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Construction In Brief: Spring 2011

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Is Your Contract Making You an Accidental Tourist?

By Edward Seglias

One of the most important provisions of the Pennsylvania Contractor and Subcontractor Payment Act prohibits contracting parties from making a contract subject to another state's law or requiring any litigation or arbitration to occur outside of Pennsylvania. The provision, of course, prevents contractors working on projects in Pennsylvania from being dragged to far off places to collect monies owed to them or defend against claims involving their workmanship. A number of other states have similar statutes, which similarly are designed to protect in-state contractors not only from unfamiliar and potentially hostile jurisdictions, but also from the substantial, additional cost that such distant litigation or arbitration typically generates.

Two recent cases, however, chip away at this protective measure, at least as it relates to arbitration actions. While both of these cases were decided outside of Pennsylvania, they portend a very real problem even for projects in Pennsylvania.

In a case decided in Illinois, Weis Builders (Weis), a general contractor from Minnesota, entered into two subcontracts with R.A. Bright Construction, Inc. (R.A. Bright) for concrete and underground utilities work on a Wal-Mart Stores, Inc. project in Illinois. Both subcontracts contained provisions requiring the parties to arbitrate all disputes in Hennepin County, Minnesota. At the conclusion of the project, R.A. Bright brought a claim against Weis in Illinois state court seeking more than $750,000. Weis sought dismissal of the action based on the parties' agreement to arbitrate disputes in Minnesota. To support the lawsuit in Illinois state court rather than through arbitration in Minnesota, R.A. Bright cited the Illinois Building and Construction Contract Act, which, like the Pennsylvania Act, states that any "provision contained in or executed in connection with a building and construction contract to be performed in Illinois that makes the contract subject to the laws of another state or that requires any litigation, arbitration, or dispute resolution to take place in another state is against public policy [and]…is void and unenforceable." R.A. Bright argued that the Illinois statute creates a contractual defense to the enforceability of the arbitration provision of the subcontract and, therefore, rendered it inapplicable.

In rejecting the argument, the Court determined that the Federal Arbitration Act (FAA) was applicable to R.A. Bright's claims because the parties' business relationship had at least a "slight nexus to interstate commerce." Weis is a Minnesota company and R.A. Bright is an Illinois company, which procured materials for the project from a supplier in Wisconsin. These interstate connections invoke the FAA, which requires courts to strictly enforce arbitration agreements.

The Court's decision relies heavily on the case of OPE International, LP v. Chet Morrison Contractors, Inc., which was decided by the United States Circuit Court of Appeals for the 5th Circuit. In the OPE case, the Circuit Court held that when forum-selection provisions in state statutes are in conflict with federal law, the FAA preempts the state law and renders such provisions unenforceable. Based on this federal court decision, the Illinois state court ordered the dispute to be arbitrated in Minnesota in accordance with the terms of the subcontract.

Taken together, these rulings create a problem for contractors who have signed contracts that require arbitration outside of Pennsylvania. While you may have believed that Pennsylvania law protects you against such forum selection clauses, the two cases discussed above throw that thinking into serious doubt. For contracts you already have signed, the die is cast. But for new contracts not yet signed that contain a clause requiring arbitration outside of Pennsylvania, the dispute resolution provisions must be carefully considered so that you know whether you may have to travel hundreds or even thousands of miles to have your case heard. From there, you can negotiate it, accept it or reject it. But the failure to do anything may cause you to be in Alaska in the wintertime to collect your money.

A Brief Note

Welcome to the first issue of our redesigned newsletter, Construction in Brief, a quarterly publication brought to you by Cohen Seglias Pallas Greenhall & Furman, PC. As in the construction industry, where design evolves over time, we believed it was time for a change to the look and feel of Construction in Brief. Our newsletter is in its ninth year of production and has become a regular source of legal analysis, news, case law updates and other information relating to the construction industry throughout the Mid-Atlantic region.

Our talented group of contributors includes attorneys whose goal is to deliver quality information that is timely and useful in your everyday business operations. Please tell us how we are doing by contacting me at either (215) 564-1700 or jgraham@cohenseglias.com. Also, spread the word about Construction in Brief by sharing your copy with colleagues and friends. Anyone is welcome to become a subscriber by sending an email to cibsubscribe@cohenseglias.com.

