Two Big Legal Developments Hit the Construction Landscape

Two major recent changes impact the enforceability of Virginia construction contracts. These changes make certain contractual waivers “null and void” as a matter of law.

First, waivers of mechanic’s lien rights executed before work begins or materials are supplied by subcontractors or material suppliers are now null and void.

This change is found in Virginia’s mechanic’s lien statute. Specifically, Section 43-3 of the Virginia Code is now amended with this italicized language:

C. Any right to file or enforce any mechanics' lien granted hereunder may be waived in whole or in part at any time by any person entitled to such lien, except that a subcontractor, lower-tier subcontractor, or material supplier may not waive or diminish his lien rights in a contract in advance of furnishing any labor, services, or materials. A provision that waives or diminishes a subcontractor's, lower-tier subcontractor's, or material supplier's lien rights in a contract executed prior to providing any labor, services, or materials is null and void.

Second, waivers of rights to payment bond claims and claims for “demonstrated additional costs” executed before work begins or materials are supplied by subcontractors or material suppliers are null and void.

This second change adds a new section to Virginia law on payment bonds and claims for demonstrated additional costs. This section is contained in Section 11-4.1:1 of the Virginia Code:

A subcontractor as defined in § 43-1, lower-tier subcontractor, or material supplier may not waive or diminish his right to assert payment bond claims or his right to assert claims for demonstrated additional costs in a contract in advance of furnishing any labor, services, or materials. A provision that waives or diminishes a subcontractor's, lower-tier subcontractor's, or material supplier's right to assert payment bond claims or his right to assert claims for demonstrated additional costs in a contract executed prior to providing any labor, services, or materials is null and void.

This new section adds broad protections for subcontractors and material suppliers on the change order front. Change order procedures in construction contracts can be overly complicated and as a result, it can be easy for a subcontractor or material supplier to let a change order claim slip through its fingers. Subcontractors and material suppliers can use this new change as leverage to negotiate change order procedures. For example, many change order procedures require a change order claim to be brought within a certain (sometimes short) time window. Under the new Virginia law, change order language mandating strict time limits to bring claims may be negotiated in favor of a subcontractor or material supplier if there is an argument that it “diminishes” the subcontractor or material supplier’s right to assert a claim for demonstrated additional costs in a contract.

In sum, here are the take-home points about the recent changes to Virginia construction law:

• Prohibited Waivers: Subcontracts and material supplier contracts cannot contain the waivers.
• Allowed Waivers: Contracts between owners and general contractors can contain the waivers. Further, subcontractors and material suppliers can waive the aforementioned rights after any work starts or materials are supplied.
• Change Order Procedures as a Negotiation Point: Savvy subs and material suppliers can use Virginia’s new rule banning pre-work waivers of claims for demonstrated additional contract costs to negotiate burdensome change order requirements in their favor.

Katie Lipp is a Senior Associate Attorney and head of the construction practice at Berenzweig Leonard LLP. She can be reached at klipp@BerenzweigLaw.com.

Builder “Silences” Noise Lawsuit Stemming from Alexandria Sale

A homeowner’s fraud lawsuit against builder Pulte Home Corporation based on excessive noise in the homeowner’s unit was recently dismissed by the U.S. District Court for the Eastern District of Virginia, Alexandria Division. The case is Devine v. Pulte Home Corporation, Case No. 1:15-cv-1361 (E.D.Va. Dec. 4, 2015). U.S. District Court Judge James C. Cacheris granted Pulte’s motion for judgment on the pleadings and dismissed the homeowner’s lawsuit.

The Plaintiff homeowner in that case purchased an apartment built by Pulte in Alexandria’s Potomac Yard community along Route 1. The homeowner alleged that he was initially concerned about traffic noise, but decided to purchase the unit based on Pulte’s representations that the unit would be of “airport quality” in blocking out traffic noise, and was “luxurious.”

