Under Construction - Fall 2012

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Letter from the Editor

Now that we are finally recovering from this summer’s searing heat and our vacations, welcome to our fall 2012 issue! I hope you’re all enjoying these cooler days and football season.

Of the four articles in this issue of Under Construction, the first describes a California arbitration case and another describes a Colorado construction defect case. The California case picks up from a case reported in the December 2011 Under Construction issue and addresses the California Supreme Court’s recent decision to enforce the arbitration provision. The second article discusses how Colorado courts are split on the issue of whether the defendant can designate non-parties at fault in construction defect cases. The third article provides a snapshot and update of 2012 Arizona court cases and legislation that affects the Arizona construction industry. The final article discusses a case involving the general contractor on a New York City apartment project that failed to comply with its obligations under the Davis-Bacon and Related Acts and the consequences of such failures. Since the Davis-Bacon and Related Acts cover many projects throughout the country, this case may directly affect you and should be a heads up to you.

If you have any questions or comments about any of these articles, please feel free to email them to me. I would appreciate hearing from you and what topics you would like us to address in future editions.

Best Regards,
Jim Sienicki

California Supreme Court Enforces Arbitration Provision in Construction Defect Case

In our December 2011 Under Construction newsletter, we reported on the tendency of certain California courts to decline to enforce arbitration provisions in construction defect cases. See Arbitration in California Construction Defect Cases After AT&T Mobility v. Concepcion. As we noted, California courts have continued after the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion to evidence their long-standing hostility to arbitration provisions in consumer contracts, despite Concepcion’s clear message that invalidation of arbitration provisions could not be justified on grounds of unconscionability.

On August 16, 2012, the California Supreme Court threw its weight behind the enforceability of arbitration provisions by holding that a condominium owners’ association was bound by such a provision in the recorded declaration of covenants, conditions and restrictions (CC&Rs) when it brought a construction defect lawsuit against the condominium developer. Pinnacle Museum Tower Assoc. v. Pinnacle Market Development (US), LLC, et al., No. S186149 (Cal. Aug. 16, 2012). 

The case involved the familiar scenario where a developer (Pinnacle) developed a mixed use residential and commercial common interest property and recorded CC&Rs governing the use and operation of the property pursuant to California’s Davis-Stirling Act, which governs the creation and operation of common interest developments. See California Civil Code § 1350 et seq. The CC&Rs, among other things, created an owners’ association (Association) responsible for managing and maintaining the property and specified that by accepting a deed for any portion of the property that the Association and each condominium owner would be required to have any construction disputes against developers resolved exclusively through binding arbitration in accordance with the Federal Arbitration Act (FAA) and the California Arbitration Act. The purchase agreements signed by individual owners included references to the CC&Rs generally and the arbitration provision specifically.

The Association filed a construction defect action against Pinnacle on behalf of itself and its owner-members and Pinnacle moved to compel arbitration. The trial court invalidated the agreement, primarily on the grounds of procedural unconscionability, and the Court of Appeal affirmed, again on the ground of unconscionability.

The California Supreme Court’s opinion, reversing the Court of Appeal, rested on two primary grounds – the binding nature of the CC&Rs and the fact that they were not unconscionable as regards to the Association. 

The California Supreme Court found that the CC&Rs should be given binding effect, even if they do not fulfill common law requirements for equitable servitudes or the privity requirements of contracts, because recorded declarations act as contracts. Although the Association did not agree to the contract, the court found that it was bound by the fact that the owners of the condominium units (its exclusive members) had either “expressly consented or [are] deemed by law to have agreed to the terms in a recorded declaration.” The Association thus “should not be allowed to frustrate the expectations of the owners (and the developer) by shunning their choice of a speedy and relatively inexpensive means of dispute resolution.” The court also found that its conclusion was bolstered by the policies of the FAA, which would preempt “singling out an arbitration clause as the only term in a recorded declaration that may not be regarded as contractual in nature.”

The court also rejected the argument that the CC&Rs were unconscionable, finding that the fact that they were drafted and recorded before the sale of any units and without input from the Association was due to the “legislative policy choices embodied in the Davis-Stirling Act.” Although such declarations may be viewed as “adhesive,” the developer’s compliance with the act “provides a sufficient basis for rejecting an association’s claim of procedural unconscionability.” The court also found that the CC&Rs were not substantively unconscionable because the Association had not met its burden of finding that any aspect of the arbitration provision was “overly harsh or so one-sided that it shocks the conscience.” Indeed, the court found that the provision in question was consistent with the Davis-Sterling Act.

