Construction Law Blog

Our Blog is replete with posts on the written claim notice issue [Written Notice Requirements Part I, Part II, and Part III, American Safety v. City of Olympia]  and, members of the firm have written extensively on the notice issue in Washington [Mike M. Johnson v. Spokane County - Contract Notice and Claim Clauses are Strictly Enforceable, Construction Contract Draconian Notice Provisions, Part I and Part II].  Here are two federal cases, which demonstrate the various ways the notice issue is handled in federal contracts.  Generally, federal contracts require an element of prejudice before the courts will impose a forfeiture on a contractor's claim as outlined in Redondo Construction Corp. below.

1.  Fluor Intercontinental, Inc. v. Dept. of State, CBCA 670, et al., 07-2 BCA ¶ 33691, 2007 WL 3055018 (October 4, 2007).

This case involves an acceleration claim by the general contractor in a dispute arising from construction of the United States Embassy complex in Astana, the capital of Kazakhstan. 

Fluor Intercontinental (Fluor) was awarded the contract for $63 million in September 2003 to build the U.S. embassy complex in the capital of Kazakhstan.  The contract required that the contract be completed by March 5, 2006, and imposed liquidated damages of $18,000/day for every day the project was late. 

The contract also contained a very exacting notice provision.  The general contractor was required to give the contracting officer written notice of any potential issues that could cause a delay in the project.  Specifically, Fluor was required to submit "impact analysis" within 15 days of suffering a delay, if it failed to submit such an analysis within the specified time, it was deemed to have waived any rights to additional time and compensation.

Fluor mobilized to the project in February 2004, but the area lacked critical infrastructure such as electricity, water, and roads.  The government continued to remind Fluor that irrespective of the local conditions, Fluor was obligated to deliver the project by May 5, 2006 or suffer liquidated damages.  Fluor was allegedly told by the government that no schedule extensions would be granted even if warranted.  Although during the course of the project, there was some correspondence and meeting exchanges concerning delays to Fluor's work, Fluor did not provide the time impact analysis as required by the contract.  After Fluor achieved substantial completion in September 2006 it sought compensable delay damages for 154 days and thus remission of liquidated damages for those days also.  The State Department contracting officer disagreed and withheld approximately $2.7 million in liquidated damages on grounds that the firm failed to submit a request for an extension supported by time impact analysis and the State Department never ordered Fluor to accelerate the performance. 

Fluor appealed the contracting officer's decision to the Civilian Board of Contract Appeals and asserted that it had been constructively accelerated by the government.  The Board found there were no excusable delays and even if there were, Fluor did not comply with the contract in requesting a time extension in the manner required by the contract. 

Comment:  This decision by the Civilian Board of Contract Appeals is a very harsh outcome for Fluor.  Not only did it lose on the acceleration issue, the Board ruled against Fluor on its claim of $9.1 million.  Many contractors that work on federal projects do not take these types of provisions seriously; they believe that they will be able to convince a Board or court that the government had actual knowledge of the problems giving rise to the claim.  In this instance, Fluor, when this argument did not work, learned a hard lesson.

2.  Redondo Construction Corp. v. Puerto Rico Highway and Transportation Authority, 678 F.3d 115 (1st Circ. 2012).

Redondo Construction Corp. (Redondo) was the general contractor on three Puerto Rico Highway and Transportation Authority (Authority) projects.  Redondo encountered unanticipated differing site conditions and design issues.  Corrective actions took considerable time, delayed and impacted the project and forced Redondo to perform extra work that increased the cost.  Redondo eventually completed the project and submitted a claim.  While the claims were pending, the contractor filed for bankruptcy protection and these cases were decided by the Bankruptcy Court applying federal law.  Redondo was awarded in excess of $11 million on its differing site conditions and defective contract documents claim. 

The Authority appealed the case, asserting that the contract specifications required that Redondo notify the resident engineer in writing of its intention to make a claim for extra compensation within one (1) working day after the contractor began work that is the subject of the claim.  The court found that Redondo had informed the Authority of both of the problems and of its intention to seek additional compensation in a prolonged series of daily conversations and weekly meetings (apparently not in writing as required by contract written correspondence).  The court also found that the Authority had issued work order and change orders authorizing further work (actual notice).  The court found that strict conformity with the contract's written notice provision is not required, as long as the counterparty [Authority] receives substantially the same information through timely actual notice and suffers no prejudice from the non-conformity. 

Comment:  The contrast between federal courts in these two cases is striking. The Fluor case likely involved a critical time sensitive project ($18,000/day in liquidated damages) and the general contractor's cavalier treatment of the urgency of the project (the construction of a U.S. embassy likely involves issues of national security) may have offended the court.  No such urgency existed in the second case and may be the explanation as to why the federal courts treated the notice issue so much differently.  As an aside, in the Redondo case, it is also interesting that the court allowed Redondo to recover extended overhead costs utilizing the Eichleay formula, without applying the harsh P.J. Dick, Inc. test (See Using the Eichleay Formula Part I and Part 2).

In a recent Nevada case,[1] Road & Highway Builders, LLC (RHB) was awarded a 2.3 mile portion of the Carson City freeway by the Nevada Department of Transportation (NDOT).  The project, among others, required the installation of more than 3,000 lineal feet of reinforced concrete boxes under the roadway surface as drains.  The reinforced concrete boxes contained a substantial amount of reinforcing steel (rebar). 

RHB used Northern Nevada Rebar (NNR) as its subcontractor to supply and install the rebar for the project.  Unbeknownst to NNR, RHB, if awarded the project, was considering using precast reinforced concrete boxes rather than poured in-place boxes.  Moreover, if NDOT approved the use of precast reinforced concrete boxes, the precast contractor (not NNR) would perform the vast majority of the rebar installation.

