Construction Law Blog
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Release from Condominium Owners Association Precludes Claims by General Contractor Against Subcontractor, Except for Defense Costs
Recently, the Washington State Court of Appeals addressed a dispute between a general contractor and its windows subcontractor in connection with the construction of the Admiral Way Mixed-Use Project in West Seattle.
In Bordak Bros., Inc. v. Pac. Coast Stucco, LLC, the developer of the Admiral Way Mixed-Use Project hired Ledcor Industries (USA), Inc. (“Ledcor”) as its general contractor, and Ledcor hired Starline Windows, Inc. (“Starline”) to supply window products for the Project. After the Project was completed, the Condominium Owners Association (“COA”) discovered defects in the building and sued the developer, who then brought suit against Ledcor. Ledcor then commenced suit against its subcontractors and suppliers. Ledcor did not initially name Starline as a defendant to its claims.
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.
There are many state and local tax implications on Washington State construction projects. Two areas of particular importance for construction contractors are sales taxes due on work performed, and business and occupation taxes (“B&O”) due on a contractor’s gross receipts. While the two types of taxes seem simple in theory, they can get complicated in practice.
Litigating and arbitrating construction cases is extremely expensive. By the time the procedural rules are complied with and the discovery process is done, even the smallest of construction cases with the most cost-conscious legal counsel will run $300,000. Larger construction cases are vastly more costly. For example, the 2012 King County Bright Water Tunneling dispute (VPFK v. King County) cost taxpayers over $10 million in attorneys’ fees alone. For more information, read our blog article, King County Scores a $155.8 Million Victory Against Contractor on Brightwater Tunneling Project.
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.
Washington Supreme Court Overturns 30-Year Law Protecting General Contractors From Trust Fund Liens on Public Works Projects
Under Washington’s Public Works Statutes (RCW 39.08 and 60.28), general contractors who perform public works are legally required to post payment bonds and have retainage withheld from progress payments. The purpose of these laws is to protect the public entity (owner) from subcontractor and supplier claims against the public project, while preserving the interests of mechanic’s lien rights (subcontractors and suppliers are provided bond claim and retainage rights, but have no lien rights in the public property).
On January 23, 2014, the Oregon Court of Appeals held that a general contractor’s offer to modify a subcontract upon acceptance by subcontractor was an insufficient form of tender to cut off the general contractor’s obligation to pay prejudgment interest.
Critics of arbitration often cite the absence of any avenue for a participant to appeal what it believes to be an unfair award. Proponents see this as an advantage; by deciding disputes finally and conclusively, an arbitration panel circumvents the opportunity for endless appeals. A recent Ninth Circuit Court of Appeals decision illustrates what occurs when participants seek to make an arbitration award binding and non-appealable in a settlement agreement.
Owners frequently require contractors, subcontractors, and suppliers to submit lien waivers to ensure that all labor, materials, subcontractors, and equipment are paid for on their projects and unexpected mechanic's liens do not pop up after payments are made.
Insurer Defending Under Reservation Of Rights May Not Subsequently Recover Defense Costs From Insured
Insurers who are uncertain of their defense and indemnity obligations to policyholders will often undertake defense of the insured under a reservation of rights while the issue of coverage is determined in a separate court proceeding. However, if the court determining coverage ultimately decides that the insurer had no duty to defend, can the insurer recover the defense costs it incurred from its insured? According to a recently decided opinion by the Washington Supreme Court, the answer is no.[i]
The coverage dispute arose as a result of 23 lawsuits filed against Immunex for allegedly reporting inflated wholesale prices of its drugs which allowed providers to receive larger reimbursements from Medicare and other third-party payors than the providers actually paid for the drugs. Immunex had first informed its insurer, National Surety of the investigations in 2001, but delayed first tendering defense of any litigation until October 2006. Immunex alleged that coverage existed under an umbrella policy provision covering injury "arising out" of "discrimination," and requested reimbursement of defense costs and settlement expenditures. National Surety responded in March 2008 that it believed there was no coverage for the drug pricing claims but agreed to defend Immunex while it completed its investigation. National Surety agreed to reimburse Immunex for defense costs back to the 2006 date of tender but reserved its rights to recoup those costs if a court later determined there was no duty to defend.
Shortly thereafter, National Surety filed a declaratory judgment action to determine the coverage issue while Immunex continued to be represented by independent counsel in the drug pricing litigation. In April 2009, the trial court ultimately determined that National Surety had no duty to defend Immunex because the complaints did not allege claims arising out of "discrimination." However, the trial court ruled that National Surety was still responsible for Immunex's defense costs from the 2006 date of tender up to the date of the coverage ruling. National Surety unsuccessfully appealed the ruling on defense costs to the Court of Appeals and ultimately the Washington Supreme Court agreed to hear the insurer's appeal.
The Washington Supreme Court, in deciding this issue for the first time, ultimately sided with the policyholder and upheld the two lower court decisions rejecting the insurer's right to seek recoupment of defense costs incurred during the reservation of rights period. The Court reasoned that even though National Surety was ultimately found to have no duty to defend, it obtained benefits from defending Immunex under a reservation of rights in the form of insulation against potential claims by the insured for breach and bad faith, and the damages which can result, including "coverage by estoppel." If the insurer's position were accepted, the insurer could retain the protective benefits of defending under a reservation of rights, without bearing any of the costs of accepting the insured's defense in the interim. The Court's ruling did leave open the possibility that National Surety could avoid some portion of defense cost reimbursement to Immunex if it could prove it was "actually and substantially" prejudiced by Immunex's late tender of defense.
This case demonstrates the benefit of tendering defense to one's insurer even where coverage may be a long shot. Even though the court ultimately determined that the claims against Immunex were not covered and that National Surety did not owe a defense, Immunex will undoubtedly obtain a significant monetary benefit merely from having tendered defense to its insurer.
[i] National Surety Corp. v. Immunex Corp., 2013 WL 865459, __ P.3d __ (2013).