Construction Law Blog
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The implied duty of good faith and fair dealing is implied in every contract, including construction contracts. Generally speaking, this implied duty requires parties cooperate with one another so that they each obtain the full benefit of their contracted bargain. Recently, the Court of Appeals (Division II) in Nova Contracting, Inc. v. City of Olympia discussed this duty’s application to a public works contract.
In early 2014, the City of Olympia published an invitation for bids to replace a culvert that conveyed a creek underneath a paved bike trail. Nova Contracting was awarded the Project. The specifications required that Nova submit a number of submittals, the approval of which was required before Nova could commence work. The contract also provided that the City’s decision with respect to these submittals would be final and that Nova would bear all risk and costs of delays caused by non-approval of any submittals.
For several years, the requirements for which parties must be named in a lien foreclosure action when a release of lien bond is in place have been cloudy. RCW 60.04 et seq., the “mechanics’ lien” or “construction lien” statute, provides protection for a party or person who provides labor, materials, or equipment to a construction project. That person or party, if not paid, can file a lien against the construction project property to secure recovery. As the lien impacts the property by “clouding title” and could potentially result in foreclosure of the property, the statute sets forth strict requirements with respect to timing, notice, and parties. For example, the lien must be recorded within 90 days of the person or party’s last day of work or materials or equipment supplied, and the lien claimant must then give a copy of the claim of lien to the owner or reputed owner within 14 days of the lien recording. RCW 60.04.081.
Recent Court of Appeals Decision Finds in Favor of Contractor With Respect to Mechanic’s Lien’s Priority Over Lender’s Deed of Trust Based on Six-Hour Time Difference and Unsigned 18% Interest Provision—Part I: Lien Priority
Recently, Division II of the Washington Court of Appeals addressed two issues of first impression: (1) whether a voluntary release of an earlier lien precludes filing of a second lien, and (2) whether an interest provision requires that the contract be signed. On appeal, the Court held that the contractor’s earlier release did not preclude the contractor from filing a second lien, which still retained priority over the lender’s Deed of Trust based on work completed by the contractor just six hours prior to the lender recording the Deed of Trust. The Court also held that the contractor was entitled to interest based on course of conduct despite the fact the interest provision was unsigned. As the Court acknowledged, the case has a long and complicated history. Thus, Part I of this blog article will address the lien release and priority issues. Part II will address the interest issue.
Subcontractor Default Insurance ("SDI") continues to capture market popularity since its invention by the Zurich Insurance Company under the name SubGuard. SDI is an alternative to traditional surety bonding that provides the general contractor ("GC") protection from subcontractor default through a two-party contract (the GC and the insurer).
Our readers are likely acquainted with business’ “Golden Rule”: “The party who holds the ‘gold’ (money) makes the rules.” When parties to a contract know that their dispute is headed to litigation or arbitration, an “upstream” party is often tempted to use whatever leverage it has, including withholding of funds, to force resolution of the claim. For example, holding funds otherwise due to a subcontractor when a claim arises, the general contractor may believe it can leverage the subcontractor into a more expeditious settlement position by “starving” the subcontractor of funds otherwise due and owing. This type of heavy-handed dealing does not generally sit well with arbitrators, judges, or juries, and can result in large damage awards, or “homeruns” against the party exercising this undue leverage. An example of the Golden Rule backfiring occurred in the East West Bank v. Rio School District. 235 Cal. App. 4th 742, 185 Cal. Rptr. 3d 676 (2015).
When analyzing liens related to tenant improvements performed pursuant to a contract between a tenant and contractor, we are frequently asked whether the lien attaches just to the tenant’s leasehold interest (i.e., the value of the lease) or whether the lien can also attach to the landlord’s fee interest in the real estate where the leased premises are located. Landlords want protection from liens, whereas contractors want lien rights against both the leasehold interest and the landlord’s fee interest in the property because liening the fee interest will likely place additional pressure on the tenant to resolve the lien and because the fee interest typically provides greater security. Washington’s lien statute and several cases provide guidance.
Historically, the common law doctrine of sovereign immunity prevented liens against public property, and federal statutes allowed only those in privity of contract with the federal government to sue to enforce contractual rights. To address this concern, Congress enacted the Heard Act in 1894. In 1935, Congress repealed the Heard Act and enacted the Miller Act in its place. The Miller Act requires that all general contractors post payment bonds on contracts in excess of $25,000.00. If the contracting officer determines that a payment bond in the full amount of the contract is impractical, he or she may set a different amount for the payment bond. Bonds of half the contract amount are common on federal jobs.
The Bankruptcy Code is Federal law. Bankruptcy courts are part of the federal (not state) judiciary system. Lien and bond claim law, however, can involve federal or state law. Federal bankruptcy intersects state lien and bond law when a participant in a construction project goes broke. As with anything else, there are winners and losers when someone on a construction project goes bankrupt. The goal is to take the available action to protect yourself. The winners are the ones who get out of the project before the bankruptcy occurs, obtain a security interest for their claims, or swiftly assert their available rights once the bankruptcy petition is filed. The losers are generally the ones who become unsecured creditors in the bankruptcy estate. Unsecured creditors share in whatever meager assets remain in the bankruptcy estate after secured creditors and administrative fees are paid.
One of the most common and avoidable mistakes made by construction contractors and subcontractors involves the execution of overly broad "partial" lien release documents in order to receive progress payments. Typically, the partial release document provides that the party receiving payment releases all claims of any type arising out of work performed through the end of the monthly payment period. While, at first blush, this may seem to be a reasonable and innocuous request in order to receive payment for work performed during that month, this type of release also has the unintended effect (from the contractor's perspective) of releasing the contractor's claims for work performed prior to the end of the month, but for which no payment has been received, such as pending change orders or unpaid retainage.
Across the country, Public-Private Partnerships ("P3s" - which you can read more about here) are gaining traction as an alternative means of financing and completing public projects. Although Washington has been slow to implement P3s in its own public ventures, it is important to think about the effect this emerging procurement model might have on other, seemingly "settled" areas of the law.