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In May of last year, we discussed an opinion in U.S. ex rel. Thyssenkrupp Safway Inc. v. Tessa Structures LLC.  If you recall, this case involves a three way payment dispute between a supplier, Thyssenkrupp, a subcontractor, Tessa Structures, and a general contractor, Vista Contracting.  As discussed in the prior post, Thyssenkrupp did not get paid on a federal project and filed a Miller Act bond claim against all of the appropriate parties and a breach of contract claim against Tessa Structures.  Tessa Structures then cross claimed against Vista Contracting for indemnification and contribution.  Vista Contracting moved for a stay pending mediation and/or arbitration of the cross claim.

Of course, the contract between Vista Contracting and Tessa Structures required mediation between subcontractor and contractor in one place and arbitration of any claim relating to the subcontract.  In the opinion (U.S. ex rel. Thyssenkrupp Safway Inc. v. Tessa Structures LLC) the U. S. District Court for the Eastern District of Virginia in Alexandria considered the interaction of the two seemingly contradictory clauses.  In doing so, the Court considered other courts’ opinions as to the application of the Federal Arbitration Act to mandatory mediation clauses.  After running through these opinions, the Court eventually determined that there was no need to talk about these distinctions given the broad nature of the arbitration provision of the contract.

In short, the Court determined that the broad language (i. e. any claim) required a stay despite Tessa Structures making the argument that its claim could not be determined until after the Court determined the validity and value of Thyssenkrupp’s claim.  The Court, as Virginia state and federal courts are want to do, looked at the plain language of the agreement and tossed this seemingly logical and practical issue aside.

The takeaway?  Look at dispute resolution provisions in your construction contracts very carefully. I have discussed arbitration clauses in the past and only like them in the right circumstances.  In this case, Tessa Structures got caught in a practical bind by moving forward with the broad mandatory arbitration language in its contract.  These clauses will be enforced, an properly so in most instances.  Should you, as a contractor or subcontractor, find yourself faced with such a provision, an experienced construction attorney can assist you in negotiating a more equitable clause.

As always, I welcome your comments below.  Please subscribe to keep up with this and other Construction Law Musings.

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For this week’s Guest Post Friday here at Musings, we welcome Alex Levin. Alex is a writer for several surety organizations. Although much is unknown about them, surety bonds are a necessary requirement for many small businesses to open and are required on almost all major construction projects.

With an unemployment rates holding steady around 9%, the effects of the recession are still surrounding us. The construction industry, one of the hardest hit, still struggles to recover. But, what many want to know is if the worst is behind us. Has the construction industry hit the bottom, and as we ring in a New Year can we look forward to more job opportunities and projects for contractors?

Some fear we’ve only just begun to dig ourselves out from the rubble and more struggles are imminent. In fact, the Engineering News Record reports the level of unemployment for construction is at a record high of 16% compared to 7% in 2007.

Within the last two years bankruptcies have overwhelmed the industry and there is evidence that there could be many more closures for the New Year. One warning sign? Much of the work currently being completed by contractors are only backlog projects from the construction industry’s busiest years of 2005 to 2007. This means new work isn’t coming in and many are struggling to complete work from years prior. Due to this, several companies are most likely headed for voluntary closure or, in the worst case bankruptcy.

In North Carolina alone, Carolinas AGC reported a 40 percent total monetary loss in contract awards from 2010 to 2011. As companies aren’t bringing in income, many financial construction supporters, such as surety agents, will be expected to finish work that their bonded principals simply cannot complete. Banks providing construction loans, project owners and subcontractors expecting payment are others also subject to face losses in this declining industry.

But, some are optimistic. The Associated General Contractors of Las Vegas reports the average hours worked and hourly wages for construction workers have spiked in recent months. Although major projects may not be awarded, this small increase in prosperity gives hope to one of the areas most affected by the recession. In 2006, 92,000 construction jobs were cut. While the projects contractors are focusing efforts on are unlike the typical megaresorts that once were the main source of employment for Vegas contractors, an increase in small buildings has allowed many to continue working.

Another source demanding workers is in refurbishing and remodeling. In fact, MGM Resorts International reported spending $78 million within the third quarter and expects to spend $275 million for the year. Their projects include remodeling the Bellagio and MGM Grand and unveiling eight new food outlets within their properties.

