Contractors and Bankruptcy: Getting the Piper Paid


This , which provides an overview of basic strategies for contractors, subcontractors and suppliers who are faced with non-payment from a bankrupt entity on a project, can be found on , Christopher Hill’s excellent construction law blog (our second guest posting honor) (click ).  I hope you won’t have a construction project affected by a bankruptcy any time soon, especially as we emerge from the recession.  But just in case you do, check out my post and be prepared for getting paid for work you performed or materials you supplied.

I’m no expert, but this is a game-changer


Well . . . a game-changer if you are a player in the expert-witness-in-federal-court game.  So, for such experts out there, construction, design or otherwise, or anyone who regularly retains an expert, read on.  Effective December 1, 2010, the Federal Rules of Civil Procedure were amended, and Rule 26 received several significant changes concerning experts.

The backdrop:  Since 1993, Rule 26 has been interpreted to permit discovery of all communications between an attorney and expert witnesses, as well as all draft expert reports.  As a result, some attorneys went to great (and often costly) lengths to avoid creating a discoverable record.

Two significant changes to the game:

First, draft expert reports are now protected under the work-product doctrine, which prevents most documents created in preparation of litigation from being discovered by opposing counsel.  Rule 26(a) now expressly protects “drafts of any report or disclosure required under Rule 26(a), regardless of the form in which the draft is recorded.”

Second, the revised rule now limits the discoverability of communications between experts and attorneys who retain them.  Most communications are now protected.  As with most legal rules, there are exceptions: (1) communications related to an expert’s compensation; (2) communications regarding facts or data provided to the expert and the expert considering in forming the expert’s opinion; and (3) assumptions provided to the expert and the expert considering in forming the expert’s opinion.

These changes may enable attorneys to avoid engaging multiple experts (i.e., consulting, testifying) to avoid creating discoverable material.  Also, they may open the door to qualified experts that were unwilling to serve as experts under the old rules.  And more drafts could promote better final reports.  Finally, these changes may help reduce costs for parties engaged in litigation involving experts, such as many construction disputes.  Always a good thing.

Remember that these are amendments to the Federal Rules of Civil Procedure, and only apply in federal courts.  It remains to be seen if states will adopt the same principles to govern experts in state courts.  Indiana has generally modeled its rules after the Federal Rules, and perhaps will follow suit.  We will keep you undated here at LAW under CONSTRUCTION if there are any further developments. 

There are, of course, other changes to the Rules, so please consult a qualified attorney regarding all of the amendments to the Federal Rules.  Also, the amendments to Rule 26 are not retroactive and, therefore, absent an agreement, communications and draft reports prepared before December 1, 2010, may still be discoverable, so again, consult with a qualified attorney. 

Finally, these amendments are new and their bounds untested, so counsel and clients must still be careful when communicating with experts in connection with litigation.

All-in-all, the game has improved.

Guards? Moats? Indiana court addresses jobsite protection

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And I quote: “Lee could have protected himself from liability only by stationing a guard upon the premises to insure that neither Rider, nor anyone else entered upon the inherently dangerous worksite.”  A guard?  Complete with a shack and taser?  Is that the rule?  Let me explain.

The facts…

On December 6, 2010, in , the Indiana Court of Appeals addressed the duties owed by both a general contractor and an independent subcontractor to the purchaser of a home when she visited the construction site, without permission, and suffered serious injuries.

The purchaser, Rider, entered into a contract to buy a house from a general contractor.  The general was also the landowner, as possession would be transferred at closing.  The general hired Lee, a sub, to perform most of the labor.  Importantly, the contract required that any visitor needed permission from the general or the real estate agent to enter the premises. 

Although Rider obtained permission once, she visited 30-35 other times without anyone’s permission.  On the ill-fated visit in question, Lee and his crew were working on the deck.  When rain set in, they split from the site for an early lunch, leaving an unfinished deck.  Rider subsequently arrived, leaned on the unattached railing, fell, and suffered severe injuries.  Lee and his crew returned, discovered the incident, and nonetheless, finished the deck.

The majority’s view…

Rider filed a complaint for negligence against the general and sub.  The court first addressed the liability of the general.  As a threshold issue, the court noted that since the general still owned the property and was in possession, its duties are judged based on its status as the landowner.  The court ultimately relied on the fact that the general/landowner was neither in actual possession or control of the deck when the accident occurred nor was in control of the premises because he did not perform any actual work.  Since the sub did all of the immediate work, Rider’s negligence claim against the general failed.

