Piercing the Corporate Veil in Construction Defect Cases

Plaintiffs in construction defect case are often presented with a frustrating paradox.  Their claims for liability are clear.  There is usually little dispute that failure to follow the building code or industry standards caused their damages.  Conversely, the ability to collect for that liability is murky.  The defendants in many cases are single purposes entities, which were established for the sole purpose of developing the project and which hold no assets once the project is complete.  Without the ability to liquidate a judgment, a judgment is worthless and a plaintiff is afforded no redress.

One way attorneys attempt to address this problem is bringing an action against the individual principals, or owners, of the entity that developed the project under a theory of “piercing the corporate veil.”  Typically, the individual shareholders, partners, or members of a corporate entity cannot be held personally liable for wrongdoing committed by the corporate entity.  However, in certain circumstance courts will “pierce the corporate veil” and hold an individual liable for corporate harms to prevent fraud, illegality, or injustice.

Pennsylvania courts has indicated a willingness to hold individual owners of single purpose entities personally liable in construction defect cases.  Masterpiece Homes

Recently, the Pennsylvania Superior Court issued a published opinion that should give plaintiffs seeking to litigate claims against single purpose entities hope and owners of those entities pause.  In Sereda v. Center City Acquisitions, LLC, the Superior Court affirmed a trial court that held the owner of a single purpose entity personally liable for damages arising out of a defective construction of a home in Center City Philadelphia.

According to the opinion, Noah Ostroff was the “president, acting officer, and sole shareholder” of defendant Center City Acquisitions, LLC.  The LLC was the developer of a newly built home located in Philadelphia.  The LLC entered into an agreement of sale with the LLC to purchase the home.  During a pre-settlement walk through, the plaintiffs notice gaps in the hard wood floors.  The gaps were placed on a punch list which the defendant LLC agreed to resolve.  The agreement also contained a “builder’s warranty.”  Under the warranty, if the plaintiffs gave notice to the defendant of defects covered by the warranty, the defendants agreed to repair or replace the defective work.

Shortly after settlement, the plaintiffs emailed Ostroff and notified him that the issue with the floors had not been resolved.  Ostroff stated that the issue would resolve itself over time as the floor became acclimated.  After a year, the issue was still present and Ostroff visited the property to observe the condition.  Ostroff instructed his contractor to replace some flooring.  But, the issue persisted.  The parties then tried to negotiate a resolution.  The plaintiffs wanted their floors replaced and Ostroff was only willing to sand the floors and fill the gaps or provide a $2500 credit.

How to Get Your Business Reopened During the COVID-19 Pandemic

The answer is very simple – take action. I have bad news for anyone who is sitting back waiting for Governors around the country to voluntarily declare the all clear – it is not happening.  Unless you are prepared to remain closed for eighteen months, you have two options: litigation and grassroots action.  On the litigation end, the orders of Governor Wolf and others like him are unconstitutional.  They are completely arbitrary.  There is simply no medical evidence to support their claims that certain businesses or more or less likely to spread the virus. Grocery stores remain open, but construction sites do not? Governors should be forced in Court to support the absurd suggestion that shutting down construction sites will slow the spread of the virus but keeping beer distributors open will not.

Also, state government should be forced to pay compensation to the businesses they have ruined through their arbitrary actions.  The 5th Amendment to the United States Constitution and most state constitutions require the government to pay just compensation to property the government seizes. The most familiar example of this is eminent domain, which is when the government pays compensation to a property owner for property that is appropriated for public use, like the construction of a road or school.  But it is well settled the 5th Amendment right to compensation applies to regulatory actions that render a business owner incapable using his business in anyway possible.

In addition to litigation, business owners must exercise their First Amendment right, which apparently has not been suspended by fiat – at least yet, to pressure elected officials for a more rational approach. One that is grounded in science and facts. Here is another idea – business owners should demand that any Governor requiring a shut down should forgo his or her salary until the shutdown is over – likewise for any public health officials that are guiding them.

There is also another reason to pressure elected officials. The longer the public allows their conduct to go unchallenged the more likely these same same officials will use emergency powers in the future for any host of reason of more dubious emergencies – global warming is one that immediately comes to mind.

I do not know if sitting back and waiting for a bunch of bureaucrats to let you know when to open you business will  “flatten the curve,” but I do know it will hasten your march to bankruptcy.  These officials are not kings. The governor at the consent of the governed.  Its time the governed start reminding them of that.

