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.

Image via stock.xchng.

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

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

For this week’s Guest Post Friday, Construction Law Musings welcomes Danielle Rodabaugh. Danielle (@DaRodabaugh) is a principal for Surety Bonds.com, an agency that issues surety bonds to individuals and businesses across the nation. She writes articles to clarify bonding rules and regulations for those who have a stake in the surety bond industry–from contractors to telemarketers, and every professional in between.

In construction we often value performance and payment bonds when considering how to protect the financial investments put into a project. We do so because these bonds provide a legal financial guarantee that the selected contractor will fulfill the contract. However, a third, equally protective kind of construction bond is often overlooked.

Before an official contract has been agreed to and successfully executed, bid bonds guarantee that the selected low-bidder will officially enter into the contract at a later date. Bidders must submit a bid bond with their bid. Without doing so, the bidder becomes non-responsive–or an invalid candidate. Sometimes we overlook the benefits provided by this kind of Virginia surety bond, and yet they frequently act as the only legal protection for a project prior to groundbreaking.

The purpose of bid bonds
The primary purpose of a bid bond is to assure the client funding the project that the low bidder will enter into a contract for the price quoted in its bid. This has two major benefits:

1. The low bidder is now unable to increase its bid on the project.
2. If the contractor refuses to enter into the official contract with the client at a later time, the bond allows the client to recover the difference between the accepted bid and the next-lowest bid.

Bid bonds also mandate that the bidder will secure other required performance and payment bonds as necessary, reaffirming that the contractor will fulfill its duties to the developer.

Bid bond forfeiture
If the principal should decide to opt out of the contract, then the entity will be held accountable for paying reparation in the amount of:

• the difference between the amount of the faulty bidder’s bid and the next-lowest bid or, if a lesser sum:
• the face value of the bond

If a principal breaks the contract, the obligee usually collects damages in the amount of how much more they now have to pay to contract the next-lowest bidder for the project. In such collection cases it’s not unusual for courts to base their decisions on precendent rather than legal stipulations, as regulations in the bonding industry are constantly evolving.

Bid bond costs
If you’re a bidder, you need to check to see whether a bid bond is needed before you start preparing a bid so that you can estimate what the approximate penal sum will be. As with other construction bonds, all publicly-funded projects in Virginia that exceed $100,000 require a bid bond. A bond’s penal sum varies for many reasons, including:

• the project’s total projected cost
• contract terms
• the area in which the contract is executed

Depending on the jurisdiction, the principal usually needs to provide between 5 and 10 percent of the bid upfront to guarantee its accountability to the client. Federally-funded projects usually set a higher standard of 20 percent. For example, if a contractor bids $100,000 on a project, the entity will need to provide a $5,000 to $10,000 (or $20,000 for a federally-funded project) bid bond prior to beginning work. This cost is calculated to protect the owner in case the low-bidder opts out of the contract, and the surety will not pay more than this amount if the principal defaults on the bond’s payment.

For construction professionals working on a smaller scale, the U.S. Small Business Administration offers a surety program for small businesses. The SBA can also guarantee bonds for contracts up to $2 million for riskier principals. Small and emerging contractors who cannot obtain surety bonds through regular commercial channels can take advantage of the SBA to back their bid, performance, and payment bonds.

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

Here at Construction Law Musings, we are quite fond of the Federal Miller Act and it’s Virginia counterpart, the “Little” Miller Act.  Both of these statutes allow a subcontractor or supplier on a government construction project the security to perform their work with the knowledge that a bonding company will back their claim for payment.  These acts are necessary because a construction company cannot file a mechanic’s lien on a government owned piece of property.

As a general rule the Miller Acts impose almost strict liability on a contractor and its surety to pay for work performed by a downstream supplier or subcontractor.  However, as a recent case out of the Fourth Circuit Court of Appeals makes clear, this rule is not without exceptions.

In US ex rel Damuth Services v. Western Surety, et al., the Virginia based federal appellate court examined a side deal between a mechanical contractor and its supplier regarding payment for equipment supplied to a project in Chesapeake, VA.    In the Damuth case, the Plaintiff entered into an agreement with the mechanical subcontractor (H & L) for full payment for other work unrelated to the Chesapeake project and for payments over time until Damuth was paid in full after finding out that H & L used payments on the project to pay for work performed elsewhere.  Furthermore (and this was the kicker), Dalmuth agreed not to inform the general contractor of the agreement.  H & L reneged on its agreement and Damuth sued on the bond under the Miller Act.

