September 2004 |
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In This Issue
Contractors Performing Work Without Signed Change Orders at Risk
In 1997, the Ohio Supreme Court in the Foster Wheeler case stated that if a contractor performed extra work without a written change order, he could not recover for that extra work, unless the change order provisions were waived by the owner or employer. The Court ignored the fact that the engineer consultant observed and acquiesced in the extra work and denied recovery, setting an extremely dangerous precedent for Ohio contractors and subcontractors. Relying heavily upon the Foster Wheeler decision, the Seventh District Court of Appeals, has defeated the claim of another contractor seeking payment for additional quantities of work indisputably provided to the project. The Court, in Seneca Valley, Inc. v. Village of Caldwell (2004) 156 Ohio App. 3d, dealt with a situation where the specified quantity of asphalt restoration in the contract (10 square yards) was only enough to resurface one driveway and yet the contractor ultimately restored about 1422 square yards. This discrepancy came up pre-bid, and the engineer told the contractor that the contract would be taken care of via unit prices and he should not be concerned. The contractor provided the additional work in plain view of the village's "observer" who noted the quantities daily. The contractor billed for the extra work on a unit price basis and was ultimately denied recovery because he didn't have a signed written change order. The Court found that the contract was a fixed (not unit) price contract, that it required change orders in writing, and that this clause was not waived either by the engineer's pre-bid "clarification" or the daily notation of quantities by the village's observer. Contractors are strongly advised to refuse to perform any additional work unless directed to do so in writing. If an owner complains about this refusal "holding up the job" the contractor should point out that it is the owner's contract language that created the dilemma and still refuse to proceed unless he receives a statement in writing that the written change order clause is being waived. Cases like this demonstrate the days when "a handshake was one's bond" are long past in the commercial construction industry in Ohio, and illustrate the perils that await those who do not document extras in writing before performing the work. Lamenting Over Liens on Lessees?By E. Rod Davisson Most in the construction industry are unfortunately too familiar with Ohio's complicated lien process. Once you have mastered the perennial buzzwords like "Notice of Commencement" and "Notice of Furnishing" the framework for filing and perfecting liens becomes exceedingly simple, right? Well, as ESPN's Lee Corso will soon be cautioning Kirk Herbstreit on College Gameday…Not so fast my friend. Often, the hustle of the construction season causes companies to enter contracts only to find later, after not getting paid, that they were performing work for a tenant (lessee) or subcontracting from a tenant's contractor. Ohio Revised Code §1311.10(A) specifically sets forth that tenants are not automatically considered agents of the landowners. The effect of this statute on contracts with tenants is that the land owner is not considered to be a party to your contract with the tenant. Does that mean that you cannot file a lien based on work done for a tenant? No, fortunately, you can still file your lien against a tenant. Ohio Revised Code §1311.02 provides that:
The problem for companies contracting with tenants is highlighted in the last line of §1311.02 where the law describes the lien as against all "interests that the…tenant may have or subsequently acquire in the land or leasehold…" This means that if you do work for a tenant, a resultant mechanic's lien attaches only to the interest of the person for whom the improvement is contracted to be made; or restated, your lien attaches to the tenant's interest in the property and not to the property itself. With that in mind, your lien must state that you are filing against the tenant's interest in the property because you have no lien right against the owner's interest. (footnote 1)
Obviously, there is not much money to be recovered by foreclosing and selling leasehold interests at a Sheriff's sale; however, if you are left with a lien against a tenant, all is not lost. For example, typically a tenant is required under their lease to keep the property free from liens. A lien being filed against a tenant often results in the property owner threatening to evict the tenant if the lien is not resolved. Additionally, the fact that a mechanic's lien as a statutorily created remedy will not, by virtue of the statute creating it, attach to certain interests or bind certain parties, does not preclude the resort to other legal or equitable remedies against such interests or parties. Kazimer v. Thom (1978), 63 Ohio App.2d 29. One of the more popular of those "other legal or equitable remedies" is Quantum Meruit; Latin for "as much as deserved". Under this principle of equity, you make a claim that the owner has received the benefit of your work without having to pay for it. The difficulty in such a claim is twofold in that 1) the owner may have paid someone above you in the project for the value of your work; and 2) depending on the valuation method employed by the court, your work may have added significantly less value to the property than you incurred in costs. Considering that liens against tenants are potentially worthless and alternative theories of recovery can prove challenging, a proactive approach to the projects may save you some headaches down the road. Know for whom you are working. Are you contracting with a tenant, a vendee, an owner, or a sub of a tenant? If you find yourself