Although Pinnacle represents a definite “win” for condominium developers, it is worth reiterating that careful consideration of both the pros and the cons of arbitration is important when parties are involved in construction disputes. Knowledgeable counsel can be helpful when considering this issue.

Colorado News: Designation of Non-Parties at Fault in Construction Defect Cases is Not as Straightforward as it First Seems

By Jonathan M. Allen

In Colorado construction defect cases, defendants often designate non-parties at fault under a Colorado statute that allows for the fact-finder to apportion fault between parties and non-parties. See C.R.S. § 13-21-111.5(3). Issues frequently arise involving whether builders owe non-delegable duties of care, thus rendering designation of non-parties at fault improper, or whether apportionment of fault is appropriate when the theory of recovery is based on contract, rather than tort. No published appellate decision has addressed the issue head-on, so practitioners often look to trial court decisions for guidance.

Unfortunately, as is so often the case, Colorado trial courts are split on the issue. A recent decision from the Arapahoe County District Court determined that a homebuilder does not owe a non-delegable duty to the homeowner. See Marx v. Alpert Custom Homes, 10-cv-405, Order Regarding Plaintiffs’ Motion for Determination of a Question of Law (Arapahoe Co. Dist. Ct., Dec. 27, 2011). The trial court denied the plaintiffs’/homeowners’ request to strike the defendant’s/homebuilder’s designation of non-parties at fault on the theory that the homebuilder’s duty to plaintiffs was non-delegable. The court looked to A.C. Excavating v. Yacht Club II Homeowners Association, 114 P.3d 862 (Colo. 2005), which held that a subcontractor owed an independent duty of care to a homeowner. The Marx court reasoned that there would be no reason for the holding in Yacht Club II if the homebuilder’s duty to the homeowner was non-delegable. Consequently, the Marx court concluded that the homebuilder’s designation of its subcontractors as non-parties at fault was proper. 

The issue also presents itself in the context where tort claims are barred by the economic loss rule, leaving a plaintiff with only a contract remedy. The question then is whether designation of non-parties at fault under a contract theory of recovery is proper. In Dwight v. R.A. Nelson & Associates, 09-cv-94, Order re: Plaintiff’s Motion for Determination of Questions of Law (San Miguel Co. Dist. Ct., March 12, 2010), the court concluded that designation of non-parties at fault was appropriate for a breach of contract claim. The court rejected the defendant’s argument that apportionment of fault to non-parties was inappropriate in a breach of contract action because a non-party must owe a duty to the plaintiff before designation of fault is appropriate. Thus, defendant argued, because only the parties to the contract owe duties to the other, no non-party to that contract could appropriately be designated. The court rejected this argument, concluding, “A party who breaches a contract should only be responsible for damages caused by the breach. When there are multiple causes of the damage, the jury must be given a way to apportion the damages among the various causes. The apportionment statute is a sensible and practical way for a jury to do just that.”

Other courts have reached different conclusions. For example, in Ashby Family Partnership v. Design Service & Construction, LLC, 10-cv-89, Order (Grand Co. Dist. Ct., March 11, 2011), the court concluded, without much analysis, that “[r]egardless of whether there are contract or negligence claims, a general contractor may not designate its independent contractor as a non-party at fault.”

Whether and under what circumstances designation of non-parties at fault is appropriate in a construction defect case has important consequences and impacts a defendant’s potential exposure, expert witness opinions and the presentation of one’s case to a jury. However, until a Colorado appellate court weighs in on the issue, practitioners and trial courts will continue to struggle with non-party designation of fault issues in construction defect cases.

2012: Arizona Construction Law Summary

This year has been a busy one so far for legal developments affecting the Arizona construction industry. Here is a brief summary of court cases and legislation of interest.

Case Law:

1. In Wang Electric, Inc. v. Smoke Tree Resort, LLC, 2012 Ariz. App. LEXIS 120, 640 Ariz. Adv. Rep. 15 (Ariz. Ct. App. July 31, 2012), the Arizona Court of Appeals addressed the enforceability of five subcontractors’ mechanics’ liens and unjust enrichment claims against a landlord of commercial property. The lease agreement required the tenant to remodel the leased premises, but the landlord approved the plans and specifications and was obligated to reimburse the tenant a substantial amount in remodeling expenses.