RHB was awarded the project and executed a subcontract with NNR, but simultaneously issued a purchase order to Rinker Materials (Rinker) for the precast reinforced concrete boxes.  Although NDOT approved the use of the precast reinforced concrete boxes shortly after the project was awarded to RHB, RHB did not inform NNR of the change. 

When NNR began delivering and installing rebar on the project, it discovered that the reinforced concrete boxes were precast and had been installed by Rinker.  At this point, NNR, realizing its rebar quantities would be drastically reduced, sought an equitable adjustment to modify its unit price. RHB rejected NNR's request.  NNR then sought payment for work it had done to date and requested to be released from its subcontract.  RHB also rejected NNR's request to be paid for the work in place but eventually terminated the NNR subcontract. 

Adding insult to injury, RHB then filed suit against NNR for breach of contract (NNR had to finish its other non-reinforced concrete box related rebar supply and installation). NNR counterclaimed for breach of contract, breach of the implied duty of good faith and fair dealing, and for fraud in the inducement (asserting that RHB's deceit caused NNR to enter into the subcontract).  After a four day jury trial, the jury unanimously awarded NNR $1 million in damages: $700,000 for breach of contract and $300,000 in punitive damages for fraud. 

The Nevada Supreme Court, however, partially overturned the jury award on appeal and held that NNR was not entitled to recover its claim for fraud in the inducement.  The Court reviewed the contract and noted that a changes clause in the contract expressly allowed RHB to reduce NNR's scope of work.  Though the Court acknowledged that RHB might have breached the subcontract by unilaterally and making alterations to the scope of work without an agreement in writing, this action could not form the basis for fraud because the subcontract contemplated a potential reduction or alteration in the scope of work, and thus, the Court overturned the $300,000 punitive damage award. 

Comment: The jury's award is easy to relate to and understand.  NNR was induced to enter into a contract believing it would furnish a large quantity of rebar, and thus, provided RHB with a unit price that anticipated delivering and installing a significantly larger quantity than actually installed when it discovered the reinforced concrete boxes were precast.  Puzzling in the case is why the court would not have found that the actions by RHB were a violation of the covenant of good faith and fair dealing that RHB owed NNR.  RHB took a calculated risk in its bid anticipating its request to use precast reinforced concrete boxes would likely be approved by NDOT.  NNR submitted its bid in good faith believing that it was bidding on a substantial rebar project that was reduced significantly when RHB's precast method was approved.  It appears that the court allowed the general contractor to reap a significant profit and provided the subcontractor with no relief for the substantial opportunity it lost.

The subcontract for rebar was based on a unit price. The final quantities of rebar would match NDOT's quantities.  Thus, RHB was aware that there would be a substantial quantity underrun in NNR's subcontract. Though by contract RHB had a right to only pay NNR the quantities of reinforcing steel that NDOT agreed to, the lack of candor by RHB and the manner in which it proceeded should have triggered the breach of the implied obligation of good faith and fair dealing, which could have resulted in damages to NNR (NNR's unit price was based on a substantial quantity of rebar and, when the quantities under ran, there were cost implications to NNR).

Moreover, RHB had a number of opportunities to advise NNR of its plan to use precast rather than in-place reinforced concrete boxes. The case indicates that RHB had begun the precast approval process prior to bid, but did not disclose that to NNR.  RHB had a second opportunity to make that disclosure but failed to do so when it delivered a written subcontract agreement to NNR.  Finally, after award, RHB did not tell NNR when NDOT gave RHB approval to use precast units; NNR was only made aware of the precast RCBs when it showed up on site. That lack of candor clearly offended the jury and could have formed the basis for the implied duty of good faith and fair dealing claim (owed by all parties to the contract). The case is unclear as to why that legal basis was not pursued with more vigor.  RHB was allowed to reap the entire profit of the savings realized by precast method and NNR's loss went uncompensated. The Nevada Supreme Court's decision is difficult to reconcile with these facts.

Another lesson in this case is that the courts are primarily interested in enforcing and upholding the parties' bargain.  When the court found a provision in the contract that expressly allowed RHB to reduce the scope of NNR's work, it seized on that contract provision. NNR could not avoid the fact that the deal it struck expressly allowed the general contractor (RHB) to reduce the scope of the subcontract which RHB did to the detriment of NNR.

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[1] Road & Highway Builders, LLC, v. Northern Nevada Rebar, Inc., 284 P.3d 377 (Nev. 2012).

Particularly in declining real estate markets, the priority of construction liens can be tricky.  Generally, contractors in private construction who improve a property are, by law, provided lien rights in that property.  The contractor's lien priority date is the date the contractor first performs work on the project regardless of when the lien is actually filed.  Financial institutions, which provide project financing, are also provided security interests in the property generally in the form of a deed of trust ("DOT").  The priority date of the DOT is the date the DOT is filed.  Thus, in most instances because the financing precedes construction, the lien rights of the contractors, subcontractors, and vendors who build the project are "behind the bank" (i.e., junior to the bank).  Then, when real estate bubbles burst, the loan amount may exceed the value of the property, and there are inadequate funds to satisfy both the DOT and contractor liens.  In such instances the bank can foreclose on its loan (the DOT) and, if the equity in the property at that point is insufficient to satisfy the bank's DOT, the contractor liens, which are "junior" to the DOT, are simply wiped out. The contractors, subcontractors, and vendors who built the project lose. 

This situation becomes interesting, however, when more parties are introduced. For example, when an architect (architect professional services are accorded lien rights similar to contractors) commences work after a bank finances a project, but then a second bank steps in and refinances the project.  Although the first bank had priority initially, the second bank removes the first bank from the picture.   At this point, if the owner of the property defaults on its loan and fails to pay the architect, there will likely be a battle to determine whether the lien or DOT reigns supreme.  Generally, when a second bank refinances a project (e.g., when the owner takes on a new debt in substitute for a former debt), the second bank is allowed to take the lien priority position of the first bank.  This legal doctrine is called "equitable subrogation."  The Oregon Court of Appeals, however, recently held that equitable subrogation does not apply when there is an intervening lien unless the new debtor (second bank) proves that it was ignorant of the intervening lien and that its ignorance was not a result of inexcusable negligence.  

