- QUESTION: I understand that there is a new law in Pennsylvania pertaining to contractors performing home improvements, what is it and should I worry about it?
- QUESTION: If a payment is not made on time to a contractor on a project, does the party withholding payment have any exposure to claims beyond the amount owed?
- QUESTION: It is a tough economy out there right now, what can I be doing to protect my business and ensure I get paid for my work?
- QUESTION: I run a mid-sized company that owns construction projects in several states across the region. These days, it seems that lawsuits are virtually inevitable on any sort of sizable project, increasing my cost to do business and my aggravation. A friend of mine suggested that I should insert a clause into my contracts which would require that any lawsuits arising from our construction projects be brought in the state in which my company is headquartered, regardless of where the project is located or where the contractor is from. She suggested that if I do so, I won't have to worry about different laws in different states or the expense involved in litigating away from my home turf. What do you think of her idea?
- QUESTION: If I include a liquidated damages clause in my construction contract, can I also recover my actual damages for breach?
- QUESTION: I am the developer of a project for the construction of an office building. Recently, a subcontractor on the project sued me, claiming that he hasn't been paid for the excavation work he performed on the project. I have never dealt with the subcontractor directly, and his contract was with my general contractor, not with me. Is his payment claim against me valid?
- QUESTION: As the developer of a new building under construction, what are the insurance liability issues I should be considering?
- QUESTION: I am the owner of a project for the construction of a commercial building. The project involves several contractors and different phases of work. Unfortunately, the project has been significantly delayed as a result of deficient work by one of the contractors on the project. I plan on bringing a lawsuit against the contractor to sue for damages incurred as a result of delays to the project. Will I need to retain an expert witness?
- QUESTION: I am developing a new commercial building. Should I require my architect to carry professional liability insurance?
- QUESTION: If the owner/developer of a private construction project has not paid its general contractor, can an unpaid subcontractor recover on the project's payment bond even if the subcontract contains a "pay-if-paid" clause?
- QUESTION: I develop, improve, and build on real estate in Pennsylvania. How do I decide if the people who perform work for me are employees or independent contractors?
Back to Question and Answer Index
QUESTION: I understand that there is a new law in Pennsylvania pertaining to contractors performing home improvements, what is it and should I worry about it?
ANSWER: The Pennsylvania Home Improvement Consumer Protection Law was passed into law and will go into effect on July 1, 2009. It requires all contractors performing "home improvement" work to register with the Pennsylvania Attorney General's Bureau of Consumer Affairs and obtain a registration number that must be displayed prominently. While the name suggests a narrow group of people are covered, care should be taken because the statute has a broader application than it first appears. For example, the construction of a new pool house on the property could be covered under the act even though no one will live in it and it is new construction. This issue is particularly problematic in a difficult economy where companies are performing extra services to generate revenue. Performing work like finishing basements or putting up fences are likely covered under this Act. Because substantial civil penalties and even potential criminal ramifications can result, an evaluation of whether the work your company performs is covered by this statute may be in order.
If a determination is made that work being performed is covered by the law, adjustments will need to be made in order to comply with the contract requirements. To begin, the registration number must be placed in a prominent place on the contract. A start and end date, as well as a detailed list of the materials to be used, must also be included. There are a number of other provisions that must be included, and other routinely included clauses would be voidable by the customer. Time should be spent to restructure a contract that continues to protect your interests without violating the statute.
In short, this law is one which all those involved in the real estate and construction business should understand, if for no other reason to be sure it does not apply to them.
By: Joshua C. Quinter, Esquire
QUESTION: If a payment is not made on time to a contractor on a project, does the party withholding payment have any exposure to claims beyond the amount owed?
ANSWER: Yes, and depending on the state in which the project is located, the risk to the non-paying party may be significant.
For example, in Pennsylvania there are two statutes, the Contractor and Subcontractor Payment Act (private projects) and the Commonwealth Procurement Code (public projects) which provide for penalties for untimely payments. While the two laws differ slightly, they basically provide that an Owner that does not pay a Contractor, or a Contractor that does not pay a Subcontractor within seven days of the date payment is due (or within twenty days of invoice if the contract is silent on payment terms), must pay interest on the balance owed at the rate of 12% per year.
