By: Benjamin D. Kerr, Esquire bdk@muslaw.com
The August 4, 2006 decision, Rateau v. Comcast of Pa. II, Inc., from the Court of Common Pleas of Allegheny County, Pennsylvania, illuminates the previously undecided issue of whether the Commonwealth recognizes a cause of action against a contractor that negligently hires a sub-contractor who is a financially irresponsible. A financially irresponsible contractor is loosely defined as one who does not have adequate liability insurance or assets to compensate victims injured by its negligence.
In this case, the Rateau family ordered high-speed internet access from their cable provider, Comcast. To facilitate installation of the service, underground utility lines had to be laid on their property. Comcast contracted with a company named Conn-X to perform this work. Conn-X subcontracted the excavation portion of the work to a company named Wellhead. As Wellhead was performing the work, it struck a gas line and caused a leak.
At approximately this time, the Rateau children had arrived home from school. Though there was ample time to warn the children to get out of the house, proper steps were not taken to ensure that the children were evacuated. Tragically, the gas leak caused an explosion, which severely injured both children.
Wellhead was undercapitalized and did not carry liability insurance. As such, the plaintiffs brought suit against Conn-X and Comcast, both of whom had liability insurance. Conn-X and Comcast denied liability. Hence the main issue was whether the plaintiffs were permitted to proceed under the theory that Conn-X and Comcast negligently hired a subcontractor who was financially irresponsible.
The plaintiffs noted that under Section 411 of the Restatement (Second) of Torts “an employer is subject to liability for physical harm to third persons caused by his failure to exercise reasonable care to employ a competent and careful contractor.” The defendants argued that under Section 411, financial irresponsibility of a contractor is not a basis for finding negligent hiring.
The Court looked to a Third Circuit Court of Appeals opinion which addressed this same issue in Becker v. Interstate Properties. In Becker, the Third Circuit predicted that the New Jersey courts would hold that a contractor can be negligent for hiring a financially irresponsible subcontractor. As such, the Court held that employers can be responsible in certain instances for acts or omissions of independent contractors and that employers have an affirmative duty to ensure the financial fitness of their subcontractors. As such, the action was permitted to proceed against Conn-X and Comcast.
In light of this ruling, contractors should exercise care in selecting their subcontractors to ensure that the subcontractors are financially responsible.
For more information about a contractor’s potential liability for the subcontractors they hire, contact Benjamin D. Kerr at 412-456-2589 or e-mail him at bdk@muslaw.com.
Monday, December 31, 2007
Waiver of Written Notice on Change Orders
By: Jason M. Yarbrough, Esquire jmy@muslaw.com
In LBL Systems (USA) Inc. v. APG America, Inc., the United States District Court for the Eastern District of Pennsylvania found that contractual notice requirements for change order requests (“CORs”) may be waived and modified by the conduct of the owner and contractor. The subcontract and the prime contract at issue required the subcontractor to present CORs within five business days of the date the subcontractor had knowledge of the basis for the CORs. However, because the Court found the owner and contractor had manifested an intent not to enforce the notice requirement through their conduct, they could not subsequently reject the CORs because they were untimely.
For more information, contact Jason M. Yarbrough at jmy@muslaw.com or 412-456-2592
In LBL Systems (USA) Inc. v. APG America, Inc., the United States District Court for the Eastern District of Pennsylvania found that contractual notice requirements for change order requests (“CORs”) may be waived and modified by the conduct of the owner and contractor. The subcontract and the prime contract at issue required the subcontractor to present CORs within five business days of the date the subcontractor had knowledge of the basis for the CORs. However, because the Court found the owner and contractor had manifested an intent not to enforce the notice requirement through their conduct, they could not subsequently reject the CORs because they were untimely.
For more information, contact Jason M. Yarbrough at jmy@muslaw.com or 412-456-2592
‘No Damage for Delays’ Provisions in Construction Contracts: Recent Pennsylvania Case Law
By: Benjamin D. Kerr, Esquire bdk@muslaw.com
In a recent case, Guy M. Cooper, Inc. v. East Penn School District, the Pennsylvania Commonwealth Court ruled that the trial court properly refused to set aside a “no damage for delay” clause when an owner does not guarantee or indemnify against loss occasioned by the delays of independent contractors which may be reasonably anticipated.
In Cooper, the school district awarded a general contractor the overall construction contract and a mechanical contractor the heating, ventilation and air-conditioning contract. Completion of the project was to occur within 460 days of the issuance of the notice to proceed; however, delays developed and substantial completion was delayed by 505 days beyond the original completion date.
