When to Have the Hard Talk About Setting Liquidated Damages

In my latest column for the Daily Journal of Commerce, I look at the concept of liquidated damages – in my experience one of the top five heavily negotiated (and litigated) clauses in a construction contract. Because a project owner’s potential delay damages are often difficult to determine with certainty at the beginning of a project, the parties stipulate what those damages will be in advance through their contract – in other words, they liquidate the amount of the owner’s delay damages. In theory, at least, the benefit of this approach is that it provides both sides with certainty for a risk that is highly uncertain: late delivery. For a few suggestions as to what to include in this important risk-shifting clause, please read the column here.

Originally published as an Op-Ed by the Oregon Daily Journal of Commerce on September 17, 2020.

California Passes Bills Expanding Rights to Both Paid and Unpaid Leave

California Assembly Bill 1867 (signed by California Governor Gavin Newsom on September 9, 2020) and Senate Bill 1383 (signed on September 17, 2020) significantly expand the rights of California employees to both paid and unpaid leave.  In addition, and especially as they relate to Senate Bill 1383, these laws will require California employers to promptly revise their policies and procedures when it comes to reviewing employee requests for unpaid leave.

Assembly Bill 1867

To recap, the Families First Coronavirus Response Act (“FFCRA”) provides that employees are entitled to up to 80 hours of paid sick leave for reasons related to COVID-19.  FFCRA, however, applies only to employers with fewer than 500 employees.  Like many ordinances adopted after the passage of FFCRA, AB 1867 attempts to fill the gap left by FFCRA by applying to employers with 500 or more employees.

AB 1867 fills this gap in two ways.  First, it creates new California Labor Code section 248, which mirrors Governor Gavin Newsom’s prior Executive Order N-51-20.  Section 248 requires entities with 500 or more employees to provide their “food sector workers” with up to 80 hours of “COVID-19 food sector supplemental paid sick leave.”  Second, it also creates new Labor Code section 248.1.  This section applies more broadly than section 248 as it requires that employers with 500 or more employees provide all employees with up to 80 hours of “COVID-19 supplemental paid sick leave.” Continue Reading

Oregon Prevailing Wage Presentation

On October 9, 2020, I will present on prevailing wages at the Oregon State Bar Construction Law Section’s seminar titled Public Contracting Issues: Federal and State. My presentation will address fundamental concepts, resources, administration, how to analyze prevailing wage issues, and tips for preparing coverage determinations. Click here to learn more and here to register online.

As COVID Continues to Cripple Businesses, New Safety Technologies Emerge

"Sorry, We Are Closed"The economic ruin caused by COVID-19 is out of control.  According to the U.S. Bureau of Labor Statistics’ report dated August 7, 2020, unemployment is at approximately 10.2%.  However, the economic impact of COVID-19 does not stop at America’s unemployment rates.

In August 2020, the Centers for Disease Control and Prevention issued an Order that does not impact a tenant’s obligation to pay rent or make a housing payment but does temporarily halt residential evictions to prevent the spread of COVID-19.  The Order was silent on remedies for owners with other financial obligations to their lenders.  Without the remedy of eviction, owners are put at serious risk for default.

According to the World Bank, school closures have left students in academic purgatory.  Most students complete an average of approximately 11.2 years of schooling; however, given the restraints of remote learning, students will only receive approximately 7.9 years of schooling if the virus continues unabated.  These long-term closures will likely have serious social and economic impacts.

The popular phrase “necessity is the mother of invention” could not be more true than it is now for entrepreneurs behind burgeoning technologies that will allow our communities to reopen and mitigate the risks of COVID-19 before a viable vaccine is available.

For example, a local Washington business owner, Jim Mischel of Electric Mirror, recently pivoted and started Safeology, a company that specializes in the design, manufacture, and supply of UVC light towers and air systems that fight against pathogens and viruses like COVID-19.  Safeology’s products harness UVC and IoT technology to allow widescale disinfection of hotels, cruise ships, restaurants, commercial spaces, classrooms, healthcare facilities, and other common areas.  Mischel has collected a team of experts, including George Diaz, M.D., who treated the first U.S. case of COVID-19; chemical engineer Joseph Anderson, Ph.D.; microbiologist David Rockabrand, Ph.D.; and electrical engineer Rolf Bergman, Ph.D. to help perfect Safeology’s products.  More information about Safeology’s products can be found here and here.

