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Construction In Brief: Summer 2008

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Cohen Seglias Pallas Greenhall & Furman PC
CONSTRUCTION IN BRIEF

Summer 2008 Issue


Cover Story:No More Hiding Behind Contractual Formalities
James Corporation v. North Allegheny School District
          -  by Christopher P. Soper, Esq.

Have you ever signed a contract that provided for no damages for delays? Or, have you ever forgotten to provide notice of a claim within the contractually required time frame? How about, have you ever performed work without first obtaining a signed change order? Do you think that these lapses prevent you from successfully raising a claim against an owner?

Think again. The Commonwealth Court of Pennsylvania recently held in James Corporation v. North Allegheny School District that a contractor could collect damages from an owner for additional costs incurred and work performed, even though the contractor signed a contract with a “no damages for delay” provision, failed to provide timely notice as the contract required, and performed work without obtaining signed change orders.

In James, a four-month delay in the creation of a fully-integrated project schedule impacted the contractor from the start. The discovery of asbestos and a number of design changes further delayed the contractor. Despite this, the contractor was able to accelerate its work and complete the project by the original completion date. In doing so, the contractor incurred a significant amount of additional costs. The contractor then brought suit against the owner to recover damages that included acceleration costs, unpaid invoices, prevailing wages withheld, and attorneys’ fees and expenses.

Owner Interference Comes at a Price
In its defense, the owner raised a number of arguments. First, the owner argued that the “no damages for delay” provision barred the contractor from recovery. The court, however, upheld the longstanding exception to the enforcement of “no damages for delay” provisions – that these provisions are not enforceable when the owner interferes with the contractor’s work.

For this reason, it is important to document owner interference throughout the course of a project. You can accomplish this by sending letters and emails to the owner or general contractor, maintaining daily/weekly journals and by raising the issue at project meetings. Remember, if an issue is discussed at a project meeting, it should appear in the minutes provided to the attendees. If an issue is not listed, write a letter to the attendees notifying them of the inaccuracy. The more thorough the documentation, the more likely the owner will promptly pay.

Provide Notice Even if You Can’t Quantify Damages
Second, the owner argued that the contractor’s failure to provide notice of its claims within 21 days of the occurrence, as the contract required, barred the contractor’s claims. The court’s response was that the contractor raised its claims in a timely manner since it could not quantify the damages until it finished the project. Additionally, the court found that the owner had actual notice that the project was behind schedule and that the delays had to be overcome if the project was going to be completed on time.

As is often the case, you may find yourself on a project where there is no possible way of calculating damages due to delay until the project has run its course. If this situation occurs, you should still provide the owner with a formal notice letter within the contractual time period. Although the letter will not be able to provide the exact amount of the delay damages, it should, at a minimum, reference the notice provision of the contract, explain that delays with a cost impact have occurred on the project, and state that you intend to file a claim as soon as you can quantify the precise damage figure.

Owners Must Pay for Work Requested
The owner’s third argument in James was that the contractor’s claims were barred because it did not obtain signed change orders before performing additional work as The Public School Code of 1929 requires. In response, the court said that the lack of change orders did not prejudice the owner because the owner verbally requested the work and the contractor followed up with all the necessary paperwork after the work was performed.

This decision could give contractors some wiggle room when school boards refuse to provide signed change orders.

“Measured Mile” Analysis Accepted to Calculate Acceleration Damages
Significantly, the court also determined that the “measured mile” approach is an acceptable method for calculating acceleration damages in Pennsylvania. The “measured mile” approach compares a period of work on the project where there were no delays to the period of time when delays occurred. The difference between the two time periods indicates the damages to the contractor resulting from delays/acceleration.

This decision should help contractors prove their delay damages because the “measured mile” approach is often a more precise method of calculating damages than other accepted methods. In order to use the “measured mile” approach, however, you need to keep detailed daily reports indicating where each worker was working and what he or she was doing. You must keep these records throughout the course of the project -- when things are moving according to plan, and when things are being delayed -- so there is a basis for comparison.

