In This Issue

• Project Labor Agreement Barring Non-Union Contractors Is Ruled Illegal
• State Loses Another Appeal
• Asian-Indians Win State MBE Certification
• No Claim for "Negligent Payment" Recognized
• Bonding Companies May Be Liable for Subcontractor's Legal Fees
• Subcontractor Relieved from Bid Due to Onerous Contract Terms
• Sub-Subcontractor's Claim Has Priority Over State's Garnishment
• Suppliers of Subcontractors Have Bond Rights

Project Labor Agreement Barring Non-Union Contractors Is Ruled Illegal

Donald W. Gregory
Construction
Law chair

The Jefferson County Commissioners, who are going to build a joint County/City of Steubenville Jail, required in the bid documents that successful bidders sign a project labor agreement with the local union. The Associated Builders and Contractors and others, through Ron Mason of the firm, filed suit challenging such a requirement and successfully argued that such a mandatory labor agreement was illegal under Ohio's bidding statues. The Court ruled that the Commissioners had to re-advertise and rebid without such a requirement.

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State Loses Another Appeal

The State's losing streak on construction claims cases that have been appealed from its Court of Claims continues. In the most recent case of Romanoff Electric v. Ohio DAS, Case No. 1667, Franklin County Court of Appeals (June 30, 1994), the Court of Appeals sustained the decision of the Court of Claims that it would have been futile for a contractor to be required to dewater the site by pumping water into an inadequate sewer that was backing up at the time. The Court of Claims had previously ruled that the State knew the sewers were inadequate and failed to inform the contractor, making the State liable for breach of an implied warranty to provide the contractor with a suitable site upon which to work.

The Court of Appeals also affirmed an award of prejudgment interest against the State.

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Asian-Indians Win State MBE Certification

In a decision that the State of Ohio has apparently decided not to appeal, Judge Thompson of the Franklin County Common Pleas Court has ruled that Asian-Indians meet the definition of "orientals" and therefore qualify as a minority for the purposes of state contracts.

The Judge ordered the Department of Administrative Services to recertify Asian-Indian companies who had been previously decertified a year earlier.

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No Claim for "Negligent Payment" Recognized

In an unusual case, a subcontractor filed suit against a tenant for unpaid labor and materials, arguing that he had a claim for "negligent payment" for the tenant's alleged failure to comply with the mechanic's lien law in making payment to the general contractor. Henderson Electric v. Elam Constr. Mgt. Serv. (1993), 92 Ohio App. 3d 98. The Court of Appeals for Hamilton County ruled that no such independent cause of action exists for "negligent payment" and denied recovery to the subcontractor.

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Bonding Companies May Be Liable for Subcontractor's Legal Fees

A case from California has held that a subcontractor may recover attorney's fees from a bonding company when the subcontract provided for an award of fees. T & R Painting v. St. Paul Fire & Marine Ins. (Cal. App. 2d Distr. Div. 2, March 22, 1994) 1994 WL 90001. Now that the model ASA/AGC subcontract provides for an award of attorney's fees to the prevailing party, subcontractors may be able to recover their attorney's fees against the bonding company even though the bond itself does not specifically provide that it covers attorney's fees.

Subcontractors and suppliers in Ohio may be able to make a similar argument that bonding companies are liable for 18% interest and attorney's fees under Ohio Prompt Payment Act in that these amounts constitute the "lawful claim" of the subcontractor or supplier for which the bonding company is liable under the terms of the bond.

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Subcontractor Relieved from Bid Due to Onerous Contract Terms

As a general principle, subcontractors are bound by their bids to a general contractor when they are relied upon by the general, even if a mistake has been made by the sub under the theories of promissory estoppel or breach of contract. However, a recent Nebraska case has carved out an important exception to this general principle. Hawkins Constr. Co. v. Reiman Corp., 245 Neb. 131, 511 N.W.2d 113 (1994).

In that case, the general contractor relied upon the subcontractor's bid price and was the successful bidder. The general then sent an onerous subcontract to the subcontractor, who objected to many of its terms. When no agreement on contract language could be reached, the general hired another sub at a higher price and sued the original sub for the difference. The Supreme Court of Nebraska ruled that because of the nonstandard and onerous terms in the subcontract, there was no contract because there was no "meeting of the minds" and the contractor's reliance upon the sub's bid or promise was not reasonable and denied any recovery to the contractor.

The ruling in this case suggests that subcontractors should consider qualifying their bids and general contractors should consider qualifying their solicitation for bids on a particular contract form so that there is no occasion to disagree about the contract terms after the price is relied upon in the general contractor's bid. If this is not done, subcontractors may not be held to their bids and may be able to extract concessions or walk away from the job if the general contractor submits a one-sided subcontract form.

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Sub-Subcontractor's Claim Has Priority Over State's Garnishment

Judge Crawford of the Franklin County Common Pleas Court has ruled that a general contractor need not pay a subcontractor's creditor, in this case the State of Ohio, pursuant to a garnishment order, before paying an unpaid sub-subcontractor on an ODOT project. The general contractor was holding money belonging to an insolvent subcontractor when a garnishment order arrived seeking to have these funds paid to the subcontractor's creditor —the State of Ohio.

While the general contractor did not place the funds in a separate account, it argued that it was holding them in trust and that it could be forced to pay twice if the funds were seized in that the sub-subcontractor was still owed money. The Court agreed with the general contractor's argument that the money in effect belonged to the sub-subcontractor rather than the insolvent subcontractor and allowed the sub-subcontractor to be paid in full ahead of the State of Ohio.

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Suppliers of Subcontractors Have Bond Rights

In a recent case of great interest to suppliers, subcontractors, contractors and bonding companies, the Franklin County Court of Appeals has ruled that suppliers of subcontractors have the right to assert payment bond claims on public works projects in Ohio.

Prior to the effective date of the new mechanic's lien and bond law on January 1, 1992, Ohio law was that "subcontractors of subcontractors" had lien rights but not bond rights and "suppliers of suppliers" had bond rights but not lien rights, but at least one bonding company argued that "suppliers of subcontractors" had no right to make a payment bond claim. A trial court accepted this interpretation but the Court of Appeals in the case of EFCO v. Buckeye Union Insurance Company ruled in my client's favor and reversed the decision of the trial court. The Court of Appeals ruled that suppliers of subcontractors are not too remote and can recover against public payment bonds.

This decision means that subcontractors and suppliers with pending "old law" bond claims can recover, and is consistent with the post January 1, 1992 "new law" which allows remote tier subcontractors and suppliers to recover against the statutorily required payment bond on public works.

As there is generally an indemnity agreement between the contractor and his bonding company as to any losses under the bond, this means that contractors who paid their subcontractors may have to "pay twice" to any unpaid sub-subcontractors or second-tier suppliers.

It is not enough for a general contractor to pay his bills and trust that his subcontractors will do the same. Contractors who do not want to "pay twice" for remote tier subcontractor or supplier bond claims on public projects may want to consider making lien waivers also serve as a bond waiver, inquiring as to payment status of subs and suppliers, and issuing joint checks to shaky subcontractors. Contractors should remember that the Notice of Furnishing required of remote tier subcontractors and suppliers to perfect mechanic's liens is not required to perfect a bond claim.

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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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