Members of the construction industry seeking to reopen their businesses and continue forward with projects might consider implementing  similar technologies to help mitigate the risks associated with coming back to the workplace.

Builder’s Risk Policy Claim Checklist

If you incur property damage on your construction project site and want to know if insurance will help you compensate for it, several challenges arise. First, you need to determine if you have an insurance policy that could provide coverage. Second, you must determine the extent to which the policy covers property damage and related losses and how to go about calculating delay costs. The most likely means to ensure coverage for property damage is the builder’s risk insurance policy, which can include delay-in-completion coverage added by endorsement to cover the delay costs and related expenses caused by the covered property damage. In my latest article for the Daily Journal of Commerce, I provide several tips to help you prepare a builder’s risk claim and maximize recovery. Read the article here.

Originally published as “OP-ED: A builder’s risk policy claim checklist to maximize recovery,” by the Daily Journal of Commerce, August 20, 2020.

Disgorgement Liability in CA for Unlicensed Contractors Runs One Year from Completion or Cessation

In a very recently published case dealing with issues of first impression in California, here, the Second Appellate District in Los Angeles determined that the disgorgement penalty under BPC 7031(b) triggers a one-year statute of limitations given that it is a penalty, and the cause of action accrues from either the completion or cessation of the work, finding that the discovery rule is inapplicable to extend the period of exposure for unlicensed contractors.

The certainty of a ruling is welcome news in an area of California law that is painfully restrictive for contractors, as we have discussed in the past. See, e.g., arguments in the unpublished SunRun decision [here], and [here], and [here].  The impact of licensing failures is legend among lawyers who have to be – usually – the bearer of bad news for contractors, with the legislatively ‘unfair’ result, but the purpose of which is set forth by the Eisenberg decision:  Section 7031(b) does not require the plaintiff seeking disgorgement to have suffered any injury.  That is because

“‘[s]ection 7031 represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties, and that such deterrence can best be realized by denying violators the right to maintain any action for compensation [or requiring them to disgorge compensation already paid].’”

(MW Erectors v. Niederhauser Ornamental & Metal Works Co. (2005) 36 Cal.4th 412, 423 (emphasis and citations omitted); see also White v. Cridlebaugh (2009) 178 Cal.App.4th 506, 518-520.)

The factual circumstances of the Eisenberg decision are interesting, in that the general contractor (Suffolk) was licensed using an employee as the qualifying Responsible Managing Employee (RME).  Under the RME requirements, the court explained the law clearly, stating

[a]n RME is “an individual who is a bona fide employee of the applicant and is actively engaged in the classification of work for which that [RME] is the qualifying person on behalf of the applicant.” (§ 7068, subd. (c).)

At the time of construction at issue in this appeal, the contractors’ law provided that the qualifier “shall be responsible for exercising that direct supervision and control of his or her employer’s or principal’s construction operations as is necessary to secure full compliance with the provisions of this chapter and the rules and regulations of the board relating to the construction operations.” (Former § 7068.1, subd. (a); see Stats. 1991, ch. 145 (Assem. Bill No. 425), § 1.)5 CSLB regulations provide that “‘direct supervision and control’ includes any one or any combination of the following activities: supervising construction, managing construction activities by making technical and administrative decisions, checking jobs for proper workmanship, or direct supervision on construction job sites.” (Cal. Code Regs., tit. 16, § 823, subd. (b).)

                     ____________

5 The current version of section 7068.1 provides that the qualifier “shall be responsible for exercising that direct supervision and control of his or her employer’s or principal’s construction operations to secure compliance with this chapter and the rules and regulations of the board.” (§ 7068.1, subd. (a).)

