Letter from the Editor

Welcome to the fall edition of our Under Construction newsletter. The first article in this edition highlights the pros and cons of joint venturing on a construction project, and items to consider in preparing the joint venture agreement. Other key topics which are addressed in this newsletter include a recent Arizona case that held that the Arizona contractor’s licensing statutes do not bar a licensed contractor who performs work outside the scope of his license from recovering for the value of the work for which he was properly licensed, a discussion of salient points to consider when drafting notices of termination and a recent decision by the National Labor Relations Board (NLRB) to change the standard that has existed for many years for determining whether two or more entities are “joint employers” of the same employees. This last NLRB decision could have a profound effect on the construction industry and the general contractor/subcontractor relationship and should be understood and addressed appropriately by those in the industry.

New legislation and court cases affecting the construction industry are constantly changing the way to conduct business. All of these articles can be valuable to anyone interested in keeping up with these ever-evolving issues. We hope we are able to inform and enlighten you. Please let us know if you want us to address a specific construction issue in a future newsletter. Have a fun, busy and safe fall season!

Regards,
Jim Sienicki

Have You Considered a Joint Venture?

by Richard G. Erickson

In July we presented a seminar to a national audience on the topic of joint ventures in construction. In attendance for the seminar were controllers, financial officers, contracts attorneys, project managers and executives representing owners/developers, general contractors and specialty contractors/subcontractors from the public and private sector. They were interested in the topic of joint ventures because of growing trends in construction project delivery favoring joint ventures. Judging from feedback after the seminar, joint venturing is a hot topic, and we want to share some of the highlights with you.

Many of our clients already appreciate the advantages of joint venture agreements and have achieved success for owners on large and small projects. Joint ventures, nonetheless, remain less common than traditional agreements between owners and prime contractors. Since 2013, ConsensusDocs^® has taken the lead in creating form agreements for joint venture projects, so we focused much of our seminar on building the ideal joint venture contract, project-by-project, using ConsensusDocs^® and similar form agreements as a foundation.

There is, indeed, a lot to consider when joint venturing in construction:

PROS:

• Will a joint venture provide access to additional owners, subcontractors and suppliers who may otherwise be out of reach?
• Will a joint venture help you to obtain work (like roadway construction) in which you may have less experience than your joint venture partner?
• Does your joint venture partner offer technology or other innovations you prefer not to develop on your own (due to cost, staffing, time, etc.)?
• Do combining financial resources and pooling key personnel make more sense than trying to go it alone?
• Will a joint venture open the door to qualify for strategic initiatives set by state and federal agencies or for minority, small business, veteran or women-owned business preferences in bidding?
• Are there social media and related marketing opportunities to be gained from joining forces with a well-branded and highly recognized name in the industry?

CONS:

• Will a joint venture complicate project management and stifle key players not used to sharing leadership responsibilities?
• Does sharing risk in a joint venture expose your company to liabilities it would not otherwise have on the project?
• Does your joint venture partner have a poor safety record or prior performance problems that affect your competitiveness in bidding for the project?
• Will a joint venture create more hurdles for the owner in terminating its contract or seeking remedies?
• Does the joint venture ultimately lead to a compromise of proprietary information that you prefer to protect and keep confidential?
• Will a joint venture adversely affect your bonding capacity or make your liability insurance less affordable?

While many of these pros and cons equally apply to traditional project delivery models (like construction manager at risk), these factors are generally unique to analyzing the risk and benefit of joining forces with a contractor that may otherwise be your competitor for the project. Because joint venture agreements are limited to a single project, many contractors and owners typically identify more advantages than disadvantages to joint venturing, especially when owners may see no downside in a combined effort between two contractors committed to build the project together.

Most joint venture agreements are generally structured the same. For example, ConsensusDocs^® created standard form contracts 297, Joint Venture Line Item Agreement and 298, Joint Venture Agreement for General Contracting (from their 200 Series) and 499, Joint Venture Agreement for Design-Build Projects (their 400 Series). ConsensusDocs^® also offers standard form contract 299 as its Joint Venture LLC Operating Agreement if the joint venture partners choose an LLC as their corporate model for the project. The standard form construction contracts start by defining for the owner the relationship and interests of the joint venture partners, including start and end dates of the joint venture, how the profit will be split and the parties’ indemnity obligations.

A standard joint venture agreement will also provide the owner with significant detail about the management team (ConsensusDocs^® 297 establishes an “Executive Committee” to coordinate project management) and financing to include payment mechanics, options for joint banking and timing of distributions to the joint venture partners. It is equally important to cover joint responsibility for performance of the work, licensing, bonding, insurance, permits and disposition and retention of shared equipment and project records. In addition, joint venture agreements should specify what happens in the event of material breach and default by one or both joint venture partners and the owner’s corresponding termination rights and remedies. Finally, the owner and joint venture should include dispute resolution provisions in their agreement.