In SERA Architects, Inc. v. Klahowya Condo. LLC,[i] the developer of a failed property development, Klahowya Condominium, LLC ("Klahowya"), found itself in the middle of a priority dispute by two of its creditors.  In March 2006, after purchasing the property with a loan from Triangle Holdings II, LLC ("Triangle"), Klahowya entered into a contract with SERA Architects, Inc. ("SERA") to provide architectural services for the development, which SERA began in March 2006.  In November 2006, Shorebank Pacific Corp. ("Shorebank") provided Klahowya with a line of credit in the amount of $1,462,000 to repay the loan from Triangle and secured the loan by a DOT on the property.  

Klahowya eventually stopped making payments to SERA and, in June 2007, SERA recorded a professional services claim of lien on the property for $375,598, plus interest.  In October 2007, SERA sued Klahowya and Shorebank to foreclose on its construction lien, claiming that its right to interest in the development property was superior to Shorebank's DOT.  Shorebank answered the complaint and asserted several affirmative defenses, including priority under Oregon's lien statute and "equitable subrogation."  The trial court held that Shorebank had priority over SERA's lien and gave Shorebank priority.  

The Oregon Court of Appeals, however, reversed and remanded, holding that Oregon's lien statute gives SERA's lien priority over Shorebank's lien, and equitable subrogation did not apply to Shorebank's lien. 

In interpreting Oregon's lien statute, the Court found that ORS 87.025(7) provides that an architect's lien relates back to the date of the commencement of the improvement (i.e., when Klahowya's contractor began performance). Here, Klahowya's contractor began improvements on the project in July 2006.  Therefore, although Shorebank recorded and modified its deed of trust before SERA filed its claim of lien, SERA had priority because the improvements commenced (July 2006) before Shorebank recorded its deed of trust in November 2006.[ii]

Shorebank argued that the doctrine of equitable subrogation should apply to its deed of trust.  The bank contended it should be afforded the original priority (i.e., as if it were Triangle) because its loan was substituted for Triangle's.  The Court, however, stated that equitable subrogation would not apply unless Shorebank proved that it was ignorant of the existence of the intervening lien (i.e., SERA's lien) and that its ignorance was not a result of inexcusable negligence.  

The Court found that Shorebank should have known of SERA's lien before recording its first deed of trust.  For example, the bank attended a workshop hosted by SERA in April 2006, at which site preparation plans were discussed and a timeline assembled, and Shorebank's loan negotiations also included discussions of SERA's work that occurred after site preparation had begun.  Thus, Shorebank should have been aware of SERA's potential lien rights before it refinanced the project.  To the extent Shorebank was ignorant as to SERA's lien rights, the Court held that its ignorance was attributable to a misunderstanding of the law, which was inexcusable negligence.  Merely being unaware of the lien law did not excuse Shorebank.  Therefore, even though Shorebank's loan was a substitute for Triangle's loan, SERA's lien had priority over Shorebank's deed of trust because Shorebank failed to prove excusable ignorance.

Comment:  The same logic applies to a construction contractor's lien.  Even though the Shorebank loan (second bank) was a substitute for the Triangle loan (first bank), the court indicated it would only apply equitable subrogation if the second bank (Shorebank) carried the burden of proof that it was unaware of the architect's intervening lien and its ignorance was not the result of inexcusable negligence. Although Shorebank believed they had superior lien rights, its misunderstanding of the lien law was inexcusable.

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[i] 253 Or. App. 348 (2012).

[ii] A construction lien’s priority date relates back to the first day work is performed irrespective of when it is filed.

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Readers of our Blog will find of interest three construction related bills that had their first public hearings last week.  A link to each bill is provided below.

The first two bills were heard in the House Labor and Workforce Development Committee, the third bill was heard in the Senate Committee on Law and Justice:

1.  HB1025-Extending the Application of Prevailing Wage Requirements.  http://apps.leg.wa.gov/documents/billdocs/2013-14/Pdf/Bills/House%20Bills/1025.pdf.

HB1025 would extend the application for prevailing wage requirements by extending the definition of “public work” to include all publicly subsidized work, construction, alterations, repairs or improvements other than ordinary maintenance if subsidized by the public.  The bill provides that: 

(5) "Public work" has the same meaning as in RCW 39.04.010, except for purposes of this chapter, "public work" also includes all publicly subsidized work, construction, alterations, repairs, or improvements other than ordinary maintenance. Work is subsidized by the public if:

(a)      One or more parties to the contract received or will receive a qualifying tax preference;

(b)      One or more parties to the contract received or will receive a loan from the state or any county, municipality, or political subdivision;

(c)      The work occurs on land that a party to the contract leases from the state or any county, municipality, or political subdivision; or

(d)      The work occurs on land that a party to the contract purchased from the state or any county, municipality, or political subdivision for less than fair market value as determined by the state, county, municipality, or political subdivision at the time of the sale.

This broad definition of what constitutes “public work” would result in a significant expansion of prevailing wage requirements in our state to projects in which a public entity is not even a party to the contract.  This would result in significant cost escalation on the projects captured by this expanded definition.  I expect substantial opposition to this bill. 

2.  HB1026-Requiring Use of Resident Workers on Public Works.  http://apps.leg.wa.gov/documents/billdocs/2013-14/Pdf/Bills/House%20Bills/1026.pdf.

HB1026 would require specifications for every public works contract to contain a provision requiring that at least 75% of the labor hours be performed by Washington residents.  The language of this bill states that residents of states bordering Washington may be considered Washington residents if the border state does not restrict the right of a Washington resident to be employed on public works project in that state.  The full text of this bill can be found in the link above.

