Where There’s Construction, There’s Litigation-How to Survive the Battle

Where There’s Construction, There’s Litigation-How to Survive the Battle

By Pamela J. Scholefield, Esq.

This may not be true with every project, but the construction industry is – and always has been – a hotbed of litigation. This is an unfortunate aspect of construction in America. Once a construction dispute starts to snowball downhill, it tends to take with it any and all persons that touched the project, even the engineers and architects. Heading towards litigation is almost a guarantee that the road will be rough and loaded with traps for the unwary.

Three Way Tie
Regardless of the type of project - a custom home, commercial building, wastewater treatment plant, power distribution system, or a highway system – there are three common levels of participation: owners, design professionals, and builders/contractors. What tie them all together are the contractual relationships and legal obligations between the parties. From an overall project standpoint, each player’s input has a direct affect on the other two. An owner provides funding. A design professional creates detailed and buildable plans. A contractor turns the vision into reality. If any of the three participants do not perform, they can doom a project. It is truly a symbiotic relationship.

Red Flag Warnings
The first clue that something may be going wrong is that one of the parties starts documenting everything. Red flags should go up when notices start appearing frequently. Don’t ignore them. It may just be a sudden surge in project management discipline, but be skeptical and expect the worst, here’s why:

He (or She) With the Best Documentation Wins
With the ease of email, there is no excuse as to why you can’t shoot off a quick email to confirm an oral decision that is made at a meeting or during a teleconference. Don’t rely on other people or requests-for-information to document the story. There are too many decisions that are made on the fly, at job site meetings, and in teleconferences that are not tied to any specific RFI. These meeting notes and emails may end up being critical pieces of evidence if something is delayed, built wrong, or costs more.

Just the Facts
It is extremely important to remember when sending emails to avoid making personal opinions, such as the state of the project or frustrations with workmates, contractors, etc. Your personal opinions often become your professional opinions by opposing parties. Don’t expect privacy, and write as if your emails will be reviewed by a judge – no sarcasm, no derogatory remarks, no slamming the owner, engineer or contractors, and – above all – no admissions that you, or anyone who works with you or for you, have done anything wrong! These rules should apply even with your own internal emails. We have heard how internal emails can provide the “smoking gun” that wins or loses a case.

This goes beyond emails and other written communications, so think before you speak as well. The rules for emails should also apply to any oral communications or conversations you have with anyone throughout the project. Remember, your litigation opponent-to-be may be documenting these impromptu meetings as well.

The Best Defense is A Good Offense
The bottom line is that a good defense begins with a good offense. And, you may find yourself taking the stand and answering questions about a project 2 or 3 years after the project’s completion. Knowing this now may make your life easier when you are testifying. So, as a minimum, you should adopt the following as standard procedures for doing business:

1. Document all meetings and then forward to all attendees for review. If you are an attendee and you receive meeting minutes that you believe to be incorrect, make your changes known in writing and forward to all attendees.
2. Document all informal meetings, such as jobsite walks or impromptu discussions. All you may need is something as simple as an email summary of what was discussed.
3. Keep a paper copy of all electronic correspondence. Don’t let emails get deleted before printing out copies.
4. Take plenty of photos when you walk the site. Note the dates when taken. Copy them to CD’s for archiving.
5. Handle RFI’s promptly. Keep an accurate and updated RFI log.
6. Handle submittals promptly. Keep an accurate and updated submittal log.
7. Date-stamp all correspondence you receive, from any source.
8. Document communications with engineers, utility personnel, suppliers, consultants, construction managers and project managers, etc.
9. Document all attempts at communications; use phone logs for conversations, sent and received, and voice messages. Set your fax machine to print out confirmations and keep failed fax transmissions. Keep a copy of returned email deliveries.
10. Document the dates that plan revisions are issued and request a delivery receipt from all recipients if you are the issuer. Require that all revisions on plans be noted and clouded in.
11. If appropriate, keep a daily jobsite journal with as much detail as possible even if not required.
12. Document and retain all calculations used for the project, such as engineering, labor, material, or down-time estimates. This will help support any claims.

