Top 5 Construction Law Developments of 2010

Kegler Brown Construction Newsletter

The construction community is only too eager to see 2010 come to a close, even though many fear that 2011 will be at least as difficult. 2010 will be remembered for great hardship in the construction industry. As a result, we saw much more aggressive lien and collection practices and greater bid challenges as work remained scarce.

Hopefully, 2011 will yield greater confidence and spending by the private sector that will breathe life into the construction industry. If not, the expected reduction in public construction spending may result in greater defaults and further erosion of profit margins.

As we cross into a new year, it may be worth revisiting the Top Five Construction Law developments of 2010.

5. ConsensusDOCS updated. Although first published in 2007, ConsensusDOCS (now a coalition of 29 endorsing associations) has continued to update its (90+) documents and issue new ones to reflect new trends in the industry. These new documents include those dealing with Building Information Modeling (“BIM”), Green Building and Integrated Project Delivery (“IPD”). Of particular interest to subcontractors are the new Sub-subcontract (725) and Purchase Order (703) forms.

4. Conti Overruled in Favor of Strict Article 8 Process. The Conti case has long stood for the fact that a State entity could not ignore a contractor’s claim without risk of having a court find that the contractor’s contractual requirement to participate in the “Article 8” dispute resolution process was waived as a “useless act.” Contractors have long relied on this case for the proposition that the State is in no position to independently evaluate a contractor’s claim when the same people who have a vested interest in denying the claim are also involved in the decision-making process. However, the Franklin County Court of Appeals decision in the matter of Cleveland Construction v. Kent State decided that the “Article 8” process must be strictly enforced and has expressly overruled Conti.

This case continued the trend of appellate courts in Ohio literally and strictly enforcing the provisions of the contract, regardless of the equities or practicalities involved.

3. Franklin County Prevailing Wage Bid Standards Struck Down. The Ohio Supreme Court found that the disgruntled bidder demonstrated by clear and convincing evidence that Franklin County abused its discretion by determining that it was not the “lowest and best” bid for the Huntington Ballpark contract due to alleged prevailing wage violations. The Court based its decision in part on the fact that neither the bid standards nor the project manual provided a definition of prevailing wage “violation.” Nor was there any definition of “violation” in the prevailing wage statutes. The Ohio Supreme Court concluded that the use of the term “violation” would simply refer to a situation where the State makes a formal finding that there was an intentional violation of the prevailing wage laws and all appeals had been exhausted. The Court went on to state that settlement agreements that resolved prevailing wage disputes do not constitute evidence of a “violation,” thereby weakening the County’s “Quality Contracting Standards.”

2. Project One Provides No Payment Bond Protection. For more than a century, subcontractors and suppliers providing labor and material to Ohio's public works have extended credit with the full assurance of lien and payment bond rights guaranteeing payment to those who protect their rights. Those rights are in jeopardy on the much publicized "Project One" at The Ohio State University, a $1 billion hospital project.

Ohio has traditionally done all its public work through multiple-prime contractors, such as the MEP trades. However, OSU (as one of three “test” projects) secured permission from the legislature to be exempt from the multiple-prime requirement, and is utilizing Turner as the “construction manager at risk” (with design assist responsibilities) on Project One. Many, including those in the surety industry, thought the legislation left the normal bonding requirement undisturbed. Yet OSU decided that Turner would not have to provide a payment bond and is arguing that the enabling legislation does not require one. While this issue will ultimately be settled by the Ohio Supreme Court, subcontractors and suppliers extending credit to the Project do not currently have payment bond protections, unlike other Ohio public works. This problem is compounded by the fact that Turner is requesting subcontracts be signed that waive lien rights upfront. This means that subcontractors who sign such “no lien” subcontracts may have no lien or bond rights on this sizeable project.

1. Contractors Must Only Terminate for Convenience in Good Faith. In a victory for subcontractors and construction firms that rely on their executed contracts as reliable indicators of future work, Maryland's highest court in the case of Questar Builders, Inc. v. CB Flooring, LLC unanimously ruled that private parties must act with good faith and in fair dealing when using a termination for convenience clause to end a contract.

In the case, the General Contractor executed a contract with a Subcontractor to install carpeting based on the Subcontractor’s bid price. One year into the Project, but before the carpeting work had started, the General Contractor terminated the Subcontractor after it had negotiated a better price with the second low bidder.

The General Contractor claimed that the Subcontract’s termination for convenience clause gave it an “absolute” right to terminate at any time for any or no reason. In response, Subcontractor and the American Subcontractors Association – ASA filed an amicus (friend of the court) brief in this case – argued that the implied duty of good faith and fair dealing applies to all contract clauses, including private contract termination for convenience clauses, and that to hold otherwise would render such contracts illusory and have a host of negative public policy ramifications.

The High Court found for ASA and the Subcontractor ruling that the General Contractor went “too far” when it argued that it could terminate “for any or no reason” because such interpretation would render the Subcontract illusory. The High Court then held that “a party with discretion is limited to exercising that discretion in good faith and in accordance with fair dealing.” The High Court added that contracting parties “give up their opportunity to shop around for a better price” once they execute a binding contract for a specified duration.