(Eisenberg Village of the L.A. Jewish Home for the Aging v. Suffolk Constr. Co., No. LC100462, slip op at 7-8 (Los Angeles County Super. Ct. August 26, 2020.)

However, Eisenberg had argued that since Suffolk’s RME had moved out of state, stopped attending meetings related to the project, and stopped having any responsibility in the project after he moved, that although perhaps originally “licensed” in 2008, the RME’s failure to comply with the RME obligations left Suffolk “unlicensed” after the RME moved out of state in late 2008.  Eisenberg also argued that it could not make that RME argument and determination until after it knew it had an unresolved construction defect claim in 2015.  After briefing and supplemental briefing at the trial court level following motions on the statute of limitations, the trial judge determined that a one-year statute of limitations applied as the statute is a “penalty” or “forfeiture,” and that in any event, the information available to or known by Eisenberg as to its potential claim was available as early as the end of 2008.  The court thereafter dismissed the disgorgement cause of action on the $49 million project.  On appeal, the court affirmed the trial court’s analysis, and declined to address the remaining arguments of whether the technical lack of compliance with the RME obligations left Suffolk “unlicensed” or not.  In part, the appellate court relied on the public policy reasons that are so harsh to also note that disgorgement is intended to be a penalty.

Instead, for reasons of policy (to deter contractors from operating without a valid license), it provides a windfall to the plaintiff, at the expense of the unlicensed contractor, since the plaintiff also retains the work completed by the contractor.

When viewed in this context, it is clear that the disgorgement provided in section 7031(b) is a penalty. It deprives the contractor of any compensation for labor and materials used in the construction while allowing the plaintiff to retain the benefits of that construction.

(Eisenberg Village of the L.A. Jewish Home for the Aging v. Suffolk Constr. Co., No. LC100462, slip op at 17 (Los Angeles County Super. Ct. August 26, 2020.)

Further, the appellate court held that it would not apply the equitable discovery rule to the accrual of the statute of limitations where “…the disgorgement mandated by section 7031(b) is not designed to compensate the plaintiff for any harm, but instead is intended to punish the unlicensed contractor.”  Highlighting the rather absurd possible applications of a discovery rule claim for disgorgement arising 10 years after completion, with no other basis for a claim against the contractor, the appellate court stated that “[t]o avoid such absurd results, and because there is no reason in equity to apply it, we hold that the discovery rule does not apply to section 7031(b) claims.”

The published opinion, while not addressing all of the potential factual and legal issues raised by the parties in the proceedings, is very instructive and helpful to advise clients (owners or contractors) regarding at least two prior matters of first impression in California.  As we have previously advised clients, in light of the restrictive rules in California regarding contractor licensing, if the question being asked is, “How close can I get to the line before it’s a violation?” you are already asking the wrong question and you should be prepared to address the arguments if not the consequences of the harsh licensing law.  At least now, however, we understand what the time limitation for such a claim will be at the outside – one year from completion of the project or cessation of the performance.

Allocate Payments Clearly to Minimize Construction Disputes

In an ideal world, a contractor performs a portion of the work on a project as provided for in a construction contract, the owner pays the contractor an installment payment for that portion of the work, and the parties continue similarly until the work is finished. However, many factors can upset the equation – changes to or an expansion of the scope of work of the project or execution of an additional contract for scope of work different than the original. With increasing complexity of a project comes increasing opportunities for confusion or disputes over the allocation of payments for the parts of a project. In an article for the Daily Journal of Commerce, I provide general guidance as to how parties can amicably resolve any issues that may arise. Read the article here.

Originally published as “OP-ED: Allocate payments clearly to minimize construction disputes,” by the Daily Journal of Commerce, July 16, 2020.

When to Prepare for Project Disputes? Always.

Originally published as an Op-Ed in the Oregon Daily Journal of Commerce on June 19, 2020.

Whether you are an owner, contractor, or design professional, construction disputes are, unfortunately, inevitable.  Below are some tips to avoid potential pitfalls and help resolve disputes as efficiently as possible, whether before or after formal litigation (or arbitration) commences.

