Mississippi Supreme Court Rules that Daughter is Not Compelled to Arbitration with her Contracting Parents in Construction Defect Case

The Mississippi Supreme Court ruled that a homeowner’s daughter was not party to, nor an intended beneficiary of a contract with a foundation contractor such that her claims were not subject to arbitration.  The court ruled that she was not compelled to arbitrate and that her claims were ripe for adjudication in Perry County.

On June 10, 2013, Phillip Moore contracted with Olshan for repairs to the foundation
of the home he shared with his wife, Gloria Moore, and his adult daughter, Katelyn Moore.  Three years later, the entire family – Mom, Dad, and Daughter – sued Olshan for economic related damages arising from the foundation.  The lawsuit was segregated in that contract damages were sought by Phillip and Gloria only, while their daughter sought damages in tort for emotional distress.  The parties successfully moved to compel arbitration with the exception of those claims made by Katelyn, as she was not a party to the contract or third-party beneficiary.

Finding that Katelyn Moore was neither a third-party beneficiary to the foundation-repair contract, nor was she bound by direct-benefit estoppel, the Mississippi Supreme Court found that the daughter’s claims were wholly independent of the terms of the contract to which she was not a party. Therefore she was not allowed to enforce an arbitration clause respecting Katelyn Moore’s claims, which were unrelated to the contract.

In a well written dissent, Justice Chamberlin argues that Katelyn’s damages arise from her father entering into the contract with Olsham and should, therefore, be arbitrated with the remainder of the case.

 

Proposed South Carolina Legislation Might Limit Residential Specialty Contractors

The South Carolina legislature is considering legislation that will affect residential builders and specialty contractors.

The text with proposed changes below

SECTION    2.    Section 40-59-20(7) of the 1976 Code is amended to read:

“(7)    ‘Residential specialty contractor’ means an independent contractor who is not a licensed residential builder, who contracts with a licensed residential builder, general contractor, or individual property owner to do construction work, repairs, improvement, or reimprovement which requires special skills and involves the use of specialized construction trades or craft, when the undertakings exceed two hundred dollars and are not regulated by the provisions of Chapter 11. A residential specialty contractor is not authorized to construct additions to residential buildings or structures without supervision by a residential builder or other appropriately licensed person or entity. Residential specialty contracting includes the following areas of contracting and other areas as the commission may recognize by regulation:

(a)    plumbers;

(b)    electricians;

(c)    heating and air conditioning installers and repairers;

(d)    vinyl and aluminum siding installers;

(e)    insulation installers;

(f)    roofers;

(g)    floor covering installers;

(h)    masons;

(i)        dry wall installers;

(j)        carpenters;

(k)    stucco installers;

(l)    painters/and wall paperers.

Plumbers, electricians, and heating and air conditioning installers and repairers must be issued licenses after passing the required examination. Vinyl and aluminum siding installers, insulation installers, roofers, floor covering installers, masons, dry wall installers, carpenters, stucco installers, and painters and wall paperers must be issued registrations.

A residential specialty contractor is prohibited from undertaking work outside the scope of his license or registration, including employing, hiring, and contracting or subcontracting with others to perform such work on his behalf.

The provisions of this chapter do not preclude a licensed residential builder from also obtaining licensure or registration as a residential specialty contractor in an area of contracting identified in statute or recognized by the commission. In addition, a residential builder, who is licensed by examination in this State, is authorized to perform work in any of the areas of residential specialty contracting without separately obtaining a residential specialty contractor license or registration.

DELAY CLAUSES IN CONSTRUCTION CONTRACTS

Delays on construction projects cost money. Because delays are typically the result of several factors and actors, contractors need to address delays and the apportionment of damages in their contracts.

No Damage for Delay Clauses

These clauses are exactly as they sound.  The enforceability of these varies from jurisdiction to jurisdiction.   South Carolina has ruled “In many respects, SC policy does not favor punishing a party for a delay arising from negligence and unlucky circumstances.  Generally, no-damage-for-delay provisions are valid and enforceable so long as they meet ordinary rules governing the validity of contracts.” U.S. for Use and Benefit of Williams Elec. Co., Inc. v. Metric Constructors, Inc., 325 S.C. 129, 132, 480 S.E.2d 447, 448 (1997). South Carolina recognizes several exceptions to this general rule, including “delay caused by fraud, misrepresentation, or other bad faith; active interference; delay which amounts to an abandonment of the contract; and gross negligence.” Id. at 137, 480 S.E.2d at 451.

