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Archive for the ‘Construction & Design Professional’ Category

Pay-When-Paid Clauses: A Cautionary Tale

Posted on: March 28th, 2018

By: Jake Carroll

With the recent surge of construction projects in Georgia, the memories of owner and developer bankruptcies following the 2008 financial crisis may have grown dim. Nevertheless, material suppliers and subcontractors must remember that when the pace slows down, their contracts could leave them without remedy or recourse to seek payment.

One of the most common issues in construction disputes is whether a general contractor is obligated to pay its subcontractor before the general contractor has received payment from the owner for the work. Most construction subcontracts address this problem and attempt to make the owner’s payment to the general contractor a condition precedent to the general contractor’s obligation to pay the subcontractor. Typically, these clauses are known as “pay when paid” clauses because they condition the general contractor’s obligation to pay the subcontractor upon receipt of payment by the owner.

Georgia appears to adhere to the rule that if the contract makes payments from the owner a condition precedent to the general contractor’s obligation to pay, then the general contractor’s obligation never arises if the owner becomes insolvent and never makes a payment. See Vratsinas Constr. Co. v. Triad Drywall, LLC, 739 S.E.2d 493 (Ga. Ct. App. 2013). Thus, if an owner fails to pay a general contractor due to the owner’s bankruptcy, the subcontractor also remains unpaid. What’s more, the provisions of the automatic stay in Bankruptcy cases may prevent the subcontractor from claiming or enforcing its rights under Georgia’s mechanic lien statutes—depending on the specific circumstances of the Project. See 11 U.S.C. 362. When combined, these circumstances leave the unpaid subcontractor with limited legal remedies and could lead the subcontractor to consider its own option for relief under the Bankruptcy code.

In order to avoid these potential payment issues, all parties in the construction process should carefully review their contracts for “pay when paid” clauses during the contract negotiation and drafting phase of the Project. And despite subcontractors’ limited bargaining power in modifying the terms of its subcontract, full awareness of the contract terms should allow the subcontractor to mitigate risk on its Projects. For advice on specific language or for questions regarding general construction contract terms and conditions, contact Jake Carroll at [email protected] or any member of the FMG Construction Practice Group.

 

Cumis Counsel Limited: Insurer-Appointed Counsel Requires Actual Conflict of Interest

Posted on: February 9th, 2018

By: David G. Molinari

The California Third District Court of Appeals has ruled that the right to Cumis counsel, independent counsel paid by the insurer (San Diego Federal Credit Union v. Cumis Insurance Soc’y, 162 Cal. App. 3d 358 (1984)) requires an actual as opposed to a potential conflict.  In Centex Homes v. Saint Paul Fire & Marine Insurance Company, (Case C081266, January 22, 2018) the Court of Appeals concluded that Cumis counsel is not required absent a reasonable likelihood of an actual conflict when an additional insured carrier accepts a tender of a developer/general contractor’s defense subject to a reservation of rights and appoints defense counsel.

In Centex Homes the homeowners sued developer for construction defects.  Developer tendered the defense to the insurer of a subcontractor involved in the project as an additional insured.  The insurer provided an attorney to defend the developer under a reservation of rights against any claims not covered by the subcontractor’s policy.  Developer hired their own attorney who filed a cross-complaint against the subcontractors, including the subcontractor under whose policy the developer was being defended.  The developer argued that the case presented a “potential” conflict of interest that required the appointment of independent counsel under Cumis.

The Third District Court of Appeals ruled otherwise.  The court concluded to the extent Cumis suggests a potential conflict arises wherever the insurer reserved its right to deny coverage being sufficient to require the appointment of independent counsel, the plain language of California Civil Code Section 2860 limits the Cumis right.  Under Civil Code Section 2860 the conflict must be actual, not merely potential.  The insurer-appointed counsel in Centex Homes was in no position to control the outcome in the case which focused on causation.  On the issue of causation, the insurer and the developer had the same interests defending the underlying claim.