In addition, if arbitration or litigation is commenced, and if it is determined that payment was withheld without a reasonable basis, these laws provide that the non-paying party will be required to pay a further penalty at the rate of 12% per year. Further, the substantially prevailing party in any claim for payment can recover its reasonable attorney's fees. Therefore, in Pennsylvania a party improperly withholding payment is potentially subject to sanctions at the rate of 24% per year plus attorney's fees.
A recent decision in the Pennsylvania Superior Court, Zimmerman v Harrisburg Fudd, holds that the attorney's fee provisions of these statutes includes fees generated in the collection on a judgment in which attorney's fees were awarded. This increases the damage exposure to a non-paying party.
New Jersey's prompt pay statute contains similar, but less stringent terms. It provides that payment by an Owner must be made within 30 days of the billing date, and by a Contractor to a Subcontractor within 10 days of the billing date, unless otherwise agreed. Late payments are subject to interest at a floating rate of 1% plus prime, and attorney's fees to the prevailing party are recoverable.
The decision to withhold payment from a Contractor or Subcontractor is an important one. It should be made only where there are reasonable, justifiable and provable grounds for holding payment or reducing a payment. Decisions made to hold payments which are not supportable with evidence and reasoned argument may trigger application of these prompt payment acts and subject the non-paying party to substantial liability, in addition to the amount owed under contract.
QUESTION: It is a tough economy out there right now, what can I be doing to protect my business and ensure I get paid for my work?
ANSWER: There are some easy steps to take to shrink the risk to any business in tough economic times. At the start, it is important to understand that it is impossible to eliminate every risk. Instead, the goal is to understand what potential problems you might face, understand them, and then make a plan to minimize the number and impact of these potential risks. Here are 3 easy steps to think about.
(1) Take your due diligence seriously. "Do your due diligence" is often an overly used phrase; and taking the time to investigate and assess the situation is certainly a simple thing. Yet many businesses still fail to take this step at all, while others do not look deep enough. There are a whole host of questions that you should be asking before you even begin to form a contract. What is the name of the entity with which you are dealing and who are you really dealing with in the transaction? These are often different people or entities. Where is the financing for the project coming from and does it have funds built in to cover contingencies like extra work? Is the project bonded or lienable? These are but a few of the inquiries to consider. Ask as many questions as you feel necessary to get a clear picture. If the other side is largely unreceptive, take it as a reason to be cautious.
(2) Assess the information honestly. Abraham Lincoln once offered up the following riddle: "How many legs does a dog have if you count the tail?" The answer? Four, the tail is not a leg just because you call it one. Although a comical way to make the point, it is still an apt one. Assess the situation honestly. Let the facts tell you the story; don't gloss over them to reach the conclusion you would prefer. As a similarly wise colleague of mine often says, sometimes it is better to not work than to work for free.
(3) Draft a Fair Contract. Now that you have all the facts, it is time to allocate the risk in a fair way in the contract. Determine what risks you are willing to carry and what risks you will not accept for the cost of doing that particular transaction. Structure the contract in a way that accurately allocates those risks by adjusting payment provisions, security arrangements, insurance and indemnity clauses, and other aspects of the contract to meet those needs. Once complete, stay informed about changes in the situation as the project progresses and move as appropriate to protect your interests early.
These simple steps are a few easy ways to protect your business in these tough times. Consider implementing them as part of your business model.
QUESTION: I run a mid-sized company that owns construction projects in several states across the region. These days, it seems that lawsuits are virtually inevitable on any sort of sizable project, increasing my cost to do business and my aggravation. A friend of mine suggested that I should insert a clause into my contracts which would require that any lawsuits arising from our construction projects be brought in the state in which my company is headquartered, regardless of where the project is located or where the contractor is from. She suggested that if I do so, I won't have to worry about different laws in different states or the expense involved in litigating away from my home turf. What do you think of her idea?