We enjoy bringing Construction in Brief to our readers and hope that you enjoy the new look and feel of the publication.

Until next time,

Jack Graham, Esq.
Editor-in-Chief

What's New

New Faces

Cohen Seglias is pleased to welcome two new employees to the Philadelphia office:

Michael P. Decktor has joined the Firm as an Associate in the Construction Group. Admitted to practice in Pennsylvania and New Jersey, he earned his J.D. from Washington and Lee University School of Law, and a dual B.A. in Economics and Philosophy from Pennsylvania State University. He is also proficient in German.

Monica M. Lavin, PHR, has joined the Firm as Human Resources Manager. In her role, Monica is responsible for all human resource functions at the Firm. She has 10 years of human resources experience, most recently as an Assistant Vice President at a local financial firm.

Congratulations
Jason A. Copley, elected Managing Partner | Jonathan A. Cass, elected Partner | Jennifer M. Horn, promoted to Senior Counsel | Melissa C. Angeline, promoted to Senior Counsel.

In the Courtroom
The Firm recently obtained a victory on behalf of its client, Ohio Valley General Hospital (Hospital). Manning J. O'Connor II, Patrick Sorek and Douglas C. Hart successfully opposed a preliminary injunction filed by a former administrator that attempted to stop the Hospital and eight affiliated doctors from performing wound care services after a Hospital contract with the administrator was terminated. Finding that the contract administrator had met none of the criteria for the requested injunction, the court refused to stop the Hospital and its physicians from continuing to provide wound care services.

This is an important victory for hospitals, physicians and others operating within the health care industry. While many factors drove the court's decision, a crucial aspect of this ruling was the court's refusal to effectively shut down one of the Hospital's key service lines due solely to the fact that a third party manager of that service line had been terminated. Being forced to discontinue these services would have had a serious financial impact on the Hospital and its wound care physicians.

At the Podium
On March 24, 2011 and March 30, 2011, Cohen Seglias hosted the 3rd Annual Labor & Employment Law Seminar in Philadelphia and Pittsburgh, respectively. More than 130 people attended the half-day seminars to learn about topics including:

  • Labor and employment case law of 2010: Genetic Information Nondiscrimination Act (GINA), "Cat's Paw Liability," Medical Leave and the Construction Workplace Misclassification Act.
  • The consequences that social media can have on workplace productivity: A recent study shows that the average employee spends two work hours every day on social media sites. The seminar stressed that simply blocking access to these sites is no longer sufficient, since most employees now have an iPhone, or other device that can easily access the Internet. Unfortunately, simply controlling the issue at work does not release employers from liability. Employees who keep personal social networking profiles on sites like Facebook, and identify themselves with your company, leave you at risk as well. Employers need to establish a social media policy, and enforce strict guidelines for what is and is not acceptable in world of social media.
  • Protecting your company's confidential information and how to create an effective non-competition agreement: Every employer needs to have a thorough and up-to-date employee handbook, and also employment agreements, where appropriate, setting forth non-competition/non-solicitation rules. In our ever-changing world, every company should have its attorney review its handbook annually, to ensure it is in compliance with the latest guidelines.
  • Issues that employers need to be aware of when it comes to dealing with the National Labor Relations Board and National Labor Relations Act.

If you would like to obtain a copy of the seminar materials, please email your request to zklein@cohenseglias.com.

Pre-Construction Lien Waivers: Only in Limited Circumstances

By Matthew Gioffre

Pennsylvania's Mechanics' Lien Law (Lien Law) has undergone significant revisions twice over the past few years. Some of the most important changes to the Lien Law relate to contractors' ability to waive their lien rights, and the lien rights of their subcontractors, before work on the project even begins. Historically, the Lien Law permitted the pre-construction waiver of lien rights for all contractors and subcontractors by agreement between the owner and contractor. Now, the Lien Law allows contractors and subcontractors to waive their lien rights after they have received payment for the labor and materials furnished to a project, but limits the enforceability of prospective lien waivers, which have been entered into before the work is performed and payment is made. However, unlike neighboring states Delaware and New Jersey, in which all prospective lien waivers are deemed void as against public policy, Pennsylvania's Lien Law still permits prospective lien waivers in certain situations. By following procedures set forth in the Lien Law, contractors may enter into an agreement with the owner to waive their lien rights as well as the lien rights of project subcontractors. This article will identify when, and how, lien rights can be waived under the current Lien Law.

