Inc. v. United Pacific Ins. Co., 935 F.2d 1201 (11th Cir. 1991). Based on the four above factors, the Court held that work to replace defective locks in a county jail were arguably “contract work” as repair or replacement of defective locks was called for under the original contract; replacement of the locks necessary due to circumstances outside the subcontractor’s control, and were therefore unexpected; that functional locks were deemed very important to operating the jail; and, given the circumstances of the case, the unclear value of the work was immaterial.

Additionally, the Fifth Circuit’s test is applied in Miller Act claims before the District Court for New Jersey. In U.S. v. Fidelity & Deposit Co. of Maryland, the court held that operation and maintenance manuals, provided approximately one year after the other subcontract material and labor, were “contract work” within the meaning of the Miller Act, and therefore tolled the statute of limitations until the date upon which they were provided. 999 F.Supp. 734, 747 (D. NJ 1998). In applying the test from the Fifth Circuit, the court held that the value of the manuals ($5,000) was substantial, regardless of the overall subcontract value ($700,000); that contract specifications specifically provided for the provision of the manuals; that an item containing instructions for repairing equipment does not make that item itself a repair item; and that the manuals were sufficiently important to operating the equipment provided under the contract.

What This Means for Subcontractors and Material Suppliers on Federal Construction Projects in Massachusetts

While the Fifth Circuit’s standard is similar to the standard followed in Massachusetts, it arguably applies a more predictable standard for determining whether the work is “contract work.” The benefit of the four-factor test developed by the Fifth Circuit is that it allows courts to assess standard categories for the work and allows flexibility to value more persuasive factors at a higher value, as opposed to missing or unclear factors. The Fifth Circuit’s test could be adopted by the Massachusetts federal court, as there is currently some ambiguity about what constitutes a date last worked on federal projects remains.

The above information is only meant to provide a general summary regarding rights and obligations for recovering under payment bonds provided on federal public construction projects. Because each project presents a different set of facts, the process and outcome of attempting to recover under a project payment bond will vary depending on the circumstances. If you are uncertain about anything regarding your company’s ability to recover under a payment bond, you should contact Massachusetts construction attorney to ensure the necessary steps are taken to achieve the best possible outcome.

[1] In U.S. for Use of Georgia Elec. Supply Co., Inc. v. U.S. Fidelity & Guaranty Co. the Fifth Circuit Court of Appeals interpreted Georgia state law, the language of which mirrors the language of the Miller Act.

Proposed Bill Targets “Wage Theft” in Massachusetts

By on May 26, 2015

Strang Scott has previously written about both the Wage Act, the Massachusetts law protecting the earnings of workers, as well as the independent contractor statute, which governs the classification of workers as either employees or independent contractors. Violating the Wage Act and independent contractor statute can have significant real-world consequences. One consequence is a state investigation of wage theft. “Wage theft” is a broad term signifying an employer’s illegal retention of earned wages. The Boston Globe recently reported that “wage theft” is rampant throughout the construction industry. Wage theft often incurs in conjunction with the misclassification of workers as independent contractors, particularly at the subcontractor level where many workers are paid in cash. According to the Globe, the Massachusetts attorney general’s office has issued 253 wage-related citations to the construction industry alone over the last eighteen months, totaling more than $1.6 million in penalties and unpaid wages. The Attorney General’s office views investigating and prosecuting wage theft as a priority.

Employers who commit wage theft or misclassify their workers do so at substantial risk. Any worker is free to file a complaint with the Attorney General’s office, which will conduct a preliminary investigation or allow the worker to file a private law suit. Should the Attorney General ultimately find that a violation occurred, penalties start at $10,000 for non-willful violations, and $25,000 for willful violations. Repeat violations incur higher penalties, and willful violations may be further punished by debarment, preventing offending companies from seeking public contracts.

