In This Issue

• Ohio Supreme Court Chalks Up Victory for Employer in VSSR Case
• Court Holds Notice of Commencement Must Be in Substantial Compliance
• Ohio Supreme Court to Interpret Prompt Pay Act
• Firm News

Ohio Supreme Court Chalks Up Victory for Employer in VSSR Case

Donald W. Gregory
Construction
Law chair

In an important case for construction companies doing business in Ohio, the Ohio Supreme Court recently vacated a Franklin County Court of Appeals decision and reinstated an administrative decision finding that a company is not liable for violation of any specific safety requirements.

In State, ex rel. Mahoney v. Team America III and Wanner Metal Worx, the general contractor, Sherman Smoot Company, subcontracted work on the renovation of the future Supreme Court building in downtown Columbus to Wanner Metal Worx. Smoot had erected two scaffolds on the outside of the building, adjacent to each other, with one being four to six floors above the other. Smoot employees were working on the upper scaffold while Mahoney, who was working for Team America, a staff leasing agency for Wanner, was working on the lower scaffold. He was injured when a piece of stone, chipped off the side of the building by an employee on the upper scaffold, struck Mahoney on the back of the neck. Mahoney's workers' compensation claim was allowed against Team America. He then filed an application for an additional award for violation of specific safety requirements, known as a VSSR, against both Team America and Wanner.

A provision in the Ohio Constitution provides that an employee who is injured in the course of his/her employment can request a VSSR award, which is a penalty levied against an employer if it is found that the worker's injury occurred because of the employer's violation of some specific safety requirement. These safety requirements are typically found in the Ohio Administrative Code. Mahoney cited provisions in the Administrative Code concerning overhead protection, safety belts and lifelines, and protective railings on scaffolds.

After the hearing, at which Dave McCarty represented Wanner, the Industrial Commission denied Mahoney's request for a VSSR award. First, it found that Wanner, rather than Team America, would be liable for any VSSR because Wanner actually supervised and controlled Mahoney's work. However, it found no safety violation. The Commission found that Wanner provided safety belts and lifelines and all of the open sides of the scaffold were properly guarded. The Commission also found that Wanner provided sufficient overhead protection for Mahoney. Mahoney appealed the matter to the Franklin County Court of Appeals. Though a Magistrate recommended denial of Mahoney's appeal, a three judge panel of the appellate court rejected that recommendation and found that Wanner did not provide overhead protection. Wanner then appealed the matter to the Ohio Supreme Court.

Dave McCarty represented Wanner in the Supreme Court action and Don Gregory represented the American Subcontractors' Association, an amicus (friend of the court) party to the action. After briefing and oral arguments, the Ohio Supreme Court agreed with Wanner and reinstated the Industrial Commission's decision. The Court first noted that, because a VSSR is a penalty, the safety requirements must be strictly construed in favor of the employer. The Court noted that the term "overhead protection" is not defined in the Administrative Code. The Court then found that the safety measures Wanner implemented were sufficient to satisfy its obligation to provide overhead protection. The Court found that Wanner satisfied that obligation when it:

1. provided Mahoney with a hard hat;
2. directed Smoot to erect a vertical plywood barrier at the end of the upper scaffold adjacent to the near side of the lower scaffold;
3. created a "safe zone" mandating that, when Smoot employees were working on the adjacent side of the upper scaffold, there was to be no work done on the near side of the lower scaffold; and
4. it ensured that the upper scaffold had toe boards.

Mahoney urged the Court to find a violation because there was no protection directly overhead of the workers. The Court rejected that interpretation and found that the overhead protection rule affords discretion to the employer to determine the means by which to protect its employees. Finally, the Court rejected Wanner's argument that, because Wanner is not a party to the underlying workers' compensation claim with the ability to contest it, Wanner's due process rights were violated.

This is a significant victory for employers in the construction industry. Had the Supreme Court not reversed the Court of Appeals, employers virtually would have struggled with uncertainty and been compelled to drastically modify scaffolding to include roofing, canopies and/or nets, at tremendous cost. The Supreme Court resisted the apparent attempt by the Franklin County Court of Appeals to "legislate from the bench" and create safety requirements that simply are not contained in the Administrative Code.

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Court Holds Notice of Commencement Must Be in Substantial Compliance

What should a subcontractor or material supplier do when the notice of commencement is deficient and contains incorrect information? According to one appellate court, the subcontractor must still follow all the statutory requirements and file a notice of furnishing in order to preserve lien rights.

