Contact Us E-Alert Signup Twitter LinkedIn Facebook

Construction In Brief: Fall 2012

Download Newsletter (PDF)

Green Construction Liability: Are You Prepared?

By Lane F. Kelman and Lori Wisniewski Azzara

With the drastic increase in green construction, industry experts and analysts predicted a flood of green-related litigation. Despite the surge in green projects and the implementation of new technologies and building strategies, however, the anticipated flurry of litigation has not yet followed. Why not? One reason is that green construction makes up a small percentage of overall construction projects, though that percentage is rapidly growing. In fact, according to a recent report by the U.S. Department of Labor's Bureau of Labor Statistics, "green" jobs accounted for 2.4% of the nation's total employment in 2010 and 6.8% of construction employment. It is clear that the green industry is here to stay, and, with its rapid development, this emerging area of the law is ripe for litigation.

That is not to say that no green-related litigation has ensued. While the case law is sparse, there are several key lessons to help minimize liability on your next green project.

Contracts Should Clearly Define the Expectations of the Project and Allocate Green Responsibilities

As contractors are well aware, there is no one-sizefits- all standard form contract. The language of any standard form building contract must be modified to account for the specific and unique owner requirements on the project, and there is no exception for green projects. Green contracts should be drafted to clearly define the expectations of the project, especially with respect to the building's operational performance and obtaining third-party green certification, Leadership in Energy and Environmental Design ("LEED") classification, or otherwise. The contract language should indicate whether performance and/or certification is a requirement or an overall goal.

In addition, provisions should be included that delegate green building responsibilities. For example, if LEED certification is required, the contract should clearly identify which party or parties are ultimately responsible for achieving that certification. The contract should also address which LEED points are being pursued, how they will be attained, and, if necessary, attach the LEED scorecard as part of the contract documents. Because of the need for detailed documentation in achieving LEED certification, the contract should also designate the party responsible for record maintenance, review, and submission to the certifying agency.

The importance of precise contract drafting is demonstrated in the Maryland federal court case of Shaw Development LLC v. Southern Builders, Inc. WhileShaw was initiated in 2007, and ultimately settled out of court, the facts illustrate a prime example of the liability that can result from a poorly drafted contract. In Shaw, the owner sued the general contractor because the building failed to achieve LEED Silver certification. The parties utilized the American Institute of Architects ("AIA") A101-1997 standard contract which incorporated a project manual as part of the contract documents. While the contract did not contain any specific green building requirements, the project manual did require the construction of an "environmentally sound ‘Green Building'" that conformed with the LEED Silver certification rating. Absent from the contract documents, however, were any provisions detailing the methodology and procedure for achieving the certification and resulting liability for failure to do so.

Marketing Building as "Green" Can Create Inconsistent Expectations

Builders and developers must be cautious when marketing a building as "green." Statements in marketing brochures and press releases often claim that the building "is" or "will be" LEED certified, is "highly energy efficient," and is "healthier and safer" for building occupants. These somewhat generic phrases create certain expectations by potential occupants and can lead to litigation over the failure to meet those expectations.

Case in Point

In the Riverhouse One Rockefeller Park Condominium Project located in Manhattan, certain unit owners filed suit against the project's principals, managers, architects, and marketing agents, claiming that the conditions in the units deviated grossly from what was promised and represented to them by the project sponsor and its principals. The owners asserted claims for breach of contract, fraud, and misrepresentation. Specifically, the unit owners alleged that the project was "marketed to be the cutting edge of ‘green' technology…featuring fresh filtered air, filtered water, eco-friendly materials and…low energy consumption." However, the owners alleged that the "the building's much-heralded ‘green' heating system" failed to adequately heat the units and that too much cold air infiltrated through doors, windows, and exterior walls. The owners are seeking damages in excess of $1.5 million.

Lesson Learned

Project personnel must choose their words wisely when marketing the building as "green." LEED certification cannot be achieved, and the performance and operational efficiency of a building cannot be measured, until sometime after a building is completed. Misstatements, misrepresentations, and false advertising claims can be avoided by careful review of the content with regard to the project's anticipated completion, certification, and operational performance.