3.  SB5031-Damages to Real Property Resulting from Construction, Alteration, or Repair on Adjacent Property.  http://apps.leg.wa.gov/documents/billdocs/2013-14/Pdf/Bills/Senate%20Bills/5031.pdf.

SB5031 would overrule the Washington Supreme Court decision in Vern J. Oja & Assoc. v. Washington Park Towers, Inc., 89 Wn.2d 72, 569 P.2d 1141 (1977), which held that  claims for damages to real property resulting from construction activities on adjacent property do not accrue until the construction project is complete.  In its place, a two year limitations period would be established so that a lawsuit for damage to real property resulting from construction on adjacent property must be commenced within two (2) years after the damaged property owner first discovered or reasonably should have discovered the damage. 

Our understanding is that the proponent of this bill is Sound Transit, which is seeking to limit exposure for damage its projects cause to adjacent property to this two (2) year limitation period from the date the damage is discovered or should have been discovered. 

We will supplement this post to advise how these bills progress through committee.

The Washington Supreme Court in Department of Transportation v. James River Insurance Company, on January 17, 2013, held that RCW 48.18.200(1)(b) barred arbitration of an insurance coverage dispute.

James River issued two insurance policies to the Contractor on a WSDOT highway project.  These policies provided coverage for certain liability relating to the Contractor's work on the project for WSDOT.  The Contractor requested that James River add WSDOT as an insured under the policies, which was done.

A traffic accident occurred at or near Contractor's highway project.  The representatives of those persons killed or injured in the accident filed suit in King County Superior Court against WSDOT.  The plaintiffs later amended their Complaint to include the Contractor as a defendant.  WSDOT sent a letter to Contractor tendering its request for a defense in response to the suit under the insurance policies.  Contractor forwarded the tender to James River.  James River accepted WSDOT's tender under a reservation of all rights under the policies.  James River also informed WSDOT that the policies contained a mandatory arbitration provision, and demanded arbitration of the parties' coverage dispute.

James River attempted to initiate arbitration pursuant to the arbitration provision.  WSDOT objected and filed a declaratory judgment action against James River, seeking a declaration that the arbitration provision was void.

The matter came on before the trial court on Cross-Motions for Summary Judgment, and the Court entered an Order granting WSDOT's Motion that the arbitration provision was barred by RCW 48.18.200, and that the statute was not preempted by the Federal Arbitration Act based on the McCarran-Ferguson Act, a Federal law.

On direct review to the Supreme Court, the Court unanimously affirmed the trial court.

RCW 48.18.200(1)(b) provides:

(1)               No insurance contract delivered or issued for delivery in this state and covering subjects located, resident, or to be performed in this state shall contain any condition, stipulation, or agreement…

*   *   *

(b)        depriving the courts of this state of the jurisdiction of action against the insurer…

The Court found that the meaning of this statute was properly determined from looking at the entire phrase:  "jurisdiction of action against the insurer."  The court found that this phrase demonstrates the legislature's intent to protect the right of policyholders to bring an original "action against the insurer" in the courts of this state.

The Supreme Court went on and found that the McCarran-Ferguson Act shields RCW 48.18.200(1)(b) from Federal preemption by the Federal Arbitration Act.  The McCarran-Ferguson Act provides in pertinent part:

No act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance… unless such Act specifically relates to the business of insurance:  Provided, That, [the federal anti-trust statutes] shall be applicable to the business of insurance to the extent that such business is not regulated by State law.

This is the last blog in a series of posts concerning the topic of implied duties in construction contracts.  See previous articles: Implied Obligations in Construction Contracts; Implied Duty Not To Hinder Or Delay; Implied Duty of Good Faith and Fair Dealing.

The question of who owes the duty to ensure a safe workplace often arises in the construction industry.  As often is the case, it depends on the facts of each project.  Sometimes the duty to ensure a safe workplace belongs to the general contractor, sometimes the subcontractor, and sometimes the owner or developer.  Sometimes it belongs to more than one party.

Under the common law, an employer who contracts with an independent contractor is not liable for injuries sustained by the independent contractor's employees.  As with most general rules, there is an exception when the employer retains control over the independent contractor's work.  Whether an employer has retained control over an independent contractor's work depends on the parties' contract and other conduct.  Thus, all contractors have a common law duty to provide a safe workplace for all of their own employees, and sometimes for the employees of independent contractors (subcontractors) that they retain control over.

In addition to the common law duty, RCW 49.17.060 imposes a statutory duty on every employer: (1) to protect its own employees from recognized hazards not covered by specific safety regulations, and (2) to comply with WISHA regulations.  The duty of an employer to protect its own employees is well established and mirrors the common law duty mentioned above.  The duty to comply with WISHA regulations is less clear, and a number of Washington courts have considered who owes that duty.

1. A.    Contractor's Duties

In Washington, general contractors have a nondelegable duty to comply with WISHA regulations for every employee on the jobsite - both their own employees and the employees of independent subcontractors.  In Stute v. P.B.M.C.,[i] the Washington Supreme Court held that RCW 49.17.060(2) creates the general contractor's duty to comply with WISHA regulations as to all employees at the jobsite - including all subcontractors.  The Stute case involved a subcontractor's employee that fell three stories when installing a roof.  The general contractor failed to provide scaffolding or other safety equipment for the roofing work.  The general contractor (P.B.M.C.) argued that the subcontractor owed the duty to ensure compliance with WISHA safety regulations.

