August 1998 |
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In This Issue
"Fairness in Construction Contracting" Act Becomes LawGovernor Voinovich signed the Fairness in Construction Contracting Act (Am. Sub. S.B. 71), on July 1, 1998. This means the law will become effective on September 30, 1998. This legislation should be of great interest to the construction industry and represents the most dramatic changes to Ohio Construction Law since the Prompt Payment Act and the Mechanic's Lien Law changes almost a decade ago. This Act, sponsored by Ohio's construction industry, 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. Prohibits as against public policy:
At least one unreported Court of Appeals decision has found that mechanic's lien rights may be waived by contract in advance, even if payment is not received for the work. This has caused some contractors to insert language in their subcontracts waiving bond rights as well. While one recent Common Pleas Court has decided that such a waiver of bond rights by contract was void and unenforceable as against public policy on a public project, the Ohio law in this area remained uncertain. The legislature has now decided that such a waiver without payment is contrary to public policy and unenforceable.
Many owners and contractors have begun inserting clauses in their contract documents which state that all pending claims are waived through the receipt of final payment. This has caused many claimants to inadvertently lose their rights through accepting the undisputed final payment on a project, or in the alternative,sophisticated claimants have reserved their rights by only requesting part of the payment indisputably owed at the end of the job. The legislature has addressed the unfairness of such a practice by stating that these contract provisions will not be enforced when the owner or contractor has notice of the claim prior to final payment.
This provision attempts to codify existing Ohio case law which provides that "no damage for delay" provisions are generally unenforceable when the delay is caused by the owner's active interference or was unforeseeable at the time that the contract was entered into. It recognizes that a time extension, without additional compensation, is often inadequate to make a contractor or subcontractor whole when the cause of the delay is caused by the owner or contractor. 2. 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. Lien claimants who have signed "pay if paid" or other contingent payment clauses are placed in the "Catch 22" situation of having to certify that money is "due and owing" on their mechanic's lien or bond claims when these monies are not technically due until such time as the owner pays the contractor. In the interim, the lien claimant may be losing the security of his lien and bond rights due to the passage of time. This provision will still allow lien claimants to perfect their lien or bond rights, even if the money is not technically due yet. 3. Requires subcontractors and suppliers to provide a Notice of Furnishing to preserve bond rights (as is the current law for mechanic's lien rights) when the contract is for $30,000 or more. This will prevent "hidden bond claims" and make bond claims consistent with mechanic's lien claims. (No additional paperwork is required for Subtrades complying with the current law.) Many contractors complain of "hidden bond claims" from suppliers who have failed to serve a notice of furnishing on the project, but nevertheless were able to recover against the payment bond. The law has been revised now to prevent hidden bond claims of a significant amount when the remote tier subcontractor or supplier fails to properly serve a notice of furnishing on the project. If a notice of furnishing is provided, it will preserve both lien and bond rights. This legislation is designed to help prevent subcontractors and contractors from inadvertently giving up important legal rights by virtue of one-sided contract language hidden in the fine print of lengthy and generally non-negotiable construction contracts. The Act 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. Igel Prevails on AppealIn a previous issue (October, 1996), it was noted that general contractor Peterson Construction and its excavation subcontractor George Igel & Co. prevailed in their jury trial against a vocational school district whose building "settled" on soft soils. The school district appealed the decision and the Madison County Court of Appeals recently upheld the jury verdict and decisions of the trial court in all respects. The Central Ohio Joint Vocational v. Peterson Construction Company, Case No. CA 97-05-24, July 13, 1998. The Court of Appeals, in formulating its opinion, placed great emphasis on a change order signed by all parties, stating that they were to follow the directions of the soil engineer. The clear lesson of this case is that contractors and subcontractors who receive direction from owners or their architects and engineers that is arguably different than the plans and specifications must be sure to memorialize these deviations in written, signed change orders. ODOT Permits Defective Bid Bond & Blank Unit PriceIn this bidding dispute, the low bidder made two significant mistakes. First, he submitted a bid bond that was defective. Second, he described a zero dollar unit price for grubbing and clearing work. ODOT was quick to treat the bid as providing that grubbing and clearing would be done for free and awarded the contract to the low bidder. Both the trial court and the Franklin County Court of Appeals ruled that the question of the defective bid bond was moot because the low bidder voluntarily agreed to enter into the contract with ODOT and stated that the defect in the unit price for grubbing and clearing was immaterial given the fact that the true value of this item ($100,000) was less than the difference ($165,700) between the two lowest bidders. Smith & Johnson Construction v. Ohio Dept. of Transportation, No. 97APE-1401, June 30, 1998. The Court of Appeals emphasized that not every variation from the bid instructions or specifications will destroy the competitive nature of the bid and that defects can only render a bidder non-responsive when they give a competitive advantage to that bidder over another. AGC Drafts New SubcontractsAGC has apparently abandoned the AGC 640 model subcontract that it jointly endorsed with ASA in 1994. Instead, AGC has recently promulgated its new AGC 650i and 655i forms. The AGC 655 form is a "pay if paid" subcontract. In addition to the obvious concerns expressed by subcontractors to such "pay if paid" language, these subcontracts contain many other provisions troubling to subcontractors.