ANSWER: The reasons you mentioned for wanting to litigate on your "home turf" are certainly good ones. However, the issues are not as cut-and-dry as they seem. First, you are really talking about two different concerns: the location where the lawsuit must be brought, i.e., the "forum," and the substantive law that will apply to the subject matter of the lawsuit, i.e., the "choice of law." It is not unusual to see contracts containing both "forum selection" clauses, which specify the particular location where the lawsuit must be brought, and "choice of law" clauses, which specify that the law of a particular state will apply to your dispute. Including these kinds of provisions may give you at least some control over where the suit will be filed and the law that will apply. But be careful: the forum closest to you is not necessarily always the best for you. You will have to carefully consider the pros and cons of litigating in your forum, depending on your situation. Likewise, you will need to consider whether the substantive law of your state works best for you. Moreover, the enforceability of forum selection and choice of law provisions is not guaranteed, particularly if the party suing you would be entitled to different protections or remedies if it had sued you elsewhere. The public policy of the state in which your project is located may hold such clauses to be invalid. For example, say you owned a construction project in Pennsylvania, where there is a statute that provides construction contractors with special remedies in certain cases of non-payment. You would not necessarily be able to avoid that law simply by specifying that the contractor must sue in another state or that the law of another state applied to your contract, because the same Pennsylvania law specifies that such clauses are unenforceable. So, although your friend's idea might be a good one, you need to consult an attorney to determine which forum and choice of law would be best for your company and the extent to which forum selection and choice of law clauses would be enforceable.
By Mohammad A. Ghiasuddin, Esquire
QUESTION: If I include a liquidated damages clause in my construction contract, can I also recover my actual damages for breach?
ANSWER: Perhaps. In a liquidated damages clause, the parties agree that in the event a project (or a phase of the project) is not completed within an agreed time period, then the delaying contractor will be required to pay the Owner/Developer a damage calculated at a pre-determined rate set forth in the contract. This rate must be reasonable, and in proportion to a reasonable estimate of delay costs at the time the contract is executed. If the rate of the liquidated damages is out of proportion to the actual delay damages incurred, a court may refuse to enforce the liquidated damages clause as a "penalty".
In a construction contract with a liquidated damages clause, an Owner/Developer is entitled to recover damages caused by delay only at the rate set forth in the liquidated damages provision. In other words, if an Owner incurs actual damages for delay in an amount greater than the pre-calculated liquidated damages sum, it cannot recover its actual damages. Case law makes it very clear that when a liquidated damages clause has been inserted into a construction contract, an Owner/Developer does not have the option to choose a higher actual damage amount.
However, an Owner may incur damages resulting from a breach of a construction contract which are unrelated to delay. For instance, damages caused by deficient work, or the cost to complete work which remains unfinished, are breach of contract damages separate and apart from liquidated damages. Therefore, in a situation where a contractor breached its schedule obligations, as well as its contractual obligations to perform work in accordance with drawings and specifications, an Owner may indeed have the right to recover both liquidated damages and the actual damages for delay, incurred as a result of the breach.
Before inserting a liquidated damages clause into a construction contract, an Owner should carefully consider the type and amount of actual damages it may incur if there is a project default. It may be advantageous to provide for recovery of actual, as opposed to liquidated damages in certain circumstances.
QUESTION: I am the developer of a project for the construction of an office building. Recently, a subcontractor on the project sued me, claiming that he hasn't been paid for the excavation work he performed on the project. I have never dealt with the subcontractor directly, and his contract was with my general contractor, not with me. Is his payment claim against me valid?