The court next addressed the sub’s liability.  Since the independent contractor had worked on the deck right before the incident and a short time after, the court first held that it was in control for purposes of establishing a duty to Rider.  The court then held that the sub’s liability was dependant on whether Rider was rightfully on the premises or whether it was foreseeable that she would visit and be harmed.  Although there were unanswered questions of fact, foreseeability was the key issue. 

The dissent…

One judge disagreed with the majority’s analysis of the sub’s liability.  The judge noted that the construction process is fraught with peril and involves many inherent dangers.  To him, the key fact was that the contract required permission to enter.  End of story.  She didn’t follow the protocol and the sub was not present when the injury occurred.   Therefore, it was not foreseeable that she would be there.   The dissent felt the issue is more properly the risk incurred by Rider in entering a dangerous site, rather than the duty owed.  The dissent stated that the majority’s view “places an impossible burden on contractors” and added the statement I initially quoted. 

The moral…

  • Don’t wander around dangerous construction sites.  Everyone loves watching their dream house as it’s built.  However, I think everyone also loves actually moving into that dream home.  Take the time to follow the procedure specified in the contract when you want to visit.   
  • Despite the dissent’s strong rhetoric, the majority is the law.  Thus, if you are in control of the construction, and it is foreseeable that a homeowner (or similar party) will come on the site, take the necessary precautions.  (consult a qualified attorney for such precautions). 
  • Kudos to the sub for finishing the deck.

Contactors and Green Building: I feel the need … the need for LEED!

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This , which discusses whether contractors and subs should get LEED accredited (or pursue a working knowledge), can be found on , Christopher Hill’s terrific construction law blog, where I have the honor of guest posting (click ).  So travel on over to Musings to read more, but don’t forget to write!  Seriously, your comments are appreciated, either there or below.

Remake of a Classic – Changes to the A312 Bond Form (Part 2)


In Part 2 of our series regarding the changes to the A312 Bond forms we examine the new A312-2010 Performance Bond.* 

The most significant change in the Performance Bond form involves the process for an Owner to declare a Contractor in default and to make a claim under the Performance Bond.  Under the old Bond form a Surety was not obligated to perform until the Owner notified the Contractor and its Surety of its intention to declare the Contractor in default and attempted to arrange a meeting with both parties.  This meeting had to be held within 15 days after receipt of the claim notice.  The Owner could not then declare a contractor in default or terminate the contractor until 20 days after the Contractor and Surety received notice of the default as described above. 

Section 3 of the 2010 Performance Bond form no longer requires the Owner to jump through these hoops in order to declare the Contractor in default and assert a claim under the Bond. 

Instead, under revised Paragraph 3.1, the Owner may request a meeting in its notice to the Surety, but isn’t required to do so.  If the Owner does not make this request, the Surety may within 5 business days after receipt of the notice request the conference.  If the Surety requests the conference, then the Owner must attend within 10 business days of the Surety’s receipt of the notice.  

Additionally, the A312-2010 Performance Bond no longer requires a waiting period before the Owner can declare the Contractor in default or terminate the Contractor. 

The most important aspect to the new claims process under the A312-2010 Performance Bond is new Section 4.  This section states:

Failure on the part of the Owner to comply with the notice requirement in Section 3.1 shall not constitute a failure to comply with a condition precedent to the Surety’s obligations, or release the Surety from its obligations, except to the extent the Surety demonstrates actual prejudice. 

Failure by an Owner to comply with the notice requirement is not a free pass, even under the new Bond form.  Most jurisdictions already have case law protecting a Surety where an Owner fails to give proper notice.  For example, in Dragon Construction Company v. Parkway Bank & Trust, 678 N.E.2d 55 (Ill. App. 3d 1997), where an Owner terminated a contractor and replaced the contractor without giving notice the Surety the Illinois Appeals Court held:

since the (owner) replaced (contractor) with (replacement contractor) before informing (surety) that (contractor) was to be terminated and without consulting (surety) as to the successor, (surety) was stripped of its contractual right to minimize its liability under the performance bond by ensuring that the lowest responsible bidder was selected to complete the job. (surety) would be entitled to select, or at the very least participate in selecting, the lowest bidding contractor to complete the project in order to mitigate its damages under the performance bond.  Surely, (surety) would not have issued the surety bonds if it did not have the authority to protect itself through the selection of the successor contractor.