Some also feel the bottoming out of the industry means opportunity for new businesses and partnerships.  Contracting companies that are profitable during times of a weakened economy are in prime position to create smart mergers. Bonding companies and banks can also help prompt an upswing within the industry by financially supporting these new acquisitions. As the debate between the optimists and pessimists wages on, it appears that time will be our indicator of what lies ahead for the future of construction.

As always, Alex and I welcome your comments below.  Also, please subscribe to keep up with this and all of the Guest Post Fridays here at Musings.

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Previously here at Musings, I discussed the application of pay if paid clauses and the Miller Act.  The case that prompted the discussion was the Aarow Equipment & Services, Inc. v. Travelers Casualty and Surety Co. case in which the Eastern District of Virginia Federal Court determined that a “pay if paid” clause coupled with a proper termination could defeat a Miller Act bond claim.  However, as I found out a couple of weeks ago at the VSB’s Construction Law and Public Contracts section meeting, the 4th Circuit Court of Appeals reversed and remanded this case in an unpublished opinion (Aarow Equipment & Services, Inc. v. Travelers Casualty and Surety Co.)

In it’s opinion, the 4th Circuit looked at some of the more “interesting” aspects of this case.  One of these circumstances was that Syska (the general contractor) directed Aarow to construct sedimentary ponds and other water management measures around the project (the “pond work”), which both agreed was outside of the scope of the work defined in their subcontract.  Syska asked that the government agree to a modification of the prime contract and asked Aarow to wait to submit its invoice for the pond work until after the government issued a modification to the prime contract and Syska issued a change order to the subcontract.

Several months later, no modification or change order had been issued, and Aarow submitted an invoice to Syska for the completed pond work. Syska instructed Aarow to list the pond work under a line item designated for certain finishing work on the project that had not yet been completed.  The government denied the subsequent change order request (submitted by Syska), stating that the pond work was in the scope of the original contract and Syska withheld money owed for other aspects of the work to make up the difference for the previously billed pond work.

In looking at these circumstances, the 4th Circuit Court of Appeals determined that the “prevention doctrine” may apply to these circumstances.  In other words, a reasonable jury could conclude that Syska was at least partially at fault for the government’s non-payment due to the the “unusual” billing procedures (i. e. including the pond work under certain finishing work) coupled with Syska’s failure to obtain the contract modification. Should the fact finder conclude that Syska was in fact at fault, Travelers could not rely on the pay if paid clause as a defense.

While I don’t know the final result of the remand, I commend Aarow’s construction attorneys for their creative arguments.  Construction professionals in Virginia would do well to obtain the advice of a qualified attorney when looking at their contracts and seeking payment in unusual circumstances such as these.

As always, I welcome your comments below.  Please subscribe to keep up with this and other Construction Law Musings.

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In the eyes of many contractors and licensed business people, obtaining a surety bond is a necessary evil in their quest to take on work. Whether you are applying for your first surety bond or are shopping around for a new surety bond company, understanding what to look for before signing with a surety company is essential.

1)      Check their license

Any company that issues surety bonds must be licensed by the insurance department of the state in which they operate. Periodically, these licensing departments will perform exams of the surety company to ensure they are practicing in accordance with legal and ethical guidelines.

2)      Know your project

If you’re beginning work on a federal government construction project, your surety company must not only be licensed by the insurance department, but also certified by the U.S. Department of the Treasury. The Treasury Dept. maintains an online list of certified companies that can be used as a reference when beginning the search process. The database lists all federally certified surety companies along with the states in which they are licensed to write bonds and the total underwriting limit that has been set for them by the government.

3)      Understand their ratings

For those that aren’t beginning a federal project, independent ratings organizations offer third-party analysis of surety companies. These consumer protection groups aim to give an unbiased evaluation of a surety’s standing. One of the mostly highly regarded ratings organizations is Dun & Bradstreet, who evaluates surety companies as well as many other businesses. While many ratings groups require membership or a fee to obtain a report on your chosen surety company, spending $100-200 upfront to ensure your surety is legitimate can save a world of headaches down the road.

4)      Shop around

Rather than seeking a straight forward surety-only company, investigate using a surety bond producer. They are independent agents with contacts in several surety companies. Producers can evaluate a client’s individual needs and pair them up with the best qualified surety company, even assisting the client in preparing for any pre-qualification processes. The National Association of Surety Bond Producers oversees all of these agents and ensures they are held to appropriate levels of professionalism to protect the client’s best interests.

