August 2013

The Pennsylvania Public Works Bond Act permits unpaid second tier subcontractors and supplier (i.e. sub-subcontractors) to make payment bond claims.  However, the “safe harbor,” provision of the Pennsylvania Prompt Pay Act bars payment bond claims by second-tier subcontractors and suppliers once a general contractor makes payment to a subcontractor in privity with those second-tier subcontractors.  The policy behind this is simple – a general contractor should not have to pay twice.

However, according to a recent Commonwealth Court decision, Berks Products Corporation v. Arch Insurance Company, 2013 WL 3753971, sureties effectively waive the safe harbor protections by utilizing standard bond claim language in their payment bonds.  Berks Products is a straight-forward bond claim case.  Arch issued a payment bond on behalf of its general contractor principal, Skepton Construction, for a school construction project.  Berks Products was a supplier to one of Skepton’s subcontractors, R.A. Tauber.  Tauber became insolvent and filed for bankruptcy and failed to pay Berks Products for $52,679.26 worth of materials.  Berks Products, therefore, brought a payment bond claim against, Arch Insurance Company.  Arch claimed that Skepton, the principal, had paid Tauber in full, and, therefore, the “safe harbor” provisions of the Prompt Payment Act barred Berks Product’s bond claim.  The trial court disagreed and entered summary judgment in favor of Berks Products.  Arch appealed and the Commonwealth Court affirmed.

The Commonwealth Court started by quoting from the language of Arch’s payment bond noting which stated”

 “[T]he terms and conditions of this Bond are and shall be that if the Principal and any subcontractor of the Principal to whom any portion of the work under the Agreement shall be subcontracted, and if all assignees of the Principal and of any such subcontractor, promptly shall pay or shall cause to be paid, in full, all money which may be due any claimant supplying labor or materials in the protection and performance of the work in accordance with the Agreement and in accordance with the Contract Documents … for material furnished or labor supplies or labor performed, then this Bond shall be void; otherwise, the Bond shall be and shall remain in force and effect.”

As Arch correctly pointed out, this language is standard in all public works payment bonds.  The Commonwealth Court held, however, that this standard language effectively waives the safe harbor protections because the above cited language stated the bond would remain in effect until Skepton “and any of [its] subcontractors” made full payment for labor and materials provided.  The Commonwealth Court also concluded that its decision was not at odds with its oft cited Trumbull decision and not in conflict with the Bond Law.

It is not clear if Arch filed a writ of cert with the Supreme Court of Pennsylvania asking it to review the Commonwealth Court’s decision.  If not and this decision stands, sureties would be wise to change their standard payment bond language for Pennsylvania public works payment bonds.

When unions picket a construction site to warn about a non-union contractor’s destruction of area wage and labor standards, the First Amendment does not give them unlimited protection for their actions.   Philadelphia Magazine’s Property blog has a story about an ongoing labor dispute between Philadelphia trade unions and an apartment developer that brings to the fore the intersection between free speech and unfair labor practices.

According to the story, IBEW Local 98 is protesting outside an apartment complex in Germantown.  (This particular protest is part of an ongoing feud between the developers and organized labor.)  The Union has posted signs urging people not to rent an apartment in the complex and, according to the story, the Union recently upped the ante by videotaping would be residents entering and exiting the complex.  (There is no mention of what exactly the Union intends to do with the videos.)

Local 98 claims that their protest is a legitimate exercise of their constitutionally protected right to free speech (or as we say in Philly, your right to “hoot ‘n halla’”).  This is generally correct.  The First Amendment does give a labor union – or anyone else – the right to protest a condition that they find objectionable.  So long as the protests remain – for the most part – peaceful and there is no destruction of property or blocking of entrances, there is little an owner can do to stop the protest, save for regulating the location of the protest through a two gate system.  However, because the National Labor Relations Act also regulates a labor union’s activities the matter is not simply one of free speech.

The NLRA is a body of federal law that regulates the relationship between management and labor, whether union or not.  Section 8 of the NLRA deals with labor unions and prohibits a labor union from engaging in a “secondary boycott.”  A secondary boycott is an attempt by a labor union to pressure a neutral employer from doing business with a firm that is the subject of a labor dispute.  Under the NLRA, secondary boycotts are unlawful.