contracting with a tenant, then make sure the land owner is aware of the improvements. One sure way to involve the landowner is to make them a party to the contract. However, it is not likely that owners will rush to sign on to a contract for improvements made by their tenants. The practical approach is for you to closely scrutinize the tenant's ability to pay your bills. When considering doing work for a tenant, the best posture is to assume that you will not be able to secure the value of your work with a mechanic's lien. With that thought in mind, a more rigorous review of the customer's ability to pay combined with a healthy dose of skepticism on your part may help to avoid issues on projects of this type. It is unfortunate that contractors are often forced to employ liens to collect for work, but the dismissal of an improper lien, or liens attached to worthless leaseholds could be a real tragedy for your business. Plan ahead to ensure that your liens are valid and attached to the property whenever possible. 1 Since [Contractor] contracted with the tenant, any mechanics' lien could attach only to the tenant's interest in the realty and not to the lessor's interest. Romito Bros. v. Frank A. Flannery, Inc. (1974), 40 Ohio St.2d 79; Mahoning Park Co. v. Warren Home Dev. Co. (1924), 109 Ohio St. 358; Vanosdell Mechanical, Inc. v. The Marion Plaza, Inc. (May 23, 1988), Clark App. No. 2373, unreported. Subcontractors at Peril for Claims Asserted by Third Parties
For more than a decade, those working in Ohio's construction industry have relied upon the Floorcraft case for assurance that only the party they had contracted with could sue them for "economic loss," such as alleged construction defects. This means that subcontractors could not sue architects for bad plans anymore than an owner could sue the subcontractor directly for construction defects. In these instances, "privity of contract" was typically required. However, a recent case out of the Franklin County Court of Appeals threatens to change this landscape and allow claims to fly from all different directions. The Court in the Corporex case allowed an owner to sue a subcontractor directly for alleged delay and defects, even though the general contractor was unable to assert such claims. The good news is the Ohio Supreme Court, at the urging of an amicus (friend of the court) brief filed by our office on behalf of the Subcontractors Legal Defense Fund of the American Subcontractors Association (ASA), took the unusual step of accepting the case for review. The hope is the Ohio Supreme Court will realize that if the Corporex case is not reversed, Ohio's entire construction industry will suffer, and litigation will explode, as any party in the construction "food chain" who feels aggrieved may sue anyone else, including those with whom they have no contractual relationship. Our firm will be filing an amicus brief (on behalf of ASA) on the merits urging the decision be reversed and certainty returned to the construction process. Get the Latest News Impacting the Construction Industry Even FasterSign-up to receive Kegler Brown's Construction Law Newsletter via e-mail
Did you know that all Kegler Brown publications, including the Construction Law newsletter are available via e-mail? You can continue to receive this timely information, and reduce the amount of time it takes to receive the latest updates on new cases and trends by changing your subscription format. Simply visit www.keglerbrown.com/publications and complete the publications subscription form to start receiving electronic editions of Kegler Brown newsletters. Subscribers typically receive electronic editions several days faster than print editions. So, sign up for Kegler Brown e-mail newsletters and get news you can use as soon as it breaks. Please contact Shannon Morgan at (614) 462-5423 for questions regarding your subscription or electronic newsletters. Experienced Former Contractor Joins Construction AreaKegler Brown is pleased to announce the addition of E. Rod Davisson. Hired as an associate with the firm, Davisson's practice will focus on construction law and litigation. He will work closely with Don Gregory, representing various clients in the construction industry.  Davisson Davisson brings a wealth of construction experience to Kegler Brown, having worked in the industry for more than a decade as a subcontractor before attending law school. Prior to joining Kegler Brown, Davisson was elected mayor of the rapidly expanding Obetz, a village of approximately 5,000 residents south of Columbus. He has held the position since 2003. Davisson earned his law degree from Capital University Law School in 2001. While in law school, Davisson was named to dean's list and to the Order of the Curia. He also holds an undergraduate degree from Franklin University, where he studied business administration. Davisson also served in the United State Naval Reserve from 1989-1997. In 1991, he was recalled to active duty in support of Operation Desert Storm and assigned to the naval hospital at Patuxent River, where his unit was awarded the Naval Meritorious Unit Commendation. Davisson was also awarded a Naval Achievement Medal, National Offense Medal and Navy Reserve Meritorious Service Award during his tenure in the Navy. Active in several community and professional organizations, Davisson serves as counsel to the Capital City Gymnastics Booster Club and to the Hamilton Township Athletic Association. He is also a member of the American Bar Association's litigation committee and the Columbus Bar Association's construction committee. In addition, Davisson is a member of the National Fire Protection Association and MENSA. CreditsKegler, 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. © 1989-2008, Kegler, Brown, Hill & Ritter Co., L.P.A.
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