5)      Verify their authenticity

For companies who regularly hire contractors to complete contract work, there are also resources available to check the background and history of a surety bond that is presented to them. Bonds can be verified either directly through the surety company, or by contacting the Surety & Fidelity Association of America. If you are working with a new contractor or an unfamiliar surety company, verifying the bond can confirm that you have adequate coverage should anything go awry on your project.

Alex and I welcome your comments below.  Also, please subscribe to keep up with this and other Guest Post Friday Musings.

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In the past few weeks, I must have been asked one question on multiple occasions:  “What is Construction Law?”  When this question was asked, I realized that I’ve been Musing on this topic for almost three years and realized that I’ve posted on everything from why I enjoy being a construction lawyer, to various topics on the subject, to marketing a construction law practice, but have never attempted to define my own practice area.

Well, here’s my attempt to do just that, i.e. put a definition to the area of the law that I have practiced for so long-construction law.  In thinking about this topic when answering the questions from colleagues and friends (not to mention for my class at Solo Practice University), I realize that I don’t have a short answer.  The best “one liner” I could come up with is a mix of contract law, construction specific collection tools, psychology, and litigation.  Mix in some general business counseling for Virginia’s contractors and subcontractors and there you have it!

Not enough detail for you?  Here are a few of the basic components (many of which are pages here at Musings):

• Construction Contract Drafting and Evaluation
• Virginia Mechanic’s Liens
• Little Miller Act Claims
• Green Building Advising
• Incorporation Issues
• General Construction & Surety Litigation

While this is not all that I do for my construction clients (either here in Virginia or those from outside of the Commonwealth), I believe that this pretty well sums up what I believe to be the components of a construction law practice.

Did I forget anything?  Is there a service you believe I could be providing that should be added to this list?  Let me know.

As always, I welcome and encourage your comments below, please share your thoughts.  Also, please subscribe to keep up with the latest Construction Law Musings.

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Recently, the legal/construction blogosphere (if that’s still a word) has been discussing a move by Ohio State University to eliminate the need for construction payment and performance bonds on public projects for the university.  Needless to say, this move is not popular with certain portions of the construction industry.  In fact the Surety and Fidelity Association of America (SFAA) and the American Subcontractors Association (ASA) filed a joint action to require OSU to require bonding on their projects.

This move by OSU is not the only step toward lowering bonding requirements by various states.  The Commonwealth of Virginia, my home turf, recently enacted a change in the minimum size of a project on which bonding is required.  This change raised the minimum project value from $100,000 to $500,000 and substituted a choice to pre-qualify contractors for public projects.

These matters have been discussed here at Construction Law Musings and by both of my pals Doug Reiser (@douglasreiser) and Chris Cheatham (@chrischeatham) on their respective blogs (linked above) so I won’t get into the specifics of the particular construction projects or the legislation.  I do however, want to get thoughts of all of you great readers on the implications of this move.

Clearly, a move from bonding requirements can lower public construction costs by whatever percentage was previously included in bids for these bonds.  The cost savings seems to be a great idea at first blush, particularly in these tough economic times.  One could look at this as a long overdue streamlining of the public procurement process.  Additionally, the pre-qualification requirements, if used properly, could be a much needed screening mechanism to assure that quality contractors and subcontractors work on public projects.

On the other hand, should the pre-qualification process be lax and only go through the general contractor level, the failure to require bonding could be a disaster.  The economics of a low bid environment create incentives to get the lowest possible price for materials and subcontractor services.  Without bonding of at least the general contractor, the states could end up paying for corrective work because of low priced but low quality subcontract work.  Such corrections would likely cost more than a quality job being done from the start and the recovery of these costs would be far from assured because a subcontractor could go out of business and become judgment proof.

Furthermore, the possibility exists that quality subcontractors and suppliers would avoid unbonded public jobs because of a lack of effective recourse in the event of non-payment.  Without the mechanic’s lien rights that exist on a private project, subcontractors and suppliers are left with recovery under the various “Miller Acts.”  Without a bond in place, even this last avenue of recovery is cut off.  A smart subcontractor or material supplier will build this risk into its costs and adjust its bid accordingly or simply refuse to bid on public construction jobs.  As one that represents construction professionals in Virginia, I can only say that the lack of bonding will likely either raise public costs or limit the pool of construction companies willing to bid on public work.

