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Construction In Brief: Winter 2006

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Cohen Seglias Pallas Greenhall & Furman PC

Winter 2006 Issue

Cover Story:THE POWER of the RELEASE
          -  by Edward T. DeLisle, Esq.

On many construction projects contractors must submit partial releases each month with their payment requisitions. While this process seems routine, blindly submitting these releases may bar valid claims for payment. On the other hand, for a general contractor or construction manager at risk, contractually requiring that subcontractors execute and return appropriately worded partial releases can provide protection from claims. The Court of Common Pleas of Philadelphia County recently issued an opinion that illustrates how a properly worded release can bar claims.

In Kleinknecht Electric Co. v. Jeffrey M. Brown Associates, Inc., the court considered the affect of a series of written releases signed by a subcontractor. In Kleinknecht, an electrical subcontractor made demand for more than $2.8 million for delays and inefficiencies that the construction manager and/or the owner allegedly caused. The electrical subcontractor first submitted its claim for delay and productivity loss toward the end of the construction project long after the problems occurred. Each month, however, the electrical subcontractor executed and returned a written form of release with its payment application that stated,“this instrument shall constitute a partial release of all rights, claims and demands of the undersigned against the contractor arising out of or pertaining to the above-referenced project.” It went on to state, “If partial, all rights and claims on the project are released up to and including [this date].”

The court found that by signing written releases with this language, the electrical subcontractor had in fact released all of its claims for delay and inefficiencies through that date. It took the position that the subcontractor knew, or should have known, that it was being adversely impacted at the time that it signed each release, yet made no attempt to alter the language in the releases. Moreover, because the Subcontract Agreement contained a clear requirement that the construction manager was entitled to such releases, the subcontractor had contractually agreed that the releases were enforceable.

While not a new concept, the Kleinknecht decision is the first time that a state court in Pennsylvania has found that such a release bars claims. In the last several years, two federal court decisions reached similar conclusions.

General contractors and construction managers at risk, or even the owner or developer, should now ask two important questions. First, does the form of contract that you currently use require constructors or subcontractors to sign releases of claims? Second, does your partial release form protect you from claims? From the perspective of the subcontractor, or that of the general contractor or construction manager to the owner or developer, similar questions must be asked. Does the contract require you to provide a release of claims in exchange for progress payments? If the answer to this question is “yes”, then what does the release that you’ve been asked to sign say? If the language is similar to that in Kleinknecht and you have disputed charges (i.e., change orders) or have been damaged by delays or inefficiencies caused by others, then you cannot sign and return that form without altering, or attempting to alter, the language. We suggest that you contact your attorney if you have any question regarding how to handle such an issue. Given the potential impact of releases generally, whether you are an owner, developer, construction manager, general contractor or subcontractor, we also suggest that you have your attorney review the forms of contract you are using, as well as any you are asked to sign.

Labor & Employment Law:
A Guide To Handling “He Said, She Said” Sexual Harassment Claims
               -- by Jonathan Landesman, Esq.

Caroline is the first and only female electrician at Electric Co. Caroline recently complained to Electric Co.’s Human Resources Manager, Mike, that her foreman, Bob, said “stop screwing around and get your cute little butt back to work.” Caroline also complained that Bob constantly stares at her, and once asked her to join him for lunch. Mike spoke with Bob about Caroline’s complaint. Bob insisted that Caroline is “full of it” and that he is a happily married man.

After speaking with Bob, Mike told Caroline this is a “he said, she said” situation, and that there is absolutely nothing he can do. Two weeks later, Caroline resigned her employment, and filed a lawsuit alleging that she was subjected to a hostile work environment because of her sex.

Is Caroline A “Victim” Of Sexual Harassment?
Under the federal and state employment laws, the term “sexual harassment” has a special meaning. Caroline will not prevail merely by claiming that she “felt harassed.” On the contrary, she will prevail in court only if she is able to prove the following three elements needed to support a hostile work environment claim.

1. Severe Or Pervasive
In order to establish an unlawful hostile work environment, the conduct at issue must be sufficiently "severe or pervasive." The "severe or pervasive" requirement in hostile environment cases means that isolated incidents or stray remarks of a sexual nature usually do not rise to the level of a legal violation. The "severe or pervasive" requirement is perhaps best viewed as an analytical tool to distinguish lawful (albeit sometimes unprofessional) conduct from unlawful harassment.

In Caroline’s case, she has not alleged sufficiently severe conduct to establish unlawful harassment. However, the fact that she has alleged that Bob “constantly stares at her” seems to indicate that the conduct is pervasive (i.e., recurring on a regular basis).

2. Objectively & Subjectively Offensive
The severity or pervasiveness of Bob’s conduct should be considered from both Caroline’s subjective perspective and that of a neutral, objective bystander. As such, Caroline will lose her case if a court determines that Bob’s conduct, viewed objectively, does not meet the “severe or pervasive” test. In addition, Caroline will lose her case if she did not personally find the environment to be hostile or abusive.

