Well, the builder did just that and added certain language to the amended counterclaim that, this time, survived dismissal.  In Dragas II, Judge Smith cited certain amendments, among them the factual allegation that the settlement was in response to four lawsuits by owners.  Judge Smith determined that this allegation of threatened litigation was enough to survive a motion to dismiss.  Judge Smith then went on to consider other defenses of the insurers, including the “voluntary payments” provision of the policy, and rejected those arguments as well.

I highly recommend this opinion and Judge Smith’s prior opinion to any lawyer or contractor who is faced with the situation of trying to be reimbursed by an insurance company for its pro-active stance toward remediation of potential defects.  These two opinions outline the pleading requirements in stark contrast because of the differing results (though Judge Smith is careful to point out that she makes no ruling on the ability of Dragas to prove its factual allegations).

In sum, while the prior Dragas opinion seems to work against the “good Samaritan” who seeks to act proactively, this latest opinion seems to remove contractors from the Gordian knot (hat tip to Tim Hughes (@vaconstruction)) of either fixing a problem and potentially losing coverage, or waiting to get sued.  Of course, a careful reading of these opinions and the advice of a Virginia construction attorney prior to taking action will go a long way toward determining if your circumstances are such that the proactive approach is the legally sound one.

UPDATE: For more good analysis on this case, check out my friend Tim Hughes’ discussion from his blog.

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In this case, the Plaintiff provided therapy services to residents of nursing homes.  It sued for breach of a contract that included a standard arbitration clause stating that all disputes relating to the contract are to be resolved through arbitration.  Subsequently, the parties reached a settlement agreement through e-mail negotiation.  The agreement, again in e-mail form, stated the amounts to be paid to the plaintiff by the defendants and on what schedule.  The settlement e-mail also stated that any dispute relating to the non-solicitation provisions of the contract would be resolved in the Western District of Virginia Federal Court.  However, this final e-mail did not provide for any particular jurisdictional requirements for payment disputes and explicitly left any unchanged portions of the original contract in full force.

The defendants brought a motion to compel arbitration under the original contract.  The Court denied this motion relating to the non-solicitation claims and granted it as to the payment dispute.  The Court reasoned that the parties specifically waived arbitration as to the non-solicitation provisions but specifically left arbitration in force regarding all other contractual claims.

While this case is not one relating to a construction contract, it provides some good lessons for construction professionals and the construction lawyers who advise them.

1.  E-mails resulting in changes to a contract, even through settlement negotiations, can waive contractual provisions.

2.  Choose your words in such e-mails carefully, you may end up in two different venues like the defendants in this case if you are not careful to either keep arbitration in force for all claims or for none.

3.  The power in point 1 of this list, when used carefully, can assure that the parties to a contract end up in the venue that they desire when seeking to enforce a negotiated settlement.

In short, be careful when crafting a non-judicial settlement of a contractual dispute to avoid litigation over what the settlement means.  It is expensive enough to litigate any breach of terms of a settlement without having a court tell you what those provisions entail.

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This week’s case discusses the operation of the Virginia construction “statute of repose” that operates as a 5 year cut off on any claim relating to improvements to a property and runs from the completion of any improvement work.  Unsurprisingly, this case comes out of the Fairfax County, Virginia Circuit Court.  In Travelers Indemnity Co. v Simpson Unlimited, Inc the Court considered the question of what constitutes and “improvement” under this code section.

The facts are these:  Simpson was contracted to replace soffits on the terraces of a building and provide maintenance work on a building in 2002.  in late 2004 a leek, attributable to the soffit work, developed and caused property damage.  The lawsuit was filed in March of 2009. Simpson Unlimited argued that while the suit was filed within the applicable statute of limitations, but outside of the cutoff found in the statute of repose and therefore the case must be dismissed.  Traveler’s argued that the work was not improvement work, but repair or replacement work so the statute of repose did not apply.