Shortly after moving into the unit, the Plaintiff could hear traffic noise, conversations of passersby from Route 1, and noises from the upstairs apartment. Pulte responded to Plaintiff’s noise complaints stating that the unit passed Pulte’s sound tests, and no further action would be taken. Plaintiff then sued Pulte, bringing fraudulent inducement of contract and Virginia Consumer Protection Act (VCPA) claims.

The Court dismissed the homeowner’s fraud claim, determining that Pulte’s statements regarding the unit – that it was “luxurious” and of “airport quality” in blocking out traffic noise – constituted mere “puffery,” or trade talk, open to subjective interpretation, and therefore could not serve as factual grounds for an actionable fraud claim.

By way of comparison, the Court cited factual statements that were deemed actionable for fraud claims to proceed. In Yuzefovsky v. St. John’s Wood Apartments, et al., 261 Va. 97, 110-11 (2001), the actionable statement was that a development was “crime-free,” that “police officers lived there,” and that “police vehicles patrolled the development.” In Tate v. Colony House Builders, Inc., 257 Va. 78, 83-84 (1999), the actionable statement was that a new dwelling was “free from structural defects.”

The Pulte case shows how fraud claims must be carefully constructed to ensure they meet the heightened pleading standard mandated by Virginia law. Pulte’s recent dismissal further clarifies what Virginia courts deem to be actionable fraud statements, and that mere puffery or sales talk are too objective to serve as the foundation for fraud in the inducement claims.

Katie Lipp is a Senior Associate Attorney and head of the construction practice at Berenzweig Leonard LLP. She can be reached at klipp@berenzweiglaw.com. 

How Government Contractors Can Escape Lawsuits – Derivative Sovereign Immunity

The United States Government generally enjoys sovereign immunity from lawsuits unless that immunity is waived. Government contractors that perform “discretionary functions” under government contracts should be aware that they could be immune from suit under the doctrine of derivative sovereign immunity.

This type of immunity generally protects government contractors performing delegated discretionary governmental acts when they are sued for taking those protected acts. To qualify for derivative sovereign immunity, a government contractor must show that its actions involved an element of judgment or choice, and that its decisions were based on considerations of public policy. See Berkovitz v. United States, 486 U.S. 531, 536-37 (1998).

In an ongoing case before the Norfolk U.S. District Court, a group of government contractors are using the doctrine of derivative sovereign immunity to try to reduce their legal liability. The contractors are defendants in a military family’s lawsuit for mold contamination in their leased military home. The defendants are comprised of property management companies, the family’s landlord, and a construction company that performed demolition and repairs in the family’s home. See Federico, et al. v. Lincoln Military Housing LLC, et al., No. 2:12cv80 (E.D.Va. Norfolk, Aug. 31, 2015).

In Federico, the defendants developed a mold remediation plan with the Navy pursuant to a public private venture. The defendants argued in a recent Motion for Judgment that their acts taken in accordance with the plan are discretionary functions, and therefore they are protected from the military family’s suit based on derivative sovereign immunity.

The District Court agreed that acts taken in accordance with the plan are likely protected by derivative sovereign immunity, but the family alleges that the companies failed to follow the plan entirely, not that the plan was defective. As a result, the District Court denied the defendants Motion for Judgment on derivative sovereign immunity, but the litigation is ongoing, and the sovereign immunity will “add a gloss on each claim” according to the District Court. No. 2:12cv80, Dkt. No. 515 at 24.

Government contractors should always remain mindful of the interplay between their role as private contractors and companies performing delegated work for the United States Government. Distinctions in a contractor’s scope of work could mean the difference between extensive legal liability and derivative sovereign immunity protection.

Katie Lipp is a Senior Associate Attorney and head of the construction practice at Berenzweig Leonard LLP. She can be reached at klipp@berenzweiglaw.com.

Construction Arbitrators Get New Powers

On July 1, 2015, the American Arbitration Association (AAA) rolled out new rules for the construction industry. Construction arbitrators can now sanction parties and grant emergency relief, among other power expansions.