  • Limit Your Project File to Your Actual Project File: Before you save documents to your project file—that folder almost every party has on its computer system to manage documents for each individual project—ask yourself two questions: (1) is everything in the folder related to this project? and (2) is everything in the folder truly a “project file” document? The goal is to have a project file that is truly representative of the project and not a folder where stray documents are randomly saved (such as the PowerPoint you prepared for last year’s company retreat titled “2019 Top Screwups: Let’s Improve!”). Another angle is to consider whether you’re only saving “project file” documents. If your case ends up in litigation you can be assured the other side will ask for a complete copy of your project file. Some personnel routinely download their entire email file (.pst file) to the project file or use the project file as a “desktop” equivalent for the time period that they’re working on the project. While you may be allowed to withhold certain documents in the event of litigation, avoiding these types of practices should minimize future landmines in the project file.
  • Be (Super) Organized: In the film Office Space, fictional boss Bill Lumbergh confronts programmer Peter Gibbons: “Uh… we have sort of a problem here. Yeah. You apparently didn’t put one of the new coversheets on your TPS reports.” While Peter swiftly apologies, we’re with Bill here—use the new coversheet. The better organized and more consistent you are in your documentation the easier it will be for you to quickly educate yourself, your team, your lawyer, the opposing party, your surety, and all other involved parties. Staying organized is one of the best things you can do to avoid or minimize disputes.
  • Don’t Destroy Your Electronic Data: While every company and jurisdiction is slightly different in its approach, you can be assured that mistakenly or deliberately “losing” electronically stored information is potentially disastrous. Periodically review your document retention schedule to ensure your schedule is up to date with current requirements and that you are doing what you say you are doing. Too often years pass after retention schedules are prepared and somebody changes something without properly documenting the change—and before you know it you are out of compliance with your own protocol. Don’t learn this lesson in the middle of a lawsuit. Some companies purge records when their “computer is full,” which can also lead to problems. Referred to as “spoliation of evidence,” negligently or deliberately destroying records can lead to sanctions; dismissal of claims (in part or entirely); negative inferences, such as the presumption that the deleted files were harmful to the deleting party; or the inability to raise certain arguments or defenses.
  • Pick up the Phone: Those in the construction industry are notoriously studious in documenting just about everything. That should be celebrated. But there are times when you and your project team members, from top to bottom, should instead consider picking up the phone. This is especially true in moments of frustration or when there is a question that merits input from your in-house or external lawyer. Before you send a “*#%!” email or make that note in your daily report, walk around the block and consider whether you should instead discuss the issue. It might not be as immediately satisfying, but that email or note will not read well years later when projected in size 72 font in a courtroom.
  • Prepare for Tomorrow, Through Today’s Contract: This topic merits a separate entry, but one of the best ways to prepare for disputes is by knowing what is in your contract and having the right terms included. One way to keep these issues top of mind is to have a template checklist that provides an overview of key dispute-related terms for any given project (e.g., notice requirements, dispute resolution provisions (pre-dispute meeting(s), mediation, arbitration, and litigation), consolidation procedures, and right to recover attorneys’ fees). In the context of arbitration, parties can also agree up-front on discovery procedures and potentially limit (or expand) certain discovery obligations per their preferences.

You never quite know where a dispute will take you, but the more rigorous you are in maintaining good daily habits the better chance you have of reaching a favorable resolution.

New Oregon Law Complicates Retainage on Construction Projects

If you do not follow the Oregon legislature closely, you may have missed a new law, which went into effect January 1, 2020, that impacts the treatment of retainage on private and public construction projects over $500,000.

For private and public construction contracts entered into on or after January 1, 2020 that include a contract price of more than $500,000, ORS 279C.570(2) and ORS 701.420(2)(b) require an owner, contractor or subcontractor to place the amounts deducted as retainage into an interest-bearing escrow account. The interest on the retainage accrues from the date the payment request is made until the date the retainage is paid to the contractor or subcontractor to which it is due.

