Legislature Enacts Statute of Limitations for State

In a first step to curbing the unlimited enforcement powers of the State, the New Hampshire legislature has passed a law that will provide a three-year statute of limitations for the State when pursuing any personal or civil enforcement action. The new law becomes effective on January 1, 2018. Prior to the enactment of this law, the New Hampshire Supreme Court had concluded – in State v. Lake Winnipesaukee Resort, LLC, 159 N.H. 42, 45 (2009) – that the State had no time limit to pursuing an enforcement action under the centuries old common law doctrine of nullum tempus.

Late last year, in a case handled by Preti Flaherty attorneys Ken Rubinstein and Nathan Fennessy, the New Hampshire Supreme Court revisited the scope of nullum tempus in City of Rochester v. Marcel A. Payeur, Inc. et al. Case No. 2016-0212 (N.H. Dec. 13, 2016), finding that the doctrine did not apply in the context of a breach of contract action brought by a municipality. In reaching its decision in City of Rochester, the court showed skepticism toward the idea that the State, when acting as a private participant in the market, would enjoy the benefits of the doctrine in pursuing a breach of contract action.

Shortly after the decision in City of Rochester, the New Hampshire legislature took up the issue in the legislative session. The new law establishes that the State may not wait more than three years after obtaining “actual knowledge” of the wrongful conduct before pursuing an enforcement action or civil action unless the State “demonstrates the delay was not unreasonable or prejudicial to the defendant, or that the detriment to the public caused by the delay outweighs the detriment to defendant.” The law also provides that the “limitation shall not apply to any violation or wrong that is ongoing or has otherwise not been corrected.” Although the exceptions contained in the new law could swallow the rule, the enactment of a statute of limitation is a good first step to providing contractors with degree of certainty when their potential liability on a State project will end.

Active Negligence May Not Preclude General Contractor from Enforcing Contractual Indemnification

Some states—though generally not in the Northeast—preclude a general contractor from recovering under a contractual indemnification provision against a subcontractor if the claim is the result, in any way, of active negligence or willful misconduct on the part of the general contractor. A recent decision by an appellate court in California, Oltmans Construction co. v. Bayside Interiors, Inc. Case No. A147313 (Cal. App. 1st Dist. March 30, 2017), however, shows that courts are increasingly skeptical of such broad interpretations of anti-indemnity statutes that preclude general contractors from pursuing their bargained-for contractual indemnification rights. Under Oltmans, a general contractor will just have to show that the injury or damage was not solely caused by its active negligence, and might have been caused in part by others, to maintain a contractual indemnification claim against its subcontractor.

The case arose from a jobsite injury suffered by an employee of a sub-subcontractor on the project. The injured party sued the general contractor and the property owner. The general contractor then sued the subcontractor alleging a right to express contractual indemnity. The general contractor argued that, even if it was actively negligent, it was still entitled to be indemnified for the portion of any liability incurred as a result of the negligence of others.

The trial court rejected the general contractor’s argument, but the appellate court agreed with the general contractor and concluded that the trial court had erred in granting summary judgment to the subcontractor. The appellate court found that denying the general contractor indemnification for the portion of any liability it may incur attributable to the fault of the sub-subcontractor, the employee, or others would be inconsistent with the language of the contractual indemnity provision and the purpose of the indemnification statute. The appellate court focused on the fact that there was no evidence that the injury was caused solely by the actions of the general contractor. The general contractor was therefore entitled to pursue its indemnification claim for that portion of any liability that was not result of the general contractor’s active negligence.

Third Circuit Rules That Filing of Mechanic’s Lien Violates Bankruptcy Stay

In a decision that will impact how subcontractors deal with an insolvent general contractor, the Third Circuit in In re Linear ElectricCompany, Inc., Case No. 16-1477, ruled that a subcontractor creditor violated the automatic stay imposed by a general contractor’s bankruptcy filing when, post-bankruptcy, the subcontractor filed a mechanic’s lien against the owner of the construction project. Much like New Hampshire’s statutory system, New Jersey’s construction lien statute allows subcontractors and suppliers to lien an owner’s property to the extent of any unpaid balance that remains due and owing to the general contractor under their contract.  

In this case, the subcontractor claimed that it did not violate the stay, because it had filed its lien only against property of the owner, not property of the general contractor. The Third Circuit, however, disagreed. Because the subcontractor could only assert the lien against the owner to the extent any money remained owing to the general contractor, the Circuit found the lien violated the stay by preventing the owner from paying over the money it owed to the general contractor’s bankruptcy estate. In other words, the mechanic’s lien had effectively attached the bankrupt general contractor’s receivable, which is prohibited under Section 362 of the Bankruptcy Code.

This is another reminder for subcontractors and suppliers that they may need to exercise their lien rights earlier in the process to preserve those rights. Delay in pursuing unpaid invoices could deprive them of the benefit of a statutory lien against the project.