The court held that the general contractor, as the primary employer, has the primary responsibility for safety and a duty to comply with WISHA regulations because "[a] general contractor's supervisory authority places the general in the best position to ensure compliance with safety regulations."[ii]  The court reasoned that the general contractor should bear the prime responsibility for compliance with WISHA regulations because the general contractor's "innate supervisory authority constitutes sufficient control over the workplace."[iii]

Mere months after Stute, the Court of Appeals in Weinert v. Bronco Nat. Co.,[iv] extended the duty to comply with WISHA regulations to both a second-tier subcontractor and an owner/developer.  In Weinert, the second-tier subcontractor erected scaffolding for installation of siding.  The court found that there was no evidence that the general contractor helped erect the scaffolding, and the general contractor had no knowledge of any defects in the erection of the scaffolding. The court reasoned that the second-tier subcontractor owed the same duty as the general contractor because Stute did not exclude imposing "a similar but more limited duty on a subcontractor"[v] and because the subcontractor had the "innate supervisory authority"[vi] over the siding installation.[vii]   The second-tier subcontractor had the duty to comply with WISHA regulations under its control because it was in a better position to inspect and supervise work done on the scaffolding than the general contractor, whose responsibilities were broader.  The court noted that the second-tier subcontractor's duty to comply with WISHA regulations extended only to employees under its control and supervision and that the general contractor's duty covered the rest of the project that was under its control and supervision.

In Husfloen v. MTA Const., Inc.,[viii] a general contractor hired a subcontractor to build a foundation for a residential construction project.  The subcontractor hired a lower-tier subcontractor to pump concrete into forms.  An employee of the lower-tier subcontractor was injured when the boom of his concrete pump truck contacted a power line. The pump truck was within 10 feet of the power line, which violated a WISHA regulation.  The Court of Appeals held that the second-tier subcontractor owed a duty to comply with WISHA regulations because it was in a better position than the general contractor to ensure compliance with safety regulations because the general contractor did not supervise the site and did not supervise the subcontractor's work.

In Gilbert H. Moen Co. v. Island Steel Erectors, Inc.,[ix] the Supreme Court stated that both general contractors and subcontractors are responsible to ensure compliance with WISHA safety regulations within their areas of control.  The court explained that under RCW 49.17.060, and the Stute court's reasoning, a "subcontractor, despite the general contractor's workplace safety duty, retains concurrent responsibility to meet workplace safety standards in the areas under its control."[x]

1. B.     Owner/Developer's Duties

After Stute, there have been a number of cases in which courts have considered whether an owner or developer also owes a duty to comply with WISHA regulations.  In Weinert, the Supreme Court extended the duty to comply with WISHA regulations to an owner/developer because its position was so comparable to that of a general contractor that the policy behind enforcing the duty to comply with WISHA regulations regarding a general contractor was the same regarding an owner/developer because the owner/developer in Weinert had the same innate supervisory authority and was in the best position to enforce compliance with WISHA.

Similarly, in Doss v. ITT Rayonier, Inc.,[xi] the Court of Appeals held that an owner had a duty to comply with WISHA regulations after an employee was injured on the job because there was no significant distinction between the owner-independent contractor relationship and the general contractor-subcontractor relationship because the owner had "innate supervisory authority" that gave it control over the independent contractor.

In contrast, in Kamla v. Space Needle Corp.,[xii] the Supreme Court held that owners are not per se liable under RCW 49.17.060.  In that case, the owner (Space Needle Corp.) did not owe a duty to an employee of a contractor when the employee was injured on the job because the owner did not have any knowledge regarding WISHA compliance for the work, and because the owner did not control any of the work.

In Afoa v. Port of Seattle,[xiii] a 2011 Court of Appeals case, the court reversed a summary judgment ruling that dismissed the Port of Seattle, as the owner of a project, because there were questions of fact regarding whether the Port retained control over the manner in which a contractor completed its work, whether the Port had the better opportunity and ability to insure compliance with safety standards than the general contractor, and whether the Port had "innate supervisory authority."

1. C.    Conclusion

Washington courts assume that general contractors have control over the worksite, and therefore have a nondelegable duty to comply with WISHA regulations.  However, if someone alleges that any other party (i.e., owners, developers, subcontractors, or sub-tier subcontractors) has control of the worksite, then the courts will examine whether that party had an "innate supervisory authority" over a portion of the worksite to determine whether they also owed a duty to comply with WISHA regulations.  This determination is fact specific to each case and project.

It is clear that the more supervisory authority that any party has over a worksite, the more likely they will be responsible for complying with WISHA regulations.  In Cano-Garcia v. King County,[xiv] a 2012 case, the Court of Appeals stated that "liability flows to those who are in a position to control the actual implementation of safety standards in the workplace."  Thus, whoever has control - general contractor, subcontractor, sub-tier contractor, owner/developer, etc.  - has a duty to comply with WISHA regulations.

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[i] 114 Wn.2d 454, 788 P.2d 545 (1990).

[ii] 114 Wn.2d at 463.

[iii] Id. at 464.

[iv] 58 Wash. App. 692, 795 P.2d 1167 (1990).

[v] 58 Wash. App. at 697.

[vi] Id. at 697.

[vii] The Weinert court used the same “innate supervisory authority” reasoning to hold that the owner/developer also owed the duty to comply with WISHA regulations, which is discussed later in this article.  Weinert v. Bronco Nat. Co., 58 Wash. App. 692, 795 P.2d 1167 (1990).

[viii] 58 Wash. App. 686, 794 P.2d 859 (1990).

[ix] 128 Wn.2d 745, 912 P.2d 472 (1996).

[x] 128 Wn.2d at 757.

[xi] 60 Wash. App. 125, 803 P.2d 4 (1991).

[xii] 147 Wn.2d 114, 52 P.2d 472 (2002).

[xiii] 160 Wash. App. 234, 247 P.2d 482 (2011).

[xiv] 168 Wash. App. 223, 277 P.3d 34 (2012).