Generally under this line of cases, a Surety does not have to show prejudice before being discharged under the Bond. Performance Bond A312-2010, however, requires a Surety to show that it has been prejudiced by the Owner’s actions if proper notice was not given to the Surety under Paragraph 3.1.  What constitutes actual prejudice is unclear.  A Surety may be prejudiced if it was not given an opportunity to participate and mitigate its damages.  This standard could then be read in conjunction with current case law.  As the Dragon court states a Surety is entitled to mitigate its damages and it would not have issued the surety bonds if it did not have the authority to protect itself.  Or it may be that a Surety must show quantifiable damages in order to demonstrate prejudice.  Overall, it remains to be seen how the Courts will interpret this section, given existing case law, if the Bond, like its counterpart, is widely adopted. 

* Because I can’t end our flashback to 1984 without a bit of reminiscing, the #1 movie was Beverly Hills Cop, the most popular fiction was The Talisman, the most popular non-fiction was Iacocca: An Autobiography,  and the most popular television show…..Dynasty (should have been the Cosby Show!). 

Green Building Cites: Green Litigation


In honor of the conference being held this week in Chicago*, we are pleased to bring you “Green Building Cites,” a periodic post bringing you news concerning green building issues and the law.  If you are like me, it may seem like the green building landscape changes daily and keeping up with it can be overwhelming…  Green Building Cites is designed to summarize the key developments in an orderly fashion. 

For our first installment, we bring you a basic overview of green litigation.

Green litigation or LEEDigation (as coined by construction attorney/consultant ) can encompass the following situations, among others: the failure of a building to achieve LEED certification when specified by contract; improperly designed or constructed LEED projects; or the decertification of a previously LEED certified building.  The latter may become even more prominent with the coming 2012 rating system, as the USGBC has recently indicated it may be decertifying buildings that are not performing as anticipated (see ).

Essentially, the key issue is who bears the liability, if any, for the owner’s losses (tax credits, financing, property value) for failure to achieve certification of later loss of certification – the design professional?  The contractor?  The LEED consultant?  No one?

I recently read an commenting on how remarkable it is that green building has spawned little litigation to date.  A review of the landscape confirms that there are very few such cases.  However, there are a handful of cases that provide an indication of (possible) things to come.    

For example, in Shaw Development v. Southern Builders, the owner desired LEED Silver certification in order to receive certain tax credits related to a project in Maryland.  The building did not achieve certification and a lawsuit followed.  It appears that there was no clear allocation in the contract of who was responsible for certification.  Thus, the case would have squarely addressed LEED certification and related liabilities.  Unfortunately, the case settled out of court before any such guidance was provided by the court.

In another matter that did not even reach the ligation stage, a group of “concerned members of the community” challenged the award of LEED Gold certification to Northland Pines High School in Eagle River, Wisconsin.  Five community members and two professional engineers alleged non-compliance with two prerequisites and filed the challenge over a year after the school was certified.  The USGBC hired two professional consultants to conduct investigations that yielded two reports, both of which concluded that the Gold certification was proper.  Thus, the USGBC upheld the certification. 

Finally, an individual recently brought a class action against the U.S. Green Building Council, alleging, in essence, that LEED promises outcomes it can’t deliver.  Excellent coverage and .     

Although there have been few lawsuits to date, given our ever-litigious country and the growing presence of green building and LEED, more green litigation is likely coming.  Green professionals should plan carefully and seek qualified legal assistance.  We will continue to bring you news of any new green lawsuits on the horizon.

* as a former Chicagoan, for anyone attending GreenBuild and looking for local fare, I highly recommend (deep dish), (hot dogs), and (steak).  You won’t be disappointed.

More “Final” and More “Binding”?


I recently came across a situation concerning a modification of the standard American Institute of Architects (AIA) general conditions that I found very interesting (hopefully you do as well).   

In this situation, an owner and a contractor entered into a contract for the construction of a project.  They used a modified version of the A201-1997 document.  As you may know, subparagraph 4.4.5 of the form document states that the approval or rejection of a Claim by the Architect shall be “final and binding” on the parties but subject to mediation and arbitration.  However, the parties decided to modify the contract and removed subject to mediation and arbitration, as well as all other references to mediation and arbitration.  No language was added concerning review.   

So what next?  What implications arise when the parties remove alternative dispute resolution from the equation?  Is the architect beyond reproach?  Can the parties still litigate?  Such questions made me look at the how Indiana treats situations where the parties to a construction contract designate a party as the final arbiter of all claims, without any articulated review process.