Current Massachusetts law holds the employer and the employer’s owners and/or managers liable for wage-related violations, but the legislature is considering expanding on current law. State Senator Sal DiDomenico has filed a bill to address the wage theft problem. Among other provisions, the bill (currently known as S.966) will hold “lead companies” responsible for wage violations. “Lead companies” are defined as any business entity that obtains or is provided workers directly from a labor contractor or indirectly from a subcontractor. In other words, should this bill become law, first tier subcontractors and general contractors would share liability for wage issues, include wage theft and independent contractor misclassification. Opponents of the bill have highlighted the potentially unfair burden the legislation would place on honest general contractors, and it is unknown if the bill will ultimately become law. However, all employers (particularly subcontractors, general contractors, and other entities operating in the construction industry) should properly classify all of their existing workers and be advised that the legislature may increase their direct liability for unpaid wages and misclassified workers. Employers should consult with their counsel to ensure that all workers are properly paid and classified.

 

Subcontractors: Do You Really Know What You’ve Waived in Your Lien Waiver?

By on April 27, 2015

Many subcontractors treat lien waivers interchangeably:  that is, if you’ve seen one, you’ve them all.  More and more, treating lien waivers in this manner could lead to significant and costly consequences.  Increasingly, general contractors and construction managers are providing subcontractors and suppliers with a new breed of lien waiver.  Unlike traditional lien waivers that sought only to protect the owner from the prospect of unwanted labor and materials (mechanic’s) liens cropping up on their projects, many new “lien waivers” are crafted with the intent for the subcontractor to agree to far more than a simple waiver of its lien.

In New Hampshire, and other jurisdictions, it’s well-settled law that contractors and subcontractors may waive their right to assert or perfect a mechanic’s lien by contract.  Savvy owners, developers and general contractors have long drafted contracts with this in mind.  As more and more subcontractors rejected provisions that limited or restrained their right to assert mechanic’s liens, owners, developers and general contractors have started to shift additional waiver language from subcontracts into lien waivers.  As an illustration, consider the following, taken in part from a lien waiver recently reviewed by the author:

 “In consideration of receipt of payment, the undersigned irrevocably and unconditionally releases and waives any and all mechanic’s liens or other liens or right to claim any and all mechanic’s liens or other liens against [the property].  Additionally, the undersigned waives and releases any and all other claims against the Owner, the property or the Contractor, or any other claims of any kind whatsoever in connection with the Subcontract and the property.  The undersigned shall defend, indemnify and hold harmless the Owner and Contractor against any lien, bond, claims or suits in connection with the materials, labor and everything else in connection with the subcontract.”

In this instance, the subcontractor waived not only its right to assert a mechanic’s lien or any other lien upon accepting payment, but the subcontractor also waived its right to assert ANY claim related to the contract or the property.  Furthermore, the subcontractor has affirmatively agreed to indemnify the owner and contractor for any claims connected to the materials, labor or “anything else in connection with the subcontract.”  Among other things, this means that contractor has agreed to pay the general contractor and the owner for any costs they might incur in dissolving a lien on the project arising from the subcontractor’s sub-subcontractors or suppliers or in resolving any other claim or lawsuit connected with the sub-subcontractor or material supplier’s involvement in the project.  This so-called “waiver,” contains substantially more than a waiver of the subcontractor’s right to claim a lien in consideration of its partial payment on the subcontract.  

Some lien waivers go a step further.  Consider the following language, taken in part, from another lien waiver recently reviewed by the author:

 “In consideration of the receipt of the payment above, the receipt and sufficiency of which are hereby acknowledged, [the subcontractor] releases and forever discharges [the contractor and owner] of and from any and all claims, causes of action, liabilities and other obligations respecting payment for, upon or by reason of work, labor and/or materials furnished through the date shown below to the construction project.”

At first blush, this provision appears ordinary enough.  A more thorough consideration of the highlighted language, however, reveals that the provision is carefully calculated to insure that each month the subcontractor waives its right to pursue payment for all work performed before the date the lien waiver is signed. 