The mechanical contractor’s complaint alleged that the school district breached its contract with the mechanical contractor by failing to see that construction proceeded without delay, and specifically that the school district failed to prevent delays by the general contractor.
The “no damage for delay” clause in the contract stated:
“[The School District] shall not be liable to contractor or any subcontractor for claims of damages of a monetary or any other nature caused by or arising out of delays contemplated or not contemplated at the signing of the contract. The sole remedy against [the School District] for delays shall be the allowance to claimant of additional time for completion of work.”
Though “no damage for delay” clauses are generally enforceable in Pennsylvania, prior cases have held that they may be unenforceable where there is a positive or affirmative interference by the owner with the contractor’s work or the owner fails to act on some essential matter necessary to the performance of the work. Similarly, an owner cannot insulate itself from a delay damage claim where it fails to perform an essential contractual duty.
Analyzing the contract language which imposed the duty of coordination and construction scheduling on the general contractor, the Commonwealth Court found no duty in the school district to oversee the construction schedule and held that reasonably anticipated delays by general contractors are covered by the “no damage for delay” clause.
For more information about this case or “no damage for delay” clauses, contact Benjamin D. Kerr at 412-456-2589 or bdk@muslaw.com
In a recent case, Guy M. Cooper, Inc. v. East Penn School District, the Pennsylvania Commonwealth Court ruled that the trial court properly refused to set aside a “no damage for delay” clause when an owner does not guarantee or indemnify against loss occasioned by the delays of independent contractors which may be reasonably anticipated.
In Cooper, the school district awarded a general contractor the overall construction contract and a mechanical contractor the heating, ventilation and air-conditioning contract. Completion of the project was to occur within 460 days of the issuance of the notice to proceed; however, delays developed and substantial completion was delayed by 505 days beyond the original completion date.
The mechanical contractor’s complaint alleged that the school district breached its contract with the mechanical contractor by failing to see that construction proceeded without delay, and specifically that the school district failed to prevent delays by the general contractor.
The “no damage for delay” clause in the contract stated:
“[The School District] shall not be liable to contractor or any subcontractor for claims of damages of a monetary or any other nature caused by or arising out of delays contemplated or not contemplated at the signing of the contract. The sole remedy against [the School District] for delays shall be the allowance to claimant of additional time for completion of work.”
Though “no damage for delay” clauses are generally enforceable in Pennsylvania, prior cases have held that they may be unenforceable where there is a positive or affirmative interference by the owner with the contractor’s work or the owner fails to act on some essential matter necessary to the performance of the work. Similarly, an owner cannot insulate itself from a delay damage claim where it fails to perform an essential contractual duty.
Analyzing the contract language which imposed the duty of coordination and construction scheduling on the general contractor, the Commonwealth Court found no duty in the school district to oversee the construction schedule and held that reasonably anticipated delays by general contractors are covered by the “no damage for delay” clause.
For more information about this case or “no damage for delay” clauses, contact Benjamin D. Kerr at 412-456-2589 or bdk@muslaw.com
Loss of Bonding Capacity as Basis for Injunction
By: Nicole H. King, Esquire nhk@muslaw.com
A recent ruling by the Pennsylvania Superior Court suggests that a subcontractor’s loss of bonding capacity could support an award of injunctive relief. In Greenmoor, Inc. v. Burchick Construction Company, Inc., decided on September 11, 2006, Greenmoor sought an injunction reinstating it to the renovation of the Moore Federal Building. Greenmoor had executed five contracts with the general, Burchick, to perform asbestos removal, but was fired after the conclusion of the first contract. In attempting to prove that it had suffered irreparable harm, one of the six elements of an injunction, Greenmoor offered evidence that after its termination, it could no longer obtain appropriate bonding for its future projects and Greenmoor actually prevailed in the trial court. Though the Superior Court ultimately denied Greenmoor’s claim and reversed the trial court, it did so because on this issue, Burchick offered contrary evidence that bonding was available to Greenmoor from a national provider. Accordingly, under this decision, a terminated contractor may be able to seek injunctive relief if it can prove that its termination was wrongful and its bonding capacity was irreparably damaged by the termination.
For more information on this case or other construction law issues, contact Nicole H. King at nhk@muslaw.com or call 412-456-2559.