First, it appears to be well-settled in Indiana that contracts appointing a party as sole arbiter, like the situation discussed above, are valid.  Second, judicial review may still be available under certain circumstances.  The court in James I. Barnes Construction Co. v. Washington Township of Starke County, 184 N.E.2d 763 (1962), held that it is a rule of law in Indiana that where a contract provides that work shall be done to the satisfaction, approval or acceptance of an architect or engineer, he is thereby constituted a sole arbitrator by the parties, who are bound by his decision in the absence of fraud or such gross mistake as to imply bad faith or a failure to exercise honest judgment.  Thus, the decision is not absolute.  It appears that this is still the general rule today. 

Other states that appear to have similar cases on point are Massachusetts (Fontaine Bros., Inc. v. City of Springfield) and New Jersey (Ingrassia Construction Co., Inc. v. Vernon Township Board of Education).  This is by no means an exhaustive list. 

Overall, grounds for reviewing the decisions of appointed sole arbiters could include fraud, bad faith, gross mistake, failure to exercise honest judgment, arbitrary and capricious decisions, or decisions outside the scope of her authority.  However, parties should consider the full implications of removing ADR references and be sure that the modified agreement accurately reflects their intent. 

This post is neither final nor binding.  There are other concerns raised by the modification described herein, which may warrant further discussion.  If you have any experiences with such modifications or comments on a different state’s treatment of the issue, drop us a comment.

Remake of a Classic – Changes to the A312 Bond Form


In 1984, Apple introduced the first mac computer, the world had only met Vice President George Bush, Miami Vice altered men’s fashion (for the better?), and the American Institute of Architects released the A312 Payment and Performance Bond forms.  The A312 bond forms have only grown in popularity over the years.  They have become some of the most commonly used forms for projects throughout the country.  This year, the AIA has released revised versions of the bond forms.  In this two-part series, we examine the most significant changes in each of the Payment and Performance Bond forms. 

For quick reference and a more thorough comparison, the AIA has provided a handy side by side comparison chart of the A312-1984 and A312-2010 Payment and Performance Bond forms which can be found . 

A312 – 2010 Payment Bond

Most significant, the A312-2010 Payment Bond addresses the consequence of the notorious Bramble case, Nat’l Union Fire Ins. Co. of Pittsburgh v. David A. Bramble, Inc., 879 A.2d 101 (Md. 2005).  As most sureties are aware, following the Bramble ruling, a surety may waive its defenses for any portion of a payment bond claim if the surety does not strictly comply with Section 6 of the A312 payment bond which requires a surety within 45 days after receipt of the claim, to state the amounts that are undisputed and the basis for challenging any amounts that are disputed.  A surety must also pay or arrange for payment of any undisputed amount. 

The revised A312-2010 bond form Sections 7.1 and 7.2 increases the timeframe for a surety to respond and arrange for payment of undisputed amounts to a claimant from 45 days to 60 days.  New Section 7.3 expressly provides that a surety’s failure to discharge its obligations under Section 7.1 and 7.2 shall not be deemed to constitute a waiver of defenses the Surety or Contractor may have or acquire as to a Claim, except as to undisputed amounts for which the Surety and Claimant have reached agreement.  However, if a Surety does fail in its obligations under Section 7.1 or 7.2 the Surety must indemnify the Claimant for reasonable attorney’s fees incurred to recover any sums found to be due and owing to the Claimant. 

Another significant revision of the A312 Payment Bond is the claim submission process.  Section 5 requires claimants to submit “Claims” to the surety, not just “Notice” of a claim.  Section 16.1 of the Bond defines “Claim” which requires a Claimant to submit a written statement and at a minimum the following:

  1. The name of the Claimant;
  2. The name of the person for whom the labor was done, or materials or equipment furnished;
  3. A copy of the agreement or purchase order pursuant to which labor, materials or equipment was furnished for use in the performance of the Construction Contract;
  4. A brief description of the labor, materials or equipment furnished;
  5. The date on which the Claimant last performed labor or last furnished materials or equipment for use in the performance of the Construction Contract;
  6. The total amount earned by the Claimant for labor, materials, or equipment furnished as of the date of the Claim;
  7. The total amount of previous payments received by the Claimant; and
  8. The total amount due and unpaid to the Claimant for the labor, materials or equipment furnished as of the date of the Claim. 

The changes to the claims process is intended to prevent claimants from submitting bare bones notice of claim in the hopes that a surety will be unable to timely respond.  As with any bond form, time will tell whether the new payment bond form will be widely adopted.  At a minimum the new A312 – 2010 Payment Bond addresses the significant challenges and concerns faced by sureties struggling to properly investigate a claim without waiving its entire defense of the claim under the Bond. 