So why is this a problem?  To the extent that the subcontractor signing such a lien waiver performed extra work, change order work or has disputed work that occurred prior to signing the lien waiver, and the subcontractor accepts the payment referenced in the lien waiver without carving an exception for the added, changed or disputed work, the subcontractor has agreed to relinquish its right to any further payment, a lien or a claim for payment for that work.  In other words, the subcontractor has agreed not to be paid anything further for work performed through the date the lien waiver is signed, regardless of whether the subcontractor is otherwise entitled to payment.  In tying the subcontractor’s waiver to a particular date in time, rather than to an agreed upon amount to be paid, this waiver extinguishes any claim for payment for any work performed that wasn’t included in the subcontractor’s payment for which the lien waiver was signed.  This subtle, but very important distinction, can prove costly when the subcontractor fails to appreciate its impact on its right to payment.

Other lien waivers seek to make the subcontractor a trustee, converting the funds paid to the subcontractor into trust funds for the benefit of its subcontractors and suppliers, by agreement.  Take the following example:

 “The undersigned [subcontractor] acknowledges and agrees that it is receiving the funds paid in consideration of this payment application as a trustee, and said funds will be held in trust for the benefit of all subcontractors, materialmen, suppliers and laborers who supplied work for which the beneficiaries or their property might be liable, and that the [subcontractor] shall have no interest in such funds until all these obligations have been satisfied in full.”

In this instance, rather than taking payment as the rightful owner of the funds paid, the subcontractor accepts payment as a trustee for its sub-subcontractors and materials suppliers, installing affirmative obligations and fiduciary duties on the subcontractor to its sub-subcontractors and suppliers, which otherwise do not exist.  By virtue of the language in this provision, the subcontractor has agreed to restrict its discretion and ability to use the funds paid to it for its work as it deems necessary, replacing its discretion with the affirmative obligation to hold and distribute the funds paid to its subcontractors and suppliers on behalf of the owner and general contractor.  In a perfect world, every subcontractor would pay each of its sub-subcontractors and suppliers in full out of each payment it received on a project.  In the real world, there are often good business reasons for subcontractors to withhold some or all of the payments claimed due by its sub-subcontractors and suppliers, or to apply certain portions of the payments it receives elsewhere.  This language removes the subcontractor’s discretion to do so.

With increasing frequency, developers, owners and general contractors employ “lien waivers” intended to do much more than insure that mechanic’s liens aren’t perfected against a property after payment has been made.  Instead, this new breed of “lien waivers” is intended to create “knowing” waivers of subcontractors’ affirmative rights after they have signed their subcontract.  These “lien waivers” are intended to rewrite the bargain to which the parties agreed in their subcontract by downshifting the owner’s and general contractor’s desired contractual terms into a lien waiver when it might otherwise have been rejected in the subcontract.  It’s no longer sufficient for subcontractor’s to review only the proposed subcontract and scope of work.  Subcontractors must review proposed lien waivers carefully to insure that the lien waivers aren’t an agreement not to be paid.  If you have any questions or concerns regarding the provisions of your lien waivers, consult your construction attorney for a thorough assessment of the risks and exposures.

 

New Hampshire Supreme Court Upholds Statute of Repose Against Constitutional Challenge, Barring Claims Against Subcontractor and Design Professional

By on March 16, 2015

On February 20, 2015, the New Hampshire Supreme Court issued an opinion in the case of Jillian Lennartz v. Oak Point Associates, P.A., & a. In Lennartz, the plaintiff sought to recover for a personal injury suffered in 2009 which was alleged to have resulted from the faulty design or installation of a vent pipe in a laboratory facility on which construction had been substantially completed in 2003. In order to attempt to recover damages for the alleged injuries, the plaintiff brought suit against the subcontractor and design professional in 2012.

At the trial court, the defendants sought and were granted summary judgment on the basis of NH RSA 508:4-b, I, New Hampshire’s statute of repose. Among other things, the statute of repose bars actions to recover damages for injuries to person, property or economic loss arising out of a deficiency in the creation of an improvement to real property through the design, construction or inspection of the improvement, if the claims for damages are not brought within eight years from the date of substantial completion. At its core, the statute of repose is intended to prevent businesses in the construction industry from exposure to claims for injuries suffered many years after completing work on any particular project.