Allocation and insulation of risk is not a new concept in the construction industry, but the liability and risks associated with green projects and LEED certification are relatively new and unchartered territories. Contractors need to ensure that contracts for green projects seeking LEED or other third-party certification specify each party's responsibility in the certification process and allocate the risk and liability for obtaining the desired certification level.

The legal documents are certainly catching up to the green trend and industry. This is exemplified by the AIA's recent introduction of its Sustainable Projects contract documents. The effectiveness of these documents, as with any contract, depends upon the party. These new AIA contract documents, like any other form contract, should be modified to conform to your particular exposure.

Lane is a Partner with the Firm and Lori is an Associate, both practicing in the Construction Group. They can be reached at (215) 564-1700,lkelman@cohenseglias.com or lazzara@cohenseglias.com.

Brief Note

We hope everyone had a good summer! At Cohen Seglias we are busy preparing seminars and articles to keep you all informed of the latest legal developments affecting your businesses.

We are happy to welcome new Partner Jeffrey M. Carbino to the Firm. We are also excited to announce that Associate Anthony M. Bottenfield has joined the newsletter team as our new Assistant Editor.

As always, feel free to reach out to us with any questions.

Ashling and Kate
Co-Editors-in-Chief

What's New

New Face

Cohen Seglias is pleased to welcome a new attorney to the Firm.

Jeffrey M. Carbino joins us as a Partner in the Bankruptcy, Financial Restructuring and Creditors' Rights Practice Group. Jeff concentrates his practice in the areas of bankruptcy, insolvency, and creditors' rights. He has represented debtors and creditors' committees, institutional secured and unsecured creditors, licensors, real and personal property lessors, stalking-horse bidders in asset sales in bankruptcy court, utility service providers and other creditors in Chapter 11 bankruptcy proceedings and related litigation. Jeff will be working out of the Firm's Philadelphia and Delaware offices.

Five Star Award

Cohen Seglias Partner Wayne Buckwalter was selected as one of Philadelphia's 2012 FIVE STAR Wealth Managers. This is the third year in a row Wayne has been selected for this distinction, which will appear in the November issue of Philadelphia Magazine. Traditionally less than 40 attorneys are chosen every year to be included in this list, and less than 3% of all wealth managers in the area.

The Five Star program, now entering its seventh year, is the largest and most widely published wealth manager award program in North America. As part of the research process for the 2012 Five Star Wealth Manager program, firms and peers nominate award candidates. Award candidates are evaluated against 10 objective criteria such as client retention rates, client assets administered and a favorable regulatory and complaint history.

New Blog Launch

We are excited to announce the launch of the Firm's third blog which will focus on employment law issues that arise in the workplace and how to handle them while avoiding costly litigation. Check the blog for frequent updates on real life case examples that will both inform your company and entertain.

Don't forget to also visit the Firm's two construction blogs, Construction Law Signal and the Federal Construction Contracting Blog for timely updates on new litigation and case law. All firm blogs can be accessed through our website, www.cohenseglias.com.

Events

As part of our growing E-Discovery Practice Group, Partners John A. Greenhall and Lane F. Kelman hosted an E-Discovery seminar in our Philadelphia office on September 12th. The seminar focused on how you and your company can avoid the pitfalls of the information age and be better prepared for the continually changing role of technology in construction. The legal ramifications as to how your company views electronic documentation are huge and can result in millions of dollars of losses if you are not careful.

Some questions/topics the seminar addressed included:

  • Does an e-mail constitute adequate notice under the contract?
  • Are electronic signatures binding?
  • How should I keep my electronic documents?
  • Why should I care if my project manager is saving e-mails on his cell phone and not the office server?

If you would like the handout from the event, contact Kerstin Isaacs.

Kerstin is the firm's marketing director. She can be reached at (215) 564-1700 or kisaacs@cohenseglias.com.

Governor Corbett Signs Public Works Verification Act Requiring Use of E-Verify

By Marc Furman

Construction industry employers in Pennsylvania need to be aware of another administrative task to keep track of. On July 5, 2012, Governor Corbett signed the Public Works Employment Verification Act into law. In a nutshell, it requires construction companies that perform work on public projects to start verifying the immigration status of certain employees. This law goes into effect on January 1, 2013.

