Kegler Brown • Construction Law Newsletter

July 1992

In This Issue

Design Responsibility by Contractors
Prevailing Wage Law Developments
The Pitfalls of Arbitration
Minority and Women Preferences Upheld
Supplier Claims Against MBE Payment Bonds
Contractor Licensure
Mechanic's Lien and Prompt Payment "Clean-up Bill" Moves Through the Legislature

Design Responsibility by Contractors

Donald W. Gregory
Construction
Law chair

In the construction industry, contractors and subcontractors are becoming increasingly involved in design concepts and drawings, traditionally handled by architects and engineers, that pose great risk for contractors and subcontractors. This problem surfaces most frequently in three areas: (1) "shop drawings" by subcontractors or suppliers; (2) "design-build" contracts by contractors or construction managers; or (3) residential drawings by home builders. Those contractors "crossing the line" into the practice of architecture may be incurring criminal and civil liability while voiding their insurance, and will not be entitled to payment for such services in any event.

Ohio Revised Code §4703.18 prohibits persons from practicing architecture without a license, except that others may apply for building permits as well as design buildings and supervise construction "for their own use." The unauthorized practice of architecture can result in criminal penalties. O.R.C. §4703.99. In addition, a contract for architectural services with one not licensed as an architect is illegal and void, and therefore one not licensed cannot recover money for such services. Elephant Lumber Co. v. Johnson, 20 O.O.2d 91 (1964).

The practice of architecture includes the designing of a building and "preliminary" plans, even if final plans are never completed. State v. Design Collective, Inc., 19 O.O.3d 81 (1980). Builders often will prepare plans or sketches of a residence for the owner thinking that this does not constitute the practice of architecture, but a builder who is not a registered architect is prohibited from preparing complete detailed plans and specifications for the construction of a building when expert knowledge or skill are required in such preparation. McGill v. Carlos, 39 O.O. 502 (1947). A more recent case, Finn v. Krumroy Constr. Co., 68 Ohio App. 3d 480 (1990), was more lenient on the builder in that the court refused to deduct a portion of the builder's fee for alleged architectural services because there was no evidence that the builder charged for the drawings provided.

Builders are strongly advised to avoid providing any detailed plans or drawings to homeowners that could be construed as the practice of architecture, and certainly should never charge for any casual sketches or drawings that they might provide.

With respect to "design-build" contracts, construction managers or contractors are cautioned to make sure that a licensed architect or engineer does the design work and prepares the plans and specifications. Design-build contractors are also cautioned to seek satisfactory evidence of "errors and omissions" coverage by these professionals and also to investigate their own insurance coverage in the event there is a design problem later. Better yet, the contractor should seek to have the owner contract directly with the A/E and the fee for A/E services paid by the owner directly to the A/E.

Subcontractors and suppliers are being increasingly asked to accept design responsibilities in the guise of "shop drawings." As the subcontractor or supplier is normally not a licensed design professional, he cannot obtain error and omissions insurance for design claims and his general liability insurance coverage will normally be voided since these policies have an exclusion for "illegal acts." It may well be an illegal act for a subcontractor to provide shop drawings that force him to accept design responsibility without being a licensed design professional.

Subcontractors and suppliers are advised to avoid accepting the design function and to insist upon certain disclaimer language on their shop drawings or in their contract documents to the effect that all designs, drawings or calculations are incidental to the performance of their trade work and shall be reviewed and approved by the owner's design professional.

Prevailing Wage Law Developments

Prevailing wage issues on Ohio public construction projects have received great scrutiny recently. One example is the lawsuit filed by the State of Ohio in January, 1992 against Toys R Us on a warehouse construction project in Youngstown that halted construction until Toys R Us provided the state with payroll and other records and agreed to pay all back wages and court costs, which were expected to range from $250,000 to $400,000.

A recent Ohio Supreme Court case has clarified the responsibilities of contractors to provide payroll records and pay prevailing wages on public works. In the case of Ohio Asphalt Paving, Inc. v. Ohio Dept. of Indus. Relations (1992), 63 Ohio St. 3d 512, the Ohio Supreme Court ruled that a contractor will be held liable for the underpayment of prevailing wages on a public improvement contract, even where the public authority fails to include prevailing wage specifications in the contract documents. In order to avoid the possible unfairness of such a ruling that contractors could be financially responsible for the public owner's omission, the Court held that a contractor could sue an owner for failure to include a prevailing wage provision in the contract if it results in liability for the contractor. For example, the contractor who is found liable to the state for not paying prevailing wages on a project where the requirement of prevailing wages was not specified in the contract might sue the public owner, whether it be a city, village, township or other public entity.

