Lamson, Dugan and Murray, LLP, Attorneys at Law

Construction Litigation—Battles on Many Fronts

Posted in Construction Litigation

Millennium_3D_Chess_init_configWhen you are involved in construction litigation, you have battles on several fronts, including those against subcontractors, owners, insurers and the court.  Shoring up your defenses on each of these fronts is imperative, or you may lose the battle or, worse yet, the war.

A recent opinion out of the Eleventh Circuit Court of Appeals (overseeing federal courts in Alabama, Florida and Georgia) Carithers v. Mid-Continent Casualty Company, illustrates the various battle fronts involved in a construction case.  In this case, the Carithers (Home Owner) sued their homebuilder, Cronk Duch Miller & Associates (Contractor) in state court after discovering multiple defects with their home.

Battle Front #1—Claim Against Contractor

The Contractor and Home Owner entered into a consent judgment for approximately $90,000.00 and the Contractor assigned its claim against its insurer to the Home Owner.  It is unlikely that the Contractor paid the $90,000.00 judgment.  The Home Owner likely agreed not to collect on the $90,000.00 in exchange for the chance to pursue the Contractor’s claim against its insurer.

Scorecard:  Home Owner wins hollow victory against Contractor, but gets a chance to pursue the Contractor’s Insurer.

Battle Front #2—Where Are You Litigating?

The Home Owner files suit against the Contractor’s insurer, Mid-Continent Casualty Company (Insurance Company), in state court.  The Insurance Company removes the case to federal court.  This is not a big deal, but you are no longer in front of your local district judge, but the federal judge.  If you were litigating near your home office, say in North Platte, you would not be litigating in Lincoln or Omaha.

Scorecard:  No winner here, just litigating in a different court.

Battle Front # 3—Claim Against Insurance Company, Part I

The Home Owner filed suit in 2010, over 4 years after the home was completed.  The Home Owner claimed that there was dry rot in the framing, electrical problems, and improperly installed brick and tile.  The Home Owner claimed that he did not discover the defective construction until 2010.

The Insurance Company insured the Contractor from 2005 through 2008.  The Insurance Company claimed that it had no duty to defend the Contactor because the property damage “occurred” after the policy period ended.  In essence, the Insurance Company claimed that the defective construction did not occur until it was discovered, and because it was discovered after the insurance ended, there was no duty to defend the Contractor.

The Court disagreed and required the Insurance Company to defend.

Scorecard:  Home Owner wins, and insurer must defend claim against Contractor.  Importantly, this does not put money in the Home Owner’s pocket.

Battle Front #4—Claim Against Insurance Company, Part II

The Insurance Company also argued that it did not have to pay the Home Owner because the claim “occurred” after the Contractor’s insurance coverage ended.  The Court again disagreed, finding that the Insurance Company must pay the claim against the Contractor arising out of defective construction.

Scorecard:  Win for Home Owner, but still no dollars in Home Owner’s pocket.

Battle Front #5—Damages

The Home Owner wants to be paid for the damage to his home.  The Insurance Company argues that the “Your Work” exclusion limits its obligation to pay for damage to the house.  In essence, the insurance company argues that the defective work performed by the subcontractors, which did not damage anything else in the house, is not covered.  There is only coverage, and an obligation to pay, when the subcontractor’s work caused damage to parts of the house beyond the subcontractor’s work.  For example, the brick on the house was improperly installed and a sealant was improperly applied, requiring the brick to be replaced.  The court found in favor of the Insurance Company because the brick subcontractor’s work did not damage any other part of the house.

Scorecard:  The Home Owner won some portions of its claim, but not all.

Take Away: There are challenges to a construction claim at every turn.  You not only have to marshal the resources to fight the battle, but you need sound counsel in pursuing each of the claims.  Having experienced construction counsel on your side is crucial to victory.

Ambush Elections are Here—Are You Ready?

Posted in Unioin Campaign

On April 14, 2015, the National Labor Relations Board’s new election rule went into effect. The new rule, which shortens the time frame for union elections, will make it easier for unions to organize.  Employers must get prepared now, not when they hear about an election.  As the NLRB Members who dissented from the final rule noted:

The Final Rule has become the Mount Everest of regulations: Massive in scale and unforgiving in its effect. Very few people will have the endurance to read the Final Rule in its entirety.