When looking at the James case, it is important to remember that the court based its decision on the specific facts at issue. For this reason, it is important to strictly adhere to the requirements of the contract and the relevant law, if at all possible. When it is not possible, make sure to thoroughly document everything that is happening on the project -- the delays, all possible claims, the owner’s verbal instructions to perform work and refusal to sign change orders, etc. -- and provide that documentation to the owner on a daily basis. The more that you are able to document and the more documentation that you provide to the owner, the more likely that you will be able to succeed in your claims.


Labor & Employment Law:
RETAILIATION CLAIMS:
An Employers' Primer

               -- by Jonathan Landesman, Esq.

The same laws that prohibit employment discrimination based on race, color, sex, religion, national origin, age, and disability also prohibit retaliation against employees who complain about discrimination, participate in an investigation, or otherwise oppose workplace discrimination. According to statistics published by the Equal Employment Opportunity Commission, retaliation charges, as a percentage of the total employment discrimination charges filed, increased from 22.6% in 1997 to 32.3% in 2007. Why are retaliation claims on the rise? Primarily, because a retaliation claim is often easier to prove than an underlying discrimination claim.

Did you know?
An employee alleging retaliation does not have to be a member of a “protected class.” In other words, potential claimants are not limited by their gender, race, religion, or disability in successfully bringing a case.

An employee does not have to succeed in his or her underlying discrimination claim (or even raise a viable complaint) to prevail in a retaliation case. In fact, in many cases, the merits of the employee’s underlying claims are completely irrelevant.

Proving a retaliation claim:
To bring a retaliation claim, an employee first needs to establish that he or she engaged in some “protected activity.” The term “protected activity” has been interpreted very broadly to include complaining about discrimination against oneself or a co-worker, filing or threatening to file a discrimination complaint, or refusing to obey an order because of a “reasonable belief” that it is discriminatory.

The next thing that an employee must prove in a retaliation case is that he or she suffered some sort of an “adverse action.” This term has also been interpreted very broadly. Obvious examples of adverse action include demotion, suspension, pay cuts, and termination. Not-so-obvious examples of adverse action may include job transfers without any change in pay, schedule changes that do not involve a reduction of hours, negative performance evaluations, or the failure to invite an employee to a company event.

Finally, the employee must prove a “causal link” between the protected activity and the adverse action. In other words, the employee must show that the employer retaliated against him or her because he or she engaged in a protected activity. The most common type of circumstantial evidence that plaintiffs use to prove retaliation is to show that the adverse action occurred shortly after the protected activity. If there is a relatively small amount of time between the protected activity and the adverse action, such as a couple of months, the employee may not need any other evidence to successfully establish a causal link.

There are a number of measures that you should take to minimize your company’s exposure to retaliation claims. Ensure that your company handbook includes a clear, unambiguous anti-retaliation section that complies with all of the technical requirements of Title VII and other applicable laws. And then walk the walk. Provide training to your supervisors and managers on the do’s and don’ts of handling termination and discrimination complaints. Having supervisors who know what to say and when to say it is absolutely critical. Finally, create appropriate documentation for employees’ personnel files. Failing to properly document disciplinary events or preparing inflated performance evaluations can ruin an employer’s case in retaliation litigation. An employee will have a much easier time establishing unlawful retaliation if -- up until the time of the protected activity -- he or she received positive performance evaluations and had no written record of disciplinary action. Employers claiming that a performance evaluation was “charitable” or “overstated” generally do not prevail at trial.

By being proactive and implementing preventative measures such as appropriate handbook policies and supervisory training, employers can go a long way toward protecting themselves from retaliation claims brought by predatory employees.


Q&A: With The Business Practice Group
              
I’ve completed the paperwork establishing a Trust. Now what do I do?

Many people who spend good money to have a Trust prepared sometimes don’t complete the next step, which is funding the Trust. Many of the potential benefits of a Trust are missed unless it is funded. “Funding” comes about when property is transferred into the name of the Trust, or when a Trust acquires new property such as a house or an insurance policy.