Contractors and their subcontractors are strongly advised to presume that any project put out for bid by a public owner of any kind, for more than an estimated cost of $4000, is a prevailing wage project and prevailing wages must be paid regardless of the contract language.

The Ohio Supreme Court in the Ohio Asphalt case also determined that the Director of Industrial Relations had the power to inspect any payroll record, regardless of how old, to investigate an alleged prevailing wage law violation. The contractor had argued that the Director had no power to inspect the contractor's records with respect to projects that had been completed for more than one year because of the state statute that requires records not be "destroyed or removed from the state" for one year from the date of project completion. This means that any payroll record in the contractor's possession may be subject to subpoena if it is arguably relevant to an alleged violation.

The irony of the recent enforcement activities under the prevailing wage laws is that they are sometimes instigated by certain labor unions that may be violating the law itself through the practice commonly called "job targeting." This practice occurs when union members contribute money through a dues deduction to a union fund that pays money to a union contractor on a specific job which in effect lowers the union contractor's cost on the job, allowing it a competitive bidding advantage.

Open shop contractors have argued that this practice defeats the spirit and letter of the prevailing wage laws in that this deduction is not an authorized one such as regular union dues and in effect improperly reduces the net wages paid the union employee on a prevailing wage job.

In a federal context, the Wage Appeals Board interpreted the Davis Bacon Act and held that deductions from gross pay into a job targeting fund violated the Copeland Anti-Kickback Act (18 U.S.C. §874) but there has not yet been a written decision under Ohio's prevailing wage statute.

As at least one complaint has been filed by an open shop contractor challenging this practice under Ohio's prevailing wage law, there will hopefully be some binding authority on the propriety of job targeting in Ohio soon.

The Pitfalls of Arbitration

Arbitration of construction disputes has been traditionally hailed as a speedy and cost efficient alternative to litigation. However, attempting to proceed with arbitration can be a frustrating, expensive and time consuming process, particularly if a dispute involves a party adamantly opposed to arbitration, in view of Ohio's recent amendment to its arbitration statute, as illustrated by a case we recently handled.

This dispute involved a Columbus general contractor who bid on a project in Marion for a utility company owner. The contractor submitted a bid, with bid bond, to the owner who awarded the contract to him. The owner signed the contract, which contained a mandatory arbitration clause, and forwarded it to the contractor. By this time, a dispute had arisen between the contractor and owner, and the contractor refused to sign the contract and sent it back to the owner. The owner made a claim against the bid bond and the battle was joined.

The contractor, desiring resolution of the dispute through arbitration, filed a demand for arbitration with the American Arbitration Association. When the owner refused to arbitrate voluntarily, the contractor filed a lawsuit in his home county, pursuant to O.R.C. §2711.03, seeking a court order forcing the owner to arbitrate. After receiving briefs from both sides, the Franklin County trial judge ordered the owner to proceed with arbitration.

The owner then appealed to the Franklin County Court of Appeals. Prior to amendment of the Ohio Arbitration Act, in May, 1990, these orders compelling arbitration were not appealable until after the arbitration had taken place. The recent amendment now allows any party seeking to avoid or delay arbitration to appeal any decision whether a dispute must go to arbitration or not.

While the case was pending in the Franklin County Court of Appeals, the owner filed suit against the contractor and his bonding company in its home county of Marion. The contractor originally convinced the trial judge to stay the Marion County case until the matter was resolved in the Franklin County courts, but the judge eventually reconsidered and removed the stay, first as to the bonding company and later as to the contractor. The contractor and bonding company then appealed these decisions to the Marion County Court of Appeals with two separate appeals.

In the meantime, the Franklin County Court of Appeals ruled that the trial judge needed to conduct a formal hearing on whether the matter should be sent to arbitration and therefore reversed his decision and sent the case back to the trial court to conduct a jury trial on this issue. Ohio Revised Code §2711.03 requires a jury trial, upon the request of a party, when the making of an arbitration agreement or its breach "is in issue."

At this time, a contractor who wanted to resolve this matter in a simple straight-forward arbitration was faced with innumerable legal delays and roadblocks including two different lawsuits and three different appeals in two different counties.

The dispute was eventually settled by the parties eighteen months after it began, after considerable legal expense, but without a single witness having been sworn to testify about the dispute itself.

While this experience is obviously the exception rather than the rule, it demonstrates the pitfalls and delays inherent in Ohio's arbitration statutes when an unwilling party wants to contest arbitration. Some of the problems could be solved if the statute were amended again to provide that there could be no appeals until the matter was finally concluded, by arbitration or trial, and that a jury trial is not necessary to determine whether there is an agreement for arbitration.