Gregory Moffett from Preti Flaherty's Bankruptcy, Creditor’s Rights and Business Restructuring Practice Group contributed to this blog.     

Boston Public School Master Plan Calls Construction Industry to Action

In March, Boston mayor Marty Walsh announced that the city is introducing a “new era of school investment,” a $1 billion, 10-year master plan called BuildBPS. Developed with planning firm Symmes Maini & McKee Associates, BuildBPS represents a major business opportunity for the local construction industry to play a part in shaping the future of Boston’s public schools.

Modernizing the Classrooms

A 2016 survey found that 60 percent of students, parents, and staff rated the condition of Boston’s public schools as “fair” or “poor.” More than 50 percent of Boston’s 127 public schools were built before World War II, and less than half of the buildings have been fully renovated. Through BuildBPS, the city plans to build modern classrooms with energy efficient environments, allowing for more fresh air and natural sunlight, and technology to promote 21st century learning and teaching methodologies.

Project Funding

Primary capital spending for BuildBPS will be funded by bonds issued by the City, with secondary funding through matching funds from the Massachusetts School Building Authority. Funding for the highest-priority projects is expected to be included in the proposal for Boston’s 2018 capital budget.

The Preti Flaherty Construction Law group is keeping abreast of this topic and will provide updates as it develops. Contact us with any questions or comments.

Oral Waiver Insufficient to Defeat Contractor’s Liability for Building Code Violation

The Massachusetts Appeals Court, in Downey, et al. v. Chutehall Construction Co., Ltd., 88 Mass. App. Ct. 795 (January 6, 2016), recently held that an oral waiver of compliance with the building code by a homeowner does not preclude the contractor’s liability for the violation, particularly where a violation carries potential public safety concerns.

In this matter, the contractor was hired to replace a roof and roof deck. The parties disputed whether the homeowners (1) represented to the contractor that there was only one layer of roofing at the time of the work; (2) refused to permit the contractor to do test cuts in the roof to determine the number of existing layers; and (3) specifically instructed the contractor to install a new rubber membrane over the existing roof. After installation of the roof was completed, the homeowners discovered four layers of roofing materials and evidence of leaking when installing HVAC equipment. A new contractor was hired to strip the roofing materials, put on a new roof, and reinstall the deck. A jury found that the contractor violated the building code, but awarded no damages, finding that the violation was a result of the homeowners’ directions.

After the case was appealed, the Appeals Court reasoned that permitting a waiver by a homeowner of his or her right to compel a contractor to comply with the contractor’s obligations under the building code would encourage contractors, and perhaps consumers, to waive provisions of the building code on an ad hoc basis, in the hope of saving money in the short-term, but endangering future homeowners, first responders and the public in general. Thus, even if the homeowners orally waived the building code requirement, the Appeals Court held that the contractor was still liable for the violation, entered judgment in favor of the homeowners, and remanded the matter to determine damages.

This decision makes it clear that a home improvement contractor must perform its work in strict accordance with the relevant building code, even if a homeowner requests certain code requirements be ignored in an attempt to save money. Contractors should use this result as an example when confronted with a request from a homeowner to deviate from the building code. This case also highlights the importance of proper documentation of the scope of work in a written contract. While this decision concerned an oral waiver, a different result may have occurred if the contractor documented in a written contract that the existing roof only had one layer of material which the new roof would be applied over. However, a written contract in which the homeowner acknowledges a request for the contractor to deviate from the building code may still leave the contractor liable due to public safety concerns.

Contractor’s Lawsuit Against Architect for Tortious Interference Allowed to Proceed

A U.S. District Court Judge for the District of Massachusetts has allowed a lawsuit to proceed brought by a contractor against an architect, alleging the architect falsely certified grounds for termination to the project owner. In a November 18, 2015 written decision in the matter of Barr, Inc. v. Studio One, Inc., C.A. No. 3:15-40056, the Court denied the architect’s motion to dismiss the contractor’s claims against it sounding in tortious interference with contractual relations and tortious interference with advantageous relations. The Court determined that in both instances, the contractor must demonstrate that the architect acted with an “improper motive or means.” The lawsuit alleged that the architect certified to the project owner that the contractor breached its contract with the project owner by “repeatedly refusing or failing to supply enough properly skilled workers or other materials.” Per the terms of the contract with the contractor and owner, this was a specific ground for termination. In the lawsuit, the contractor alleged the architect knew this was not true, and project correspondence and meeting minutes established the project delays were not the fault of the contractor. The contractor also asserted that the architect caused the owner to terminate the contractor for the architect’s own financial gain and to secure benefits with respect to compensation for post-termination services that would otherwise not have been available.