Secondary boycotts have particular significance in the construction industry because the owner of a construction site that is the subject of a union protest is usually a neutral employer, who is not in charge of directly hiring members of a trade union, rather it is the contractors the owner employs that have that power.

In the matter involving the apartment developer, while Local 98 has the right to protest those contractors employed by the developer, protesting the apartment developer could be an illegal secondary boycott.  Local 98’s protest is aimed at persuading people from renting from the developer rather than publicizing a labor dispute with an electrical contractor because, as far as we know, the apartment developer is not an electrical contractor and, therefore, not capable of directly employing Local 98 members.

A few years ago, the National Labor Relations Board, the administrative agency charged with resolving disputes under the NLRA, awarded trade unions a major victory in outlining how far they could go in protesting a neutral employer before their actions become an illegal secondary boycott. In a series of cases decided in 2010, the Board ruled that displaying stationary banners declaring “shame” on a neutral employer for contracting with a merit shop contractor was not a secondary boycott and was protected speech. In 2011, in a separate case, the Board ruled that the same rationale applied to the ubiquitous inflatable rats used by unions to protest merit shop contractors.

But those decisions are not the end of the story.  Under Section 303 of the Labor Management Relations Act anyone injured by an unfair labor practice can sue in federal court to recover damages.  Federal Courts tend to take a different view of secondary boycotts and are not bound by the Board’s decisions.

For example, in U.S. Info. Sys., Inc. v. Int’l Bhd. of Elec. Workers Local Union No. 164, AFL-CIO, 500 F. App’x 198, 200 (3d Cir. 2012), the Third Circuit upheld a summary judgment award in favor of a subcontractor and against Local 98’s counterpart in New Jersey, Local 164, under Section 303.  In that case, Local 164 protested a construction site where a subcontractor, who did not employ Local 164 members, was working.  As a result of the protests, the subcontractor was terminated and replaced with a subcontractor, who did employ Local 164 members.  The terminated subcontractor then brought a claim for damages against Local 164 under Section 303.  The District Court found in favor of the subcontractor finding that the intent of Local 164’s protest was to force the neutral employer to award the contract to an employer who employed Local 164’s members and awarded it $180,000 in damages.  The Union appealled and the Third Circuit affirmed.

If the apartment developer can show that people were actually persuaded from not renting from it, then it could sue Local 98 for damages.  Thus, the irony is that if the Local 98’s protest is successful and people chose not to rent from the developer, they could be liable for damages.

 

The solar energy industry has seen tremendous growth.  In 2012, solar panels generated 3.3 billion gigawatts of power. That amount is expects to more than double to 7.2 billion gigawatts by the end of 2013.  Solar energy is now a $77 billion industry and solar energy stocks are among the top performers on Wall Street.  With this growth comes an increasing number of contractors installing solar panels and developers installing solar panels on their projects.

However, this growth has come at a cost.  One of the reasons for this tepid growth is the dramatically falling costs of the photovoltaic panels (those ubiquitous blue solar panels) used to capture and generate the suns rays into electricity.  Some manufactures have sacrificed cost for quality and this has the solar industry concerned.

Early this summer, the New York Times ran a story regarding the growing anxiety in the solar energy industry over the quality of solar panels being manufactured, particularly in China.  The concern over defective panels is great enough that, according to the Times, “First Solar, one of the United States’ biggest manufacturers, has set aside $271.2 million to cover the costs of replacing defective modules it made in 2008 and 2009.”

Contractors installing solar panels and developers building projects that use them should be very concerned as well.  Although the usual claims of breach of contract and warranty exists against contractors and developers over defective solar panels, so do claims of product liability, which are relatively uncommon in the construction industry.  Under the legal theory of strict liability, a “seller” of a product is liable for damages caused by defects in the product.  Because liability is strict, a plaintiff in a strict liability case need not show that the seller knew the product had a defect.  The problem for contractor and developers is that in the world of strict liability the term seller does not just mean the manufacturer, but anyone in the chain of distribution.  This chain of distribution includes retail dealers and distributors, contractors and developers.  For contractors and developers concerned about this growing threat, now would be the time to review your insurance policies with your insurance agent to see if such claims would be covered by your current policy.  (Chances are they are not.)