From healthcare to roadways to infrastructure and even homebuilding, public and private owners and contractors alike are touting the success of their joint venture projects. Pooling contractor resources to join forces tends to sway project owners, but contractors should also consider the risk factors when drafting their joint venture contracts. Owners should equally ensure that their joint venture agreements cover the full spectrum of risk and management required to successfully complete a joint venture project.

Arizona Contractor Can Recover for Part of Work Within Scope of Contractor's License

by Mark Molique

The Arizona Court of Appeals recently held that the Arizona contractor’s licensing statutes do not bar a licensed contractor who performs work outside the scope of his license from recovering for the value of the work for which he was properly licensed. In Chavira v. Armor Designs of Delaware, Inc., No. 1 CA-CV 14-0344, slip op. (Ariz. Ct. App. Aug. 13, 2015), Chavira brought suit against Armor Designs of Delaware, Inc. (Armor Designs) after he disassembled and reinstalled equipment at Armor Designs’ manufacturing plant. Chavira was a licensed and bonded electrical contractor for both residential and commercial work. Armor Designs alleged that 18 of 77 tasks invoiced by Chavira fell outside the scope of Chavira’s license.

Arizona Revised Statute (A.R.S.) § 32-1153 prevents a contractor from bringing a lawsuit to collect payment for any work requiring a license without first proving that he was duly licensed at the time of contracting and at the time the cause of action arose. The statute prevents an unlicensed contractor from bringing suit to recover for any work that would require a license. Previous Arizona cases have held that the statute prevents a licensed contractor from recovering for work where all of the work performed fell outside of the license scope. See Sanders v. Foley, 190 Ariz. 182, 190, 945 P.2d 1313, 1321 (Ct. App. 1997) (section 32-1153 barred general commercial contractor from recovering for residential construction).

A.R.S. § 32-1153’s application to a licensed contractor who performed work where only a portion of the work fell outside the license scope was not clear before the Chavira case. Armor Designs argued that because some of the work Chavira performed fell outside the scope of his license, A.R.S. § 32-1153 barred Chavira from recovering for any of the work he performed. In Chavira, the court held that a licensed contractor may recover for the portion of the work for which he was properly licensed even though he could not recover for the work outside the license scope. The court reached this conclusion despite the fact that “the vast majority of the tasks Chavira performed fell within the scope of his electrical contracting license.”

In concluding that Chavira was not barred from any recovery, the court recognized that the licensing statutes should not be given an overbroad interpretation and should not be used as a sword against a licensed contractor regarding work within the scope of his license. The court also rejected an argument that because A.R.S. § 32-1151 made unlicensed contracting unlawful, Chavira should be barred from any recovery. While recognizing that Chavira may have violated that statute in performing work outside of its license scope, the court reasoned that the penalty for violating section 32-1151 was set forth in A.R.S. § 32-1153, that is, to bar an action to collect for work outside the scope of the license only.

The court noted that Chavira would “still have to prove as a factual matter that the licensed work can be bifurcated from the unlicensed work.” A contractor in this situation should take care when bringing suit to separate recoverable portions from what cannot be recovered or, as other case law holds, the entire claim could be lost. See Miller v. Superior Court, 8 Ariz. App. 420, 423, 446 P.2d 699, 702 (1968) (failing to separate valid from invalid “infects the valid part, tainting it with invalidity and causing it to fail”).

For all contractors, this case should be a warning to make sure that they are properly licensed for all the work they intend to perform before contracting to perform the work.

Use Care in Drafting Notices of Termination

by Daniel Frost

One of the most critical points of any construction project can be the decision to terminate a contractor or subcontractor for cause. The reasons are obvious. Justifications for a termination vary greatly from project to project and an incorrect decision can excuse the terminated party from further performance and subject the terminating party to a wide variety of costs and/or damages. The standards for a termination for cause are exacting. In order for an owner or contractor to properly terminate a contract, it must prove that:

(1) the contractor or subcontractor materially breached its contract, based upon an evaluation of the circumstances under the doctrines of substantial performance, economic waste, excusability, waiver, cure, mitigation, impracticability, and principles of contract interpretation; (2) the material breach was not induced, preceded, or otherwise excused by the terminating party's own supervening material breaches of contract; (3) the termination decision resulted from the exercise of independent discretion and good-faith motives of those having authority to terminate the contract; (4) the breaching party and its surety were given adequate notice of and an opportunity to cure deficiencies deemed sufficiently material to warrant termination; (5) the terminating party terminated the contract in strict compliance with contractually specified termination procedures; (6) the breaching party's performance bond surety was allowed to exercise its post-termination performance rights; (7) if there was no performance bond or if the surety refused to acknowledge its performance obligations, the terminating party's reletting of the contract was both necessary and reasonably accomplished in mitigation of damages; and (8) the terminating party's compensable completion costs were reasonably incurred and properly accounted for.
5 Bruner & O'Connor Construction Law.

