Construction in Brief 2018 Volume 1

by Cohen Seglias Pallas Greenhall & Furman PC

Welcome to the newest edition of the Construction In Brief newsletter. This issue includes:

One Year Later: An Update on the PA Construction Notices Directory
By John A. Greenhall & Christopher C. Reese

What Every Contractor Needs to Know About Withdrawal Liability
By Jonathan Landesman

Strategies for Buying or Selling Construction Materials
By Anthony L. Byler and Jeffrey E. Jakob

Has the Government “Waived” Goodbye to Strict Compliance with Your Contract Specifications?
By Maria L. Panichelli and Alissandra D. Young

One Year Later: An Update on the PA Construction Notices Directory

In what seems like the blink of an eye, 2017 is already gone. One of the biggest changes to the Pennsylvania construction industry is now over a year old. That’s right, the Pennsylvania Construction Notices Directory—the state-operated construction project database that can, under various circumstances, affect the lien rights of owners, contractors, suppliers, and subcontractors—went live over a year ago.

But even after a full year of operation, many in the industry still seem unaware that the Directory exists or unsure of how it works. And those who do know about it are likely wondering how it has impacted the construction industry in its first year. Given the potentially high stakes of not using the Directory, we have provided a recap of the essential features of the Directory and how it has been used.

What is the Pennsylvania Construction Notices Directory?
The Directory is a searchable, online database of construction projects. Whether a project is registered in it is at the discretion of project owners. An owner’s contractor may also register a project if the contractor is an authorized agent of the owner. To register a project, owners and contractors can file a “Notice of Commencement” in the Directory as long as the project’s costs are at least $1.5 million. When an owner or contractor registers a project, all suppliers and subcontractors are required to file a “Notice of Furnishing” within forty-five days of either beginning work on or first providing materials to the job site. Suppliers and subcontractors that fail to comply with the forty-five day Notice of Furnishing requirement forfeit their lien rights for the project.

Use of the Directory to restrict or enforce lien rights is somewhat limited. A searchable project’s owner or contractor can only limit supplier and subcontractor lien rights via the Directory if the searchable project’s contract contains language stating that failure to file a Notice of Furnishing will result in loss of lien rights, and if the owner has posted a copy of the Notice of Commencement at the job site. Additionally, a supplier or subcontractor seeking a lien against a project must file a Notice of Furnishing, as specified above, and provide an owner with notice of intent to file a lien at least thirty days before actually filing the lien.

What was the impact of the Directory in its first year?
By all appearances, the Directory’s first year of operation was a success. As we expected, owners and contractors wasted no time in registering projects. As of this writing, we estimate that in 2017 over two-hundred projects were registered. Given the Directory’s heavy use thus far and the possible legal requirements or consequences one could face if one’s project is registered, it may be time for you to run a quick Directory search to ensure your compliance and protect your rights.

The Directory’s operation also led to a need for contractors to “tune-up” their contract documents to reflect the Directory’s contractual notice requirement. The statute requires a contract to contain language essentially warning suppliers and subcontractors that failing to comply with the Notice of Furnishing requirement will result in the loss of their lien rights. By making Directory-driven contract revisions, contractors can add significant value to their business by ensuring the business’ ability to restrict the group of potential lien claimants to only those that complied with the Notice of Furnishing requirement.

We believe that the Directory’s operation is also leading to an increase in bond claim activity. Though this is difficult to assess with certainty, an increase in bond activity is likely because the governing statute requires that an owner or contractor’s Notice of Commencement filed in the Directory contain the name and contact information of any surety provides performance or payment bonds and the applicable bond numbers. Given the difficulty of obtaining this information in private projects not registered in the Directory, and that a number of private projects registered in it comply with the statute’s surety disclosure requirement and include this information, it is reasonable to assume that unpaid suppliers, subcontractors, and the like made more bond claims in 2017 than in previous years.

From a legal perspective, the statute providing for the Directory remains entirely intact. In other words, it appears that no courts in the Pennsylvania judicial system expanded upon or further defined any of the statute’s provisions during 2017. This is not surprising to us given that twelve months in real time can often feel more like twelve minutes in judicial time; however, we anticipate a judicial review of the statute in the near future. We believe that the statute contains a number of provisions that may need to be litigated to determine their true meanings. But until that happens, the Directory continues to operate as described.

