In This Issue

• Sixth Circuit Confirms Ohio's Construction Set-Aside Program Is Unconstitutional
• Contract May Limit Time for Asserting Claims
• Dept. of Labor Has Priority Over Subcontractor's Lien
• Eichleay Recovery Broadened Against ODOT
• Prompt Payment Act Narrowly Construed

Sixth Circuit Confirms Ohio's Construction Set-Aside Program Is Unconstitutional

Donald W. Gregory
Construction
Law chair

AGC previously filed suit and obtained an order from the trial court, U.S. District Judge Graham, that Ohio's minority ("MBE") set-aside plan for construction and public works was unconstitutional and therefore unenforceable. As a result, Ohio, through the Department of Administrative Services ("DAS"), had ceased enforcing the set-aside law while the case was pending.

The U.S. Sixth Circuit Court of Appeals, based out of Cincinnati, has affirmed that decision and ruled that the MBE requirements for state construction contracting are unconstitutional in that mere statistical disparities between the percentage of minority businesses and the percentage of state contracts are not enough to justify such an MBE set-aside plan. AGC v. Drabik, Case No. 98-4393 (decided June 1, 2000, Sixth Circuit).

The State will now have to decide whether to initiate a detailed study to support a new set-aside plan, adopt a race neutral disadvantaged business type plan or abandon the concept altogether.

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Contract May Limit Time for Asserting Claims

A recent Court of Appeals case from Montgomery County has ruled that a contractor's claim against the county arising from an unforeseen condition on a sewer project was barred because it was not filed within 60 days of the Engineer's denial of the claim - as required by the contract documents. R.E. Holland Excavating Co. v. Montgomery Cty. (1999), 133 Ohio App. 3d 837.

Despite filing its complaint well within the statute of limitations for contract claims (15 years), the contractor's claim was thrown out of court because the parties had contractually agreed (in the contract documents) to shorten that period to 60 days. The Court repeated the general rule that parties may shorten that period so long as the time period is "reasonable" and went on to specifically rule that the 60 day period in this case was reasonable.

This case means that many more owners (and contractors) will be inserting time limitations in their contract documents and that contractors (and subcontractors) will have to be vigilant in recognizing these clauses and taking timely legal action on their claims.

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Dept. of Labor Has Priority Over Subcontractor's Lien

An Ohio case has determined who has priority to the project funds when a general contractor on a federally funded project fails to pay prevailing wages to its subcontractors. In that case, the U.S. Dept. of Labor assessed for unpaid wages under the Davis-Bacon Act and the subcontractors filed mechanic's liens against the project funds.

The Court of Appeals for Ashtabula County ruled that federal law in the form of the Davis-Bacon Act preempted Ohio's mechanic's lien statute. Conneaut v. Allegheny Sur. Co. (1998), 128 Ohio App. 3d 724. As a result, the Court permitted the Dept. of Labor to withhold the funds from the contractor in the first instance, meaning that there were no contract funds owing to the contractor and therefore no recovery available for the subcontractors on their mechanic's liens.

Hopefully, the subcontractors on this public project also asserted timely payment bond claims so that they might recover against the contractor's payment bond.

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Eichleay Recovery Broadened Against ODOT

A major Central Ohio highway contractor and Ohio's Department of Transportation ("ODOT") have actively litigated the applicability and legal parameters of the Eichleay formula - which is a generally accepted way to compute unreimbursed home office overhead in the event of compensable project delay or suspension. As a result, the applicability of the Eichleay formula to project delay in Ohio was confirmed and a public authority's exposure for these types of delay damages may have been broadened. Complete General v. ODOT, Case No. 98AP-1619 (May 25, 2000, 10th District).

The Franklin County Court of Appeals ruled that a contractor may establish a prima facie case for unabsorbed home office overhead when an "extension period" was added to the contract duration due to a government-caused delay during the original contract period and the contractor was on "standby" during the suspension period. The Court stated that it was only necessary for a part of the contractor's work to be on "standby," and not the entire project, for Eichleay to apply. The Court also said that the contractor's normal replacement of work during the bidding process should not constitute replacement work to bar an Eichleay recovery. Finally, the Court minimized the impact of the normal winter ODOT shutdown on the Contractor's recovery by stating that the Eichleay computation should be based upon the length of the extension period, rather than the suspension period. This appellate decision has reinforced that Eichleay is alive and well here in Ohio and that this component of damages shall remain a considerable risk for public owners in the event of project suspensions and delays.

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Sixth Circuit Confirms Ohio's Construction Set-Aside Program Is Unconstitutional

Ohio's Prompt Payment Act provides that a subcontractor can recover 18% interest per annum, as well as attorney's fees in the event legal action proves necessary, when the contractor receives payments from the owner that he fails to pay to the subcontractor within 10 days of receipt. O.R.C. 4113.61. A Franklin County Court of Appeals case has limited a subcontractor's recovery by refusing to grant attorney's fees or 18 percent interest under the Act by concluding that the general contractor had a good faith basis for withholding the money owed as an "amount that may be necessary to resolve disputed liens or claims." Consortium Communications v. Cleveland Telecommunications, Inc., 1998 WL 63538 (Ohio App. 10th Dist., February 10, 1998). The Court found that neither the 18% interest nor the attorney's fees were mandatory provisions. A more favorable interpretation for subcontractors would have been that this "disputed liens or claims" language was limited to circumstances where this withholding was necessary to protect the general contractor from mechanic's liens (called claims against public funds on public projects) asserted by the subcontractor or its sub-subcontractors and suppliers.

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

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