ANSWER: Probably not-you cannot breach a contract to which you are not a party. The subcontractor's claim for non-payment under its subcontract should be against the general contractor, not you, because there is no contractual privity between you and the subcontractor. Unless the general contractor was not a true general contractor but instead an "agent" of yours, the subcontractor cannot sue you directly for breach of the subcontract. Faced with the well-established law of contracts, some subcontractors may try to be creative with their claims and assert what appear at first glance to be non-contractual claims against a project owner. For example, a subcontractor may seek to assert an "equitable" claim alleging that the project owner was "unjustly enriched" by receiving the benefit of the subcontractor's work. However, most courts hold that where the work in question is covered by an express subcontract, the subcontractor cannot maintain such an action. Other "creative" claims may include claims of "negligence," where it may be alleged that the subcontractor was not paid due to some sort of negligent conduct by the owner. However, courts tend to reject such claims either on the basis of the economic loss rule, the gist of the action doctrine, or both. The economic loss rule states that actions for negligence cannot be maintained where the damages are purely economic (as opposed to property damage or personal injury), with some very limited exceptions. Similarly, the gist of the action doctrine provides that claims that sound in contract cannot be re-cast as tort claims. In your case, the subcontractor's claim seems to arise from his subcontract with general contractor. Absent an allegation that you promised to pay the subcontractor directly or that you directed the subcontractor to perform the work in question, the subcontractor's payment claim against you will likely be found to be invalid.
Since you did not mention it in your question, I presume that the subcontractor has not done what most subcontractors would do if they could: assert a mechanic's lien claim. Mechanic's liens can serve to give subcontractors a direct claim against the project owner even in the absence of contractual privity, by allowing the aggrieved subcontractor to file a lien against the property for the value of the labor and materials provided. Mechanic's liens are governed by statute, so a subcontractor has to strictly comply with the requirements of the state mechanic's lien law. Depending on your state's statute, you may be able to contractually prevent subcontractors from filing mechanic's liens on your projects. You should consult with a lawyer to determine how to best protect yourself.
By Mohammad A. Ghiasuddin, Esquire
QUESTION: As the developer of a new building under construction, what are the insurance liability issues I should be considering?
ANSWER: The fire in Conshohocken, PA, which severely damaged a building under construction and an adjacent residential condominium building, raises significant liability issues for owners and developers of new buildings. As a result of that fire, there was severe property damage to the building under construction, and the adjacent building. Fortunately, there were no deaths or serious bodily injury, but there will no doubt be millions of dollars in property damage, business interruption, and loss of use claims stemming from this fire. The Owner/Developer of a new building must take appropriate advance steps to insure against such possible damage claims.
On most construction projects, an Owner/Developer secures Builder's Risk insurance, which provides protection from multiple perils to the building under construction, including fire. The amount of this insurance is usually at least equal to the value of the construction being performed. To protect itself from claims for bodily injury, death, or property damage, an Owner/Developer will require its Prime Contractor (and all subcontractors and sub-subcontractors) to provide commercial general liability insurance coverage. Advance thought must be given to the levels of these coverages, which should include excess coverage. Because it is difficult to predict the amount of possible claims, it would be prudent to have a professional assess the risk of possible claims. Special risks such as (in the case of the Conshohocken fire) the proximity of the building under construction to an existing stick-built residential condominium can be taken into account when coverage levels are established.
Special coverages may be available by endorsement with respect to claims arising from damage to existing adjacent buildings. A prudent developer will consult with their insurance professional as to the appropriate level and coverage endorsements. That professional can assist the Owner in identifying any risks unique to a particular site.
Developers should require their contractors to include appropriately worded indemnification clauses in their construction contracts which, together with insurance coverage, will allocate responsibility to the contractors in the event of a claim arising from their negligence. Further, developers should require their contractors to name the Developer, and their related and affiliated entities (including any Lender) as Additional Insureds on the liability policies of the contractors.
Concerning the Conshohocken fire, a key question will be whether, and to what extent, the developer of the building being constructed (which was the apparent source of the fire) was able to protect itself through insurance from the claims which will surely be brought by the owner and tenants of the damaged condominium building, (and their insurers via subrogation claims). Properly worded endorsements covering such damages to adjacent buildings, and proper levels of coverage, are essential to protecting a developer from potential, substantial liability from similar claims.