Here are some highlights of the new rule:

  • Within 2 business days after service of the Notice of the Pre-Election Hearing, the employer must post a Notice of Petition for Election. The employer must also distribute the notice via e-mail if the employer customarily communicates with employees via e-mail.
  • A Pre-Election hearing will be scheduled within 8 days from the Notice.
  • The employer must file a Statement of Position (new form) within 7 days of the Notice of Petition identifying any issues it wishes to litigate at the hearing.  Any issues not raised are waived.
  • The employer must provide a list of employees, including detailed contact information. And, if the employer believes that the classification unit is inappropriate, a separate list of all individuals the employer claims should be added or excluded in the proposed unit must be provided.
  • The voter list must be filed with the NLRB and the union.
  • After the hearing, objections must be filed within seven days after the tally of ballots and must specify the reason for each objection along with a written offer of proof identifying the witness(es) who would testify in support of each objection and what they would say if they provided testimony.

For those of you not familiar with litigation, this is like going to trial within 10 days of being served with a lawsuit.  You have to be prepared well ahead of any organizing activity to effectively defend against the organizing efforts.

For those of you that want to read more, here are a few links to information about the new rule that the NLRB issued:

Take Away: Union organizing is a real threat to every merit shop.  Now is the time to get prepared for an election campaign–well before the campaign begins.

OSHA Penalties—What Happened with International Nutrition

Posted in Uncategorized

For those of you in and around Omaha, you recall the tragic collapse of International Nutrition’s plant in early 2014, killing two workers and injuring several others.  OSHA swept onto the scene and issued citations.  Surprisingly, the penalties totaled only $120,000.  While a large sum, one would think two deaths and a score of injuries would generate a larger fine.  International Nutrition appealed the penalties and they have now been reduced to $78,000, about a 1/3 reduction.  Below, I’ll set forth what happened.

The Original Penalties

International Nutrition was originally fined $120,650.00 for citations ranging from willful, serious, to other-than-serious.  Here is the original citation.  The table below summarizes the citation and penalties:

Description of Citation Gravity Penalty
Employer did not furnish hazard free work environment Serious $6,160.00
Passageways and storerooms not kept clean Serious $6,160.00
Employer failed to provide written respiratory protection program Serious $2,640.00
Employer failed to provide medical evaluation to determine employee’s ability to wear respirator Serious $0.00
Employer failed to annually fit test respirators Serious $0.00
Employer failed to provide confined space training Serious $4,400.00
Employer failed to adopt an energy control plan Serious $6,160.00
Employer failed to provide training in Spanish; for new hires and on the use of energy control procedures Serious $6,160.00
Employer did not ensure employees successfully completed training and failed to evaluate operator’s performance Serious $6,160.00
Employer failed to install proper electrical systems and wiring Serious $6,160.00
Employer failed to install dust proof junction box Serious $0.00
Employer failed to provide HAZCOM training Serious $2,640.00
Employer exposed employees to hazardous worksite by overloading structure Willful $61,600.00
Employer failed to regulate air nozzles so as not to exceed 30 p.s.i. Repeat $12,320.00
Respirators were not provided with adequate respirator training Other-than serious $0.00
Employer failed to keep permits for one year Other-than serious $0.00
Total $120,650.00

 

Not surprisingly, the largest penalty, $61,600.00, stemmed from the willful violation that International Nutrition’s exposed workers to a hazardous work site.

Challenge to Penalties

International Nutrition chose to contest the penalties by filing a “Notice of Contest” with the Secretary of Labor.  The Notice of Contest then begins the administrative proceedings, much akin to a lawsuit, in which the Department of Labor’s OSHA attorney files a lawsuit against International Nutrition alleging that International failed to abide by the OSHA regulations and asking that the penalties listed in the citation be imposed against International Nutrition.

Settlement Discussion

During the pendency of an OSHA proceeding, parties generally continue to discuss settlement.  And, that’s what happened here.  Under the settlement with OSHA, International Nutrition’s penalties were reduced to $78,000.  The biggest change was the willful penalty reduced to repeat and the associated penalty was reduced from $61,500 to $50,000.  The number of the serious citations was also reduced from 12 to 5.  International Nutrition must also participate in the Severe Violator Enforcement Program, which means it will be subject to follow-up inspections and increased company awareness of OSHA programs, such as an obligation to hire an OSHA consultant to work with the company’s OSHA compliance.

Take Away: International Nutrition must have had a pretty good OSHA program to limit the penalties that OSHA could impose after this tragic accident.  This situation certainly underscores the importance of maintaining an effective OSHA program to minimize penalties.