Better Safe than Sorry
Some of you may think that all this is overkill for smaller projects, but you’re going to wish you had done this if you’re ever caught in the middle of a construction lawsuit – regardless of the value of the project. Plus, the better documentation you have, the easier it is for your attorney to represent you. Making your attorney’s job easier will reduce your legal bills in the long run. And, most people find that litigation creates quite a bit of unwanted personal stress. So, the better your defense, the less stress you will suffer as you wind your way through the long process of litigation. Nothing you do will make litigation enjoyable, but at least you will know you are in the best possible position to defend yourself when needed.
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To Lien or Not to Lien…that is the question

To Lien or Not to Lien…that is the question

By Pamela J. Scholefield, Esq.

Question: Our company is a construction equipment rental company. Some of our equipment was leased by a contractor to use for a meat packing plant expansion. The expansion also includes relocating the plant’s emergency power system. The contractor rented from us various items such as a backhoe, emergency generators, and site fencing. The contractor has fallen way behind in making payments for the rented equipment. We provided the 20-day preliminary notice as required for this project when we first sent the equipment out. Can we record a mechanic’s lien to protect our rights to payment?

Answer: The right to a mechanic’s lien for persons supplying labor, services, equipment, or materials to improve property is vested in the California Constitution. The public policy behind liens is to prevent a property owner from being unjustly enriched by the value added to their land if the one who supplied the labor, services, equipment, or materials for that increased value went unpaid. But, it is not always easy to figure out who, exactly, has lien rights and your seemingly simple question, unfortunately, cannot be answered with a “yes” or “no.”

Per Civil Code, section 3116, you can file a mechanic’s lien after you have “ceased furnishing labor, services, equipment, or materials” to the project. So the first question is whether or not your company is still leasing its equipment to the site. Assuming that you’ve retrieved your equipment, we have to assume that the project is ongoing or, if not, that the time to record a lien has not expired. That is subject of another question.

Next, we have to consider each piece of equipment your are supplying and determine whether or not it was “used or consumed” in the “work of improvement.” (Civil Code, section 3110). Court cases analyzing this statute have held that the word “used” means actually and directly used to improve the property and increase the property’s value.

The leasing of the backhoe would most likely entitled you to lien the property for the rental charges that have not been paid for that piece of equipment. The backhoe was used for earthwork that altered the property. Thus, the backhoe was used in the work of improvement, meaning it was used to directly improve the property.

On the other hand, site fencing is usually not an item that would entitle a rental company to lien rights. The fence may have been required by contract, insurance or even local ordinance, and was actually in place during the construction work. Without the fencing in place, the contractor probably would not have been allowed to proceed with the construction work. So, there is no doubt that the fencing was a necessary element in completing the work of improvement. But, the fence was constructed solely for security and liability purposes. It is temporary and does not, itself, directly improve and add value to the property.

The emergency generators are another issue all together. In some instances, a generator may be used to supply power to a jobsite in order to power up various tools being used to perform construction work. Wouldn’t that be similar enough to the backhoe? Each piece of equipment, while not permanently installed on the land, was actually used to improve the property. But, if the generator, or backhoe, was delivered to the jobsite and left there for the duration of the leased time, but for some reason sat idle and was never used, there would be a strong argument that the rental company does not have lien rights in that situation because the equipment was never actually used to improve the property.

By your question, it would seem that the emergency generators were rented to be on site for the purpose of supplying backup power to the existing operations just in case the normal utility power failed during the time the plant’s emergency power system was being relocated. If that is the case, then how would those generators, themselves, be adding value to the property? In this case, aren’t more like the fencing? They are needed in order for the project to go forward. But, the generators not actually and directly used in the actual work of improvement – they are not being used to enhance the value of the property.

As you see, mechanic’s lien rights are not very straightforward. The California Law Review Commission (CLRC) has been wrestling with this issue for some time and is currently in the process of revamping the mechanic’s lien laws in order to provide clarity as to who is entitled to a lien. Those of us in the construction industry are eager for any guidance these new laws will provide.

General Disclaimer
The information in this article is based upon California law and is for general information only. Any scenarios or hypotheticals are provided only to illustrate laws and legal principals in general. Any information or analysis presented here is intended solely to inform and educate the reader on general issues. Nothing presented or referenced to, regarding facts, documents, or applicable laws, constitutes legal advice. Before acting or relying on any information, including any information presented here, consult with a qualified attorney for your specific situation.

A New Year Brings New Laws for Contractors

A New Year Brings New Laws for Contractors

Fortunately, 2008 brings with it only a few changes to the laws that will affect the construction industry as a whole. Plus, one new law that affects virtually everyone that drives and uses a cell phone – we’ll discuss this one first.

