Construction Contracts

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Can parties waive both the commencement and length of the statutory limitation periods for construction defect actions?  Yes, answered the Fourth Appellate District, by allowing the parties to contractually preclude the application of the “delayed discovery” rule that normally triggers the commencement of the limitation time period and affirming case law permitting the shortening of the 10-year latent limitation period to four years.  The court did hold, however, that such waiver and shortening is permitted where there are sophisticated parties, in a commercial context, and perhaps that the contract must even be highly negotiated (or at least such negotiation is available).

On June 3, 2013, in Brisbane Lodging, L.P. v. Webcor Builders, Inc. (Cal. Ct. App., June 3, 2013, No. A132555) 2013 WL 2404154, the appellate court reviewed the trial judge’s granting of summary judgment in favor of the general contractor (“Webcor”) on the grounds that a provision in the 1997 version of the AIA 201 (General Conditions to the prime agreement between Owner and Contractor) unambiguously barred all claims, contract and tort, brought more than four years after substantial completion of the project, rather than four years after the Owner discovered the alleged breach or defect and within the 10-year statute of repose.  The key language for both the trial court and the appellate court was found in provision 13.7:

“13.7 Commencement of Statutory Limitation Period

“13.7.1 As between the Owner and Contractor:

“.1 Before Substantial Completion. As to acts or failures to act occurring prior to the relevant date of Substantial Completion, any applicable statute of limitations shall commence to run and any alleged cause of action shall be deemed to have accrued in any and all events not later than such date of Substantial Completion ….” (AIA A201, Article 13.7.1.1 (Article 13.7.1.1), bolding and capitalization omitted.)

A 2013 decision from New York reminds us that threats can be costly. In Mometal Structures, Inc. v. T.A. Ahern Contractors Corp., from the Eastern District of New York, Mometal was hired by Ahern as structural steel subcontractor. The project was delayed for reasons that were not Mometal’s fault. Mometal tried to get the information and approvals…

The Washington Supreme Court—in Gandee v. LDL Freedom Enterprises, Inc., 176 Wn.2d 598 (2013)—recently examined the validity and enforceability of a contractual arbitration provision and found, under the circumstances, that the clause was “unconscionable” and therefore unenforceable. Although the case did not occur within a construction setting, it nevertheless presents important lessons to consider when drafting, negotiating or complying with mandatory arbitration provisions in construction agreements.  

In Gandee, a borrower, under a debt adjustment contract, brought suit against LDL Freedom Enterprises, Inc. (“Freedom”), seeking to recover damages based on alleged violations of the Washington Consumer Protection Act (the “CPA”) (RCW 19.86, et seq.) and the Debt Adjusting Act (RCW 18.28, et seq.). Id. at 601-02. Freedom moved to compel arbitration based on the following arbitration clause reflected in the parties’ agreement:

Arbitration. All disputes or claims between the parties related to this Agreement shall be submitted to binding arbitration in accordance with the rules of [the] American Arbitration Association within 30 days from the dispute date or claim. Any arbitration proceedings brought by Client shall take place in Orange County, California. Judgment upon the decision of the arbitrator may be entered into any court having jurisdiction thereof. The prevailing party in any action or proceeding related to this Agreement shall be entitled to recover reasonable legal fees and costs, including attorney’s fees which may be incurred.

Id. at 602 (brackets in original). In addition, the agreement contained a common “severability clause,” providing that “[i]f any of the above provisions are held to be invalid or unenforceable, the remaining provisions will not be affected.” Id. 

In recent years, the Department of Industrial Relations (“DIR”), the Legislature and the California courts have expanded the application of the prevailing wage law to projects through the broad definition of a “public works,” beyond what most contractors, owners and even counsel would expect.  While most involved in construction anticipate that any work directly for, or direct payment of funds by, a public entity would trigger the prevailing wage laws, several decisions, determinations and recent legislation have significantly expanded the prevailing wage reach over the last several years.

Very recently, the DIR determined that both the shell construction of a Volkswagen auto dealership, and the separate tenant improvements in that shell, were public projects subject to prevailing wage law due to the land transfer by the City to the developer “because the Land is a transfer of an asset of value for less than fair market price”.

Similarly, in May 2012, the DIR determined that a contractor involved in the $95 million privately funded development and construction of a new agricultural facility was subject to prevailing wage law, but for the application of the de minimis doctrine, when the contractor accepted the City’s “in lieu of fees” for the City required infrastructure improvements.  The DIR determined that “[i]t does not matter that Company is performing infrastructure improvements itself or that Company could have elected to simply pay the fee and let the City perform the infrastructure improvement work. Company plans to accept the fee waiver. Therefore, it has received or will receive public funds within the meaning of subdivision (b)(4)”.  For additional applications and coverage determinations, see also the DIR’s most recent determination.  Previously in January 2012, the Legislature eliminated the applicability of the DIR’s 2010 determinations that solar photovoltaic power purchase agreements that include installation of leased equipment on public property were not public works through the passage of Labor Code section 1720.6.  This statute specifically defines a public project in part to be the “construction or maintenance of renewable energy generating capacity or energy efficiency improvements,” if certain elements are triggered.  See the DIR determinations from April 21, 2010, PW Case 2008-038 and 2009-005, for the prior analysis:  http://www.dir.ca.gov/OPRL/PWDecision.asp.  (See also Lab. Code, §§ 1720-1720.6.)