If you are a player in the Pennsylvania construction industry, it is absolutely crucial for you to understand how the Directory works and how it can impact your legal rights and remedies. Owners, contractors, and subcontractors that fail to register projects in the Directory, or do so without proper notice language in the project’s contract, can lose the ability to restrict the number of possible lien claimants on a given project. On the other hand, suppliers and subcontractors on a project that fails to comply with the Notice of Furnishing requirement can lose their ability to file a lien on the project.

Throughout the course of 2017, our attorneys became very familiar with the nuances of the Directory. If you have any questions about how it relates to your construction business, feel free to contact us for assistance.

What Every Contractor Needs to Know About Withdrawal Liability

If you are a union contractor, you are probably making contributions to one or more union pension funds every month. These pension funds, known as multi-employer pension plans (MEPs), rely on a number of employers paying their share toward a common fund. Notably, because of the nature of these pension plans, many (if not all) of them are underfunded and do not presently have enough assets to cover their expectant liabilities. However, despite underfunding, employees are still entitled to their full pension benefits. But who is responsible for this unfunded amount, and what happens if you exit the fund?

You may be surprised to learn that the contributing employers are liable for all of the vested benefits that must be paid, even if they leave the pension plan altogether. Put another way, the responsibility, or liability, for benefits that the fund cannot cover actually belongs to the employers paying into the fund. Each employer owns a proportionate share of the unfunded liability, and that share is referred to as “withdrawal liability.” 

1. What is Withdrawal Liability?
Withdrawal liability exists for all employers who contribute to underfunded MEPs. Under withdrawal liability rules and federal law, an employer who experiences a “triggering event” (such as a ceasing to contribute to the MEP due to leaving the fund, closing down, going out of business, etc.) has to continue to make payments to the fund to cover their proportionate share of the unfunded liability. Withdrawal liability essentially acts as an exit fee, which requires you, the employer, to pay a share of the pension plan’s future benefits which have not already been funded by previous contributions or investments. This way, the fund is covered for the benefits that need to be paid out. Thus, even if you end your relationship with the fund and you are “current” in your monthly contributions, you may still be on the hook for your proportionate share of the unfunded amount. Upon withdrawal, the plan determines the amount of an employer’s liability, notifies the employer of that amount, and collects it from the employer.

2. When Do You Need to Worry?
Withdrawal liability can be triggered when an employer shuts down or has a substantial reduction in business operations. Unfortunately, this is true even when the reasons for closing are primarily financial. A pension fund can even assess withdrawal liability when employees vote to change or decertify their union. Common events that can trigger some form of withdrawal liability include, but are not limited to, the sale of the business, a sale of assets, substantially downsizing, going non-union, moving the business, closing the business, or the termination of the Collective Bargaining Agreement (CBA). Typically, a withdrawal is classified into one of two types:

A. Complete Withdrawal — A complete withdrawal from a plan is when the contractor permanently ceases to have a current financial duty to the fund. This can occur when (1) the employer permanently ceases all covered operations under the plan (i.e., closing up shop) or (2) the employer permanently ceases to have an obligation to contribute (i.e., terminating the CBA). 

B. Partial Withdrawal — Partial withdrawal can occur when there is a substantial decline in the obligation to contribute, including layoffs, plant or warehouse closures, sales, or even changes in the CBA. In the building and construction industry, a 70% base unit decline in contribution will be considered a partial withdrawal. Partial withdrawal may also occur when an employer no longer has contractual obligations under one or more, but not all of the CBA’s, and continues to perform the same type of work within the jurisdiction of the CBA. 

Additionally, a “facility take-out” may also trigger partial withdrawal liability, where the employer no longer has an obligation to contribute for the work at some, but not all, of its locations but the employer continues to perform work in at least one location where the contractual obligation to contribute exists. 

3. The Construction Industry Exemption
There is a special rule applicable to “building and construction industry” employers. Under the exemption, if

1. the employer does not perform the same work in the same geographic jurisdiction; or
2. resumes such work within five (5) years;

there is no withdrawal liability when the employer’s contributions end. Thus, if a contractor ceases operations for a full five years, they can avoid paying the withdrawal liability. This can be useful when going out of business. 

4. Conclusion
Unfortunately, if you contribute to an MEP the actual amount of withdrawal liability you are responsible for may be out of your control. However, there are steps employers can take to have a better sense of their potential liability and to be aware of any changes to that amount. 

As an employer, you have a legal right to request from the plan an estimate of your potential withdrawal liability. Sending a letter to each MEP in which you contribute requesting an estimate or assessment of your potential liability can keep you aware of what you might owe. 