More specifically, the law requires employers performing work on public construction projects to utilize the United States Homeland Security Identification system, known as "E-Verify," to check and verify that all employees hired on or after January 1, 2013 are in the United States legally and that none are undocumented workers or illegal aliens. An employee is defined as anyone for whom the company must issue a form W-2 to the IRS. This verification requirement will be enforced by the Pennsylvania Department of General Services and includes penalties ranging from fines to debarrment from performing work on publicly-funded projects for up to three years.

Since 2009, it has been mandatory for companies working on federally-funded construction projects to make use of the E-verify system (although the federal rules are slightly different than what Pennsylvania's law will require). Pennsylvania is now the 18th state to adopt this verification requirement for its own state-funded construction projects. The law has been supported for various reasons, such as, ensuring that publicly-funded construction projects are only awarded to United States citizens and legal alien workers, rooting out Social Security identification number fraud, and detecting illegal immigration.

Employers working on public projects in Pennsylvania will need to make sure that they have the right procedures in place to comply with this new law by 2013. All employers must presently comply with the requirement that their newly hired employees complete I-9 forms and submit the appropriate supporting documentation. Employers who perform work on public projects in Pennsylvania will now have to put another procedure in place to verify the status of employees hired on or after January 1, 2013, and confirm that the information and documentation provided with the I-9 is legitimate. Employers will need to register to use the E-Verify system, as well as become familiar with the protocols for using the system and the timeframes in which to complete their employee verifications. Many contractors complain about the cumbersome and timeconsuming process of registering to use the E-Verify system but, fortunately, the new verification requirement is relatively convenient and easy to use after the initial registration process has been completed.

Employers in the construction industry should use this law as a reminder to re-confirm that they are complying with all Pennsylvania laws governing public projects. The most critical requirements for construction companies performing public work are to be sure that they are: (1) properly paying the prevailing wage rate (both wages and fringe benefits); (2) completing and submitting 100% accurate certified payroll reports; (3) maintaining payroll records and time sheets; and (4) keeping daily job logs that document the classifications of and specific tasks being performed by their employees each and every day. It is also important to keep in mind that the definition of "public work" in Pennsylvania includes construction projects which are over $25,000 and receive public funding, even though they may not involve a contract directly with a public entity. Employers must always be sure to know when they are performing "public work" and are subject to these legal requirements, which will soon include the E-Verify requirement.

Marc is a Partner with the Firm and Mark is an Associate, both practicing in the Labor and Employment Group. They can be reached at (215) 564-1700,mfurman@ cohenseglias.com or mleavy@cohenseglias.com.

Preserving Your Rights as a Second-Tier Subcontractor or Supplier Performing Work for a Public Agency in New Jersey

By George E. Pallas and Ashling A. Ehrhardt

Are you a second-tier subcontractor or supplier in New Jersey performing work on a job for a public agency? A public agency is defined as any county, city, town, township, public commission, public board or other municipality within the state — but not the state or the state's agencies. Here is a brief reminder of your rights and what you need to do to protect them.

Municipal Mechanics' Lien Law

One way of preserving your rights on a job for a public agency is to file a municipal mechanics' lien. Unlike a construction lien, a municipal lien does not attach to the property on which the project is situated. Rather, this type of lien attaches to the funds which have been appropriated for the payment of the public work which are still in the hands of the public agency at the time the lien is filed.

In order for a second-tier subcontractor or material supplier (i.e. a subcontractor or supplier who holds a contract with a subcontractor who holds a contract with a prime contractor) to preserve its rights to a municipal lien, it must follow a special notice procedure. The party must notify the public agency in writing within 20 days of its first performance of work or delivery of payment or materials that it furnished labor or materials to the subcontractor.

If the written notice is not provided, the party's lien rights are barred except to the extent that the general contractor owes money to the subcontractor to whom the labor and materials were provided. If the notice is filed after the 20-day period, a lien may only be filed for labor or materials provided after the date of the notice.

Public Works Bond Act

A second-tier contractor or material supplier may also proceed under the terms of the Public Works Bond Act. Under the Bond Act, one who performs labor or furnishes materials may elect to proceed on the bond which the prime contractor was obligated to furnish to the owner. In order to preserve its rights pursuant to the Bond Act, the second-tier party must provide written notice to the prime contractor that it is a beneficiary of the bond prior to commencing work.

