“Fairness in Construction Contracting” Act Becomes Law

Kegler Brown Construction Newsletter

Governor Voinovich signed the Fairness in Construction Contracting Act (Am. Sub. S.B. 71), on July 1, 1998. This means the law will become effective on September 30, 1998.

This legislation should be of great interest to the construction industry and represents the most dramatic changes to Ohio Construction Law since the Prompt Payment Act and the Mechanic's Lien Law changes almost a decade ago.

This Act, sponsored by Ohio's construction industry, is designed to remedy certain inequities in construction contracting created by adverse court decisions or unfair practices within the industry, and contains the following elements:

1. Prohibits as against public policy:

a. Waiving bond rights by contract without payment

At least one unreported Court of Appeals decision has found that mechanic's lien rights may be waived by contract in advance, even if payment is not received for the work. This has caused some contractors to insert language in their subcontracts waiving bond rights as well. While one recent Common Pleas Court has decided that such a waiver of bond rights by contract was void and unenforceable as against public policy on a public project, the Ohio law in this area remained uncertain. The legislature has now decided that such a waiver without payment is contrary to public policy and unenforceable.

b. Waiving pending claims by final payment

Many owners and contractors have begun inserting clauses in their contract documents which state that all pending claims are waived through the receipt of final payment. This has caused many claimants to inadvertently lose their rights through accepting the undisputed final payment on a project, or in the alternative,sophisticated claimants have reserved their rights by only requesting part of the payment indisputably owed at the end of the job. The legislature has addressed the unfairness of such a practice by stating that these contract provisions will not be enforced when the owner or contractor has notice of the claim prior to final payment.

c. "No damage for delay" clauses (when the delay is caused by the owner's or contractor's actions or inactions)

This provision attempts to codify existing Ohio case law which provides that "no damage for delay" provisions are generally unenforceable when the delay is caused by the owner's active interference or was unforeseeable at the time that the contract was entered into. It recognizes that a time extension, without additional compensation, is often inadequate to make a contractor or subcontractor whole when the cause of the delay is caused by the owner or contractor.

2. Allows subcontractors and suppliers to file mechanic's lien and bond claims within the deadlines provided by law, despite the existence of contingent payment clauses. This will prevent "pay-if-paid" clauses from interfering with the filing of lien and bond claims which are necessary to secure payment.

Lien claimants who have signed "pay if paid" or other contingent payment clauses are placed in the "Catch 22" situation of having to certify that money is "due and owing" on their mechanic's lien or bond claims when these monies are not technically due until such time as the owner pays the contractor. In the interim, the lien claimant may be losing the security of his lien and bond rights due to the passage of time. This provision will still allow lien claimants to perfect their lien or bond rights, even if the money is not technically due yet.

3. Requires subcontractors and suppliers to provide a Notice of Furnishing to preserve bond rights (as is the current law for mechanic's lien rights) when the contract is for $30,000 or more. This will prevent "hidden bond claims" and make bond claims consistent with mechanic's lien claims. (No additional paperwork is required for Subtrades complying with the current law.)

Many contractors complain of "hidden bond claims" from suppliers who have failed to serve a notice of furnishing on the project, but nevertheless were able to recover against the payment bond. The law has been revised now to prevent hidden bond claims of a significant amount when the remote tier subcontractor or supplier fails to properly serve a notice of furnishing on the project. If a notice of furnishing is provided, it will preserve both lien and bond rights.

This legislation is designed to help prevent subcontractors and contractors from inadvertently giving up important legal rights by virtue of one-sided contract language hidden in the fine print of lengthy and generally non-negotiable construction contracts.

The Act should cause a more equitable sharing of risk in the construction process by encouraging the party most able to manage or control that risk to remain responsible for it.