As to the unjust enrichment claims, the Court held that the subcontractors must show that the landlord engaged in improper conduct—such as directly retaining the general contractor and refusing to pay—in order for liability to attach. Otherwise, the landlord’s active role in construction and the landlord’s contractual right to retain the improvements did not, by themselves, make retention of those improvements without payment to the subcontractors unjust. On the other hand, mechanics’ liens may attach to the landlord’s property if the tenant acted as the landlord’s agent in requesting the remodeling work.  A lease provision stating that no liens shall attach to the property is void against public policy.

Addressing whether the subcontractors properly perfected their mechanics’ liens against the landlord’s interest in the property, the Court held as follows: (1) serving the mechanics’ lien on the landlord (along with the lien foreclosure complaint) three months after recording the lien constitutes service “within a reasonable time” after recording the lien under A.R.S. § 33-993(A); (2) initial service of a preliminary 20-day notice on the landlord suffices to apprise the landlord of potential lien claimants, even if subsequent preliminary notices named only the tenant, and not the landlord, as the property owner; (3) a mechanics’ lien contains a sufficient legal description pursuant to A.R.S. § 33-993(A)(1) if it contains the county assessor parcel number and incorporates by reference a property description contained in the public records; (4) a preliminary 20-day notice may be served on the tenant’s managing member as the “reputed owner” pursuant to A.R.S. § 33-992.01(B) and is not invalid for failing to serve the landlord; and (5) a mechanics’ lien exclusively against the tenant’s leasehold interest that has been terminated is extinguished if the lien is imposed against improvements in which a landlord has a continuing or reversionary ownership interest, unless the tenant acted as the landlord’s agent (which it did in this case for purposes of the lien statutes), or the landlord is estopped from denying the agency relationship, the lien may be enforced against the landlord’s property interests.

2. In Technology Construction, Inc. v. City of Kingman, 636 Ariz. Adv. Rep. 20, 278 P.3d 906 (Ariz. Ct. App. June 12, 2012), the Arizona Court of Appeals affirmed the award of delay damages to a contractor on a public project. After the City of Kingman presented the contractor with a contract and notice to proceed four months late, the contractor submitted a notice of claim due to the increased cost of asphalt, changes in the work, delays beyond the contractor’s control and the cost impact on oil-based product caused by Hurricane Katrina. The Court held that despite the existence of a “no liability” clause stating “in no case…will the City…be liable for any portion of the expenses of the work,” the contractor nonetheless could recover damages pursuant to uniform specifications that were incorporated into the contract that contained delay damages and changed conditions clauses. The Court also rejected the City’s reliance on the classic rule in Hadley v. Baxendale, which holds that only reasonably foreseeable damages can result from a breach of contract and the City’s argument, that delay damages for increased material costs were not foreseeable, the Court held that these delay damages were reasonably foreseeable because “[p]rices of commodities…change over time and in accordance with market forces under many influences, including weather.”

3. In KAZ Construction, Inc. v. Newport Equity Partners, 629 Ariz. Adv. Rep. 8, 275 P.3d 602 (Ariz. Ct. App. March 2, 2012), the Arizona Court of Appeals held that even though a construction deed of trust was invalid for failure to have the trustee execute the deed of trust, a contractor could not enforce its mechanics’ lien against the reputed lender due to the contractor’s failure to serve a preliminary 20-day notice on that lender. A.R.S. § 33-992.01(B) requires that a mechanics’ lien claimant “shall, as a necessary prerequisite to the validity of any claim of lien, serve the owner or reputed owner, the original contractor or reputed contractor, the construction lender, if any, or reputed construction lender, if any,…with a written preliminary twenty day notice as prescribed by this section.” The Court reasoned that the policy underlying the statute was to provide notice to parties with an interest in the property so they might protect that interest. Since the contractor had constructive notice of the lender's reputed interest in the property and was statutorily required to provide that lender with a 20-day notice, the mechanics’ lien was invalid as to the lender.