Sanctions

A construction arbitrator can order sanctions where a party fails to comply with AAA rules or an arbitrator’s order. The arbitrator can also order non-monetary sanctions, such as making an adverse determination against a party or limiting a party’s participation in the arbitration. A party must have an opportunity to respond before a sanction determination, through the submission of evidence and legal argument before a sanction award is made. The sanction award must be explained in writing, and default awards cannot be used under this sanction power.

Emergency Relief

A party can apply for emergency relief before an AAA panel is formed. One day after submitting an emergency relief application an emergency arbitrator is appointed. Not later than two days after this appointment, the arbitrator sets a schedule for consideration of the emergency relief application. If the emergency arbitrator finds that the applicant shows that “immediate and irreparable loss or damage” will occur absent emergency relief, the arbitrator can enter an order granting emergency relief.

Dispositive Motions

Arbitrators can consider written motions disposing of all or part of a claim, or narrowing case issues. This new explicit allowance of dispositive motions is akin to motions to dismiss or motions for summary judgment in traditional litigation.

Mediation

The revised rules provide for a mediation step for cases with claims over $100,000. In these cases, the dispute is automatically tracked for mediation. However, any party can opt-out of the mediation, unless the parties’ contract has a mandatory mediation provision. The mediation takes place concurrently with the arbitration and cannot be used to delay the underlying arbitration proceedings.

Conclusion

Other rule changes include the addition of time frames and filing requirements to the consolidation and joinder process, new preliminary hearing rules, and greater oversight and regulation over pre-hearing document exchange and production. These new expansive powers are welcome additions, because they will allow construction companies involved in arbitration swifter resolutions and more opportunities for interim monetary relief.

Katie Lipp is a Senior Associate Attorney and head of the construction practice at Berenzweig Leonard LLP. She can be reached at klipp@berenzweiglaw.com.  

Pick your Litigants Wisely When Filing Mechanic’s Lien Lawsuits

The Supreme Court of Virginia recently held that a subcontractor, Synchronized Construction Services, Inc. (“Synchronized”), could proceed with its mechanic’s lien lawsuit against the project owner and bank, despite the absence of the general contractor on the hotel construction project, finding that the general contractor was not a necessary party. In Synchronized Construction Services, Inc. v. Prav Lodging, LLC, et al., 764 S.E.2d 61 (Va. 2014), the subcontractor sought project amounts due with a breach of contract count against the general contractor (“GC”), and a mechanic’s lien count against the project owner and bank.

Synchronized failed to serve the GC in the litigation, and an appealable issue arose because the GC was not involved in the litigation of the mechanic’s lien claim. The circuit court held that because the GC was a necessary party, Synchronized’s mechanic’s lien claim could not proceed.

On appeal, the Supreme Court of Virginia focused its necessary party inquiry on the subject matter or the so-called “res” of the mechanic’s lien action.  Notably, the GC failed to perfect a mechanic’s lien on the project real estate. During the litigation, the owner and bank chose to go through a “bonding-off process” where they posted a bond, which had a practical effect of substituting the bond for the underlying project real estate – meaning that the res became the bond itself and not the real estate. The Court found that because the GC was not involved with its own lien and therefore had no rights to the underlying project real estate, and its rights were not tied up in any way with the posted bond, it had no specifically defined interest in the subject matter of the lawsuit, and was not a necessary party.

In light of this case, subs and other companies should ensure that they choose their parties wisely before proceeding with construction litigation. Failing to do so could derail an attempt to get a fair shake in court. The legal landscape is complicated and one slip can endanger a company’s entire payment claim.

Katie Lipp is an attorney with the Washington, DC regional business law firm Berenzweig Leonard, LLP, and the head of its construction law team. Katie can be reached at klipp@berenzweiglaw.com.

How Does a Construction Contractor Not Slip and Fall Over Its Own Contract?

Ensuring that a construction contract clearly defines who is responsible for work-related injuries and related workers compensation benefits is critical, otherwise unanticipated statutory liability could surface, like a roofing contractor learned in Associated Aluminum Products and Builders Mutual Insurance Company v. Elvira-Menez et al., No. 2301-13-2 (Va. App. Sept. 16, 2014). In this recent case out of the Virginia Court of Appeals, the Court found that the prime contractor, Associated Aluminum Products (“AAPCO”) had to pay workers compensation benefits to a worker that slipped and fell off of a roof at its worksite, even though the worker was employed by a subcontractor, a Mr. Rodney Blair.