It is worth noting that Bob’s state of mind is not relevant when determining whether a hostile environment exists. In fact, many employers have paid dearly for the acts of a well-intended harasser, such as the worker who tells “innocent” sexually-related jokes around the water cooler.

3. Discrimination “Because of Sex”
In a recent federal district court case, a husband and wife who worked for the same employer filed a lawsuit alleging that a bi-sexual supervisor made sexual advances toward both of them. This lawsuit was dismissed because the court found that even if their allegations were true, they were not treated differently “because of their sex.”

Applying this to Caroline’s claim, in order to prevail, she must be able to prove that she was treated differently because of her sex. This means that if Bob stares and yells at Electric Co.’s male and female employees, Caroline’s claim may fail.

Maintaining these records is a “preventive medicine measure” that will help in warding off some lawsuits and will be your best defense in others. Remember, documentation is your best cure for personnel claims.

Should Mike Have Done Anything Differently?
Electric Co.’s ability to mount a successful defense will likely depend upon whether it has undertaken several preventative measures. First, the court will want to know whether Electric Co. had implemented a comprehensive sexual harassment policy. At a minimum, Electric Co.’s policy should contain a clear definition of prohibited conduct and a multi-channel complaint procedure. Second, the court will examine whether Electric Co. had provided sexual harassment training to supervisors and managers (and, if feasible, rank-and-file employees).

Third, and perhaps most importantly, the court will analyze whether Mike implemented prompt and effective remedial action when Caroline complained. This would include conducting a thorough investigation of her complaint, documenting the results of the investigation, and (if appropriate) disciplining Bob.

Q&A: With The Business Practice Group
Contract Disputes, Real Estate Purchases, and 401K Plans 

Is it important to examine provisions regarding choice of law, venue and forum controlling disputes in standard form contracts?

These provisions become critical when business disputes result in litigation. A party to the contract may be required to either enforce a contract or defend a breach of contract suit in a court thousands of miles away which will apply unfamiliar law. Not only may this create inconvenience and additional expense, but the final outcome of the case may turn on the difference in the law of another state. These potential pitfalls can be avoided with the careful review and modification of such provision
-- by Thomas N. Sweeney, Esq.

An opportunity to purchase real estate has come up that I want to pursue, what should I do?

It is crucial to isolate the property from other potential purchasers in order to perform due diligence to confirm that the property is what it appears to be and that there will be no obstacles to your intended purchase and use. A carefully drafted Agreement of Sale will put control of the property in your hands during a due diligence period. You will have the opportunity to perform tests and studies including structural status, financing options, environmental issues and zoning to permit your intended use or an evaluation of the time frames for zoning changes if required. An Agreement of Sale tailored to meet your specific goals will give you the ability to walk away from the transaction without potential liability if your review concludes that the property does not meet your requirements.
               -- by Marian A. Kornilowicz, Esq.

I am selling my business. What will happen to my 401(k) plan?

The choice is yours. The investments may be left in the existing 401(k) plan subject to limited investment options. When required minimum distributions (“RMD’s” taxable at ordinary income tax rates) begin at age 70 1/2 , RMD’s are annuitized and the dollar amounts may not be changed. If your 401(k) includes Company Stock, an immediate distribution of that stock (at its original cost basis, not present value) may result in tax savings. The investments may be “rolled over” tax free into an IRA. RMD’s are flexible based on life expectancy tables and not fixed. You have unlimited investment options. As part of your estate plan, your children or grandchildren will have the opportunity to defer RMD’s over their life expectancies.
               -- by Wayne C. Buckwalter, 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:
The Changing Face of Construction Law
             -- by Robert Ruggieri, Esq.

Over the past few months, the landscapes of construction law in Pennsylvania and New Jersey have seen significant changes. There have been changes which affect both contractors’ and owners’ lien rights as well as their payment rights and obligations on both public and private construction projects.

Pennsylvania Mechanics' Lien Law

On September 1, 2006, Governor Rendell signed into law the first changes to Pennsylvania's 43-year-old Mechanics Lien Law. The changes affect all contracts entered into after January 1, 2007. It is important that all contractors, owners and developers understand these changes so that they are able to protect their lien rights and adjust their business practices accordingly, especially because the amendments have extended lien rights to second-tier claimants, specifically, sub-subcontractors and suppliers.

The most significant amendment, however, is that Pennsylvania has now joined the majority of states prohibiting lien waivers. The law generally provides that a wavier of lien rights by a contractor is against public policy, unlawful and void unless given in consideration for payment of work, services, material or equipment and only to the extent such payment is actually received. The amendments do allow waivers by subcontractors and second-tier claimants, but only if the general contractor has posted a bond guaranteeing payment of labor and materials provided by subcontractors. There is also an exception for residential work when the general contract value is less than $1,000,000.

The amendments extend the time for filing a lien from four months to six months. And while the lien law still requires subcontractors and suppliers to provide thirty days written notice before filing a lien, it eliminates the requirement that a subcontractor give preliminary notice of its intent to file a lien prior to completing alteration and repair work.