QUESTION: I am the owner of a project for the construction of a commercial building. The project involves several contractors and different phases of work. Unfortunately, the project has been significantly delayed as a result of deficient work by one of the contractors on the project. I plan on bringing a lawsuit against the contractor to sue for damages incurred as a result of delays to the project. Will I need to retain an expert witness?
ANSWER: Yes, you will likely need to retain the services of an expert witness to establish that delays resulting from the contractor's deficient work impacted the completion date of the project and caused you to suffer damages. The mere fact that the project took longer than anticipated is generally not enough to sustain a typical claim for damages for delay. Rather, a claimant would be expected to establish that the contractor's delays impacted activities that were necessary for timely completion of the project, and that the contractor's delays were the proximate cause for damages for delay. In cases involving multiple contractors and different phases of work, courts will typically require a claimant to establish these factors using expert testimony. A qualified expert will be needed to study the project's schedule and provide an analysis as to whether the contractor's alleged delays were of activities that were critical to the project's completion date, i.e., "critical path" activities. Such an expert would conduct what is known as a critical path method analysis, which is a technical, complex and detailed analysis of a project's schedule, requiring specialized knowledge and skill. The expert would need to identify the critical path of the project and explain how the contractor's deficient work impacted these critical path activities. If the delays did not impact the critical path of the project, you may not be able to recover damages for delayed completion of the project. Expert testimony would also likely be needed to establish the extent to which the delays to the completion date were caused by the contractor. If factors other than the deficient work of the contractor delayed the project, i.e., if the contractor alleges that concurrent delays impacted the project, expert testimony would be needed to show that the contractor was the proximate cause for the delays. Courts have held that such complex questions require the use of expert testimony at trial. Given how important expert testimony is to a claim involving delay damages, you should be sure to speak with your attorney about selecting the right expert or experts for your case, along with the often significant costs involved.
By Mohammad A. Ghiasuddin, Esquire
QUESTION: I am developing a new commercial building. Should I require my architect to carry professional liability insurance?
ANSWER: Optimism being the most common character trait of those involved in real estate development, it is not surprising that risk and liability are not at the top of the list of issues receiving attention from developers in design services agreements. Developers, whose goals are to build and create, naturally prefer not to spend time and effort thinking about the "glass half empty" of negligently performed design services. Issues like scope of services, schedule, cost and payment are likely to receive more attention. Yet, experience teaches that ignoring liability risks inherent when design services are provided can have severe financial consequences. These risks can and should be professionally handled up front to avoid larger problems and costs later.
One of the risk issues frequently ignored in design services agreements is insurance coverage for design errors and omissions. Many of the most commonly used standard form design services agreements, such as those published by the American Institute of Architects, do not automatically provide for mandatory errors and omissions insurance. A developer's assumption that its architect or engineer maintains such coverage can be incorrect because many design firms go without coverage. Those that do maintain coverage typically provide "claims made" policies which, if not maintained continually from year to year, essentially expire following completion of the project.
The cost of uninsured design negligence can be magnified when a "limitation of liability" clause is inserted in the design services agreement. Such clauses, routinely used by architects and engineers in their own proprietary form agreements, cap financial liability for design negligence, typically at a fixed amount, or a multiple of the design fee. Such clauses are generally enforced by the courts. For example, in the case of Valhal Corp. v. Sullivan Associates, a federal court in Pennsylvania enforced a limitation of liability clause in a design agreement that capped an architect's liability at $50,000, or the amount of its fee. In that case, an architect had failed to disclose a building height restriction to a developer that resulted in losses exceeding $1,000,000. The court held that between commercial parties, such limitation of liability clauses did not violate public policy and were enforceable. The court stated that such clauses were unenforceable only if the amount of the liability cap, compared to the fee being charged for services, was so disproportionate as to remove the design professional's incentive to perform its services with due care.
On projects of any size or complexity, owners and developers negotiating design services agreements should almost always require their design professionals to provide insurance. They should also be aware of the financial risks created by limitation of liability clauses in those agreements. Dealing with such issues up front is the most effective way to handle the risk of damages from design negligence.
