Kegler Brown • Construction Law Newsletter

March 2003

In This Issue

Drug Free Workplace Mandated on State Work
Partnering Works
Will Ohio Adopt a Statute of Repose?
Bonding Company Still Has to Pay Despite "Pay When Paid" Clause
Sub Who Is Asked to Sign an Onerous Subcontract Is Released from His Bid

Drug Free Workplace Mandated on State Work

Donald W. Gregory
Construction
Law chair

Contractors who bid work to the Ohio Department of Administrative Services, Department of Transportation or other state agencies or entities will have to be enrolled and in good standing with the Ohio Bureau of Workers' Compensation Drug Free Workplace Program by virtue of an Executive Order signed by Governor Taft.

Executive Order 2002-13T gives contractors a 10-day grace period after submitting a bid to enroll in a drug-free workplace program without causing their bid to be rejected. This grace period runs from January 1, 2003 through July 1, 2003. After July 1, 2003, contractors will not be permitted to submit bids without being enrolled prior to the bid date. This means that all contractors bidding on Ohio public works should immediately enroll in an authorized Bureau of Workers' Compensation Drug Free Workplace Program so that they might be listed (by employer ID number) on the BWC website. Only contractors whose number is listed on the website will be considered properly enrolled and therefore eligible to enter into state contracts.

Contractors who are not yet enrolled should apply online at www.ohiobwc.com or fill out an application (U-140) with the BWC as soon as possible. While the BWC may eventually take action to determine whether a drug free workplace program in fact meets appropriate standards, the first step for BWC will likely be to simply determine whether the contractor has filed the appropriate application and has listed themselves as being enrolled in such a program.

Subcontractors will also be required to enroll in the BWC program, if they want to do State work in that contractors will have to provide proof that their subcontractors are properly enrolled before they can perform work on the project.

It is hoped that this additional emphasis on drug free workplace programs will reduce drug or alcohol use and jobsite injuries.

These additional requirements may create an opportunity for bid challenges in the coming months as competitors may discover that some of the apparent low bidders have not satisfied this mandatory requirement.

Partnering Works

A 1995 study of public sector partnering by the Construction Industry Institute has concluded that partnering works well in Ohio. That study concluded that claims costs on traditional public projects average 7.7% of project budget.

In contrast, the study found that public construction projects that utilize partnering experience legal claims averaging only .01% of project budget. If those figures are even close to being accurate, this would emphasize the great value of partnering (and other alternative dispute resolution techniques) that help avoid protracted and expensive construction claims.

More and more owners in Ohio are utilizing partnering and other creative dispute resolution techniques to avoid those claims. The Ohio School Facilities Commission who is managing Ohio's ambitious school building program is, particularly fond of partnering and other alternative dispute resolution techniques. OSFC believes that those strategies have kept their claims costs at a minimal level to date despite the huge volume of work that is currently being prosecuted.

Will Ohio Adopt a Statute of Repose?

A statute of repose is designed to protect contractors and design professionals from legal liability long after a building is substantially complete. In this way, contractors and design professionals are not subjected to open ended liability and the tremendous costs associated with preserving records for an extensive period of time. It is also difficult to disprove claims once the memories of those involved in the original construction have faded, witnesses die or move, or where the documents have disappeared.

Therefore, most states have a statute of repose to protect against these stale claims that are asserted many years or decades after a building is constructed.

Unfortunately for the construction industry in Ohio, the Ohio Supreme Court has twice found the Ohio statute of repose (Ohio Revised Code §2305.131) unconstitutional. Brennaman v. R.M. I. Co. (1994), 70 Ohio St.3d 460.

The construction industry is now clamoring for a new statute of repose that may have a greater chance of constitutionality, particularly in view of the new additions to the Ohio Supreme Court. We will have to wait and see whether the current General Assembly enacts a new statute of repose and, if so, whether that statute is upheld. Until then, contractors and design professionals are advised to keep their records for an indefinite period of time in an effort to protect themselves against claims that could be asserted years or decades later.

Bonding Company Still Has to Pay Despite "Pay When Paid" Clause

A federal case from the Ninth Circuit has ruled that a Miller Act surety's liability is established by the Miller Act itself and not by the contractors' subcontract language and therefore a subcontractor can still recover on its payment bond claim despite signing a "pay when paid" clause. United States ex rel. Walton Technology, Inc. v. Westar Engineering, Inc., 290 F.3d 1199 (9th Cir. 2002). This reasoning leads to the ironic result that the contractor would not have liability to the subcontractor, but his bonding company would. This is a notable exception to the general rule that a bonding company is not liable for debts beyond those owed by its principal (contractor).

The Court emphasized that the proper analysis under a Miller Act claim is whether a subcontractor had expressly waived its Miller Act rights in the subcontract itself. The Courts generally hold that such a Miller Act waiver must be clear and explicit and include an express reference to the Miller Act or a subcontractor's payment bond recovery. As the "pay when paid" clause in this case did not have such express bond waiver language, it did not defeat the subcontractor's payment bond claim.

As Ohio has a statute (Ohio Revised Code §4113.62), that prohibits clauses that waive bond rights "up front" in a subcontract, it is believed that an express waiver of either a Miller Act payment bond on a federal project in Ohio or a "little Miller Act" payment bond on state work in Ohio would be unenforceable. Therefore, one could conclude that a "pay if paid" or "pay when paid" clause in Ohio would not insulate a bonding company from a payment bond claim. The question remains whether a contractor would be forced to reimburse his bonding company under his indemnity agreement for a loss sustained on such a payment bond claim if he had a good defense to the underlying contract claim in the first instance.

Sub Who Is Asked to Sign an Onerous Subcontract Is Released from His Bid

Generally subcontractors whose bids are relied upon by the general contractor to obtain the prime contract are stuck with their bid whether they make a mistake or not. This often leads to problems when a general contractor submits a one-sided subcontract to the subcontractor for signing, particularly if the subcontractor has not conditioned his bid upon certain reasonable subcontract language such as the AIA A401 Subcontract.

When this situation occurs, the subcontractor often finds himself on the horns of a legal dilemma where if he refuses to sign the general contractor's one sided subcontract then the general contractor can hire another subcontractor to perform the work and seek the excess cost from the low bid subcontractor.

However, a recent Court of Appeals case out of Cincinnati has held that if the general contractor proposes a subcontract which contains unreasonable terms, the subcontractor need not stand behind his bid. In that case, the subcontractor was permitted to withdraw his bid because the subcontract contained a "time of the essence" clause which required the masonry work to be performed under a strict time schedule. Lichtenberg Construction & Development, Inc. v. Paul W. Wilson, Inc., 2001 Ohio App. LEXIS 4372 (Ohio App., 1st Dist. Sept. 28, 2001).

In view of this decision, subcontractors may be able to use one-sided subcontract language as a basis for avoiding honoring their bids. Contractors who want subcontractors to stand behind their bids are cautioned to submit reasonable and customary subcontract language to such subcontractors.

Credits

Kegler, 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.