May 2012

If you are a subcontractor that bids on public work you may wonder whether the general contractor is bound to subcontract with you if it uses your bid as part of its bid to the government authority and the authority awards the contract to the general.  The definitive answer in the Commonwealth of Pennsylvania, like most jurisdictions, is no.

In Ribarachak v. Municipal Authority of the City of Monongahela, the Commonwealth Court formal adopted the general rule – long adopted ago adopted by a majority of jurisdictions – that the use of a subcontractor’s bid by a general contractor constitutes legal acceptance of the bid.  As the Commonwealth Court articulated:

A subcontractor bidder merely makes an offer that is converted into a contract by regularly communicated acceptance conveyed to him by the general contractor.  No contractual relationship is created between the subcontractor and the general contractor even though the bid used as part of the general over-all bid by the general contractor was accepted by the authority.”

I was rather surprised to find out the above was not already the law in Pennsylvania because I can remember learning about it in my first year contracts class in law school.  I bet most Pennsylvania construction lawyers just assumed it was the law as well.  However, if anyone had an doubt, the Commonwealth Court just cleared it up for you.

 

Add Maine Department of Transportation (MDOT) to a growing list of stage agencies considering private funding for major infrastructure projects.  ENR Reports that MDOT is  a $2 billion, 220-mile closed-access toll highway that would create a direct link from southwestern New Brunswick to southern Quebec.

Pennsylvania used to be an unforgiving place for a subcontractor seeking to file a mechanics lien.  For over thirty years, with few exceptions, higher tier contractors could waive a subcontractor’s lien rights by filing lien waivers before work began on the project.  The onus was on the subcontractor to check with the Prothonotary to see if a lien waiver had been filed for a particular project and, thus, whether it had any lien rights.  Because pre-construction lien waivers were routine there were only a few instances were subcontractors could file mechanics liens.

However, in 2007, the General Assembly greatly increased the pool of potential lien claimants when it amended the Lien Law and made pre-construction and contractual lien waivers void as a matter of public policy.    Still, while the Assembly signaled a shift towards favoring contractors with the 2007 amendments, the courts still took a hard line in interpreting Lien Law and continued to “strictly construe” the Lien Law’s requirements, meaning even the slightest deviation from the Lien Law’s requirements could result in a lien being stricken.  Thus, the courts muted any intended liberalization of the Lien Law by the Assembly.

At least that was the case until June of last year when the Superior Court issued the first in a series of opinions liberalizing the interpretation of the Lien Law and signaling a bias in favor of contractors and subcontractors.  In June 2011, the Superior Court issued an opinion in B.N. Excavating, Inc. v. PBC Hollow-A, L.P., where the Court liberalized the definition of when excavation work is “lienable.”  Prior to B.N. Excavating, the prevailing view was the in order for excavation work to support a mechanics lien claim the work must be part of a completed structure.  However, in B.N. Excavating, the Superior Court reasoned “we do not interpret the [Mechanics Lien Law] . . . as creating a bright-line rule that a mechanic’s lien can never attach to land absent an erected structure.”

Then in January 2012, the Superior Court issued its “earthquake” opinion in Bricklayers of Western Pennsylvania Combined Funds, Inc. v. Scott’s Development Company, where the Court overturned decades of precedent and held that “[p]ursuant to the plain language of 1 Pa .C.S.A. § 1928(a) and (c), the Mechanic’s Lien Law of 1963 cannot be strictly construed on the basis that it is in derogation of the common law. See 1 Pa.C.S.A. § 1928(a), (c)” and permitted labor union health and welfare funds to file mechanics liens against a project!

Most recently, in Commerce Bank/Harrisburg, N.A., v. Kessler, the Superior Court held that an open-end mortgage does not have priority over a mechanics’ lien filed after the mortgage is recorded if (1) work on the property began prior to the recording of the mortgage; and (2) any portion of the loan proceeds are used to fund something other than the “cost of completing erection, construction, alteration or repair of the mortgaged premises secured by the open-end mortgage.”

The Court reached this conclusion despite what appears to be a clear definition of when an open end mortgage is superior to a mechanics lien.  Under Section 1508(c) of the Lien Law a lien is subordinate to an open-end mortgage “the proceeds of which are used to pay all or a part of the cost of completing erection, construction, alteration or repair of the mortgaged premises secured by the open-end mortgage.”  Apparently, the Superior Court did not think that part of the open end mortgage proceeds could be used to fund construction and the other part of the proceeds pay for other items such as closing costs, old mortgages, unpaid taxes, ect. – as is commonly the case –  for an open end mortgage to retain priority over a mechanics lien.  Instead the Court held:

“[w]e interpret the use of the terms “the proceeds” to mean all of the proceeds.”

Obviously, lenders and title insurances companies are concerned about this decision and are looking for ways to protect themselves. Most of the recommendations I have seen do not make any sense, except for the recommendation that lenders pay contractors and subcontractors directly, which is a great idea for a myriad of other reasons the discussion of which is beyond this post.

There are also several questions that this opinion raises:

1.  The Court agreed with the appellant’s argument that so long as a lender could show that $1 was spent on construction the lender could retain priority and stated that if lenders were permit to do so an absurd result would occur.  However, couldn’t the same argument now be said from the contractor’s position?  So long as $1 of the construction loan is used for purposes other than construction is the lender’s priority not defeated?

2.  How does a lender control 100% of the loan proceeds?  I.e. how does it insure that 100% of the loan proceeds are used for construction thereby maintain its priority?

3.  Senior position is a basic premises upon which a loan is underwritten.  If lenders cannot assure senior position what does that mean for underwriting of construction loans?

There is one question that the Superior Court did an answer  “do I have lien rights?”, the answer, at least from the current Superior Court, is YES.

Anyone who has tried to undertake a significant construction project in the City of Philadelphia can testify to the brotherly love organized trade unions show them.  Well according to the Philadelphia Daily News, one developer is fighting back.

Like many developers, Post Goldtex is the victim of a classless and illegal picketing campaign brought by the Philadelphia Building Trade Council.  Among the tactics Big Labor is employing in this particularly nasty dispute is the circulation of a flyer showing the wife of the principals in the development group in a photoshopped pornographic picture.  Talk about the War on Women.  Even worst, the Philadelphia City government seems at best complicit to the entire ordeal and at worst actively involved.

However, the developers are not rolling over.  Instead they have started a web page www.phillybully.com to tell their side of the story.  In my experience, Big Labor cannot take a taste of their own medicine and the developer should aggressively counter-picket the unions and beat them at their own game.

Are you a pipe fitting contractor or excavator looking for more work?  Are you a material supply house looking for a swift selling product?  Then you better get to know gas-line pipe.  ENR reports that the discovery of natural gas formations present a tremendous opportunity for pipe line builders.  Meeting the demands of the natural gas market:

“will require the annual construction of nearly 2,000 miles of pipeline in the lower 48 states and the Gulf of Mexico, roughly a 17% increase over current capacity. Additionally, an average of 1,300 miles of oil and natural-gas-liquid (NGL) pipeline will need to be constructed annually. The study predicts more than $250 billion of investment in the new lines.”