Employee Handbooks—Your First Line of Defense

Posted in Employee Handbook

This spring has been busy with questions about employee handbooks.  Perhaps it is because the NLRB just issued a directive on the legality of various clauses usually contained in handbooks. Or perhaps it’s because employers, including construction companies, are realizing the importance that handbooks play in defending against claims of harassment.

Craig Martin, Construction Attorney, Lamson Dugan & Murray, LLP

 

Employee Handbooks Are Important

Employee handbooks are an employer’s first line of defense in claims of harassment.  A key provision to any employee handbook is an anti-harassment provision that includes:

  • A definition of harassment;
  • The process to complain about harassment;
  • A commitment to investigate all claims of harassment; and
  • An assurance that no one will be retaliated against for reporting harassment.

This is the first line of defense in a harassment claim because employers may avoid liability IF they have a policy against harassment, investigate the situation, and take appropriate action in response to the allegations of harassment. If the employer does not have an anti-harassment policy, this defense is not available and the situation will be more difficult to resolve.

Employee Handbooks Can Be Simple

I have heard employers say time and time again, we’re a close knit crew and we don’t want a 50 page employee handbook.  First, you are a close knit crew until some complains about harassment.  Second, you don’t have to have a 50 page handbook.  Handbooks are often times less than 15 pages, and many times less than 10 pages.  This is not a lot of paper, given the protection that a handbook can provide.

Training is Crucial

Just like with your safety policies, you have to provide training on your handbook.  At least once a year, you should go over the handbook , spending a little extra time on the anti-harassment policy and reporting procedure.

Take Away: You need an employee handbook.  Make it a goal for this spring or even 2015 to adopt an employee handbook.

Demanding A Reduction in Retainage

Posted in Nebraska Prompt Pay Act

One of the attendees of the Goldleaf Surety presentation asked a great question about reducing retention under the Nebraska Construction Prompt Pay Act, Nebraska Revised Statutes, 45-1201-45-1211.  He wanted to know whether there was any way to reduce and recover retainage during the project.  The short answer is retainage should be reduced half way through the project, but there is no right to recover retainge for work performed during the first half of the project.

Retainage in Nebraska

Under section 45-1204 of the Prompt Pay Act, a contractor may withhold up to 10% retainage.  A contract that allows for greater retainage is not enforceable.

Reduced Retainage

Once the project is 50% complete, retainage should be reduced to 5%.  But, the reduced retainage only applies to additional progress payments.  There is nothing in the Prompt Pay Act that requires the upstream contractor to pay retainage withheld since the beginning of the project.

Reasons Not to Reduce Retainage

A reduction in retainage is not automatic.  In order to get the reduced retainage, the downstream contractor must demonstrate to the upstream contractor:

  • that the work completed to date has been done in accordance with the contract;
  • that the downstream contractor has provided assurances of continued performance; and
  • the downstream contractor has the financial ability to complete the work.

Take Away: Retainage should be reduced to 5% after the project is 50% complete.  But, the upstream contractor may hold on to the entire retainage withheld during the first 50% of the job until the job is complete.

Improper Classification Under Davis Bacon Can Be Costly

Posted in Davis Bacon Act

The Department of Labor announced late last year that it had recovered nearly $2 million Craig Martin, Construction Attorney Lamson Dugan & Murray LLPin back wages and fringe benefits from a subcontractor that provided constructions services at the federally funded Crescent Dunes Solar Energy Project in the Nevada desert. This was not a failure to pay Davis Bacon wages, but a failure to properly classify laborers on the project. The DOL determined that the laborers should have been paid as skilled trade steelworkers, not general laborers.  As the subcontractor found out, this proved very costly.

The subcontractor submitted its bid, classifying its laborers as general laborers and designating their wage at $30.00. The laborers were to assemble billboard sized mirrors on the project. There is some indication that the Department of Energy agreed with the classification, even though the Department of Labor has the final say on classifications. The Department of Labor’s investigation revealed that the laborers routinely performed duties in skilled trades, such as ironworking, electrical work, painting or bridge crane operation. Based on these activities, the Department of Labor concluded that the laborers should have been paid $60.00 per hour plus fringe benefits.

Some might ask why the subcontractor couldn’t rely on the Department of Energy’s approval of the wages. Aside from the Department of Labor having the final say on these matters, perhaps the subcontractor or general contractor should have sought guidance from the Department of Labor on this issue. The Department of Labor’s Frequently Asked Questions section addresses this very issue. The general contractor could have submitted a Request for Wage Determination, Form 308, before the bids were opened. After bids were opened, the contractor should have requested a wage determination. In situations where the contract wage determination does not contain a class of workers needed to complete the construction:

a contractor shall submit to the contracting officer a request for the addition of the needed classification(s) of laborers or mechanics not listed in the wage determination, together with proposed wage rates and fringe benefits conformable to the wage determination.