A recent ruling by the Pennsylvania Superior Court suggests that a subcontractor’s loss of bonding capacity could support an award of injunctive relief. In Greenmoor, Inc. v. Burchick Construction Company, Inc., decided on September 11, 2006, Greenmoor sought an injunction reinstating it to the renovation of the Moore Federal Building. Greenmoor had executed five contracts with the general, Burchick, to perform asbestos removal, but was fired after the conclusion of the first contract. In attempting to prove that it had suffered irreparable harm, one of the six elements of an injunction, Greenmoor offered evidence that after its termination, it could no longer obtain appropriate bonding for its future projects and Greenmoor actually prevailed in the trial court. Though the Superior Court ultimately denied Greenmoor’s claim and reversed the trial court, it did so because on this issue, Burchick offered contrary evidence that bonding was available to Greenmoor from a national provider. Accordingly, under this decision, a terminated contractor may be able to seek injunctive relief if it can prove that its termination was wrongful and its bonding capacity was irreparably damaged by the termination.
For more information on this case or other construction law issues, contact Nicole H. King at nhk@muslaw.com or call 412-456-2559.
Partial Releases of Liens May Limit Claims
By: Nicole H. King, Esquire nhk@muslaw.com
Partial releases and waivers of liens have become commonplace as a requirement for subcontractor payment. A recent ruling in Philadelphia County imposed significant restrictions on a subcontractor’s ability to recover payment for delay and impact claims when such releases are signed.
In Kleinknecht Electric Co. v. Jeffrey M. Brown Associates, Inc. and Federal Insurance Company, Kleinknecht Electric entered into an electrical subcontract with Brown, the general contractor. The actual cost of work exceeded the original contract price, thus requiring Kleinknecht to submit change orders. Throughout the project, Brown required Kleinknecht to submit partial releases and/or waivers of liens as a pre‑condition to payment.
At the conclusion of the project, Kleinknecht filed suit against Brown and its surety, Federal Insurance Company, to recover payment for extra work performed by Kleinknecht. Kleinknecht also sought to recover money for an impact claim – valued at nearly $3,000,000 – that it had previously asserted against Brown in a change order.
Strictly construing the language in the partial release, the court held that Kleinknecht was barred from pursuing any claim – including its impact claim – that existed at the time it executed the partial release. The court reasoned that since Kleinknecht had previously asserted the claim in a change order, it was undoubtedly aware of the existence of its claim and had failed to reserve its rights or limit the terms of the release. Consequently, the court held that Kleinknecht was barred from pursuing its impact claim.
The court rejected Kleinknecht’s defenses of economic duress and unknown value. Specifically, the court held that Kleinknecht was aware, at the outset of the contract, that it would be required to sign partial releases. It did not matter if Kleinknecht needed the money to finish the project and therefore felt coerced to sign the partial releases. Similarly, the court rejected the notion that the unknown value of Kleinknecht’s impact claim preserved the claim. It did not matter that Kleinknecht could not have known the value of the claim until the conclusion of the project.
The court did note, however, that Kleinknecht could have preserved its claim by limiting the terms of the release or reserving its rights to bring a claim at a future date. Of course, whether a contractor will issue payment upon receipt of a qualified partial release is always an open question. In the meantime, however, contractors and subcontractors must consider the consequences of signing any partial release or waiver of liens without preserving existing claims. If the claim is reserved, there is a question of whether payment will be made. However, if the claim is not reserved, it could be waived.
For more information about the Kleinknecht case or construction law issues, contact Nicole H. King at 412-456-2559 or nhk@muslaw.com.
Partial releases and waivers of liens have become commonplace as a requirement for subcontractor payment. A recent ruling in Philadelphia County imposed significant restrictions on a subcontractor’s ability to recover payment for delay and impact claims when such releases are signed.
In Kleinknecht Electric Co. v. Jeffrey M. Brown Associates, Inc. and Federal Insurance Company, Kleinknecht Electric entered into an electrical subcontract with Brown, the general contractor. The actual cost of work exceeded the original contract price, thus requiring Kleinknecht to submit change orders. Throughout the project, Brown required Kleinknecht to submit partial releases and/or waivers of liens as a pre‑condition to payment.
At the conclusion of the project, Kleinknecht filed suit against Brown and its surety, Federal Insurance Company, to recover payment for extra work performed by Kleinknecht. Kleinknecht also sought to recover money for an impact claim – valued at nearly $3,000,000 – that it had previously asserted against Brown in a change order.
Strictly construing the language in the partial release, the court held that Kleinknecht was barred from pursuing any claim – including its impact claim – that existed at the time it executed the partial release. The court reasoned that since Kleinknecht had previously asserted the claim in a change order, it was undoubtedly aware of the existence of its claim and had failed to reserve its rights or limit the terms of the release. Consequently, the court held that Kleinknecht was barred from pursuing its impact claim.
The court rejected Kleinknecht’s defenses of economic duress and unknown value. Specifically, the court held that Kleinknecht was aware, at the outset of the contract, that it would be required to sign partial releases. It did not matter if Kleinknecht needed the money to finish the project and therefore felt coerced to sign the partial releases. Similarly, the court rejected the notion that the unknown value of Kleinknecht’s impact claim preserved the claim. It did not matter that Kleinknecht could not have known the value of the claim until the conclusion of the project.