4. In Alliance Trutrus, LLC v. Carlson Real Estate Co., 629 Ariz. Adv. Rep. 4, 270 P.3d 911 (Ariz. Ct. App. February 28, 2012), the Arizona Court of Appeals held that a contractor did not timely file suit against a mechanics’ lien discharge bond. The contractor originally recorded a mechanics’ lien against the property, but the owner executed and served a lien discharge bond pursuant to A.R.S. § 33-1004. The contractor thereafter filed suit on the bond. However, the contractor filed that suit more than six months after the contractor had recorded its mechanics’ lien, arguing that A.R.S. § 33-1004(D)(2) extended the statute of limitations since the lien discharge bond was served less than 90 days before the six-month lien foreclosure period expired. However, the Court held that the plain language of A.R.S. § 33-1004(D)(2) does not grant a claimant an additional 90 days to file its lawsuit, it merely allows an additional 90 days to amend any complaint to add the principal and sureties as parties. Since the contractor did not timely file its action within six months, the bond claim was already discharged as a matter of law before the action was filed.

5. In Hall v. Read Development, 623 Ariz. Adv. Rep. 11, 274 P.3d 1211 (App. 2012) (summarized in our June Under Construction newsletter), the homeowner plaintiff purchased a previously-owned house and experienced various structural problems. The homeowner filed suit against the original contractor alleging breach of the implied warranty of habitability and requesting “rescission of the purchase,” or damages for the cost of repair in the alternative. The jury found in favor of the homeowner on her breach of implied warranty claim and awarded $30,000 in damages. Both parties then requested their attorneys’ fees pursuant to A.R.S. § 12.341.01(A). The homeowner cited the court’s discretionary ability, in absence of a contractual provision addressing attorneys’ fees, to award the “successful party” its reasonable attorneys’ fees in any action arising out of contract. The original contractor, citing past settlement offers, based its request for fees on the statutory provision stating “if a written settlement offer is rejected and judgment finally obtained is…more favorable to the offeror…, the offeror is deemed to be the successful party from the date of the offer and the court may award [that party] reasonable attorney fees.”  The homeowner countered that the original contractor’s prior $40,000 and $126,000 settlement offers did not exceed the “judgment finally obtained,” because the judgment finally obtained consisted of the $30,000 verdict plus the homeowner’s attorneys’ fees and costs. The trial court agreed: since the homeowner would be awarded $225,000 in fees and $10,757.79 in costs as the “successful party,” the aggregate amount, including the $30,000 in damages awarded by the jury, exceeded the contractor’s prior settlement offers.

The Arizona Court of Appeals upheld the trial court’s decision to include attorneys’ fees and costs in the “judgment finally obtained,” but on different grounds. As a preliminary matter, the court agreed there can be two competing “successful parties” in a contract-related case—(1) the overall successful party in the litigation, based on the jury’s verdict, and (2) the party whose offer was rejected and never beaten by the “judgment finally obtained,” but that party is deemed “successful” only from the date of the offer forward. The court clarified that the amount of fees and costs the trial court should consider in determining what the “judgment finally obtained” are those fees and costs incurred up to the date of the offer, not through the date of the judgment. In this case, the original contractor made a $40,000 settlement offer in January 2007 but, at the time of that offer, the homeowner had incurred $69,396.50 in fees. Later, about one month before trial, the original contractor made another settlement offer for $126,000—however, the homeowner had incurred $206,692.81 in fees as of that date. In both cases, the “judgment finally obtained”—the homeowner’s pre-offer attorneys’ fees and costs along with the $30,000 damages award—exceeded the original contractor’s various settlement offers and therefore precluded the original contractor from being a “successful party” from the date of the offers. Therefore, since the homeowner was the only “successful party,” the trial court’s $225,000 fee award and $10,757.79 cost award in the homeowner’s favor was upheld.

The Arizona Court of Appeals also agreed that the homeowner could not seek rescission of her home purchase. Although the Supreme Court long ago eliminated any privity requirement for subsequent homeowners to maintain a breach of implied warranty of habitability claim against the original builder, privity of contract is nonetheless required for any homeowner seeking rescission of the contract. Thus, a subsequent purchaser is limited to the remedy of recovering damages for any breach of the implied warranty of habitability.