QUESTION: If the owner/developer of a private construction project has not paid its general contractor, can an unpaid subcontractor recover on the project's payment bond even if the subcontract contains a "pay-if-paid" clause?
ANSWER: Probably, although the question has not been squarely addressed in many courts. In response to a payment bond claim, a bonding company (or "surety") typically has the option of defending the claim by standing in the shoes of the general contractor and may assert whatever contractual or legal defenses the general contractor may have had to the claim. The question becomes trickier, however, when the subcontract includes a "pay-if-paid" clause, which is a contractual provision specifying that a subcontractor is not entitled to payment if the general contractor has not received payment from the owner. A pay-if-paid clause would make the general contractor's obligation to pay the subcontractor contingent upon payment from the owner to the general contractor. Such a clause could mean that if an owner becomes insolvent and cannot pay its general contractor, the subcontractor would not have a right to receive payment from the general contractor even if its work was properly completed and the general contractor was financially solvent, potentially shifting the risk of an owner's non-payment from the general contractor to the subcontractor. Several jurisdictions have found such clauses to unenforceable as between a contractor and subcontractor on policy grounds, while other jurisdictions have found them enforceable as between contractors and subcontractors when properly drafted.
The question of whether a surety may validly assert a pay-if-paid clause as a defense implicates a unique policy concern because a payment bond is seen as a safety-net of sorts for subcontractors and suppliers. One of the purposes of a payment bond is to ensure that subcontractors and suppliers have a source of recovery in the event the general contractor is financially unable to pay. While sureties are typically permitted to assert whatever defenses may be available to the general contractor in defending a bond claim, courts have expressed concern that allowing a surety to assert a pay-if-paid clause defense could potentially leave the unpaid subcontractor or supplier without a source of recovery. Although the question has not been squarely addressed everywhere, many courts that have looked at the issue have rejected the use of the defense by sureties, citing the concern that allowing sureties to rely on pay-if-paid clauses could serve to defeat the purpose of the payment bond. While the issue certainly has not been addressed in all jurisdictions, if the trend is any indication sureties will continue to face difficulties in attempting to rely on pay-if-paid clause defenses.
By Mohammad A. Ghiasuddin, Esquire
QUESTION: I develop, improve, and build on real estate in Pennsylvania. How do I decide if the people who perform work for me are employees or independent contractors?
ANSWER: A new law which just became effective in Pennsylvania will affect your decision. The "Construction Workplace Misclassification Act" targets contractors who misclassify their employees as "independent contractors." Such misclassification can occur if a contractor incorrectly treats an employee as an independent contractor to avoid expense such as payroll taxes, worker's compensation insurance costs, and unemployment compensation expenses, which would be payable for actual employees. The Act provides for civil penalties, potential stop work orders, and criminal liability for such actions.
The Act applies to employers in the "construction industry," which is defined as a business involved in the erection, reconstruction, demolition, alteration, modification, building, assembling, site preparation and repair of real property on public or private projects. It narrowly defines an "independent contractor". An independent contractor must have a written contract, control his own performance, and be engaged in an independent trade, profession, or business. A person is so engaged only if he/she has their own tools, has a contract which provides for profit, performs services through a separate business, maintains a separate business location, maintains separate liability insurance of at least $50,000, and holds themselves out as a separate business. If a business misclassifies an employee as an independent contractor, it can be fined between $1000 and $2500 per offense, and a stop work order preventing the business from continuing to employ the misclassified individual may be issued. Intentional violations of the Act may result in a criminal referral to the Attorney General or a local District Attorney. Intentional violations of the Act are misdemeanors of the second or third degree. The Act also contains a whistle blower provision which protects individuals from retaliation from reporting violations of the Act. This new law imposes formidable risks, apart from federal tax liability, for businesses which misclassify employees as independent contractors. Construction employers are advised to review their hiring practices to ensure that they conform to the requirements of this new law.