The Court agreed with Traveler’s, stating the general rule that repairs did not constitute improvements and that Simpson Unlimited’s work constituted repair work.  The Court cited Black’s Law Dictionary in making this determination.  It then concluded that removal and replacement of the soffit was repair work, despite the clear addition to the value of the property because of the work.

The take away?  Contractors and subcontractors will need to determine whether they are performing improvement work or repair work in order to determine if the statute of repose applies in the first instance.  Additionally, this case shows that the Courts in Virginia will look to strictly construe both the contract and the applicable statutes when analyzing construction claims.  The assistance of an experienced Virginia construction lawyer can help construction professionals navigate this statutory and contractual minefield.

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Musings thought that it would step away from its discussion of “green” construction to discuss a few interesting construction cases that came down recently in the Commonwealth of Virginia.

The first of these is another warning to contractors that arbitration provisions can be waived by conduct.  In Shoosmith Bros., Inc. v. Hopewell Nursing Home, the Hopewell Circuit Court of Virginia found that Kenbridge Construction Company’s waived its right to arbitration by its use of the Courts for a substantial period of time and its use of the discovery “machinery” of the Court.  In short, if you want to enforce an arbitration clause, do it early to avoid an argument that you have waived arbitration.

The second case is in relation to mechanic’s liens.  I find this one interesting because the Court actually refused to invalidate a lien for a minor inaccuracy in the description of the work performed.  In B.P. Realty LP v. Urban Eng’g Associates, Inc. et. al., the Fairfax, Virginia Circuit Court refused to invalidate a lien because the engineering firm and defendant in the case failed to include the word “surveying” in its description of the work.  The court held that this is an excusable inaccuracy.

This is significant because, as I have discussed on numerous occasions here at Musings, Virginia mechanic’s liens are extremely picky in their enforcement.  While I would not take this case to allow any inaccuracy that is more significant than that described here, it needs to be pointed out that you are not without arguments against claims that your lien is invalid due to a minor inaccuracy.

The third case I felt needed a mention is S. B. Ballard Construction Co. v. LGS Group, LLC, et. al.. In this case, the Court give a quick reminder that, in Virginia, it is very hard to make a contract claim into one for fraud, negligence or conspiracy.  The economic loss rule in Virginia prohibits any claim that could arise from the contract from being prosecuted as a tort claim instead of a contract claim.

In a fourth set of consolidated cases, the Norfolk Circuit Court held that the language found in Va. Code Sections 43-11 and 43-7 invalidated a subcontractor’s mechanic’s lien, despite non-payment to the general contractor, where an owner expressly conditioned payment to the general contractor upon its obtaining financing, diligently sought financing and was unable to obtain that financing.  The Norfolk Circuit Court also discussed estoppel and waiver and I commend reading this case to all who are interested in construction contracts and liens.

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Recently I was discussing the ConsensusDOCs with a colleague and friend and had a revelation. These forms are used often (though somewhat less than their AIA counterparts and less than they should be used). Quick disclaimer: I have been a part of a couple of drafting committees for ConsensusDOCs and am friends with Brian Perlberg, general counsel to the drafting effort.

Some of the reason that these forms are so widely used is that they can be applied in a general way to almost any situation. Both sets of forms have documents for small and large jobs. Both have forms for Contractor/Owner and Contractor/Subcontractor. In short, a form document exists for about any scenario.

I am writing now to let you know that while forms are great, they are just that. . . forms. Like with any set of forms, they need to be “tweaked” for your particular project. In my opinion they both have great clauses in them, and both have some flexibility built in (ConsensusDOCS more at the moment than the AIA forms). At the very least, construction professionals need to use this flexibility to conform the documents to their particular situation and do so within the documents themselves and not with addenda that “strike” or “modify” particular clauses.

Frankly, the use of such addenda over time can lead to a lot of work for a construction attorney and a lot of headaches for a contractor. Eventually, use of such addenda without thorough periodic review can lead to clauses that nest and are internally contradictory leading to disputes over what the document means. Such ambiguity and self-contradiction within the documents only leads to another layer between you and the key question: Who owes whom money and how much?