Next time, we will review the more significant changes of the AIA A312-2010 Performance Bond. 

Caveat emptor . . . now just an old latin phrase.

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Having recently purchased a home built the same year the yo-yo was invented (1929), I was especially interested in a recent opinion of the Indiana Court of Appeals discussing the doctrine of caveat emptor.   In Kent and Elizabeth Hizer v. James and Rebecca Holt, No. 71D06-0907-PL-176 (Oct. 27, 2010), the Court addressed liability where a seller fails to disclose certain items AND a buyer fails to independently inspect those same items. 

In 2008, the plaintiffs entered into an agreement with the defendants to purchase a home and reserved the right to conduct an inspection.  As you may expect, they did not conduct an independent inspection of the home itself.  The sellers reported that a prior inspection by a prospective buyer had revealed virtually no problems.   The sellers completed the Sales Disclosure Form, as required by I.C. 32-21-5-7, at closing.  They disclosed only that the microwave oven and ice maker did not work.

Lo and behold, after the closing, the buyers discovered numerous problems, including faulty mechanical items, extensive mold, recalled pipe, and a leaking crack in the basement wall.  They contacted an inspector, who, coincidentally, was the same inspector that had inspected the house for the prior potential buyers.  He reported that he had previously discovered the mold, the recalled pipe,  and indications of water flow into the basement.   A lawsuit was born. 

Basically, the dispute concerned whether fraudulent statements made on the Sales Disclosure Form are negated when an inspection would have revealed the alleged defects.  The sellers cited a 2009 opinion, Dickerson v. Strand, wherein the court held that sellers could not be liable for fraud in misrepresenting the quality of the property when the buyers had the opportunity to inspect.  The Court rejected this earlier case, holding that it failed to account for the statutory disclosure requirements under Indiana law, and that there would be no purpose for such forms if sellers cannot be liable for fraud.  Thus, the Court rejected any interpretation of the common law that might allow sellers to make written misrepresentations with impunity regarding items that must be disclosed on the Sales Disclosure Form.

The Court did not address whether the microwave and ice maker were fixed in time for football season.

For the full text of the opinion, see .

OSHA crackdown coming?

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A positive note from 2009 –  it appears that it was a safer year to be a construction worker.  

The Labor Department recently reported that the number of nonfatal injuries and illnesses, an indicator of jobsite safety, declined in 2009.  The department’s Bureau of Labor Statistics released its latest annual workplace safety report on October 21, 2010 reporting construction injuries and illnesses on the job decreased 22% last year, or in numerical terms, to 251,000.  Looking at the data from a different perspective (always fun with stats) - injuries and illnesses per worker – also showed a decline.   In 2009 the rate was 4.3 cases per 100 workers, down from 4.7 in 2008.  See the report .   

Or maybe not.

As one would guess, part of the dip in workplace injuries and illnesses can be traced to the drop in construction activity.  However, the Labor Dept. highlighted that its own data may not be complete, because, as it sees it, some companies have not reported all injuries that occurred.  A representative added, “We are concerned about the widespread existence of programs that discourage workers from reporting injuries and we will continue to issue citations and penalties to employers that intentionally under-report workplace injuries.”

This data may be especially relevant in light of OSHA’s “National Emphasis Program on Recordkeeping,” launched last year after several academic studies found that many companies were underreporting or incorrectly reporting workplace-related injuries and illnesses.  Through this program, OSHA aims to correct such inaccurate reporting via stricter enforcement.  The program did not specifically target the construction industry, yet included several pilot inspections of construction employers in  an effort to better understand how to approach potential underreporting issues within the industry on a broader scale.  OSHA more recently issued a revised directive for the national emphasis program that cracks down on underreporting of occupational injuries and illnesses.

It remains to be seen whether the lower rates bundled with scepticism regarding the construction industry underreporting may trigger increase scrutiny by OSHA…

UPDATED - November 1, 2010:  A new tidbit of news seemed especially relevant to this post….  

OSHA announced on October 19, 2010 its intent to expand its interpretation of the word “feasible” as related to occupational noise exposure standards.  Under current standards, a citation can be issued if a company fails to use engineering and administration controls (i.e. limit employee exposure) when they cost less than hearing conservation equipment or such equipment is ineffective.  OSHA intends to update “feasible” to “capable of being done,” which will result in citations for not implementing engineering and administration controls unless such controls will put them out of business or threaten the company’s viability.  OSHA is accepting comments on the proposed interpretation until December 20, 2010.

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