In June 2006, a builder and developer formed a company (Owner1) to buy 11 properties ("Property") for a phased residential development.  Before Owner1 bought the Property, however, it hired an engineering firm (Olson) to perform surveying, engineering, and planning for the residential development.[i]  

In December 2006, over six months after Owner1 hired Olson, Owner1 closed on the Property (Owner1 became "owner" of the Property).  The sale was financed by a bank ("Bank"), and Bank was granted a deed of trust secured by the Property.   

Over 2 years later, on October 1, 2008, Olson, who had been doing engineering on the project since June 2006, filed a lien against the Property as a whole-not against the individual 11 parcels.  That same month, Owner2, an entity related to Owner1, acquired title to the Property, and Owner1 (the builder and developer) and its principals declared bankruptcy.

As a result of the bankruptcy, the Bank foreclosed on its deed of trust and filed a release-of-lien bond pursuant to RCW 60.04.161. Thereafter, the engineering firm (Olson) filed an action to foreclose its lien claim.

The engineering firm sought: (1) a money judgment for amounts due and owing from Owner1 and Owner2; (2) a decree enjoining the Bank from selling the Property at the trustee sale; (3) an order establishing the engineering firm as having priority over the deed of trust; and (4) an order barring the Bank from asserting any right or interest in the Property.  In Washington, a lien claimant's lien priority date relates back to the first day work is performed on the project. In this instance, because Olson performed work on the project in June 2006, before the Bank's deed of trust attached to the project in December 2006, the court awarded the engineering firm a judgment of $107,446 against the Bank. The case, however, was appealed. 

On appeal the issues were:

1. Effect of Release-of-Lien Bond on Lien Priority Dispute.

As indicated before the Bank foreclosed on its deed of trust, it recorded a release-of-lien bond. A release-of-lien bond has the effect of transferring the lien against the property to the bond and freeing up the property for conveyance. The statute (RCW 60.04.161) is silent as to whether, after the filing of the release-of-lien bond, the parties may challenge lien priorities.

The Bank argued that by the plain language of the statute: (i) the statute's purpose to free up the subject property for sale, pending final determination of lien claimants rights; and (ii) the statute is consistent with other state lien statutes covering lien priorities and these similar statutes allow the court to adjudicate the parties' lien priorities after the filing of a release-of-lien bond.  In contrast, the engineering firm argued that the Bank had relinquished its right to dispute the lien priority work after it filed the release-of-lien bond because (i) the plain language of the statute does not provide for disposition of lien priority disputes, and (ii) allowing parties to dispute lien priorities after filing a release-of-lien bond would prejudice the rights of the lien holder's (a lien holder's sole recourse after the release-of-lien bond is filed is against the bond not the Property).

Ultimately siding with the Bank, the court held that the plain meaning of the release-of-lien bond statute (RCW 60.04.161), when viewed in the context of the entirety of the lien statutes and the statutory scheme as a whole, permits parties to dispute lien priority after the filing of a release-of-lien bond.

2. Lien Priority.

The Appellate Court also overruled the trial court's opinion that the engineer's lien, as a matter of law, had priority over the Bank's deed of trust because at the time the engineer (Olson) commenced its professional services, Owner1 (the entity directing the work) did not own the Property.  A lien right is only created when the work is performed "at the instance of the owner."  RCW 60.04.021.  Hence, there was an issue of fact precluding summary judgment that the engineer's lien was "created" before the Bank's deed of trust attached to the Property.

3. Improper Lien Claim.

Similar to the argument above, but attacking the lien itself, the Bank also argued that Olson's construction claim was improper as a whole because the work on which Olson predicated its lien was not "furnished at the instance of the owner" of the Property or an agent of the owner, as required by Washington's lien statute (RCW 60.04.021). Olson took the position that it provided services at the request of Owner1, who eventually became the owner of the Property.  The Court of Appeals held that Owner1 was not an "owner" of the properties until after June 1, 2006, after the Bank recorded its deed of trust and therefore, Olson did not work at the "instance of the owner" until after Owner1 acquired the Property on June 1, 2006.  Thus, Olson's lien was invalid.

4. Divisible Contracts.

Finally, the Bank argued that Olson's single lien, though Olson did work on multiple properties, did not accurately reflect Olson's multiple and divisible contracts to do work separately on each of the subdivisions (there were 4 subdivisions). Olson's position was that its work benefited the entire Property and that the intention of Olson and Owner1 was to create a single contract rather than multiple divisible contracts. The Appellate Court held that Olson's "blanket lien" was appropriate, and despite the fact that the professional services invoices showed that Olson worked and billed separately for multiple properties, its work benefited the entire Property and was indivisible.

Comment: This case illustrates a few fundamental lien issues:

• First, the mere fact that a release-of-lien bond is filed does not preclude the argument on priorities.  The mere fact that an entity may file a release-of-lien bond does not ensure that downstream lien claimants will automatically be paid.  Those lien claimants must show that they have a right prior to the entity posting the release-of-lien bond in order to benefit from the bond. 

• Second, a lien claimant must always ensure that it is either dealing with the owner or construction agent of the owner of the property.  As this case illustrated, the entity that hired the engineer did not own the property and therefore, the engineer's lien claim will likely be invalidated when the case returns to the trial court. 

• Finally, this case reminds us of another important feature of lien law and that is when a contractor improves a property and that property benefits an adjoining parcel, the lien may attach to both the parcel improved and the parcel benefited.

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[i] Olson Engineering, Inc. v. KeyBank Nat. Association, 171 Wn. App. 57, 286 P.3d 390 (2012).

We now know that Congress did not recklessly drive the economy off the fiscal cliff like the ending in the movie of "Thelma and Louise." Nevertheless, we are in for more wrangling, swagger and blustering while Congress and the President try not to bump their heads on the debt ceiling, a debate in store for all of us next month. In the meantime, experts have now analyzed the deal Congress made with the President and it looks like households making between $200,000-$500,000 per year save the most in comparison to where they would have been had we careened off the cliff.