The ability to obtain prospective lien waivers on construction projects in Pennsylvania varies based on whether or not the project is "residential" as currently defined by the Lien Law. Prospective lien waivers issued on residential properties are enforceable, while those on non-residential properties may not be.

The Lien Law defines "residential property" as property that is zoned or otherwise approved for residential development on which a residential building not more than three stories in height, excluding the basement, exists or is being constructed. All liens, including liens of the contractor and all subcontractors, can be prospectively waived on residential projects through an express agreement between the owner and the contractor. Essentially, the Lien Law permits prospective lien waivers on projects to build small residential structures, such as houses, but mandates that prospective lien waivers on large residential structures, such as high rise apartment buildings, be deemed unenforceable. This definition represents a change in approach from the prior version of the Lien Law, which restricted the applicability of prospective lien waivers to residential projects based on the dollar value of the project. Under the old law, prospective lien waivers were not enforceable on any residential project in which the contract between the owner and the contractor exceeded $1 million. Owners on large residential projects would attempt to circumvent the purpose of this provision by breaking up the scope of work on the project and issuing multiple contracts, each of which had a value of less than $1 million. The Pennsylvania legislature has attempted to put a stop to this practice by refining the definition of "residential property."

For properties that do not fall within the Lien Law's definition of residential property, a contractor's lien rights cannot be prospectively waived under any circumstances, and any agreement to that effect will be deemed unenforceable as against public policy. However, an agreement between an owner and a contractor can act as a waiver of subcontractors' lien rights on non-residential projects, provided that the contractor obtains a bond to secure payments to the subcontractors.

Accordingly, lien rights can be prospectively waived: (1) by contractors and subcontractors on "residential projects," and (2) by contractors on behalf of their subcontractors on nonresidential projects, provided that a payment bond is in place.

In both of these scenarios, the Lien Law sets forth procedures that a contractor must follow in order for the prospective lien waivers to prevent subcontractors' lien claims. These procedures are unchanged from the 1964 version of the Lien Law. In order to waive the lien rights of their subcontractors, the contractor must expressly agree to do so in a contract with the owner or other written instrument, such as a Stipulation of Waiver of Liens, and must establish that it:

1. Provided actual notice to the subcontractors of the waiver prior to the time that the subcontractors furnish any labor or materials for the project (while the Lien Law does not require that this notice be in writing, it is good practice for a contractor to send the notice so it can definitively prove that the subcontractors had notice of the waiver); or

2. Filed a copy of the contract or other written instrument that contains the lien waiver with the office of the prothonotary in the county where the project is taking place either:

a. before commencement of work upon the ground;
b. within 10 days after execution of the contract between owner and contractor; or
c. at least 10 days before the claimant's subcontract was executed.

By filing the contract or other written instrument with the prothonotary, the lien waiver becomes public information and all subcontractors are deemed to be on notice that they are forfeiting their lien rights. However, for large residential projects, and all non-residential projects, the Lien Law ensures that security will exist for all contractors and subcontractors, either in the form of a mechanics' lien or payment bond.

Employer's Accounting for Pensions – FASB No. 87

By Lonny S. Cades

Financial statements are relied upon by lenders, bonding companies and by those deciding whether to grant credit to companies. One of the main financial statements is the balance sheet. The balance sheet sets forth the assets, liabilities and net worth of a company. Information on the balance sheet is also used by lenders, bonding companies and those extending credit to determine if the company is meeting certain technical financial covenants that are often used to determine the credit worthiness of a company. If the recommendations of the Financial Accounting Standards Board (FASB) set forth in FASB No. 87 concerning the reporting of certain unfunded pension liabilities are adopted, it will become increasingly difficult for companies to borrow money, post bonds and obtain credit.

The FASB sets forth on its website that "The mission of the FASB is to establish and improve standards of financial accounting and reporting that foster financial reporting by non-governmental entities that provide decision-useful information to investors and other users of financial reports." The FASB is "…independent of all other business and professional organizations".

FASB No. 87 recommended that "This Statement requires immediate recognition of a liability (the minimal liability) when the accumulated benefit obligation exceeds the fair value of plan assets…". Essentially what this means is that if a defined benefit pension plan is underfunded, which is the case for most multi-employer union plans, that this must be reflected on the financial statements of the member employer.