It is important to be aware of your obligations under your pension plan, and what can trigger your withdrawal liability, in order to make financially sound business decisions going forward.

This article was originally published in the August 2017 edition of the Utility and Transportation Contractor Association’s Magazine.

Strategies for Buying or Selling Construction Materials

Virtually every transaction for the sale of construction materials involves an exchange of the contracting parties’ respective terms and conditions, along with several documents including credit applications, price quotes, purchase orders, order acknowledgments, and invoices. At some point during the sale process, parties will likely send or reference forms containing standard terms and conditions. Because these terms are usually peripheral to the transaction and often considered to be boilerplate, they are rarely discussed and frequently overlooked.

When a dispute arises, however, the parties’ terms are thrown front and center. When faced with two different sets of terms, a judge or arbitrator must determine which party’s terms are the controlling language of the parties’ contract. This sorting process is known as “the battle of the forms” and can dramatically affect the outcome of the dispute. 

For example, a material supplier’s terms might disclaim all liability to the purchaser except for the replacement of defective materials, which means a contractor might be unable to recover damages for delays caused by late deliveries. Likewise, a contractor’s standard terms might allow it to cancel orders up to the last minute, even if the materials were specially fabricated for the job. Standard terms might also require lawsuits to be brought in a particular state, which may be inconvenient and expensive for the other party. Or the terms might bar lawsuits altogether, instead of requiring binding arbitration or mediation. In short, the party that wins the battle of the forms will have a significant advantage in any dispute that arises from the contract. 

In almost every state, the Uniform Commercial Code (UCC) (or some variation of it) provides the rules that govern a court’s battle of the forms analysis. The UCC rules take into consideration the content of the parties’ terms, the timing of their exchange, the communications between the parties, and the conduct of the parties. The outcome often turns on factual nuances that vary from case to case and may have initially received little thought from the parties. As a result, contractors and their suppliers are frequently rolling the dice when it comes to protecting themselves in the event of a dispute. 

We offer two suggestions you can easily implement to minimize your company’s exposure to onerous terms and maximize the effect of your preferred terms.

The first and most important step for controlling the battle of the forms is to include a copy of your terms with the first document you send to your counterparty. This will not guarantee that all of your terms are included in the contract, but it will ensure that no contract is formed before you send your terms. For suppliers, the first document might be a price quote or a credit application. For contractors, it would probably be a purchase order. By way of example, suppose a supplier sends a price quote and a copy of its terms to a contractor and the contractor sends back a purchase order that only addresses the price and quantity of materials. Even if the contractor sends its terms at a later date, a court would probably find that a contract had already been formed under the supplier’s terms. By sending the purchase order without objecting to or countering the supplier’s terms, the contractor creates the impression (intentionally or otherwise) that it wants to proceed with the deal and that the supplier’s proposed terms are acceptable. On the other hand, if the contractor sends back a purchase order along with a copy of its terms, there is an increased likelihood that the contractor’s terms will be included in the contract. In short, it matters little what your terms say if you send them too late. The longer you wait, the more likely it is that you will be at the mercy of the counterparty’s terms.

The second key for controlling the battle of the forms is to state on all of your standard documents (and in your terms and conditions) that your assent to any deal is expressly conditioned on the acceptance of your terms. This is particularly important when the contractor and supplier both send their standard terms in a timely manner and then complete the purchase without further negotiation of those terms. If only one party makes its assent expressly conditional on its terms, there is a much greater possibility that a court would find the contract to include only that party’s terms. If both parties make their assent expressly conditional, then the contract will consist of the terms that both parties agree on, and any gaps will be filled by the default provisions of the UCC. Thus, by including “expressly conditional” language in your standard terms and other forms, you can establish a baseline level of protection against your counterparty’s onerous terms and you will increase the chance that your terms will control.

While the battle of the forms is frequently overlooked, it has a significant impact on disputes that arise from contracts to buy or sell materials for construction projects. By simply making a habit of sending your terms early and ensuring your assent is expressly conditioned on those terms, you will minimize your exposure to burdensome terms and maximize the effect of your preferred terms.

Has the Government “Waived” Goodbye to Strict Compliance with Your Contract Specifications?