Logic tells us that damages should be paid by the party causing the delay.  Very often, delays are caused by multiple parties relying on a condition which fails to occur or, sometimes, delays are simply the fruit borne from the confluence of confusion and justifiable misunderstanding.   

Drafting a No Damage for Delay clause can result in an instant debate settler and limit the likelihood of a lawsuit which might cause further delay and waste. Contractors and subcontractors faced with No Damage for Delay clauses can adjust their prices to account for increased risk or, in some cases, elect to pursue other opportunities.

Negotiation of Clauses 

Allocation of risk for delays should be considered and thoughtfully negotiated.   AIA and Consensus  Construction contracts frequently include some type of No Damage for Delay clause. For example:

No payment or compensation of any kind shall be made to the Contractor for damages because of hindrance or delay from any cause in the progress of the work, whether such hindrances or delays are avoidable or unavoidable;

or,

Contractor agrees that it may be subject to delay in the progress of the work and that the sole remedy for such delay shall be an extension of time;

or,

In the event the subcontractor’s performance of this subcontract is delayed by acts or omissions of the owner, contractor or other subcontractors, subcontractor may request an extension of time for the performance of this subcontract, but shall not be entitled to any increase in the subcontract price or to damages or additional compensation as a consequence of such delays.

Courts generally enforce No Damage for Delay clauses.  Courts generally enforce all contractual clauses between businesses.    One way for contractors and subcontractors to avoid such clauses is to use an unmodified industry form agreement such as ConsensusDocs 200 -Agreement and General Conditions between Owner and Constructor or ConsensusDocs 750 -Agreement between Constructor and Subcontractor which do not have No Damage for Delay clauses. But many owners and contractors will use their own form which will frequently include a No Damage for Delay clause.

Even if the contract includes a No Damage for Delay clause, the clause may prove to be unenforceable.

Next time we will examine exceptions to No Damage for Delay Clauses

As always, any questions in SC call or email Clay Olson.   843-224-6676 clay@harperwhitwell.com 

In Mississippi email James Harper james@harperwhitwell.com

Notice of Furnishing and Remote Claimants

A “remote” claimant can be defined as one contributing labor or materials to a construction project who does not have a direct contract with the general contractor.   This is typically a sub of a sub or a material supplier who sells to a subcontractor.   The key is the provider must not be in privvity with the GC or owner.   

In order to protect remote rights, a provider should “raise its hand” by sending notice to the general contractor by Certified Mail, Return Receipt Requested (see S.C. Code Ann. § 29-5-20). This should be done at the beginning of the project and on subsequent occasions assuming more materials or services are provided.   

Formal requirements are found in the statute.

The Miller Act and Performance Bonds

The Miller Act, 40 U.S.C. §§ 3131–3134, provides that, before any contract for the construction, alteration, or repair of any public building or public work of the United States of more than $150,000 (increased fris awarded to any person, that person (usually the general contractor) must furnish:

(1) A performance bond in an amount the contracting officer considers adequate for the protection of the United States;

The United States and federally created bodies such as GSA are the beneficiaries of the performance bond piece.  If an awarded prime contractor defaults in the performance of its work or is terminated for cause, the United States may turn to the surety to step in and take over the general contractor’s obligations under the prime contract.  Bond language allows the surety to bring another qualified entity to finish the work, at the surety’s expense on behalf of citizens.

 

The Miller Act: An Introduction

The Miller Act is codified at 40 U.S.C. §§ 3131-3134.  The Act requires a general contractor contracting with the federal government or a federal governmental entity for a construction project with a contract in excess of $150,000 to obtain both a performance bond and a payment bond.

The Miller Act’s primary function is to foster construction and development in the public sector, while protecting infrastructure and public projects from the potential lien rights of material suppliers and subcontractors.

Miller Act v. Mechanics Lien

When a subcontractor is not paid for labor or materials furnished to a prime contractor in a private construction contract, the aggrieved party is normaly able to seek recourse if not paid by taking out a mechanic’s lien against the property. However, the doctrine of sovereign immunity prohibits a lien being taken out against any public property, and this applies to construction contracts awarded by the federal government.