For example, if you establish a Trust to hold some of your property, like your house, the name on the deed must show the Trust as the owner. If John Doe and Jane Doe own property as joint tenants with right of survivorship, the deed existing before the Trust is created might (for example) state their name as follows: “John Doe and Jane Doe, husband and wife, as joint tenants.”

After the Trust is created, this couple would fund the Trust by placing this real property in the name of the Trust. For example, the deed might show the following transfer: “John Doe and Jane Doe, husband and wife, as joint tenants, hereby grant all of their right, title and interest in the following property to John Doe and Jane Doe, as trustees of The Doe 2008 Living Trust.” By doing this, John Doe and Jane Doe will continue to control the property in the same manner as if they owned the property outright, at least when both spouses are living. However, the bad news: if a Trust is not funded properly, it is possible that a probate will need to be opened to either fund the Trust or to transfer the property. Either way, this couple would incur unnecessary costs and estate tax liability when a simple transfer deed would have done the trick and avoided both. The moral, of course, is to review your planning and make sure your Trust is funded. Doing this will save much effort, time and money in the long run.
-- by Wayne C. Buckwalter, Esq.

I heard that the Courts have just made it easier for residential tenants to appeal from eviction judgments. Is this right?

In some cases, you are correct. The Pennsylvania Supreme Court has enacted new rules regarding stays of eviction that are based on magisterial district judge (“MDJ”) judgments. Under the old rule, in order for a tenant to remain in the property during the course of an appeal, the tenant was required to pay the lesser of three months’ rent or the amount of the MDJ judgment.

The new rule provides an alternative for poor tenants. If the tenant’s income level is below the Health and Human Services’ poverty guidelines, the tenant can obtain a stay of eviction by paying into court escrow, at the time of the appeal, one-third of the monthly rent, followed by an additional deposit of two-thirds of the monthly rent within twenty days. That is, the tenant can obtain a stay by paying only one month’s rent rather than by paying potentially three months’ rent.

In order for the stay of eviction to remain in effect, the tenant must pay each subsequent month’s rent into court escrow (as is the case under the old rule).
-- by Steven M. Williams, Esq.

Question for our Business Practice Group?
Submit it to Janet L. Treiman, our editor, and you might just see it appear in this column.


Construction News:
Contractor Default Insurance -- Not a Replacement for Pennsylvania Payment Bonds
 
             -- by Daniella Gordon, Esq.

HIs a general contractor asking you to waive your Pennsylvania mechanics’ lien rights before beginning work on a project, in exchange for the general contractor providing some form of payment security? Or are you a general contractor looking for a less expensive alternative to providing a payment bond, in exchange for your subcontractors waiving their Pennsylvania mechanics’ lien rights?

If so, you may have considered a product called Subcontractor Default Insurance (“SDI”), perhaps more commonly recognized by Zurich’s trademarked “Subguard” name. But what is SDI? And is it a viable alternative to a payment bond under Pennsylvania’s Mechanics’ Lien Law?

At first glance, SDI may seem like an alternative to a payment bond, but it is not. It is important that contractors and subcontractors recognize the separate purposes and different guarantees of SDI and payment bonds.

Typically, a payment bond is issued in conjunction with a performance bond. As contractors are aware, a payment bond protects owners, developers and lenders in the event that a contractor fails to make payment to a subcontractor or supplier. A performance bond, on the other hand, ensures that the contractor will complete its work.

While SDI functions as a type of performance insurance, it is not a replacement for a payment bond. SDI may be sufficient to insure against a limited range of performance issues; however, it will not insure against claims that arise out of a contractor’s alleged failure to pay for labor and/or material on a project.

So why do some contractors choose SDI over performance and payment bond packages? The short answer is that on large-scale private projects, where the cost of bonds can become significant, SDI may be an economical alternative. The cost of SDI is roughly half of the cost of a bond, which can range from one to two percent of the amount of a subcontract. In addition, the SDI claims-resolution process appears to be faster than a surety’s investigation. SDI also permits the contractor, rather than the surety, to pre-qualify its subcontractors, which may produce a wider pool of applicants.

