November 2009

In This Issue

• Contractor at Risk on Unit Price Contract Without Change Order
• Mechanic's Lien Case Results in Recovery of Attorney's Fees
• NOF Not Required to Perfect Bond Claims on ODOT Work
• ODOT Final Acceptance is Final Indeed

Contractor at Risk on Unit Price Contract Without Change Order

Donald W. Gregory, Construction Law Chair

Contractors on unit price contracts may not worry about change orders when the estimated bid quantity of a line item is exceeded, but perhaps they should. Typically contractors expect to be paid for the number of items provided so long as the owner’s representative verifies the quantity provided on a daily basis. However, a Seventh District Court of Appeals case has found that the public owner had no obligation to pay for any quantity that exceeded the bid estimate without a written change order. Seneca Valley v. Village of Caldwell, 156 Ohio App.3d 628 (2004).

This harsh result means that contractors on unit price contracts are at risk if they do not follow the express contract change order process when initial bid quantity items are exceeded.

Mechanic's Lien Case Results in Recovery of Attorney's Fees

The current economic downturn has made the effective use of lien rights more important than ever. The problem with lien rights (on private work) is that they only provide security to the extent there is “equity” in the property – a real concern in a time of declining real estate values.

Ohio has a mechanic’s lien statute – Ohio Revised Code §1311.16 – that allows the recovery of legal fees by a lien claimant from the fund created for lien claimants. Fees are rarely recovered under this provision in that there rarely is a fund created for lien claimants when a distressed property is sold in foreclosure. Yet a different situation can exist when the lien is “bonded off.”

When a lien is bonded off, a bond (or cash) must be posted in 150% of the lien amount. The difference between the lien amount and the bond amount is available to pay interest and attorney’s fees.

A subcontractor (whom we represented) utilized this provision to recover significant legal fees incurred over a protracted multi-year legal battle. The Fifth District Court of Appeals awarded legal fees under both the mechanic’s lien statute and the frivolous conduct statute (for “causing unnecessary delay or a needless increase in the cost of litigation”) to the victorious subcontractor lien claimant. Mid-Ohio Mechanical, Inc. v. Eisenmann Corporation, Case Nos. 07-CA-35 and 08-CA-12 (November 2, 2009).

Contractors, subcontractors and suppliers can utilize these statutes and the Mid-Ohio case to leverage their recovery on mechanic’s liens, particularly when a lien has been “bonded off.” Those that inappropriately threaten lien claimants with needless litigation, or delay efforts of lien claimants to recover, do so at their peril.

NOF Not Required to Perfect Bond Claims on ODOT Work

When the modern lien law was enacted almost 20 years ago, a Notice of Furnishing (“NOF”) was required to perfect lien rights, but not payment bond rights, when a subcontractor or supplier did not have a contract with the prime contractor. Subsequently, in an effort to prohibit “hidden bond claims,” the law was changed to require that same NOF to be utilized to protect payment bond rights (if the contract exceeded $30,000.00).

While the intention of this law change was to make all public work subject to a NOF requirement to perfect both lien and bond claims, this result was apparently not achieved with respect to Ohio Department of Transportation (“ODOT”) work. As Ohio Revised Code §153.56 (which mandates the NOF requirement) refers to “public improvement as provided in section 153.54,” which expressly excludes ODOT work, there is a good argument that ODOT work does not require a NOF to perfect a payment bond claim.

Therefore, contractors on ODOT work must carefully monitor payment of subtrades and effectively use joint check agreements and lien/bond waivers to avoid paying twice on “hidden bond claims.” Second-tier subcontractors and suppliers can exercise their payment bond rights on ODOT projects, even without a valid NOF that caused the loss of their lien rights.

ODOT Final Acceptance is Final Indeed

It is well known that ODOT has taken an aggressive stance toward bridge painting inspections and has sought recovery against contractors and their bonding companies for allegedly substandard work, even when the bridges passed ODOT final inspections.

A Referee in the Ohio Court of Claims has now had occasion to determine the legal significance of “final acceptance” when the owner believes that sub-standard work is discovered later.

The Referee ruled that while periodic inspections (and payments) did not prevent ODOT from subsequently revisiting and rejecting previously approved work, this option was not available after FINAL acceptance. Beasley v. Manako, 2009-Ohio-5319.

Whether there would have been a different result had ODOT argued that the defects were “latent” (hidden and not discoverable by ordinary inspection) is not known, as ODOT’s painting “expert” concluded that the defects were substantial and pervasive, and seen in an ordinary inspection. Contractors will likely use this decision to support their position that final acceptance is indeed “final” and should not be revisited months or years later.

First Green Building Standard Contract Issued

Green Building is increasing in visibility and market share every year. Now, for the first time, a standard document (ConsensusDOCS 310) has been prepared to identify the roles and responsibilities of project participants on a Green Building project. It has been endorsed by approximately two dozen leading nationwide construction associations and became available on November 10, 2009.

Don Gregory served on the Working Group of construction professionals who negotiated and drafted this important document.