Also attached for your reading enjoyment is a post our blog editor had chambered but inadvertently did not get out before the fiscal cliff deal was made. (The Fiscal Cliff’s Impact On Construction) The article discusses the impact to the construction industry had the logjam in Congress not been broken.  Referenced is an interesting article by Prof. Stipanowich, who draws comparisons to Lincoln and his ability to pass the 13th Amendment and President Barack Obama and his ability to negotiate a deal with Congress.

Fundamentally striking the deal on the "sequestration," as the fiscal cliff is known in congressional terms (sequestration refers to automatic spending cuts), means that the President and Congress gave us all a tax hike. Expiring payroll tax lowers everybody's after-tax income by at least one percent. There are three major tax issues which add up to modest tax increases for the bottom 99% and much greater tax increases for the top 1% of the taxpayers.

• Five-Year Extension Of The Stimulus Tax Credits.  The 2009 stimulus package expanded three tax credits, the Earned Income Tax Credit, the Child Tax Credit and the American Opportunity Tax Credit. The fiscal cliff deal extended all of these tax credits for an additional five years. Under these credits households can receive tax refunds even if their tax liability is zero.  To get this credit, households must have paid some taxes to begin with.

• Expiration Of The Payroll Tax Cut Holiday.  In the past two years, the worker's half of the payroll tax had been cut two percentage points from 6.2% to 4.2%. That tax break is now over and therefore everybody will take home less money in 2013 than in 2012, though  the impact will not be as big for households making $200,000 and over because payroll taxes are only paid on the first $110,100 of income.

• Top Marginal Rate For Incomes Over $400/$450,000 Returns To 39.6%. The top marginal rate for singles earning over $400,000 or couples earning over $450,000 went back up to 39.6%. This is a marginal rate, which means the more income you have above the threshold, the harder the higher rate hits you. As far as capital gains are concerned, capital gains rate rose from 15% to 23.8% for individuals making $400,000 or more and for joint filers making $450,000 or more.

The big winners are what are affectionately known as "HENRYs" (High - Earner - Not - Rich - Yet).  Those households making between $200,000 and $500,000 a year, will mostly avoid marginal tax increases because the threshold for higher rates was set at $400,000/$450 000 instead of the $200,000/$250,000 President Obama originally wanted.

http://www.theatlantic.com/business/print/2013/01/these-2-tax-charts-tell-you-exactly-who-won-the-fiscal-cliff-deal/266744/

We have discussed the fiscal cliff in a previous post [Second Presidential Debate] this post explores what the effect of an  impasse in Congress will be on the construction industry (when the economy tumbles over the fiscal cliff).[1]

The Fiscal Cliff:

During Summer 2011, Congress and President Obama debated the merits of increasing the debt ceiling for the federal government and how to trim the nation's spiraling annual budget deficits.  Although they eventually decided to increase the debt ceiling, Congress and the President essentially postponed major action on deficient reduction.  Instead, the "Budget Control Act" of 2011 was passed, which recommended measures for reducing the federal deficient by at least $1.2 trillion between fiscal years (FY) 2012 and 2021.  The committee's recommendation was to be the subject of a congressional up or down vote.  The members of the committee, however, were unable to agree on recommendations by the required deadline of December 2011, and so far this year, Congress has failed to resolve the question of how to reduce the deficit in accordance with the Budget Control Act mandate.

Unless Congress and the White House enact a plan by the end of the calendar year of 2012 to achieve the required deficit reduction target of $1.2 trillion, significant budget cuts will occur automatically.  Known as "sequestration" in legislative terminology, the cuts will reduce federal spending by roughly $109 billion annually over the next 9 years, an amount that is to be split equally between defense and non-defense spending.  Scheduled for January 2, 2013, the first round of such reductions looms large, threatening federal agencies with the imminent specter of automatic across-the-board cuts (denominated the "fiscal cliff").

Effect On Construction/Infrastructure: 

The Office of Management and Budget (OMB) estimates that defense discretionary funding and non-defense discretionary funding subject to cuts will be reduced by 9.4% and 8.2% respectively.  As for mandatory funding, defense programs will be subject to a reduction of 10% while non-defense programs will be cut 7.6 %.

Among the federal programs involving infrastructure, most are classified by OMB as non-defense spending, meaning that they would be subject to slightly smaller reductions (7.6%) in terms of percentage than defense programs (10%).  Environmental clean-up efforts conducted by the U.S. Department of Energy at defense sites would be treated as a defense program and, therefore, would be subject to a cut of $472 million or 9.4%. 

Most federal programs, including most infrastructure programs, are funded by what is known as "appropriated budget authority," meaning funding authorized by Congress and provided by the traditional appropriations process.  By contrast, a smaller number of programs, including certain key highway and mass transit programs, are funded by what is known as "contract authority."  Programs funded by contract authority (with obligation limitations) are exempt from sequestration according to the American Association of State Highway and Transportation Officials (ASHTO).  This distinction means that certain elements of discretionary funding for surface transportation would not be cut under sequestration.  For example, federal aid for highways and mass transit financed through the Highway Trust Fund would be spared from sequestration because these are contract authority programs that receive annual obligation limitations.  The Highway Trust Fund, however, will not go unscathed under sequestration and will be subject to a cut of 7.6%, resulting in a reduction of $471 million next year.  Meanwhile, other surface transportation programs funded by appropriated budget authority, including funding for high speed rail, Amtrack and Federal Transportation Administration's New Starts grants program, will be cut by 8.2%.

Aviation funding faces similar reductions.  The agency's operations budget will likely be reduced by $377 billion according to the OMB report, and further reductions are in line for the U.S. Environmental Protection Agency.  For example, the Clean Water State Revolving Fund and Drinking Water State Revolving Fund will be cut by 8.2% ($293 million), the Super Fund program will lose $119 million, and the U.S. Army Corps of Engineers will see their programs cut by $326 million (construction and maintenance). 