If the second-tier party complies with the notice requirement, it must then file a Statement of Claim with the prime contractor's surety. Then, after waiting 90 days, the claimant may file a lawsuit, but in no event later than one year from the last date upon which the claimant performed actual work or delivered materials to the project.

These advance notice requirements imposed upon second-tier claimants under both the Mechanics' Lien Law and the Public Works Bond Act provide the contractor and owner with the opportunity to determine the identity of potential claimants. These requirements aim to protect contractors by intending to eliminate payment problems that sometimes arise in the public construction context when a general contractor hires subcontractors, who, in turn, hire other subcontractors that are unknown to the general contractor. Be sure to consult with an attorney in order to properly preserve your rights under these statutes.

George is a Partner with the Firm and Ashling is an Associate, both practicing in the Construction Group. They can be reached at (215) 564-1700,gpallas@cohenseglias.com or aehrhardt@cohenseglias.com.

The Uniform Commercial Code: Helping Contractors Protect Their Interests in Purchased Goods or Materials

By Lonny S. Cades and Lisa M. Wampler

Does your business require you to purchase and/or ship raw parts or materials to a supplier/manufacturer/ fabricator? Do you ever wonder what would happen if that supplier/manufacturer/ fabricator went bankrupt or defaulted on a loan before delivering the materials or goods to you? Without taking the precautions outlined in this article, your interest in those materials or goods, even though you have already paid for them, may take a back seat to the interest of a secured creditor like a lender or other financing company.

The Security Agreement

Executing a security agreement with a supplier/manufacturer/fabricator is the first line of defense in protecting yourself as the owner of goods that are not in your possession. A security agreement is similar to a mortgage on real estate but the collateral is on the items identified in the agreement. The security agreement must: 1) be signed by the owner of the property; 2) contain a description of the collateral; and 3) make clear that a security interest is intended. It is advisable to have the security agreement contain a provision allowing the creditor to file a UCC-1 financing statement, which is a public filing required to perfect a security interest.

The UCC-1 Financing Statement

Like the security agreement, the UCC-1 identifies those items owned by or in the possession of the supplier/manufacturer/fabricator in which you are claiming a secured interest. A UCC-1 must be filed in the state where the debtor is located and maintains its principal place of business, in the debtor's state of organization, and the state where the items are being stored and/or to be delivered. By filing the UCC-1, you put the world on notice of your security interest and ensure that your ownership rights in the goods or materials are fully enforceable.

Although states' UCC provisions and filing requirements may differ, generally a UCC-1 must include the full name and address of the debtor, the full name of the secured party, and a description of the collateral being secured. The UCC-1 should describe the collateral with as much specificity as possible. Extremely vague descriptions like "all assets" or "all debtor's personal property" should be avoided. If the items serving as collateral are part of a purchase order or contract, it is also recommended to attach these documents to the UCC-1.

Ordinarily, the existence of a valid security agreement and UCC-1 filing does not give you priority over a bank or other secured creditor. Executing these documents simply places you in a more advantageous position than unsecured creditors. If, however, you purchased the goods as a "buyer in the ordinary course of business" or obtained a purchase money security interest ("PMSI"), your rights will be superior to secured parties with interests in the same collateral.

"Buyer in the Ordinary Course of Business"

A "buyer in the ordinary course of business" is a person or entity that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course, from a person in the business of selling goods of that kind. If you satisfy this definition, which may vary slightly from state to state, you take the goods free and clear of any other security interest in the goods created by the seller.

Purchase Money Security Interest

A PMSI is defined as a security interest in goods that is collateral for an obligation that arises in connection with the sale of specified goods. The principle advantage of a PMSI is that it provides the seller of goods with a special priority over other creditors who have a conflicting security interest in the same property, if special rules are followed. In many ways, a PMSI is the same as any security interest, i.e. a security agreement must be executed and a UCC-1 must be filed. The two key distinctions for obtaining a PMSI are:

1) the creditor must perfect its secured interest by filing a UCC-1 before the supplier/manufacturer/ fabricator receives possession of the items; and

2) the creditor must send notice to all secured parties who may assert a security interest prior to the supplier/manufacturer/fabricator taking possession. The notice should be in the form of a letter and include a copy of the UCC-1 filing. The filing requirements are controlled by the state where the supplier/manufacturer/ fabricator is organized.