Minority and Women Preferences Upheld

Most familiar with the construction industry have heard of the Croson case where the U.S. Supreme Court struck down certain MBE "set-aside" programs instituted by state and local governments. In view of this case, many local and state governments have revised or eliminated altogether their traditional set-aside plans.

However, a recent case out of San Francisco may give owners a new approach to satisfy their desire to legislate preferences for women and minority contractors while at the same time satisfying their constitutional requirements after Croson.

In the case of Associated Gen. Contractors of Cal. v. Coalition, 950 F.2d 1401 (9th Cir. 1991), AGC challenged a San Francisco ordinance giving bid "preferences" to minority business ("MBE") and women business enterprises ("WBE"). The program, unlike the set-aside contracts found unconstitutional in Croson, gave 5% bid preferences to MBEs and WBEs, with an extra 5% if they were a local business enterprise ("LBE"), when calculating the low bidder on San Francisco contracts.

The U.S. Court of Appeals (Ninth Circuit) ruled that the plan was constitutional because there had been a specific finding of prior discrimination in the construction industry in that city and a large statistical disparity between the percentage of contracts awarded to MBEs and the percentage of available MBEs. The Court also spoke favorably of the system of bid "preferences" rather than the rigid "quota" or "set-aside" system found faulty in Croson. The U.S. Supreme Court, without comment, recently let this ruling by the U.S. Court of Appeals stand. This means that local and state governments will likely attempt to emulate the "San Francisco preference plan" with respect to future MBE programs on public work.

Supplier Claims Against MBE Payment Bonds

The State of Ohio has operated a minority contractors bonding program under which the Department of Development acts as the surety for qualifying minority contractors. A recent case has interpreted when an unpaid supplier may proceed against such a bond.

In the case of Bailey Lumber Co. v. State of Ohio, Case No. 91-AP-1074 (April 30, 1992, unreported), the Franklin County Court of Appeals reversed the decision of the Court of Claims which earlier had ruled that a supplier could not proceed against a MBE's payment bond, through the Department of Development, unless the MBE defaults on its contract with the State. This meant, as a practical matter, that an unpaid supplier could not proceed against the Development Department under the minority bonding program if the State breached the contract with the MBE.

The Court of Appeals instead ruled that so long as the unpaid supplier or subcontractor perfects its claim under the normal bonding statute, O.R.C. §153.56, the supplier or subcontractor is entitled to collect on the bond regardless of whether the MBE or the State failed to perform. The Court of Appeals properly recognized that denying recovery to a supplier in such a situation would have the effect of discouraging suppliers from contracting with MBEs.

This decision means that subcontractors and suppliers to MBEs participating in the state minority bonding program will be able to proceed against such bonds in the same manner as normal public surety bonds.

Contractor Licensure

The Ohio General Assembly has recently enacted Substitute House Bill 402, effective July 31, 1992, which will permit municipalities to test and license electrical, HVAC, plumbing, refrigeration and hydronics contractors and counties to test and license electrical and HVAC contractors wanting to do work in their jurisdictions. The law also establishes a new Ohio Construction Industry Examining Board which is to conduct examinations for those contractors interested in a statewide qualification certificate in their field. Such a statewide certificate would prevent the contractor from having to take tests in each municipality or county where he does business, unless the municipality or county tests areas or subjects not covered by the statewide test. The law also provides that only municipalities or counties are to regulate the licensing of electrical, HVAC, plumbing, refrigeration or hydronics contractors.

Mechanic's Lien and Prompt Payment "Clean-up Bill" Moves Through the Legislature

At the request of the American Subcontractors Association and many other construction associations, House Bill 593 and Senate Bill 338 have recently passed their respective legislative chambers unanimously and one of these similar bills is expected to become law soon. These "clean-up" bills correct some of the technical problems inadvertently created when the massive mechanic's lien revisions were passed last session and also make it crystal clear that Ohio's prompt payment act applies to both private and pubic work.

Both bills were passed over the opposition of the Ohio Contractors Association and the surety industry, who also unsuccessfully sought amendments that would arguably have made it uncertain whether prompt pay applied to public work and created an additional notice of furnishing requirement to perfect payment bond claims.

Credits

Kegler, Brown, Hill & Ritter's Construction Law Newsletter is prepared by Donald W. Gregory for the Construction Law practice group.

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The Construction Law Newsletter is designed to provide general information about the subjects discussed. It is not meant to be all-inclusive or comprehensive. Kegler Brown is not rendering any legal or professional advice by way of this publication.