In my latest Daily Journal of Commerce Construction column, I discuss the recent rash of cases involving the question of whether subcontractors are bound by the terms of a project’s prime construction contract. In many of these situations, subcontractors contend that their subcontracts give them rights, remedies or defenses against the prime contractor that the…

A reminder from the Idaho Supreme Court for parties to a construction contract:  the plain language of the parties’ contract governs the obligations between them in the absence of ambiguity.  In City of Meridian v. Petra, Inc., No. 39006, 2013 WL 1286014 (Idaho Apr. 1, 2013), the Idaho Supreme Court reviewed a construction dispute between the City of Meridian and its construction manager, Petra.  Not atypically, unfortunately, a project ballooned from $12.2 million in 2006 to over $21 million by October 2008 for a variety of reasons.  As the project progressed, Petra, pursuant to its contract with the City, notified the City of the proposed increased costs of construction and the City approved them, or often the City directed the changes itself.  During this same time, Petra notified the City of Petra’s right to an equitable adjustment to Petra’s fee based on the changing nature of the project. At that time, Petra agreed to wait until the final project value was determined before submitting the fee request. Thereafter, Petra managed the project for the City through occupancy.  Approximately six months prior to occupancy, Petra issued a change order requesting an equitable adjustment in the amount of 4.7% of the excess of the original base contract, which was the same percentage used for the original fee and a significant change order previously. The City denied the request.

 

  When mediation didn’t resolve the dispute, the City filed suit against Petra for declaratory relief and alleged breach of contract, among other claims.  Although the case itself addresses a number of related and interesting topics regarding evidence at trial, evidentiary issues relating to the claimed breach by Petra, and attorney fees, the foundational issue addressed by the court is the clarity of the contract and the allowance of the equitable adjustment.  On that score, the trial court found against the City on all but the lesser claims, and awarded Petra $595,896.17 in costs and $1,275,416.50 in attorney fees, in addition to its requested (as adjusted) fee of almost $325,000.  

The Nevada Supreme Court has answered a question that developers and contractors have been asking for years:  can the statutory limitation period for a construction defect action be shortened?  The court answered in the affirmative but held that there must be no statute to the contrary and that the reduced limitation period must be reasonable …

A California appellate court recently held that the value of an original construction contract is admissible as evidence to limit a contractor’s right to recovery under Civil Code section 3123(a), even by a property buyer that was not a party to the construction contract. Appel v. Los Angeles Superior Court (CA No. B244590, Mar. 11, 2013). The net effect in this instance could be a reduction of the value of the contractor’s lien claim by at least $13.5 million. 

The underlying facts reflect an all-too-common scenario of a failed project. Here, a single-purpose entity developed a large condominium project, originally inked with a GMP of $65 million. Increases through construction by approved change orders moved the GMP to $81 million. Disputes arose, and the contractor thereafter claimed an additional $13.5 million above the $81 million GMP. Unfortunately here, several units of the project had been purchased by this point, and the buyers were then subject with the developer to the mechanic’s lien of the contractor. Prior to trial, the developer entity and its alter ego affiliates negotiated a pre-trial settlement with the contractor that included in part a restatement of the final contract GMP to $95.5 million, purportedly settling the issue of the “value” of the construction contract for the contractor to continue pursuing its lien claim against the unit buyers. During pre-trial motions, the trial court commented on the impact of the negotiated settlement and “expressed doubt as to whether the unit owners should be precluded from challenging the value of the GMP contract set forth in the settlement agreement:

 

COURT: Are you saying [the unit owners] don’t have a right to attack the . . . value of the contract which was agreed after the fact as part of the settlement?

[CONTRACTOR]: We don’t believe they have a right to attack that.

COURT: Well, that is just boggling to my mind. [¶] . . . [¶] [I]t totally boggles my mind, because you could agree to anything, anything [in the settlement].”

 

The trial court also stated that it saw “‘no purpose’ for the settling parties’ decision to raise the value of the GMP other than to hinder the unit owners’ lien foreclosure defense.” Although the trial court took the matter under submission, it later felt constrained to rely on an existing decision cited by neither party and ruled against the unit buyers, precluding them from challenging the post-lien GMP value set during the settlement between the developer and contractor.

Litigation can be one of the most time-consuming and expensive ways to resolve disputes in the construction industry. Often, parties to construction-related disputes prefer to resolve them through alternate dispute resolution procedures, such as mediation or arbitration. However, sometimes litigation cannot be avoided. In his latest article in the Daily Journal of Commerce, Guy Randles…

Construction projects can impact neighboring landowners in ways that range from minor annoyances to dangerous structural issues. Well-drafted temporary and permanent site agreements with neighboring landowners can help project owners maintain good relationships with their neighbors. In my latest article in the Daily Journal of Commerce, I describe some of the types of legal agreements…