In this instance, the plaintiff’s injuries were alleged to have been suffered before the repose period expired, but the plaintiff brought suit against the defendants only after the eight year period from the date of substantial completion had expired. Among other arguments, the plaintiff principally argued that the statute of repose was unconstitutional as applied to her on an equal protection under the law basis, because her injuries were suffered before the repose period expired, but were barred only because her suit was filed after repose period expired. That plaintiff argued that this ran afoul of equal protection in so far as it prevented her from redressing injuries alleged to have occurred before the statute’s expiration, while others similarly injured that filed sooner would not have been barred by the court from proceeding with suit against the defendants.

The New Hampshire Supreme Court disagreed, holding the statute of repose constitutional as applied to the plaintiff’s claims because the statute is substantially related to an important governmental interest in protecting and relieving those in the construction industry from limitless liability under the discovery rule, which otherwise might infinitely suspend the limitations clock from running on the applicable limitations period until an injured party discovers its injury or should discover its injury in the exercise of reasonable diligence.

The Lennartz decision is an important one for those involved in the construction industry because it reaffirms an important limit to liability for builders and design professionals against claims brought long after the completion of a project. The decision should instill contractors, subcontractors and design professionals working in New Hampshire with further confidence that they will not be subject to liability for alleged defects decades after completion.

E-mail Acceptance Can Constitute Contract for Massachusetts Mechanic’s Liens

By on March 9, 2015

The Massachusetts Superior Court recently held that electronic communications and signatures — no less than physically signed documents — can constitute a “written contract” for general contractors, subcontractors and construction material suppliers, within the meaning of the Massachusetts mechanic’s lien statute, G. L. c. 254. In Clean Properties, Inc. v. Riselli (“Clean Properties”), the parties mainly communicated via e-mail. The defendant, a property owner, sought to discharge the mechanic’s lien levied against her property for work performed by the plaintiff, a contractor. Because the parties never executed a paper contract, the property owner argued that the contractor could not meet the mechanic’s lien statute’s requirement of a written contract. The court held otherwise.

Applying the Uniform Electronic Transactions Act (UETA) adopted by Massachusetts in 2004, the court held that, where there is a clear intent between parties to conduct their business via electronic means, an enforceable contract can be formed when one accepts a written offer via e-mail. Thus, in certain circumstances, an electronic signature — such as one’s name at the end of an e-mail — can have the same legal effect as a physical signature on paper. See G.L.c. 110G, §7(b) (“contracts may not be deemed unenforceable solely because electronic records were used in formation.”).

In Clean Properties, the parties’ e-mail correspondence made clear that each intended to enter into a contract. Specifically, the court held that the contractor had extended an offer by attaching contract terms to an e-mail with instructions for the property owner to respond, if desired, with an acceptance. The property owner replied as instructed and included her name at the end of the e-mail. Because this reply formed a contract under the UETA, the court concluded that the parties’ e-mail communications sufficed to establish a written contract within the meaning of G. L. c. 254. Contractors and construction material suppliers should still be diligent in getting formal contracts signed. However, this is a positive sign for the future use of electronic communications in negotiating construction contracts.

The case is Clean Properties, Inc. v. Riselli (Salinger, J.) (Middlesex Superior Court) (Docket No. MICV2014-04742) (June 18, 2014).