Further, the developer argued independent counsel was required because the insurer-appointed counsel had a conflict of interest under Rule 3-310 of the Rules of Professional Conduct: “Avoiding Representation of Adverse Interests.”  Again, the Court of Appeals determined otherwise.  The court concluded that while generally conceptualized, defense counsel represents the interests of both the insurer and the insured, they are not necessarily both clients in the matter as contemplated under the Rules of Professional Conduct for conflicts of interest.  As the Court of Appeal viewed Rule 3-310 (C), the rule was not intended to apply to the relationship between an insurer and a member of the bar when the insurer’s interest is as an indemnity provider and not a direct party to the action.  In Centex the court concluded there was no actual conflict of interest presented in the case.

Centex Homes may signal the limitation and narrowing of the right to independent counsel in construction litigation.

If you have any questions or would like more information, please contact David Molinari at [email protected].

Georgia Court of Appeals Upholds Statute of Limitations Defense in Exterior Siding Case

Posted on: January 9th, 2018

By: Jan S. Sigman

In Georgia, a negligent construction action must be brought within four years from when the right of action accrues. The right of action accrues when the plaintiff first could have maintained the action to a successful result, which means substantial completion of the project in original construction cases or the sale of the property in improvement cases.

O.C.G.A. § 9-3-30(b)(1) carves out a specific exception to this general rule. If the damage is due to the manufacture, design or installation of synthetic exterior siding, then the right of action accrues “when the damage to the dwelling is discovered or, in the exercise of reasonable diligence, should have been discovered, whichever first occurs.” The Georgia Supreme Court has interpreted this exception to require the plaintiff to bring an action within four years of learning of potential problems with exterior siding. Scully v. First Magnolia Homes, 279 Ga. 336 (2005).

Recently, the Court of Appeals reaffirmed the Scully rule. In Demere Marsh Assocs., LLC v. Boatright Roofing & Gen. Contr., Inc., 343 Ga. App. 235 (2017), a homeowner’s association sued a contractor and a subcontractor for negligent design and installation of vinyl siding following water damage in multiple residential buildings. The contractor and subcontractor moved for summary judgment, arguing certain claims were time barred. The trial court disagreed, holding there was a factual dispute as to whether the homeowner’s association knew or should have known of siding problems between 2008 and 2012, when the lawsuit was filed.

The Court of Appeals reversed the trial court’s denial of summary judgment and, citing Scully, held the statute of limitations began to run when the homeowner’s association, “through the exercise of reasonable diligence, should have discovered that their [buildings were] being damaged due to defective synthetic … siding.” The Court of Appeals pointed to maintenance records showing water intrusion complaints dating back to 2004 and a report from a hired consultant in 2007, which identified improperly installed vinyl siding. The Court of Appeals concluded the statute of limitations began to run in 2007 and expired in 2011, well before the 2012 suit was file.

The Boatright case confirms Georgia courts will uphold statute of limitations defenses in construction cases, even those involving the exterior siding exception. Jan Seanor Sigman is licensed to practice in Georgia and represents contractors and design professionals in all construction matters including contract negotiations, payment disputes and delays, contract terminations, and defective work. If you have any questions or would like more information, please contact Jan Seanor Sigman at [email protected].

Pre-Suit is the New Lawsuit: Florida Supreme Court holds Insurance Carrier Had Duty to Defend Policy Holder during Pre-Suit Proceedings

Posted on: December 22nd, 2017

By: Jake Carroll

Given the pace of construction in Florida over the past three decades, it should come as no surprise that the Sunshine State has a robust statutory scheme for construction defect claims. Indeed, Florida’s Construction Defects Statute, Chapter 558, Florida Statutes (“FCDS”), outlines a complex pre-suit procedure requiring owners to send a “notice of claim” to contractors while identifying any alleged construction and/or design defects in “reasonable detail” before a lawsuit for such defects can be brought. The FCDS also details procedures for building inspection, destructive testing, obtaining construction documents and maintenance records, and utilizing consultants. Under the FCDS, contractors are required to provide a written response to the notice, to accept or dispute each reported defect, and may include offers to repair, partial payment, or partial settlement.

Contractors may represent themselves during the notice process, but do so at their own peril. Instead, contractors are encouraged to retain legal counsel as soon as possible following receipt of a 558 Notice.

However, in the case of Altman Contractors, Inc. (Altman) v. Crum & Forster Specialty Insurance Company (C&F), 42 Fla. L. Weekly S960b, Altman forwarded the notices to its carrier (C&F), seeking coverage and defense under its CGL policy. C&F initially denied Altman’s request on the basis that the Chapter 558 process did not trigger the duty to defend.