Pennsylvania Public Prompt Payment Act

Cohen Seglias Pallas and Furman, P.C. recently won a landmark decision which directly impacts all contractors who perform work on public projects in Pennsylvania. In the matter of Pietrini Corp. v. Agate Construction, the Superior Court of Pennsylvania ruled that the prompt payment provisions of the Pennsylvania Procurement Code require contractors to make payments on undisputed contract balances regardless of the existence of disputes over other work on the project. The Court reasoned that while money may be withheld when the contractor disputes the payment in good faith, withholding payment to coerce settlement of other payments constitutes vexatious and arbitrary conduct, i.e. “bad faith.” In such circumstances, a subcontractor who is not paid is entitled not only to payment on the undisputed balance, but also to penalties and attorney’s fees. This decision should take away some of the negotiating and coercion tactics often employed by contractors on public projects.

New Jersey Prompt Payment Act

Another development involves amendments to the New Jersey Prompt Payment Act (the “Act”) and affects contractors and owners on both public and private projects in New Jersey who entered into construction contracts as of September 1, 2006. The amendments set specific times within which payment must be made for construction work and makes New Jersey the exclusive venue for payment disputes involving construction projects in New Jersey. In addition, prevailing parties in such actions are now entitled to interest on the amount improperly withheld, plus attorney’s fees.

The new Act covers payments due to contractors down through second tier subcontractors and suppliers as well as licensed professionals. In the case of contractors, the owner must pay the amount due for approved work to a prime contractor within thirty days of the billing date as specified in the contract. Billings are deemed approved twenty days after receipt unless the owner provides the contractor with a written statement of the amount withheld and the reasons for doing so. These dates may vary when a public owner must vote on authorizations to make payments. Moreover, if only a portion of the work is considered unacceptable, the owner may withhold payment only for the reasonable value of that portion of the work.

In the case of second tier contractors and suppliers, contractors are obligated to pay subcontractors and subcontractors are required to pay sub-subcontractors and suppliers within ten days of receiving payment, unless the parties have provided otherwise by written contract. Unlike owners, contractors and subcontractors are not under a specific obligation to provide a reason for withholding payment. If they do not provide a written statement, however, the party that has not been paid may have the right to suspend work until payment is made. The right to suspend work applies so long as the payor is not engaged in a good faith effort to resolve the dispute. The contractor intending to suspend work must also provide seven days written notice of its intent to do so. It is important to note that this section of the statute does not apply to certain federally funded transportation projects.

The new Act also requires that all contracts for construction in New Jersey contain language regarding alternative dispute resolution for payment disputes. Given these recent developments in Pennsylvania and New Jersey construction law, it is very important that you contact counsel to understand your lien and payment rights/obligations on a particular project

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

Cohen Seglias is pleased to announce that Marc Furman has been named to the list of Top One Hundred Labor Lawyers In the United States for 2006 by the Labor Relations Institute. In addition, John Greenhall and George Pallas have been selected to serve as neutrals on the American Bar Association’s Panel of Commercial Neutrals. The American Arbitration Association is the nation’s leading provider of alternative dispute resolution services. In order to become selected, John and George were required to go through a rigorous screening process, which included evaluation of their substantive training and experience, as well as a review of their ethical standards and commitment to the law, among other things. Congratulations to Marc, John and George!

Since our last edition, the attorneys of Cohen Seglias have spoken to a number of different organizations on issues of importance. On October 11 Roy Cohen and Ed DeLisle gave a seminar entitled, “Mining Your Contract for Gold”, to the Specialized Carriers & Rigging Association in La Jolla, California. Jason Copley spoke to the Certified Financial Managers Association on the prosecution and defense of surety claims. On November 6, Tom Zipfel spoke to the South Jersey Mechanical Contractors Association regarding the prevailing wage laws of New Jersey. Cohen Seglias attorneys have also spoken at many recent meetings in Pennsylvania to explain how the Amended Mechanics’ Lien Law will impact construction projects.

Finally, Cohen Seglias would like to welcome its newest attorneys, Rick Russo, Jeff Johnson, and Lori B. Wisniewski. Rick, a recent graduate of Temple University’s Beasley School of Law, has joined the firm’s Construction Group. Jeff, who brings with him an L.L.M. in tax from Villanova’s School of Law, has joined the Business Practices Group. And, a new addition to the Construction Group's Pittsburgh office is attorney Lori B. Wisniewski, a recent graduate of Duquesne University School of Law. Welcome aboard!

Words From Our Editors:
               -- by Janet L. Treiman, Esq., Jason A. Copley, Esq.

Welcome to the Winter 2006 Edition of Construction in Brief. As the year is coming to a close, it is the perfect time to reflect on significant developments in construction law in the past year. As such, the topics covered in this edition include an explanation of a recent court decision that discusses the implications of signing partial releases included with payment applications as well as explanations of developments that impact lien rights and payment obligations.

As always, 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!