Bad news for contractors and developers is good news for plaintiffs stuck with defective solar panels.  In a strict liability case, the class of potential defendants liable for the defective product is much larger than in a breach of contract or warranty case.  With a larger defendants pool, the chances of an affirmative recovery or a favorable settlement are increased.

Over budget construction projects are all too common problem for project owners.  A Google News search of the term “construction cost overruns” yields the following stories for the month of July 2013 alone:

  • A VA hospital that is $400 million over budget;
  • A nuclear power plant that is $700 million over budget; and
  • An airport terminal that is “substantially over budget.”

That is over $1 billion in total cost overruns for only three construction projects.

While most of the blame usually is directed towards the project’s general contractor, in reality project owners should only blame themselves.  Owners usually spend little time (and money) making sure their construction documents are drafted to fully protect their interests.

Owners usually make three common mistakes, all with simple fixes, during the project’s contracting phase that cause them to have construction projects that are over budget: (1) failing to make sure the architect issues fully complete construction documents; (2) failing to require contractors to review the drawings and specifications prior to bidding; and (3) simply accepting the lowest bid.

 1.         Incomplete Design Documents.

While other forms of project delivery, such as design-build and construction manager at risk, are gaining acceptance, the most common delivery method remains design-bid-build.  Under the design-bid-build delivery method, the owner hires an architect to design the project (Design).  The architect designs the project and prepares drawings, plans, and specifications outlining what the contractor are to build.  The owner then takes the plans and specifications and obtains bids from contractors to build the project (Bid).  Finally, the owner selects a contractor to build the project (Build).

Projects go over budget when contractors demand more money from the owner for work that was not clearly shown on the plan and specification that the architect prepared.  These payment demands are referred to as change orders.  This mistake that most owners make is assuming that the architect has prepared a 100% complete set of plans and specification that contain every detail necessary for the contractor to build the project.  To the contrary, most owner-architect agreements only require the architect to prepare plans and specifications that show the architect’s general design intent.  It is up to the contractor to fill in the blanks by requesting information from the architect during the construction phase of the Project.  Problems arise when contractors claim their bid was based on details not shown on the plans and specification and when the detail is revealed during the construction of the project the owner is forced to incur additional costs.

In order to address this problem, owners should insist that their owner-architect agreement contains language requiring the architect to produce a fully 100% complete set of drawings that are fully coordinated with any documents prepared by engineers and designs working on the project.  By including such language, owners can look to the architect for compensation for cost overruns incurred because of missing details in the drawing.  Of course, owners routinely look to the architect for compensation when they are forced to incur additional costs because of incomplete plans, however, by including language requiring the architect to produce a fully complete set of documents they undercut the number of defenses the architect can raise.

2.         Failing to Require Contractors to Review Documents Prior to Bidding.

In order to combat the contractor who seeks additional compensation for work allegedly not shown on the plans and specifications, owners need to include language in their owner-contractor agreement that stating that the contractor has fully reviewed the plans and specifications prior to submitted its bid.  The owner should also require the contractor to affirm that it is fully familiar with the plans and specifications and fully understands the architect’s design intent and that the contractor’s price includes all of the work necessary to achieve the architect’s implied or express design intent.

3.         Accepting the Lowest Bid.

Whether it be demands of shareholders, boards of directors, or investors, the owner’s need to complete a project at the lowest possible price is understandable.  However, unlike in the public contracting, there is no need for the owner to select the lowest bid among the bids it receives.  As any experienced owner knows, the lowest bid does not equal the best bid.  Indeed, some unscrupulous contractors are known to purposely under bid a project only to make up the cost through a series of change orders which request additional compensation.

Owners are much better off going with a trusted contractor rather than simply selecting the lowest bid.  Selecting a trusted contractor with a track record of constructing projects like the one the owner wants to build combined with changes to the contract suggested above will greatly increase the chances that a contract will be completed on budget and on time.