The changes are so new that, like with much in green building, the implications have yet to play out, but play out they will.

So, what do you think?  Is the cost savings and streamlining that will likely occur because of these changes in public procurement worth the risks that I’ve outlined?  Do you think I’m being too pessimistic?  Too optimistic?  Please let me know your thoughts.

As always, I welcome and encourage your comments below, please share your thoughts.  Also, please subscribe to keep up with the latest Construction Law Musings.

© Construction Law Musings- Richmond, VA is licensed under a Creative Commons Attribution-No Derivative Works 3.0 U.S. license.

Professionals who work in the construction industry know the laws that regulate the market change constantly. Unfortunately, even government agencies are flawed, which means they sometimes establish nonsensical, arbitrary regulations that leave construction professionals even more confused as to how they’re expected to do their jobs.

For example, back in 2007 government agencies in Vancouver had to rework laws that mandated certain green building stipulations in regard to roofs.  The city essentially created a law so risky that no insurance company would provide insurance for projects related to green roof building due to the high risk for potential claims. Because insurance companies refused to issue the necessary coverage to contractors, work could not begin on any new projects until the law was reworked. Construction professionals and surety providers alike are worried this kind of hindrance could result when Washington D.C.’s 2006 Green Building Act goes into effect in January.

According to section 6b of the act:

On or before January 1, 2012, all applicants for construction governed by section 4 shall provide a performance bond, which shall be due and payable prior to receipt of a certificate of occupancy.

The bond, which could be worth up to $3 million, would be forfeited if a building should fall short of expected green building standards (such as LEED certification) outlined within the act.

“The Green Building Technical Corrections, Clarification, and Revision Amendment Act of 2009″ featured a number of changes, including a fairly simple one that replaced the term “performance bond” with “bond.” Ideally, this means that the bond required by the act will function more as a license and permit bond that guarantees contractors’ compliance with statutes (a.k.a. green building codes).

After this change, it became clear that something known as a “green performance bond” would not formally exist in name. However, since the regulation hasn’t yet become enforceable, it’s still unknown just how accountable surety providers will be for contractors who build projects that don’t meet environmental standards. It still seems as though these bonds would provide a financial guarantee of a contractor’s ability to meet third-party certification standards, which is something most sureties avoid due to a lack of control.

If implemented industry-wide, these bonds would essentially function as do other license and permit bonds. At this point, one of the major concerns is how to enforce a bond in a part of the industry where there’s a lot of gray area, especially because green building regulations change so frequently.

Furthermore, surety providers are extraordinarily hesitant to write what they consider to be high risk bonds. Unfortunately it’s still unclear just how liable sureties will be for contractors who fail to meet environmental standards, and that’s something that will just have to be worked out through experience. In the meantime, sureties don’t want to risk backing a contractor that could cost them a great deal due to unforeseeable violations that are beyond their control.

As always, we welcome your comments below.  Please subscribe to keep up with this and other Guest Post Fridays at Construction Law Musings.

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We’re back on the Miller Act train here at Musings.  Recently, the Alexandria, VA Federal District Court revisited the issue of whether the failure of a subcontractor to pay its supplier provides a general contractor and its surety with a defense to a Federal Miller Act bond claim.  The short answer is “No.”

In U.S. ex rel. Thyssenkrupp Safway Inc. v. Tessa Structures LLC, (“Safway”) (23 page PDF), the Court discussed several issues arising from the above stated scenario. In Safway, the Plaintiff provided scaffolding to a masonry subcontractor at the FBI facility in Quantico, Virginia.  Safway was not paid, and filed the inevitable bond claim.  Among other defenses, the surety and the general contractor, Vista Contracting, defended claiming that they were entitled to a recoupment defense for amounts that Vista had to pay out due to it’s subcontractor’s breach of contract.

While implying without deciding that Vista and the Surety could not defend a bond claim by mere reference to the subcontractor’s breach of contract when Vista had no contract with Safway, the Court stated that regardless of any alleged breach of contract by the subcontractor, Vista and the surety could not point to any evidence that Safway provided faulty scaffolding.  Furthermore, the Court followed prior cases in stating that full payment to a subcontractor is not a defense to a Miller Act bond claim by a supplier (this is contrasted with the payment defense to a Virginia mechanic’s lien).