Blair arranged workers compensation insurance through a third party, Mr. Ronnie Jenkins. Jenkins received the payments from AAPCO, and the Court found that this arrangement was a mere ruse to let Blair latch onto Jenkins’ licenses and benefits. AAPCO believed that Jenkins was the subcontractor, and that Blair was the sub-sub, but none of these assumptions were documented in a written contract. Ultimately, the Court found that Blair was the actual employer, and not Jenkins.
The Appeals Court found that the following factors meant that Blair was the actual employer:

• AAPCO received payment requests directly from Blair;
• AAPCO contacted Blair regarding available projects;
• Blair completed projects without any involvement from Jenkins;
• AAPCO did not give any updates to Jenkins regarding project work; and
• Jenkins was only aware of the project’s status after it was completed.

Because Blair was uninsured, the Court found that AAPCO was liable for workers compensation benefits as the injured worker’s statutory employer.

The take-away lesson of this case is for contractors to always ensure that a written contract is in place before a construction project begins. The contract must carefully define which party is actually responsible for workers compensation benefits and accidents on the worksite. Failing to do so can result in unforeseen liability and costs and these pitfalls can be avoided by ensuring a proper contract is in place before the project starts.

Katie Lipp is an attorney with the Washington, DC regional business law firm Berenzweig Leonard, LLP, and the head of its construction law team. Katie can be reached at klipp@berenzweiglaw.com.

New Construction Arbitration Rules Promise Cheaper and Faster Construction Arbitrations

Companies involved in construction arbitration can now benefit from new rules which allow them to better predict time frames and costs to resolve disputes. The American Arbitration Association® developed new Supplementary Rules for Fixed Time and Cost Construction Arbitration effective June 15, 2014.

Companies can benefit from the new Supplementary Rules, because:

• Reduced Discovery/Document Exchange: they are ideal for disputes with distinct issues, because these disputes benefit from reduced discovery and document exchange.


• Two-Party Dispute: the rules generally only apply to two-party arbitrations.


• Surety exception: a surety can be a third-party to a dispute, if it is represented by the same attorney as its principal, and has not made a separate claim against any party.


• Time Schedules:  the rules include a schedule linking time frames to claim amounts.


• The time frames from filing to award range from 120 to 360 days – the time frame increases with the claim amount.


• Mandatory Administrative Conference: within 3 days of filing the Demand or Submission for arbitration, a mandatory Administrative Conference takes place to expedite the proceedings


• Mandatory Meet and Confer Conference:  within 14 days of the Administrative Conference, the parties must participate in a Meet and Confer Conference to select an arbitrator; hearing time, place and date; number of hearing days; and determine necessary discovery.


• Limits on Time Extensions beyond Schedule Time Frames: extensions beyond the schedule’s time frames are frowned upon – they have to be granted by the arbitrator upon request.


• Limits on Additional Hearing Days: have to be granted by the arbitrator upon request.


• AAA Fees: the rule schedule also links claim amounts to AAA fees.
  
• AAA fees range from $2,500 to $10,000
• Exclusions: arbitrator fees for hearing and study time.


• Maximum Fees: the maximum total fees range from $10,500 (claim of $75,000 –  $250,000), to $52,000 (claim of $1M – $5M). 
• Exclusions: conference calls, travel time, site visits, and post-hearing brief review.


• Expedited Award Time: arbitrators must render their award within 20 days of the hearing.

Arbitration is quickly evolving to mimic traditional litigation; therefore, companies should be aware of these new construction arbitration rules which may help cut arbitration costs and time expended on dispute resolution.


Katie Lipp is an attorney with the Washington, DC regional business law firm Berenzweig Leonard, LLP, and the head of its construction law team. Katie can be reached at klipp@berenzweiglaw.com.