Legislation:

1. H.B. 2123 – Transaction Privilege Tax Reform Committee. This bill establishes the Transaction Privilege Tax Reform Committee and requires it to study and make recommendations regarding the collection of revenues to the state General Fund - including individual and corporate income tax as well as the transaction privilege tax. The bill also requires the committee to make recommendations to minimize the fiscal impact to cities, towns and counties. The committee will submit its report to the Governor and Legislature by October 31, 2012.

2. H.B. 2830 – Energy Savings Accounts. This bill indefinitely extends the current expiring law allowing school districts to enter into long-term energy savings contracts at no initial outlay of money, and extends this contracting ability to the rest of state and local government.

3. S.B. 1441 – Residential Construction, Fall Protection. This bill creates a more flexible standard for residential fall protection of Arizona construction workers. In particular, the bill:

  • Requires each residential construction employee who is engaged in construction activities that are 15 or more feet above areas or surfaces to which the employee can fall to be protected by guardrail systems, safety net systems or personal fall systems, except when an employer can demonstrate that it is impractical or creates a greater hazard.
  • Allows for the suspension of residential construction fall protection requirements if the work in question is of a short duration or non-repetitive.
  • Includes requirements for temporary or emergency conditions where there is a danger of employees or materials falling through floor, roof or wall openings or from stairways or runways.
  • Permits the employer to develop and implement a fall protection plan that meets the requirements pursuant to current statute if the employer demonstrates that it is infeasible or creates a greater hazard to use these systems.
  • Permits an employer to develop a single fall protection plan covering all construction operations.

Employers whose work does not fall within the Arizona Department of Occupational Health and Safety’s jurisdiction, such as federally owned or managed lands, and work on Native American lands, must still comply with federal OSHA’s residential fall protection enforcement policy.

The Davis-Bacon Corner

It is well-established that general contractors are responsible for their subcontractors’ compliance with Davis-Bacon. Nevertheless, we frequently encounter situations where the general contractor has failed to comply with this obligation. A recent settlement reached by Lettire Construction Corp. (Lettire) and the Wage and Hour Division of U.S. Department of Labor (DOL) is instructive.

Lettire was the general contractor at the “Hobbs-Ciena Project,” (the Project), a construction project of the City of New York (NYC) for the rehabilitation of several apartment buildings and the construction of new ones. The Project was funded, in part, with monies from the Tax Credit Assistance Program (TCAP) and was therefore subject to the American Recovery and Reinvestment Act of 2009 (ARRA), a Davis-Bacon Related Act, and the applicable regulations issued at 29 C.F.R. parts 1, 3 and 5 (the Regulations).

Employees from several of Lettire’s subcontractors complained to DOL that they were not receiving the appropriate wages and overtime pay. After an investigation, DOL concluded that Lettire had:

  1. failed to incorporate by reference the required Davis-Bacon and Related Acts (DBRA) labor standard clauses set forth in the Regulations in its subcontracts with various subcontractors;
  2. failed to receive certified payrolls from several of its subcontractors, including several second tiers;
  3. failed to post the applicable wage determination at the Project;
  4. failed to monitor the subcontractors to ensure payment of the required prevailing wages, fringe benefits and overtime wages to the proper job classifications for laborers and mechanics; and,
  5. submitted subcontractors’ certified payroll records to the state agency that had awarded the construction project (NYC Department of Housing Preservation and Development (HPD)), which failed to list certain laborers and mechanics who performed work at the Project.

In addition to paying backpay due to the employees of its subcontractors (first and second tier), in order to avoid debarment, Lettire entered into a settlement with DOL which, among other things, required it to:

  1. hire a federal monitor who will conduct regular compliance reviews of Lettire and its subcontractors for three years;
  2. investigate prospective subcontractors with respect to their ability to comply with Davis-Bacon;
  3. establish electronic type bookkeeping and certified payrolls to ensure their accuracy;
  4. assign supervisors to oversee compliance on Davis-Bacon jobs, and;
  5. advise employees on their job classifications, wage and fringe benefit rates and the right to submit complaints to DOL.

Labor Solicitor Patricia Smith stated that this settlement “should serve as a warning to other contractors that the Department’s Wage and Hour Division has many enforcement tools, including surveillance of workers moving on and off project sites, withholding of contract funds, litigation and debarment, to hold all parties from the top of the contract chain to the bottom accountable for compliance with the law.”

Published In: Alternative Dispute Resolution (ADR) Updates, General Business Updates, Construction Updates, Commercial Real Estate Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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