In short, this case continues the trend in Virginia federal courts of not allowing set off as a defense to Miller Act bond claims unless there is a direct contract between the general contractor and the bond claimant on the particular project to which the bond applies.  I recommend Judge Cacheris’ analysis in the Safway opinion for a great discussion of these principals.

Because of the various wrinkles in Miller Act bond claim law and the court opinions analyzing them, please contact an experienced Virginia construction lawyer prior to deciding your best course of action.

As always, I welcome and encourage your comments below, please share your thoughts.  Also, please subscribe to keep up with the latest Construction Law Musings.

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Here at Construction Law Musings, I have discussed the interaction between fraud and contracts on many occasions.  Recently, I got to put my advice into action.  I am counsel for the plaintiff in the matter of Environmental Staffing Acquisition Corp. v. Beamon, et. al. in the Portsmouth, VA Circuit Court and recently got a great opinion (.pdf) right on point that was recently featured in Virginia Lawyers Weekly.

The basic facts are these.  My client, Environmental Staffing (En-Staff) filed a Little Miller Act claim and a claim for breach of contract for Beamon’s failure to pay for temporary staffing that En-Staff provided it at the Jeffry Wilson housing project demolition in Portsmouth, VA.  Beamon then counterclaimed for fraud and breach of contract claiming that some statements to the effect that a particular supervisor was qualified along with presentation of the individual’s resume constituted fraud.  My client demurred to the two fraud counts (actual and constructive).

The Circuit Court agreed with En-Staff and adopted a couple of my arguments.  Aside from the argument that works in most contexts (i. e. that where the duty to act a certain way is based in contract, there can be no fraud), the Court stated that statements like those made by the employee of En-Staff (see the opinion for specifics) were merely sales talk.  Additionally, the Court set forth a test for the difference between statements of opinion (not fraud) and statements of fact (possibly fraud).  The Court also discussed how the ability to investigate the claimed fraudulent statements may impact the analysis.  The Court then concluded that no fraud occurred and that, as expected, Beamon had to proceed under a contract theory.

In short, I recommend the opinion as a good discussion of the interaction between fraud and contract (and not just because the Court sided with me).  The nuances discussed show why contractors and other construction professionals should discuss their claims with an experienced Virginia construction lawyer prior to deciding how to proceed.

As always, I welcome and encourage your comments below, please share your thoughts.  Also, please subscribe to keep up with the latest Construction Law Musings.

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The Virginia General Assembly has passed a couple of bills, effective July 1, 2011, that will affect contractors’ and other construction professionals’ rights to payment and where they can and should bring their construction related claims.

The first set of changes are to Virginia’s “Little Miller Act” of which I have spoken on many occasions here at Construction Law Musings.

HB 1951 raised the minimum amount required for bid, performance and payment bonds. The new minimum contract amount increased from $100,000 to $500,000 for non-transportation construction projects. If the bond requirement is waived on projects between $100,000 and $500,000 the prospective contractors must be prequalified. What this means is that subcontractors and suppliers in particular can no longer assume that the $250,000.00 project on which they are working is bonded.  They should therefore make sure to check on the financial stability and credit or the general contractor for whom they are working just as if they were working on a private construction project.

SB 1424 reduced the time within which lower tier subcontractors and vendors must provide notice to the contractor from 180 days to 90 days. Therefore, any claimant that has a contract relationship with a subcontractor or vendor, but no contract relationship with the contractor, may only pursue a payment bond claim if it first gives written notice to the contractor within 90 days (as opposed to 180 days) from the day on which the claimant performed the last of the labor or furnished the last of the materials for which it claims payment.  On the one hand, the new time limit will track with the Federal Miller Act.  On the other, the well known 180 day limit is no longer.  Make sure that, as a second tier subcontractor or supplier, that you are aware of this shortened time limit.

A second, and in my opinion laudable, change is the increase in jurisdictional limit for Virginia General District Courts.  Effective July 1, 2011, this top limit will increase from $15,000 to $25,000.  As stated in the post linked above, I believe that this will open up more claims to efficient resolution, particularly for subcontractors and suppliers that may have claims in the $20,000 range for which Circuit Court may not be an efficient option.

These are only a few of the many changes in Virginia law that occurred during the last General Assembly session.  Please consult with an experienced Virginia construction attorney to determine how these (and other) changes may affect your construction business.

As always, I welcome and encourage your comments below, please share your thoughts.  Also, please subscribe to keep up with the latest Construction Law Musings.

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