Final Checklist

The following is a checklist of those necessary steps to follow in order to adequately protect your ownership interests in purchased materials and other goods that fall into the hands of a supplier/manufacturer/fabricator:

  1. Check the state of organization and principal place of business of the Debtor.
  2. Check the laws of the states where the Debtor is doing business, paying particular attention to the laws of the states where the items are to be stored and/or delivered.
  3. Conduct UCC and judgment searches against the Debtor in the states identified in numbers 1 and 2.
  4. Send notice to all existing Secured Creditors found in number 3.
  5. File UCC-1s in the states set forth in numbers 1 and 2. If it is a third party, the UCC-1 must be filed before the third party receives possession of the goods.
  6. Execute a Security Agreement prior to or contemporaneously with the filing of the UCC-1.

It is recommended that an attorney be consulted in advance to review the UCC-1 filing and security agreement as defects in these documents can render the security interest unenforceable.

Lonny is a Partner with the Firm practicing in the Wealth Preservation Group and Lisa is Senior Counsel practicing in the Construction Group. They can be reached at (215) 564-1700, lcades@cohenseglias.com orlwampler@cohenseglias.com.

Q&A with Tony L. Byler

By Anthony L. Byler

 

Partner Tony L. Byler recently re-joined Cohen Seglias Pallas Greenhall & Furman PC as a partner in the Construction Group. We sat down with Tony to discuss his background and his thoughts on the state of the construction industry.

Q: Tell us a little about your background.

A: For more than fifteen years I've represented companies in all tiers of the construction industry, including private and public owners, general contractors, subcontractors, and suppliers. I regularly mediate, arbitrate, and try all types of construction disputes including payment claims, delay and disruption claims, payment and performance bond claims, mechanics' lien claims, prompt payment claims, claims arising out of errors and omissions, and fiduciary duty and fraud claims. I also sit as a construction and commercial law arbitrator on the American Arbitration Association's roster of neutrals.

Q: On what types of projects have you been involved?

A: I've had the opportunity to work on all types of projects. I am frequently involved in school projects, hotels, high-rise buildings, solar projects, waste water treatment plants, parking garages, grocery stores, shopping and retail centers, bridges, docks, assisted living and health care facilities.

Q: Tell us a little bit about your clients.

A: My clients are a fantastic group of folks who reflect the entire spectrum of the construction industry. They range from hard-working mom-and-pop subcontractors, reminiscent of my father's small HVAC company, to multi-billion dollar publically traded real estate investment trusts. On any given day my clients are awarded contracts for projects that have been in the making for years and are submitting bids on projects with the hope of growing their enterprises in the years to come. While they differ in terms of tiers, size, experience, and expertise, my clients all have the same goal: to maximize their upside while keeping their exposure in check. It's a balance and I work hard to preserve that goal from the front-end of a project to close-out at the end.

Q: What do you do to keep up with your clients' evolving needs?

A: First, I've partnered with a great group of people here at Cohen Seglias. Not only are they some of the hardest-working and most dedicated professionals I've ever met, their rates represent some of the best values in the region, for which they offer acclaimed depth of service not only in construction law, but in labor and employment law, commercial litigation, transactional work, real estate, estate planning, creditor's rights and collections. Second, I'm active in organizations that follow the ever-changing laws affecting the construction industry, including the American Bar Association's Public Contract Law Section and Construction Industry Forum, and the New Jersey State Bar Association's Construction Law Section. Third, I'm active in trade associations and with institutions of higher learning to whom I provide legal seminars on issues of interest and author articles relating to legal decisions and emerging trends in the industry. Last, I listen to what my clients have to say. I help them customize solutions that work best for their objectives and budget. I consider their collective experiences when I draft or modify contract clauses to better protect their interests and to help them navigate the many challenges and uncertainties they encounter daily.

Tony is a Partner with the Firm and a member of the Construction Group. He can be reached at (215) 564-1700 or tbyler@cohenseglias.com.