The three major factors identified by FASB No. 87 are delaying recognition of certain events, reporting net cash and offsetting liabilities and assets.

The adoption of FASB No. 87 is currently under review. If adopted, underfunded pension liability would be required to be addressed in a company's financial statements, which could have devastating results. The employer would be required to report its percentage of the underfunded liability as a liability on its balance sheet. This would result in any and/or all of the following:

1. Greater difficulty in obtaining financing;

2. Greater difficulty in obtaining bonding; and

3. Technical defaults under present bank loans based on being out of the financial covenants.

It is important to remain cognizant of the push to have FASB No. 87 adopted. In addition, although most accountants are aware of FASB No. 87, not all are. Therefore, it would be beneficial to you to advise your accountant as to the existence of FASB No. 87.

We will continue to monitor the status of FASB No. 87 and advise if it is adopted and thereupon required to be reported on financial statements.

Maintenance Bonds: Protection Against Faulty Workmanship Claims in Unsecure Times

By Jonathan A. Cass

Picture this scenario: general contractor (GC), has been using a roofing subcontractor (SC) for almost 10 years. They have worked together on many projects, and it has been a mutually rewarding business relationship. However, three months after completing their last project together – a warehouse building – the owner of SC called GC to advise that SC is going out of business. SC's company had simply been unable to withstand the economic downturn. A year later, GC receives a call from the owner of the warehouse building advising that the roof has started to leak. GC investigates and determines that SC had improperly installed portions of the roofing system, and that it will cost over $250,000 to make the necessary repair. Is GC on the hook for these costs?

General contractors have traditionally relied on insurance coverage provided by their own commercial general liability (CGL) policies, as well as additional insured coverage provided by their subcontractors, for third-party protection against claims arising from the faulty workmanship of those subcontractors. However, recent court decisions in a number of states, including Pennsylvania, have significantly limited, if not completely eliminated, insurance coverage under a CGL policy for faulty workmanship claims. Because of uncertainty created by this restriction in insurance coverage, combined with economic conditions that are forcing long-term subcontractors out of business, general contractors should consider having their subcontractors purchase maintenance bonds to provide protection against faulty workmanship claims.

Recent Court Decisions
In the Pennsylvania Supreme Court case, Kvaerner v. Commercial Union Ins. Co., and cases that have followed, Pennsylvania courts have held that there is no coverage for claims arising from faulty workmanship because such claims do not arise from an "accident" and, therefore, are not "occurrences" within the meaning of a CGL policy. According to the Pennsylvania Supreme Court, such "claims do not present the degree of fortuity contemplated by the ordinary definition of ‘accident' or its common judicial construction in this context. To hold otherwise would be to convert a policy for insurance into a performance bond."

Turning to the scenario described above, these Kvaernerrelated decisions would not only eliminate coverage for GC under its own CGL policy for the faulty workmanship claim related to the work of SC, but also eliminate additional insurance coverage that would be available to GC under SC's CGL policy (assuming that there was even a policy available against which to make a claim). Thankfully, Courts in New Jersey and Delaware have not adopted the Kvaerner analysis, so contractors located in these states can breathe a sigh of relief.

An Alternative To CGL Coverage
Many carriers in Pennsylvania have responded to the Kvaerner-related decisions by drafting and issuing so-called "resultant damage endorsements." These endorsements seek, in essence, to define an "occurrence" under a CGL policy to include property damage that arises from the faulty workmanship of a subcontractor. However, each insurer has drafted its own resultant damage endorsement, and each such endorsement is subject to interpretation by the adjuster handling the claim. As a result, the Kvaerner-related decisions have created coverage uncertainty, and have exposed general contractors to significant, potential uninsured risk.

General contractors can protect themselves from this uncertainty by requiring their subcontractors to post maintenance bonds. Generally, a maintenance bond guarantees against defective work and materials for a certain amount of time once the project is complete. The bond represents a third-party guarantee from, hopefully, a financially secure surety company.

Under a maintenance bond:

  • The work required under the subcontract is guaranteed against defective work and materials for a certain period of time after the work is completed and the surety's obligation under the performance bond has expired;
  • The period of coverage is typically one to two additional years, but longer periods can be purchased; and
  • The protection is relatively inexpensive – typically $1.50 per thousand.