The Florida Supreme Court disagreed with C&F, holding that the insurance carrier’s duty to defend may be triggered when a contractor receives a construction defect notice, depending on the language of the policy and the allegations in the notice. The ruling impacts all stakeholders in the construction industry, including owners, condominium associations, developers, contractors, and insurers.

The decision encourages insurer participation in the pre-suit process for resolving defect disputes and may result in more out-of-court resolutions—avoiding complex and expensive litigation that burdens litigants and the court system.

Insurance trade groups warn the decision could drive up premiums for some CGL policies within the construction industry, while other industry professionals note the potential for bad faith claims if carriers refuse to participate in Chapter 558 proceedings where a construction defect claimant is seeking covered damages from the policyholder.

At the very least, contractors should review their CGL policies, comply with the terms of the policies, and forward any FCDS notices to their carriers before issuing a response. Depending on the specific policy language, costs incurred during the Chapter 558 process may be the insurance carrier’s responsibility.

It is also worth noting that parties may choose to opt out of FCDS, if agreed to in writing beforehand. Such provisions are commonly included in construction contracts.

Jake Carroll represents owners, contractors, and design professionals in all construction matters including contract negotiations, payment disputes, and claims resulting from delays, contract terminations, and defective work. Mr. Carroll is licensed to practice in both Georgia and Florida. If you have any questions or would like more information, please contact Mr. Carroll at [email protected].

Professional Negligence Claim Against Georgia Design Professional Survives Economic Loss Rule

Posted on: November 27th, 2017

By: Cheryl H. Shaw

Georgia’s economic loss rule bars recovery in tort for economic losses arising from a contract.  The idea behind the rule is that simple: When a dispute involves strictly economic losses, the parties should resolve their claims based on the standards set out in their contract and not judicially-created tort duties.  The economic loss rule offers significant protection to design professionals, but a recent decision by the Georgia Court of Appeals signals further erosion of that protection.

In Atlantic Geoscience, Inc. v. Phoenix Development & Land Investment, LLC,[1] a residential developer hired an engineering firm to perform an environmental site assessment for a 45-acre property under consideration for purchase and development.  The engineer’s report concluded that an adjacent landowner had encroached on and was using a small portion of the property as a “soil/stone storage yard,” but did not recommend any additional investigation.  Relying on the report, the developer bought the property and began pre-development work.

During discussions with the adjacent landowner the following year, it came to light that the “encroachment” was actually a “landfill” that rendered the property not viable for development as originally planned.  Business deals fell through, the developer was unable to secure financing, and the bank ultimately foreclosed on the property.

The developer sued the engineer for professional negligence, a tort-based claim. The engineer moved for summary judgment under Georgia’s economic loss rule which provides that “a contracting party who suffers purely economic losses must seek its remedy in contract and not in tort.”  The engineer argued the developer did not suffer any personal injury and did not claim any injury to property or diminution in value; instead, the developer sought to recover the money it would have received had the development proceeded as intended, plus pre-development expenses (i.e., purely economic losses).  Thus, the engineer reasoned, the claims were barred by the economic loss rule.

The trial court agreed with the engineer, but the Court of Appeals reversed, citing the “misrepresentation exception” to Georgia’s economic loss rule and holding that the case, at its core, involved the engineer’s alleged misrepresentation in failing to disclose the presence of the landfill.  It was of no consequence that the alleged misrepresentation was made by the engineer in breach of its professional duties: “Georgia law permits the recovery of certain types of economic losses in an action, such as this, were the plaintiff alleges professional negligence resulting in a misrepresentation.”[2]  The Court then sent the case back to the trial court to determine liability and damages.

The Atlantic Geoscience case is further evidence that Georgia’s economic loss rule does not insulate design professionals from the tort of negligent misrepresentation; thus, an allegation of misrepresentation can allow plaintiff to escape the rule’s operation. This can result not only in increased exposure to direct clients, but liability to third-parties who claim economic losses as a result of the design professional’s services.  Against this backdrop, it is important for design professionals to understand how the laws of each state apply and utilize contractual provisions that help mitigate risk.  For more information, contact Cheryl H. Shaw at [email protected].

[1]   341 Ga. App. 81 (2017).

[2]   Id. at 86.