In short, clarity is key. Adequate clarity is achievable with the AIA and ConsensusDOCs forms (among others created by the AGC and other organizations). However, you must use the forms as they are written and for the purpose for which they were created. If you cannot get to where you want to go with these forms, then consult an attorney and collaborate with him or her to create documents that achieve the specificity that you need and the clarity that is a must.

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Recently, the U. S. District Court for the Eastern District of Virginia weighed in on the issue of an insurers duty to defend a home builder that voluntarily institutes a remediation plan to fix drywall issues.  In Builders Mutual Ins. Co. v. Dragas Mgmt Corp., the Court faced the question of what duty an insurance company has to pay for expenses that are incurred by a builder that voluntarily remediates building issues.

In Dragas, prior to any suit being filed by a homeowner, the contractor decided that it would seek out information from the owners of homes that it had constructed regarding health and other issues caused by its use of Chinese drywall and then seek to cure those issues.  The contractor then sent correspondence outlining its plan to the insurance carrier from which it received no objection.  Later, the contractor made a claim for its anticipated costs in fixing these issues.  The insurance carrier denied the claim.

The Virginia Court ruled in the insurer’s favor.  In doing so, the court determined that, based on the policies in question, the insurance company had no duty to pay for anticipated costs without a claim or evidence that the contractor had a legal obligation to pay, in the form of lawsuits, judgments, administrative obligations or even threatened lawsuits.  In short, because the contractor decided to act in a good hearted manner and try and head off issues before they arose, it was not entitled to reimbursement from the insurance.

The moral of this story, aside from read your insurance contracts and make sure you, as a construction professional, understand them, is to be careful in assuming that what you feel to be your moral obligation will be seen by the courts to also be a legal obligation.  Before acting (even with the best of intentions) you should consult an attorney and make sure that you will be covered in the event that your actions are challenged or your right to coverage is not totally clear.

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In L. White and Company v Culpeper Memorial Hospital, the plaintiff contractor (L. White and Company) sued the hospital for wrongful termination from the project.  The hospital responded that the contract required exhaustion of a two stage informal resolution process prior to any suit being filed.  The informal resolution required both submission of any claim to the architect and mandatory mediation.  L. White and Company could show that it had submitted the claim to the architect, but conceded that it never sought to mediate it’s claim.  However, L. White and Company argued that the mediation provision was merely advisory.

The Culpeper County, Virginia Circuit Court disagreed with the plaintiff and dismissed the claim in it’s entirety because the contract provided for exhaustion of the informal resolution process prior to either party filing suit.  In short, both sides agreed and signed the contract and therefore both parties were going to be held strictly to it’s terms.

While I have discussed the great value of mediation on several occasions here at Musings over the past year and a half (and my thoughts on mandatory mediation), the true take away from this case for contractors, subcontractors and suppliers is to carefully read the contract documents that control your rights regarding a construction project.  You, as a construction professional, should read them carefully at the time of signing the contract and any time you plan to make a claim or exercise your rights under the contract.  Here, the court clearly implied that the simple act of requesting mediation could have saved the contractor’s claim (particularly if the owner did not reply or blocked mediation).

Remember, your contract is the law governing the construction project.  Make sure that you carefully read and analyze that law prior to beginning work.  Also, the help of a Virginia construction attorney will help avoid problems down the road.

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My fellow construction attorneys and friends Doug Reiser of the Builder’s Counsel Blog (@douglasreiser on Twitter) and Chris Cheatham of the Green Building Law Update (@chrischeatham on Twitter) have discussed this policy and the failed challenge by a Wisconsin group to the LEED certification of a local high school.  Both of these guys have asked some great questions and I recommend that you read their analysis.

