In This Issue

• Decision of Court of Appeals in Favor of OSU on Fisher College of Business Stands
• Is the State's Existing MBE Statute Unconstitutional?
• Prompt Payment — An Update
• Court of Claims Issues Injunction Against State
• California Supreme Court Declares "Pay If Paid" Void
• New AIA Subcontract Adopted
• Senate Committee Passes Fairness in Construction Contracting Bill as S.B. 71

Decision of Court of Appeals in Favor of OSU on Fisher College of Business Stands

Donald W. Gregory
Construction
Law chair

The Ohio Supreme Court has declined to accept Cleveland Construction's appeal, meaning that the decision of the Franklin County Court of Appeals upholding the finding that Cleveland Construction was not "responsible" to perform the Fisher College of Business project stands (see September, 1997 Newsletter). This decision likely will encourage other public owners to take a serious look at the "responsibility" of bidders, and that the low bidder will not always be the successful bidder.

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Is the State's Existing MBE Statute Unconstitutional?

Many courts around the country have declared Minority Business Enterprise ("MBE") "set aside" programs unconstitutional, including the City of Columbus MBE program. A recent decision from the Franklin County Court of Appeals has ruled that Ohio's MBE Program is unconstitutional, at least as applied to the facts of that case. Ritchey Produce Company v. State of Ohio, Case No. 97APE04-567 (October 7, 1997). The Court stated that the State's existing MBE program is a race per se classification which was unconstitutionally applied to deny MBE certification to the plaintiff who claimed he was an "oriental," but went on to infer that Governor Voinovich's executive order 96-53V, establishing a "Socially and Economically Disadvantaged Business Policy" to assist all "disadvantaged" Ohio citizens regardless of race, might be constitutional.

The State is attempting to appeal this decision to the Ohio Supreme Court. While it is too early to declare the entire State MBE set-aside program extinct, it certainly has numerous legal problems that threaten its existence.

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Prompt Payment — An Update

Unfortunately, there is very little case law to construe what constitutes a "disputed lien or claim" to allow a contractor to withhold monies it has received from the owner for the subcontractor's work, without violating the Prompt Payment Act and incurring liability for 18 percent interest and attorney's fees. However, one recent case has begun to shed some light on this issue.

In the unreported case of Solomon v. Excel Marketing, Inc., No. 95-CA-76 (Sept. 13, 1996), the Court of Appeals for Clark County found that the Prompt Payment Act applied to private construction projects, as well as public construction projects, and then went on to rule upon the propriety of holding money from a subcontractor for allegedly defective work. In that case, the contractor had maintained that the subcontractor had breached the subcontract by failing to install the fixture according to code. The trial court found the subcontractor had breached the contract, but awarded the subcontractor some money under the principle of quantum meruit. However, the subcontractor was denied recovery for 18 percent interest and attorney's fees under the Prompt Payment Act because the contractor was entitled in good faith to withhold payment based upon the breach of contract.

While certainly not dispositive of the issue, this case should assist contractors in making the argument that they are entitled to withhold monies when they have a "disputed claim" against the subcontractor for defective work or delay, particularly if the subcontractor's shortcomings rise to the level of a breach of contract.

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Court of Claims Issues Injunction Against State

Traditionally, bidding disputes involving State entities have been initiated in Courts of Common Pleas who have the equity power to issue injunctions, but not to award damages against the State or its entities. Traditionally, only the Ohio Court of Claims has jurisdiction to award damages against the State. In a unique development, several taxpayers and Cincinnati area contractors and their trade associations sought and received an injunction from the Ohio Court of Claims barring the University of Cincinnati from proceeding further on its conference center project without complying with the public works and bidding laws. The University unsuccessfully argued that the project was exempt from competitive bidding and Ohio's other public work statutes because it was a "lease-purchase agreement." This case may encourage others to seek injunctive relief against the State in the future in the Court of Claims.

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California Supreme Court Declares "Pay if Paid" Void

The California Supreme Court has invalidated "pay if paid" clauses in construction subcontracts in that State. A "pay if paid" clause provides that the subcontractor will be paid if, and only if, the contractor is paid by the owner for that work, shifting the risk of owner non-payment from the contractor to the subcontractor.

The Court in the case of Wm. Clarke Corp. v. Safeco Insurance, ruled that the contract language making payment by the owner to the contractor a "condition precedent" to the contractor's obligation to pay the subcontractor for work performed, is no longer enforceable in California. Additionally, the Court ruled that a bonding company could not use the owner's non-payment as an excuse for not paying a subcontractor's payment bond claim.

This decision adds to the growing legislative and judicial trend finding "pay if paid" provisions against public policy and unenforceable. It means that contractors must pay subcontractors within a reasonable period of time for their work in California and should cause prudent contractors to increase their financial scrutiny of owners to assure adequate financing for projects.

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New AIA Subcontract Adopted

The American Institute of Architects ("AIA") has adopted its 1997 edition Subcontract (A 401) which, as in the past, is endorsed by the American Subcontractors Association ("ASA") and the Associated Specialty Contractors, Inc. ("ASC"), but not endorsed by the Associated General Contractors ("AGC").

Some of the more noteworthy 1997 changes are as follows:

1. The Contractor within 30 days after receipt of a written request (or earlier if required by law) is to provide Subcontractor with all information necessary to give notice or perfect mechanic's lien rights (3.2.5).

2. Mediation is required before either party can commence arbitration or litigation (6.1.1).

3. It contains a "watered down" trust-type provision requiring both the contractor and subcontractor to hold monies for the benefit of their respective creditors on that project (11.1).

4. Both Contractor and Subcontractor waive consequential damages against the other (15.4).

This 1997 edition of the A401 Subcontract should remain in use for the next ten years.

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Senate Committee Passes Fairness in Construction Contracting Bill as S.B. 71

The Senate Commerce and Labor Committee has unanimously passed the Fairness in Construction Contracting Bill (S.B. 71).

This bill was originally introduced in March of 1995 as S.B. 106 (now S.B. 71), and passed the Senate 32-1 during the last session, but ran out of time before a vote could be taken in the House of Representatives.

After extensive discussion, negotiation and drafting, the general contractors of the State represented by AGC-Ohio and the subcontractors represented by the Ohio Subcontractors Council (acting for all Ohio ASA chapters) have reached agreement on a compromise and consensus industry bill - Sub. S.B. 71 (Fairness in Construction Contracting Bill), which is now moving through the State Senate.

This legislation is designed to remedy certain inequities in construction contracting created by adverse court decisions or unfair practices within the industry, and contains the following elements:

1. Requires subcontractors and suppliers to provide a Notice of Furnishing to preserve bond rights (as is the current law for mechanic"s lien rights). This will prevent "hidden bond claims" and make bond claims consistent with mechanic's lien claims.

2. Prohibits as against public policy:

   1. waiving bond rights by contract without payment (to eliminate the "Farrell" problem);

   2. waiving pending claims by final payment; and

   3. "no damage for delay clauses" (when the delay is caused by the owner's or contractor's actions or inactions).

      This will prevent one from inadvertently giving up important legal rights by virtue of one-sided contract language hidden in the fine print of lengthy non-negotiable construction contracts.

3. Allows subcontractors and suppliers to file mechanic's lien and bond claims within the deadlines provided by law, despite the existence of contingent payment clauses. This will prevent "pay-if-paid" clauses from interfering with the filing of lien and bond claims which are necessary to secure payment.

These provisions should cause a more equitable sharing of risk in the construction process by encouraging the party most able to manage or control that risk to remain responsible for it.

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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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