Summary of Lien and Bond Laws

Found an old chart I made summarizing the various deadlines for filing Pennsylvania, New Jersey, and Federal Lien and Payment Bond Claim that I used to give out to clients.  It was pretty popular and I am not sure why I stopped giving it out.  Anyway, I updated it and am making it available to anyone on the interwebs that wants to use it.  Of course, this is a very topical summary and you should check with me (or your current attorney first) before filing a lien and bond claim and to understand your rights.  You can also download a pdf version here – Summary of Bonds and Liens Law_Updated

CAPSA Changes Now in Effect

Back in June, I posted about changes coming to the Pennsylvania Contractor and Subcontractor Payment Act (CAPSA), 73 P.S. Section 501, et. seq. The Act applies to virtually all private construction projects in Pennsylvania.  As of last week (Oct. 10), those changes are effective.  While there is some argument to the contrary, these changes are NOT retroactive and apply to all projects going forward from that date.  To recap, here are some of the important changes you need to be aware of:

1. Contractual waivers.  Parties cannot waive the applicability of the act through contract.  Therefore, any clause in a contract purporting to waive the Payment Act’s applicability is void.
2. Suspension of work.  Unpaid contractors and subcontractors have always enjoyed a common law right to suspend performance until payment was made.  Now, they also have a statutory right to do so.  Section 5 of the Payment Act ads a subpart (e) which states that an unpaid contractor or subcontractor can suspend performance without penalty if it is not paid.
3. Written notice of deficiency items.  Owners or contractors seeking to withhold payment must now do so in writing and with a written explanation of its good faith reason for non-payment within 14 days of receiving an invoice that it intends not to pay in whole or in part.
4. Waiver of defense to payment.  Perhaps the most critical change to the Payment Act is the part that says failure to provide written notice explaining non-payment within 14 days shall constitute a waiver of the basis and necessitate payment in full for the invoice.  As it stands, if notice is not timely and properly provided a contractor or subcontractor could file a complaint, get an admission that written notice was not provided, and move for judgment on the pleading or summary judgment.  In essence, failure to provide the required notice makes an owner or contractor strictly liable. (I cannot underscore enough how important this change is.  Going forward you must be hyper vigilant about providing written notice to a contractor or subcontractor the reason you are withholding payment.)
5. Retainage.  If retainage is to be withheld beyond 30 days after final acceptance of the work, then an owner or contractor, as the case may be, must provide written notice as required for deficiency items.

Owners and Contractors Beware: Pennsylvania (Significantly) Strengthens Contractor Payment Act

Yesterday, Governor Tom Wolf signed into law House Bill 566 which make major changes to Pennsylvania’s Contractor and Subcontractor Payment Act.  Owners and General Contractors that fail to take head of the changes could face significant financial consequences.

The Pennsylvania Contractor and Subcontractor Payment Act, known as CAPSA or simply the Payment Act, was passed into law in 1994.  The intent was “to cure abuses within the building industry involving payments due from owners to contractors, contractors to subcontractors, and subcontractors to other subcontractors.”  Zimmerman v. Harrisburg Fudd I, L.P., 984 A.2d 497, 500 (Pa. Super. Ct. 2009).  In reality, abuses still occurred.  While the Payment Act purportedly dictated a statutory right to payment within a certain amount of time and imposes stiff penalties for failure make payment, including 1% interest per month, 1% penalty per month, and reasonable attorneys fees, the language of the Payment Act left recalcitrant contractors with wiggle room.  Particularly, the Payment Act allowed owners and higher tier subcontractors to withhold payment “deficiency items according to the terms of the construction contract” provided it notified the contractor “of the deficiency item within seven calendar days of the date that the invoice is received.”  73 P.S. Section 506.  The problem was that the Payment Act did not expressly state where the notice must be in written, what it must say, and what happened if notice was not given.

The changes to the Payment Act close this and other loopholes.  Here are a summary of the changes:

1. Contractual waivers.  Parties cannot waive the applicability of the act through contract.  Therefore, any clause in a contract purporting to waive the Payment Act’s applicability is void.
2. Suspension of work.  Unpaid contractors and subcontractors have always enjoyed a common law right to suspend performance until payment was made.  Now, they also have a statutory right to do so.  Section 5 of the Payment Act ads a subpart (e) which states that an unpaid contractor or subcontractor can suspend performance without penalty if it is not paid.
3. Written notice of deficiency items.  Owners or contractors seeking to withhold payment must now do so in writing and with a written explanation of its good faith reason for non-payment within 14 days of receiving an invoice that it intends not to pay in whole or in part.
4. Waiver of defense to payment.  Perhaps the most critical change to the Payment Act is the part that says failure to provide written notice explaining non-payment within 14 days shall constitute a waiver of the basis and necessitate payment in full for the invoice.  As it stands, if notice is not timely and properly provided a contractor or subcontractor could file a complaint, get an admission that written notice was not provided, and move for judgment on the pleading or summary judgment.  In essence, failure to provide the required notice makes an owner or contractor strictly liable.
5. Retainage.  If retainage is to be withheld beyond 30 days after final acceptance of the work, then an owner or contractor, as the case may be, must provide written notice as required for deficiency items.