To afford subcontractors a form of redress, Congress enacted the Miller Act (40. U.S.C.A. § § 3131 and 3133).   In our next installment we will discuss specific details covered by the Act including the distinctions between a payment bond and performance bond.

If interested in this topic, please see next post on performance bonds.

 

 

 

 

 

OSHA and Silica Regulations Close to Finality

The the Occupational Safety and Health Administration (OSHA) has finally sent its comprehensive rule governing worker exposure to silica dust to the White House Office of Management and Budget (OMB) for final review.

A proposed rule until now, the silica guidelines’ pending approval by OSHA will make them law.

Silicosis is the lung disease the rule is trying to curtail. While neither I or anyone I know has ever heard of it, silicosis can be fatal. Evidence suggests that the disease is rare, however, and fatalities have declined since its identification in 1968.

The OSHA guidelines would affect all trades which involve sand blasting, rock drilling or ceramic and glass manufacturing. From a construction industry viewpoint, the silica rule certainly applies to folks working in almost any capacity with concrete and masonry. The rule might also affect those in the business of manufacturing or applying drywall and other synthetic products such as siding materials.

In the grand picture, those in the field will not be overly burdened as silica dust control measures boil down to wearing a half-face respirator and using water or vacuums to dampen dust exposure. Silica dust particles are not super fine like asbestos so it is believed that minimal protection (paper mask) is adequate.

The largest significance will be felt administratively. OSHA guidelines require documentation, reporting, logs, control readings, and further documentation. This burden will serve to keep construction safety and legal departments at the office longer starting in 2017 when the rule is expected to be in effect.

Still a Beneficial Tool, Mediation Process Is Not Perfect

     In 2001 I mediated my first case as a young lawyer with just enough knowledge to be dangerous…..to myself most likely.   Over the past 14 years I have observed the process and it’s uncanny ability to resolve the previously unresolvable.  Lately I have noticed the indirect, less tangible benefits.  That said, a review of the past 15 years leaves me with a few criticisms.

Mediation

The legal definition of mediation is as follows:

“A settlement of a dispute or controversy by setting up an independent person between two contending parties in order to aid them in the settlement of their disagreement.”

That independent person, the mediator, is typically a lawyer removed from the parties and case prior to mediation.   He or she wears many hats during the process.   One should be a capable listener who possesses other qualities such as man management, a calm demeanor, and the ability to remain neutral in both mind and exterior actions.   While it is argued that a mediator should not be an advisor, I think the two can coexist if practiced in an artful manner.

Advantage of Mediation Part 1: Cost

This should come as no surprise.   Trials are very expensive in all practice areas.  Within complex construction defect matters, the time preparing witnesses and evidence alone can anhilate a litigation budget before the trial has begun.

These trials take weeks.   Mediation can be concluded in as few as a couple of days.

Advantage of Mediation Part 2: Control

Some people refer to this principal as predictability.  I don’t know if a mediation is always a predictable endeavor, yet I find it leaves less to chance than a resolution which involves 12 strangers who have spent too much time away from life and reality.  Even the most unfavorable mediation outcome requires the parties, rather than strangers, to dictate outcomes.

Advantage of Mediation Part 3:  Venting

Lawyers are guilt of forgetting that there can be value, in the form or personal satisfaction, derived by a client who has the opportunity to air their hurt, anguish etc.  In construction defect matters this can be best illustrated by a homeowner providing specific instances of inconvenience due to the alleged defective construction.

Contractors often feel affirmed as their reputation is put on the line.  Having the ability to tell a crowded room, “Hey, I am a quality professional and human being.  I take these allegations seriously and I feel that I was kept out of the loop when problems were mentioned.”   This helps the insured contractor as he more than likely has not been in any contact with the Plaintiff since initiation of suit.

Ways We Can Improve

Suggestion 1:  Light Judicial Involvement

This might be more idealistic than realistic but medications would be aided with some judicial monitoring.  In South Carolina the court administration is pretty hands off, with the exception of requiring contested civil matters participate in some form of ADR within the first 300 days.  If there were more formal requirements to report back to court post mediation, it might allow an insurance coverage issue to be fast tracked for judicial ruling.  Having a conference call which allowed the Judge or a law clerk to document the issues impeding settlement might allow for these to be addressed sooner, rather than two years later.