Take Away: The subcontractor was forced to pay nearly twice the wages it budgeted on this project. Proactive measures with the Department of Labor could have clarified the wages laborers should be paid on this project and may have allowed the subcontractor to increase its bid to cover the additional cost.

 

Submitting Claims on Government Projects Can Be Tricky

Posted in Government Contracting

The Federal Circuit Court of Appeals opinion in K-Con Building Systems, Inc. v. United iStock_000002341708MediumStates illustrates the difficulties a contractor may face when pursuing a claim before a Contracting Officer. After nearly 10 years of litigation, the court found that the contractor’s claim to the Contracting Officer did not contain enough detail to allow the claim to proceed. That’s a lot of time and resources wasted on a claim that was dead from the start.

K-Con was awarded a $582,000 job to design and build a Coast Guard support building in Michigan. K-Con was unable to complete the project by the finish date and the Coast Guard assessed liquidated damages of $109,554. K-Con contested the assessment of liquidated damages by submitting a one paragraph letter asserting that it was not the sole cause of the alleged delays; that the government was at fault for the delay; and the liquidated damages were an impermissible penalty. The Contracting Officer ultimately denied K-Con’s claim and K-Con appealed to the Court of Claims.

K-Con must have understood that even if it won its appeal in the Court of Claims, it would not be able to recover additional compensation to which K-Con thought it was due. So, K-Con filed another claim before the Contracting Officer to recoup money owed for extra work. The Contracting Office denied K-Con’s claim and K-Con then added these claims to its Court of Claims action.

The parties continued to litigate all issues for three more years. Then, in 2013, the government raised a jurisdictional argument—that K-Con had not raised all issues pending before the court in its first claim to the Contracting Officer and thus the Court of Claims did not have jurisdiction to hear K-Con’s claim for additional compensation. The Court of Claims agreed and dismissed K-Con’s claim for additional compensation. The Court of Claims then ruled against K-Con on the remaining claim that liquidated damages should not be imposed.

K-Con appealed the Court of Claims decision, but lost again. So, after nearly 10 years of litigation, K-Con lost all of its claims and had to pay liquidated damages to the Coast Guard.

Take Away: Government contracting claims can prove difficult and if you don’t do it right, you may lose your right to make the claim.  Make sure you review and understand the requirements of the FAR regulations before submitting your claim.

 

Pay-if-Paid Clauses, Nasty, but Enforceable

Posted in Construction Contracts

Feeling the pinch of a recession?I am preparing for a presentation this week on Troublesome Contract Clauses to the Construction Specifications Institute (“CSI”), Nebraska Chapter. One of the clauses we will be discussing is the dreaded Pay-if-Paid clause, a particularly nasty provision that places the risk of owner’s solvency squarely on the subcontractor’s shoulders.  While pay-if-paid clauses can create tremendous problems for subcontractors, they are enforceable.

Pay-if-Paid clauses eliminate the obligation to pay the subcontractor until the general contractor is paid by the owner.  Pay-if-paid clauses usually contain something akin to the following phrases:

  • payment to subcontractors are “expressly and unequivocally contingent upon receipt of payment from the Owner for the Subcontract Work.”
  • the subcontractor “expressly acknowledges that it relies on payment under the Subcontract on the creditworthiness of Owner, not that of the General Contractor.”
  • the owner’s acceptance of the work and payment to the General Contractor are “conditions precedent to any obligation of the General Contractor to pay the subcontractor.”

If you see these clauses in your subcontract, you should either investigate the owner’s ability to complete and pay for the job or negotiate alternative language in the subcontract. One alternative to the pay-if-paid clause would be to allow for an assignment from the general contractor to the subcontractor the general contractor’s claims against the owner for payment.  Another alternative would be to limit the duration of the pay-if-paid clause to a certain number of days after the subcontractor’s pay application.  Finally, a subcontractor could demand that is must retain its lien and bond claim rights in the event of non-payment.

I understand that negotiating changes to a general contractor’s contract is often times difficult, but practical approaches to pay-if-paid clauses, which would allow a subcontractor to make demand upon the owner, may prove fruitful.

Can General Contractors Make Subcontractors Pay for OSHA Violations?