The changes take effect on October 10, 2018.  Email me with any questions.

Are Proprietary Specifications Illegal?

A friend came to me with a question regarding a case he was working: “can a public owner require that bidders use a specific brand name product?”  “Of course not,” I said “proprietary specifications are illegal.”  Or, at least that’s what I assumed.  To my surprise, the law in the Commonwealth of Pennsylvania is not as clear as it is in other jurisdictions.

What is a proprietary specification?

A proprietary specification lists a product by brand name, make, model and/model that a contractor must (shall) utilize in construction.  A basic example of a proprietary specification would state:

“Air Handlers shall be “Turbo Max” as manufactured by Chiller Corp.”

There are two problems with a proprietary specification (other than potentially being illegal): (a) they limit competition, and (b) invite steered contract awards.  They limit competition because it limits the type of material that can be used on the project.  In the example above, there could be equivalent air handlers available at a better price but the contractor could not use that lower priced product in its bid.  Thus, the taxpayers end up paying more for tile.  Also, contractors may not be able to secure a certain brand name product because of exclusive distribution agreements.  Again using the example above, contractor A’s competitor may have the exclusive distribution agreement with Chiller Corp.

Besides being more costly, this situation invites favoritism and fraud, which public bid laws are designed to prevent.  If the design professional that is drafting the specification knows that a certain favored contractor has the exclusive right to distribute a product, the design professional can draft the specification in a way that steers the bid to that favored contractor.

Federal Law

Most federal agencies prohibit proprietary specifications.  For example, with limited exceptions, FHWA regulations prohibit contracting state transportation agencies receiving federal funds from requiring the use of a patented or proprietary material, specification, or process.   Likewise, under FAR’s “Material and Workmanship Clause,”  “[r]eferences in the specifications to equipment, material, articles, or patented processes by trade name, make, or catalog number, shall be regarded as establishing a standard of quality and shall not be construed as limiting competition. The Contractor may, at its option, use any equipment, material, article, or process that, in the judgment of the Contracting Officer, is equal to that named in the specifications, unless otherwise specifically provided in this contract.”

New Jersey Law

Many states have also banned proprietary specifications.  In New Jersey (where I frequently practice), the Local Public Contracts Law bans local government agencies from using proprietary specifications.  However, on NJDOT projects that do not receive federal funding, proprietary specifications are not per se prohibited.  But, a contractor can request substitution of the specific product.

Pennsylvania State Projects

In contrast, Pennsylvania does not expressly address proprietary specification by statute.  However, under Department of General Services’ guidelines, which apply to state projects including PennDOT, proprietary specifications are strictly limited.  Section 205.1 of DGS’s Project Procedure Manual states:

“Specifications for DGS projects are “or equal” specifications, and products available from a single manufacturer, or a limited number of manufacturers, are not to be used in project designs. DGS requires at least three (3) manufacturers of an available product to be specified, but bidders may use equal products/manufacturers as approved by the Professional, as per the General Conditions to the Construction Contract.”

Pennsylvania Local Projects

Pennsylvania Municipal and County projects are not subject to DGS’s guidelines.  Instead, a patch work of statutes applying to Pennsylvania’s Byzantine system of Cities/Township of the First/Second/Third class, govern procurement at this level.  All of those statutes require that bids be awarded to the lowest responsive and responsible bidder.  However, none specifically restrict the use of proprietary specifications.

Therefore, bidders facing a proprietary specification at this level must rely upon the Pennsylvania common law public policy of assuring the best price possible for the taxpayers and guarding against favoritism, extravagance, fraud, and corruption in the awarding of municipal contracts.

What to do about it?

If you encountered a proprietary specification, whether on a Federal, New Jersey, or Pennsylvania contract, you need to act before the time of bidding or your claim may be barred by statute or waived.  When and how that objection is lodged depends on the project and contracting authority.  If the bids have been opened and a proprietary specification has resulted in you losing the award, the potential still exists to challenge the award but the burden could be higher.  Therefore, understanding how to spot a proprietary specification and what the law is in the area is the best chance at successfully challenging it.