Motor Vehicle Code §23123 – Hands-Free for Cell Phones
This new law restricts the use of mobile phones while operating a motor vehicle and takes effect on July 1, 2008. The law requires most drivers to use hands-free device while using a wireless telephone while driving a vehicle. There are exceptions for emergency use, tow trucks, farm vehicles, large commercial vehicles, and operating vehicles while on private property.
(See http://www.dmv.ca.gov/cellularphonelaws/ for DMV’s explanation).

There have been recent press releases that say that the use of the two-way radio, walkie-talkie like feature on a cell phone (like that provided by Nextel) is still allowed, but that is not the case. The exemption allowing the use of two-way radios applies only to specific vehicles, which does not include a pickup truck, despite that truck being registered and used exclusively for commercial purposes. The exemption does apply to a motor truck (think moving van) or a truck tractor (big-rig or semi tractor-trailer) that require either a commercial class A or class B driver's license to operate.

Business & Professions Code §125.6 – Anti-Discrimination
A licensed contractor will face disciplinary action if they discriminate by refusing construction-related services based upon a prospective client’s medical condition or sexual orientation. This expands the existing law providing disciplinary action against licensees for refusing services based upon race, color, sex, religion, ancestry, disability, marital status, or national origin of a prospective client.

Business & Professions Code §7026.11 – Mobile/Manufactured Homes
Because health and Safety laws now provide separate and distinct definitions for the terms “mobile home” and “manufactured home”, the Contractors State License laws had to be amended to allow for a General Manufactured Housing (C-47) classification to continue to be the appropriate specialty license for performing work relative to both mobile homes and manufactured housing.

Business & Professions Code §7027.5 – Expanded Scope for Landscape Contractors
Landscape Contractors (C-27 license) are authorized to enter into prime contracts for residential landscape projects that include the construction and installation of fireplaces (that are not attached to the dwelling) or outdoor cooking centers, as long as any work beyond the scope of the landscape contractor’s licensing is subcontracted out to appropriate specialty contractors or a licensed general contractor.

Business & Professions Code §7083.1 – Expired or Cancelled Licenses
A contractor whose license is expired, suspended and renewable, or canceled, must keep current his or her address of record with the Contractors State Licensing Board for a five-year period immediately following the expiration, suspension or cancellation of their license.

Business & Professions Code §7091 – Statute of Limitations for Disciplinary Actions
If a licensee is convicted of a crime that is substantially related to the qualifications, functions or duties of a contractor, the CSLB will have two (2) years from the date the conviction is discovered in which to file disciplinary action against the licensee. Also, the CSLB will have 18 months after the date a warranty expires in which to file a disciplinary action against a licensee who fails to honor the terms of the warranty.

Business & Professions Code §7114 – Payment of Money for Aiding Unlicensed Contractor
As part of disciplinary action against a licensee, the Registrar of Contractors is authorized to order a licensee to pay a specific amount of money to an injured party if the licensee has aided an unlicensed person or allowed an unlicensed person to use his or her license.

Business & Professions Code §7159.5 – Home Improvement Contracts
Parts of this statute have been revised to as follows: Contractors who provide and register payment and performance bonds need not include some of the language normally required for home improvement contracts. Also, this revised statute sets specific time frames for the running of statutes of limitations to bring criminal charges against contractors who violate certain provisions of the home improvement contracts statutes.

Business & Professions Code §7159.14 – Service and Repair Contracts
This amended statute clarifies statutes of limitation for bringing criminal charges against contractors who violate the requirements for Service and Repair home improvement contracts.

Civil Code §2782 – Subcontractor Indemnity
A new subsection added to this statute voids residential building contract provisions that attempt to make the subcontractor responsible (by way of indemnification) for construction defects claims that arise out of the negligence or design defects of the general contractor. But, this new subsection applies only to general contractors who are “unaffiliated” with the builder. This means that, in order for this safeguard for the subcontractor to apply, the general contractor must be an independent from the builder, meaning it can’t be a partner, member of, or subsidiary of the builder.

Insurance Code §11760.1 – Audit Penalties
This new statute provides that if, after three requests, an employer fails to allow an insurance company, or its representative, access to its records in order to perform a workers’ compensation audit, the employer may be liable to pay the insurance company three (3) times the total annual premium, plus associated costs.