March 2007

In This Issue

• Waiver of Bond Rights in Subcontract Found Unenforceable
• OEPA Adopts Rules for Disposal of "Construction & Demolition Waste"

Waiver of Bond Rights in Subcontract Found Unenforceable

Donald W. Gregory, Construction Law Chair

Many Central Ohio subcontractors were denied recovery of their payment bond claims against the bonding company after the general contractor became insolvent, because they signed subcontracts containing a provision purporting to waive payment bond rights. The relevant subcontract language provided "subcontractor waives and relinquishes any rights to pursue a claim on the surety bond issued by contractor and its surety in connection with this project." This problem raised the novel issue whether such a waiver of payment bond rights, at the time of contract and without payment, was enforceable under Ohio law.

As there was no legal authority on point in Ohio, the bonding company filed suit seeking a declaration that such a subcontract provision was enforceable and that the subcontractor's claims should be denied under "freedom of contract." The subcontractors argued that such a provision violated public policy, as well as Ohio's bond statutes, and should be declared unenforceable. The subcontractors argued that if such subcontract "fine print" were effective then the public owners of the State would suffer as well as the subcontractors, in that the owner (and indirectly the taxpayers) will have paid for a bond that did not serve its intended purpose of ensuring payment to subcontractors, which is not only inherently beneficial, but encourages subcontractors to bid and perform public construction work at the lowest possible price. It also could lead to the undesirable result of having unscrupulous contractors place this language in their subcontracts, lowering their risk, and achieving an unfair competitive advantage over contractors who use equitable contract language and expect to pay their bills to subcontractors.

In a landmark victory for local subcontractors, Judge Cain of the Franklin County Common Pleas Court in the Farrell Construction case agreed with the subcontractors and ruled that the subcontract waiver language conflicted with Ohio's bond statutes and was unenforceable for that reason. This decision should allow the subcontractors in the case to recover on their bond claims and discourage the use of such language in the future.

In addition, there is legislation pending in the Ohio General Assembly that would specifically find such "waiver of bond rights" language to be unenforceable and against public policy in Ohio.

Until such a bill becomes law in Ohio, prudent subcontractors will want to closely review their subcontracts and consider objecting to any provisions that purport to waive bond rights without full payment.

OEPA Adopts Rules for Disposal of "Construction & Demolition Waste"

If you do construction or demolition work in Ohio, you may want to take a look at the new Ohio Environmental Protection Agency ("OEPA") rules that went into effect on September 30, 1996 regarding the disposal of construction and demolition waste. These new rules, codified at chapters 3745-37 and 3745-400 of the Ohio Administrative Code, supersede any county regulations that previously regulated construction and demolition ("C & D") landfills.

Generally, the new rules define "construction and demolition waste" as those materials resulting from the alteration, construction or destruction of any man-made physical structure. Contractors throughout the state will be required to dispose of construction and demolition debris only at approved C & D sites or solid waste disposal facilities. Examples of acceptable C & D waste materials include: shingles, roofing paper, drywall, plaster, studs, joists, rafters, electrical wiring, plumbing fixtures, heating equipment, cement block, cabinets, glass, window frames, and structural metal and wall coverings. Also, if incidental to the load, construction material packaging such as pallets, cardboard and empty caulking tubes are acceptable C & D fill materials.

Materials that may not be disposed of at C & D fills include those materials that were required to be removed prior to demolition, and materials which are otherwise contained within or exist outside the structure. Such items include yard wastes, furniture, appliances, tires, batteries, garbage, and other solid waste.

An important exception to the rules relates to the disposal of "clean hard fill." OEPA defines clean hard fill as construction and demolition debris which consists of only concrete, asphalt, brick, block, tile, stone, and mortar. In essence, if the contractor can separate out the wood and unacceptable materials from the pile, this clean hard fill can be used to change grade at the demolition site. In addition, this material can also be used to change the grade of another site provided that a written "notice of intent to fill " is submitted to the local health department in the county where the fill is to be used. Although, clean hard fill can be stored for two years, this material should be covered with dirt if used to permanently change grade.

Two approved construction and demolition landfills exist in the Columbus area including the Central Ohio Contractors Inc. ("C.O.C.") facility located at 900 Frank Road.