Although this law seems simple on the surface, the application of this new law raises many questions. We have attempted to answer some of those questions below.

Who Provides Escrow Services and What Are the Fees?

Generally, an interest-bearing escrow account is not an account that can be opened up at your local bank or a title company as it is unrelated to a mortgage or the sale of the underlying land. Rather, these accounts are opened with escrow companies that provide this specialty service. In Oregon, there are only a handful of companies that provide this escrow service.

The fees associated with opening an escrow account vary depending on the amount of money deposited into the account, how long the money will sit in the account, and how disbursement will occur.

Because only a couple of companies provide this escrow service and the fees are on a sliding scale basis, it is imperative to do your due diligence before the project starts and understand the logistical and financial impacts this will have on your project and your bottom line.

What Happens if the Retainage Is Not Placed into an Interest-Bearing Escrow Account?

ORS 279C.570(2) and ORS 701.420(2)(b) provide clear language as to when the retainage has to be placed into the escrow account and how the interest will accrue. However, the statutory language does not provide any clear explanation of what will happen if the retainage is not placed into an escrow account. Specifically, it does not identify what the offending party is going to be liable for: the amount of interest that was supposed to accrue if the money was in the escrow account or the statutory amount of 12% per year (or 1% per month).

Based on the statutory language and the legislative history, it seems that the offending party would be liable for the interest that should have accrued if the money was in the escrow account. This interpretation is in line with the language in ORS 279C.570 and ORS 701.420 as the statutory amount of 12% (or 1% per month) is only activated if the contractor or subcontractor has completed its work and the owner accepted the work, but the final payment has not been paid to the contractor.

Who Gets the Interest?

Although not specifically stated in the language of ORS 279C.570 and ORS 701.420, the interest accrued on the project probably accrues and is due to the contractor or subcontractor and not to the party that opened the account.

This conclusion is supported by the legislative history related to these laws (for example, prior laws in the Public Contracting Code provided that “earnings” from an interest-bearing account accrue to the contractor) and the rationale behind the concept of retention because retention is tied to specific work completed on the project.

If you have additional questions or would like additional information about this topic, please contact us.

Registration Now Open for the WSBA Construction Section’s Annual CLE Seminar (Via Webinar on June 12, 2020, on Alternative Procurement and Coronavirus Impacts)

The Construction Section of the Washington State Bar Association, in partnership with Stoel Rives, will present its annual full day seminar (via webinar) on June 12.  Co-chaired by Bart Reed (Partner at Stoel Rives), Brett Hill (Partner at Ahlers, Cressman & Sleight), and Ron English (Retired General Counsel of the Seattle Public Schools), the webinar will concentrate on various alternative procurement approaches, including public-private partnerships, design-build issues, and developments in general contractor/construction manager (GC/CM) contracting.  Karl Oles, a Partner in Stoel Rives’ Construction and Design Group, will provide highlights from the “Bertha” design-build tunnel project and the related litigation.

In recognition of the tremendous impact wrought by COVID-19, the webinar will include a presentation on how the coronavirus has impacted and will continue to impact the construction industry.  The popular Judicial Panel, consisting of the Honorable Beth Andrus (Court of Appeals, Division I, Seattle), the Honorable Jim Rogers (Presiding Judge, King County Superior Court, Seattle), and the Honorable Catherine Shaffer (King County Superior Court, Seattle), will share perspectives on how the pandemic has changed trial and appellate practice and how the courts and law practice will continue to evolve to address and manage the impacts.

Adhering to tradition from past years, the webinar will include an update on recent appellate cases of interest to construction law practitioners and a survey of the 2020 Washington legislative session.  Rounding out the program will be Chris Soelling’s entertaining and informative “ethics hour,” with musings on how COVID-19 has impacted mediation and settlement discussions.

At the conclusion of the webinar, attendees will be invited to participate in a BYOB social hour, which could very well devolve into a crash course in remote video conferencing etiquette.

To register for this year’s WSBA Construction Section CLE webinar, please follow this link.

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