On the other hand, SDI carries a significant deductible, which makes it impractical for small and even medium-size projects. It also places the burden on the contractor to ensure that its subcontractors’ financial status and performance histories are sound, and may force the contractor to independently assess its subcontractors’ ability to perform. Unlike a surety-issued performance bond, SDI may not cover the entire performance cost of the subcontract, which leaves the contractor with a certain amount of financial exposure. Finally, unlike payment bonds, SDI policies do not guarantee that payment will be made, which means that contractors are not protected against mechanics’ lien claims and breach of contract claims.

What does this mean to Pennsylvania contractors and subcontractors? If you are a contractor and are considering bonding to obtain lien waivers from your subcontractors, SDI is not recognized under the Pennsylvania Mechanics’ Lien Law as a substitute for a payment bond on a commercial project. To be clear, payment bonds seem to be the only types of securities which are recognized for parties that decide to waive their lien rights, in advance, on commercial construction projects. Subcontractors should also be aware that SDI alone will not guarantee payment on commercial projects.

SDI certainly has its benefits, but it is primarily meant to be considered for certain types of large scale projects. Remember: if an owner or general contract desires a lien waiver, a payment bond is necessary. In each case, contractors and subcontractors should consult with their attorneys and insurance brokers to determine which course of action will best protect their interests and comply with the law.


Did You Know?

Did you know that in order to protect your company’s position upon the sale and installation of equipment for which you have not yet been paid, you can take certain steps in advance that will assist in protecting your company’s ability to obtain payment from the customer? At the very least, you can file UCC documents to demonstrate that your company has a lien against the equipment.

Also, if your company owns the real estate at which its business is located, there may be situations where you can take steps to protect the equity in that property for the benefit of the company and its owners.

Steven D. Usdin, who recently joined the Firm’s Business Practice Group, focuses his practice on creditors’ rights and general corporate matters.
 

What's New At The Firm?
  
-- by Edward T. DeLisle, Esq.


Cohen Seglias recently completed its first live webinar. John Greenhall and Kevin Watson spoke to members of the construction industry about the newly revised AIA Contract Documents and compared them to the new Consensus Documents, providing participants with the advantages and disadvantages of each. The event was a great success and we would like to thank all of those who participated. For anyone that missed the presentation, it can be found on the firm website at www.cohenseglias.com. Please check our website for future webinars and other firm events.

The Philadelphia Business Journal recently featured Ed Seglias in a front page article entitled “Construction Cases on the Rise.” The article chronicled the impact of the current economic climate on the state of construction litigation in the region. Ed also participated in a panel discussion entitled “Construction Trends in 2008,” which the General Building Contractors Association hosted. He led the panel in discussing coverage limitations in general liability insurance policies.

Finally, Cohen Seglias is pleased to announce the addition of Daniella Gordon to its Philadelphia Construction Group. Daniella is a graduate of Connecticut College and Rutgers University School of Law at Camden. She comes to us from a firm in New Jersey where she practiced in the areas of employment and civil rights litigation, among other things.


Words From Our Editor:
               -- by Janet L. Treiman, Esq.

Welcome to the Summer 2008 Edition of Construction in Brief. In this issue, we continue to explore the ever-evolving laws impacting the construction industry. More specifically, we discuss the increasing use of Subcontractor Default Insurance and a recent case that has potentially far reaching effects for contractors bringing claims on public school projects and for all contractors in calculating their damages. In addition, we offer insight into Trust issues and the increasing number of employee retaliation claims.

As always, we welcome you to submit suggestions for future articles that may be of interest to you, either by regular mail or e-mail at: JTreiman@cohenseglias.com

Remember, if you have a specific legal concern, we recommend that you consult with counsel so that you may receive the best advice. See you next issue!