Suggestion 2:  Multiple Days

This is self explanatory.   Attempting to settle a large, complex case with multiple defendants is simply too much of an endeavor and typically fails.   Further, I would argue that these one day events are viewed by lawyers as wasted efforts prior to attending mediation and thus less effort is initiated prior to the event.  If, for instance, a two day mediation is scheduled 90 days in the future there should be none of the common impediments such as securing settlement authority after fully evaluating your position and exposure.
Conclusion

Complex construction defect suits are perfectly posture for the mediation process.   Without mediation, these suits would not be resolvable due to the numerous parties and issues.  Trial judges and court administrators would be the equivalent of sheephearders without it as babysitting the parties, jury, lawyers etc would be rendered impossible.   All that said, the process can be improved and tweaked in slight ways which would only make mediation a more satisfying and successful means of resolving disputes.

Insurance Coverage for Defective Workmanship

For years, some state courts and insurance companies have been telling contractors that the construction defect claims they face aren’t covered by their insurance because faulty work is not an “accident” that insurance is intended to guard against. This situation is rapidly changing, however, as more and more courts are concluding that defective construction is an “accident.” This has opened the way for these claims to be covered by insurance.

We have covered this topic before in the blog.  As in 2011, insurance coverage remains ever evolving as it pertains to construction defect claims.

There are four questions that must be answered to determine if a construction defect claim is covered by a contractor’s standard commercial general liability insurance policy:

• Was the alleged faulty work or breach of care an accident?

• Has the workmanship resulted in tangible property damage?

If the first two items are satisfied, we move to exclusionary language, as well as exceptions to exclusions.

• Is the construction defect expressly excluded from the policy’s coverage?

• If there is an exclusion that applies, is there an exception that restores coverage?

This article will focus on the first question only, which is often referred to as the “accident” prong.  The definition of “accident” varies from jurisdiction to jurisdiction and often hinges on concepts which are lesser understood such as fortuity.

For example, in the recent case of Dusty McBride v. Acuity, the 6th Circuit Court of Appeals denied insurance coverage for claims against a contractor based on structural construction defects because under Kentucky law, construction defects are caused by the builder, or the subcontractors chosen by the builder, and not by a fortuitous or truly accidental event.

Kentucky’s rationale is becoming less and less common, as states are trending toward construing instances of faulty construction as “accidents” in that they are not purposeful acts.

Consider the following cases from 2013:

The Connecticut Supreme Court, in Capstone Building Corp. v. American Motorist Ins. Co.; the Supreme Court of Georgia, in Taylor Morrison Serv. Inc. v. HDI-Gerling America Ins. Co.; and the Supreme Court of North Dakota, in K&L Homes Inc. v. American Family Mutual Ins. Co., reached the conclusion that defective construction is an accident.

The decisions by these courts provide evidence of a rapidly growing trend in which courts have rejected arguments advanced by insurance companies to avoid covering construction-defect lawsuits. But there are still many states in which this question has not been answered.

Still, states remain undecided or, as in Utah, conflicted.  In that state judges in the U.S. District Court have come to opposite conclusions: one, that construction defects aren’t accidents under Utah law, and another, that they are.

However, given the strength of the national trend in the courts and resulting appeals decisions, an insurance company’s denial of coverage for a construction defect claim on the basis that the defective construction was not an accident likely will not be upheld in future cases.

Sixth Circuit Holds Defective Workmanship Not Covered by Contractor’s CGL Policy

Defective workmanship is not a covered occurrence, according to a 6th circuit decision. The concept of defective work continues to be interpreted differently by states around the country.

Green Building/Construction Law

insurance_policyA recent post on Insurance Developments (this blog’s sister blog) discussed a recent unpublished opinion by the Sixth Circuit Court of Appeals, which held that a contractor’s allegedly poor workmanship did not constitute an “occurrence” under the contractor’s policy, thereby relieving the insurer of the obligation to indemnify the contractor in a construction defect action. While this topic is not specifically related to green building (there are few reported decisions or active cases that are), the principle is nonetheless applicable to contractors working on green building projects.

Very briefly (click the link above if you want to read a slightly more in-depth discussion), Wal-Mart contracted with MW Builders to construct a new Wal-Mart in Kentucky. MW Builders subcontracted the site preparation and some preliminary foundation work to Kay & Kay. After construction was complete, cracks began to develop in the building’s walls, allegedly resulting from settlement below the foundation. MW…

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