My focus here, as always, is on the “on the ground” risk management issues for contractors and subcontractors on projects seeking, and in this case obtaining, LEED certification.  The real issue here, from my perspective as a construction lawyer, is the further implication of third party action in the potential liability of the construction professional who constructs the building.

For the same reasons that contractors and subcontractors (and even architects and construction managers) need to structure their construction contracts to assure that failure of a building to meet certain energy benchmarks 3, 4 or even 10 years down the road does not come back to bite them, these same construction professionals must assure that their contracts shield them from the potential liability of LEED de-certification due to a challenge like that in Wisconsin.  This policy by the USGBC creates more questions than it answers, for example, how will insurance companies and bonding companies deal with the totally uncontrollable possibility of a certification challenge? How will the ghost of liabilities future (like that mangled Dickens reference?) dampen the enthusiasm for sustainable construction overall?

The Eeyore in me fears that our much needed shift to sustainable, energy efficient building stock will be hindered by the worries of contractors.  My hope (and, yes, I do have an optimistic side!) is that by asking these questions now, we can all work to deal with them and, with some luck and good planning, create a strong sustainable infrastructure that will be around for years to come.

This debate must continue.  If you comment to one post here at Musings, please make it this one because I truly do not have the answers to these questions.  Because of the uncertainty relating to the legal aspects of this brave new building world, your input on this topic is invaluable.

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Just this past Friday, my good friend Tim Hughes (@vaconstruction) posted a somewhat scary update regarding the removal of the owner exception and expansion of the rules to commercial construction.  Tim gives a great analysis and also links to several prior posts at his Virginia Real Estate, Land Use & Construction Law blog regarding the topic.

Last Tuesday, another good friend and construction attorney in Massachusetts, Andrea Goldman (@andreagoldman) posted regarding the new documentation requirements for contractors.  She also linked to a very helpful post from remodeling expert Shawn McCadden relating to these requirements.  Andrea also was kind enough to guest post her wonderful thoughts relating to the important legal issues raised by this new lead paint regime.

For a slightly more contrarian, yet no less helpful, opinion piece on the economic impact of these rules, please check out my good friend Rick Provost’s (@remodelthink)  lead rule perspective at the Profitable Contractor blog.

For the safety perspective, check out the Circle Safety blog (@circlesafety) for their take on this new rule.

I hope that you find these resources helpful.  I like and respect all of the folks to whom I have linked here and would only be reinventing the wheel relating to the lead paint renovation rule by discussing this further.

I would love to hear your comments and suggestions relating to other resources relating to this new rule and its impact on contractors and subcontractors.  Please join the conversation on this timely topic.

UPDATE: The Homeowners Resource Center has a great update on the regs as well, check it out.

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Here at Musings, we have discussed the topic of mechanic’s liens extensively.  However, a mechanic’s lien may not be appropriate depending on the type of project that you work on.  For instance, in Virginia (as in most states), a contractor cannot place a mechanic’s lien on a public project.

In Virginia, the legislature has adopted the “Little Miller Act,”modeled after its federal counterpart.  The Virginia Act requires that a contractor post both a payment and procurement bond on any public project valued at over $100,000.00.  These bonds secure just what you would think that they would, i. e. payment of subcontractors and performance of the work. The payment bond is a substitute for the lien rights that a subcontractor would have on a private project.

Essentially, the Little Miller Act allows a subcontractor or material supplier the right to collect under the bond if it has not been paid within 90 days of the date that the last material or labor was provided to a project. Once the subcontractor or material man shows that the labor or material was in fact provided, the claim is collectible absent some proof by the bonding company or contractor that it has some sort of payment defense (setoff, delay, etc.).

In order to take advantage of this powerful tool, you need only file a claim within a year of the last date of work/material supply if you are in direct contract with the general contractor.  If you are not in direct contract with the general contractor (or other party against whose bond you are claiming), you must send a notice to that party within 180 days of the last date of work.

This brief overview should give the basics of Virginia’s Little Miller Act.  As always, consult with a knowledgeable attorney when making any sort of construction claim.

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