In short, the AGC 655 contains "pay if paid" and other provisions potentially disastrous to subcontractors. Even the 650, which has a "pay when paid" clause, contains the same problems absent the "pay if paid" provision. While both subcontracts may be marginally better than many proprietary forms currently being used by many general contractors in the industry, they are much less equitable than the AIA A401 or the AGC 640 form for that matter. We also believe that they are less favorable to subcontractors than the old AGC 600 form. A review of the AGC 650 reveals that it goes much further in diminishing subcontractors rights than simply making it consistent with the new AIA A201 General Conditions, as apparently argued by AGC. Subcontractors should be cautioned to carefully review and revise this document or, in the alternative, avoid it altogether. Recent Lien Law DevelopmentsThere have been a number of recent cases construing the Modern Mechanic's Lien Law, including what happens when there are problems with a Notice of Commencement ("NOC") or a Notice of Furnishing ("NOF"). What Happens When There Is An Error In The Notice Of Commencement?There are two newly reported cases from Franklin County that deal with the issues of a defective NOC and failure to post a NOC on the job site. Jim Morgan Elec. Co. v. Smith (Sept. 19, 1996, Franklin Co. C.P.), 85 Ohio Misc. 2d 45; Jim Morgan Elec. Co. v. Smith (Dec. 10, 1996, Franklin Co. C.P.), 85 Ohio Misc. 2d 53. In Jim Morgan, the owner filed a NOC but forgot to include the date of contract with the original contractor. The sub, Jim Morgan Electric, did not serve a NOF until forty-eight days after the last day of work (the same day he filed his lien). The sub then initiated a foreclosure action asserting that his duty to serve a NOF was relieved for two reasons: 1) the NOC was defective because it didn't include the date of contract; and 2) the NOC was not posted at the job site. Judge Travis held that the owner "substantially" complied with §1311.04 and that the failure to include the contract date did not cause the sub any "inconvenience, prejudice, loss, or inability to serve its notice of furnishing in a timely manner." With respect to the posting issue, Judge Travis held that the sub's duty in regard to serving a NOF is dependent upon an owner's "filing" a NOC, not posting it. As such, failure to post a NOC at the job site will not excuse a sub from having to serve a NOF. On Jim Morgan Electric's motion for reconsideration, Judge Travis, in denying the motion, added to his previous decision by pointing out that the sub made no effort to determine if a NOC was filed until after he completed his work. Further, Judge Travis gave little weight to the sub's technical arguments with respect to the NOC because the sub obviously didn't lose his lien rights as a result of his reliance. The defect was only discovered by the sub after he had allowed the time to pass for effectively serving a NOF In summary, Judge Travis states that §1311.04(C) "provides that a lienholder's remedies should it discover that a notice of commencement contains incorrect information are available only if the 'loss and expenses incurred are a direct result of the lien claimant's reliance on the incorrect information." This reliance argument was disregarded by Judge Travis in another case that involved significant and substantial defects in the NOC. In this case, Judge Travis disregarded the fact that the supplier lien claimant could not show reliance upon a defective NOC in that the supplier never even attempted to serve a NOF. RN Bldg. Materials, Inc. v. Huffer Roofing (1997), 85 Ohio Misc. 2d 20. The Court found that the supplier's failure to serve a NOF was excused where the owner failed to file a NOC with the County Recorder which substantially complied with the statute. In RN, the NOC contained many material errors including a misidentification of the owner and lacked a legal description. While the case law remains unsettled on these issues, certain rules are emerging. First, the failure to post the NOC on the site will not excuse a failure to serve a NOF. Second, a NOC with minor defects but which substantially complies with the statute will not excuse a failure to serve a NOF, particularly where there is no reliance upon the defective NOC. Third, a NOC which fails to substantially comply with Ohio Rev. Code §1311.04 will excuse a failure to serve a NOF. We will have to await further judicial guidance as to which defects are "substantial" and which are not. What Happens When There Is A Failure To Properly