To Lien or Not to Lien

By on January 5, 2015

Mechanic’s Liens and the Plight of the MA Subcontractor

The Fundamentals

In laymen’s terms, a mechanic’s lien is a tool whereby a subcontractor can attach a security interest on property that it has contracted to do work on. This lien operates to protect the subcontractor’s interest in payment for work provided in the event that the general contractor does not pay in full. While a subcontractor can file a Notice of Contract, which is the first step in perfecting a mechanic’s lien, at any time after the ink dries on its subcontract, it is a common practice to defer asserting a lien against the property until it is clear that one is in danger of not getting paid. This “wait and see” approach, while good for business relations, can be risky for subcontractors. Given recent developments in Massachusetts law, subcontractors may need to start asserting mechanic’s lien rights much earlier in order to benefit from the remedy at all. In Massachusetts, the first steps of the procedure that a subcontractor must follow in order to establish a mechanic’s lien are governed by G. L. c. 254, § 4. This section also defines the limit of the remedy provided. Specifically, § 4 states that “[s]uch lien shall not exceed the amount due or to become due under the original contract [i.e., the contract between the owner and the general contractor] as of the date notice of the filing of the subcontract is given by the subcontractor to the owner.” This quoted language is colloquially known as the “amount due” clause. The recent interpretation of this language by the Massachusetts Appeals Court will likely have far-reaching implications for subcontractors going forward.

Recent Developments

The “amount due” clause was recently interpreted to severely limit the ability of subcontractors to recover payment due via the mechanic’s lien process. In Superior Mech. Plumbing & Heating, Inc. v. Ins. Co. of the West, 81 Mass. App. Ct. 584 (2012) (“Superior Mechanical”), the court stated a new rule for the interpretation of the “amount due” clause. Previously, so long as notice of a mechanic’s lien was filed prior to the formal termination of the contract between the general contractor and the property owner, the subcontractor could count on having the benefit of some security from the lien. Now, subsequent to the ruling in Superior Mechanical, the test for whether or not the subcontractor has the ability to recover payment via a mechanic’s lien requires that the court “[l]ook to whether the general contractor was entitled to payment under the terms of the general contract, and not solely to when formal termination occurred, in determining whether additional payments were due the general contractor at the time the owner received notice of the lien.” This new test implies that a subcontractor may be precluded from accessing the remedy afforded by a mechanic’s lien much earlier in the process than before. In Superior Mechanical, for example, a mechanic’s lien asserted by a subcontractor was held to have no value where the lien was created after the general contractor had materially breached its contract with the property owner but before the property owner issued a formal termination letter to the general contractor. The original contract in question contained a clause that required the general contractor to promptly pay its subcontractors upon receipt of payment from the property owner in order to receive future payments. Accordingly, once the general contractor stopped making payments to its subcontractors, it materially breached its contract with the property owner and no more money was “due or to become due” to the general contractor from that point forward. Thus, the court ruled that the date of the material breach of the terms of the general contract (rather than the formal termination date) was the decisive factor and that the subcontractor could not recover because, at the time its lien was filed, no money was due (or to become due) to the general contractor under the original contract. In other words, the reason the subcontractor filed the lien in the first place – nonpayment by the general contractor – was the material breach that excused the owner from liability to the subcontractor under the lien statute. Further, it is important to note that this new interpretation of the “amount due” clause has been cited in a subsequent Appeals Court case as good law supporting a similar holding. More specifically, in Nat’l Lumber Co. v. Blackwood Dev. Corp., 2014 Mass. App. Unpub. LEXIS 657 (Mass. App. Ct. May 20, 2014), a subcontractor was barred from recovery via a mechanic’s lien where the property owner had a judgment against the general contractor. The judgment against the general contractor both exceeded the amount due under the original contract and predated the subcontractor’s assertion of a lien. As a result, the court held that there was no amount due or to become due to the general contractor at the time the lien was filed, which effectively barred the subcontractor’s right to access payment via a mechanic’s lien.

Takeaway

The positive treatment of this new “amount due” rule by the courts is indicative of its staying power. Thus, subcontractors need to be aware of what this means for their business going forward. This new rule shifts the incentives and risks regarding the timing of filing a mechanics lien. In the past, with relatively little potential for loss of security, subcontractors could wait and see whether a situation necessitating a lien actually arose. Now that approach may be too risky. In the course of a project, there are an infinite number of situations that could prevent any further payment from becoming due to the general contractor prior to the formal termination of its contract. Under the new rule, this creates much more uncertainty for subcontractors. Accordingly, subcontractors now have an incentive to initiate the lien process much earlier, and prior even to a payment issue arising. Failure to do so can cost the subcontractor the security that mechanic’s liens were designed to provide.