The Court stated that, in failing to inform the general contractor and surety, Damuth participated in misleading the general and surety.  The Court found that, in light of H & L’s contractual and statutory obligation to pay Damuth from funds paid to it on the project, Damuth essentially agreed to accept payment under other terms in exchange for a promise not to “rat out” H & L.  This activity kept the General Contractor from being able to deal with the situation and therefore the surety did not have to pay.

The take away? Always be honest with everyone when making deals outside of the contractual chain.  I would advise that you, as a subcontractor or supplier, don’t make such deals on bonded projects or at the very least keep the general contractor and surety in the loop.  By keeping the general contractor and surety in the loop, you avoid looking like you are in on the scam and also give the surety a chance to protect itself by paying you or at worst having to pay you when you have to make a claim.

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

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

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.

Image via stock exchange

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

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

I have discussed the picky nature of Virginia mechanic’s liens often over at my Construction Law Musings blog. Not only are the requirements and details strictly enforced, but the Virginia General Assembly seems to feel the need to tweak them in each of its sessions.

The latest change involves the use of a mechanic’s lien agent on residential projects. Beginning at the start of this month, July 1, 2010, a contractor can no longer depend on the failure of the owner to list a mechanic’s lien agent on the posted building permit. The new statute requires that a contractor go beyond merely reading the building permit and make a reasonable inquiry with the local building authority to determine the identity of the mechanic’s lien agent.

I truly appreciate the opportunity to reach a new audience with a guest post. As all of my readers know, I am a big fan of guest posts and having others guest post here at Musings.

Check out this blog and the Wolfe Law Group‘s great resource for construction professionals, the Construction Law Monitor.

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

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

Green Building is all the rage. From the latest version of LEED, LEED 3.0, to discussions of “LEEDigation.”

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

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.

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

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

Image via Wikipedia

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.

If you find this and other Musings helpful or interesting, please let me know by a comment below and please subscribe to keep up with the latest Musings.

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

Another exception is highlighted by a recent case in the Western District of Virginia Federal district court.  In Summit Community Bank v. Blue Ridge Shadows Hotel the Court considered the question of what supplies to a construction project are subject to a mechanic’s lien in Virginia.  In this case, the Western District bankruptcy court determined that furniture delivered to a hotel during construction was properly subject to a mechanic’s lien.  Unfortunately for the lienholder, the U. S. District Court disagreed.

The Court stated that furniture, including tables, lamps, chairs, etc. are not “improvements” within the meaning of the mechanic’s lien statute.  In short, the Court determined that the Virginia statute requires more of a connection between the materials and the structure than is present with personal property with the sole connection of  “presence” in the building.  The Court did not go so far as to require a physical connection, leaving open the question of where on the spectrum of personal property with only a “presence” connection and an irremovable fixture would allow materials delivered to a job site to be subject to a lien.

The takeaway?  First of all, not all work or materials are subject to lien.  This means that a contractor, subcontractor or supplier must be careful in what it includes in a lien, particularly in light of the picky nature of these liens and the ease with which the Virginia courts will invalidate them.  Second of all, just because a claim is not subject to lien does not mean that a contractor is completely without remedy.  A breach of contract action is always a possibility (of course this case is a bankruptcy case and a lien is always a better option in such circumstances).

As always, I encourage you to consult a Virginia construction attorney to discuss your options prior to moving forward with a mechanic’s lien or any other claim related action.

Image via Stock Exchange.

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

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

An OSHA (Occupational Safety and Health Administration) or VOSH (the Virginia equivalent) inspection can be stressful. Knowing what to do during an inspection can go a long way to relieving this stress.

Check out this SlideShare Presentation regarding a contractor’s rights when the Safety Inspector shows up at a job site. This is the PowerPoint from a presentation I have done several times around the Commonwealth of Virginia. The presentation goes well with my VOSH Inspection Checklist.

As always, I welcome your comments.  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.