Clearly, detailed planning and care are necessary before terminating a contractor or subcontractor for cause. But all too often, a party desiring to terminate another party for cause focuses on the claimed breach and the post-termination costs and remedies, and fails to adequately address certain necessities.

One of the most important necessities can be the actual notice of termination. Judges and commentators alike stress the need for a fair and comprehensive notice prior to termination. If a breach can be cured, the breaching party must first be given clear notice of, and a fair opportunity to, cure the breach. A termination for cause may not be upheld if the breaching party is not given a reasonable opportunity to remedy mistakes or deficiencies in performance. The notice must also clearly explain to the breaching party the reasons for the termination and describe the inadequate performance specifically. It must also advise that without prompt correction, the contract will be terminated. Moreover, the cure notice must thoroughly define the parameters of the problem giving rise to the threatened termination. Routine correspondence, meeting agendas or deficiency punch lists, alone, do not necessarily constitute adequate cure notice sufficient to warn a contractor or subcontractor that aspects of its performance are viewed as endangering future performance and warranting termination for cause. See 5 Bruner & O'Connor Construction Law § 18:41.

The Court of Appeals of Minnesota in Blaine Econ. Dev. Auth. v. Royal Elec. Co., 520 N.W.2d 473, 477 (Minn. Ct. App. 1994) also provides some helpful guidance in the drafting of a notice of termination. In that case, the contract did not require that any particular written notice was necessary to warn the subcontractor of the consequences of failure to correct inadequate performance. Nonetheless, the court recognized that, “under a typical construction contract, work may be done over an extended period of time. An owner could be dissatisfied with a contractor's performance on part of a project, and notify the contractor of this dissatisfaction, without requiring that correction efforts begin right away.” Id. The court went on to hold that “written notice to cure must describe the inadequate performance and must fairly advise [the subcontractor that the contractor] considers the inadequate performance serious enough that, without prompt correction, the contract will be terminated.”

This is important because a contract termination that is shaped by “ulterior motives” is wrongful. 5 Bruner & O'Connor Construction Law § 18:42. It follows that any notice of termination must be clear and objective enough to dispel doubts about the motivations of the terminating party.

It is not difficult to distill a helpful checklist for a notice of termination from these cases and commentaries. First, the notice must list with as much particularity as possible the breaches. It would be helpful to also explain the seriousness of the deficiencies and the reasons for the threatened termination. It also must be clear enough to put a reasonable person on notice of what must be accomplished to avoid termination. A definite and fair period of time for the breaches and deficiencies to be remedied should be delineated. In addition, the notice must be timely enough to allow a cure to actually be accomplished. Lastly, if the cure is not effected within the given time period, a follow-up notice of actual termination and post-termination instructions should be provided promptly.

Joint Employers Under Labor Law/Implications for the Construction Industry

by Gerard Morales

On August 27, 2015 the National Labor Relations Board (NLRB) changed the standard that has existed for many years for determining whether two or more entities are “joint employers” of the same employees. As discussed in this article, this change in the law will have very significant implications in the traditional relationship between general contractors and subcontractors in the building and construction industry. Thus, to the extent that general contractors possess a significant degree of control over “essential terms and conditions of employment” affecting their subcontractors’ employees, such as scheduling and hours of work, the general may be found a “joint employer” with the subcontractor with respect to the latter’s employees, even when the control over such terms of employment is not exercised directly or at all.

THE OLD STANDARD

Up until August 27, 2015, the standard has been that in order to find a joint employer relationship, it must be demonstrated that the various “employing” entities have “direct and immediate control over the employees’ essential terms and conditions of employment.”¹

THE NEW STANDARD

Under the new standard adopted by the NLRB, the putative employer(s) will now be “joint employer(s)” if it possesses sufficient control over the employees essential terms and conditions of employment, irrespective of whether such control is exercised directly or indirectly, such as through an intermediary, and irrespective of whether the control is even exercised in any way. Possession of the control over employees’ essential terms and conditions of employment is now, under NLRB law, sufficient to find that a joint employer relationship exists.²

“ESSENTIAL TERMS AND CONDITIONS”

With respect to what constitute “essential terms and conditions of employment,” the NLRB will adhere to the “inclusive approach.” Thus, any “matters relating to the employment relationship such as hiring, firing, discipline, supervision and direction” will be considered “essential terms and conditions.” Examples include, in addition to wages and hours, “dictating the number or workers, controlling scheduling, seniority, overtime, and assigning work and determining the manner and method of work performance.”

CONCLUSION

Clearly, the new joint employer standard will have far reaching implications, with respect to liability for unfair labor practices and the obligation to engage in collective bargaining, for a multitude of relationships, including but not limited to those of the general contractor/subcontractor in the construction industry.

Notes:

^[1] TLI Inc. 271 NLRB 798 (1984), enfd. 772 F.2d 894 (3d Cir. 1985), Laerco Transportation 269 NLRB 324 (1984) [back]
^[2] Brownin-Ferris 362 NLRB No. 186 (August 27, 2015) [back]