In This Issue

• Top Ten Commandments of Ohio Construction Law
• Ohio's Reform Effort (House Bill 208) Passes Committee
• Are Price Escalation Clauses Needed?
• Between a Rock and a Hard Place: Forum Selection Clauses v. State Statutes Prohibiting Such Clauses

Top Ten Commandments of Ohio Construction Law

Donald W. Gregory
Construction
Law chair

There are ten key "commandments" in Ohio that govern construction law. Remember these and you will hopefully avoid any biblical disasters.

1. Thou shall pay promptly.
   ORC §4113.61: Ohio requires contractors to pay their subs within 10 calendar days after receipt of the payment from the owner for that work or face 18% interest per annum and attorney's fees.

2. Thou shall not hide behind "no damage for delay."
   ORC §4113.62(C)(1) and (2): Ohio finds "no damage for delay" clauses unenforceable when the cause of the delay is the owner's "actions or inactions."

3. Thou shall not hide behind final payment.
   ORC §4113.62(B): Ohio does not recognize final payment as a defense when there is prior written notice of a claim before final payment is received.

4. Thou shall be responsible for one's own negligence, in whole or in part.
   ORC §2305.31: Ohio's anti-indemnity statute makes unenforceable any indemnity provision in a construction contract that attempts to make one responsible for another's negligence for personal injury or property damage.

5. Thou shall be permitted to "pay if paid" (but liens still may be filed).
   ORC §4113.62(E): Unambiguous "pay if paid" clauses are enforceable, but do not bar the timely filing of mechanic's liens.

6. Thou shall go forth to arbitration.
   ORC §2711.01: Ohio's public policy favors arbitration and compels arbitration when there is a written agreement to arbitrate.

7. … and an order that denies a stay is a final appealable order.
   ORC §2711.02: As Ohio wants to encourage arbitration, only an order that denies a stay (pending arbitration) is appealable; an order compelling arbitration is not appealable.

8. Thou shall sue in Ohio (on Ohio projects).
   O.R.C. §4113.62(D)(2): Disputes concerning Ohio construction projects are only supposed to be litigated in Ohio courts.

9. Thou shall apply Ohio law.
   O.R.C. §4113.62(D)(1): Ohio law is to apply to Ohio construction projects regardless of the choice of law provision in the contract.

10. Thou shall not waive bond rights.
    O.R.C. §4113.62(A): In Ohio, one cannot waive bond rights "up front" in a contract.

In short, Ohio has much law restricting "freedom of contract" in the construction industry in an effort to avoid inequitable contracting practices.

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Ohio's Reform Effort (House Bill 208) Passes Committee

In a seven to one vote on December 9, 2003, the House Commerce and Labor Committee approved the Retainage Reform Bill (Sub. H.B. 208), that follows the lead of the Federal Government and the Ohio Department of Transportation, who have eliminated retainage. While the Bill does not eliminate retainage in its entirety, it radically reforms retainage practices in the State of Ohio on both public and private commercial work in the following respects:

1. Retainage would be capped at a maximum of 2%;

2. There would be line item release of retainage by trade when that trade's work is fully complete;

3. Owners would have to pay their bills within twenty days of approval of the draw request, granting of a certificate of occupancy, or expiration of a trade's lien rights, whichever occurs first, or would be liable for 18% interest and attorney's fees;

4. There could be no improper or excessive "hold backs" in the form of retainage or otherwise, such as excessive amounts withheld for operating manuals, warranties and the like; and

5. Interest would be paid on retainage at all levels of the "construction food chain."

Supporters of the bill believe that it will speed up payment and reduce the impact of using contractors and subcontractors as "the bank," while at the same time not sacrificing quality or timeliness of work. Don Gregory and Dan Hilson were actively involved in the drafting and passage of the bill out of Committee on behalf of Ohio's subcontractors. The bill is currently awaiting a possible vote by the entire House of Representatives. Anyone with opinions on the merits of this Retainage Reform Bill (H.B. 208) should contact their State Representative or Senator to communicate their thoughts on the bill as currently drafted.

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Are Price Escalation Clauses Needed?

Dramatic recent construction material escalation costs, particularly in steel, have created hardship for many in the industry and caused some contractors, subcontractors and suppliers to consider placing a condition in their bid proposal or contract protecting the bidder from these costs, such as:

"In the event of significant delay or price increase of material, equipment, or energy occurring during the performance of the contract through no fault of the contractor, the contract sum, time of completion, or contract requirements shall be equitably adjusted by change order in accordance with the procedures of the contract documents. A change in price of an item of material, equipment, or energy will be considered significant when the price of an item increases ____ percent between the date of this contract and the date of installation."

While such a clause could be readily utilized on negotiated private work, there is considerable doubt that such an escalation clause could be used on public work where a bid must be responsive to the bid solicitation. It remains uncertain whether a differing condition or equitable adjustment clause could be utilized on public work to support an unexpected material cost increase.

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Between a Rock and a Hard Place

Forum Selection Clauses v. State Statutes Prohibiting Such Clauses

Many states (including Ohio) have recently enacted statutes that require construction-related litigation be conducted in the state where the project is located. Many construction contracts contain forum selection clauses requiring that the drafter's state law apply and that litigation must be commenced in a state far from the construction project. Both forum selection clauses and the number of states passing statutes restricting the use of forum selection clauses in construction cases (and mandating litigation where the project is located) are on the rise. Complicated legal issues can be involved when the two are juxtaposed.

The general issue was addressed by the landmark U.S. Supreme Court case of The Bremen et al. v. Zapata Off-Shore Co., 407 U.S. 1 (1972), where the Court explained that if the forum selection clause violates public policy, then the forum selection clause must give way. However, in cases interpreting the Miller Act, which mandates that federal public projects be brought in the judicial district where the contract was performed "and not elsewhere," courts have upheld the forum selection clauses in the contract and not the Miller Act's jurisdictional provisions.

Accordingly, the key issue is whether the state and federal courts will enforce the state statutes or defer to the contract. Two recent cases have dealt with this issue. In Florida, in Kerr Construction, Inc. v. Peters Contracting, Inc., 767 So.2d 610 (Fla. 5th DCA 2000), the court invalidated a venue selection clause in a case that involved a Florida construction project with a venue selection provision requiring litigation in another state. The Florida court invalidated the contract provision based upon Florida's construction jurisdictional statute. In McCloud Construction, Inc. v. Home Depot U.S.A., Inc., 149 F.Supp.2d 695 (E.D. Wis. 2001), the federal court threw out a forum selection clause requiring litigation in Georgia based upon Wisconsin's public policy prohibiting forum selection clauses requiring litigation in another state. Nevertheless, there is some risk that when an owner or contractor files first in the state where the contract says the dispute should be heard that the Court will find the "home rule statute" inapplicable.

Therefore, contractors and subcontractors should not presume that contract language (mandating that another state's law or courts apply) is unenforceable and should instead strike such language and require application of the courts and law where the project is located.

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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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