Serve A Notice Of Furnishing?A recent decision from a Magistrate in Montgomery County has held that a failure to obtain proper written evidence of receipt of a NOF pursuant to §1311.19 of the Ohio Revised Code defeats a mechanic's lien. In this case, the lien claimant mailed the NOF "first class, postage pre-paid." Further, the owner in its answer to a request for admission, acknowledged receipt of the NOF. Nonetheless the trial court found that failure to secure a written receipt invalidated the lien. Carey Electric Co. v. ABF Freight System, Case No. 97-7764, Montgomery County Common Pleas Court, unreported. The lesson of the case is clear - obtain a written receipt for service of your NOF if you want to maintain lien rights. Failure to Correctly Identify Property Owner Held to be Fatal Defect to Mechanic's LienA material supplier's mechanic's lien has been held to be invalid as a result of the lien claimant's failure to properly identify the property owner in the lien affidavit. Specifically, in Hoppes Builders and Development v. Hurren Builders, Inc. (1996), 118 Ohio App.3d 210, 211, the lien claimant, a material supplier, identified the property owner as "Mike Hurren" who in fact was the president, owner, and statutory agent for the company owning the property, "Hurren Builders, Inc." The Second District Court of Appeals found that the mechanic's lien statutes should be strictly construed with respect to the creation of a lien. (citing Crock Constr. Co. v. Stanley Miller Constr. Co. (1993), 66 Ohio St.3d 588, 592.) As such, the court went on to find that the supplier's mechanic's lien did not satisfy Ohio Revised Code § 1311.06(A) which states that the name of the property owner must be included in the lien affidavit to create a lien on the property. In making this ruling the court rejected the supplier's arguments that the mechanic's lien statutes should be construed liberally by finding that liens are liberally construed as to procedural and remedial provisions only after the lien has been created. The court also rejected the supplier's reliance on Queen City Lumber Co. v. O.G. Enterprise, Inc. (March 30, 1983), Hamilton App. No. C-820440, 1983 WL 8761, in which the court found that the incorrect name of the property owner in the lien affidavit was sufficient to satisfy O.R.C. § 1311.06. Specifically, the lien claimant in Queen City identified the property owner as "O.G. McGee Enterprises, Inc." when in fact the correct name of the owner was "O.G. Enterprises, Inc." The Queen City court allowed this lien to stand because the name listed by the lien claimant, although incorrect, contained the entire name of the property owner. The Hoppes court distinguished the Queen City ruling on the fact that the supplier's lien at issue did not contain the "full" name of the property owner within the name listed on its affidavit as was the case in Queen City. The Second District's holding in Hoppes Builders underscores the importance of obtaining the proper name of the property owner from either the notice of commencement for the project or from the deed from which the owner took title to the subject property. Firm NewsDon Gregory and Dan Hilson helped negotiate, draft and secure passage of the Fairness in Construction Contracting Act, with the invaluable support and cooperation of both AGC and ASA. Bill Nicolozakes and Patrick O'Neill have been actively involved in litigating many of the recent landmark cases construing the Modern Mechanic's Lien Law. Don Gregory argued the Igel case on appeal and Steve Chappelear helped write the winning brief. Congratulations to Rob Cohen who recently became a director of the Firm. Don Gregory is serving as Chairman of ASA's Taskforce on the new AGC Subcontracts. Rusty Schuermann, Don Gregory and Gene Holliker were involved in the drafting and successful bidding of the Butler Regional Highway construction contracts for the Butler County Transportation Improvement District. This is the largest highway construction project in Ohio. CreditsKegler, Brown, Hill & Ritter's Construction Law Newsletter is prepared by Donald W. Gregory for the Construction Law practice group. To subscribe to any Kegler Brown publication, please use our Subscribe Form. To unsubscribe from any Kegler Brown publication, please use our Opt-Out Form. This publication, as well as an archive of previous publications, is also available from our Publications Archive. 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. © 1989-2008, Kegler, Brown, Hill & Ritter Co., L.P.A.
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