In Linworth Lumber Co. v. Z.L.H. Ltd. et al, the notice of commencement contained incorrect information for several of the mandatory requirements. The subcontractor asserted that a faulty notice of commencement excused the requirement for filing a notice of furnishing. The court of appeals disagreed. The court reviewed the mechanics' lien statute and found the notice of commencement requirements outlined in O.R.C. 1311.04 are ambiguous. One section (1311.04(A)) requires the notice of commencement to be "substantially the form specified" in contrast to the strict compliance language of the very next section (1311.04(B)) which mandates that the notice of commencement "shall contain" the twelve statutory requirements.

The court concluded that a notice of commencement must only be in substantial (not strict) compliance. In evaluating the inconsistency in the statute, the court indicated that "the overriding purpose ... is to put subcontractors or materialmen on notice of who the owner is and where the construction work is to be done." According to the court, because changes to the notice of commencement do not effect the effective date of the notice of commencement then incorrect information must not invalidate it either. Therefore, the court found the notice of commencement "fulfilled the necessary requirements for recording and put subcontractors or materialmen on notice the information pertaining to the real property which was necessary for the preparation of the notice of furnishing."

This case gives owners who make certain mistakes in the notice of commencement a break. A subcontractor facing this situation should still file a notice of furnishing because section 1311.04(C) gives lien claimants the opportunity to correct a lien containing wrong information obtained from a faulty notice of commencement and maintain a damage claim against the owner.

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Ohio Supreme Court to Interpret Prompt Pay Act

Recently, the Ohio Supreme Court heard arguments on a case that will determine the future effectiveness of Ohio's Prompt Pay Act. The Prompt Pay Act assists subcontractors and material suppliers in receiving timely payment for labor, materials, and equipment supplied to a project and includes attorney fees and 18% interest that can be assessed against contractors failing to pay within 10 days of receipt of money from an owner.

The Ohio Supreme Court is considering the case of Masiongale Electrical-Mechanical, Inc. v. Construction One, Inc. from the Franklin County Court of Appeals. In Masiongale, the Supreme Court will evaluate the following statutory provision: "The contractor may reduce the amount paid by any retainage provision contained in the contract, invoice, or purchase order … and may withhold amounts that may be necessary to resolve disputed liens or claims involving the work or labor performed or material furnished by the subcontractor."

The issue is what is a "disputed lien or claim." Subcontractors seek a narrow definition that "disputed lien or claim" means a mechanic's lien on a private commercial project or a claim against the public funds on a public project. This provision allows a contractor to withhold a subcontractor's pay until the subcontractor addresses the outstanding lien or claim from a lower-tier subcontractor or material supplier. Contractors seek a much broader definition of this language to include back charges, delay claims, or claims for defective work. The effectiveness of the Prompt Pay Act may depend on how the Courts define this term.

In Masiongale, the contractor asserted that the Prompt Pay Act allows him to withhold from the subcontractor's pay the necessary funds to resolve other disputes including the cost of bonding off a mechanic's lien and the potential cost of defending the lawsuit out of state.

In evaluating the definition of liens and claims, the Court of Appeals concluded definitively as a matter of law, that the Prompt Pay Act does not allow a withholding for actual or potential litigation costs or for premiums paid to bond off mechanic's liens. The Court explained that a contractor can only withhold pay that "may be necessary to resolve disputed liens or claims involving the work or labor performed." The Court noted that the "intent of the Prompt Payment Act is exactly that—to encourage contractors to promptly pay their subcontractors." The Court added that in recognizing that "disputes do arise over such things as the quality of the work performed or materials used, … the legislature provided for the withholding of amounts related to such disputes." The Court concluded that "the proper interpretation of the statute is that a contractor may withhold amounts that are directly related to alleged faulty work, labor or materials[; however, a]ncillary costs that may arise as a result of such disputes, such as actual or potential litigation costs, cannot be withheld, as these costs are seldom definite and, more often than not (and certainly in the case of potential litigation costs), will greatly exceed the direct amounts disputed."

The Ohio Supreme Court will now decide how narrowly to define this "excuse" for lack of prompt payment.

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Firm News

In November, Mike Copley made a presentation to the American Subcontractors Association-Central Ohio Chapter on "Mold" and Don Gregory taught "Fundamentals of Construction Law" sponsored by the Construction Forum of the American Bar Association.

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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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