In seeking to dismiss the lawsuit, the architect argued that the contractor did not allege it acted with “actual malice,” which is more stringent than the “improper motive” which was alleged. In rejecting this argument, the Court held that intentional interference torts – such as tortious interference with contractual relations and tortious interference with advantageous relations – do not require a showing of actual malice. The contractor’s allegations in the Complaint, including that that the architect knowingly certified false reasons to induce the owner to terminate its contract with the contractor, met the elements of the intentional interference torts alleged and were sufficient to survive a motion to dismiss.

Under the standard AIA contract used here, the owner could not terminate the contractor for cause without the architect’s certification of the grounds for termination. The Court’s ruling confirms that the contractor’s Complaint sufficiently alleged that the architect was not carrying out its contractual duties objectively and in good faith. Despite being hired by the owner, the architect still has a contractual duty to interpret and decide matters concerning performance under the contract in good faith, and without partiality to either the owner or the contractor, which the contractor alleged it failed to do.

Alert: Massachusetts High Court Clarifies Construction Manager’s Role

The Massachusetts Supreme Judicial Court issued a very significant ruling yesterday regarding the use of the CM-At Risk delivery method, particularly on public jobs.

In Coghlin Electrical Contractors, Inc. v. Gilbane Building Company, the Court held that a construction manager who performed preconstruction services to assist in the development of plans and specifications did not waive the owner’s implied warranty as to the sufficiency of the plans and specifications. In addition, the Court held that the contract’s language requiring the construction manager to indemnify the owner from any subcontractor claims did not bar the construction manager from suing the owner – even to pass along a subcontractor’s claim – for a claim based upon errors in the plans and specifications.

The Massachusetts Division of Capital Asset Management and Maintenance (“DCAM”) entered into a contract with Ellenzweig Associates to prepare designs to build a psychiatric facility at the site of the Worcester State Hospital (“Project”).

When the designs were partially completed, DCAM entered into a contract with Gilbane Building Company (“Gilbane”) as the CMAR. Gilbane then entered into a subcontract with Coghlin Electrical Contractors, Inc. (“Coghlin”), to perform electrical work. The subcontract incorporated by reference the terms of the contract between DCAM and Gilbane. A dispute arose between Coghlin and Gilbane regarding additional costs that Coghlin alleged resulted from various scheduling, coordination, management, and design errors. After Coghlin filed suit against Gilbane, Gilbane filed a third-party complaint against DCAM, asserting that, "in the event that Coghlin proves its claims against Gilbane," DCAM committed a breach of its contract with Gilbane by refusing to pay Gilbane the amounts claimed by Coghlin. DCAM filed a motion to dismiss the third party complaint claiming that Gilbane could not obtain indemnification for design defects when Gilbane had participated in the development of plans and specifications for the Project.

The Massachusetts Superior Court had originally held that a Construction Manager who provides design assist services could not make a claim against the owner when later problems arise on the job due to defects in the plans and specs. That lower court held that although Massachusetts recognizes the “Spearin Doctrine,” in which the project owner gives an implied warranty regarding the feasibility of the designer’s plans and specs, the CM could not raise that warranty, given their role in developing the plans and specs. The Court also held that the contract’s indemnification language (which required the construction manager to indemnify the owner from subcontractor claims) constituted a further waiver in this case, since the dispute originated with a subcontractor’s complaint regarding the plans and specs.

The reversed the lower court’s decision, holding:

“(1) under our common law, a public owner of a construction management at risk project gives an implied warranty regarding the designer's plans and specifications, but the scope of liability arising from that implied warranty is more limited than in a design-bid-build project; (2) the construction management at risk contract in this case did not disclaim the implied warranty; and (3) the indemnification provision in the contract did not prohibit the CMAR from filing a third-party complaint against the owner that sought reimbursement under the implied warranty for damages claimed by the subcontractor arising from the insufficiency of or defects in the design.”

The SJC reached its decision in part based on the fact that “t]he possibility that the CMAR may consult regarding the building design does not suggest that the CMAR should be the guarantor against all design defects, even those that a reasonable CMAR would not have been able to detect.” The SJC found that the scope of the implied warranty will depend upon whether the CMAR “acted in good faith reliance on the design and acted reasonably in light of the CMAR's own design responsibilities.” In making such determinations, courts will need to consider the “CMAR's level of participation in the design phase of the project and the extent to which the contract delegates design responsibility to the CMAR.” The SJC signaled that “[t]he greater the CMAR's design responsibilities in the contract, the greater the CMAR's burden will be to show, when it seeks to establish the owner's liability under the implied warranty, that its reliance on the defective design was both reasonable and in good faith.”

This is a significant decision because the lower court’s ruling, if upheld, would have a chilling effect on construction using the CM-At Risk method as builders would be far more hesitant to provide design assist services, if they thought that doing so would make them responsible for the entire design.

For further information, please contact Ken Rubinstein at 617.226.3868 / krubinstein@preti.com; or Nathan Fennessy at 603.410.1528 / nfennessy@preti.com.