Posted in OSHA

OSHA has long held the opinion that general contractors may be held liable for subcontractor’s OSHA violations and the Eighth Circuit Court of Appeals, overseeing the Midwest, has agreed since 2009. To combat this risk, general contractors would be well served to incorporate targeted indemnity provisions into their subcontracts that require subcontractors to pay for all claims and costs associated with subcontractor caused OSHA violations.

Craig Martin, Construction Attorney Lamson Dugan & Murray, LLP

OSHA’s Multi-Employer Policy

OSHA’s Multi-Employer Policy, a/k/a OSHA Instruction CPL 02-00-124, allows OSHA to cite multiple employers at a single worksite for creating a hazard, or for failing to prevent or correct a hazard, even if their own workers are not exposed to the hazard. A ‘‘controlling’’ or ‘‘correcting’’ employer is liable for hazards that it did not take ‘‘reasonable care’’ to detect and prevent.

The case that brought this issue to a head in the Midwest is Solis v. Summit Contractors, Inc. which involved Summit Contractors oversight of a college dormitory construction project in Arkansas. Summit had only four employees on the job and utilized subcontractors for the vast majority of the work on the project. OSHA stopped by for an inspection and noticed a subcontractor’s workers on defective scaffolding who were not wearing fall protection. OSHA issued Summit a citation for this safety violation as the “controlling employer.” The case wound its way through the court system, with the Eighth Circuit Court of Appeals holding that OSHA was permitted to rely on the multi-employer worksite doctrine to cite general contractors for the safety violations of its subcontractors.

The Takeaway for General Contractors

General contractors facing increased risk of being cited for their subcontractor’s misconduct can take a few steps to minimize their liability. General contractors may incorporate indemnity clauses specifically tailored to address situations in which a general contractor is cited for a subcontractor’s OSHA non-compliance. Here is a sample clause:

Subcontractor shall defend, indemnify and hold harmless General Contractor from and against all claims, penalties, fines, losses, judgments, liabilities, settlements, costs and expenses, including but not limited to attorney’s fees, arising out of, relating to, or incurred in connection with the breach or violation of any occupational safety and health administration (“OSHA”) laws, rules, or regulations by Subcontractor, any of Subcontractor’s subcontractors, anyone directly or indirectly employed by them or anyone for whose acts any of them may be liable.

Incorporating an indemnity provision that targets OSHA violations should assist general contractors in recovering any penalties assessed by OSHA against the general contractor for a subcontractor’s safety violations.

Craig Martin, Construction Attorney, Lamson Dugan & Murray, LLP

How Long is Your Construction Warranty?

Posted in Nebraska Construction

The Nebraska Court of Appeals threw a wrench into the calculation of your warranty iStock_000017987518XSmallearlier this year in Adams v. Manchester Park, LLC and Southfork Homes, Inc. In that case, the court found that the statute of limitations for a warranty claim started running after the homebuilder’s warranty expired. So, the four year breach of warranty statute of limitations did not begin until after the one year homebuilder warranty expired.

In this case, the homeowner purchased a home from Southfork in September, 2007. The purchase agreement provided for a one-year New Home Limited Warranty which covered material defects in workmanship and materials. The homeowner noticed cracks in the drywall and problems with windows within 6 months of the purchase. The builder told the homeowner to keep track of all the problems and they would be fixed at the yearend walk through.

The homebuilder brought in contractors at the yearend walk through and cosmetically fixed the problems. Afterwards, the homeowner continued to experience settling problems with the house, but the builder refused to fix the problems.

In September, 2011, slightly more than four years after closing on the house, the homeowner sued the builder, alleging breach of express and implied warranties. The builder moved to dismiss, arguing that the four year statute of limitations for bringing a breach of warranty claim had run because the lawsuit was not brought within four years of the house being completed. The trial court agreed and dismissed the case.

On appeal, the court of appeals found that the four year statute of limitations had not run. With very little analysis or explanation, the court of appeals concluded:

[after] the expiration of the 1–year limited warranty . . . the statute of limitations pursuant to § 25–223 commenced for an action based on an “alleged breach of warranty on improvements to real property or based on any alleged deficiency in the design, planning, supervision, or observation of construction, or construction of an improvement to real property” between [the builder] and the [homeowner].

So, the homeowner had, in essence, five years to file it claim—the one year homebuilder warranty plus the four year statute of limitations.

This is certainly an interesting development for Nebraska builders. The homebuilder in this case had asked the Nebraska Supreme Court to look at this issue, but as of the date of posting this blog, the court has not indicated whether it would take the case. While we wait for this matter to work it’s way through the courts, builders are well advised to consider that their express warranty may be adding years to the time by which property owners must sue for poor workmanship.