Good news for federal construction contractors: a recent Armed Services Board of Contract Appeals (Board) decision confirmed that waiver defenses can defeat government demands for strict compliance with contract requirements. On December 19, 2017, the Board found in Appeal of American West Construction, LLC that the United States Army Corps of Engineers (Corps) had effectively waived the right to enforce a construction contract specification. This meant that the government could not recover from the contractor the difference in the price it paid for the original specification and the lower amount spent by the contractor to perform the deviation. In a world where the government often has the right to strictly enforce contract requirements and hold contractors financially responsible for any deviation, this decision is a big win for construction contractors. 

The solicitation at issue in Appeal of American West Construction sought proposals for the construction of bridges over certain irrigation canals in El Paso County, Texas for the Corps. The solicitation specified that the contractor should build temporary bridges to access the construction site and then remove those temporary bridges after the permanent bridges were finished. One offeror, American West Construction, LLC (American West), believed it would be less expensive, faster, and safer to access the site via a levee, rather than building temporary bridges. However, to use the levee, American West had to apply for an easement from a local water district and obtain the necessary permits. Those items were not finalized in time for the levee plan to be incorporated into American West’s response to the solicitation. Accordingly, American West’s proposal and price included the construction of the originally-contemplated temporary bridges, rather than the use of the levee. American West ultimately received a contract award and was directed to proceed with the work outlined in its proposal, including construction of the temporary bridges. 

However, after receiving the contract award, American West obtained the permits necessary to access the levee. It scrapped the construction plan laid out in its proposal and proceeded to access the construction site through the levee without building the contractually-mandated temporary bridges. American West liked this substantially cheaper plan — what contractor doesn’t like an increased profit margin? The Corps, however, disagreed. Because it had never approved this deviation from the contractual specifications, the Corps asserted a claim against American West for the difference in cost between the construction of temporary bridges, and the use of the levee — a difference of approximately $40,000. 

At first glance, it might appear that the government had a fail-proof argument. As any experienced federal contractor will tell you, the government may require strict compliance with terms of a contract, even if other methods of performance are more efficient. Moreover, if a contractor does not fulfill its contractual requirements, the government is entitled to adjust the contract price downwards and, further, may withhold payments to the contractor to set off the price difference of the alternate work. But — as American West made clear — sometimes, the government’s conduct during contract performance may amount to a “waiver,” which releases the contractor from strictly complying with its contractual requirements, even absent explicit approval from the government. American West also made it clear that the government may be prohibited from seeking compensation for the difference in price from a contractor. 

So how do you, as a contractor, know when strict compliance is required and when the government’s conduct has amounted to a waiver? The answer depends on the specific facts of each case, but there are a few key points to keep in mind. Generally speaking, when: (1) the government is aware of the contractor’s deviation, but (2) fails to demand strict compliance for (3) an extended period of time, such that (4) the contractor reasonably believes compliance is not required, the government has likely waived its right to demand strict compliance later. 

For example, in the American West case, the government was made aware through a submittal that American West planned to access the site via the levee rather than using temporary bridges. Although the Corps never explicitly approved the plan to use the levee, it also never explicitly rejected it. For four months, the Corps regularly had personnel onsite observing the use of the levee, noted in several construction meeting minutes that American West obtained the necessary permits to use the levee, and approved and made progress payments, all without raising any objection to the levee. The Board reasoned that this conduct led American West to reasonably believe that the Corps no longer required the temporary bridges to be built. Accordingly, when the Corps later sought reimbursement for the difference in price, it was too late. The Board held that the Corps’ conduct had already waived strict compliance. The agency, therefore, had no right to pursue recovery from American West, even though American West had admittedly deviated from the contract specifications. This meant that American West did not have to pay the Corps the $40,000 it saved by using the levees. 

So what does this mean for you?
Federal contractors should be aware that, while deviation from contract specifications is never ideal, you are not necessarily without defenses if deviation has already occurred. If the government has implicitly accepted your work, observed but failed to object to your work, or engaged in any other conduct that has led you to reasonably believe that it has waived the contractual requirements from which you deviated, you may be able to defeat a claim against you. That said, while this is certainly a helpful decision for contractors, it is important to remember that the availability of a successful waiver argument depends on the specific circumstances of your case. It is still best practice to ensure the government provides explicit approval for deviations to contract specifications. If you are a contractor facing government claims for reimbursement for your deviation from contract requirements, be sure to contact a legal professional to determine whether a waiver defense applies to your situation.

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.

© Cohen Seglias Pallas Greenhall & Furman PC | Attorney Advertising

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