Kegler Brown • Construction Law Newsletter

November 1999

In This Issue

Miller Act Reformed
House Passes Bill Providing Post-Judgment Interest to Contractors on Claims
School Rebuilding Plan Should Translate Into a Building Bonanza for Contractors
Spearin Doctrine Invoked Against School District
Architects May Retain Rights to Plans Under AIA Documents
AGC Adopts Family of Design-Build Subcontracts

Miller Act Reformed

Donald W. Gregory
Construction
Law chair

The Miller Act requires payment bonds on sizable Federal Government projects to ensure that subcontractors and suppliers are paid even in the event there is a financial default by the prime contractor. This important Act has not been revised for decades. However, House Resolution 1219, The Construction Industry Payment Protection Act of 1999, has passed Congress and was signed into law by the President on August 17th. This legislation introduced by Representative Carolyn Maloney of New York amended the Miller Act to help subcontractors and suppliers by: 1) requiring the payment bond to equal the contract price; 2) prohibiting the waiver of rights under a payment bond; and 3) allowing notice to a prime contractor by any method that provides sufficient proof of receipt.

This legislation was a result of negotiations between key groups in the construction industry and received the consensus support of the industry, including ASA, AGC, ASC, and the surety industry. It expands payment protections for subcontractors and suppliers and modernizes service requirements for claims without adversely affecting the rights of solvent general contractors or sureties.

Federal regulators must issue regulations no later than February, 2000 and the new law will take effect 30 days after final regulations are issued.

House Passes Bill Providing Post-Judgment Interest to Contractors on Claims

Prime contractors on State public works have to operate with a separate set of rules than those which apply to private projects. A contractor who wishes to pursue a claim against the State must file suit against the State of Ohio in the Court of Claims. Although contractors have been fairly successful asserting contract claims in recent years, the State still maintained an inherent advantage in the event the matter was appealed in that contractors might receive pre-judgment interest, but would not receive post-judgment interest in the event the contractor elected to appeal in an attempt to recover a higher amount.

In that appeals could take a year or two and claim amounts often were for six or seven figures, this loss of post-judgment interest (even when the contractor ultimately prevailed on appeal) was a substantial amount and acted to discourage otherwise meritorious appeals. House Bill 60, promoted by both ASA and AGC, would eliminate that loophole, and allow contractors to receive post-judgment interest when they ultimately prevailed on their appeal. The Bill passed the House of Representatives unanimously and is now awaiting Governor Taft's signature. It is expected to become law soon.

School Rebuilding Plan Should Translate Into a Building Bonanza for Contractors

On September 9, 1999, Governor Bob Taft unveiled "Rebuilding Ohio's Schools: A 12-Year Commitment." The Governor has proposed a plan to provide $10.2 billion in state funding to help rebuild Ohio schools. Roughly, $6 billion will be derived from the issuance of general-obligation bonds. In the Nov. 2nd election, voters approved a constitutional amendment, State Issue 1, permitting the State to issue bonds. The passage of Issue 1 was a critical component for allowing the State to assist local school districts achieve their school facility needs. The proceeds will be used for repairing, improving, expanding and rebuilding Ohio's school facilities. Without the passage of Issue 1, the Governor's package would have been in jeopardy.

The Governor proposes the following guide for implementing his plan:

$9.9 billion for classroom facilities assistance;

$195 million for emergency assistance; and,

$65 million for a permanent improvement trust fund

While the Issue 1 bond money will not be the only revenue source for the Governor's plan, it comprises approximately 60% of the funding source. Roughly, 20% will come from cash appropriations and interest earnings, while 25% will be derived from the tobacco settlement lawsuit.

Issue 1 and the State's plan should create billions of dollars in additional construction work for Ohio contractors.

Spearin Doctrine Invoked Against School District

In a case successfully argued by our firm, the Twelfth District Court of Appeals has ruled that Owners, in this case a School District, impliedly warrant the sufficiency of the plans and cannot complain of a problem that arises when the Contractor follows the plans.

The Court also found that disclaimers in soils reports could not overcome the implied warranty imposed by the Spearin doctrine.

Architects May Retain Rights to Plans Under AIA Documents

The AIA contract documents basically provide that the plans remain the property of the Architect, even after they are paid for by the Owner. This can act as a difficult impediment to project completion if the Owner is forced to terminate the Architect.