Retainage on Pennsylvania Public Contracts

Ah yes, retainage, what could represent your profit on a project and something frequently abused by owners on private and public projects alike.  Fortunately, Pennsylvania law offers public works contractors some protection from retainage abuse.  The Public Prompt Payment Act dictates when retainage can be withheld and when it must be released.  Agencies that fail to follow the Prompt Payment Act’s retainage rules can end up owing you interest, penalty, and attorneys fees.

The Prompt Payment Act’s Retainage Provisions

The Prompt Payment Act deals with retainage in two sections: 3921 and 3941.  Section 3921, 62 Pa.C.S.A. 3921, authorizes a government agency to withhold retainage.  But, in general, it limits the amount of retainage withheld to 10%, which is industry standard.  However, Section 3921 states that at 50% completion, the government agency must release 50% of the retainage withheld and retainage must be reduced to 5%.   There are a two caveats.  First, in order to receive the retainage reduction, there must not be a reason to hold retainage at 10%.  Second, where the Department of General Services (DGS) is the owner, retainage is capped at 6% and must be reduced to 3% at 50% completion.

Section 3941, 62 Pa.C.S.A. 3941, the project’s architect or engineer must make a final inspection of the work within 30 days of your final payment request.  If the work is found to be substantially complete, the government agency is required to make payment within forty-five days.  If the architect or engineer finds certain work is incomplete, it must identify that work in detail and the government agency may withhold 1.5 times the amount to complete that work.  The architect and engineer must also identify the estimated cost to complete the work.

The Prompt Payment Act’s Retainage Penalties

Under Section 3941(b), 10% interest is tacked on to retainage that is not paid within forty-five days of substantial completion.  Under Section 3935, if the government agency is found to have withheld retainage in bad faith, it may be liable for a additional interest at 1% per month and reasonable attorneys fees.

Payment of Retainage to Subcontractors

The Prompt Payment Act contains an important provision regarding payment of retainage to subcontractors.  Prime contractors are required to pay retainage to subcontractors within twenty days of receiving retainage from the owner.  Therefore, if you are a subcontractor and have not received at least a 50% retainage reduction and you know the project is more than 50% complete, you need to start asking questions of the prime contractor.

The Little Ice Age and Delay Claims

Much of the Eastern United States is just now emerging from a historic two week cold snap.  In much of the Northeast and Mid-Atlantic, the temperature stayed below freezing for 15 days straight.  Cities recorded the lowest temperatures in a quarter century.  Winter Storm Grayson reeked havoc along the Eastern Coast bringing snow to places like Charleston and a crippling blizzard to Boston.

The record cold snap also impacted the construction industry.  Delivery delays, the inability to apply weather sensitive applications (like cast in place concrete), and the unavailability of labor are just a few things that extreme weather can cause on a construction project.  If they happen at the wrong time, delays can destroy project schedules and make previous delays even worse. Delays cost money and can mean the difference between a profitable project from both the owner and contractors perspective.

In order to determine what relief you are entitled to because of the Little Ice Age’s impacts to your project, you need to determine three things.  First, is the delay compensable. Second, is the delay excusable.  Third, is the delay critical.

Is it compensable?

Many contractors contain so called “no damages for delay” clauses that limit a contractor’s right to recover for project delays to an extension of time only.  That means a contractor will be entitled to relief from the agreed upon substantial completion date but is not entitled to additional money for the delay.  There are exceptions to no damages for delay clause, as I discussed in this blog post, back in the day.  But, you need to prove those exceptions first.

Is it excusable?

Weather related delay are rooted in the common law rule of impracticability or impossibility of performance.  This means that the weather delays are only compensable when they are so unusual that neither party could have reasonably anticipated them at the time of contract.  Of course, it is reasonable to assume that one should expect cold weather in the Northeast during the winter.  However, what about extreme cold weather for two weeks, like we just had.  Better yet, what about the extreme cold in the Southeastern Conference portion of the United States?

Where weather related delays often become an issue is when they compound other delays.  For example, a general contractor may have anticipated cold weather in the winter when it agreed to the schedule.  However, it did not anticipate that other project delays would cause its ready mix contractor to have to pour in the winter rather than the fall, as it was anticipated.  In that situation, the delay because an issue both for the general contractor and the subcontractor.

Is it critical?

From the prime contractor’s perspective, the delay must be on the critical path for it to matter. For example, a delay by an interior painting contractor will probably not impact the schedule to a large extent.  However, a contractor whose completion is critical to multiple follow trades, like a structural steel contractor, is almost certainly on the critical path.