If GC had required SC to purchase a maintenance bond that provided a guarantee against defective work and materials for, say, two years after the completion of the roofing work on the warehouse building, GC would have been able to make a claim against the maintenance bond for the cost of the repairs.

Although maintenance bonds may not make sense on every project due to either cost considerations or the ability of the subcontractors to obtain a bond, general contractors should consider such bonds as, at the very least, an added level of risk-shifting protection against claims for the faulty workmanship of its subcontractors.

Q&A with the Managing Partner

By Jason A. Copley

On January 1, 2011, Jason Copley took the reins as Managing Partner of Cohen Seglias Pallas Greenhall & Furman, PC, following the 10 year tenure of the Firm's previous Managing Partner, John Greenhall. Your intrepid Editor sat down for a question and answer session with Mr. Copley.

Q. How do you feel about being named Managing Partner of Cohen Seglias?
A. I'm very excited about the opportunities that the Firm has. We are in a great position as we had remarkable growth under John Greenhall's leadership. The economic environment over the last two years has been challenging, however, the Firm, through the efforts of our attorneys and staff, has weathered the storm and is positioned for continued success and growth. I look forward to leading the Firm in this direction.

Q. For those readers who do not know you, tell them a little about your background.
A. I have a degree in engineering and worked in the construction industry for six years as a project manager for a specialty subcontractor. After finishing law school, I spent most of the last 17 years focused in construction law. I joined Cohen Seglias in1998, when we were a 10-attorney firm, and became partner in 2003. I have been fortunate to have grown professionally right along with Firm.

Q. What led you to move from construction to the law?
A. I actually didn't look at it as a move away from construction. I wanted to stay involved in the construction industry and went to law school because I was most interested in project disputes, evaluating the parties' positions and working out solutions. I went to law school to become a construction lawyer.

Q. What are the differences and similarities of the Cohen Seglias of 2011 and the Cohen Seglias of 1998?
A. In the time that I have been with the Firm, the most obvious difference is its growth. In those years, the Firm has grown from 10 to 55 attorneys with offices in four states. We also dramatically increased the complementary legal practices that we offer our clients. In addition, we have a full complement of supporting professionals and departments, including an Executive Director, Marketing Department, Accounting Department, IT, Human Resources and Facilities. In terms of similarities, our attorneys maintain collaborative relationships with our individual clients – some of which have been cultivated for over 20 years and others that are brand new. Our attorneys have always worked in partnership with our clients because we consider the Firm to be a part of the construction industry. Our reputation of being knowledgeable and passionate about the industry is something that has been developed over time and has been a consistent factor in the way we have tried to build the Firm.

Q. What is the Firm's greatest strength?
A. The Firm's greatest strength is the energy, experience and enthusiasm of our people. These traits are exemplified by our founding Partner, Roy Cohen, and are reflected throughout our entire practice by the attorneys who diligently bring solutions to our clients.

Q. What do you see in the future of Cohen Seglias?
A. We believe that technology is a significant factor in the Firm's ability to provide effective and cost-efficient solutions to problems, and we continue to invest in all of the tools our professionals need to succeed and achieve meaningful and positive results for our clients.

Legislative Roundup

New Jersey Establishes Process for Bid Withdrawal

On January 4, 2011, New Jersey Governor Chris Christie signed P.L. 2010, C. 108 into law. The new law went into effect on March 4, 2011 and permits a bidder, under certain circumstances, to withdraw a bid on a public project due to mistakes in the bid, under the Local Public Contract Law.

New Jersey Construction Lien Law Changes
Governor Christie also recently enacted legislation revising the New Jersey Construction Lien Law, which was last amended in 1994. The amendments are effective immediately. If you seek to lien a New Jersey property in order to secure payment for the labor and materials you provided, you must understand these changes, which include, but are not limited to, critical timing, definitional and enforcement requirements.

Pennsylvania Construction Workplace Misclassification Act
As of February 10, 2011, all construction companies using independent contractors must comply with Pennsylvania's Construction Workplace Misclassification Act (CWMA). CWMA includes criminal penalties for those who misclassify their own employees, or those who contract with entities known to misclassify their employees, as independent contractors. Penalties for violations of the Act include fines, incarceration, stop-work orders and administrative penalties.

For more information regarding these legislative updates, please contact the Cohen Seglias attorney with whom you normally consult.