The court did note, however, that Kleinknecht could have preserved its claim by limiting the terms of the release or reserving its rights to bring a claim at a future date. Of course, whether a contractor will issue payment upon receipt of a qualified partial release is always an open question. In the meantime, however, contractors and subcontractors must consider the consequences of signing any partial release or waiver of liens without preserving existing claims. If the claim is reserved, there is a question of whether payment will be made. However, if the claim is not reserved, it could be waived.
For more information about the Kleinknecht case or construction law issues, contact Nicole H. King at 412-456-2559 or nhk@muslaw.com.
New Changes in Law Require Changes in Contract Forms
By: Joshua R. Lorenz, Esquire jrl@muslaw.com
As has been widely publicized, earlier this year a number of significant changes to Pennsylvania’s Mechanic’s Lien Law went into effect in January 2007. While most of the discussions on this topic have generally addressed how these recent amendments will impact the construction industry as a whole, the steps that each individual contractor, subcontractor, or materials supplier must take within their own businesses in order to keep pace with the new law have gone largely undiscussed. Because of these changes and other developments in the law in recent years, owners, contractors and subcontractors cannot rest comfortably in using pre-2007 forms. Such forms must be reviewed and revised to comply with all new changes and developments and to provide the maximum protection allowable under the new rules. With this in mind, the following will highlight some of the key changes to Pennsylvania’s Mechanic’s Lien Law and offer some suggestions as to how those in the construction industry can undertake efforts to comply with and protect themselves under these new amendments.
Limited Ability to Waive Lien Rights by Agreement
The most significant change is that unless certain conditions have been met, parties to a construction project will not be able to contractually waive in advance their rights to a mechanic’s lien prior to completion of and payment for the work, which historically has been accomplished through the use of “No Lien” agreements or equivalent provisions in general contracts or subcontracts. With respect to non-residential buildings, while contractors can never waive their lien rights in advance, subcontractors will be able to only if a contractor posts a labor and materials bond guaranteeing them payment. As to residential construction, if the total prime contract price between the owner and the contractor is less than One Million Dollars ($1,000,000), either a contractor or subcontractor can waive its lien rights in advance. For residential construction where the total prime contract price between the owner and the contractor is One Million Dollars ($1,000,000) or more, contractors cannot waive their lien rights in advance, but subcontractors are permitted to do so if a contractor posts a labor and materials bond guaranteeing payment for the subcontractors. Consistent with prior practice, a contractor or subcontractor can always waive its lien rights in consideration for payment for the work, services, materials and/or equipment provided to the extent that payment for such is actually received. However, except for the limited exceptions outlined above, an advanced waiver of a claimant’s lien rights is against public policy, unlawful and void. Thus, general contracts, subcontracts, purchase orders, sales acknowledgements, quotations or proposals and requests for quotations or proposals must all be reviewed and tailored so as to avoid contractual provisions on indemnifications and releases of liens being so overly broad and absolute as to be void and unenforceable.
Inclusion of Additional Subcontractors and Suppliers
A second significant change to Pennsylvania’s Mechanic’s Lien Law is that the amendments expand the categories of parties who are entitled to file a mechanic’s lien. Formerly, only a traditional contractor or first-tier subcontractor had the ability to file a mechanic’s lien. However, under the revised Mechanic’s Lien Law, the definition of “subcontractor,” for lien right purposes, has been expanded so that it includes not only a subcontractor in direct contract with a prime contractor, i.e., a first-tier subcontractor, but also a subcontractor in direct contract with such a subcontractor, i.e., a second-tier subcontractor. Thus, anyone who contracts with a subcontractor that has a direct contractual relationship with a contractor can also file a mechanic’s lien. This change opens the way for many second-tier subcontractors and materials suppliers to avail themselves of the rights and protections of the Mechanic’s Lien Law, which they previously did not enjoy.
Other Concerns Raised By Recent Changes
As has been widely publicized, earlier this year a number of significant changes to Pennsylvania’s Mechanic’s Lien Law went into effect in January 2007. While most of the discussions on this topic have generally addressed how these recent amendments will impact the construction industry as a whole, the steps that each individual contractor, subcontractor, or materials supplier must take within their own businesses in order to keep pace with the new law have gone largely undiscussed. Because of these changes and other developments in the law in recent years, owners, contractors and subcontractors cannot rest comfortably in using pre-2007 forms. Such forms must be reviewed and revised to comply with all new changes and developments and to provide the maximum protection allowable under the new rules. With this in mind, the following will highlight some of the key changes to Pennsylvania’s Mechanic’s Lien Law and offer some suggestions as to how those in the construction industry can undertake efforts to comply with and protect themselves under these new amendments.