The effect sequestration will have on the Country's infrastructure will be significant, long lasting and drastic on public works (initially) and industry-wide (eventually).  OMB has called on Congress to prevent the planned cuts before they take effect: "the destructive across-the-board cuts required by the sequestration are not a substitute for a responsible deficit reduction plan."  The bi-partisan Policy Center, a think tank based in Washington D.C., in a September 14, 2012, news release stated, "We strongly hope that the OMB report reveals the ham-handed and indiscriminate sequester cuts for what they are: indefensible and irresponsible way to make budget changes.  The message to policy makers is clear: urgent action is needed to replace the looming disfunction of sequestration with a balanced plan to address the deficit and the nation's perilous fiscal trajectory."

Comment:  It seems unimaginable that our politicians would be unable to compromise on an issue of such importance to this nation.  Professor Stipanowich has written an interesting article on the parallels of the challenges faced by Lincoln in passing the 13th Amendment through a sharply divided Congress to those faced by Obama in averting the Fiscal Cliff disaster.  Leadership, resolve, and compromise are essential to the proper working of our political process.  Professor Stipanowich's observations are particularly poignant after viewing the Spielberg movie "Lincoln."

 [1]  This post is based on an ASCE Civil Engineering November 2012 article entitled “Budget Cuts Loom for Infrastructure Programs Unless Congress Acts.”

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Fiscal cliff negotiations: Lessons from Lincoln

Thomas J. Stipanowich is William H. Webster Chair in Dispute Resolution, professor of law at Pepperdine University School of Law and academic director of the Straus Institute for Dispute Resolution. He is currently writing a book titled "The Lincoln Way: The Evolution of a Master of Conflict."

Our president wishes to be seen as emulating our 16th chief executive, and now by happy accident Steven Spielberg's opus "Lincoln" has opened amid a super-heated political struggle over the future of our national economy that may define success or failure for Barack Obama and Congress. Since the film focuses on Lincoln's effort to end slavery by pushing the 13th Amendment through a sharply divided Congress, the urge to distill lessons from that experience is irresistible. If our political leaders examine Lincoln's career and his approach to conflict, several guiding principles emerge:

1. Few things are truly non-negotiable. Studies in human behavior teach that public commitments like the "no-new-tax" pledge Republicans made to Grover Norquist or the promises by Democrats not to touch "entitlements" raise barriers to compromise. This "commitment bias," reinforced by Fox News, MSNBC and other national media reinforcing the perceptions of their respective audiences, has undermined efforts to address our economic crisis. Lincoln grasped that effective solutions require flexibility and pragmatism - keeping options open and minimizing "non-negotiable" zones. Lincoln viewed two key priorities as non-negotiable: the preservation of the Union and preventing the expansion of slavery. Everything else was negotiable. Even the timing of and terms surrounding the abolition of slavery - an institution he detested - were ultimately dictated by events and political opportunity.

2. Collaborate to address the common enemy. Expert negotiators like Lincoln pay close attention to the values, needs and interests that lie underneath negotiating positions, as well as the consequences of not reaching a bargain. A moderate, Lincoln somehow managed to maintain a coalition that included "radical" abolitionists and border state conservatives in the face of civil rebellion; despite differences, they shared a common interest in preserving the Union and defeating the Confederate foe. Today, Republican and Democratic politicians alike are confronted with dire economic - and political - consequences if a mutually acceptable scheme cannot be hammered out before the Jan. 1 deadline. Both parties must work together to solve their common problem.

3. Focus on problem-solving, not on demonizing opponents. Today's political debate is suffused with highly personalized rhetoric; reasoned argument is displaced by assaults on the motives and character of political opponents. As president, Lincoln was vilified not just in the South, but by many in the North who questioned his intelligence, integrity and loyalty. Yet Lincoln avoided nursing grudges or retaliating. He claimed, "I have not willingly planted a thorn in any man's bosom." Lincoln's ability to rise above partisan invective and focus on real was a critical element in his ultimate political success.

4. Look for trade-offs. Political trade-offs are the indispensable lubricant of politics. From his early days in the Illinois legislature, Lincoln showed his mastery of political horse-trading, or "logrolling." By identifying and responding to the needs of his colleagues and opponents, Lincoln could enlist their help attaining his own legislative priorities - like moving the Illinois state capital to his home town of Springfield. The pattern was refined and repeated throughout his career, culminating in the passage of the 13th Amendment. If the looming fiscal cliff is to be avoided, key trade-offs involving tax reform and reductions in government expenditures will be essential.

Since the film focuses on Lincoln's effort to end slavery by pushing the 13th Amendment through a sharply divided Congress, the urge to distill lessons from that experience is irresistible.

5. Seek creative avenues to a solution. While Americans will feel relief through resolution of current fiscal issues, many will experience higher costs or reduced benefits. Meanwhile, there will be great beating of chests from both wings. In addition to profound political courage on the part of our leaders, some creativity of approach may be necessary. Lincoln knew the value of using third parties in avoiding impasse, and personally stepped in to mediate legal disputes involving his own clients when the situation called for it. Widely regarded and capable third parties who are not actively engaged in the current fight might be crucial to facilitating a deal to avoid the fiscal cliff. Obvious candidates are former Sen. Alan Simpson and Erskine Bowles, the co-chairs of the National Commission on Fiscal Responsibility and Reform. Another is America's "Mediator General," Kenneth Feinberg, who successfully administered the 9/11 Victims Fund allocation and compensation for victims of the BP Oil Spill.

The fiscal cliff looms large on the near horizon, but only because Lincoln's lessons have not yet been embraced.

Thomas J. Stipanowich is William H. Webster Chair in Dispute Resolution, professor of law at Pepperdine University School of Law and academic director of the Straus Institute for Dispute Resolution. He is currently writing a book titled "The Lincoln Way: The Evolution of a Master of Conflict."