What about notice?

Assuming the delay is excusable and it is critical, you need to assure that you are giving proper notice to your counter party.  Even if your contract contains a no damages for delay clause, you still want to seek an extension of time to avoid a liquidated damage claim.  Many contract, however, require you to give notice within a certain amount of time of first learning about the delay.  That means if the weather has impacted your schedule and you believe you will require additional time to perform YOU NEED TO GIVE WRITTEN NOTICE IMMEDIATELY.  Otherwise, you will end up waiving your right to claim additional time or additional compensation.

Revisiting OSHA’s Controlling Employer Policy

The United States Court of Appeals for the 5th Circuit has been asked to review OSHA’s twenty year old “controlling employer” policy.  As many contractors are surprised to learn, under OSHA’s controlling employer policy, you can be given an OSHA citation even when your own employee is not exposed to the alleged hazard.

A.  The Controlling Employer Policy

OSHA’s current controlling employer policy has been effective since 1999.  That policy applies to multi-employer worksites, which means virtually all construction sites.  Under the policy, OSHA can cite the creating, exposing, correcting, or controlling employer.  A creating employer is one who creates the hazard to which workers are exposed.  The exposing employer is one who permits his employees to be exposed to the hazard, whether it created the hazard or not.  The correcting employer is one who is responsible with correcting known hazards. Finally, the controlling employer is one “who has general supervisory authority over the worksite, including the power to correct safety and health violations itself or require others to correct them.”  Most general contractors and CM’s are controlling employers.

Under OSHA’s policy, a contractor’s OSHA safety obligations hinges on whether it is a creating, exposing, correcting, or  controlling employer.  The creating, exposing, and correcting contractors obligations are fairly straightforward.  However, the controlling contractors obligations are more nuisanced.

If an employer creates a hazardous condition, it must immediately and effective steps to keep everyone away from the hazard and notify the party responsible for correcting the hazard.  If the creating employer is also responsible for correcting the hazard, then it should immediately take steps to correct it all while creating folks away from the hazard.  Pretty basic.

If the employer is the exposing employer, then a normal OSHA citation analysis applies.  The employer will be cited for exposing its employees to the hazard and OSHA must show that (a) the employer knew or should have known of the condition; (b) that the specified OSHA standard applies; and (c) that the employees were actually exposed to the hazard.

If the employer is the correcting employer, then, as common sense would suggest, it should correct hazards that are made known to it.  Also, the correcting employer should regularly inspect the site to make itself aware of hazards that it could correct.

The controlling employers duties are more subjective.  OSHA admits that the controlling employer’s “duty of reasonable care is less than what is required of an employer with respect to protecting its own employees.”  OSHA lists several factors evaluating whether a controlling employer exercised reasonable care.  The one constant is that a controlling employer should take some form of affirmative steps to (a) make itself aware of hazards and (b) enforce a policy to make sure known hazards are corrected.  In other words, the controlling employer cannot make controlling OSHA violations someone else’s problem.  This attitude is more prevalent than you think.

What should the controlling employer do?  Walk the site at regular intervals to inspect for obvious hazards, engage subcontractors with a strong record of safety, maintaining a worksite safety policy and enforce it.  In other words, just having a manual is not enough.

These steps really make all the difference. I recently navigated my client through an OSHA investigation which resulted in OSHA declining to issue a citation.  As much as I would like to say that my legal acumen saved the day, it was really what my client did long before my involvement, which is to credit. It regularly walked the site, it pointed out obvious hazards, it maintained a safety manual and program which it followed, and it hired subcontractors with strong safety records.  We were able to present all of this to OSHA during the investigation and it is what made the difference.

B.  Criticism of the Policy

The chief criticism of the policy is that it extends beyond the Congressional mandate that OSHA cite employers who expose employees to hazards.  Therefore, OSHA lacks the authority to cite a contractor when those exposed to the hazard are employed by someone else.  In 2007, in Sect. of Labor v. Summit Contractors, Inc., the OSHRC struct down the controlling employer policy. However, the 8th Circuit Court of Appeals overturned that decision and reinstated the controlling employer policy.  Now, the 5th Circuit is asked to review the policy.

C.  Takeaways

The bottom line is that every contractor on a construction site needs to be vigilant about safety in order to avoid ending up in OSHA’s cross-hairs.  Even if your employees are far from the hazard, the best approach is that if you see something say something and of course document it in writing.

Labor Unions: Myths and Facts