Limited Ability to Waive Lien Rights by Agreement
The most significant change is that unless certain conditions have been met, parties to a construction project will not be able to contractually waive in advance their rights to a mechanic’s lien prior to completion of and payment for the work, which historically has been accomplished through the use of “No Lien” agreements or equivalent provisions in general contracts or subcontracts. With respect to non-residential buildings, while contractors can never waive their lien rights in advance, subcontractors will be able to only if a contractor posts a labor and materials bond guaranteeing them payment. As to residential construction, if the total prime contract price between the owner and the contractor is less than One Million Dollars ($1,000,000), either a contractor or subcontractor can waive its lien rights in advance. For residential construction where the total prime contract price between the owner and the contractor is One Million Dollars ($1,000,000) or more, contractors cannot waive their lien rights in advance, but subcontractors are permitted to do so if a contractor posts a labor and materials bond guaranteeing payment for the subcontractors. Consistent with prior practice, a contractor or subcontractor can always waive its lien rights in consideration for payment for the work, services, materials and/or equipment provided to the extent that payment for such is actually received. However, except for the limited exceptions outlined above, an advanced waiver of a claimant’s lien rights is against public policy, unlawful and void. Thus, general contracts, subcontracts, purchase orders, sales acknowledgements, quotations or proposals and requests for quotations or proposals must all be reviewed and tailored so as to avoid contractual provisions on indemnifications and releases of liens being so overly broad and absolute as to be void and unenforceable.
Inclusion of Additional Subcontractors and Suppliers
A second significant change to Pennsylvania’s Mechanic’s Lien Law is that the amendments expand the categories of parties who are entitled to file a mechanic’s lien. Formerly, only a traditional contractor or first-tier subcontractor had the ability to file a mechanic’s lien. However, under the revised Mechanic’s Lien Law, the definition of “subcontractor,” for lien right purposes, has been expanded so that it includes not only a subcontractor in direct contract with a prime contractor, i.e., a first-tier subcontractor, but also a subcontractor in direct contract with such a subcontractor, i.e., a second-tier subcontractor. Thus, anyone who contracts with a subcontractor that has a direct contractual relationship with a contractor can also file a mechanic’s lien. This change opens the way for many second-tier subcontractors and materials suppliers to avail themselves of the rights and protections of the Mechanic’s Lien Law, which they previously did not enjoy.
Other Concerns Raised By Recent Changes
- Contracts between owners and general contractors usually carry an indemnification against liens. Such provisions used to be of little concern because of the frequent use of “No Lien” agreements. However, going forward, the general contractor’s indemnification of the owner against liens now takes on greater significance and will probably require the general contractor, if he does not already do so, to incorporate similar indemnification language into his subcontract agreements. This language should be properly tailored to account for the recent changes to Pennsylvania law.
- General contractors also should look to obtain interim partial releases of liens and final releases of liens from not only its first-tier subcontractors, but also second-tier subcontractors. This is particularly important on jobs in which advanced waivers of liens cannot be or have not been issued. While interim partial releases of liens in particular have not been used frequently in the past, the new amendments to Pennsylvania’s Mechanic’s Lien Law will likely change this practice.
- In many ways under the new law, first-tier subcontractors share the anxieties of general contractors in dealing with their own subcontractors and materials suppliers. Accordingly, first-tier subcontractors should seek to put in place contractual provisions in their subcontracts and purchase orders to protect their interests and obtain interim partial releases of liens and final releases of liens from the second-tier subcontractors that they hire on a project.
- As noted above, second-tier subcontractors can no longer be ignored. Efforts should be made to ensure that they are accounted for in contracts, subcontracts and purchase orders, and in bonding and lien waiver practices.
- Additionally, the interplay between the amendments to Pennsylvania’s Mechanic’s Lien Law and the Pennsylvania Contractor and Subcontractor Payment Act and/or the Commonwealth Procurement Code is unresolved. Therefore, steps should be taken to address these uncertainties.
Most contracts, subcontracts, purchase orders and related documentation should be reviewed on a case-by-case, document-by-document basis to ensure proper compliance and updating in view of the changes to Pennsylvania’s Mechanic’s Lien Law.
If you have any questions about these important developments and/or how these changes in Pennsylvania’s Mechanic’s Lien Law may impact your business, please contact Josh Lorenz at 412-456-2836, or e-mail him at jrl@muslaw.com.
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