In one recent case, an Owner hired an Architect to design a restaurant. The Owner then showed the plans to another Architect that was hired because the Owner was dissatisfied with the original plans. The Court found copyright infringement by the Owner for showing the plans to another Architect.

Therefore, Owners should consider revising the AIA documents to provide that the plans become the property of the Owner when they are prepared and paid for, and can be utilized by others on that project.

AGC Adopts Family of Design-Build Subcontracts

With the increasing popularity of design-build contracting in the construction industry, AGC has attempted to seize leadership from AIA with respect to contract documents by formulating a complete set of design-build documents, including four types of design-build subcontracts —the AGC 450, 455, 460 and 465.

The AGC 450 is to be used when there is no Guaranteed Maximum Price ("GMP") expected from the Subcontractor and the Subcontractor has not been retained to provide substantial design work on a design-build project. The AGC 455 is virtually the same design-build subcontract, but containing a "pay if paid" clause shifting the risk of Owner non-payment from the Design-Builder to the Subcontractor.

Both the AGC 460 and 465 envision a GMP and a substantial design role, but the AGC 465 contains a "pay if paid" clause.

All of these design-build forms contain several one-sided provisions that are found in the AGC 650 (regular subcontract) including two provisions that could cause financial ruin for any Subcontractor signing the document. First, if the Owner suspends the work or terminates the Design-Builder (with or without cause), the Subcontractor's sole remedy is limited to what the Design-Builder can recover against the Owner on the Subcontractor's behalf. If the Design-Builder is terminated by the Owner for cause (i.e., a failure to perform unrelated to Subcontractor's scope of work), that recovery will likely be absolutely nothing, depriving the Subcontractor of any reasonable opportunity to recover even if he has satisfactorily performed his work in all respects.

Secondly, while mediation is required in the event of a dispute, arbitration is not. In the event the Subcontractor cannot be joined to the Design Builder/Owner dispute, and the Subcontractor's claim involves (in whole or in part) disputes between the Design-Builder and the Owner, the Sub's claim is to be stayed pending the conclusion of the Design-Builder/Owner dispute, depriving Subcontractor of a meaningful and timely remedy through no fault of his own. The Subcontractor's claim (and recovery) could be stayed for years while the Owner and Design-Builder battle it out in an arbitration or the courts.

Design delegation also presents significant risks for Subcontractors under these documents. Under the AGC 450 and 455, the Subcontractor is to provide the design necessary to "satisfactorily complete" the work. The design services are to be provided by a licensed design professional who is required to sign and seal the documents. The Subcontractor is ultimately responsible to "conform" the design with the design concept.

Under the AGC 460 and 465, the Subcontractor is actively responsible for preparing design documents and for "coordinating" its design with the project design.

As with any design-build work, Subcontractors are cautioned to make sure that they are covered adequately with insurance coverage specially designed for the unique risks of design-build work and that all of their "designers" (architects and/or engineers) are also adequately insured for design errors and omissions. Subcontractors also should be sure that the design-build concept is legally permitted in the jurisdiction where the project is located.

The GMP documents, the AGC 460 and 465, also pose special risks for Subcontractors who could perform all of the upfront design work only to have the Design-Builder shop the work to another Subcontractor for a lower price and have that second Subcontractor use the Design-Build Subcontractor's plans and specifications. Under the AGC 460 and 465 in the event the Design-Builder does not like the Subcontractor's GMP, the Design-Builder may elect to proceed without a GMP, or upon seven days written notice to the Subcontractor, terminate the agreement and award the Subcontractor's work to another Subcontractor and utilize the design documents prepared by the terminated Subcontractor. Although there is general language about reimbursing the Subcontractor for all "unpaid compensation then earned," the amount of compensation to be paid in that event is unclear and will likely not include lost profits on the unperformed work. It also is contrary to the AIA documents which traditionally maintain ownership of the documents with the design professional who prepared them, and avoids this risk of having the Subcontractor's work product utilized by others. If the Design-Builder uses the terminated Subcontractor's documents on the project, he does so at his own risk and indemnifies the Subcontractor from such claims. However, this indemnity is only as good as the collectability of the Design-Builder who has acted in such a questionable manner.

In conclusion, while design-build provides many opportunities for both Contractors and Subcontractors in the rapidly changing construction industry, design-build documents should be closely scrutinized. General contractors are likely to consider utilizing these AGC documents on their design-build work. Subcontractors should carefully evaluate the risk in these evolving documents and pay particular attention to certain one-sided provisions that appear to exist in the AGC design-build subcontracts.

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.